BUSINESS STUDIES

IGCSE (0450/0986)
Summary

Dr. Rawya El-Sayed

Prepared by Youssef Abdelbary
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 Table of contents:
Chapter 1: The Purpose of Business Activity _________________________1

Chapter 2: Classi cation of Business Activity ________________________3

Chapter 3: Types of Business Organisations __________________________4

Chapter 4: Enterprise, business growth and size _____________________7

Chapter 5: Organisation and Management __________________________10

Chapter 6: Communication in a Business ___________________________12

Chapter 7: Motivation _____________________________________________14

Chapter 8 Part I: Recruitment, Selection and Dismissal ______________16

Chapter 8 Part II: Part-time Workers, Training and Labour Legal

Controls __________________________________________________________17

Chapter 9: Financing Business Activity _____________________________19

Chapter 10: Costs, Scale of Production, and Breakeven Analysis _____22

Chapter 11: Managerial Accounting ________________________________24

Chapter 12: Cash ow Planning ____________________________________27

Chapter 13: The Marketing Department ____________________________28

Chapter 14: Market Research ______________________________________29

Chapter 15: Marketing Mix; The 4Ps _______________________________31

Chapter 16: Marketing Strategies __________________________________37

Chapter 17: Operations Department and Quality Control _____________38

Chapter 18: Location Decisions ____________________________________39

Chapter 19: Supply Chain and Methods of Production _______________40

Chapter 20: Government Objectives and Policies ____________________43

Chapter 21: Environmental and Ethical Issues ______________________45

Chapter 22: Businesses and International Economy _________________46

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 Chapter 9: Financing Business Activity
Why businesses need finance:
• Starting up a business
• Expanding an existing business
• Additional working capital

Internal sources of finance:

1. Retained profit
This is the profit kept in the business after the owners have taken their share of the profits.
Advantages Disadvantages
Retained profit does not have to be repaid. A new business will not have retained profits.
There is no interest to pay Many small firms’ profits might be too low
Keeping more profits in the business reduces
payments to owners.
2. Sale of existing assets:
This means the business sells the assets it has, for example, selling buildings and vehicles.
Advantages Disadvantages
This makes better use of the capital tied up in It may take some time to sell these assets
the business.
It does not increase the debts of the business. new businesses have no extra assets to sell.

3. Sale of inventories to reduce inventory levels:

This means the business will sell the products they have to raise finance
Advantages Disadvantages
Less storage cost of high inventory levels. may disappoint customers

4. Owners’ savings:
Owners can put more of their savings into their unincorporated businesses.
Advantages Disadvantages
Available to the firm quickly. Savings may be too low.
No interest is paid. It increases the risk taken by the owners.

External sources of finance:

1. Issue of shares:
Advantages Disadvantages
only possible for limited companies. Dividends are paid after tax
would not have to be repaid to shareholders Dividends will be expected by the shareholders.
No interest has to be paid. The ownership of the company could change
hands if many shares are sold

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2. Bank loans
A sum of money obtained from a bank which must be repaid and on which interest is payable.
Advantages Disadvantages
These are usually quick to arrange. Have to be repaid and interest must be paid.
allows the business a long time to repay the loan Security or collateral is usually required.
Large companies are offered low rates of interest Difficult for new businesses to arrange

3. Selling debentures:
A company borrows money from investors and agrees to pay interest to the debenture holders.
Advantages Disadvantages
Used to raise very long-term finance Must be repaid and interest must be paid.

4. Factoring of debts
Debtors owe businesses money for goods. Debt factors buy these claims for cash.
Advantages Disadvantages
Immediate cash is made available. The business does not receive 100% of its debts.
The risk of collecting the debt becomes the
factor’s and not the business’s.

5. Grants and subsidies from outside agencies

Outside agencies include, for example, the government will offer financial help.
Advantages Disadvantages
do not have to be repaid. They are often given with ‘strings attached’.

External alternative sources of capital:

1. Micro-finance
This is a small amount of money given to poor people who are not served by traditional banks.

2. Crowdfunding
Encouraging a large number of people to invest small amounts has been used for many years.

Advantages Disadvantages
No initial fees, but platform charges Crowdfunding platforms reject poorly conceived
percentage fee if finance raised. proposals.
Public reaction to the business can be tested. If the total amount required is not raised, the
finance will have to be repaid.
Fast way to raise substantial sums. Media interest and publicity need to be generated
to increase the chance of success.
Crowdfunding risks idea theft by competitors.

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Short-term and long-term finance:
Short-term finance:
1. Overdrafts:
This is when you withdraw from a bank account more than you have.
Advantages Disadvantages
Can be cheaper than short-term loans. Interest rates are variable.
Interest paid only on the amount overdrawn. Overdraft is repaid at very short notice.
The overdraft will vary each month.
2. Trade credit
This is when a business delays paying its suppliers, which leaves the business in a better cash position.
Advantages Disadvantages
No interest is paid Supplier may refuse discounts or goods if
payment is delayed.
3. Factoring of debts

Long-term finance:
1. Hire purchase:
Allows businesses to buy expensive items over time with monthly payments, including interest.
Advantages Disadvantages
Business don’t need large cash sums to purchase A cash deposit is paid at the start of the period.
Interest payments can be quite high.
2. Leasing:
Leasing an asset allows the business to use the asset without having to purchase it, just like renting.
Advantages Disadvantages
Business don’t need large cash sums to purchase Leasing costs exceed purchase cost, long-term
Leasing company handles asset maintenance.
3. Issue of shares:
Loans differ from share capital in the following ways:
• Loan interest is paid before tax and is an expense, with the issue of shares, we pay dividends, and
it is a capital, not a cost.
• Loan interest must be paid every year, but dividends do not have to be paid
• Loans must be repaid, as they are not permanent capital.

4. Bank loans
5. Debentures

Factors when choosing a source of finance:

1. Purpose and time
2. Amount needed
3. Legal form and size
4. Control
5. Risk and gearing – does the business already have loans?
6. Limited or unlimited liability
7. Will interest be paid
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 Chapter 10: Costs, Scale of Production, and
Breakeven Analysis
There are two types of costs:
1. Fixed Costs: costs which don’t change with the number of items sold or produced in the short run.
2. Variable Costs: Costs which change with the number of items sold or produced (direct costs)

Wages and Salaries:

• Salary is a fixed amount of money that should be paid, whatever the level of output produced
• A wage is the amount of money paid to workers that changes with the number of units being
produced (we call this piece rate payment), or it can change depending on hours worked (time rate)

Average Costs and Total Costs:

Average cost is the cost of producing one unit, including both variable and fixed costs.
Total cost = average cost per unit × output

Economies of scale:
The bigger company has much lower average costs than the smaller one.
There are five economies of scale:
1. Purchasing economies
2. Marketing economies
3. Financial economies
4. Managerial economies
5. Technical economies:
Diseconomies of scale:
When a business expands beyond a certain point, it experiences diseconomies of scale, due to:
1. Poor communication
2. Lack of commitment from employees
3. Weak coordination

Break Even:
Break-even analysis determines when total revenues equal costs.
Break-even Point = Fixed costs / (selling price per unit - variable cost per unit)
Contribution = Selling price per unit - variable cost per unit
The margin of Safety:
How much sales can drop before the business reaches its break-even point
Margin Of Safety = Output - Break-even point (BEP)

Break-Even Chart:
1. Identify the Key Values
• Fixed Costs (FC): Costs that do not change with the level of output (e.g., rent, salaries).
• Variable Costs (VC): Costs that change with each unit produced or sold (e.g., materials, labour).
• Selling Price (SP) per Unit: The price at which each unit is sold.
• Break-Even Point (BEP): The number of units that must be sold to cover all costs.

2. Set Up the Axes

• X-Axis (Horizontal): Represents the number of units produced or sold.
• Y-Axis (Vertical): Represents the monetary values (costs and revenue).

3. Plot the Fixed Costs Line

4. Plot the Total Costs Line
5. Plot the Total Revenue Line
6. Identify and Mark the Break-Even Point
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Why Total Costs Start from Fixed Costs:
• When Production is Zero: When no units are produced, the business still has to pay its fixed costs.
• Starting Point on the Graph: Total costs line must start at the level of fixed costs.
Total Costs = Fixed Costs + Variable Costs

Break-Even
Advantages Disadvantages
Managers can read off from the graph the Break-even charts are constructed assuming that
expected profit or loss to be made at any level all goods produced by the firm are actually sold
of output.
The impact on profit or loss of certain business Fixed costs only remain constant if the scale of
decisions can also be shown by redrawing the production does not change.
graph.
Used to show the margin of safety – the The simple charts used in this section have
amount by which sales exceed the break-even assumed that costs and revenues can be drawn
point. with straight lines.

Summary of the formulas

Formula Explanation
Total revenue Selling price per unit X Here we must understand the difference between
Number of units revenue, profit and selling price
• Selling price is how much I charge for my product
• Revenue is the total amount I gain from selling a
large number of products that's why revenue is
the selling price multiplied by the number of units
• On the other hand, profit is calculated after I
deduct all costs from my revenue
Total variable Variable cost per unit X It is the total variable costs of all the products
number of output produced
cost
Total cost • Fixed cost + Total This is the Total Cost for producing all the products
variable cost including both the variable and xed costs
• Total cost = Average cost
X Output
Average Cost Total Cost / Number of This is the average cost per unit, which shows how
Units much 1 unit costs to manufacture, also including both
the varaible and xed costs

Gross Profit Total Revenue - Variable This is the pro t made after removing only the
Cost variable cost

Profit Total Revenue - Total Cost This is the actual pro t the business receives after
deducting all costs

Contribution Selling price per unit -

variable cost per unit
Break even Fixed costs / (selling price Is the point where total revenue = total costs;
Point per unit - variable cost per neither a profit nor loss is made.
unit)
Margin Of Output - BEP This is the amount by which sales exceed the break-
Safety even level of output

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 Chapter 11: Managerial Accounting
Important financial accounts:
1. Income Statement
2. Statement of financial position or Balance Sheet

Income Statement:
Shows a company’s revenues, expenses, and profits or losses over a specific period.

Features:
1. Revenue:
2. Cost of Goods Sold (COGS) or Variable Costs:
It is the variable cost of production for the goods.
3. Gross Profit:
Gross Profit = Revenue - Cost of Goods Sold
Gross profit is the profit a company makes after deducting the variable costs.
4. Other Expenses and Taxes OR Fixed Costs:
These are the costs that do not vary with production levels.
5. Net Profit
Net Profit = Gross Profit - Other Expenses and Taxes
Net profit is the final profit after all expenses.

Retained Profit: The profit reinvested back into the business after all payments have been deducted.

How to increase Profit:

1. Increasing revenue by more than costs
2. Reducing the cost of making products
3. A combination of 1 and 2.

Profit Importance:
1. Reward for enterprise
2. Reward for risk-taking
3. Source of finance
4. Indicator of success

Profitability ratios %:
1. Gross profit margin = (Gross Profit / Revenue) X 100
This ratio indicates how efficiently a company can control its variable costs.
2. Profit Margin = (Net profit/Revenue) X 100
Shows how well a business can control its fixed costs.
3. Return on Capital Employed ROCE = (Net profit / Capital Employed) X 100
ROCE indicates how well a company is generating profits from its capital.

Statement of financial position:

It shows what the company owns (assets), what it owes (liabilities), and the owner’s equity (the
difference between assets and liabilities). The Balance Sheet is divided into three main sections:

Assets:
Assets are those items of value which are owned by the business, such as cash, inventory, property.
Non-current Assets:
These are assets that have been owned by a business for more than a year.
Current Assets:
These are assets owned by a business for less than a year
• Cash, Bank, Inventory
• Trade receivables (These are people who borrowed money from the business)
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Liabilities:
Liabilities are obligations or debts that a company owes to external parties.
Non-current liabilities:
long-term borrowings which do not have to be repaid within one year.
• Long-term debt, Bank Loans
Current liabilities:
These are amounts owed by the business which must be repaid within one year.
• Trade Payables (People who the business borrowed money from and will have to repay it), Overdraft

Equity:
The equity is the money invested by the owners or shareholders of a company.
Total assets – Total liabilities = Owners’ equity

Additional Calculations From Balance Sheet / SoFP:

• Working capital It measures the short-term liquidity and operational efficiency of a company
Working capital = Current assets – Current liabilities
• Needed to pay day-to-day costs and buy inventories.
• Not having enough inventories may cause production to stop. On the other hand, a very high
inventory level may result in high opportunity costs

• Capital employed determines the total amount of capital that is being used in a business.
Capital employed = Shareholders’ funds + Non-current liabilities

Ratios:
1. Current Ratio = Current assets / Current liabilities
The optimal ratio is 1.5 —> 2
Current Ratio measures company’s ability to pay off short-term obligations with short-term assets.
2. Acid test Ratio = (Current assets - Inventory) / Current liabilities
Optimal ratio is 1 —> 1.5
Measures a company’s ability to pay short-term debts without relying on the sale of inventory.
3. Gearing Ratio = (Non-Current liability / Capital Employed) X 100
The Gearing Ratio measures the proportion of a company’s capital that is financed by debt

Profitability is a measure of how effectively a business is converting its sales into profit.
The Concept and Importance of Liquidity
Liquidity refers to a business’s ability to quickly convert assets into cash to pay off debts.
Differentiating Profitability and Liquidity
A business can be profitable but not liquid, and vice versa, profitability focuses on long-term success
and efficiency, while liquidity emphasises the ability to manage short-term financial commitments.

Why and how accounts are used:

Users of Accounts What they use the account for ?
Managers: To keep control over the performance and help in decision making.
Shareholders To know the profit or loss the company made.
Creditors Liquidity ratios, will indicate the ability of the company to pay back.
Government To check on the profit tax paid by the company
Workers and trade unions To assess whether the future of the company is secure or not.
Other businesses To compare their performance and profitability with others.
Analysis of Accounts helps a business decide whether a business is:
• Performing better this year than last year
• Performing better than other businesses.
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 Templates of Income Statement and Balance Sheet
Template Statement of Financial Income Statement:
Position (balance sheet)
current assets: Revenue
+ non-current assets - cost of goods sold/Variable cost
total assets ——— gross profit ———

current liabilities: -other expenses and taxes/Fixed

+ non-current liabilities costs
total liabilities ——— net profit———

owners’ equity ———

total liabilities and owners’ equity
———
Summary of the formulas
Formula Explanation
Working Capital Current Assets - Current Liabilities

Net Assets Fixed assets + Working Capital

Gross Profit Revenue - Cost of sales Shows profit made after the variable
costs have been paid.
Profit Gross profit - Other expenses Shows profit after all costs have
been deducted from the revenue.
Total Assets Total liabilities + owners’ equity

Capital Employed Equity + Non-Current Liabilities

Profitability ratios: %
Gross profit margin (Gross Profit / Revenue) X 100 Shows the percentage of revenue
has been converted into gross profit.
Profit Margin (Net profit/Revenue) X 100 Shows what percentage of revenue
has been converted into profit.
Return on Capital (Net profit / Capital Employed) X 100 Shows profit made for each $1
employed ROCE invested into the business.

Ratios:
Current Ratio Current assets / Current liabilities Optimal ratio is 1.5 —> 2
This shows the ability of a business
to pay its short-term debts from its
current assets.
Acid test Ratio (Current assets - Inventory) / Current Optimal ratio is 1 —> 1.5
liabilities This shows the ability of a business
to pay its short-term debts from its
current assets – inventories.
Gearing Ratio (Non-Current liability / Capital If gearing ratio is high and is near
Employed) X 100 50% the bank will be reluctant to
offer the business more loans

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 Chapter 12: Cashflow Planning
Cash refers to the money that a business has readily available to use at any given time.
Cash Inflows:
Cash inflow is any money that the business receives, whether it is from sales or loans
The sale of products for cash, Payments made by debtors, and Borrowing money.
Cash Outflows:
Cash outflows are any money that the business spends; these can be costs, repaying a loan, etc.
Purchasing goods or materials for cash, Paying wages, salaries and other expenses in cash.

Trade receivables are customers who buy products on credit from a business.
Trade payables are suppliers who supply the business with goods on credit.

Cash Flow is the movement of cash in and out of a business over a specific period
Problems of a bad cashflow:
• Being unable to pay workers, suppliers, landlord, government
• Production of goods and services will stop
• The business may be forced into liquidation

Difference Between Liquidity and Profit:

Liquidity measures a company’s ability to meet short-term obligations using cash or easily convertible
assets, while profit represents financial gain after expenses. A company can be profitable but lack
liquidity, or vice versa.
A profitable business can run out of cash due to over-expansion of the business by keeping high levels
of inventory, offering credit to customers too long a credit period to pay or paying suppliers quickly.

Difference between cash flow and forecast:

Cash flow itself is a concept, while the cash flow forecast is the actual document that a business uses.
Most of the questions in the exam will ask about cash flow forecast, also, when he asks you to write
the accounts a business publishes/uses, you have to write cash flow forecast.

Uses of cash flow forecasts:

• Starting up a business
• Keeping the bank manager informed
• Managing an existing business
• Managing cash flow: too much cash held in the bank account of a business means that this capital
could be better used in other areas of the business.

In the forecast, you will have several important parts:

• Net Cash Flow:
When the net cash flow is in brackets (), this means that the business has a negative cash flow.
Net Cash flow = Cash Inflow - Cash Outflow
• Opening Balance:
The amount of money that a business starts with at the beginning of a new accounting period.
• Closing Balance:
The closing balance is the amount of money left in an account at the end of an accounting period.
The closing of the previous month is the opening of the next
Closing balance = Opening balance + Net cash flow

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Overcoming Cash Flow Problems:
Method How it works Limitations
Increasing bank loans Brings in cash inflow • Interest must be paid
• loans have to be repaid eventually

Delaying payments to Cash outflows will decrease • Suppliers could refuse to supply
suppliers in the short term • Suppliers will not offer discounts for
late payments
Asking debtors to pay more Cash inflows will increase Customers may purchase from
quickly in the short term another business that offers credit
Delay or cancel purchases of Cash outflows for purchase The long-term efficiency of the
capital equipment of equipment will decrease business could decrease

Chapter 13: The Marketing Department

The Role of Marketing:
1. Identify Customer Needs
2. Satisfy Customer Needs
There is a difference between identifying and satisfying customer needs:
Identifying customer needs involves understanding their wants. Satisfying customer needs
requires acting upon this understanding.
3. Maintain Customer Loyalty
4. Build Customer Relationships
5. Anticipate Changes in Customer Needs

Changing Consumer’s behaviour change:

• Changing Tastes and Fashions
• Technological Changes
• Changes in Income
• Demographic Changes
Business Response to Changes:
1. Maintaining strong customer relationships to ensure loyalty.
2. Continuously improving products to stay ahead of competitors.
3. Innovating new products to keep customer interest.
4. Keeping costs low to remain competitive.

Types of Markets:
1. Mass marketing
Mass markets target broad consumer groups with widely appealing products.
Advantages Disadvantages
Total sales in these markets are very high High levels of competition between businesses
Benefiting from economies of scale High costs of advertising and promotion
Risks can be spread May not meet the specific needs of customers
Opportunities for growth as large potential sales.
Brand Recognition

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