IGCSE BUSINESS STUDIES Topic : How government helps businesses

How does government help businesses?

• Providing cheap loans and giving grants.
• Providing advice and information centres for businesses.
• Providing college courses and training programmes for entrepreneurs.
• Offering subsidies or tax reduction to businesses.
• Maintain a stable exchange rate of the currency.

Just a moment…

Why does government help businesses?

• To help small businesses to survive and encourage competition in the economy.
• To encourage firms to export and earn foreign exchange for the country.
• To encourage businesses to set up in underdeveloped regions of the country and create wealth and employment opportunities in these areas.

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IGCSE BUSINESS STUDIES Topic : Economic Environment factors

Economic factors affecting  business

These are some of the economic environment factors which affect business

At what stage of the business cycle is the economy

If the economy is going through a recession it is obvious that businesses generally will not be doing well due to low aggregate demand in the economy. On the other hand, a boom period will lead to higher business profits and revenue for most of the businesses in the economy.

Inflation rate

High rate of inflation leads to lower purchasing power for consumers resulting in lower demand for goods and services. Moreover, a higher inflation rate will make business uncompetitive in the international market leading to lower sales for the business.

Prevailing interest rates

Higher Interest rates will lead to a fall in the aggregate demand in the economy thus leading to difficulty for business to find customers willing to buy its product. Lower interest rates will lead to a increase in demand in the economy.

Unemployment level

High level of unemployment in the country can also adversely affect a business. People will not have enough money to purchase a firm’s product.

Labor costs

 

High labor cost will result higher production costs. This will make a firm’s product more expensive as compared to other firms affecting its sales and profit margin.

Levels of disposable income and income distribution

High level of disposable income is good for business producing luxury goods. A large disparity in income distribution will promote businesses dealing in luxury goods as well as inferior goods.

Taxes

High level of taxes will lead to low disposable income and contraction of demand in the economy. Business will find it difficult to attract consumers.

Tariffs

Tariffs are taxes and imposed on imported goods. If the tariffs are low the domestic market may be flooded with cheap imported goods and the local businesses will have tough time selling their products.

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IGCSE BUSINESS STUDIES Topic : Legal environment factors affecting business

How government controls business activity?

Governments control the business activities is many ways both direct and indirect. We have already covered government’s economic policies. However, government can control business activities in a more direct way. These are as follows:

Controlling what to produce

In order to safeguard the interest of the community government may ban or limit the production of certain goods and services. For example, selling of guns, explosive and dangerous drugs are illegal in many countries. Moreover, Goods which harm the environment are also totally banned or strictly controlled in many countries, e.g. aerosol cans that use CFCs which has been banned because of their damaging effect on the ozone layer.

Employees Protection legislations

Government may pass laws to protect the interest of employees such as

Laws against unfair discrimination at work and when applying for jobs. There is no unfair discrimination on the basis of Race, religion, sex, age, or colour.

Legislations for health and Safety at work:

• To protect workers from dangerous machinery.
• Workers should be provided with proper safety equipments and clothing.
• A reasonable workforce temperature is maintained for workers.
• Proper hygienic conditions and washing facilities are provided.
• Workers get adequate breaks between shifts.

Protect employees against unfair dismissal

Business can not dismiss the workers because they have joined a trade union or for being pregnant. There should be proper warning before dismissing a worker otherwise it will be treated as unfair dismissal.

Ensure fair wages for the employees

In many countries, government makes it mandatory to have a written contract of employment. It contains the details of the wage rate; working hours, deductions (if any) and other necessary details regarding working conditions. Minimum wages paid to different types of workers are also determined by the government.

Consumer Protection legislations

Most of the countries have consumer protection laws aimed at making sure that businesses act fairly towards their consumers: A few examples are

Weight and Measures Act: goods sold should not be underweight. Standard weighting equipments should be used to measure goods.

Trade Description Act: deliberately giving misleading impression about the product is illegal.

Consumer Credit Act: According to this act consumers should be given a copy of the credit agreement and should be aware of the interest rates, length of loan while taking a loan.

Sale of Goods Act: It is illegal to sell products with serious flaws or problems and goods sold should conform to the description provided.

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IGCSE BUSINESS STUDIES Topic : How fluctuation in exchange rate affects business

 

Who gains and Who loses

How fluctuation in exchange rate affects business.

Let’s take the example of Britain and US. If the value of US$ fluctuates in comparison to UK Pound, then, how will it affect different businesses in United States?

Affect of Appreciation of currency

US Dollar becomes expensive as compared to British Pound.
In order words, there is an Appreciation in the value of US$
Earlier 1 Pound could get $1.5, Now 1 Pound can only get $1.3 (because US$ has appreciated)

It will directly affect US Importer and Exporters. Lets see how…

US Importers will GAIN...

because now US$ dollar can buy more from Britain. Earlier $1.5 could get only 1 Pound worth of goods from UK but now US importer have to pay only $1.3 to get 1 Pound worth of goods from UK.

• Imported goods from UK will become cheaper for US consumers.
• Goods using imported components from UK will become cheaper.
• US tourists travelling to UK will be able to enjoy more as they get more UK Pounds when they exchange dollars.

Customers will be happy but it might adversely affect the domestic industry as it will face competition from cheaper imports from UK. Domestic businesses will find it difficult to sell their products, will reduce output and cut jobs.

US Exporters will LOSE...

because now they will find it difficult to compete with other countries with comparatively cheaper exchange rate. UK businesses will now think twice to buy from US because earlier they could buy US$1.5 worth of good for £1, but now, they can only buy US$1.3 worth of goods due to appreciation in the value of US$.
Because of fewer exports, US business will reduce output, which will lead to unemployment.
So the moral of the story is ‘Though it is nice to hear that the value of our currency has appreciated but, in fact, it is not so nice for the economy’

Affect of Depreciation of currency

US Dollar falls in value as compared to UK Pound.
In order words there is Depreciation in the value of US$.
Earlier 1 Pound could get $1.5,
Now 1 Pound can get $1.8 (because US$ has depreciated)

US Importers will LOSE...

Imports will become expensive. Products which use imported components will become expensive. US tourists to UK will have to shell out more money for their vacation. Consumers will feel the pinch and might be unhappy. BUT domestic producers will gain as they will have a cost advantage over imported goods. Output will rise and so will employment.

US Exporters will GAIN...

because UK businesses will prefer to buy from US. US exporters will become more competitive in the International market due to cost advantage. As exports rise, more goods will be produced and thus more jobs will be created.

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IGCSE BUSINESS STUDIES Topic : Exchange rate | Appreciation and depreciation of currency

Exchange Rate

Exchange rate is the rate at which one country’s currency can be exchanged for another country’s currency.

How is exchange rate determined?

A fixed exchange rate system refers to the case where the exchange rate is set and maintained at same level by the government irrespective of the market forces.
Floating exchange rate system means that the exchange rate is allowed to fluctuate according to the market forces without the intervention of the Central bank or the government.

Appreciation and Depreciation

The exchange rate for any currency usually fluctuates. When the value of the currency goes up as compared to other currency it is known as appreciation. When the value of currency falls as compared to other currency it is known as depreciation.

Usually the exchange rates are determined by the demand and supply of that currency in the international market.

Demand for any country’s currency on the foreign exchange market is determined by demand for that country’s exports of goods and services and by changes in foreign investment in that country. This is because when foreigners buy another country’s exports of goods or services they must pay for these in the currency of the exporting country.

In the same way Supply of any country’s currency on the foreign exchange market is determined by that country’s imports of goods and services and by its investment in other countries.

Thus when the demand for a currency rises its price goes up and it becomes costlier.

What causes the fluctuation in currency value?

Changes in the imports and exports of the country: An increase in exports of a country will lead to an increase in demand for the currency and thus the value rises.

Changes in Interest rate: Higher interest rate will attract more foreign investors to invest in the country and thus the demand for currency will rise, resulting in appreciation in value of the currency.

Changes in Inflation rate: Higher inflation rate will make the country uncompetitive in the international market. The exports will fall resulting in decreased demand for the currency and hence lower value.

Revaluation and Devaluation

It refers to official changes in the price of a currency in a fixed exchange rate system.

Devaluation is when the price of the currency is officially decreased in a fixed exchange rate system.

Revaluation is the official increase in the price of the currency within a fixed exchange rate system.

 

Watch a Video

 

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IGCSE BUSINESS STUDIES Topic : Globalisation - its benefits and drawbacks

What is globalisation

Globalisation means the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology.

According to dictionaries
Globalisation (n) is the "process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications" (Collins) or - from the US - to "make worldwide in scope or application" (Webster). The financial markets, however, are where the story begins.















 

Promotion of free trade:

• Elimination of tariffs; creation of free trade zones with small or no tariffs
• Reduced transportation costs, especially resulting from development of containerization for ocean shipping.
• Reduction or elimination of capital controls
• Reduction, elimination, or harmonization of subsidies for local businesses
• Creation of subsidies for global corporations
• Harmonization of intellectual property laws across the majority of states, with more restrictions.
• Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)

Benefits of Globalisation

• By buying products from other nations customers are offered a much wider choice of goods and services.
• Creates competition for local firms and thus keeps costs down.
• Globalisation promotes specialisation. Countries can begin to specialise in those products they are best at making.
• Economic Interdependence among different nations can build improved political and social links.

Drawbacks of Globalisation

• Cheap imports from developing nations could lead to unemployment in developed countries where the cost of production is high.
• Choosing to specialise in certain products may lead to unemployment in other sectors which are not prioritised.
• Increased competition for infant industry.
• ‘Dumping’ of goods by certain countries at below cost price may harm industries in order countries.

Explore these sites about Globalization:

 

• Globalization Data and Statistics
• United Nations Conference on Trade and Development
• World Development Indictors Online

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IGCSE BUSINESS STUDIES Topic : External environment factors | PESTEL analysis

External environment factors

PESTEL analysis stands for "Political, Economic, Social, and Technological, Environmental and Legal analysis". It is a part of the external analysis when conducting a strategic analysis or doing market research and gives a certain overview of the different macroenvironmental factors that the company has to take into consideration.

Political factors, or how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.

Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy

Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that  company operates. For example, an ageing population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).

Technological factors include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
Environmental factors include weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance.Furthermore, growing awareness to climate change is affecting how companies operate and the products they offer--it is both creating new markets and diminishing or destroying existing ones.
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.

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IGCSE BUSINESS STUDIES Topic : Multinational businesses

What are Multinational Businesses?

Businesses which have their operations, factories and assembly plants in more than one country are known as Multinational Business. They are also known as Transnational businesses.

Advantages of being a Multinational

• Multinational can set up their business operations in countries where the labour and raw material is cheaper, which can give them cost advantage in the international market.
• Multinational have access to many markets which spreads the risk of failure. If any product may not be successful in a particular market, it might be successful in another.
• MNCs produce in large quantities thus achieving greater economies of scales.
• A multinational business is less vulnerable to trade barriers. MNCs set up their local operations in countries where there is potential market for them and get away with import duties and restrictions.
• MNCs can locate their operations near the potential market which results in lower transportation cost.

Advantages of Multinational to the host country

• Multinationals create employment.
• They bring new technology and techniques of production.
• MNCs usually provide training to their worker which results in better skills for the country’s workforce.
• Multinational businesses usually produce in large quantities and export to other countries which can result in valuable foreign exchange for the host country.
• They pay huge taxes to the government which can be used for the development of the host country.

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IGCSE BUSINESS STUDIES Topic : Centralisation and Decentralisation

Centralisation and Decentralisation

Centralisation implies the concentration of authority at the top level of the organisation while decentralisation means dispersal of authority throughout the organisation
According to Allen

Centralisation is systematic and consistent reservation of authority at central points within an organisation. Decentralisation applies to the systematic delegation of authority in an organisation context.

Advantages of Decentralisation

• Decentralisation reduces the workload of top executives.
• It improves job satisfaction and morale of lower level managers by satisfying their needs for independence, participation and status.
• Decision making is quicker.
• It facilitates growth and diversification. As each product division is given sufficient autonomy for innovation and creativity.
• It gives opportunity to subordinates to exercise their own judgment. They develop managerial skills which will be useful to the organisation in the longer run.
• Decentralisation requires wider span of control and fewer levels of organisation. It speeds up communication.
• Decentralisation increases the administrative expenses and each division or department has to be sufficient in terms of physical facilities and trained personnel.
• As each department or division enjoys substantial autonomy it might lead to co-ordination problems.
• There might be lack of uniformity and inconsistent procedures as each department might have the authority to formulate its own policies and procedures.

Disadvantages of Decentralisation

• Decentralisation increases the administrative expenses and each division or department has to be sufficient in terms of physical facilities and trained personnel.
• As each department or division enjoys substantial autonomy it might lead to co-ordination problems.
• There might be lack of uniformity and inconsistent procedures as each department might have the authority to formulate its own policies and procedures.

Advantages of Centralisation

• Effective utilisation of talents of the top management.
• It reduces co-ordination problems as a unifying force integrates all operations.
• It allows the development of a strong co-ordinates top management team.
• There is uniformity of policies and plans across the organisation.
• Centralisation organisations are best suited where resources and information has to move swiftly, especially in emergencies.
• Duplication of functions and facilities is minimised which in turn reduces costs.
• Due to the fact that all decisions are made at the top it might result in delays in decision-making and communication.
• Centralised power and authority might be abused.
• Doesn’t give an opportunity to lower level managers/supervisors to develop their managerial skills.
• Centralised organisation faces the problem of lower motivation levels among workforce.
• The success of organisation depends on the competence of top executives which might be quite risky.

Disadvantages of Centralisation

• Due to the fact that all decisions are made at the top it might result in delays in decision-making and communication.
• Centralised power and authority might be abused.
• Doesn’t give an opportunity to lower level managers/supervisors to develop their managerial skills.
• Centralised organisation faces the problem of lower motivation levels among workforce.
• The success of organisation depends on the competence of top executives which might be quite risky.

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IGCSE BUSINESS STUDIES Topic : Functions of a manager

Functions of the manager

There are basically four management concepts that allow any organization to handle the tactical, planned and set decisions. The four basic functions of the management are just to have a controlled plan over the preventive measure.

These Functions can be summarized below:

Planning

Planning is the first tool of the four functions in the management process. The difference between a successful and unsuccessful manager lies within the planning procedure. Planning is the logical thinking through goals and making the decision as to what needs to be accomplished in order to reach the organizations’ objectives. Managers use this process to plan for the future, like a blueprint to foresee problems, decide on the actions to evade difficult issues and to beat the competition.

Organising

The second function of the management is getting prepared, getting organized. Management must organize all its resources well before in hand to put into practice the course of action to decide that has been planned in the base function. Through this process, management will now determine the inside directorial configuration; establish and maintain relationships, and also assign required resources.

Directing

It involves the implementation of plans by mobilising individuals and group efforst through motivation, communication, leadership and supervision. Directing may be defined as the process of activating the efforts of employees towards the achievement of organisational objectives.

Controlling

It is the process of regulating the ongoing activities of the organisation to ensure that they are in conformity with the established plans and produce the desired results. Through the controlling function, management can keep the organisation o its chosen track. It involves:

• Establishing standards of performance
• Measuring current performance
• Comparing actual results with the established standards
• Detecting deviations from the standards
• Taking corrective actions for significant deviations.

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IGCSE BUSINESS STUDIES Topic : Franchise - Features, advantages and disadvantages

What is franchising?

The term "franchising" can describe some very different business arrangements. It is important to understand exactly what you're being offered.

Business format franchise

This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area.

The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and support.

In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue.

The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include Prontaprint, Dyno-Rod, McDonald's and Coffee Republic.
Other types of arrangement

Different types of sales relationships are also sometimes referred to as franchises. For example:

• Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
• Agency - you sell goods or services on behalf of the supplier.
• Licensee - you have a license giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.

Multi-level marketing

Some businesses offer franchises that are really multi-level marketing. Self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit.

Advantages and disadvantages of franchising

Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.

Advantages

• Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
• You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the "franchisor".
• The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
• You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same region.
• Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
• Risk is reduced and is shared by the franchisor.
• If you have an existing customer base you will not have to invest time looking to set one up.
• Relationships with suppliers have already been established.

Disadvantages

• Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy products from the franchisor.
• The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local marke.
• The franchisor might go out of business, or change the way they do things.
• Other franchisees could give the brand a bad reputation.
• You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
• Reduced risk means you might not generate large profits.

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IGCSE BUSINESS STUDIES Topic : Cooperatives - Features, advantages and disadvantages

What is a Co-operative?

A cooperative is defined as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

A cooperative may also be defined as a business owned and controlled equally by the people who use its services or who work at it.

There are different types of co-operatives:

Housing cooperative

A housing cooperative is a legal mechanism for ownership of housing where residents either own shares reflecting their equity in the co-operative's real estate, or have membership and occupancy rights in a not-for-profit co-operative and they underwrite their housing through paying subscriptions or rent.
Building cooperative

Members of a building cooperative (in Britain known as a self-build housing co-operative) pool resources to build housing, normally using a high proportion of their own labour. When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved.
Retailers' cooperative

A retailers' cooperative (known as a secondary or marketing co-operative in some countries) is an organization which employs economies of scale on behalf of its members to get discounts from manufacturers and to pool marketing. It is common for locally-owned grocery stores, hardware stores and pharmacies. In this case the members of the cooperative are businesses rather than individuals.
Utility cooperative

A utility cooperative is a public utility that is owned by its customers. It is a type of consumers' cooperative. In the US, many such cooperatives were formed to provide rural electrical and telephone service.

Worker cooperative

A worker cooperative or producer cooperative is a cooperative that is owned and democratically controlled by its "worker-owners". There are no outside owners in a "pure" workers' cooperative, only the workers own shares of the business, though hybrid forms in which consumers, community members or capitalist investors also own some shares are not uncommon. Membership is not compulsory for employees, but generally only employees can become members. However, in India there is a form of workers' cooperative which insists on compulsory membership for all employees and compulsory employment for all members. That is the form of the Indian Coffee Houses. This system was advocated by the Indian communist leader A. K. Gopalan.

Consumers' cooperative

A consumers' cooperative is a business owned by its customers. Employees can also generally become members. Members vote on major decisions, and elect the board of directors from amongst their own number. A well known example in the United States is the REI (Recreational Equipment Incorporated) co-op, and in Canada: Mountain Equipment Co-op.
The world's largest consumers' cooperative is the Co-operative Group in the United Kingdom, which offers a variety of retail and financial services. The UK also has a number of autonomous consumers' cooperative societies, such as the East of England Co-operative Society and Midcounties Co-operative.
Migros is the largest supermarket chain in Switzerland and keeps the cooperative society as its form of organization.
Coop is another Swiss cooperative which operates the second largest supermarket chain in Switzerland after Migros.

Agricultural cooperative

Agricultural cooperatives are widespread in rural areas.
In the United States, there are both marketing and supply cooperatives. Agricultural marketing cooperatives, some of which are government-sponsored, promote and may actually distribute specific commodities. There are also agricultural supply cooperatives, which provide inputs into the agricultural process.
In Europe, there are strong agricultural / agribusiness cooperatives, and agricultural cooperative banks. Most emerging countries are developing agricultural cooperatives.

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IGCSE BUSINESS STUDIES Topic : Types of Public Sector Organisations

What is Public Sector?

The public sector is a part of the state that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal.

Examples of public sector activity range from delivering social security, administering urban planning and organizing national defenses.

The organization of the public sector (public ownership) can take several forms, including:

• Direct administration funded through taxation; the delivering organization generally has no specific requirement to meet commercial success criteria, and production decisions are determined by government.
• Publicly owned corporations (in some contexts, especially manufacturing, "state-owned enterprises"); which differ from direct administration in that they have greater commercial freedoms and are expected to operate according to commercial criteria, and production decisions are not generally taken by government (although goals may be set for them by government).

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IGCSE BUSINESS STUDIES Topic : Public Limited companies

Public Limited company

Limited companies which can sell share on the stock exchange are Public Limited companies. These companies usually write PLC after their names. Minimum value of shares to be issued (in UK) is £50,000.

Advantages

•  There is limited liability for the shareholders.
• The business has separate legal entity. There is continuity even if any of the shareholders die.
• These businesses can raise large capital sum as there is no limit to the number of shareholders.
• The shares of the business are freely transferable providing more liquidity to its shareholders .

Disadvantages

• There are lot of legal formalities required for forming a public limited company. It is costly and time consuming.
• In order to protect the interest of the ordinary investor there are strict controls and regulations to comply. These companies have to publish their accounts.
• The original owners may lose control. 
• Public Limited companies are huge in size and may face management problems such as slow decision making and industrial relations problems.

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IGCSE BUSINESS STUDIES Topic : Private Limited Companies - features, advantages and disadvantages

Private limited Companies

These are closely held businesses usually by family, friends and relatives.
Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering.
Shareholders may not be able to sell their shares without the agreement of the other shareholders.

Advantages

• Limited Liability: It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors.
• Continuity of existence: business not affected by the status of the owner.
• Minimum number of shareholders need to start the business are only2.
• More capital can be raised as the maximum number of shareholders allowed is 50.
• Scope of expansion is higher because easy to raise capital from financial institutions and the advantage of limited liability.

Disadvantages

• Growth may be limited because maximum shareholders allowed are only 50.
• The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders

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IGCSE BUSINESS STUDIES Topic : Public Limited Companies and Stock Exchange

Public Limited Companies and Stock Exchange

This short video gives an insight into the forming of a Public LImited Company and the process of listing it on the Stock Exchange.

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IGCSE BUSINESS STUDIES Topic : Limited Companies - features

Limited companies

Also known as Joint stock companies. These are businesses where a number of owner(shareholder) pool in their resources to do a common business and to share the profits and losses proportionally.
In a limited company, the debts of the company are separate from those of the shareholders. As a result, should the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors. Ownership in the limited company can be easily transferred, and many of these companies have been passed down through generations.

Difference between Limited companies and partnership

• Limited companies can issue shares whereas partnership business cannot.
• Shareholders enjoy limited liability in Limited companies. It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors. Whereas partnership business does not have limited liability except for limited partnerships.
• Separate Identity: Limited companies are considered as human beings in the eyes of the law. They are born and die in the eyes of law. They can sue and get sued on their own name.
• Continuity: There is continuity of existence in limited companies and are their existence is not affected by the death, bankruptcy
• or sickness of their owner. This is not the case in Partnership or sole trader
• businesses.

There are two main types of Limited companies.

• Public Limited Companies
• Private Limited Companies

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IGCSE BUSINESS STUDIES Topic : Partnership - Features, advantages and disadvantages

What is a Partnership?

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

Advantages of Partnership

• Easy to set up
• More capital can be brought into the business.
• Partners bring new skills and ideas to a business
• Decision making can be much easier with more brains to think about a problem.
• Partners share responsibilities and duties of the business.
• Division of labour is possible as partners may have different skills.

Disadvantages of Partnership

• There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings.
• Disagreement among the partners can lead to problems for the business.
• There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.
• There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.

Partnership Deed

Before starting a partnership business, all the partners have to draw up a legal document called a Partnership Deed of Agreement. It usually contains the following information:
There are many parts that should be included in any articles of partnership. These are:

• Names of included parties - includes all names of people participating in this contract
• Commencement of partnership- includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.
• Duration of partnership - includes how long the partnership should last. It is automatically assumed that the death of one of the contracting parties breaks the contract, unless otherwise stated.
• Business to be done - includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes.
• Name of firm - includes the name of the business entity.
• Initial investments - includes how much each partner will invest immediately or by installments.
• Division of profits and losses - includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners' debts, including their own).
• Ending of the business - includes what happens when the business winds down. Usually this includes three parts: 1) All assets are turned into cash and divided among the members in a certain proportion; 2) one partner may purchase the others' shares at their value; 3) all property is divided among the members in their proper proportions.
• Date of writing - includes simply the date that the contract was written.

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IGCSE BUSINESS STUDIES Topic : Sole Trader or Sole Proprietor - features, advantages and disadvantages

What is a Sole trader or Sole Proprietor form of business?

The sole trader is the oldest and most popular type of business. It is a form of business where there is only one owner who manages and controls the business.

A sole proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners.

A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.

A sole proprietor may do business with a trade name other than his or her legal name. In some jurisdictions, for example the United States, the sole proprietor is required to register the trade name or "Doing Business As" with a government agency. This also allows the proprietor to open a business account with banking institutions.

Advantages to a Sole Proprietor

• An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business.
• A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual's non-protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member corporation or limited company still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability.
• Furthermore, in most jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. Typically a sole proprietorship reports its income and deductions on the individual's personal tax return. In comparison, an identical small business operating as a corporation or partnership would be required to prepare and submit a separate tax return.
• A sole proprietorship often has the advantage of the least government regulation.

Disadvantages to a Sole Proprietor

• A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company.
• It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is required for bank financing.
• Hiring employees may also be difficult.
• This form of business will have unlimited liability, so that if the business is sued, the proprietor is personally liable.
• The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.
• In countries without universal health care, such as the United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue.
• Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation. In the United States, a sole proprietor could also form a limited liability company, or LLC, which would give the protection of limited liability but would still be treated as a sole proprietorship for income tax purposes.

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IGCSE BUSINESS STUDIES Topic : Functions of different departments

Functions of various departments

Every organisation is made up of different department.  Each department contributes to the running of the business. The most common departments are: 

• Production
• Marketing & Sales
• Finance
• Human resource
• and in some cases, Information Technology departments

Production Department

The production department is responsible for converting inputs into outputs through the stages of production processes. The Production Manager is responsible for making sure that raw materials are provided and made into finished goods effectively. He or she must make sure that work is carried out smoothly, and must supervise procedures for making work more efficient and more enjoyable.

There are five production sub-functions

• Production and planning.

They will set the standards and targets at each stage of the production process. The quantity and quality of products coming off a production line will be closely monitored.

• Purchasing department

This department will provide the materials, components and equipment required. An essential part of this responsibility is to ensure that stocks arrive on time and are of good quality

• The stores department

The stores department are responsible for stocking all the necessary tools, , raw materials and equipment required to service the manufacturing process.

• The design and technical support department

They are responsible for the design and testing of new product processes and product types, together with the development of prototypes through to the final product.

• The works department

This department is concerned with the manufacture of products. This will include the maintenance of the production line and other necessary repairs. The works department may also have responsibility for quality control and inspection.

Human resource Department

The role of Human resource department is in charge of recruiting, training, and the dismissal of employees in an organisation.

• Recruitment and selection
• Training programmes

Training programs are held by the HRD to improve the employees skills, as well as to motivate them.
There are three main types of training :

1. Induction training
2. On-the- job training
3. Off-the-job training

• Manpower Planning

The HR department needs to think ahead and establish the number and skills of the workforce required by the business in the future. Failure to do this could lead to too few or too many staff or staff with inappropriate needs.

• Dismissal and Redundancy (retrenchment)
  

Dismissal is where a worker is told to leave their job due to unsatisfactory work or behaviour.
Redundancy is when the business needs to reduce the number of employees either because it is closing down a branch or needs to reduce costs due to falling profits. It may also be due to technological improvements, and the workers are no longer needed.

Marketing department

These are the main section of the market departments:

• Sales department is responsible for the sales and distribution of the products to the different regions.
• Research & Department is responsible for market research and testing new products to make sure that they are suitable to be sold.
• Promotion department decides on the type of promotion method for the products, arranges advertisements and the advertising media used.
• Distribution department transports the products to the market.

Finance Department

• Book keeping procedures
  Keeping records of the purchases and sales made by a business as well as capital spending.
• Preparing Final Accounts
  Profit and loss account and Balance Sheets
• Providing management information
  Managers require ongoing financial information to enable them to make better decisions.
• Management of wages
  The wages section of the finance department will be responsible for calculating the wages and salaries of employees and organising the collection of income tax and national insurance for the Inland Revenue.
• Raising Finance
  The finance department will also be responsible for the technical details of how a business raises finance e.g. through loans, and the repayment of interest on that finance. In addition it will supervise the payment of dividends to shareholders.

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IGCSE BUSINESS STUDIES Topic : Delegation

What is Delegation?

Delegation is the assignment of authority and responsibility to another person (normally from a manager to a subordinate) to carry out specific activities. However the person who delegated the work remains accountable for the outcome of the delegated work. Delegation empowers a subordinate to make decisions.

What makes an effective delegation?

To enable someone else to do the job for you, you must ensure that:

• Objectives must be clearly defined.
• Authority and responsibility of each subordinate must be clearly defined.
• Subordinates show be rewarded suitably as a positive incentive for accepting responsibility.
• Workers should be given adequate training for carrying out the task delegated.
• Two way communication between the manager and the subordinate.

Benefits for the manager

• can concentrate on more important job and improve their productivity. The manager gets the opportunity to handle aspects of the job that no one else can do. These activities might include project planning, monitoring team members, and handling personnel problems as they arise.
• Delegation ensures that specialist people are doing the job which reduces the chances of mistakes by the manager.
• Manager can also gauge the efficiency of the subordinates.

Benefits for the subordinates

• It motivates the subordinates as they feel more trusted.
• Through delegation subordinates can be trained to handle responsibilities and future growth.
• Increases team member involvement. Proper delegation encourages team members to understand and influence the work the department does.

For the organisation

• Quick decisions can be taken as the authority to take decisions lies near the point of action.
• Delegation improves a healthy relationship among the manager and the subordinate and thus fewer conflicts.

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IGCSE BUSINESS STUDIES Topic : Organisational Structure

Organisational Structure

Organisational structure is defined as the

relatively enduring allocation of work roles and administrative mechanisms that creates a pattern of interrelated work activities and allows the organisation to conduct, co-ordinate and control its work activities

To put it in simple words Organisational structure refers to the levels of management and division of responsibilities within an organisation.
In an organization of any size or complexity, employees' responsibilities typically are defined by what they do, who they report to, and for managers, who reports to them. Over time these definitions are assigned to positions in the organization rather than to specific individuals. The relationships among these positions are illustrated graphically in an organizational chart.

Types of Organisation Structure

Line Organisation

It is perhaps the oldest and the simples organisational structure. In this kind of structure every manager exercise a direct authority over his subordinate who in turn directly reports to their superiors.

• There is a hierarchical arrangement of authority.
• Each department is self contained and works independently of other departments.
• Lines of authority are vertical i.e. from top to bottom.
• There are no staff specialists.

 

Advantages

• Simple to establish and operate
• Promotes prompt decision making.
• Easy to control as the managers have direct control over their subordinates.
• Communication is fast and easy as there is only vertical flow of communication.

Disadvantages

• Lack of specialisation
• Managers might get overloaded with too many things to do.
• Failure of one manager to take proper decisions might affect the whole organisation.

However, line structures are suitable for

• small businesses where there are few subordinates
• organisations where there is largely of routine nature and methods of operations are simple.

Functional Organisation

The organisation is divided into a number of functional areas. This organisation has grouping of activities in accordance with the functions of an organisation such as production, marketing, finance, human resource and so on.
The specialist in charge of a functional department has the authority over all other employees for his function.

 

Advantages

• Is logical and reflection of functions
• Follows principle of occupation specialisation
• Simplifies training
• Better control as the manger in charge of each functional department is usually an specialist.

Disadvantages

• Overspecialisation and narrow viewpoints of key personnel can limit the organisation growth.
• Reduced coordination between functions.
• Conflicts between different functions could be detrimental for the organisation as a whole.
• Difficult for general managers to coordinate different departments.

However, it is much suitable for large organisations where there is ample scope for specialisation. Once harmony and proper coordination among different functions is achieved, it could lead to sure success for an organisation.

Line and Staff Organisation

It is a combination of line and functional structures. In this organisation a structure, the authority flows in a vertical line and get the help of staff specialist who are in advisory.  When the line executives need advice, information about any specific area, these staff specialists are consulted.
For example Chief accountant has command authority over accountants and clerks in the accounts departments but he has only advisory relationship with other departments like production or sales.

 

Advantages

Line managers are provided by expert advice by these specialists.
Staff managers provide specialist advice which can improve quality of decisions in various departments.

Disadvantages

Line managers and staff managers might have conflicts on particular issues.
Line and staff managers might not be clear as to what the actual area of operations is and what is expected of them. Co-ordination may be a problem.
Staff personnel are not accountable for the results and thus may not take tasks seriously.
However, Line and staff organisation is very suitable for large organisation.

Project Organisation

The project structure consists of a number of horizontal organisational units to complete projects of a long duration.  A team of specialists from different areas is created for each project. Usually this team is managed by the project manager. The project staff is separate from and independent of the functional departments.

Advantages

• Special attention can be provided to meet the complex demand of the project.
• It allows maximum use of specialist knowledge thus chances of failure are very less.
• Project staff works as a team towards common goal which results in high motivation level for its members.

Disadvantages

As the project staff consists of personnel from diverse fields, it might be quite challenging for the project manager to coordinate among them.

Matrix Organisation

• Matrix organisation combines two structures – functional departmentation and project structure.
• Functional department is a permanent feature of the matrix structure and retains authority for overall operation of the functional units.
• Project teams are created whenever specific projects require a high degree of technical skill and other resources for a temporary period.
• Project team form the horizontal chain and functional departments create a vertical chain of command.
• Members of a particular team are drawn from the functional departments and are placed under the direction of a project manager who has the overall responsibility of a particular project.

 

Advantage

• Is oriented towards end results.
• Professional identification is maintained
• Pinpoints product-profit responsibility

Disadvantages

• Conflict in organisation authority exists.
• Possibility of disunity of command exists
• Requires manager effective in human relations

Matrix organisations is used in industries with highly complex product systems for example, aerospace industry where project teams are created for specific space or weapon systems.

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IGCSE BUSINESS STUDIES Topic : Economic Problem and Opportunity cost

Economic Problem

We have unlimited Needs and wants and there are limited resources. This is the basic Economic Problem.

Limited Resources

Resources available on earth to make goods and services to satisfy our needs and want are limited. These resources are also known as factor of production. These can be categorised as

Land

All natural resources provided by nature such as fields, forests, oil, gas, metals and other mineral resources

Labour

The people who are used produce goods and services.

Capital

Finance, machinery and equipments needed to produce goods and services.

Enterprise

The skill and risk taking ability of the person who brings together all the other factors of production together to produce goods and services. Usually the owner or founder of a business.
Business activity combines the factors of production to produce goods and services to satisfy our needs and wants.So a business activity takes inputs (factors of productions), processes it and gives an output

Opportunity Cost

Because of Unlimited needs and wants and limited resources we have make a choice. When we make a choice we have to give up something. This next best alternative foregone while making a choice is known as Opportunity Cost.

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IGCSE BUSINESS STUDIES Topic : Specialisation or Division of labour

Specialisation and Division of Labour

Because of the fact that choice involves opportunity cost, the factors of production have to be used in the most efficient way. This is achieved through Specialisation and Division of Labour. This means every individual performs a specific task only so that he can give in the best output. Division of labour can be defined as

the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons.

As the workers become specialised in a particular task, it results in 'specialisation'.
Division of labour is most visible in assembly lines which are used for mass production of goods. example. a car assembly line.
There are advantages and disadvantages related with division of labour.

Advantages

Specialisation results in greater efficiency and productivity
Time and resources are saved as the workers become for conversant with the process

Disadvantages

Repeatedly doing the same job can result in boredom for the workers
If a worker cannot complete his or her job on time this may result in a bottleneck for the whole production process.

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IGCSE BUSINESS STUDY TOPIC : Types of economic systems | Planned, Market and mixed

 

Market Economy/Free Market EconomyFeatures

Features

• All the resources in a market economy are privately owned by people and firms.
• Every business will aim to make as much profit as possible i.e. profit is the main motive.
• There is consumer sovereignty.
• Firms will only produce those goods which consumers want and are willing to pay for.
• Price is determined through the price mechanism

Advantages

• Market economies responds quickly to people’s wants
• Factors of production which are profitable will only be employed.
• There is wide variety of goods and services in the market.
• New and better methods of production are encouraged thus leading to lower cost of goods and services.

Disadvantages

• Public goods may not be provided for in Market economy, thus the government will have to interfere to provide these types of goods.
• Market economies encourage consumption of harmful goods
• Prices are determined by the demand and supply of goods.
• Social cost may not be considered while producing goods and services.It may lead to unemployment because machines will be more productive than men.

Planned Economy/ Command Economy

Features

• Government decides how all scarce resources were to be used.
• Government will decide what is to be produced, how much to be produced and how much should be charged for goods and services.
• The economy only has Public Sector.

Advantages

• There is no competition between firms thus resulting in less wastage.
• Government ensures that everybody is employed.
• Less gap between poor and rich

Disadvantages

• No incentives for businesses to produce.
• Production of goods is decided by government thus there is no consumer sovereignty.
• Businesses usually are less efficient because of lack of profit motive.

Mixed economy

Features

Mixed economy is a combination of market economy as well as government planning.
It has both private sector and public sector.Some businesses are owned by private individuals while some businesses are owned by the government. India, Indonesia is examples of mixed economies.
Mixed economy attempts to overcome the disadvantages of a market economic system by using government intervention to control or regulate different markets.

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