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Business Studies Unit 1 Economics is the study of how scarce resources are allocated to meet unlimited human needs

and wants. Needs: is a good or service essential for living. Wants: is a good or service which people would like to have, but which is not essential for living. Peoples wants are unlimited. The economic problem The economic problem results from there being unlimited wants but limited resources to produce the goods and services to satisfy these wants. This creates scarcity. This means that the real cause of the shortage of goods and services in a country is having too few factors of production. There are four factors: Land: this term is used to cover all of natural resources provided by nature and includes fields and forests, oil gas, metals, and other mineral resources. Labour: this is the efforts of people needed to make products. Involves specialization and division of work, this means dividing up different jobs and making each worker a specialist I one of these. Capital: this is the finance, machinery and equipment need for the manufacture of goods. Enterprise: this is the skill and risk-taking ability of the person who brings the other resources together to produce a good or service. These people are called entrepreneurs. Limited resources: the need to choose Resources are limited so we have to choose, therefore not all of our wants can be met. This mean we have to decide which wants we will satisfy and which not. In making any choice, we need to consider what we are giving up, to make sure its not worth to us the option we are choosing. This is called considering the opportunity cost of a decision. Why is business activity needed The aim of al business is to combine the factor of production to make products, goods or services, which will satisfy peoples wants. Business objectives To make a profit To increase added value: values is added to materials and components by working on them and turning them into much more expensive finished articles. To expand the business To achieve business survival: difficult periods To provide a service Conflict of business objectives Conflict of business objectives might appeared when there is a disagreement of interests between the groups involved in business, including the government. Causes for conflict: Owners of the company: are likely to want the business to work towards as much profit as possible. Directors: will be interested in growth of the business as their salaries are likely to depend on this. Workers: they will want as many jobs as possible with security of employment. Local community: they will be concerned about jobs too, but they will be worried about pollution of the environment from factories. In small towns where there is lot of turism they are against consumers because they overpopulate the city.

Consumers: will want reasonably priced products of appropriate quality, or they may buy goods from competitors. Unit 2 Level of economic activity Primary sector: basic, where raw materials are extracted. Ex: woodcutter Secondary sector: transforms raw materials into goods to be sold. Ex: furniture maker Tertiary sector: where services are provided. Ex: retailer Types of economies Free market economy: where the government doesnt intervene Advantages: Allocation of scarce resources is by means of prices Consumer choose what they want to buy Businesses compete with each other and this could keep prices low Disadvantages: Certain goods are not allocated correctly Businesses might be encouraged to create monopolies in order to increase prices, as a result consumer have limited choice. There are no government- provided goods or services such as health and education services. Command or planned economy: where the government owns the company and takes decisions. Advantages: There should be work for everybody The allocation of scarce resources is correct. As the states decide and controls everything, prices are low Everybody would have the good they need. Disadvantages: Governments may not produce goods which people want to buy The lack of a profit motive for firms leads to low efficiency. There is less incentive to work as the government fixes wages and private property is not allowed Mixed economy: combines some features of the free market economy and of a planned economy Private sector: Made up of a business not owned by the government. Will make their own decisions about what to produce and what price it will have. Most business will aim to turn profitably. Public sector: Made up of government or stat-owned and controlled business and organizations. The government makes decisions about what to produce and how much to charge consumers Profit is not always an aim, service to community can be alternative aim. Privatization Is when business pass from the public sector to the private sector Advantages: Government has more income Owners operate the business with profit as main aim. Competition is encouraged so it helps increase the efficiency and keeps prices low. Owners may have additional capital to invest in improving the service offered by the business

Important business decisions will be made for business reasons. Disadvantages: Workers lose jobs as the owners want to increase the efficiency. If it is sold to one owner who will run it as a monopoly prices will rise for consumer Only few people, the new owners, will benefit from running the business. As they want to make profits some services making losses may be closed. Comparing the size of businesses Businesses can be measured: By number of employees: some firms use production methods which employ few people but which produce high output levels. By value of output and sales: it shows which business is most important in an industry. By profit: profit depends on more than just he size of the firm, it depends on efficiency and the skills of the managers. By capital employed: is the total amount of capital you have invested in the company. How can businesses grow? The owner often want their firms to expand. Benefits: Higher profits for the owners More status and prestige for the owners and managers Lower average costs Growth often means it controls a larger share of its market. Business can expand in two ways By internal growth: occurs when a business expands its existing operations By external growth: is when a business takes over or merges with another business. Take over: when one business buys out the owners of the business which then becomes part of the predator business. One buys the other. Merger: is when the owners of two businesses agree to join their firms together to make one business. Two companies come together. Horizontal integration: when one firm merges with or takes over another one in the same industry at the same stage of production. Vertical integration: when one firm merges with or takes another one in the same industry but at a different stage of production. It can be forward, when a firm integrates with another firm which is at later stage of production, or back ward, when a firm integrates with another firm at an earlier stage of production. Conglomerate integration: when one firm merges or takes over a firm in a completely different industry. Why do business stay small? Some stay small, they continue to employ few people and use relatively little capital. Causes: The type of industry the business operates in: firms that offer personal services or specialized products, if they grow too large, it would be difficult to offer the personal service demanded by consumers. Market size: if the market (total number of consumers) is small, the businesses are likely to remain small. Owners objectives: owners prefer to keep their firm small because they are interested in keeping control of a small business or because they want to avoid the stress and worry of running a larger one.

Unit 3 Business organizations: private sector Sole trader: business own and operated by only one person. Advantages: Few legal regulation has completely control over the business, own boss As he keeps all the profits has incentive to work hard. Has close contact with the customers Disadvantages: Has no one to discuss business matters Dont have the benefit of limited liability (the owners of a company cannot be held responsible for the debts of the company they own, is limited to the investment they made by buying the shares) Partnerships: own by two or more people Advantages: More capital is invested and allows expansion The responsibilities of running the business are shared. Partners are motivated to work hard because they all benefit from the profits made Any loss made by the business will be shared by the partners. Disadvantages: Partners did not have a separate legal identity. Partners can disagree on important business decisions. If one of the partners is dishonest the rest will suffer by loosing money. Partners did not have limited liability. Private limited company: a company is separate legal unit from its owners. It is jointly owned by the people who have bought shares, the share holders. Advantages: Shares can be sold to a large number of people, but they cant advertise the shares to the general public. All share holders have limited liability The people who started the company are able to keep control of it as long as they do not sell too many shares to other people. Disadvantages: There are significant legal matters which have to be dealt with before the company can be formed The shares cannot be sold or transferred to anyone else without the agreement of the other shareholders. The accounts are much less secret The company cannot offer its shares to the general public. Public limited companies: they are owned by private individuals or private businesses. Suitable for very large businesses. Advantages: Offers limited liability to shareholders It is an incorporated business and a separate legal unit. Can raise very large capital sums to invest in business There is no restriction on the buying, selling or transfer of shares Disadvantages: The legal formalities are complicated Many regulations and controls Selling shares to the public is expensive Original owners may lose control over it when it goes to the general public.

Co-operatives: are groups of people who agree to work together and pool their resources. Constituted in benefit of all members. Ex: sancor Common feature: All members have one vote no matter how many shares they have All members help in running the business The profits are share equally amongst members Close corporations: there are fewer legal regulations about its formation and management. Common features: Limited to a maximum of ten people Members are also managers They are separate legal units offering continuity and limited liability. Franchise: it is when a company authorizes a business to use its name or system of production by paying a royalty in return, it can be a fixed sum, a percentage of sales or a mixture. Ex: Mc donalds Joint venture: is when two or more businesses agree to start a new project together. When research and development into new products is likely to be more expensive so two firms might agree to share costs. Joint ventures spread risks and reduce costs for business. Business organizations: the public sector Public corporations: owned by the state or central government. They are usually business that were once owned by private individuals, but were purchased by the government. Objectives To keep prices low so that everybody can afford the service To keep people in jobs so than unemployment does not rise To offer a service to the public in all areas of the country. Municipal enterprises: local government authorities or municipalities usually operate some trading activities. Some of these services are free to the user and paid for out of local taxes. Ex in Argentina: National: Fab. Militares Provincial: sistema de aguas de las provincias Municipal: subterrneas de Bs.As. Unit 4 The impact of business activity on society Inflation: is the increase of prices on goods and services over a period of time. The government will try to keep it low. Affects workers because their salaries dont increase, but the price of goods and services they consume do increase. People may buy foreign goods. Businesses will be unlikely to want to expand and create more jobs in future. Unemployment: people that wished to work but they dont find a job. The government will try to keep it low because lower unemployment will help to increase the output of a country and improve workers living standards. Economic growth: when a countrys Domestic gross product is higher than the precious period. The domestic gross product is the sum of goods and services which are produced in a country. Balance of payments: records the difference between a countrys exports and imports. Governments will aim to achieve equality or balance between imports and exports over a period of time. When exports are more than imports there is a surplus, when the imports are higher there is a deficit. Government economic policies: main ways in which government can influence the economy Fiscal policies: Taxes and government spending

Government raise money from taxes on individuals and businesses. Types of taxes: Direct tax: are paid by the person directly. Income tax: used by most governments, it is a tax on peoples incomes. It is set at a certain percentage of income and in many countries it is progressive, this means that the rich pay tax at a higher rate than the poor. Corporation tax: is a tax on the profits made by businesses. Indirect tax: are added to the prices of goods and are paid by the consumer as the purchase the good. Make goods and services more expensive. Ex: VAT Import duties: are taxes which are paid when somebody imports a good into a foreign country. Set by governments in order to reduce imports of products. Tariffs: charged by the government and acts as a trade barrier. Trade barriers are regulated by the world trade organization: Tariffs Quotas (cupo) Prohibition Monetary policies: Interest rates An interest rate is the cost of borrowing money. It is fixed by the central bank or the government. (BCRA). Effects on business of higher interest rates: Higher cost of interest on existing loans Less borrowing to pay for business investment or expansion Could lead to higher exchange rate (relationship that exists between two different currences) Less consumers borrowing to buy expensive products Consumers disposable income will fall Supply side policies: Make economy more efficient and increase competitiveness of their industries against those form other countries. S.S.P tries to improve the efficient supply of goods and services. Privatization: the aim is to use the profit motive to improve business efficiency. Improve training and education: to improve the skills of the countrys workers, in order for them to become more productive. Increase competition in all industries: may be done by reducing the government controls over industry or by acting against monopolies. Government controls over business activity There are some of the main areas which are often directly controlled by government action: Production decisions: what firms can produce and what firms cannot produce. Cannot produce guns, explosives, illegal substances or goods which harm the natural environment. Consumer protection: producers have to provide consumers as much as information as possible, in order for the consumer to know the quality of the product and how it works. Therefore, products should have labels establishing how the product was elaborated. Control of monopolies: a monopoly is when one firm controls or dominates the market for a good or service. Such firms have eliminated competitor and prevented other firms from making the same product. They should be controlled because they can take decisions which affect society and consumer interests. Protecting employees: the workers in a business need protection in the following areas: Against unfair discrimination at work when applying for jobs Health and safety at work

Employment protection Wage protection(minimum wage, paid on time) Location decisions: companies cannot set up where they want and what they want. Responsibilities to the environment: firms cant established a factory where the environment can be harmed. Or cant harm it when taking raw material. Governments can help businesses too Governments encourage businesses for three main reasons: Regional assistance: establishing firms on rural areas in order to encourage business development in poorer areas of the country and to avoid having very rich areas and very poor ones. Small firms: to encourage enterprise by assisting small firms to set up and survive because they have important advantages for an economy. Exporting goods and services: To encourage exports and helping exports by providing loans and lowering taxes of exportation. Unit 5 Other external influences on business External constraints on business activity A constraint is something that limits or controls actions. Technological change The products we buy and the ways in which these products are made are constantly changing. There is a constant development and change in the role of information technology in business; office computers have an increasingly wide range of software and applications. Do firms have to accept technological change? No, they can ignore technological change if they wish to. But, the products being made would become more and more outdated. Newer models with new features would be introduced by competitors. Methods of making goods would also remain unchanged, while rival firms became quicker at producing goods. Perhaps, firms with unique product would ignore these changes. Failure to introduce information technology will leave firms with oldfashioned method. Problems of introducing new technology There are two possible problems areas. Cost of new technology There will be three main costs: Costs of researching into new products and methods Costs of buying the new machinery and equipment Costs of training staff Resistance to changes Workers who may lose their jobs owing to new automated equipment may go on strike to express their opposition. Older workers may be afraid of not being able to learn the new skills and losing out to younger staff. Managers would think that the new technology know more than they do and they might feel inferior or less useful. Environmental constraints on business activity Problems such as global warming. All consumers and producers have some responsibility to help overcome them The whole society has to pay to clean up pollution and to dispose of waste products. It will be better if these problems were reduce by producing less-polluting products By using scarce resources such as rainforest timber or metals that cannot be replace

Consumers are now increasingly looking for environmentally friendly goods Powerful world pressure groups (are formed by people who share a common interest and who will take action to achieve the changes they are seeking) publicize the damaging activities of some companies and this gives them a bad press. Ways to make business more environmentally friendly Legislation Permits Consumer action and pressure groups Environmental factors and cost-benefit analysis Increasingly governments are using a relatively new form if analysis to investigate important business proposals. This is called cost-benefit (is the valuation by a government agency of all social and private costs and benefits resulting from a business decision). Cost-benefit analysis requires an awareness of social costs (are the costs paid by the rest of society, other than the business. As a result of a business decision) and social benefits (are the gains to society resulting from a business decision). Unit 6 Business costs and revenue Costs is what a business incurs in order to produce a good or service. For example: raw materials, labour, capital goods. Business costs are needed to calculate profit and loss and can help manager to make decisions. Fixed costs: are costs which do not vary with the number of items sold or produced in the short term. They have to be paid whether the business is making any sales or not. Variable costs: are costs which vary with the number of items sold or produced. Associated with the production of goods. Total costs: fixed costs + variable costs. Fixed costs + (variable costs x quantity) Revenue= income= sale: Price x Quantity sold. Is the income during a period of time from the sale of goods and services. Break even point: is the level of sales at which total costs= total revenue. (no loss or profit) Loss: when the income is less than the total cost Profit: when the income is higher than the total cost. Equilibrium point: demand= supply Contribution: selling price variable costs. Break even level of production: total fixed costs / contribution per unit. Business costs other definitions In some situations it is important for manager to be able to analyse costs in ways other than just splitting them into fixed and variable costs. Direct costs: are those costs which can be attributed directly to the product or service. Ex: raw material. Indirect costs: are those costs which cannot be directly to the product. Marginal costs: is the increase in total cost which is incurred in producing one more unit. Average costs: total costs of production/ total output Economies and diseconomies of scale The economies of scale are the factors that lead to a reduction in average costs as a business increases in size. There are five economies of scale: Purchasing economies When a business buys large numbers of components they are able to gain discounts for buying in bulk. This reduces the unit cost of each item bought and gives the firm an advantage over smaller businesses which buy small quantities.

Marketing economies Marketing is the process from where the product is finished till the moment the product reaches the consumer. There are several advantages for a large business when marketing its products. It might be able to afford to purchase its own vehicles to distribute goods rather than depend on other firms. In term of advertising, the business will not need twice as many sales staff to sell their products. Financial economies Larger businesses are often able to raise capital more cheaply than smaller ones. Bank managers often consider that lending to large organizations is less risky tan lending to small ones so a lower rate of interest is often charged. Managerial economies Small businesses cannot usually afford to pay specialist managers; this tends to reduce their efficiency. Larger companies can afford specialists and this increases their efficiency and helps to reduce their average cost. Technical economies Large manufacturing firm often use flow production methods, specialists machines are used to produce items in a continuous flow and the division of labour is applied. The use of flow production and latest equipment will reduce average costs of the manufacturing business. Small business cannot usually afford this expensive equipment. Diseconomies of scale are the factors that lead to an increase in average costs as a business grows beyond a certain size. Poor communication The larger the organization the more difficult it becomes to send receives accurate messages. If often takes longer for decisions made by managers to reach all groups of workers and this could mean that it will take a long time for workers to respond and act upon managers decisions. Low morale Large businesses can employ thousand s of workers. It is possible that one worker will never see the top managers of the business. The lack of these relationships between workers and managers in a big firm can lead to low morale and low efficiency amongst the workers. This will lead to push up average costs. Forecasts Managers often try to predict what is likely to happen in the future and how changes will affect their business. For example they may attempt to predict: Sales or consumer demand Exchange rates of the currency Wage increases These predictions are called: Forecasts: are predictions of the future Forecasting methods: there are several methods of forecasting, most common methods of forecasting sales figures include: Past sales figures could be used to calculate the trend which can then be extended into the future Past sales figures could be plotted on a graph to draw a line of best fit which can then be extended into the future A line of best fit: is a line drawn through a series of points. It can be used to forecast results in the future. Trend: is an underlying movement or direction of data over time Budget A forecast does not tell a business how to react to the future. Managers must still decide how to direct their business in the months and years to come. To help them in this process they use a method of planning and control known as budgets.

Budgets: plans for the future which contains targets. It is based on concrete figures. Advantages: They provide targets for departments and managers to work toward which helps to motivate people. They can be used to control how the business is performing by comparing budgets with actual results. Help to control the whole business
Unit 7 Business accounting Accounts: are the financial records of a firms transaction. They are utilized as the basis for registering the operations undertaken. Help to know how much control you have over the business, how much profit you have and the stock left. Accountants are he qualified people who have responsibility for keeping accurate accounts and for producing the final accounts. Final accounts are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business. Financial documents involved in buying and selling During the financial year very large number of financial documents will be created as the business buys and sells goods and services. These documents will be used by accountants to: Keep records of what has been brought and from which supplier Keep records of what has been sold and to which customers Provide the data needed to create final accounts. Delivery notes: signed by the person who receives the merchandise (remito) Invoice: issued by the seller, legal document which proves the sale (factura) Credit note: something given to purchasers if there is money to be return. (nota de credito) Statement of account: issued by the supplier and indicates a detailed of the operation during the month. (estado de cuenta) Receipts: indicates that you have paid. (recibo) Purchase order: is something you place with the supplier, ordering the delivery for a certain amount of goods. (estado extracto de cuenta) Who use the final accounts? Shareholders: they will clearly have an interest in knowing how big a profit or loss company makes. They will want to know if the business is worth at the end of the year Creditors: other businesses or banks which have lent money to the company or have supplied goods without year receiving payment. They will want to study the accounts to see if the company can afford to pay them back. Government: will want to check on the profits tax paid by the company. Other companies: may be considering a bid to take over the company or they may just wish to compare the performance of the business with that of their own. What do final accounts contain? The trading account: Shows the difference between the cost of goods sold and what they were sold for, the sales revenue. This difference is the gross profit of a business. They show the result at the end of a period, whether it is a profit or a loss. Does not include overhead expenses. Gross profit= sales revenue cost of goods sold Cost of good sold= opening stocks + purchases closing stocks. The profit and loss account: Shows the net profit of a business and the retained profit of a company are calculated. Records the income and expenses of a business. Net profit is the profit made by a business after all costs have been deducted from sales revenue. Its is calculated by subtracting overhead costs from gross profits. Appropriation account:

Is the part of the profit and loss account which shows how the profit after tax is distributed, either as dividend or kept in the company are retained profits. It shows what the company has done with the profits made. Balance sheets Shows the value of a businesss assets and liabilities at a particular time. It records the value and worth of a business at just one year, at the end of the financial year. Assets: are those items of value which are owned by the business. Liabilities: are the items owed by the business Both can be fixed (cannot sell it with in a year or not planning to sell it) or current(can be transformed into cash within a year) Depreciation: fall in the value of a fixed asset due to its utilization. Balance sheet terms: Working capital= net current assets: current assets- current liabilities Net assets: fixed assets + (current assets current liabilities) Shareholders funds= net worth: is the total sum of money invested into the business by the shareholders. Is the money they will take if the business is sold. Money can be invested in two ways: Share capital: is the money put into the business when shareholders nought newly issued shares. Reserves: profit and loss reserves are retained profits from this and previous years, which is owned by the shareholder and it is kept in the business as part of the share holders funds. Capital employed: net worth + long- term liabilities. Ratio analysis of accounts Ratios are used to measure and compare performance and liquidity of a business. Liquidity is the ability of a business to pay back its short-term debts. Performance ratios (profit and loss accounts) Return on net assets: operating profit/ net assets x 100. (efficiency in sales) Gross profit margin: gross profit /sales turnover x 100 (efficiency in buying goods) Net profit margin: net profit margin before tax/ sales turnover x 100 Liquidity ratios Current ratio: current assets/ current liabilities Acid test: current assets stock /current liabilities (possibility to payback without utilizing stock) Stock turnover: cost sales/ stock ( shows rotation of goods and profits) Disadvantages Ratios are based on past results and may not indicate how it wil perform in the future Accounting results over time will be affected by inflation and comparisons may be misleading Unit 8 Cash flow planning Cash is a liquid asset. This means that is immediately available for spending on goods and services. The cash flow of a business is the cash inflows and outflows over a period of time. Cash inflows: are the sums of money received by a business during a period of time. Cash outflows: are the sums of money paid out by the business during a period of time. Cash flow cycle A cash flow cycle shows the stages between paying out cash for labour, materials etc. And receiving cash from the sale of goods. 1. Cash needed to pay for essential materials 2. Other costs required to produce the product: materials, goods, wages, rent, etc. 3. Goods produced 4. Goods sold 5. Cash payment received for goods sold Cash flow forecast Is an estimate of future cash inflows and outflows of a business, usually on a month by month basis. This will the show the expected cash balance at the end of each month. Can be used to tell the manager: How much is available for paying bills, repaying loans or for buying fixed assets.

How much the bank might need to lend in order to avoid insolvency (run out of cash) Whether the business is holding too much cash which could be put to a more profitable use. They are useful in the following situations Starting up a business Keeping the bank manager informed Running an existing business Managing cash flow Opening cash balance: is the amount of cash held by the business at the start of the month Net cash flow: is the difference, each month, between inflows and outflows. Closing cash balance: is the amount of cash held by the business at the end of each month. It becomes the next months opening cash balance. How can cash flow problems be solved? Arrange you bank to borrow money over the time when you have a negative cash flow Reduce or delay some of your planned expenses Increase your forecasted cash income in some way Delay paying for some of your expenses until cash is available