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A LEVEL BUSINESS STUDIES

REVISION GUIDE

1.a) Should firms train their employees? [10]

Increase productivity­If your employees know what they’re doing and are properly trained,
productivity will increase. The manufacturing industries have caught on to this gem a long
time ago. The most successful Electrical Contracting businesses train their staff to achieve
improved quality, provide better service, reduced snagging and ultimately make a profit.

Reduce employee turnover­Investing in your employees will let them know you are
interested in developing their skills. As a result they tend to stay longer and contribute more
to your business. Recruiting replacement staff is expensive, time consuming and risky. It’s
much better to train and retain your best people in the first place. Technical, management and
administrative training courses can be as good a pay rise during difficult times.

Decrease need for supervision­Untrained and under­qualified staff can drain your
management resources and distract your best people from urgent and important tasks. How
many times have your Managers said that they can’t do something because they are still
"keeping an eye" on an employee? Free up managers time and effort by training employees to
do the work themselves. Avoid becoming over reliant on one person by training at least one
other alternative member of your team to an accredited standard.

Increase ability to employ new technologies­Keeping up to date with technology is essential.

Ensuring that your employees are current with technology will not only enable them to do
their job better but also ensures that your Company is at the forefront when it comes to the
competition.

Increase safety to decrease work­related injury/illness­Training in health and safety will

reduce the amount of work based injuries which occur. This protects not only the employee,
but also the employer when it comes to possible corporate manslaughter charges.

Maintain employee credentials/certifications­Maintaining credentials is cheaper than

allowing them to expire and starting again. Ensure that the hard won qualifications of your
employees remain up to date with regular training.

Help employees meet new responsibilities­Who would allow a 17 year old to drive a MEWP
without any instruction? Then why do some Companies promote employees to new positions
without giving them the necessary skills to perform their new role effectively? Training for
newly promoted employees is beneficial to both the Company and the employee in terms of
productivity, effectiveness and efficiency.

Increase job satisfaction, morale and motivation among employees­A happy workforce is a
productive workforce. Training increases the wellbeing of employees and reduces
absenteeism, mistakes and stress in the workplace – always beneficial for a Company. The
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provision of technical training including Inspection and Testing, Regulations and PAT
improves the reputation of the Company and the performance of individual workers.

Enhance company image, e.g. conducting diversity training­PR and reputation is

increasingly important in Northern Ireland. Gaining an accreditation such as IIP (Investors in
People) can be prestigious in terms of promoting the Company and ensuring that people
would like to work for, and with the organisation.

ETT Tip: If you want to win an invitation to tender via a PQQ procedure, you must be able to
demonstrate evidence of planned staff training. Improve risk management, e.g., training
about sexual harassment, diversity training­

Training in essential areas will reduce the risks associated with employing people and
potential Employment Tribunal claims. Remember, the average cost of just defending a
Tribunal claim is around £10K. And that’s excluding an award made against you.

b) Discuss how importance of financial reward systems in the motivation of part­time

staff. [15]
Introduction
Young part time workers are motivated a lot differently than full time employees and even
adult part­time employees. Overall this stems from the different reasons why they are
working; i.e. if a young part time worker loses their job the extent to which they are affected
is incomparable to most full time workers. The main factors, young people consider when
choosing an employer are, working hours, job satisfaction and most importantly pay. Because
of this they may not care that the job is easy, they may only care that the pay is good/bad. If
the part time worker doesn't care if he loses his job or not then a financial reward system may
give that worker a reason to stay and even work better.

Middle

They would actually care if they lose their job or not and young, part time workers are
normally, easy to come by. Overall this situation produces somewhat of a catch 22 due to the
conflict that is brought about by extra pay and the changing of the worker's attitude. It seems
to be very 'hit and miss' in the effect it could have on employees but in this situation I believe
that there isn't enough pressure on workers to create a feeling of job insecurity sufficient
enough to de­motivate. A different situation where a financial reward system would have a
different effect on employees would be if the young part­time workers were simply bored of
their jobs so they became de­motivated. ...read more.

Conclusion

The effect that a financial reward system has in this situation is a lot more easily attained than
the last, as it would seem that it would not motivate the workers. The situation is one that
cannot be solved with extra money, rather with job enrichment, which is unlikely to be viable
a majority of the time. In conclusion the importance of financial reward systems would be
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very great in circumstances such as the first one explored, although problems may arise very
rarely. But they are less important if the worker doesn't enjoy the job they do and has no
sense of 'self actualisation' as Maslow puts it. There are so many different working conditions
and situations for young part­time workers that it is unrealistic to say it is or is not important.

2. a) Explain the factors that are likely to determine the price of a product. [10]

Pricing is often one of the most difficult things to get right in business. There are several
factors a business needs to consider in setting a price:

Competitors – a huge impact on pricing decisions. The relative market shares (or market
strength) of competitors influences whether a business can set prices independently, or
whether it has to follow the lead shown by competitors

Costs – a business cannot ignore the cost of production or buying a product when it comes to
setting a selling price. In the long­term, a business will fail if it sells for less than cost, or if its
gross profit margin is too low to cover the fixed costs of the business.

The state of the market for the product – if there is a high demand for the product, but a
shortage of supply, then the business can put prices up.

The state of the economy – some products are more sensitive to changes in unemployment
and workers wages than others. Makers of luxury products will need to drop prices especially
when the economy is in a downturn.

The bargaining power of customers in the target market – who are the buyers of the product?
Do they have any bargaining power over the price set? An individual consumer has little
bargaining power over a supermarket (though they can take their custom elsewhere).
However, an industrial customer that buys substantial quantities of a product from a business
may be able to negotiate lower or special prices.

Other elements of the marketing mix – it is important to understand that prices cannot be set
without reference to other parts of the marketing mix. The distribution channels used will
affect price – different prices might be charged for the same product sold direct to consumers
or via intermediaries. The price of a product in the decline stage of its product life­cycle will
need to be lower than when it was first launched.
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b) To what extent is price the most important factor in the successful marketing of a
firm’s products?[15]
Price is important to marketers because it represents marketers' assessment of the value
customers see in the product or service and are willing to pay for a product or service. The
other elements of the marketing mix (product, place and promotion ) may seem to be more
glamorous than price, and thus get more attention, but determining the price of a product or
service is actually one of the most important management decisions. Here's why.

While product, place and promotion affect costs, price is the only element that affects
revenues, and thus, a business's profits . Price can lead to a firm's survival or demise.

Adjusting the price has a profound impact on the marketing strategy, and depending on the
price elasticity of the product, it will often affect the demand and sales as well. Both a price
that is too high and one that is too low can limit growth. The wrong price can also negatively
influence sales and cash flow .

Problems occur if the marketer fails to set a price that complements the other elements of the
marketing mix and the business objectives, as pricing contributes to how customers perceive
a product or a service. A high price indicates high quality. The term luxury comes to mind. If,
however, a firm wants to position itself as a low­cost provider, it will charge low prices. Just
as they do with high­end providers, consumers know what to expect when they see low prices.

So, as you can see, it is important that a company sets the right price. A company's success
can depend on it. However, with so many factors to consider along with the lack of a crystal
ball that will show the effect of a price change, It isn't so easy to do.

3. “Break even analysis is of limited value to business.” To what extent is this statement
true? [25]

Breakeven Analysis

Break­even analysis is a practical and popular tool for many businesses, including start­ups.
However, you also need to know about the limitations of the method. Here is a summary of
the key issues from the perspective of a start up or new business, for whom breakeven
analysis is particularly relevant and important.

Strengths of breakeven analysis

Focuses entrepreneur on how long it will take before a start­up reaches profitability – i.e.
what output or total sales is required

Helps entrepreneur understand the viability of a business proposition, and also those who will
lend money to, or invest in the business

Margin of safety calculation shows how much a sales forecast can prove over­optimistic
before losses are incurred
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Helps entrepreneur understand the level of risk involved in a start­up

Illustrates the importance of a start­up keeping fixed costs down to a minimum (higher fixed
costs = higher break­even output)

Calculations are quick and easy – great for giving quick estimates

Limitations of breakeven analysis

Unrealistic assumptions – products are not sold at the same price at different levels of output;
fixed costs do vary when output changes

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted
output too

Variable costs do not always stay the same. For example, as output rises, the business may
benefit from being able to buy inputs at lower prices (buying power), which would reduce
variable cost per unit.

Most businesses sell more than one product, so break­even for the business becomes harder
to calculate

Break­even analysis should be seen as a planning aid rather than a decision­making tool

4. Evaluate the significance of setting objectives to a business organisation. [25]

Provides direction for the customer and organisation

It’s important to be on the same page as your customer to create a common sense of purpose.
The customer feels like they are a part of the brand, not separated from it, when they are able
to see the course the brand is taking . Providing direction for the customer makes them feel
more secure and gives your organisation guidance for promotional activities.

Fundamental for human motivation within the organisation

Employees need guidance and motivation. By providing them with a target you give them a
reason to prove themselves. Nobody wants employees running around the office like a bunch
of lunatics because they have no idea where they’re supposed to go. Setting objectives
motivates them to achieve.

Keeps your performance in check

How do you know that your strategies producing epic results when you don’t have any
objectives to measure your results against? Of course, there’s a chance you may not be
meeting your objectives, but that’s okay, because now that you keep yourself in check, you
can improve your performance before anyone even notices that you were slacking.
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Allows you to organise various marketing techniques towards a common goal

Within the marketing process, there are many factors that need to be accomplished such as
campaigns, strategies, research, reporting, content creation and development. If you have set
common goals then you will be able to aim and integrate all of these factors in the same
direction. Establishing this will make your brand that much stronger.

Encourages frequent communication within the organisation

Setting objectives leads to good communication. The organisation needs to constantly be

reassessing and re­evaluating the objectives they have set and how they can be increased or
improves. This means that the various departments have to communicate and coordinate with
one another in order to achieve this.

Bridges the gap between customer expectations and reality

Realistic and attainable objectives assure that your customer will not have expectations that
are impossible for you to meet. This allows you to set goals that are achievable and
measurable, and when you do achieve them, it builds up the customers trust in you. By not
setting objectives, you could be aiming for a successful campaign while the customer has
been preparing for world domination. Set objectives that bridge that gap.

Key driver of your strategies

And by key driver, we mean absolutely, one hundred percent necessary. By setting objectives,
you are able to come up with well­defined strategies that are guaranteed to make you look
like a marketing guru ( because that is what you are of course). Without setting objectives,
your strategies have no purpose and that’s definitely not what you’re going for. .

Challenges you to think creatively and strategically

We all care what we look like. So if you’re going to set bland, easy objectives that don’t
challenge you, you won’t look very impressive. We know you want your customers to be
blown out of the water, so setting objectives that require you to get your creative skills and
strategic thinking caps on, will undoubtedly produce an outcome that will be far greater than
the alternative.

Increases customer loyalty

As you begin to smash the objectives you set out of the ball park, your customers admiration,
satisfaction and loyalty towards your brand will begin to increase. You will be set apart, and
look better than everyone else.

Differentiates between Reach, Act, Engagement and Conversion

Yes, those are four separate things that need to be considered individually and holistically.
When you set objectives, you are able to differentiate between these four goals and set
specific objectives for each, in doing so you can come up with individual strategies. Once
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you achieve each of these goals you will be on your way to accomplishing the final, common
goal – to be the best of the best.

5. Assess the importance of the following activities in an organisation.

a) Job evaluation [9]

Job evaluation is the systematic process for assessing the relative worth of jobs within an
organization. A comprehensive analysis of each position’s tasks, responsibilities, knowledge,
and skill requirements is used to assess the value to the employer of the job’s content and
provide an internal ranking of the jobs. It is important to remember that job evaluation is a
measurement of the internal relativity of the position and not the incumbent in the position.
This analysis can also contribute to effective job design by establishing the organizational
context and value of the job, and to hiring and promotion processes by providing job analysis
on skill and competencies required to successfully meet job requirements.

Job evaluation provides a rational and consistent approach for determining the pay of
employees within an organization. Paying fairly based on internal relative worth is called
Internal Equity. Job evaluation can be used independently, although it is usually part of a
compensation system designed to provide appropriate salary ranges for all positions. This
process will ensure an equitable and defensible compensation structure that compensates
employees fairly for job value.

When to conduct job evaluation

The job evaluation process should be conducted after completing a job analysis but before
creating a compensation program . Job evaluation should be conducted for every new
position in order to ensure the organization is hiring the correct level based on expected tasks,
qualifications and responsibilities of the job. Job evaluations should also be conducted when
a job has changed substantially in order to reflect the current role, which is known as
reclassification or re­evaluation.

The goal is to identify what is required to ensure satisfactory performance and/or progression.
Therefore, the same criteria should be used when hiring a new employee, during the
establishment of goals and expectations, in recognizing achievement, or in promotion of an
employee.

b) on­the­job training [8]

On­the­job training is a form of training taking place in a normal working situation. It is a one
­on­one training located at the job site, where someone who knows how to do a task shows
another how to perform it. In antiquity, the work performed by most people did not rely on
abstract thinking or academic education. Parents or community members, who knew the
skills necessary for survival, passed their knowledge on to the children through direct
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instruction.

On the Job Training is still widely used today. It is a frequently used method of training
because it requires only a person who knows how to do the task, and the tools the person uses
to do the task. It may not be the most effective or the most efficient method at times, but it is
normally the easiest to arrange and manage. Because the training takes place on the job, it can
be highly realistic and no transfer of learning is required. It is often inexpensive because no
special equipment is needed other than what is normally used on the job. One drawback is
that On the Job Training takes the trainer and materials out of production for the duration of
the training time. In addition, due to safety or other production factors, it is prohibitive in
some environment.

c) collective bargaining [8]

Collective bargaining is a process of negotiation between employers and a group of

employees aimed at agreements to regulate working salaries, working conditions, benefits,
and other aspects of workers' compensation and rights. The interests of the employees are
commonly presented by representatives of a trade union to which the employees belong. The
collective agreements reached by these negotiations usually set out wage scales, working
hours, training, health and safety, overtime, grievance mechanisms, and rights to participate
in workplace or company affairs.

The union may negotiate with a single employer (who is typically representing a company's
shareholders) or may negotiate with a group of businesses, depending on the country, to reach
an industry­wide agreement. A collective agreement functions as a labour contract between
an employer and one or more unions. Collective bargaining consists of the process of
negotiation between representatives of a union and employers (generally represented by
management, or, in some countries such as Austria, Sweden and the Netherlands, by an
employers' organization ) in respect of the terms and conditions of employment of employees,
such as wages, hours of work, working conditions, grievance procedures, and about the rights
and responsibilities of trade unions.

6 “ The Just in Time method of stock management is not compatible with flow
production.”
a) To what extent do you agree with this statement? [10]

Just in time (JIT) is an inventory management system, used to manage the stock that is
kept in storage. It involves receiving goods from suppliers as and when they are
required, rather than carrying a large inventory at once.

Advantages of just in time inventory management

Companies like to use JIT as it is seen as a more cost efficient method of holding stock.
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Its purpose is to minimise the amount of goods you hold at any one time, and this has
numerous advantages:

Less space needed : With a faster turnaround of stock, you don’t need as much
warehouse or storage space to store goods. This reduces the amount of storage an
organisation needs to rent or buy, freeing up funds for other parts of the business.

Waste reduction: A faster turnaround of stock prevents goods becoming damaged or

obsolete while sitting in storage, reducing waste. This again saves money by preventing
investment in unnecessary stock, and reducing the need to replace old stock.

Smaller investments: JIT inventory management is ideal for smaller companies that
don’t have the funds available to purchase huge amounts of stock at once. Ordering
stock as and when it’s needed helps to maintain a healthy cash flow.

All of these advantages will save the company money.

Disadvantages of just in time inventory management

JIT unfortunately comes with a number of potential disadvantages, which can have a
significant impact on the company if they occur.

Risk of running out of stock : By not carrying much stock, it is imperative you have the
correct procedures in place to ensure stock can become readily available, and quickly.
To do this, you need to have a good relationship with your supplier(s). You may need
to form an exclusive agreement with suppliers that specifies supplying goods within a
certain time frame, prioritising your company. JIT means that you become extremely
reliant on the consistency of your supply chain. What if your supplier struggles with
your requirements, or goes out of business? Can you get the products quickly from
somewhere else?

Lack of control over time frame: Having to rely on the timeliness of suppliers for each
order puts you at risk of delaying your customers’ receipt of goods. If you don’t meet
your customers’ expectations, they could take their business elsewhere, which would
have a huge impact on your business if this occurs often.

More planning required : With JIT inventory management, it’s imperative that
companies understand their sales trends and variances in close detail. Most companies
have seasonal sales periods, meaning a number of products will need a higher stock
level at certain times of the year due to higher demand. Therefore, you need to factor
that into planning for inventory levels, ensuring suppliers are able to meet different
volume requirements at different times.

In conclusion, if run properly, JIT inventory management is seen as one of (if not the)
best ways of managing inventory. While it is not without risks, it has significant
rewards, and is ideal for those who are able to plan carefully in advance, and build
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strong relationships with suppliers.

b) Evaluate the appropriateness of flow production to a soft drink manufacturer.

[15]

As a business grows the scale of its operations, it often needs to change its method of
production to allow greater production capacity. A small business might use job or
batch production to provide a personalised or distinctive product. However, if the
product is intended for much larger, mass markets , then alternative methods of
production may be required in order for the product to be produced efficiently . A key
production method in these circumstances is flow production.

Flow production involves a continuous movement of items through the production

process .This means that when one task is finished the next task must start immediately.
Therefore, the time taken on each task must be the same. Flow production (often known
as mass production) involves the use of production lines such as in a car manufacturer
where doors, engines, bonnets and wheels are added to a chassis as it moves along the
assembly line. It is appropriate when firms are looking to produce a high volume of
similar items . Some of the big brand names that have consistently high demand are
most suitable for this type of production.

Advantages of flow production

Flow production is capital intensive . This means it uses a high proportion of machinery
in relation to workers, as is the case on an assembly line. The advantage of this is that a
high number of products can roll off assembly lines at very low cost. This is because
production can continue at night and over weekends and also firms can benefit from
economies of scale, which should lower the cost per unit of production.

Disadvantages of flow production

The main disadvantage is that with so much machinery it is very difficult to alter the
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production process.

This makes production inflexible and means that all products have to be very similar or
standardised and cannot be tailored to individual tastes.

Another disadvantage of using flow production is that the work can be pretty boring for
employees involved. Keeping staff motivated is therefore an important issue for
management.

7 a) Evaluate the contribution of advertising towards the marketing of goods and services.
[12]

Provides information: Advertising's primary purpose is to provide information about

products or services to prospective buyers. The details of products such as features, uses,
prices, benefits, manufacturer's name, so on; are in the advertisements. The key message and
brand name are also there. The information supplied educate and guide consumers and
facilitate them to make a correct choice while buying a product.

Paid communication: Advertising is a form of paid communication. The advertiser pays to

the media for giving publicity to his advertised message. He also decides the size, slogan, etc.
given in the advertisement.

Non­personal presentation: Advertising is non­personal in character as against salesmanship,

which is a personal or face to face communication. Here, the message is given to all and not
to one specific individual. This rule is applicable to all media including the press. However,
even in it, target consumers or target market can be selected for making an advertised appeal.

Publicity: Advertising publicizes goods, services, ideas and event events. It is primarily for
giving information to consumers. This information is related to the features and benefits of
goods and services of different types. It offers new ideas to customers as its contents are
meaningful. The aim is to make the popularize ideas and thereby promote sales. For example,
an advertisement for family planning, family welfare, and life insurance is useful for placing
new ideas before the people.

Primarily for Persuasion: Advertising aims at the persuasion of potential customers. It attracts
attention towards a particular product, creates a desire to have it, and finally induces
consumers to visit the market and purchase the same. It has a psychological impact on
consumers. It influences their buying decisions.

Target oriented: Advertising becomes effective and result­oriented when it is target oriented.
A targeted advertisement intensively focuses on a specific market or particular groups of
customers (like teenagers, housewives, infants, children, etc.). Here, the selection of a
particular market is called a target market.

Art, science and profession: Advertising is art, science and a profession, and this is now
universally accepted. It is an art as it needs creativity for raising its effectiveness. It is a
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science as it has its principles or rules. It is also a profession as it has a code of conduct for its
members and operates within standards set by its organized bodies. In its field, AD Agencies
and space brokers function as professionals.

The element of a marketing mix: Advertising is an important part of a marketing mix. It

supports the sales promotion efforts of the manufacturer. It makes a positive contribution to
sales promotion provided other elements in the marketing mix are reasonably favourable. It is
alone inadequate for promoting sales. Many companies now spend huge funds on
advertisements and public relations.

Creativity: Advertising is a method of presenting a product in an artistic, attractive and

agreeable manner. It is possible through the element of creativity. The creative people
(professionals) introduce creativity in advertisements. Without it, the Ads won't succeed.
Therefore, creativity is called the ‘Essence of Advertising.’

c) Evaluate the usefulness of market segmentation to a manufacturer of clothes.

[13]

Market segmentation pertains to the division of a set of consumers into persons with
similar needs and wants. Market segmentation allows for a better allocation of a firm's
finite resources. Due to limited resources, a firm must make choices in servicing
specific groups of consumers. With growing diversity in the tastes of modern
consumers, firms are taking note of the benefit of servicing a multiplicity of new
markets. Market segmentation can be defined in terms of the STP acronym, meaning
Segment , Target and Position .

Benefits of Segmentation

While there may be theoretically 'ideal' market segments , in reality, every organization
engaged in a market will develop different ways of imagining market segments, and
create product differentiation strategies to exploit these segments. The market
segmentation and corresponding product differentiation strategy can give a firm a
temporary commercial advantage. Most market segmentations are the techniques used
to attract the right customer.

In essence, the marketing objectives of segmentation analysis are:

To reduce risk in deciding where, when, how, and to whom a product, service, or brand
will be marketed

To increase marketing efficiency by directing effort specifically toward the designated

segment in a manner consistent with that segment's characteristics

Market segmentation is a twofold process that includes:

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1. Identifying and classifying people into homogeneous groupings, called segments

2. Determining which of these segments are viable target markets.

The Segmented Market

The premise of segmenting the market theorizes that people and/or organizations can be
most effectively approached by recognizing their differences and adjusting accordingly.
By emphasizing a segmentation approach, the exchange process should be enhanced,
since a company can more precisely match the needs and wants of the customer.

While product differentiation is an effective strategy to distinguish a brand from

competitors ', it also differentiates one product from another. For example, a company
such as Franco­American Spaghetti has differentiated its basic product by offering
various sizes, flavours, and shapes. The objective is to sell more product, to more
people, more often. The problem is not competition; the problem is the
acknowledgment that people within markets are different and that successful marketers
must respond to these differences.

Choosing a Target Market from within a Defined Segment

While it is relatively easy to identify segments of consumers, most firms do not have
the capabilities or the need to effectively market their product to all of the segments
that can be identified. Rather, one or more target markets (segments) must be selected.
A company selects its target market because it exhibits the strongest affinity to a

particular product or brand. It is in essence the most likely to buy the product.

8.a) Explain the distinction between financial and management accounting. [5]

Financial accounting has its focus on the financial statements which are distributed to
stockholders, lenders, financial analysts, and others outside of the company. Courses in
financial accounting cover the generally accepted accounting principles which must be
followed when reporting the results of a corporation's past transactions on its balance sheet,
income statement, statement of cash flow, and statement of changes in stockholders' equity.

Managerial accounting has its focus on providing information within the company so that its
management can operate the company more effectively. Managerial accounting and cost
accounting also provide instructions on computing the cost of products at a manufacturing
enterprise. These costs will then be used in the external financial statements. In addition to
cost systems for manufacturers, courses in managerial accounting will include topics such as
cost behaviour, break­even point, profit planning, operational budgeting, capital budgeting ,
relevant costs for decision making, activity based costing, and standard costing.
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b) Discuss the importance of ratio analysis to the following stakeholders:

Ratios as a tool of financial analysis provide symptoms with the help of which any
analyst is in a position to diagnose the financial health of the unit. Financial analysis
may be compared with biopsy conducted by the doctor on the patient in order to
diagnose the causes of illness so that treatment may be prescribed to the patient to help
him recover. As, already hinted different groups of persons are interested in the affairs
of any business entity, therefore, significance of ratio analysis for various groups is
different and may be discussed as follows:

i) managers

ii) creditors

Creditors may broadly be classified into short­term and long term. Short­term creditors are
trade creditors, bills payables, creditors for expenses etc., they are interested in analyzing the
liquidity of the unit. Long­term creditors are financial institutions, debenture holders,
mortgage creditors etc., they are interested in analyzing the capacity of the unit to repay
periodical interest and repayment of loans on schedule. Ratio analysis provides, both type of
creditors, answers to their questions.

iii) shareholders

Existing as well as prospective owners or shareholders are fundamentally interested in the (a)
long­term solvency and (b) profitability of the unit. Ratio analysis can help them by
analyzing and interpreting both the aspects of their unit.

iv) workers [20]

Employees are interested in fair wages: adequate fringe benefits and bonus linked with
productivity/profitability. Ratio analysis provides them adequate information regarding
efficiency and profitability of the unit. This knowledge helps them to bargain with the
management regarding their demands for improved wages, bonus etc.

9. Evaluate the usefulness of installing and using computers to the management of a

large manufacturing firm. [25]
Computers have tremendously improved the way businesses operate in their respective
industries. Technology has advanced so remarkably that those who are not using computers
in their business are at a major disadvantage against their competitors. In particular, there are
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several important advantages that computers can provide to small businesses.

Organization

Computers allow the application of different types of software that can help businesses keep
track of their files, documents, schedules and deadlines. Computers also allow businesses to
organize all of their information in a very accessible manner. The ability to store large
amounts of data on a computer is convenient and inexpensive, and saves space. A computer's
ability to allow a company to organize its files efficiently leads to better time management
and productivity.

Self­Sufficiency

Computers have made staff and companies more self­sufficient by allowing them to do tasks
that previously had to be outsourced. For example, a company can now use office software to
create their own training material. Desktop publishing software can be used to create
marketing materials. Online tax and accounting programs allow companies to prepare their
own taxes. This allows the dominant operations of a company to remain in­house and
empowers the company to become more independent and less susceptible to errors committed
by outside parties.

Cost­Effective

Emerging technology makes new tools and services more affordable and allows companies to
save on their staff payroll and office equipment. Because computers allow work to be done
faster and more efficiently, it is possible for a company to hire fewer staff. In addition, with
networked and relatively inexpensive computers, companies can store data more easily,
saving on the cost of outside file storage, and can avoid having to purchase as many copiers,
fax machines, typewriters, and other such items that were used before computers became
popular. Correspondingly, potentially profitable businesses can be started with a smaller
overhead cost. Email capabilities decrease postage costs; software applications reduce the
need for large accounting departments, while videoconferencing reduces the need for travel.
All resources saved will trickle down to the consumers, who are then provided with much
more affordable products and service.

Speed

Computers help speed up other business operations. The collecting of consumer feedback,
ordering of raw materials, and inspection of products is made quicker through the use of
computers, allowing companies to operate much faster and to produce better quality results.

Cheaper Research and Development

R&D, or research and development, costs will also decrease with the help of computers.
Scientific research can now be done using the Internet and computer software applications
designed to develop and produce new products and services. For example, instead of a
company having to do in­person focus groups on a potential new product or to determine
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their target market, the company can conduct a widespread online survey for a far lower cost.
In addition, new models of a product can be created online using virtual pictures and
drawings instead of having to be hand­drawn. These interactive models created using
software programs can help bring the product and its features to life for a far lower cost than
creating an actual physical model of the given product.

Sales

Computers can help generate higher sales and profits for businesses via a company website.
Many businesses now operate online and around the clock to allow customers from around
the world to shop for their products and services.

Disadvantages of computer

The use of computer has also created some problems in society which are as follows.

Unemployment

Different tasks are performed automatically by using computers. It reduces the need of people
and increases unemployment in society.

Wastage of time and energy

Many people use computers without positive purpose. They play games and chat for a long
period of time. It causes wastage of time and energy. Young generation is now spending
more time on the social media websites like Facebook, Twitter etc or texting their friends all
night through smart phones which is bad for both studies and their health. And it also has
adverse effects on the social life.

Data Security

The data stored on a computer can be accessed by unauthorized persons through networks. It
has created serious problems for the data security.

Computer Crimes

People use the computer for negative activities. They hack the credit card numbers of the
people and misuse them or they can steal important data from big organizations.

Privacy violation

The computers are used to store personal data of the people. The privacy of a person can be
violated if the personal and confidential records are not protected properly.

Health risks

The improper and prolonged use of computer can results in injuries or disorders of hands,
wrists, elbows, eyes, necks and back. The users can avoid health risks by using the computer
in proper position. They must also take regular breaks while using the computer for longer
period of time. It is recommended to take a couple of minutes break after 30minutes of
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computer usage.

Impact on Environment

The computer manufacturing processes and computer waste are polluting the environment.
The wasted parts of computer can release dangerous toxic materials. Green computer is a
method to reduce the electricity consumed and environmental waste generated when using a
computer. It includes recycling and regulating manufacturing processes. The used computers
must be donated or disposed off properly.

10. Why firms need finance

Businesses need finance to:­

Start a business­a new business will need finance to buy assets, materials and

employ staff. There will also need to be money to cover the running costs.

(running costs = ongoing costs such as electricity, rent, insurance)

Finance expansions to production capacity­As a business grows, it needs to be able to

produce more and new technology and machinery to cut costs and keep up with competitors.

To develop and market new products­ a business needs to spend money on developing and
marketing new products e.g. to do marketing research and test new products in “pilot”
markets.
To enter new markets­When a business grows it may sell products into new markets. These
can be new geographical areas to sell to (e.g.export markets) or new types of customers.
This costs money in terms of research and marketing e.g. advertising campaigns and setting
up retail outlets.

Take­over or acquisition­When a business buys another business, it will need to money to

pay for the acquisition (acquisitions involve significant investment).

To pay for the day to day running of business­A business needs money to pay for day to day
items such as paying a supplier for raw materials or paying the wages or buying a new printer
cartridge.

11.What is investment appraisal?

Before committing to high levels of capital spend, companies normally undertake investment
appraisal.

Investment appraisal has the following features:

 Assessment of the level of expected returns earned for the level of expenditure made
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 Estimates of future costs and benefits over the project's life.

When a proposed capital project is evaluated, the costs and benefits of the project should be
evaluated over its foreseeable life. This is usually the expected useful life of the non­current
asset to be purchased, which will be several years. This means that estimates of future costs
and benefits call for long­term forecasting.

A 'typical' capital project involves an immediate purchase of a non­current asset. The asset is
then used for a number of years, during which it is used to increase sales revenue or to
achieve savings in operating costs. There will also be running costs for the asset. At the end
of the asset's commercially useful life, it might have a 'residual value'. For example, it might
be sold for scrap or in a second­hand market. (Items such as motor vehicles and printing
machines often have a significant residual value.)

A problem with long­term forecasting of revenues, savings and costs is that forecasts can be
inaccurate. However, although it is extremely difficult to produce reliable forecasts, every
effort should be made to make them as reliable as possible.

A business should try to avoid spending money on non­current assets on the basis of wildly
optimistic and unrealistic forecasts.

The assumptions on which the forecasts are based should be stated clearly. If the assumptions
are clear, the forecasts can be assessed for reasonableness by the individuals who are asked to
authorise the spending.

Two basic appraisal techniques covered here are Accounting Rate of Return and Payback.

There are other more sophisticated methods of investment appraisal such as Net Present
Value (NPV) and Internal Rate of Return (IRR).

Accounting profits and cash flows

In capital investment appraisal it is more appropriate to evaluate future cash flows than
accounting profits, because:

 profits cannot be spent

 profits are subjective

 cash is required to pay dividends.

1. Accounting Rate of Return(ARR)

Formula

 The initial capital cost could comprise any or all of the following:
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 cost of new assets bought

 net book value (NBV) of existing assets to be used in the project

 investment in working capital

 capitalised R&D expenditure

Decision rule

If the expected ARR for the investment is greater than the target or hurdle rate (as decided by
management) then the project should be accepted.

Example using ARR

A project requires an initial investment of $800,000 and then earns net cash inflows as
follows:

In addition, at the end of the seven­year project the assets initially purchased will be sold for
$100,000.

Required:

Determine the project's ARR using:

(a) initial capital costs

(b) average capital investment.

Solution:

Advantages of ARR

 simplicity

 links with other accounting measures.

Disadvantages of ARR

 no account is taken of project life

 no account is taken of timing of cash flows

 it varies depending on accounting policies

 it may ignore working capital

 it does not measure absolute gain

 there is no definitive investment signal.

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2.Payback

The payback period is the time a project will take to pay back the money spent on it. It is
based on expected cash flows and provides a measure of liquidity.

Formula

Constant annual cash flows:

Uneven annual cash flows:

Where cash flows are uneven, payback is calculated by working out the cumulative cash flow
over the life of the project.

Decision rule

When using Payback, the company must first set a target payback period.

Select projects which pay back within the specified time period

Choose between options on the basis of the fastest payback

Example using Payback

Constant annual cash flows

An expenditure of $2 million is expected to generate net cash inflows of $500,000 each year
for the next seven years.

What is the payback period for the project?

Uneven annual cash flows

A project is expected to have the following cash flows:

What is the expected payback period?

Payback is between the end of Year 3 and the end of Year 4. This is the point at which the
cumulative cash flow changes from being negative to positive. If we assume a constant rate
of cash flow throughout the year, we could estimate that payback will be three years plus
($500/800) of Year 4. This is because the cumulative cash flow is minus $500 at the start of
the year and the Year 4 cash flow would be $800. Therefore payback is after 3.625 years.

Advantages include:

 it is simple

 it is useful in certain situations:

­rapidly changing technology

­improving investment conditions

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 it favours quick return:

 helps company growth

 minimises risk

 maximises liquidity

 it uses cash flows, not accounting profit.

Disadvantages include:

 it ignores returns after the payback period

 it ignores the timings of the cash flows. This can be resolved using the discounted
payback period.

 it is subjective as it gives no definitive investment signal

 it ignores project profitability.

12. Explain ways of reducing high labour turnover

1. Give employees avenues to express purpose.

People want to do work that matters and this is particularly true when it comes to anyone
under the age of 35. Compared with Boomers and Gen Xers, Millennials have no qualms
about leaving a company to go somewhere they can do meaningful work. To help with this
Michelin recently offered employees the opportunity to support the company's value of
environmental sustainability. About 1,400 employees threw their hats into a lottery which
sent 10 people to Yellowstone National Park where they replaced the asphalt walkways
around Old Faithful with a porous kind of a rubber mat asphalt made from tires which lets
water drain into the aquifer.

2. Challenge them to grow.

One way Michelin does this is by giving employees opportunities to rotate between functions
within the company. "It keeps it new and exciting and they're challenged," he says. "And
when people are challenged we know they perform better, both individually and as a team."

3. Set collective goals and reward teams for meeting them.

While Michelin recognizes individual accomplishments, the company is focusing more on

rewarding collective contributions. For example, in 2015 the company set a revenue growth
goal and then communicated monthly progress, focusing on the message that once the goal is
met everyone will receive a payout. "The amazing thing is when I visit sites today and talk
with employees and ask what the growth was in a certain month almost all of them can repeat
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it immediately," he says. "A year ago­­ before we had this­­almost no one would have been
able to say that."

4. Instill a culture of innovation.

Who doesn't want to be involved in doing cutting­edge work? Plus, any company seeking to
stay ahead of the competition must incessantly innovate. And while you may not think of
tires as a high­tech product, how the rubber and road interact is actually a fairly complicated
process. To foster a companywide mindset of innovation Michelin sponsors cross­functional
hackathons and internal incubators in which employees are encouraged to take risks and
generate good ideas.

5. Model servant leadership.

Think of the best boss you've ever had. Was this person humble and approachable? Stafford
says Michelin does not have a C­suite of offices regular employees cannot access and that
executives are genuinely interested in the wellbeing of employees. As proof, he points to
family health clinics the company provides at four of its larger sites so employees can receive
care right at work. "Our goal is to make sure all of our employees retire healthy and prepared
for retirement financially," he says.

6. Make them believe you're committed to them for the long haul.

During the financial crisis of 2008 Michelin didn't lay people off, but reduced work hours
while continuing to give employees full benefits. Then, when the markets turned around the
company gave employees who were impacted bonus checks to thank them for sticking with
the company during hard times. "We bought a lot of respect with our employees," he says.
"They really trust us and know that we'll be there when things get tough."

14. Stakeholders

There are many groups of people who have an interest, financial or otherwise, in the
performance of a business ­ these different groups are known as stakeholders. The main
stakeholders are considered to be:

Shareholders

These people have a clear financial interest in the performance of the business. They have
invested money into the company through purchasing shares and they expect the company to
grow and prosper so that they receive a healthy return on their investment. The return that
they receive can come in two forms. Firstly, by a rise in the share price, so that they can sell
their shares at a higher price than the purchase price (this is known as making a capital gain ).
Secondly, based on the level of profits for the year, the company issues a portion of this to
each shareholder for every share that they hold (this is known as a dividend ). The
shareholders are also entitled to vote each year at the A.G.M. to elect the Board of Directors,
who will run the company on their behalf.
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Employees

This group also has an obvious financial interest in the company, since their pay levels and
their job security will depend on the performance and the profitability of the business. It is
employees who perform the basic functions and tasks of the business (producing output,
meeting deadlines and delivery dates, etc.) and over recent years their traditional role has
started to change. They are often now encouraged to become involved in multi­skilled team
working, problem solving and decision making ­ thus having a significant input to the
workings of the business.

Customers

Customers are vital to the survival of any business, since they purchase the goods and
services which provides the business with the majority of its revenue. It is therefore vital for a
business to find out exactly what the needs of the consumers are, and to produce their output
to directly satisfy these needs ­ this is done through market research. The goods and services
must then be promoted in such a way as to appeal to the target market and to inform them of
the availability, price, etc. Once the goods and services have been purchased by the customer,
it is essential that after­sales service is offered and that the customer is happy with his/her
purchase. The business must try to keep the customer loyal so that they return in the future
and become a repeat­purchaser.

Suppliers

Without flexible and reliable suppliers , the business could not guarantee that it will always
have sufficient high quality raw materials which they require to produce their output. It is
important for a business to maintain good relationships with their suppliers, so that raw
materials and components can be ordered and delivered at short notice, and also so that the
business can negotiate good credit terms from the suppliers (i.e. buy now, pay at a later date).

The Government

The government affects the workings of businesses in many ways:

1. Businesses have to pay a variety of taxes to central and local government, including
Corporation tax on their profits, Value­Added Tax (V.A.T) on their sales, and Business Rates
to the local council for the provision of local services.

2. Businesses also have to adhere to a wide­ranging amount of legislation, which is aimed at

protecting the consumers, the employees and the local environment from business activity.

3. Businesses will be affected by different economic policies, (for example, if interest rates
are increased, then this will discourage businesses from borrowing money since the
repayments will now be significantly higher). However, businesses can also benefit from
government incentives and initiatives, such as new infrastructure, job creation schemes and
business relocation packages, offering cheap rent, rates and low­interest loans.
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The Local Community

Businesses are likely to provide significant amounts of employment for the local community
and often will produce and sell much of their output to the local residents. The sponsorship of
local events and good causes (such as local charity work) can also help the business to
establish itself in the community as a caring, socially responsible organisation. Many
businesses develop links with local schools and colleges, offering sponsorships and resources
to these under­funded institutions. However, businesses can also cause many problems in
local communities, such as congestion, pollution and noise, and these negative externalities
may often outweigh the benefits that the businesses bring to the community.

Disagreements between stake holders

Due to the demands placed on businesses by so many different stakeholders, it is no surprise

that there are often disagreements and conflict between the different groups. Some of the
more common areas of conflict are:

Shareholders and management

Profit maximisation is often the over­riding objective of shareholders ­ resulting in large

dividend payments for them. However, it is far more likely that the managers of the business
will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a
satisfactory level of profits, and then use the remaining resources to pursue other objectives
such as diversification and growth). This conflict between these two groups is often referred
to as divorce of ownership (the shareholders) and control (the management).

Customers and the business

Customers are unlikely to remain loyal and repeat purchase from the business if the product
that the have purchased is of poor quality and/or is poor value for money. More customers are
prepared to complain about the quality of products and after­sales service than ever before,
and the business must ensure that it has in place a number of strategies designed to satisfy the
disgruntled customer, reimburse any financial loss that they may have incurred and persuade
them to remain loyal to the business.

Suppliers and the business

Suppliers are often quoted as complaining about the lack of prompt payments from
businesses for deliveries of raw materials, and if this became a regular problem then the
suppliers may well refuse credit to the businesses or may even cease all dealings with them.
On the other hand, many businesses have been known to complain about the late deliveries of
raw materials and components from suppliers, and the dubious quality of the parts once they
have been inspected.

The community and the business

As outlined previously, the local community can often suffer at the hands of a large company
through the negative externalities of pollution, noise, congestion and the building of new
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factories in areas of outstanding beauty. However, if the business faces strong protests from
residents and from pressure groups concerned about its actions, then it may decide to relocate
to another area, causing much unemployment and a fall in investment in the community it
leaves behind.

14. Ratio Analysis Importance and Limitations

Ratio analysis is an important and useful technique to check upon the efficiency of an
organization. The management can arrive at important decisions by using ration analysis. The
ratio is used for expressing the mutual relation to different accounts consisting in the financial
statement.

In fact, any given data in the financial statements are not important in itself. To make its real
importance clear, it is to be expressed in referring to other figures. With the help of ratio, the
big figure or groups can be made short and simple. From this, the business activities are made
possible to analyze systematically.

Importance of Ratio Analysis

Helpful in assessing operating efficiency of the Business­The ratio can be used as the
measuring rod of efficiency. With the help of this, the evaluation of changes during different
period can be performed. In this way, the comparative efficiency of company can be
informed.

Helpful in measuring financial solvency­Ratios are useful tools for evaluating the liquidity
and solvency position of a concern. They point out the liquidity position of an organization to
meet its short and long term obligations.

Helpful in future forecasting­Ration analysis is very helpful in financial forecasting and

planning. The ration calculation of past years works guide line for the future.

Helpful in decision making­Ratio analysis is also very helpful for decision making. The
information provided by ration analysis is very useful for making decision on any financial
activity.

Helpful in corrective action­Ratio analysis can also point out the deficiencies of the business
so that corrective steps may be taken accordingly.

Helpful in comparing inter firm performance­Due to inter firm comparison, ratio analysis
also serves as a stepping stone to remedial measures. It helps management evolving future
'market strategies'.

Helpful in communication­Ratio is an effective means of communication. Different financial

ratios communicate the strength and financial standing of the firm to the internal and external
parties.

Helpful in cost control­From the use of ratio, it is possible to control the different costs of the
concern.
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Limitations of Ratio Analysis

The ratio analysis contributes a lot to portray the financial position of a business. But they
suffer from various limitations.

Limited use of single ratio­A single ratio in itself is not important. It would not be able to
convey anything. For making a meaningful conclusion, a number of ratios which makes
confusion to analyst is to be calculated.

Difficult to interpreter­It is very difficult task to fix an adequate standard for compression
purpose. There are no rules of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ration difficult.

Ignored qualitative factors­ Ratio analysis is related to the quantitative analysis only but
not with a qualitative analysis because it is ignored by ratio analysis.

Limitation of accounting record­Ratio analysis is related to financial statement. Financial

statement itself is subject to limitations. This ratio analysis also suffers from the inherent
weakness of the financial statement.

Mislead by accounting procedure­There must be uniformity in the accounting procedure used

by the concerns which are going to be taken as a window dressed. So the analyst must be
very careful on making decision from ratio calculated from such financial statement.

Wrong conclusion­The analyst or the user must have knowledge about the concern whose
statements have been used for calculating the ratios. Only then the conclusion may be draw.
The conclusion may be wrong if it has been drawn.

Price level changes­While making comparisons of ratios, no allowance for changes in general
price level is made. A change in price level can seriously affect the validity of comparisons of
ratios computed for different periods.

Personal Bias­Ratios have to be interpreted and different people may interpret the same ratio
in different ways. Ratios are means to achieve a particular and but not an end itself. It totally
depends upon the user as what conclusion he draws on the basis of ratio calculation.

15. Explain the importance of motivation in a business?

The importance of motivation is brought out by the following facts:

Improves performance level­The ability to do work and willingness to do work both affect
the efficiency of a person. The ability to do work is obtained with the help of education and
training and willingness to do work is obtained with the help of motivation. Willingness is
more important in comparison to ability. For example, a person is highly educated and he is
recruited on this very basis. But it is not essential that he will do outstanding work.

He shall have to be motivated to do good work. This is possible only through motivation.
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Therefore, motivation improves efficiency. The efficiency of a person is reflected through

increase in productivity and decrease in costs.

Helps to change negative attitudes of Employees­Some employees of an organisation have a

negative attitude. They always think that doing more work will not bring any credit. A
manager uses various techniques to change this attitude. For example, if the financial
situation of such an employee is weak, he gives him a raise in his remuneration and if his
financial condition is satisfactory he motivates him by praising his work.

Reduction in employee turnover­The reputation of an organisation is affected by the

employee turnover. This creates a lot of problems for the managers. A lot of time and money
go waste in repeatedly recruiting employees and giving them education and training. Only
motivation can save an organisation from such wastage. Motivated people work for a longer
time in the organisation and there is a decline in the rate of turnover

Helps to reduce absenteeism in the organisation­In some of the organisations, the rate of
absenteeism is high. There are many causes for this­poor work conditions, poor relations with
colleagues and superiors, no recognition in the organisation, insufficient reward, etc. A
manager removes all such deficiencies and motivates the employees. Motivated employees
do not remain absent from work as the workplace becomes a source of joy for them.

Reduction in resistance to change­New changes continue taking place in the organisation.

Normally workers are not prepared to accept any changes in their normal routine. Whereas it
becomes essential to bring in some changes because of the demands of time. Employees can
be made to accept such changes easily with the help of motivation. Motivated people accept
these changes enthusiastically and improve their work performance.

16. Definition of Formal Communication

The communication in which the flow of information is already defined is termed as Formal
Communication. The communication follows a hierarchical chain of command which is
established by the organisation itself. In general, this type of communication is used
exclusively in the workplace, and the employees are bound to follow it while performing
their duties.

Example: Requests, commands, orders, reports etc.

The formal communication is of four types:

Upward or Bottom­up: The communication in which the flow of information goes from
subordinate to superior authority.

Downward or Top­down: The communication in which the flow of information goes from
superior to subordinate.

Horizontal or Lateral: The communication between two employees of different departments

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working at the same level.

Crosswise or Diagonal: The communication between the employees of two different

departments working at different levels.

Definition of Informal Communication

The communication which does not follow any pre­defined channel for the transmission of
information is known as informal communication. This type of communication moves freely
in all directions, and thus, it is very quick and rapid. In any organisation, this type of
communication is very natural as people interact with each other about their professional life,
personal life, and other matter.

Example: Sharing of feelings, casual discussion, gossips, etc.

The informal communication is of four types:

Single Strand Chain: The communication in which one person tell something to another, who
again says something to some other person and the process goes on.

Cluster Chain: The communication in which one person tells something to some of its most
trusted people, and then they tell them to their trustworthy friends and the communication
continues.

Probability Chain: The communication happens when a person randomly chooses some
persons to pass on the information which is of little interest but not important.

Gossip Chain: The communication starts when a person tells something to a group of people,
and then they pass on the information to some more people and in this way the information is
passed on to everyone.

17. Causes of Cash Flow Problems

A cash flow problem arises when a business struggles to pay its debts as they become due.
Note that a cash flow problem is not necessarily the same as experiencing a cash outflow. A
business often experiences a net cash outflow, for example when making a large payment for
raw materials, new equipment or where there is a seasonal drop in demand. However, when
cash flow is consistently negative and the business uses up its cash balances, then the
problem becomes serious.

The main causes of cash flow problems are:

Low profits­There is a direct link between low profits or losses and cash flow problems.
Remember ­ most loss­making businesses eventually run out of cash.

Over­investment in capacity­This happens when a business spends too much on production

capacity. Factory equipment which is not being used does not generate revenues – so is often
a waste of cash.
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Too much stock­Holding too much stock ties up cash and there is an increased risk that
stocks become obsolete (that is it can't be sold).

Allowing customers too much credit­Customers who buy on credit are called "trade debtors"
Offering credit to customers is a good way to build revenue, but late payment is a common
problem and slow­paying customers put a strain on cash flow

Overtrading (growing too fast)­This occurs where a business expands too quickly, putting
pressure on short­term finance. For example, a retail chain might try to open too many stores
too quickly before each starts to generate profits

Seasonal demand­Predictable changes in seasonal demand create cash flow problems – but
because they are expected, a business should be able to handle them

17. Evaluating Investment Appraisal

Given the range of investment appraisal methods and the need for a business to allocate
resources to capital expenditure in an appropriate way, what key factors do management need
to consider when making their investments?

The key issues to consider are:

Risks and uncertainties­All business investments involve risk – the probability that the hoped
­for outcome will not happen. An investment needs to earn a return that compensates for the
risk.

The risk of a capital investment will vary according to factors such as:

Length of the project­The longer the project, the greater the risk that estimated revenues,
costs and cash flows prove unrealistic

Source of the data­Are estimated project profits and cash flows based on detailed research,
gut feel, or a little of both?

The size of the investment­An investment that uses a substantial proportion of the available
business funds is, by definition, more risky than a smaller project. Risk is also about the
consequences to the business if something goes wrong!

The economic and market environment

A major issue for most large investments­Most projects will make assumptions about demand,
costs, pricing etc which can become wildly inaccurate through changing market and
economic conditions

The experience of the management team­A project in a market in which the management
team has strong experience is a lower­risk proposition than one in which the business is
taking a step into the unknown!
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Qualitative influences on investment appraisal­An investment decision is not just about the
numbers. A spread sheet calculation for NPV or ARR might suggest a particular decision, but
management also need to take account of qualitative issues such as:

 The impact on employees

 Product quality and customer service

 Consistency of the investment decision with corporate objectives

 The business' brand and image, including reputation

 Implications for production and operations, including any disruption or change to the
existing set­up

 A business' responsibilities to society and other external stakeholders

Quantitative influences on investment appraisal

The investment appraisal comes up with a result, but how is a decision made?

Many firms set what are known as "investment criteria" against which they judge investment
projects.

A problem with the three main investment appraisal methods is that they can generate
seemingly contradictory results. For example, an investment might have a long payback
period because the returns only occur several years into the project (possibly too long to be
acceptable). However, if those returns are significant to the original investment, it is likely
that the NPV or ARR would suggest going ahead.

The use of investment criteria is intended to help guide management through these decisions
and address the potential conflicts.

So possible criteria might suggest only accepting investment proposals which meet at least
two of the following:

A payback within four years

ARR of at least 20%, with no profits taken into account beyond Year 5

NPV of at least 25% of the initial investment

19.a) Compare and contrast the various methods of investment appraisal. To what
extent would it be true to say there is a place for each of them (25)
As capital investment decisions usually involve significant amounts of finance, it is important
to fully evaluate each decision using sound appraisal techniques. The main methods used to
evaluate investment in capital projects are:

Accounting rate of return.

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Payback method.
Net present value.
Internal rate of return

These methods use different approaches to evaluating the value of an investment for an
organisation. While three of the methods focus on cash flow, the accounting rate of return
uses accounting profit in its appraisal calculation, providing a view of the overall profitability
of the investment.
The accounting rate of return method calculates the estimated overall profit or loss on an
investment project and relates that profit to the amount of capital invested and to the period
for which it is required. It is the profit that is directly related to the investment project that is
used in the appraisal process and thus costs or revenues generated elsewhere in the business
are excluded. A business will have a required minimum rate of return for any investment.
This is related to the cost of capital of the business. If an investment yields a return greater
than the cost of capital, then the investment would be considered suitable and profitable.

Accounting rate of return

The accounting rate of return is an average rate of return calculated by expressing average
annual profit as a percentage of the average value of the investment.

Its main advantages are

­ It takes account of the overall profitability of the project.

­ It is simple to understand and easy to use.
­ Its end result is expressed as a percentage, allowing projects of differing sizes to be
compared.

Its main disadvantages are

­It is based on accounting profits rather than cash flows. The calculation of profit and capital
employed depend on which items of expenditure are treated as capital (on the balance sheet)
and as revenue (charged to the profit and loss account). Despite guidelines in this area, it can
be quite subjective. Also different accounting policies (depreciation) can produce different
profit and capital employed figures, thus allowing the profit and balance sheet figures to be
somewhat manipulated. It is for this reason that capital projects are also evaluated in terms of
cash flows.
­The ARR does not take into account the timing of cash flows. For example, project A may
give an ARR of 20 per cent compared to project B’s 18 per cent. However project A may be
an eight year project whereas project B may be a five year project. Investors may choose a
project that is slightly less profitable but which generates cash earlier.

­ The ARR does not take into account the time value of money. It does not take into account
the cost of waiting to recoup the investment.

­ The ARR takes no account of the size of the initial investment. A five per cent return on an
investment of $25,000 might be acceptable, however it may not be an acceptable return on an
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initial investment of $10 million.

The payback method

The payback method of investment appraisal simply asks the question ‘ how long before I get
my money back? ’ In other words how quickly will the cash flows arising from the project
exactly equal the amount of the investment. It is a simple method, widely used in industry
and is based on management’s concern to be reimbursed on the initial outlay as soon as
possible. It is not concerned with overall profitability or the level of profitability.

Based on this method a business will simply reject a project with a payback period longer
than that required.

The advantages of payback are

­It is simple to understand and apply.

­ It promotes a policy of caution in investment.

Its main disadvantages are

­ It takes no account of the timing of cash flows ($100 received today is worth more than
$100 received in 12 months time). This is known as the time value of money and will be
considered in more detail below.

­ It is only concerned with how quickly the initial investment is recovered and thus it ignores
the overall profitability and return on capital for the whole project. The accounting rate of
return incorporates the overall profitability of the investment.

The Net Present Value

The net present value approach involves discounting all cash outflows and inflows of a
capital investment project at a chosen target rate of return or cost of capital. The present value
of the cash inflows minus the present value of the cash outflows is the net present value. If
the NPV is positive, the project is likely to be profitable, whereas if the NPV is negative, the
project is likely to be unprofitable.

Its main advantages are

­ It takes into account the time value of money.

­ Profit and the difficulties of profit measurement are excluded.
­ Using cash flows emphasises the importance of liquidity.
­ It is easy to compare the NPV of different projects.

The main disadvantages associated with this method are

­It is that it is not as easily understood as the payback and accounting rate of return.
­ Also, the net present value approach requires knowledge of the company’s cost of capital,
which is difficult to calculate.
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Internal Rate of Return

The IRR method calculates the exact rate of return which the project is expected to achieve
based on the projected cash flows. The IRR is the discount factor which will have the effect
of producing a NPV of 0. It is the return from the project, taking into account the time value
of money. Its decision rule is to accept the project if it’s IRR is greater than the cost of capital.

It main advantage is that the information it provides is more easily understood by managers,
especially non­financial managers.

Its main disadvantages are

­It is possible to calculate more than two different IRR’s for a project. This occurs where the
cash flows over the life of the project are a combination of positive and negative values.
Under these circumstances it is not easy to identify the real IRR and the method should be
avoided.

­ In certain circumstances the IRR and the NPV can give conflicting results. This occurs
because the IRR ignores the relative size of investments as it is based on a percentage return
rather than the cash value of the return. As a result, when considering 2 projects, one may
give an IRR of 10 per cent and the other an IRR of 13 per cent. However the project with the
lower IRR may yield a higher NPV in cash terms and thus would be preferable.

Overall all four methods provide different approaches to investment appraisal and can
provided a difference outlook on a proposed investment. Thus it would seem prudent that
management should use all four methods in assessing investment projects. However the NPV
approach is the one approach with the least amount of weaknesses or disadvantages and
hence this approach should be used as the main guide in evaluating investment projects.

20. With regard to capital investment appraisal methods, explain why cash flows are
preferred to accounting profits.(10)
The four methods of investment appraisal use different approaches to evaluating the value of
an investment for an organisation. While three of the methods focus on cash flow, the
accounting rate of return uses accounting profit in its appraisal calculation, providing a view
of the overall profitability of the investment.

The accounting rate of return is based on the use of operating profit . The operating profit of a
project is the difference between revenues earned by the project, less all the operating costs
associated with the project, including depreciation. Note, the revenues and expenses must be
directly related to the project and would exclude any element of fixed costs apportioned from
elsewhere in the business.

All other appraisal methods use net cash flows as the basis for appraising capital projects.
Ultimately cash flows are preferred to accounting profits due to the nature of capital
investment projects. This is due to the fact that the timescale on capital projects between
investing and receiving payback are quite long. Financial theory tells us that waiting for
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money has a cost. For example the cost of waiting for a customer to pay their account is the
interest charge on a bank overdraft used while waiting. To take account of this cost of waiting,
it is important to be mindful of the timing of the cash inflows and outflows of a business. The
calculation of accounting profit is not concerned with the timing of cash flows and thus
cannot take into account this cost of waiting.

21.Define privatization. What are the advantages and disadvantages of

privatization?(25)

Privatization is the process of transferring ownership of a business, enterprise, agency, public

service or property from the public sector (government) to the private sector or to private non
­profit organizations. The term is also used in a quite different sense, to mean government out
­sourcing of services to private firms.

Government takes this step whenever any government enterprise does loss continuously or if
the enterprise decreases profit alarmingly or if the government thinks the enterprise would cut
more profit if it was operated by the private governing body.

Advantage of privatization

 Privatization places the risk in the hands of business or private enterprise.

 Private enterprise is more responsive to customer complaints and innovation.

 The government should not be a player and an umpire.

 Privatization provides a one off cash boost for govt. this can be spent on hospitals etc.

 Privatization leads to lower prices and greater supply.

 Competition in privatization increases differentiation.

Disadvantage of privatization

 Privatization is expensive and generates a lot of income in fees for specialist adviser
such as banks.

 Public monopolies have been turned into private monopolies with too little
competition, so consumers have not benefited as much as had been hoped.

 The nationalized industries were sold off too quickly and too cheaply. With patience a
better price could have been had with more beneficial results on the government’s
revenue. In almost all cases the share prices rose sharply as soon as dealing began
after privatization.

 The privatized businesses have sold off or closed down unprofitable parts of the
business and so services.
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 Wide share ownership did not really happen as many small investors took their profits
and didn’t buy anything else.

However, there are also several reasons for what the government doesn’t give over an
enterprise to the private sector even after experiencing loss years after years.

22. Communication

Communication is a process of exchanging information, ideas, thoughts, feelings and

emotions through speech, signals, writing, or behaviour. In communication process, a sender
(encoder) encodes a message and then using a medium/channel sends it to the receiver
(decoder) who decodes the message and after processing information, sends back appropriate
feedback/reply using a medium/channel.

Types of Communication

People communicate with each other in a number of ways that depend upon the message and
its context in which it is being sent. Choice of communication channel and your style of
communicating also affects communication. So, there are variety of types of communication.

Types of communication based on the communication channels used are:

1. Verbal Communication

2. Nonverbal Communication

1. Verbal Communication

Verbal communication refers to the form of communication in which message is transmitted

verbally; communication is done by word of mouth and a piece of writing. Objective of every
communication is to have people understand what we are trying to convey.

In verbal communication remember the acronym KISS (keep it short and simple).

When we talk to others, we assume that others understand what we are saying because we
know what we are saying. But this is not the case. Usually people bring their own attitude,
perception, emotions and thoughts about the topic and hence creates barrier in delivering the
right meaning. So in order to deliver the right message, you must put yourself on the other
side of the table and think from your receiver’s point of view. Would he understand the
message? how it would sound on the other side of the table?

Verbal Communication is further divided into:

Oral Communication

Written Communication

Oral Communication
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In oral communication, Spoken words are used. It includes face­to­face conversations, speech,
telephonic conversation, video, radio, television, voice over internet. In oral communication,
communication is influence by pitch, volume, speed and clarity of speaking.

Advantages of Oral communication are:

­It brings quick feedback.

­In a face­to­face conversation, by reading facial expression and body language one can guess
whether he/she should trust what’s being said or not.
Disadvantage of oral communication
In face­to­face discussion, user is unable to deeply think about what he is delivering, so this
can be counted as a

Written Communication

In written communication, written signs or symbols are used to communicate. A written

message may be printed or hand written. In written communication message can be
transmitted via email, letter, report, memo etc. Message, in written communication, is
influenced by the vocabulary & grammar used, writing style, precision and clarity of the
language used.

Written Communication is most common form of communication being used in business. So,
it is considered core among business skills.

Memos, reports, bulletins, job descriptions, employee manuals, and electronic mail are the
types of written communication used for internal communication. For communicating with
external environment in writing, electronic mail, Internet Web sites, letters, proposals,
telegrams, faxes, postcards, contracts, advertisements, brochures, and news releases are used.

Advantages of written communication includes:

­Messages can be edited and revised many time before it is actually sent.
­Written communication provide record for every message sent and can be saved for later
study.
­A written message enables receiver to fully understand it and send appropriate feedback.

Disadvantages of written communication includes:

­Unlike oral communication, Written communication doesn’t bring instant feedback.
­It take more time in composing a written message as compared to word­of­mouth and
number of people struggles for writing ability.

2. Nonverbal Communication
Nonverbal communication is the sending or receiving of wordless messages. We can say that
communication other than oral and written, such as gesture, body language, posture , tone of
voice or facial expressions, is called nonverbal communication. Nonverbal communication is
all about the body language of speaker.
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Nonverbal communication helps receiver in interpreting the message received. Often,

nonverbal signals reflects the situation more accurately than verbal messages. Sometimes
nonverbal response contradicts verbal communication and hence affect the effectiveness of
message.

Nonverbal communication have the following three elements:

a) Appearance

Speaker: clothing, hairstyle, neatness, use of cosmetics

Surrounding: room size, lighting, decorations, furnishings

b) Body Language

facial expressions, gestures, postures

c) Sounds

Voice Tone, Volume, Speech rate

Formal Communication

In formal communication, certain rules, conventions and principles are followed while
communicating message. Formal communication occurs in formal and official style. Usually
professional settings, corporate meetings, conferences undergoes in formal pattern.

In formal communication, use of slang and foul language is avoided and correct
pronunciation is required. Authority lines are needed to be followed in formal communication.

Informal Communication

Informal communication is done using channels that are in contrast with formal
communication channels. It’s just a casual talk. It is established for societal affiliations of
members in an organization and face­to­face discussions. It happens among friends and
family. In informal communication use of slang words, foul language is not restricted .
Usually informal communication is done orally and using gestures.

Informal communication, Unlike formal communication, doesn’t follow authority lines. In an

organization, it helps in finding out staff grievances as people express more when talking
informally. Informal communication helps in building relationships.

23. Budgeting

This report is aimed to evaluate the importance of budgeting, analysis the benefits and
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problems that brought by budgeting and also discusses the behavioural aspects of budgeting.
A budget is a comprehensive, formal, coordinated, detailed, quantitative plan that estimates
the probable expenditures for acquiring and using financial and other resource for an
organization over a specific time period (Margaret, George, 2011). Budgeting describes the
overall process from preparing budget, using budgets during the business operation, and later
performance evaluation. It provides us the valuable tools for planning and control of finances
and affects nearly every type of organization­from governments and large corporations to
small businesses­as well as families and individuals. A small business generally engages in
budgeting to determine the most efficient and effective strategies for making money and
expanding its asset base. Budgeting can help a company use its limited financial and human
resources in a manner which best exploit existing business opportunities such production
expansion and acquisition that might otherwise miss.

A good and through understanding of how budgeting works is a must for ambitious business
executive if he or she wants to run the business with flying colours. What is more, budgeting
give access to business owners who intend to assess the managers' performance during a
specific time assigned. It is of great importance because the managers' compensation is quite
often tied with his or her performance during the time in charge.

There are different kinds of budgets fall into various categories. The financial budget (Genrad,
et al., 2002) includes the capital expenditure budget, which presents a company's plans for
financing its operating and capital investment activities. The capital expenditure budget
relates to purchases of plant, property, or equipment with a useful life of more than one year.
On the other hand, the cash budget, the budgeted balance sheet, and the budgeted statement
of cash flows deal with activities expected to end within the 12­month budget period. Last but
not the least, companies' sales departments are often responsible of making sales budget
based mainly on their products' selling experience last year and future economic conditions.
The budget is developed within the framework of a sales forecast that shows potential sales
for the industry and the company's expected sales.

Benefits of Budgets

With careful planning and good execution, a company can reap the benefits of having
budgets in many ways, including:

Communication of corporate goals

Modern corporations consist of departments of different important functions. It is quite hard

for the chief executive officer to convey the corporate goals to each employee very well. But
on the other hand, in order for corporation to reach its best performance, it is indispensable
for employees in different positions within a corporation to understand the corporate goals.
The process of preparing budgets actually constructively bridges this communication gap
because it engages everyone from managers to front­line staff. Quite often in practice, an
CEO will hold a budgets discussion meeting that managers of various departments will come
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and discuss the company's whole budgets and make adjustments according to next year's goal.
In this way, budgeting comes a communication tool because the different departments get the
chance to take part in future planning and discuss the priorities for where the money and
resources should be most suitably spent and allocated. More importantly, the act of making
estimates about future economic conditions and about the company's ability to respond to
them, forces managers to synthesize the external economic environment with their internal
goals and objectives. This whole "communication process" is extremely crucial given the
consideration of the complexity of business in recent years.

Warning of potential problems

Keeping budgets and constantly comparing it with the running of the real operating acts as an
early warning system of potential problems which the management people in charge can
make changes before things get out of control which make the company suffer greatly in
terms of money and resources. In this way, when a flag is raised, managers in charge can
revise their immediate plans such as to change a product mix, revamp an advertising
campaign, or borrow money to cover cash shortfalls.

Coordination of different segments

Having the different departments within the corporation to create budgeting together is the
key to resolving the differences and conflicts between various departments when involves in
money and resources handling. Often in practice, the chief executive officer asks departments
of various functions to make their own department budgets first according to each
department's needs and its specific goal next year. Throughout this process, each department
correlates each segment's goals with corporate objectives. Preparation of a budget assumes
the inclusion and coordination of the activities of the various segments within a business. The
budgeting process demonstrates to managers the inter­connectedness of their activities and
offers them directions to follow.

Evaluation of actual performance

The budget provides definite objectives for evaluating performance at each level of
responsibility assigned (Jan, et al., 2008). Managers in charge are able to have access to do
quick and easy performance evaluations with previous established criteria. With the
economic conditions rapidly changing, managers may increase activities in one area where
results are well beyond their exceptions. In situation like this, budgeting maximizes the
objectivity to a great extent and offers a helpful hand for managers in making sound
judgments with some indicators to compare. In other situations, managers may need to refer
some measurement to reorganize activities whose outcomes demonstrate a consistent pattern
of inefficiency, so that they can make timely adjustments to minimize the loss that otherwise
might incur.

Problems of Budgets

As one of the most important steps in running a successful business, there is also some
problems that involves with the budgets, including:
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Overstating projections

Companies with strong ambitious of achieving success usually tend to think that their
business will do a huge amount of business in a short amount of time which sometimes could
be not very realistic in practice. So in this case, they often inflate the budgeted sales figure
with possibly wrong sales forecasts. The overstating sales projections resulted from over
optimistic future sales predictions most of the time will lead to other financial budgets such
as cash flow budget, income statement budget, and balance sheet budget not reflecting the
reality.

Lack of fairness in funds allocation

When asked to their own budget, different departments often have a tendency to ask more
than they need to provide buffer in case unforeseen things that might happen in the future, so
that they will not be under budget. This tendency prevent the funds to be allocated to the
company's best interest and distorts the real needs and makes the next year funds allocation
somehow lack of the fairness it should have, especially for corporations which is at the
growing stage when the funds is extremely precious and limited. What is worse, when it
comes to the using the budgets, the majority of departments will tend to squeeze the use of
the budget at the beginning of the period to save for the later use, while try everything they
can to use up the rest of the budget by the end of the period. This lack of consistency in usage
actually further wastes the company's resources and money, which is likely lead to
inconsistency of the goods and services that the company provides.

Lack of operation flexibility

While sticking to the budgets provides a roadmap for the running of operation, it can hinder
creativity and flexibility of the company's development (Eugene, Michael, 2010). This
situation arise often enough the managers cautiously and strictly enforce the operation in
accordance with the budgets and give up some opportunity that might open doors to
developing innovative products and exploring new markets. This is particularly true for those
giant corporations where the managers are more willing to play it safe than taste a new
flavour and usually lead them to only look at an annual plan therefore may fail to take a
longer term view into account.

Behavioural aspects of Budgeting

Budgetary control relies greatly on the individuals of a corporation. The human aspect in the
budgetary system can be very complicated since the budgetary process involves relationships
between different people within the corporation which includes the chief executive officer,
managers and staff. Sometimes budgets affect people's behaviours and vice versa. Thus the
behavioural aspects of budgeting are of vital significance and consist of many different areas
that high attention must be paid.

First and foremost, we need to know the Factors affecting behaviour of budgeting, including:
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Budgets perceived by employees as being too difficult

In situations that lack full participation of all levels in preparing for the budgets, the
employees will perceive the budgets as being too difficult to follow. In addition, the
punishment that comes along from failing to meet what this budgeted has a tendency to
encourage staff's attempts to beat the system. This greatly affects the employees' enthusiasm
for the job and can knock down their creativity and initiative which might lead to financial
and nonfinancial loss for the corporation. In order to deal with this kind of situation, the
managers in charge should maintain supportive and cooperative relationships with staff of all
levels since it can leads to increase productivity and satisfaction which in turn can raise the
working morale of staff. What is more, managers should try their best to make
communication open without obstruction, which is extremely critical because the good
communication in budgeting can act as a good delivery of corporate goals.

Targets that do not provide any challenge

In sharp contrast to the previous situation discussed just now, non­scientific and not
reasonable budgeting could also result in having targets that do not provide any challenge
which leads to no breakthroughs and developments. This happens more often than not when
managers only emphasize on the financial goals which is quite detrimental to the realization
of important non­financial goals. In order to fix this problem, managers should use the
historical data as an important reference and try their best to gain a better understanding of
the directions that the future economic conditions. Moreover, it is also of crucial importance
for managers to identify the employee's ability objectively and truly engage the staff in
participation genuinely. Due to a tendency for individuals to become "ego" involved in
decisions which they have contributed, only in this way, can the budgeted goal be set in a
way that reflect the real conditions and performs guidance.

Insufficient flexibility

There are times when strong­minded managers strictly hold on to budgets and overlook the
real actual operation performance. Confronted with this kind of situation, what a company
should do is to adopt variance analysis in practice. It is encouraged for businesses regularly
conduct variance analysis because this allows them to notice if financial plans are inaccurate
and therefore make timely adjustments. On the other hand, if businesses fail to analyse
variances on a regular basis they will not be aware of their financial performance compared
to what is budgeted. Favourable variance is when revenues are greater than budgeted or costs
are less than budgeted. In contrary, adverse variance is when revenues are less than budgeted
or costs are greater than budgeted. By calculating variances through looking at costs and
revenues, managers can make wise remedies to cope with the situation and keep the company
running on the right track.

Conclusion

Budgeting is a very crucial process that can bring numerous benefits to the companies if be
used wisely and correctly. These benefits includes: Communication of corporate goals,
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Warning of potential problems, Coordination of different segments, and Evaluation of actual

performance. All of them will increase the management's ability to more efficiently and
effectively deploy resources, and to introduce modifications to the plan in a timely manner.
However, there are also problems of that might incur when the budgeting is not proper done.
These problems includes: Overstating projections, Lack of fairness in funds allocation, and
Lack of operation flexibility. In order to truly embrace the benefits of budgeting, managers
really should study the behavioural aspects of budgeting.

24. What is a Budget?

A plan which for a definite period, covers, all phases of operations in the future is known as a
business budget. Policies, plans, objectives & goals are formally expressed by it & are laid
down in advance for the concern as a whole & for each of its sub­divisions by the top
management. Thus an overall budget will be there for the concern composed of several sub­
budgets which are in the form of departmental budgets. Expense limitations are expressed by
the budget in the expense budgets & in the sales budget, revenue goals are expressed & for
the purpose of realizing the desired profit objective, these must be attained. Besides, plans
relating to items such as levels of inventory, additions to capital assets, plans of production,
plans of purchasing, requirements of labour, requirements of cash etc. are expressed by the
budget. Thus, for a given period, budget is a formal management plans’ & policies’ statement
which can be used in that period as a guide or blue print.

The basic elements of a budget are:

(a) For a specified period of time, it’s a future plan of activity,

(b) Budget can be expressed in monetary or physical units or in both,

(c) Before the period during which the budget is supposed to operate, it is prepared
i.e. it is prepared in advance.
(d) Before the preparation of the budget, it is necessary to lay down the objectives
which are required to be attained & the policies which are required to be pursued
for the achievement of those objectives.
Budgetary Control:

Throughout the budget period, the use of budgets & budgetary reports for the purpose of
coordinating, evaluating & controlling day­to­day operations according to the goals which are
specified by the budget is involved by budgetary control. The mere presentation of budget
doesn’t have much value, its real value lies in the aspects of the planning & its utilization
during the period for the purposes of control & coordination. Under budgetary control, actual
results are constantly checked & evaluated & comparison of actual result is made with the
budgeted goals & wherever indicated, corrective action should be undertaken. The following
steps are involved in the process of budgetary control:

(a) The objectives which are required to be achieved by the business should be defined &
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specified by budgetary control.

(b) For the purpose of ensuring that the desired objectives are accomplished, business plans
are needed to be prepared by budgetary control.

(c) Budgetary control translates the plans into budgets & relates to particular sections of the
budget, the responsibilities of individual executives & managers.

(d) Budgetary control constantly compares the actual results with the budget & the
differences between the actual & budgeted performance are calculated.

(e) For the purpose of establishing the causes, the major differences are investigated by
budgetary control.

(f) In a suitable form, budgetary control presents the information to the management, relating
to variances to individual responsibility.

(g) In order to avoid a repetition of any over­expenditure or wastage, management takes

corrective actions. Alternatively, where due to the change in circumstances, the budgeted
targets cannot be achieved, the budget is revised.

Difference between Budget, Budgeting & Budgetary control:

Individual objectives of a department etc. are indicated by budget, whereas the act of setting
the budgets is known as budgeting. All are embraced by budgetary control & also the science
of planning the budgets themselves & as an overall management tool, the utilization of such
budgets, for the purpose of business planning & control are included in budgetary control.
Thus, the term by budgetary control is wider in meaning & both budget & budgeting are
included in by budgetary control.

Objectives of Budgetary Control:

The objectives of budgetary control are:

Compel for planning: As management is forced to look ahead, responsible for setting of
targets, anticipating of problems & giving purpose & direction to the organization, this
feature is the most important feature of budgetary control.
Communication of ideas & plans: Communication of ideas & plans to everyone is effected by
budgetary control. In order to make sure that each person is aware of what he is supposed to
do, it is necessary that there is a formal system.
Coordinating the activities: The budgetary control coordinates the activities of different
departments or sub­units of the organization. The coordination concept implies, for example,
on production requirements, the purchasing department should base its budget & similarly, on
sales expectations, the production budget should in turn be4 based.
Establishing a system of control: A system of control can be established by having a plan
against which progressive comparison can be made of actual results.
Motivating employees: Employees are motivated for improving their performances by
budgetary control.
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Requisites of an effective system of budgetary control:

(a) There should be a clearly defined organizational structure where are area of responsibility
is emphasized.
(b) Within the budgeting process, the employees should participate.
(c) For the purpose of relying the measurement of performance, there should be adequate
accounting records & procedures.
(d) Budgetary control needs to be flexible, so that the plans & objectives may be revised.
(e) An awareness of the uses of the budgetary control system should be spread by the
management.
(f) An awareness regarding the problems of budgetary control & especially the individual’s
reactions to budgets should be spread by the top management.
Advantages of Budgetary control:
(1) The objectives of the organization as a whole & the results which should be achieved by
each department within this overall framework are defined by the budgetary control.
(2) When there is a difference between actual results & budget, then the extent by which
actual results have exceeded or fallen short of the budget is revealed by the budgetary control.
(3) The variances or other measures of performance along with the reasons of difference
between the actual results with those from budgeted is indicated by the budgetary control.
Also, the magnitude of differences is established by it.
(4) As the budgetary control reports on actual performance along with variances & other
measures of performance; for correcting adverse trends, a basis for guiding executive action
is provided by it.
(5) A basis by which future budget can be prepared or the current budget can be revised is
provided by the budgetary control.
(6) A system whereby in the most efficient way possible the resources of the organization are
being used is provided by the budgetary control.
(7) The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.
(8) Situations where activities & responsibilities are decentralized, some centralizing control
is provided by the budgetary control.
(9) The budgetary control provides means by which the activities of the organization can be
stabilized, where the organization’s activities are subject to seasonal variations.
(10) By regularly examining the departmental results, a basis for internal audit is established
by the budgetary control.
(11) The standard costs which are to be used are provided by it.
(12) For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.
Limitations of Budgetary Control:
The main limitations of budgetary control are:
(1) It used the estimates as a basis for the budget plan.
(2) In order to fit with the changing circumstances the budgetary programme must be
continually adapted. Normally for attaining a reasonably good budgetary programme, it takes
several years.
(3) A budget plan cannot be executed automatically. Enthusiastic participation is required by
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all levels of management in the programme.

(4) The necessity of having a management & administration will not be eliminated by any
budgetary control system. The place of the management is not taken by it; rather it is a tool of
the management.
25. What are the main causes of Labour Turnover?
The causes of labour turnover may be put into two groups, i.e.,
(1) Avoidable causes and
(2) Unavoidable causes
(1) Avoidable causes ­ These include:

(i) Dissatisfaction with jobs,

(ii) Dissatisfaction with remuneration,
(iii) Bad working conditions,
(iv) Odd hours of work,
(v) Lack of incentives and promotional avenues,
(vi) Lack of adequate recreational facilities,
(vii) Inadequate housing and medical facilities,
(viii) Poor worker­supervisor relationship,
(ix) Poor group relations,
(x) Discrimination between one worker and another, etc.
(2) Unavoidable causes ­ Unavoidable causes may be personal or impersonal. These
include:
(i) Personal betterment,
(ii) Retirement, death or disablement,
(iii)Domestic responsibilities, i.e., to look after old parents,
(iv)Discharge due to factors like unsuitability, insubordination, and negligence,
(v) Marriage in case of women workers, etc.
Every organisation must see that leaving due to avoidable causes is prevented.

26. Q&A ­ Explain what labour turnover is and why it happens

Labour turnover is defined as the proportion of a firm’s workforce that leaves during the
course of a year. The formula for calculating labour turnover is, therefore:
It is important to remember that all businesses lose staff – for a variety of reasons:
­ Retirement / Maternity / Death / Long­term Illness
­ Unsuitability for the job
­ Changes in strategy (e.g. closure of locations)
­ Changes in capacity ­ e.g. a decision to reduce output by closing a shift
­ Seasonal changes in demand (one reason why labour turnover is traditionally high in
industries that employ many temporary or seasonal staff)
For a business, we are more concerned with the loss of staff for reasons other than above.
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You might call this voluntary staff turnover – employees who leave of their own accord.
It is important to remember that labour turnover levels vary between industries . Successive
surveys of labour turnover show that the highest levels are typically found in retailing, hotels,
catering and leisure, call centres and among other lower paid private sector services groups.
Labour turnover levels also vary from region to region. The highest rates are found where
unemployment is lowest and where it is unproblematic for people to secure desirable
alternative employment.

27.Overtrading

Overtrading happens when a business expands too quickly without having the financial
resources to support such a quick expansion. If suitable sources of finance are not obtained,
overtrading can lead to business failure.

Importantly, overtrading can occur even a business is profitable. It is an issue of working

capital and cash flow. Overtrading is, therefore, essentially a problem of growth.
It is particularly associated with retail businesses who attempt to grow too fast.
Overtrading is most likely to occur if:
Growth is achieved by making significant capital investment in production or operations
capacity before revenues are generated
Sales are made on credit and customers take too long to settle amounts owed
Significant growth in inventories is required in order to trade from the expanding capacity
A long­term contract requires a business to incur substantial costs before payments are made
by customers under the contract.

BUSINESS STUDIES

SECTION A –Answer all questions

1 (a) Define the following terms:

(i) management buy­out [2]

This is when shares are bought from company’s shareholders by the managers of the
business (company), so that they become the owners.

(ii) contracting out [2]

this happens when a business cedes some of its non­core activities to another company
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so that it concentrate on core competences

(b) Distinguish between a public limited company and a public corporation . [4]

A public limited company belongs to the public whereas a public corporation belongs to the
public sector. Examples of public limited company includes OK Zimbabwe Limited whilst
public corporations include Zimbabwe Broadcasting Corporation. (ZBC)

2. (a) List any two types of production methods. [2]

 job

 flow

 batch

(b) How can a manufacturer of cellphones improve the productivity of his workers? [4]

Productivity of workers can be improved through training or increasing their wages and
salaries. Another is that of improving working conditions and involving them in the decision
making process.

3. Explain any two communication problems that are beyond the receiver’s control. [4]

Communication problems that are beyond the receivers control include network problems
and use of wrong channel of communication. Wrong channel will make the receiver unable to
understand the message.

4 (a) State and explain any two non­financial methods of motivation. [4]

The first non­financial method for motivation is including workers in the decision making
process. Workers also need to work where there is security to there jobs. Delegation of duties
and job rotation are other non­financial methods of motivation.

(b) Comment on Herzberg’s ideas on motivation. [5]

Herzberg’s ideas on motivation include hygiene factors and motivating factors. What this
means is whenever motivating factors are lacking, productivity will fall, for example,
delegation or promotional prospects. However if these are lacking at least hygiene factors
should be provided and these include increase in salaries or payment of bonuses.

5. Is democratic leadership necessarily a good management style? [4]

Democratic leadership is to a certain extend a good management style. It improves rapport

between managers and workers and encourages worker initiativeness. Democratic leadership
improves effective communication between workers and managers. However democratic
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leadership at times is not a good management style because it is time consuming due to
consultations. Sensitive issues do not require involvement of all the people.

6 (a) What is niche marketing? [2]

It is the process of identifying and exploiting a small segment of a larger market by

developing products to suit it.

(b) Evaluate the usefulness of market skimming. [4]

It is a pricing strategy that is used when introducing a product in the market at a higher price
and this will help in maximizing profits before competitors enter the market. It usually works
well when demand is inelastic. It attracts customers who believe that high prices means high
quality.

8. (a) What is benchmarking? [2]

It is when management identifies the best firm in the industry and then compares the
performance standards for improvement purposes.

(b) Assess the significance of maintaining quality in a business organisation. [5]

There are a lot of benefits to an organisation that maintains quality because it improves its
image and reputation. Customers will also spread the good image of the company hence there
will be an increase in sales and profits. Organisations that maintain quality always attracts a
large customer base. However a company that maintain quality is usually affected by high
training costs of its employees. It is also costly for the organisation sourcing quality raw
materials which might be expensive.

9. (a) Outline two advantages of the payback method. [2]

­it provides a quick initial screening device

­easy to use and calculate
(b) (i) What is investment appraisal? [2]
It is an investment technique which seeks to see the wisdom behind accepting or rejecting or
project.

(iii) Analyse the importance of Net Present Value as a method of evaluating

projects. [4]

This method takes into account the time value of money and it considers the whole life of the
project. The NPV rate of discount can be varied to allow for different economic conditions.
However it also need to be noted that it is a difficult method compared to payback method. Its
final result depends heavily on the rate of discount used.

10. Show how a producer of flour can benefit from bulk­buying economies of scale. [3]

The producer will buy wheat in large quantities thereby receiving bulk­buying discounts.
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This discount will be passed on to the consumers buy getting flour at a cheaper price. When
demand for flour is elastic, the producer will realise more revenue.

11. (a) Identify two stakeholders who are interested in the accounts of a firm. [2]

­employees
­shareholders
­Creditors .e.t.c
(b) Define the following terms:
(i) zero budgeting, [1]

It is a budgeting process in which activities are analysed as if they are being started for the
first time.

(i) cost centre. [1]

It is a entity to which costs can be attributed

12. Distinguish between money market and capital market. [4]

The money market is a financial market where short term funds are raised, for example
overdrafts whilst the money market is a financial market where long term funds are raised,
for example debentures.

Key terms in Business Studies

Adding value
A process through which a business increases the worth of there sources included in
production so that customers perceive the product to be worth more than the cost of the inputs
Adviser
Anexternalcontactofabusinessthatprovidessupportandadvice,sometimes for free
Adverse variance
A difference between actual and budgeted amounts which is bad news – e.g. higher than
budgeted costs

Advertising
Paid­for communication, aimed at informing or persuading
Assessment centres
Where a recruiting firm runs a series of extended selection procedures, each lasting one or
two days or sometimes longer
Automation
The replacement of workers with machines to perform task in production
Bank loan
A fixed amount loan from a bank which is generally used to finance long­term assets
Bank overdraft
Borrowings from a bank on a current account which are payable on demand
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Breakeven output(or point)

The point at which the total sales of a business equal total costs­i.e. the business is making
neither profit and or a loss
Budget
A detailed plan of income and expenses expected over a certain period of time
Business angel
A particular type of investor, usually a successful entrepreneur, who is willing to invest in
high­risk, high­growth firms at a very early stage
Business plan
A detailed description of an existing business, including the company’s strategy, aims and
objectives, marketing & financial plan
Business objective
A stated goal or target of a business (note: a business can have more than one objective!)
Boston Matrix
A model which analyses the product portfolio of a business into four categories (stars, cash
cows, problem children and dogs)
Branding
The use of a trade name, symbol, logo or other device to differentiate a product or service
Budget
A detailed plan of income and expenses expected over a certain period of time
Business to business
Abbreviated to B2B, business­to­business involves the selling of products and services by
one business directly to another
Capacity utilisation
The proportion of total capacity that is used (expressed as a percentage)
Cash flow
The movements of cash into (“inflows”) and out of(“outflows”)a business
Cash flow forecast
A projection, usually by week or month, of the likely cash inflows and out flows in a business
Contribution
The difference between total sales and total variable costs
Contribution per unit
The difference between selling price per unit and variable cost per unit.
Costs
Amounts incurred by a business as a result of its trading operations
Communication
The process of exchanging information or ideas between individuals or groups
Competition
The businesses that compete for a share of a market
Competitiveness
The ability of a business to offer a better product than competitors (as measured by customers)
Cost reduction
Actions taken by a business aimed at reducing total costs, or lowering average unit costs
Customer expectations
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What customers expect to receive as a result of buying a good or service; influenced by

perceptions of factors such as quality and price
Customer service
The ways in which a business meets the needs and wants of its customers
Demand
Theamountofaproductorservicethatcustomersarewillingandabletopayatagiventime
Demographic
Defining a market in terms of social­economic factors such as segmentation age, income,
class etc
Delegation
Where responsibility for carrying out a task or role is passed onto someone else in the
business.
Direct selling
A method of distribution which involves a business transacting with a customer without the
use of intermediaries
Distribution channel
How a business gets its products to the end consumer (with or without the use of
intermediaries)
Elasticity of demand
The responsiveness of demand to a change in price or incomes
Electronic market
A market in which buyers and sellers are brought together using digital means of
communication (e.g.online) in order to exchange information(e.g.prices) and conduct
transactions. Compare with physical markets where buyers and sellers meet face to face.
Enterprise
The process by which new businesses are formed in order to offer products and services in a
market
Entrepreneur
An individual who sets up and runs a new business and takes on the risks associated with the
business

Expenditure budget
The budget which sets out the expected costs to be incurred by the firm, usually split into
various categories (e.g. production, marketing , administration)
Empowerment
Delegating power to employees so that they can make their own decisions
External recruitment
Where candidates for a job vacancy come from outside the organisation
Factoring
A source of finance where a business receives a proportion of the amount owned by trade
debtors from a specialist finance­provider
Favourable variance
A difference between actual and budgeted results which is good news. E.g. higher than
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budgeted revenue
Flexible working
Where a business uses a number of different working practices in order to suit the job in hand
and the needs of employees
Fixed costs
Costs that do not vary with the level of output–e.g. rent, salaries)
Franchisee
The person or company which operates a franchised business format­under licence from a
franchisor
Franchisor
The owner of a business format (franchise) which is licensed out to other people or
businesses (franchisees)
Full­time employee
An employee who works more than 30hours a week in a business.
Hierarchy
The structure and number of layers of management and supervision in an organisation
Inputs
The resources (land, labour, capital, enterprise) that go into producing goods and services
Induction training
Training aimed at introducing new employees to a business and its procedures
Internal recruitment
Where candidates for a job vacancy come from within the organisation
Interview
Part of the recruitment process where a candidate is met face­to­face
Job description
A summary of the main duties and responsibilities of a job
Job design
The way in which tasks are combined to form a job
Job enlargement
Giving employees more tasks of a similar level of complexity. Job enlargement expands the
number of tasks completed by an employee

Job enrichment
Making a job more interesting or varied so that is more rewarding
Labour productivity
The output produced per employee over a given time period
Loss leader
Where a price is set deliberately below the cost of production in order to attract customers
who will buy other, more profitable products
Limited liability
Shareholders are only liable forth the money they have invested­not for the overall debts and
liabilities of their company.
Market research
The process of planning, collecting, and analysing data relevant to help make marketing
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decisions.
Marketing mix
The set of marketing tools that the firm uses to pursue its marketing objectives. Commonly
taken to comprise product, price, promotion and place
Margin of safety
The difference between the actual level of output and the break even output
Market
Anyplace (e.g. physical, electronic) where buyers and sellers come to mingle with a view to
exchanging transactions
Market growth
The percentage growth in the size of the market, measured over a specific period
Market research
The process of planning, collecting, and analysing data relevant to help make marketing
decisions
Market segmentation
The process of dividing a market into smaller sections(segments) segmentation which
contain customers with similar needs and wants
Market share
The share of the total market that is owned by a particular business, product or brand. Usually
expressed in percentage terms. The firm with the largest percentage market share is known as
the market leader.
Market size
The total value or quantity of demand in a specific market over a specific period of time. Can
be measured in value terms(e.g.sales) or in terms of quantities (e.g.units)bought or sold.
Merchandising
Promotion of a product at the point­of­sale, usually in a retail environment
Net profit
Profit that remains after all operating costs are taken away from sales revenue. Net profit is
usually stated before any deductions for tax.
Net profit margin
A measure of profitability. Net profit margin is calculated as net profit divided by sales
revenue. The resulting figure is shown as a percentage
Niche market
A niche market is a focused segment of a larger market sector which is it possible to target
Off­the­job
Training that takes place away from the workplace (e.g. on a course)
On­the­job
Training that takes place at the workplace (e.g. being supervised and coached whilst working)
Organisational structure

The way that the roles and responsibilities within an organisation are structured
Output
The finished products (goods and services) that result from the production (or
"transformation") process.
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Overtime
Staff who work for less than a standard working week or day
Opportunity cost
The cost of a decision as measured by the benefits foregone of the next best alternative
Patent
The right to be the only user of producer of a specified product or process
Permanent employee
An employee who is employed on a formal employment contract and remains with the firm
for an open­ended period until the contract is ended. Compare with a temporary
employee(“temp”) who is employed for a shorter, time­limited period.
Primary research
The market research that involves the collection of data that does not yet exist
Profit
The difference between total sales and total costs
Payment terms
The period of time that a supplier allows for an invoice to be settled
Penetration pricing
Pricing strategy that involves the setting of lower, rather than higher prices in order to
achieve a large market share
Permanent employee
An employee who has a permanent position (i.e. not temporary) in a business
Person specification
A description which identifies the skills and experience that are likely to be held by a
successful applicant for a job vacancy
Price elasticity of demand
The responsiveness of demand to a change in the price of a product
Price leader
A market leader business whose price changes are followed by rivals
Price skimming
Pricing strategy where a higher price is charged for new product to take advantage of
customers prepared to pay for innovation

Price taker
A business that has no option but to charge the ruling market price
Pricing decisions
The decisions taken about how to price a product
Pricing strategies
The overall strategic approach to pricing over the medium­to­long term, often based on the
market positioning of a product
Pricing tactics
The short­term pricing decisions and approaches taken ­ e.g. the temporary use of sales
promotions or a short price war
Product life cycle
A theory which predicts the stages a product goes through from introduction to withdrawal
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from a market
Product portfolio
The collection of products and brands owned and operated by a firm
Productivity
Measures of output per worker over a given time period
Profitability
The ability of a business to generate profits from its activities. Profitability is often measured
in terms of the return on sales (net profit margin) or return on investment (return on capital)
Promotional mix
The mix of activities and approaches taken to promoting a product, including advertising,
direct selling etc.
Psychological pricing
Using price as a way of influencing a consumer's behaviour or perceptions, for example using
high prices to reinforce a quality image
Public relations
The promotion of a business through news stories, sponsorship and similar activities. Usually
shortened to PR.
Quality
Where a product meets a customer's requirements
Quality assurance
Organising every process to get the product 'right first time' and prevent mistakes ever
happening
Quality control
The inspection of products as part of a sampling process to ensure that the right production
standards have been achieved
Rationalisation
Reorganising production in order to increase productivity and efficiency. Often involves
closure or relocation of production capacity.
Return on capital
A measure of the return made by investing in a business or business project. Return on capital
is calculated as: (Net profit / Capital Invested) x 100 [shown as a percentage)

Robotics
The science and technology of robots, and their design, manufacture, and application
Sale & leaseback
A method of raising finance. Sale and leaseback involves a business selling a major asset (e.g.
land & buildings) and then leasing the same asset back from the new owner.
Sales promotion
Tactical, point of sale material or other incentives designed to stimulate purchases
Selection
The process of deciding which applicant for a job a business should accept

Span of control
The number of employees who are directly supervised by a manager
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Spare capacity
When a business is able to produce more with existing resources (also known as excess
capacity)
Stock control
The processes and controls used by a business to ensure that it has sufficient (but not too
much) stock for its purposes
Stocks
Raw materials, work­in­progress and finished goods held for resale. Stocks are sometimes
also referred to as "inventories"
Sub­contracting
Delegation by one firm of a portion of its production process, under contract, to another firm,
including in another country
Supplier
An individual, business or other organisation which provides goods or services to a customer
or consumer
TQM
Total Quality Management. An attitude to quality where the aims are zero defects and total
customer satisfaction
Training
The provision of work­related education or skills development
Unit cost
The average production cost per unit
USP
USP is an acronym for "Unique Selling Point". A USP is a feature of a product or service that
makes it stand out compared with the competition. If a USP is sustainable, then it can be a
source of significant competitive advantage for a business.
Variance
The difference between the budgeted amount and what actually happens. A variance can be
"positive" (favourable) or "negative" (adverse)
Waste
A cost of production. Sub­standard completed output or raw materials which are not retained
in the production process
Workforce role
The tasks involved in a particular level or grade of job
Workload
The amount of work assigned to a particular worker, normally in a specified time period
Subcontracting: Part of out sourcing–where another business is used to provide part of the
production process
Tariff: A tax levied on imports to increase their price compared with domestic goods(form of
trade barrier)
Technical economies: Reductions in unit costs arising from the effective use of technology

Unit costs: The key measure of productive efficiency–calculated as total costs divided by
total output (over a specific period)
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Human Resource Strategies

Arbitration: An alternative to a court of law in determining legal and employment disputes.
Involves a specialist outsider being asked to make a decision on a dispute
Centralisation: An organisational structure where authority rests with senior management at
the centre of the business
Communication: The process by which a message or information is exchanged from a sender
to a receiver
Conciliation: A way of mediating industrial disputes to gain agreement without going to
arbitration
Core workers: Employees who are part of the core workforce of a business–central to the
business activities
Decentralisation :An organisational structure where authority is delegated further down the
hierarchy, away from the centre
Delayering: The process of removing one or more layers from the organisational structure
Downsizing: The reduction in the scale and resources of a business, usually involving job
losses and/or the sale or closure of business units
Flexible working: The range of employment options designed to help employees balance
work and home life (e.g .part­time, job­sharing, home­working, annualised hours contracts)
Gap analysis: Analysis of the difference between the workforce needs or a business and its
current capabilities
Hard HRM: An approach to HRM based on treating employees as resources in the same way
as any other business resource
Human resource management (HRM): Strategies form an aging people in order to achieve
business objectives
Labour shortage: Where a business finds it does not have sufficient employees in number, or
with the right skills and experience ,for its needs
Peripheral workers: Employees who are on the fringe of the core workforce. They are not
essential (core) workers ,and their activities can often be outsourced or provided using
flexible contracting
Soft HRM: An approach to HRM based on treating employees as the most important resource
in a business
Staff(Labour)turnover:Theproportionofstaffthatleavetheiremploymentwithabusinessoveraperi
od–usuallymeasuredoverayear
Team working: Individuals working in groups rather than focusing on their own specialised
jobs
Trade union: Organisations of employees who seek to negotiate their employment terms
through collective bargaining
Workforce planning: How a business determines how many and what kind of employees are
required
Works council: A formal meeting of employer and employees to consider issues affecting the
business and workplace–mandatory for larger businesses in the EU
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Tinofamba nevanofamba