Unit 4 – Question 5 *6

Question/ Year Due for Exam on this Unit

Higher Level 2013 (Q5), 2009 (Q6), 2008 (Q5) 13th March 13th March
Ordinary Level 2013 (Q6), 2012 (Q5), 2010 (Q6) 13th March 13th March
 Chapter 9 - HUMAN RESOURCE MANAGEMENT

Functions of a Human Resource Manager

1. Manpower Planning
 Involves examining the human resource needs of the organisation and ensuring that they are met.
 An audit of existing employee skills and expertise may be conducted.
 1: HR Manager identifies needs for more staff
If demand for staff exceeds supply of staff the strategy a business should use is to recruit staff.
 2: HR Manager identifies areas for redundancy
If supply of staff exceeds demand for staff the strategy is to make some of the existing staff redundant.
 3: HR Manager ensures employee development programmes are designed.

Benefits of Manpower Planning

 Avoids the problem of the business being understaffed.
Too few workers may result in products not getting made on time, leading to unhappy customers & lower sales.
 Avoids the problem of being overstaffed.
Excess staff can be made redundant; this helps the business to reduce its wage costs.

2. Recruitment & Selection

 This is the process by which the firm gets the best people to do the jobs necessary to achieve its goals.
 Recruitment: Involves finding the best people to apply for the job.
This is done by preparing a job description and person specification for the job.
There are two main sources – Internal Recruitment (Promotion/Demotion/Transfer)
External Recruitment (Advertise in media/Use recruitment agency/Headhunting)
 Selection: Involves choosing the best applicant from all those who have applied.
Steps involve: 1 – Screening, 2 – Interview, 3 – Check References.

Benefits of Recruitment & Selection

 Job description & person specification help find exactly the right person.
This saves time and money interviewing unsuitable candidates.
 Choosing the right person will ensure the business does well.
A person who fits in with the business & their beliefs will reduce the possibility of industrial action in the future.

3. Training & Development

 Involves supplying the skills, knowledge and attitudes needed by employees to do their jobs better.
 Induction Training
The first training new employees receive when they start; they learn the procedures & policies in the business.
 On the job training
Employees are trained while at work in the normal working situation by a more experienced staff member.
Involves learning from practical experienced gained and practicing the tasks involved e.g. through a job rotation.
 Off the job training
Employees are trained while away from the normal working environment by professionals. Can be costly.
 Development
Involves preparing the employees to take on more responsibility and new challenges in the workforce.
Teaches employees transferable skills that they can use in any job in the future, e.g. communication skills.

Benefits of Training & Development

 Leads to lower labour turnover rates
Due to high staff morale, good reputation of the firm and thereby attracting quality staff.
 Leads to more flexible and adaptable workforce
This allows for changes to take place such as new work methods and new technologies are facilitated.

4. Performance Appraisal
Unit 4 – Question 5 *6

 Manager carries out an interview to evaluate how each worker is performing in their job.
 High score: Employees are rewarded with promotion, pay rise, bonus.
 Low score: Employees are given more training or temporary staff may be sacked.
 Discuss goal setting targets, expectations and problems employees may be encountering.

Benefits of Performance Appraisals

 Increased employee productivity
Important for staff motivation & morale & for communicating & fostering a positive relationship between
management and staff.
 Opportunity to review rewards
May be used in determining pay increases or promotion.
Business can review & reduce the costs of reward and benefits packages.
 Retain the right staff/identify poorly performing staff
Helps identify top talent and ensures that these employees are retained.
Can identify employees who are not reaching their potential and send them on training courses.

5. Pay & Rewards

 Consist of the incentives offered to employees as compensation for the work they have done.
 They can be financial or non-financial.

Financial Rewards
 Time Rate:
Payments of a fixed amount per hour for a fixed number of hours per week are made to employees.
If employee works more than the fixed hours, overtime is paid at different rates e.g. time and a half.
 Piece Rate:
The payment given to employees for each unit produced or job completed.
The more units produced, the more the employee earns.
 Bonus:
A sum of money paid to employees for reaching a certain target.
E.g. for producing units above an agreed limit.
 Commission:
A type of financial reward where payment is made according to value of the amount sold.
E.g. payments to a sales person (10%) in proportion to the level of sales achieved.
 Profit-sharing schemes:
A scheme where some of the businesses profits are paid to employees on an agreed basis.
Profits are paid to employees to motivate them to become more productive.
 Employee Share Ownership Scheme:
Share option schemes give employees an option to buy shares in a company at a specified price.
Shares may be given to employees instead of cash bonuses, maintaining employee interest in the job.

Non-Financial Rewards
 Benefit-in- kind:
Also known as a perk or a fringe benefit. It takes the form of non-cash goods or a service given to employees.
Examples include meal vouchers, company cars and health insurance.
(** Benefit-in-kind can be considered financial or non-financial depending on whether it is taxable or not).
 Promotion:
Movement to a more responsible senior level in the organisation.
This will also carry a higher wage but it’s often the job title/bigger office that’s reward as per Maslow’s.
 Job sharing:
This involves employees sharing a position e.g. two employees have a job split between them.
This recognises that employees may wish to prioritise leisure time over work time.
 Job Satisfaction/Job enrichment/Job enlargement:
Employees are rewarded because the job satisfies their social needs (teamwork) and self- actualisation needs
(opportunity to do further study).
 Flexitime:
This allows employees the freedom to choose their own work hours within an agreed time frame.
E.g. workers may have to be in the workplace between 10am and 1pm only.
This lets employees work from home & organise for e.g. their childcare arrangements more efficiently.
6. Employer/Employee Relationships
 Unit 4 – Question 5 *6

 The quality of the relationship that exists between employers and employees determines the quality of industrial
relations between the parties.
 High morale in the organisation can be achieved by: Open Communications; Valuing employees; and Teamwork.

Benefits of employee/employer relationships

 Labour turnover is reduced
Employees are happy to stay in the job so absenteeism and labour turnover is reduced.
Money is saved on recruiting, selecting and training new employees.
 Employees are motivated to work to the best of their ability
Good relationships increase employee morale and thus employee productivity.

 Chapter 10 - CHANGE
 Unit 4 – Question 5 *6

Changing role of a manager from controller to facilitator

 Change in leadership style
Modern managers are facilitators and use a democratic leadership style whereas traditional managers are controllers
and used an autocratic leadership style.
 Change in Span of Control
Traditionally managers used a narrow span of control & kept a close eye on employees and made sure all rules were
obeyed. Today the span of control is wider, the facilitator encourages employees to do better & work independently.
 Change in communications
Previously the controller used downward communication and required no response from employees. Today the
facilitator encourages upward communication. They welcome feedback and opinions from employees.
 Modern managers empower their employees
Empowerment means placing real power, which includes decision-making and responsibility in the hands of those
workers where it is most effective, i.e. as close as possible to the customer.

Employee Empowerment
 This means placing real power, which includes decision-making & responsibility in the hands of those workers where
it is most effective, i.e. as close as possible to the customer.
 It’s a method of non-financial motivation and encourages Intrapreneurship.

Benefits of Empowerment
 Better customer service
If a customer has a grievance the employee has the power to deal with it.
Employees become more responsive to the needs of customers & come up with ideas to solve issues.
 High employee motivation levels
Employees are given more responsibility which will increase motivation (McGregor Theory Y).
It satisfies their esteem needs (Maslow’s Hierarchy of needs); they are happier in their job and work harder.
 Fully utilising staff skills
Decision-making and control is in the hands of employees who use their greater skills & knowledge for the benefit
of the business/decisions made quicker.
 More time for managers to carry out management activities
Managers can spend less time supervising employees & spend more time on planning, organising and controlling
important matters.

Risks of Empowerment
 Empowerment can result in mistakes
If empowerment is introduced without adequate training for employees then mistakes can be made, leading to bad
decision making which end up costing the business money.
 Some employees may be unhappy with empowerment
Employees may be unhappy with the extra responsibility and/or lack of training and their stress levels may increase.
This can cause de-motivation among employees.
 Managers may not be happy with the loss of control
Management are handing over control, responsibility and power to subordinates.
Some managers may be cautious & it can lead to conflict between themselves and employees.

Employee Participation
 Employees are allowed an input into the businesses decision making process.
 It’s sometimes called industrial democracy.
 It may be achieved in a number of ways:
 Work Councils: Employees, elected by other employees, who have a say in the business’ plans & strategy.
If a business has more than 1000 employees they must have a works council.
 Worker Directors: Employees have a seat on the BOD and an input into decision making at the highest level.
 Share Options: Employees are allowed to buy shares at a reduced price; they now have a vote at the AGM.

Benefits of Employee Participation

 High employee motivation levels
 Unit 4 – Question 5 *6

Employees are given more responsibility which will increase motivation (McGregor Theory Y).
It satisfies their esteem needs (Maslow’s Hierarchy of needs); they are happier in their job and work harder.
 Encourages intrapreneurship
Employees offer useful solutions to the business’s problems and/or suggestions to make the business better.
 Improved industrial relations
More communication between management & employees through work councils and worker directors means
that problems will be solves through negotiation & teamwork rather than strikes.

Teamwork
 Employees work together to achieve desired objectives of the business.
 Stages in forming teams include: Forming, Storming, Norming, Performing.

Benefits of Teamwork
 Employees experience greater job satisfaction
All members’ efforts are taken into account; they are better motivated as participation in teams satisfies the
social needs of employees (Maslow).
 Employee’s communications skills and interpersonal skills improve.
Employees are working in a group and dealing with different personalities.
This is important as these skills will help prepare employees for leadership roles within the business.
 Easier to make tough decisions.
When working in isolation employees might find it difficult to take tough decisions.
With the support & protection of a team, tough decisions are easier to make e.g. making workers redundant.

Total Quality Management (TQM)

 A management strategy to produce 100% perfection in quality and 100% customer satisfaction.
 There are four main principles of TGM:
1. Focus on customer
The customer is the most important person in the business.
The business will find out exactly what the customer wants and produce it.
2. Employee Empowerment
Employees use their skills and qualities as they see fit to produce perfect products.
They have real power, responsibility and authority to decide what to do in order to make perfect products.
3. Teamwork
Employees work in teams, they are motivated to make perfect products and will not the team down.
The business and suppliers work as a team, the business continues regular custom with suppliers & pays promptly,
and in turn supplier supplies high quality stock
4. Continuous Improvement
The aim is to make perfect products; the business will strive for zero defects. They try each time to do better.

Benefits of TQM
 Increases sales as products are perfectly made
The business’s quality improves, as does its reputation for making great products - leads to higher sales/profits.
 Reduction in cost as there will be less waste
The business does not waste money on repairing or giving refunds on faulty goods which leads to lower costs.
 Increased employee motivation
Employees feel valued and are therefore committed to the business when their recommendations are accepted.
 Meet the Requirements of Legislation
Sale of Goods and Supply of Services Act 1980 - goods must be of merchantable quality.

 
Technologies impact on the job of a manager
 Technology can be an effective marketing tool.
 Unit 4 – Question 5 *6

 A website/social networking sites may be an effective global marketing tool.

 Business can conduct market research via their website:
E.g. amazon.com profiles the interests of its users, & reminds users each time they log on to the Amazon website
of any new books which may be of interest to them.
 Production is more efficient
 Managers can use CAD to design & make products more quickly & cheaply.
 Managers can use CAM to run machines 24/7 which enables the business to mass produce products.
 Managers can use CIM to produce high quality standardised products in each factory no matter where they’re located.
 Redundancies
 New Technology, (self-service checkouts at airports) replaces employees which reduce manager’s span of control.
 This free up managers to spend time on the management activities of planning, controlling & organising.
Employee retention & motivation
 Increases scope for flexible working conditions e.g. teleworking.
Video-conferencing
 Meetings can be conducted in real time from two different locations/parts of the world.
 Cost effective – avoids necessity to travel, saving both travel time and cost.

Impact of Technology on Personnel

 Changing nature of jobs
More quickly & cheaply, e.g. bus drivers can drive & collect fares because of computerised technology on the bus.
 New Types of Jobs
New technology creates new types of jobs in areas such as web design, computer programming.
 Redundancies
Technology, (self-service checkouts at airports) replaces employees which reduce manager’s span of control.
 Teleworking
Increases scope for flexible working conditions e.g. teleworking.

Impact of Technology on Business Costs

 Increased business costs
 Capital Expenditure – the purchase of the equipment and programmes. Also current expenditure after installation,
maintaining ICT equipment is costly.
Training employees to operate technology costs money.
 Reduced business costs
Fewer workers needed this lowers wages bill, e.g. using robotic equipment in automated production facilities.
Technology can make the business more efficient. It allows business to deal with customers quickly; it can increase
quality of productivity (CAM), all impacting on the cost of dealing with complaints, refunds and repairs.

Impact of Technology on Business Opportunities

 World Wide Business
E-commerce allows businesses to sell products to a worldwide market 24/7 - they become international brands.
 Sales &Marketing
The use of ICT offers enterprises the opportunity to keep a regular check on consumption patterns, consumer attitudes
in the market. There should be better customer satisfaction due to the more focused service.
 New products/services can be developed through the use of technology.
Entrepreneurs develop products around technology advances, e.g. reserving seats on airlines and making hotel
reservations from any part of the world at any time.
 New technology add to the efficiency of production
Applications such as computer aided design (CAD) make the design process easier and increase productivity.
 Wider Spans of control
This is a result of the increased ability to monitor larger groups or groups which are geographically apart.

Reasons for Resistance to Change

 Fear of losing job
 Unit 4 – Question 5 *6

Employees might resist the introduction of new technology if they thought it would lead to fewer jobs.
 Fear of losing power
E.g. The Gardaí resisted the introduction of the Garda Reserves as they thought the profession would be less respected.
 Fear of failure
Employees might far that they will be unable to cope with change, rather than face it they may resist it.
 Laziness
Employees may resist change because they don’t want the hassle, they just can’t be bothered.

Strategies for Managing Change

 Senior management must lead by example
Managers must show they are willing to put in extra effort and that the change is important and beneficial.
If the employees see the manager resisting the new idea, they will resist it too and the change will fail.
 Communication with employees about change
Management need to communicate clearly why change is necessary and the consequences of not taking any action.
They should be open and honest with employees in order to reduce gossip and rumours.
 Consultation with employees about change
Management needs to consult with the employees before introducing change so that employees will be more willing to
accept the changes introduced e.g. input into the decisions being made through work councils.
 Offer rewards to employees that embrace change
E.g. bonus payments and wage increases for accepting and using new technology.
 Provide training to employees
Employees must be able to do the new task required of them. To ensure this they should be trained in all the skills
required to implement the change e.g. how to use new technology.

 Chapter 11 – ACCOUNTING
 Unit 4 – Question 5 *6

Importance of Financial Information

 Liquidity and Cash Flow
The liquidity of a firm is an indication of its ability to pay debts when they are due.
 Control of Debt
The level of debtors and the age of some debts will indicate if any ‘risky’ debts exist.
Management may need to review its credit policy with some customers.
 Size of creditors
The size of creditors shows management how long payments can be deferred without loss of any discount.
 Profitability and Product Portfolio
Actual profit figures can be compared to the figure from previous years and to the budget.
May be possible to examine product range and isolate products which are losing money.
 Value of Net Assets
Interests managers if future borrowings were required or if a buy-out was being considered.
 Filing of Accounts
If the business is a company (Ltd or PLC), certain information from its accounts must be filed with the Companies
Registration Office.
 Future Planning
Future planning will depend on the profitability and liquidity position of the business.

Importance of different accounts

1. Trading Account
Calculates Gross Profit:
Low gross profit tells managers that the selling price may be too low – rise to increase profits.
Low gross profit tells managers that cost of sales may be too high - need cheaper supplier.

2. Profit and Loss account

Calculates Net Profit:
Low net profit tells managers that the business expenses are too high.
The manager can make cutbacks (e.g. wage cuts) to reduce expenses and increase profits.
Allows management to make important decisions
Shows how much the business can pay out in dividends & what they can reinvest.
This shows the manager if they can expand out of profits or if they have to borrow.

3. Balance Sheet
Calculates fixed asset value
Shows security (collateral) a business has when applying for a loan.
Calculates working capital
Shows the manager if the business has enough cash to pay its bills as they fall due.
Illustrates how business is financed
Tells the managers whether the business can get another loan.
Many loans means it may be hard to borrow as banks are unwilling to lend to a business that already has unpaid loans.

Which stakeholders are interested in which ratio?

Profitability Liquidity Gearing

Investors/ Shareholders Suppliers Lenders/Bank
To see if they will receive a dividend (net profit) To see the businesses ability to pay debts To see if the business will qualify for further long
To see their ROI & compare it to return from other as they fall. term loans.
investment opportunities. To see if they should sell on credit – is the Investors/Shareholders
Employees business able to pay its invoice in full/on To see if the business is over financed by debt.
To see job security (net profit). If the business is time? Have they increased long term debt with high
not making a profit it may close/make Lenders/Bank interest payments-will impact level of dividend.
redundancies. Concerned with repayments. Employees
To see if they can make wage demands (net profit) To see if the business qualify for an To see if there is a risk of bankruptcy - job
Entrepreneur overdraft. security.
Their aim is to make a profit and they will want to
see if the business is doing so.
 Unit 4 – Question 5 *6

Comment:
Formula:
Net Profit Margin What happened: The NPM has decreased from 32% in 2008 to
25% in 2009 (down 7%).
Net Profit x 100 Good or bad trend: This is a bad trend as the business is less
Sales profitable than last year.
Reason: One reason for this is that the businesses expenses may
have increased.
33,750 x 100 Solution: The business should reduce expenses by introducing
135,000 = 25% voluntary pay cuts.
Comment:
Current ratio Formula: What happened: The Current Ratio has decreased from 2:1 in
2008 to 1.3:1 in 2009.
Current Assets: Current Liabilities Good or bad trend: This is a bad trend as the business has less cash
available to pay its bills.
Compare to ideal: The ratio in 2008 was the ideal of 2:1 but in
2009 it was less than ideal which means the business can’t pay its
84,500: 65,000 = 1.3:1 short term debts as they fall due.
Reason: The business may have increased its overdraft or might be
buying more goods on credit (from creditors).
Solution: Increase sales, e.g. sell investments, to raise cash to
improve its liquidity.
Acid Test Ratio Comment:
Formula: What happened? The acid test ratio has decreased from 1.1:1
2008 to 0.7:1 in 2009.
Current Assets – Closing Stock: Good or bad trend? This is a bad trend as the business does not
Current Liabilities have cash available to pay its bills, it’s illiquid.
Compare to ideal (if relevant): The ratio in 2008 was the ideal of
84,500 – 39,000: 65,000 1:1 but in 2009 it was less than ideal which means the business
45,500: 65,000 can’t pay its short term debts immediately if necessary.
0.7:1 Reason? The business may have increased its stock levels over the
year which remains unsold, thus tying up a lot of cash in stock.
Solution? Increase sales, e.g. sell slow moving stock at a discount.
Comment:
Formula:
Debt Equity Ratio What happened? The debt: equity ratio has increased from 0.4:1
2008 to 0.6:1 in 2009.
Debt: Equity Good or bad trend? This is a bad trend as the business has more
[(OSC+ Retained Earnings)] long-term debt than last year.
Reason? The business may have increased its long term loans -
increased borrowing means more interest to repay.
192,000:300,000 + 20,000 Solution? The business could reinvest more of its profits and/or
192,000:320,000 = 0.6 :1 sell more shares in the future to increase equity.

Formulas
Gross Profit Margin Formula Net Profit Margin Formula Return on Investment Formula

Gross Profit x 100 Net Profit x 100 Net Profit x 100

Sales Sales Capital Employed* [*OSC+ Retained Earnings + LTL]
Current Ratio Formula Acid Test Ratio Formula Debt Equity Ratio Formula

Current Assets: Current Liabilities Current Assets – Closing Stock: Current Liabilities Debt: Equity* [*OSC+ Retained Earnings]

Sample Ratio Question

From the figures given for 2009 calculate the
following for CES Ltd and comment on each.

(i) Net profit margin; (iii) Acid Test ratio;

(ii) Current ratio; (iv) Debt Equity ratio.
*Current assets: closing stock, debtors, cash.
*Current liabilities: creditors, overdraft

 Chapter 12 – INSURANCE & TAX

 Unit 4 – Question 5 *6

Risk Management
 Risk Management is a planned approach to the handling of the risk that the individual or business is exposed to.
 It involves:
 The identification of all liable risks.
E.g. the risk of fire, personal injury loss.
 The calculating of costs of protection from loss.
E.g. Insurance, H & S.

Example of Risk Management

 Insurance
Transfer the financial risk to an insurance company for a premium.
 Health and Safety
Health and Safety statements: Regulations, identification of hazards.
 Security systems
Install alarms, fire doors, CCTV to minimise risk in the business.

Principles of Insurance
1. Utmost Good Faith.
Must tell the truth and not give false information. Must supply all material facts.
E.g. If you do skydiving regularly and you are taking out life assurance you must include this when filling out the proposal
form, whether it asks this or not.
2. Insurable Interest
You can only insure something that you own.
You must gain financially from its existence and suffer from its loss (must have a legal relationship with the item).
E.g. you can insure your own house but you cannot insure the Eiffel Tower.
3. Indemnity
You cannot make profit from a loss.
You will only receive compensation for the market value.
A house valued at €200,000 cannot be insured for 250,000.
Linked to Average Clause:
 Average Clause applies to items that are underinsured.
 If you partially insure something you can only receive partial compensation.
 E.g. ¾ insured mean ¾ compensated

Q. Susan’s house is worth €200,000 but to save money on the premium

Claim x Amount Insured she insured it for €160,000. Fire caused €30,000 worth of damage. How
Current market value much compensation will Susan receive?
€30,000 x €160,000 = €24,000
€ 200,000
4. Contribution Since Susan insured her house for only 4/5 of it’s value she will only receive
If you something with two insurance companies you with not get paid full compensation from both companies.
On making a claim each company will contribute to the compensation.

Claim x Amount Insured for with this Insurer

Total of amounts insured with all insurers.

5. Subrogation
Once an insurance company has paid out full compensation to a party they then have the right to:
 Take the damaged item for its scrap value.
 Sue the party that caused the damaged.

Insurance Premium
The sum of money paid for insurance every year.
 Unit 4 – Question 5 *6

The amount paid depends on:

1. Risk: The higher the risk the higher the premium. Loadings for high risk people & businesses, e.g. Smoker v’s non-
smoker
2. Value of the Item: The higher the value of the asset the higher the premium.
3. Claims: The more the company pays out in compensation claims, the higher the premium to cover costs.
4. Profit: The premiums collected must exceed the amount paid out in claims.
5. Government Tax: Tax is added to the premium charged by the insurance company, increasing the cost for consumer.

Insurance Parties
Broker: offers advice to consumers and sells insurance on behalf of several insurance companies.
Actuary: calculates the likelihood of an insured loss occurring and calculates the premium to be paid.
Assessor: assesses the damage following an insurable loss & calculates the amount of compensation to be paid.

Insurance Premium Calculations

Types of Business Insurance

1. Fidelity Guarantee: Protects against employees stealing or embezzling cash from the business.
 Unit 4 – Question 5 *6

2. Public liability Insurance: Protects the business if any member of the public is injured or their property is damaged due
to the businesses negligence while on the businesses premises.
3. Product Liability Insurance: Protects against claims made by customers injured by the businesses products.
4. Employee’s liability Insurance: Protects the business against claims by employees injured or made ill in work accidents.
5. Motor Insurance: Required by law on all vehicles.
 Third Party
 Third Party, Fire & Theft
 Comprehensive
6. Theft Insurance: Pays the business compensation for the value of any stock/items that are stolen from the business.
7. Plate Glass Insurance: Pays compensation to the business if its windows are damaged.

Importance of Insurance for a Business

 Business Survival
Insurance means that the business will not be ended by some catastrophe. The insurance company will give the
business owner the money to rebuild her business, so that she can start again.
 Risk Management
When taking out insurance the business must examine all the risks facing it. To lower the premium it has to pay, the
business might take steps to reduce the chance of these risks occurring. E.g. installing alarm systems.
 Improved Cashflow
Paying a relatively small premium every year is a lot easier for businesses that having to pay out a large amount of
money all in one go for some unexpected crisis.

Types of Household Insurance

1. Health Insurance: Pays private health bills.
Under Irish law, health insurance companies must charge customers the same amount for a policy – ‘community rating’.
2. Life Assurance: Insurance company pays a certain amount of compensation to family members when the insured
person dies.
3. Two main types:
 Whole Life Policies: Paid out when the insured person dies.
 Endowment Policies: Paid at the earlier of two events–the death of the person or when he reaches a certain age.
4. House and Contents Insurance: Protects the family home and its contents against damage/theft.
5. Motor Insurance: Required by law on all vehicles.
 Third Party
 Third Party, Fire & Theft
 Comprehensive
6. Mortgage Protection Insurance: If the household can’t pay their monthly mortgage repayments due to ill health,
redundancy or death, the insurance company will pay it for them until they can afford to pay it themselves.

 Taxation
 Unit 4 – Question 5 *6

Reasons for Taxation

 To raise money
E.g. roads, schools, hospitals
 To redistribute wealth
E.g. 41% for high earners
 To discourage consumption
E.g. excise duties on alcohol, cigarettes.

Taxes paid by households

1. PAYE:
 A direct tax on income earned from employment.
 It is deducted at source by the employer and passed onto the Revenue Commissioners.
 It’s a progressive tax, i.e. taxed at two different rates: standard rate is 20% & higher rate is 41%.
 Tax credits: reduce tax payable (Gross Tax less Tax Credits = Tax Payable).
Credits depend on personal circumstances, e.g. single person tax credit or married tax credit.

2. Pay Related Social Insurance (PRSI):

 A direct tax on income earned from employment.
 It is deducted at source by the employer and passed onto the Revenue Commissioners.
 Employees pay it to qualify for welfare benefits in the future, e.g. old age pension.

3. Universal Social Charge (USC):

 A tax payable on all income (not just wages).
 It is deducted at source by the employer and passed onto the Revenue Commissioners.
 It’s a progressive tax, i.e. 2%, 4%, 7%.

4. Value Added Tax (VAT):

 An indirect tax charged on the sale of goods and services.
 VAT is remitted by the business every two months to the revenue commissioners.
 VAT is charged at different rates, depending on the type of goods or services involved e.g. 9% in tourism industry.

5. Capital Gains Tax (CGT)

 Tax on the profit when households sell one of their assets (shares, holiday homes, antiques).
 A percentage of the profit made - currently 33%
 Households themselves have to work out how much CGT they owe revenue.
 A small amount of the profits made in a year is tax free – called annual exemption – the first €1,270

6. Capital Acquisition Tax (CAT)

 Tax households pay on the value of a gift or an inheritance they have received.
 It’s a % of the value of the gift/inheritance – currently 33%.
 Households themselves have to work out how much CAT they owe revenue.
 Households receive a certain amount of gifts and inheritance tax-free – e.g. married couples, civil partners.

7. Deposit Interest Retention Tax (DIRT)

 Tax on interest earned on savings in a bank/credit union – 33%
 The bank deducts the DIRT and pays it to revenue.

8. Motor Tax:
 Required by law on all vehicles and must be displayed in the windscreen of your car
 It is collected by local authorities.
 The rate is calculated by either engine size or CO2 emissions.

Forms used in PAYE Tax

Form P45 is:
 Unit 4 – Question 5 *6

• Issued by an employer to an employee at the end of an employment.

• Details of Gross Pay, Tax, PRSI & USC paid up to the date of leaving employment.  
• Used to claim social welfare benefits or to give to a new employer to apply correct tax rate.
Form P60 is:
• Issued by an employer to an employee at the end of the tax year.
• Shows Gross Pay, Income Tax, PRSI & USC paid in the specified financial year.
• Used to claim a tax refund from revenue & as evidence of PRSI payments to qualify for social welfare.
Form P21 is:
• Issued by revenue to an employee at the end of the tax year.
• Form P21 is known as a ‘balancing statement’.
• It indicates if an employee has overpaid or unpaid tax for the year.
• If an employee has overpaid tax, he will get a tax refund.
• If an employee has underpaid tax, the Inspector of Taxes will issue a tax demand.
Form 12A is:
• All employees must fill this out when starting work for the first time.
• It’s sent to revenue to work out credits and rate of tax.
• If it’s not filled in employees will be emergency taxed.
•
Taxes paid by businesses
1. Self-assessment Income Tax
 Paid by self-employed entrepreneurs on their businesses profits.
 They calculate the amount of tax they owe themselves.
 Pay preliminary tax for the current year on or before 31 October each year
 Make your Tax Return after the end of the tax year but not later than the following 31 st October
 They are subject to revenue audits as a means of stopping tax evasion.
2. Corporation Tax
 A tax companies pay on their annual profits - Irelands rate is 12.5%
 Attracts FDI – Google, Apple, Facebook
 Calculated by companies themselves who forward it to revenue.
 Subject to revenue audits as a means of stopping tax evasion.
3. Value Added Tax
 Tax businesses must add to the price of goods and service they sell to consumers.
 Businesses collect tax from consumers when they pay for the products.
 When a business buys goods/services they pay VAT to the supplier.
 Unlike consumers, businesses get a refund on the VAT they pay on business purchases.
4. Commercial Rates
 Tax the business pays to their local council each year.
 Based on the value of the business premises.
 Money is used to finance the local council’s activities – roads, lighting.
5. Customs Duties
 A tax on the import of goods and services from a non - EU country.
 Tax payable is a % of the value of the goods.
Tax evasion: when tax payers deliberately fail to pay the correct
 The percentage of tax can be over 100%.
amount of tax they owe by not declaring the full amount of their
6. Employers PRSI income or by claiming tax deduction they’re not entitled to. It’s illegal.
 A business pays this tax to revenue if it has employees. Tax avoidance: when tax payers take advantage of rules contained in
 The money is not taken from the employees’ wages. tax law to reduce the amount of tax they owe e.g. investing in Irish
films and businesses. This is legal.
 The entrepreneur has to pay it out of his own profits.
 Employers PRSI increases a business’s costs and hence reduces profits.

Effects of Taxation on Business

 Lower Profits: Self-assessment tax & corporation tax reduce company profits – more difficult to expand.
 Lower Sales: VAT – consumer may buy fewer products, less demand means less sales/profits.
 Higher Costs: May have to higher an accountant to sort out taxes, Employers PRSI is an added cost.
 Less Overtime: Higher taxes (e.g. 41% PAYE) is a disincentive for employees to do overtime.

 Chapter 13 – FINANCE
 Unit 4 – Question 5 *6

Business CashFlow Forecast

 A written plan in which a business sets out its expected future cash receipts and payments over a period.

Reasons for a CashFlow Forecast

 To establish net inflows/outflows
It allows a business to plan effectively to meet cash shortages (deficits)/or alternatively consider their options in relation
to a large cash surplus.
 Provides a benchmark against which actual performance can be compared
This allows businesses to see if it is on target or off target with its cashflow forecast. This aids financial control.
 To secure finance
Businesses can show investors that the business carefully plan out its cash payments and receipts to ensure it never
runs out of cash and thus avoids bankruptcy.

Dealing with an expected future deficit

 Improve credit control
Could implement a more careful credit policy to ensure quicker collection of outstanding money from debtors.
 Improve stock control
Could introduce a ‘just in time’ stock policy whereby stocks arrive as closely as possible to the time of use.
 Short term finance
Could arrange a bank overdraft to free up some cash for other areas of the business in the short term.
 Sell of stock at a discount
Could have a sale and drop its prices to encourage customers to spend more, increasing the amount of cash coming in.
 Reduce expenses by making cutbacks
E.g. voluntary wage cuts or shop around for a cheaper supplier.

Household Budget
A written plan in which a family sets out its expected income and expenditure over a period.

Reasons for a Household Budget

 To establish net inflows/outflows
It allows a household to plan effectively to meet cash shortages (deficits)/or alternatively consider their options in
relation to a large cash surplus.
 It allows households to manage their money better
It allows households to see if it is on target or off target with its budget. This aids financial control.
 To secure finance
Households can show banks that they carefully plan out their income and expenditure to ensure they can always pay
their bills on time.

Dealing with an expected future deficit

 Short term finance
Could arrange a bank overdraft to free up some cash for other areas of the household in the short term.
 Reduce expenses by making cutbacks
E.g. shop around for a cheaper supplier
 Earn some extra income
Family members can do overtime or take on a part-time job.

Spreadsheets
 A computer software that is used to do basic maths calculations.
 Does calculations quickly & accurately.
This enables a business/household to prepare its accounts quickly, saving time & money.
 Allows for a ‘what if’ analysis
E.g. what will the answer be if the numbers change? The spreadsheet will instantly recalculate all the new answers.

Sources of Finance
Short Term Medium Term Long Term
Unit 4 – Question 5 *6

Finance that will take up to Finance that will take up Finance that will take longer than
one year to repay to five years to repay five years to repay
Short Term Source of Finance - ADVANTAGES DISADVANTAGES
Bank Overdraft Interest is paid on the amount that is Rate of interest is expensive.
overdrawn only. Can be asked to pay back the overdraft immediately.
No security is needed. Imposes charges if you go over the overdraft limit.
For a business only – the interest paid
is tax deductible, thus lowering the
businesses tax bill.
Accrued Expenses No interest is charged Services may be cut off if bill is not paid & reconnection fee.
No security is needed Only suitable financing for certain purchases such as utility services.

Credit Card (Household No interest is charged Interest charged is usually very high. Sometimes up to 25%.
only) It is safer than carrying cash Must pay a government tax for every credit card in the house.
Factoring The business can get much-needed Expensive form of finance because the bank charges a high fee for the
Business raises money cash immediately. service.
by selling its debtors to No security is needed. Can only be used by businesses that sell a lot of goods on credit (have lots of
a bank for cash. Owners’ control over the business is debtors).
not affected.

Trade Credit It is a free source of finance for the May lose credit rating/reputation – difficult to secure credit in the future.
business if it pays its bill on time. May lose out on discounts if payments are not made in time.
Interest is tax deductible if charged
No security is needed
Owners’ control over the business is
not affected.
Medium Term Source of Finance
Hire Purchase No security is needed – the asset itself Expensive form of finance – interest charged is very high.
is the security. The asset may be repossessed if instalments are not paid. Interest is paid
Business: interest is tax deductible. on the initial amount borrowed, it does not reduce for instalments repaid.
Business: owners’ control over the
business is not affected.
Leasing No security is needed The asset may be repossessed if payments are not made.
Models are always up to date Renting may be a lot more expensive in the long run.
Business: interest is tax deductible.
Business: owners’ control over the
business is not affected.
Personal Loan Interest is cheaper than hire purchase. Interest is paid on the initial amount borrowed, it does not reduce for
(Household only) No security is needed. instalments repaid
Medium Term Loan Interest is cheaper than hire purchase Security is normally required
(Business only) Interest is tax deductible
Owners’ control over the business is
not affected
Long Term Source of Finance
Mortgage Mortgage interest relief -Mortgages Home may be repossessed if payments are not made
taken out after 31 December 2012 do
not qualify for mortgage interest
relief.
Cheapest rate of loan.
Retained Earnings No interest is paid New businesses do not have retained earnings
No security is needed Relationship with shareholders may suffer is sufficient dividend is no paid
Owners’ control over the business is
not affected
Grants No interest is paid Granted subject to strict conditions - if broken money has to be repaid.
No security is needed Government only gives a % of the money needed.
Owners’ control over the business is
not affected
Debentures Interest is tax deductible Security is required
Secured on the Owners’ control over the business is Increases the business debt/equity ratio
businesses assets. not affected

Equity Capital No interest is paid Control is diluted

No security is needed Organising the selling of shares is expensive – e.g. prospectuses,
Permanent source of finance – no advertisements, lawyers
repayments required
Equity Capital v’s Debt Capital
 Unit 4 – Question 5 *6

Factors to consider before choosing between different sources of finance.

 Cost:
A business should try to obtain the cheapest source of finance available.
Close examination of the APR attached to each type of loan finance is needed when making the choice.
 Purpose/Correct match:
Sources of finance must be matched with uses e.g. a long term business expansion plan should not be financed by a
bank overdraft. Assets which are going to last a long time are paid for with long term finance.
 Amount:
Large amounts of money are not available through some sources.
Some sources of finance may not offer flexibility for smaller amounts.
 Control:
Issuing new voting shares in a company could lead to a change of power.
The use of loan capital will not affect voting control.
 Collateral:
Lenders often seek security before giving finance.
This restricts the freedom of the borrower regarding what it wishes to do with these particular assets.
Sometimes the borrower may not have enough assets to give as security, which limits the sources of finance available.
 Risk:
A business which has less chance of making to a profit is deemed more risky than one that does.
Potential sources of finance (especially external sources) takes this into account and may not lend money to higher risk
businesses, unless there is some guarantee that their money will be returned.
 Status of the business: Private Limited (Ltd) or Public Limited (PLC) companies will find it easier to obtain finance than a
sole trader as LTDs and PLCs are required to prepare much more detailed financial information, which can assist the
finance raising process by the banks.

Sample Exam Question: 2002:5A

Unit 4 – Question 5 *6

Outline two activities that are common and two activities that are different when managing a business as opposed to
managing a household. (20 marks)

Similarities
1. Planning
 Both the manager and the head of the household have to plan out all the cash they will expect to receive and to
spend in the future.
 E.g. Cash-flow forecast (business) & household budget (household) are used to predict a surplus or a deficit at
the end of a period and allows for action to be taken accordingly.

2. Sources of finance
 Both a business & household raise finance. Both fill in forms to apply for loans.
 E.g. both can use overdrafts to deal with to solve their short term finance needs or leasing/hire purchase for
their medium term finance needs.

3. Controlling
 Both a business and a household engage in controlling.
 E.g. Businesses use stock control to make sure they don’t run out of products to sell. Similarly, a family used
stock control to make sure that it doesn’t run out of food to eat.

4. Communications
 Both a business & a household sue internal and external communications.
 E.g. The manager of the business uses internal communications to give instructions to employees. Similarly, the
head of the household communicates instructions to children.
 External communication is used by both when arrange loans with banks or paying taxes to the government.

Different Activities
1. Taxation
 Businesses must compute themselves the amount of Self-Assessment Income Tax or Corporation Tax and VAT
they owe and pay this amount over to revenue.
 In contrast, households do not have to calculate their PAYE income tax or their VAT. The employer and shops do
it for them.
2. Size
 Businesses tend to be much larger than households. For this reason the business owner often hires managers to
run the business for her.
 In contrast, households tend to manage themselves. They usually do not hire outsiders to run the family.
3. Mission
 A business is set up with the main aim of producing and selling a product to make a profit. The manager has to
persuade the public to buy the businesses products through advertisements.
 In contrast, a household is not set up with this aim in mind. It is a social unit set up for love and support of family
members.

4. Manpower Planning
 Businesses engage in manpower planning to make sure they have the right number of employees to do the jobs
in the business. They may have to recruit or make redundancies.
 Households do not engage in manpower planning.