Form two

Business
studies
Teaching
notes .

FORMS OF BUSINESS UNITS

CONTENTS
 Introduction

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  Sole proprietorship
 Partnership
 Co-operatives
 Limited liability companies
 Public corporations
INTRODUCTION
Forms of business units refer to types of business ownership which includes the following:
 Sole proprietor
 Partnerships
 Co-operatives
 Limited liability companies
 Public corporations
 Parastatals
Business units can further be classified on the basis of their legal status into two, namely:
a) Unincorporated business organisations
b) Incorporated business organizations
a) Unincorporated business organizations
This are those business units which the law has no or little control over their formation, ownership and
operations. There is no formal certificate of registration required to form these business units. They may
include partnerships and sole proprietorships.
b) Incorporated business units
These are business units where there is legal control over their formation, ownership and operation.
These businesses are allowed to start operations after complying with all legal requirements.
Examples are limited liability companies, co-operative societies and public corporations.
Differences between incorporated and unincorporated business organisations

Unincorporated business organisations Incorporated business organisations

There are no legal procedures to be followed Legal procedures have to be followed during
during their formation their formation
The business is not a separate legal entity The business is a separate legal entity
All transactions are conducted in the name of All transactions are conducted in the name of
the owner(s) the business
The owners have unlimited liabilities The owners have limited liabilities
They lack perpetual existence They have perpetual existence
The business tends to be small in size due to The business tends to be large in size due to the
limited capital ability to raise more capital

SOLE PROPRIETORSHIP

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Ownership
This is a form of business unit which is owned by one person. This person is known as a sole trader or a
sole proprietor.
Sole proprietorships are the most common forms of business units. They mostly operate in retail and
wholesale trade.
Formation
Formation of a sole proprietor is very simple since it requires very few legal formalities.
In Kenyan, one only is required to apply to the local authority and if the application is approved, he is
issued with a trade license after paying the trade license fee. The trade licence gives him the permission
start his business
Management
Management of a sole proprietorship is done by the owner. The owner may however get assistance from
his family members or employ other people to assist him in managing the business.
The sole proprietor remains responsible for the success and failure of the business.
Capital
The amount of capital required to start a sole proprietorship is relatively small compared to other forms of
business units. The owner can raise capital through the following sources:
 Owners’ savings (main source).
 Inheritance.
 Grants and donations from friends and relatives.
 Buying on credit.
 Ploughing back profits.
 Leasing and renting of property.
 Borrowing from friends, banks and other financial institutions.
NOTE: The amount of capital borrowed depends on the following factors:
 Whether the lender has funds to loan out
 The amount of interest to be charged on borrowed capital
 Ability of the borrower to repay the loan together with interest
 Whether the amount of money borrowed will serve the intended purpose
Advantages of sole proprietorship
a) Requires fewer legal formalities to start hence reducing formation costs
b) Decision making is faster since the sole proprietor does not consult anybody
c) The owner exercises direct control over the business at all time
d) The owner enjoys close contact with his customers enabling him cater for their individual needs
e) Direct contact with customers enables the owner to assess the credit worthiness of his/her
customers in order to know whom to allow credit so as to avoid losing money through bad debts
f) The trader is accountable to himself
g) The sole trader is able to keep the top secrets of his/her business
h) The trader enjoys profits alone

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 i) The trader can get assistance from family members to run the business
j) Requires less amount of capital to start
k) The owner works to his level best because he is accountable to him/herself
l) The business is flexible i.e. it can switch from one line of trade to another
Disadvantages of sole proprietorship.
a) The business has limited liabilities. This means that in case business assets are not enough to pay
business debts, personal property of the owner may be sold to repay the debts.
b) Expansion of the business may be limited due to scarcity of capital.
c) The sole trader may overwork himself leaving him/her with little time for leisure
d) The owner suffers all losses and risks alone.
e) Lack of specialisation leads to poor performance. This is because one person may not manage all
the aspects of the business effectively.
f) Death of the owner may lead to the collapse or poor performance of the business.
g) The owner may not enjoy benefits enjoyed by large scale business such as easy access to loans.
h) Lack of consultation may lead poor decision making.
Dissolution
Dissolution refers to bringing a business to an end.
A sole proprietorship may be dissolved under the following circumstances
 If the owner decides to dissolve the business.
 In case of death, insanity or bankruptcy of the owner.
 In case the intended purpose is accomplished.
 If the court orders the business to dissolve.
Features of a sole proprietorship
a)It is owned and managed by one person.
b)The owner is responsible for all the debts of the business.
c)The owner provides capital to start the business.
d)The business lacks a separate legal entity status i.e. the owner and the business are regarded as
one.
e) The owner has unlimited liabilities.
f) The owner enjoys all profits.
g) The owner makes all decisions affecting his/her business.
h) The owner bears all losses alone.
i) Mostly, the business is smaller in size.
Circumstances under which sole proprietorship is appropriate
a) When the investor has limited capital
b) When the size of the market is small
c) When there is need to retain control over the business
d) When the investor would like to give personalized services
Role of a sole proprietorship in the economy
a) Creates employment to oneself and to others
b) Enables the utilisation of local natural resources
c) Provides revenue to the government in form of taxes
d) Helps in bringing goods and services closer to the people

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 PARTNERSHIP
Ownership
A partnership is a business unit which is owned by more than one person. The people who own a
partnership are known as partners.
A partnership is owned by a minimum of 2 partners and a maximum of 20, except for partnerships which
provide professional services such as law, medicine, auditing, banking etc. which have a maximum of 50
partners.
Classification of partnerships
Partnerships may be categorised in either of the following ways:
 According to the type of partners
 According to the period of operation
a) According to the type of partners
When classified according to the type of partners, partnerships can either be general or limited.
General partnership: in a general partnership, all members have unlimited liabilities. This means if
partners are unable to repay all business debts from the available business assets, personal property of the
partners will be sold to repay the debts
Limited partnership: in a limited partnership, partners have limited liabilities. This means that if
partners are unable to repay business debts from the available business assets, partners only loose the
capital they contributed to the business but not their personal property.
NOTE: in a limited partnership, there must be one partner whose liabilities are unlimited
b) According to period of operation
When classified according to the period of operation, partners can either be temporary or permanent.
Temporary partnership: these are partnerships which are formed to accomplish a specific objective
after which they are dissolved. These partnerships are also known as joint ventures.
Permanent partnerships: these are partnerships which are formed to operate indefinitely

Types of partners
Partners may be classified according to the role they play, their liabilities, their age and their capital
contribution as discussed below

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 a) Role played by the partners;-Partner can either be active or dormant. An active partner is the
one who plays an active role in the running of the business while a dormant partner does not play
an active role in the running of the business. A dormant partner is also known as a sleeping,
passive or silent partner.
b) Liabilities of the partners;-When classified according to their liabilities, partners can either be
general or limited. Limited partners have limited liabilities while general partners have unlimited
liabilities.
c) Age of partners; According to their ages, partners can either be min or major. A minor partner is
the one who is below 18 years. A minor partner only takes part in the sharing of profits but
cannot participate in the day to day running of the business until he/she attains the majority age
( 18 years and above). A major partner is the one who is above 18 years.
d) Capital contributions;-When classified according to their capital contributions, partners can be
real or nominal. A real partner is the one who has contributed capital to the business while a
nominal partner is the one who does not contribute capital to the business but allows the business
to use his/her name for prestige in order to attract customers. A nominal partner may also be a
person who retired from the partnership but left his/her in the business in form of a loan which
earns him interest from the partnership at an agreed rate. A nominal does not take part in the
sharing of profits. A nominal partner is also known as a quasi-partner.
Formation
When forming the partnership, partners have to agree on how the business will be operated in order to
avoid misunderstanding amongst themselves. The agreement among partners is known as a partnership
agreement.
The partnership agreement can either be oral or in writing. When it is in writing, the partnership
agreement is known as a partnership deed.
The partnership deed contains the following:
 Name of the partnership.
 Address of the head office.
 Location and area of operation of the partnership.
 The term of the partnership (whether temporary or permanent)
 The objectives of the business.
 Amount of capital contributed by each partner.
 Rate of interest on capital.
 Drawings by partners and the rate of interest on drawings.
 Salaries and commissions to partners.
 Rate of interest on loans from partners to the business.
 Procedures of dissolving the partnership.
 Profit/loss sharing ratio.
 Means of solving conflicts between partners.
 Methods of valuing goodwill on the admission or retirement of a partner
Once the partnership agreement is ready, the business can be registered by the registrar of companies
upon payment of the registration fee.
The name of the partnership should be different from the surnames of the individual partners.
NOTE:in case the partnership deed has not been drawn or is ambiguous, the contents of the partnership
act of 1963 will apply. These contents are:

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  All partners should contribute equal amount of capital.
 No salary is to be paid to any partner.
 No interest is to be allowed on capital.
 No interest is to be charged on drawings.
 All profits and losses are to shared equally.
 Every partner has the right to inspect the books of account.
 Every partner has a right to take part in decision making.
 Interest must be paid on all loans advanced to partners.
 When the partnership is dissolving, external debts are paid first, followed by loans from partners
and lastly partners’ capital.
 No partner should carry out competing business.
 Any major change in the business such as the admission of a new partner must be agreed upon by
all the partners.
 Partners should be compensated for the losses they incur while executing duties of the business.

Management
All partners share the responsibility of managing the business. This is done by assigning different areas of
management to partners based on their specialities.
Partners may also employ specialized personnel to manage the business on their behalf especially when
the business is too large or when the partners are ignorant on how the business should be managed.
Partners who take play an active role in the management of the business are major, real and general
partners. Minor, quasi and limited partners do not play an active role in the management of the business.
They are however allowed to access the books of account and to offer advice to active partners.
Sources of capital
 Contributions by partners.
 Loans from banks and other financial institutions
 Buying on hire purchase.
 Buying goods on credit.
 Ploughing back profits.
 Leasing and renting property.
Advantages of partnerships
a) Capital raised is higher.
b) Workload is reduced since work is distributed among partners.
c) Losses are risks are shared,
d) Requires fewer legal formalities to start compared to companies.
e) Consultation in decision making results in good decisions.
f) Combining of different talents in management results in efficient management.
Disadvantages of partnerships
a) A mistake made by one partner results in losses that are shared by all partners.
b) The liability of some partners is unlimited.
c) Continued disagreements among partners may lead to dissolution.
d) Decision making process may be slow since all partners have to be consulted.

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 e) Actions taken by any partner in good faith on behalf of the business are binding to all other
partners.
f) Retirement or death of a partner may adversely affect the partnership in case the business heavily
relied on that partner.
g) Compared to limited companies, partnerships have limited access to major sources of capital.
h) Lack of a variety of managerial skills especially when partners manage the business alone.
i) A hard working may not be rewarded for his/her hard due to the fact that profits realised from
efforts are shared.
Dissolution
A partnership may come to an end under the following circumstances;
a) If the partners mutually agree to dissolve.
b) In case of death, insanity or bankruptcy of the main partner(s).
c) In case of the completion of the intended purpose or end of the agreed time.
d) If the court orders the business to dissolve.
e) When one of the partners requests for a dissolution in writing.
f) If the business engages in unlawful activities or in activities that have been rendered illegal by a
change in law.
g) In case of retirement or admission of a new partner, the partnership may be dissolved temporarily
or permanently.
h) In case of continued disagreements among partners.
Features of a partnership
a) Formed and owned by 2-20 people in the case of ordinary partnerships and 2-50 people in te case
of partnerships offering professional services
b) Capital is mostly contributed by partners.
c) The business is managed by partners.
d) The business lacks legal entity status.
e) Partners have unlimited liabilities.
f) Profits are shared.
g) Losses are shared.
h) Each partner can act as an agent of the business.
i) Business decisions are made jointly.

CO-OPERATIVES
A co-operative society is a group people who come together mainly to provide convenient and efficient
services to members.
Co-operatives are also formed in order to eliminate middlemen so that all profits go to members.
Co-operatives are formed by people who have common interests and problems.

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The idea behind the formation of co-operatives is the need to pool together individuals’ scarce resources
so as to achieve common goals more efficiently.
Ownership
Co-operative societies are owned by more than 10 adults who register as members upon payment of a
non-refundable membership fee
Members are further expected to buy shares in the co-operative. The value of each should not be less than
Ksh 20.
No single member should own more than 5% of the co-operative’s shares capital. This is to ensure that
the co-operative is not controlled by a single member.
Membership to a co-operative is open and voluntary. This means that any member of the public can join
the society provided he shares the common of objective as that of the society. The member can also leave
the society at will.
Members also have limited liabilities.
Formation
Co-operative societies are formed by people who are above 18 years irrespective of their social, economic
or political background.
The number of members required to form a co-operative should not be less than 10.
The at least 10 members will draft rules and regulations to govern the operations of the co-operative.
These rules and regulations are known as by-laws. The by-laws are submitted to the commissioner of co-
operatives for approval. Upon approval, the commissioner registers the co-operative and issues it with the
certificate of registration to enable it commence its operations.
NOTE: in case of failure by members to draft their own by-laws, the co-operative societies’ act of 1996
can be adopted in part or whole

Management
A co-operative society is managed by a committee elected by members in a general meeting. The
committee consists of nine members.
The management committee then elects the executive committee members i.e. the chairman, treasurer and
the secretary amongst themselves.
The committee acts on behalf of members i.e. it can enter into contracts, borrow money etc. on behalf of
the society. The committee also educates the members on their responsibilities by organising seminars.
The committee holds regular meetings to discuss matters affecting the co-operative society.
The co-operative society can also hire professionals to assist in managing the society.
The management committee members are not paid salaries for their services to the society. Instead, they
are allowed sitting allowances and honoraria in accordance with the guidelines of the commissioner of co-
operatives.

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Where the committee fails to perform as expected, it can be voted out by members in a general meeting or
be dismissed by the commissioner of co-operatives
Sources of capital
a) Membership contributions in the form of registration fee and share capital contribution.
b) Retained profit (earnings).
c) Interest on loans to members.
d) Investment income.
e) Acquiring property on credit or hire purchase.
Dissolution
A co-operative society may be dissolved under the following circumstances:
a) In case of a court order.
b) In case of an order from the commissioner.
c) In case of a decision by members to dissolve the society.
d) In case of withdrawal of members from the society leaving less than ten members.
e) In case the society is declared bankrupt.
PRINCIPLES OF CO-OPERATIVES
These are rules and regulations which govern the operations of co-operative societies. These principles
are discussed below:
a) Principle of open and voluntary membership;-Membership to a co-operative society is open to
any member of the public provided he shares the same objectives as the other members of the
society.
b) Principle of democratic administration;-A co-operative society is managed on the basis of one
man one vote. This ensures that all members have an equal say in the running of the co-operative
c) Principle of limited interest on share capital;-Members earn interest or dividends on their share
capital and savings. These interest or dividends calculated on a percentage which is determined
by the income earned by the society for the year.
d) Principle of co-operation with other co-operatives;-A co-operative society is required to co-
operate with other co-operatives of the same level so as to learn from one another
e) Principle of education to members;-A co-operative society should continuously educate their
members on their rights and responsibilities. This is done through organised seminars.
f) Principle of provision of dividends to members;-Co-operatives are required to pay members
dividends on their share capital at a given rate.

TYPES OF CO-OPERATIVE SOCIETIES IN KENYA.

In Kenya, co-operative societies are classified according to the nature of their activities or according to
the levels of operation
Classification according to the nature of their activities
When classified according to the nature of their activities, co-operative societies can be categorised into:
a) Producer co-operatives
b) Consumer co-operatives

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 c) Savings and credit co-operative societies
a) Producer co-operative societies;-A producer co-operative society is an association of producers
who have come together to improve the production and marketing of their products.
Functions (advantages) of producer co-operative societies
 Obtaining better prices for members’ products.
 Providing better storage facilities for members’ products.
 Providing affordable means of transporting members’ products to the market.
 Providing loans to members.
 Grading, packing and processing products for members.
 Providing farm inputs on credit to members.
 Educating members on better production methods.
Examples of producer co-operative societies in Kenya are:
 Kenya co-operative creameries (KCC)
 Kenya planters’ co-operative union (KGGCU)
 Kenya grain growers’ co-operative union (KGGCU)
b) Consumer co-operative societies;-These are formed by a group of consumers who come
together and set up shops from where they can buy goods of better quality more conveniently.
These co-operatives buy goods directly thereby eliminating middlemen i.e. retailers and wholesalers. As
such they are able to sell goods to members at relatively lower prices.
These co-operatives mostly deal in goods of general consumption e.g. milk, grocery etc.
Members of the public are also allowed to buy from the society at normal prices hence enabling the
society make more profit.
Profit made by these co-operatives is shared by members in the ratio of their purchases from the society.
Examples of consumer co-operative societies in the Kenya are:
 Nairobi consumer co-operative union
 Railways co-operative society etc.
Advantages of consumer co-operative societies
a) They sell goods of high quality to members.
b) They sell goods to members at lower prices.
c) They sell goods to the public at normal prices thereby making more profit.
d) They give credit facilities to members.
e) They buy goods directly from producers hence eliminating middlemen. This enables them make
more profit.
f) They may pay interest on members’ capital.
g) They avail a variety of goods to members.
h) They ensure constant supply of goods to members.
i) They protect members against exploitation by traders
Disadvantages of consumer co-operative societies.
a) They face stiff competition from large scale retailers who buy goods directly from producers. and
sell them directly to consumers at lower prices.
b) They may not afford to employ qualified staff.

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 c) They may not raise adequate capital due to the fact that majority of its members are low-income
earners.
d) Subsistence production makes them unpopular.
e) Consumer shops may be mismanaged.
c) Savings and credit co-operative societies (SACCOs);-These are co-operative societies which
are formed with the objective of enabling their members save money and access loans.
They are mostly attached to the employer i.e. the employer deducts part of the employee’s earns on a
monthly basis (check off system) and remits the money to the society.
SACCOs have become very popular in Kenya especially due to the check off system and due to the fact
that they offer loans at lower interest rates
Examples of SACCOs in Kenya include:
 Mwalimu SACCO
 Stima SACCO
 Mhasibu SACCO etc.
 Elimu SACCO.
 Gussii SACCO.
 Ukulima SACCO.
Advantages of SACCOs
a) Profits made by SACCOs are distributed to members in form of dividends.
b) They enable members to save.
c) Enable members access loans at lower interest rates.
d) In case a member dies, the outstanding loan is written off.
e) They offer variety of loans to members e.g. school fees loans, development loans, emergency
loans etc.
f) In case a member dies, the beneficiaries are entitled double his share contribution.
g) Easy access to loans since it requires few formalities.
h) They offer education to members on co-operative activities, their rights and obligations.
i) They may offer banking services through their front offices.
j) Members are paid dividends on their share contributions.
k) They insure members’ contributions and loans.
l) They pay interest to members on their savings.

Disadvantages of SACCOs
a) They may not have enough finances at their disposal to cater for the needs of all their members.
b) Continued default on loan repayment may cripple the society financially.
c) They face stiff competition from well-established financial institutions.
d) They may be mismanaged.
e) They may be subjected to misappropriation of funds.
Reasons for the popularity of SACCOS
a) They provide easy access to loans since very few formalities are required.
b) They offer loans at relatively lower interest rates.
c) They offer a variety of loans to their members.

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 d) In case a member dies, the outstanding loan is written off.
e) In case a member dies, his/her beneficially are entitled to double the amount of his capital
contribution.
f) Channelling members’ share capital contributions through a check off system.
Classification according to level of operation.
When classified according to the level of operation, co-operatives may be categorised into two, namely:
 Primary co-operative societies.
 Secondary co-operative societies.

a) Primary co-operative societies.
These are co-operative societies which are composed of individuals who are either actual producers,
consumers or people who come together to save and obtain loans more conveniently
Most primary co-operative societies operate at village and district levels though a few of them operate at
national level
Most consumer co-operatives societies and most SACCOs are primary co-operative societies since their
membership is composed of individuals.
b) Secondary co-operative societies
These are co-operative societies which are composed of primary c0-operative societies as their members.
They are also known as unions.
They are found either at district or national level.
NOTE: all co-operative societies in Kenya are under the Kenya federation of co-operatives
Advantages of c-operative societies
a) They serve the interests of members more effectively
b) They provide services to members more cheaply
c) Profits made by the society are shared among members in form of dividends or interest
d) Management is democratic.
e) They enable members increase their incomes and their living standard by giving them loans
f) They continuously educate their members on their rights, responsibilities and the investment
opportunities available
g) They offer credit facilities to their members e.g. in the form of farm inputs
h) Membership is open and voluntary
i) Members have limited liabilities
j) They eliminate exploitation of members by middlemen. This is done by buying directly from the
producer and selling to their members.
k) The government through the ministry of co-operatives may step in to assist them whenever they
are in financial crisis
l) They offer loans to members at lower interest rates
m) Any member can be elected to the management committee.
Disadvantages of co-operatives
a) Some co-operatives have lesser capital hence they cannot benefit from economies of scale
b) They may be poorly managed due to lack of trained personnel

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 c) Withdrawal of members from the society may create financial problems since their capital
contributions are refunded
d) They may suffer from political interference
e) They may be subjected to corruption and embezzlement of funds
f) Some members may not be keen on the management of the society since their capital contribution
is small.
Problems facing co-operative societies
a) Poor management
b) Financial problems
c) Low interest on members’ deposits discourages their participation
d) Low share capital
e) Lack of co-operative education and awareness among potential members
f) Political interference
Features of co-operative societies
a) They separate legal entities
b) Members have limited liabilities
c) They can sell shares to the public
d) Membership is free and voluntary
e) All members are equal i.e. all have one vote irrespective of the number of shares one owns
f) One member cannot own more than 5% of the society’s shares
g) Managed by an elected committee
h) Profits are shared amongst members in the form of dividends
i) Formed a minimum of 10 people and maximum

LIMITED LIABILITIES COMPANIES

A company is an association of persons who contribute capital in order to carry out business with the aim
of making profit.
A company is viewed by law as a separate legal entity separate from the members who form it, therefore
death, insanity, bankruptcy or retirement of some of its members does not affect its continuity.
The members (owners) of a company are known as shareholders.
A company is regarded by the law as an artificial person, hence just like natural persons, it can own
property, enter into contracts, sue and be sued in a court of law in its own name.

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A company unlike natural persons can only engage in those activities which it is authorised to engage in
by terms of its registration (acting intra-vires). E.g. a company registered to offer transport services
cannot offer banking services. A company which engages in activities which it is registered to engage is
said to acting against the law (ultra-vires)
Formation
The people who come together to form a company are known as promoters.
When forming the company, promoters are expected to come up with the following documents
 The memorandum of association.
 Articles of association.
a) Memorandum of association
This is a document which defines the relationship between the company and the outsiders.
Contents of the memorandum of association
Information contained in the memorandum of association is divided into subsections known as clauses.
These are discussed below;
a) Name clauses;-In contains the name of the company. This name must end with the word limited
(Ltd) which indicates that the liabilities of the company are limited. Some companies have their
names ending with the initials PLC which stands for public limited company. This indicates that
it is a public company and not a private company.
b) The objects clause;-The objects clause stipulates the activities the company should engage in.
the company is therefore not authorised to engage in any other activity other than the one
indicated in its objects clause. The objects clause serves as a warning to the public that the
company is only authorised to engage in the stated activities only.
c) Situation clause;-The situation clause indicates the location of the registered office of the
company where official communication can be sent to or received from.
d) Liability clause;-This is clause which informs members of the public that the liabilities of the
members of the company are limited
e) Capital clause;-This clause indicates the amount of capital the company is required to raise and
the subdivision of this capital into smaller units of equal value known as shares. The amount of
capital indicated in the capital clause is known as the authorised share capital, registered capital
or nominal share capital. This clause also specifies the types of shares and the value of each share
f) Declaration clause;-This is a declaration which is signed by the promoters stating that they wish
to form the company and buy shares in the company. The declaration should be signed by a
minimum of seven promoters in the case of a public limited company and a minimum of two in
the case of a private company.
NOTE: the memorandum also contains the names of the promoters, their addresses, occupations and the
number of shares they intend to buy. Each promoter must sign against his/her details.
b) Articles of association
This is a document which governs the internal operations of the company. It contains rules which govern
the conduct of shareholders in relation to each other and to the company.
Contents of the articles of association
a) Rights of type of shareholders e.g. voting rights

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 b) Methods of calling meetings e.g. a notice must be given to each shareholder before a meeting is
called
c) Rules governing the election of officials e.g. the chairman, directors and auditors
d) Rules regarding the auditing of account
e) A list of directors with details of their names, addresses, occupations, number of shares they have
bought and the statement of agreement to serve as directors.
f) A declaration that registration requires as laid down by the law have been met. The declaration
must be signed by a lawyer, secretary or a director
g) A statement signed by directors stating that they have agreed to act as directors
Once the above documents are ready, they are submitted by the promoters to the registrar of companies
for approval. If the registrar is satisfied that the documents are correct, he will issue a certificate of
registration (certificate of incorporation) to the company upon payment of a registration fee.
The certificate of incorporation makes the company a separate legal entity from its members.
Sources of capital
a) Issue of shares
This is the main source of capital for a company. A share is a unit of capital for a company.
Example
A company may state its share capital as Ksh 10,000,000. But because it cannot raise all this capital from
one person, they subdivide this capital into affordable units of equal value say Ksh 10 each. Each of these
units is known as a share. Therefore, the company will be said to have 1,000,000 shares. A person
becomes a member (shareholder) by buying shares in the company.
Shareholders are entitled to a share of profits of the company. This share of profits is known as dividends.
Each share is given a number. However, after all shares of a given class have been sold and fully paid for,
they do not require numbering hence they are grouped together into to bigger units known as stocks. A
company that deals in stocks in known as a joint stock company.
Types of shares
There are two types of shares.
 Ordinary shares
 Preference shares

1) Ordinary shares (equity shares)

These are shares which have the following rights (features)
 They have voting rights.
 They have no fixed rate of returns (dividends). The dividends paid to ordinary shareholders.
depends on the profits made by the company.
 They have a claim to dividends after preference shares.
 They are paid last when the company is liquidated (dissolved).
Benefits of raising capital through sale of ordinary shares
a) The company acquires permanent capital as ordinary shares are not redeemable.
b) The company is not obliged to pay dividends to ordinary shareholders.

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 c) Rate of dividends on ordinary shares is not fixed since it is determined by realised profits.
d) Ordinary shareholders are paid last when the company is winding up.
e) Ordinary shares require no security.

2) Preference shares
These are shares with the following rights (features).
 Have a fixed rate of dividends.
 Have a claim to dividends before ordinary shares.
 Have no voting rights.
 Can be redeemable or irredeemable: To redeem means to buy back. Therefore, redeemable
shares are the ones that can be bought back by the company at a future date whereas irredeemable
shares cannot be bought back by the company.
 Can be cumulative or non- cumulative: to cumulate means to increase by adding. Cumulative
shares therefore are the ones whose dividends keep accumulating until they are paid. This means
that if the company makes a loss or a profit that is not enough to pay dividends owing to
cumulative preference shares in the current year, such dividend will be carried forward to the next
year (s) when enough profits will be made. Non- cumulative shares are the ones whose dividends
are not carried forward to future years i.e. they are only entitled for dividends in the year when
dividends are declared.
3) Debentures
A debenture is a loan from the public to the company.
A debenture may also refer acknowledgement of a debt by a company.
Debenture being loans carries interest at fixed rates which must be paid whether the company makes
profit or not. Debentures are issued to the public the same way as shares
Types of debentures
a) Redeemable debentures;-These are debentures that can be bought back by the company within a
specified future date
b) Irredeemable;-These are debentures that cannot be bought back by the company. They can
however be redeemed when the company is being dissolved (liquidated)
c) Mortgage ( secured) debentures;-To mortgage means to attach property as security. Mortgage
debentures are therefore the ones to which company property is attached (pledged) as security.
d) Naked (unsecured)debentures;-These are debentures to which no security is attached. They are
treated the same way creditors are treated in the event that the company is being liquidated.
Differences between shares and debentures

Shares Debentures
A share is a unit of capital in a limited company A debenture is a loan advanced to a limited
company
Shareholders are owners of the company Debenture holders are creditors of the company
Shares earn dividends Debentures earn interest
Dividends on shares are paid only when the Interest on debentures must be paid whether the
company makes profit company makes profit or not
Shares represent capital invested hence do not Debentures are loans and security must be
require security provided by the company

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 Shareholders have voting rights Debentures have no voting rights
Share capital cannot be withdrawn unless when Debentures can be withdrawn at any time
the company is dissolving
In case of dissolution, shareholders are paid last In case of dissolution, debenture holders are
paid first

Reasons why public limited companies prefer raising finance through issue of ordinary shares to
debentures
a) Debentures are units of loans which must be repaid while ordinary shares are units of capital and
are not paid back
b) Ordinary shareholders are not paid a fixed rate of dividends but debenture holders are paid a fixed
rate of interest irrespective of whether the company makes profits or not
c) Payment of interest on debentures is a legal obligation failure to which may lead to liquidation
while dividends on shares is not a legal obligation
d) Shareholders contribute important ideas during AGM on how to run the company while
debenture do not contribute any ideas since they do not attend the AGM
Differences between debit financing and equity financing

Debt financing (Raising capital through sale Equity financing (Raising capital through
of debentures) sale of ordinary shares)
Usually redeemable It is a permanent source of capital
Payment of interest on finance is a legal Payment of dividends is not a legal obligation
obligation
Rate of interest on finance is fixed Rate of dividends varies with the amount of
profit realised
Involves costs such as insurance and security Does not involve such costs
It is usually secured It is not secured

4) Loans from banks and other financial institutions

A company may borrow money from banks and other financial institutions in the form of loans. These
loans carry interest at an agreed rate.
5) Ploughing back profits
A company may decide not to distribute all its profits to members in form of dividends but to set aside
part of the profits for a specific purpose. Profit set aside this way is known as a reserve
6) Bank overdraft
A bank overdraft is an over-withdrawal of the amount in the account holder’s account. A company can
arrange with its back to be allowed overdraft facilities.
7) Leasing and renting of property
8) Buying goods on credit
9) Acquiring property through hire purchase
Features of limited liability companies
a) It is a separate legal entity
b) Shareholders have limited liabilities
c) Most capital is raised through sale of shares

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 d) Managed by a board of directors
e) Profits are shared among shareholders in the form of dividends
f) Has perpetual existence
g) The procedure of formation, registration and operation is controlled by law

TYPES OF COMPANIES
Limited companies can be classified into two;
 Private limited company
 Public limited company
a) Private limited company
This is a company which has the following characteristics:
a) They are formed by a minimum of 2 and a maximum of 50 shareholders (excluding employees.
b) It does not advertise its shares to the public. It therefore sells them privately to specific people
c) It restricts the transfer of shares i.e. a shareholder cannot sell his/her shares without the consent
of other shareholders
d) Can be managed by one or two directors. But a big private limited company may be managed by
a board of directors
e) It can start trading immediately after receiving a certificate of incorporation.
Advantages of a private limited company
a) It is easy to form since it involves a shorter procedure with less cost compared to a public limited
company
b) It has a separate legal entity from its owners hence it can own property, sue, be sued and enter
into contracts
c) The liabilities of shareholders is limited
d) It enjoys wide sources of capital
e) It is in a position to hire professionals to manage it
f) It starts traded immediately it receives a certificate of incorporation
g) It is assured of continuity i.e. death of a shareholder (s) does not affect its continuity
Disadvantages of private limited companies
a) It is required to submit annual returns on prescribed forms to the registrar of companies
immediately after the annual general meeting. This may be so involving.
b) It cannot sell shares to the public. This limits its access to more capital
c) Transfer of shares is restricted
d) It is only allowed to carry activities spelt out in its objects clause
e) Shareholders do not directly control the business since management is done by directors
f) Decision making takes long since each decision must be sanctioned by shareholder.

b) Public limited company

This is a company with the following characteristics
a) It can be formed by a minimum of 7 shareholders and no set maximum
b) It can only start trading after being issued with a certificate of trading.
NOTE: a certificate of trading is issued after the certificate of incorporation. It is issued after the
company has raised the minimum amount of capital as spelt out in its capital clause.

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 c) It is managed by a board of directors.
d) Its shares and debentures are freely transferable from one person to another. This may be done
through a stock exchange market.
e) It advertises and invites the public to subscribe (buy) to its shares and debentures
NOTE: the advertisement inviting members of the public to subscribe to a company’s shares and
debentures is contained in a special booklet known as the prospectus. A prospectus contains the details of
the type, amount and value of the shares or debentures offered.
Advantages of a public limited company
a) It has access to a wide range of sources of capital.
b) Shareholders have limited liabilities.
c) It can afford to hire professionals to manage it.
d) It has a wide choice of business opportunities i.e. its wide capital sources enables it to expand
operations to new markets.
e) Shares are freely transferable.
f) It is assured of continuity.
g) It enjoys economies of large-scale operations i.e. it is able to reduce its production costs in order
to maximize profit.
h) Its employees are well motivated e.g. by giving them an opportunity to buy shares in the
company.
Disadvantages of public limited companies
a) Cost of formation may be high. Examples of expenses incurred when forming a public limited
company include; legal costs, registration fees and taxes.
b) It is required by law to comply with a number of requirements e.g. filing of tax returns,
maintaining a list of all its shareholders etc.
c) Shareholders do not have direct control over the running of the business since management is
done by a board of directors.
d) Lacks secrecy. This is because they are required by law to publish their end year financial
statements. Any member of the public can also access these financial statements from the
registrar after payment of a small fee.
e) Directors may have personal interests that may conflicts interests of the company.
f) Slow decision making since all major decisions must be sanctioned by shareholders.
g) It may experience high costs of operation.
h) It is subjected to double taxation. This is because its profits are taxed and are the dividends
distributed to its shareholders.
Management
Management of a private company is determined by its size. A small private company may be managed
by one director known as the managing director. A bigger private company is managed by a board of
directors.
A small public company can be managed by two directors one of whom must a managing director. A
bigger public company is managed by a board of directors and other professional staff such as auditors,
accountants, lawyers etc. the directors are responsible for the formulation of the company’s policies
Below the directors are the professional managers e.g. the general manager, the marketing manager, the
personnel manager and the finance manager. The managers are responsible for their own departments.
They however take collective responsibility for the implementation of the company’s plans.

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 Differences between a private limited company and a public limited company

Private limited company Public limited company

Formed by a minimum of two and a maximum of fifty Formed by a minimum of seven shareholder. The maximum is
shareholders controlled by the number and type of shares
Managed by at least one director Managed by at least two directors and the maximum is not specified
Shares are not freely transferable i.e. any transfer must be Shares are freely transferable
endorsed by all shareholders
Does not advertise its shares to the public Advertises its shares to the public
Its audited accounts do not have to be published in the press Its audited accounts must be published in the press

Differences between a public limited company and a partnership

Public limited company Partnership

Formed by a minimum of 7 members and no Formed by a minimum of 2 and a maximum of
specified maximum 20 members (except for partnerships providing
professional services whose maximum
membership is 50)
Members have a limited liability Partners have unlimited liability
Managed by a board of directors Managed by partners themselves
Regulated by articles and memorandum of Regulated by the partnership deed or the
association partnership act
Pays corporation tax Pays income tax
Can be sued under its name Individual partners are sued
It is a legal entity It is not a legal entity

Differences between public limited company and a co-operative society

Co-operative society Public limited company

It is welfare motivated It is profit motivated
It serves members only It serves members and outsiders
Formed by a minimum of 10 members and no Formed by a minimum of 7 members and no
specified maximum specified maximum
Governed on the basis of one member one vote Governed on the basis of one share one vote
Co-operates with other co-operatives Competes with other companies
Governed by the co-operatives act Governed by the company’ act
Has only one class of shareholders Has several types of shareholders

THE STOCK EXCHANGE MARKET

This is a market where shares of quoted companies are bought and sold.
Definitions
Stock: refers to a group of shares in a public limited company.
A quoted company: this is a company that has been registered (listed) as a member of the stock
exchange market.
Securities: refers to shares. It may also refer to documents which support share ownership

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Initial public offer (IPO): refers to situations where a company has floated new shares for subscription
by the public i.e. has invited the public to buy its new shares. New shares are issued in a primary market.
Secondary market: this is a market for second hand shares. It facilities the transfer of shares from one
person to another.
Stock broker: refers to individuals or organisations which buy and sell shares on behalf of investors
Investor: refers to an individual or an organisation who intends to buy or sell shares in the stock
exchange.
Jobbers: these are dealers in shares who buy and sell shares and other securities on their own behalf with
the intention of making profit
The capital markets authority: this is an organization established by the government to supervise and
oversee the operations of the stock exchange
NOTE
 It is only quoted companies that can have their shares traded in the stock exchange.
 The only stock exchange market in Kenya is the Nairobi stock exchange.
 Apart from shares, the stock exchange may also deal in government securities such as bonds,
treasury bills and stocks of local authorities.
 The stock exchange facilities both primary and secondary share deals
 An investor cannot buy or sell shares directly in the stock exchange market, he/she can only buy
or sell shares through stock brokers.
Role played by the stock exchange market an economy
a) Facilitates buying of shares;-The stock exchange market provides the market for investors
willing to buy shares in different quoted companies
b) Facilitates selling of shares;-The stock exchange market provides a steady market for those
wishing to sell their securities
c) Safeguards investors’ interests;-The stock exchange market safeguards the interest of investors
by putting in place standards of performance to be attained before a company is quoted. The stock
exchange market also ensures that quoted companies are observing certain set regulations
d) Provides useful information to investors;-The stock exchange market provides timely, accurate
and reliable information to enable them make investment decisions
e) Enables companies raise capital;-The stock exchange market enables companies raise capital
by providing a market where they can issue shares to the public.
f) Creates employment;-Stock exchange market has created employment opportunities for those
people who facilitate the buying and selling of shares. This may include stock brokers and their
agents.
g) Raises revenue for the government;-The government raises revenue through fees and other
dues charged on activities carried out in the stock exchange market. The government may
revenue from the stock exchange market in the form of taxes and license fees.
h) Avails a variety of securities;-The stock exchange market fulfils the needs of different investors
by availing to them a variety of securities from different companies
i) Fixes prices;-The stock exchange market provides an environment buyers and sellers of
securities meet to determine the prices of securities.

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 j) Measures a country’s economic progress;-The performance of securities in the stock exchange
market indicates a country’s economic progress. E.g. a rise in demand and prices of securities
indicates that the economy is doing well.
k) Promotes a saving culture;-Stock exchange market provides an avenue where investors can
channel their excess funds hence they save funds by investing them in the stock exchange.
Benefits enjoyed by a company quoted on the stock exchange
a) The company can sell its shares and other securities easily to raise capital
b) Interested investors can invest in different companies by buying their shares and securities
c) It improves the image of the company as a well-managed, profitable and a financially stable
company
d) Quotation on the stock exchange improves the management of the company as managers try to
uphold the integrity of the company
e) It improves the credit rating of the company making it easier for the company to obtain loans
from financial institutions
f) The stock exchange advertises the company to the public

Dissolution of limited liability companies

Dissolution of a limited company is also known as liquidation or winding up. A limited liability company
may be dissolved under the following circumstances:
a) Insolvency;-This refers to a situation where the company is unable to pay its debts. A company
may be dissolved if fails to pay its debts. If this happens, the company may be placed in the hands
of the official receiver (placed under receivership)
b) Ultra vires;-Refers to where the company is engaging in activities contrary to the provisions of
its objects clause. A company which is acting ultra vires will be wound up.
c) Amalgamation;-Refers to joining together of two or more companies to form one company
which is completely different from the original companies. When this happens, the companies
joining together must be dissolved.
d) Court order;-A company may be ordered by a court of law to dissolve especially when there are
complaints from creditors.
e) Decision by share holders;-The shareholders may decide to dissolve a company. This decision
can only be arrived at in a general meeting.
PUBLIC CORPORATIONS
Public corporations (state corporations) are organisations which are formed and/or controlled by the
government.
More than 50% of their shares are owned by the government.
Public corporations are formed to provide essential services to the public more cheaply.
Examples of public corporations include:
 Mumias sugar company
 Kenya commercial bank
 Telcom Kenya

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  Kenyatta national hospital
 Public schools
 Postal Corporation of Kenya etc.
Formation
Most public corporations are formed by an act of parliament while a few are formed under the existing
laws. E.g. all public schools are formed under the existing laws i.e. the education act.
When a corporation is formed by an act of parliament, the act outlines the following:
a) Proposed name of the corporation
b) Aims and objectives of the corporation
c) Goods or services to be provided or produced
d) Location and area of operation of the corporation
e) The appointment of executives
f) The powers of the board of directors
g) The ministry under which it will operate
Management.
Corporations are managed by a board of directors which is headed by a chairman.
The chairman and the members of the board of directors are appointed by the president or by the
respective minister.
The chairman of the board of directors reports to the government through the minister.
The managing director is the secretary to the board of directors and is the chief executive officer of the
corporation.
Sources of finance (capital)
The initial financing is provided by the government through the concerned ministry. Thereafter, the
corporation will be expected to generate finances on its own. Other sources of capital may include:
 Ploughed back profits
 Profits from investments in the economy
 Loans from banks and other financial institutions
 Sale of its property etc.

Advantages of public corporations

a) Initial capital is readily available since it is provided by the government
b) They provide goods and services to the public at relatively lower prices
c) They benefit from economies of large-scale production i.e. they are able to lower the cost of
production in order to maximize profit.
d) Some corporations are monopolies e.g. Kenya power and lighting company. Therefore, they
enjoy the benefits of enjoyed by monopolies such as lower advertising costs
e) The government comes to their aid whenever they are in a financial crisis
f) They provide revenue to the government
g) They create employment
Disadvantages of public corporations

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 a) They may not provide the goods and services they produce to every part of the country as they are
expected
b) They may incur high operational costs
c) Slow decision-making processing because of the large number of people to be involved
d) Their performance may be poor due to the fact that managers are political appointees who may be
lacking appropriate management skills.
e) Corporations may be insensitive to customers’ feelings especially when they are monopolies
Dissolution of public corporations
Public corporations are dissolved by the government. This may happen under the following circumstances
a) Persistent loss making
b) Bankruptcy
Types of public corporations
a) Marketing boards; These are public corporations formed by the government to assist local
farmers in marketing and selling their prices at the best possible price
Their functions include
 Collecting, transporting and storing produce from farmers
 Processing, grading and parking the produce
 Searching for markets
 Selling products on behalf of farmers
 Undertaking market research
 Stabilising prices by controlling supply
b) Commercial (trading) corporations-These are public corporations which are established with
the aim of engaging in business to provide goods and services at a profit. E.g. Kenya power and
lighting company, postal corporation of Kenya
c) Finance and banking corporations;-These are corporations which are established to do the
following:
 Provide banking services
 Earn revenue to the government
 Mobilise funds from the public and channel them to investment activities
 Supporting trade by providing loans

d) Research corporations
These are corporations which are established to provide research services in order to support the
development of industry, agriculture etc. e.g. Kenya agricultural research institute
TRENDS IN PUBLIC CORPORATIONS
Emerging issues in public corporations include
a) Privatisation
b) Nationalisation
1) Privatization of public corporations
Privatisation is the process through which the government gives up ownership of public corporations by
selling its shares to the private sector

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The government can sell part of its shares to the public so as to reduce its shareholding to below 50%
Some of the circumstances (reasons) under which a public corporation may be privatised include:
a) If the corporation makes losses regularly
b) To improve service delivery
c) To eliminate wastage of resources
d) To raise revenue to the government
e) To eliminate political interference
f) To promote local ownership of such corporations
g) To make management more accountable

Advantages of privatization
a) Enables the government to raise capital through sale of shares
b) Enables the government to concentrate on other state responsibilities
c) Attracts foreign investment
d) The government obtains revenue by taxing the profits made by the firm
e) Reduces government expenditure
f) Offers opportunity for private citizens to participate in business
g) Enhances efficiency in the management of the firm
2) Nationalisation

Refers to the process where the government acquires total ownership of privately owned business
organisations thereby transforming into public corporations

Reasons for nationalisation

a) For security reasons e.g. weapon making businesses
b) To provide non profitable but essential services to the citizens
c) Need to protect consumers from exploitation from high prices charged on goods provided by a
private investor
d) Need to avoid foreign control over an industry
e) Changes in political ideology
f) To generate revenue

Ways in which the government participates in the operations of state corporations

a) Appointing directors
b) Providing legal advice
c) Giving financial support
d) Supervising the activities of state corporations
e) Auditing the accounting records of state corporations
f) Training staff in state corporations.

PARASTATALS

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 A Parastatals is a public corporation which is fully owned by the government. Its formation, management,
sources of capital is the same as that of a public corporation.
Ways of improving the efficiency of Parastatals
a) Employing qualified staff
b) Organizing regular training for staff
c) Enforcing laws to punish errant Parastatals
d) Controlling errant staff
e) Reducing undue influence by government
f) Motivating staff
g) Restructuring them so as to make them more competitive
h) Reducing monopolistic tendencies
SUMMARY OF DIFFERENT FORMS OF BUSINESS UNITS

Characteristi Sole partnership Limited Parastatals Co-operatives

cs proprietorshi liability
p companies
Formation Individual’s Agreement by Registration by Act of parliament Members’ decision
decision partners the registrar of
companies
Ownership/ One person 2-20 partners 2-50 shareholders Gov’t owned 10 and no maximum
membership for a private members
limited company
and 7 and no
maximum for
public limited
companies
Sources of  Owners  Members’  Issue of  Governme  Members’
capital , contributio shares nt contributio
savings ns  Loans  Retained ns
 Loans  Loans  Retaine profit  Interest on
 Retaine  Retained d profit  Leasing loans
d profit profits  Credit and  Retained
purchas renting profit
es
 Leasing
and
renting
Management Owner with Active partners with Board of directors Chairman with the Management
employees or employees board of directors committee
family members

Sources of short term financing to businesses

a) Promissory notes
b) Trade credit
c) Bank overdraft
d) Retained earnings
e) Personal savings
f) Contributions from relatives
g) Bills of exchange
Advantages of leasing as a method of raising capital

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 a) Lease finance is not secured i.e. no property is attached to it
b) It is a long-term source of capital
c) The borrower has an option of buying the asset after expiry of the lease period
d) Leasing is not subject to credit control by the central bank
e) Rental charges may be lower than inflation rate
Reasons why a firm would prefer trade credit as a source of capital to a bank loan
a) Bank loan is always secured while trade credit is not secured
b) Bank loan is expensive since interest must be paid while in trade credit, the borrower will only
forego discounts
c) Acquiring a loan involves a long procedure while the acquisition of trade credit does not require
long procedure
d) Trade credit does not involve any explicit costs unlike a bank loan which will require the
restrictive use of security
e) For a firm to secure a loan, it must have maintained a healthy bank account with the bank while
to secure trade credit, a firm does not need to have a bank account

TRENDS IN FORMS OF BUSINESS UNITS

The following are some of the current trends in forms of business units
a) Holding companies;-A holding company is one that acquire 51% or more shares in one or more
other companies. The companies owned are known as subsidiaries of the holding company. The
subsidiaries retain their names.
b) Cartels;-A cartel is a group of related companies that agree to work together in order to control
output, prices and the markets of their goods and services. E.g. O.P.E.C.
Features of cartels
a) Cartels sell similar goods
b) Their members decide on their share of the market
c) Members form rules governing their operations
d) They are made up of competing firms
e) Members agree to fix prices of goods sold
Disadvantages of a cartel
a)They may result in monopolistic situations
b)They may lead to the production of inferior goods due to lack of competition
c)Prices of goods may be kept high
d)They may restrict entry of other firms into the market hence limiting consumer choice
e)Leads to shortages
f)Denies customers bargaining power
c)Privatisation;-Privatisation is the changing of state owned corporations into public limited
companies
d) Absorptions (takeovers);-Absorption refers to a business taking over another business by buying
all its assets making it cease to exist.
e) Mergers (amalgamations) ;-This where two or more businesses combine to form a new
business. The merging businesses totally cease to exist.
Reasons for mergers (amalgamations)

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 a) To lower cost of production
b) To make it easier to face risks
c) To control prices
d) To make it easier to borrow
e) To avoid decline in profits/loss making
f) To control inputs
g) To control a wider market
h) Desire to share research
i) To bring on board new skills
j) To venture into new businesses
Advantages of mergers (amalgamations)
a)
Reduces competition amongst firms hence reducing advertising costs
b)
Brings together a pool of managerial skills
c)
Ensures that a firm has steady supply of raw materials
d)
Firms will enjoy economies of scale enabling them to lower the cost of production
e)
It may result in control of a wider market
f)
Results in market diversification which helps in spreading risks faced by the firm
g)
Enables the firm effectively utilize the resources
h)
Creates employment
f)
Check-off system;-This where money is deducted by the employer and directly submitted to the
SACCO on behalf of the employee who is a member of the SACCO. Check-off system is one of
the reasons behind the success of SACCOs
g) Burial benevolent funds (BBF);-This is a system mostly in SACCOs which is aimed at assisting
their members financially during burials
h) Front office savings account (FOSA);-This is a service which used in SACCOs to enable their
members conveniently deposit and withdraw money.
i) Franchising;-This is where one business grants another the rights to manufacture, distribute or
provide its branded products using the name of the business that granted the right. E.g. general
motors have a right to sell Toyota, Isuzu and Nissan vehicles
j) Trusts;-This is where a group of companies work together to reduce competition. A trust may
also be formed when a company buys more than 50% of shares in another company so as to
reduce competition
k) Globalisation;-Refers to the use of technology to enable business conduct their operations
worldwide.
l) Performance contract;-These are contracts signed by employees in state corporations where
they commit perform to set standards.
TOPIC 2: GOVERNMENT AND BUSINESS
CONTENTS
 Introduction
 Reasons for government involvement in business activities
 Methods of government involvement in business activities
 Merits and demerits of government involvement in business activities
 Consumer protection
INTRODUCTION
The government gets involved in business activities in several ways. These include:

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 a) Production of goods and services
b) Distribution of goods and services
c) Offering advisory services to producers and traders
d) Promotion of trade and economic development
e) Protecting consumers against exploitation by business people
f) As a consumer of goods and services

REASONS FOR GOVERNMENT INVOLVEMENT IN BUSINESS ACTIVITIES

a) To prevent the exploitation of consumers by business people. Such exploitation may include
selling of commodities at high prices or selling poor quality commodities.
b) To provide essential goods and services in areas where private business do not operate due to low
profitability
c) To provide essential goods and services which the private sector is unable because they require
high capital e.g. electricity
d) To attract foreign investors into the country by initiating major business projects which attract
foreign investors
e) To stimulate economic growth and development in the country
f) To provide very sensitive goods and services which cannot be left in the hands of the private
sector e.g. fire arms
g) To create employment opportunities through initiating projects which create jobs
h) To prevent dominance of foreign investors in the economy. It does this by investing in areas
where the local people are unable to invest in

METHODS OF GOVERNMENT INVOLVEMENT IN BUSINESS ACTIVITIES

These are the ways through which the government gets involved in business activities. These methods are
discussed below:
1) Regulation
The government may regulate the operations of businesses through methods such as
 Licensing
 Ensuring standards
 Legislations

a) Licensing
A business must be given permission to operate by the government. This permission is indicated by the
issuance of a license.
A licence is therefore a document which shows that a business has been allowed by the government to
start operating
It is usually obtained upon payment of a fee known as the license fee.
Reasons for licensing
a) Regulates the number of businesses operating in a given area so as to avoid unhealthy
competition

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 b) Controls the type and amount of goods entering and leaving the country
c) Helps in getting rid of illegal businesses
d) Helps in ensuring that traders engage licensed activities only
e) To ensure that those engaging in professional activities such as accountancy meet the
requirements of the profession
f) To raise revenue to the government
b) Ensuring standard

The government regulates business activities by setting standards that businesses must meet in their
operations.

In Kenya, the Kenya bureau of standards (KEBS) is charged with the responsibility of setting standards
especially for manufactured goods and ensuring that such standards are adhered to. Products which meet
the set standard are stamped with the KEBS logo as a sign of quality.

Functions of Kenya bureau of standards (KEBS)

a) It sets the required standards for all goods sold in Kenya
b) Ensuring that set standard are maintained through regular inspection
c) Prosecuting those who produce inferior goods
d) Putting a stamp of approval to show that the established standards have been met
e) Carrying out testing on measuring apparatus to establish accuracy standards.
c) Legislations

Legislations are rules and regulations put in place by the government to regulate business activities. The
government can therefore come up with rules and regulations that regulate the operations of businesses.
For example, the government may ban hawking in certain areas such as within the city centre

Other methods of regulating businesses include the following:

 Imposition of taxes
 Issuing guidelines to business people
 Total ban on new businesses where there is need
 Registration of business
 Fixing quotas

2) Training

The government organises trainings for business people. This is mainly done at the Kenya business
training institute (K.B.T.I)

Reasons for training business people

a) To expose them to modern developments in management
b) To educate them on better and efficient methods of operating businesses e.g. effective advertising
and book-keeping methods

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 c) To expose them to problems facing businesses and their possible solutions
d) To impart proper business ethics to business people e.g. good customer relations.
e) To educate them on ways of using the available resources to minimize cost and maximize profit
f) To inform them on the available business opportunities
g) To expose them to government policies and legislations regarding the operations of businesses

3) Trade promotion

Trade promotion refers to a government initiated and supported policy to encourage the local people enter
into business.

The aim or trade promotion is to increase the volume and variety of goods and services traded in.

Trade promotion may take two forms:

 External trade promotion
 Internal trade promotion
a) External trade promotion

This is a form of trade promotion which aims at encouraging the local business people to enter into export
trade. It is also intended to encourage foreign investors into the country.

In Kenya external trade promotion is done by the ministry of trade and industry. It can also be done by
commercial attaches and Kenya external trade authority (K.E.T.A)

Commercial attaches

These are offices sent by the country’s government to work with embassies in foreign countries as
support in the field of trade.

Functions of commercial attaches

a) Explore and identify new markets for exports from their home countries
b) Research and analyse markets for exports from their home countries
c) Takes and keep important statistical data of products e.g. volumes, packaging sizes and method of
manufacturing.
d) Attends meetings, seminars and workshops where trade patterns of respective foreign countries
are discussed hence keeping data on new markets for exports
e) Advertise their country’s exports in foreign countries besides publishing such exports in business
journals of foreign countries
f) Identify buyers, agents and distributors of their home country’s exports
g) Informs traders in their home countries of the standard required for export
h) Assist sales missions from their home countries by organising educational tours for them
i) Organise visits to trade fairs and exhibitions for business people from their home countries
j) Make detailed reports on commercial activities that may improve exports from their home
countries.

Kenya external trade authority

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Its functions
b) Expands and diversifies exports
c) Expands and diversifies foreign markets
d) Developing bilateral and multilateral trade
e) Providing information to Kenyan producers on the available selling opportunities in foreign
countries
f) Educates and advertises exporters on trade regulations and commercial practices in other
countries
g) Arranges courses and seminars for business people and relevant government officials to inform
them on how to promote exports

Problems faced by K.E.T.A and commercial attaches

a) Poor infrastructure which hampers operations of investors
b) High rate of taxation that discourages investors and makes local goods less competitive
c) High production costs that make local products very expensive
d) Insecurity that discourages investors
e) Corruption which may add extra costs to investments
f) Inadequate funds which makes it difficult for K.E.T.A and commercial attaches to carry their
functions

c) Internal trade promotions

This is a form of trade promotion that aims at helping the local people to start and run businesses. Internal
trade promotion is the responsibility of the ministry of trade and industry.

Internal trade promotion can also be done through Kenya chamber of commerce and industry

Functions of the ministry of trade and industry

a) Advising business people on matters relating to the type of goods to produce, available sources of
finance, suitable locations for their businesses and the legal formalities required for various
businesses.
b) Training businesses people on appropriate ways of carrying out businesses
c) Offering business people financial assistance to enable them start and operate their businesses
d) Organising shows, trade fairs and exhibitions from where local traders can advertise their
products
e) Providing incentives such as tax exemptions to encourage local businesses
f) Creating a conducive business environment

Functions of the Kenya chamber of commerce and industry

a) Issues certificates to those who want to export goods to other countries
b) Informing members on all the registration requirements affecting their businesses
c) Acting as an agent between the government and businessmen on matters relating to business
activities

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 d) Holding courses for the members and discussing problems affecting their businesses
e) Publishing business journals for members and interested parties
f) Organising trade shows and participating in national shows
g) Organising participation in trade shows outside the country
h) Collecting statistics which are vital for government budgeting

4) Provision of public utilities

Public utilities are essential services such as water, transport, electricity, sewerage, communication etc.

These services are provided either by the central government or by the county governments through
businesses set up by them.

Businesses set up to provide public utilities enjoy some level of monopoly and are financed by the
government e.g. the Kenya power and lighting company. The major objective of these businesses is to
provide public utilities affordably, profit making is their secondary objective.

Public utilities provided by the central government are meant for the welfare of the general public
whereas those provided by the county government are meant to benefit the residents of the given county

Examples of public utilities

a) Good infrastructure
b) Reliable and less expensive power supply
c) Water supply and good sewerage systems
d) Good communication systems
e) Education
f) Healthcare
g) Security to help create confidence among investors

5) Enabling environment

The government plays an important role in ensuring that the business environment is conducive.

Ways of creating a conducive business environment

a) Offering subsidies

A subsidy is a financial assistance given by the government to the businesses people in order to enable
them lower their production costs so as to sell goods at lower prices. Subsidies may take the following
forms
 Technical assistance
 Cheap financing
 Manpower assistance etc.
b) Giving incentives

Incentives are things that are given to encourage one to do something. The government may offer various
incentives to business people in order to encourage them invest.

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Incentives may take the following forms:
 Tax holidays and tax exemptions
 Duty free privileges
 Expatriate protection for foreign investors etc.

c) Protection of local businesses from unfavourable foreign competition

This refers to putting in place legal measures and regulations which are aimed at shielding local industries
from foreign competition. This is because big foreign firms which are able to take advantage of
economies of scale and sell their goods at relatively lower prices compared to the local small firms may
take control of the local market if allowed to operate freely hence forcing local businesses to close down.

The government therefore has to come up with measures that will protect local businesses. Such measures
may involve the use of import duties and import quotas.

Import duties increases taxes on imports making them expensive compared to the locally manufactured
goods whereas import quotas reduce the amount of goods to be imported.

Other methods of creating an enabling environment include:

a) Providing basic infrastructure
b) Enabling business people get access to loans
c) Lowering taxes
d) Easing licensing procedures
e) Providing adequate security
f) Ensuring there is political stability
g) Putting in place anti-dumping rules

d) Loan guarantee

The government may act as a guarantor to enable local businesses access loans from international
financial institutions.

A guarantor is a person who undertakes to pay the loan in case the loanee defaults in payment.

MERITS OF GOVERNMENT INVOLVED IN BUSINESS ACTIVITIES

a) The government is able to carry out businesses that require large amount of start-up capital which
the private investors cannot raise. E.g. Kenya power and lighting company.
b) Government involvement in business activities facilities the provision of essential but non-
profitable services since most of these services is provided by the government. E.g. medical care,
education, provision of water, construction of roads
c) Businesses started and run by the government helps solve the problem of unemployment.
d) Profits realised by businesses run by the government may be distributed to all citizens in the form
of provision of services e.g. education and health care.
e) Businesses run by the government helps create competition which may make private investor
improve quality and charge fair prices of their goods and services
f) Government involvement in business activities helps reduce foreign dominance in an economy.

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 DEMERITS OF GOVERNMENT INVOLVEMENT IN BUSINESS ACTIVITIES
a) Businesses run by the government may be mismanaged since in most cases managers are political
appointees who may not have the required qualifications.
b) Government involvement in business activities may scare away potential investors who would
have rendered the same services more efficiently
c) Government-run businesses may consistently make losses forcing the government to finance
them using tax payers money
d) Most government-run businesses and projects require high amount of start-up capital, expensive
equipment and highly trained staff which may be very costly.
e) Government-run businesses are subjected to increased cases of corruption and embezzlement of
funds.

CONSUMER PROTECTION

Consumer protection involves safeguarding the consumer from exploitation by producers and business
people.

The consumer may be exploited through:

 Unfair pricing
 Selling poor quality goods and services
 Misleading advertising
 Misleading on quantities of goods etc.

Need (reasons) for consumer protection

a) To ensure commodities sold to consumers are of good quality
b) To ensure that commodities offered for sale to consumers are of right quantity and size
c) To ensure that the required health standards are maintained e.g. businesses premises such as
butcheries should be clean and hygienic.
d) To ensure that safety standards are observed when constructing business buildings. For example,
buildings such as schools, hospitals and supermarkets should be firm and safe i.e. with emergency
exists.
e) To ensure fair prices are charged on goods and services
f) To ensure that goods are readily available to consumers. This is to ensure that business people
and producers do not create artificial shortages by hoarding products so as to increase their prices.
g) To protect consumers against false and misleading advertisement
h) To ensure consumers are protecting from the sale of harmful commodities which may adversely
affect their health. For instance, all products should have expiry dates printed on their packages
i) To protect consumers against breach of contract since businesses people may fail to honour
contracts entered into with consumers with regard to the sale of goods.

METHODS OF CONSUMER PROTECTION

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Methods of consumer protection can be classified into two:
 Government initiated methods
 Consumer initiated methods
 Non-governmental organisations

a) Government initiated methods

These are methods the government uses to protect consumers from exploitation by business people. These
methods are discussed below.
a) Setting up standards;-Setting of standards in Kenya is the responsibility of the Kenya bureau of
standards (KEBS). KEBS sets national quality standards and ensures commodities conform to the
set standards. KEBS also requires that commodities are examined and tested before being used.
b) Weights and measures act;-The government ensures that equipment used for weighing and
measuring are correct and accurate. This is done by regular checking and testing of these
equipment. The government further requires consumers to be issued with receipts which indicate
the quantity, size and price of the commodities they buy. The receipt is to act as evidence in case
the consumer raises a complaint.
c) Licensing;-Licenses are documents which shows that a given business has been allowed by the
government to operate. Through licensing, the government ensures that there is control on the
type of business carried out.
d) Foods and drugs act;-This ensures that producers and traders do not include any substance in the
commodities they sell that can be harmful to the consumers’ health. According to this act, all
packages of food products and medicine should show the ingredients used in making the
commodity. For medicine, side effects should be disclosed. There is also a requirement in this act
that who sell certain category of foods and drugs be licensed e.g. all butcheries, hotels and
chemists must be licensed.
e) Trade description act (sale of goods act);-This act ensures that producers and traders must not
mislead consumers by providing false descriptions of commodities. The act further requires that
goods offered for sale are of good quality and right standards
f) Public health act;-This act ensures that commodities offered for sale hygienic and of good
quality. The act further requires that business premises conform to laid down health and
construction regulations. This is done through regular inspection of public places by health
inspectors.
g) Price control;-This refers to setting of a price beyond which a product should not be sold. Price
control is done by the government and it mostly affects essential goods and services such as
petroleum products. There is also a requirement that traders display price lists or price tags for the
goods and services they sell.
h) Rent and tribunal act;-This act ensures that tenants are not overcharged by landlords.

b) Consumer initiated methods

Consumers can protect themselves by forming consumer associations. These associations act as a
watchdog to ensure that consumers are not cheated or exploited.

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Functions of consumer associations
a) They deal with complaints concerning any defective items bought by members.
b) They make sure goods are not hoarded by traders. This is to ensure that regular supply of goods is
maintained.
c) They ensure that weights and measures of commodities are correct
d) They ensure that health and safety regulations are adhered to
e) They ensure that essential goods and services are available at fair prices
f) They educate their members on their rights as consumers
g) They seek legal redness against offenders
h) They take consumer complaints to the relevant government bodies

Some off the complaints received by consumer associations relate to:

 Sale of poor-quality goods and services
 Incorrect weights and measures
 Unfair pricing
 Sale of expired goods
 Non-compliance to building standards
 Sale of harmful goods
 Hoarding
 Misleading advertising
 Environmental pollution
 Technological side effects
 Breach of contract

Role of manufacturers/producers in ensuring the efficiency of consumer associations

a) They should indicate proper expiry dates on their products
b) They should indicate the type of ingredients used to manufacture products
c) They should indicate the recommended retail price on packets
d) They should indicate any side effects that a consumer may experience after consuming the
product
e) They should that agents and distributors observe ethics when dealing with consumers
f) They should not mislead consumers during advertising
g) They should ensure that their products or packaging materials do not litter the environment

Other consumer-initiated methods include the following:

 Boycotting buying from traders who exploit them
 Reporting traders who exploit them to the authority
 Complaining through the press whenever they are exploited
 Taking their exploiters to court
 Promoting consumer education so as to inform consumers about their rights
 Informing vigilant groups to fight against exploitation

Limitations of consumer initiated methods

a) They lack government support
b) They lack adequate capital to finance their operations

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 c) Some consumers are ignorant about of their rights
d) They have fewer members due to the reluctance of some consume join
e) Consumers may not have the initiative to check on traders’ performance and report cases of non-
compliance to quality and price

c) Non-governmental organisations (NGOs)

Some non-governmental organisations may also participate in activities aimed at protecting the consumer.
E.g. the public law institute.

Advantages of consumer protection

a) Leads to production of high-quality goods
b) Creates a positive attitude and confidence of the consumers in goods and services
c) Leads to charging of fair prices on goods and services
d) Makes producers take consumer’s complaints more seriously

Disadvantages of consumer protection

a) Adhering to set standards may raise the cost of production leading to increase in prices
b) Consumer protection campaigns may be used unethically against competitors
c) Over reacting of consumer protection agencies may lead to political and social instability

EMMERGING ISSUES IN GOVERNMENT AND BUSINESS

a) Market liberalization;-This refers to the removal of protective policies and regulations so that
Kenyan market is open to all
b) Privatization; Refers to the conversion of public enterprises into private enterprises
c) Dumping of goods; Refers to selling of out-dated or low-quality goods at lower prices in
overseas markets

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TOPIC 3: TRANSPORT

CONTENTS
 Introduction
 Importance of transport to businesses
 Essential elements of transport
 Modes of transport
 Factors influencing the choice of an appropriate means of transport
 Trends in transport

INTRODUCTION

Transport refers to the movement of goods or people from one place to another.

Transport enables the availing of goods and services to consumers at places convenient to them.
Transport therefore helps in bridging the geographical gap between producers and consumers.

Transport facilitates trade. It is an aid to trade that creates place utility.

IMPORTANCE OF TRANSPORT TO BUSINESSES

a) Links consumers to producers; Transports links consumers to producers hence enabling
consumers obtain the goods they need.
b) Creates employment;-Transport helps in the creation of job opportunities. It creates jobs for
drivers, pilots, touts, mechanics, road constructors etc.
c) Promotes specialisation; Transport enables people to specialise in jobs they are best at. For
example, transport enables producers to concentrate only on production and distributors to
concentrate only on distribution.
d) Increases the usefulness of commodities;-Through transport, goods and services are moved
from places where they are least needed to places where they are most needed thereby making
them more useful.
e) Improves peoples’ standard of living;-Transport enables consumers to get a variety of goods
and services thereby improving their standards of living.
f) Widens the market for goods and services;-Transports helps producers to reach consumers in
far places. This enables them reach more customers hence increasing their sales volumes.
g) Increases the volume of production;-Due to the wide market created through transport,
producers are able to increase the amount of commodities they produce
h) Avoids wastage;-Transport makes the disposal of surplus goods possible by taking them to areas
where they are needed.
i) Promotes development of industries;-Through transport, raw materials can be taken
manufacturing industries and also finished goods taken to the market. As such more
manufacturing industries are established. Transport may also promote the development of service
industries e.g. tourism.

Ways in which transport promotes trade

a) Assists in the distribution of finished goods

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 b) Aids in the transportation of labour to industries
c) Facilitates the movement of raw materials to industries
d) Creates place and time utility for goods
e) Widens the market by moving goods from areas of surplus to areas of shortage
f) Creates specialization in production by enabling producers concentrate in production and
distributors concentrate in distribution
g) Facilitates large scale production by ensuring that goods produced are taken to the market

ESSENTIAL ELEMENTS OF TRANSPORT

Elements of transports are factors that must be in place for transportation to take place. These elements
include:
 Unit(s) of carriage
 Methods of propulsion
 Ways
 Terminals(terminuses)
a) Units of carriage; Refers to anything that is used to carry goods and people to be transported
from one place to another. Units of carriage include: ships, trains, aeroplanes, motor vehicles,
bicycles, human beings, carts, animals etc.
b) Methods of propulsion; This is the driving force (source of power) that makes a unit of carriage
move. The most common methods of propulsion include: petroleum products, electricity, human
energy, animal energy etc.
c) Ways; This is the route or path where the unit of carriage passes. The route can be on land, on
water or through air. Examples of ways may include: roads, railways, paths, canals, air etc.

Ways can be classified into two

i. Natural ways:these are ways which are provided by nature. They are free to acquire. They
include: airways and sea ways
ii. Man-made ways:these are ways that are made available by human beings. They cost money to
construct and maintain. They include: roads, canals and railways.
d) Terminals; These are places where loading and off-loading to and from the unit of carriage is
done. Examples of terminals include: bus stations, airports, seaports, railway stations etc.

MODES OF TRANSPORT

Mode of transport refers to the manner in which transport is carried out i.e. transport can be carried out
through air, on water or on land.

There are three modes of transport, namely:

 Land transport
 Water transport
 Air transport

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 LAND TRANSPORT

This mode of transport involves the movement of goods and people using units of carriage that move on
dry land.

Means of transport under land transport

The various means of transport under land transport include:

 Human porterage
 Carts
 Vehicles
 Trains
 Pipeline
1) Human porterage

This involves human beings carrying goods on their shoulders, heads or backs as they transport them
from one place to another.

It is the oldest but still very common means of transport.

It is suitable for carrying light goods over short distances

Its major advantage is that it can access places where other means of transport cannot access.

Advantages of human porterage

a) It is always available
b) It supplements other means of transport
c) It is flexible since it does not have a fixed timetable
d) It may be cheaper compared to the means of transport
e) It is convenient over short distances

Disadvantages of human porterage

a) It is not suitable for long distances
b) It increases congestion on roads.
c) It is not suitable for transporting heavy and bulky goods
d) It is relatively slow
e) It relies on human energy which can be exhausted

Reasons for the popularity of human porterage

a) It requires low or no running expenses
b) It is highly flexible in terms of time and routes
c) It is economical for small quantities over short distances
d) It can access places where other means of transport cannot access
e) It is readily available

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 2) Carts

Carts are open vessels which move on two or four wheels and are pulled or pushed by human beings or
by animals such as donkeys.

The carts that are pushed or pulled by human beings are referred to as hand carts or mikokoteni. The ones
pulled by animals are called animal driven carts.

Compared to human beings, carts can carry relatively large quantities of goods. They are however slow
hence not suitable for long distances.

Advantages of carts
a) They complement other means of transport
b) They are relatively cheap to hire
c) Initial buying and maintenance cost is relatively low.
d) They are readily available
e) They can fairly heavier and bulkier goods
f) They are convenient for transporting goods over short distances.

Disadvantages of carts
a) They may not be suitable for transporting very heavy and very bulky goods
b) They contribute to congestion on roads
c) They are not suitable for transporting goods over long distances.

3) Vehicles

These are means of transport where the units of carriage ferry goods and people on roads. Vehicles are the
most commonly used means of transport.

Vehicles are either passenger or goods carriers. Passenger carriers includes buses, matatus, taxis, private
cars etc. while goods carriers include Lorries, tankers, trailers etc.

Vehicles may be expensive to acquire and maintain.

Matatus

This is a special category of vehicles on Kenyan roads. Matatus are privately owned passenger vehicles
that are mostly used to supplement big transport companies.

Advantages of matatus
a) They supplement big transport companies e.g. bus companies especially in the rural areas
b) They save time since they fill up faster
c) They are more flexible since they mostly don’t follow fixed routes
d) They can access the rural areas where buses do not access

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 e) Their fares are not fixed hence they can be negotiated
f) They are readily available
g) They are cheaper compared to buses

Disadvantages of matatus
a) Some matatus are poorly maintained making them unroadworthy
b) They can be subjected to reckless driving as drivers rush to pick passengers
c) Touts may use impolite and abusive language
d) They may cause noise pollution due to unnecessary hooting and loud music
e) They may cause unnecessary congestion in towns due to careless driving and parking
f) They may increase fares suddenly especially during peak hours thereby inconveniencing
travellers
g) They operate mostly during peak hours i.e. during the day
h) They may change their routes unexpectedly hence inconveniencing travellers

Reasons for the popularity of matatus

a) They don’t follow fixed schedules hence preferred by many people
b) They do not require large amount of capital to acquire as compared to buses
c) They fill faster
d) They access many areas where other means of transport may not access
e) They are readily available

Advantages of vehicles
a) They are readily available
b) They are relatively faster compared to carts and human porterage
c) They are relatively cheaper over short distances
d) They are flexible hence they can offer door-to-door services
e) Vehicles can be modified to transport special categories of goods
f) They access most parts where roads are constructed

Disadvantages of vehicles
a) Acquisition and maintenance cost may be relatively higher
b) They may not be suitable for transporting heavy and bulky goods
c) They are affected by traffic jams on roads resulting into delays
d) Vehicle transport is prone to accidents
e) Some roads may be impassable during bad weather e.g. during rainy seasons

Reasons for the popularity of road transport

a) Roads are available in most parts of the country
b) It is flexible since means of transport used can offer door to door services
c) There is a wide variety of vehicles
d) It is cheaper over short distances
e) Means of transport used mostly have flexible schedules
4) Trains

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Trains are vessels that transport goods and people on rails. The terminuses for railway transport are the
railway stations.

Railway transport is suitable for heavy and bulky goods. Trains can also be designed to transport
passengers.

There are two types of trains:

Cargo trains: these are trains that are used to transport goods

Passenger trains: these are trains that are used to transport people

Advantages of trains
a) They are relatively secure as cases of theft and accidents are minimal
b) They follow a fixed timetable hence allowing the transporter to plan for the transport of his/her
goods
c) They are economical (relatively cheaper) for transporting heavy and bulky goods over long
distances
d) Trains may have facilities for carrying special categories of goods e.g. gas, petrol and vehicles
e) They may deliver goods up to or from the owner’s premises

Disadvantages of trains
a) They are not flexible since they follow a fixed timetable
b) Rails are expensive to construct and maintain
c) Trains may not be always available since not all areas are served by railway lines
d) They are not suitable for transporting perishable and urgently needed goods
e) They are unsuitable for transporting goods and passengers over short distances
f) Trains are expensive to acquire and maintain

Circumstances under which railway transport is preferred

a) When goods are bulky
b) When goods are heavy
c) When storage facilities are required since railway terminus have warehouses
d) When planning is desired since trains follow a regular time table
e) Where specialized loading and off-loading is desired

5) Pipeline transport

Refers to the movement of liquids and gases from one place to another through a pipe. Examples of
products that are transported using pipeline transport are water, gases, petrol, dieses and solids that cannot
dissolve or damaged by water.

The pipeline is both a vessel (unit of carriage) and the way.

Products flow through the pipe by the force of gravity by pressure from the source.

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Advantages of pipeline transport
a) It saves labour costs since it requires minimal workers
b) It may not cause environmental pollution since it is noise and smoke free
c) Pipelines can pass in places where other means of transport cannot pass e.g. on sloppy areas
d) Pipeline transport allows continuous flow of liquids being transported
e) It reduces road damage by reducing the number of tankers on roads
f) It reduces the number of accidents that may be caused by tankers on roads
g) It delivers liquids in time since there are no delays along the way
h) Maintenance cost of pipelines is relatively low
i) Pipeline transport may not be affected by adverse weather conditions

Disadvantages of pipeline transport

a) An undetected leakage may result in huge losses
b) Initial construction cost of pipelines is high
c) Accidental leakages may cause environmental pollution
d) It travels only in one direction
e) It can transport only one product at a time
f) It is not flexible. This is because the pipeline once laid cannot be adjusted to fit the desires of the
transporter
g) It contributes to unemployment since it requires few workers
h) It is subject to sabotage by enemies.

Advantages of transporting oil by pipeline rather than roads in Kenya

a) Reduces transport cost
b) Loss of oil through accidents on roads is reduced
c) Cases of theft of oil are reduced
d) There is less damage to the roads since no or few tankers are on the road
e) It ensures regular and reliable supply of oil
f) It reduces environmental pollution
g) Large volume of oil is transported at a given time

WATER TRANSPORT

This is a mode of transport where the units of carriage transports people and goods on water. Water in this
case refers to navigable rivers, lakes, seas and oceans.

The units of carriage which are also the means of transport include: ships, boats, ferries, steamers and
dhows.

Water transport can be divided into two:

1) Inland water ways:

This is transport that is carried out on lakes, rivers and inland canals e.g. transportation on Lake Victoria.

Advantages of inland water transport

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 a) The water way is free hence cheaper to construct a terminal
b) There is no congestion on the route

Disadvantages of inland transport

a) It is slow
b) It does not allow the use of large vessels
c) Often affected by unpredictable strong winds
d) Affected by water weeds such as hyacinth

Reasons for limited use of inland water transport in Kenya

a) Most rivers in Kenya are not navigable due to changing seasons, rapids and falls
b) Inland water transport is slow hence not suitable where urgency is desired
c) Most rivers in Kenya usually affected by strong winds and storms
d) Most rivers are narrow and shallow hence they do not allow the use of large vessels
e) Inland water transport may be affected by water weeds e.g. water hyacinth
2) Sea transport:

This is transport that is carried out in seas and oceans. Sea transport connects continents hence facilitating
international trade.

NOTE: most rivers in Kenya are not navigable (cannot allow water transport) due to the following
reasons
 They are too small
 Due to presence of rapids and water falls
 They are too shallow
 Some of them are seasonal
 Some have steep slopes

Means of transport under water transport (types of water vessels)

The common means of transport under water transport include:

 Ships
 Boats and ferries

1) Ships

A ship is a large vessel that transports people or goods through water.

Ships connect countries or places which borders the sea or the ocean.

They load and off-load in terminals known as harbours e.g. the Kilindini harbour in Mombasa.

Classification of ships

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Ships can be categorised into:
 Cargo ships
 Passenger ships
 Liners
 Tramps
a) Cargo ships; These are ships that are designed to transport goods. They are convenient for
transport heavy and bulky goods
b) Passenger ships; These are ships that are designed to transport people
c) Liners; These are ships that are owned and operated by shipping companies known as
conferences. Each conference determines the routes each liner should operate, the rates they will
charge and the rules and regulations to be followed by their members.

Characteristics of liners
 They have fixed routes
 They follow a fixed time table
 They charge fixed rates
 They call at specific ports along the route at regular intervals
 They travel at regular intervals
 They are owned by shipping companies

Advantages of liners
 Their freight charges are generally cheap and affordable
 Freight charges are fixed
 Efficient and economical
 They operate on fixed routes, fixed timetables and fixed schedules

Disadvantages of liners
 They are not flexible
 They operate at a loss when demand on a particular route is low
 They leave the port whether they are full or not
d) Tramps

These are ships that do not follow fixed routes or time table

Their routes and rates depend on demand in the sense that they charge higher rates when demand is high
and low rates when demand is low

Tramps can be likened to matatus in Kenya.

Tramps may be owned by individuals or by firms

Characteristics of tramps
 They don’t charge fixed rates

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  That don’t have a fixed time table
 They are owned by individuals or firms
 They have irregular travelling patterns.
 They are normally owned by small scale private individuals, partnerships or limited companies

Advantages of tramps
 They are flexible
 Their freight charges are lower than those of liners
 They are readily available for hire
 Their freight and hire charges are negotiable
 They carry all types of cargo

Disadvantages of tramps
 Their timing, route and schedule are not fixed
 Their freight charges are not fixed
 They must be fully loaded before departure hence causing delays
 They lower their freight charges when demand decreases leading tom losses

Shipping conferences.

These are associations of companies which own liners. The membership of these conferences is
international. Shipping conferences serve the following purposes
a) Fixing and controlled the routes used by liners
b) Fixing and controlling the freight charges
c) Fixing and controlling the timetables and schedules for members
d) Acting as watchdogs to safeguard the interests of their members
e) Establishing their own shipping agencies and their own shipping offices in countries and ports
where they operate
f) Countering competition from tramps

NOTE
i. When a trader hires an entire ship to transport goods to a given destination, he/she and the ship
owner sign a document known as the charter party which shows the terms and conditions under
which the goods are to be transported.
ii. When the ship is hired to carry goods for a given journey, the trader and the ship owner sign a
document known as the voyage charter.
iii. When the ship is hired to transport goods for a given period of time, the trader and the ship
owner sign a document known as the time charter.

Ships may build and designed to carry special goods.

2) Boats and ferries

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These are water vessels that are used to transport people and goods over short distances.

They are found both in inland and sea transport. E.g. the Likoni ferry in Mombasa.

Advantages of water transport

a) It is economical since the number of employees to carriage volume is less
b) It is suitable for transporting heavy and bulky goods
c) It is relatively cheaper since the way is natural and free
d) Connects countries of the world bordering the sea hence creating harmony and understanding
among countries
e) Ships may be designed to carry special types of goods
f) Large volume can be carried hence reducing cost per unit

Disadvantages of water transport

a) Sea-sickness, sea pirates and storms may occur
b) It is not suitable for transporting perishable and urgently needed goods
c) Artificial harbours are expensive to construct and maintain
d) It may be affected by bad unfavourable weather conditions
e) It is not accessible to land-locked countries
f) The cost of acquiring and maintaining ships may be too high
g) Lack of loading and off-loading facilities may cause delays

Importance of water transport in Kenya

a) It is the gateway for most imports and exports thereby facilitating international trade
b) Earns Kenya foreign exchange
c) Promotes the development of agricultural and industrial sector
d) Creates employment
e) Promotes tourism by receiving passenger liners which transport tourists

NOTE: in Kenya water transport is managed and controlled by the Kenya ports authority

Functions of Kenya Ports authority

a) Ensures that facilities are available to handle goods at the port
b) It takes precautionary measures to ensure safety of the ship and that of the cargo
c) It provides enough space for storing cargo
d) It supervises and maintain other small ports
e) It provides navigational services to the ship
f) It provides other shipping services such as loading and off-loading

AIR TRANSPORT
This is a mode of transport where aeroplanes are used. Therefore aeroplanes (aircrafts) are the means of
transport.
Air is the way while airports and airstrips are the terminuses

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Air transport is the fastest means of transport hence it is suitable for transporting urgently needed goods
over long distances.
Air crafts can be classified into two, namely,
 Passengers’ planes
 Cargo planes
Passenger planes transport people whereas cargo planes transport goods
Aeroplanes may be designed to carry special types of goods.
Aeroplanes may be expensive to acquire and maintain.
Features of air transport
a) Air transported has the highly automated and mechanised cargo and passenger handling facilities
b) Aircrafts are fitted with special safety facilities
c) Air transport services are controlled by international air transport associations
d) Fares and rates are comprehensive to include all services at the terminus

Advantages of air transport

a) There is less handling of goods along the way since aeroplanes mostly fly directly to their final
destinations. This reduces cases of damage to the goods.
b) The way is natural and free
c) Planes can move through places other means cannot e.g. across mountains.
d) Airlines are interconnected all over the world hence making it more convenient
e) It is suitable for long distance travelling e.g. from one country to another
f) It is suitable for transporting perishable and urgently needed goods
Disadvantages of air transport
a) It causes pollution
b) Airstrips and airports are not available everywhere
c) It is not convenient for heavy and bulky goods
d) Aircrafts are expensive to acquire and maintain
e) It requires highly trained personnel e.g. pilots.
f) Unfavourable weather conditions causes delays
g) It an expensive means of transport in terms of freight charges
h) It is not suitable for transporting inflammable goods such as petrol and cooking gas
i) Airstrips and airports (airfields) are expensive to construct and maintain
j) In case of an accident, the results are catastrophic
Circumstances under which air transport is preferred
a) When urgency is desired
b) When goods to be transported are perishable
c) When goods to be transported are of high value
d) When goods to be transported are fragile in nature
e) When the distance to be covered is long

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 f) When safety is desired
Role of air transport in Kenya
a) Promotes the development of horticultural industry by providing speedy transportation of
agricultural products
b) Provides revenues to the government through fees and taxes
c) Facilitates the movement of business people
d) Promotes development of tourism by transporting tourists
e) Creates employment
CONTAINERISATION
Involves the transportation of goods packed in standard box like containers. These containers can either
be made of wood or metal.
These containers can either be bought or hired.
Containers can be transports using ships, trains, Lorries or even by air.
Goods can be transported in containers using two methods:
 Full container load
 Less than container load
Full container load (F.C.L): this applies where the container is filled with goods belonging to one
person (consignor)
Less than container load (L.C.L): this applies where a container is filled with goods belonging to
several people (consignors). When such container reaches the destination, it is open for each Consignor to
take his/her goods.
In Kenya, the main container depot is in Mombasa. Kenya ports authority has also established inland
container depots known as dry ports e.g. in Embakasi-Nairobi.
The aim of establishing dry ports is to:
 Easy congestion at the sea port
 Make handling of cargo easier and efficient for inland importers and exporters
When containers are off-loaded from ships in Mombasa, they are loaded into special container trains
known as railtainers which transports them by railway to the inland container depot at Embakasi.
Containers can also be transports by road using specially designed trucks.
Railtainer: this is a special train meant for transporting containers from one sea port to the upcountry dry
port inland container depot.
Advantages of containerisation
a) It minimizes of loss or damage of goods since containers are sealed at source
b) Containers can be fitted with devices that movement and handling easier
c) Saves time and labour on loading and off-loading since machines are used
d) Reduces delay due to the fact that containers are sealed at source and only opened at the
destination
e) The costs of insuring containers are low since risks are minimal.
f) Use of containers saves on space compared to when individual items are packed in the carrier

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Disadvantages of containerisation
a) Containers are expensive to acquire
b) Contributes to unemployment due to the use of machines
c) It is not suitable for transporting small quantities of goods
d) Requires special handling equipment which may be expensive
e) It may not be suitable for transporting goods with irregular shapes

FACTORS THAT INFLUENCE THE CHOICE OF AN APPROPRIATE MEANS OF

TRANSPORT
a) Cost; The cost of transport vary from one means of transport to another. An affordable means of
transport should therefore be chosen.
b) Nature of goods; Goods to be transported can be perishable, durable, light, heavy and bulky. The
fastest means of transport should be used for perishable goods. Heavy and bulky goods require
the appropriate means of transport such as use of trains and ships.

How the nature of goods influences the choice of a means of transport

a)
If goods are perishable, a faster means of transport should be chosen
b)
If goods are fragile, a smooth means of transport should be used
c)
If goods are of high value, a secure means of transport should be used
d)
If goods are urgently needed, a faster means of transport should be used
e)
If goods are bulky, a means of transport with enough space should be used
c)
Reliability; Reliability refers to the assurance that goods will reach the intended destination at
the right time and in the right form. The most reliable means should therefore be chosen.
d) Urgency;-When goods to be transported are urgently required, the fastest means of transport
should be chosen.
e) Security;-A more secure means of transport should be chosen in order to ensure that goods in
transit secured against damage, loss or theft.
f) Distance;-Distance to be covered should also be considered when choosing a suitable means of
transport. For long distances, air, railway and water transport will be appropriate whereas for
shorter distances, road transport will be the most appropriate means of transport.
g) Availability of the means;-One should always choose the means of transport that is easily
available
h) Flexibility;-Flexibility is the ability of the means of transport to be manipulated in order to meet
the needs of the transporter. Where flexibility is required, a more flexible means of transport such
as the use of matatus should be selected.
i) Terminals;-Some means of transport may have their terminals closer to the transporter than
others. In this case, the transporter should choose the means of transport whose terminals are
accessible.
FEATURES OF AN EFFICIENT TRANSPORT SYSTEM
a) It should be affordable
b) It should be punctual
c) It should be quick

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 d) Its speed should be moderate
e) It should be reliable
f) It should be flexible and convenient
g) It should be comfortable
h) It should be safe

ROLE OF TRANSPORT IN THE ECONOMY

a) It promotes the development of industries by facilitating the movement of raw materials and
distributing finished goods
b) Promotes the development of agriculture by transporting inputs to farmers and produced goods to
the market
c) Promotes regional specialisation by transporting the goods produced to the market thereby
encouraging the continued production of such goods
d) Facilitates the delocalisation of industries
e) Facilitates the movement of workers and business people from one place to another
f) Promotes the movement of people within the country creating peace and understanding
g) Facilitates the disposal of surplus goods hence avoiding wastage
h) Promotes tourism by transporting tourists to tourist attraction sites
TRENDS IN TRANSPORT
A lot of changes have been introduced in the transport sector both in Kenya and abroad. Some of these
changes include:
a) Introduction of pipeline transport
b) Introduction of electric trains to replace diesel engines
c) Use of underground tunnels for trains to ease congestion on Kenyan roads.
d) Introduction of dual carriage roads to ease congestion and reduce accidents
e) Development of planes with larger carrying capacity and high speed
f) Use of bicycles popularly known as bodaboda, motor cycles and tuktuks especially in the rural
areas and bus terminals to supplement other means of transport.
g) Use of private vehicles with smaller capacities as matatus
h) Passenger vehicles are fitted with radios, music systems, video players etc. to entertain
passengers
i) Introduction of the yellow line on passenger vehicles in Kenya
j) Introduction of uniforms for drivers and conductors of all public service vehicles
k) Introduction of speed governors on public service vehicles to control speed
l) Limiting the carrying capacity for all public service vehicles i.e. 14 seaters.

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TOPIC 4: COMMUNICATION
CONTENTS
 Introduction
 Importance of communication
 Lines of communication
 Essentials of effective communication
 Forms and means of communication
 Factors to consider when choosing a means of communication
 Barriers to effective communication
 Services that facilitate communication
 Trends in communication
INTRODUCTION
Communication is the process of passing information from one person to another.
Communication has to be effective in order to facilitate efficient operations in the organization.
IMPORTANCE OF COMMUNICATION
a) Facilitates the giving and obtaining of information;-Communication facilitates proper flow of
information within the organization and also between the organization and outsiders
b) Enables the clarification of issues and points;-Through communication, the organization is
able to clarify issues which would otherwise be confusing.
c) Enhancing public relations;-Good communication enables the organization to create a positive
image to outsiders in order to over negative attitudes that people may have towards the
organization
d) Enables the starting and influencing of actions;-Communication enables management to get
new ideas, make plans and ensure that they are implemented in the desired way.

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 e) Improves customer relations;-Good communication helps in handling customers’ complaints
and enquiries more efficiently and offering them appropriate feedback.
f) Facilitates the giving of instructions;-Through communication, management is able to get work
done by issuing procedures and orders
g) Facilitates the giving of reassurances;-Communication is used to reassure people that their
performance is good so as to boost their morale. E.g. the best performing employee will feel
recognised if he/she is sent a letter to appreciate him/her for the good work.
h) Helps in confirming arrangements;-Through communication, arrangements for activities to
take place such as meetings and conferences can be confirmed.
i) Co-ordinates departments of the firm;-Communication enables the coordination of activities of
various departments. For example when sales increase, the sales department has to inform the
production department about this increase for it to increase production proportionately
LINES OF COMMUNICATION
Lines of communication refers to the direction in which communication flows from the sender to the
receiver.
Lines of communication can be classified according to the level of the communicating parties or
according to the nature of the message.
Classification according to the level of the communicating parties
When classified according to the level of the communicating parties, communication can be classified
into:
a) Vertical communication
b) Horizontal (lateral) communication
c) Diagonal communication
a) Vertical communication
This is where messages are passed between a senior and his/her junior in the same organization.
Classification of vertical communication
Downward communication: this is a communication process where a person communicates with his/her
juniors. It is commonly used when:
 Training juniors
 Evaluating performance of juniors
 Delegating duties
 Solving problems facing junior officers
 Inspiring and motivating juniors
Upward communication: this is a communication process where a person communicates with his/her
seniors. It is mostly used when:
 Submitting reports
 Giving suggestions
 Submitting complaints
b) Horizontal (lateral) communication
This is communication between or among people of the same level e.g. between heads of departments.
It used to:

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  Co-ordinate and harmonise various activities in the organization
 Create team work within the organization
 Exchange ideas
 To create a sense of belonging within the organization
c) Diagonal communication
This is communication between people of different levels in different departments or in different
organisations. E.g. an accounts clerk communicating with a sales manager of the same organization or
from a different organization.
Diagonal communication enhances team work.
Classification according to nature of the message
When classified according to the nature of the message, communication can be classified into:
a) Formal (official) communication
b) Informal communication

a) Formal communication
This is where messages are passed using the approved and recognised way in an organization. This means
that messages are passed to the right people following the right channels and in the right form.
It is also known as official communication because it involves the transfer of messages meant for office
purposes.
b) Informal communication
This is where messages are passed not in the right form and without following the right channels.
It is commonly used when sending messages to friends and relatives.
It can also take the form of gossiping and rumour mongering.
NOTE: both formal and informal communication are necessary for the smooth running of the
organization
ESSENTIALS OF EFFECTIVE COMMUNICATION
These are the essential elements that must be in place for communication to be effective. These elements
are discussed below:
a) The sender (communicator) ;-This the person from whom the message originates. The sender
encodes the message i.e. puts the message in a form that can be understood. The sender encodes
the message through the proper use of words, symbols, gestures and signs to represent his/her
ideas. After encoding the message, the sender sends the message.
b) The message;-This is the information to be sent. The message may be in the form of words,
symbols, pictures or in any other form that will make it understandable
c) The medium (channel);-This refers to the means through which the message is sent. The
medium can be a telephone, a letter, a radio, face to face etc.
d) The receiver;-This is the person for whom the message is intended. The receiver decodes the
message i.e. interprets the message for easy understanding.

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 e) Feed-back;-This refers to the reaction of the receiver to the message. It may be in the form of a
response which the receiver sends back to the sender.
Communication process
The process of communication involves three stages:
a) Sending the message (transmission)
b) Receipt of the message by the receiver
c) Response from the receiver
Feedback ensures that communication is complete. (Illustrate)
FORMS AND MEANS OF COMMUNICATION
Forms of communication: these are the methods or ways used to pass messages. There are three forms
of communication, namely:
 Oral communication
 Written communication
 Audio-visual communication
 Electronic communication
Means of communication: these are devices used to pass on information. Examples include messengers,
letters, telephones, radio, televisions, face-to face etc.
1) ORAL (VERBAL) COMMUNICATION
This is where information is conveyed by word of mouth.
Circumstances when verbal communication is used
a) When a person wishes to convince, persuade or influence another
b) When the message is urgent
c) When the message is confidential
d) When immediate feedback is required
Means of oral communication
Some of the means of oral communication include:
a) Face-to-face conversation
b) Telephone
c) Radio calls
d) Paging
1) Face-to-face conversation
This is a means of communication which involves two or more people talking to each other.
It is appropriate when the parties involved are closer to each other.
It is suitable where the subject matter requires convincing, persuasion and immediate feedback
Advantages of face-to-face conversation
a) Provides immediate feedback
b) It has personal appeal
c) Allows the expression of body language
d) One is able to convince and persuade another

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 e) It is simple to use
f) It is direct i.e. does not pass through intermediaries
g) It is convenient for confidential messages
h) It promotes harmony due to discussions
Disadvantages of face-to-face conversation
a) It has no record for future reference
b) It can be time consuming
c) The message can be distorted
d) It is not suitable when people are far away
e) It is not suitable for the deaf and dumb
Circumstances where face-to-face conversation is preferred
a) When there is need to persuade and convince another person
b) During meetings
c) When confidentiality is desired
d) When parties involved in communication are near each other
e) When immediate feedback is required
f) When giving routine instructions
g) When there is need to discuss issues
Reasons for the ineffectiveness of face-to-face communication
a) Where there if age difference
b) Poor timing
c) Where there are pronunciation problems
d) Differences in language between the communicating parties
e) Where the receiver has hearing problems
f) Where unfamiliar terminologies are used
g) In case of poor listening by the receiver
h) In case there is noise in the environment
i) Inability of the receiver to understand gestures accompanying face-to-face communication
j) Where the message is long and detailed making the receiver lose concentration

2) Telephone
A telephone is an electronic gadget that is used to send messages.
It is suitable for sending messages quickly over short distances.
In Kenya, telephone services are provided by Telkom Kenya, Safaricom, airtel, yu etc.
Advantages of telephones
a) Relatively fast.
b) It has personal appeal.
c) Provides for immediate feedback.
d) Allows for persuasion and convincing.
e) Suitable for long distance communication.
Disadvantages of telephones
a) Telephones may be expensive to acquire.

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 b) It lacks confidentiality.
c) It is not convenient for deaf and dumb people
d) It can be time consuming.
e) It is not suitable for detailed messages
Circumstances where telephones will be preferred
a) When there is the desire convince and persuade the other person
b) When the parties involved in communication are far away from one another
c) When immediate feedback is desired
d) When the message is urgent
Reasons for popularity of mobile phones
a) They have personal appeal
b) They convey status in the owner
c) Sending messages via mobile phones is relatively cheaper
d) They offer additional services such as the radio, mp3 player, internet etc.
e) Some of them are relatively cheaper to acquire

3) Radio calls
This is a means of communication where messages or information is conveyed by use of radio waves i.e.
without connecting wires between the sender and the receiver.
The device used is called a radio telephone.
Radio telephones are mostly used in places without telephone lines
Radio calls are mostly used by the police, game rangers, researchers, foresters etc.
Advantages of radio calls
a) It is relatively fast
b) It has immediate feedback
c) It has personal appeal
d) Allows persuasion and convincing
e) It can transmit messages over long distances
Disadvantages of radio calls
a) It has no record for future reference
b) It lacks confidentiality
c) Messages are sent one way at a time
d) It can be expensive
e) It is not suitable for deaf and dumb people
f) It can be time consuming
4) Paging
This is a means of communication that mostly used to locate or alert staff quickly within an organization.
It can be done using loud speakers, bells, portable receivers and lighted signals
Paging only works within a given radius
Advantages of oral communication

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 a) The message has a greater impact on the receiver
b) Clarity can be sought from the sender
c) Allows the sender to convince and persuade the receiver
d) It has personal appeal (touch)
e) The message reaches the intended recipient
f) Immediate feedback is possible
g) Suitable for conveying confidential messages
h) It can be used to pass messages to a large audience
i) Allows the participation of others
Disadvantages of oral communication
a) It does not keep a record for future reference
b) It cannot be used when the communicating parties are far from one another
c) It does not allow detailed messages
d) It is not suitable for the deaf and dumb
e) It is time consuming especially when persuading and convincing the other party

2) WRITTEN COMMUNICATION
This refers to transmission of messages through writing
Means of written communication
Some of the means of written communication include the following
a) Letters
b) Telegram
c) Telex
d) Facsimile (fax)
e) Memorandum (memo)
f) Notice
g) Reports
h) Circulars
i) Agenda
j) Minutes
a) Letters
Letters can be classified into two, namely:
 Formal letters
 Informal letters
Formal letters include business and official letters while informal letters refer to personal letters.
NOTE:
a) Business letters are used to pass information between the business and its customers e.g. the letter
of inquiry. They may be used to pass information the employer and employees within the
organization
b) Official letters are used to pass information from government to employers and employees and
vice versa.
c) Personal letters are those letters that are written to friends and relatives

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Advantages of letters
 It provides evidence
 The message is not distorted
 Provides a record for future reference
 The message can be detailed
 It is relatively cheap
 It can be used to send confidential messages
b) Telegram
This is a means of communication that is provided by the post office. The sender types or writes a
message on a telegram form in capital letters and hands it over to the post office. The post office then
transmits the message to the recipient’s post office.
The charges for sending a telegram are based on the number of words i.e. the more the words, the higher
the charges

c) Telex
This is a means of communication that is used to send short or detailed messages faster by using a
machine known as a teleprinter.
It is provided by the post office.
Both the sender and the receiver must have telex machines which should be connected to each other. The
message is typed on the sender’s machine and it is simultaneously received or typed on the receiver’s
machine.
It is fast hence saving time. However, it is expensive.
d) Facsimile (fax)
This involves the transmission of information through a fax machine. Both the sender and the receiver
must fax machines connected by a telephone line.
To send the message, the sender dials the fax number of the receiving machine. He then feeds the
document to be sent into his/her machine. The receiving machine reproduces the document immediately.
A fax works like a distant photocopying machine.
e) Memorandum (memo)
This is a means of communication that is used to pass information between departments or offices in an
organization.
They are used to inform workers within an organization on matters related to the organization.
f) Notice
This is a means of communication that is used to inform a group or the public about past, current or future
events.
It is brief and to the point.
It can be placed on walls, in public places, in newspapers or on notice boards.

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 g) Reports
Reports are statements that are used to communicate finding, recommendations and conclusions of an
investigation.
A report is usually sent to people who asked for it for a specific purpose.
h) Circulars
These are copies of a single letter that are addressed and copied to many people when the message to be
sent to each person is the same. For example, the ministry of education can send circulars to all school
heads in Kenya informing them on the closing date.
I) Agenda
This is an outline of items to be discussed in a meeting. It is normally contained in a notice of the meeting
that is sent to participants of the meeting.
The notice of the meeting contains the following:
 The date of the meeting
 The venue of the meeting
 Time of the meeting
 The agenda of the meeting
i) Minutes
This is record of the proceedings of a meeting.
Advantages of written communication
a) It provides a record for future reference
b) Some means of communication under written communication are relatively cheap
c) It suitable for confidential messages
d) It can allow the inclusion of details
e) The message may not be distorted
f) Written communication can be used as evidence.
g) It can be addressed to many people
Disadvantages of written communication
a) It lacks personal appeal
b) It takes time to prepare
c) It is not suitable for the illiterate people
d) Immediate feedback may not be possible
e) It does not offer room for persuasion and convincing
f) It is not a two-way communication
g) The message may take long to reach the receiver
h) It does not allow the expressions of body language
i) Some means of written communication are expensive

3) AUDIO-VISUAL COMMUNICATION
This is a form of communication where messages are sent through sounds and signs.
Audio-visual communication is suitable where the message is targeting a large number of people.
Means of audio-visual communication

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  Siren
 Television
 Photographs
 Signs
 Charts
 whistle
a) Siren
This is a means of communication where a device is used to proud a loud shrill sound. This sound may be
accompanied by a flashing light.
It is commonly used by the police, ambulances, security firms and fire brigades
b) Television (TV)
This is a device that produces information in the form of a series of images on a screen accompanied by
sound.
It is a very effective means of communication since it combines the advantages of image and sound.
It is suitable for sending urgent message that give live coverage of events.
c) Photographs
A photograph is an image of an object as it appeared at the time when the photograph was taken.
They are self-explanatory hence the receiver is able to get the message at a glance
d) Signs
Signs refer to symbols, drawings or gestures whose purpose is to inform the public about such things as
directions, distances and dangers
e) Charts
These are visual representations of information which are clearly displayed so that the observer can get
the message at a glance.
f) Whistle
This is where a small device is blown to produce sound whose purpose is to warn or alert the target
audience.
Advantages of audio-visual communication
a) It reaches many people
b) It is more appealing compared to other means of communication
c) It reinforces verbal communication hence making it clearer
d) It may have a lasting effect on the receiver
e) It is suitable for the illiterate
f) It increases the receiver’s concentration
g) Information can be used to entertain while communicating the message.

Disadvantages of audio-visual communication

a) There may no feedback
b) Some means of verbal communication may require interpretation to be understood e.g. charts
c) The preparation of the message may be expensive and time consuming

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 d) It is not suitable for confidential messages

4) ELECTRONIC COMMUNICATION
This is a form of communication where messages are passed via electronic devices such as computers and
mobile forms.
The means of communication under electronic communication include E-mails and text messages.
Electronic communication is suitable for sending urgent massages.
Advantages of using E-mail to communicate
a) It is relatively cheap
b) It is relatively fast
c) it is suitable for sending confidential messages
d) it allows immediate feedback
e) it is easy to access the message
f) it is universal hence allowing world-wide communication
g) it allows detailed messages
h) it keeps a record for future reference

FACTORS TO CONSIDER WHEN CHOOSING A MEANS OF COMMUNICATION

a) Speed;-It is important to take in consideration the speed of the means of communication
especially when the message is urgent. For urgent messages therefore, telex, fax and telephone
will be the preferred means of communication
b) Cost;-Cost refers to the expenses incurred when sending a message. a less costly means of
communication should be selected.
c) Confidentiality;-The message is said to be confidential when it is intended for a specific
person(s) only. In this case, a telephone, a registered mail or an internal memo enclosed in an
envelope may be used.
d) Distance;-This refers to the geographical distance between the sender and the receiver of the
message. For short distances, face-face, posters and sirens may be used whereas for long
distances, fax,telephone and letters are most suitable.
e) Availability of evidence;-Refers to the ability of the means of communication to provide a
record for future reference. Where evidence is required, all means of written communication will
be preferred.
f) Reliability;-Reliability is the assurance that the message will reach the intended recipient at the
intended time, place and in the right form. Where reliability is to be considered, face-to face
communication should be used.
g) Accuracy;-Accuracy refers to the exactness of the message to be conveyed by a means of
communication. When accuracy is to be considered, written communication should be given
preference
h) Desired impression;-At times, it may be necessary to create a certain impression on the receiver.
E.g. use of a telegram conveys a sense of urgency, use of coloured and attractive letterheads
portrays a goods image of the business etc. a means of communication that conveys the desired
impression should therefore be chosen
i) Availability;-Some means of communication are easily available than others. A readily available
means of communication should therefore be chosen.

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 BARRIERS TO EFFECTIVE COMMUNICATION
Barriers to effective communication are conditions existing between the sender and the receiver which
have the effect of distorting the message leading to ineffective communication.
These barriers are discussed below:
a) Language barrier;-This is where the receiver is unable to understand the language being used by
the sender. It may be due to use of a foreign language or use of a different accent.
b) Poor listening;-Communication is effective when the recipient is a keen listener. Listening
requires careful attention and concentration. Poor communication therefore renders
communication ineffective.
c) Negative attitude;-Attitudes refers to feelings of the communicating parties towards one another.
Where these feelings are negative, there may be intentional misunderstanding of the message
resulting in ineffective communication.
d) Poor timing;-For communication to be effective, the message should be sent and received at the
appropriate time. For example, a message sent when somebody is in a hurry may not be properly
received. Poor timing therefore contributes to effective communication.
e) Use of a wrong medium;-Medium refers to the means of communication used. The means of
communication used should be appropriate for the message being conveyed e.g. on cannot
convey confidential messages effectively using audio-visual communication. Using a wrong
medium therefore contributes to effective communication.
f) Prejudgement;-Prejudgement refers to past experiences and knowledge about the sender and the
message. For example a message conveyed by the sender who is a well-known drunk may not be
taken seriously.Negative prejudgements there contribute to ineffective communication.
g) Emotional responses;-These are reactions resulting from anger or excitement. These reactions
may distort the message
h) Unclear systems within the organisation;-If the channels of passing information within the
organisation are not clear, messages will not get to the right people as intended.
i) Noise;-Noise refers to any disturbing sounds within the surrounding that may interfere with the
concentration or the listening ability of the recipient. The presence of noise may make it
impossible for the message to be received in the right form.
j) Unfamiliar non-verbal signals;-Non-verbal signals are the means of communication which help
enhance verbal communication. These signals may include facial expressions, gestures and
nodding. Non-verbal signs become a barrier to effective communication when they are
misinterpreted by the receiver.
Features of effective communication
a) It should be relatively cheap
b) It should be widely available
c) It should be relatively fast
d) It should offer a variety of means of communication

SERVICES THAT FACILITATE COMMUNICATION

These are services offered by different organisations such as Telkom, postal courier etc. to facilitate
communication. These services may be classified into four:

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 a) Mailing services
b) Telephone services
c) Broadcasting services
d) Print media services.\

a) Mailing services
Mailing refers to the handling of letters and parcels. Mailing services are therefore are those services
which deal with the handling of letters and parcels.
These services are provided by organisations such as the postal corporation of Kenya, Securicor courier
etc.
Mailing services include the following:

a) Speed post
This is a service that is offered by the post office to send correspondence and parcels to a destination
within the shortest time possible. To deliver the mail, the post office uses the fastest means of transport
available to the destination.
The sender pays the normal postage plus a fee for the special service.
In Kenya, EMS is the best example of speed post service
b) Poste restante
This is a service offered by the post office to travellers who may wish to receive correspondence while
away from their post office box.
The receiver (traveller) has to inform those who may wish to communicate with him his/her nearest post
office during his/her travel. The sender must write the words ‘post restante’ on the envelope
An additional fee on top the normal postage charges is paid for the service.
c) Express mail
This is a service offered by the post office where mails and correspondences are delivered to the
destination in the shortest time possible.
When mail is sent using express, it is delivered to the receiver’s nearest post office from where the post
office will make arrangements to deliver the mail to the receiver within the shortest time possible.
The difference between express and speed post lies in the manner in which the mail is treated. For speed
post, special arrangements to deliver the mail start at the sender’s post office whereas for express mail,
arrangements start at the sender’s post office.
Normal charges plus a fee is charged for using this service.
d) Registered mail
This is a service that is offered by the post office and other registered service provider such as Akamba,
Securicor etc. for sending valuable items for which secure handling is required.
A registration fee and a commission is paid for this service. The commission depends on the weight and
the nature of the item being sent.

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When sending items via registered mail, a certificate of registration is issued to the sender. In case of loss,
the sender is compensated on producing the registration certificate.
e) Business reply services
This is a service that is used by businesses that intend to encourage their customers to reply their letters
promptly. These businesses usually send their customers unstamped reply cards, letter cards or envelopes
marked “postage paid” or “postage will be paid by licensee”
b) Telephone services
These are services that are offered by firms such as Telkom Kenya, airtel and Safaricom.
These services are available on either landline or mobile telephones.
For one to use the service, he/she must have a telephone equipment which is connected to the service
provider through networking.
The subscriber pays for the service either in advance (post-paid) or in arrears (pre-paid)
c) Broadcasting services
These are services that are provided by radio and television stations.
These services are regulated by the telecommunications commissions of Kenya which issues licenses for
radio and television broadcasting stations.
Examples of radio and television stations in Kenya include:
 Kenya television network (KTN)
 Nation TV
 Kiss 100
 Easy FM
 Radio jambo etc.
d) Print media services
These are means of written communication that are intended to pass messages to the general public. They
include newspapers, magazines and journals.
TRENDS IN COMMUNICATION
a) Emergency of communication bureaus: these are privately owned kiosks where telephone
services are offered
b) Introduction of mobile phones
c) Introduction of E-mail services
d) Introduction of internet
e) The growing use of short message services provided by mobile phones.

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TOPIC 5: WAREHOUSING
CONTENTS
 Introduction
 Importance of warehousing to business
 Essentials of a warehouse
 Types of warehouses
INTRODUCTION
Warehouse
A warehouse is a special place where goods are stored until demand for them arises.
It may be a building known as a storehouse, or an open space known as a stockyard.
A warehouse is also referred to as a depot or a godown.
Warehousing
Warehousing is the process of storing goods until the time they are required. It may also refer to the
systems by which goods are handled and controlled for efficient retrieval.
Warehousing involves the following:
a) Receiving goods into the warehouse
b) Storing the goods in the warehouse
c) Releasing the goods from the warehouse
Warehousing is an aid to trade which creates time utility.
IMPORTANCE OF WAREHOUSING TO BUSINESS
a) Ensures steady flow of goods;-Warehousing ensure steady supply of goods by storing goods
during times of surplus and releasing them to the market when need for them arises.
b) Ensures stability in market prices;-By ensuring steady supply of goods, warehousing prevents
shortages or surplus in the market which may lead to changes in market prices
c) Protects goods;-Warehousing protects the goods stored from risks such as theft, fraud and
physical damage

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 d) Helps in meeting unexpected demands;-Through warehousing, goods are stored during times of
surplus and later released to the market when demand for them arises. As such, warehousing
helps in meeting unexpected demand.
e) Ensures continuity in production;-Warehousing enables production activities to continue
throughout. This is because it enables producers to store raw materials awaiting their need to
arise.
f) Enables the preparation of goods for sale;-Goods stored in the warehouse can be blended,
branded, packed and graded in preparation for sale
g) Enables the owner to look for market;-Warehousing gives the owner of the goods time to look
for a suitable buyer(s) while the goods are still in the warehouse
h) Goods can improve in quality;-The quality of some goods such as wine and bananas may
improve while still in the warehouse
i) Encourages specialization;-Through warehousing, the producers are able to only deal with the
production of goods whereas distributors only deal in the storage and distribution of goods. As
such, each party is able to only specialize in one line of operation.
j) Enables buyers inspect the goods;-Warehousing gives buyers an opportunity to inspect the
goods before they can buy them.

Importance of warehousing to producer (manufacturer)

a)Allows the producer to produce goods in advance in order to meet unexpected demand
b)Allows the producer to produce goods steadily without rushing
c)Enables the producer to offer steady supply of seasonal goods
d)Raw materials can be stored in the warehouse hence enabling the producer to continue his
production throughout
e) Producer’s goods are protected from physical damage and spillage
f) Enables the producer to prepare goods for sale
Importance of a warehouse to the consumer
a) Ensures constant supply of goods to the consumer
b) Stabilizes prices by avoiding excess demand through constant supply of goods
c) Inspection of goods in the warehouse ensures the consumer does not receive defective goods
d) Ensures the consumer has access to a wider variety of goods#
e) Through packing and packaging, goods are broken into smaller quantities hence enabling the
consumer access small quantities of goods

ESSENTIALS OF A WAREHOUSE
Essentials of a warehouse are the features and the resources that a warehouse must have for it to function
effectively. These include the following:
a) Suitable location;-A warehouse should be located in a place where receipt and issue of goods
can be done efficiently. The location therefore should be accessible or near the market.
Reasons for locating a warehouse nearer to the customer
a) To minimize transportation cost
b) To minimize damages
c) To ensure continuous supply of goods to the market
d) To increase sales as a result of continuous supply of goods to the market

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 e) To minimize losses due to damages
b) Suitable buildings;-A warehouse should be designed in such a way that it is appropriate for the
type of goods being stored. The design of the warehouse should also facilitate safety, security and
ease of handling goods that have been stored.
c) Appropriate equipment;-A warehouse should be equipped with proper and appropriate facilities
for handling the type of goods stored.
d) Proper safety facilities;-A warehouse should be fitted with safety equipment and facilities
necessary for protecting goods against damage that can be caused by water, sunshine or personnel
who may mishandle the goods.
e) Appropriate transport system;-A warehouse should be located in a place which is accessible to
the appropriate transport system for the type of goods stored. This is to facilitate the movement of
goods in and out of the warehouse.
f) Good communication network;-A warehouse should have access to good communication
network for easy contact with the clients and suppliers
g) Adequate space;-A warehouse should be spacious enough to allow easy movement of personnel
and goods. The space should also be enough to accommodate the required quantity of goods.
h) Efficient staff;-Warehouse staff should be well trained with the necessary skills for handling the
type of goods stored
i) Appropriate special facilities;-A warehouse should be equipped with appropriate special
facilities for handling special goods e.g. refrigerators for perishable goods.
j) Proper recording systems;-A warehouse should have a good recording system to monitor
movement of goods
k) Compliance with the law;-A warehouse should be operated in accordance with the law.
l) Precaution against risks; Precautions against risks such as fire should be taken within the
warehouse. This can be done by providing suitable equipment and insurance against such risks.

TYPES OF WAREHOUSES
Warehouses can be classified according to ownership or according to the goods stored.
When classified according to ownership, warehouses can be categorised into:
 Private warehouses
 Public warehouses
When classified according to the goods stored, warehouses can be categorised into:
 Bonded warehouses
 Free warehouses
1) PRIVATE WAREHOUSES
These are warehouses that are privately owned either by individuals or firms.
They are used to store goods belonging to the owner only.
These warehouses may be owned by producers, wholesalers or retailers
a) Wholesalers’ warehouses; These are warehouses that are owned by the wholesaler. Wholesalers
need warehouses to store the goods they buy in bulk from producers before they are bought by
retailers. These warehouses enable the retailer to prepare the goods for sale through packaging,
branding, blending and sorting.

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 b) Producers’ warehouses; These are warehouses that belong to producers.
c) Retailers’ warehouses; These are warehouses which are owned by large scale retailers to store
their goods as they wait for customers. Such large-scale retailers include supermarkets,
hypermarkets, chain stores and departmental stores.
Advantages of private warehouses
a) Eliminates the cost of hiring storage space
b) The owner is tied to the procedures of receiving and releasing goods
c) The owner exercises full control over the warehouse hence he/she can make major decisions
without having to consult anybody
d) The owner may design the warehouse to suit his/her specification
e) The owner can purchase special facilities to handle special goods
f) Gives the owner time to look for market
g) Enable the business to maintain continuous supply of goods
h) The warehouse can be conveniently located
Disadvantages of private warehouses
a) The initial construction cost of the warehouse is high
b) Staff may be under-utilised (idle) during times of volumes of goods
c) Private warehouses may not employ qualified staff to run the affairs of the warehouse
d) The overhead costs (expenses) may be higher
Circumstances under which traders (retailers and warehouses) require warehousing facilities
a) When they buy goods in bulk
b) When they don’t have ready market for their goods
c) When public warehouses and other warehouses are located far away
d) When they need to prepare their goods for sale through packaging, blending, sorting and branding
e) When they need to avoid storage charges
Circumstances under which traders (retailers and wholesalers) may not require (or require
minimal) warehousing facilities
a) When they deal in perishable goods
b) When demand for the goods is high
c) When their premises are located near customers
d) When they deal in fast moving goods
e) When they deal in goods that require orders
f) When they deal in goods of high value

2) PUBLIC WAREHOUSES
These are warehouses that are owned by individuals or firms for the purpose of renting space to members
of the public who need temporal storage for their goods.
They are strategically located i.e. near major roads junctions, bus stations, airports, railway stations etc.
Advantages of public warehouses
a) Goods can be sold while still in the warehouse
b) Gives traders an opportunity to rent space in the warehouse
c) Traders do not have to construct their own warehouses
d) Goods in the public warehouse are insured against risks such as fire and theft

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 e) The goods held in the warehouse can be used as collateral security to access loans from the
warehousing firm and other financial institutions
f) Public warehouses can offer additional services such as bottling, bagging and repairs to their
clients
g) Owners of public warehouses hire qualified staff who ensures proper operations of the warehouse
Disadvantages of public warehouses
a) The hirer competes for space with other hirers hence he/she can miss space during peak seasons
b) The owner of the goods is denied the opportunity to physically handle the goods
c) The owner of the goods may lose contact with his/her customers if they buy goods directly from
the warehouse
d) The procedure of receiving and releasing goods may be long
e) Continued renting of space in the public warehouse may be expensive in the long run compared
to constructing one’s own warehouse
f) The location of the public warehouse may not be suitable to the hirer i.e. they may be far away
from the hirer

3) BONDED WAREHOUSES
These are public warehouses which are specifically meant for storing imported goods as they await
payment of customs duty.
Customs duty is the tax that is imposed on imported goods.
These warehouses are located at entry points for goods entering the country from other countries. Such
entry points include airports, seaports and border towns.
Goods kept in a bonded warehouse are said to be goods under bond or goods in bond. This means that the
owner of the goods has given a bond to customs duty authorities. A bond is a guarantee that the goods
cannot be released before duty for them is paid.
A bonded warehouse can be owned by the government or by an individual who is different from the
owner of the goods.
If goods are sold while still in the warehouse, the buyer (new owner) takes the responsibility of paying
customs duty.
If goods are re-exported from the warehouse, the owner (importer) does not pay customs duty.
Goods are stored in the bonded warehouse for a specific period of time. If this period expires before
customs duty is paid by the owner of the goods, the goods can be auctioned by the customs authorities.
Once the owner of the goods pays customs duty, he/she is issued with a release warrant to enable him/her
get the goods out of the warehouse.
Features of a bonded warehouse
a) Goods are bonded until custom duty is paid
b) Goods can be re-exported while still in the warehouse
c) Storage charges are made on all goods stored in the warehouse
d) Goods can be sold while still in the warehouse
e) Goods can be inspected and prepared for sale while in the warehouse
f) Goods are released after the production of a release warrant

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 g) They are usually located at entry points
h) They are usually large in size
i) They are used for storing imported goods
j) Goods are stored in the warehouse for a fixed period of time
Advantages of a bonded warehouse to the importer
a) The importer can prepare the goods for sale while still in the warehouse
b) The importer can look for market before paying customs duty
c) Some goods lose weight while still in the warehouse, therefore the importer pays less duty in case
duty is based on the weight of the goods
d) The burden of paying customs duty passes to the buyer in case goods are sold while still in the
warehouse
e) It gives the importer time to look for money to pay for customs duty
f) Security and safety of goods is provided
g) Some goods e.g. wine may improve in quality while still in the warehouse
h) Storage space in the bonded warehouse is always available
i) Goods can be withdrawn from the warehouse in bits as duty for them is paid
Advantages of a bonded warehouse to the government
a) It earns revenue to the government through duty charged on the goods
b) The government is able to control the entry of harmful goods into the country
c) Enables the government to verify documents for goods in transit
d) The government is able to control the quality of goods entering the country
e) Enables the government to control the quantity of goods entering the country
f) Enables the government to inspect the goods imported
g) Enables the government to check on illegal goods entering the country
h) Helps the government prevent dumping

Disadvantages of a bonded warehouse

a) Goods are auctioned by customs authorities if the importer fails to pay customs duty.
b) Warehouse charges may be expensive to the importer
c) Owners of goods (importers) have no control over the operations and management of the
warehouse
d) The importer pays higher duty in the long run when he/she withdraws goods from the warehouse
in bits compared to when he/she pays duty at once
Differences between a private warehouse and a bonded warehouse

Private warehouse Bonded warehouse

It is owned by an individual It is owned by the government
It stores owner’s goods It stores imported goods
It is located near owner’s premises It is located at entry points
No permission is needed when releasing goods A release warrant is required before goods are
released
No customs duty is paid on stored goods Goods are stored awaiting payment of customs
duty

Differences between a public warehouse and a bonded warehouse

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 Public warehouse Bonded warehouse
It is owned by individuals or firms It is owned for the government
It stores clients’ (hirers’) goods It stores imported goods
It is located strategically e.g. at airports It is located at entry points
Goods are released after payment of rent Goods are released after a release warrant has
charges been obtained
No customs duty is paid on goods stored Goods are stored awaiting payment of customs
duty

4) FREE WAREHOUSES
These are warehouses where tax free goods are kept as they await sale or collection by owners.
Goods kept in these warehouses may be locally produced goods which require no taxation or imported
goods which are duty free or whose duty has already been paid.
NOTE: all other warehouses (private and public) are free warehouses since tax is not paid on goods
stored in them.
Advantages of free warehouses
a) The goods cannot be auctioned since there is no taxation on the goods
b) It is cheaper to store goods in free warehouses since customs duty is not paid on the goods
c) Clearing goods from a free warehouse is easy since a release warrant is not required
d) They are located in places convenient to the hirers
Disadvantages of free warehouses
a) The government does not benefit from free warehouses since customs duty is not paid
b) Some traders may store dutiable goods in free warehouses so as to avoid paying taxes
c) Illegal goods maybe be stored in free warehouses since they are not strict on inspection and
scrutiny of goods
The processing of warehousing
Warehousing involves three key stages. These are:
a) Receipt of goods
It involves ordering for the goods, inspecting them on arrival and accepting them into the warehouse.
Receipt of goods involves the following activities
 Ordering goods from suppliers
 Inspecting the goods
 Checking the documents which accompany the goods for their authenticity
 Coding goods
 Recording incoming goods
 Accepting goods into the warehouse
b) Storing the goods
It involves placing goods in the appropriate storage facilities and regularly inspecting them to ensure they
are in good condition
Activities carried out during this stage includes:

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  Providing handling facilities
 Regular checking to ascertain conditions of goods
 Regular stock taking
c) Protecting goods
Involves protection of goods from damages. Activities carried out at this stage include:
 Providing necessary preservation facilities
 Regular checking of goods to ascertain their conditions
 Hiring personnel to look after the goods

d) Releasing the goods

It involves issuing the goods to the owner upon payment of customs duty.
Releasing goods involves the following activities:
 Receiving orders from customers
 Inspecting outgoing goods
 Recording outgoing goods
 Preparing goods for resale through parking them
 Passing dispatches to the accounts department
Advantages of systematic arrangement of goods in the warehouse
a) It minimizes breakages
b) It minimizes pilferage
c) It minimizes contamination
d) It ensures proper utilization of space
e) It is easier to access goods
f) It is easy to detect illegal goods

TRENDS IN WAREHOUSING
a) Use of machines to handle goods
b) Storage of goods using racks to allow easy retrieval
c) Environmental pollution due to destruction of unwanted goods.

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TOPIC 6: INSURANCE
CONTENTS
 Introduction
 Pooling of risks
 An insurance contract
 Importance of insurance
 Terms used in insurance
 Principles of insurance
 Classes of insurance
 Re-insurance
 Co-insurance
 Procedure of obtaining an insurance
 Procedure of making an insurance claim
 Insurance and gambling
INTRODUCTION
Insurance is a contract between an individual or an organisation and the insurance company where the
insurance company undertakes to protect the individual or the organisation against loss arising from the
occurrence of the risks insured against.
The individual or the organisation taking the insurance cover is known as the insured whereas the
company giving the insurance cover is known as the insurer.
The insured must make regular payments to the insurer to effect insurance. These regular payments are
known as premiums.
The insurance uses the number of people insured a particular risk and its past experience as the basis for
determine the amount of premiums to be charged.
Examples of insurance companies in Kenya include:
 Blue shield insurance company
 Amaco insurance company
 Britam insurance company etc.
 CFC
How insurance works
Insurance companies operate on the law of large numbers where:

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 a) Many people are insured against the same risk
b) Each person contributes a small amount of money (premium) to cover the risk
c) The amount of money contributed by all persons is collected together into a pool
d) Any person who suffers a loss from the insured risk is compensated from the money collected in
a pool

POOLING OF RISKS
Refers to the practising of grouping together all the people insured against the same risk by the insurance
company.
The pooling or risks spreads the risk over a large number of people, hence reducing the burden on each of
them.
Benefits of pooling of risks to the insurance company
a) It enables the insurance company to create a common pool of funds out of the premiums paid
b) It enables the insurance company to compensate those who suffer loss when the risks insured
against occur
c) It enables the insurance to spread the risks over a large number of insured thereby reducing the
burden on each of them
d) Surplus funds from the pool can be invested in the economy by the insurance company
e) The insurance company can use funds from the common pool to its operational costs
f) It enables the insurance company to calculate the insurance company to be paid by each insured
g) It enables the insurance to determine whether to re-insure itself with another insurance company
or not
Characteristics of an insurance scheme
a) There must be a large number of people exposed to the similar risk
b) The possibility of calculating premiums must exist
c) Occurrence of the loss should be accidental
d) The insured must suffer a financial loss
e) The insured risk must not be catastrophic

INSURANCE CONTRACT
A contract is a legally binding agreement between two or more parties.
An insurance contract is therefore a legally binding agreement between the insurer and the insured where
each of them agrees to undertake certain specified obligations.
An insurance contract must meet the following conditions in order to be legally binding
a) It must be for a legal purpose i.e. one cannot insure illegal activities or items such as bhang.
b) The parties must have the legal capacity to contract i.e. they must be mature (above 18 years),
sane and not bankrupt.
c) The terms and conditions of the contract must be acceptable to both the insured and the insurer.
d) There must be a payment and a consideration. The payment is the premiums paid by the insured
whereas the consideration is the insurance cover given by the insurer.

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 IMPORTANCE OF INSURANCE
a) Creates employment;-Insurance creates employment opportunities either directly or indirectly.
It creates employment opportunities directly through the employment of people in insurance
companies. On the other hand, it creates employment opportunities indirectly by enabling
business to continue operating which in return employ people.
b) Creates confidence in investors;-Insurance creates confidence in investors thereby encouraging
them to venture in risky but profitable businesses.
c) Earns revenue to the government;-The government earns from insurance companies by taxing
the profits they make and the salaries paid to their employees.
d) Ensures continuity of businesses;-Insurance enables businesses to continue operating
throughout by compensating them whenever the risks insured against occurs
e) Spreads risks;-Through pooling of risks, insurance spreads risks in that each of the insured
contributes a small amount of money into a common pool out of which those who suffer losses
are compensated. As such they spread the burden (loss) to all the insured.
f) Encourages savings; The amount of money contributed as premiums may act as savings
especially in life assurance polices
g) Invests in the economy;-Insurance companies may invest their surplus funds in the economy e.g.
by buying shares in order to earn more incomes.

TERMS USED IN INSURANCE

Some of the commonly used terms in insurance are discussed below:
a) The insurer;-This is the insurance company that undertakes to provide the insurance cover
b) The insured; This is the individual or an organisation who takes insurance cover
c) Insurance; This is a written contract between the insured and the insurer where the insurer
undertakes to protect the insured against loss arising from the occurrence of the risk insured
against.
d) Premium; This is the specified amount of money which is paid by the insured to the insurer at
regular intervals in return for the insurance cover.
e) Risk; These are perils or events against which an insurance cover is taken. They include fire,
theft, accident etc.
There are four types of risks:
 Pure risk
 Speculative risk
 Insurable risks
 Uninsurable risks
i. Pure risk
This is a risk which results in a loss it occurs and results in no gains if it doesn’t occur e.g. accident.
ii. Speculative risk
This is a risk which results in a loss or a gain when it occurs e.g. risks involved in the stock exchange.
iii. Insurable risks
These are events or risks which an insurance firm will accept to insure. Examples include fire, accidents,
theft etc. Their features include the following:
 Their probability of occurrence of the risk may be predicted

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  Financial loss arising from their occurrence may be determined accurately
 The number of people who are likely to suffer loss from their occurrence within a given period of
time can be predicted.
 The risk must not be under the control of the insured
 The risk must be pure and not speculative
 The risk must not be unlawful
 A large number of people must be exposed to the same risk
 The risk must unlikely to affect all the insured at once
 The loss must be significant enough to warrant insurance
 The insured must have insurable interest in the subject matter
 The value of the insured should be easily determined
iv. Uninsurable risks; These are risks or events which an insurance firm would not be willing to
insure e.g. death. Their features include the following:
 Their probability of occurrence may not be accurately predicted
 The resulting financial loss may be too enormous to compensate
 The number of people likely to suffer the loss is not accurately predictable
f) Actuaries;-These are people employed by the insurance company to compute expected losses
and calculate the value of premiums
g) Claim;-This is a demand for compensation from the insurance company by the insured for loss
arising from the occurrence of the insured risk
h) Policy;This is a document that contains the terms and conditions of the insurance contract
i) Actual value;This is the true value of the property insured.
j) Sum insured/sum assured;-This is the financial value of the subject matter insured as stated by
the insured at the time of taking the insurance cover.
k) Surrender value; This is the amount of money that is refunded to the insured by the insurance
company in case the insured terminates payment of premiums before the insurance contracts
matures. The amount compensated is usually less than the total amount of premiums already paid.
l) Grace period;-This is the time allowed between the date of signing the insurance contract and
the date of payment of the first premium. The grace period is usually a maximum of 30 days
m) Proposer;-This is the person who is wishing to take out an insurance cover. He/she is the
prospective insured.
n) Cover-note (binder); This is a document that is given to the insured by the insurer on payment
of the first premium while awaiting processing of the policy. The cover-note acts as evidence that
the insurer has accepted to cover the proposed risk.
p) Annuity; This is the amount of money that the insurance company agrees to pay the insured
annually until the insured’s death.
Annuity is paid when the insured saves a large amount of money with the insurance company and agrees
with the insurance company that on maturity of the insurance contract, he/she be paid a specific amount
of money annually until his/her death.
q) Consequential loss; This is loss that is suffered by the insured as a result of the disruption of
business caused by the occurrence of the risk insured against
r) Assignment; This is the transfer of an insurance policy by an insured to another person. The new
policy holder is known as the assignee. The assignee takes over all the claims arising from the
transferred policy
s) Beneficiaries; These are people named in life assurance policy by the insured who are to be paid
by the insurance company in the event that the insured dies.

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 t) Nomination; This is the act of designating (identifying) beneficiaries. The designated people are
known as nominees
u) Average clause; This is a clause that is included in the policy to discourage under-insurance
(insurance property at a lower value than its actual value).
The clause provides that the insured can only recover the proportion of the loss as the value of the policy
bears on the property insured.
The formulae used to calculate the amount of compensation when the property is under-insured is:
Compensation = (value of the policy × loss) ÷ value of property
Example: Musa insured a car valued at Ksh 500,000 against an accident for Ksh 400,000. An accident
occurred and the car was damaged. The loss suffered was estimated at Ksh 200,000. Calculate the amount
of compensation Musa will receive from the insurance company.
Compensation = (400,000 × 200,000) ÷ 500000 = Ksh 160,000
v) Double insurance; This refers to where the insured takes insurance policies with more than one
insurance companies in respect of the same risk and subject matter. E.g. insuring a house against
the risk of fire with two insurance companies. In this case, the insurance companies will share the
compensation proportionate to the value of the subject matter insured with them.
w) Self-insurance;-This is where an individual or an organisation insures oneself/itself by saving
and accumulating funds to meet losses that may occur from certain risks rather than insurance the
risks with the insurance company
x) Proposal form;-This is a form that is filled by the prospective insured seeking to get an
insurance cover from the insurance company.
PRINCIPLES OF INSURANCE
These are the guidelines which govern the relationship between the insured and the insurer.
These principles are discussed below:
a) The principle of utmost good faith (uberrimae fidei)
According to this principle, the person taking out insurance cover should disclose all the material facts
relating to the person or the property being insured.
This disclosure is done at the time of entering into the contract. Any changes during the contract period
must be communicated to the insurance company.
All relevant material fact must be disclosed by the insured whether he is asked to or not.
The aim of this principle therefore is to ensure that the insured discloses all the relevant material facts
when taking the insurance policy.
Disclosure of all relevant material facts enables the insurance company to:
a) Decide whether to offer insurance cover or not
b) Determine the amount of premiums to be paid
If the insured fails to give all the material facts honestly and truthfully, the insurance company has the
right to refuse to compensate the insure when the risk insure against occurs
b) Principle of insurable interest

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According to this principle, one should only insure property whose damage (loss) as a result of the
occurrence of the risk insured against will result in a financial loss to him/herself.
According to this principle therefore one can only insure his/her own property or any other property in
which he/she has interest.
Where the subject matter (property) to be insured is owned by more than one person, each person can
insure only to the extent of his/her interest in the subject matter.
The aim of the principle is to discourage people from insuring other people’s property.

c) Principle of proximate cause

According to this principle, for the insured to be compensated, there must be a very close relationship
between cause of the loss and the risk insured against i.e. the loss must arise directly from or be closely
connected to the risk insured. For example, if a person insures his vehicle accident and it is stolen, he/she
cannot be compensated
The aim of this principle is to ensure that compensation is made for losses arising from risks insured
against only
d) Principle of indemnity
To indemnify means to put one in the financial position he/she was in just before the loss occurred.
According to this principle therefore, the insured should be compensated only to the extent of the actual
financial loss suffered.
The aim of this principle is to ensure that the insured does not benefit from the misfortune.
For example, if a vehicle is insured for Ksh 500,000 against theft, the insurance will only compensate up
to a maximum of Ksh 500,000 in the event that the vehicle is stolen
NOTE: the principle of indemnity does not apply to life assurance policies as it is not possible to restore
life
e) Principle of subrogation
To subrogate means to step in the place of or to find a substitute for.
According to this principle, whatever remains of the property insured after the insured has been
compensated according to the terms of the policy becomes the property of the insurance company.
For example, if a vehicle which is insured for Ksh 300,000 is totally damaged and the owner fully
compensated, any scrap metal left behind after compensation becomes the property of the insurer.
The aim of this principle is to ensure that the insured does not benefit from the misfortune in accordance
with the principle of indemnity.
f) Principle of contribution
This principle operates in a situation where the insured has taken policies with more than one insurance
companies covering the same risk (double insurance).
According to this principle, in the event of a loss, all the insurance companies would contribute
proportionately in order to indemnify the insured.

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The total amount received from all the insurers should be equal to the loss suffered in compliance with
the principle of indemnity.
The aim of this principle is to ensure that the insured does not benefit from the misfortune in accordance
with the principle of indemnity.

CLASSES OF INSURANCE
There are two broad categories of insurance, namely:
a) Life assurance
b) Property insurance
a) LIFE ASSURANCE
This is a form of insurance cover that is taken to cover personal life. It covers the risk of death or
incapacitation.
Death as a risk is inevitable hence the word “assurance” is used.
Life assurance is not a contract of indemnity.
The value of the insurance policy is determined by the ability of the insured tom pay premiums.
Types of life assurance policies
The common types of life assurance policies include the following:
a) Term insurance policy
b) Whole life assurance policy
c) Endowment insurance policy
d) Annuities
e) Statutory scheme
f) Miscellaneous life assurance policies
a) Term insurance policy
This is a form of life assurance that provides protection within a specified period of time whereby if the
policy holder dies within this period, compensation is offered to beneficiaries.
However, if the assured does not die within the specified period, no compensation is offered
Term assurance covers short periods of time e.g. 1 year, 5 years 10 years etc.
Term assurance is purely for protection. It is not a savings plan.
b) Whole life assurance policy
This is a type of insurance policy in which the assured pays premiums until he/she dies.
Upon death of the assured, his/her beneficiaries are paid the sum assured as indicated in the policy.
Whole life assurance also covers disabilities due to illness or accidents in that if the assured is disabled
during the period when the policy is in form, the insurer will compensate him/her for the income lost.
Premiums can be paid over an agreed period of time or in a single payment.
c) Endowment insurance policy

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This is a type of life assurance policy where the assured pays premiums regularly for a specified period of
time. Sum assured is paid at maturity of the policy.
If however the assured dies before the policy matures, he/her beneficiaries are paid the sum assured.
Endowment insurance can be terminated by the assured before maturity, in this case the assured is paid
the surrender value
Advantages of endowment insurance policy
a) It is a savings plan since the assured can be paid the sum assured
b) Provides financial security to the beneficiaries in case of early death of the assured
c) It provides financial security to the assured at retirement
d) It can be terminated before maturity by the assured
e) It is a form of investment since it earns interest in most cases
f) The assured enjoys a special tax relief
g) It can be used as a collateral security to acquire a loan
Differences between a whole life policy and endowment policy

Whole life Endowment

Compensation is paid after the death of the Compensation is paid after the expiry of an
assured agreed upon period
Premiums are paid throughout the life of the Premiums are paid for an agreed period of time
assured
Benefits go the beneficiaries Benefits may go to the assured if he/she is still
alive at the maturity of the policy
Aimed at providing financial security to the Aimed at providing financial security to the
dependants assured and the dependants

d) Annuities
This is a type of life assurance policy where the assured (annuitant) pays a certain sum of money to the
insurance company in return for an annual payment of a specified amount of money from the insurance
company for a specific period of time or until his/her death.
e) Statutory schemes
These are insurance schemes which are offered by the government to provide welfare to the members of
the scheme. Such welfare may be in the form of medical services or retirement benefits.
They are mostly offered to people who are employed.
A member and the employer both contribute certain amounts of money to the scheme at regular intervals.
Examples of statutory schemes in Kenya include:
 National social security fund (NSSF)
 National hospital insurance fund (NHIF)
f) Miscellaneous life assurance policies
Under this category of life assurance,
a) One can insure anybody whose life he/she has an interest e.g. a wife, a child or a husband

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 b) Group life policies can be taken to cover a group of people e.g. an employee can take a group
policy over his/her employees
Characteristics of life assurance policy
a) It may cover life until death or for a specific period of time
b) It deals exclusively with life
c) It is usually a long-term contract which does not require annual renewal
d) Its value depends on the ability of the assured to pay premiums
e) It may be used as a security when acquiring loans
f) It can be assigned to beneficiaries
g) It has surrender value
h) It has a maturity date
i) It may be a savings plan
Circumstances under which life assurance policies may be terminated
a) When the assured fails to pay premiums as agreed
b) When the assured terminates the policy before maturity
c) When the assured dies
d) When the policy matures

b) GENERAL (PROPERTY OR NON-LIFE) INSURANCE

This is a class of insurance that covers property against various risks which may result to loss or damage.
It is a contract of indemnity which requires annual renewal.
Examples of risks insured under property insurance include; fire, accident and marine. Each of these is
discussed below:
1) FIRE INSURANCE;-This is a type of insurance that covers loss or damage of property caused
by fire. Properties covered under fire insurance include; stock, machines, equipment and building.
For the insured to be compensated under fire insurance, the following conditions must be met:
a) Fire must be accidental
b) Fire must be the immediate cause of the loss and not the incidental loss
c) The loss must be caused by the actual fire.
Types of fire insurance policies
There are three types of fire insurance policies;
a) Consequential loss (profit interruption) policy
b) Sprinkler leakage policy
c) Fire and related perils (material damage) policy

a) Consequential loss( profit interruption) policy

This is a type of fire insurance policy which is aimed at indemnifying the insured due to loss of profit as a
resulting of the interruption of business activities as a result of fire.
b) Sprinkler leakage policy
This is a type of fire insurance policy which provides cover against loss or damage caused to goods or
premises by accidental leakages from firefighting sprinklers.

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Firefighting sprinklers are devices which are installed in buildings to provide automatic mechanisms for
fighting fire outbreaks
c) Fire and related perils( material damage) policy
This is a type of fire insurance policy which covers buildings and their contents. Such buildings may
include; shops, warehouses, offices and factories

2) ACCIDENT INSURANCE
This is a type of insurance which covers all type of risks which occur by accident.
Types of accident insurance policies
There are two types of accident policies;
a) Motor policies
b) General accident policies
a) Motor policies
These are policies which are aimed at covering vehicles from losses arising from accidents.
Motor policies requires annual renewal.
Policies offered under motor policies include:
 Third party insurance
 Third party fire and theft
 Comprehensive policy
a) Third party insurance;-This is a policy that covers losses caused by the vehicle to other people,
other vehicles and to property as a result of the accident.
The policy does not cover the vehicle and the owner.
In Kenya, this policy is mandatory for all vehicles.
NOTE:
 First party: refers to the driver and the vehicle
 Second party: refers to the passengers and goods carried in the vehicle
 Third party: refers to road users and property outside the vehicles
b) Third party fire and theft;-This is a policy where compensation is offered to third parties as
well as the vehicle itself in case of loss or damage caused by fire or theft.
c) Comprehensive policy; This is a policy which covers damage or loss caused by the vehicle to
first, second and third parties as a result of an accident.
It also covers loss of the insured vehicle through fire and theft.
b) General accident policies
This is a form of insurance which provides cover for a wide range of risks. These risks are discussed
below:

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 a) Personal accident cover;-This is a policy that covers partial or total physical disability caused to
a person due to injury or loss of income as a result of an accident. The policy offers the
following:
 A lumpsum in case the insured loses part of body
 Regular payments in case of partial or total disability
 Payment to beneficiaries in case the insured dies in an accident
 Meeting the medical bill in case the insured is hospitalised
b) Workmen’s compensation cover (employer’s accident liability cover);-This is a policy that
covers employees who may suffer injuries while on official duty.
c) Cash or goods in transit cover;-This is a policy that provides cover for loss of cash or goods
while being transported.
d) Theft and burglary cover;-This is a policy that provides cover for losses arising from the
activities of robbers and thieves. For example, if robbers break into business premises and take
away goods, the insurer will compensate the insured for loss of goods and damage to business
premises.
e) Bad debt cover;-This is a policy that covers the business against losses arising from failure of
debtors to pay their debts.
f) Public liability cover;-This is a policy that covers losses, injuries or damages caused
accidentally by a business or its employees to the members of the public. For example, if a
building collapse injuring passers-by in the process, the insurer will compensate the people who
were injured.
g) Fidelity guarantee policy; This is a policy that covers the owner of the business against losses
arising from activities of his/her dishonest employees.
h) Consequential loss policy; This is a policy that provides cover against loss of profits resulting
from interruptions in business causing the business to close down temporarily.

3) MARINE INSURANCE
This is a type of insurance that provide cover for the ship, other water vessels and cargo against sea perils
that may lead to financial loss. Examples of sea perils include storms, fire and sinking.
Policies available under marine insurance include the following:
a) Marine hull policy; This is a policy that covers the ship against loss or damage as a result of
risks at sea. These risks include; storm, fire, collision and capsizing.
b) Marine cargo policy; This a policy that covers cargo against loss or damage while being
transported by ship
c) Part policy; This is a policy that covers a specific peril when the ship is being loaded, off-loaded
or serviced
d) Voyage policy; This is a policy that covers the ship or cargo on a particular journey. The insurer
may not compensate if the destination is changed unless such change was necessary to save the
ship, cargo or human life.
e) Floating policy; This is a policy where several shippers pay a lumpsum to cover their ships while
in transit. As ships make shipments, the amount of insurance for a particular shipment is deducted
from the lumpsum. The policy collapses when the sum insured equals the total value of all the
shipments.
f) Time policy; This is a policy that covers losses arising within a specified period of time.
g) Mixed policy; This a policy that covers ships against losses while on a specified voyage and
specified time.

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 h) Fleet policy; This is a policy which covers a fleet of ships against losses under one policy. This is
possible where there are many ships belonging to one organisation
i) Composite policy; This is a policy that provides cover to one specific ship which is insured by
several insurance companies. This is necessary where the sum insured is too large for one
insurance company to cover.
j) Construction (builders) policy; This is a policy which covers the risks that a ship is exposed to
while it is either being constructed, tested or delivered.
k) Freight policy; This is a policy that covers the ship owner against losses arising from failure by
the hirer of the ship to pay freight charges
l) Third party liability; This is a policy that covers claims that may arise from loss caused to other
people and property by the ship.
m) Port policy; This is a policy that covers the ship against sea perils when it is at the port
Marine losses
Losses encountered in insurance can be classified into two;
a) Total loss
b) Partial losses

a) Total loss; Refers to total damage to the ship or on the cargo or on both.
Total loss may be classified into two:
 Constructive total loss: this occurs when the insured is extensively damaged and as a result it is
abandoned because the cost of salvaging it would be more than the wreckage.
 Actual total loss: this occurs when there is total damage to the ship, on the cargo or both.
b) Partial loss ; Refers to where the ship or the cargo is partly damaged. It is also known as average.
Partial loss may be classified into two:
Particular average: this is an accidental loss or damage on either the ship or the cargo.
General average: this is loss that occurs when actions taken to save the ship and the cargo result
in a loss
Characteristics of general insurance
a) The policy cannot be assigned to somebody else
b) The amount of premiums depends on the value of the property and the degree of the risk.
c) It is a contract of indemnity
d) It is usually a short-term contract which requires periodic (annual) renewal
e) It requires the insured to have insurable interest in the property being insured
f) It has no surrender value
Differences between property (general) insurance and life assurance

Property (general) insurance Life assurance

The policy cannot be assigned to a beneficiary The policy can be assigned to a beneficiary
The amount of premiums depends on the value of the The amount of premiums depends on the sum assured and the
property and the degree of the risk ability of the assured to pay
Deals exclusively with property Deals exclusively with life
It is usually a short-term contract which requires annual It is a long-term contract which does not require annual renewal
renewal
Has no surrender value It has surrender value
It is not a savings plan It is a savings plan
It is a contract of indemnity It is not a contract of indemnity
Causes of over or under insurance may arise There is no under or over insurance

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Nominees are not named Nominees are named

Factors influencing the amount of premiums to be paid

a) Health of the insured;-The amount of premiums will he higher when health of the insured is
poor compared to when he/she is healthy
b) Frequency of occurrence of insured risk;-The amount of premiums will be higher when the
probability of occurrence of the insured risk is higher than when the probability is low.
c) Extent of previous losses;-The amount of premiums will be higher if the extent of damage
caused by the insured risk previously was high compared to when the extent of damage was low
d) Value of property insured;-The higher the value of the property, the higher the amount of
premiums and vice versa
e) Occupation of the insured;- An insured person with a well-paying job will pay higher premiums
compared to the one with a poor paying job.
f) Age of the insure or property; Older people will pay higher premiums than higher people than
younger people. On the other hand, the insured will pay low premiums for older properties
compared to newer properties.
g) Period to be covered by the policy; A longer period attracts lesser premiums than a longer
period
h) Residence of the insured; Insured who reside in urban areas tend to pay higher premiums than
the ones residing in rural areas. This is because those residing in urban are assumed to be
financially stable than those residing in the rural areas

RE-INSURANCE
Re-insurance means to insure again. Re-insurance therefore refers to where insurance companies insure
themselves with other insurance companies known as re-insurers.
Insurance companies usually re-insure themselves when the value of the property insured with them is
high or when the chances of the risk occurring are very high.
In the event of the risk insured against occurring, the re-insurer helps the insurance company to
compensate.
In Kenya, all insurance companies are required by law to re-insure themselves with the Kenya re-
insurance company.
Circumstances (reasons) that necessitate re-insurance
a) When the value of the property insured is high
b) When chances of the risk insured against occurring are high
c) When the loss from the damage caused by the occurrence of the risk is projected to be high
d) When the insurance company has insured many different risks.
e) When there is need to spread the risk.
f) When the government requires all insurance companies to re-insure themselves.
g) When the insurance company wishes to share liability in case of a major loss.
Features of a re-insurance company (e.g. Kenya re-insurance company)
a) It commands large financial resources.
b) Re-insurance companies are empowered by law to insure other insure other insurance companies.

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 c) Government has a stake in the re-insurance company.
d) Re-insurance company only deals with corporate insurance clients.
e) It guarantees compensation.
CO-INSURANCE
Refers to where the insurance company insures the same property for the same risk with other insurance
companies.
Co-insurance is necessary when the value of the property is high to be covered by one insurance
company.
Each insurance company will provide cover for only a portion of the value of the property insured.
The insurance company that accepts to insure the property or the one the highest proportion is known as
the leader while the others are called co-insurers.
In the event of the risk occurring, the leader will ascertain the loss and apportion it to each of the co-
insurers in accordance to the value of the property covered by each of them for compensation purposes.
DOUBLE INSURANCE
Refers to where the owner of the property (insured) insures the same property for the same risk with two
or more insurance companies.
The property may be insured with each insurance company for the full value or each firm taking a share
of the value.
In the event the risk insured against occurs, each insurance company only a share of the loss suffered
based on the proportion of the value insured.
UNDER-INSURANCE
This is where the sum insured is less than the actual value of the subject matter insured. In the event of
the actual loss, the insured will be compensated the lesser of the sum insured or the actual loss suffered
OVER-INSURANCE
This is where the sum insured is higher than the actual value of the subject matter insured. In the event of
the actual loss, the insured is compensated the less of the actual loss or the actual value of the subject
matter.
PROCEDURE OF OBTAINING AN INSURANCE POLICY
The process of obtaining an insurance policy involves five key stages which are outlined below:
a) Filling a proposal form; A person intending to take an insurance policy will first fill a proposal
form which will be obtained from the insurance company he intends enter into contracts with.
The applicant is expected to fill the form with the highest level of honesty by disclosing all the
relevant facts in compliance with the principle of indemnity. Information given in the proposal
form is used by the insurance company to calculate the amount of premiums to be paid by the
insured.
b) Determining the premiums to be paid; On receiving the proposal form, the insurance company
uses the facts stated in the form to decide whether to accept to cover the risk. If the insurance
company accepts to cover the risk, it will calculate the amount of premiums to be paid based on

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 the information provided in the proposal form.Where necessary, arrangements may be made to
inspect the subject to be insured
c) Payment of the first premium; After the insurance company has accepted to cover the risk and
the premiums calculated, the insured pays the first premium.
d) Issue of the cover note (binder); Upon paying the first premium, the insured is issued with a
cover note by the insurer. The purpose of the cover note is to serve as evidence that a contract has
been entered into between the insured and the insurer. The cover note is valid for a period of 30
days after which the policy is issued.
e) Issuing of the policy;-The policy is the actual document of contract between the insured and the
insurer. It contains the terms and conditions of the insurance contract. The policy are issued
within 30 days to replace the cover note.
PROCEDURE OF MAKING AN INSURANCE CLAIM
This is the process followed by the insured when claiming compensation from the insurer. This process
involves five key stages which are discussed below:
a) Notifying the insurer; The insured should inform the insurer immediately the risk insured occurs.
b) Filling a claim form; After being notified of the occurrence of the risk, the insurer issues a claim
form to the insured. The insured will then fill the form by giving all the details relating to the
occurrence of the risk. The fully filled claim form is retained by the insurer.
c) Investigation of the claim; On receiving the claim form, the insurer undertakes to investigate the
cause of the occurrence of the risk so as to ascertain whether the cause of the loss has any direct
connection with the risk covered.
d) Preparation of the assessment report; Once the insurance company establishes that the claim is
valid, it prepares a report concerning the extent of the loss suffered. This report is prepared by
experts known as assessors
e) Payment of the claim; Upon receiving the assessment report, the insurer makes arrangements to
pay insured. This payment concludes the contract between the insured and the insurer.

INSURANCE AND GAMBLING

Gambling refers to the activity or practice of playing a game of chance for money or other stakes. In most cases
insurance is erroneously taken to be the same as gambling in that small amounts are contributed by many people into
a common fund which later benefits a few people.

Insurance however differs with gambling in the following ways:

Insurance Gambling
The person taking the policy should have insurable A gambler doesn’t need insurance interest
interest
The aim of insurance is to indemnify the insured The aim of gambling is to improve the financial
position of the gambler
The insured is required to pay regular premiums to Gambling money is paid at once
the insurer for the insurance cover to be in force.
Insurance involves pure risks Gambling involves speculative risks
The event of loss may not occur The event of bet must happen to determine the
winner and the loser

Reasons for terminating an insurance contract

a) When the insured has not acted with utmost good faith and is discovered by the insurer

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 b) When the risk insured has occurred and compensation has been paid.
c) When the insurance contract matures.
d) When the insured decides to terminate the contract.
e) When the court of law orders termination of the contract thus rendering it null and void.
f) When the insurance company is wound up.
g) When the insured ceases to have insurable interest on the property e.g. in case the property is sold.

TRENDS IN INSURANCE

a) Introduction of education policies

b) Introduction of funeral and benevolent funds
c) Introduction of medical insurance
TOPIC 7: PRODUCT PROMOTION
CONTENTS
 Introduction
 Importance of product promotion
 Methods of product promotion
 Sales promotion
 Ethical issues in product promotion
 Trends in product promotion
INTRODUCTION
Product promotion refers to the use of various methods and techniques to inform, influence and persuade
consumers to buy and consume the products.
A product is a good or a service produced for the purpose of satisfying human wants. A product can also
be an idea.
PURPOSE OF PRODUCT PROMOTION
a) Introduces new products;-Product promotion aims at providing information about new products
and persuades consumers to buy them.
b) Highlights the benefits of a product;-Product promotion aims at providing information about
the benefits of the product to the consumer
c) Monitors consumer loyalty;-Product promotion aims at ensuring that consumers continue
buying the product.
d) Stimulates demand;-Product promotion encourages the consumption of the product thereby
increasing sales
e) Creates awareness;-Product promotion aims at educating the consumer on the features of the
product, its quality and its usage.
f) Counters competition;-Product promotion may enable the firm outdo its competitors by gaining
a greater market share for the product
g) Improves the image of the business organisation;-Product promotion is used as a strategy of
marketing the business organisation hence improving its image
h) Persuades consumers to buy the product;-Product promotion aims at convincing consumers
that the product will fulfil their needs hence influencing them to buy the product.
i) Reminds consumers about the existence of the product;-Product promotion aims at reminding
consumers about the continued existence of the product so as to encourage them to keep buying
the product.

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 METHODS OF PRODUCT PROMOTION
Methods of product promotion are the activities that are carried out by businesses in order to increase the
demand for their products.
Common product promotion methods include the following
a) Personal selling
b) Advertising
c) Publicity
d) Public relations
e) Point of purchase (window) display
f) Direct mail advertising
g) Catalogue
h) Guarantee
i) Discount
j) Loss leader
k) Psychological selling
l) Coupons
m) Credit facilities
n) After-sale-services

1. PERSONAL SELLING
This is a method of product promotion where a sales person (sales representative) presents a
commodity to the consumer with the aim of convincing the consumer to buy. To be able to sell, the
sales person should do the following:
 Gain the attention of the consumer
 Arouse the interest of the consumer in the product
 Arouse the desire of the consumer to buy the product
 Convince the consumer to buy the product
Qualities of an effective sales person
a) He/she should have an attractive personality
b) Should have knowledge about the product
c) Should be polite
d) Should be honest
e) Should be able to assess the behaviour of different customers
f) Should be well educated so as to cope with customers of different educational backgrounds
g) Should have good communication skills
h) Should be smart in appearance
Circumstances under which personal selling is suitable
a) When introducing a new product
b) Where demonstration on the use of the product is required
c) When the product is expensive and durable e.g. cars
d) Where the market consists of few customers who can be easily accessed

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 e) When the product is designed tom meet customers’ specifications
f) When the firm can afford to hire sales persons
g) When the customers are concentrated in one area.
Steps involved in personal selling
Personal selling involves the following steps:
a) Identifying the prospective customers;-Potential customers are referred to as prospects.
Potential customers can be identified through the following methods:
 Analysing the organisation’s past customers records
 Reading newspapers
 Interviews and meeting.
b) Preparing the presentation;-The sales person should gather as much information about the
product as possible and then present this information to the prospective buyer.
c) Establishing customer contacts;-The sales person should an appropriate time when the
prospective customer is available and likely to attend the sales person
d) Arousing interest in the product;-The sales person should use the appropriate approach and
language to arouse the prospective customer’s interest in the product.
e) Dealing with objections;-Objections are the reactions of the prospective customer. The sales
person should be prepared to deal with objections. The objections may relate to price, quality,
quantity and design. The objections must be dealt with properly otherwise the prospective
customer will decide not to buy.
f) Closing the sale;-This involves the sales person asking the prospective customer to buy the
product. This should be done in a friendly way.
g) Offering after sale services;-Once the sale has been made, the sales person should make a
follow up to ensure that all the after sale services promised to the customer have been offered.
Such services may include; transportations, installations and repairs.
Methods of personal selling
These are the ways in which personal selling is carried out. These methods include the following:
 Sales persons approaching customers
 Shows, trade fairs and exhibitions
 Showrooms
 Field sales
 Free gifts
 Free samples
1) Sales persons approaching customers;-This is where the sales persons physically approach the
prospective customers to explain the details of the product and even demonstrate the use of the
product with the aim of convincing the customer to buy the product.
2) Shows, trade fairs and exhibitions;-A trade fair refers to an event where producers or dealers in
a given class of products show their products to the prospective buyers with the aim of
convincing them to buy. An exhibition on the other hand is an outdoor public display of products.
During shows, trade fairs and exhibitions, sales persons demonstrate and explains the features of
the products to the prospective buyers. This enables the firm to sell their products and attract new
customers.
Role of shows, trade fairs and exhibitions
a) Enables producers and traders to display their products for sale

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 b) Gives an opportunity for producers and traders to advertise their products
c) Gives an opportunity for producers and traders to attract with their customers so as to answer
their questions
d) Enables producers and traders to launch new products in the market
e) Enables traders to compete fairly
f) Enables producers to get new ideas on how to improve their products

Advantages
a) Gives customers an opportunity to compare various products before they decide on the one to
buy
b) Gives sales persons an opportunity to demonstrate and explain various features of their products
c) The firm is able to get feedback from customers immediately
d) Enables the organisation to assess whether their product is popular or not based on the number of
people who visit their stall
Disadvantages
a) Stalls may be expensive to hire
b) It is tiresome to sales persons as they are forced to explain and demonstrate several times since
customers don’t visit the stall at the same time
c) Shows, trade fairs and exhibitions are not organised oftenly hence they cannot be relied on as a
method of promoting sales.
3) Showrooms;-These are large rooms in which products for sale are displayed for sale to
prospective customers. Showrooms usually deal with bulky and durable products e.g. cars.
Customers who visit the show rooms get the necessary details from the sales persons concerning
the displayed product.
Advantages
a) The seller is able to interact with customers and get immediate feedback from them
b) Customers are able to get clarifications from the sales persons before deciding to buy the product
c) It is a cheap method of product promotion
d) Enables the demonstrations on the uses of the product
e) Customers can be advised on the type of goods to buy
Disadvantages
a)Showrooms are not accessible to many people since they are mostly located in urban centres
b)Putting up or hiring a show room is expensive
c)Showrooms require security which may be expensive to provide
d)Customers may tamper with the products in the show room
4)Free gifts;-A gift is an item which is given to a customer for free after buying a given product
worth a certain value. The aim of giving free gifts is to encourage customers to buy more
products.
Advantages
a) It enables the customer to enjoy using a certain product without paying for it
b) It encourages customers more products so as to get more free gifts

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 c) It increases customer satisfaction
d) May create customer’s loyalty to the firm offering the free gifts
Disadvantages
a) It may encourage unplanned buying by the customer in his/her efforts to get the free gift
b) Getting the free gift may be costly since the customer has to buy more goods in order to get the
free gift
c) Some traders may keep away the free gift
d) There is assurance to the trader that the customer will buy the product after getting the free gift
5) Free sample;-A free sample is a product that is given to the customer freely for trial. Free
samples are normally given when the product is new or when the old product has been improved.
The aim of giving free samples is to induce customers to buy more of the product
Advantages
a) Enables the customer to use the product before paying for it
b) Enables the customer to enjoy using the product which he/she may not have otherwise enjoyed
c) Attracts more customers to the organisation
Disadvantages
a) Some people receive free samples may not be potential customers
b) It is an expensive method of sales promotion
c) The sample may not increase the sales in cases where the product is not appealing to the
consumers
d) It is not appropriate for expensive products
6) Field sales;-This is where sales persons go out with samples of products to meet prospective
buyers and try to convince them to buy the products.
Advantages of personal selling
a) It gives the sales person an opportunity to explain and persuade customers to buy the product
b) It facilitates exchange of ideas between the sales person and the customers
c) It enables the sales person to gather information concerning the response of consumers towards
the product
d) It gives customers a chance to ask questions and clear their doubts about the product
e) It is a flexible method of sales promotion since the marketer is able to meet the needs of the
individual customers
f) Enables the sales person to demonstrate the operation and use of the product
g) It gives the buyer an opportunity to negotiate the terms of purchase e.g. price, discounts, delivery
etc.
h) It can be directed to specific prospective buyers only
i) Enables the buyer to make informed decisions when buying the product
j) It takes care of both the literate and the illiterate
k) It establishes interpersonal relationships between the buyer and the sales person which may
encourage the customer to buy again
Disadvantages of personal selling
a) It is a costly method to operate since sales persons are paid and sometimes trained regularly
b) It is time consuming since it involves bargaining, demonstrating, asking and answering questions
etc.

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 c) It may be difficult to persuade the prospective customer especially when the sales person lacks
etiquette, skills and knowledge.
d) Sales people may misuse the resources allocated to them
e) Personal selling may inconvenience the programs of the prospective buyer
f) It covers a small geographical area
g) It may not be self-sufficient hence it has to be supported by advertising
h) Sales persons may convince customers to buy products that they don’t need.

2. ADVERTISING
This is referring to any form of impersonal presentation of a product which is made through the mass
communication media such as newspapers, radios, TVs etc.
Features of advertising
a) It is impersonal i.e. sales persons are not used
b) Advertising is paid for
c) It is directed to a given category of people or to the public
d) Most advertisements are persuasive
Reasons for advertising
a) To reach new markets
b) To maintain the sales of an already existing product
c) To create awareness of the new product in the market
d) To inform customers on any changes in the product e.g. price, quality and uses
e) To build and uphold the image and reputation of the selling firm
f) To increase the sales volume for the existing product
g) To reach potential customers who are not accessible by the sales persons
h) To boost the efforts of sales persons
i) To counter customers’ misconceptions about the product
j) To link producers and consumers
k) To fight off competition

Types of advertising
a) Product advertising;-This is a type of advertising which aims at increasing the sales of a
particular product. The brand name of the product features predominantly in the advertisement.
The name of the manufacturer is not mentioned in the advertisement.
b) Primary demand (informative) advertising;-This is a type of advertising that mainly aims at
popularising a new product to potential customers. The aim of this advertisement is to create
awareness to the potential customers about a new product in the market.
c) Institutional advertising;-This is a type of advertising that is aimed at popularising the business
organisation and not the individual products. Institutional advertising is mostly used when various
business organisations are selling similar products. The main objective of this form of
advertising is to improve the image of the business organisation, its sales and its relations with
customers.

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 d) Competitive (persuasive) advertising;-This is a type of advertising which is used by a business
organisation that is face facing stiff market competition to convince potential customers that the
product provided by the organisation is the best in the market. It is used to differentiate the
products of the business organisation from those of the competitors
e) Celebrity advertising;-This is a type of advertising where famous people are used to advertise
products. The aim of this advertisement is to encourage people to identify with such celebrities so
as to buy the product
f) Reminder advertising;-This is a type of advertising which is used to remind that the product is
still available so as to help in retaining these customers and encouraging them to continue buying
the product.
g) Educative advertising;-This is a type of advertising which has features of both informative and
persuasive advertising. Educative advertising educates the consumer about the product and leaves
the consumer to make the decision on whether to buy the product or not.
h) National advertising;-This is a type of advertising which is done by producers whose products
are consumed nationwide
i) Regional advertising;-This is a type of advertising which is aimed at a particular region or
section of the country
j) Local advertising;-This is a type of advertising which is done by retailers to attract customers to
their business premises e.g. use of posters, neon signs etc.

ADVERTISING MEDIA
Advertising media refers to the channel through which the advertising message is conveyed to the target
group. These channels include the following:
a) Newspapers
b) Magazines and journals
c) Posters
d) Billboards (hoardings)
e) Transit (transport) advertising
f) Electronic neon signs
g) Radio
h) Television
i) Cinema

Reasons why product promotion may not result in an increase in sales

a) The price of the product may be too high
b) Economic conditions maybe unfavourable e.g. the living standards may be too high
c) Tastes and preferences of consumers may not be in favour of the product
d) Product promotion may not have targeted the right group
e) There is stiff market competition

FACTORS TO CONSIDER WHEN CHOOSING THE ADVERTISING MEDIUM

a) Cost of the medium;-The advertising medium chosen should be economical, affordable and
within the available budget

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 b) Selectivity;-This is the ability of the medium to distinguishing between groups so as to reach the
intended group. The medium that can convey the advertising message to the target group should
be selected
c) Flexibility;-This is the ease with which it is possible to change from one medium to another. The
medium selected should be flexible to accommodate future changes
d) Lifespan of the advertising message;-If the firm wants to keep the advertising message for long,
newspapers, journals and magazines but if it intends to keep the advertising message for a short
time, then radios, TVs and cinema will be preferred. The firm should therefore choose the
medium that will keep the message for the intended length of time.
e) Availability of the medium;-The medium selected should be easily available.
f) Nature of the product;-The product being promoted may be such that it either requires
demonstration or it doesn’t. For products requiring demonstration, TVs and cinemas are most
appropriate and for products which don not require demonstration, the radio is appropriate. The
firm should therefore choose the medium that will suit the product being promoted.
g) Government policy;-A firm should use the medium which is approved by the law to promote its
products.
h) Medium used by competitors;-An alternative medium from the one used by the competitors
should be used in order to counter competition.
Other factors to consider include:
 The target group
 Reliability of the medium
 Time of promotion
 Speed/urgency of the promotion message
 Duration of the promotion message.

a) NEWSPAPERS
These are regular publications which contain news and advertisements. They are commonly used in
advertising since they penetrate most segments of the society. Examples of newspapers in Kenya
include the standard, the daily nation, Taifa Leo, the star etc.
Advantages
a) They cover a wide geographical area hence reaching high number of potential customers
b) They are relatively cheaper
c) Advertised messages on the newspapers are easily acceptable by readers
d) They convey the message for a long time
Disadvantages
a) They have a short lifespan since they are mostly read during the day
b) They mostly advertise in Kiswahili or English hence the message cannot get to potential
customers who don’t understand the two languages
c) The message cannot be targeted to a specific group as newspapers are read by everyone
d) Some readers go through the newspaper in a hurry hence they may not read the advertisement
e) It is costly to advertise on the newspaper
f) It does not allow demonstrations
b) MAGAZINES AND JOURNALS
These are publications which are produced periodically i.e. monthly or yearly. They mostly target a
specific class of readers. Examples of magazines include; parents, eve, Africa law reports etc.

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Advantages
a) The advertisement can be targeted to a specific class or group of people
b) They have a long lifespan i.e. they are read again and again.
c) They use high quality papers hence able to catch the reader’s eye.
Disadvantages
a) There may be a big-time gap between when the advertisement is placed and when the publication
is circulated making the advertisement fail to achieve the desired objective.
b) They are a bit expensive to buy hence not all potential customers can afford to buy them
c) It is costly to advertise in magazines
d) Circulation of magazines may be limited to a small geographical area e.g. in urban areas
e) They are written mostly in English and Kiswahili hence the advertisement cannot be understood
by people who cannot read and write.

c) POSTERS
These are forms of outdoor advertising media that can be used to advertise products. Posters contain
advertising information both in words only or in both words and pictures. To be effective, posters
should be placed in strategic places where it is likely to draw attention.
Advantages
a) They may convey the advertised message to a large audience since they are placed in strategic
places
b) They are cheaper to prepare
c) Different colours may be used to make it appealing to the audience
d) They are appropriate both to the literate and the illiterate
e) They are easy to prepare
Disadvantages
a) They may be affected by adverse weather conditions
b) It is a silent channel of advertising which may not be recognised
c) They are prone to destruction by passers-by

d) BILLBOARDS (HOARDINGS)
This is a medium of advertising where the advertising message is written on the board. The
advertising message is designed in such a way that it is attractive and capable of read from a distance.
Advantages
a) They are positions at strategic points where they can be easily read by many people
b) It is easy to understand the advertising message since it is heavily worded
c) They are relatively permanent hence they convey the advertising message for a long time
d) They are attractive to the audience
Disadvantages
a) They are prone to vandalism
b) They are expensive to make
c) They are not suitable in circumstances where the customers need to examine the good
d) They may contribute to accidents by obstructing motorists’ visibility

e) TRANSIT (TRANSPORT) ADVERTISING

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 This is where vehicles such as matatus, buses, trains and Lorries carry the advertising message. The
advertiser paints the message or fixes a poster on the body of the vehicle.
Advantages
a) The advertiser reaches people inside the vehicle as well as those in areas served by the vehicle
b) The painting on the vehicle may be long lasting hence able to convey the message for a long time.
c) The advertising message can be read quite often as many people are regular travellers
Disadvantages
a) Rush hour crowds may limit travellers’ opportunity to read the message
b) The advertising message gets only to those places accessed by the vehicle

f) ELECTRONIC NEON SIGNS

These are coloured lights which usually keep on flickering at regular intervals to attract passers –by.
They are mostly found on walls and roofs of tall buildings.
Advantages
a) They are attractive especially at night
b) They can direct customers to places where advertised services are rendered
Disadvantages
a) They are expensive to install
b) They are not convincing and persuasive hence they can be ignored by passers-by
c) They require electricity
g) RADIO
This is a medium of advertising that uses electromagnetic waves to receive and broadcast sound
messages. A radio is an important medium of advertising as it reaches many parts of the country.
Advantages
a) It has a wider coverage therefore the advertisement can reach many potential customers
b) It conveys the advertisement to many people at the same time
c) The advertisement reaches both the literate and the illiterate
d) Different radio stations are able to broadcast in different languages hence the advertising message
can reach those who don’t understand Kiswahili and English
e) Radio advertisement is appealing to many people since the message can be accompanied by
music
f) The advertisement can be repeated over and over again according to the needs of the advertiser
g) The advertisement reaches the audience in the intended time
h) The advertisement may be targeted to a specific audience through proper timing
i) Radios captures the attention of the audience quickly
Disadvantages
a) Radio advertisement lacks reference since records cannot be kept
b) The audience cannot see the image of the products being advertised
c) The advertisement may be a nuisance especially when it interrupts a popular programme
d) The advertisement may be aired when the target audience is not listening
e) The advertisement may be aired for a short term hence the audience may not understand the
message
h) TELEVISION (TV)

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 This is a medium of advertisement that conveys both audio and visual messages. The TV is therefore
the most effective medium of advertisement since it can convey messages by combining words,
sounds and motion pictures.
Advantages
a) Dramatized advertisement appeal to many people since they are entertaining
b) The advertiser can show the various features of the product being advertised
c) TV advertising combines words, sounds and motion pictures which create a more lasting
impression in the minds of the viewers...
d) The advertisement can be modified as per the needs of the organisation.
e) The advertisement may be aired as frequently as required by the advertiser.

Disadvantages
a) It is expensive to advertise through the TV.
b) The advertisement may be screened when the target audience is not viewing.
c) A TV set may be expensive to buy hence the advertisement may not reach everyone.
d) TV sets require electricity as a power source.
e) Advertisement through the TV is not long lasting.

i) CINEMA
A cinema is place where films (movies) are shown. Such films may be used to pass the advertisement.
The film just like a TV may be combine written words, sounds and motion pictures so as to reach the
audience more effectively.
Cinemas are mostly attended by the youth and the middle-aged people hence cinemas can be used to
advertise products to a target group.
Advantages
a) The advertisement reaches both the literate and the illiterate
b) The advertisement may target a specific group
c) It allows demonstration in order to show the features of the product being advertised
d) Films combines written words, sounds and motion pictures which creates a lasting impression on
the audience
e) Cinemas are normally taken to highly populated areas hence the advertisement reaches many
people
Disadvantages
a) The advertisement may not reach those who don’t attend cinemas
b) Cinemas are fairly expensive as an advertising medium
c) Cinema attendance has reduced over the years due to the popularity of television and videos.
d) Movie halls are fewer hence limiting their use as the advertising media.

ADVERTISING AGENCIES

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These are businesses that specialise in advertising work and are hired to carry out advertising functions
for businesses
Advertising agencies are paid on commission basis for their services.
Functions of advertising agencies
a) They help organisations in designing their trademarks, logos and advertising materials
b) They book space and airtime for their customers in various media
c) They advise their clients on best-selling techniques
d) They advertise on behalf of their clients
e) They choose the appropriate media to use on behalf of their clients

Advantages of advertising to the business

a) Creates awareness of the firm’s products to potential customers especially when the product or
the firm is new in the market
b) Increases the volume of sales
c) Popularises the firm’s products hence encouraging their frequent use
d) Reminds consumers of continued existence of the product
e) Enables businesses get feedback from consumers about their products through consumer
reactions to advertisements.
Disadvantages of advertising to the business
a) It is costly to the business
b) Costs incurred in advertising results in reduction of profits
c) A poorly planned advertisement may have a negative effect on the publicity of the business
making customers to hate the product being advertised
d) Misleading advertisement may result in the business being sued hence negatively affecting its
reputation
e) Advertisement may not result in increase in sales
Advantages of advertising to the customer
a) The customer through advertising may be educated on how to use the product
b) Advertisement may inform the customer about the offers available in the market
c) Competitive advertising may result in price reductions
d) The customer may be guided by the advertisement on where to find the product
e) Competitive advertising may result in improved quality of goods and services
f) Advertising enables the availing of information relating to price and other features of the product
to the customer
g) Competitive advertising may result in production of different types of goods to customers hence
providing a variety of goods to customers
h) Advertising through the mass media entertains customers
Disadvantages of advertising to customers
a) Advertisements may not disclose the side effects of the product
b) Advertising costs may be passed over to the consumer through increased prices

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c) Advertisement may persuade the customer to buy products he/she doesn’t need.
d) Misleading advertisement may make the customer buy sub-standard goods
e) May lead to impulse buying

3. PUBLICITY
Publicity refers to any mention of the product, firm or person in the mass media. Publicity makes
the product, firm or person mentioned known to many people.
Types of publicity
Publicity can be classified into two:
 Free publicity
 Special feature publicity
a) Free publicity;-This is publicity which is not paid for. For example, when an organisation invites
somebody important to open a new branch, the mass media that will cover such event offer free
publicity to the organisation
b) Special feature publicity;-This is publicity which is paid for by the organisation. For example
where the organisation has organised a sporting activity and invites mass media to cover the
event.
Advantages of publicity
a) It may be free i.e. in case of free publicity
b) It covers a large geographical area
c) It may improve the image of the advertiser
Disadvantages of publicity
a) The firm has no control over free publicity as related to the content of the message, timing and
space
b) Only a portion of the information released by the firm might appear in the media
c) The media may give negative information about the firm hence adversely affecting the firm
d) The media may not cover the firm at the firm’s convenience
e) It is not long lasting
f) Special feature advertising may be costly to the firm

4. PUBLIC RELATIONS
This is the process of passing information with a view of creating, promoting or maintaining good
will and a favourable image of the organisation to the public. Public relations is not aimed at
increasing sales directly. Public relations involves the following activities:
a) Informing the public about the firm’s achievements and concerns
b) Contributing to community welfare by helping the disabled, giving bursaries to needy students,
supporting sporting activities etc.
Advantages of public relations
a) It may correct the bad image of the organisation
b) It informs the public about the activities of the firm
c) Assists in upholding the good image of the organisation
d) It improves the relationship between the firm and its customers

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e) It can be used to target a particular category of potential customers

Disadvantages of public relations

a) It is costly
b) It is difficulty to evaluate the impact of the message since customers are not obliged to respond
c) It lead to premature buying by customers
d) It takes longer for the effects of the advertisement to be realised
e) It does not guarantee increase in sales

OTHER TYPES OF PRODUCT PROMOTION

5. POINT OF PURCHASE (WINDOW) DISPLAY

This refers to the arrangement of items at strategic points in the shop where potential customers
can easily see themPoint of purchase display is used to attract, inform and induce customers to
buy from the shop.
Advantages of window displays
a) It is a relatively cheaper method of product promotion
b) Potential customers can be induced to buy the product displayed
c) Through the display, customers are able to get the basic features of the product such as colour,
size and price before making a decision on whether to buy the product
d) The display may attract customers into the shop and finally end up buying products inside the
shop
Disadvantages of window displays
a) Customers who are located far away may not be reached
b) It may attract thieves leading to heavy losses
c) Customers may not go inside the shop to buy if goods displayed are not appealing to them
d) Setting up the display area or window may be expensive

6. DIRECT MAIL ADVERTISING

This refers to any form of advertising which is sent directly to the potential customer through the
mail.
Advantages of direct mail advertising
a) The advertisement reaches the target audience
b) There may be immediate feedback from the potential customer
c) Potential customers do not incur any costs to get the information
d) The message may be tailored to suit the needs of each individual customer
Disadvantages of direct mail advertising
a) It is only appropriate to the literate
b) Sometimes the mail may not get to the intended potential customer

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c) It may be costly
d) Sometimes potential customers may ignore the message
e) It may not be appropriate where the customer needs to examine the product

7. CATALOGUE
A catalogue is a booklet that gives a brief description of products sold. It gives details relating to
price of different products and the terms of sale.
Advantages of a catalogue
a) It can be used to advertise all the products the organisation sales at once
b) The advertiser has total control over the catalogue
c) It gives details information about the product
d) It is printed in beautiful colours hence making an attractive promotional tool
Disadvantages of a catalogue
a) It is expensive to produce
b) It is affected by price changes

8. GUARANTEE
This is the assurance by the seller to the buyer that the product offered for sale will serve as
expected if it is used as specified. During the guarantee period, the seller undertakes to either
replace, or repair the item if it fails to perform as specified. The seller will however not repair or
replace the item during the guarantee period if the buyer uses the item against the specifications.
The aim of the guarantee is to build confidence in customers so that they can buy the firm’s
products.
Advantages of a guarantee
a) Helps boost the firm’ sales
b) Helps in creating the customers’ loyalty to the products of the firm
c) The products are replaced or repaired during the guarantee period in case they develop a problem.
This is an advantage to the buyer
Disadvantages of a guarantee
a) Repairing and replacing items may be costly to the firm
b) Customers may carelessly handle the products during the guarantee period
c) It is only suitable for durable goods

9. DISCOUNT
Discount refers to the reduction in the sales price of the commodity by the seller so that the buyer
ends up paying less. There are three types of discount; trade discount, quantity discount and cash
discount (already discussed). Discounts are used to attract customers since customers are likely
to buy from sellers who give discounts than those who don’t.

10. LOSS LEADER

A loss leader is a product that is sold below its marked price in order to attract customers into the
shop with the view that once in the shop, the customer is likely to buy other products which are
sold at normal prices

11. PSYCHOLOGICAL SELLING

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 Psychological selling involves all the activities which are meant to increase sales by playing
around with the customer’s mind. For example, the price may be quoted as Ksh 999 to make the
customer think the price is reduced and therefore end up buying the product

12. COUPONS
A coupon is a small piece of paper that gives someone a right to buy something at a lower price
than normal. For example, sellers may give coupons of Ksh 50 for any purchase of goods worth
Ksh 2000. The customer can use these coupons to buy more goods worth the value of the coupon
from the seller.

13. CREDIT FACILITIES

This is a method of selling where the seller allows the buyer to take goods and pay for them later.
Credit facilities may induce may induce the customer to buy more. It also creates loyalty in the
customer.

14. AFTER-SALE-SERVICES
These are services offered by a seller to a buyer after the buyer has bought goods. Such services
may include; transport, installation and repairs. After-sale-services may be offered freely or at a
reduced cost. A seller who offers after-sale services is likely to retain existing customers as well
as attract new ones

Ways of offering after-sale-services

a) Transportation/delivery services.
b) Installation of equipment.
c) Provision of technical advice.
d) Giving guarantees.
Circumstances which necessitate after-sale-services
a) Where goods are technical in nature
b) Where expertise is required in installation and the trader has technical ability
c) Where the product is new in the market and the trader wants constant feedback
d) Where competition is stiff hence the seller uses after-sale-services to attract customers
e) Where expertise is required in maintenance
f) Where the policy of the business requires the use of after-sale services as a strategy of improving
customer relations
g) Where it is a government
h) Where specialized transport is required
Advantages of after-sale-services
a) More customers are attracted to buy from the seller
b) It promotes a good image of the seller
c) The customer is able to get longer and better services from the product due to repairs
d) Buyers are assisted with technical advice on how to use the product
Disadvantages of after-sale-services
a) Lack of spare parts may hinder after-sale-services

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b) It is costly to the seller which may reduce profits
c) Some sellers may require the product to be brought to their premises for servicing. This may
inconvenience the buyer.
d) High expenses may result in increase in prices of products
e) Servicing of products may require specialists which may be costly to the seller
f) It may encourage careless handling of products by the buyer

Problems faced by a trader who stocks only one type of a product

a) A fall in demand for the product will result in a decrease in profits leading to closure of the
business
b) The trader may attract many buyers since most people prefer buying from traders who stock a
variety of goods
c) A fall in supply from suppliers may result in the closure of the business
d) The trader will lack innovativeness
e) The trader will face stiff competition from firms which offer varieties

SALES PROMOTION
Sales promotion refers to the application of various techniques and activities to attract customers and
increase sales. Some of these techniques and activities include the following:
a) Organising shows, trade fairs and exhibitions
b) Giving free gifts to customers
c) Giving free samples to customers
d) Showroom sales
e) Window displays
f) Allowing customers credit facilities
g) Giving customers after sale services
h) Through guarantees
i) Giving discounts to customers
j) Using loss leaders
k) Using psychological selling
l) Giving coupons to customers
m) Self-service
n) Personal attention
o) Proper pricing
Reasons for sales promotion
a) To increase sales
b) To inform customers about the new product
c) To persuade existing and potential customers to buy the firm’s products
d) To remind customers about product attributes
Role of a sales department

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a) It sells goods to consumers
b) It receives orders for goods
c) It maintains records/documents
d) It undertakes market research
e) It evaluates the credit worthiness of customers
f) It processes orders for goods and services
g) It handles complaints from customers
h) It gives advice to customers
Advantages of sales promotion
a) It increases sales almost instantly
b) It results in expanding the firm’s market share
c) The customer may buy the product at a lower price
Disadvantages of sales promotion
a) It involves expenditure hence increasing overhead costs
b) It may pressurise customers into buying products that they do not need
c) It leads to impulse buying
d) Overhead costs may be passed over to the buyer by increasing the selling price

FACTORS INFLUENCING THE CHOICE OF PROMOTION METHOD

a) Cost;-A more affordable method of sales promotion should be chosen.
b) Nature of the product;-Some products because of their nature require to be promoted by
specific methods only. For example, a product requiring demonstration is best promoted through
personal selling. Therefore, the firm should choose a method of product promotion that suits its
products.
c) Target group;-The promoter should a method of promotion that reaches his/her target group so
as to reduce wastage.
d) Objectives of the promoting firm;-Sometimes, firms undertake product promotion in order to
achieve certain objectives. For instance, if the objective is to correct the bad image of the firm,
public relations should be preferred. A firm should therefore choose a method of sales promotion
that will help meet the objectives of the firm.
e) Methods used by the competing firm;-Firms should choose methods of promotion that enables
them compete favourably with their competitors that is the firm should use a different method of
promotion from the one the competitor is using
f) Government policy ;-A firm should use only those methods that are allowed by the law of the
land.
g) Geographical region;-Some products may require countrywide coverage while others will
require regional coverage. The firm should therefore choose a method that will cover the
geographical area intended.
h) Availability of the promotion method;-Some methods of product promotion are easily available
than others. A firm should therefore choose a method that is easily available.

ETHICAL ISSUES IN PRODUCT PROMOTION

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 The term ethics refers to the prescribed or accepted code of conduct. Ethics in product promotion
therefore refers to the rules and regulations which are to be followed when promoting products so
as to avoid the violation of other people’s rights.
Ethical issues in product promotion refer to product promotion practices which contravene the
principles of good ethics and fair business practices resulting to negative effects on the consumer.
These ethical issues are discussed below:
a) Cheating on performance of the product;-This is a situation whereby the promoter of the
product does tell the truth about the performance of the product.
b) Cheating on ingredients of the product;-This is where the promoter gives false information
about the ingredients of the product so as to lure the customers into buying the product. He/she
may give the impression that the product contains certain ingredients when it doesn’t
c) Failure to disclose the side effects;-Side effects refers to the negative effects the product may
have on the consumer alongside the intended purpose. Promoters may avoid disclosing negative
effects and only disclose positive effects so as to lure the consumers into buying their products
d) False pricing;-Some promoters may overprice their products and later reduce their prices slightly
so as to make the customer think that the price has been reduced and therefore buy the product.
e) Disregarding negative effects on the environment;-Some promotional activities may have
adverse effects on the environment e.g. loudspeakers used by sales persons may cause noise
pollution. The promoter may however disregard all these negative effect on the environment in
his/her efforts to sell the product
f) Encouraging social-cultural conflicts;-Product promotion may encourage the use of foreign
products and styles that conflict with the cultures of the various communities in the country. For
example putting on earrings by men is considered a taboo in some communities.

Ethics (ethical practices) in product promotion

a) Advertisements should not challenge the cultural set-up of the society. Advertisements should
not lead to high prices of goods
b) Advertisements should not mislead the customer
c) Advertisements should not corrupt brand names of popular products
d) The methods used in product promotion should be environmentally friendly e.g. posters should
not make the environment look untidy.
e) Sellers should not use product promotion to malign the names of their competitors
f) Sales people should make offers that they intend to fulfil e.g. promised guarantee should be
genuine
g) Consumers should be educated on the side effects of the products
h) Ingredients used to make the product should be disclosed

Reasons for ethical practices in product promotion

a) Encourages the selling of quality products.
b) Safeguards cultural practices.
c) Encourages disclosure of information about the product.
d) Ensures compliance with existing government legislations.
e) Helps curb environmental degradation.
f) Safeguards consumers against misleading advertising.

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g) Helps counter market competition.

TRENDS IN PRODUCT PROMOTION

a) Use of internet to promote products.
b) Intensifying the use of personal selling.
c) Use of promotion convoys.
d) Promoting products over mobile phones by sending SMSs to prospective buyers.
e) Use of advertising agencies.
f) Use of public relations.
g) Conversion of single shops into mini super markets.
h) Establishment of customer care centres by most firms.

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