Business Studies

Business Studies -

Buss 2

By Caroline Booth

Benefits of using Budgets:

• Provide direction and coordination: 
  • Ensure spending is geared towards the aims of the business rather than those of the individual. 
  • Ensure united approach within an organisation .
• They motivate staff:
  • According to Mayo and Herzberg - People encouraged by the responsibility and recognition gained from meeting budget targets. 
• They improve efficiency:
  • Business able to establish standards and investigate the causes off aby successes and failures - info used to improve future decisions.
• Assess forecasting ability:
  • Businesses that can predict the future have significant advantages - budgeting encouragws careful evaluation of future possibilities and realistic planning.

Drawbacks of using Budgets:

• Difficult to moniter fairly:
  • Senior managers will be less aware of detailed expenditure and costs - rely on the honesty of budget holder in explaining a deperatment or section's budgeting needs.
  • If budget targets are not met - senior manager may not understand the reasons
• Allocations may be incorrect:
  • Based on predictions of future - always unforeseen changes - budget not always right
  • COst/expenditure budget that's insufficient will demotivate staff
• Savings may be sought that are not in the interests of the firm:
  • To keep within budget, buyer may purchase cheaper materials - lower quality of product = consumer dicontent - effecting income
• Changes may not be allowed for when a budget is reviewed
  • External factors outside the control of the organisation may affect budget holders ability to keep to their plan. Eg. fuel prices for airlines.

Features  of Good Budgeting

• Be consistent with the aims of the business:
  • Ensures that managers cannot use the company's finances  for projects to boost their own careers/interests
• Be based on the opinions of as many people as possible:
  • Helps to ensure realistic set of targets
• Set challenging but realistic targets:
  • Must be achievable, reasonable
• Be motivated at regular intervals, allowing for changes in the business and its environment:
  • Allows business to improve by identifying situations in which targets are being missed or exceeded.
• Be flexible:
• • Crucial budgeting process allows for changing circumstances.

Variance Analysis

• The process by which the outcomes of budgets are examined and then compared with the budgeted figures. The reasons for any differences are then found.
• Calculating Variances:
  • Variance = budget figure - actual figure
• Thus a variable variance is shown when:
  •  Actual revenue is greater than budgeted revenue
  • Actual costs are below the budgeted costs
• An adverse variance is shown when:
  • Actual revenue is less than budgeted revenue
  • Actual costs are above budgeted cost
• For variance analysis, it is best to use 'F' for favourable variances and 'A' for adverse variances, rather than positive/negative numbers 
  • Favourable Variance:
    • When costs are lower than expected or revenue is higher than expected
  • Adverse Variance:
    • When costs are higher than expected or revenue is lower than expected

Examples of Calculating Variances

Examples of Calculating Variances

• An expenditure budget allocated £2,000 for stationary expenses, but the actual amount spent is £2,200
  • £2,000 - £2,200 = (£200) A
  • This is an adverse variance because costs are £200 higher than the budget and so, other things being equal, the profit will be £200 less than budgeted.
• An expenditure budget allocated £23,000 for wages, but the actual amount paid in wages is £22,200
  • £23,000 - £22,200 = £800 F
  • This is favourable variance because wages are £800 lower than the budget and so, other things being equal, the profit will be £800 more than budgeted. 

Using Variance Analysis to Inform Decision Making

• Adverse variances may show inefficiency, where the business has made mistakes. They may also show that external influences, such as changes in the market, have made it more difficult for a firm to meet its targets.
• Similar logic applies to favourable variances. These may shows efficiency, indicating that the business has operated well. May also show external influences such as the state of the economy, have made it easier for a firm to meet its targets.

Causes of Cash-Flow Problems

• Seasonal demand
  • Causes significant but predictable cash-flow problems
  • Because it's predictable - easy to get bank overdraft
• Overtrading
  • Become to confident and expand rapidly without organising sufficient long-term funds
  • During rapid expansion business needs to buy more and more materials but lacks money because its customers are not paying it as soon as the goods are sold = leaves business short of cash
• Over investment in fixed assets
  • May invest in fixed assets in order to grow  - leave them with inadequate cash for day - to - day payments
  • Equipment and buildings cannot easily be turned back into cash

• Credit sales
  • Marketing department will want to give credit to customers, to encourage them to buy - can lead to a lack of cash flow in organisation if sales are not leading to immediate receipts of cash
• Poor stock management
  • Might hold excessive stock levels - tying up cash that could have been used for other purposes
  • High level of stock may mean that the stock becomes worthless as it becomes out of date or un fashionable.
  • Low stock may limit sales - particularly those resulting in impulse buying
• Poor management of suppliers
  • Influenced by the credit period given by its suppliers. Well managed business should be able to negotiate a credit period with suppliers so that the payment from customers reaches the business at the same time as the business is required to pay its suppliers.

•  
  • Good management also involves negotiating a reasonably low price so that the money is not wasted - also ensuring prompt deliveries so customers aren't lost
• Unforeseen change
  • Arise from internal changes (eg. machinery breakdown)
  • External factors (eg. change in the government legislation)
• Losses or low profits
  • Cash flow and profit = linked
  • A business whose sales revenue is less than its expenditure will usually have less cash than on e that is making a healthy profit
  • Creditors and investors will be less likely to put money into a business that is not expected to make a profit in the future. Unless a loss-making business can show how it will become profitable in the future it will find it hard to overcome cash-flow problems

Ways of Improving Cash Flow

Bank Overdraft:  an agreement whereby the holder of a current account at a bank is allowed to withdraw  more than there is in the account. The agreement specifies the maximum level of the  overdraft.

Benefits of a bank overdraft:

• Administrative convenience
  • Easy to arrange - once agreed usually only need to be confirmed once a year
• Flexibility
  • Overdraft is flexible - can be used to pay for whatever the business requires
  • One month wages - next month used to purchase machines

• Interest is paid only on the amount owed
  • Only pay interest on amount of the overdraft that is actually used
  • Only paid on a daily basis eg.
    • Business has an agreed overdraft limit of £10,000. It has £3,000 in its account but then withdraws £5,000. This means it goes 'into the red'. Its overdrawn by £2,000. The business well only pay interest on the £2,000 and not on the £10,000 maximum that's allowed. Also this interest will cease on the day that the bank account returns 'into the black'.
• No security necessary
  • Does not require a business to provide security - therefore if there are any difficulties in paying back the overdraft the bank can't claim the proceeds from sale or any assets

Problems of a bank overdraft

• Variable interest payments
  • Based on  flexible interest rates - interest will rise and fall with Bank of England's base rate = difficult to budget accurately, as the bank may change its rate of interest on a monthly basis.
• Higher interest rate
  • Rate of interest charged on an overdraft is usually significantly higher than charged on short-term bank loan = overdraft can be more expensive than bank loan
• Immediate repayment
  • Agreements to provide an overdraft normally allow the bank to demand immediate repayment = business facing cash-flow problems may suddenly have to pay back overdraft at exactly the time when the business is most vulnerable

Short Term Loan

A sum of money provided to a firm or an individual for a specific, agreed purpose. Repayment of the loan will take place within 2 years, and possibly much less.

• Usually used for fixed assets not a solution for a cash-flow problem

Benefits of a bank loan

• Fixed interest repayments
  • Interest and repayment is calculated at time of the loan = business knows whether it can afford to repay the loan
  • Easy to budget the loan repayments - standing order/direct debit usually used to pay the same amount every month over the duration of the loan
• Lower interest rates
  • Less than an overdraft - can be cheaper solution to cash flow issues 

Problems of a bank loan

• Higher interest payments
  • Interest is paid on the whole of the sum borrowed - can be more expensive than an overdraft even though the overdraft has a higher rate of interest
• Security
  • Business needs to provide the bank with security - if there are difficulties paying back the overdraft, the bank will be able to claim back the amount owed by forcing the sale of this asset

Factoring (dept factoring)

When a factoring company buys the right to collect the money from the credit sales of an organisation.

Benefits of factoring:

• Improved cash flow in the short term
  • May save expenses such as overdraft interest charges and in extreme cases the immediate receipt of cash may keep the business alive by allowing it to pay its own debts on time. For businesses offering long credit periods to their customers as a way of boosting sales revenue, the immediate receipt of cash may be essential because it would be impossible for the business to wait a year for payment.

• Lower admin costs
  • Collecting and chasing up debts can be costly and tome-consuming process. The factoring company specialises in this and it is possible that it will be collecting more than one debt from the same firm.
• Reduced risk of bad debts
  • The factoring company takes this risk instead of the original business. However it does reverse the right to refuse to factor a debt if it considers it to be risky. For this reason, firms such as Comet and Currys will contact the factoring company before giving credit to a customer. The factoring companied will have lists of customers who may be a high risk
• Increased efficiency
  • Factoring can encourage businesses to be more careful with their provision of credit. If a business gains a reputation for having nore customers that turn out to be bad debts then the factoring company will reduce the cost of factoring to that business. This will provide firms with an incentive to be more efficient in their provision of credit

Problems of Factoring

• Loss of revenue
  • Business using a factoring company lose between 5% and 10% of its revenue. Ultimately, this reduces its profit, although it may be possible to increase the price charged to customers where credit terms are being offered
• High cost
  • The business using a factoring company more for its services than it would have to pay a bank for a loan, as there are administrative expenses involved in chasing depts. This additional cost should be set against the administrative savings to the business from no longer having to chase up the depts itself

• Customers relations problems
  • Customers may prefer to deal directly with the business that sold them the product. An aggressive factoring company may upset certain customers, who will blame their bad experience on the original seller of the product. Although factoring involves costs, many large retailers take advantage of this service because large factoring companies can carry out the process of debt collections more cheaply, and pass on their cost savings to the retailer. 

Sale of Assets

When a business transfers ownership of an item that it owns to another business or individual, usually in return for cash.

Benefits of sale of assets

• Income 
  • Can raise considerable sum of money - sometimes buildings
• Profitability
  • Possible that particular asset is not longer contributing - sale of asset will ease business's cash flow problem

Problems of Sale of Assets

• Receiving a low value for the asset
  • Assets like buildings/machinery difficult to sell quickly - quick sale = lower price = not usually a goof strategy because it can have a damaging effect in the long run
• Reduced ability to make profit
  • Firm should not sell fixed assets to improve liquidity - fixed assets enable it to produce the goods/services

Sale and Leaseback

When assets that are owned by a firm are sold to raise cash and then rented back so that the company can still use them for an agreed period of time

Benefits of sale and leaseback

• Cash inflow
  • Overcomes cash-flow issue - provides immediate inflow of cash
• Flexibility
  • More flexible as new and more efficient assets can be leased
• Lower costs
  • Ownership of fixed assets can lead to a number of costs eg. maintenance 
  • Many firms lease assets eg. machinery - owners are responsible for servicing - unexpected repair costs are avoided

• Greater focus
  • Owning asset can distract a business from its core activity - has to be involved with property management/organising transport. Trend within UKK to lease rather than purchase assets - business can concentrate on own area of expertise 

Problems of sale and leaseback

• Rent
  • Assuming new owner expects to make profit from the asset - long run the selling business will pay more in rent than it receives from its sale
• Reduced assets
  • Reduces value of firms assets that can be used as security against future loans - makes future borrowing more difficult - leading to higher interest rates
• Loss of use of the asset
  • Firm may lose the use of the asset when lease ends - competitor may be prepared to pay higher a higher rental for lease

Other Ways of Improving Cash Flow

• Improved working capital control
  • Working capital is the day to day finance used in a business consisting of assets minus liabilities
  • To stay solvent, firm must manage working capital - involves careful control of firm's main current assets - insure there is enough to pay creditors and make other immediate payments
• Cash management - two options
  • Agree an overdraft with bank
  • Set aside contingency fund to allow company to meet unexpected payments/cope with lost income
• Debt management
  • Debtors = customers who owe a business money - should customer be given credit? 

• • If all sales are for cash - no debtors - but more cash
  • Giving customers credit facilities will encourage them to but the products - but will increase cash flow issues in the short run (wages and materials still have to be paid even though no cash received from sales)
  • Company has to evaluate - increase of sales and profit potential against risks of late / non-payment. Depends on
    • Policy of rival companies + customer expectations.
• If it's decided credit will be given - company must control debtors to ensure prompt payment. Methods are:
  • Obtaining a credit rating
  • Control product quality - satisfied customer less likely to delay / dispute payment
  • Scrutinising the offer of credit 
  • Managing credit control - gain prompt payments

Stock Management

Just in time systems are used:

• Low stock levels - reduce storage costs
• Relies on efficient suppliers and require them to suffer penalties if deliveries are late
• Can operate with lower levels of working capital than other oraganisations - improving cash-flow situation
  
  
• Finance department will want minimum stocks - higher holding of stock = lower holding of cash.
• Marketing department will want stocks to readily available to meet customer demand
  
  
• Low stock - reduce storage, damage and deterioration
• High stock - benefit from bulk buying and minimise lost sales 

A business can also improve its cash flow by:

• Diversify its product portfolio - create range that sells throughout the year
• Improved decision making procedures, planning, monitoring and control, more thorough market research and intelligence
• Contingency fund should be set aside - allows company to meet unexpected payments / cope with lost income

Profit and Profitability

• Profit: The difference between the income of a business and its total costs. 
  • Profit = revenue - total costs 
• Profitability: The ability of a business to generate profit or the efficiency of a business in generating profit.
• Profit is just a sum - profitability relates this sum to the size of the business
• Two ways to measure the size of a business
  • Sales revenue
  • Capital employed (adding up all the money that has been invested in the business by owners)

• Example:
  • Business makes £100,000 profit in a year by selling £700,000 worth of good and services over the 12 months. Means that for every £7 of revenue earned, £1 of profit was made. Dividing the profit by revenue gives a fraction of one-seventh.

    Compare this to a smaller business:

    The small business earns £16,000 profit from sales of £100,000? As a fraction = 4/25. Easiest way to compare is to convert the fractions to percentages. The larger business £100,000/£700,000 or 1/7 as a percentage:

    1/7 x 100 = 14.3% and    4/25 x 100 = 16%

  • This makes it easier to see that the second business has a higher profitability than the first business.  

Calculating and Understanding the Main Measures of Profitability

Calculating the net profit margin

• This measures net profit as a percentage of sales. Net and operating profits are considered the best measure of a firm's profits, sales turnover is an excellent measure of scale.
  
  
• Net profit margin (%) = net profit before tax  x 100 

   Sales (turnover)

Interpreting the Net Profit Margins

• Over time
• Comparison with other firms

Business's want to compare themselves to other companies.

Calculating the Return on Capital

• Return on capital is the ratio showing net profit (operating profit is also used) as a percentage of capital invested.
• Capital invested is all of the money provided to the business by owners.
• In calculating the return on capital invested, net profit is normally used because this is always declared. However, operating profit is also a good measure of a firm's size. 

• Not a totally reliable guide - firms tending to lease assets rather than purchase them - useful for entrepreneur to see if his or her return is better than the interest paid by a bank if the money had been saved instead.

Return on capital employed is measured as a percentage using the following formula:

return on capital (%) = (net profit before tax/capital invested) x 100

Interpreting the Return on Capital Results

• Over time
• Comparison with other firms

Significance of Return on Capital

Calculation looks at percentage return on sum of money invested in a business. Therefore an excellent means of comparison. 

• Allows investor whether it was more beneficial to invest into a company or whether it's better to put the money it the bank, or even an alternative company - depends which has a better percentage return on sum of money.

Methods of Improving Profits and Profitability

• Increasing the price
• Decreasing costs
• Increasing sales volume

Increasing the price

• Business increased the price of a product - widen profit margin and therefore each product sold - generate more profit
• Particularly effective if product is a necessity or has no close substitutes - customers willing to pay higher price.
• Strategy of increasing the price must be treated with caution if there are many competitors - higher price may lead customers to switch to competitors.
  • Possible that the price rise may cause a fall in demand that is so great that the higher profit margin will be offset by a dramatic fall in quantity.
• Some businesses cut the price - if leads to increase quantity demanded - profit will increase.

Decrease Costs

• Business can cut its direct costs eg. wages, raw material costs - profit margin will increase
• Each product will yield more profit - increase profit
• Sometimes change is costs leads to a decrease in quality or efficiency - demand may fall
  • Could happen if costs are being cut because inferior raw materials are being used - or workers who accept a lower wage are less efficient
• Reducing overheads - rent, office expenses, machinery costs - careful does not damage sales

Increasing Sales Volume

• Costs and price remain the same - it is possible to increase profits by increasing the volume of products sold.
• May occur simply because demand increases as the product becomes more established in the market.
• May be due to the actions of the business - marketing/product development

Other Methods of Improving Profit / Profitability

• Investment in fixed assets
  • Purchasing new equipment, buildings or vehicles - enables a business to expand its scale of operation and possibly improve both the efficiency of production and the quality of the product.  Business may be able to increase its profits by achieving higher sales volume, charging a higher price and cutting its costs.

• Product development
  • Business can introduce new, unique products in order to attract more customers.
  • New products often carry higher prices because they are different from established brands - business can gain extra profits by selling more items and charging a higher price at the same time
• Marketing
  • Successful marketing strategies - clever advertising campaign or sponsorship of a popular organisation - can encourage customers to buy more of the business's products.
  • Great deal of marketing is intended to increase the value of the product to the customer - so may encourage customers to pay a higher price.
  • Although marketing adds to costs - these extra costs should be offset by the additional revenue generated - profit should increase.

• Human resource strategies
  • Staff of an organisation - greatest asset
  • Careful selection, recruitment, training, strategies that motivate the workforce - lead to greater efficiency - greater output - higher quality goods - better customer service = All contribute to higher profits.

Distinction between Cash and Profit

Profit calculated by subtracting expenditure from revenue. Easy to assume that a profitable firm will be cash rich - not necessarily true. 

Profitable firms may be short of cash for the following reasons:

• If firm has built up its stock levels - wealth will lie in assets rather than cash. Stocks may not be saleable in the short term
• If firm's sales are on credit - wealth will be in debtors rather than cash. Firm may have agreed with its debtors that they need not pay for a given time period. Although this helps marketing - may damage cash flow.
• If firm has used its profit to pay dividends to shareholders or repay long-term loans - may be short of cash.

• If company has purchased fixed assets - will have involved large outflow of cash - but in accounts the 'cost' of fixed assets is spread over a number of years. Therefore in the year in which the fixed assets are purchase - recorded 'costs' will be much lower than the actual loss of cash = potential crisis.

Long term  - business must make profit in order to survive. Firm who continually records losses will find it difficult to acquire cash - sales revenue will be lower than expenditure - creditors and investors will be reluctant to give the firm credit or loans, or buy shares.

Even profitable businesses may face difficulties if they do not plan their cash flow carefully. Eg.

• Firm that purchases assets may expect to make profit from these assets in the future - but cash payments for the assets could lead to the firm being unable to pay suppliers or workers. This could lead to liquidation - the fir

Definitions

Organisational structure is the relationship between the different people and funstions in an organisation - both vertically, from shop workers throguh supervisors and managers to directors, and horizontally between different functions and people at the same level

Organisation chart is a diagram showing the lines of authority and layers of hierarchy in an organisation

Organisational hierarchy is the vertical division of authority and accountability in an organisation

Levels of hierarchy is the number of different supervisory and management levels between the shop floor and the chief executive in an organisation. 

Organisation charts show

• Design of organisation - includes chain of demand
• How different functions and divisions fit together
• Who is answerable to whom 
• Span of control in each division
• Official channels of communication 

Span of control is the number of subordinates whom a manager is required to supervise directly.

• Manager has lots of subordinates answerable to them = wide span of control
• Manager has few subordinates answerable to them = narrow span of control
• Greater degree of similarity in jobs a group of workers do = allows for wider span of control
• Narrow span of control at senior levels of management

Relationship between Span of Control and Levels of Hierarchy

• Traditionally organisations - tall hierarchical structures
  • Many layers of management 
  • Each with narrow span of control
• More recently - hierarchies have become flatter
  • Less layers
  • Wider span of control

Features of Tall Structures with Narrow Span of Control

• More promotional opportunities 
• More layers = more staff = higher company overheads
• Less delegation - less stress - however could lead to low morale and lack of commitment
• Narrow spans - tight control - better quality, safety, security
• Important detail or info may be lost in reporting upwards - undesirable gap may emerge between what management intended and what actually happens
• Longer chain of command - takes longer for decisions to be made and implemented  

Features of Flat Structure with Wide Spans of Control

• Individual managers may have less time for each subordinate - must delegate effectively
• More delegation - staff have greater responsibility - more opportunity to use their ability - staff can become over stretched = stress
• Fewer layers between the bottom and top = vertical communication improves
• Together with the reduction in overhead costs - mean greated efficiency within the organisation

Workforce Roles, Workloads and Job Allocation

• Workload determined largely by nature of organisation and management structure that is in place
• Large span of control / lack of delegation = increase workloads considerably
• Change in organisational structure can change job allocations

Work roles within an organisational structure will vary from business to business - as business grows they will generally involve directors, managers, supervisors, team leaders. Example of a business:

• Managing director
  • Owner of business - assumes overall leadership
  • Delegates responsibility for production, marketing and sales, finance to managers
• Marketing and sales manager
  • Responsible for marketing and sales
  • Consists of several people - one is team leader

• Team leader
  • Coordinates work of sales team and liaises with the marketing and sales manager
• Production manager
  • Responsibility for two separate locations - delegated responsibility to two supervisors - oversee work of the shop=floor operatives in each location

Delegation

Delegation is the process of passing authority down the hierarchy from a manager to a subordinate.

Responsibility is being accountable for one's actions.

Authority is the ability or power to carry out a task

Accountability is the extent to which a named individual is held responsible for the success or failure of a particular policy, project or piece of work.

• Responsibility 
  • Person who is responsible for the performance of a department, section or team - required to explain and justify performance that falls short of expectations - ensure that things are put right.

• Authority
  • Subordinates must have the authority to undertake the various tasks delegated to them. Important manager has passed authority to them - and that authority is clear and explicit
• Accountability
  • Despite delegating responsibility and authority - manager is still accountable
  • He / She has chosen to delegate tasks to subordinate, recruited and trained subordinates, made the decision that the subordinate is capable of exercising power efficiently = accountability remains at top of organisation structure

Improving the Effectiveness of Delegation

Following factors - likely to improve effectiveness of delegation:

• Delegation should be based on mutual trust between the manager and the subordinate
• Important to select most suitable person to delegate to - someone who can complete task efficiently and effectively. Appropriately trained, skilled and informed.
• Interesting and challenging tasks should be delegated as well as the more routine ones.
• Tasks and responsibility to be delegated need to be explained clearly - avoid subordinates making mistakes / feeling unsure or insecure due to lack of info. Effective support system should be in place - allows subordinates to question and discuss issues connected with delegation tasks.

• When delegating responsibility for carrying out task, managers must also delegate authority to carry it out and communicate this to others in the business - avoid difficulties such as someone else questioning the authority of the subordinate. Limitations of authority should be highlighted.
• Managers should avoid interfering with delegated tasks unless it is evident that things are going seriously wrong. Must relinquish control in order to ensure that subordinates feel they are trusted and that the manager has confidence in tehm

Advantages of Delegation

• Management time
  • Necessary in all organisations - limit to amount of work managers can carry out themselves.
  • Reduces stress and burdens of management
  • Frees up time for managers to concentrate on more important strategic tasks
• Motivation
  • Empowers and motivated workers
  • Provides subordinates with greater job satisfaction - giving them a say in the decision making that affects their work and demonstrating trust in their abilities.
• Local knowledge
  • Subordinated might have a better knowledge of local conditions affecting their area of work and therefore might be able to make better-informed decisions.

• Flexibility
  • Delegation may allow greater flexibility and a quicker response to changes - if problems don't have to be referred to senior manager - decision making should be quicker.
• Staff Development
  • By giving subordinated the experience of decision making - delegation provides a means of grooming them for higher positions and is thus important for management development purposes.

Limits to Delegation

• Small firms
  • Some small firms, managers delegate little - often because they do not have the staff to delegate to / or set up their business on their own and are used to controlling all aspects of the operations and therefore reluctant to relinquish control.
• Customer expectations
  • Often customers want to see the manager - regardless of the fact that responsibilities may have been delegated further down the hierarchy.
• Attitudes and approach of management 
  • Leadership style in an organisation - largely dictate the extent to which responsibilities are delegated down the hierarchy
• Quality of staff
  • he extent to which responsibilities can be delegated will be influenced by the quality and skills of the staff who are employed

• Crisis situations
  • In emergency / crisis situations where decisions need to be made quickly - delegation is less likely and is often less effective
• Confidentiality
  • Where there is a need for confidentiality or extreme security - less delegation is likely to take place

Communication Flows

Definitions

Communication is the process of exchanging information or ideas between two or more individuals or groups

Internal communication is the exchange of information that takes place within an organisation

External communication is the exchange of information that takes place with the individuals, groups and organisations outside the business.

Effective communication offers organisations a number of benefits:

• Allows the organisation to make more informed decisions - based on better-quality information
• Makes it easier to implement change because employees and other stake-holders understand and recognise the need for it
• Encourages more motivated workforce and develops commitment to the business from employees at all levels of the organisation
• Helps to ensure that the business is well coordinated and that all employees pursue the same corporate objectives
• Allows the organisation to be more competitive - improving efficiency and identifying opportunities

Organisation that communicates effectively is likely to be more in touch with consumers and other external groups - more motivated and committed workforce - make better decisions and find it easier to introduce change

Internal and External Communication

• Vital to efficiency and success of a business
• Ensures employees know exactly what they're required to do
• Departments interact effectively
• Good communication = heart of effective management and is an essential aspect of successful decision making
• All business exist in external environment - important for organisation to communicate effectively with external groups: 
  • Suppliers
  • Customers
  • Investors
  • Pressure groups
  • Media
  • Local community 
• External - allows organisation to monitor changes in market and improve its products and services.

The Process of Communication

Effective communication only happens if info sent is received and clearly understood.

• Sender/communicator - sends message
• Message - topic of communication
• Transmission mechanism - how message is conveyed - phone, memo, face - to - face
• Receiver - person at whom the message is aimed
• Feedback - response from receiver - written, verbal, facial expression - indicating message has been understood

One and Two Way Communication

One way communication is communication without any feedback (notice board, giving instructions)

Two way communication is communication with feedback (discussion or Q&A)

One-way communicator never sure if message has been understood and therefore whether it was effective.

• Often associated with auto-cratice management styles

Two-way ensures that any commutation has been fully understood - more effective 

• Vital element of democratic management, effective delegation, empowerment and teamwork

Communication Channels

Communication channel is the route through which communication occurs.

Most effective channels of communication vary according to the information that is being passed on. For example

• Team briefing sessions - start of day/week - used as forum for communication between supervisiors and their team.
• Works council - Allows discussion about company plans between management and employee represnetatives. Ensures employees' ideas and suggestions become an automatic element of company decision making.
• Can take place up and down communication chains
  • Instructions down
  • Ideas up
  • Also horizontal - between management

Formal and Informal Channels of Communication

Formal channels of communication are established and approved by senior management - meetings, team briefing

Informal channels of communication is a means of passing information outside the official channels, developed by employees their selves - grapevine, gossip

Informal communication:

• Can spread inaccurate information eg. redundancies
• Can be used to gather reaction of employees before introducing a change - by issuing a 'leak'

Vertical and Lateral Communication

Vertical communication is when information is passed up and down the chain of command

Two rypes of vertical communication:

• Downwards communication
  • transmitted from top to bottom
  • Used to tell employees about decisions that have alreadt been made and to give instructions.
• Upwards communication is transmitted from the bottom to top
  • Very useful in decision making:
    • Helps managers understand employees views and concerns
    • Helps managers keep in toucg with employees' attitudes and values
    • It can alert managers to potential problems

•  
  •  
    • Can provide managers with the info needed for decision making
    • Helps employees to feel that they're participating, and this can encourage motivation
    • Provides feedback on the effectivness of downwards communication and how it can be improved

Lateral communication is when people at the same level within an organisation pass info to each other.

How Organisational Structure Affects Business Performance

• Organisational hierarchied and spans of control
• Clarity of lines of accountability
  • When management structure is clear, as shown by its organisation chart - staff should know what authority has been given to them. Achievement and recognition of achievment are likely to produce motivation.
  • If mistakes are made - essential to know how they happened in order to correct them - identified more easily if lines of accountability are clear.
  • Sometimes clear lines of accountability - seen as a threat that deters managers from taking decisions.
• Delegation
  • Improving the effectivness of delegation - increases managerial success - hence may improve business performance
• Quality circles
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    • Principal function