Firms recruit, select and train staff in different ways with varying degrees of success.

Recruiting staff

Without the right staff with the right skills, a business cannot make enough products to satisfy customer requirements. This is why organisations draw up workforce plans to identify their future staffing requirements. For example, they may develop plans to recruit a new IT Manager when the current one plans to retire in eight months time.

Recruitment is the process by which a business seeks to hire the right person for a vacancy. The firm writes a job description and person specification for the post and then advertises the vacancy in an appropriate place.

• ptions explain the work to be done and typically set out the job title, location of work and main tasks of the employee.
• Person specifications list individual qualities of the person required, eg qualifications, experience and skills.

Firms can recruit from inside or outside the organisation.

• Internal recruitment involves appointing existing staff. A known person is recruited.
• External recruitment involves hiring staff from outside the organisation. They will bring fresh ideas with them but they are unknown to the company - will they fit in?

Managers must decide on the best method to assess and select applicants for a job. Application forms, CVs, references, interviews, presentations, role-play and tests can be used to show if an individual is suitable for the specific job on offer.

Many organisations are as concerned about attitude as they are about skill. There is little point in appointing the best qualified or most skilled applicant if they have a poor attitude toward work or cannot operate as part of a team. This is particularly important in small firms with very few staff.

Training

Induction is the training given to new workers so that they understand their role and responsibilities and can do their job.

Staff should learn new skills throughout the course of their career to stay productive. Training improves technical, personal or management skills and will increase staff efficiency. There are two main training methods:

Workers in a call centre

• On-the-job training where experienced members of staff explain a job or a skill.
• Off the job training where outside experts are paid to explain a job or a skill.

An annual staff appraisal is a chance for an employee to discuss their recent work and future training needs with their line manager in a meeting.

Retaining workers is important to a firm because it costs time and money to hire and train a replacement. Appraisal and training helps motivate staff and so improves staff retention.

Solvency

Cash flow is the movement of money in and out of the business.

Cash flows out of the business when bills are paid

• Cash flows into the business as receipts, eg from cash received from selling products or from loans.
• Cash flows out of the business as payments, eg to pay wages, supplies and interest on loans.
• Net cash flow is the difference between money in and money out.

Profit and cash flow are two very different things. Cash flow is simply about money coming and going from the business. The challenge for managers is to make sure there is always enough cash to pay expenses when they are due, as running out of cash threatens the survival of the business.

Insolvency

If a business runs out of cash and cannot pay its suppliers or workers it is insolvent. The owners must raise extra finance or cease trading. This is why planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft.

Calculating the cash flow

This is an example of a cash flow forecast for the next three months:

A sample cash flow table for January to March

ItemJanFebMar Opening bank balance £2,000 £1,000 £1,250 Total receipts (money in) £500 £750 £5,000 Total spending (money out) £1,500 £3,000 £2,000 Closing bank balance £1,000 -£1,250 £1,750

At the beginning of January, the business has £2,000 worth of cash. You can see that the total flow of cash into the business (receipts) for January is expected to be £500, and that the total outflow from the business (expenditure) is £1,500. There is a net outflow of £1,000 which means the projected bank balance at the beginning of February is only £1,000.

In February, there are expected payments of £3,000 and only £750 of expected income. This means that the business is short of £1,250 cash by the end of February and cannot pay its bills. An overdraft is needed to help the business survive until March when £5,000 worth of payments are expected.

A business can improve its cash flow by:

• Reducing cash outflows, eg by delaying the payment of bills, securing better trade credit terms or factoring.
• Increasing cash inflows, eg by chasing debtors, selling assets or securing an overdraft.

Calculating profitability involves first working out the minimum level of sales required to cover all costs.

Breakeven point

At low levels of sales, a business is not selling enough units for revenue to cover costs. A loss is made. As more items are sold, the total revenue increases and covers more of the costs. The breakeven point is reached when the total revenue exactly matches the total costs and the business is not making a profit or a loss. If the firm can sell at production levels above this point, it will be making a profit.

Establishing the breakeven point helps a firm to plan the levels of production it needs to be profitable.

Breakeven chart

The breakeven point can be calculated by drawing a graph showing how fixed costs, variable costs, total costs and total revenue change with the level of output.

Here is how to work out the breakeven point - using the example of a firm manufacturing compact discs.

You can assume the firm has the following costs:

Fixed costs: £10,000. Variable costs: £2.00 per unit

Graph showing fixed costs and total costs

You first construct a chart with output (units) on the horizontal (x) axis, and costs and revenue on the vertical (y) axis. On to this, you plot a horizontal fixed costs line (it is horizontal because fixed costs don't change with output).

Then you plot a variable cost line from this point, which will, in effect, be the total costs line. This is because the fixed cost added to the variable cost gives the total cost.

To calculate the variable cost, you multiply variable cost per unit x number of units. In this example, you can assume that the variable cost per unit is £2 and there are 2,000 units = £4,000.

Graph showing the breakeven point of a business

Once you have done this you are ready to plot the total revenue line. To do this, you multiply:

sales price x number of units (output)

If the sales price is £6 and 2,000 items were to be manufactured, the calculation is:

£6 x 2,000 = £12,000 total revenue

Where the total revenue line crosses the total costs line is the breakeven point (ie costs and revenue are the same). Everything below this point is produced at a loss, and everything above it is produced at a profit.

All businesses should keep proper accounts. This involves the calculation of revenue, costs and profit.

Revenue

Revenue is the income earned by a business over a period of time, eg one month. The amount of revenue earned depends on two things - the number of items sold and their selling price. In short, revenue = price x quantity.

For example, the total revenue raised by selling 2,000 items priced £30 each is 2,000 x £30 = £60,000.

Revenue is sometimes called sales, sales revenue, total revenue or turnover.

Costs

Renting an office block is part of a company's fixed costs

Costs are the expenses involved in making a product. Firms incur costs by trading.

Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made.

Other costs, called fixed costs, stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

Fixed costs, variable costs and total costs

Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.

The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

Profit and loss

Put simply, profit is the surplus left from revenue after paying all costs. Profit is found by deducting total costs from revenue. In short: profit = total revenue - total costs.

For example, if a firm has a total revenue of £100,000 and a total cost of £80,000, then they are left with £20,000 profit.

Profit is the reward for risk-taking. A business can use profit to either:

• Reward owners.
• Invest in growth.
• Save for the future, in case there is a downturn in revenue.

Losses

Trading does not guarantee profit. A loss is made when the revenue from sales is not enough to cover all the costs of production. For example, if a company has a total revenue of £60,000 and a total cost of £90,000, then they have lost £30,000 from trading.

Losses can be reduced or turned into profit by:

• Cutting costs, eg by letting staff go and asking those who remain to accept lower wages.
• Increasing revenue, eg by cutting prices and selling more items - if demand is elastic.