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4.1 – Production of Goods and Services

Production is the effective management of resources in producing goods and services.

The operations department in a firm overlooks the production process. They must:

Use the resources in a cost-effective and efficient manner

Manage inventory effectively

Produce the required output to meet customer demands

Meet the quality standards expected by customers

Productivity

Productivity is a measure of the efficiency of inputs used in the production process over a period of time. It is the output measured against the inputs used to produce it. The formula is:

Productivity = Quantity Output/Quantity input

Businesses often measure the labour productivity to see how efficient their employees are in producing output. The formula for it is:

Labour Productivity = Output (over a period of time) / No. of employees

Businesses look to increase productivity, as the output will increase per employee and so the average costs of production will fall. This way, they will be able to sell more while also being able to lower prices.

Ways to increase productivity:

improving labour skills by training them so they work more productively and waste lesser resources

introducing automation (using machinery and IT equipment to control production) so that production is faster and error-free

improve employee motivation so that they will be willing to produce more and efficiently so.

improved quality control and assurance systems to ensure that there are no wastage of resources

Inventory Management

Firms can hold inventory (stock) of raw materials, goods that are not completed yet (a.k.a work-in-progress) and finished unsold goods. Finished good stocks are kept so that any unexpected rise in demand is fulfilled.

When inventory gets to a certain point (reorder level), they will be reordered by the firm to bring the level of inventory back up to the maximum level again. The business has to reorder inventory before they go too low since the reorder supply will take time to arrive at the firm

The time it takes for the reorder supply to arrive is known as lead time.

If too high inventory is held, the costs of holding and maintaining it will be very high.

The buffer inventory level is the level of inventory the business should hold at the very minimum to satisfy customer demand at all times. During the lead time the inventory will have hit the buffer level and as reorder arrives, it will shoot back up to the maximum level.

Lean Production

Lean production refers to the various techniques a firm can adopt to reduce wastage and increase efficiency/productivity.

The seven types of wastage that can occur in a firm:

Overproduction– producing goods before they have been ordered by customers. This results in too much output and so high inventory costs

Waiting– when goods are not being moved or processed in any way, then waste is occurring

Transportation-moving goods around unnecessarily is simply wasting time. They also risk damage during movement

Unnecessary inventory-too much inventory takes up valuable space and incurs cost

Motion-unnecessary moving about my employees and operation of machinery is a waste of time and cost respectively.

Over-processing-using complex machinery and equipment to perform simple tasks may be unnecessary and is a waste of time, effort and money

Defects– any fault in equipment can halt production and waste valuable time. Goods can also turn out to be faulty and need to be fixed- taking up more money and time

By avoiding such wastage, a firm can benefit in many ways

less storage of raw materials, components and finished goods- less money and time tied up in inventory

quicker production of goods and services

no need to repair faulty goods- leads to good customer satisfaction

ultimately, costs will lower, which helps reduce prices, making the business more competitive and earn higher profits as well

Now, how to implement lean production? The different methods are:

Kaizen: it’s a Japanese term meaning ‘continuous improvement’. It aims to increase efficiency and reduce wastage by getting workers to get together in small groups and discuss problems and suggest solutions. Since they’re the ones directly involved in production they will know best to identify issues. When kaizen is implemented, the factory floor, for example, is rearranged by re-positioning machinery and equipment so that production can flow smoothly through the factory in the least possible time.

Benefits:

increased productivity

reduced amount of space needed for production

improved factory layout may allow some jobs to be combined, so freeing up employees to do other jobs in the factory

Just-in-Time inventory control: this techniques eliminates the need to hold any kind of inventory by ensuring that supplies arrive just in time they are needed for production. The making of any parts is done just in time to be used in the next stage of production and finished goods are made just in time they are needed for delivery to the customer/shop. The firm will need very reliable suppliers and an efficient system for reordering supplies.

Benefits:

Reduces cost of holding inventory

Warehouse space is not needed any more, so more space is available for other uses

Finished goods are immediately sold off, so cash flows in quickly

Cell Production: the production line is divided into separate, self-contained units each making a part of the finished good. This works because it improves worker morale when they are put into teams and concentrate on one part alone.

Methods of Production

Job Production: products are made specifically to order, customized for each customer. Eg: wedding cakes, made-to-measure suits, films etc.

Advantages:

Most suitable for one-off products and personal services

The product meets the exact requirement of the customer

Workers will have more varied jobs as each order is different, improving morale

very flexible method of production

Disadvantages:

Skilled labour will often be required which is expensive

Costs are higher for job production firms because they are usually labour-intensive

Production often takes a long time

Since they are made to order, any errors may be expensive to fix

Materials may have to be specially purchased for different orders, which is expensive

Batch Production: similar products are made in batches or blocks. A small quantity of one product is made, then a small quantity of another. Eg: cookies, building houses of the same design etc.

Advantages:

Flexible way of working- production can be easily switched between products

Gives some variety to workers

More variety means more consumer choice

Even if one product’s machinery breaks down, other products can still be made

Disadvantages:

Can be expensive since finished and semi-finished goods will need moving about

Machines have to be reset between production batches which delays production

Lots of raw materials will be needed for different product batches, which can be expensive.

Flow Production: large quantities of products are produced in a continuous process on the production line. Eg: a soft drinks factory.

Advantages:

There is a high output of standardized (identical) products

Costs are low in the long run and so prices can be kept low

Can benefit from economies of scale in purchasing

Automated production lines can run 24×7

Goods are produced quickly and cheaply

Capital-intensive production, so reduced labour costs and increases efficiency

Disadvantages:

A very boring system for the workers, leads to low job satisfaction and motivation

Lots of raw materials and finished goods need to be held in inventory- this is expensive

Capital cost of setting up the flow line is very high

If one machinery breaks down, entire production will be affected

Factors that affect which production method to use:

The nature of the product: Whether it is a personal, customized-to-order product, in which case job production will be used. If it is a standard product, then flow production will be used

The size of the market: For a large market, flow production will be required. Small local and niche markets may make use of batch and flow production. Goods that are highly demanded but not in very large quantities, batch production is most suitable.

The nature of demand: If there is a fair and steady demand for the product, it would be more suitable to run a production line for the product. For less frequent demand, batch and job will be appropriate.

The size of the business: Small firms with little capital access will not produce using large automated production lines, but will use batch and job production.

Technology and Production

Automation: equipment used in the factory is controlled by computers to carry out mechanical processes, such as spray painting a car body.

Mechanization: production is done by machines but is operated by people

CAD (computer aided designing): a computer software that draws items being designed more quickly and allows them to be rotated, zoomed in and viewed from all angles.

CAM (computer aided manufacturing): computers monitor the production process and controls machines and robots-similar to automation

CIM (computer integrated manufacturing): the integration of CAD and CAM. The computers that design the product using CAD is connected to the CAM software to directly produce the physical design.

EPOS (electronic point-of-sale): used at checkouts/tills where operator scans the bar-code of each item bought by the customer individually. The item details and price appear on screen and are printed in the receipt. They can also automatically update and reorder stock as items are bought.

EFTPOS (electronic funds transfer at point-of-sale): the electronic cash register at the till will be connected to the retailer’s main computer and different banks. When the customer swipes the debit card at the till, information is read by the scanner and an amount is withdrawn from the customer’s bank account (after the PIN is entered).

Advantages of technology in production

Greater productivity

Greater job satisfaction among workers as boring, routine jobs are done by machines

Better quality products

Quicker communication and less paperwork

More accurate demand levels are forecast since computer monitor inventory levels

New products can be introduced as new production methods are introduced

Disadvantages of technology in production

Unemployment rises as machines and computers replace human labour

Expensive to set up

New technology quickly becomes outdated and frequent updating of systems will be needed- this is expensive and time-consuming.

Employees may take time to adjust to new technology or even resist it as their work practices change.

4.2 – Costs, Scale of Production and Break-even Analysis

Fixed Costs are costs that do not vary with output produced or sold in the short run. They are incurred even when the output is 0 and will remain the same in the short run. In the long-run they may change. Also known as overhead costs.

E.g.: rent, even if production has not started, the firm still has to pay the rent.

Variable Costs are costs that directly vary with the output produced or sold. E.g.: material costs and wage rates that are only paid according to the output produced.

TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS

TOTAL COST = AVERAGE COST * OUTPUT

AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT

A business can use these cost data to make different decisions. Some examples are: setting prices (if the average cost of one unit is $3, then the price would be set at $4 to make a profit of $1 on each unit), deciding whether to stop production (if the total cost exceeds the total revenue, a loss is being made, and so the production might be stopped), deciding on the best location (locations with the cheaper costs will be chosen) etc.

Scale of production

As output increases, a firm’s average cost decreases.

Economies of scale are the factors that lead to a reduction in average costs as a business increases in size. The five economies of scale are:

Purchasing economies: For large output, a large amount of components have to be bought. This will give them some bulk-buying discounts that reduce costs

Marketing economies: Larger businesses will be able to afford its own vehicles to distribute goods and advertise on paper and TV. They can cut down on marketing labour costs. The advertising rates costs also do not rise as much as the size of the advertisement ordered by the business. Average costs will thus reduce.

Financial economies: Bank managers will be more willing to lend money to large businesses as they are more likely to be able to pay off the loan than small businesses. Thus they will be charged a low rate of interest on their borrowings, reducing average costs.

Managerial economies: Large businesses may be able to afford to hire specialist managers who are very efficient and can reduce the business’ costs.

Technical economies: Large businesses can afford to buy large machinery such as a flow production line that can produce a large output and reduce average costs

Diseconomies of scale are the factors that lead to an increase the average costs of a business as it grows beyond a certain size. They are:

Poor communication: as a business grows large, more departments and managers and employees will be added and communication can get difficult. Messages may be inaccurate and slow to receive, leading to lower efficiency and higher average costs in the business.

Low morale: when there are lots of workers in the business and they have non-contact with their senior managers, the workers may feel unimportant and not valued by management. This would lead to inefficiency and higher average costs.

Slow decision-making: As a business grows larger, its chain of command will get longer. Communication will get very slow and so any decision-making will also take time, since all employees and departments may need to be consulted with.

Businesses are now dividing themselves into small units that can control themselves and communicate more effectively, to avoid any diseconomies from arising.

Break-even

Break-even level of output is the output that needs to be produced and sold in order to start making a profit. So, the break-even output is the output at which total revenue equals total costs (neither a profit nor loss is made, all costs are covered).

A break-even chart can be drawn, that shows the costs and revenues of a business across different levels of output and the output needed to break even.

Example:

In the chart below, costs and revenues are being calculated over the output of 2000 units.

The fixed costs is 5000 across all output (since it is fixed!).

The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at output 2000- so you just draw a straight line from $0 to $6000.

The total costs will then start from the point where fixed cost starts and be parallel to the variable costs (since T.C.= F.C.+V.C. You can manually calculate the total cost at output 2000: ($6000+$5000=$11000).

The price per unit is $8 so the total revenue is $16000 at output 2000.

Now the break-even point can be calculated at the point where total revenue and total cost equals– at an output of 1000. (In order to find the sales revenue at output 1000, just do $8*1000= $8000. The business needs to make $8000 in sales revenue to start making a profit).

Advantages of break-even charts:

Managers can look at the graph to find out the profit or loss at each level of output

Managers can change the costs and revenues and redraw the graph to see how that would affect profit and loss, for example, if the selling price is increased or variable cost is reduced.

Te break-even chart can also help calculate the safety margin- the amount by which sales exceed break-even point. In the above graph, if the business decided to sell 2000 units, their margin of safety would be 1000 units. In sales terms, the margin of safety would be 1000*8 = $8000. They are $8000 safe from making a loss.

Margin of Safety (units) = Units being produced and sold – Break-even output

Limitations of break-even charts:

They are constructed assuming that all units being produced are sold. In practice, there are always inventory of finished goods. Not everything produced is sold off.

Fixed costs may not always be fixed if the scale of production changes. If more output is to be produced, an additional factory or machinery may be needed that increases fixed costs.

Break-even charts assume that costs can always be drawn using straight lines. Costs may increase or decrease due to various reasons. If more output is produced, workers may be given an overtime wage that increases the variable cost per unit and cause the variable cost line to steep upwards.

Break-even can also be calculated without drawing a chart. A formula can be used:

Break-even level of production =Total fixed costs/ Contribution per unit

Contribution = Selling price – Variable cost per unit (this is the value added/contributed to the product when sold)

In the above example, the contribution is $8 -$3 =$5, so the break-even level is:

$5000/$5 = 1000 units!

4.3 – Achieving Quality Production

Quality means to produce a good or service which meets customer expectations. The products should be free of faults or defects. Quality is important because it:

establishes a brand image

builds brand loyalty

maintains good reputation

increase sales

attract new customers

If there is no quality, the firm will

lose customers to other brands

have to replace faulty products and repeat poor service, increasing costs

bad reputation leading to low sales and profits

There are three methods a business can implement to achieve quality: quality control, quality assurance and total quality management.

Quality Control

Quality control is the checking for quality at the end of the production process, whether a good or a service.

Advantages:

Eliminates the fault or defect before the customer receives it, so better customer satisfaction

Not much training required for conducting this quality check

Disadvantages:

Still expensive to hire employees to check for quality

Quality control may find faults and errors but doesn’t find out why the fault has occurred, so the it’s difficult to solve the problem

if product has to be replaced and reworked, then it is very expensive for the firm

Quality Assurance

Quality assurance is the checking for quality throughout the production process of a good or service.

Advantages:

Eliminates the fault or defect before the customer receives it, so better customer satisfaction

Since each stage of production is checked for quality, faults and errors can be easily identified and solved

Products don’t have to be scrapped or reworked as often, so less expensive than quality control

Disadvantages:

Expensive to carry out

How well will employees follow quality standards?

Total Quality Management (TQM)

Total Quality Management or TQM is the continuous improvement of products and production processes by focusing on quality at each stage of production. There is great emphasis on ensuring that customers are satisfied. In TQM, customers just aren’t the consumers of the final product. It is every worker at each stage of production. Workers at one stage have to ensure the quality standards are met for the product in production at their stage before they are passed onto the next stage and so on. Thus, quality is maintained throughout production and products are error-free.

TQM also involves quality circles and like Kaizen, workers come together and discuss issues and solutions, to reduce waste ensure zero defects.

Advantages:

quality is built into every part of the production process and becomes central to the workers principles

eliminates all faults before the product gets to the final customer

no customer complaints and so improved brand image

products don’t have to be scrapped or reworked, so lesser costs

waste is removed and efficiency is improved

Disadvantages:

Expensive to train employees all employees

Relies on all employees following TQM– how well are they motivated to follow the procedures?

How can customers be assured of the quality of a product or service?

They can look for a quality mark on the product like ISO (International Organization for Standardization). The business with these quality marks would have followed certain quality procedures to keep the quality mark. For services, a good reputation and positive customer reviews are good indicators of the service’s quality.

4.4 – Location Decisions

Owners need to decide a location for their firm to operate in, at the time of setting up, when it needs to expand operations, and when the current location proves unsatisfactory for some reason. Location is important because it can affect the firm’s costs, profits, efficiency and the market base it reaches out to.

Factors that affect the location decisions of a manufacturing firm:

Production Method: when job production is used, the business will operate on a small scale, so the nearness to components/raw materials won’t be that important. For flow production, on the other hand, production will be on a large scale- there will be a huge amount of components and transport costs will be high- so components need to be close by.

Market: if the product is a consumer good and perishable, the factories need to be close to the markets to sell out quickly before it perishes.

Raw Materials/Components: the factories may need to be located close to where raw materials can be acquired, especially if the raw material is to be processed while still fresh, like fruits for fruit juice.

External economies: the business may locate near other firms that support the business by provide services- eg: business that install and maintain factory equipment.

Availability of labour: Businesses will need to locate near areas where they can get workers of the skills they need in the factory. If lots of unskilled workers are needed in the factories firms locate in areas of high unemployment. Wage rates also vary by location and firms will want to set up in locations where wage rates are low.

Government Influence: the government sometimes gives incentives and grants to firms that set up in low-development, rural and high-unemployment areas. There may also be govt. rules and restrictions in setting up, e.g.: in some areas of great natural beauty. The business needs to consider these.

Transport & Communication infrastructure: the factories need to be located near areas where there are good road/rail/port/air transport systems. If goods are to be exported, it needs to be set up near ports.

Power and water supply: factories need water and power to operate and a reliable and steady supply of both should be ensured by setting up in areas where they are available.

Climate: not the most important factor but can influence certain sectors. Eg: the dry climate in Silicon Valley aids the manufacturing of silicon chips.

Owner’s personal preferences

Factors that affect the location decisions of a service-sector firm:

Customers: service-sector businesses that have direct contact with customers need to locate in customer-accessible and convenient places. Eg; restaurants, hairdressers, post offices etc.

Technology: today, with increasing use of IT to shop and make payments, customers do not need direct access to services and proximity to the market/customer is not a very important factor in location decisions. They locate away from customers in places where there are low rent and wage rates. Eg: banks

Availability of labour: if large number of workers are required in the firm, then it will need to locate close to residential areas. If they want certain types of worker skills, they will need to locate in places where such skilled workers can be found. However, with work-from-home and technology, this is not that big of a factor nowadays.

Climate: tourism services need to be located in places of good climate.

Nearness to other business: some services serve the needs of large companies, such as firm equipment servicing and so they need to be very close to such businesses. Businesses may also set up where close competitors are to watch them and snatch away their customers.

Rent/taxes

Owner’s personal preferences

Factors that affect the location decisions of a retailing firm:

Shoppers: retailers need to be located in areas where shoppers frequent, like malls, to attract as many customers as possible.

Nearby shops: being located to other shops that are visited regularly will also attract attention of customers into the shop. Being near competitors also helps keep an eye on competition and snatch away customers.

Customer parking availability: when parking is available nearby, more people will find it convenient to shop in that area.

Availability of suitable vacant premises: Obviously, there needs to be a vacant premise available to set up the business. Vacant premises can also help the business expand their premises in the future.

Rent/taxes: rents and taxes on the locations need to be affordable.

Access to delivery vehicles: if the retailer has home delivery services, then delivery vehicles will be required.

Security: high rates of crime and theft can happen in shops. Shopping complexes with security guards will thus be preferred by firms.

Why businesses locate in different countries?

New markets overseas.

Cheaper or new raw materials available in other countries.

Cheaper and/or skilled workers are available overseas.

Rent/ taxes are lower..

Availability of government grants and other incentives

Avoid trade barriers and tariffs: when exporting goods to other countries, there will be some tariffs, rules and regulations to get by. in order to avoid this, firms start operating in the country itself, since there is no exporting/importing involved now.

The role of legal controls on location decisions

Governments influence location decisions:

to encourage businesses to set up and expand in areas of high unemployment and under-development. Grants and subsidies can be given to businesses that set up in such areas.

to discourage firms from setting in areas of that are overcrowded or renowned for natural beauty. Planning restrictions can be put into place to do so.

5.1 – Business Finance: Needs and Sources

Finance is the money required in the business. Finance is needed to set up the business, expand it and increase working capital (the day-to-day running expenses).

Start-up capital is the initial capital used in the business to buy fixed and current assets before it can start trading.

Working Capital finance needed by a business to pay its day-to-day running expenses

Capital expenditure is the money spent on fixed assets (assets that will last for more than a year). Eg: vehicles, machinery, buildings etc. These are long-term capital needs.

Revenue Expenditure, similar to working capital, is the money spent on day-to-day expenses which does not involve the purchase of long-term assets. Eg: wages, rent. These are short-term capital needs.

Sources of Finance

Internal finance is obtained from within the business itself.

Retained Profit: profit kept in the business after owners have been given their share of the profit. Firms can invest this profit back in the businesses.

Advantages:

– Does not have to be repaid, unlike, a loan.

– No interest has to be paid

Disadvantages:

– A new business will not have retained profit

– Profits may be too low to finance

– Keeping more profits to be used as capital will reduce owner’s share of profit and they may resist the decision.

Sale of existing assets: assets that the business doesn’t need anymore, for example, unused buildings or spare equipment can be sold to raise finance

Advantages:

– Makes better use of capital tied up in the business

– Does not become debt for the business, unlike a loan.

Disadvantages:

– Surplus assets will not be available with new businesses

– Takes time to sell the asset and the expected amount may not be gained for the asset

Sale of inventories: sell of finished goods or unwanted components in inventory.

Advantage:

– Reduces costs of inventory holding

Disadvantage:

– If not enough inventory is kept, unexpected increase demand form customers cannot be fulfilled

Owner’s savings: For a sole trader and partnership, since they’re unincorporated (owners and business is not separate), any finance the owner directly invests from hos own saving will be internal finance.

Advantages:

– Will be available to the firm quickly

– No interest has to be paid.

Disadvantages:

– Increases the risk taken by the owners.

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External finance is obtained from sources outside of the business.

Issue of share: only for limited companies.

Advantage:

A permanent source of capital, no need to repay the money to shareholders

no interest has to be paid

Disadvantages:

Dividends have to be paid to the shareholders

If many shares are bought, the ownership of the business will change hands. (The ownership is decided by who has the highest percentage of shares in the company)

Bank loans: money borrowed from banks

Advantages:

Quick to arrange a loan

Can be for varying lengths of time

Large companies can get very low rates of interest on their loans

Disadvantages:

Need to pay interest on the loan periodically

It has to be repaid after a specified length of time

Need to give the bank a collateral security (the bank will ask for some valued asset, usually some part of the business, as a security they can use if at all the business cannot repay the loan in the future. For a sole trader, his house might be collateral. So there is a risk of losing highly valuable assets)

Debenture issues: debentures are long-term loan certificates issued by companies. Like shares, debentures will be issued, people will buy them and the business can raise money. But this finance acts as a loan- it will have to be repaid after a specified period of time and interest will have to be paid for it as well.

Advantage:

Can be used to raise very long-term finance, for example, 25 years

Disadvantage:

Interest has to be paid and it has to be repaid

Debt factoring: a debtor is a person who owns the business money for the goods they have bought from the business. Debt factors are specialist agents that can collect all the business’ debts from debtors.

Advantages:

Immediate cash is available to the business

Business doesn’t have to handle the debt collecting

Disadvantage:

The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t get all of their debts

Grants and subsidies: government agencies and other external sources can give the business a grant or subsidy

Advantage:

Do not have to be repaid, is free

Disadvantage:

There are usually certain conditions to fulfil to get a grant. Example, to locate in a particular under-developed area.

Micro-finance: special institutes are set up in poorly-developed countries where financially-lacking people looking to start or expand small businesses can get small sums of money. They provide all sorts of financial services

Crowdfunding: raises capital by asking small funds from a large pool of people, e.g. via Kickstarter. These funds are voluntary ‘donations’ and don’t have to be return or paid a dividend.

Short-term finance provides the working capital a business needs for its day-to-day operations.

Overdrafts: similar to loans, the bank can arrange overdrafts by allowing businesses to spend more than what is in their bank account. The overdraft will vary with each month, based on how much extra money the business needs.

Advantages:

Flexible form of borrowing since overdrawn amounts can be varied each month

Interest has to be paid only on the amount overdrawn

Overdrafts are generally cheaper than loans in the long-term

Disadvantages:

Interest rates can vary periodically, unlike loans which have a fixed interest rate.

The bank can ask for the overdraft to be repaid at a short-notice.

Trade Credits: this is when a business delays paying suppliers for some time, improving their cash position

Advantage:

No interests, repayments involved

Disadvantage:

If the payments are not made quickly, suppliers may refuse to give discounts in the future or refuse to supply at all

Debt Factoring: (see above)

Long-term finance is the finance that is available for more than a year.

Loans: from banks or private individuals.

Debentures

Issue of Shares

Hire Purchase: allows the business to buy a fixed asset and pay for it in monthly instalments that include interest charges. This is not a method to raise capital but gives the business time to raise the capital.

Advantage:

The firms doesn’t need a large sum of cash to acquire the asset

Disadvantage:

A cash deposit has to be paid in the beginning

Can carry large interest charges.

Leasing: this allows a business to use an asset without purchasing it. Monthly leasing payments are instead made to the owner of the asset. The business can decide to buy the asset at the end of the leasing period. Some firms sell their assets for cash and then lease them back from a leasing company. This is called sale and leaseback.

Advantages:

The firm doesn’t need a large sum of money to use the asset

The care and maintenance of the asset is done by the leasing company

Disadvantage:

The total costs of leasing the asset could finally end up being more than the cost of purchasing the asset!

Factors that affect choice of source of finance

Purpose: if a fixed asset is to be bought, hire purchase or leasing will be appropriate, but if finance is needed to pay off rents and wages, debt factoring, overdrafts will be used.

Time-period: for long-term uses of finance, loans, debenture and share issues are used, but for a short period, overdrafts are more suitable.

Amount needed: for large amounts, loans and share issues can be used. For smaller amounts, overdrafts, sale of assets, debt factoring will be used.

Legal form and size: only a limited company can issue shares and debentures. Small firms have limited sourced of finances available to choose from

Control: if limited companies issue too many shares, the current owners may lose control of the business. They need to decide whether they would risk losing control for business expansion.

Risk- gearing: if business has existing loans, borrowing more capital can increase gearing- risk of the business- as high interests have to be paid even when there is no profit, loans and debentures need to be repaid etc. Banks and shareholders will be reluctant to invest in risky businesses.

Finance from banks and shareholders

Chances of a bank willing to lend a business finance is higher when:

A cash flow forecast is presented detailing why finance is needed and how it will be used

An income statement from the last trading year and the forecast income statement for the next year, to see how much profit the business makes and will make.

Details of existing loans and sources of finance being used

Evidence that a security/collateral is available with the business to reduce the bank’s risk of lending

A business plan is presented to explain clearly what the business hopes to achieve in the future and why finance is important to these plans

Chances of a shareholder willing to invest in a business is higher when:

the company’s share prices are increasing- this is a good indicator of improving performance

dividends and profits are high

the company has a good reputations and future growth plans

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A good or service that is essential for living.

want

A good or service that people would like to have but is not necessary for living. People have unlimited wants.

economic problem

There are unlimited wants but limited resources to produce the goods and services to satisfy wants. This creates scarcity.

Factors of production

Resources needed to produce goods and services. There are 4 factors of production (land, labour, capital, enterprise) and they are limited in supply.

Scarcity

The lack of sufficient products to fulfil the total wants of the population.

Opportunity Cost

The next best alternative given up by choosing another item.

Specialisation

When people and businesses concentrate on what they are best at.

Division of labour

When the production process is split up into different tasks and each worker performs one of these tasks. It is a form of specialisation.

Business

Combines factors of production to make products (goods and services) which satisfy people's wants.

Added Value

It is the difference between the selling price of a product and the cost of bought in materials and components.

Primary Sector

Extracts and uses natural resources to produce raw materials used by other businesses.

Secondary Sector

Manufactures goods using raw materials provided by Primary Sector.

Tertiary Sector

Provides services to customers and other sectors of industry.

De-industrialisation

There is a decline in the importance of the secondary, manufacturing sector of industry in a country.

Mixed Economy

Has both a private sector and a public sector.

Private Sector

Businesses not owned by government. Make their own decision about selling price. Aim to run profitably. Some government control.

Public Sector

Government-owned, controlled businesses and organisations. Decide which price to charge consumers. Different aim from Private Sector.

Capital

Money invested into business by owners.

Entrepreneur

A person who organises, operates and takes the risk for a new business venture.

Business Plan

Document containing the business objectives and important details about the operations, finance and owners of the new businesses.

Capital Employed

Total value of capital used in the business.

Internal Growth

When a business expands its existing operations.

External Growth

When a business takes over or merges with another business.

Integrations/Merger

When two businesses agree to join their firms together to make one business.

Takeover/Acquisition

One business buys out the owners of another business which then becomes part of the 'predator' business

Horizontal Integration

When one company merges with or takes over another in the same industry in the same stage of production.

Vertical Integration

When one company merges with or takes over another in the same industry but at a different stage of production.

Conglomerate Integration/Diversification

When one company merges with or takes over another in a completely different industry.

Sole Trader

Business owned by one person

Limited Liability

The liability of shareholders in a company is only limited to the amount they invested.

Unlimited Liability

The owners of a business can be held responsible for the debts of the business they own. Their liability is not limited to the investment they make.

Partnership

A form of business in which two or more people agree to jointly own a business.

Partnership Agreement

The written legal agreement between partners.

Unincorporated Business

One that does not have a separate legal entity. Sole traders and partnerships are unincorporated businesses.

Incorporated Business

Companies that have a separate legal status from their owners.

Shareholders

Owners of a limited company. They buy shares which represent part ownership of a company.

Annual General Meeting

A legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.

Dividend

Payments made to shareholders from the profit (after tax) of a company. They are the return to shareholders for their investment in the company.

Franchise

Business based upon the use of brand names and trading methods of an existing successful business. Franchisees use franchisor's ideas, names.

Business Objective

Aims and targets that a business works towards.

Profit

Total income (sales revenue) - total costs

Market share

Proportion of total market sales achieved by one business.

Social Enterprise

Has social objectives as well as an aim to make profit to reinvest back into the business.

Stakeholder

A person or group with a direct interest in the performance and activities of a business.