Principles of Business (POB) CSEC Notes 2013 2015 1
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Structure and Organization of the Syllabus The syllabus is arranged into ten (10) sections consisting of specific objectives and related content
Profile Dimension 1: Section 1 -
Nature of the Business
Section 2 -
Internal Organizational Environment Environment
Section 3 -
Establishing a Business
Section 4 -
Legal Aspects of a Business
Profile Dimension 2: -
Production Marketing Finance
Section 5 -
Production
Section 6 -
Marketing
Section 7 -
Business Finance
Profile Dimension 3 -
The business Environment
Section 8 -
Roles of government in an Economy
Section 9
3
-
Social Accounting and Global Trade
Section 10 -
Regional and Global Business Environment
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SECTION 1: NATURE OF THE BUSINESS SPECIFIC OBJECTIVES Student should be able to: Objective 1: Explain the terms and concepts related to business
Business A business is any individual or group of individuals whose goal is to make a profit by selling products and/or services. Enterprise Simply means “a business”. It is used to describe an undertaking or activity with some degree of difficulty or risk. Enterprise can also mean ‘initiative’ which is daring to do something new or different, challenging or risky. Entrepreneurship The practice of identifying a new innovation or opportunity, organizing the financing and other resources and taking the risks in hope of creating wealth. Entrepreneur The individual who identifies the opportunity and risk the times and money to start/to organize this new venture. Barter The exchange of goods for other goods. This was the first type of trade. Barter was the first form of trade, however it had several drawbacks: i.) ii.) iii.) iv.) v.)
A double coincidence of wants Rate of Exchange Some goods are not divisible Some goods are bulky and difficult to transport Store of value
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Profit The money remaining after the cost of production, distribution and taxes have been paid. It is the financial gain for the business or entrepreneur. It can be represented in the following ways: -
Total Revenue o Greater than Total Cost =Total Revenue (TR) > Total Cost (TC)
-
Revenue o The money earned from the enterprise or business E.g. TR = $600 TC = $400 Profit = TR – TC = TR- TC = $600 - $400 = $200 – Profit
Loss The Opposite of profit, when the cost of production and other expenses are greater than the revenue, this is called “making a Loss” It means the business is not making enough money A Loss is occurring when the total revenue is less than total cost. Loss = TR < TC
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ACTIVITY Brandon makes fruit juices in his neighborhood; below are his costs and revenues for September and October in 2010. September Total Sales Revenue = $50,000 Total Costs for all Expenses = $55,000 October Total Sales Revenue = $60,000 Total Costs for all expenses = $52,000
In which Month did Brandon make a profit? Brandon made a Profit in the Month of October. What is the amount of the profit? The profit was $8,000 How much was the amount of the loss? The loss was $5,000
Trade Trading means buying and selling. Organization A group of persons using resources or things that are arranged in a certain way to carry out specific activities in order to achieve a goal or objective. Economy A system that allocates or shares scarce resources be deciding what should be produced, how and for whom. Producer A Person or business that makes or creates goods and services
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Consumer A Person or group that uses goods and services to satisfy wants. Exchange The giving of one thing and the receiving of another Goods Tangible (can be seen or touched) things that are made to be sold and are otherwise called products. Services Work that is done for another; assistance or benefit given. Market Any situation in which sellers and buyers meet and communicate in order to exchange goods and services. Commodity An item that is traded, usually raw materials such as copper or coffee. Capital The money or other resources or other things that are used to start a business. The money, machinery and man-made materials that are used daily in a business. Labour The physical or mental work of a person. It is another name for human resources.
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Specialization of Labour Refers to the division of a task into a number of related parts. Specialization A form of division of labour in which each individual or firm concentrates its productive efforts on a single or limited number of activities. This concentrating on only one task and is an aspect of division of labour. In essence division of labour leads to specialization. Division of Labour This is splitting up of a main task into several smaller tasks. Division of labour come about as persons began to maximize their individual skills Specialization Can: -
Occur at the product or occupational Level
-
Be a process E.g. Making Butter
-
Be a firm E.g. St. Vincent Brewery Specializes in bottling drinks
-
Be industry related E.g. Bauxite Industry
-
Be regional or international in score E.g. Caribbean Area is known for tourism
Advantages of Specialization -
It increases the skills of workers since the same task is repeated and workers learn from repetition.
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It increases productivity, less time is used to change from one activity to another
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The costs of production is reduced since a greater number of items are made
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The quantity of a product can also improve since workers are more skilled and the use of machines means that quality cannot be dissolved
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Less time is spent on training of workers because only a small part of the skill is necessary
Disadvantages of Specialization -
The work is monotonous
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The work environment is impersonal since specialization leads to a larger scale industries in which workers are no longer close family members
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Workers may lose pride in their job since they are not completing the entire job and therefore, cannot fully appreciate the marking of the product
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Since processors require a large amount of capital to purchase the machinery.
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Levels of Specialization -
Product or occupation
-
Process
-
Firm
-
Industry
-
Region
-
Nation
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Objective 2: Trace the development of instruments of exchange
Direct Satisfaction of Wants This is where needs are satisfied directly from nature, hardly altering the original state of the goods by cooking or applying any form of processing A Subsistence economy is an economic system where needs and wants are satisfied directly from nature. Barter (See Topic: Nature of Business) Limitations/ Draw-Backs of the barter system -
For bartering to be successful, one person must have what the other person wants and be prepared to exchange. This condition is referred to as double coincidence of wants
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The process becomes very complicated when more than two (2) persons were involved in the exchange, since persons would have to keep exchanging items until individual wants and needs are met
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The rate of exchange or the right quantity acceptable in exchange for the other item
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The indivisibility of certain commodities
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The store of wealth and store of value For example, perishable goods lost value with the passing of time, whereas precious stones such as gold gained value with time. It became very difficult, therefore to settle on trading principles and practices that guarantee a fair price for goods that were exchanged.
How does production leads to the satisfaction of Needs and Wants? Wants and needs are satisfied by the certain creation of goods and services which have the abilty to satisfy needs and wants.
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Money Is any commodity that is accepted as a measure of value and a medium of exchange. Features of Money To be accepted as money the commodity must have the following features: i. ii. iii. iv. v. vi.
The commodity must be acceptable – everyone must be willing to accept it It must be relatively scarce. In other words, the item must only be available in small quantities. In this way, the value will be maintained The commodity must be capable of being divided easily into smaller fractions It must be homogenous, it must be identical in look, size and weight Since the item must pass from hand to hand, it must be durable It must be portable, one must be able to carry it around easily
Functions of Money 1. Medium of Exchange – Everyone must be willing to accept it in exchange for goods and services 2. Standard of Value – The worth of goods and services is measured in money, which sets the price of the item. 3. Store of value – Money can be saved and used in the future. It makes saving possible and hence brings out investment 4. Means of Defer Payment – Money is used to pay for goods bought on credit 5. Favorable Price Mechanism – It is the Price one is willing to pay to satisfy effectively
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Developments of Money
Barter
Commodity Money (E.g. Cowrie Shells, salts)
Money of Intristic Value (E.g. Gold Coins, Silver Coins)
Representative Money
Fiat Money (Legal Tender notes or coins)
Near Money (Debit + Credit Cards
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Types of Money Coins Refered to as token money and are legal tender only up to a small amount Bank Notes These are issued by the central bank in specific denominations Bank Notes maintain its value in the outside world if the issuing country is able to produce an export sufficient goods to be able to pay for the value of all imported goods Bank Deposits The holder of a bank deposit is allowed to draw cheques on his bank account. It is the most common form of payment used in business today. Near Money It satisfies the needs for a medium of exchange, but is not legal tender. NB: The seller does not have to accept these forms of payment, he can demand cash if he so desires Bills of Exchange Is a written order from one person to another. The person who sends it is instructing the person receiving it to pay a certain sum of money at a specific time in the future. The person who is sending is called the “drawer”. The person receiving it is called the “drawee” (who owes the money to the drawer). The drawer may give instructions for the money to be paid to another person. Bills of exchange are usually used by persons who are selling goods to others in another country. Credit Cards A credit card is a card given by a financial institution to its customers which authorizes that customer to purchase “on credit.” This card enables the electronic transfer of information and money. In order to receive a credit card, persons must first quantify that is satisfy the financial institution that they will make the necessary payments when they are due. If payments are not paid on time, then the cardholder may/ must pay interest charges.
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Debit Cards Also known as a bank card or check card. Is a plastic payment card that provides the cardholder electronic access to his/her bank account(s) at a financial institution. Some cards have a stored value which at a payment is made, while most relay a message to the car holder’s bank to withdraw funds from the payee’s designated bank account . The card where accepted can be used instead of cash when making purchases. In some cases, the primary account number is assigned exclusively for use on the internet and there is no physical card. Electronic Transfer Is payment transferred electronically from one bank account to another. It is very fast and it is a safe way of making payments. A cardholder can insert their automatic bank card (also called ‘Debit Card’) into a machine which is electronically linked to his/her Bank Account. Telebanking & E-commerce Ecommerce refers to any business transaction that is done through the internet. This may include the transfer of money as well as information. Telebanking is a system for conducting banking transactions over telephone lines.
Objective 3: State reasons why an individual may want to establish a business. Reasons for establishing a business A business organization is formed when a person or group of persons uses resources to provide goods and services with the view of making a profit. An individual will establish a business for several reasons: -
To produce either a good or a service or both; Manufacturing products Buying goods for resale Providing services to the public or other firms
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To create jobs by hiring and training employees;
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To make a profit;
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To become financially independent;
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To contribute to the development of the economy
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Objectives of a Business Owner -
To the private owner the objective may be to produce a reliable stream of income to allow the owner support his/her family and to pay debts
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A business may serve a place where the owner and his children can work. The children earn extra cash and gain experience; and there is a dependable source of employees
Employees Employees see the business differently which is: -
To make enough money to support themselves and their families
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Security of the employment is another objective of the employee. Some employees expect to achieve personal grants, promotion and responsibility to achieve self-esteem.
Society -
The business must act firmly and responsibly, society expects the business to be a good corporate ciitzens, to pay its fair share of taxes and to support important local causes
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People expect the quality of the product produced must reflect on the value of money spent
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Society expects to be informed about any changes and hazards associated with a product. Finally, society expects a business to stand behind its products
Not for Profit Making Organizations -
State Cooperation
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Nationalised Industries
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Local and Municipal Authorities
-
Government Departments
Reasons 1. Independence 2. Income
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3. Redundancy 4. Poor Job respects
Independence -
Being in control of your working life
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Being in control of your business
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Having a secure job
Income -
Job Security
Poor Job Respects -
Individuals are not well educated
Objective 4: Describe arrangements.
the
different
forms
of
business
organisations
and
Sole Trader -
A sole trader is a person who has total ownership of and responsibility for managing his/her business
Formation -
No Legal requirements however, trade names must be registered
Management -
Managed by the owner
Features -
Owned by one (1) person
-
Easy and inexpensive to set-up
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Usually financed by the owner
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Capital is limited since the savings of the owner fund the business
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This type of business is not incorporated
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Soletrader takes all the risks and losses but enjoys the profit
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Have Unlimited Liability
How is Capital formed?
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-
Personal Savings
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Borrowing
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Partnership -
An association of 2- 20 members/partners operating a business for the common goal of making a profit
Formation -
No formal requirements, but it is best if a partnership deed is drawn up
Management -
Managed by ordinary partners
Features -
Each partner contributes to the business’ equity
-
Have unlimited liability
-
This type of business is not incorporated
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Limited Life (The partnership ends on change of members, if a partner dies or withdraws from the partnership. Then the partnership will cease to exist)
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Profit or loss is shared among partners
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Joint Ownership
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Co-Ownership of contributing assets
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Each Partner is part of the management of the firm as such as the partnership
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Liable for the actions and decisions made by any partner on behalf of t he firm
How Capital is raised? -
Each partner contribute to capital
-
Borrowing/ Loans
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Limited and Unlimited Companies / Co-operatives
Private -
Is an incorporated business organization consisting of 2- 50 shareholders, whose aim is to make profits
Public -
A public Limited Company / Joint Stock is an incorporated company that offers shares to the public
Company -
A company is a business entity that has been incorporated that is, the company has separate legal entity from that of the owners
Formation -
Certain level of requirements must be met before a company can commence trading. Certain documents must be subtracted to the registrar of companies
Management Private -
Managed by owners or may appoint a specialized personnel Public
-
The board of directors, which is elected by the shareholders at the annual general meeting manages the company. The board of directors appoint an executive who heads the company and reports to the Board on the Operations of the company.
Features Public Limited Companies -
Shares are openly traded on stock market
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They must have PLC at the end of their name
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Without the certificate of incorporation the business cannot trade
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Have a minimum of 7 and NO maximum
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Have limited liability
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The life of the company is independent independent of the shareholder
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The company is managed and controlled by professional directors who are elected by shareholders at an annual general meeting Private Limited Companies
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The word “ltd.” must be included in the name
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Shares are sold only to family members and loyal employees
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Shareholders are between 2- 20 persons
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Shareholders Shareholders have limited liability
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The company must be registered with the registrar of companies
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Accounting Statements must be prepared and an audit undertaken with a copy issued to the registrar of companies
How capital is Raised? -
From private individuals
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Borrowing
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Profit is ploughed back
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From issuing shares
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Public Companies issue shares on stock market
Co-operatives -
A co-operative is is a business business that is formed and operated operated by their members.
Formation -
Each member purchases shares to form capital base of o f the business. b usiness.
Features -
Members have a common bond (E.g. All the teachers or public servants all belong to a particular community)
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There is the pooling of capital among the membership membership
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The members are also clients
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They are managed and controlled by their members
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They are voluntary, non-profit making organizations engaged in retail or other financial activities.
How Capital is raised? -
Members contribute to the capital
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Memoandum of Associations It is a legal document that founders of the company must submit to the Registrar of Companies when they are registering a company. It contains the company’s name, which must contain the word ‘limited’, the address of the company’s registered office, the objectives of the comp any, the statement of the company, liability of its shareholders, the authorized share capital and types of shares to be issued. Articles of Association Association These control the internal running of the company. They cover such areas as: a. b. c. d. e.
Procedures for calling an annual general meeting Rights and obligations of the directors Procedures governing the election of directors Statement concerning concerning the borrowing power of the company Procedures dealing with the payments of dividends
Statement of Authorized/Registered This is the amount stated in the memorandum, which is the maximum amount which the company is authorized to make/raise. make/raise. Prospectors/ Prospectus This is an imitation to the public to buy shares, in the public limited company. It contains detailed information to enable investors to estimate its prospects. Multi-national Co-operations This is called Trans-National Corporations. They are a network of firms which operate in many countries but are owned and controlled by a single group of shareholders. E.g. Courts Characteristics -
Multinational Corporations are created through direct foreign exchange/investments exchange/investments
-
Headquarters of multinational multinational co-operations co-operations are are usually usually located located in country, while subsidiary companies are located in developing countries.
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These firms usually use the latest technology and invest heavily in research and development.
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These firms are usually capital-intensive and therefore benefits from economies of scale
a developed
Economies of Scale are the cost reductions that can benefit a business as the industry ‘clusters’ and grows in one region.
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Conglomerate A group of companies operating in many different industries. Some conglomerates have a complexed structure. They may include -
A parent company company which controls and owns other members of the group
-
Holding companies which in turn owns other group companies
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Subsidiaries, which are majority-owned by the group with a wholly owned subsidiary. The group owns 100% of the shares
-
Associated companies where the conglomerate owns more than 20% and less than 50%
-
Joint Venture- Their Ownership is usually spilt 50%/50%
Note: A A Holding Company is formed for the sole purpose of holding shares in other companies E.g. Coreas Hazells, Courts, Grace Kennedy and Company, ECGC
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Franchise A franchise is a business which which is licensed to use a brand developed by another company. The franchisor owns the brand and moset franchise are internationally known. The business must be conducted in a prescribed manner set out by the franchisor. The Franchisee: -
Is Licensed to use the brand
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Pays an initial Start-Up fee
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Pays royalty, which are often 2-10% of sales
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Rent/ pays tax for building and also to employ staff
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Takes care of paper work and pays tax
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Buys signs and equipment from the franchisor
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Pays a contribution to advertising cost
The Franchisor: -
Provides advice, know-how and equipment
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Develops advertising materials and marketing campaigns
-
Keeps a close eye on the business to make sure standards are maintained
Advantages Advantages To Franchisee Franchisee -
Can use internationally known brand name
-
Receives advise and training from the franchisor
-
Startup is fast
To Franchisor -
Gains sales and visibility in new markets
-
Gains from the franchisee’s local knowledge and hard work
To customer -
Receives international standards of goods and services
Disadvantages To Franchisee Franchisee -
Cannot expand into into new product product or activities activities
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-
Makes regular payments to franchisor
-
Loses some independence with running the business
To Franchisor -
Must rely on the management skills of the franchisee – if – if a franchise is badly run the brand name will suffer
To Customer -
May loose local variety and choice
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Municipal Authorities Are enterprises run by locally elected councilors to operate such units as municipal swimming baths, theater arts
Municipal Authorities obtain their capital by borrowing against the security of the rates they impose on households. They Price their goods and services at a rate that recovers the operating cost, interest and capital repayments based on the life of the physical assets. E.g. Town Board, local Government Statutory bodies are setup by acts of parliament to handle the distribution of the goods and services. These authorities sometimes take the form of borough or country councils and after securities such as water supply, drainage, health care, garbage disposal. Each council is headed by a chairman or Mayor who presided over an assembly or elected councilors. Local authorities carry out their responsibilities with goals from the government together with collection of local rates and taxes. E.g. House and Land Tax Government Departments The system of government in the Caribbean is divided into two (2) broad Categories -
Central Government The central government consists of the ministries and departments such as Education, Health, Housing, Police and Fire Department, Finance, Culture, foreign affairs, welfare and transportation. Each ministry is headed by an elected official, the ministry and a team of techno-cra t echno-crats ts are headed by a Permanent Secretary Secretary
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Local government Consists of the municipal authorities for e.g. the city Corporations. This arm of the government serve the community. They are mainly responsible for Local road maintenance, garbage collection, maintenance of parks and road ways, cleaning of gullies/ culverts, public cemetery and the consumer market. Funding is provided by the central government and the collection of rates and taxes from the local resident. At a Local government, election councilors are elected. From among these councilors the mayor or chairperson for the borough council is appointed as head
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Concept of Private and Public Sector -
The public sector includes all business enterprises owned and manage and controlled by government, for example water, transportation, radio, television, bauxite.
-
Private sector is that part of the economy that is owned by the private citzens – individuals/ private co-operation.
-
The public sector seeks to regulate and se fair trading standards in the private sector. It seeks to protect consumers against monopoly enterprises and wasteful competition. It ensures certain goods are provided for consumers E.g. roads, Transportation
Private Sector profit is the driving force. Market forces of demand and supply determine the prices and allocating resources, it allows for the movement of capital and labour to where they are most profitable Business found in the private sector are sole traders, partnerships, and public and private limited companies, credit unions and Non-Profit Non- Profit Organizations such as the Lion’s Club
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Profit Motive of the Public Limited Companies and Public Co-Operation Private Limited Companies -
The main motive/ aim is to make huge sums of profit
-
Capital is obtained from many small investors as well as from large organizations
-
Capital is obtained from private individuals, financial institutions, government agencies or retained profits
-
Public Limited Companies -
Capital is obtained from many small investors as well as from large organizations
Public Co-operation -
Main motive is not to make a profit but to provide a service. Usually they are nonprofit making but in the long-term they have to be self-financing
-
Where do they get their Capital to operate?
How Do they Raise Capital? (Private and Public Sector) Private Sector -
Capital is funded from private individuals and funded by owners
Public Sector -
Capital is raised by the government through tax-payers
Objective 5: Differentiate among the different economic Systems Definition An economic system is a system of production and exchange of goods and services as well as allocation of resources in a society. It includes the combination of the various institutions, agencies, entities (or even sectors as described by some authors) and consumers that comprise the economic structure of a given community Formal Sector Exist when there are clearly defined relationships, procedures and purposes between individuals in an organization. Informal Sector
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Refers to the unofficial relationships that exist within the firm, relationships are based on social interaction. Traditional (Subsistence) Economy 1. Command/Planned (Socialist/ Communist) 2. Free/ Capitalist 3. Mixed (Public & Private) Economists exist because of limited resources and unlimited wants, leading to scarcity.
All economies must answer the questions of: -
What to produce?
-
How to Produce?
-
For whom to produce?
****Economic Systems exist to answer the Above Questions ^^****
Each Economic system has special characteristics Traditional System Where Needs and Wants were basic and were provided by direct satisfaction Characteristics -
Countries with system are not usually modern
-
These societies carry out subsistence farming, herding of cattle hunting
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The decision on what, how and for whom to produce was determined by the customs and traditions handed down through generations
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The economy only had sufficient to survive on, any surplus would be traded
Planned System Is where production is planned and all resources are owned by the state Characteristics -
Use of officials may give rise to bureaucracy and corruption
-
State makes all the decisions regarding economic activities
-
Economic efficiency depends on the degree of accuracy with which wants are estimated and resources are allocated.
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Free System/ Free enterprise/ capitalist / Market Economy Is where there is little or no government control. Market Forces determine what is to be produced, how and for whom
Characteristics -
Government plays little part in the economic activity
-
Emphasis is on freedom of the individual
-
All the economic decisions are made by the private individuals as consumers or producers and are reconciled by the price mechanism
-
Land and Capital are privately owned
Mixed Is a mixture of communists and capitalists economies. Market forces are allowed to operate but government controls and regulates the system Characteristics -
The aim of the private sector is to maximize its profits
-
The aim of the public sector is to maximize social welfare
-
Economic decisions are taken by the price system and also by the state.
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Advantages and Disadvantages of Economic Systems Free System/ Free enterprise/ capitalist / Market Economy Advantages -
There is freedom from government interference
-
There is complete freedom of choice for consumers and producers
-
Price is mainly determined by the market or the ‘invisible hand’ of the price mechanism
-
The system works for the self-interest of all groups in the system
-
Competition among firms improves quality, keeps prices low and spurs new technology and innovation
-
Since resources are allocated to their most profitable use in free markets, efficiency is promoted
Disadvantages -
This system leads to inequalities of wealth; the few rich get richer at t he expense of the many poor persons
-
Large Companies, E.g. monopolies and cartels, can exert a powerful influence on prices and supplies and can limit competition
-
There is much pollution (E.g. noise, environmental, etc.) associated with this system when industrialization gathers speed
-
‘Boom’ and ‘Slump’ are both characteristics of this type of economy. Periods of prosperity usually give way to periods of recession, or a fall in business activity. This is called the Trade Cycle. During periods of slump, resources are not fully used.
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Profit is pursued at the expense of all the members of society, especially the poor, because only those who own resources profit from them.
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There is little production of Public Goods , such as roads and street lights, and limited production of Merit Goods, such as health care and education, which only the rich can afford
-
There tends to be an over-consumption of Demerit Goods such as alcohol, cigarettes and drugs.
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Planned Economy Advantages -
The welfare of all citizens is the primary goal of the economic system
-
Government possesses the information to be able to direct resources where they are most needed
-
Wasteful consumption is avoided
-
As wages are controlled by the state there is no industrial unrest (such as strike action)
-
There is a greater emphasis on the quality of life (Health, Education, Elimination of Poverty, moral direction) than on the quantity of production (output) in the country.
Disadvantages -
There is no freedom of choice for consumers or producers
-
The system is too rigid to adjust when changes occur; this can result in shortages
-
Lack of incentive for workers results in low morale and efficiency. Managers are also not motivated
-
There are too many officials, and too much unnecessary procedures and paperwork (known as red tape or bureaucracy – for example, visiting a government office to obtain a permit).
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Objective 6: Identify the stakeholders involved in business activities Stakeholders – Are the various groups within or outside an organization that stand to gain or lose as a result of the organization’s activities
Internal Owners -
They want to be sure that the business makes a profit
-
Efficient management of revenues (Employees, equipment) Through planning, control and other functions and strategies in the business
-
They want to provide goods and services of high quality at a reasonable price
-
They also have the satisfaction of owing a successful enterprise
Employees -
They want to see that their earnings increase
-
Jobs are secured
-
Working conditions are better
-
An expanding company brings more chance of promotion and useful work experience
External Customers -
Buy quality goods and services (dependence on your business)
-
They want to be able to depend on the business for provision of goods and services
Community -
Benefit from increased employment
-
The business support community organizations
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Employees have money to spend
Suppliers -
They want to be able to sell to a successful business, hence a guaranteed market
-
They want to know that they will be paid in full and on time
Banks/Lending agencies -
Ensure principal plus interest would be repaid without difficulty
-
Lend the business money to expand
Government
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-
Gains money from a profitable business pays taxes as do well-paid employees
-
Successful business reduces unemployment and they earn foreign currency by selling goods and services
If a business fails the stakeholders suffer: Owners – Lose their investment and suffer from stress and worry Employees – Lose their jobs Customers – Have to go to a rival company if there is one Bankers –May Lose funds lent to the business. This is called Bad Debt. Suppliers – Loose a customer and may have to cut back their own business. They may also be left with bad debt for unpaid supplies The Community – Supermarkets and Other Local Business lose trade because workers have less money to spend. Unemployment may create social problems and crime. Sports and other Sponsorships may be cut. The Government – Lose tax income and has to deal with social problems. Export earnings fall. Imports increase if customers switch from local to overseas supplies.
Companies are likely to be successful if they promote good relations with their stakeholders Owners – Who earn a profit and are more likely to increase their investment. Employees - are more likely to work hard and creatively Customers – Bring repeat business Bankers – Are willing to lend. They may charge a lower rate of interest. Suppliers – Give priority to customers who give regular orders and pay bills on time. The Community – Is more likely to give support to a business which creates employment and supports local organizations. The Government – Is more likely to respond to the needs of a business which is a good corporate citizens and pays taxes. With money from taxes, the government can keep roads in good repairs and educate the next generation of employees.
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Objective 7 – Discuss the role of stakeholders in business activities Roles and responsibilities Owners -
To provide capital for the business (reward is profit)
-
In sole trader and partnerships owners are likely to have a role which includes i) Strategic management, that is making important decisions about the future of the business ii) And operational management, that is decisions about what happens on a day to day basis
-
In private limited companies the owners are likely to maintain full control, as most private limited companies are family concerns. In public limited companies, owners/ shareholders have the right to attend Annual General Meeting. Shareholders are allowed to vote on any decisions taken at this meeting.
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Objective 8: Outline the functions of a business A Business or business unit consists of a person or group of persons engaged in trade or some other commercial activity, with a view of making a profit. Not all organizations can be regarded as businesses. A Non-profit organization is not a business. For Example, a church bazaar may be engaged in selling goods, but it is not a business, because the money made will be given to the church or a charity. They did not sell with the aim of making a profit. A Private school, run for profit by its owners, is a business, but a government school, provided as a service to the community is not. Functions of a business The functions carried out by a business depend on its aims, goals and objectives. However, for most businesses there are several main functions: 1.) The Production of goods, services to meet customers’ needs and wants Goods are made through the use of raw materials and other products 2.) Create jobs by hiring and training employees 3.) Businesses buy goods and services for their own use and resale 4.) Raise money by borrowing They borrow for short-term cash needs from local banks
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Section 2: Internal Organizational Environment SPECIFIC OBJECTIVES Student should be able to: Objective 1: Describe the functional areas of a business
Functional areas refer to specialized departments within a business. These departments carry out specific functions that assists the business overall. Businesses can vary greatly in size. When a business is small, there are no definite functional areas evident. This is so because the owner usually produces and markets his own products, does his own accounting and personnel work. As the business expands, however, specialized (functional areas) departments become necessary. Most large businesses have FOUR functional areas: PRODUCTION, FINANCE, MARKETING and PERSONNEL. In very large businesses, there are TWO additional functional areas: RESEARCH and DEVELOPMENT, and SOCIAL Functional areas of a business 1. 2. 3. 4.
Production Finance Marketing Personnel
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THE PRODUCTION FUNCTION The Production Department is run by the Production manager. In this department, raw materials are combined to produce goods and services. Designers make specifications which are fully developed and tested. Sample products are also made. There will be no production department if the business is only engaged in retailing or wholesaling, since they are buying and selling already manufactured goods or they are in the service industry. Functions -
Purchasing the raw materials
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Scheduling the production process
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Making of the Product
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Warehousing the scheduling goods
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Establishing quality control procedures
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Maintaining an adequate inventory system
Production should be geared toward: (i) (ii) (iii)
Offering the highest quality and standards required; Producing the quantity required in a timely manner; Making the goods and services available at an affordable price to customers.
A method of production adopted by some firms or industries is ‘mass production’, which means producing goods in very large quantities (usually by using automated methods). Mass production often leads to reduced cost (for the producer) and cheaper prices (for the customer). Apart from the main functions of the Production Department, the manager and staff may also be responsible for: -
Controlling progress and standard of the work;
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Keeping production records;
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Keeping abreast of production costs;
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Estimating the cost of jobs;
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Preparing the budget for the production department;
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Liaising with the various departments and sections; and
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Providing overall, excellent service to the organizing and eventually to customers.
THE FINANCE FUNCTION The Accounting and Finance Department, which is usually run by the Financial Comptroller of the business, is responsible for the accounting procedures and processes of the business. The department deals with the money management and money resources of the organization and
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usually has overall control of income and expenditure within the organization. The finance function of the business mainly involves: (i)
(ii)
(iii) (iv)
Producing the business’ annual, final accounts. This includes the preparation of the Trading and Profit and Loss Account and the Balance Sheet, to be presented to the shareholders and to be filed with the Registrar of Companies. Advising management on the availability of capital for expansion and the investment of funds in plant building and machinery. The department will offer advice on how funds may be raised; the ability to pay higher wages and so forth. Ensuring that dividends are paid to shareholders (if shareholders are paid dividends). Maintaining a satisfactory cash-flow position
Other Functions include: Making out payments on behalf of the business and Receiving all the monies due to the company The payment of wages and salaries Purchases and Sales, whether for cash or credit Budgeting and forecasting Establishing hire purchase and credit control measure as well as a collection system
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THE MARKETING FUNCTION The Marketing function of the firm involves identifying and/or anticipate customers’ wants and needs and to satisfy them in an efficient and profitable manner. The Marketing and Sales Department is controlled by the Marketing (and Sales) Manager who has direct responsibility for: (i) (ii) (iii)
Assessing market possibilities through market research and sales forecasting; Advertising and sales promotions; and Distribution of products.
Other Functions include: -
Liaise with Production Department regarding product design
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Pricing
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After-sales service, repairs and refund
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Storage of products (if not done by Production Department)
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Dispatch and control
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Transportation of products
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The preparation of: (i) Sales invoices; (ii) Cost of Sales reports, Sales statistics, etc.
THE ADMINISTRATIVE FUNCTION The Administration Department is also referred to as the Personnel Department or the Human Resources Department. It is often managed by the Administrative Officer or the Chief Personnel Officer or the Human Resource Manager. The functions and duties of this department concern mainly the employees of the business. Functions -
Planning and forecasting man-power requirements
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Recruiting and selection of employees of the business
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Job analysis and job descriptions
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Job specifications and employee training
Having looked at the FOUR main areas, let us now spend a few minutes on the additional functional areas that may exist if the business is large.
Additional functional areas that may exist if the business is large:
THE RESEARCH AND DEVELOPMENT FUNCTION This department includes many types of research such as consumer, product and motivation The work of this department includes many types of research, e.g., consumer research, product research and motivation research. Feasibility studies and pilot projects are carried out and communication with research institutes, such as the department of statistics, takes place.
THE SOCIAL FUNCTION This may include: trade union negotiations, efforts to reduce pollution and dumping of waste products, provision of health facilities and the provision of clean working environments, and the initiation of social groups in the business e.g., clubs and credit unions. Many persons decide to own and operate their own businesses. Some decide to invest in the business ventures of others. Still, others end up working in the business. Whatever the case, one needs to understand the fundamentals of management. Functions
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Trade Union Negotiations
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Efforts to reduce pollution
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Dumping of waste products
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Provision of health facilities
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Provision of clean working environment
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The imitation of social groups in the business. E.g. Clubs and Credit Unions
Objective 2: Outline the functions of management The functions of management 1. Planning – Is the developing for the future activities and opportunities of the business. 2. Organizing – Involves ensuring that everything is I place for the work of the business – that materials, equipment personnel and financial resources are available at the right time. 3. Directing – Involves ensuring that the middle or junior management and other employees have what is required of them 4. Controlling – Involves setting up systems which monitor performance so that problems can be detected and dealt with 5. Co-coordinating –Ensuring that different departments work together and provide support for each other 6. Delegating – Involves giving responsibility for specific areas to middle and junior managers. Senior managers retain final responsibility 7. Motivating – Inspiring staff so that they are keen to do their jobs to the best of their ability. This includes providing the right pay and incentive structure and creating a prospectful working environment. 8. Communicating – Ensuring that staff and stakeholders are aware of what is expected of them, of what is happening in the organization and of what is planned for the future.
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