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BUSINESS STUDIESUNIT 2
USING BUDGETSA budget is a financial plan for the future concerning the revenues and costs of a business over a given period of time.
Why are budgets used:
- Establish priorities and sets out targets
- Provides direction
- Assign responsibilities
- Allocate resources
- Delegate without loss of control
- Motivate staff
- Monitor performance
- Control revenues and costs
- Communicate targets
USING BUDGETSHistorical budgeting:
- Using last years figures as a basis for the budget
- Realist and based on actual results
- Circumstances may have changed
- Doesn’t encourage efficiency
Zero-Based Budgeting
- Budgeting costs and revenues are set to zero.
- Budget is based on new proposals for sales and costs
- More time consuming and more complicated
- Potentially more realistic
USING BUDGETSA variance arises when there is a difference between actual and budget figures.
Favourable Variances
- Actual figures are better than budgeted
- Costs lower than expected
- Sales higher than expected
Adverse Variances
- Actual figure is worse than budgeted figure
- Costs are higher than expected
- Revenue is lower than expected
USING BUDGETSDrawbacks and limitations of budgeting:
- Are only as good as the data being used
- Can lead to inflexibility in decision making
- Need to be changed as circumstances change
- Takes time to complete and manage
- Can result in short term decisions to keep within the budget
MEASURING AND INCREASING PROFITProfit is financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something.
Why businesses should increase profits:
- Earn better returns for investors
- Stop the business from suffering losses
- Improve internal sources of finance
- Provides a better return on investment
Ways to increase profit:
Sales
Less Variable Costs
Less fixed Costs
Net Profit
Increase quantity or raise selling price
Reduce variable cost per unit
Increase output (economies of scale)
Reduce overheads
MEASURING AND INCREASING PROFITStrategies:
Selling more:
+ Higher sales= higher revenues+ Better use of production capacity+ Result in higher market share- Depends on elasticity of demand- Sales value may fall if price falls- Can you physically sell more?- Competitors are likely to respond- Marketing efforts may fail- Fixed costs may rise (higher marketing)
MEASURING AND INCREASING PROFITStrategies:
Increase selling prices:
+ Higher price=high sales value+ Customer may perceive product as higher quality+ No need for extra capacity- Depends on elasticity of demand- Number of sales may fall- Customers have to remain loyal- Competitors are likely to respond- Customers may switch to competitors
MEASURING AND INCREASING PROFITStrategies:
Increase production:
+ Greater quantity of product to be sold+ Spread fixed costs over a greater number of units+ Economies of scale- Extra output might no be sold- Business might not have spare capacity- Fixed costs might rise- Quality may fall
MEASURING AND INCREASING PROFITStrategies:
Reducing fixed costs and overheads
+ Feeds directly to higher profits+ Reduces breakeven output+ Potential for substantial savings- Cutting costs may affect quality- Might reduce ability of increasing sales- Intangible costs e.g. redundancies may lead to low morale
IMPROVING CASH FLOWMain causes of cash flow problems:
- Low profits
- Too much production capacity
- Too much stock
- Allowing customers too much credit
- Growing too fast
- Unexpected changes
- Seasonal demand
IMPROVING CASH FLOWWays to improve cashflow:
Short term:
- cut costs
- reduce current assets (stock and debtors)
- increase current liabilities (delay payments)
- sell surplus fixed assets
Medium to long term:
- improve efficiency & productivity
- increase equity finance
- increase long-term liabilities
- reduce spending on fixed assets
IMPROVING CASH FLOW- Managing cash flow tied up in stocks
- Debt Factoring
- Handling cash flow problems with customers
- Sale of assets
IMPROVING ORGANISATIONAL STRUCTUREFactors that determine the organisational structure:
Size of the business
Type of the business
Management and leadership style
The competitive environment
Changing the organisational structure:
+ Growth for the business
+ Reduce costs and complexity
+ Motivate employees
+ Improve customer service
- Manager and employee resistance
- Disruption
- Costs
- Negative impact on quality
IMPROVING ORGANISATIONAL STRUCTURENarrow span of control:
- Allows for closer supervision of employees
- More layers may be required
- More effective communication
Wide span of control:
- Gives subordinates the chance of more independence
- More appropriate to reduce labour costs (reduce number of managers)
IMPROVING ORGANISATIONAL STRUCTURETall hierarchies- many layers of hierarchy and narrow span of control.
- Allows tighter control
- More opportunities for promotion
- Takes longer for communication through the layers
- More layers=more staff= higher costs
Flat hierarchies- few layers of hierarchy and wide span of control
- Less direct control and more delegation
- Fewer opportunities of promotion but staff have greater responsibility in their role
- Vertical communication is improved
- Fewer layers=fewer staff=lower costs
IMPROVING ORGANISATIONAL STRUCTUREDelegation- is the assignment to others of the authority for particular functions, tasks and decisions.
Advantages:
- Reduces management stress and workload
- Allows senior management to focus on key tasks
- Subordinates are empowered and motivated
- Potentially better use of resources
- Good method of on-the-job training
Disadvantages:
- Cant delegate responsibility
- Depends on the quality or experience of the subordinates
- Harder in a small firm
- May increase workload and stress on the subordinates.
IMPROVING ORGANISATIONAL STRUCTUREDelayering- involves removing layers of management from the hierarchy of the organisation
Advantages:
- Lower labour costs
- Faster decision making and communication
- Stimulate employee innovation
Drawbacks:
- Less opportunity for promotion
- De-motivating effect (redundancies)
EFFECTIVENESS OF THE WORKFORCEStaff Turnover
Percentage of staff who leave during a period
Staff turnover= number of employees leaving during period x100
Average number employed during periodCosts to a business when higher labour turnover:
- High recruitment and training costs
- Increased pressure on remaining staff
- Disruption to production
- Harder to maintain standards of quality
Factors affecting the level:
- Industry practice
- Employee loyalty
- Economic conditions
- Size and ownership of the business
- Financial rewards
- Working conditions
- Recruitment standards
EFFECTIVENESS OF THE WORKFORCELabour productivity
Output per employee
Labour productivity= output per period (units)
number of employees at workFactors affecting the level:
- Quality and extent of fixed assets
- Skills, ability and motivation of the workforce
- Methods of production
- External factors (reliability of suppliers)
Ways to improve:
- Set and measure to targets
- Streamline production
- Invest in equipment
- Invest in employee training
- Make the workplace productive
EFFECTIVENESS OF THE WORKFORCEAbsenteeism
Production of staff who are absent from work
absenteeism= number of staff absent during a period x100
number employed during the periodFactors affecting the level:
- Industry practice
- Employee loyalty
- Economic conditions
- Size and ownership of the business
- Financial rewards
- Working conditions
- Recruitment standards
Ways to improve:
- Understand the causes
- Set targets and monitor trends
- Clear sickness and absence policy
- Provide rewards for good attendance
- Consider the wider issues of employee motivation
RECRUITMENT, SELECTION AND TRAININGInternal recruitment:
- Jobs are given to staff already employed within the business
- Involves promotion and reorganisation
Advantages:
- Cheaper and quicker to recruit
- People already familiar with the business and how it operates
- Provides opportunities for promotion within the business
Disadvantages:
- Business already knows strengths and weaknesses of candidate
- Limits number of potential applicants
- No new ideas can be introduced from the outside
- May cause resentment from other colleagues
- Creates another vacancy which needs to be filled
RECRUITMENT, SELECTION AND TRAININGExternal recruitment:
- Job centres
- Job advertisements
- Recruitment agencies
- Headhunting
- Personal recommendation
Advantages:
- Outside people bring new ideas
- Wider pool of workers to find the best candidate
- People have a wider range of experience
Disadvantages:
- Longer process
- More expensive
- Selection may not be as effective
RECRUITMENT, SELECTION AND TRAININGOn-the-job training- an employee receives training whilst remaining in the workplace. E.g demonstration, coaching, job rotation or team projects.
Advantages:
- Generally cost effective
- Employees are actually productive
- Opportunity to learn whilst doing
- Training along side real colleagues
Disadvantages:
- Quality depends on the ability of the trainer and time available
- Bad habits might be passed on
- Learning environment might not be suitable
- Potential disruption to production
RECRUITMENT, SELECTION AND TRAININGOff-the-job training- An employee receives training away from the workplace. E.g courses, day release or webinars
Advantages:
- Wider range of skills or qualifications can be obtained
- Can learn from specialists with expertise
- Employees can be more confident
- Motivate employees as the business has spent money on them
Disadvantages:
- More expensive
- Lost working time and potential output
- New employees may still need some induction training
- Employees now have new skills and may leave for better jobs.
RECRUITMENT, SELECTION AND TRAININGInvestment in training:
Advantages:
- Better productivity
- Higher quality
- More flexibility through better skills
- Less supervision required
- Improved motivation (empowerment)
- Better recruitment and employee retention
- Easier to implement change
Disadvantages:
- Poor management may still be a problem
- Poor job design
- Ineffective or inefficient equipment
- Poor production organisation
- Inappropriate recruitment
MOTIVATING EMPLOYEESMotivation is the will to work, it comes from enjoyment of work or desire to achieve certain goals.
Methods of motivation:
-financial (eg. Salaries, bonuses)
-non financial (responsibility or praise)
Advantages of a motivated workforce:
- Better productivity
- Better quality and customer service
- Lower levels of absenteeism
- Lower levels of staff turnover
- Lower training and recruitment costs
MOTIVATING EMPLOYEESMotivational theorists:
- Taylor (scientific management)
- Mayo (human relations management and hawthorne effect)
- Maslow (hierarchy of needs)
- Herzberg (two factor theorem-hygiene+maintenance factors)
- Mcgregor (theory x and y)
- Drucker (importance of objectives)
- Peters (involving employees and
recognising champions)
MOTIVATING EMPLOYEESFinancial incentives to work:
- Wage
- Salaries
- Bonus system
- Commission
- Profit sharing
- Performance related pay
- Share options
- Fringe benefits (eg company car)
MOTIVATING EMPLOYEESNon- Financial for employees:
- Empowerment
- Praise
- Promotion
- Job enrichment
-more interesting and challenging tasks
-workers get the chance to further themselves
-Herzberg’s approach
- Job enlargement
-giving workers more work of a similar nature
-job rotation
- Better communication
- Working environment
- Team working
OPERATIONAL DECISIONSImprove efficiency in productivity:
- more training
- Improved motivation
- Better equipment
- Better quality raw materials
- Less wastage
OPERATIONAL DECISIONSCapacity utilisation- the percentage of total capacity that is actually used or achieved in a given period.
Capacity is the maximum output that a business can produce in a given period of with the available resources.
Capacity utilisation= actual output
maximum possible output
Why firms don’t operate at full capacity:
- Low demand
- Increase not used as it is new and recent
- Inefficiency
Problems of working at high capacity utilisation:- Negative effect on quality
- Employees suffer
- Loss of sales
QUALITYQuality is the fitness for use, the product/service meets the needs and expectations of customers which achieves a desired minimum standard.
Effects of poor quality:
- Loss of customers
- Cost of remaking the product
- Cost of replacements and refunds
- Wasted materials
- Competitors gain customers
Ways to help manage quality:
- Quality circles (groups of employees who discuss the quality)
- Continuous improvement (Kaizen) (continually examining production)
- Benchmarking (using data to compare with industry and practice)
CUSTOMER SERVICECustomer service- is the way the organisation looks after the customers.
Why customer service is important:
- Package of benefits that the customer buys
- Way to differentiate the product
- Helps keep loyal customers
- Customers feel valued and recommend
- Source of customer feedback and forgive and tell
- Helps attract and retain employees
CUSTOMER SERVICETo give good customer service:
- Listen
- Build trust
- Take complaints seriously
- Get it right first time
- Make the most of your staff
- Go the extra mile
WORKING WITH SUPPLIERSA supplier is a business or individual that provides goods and services to another business.
A good supplier can improve business competiveness:
- Lower purchase costs
- Better quality
- Improved customer service
- Increased productivity
- More flexible capacity
- Get given trade credit
USING TECHNOLOGY IN OPERATIONS- Robots
- Stock control
- Automation
- Design software systems
- Communications
Advantages:
- speed, accuracy and efficiency
- Reliable quality and less waste
- Repetitive or hazardous tasks can be done
- Reduces unit cost
Disadvantages:
- up-front investment
- De-motivating for displaced staff
EFFECTIVE MARKETING AND THE MARKETING MIXMarketing is the process of identifying, anticipating and satisfying customer needs profitability.
Effective marketing on customers:
- Customers are looking for value
- Are prepared to be loyal
- Their tastes change frequently
Orientations of marketing:
- Production (based on what the business is good at)
- Marketing (business responds to customers needs and wants)
Why segment the market:
- Better matching of customer needs
- Enhanced profits
- Better growth opportunities
- Customer retention
- Target the customers
- Gain share of the market segment
EFFECTIVE MARKETING AND THE MARKETING MIXNiche marketing is where a business targets a smaller segment of a larger market, where customers have specific needs or wants.
+ Less competition
+ Clear focus
+ Builds up specialist skills and knowledge
+ Charge a higher price (profit margins are higher)
+ Loyal customers
- Lack of economies of scale
- Dependent on single market
- Attract competition if successful
- Vulnerable to market change
EFFECTIVE MARKETING AND THE MARKETING MIXMass marketing is where a business sells into the largest part of the market where there are many similar products offered by competitors.
- Customers form the majority in the market
- Customers needs and wants are more general
- Higher production output
- Success is linked with low cost operation or market leading brands
PRODUCTSThe product is the most important part of the marketing mix because without the good product the other elements are less effective
Product life cycle:
-development (expensive and no income)
-introduction (low capacity utilisation)
-growth(start economies of scale)
-maturity (rivals enter the market)
-Decline product loses popularity
Product extension
PROMOTIONPromotion is the way in which a business communicates with existing and potential customers to encourage demand.
What promotion depends on:
-stage in product life cycle
-nature of product
-competition
-marketing budget
-marketing strategy
-target market
Ways of promotion:
- Advertising (paid for)
- Sales promotion (point of sale good for short term)
- Direct marketing (direct mail, email or telephoning)
- Personal selling (meeting with potential customers)
PRICEPrice is the money charged for a product or service.
Factors that affect price:- Costs of production
- Competitors prices
- Customer perception
- Firms objectives
- Customer demand
- Target market
- Stage in product life cycle
Pricing Methods:
- Price skimming
- Penetration pricing
- Physiological pricing
- Cost plus
- Loss leader
PLACEPlace refers to the way in which a product or service is distributed from the producer to the final consumer.
Distribution channels move a product from production to consumption.
- Retailers
- Wholesalers
- Distributors
- Agents
Selling direct: (direct mailing or e-commerce)
-retains profit margin
-deals direct with customer
Influencing factors:
- The market
- The business
- The nature of the product
MARKETING AND COMPETITIVENESSCompetitiveness is the ability of a business to deliver better value to customers than competitors.
Examples: (USP)
- Lower prices
- Better customer service
- Easier access
- Higher quality
- Better design or style
Market structures:
- Perfect competition (homogeneous goods, eg, CDRs)
- Monopolistic (competition producing differentiated goods, eg, restaurants)
- Oligopoly (competition between small number of suppliers, eg, banking)
- Monopoly (Single supplier, eg, water and gas)
