Csec Principles of Business Study Guide

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Caribbean Examinations Council®

for CSEC

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®

for self-study and distance learning

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for CSEC

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P LE

®

for self-study and distance learning

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Contents

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Introduction

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The nature of business

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Marketing

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Business finance

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Internal organisational environment

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T 10 Social accounting and international trade

The school-based assessment

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Legal aspects of business

Production

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Establishing a business

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The role of government in an economy

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Regional and global business environment

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Introduction

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ឣ Purpose

ឣ What resources will you need? ®

ឣ Course aims

1 promote understanding of theories, concepts

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and practices that are applicable to the culturally diversified economic environment of the Caribbean; provide knowledge of business and of its role in a rapidly changing Caribbean and global economic environment; provide the opportunity for informed decisionmaking through the development of skills in critical thinking, problem-solving, research and communication; nurture students’ creative and entrepreneurial abilities to enable them to participate fully in the local, regional and global economy; sensitise students to the need for responsible social and ethical behaviour in their pursuit of business goals; enable students to access and apply appropriate technology in pursuing opportunities and solving problems in business.

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You will also need basic study equipment, for example, paper, pens, pencils and highlighters for marking important parts of the text. A good dictionary and a thesaurus are also essential to this programme.

ឣ Managing your time

This course aims to:

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Remember that this study guide will not be all that you need to complete the syllabus and prepare for your examination. You are expected to make use of the resources listed at the end of the course book as well as engage in other wide, general reading, which will improve your general knowledge, vocabulary and structural competence.

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The Caribbean Examinations Council (CXC ), in collaboration with the Commonwealth of Learning (COL), has developed self-study guides for a number of Caribbean Secondary Education Certificate (CSEC®) and Caribbean Advanced Proficiency Examination (CAPE®) subjects. The main purpose of the guides is to provide both in-school and out-of-school candidates with resource materials to help them prepare for CXC examinations. Each study guide is student-centred and its language is student-friendly.

ឣ Course structure The course consists of 11 sections based on the Principles of Business syllabus. Each section addresses the skills and content of a specific module of the syllabus. However, the sequence of the section does not mirror that of the syllabus modules since the syllabus modules are not bound by a rigid sequence. The sequence of topics in this course is designed to facilitate study by leading you through topics in a way that enables you to build on previously learned skills.

Remember to put aside a special time each day for general reading in addition to your study time.

ឣ Study guide structure

You will be exploring 11 sections in order to complete the Principles of Business syllabus. Each section starts with the following items: ឣ

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Section introduction This gives you a brief overview of the entire section, and places it in the context of the Principles of Business syllabus. Objectives These show you the main things that the writers want you to learn, and the specific skills that you should have acquired by the end of the section. You should read these carefully to acquaint yourself with what you are meant to be learning. Topics This lists the topics that are to be covered in the section.

The topics in each section are structured as follows: ឣ

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Introduction This places what you are about to study in the context of your everyday life and relates it to what you have done in previous sections. Contents This is the information that forms each lesson and is meant to guide you to an understanding of each concept being taught. Read carefully before you attempt any activities that follow. Activities Instructions are provided at the start of each activity. Read all instructions carefully

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Introduction

before you attempt the activity. Some activities require you to think about something before you read any further. You should take the necessary time to do so. The thinking activity is designed to help you focus your thoughts in the right direction and facilitate your ability to complete the activities that follow. Feedback Each activity has feedback that allows you to determine how you have done in the activity. If you have not completed the activity successfully, you should reread the preceding examples or information carefully. Examples These are meant to guide you to an understanding of the concept being taught. All examples should be read carefully before you attempt any activities that follow.

At the end of each section, you must pay special attention to the following:

End test This comes at the end of each section of the study guide and is designed to ensure that you have acquired those skills identified in the objectives. There is a feedback section following the test which allows you to measure the accuracy of your answers, so that you will know whether or not you have acquired the competencies. If there are questions in the test that you have not answered satisfactorily, ensure that you return to the relevant section of the study guide and review those areas until you are satisfied that you have understood the concept. Key points These summarise important concepts that you need to remember and pay special attention to in the future.

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ឣ Assignments Course assignments are included in order to allow you to check your progress through the course. The assignments enable you to determine your areas of weakness and to check your understanding of the concepts.

ឣ Examinations Please refer to the latest syllabus for guidance on the structure of the exam, the number of papers, the length of each paper, what marks are allocated to each question and the structure of the school-based assessment.

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ឣ School-based assessment

The school-based assessment component of the Principles of Business syllabus is a single guided research project for school candidates. Candidates are required to write a business plan for a specific functional area of a business. The project should be based on the theme of establishing a business. Students should apply the knowledge and skills incorporated in Profile Dimension 2: Production, marketing and finance. The business plan should be on one of production, marketing or finance. The report should be between 1,000 and 1,200 words (not including appendices). Private candidates, or those candidates who are not under the direct supervision of a recognised educational institution, are required to write Paper 03/2 in lieu of the project. Please refer to a copy of the latest syllabus for guidance on the structure and length of this paper.

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General objectives On completion of this section, you should: appreciate the stages in the development of business activities develop an understanding of the underlying business principles that form the basis for business decisions.

Specific objectives You should be able to: explain terms and concepts related to business

differentiate among types of private and public sector business organisations

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distinguish among the economic systems

Chapter 1 introduces you to the principles used by business organisations to guide their operations. You will learn how humans conducted business activity long before the ‘invention’ of money. We will examine the different types of businesses, as well as the main types of arrangements that countries use for all their business activities. You will also learn about stakeholders in a business, and the main functions and responsibilities of businesses in a country. On completion of this chapter, you should have a good understanding of the general features of businesses.

ឣ Contents ឣ

Important business terms and concepts From barter to the use of money and e-commerce Types of businesses in the private and public sectors Forms of business organisation and arrangement Economic systems Stakeholders Responsibilities of a business

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describe the transition of business activity from barter to the use of exchange instruments

Welcome to the wonderful and exciting world of business! An excellent way to start is by understanding the jargon, or main words and concepts of the business world. The topics that you learn in this section will give you a framework or foundation that you will use for all the other sections. You will be using these new words as your own business vocabulary, so study carefully. It is very important that you understand the topics, because this information is used to make business decisions.

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discuss the role of stakeholders involved in business activities outline the role and functions of a business.

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Important business terms and concepts Have you ever tried to learn a new language or dialect? Maybe as a child you played the game of creating your own language. This topic is your introduction to the study of business. It helps you to form your new business language or vocabulary. Before you can think and act like a businessperson, you must first learn how to use the words that they use every day. Let’s get familiar with the words below.

Enterprise The word enterprise could simply mean ‘a business’. Generally, it is used to describe an undertaking or activity with some degree of difficulty or risk. This undertaking has a specific purpose. A business enterprise has a monetary purpose or goal. Enterprise could also mean ‘initiative’, which is daring to do something new or different, challenging or risky.

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Chapter 1

Example ‘Tommy has started a small restaurant. This enterprise should be very successful because he is such a great chef!’

Entrepreneurship

Barter

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Entrepreneurship is the practice of identifying a new innovation or opportunity, organising the financing and other resources, and taking the risk in the hope of creating wealth. The entrepreneur is the individual who identifies the opportunity and risks the time and money to start to organise this new adventure. You could use the internet and talk to your parents or guardians to learn about many interesting entrepreneurs in your country.

This means the exchange of goods for other goods. This was the first type of trade. Did you know that some businesses today still carry out barter? We will examine barter in the next topic.

Profit

which is the same as writing: TR > TC

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Total revenue (TR) is greater than total cost (TC)

Example

Profit is the outcome or result when:

TR is $600 and TC is $400, therefore: TR − TC = profit $600 − $400 = $200 profit

Example

This is the money remaining or left over after the costs 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 way:

TR is $300 and TC is $500, therefore: TR − TC = loss $300 − $500 = ($200) loss

Loss

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Revenue is the money earned from the enterprise or business.

A loss is the opposite of profit. When the costs of production and other expenses are greater than the revenue, this is called ‘making a loss’. It means that the business is not making enough money. A loss is the outcome or result when: Total revenue (TR) is less than total cost (TC) which is the same as writing: TR < TC

Activity 1.1 Let’s see whether you understand the concepts of profit and loss. Imagine that Peter makes fruit juices in your neighbourhood; below are his costs and revenues for September and October in 2010: September Total sales revenue is $50,000 Total cost for all expenses is $55,000

October Total sales revenue is $60,000 Total cost for all expenses is $52,000 a In which month did Peter make a profit? b What was the amount of the profit? c How much was the amount of the loss?

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Feedback If you understood how we calculated the profit and loss in the examples given, this activity should have been easy. Your answer should be: a Peter made a profit in October. b TR $60,000 − TC $52,000 = $8,000 profit c TR $50,000 − TC $55,000 = ($5,000) loss

In part (c), the loss is written as a negative value by using brackets ( ). You could also have used a minus sign to show that it is a negative value.

Trade

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This means buying and selling. A business will engage in trade in order to make a profit.

Organisation

This means 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. A business is an organisation. The word ‘organisation’ is used for many other institutions, such as churches.

Economy

Producer

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This is a system that allocates or shares scarce resources by deciding what should be produced, how and for whom. Different countries may make different decisions about these things, so we would say that they have different types of economies.

This is a person or business that makes or creates goods or services. Usually, the goal of the producer is to make a profit.

Consumer

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This is the person (or group) that buys goods and services to satisfy wants. The goal of a consumer is to maximise satisfaction. Think of the things that you buy. You are a consumer, and you buy things that give you satisfaction. What are some of the things that you buy?

Goods

These are things that are made to be sold, otherwise called products. Goods are used in exchange or trade, along with services. Goods are tangible (can be seen and touched), unlike services.

Services This means work that is done for another; assistance or benefit given. Services are intangible, unlike goods.

Market A market is any situation in which buyers and sellers meet or communicate in order to exchange goods and services. The buyers and sellers do not have to meet face-to-face. Have you been to a produce market in your country? Well, this is only one example of a market,

Example

This is the giving of one thing and the receiving of another. The things exchanged are usually of similar value.

Whenever you purchase a book, you are purchasing a ‘good’ or a product.

Example

Exchange

When you pay the dentist for checking your teeth, you are paying for a service.


Chapter 1

where the buyers and sellers meet face-to-face. Buyers and sellers can communicate and do business online or over the phone.

Commodity This is an item that is traded, usually raw materials such as copper or coffee.

Capital This word has different meanings. It can mean the money and other resources or things that are used to start a business. It can also mean the money, machines and man-made materials that are used every day in business.

Labour

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This is the physical or mental work of a person. It also means ‘the worker’. Labour is another name for human resource.

Before we examine the final word, let’s carry out a revision activity. How much do you think you remember?

Activity 1.2

Carefully read each of the following statements or questions. This is a multiple-choice exercise. You must select the best option among (a), (b), (c) and (d) below each statement or question. Another word for a business is a building b capital c enterprise d economy

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Persons who own and operate their own business are called a executives b operators c economisers d entrepreneurs

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An intangible benefit is called a a service b good c commodity d market

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When coffee is traded between countries it is called a a loss b profit c good d commodity

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Which of the following words could mean man-made resources? a labour b capital c organisation d market

A person who creates goods and services is called a a consumer b producer c businessperson d trader

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Feedback Your answers should be: 1

c

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Specialisation Specialisation of labour refers to the division of a task into a number of related parts. Adam Smith (1776) noted that the pin-maker, before division of labour, could make perhaps one pin in a day. With division of labour, this same job was divided into 18 distinct operations, which included one person who drew out the wire, another who straightened it, a third who cut it, and a fourth who pointed it and so on. Since all of these processes were performed by distinct hands, there was an increase in output to 48,000 pins in a single day. Specialisation is a form of division of labour in which each individual or firm concentrates its productive efforts on a single or limited number of activities. Specialisation can:

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occur at the product or occupational level, for example, the production of cows’ milk; be a process, for example, the making of butter; be by firm, for example, Jamaica Cement Limited specialises in the production of cement; be industry-related, for example, it could be confined to the bauxite industry; be regional or international in scope, for example, the Caribbean area is known for tourism.

Advantages

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It increases the skills of workers since the same task is repeated and workers learn from repetition. It increases productivity. Less time is used to change from one activity to another. The cost of production is reduced since a greater number of items are made. The quality of the product can also improve since workers are more skilled and the use of machines means that quality control can be observed. Less time is spent on training of workers because only a small part of the skill is necessary.

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Let us now explore the advantages and disadvantages of division of labour and specialisation.

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Disadvantages ឣ

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Here is your opportunity to test whether you understand division of labour. List five areas of specialisation for conducting the:

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Activity 1.3

The work is monotonous. The work becomes boring and tiresome. The work environment is impersonal since specialisation leads to large-scale industries in which workers are no longer close family members. Workers may lose pride in their job since they are not completing the entire job and, therefore, cannot fully appreciate the making of the product. Some processes require a large amount of capital to purchase the machinery.

a building of a house b manufacture of a motor car c production of a movie.

Feedback Your answer could include the following activities: a The building of a house – architect or draughtsman; mason; plumber; electrician; carpenter. b The manufacture of a motor car – designer; engineer; upholsterer; painter; auto electrician. c The production of a movie – scriptwriter; set designer; actor; musician; director.


Chapter 1

Activity 1.4 This activity will help to reinforce your knowledge. The advantages and disadvantages of the division of labour and specialisation. State whether the following statements are true (T) or false (F). 1

Specialisation increases efficiency.

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Division of labour develops an individual’s creativity.

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Specialisation can be applied to all productive activities.

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Cost per unit is reduced with specialisation.

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Specialisation produces sameness of products.

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Workers feel alienated from their produce because of division of labour.

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From barter to the use of money and e-commerce

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Business activities change over time. You must now examine the history of business activity in order to understand why changes were necessary. This topic explains these stages, which started with direct satisfaction or self-sufficiency through to the use of money. You will also examine why people found it necessary to establish businesses. You should be able to use the words and terms from the previous topic. Are you ready for our history lesson?

How our ancestors satisfied their needs and wants

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Our early ancestors satisfied their primary needs for food, clothing, shelter and protection directly from nature. Food came from animals, trees, the seas and the earth. For example, they hunted animals for their meat and skins, which provided food and clothing, respectively. They gathered berries, and scoured the shrubs and grasses for wild peas and beans. Fishing in rivers and watercourses provided fish and seaweeds.

Activity 1.5

Imagine you were living in a primitive society; list five items you would use as food, and the source for each item.

Feedback If you listed any item that is used directly from nature without any processing, you are correct. Below is a list of some of these items. Food such as fruits, peas, beans and berries were obtained from trees. Ground provisions such as cassava and dasheen were dug out of the earth. Small animals, including birds, and produce of animals such as milk and honey, were obtained from animal life. Fish and seaweeds were sourced from the sea.

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Now let us examine how our early ancestors equipped themselves with clothing, shelter, tools and utensils. Clothing was provided from animal skins, for example, wool from sheep. Branches and leaves from trees, and mud and stones from the earth, were used to build huts. Tools and weapons were made of animal teeth and bones, branches and small stones. Spears, for example, were made from tree branches. Utensils such as bowls for storing water were made from clay and stones or provided from the cleaned-out insides of seeds such as the coconut. Grass was used to make baskets. Animal bones, horns and items such as elephant tusks were used to make eating and drinking utensils. Wood and stones were used to make firesides for the cooking of food and provision of warmth.

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Activity 1.6 From the information you have just read, identify the items of nature used by our early ancestors.

Feedback You should list items from the earth, seas, animals and trees. You could include stones, grass, bones and similar answers.

ឣ The development of the barter system

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You have seen that our early ancestors satisfied their needs directly from nature, hardly altering the original state of the goods by cooking or applying any form of processing. Economists refer to this type of existence as the direct satisfaction of wants. An economic system where needs and wants are satisfied directly from nature is referred to by economists as a subsistence economy.

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The problem, however, was that no one area provided all the goods to satisfy the needs of families, who were forced to specialise in whatever crops were native to the area they inhabited. For instance, a Taino family producing corn on the banks of a river in Guyana still relished the meat and skins that Kalinago hunters from the interior possessed in large quantities. It will be obvious to you by now that, in time, there would develop a system whereby tribes would begin to exchange their goods for those they were unable to acquire themselves. This system whereby goods are exchanged for other goods is called bartering.

ឣ Limitations of the barter system While bartering solved some problems, there were many drawbacks. 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 a double coincidence of wants. For example, Jim must need the bananas that Tom has, and Tom must need the peas that Jim has. Only then is the exchange possible. The process became very complicated when more than two persons were involved in the exchange, since persons would have to keep exchanging items until individual wants and needs were met. Another problem was deciding the rate of exchange or the right quantity acceptable in exchange for the other item. For example, how many

Example

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A subsistence economy continued for thousands of years, until groups of hunters and gatherers found it convenient to abandon their nomadic way of life and settle down on the embankments of rivers, streams and waterways. Here, they could obtain a steady supply of water; locations such as these provided fertile soils and both plant and animal life could be found in abundance. This act of settling down created the conditions for a more orderly and peaceful existence, in which family units could thrive by gathering food, caring for plants that they found in the immediate environment and even, through trial and error, learning to cultivate and tend crops for themselves.

Bartering The exchange of fish for green peas, or bananas for yams, or pearls for a stone axe. These exchanges all involve the giving of one item for another, and money is not used.

Activity 1.7 From your reading of the above, define the term ‘barter’, giving an example in your answer.

Feedback If your answer indicates that bartering is the exchange of goods and services without the use of money, for example, the exchange of gold bits for sheepskins, you are indeed correct.


Chapter 1

pounds of peas would be acceptable in exchange for a certain quantity of bananas? For instance, are 10 lbs of peas equal to 2 lbs of bananas? Another problem was the indivisibility of certain commodities. One could not exchange part of a cow for peas, since refrigeration was not yet invented. It therefore meant that the entire cow had to be traded as a single item of trade. If the recipient did not require the whole cow, then a problem of divisibility would arise.

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Yet another problem was the store of wealth and store of value. Some items lost value with the passing of time, while others gained value with time. 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 guaranteed a fair price for goods that were exchanged.

Activity 1.8

Read the following case and identify the problems of the barter system experienced by Ancient Tim and Zion.

Feedback

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Case study Ancient Tim, who cultivated peas and corn for himself and his wife, wished to have fish to complement his peas and corn for dinner. He approached Harry, but Harry had only mutton and did not require peas or corn. He approached Jane, Frank and Mary, but still was

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The problems of Ancient Tim and Zion were derived from two problems associated with bartering: the need for a double coincidence of wants, that is, Ancient Tim had to find someone who had fish and required peas and corn; later, Zion faced the same problem when he could not find someone who had bones and required fish

unsuccessful. After five days, Ancient Tim met Zion, who had some very large fish. They both had difficulty in deciding how many of Ancient Tim’s peas could be exchanged for one of Zion’s large fish. Also, Zion needed animal bones to make spears for fishing the next day. He approached Mary, Harry and Jack, but by late evening he was unable to find a suitable person with whom to exchange his remaining fish for the bones of animals.

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indivisibility of the commodity, that is, Tim did not want all the fish Zion had, and, therefore, there was a problem deciding on the exchange rate of the items and their value, especially in light of the fact that they were both perishable items.

ឣ The history of money

Money is considered a financial wonder since it solved many of the problems associated with the barter system. In this section, we will examine the functions and characteristics of money and show that its introduction facilitated trade and led to the development of the modern financial system that is in operation today. Our early ancestors progressed from using peas, stones and shells to using precious metals for trading. The Egyptians were among the first to use metal rings as money. The Lydians introduced coins to the Western world. Coins were more acceptable since they were hard-wearing, easy to carry and contained valuable metals. These coins were referred to as commodity money. The value of the coin depended on the quantity of gold or silver it contained.

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The Chinese introduced paper currency. The Emperor’s seal and signature were placed on the paper in order to authenticate the currency. Paper currency is not intrinsically valuable since the paper only represents wealth and promises that it would be exchanged at a later date for other commodities. ‘Representative money’, therefore, is accepted in the exchange for goods and services since it has been authorised by the government.

Activity 1.9 This exercise will help you to understand the contribution money has made to economic progress. Indicate which of the following statements are true (T) or false (F). In early civilisation traders used ‘commodity money’.

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Coins were introduced because they were durable.

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‘Commodity money’ was regarded as token money.

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‘Representative money’ was accepted because the emperor’s seal and signature were placed on it.

Feedback

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‘Representative money’ can be exchanged for a commodity.

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In today’s trading, representative money is used.

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ឣ Features of money

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Money is any commodity that is accepted as a measure of value and a medium of exchange. To be accepted as money, the commodity must have the following features:

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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 homogeneous. 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.

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Today, paper money (‘fiat money’) and coins are the most common forms of money.

ឣ Functions of money Now let us consider the functions of money. In order for money to effectively solve the problems of the barter system it must serve as a: ឣ

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medium of exchange – everyone must be willing to accept it in the exchange for goods and services; standard of value – the worth of the goods or service is measured in money, which sets the price of the item. For instance, a ring with a price of $60.00 is worth twice as much as a ring for $30.00;

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Chapter 1

store of value – money can be saved and used in the future. It makes saving possible and hence brings about investment; means of deferred payment – money is used to pay for goods bought on credit; facilitator of the price mechanism – it is the price one is willing to pay to satisfy effective demand.

Activity 1.10 This activity will help you to recall the functions of money. Match the statements on the left with the functions listed on the right. Trade is facilitated because money is acceptable.

means of deferred payment

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A pair of shoes for $10 is worth four times as much as a cap. This function deals with the price of items.

medium of exchange

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It can be accumulated and used to purchase a car in three years’ time.

price mechanism

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My stereo system can be purchased on hire purchase.

store of value

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It makes easy the exchange of currency for purchasing goods standard of value and services.

Feedback

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medium of exchange standard of value

ឣ Bills of exchange

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store of value means of deferred payment

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price mechanism

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It is possible that bills of exchange were being used before paper money was created. A bill 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 specific sum of money at a specific time in the future. The person who is sending it is called the ‘drawer’, the person receiving it is called the ‘drawee’ (who owes 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.

ឣ Credit cards At this stage all business students should understand the concept of credit, that is, making payment after a person has received the item or benefit being purchased. A credit card is a card given by a financial institution to its customer which authorises that customer to purchase ‘on credit’. This card enables the electronic transfer of information and money.

Example

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The previous section described how and why people developed a ‘money economy’. In the business world today, people use money as well as different forms of ‘near money’, that is, other acceptable forms of payment. One example is a cheque, which is a signed order for payment from a person’s bank account. Another example is a bill of exchange. Mr Chung Foo in China is selling two cars to Mr Davis in Grenada. The cars will be shipped off to Grenada as soon as Mr Davis accepts the bill of exchange that Mr Chung Foo has sent. The cars will take 27 days to reach Grenada, and the bill of exchange is due to be paid in 28 days.

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ឣ Electronic transfer

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Customer Bob presents his credit card to the grocery store instead of making a cash payment. The grocery store’s cashier accepts the credit card and inserts it in a machine which is electronically linked to the financial institution. It will reveal whether the card is valid and the amount of money is authorised. If the transaction receives an approval message, the machine prints copies of a receipt. The cashier gives Bob one copy of the receipt. The cashier will send another copy of the receipt to Bob’s financial institution, which will make the necessary payment. Bob will then have a specified period of time to pay the financial institution.

Previously we used the word ‘electronic’. One meaning of the word electronic is ‘via the use of a computer network’. This should help you to understand how money is transferred electronically.

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Electronic funds transfer is a very fast and safe way of making payments during trade. The payment can be transferred electronically from one bank account to another. A cardholder can insert his or her automatic banking card (also called a debit card) into a machine which is electronically linked to his or her bank accounts. By keying in a special code, the cardholder authorises the transfer of money from his or her bank account.

ឣ Telebanking and e-commerce

E-commerce refers to any business transaction that is done through the internet. This may include the transfer of money as well as information. Many Caribbean businesses are able to compete with other businesses all over the world by engaging in e-commerce. They advertise, purchase materials and sell their products over the internet.

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Example

In order to receive a credit card, persons must first qualify, that is, satisfy the financial institution that they will make the necessary payments when they are due. If the payments are not paid on time, then the cardholder must pay interest charges.

Telebanking is a system for conducting banking transactions over telephone lines.

Activity 1.11

This activity will help you to understand when the different instruments of exchange are used. Answer the following questions by indicating which of the instruments would be most appropriate: a bill of exchange, credit card or electronic transfer, or telebanking. 1

Marie lives in Jamaica. She is buying an expensive machine from Japan. She has to show that she is willing to pay before the machine leaves Japan. However, she does not want to release the actual money from her bank account until she is sure that the machine has arrived in Jamaica. Which instrument should she use?

2

Paul wants to sell his guava jam in England. It is produced in Guyana, but English buyers want to buy many cases in England. Paul can send the jams on a plane, but he wants payment first. What is the fastest payment method for Paul’s customers?

3

Oliver wants to travel to another part of the country to purchase some supplies. It will cost a lot of money, but Oliver does not want to travel with a large amount of cash. What would be a more convenient payment method for Oliver?


Chapter 1

Feedback 1

Bill of exchange

2

Telebanking or electronic transfer

3

Credit card

ឣ Reasons for establishing a business A business organisation is formed when a person or group of persons uses resources to provide goods or services with the view of making a profit. There may be other goals, such as maximising sales, the growth of the firm’s assets or simply satisfying the owners’ desire to be in business.1

P LE

The profit-making motive distinguishes businesses from nonprofit-making organisations. The purpose of business is to make a profit, whereas the purpose of non-profit-making organisations is humanitarian, that is, providing services or goods for the benefit of mankind. Non-profit-making organisations may, at the end of their financial year, generate a surplus. Examples of non-profit-making organisations are social clubs and organisations that provide support for disadvantaged persons in society, for example, a home for abused women.

Activity 1.12

M

Classify each of the following businesses as either profit-making or non-profit-making. The first one has been done for you.

S A

Tom repairs shoes for people in the community. Rodney sells food items to the neighbourhood. Mary prepares meals for the homeless. John provides a taxi service.

A rehabilitation center for alcoholics and drug addicts. UN home for abused women.

Mrs Jones charges $150 for Principles of Business tutorials. The farmer sells his produce in the wholesale market. The neighbourhood community group sells sweets and cakes in order to offset the expenses of the group. The farmers’ cooperative sells seedlings to the farmers in the neighbourhood.

1

Layyne, W. Armanand , Samuel, Wendell and Anthony Kenny, CXC Principles of Business, Cambridge University Press, 1994.

Profit-making business ✔

Non-profit-making organisation

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Feedback Profit-making business Tom repairs shoes for people in the community.

✔

Rodney sells food items to the neighbourhood.

✔

Non-profit-making organisation

✔

Mary prepares meals for the homeless. ✔

John provides a taxi service.

✔

UN home for abused women.

✔

P LE

A rehabilitation center for alcoholics and drug addicts.

Mrs Jones charges $150.00 for Principles of Business tutorials.

✔

The farmer sells his produce in the wholesale market.

✔

The neighbourhood community group sells sweets and cakes in order to offset the expenses of the group. The farmers’ cooperative sells seedlings to the farmers in the neighbourhood.

M

ឣ The main functions of a business The functions are listed below.

ឣ

ឣ

ឣ

ឣ

The production of goods or services. Goods are tangible items used to satisfy human wants and needs, whereas services are intangibles that are used to satisfy human wants and needs. The creation of jobs. In order to produce goods or services, labour must be used. The amount of labour used will depend on whether the firm is labour-intensive or capital-intensive. Labour-intensive firms employ a large number of people, whereas capital-intensive firms use a lot of machinery. In the case of private investments, the aim is to make a profit. All businesses aim to make the highest possible returns on investment so that the shareholders (owners) of the business receive an adequate dividend. The aim of non-profit-making organisations is to fulfill a need in the provision of goods or services that will be of benefit to the community. In society, there are those who are unable to satisfy their basic needs through their own efforts, and others who may need financial or social support. To contribute to economic growth. Economic growth is the increase in the total real output of goods and services in an economy over time. Business adds to economic growth. Each new business adds to output, and creates growth and employment.

S A

ឣ

✔

✔

17


Chapter 1

Types of businesses in the private and public sectors In mixed economies like ours in the English-speaking Caribbean, businesses are classified into two types, depending on ownership. These are the private sector and the public sector. These two groups have some differences, and knowing these differences will help you to understand the decisions of different businesspersons.

Example

Firms in the private sector One-owner businesses, such as the small shop on the street, family-owned businesses, a large business with several investors, or multinational companies.

Public sector organisation Organisations in the public sector are government-controlled agencies, such as those that supply water and sewerage services, or those in communication, such as The Telecommunication Services of Trinidad and Tobago (TSTT), the Jamaica Telecommunication Services and government agencies such as the Ministries of Health, Education and Social Services.

P LE

The private sector is that part of the economy that is funded by private individuals and is therefore owned and controlled by private firms. The objective of the private sector is to make a profit. The private sector includes the self-employed, the manufacturing industries, firms in the construction industry, joint ventures, multinational firms and cooperatives. In most countries, it also includes ‘hawkers’, that is, those who are engaged in purchasing items from abroad to be sold locally on the streets or in homes.

Example

ឣ Private sector

Firms in the private sector have the following common features: ឣ

ឣ ឣ ឣ ឣ

the aim is to make a profit; profits are shared among shareholders or those who invest in the company; the business is funded by the owners; there is little or no government intervention or control; the business is funded by private individuals; owners are free to make their own decisions as long as these decisions are not contrary to the laws of the land.

ឣ Public sector

M

ឣ

S A

The public sector is that part of the economy that is financed by the government through taxpayers, and is controlled and operated by the government or its agents. The surplus or profit is used for the benefit of the entire population. The public sector includes governmentcontrolled companies, companies incorporated by the government through legislation, companies that are essential for the development of the economy, and companies in which the private sector has little or no interest until they are sufficiently developed or if profits are to be made in the future, for example, communication companies or production of water and energy. Firms in the public sector share the following features. This sector: ឣ ឣ

ឣ ឣ ឣ

aims to provide a service at the lowest possible price; uses profits to improve the efficiency of the firm or to benefit all citizens; usually participates in ventures that provide basic necessities; is funded by the government through taxation; is driven by the need to provide goods and services to the population so as to improve their quality of life.

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Activity 1.13 This activity will help you to identify businesses in the private sector and the public sector. The knowledge will assist you in understanding why businesses operate in a particular manner. Read the instructions of the various businesses and indicate whether these businesses are in the private or public sector. Jim maintains his family by using his private vehicle for hire.

2

Mary goes to Florida every three months to shop. On her return she sells her goods in the vendors’ mall.

3

State Co. is a company of which the government has 60 per cent ownership; it supplies water to an Asian country.

4

Agri. Co., an agricultural company that grants loans to farmers, is controlled by the state.

5

Power Supply Inc. is a joint venture firm which supplies energy to the country.

Feedback

2

private private

3 4

public public

5 6

private public

M

1

The postal agency is a statutory body that is controlled by an government-appointed board of directors.

7

A public transport company that is funded by taxpayers.

8

A group of designers and seamstresses formed themselves into a company, Jamaica Garments, which supplies uniforms and a variety of cloths for the government.

9

A multinational firm that has been serving food and related beverages to the Caribbean area.

P LE

1

6

7

8

10

public private

Samson’s Housing Development builds homes throughout the Caribbean and Latin American countries.

9

10

private private

S A

Forms of business organisation and arrangement ឣ The sole trader/sole proprietorship Definition

A sole trader is a person who has total ownership of and responsibility for managing his or her business. The owner is the boss. As owner, there is no obligation to share the profits with others and all the debts incurred by the business are the responsibility of the owner alone. This responsibility for the debts may even extend to personal assets. In other words, one may lose one’s home or personal car in the settlement of the debt of the business.

Characteristics of a sole trader ឣ

ឣ ឣ

ឣ ឣ

ឣ

He or she manages the business, but may have the services of family and friends. He or she enjoys all the profit and bears all the risks. Capital is limited since the savings of the owner fund the business. He or she has personal contact with the client. He or she performs a large variety of tasks related to the operations of the business. This type of business is not incorporated (not given a separate identity) and is therefore easy to set up.


Chapter 1

This type of business can easily be found in the service industry. Sole traders are employed as decorators, electricians, plumbers, hairdressers, small building contractors and small farmers, or for professional services, such as doctors, lawyers and surveyors.

Formation There are no legal formalities involved in setting up business as a sole trader, except that a trade name must be registered and some traders must acquire special licenses. For example, the sale of alcohol requires a license from the local magistrate, and the sale of food items requires prior approval from the local health authority.

P LE

Legally, the business and its sole proprietor are inseparable, and therefore the owner is responsible for all debts, including taxes (income tax) and National Insurance contributions as a self-employed person.

Management and advantages of the sole trader

The sole trader manages the business personally, and this has many advantages, as listed below.

ឣ

ឣ

ឣ

ឣ

ឣ

M

ឣ

Ease of formation: As mentioned before, there are no legal requirements, except in a minority of trades. Independence: Many persons find personal satisfaction in working for themselves. Simple organisational structure: The organisational structure is simple, usually the owner and one or two employees, who may be relatives or friends. Personal control: The proprietor has personal control, with no obligation to consult, thus decision-making is quick. Personal service: The proprietor knows his staff and customers individually and can vary the hours of work to suit the customers. Secrecy: There is no need to disclose business affairs, except to the tax authorities and to creditors when seeking loans. Minimum accounting is necessary only to satisfy the income tax office. Personal commitment to succeed: When working for oneself, there is a greater commitment to succeed.

S A

ឣ

Disadvantages of the sole trader ឣ

ឣ

ឣ

ឣ

ឣ

Limited source of finance: The sole proprietor’s capital depends on personal savings or profits, and on loans made on the security of personal property. As a result, the amount of capital available is often not enough for much expansion. Lack of specialised staff: The owner may not be in a position to employ specialised staff, and therefore the business may not expand as quickly. Over-reliance upon one’s personal health and vigour: Illness or old age can cause difficulties. There is therefore a lack of security for family, employees and clients. Unlimited liability: If the business fails, even the personal possessions of the owner will be sold in order to pay off the debts of the business (if necessary). Lack of leisure time: The sole trader has to work long hours and may not be able to take a vacation.

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Lack of technology: The sole proprietor can seldom afford the heavy capital outlay required, and therefore may not be able to benefit from economies of scale.

ឣ Partnerships Definition

P LE

A partnership is an association of 2 to 20 partners operating a business for the common goal of making a profit. The owners share the responsibility for the running of the business and any subsequent profit or losses that may be generated. Partnerships are not legal entities in their own right. Consequently, a partnership cannot sue or be sued in its own name; instead, each of the partners has to be named. There are two kinds: ordinary partnerships and limited partnerships. In ordinary partnerships, losses are shared equally, or as agreed by partners. In the limited partnership, limited partners will lose only what they have invested. If the business goes bankrupt, however, unlimited partners may lose even their personal assets.

Characteristics of partnerships

ឣ

ឣ ឣ ឣ

Formation When a number of persons want to form a partnership, a written agreement should be drawn up. This is called the Partnership Deed. The written agreement, although not necessary, helps to settle disputes. In the absence of such agreements, the partnership will be governed by the Partnership Act. The Partnership Deed or Articles of the Partnership sets out in writing the terms of the partnership. The agreement should deal with: ឣ ឣ ឣ

the name of the partners; the nature of the business and the date of its commencement; the amount of capital put into the business by each partner;

Example

ឣ

M

ឣ

The minimum number of members is 2 and the maximum is 20 members, except in the case of banking, in which the minimum number is 10. Among professions such as stockbrokers, stockjobbers, lawyers and accountants, membership is unlimited since the Partnership Act prevents professionals from forming companies. There are two main types of partners: limited and general/ordinary partners. In the ordinary partnership, each partner may take an active role in the management of the business. Each partner acts as an agent of the partnership, and therefore the action of one partner is binding on all partners. There must be at least one ordinary partner in the limited partnership. The ordinary partner’s liability for debts and obligations is unlimited. The limited partner cannot take part in management. He or she has no power to bind the firm. Profits are shared equally or as stated in the Partnership Deed. Capital is provided by the partners as agreed. The retirement or death of one partner may require the reorganisation or dissolution of the partnership.

S A

ឣ

Partnership Partnerships are popular among professions like stockbrokers and stockjobbers, accountants, solicitors, and among specialists like decorators.


ឣ ឣ

ឣ ឣ

ឣ ឣ ឣ ឣ

arrangements for division of profits or apportionment of losses; the amount of interest (if any) to be allowed on the capital; the amount each partner is allowed to withdraw each year in anticipation of profit, and the amount of interest, if any, to be charged on these drawings; the role of each partner; salaries, if any, to be paid to certain partners for the performance of special duties; voting rights; methods of determining goodwill; arbitration procedures if partners cannot reach an agreement; the duration of the partnership and method of dissolving the partnership.

P LE

ឣ

Chapter 1

In the absence of a Deed, the Partnership Act is enforced. It states that: ឣ ឣ ឣ

profits and losses are shared equally; no salaries are paid to partners; no interest is paid on capital.

Management

The ordinary partners manage partnerships. Payment for specialised skills must be included in the Partnership Deed.

Advantages of partnerships

ឣ

ឣ

ឣ

ឣ

ឣ

More capital: More capital can be obtained than as a sole trader. Specialisation: Partners can specialise and manage different sections of the business according to their ability, experience and training. This allows for greater efficiency and therefore lower costs. Simple organisation: Like the sole trader, a partnership is easy to form, with little or no legal formalities. Continuity: There is more continuity than in the case of the sole trader. The business may not be dissolved at the death or bankruptcy of a partner. Limited liability: It is possible to have limited liability by being a limited partner. Workload shared: The workload is shared among partners, thus partners may be able to take vacations and enjoy more leisure time. Decision-making: There is better decision-making due to shared knowledge and expertise.

M

ឣ

S A

ឣ

Disadvantages of partnerships ឣ ឣ

ឣ

ឣ

ឣ ឣ

Unlimited liability: All ordinary partners are fully liable. Binding: All partners stand to lose if one partner makes a bad mistake. Limited capital: Capital is still limited and may be insufficient for full expansion. Disagreement: There can be difficulty of management when partners disagree. Concentrated risk: The risk is still concentrated on a few. Decision-making: Decision-making may take longer and arguments may arise.

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ឣ


Capital: Capital is limited to 20 partners. Continuity: Continuity of the partnership may be broken on the death of a partner or if someone leaves. In the absence of a partnership agreement, profits are shared, irrespective of effort.

ឣ Cooperatives Definition Cooperatives are businesses that are formed and operated by their members. The cooperative society must be registered. Shares are sold to its constituents, that is, the community that the society is serving. The principles that govern cooperatives are listed below. ឣ ឣ ឣ

There is democratic control, that is, one person one vote. Membership is open to constituents. There is limited interest on capital investments. The surpluses of cooperative societies are distributed according to the shares/purchases of the members.

P LE

ឣ

Characteristics

Cooperatives share the characteristics listed below.

ឣ ឣ ឣ

ឣ

They are voluntary, non-profit-making organisations engaged in retail or other financial activities. They are managed and controlled by their members. The members are also the clients. Members have a common bond, for example, all are teachers or public servants or belong to a particular community. There is the pooling of capital among the membership.

Types of cooperatives

M

ឣ

ឣ ឣ

ឣ

ឣ

S A

There are at least four types of cooperatives as listed below. Financial cooperatives, for example, credit unions. Agricultural cooperatives, for example, the farmers’ cooperatives which supply agricultural products and equipment to farmers. Consumer cooperatives involved in the retail trade, for example, the El Dorado Cooperative, which retails foodstuff. Service cooperatives such as the St Christopher’s Taxi Cooperatives.

Advantages of cooperatives There are many advantages to be gained from being a member of a cooperative. Listed below are some of these advantages. ឣ ឣ ឣ ឣ ឣ ឣ

Members pool their resources. Members are the owners. There is shared decision-making. All profits are shared among the membership. The community bond is strengthened. Products are much lower in price since administrative expenses are lower.

23


Chapter 1

Disadvantages of cooperatives The following can be considered disadvantages of cooperatives. ឣ

ឣ

The membership may not have the expertise necessary to build the organisation. Decision-making is slow and therefore clients may lose out on opportunities.

Activity 1.14

Form of business

Definition

Sole trader Partnership Cooperative

Feedback Definition

Sole trader

Partnership

Management

Management

– A person who owns, controls, manages and has total responsibility for his or her business.

– No legal requirements, however, trade names must be registered.

– Managed by the owner.

– An association of 2 to 20 partners operating a business for the common goal of making a profit.

– No formal requirement, but it is best if a Partnership Deed is drawn up.

– Management by ordinary partners.

– A business that is formed by individuals with a common bond.

– Each member purchases shares to form the capital base of the business.

– Governed by membership through a management board. – Board of management elected annually by the membership.

S A

Cooperative

Formation

Formation

M

Form of business

P LE

This activity will help reinforce your knowledge in defining and stating the formation and management of sole traders, partnerships and cooperatives. Fill in the blanks in the table.

Activity 1.15 List the advantages and disadvantages of sole proprietorships, partnerships, and cooperatives.

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Feedback Form of business

Advantages

Disadvantages

Sole trader

1 Easy to form. 2 The owner has great flexibility. 3 There is a simple organisation structure –

1 Source of finance is limited. 2 Lack of specialised staff. 3 Over-reliance on one’s personal health and

usually the owner and one or two workers. 4 Personal service is provided to clients. 5 The owner has personal incentive to succeed since all profits belong to him or her. 6 There is no need to disclose profits. 1 More capital is obtained. 2 Specialisation is possible since partners 3 4 5 6

lack of finance.

1 Ordinary partners have unlimited liability. 2 The actions of ordinary partners are binding

P LE

Partnerships

vigour. 4 The owner has unlimited liability. 5 The owner has limited leisure time. 6 Simple technology is used because of the

may bring their expertise to the business. There is continuity of the business. Some partners enjoy limited liability. The workload can be shared. Partners share in the decision-making.

on the partnership.

3 Capital is still limited. 4 Conflict may occur among the partners. 5 Decision-making takes longer. 6 In the absence of a partnership agreement

profits are shared equally, irrespective of efforts.

Members pool their resources. Members are the owners. Decision-making is shared. All surpluses are shared among the membership. 5 The community is strengthened socially. 6 Members have a say in all decisionmaking. 7 Products are lower in price since administrative expenses are lower. 1 2 3 4

1 The membership may not have the expertise

necessary to build the organisation.

2 Decision-making is slow.

S A

M

Cooperatives

ឣ Companies Definition

A company is a business entity that has been incorporated, that is, the company has a separate legal identity from that of the owner(s). This separate identity means that the company can enter into contracts, make any legal claims and face any legal claims that are made against it.21 There are two types of limited liability companies: private limited companies; public limited companies. These are explained below.

ឣ ឣ

Formation Certain legal requirements must be met before a company can commence trading. Certain documents must be submitted to the Registrar of Companies. These documents are outlined below. 2

Barratt, Michael and Mottershead, Andy, Business Studies, Pearson Education Ltd, England, 2000, p.29.


Chapter 1

A private company must submit to the Registrar of Companies: ឣ ឣ ឣ

the Memorandum of Association; the Articles of Association; Statement of Authorised, Registered or Nominal Capital.

A public company must submit to the Registrar of Companies: ឣ ឣ ឣ ឣ

the Memorandum of Association; the Articles of Association; Statement of Authorised, Registered or Nominal Capital; the Prospectus.

Memorandum of Association

ឣ ឣ ឣ ឣ ឣ

P LE

This governs the company’s relationship with the outside world. It contains:

the company’s name, which must contain the word ‘Limited’; the address of the company’s registered office; the objectives of the company; the statement that the liability of the shareholders is limited; the authorised share capital and the types of shares to be issued.

Articles of Association

These control the internal running of the company. They cover such areas as: ឣ ឣ ឣ ឣ

procedures for calling an annual general meeting; rights and obligations of the directors; procedures governing the election of directors; statement concerning the borrowing power of the company; procedures dealing with the payment of dividends.

M

ឣ

S A

Statements of Authorised, Registered or Nominal Capital This is the amount stated in the Memorandum of Association, which is the maximum amount which the company is authorised to raise.

Prospectus

This is an invitation to the public to buy shares in a public limited company. It contains detailed information to enable investors to estimate its prospects. It is important that the public should not be misled.

Private limited companies Definition A private limited company is an incorporated business organisation, consisting of 2 to 50 members, whose aim it is to make profits. The membership is restricted to family and friends.

Management The owners manage this type of business or may appoint specialised personnel. The membership must approve any disposal of shares, and usually sales of shares are restricted to the membership.

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Characteristics of private limited companies ឣ

ឣ ឣ ឣ ឣ ឣ

Capital is obtained from private individuals, financial institutions, government agencies or retained profits. Limited liability shareholders have limited liabilities. The company must be registered with the Registrar of Companies. The word ‘limited’ must be included in the name. Membership is between 2 and 50 persons. Accounting statements must be prepared and an audit undertaken, with a copy issued to the Registrar of Companies.

Advantages of private limited companies

ឣ

ឣ ឣ

A larger capital base than a sole trader or partnership because the membership is larger. The company has continuity and thus can easily obtain loans from financial institutions. The company has a separate legal identity from the ownership. Shareholders have limited liability. The financial commitment of the shareholder does not extend to his or her personal possessions.

P LE

ឣ

Disadvantages of private limited companies ឣ ឣ

ឣ

Capital is limited since the membership is limited to 50. The company must file its financial reports with the Registrar of Companies. Selling of shares is restricted to the private grouping.

Definition

M

Public limited companies

A public limited company or joint stock company is an incorporated company that offers shares to the public.

S A

Management

The board of directors, which is elected by the shareholders at the annual general meeting, manages the public limited company. The board of directors appoints an executive director or chief executive officer, who heads the company and reports to the board on the operations of the company.

Characteristics of public limited companies ឣ

ឣ ឣ ឣ

ឣ

ឣ

There must be at least seven shareholders, with no limit on the maximum number of shareholders. The shares are traded openly in the stock market. The public limited company must be incorporated. The company can obtain capital from shareholder equity and financial institutions. The company is continuous; it does not close down on the death of a shareholder. Greater specialisation is possible.

Advantages of public limited companies ឣ

It is easier to obtain finance. A public company is able to obtain investment from many small investors as well as from large organisations.

27


ឣ

ឣ ឣ ឣ

Chapter 1

Shareholders have limited liability. Ownership and control are separated. Shares can be quoted on the stock exchange and sold to the public. The company is able to grow and obtain economies of scale. It has a separate legal existence. Changes in shareholders and directors do not affect the continuity of the company.

Disadvantages of public limited companies ឣ ឣ ឣ

ឣ

ឣ

The legal requirements may be costly and time-consuming. The accounts have to be made public. Because of the large size, decision-making usually takes longer. Differences of opinion may develop because the ownership and day-to-day administration of the company are divided – the shareholders are the owners and the directors run the company. Control of the company may be lost if another company or other people obtain sufficient shares in the company. These companies lack the personal element that is a feature of the simpler forms of business organisations.

ឣ Multinational corporations Definition

P LE

ឣ

M

Multinational corporations (MNCs), also called transnational corporations, are a network of firms which operate in multiple countries but are owned and controlled by a single group of shareholders.

Characteristics of multinational corporations The following are characteristics of multinational corporations.

ឣ

ឣ

ឣ

Multinational corporations are created through direct foreign investment (DFI). Headquarters of multinational corporations are usually located in a developed country, while subsidiary companies are located in developing countries. These firms usually use the latest technology and invest heavily in research and development. These firms are usually capital-intensive and therefore benefit from economies of scale.

S A

ឣ

Management

Expatriates with limited local inputs manage the subsidiaries of transnational or multinational firms.

Advantages of investment by multinational corporations to the host country The following are some of the benefits to the host country of multinational corporations. ឣ ឣ ឣ ឣ

A large injection of foreign capital stimulates the economy. Employment is provided for locals. Transfer of skills from the foreign counterparts to the locals. Revenue increases since more taxes are paid to the government.

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Disadvantages of investment by multinational corporations to the host country The following are some of the disadvantages to the host country of multinational corporations.

ឣ ឣ

ឣ

ឣ

ឣ

Risk of abuse of workers’ rights and poor working conditions in the factories. Possible destruction of the environment. Possible intimidation of trade unions, which try to improve working conditions and to expose the poor conditions of work. Possible abuse of consumers, for example, babies fed breastmilk substitute or children exposed to intensive tobacco marketing. Risk of destruction of communities, especially when the company moves to another location. Repatriation of profits.

Activity 1.16

P LE

ឣ

Define limited liability companies (private and public), and multinationals; then state how they are formed and managed.

Feedback Definition

Private limited company

A business organisation with 2–50 members. Membership is restricted to close friends and family.

S A

M

Form of business

Formation

Management

Must be incorporated and, Managed by the owners or therefore, must give to the Registrar persons appointed by the of Companies the following owners documents: – Memorandum of Association – Articles of Association – Statements of Authorised, Registered or Nominal Capital

Public limited company

An incorporated business organisation with at least seven members that offers shares to the public

Must be incorporated and must give a Managed by a board of to the Registrar of Companies the directors following documents: b Daily operations managed by an – Memorandum of Association executive director with – Articles of Association help of specialist staff – Statements of Authorized, Registered or Nominal Capital – Prospectus

Multinational corporations

Network of firms which operate in multiple countries

Incorporated in a developed country

Activity 1.17 List the advantages and disadvantages of limited liability companies (private and public) and multinational corporations.

Managed by team of expatriates


Chapter 1

Feedback Form of business

Advantages

Disadvantages

Private limited company 1 The capital base is larger than that of the sole trader or partnership. 2 Companies have continuity. 3 The company can easily obtain loans. 4 Shareholders have limited liability.

1

Public limited company

1

1 Finance is easy to obtain. 2 There is continuity of the business. 3 Shareholders have limited liability. 4 The value of shares is quoted on the stock

Large foreign capital injected into the country. 2 Creates employment. 3 Transfers skills. 4 Increases revenue (through taxes) for the country. 1

ឣ State corporations Definition

5

Possible poor working conditions and abuse of worker’s rights. 2 Possible destruction of the environment. 3 Possible intimidation of workers and trade unions. 1

M

Multinational corporations

2 3 4

S A

State corporations are independent organisations set up by the government to carry out a service. The government does not control their daily operations, but can fix the overall strategy for them and nominate their board of directors. These are usually non-profit-making, but in the long term they have to be self-financing. State corporations are usually in the broadcasting field, and in the transport, power and telecommunication industries.

Formation

State corporations are formed by legislation, that is, by the passing of laws by Parliament.

Management The government appoints a board of governors or directors for a stipulated time frame. An executive director is also appointed to head each organisation. The executive director reports to the board of governors or directors.

Characteristics of state corporations State corporations normally display the characteristics listed below. ឣ

Setting-up of the company is timeconsuming and costly. The accounts have to be made public. Decision-making takes longer. There may be conflict between owners and paid managers. The company is in a vulnerable position since it may be taken over by mergers.

P LE

exchange and, therefore, members can assess the value of their shares. 5 The company has a separate legal identity. 6 These companies enjoy economies of scale.

Although capital base is larger than that of the shareholder, it is still limited since the membership is restricted to 50. 2 The company is not as easy to form as the sole trader. 3 Membership is restricted.

Funding is mainly done by the state providing grants, although some legislation allows the organisations to raise their own funds.

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The state or state-appointed auditors monitor all accounting procedures. Annual accounting reports must be sent to the Auditor General. The aim of the state is not to make a profit, but it is expected that these corporations may break even.

ឣ Nationalised industries Definition

P LE

Nationalised industries are firms which were once privately owned, but have been taken over by the government. Governments seek to nationalise key industries, that is, the industries on which the government depends for the country’s economic survival, for example, the oil industry in Trinidad and Tobago or the bauxite industry in Jamaica.

Formation

A company becomes nationalised when the government purchases all or the majority of shares in the company.

Management

M

As for state corporations, a board of governors is appointed. The board reports to the line minister of government. Each nationalised industry has an executive director who heads the company. The audited accounting reports of these companies must be laid with the auditor general or a government accounting firm.

Characteristics of nationalised industries

Nationalised industries display common features, including the following: ឣ ឣ

They are legal entities. The state is the only shareholder. They are managed by boards of directors that are appointed by the state.

S A

ឣ

Advantages of nationalised industries The following are advantages of nationalised industries. ឣ

ឣ

ឣ

Ownership and control are in the hands of the state, thus all profits remain in the country. The company is in a better position to service the needs of the community, for example, the funding of community projects in education, sport and culture. Nationalisation prevents private monopolies from being formed.

Disadvantages of nationalised industries The following are disadvantages of nationalised industries. ឣ

ឣ

Relatively low salaries paid to executive directors may not attract the best expertise. The industries may be a drain on the government’s revenue.

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ឣ Government departments The system of government in the Caribbean is divided into two broad categories – central and local government1.3 The central government consists of the ministries and departments such as Education, Health, Public Housing, Water Supplies, Police and Fire Services, Finance, Culture, Foreign Affairs, Labour, Welfare and Transportation. Each ministry is headed by an elected official, the minister, and a team of technocrats headed by a permanent secretary.

ឣ Other forms of business ឣ

Joint venture: cooperation between a domestic company and foreign company to accomplish a specific project. Franchise: an agreement between an established company (a franchiser) and a franchisee, in which permission is granted to conduct business in a prescribed manner set out by the franchiser. The franchisee has an obligation to pay royalty fees to the franchiser periodically, but the franchisee in return gains from the reputation and business expertise or management of the franchiser. This business arrangement is gaining increasing popularity in the Caribbean, for example, in McDonalds, KFC, Pizza Hut and The Body Shop.

S A

M

ឣ

P LE

The local government system consists of the municipal authorities, for example, the city corporations. This arm of government serves the community. They are mainly responsible for local road maintenance, garbage collection, maintenance of parks and roadways, cleaning of gullies and culverts, public cemeteries, and the consumer markets. Funding is provided by central government and the collection of rates and taxes from the local residents. At a local government election, councillors are elected. From among these councillors, the mayor of a city or chairperson for the borough council is appointed as head.

Activity 1.18

Match the statements below with the following types of organisation structure. A structure may be used more than once. The first one has been done for you. Organisation structures: state corporation, nationalised industry, local government, central government, franchise, joint venture. Statement

Organisation

An independent organisation set up by the state to carry out a service.

state corporation

A firm once in the hands of private individuals but now owned and controlled by the government. These organisations are formed by Acts of Parliament. Ministries such as Education, Housing and Health fall under its purview. An agreement to trade under the name of an established company. City corporations and borough councils fall under its purview.

3

Robinson, Karlene and Hamil, Sybile, CXC Principles of Business, Carlong Publishers (Caribbean) Ltd, Kingston, 2001.

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Statement

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Organisation

A foreign company joins with a local company. The board is appointed by the government. The aim is to provide a service, not generate profits. Too much political interference. Profits are returned to the people.

Feedback Organisation

P LE

Statement

An independent organisation set up by the state to carry out a service.

state corporation

A firm once in the hands of private individuals but now owned and controlled by the government.

nationalised industry

These organisations are formed by Acts of Parliament.

state corporation

Ministries such as Education, Housing and Health fall under its purview.

central government

An agreement to trade under the name of an established company.

franchise

City corporations and borough councils fall under its purview.

local government

A foreign company joins with a local company.

joint venture

M

The board is appointed by the government.

state corporation and nationalised industry

The aim is to provide a service, not profits.

state corporations

Too much political interference.

state corporation and nationalised industry

Profits are returned to the people.

nationalised industry and state corporation

S A

Economic systems

Which country do you live in? Did you know that your country uses an economic system? The term ‘economic system’ refers to the way society organises its scarce resources to produce goods and services to satisfy the needs and wants of the population. Societies are organised to answer three basic economic questions:

1 What goods and services are to be produced? 2 How will the goods and services be produced? 3 For whom are the goods and services to be produced? Economists have classified economic systems into the following types:

1 2 3 4

the traditional (subsistence) economy; the free market or the market-driven capitalist economy; the planned, command or controlled economy; the mixed economy.

ឣ Traditional (subsistence) economy The traditional economic system existed in early societies and is rarely used today. In those early societies, people formed communities and produced food and basic goods for a simple lifestyle. An example is


Chapter 1

Taino society, where enough was produced to satisfy the needs of all persons, and simple exchange took place if there was any surplus. There was usually a community leader, such as a cacique, who made the decisions of what, how and for whom the goods and services would be produced. Bartering was used to obtain the goods that the community did not produce for itself. Isolated islands and remote areas in some countries may still use this type of economic system.

ឣ Free market or capitalist economy

P LE

The free market is an economic system in which the customer drives the economy. The consumer influences the producers’ decisions on what to produce since the producers will not make a profit by producing goods that are not in demand. Consumers exercise the right to buy whatever they want to satisfy the needs and wants of their family. Private individuals own the resources in a free market economy and there is little or no governmental interference. The factors of production are controlled by market forces, not by the government. These market forces refer mainly to factors of supply, demand, competition, customer satisfaction, price, quality of the product and efficiency of production and supply. The market forces, therefore, determine allocation of resources.

M

In a free market economy, goods and services are bought and sold on the market. The market may be a physical place, such as an agricultural market, which many persons in the Caribbean visit on Saturdays or Sundays to obtain fruit, vegetables and meat. A market may also be a neighborhood shop, a bank, an insurance company or the stock market, where shares of companies are bought and sold.

Although there are no pure free market economies, the US and Hong Kong are examples of two economies that are closest to the theoretical concept of a free market economy.

S A

Let us now explore the benefits and limitations of the market economy.

Benefits of the market economy

The benefits of market economies are listed below. ឣ

ឣ ឣ

ឣ

ឣ ឣ ឣ

Government’s involvement is very limited. The activity of the government is usually restricted to the collection of taxes. Competition among firms forces prices down. Producers are free to use the factors of production in any way they consider to be most suitable to them. Consumers are free to spend their money in any way to give them maximum utility. A large variety of goods or services are made available to consumers. Labourers are free to sell their labour to the highest bidder. There is greater efficiency in the use of factors of production, since market forces determine the allocation of resources.

Limitations of the market economy The limitations of market economies are listed below. ឣ

The profit motive drives this economy and thus encourages unequal distribution of wealth.

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Large sums of money are spent on advertising, which creates artificial demand and increases prices. Monopolies develop and these can exploit consumers since they can unilaterally decide on higher prices. Social and merit goods, for example, health, defence, education and security, may not be adequately provided for. Trade unions may be suppressed since the capitalist may seek to suppress wages in order to minimise the cost of production.

ឣ

ឣ

ឣ

ឣ

Activity 1.19 5

Consumers have a wider variety of ______________ and __________.

6

Because of the profit motive there is ____________ __________.

P LE

This activity will help reinforce your knowledge of the advantages and disadvantages of the market economy. Complete the following sentences. 1

The market economy is a more _________________ type of market.

7

Advertising creates ____________ _______________.

2

There is limited ______________ ________________ in this type of market.

8

Market economies are not driven to produce _____ and _______ goods.

3

Consumers set the ____________ of goods and services.

9

_________________ are generally present.

4

Prices are kept down because of ________________.

M

Feedback

10

____________________ are low since trade union activities are not encouraged.

efficient

3

prices

5

goods, services

7

artificial demand

2

governmental involvement

4

competition

6

unequal distribution of wealth

8

social, merit

S A

1

ឣ Planned or command economy A planned economy is one in which the government assumes responsibility for economic planning in order to achieve the best possible use and distribution of a country’s scare resources. Governments, therefore, influence and control key economic variables, such as income, consumption, employment, savings, investment, imports and exports.

Characteristics of the planned economy ឣ

ឣ

ឣ

The government plans, coordinates and controls all economic activities. The government decides on what to produce, how much to produce and controls the distribution of output. Prices are set by the state.

Benefits of the planned economy ឣ

ឣ ឣ

The state can direct its development since it controls all the resources. There is likely to be less waste of resources. Incomes are more likely to be evenly distributed.

9 10

monopolies wages


Chapter 1

ឣ

ឣ

ឣ ឣ

Government planning may be more rigid and inflexible compared with the decision-making of the capitalist economy, and this may lead to scarcity of goods or services. The government may have the responsibility of administering and implementing the plans. This task may be too enormous for the technocrats working with the government and hence there may be inefficiency in the delivery of goods and services. Private sector initiatives may be blocked. Planning may be manipulated by the more powerful groups that may not act in the best interests of all.

This activity will help you to understand the features of planned economies. The following sentences describe features of a planned economy. State whether each statement is true (T) or false (F). 1

Private enterprises assume full responsibility for economic planning.

2

Key economic variables such as income and investment are under the direct control of the government.

F

Competition ensures efficiency.

5

Income is more evenly distributed.

6

Poverty is eradicated.

7

The government usually operates through large bureaucracies and hence this is a more efficient system.

8

The private sector usually takes a leading role.

9

Prices are controlled by the state.

10

M

S A

Feedback 1

4

What to produce and how much to produce are influenced by the consumer.

3

2

T

3

F

4

F

5

T

6

F

7

F

Powerful politicians can influence government decisions, which may not be in the best interests of the population.

8

F

ឣ Mixed economies

Mixed economies are economic arrangements in which both government and private individuals make economic decisions as to what to produce, how to produce and for whom goods and services should be produced. The mixed economy is by far the most popular form of economic organisation existing in the world today. Most countries, including the English-speaking Caribbean states, have mixed economies.

Characteristics of the mixed economy ឣ ឣ ឣ

Involvement of both state and private individuals. Efficient use of resources. More equitable distribution of income than free market economies.

Benefits of mixed economies ឣ

Planned economies North Korea, Cuba and the Soviet Union (before 1990).

P LE

Activity 1.20

Example

Limitations of the planned economy

Both sectors of the economy, the government and private individuals, engage in activities that can best produce, and therefore

9

T

10

T

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ឣ


there is more efficient use of resources. A wide variety of goods are available since the government complements those goods and services that are provided by the private sector. Governments are free to make laws to protect natural resources and the people.

Limitations of mixed economies ឣ

ឣ

There is always a need to keep a balance between government and private sector involvement. Conflict may arise between government and private investment, and thus result in long delays in the production of goods and services.

Stakeholders

P LE

Now that you understand how business activities evolved and the different types of businesses, you should examine the persons or groups who make decisions. These are the stakeholders, and they are all affected by business decisions. Did you know that you are also a stakeholder in the various business activities that take place in your community? Let us examine what we mean by this term.

Definition: Stakeholders are the various groups within and outside an organisation that stand to potentially gain or lose as a result of the organisation’s actions. Examine the following list of stakeholders.

ឣ ឣ ឣ ឣ

ឣ

M

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owners/employers/investors employees customers/consumers suppliers government the members of society (including the media, special interest groups, communities) lenders/investors and other creditors.

S A

ឣ

It is important to identify the stakeholders in a business so that the organisation: ឣ ឣ ឣ

knows who it depends on for its survival; also knows who has a vested interest in the business; can take these groups into consideration when making decisions; this helps the business to meet the expectations and priorities of its stakeholders.

The roles of stakeholders involved in business activity Role of employers/investors/managers These parties want to achieve: ឣ ឣ

ឣ

the best return on their investments (profits); efficient management of the resources (employees, raw materials, equipment) through planning, control and other functions and strategies in the business; to provide goods/services of a high quality, at a reasonable price, with necessary after-sales service;

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ឣ

ឣ

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the best possible employees, fair payment for work, fair and respectful treatment, good working conditions and the necessary tools and equipment; to act ethically and be socially responsible.

Role of employees These are: ឣ ឣ ឣ

to carry out the activities stated on their job description; to efficiently utilise the resources placed in their care; to act ethically and be socially responsible.

Role of consumers Consumers can:

ឣ

ឣ

provide feedback on product quality and design through complaints and suggestions; contribute to research by participating in surveys and product testing; use the product/service provided in the way that it was intended to be used.

P LE

ឣ

Role of government Government provides:

ឣ

ឣ

S A

ឣ

regulations that force the business to consider the best interests of the other stakeholders; assistance to businesses in the form of loans, training, research and financial aid/subsidies; information to all the stakeholders (in many cases); protection for consumers through laws and agencies; also protection to all the other stakeholders.

M

ឣ

Activity 1.21

Use this exercise to assess your understanding of ‘stakeholders’. Read the following situation and complete the table that follows.

owners, wanted to know if Sandra knew how to grow healthy chickens. Sandra is also concerned about her profits.

Sandra has graduated from school and plans to keep layer chickens in her backyard. She plans to sell the eggs to the two corner shops in her neighbourhood. Her younger cousin, Althea, will assist her with caring for the chickens.

Use the table below to identify the type of stakeholders in this situation. In the space provided, write the name of the stakeholder.

As soon as Sandra started building a structure for the chickens, several persons began to voice their concerns. Phillip, who lived beside her, wanted to know how often she would be cleaning the hen-house. Althea wanted to know if she would be paid a reasonable amount of money. Tommy, one of the corner-shop

Type of stakeholder Owner Employee Customer Community member

Name of the stakeholder

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Responsibilities of a business

Feedback

ឣ

ឣ

Example

ឣ

M

ឣ

Economic responsibilities: The business and its owners or managers operate within an economic system and should play their part in helping this system to be effective. The business does this by providing employment to citizens in the economy and by contributing to the overall growth of the economy; if the business exports goods and services, it will help to increase the overall exports of the country. Pricing policies that are too aggressive can have a very negative effect on other businesses in the economy, and can exploit consumers. Financial responsibilities: Similar to the above, businesses must create a reasonable financial return to the owner or investor. This may not always be high because of the various objectives of a business. Social responsibility: Businesses should make decisions that are in the best interests of the society in which they operate. They also rely on this society to provide vital resources. Political responsibility: Businesses have many obligations to the government. Ethical responsibility: The term ‘ethics’ refers to beliefs about what is right and wrong conduct; most societies agree on the basic ethics of honesty and fair play. Businesses should make ethical decisions.

S A

ឣ

Type of stakeholder

Name of the stakeholder

Owner

Sandra

Employee

Althea

Customer

Tommy

Community member

Phillip

P LE

You have already learned that businesses can be formed in different ways, and that their decisions and activities are influenced by the different stakeholders. Now you must look at the business itself as an important participant in its community or society. Business organisations have economic, financial, political and social responsibilities to the society in which they operate. These organisations have a responsibility to invest capital in order to increase the wants and needs necessary for survival. In the pursuit of their economic role, business organisations should not destroy the environment nor add to any conflict among the various religious, ethnic or regional groups in the community. Also, business organisations should ensure that equality and democratic principles are adhered to at all times. The main responsibilities can be grouped as shown below.

Economic responsibilities Produce a good or service to satisfy the needs and wants of society Stimulate economic growth Financial responsibilities Pay a fair wage to employees Provide a reasonable return on investments Political responsibilities Act as pressure groups to lobby governments for changes that will benefit business activity Operate along democratic principles of equality and fair play Act in accordance with the laws, for example, paying all taxes when they are due Assist in setting policies by giving feedback, making suggestions

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Ethical responsibilities Design ethical guidelines for their behaviour/decisions and follow these guidelines Encourage good business ethics of their stakeholders by refusing to do business with unethical firms or persons

Activity 1.22

P LE

Social responsibilities Protect the environment and avoid social costs (borne by society as a result of business operations, for example, pollution) Develop the culture of a country Educate consumers and community members on safety tips and proper use and disposal of products Use some of the profits to help develop and benefit the community, as well as the culture of the country

Classify the activities listed below according to the relevant area of responsibility. The first one has been done for you.

Economic Financial Political Social

2

making pastries for today’s sales

3

improving the wellbeing of employees

4

sponsoring the sports day of the primary school in the area

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✔

M

paying corporation taxes

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1

disposing of garbage in a timely and fitting manner

lobbying the government to provide measures that would encourage savings improving the environment

promoting an awareness of human rights violations

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reinvesting profits into the business

10

providing a 30 per cent return on investment to shareholders

11

providing employment

Feedback 1

Financial

7

Social

2

Economic

8

Political

3

Social

9

Financial

4

Social

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Financial

5

Social

11

Economic

Political You perhaps had difficulty categorising some items. Why not tick those that are both? This is not a problem since the categories may be a combination of two areas, for example, socio-economic or socio-political. 6

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Key points

ឣ

ឣ

ឣ

ឣ

ឣ

Students need to familiarise themselves with key terms and concepts used during the course of study. These include concepts related to the business environment in which goods and services are produced and traded. Instruments of trade developed in early times through the system of bartering have evolved today to the use of bills of exchange and electronic banking systems using credit cards and electronic transfer instruments. The private sector is funded by individuals who enter business to make a profit, whereas the public sector is controlled by the government for providing goods and services to the population. Types of business include the sole trader, partnership, corporation, limited liability company and multinational corporation. Economic systems include the traditional, free market, planned and mixed systems. Businesses have economic, financial, political, ethical and social responsibilities.

End test Answer all questions. 1 Define the term ‘barter’.

P LE

ឣ

Give three examples of bartering.

15

Describe the institutional characteristics of: a free market economies; b planned economies; c mixed economies.

3

List three features of bartering.

4

State two advantages and two limitations of bartering.

5

Define the term ‘money’, giving examples of items used in the past instead of money.

16

Explain the main differences between the private and public sectors.

6

List three features of money.

17

List the stakeholders of a business.

7

State the functions of money.

18

8

State four benefits derived from the introduction of money.

Briefly describe the five main responsibilities of a business.

19

List the characteristics of: a the sole trader; b partnerships; c cooperatives.

20

Outline the advantages and disadvantages of each type of business listed in question 19.

21

Identify the regulatory practices instituted by governments for setting up a sole trader, partnerships and cooperatives.

22

Outline the characteristics of limited liability companies and multinational corporations.

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2

c the quality and quantity of goods; d job creation and job specialisation.

9

Explain the term ‘indirect satisfaction of wants’.

10

Define the term ‘division of labour’.

11

Explain the advantages and disadvantages of specialisation.

12

Explain the functions of a business.

13

Describe the economic, financial, political and social responsibilities of a business organisation.

14

Explain the effects of the change from a subsistence to a money economy on: a availability of goods; b access to goods;

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Chapter 1

23

State the advantages and disadvantages of limited liability companies and multinational corporations.

24

Identify the regulatory practices instituted by governments for establishing limited liability companies and multinational corporations.

25

Describe the characteristics of state corporations and nationalised industries.

26

State the advantages and disadvantages of state corporations and nationalised industries.

27

Describe how state corporations and nationalised industries are established.

Feedback Barter is the exchange of goods and services without the use of money.

2

Three examples of bartering are the exchange of: ឣ bananas for breadfruit ឣ fish for shrimps ឣ wooden spears for eating utensils.

3

Features of bartering are: ឣ direct exchange of items ឣ immediate exchange of items ឣ direct satisfaction of needs and wants.

4

Two advantages of bartering are: ឣ individuals are able to enjoy more goods and services ឣ it encourages division of labour. Limitations of bartering are the possible absence of (any two): ឣ double coincidence of wants ឣ rate of exchange ឣ store of wealth indivisibility

M

5

6

S A

ឣ

7

8

9

Indirect satisfaction of wants is the system by which needs and wants are fulfilled with the help of others. One satisfies one’s needs and wants through the exchange of goods and services with another individual. It involves bartering and, currently, the use of money.

10

Division of labour refers to the organisation of a job into a number of related tasks. For example, in the making of a shirt in a factory, the job is divided into cutting, stitching, placing of the buttonholes and sewing of the buttons.

11

Advantages of specialisation are listed below. ឣ It increases the skills of workers since the same task is repeated and workers learn from continuous repetition. ឣ It increases productivity since less time is needed when changing from one activity to another.

store of value.

Money is any commodity that is accepted as a measure of value and a medium of exchange, such as: ឣ precious metals ឣ shells ឣ beads were some of the items used in the past as money. Features of money are (any three): ឣ acceptability ឣ divisibility ឣ homogeneity ឣ durability ឣ portability ឣ relative scarcity.

The functions of money are that money serves as a: ឣ medium of exchange – everyone must be willing to accept it in exchange for goods and services; ឣ standard or value – the worth of the goods or service is measured in money, which sets the price of the item; ឣ store of value – money can be saved and used in the future; ឣ means of deferred payment – money is used for goods bought on credit; ឣ facilitator of the price mechanism – the price one is willing to pay for a good or service. The introduction of money (any four): ឣ facilitated the exchange of goods and services; ឣ encouraged the division of labour; ឣ enabled individuals to enjoy more goods and services; ឣ promoted investment; ឣ facilitated credit.

P LE

1

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As output increases, the cost of production is reduced. ឣ Less time is spent on training since workers are only required to master one task. ឣ The quality of the product can also be improved since workers are more skilled. Disadvantages of specialisation are listed below. ឣ The work is monotonous. One is required to perform the same task repetitively. The work, therefore, becomes boring and tiresome. ឣ Specialisation usually occurs in large-scale industries and therefore the work environment is impersonal. ឣ

ឣ

a The change from subsistence to a money economy meant that the community enjoyed a better standard of living since more goods were available. People now had more leisure time. b Goods were easily available to all since the use of money made the exchange process easy. c The change from subsistence to a money economy meant that the quality and quantity of goods improved and increased since specialisation or division of labour was possible. d More jobs were created because of job specialisation.

15

a The institutional characteristics of free market economies are that:

Workers lose pride in their work because they are not completing the entire job. Some specialisation processes require large capital investment.

The functions of a business are listed below. ឣ The production of a good or service. Goods and services are required for the satisfaction of needs and wants. ឣ The creation of jobs. Business needs labour to produce goods and services. The amount of labour will depend on whether the firm is labour-intensive or capital-intensive. ឣ In the case of private investments, the aim is to make a profit. All businesses aim to make the highest possible returns on investment so that the shareholders of the business receive an adequate dividend. ឣ Non-profit organisations aim to fulfil a need in the provision of a good or service that will be to the benefit of the community. In all communities there are those who cannot provide for themselves and therefore rely on the services of non-profit organisations. ឣ To contribute to economic growth. Economic growth is stimulated by the increase in business activity, which adds to the total real output of goods and services.

they are customer-driven – the consumer influences the producers’ decisions on what to produce ឣ private individuals own the resources ឣ there is little or no government interference ឣ the factors of production are controlled by market forces – goods and services are sold on the market. b The institutional characteristics of planned economies are that: ឣ the government plans, coordinates and controls all economic activities ឣ the government decides what to produce, how much to produce and controls all the resources ឣ prices are set by the state. ឣ

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M

12

14

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ឣ

13

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Business organisations have a responsibility to invest capital in order to increase the wants and needs necessary for the survival of man. In the pursuit of their economic role, business organisations should not destroy the environment nor add to any conflict among the various religious, ethnic or political groups in the community. Also, equality and democratic principles must be adhered to at all times.

c The institutional characteristics of mixed economies are: ឣ involvement of both state and private individuals ឣ efficient use of resources ឣ more equitable distribution of income than in free market economies. 16

The private sector is that part of the economy that is funded, owned and controlled by individuals and private firms. The main objective of the private sector is to make a profit. On the other hand, the public sector is financed by the government through the money of taxpayers and is controlled and operated by the Government or its agent. The public sector aims to provide a service at the lowest possible price.

17

The stakeholders of a business are: ឣ owners ឣ employees


Chapter 1

ឣ ឣ ឣ ឣ

customers suppliers government society.

ឣ

ឣ

ឣ

The five main responsibilities of a business are listed below. ឣ Economic responsibilities: The business and its owners/managers operate within an economic system and should play their part in helping this system to be effective. The business does this by providing employment to citizens in the economy and by contributing to the overall growth of the economy; if the business exports goods and services, it will help to increase the overall exports of the country. Pricing policies that are too aggressive can have a very negative effect on other businesses in the economy, and can exploit consumers. ឣ

Financial responsibilities: Similar to the above, businesses must create a reasonable financial return to the owner/investor. This may not always be high because of the various objectives of a business. Social responsibility: Businesses must: avoid social costs (borne by society as a result of business operations), for example, air pollution; protect the environment; educate consumers and community members on safety tips and the proper use and disposal of the products; use some of the profits to help develop and benefit the community, as well as the culture of the country. Political responsibility: Businesses have an obligation to the government to: act in accordance with the laws; assist in setting policies by giving feedback, making suggestions, lobbying for changes. Ethical responsibility: The term ‘ethics’ refers to beliefs about what is right and wrong conduct; most societies agree on the basic ethics of honesty and fair play. Businesses must: design ethical guidelines for their behaviour and decisions and follow these guidelines; encourage good business ethics of their stakeholders by refusing to do business with unethical firms or persons.

S A

M

ឣ

ឣ

ឣ

19

b The characteristics of partnerships are that: ឣ

ឣ

ឣ ឣ

partners can consult each other when making decisions they are governed by a Partnership Deed or the Partnership Act there are 2 to 20 members profits and losses are shared according to a Partnership Deed or the Partnership Act

P LE

18

the owner manages the business himself or herself the owner maintains personal contact with clients these businesses are conveniently located in the rural area.

a The characteristics of the sole trader are that: ឣ it is easy to set up ឣ the owner enjoys all the profits and bears all the risks

ឣ

ឣ

ឣ

partners share knowledge and skills few formalities are required to set up the business there is no obligation to publish accounts.

c The characteristics of cooperatives are that they: ឣ

ឣ

ឣ ឣ ឣ

20

are owned and operated by members to promote their common economic interest provide opportunities for members to pool capital provide limited liability use democratic decision-making have members who share a common bond.

Advantages of the sole trader: ឣ The owner gets the personal satisfaction of being his or her own boss. ឣ The owner enjoys all the profits but bears all the risk. ឣ It is easy to form. ឣ The owner enjoys personal contact with clients. ឣ The owner is under no obligation to keep or disclose financial statements. ឣ The owner has a commitment to succeed. Disadvantages of the sole trader: ឣ There is limited funding. ឣ They lack specialised staff. ឣ The owner has unlimited liability. ឣ There is limited time for leisure. Simple and out-of date technology may be used. ឣ The owner relies heavily on his or her good health and energy. Advantages of partnerships: ឣ The sharing of partners’ knowledge and skills. ឣ

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Partners can consult each other when making decisions. ឣ Sharing of the management of the business. ឣ Few formalities necessary to set up. ឣ No obligation to publish accounts. ឣ The business has continuity. ឣ Limited partners have limited liability. Disadvantages of partnerships: ឣ Partners may not always work harmoniously. ឣ Death or bankruptcy of one partner will automatically dissolve the partnership, unless otherwise provided for in the Partnership Deed. ឣ The actions of partners are binding on the partnership.

capital is obtained from private individuals, financial institutions, government agencies or retained profits ឣ with the exception of ordinary shareholders, all shareholders have limited liabilities ឣ the company must be registered with the Registrar of Companies ឣ the word ‘limited’ must be included in the name ឣ accounting statements are prepared and a copy sent to the Registrar of Companies. The characteristics of a public limited company include the features that: ឣ there must be at least seven shareholders, with no limit on the maximum number of shareholders ឣ

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Ordinary partners have unlimited liability. ឣ Capital is still limited. ឣ The risk is borne by a few ordinary partners. Advantages of cooperatives: ឣ Members are the owners. ឣ Decision-making is shared. ឣ All surpluses are shared among the membership. ឣ Community bond is strengthened. ឣ Products are much lower in price since administrative expenses are lower. ឣ Rewards are shared among all the membership. Disadvantages of cooperatives: ឣ The membership may lack the specialist knowledge and skills to build the organisation. ឣ Decision-making is slow and therefore the business may lose out on opportunities.

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No requirement is necessary to set up a sole trader unless the owner is using a trade name, then the trader must register the trade name. Although there is no formal requirement to set up partnerships, it is advisable that a Partnership Deed be made. Again, if the partnership is operating under a name other than that of the owners, it is advisable to register the trade name. Cooperatives are required to be registered with the relevant government agencies. The books of accounts must be prepared annually.

Limited liability companies are of two types – private limited or public limited liability companies. The characteristics of a private limited company include the rules that: ឣ membership is between 2 and 50 persons

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the shares are traded openly on the stock market the public limited company is incorporated capital is obtained from shareholders’ equity and financial institutions the company is continuous specialisation is possible since specialist staff can be employed there is a large capital base.

The characteristics of multinational corporations (MNCs) are listed below. ឣ MNCs are created through direct foreign investment (DFI). ឣ Headquarters of MNCs are usually located in a developed country, while subsidiary companies are located in developing countries. ឣ Firms usually use the latest technology. ឣ Firms invest heavily in research and development. ឣ Firms are usually capital-intensive and thus benefit from economies of scale. Limited liability companies have advantages that include the fact that: ឣ they are able to raise large capital, particularly in the case of public liability companies ឣ shareholders’ risk is limited to the value of the shares they have invested ឣ the companies have a separate legal entity ឣ there is continuity since the death of a shareholder does not affect the survival of the firm ឣ shares are transferable, particularly in the public limited company ឣ they can benefit from economies of scale since they can employ specialists and engage in research and development


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financial statements are available for inspection by members of the public. The disadvantages of limited liability companies are listed below. ឣ Considerable legal procedures are involved in setting up this type of business. ឣ Owners often lose touch with what is happening in the organisation. ឣ Management’s actions may not always be in the best interests of the shareholders. ឣ In private limited companies shares are not always transferable, except with the approval of the membership. ឣ In the private limited company, because of the family structure, entrepreneurial talent is drawn from a restricted pool. The public liability company is in the vulnerable position of being taken over by mergers. The advantages of multinational corporations to the host country are: ឣ

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Characteristics of nationalised industries: ឣ Previously privately owned, they were taken over by the state. ឣ The state is the only shareholder. ឣ They are a separate legal entity. ឣ

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the injection of foreign capital in the economy the creation of employment opportunities ឣ the transfer of skills ឣ increased revenue through taxation. Perceived disadvantages of multinational corporations to the host country are: ឣ possible poor working conditions and abuse of worker’s rights ឣ risk of destruction of the environment ឣ possible intimidation of workers and trade unions. ឣ

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Their objective is to provide a service to the population. A board of directors appointed by the government manages them. Funding is mainly from the government and grants. Accounting procedures are monitored by the state.

Limited liability companies must be incorporated and therefore must submit to the Registrar of Companies the following: ឣ Memorandum of Association ឣ Articles of Association ឣ Statement of the Authorised or Nominal Capital. Characteristics of state corporations: ឣ They are established by the government through legislation.

A board of directors appointed by the government manages them. Accounting reports must be sent to the auditor general.

An advantage of a state corporation is that the state has the autonomy to act on its own. Disadvantages of a state corporation are that the company may depend heavily on state funding and there may be too much political interference. Advantages of nationalised industries: ឣ Profits remain in the country. ឣ The company serves the various needs of the community. ឣ Nationalisation prevents monopolies from forming. ឣ Ownership of the most profitable industries is in the hands of the state. Disadvantages of nationalised industries: Low salaries are paid to top executives. The non-profitable industries may be a drain on the government’s revenue. State corporations are incorporated through an Act of Parliament, that is, through legislation. These firms are funded by the taxpayers. The government purchases the shares of nationalised industries. In fact, the government is the only shareholder.

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Tutor-marked assignment You are the newly promoted director of a manufacturing company producing cement in Harbour View, Jamaica. Draw up a plan that would

satisfy the company’s social responsibilities to the community and show how this plan would be implemented. (40 marks)

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The Caribbean Examinations Council (CXC®) has developed this self-study guide to provide candidates both in and out of school with an additional resource to help them prepare for the Principles of Business for CSEC® examination. The guides have been prepared by experienced educators with expertise in the syllabus, teaching and/or examination. The content covers the key concepts of the subject that candidates must know. Features of the study guides include:

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Introduction and Objectives setting out the key concepts to be covered in each chapter Examples to illustrate learning points

Activities and Feedback to provide plenty of practice and help you build your understanding and application of the concepts

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End Tests with Feedback to help you evaluate your progress.

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This study guide will provide you with the tools and support you need to reach your full potential.

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Csec Principles of Business Study Guide

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