Inputs and outputs
Inputs - Factors required to produce goods
- Raw materials
Outputs - Goods and services that meet the demand of the customers
Factors of Production
- Land - premises used for factories in order to carry out production
- Laour - The input of the workforce
- Capital - The capital used i.e. machninery, faccilities
- Enterprise - The owner of the business
Constraints - The restricitons that impact on the operations of the business
- Environment - Seasonal demand i.e. Christmas/Summer
- Legislation - political factors i.e. VAT/Taxation
- Economy - Current ecenomic climate i.e. reccession/boom
- Competition - Market position i.e. pricing strategies
Adding Value - Ensuring the price of the finished product exceeds the costs of producing it.
- This can be acheived by turning inputs into outputs i.e making a finished product
- However it can also be acheived by adding a USP or a brand image to the product, thus increasing it's value
Products and services
Consumer non-durable - Can only be used once e.g. food, drink, petrol ect
Consumer durable - Can be used more than once e.g. cars, fridges, ovens ect
Industrial goods - Machinery sold B2B for firms to manufacture goods
Services - consists of all goods that are not tangible e.g. banking, holidays
Stakeholders - Someone whos owns an interest in the usiness either for beneficial inventives or financial gain. Each individual stakeholder has their own ojective for what they want the business to acheive. For example the owner wants to increase sales and profits, customers want to gain value for money, employees want job security and the local commmunity want more jobs
- Local Community
Conflict between stakeholders
Conflict between stakeholders - As each stakeholder has their own different objectives for what they want the business to achieve, it is likely that conflict will arise between them, for example:
- The closure of a factory may save costs and prevent significant losses for a business but will mean that a number of employees will loose their jobs, this causes conflict between employees/local community and owners
- The owners of a firm may decide to rise the prices of some of its goods as it knows there are little substitutes for the product i.e. petrol. This would cause conflict amongst customers/government and owners
Cost and benefits
Private costs - Costs that a business pays e.g. labour, raw materials ect
Private benefits - The benefits a business receives e.g. proftis
Social costs - Costs of a businesses actions that are paid by society e.g. pollution, traffic congestion
Social benefits - Benefits that a business brings to society e.g. lower crime rate due higher levels of employment
Business r esources
Business resources - The factors that are essential for a business to operate effectively, including employees, managers and finance.
Employees - Employees with the right skills need to be appointed and once recruited they need to be trained and motivated.
Managers - Managers help ensure that the business is achieving it's objectives, they are needed in each different area i.e. Finance, HR, Production, marketing
Finance - Finance is needed for meeting the costs of the day to day business activity as well as for investment for growth.
Short term finance
Working capital - Short-term finance used for day-to-day business activity
Cash flow - A business needs sufficient inflows of cash to finance its day-to-day outgoings e.g. wages and interest repayments. A cash flow shows the inflows and outflows of the business i.e. whats coming in and whats going out.
Short term finance - Overdraft, loan, trade credit, factoring, hire purchase
Medium term finance - Loan, hire purchase, leasing, retained profit
Long term finance - Loan, sale of assets, sale and leaseback, retained profit, shares, debentures
Overdraft - An overdraft is where a business can run the account to zero and then to a further pre-arranged amount can be withdrawn.
Interest charged on an overdraft is only paid for the actual amount overdrawn, so a business can save costs by ensuring that they do not go overdrawn, however an overdraft can be useful in terms of purchasing extra amounts of stock or paying for extra for employees to do further shifts.
An overdraft is therefore to be used as a safety net for the business. it should not be used to purchase capital items such as machinery.
Short term loan
Short term loans - These are used to purchase specific pieces of equipment or a particular consignment of raw materials in order to fulfill a contract.
A loan is not a safety net like an overdraft is because there is little point in taking out a loan in the chance anything happens as it would mean paying interest on unnecessary funds it wasn't using.
When a loan is taken out it has to be paid back within a given period, interest is also charged until the loan is paid back in full.
Trade credit - Making the use of an opportunity offered to defer payment to a supplier, for example:
- A wholesaler receives its raw materials from a producer, the wholesaler then sells to a retailer and receives payment 4 weeks later.
- The producer allows a 6 week period of trade credit to the wholesaler. This means the wholesaler can wait until it receives payment from the retailer in 4 weeks and so use the funds it would have used to pay the producer for other purposes in the meantime within a two week period, thus the wholesalers use of trade credit is a form of short term finance, of which does not incur interest and frees up cash flow.
Hire purchase - A method of paying for an item in installments over a period of months or years. While the payments are being made, the item is being hired by the business and is not actually purchased until the last payment is made
The advantage of this is that large amounts of money can be spread over time meaning the finance does not need to be found all at once, this benefits the firms cash flow.
However the disadvantage of this is that due to the amount of interest applied to the repayment of the item the business will end up paying more than it would have it it had purchased it outright in the first place.
Medium and long term loans
Medium and long term loans - The same features of a short term loan apply to both a medium and long term loan as well, however there is a difference in terms of interest charged.
With these types of loans the business has to choose to take a variable rate loan or a fixed rate loan, each has its benefits and drawbacks
Fixed rate - This is where the rate of interest will stay the same throughout the period of the loan. The advantage of this is that it provides certainty, meaning financial planning will be easier and the business will not be impacted if interest rates increase. However if interest rates decrease and the business have a fixed rate loan then they are loosing out on potential money they could have saved.
Variable rate - This is where the rate of interest fluctuates throughout the given period of the loan, meaning that if the rate falls then the firm benefits in comparison to if it had chosen a fixed rate. However if it increases it could cause significant financial implications for the business.
Leasing - This is simillar to hire purchasing as the item is paid for in instalments over a period of time therefore spreading the costs.
The main difference is that leasing is more like renting, the business will never purchase the item it will just continue paying the instalments
However unlike hire purchase, leasing offers a major benefit as if the item breaks down the leasing company will fix it at their own expense.
Leasing apears to impact more on costs of the business in the short term as it is continous payments being made, but perhaps having broken machinery fixed may reduce costs when regarding the long term.
Issue of shares
Issue of shares - This is a long term source of finance that can only be gained if the company is a public limited company (PLC).
This is a form of finance that can be used to raise large amounts of capital, this is achieved through through selling shares of the company on the stock market to shareholders who in return receive a share of the profits of the company in the form of dividends as a result of their investment.
The advantage of this is that it avoids debt in comparison to using loans and overdrafts. In addition there is also little restriction when the dividends need to be payed back to the shareholders.
However disadvantages include that in the long term the business has to pay out more than it sold its shares for originally in order to give the shareholder a dividend, a loan may have potentially been more cost effective. Furthermore it may also cause conflict amongst stakeholders, if shareholders are not paid reliably for example. There is also the possibility that the business may loose a degree of control of their company if too many shares are sold.
Sale and leaseback
Sale and leaseback - A business can sell of it's assets such as building or pieces of land in order to raise finance, this can be an appropriate form of action if the asset is no longer needed.
If the asset is still needed however sale and leaseback is where the asset is sold but then can be leased back to the company, usually for a long period of time.
There are benefits to this source of finance, for example a factory can be sold and the n leased back in order to fund an expansion of the firm whilst still using the same factory for operations.
There are also disadvantages however, when the lease expires there is no guarantee that it will be renewed. Furthermore the firm will most probably pay in excess of what they sold the factory for, resulting in losses for the business.
Retained profit - This is a source of finance where a business uses it's own capital which it has saved over a number of years. This type of finance is usually used to invest into the long term growth of the firm.
The main advanatge of this is that it is debt free as there are no interest charges due to it being an internal source. However it could be said that this type of finance is only really available to large firms with financial economies of scale.
Recruitment - The process of employing additional staff, the aim of this is to employ and retain the best possible human resources, the stages of the process are as followed:
- Demand for labour - The business needs to establish the demand for a particular job, this mat arise from an increase in demand for a product.
- Job description - Outlines the roles, responsibilities of the job and also highlights the job specification i.e. what skills are needed for the job.
- Job advertisement - This depends on if the firm is recruiting internally or externally, this basically advertises the job to attract potential candidates.
- Selection - Where potential employees are short listed and then selected through methods such as interviews.
- Appointment - Where the employee or employees are appointed to the job, this is where an employment contract is offered to the new employee.
- Induction - In order to effectively retain the appointed employee(s) induction training is needed to help them settle into the business, this includes showing the employee how the firm operates and so on.
Training - Training is needed for the employee to gain particular skills in order to meet the demands of the job, the business benefits due to having a more skilled workforce, therefore boosting productivity and employees benefit in terms of being more motivated in the workplace.
On-the-job training - Internal training where the training is carried out at the place of employment by an experienced employee. This is therefore more convenient for the trainee and is less time consuming as no travelling is needed, as a result this also appears to be a more cost effective method. However it could be said that the skill and attitude of the trainer plays a major role in how successful the training is.
Of-the-job training - External form of training, this is less convenient for the trainee and more time consuming, which reflects higher costs for the firm than internal training, due to travelling and paying the outsourced trainer. This might also impact on the business as well as a degree of production might be lost. on the other hand the trainee may benefit from gaining greater skills from expert trainers.
Market research - Gathering information to help better understand the market in which the business operates, market research is used to for the following reasons:
- Describe the market - Exploring trends, comparing market performance, establishing market share, finding out who customers are
- Explain the market - Why the market share has fallen, whether a price reduction worked, whether customers prefer their products or those of the competition, how good a promotional campaign was
- Predict changes in the market - What customers will do if the company rises prices, the likely impact of increased competition, the possible future impact on market share
- Explore future customer reaction - Explores customers' reaction to new ideas, find the target price, establish the most appropriate distribution channels, discover the best methods of promoting a new product
Quantitative and qualitative data
Quantitative data - Information gathered that can be analysed in a numerical way e.g. surveys/sales figures ect. This is an effective method in describing the market, for example 48% of our customers are male. However quantitative data raises issues about it's validity i.e. is the sample size a good representative? Furthermore quantitative does not provide an explanation behind this i.e. why is 48% of our customers male? Qualitative data might be able to provide the explanation for this.
Qualitative data - More in-depth information that contains a much wider variety of responses, this includes methods such as observations and interviews. This information tends to be gathered from smaller amounts of people and focuses on opinions. As a result it is harder to analyse such data but this provides a better explanation behind the quantitative data i.e. explaining customer behavior. Furthermore this also raises issues about it's validity because of the small sample size, the data might not be representative.
Primary/secondary data and internal/external data
Primary data - This is original data obtained by field research specifically for the purpose of analysis by a particular firm, thus meaning the data will have specific significance in relation to the business carrying it out. Primary data methods consist of observation, interviews and surveys. Using a primary method increases the validity of the data and can be made more specific to what the business wants to find out. However using primary data is a costly and time consuming process.
Secondary data - This is where desk research is used to gather information that has already been obtained for some other purpose, secondary data methods consist of previous survey results and competitors sales figures. This is a more cost effective method in comparison to a primary approach however there is the concern that the data may be out-dated
Internal data - Information gathered inside the business, this includes sales figures, previous survey results and customer data
External data - Information gathered outside the business, this includes government statistics, trade publications and market research companies
Sampling - Gathering a smaller more representative group in the hope of finding out the opinions of a large group.
- Random sampling - Where everyone in the population (the total number of people who could be included in a particular survey) has an equal chance of being included.
- Quota sampling - Where the number and characteristics of people surveyed are deliberately matched to the actual population.
- Stratified sampling - Where the population is divided into smaller groups, which are likely to be interested in the product being researched.
- Cluster sampling - Where a particular group is included, hopefully reflecting the views of the whole population, when information about the population is incomplete.
- Systematic sampling - Where a set formula is used (e.g. every tenth person) to select the people in the research.
- Convenience sampling - Where any non-scientific method is used to help the speed of response and to lower the cost.
Primary sector - Businesses in the primary sector are concerned with the extraction of raw materials, these include farming, fishing, forestry and mining, as well as oil and gas extraction.
Secondary sector - Businesses in the secondary sector are concerned with manufacturing i.e. turning raw materials obtained from the primary sector into finished products. Examples of this include the construction and car industries.
- Deindustrialisation - Decline in the size of secondary sector
Tertiary sector - Businesses in the tertiary sector are concerned with the output of services, this includes retailing (selling the finished product to the consumer), banking and transportation.
Soletrader and partnership
Public sector - Businesses and organisations owned and run by government whose objective is to provide a service rather than make a profit.
Private sector - Businesses owned and run by private individuals for profit.
- Soletrader - A soletrader is where an individual owns the business and makes all the decisions affecting it. Being a soletrader means that the firm is unincorporated, this means that business doesn't exist separately from it's owners. An advantage of being a soletrader is that all profits go to the owner, however the owner has unlimited liability meaning the owner is fully responsible for the debts of the business.
- Partnership - Where two or more people run a business together and profits and losses are shared, partnerships are common in firms like solicitors, dentists and accountants. Similarly to a soletrader the business is unincorporated. Unlike a soletrader however the advantage of a partnership is that it can have additional partners meaning more potential capital for expansion. The disadvantages of this type of business is that not only does it also has unlimited liability but the decision making process is more time consuming due to the number of owners involved.
Private limited company - This is a company ending in Ltd or Limited and is usually run by a family that is Incorporated, meaning the business exists in it's own right i.e. those who own the company are not the same as who run it. An advantage is that shares of the business can be sold privately (shares of an ltd can not be advertised for sale) meaning growth is easier. However because most are family oriented this might impact on its predominance.
Public limited company - This is a company ending in PLC, these are usually large businesses who have the ability to sell shares of the company on the stock market which is highly beneficial in terms of growing the business. However this also enables the possibility of loosing operational control of the business if too many shares are sold. Furthermore being a PLC means that they have certain responsibility they need to carry out by law, for example they are obligated to publish financial documents such as balance sheets. On the other hand the benefit of being a public limited company is that it has limited liability i.e. shareholders (who own the business) do not have the responsibility of debt.
Franchise - Where a business with a well established brand (the franchiser) lets a person (the franchisee) set up their own business using the brand. This is in exchange for an initial fee as well as royalty payments (percentage of turnover or profits). Fast food business's like McDonald's and Burger King are the most common examples of franchised companies.
The advantages of being a franchisee is that the brand is already well known, meaning there is an already established customer base. Furthermore the business does not need to spend money on promotional campaigns as this is covered at the expense of the franchiser, resulting in relatively low marketing costs. Training is also an important aspect paid for by the franchiser, this also results in low costs. Furthermore because of this, these factors offer great forms of security which means obtaining money for from the bank for expansion is more accessible.
The disadvantages of owning a franchise is that there is less control over what and how a business sells than if it was run individually. In addition specific suppliers of the franchiser need to be used when buying products, these of which might charge higher prices than those of similar products on the market.
The public sector
Nationalisation - Government taking ownership and control of a business or industry from the private sector by buying the majority of it's shares.
Privitisation - The process of selling state-owned industies or businesses to the private sector. The advantage of privatisation is that effiency will increase as privately run businesses have to keep costs down in order to survive. Privitisation also provides greater competion between business which benefits the consumer. Competition leads to lower prices, more choice and better quality of service. However the drawbacks of privitasion is that they can be sold off at a low price, meaning the government lost out on in terms of potnetial capital that could have been raised. Furthermore privately run business have less of an aim to be socially responsible opposed to a business in the public sector.
Measuring the size of a business
A business's size can be measured in relation to the following:
- Number of employees - It is usually perceived that a large business will employ a large number of staff, however many factories are capital intensive, meaning they produce a lot of output but do not employ many.
- Number of factories/buildings - The higher number of factories, shops and offices a business has the more it will be seen as a large firm. However a business with just one shop could be generating more profits than one with multiple shops
- Turnover and profit levels - Higher turnover or profit levels is generally associated with a large business. Although as mentioned earlier a firm could have one shop but have a high turnover.
- Stock market value - The higher the figure, the larger the company is likely to be. However the drawback of using this to measure the size of the business is that if the share price falls then the business has become smaller regardless of how many employees it has or its turnover levels.
- Capital employed - This is the total value of the firm's assets, again the higher value the bigger the business is perceived to be. However this does not take into account where the assets are located i.e. having offices in the middle of London compared to in Newcastle.
Mission statement - Gives a general statement about the purpose of the firm.
Aims - What the business wants to achieve e.g. survival, breakeven, market share
Objectives - The goal set to achieve the main aim of the business, this provides a greater sense of direction for the firm and may motivates it's employees.
- Strategic objectives - The long term approach of achieving the aim, for example a strategic objective could be to increase productivity.
- Tactical objectives - The short term objectives needed to ensure the strategic objectives are achieved, for example in order to increase productivity the tactical objective might be to increase the use motivational methods within the workforce i.e. job rotation ect
SMART objectives - A set criteria for setting objectives
- Specific - So that everyone understands what the objective is.
- Measurable - So that a form of success or failure can be ascertained.
- Agreed - Agreement of the aim increases the likelihood of its achievement.
- Realistic - So that demotivation amongst employees can be avoided.
- Time-bound - Time constraint aids measurement and focuses employees
- A lack of finance to meet the chosen objectives i.e. growth
- Poor communication within the business i.e. decision making process
- An industrial dispute with the workforce i.e. strikes - impact productivity
- Conflict between the different departments of the business
- Changes in law that affect the operations of the business
- The state of the economy i.e. recession
- Behavior of competition i.e. price war
- Behavior of external stakeholders i.e. suppliers
Opportunity cost - The cost of the next best alternative that has to be given up when a decision is made. As businesses do not have the sufficient resources to do everything they would like to do, decisions have to be made on the basis of priorities. This means that the potential benefits from all the possible decisions are considered and the one with the most benefit is chosen.
For example, the marketing director of a company wants to launch an advertising campaign which they think will increase sales significantly. However the production director wants to install new technology into the business's production line as she believes it will increase the quality of the product and therefore will create a major selling point. The business does not have the funds to do both so the owner has to make the decision based on which will bring the most benefit to the firm. If the owner decides that the advertising campaign will be the most beneficial, then the opportunity cost is not the cost of the advertising campaign but the benefits lost by the decision not to install the technology.
Supply and demand
Demand - Demand refers to the quantity that people in a particular market actually can and will purchase at each price. Usually if the market price is low, then demand is high, the same principle applies vice versa.
Supply - Supply refers to the quantities that are offered for sale by the business at each price. Whereas the demand curve looks at the behavior of customers when price changes, the supply curve looks at price from the point of view of the business. For example if demand rises, businesses will try to supply more because they can make more profits.
Equilibrium - The situation in the market when demand is equal to supply. In other words equilibrium is the price at which the consumer coincides with what the business are prepared to supply. In any market, price is always moving towards equilibrium, it changes until both customer and business is satisfied.
Supply and demand curves - If the curve moves to the right this shows an increase, if it moves to the left this shows a decrease. This applies to both the supply and the demand curve.
Factors influencing demand
Price - The higher the price, the lower quantity demanded and vice versa
Income - An increase in income leads to an increase in demand for most goods
Promotion - Marketing is a tool used to significantly increase demand
Trends - A particular product may be regarded as an essential product
Demographic changes - A larger population means increased demand
Government action - Healthy eating campaigns might decrease demand
Substitutes - A cheaper alternative of a product might be introduced
Complimentary product - These create joint demand: that is, when one product is bought so is the other in conjunction