MACRO ECONOMIC

AWARENESS
&

YOUR QUALITY MANAGEMENT

SYSTEM
The New Boost For Your Business

Expiry Date : 29 February 2005 Revision date : 30 March 2005 1

1. THE BUSINESS ENVIRONMENT
Before we deal with the issue of quality management, it is important to have a basic understanding
of economics and the financial world.

Introduction

The business world is a system of individuals and organisations, which, in a market economy,
produces goods and services to meet people’s needs. The single most important characteristic of
the business world as it is seen in the so-called First World or the developed countries of the West
and Asia, is the freedom of individuals to start or close a business enterprise, to buy and sell shares
in businesses and to produce, within limits, any product or service the market requires.
Accordingly, the developing world aspires to this level of economic interaction.

This economic system, in which individuals themselves decide what to produce, how to produce it
and at what price to sell their products, is called a free-market system or a market economy. This
system is also followed in the South African economy. It is a complex system comprising various
types of small and large business organisations that mobilise the resources of the country to satisfy
the needs of its inhabitants.

Each and every individual within a country’s economy a form part of, and is affected by, the
economy. Everybody uses money, acts as a consumer and relies on the receipt of income to finance
purchases. As changes such as inflation rising or interest rates falling occur within the economy so
each individual is affected. However, it is often the collective activities of individuals that drive
changes in the interest rate or inflation of the country. In looking at the role of the individual and
the business within the economy, the concept of quality and quality control is very important, as
this is the pivotal point on determining improvements in productivity. The concept of quality is
about applying the principle of continuously engaging in self analysis, self measurement and
aligning of behaviour to ensure that original intentions of quality are met. By constantly ensuring
that we deliver what we promised, we automatically align ourselves to economic targets. This in
turn enables higher profits and higher GDP per capita.

Issues such as taxation, price setting by the state and levels of unemployment affect us all. For the
producer, issues such as trade unions, costs of imported machinery and nationalization are
important considerations. These factors affect us all by influencing the cost of every product we
consume as well as every other aspect of our daily lives. Similarly, economic decisions we make in
our private and business lives do not affect our lives alone but that of many others. For example,
the decisions we made as individuals to all buy cell phones, created an industry and a demand for
mobile solutions beyond anyone’s expectation level!

Example
A retail company, for example: Pick ‘n Pay, provides a much needed service to the community. By
means of distribution, job creation and needs satisfaction. The retail company itself pays salaries to
employees who use this to buy products. The retail company itself is a buyer, thus stimulating
demand for consumables. This in turn leads to stimulus of production, which in turn causes another
affect on economic activity elsewhere.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 2

1.2 WHAT IS ECONOMICS?
Definition

Economics is as old as the human race: it is probably the first art which man acquired. When some
of the cavemen went out to hunt while others remained to defend the fire, or when skins were
traded for flint axes, we so the beginning of economics. Therefore economics is a study of the
economic problems and variables of the community as a whole, with the improved well-being of
the community as its preconceived goal.

Traditional economist describes the term “economics” as: the study of how humans use their
limited resources to their disposal in order to satisfy as many of their endless needs and desires as
possible. Formally stated, “economics” is the study of man's behaviour in acquiring and utilizing
the limited factors of production in order to maximize utility.

Economics studies only a small section of human behaviour and is, for example not concerned
with what makes a criminal mind. Economics is limited to study human decisions collectively -
macro emotions in buying and selling of those material goods and services that satisfy their needs.

It is the decisions humans make which are of a material nature, which is of interest to economists.
These include careers, what goods to buy, when and where to buy and what to do with savings, on
an individual level. Questions such as “how many labourers to employ, to expand or not, and the
role of trade unions from the producers point of view” need to be answered. What taxes are levied,
levels of education, the access to private ownership and the protection of individual rights as well
as the availability of hospitals, roads and other are looked at from a national point of view.

The concept of Quality in economics enables societies to measure standards and set targets for
improvements. This creates a cycle of continuous improvement.

Example
There is an economic aspect to almost any topic we care to mention – education, religion,
employment, housing, transport, defence, etc. By constantly looking at how to improve the
national education system, we serve the principle of quality.

1.3 KEY CONCEPTS

The concept of the business cycle refers to the amount of economic activity within a country,
measured by the GDP (production) within a country. Economic activity is not stable all the time,
but constantly fluctuating. During periods of high economic activity - known as a boom or
upswing, economic growth increases (production) and is often accompanied by increased
spending, increased investment and employment. During periods of reduced (or low) economic
activity, unemployment increases while investment and growth decreases. This is known as a
recession or a depression if it is particularly severe and it continues for an extended period of time.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 3

How interest rates are determined: Supply and demand of money, determine the interest rates
being charged. The interest rate is the cost of lending money. The interest rate is monitored by the
South African Reserve Bank (SARB). Money is offered at a particular interest rate by the financial
sector. If potential borrowers are of the opinion that the rate is too high, they will delay their
application for credit until the cost is less.

The prime-lending rate is the best overdraft rate paid by the best clients of the bank. The prime
rate is also that interest rate quoted the most, thus the most representative rate. All other interest
rates move with the prime rate.

The importance of saving: If people deposit money in financial institutions, that money is not
spent on goods and services. This is thus reducing the inflationary potential within the economy as
that money does not chase goods and services. The savings will also have an effect on the prices,
as demand is less. This money so saved, is lent out by financial institutions to other enterprises for
expansion. For the enterprise (interest) the cost of capital is a vital component of total costs.

The BA rate stands for the Bankers Acceptance rate. A BA is a private bank note that guarantees
the holder repayment of the sum displayed on it. The bank has thus accepted a deposit (of usually
R250 000 or more) from an investor for a specific period of time, (usually ninety days), at a
specific interest rate which will be paid at the end of the period.

What happens if banks lend out more money than they receive? Banks go the South African
Reserve Bank -SARB (the lender of last resort) and borrow from the SARB at the official bank
rate. (The official bank rate is 3% less than the prime rate, which accounts for the profit of the
bank.) This situation is known as a shortage in the money market. Thus the bank rate affects all
interest rates charged to bank clients, not only the prime rate. In this way, monetary policy can
affect the economy as a whole.

The importance of the gold price: Gold is SA's biggest export item (approximately 30%), hence it
has a major effect on the South African economy. If the gold price or exports are low, downward
pressure is put on the Rand, causing upward pressure on interest rates.

The exchange rate: The exchange rate refers to the value of one currency in terms of other
currencies i.e. the Yen to the Mark or the Dollar. It thus refers to the supply and demand for Rand,
which is used for exports, investment, imports and dis-investment. If there is an excess of Rands in
the market, the value will decrease, leading to a decrease in the exchange rate.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 4

Quality: It is the degree to which a set of inherent (inborn) characteristics adheres/fulfils to
predetermined requirements. Or in other words, how does a situation measure up to its own
intentions?

Quality Control: It is the degree to which outputs are measured against predetermined
requirements. (Quality)

TQM: Total :Quality Management refers to the collective activity of implementing, monitoring
and constantly improving on, a quality system. TQM is about the notion that Human behaviour
can be facilitated to lead to increasing efficiency. This in turn leads to higher profitability which
in its turn leads to a reduction in poverty.

QMS: A quality Management System, or QMS is an integrated set of systems and procedures
aimed at improving quality in an organisation. A Quality Management System (QMS) is the way
your organisation directs and controls those business activities which are associated with quality. It
consists of your organizational structure toghether with the planning, processes, resources and
documentation that you use to achieve your quality objectives, to provide improvement of your
products and services and to meet your customers’ requirements.

ISO: International Starndards Organization developed the ISO system, which is a of standards to
which a quality management system (QMS) has to conform.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 5

1.4 THE ECONOMIC CYCLE
Definition & background

One of the basic principles in economics is that if I spend R1.00, somebody else earns it. From this
economists have developed the economic cycle to illustrate how money flows between people in
exchange for productive services, such as labour, or goods and services designed to satisfy human
needs. In the most simple case exchange takes place between the individuals who supply their
labour services to a firm, or group of firms, in exchange for a wage and in turn use these wages to
purchase goods and services from the producers. The economic cycle is thus a never ending
activity between the “sectors” of the economy. These sectors are also discussed in 1.5.

Over and above the individual, who acts both as consumer and supplier of the production factors,
and business organisations, who employ the production factors in the creation of goods and
services to satisfy mans needs, the state and foreign sectors also play an important part in the
economy of any country. For example, government spends large sums of money on just about
everything from stationary to travel and accommodation, thus acting as a huge consumer. Through
macroeconomics the role of the state is demonstrated in its taxation policies, their ability to affect
disposable income of consumers, their ability to enforce laws influencing and regulating the
economy.

The mobility of labour, pricing structures, the availability of credit and restrictions on the
production, consumption and importation of certain commodities are influenced by state policy,
while state expenditure will play an important part in determining the levels of skill of the labour
force, the availability of health care and may result in the creation of jobs, and incomes for
productive use of the scarce resources of the' country.

Financial institutions act as vital intermediaries between those groups who have surplus funds and
those with a shortage. For South Africa, the foreign sector supplies technology in the form of better
production techniques and consumer goods giving a better life-style to consumers. Having a
Quality Management System implemented ensures better performance of producers and a better
life-style for Consumers. Quality management makes it easier to obtain capital for the erection of
mines and factories to produce wealth, to create jobs for the population, and to stimulate an export
market for minerals, agricultural produce and manufactured goods produced in our country.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 6

 MARKET FOR FACTORS OF PRODUCTION

Factors of Production

Income Expenditure

HOUSEHOLDS BUSINESS
ENTERPRISES

Expenditure
Income
MARKET FOR
CONSUMER GOODS

And Services
Final Goods

COMMODITIES MONEY

Figure 1.1: The economic Cycle.

In order to better understand the interrelationships that exist between the different sectors of the
economy we are going to gradually assemble different parts of a model. In our case our model
won’t be of a little plastic airplane but rather the parts of our model will be the different parts, or
sectors of the economy. If we can correctly place each sector in its place, in relation to all the other
parts of the economy, we will have a far better idea of the functioning of the real world economy.

Like the plastic airplane our model will only be a representation, of a real world economy, and the
individual student, manager, consumer and politician must understand that the real world is far
more complex than any model can describe with one hundred percent accuracy. It must always be
remembered that humans has yet to discover all the answers. For this very reason, we need to
ensure that we drive the concept of constantly looking for ways to improve everything we do.

As such Quality Management ensures that the continuous cycle is constantly reviewed and
measured against predetermined standards. This enables business to improve all the time.
Expiry Date : 29 February 2005 Revision date : 30 March 2005 7
1.5 SECTORS WITHIN THE ECONOMY
Introduction

Parts of an economy are usually referred to as sectors of that economy. For example, the
agricultural sector is part of the economy that producers agricultural commodities.

1.5.1 The Government (State)

The term government is used in economics in a broad sense to include all public officials, agencies,
government bodies, and other organisations belonging to or under the direct control of federal
state, and local governments. For example, in the United States, the term government includes,
among others, the president, the Federal Reserve System, city councils, commissions and
regulatory bodies, legislative bodies, and police forces. In South Africa, the term government
includes all levels of national and provincial parliament, municipalities and other state controlled
agencies and companies. The state plays an important role in the economic cycle by means of the
expenditure of the State and how the expenditure is financed whether by loans or through taxes.

The concept of a Quality Management System in the Government is essential in all sections and
sectors to insure that products, services and management is correctly delivered against the original
plan or standard. Thus, to ensure that performance is in line with expectation.

Government as a player in the economic cycle: The state plays an important role in the economic
cycle by means of the expenditure of the state, and how the expenditure is financed whether by
loans or through taxes.

1.5.2 Producers (Business Firms)

A firm or a business is defined as the unit that employs factors of production to produce
commodities that it sells to other firms, to households, or to government. A business firm is often
called a producer. Elementary economic theory gives firms several attributes. Business firms are
the principal users of factors of production. Having a Quality Management System in place ensures
the best managed services and products. In “factor markets” where factor services are bought and
sold the roles of firms and households are thus reversed from what they are in commodity markets:
In factor markets, firms do the buying and households do the selling. The business uses the
economic resources from the households and after the transformation process, sells it to the
households in the form of goods and services for the households to consume/use.

Business Organizations (Firms): The business uses the economic resources from the households
and after the transformation process, sells it to the households in the form of goods and services for
the households to consume/use.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 8

1.5.3 Consumers (Households)

A household is defined as all the people who live under one roof and who make joint financial
decisions or are subject to others who make such decisions for them. The members of the
households are often referred to as consumers because they buy and consume most of the
consumption goods and services.

The households offer their resources to the organization to be utilised. For example, the household
offers labour, capital (in the form of savings) and in return the households receive an income e.g.
salary, interest. This income that the household receives can be used the way that they see fit,
either spending or saving it.

Households: The households offer their resources to the organization to be utilised (labour, capital)
and in return the households receive an income (salary, interest). This income that the household
receives can be used the way that they see fit, either spending or saving it.

1.5.4. Foreign Sector

It is widely accepted that no country can function without obtaining goods and services from
foreign countries. The foreign sector can thus be a source or destination of goods and services.
Exports (X) are when goods and services are sold to other countries, and in return, the business,
receive money. This money then flows into the economic cycle, for the goods, which were sold.
Exports from South Africa include minerals such as gold, diamonds and platinum.

Imports (M) happen when business buy goods from foreign countries for use in South Africa.
Goods are thus received which have to be paid for. Money is then sent out of the country to pay for
these goods. If export (X) increase, it means that we are able to sell our goods overseas, thus
boosting national income. More money is thus flowing into the country. Production has to be
increased, and this leads to increased work opportunities within this country as well as an increase
in the national income.

However, as we have seen, certain goods are imported while others are exported, thus M (imports)
must be excluded and exports (X) included if we wish to determine total production within the SA
economy. Exports, which are made here but sold elsewhere, must thus be added while imports,
which are made elsewhere but which are bought here must be subtracted.

GDP = C + G + I + (X - M)

The economic cycle thus shows the flow of money in the economy, and by looking at the various
components of the cycle; we are able to determine what the effect will be should certain events
occur. Often, foreign companies will only purchase South African products if such manufacturer
can ensure ISO Standards in their Production. The ISO standard give foreign companies the
assurance that the manufacturer operates in accordance known international benchmark.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 9

1.6 FLOWS IN THE ECONOMIC CYCLE

Two main flows can be identified in the economic cycle. A flow of goods and services from
business sector to the households, and the flow of resources to the business sector. The households
thus provide capital and labour, while the business sector produces various products.

The flow of money: The money is for the goods and services, which are purchased from the
business sector, or it can be seen as income for the households in the form of wages or interest.

Expenditure (C) is on goods and services, which have been produced by the business sector. Thus
C = Y = the value of production (P). The value of production (P) can be determined by means of
calculating the cost of the various production factors such as wages, rent and interest. We have said
that expenditure (C) = Income (Y). It is therefore implied that everyone spends all of his or her
income on consumables, which is not necessarily true. A certain amount may be set aside every
month and deposited in an account at a bank. A lot of households also save contractually, by means
of insurance policies. This money is set aside and not spent on “products”. Such action is known as
savings. Savings is thus not only the money that is deposited in a bank, but includes money
flowing to pension funds, unit trusts and life assurance companies.

Investment (I) The financial institutions make the money that is deposited, and lend it to various
groups who need financing e.g., business organizations and the government. The bank charges the
business interest to lend the money, which are the costs of lending money. The business uses the
money to invest in new machinery, equipment or in new factories. Only businesses that produce
can invest. The investment (I) is therefore part of the flow in the economic cycle.

Government (G) The government plays a major role in the economic cycle. The role of the
government is seen in three main areas:

1. Taxation (TX): Taxation provides the government with the income that it needs to keep services
running. The businesses and households pay taxation to the government; thus it flows out of the
cycle.

2. Transfer payments (TR): There are certain sectors, which require government assistance for a
variety of reasons. Such sectors include pensioners and the disabled; the government gives these
people a monthly amount, which is used to Purchase goods and services, which they need.

3. Government spending: The government has to spend money on a variety of goods that are
needed. The people who work for the state must be paid salaries, and this is the greatest expense of
the government. Government expenditure is known as the “current expenditure” of the
government. Government expenditure is thus on education, health and defence.

“Quality Management in the Economic Cycle involves setting standard operational procedures
and measuring performance against it.”

Expiry Date : 29 February 2005 Revision date : 30 March 2005 10

1.7 SUPPLY AND DEMAND

Prices

The price that a person sees on a product is the sacrifice that has to be made so as to obtain that
product. For example, if a-chocolate were R1, you would have to decide whether you would spend
your R1 on a chocolate, or whether you would save it, or spend it on something else. Prices are
expressed in currency (R/c) and the consumer has freedom to decide whether he will pay it or not.

Determining Prices

For a certain group of products such as petrol and agricultural products, the government is involved
in the setting of prices by means of “marketing control board” type institutions and price
regulation.

When the government is not involved in the setting of prices, the prices are determined by means
of the supply and demand mechanism - also known as the free market.

Demand

The demand for cell phones and airtime in South Africa is a good example of how consumer
(households) needs are driving a market. As more people want cell phones, the business sector (for
cell phones) produce more, but also at a higher price. As prices keep on increasing, consumers
slowly start resisting…At a certain level of prices, consumers start to withdraw. So, the higher the
price of the products, the less the quantities that will be demanded by consumers.

1.8 BANKING

The “banking” part of the business sector consists of a number of different institutions. These
include Commercial banks such as FNB & Standard bank, Merchant banks, such as Rand
Merchant bank, Corporate Financing, such as Braitt and Capital Partners.

Commercial Banks. The commercial banks are those banking organisations that form the first line
of contact between the public and the financial markets. Commercial banks can be defined as those
banks that carry out a business, a substantial part of which consists of accepting deposits that can
be withdrawn by cheque or even cash. Commercial Banks make their profit by charging a higher
interest on money that is borrowed from them than the interest they pay on money received as
deposits. The most important functions of the commercial banks are listed as:

• Accepting of deposits, especially current accounts.

• Extension of credit, especially overdraft facilities.
• Payments and collections by way of the clearing system.
• Rendering of financial services.
• Acting as authorised currency dealers.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 11

Merchant Banks. Merchant Banks, as their name implies, deal primarily with the corporate sector.
Merchant banks often have ties to the commercial banking sector. For example, RMB private bank
will manage the private accounts of business people whilst RMB Merchant will service the same
people in business. Their main functions include:

• Corporate finance.
• Corporate lending.
• Money and capital markets.
• Derivative markets.
• International services.
• Investment management.

Quality is of paramount importance in banking. Every Bank is governed by a QMS that involves
standards, procedures, audits and checks. Without these, the financial Flow of the economy would
be a disaster.

1.9. EIGHT BUSINESS FUNCTIONS

1.9.1 Human Resources

The personnel function, or Human Resources, is responsible for the appointment, development and
maintenance of the human resources of the organisation. To enable the organisation to operate at a
profit, this function has to appoint the right people and provide them with the right training so as to
make the best use of them and retain them in the business. The concept of a Quality Management
System will ensure that Human Resources will be able to function according to written procedures.
This in turn will ensure maximum performance and act as a profit driver.

Example:
In large organisations there is a personnel department headed by a personnel manager. The task of
this department is the provision, development, retention & control of staff in a systematic &
scientific manner.

Diagrammatic representation of the personnel function

Personnel Activities

Provision of Development Creation of an

Personnel of Personnel organisational
• Recruitment • Education climate
• Selection • Training • Job
• Placement • Development Enrichment
• Merit Determine • Job
• Remuneration Enlargement
• Research • Creation of a
• Retention of Staff favourable
work
atmosphere
Expiry Date : 29 February 2005 Revision date : 30 March 2005 12
1.9.2 Public Relations

The public relations function of an enterprise has to create a favourable, objective image of the
organisation, establishing good relations with those directly or indirectly concerned with the
business and its products or services. The concept of a QMS enables Public Relations to operate
swiftly against written procedures. This delivers comfort to clients in knowing how their needs will
be met.

Example:
It is becoming more difficult lately for cigarette companies to advertise. Winston’s P.R. people
came up with the idea to donate a certain percentage of profits to Wildlife conservation e.g.: The
Eagle. This enables the Company to promote its product as well as create a positive image of itself
to the public. This cycle of continuous improvement in Public Relations prompted the company to
come up with more innovative ways of managing its corporate image.

1.9.3 Marketing

The marketing function is responsible for the marketing of the products or services of the business
enterprise. This includes the assessment of the market and the needs of consumers as well as the
development of a strategy to satisfy those needs profitably.

The concept of a QMS in Marketing ensures that the Services and Products comply with standards
and spelled out requirements. This enables maximum delivery of performance.

Example:
Sometimes you will come across a person asking you to fill out a questionnaire outside a shopping
centre. These questionnaires help the businesses or supermarkets understand & realise the public’s
needs. This enables the “Supermarket” to provide you with a better product or service, thus
increases it’s sales & keeping the customer happy. The feedback so obtained is used in the quality
loop – a feedback circle that prompts continuous improvement.

1.9.4 Production

The production or operational management function includes that group of activities concerned
with the physical production of products (or services), namely the establishment and layout of the
production unit and the conversion of raw materials and semi-finished products into finished
products for the market.

Example:
Joshua Doors factory will receive the raw materials (wood); these raw materials will then be
converted into a chair or table by means of an assembly plant. Different machines will cut, shape
and assemble the furniture into the desired finished product. The finished product will then be sent
to the showroom floor for sale to the consumer.

The introduction of a QMS in production ensure that all products are manufactured according to
standard requirements. This enables easy testing and comparing of products. Since standards are
defined, it is easy to detect variances.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 13

1.9.5 Administration

The Administration function is included in most of the other functions mentioned. Administration
is the core of the business, it cannot function without it. Typing important documents, corporate
governance, compliance, quality management, issuing invoices, ordering and stock replenishment,
filing and paying of bills are just some examples.

Example:

Spar will receive a delivery of stock from its suppliers; the invoice is then handed to the finance
dept. for payment. The invoice is filled and a cheque sent to the suppliers for the payment of the
goods received. Without these simple admin duties, a business will not run smoothly. Having a
QMS ensures that Admin will be managed precisely in accordance to standard operating
procedures. The implementation of the QMS ensures best overall performance.

1.9.6 Purchasing Management

The purchasing function is responsible for the acquisition of all products and materials required by
the business to function profitability, namely raw materials, components, tools, equipment and, in
the case of a dealer, the inventory. The purchasing manager has to be in contact with suppliers, so
that he is aware of new products and knows the prices at which goods can be bought. He also has
to keep the inventory up to date, to ensure continuity of functioning.

A QMS will ensure that Purchasing gets managed in the best way with the engagement of standard
operating procedures and performance based trading.

Example:

The purchaser will receive numerous prices and catalogues from their various suppliers. The
purchasing department must then select the best product, quality & price. Once this has been
established, the purchaser will purchase the stock for the company. A purchase of bad product e.g.
Low-grade machinery can lead to the collapse of the assembly line. This in turn will lead to loss of
sales for the company.

1.9.7 General Management

The function of general management includes an examination of the management process as a

whole. The planning that management has to do, the organisation that it has to establish its plans,
the leadership that management has to assume to get things done and the control that has to be
exercised over the whole process. This requires surveying different management approaches that
may be adopted.

A QMS will require regular Management reviews, thus ensuring continuous improvement of
management procedures.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 14

Example:

Without a Store Manager, a shop would not be able to function. Store Managers tasks would
include the management of: Human Resources, Public Relations, Marketing, Production,
Administration, Purchasing & Finance.

1.9.8 Finance

The financial function includes the acquisition, utilisation and control of the money the enterprise
needs to finance its activities, to buy materials and equipment. The financial function aims to
maximise profits.

By following Standard Operating Procedures and forms, Finance will ensure that performance will
be more efficient overall.

Example:

The finance department will invest the firm’s money in the best possible way to ensure maximum
return on investment, the purchasing of new machinery to improve production & salary structuring.

1.10. THE WORLD OF FINANCE

1.10.1 Definition of Finance

Finance is an essential aspect of all organisations, whether profit-making or not. Before any
organisation can do anything, it must have some resources, which have a monetary value. Finance
is therefore as vital at the start as is the product itself. Finance is fundamentally concerned with
sources of funding, how and where the funding is applied, and with the control of the funds. It is
also an unavoidable tool when reviewing and assessing the performance and position of any
organisation.

1.10.2 Investment

Investment is the function of making your money more. There are various types of investments
such as Unit Trusts, Purchasing shares and fixed deposits to earn a higher interest rate. If you
invest a certain amount of money each month into a retirement annuity, your investment will look
after you in your old age. Therefore investment is very important, especially in large organisations,
which deal in large volumes of money, as money can always make more money, invested wisely.

1.10.3 Controlling Capital

Controlling capital is how you manage the funds of the company or if you own 51% or more of the
company, you control the capital.

1.10.4. Diversification

Diversification in this instance means making sure all your eggs are not all in one basket in order to
eliminate the risk of one breaking. A good example is one of “Chinese Insurance” Where 50 boats

Expiry Date : 29 February 2005 Revision date : 30 March 2005 15

carrying a cargo of vegetables, fruit and supplies all carry a portion of each other’s cargo. Thus to
ensure that if one boat sinks, or the cargo is damaged, they don’t loose all their cargo (income).

It is important to diversify your interests in business. If you have the bulk of your investments
invested in one organisation and it collapses for any economic reason, you stand to loose
everything. Whereas if you diversify your interests into different investments, it lowers the risk.

1.10.5 Dividends

A dividend is the percentage of the profit you receive after the company, which you invested in,
makes a profit. Dividends are usually paid in cash, but they may also be paid in kind, or by means
of bonus issues. The capital structure of a company comprises a mix of debt and equity. Equity
includes the original invested capital and the earnings, which the company has chosen to retain.
Payment of dividends reduces the retained earnings.

1.10.6 Liquidity

The term liquidity refers to how much the company has in liquid cash. In other words, how much
can it actually spend and pay in cash at any given point in time. This for example, always effects a
merger or acquisition strategy. A company that is cash rich is often sought after, especially when
such a company is listed and trading for a value less than its cash.

1.10.7 Solvency

Solvency refers to the degree to which assets exceed liabilities. For example, a hairdresser owns
equipment worth R600 000 and has debt of R200 000. The assets exceed liabilities 3 times. The
solvency ratio is thus 3.

1.10.8 Profitability

Profitability refers to the profit made in relation to the money spent to do so. For example, if a
hairdresser had to spent R200 000 in establishing a shop and know makes R100 000 per year in
profits, the profitability of the shop is:

Net Income x 100

Capital 1
Or R100 000 x 100
R200 000 1
= 50%

1.10.9 Listing

Listing is the term used when a company which has a minimum net earnings after tax (of R1
million, depending on which sector it lists in) lists on the Johannesburg Stock Exchange. A
Company, which lists on the Stock Exchange, can only do so after adhering to regulations and
meeting certain requirements. Once listed, the shares of the company is traded on the exchange.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 16

1.10.10 Time Value of Money

The time value of money bears a direct relation to the opportunity of earning interest on an
investment. This is the opportunity rate of return on investment. The opportunity to earn interest in
the interim period is foregone if an amount is expected some time in the future rather than received
immediately. If you were to choose between receiving a cash gift of R500 today or in a year’s
time, what would you prefer? Naturally the R500 today. Why? Because R500 received today is
worth more than R500 expected one year from now. It can be invested now to earn interest, this is
the pure time value of money. In principle, the time value of money refers to the fact that a R1
received today is worth more than R1 received next year. This relates to the opportunity of earning
a profit with the R1 that is received today – making it R2 by next year. The use of capital therefore
has a time implication.

The approach to future value the relationship between future and present value – FV and PV, the
original value of the investment, is expressed as what we call “a return on investment” ROI.

1.10.11 Sources of Finance

Every organisation needs finance to conduct its operations. The financial manager must consider
the broad categories of finance to be raised, the mix of debt and equity and the cost of the finance.
Financial Markets: In the market place where everyday commodities are traded, sellers have goods
to sell and buyers are looking for goods to be purchased. Finance is also a commodity, which is
traded in the market place.

• Money and capital markets.

• Primary and secondary markets.
• Formal and over-the-counter (OTC) markets.
• Johannesburg Stock Exchange (JSE).
• Financial Institutions.

1.10.12 Cost of Capital

The cost of capital of a company is the rate that must be earned in order to satisfy the combined
required rates of return of the firm’s providers of capital.

1.10.13 Capital Structure

Capital structure refers to the ratio between your equity and borrowed capital, such as debentures.
For example, a company obtained R200 000 to start. R100 000 was put in by the entrepreneur, who
had some savings. R50 000 was borrowed from the bank, whilst her mother in law put in the rest as
an investment and owns 25% of the company.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 17

1.10.14 Financial Gearing (Leverage)

Gearing refers to the ratio of own versus borrowed capital. If a new company needs R100 to start
with and borrows R50 and uses R50 of the owner’s own money –the business is 50% geared – in
other words, 50% borrowed capital.

1.10.15 Break-even analysis

Rand break-even point is reached when total costs are equal to total income and where no profit or
loss is made. The introduction of a QMS in a business can limit the cost of mistakes, thus reducing
production cost. When production cost drops, so does break even point.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 18

1.11. INTRODUCTION TO QUALITY MANAGEMENT

1.11.1 What is Quality Management ?

Quality Management is an extension of the administration and management functions. Quality
management has to do with :
1. Documenting your Vision, Mission and Business Objectives.
2. Setting Standards according to which business procedures will be measured. Developing
Standard Operating Procedures. Record keeping is also documented and described in this
phase.
3. Documenting job descriptions and work instructions plus supporting documents and
policies.
4. Developing standard forms such as letterheads, Fax cover sheets and company documents
such as invoices, cheque requisitions, all accompanied by a form register.

Quality management systems are not just for large companies. Quality management systems are
about how the business is managed and can be applied to all sizes of business as well as all
functions of business management, such as your marketing, sales and finance activities. Quality
management system standards should not be confused with product standards.

The use of product standards, quality management system standards and quality improvement
approaches are all means of improving your customers' satisfaction and the competitiveness of
your business.

The installation of a QMS has one major objective though, namely to ultimately, improve the
productivity, profit and capacity of your business. In the context of the Services Seta, the QMS
project has, as an objective, to build capacity of business and to improve the quality of service
offerings within the industry.

Quality management systems should not result in excessive bureaucracy or paperwork or lack of
flexibility. Remember all businesses already have a management structure and this should be the
basis on which the quality management system is built. You may find that you are already
carrying out many of the requirements included in the standard but have not stated how they are
done. The first step of a QMS is thus the fact that you are already successfully in business.

The current key documents from the ISO 9000 consist of the following:
ISO 9000-Which sets out the concepts, principles, fundamentals and vocabulary for quality
management systems,
ISO 9001 -Which sets out the requirements to be met,
ISO 9004 -Which provides guidance for continual improvement of an organization's overall
performance.
ISO 19011 -Which provides guidelines on auditing quality management systems (and
environmental management systems as well).
Even though the first three of the above standards have been substantially revised compared
with the 1994 editions, and there are some new requirements in the 2000 edition of ISO 9001,
they are still not about imposing something totally new on your business.
If you are only now adopting ISO 9001,your system might be effective, but probably informal
and not well documented.
If your system already exists and is based on one of the 1994 editions, it will need to be updated
to ISO 9001:2000, which may require some changes to your documentation.
In both cases, the advice given in this programme (see next set of material on actual QMS
training) is relevant.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 19

Some customers in both the private and public sectors are looking for the confidence that can be
provided by a business with an effective quality management system.
While meeting these expectations is one reason for having a quality management system, there
are other reasons and some of these are listed here.

1.11.2. TQM Process Approach

STAGE 1: INTERVENTION ONE: Business Management & Macro economic awareness of

quality. SME’s will attend a seminar in their various groups. Each SME will be given a practical
task to complete. This task will constitute an element in the creation of the final QMS document
for each SME.

STAGE 2: (TIER 1): INTERVENTION TWO: Developing a Business Plan (Quality

perspective). Each SME will be assisted in the developing of a business plan. This business plan
will be documented with the view to incorporating it into the final QMS document. Monitoring
Visits to companies will be held during the implementation period and an assessment day will
also be presented to ensure that documentation is correct for progressing to Stage 3

STAGE 3 : (TIER 2): INTERVENTION THREE: Developing a functional procedures manual

for an SME as part of a QMS. Each SME will be assisted to develop a QMS document based on
a set of procedures that has been generically developed. Every SME will be given a toolkit to
assist in the development of the QMS. Monitoring Visits to companies will be held during the
implementation period and an assessment day will also be presented to ensure that
documentation is correct for progressing to Stage 4

STAGE 4 : (TIER 3): INTERVENTION FOUR: Developing an actual QMS manual. SME’s
will be assisted in the development of a QMS as part of the continuous mentoring that will be
provided. Monitoring Visits to companies will be held during the implementation period and an
assessment day will also be presented to ensure that documentation is correct for progressing to
Stage 5

STAGE 5 : (TIER 4): INTERVENTION FIVE: Internal use of Forms throughout the company,
including Management Reviews, and Continues Improvement. Monitoring Visits to companies
will be held during the implementation period and an assessment day will also be presented to
ensure that documentation is correct for progressing to Stage 6

STAGE 6: INTERVENTION SIX: Certification. Each SME that successfully completes the
program will be certified as internally compliant (Certification of Competency). During the
project, RIMS will, via an accredited provider, submit the training part of the program for
alignment with unit standards and accreditation. Accordingly, individuals will be certified as
competent once they have completed the entire program.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 20

1.11.3 HOW TO DEVELOP A CORPORATE VISION

a) What is a corporate vision?

Remember when you were little? Remember when you said “ one day when I grow up, when I
am big, I am going to be a doctor/nurse / fireman?

A corporate vision is the “one day when I am big” for a business. …

The best way to create a vision for your company is to take some time off and ponder on the
question of what you would like your business to look like :

1. In five years from now

2. In an ideal world
3. In the best format you can imagine

Discuss these visions with your staff and family.

Finally, write your visions down and frame it. Hang it up in your office.

Example : To be the biggest provider of broad based human empowerment.

b) What is your corporate mission?

If a vision is the destination, the mission is the road map of how to get there. The best way to
develop a mission is to ask yourself how you will attain the vision in 5 easy steps. Again, write
your mission down and frame it.

c) What about Objectives?

Once you have written down your mission, it is time to break the mission and vision into
Objectives. Consider Objectives as things that you have to do over the next 3 years in order to
achieve the vision and mission. An easy way of developing objectives is to work according to the
8 functions of business. The following guideline seems to work well:

1. Identify the 8 business functions and set 4-6 objectives for each one.
2. Take each objective and unpack it into to 4 tasks – to be performed monthly.
3. Take each task and unpack into 4 activities – to be performed daily.

Once you have identified these list of required tasks, it is easy to cluster them into procedures,
job descriptions and the like. This is the start of your QMS. Once you have mapped out the
required activity, the real fun can begin!

Example: To facilitate human development by training, continuous mentoring and regular quality
improvements.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 21

1.12 THE 3-STAR SERVICES SECTOR GRADING SYSTEM:
Distinguishing the Best from the Rest

1.12.1 What will a grading system do for me?

A grading system sends out important messages about your business. It recognises that:

STAR 1
You comply with the Employment Equity Act, the Skills Development Act, and any other
legislation that directs your relationship with your staff, your most important asset.
Your workplace skills planning process is in place, it is inextricably linked to your business's
employment equity targets, and it is being implemented.
Irrespective of the size of your business, your staff are encouraged to achieve their personal and
collective continuous development objectives.
As a team, management and staff are planning for the real and probable manpower needs of the
future by using learnerships and benefiting from other discretionary funding windows of the
SSETA.

STAR 2
Your company has systems in place that are designed to manage all resources effectively and
that these systems are achieving their purpose.
Your systems are International Standards Organisation (ISO) compliant or ISO recognised.
Your human resources management system is effective and has either Investors in People status
or is Investor-in-People compliant.

STAR 3
Your company is focused on your clients and customers.
Your staff are competent to be client-centric.
Your clients recognise and appreciate the client-centric strategy of your company and that this
strategy is successful.
You are driven by your clients' changing needs and perceptions of your service excellence.
There are additional benefits to having a STAR 3 rating. SSETA will
Subsidise STAR 3 companies to become members of the Proudly South African Campaign.
Establish a national marketing campaign to encourage consumer awareness of the value of doing
business with a STAR 3 company.
Enter into memoranda of understanding with local, provincial, and national government
organisations, such as the Gauteng Shared Services Board, to ensure that these organisations deal
exclusively with STAR 3 companies.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 22

1.12.2 How do I achieve a STAR grading?

STAR 1
Applying for and achieving a STAR 1 rating is simple:
Apply to SSETA for a clearance letter for STAR 1.
SSETA's Compliance Department will arrange an audit.
Trained assessors (SSETA moderators) will conduct the audit.
The SSETA file on your company will be evaluated.
Workplace Skills Plans (WSP) participants in your company will be interviewed.
The Skills Development Facilitator (SDF) will be the principal contact person in your company
and will also take responsibility for any remedial action required.
Trained senior verifiers in the Compliance Department will moderate the work of the assessor.

STAR 2
Apply to SSETA for a clearance letter for STAR 2.
If your company has ISO or IPP certificates, no audit will be necessary.
If your company is applying for ISO/IPP compliance status, then the SSETA Compliance
Department will arrange an audit (as for STAR 1).

STAR 3
Apply to SSETA for a clearance letter for STARs 3.
The Compliance Department will appoint an assessor who will guide your company through the
process.

ALL STARS
You must sign a contractual undertaking, including a code of good practice.
You will be issued with a SSETA certificate when you have complied.
The certificate is valid for 24 months, after which you will be audited again. (This renewal audit
is less strenuous than the initial audit.)
SSETA will publish the names of all the companies that have achieved STAR grading.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 23

1.12.3 How much will it cost me?

The total costs of the audit and certification will cost you nothing as a Services SETA member; it
will be funded by SSETA.
STARs 2 and 3 will cost you nothing if an assessment is not required. If, however, an assessment
is required, then a pre-assessment report on what needs to be addressed will cost R2 000. The
costs of the final assessment will be:
• R1 000 up to 30 employees
• R1 500 for 31 to 50 employees
• R2 000 between 51 and 150 employees
• R4 000 for over 150 employees

Once you have been awarded certification, you will be required to pay a small annual registration
fee. This fee depends on the number of employees in your company:
• R500 a year for up to 30 employees
• R800 a year for 31 to 50 employees
• R1 500 a year for between 51 and 150 employees
• R2 000 a year for over 150 employees

After 24 months, there is a small charge for the renewal audit:

• STAR 1 will cost the same as the annual fee.
• STARs 2 and 3 will cost 50% of the assessment fee.
All fees will be deducted from the Implementation Grant.

Expiry Date : 29 February 2005 Revision date : 30 March 2005 24