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‘A’ LEVEL BUSINESS STUDIES

EXAM PREPARATION

QUESTIONS AND SOLUTIONS

Tinofamba nevanofamba

COMMERCIALS DEPARTMENT
1. a) Explain the factors that are likely to determine the price of a product. [10]

Pricing is often one of the most difficult things to get right in business. There are several factors
a business needs to consider in setting a price:

Competitors – a huge impact on pricing decisions. The relative market shares (or market
strength) of competitors influences whether a business can set prices independently, or whether it
has to follow the lead shown by competitors

Costs – a business cannot ignore the cost of production or buying a product when it comes to
setting a selling price. In the long-term, a business will fail if it sells for less than cost, or if its
gross profit margin is too low to cover the fixed costs of the business.

The state of the market for the product – if there is a high demand for the product, but a
shortage of supply, then the business can put prices up.

The state of the economy – some products are more sensitive to changes in unemployment and
workers wages than others. Makers of luxury products will need to drop prices especially when
the economy is in a downturn.

The bargaining power of customers in the target market – who are the buyers of the product?
Do they have any bargaining power over the price set? An individual consumer has little
bargaining power over a supermarket (though they can take their custom elsewhere). However,
an industrial customer that buys substantial quantities of a product from a business may be able
to negotiate lower or special prices.

Other elements of the marketing mix – it is important to understand that prices cannot be set
without reference to other parts of the marketing mix. The distribution channels used will affect
price – different prices might be charged for the same product sold direct to consumers or via
intermediaries. The price of a product in the decline stage of its product life-cycle will need to be
lower than when it was first launched.

b) To what extent is price the most important factor in the successful marketing of a
firm’s products?[15]
Price is important to marketers because it represents marketers' assessment of the value
customers see in the product or service and are willing to pay for a product or service. The other
elements of the marketing mix (product, place and promotion ) may seem to be more glamorous
than price, and thus get more attention, but determining the price of a product or service is
actually one of the most important management decisions. Here's why.

While product, place and promotion affect costs, price is the only element that affects revenues,
and thus, a business's profits . Price can lead to a firm's survival or demise.
Adjusting the price has a profound impact on the marketing strategy, and depending on the price
elasticity of the product, it will often affect the demand and sales as well. Both a price that is too
high and one that is too low can limit growth. The wrong price can also negatively influence
sales and cash flow .

Problems occur if the marketer fails to set a price that complements the other elements of the
marketing mix and the business objectives, as pricing contributes to how customers perceive a
product or a service. A high price indicates high quality. The term luxury comes to mind. If,
however, a firm wants to position itself as a low-cost provider, it will charge low prices. Just as
they do with high-end providers, consumers know what to expect when they see low prices.

So, as you can see, it is important that a company sets the right price. A company's success can
depend on it. However, with so many factors to consider along with the lack of a crystal ball that
will show the effect of a price change, It isn't so easy to do.

2. “Break even analysis is of limited value to business.” To what extent is this statement
true? [25]

Breakeven Analysis

Break-even analysis is a practical and popular tool for many businesses, including start-ups.
However, you also need to know about the limitations of the method. Here is a summary of the
key issues from the perspective of a start up or new business, for whom breakeven analysis is
particularly relevant and important.

Strengths of breakeven analysis

Focuses entrepreneur on how long it will take before a start-up reaches profitability – i.e. what
output or total sales is required

Helps entrepreneur understand the viability of a business proposition, and also those who will
lend money to, or invest in the business

Margin of safety calculation shows how much a sales forecast can prove over-optimistic before
losses are incurred

Helps entrepreneur understand the level of risk involved in a start-up

Illustrates the importance of a start-up keeping fixed costs down to a minimum (higher fixed
costs = higher break-even output)

Calculations are quick and easy – great for giving quick estimates
Limitations of breakeven analysis

Unrealistic assumptions – products are not sold at the same price at different levels of output;
fixed costs do vary when output changes

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted
output too

Variable costs do not always stay the same. For example, as output rises, the business may
benefit from being able to buy inputs at lower prices (buying power), which would reduce
variable cost per unit.

Most businesses sell more than one product, so break-even for the business becomes harder to
calculate

Break-even analysis should be seen as a planning aid rather than a decision-making tool

3. Evaluate the significance of setting objectives to a business organisation. [25]

Provides direction for the customer and organisation

It’s important to be on the same page as your customer to create a common sense of purpose.
The customer feels like they are a part of the brand, not separated from it, when they are able to
see the course the brand is taking . Providing direction for the customer makes them feel more
secure and gives your organisation guidance for promotional activities.

Fundamental for human motivation within the organisation

Employees need guidance and motivation. By providing them with a target you give them a
reason to prove themselves. Nobody wants employees running around the office like a bunch of
lunatics because they have no idea where they’re supposed to go. Setting objectives motivates
them to achieve.

Keeps your performance in check

How do you know that your strategies producing epic results when you don’t have any
objectives to measure your results against? Of course, there’s a chance you may not be meeting
your objectives, but that’s okay, because now that you keep yourself in check, you can improve
your performance before anyone even notices that you were slacking.

Allows you to organise various marketing techniques towards a common goal

Within the marketing process, there are many factors that need to be accomplished such as
campaigns, strategies, research, reporting, content creation and development. If you have set
common goals then you will be able to aim and integrate all of these factors in the same
direction. Establishing this will make your brand that much stronger.
Encourages frequent communication within the organisation

Setting objectives leads to good communication. The organisation needs to constantly be


reassessing and re-evaluating the objectives they have set and how they can be increased or
improves. This means that the various departments have to communicate and coordinate with
one another in order to achieve this.

Bridges the gap between customer expectations and reality

Realistic and attainable objectives assure that your customer will not have expectations that are
impossible for you to meet. This allows you to set goals that are achievable and measurable, and
when you do achieve them, it builds up the customers trust in you. By not setting objectives, you
could be aiming for a successful campaign while the customer has been preparing for world
domination. Set objectives that bridge that gap.

Key driver of your strategies

And by key driver, we mean absolutely, one hundred percent necessary. By setting objectives,
you are able to come up with well-defined strategies that are guaranteed to make you look like a
marketing guru ( because that is what you are of course). Without setting objectives, your
strategies have no purpose and that’s definitely not what you’re going for. .

Challenges you to think creatively and strategically

We all care what we look like. So if you’re going to set bland, easy objectives that don’t
challenge you, you won’t look very impressive. We know you want your customers to be blown
out of the water, so setting objectives that require you to get your creative skills and strategic
thinking caps on, will undoubtedly produce an outcome that will be far greater than the
alternative.

Increases customer loyalty

As you begin to smash the objectives you set out of the ball park, your customers admiration,
satisfaction and loyalty towards your brand will begin to increase. You will be set apart, and look
better than everyone else.

However…….
4. Assess the importance of the following activities in an organisation.

a) Job evaluation [9]

Job evaluation is the systematic process for assessing the relative worth of jobs within an
organization. A comprehensive analysis of each position’s tasks, responsibilities, knowledge, and
skill requirements is used to assess the value to the employer of the job’s content and provide an
internal ranking of the jobs. It is important to remember that job evaluation is a measurement of
the internal relativity of the position and not the incumbent in the position. This analysis can also
contribute to effective job design by establishing the organizational context and value of the job,
and to hiring and promotion processes by providing job analysis on skill and competencies
required to successfully meet job requirements.

Job evaluation provides a rational and consistent approach for determining the pay of employees
within an organization. Paying fairly based on internal relative worth is called Internal Equity.
Job evaluation can be used independently, although it is usually part of a compensation system
designed to provide appropriate salary ranges for all positions. This process will ensure an
equitable and defensible compensation structure that compensates employees fairly for job value.

b) on-the-job training [8]

On-the-job training is a form of training taking place in a normal working situation. It is a one-
on-one training located at the job site, where someone who knows how to do a task shows
another how to perform it. In antiquity, the work performed by most people did not rely on
abstract thinking or academic education. Parents or community members, who knew the skills
necessary for survival, passed their knowledge on to the children through direct instruction.

On the Job Training is still widely used today. It is a frequently used method of training because
it requires only a person who knows how to do the task, and the tools the person uses to do the
task. It may not be the most effective or the most efficient method at times, but it is normally the
easiest to arrange and manage. Because the training takes place on the job, it can be highly
realistic and no transfer of learning is required. It is often inexpensive because no special
equipment is needed other than what is normally used on the job. One drawback is that On the
Job Training takes the trainer and materials out of production for the duration of the training
time. In addition, due to safety or other production factors, it is prohibitive in some environment.

c) collective bargaining [8]

Collective bargaining is a process of negotiation between employers and a group of employees


aimed at agreements to regulate working salaries, working conditions, benefits, and other aspects
of workers' compensation and rights. The interests of the employees are commonly presented by
representatives of a trade union to which the employees belong. The collective agreements
reached by these negotiations usually set out wage scales, working hours, training, health and
safety, overtime, grievance mechanisms, and rights to participate in workplace or company
affairs.

The union may negotiate with a single employer (who is typically representing a company's
shareholders) or may negotiate with a group of businesses, depending on the country, to reach an
industry-wide agreement. A collective agreement functions as a labour contract between an
employer and one or more unions. Collective bargaining consists of the process of negotiation
between representatives of a union and employers (generally represented by management, or, in
some countries such as Austria, Sweden and the Netherlands, by an employers' organization ) in
respect of the terms and conditions of employment of employees, such as wages, hours of work,
working conditions, grievance procedures, and about the rights and responsibilities of trade
unions.

5 a) Explain the distinction between financial and management accounting. [5]

Financial accounting has its focus on the financial statements which are distributed to
stockholders, lenders, financial analysts, and others outside of the company. Courses in financial
accounting cover the generally accepted accounting principles which must be followed when
reporting the results of a corporation's past transactions on its balance sheet, income statement,
statement of cash flow, and statement of changes in stockholders' equity.

Managerial accounting has its focus on providing information within the company so that its
management can operate the company more effectively. Managerial accounting and cost
accounting also provide instructions on computing the cost of products at a manufacturing
enterprise. These costs will then be used in the external financial statements. In addition to cost
systems for manufacturers, courses in managerial accounting will include topics such as cost
behaviour, break-even point, profit planning, operational budgeting, capital budgeting , relevant
costs for decision making, activity based costing, and standard costing.

b) Discuss the importance of ratio analysis to the following stakeholders:[20]

Ratios as a tool of financial analysis provide symptoms with the help of which any analyst is in a
position to diagnose the financial health of the unit. Financial analysis may be compared with
biopsy conducted by the doctor on the patient in order to diagnose the causes of illness so that
treatment may be prescribed to the patient to help him recover. Ratio analysis serves the
purposes of various interested parties of the financial statements. The interested parties are top
management, shareholders, creditors, employees, government and tax authorities. With the use of
ratio analysis, one can measure the financial condition of the business concern and assess as
whether the condition is strong, questionable or poor. As, already hinted different groups of
persons are interested in the affairs of any business entity, therefore, significance of ratio analysis
for various groups is different and may be discussed as follows:

i) Creditors

Creditors may broadly be classified into short-term and long term. Short-term creditors are
trade creditors, bills payables, creditors for expenses etc., they are interested in analyzing the
liquidity of the unit. Long-term creditors are financial institutions, debenture holders, mortgage
creditors etc., they are interested in analyzing the capacity of the unit to repay periodical interest
and repayment of loans on schedule. Ratio analysis provides, both type of creditors, answers to
their questions.

ii) Shareholders

Existing as well as prospective owners or shareholders are fundamentally interested in the (a)
long-term solvency and (b) profitability of the unit. Ratio analysis can help them by analyzing
and interpreting both the aspects of their unit. Long term solvency ratios ensure the growth of the
business concern and possibility of getting back their investments. Ratio analysis will be useful
for deciding whether the present financial position warrants further investments or not.

iii) Workers

Employees are interested in fair wages, adequate fringe benefits and bonus linked with
productivity/profitability. Ratio analysis provides them adequate information regarding
efficiency and profitability of the unit. This knowledge helps them to bargain with the
management regarding their demands for improved wages, bonus etc. If financial position is
strong, then, the employees are getting wages, salaries and perquisites in time. They can get
adequate financial increment and promotion in time. There is a guarantee in employment.

iv) Management

Ratio analysis helps the management to assess the performance of the business concern and
improve the management functions such as planning, coordination and control. Some ratios are
calculated for a number of years. These are working as guide to the management. Meaningful
conclusions can be drawn from these ratios. The financial strength and weakness of the business
concern can be find out through calculating some ratios. It means that communication is
facilitated by ratios. If financial position is very weak, better co-ordination is formulated by the
top management for improving efficiency. Standard ratios can be used for finding variations or
deviations. Such variations can be found by comparing the actual with the standards so as to take
a corrective action at the right time.

v) Government

The government can prepare the industrial policies on the basis of financial position information
available from various units. Various loan scheme with subsidies can be chalked out by the
government. The government can assess the economic condition of the nation. The contribution
of each industrial sector to GDP is also identified by the government.

6. Evaluate the usefulness of installing and using computers to the management of a


large manufacturing firm. [25]
Computers have tremendously improved the way businesses operate in their respective
industries. Technology has advanced so remarkably that those who are not using computers in
their business are at a major disadvantage against their competitors. In particular, there are
several important advantages that computers can provide to small businesses.

Organization

Computers allow the application of different types of software that can help businesses keep
track of their files, documents, schedules and deadlines. Computers also allow businesses to
organize all of their information in a very accessible manner. The ability to store large amounts
of data on a computer is convenient and inexpensive, and saves space. A computer's ability to
allow a company to organize its files efficiently leads to better time management and
productivity.

Self-Sufficiency

Computers have made staff and companies more self-sufficient by allowing them to do tasks that
previously had to be outsourced. For example, a company can now use office software to create
their own training material. Desktop publishing software can be used to create marketing
materials. Online tax and accounting programs allow companies to prepare their own taxes. This
allows the dominant operations of a company to remain in-house and empowers the company to
become more independent and less susceptible to errors committed by outside parties.

Cost-Effective

Emerging technology makes new tools and services more affordable and allows companies to
save on their staff payroll and office equipment. Because computers allow work to be done faster
and more efficiently, it is possible for a company to hire fewer staff. In addition, with networked
and relatively inexpensive computers, companies can store data more easily, saving on the cost
of outside file storage, and can avoid having to purchase as many copiers, fax machines,
typewriters, and other such items that were used before computers became popular.
Correspondingly, potentially profitable businesses can be started with a smaller overhead cost.
Email capabilities decrease postage costs; software applications reduce the need for large
accounting departments, while videoconferencing reduces the need for travel. All resources
saved will trickle down to the consumers, who are then provided with much more affordable
products and service.

Speed

Computers help speed up other business operations. The collecting of consumer feedback,
ordering of raw materials, and inspection of products is made quicker through the use of
computers, allowing companies to operate much faster and to produce better quality results.

Cheaper Research and Development

R&D, or research and development, costs will also decrease with the help of computers.
Scientific research can now be done using the Internet and computer software applications
designed to develop and produce new products and services. For example, instead of a company
having to do in-person focus groups on a potential new product or to determine their target
market, the company can conduct a widespread online survey for a far lower cost. In addition,
new models of a product can be created online using virtual pictures and drawings instead of
having to be hand-drawn. These interactive models created using software programs can help
bring the product and its features to life for a far lower cost than creating an actual physical
model of the given product.

Sales

Computers can help generate higher sales and profits for businesses via a company website.
Many businesses now operate online and around the clock to allow customers from around the
world to shop for their products and services.

Disadvantages of computer

The use of computer has also created some problems in society which are as follows.

Unemployment

Different tasks are performed automatically by using computers. It reduces the need of people
and increases unemployment in society.

Wastage of time and energy

Many people use computers without positive purpose. They play games and chat for a long
period of time. It causes wastage of time and energy. Young generation is now spending more
time on the social media websites like Facebook, Twitter etc or texting their friends all night
through smart phones which is bad for both studies and their health. And it also has adverse
effects on the social life.

Data Security

The data stored on a computer can be accessed by unauthorized persons through networks. It has
created serious problems for the data security.

Computer Crimes

People use the computer for negative activities. They hack the credit card numbers of the people
and misuse them or they can steal important data from big organizations.

Privacy violation

The computers are used to store personal data of the people. The privacy of a person can be
violated if the personal and confidential records are not protected properly.

Health risks

The improper and prolonged use of computer can results in injuries or disorders of hands, wrists,
elbows, eyes, necks and back. The users can avoid health risks by using the computer in proper
position. They must also take regular breaks while using the computer for longer period of time.
It is recommended to take a couple of minutes break after 30minutes of computer usage.

Impact on Environment

The computer manufacturing processes and computer waste are polluting the environment. The
wasted parts of computer can release dangerous toxic materials. Green computer is a method to
reduce the electricity consumed and environmental waste generated when using a computer. It
includes recycling and regulating manufacturing processes. The used computers must be donated
or disposed off properly.

7. Why firms need finance

Businesses need finance to:-

Start a business-a new business will need finance to buy assets, materials and employ staff.
There will also need to be money to cover the running costs. (running costs = ongoing costs such
as electricity, rent, insurance)
Finance expansions to production capacity-As a business grows, it needs to be able to produce
more and new technology and machinery to cut costs and keep up with competitors.

To develop and market new products- a business needs to spend money on developing and
marketing new products e.g. to do marketing research and test new products in “pilot”
markets.
To enter new markets-When a business grows it may sell products into new markets. These can
be new geographical areas to sell to (e.g.export markets) or new types of customers.
This costs money in terms of research and marketing e.g. advertising campaigns and setting up
retail outlets.

Take-over or acquisition-When a business buys another business, it will need to money to pay
for the acquisition (acquisitions involve significant investment).

To pay for the day to day running of business-A business needs money to pay for day to day
items such as paying a supplier for raw materials or paying the wages or buying a new printer
cartridge.

8.What is investment appraisal?

Before committing to high levels of capital spend, companies normally undertake investment
appraisal.

Investment appraisal has the following features:

 Assessment of the level of expected returns earned for the level of expenditure made
 Estimates of future costs and benefits over the project's life.

When a proposed capital project is evaluated, the costs and benefits of the project should be
evaluated over its foreseeable life. This is usually the expected useful life of the non-current asset
to be purchased, which will be several years. This means that estimates of future costs and
benefits call for long-term forecasting.

A 'typical' capital project involves an immediate purchase of a non-current asset. The asset is
then used for a number of years, during which it is used to increase sales revenue or to achieve
savings in operating costs. There will also be running costs for the asset. At the end of the asset's
commercially useful life, it might have a 'residual value'. For example, it might be sold for scrap
or in a second-hand market. (Items such as motor vehicles and printing machines often have a
significant residual value.)
A problem with long-term forecasting of revenues, savings and costs is that forecasts can be
inaccurate. However, although it is extremely difficult to produce reliable forecasts, every effort
should be made to make them as reliable as possible.

A business should try to avoid spending money on non-current assets on the basis of wildly
optimistic and unrealistic forecasts.

The assumptions on which the forecasts are based should be stated clearly. If the assumptions are
clear, the forecasts can be assessed for reasonableness by the individuals who are asked to
authorise the spending.

Two basic appraisal techniques covered here are Accounting Rate of Return and Payback.

There are other more sophisticated methods of investment appraisal such as Net Present Value
(NPV) and Internal Rate of Return (IRR).

Accounting profits and cash flows

In capital investment appraisal it is more appropriate to evaluate future cash flows than
accounting profits, because:

 profits cannot be spent


 profits are subjective
 cash is required to pay dividends.

1. Accounting Rate of Return(ARR)

Formula

 The initial capital cost could comprise any or all of the following:
 cost of new assets bought
 net book value (NBV) of existing assets to be used in the project
 investment in working capital
 capitalised R&D expenditure
Decision rule

If the expected ARR for the investment is greater than the target or hurdle rate (as decided by
management) then the project should be accepted.

Advantages of ARR

 simplicity
 links with other accounting measures.

Disadvantages of ARR

 no account is taken of project life


 no account is taken of timing of cash flows
 it varies depending on accounting policies
 it may ignore working capital
 it does not measure absolute gain
 there is no definitive investment signal.

2.Payback

The payback period is the time a project will take to pay back the money spent on it. It is based
on expected cash flows and provides a measure of liquidity.

Decision rule

When using Payback, the company must first set a target payback period.

Select projects which pay back within the specified time period

Choose between options on the basis of the fastest payback

Advantages include:

 it is simple
 it is useful in certain situations:

-rapidly changing technology

-improving investment conditions

 it favours quick return:


 helps company growth
 minimises risk
 maximises liquidity
 it uses cash flows, not accounting profit.
Disadvantages include:

 it ignores returns after the payback period


 it ignores the timings of the cash flows. This can be resolved using the discounted
payback period.
 it is subjective as it gives no definitive investment signal
 it ignores project profitability.

9. Stakeholders

There are many groups of people who have an interest, financial or otherwise, in the
performance of a business - these different groups are known as stakeholders. The main
stakeholders are considered to be:

Shareholders

These people have a clear financial interest in the performance of the business. They have
invested money into the company through purchasing shares and they expect the company to
grow and prosper so that they receive a healthy return on their investment. The return that they
receive can come in two forms. Firstly, by a rise in the share price, so that they can sell their
shares at a higher price than the purchase price (this is known as making a capital gain ).
Secondly, based on the level of profits for the year, the company issues a portion of this to each
shareholder for every share that they hold (this is known as a dividend ). The shareholders are
also entitled to vote each year at the A.G.M. to elect the Board of Directors, who will run the
company on their behalf.

Employees

This group also has an obvious financial interest in the company, since their pay levels and their
job security will depend on the performance and the profitability of the business. It is employees
who perform the basic functions and tasks of the business (producing output, meeting deadlines
and delivery dates, etc.) and over recent years their traditional role has started to change. They
are often now encouraged to become involved in multi-skilled team working, problem solving
and decision making - thus having a significant input to the workings of the business.

Customers

Customers are vital to the survival of any business, since they purchase the goods and services
which provides the business with the majority of its revenue. It is therefore vital for a business to
find out exactly what the needs of the consumers are, and to produce their output to directly
satisfy these needs - this is done through market research. The goods and services must then be
promoted in such a way as to appeal to the target market and to inform them of the availability,
price, etc. Once the goods and services have been purchased by the customer, it is essential that
after-sales service is offered and that the customer is happy with his/her purchase. The business
must try to keep the customer loyal so that they return in the future and become a repeat-
purchaser.

Suppliers

Without flexible and reliable suppliers , the business could not guarantee that it will always have
sufficient high quality raw materials which they require to produce their output. It is important
for a business to maintain good relationships with their suppliers, so that raw materials and
components can be ordered and delivered at short notice, and also so that the business can
negotiate good credit terms from the suppliers (i.e. buy now, pay at a later date).

The Government

The government affects the workings of businesses in many ways:

1. Businesses have to pay a variety of taxes to central and local government, including
Corporation tax on their profits, Value-Added Tax (V.A.T) on their sales, and Business Rates to
the local council for the provision of local services.

2. Businesses also have to adhere to a wide-ranging amount of legislation, which is aimed at


protecting the consumers, the employees and the local environment from business activity.

3. Businesses will be affected by different economic policies, (for example, if interest rates are
increased, then this will discourage businesses from borrowing money since the repayments will
now be significantly higher). However, businesses can also benefit from government incentives
and initiatives, such as new infrastructure, job creation schemes and business relocation
packages, offering cheap rent, rates and low-interest loans.

The Local Community

Businesses are likely to provide significant amounts of employment for the local community and
often will produce and sell much of their output to the local residents. The sponsorship of local
events and good causes (such as local charity work) can also help the business to establish itself
in the community as a caring, socially responsible organisation. Many businesses develop links
with local schools and colleges, offering sponsorships and resources to these under-funded
institutions. However, businesses can also cause many problems in local communities, such as
congestion, pollution and noise, and these negative externalities may often outweigh the benefits
that the businesses bring to the community.
10.Disagreements between stake holders

Due to the demands placed on businesses by so many different stakeholders, it is no surprise that
there are often disagreements and conflict between the different groups. Some of the more
common areas of conflict are:

Shareholders and management

Profit maximisation is often the over-riding objective of shareholders - resulting in large


dividend payments for them. However, it is far more likely that the managers of the business will
aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level
of profits, and then use the remaining resources to pursue other objectives such as diversification
and growth). This conflict between these two groups is often referred to as divorce of ownership
(the shareholders) and control (the management).

Customers and the business

Customers are unlikely to remain loyal and repeat purchase from the business if the product that
they have purchased is of poor quality and/or is poor value for money. More customers are
prepared to complain about the quality of products and after-sales service than ever before, and
the business must ensure that it has in place a number of strategies designed to satisfy the
disgruntled customer, reimburse any financial loss that they may have incurred and persuade
them to remain loyal to the business.

Suppliers and the business

Suppliers are often quoted as complaining about the lack of prompt payments from businesses
for deliveries of raw materials, and if this became a regular problem then the suppliers may well
refuse credit to the businesses or may even cease all dealings with them. On the other hand,
many businesses have been known to complain about the late deliveries of raw materials and
components from suppliers, and the dubious quality of the parts once they have been inspected.

The community and the business

As outlined previously, the local community can often suffer at the hands of a large company
through the negative externalities of pollution, noise, congestion and the building of new
factories in areas of outstanding beauty. However, if the business faces strong protests from
residents and from pressure groups concerned about its actions, then it may decide to relocate to
another area, causing much unemployment and a fall in investment in the community it leaves
behind.
11. Ratio Analysis Importance and Limitations

Ratio analysis is an important and useful technique to check upon the efficiency of an
organization. The management can arrive at important decisions by using ration analysis. The
ratio is used for expressing the mutual relation to different accounts consisting in the financial
statement.

In fact, any given data in the financial statements are not important in itself. To make its real
importance clear, it is to be expressed in referring to other figures. With the help of ratio, the big
figure or groups can be made short and simple. From this, the business activities are made
possible to analyze systematically.

Importance of Ratio Analysis

Helpful in assessing operating efficiency of the Business-The ratio can be used as the
measuring rod of efficiency. With the help of this, the evaluation of changes during different
period can be performed. In this way, the comparative efficiency of company can be informed.

Helpful in measuring financial solvency-Ratios are useful tools for evaluating the liquidity and
solvency position of a concern. They point out the liquidity position of an organization to meet
its short and long term obligations.

Helpful in future forecasting-Ration analysis is very helpful in financial forecasting and


planning. The ration calculation of past years works guide line for the future.

Helpful in decision making-Ratio analysis is also very helpful for decision making. The
information provided by ration analysis is very useful for making decision on any financial
activity.

Helpful in corrective action-Ratio analysis can also point out the deficiencies of the business so
that corrective steps may be taken accordingly.

Helpful in comparing inter firm performance-Due to inter firm comparison, ratio analysis
also serves as a stepping stone to remedial measures. It helps management evolving future
'market strategies'.

Helpful in communication-Ratio is an effective means of communication. Different financial


ratios communicate the strength and financial standing of the firm to the internal and external
parties.

Helpful in cost control-From the use of ratio, it is possible to control the different costs of the
concern.
Limitations of Ratio Analysis

The ratio analysis contributes a lot to portray the financial position of a business. But they suffer
from various limitations.

Limited use of single ratio-A single ratio in itself is not important. It would not be able to
convey anything. For making a meaningful conclusion, a number of ratios which makes
confusion to analyst is to be calculated.

Difficult to interpreter-It is very difficult task to fix an adequate standard for compression
purpose. There are no rules of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ration difficult.

Ignored qualitative factors- Ratio analysis is related to the quantitative analysis only but not
with a qualitative analysis because it is ignored by ratio analysis.

Limitation of accounting record-Ratio analysis is related to financial statement. Financial


statement itself is subject to limitations. This ratio analysis also suffers from the inherent
weakness of the financial statement.

Mislead by accounting procedure-There must be uniformity in the accounting procedure used


by the concerns which are going to be taken as a window dressed. So the analyst must be very
careful on making decision from ratio calculated from such financial statement.

Wrong conclusion-The analyst or the user must have knowledge about the concern whose
statements have been used for calculating the ratios. Only then the conclusion may be draw. The
conclusion may be wrong if it has been drawn.

Price level changes-While making comparisons of ratios, no allowance for changes in general
price level is made. A change in price level can seriously affect the validity of comparisons of
ratios computed for different periods.

Personal Bias-Ratios have to be interpreted and different people may interpret the same ratio in
different ways. Ratios are means to achieve a particular and but not an end itself. It totally
depends upon the user as what conclusion he draws on the basis of ratio calculation.
12. Causes of Cash Flow Problems

A cash flow problem arises when a business struggles to pay its debts as they become due. Note
that a cash flow problem is not necessarily the same as experiencing a cash outflow. A business
often experiences a net cash outflow, for example when making a large payment for raw
materials, new equipment or where there is a seasonal drop in demand. However, when cash
flow is consistently negative and the business uses up its cash balances, then the problem
becomes serious.

The main causes of cash flow problems are:

Low profits-There is a direct link between low profits or losses and cash flow problems.
Remember - most loss-making businesses eventually run out of cash.

Over-investment in capacity-This happens when a business spends too much on production


capacity. Factory equipment which is not being used does not generate revenues – so is often a
waste of cash.

Too much stock-Holding too much stock ties up cash and there is an increased risk that stocks
become obsolete (that is it can't be sold).

Allowing customers too much credit-Customers who buy on credit are called "trade debtors"
Offering credit to customers is a good way to build revenue, but late payment is a common
problem and slow-paying customers put a strain on cash flow

Overtrading (growing too fast)-This occurs where a business expands too quickly, putting
pressure on short-term finance. For example, a retail chain might try to open too many stores too
quickly before each starts to generate profits

Seasonal demand-Predictable changes in seasonal demand create cash flow problems – but
because they are expected, a business should be able to handle them
13. Compare and contrast the various methods of investment appraisal. To what
extent would it be true to say there is a place for each of them (25)
As capital investment decisions usually involve significant amounts of finance, it is important to
fully evaluate each decision using sound appraisal techniques. The main methods used to
evaluate investment in capital projects are:

Accounting rate of return.


Payback method.
Net present value.
Internal rate of return

These methods use different approaches to evaluating the value of an investment for an
organisation. While three of the methods focus on cash flow, the accounting rate of return uses
accounting profit in its appraisal calculation, providing a view of the overall profitability of the
investment.
The accounting rate of return method calculates the estimated overall profit or loss on an
investment project and relates that profit to the amount of capital invested and to the period for
which it is required. It is the profit that is directly related to the investment project that is used in
the appraisal process and thus costs or revenues generated elsewhere in the business are
excluded. A business will have a required minimum rate of return for any investment. This is
related to the cost of capital of the business. If an investment yields a return greater than the cost
of capital, then the investment would be considered suitable and profitable.

Accounting rate of return

The accounting rate of return is an average rate of return calculated by expressing average annual
profit as a percentage of the average value of the investment.

Its main advantages are

- It takes account of the overall profitability of the project.


- It is simple to understand and easy to use.
- Its end result is expressed as a percentage, allowing projects of differing sizes to be
compared.

Its main disadvantages are


-It is based on accounting profits rather than cash flows. The calculation of profit and capital
employed depend on which items of expenditure are treated as capital (on the balance sheet) and
as revenue (charged to the profit and loss account). Despite guidelines in this area, it can be quite
subjective. Also different accounting policies (depreciation) can produce different profit and
capital employed figures, thus allowing the profit and balance sheet figures to be somewhat
manipulated. It is for this reason that capital projects are also evaluated in terms of cash flows.
-The ARR does not take into account the timing of cash flows. For example, project A may give
an ARR of 20 per cent compared to project B’s 18 per cent. However project A may be an eight
year project whereas project B may be a five year project. Investors may choose a project that is
slightly less profitable but which generates cash earlier.

- The ARR does not take into account the time value of money. It does not take into account the
cost of waiting to recoup the investment.

- The ARR takes no account of the size of the initial investment. A five per cent return on an
investment of $25,000 might be acceptable, however it may not be an acceptable return on an
initial investment of $10 million.

The payback method

The payback method of investment appraisal simply asks the question ‘ how long before I get my
money back? ’ In other words how quickly will the cash flows arising from the project exactly
equal the amount of the investment. It is a simple method, widely used in industry and is based
on management’s concern to be reimbursed on the initial outlay as soon as possible. It is not
concerned with overall profitability or the level of profitability.

Based on this method a business will simply reject a project with a payback period longer than
that required.

The advantages of payback are

-It is simple to understand and apply.


- It promotes a policy of caution in investment.

Its main disadvantages are

- It takes no account of the timing of cash flows ($100 received today is worth more than $100
received in 12 months time). This is known as the time value of money and will be considered in
more detail below.

- It is only concerned with how quickly the initial investment is recovered and thus it ignores the
overall profitability and return on capital for the whole project. The accounting rate of return
incorporates the overall profitability of the investment.

The Net Present Value

The net present value approach involves discounting all cash outflows and inflows of a capital
investment project at a chosen target rate of return or cost of capital. The present value of the
cash inflows minus the present value of the cash outflows is the net present value. If the NPV is
positive, the project is likely to be profitable, whereas if the NPV is negative, the project is likely
to be unprofitable.

Its main advantages are

- It takes into account the time value of money.


- Profit and the difficulties of profit measurement are excluded.
- Using cash flows emphasises the importance of liquidity.
- It is easy to compare the NPV of different projects.

The main disadvantages associated with this method are

-It is that it is not as easily understood as the payback and accounting rate of return.
- Also, the net present value approach requires knowledge of the company’s cost of capital,
which is difficult to calculate.

Internal Rate of Return


The IRR method calculates the exact rate of return which the project is expected to achieve based
on the projected cash flows. The IRR is the discount factor which will have the effect of
producing a NPV of 0. It is the return from the project, taking into account the time value of
money. Its decision rule is to accept the project if it’s IRR is greater than the cost of capital.

It main advantage is that the information it provides is more easily understood by managers,
especially non-financial managers.

Its main disadvantages are

-It is possible to calculate more than two different IRR’s for a project. This occurs where the
cash flows over the life of the project are a combination of positive and negative values. Under
these circumstances it is not easy to identify the real IRR and the method should be avoided.

- In certain circumstances the IRR and the NPV can give conflicting results. This occurs because
the IRR ignores the relative size of investments as it is based on a percentage return rather than
the cash value of the return. As a result, when considering 2 projects, one may give an IRR of 10
per cent and the other an IRR of 13 per cent. However the project with the lower IRR may yield
a higher NPV in cash terms and thus would be preferable.

Overall all four methods provide different approaches to investment appraisal and can provided a
difference outlook on a proposed investment. Thus it would seem prudent that management
should use all four methods in assessing investment projects. However the NPV approach is the
one approach with the least amount of weaknesses or disadvantages and hence this approach
should be used as the main guide in evaluating investment projects.
14.Define privatization. What are the advantages and disadvantages of
privatization?(25)

Privatization is the process of transferring ownership of a business, enterprise, agency, public


service or property from the public sector (government) to the private sector or to private non-
profit organizations. The term is also used in a quite different sense, to mean government out-
sourcing of services to private firms.

Government takes this step whenever any government enterprise does loss continuously or if the
enterprise decreases profit alarmingly or if the government thinks the enterprise would cut more
profit if it was operated by the private governing body.

Advantage of privatization

 Privatization places the risk in the hands of business or private enterprise.


 Private enterprise is more responsive to customer complaints and innovation.
 The government should not be a player and an umpire.
 Privatization provides a one off cash boost for govt. this can be spent on hospitals etc.
 Privatization leads to lower prices and greater supply.
 Competition in privatization increases differentiation.

Disadvantage of privatization

 Privatization is expensive and generates a lot of income in fees for specialist adviser such
as banks.
 Public monopolies have been turned into private monopolies with too little competition,
so consumers have not benefited as much as had been hoped.
 The nationalized industries were sold off too quickly and too cheaply. With patience a
better price could have been had with more beneficial results on the government’s
revenue. In almost all cases the share prices rose sharply as soon as dealing began after
privatization.
 The privatized businesses have sold off or closed down unprofitable parts of the business
and so services.
 Wide share ownership did not really happen as many small investors took their profits
and didn’t buy anything else.

However, there are also several reasons for what the government doesn’t give over an enterprise
to the private sector even after experiencing loss years after years.
15. What is labout turnover and its main causes of Labour Turnover?
Labour turnover is defined as the proportion of a firm’s workforce that leaves during the
course of a year.
The causes of labour turnover may be put into two groups, i.e.,
(1) Avoidable causes and
(2) Unavoidable causes

(a) Avoidable causes - These include:

(i) Dissatisfaction with jobs,


(ii) Dissatisfaction with remuneration,
(iii) Bad working conditions,
(iv) Odd hours of work,
(v) Lack of incentives and promotional avenues,
(vi) Lack of adequate recreational facilities,
(vii) Inadequate housing and medical facilities,
(viii) Poor worker-supervisor relationship,
(ix) Poor group relations,
(x) Discrimination between one worker and another, etc.
(b) Unavoidable causes - Unavoidable causes may be personal or impersonal. These
include:
(i) Personal betterment,
(ii) Retirement, death or disablement,
(iii)Domestic responsibilities, i.e., to look after old parents,
(iv)Discharge due to factors like unsuitability, insubordination, and negligence,
(v) Marriage in case of women workers, etc.

Every organisation must see that leaving due to avoidable causes is prevented.
SPECIMEN PAPER

SECTION A QUESTIONS & ANSWERS

1 (a) Define the following terms:

(i) management buy-out [2]

This is when shares are bought from company’s shareholders by the managers of the
business (company), so that they become the owners.

(ii) contracting out [2]

this happens when a business cedes some of its non-core activities to another company so
that it concentrate on core competences

(b) Distinguish between a public limited company and a public corporation . [4]

A public limited company belongs to the public whereas a public corporation belongs to the
public sector. Examples of public limited company includes OK Zimbabwe Limited whilst
public corporations include Zimbabwe Broadcasting Corporation. (ZBC)

2. (a) List any two types of production methods. [2]

 job
 flow
 batch

(b) How can a manufacturer of cellphones improve the productivity of his workers? [4]

Productivity of workers can be improved through training or increasing their wages and salaries.
Another is that of improving working conditions and involving them in the decision making
process.

3. Explain any two communication problems that are beyond the receiver’s control. [4]

Communication problems that are beyond the receivers control include network problems and
use of wrong channel of communication. Wrong channel will make the receiver unable to
understand the message.

4 (a) State and explain any two non-financial methods of motivation. [4]

The first non-financial method for motivation is including workers in the decision making
process. Workers also need to work where there is security to their jobs. Delegation of duties and
job rotation are other non-financial methods of motivation.
(b) Comment on Herzberg’s ideas on motivation. [5]

Herzberg’s ideas on motivation include hygiene factors and motivating factors. What this means
is whenever motivating factors are lacking, productivity will fall, for example, delegation or
promotional prospects. However if these are lacking at least hygiene factors should be provided
and these include increase in salaries or payment of bonuses.

5. Is democratic leadership necessarily a good management style? [4]

Democratic leadership is to a certain extend a good management style. It improves rapport


between managers and workers and encourages worker initiativeness. Democratic leadership
improves effective communication between workers and managers. However democratic
leadership at times is not a good management style because it is time consuming due to
consultations. Sensitive issues do not require involvement of all the people.

6 (a) What is niche marketing? [2]

It is the process of identifying and exploiting a small segment of a larger market by developing
products to suit it.

(b) Evaluate the usefulness of market skimming. [4]

It is a pricing strategy that is used when introducing a product in the market at a higher price and
this will help in maximizing profits before competitors enter the market. It usually works well
when demand is inelastic. It attracts customers who believe that high prices means high quality.

8. (a) What is benchmarking? [2]

It is when management identifies the best firm in the industry and then compares the
performance standards for improvement purposes.

(b) Assess the significance of maintaining quality in a business organisation. [5]

There are a lot of benefits to an organisation that maintains quality because it improves its image
and reputation. Customers will also spread the good image of the company hence there will be an
increase in sales and profits. Organisations that maintain quality always attracts a large customer
base. However a company that maintain quality is usually affected by high training costs of its
employees. It is also costly for the organisation sourcing quality raw materials which might be
expensive.

9. (a) Outline two advantages of the payback method. [2]

-it provides a quick initial screening device


-easy to use and calculate
(b) (i) What is investment appraisal? [2]
It is an investment technique which seeks to see the wisdom behind accepting or rejecting or
project.

(iii) Analyse the importance of Net Present Value as a method of evaluating


projects. [4]

This method takes into account the time value of money and it considers the whole life of the
project. The NPV rate of discount can be varied to allow for different economic conditions.
However it also need to be noted that it is a difficult method compared to payback method. Its
final result depends heavily on the rate of discount used.

10. Show how a producer of flour can benefit from bulk-buying economies of scale. [3]

The producer will buy wheat in large quantities thereby receiving bulk-buying discounts. This
discount will be passed on to the consumers buy getting flour at a cheaper price. When demand
for flour is elastic, the producer will realise more revenue.

11. (a) Identify two stakeholders who are interested in the accounts of a firm. [2]

-employees
-shareholders
-Creditors .e.t.c
(b) Define the following terms:
(i) zero budgeting, [1]

It is a budgeting process in which activities are analysed as if they are being started for the first
time.

(i) cost centre. [1]

It is a entity to which costs can be attributed

12. Distinguish between money market and capital market. [4]

The money market is a financial market where short term funds are raised, for example
overdrafts whilst the money market is a financial market where long term funds are raised, for
example debentures.
“A” LEVEL
BUSINESS STUDIES
PAPER 1
TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

Answer all questions.

If you use more than one sheet of paper, fasten the sheets together.

INFORMATION TO CANDIDATES

The number of marks is given in brackets

You are reminded of the need for good English and clear presentation in your answers.

Calculators may be used.

Section A [ 70 Marks ]

Answer all questions.

1 What is meant by the term corporate culture? [2]

2 Discuss the role played by the primary sector in the economy of your country. [4]

3 a) Distinguish between economic and political constraints. [4]

b) To what extent should the government be concerned about the activities of multinational
companies. [5]

4 a) State any two methods of stock control. [2]

b) How might the production manager of a detergent company find benchmarking useful? [4]

5 How might a saw milling firm benefit from training? [4]

6 a) What is the difference between leadership and management? [2]

b) Evaluate the effectiveness of autocratic leadership. [4]

7 a) State any two communication barriers that lie with the sender. [2]

b) Explain the limitations of vertical communication in a tall organisational structure. [4]


8 a) Explain how a manufacturer of soft drinks might find price elasticity of demand useful. [3]

b) The following information shows the effect of a price change, from $10 to $15, to a product
produced by Nyakunika Ltd.

10 5 000 20 000
15 6 000 22 000

Calculate the promotional elasticity on demand for this product. [2]

9 a) Explain the two classes under which products are grouped. [4]

b) Why might a clothes manufacturing firm be prepared to sell its product at a price below the
total cost of producing it? [4]

10 a) List any two factors which might influence the relocation of a shoe manufacturer. [2]

b) Evaluate the usefulness of the flow production method. [4]

11 a) What are the functions of the stock exchange? [3]

b) For what reasons might a business make provisions for

i) Bad debts, [2]

ii) Depreciation? [2]

12 a) The following are marks obtained by Business Studies student in a given test:

60 50 70 60 80 40 30 10 60 90 20 40 60 80 90

From the given set of marks, distinguish between the mode and the mean. [4]

b) What are the benefits of linear programming? [3]


Section B [ 30 Marks ]

Read the following case study and answer all the questions that follow.

Fair Deal Furniture

Conrad and Taurai own a furniture workshop, Fair Deal Furniture (FDF), in partnership. The business
produces home furniture using high-technology equipment. For the past 10 years, all the furniture has
been sold exclusively to Mambo Dealers under the brand name ” Good Living”. This arrangement has
suited both the workshop and the retail chain. It has helped FDF to earn a fair and regular income.

Recent developments in the business environment have called for quick action from FDF. The demand for
home furniture has been falling. The suppliers of timber have changed their discount terms from 20% on
goods worth $6 000 or more to 20% on goods worth $8 000 or more. Any purchases less than $8 000
would now attract a discount of only 12 %/

The partners have the idea to incorporate that is, converting their partnership into a limited company, and
then explore the foreign markets. They can start producing and distributing office furniture through agents
in neighbouring countries. On the contrary, Excellence Financial Services, FDF’s financier and advisor,
has another option of specialising in the provision of school furniture since there has been an increase in
demand for school furniture.

However, the viability of each option has been assessed and the following information on the expected
returns for the next 4 years has been made available.

0 ($200 000) ($100 000)

1 $80 000 $100 000

2 $120 000 $150 000

3 $150 000 $120 000

4 $150 000 $80 000

13 a) Calculate the Average Rate of Return (ARR) for each of the above options. [4]

b) Comment on the usefulness of the discounted cash flow method in this case. [6]

14 Discuss the benefits that Fair Deal Furniture might enjoy by incorporating. [10]

15 Evaluate the problems that are faced by single product firms. [10]
“A” LEVEL
BUSINESS STUDIES
PAPER 2
3 HOURS

INSTRUCTIONS TO CANDIDATES

Answer all questions in Section A and any three from Section B.

If you use more than one sheet of paper, fasten the sheets together

INFORMATION FOR CANDIDATES

The number of marks is given in brackets

You are reminded of the need for good English and clear presentation in your answers.

Calculators may be used.

Section A: Data Response [25 marks]

Answer all questions.

1 Read the passage below and answer the questions that follow.

Techno-call (Pvt) Ltd

Techno-call (Pvt) Ltd is a cellular network service provider in a country with three cellular
network providers. It is registered as a private limited company. Techno-call manufactures and
sells recharge cards to customers subscribing to its cellular network. With a subscriber base of
200 000, the company is ranked third in the country. There are one million subscribers in the
country and the markets leader’s market share is 45%.

Although Techno-call has been realising modest profits since its inception three years ago, of
late the company has been experiencing a decline in sales. It is estimated that if management
does not take action, the subscriber base is likely to decline to 15% by year end. The subscriber
base for rival firms has been growing and this has prompted a board meeting for Techno-call. In
the board meeting, the Technical director suggested that more base stations be constructed. The
effect would be to increase the company’s network coverage, earn economies of scale, become
more competitive and attract more subscribers. “We could even purchase recharge card materials
at a discount if we bought them in bulk.”
A major setback faced by the directors is how to raise $3 000 needed for the construction of
more base stations. The forecasted net cash flows for this investment are shown in the table
below.

1 $1 200 0.91

2 $1 400 0.83

3 $1 800 0.75

4 $1 600 0.68

Despite the setbacks likely to be faced in raising the needed capital, all the directors agree that
growth will ensure survival. They have tabled the following strategies for survival.

Merge with the second-largest network service provider in the country.

Offer a rights issue.

Subcontract manufacturing of recharge cards.

The directors are resolute that if adopted, these strategies will revive the declining market share.

(a) Explain the meaning of the term economies of scale ( line 12) as used in the passage. [3]

(b) Calculate

(i) Techno-call (Pvt) Ltd’s market share. [2]

(ii) The Net Present Value (NPV) of constructing more base stations using the discount
factors provided. [4]

(c) How and to what extent might your calculations in 1 (b) influence the decision to
construct more base stations. [6]

(d) Evaluate the three survival strategies Techno-call directors wish to adopt. [10]

Section B: Essays [75 marks]

2 With reference to Taylor and Hezberg’s motivation theories, evaluate the importance of
financial as a way of improving the productivity of shopfloor workers. [25]

3 (a) Explain the criteria that a business might use to assess the effectiveness of its
communication systems. [12]
(b) Critically examine the importance of informal communication to businesses. [13]
4 To what extent do you agree with the statement that “product quality guarantees business
success”? [25]

5 (a) Explain the usefulness of the elasticity of demand concept to managers of a business. [10]

(b) Discuss how and why a marketing manager might change a firm’s promotional activities
at different stages of a product’s life cycle. [15]

6 Evaluate the usefulness of the Profit and Loss Account and Balance Sheet to managers of a
business. [25]

7 Discuss the likely effects of changes in technology to businesses in your country. [25]

8 An operations manager has decided to change from a batch to a flow production process.

(a) Explain how this change might be viewed by:

(i) production workers,

(ii) customers of the business [10]

(b) Evaluate the significance of the flow production technique to a manufacturer of motor
vehicles. [25]
9 (a) Explain the factors a finance manager might consider when selecting appropriate sources
of finance. [10]

(b) Evaluate the role of the Stock Exchange to the economy of your country. [15]

10 Evaluate the importance of the following techniques to an organisation.

(a) Boston Matrix, [9]

(b) Lean Production, [8]

(c) Linear Programming. [8]


TRAINING OF EMPLOYEES

Training is concerned with increasing the knowledge and skills of employees for doing specific
jobs, and development involves the growth of employees in all aspects. Whereas training
increases job skills, development shapes attitudes of employees.

Meaning of Training:

“Training is the act of increasing the knowledge and skills of an employee for doing a particular
job.” — Edwin B. Flippo

Training is an organized activity for increasing the technical skills of the employees to enable
them to do particular jobs efficiently. In other words, training provides the workers with facility
to gain technical knowledge and to learn new skills to do specific jobs. Training is equally
important for the existing as well as the new employees. It enables the new employees to get
acquainted with their jobs and also increase the job-related knowledge and skills.

Objectives of Training:

The objectives of training are as follows:

(i) To provide job related knowledge to the workers.

(ii) To impart skills among the workers systematically so that they may learn quickly.

(iii) To bring about change in the attitudes of the workers towards fellow workers, supervisor and
the organization.

(iv) To improve the productivity of the workers and the organization.

(v) To reduce the number of accidents by providing safety training to the workers,

(vi) To make the workers handle materials, machines and equipment efficiently and thus to
check wastage of time and resources.

(vii) To prepare workers for promotion to higher jobs by imparting them advanced skills.

Need and Importance of Training:

The need for training of employees arises due to the following factors:
(i) Higher Productivity:

It is essential to increase productivity and reduce cost of production for meeting competition in
the market. Effective training can help increase productivity of workers by imparting the
required skills.

(ii) Quality Improvement:

The customers have become quality conscious and their requirement keep on changing. To
satisfy the customers, quality of products must be continuously improved through training of
workers.

(iii) Reduction of Learning Time:

Systematic training through trained instructors is essential to reduce the training period. If the
workers learn through trial and error, they will take a longer time and even may not be able to
learn right methods of doing work.

(iv) Industrial Safety:

Trained workers can handle the machines safely. They also know the use of various safety
devices in the factory. Thus, they are less prone to industrial accidents.

(iv) Reduction of Turnover and Absenteeism:

Training creates a feeling of confidence in the minds of the workers. It gives them a security at
the workplace. As a result, labour turnover and absenteeism rates are reduced.

(vi) Technology Update:

Technology is changing at a fast pace. The workers must learn new techniques to make use of
advance technology. Thus, training should be treated as a continuous process to update the
employees in the new methods and procedures.

(vii) Effective Management:

Training can be used as an effective tool of planning and control. It develops skills among
workers and prepares them for handling present and future jobs. It helps in reducing the costs of
supervision, wastages and industrial accidents. It also helps increase productivity and quality
which are the cherished goals of any modern organization.
INDUCTION TRAINING

Induction training is used to introduce a new employee to the company and the way it works. It
can last anything from half a day to several weeks, but it is important that every company does it
because:

Most people who quit their job do it within the first weeks, because they have difficulty adapting.
This reflects poorly on the image of the company and means that they have to go through the
whole process of recruitment again, which is expensive and time-wasting. Induction training
helps reduce this.

Induction training is necessary so that employees know what they are expected to do. Given
appropriate induction training, employees will become productive more quickly and adapt better
to the company. Training can be divided into two main types. These are on-the-job training and
off-the-job training. Most companies will use a mixture of the two methods of training.

ON-THE-JOB TRAINING

In this type of training, the employee learns skills from another employee (typically somebody
with more experience at the job).

Advantages

To the employer:

 Less expensive than sending them to a course.


 Knows where the employee is and what the employee is doing at all times.
 Training is exactly what is needed for the job.
 Skills may not be transferable to other companies, reducing the chances the employee
will leave.
 The employee will continue working during the training.

To the employee:
 Does not have to travel for training.
 Learns relevant skills which will help him in his job.

Disadvantages

To the employer:

 Mistakes made by the trainee can be damaging to the company.


 The trainer will be less productive whilst they are doing the training.
To the employee:

 Does not gain any official qualification.


 Skills learnt are often only relevant to the company, and will not help in a different job.
 Normally only a short training.
 Often, they are not trained by an expert teacher, so the quality of the training may be
poor.

OFF-THE-JOB TRAINING

In this type of training, the employee is sent to a training center to be taught skills related to his
job.

Advantages

To the employer:

 Any mistakes made will not affect the company.


 If courses are held outside of work hours, the employee is still working normally.

To the employee:

 Gains an official qualification, which will help when applying for a promotion or a new
job.
 Often a fun or interesting experience because it changes the normal routine of work and
lets them meet new people.

Disadvantages

To the employer:

 Courses are often expensive.


 The employee will be missing work time to go to the courses.
 Once the employee has gained the qualification, he may use it to find another job.
 Cannot check on the employee easily when he is away from work.
To the employee:

 May have to travel to get to the training centre.


 Some courses may be outside of work hours.
 Some of the skills learnt may not be directly transferable to his job.

DIFFERENCES BETWEEN FORMAL AND INFORMAL ORGANISATION

FORMAL ORGANIZATION

Is a structure that comes into existence when two or more people come together for a common
purpose, and there is a legal & formal relationship between them. The formation of such an
organisation is deliberate by the top level management. The organisation has its own set of rules,
regulations, and policies expressed in writing.

The basic objective of the establishment of an organisation is the attainment of the organisation’s
goal. For this purpose, work is assigned, and authorities are delegated to each member and the
concept of division of labour and specialisation of workers are applied and so the work is
assigned on the basis of their capabilities. The job of each is fixed, and roles, responsibilities,
authority and accountability associated with the job is clearly defined.

In addition to this, there exists a hierarchical structure, which determines a logical authority
relationship and follows a chain of command. The communication between two members is only
through planned channels.

Types of formal organization structure

Line Organization

Line and Staff Organization

Functional Organization

Project Management Organization

Matrix Organization

INFORMAL ORGANIZATION

An informal organisation is formed within the formal organisation; that is a system of


interpersonal relationships between individuals working in an enterprise, that forms as a result of
people meet, interact and associate with one another. The organisation is created by the members
spontaneously, i.e. created out of socio-psychological needs and urge of people to talk. The
organisation is featured by mutual aid, cooperation, and companionship among members.
In an informal organisation, there are no defined channels of communication, and so members
can interact with other members freely. They work together in their individual capacities and not
professional.

There is no defined set of rules and regulations that govern the relationship between members.
Instead, it is a set of social norms, connections, and interaction. The organisation is personal i.e.
no rules and regulations are imposed on them, their opinions, feelings, and views are given
respect. However, it is temporary in nature, and it does not last long.

KEY DIFFERENCES BETWEEN FORMAL AND INFORMAL ORGANIZATION

The difference between formal and informal organisation can be drawn clearly on the following
grounds:

1. Formal Organization is an organisation in which job of each member is clearly defined, whose
authority, responsibility and accountability are fixed. Informal Organization is formed within the
formal organisation as a network of interpersonal relationship when people interact with each
other.

2. Formal organisation is created deliberately by top management. Conversely, informal


organisation is formed spontaneously by members.

3. Formal organisation is aimed at fulfilling organisation’s objectives. As opposed to an informal


organisation is created to satisfy their social and psychological needs.

4. Formal organisation is permanent in nature; it continues for a long time. On the other hand,
informal organisation is temporary in nature.

5. The formal organisation follows official communication, i.e. the channels of communication
are pre-defined. Unlike informal organisation, the communication flows in any direction.

6. In the formal organisation, the rules and regulations are supposed to be followed by every
member. In contrast to informal communication, there are norms, values, and beliefs, that work
as a control mechanism.

7. In the formal organisation, the focus is on the performance of work while in the case of an
informal organisation, interpersonal communication is given more emphasis.

8. The size of a formal organisation keeps on increasing, whereas the size of the informal
organisation is small.

9. In a formal organisation, all the members are bound by the hierarchical structure, but all the
members of an informal organisation are equal.
Conclusion

An informal organisation is just opposite of a formal organisation. The principal difference


between these two is that all the members of a formal organisation follow a chain of command,
which is not in the case of an informal organisation. Moreover, there exists a superior-
subordinate relationship (status relationship) in the former, whereas such relationship is absent in
the latter because all the members are equal (role relationship).

CONFLICT

SOURCES OF CONFLICT

There are various sources of conflict. The model of conflict process identifies six structural
sources of conflict within organizations.

1. Incompatible Goals—This is when the goals one person or department in the organization
interferes with that of another person's or department's in a way that causes conflict.

2. Differentiation—When there are differences among people's training, beliefs, values, and
experiences that lead to conflict. Even if there is agreement about the goals the organization is
working toward, people may have very different ideas about the ways to achieve that goal.

3. Interdependence—When team members rely on each other to accomplish a goal and their
performance hinges on the performance of others, there can be conflict. The more
interdependence within an organization, the more opportunity for conflict to occur.

4. Scare Resources—When there is a scarcity of financial, human capital, and other resources, it
can lead to people vying for resources instead of working together to accomplish a goal.

5. Ambiguous Rules—When the rules are not clear, there is uncertainty about how to proceed
and what is expected from each person, which often leads to conflict.

6. Communication Problems—When there is a lack of communication or unclear


communication, conflict often ensues. However, this can become a downward spiral since
conflict often creates an environment where less communication occurs.

CONFLICT RESOLUTION TECHNIQUES

Listen, Then Speak Out

Believe it or not, just listening to an employee’s issue is the first and most important step in
resolving conflict. You should simply listen to all parties involved to completely understand the
nature of conflict, and then start troubleshooting solutions.
Gather the Group

As a leader, you’ll need to arrange a meeting with all involved parties to discuss the issue. Give
everyone a chance to speak; this is a good opportunity to hear all sides and gain a full
understanding of the conflict. Having a group meeting may also expedite a resolution that will
satisfy everyone.

Be Impartial

Don’t take sides! In a leadership position, you shouldn’t display any sort of opinion that favors
one person over another. If you are partial towards one person, try to access the situation from all
sides to come up with a fair and reasonable solution.

Do Not Postpone Conflict Resolution

Address the conflict immediately. Otherwise, the situation could escalate and could affect
employee performance. Just make sure not to address the situation too quickly or without careful
consideration, as your decision will directly affect the demeanor and performance of your staff.

Promote Teamwork

Encouragement and motivation are powerful. Remind your staff of successful projects that
required teamwork to complete. This is one of the most effective conflict resolution techniques
and will really make the employees think about the importance of working in a team.

Broadcast Praise

As stated above, the power of encouragement and motivation can be multiplied when it is spread
to recognize those who are modeling the teamwork and cooperation that is desired within any
conflict. Try to give suitable models in these instances because behavior modeling can be risky if
there are elements in the model that are undesirable.

It’s important to note that while resolving workplace conflicts, you need to consider your
company’s regulations and policies. With the right conflict resolution training , you’ll have the
tools and techniques necessary to keep harmony among your team

COMMUNICATION

HORIZONTAL COMMUNICATION

Horizontal communication is the transmission of information between people, divisions,


departments or units within the same level of organizational hierarchy. You can distinguish it
from vertical communication, which is the transmission of information between different levels
of the organizational hierarchy. Horizontal communication is often referred to as 'lateral
communication.'
Advantages

Horizontal communication presents some distinct advantages . It decreases misunderstanding


between departments working on the same project, thereby increasing efficiency and
productivity. It may result in better implementation of top-level decisions because employees on
lower levels are permitted to coordinate directly with each other in the implementation of the
decision made at the top. Horizontal communication facilitates teamwork if a project requires
tasks from different people or departments. It may also increase job satisfaction and motivation
by creating more employee empowerment in communication.

Disadvantages

Horizontal communication does come with some disadvantages . Management may have a
greater problem maintaining control as horizontal communication increases. This is, in part,
because management can derive much control and power if it controls the flow of information.
Horizontal communication can also create conflict between employees exposed to each other
through the communication process. It is also more time-consuming if vertical communication is
required to ratify decisions made during horizontal communication or to confirm information
received through horizontal communication. Finally, it may create a lack of discipline if strict
procedural rules of communications are not imposed and followed.

VERTICAL COMMUNICATION

Vertical communication is the communication where information or messages flows within the
top level of the organizational structure and bottom level of the organizational structure.

Advantages of vertical communication

Without communicating with superior and subordinate, no organization runs a single day.
Communication without upper level and the lower level employee is very much essential for
organization. Some advantages of vertical communication system are as follows:

Conveying message of subordinate: Through upward direction of vertical communication


system, the upper level management covey their suggestions, complains and recommendations to
the subordinates.

Maintains good labor-management relations: There is systematic flow of information under his
communication system, so a good relation can be developed between superior and subordinates.

Maintains organizational discipline: There is a chain of command in vertical communication


system. So, a sense of discipline may be developed among the employees.

Explaining policies and plan: Through vertical communication system, upper level management
can send the policies and procedures to the subordinates.
Effective decision making: Superiors needed various information to take decision making in the
organization. With the help of vertical communications, superiors collect information form
subordinate.

Help in decentralizations: Duties and responsibilities can be delegated among departments


thorough vertical communication.

Avoid by-passing: Under this communication system superior and subordinates exchange
message directly. So there is no chance to by-passing.

Maintains chain of command: proper chain of commands is easily maintains through vertical
communication system.

Assigning jobs and evaluating performance: Vertical communication facilitates job assignment
and job evaluation of the employees.

Increase efficiency: Necessary instructions are sent to subordinates and they perform their duties
and responsibilities accordingly that is help to increase efficiency both superior and subordinate.

Disadvantages of vertical communication

In spite of having many advantages vertical communication , there are some disadvantages
which are given below:

Delay process: Vertical communication system is a delay process. It maintains long chain of
command in large organization to exchange information.

Disturbing discipline: In this communication, if the boss’s role of direction is seen by doubtful
eyes by the subordinates, the chain of command and discipline may be broken.

Efficiency reduces: Downward direction of vertical communication is commanding in nature.


So, there is no opportunity of the workers to become efficient.

Loss or Distortion of information: Information may be fabricated by the employees to maintain


lengthy channel. So, through his communication information may lose its originality.

Reduces relationships: By this communication system relationship between superior and sub-
ordinate may be reduced due to inability and inefficiency.

Slowness system: Vertical communication is the slowest communication method because it


requires passing through the various levels of an organization. For this, it may become
ineffective.

Negligence of superiors: In this communication superiors can neglect to send message to their
subordinates.
DOWNWARD COMMUNICATION

Advantages of Downward Communication

To inform : Top level management informs the lower level employees of the organization about
the policies and procedures through downward communication.

Delegation of Authority : Downward communication helps the management to delegate authority


among the employees. It also helps to distribute workload to the workers so that they can know
their area of responsibility as well as authority.

Explaining Policies : Downward communication is widely sued by the managers to explain


polices and organizational procedures to the lower level employees to make them acquainted
with the organizational culture.

Maintaining Discipline : In downward communication system, a chain of command is


established that helps to develop a sense of discipline among the employees.

Increasing Efficiency: Though downward communication top level executives provide the lower
level employees with necessary instructions and suggestions. This instructions and suggestions
system helps the subordinates to perform their job properly that in turn increases the efficiency in
the organization.

No Bypassing : Downward communication flows very systematically from upward to downward.


Here no superior can send any message to any subordinate by bypassing his immediate next
subordinate.

Building Good Relationship : In downward communication information flows very


systematically that helps to build and maintain a harmonious relationship at all the levels of the
organization.

So, from the above discussion, it is clear that downward communication offers various benefits
to an organization. Every organization following downward communication system must
capitalize these advantages or opportunities. Business Communication

Disadvantage of Downward Communication

Though downward communication offers many advantages it also has some advantage. The
demerits of downward communication are discussed below:

Under communication and over communication : Downward communication is often marred by


either under communication or over communication. Under communication occurs when the
superior talks too little or gives incomplete instructions to the subordinates. And over
communication takes place when the superior talks too much or gives instructions repeatedly.
Under communication and over communication may lead to the lack age of confidential
information.

Lack of Feedback : Downward communication lacks in feedback. After getting message from the
superiors the subordinates cannot pass out their feelings to their boss if there is not any upward
communication system. Lack of feedback may result in incomplete understanding or
misunderstanding or unsatisfactory performance.

Delay in Exchanging Information : If the line of communication in the downward


communication system is very long. It takes too much time to transmit information to the lowest
level workers. By the time information reaches them, it may lose its significance much.

Loss of Information : In downward communication, if the message is not fully written, some of
its part may be lost at the time of transmission. It has been experimentally verified that only 20%
of the information sent downward through five levels of management finally reaches at the
workers level.

Distortion of Information: In the long lines of communication, information may be distorted


because of exaggeration, making under statements, giving unconscious twists etc. Whenever a
piece of information passes on from one individual to another, it may lose a little of its
authenticity. By the time it reaches its destination, it may not contain even an iota of truth.

Creation of Resentment: Downward communication is widely used by authoritative


management. Here the subordinates don not get any opportunity of participating in the decision
making process. They are expected to receive the policy, decisions and directives without
questioning their validity that creates resentment among the employees.

In spite of the above mentioned demerits downward communication is still much more effective
in the cases where the employees need direct supervision and guidelines from the top officials
for performing their duties.

UPWARD COMMUNICATION

Advantages/Importance of upward communication :

1. Feedback :

The major advantages of upward communication are, it provides feedback from the employees.
As a result the communication loop (cycle) completes and management can realize the reactions
of the employees.

2. Constructive idea:

Upward communication allows the employees to inform their views regarding the
implementation of company policies.
3. Helps decision making :

Through upward communication top management can know the views of flower level employees
which help them to make more realistic decision.

4. Establishment of good relation :

Upward communication brings executives and employees close to each other and accordingly
mutual relationship developed.

5. Mutual trust:

For the success of any sort of communication trust is an essential element. As relationship
developed through upward communication mutual trust also created.

6. Enhance coordination:

Opportunity to express own views and participation in the decision making enhance the level of
coordination.

7. Motivation:

The task of motivation needs two way communications between the concerned parties.

Upward communication enables the executives to extend appropriate motivational measures.

8. Introduction of new policy:

Upward communication also helps the executives to introduce new policies.

Disadvantages/Limitations of upward communication :

1. Reluctance:

In some cases employees are reluctant to provide information through upward channel.

2. Non-cooperative attitude:

Non-cooperative attitude to the executives damage the willingness of the employees to initiate
upward communication.

3. Chance of distortion :

Downward communication can be distorted unconsciously but in case of upward communication


information can be distorted deliberately.

4. Trend to by-pass :
Another side effect of upward communication is tendency of by passing the immediate boss, can
be created among the employees.

5. Delay :

Sometimes lower level employees hesitate to inform a problem upward because doing so means
acceptance of failure. Thus delays may take place to decide whether to inform the top
management or try further to solve the problem.

HORIZONTAL COMMUNICATION

Horizontal communication is essential for smooth functioning of organizational activities and for
interdepartmental coordination. This type of communication is especially important for larger
scale enterprise. The followings are the main benefits that can be derived from horizontal
communication.

Advantages of Horizontal Communication

Coordination: Organizational activities are divided into various departments or groups.


Horizontal communication facilities coordination of various departmental activities so that
organization can reach its ultimate goal.

Reducing Misunderstanding: Misunderstanding and conflict among the mangers and staffs are
very common in organizational life. Horizontal communication helps to reduce possible
misunderstanding and conflict though meeting, discussion, face to face conversation etc.

Strengthening group efforts : Group efforts and teamwork are essential prerequisites for
organizational success. Horizontal communication helps in reducing conflicts, controversies, and
differences in opinions and thus establishes consensus among the managers and workers
concerned. This consensus strengthens group efforts and team spirit in the organization.

Performing inter departmental communication: Horizontal communication occurs between


people at the same level in various departments. Therefore interdepartmental communication
occurs smoothly.

Gaining benefits of informal communication : Though horizontal communication is formal in


nature, it enjoys some degree of informality in exchanging information as the senders and the
receivers hold same position, status and honor.

Distortion free communication : Horizontal communication is usually free form distortion. Since
the sender and the receiver of horizontal communication can exchange information directly,
there is no possibility of distortion of message.
Bringing dynamism in workplace : Horizontal communication helps to overcome
misunderstanding and confects among the managers. It creates an environment of cooperation,
teamwork and team spirit. This brings dynamism in performing organizational activities.

In conclusion, we can say that flow of information through horizontal communication channel is
inevitable for organizational success. In the present complex business world, efficient
functioning of a large business organization mostly depends on effective horizontal
communication.

Disadvantages of Horizontal Communication

Though horizontal communication is essential for smooth functioning of an organization, it is not


completely free form defects or flaws. Followings are the possible drawbacks of horizontal
communication.

Rivaling attitude: Horizontal communication occurs between the people at the same rank and
position. If there exists any hostility or rivalry between them, they will not exchange information
spontaneously. Moreover, they will conceal their information intentionally to deprive someone
from the real news.

Interdepartmental conflict: The success of horizontal communication depends on good


relationship between sender and receiver. If there is any conflict, distrust or suspicion between
them, horizontal communication will be ineffective.

Discouraging attitude of top management : In some cases, top managers discourage horizontal
communication thinking that workers may become friendly with one another and may create
threat for the management.

Ignoring vertical communication : More concentration on horizontal communication may work


as substitute of upward and downward communication. In that case upward and downward
communications are ignored.

At last, we can conclude that the above stated factors can diminish the utility of horizontal
communication. So the persons concerned should be well aware of those factors when they
communicate horizontally.
BENEFITS OF MOTIVATION

The major benefits of motivation in an organisation are as follows:

1. Need satisfaction

Motivation satisfies the needs of individuals as well groups. Every individual or group of
individuals joins an organisation to fulfill certain personal needs. The motivation function of the
manager serves to help such fulfillment.

2. Job satisfaction

Motivation also promotes job satisfaction. When an employee’s needs are satisfied, he is on the
whole happy. His job satisfaction is of more direct concern. It is the key to other important
consequences.

Managers in general are satisfied with jobs which are challenging in character and involve some
creative thinking.

3. Productivity

An individual’s contribution to output is the resultant of two variables-his capacity for work and
his willingness to work. If P is performance, an ability and M motivation, then P = A X M. It is a
clear that performance is not equal to the sum of an individual’s ability and motivation but rather
to the product of these two variables.

Given the value of ability greater than Zero, level of performance is a constantly increasing
function of amount of motivation. Since productivity is the effect of performance, it is logical to
conclude that proper motivation increases productivity.

4. Learning

Motivation helps the learning process. Without motivation learning does not take place. There
must be motivation or drive before there can be learning. Motivation stimulates interest and the
attitude of willing to learn.

If a person does not want to learn, he will not learn, even though he understands clearly what is
being taught and has perfect capacity to respond in the way that would show the learning.

This means that the trainer needs to select trainees on the basis of motivation and needs to have
policies and practices that will encourage the growth of motivation.
5. Discipline

Motivation promotes self-discipline. The idea of discipline generally carries a negative


connotation. Subordinates obey a superior and maintain orderly behaviour for fear of
punishment. But motivation raises discipline to a positive level.

The self-discipline of an individual costs less and accomplishes much more than the discipline
imposed by the boss from above. Committed workers discipline themselves. They feel that by
doing so they further their own interest.

6. Dynamism

There is an element of dynamism in motivation. When the rank and file workers and managers
are properly motivated, a kinetic energy is generated which produces a tremendous impact not
merely on the productivity and profits of an organisation but also on its industrial relations,
public image, stability and future development.

DISCUSS THE IMPORTANCE OF RATIO ANALYSIS TO STAKEHOLDERS

How ratio analysis benefits the stakeholders of a company Ratio analysis is a type of financial
information that always prepared to satisfy in some way the needs of various interested parties
(stakeholders). Below are some of the benefits that the stakeholders can get from the ratio
analysis:

Planning and Forecasting

Management uses the ratio analysis to identify the future trends of its financial performance.
With those information, its provide opportunity for the management team in planning and
predicting the future of a company.

Comparing Performance

Analysts use ratios to compare the performance of a company with other firms in the same
industry before deciding on where to invest. So that it can make the best decisions on investment.
For example, profitability ratios allow the management to compare, evaluate and measure the
performance with its competitors in the industry.

Evaluating solvency

By computing the solvency ratio, the companies are able to keep an eye on the correlation
between the assets and the liabilities. This is helpful for creditors or lender’s decision because all
of them are interested to know whether company will repay their debt or not under a specific
period.
Judging Efficiency

Although ratio analysis are used to analyze the company's past financial performance, but it also
can assists management team judging the company's efficiency in terms of its operations and
management. They help judge how well the company has been able to utilize its assets and earn
profits.

Employees' decisions

Every employee wants to increase his salary and get more and more incentives from company.
Besides, they also want to ensure that their jobs are secure. Thus, ratios will be helpful for
employees to put pressure on the company for increasing their salary or know about the
company earning status.

FACTORS AFFECTING THE CHOICE OF THE SOURCE OF FUNDS

Financial requirements of a business are of various types - long term , short term , fixed and
fluctuating. Hence, business firms route to many types of sources for raising funds . Short- term
borrowings offer the advantage of reduced cost owing to reduction of idle capital , but long -
term borrowings are considered as an inevitable requirement on many grounds . Correspondingly
equity capital has a vital role to play in raising funds in a corporate sector . As we are aware, no
source of funds is devoid of limitations , it is sensible to use a combination of sources, rather
than relying only on a single source. There are numerous factors listed below that affect the
choice of this combination and make it a very complex decision for the business .

i . Cost : Here we look at two types of cost viz . , the cost of procurement of funds and cost of
utilising the funds . Both these costs should be taken into consideration while deciding about the
source of funds used by an organisation .

ii . Financial Strength and Stability of Operations : The financial strength of a business also
serves as a key determinant. While making the choice of source of funds , business should be
financially sound so that the company is able to repay the principal amount and interest on the
borrowed amount . When the income/ financial position of the organisation is not stable, fixed
charged funds like preference shares and debentures should be carefully selected as these add to
the financial burden of the organisation .

iii . Form of Organisation and Legal Status: The form of business organisation and status plays a
major role in the choice of a source for raising funds . For instance , a partnership firm cannot
raise money by issuing equity shares as these can be issued only by a joint stock company .

iv . Purpose and Time Period : Business should plan based on the time period for which the
funds are utilized . A short - term need for example can be dealt by borrowing funds at low rate
of interest through trade credit , commercial paper , etc . For long term finance, sources such as
issue of shares and debentures are more apposite. Correspondingly , the main purpose for which
funds are required need to be analyzed so that the source is matched with the utilization of the
same.

v . Risk Profile : Business should analyze every source of finance in terms of the risk involved.
For instance , there is minimal risk in equity as the share capital has to be repaid only at the time
of disolvency of the company and dividends need not be paid if profits are not generated. A loan
on the other hand , has a settlement schedule for both the principal and the interest . It is
mandatory to pay the interest irrespective of the profit or loss incurred by the company .

vi . Control : There are certain sources of fund that may affect the control and power of the
owners in the management of the company . Issuance of equity shares may lead to dilution of the
control . For instance , as equity share holders enjoy voting rights , there are possibilities for the
financial institutions to take control of the assets or impose conditions as part of the loan
agreement. Thus , it is advisable for a business firm to analyze the extent to which they are
willing to share their control over business .

vii . Effect on Credit Worthiness : The credit worthiness in the market is affected by the
dependence of business on certain sources. For example, issuance of secured debentures might
affect the interest of unsecured creditors of the company and develop chances for an adverse
effect and their willingness to extend further loans as credit to the company .

viii. Flexibility and Ease : One another aspect affecting the choice of a source of finance is the
flexibility and ease in availing funds . Restrictive provisions , detailed investigation, analysis and
documentation in case of borrowings from banks and financial institutions could be the reason
for a business organisations to avoid it , if other options are readily available.

ix . Tax Benefits : Various other sources may also be weighed with respect to the tax benefits.
For example, as the dividend on preference shares is not tax deductible, interest paid on
debentures and loan is tax deductible and may , for this reason opt for seeking tax advantage.

CASH FLOW PROBLEMS AND SOLUTIONS

Most small businesses encounter a cash flow problem at one time or another. Fortunately, most
cash flow problems can be prevented with a bit of preparation and the right strategy.

This article lists the 5 most common cash flow problems, along with ways to solve them.

1. High overhead expenses

Overhead expenses are the costs of running a business that are not tied directly to selling a
specific product or service. Examples of overhead include rent, telephone, utilities, etc.
Sometimes overhead expenses get out of hand relative to the revenue the business produces.
High overhead expenses can hurt your business’s cash flow.
High overhead expenses are particularly challenging because they are persistent. These expenses
affect your cash flow every day until the problem is corrected.

Solution

The solution to this problem is simple, but it is not easy. Audit your expenses and cut back where
you can. Be careful not to cut too much, as that approach could also hurt the company.

If you cannot cut back, consider cheaper options. In fact, every business should audit expenses
regularly to ensure that overhead expenses stay in line.

2. Slow-paying invoices

Slow-paying invoices are a common cause for cash flow problems. As a small business, you
have to offer 30-day to 60-day payment terms to clients. However, small companies can’t always
afford to wait this long for payment. They need money sooner. Eventually, slow payments create
a financial problem that can seriously affect your business even if it’s growing quickly .

Solution

There are two ways to solve this problem. One solution is to provide clients with an incentive to
pay faster. Offering a 2% discount in exchange for a payment in 10 days can motivate clients to
pay quickly. However, this incentive needs to be negotiated directly with each client.

An alternative is to use invoice factoring to finance slow-paying invoices. This method improves
cash flow immediately and enables you to offer payment terms with confidence. To learn more
about factoring, read this article.

3. Excess inventory

This problem can affect companies that manufacture goods or re-sellers that keep a warehouse
stocked with products. If too much product is made or purchased, it ends up sitting on shelves
and tying up cash flow.

Solution

Fine-tune your inventory so that you stock items for the shortest possible time before being sold
or used in the manufacturing process. The amount of product you keep in stock depends on your
volume, sales forecasts, available cash, and supplier capabilities. Monitor inventory levels
carefully. Having key products out of stock is a sure way to lose clients.

Companies that re-sell products can also use purchase order financing to finance large sales that
exceed their cash flow capabilities. When used correctly, purchase order financing can improve
your cash flow and allow you to finance the supplier expenses associated with large orders.
4. Too much bad debt

Bad debt occurs when you sell product, or provide a service, to a client who does not pay. Bad
debt presents an obvious harm to your cash flow and your profitability.

Solution

The solution to this problem is to review the commercial credit of your clients before you extend
payment terms. Provide terms only to clients who have good credit and a solid payment record.
Others should prepay until they have built a track record with your company. This strategy may
cost you some sales. However, it will only cost you clients who were deemed credit risks to
begin with.

5. Insufficient gross margins

Small businesses sometimes sell their products and services for such low prices that they have
low, or negative, gross margins. This scenario often happens in highly competitive environments
with constant pricing pressure. It usually affects small business owners who do not have a clear
understanding of their costs.

Solution

To solve this problem, audit all your products and services to determine the all-inclusive cost of
delivering your products and services. This step is difficult but necessary. Once you have
determined the all-inclusive cost, do the following:

1. If you can, raise the prices of products/services that have weak margins
2. If you can’t raise prices, consider dropping products/services that have weak margins
3. Ensure that all proposals price your products according to their cost

WHY BUSINESSES NEED FINANCE

Right from the moment someone thinks of a business idea, there needs to be cash. As the business grows
there are inevitably greater calls for more money to finance expansion. The day to day running of the
business also needs money.

The main reasons a business needs finance are to:

Start a business

Depending on the type of business, it will need to finance the purchase of assets, materials and employing
people. There will also need to be money to cover the running costs. It may be some time before the
business generates enough cash from sales to pay for these costs. Link to cash flow forecasting.
Finance expansions to production capacity

As a business grows, it needs higher capacity and new technology to cut unit costs and keep up with
competitors. New technology can be relatively expensive to the business and is seen as a long term
investment, because the costs will outweigh the money saved or generated for a considerable period of
time. And remember new technology is not just dealing with computer systems, but also new machinery
and tools to perform processes quicker, more efficiently and with greater quality.

To develop and market new products

In fast moving markets, where competitors are constantly updating their products, a business needs to
spend money on developing and marketing new products e.g. to do marketing research and test new
products in "pilot" markets. These costs are not normally covered by sales of the products for some time
(if at all), so money needs to be raised to pay for the research.

To enter new markets

When a business seeks to expand it may look to sell their products into new markets. These can be new
geographical areas to sell to (e.g. export markets) or new types of customers. This costs money in terms
of research and marketing e.g. advertising campaigns and setting up retail outlets.

Take-over or acquisition

When a business buys another business, it will need to find money to pay for the acquisition (acquisitions
involve significant investment). This money will be used to pay owners of the business which is being
bought.

Moving to new premises

Finance is needed to pay for simple expenses such as the cost of renting of removal vans, through to
relocation packages for employees and the installation of machinery.

To pay for the day to day running of business

A business has many calls on its cash on a day to day basis, from paying a supplier for raw materials,
paying the wages through to buying a new printer cartridge.

CHOOSING THE RIGHT SOURCE OF FINANCE

A business needs to assess the different types of finance based on the following criteria:

Amount of money required – a large amount of money is not available through some sources and the
other sources of finance may not offer enough flexibility for a smaller amount.

How quickly the money is needed – the longer a business can spend trying to raise the money, normally
the cheaper it is. However it may need the money very quickly (say if had to pay a big wage bill which if
not paid would mean the factory would close down). The business would then have to accept a higher
cost.
The cheapest option available – the cost of finance is normally measured in terms of the extra money that
needs to be paid to secure the initial amount – the typical cost is the interest that has to be paid on the
borrowed amount. The cheapest form of money to a business comes from its trading profits.

The amount of risk involved in the reason for the cash – a project which has less chance of leading to a
profit is deemed more risky than one that does. Potential sources of finance (especially external sources)
take this into account and may not lend money to higher risk business projects, unless there is some sort
of guarantee that their money will be returned.

The length of time of the requirement for finance - a good entrepreneur will judge whether the finance
needed is for a long-term project or short term and therefore decide what type of finance they wish to use.

REVISION MATERIAL

Difference between a leader and a manager

The main difference between leaders and managers is that leaders have people follow them while
managers have people who work for them. A successful business owner needs to be both a
strong leader and manager to get their team on board to follow them towards their vision of
success.

Financial and Non-financial Motivators

Every management tries to place certain motivational techniques which can be employed for
improving performance of its employees. The techniques may not be similarly useful in all types
of concerns. Some techniques may be suitably employed in one concern, others may be useful in
another concern and so on. Motivational techniques may be classified into two categories i.e.,
financial and non-financial.

A. Financial Motivators:

Financial motivators may be in the form of more wages and salaries, bonuses, profit-sharing,
leave with pay medical reimbursements, company paid insurance of any of the other things that
may be given to employees for performance. The economists and most managers consider
money and financial incentives as important motivators. Behavioural scientists, on the other
hand, tend to place them low. Neither view is probably right.

Money is the most important motivator to people who are young and are raising their families
than to those who have aligned at a stage when money needs are less. Money needs go on
changing from time to time. A person may be satisfied with a modest house at one time. He may
like to have a comfortable house later on. For some persons money remains to be a motivator and
for others it may never be. According to Gellerman money is actually used to retain people in the
organization and not primarily to motivate them. To attract good persons an organization will
have to offer better wages.
Generally, persons engaged in some types of work are offered equal wages. It is seen as a
practice that persons on comparable levels get the same or usually the same compensation.
Under such circumstances money tends to be diluted as a motivator. Besides all this money can
motivate people if their wages are related to their performance.

B. Non-financial Motivators:

These motivators are in the nature of better status, recognition, participation, job security etc.

Some of these motivators are discussed here:

1. Recognition:

Every person wants his work to be recognized by his superiors. When he knows that his
performance is known to his boss then he will try to improve it more and more. The recognition
may be in the form of a word of praise, a pat on the back, a word of praise, a letter of
appreciation, entry in annual confidential report etc.

There may also be awards, certificates, plaque etc. The recognition may be for better output,
saving in time, improving quality of products, suggestions for better ways of doing things etc.
These types of recognitions will act as motivator. If the performance of persons is not recognized
and everybody is treated on the same footing then good persons will not like to put their best
efforts.

2. Participation:

Participation has been considered a good technique for motivation. It implies physical and
mental involvement of people in decision- making process. It satisfies ego and self-esteem of
persons. They feel important when asked to make suggestions in their field of activity. There is
no doubt that most of the people know the problems they will face and their possible solutions.

Participation results in motivation and knowledge valuable for the enterprise success.
Participation gives a sense of affiliation and accomplishment. It certainly acts as motivator.
Participation should not mean that managers should abdicate their positions. They should
encourage subordinates to participate in matters where they can help. Managers should listen
various view-points and then take decisions themselves.

3. Status:

It refers to a social status of a person and it satisfies egoistic needs. A management may create
some status symbols in the organization. This can be done by way of giving various facilities to
the persons. These may be superior furniture, carpets on the floor, attachment of peons, personal
assistant etc. To get these facilities a person will have to show a certain amount of performance.
When a person achieves certain facilities then he tries to get better status by working more. In
this way status needs act as motivator.
4. Competition:

In some organizations competition is used as a motivator. Various persons are given certain
objectives and everybody tries to achieve them ahead of others. There may be praises,
appreciation letters, and financial incentives to those who reach the goals first. The competition
encourages persons to improve their performance.

5. Job Enrichment:

Job enrichment has been recognized as an important motivator by various researches. The job is
made more important and challenging for the workers may be given wide latitude in deciding
about their work methods. The employees will also perform the management functions of
planning and control so far as the work is concerned. According to Herzberg, job enrichment
would provide an opportunity for the employees’ psychological growth.

ADVANTAGES OF COMPUTER NETWORKING

1. It enhances communication and availability of information.

Networking, especially with full access to the web, allows ways of communication that would
simply be impossible before it was developed. Instant messaging can now allow users to talk in
real time and send files to other people wherever they are in the world, which is a huge boon for
businesses. Also, it allows access to a vast amount of useful information, including traditional
reference materials and timely facts, such as news and current events.

2. It allows for more convenient resource sharing.

This benefit is very important, particularly for larger companies that really need to produce huge
numbers of resources to be shared to all the people. Since the technology involves computer-
based work, it is assured that the resources they wanted to get across would be completely shared
by connecting to a computer network which their audience is also using.

3. It makes file sharing easier.

Computer networking allows easier accessibility for people to share their files, which greatly
helps them with saving more time and effort, since they could do file sharing more accordingly
and effectively.

4. It is highly flexible.

This technology is known to be very flexible, as it gives users the opportunity to explore
everything about essential things, such as software without affecting their functionality. Plus,
people will have the accessibility to all information they need to get and share.
5. It is an inexpensive system.

Installing networking software on your device would not cost too much, as you are assured that it
lasts and can effectively share information to your peers. Also, there is no need to change the
software regularly, as mostly it is not required to do so.

6. It increases cost efficiency.

With computer networking, you can use a lot of software products available on the market which
can just be stored or installed in your system or server, and can then be used by various
workstations.

7. It boosts storage capacity.

Since you are going to share information, files and resources to other people, you have to ensure
all data and content are properly stored in the system. With this networking technology, you can
do all of this without any hassle, while having all the space you need for storage.

DISADVANTAGES OF COMPUTER NETWORKING

1. It lacks independence.

Computer networking involves a process that is operated using computers, so people will be
relying more of computer work, instead of exerting an effort for their tasks at hand. Aside from
this, they will be dependent on the main file server, which means that, if it breaks down, the
system would become useless, making users idle.

2. It poses security difficulties.

Because there would be a huge number of people who would be using a computer network to get
and share some of their files and resources, a certain user’s security would be always at risk.
There might even be illegal activities that would occur, which you need to be careful about and
aware of.

3. It lacks robustness.

As previously stated, if a computer network’s main server breaks down, the entire system would
become useless. Also, if it has a bridging device or a central linking server that fails, the entire
network would also come to a standstill. To deal with these problems, huge networks should
have a powerful computer to serve as file server to make setting up and maintaining the network
easier.
4. It allows for more presence of computer viruses and malware.

There would be instances that stored files are corrupt due to computer viruses. Thus, network
administrators should conduct regular check-ups on the system, and the stored files at the same
time.

5. Its light policing usage promotes negative acts.

It has been observed that providing users with internet connectivity has fostered undesirable
behavior among them. Considering that the web is a minefield of distractions—online games,
humor sites and even porn sites—workers could be tempted during their work hours. The huge
network of machines could also encourage them to engage in illicit practices, such as instant
messaging and file sharing, instead of working on work-related matters. While many
organizations draw up certain policies on this, they have proven difficult to enforce and even
engendered resentment from employees.

6. It requires an efficient handler.

For a computer network to work efficiently and optimally, it requires high technical skills and
know-how of its operations and administration. A person just having basic skills cannot do this
job. Take note that the responsibility to handle such a system is high, as allotting permissions and
passwords can be daunting. Similarly, network configuration and connection is very tedious and
cannot be done by an average technician who does not have advanced knowledge.

7. It requires an expensive set-up.

Though computer networks are said to be an inexpensive system when it is already running, its
initial set up cost can still be high depending on the number of computers to be connected.
Expensive devices, such as routers, switches, hubs, etc., can add up to the cost. Aside from these,
it would also need network interface cards (NICs) for workstations in case they are not built in.

Conclusion

Computer networking will always be a fast and convenient means of transferring and sharing
information, but people should be aware of its consequences as well. They should remember that
often relying on this system can put them at certain risks that can be cause by its flaws and other
malfunctions.
“A” LEVEL
BUSINESS STUDIES
PAPER 2
TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

Answer all questions in Section A and any three from Section B.

Write your answers on a separate answer sheet.

If you use more than on e sheet of paper, fasten the sheets together.

INFORMATION TO CANDIDATES

The number of marks is given in brackets

You are reminded of the need for good English and clear presentation in your answers.

Calculators may be used.

Section A: Data Response [25 marks]

Answer all questions in this section.

Read the passage below and answer all the questions that follow.

Tomtit Cuisine

Tomtit Cuisine is a sole proprietorship established ten years ago by Tom, a retiree from a leading
hotel. It provides catering services for special occasions like weddings, graduation ceremonies
and seminars. The business has a staff compliment of two chefs and four waiters.

Tom has always wanted his business to remain small. His major reason has been to allow him to
retain control of the business. He believes that sales and profit of the business have always been
steady due to his personal involvement. His employees, however, want Tom to let the business
grow. They view growth as a way of ensuring higher salaries and job security.

Tom’s philosophy of wanting the business to remain small contradicted with that of his
employees who expected the business to grow. He now intends to dispose of the business and
has made this known to his employees. The employees are worried about the possibility of job
losses, even though Tom has assured them that their jobs will be secure under a new owner.
Most these workers now regret having been employed by Tomtit Cuisine in the first place.

Meanwhile, Tom has engaged an accountant to prepare the final accounts shed of sale of the
business. The following is an extract of The Statement of Financial Position (Balance Sheet)
drawn by the accountant.

Tomtit Cuisine

Statement of Financial Position (Balance Sheet) extract as at 31 December 2013

Equipment 50 000

Motor vans 40 000

Goodwill 10 000

Current Assets

Inventory (stock) 20 000

Trade receivables (debtors) 20 000

Cash 10 000

Current Liabilities

Trade payables 15 000

Bank overdraft 10 000

Tom is looking forward to disposing of the business at the best possible value.

(a) From the information in the passage, calculate the

(i) current ratio, [3]

(ii) quick (acid test) ratio. [3]

(b) Comment on the liquidity position of Tomtit Cuisine, from your results in (a). [3]

(c) Explain why employees of Tomtit Cuisine should worry about the sale of the business. [6]

(d) Evaluate the importance of growth to a business such as Tomtit Cuisine. [10]

Section B: Essays [75 marks]

Answer any three questions from this section.


2 (a) “Businesses only aim at maximising profit.” Discuss this assertion. [12]

(b) How might government economic policies impact on business objectives in your

country? [13]

3 Assess the importance of the following human resource functions:

(a) human resource planning, [9]

(b) job evaluation, [8]

(c) performance appraisal. [8]

4. (a) Why might the market for clothes be segmented? [10]

(b) Evaluate the usefulness of elasticity of demand to a producer of soft drinks. [15]

5 With the aid of a relevant diagram, evaluate the usefulness of the Boston Matrix. [25]

6 (a) Why might it be difficult for a firm to collect relevant information about the market
for its product? [10]

(b) To what extent is Cost Benefit analysis a useful technique in decision making? [15]

7. To what extent is Break-even analysis a useful technique in decision-making? [25]

8 (a) Distinguish between last in, first out (LIFO) and first in, first out (FIFO) methods of
stock valuation. [10]

(b) Assess the importance of profit and loss accounts to a stationary manufacturing
concern. [15]

9. Evaluate the methods a business might use to manage its inventory (stock). [25]

10. Evaluate the significance of small businesses to the economy of your country. [25]

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