A2 Short Revision Notes - Waqas Majeed
A2 Short Revision Notes - Waqas Majeed
SHORT
REVISION NOTES
Waqas Majeed
Free trade: no restrictions or trade barriers exist that might prevent or limit trade between countries.
Some benefits include:
- Imports of raw materials allow a developing economy to increase its rate of industrialization.
- Imports offer consumers a much wider choice of goods and services.
Trade barriers
Tariffs: taxes imposed on imported goods to make them more expensive than they would otherwise be.
Quotas: limits on the physical quantity or value of certain goods that may be imported.
Voluntary export limits: an exporting country agrees to limit the quantity of certain goods sold to one country
Protectionism: using barriers to free trade to protect a country’s own domestic industries.
Globalization: the increasing freedom of movement of goods, capital and people around the world.
Multinational business: business organization that has its headquarters in one country, but with operating
branches, factories and assembly plants in other countries.
Why become a multinational? There are several reasons why businesses become multinationals: • It brings them
closer to their main markets, with the benefits of lower transport costs and better market information about
consumer tastes. • The benefits include lower costs of production as a result of lower wages, lower rental costs
and relatively weak government restrictions. • They avoid import restrictions by producing in the local country.
Benefits on host country Drawbacks on host country
The investment will bring in foreign currency Exploitation of the local workforce might take place
Employment opportunities will be created and training Local competing firms may be squeezed out of business due
programmes will improve the efficiency of local people to inferior equipment and resources
Privatization: selling state-owned and controlled business organisations to investors in the private sector.
Arguments for Arguments against
The profit motive of private-sector businesses will lead to With competing privately run businesses it will be much
much greater efficiency than when a business is supported more difficult to achieve a coherent and coordinated policy
and subsidized by the state. for the benefit of the whole country
Decision-making in state bodies can be slow and Many strategic industries could be operated as ‘private
bureaucratic. monopolies’ if privatized and they could exploit consumers
with high prices
Nationalisation: when the government takes ownership and control of private businesses or industries, often to
safeguard public interest, ensure fair distribution of resources, or support economic stability.
Arguments for Arguments against
Essential services (like water, energy, and healthcare) can Without the pressure of competition, state-owned firms may
be provided equitably, without profit motives driving up become inefficient, with poor customer service and
prices or limiting access. innovation.
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Government control can prevent large industries from Decisions may be driven by political agendas rather than
collapsing, protecting jobs and the broader economy. business logic, leading to mismanagement.
Unlike private firms focused on short-term profits, Nationalised industries often require taxpayer support,
governments can invest in infrastructure and innovation for especially if they are unprofitable or poorly managed.
the public good.
Legal constraints on business activity: Law and employment practices, Recruitment, employment contracts and
termination of employment, Health and safety at work, Minimum wage, Law, marketing behavior and consumer
rights, Law, business competition
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4) Predatory pricing: When a major firm in an industry tries to block new competitors by charging very low
prices for certain goods, then this is called predatory pricing.
3) Social Influences
Social audit: a report on the impact a business has on society – they include: a health and safety record (e.g. the
number of accidents and fatalities), pollution levels, contributions to local community events and charities, the
proportion of supplies from ethical sources (e.g. Fairtrade suppliers) and employee benefit schemes.
Benefits of social audits Limitations of social audits
They identify what social responsibilities the business is If the social audit is not independently checked, it may
meeting – and what still needs to be achieved. not be taken seriously by stakeholders.
Managers can set targets for improvement in social Detailed social audits require time and money.
performance by comparing these audits with the best-
performing firms in the industry.
Why businesses need to consider community needs
A business that aims to be socially responsible will take decisions that consider the needs of the community as
well as its shareholders. The benefits of a business attempting to meet the needs of the community are:
• improving the public image of the business, making it more attractive to investors and socially aware
consumers
• increasing the chance that the community will accept business decisions such as expansion or relocation
An ageing population: This means that the average age of the population is rising.
Adopting environmentally friendly business strategies:
Arguments in favour Arguments against
Businesses that reduce pollution by using the latest ‘green’ There might be a marketing advantage from keeping
equipment or use recycled material rather than scarce costs as low as possible, even though the environment is
natural products can have a real marketing and promotional damaged as a result. Lower prices may increase sales.
advantage.
Environmental audits: assess the impact of a business’s activities on the environment.
Pressure groups: organisations created by people with a common interest or aim who put pressure on businesses
and governments to change policies so that an objective is reached.
Demographic changes:
Recent global social and demographic changes include:
• an ageing population in many high-income countries
• the changing role of women, who increasingly seek employment and fill posts of responsibility in industry
• better provision of education facilities and increasing literacy, leading to more skilled and adaptable
workforces
• early retirement in many high-income countries, leading to more leisure time for a growing number of
relatively wealthy pensioners
4) Competitors
Competitors are firms that can provide your clients with the same or similar goods and services as you. By keeping
track of their competition, businesses may expand their market share and remain relevant to their customers.
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• cutting profit margins and limiting price rises to stay as competitive as possible
Deflation: A general drop in the price of goods and services is referred to as deflation. It occurs when consumers
just forgo spending in the hope of reduced pricing in the future.
Unemployment: this exists when members of the working population are willing and able to work, but are unable
to find a job.
There are three main causes or categories of unemployment:
• Cyclical unemployment: unemployment resulting from low demand for goods and services in the
economy during a period of slow economic growth or a recession.
• Structural unemployment: unemployment caused by the decline in important industries, leading to
significant job losses in one sector of industry.
• Frictional unemployment: unemployment resulting from workers losing or leaving jobs and taking a
substantial period of time to find alternative employment.
Costs of unemployment
• The output of the economy is lower than it could be, which reduces living standards.
• The cost of supporting unemployed workers and their families is substantial and is paid for out of general
taxation.
• High unemployment may lead to social problems, such as crime, which is a cost to society.
Impact of unemployment on business activity
• Reduced income levels will reduce demand for most products.
• It is easier to recruit new employees as more people apply for each vacancy.
• Workers may accept lower pay increases as they are afraid of losing their jobs.
Exchange rate: the price of one currency in terms of another
Exchange rate depreciation: a fall in the external value of a currency as measured by its exchange rate against
other currencies.
Exchange rate appreciation: a rise in the external value of a currency as measured by its exchange rate against
other currencies.
domestic firms that gain from an domestic firms that lose from domestic businesses that gain e home-based businesses that are
appreciation of the country’s an appreciation are from a depreciation are likely to lose from a depreciation
currency are are
Importers of Importers of Exporters Businesses Home- Businesses Manufacturers Retailers that
foreign raw foreign of goods that sell goods based that sell in the who depend purchase
materials and manufactured and and services to exporters domestic heavily on foreign
components goods services to the domestic market will imported supplies supplies,
foreign market and experience of materials, especially if
markets have foreign less price components or there are
competitors competition energy sources close
from domestic
importers – substitutes
Factors, other than product prices, that can determine the international success of a business:
• Product design and innovation:
• Quality of construction and reliability
• Effective promotion and extensive distribution
• After-sales service
• Investment in trained staff and modern technology
Macro-economic policies: These are policies that are designed to impact on the whole economy – or the
‘macro-economy’. They mainly operate by influencing the level of total or aggregate demand in the economy.
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Fiscal policy: concerned with decisions about government expenditure, tax rates and government borrowing –
these operate largely through the government’s annual budget decisions.
• Expansionary Fiscal Policy/ Government budget deficit: the value of government spending exceeds
revenue from taxation.
• Contractionary Fiscal Policy/ Government budget surplus: taxation revenue exceeds the value of
government spending.
Monetary policy: is concerned with decisions about the rate of interest and the supply of money in the
economy.
Impact on business and business decisions
Higher interest rates will have an impact on businesses in three main ways:
• They increase interest costs and reduce profits for businesses that have very high debts.
• They reduce borrowing by consumers, which reduces demand for goods bought on credit (e.g. houses, cars,
washing machines).
• They often lead to an appreciation of the country’s exchange rate.
Corporate strategy: a long-term plan of action for the whole organization, designed to achieve a particular goal.
Tactic: short-term policy or decision aimed at resolving a particular problem or meeting a specific part of the
overall strategy.
Corporate strategy will be influenced by four main factors: Resources available, Other strengths of the business
(for example in researching heart-disease), Competitive environment, Objectives
Competitive advantage: a superiority gained by a business when it can provide the same value product/ service
as competitors but at a lower price, or can charge higher prices by providing greater value through
differentiation.
According to Michael Porter, there are two main factors leading to a significant competitive advantage:
Business managers must decide whether they want the business to focus on
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Example:
Political and legal: Stability of the government
Economic: Rate of economics growth
Social: Demographic changes
Technology: Rapidly changing technology allowing products to be made more cheaply
Advantages Disadvantages
Helps organizations spot external opportunities and A high-level tool that offers a general overview of the
threats. Understanding these factors allows businesses to external environment but may overlook the organization’s
make informed decisions and adapt to market changes. specific needs or challenges.
Informs business strategies by factoring in the external Time-consuming and may lack actionable insights, as
environment, helping create plans that are more likely to thoroughly examining the four factors requires significant
succeed long-term. time and resources.
5) Business vision/Mission statement and objectives
Mission statement: a statement of the business’s core purpose and focus, phrased in a way to motivate
employees and to stimulate interest by outside groups.
Vision statement: a statement of what the organization would like to achieve or accomplish in the long term.
Mission statements outline the overall purpose of the organization. A vision statement, on the other hand,
describes a picture of the ‘preferred future’ and outlines how the future will look if the organization achieves its
mission
4) Porter’s Five Forces analysis
Advantages Disadvantages
Offers a clear, structured way to analyze an industry, Relies on assumptions that may not always hold true, such
helping organizations objectively assess key factors as the belief that firms are driven solely by profit.
shaping the competitive landscape.
Helps identify industry opportunities and threats, enabling Ignores internal factors like culture, leadership, and skills,
organizations to make informed decisions and strategically potentially offering an incomplete view of an
position themselves for success. organization's competitive position.
Barriers to entry: the ease with which other firms can join the industry and compete with existing businesses
The power of buyers: the power that customers have on the producing industry.
The power of suppliers: Suppliers will be relatively powerful compared with buyers when the cost of switching is
high, e.g. from PC computers to Macs, when the brand being sold is very powerful and well-known, etc.
The threat of substitutes In Porter’s model, ‘substitute products’ does not mean alternatives in the same industry,
such as Toyota for Honda cars. It refers to substitute products in other industries.
Competitive rivalry: This is the key part of this analysis – it sums up the most important factors that determine
the level of competition or rivalry in an industry.
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6) Core competencies: The concept of core competencies was first analyzed in the work of Hamel and Prahalad.
They argued that if a business develops core competencies, then it may gain competitive advantage over other
firms in the same industry. To be of commercial and profitable benefit to a business, a core competence should:
■ provide recognizable benefits to consumers
■ not be easy for other firms to copy, e.g. a patented design
■ be applicable to a range of different products and markets.
Advantages of Core competencies
1. Core competencies can provide a competitive advantage
2. Core competencies can drive innovation and growth
3. Core competencies can improve efficiency and effectiveness
Limitations of Core competencies
1. Developing core competencies can be time-consuming and costly
2. Focusing on core competencies can limit an organization's flexibility
3. Core competencies may not always align with customer needs
Core product: product based on a business’s core competences, but not necessarily for final consumer or end
user.
Core competence: an important business capability that gives a firm competitive advantage
Strategic choice: Strategic decision-making encompasses the entire process of selecting a specific option from a
variety of possibilities. It is a component of the strategic management framework that assists managers in
evaluating multiple possibilities and selecting the most advantageous one.
7) Ansoff ’s matrix: a model used to show the degree of risk associated with the four growth strategies of market
penetration, market development, product development and diversification.
Market penetration: achieving higher market shares in existing markets with existing products.
Adv: Low risk, leverage existing resources
Disadv: Limited growth potential, increased competition
Product development: the development and sale of new products or new developments of existing products in
existing markets.
Adv: Increased revenue potential, improved customer loyalty
Disadv: High risk, limited resources
Market development: the strategy of selling existing products in new markets.
Adv: Increased revenue potential, diversification
Disadv: High risk, limited resources
Diversification: the process of selling different, unrelated goods or services in new markets.
Adv: Risk reduction, increased revenue potential
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8) Force-field analysis: technique for identifying and analyzing the positive factors that support a decision (‘driving
forces’) and negative factors that constrain it (‘restraining forces’).
Conducting a force-field analysis
1. Analyse the current situation and the desired situation.
2. List all of the factors driving change towards the desired situation.
3. List all of the constraining factors against change towards the desired situation.
4. Allocate a numerical score to each force, indicating the scale or significance of each force: 1 = extremely
weak and 10 = extremely strong.
5. Chart the forces on the diagram with driving forces on the left and restraining forces on the right.
6. Total the scores and establish from this whether the change is really viable. Is it worth going ahead? If yes,
then the next stage is important.
7. Discuss how the success of the change or proposed decision can be affected by decreasing the strength
of the restraining forces and increasing the strength of the driving forces.
Advantages Disadvantages
The technique helps managers strengthen supporting Unskilled or inexperienced managers could fail to identify
forces and reduce opposing ones to guide better decision- all of the relevant forces involved in the change process.
making.
In business, decisions such as introducing a new product Assigning numerical values to forces is subjective, leading
or service, or implementing a major internal change, to different outcomes if managers assess the same
could be analysed using this approach. situation independently.
9) Decision tree: a diagram that sets out the options connected with a decision and the outcomes and economic
returns that may result. how they are constructed:
• It is constructed from left to right.
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• Each branch of the tree represents an option together with a range of consequences or outcomes and the
chances of these occurring.
• Decision points are denoted by a square – these are decision nodes.
• A circle shows that a range of outcomes may result from a decision – a chance node.
• Probabilities are shown alongside each of these possible outcomes. These probabilities are the numerical
values of an event occurring – they measure the chance of an outcome occurring.
• The economic returns are the expected financial gains or losses of a particular outcome.
Expected value: the likely financial result of an outcome obtained by multiplying the probability of an event
occurring by the forecast economic return if it does occur.
Advantages Disadvantages
They force the decision-maker to consider all of the The possible inaccuracy of this data makes the results of
options and variables related to a decision. decision-tree analysis no more than a useful guide for
managers.
They put these on an easy-to-follow diagram, which allows Probabilities based on past data may be unreliable, as
for numerical considerations of risk and economic returns changing circumstances—like new competition—can affect
to be included. outcomes.
Adv: - provides clear focus and sense of purpose - the original objectives can be compared with actual outcomes
to see progress
Disadv: - The best-laid plans of any business can be made obsolete by rapid and unexpected internal or external
changes. - Corporate planning relies on forecasting future trends and conditions, which can be difficult to do
accurately, causing limited foresight.
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Corporate culture: Corporate culture shapes how employees interact internally and with stakeholders. A strong
culture promotes clear goals, positivity, and adaptability, while a weak culture lacks direction, morale, and
accountability.
The main types of corporate culture
• Power culture: This is associated with autocratic leadership. Power is concentrated at the center of the
organization.
• Role culture: This is most associated with bureaucratic organisations. People in an organization with this
culture operate within the rules and show little creativity.
• Entrepreneurial culture: this encourages management and workers to take risks, to come up with new
ideas and test out new business ventures.
• Person culture: when individuals are given the freedom to express themselves fully and make decisions
for themselves.
• Task culture: based on cooperation and teamwork.
Advantages of corporate culture: A distinctive organisational culture can support a business’s brand image and
relationships with customers, Culture determines not just how strategic decisions are made and implemented,
but also the type of strategic decisions that are taken. A business with a people-based culture is most unlikely to
take decisions that would damage workers’ health or the local environment.
Change management: planning, implementing, controlling and reviewing the movement of an organization from
its current state to a new one
1) Understand what change means
2) Recognize the major causes/types of change
3) Understand the stages of the change process
4) Lead change, not just manage it
Transformational leadership is of most importance during periods of significant corporate change. Aim include:
- Influence employees with their own (the leader’s) behaviour and qualities. Setting the right example is so
important.
- Demonstrate a genuine concern for the needs and feelings of employees
Promoting change
According to John Kotter, a leading writer on organizational change, the best way to promote it in any organization
is to adopt the following eight-stage process:
1) establish a sense of urgency
2) create an effective project team to lead the change
3) develop a vision and a strategy for change
4) communicate this change vision
5) empower people to take action
6) generate short-term gains from change that benefit as many people as possible
7) consolidate these gains and produce even more change
8) build change into the culture of the organization so that it becomes a natural process.
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Contingency planning and crisis management: This is also known as ‘business continuity planning’ or ‘disaster-
recovery planning’. Effective contingency planning allows a business to take steps to minimize the potential impact
of a disaster – and ideally prevent it from happening in the first place.
Contingency plan: preparing an organization’s resources for unlikely events.
Adv: - reassures staff - minimizes negative impact on customers and suppliers
Disadv: - costly - time consuming
The key steps in contingency planning are:
1) Identify the potential disasters that could affect the business
2) Assess the likelihood of these occurring
3) Minimize the potential impact of crises
4) Plan for continued operations of the business
Business objectives and organisational structure: New competitors enter the industry, The business grows and
develops, Intrapreneurship is being encouraged
Types of structures
Flexible Organizational Structure: Workers in a readily adjust to their clients' needs, finish their work efficiently
The hierarchical (or bureaucratic) structure: includes different layers of the organization with fewer and fewer
people on each higher level
Chief Executive
Directors
Line Workers
Adv: - role of each individual will be clear - clearly identifiable chain of command
DisAdv: - managers are often accused of tunnel vision (they only see the perspective of their own dept) -
few horizontal links between the departments leading to a lack of coordination
Functional Structure: a sort of corporate structure that divides a corporation into sections depending on
specialization, such as marketing, HR, etc
Adv: - departmental loyalty and pride in the work of their department exists in employees - encourages
employees to become specialists, and this can increase efficiency and productivity
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Disadv: - coordination between departments is difficult - there might be unhealthy competition between
department
Flat Structure/Delayering: Delayering is the process of removing a management layer
Business Unit Structure: This permits specialized managers to concentrate on the demands of various divisions.
Adv: is that it helps in decision making
Disadv: it might lead to rivalry between different departments.
Geographical Structure: organizes people within an organization by geographic location, like countries or
continents.
Adv: is that there is close communication with local customers.
Disadv: is that some economies of scale may be lost.
Product Structure: when corporation is divided into groups with people from different department to work on a
product.
Adv: helps your business focus on specific market segments and meet customer needs more effectively.
Disadv: duplicating functions and resources, e.g a different sales team for each division
Matrix structure: an organizational structure that creates project teams, it is task/project oriented
Adv: - allows total communication between all members of the team - crossover of ideas between people with
specialist knowledge in different areas tends to create more successful solution
Disadv: - there is less direct control from the ‘top’ as the teams may be empowered to undertake and complete a
project - this passing down of authority to more junior staff could be difficult for some managers to come to terms
with
Chain of command: this is the route through which authority is passed down an organization
Span of control: the number of subordinates reporting directly to a manager. Two types:
wide – with a manager directly responsible for many subordinates
narrow – a manager has direct responsibility for a few subordinates.
Delegation: the passing down of authority from higher to lower levels in the organization.
Adv: gives senior managers more time to focus on important tasks, trains staff for more senior positions
Disadv: managers may only delegate the boring jobs that they do not want to do – demotivating
Centralization: keeping all of the important decision-making powers within the center of the organization.
Adv: fixed set of rules and procedures in all areas of the firm should lead to rapid decision-making
Decentralization: decision-making powers are passed down the organization to empower subordinates and
Regional / product managers.
Adva: More junior managers can develop and this prepares them for more challenging roles.
Factors that could determine the internal structure of a business: The style of management, or the culture of the
managers, If the business were to grow, another manager or supervisor might be required, Retrenchment caused
by economic recession or increased competition might lead to delayering to reduce overhead costs, Corporate
objectives, Adopting new technologies
Important links between organizational principles
1) The greater the number of levels of hierarchy, the longer the chain of command
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Staff managers: managers who, as specialists, provide support, information and assistance to line managers.
Key features of effective communication: sender (or transmitter) of the message, clear message, appropriate
medium (way in which the message is sent), receiver, feedback to confirm receipt and understanding.
Importance of effective communication: staff motivation, reduces the risk of errors, effective coordination
between departments
Essential Situations for Communication
Businesses communicate externally with stakeholders like customers, suppliers, and shareholders, and internally
within the organization. Effective external communication is crucial for:
• Customers – Informing about new products, updates, safety warnings, feedback, and promotions.
• Suppliers – Discussing orders, deliveries, discounts, and resolving issues.
• Shareholders – Providing updates on AGMs, dividends, director elections, and financial reports.
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Oral (spoken) communication: one-to-one conversations, interviews, appraisal sessions, group meetings or team
briefings.
Adv: - Direct - can be questioned quickly - easy to understand
Disadv: - affected by noise - no permanent accurate record- can be quickly forgotten
Written communication: letters, memos, notices on boards, reports, minutes of meetings and diagrams.
Adv: - recorded – permanent record - easy to distribute - more structured
Disadv: - no body language - may be misinterpreted - costly and time-consuming
IT and web-based media (electronic media): internet and email use, Intranets (internal computer links), fax
messages, video/web conferencing and smart phones.
Adv: - great speed - overcomes global boundaries - interactive
Disadv: - expensive in hardware - security issues - risk of communication overload
Visual communication: diagrams, pictures, charts and pages of computer images can be presented by using
overhead projection, interactive white boards, data projectors, downloads.
Adv: - more interactive - often easier to remember
Disadv: - needs close attention - interpretations by receivers can vary
Factors influencing choice of appropriate media: The importance of a written record, The advantages to be
gained from staff input or two-way communication, Cost, Speed, Quantity of data to be communicated, Size and
geographical spread of the business
Communication barriers: consists of factors and reasons to why communication fails within a business
Three broad reasons why barriers to communication occur:
1) Failure in one of the stages of the communication process
2) Poor attitudes of either the sender or the receiver
3) Physical reasons
Problems with Two-Way Communication: can be time-consuming and unnecessary for straightforward
messages.
Problems with Vertical Communication: often one-way, slow due to intermediaries, and prone to distortion in
hierarchical structures.
Problems with Horizontal Communication: may have conflicting objectives, different work cultures, or struggle
with technical jargon.
Failures in the Communication Process: using inappropriate methods, excessive jargon, vague instructions, or
lengthy channels can cause misunderstandings and delays.
Poor Attitudes: Distrust, lack of motivation, or negative sender-receiver relationships can disrupt
communication.
Physical Barriers: Noisy environments and geographical distance hinder effective communication, though
technology can help.
Overcoming Barriers: Managers should ensure clarity, use short communication channels, encourage feedback,
build trust, and create suitable physical conditions for communication.
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Formal communication networks: the official communication channels and routes used within an organization.
One-way communication: When the methods of communication do not allow for or encourage feedback from
the receiver of the message. Example: messages pinned on noticeboards.
Two-way communication: When the methods of communication allow for and encourage feedback from the
receiver of the message. Example: one to one conversations.
Vertical communication: is when people from different levels of hierarchy communicate with each other.
Horizontal communication: occurs along an organization chart – between people who have approximately the
same status but different areas of responsibility.
Informal communication: unofficial channels of communication that exist between informal groups within an
organization.
2.6 Leadership
Leadership: is the ability of an individual or a group to influence and guide followers and other members of the
organization. Qualities of a leader include: Confident, Creative, Multitalented, incisive mind, Commitment and
Passion, Good Communicator, Decision Making Ability
Leadership positions
• Directors: These senior managers are elected into office by shareholders in a limited company.
• Managers: They have some authority over other employees below them in the hierarchy. They direct,
motivate and praise, and discipline workers.
• Supervisors: These are appointed by management to watch over the work of others.
• Workers’ representatives: These are elected by the workers to discuss with managers the concern of
the workers.
• Informal leadership: Informal leaders are people who have the ability to lead without formal power,
perhaps because of their experiences, personality or special knowledge.
Authoritative Characteristics: Informal leaders help their team members achieve goals and fulfill needs, making
them highly influential. They take a balanced approach, considering multiple perspectives before making
decisions.
Relationship Characteristics: They’re trusted for advice, valued for loyalty and practical decisions, and often
mentor others informally, strengthening workplace culture.
Communication Characteristics: When given more responsibility, they boost team success. Their
communication, rooted in camaraderie and shared interests, builds trust and cohesion.
Theories of Leadership
Goleman’s Emotional Intelligence (EI) Competencies
Daniel Goleman identifies four key EI competencies for effective leadership:
1. Self-Awareness – Recognizing and managing one's emotions, having confidence, and making informed
decisions.
2. Self-Management – Controlling emotions, handling stress, staying trustworthy, and showing initiative.
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3. Social Awareness – Understanding others' emotions, considering different perspectives, and building
relationships.
4. Social Skills – Managing emotions in interactions, persuading, negotiating, and leading effectively.
Low EI Managers: They lack confidence, struggle with stress, ignore others’ views, and fail to communicate or
build strong teams. Developing EI enhances leadership, teamwork, and workplace culture.
Great man (Great person) theory
According to this theory, some people are naturally born with leadership qualities and those qualities cannot be
taught.
Trait theory
It believes that people are either born with the personality characteristics (or traits) required for leadership, or
they are not.
Behavioral theory
It assumes that capable leaders can learn the skills needed rather than having inherent qualities.
Contingency theory
This theory suggests that the most successful leaders adapt their leadership style to different situations.
Changing situations that can create a need for a different approach to leadership include:
• Levels of experience and maturity of the subordinates
• The relationship between leader and followers
• Amount of time needed to complete the task
• The level of power of the leader’s position
Emotional Intelligence/Emotional Quotient: The ability of managers to understand their own emotions, and
those of the people they work with, to achieve better business performance. There are four main EI competencies:
1. Self-awareness 2. Self-management 3. Social awareness 4. Social skills
Hard HRM: this focuses on cutting costs, e.g. temporary and part-time employment contracts
Adv: you gain complete control over your company, you can make more cost-effective policies
Disadv: it could increase recruitment and induction training costs in the long term, bad publicity regarding the
treatment of workers, ignores the research findings of Maslow, Mayo and Herzberg
Soft HRM: this focuses on developing staff so that they reach self-fulfillment and are motivated to work hard
Adv: can assist a company in establishing a reputation as a "good" employer, encourages employees to be more
innovative
Disadv: Decision-making can become much more difficult as everyone needs to be consulted
Employment contracts: Businesses offer two main types of employment contracts: permanent, full-time contracts
for key "core workers" and temporary, part-time, zero-hours, or gig contracts for easily replaceable "peripheral
workers." Hard HRM favors flexible contracts, while soft HRM prioritizes permanent roles, providing job security
and development opportunities.
Shamrock Organization
• Core employees: Full-time, permanent roles with competitive pay and benefits.
• Outsourced functions: Handled by independent providers or gig workers.
• Flexible workers: Temporary or part-time, brought in as needed.
Flexible employment contracts: Employers are being forced to consider ways in which they can make the jobs
they offer more attractive. Offering the following forms of flexibility is one way of doing this:
• flexitime arrangements
• home working
Flexible Workforce: A flexible workforce expands in size to meet changing needs and then shrinks down to a
baseline size when the extra size is no longer required.
Several methods to employ flexible contracts: Part-time employment contract, hours, Temporary employment
contract, Flexi-time contract, Outsourcing, Zero hour, Annualized Hours
Measuring and monitoring employee performance
Labor productivity: the output per worker in a given time period. It is calculated by:
total output in time period/total workers employed
Absenteeism: measures the rate of workforce absence as a proportion of the employee total. It is measured by:
absenteeism (%) = no. of employees absent/Total no of employees x 100
Management by objectives (MBO): This system is designed to motivate and coordinate a workforce by dividing
the organization’s overall aim into specific targets for each division, department and individual.
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Adv: - Each manager and subordinate will know exactly what they have to do - By using the corporate aim and
objectives as the key focus to all departmental and individual objectives
Disadv: - The process of dividing corporate objectives into divisional, departmental and individual targets can be
very time consuming - Objectives can become outdated very quickly
Labor legislation: All governments have passed laws to control working conditions and the relationship between
employer and employee. The state intervenes in industrial relations in a number of ways: through industrial-
relations laws, through agencies set up to improve industrial relations, such as arbitration councils, through its
own policies as a major employer.
1) ‘Hard’ or autocratic management style: some managers have a ‘take it or leave it’ attitude to the
workforce. Workers might be employed on very short-term contracts – even on a daily basis – offering no
security at all.
2) Collective bargaining between trade unions and major employers and their associations: collective
bargaining is when representatives of unions and national employers negotiate wage levels and working
conditions for the whole industry or for large sections of it.
3) Cooperation between labor and management: this approach is based on the recognition that successful
competitive businesses will benefit all parties.
Workforce planning: analyzing and forecasting the numbers of workers and the skills of those workers that will
be required by the organization to achieve its objectives.
Workforce audit: a check on the skills and qualifications of all existing workers/managers.
Reasons for and role of a workforce plan
If a business plans to expand production and enter foreign markets, the workforce plan must align. Next, the
required employee count and skills are determined.
Recent IT applications in HRM
Recruitment: web portals allow employers to post details of vacant positions and the qualifications and
experience required of applicants.
Training and development: Training programmes can be uploaded on IT, such as essential induction training
programmes.
The future of IT and AI in HRM
The use of AI, which learns how to perform tasks that usually need human intelligence, is particularly likely to
transform HRM within the next 20 years.
- AI can read hundreds of job applicants’ details very rapidly. It can then evaluate these candidates without
human bias or error.
- Virtual reality (VR) is breaking away from its computer gaming image and is being used to develop realistic
and interactive training courses.
Evaluation of increased use of IT in HRM: The use of IT frees up HRM time for more important strategic issues,
It can reduce social and personal contact between HRM and employees and make the HR managers seem remote.
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2) How many similar competing products or brands there are: If there are many competitors, then there are a
large number of substitutes, and consumers will quickly switch to another brand if the price of one manufacturer’s
product increases: elastic demand, e.g., fruit
3) The level of consumer loyalty: If a firm has successfully branded its product to create a high degree of loyalty
among consumers, like Coca-Cola, then the consumers will be likely to continue to purchase the product following
a price rise: inelastic demand
4) The price of the product as a proportion of consumers’ incomes: A cheap product that takes up a small
proportion of consumers’ incomes, such as matches: inelastic demand
Business uses of PED: Making more accurate sales forecasts, assisting in pricing decisions
PED Value Classification
Zero Perfectly inelastic demand
between 0 to 1 Inelastic Demand
between 1 to infinity Elastic Demand
Unitary Unit elasticity
Infinity Perfectly Elastic demand
Income elasticity of demand: measures the responsiveness of demand for a product following a change in
consumer incomes.
Percentage change in demand for a product/Percentage change in consumer incomes
Promotional elasticity of demand: measures the responsiveness of demand for a product following a change in
the amount spent on promoting it.
Percentage change in demand for a product/Percentage change in promotional spending
Impact of Elasticities on Business Decisions
• Price elasticity: Raise prices if demand is inelastic; lower if elastic to boost sales.
• Income elasticity: If negative, higher incomes lower demand—adjust prices or explore new markets.
• Promotional elasticity: Low impact? Focus on product quality or customer service instead.
Limitations of Elasticities
• Price elasticity: Overlooks income and preferences; hard to measure.
• Income elasticity: Ignores price changes; tricky for rare purchases.
• Promotional elasticity: Varies with ad effectiveness; tough to gauge accurately.
Integrated marketing strategy: Integrating with other departments of the business, The four elements of the
marketing mix must be mutually supportive and integrated with each other.
New product development (NPD): the design, creation and marketing of new goods and services.
Research and development: is the set of innovative activities undertaken by corporations or governments in
developing new services or products and improving existing ones.
Importance
- New product innovations allow businesses to survive and grow in rapidly changing marketplaces.
- They may have a considerable unique selling point or proposition over rivals so that the business can charge
premium prices – earning higher profit margins.
Limitations
- Expenditure on R&D can be a risky investment, as the success of such scientific enquiry can never be foreseen
with great accuracy.
Some factors that influence the level of R&D expenditure by a business: The nature of the industry, The R&D
spending plans of competitors, Government policy towards grants to businesses and universities for R&D
Adv: results in innovation over time, competitive edge
Disadv: research takes time, costly
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Sales forecasting: the process in which several methods are used to predict future sales levels and sales trends.
Benefits: production department would know how many units to produce and how many materials to order,
distribution would hold just the correct level of stocks, finance could plan cash flows with much greater accuracy
Sales-force composite: a method of sales forecasting that adds together all of the individual predictions of future
sales of all of the sales representatives working for a business.
Adv: quick and cheap to administer.
Disadv: sales representatives may not be aware of macro-economic developments or competitors’ actions
Delphi method: a long-range qualitative forecasting technique that obtains forecasts from a panel of experts.
Adv: Tests have proven that this Delphi is more accurate than unstructured group experts giving their opinions
and forecasts.
Disadv: Can be too time consuming and heavy on the budget
Consumer surveys: These are a form of market research and the questions may either be quantitative in nature
(e.g. asking for likely future levels of demand) or qualitative (e.g. asking for reasons behind future demand
choices).
Jury of experts: The jury of experts uses senior managers within the business, who meet and develop forecasts
based on their knowledge of their specific areas of responsibility.
Time-series analysis: This method of sales forecasting is based entirely on past sales data. They are sale records
kept overtime, presented in date order.
Extrapolation: The most basic method of predicting sales based on past results is termed extrapolation.
Extrapolation means basing future predictions on past results.
Moving averages: It allows the identification of underlying factors that are expected to influence future sales,
such as the trend, seasonal fluctuations, cyclical fluctuations, random fluctuations, seasonal variation, and
predicted sales.
Adv: useful for identifying and applying seasonal variation, reasonably accurate short-term predictions, assist
future planning.
Disadv: complex calculations, less accurate future predictions.
• Human resources – make plans for flexible employment contracts, plan for redundancies or cut back on
recruitment for vacant posts.
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Adv: complete control over international marketing of product, agents/traders might not give priority to new
exporting business, no commission is taken by intermediaries.
Disadv: need dedicated sales personnel to deal with foreign buyers
Exporting Indirectly:
Adv: agent will have local market knowledge and contacts aiding marketing of product, agent is responsible for
transport and administrative procedures, may be cheaper as fewer staff involved.
Disadv: commission/payment to be paid to agent, agent will also focus on selling other firms’ products.
International Franchising: is a form of expansion that can be used by new or existing franchises to expand into
new geographic areas and markets.
Joint Venture: it is when two or more businesses pool their resources in order to complete a certain goal. The
profit, losses and costs associated are shared.
Licensing: Obtaining authorization from a firm (licensor) to manufacture and sell one or more of its products
within a specific market area.
Globalization: It is selling a same standardized product with same quality standards all over the world.
International marketing – alternative strategies:
Direct investment in subsidiaries: A subsidiary is an incorporated enterprise in which the foreign investor controls
directly or indirectly.
Adv: employment will increase, support from foreign government.
Disadv: high costs, decisions could be unfavorable for the local community.
Foreign subsidiary: A foreign subsidiary is a company operating overseas that is part of a larger corporation with
headquarters in another country, often known as a parent company or a holding company.
Adv: head office has control of operations, all profits after tax belong to the company, foreign governments could
offer financial support.
Disadv: expensive to set up operations in foreign countries, might be subject to changes in government policy,
decentralized foreign subsidiaries could take decisions that damage the reputation of the entire business.
Localization: adapting the marketing mix, including differentiated products, to meet national and regional tastes
and cultures.
Adv: could lead to higher sales and profits, no attempt to impose foreign brands on regional markets, will likely
meet local national legal requirements, less local opposition to multinational business activity.
Disadv: scope for economies of scale is reduced, international brand could lose power and become less
population, additional cost of adapting products, store layouts, adverts etc. to specific local needs.
Two broad approaches of selling goods and services internationally:
Pan Global Marketing: marketing a standardized product across the globe, as if the entire world were a single
market, selling the same product in the same way everywhere.
Adv: standard identity for product which aids consumer recognition, cost reductions and substantial economics
of scale, recognizes that difference between consumer in different countries are reducing.
Disadv: might be necessary to develop different products to suit cultural/religious variations, lost market
opportunities, legal restrictions can vary, brand names don’t translate effectively into other languages
Global Localization: adapting the marketing mix, including differentiated products and adjusting for national and
regional tastes and cultures, in order to maintain local differences.
Adv: could lead to higher sales and profits, no attempt to impose foreign brands on regional markets, will likely
meet local national legal requirements, less local opposition to multinational business activity.
Disadv: scope for economies of scale is reduced, international brand could lose power and become less
population, additional cost of adapting products, store layouts, adverts etc. to specific local needs.
Choosing the strategy to develop a global market: Economic and social differences, Legal differences, Cultural
differences, Difference in business practices
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Selecting the method of entry into international markets: Exporting products, International franchising, Joint
ventures, Licensing, Direct investment in foreign subsidiaries
Other locational issues: The pull of the market, Planning restrictions, External economies of scale
Multi-site location: a business that operates from more than one location.
Adv: convenience for consumers, lower transport costs
Disadv: coordination problems between locations, potential lack of control of senior management
Off shoring: the relocation of a business process done in one country to the same or another company in another
country.
Multinational: A multinational company is a corporate organization that owns or controls the production of goods
or services in at least one country other than its home country
Reasons for international location decisions: to reduce costs, to access global (world) markets, to avoid
protectionist trade barriers, other reasons – substantial government financial support to relocate businesses,
good educational standards, highly qualified staff, avoidance of problems resulting from exchange rate
fluctuations.
Issues and potential problems with international location:
1) Language and other communication barriers – company suppliers/employees might use different
language to communicate
2) Cultural differences – differences in consumer tastes and religious factors
3) Level-of-service concerns – off-shoring of services led to inferior customer service
4) Supply-chain concerns – loss of control over quality and reliability of delivery
5) Ethical considerations – loss of jobs when a company relocates its operations abroad
Scale of operation: the maximum output that can be achieved using the available inputs (resources) – this scalecan
only be increased in the long term by employing more of all inputs.
Factors that influence the scale of operation of a business include: owners’ objectives, capital available, size of
the market the firm operates in, number of competitors, scope for scale economies
Economies of scale: reductions in a firm’s unit (average) costs of production that result from an increase in the
scale of operations.
Types of economies of scale:
1) Purchasing economies – suppliers will most likely offer discounts for large orders as they’re cheaper to
process and deliver will also want to keep customer happy due to large profits made on this sale.
2) Technical economies - Large firms are more likely to be able to justify the cost of flow production lines.
Such expense can only be justified when output is high so that fixed costs can be spread ‘thinly.’
3) Financial economies - Banks and other lending institutions often show preference for lending to a big
business with a proven track record and a diversified range of products.
4) Marketing economies - Marketing costs obviously rise with the size of a business, but not at the same
rate. These costs can be spread over a higher level of sales for a big firm.
5) Managerial economies - As a firm expands, it should be able to afford to attract specialist functional
managers who should operate more efficiently than general managers.
Diseconomies of scale: factors that cause average costs of production to rise when the scale of operation is
increased.
Types of Diseconomies of a scale:
1) Communication problems- Large-scale operations will often lead to poor feedback to workers,
communication overload with the sheer volume of messages being sent, and distortion of messages
caused by the long chain of command.
2) Alienation of the workforce - The bigger the organization, the more difficult it becomes to directly involve
every worker and to give them a sense of purpose and achievement in their work.
3) Poor coordination - Business expansion is often associated with a growing number of departments,
divisions and products. The number of countries a firm operates in often increases too. A major problem
for senior management is to coordinate and control all of these operations.
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How to overcome the impact of potential diseconomies: Management by objectives, Decentralization, Reduce
diversification
Sustainability: production systems that prevent waste by using the minimum of non-renewable resources so that
levels of production can be sustained in the future
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Simultaneous engineering: This method develops new products by handling design, research, costing, and
engineering tasks simultaneously, rather than sequentially.
Cell production: Cell production is a form of flow production, but instead of each individual worker performing a
single task, the production line is split into several self-contained mini production units – known as cells.
Just-in-time: this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just
as they are needed in production and completed products are produced to order
Adv: Capital invested in inventory is reduced and the opportunity cost of inventory holding is reduced.
Disadv: Delivery costs will increase as frequent small deliveries are an essential feature of JIT
Kaizen – continuous improvement: Kaizen emphasizes that all workers can contribute to improving operations
and products. It recognizes that employees often know more than managers about how to perform tasks or boost
productivity.
The following conditions are necessary for kaizen to operate: Management culture must be directed towards
involving staff and giving their views and ideas importance, team-working, empowerment, all employees should
be involved
Limitations of the kaizen approach: Some changes cannot be introduced gradually and may need a radical and
expensive solution, At least in the short term there may be tangible costs to the business of such a scheme
Quality circles
Benefits of Quality circles
• They improve quality through joint discussion of ideas and solutions.
• They improve motivation through participation.
• They make full use of the knowledge and experience of the employees.
Conditions determining success
• Circle members must be committed to improving quality.
• Members must be given training in holding meetings and problem-solving.
• They need full support from management.
Project: a specific and temporary activity with a start and end date, clear goals, defined responsibilities and a
budget.
Project management: using modern management techniques to carry out and complete a project from start to
finish in order to achieve pre-set targets of quality, time and cost.
The four basic elements of any project: Resources, Time, Money, Scope
The key elements of project management include: defining the project carefully, including the setting of clear
objectives, dividing the project up into manageable tasks and activities, controlling the project at every stage to
check that time limits are being kept to, giving each team member a clear role, providing controls over quality
issues and risks.
Projects fail mostly because of: customers were not involved in the planning and development process, poor
planning, poor management and poor communication, the project had inadequate or no resources that were vital
for its completion
Critical path analysis: a planning technique that identifies all tasks in a project, puts them in the correct sequence
and allows for the identification of the critical path.
Critical path: the sequence of activities that must be completed on time for the whole project to be completed by
the agreed date.
Network diagram: the diagram used in critical path analysis that shows the logical sequence of activities and the
logical dependencies between them – so the critical path can be identified
The process of using critical path analysis involves the following steps:
1) Identify the objective of the project, e.g. building a factory in six weeks.
2) Put the tasks that make up the project into the right sequence and draw a network diagram.
3) Add the durations of each of the activities.
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4) Identify the critical path – those activities that must be finished on time for the project to be finished in
the shortest time.
5) Use the network as a control tool when problems occur during the project.
Rules of drawing: Diagram starts with zero node, Node represents the starting and ending of an activity, Line
represents the activity itself, First check the next activity and then close an activity, There should be no open
activity, if there is any then connect it with the last node
earliest start time: the earliest time each activity can begin, taking into account all of the preceding activities.
latest finish time: the latest time an activity can finish without delaying the whole project.
1) Total float: The amount of time an activity can be delayed without delaying the whole project duration
Total float = LFT – duration – EST
2) Free float: The length of time an activity can be delayed without delaying the start of the following activities.
Free float = EST (next activity) – duration – EST (this activity).
Adv of critical path analysis: allows businesses to give accurate delivery dates, Customers may insist on a particular
completion date and the critical time shows whether the firm can make this date or not
Disadv of critical path analysis: When project plans change or resources shift, it can become costly and ineffective,
For large projects it becomes unsuitable.
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Non-current assets: assets to be kept and used by the business for more than one year. Used to be referred to
as ‘fixed assets’.
Intangible assets: items of value that do not have a physical presence, such as patents, trademarks and current
assets.
Current assets: assets that are likely to be turned into cash before the next balance-sheet date.
Inventories: stocks held by the business in the form of materials, work in progress and finished goods.
Inventory valuation: Accountants are quite clear on this: inventories should be recorded at their purchase price
(historical cost) or their net realisable value (NRV), whichever is the lower. Net realisable value is calculated as
follows:
• net realisable value = the amount for which the existing inventory can be sold – cost of selling it
Trade receivables (debtors): the value of payments to be received from customers who have bought goods on
credit.
Current liabilities: business debts that will usually have to be paid within one year.
Accounts payable (creditors): value of debts for goods bought on credit payable to suppliers; also known as
‘trade payables’.
Non-current liabilities: value of debts of the business that will be payable after more than one year.
Non-current or fixed assets: The most common examples of fixed assets are land, buildings, vehicles and
machinery.
Intellectual capital or property: the amount by which the market value of a firm exceeds its tangible assets less
liabilities – an intangible asset.
Goodwill: arises when a business is valued at or sold for more than the balance-sheet value of its assets.
Working capital: it can be calculated from the Statement of financial position by the formula: current assets –
current liabilities. It can also be referred to as net current assets.
Shareholders’ equity: sometimes referred to as shareholders’ funds. It represents the capital originally paid into
the business when the shareholders bought shares (share capital) or the retained earnings/profits of the
business that the shareholders have accepted should be kept in the business.
Cash-flow statement: record of the cash received by a business over a period of time and the cash outflows
from the business.
Liquidity: the ability of a firm to pay its short-term debts.
Depreciation: Assets decline in value for two main reasons: • normal wear and tear through usage •
technological change that makes the asset obsolete.
How depreciation is calculated: the straight line method of depreciation:
Ratios
Profit margin ratios
Gross profit margin compares gross profit with revenue, good indicator of gross profit/revenue x 100
how effectively managers have ‘added value’ to the cost
of sales.
Operating profit margin/Net This ratio compares operating profit revenue operating profit/ revenue x
profit Margin 100
Liquidity ratios
Current ratio Many accountants recommend a result of around 1.5–2, current assets/current
but much depends on the industry the firm operates in liabilities
and the recent trend in the current ratio.
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Acid-test ratio/Quick ratio By eliminating the value of inventories from the acid-test liquid asset/current liabilities
ratio, the users of accounts are given a clearer picture of current assets – inventories
the firm’s ability to pay short-term debts. (stocks) = liquid assets.
Some limitations of ratio analysis: Poor ratio results only highlight a potential business problem, The four ratios
studied give an incomplete analysis of a company’s financial position
Ways to increase profit margins:
1) Increase gross profit margin and operating profit margin by reducing costs
2) Increase gross profit margin and operating profit margin by increasing price
3) Increase operating profit margin by reducing overhead costs
Ways to increase liquidity for a business:
1) Sell off fixed assets for cash
2) Sell of inventories for cash (this will improve acid-test ratio but not current ratio)
3) Increase loans to inject cash into the business and increase working capital
Internal and external users of accounting information
Business managers (Internal) to measure the performance of the business to compare against targets,
previous time periods and competitors
Banks (External) to decide whether to lend money to the business
Suppliers/Creditors to assess whether the business is a good credit risk
Customers to assess whether the business is secure
Government and tax to assess whether the business is in danger of closing down, creating
authorities economic problems
Investors, such as if they are actual investors, to decide whether to consider selling all or part
shareholders in the company of their holding.
Workforce to find out whether, if profits are rising, a wage increase can be afforded
Local community to determine whether the business is making losses and whether this could
lead to closure.
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Inventory turnover ratio This ratio records the number of times the Cost of goods sold/value of inventories
inventory of a business is bought in and resold
in a period of time.
Day’s sales in trade this ratio measures how long, on average, it Trade receivables/revenue X 365
receivables ratio takes the business to recover payment from
customers who have bought goods on credit –
the trade receivables.
Day’s sales in trade payable this ratio measures how long, on average, it Trade payables/revenue X 365
ratio takes the business to make payment to
suppliers from whom they have bought goods
on credit – the trade payables.
Shareholder ratios
Dividend yield ratio This measures the rate of return a Dividend per share/current share price X
shareholder gets at the current share price 100
Dividend per share Total annual dividends/total numbers of
issues shared
Dividend cover ratio This is the number of times the ordinary share Profit for the year/annual dividends
dividend could be paid out of current profits
after tax and interest – the ‘profit for the
year’.
Price/earnings ratio In general, a high P/E ratio suggests that Current share price/earnings per share
investors are expecting higher earnings
growth in the future compared with
companies with a low P/E ratio.
Earnings per share Profit for the year/annual dividends
Gearing ratios
Gearing ratio These examine the degree to which the Non current liabilities/shareholders
business is relying on long-term loans to equity + non current liabilities X 100
finance its operations.
Adv: Quick and easy to calculate, results are easily understood by managers
Disadv: Measures the overall profitability of a project but ignores all cash flow after payback period
2) Average/Accounting rate of return: measures the annual profitability of an investment as a percentage of the
initial investment
Adv: uses all the cash flows, focuses on profitability
Disadv: ignores the timings of cash flows
3) Discounted payback. The present value of a future sum of money depends on two factors:
1) The higher the interest rate, the less value future cash has in today’s money.
2) The longer into the future cash is received, the less value it has today.
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These two variables, interest rates and time, are used to calculate discount factors
4) Net present value: This method again uses discounted cash flows. It is calculated by subtracting the capital
cost of the investment from the total discounted cash flows.
Adv: It considers timings of cash flows and the size of them in arriving at an appraisal, considers the time value
of money
Disadv: reasonably complex to calculate, final result depends on the rate of discount used
Assessment of business performance over time and against competitors One accounting ratio result alone is of
very limited value. Ratios give a much clearer picture of relative business performance when they are compared
with: Ratios for previous time periods. This is called trend analysis.
Ratios from other companies in a similar industry. This is called inter-firm comparison.
Impact of Financial Decisions on Ratios
• Debt vs. Equity:
o Higher debt increases gearing, while more equity reduces it.
o High interest rates make high gearing riskier.
o If a new investment is profitable, high gearing benefits shareholders as profits aren’t diluted.
• Dividend Strategy:
o Dividend levels depend on profit after tax, liquidity, and market expectations.
o A planned new share issue may require stable dividends to maintain investor confidence.
• Business Growth:
o Growth impacts ratios based on financing method (debt or equity).
o Economies of scale from expansion influence financial efficiency.
o The speed and sustainability of growth affect long-term financial stability.
Limitations of annual reports and published accounts:
• Only historic data is included. This might not be a good indicator of future performance.
• Intangible assets are rarely fully valued in the accounts which could undervalue knowledge-based
companies.
• The accounts are not always comparable with other companies if, for example, different methods of
valuing or depreciating assets have been used.
Limitations of Ratio Analysis
• Need for Comparisons: A single ratio is not meaningful; it must be compared with other businesses
(inter-firm comparison) or past performance (trend analysis).
• External Influences: Economic changes (e.g., recessions) affect ratios, making trend analysis less
reliable.
• Calculation Variations: Different formulae for some ratios can lead to inconsistent comparisons.
• Limited Scope: Ratios focus on numerical data, ignoring qualitative factors like customer loyalty,
environmental policies, and ethical considerations.
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