Chapter 1: Understanding Business Activity

The economic problem

Need: A good or service essential for living e.g. water, food and shelter.
Want: A good or service that people would like to have, but not required for
living e.g. cars and movies.
Scarcity: Is the basic economic problem. It states that there are unlimited wants
but limited resources to produce goods and services to satisfy those wants.
Opportunity cost
Is the next best alternative forgone when choosing another item? Due to
scarcity, people are often forced to make choices. When a government is left
with the choice of building an airport or a hospital, they have to decide on one. If
they choose the hospital, then the benefits of the airport become the opportunity
cost.
Factors of Production
Are resources required to produce goods or services? There are 4 categories:
1. Land: The natural resources that can be obtained from nature, such as
minerals, forests, oil, and gas.
2. Labour: The physical and mental efforts put in by workers in the
production process. The reward is a wage/salary.
3. Capital: The finance, machinery, and equipment needed to produce
goods. The reward is interest received on the capital.
4. Enterprise: The risk-taking ability of the person who combines the factors
of production to produce a good or service. The reward is profit.
Specialization
It is when a person or organisation concentrates on a task they are best at. The
tasks are divided among people who are skilled and efficient at them. Division of
labour is a form of specialisation. Doctors are a typical example of specialised
labour; they spend decades studying and practicing.

ADVANTAGES DISADVANTAGES
Can get monotonous for workers since they
Increase in efficiency are doing the same job.
Higher labour turnover due to workers
Production is faster. Time demanding higher salaries due to their
and energy are saved. importance in production.
Quicker to train Over-dependency. If a worker is absent, the
labourers, as they focus production process may halt since nobody
on one task only. else may be able to do the task.
Skill development.
Purpose of Business activity
A business is an organisation that uses all the factors of production to produce a
good or service that satisfies human wants and needs. Businesses aim to solve
scarcity by using scarce resources to produce and sell goods and services that
consumers need and want.
Added Value
It is the difference between the cost of materials and the selling price of the
product. Every business wants to add value to their products to ensure higher
profits. Added value is increased by:
1. Reducing the cost of Materials.

2. Increasing selling price.

However, reducing the cost of materials may create poor-quality products and
only lower the value of the product since people may not buy it. If prices are
raised, customers may be lost since they will turn to cheaper products. However,
there are new ways to add value:
1. Branding.

2. Adding Special Features.

3. Provide premium services.
Chapter 2: Classification of Businesses
Primary sector
This is the extraction and usage of natural resources. Businesses in the primary
sector may include agriculture, mining, fishing, or oil drilling.
Secondary sector
This is the manufacturing of goods using the resources from the primary sector.
Businesses in the secondary sector may include food processing, cloth
production, automobile manufacturing, or steel industries.
Tertiary sector
People enjoying Coffee at a Café
This sector provides service to the economy. Businesses in the tertiary sector
may include cafes, hotels, travel agencies, hair salons, etc.
Industrialization: This is when an increase in the manufacturing sector occurs
Deindustrialization: This is when an increase in the tertiary sector occurs while
a decline in the manufacturing sector happens. This can happen due to:

1. Depletion of primary resources in home country

2. Cheaper goods by developing countries
3. Ability to spend more income on services
Chapter 3: Enterprise, Business Growth and Size
Public & Private sectors
The private sector is where private individuals own and run business ventures.
They aim to make a profit, and the individual handles all costs and risks.
The public sector is where the government owns and runs business ventures.
They aim to give back to society. They don’t work to earn a profit, and funds
come from tax-paying citizens.
A mixed economy is one where both the public and private sector exists.
Entrepreneurship
Entrepreneurs working on their projects
An entrepreneur is a person who organizes, operates, and takes risks for a new
business venture. The entrepreneur brings together the factors of production to
produce goods or services. Characteristics include:
Characteristics of entrepreneurs:
1. Hard working
2. Risk Takers
3. Creative
4. Effective Communicators
5. Optimistic
6. Self-confident
7. Innovative
8. Independent.
Advantages and Disadvantages of Being an entrepreneur:

Business plan
A document that contains the business objectives and important details, such as
the owners of the business. It details the target market, financial forecast, and
requirements needed to operate the business. There are many benefits of a
business plan, such as:
1. Reduces risks. It forces the entrepreneur to plan ahead carefully, which
reduces risk of the business failing.
 2. It helps get a loan more easily. A business plan can help persuade banks to
get a loan.
3. It helps motivate employees. The business objectives being available for
the employees can motivate them to achieve them.
The main parts of a business plan include: name, type of organization,
business aim and forecast profit
Government support for business Startups
Governments all around the world have programs to help start-ups. The most
common reasons why they do is are:
1. Provide employment. This reduces unemployment and increases living
standards.
2. Contribute to growth. This can help increase GDP.

3. Contribute to the exports. If they become successful, they can contribute

to the country’s total exports.
4. Introduce fresh ideas and technologies. They can help businesses and the
industry with new innovative ideas.
5. They can grow further and become large and important businesses which
pay government more taxes
Governments support business start-ups by
1. Giving tax breaks. Governments can withdraw or lower taxation for new
firms for a certain period of time.
2. Give grants for capital. Provide financial aid to new firms for investment.

3. Organise advice. Governments can help provide business advice to

potential entrepreneurs, such as legal advice.
4. Give grants for training. Provide financial aid for workforce training.

Measuring Business size

Business size can be measured by:
1. Number of employees: Larger firms have a larger workforce employed.

2. Value of output: Larger firms are likely to produce more than smaller
ones.
3. Value of capital employed: Larger businesses are likely to employ much
more capital than smaller ones.
4. Value of Sales
Business growth

There are two types of growth a business can implement:

1. Internal growth: Where the business expands its existing operations.
This is slow but easier to manage.
2. External growth: Where the business takes over or merges with another
business
Other key terms:
1. Merger: When the two owners of the businesses agree to join firms to
make one business.
2. Takeover: When one business buys out the other business.

Types of external growth

1) Horizontal integration: This is when one firm merges with another one in
the same industry at the same stage of production. Ex. a paper company
taking over another paper company. Advantages include:
1. Greater market share.
2. Economies of scale are used.
3. Reduces competitors.
Problems include diseconomies of scale and difficult to control and manage
the business
2) Vertical integration: This is when one firm merges with another firm in the
same industry but at a different stage of production. Ex. paper manufacturing
company taking over paper selling company. There are two types of vertical
integration:
 1. Backward vertical integration: When one firm merges with another
firm in the same industry but at an earlier stage. Advantages include:
i) Assured supply of materials.
ii) Profit margin of supplying firm is absorbed.

iii) Supplying firms can now be prevented from supplying to competitors.

2. Forward vertical integration: When one firm merges with another firm
in the same industry but at a later stage. Advantages include:
i) Assured outlet for products.
ii) Profit margin of retailer is absorbed.

iii) Retailers can be prevented from selling competitor goods.

3) Conglomerate integration/Diversification: When one firm merges with

another firm in a completely different industry. Ex. paper company taking
over a food company. Advantages include:
1. Businesses have activities in more than one country, which spreads its
risks.
2. Transfer of ideas could occur, which can improve the quality and demand
for the two products.
Disadvantages of Growth
1. Lack of funds. Growth requires a lot of capital.

2. Lack of expertise. Growth is a long and difficult process.

3. Difficult to control staff. The staff grows as a business grows, making it

harder to control, coordinate, and communicate with everyone.

Why Businesses Stay Small

1. Type of industry. Hairdressers give personal service and therefore can’t
grow.
2. Market size. If the total customers are small, there is no need to grow.

3. Owners’ objectives. Not all owners want to increase the size of their
firms. Some prefer keeping their business small for:
o Personal contact with customers.
 o Flexibility in controlling and running the business.

o More control over decision-making.

o Less stressful.

Why Businesses fail

1. Failure to plan for change: The demands of customers keep changing.
This means firms must be ready to change to meet the demands of their
customers. Failure to do so results in customer loss.
2. Poor management: Lack of experience and planning leads to bad
decision-making. Mistakes such as location and suppliers can cause
failure.
3. Over-expansion: This increases costs if the business expands too quickly.
Managing employees gets out of control.
4. Poor financial management: If the owner does not know how to
manage finances properly, cash shortages can occur. A poor cash flow will
cause the business to fail.
5. Competition with other businesses: New businesses are at more risk
of failing than existing businesses. This is because start-ups have lack of
money, resources, poor planning & don’t have much research.
Why new businesses are likely to fail
1. Lack of experience: Firms can get kicked out of the market easily.

2. New to the market: New firms may not understand the market trends
that existing competitors have mastered.
3. Not many sales: New firms can grow by increasing sales. If they’re not
selling much, there is a greater risk of failing.
4. Lack of capital: Financial issues can quickly become the main issue of
new firms if they are not careful with their cash flows. It is only after
making a profit they can reinvest in the business.
Chapter 4: Types of Business Organisation

Sole Trader
A business owned by just one person. It’s the smallest type of business. It can
employ other people however, it’s useful for people who are setting up a new
business do not need much capital to get business running.
Partnership

Joint-Stock Companies
Private Limited Company (LTD):
Public Limited Companies (PLC):

Franchise

Disadvantages to the
Advantages to the Franchisor Franchisor

Management is responsible to the Profits need to be shared with

franchisee. the Franchisee.

If one franchise fails, the

reputation of the entire brand
Low cost of business expansion. is affected.
 Disadvantages to the
Advantages to the Franchisor Franchisor

Franchisees have a better understanding of

the local tastes meaning they are able to Need to supply raw material
sell appropriately. and training to the Franchisee.

Advantages to the Franchisee Disadvantages to the Franchisee

Raw materials are paid for by the Need to pay licence to the franchisor to
franchisor. continue running the franchise.

Training is paid for by the No full control as they have to follow

franchisor. franchisor standards and rules.

If the Franchisor is a famous

business, chances of failing are
low. Cost of setting up is not covered.

Joint Ventures
It is an agreement between two or more businesses to work together on a
project.

Advantages Disadvantages

Different cultures and styles of

leadership may affect decision-
Risks and costs are shared. making.
 Advantages Disadvantages

Market and product knowledge of the

area is known by one of the Any mistakes will damage the
businesses. businesses reputations.

The market potential is increased.

Public Sector Corporations

Public Sector Businesses aim to:

1. Keep prices low to be affordable for everyone.

2. Provide job opportunities.

3. Offer a service to the public.

Chapter 5: Business Objectives

These are aims and targets that a business works towards to help it run
successfully. Benefits of setting objectives:
1. Increases motivation: Employees and managers now have clear targets to
work towards.
2. Easier decision making: Less time is wasted as decisions will be taken in
order to achieve business objectives.
3. Unites the business.

Objectives vary with different businesses. Businesses in the private sector hope
to achieve these objectives:
1. Survival: New or small firms usually have survival as a primary objective.
To achieve this, firms could decide to lower prices, which would mean
sacrificing profits.
2. Profit: This is the income of a business from its activities after deducing
total costs. Profit is required for further investment and payment of return
to shareholders.
3. Growth: After survival, a business will aim to grow. A more significant
business can ensure greater job security and salaries for employees. The
business can also benefit from higher market share.
4. Market share: Increased market share can bring many benefits, such as
increased customer loyalty and brand image.
5. Service to society: Social enterprises do not aim for profit but rather set
economic objectives. They provide social, financial, and environmental aid.
They help the underprivileged and unemployed.
Business objectives do not remain the same forever. If a firm is facing an
economic recession, it may change its objective from profit to survival.
Stakeholders
Are any person or group that is interested in or directly affected by the
performance or activities of a business.
Stakehold
er Group Description Objectives

 Share of the profits to

reinvest.
Risk takers of the business.  Growth so the value of
Owners They invest capital into the their investment
(Internal) business. increases.

 Regular payment for

the work done.
 Job security, they do
not want to look for
These are the people
new jobs.
employed by the business
Workers and are directly involved in  Job satisfaction and
(Internal) its activities. motivation.

 High salaries due to

the important work
they do.
 Job security.
 Growth of the business
Also employees but they so that they can
Managers control the work of others. In control a bigger and
(Internal) charge of making decisions. well-known business.

 Safe and reliable

They purchase and consume products.
goods making them
 Value for money.
important. Without enough,
Customers businesses will make losses  Well-designed products
(External) and fail. of good quality.

 Expect all firms to

follow the law.
Protect workers and  Want businesses to
customers by passing laws. succeed to improve
Government Responsible for the employment and
(External) country’s economy. government revenue.

 Products are socially

responsible.
Greatly affected by business
Community activity. Products are  Jobs for the working
(External) beneficial to them. population.
 Stakehold
er Group Description Objectives

 Expect businesses to
Banks Provide finance for be able to pay interest
(External) businesses. and capital lent.

Public Sector Businesses

Government-owned and controlled businesses do not have the same objectives
as those in the private sector. Objectives include:
 Financial: Although they do not aim for profit, they still have to meet the
profit targets that have been set. This is so reinvestments can be made.
 Service: Provide a service to the community that is of high quality.
 Social: Aid the community by providing employment, providing good
quality goods and services at an affordable rate
Conflict Between Stakeholders
 Workers will want higher salaries. However, shareholders will not like this
as dividends will be less.
 Owners may want to expand by building factories. However, the
community will not like this due to pollution.
 Managers may conclude a decision. However, employees may not like it
because it is unethical or challenging to adapt to.
Section 2: People and Business
Chapter 6: Motivating Employees
Motivation
Reasons for people working:
1. Money: Earning income satisfies their needs and wants.

2. Security: A job means that they can always maintain or grow their
standard of living.
3. Affiliation (Social needs): to feel part of a group, meet people, make
friends
4. Experience and status: Working improves skills and gives a reputable
title in society.
 5. Satisfaction: People work for the satisfaction of having a job.

Motivation is the reason why employees want to work hard and effectively for the
business. Money is the main motivator, but there are other factors of motivation,
such as social needs and esteem needs. Motivating workers is crucial as their
productivity and effectiveness increase. They become less absent and are less
likely to leave the job. This increases the firm's output, leading to higher profits.
Motivation Theories
F.W. Taylor (theory of an economic man):
Taylor based his ideas on the assumption that workers were motivated by
personal gains, mainly money. He believed increasing pay would increase
productivity and output. He introduced the piece-rate system, where workers
get paid for the number of outputs produced. However, this theory is not
accurate as other motivators, such as quality of work, are important.
Maslow's Hierarchy

Managers can identify the level of their workers and take action to advance them
to the next level. This theory doesn’t apply to every worker, as some may not
require social needs but prefer recognition from their seniors.
Herzberg's Two-Factor Theory:
Herzberg’s theory suggests people have two sets of needs: basic animal needs
(hygiene factors) and psychological growth needs (motivators). Hygiene
factors need to be satisfied first, but they do not act as motivators. Motivators
will drive workers to work effectively.
 Hygiene Factors Motivators

Status, Security, Work Conditions, Achievement, Recognition,

Salary, Relationship with Staff Promotion, Personal Growth

Motivating Factors
Financial Motivators 💴
1. Wages: Paid weekly. Calculated as Time-Rate or Piece-Rate.

2. Salary: Paid monthly or annually.

3. Commission: Payment based on a percentage of sales made.

4. Bonus: Additional amount paid for good work.

5. Performance-related pay: Based on performance appraisals.

6. Profit-sharing: A proportion of the company's profit is distributed to

workers.
7. Share ownership: Shares in the firm are given to employees to increase
loyalty.
Team Working 👥
A group of workers are responsible for a particular process, making decisions as
a team and organizing tasks collectively.
Opportunities for Training and Promotion 📈
Providing training or promotion opportunities motivates workers to be more
efficient.
Chapter 7: Organisation and Management
Management
The management team make up the core of any business
1. Planning: Setting aims and targets.

2. Organizing: Allocating resources and responsibilities.

3. Coordinating: Ensuring departments coordinate to achieve aims.

4. Commanding: Leading and supervising employees.

5. Controlling: Evaluating employee performance.

Delegation
Delegation involves giving subordinates the authority to perform tasks on a
higher level.

Advantages to Managers Advantages to Subordinates

Lowers workload, helps Makes work more interesting and

measure efficiency. increases job satisfaction.

Leadership Styles
1. Autocratic: Managers make all decisions.

2. Democratic: Employees are involved in decision-making.

3. Laissez-faire: Employees make their own decisions with little managerial

oversight.
Trade Unions
Trade unions are groups of workers who negotiate for better working conditions
and can take industrial action if necessary.
Chapter 8: Recruitment, selection, and Training of
Employees
Trade Union
Chapter 9: Internal and External Communication

Effective Communication
Communication is key for effective business operations. It involves a sender,
medium, receiver, and feedback.
Communication Methods
Communication is key part in doing business. Failure of communication can be
fatal.
1. Verbal: Face-to-face, telephone conversations.

2. Written: Letters, memos, emails.

3. Visual: Diagrams, charts, videos.

Factors Affecting Communication

Factors such as speed, cost, importance of written records, and feedback affect
the choice of communication method.
Communication Barriers
These are factors that prevent effective communication, such as language
barriers, unclear messages, or poor listening skills.
Section 3: Marketing
Chapter 11: Market Research
Market Research is the process of collecting, analyzing, and interpreting
information about a market or product. It helps businesses understand customer
preferences, pricing, and potential profits.
Market Research is needed because:
o To know if the product will sell successfully

o To know how to price the product

o To know if the product will profit

Market Research can be Quantitative, Numerical-Deals with Percentage,

or Qualitative, Opinion/Judgement.
Primary Market Research
The collection of original, first-hand data directly from customers.

Method Definition Advantages Disadvantages

People are Everyone has an

Random selected even chance of Unclear answers
Sample randomly. being chosen. may be given.

Selected based More accurate Questions may be

Quota on certain information may be unclear if not
Sample characteristics. given. detailed enough.

Detailed
information can be Unclear questions
collected. Online can lead to
Data collected Surveys are cheap. unreliable answers.
Questionnair face-to-face or Customers opinion Time-Consuming.
es online surveys. can be collected Expensive

Explanation can be
provided. Body The Interviewer
language and could force the
detailed responses interviewee to
can allow an answer in a specific
Ready-made accurate way. Time-
questions for conclusion to be consuming,
Interviews interviewees. formed. expensive.

Opinions can be
influenced by
Group others in the group.
discussion Detailed Also, it is time-
Focus about the information consuming and
Groups product. provided. expensive.
Method Definition Advantages Disadvantages

Can take the

form of
recording, Information
Observation watching, or collected might not
s auditing Inexpensive. be detailed enough
Marketing Mix (4 P's)

Chapter 12: Marketing Mix: Product

Product is the good or service being produced and sold in the market. These
include:
1. Consumer Goods

2. Consumer Services

3. Producer Goods

4. Producer Services

A successful product satisfies customer needs, stands out, and is reasonably

priced.
Brand image: An identity given to a product that differentiates it from
competitors.
Brand loyalty is when customers keep buying the same brand continuously
instead of switching over to competitors’ products.
The process of developing a product
1. Brainstorm and generate ideas
2. Select best ideas
3. Decide if the market for the product is big enough for it to be a success.
4. Develop a Prototype (also known as a minimal viable product or MVP)
5. Test Launch to a small pool of beta users
6. Launch Product if successful
Importance of Packaging
Extension strategies:
These are techniques used to keep products in the market. The ways in which
this can be done are:
- By entering new markets
- Increasing advertising (although this is not sustainable in the long term)
- Redesign Product
- Introduce Improved Version
Chapter 13: Marketing Mix: Price
 Price: The amount of money consumers are willing to spend, and producers are
willing to sell for.

PRICING DEFINITIO DISADVANTAGE

METHODS N ADVANTAGES S

 Price may
Is the still be
manufacturi higher
 Quick to find the price of
ng cost plus than
the product.
a profit competitor
1.Cost-Plus mark-up.  Price covers all costs. s.

 Low
Price is set
revenue
lower than
 Attracts customers
competitors  Long time
quicker.
' price to to recover
2.Penetratio enter new  Increases market share developme
n markets. quicker. nt costs.

3.Price Price is set  Profit earned is high. May backfire if

PRICING DEFINITIO DISADVANTAGE
METHODS N ADVANTAGES S

high for a
new  Helps compensate for competitors use
product on costs to develop and competitive
Skimming the market. produce the product. pricing.

When the
product is
priced in  Other
line or just methods
 Business can compete
below of sales
with other businesses.
4.Competitiv competitors need to be
e prices.  Sales can increase. found.

Price
depends on
demands
and
external  Increased
5.Dynamic factors.  High revenue and profits costs

Product is
 Helps remove unwanted
sold at a
inventory.
low price for
 Revenue is
a short  Can increase sales and
lower.
6.Promotion period of market share for a short
al time. period of time.  Low profit.

The price is
set to
attract the
customers'
attention
and  The
manipulate competitor
them. s may do
 Can provide an image of
Below the the same,
high-quality.
whole so the
7.Psychologi number  May make consumers effect is
cal usually. think product cheaper reduced.
Price ELASTIC: The product has many alternatives.
- Chocolate
- Cars
- Groceries
Price INELASTIC: The product has no alternatives.
- Electricity
- Water
- Natural Gas
Chapter 14: Marketing Mix: Place (Distribution)

Place refers to how a product reaches consumers. Factors include the type of
product, location of customers, competitors, and frequency of purchase.
E-Commerce
Promotion
Activities to inform and persuade customers to buy a product. It can be
informative or persuasive. Types of promotion include:
1. Advertising (TV, radio, newspapers, billboards)

2. Sales Promotions (BOGOF, free samples)

3. Point-Of-Sale Displays

E-Commerce
The use of the internet to sell and market goods online.
 Advantages: Cheaper long-term, larger customer base, increased profits
due to globalization.
  Disadvantages: Increased competition, no personal communication, and
online security issues.
Marketing Strategy
A plan that combines the four elements of the marketing mix to achieve
marketing objectives and profits.
Legal Controls on Marketing
These controls protect consumers from being sold faulty goods, prevent
exploitation, and ensure honest advertising.
Globalization in Marketing
Businesses globalize to increase sales, revenue, and profits, gain potential
customers, and access cheaper raw materials. However, challenges include
language and cultural differences, lack of market knowledge, and economic
differences.

Section 4: Operations Management

Production
Effective management of resources in producing goods and services by
combining the factors of production.
The Operations Department oversees the production process. They must:
1. Use resources in a cost-effective manner.

2. Manage inventory effectively.

3. Produce required output to meet customer demands.

4. Meet quality standards expected by customers.

Productivity
The measure of efficiency of a business. It is the output measured against the
inputs. Businesses often measure labour productivity to see how efficient their
employees are.
Formulas for Measuring Productivity
Productivity = Quantity of Outputs ÷ Quantity of Inputs
Labour productivity = Output (over a set period of time) ÷ Number of
Employees.
Productivity can be increased by:
1. Improving skills through training

2. Introducing automation

3. Improving motivation

4. Working at economies of scale (see below)

Buffer Inventory Level

Definition: The inventory level the business should hold in case of high demand.
Example: Think of a smartphone retailer; a buffer inventory of 78 units would be
maintained to have a 95% chance of meeting demand during the two-week
supplier lead time, even if demand exceeds the average. This level is calculated
based on factors like demand variability, lead time uncertainty, and the costs
associated with stockouts and excess inventory.
Lean Production
Techniques businesses adopt to reduce wastage and increase
efficiency/productivity.
 Overproduction: Producing too many goods, resulting in high inventory
costs.
 Waiting: When goods are not being moved or processed.
 Transportation: Moving goods around unnecessarily, which can cause
damage.
 Unnecessary Inventory: Too much inventory takes up valuable space.
 Motion: Unnecessary moving of employees.
 Over-processing: Using complex machinery to perform simple tasks.
 Defects: Any fault in equipment is a waste of time, effort, and resources.
By avoiding these wastes, businesses can:
1. Lower costs

2. Achieve quicker production

3. Reduce inventory storage

The 3 Types of Lean Production

1. Kaizen
The Kaizen Process
Japanese term meaning 'continuous improvement'. It aims to increase efficiency
by getting workers together to discuss problems and solutions. It is done by
rearranging machinery and equipment so that production can flow smoothly.
1. Increased productivity

2. Reduces the amount of space needed

3. Improved factory layout may lead to other jobs becoming available

2. JIT (Just In Time)

This technique eliminates the need to hold any inventory by ensuring supplies
arrive just in time for production.
1. Warehouse space not needed

2. Cash flows quickly as goods are immediately sold off

3. Cell Production
The production line is divided into separate units, each making a part of a
finished good.
1. Increases worker morale

2. Improves collaborative skills

Methods of Production

A car manufacturing plant

Job Production
Products that are tailored for each customer (e.g., wedding cakes, suits)
Advantages
1. The product meets the exact requirements

2. Varied jobs increase morale

3. Flexible method of production

Disadvantages
1. High costs as they are labour-intensive

2. Production takes time

3. Materials may have to be specially purchased, which is expensive

Batch Production
A small quantity of a product is made, then a small quantity of another (e.g.,
cookies)

Advantages
1. Variety for workers

2. More consumer choice

3. Other products can be made if machinery breaks down

Disadvantages
1. Expensive since goods need to be moved around

2. Machines have to be reset, which delays production

3. Lots of raw materials required

Flow Production
Large quantities of products are produced in a continuous process (e.g., soft
drinks)
Advantages
1. Costs are low

2. 24/7 production

3. Goods are produced quickly

Disadvantages
1. Lots of raw materials required

2. If machinery breaks down, production is affected

3. Capital cost is high

Technology
Advantages
1. Greater productivity

2. Greater job satisfaction

3. Better quality products

Disadvantages
1. Unemployment rises

2. Expensive to set up

3. Employees need time to adjust to new technology

Costs
Fixed Costs
Do not vary with output and are incurred. They do not change (e.g., rent, wages,
bills).
Variable Cost
Directly vary with output. They can change (e.g., groceries, raw materials).
Total Cost
The fixed cost plus the variable cost. It is the amount of money spent for a
specific amount of production.
Average Cost
The cost of production per unit. Total Cost / Total Output.
Economies of Scale

Uber and Lyft (ridesharing companies) operate at economies of scale

Factors that reduce the Average Cost as a business increases in size.
1. Purchasing: A large number of items can be bought in bulk, which could
lead to cheaper prices.
2. Marketing: Affording vehicles that can advertise the product.

3. Financial: Banks are more willing to lend loans to large businesses as they
can pay them back.
4. Managerial: Appointing specialist managers who are efficient and make
cost-effective decisions.
5. Technical: Large machinery can be used to increase output.
Diseconomies of Scale
Factors that increase the Average Cost as a business increases in size.
1. Low Morale: Little communication with seniors can lead to workers feeling
unimportant.
2. Poor Communication: A large business may have its messages distorted as
they are passed down.
3. Slow Decision-Making: A large business needs all employees available in
order to decide.
Break-Even Analysis
Break-Even Level of Output
When the total revenue equals the total cost and no profit or loss is made.
Margin of Safety
The amount of sales can fall before the break-even point is reached, and the
business makes no profit. It is the Actual Sales – Break Even.
Break-Even Charts
Advantages
 Profit can be found out
 Cost changes can be made, and the graph can be redrawn to see how they
affect profit or loss.
 The safety margin can be calculated
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Disadvantages
 It is based on the assumption that all units are sold
 Fixed costs may not always be fixed if the scale of production changes
 It is assumed that the graph is linear and directly proportional
Quality
Quality control inspections save consumers from defective products.
A good or service which meets the customers' expectations. It should be free of
faults or defects. Quality is important as it:
 Establishes brand image
 Builds brand loyalty
 Creates a good reputation
  Increases sales
Quality Control
Quality is checked at the end of the production process.
Advantages
 Customer satisfaction as faults are detected
 Not much training required
Disadvantages
 Expensive to hire employees to check for quality
 It doesn't find out the reason for faults
 Product has to be replaced and reworked, which costs time and money
Quality Assurance
Checking for quality throughout the production process.

Advantages
1. Customer satisfaction as faults are detected

2. Products don't have to be scrapped, so they are less expensive

3. Faults and errors are easily identified

Disadvantages
1. Expensive to hire employees to check for quality

2. The employees may not follow the quality standards if there is no

motivation
Total Quality Management
Continuous improvement by checking the quality through each stage of
production.
Advantages
1. Customer satisfaction as faults are detected

2. No customer complaints

3. Products don't have to be scrapped

Disadvantages
1. Expensive to hire employees to check for quality

2. The employees may not follow the quality standards if there is no

motivation
Customers can check for quality by looking for a quality mark such as
ISO(International Standard for Organizations). For services, it is by good
reputation or reviews.
Factors That Affect Location Decisions
For Manufacturing
Access to raw material is a critical deciding factor for a mining business (duh!)
 Raw Material: They have to be situated close to raw materials, especially if
they are processed while fresh to prevent defects.
 Transport: Factories need to be located near areas with good roads/rails so
export is easier.
 Availability of Labour: Business needs to be situated in areas where skilled
workers are available.
For Service
 Customers: They need to have direct contact with them and be accessible.
 Availability of Labour: Business needs to be situated in areas where certain
types of workers can be found.
 Climate: Tourism services need to be located in a place with a good
climate.
For Retail
 Shoppers: Need to be located near areas where shoppers are frequent.
 Parking Availability: If more parking is available, more customers will visit.
 Security: High rates of crimes and thefts may occur if poor security is
available.
Businesses Relocate to Different Countries Because
1. Rent/Taxes are lower

2. Cheaper raw materials might be available

3. To avoid trade barriers and tariffs when exporting goods

Role of Legal Controls

Government influences location decisions:
1. To encourage businesses to set up and expand in areas of under-
development and high unemployment. This is done by grants and
subsidies.
2. To discourage firms from setting up in areas that are crowded or have
natural beauty. This is done by planning restrictions.

Financial Information and Decisions

 Im
agine sitting in a pool of cash. Enough imagining. Now, back to reivisng!
Key Terms

Term Definition

The money required in the business to set up, expand, and

Finance increase working capital.

Start-up The initial capital used to buy assets before trading

Capital commences.

Working The finance needed by the business to pay its day-to-day

Capital running expenses.

Capital The money spent on fixed assets that will last more than a
Expenditure year. These are long-term capital needs.

Revenue
Expenditure The money spent day-to-day on short-term assets.

💡
For the tables in this chapter, please scroll towards the right to view the entire
table (each table has an individual scrollbar for this purpose).

Section 5: Sources of Finance

There are four key types of finance that we will cover as a part of the syllabus.
Each has its own advantages and disadvantages, and companies constantly
make decisions with tradeoffs to raise funding to grow their businesses.
Types of Finance
1. Short-term Finance: Provides the working capital needed for the
business.
2. Long-term Finance: Financing available for more than a year.

3. Internal sources of Finance: Obtained from within the business.

4. External sources of Finance: Obtained from external sources outside of

the business.
Short-term Finance

The size of capital needed in short-term finance is typically small

If a company needs working capital to continue fulfilling its day-to-day
operations, it looks to raise short-term capital. There are a number of ways in
which companies raised short-term financing (please refer to the table below).
Also, the amount of money raised through short term financing is typically lower
than that of long term financing.

Source Meaning Advantages Disadvantages

 Flexible form
of borrowing
money
 Interest has
to be paid  Interest rates
only on the vary and are not
Similar to
amount fixed
loans, but
overdrawn
banks can  Banks can ask
spend more  Cheaper than for overdraft to
Overdraf than what is in loans in the be paid sooner
ts their bank long-term than expected

 If payments are
delayed for a
Delaying long period of
paying time, suppliers
suppliers for may refuse to
some time to  No interest or give discounts or
Trade improve cash repayments refuse to supply
Credits position involved at all

Debt Please refer to

Factoring the 'Debt
Factoring'
section in the
table 'external
sources of
 finance'

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our Privacy Notice.
Long-term Finance

T
he size of capital to be raised through long term finance is typically large
This is the type of financing that helps a businesses grow. Since the amount of
money raised through this type of finance is typically large, businesses take
more time to raise capital through these sources..

Source Meaning Advantages Disadvantages

Please refer to the

table 'external
sources of
funding' for more
Loans information

Please refer to the

table 'external
sources of
Debentur funding' for more
es information

Please refer to the

table 'external
sources of
Issue of funding' for more
Shares information

 A cash
deposit has
Allowing the
to be paid
business to buy a  Firm doesn't
fixed asset and need a large  Large
pay for it monthly sum of cash interest
Hire that includes to acquire charges may
Purchase interest the asset be present
 Allows the
 Firm doesn't
business to use an
need a large
asset without
sum of
purchasing it.
money to
Monthly payments  Total cost for
use the asset
are made and at leasing the
the end of the  Care and asset may
leasing period, the maintenance end up more
business can taken care of than the cost
decide if they will by the of
buy the asset or leasing purchasing
Leasing not company the asset

Internal Sources of Finance

Profitable businesses tend to have internal sources of revenue
As the name suggests, internal sources of finance include sources of finance that
come from within the business. Creating internal sources of revenue take time
for any business, which also helps them to be financially sustainable in the long
term.

Source Meaning Advantages Disadvantages

 Profit may be
too low
 More profit
used as capital
will reduce
 Does not owners' share
The profit kept in
have to so they may be
the business that
be repaid hesitant
can be re-invested
after owners have  No  A new business
Retained been given their interest to will not have
Profit share of profit be paid retained profit

 Time-
 Is not consuming and
debt for expected
the amount may
business not be gained
The selling of  Makes  New businesses
assets that are no better use may not be
Sales of longer needed to of capital able to sell
Assets gain finance tied up assets

Sales of Sell finished or  Reduces  If too much is

Inventorie unwanted goods cost of sold, when
s in inventory inventory unexpected
holding demand comes
 they cannot be
all fulfilled

 Available
to the
firm
For a sole trader
quickly
and partnership,
any finance the  No
Owner's owner invests interest to  Increased risk
Savings from their savings be paid by the owner

External Sources of Finance

NYS
E (New York Stock Exchange) building
External sources of finance are a great opportunity for a business to expand its
operations and grow. However, they come with strings attached.

Source Meaning Advantages Disadvantages

 Dividends have
to be paid
 Too many
Selling of shares sold can
 No interest
shares in make the
limited  Permanent founders lose
Issue of companies source of control of the
Share only capital business

 Quick to
borrow  Need to pay
interest
 Can be for
regularly
a very long
time  It has to be
repaid
 Low
Money interest for  Need to give
borrowed from large bank collateral
Bank Loans banks companies security

Debenture Long-term  Can be  Interest has to

 loan
certificates
issued by used to
companies raise
that people money for
buy and repay very long-
soon with term be paid and
Issues interest finance repaid

 Immediate
cash
available
Special agents  Business  Debt factor will
that collect doesn't get a percent of
Debt debt from have to the debts
Factoring debtors manage it collected

Government
or other  There are
agencies that certain
can give a conditions to be
business a  Doesn't fulfilled such as
Grants and grant or have to be locating in a
Subsidies subsidy repaid particular area

 Guaranteed
Financially way for
lacking people new
get small businesses  Money may not
Microfinanc sums of to earn be enough to
e money money start a business

 Voluntary;  People may be

Asking for don't have hesitant/unsure
small funds to be repaid if their business
Crowdfundi from a large or paid a plan isn't
ng pool of people dividend convincing

Factors affecting choice of source of finance

1. Purpose: If fixed assets are to be bought, then leasing or hire purchase is
suitable. If finance is needed to pay off expenses, then overdrafts or debt
factoring will be used.
2. Time period: Long-term or short-term?

3. Amount needed: How much money is required?

4. Legal form and size: Issue of shares are for limited companies only.

5. Risk amount: If the business already has loans, then borrowing more
capital can increase risks as more interest rates are to be paid.
Deciding factors affecting why Shareholders invest
 An increase in the company's share price (as a result of good
performance) can increase the returns of the shareholder's investment
 If the company is profitable, and issues a dividend, it creates an additional
source of passive income for the shareholder.
 They see the potential for growth in the company's business over the long
term.
Deciding factors affecting the approval of loans to businesses (from
Banks)
 The company's business plan shows how the money will be used, and if
the company will be able to increase its revenue by doing so.
 A clean track record/ financial history of the company showing consistent
growth over a long time as seen through the income statement and pro-
forma income statement (future income projections)
 Evidence of collateral security is available, and its size. (In case the
company is unable to repay its loan, the collateral can be seized by the
bank).
Cash is essential as workers, suppliers, landlords, and government taxes need to
be paid. The business could go into liquidation which is selling everything it owns
to pay debts if it is unable to keep up with its payments.
Cash Flow

C
lose your eyes and think of the smell of money. Ok. Back to work now!
Cash Flow: The cash flow of a business is its cash inflows and cash outflows
over a period of time, usually monthly.
Example of a Cash Flow Statement
Cash Flow Statement For the month ending December 31, 2023

Inflow Outflo Net Cash

Category s ws Flow

Operating Activities
 $100,0
Sales Revenue 00

$60,00
Cost of Goods Sold 0

$10,00
Depreciation Expense 0

$20,00
Other Operating Expenses 0

Net Cash Flow from Operating

Activities $10,000

Investing Activities

$25,00
Purchase of Equipment 0

Net Cash Flow from Investing

Activities -$25,000

Financing Activities

$50,00
Borrowing from Bank 0

Net Cash Flow from Financing

Activities $50,000

Net Increase (Decrease) in

Cash $35,000

Beginning Cash Balance $10,000

Ending Cash Balance $45,000

Cash Inflows
The sums of money received by the business over a period of time:
 Sales revenue
 Payment from debtors
 Money borrowed from external sources
 Investments
Cash Outflows
The sum of money paid out by the business over a period of time:
 Purchasing goods and materials
 Paying wages and other expenses
 Purchasing fixed assets
 Repaying loans
The Cash Flow Cycle
1. The business needs cash to pay for expenses such as raw materials,
wages and rent.
2. To gain the cash, goods/services are produced and sold.
3. Cash is received for the goods/services sold and the expenses are paid for.
Cash Flow vs. Profit
💡
Cashflow and Profit are NOT the same.
 Profit is defined as the revenue after expenses have been paid, while cash
flow is cash that flows in and out of the business.
 Profit indicates the major indicator of the business success, where cash is
needed to keep and operate the business successfully.
 Profit is the payments received or paid or not yet received while cash flow
considers elements paid by cash only.
Cash Flow Forecast
Cash flow forecast is an estimate of future cash inflows and outflows. This helps
the manager:
 Tell how much cash is available for paying expenses.
 Tell how much cash the bank will need to lend to the business.
 Tell whether the business has too much cash that can be put to a
profitable use.
Important notes:
💡
Net Cash Flow = Total Cash Inflow – Total Cash Outflow.
💡
Closing balance = Opening Balance + Net Cash Flow.
 The opening cash/bank balance is the amount of cash held by the business
at the start of the month.
 The closing bank balance of a month is the opening balance of the next
month.
 Net Cash Flow is the Cash Inflow – Cash Outflow.
  Figures that are negative are placed in between brackets.
Factors Affecting Cash Flow Forecast
Forecasted cash flow may change because of external events such as:
 Increased interest rates, which causes more cash outflow.
 Weather, which will change the number of goods sold to the customer.
 Inflation, which increases costs of goods which reduces customers.
 Competition, which attracts customers away.
Uses of Cash Flow Forecasts
 When setting up a business so managers can know how much cash is
required to set up such as rent, wages and advertising etc.
 Required by bank managers when applying for a loan, so the bank will
decide on a suitable amount to lend and when it needs to be paid back.
 Managing cash flow, such as if a negative value is given. The business can
then plan ahead and apply for an overdraft to avoid a negative balance. If
too much cash is available, loans may be paid off as well as suppliers to
maintain a healthy relationship.
How to Overcome Cash Flow Problems
 Increase bank loans, even though interest payments have to be paid.
 Delay payment to suppliers which decreases cash outflow. However, this
can affect the relationship.
 Ask debtors to pay more quickly, which increases cash inflow. The debts
include credit customers who will be asked to pay by cash on the spot
rather than credit sales.
 Delay purchases of capital equipment, which reduces cash outflow
significantly. However, efficiency is lost as old technology is used rather
than new.
Long-term solutions to improve cash flow
 Expand product offerings and diversify sources of revenue
 Increase operational efficiency by reducing waste and cutting costs where
possible
 Optimally price products in a way where the price dynamically meets the
changes in supply and demand.
 In businesses with inventory, improve demand forecasting, reduce holding
costs, and increase inventory turnover.
Working Capital
 Mo
st restaurants need working capital to keep their doors open.
Working capital is all the liquid assets of the business that can be quickly
converted to cash to pay off short-term day-to-day expenses such as debts. It
can be in the form of:
 Cash is needed to pay expenses.
 Cash due from debtors, which is when they are asked to pay quickly.
 Cash in the form of inventory, which is when finished goods are quickly
sold to reduce high inventory costs/storage.
Restaurants are typically very working capital intensive since money for
purchasing ingredients, pay workers, pay leasing costs, and utilities need to be
paid in advance to be able to serve guests.
Accounts and Profit
Accounts are the financial records of a firm's transactions. Final Accounts are
prepared at the end of the financial year and give details of the profit or loss
made.
💡
Profit = Sales Revenue – Total Cost
When the total costs exceed the sales revenue, a loss is made. To increase profit:
 Increase sales revenue- this can be done by increasing the price of
products/services or by increasing the quantity of products/services sold.
 Double down on profitable products or services and discontinue
unprofitable sources of revenue.
 Increase productivity of the employees.
 Reduce costs (these include cost of goods sold, operating costs, etc).
Importance of Profit
Profit is important to a business because:
 It is a reward for the enterprise. Entrepreneurs start a business to make a
profit.
 It is a reward for risk-taking. Entrepreneurs take considerable risks when
investing capital and profits are compensation/reward to them for taking
these risks.
  It is a source of finance. After payments to owners, the money left is
retained profit, which can be reinvested back into the business.
 It is an indicator of success. More profits indicate to investors that the
business is worth their time and money, making them more likely to
invest.
In social enterprises, profit is not the main objective. However, they will still try
to make some profit by reinvesting in the business to help it grow.
Income Statements
An income statement is a financial document of the business that records all
income generated by the business as well as the costs over the financial year. It
is also known as a profit and loss account.
Now, there's going to be a lot of light bulbs going off. Brace yourself 😄
💡
Gross Profit = Sales – Cost of Sales
💡
Cost of Sales = Total Variable cost of Production + (Opening inventory of finished
goods – Closing inventory of finished goods)
💡
Net Profit = Gross Profit – Overhead Expenses
Overhead expenses are all the fixed costs.
💡
Profit after Tax = Net Profit – Tax
💡
Retained Profit = Profit after Tax – Dividends
Dividends are a share of profit given to shareholders
Purpose of Income Statements
1. Know the profit/loss made by the business.

2. Compare performance with previous years and with competitors. If profit is

lower, they can find why it fell and how to correct the issue. If it's lower
than competitors, they can find out how to be more profitable and
competitive.
3. Know the profitability of products by preparing separate income
statements for each product. They can then stop manufacturing products
that are making little to no profit.
4. Help decide which products to launch by preparing forecast income
statements. Whichever product has a higher forecast will be chosen.
Example of an Income Statement
Income Statement For the year ended December 31, 2023
Item Amount

Revenue

$1,000,0
Sales Revenue 00

Other Income $50,000

$1,050,0
Total Revenue 00

Cost of Goods Sold

$100,00
Beginning Inventory 0

$800,00
Purchases 0

$120,00
Less: Ending Inventory 0

$780,00
Cost of Goods Sold 0

$270,00
Gross Profit 0

Operating Expenses

$100,00
Selling Expenses 0

Administrative
Expenses $50,000

Depreciation Expense $30,000

Total Operating $180,00

Expenses 0

Operating Income $90,000

Other Income and

Expenses
 Interest Income $10,000

Interest Expense $20,000

Net Other Income

(Expense) -$10,000

Income Before Taxes $80,000

Income Tax Expense $24,000

Net Income $56,000

Balance Sheet
A balance sheet for a business is prepared at the end of every financial year.
They show the:
 Company's financial position at a specific point in time
 Assets and Liabilities of the business - what the company owns and what it
owes.
💡
Helpful Note: A balance sheet is also known as a Statement of Financial Position
Assets
Assets are items that are owned by the business.
 Fixed/Non-Current Assets: Assets that remain in the business for more
than a year. Their value falls over time in a process called depreciation.
E.g., Buildings, Vehicles, Equipment, etc.
 Short-Term/Current Assets: Assets that are owned only for a very short
time. E.g., Inventory and debts from customers.
 Intangible non-current assets: Assets that cannot be touched or felt.
They include copyrights and patents.
Liabilities
Liabilities are debts owed by the business to its creditors.
 Non-Current Liabilities: Liabilities that do not have to be repaid within a
year. E.g., loans, debentures, etc.
 Current Liabilities: Liabilities that need to be repaid within a year. E.g.
overdrafts, trade payables etc.
💡
Working Capital = Current Assets – Current Liabilities
Shareholders' Equity: The total amount of money invested in the company by
shareholders. This includes the share capital and reserves. Shareholders can see
if their stake in the business has risen or fallen by looking at the total equity.
💡
Shareholders Equity = Total Assets – Total Liabilities
💡
Total assets = total liabilities + shareholders' equity
💡
Capital employed = shareholders' equity + non-current liabilities
Note: you can access all these formulas in one place at the end of this booklet.
Example of a Balance Sheet
Example Balance Sheet

Assets Liabilities and Equity

Current Assets Current Liabilities

$50,00 $30,00
Cash 0 Accounts Payable 0

$80,00 $10,00
Accounts Receivable 0 Salaries Payable 0

$120,0 Notes Payable (due $20,00

Inventory 00 within a year) 0

$10,00 $60,00
Prepaid Expenses 0 Total Current Liabilities 0

$260,0
Total Current Assets 00 Long-term Liabilities

Property, Plant, and Notes Payable (due after $50,00

Equipment a year) 0

$100,0 Total Long-term $50,00

Land 00 Liabilities 0

$200,0 $110,0
Building 00 Total Liabilities 00

$50,00
Equipment 0 Equity

Less: Accumulated $50,00 $100,0

Depreciation 0 Common Stock 00
 Assets Liabilities and Equity

Net Property, Plant, and $300,0 $150,0

Equipment 00 Retained Earnings 00

$560,0 Total Liabilities and $560,0

Total Assets 00 Equity 00

Uses of Balance Sheet

1. To check if the business is liquid. This is done by comparing current assets
with current liabilities.
2. Debt-equity ratio. This is comparing the total liabilities to the total assets.

3. To see if the firm will be able to pay back its debt. This is done using the
Debt to Equity Ratio.
4. Investors can check if the dividends paid to them are suitable.

5. Any assets that can be potentially sold off can be checked.

Financial Ratios
Profitability Ratios
Profitability is the ability of a company to use its resources to generate revenues
in excess of its expenses. These ratios are used to see how profitable the
business has been in the year.
1. ROCE (Return on Capital Employed): Calculates the net profit earned
on each unit of capital employed. The higher the ROCE, the better.
💡
ROCE = (Net Profit / Capital Employed) × 100%
2. Gross profit margin: This calculates the percentage of gross profit made
on each unit of sales revenue. The higher the GPM, the better. If this
increases this means that prices have increased and cost of goods have
decreased.
💡
Gross profit margin = (Gross Profit / Sales Revenue) × 100%
3. Net profit margin: This calculates the net profit generated on each unit
of sales revenue. The higher the NPM, the better. If this increases, this
means the gross profit increased and overhead expenses decreased.
💡
Net profit Margin = (Net Profit / Sales Revenue) × 100%
Liquidity Ratios
Liquidity is the ability of the company to pay back its short-term debts. If the
working capital is low, it will go illiquid meaning it will be forced to sell assets.
 1. Current Ratio: The ratio that calculates the proportion of current assets
to every current liability. A value above 1 is good, with 1.5-2 being ideal.
The higher the better but too high indicates that too much money is
invested in assets which is risky. A number lower than one means the
business has cash flow problems.
💡
Current Ratio = Current Assets / Current Liabilities
2. Acid Test Ratio/ Liquidity Ratio: This ratio doesn't consider inventories
to be a liquid asset as it takes time to convert it to cash. A high inventory
can cause a big difference between the current and liquid ratio. A value of
1 means the company is just able to pay off their short-term debts. A
value below 1 means the managers have to take action as this is worrying,
such as reducing the level of inventories.
💡
Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities
Uses and Users of Accounts
Managers
 Use them to help keep control over the performance of each product since
they can see which product is profitably performing.
 Better decisions can be made, such as cutting expenses.
 Ratios can be compared with other firms, to ensure they are still in the
market and are doing better than rivals.
Shareholders
 It is a legal requirement that they be presented with the company's
financial account information.
 It helps them decide whether they should invest by buying shares. Higher
profitability means higher dividends.
 Ratios can be compared with other companies and the highest ratio is the
company they will invest in.


Creditors
 The position and debts of the business can be determined. They will be
ready to supply the business if they will be able to pay them.
 If there are liquidity problems, they will be hesitant to supply them.
Workers and Trade Unions
 Helps them see if the business is secure, by checking if workers will lose
their jobs or not.
Banks
 They will look at how risky it is to lend to a business. They'll only lend to
profitable and liquid firms.
Governments
 Helps determine a fixed tax rate and to see if the business is profitable
and liquid to continue operating which will ensure job security.
Other Businesses
 Helps them compare performance and decide on takeovers.
Limitations of Using Accounts and Ratio Analysis
 Ratios are based on old data, meaning the forecasts may not be accurate.
 External users may not get the full picture about the business as
managers only publish required documents. Some documents are kept
within the business.
 Data comparison over the years leads to misleading assumptions as
inflation affects the prices.
 Different companies use different accounting methods, making
comparisons unreliable.

6. External Influences on Business Activity

6.1 Government Economic Policies & Objectives
Key Concepts
 Inflation:
The increase in the average prices of goods and services.
 Government Economic Objectives:
Governments typically strive to achieve the following:
o Low Inflation:
Low prices encourage spending, leading to more money circulating
in the economy.
o Low Unemployment:
A high percentage of people working reduces reliance on
government assistance.
o Economic Growth:
An increase in the country’s GDP (Gross Domestic Product),
meaning more goods and services are produced and sold.
o Balance of Payment (BoP):
The difference between a country's exports and imports, calculated
as:
BoP = Exports – Imports.
Exports and Imports
 Exports:
Goods and services sold from one country to another, bringing money into
the country.
  Imports:
Goods and services purchased from another country.
Economic Fluctuations: The Business Cycle
1. Growth:
GDP is rising, unemployment is falling, and living standards are improving.
2. Boom:
Increased living standards lead to more spending, which can cause prices
and business costs to rise.
3. Recession:
Uncertainty about jobs causes reduced spending. This leads to falling
demand, job losses, and lower profits.
4. Slump:
A prolonged and severe recession characterized by very high
unemployment, significant GDP decline, and many business failures.

6.1.1 Government Economic Policies

Main Tools for Influencing the Economy
1. Government Expenditure:
Money spent on education, defense, healthcare, public transport, etc.
o Impact:
Boosts the economy by creating jobs and increasing demand.
2. Fiscal Policy (Changing Tax Rates):
o Types of Taxes:

 Direct Taxes:
Taxes on incomes (wages or business revenue).
Example: Progressive income tax where higher earners pay a
larger percentage.
 Indirect Taxes:
Taxes added to the prices of goods and services (e.g., VAT).
o Examples of Taxes Affecting Business:

Tax Type What It Is Effect on Business Activity

Income Tax Tax on individuals' Less disposable income for consumers;

(Direct) earnings reduced spending on goods and services

Tax on the profits Higher tax rates make it harder for

Profit Tax
made by businesses to expand, reducing funds
(Direct)
businesses available for reinvestment

Tax added to the

VAT/Indirect Increases prices, potentially reducing
prices of goods and
Tax demand
services

Import Tariffs Taxes and limits on Can protect local businesses by making
Tax Type What It Is Effect on Business Activity

& Quotas imported goods more expensive; however,

imported goods
(Indirect) raises the cost of imported raw materials

3. Monetary Policy (Interest Rates):

o Definition:
The percentage charged by banks for borrowing money.
o Effects of Higher Interest Rates on Business:

 Reduces profits for businesses with loans, slowing expansion.

 Discourages entrepreneurs from starting new ventures due to
higher borrowing costs.
 Consumer loans (e.g., mortgages) become more expensive,
reducing disposable income and demand.
 Can lead to a higher exchange rate, affecting international
competitiveness.
o Potential Business Responses:

Policy
Business Response
Change

Higher
Lower production costs to reduce sale prices
income tax

Higher
Shift focus to the domestic market; source materials locally
import tariffs

Higher
Reduce investments in business growth; lower product prices to
interest
maintain competitiveness; sell assets for cash to reduce loans
rates

6.2 Environmental & Ethical Issues

Environmental Impacts of Business Activity
 Common Impacts:
o Air pollution from factories and transportation.

o Water and land pollution due to improper waste disposal.

o Increased carbon emissions contributing to global warming.

 Costs and Benefits:

o Private Costs/Benefits:
Costs incurred or benefits gained directly by the business.
o External Costs/Benefits:
Costs imposed on society or benefits provided to society as a
consequence of a business decision.
 External Costs External Benefits

Environmental damage
Job creation and economic boost
from waste

Pollution affecting public Attraction of related businesses (better

health services, infrastructure)

Increased energy
Improved quality of life
consumption

Traffic congestion

Sustainable Development
 Definition:
Development that meets current needs without compromising future
generations.
 Business Contributions:
1. Using renewable energy (wind, solar).
2. Recycling and reusing waste.
3. Employing lean production to use fewer natural resources.
4. Developing environmentally friendly products and biodegradable
packaging.
Ethical Considerations in Business
 Key Ethical Decisions:
o Employment practices (e.g., child labor).

o Sourcing supplies that may harm the environment.

o Distribution of profits and bonuses amid varying wage levels.

o Practices such as bribery.

 Potential Advantages of Ethical Practices:

o Improved consumer reputation.

o Enhanced public relations.

o Reduced risk of lawsuits.

o Easier recruitment of employees.

 Potential Disadvantages:
o Increased production costs.

o Higher product prices potentially leading to reduced demand.

 External Pressures:
o Pressure Groups:
Groups that campaign for changes in business or government
policies can lead to consumer boycotts if businesses act unethically.
 o Government Legislation:
Laws that may make certain practices illegal (e.g., dumping waste)
and impose fines on violators.

6.3 Business and the International Economy

Globalization
 Definition:
The increasing interconnectedness of the world, leading to more
international trade and movement of people.
 Drivers of Globalization:
o Free-trade agreements reducing tariffs on imports/exports.

o Advances in transportation making international trade easier,

cheaper, and faster.
o E-commerce enabling global purchasing.

o Industrializing countries (e.g., India, China) producing goods at

lower costs.
Opportunities and Threats
 Opportunities:
o Increased sales by entering international markets.

o The ability to open factories or offices abroad for lower production

costs.
o Access to cheaper raw materials and resources.

o Risk diversification across different markets.

 Threats:
o Increased competition from foreign companies.

o Higher expenses in setting up international operations.

o Potential loss of local jobs if workers move to higher-wage countries.

o Home country businesses may suffer if foreign companies increase

their operations locally.
 Protectionism:
o Definition:
Government policies (such as import tariffs and quotas) designed to
protect local industries by reducing foreign competition.
o Impact:
While local businesses may benefit from reduced competition, these
policies can also raise the costs of imported raw materials and make
exporting more challenging.
6.3.2 Multinational Companies (MNCs)
  Definition:
Companies that operate in more than one country—not only selling
products internationally but also establishing production or service
operations abroad.
 Benefits to Business:
o Lower production costs.

o Proximity to natural resources and key markets.

o Avoidance of expensive import taxes.

o Risk spread across multiple markets.

 Benefits to the Host Country:

o Job creation.

o Investments in local infrastructure.

o Increased exports.

o Expanded product choices for consumers.

 Potential Drawbacks for the Host Country:

o Negative impact on local businesses.

o Repatriation of profits to the company’s home country.

o Excessive influence over local government policies.

o Consumption of scarce local resources.

6.3.3 Exchange Rates

 Definition:
The price of one country’s currency in terms of another’s.
 Examples:
o 1 Euro might be equivalent to 1.2 US Dollars.

 Currency Movements:
o Appreciation:
When a currency increases in value (e.g., 1€ becomes equivalent to
1.7$).
 Effects:
 Import prices fall.
 Export prices rise, making exports more expensive for
foreign buyers.
o Depreciation:
When a currency decreases in value (e.g., 1€ becomes equivalent to
1.1$).
 Effects:
  Import prices rise.
 Export prices fall, making exports more competitive.
 Implications for Businesses:
o When the Currency Appreciates:

 Cheaper imports may lead to increased profits.

 Lower production costs, enabling businesses to lower prices
and remain competitive.
o When the Currency Depreciates:

 More expensive imports may reduce profit margins.

 Businesses might have to increase their prices to maintain
profit levels, potentially reducing competitiveness.

IGCSE Business Formulas

IGCSE/ O Levels Business Formulas
Got all the IG Business Formulas in once place. Take a look!

This guide will serve as a complete list of all formulas for IGCSE Business
Studies.
Revenue:
Formula: Revenue = Quantity Sold × Price
Measures the total income generated from selling goods or services,
calculated by multiplying the quantity sold by the price per unit.
Productivity:
Formula: Productivity = Output ÷ Quantity of Input
Shows how efficiently resources are used, found by dividing the total
output by the quantity of input used in production.
Labor Productivity:
Formula: Labor Productivity = Output ÷ Number of Employees
Assesses how efficiently labor is used, calculated by dividing total output
by the number of employees.

Working Capital:
Formula: Working Capital = Current Assets − Current Liabilities
Indicates the short-term financial health of a business, showing the
difference between current assets and current liabilities.
Capital Employed (or Shareholder's funds):
Formula: Capital Employed = Total Assets − Total Liabilities OR Equity(
Share Capital + Share Premium + Retained Earnings + General
Reserve) + Non-Current Liabilities
Represents the total capital invested in the business.
Profit:
Formula: Profit = Revenue − Cost of Sales
Measures the financial gain from business activities, found by subtracting
the cost of sales from total revenue.
Profit (from Break-even graph):
Formula: Profit = Total Revenue − Total Costs
Shows how much profit is made after covering all costs, calculated by
subtracting total costs from total revenue.
Total Costs:
Formula: Total Costs = Fixed Costs + Variable Costs
The overall expenses to produce goods or services, determined by adding
fixed costs to variable costs.
Average Cost:
Formula: Average Cost = Total Costs ÷ Total Units Produced
Shows the cost per unit produced, calculated by dividing total costs by the
number of units produced.
Break-even Point:
Formula: Break-even Point = Fixed Costs ÷ Contribution per Unit
The point where a business covers its fixed costs, calculated as fixed costs
divided by the contribution per unit.
Contribution per Unit:
Formula: Contribution per Unit = Selling Price − Variable Costs
Measures the profit made on each unit sold after deducting variable costs
from the selling price.
Margin of Safety:
Formula: Margin of Safety = Maximum Output − Break-even Output
Indicates how much actual production exceeds the break-even point,
providing a buffer before losses start.
Gross Profit:
Formula: Gross Profit = Revenue − Cost of Sales
Shows the profit from sales after deducting the cost of goods sold (direct
costs).
Gross Profit Margin:
Formula: Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
Expresses the gross profit as a percentage of revenue, showing
profitability before other expenses.
Net Profit:
Formula: Net Profit = Gross Profit − Expenses
Represents the total profit after all expenses, both fixed and variable, are
deducted from gross profit.
Net Profit Margin:
Formula: Net Profit Margin = (Net Profit ÷ Revenue) × 100
Indicates how much of the revenue remains as profit after all expenses,
expressed as a percentage.
Return on Capital Employed (ROCE):
Formula: ROCE = (Net Profit ÷ Capital Employed) × 100
Shows how efficiently the company generates profit from its capital
investments.
Current Ratio:
Formula: Current Ratio = Current Assets ÷ Current Liabilities
A liquidity measure that compares current assets to current liabilities to
assess the ability to meet short-term obligations.
Acid Test Ratio (or Quick Ratio):
Formula: Acid Test Ratio = (Current Assets − Inventory) ÷ Current
Liabilities
A stricter liquidity measure that excludes inventory from assets to assess
whether a company can meet short-term liabilities without selling
inventory.

7 Skills for IGCSE Business Success

1. Knowledge and Understanding (K)

 Overview:
Knowledge and Understanding (K) make up 40% of marks in IGCSE/O-
level Business Studies. However, Knowledge is the foundation of every
answer. Without at least one Knowledge point, you will struggle to access
any of the other marks for Application, Analysis, and Evaluation.
 Knowledge Command Words:
State, Identify, Define, Calculate
 Example Question:
“Define the term opportunity cost”
  Quick Tips:
Learning definitions and a relevant example for each of the keywords on
the IGCSE syllabus is highly recommended. It’s not just me who thinks this
is a good idea – it is written in nearly every examiner report!
2. Application
 Overview:
Application makes up 20% of marks in IGCSE/O-level Business Studies.
Application is using your knowledge and understanding of different
business concepts and applying them to different business situations.
 Context in Exams:
o Paper 1: Application will come from referring to the short case
study at the start of each question.
o Paper 2: Application will come from relevant application to the
case study.
 Common Pitfall:
Beware of this common student error—as the exam goes on, it’s common
to forget to include application as students become tired and anxious to
finish the exam on time.
 How to Include Application:
If a question refers to a specific business, you must APPLY your answer to
that business.
 Example Question:
“Should DelaRosa Sports introduce flow production?”
As DelaRosa Sports is a specific business from the case study, we ensure
we include application in our answers.
 Quick Tips:
Application words are UNIQUE to the relevant case study and couldn’t be
applied to every other question. To make sure you do use the context,
refer back to the case study before answering each part of the question.

3. Analysis
 Overview:
Analysis makes up 25% of marks in IGCSE/O-level Business Studies.
However, many students score fewer marks with limited analysis rather
than maximum marks for developed analysis.
 What It Involves:
Explaining the impact of a problem or an issue on the business. Students
often lose analysis marks because they don’t make it clear to the
examiner why a business decision will have a positive or a negative
impact.
  How to Indicate Analysis:
Use sentence starters such as “this means that” or “this will impact the
business positively because” to signal a move into analysis.
 Quick Tips:
Remember to tie your analysis to the specific business in the question so
you stay focused on the most important issues and also to gain application
marks.

4. Evaluation
 Overview:
Evaluation is the final 15% of your grade, and because it can be the most
difficult of the assessment criteria, it is often neglected by students.
However, perfecting your skills of evaluation can often make the
difference between a B and an A or A*!
 When Is Evaluation Awarded?
Evaluation is awarded when we:
o Present reasoned explanations

o Make decisions

o Make judgments and recommendations

 What It Involves:
Put simply, evaluation is when we make a decision or reach a conclusion
and justify why we made that choice by making a reasoned argument. The
crucial component that students often miss is explaining why one option is
better than the other option.
 Example:
“Although option A has a lower short-term cost, option B will rapidly
increase revenue and allow greater profitability in the long term.”
 Quick Tips:
There is no “right” or “wrong” answer in evaluation, as long as your
decision is justified and focused on the question. For example, in this
question on motivational methods, “Recommend the method(s) of
motivation Charlie should use with employees at EasyStick Ltd,” we can
take the view:
o “pay is the most important method of motivation due to the
evidence from the survey,” OR
o “that other methods of motivation should be considered before pay
as the business will not have the resources to significantly improve
the pay of the employees enough to improve motivation.”

5. Calculations
 Overview:
In IGCSE Business, we have a lot of potential calculation questions. From
 calculating market share to return on capital employed (ROCE),
calculations can come up across topics and on both paper 1 and paper 2.
 Components of Calculation Skills:
o Finding the correct data to input into your calculation

o Learning the correct method to accurately and precisely solve the

calculation
o Interpreting the results in order to answer analysis or evaluation
questions – (especially in paper 2)
 Overcoming Calculation Anxiety:
Many students get calculation anxiety and worry that their level of maths
will mean they will never master calculations. Fear not! With practice, you
can master ALL the calculations on the IGCSE syllabus.
 Exam Strategy:
Write down the formula to guide you through the calculation, and show
your working. Students are awarded marks for showing the correct process
of answering the question, even if they get the rest of the answer wrong.

6. Time Management
 Overview:
The business cliché “Time is money” converts to “Time is marks” in
exams. It’s tempting to spend more time on the questions you feel more
confident answering, or run out of time as you want the perfect answer to
every question. However, there are a limited number of marks you can get
on each question, and there is a much greater opportunity cost to running
out of time.
 Quick Tips:
o Calculation questions can use up a lot of valuable time; skip and
leave them to the end if you don’t feel confident that you can
answer the calculations within your time limit.
o Don’t forget a watch! It may be difficult to see the clock in the exam
hall.
o To keep on track, write down the time you begin and when you
should finish the question on your paper. Remember it’s
approximately 1 min per mark.

7. Problem Solving Approach

 Overview:
An overarching skill students need to succeed in IGCSE Business is
problem-solving. In exam conditions, we need to be prepared for
unwelcome surprises and everything not going our way.
 Common Scenarios:
 o The case study may be in a sector we are not that familiar with.

o We may make a mistake in a calculation which uses up too much

time.
o A business concept may come up that we are not so familiar with.

 Strategic Approach:
However, with a problem-solving, pragmatic approach we can take a
strategic approach to the exam in order to maximize our marks in every
question.
 Quick Tips:
Reviewing past papers and making brief plans of how you would answer
each question can be a time-effective method of working on your problem-
solving skills, exam technique, and structuring different types of
questions.
After reading the case study, give yourself a strict time limit – let’s say 4-5
minutes in a 12-mark paper 2 question. How many points could you come
up with? What was the focus of your evaluation? Then compare your
answer plan to the mark scheme.