Business IGCSE

Chapter 1
The purpose of business activity is to provide consumers with goods and services that meet our needs and wants.
Needs are essential to living and wants are what people would like to have (not essential), they are also unlimited. The
factors of production are the requirements for the production of goods and services, they are limited and scare. The
four main factors of production:
 Land: all natural resources  Capital: machinery, equipment and finance
 Labor: number of people required to work needed
 Enterprise: people prepared to take the risk of
setting up a business
There are not enough goods and services to meet our needs and wants, this creates scarcity; this is an example of an
economic problem. The opportunity cost is the benefit cost that could have been gained from an alternative use of
the same resource. Specialization is when people in a business concentrate in one specific task or job so that they can
improve the quality of the produce, be less waste efficient and produce in a faster way. The downside of this, is that
boredom is more frequent and if one employee leaves, it will affect the hole process of production. Division of labor
is when the production of a good is divided into separated tasks and each employee does just one task. There are three
main types of goods and services:
 Consumers goods: products which are sold to the public; they may be durable of non-durable and are tangible
 Consumer services: are non-tangible
 Capital goods: physical goods that are sold to other business
Added value is the price of the good minus the material costs. Branding is giving a name, image or symbol that
distinguishes a product.
Chapter 2
Three types of sectors:
 Primary: business activity that involves extracting or harvesting natural resources from land or sea
 Secondary: business activity that take the raw materials and turn them into finished goods
 Tertiary: business activity that provide the services to the final consumer
Chain of production is the production and supply of goods to the final consumer that involves activities from
primary, secondary and tertiary sector business. Industrialization is the growing of a business secondary sector
reducing the importance of the primary sector. De-industrialization is the growing of the tertiary sector reducing the
importance of the secondary sector. Mixed economy is an economy where the resources are owned and controlled by
both the private and public sector; individuals decide but the government sometimes interfere to help the consumer
achieve their needs. The private sector (Free Market Economy) is the part of the economy that is owned and
controlled by individuals and companies for profit; consumers and individuals decide what and how to produce, the
ones that can afford it are going to decide either to buy it or not, to maximize profit. The public sector (Planned
Economy) is the part of the economy that is controlled by the state or government; the government decides what and
how to produce and everyone gets what they want. The three basic economic questions:
 How to produce  What to produce  Whom to produce
Chapter 3
An entrepreneur is an individual who has an idea for a new business and takes the financial risk of starting un and
managing it. Some characteristics of an entrepreneur:
 Innovate Initiative
 Self-motivated and determined Result driven
 Self-confident Risk-Taker
 Multi-skilled Good at networking
 Strong leadership qualities
A business plan is a detailed written document outlining the purpose and aims of a business which is often used to
persuade lenders or investors to finance a business proposal. It describes the business, the business opportunity, the
market, the objectives of the business and the financial forecast. The plan gives a purpose and direction to the business
and it provides targes to aim. A business start-up is a newly formed business that usually starts small but then they
become much bigger. They increase the variety of products, give more competition, provide more specialized goods
and services and have low costs. There are four ways to measure and compare the size of the business:
 Capital employed: the value of all long-term  Market share: the revenue of a business
finance invested in a business, its used to buy the expressed as a percentage of a total market
equipment revenue
 Value of output: the amount the business earns  Number of employees
from selling their products (Revenue)
Reasons for why a business may want to expand or grow:
 Increase in profit  Economies of scale (the deduction of average cost
 Increase in the market share (become more widely as a result of the scale of operations)
known)  Greater power to control the marker (control over
their prices)
 Protection from the risk of takeover
There are two types of growth:
Internal Growth: it occurs when the number of goods is increased, new products are developed and new markets are
found for a product.
External Growth: it occurs when a business merges with another one, this process is known as integration. There are
four types of integrations:
 Horizontal: to firms in the same industry who are  Backward vertical: two firms in the same
also in the same sector industry but one is a supplier of the other one
 Forward vertical: two firms that are in the same  Conglomerate: two business that are in different
industry but one is a customer of the other on industries

Reasons for why a business may want to remain small:

 Owners’ choice (does not want the  Market size
responsibility, keep total control of the  Access and availability of capital
business, maintain a close relationship with the  Market domination
customers or does not want to take the risk)
Causes that may lead the business to fail:
 Poor planning and lack of objectives  Poor market
 Liquidity problems  Lack of finance
 Poor choice of location  Competition
 Poor management  Economic influences
 Failure to invest in new technologies

Chapter 4
There are five forms of business organizations:
Type of Definitions Advantages Disadvantages
business
Sole Trader A business that is owned Easy to setup Unlimited liability
and controlled by just Has all the control Hard to get a loan
one person who takes all Makes all the decisions Has no continuity
of the risks and receives Keeps all the profit Has no legal personality
all of the profit Has more working hours
Partnership A business formed by Easy to set up a deed of Unlimited liability
two or more people who partnership Has no continuity
will usually share Greater chances to get finance Has no legal personality
responsibility for the access Profit is shared
day-to-day running of the Less legal responsibility Every action taken by your partner can
business. Partners usually Decisions are divided and affect you
invest capital in the everything is shared
business and will share They are not required to publish
profit money used, have secrecy
Private Often small to medium Limited liability Profit is shared
Limited sized company; owned Has continuity Every action taken by the shareholders
Companies by shareholders who Has legal personality can affect you
have limited liability. Theirs is no risk of takeover since Shares can only be only sold privately
The company cannot sell the shares are sold privately so it’s hard to raise money through
its shares to the general Decisions ate kept within a circle shares
public of close contacts Can own Shares but have no control
As it’s small it has more chances to get
 takeover
Public Often a large company; Limited liability Profit is shared
Limited owned by shareholders Has continuity Every action taken by the shareholders
Companies who have limited Has legal personality can affect you
liability. The company Shares can be sold publicly Can own shares but have no control
can sell its shares to the Quick and easy sale of shares There is risk of takeover since shares
general public Easy to raise a high amount of can be sold publicly
capital through shares
Franchises A business system where Less chances of failure because of The initial cost of buying a franchise is
entrepreneurs buy the the brand recognition often very expensive
right to use the name, Franchisor can give advice to the The franchisee is very strict on how to
logo and product of an franchisee, related to products, behave and what they are allowed to
existing business pricing, store layout, etc do
The franchisee will have to pay for any
local promotion
Joint Two or more business Can be less expensive since less Any mistake can affect the reputation
Venture agree to work together on machinery and workers will be of both businesses
a project and set up a needed The difference in management can
separate business for this Each business brings different lead to problems in control
purpose expertise and skills to share
Both have strong aspects
Shareholder is a person or organization who owns shares in a limited company. An ordinary shareholder is the
owner of a limited company. Unincorporated business are business that do not have legal identity separated from its
owners. The owner have unlimited liability for business debts. Limited liability is when in a business failure, the only
risk is to lose the amount invested in the company and not any other personal wealth; unlimited liability is the
contrary. The dividend is the amount that the shareholders get as a reward for their investment if the business earns
any profit. When choosing which type of business organization to use, several factors must be considered:
 The number of owners  How quickly the owners want to start operating
 The owner’s role in the management of the their business
business  The potential size of the business
 The attitude towards financial risk
A public corporation is a business organization that is owned and controlled by the state.
Chapter 5
An objective should be SMART, this means:
 Specific  Realistic and Relevant
 Measurable  Time-specific
 Achievable and Agreed
The main business objectives are:
 Survival  Market share
 Growth  Corporate social responsibility: is a business
 Profit taking responsibility for the impact their activities
might have on society and the environment
Pressure group is a group of like-minded people that puts pressure on a business and government to change their
policies to reach a predetermined objective. Social enterprise are business with social objectives that reinvest most of
its profit back into the business or into benefiting society at large. Stakeholder is an individual or group which has an
interest in a business because they are affected by its activities and decisions. There are two types of stakeholders:
Internal
 Owners and shareholders: to receive high dividends and to benefit from an increase in the share value
 Managers: to have job satisfaction and status and to have a salary increase and bonuses
 Employees: to have job security and to receive a fair wage
External
 Lenders: to receive interest payments at time
 Suppliers: to receive prompt payment for good supplied credit and to be treated fairly
 Customers: to receive good quality and after-sales services and to be charged with a fair price
 Government: to be paid the correct amount of taxes and to have minimal spending in unemployment
 Local community: to receive benefits for the local community and to avoid negative impact of the business
activities
The services and facilities that a public sector provide must be:
 Accessible  Affordable  Open to all
Chapter 6
Motivation is the factors that influence the behavior of employees towards achieving set business goals. There are
several benefits of having a well-motivated workforce:
 Improved labor productivity  More competitive
 Low rate of absenteeism  Better quality of goods and services
 Low rate of labor turnover
Maslow believed that humans have five levels of needs:
1. Physical needs: basics 4. Esteem needs: respect from others. Recognition
2. Safety needs: health and safety at work and job for a well job done and status
security 5. Self-actualization: reaching one’s potential
3. Social needs: friendship, accepted, belonging to a
group
Taylors theory or mostly known as “The theory of the economic man” says that humans are only motivated by money.
The piece-rate method is paying employees for each unit produced, this method was developed thanks to this theory.
Herzberg discovered two factors that would help with the motivation, this factors were:
Hygiene factors: Motivators:
1. Working conditions 1. The work itself
2. Relationships with others 2. Responsibility
3. Salary and wage 3. Advancement
4. Supervision 4. Achievement
5. Company policy and administration 5. Recognition of achievement
Hygiene factors are the factors that must be present in the workplace to prevent job dissatisfaction. Motivators are
the factors that influence a person to increase their effort. Job dissatisfaction is how unhappy and discontent a person
is with their job.

Employees are
Employees are Employees are
not dissatisfied
disatisfied and Hygiene factors Motivators satisfied and
but are not
demotivated motivated
motivated

Managers can motivate their employees with financial or non-financial rewards. Financial rewards are cash or non-
cash rewards which are often used to motivate employees to increase their efforts. Non-financial rewards are methods
used to motivate employees that do not involve giving any financial reward.
Financial rewards:
 Hourly wage rate: a payment to employees based on a fixed amount for each hour worked
 Salary: a fixed annual payment to certain grades and types of staff not based on hours worked or output
 Piece-rate: a payment to employees based on the number of units produced
 Commission: a payment to sales staff based on the value of the items they sell
 Bonus scheme: an additional reward paid to employees for achieving targets set by managers. A bonus scheme
used to reward staff for performing to the required standard
 Fringe benefits: non-cash rewards often used to recruit or retain employees and to recognize the status of certain
employees.
 Profit sharing: and additional payment to employee’s base on the profit of the business
Non-financial rewards:
 Job rotation: increasing the variety in the workplace by allowing the employees to switch from one task to
another
 Job enlargement: to increase or widen the tasks to increase variety of employees
 Job enrichment: organizing work so that employees are encouraged to use their full abilities. This will increase
the job satisfaction which is how happy and content a person is with their job
 Quality circles: a group of employees who meet regularly to discuss work-related problems
 Team working: organizing production so that groups of employees complete the whole unit of work
 Delegation: passing responsibility to perform tasks to employees lower down in the organization.
Chapter 7
An organizational structure is the formal, internal framework of a business that shows how it is managed and
organized. The functional departments we are going to see are: human resources, finance, marketing, operations
management and research and development. A hierarchy is the numbers of levels in an organizational structure. As
you move down the hierarchy, the tasks become simpler so, it’s more normal to have a wider span of control in the
bottom than at the top. The term chain of commands describes the route in which the authority is passed down
through the organization. Each person in the chain of command is directly responsible to the person above them and
directly responsible for the person(s) below them. The span of control is the number of subordinates reporting to each
supervisor per manager. Some factors that may affect the size of the span of control are:
 The difficulty of the task  Levels of hierarchy
 The experience and skills  Management style
 The size of the business
Tall organizations have many levels of hierarchy:
 Each level in the hierarchy, except for the bottom level, is a layer of management; it has several layers of
management, and therefore more managers
 The span of control for each manager will be narrow.
 The chain of command is long
Communication and decision-making are often slower because they must pass through several layers
Flat organizations have few levels of hierarchy:
 The chain of command is very short
 Communication and decision-making are much quicker because there are very few levels for these to pass through
 There are fewer managers so the span of control is wide
Delayering is reducing the size of the hierarchy by removing one or more levels-often the middle management. A
centralized organization is one where decision-making power is held at head office. A decentralized organization
is one which decision-making power are passed down the organization to lower levels, by delegation. Directors are
appointed or elected members of the Board of Directors of a company who have the responsibility for determining and
implementing the company’s policy, some directors might also have a management role. Their responsibilities often
include:
 Setting strategy  Protecting the interests of shareholders and
 Making sure that the resources are available to other stakeholders
achieve objectives  Providing leadership to ensure the success of
 Reviewing the performance of managers the business
The Annual General Meeting (AGM) is a meeting for shareholders that limited companies must hold one a year. The
Chief Executive Officer (CEO) are the most senior manager responsible for the overall performance and success of a
company. Manager is an individual who is in charge of a certain group of tasks, or a certain area or department of a
business. The main responsibilities of a manager are:
 Setting objectives  Making sure employees have the resources
 Motivating employees they need to complete their tasks
A supervisor is an individual who checks and controls the work of subordinates.
The main five functions of a manager are:
 Planning: see where the business is so that it can set clear objectives and decide on the actions needed for these to
be achieved
 Organizing: preparing and organizing the resources needed to achieve the planned goals and objectives while
making sure that the cost are the lowest possible
 Commanding: control and supervision of subordinates
 Coordinating: making sure that all of the different parts of the business are working together towards achieving
the business' goals
 Controlling checking to make sure that the plan is working
Delegation is passing authority down through the organizational hierarchy to a subordinate. The main
advantages are:
 More time for other tasks
 Motivate the employees by giving them an opportunity to take responsibility
 Developing skills and increasing the flexibility of the workforce
There are three styles of leadership:
 Autocratic leadership: all of the decisions are made without any discussion with others, it is more interested in
the completion of the task than in the welfare and motivation of employees snd the decisions are usually doe very
fast
 Democratic leadership: will discuss with employees before taking any decision, the quality of the final decision
should be improved, especially where individual employees have more experience of a work situation than the
leader and it is more likely to delegate authority
 Laissez-faire leadership: it allows employees to make decisions and carry out tasks with very little or no input
from the leader, the leader will provide a coordinating and supporting role for the team members and it is usually
effective for employees involved in creative tasks.
When choosing which style to use, the following factors should be considered:
 The skills and experience of the workforce  The personality of the manager
 The time available to make a decision  The task to be completed
A trade union is an organization of employees aimed at improving pay and working conditions and providing other
services. Some roles that must be done by them are:
 Negotiating with employers (collective bargaining)  Providing legal support and advice
 Resolving conflict  Providing services for members
Chapter 8
There are two types of recruitment:
 Internal: filling a vacant post with some already employed in the business. The vacant will be filled much faster,
applicants already know the business, the strength and weaknesses of the vacant are known and employees
become motivated as they see a chance of promotion; a better applicant may have been chosen, may have internal
conflicts, does not bring knew ideas and there will still be a vacancy to fill
 External: filling a vacant post with somebody not already in the business. The vacant may bring new ideas and
there will be a wider range of selection with different skills; it takes longer, its more expensive and they may need
training.
1. The business identifies the need for a new employee and carries out a job analysis; this is a process that identifies
the content of a job in terms of the activities involved and the skills, experience and other qualities needed to
perform the work.
2. A job description is produced; this is a list of the key points about a job, job title, key duties, responsibilities and
accountability
3. A person specification is produced; this is a list of the qualifications, skills, experience and personal qualities
looked for in a successful applicant.
4. The job is advertised; may be placed in the staff notice-board or send through email, or it could be posted in a
magazine/newspaper
5. Application forms and job detailed are sent out
6. Completed applications are received; also CV (curriculum vitae) may be received
7. A shortlist is selected from all of the applicants; this is a list of the candidates who are chosen from all of the
applicants to be interviewed for the job
8. The shortlisted candidates are interviewed; usually a question-and-answer session
9. The right candidate is selected
Induction training is a training program to help new recruits become familiar with their workplace, the people they
work with and the procedure they need to follow. There are two types of training:
On-the-job-training: it is training ate the place of work, watching or following an experienced employees. It is cheap,
they learn how the work should be done, they produce while they learn; may pick up bad habits, there will be wasted
due to the mistakes, will not learn up-to-date methods and its slows down the production.
Of-the-job-training: training that takes place away from the workplace.
Chapter 15
Production is the process of converting inputs such as land, labor and capital into saleable goods (outputs).
Operation management (managing the process) must:
 Use resources in the most efficient way
 Produce the required output to meet the consumers demand
 Meet the quality standard expected to consumers
Productivity is the a measurement of efficiency of inputs used in the production process.
Labor productivity = total output % number of production employees
To improve labor productivity
Increasing output with the same number of employees
Keeping the output at the same level with fewer employees
To increase the productivity of employees:
 Improve the skill level  Introduce to better technology
 Improve the motivation  Improve the quality of management decisions
All the ways of improving productivity will add costs and these cost should be reduced, so the increase in output is
greater than the increase in costs.
Inventories are the stocks of raw materials, work-in-process and finished goods held by a business.
Why business hold inventories:
 The production process need raw materials and components, and if they are not available the process will have to
stop, this will cause a loss of output
 There could be a loss in sales due to not having enough finished goods in stock
 The business may get discounts by buying big amounts of materials to the supplier
Cost of holding inventories
 Warehouse (rent)  Insurance (shrinkage coverage)
 Handling (transport)  Obsolescence (no up-to-date goods)
 Shrinkage (replacement)  Opportunity

Lean production is the production of goods and services with the minimum waste of resources to aim the lower costs
possible.
Main sources of waste
Production defects
High inventories
Over production
Idle resources
Transporting goods
Just-in-time inventory control is a
system were no inventories are keeps by
the business. All the raw materials and
components arrive as soon as they are needed and the good is delivered just when its finished. This system reduces
inventories costs, but for it to work you must have a good relation and communication with the supplier as well as a
flexible workforce. The materials should also be of good quality and in big quantities.
Kaizen is another system in which employees are allowed to make suggestions about how to improve the quality
and/or productivity, These suggestions may lead to a more efficient workforce as there is more motivation.
Benefits of these systems:

 New products can be brought to the market quickly  The inventories costs are eliminated
 Quality is improved  Unit costs are reduces which causes an increase
 Waste are eliminated in profit

Job production is the production of items one at a time. Its

more unique and with a higher quality and the employees are motivated. But it has high costs, a longer time of
production, special tools are required and the product is much more expensive.
Batch production is the production of goods in batched. Each batch passes through one stage of production before
moving on to the next one. The unit costs are lower, it has variety of products and the materials are cheaper. But there
is lees motivation as the work is repetitive and there are inventories costs.
Flow production is the production of very large quantities of identical goods using a continuously moving process.
There is more capital intensive which lowers the labor costs and materials are cheaper. But there is less motivation as
the work is repetitive, it needs a higher capital for the machinery, there is no flexible work line, one defect may affects
all the products and there are inventory costs.
Capital intensive is the production process that uses high quality of capital equipment compared with labor input.
Choosing the best method of production:

 Amount of sells  Variety of products expected

 The product that is produced  Size of market
 Cost of production  Type of good being made

Chapter 16
Fixed cots: Costs that do not change with the output.
Variable cost: Costs that change in direct proportion to output.
Average cost: Cost of producing a single unit of output.
Total cost: All the variable and fixed costs of producing the total output.
An economies of scale is the reduction in average costs as result of increasing the scale (size) of operations. There are
different types of economies of scales:
 Financial Economies: Lenders prefer to lend to large business because they are less likely not to pay. As a result,
large business find easier to get loans and often at a lower rate of interest.
 Managerial Economies: A bigger business usually has more specialist managers for different categories. These
managers often improve the quality of the business decisions and make fewer mistakes.
 Marketing Economies: As a business grows, the sales level increase at a faster rate than the marketing costs. So,
these means that the average cost of marketing falls as output and sales increase.
 Purchasing Economies: Larger businesses buy bigger quantities of raw materials and components. This causes
discounts made by the supplier which help cost lo lower. Often its also called “Bulk-buying economies”.
 Technical Economies: Large businesses usually use flow production which uses a higher capital for technology.
Despite this high capital being needed, it produces a higher amount of output than smaller businesses.
A diseconomies of scale are factors that cause the average costs to rise as the scale of operation increases. The main
causes of this problems are:
 Poor communication: If the business is way too big, the manager may not be able to communicate directly with
the employees. This can lead to slow and poor decision-making and an increase in mistakes.
 Lack of commitment from employees: Employees could feel that they are no longer valued by the business as
the managers may not be able to contact with them every day, this can cause employees to be demotivated which
can lead to labor high turnover, poor quality and a fall in productivity.
 Weak coordination: As the business may have a lot of departments, it may be harder for the managers to control
and coordinate. This can imply that the managers of different departments work towards different aims causing an
increase in costs.
The break-even describes the level of output where revenue equals total costs which means that the business is not
making neither profit nor loss. The break-even analysis shows the relationship between revenue, costs and volume of
output/sales. With it you can calculate:
 How many units are needed to sell before it starts to make profit
 The effects on profit of increasing or decreasing the price of a product
 The effect on profits if an increase or decrease in business costs
A break-even chart can be used to work out the number of output that is needed to be sold so that all the costs can be
covered and profit can be gained, this is known as break-even output. To make this chart, a business should know its:
 Revenue at zero output and its maximum output (capacity)
 Total costs at zero output and at capacity output
 Fixed costs at zero output and at capacity output
The margin of safety is the difference between the current level of output and break-even output. This is a measure of
the amount by which sales can fall before losses are made, the higher the margin, the lower the risk of a loss being
made.
Margin of safety = actuals sales – breakeven output
Chapter 17
Quality is ensuring a good or service that meets the needs and requirements of its consumer. Quality standards are
the minimum standard of production or service acceptable to consumers. Quality is important because it helps to:
 Develop a strong brand image: it helps the business to introduce new products, consumers will assume that the
quality of the product is as good as the others.
 Keep customers and attacks new customers: this is based of keeping the loyalty of old customers so they can
keep buying goods, this helps with the long term success.
 Reduce costs, customers complains and returns: basically, if the quality of the product it’s as its expectations
and or even less, there will be more returns and complains which will cause a loss in profit and and increase in
cost due to the replacement of the product. Also, it will be harder for the business to attack new customer.
 Charge a premium price: if a product is seen as being of a higher quality, the customer is ready to pay a higher
prices, this will help to increase the profit.
 Encourage wholesalers and retailers to stock the product: if the product is of high quality, the customer will
want to keep buying from the business, this will help both the wholesaler and the retailer to keep selling to the
business as they would all make profit.
 Lengthen product life cycles: products that have a longer life cycle will meet the need of customers.
Quality control is the method of checking the quality of goods though inspection. This process may cause some
problems, such as:
 The work can be repetitive and boring which may demotivate the inspectors causes a less efficient performance.
 If quality control is only performed at the end of the process, the problems that happen at the beginning are not
spotted. Resources are wasted completing a product which should have been rejected much earlier.
 The inspector take away any responsibility that the employees have, and as they don’t see that as a responsibility
anymore, they do not try to ensure the high quality of the product.
Quality assurances is a method that focuses on preventing poor quality by a system of setting agreed standards for
every stage of production. This method also makes sure that:
 Raw materials, components and other resources are of the required standard before they enter the production
process.
 Quality standard are agreed for every stage
 Products are designed to minimize quality issues
 Employees know they have responsibility for ensuring the quality of their work
Some benefits of quality assurance:
 It encourages team work and may help with motivation
 It reduces the cost of wastage and faulty products
 Quality issues are found at the moment which help to decrease wastage
 The time of inspection will be less and it will have lower costs
Chapter 18
An infrastructure are the basic facilities, services and installations needed for a business to function. As a business
wants to set a location, there are two kinds of factors that should be considered: quantities factors and qualitative
factors.
The qualitative factors can be measured in financial terms and will directly affect the cost, revenues and profitability
of a site:
 Cost of site: how expensive the land and buildings are to rent or buy.
 Labor costs: the average wage paid to employees will depend on the skill level required and competitors for the
labor concerned.
 Transport costs: how far are the suppliers and what will the costs of transporting goods from the site and how
accessible is for consumers the site.
 Market potential: tertiary sectors should be more near to the customer than secondary sectors.
 Government incentives: government may provide the business with financial and other incentives for o
encourage them to locate in a particular area, this may include set-up-costs, interest free loans or grants.
The quantitative factors include:
 The size of the available site: some business may need more space than others depending on the type of sector
and even may want to expand in the future.
 Legal restrictions: for most businesses, they are not allowed to be located wherever they want due to some
restrictions to prevent pollution and contamination in certain areas.
 Quality of local infrastructure: how good are transports such as roads and rails, if there is good supply of water,
power and telecommunication.
 Ethical issues and concerns: is the workforce willing to move yo another country or to relocate and if the level of
redundancy will increase or not due to it.
Reason to relocate in another country:
 To achieve growth: location can be the best way of achieving growth for companies who achieved the maximum
level of the home market.
 To reduce production cost
 To locate production closer to the marker: this reduces delivery time to customers and reduced transport costs.
International location decision have certain benefits:
 Lower labor costs: cost in other places may be lower than in others
 Access to global markets: new markets have been opened for businesses who have reached their higher stage of
maturity of its life cycle. Despite them being able to export, it is much more successful and efficient to locate
operations in other countries.
 Avoidance of legal barriers and import tariffs: the business does not have to pay import tariffs and will not be
affected by legal restrictions on foreign companies.
 Government incentives
International location also haves its limitations:
 Cultural differences: these may affect the workplace or the marketplace as the product may be less popular in
another country than its own due to the different taste in products and religious beliefs.
 Communication problems: language differences may disturb in the work between employees, managers and
suppliers.
 Ethical concerns: not all of the employees may be ready to relocate to another country, and if they cannot move,
the business ends up with a high level of redundancy.
 Quality issues: it may be more difficult to control the quality of the product in international markets.
The role of legal controls:
When setting a business in another country, it is required a planning permission to the government. Government want
to attract new business to set in their country to give jobs to the population, but at the same time they want to protect
their environment from pollution and prevent damage to the wildlife. Any business that may cause damage of this
kind will be shut down. There are also laws to protect workers from discrimination and wages. The legal controls will
not be the same in every country.
Chapter 19
A business may need finance for different activities:
 To set up the business, which is known as start-up capital
 To pay the day-to-day expenses such as wages, suppliers of raw materials and fuel expenses; this is known as
working capital (also to pay short-term debts)
 To purchase non-current (fixed) assets, this are the resources owned by the business that will be used for a time
period longer than 1 year, such as machines and buildings
 To invest in the latest technology, this is known as capital expenditure
 To finance the expansion of the business
 To finance research into new products and/or new markets
Long-term finance are loans or debts that are not expected to be repaid in less than one year
Short-term finance are loans or debts that are expected to be repaid within one year
There are 4 types of internal sources of finance (can be raised by the business itself):
 Retained Profit: It is profit that remained after all expenses, taxes and dividends that have been paid and which is
ploughed back into the business, it will reinvest in the business. The main advantage is that there is no extra cost
for the business but not all businesses have retained profit.
 Owners savings
 Sale of non-current (fixed) assets: This can be achieved by selling unwanted non-current assets and then leasing
back the non-current asset. The main advantage is that there are no direct costs to the business. The main
disadvantages are that future fixed costs of the business will increase as they now have to pay annual leasing
charged to the new owner, the leasing charge is likely to increase as its renewed and when the leasing agreement
is over the business may have to find new premises if the new owner decides that they will use the land.
 Use of working capital: Businesses may be able to use some of their working capital to raise additional funds.
Sources of finance may come from:
o Cash balances: This are any cash a business has that can be used to finance capital expenditure. However, this
cash must be managed properly as the business may not be able to pay the day-to-day expenses.
o Reducing inventory levels
o Reducing trade (or accounts) receivables: customers that buy goods but agree to pay in certain date in the future
are known as debtors. A business can reduce the length of time by making sure that customers pay on time or
 offering discounts on early payment. By reducing the total of accounts receivable in this way the business's cash
balances increase and this provides a possible source of internal funds for capital expenditure.
External sources of finance can be divided into long-term and short-term sources.
The main sources of short-term finance are:
 Overdrafts: An agreement with the bank which allows a business to spend more money that it has in its account
up to an agreed limit and it has to be repaid within 12 months. However, the cost of this type of borrowing is often
higher than most other sources of borrowing.
 Trade credit: The supplier is really lending the money for the cost of the goods for the length of the agreed credit
period. Another way of using trade credit is to delay the payment to the supplier. The limitations of this include:
discounts due to early payment will vanish, the supplier may refuse further deliveries until the outstanding
payment has been made and if delayed payment occurs too often, then the supplier may demand payment before
delivery.
 Debt Factoring: Trade receivables is the amount owned to a business by its customers who bought goods on
credit. If a business has a lot of trade receivables, it will not be able to meet the day-to-day expenses, so this is
why they use debt factoring. This is selling trade receivables to debt-factoring companies which will give an
immediate amount of cash, though not all the cash of the debt will be given as it has a certain interest.
The main sources of long-term finance are:
 A Bank loan is a provision of finance offered by a bank which will be repaid in the future and it has a fixed
interest agreed over a certain amount of time. If the interest is fixed it eliminate the risk of an increase in costs if
interests in the future. A variable rate of interest can rise or fall depending on economic factors.
 Leasing is obtaining the uses of a non-current asset by paying a fixed amount per time period for a fixed period of
time. Ownership will remain with the leasing company, which means that they are responsible for the
maintenance and repair of the asset.
 Hire purchase is the purchase of an asset by paying a fixed repayment amount per time period over an agreed
period of time, The asset is owned by the purchasing company on completion of the final payment. Like leasing,
hire purchase is most often used to finance non-current assets. However, the main difference is that the business
will own the asset once all payments have been made and it is responsible for any maintenance or repairs to the
asset. The main limitation with both of these sources of finance is that they are expensive as the interest charges
are much higher than other finance options.
 Mortgages are a long-term loans used for the purchase of land or buildings.
 A Debenture is a type of bond that a business sells in order to raise very large sums of money. In return for
buying the debenture, the buyer receives a fixed rate of interest per year. At the end of the debenture term, the full
purchase price of the debenture must be repaid to the debenture holder.
 Share issues is a source of permanent capital available to limited liability companies. The company can offer to
sell shares up to a maximum number, this is called authorized share capital. The amount of capital raised
through share issue becomes permanent capital and never has to be repaid unless us business ceases to trade.
 Debt financing does not change the ownership of the company. Lenders have no say in the running of the
company. But the interest is charged on the amount borrowed and this increases business costs. Interest must be
paid even if the business makes a loss. The amount borrowed must be repaid.
 Equity financing is a permanent finance provided by the owner of a limited company. It never has to be repaid.
There is no ongoing cost. If the business makes a loss, it does not have to pay dividends to shareholders. But the
increase in shareholders 'dilutes' the ownership of the company.
 Government grants and other financial assistance are given to encourage new business start-ups, or to assist
business growth and development.
Alternative sources of capital
 Micro-finance are small amounts of capital loaned to entrepreneurs in countries where business finance is often
difficult to obtain. These loans are usually repaid after a relatively short period of time. Once the loan has been
repaid it then becomes available to other borrowers.
 Crowd-funding is financing a business idea by obtaining small amounts of capital from a large number of people,
often using the internet and social media networks.
Factors influencing the choice of finance
 Size and legal form of business – Not all business may get finance by, for instance, issue share, that’s why the
business's legal status may therefore influence the sources of finance available to it.
 Amount required
 Length of time - The longer the period of time finance is borrowed over, the more costly it will be because of
interest payments.
 Existing borrowing (gearing)
Chapter 20
A business may need cash to pay:
o Wages
o It suppliers
o Rent, heating and lighting and other costs
A cash-flow forecast is an estimate of the future cash inflows and outflows of a business. A net cash flow is the cash
inflow minus cash outflow.
Working capital measures the liquidity of a business. Liquidity is the ability of a business to pay its short-term debts.
Credit sales are goods sold to customers who will pay for these at an agreed date in the future.
A business can improve its working capital by:
o Reducing inventory levels
o Negotiating longer credit terms with its supplier
o Reducing the amount of time it takes to receive payments from
Goods sold
customers who have been supplied goods on credit term. to Cash
o The length of the working capital cycle depends on: customers
o The level of inventories and how quickly suppliers are paid
o How long it takes to produce goods for sales and finds buyers for
its products
o The length of the credit period customers are given

Production Inventories
of goods purchased
for sale on credit