STUDY UNIT 1: Business ÷4 elements: Human Activities, Production, Exchange, And Profit

Self Natural
Realis Resources
ation
Human/ Labour
Esteem SATISFACTION Resources
Needs OF
THE NEEDS OF
Social Needs SOCIETY Capital
(love, recognition)
Entrepreneurship/
Security Needs including
(protection) management

Physiological Needs
(hunger, thirst)
Needs & Resources of the Community

5 Factors of Production
1. Natural Resources
THE COMMUNITY 2. Capital (finance)
• Unlimited needs 3. Labour (human resources)
• Limited resources of society 4. Entrepreneurship
• Economic motive drives community 5. Knowledge

The community chooses its need-satisfying system

Economic Principle
Highest possible satisfaction of society’s needs
with goods & services with scare factors of
production
ECONOMIC SYSTEM Community not satisfied
• The system chosen to achieve the with way in which its
highest possible satisfaction of needs are satisfied, it will 3x Economic Systems
needs using scare resources change the system 1. Capitalism (free-market)
• Market/ Socialism/ Communism accordingly 2. Socialism (mixed system)
3. Communism (centrally controlled)
It indicates the role of need-satisfying organisations

THE ENTREPRENEUR Entrepreneurship:

• Entrepreneurs and their businesses
are the need-satisfying institutions Use talents & abilities, take initiative in acquiring
in a market economy capital & natural resources, combine them &
provide necessary management to convert original
• Driving force in free market = profit idea into a business.
The needs of the community are satisfied or are not met

Need-satisfaction Cycle in Community

Business Environment: 1) Changes Constantly

2) Must be in tune with changing environment
3) Opportunities & Threats exist
4) Establishment, growth, & continued existence directly influenced by business environment
5) Influences future of business
Micro
♥ of business
÷ 3: Micro / Market/ Macro Variables = Mission statement & goals, business
functions, management

Market
Link between business & business environment.
Variables = market, competition, suppliers of
resources/services

Macro
Economic, Socio-cultural/ demographic,
Technological, Physical (natural),
Political/statutory, International
 GENERAL MANAGEMENT:
(process whereby human, financial, physical and information resources are deployed in order to reach goals of organisation)

Systems Approach
OUTPUTS (performance)
INPUTS (resources) TRANSFORMATION
Achievement of goals
• Human Physical
Products
Financial transformation
• Services
process
• Physical Productivity
Management
• Information Job creation
process
• Entrepreneurship Profit

Management Process/ Function

PLANNING ORGANISING LEADING CONTROLLING

• What? • How? • When? • Whether?

FEEDBACK!

Management Skills

Technical Skills Necessary to accomplish specific task/ train & support subordinates
Interpersonal Skills Ability to communicate/ understand/ motivate individuals/teams
Conceptual Skills Ability to see & understand business as a whole entity/ think strategically & see big picture
Diagnostic Skills Ability to diagnose symptoms & develop solution
Communication Skills Convey and receive ideas from and to others
Decision Making Skills Ability to recognise problems/ opportunities and formulate alternative solution
Time Management Skills Ability to prioritise work, effectively/efficiently & delegate tasks.

Management Levels: Types of Decisions:

Non-programmed Decision
Managers set goals/objectives TOP Single-use plan
= desired end state if not met = problems exists Strategic
Management
MANAGERIAL DECISION

Long term goals Programme project

Middle
Tactical Management
Medium Term Goals

Supervisory/ Line
Management Programmed Decision
Operational Management Standing Plan

Rules & Regulations/ SOPs

Decision Making Conditions

Rational Decision Making 6 Steps
Certainty:
1) Classify & define problem/opportunity (perfect knowledge available for each alternative & their
2) Set objectives and criteria consequences)
3) Generate creative alternatives Risk:
4) Analyse alternatives (available alternatives, probability of occurrence & potential
5) Plan & implement decision benefits/costs associated with them are known)
6) Follow-up and evaluate results Uncertainty:
(risks are unknown, therefore need to gain insight and
make logical/rational decision)
 FINANCIAL MANAGEMENT:
(Value must be added by financial manager = custodian of shareholder’s money therefore must know what affects share prices. i.e.
how to increase share value)

ROLE OF FINANCIAL MANAGER:

1) Business Start-up
Determine long-term investment
Obtain long-term financing (equity or loans)
Debtor & creditors (short term)

What cash / inventory levels must be kept?

Sell/ purchase for credit or on cash?
2) Analysis of business to determine value adding
Ratio analysis used to analyse where and how value is added throughout business v.s. competitors

Ratio Analysis
• Assist in comparing business’s performance & status with competitor or itself over period
• Shareholder’s, creditors and managers use information to determine how efficient and profitable business is
• Income Statement and Balance Sheet used to input ratios

Profitability Ratios

Activity Ratios

Capital Structure/ Liquidity Ratios
Economic Value Adding (EVA)
Rate of return on total capital determines value added by cash-generating projects & contributes to overall business performance
Points to remember for EVA
a) Calculated weighted average costs of capital
b) Calculate net operating profit after tax (NOPAT)
GAAP distortions consist of add back:
c) NOPAT take into account GAAP distortions  R&D
d) Calculate the value of investment  Training Expenses that have long
e) Calculate capital cost [a x d]  Marketing term benefits for business
f) Deduct [c –e)
3) Financial planning (short/long term)
Capital budgeting (means to identify best investment option)

Net Present Value (NPV)

NPV = estimated market value of business – cost of investment

Payback rule: how long will it take to recover investment money

Profitability index (PI) = PV ÷ original investment
Capital structure (viable combination of debt and equity)
Financial leverage is obtained when debt is used – value is added to business and costs are reduced. Value is added via tax deductibility of interest
paid, which lowers interest payment. BUT Higher debt = higher risk hence bank charges higher interest rate hence use Interest Cover Ratio to
determine how effective the financial leverage has been.

Type of risks
Business risk – the risk of the return on its assts being insufficient if no debt is used
Financial risk – the onus falls on shareholder to bear a higher risk when the business decides to use debt.
Working capital management (management of current assets & liabilities)
Must ensure right capital invested in short-term financing
Working capital NB to ensure that cash is available to purchase stock, pay creditors, provide credit to debtors and pay for day-to-day expenses
Net working capital = current assets – current liabilities
Balance between CA and CL must be such that the amount of profitability and risk adds positive value to the business.
Cash conversion cycle NB to ensure business has enough cash to cover its cost of x period.
Cash conversion cycle can be shortened by:

Produce and sell products fasters

Shorten receivables period (i.e. collect $ from debtors faster)

Stretch payables deferral period (take longer to pay accounts)

4) Budgets
Plan for future activities expressed in monetary terms
Assist with planning & control processes of business = financial tool (indicates expected future & used as measuring tool)
Budget control:
Step 1: Setting standards (objectives set out in monetary terms)
Step 2: Comparing actual performance with the standards
Step 3: Evaluating and analysing actual performance
Step 4: Taking corrective and preventative action