Public vs Private Limited Companies: Advantages and Disadvantages

Understanding business activity advantages and disadvantages of public limited companies : ● able to sell shares to public so more capital can be raised ● rapid expansion possible by raising large sums of capital for expansion ● limited liability will encourage more people to invest in it ● accounts available for the public, so competitors can see ● pressure to pay large dividends to shareholders, restricts the planned expansion ● divorce between ownership and control, risk of takeover private limited companies : ● small number of shareholders so no separation between ownership and control ● limited liability for the few shareholders ● accounts are not available to the public ● shares are sold privately, so additional capital cannot be raised ● difficult to raise finance as they are a small business use of bs objectives

• a clear target/aim/purpose/goal to work towards – guides the business in the right direction – avoids loss of focus

• decision-making will be focused on the objectives – meaning better decisions are taken – the business may be more efficient

• helps motivate employees – objectives will help focus the employees and management to increase efficiency – making it more likely to be achieved

People in Business benefits of well motivated workforce ● improved productivity ● less labour turnover (rate at which employees leave the company) ● low rate of absenteeism ● better quality of goods and services ● more competitive business methods of motivation ● financial rewards ○ hourly wage rate: business pays based on how many hours employees work, not linked to how much they produce ○ salary:employees do not receive more if they work longer hours, salary not linked to employee efforts or amount produced ○ piece rate: employees paid for amount produced,quality may reduce, some tasks more difficult than others ○ commusion: linked to value of goods sold, lesser job security ○ bonus scheme: performance related pay,linked to performance targets, employees may be demotivated ○ fringe benefits : discounts on company products etc,helps in recruitment and retention of existing employees, linked to status not performance ● nonfinancial rewards ○ job rotation ○ job enlargement : greater variety of similar level tasks ○ job enrichment : use their full abilities, job satisfaction, more involved

○ quality circles: discussing work related problems, suggest improvements ○ team working: given responsibility of whole task, more involved ○ delegation : passing responsibility to perform tasks to employees lower levels factors affecting span of control

• difficulty of tasks: if simple, wide can be used

• experience and skills of employees : more experienced will be wider

• size of business : large business is usually more narrow

• levels of hierarchy : tall will have narrower

• management style : if managers have more control, narrow short/wide span of control adv and disadv ● communication is more accurate as there are fewer people to be passed through,less errors ● decision making can be quicker as there are fewer levels to discuss with ● managers may have lesser control over subordinates work, so they may mistakes and increase managers workload ● less expensive as fewer managers are needed narrow/long span of control ● have enough control on subordinates work ● may of narrow span of control so more manager positions increase promotion opportunities ● communication and decision making is more difficult ● more supervision may reduce employee motivation

centralised organisations : ● advantages ○ quicker decision making ○ benefits entire business ○ greater use of specialist staff ● disadvantages ○ slower communication ○ unable to respond quickly to changes in local markets ○ reduce employee motivation decentralised organisations : ● advantages ○ based on local needs ○ training junior managers ○ improve motivation ● disadvantages ○ may not benefit entire business ○ lack of skills and experience

role of managers ● planning : where bs wants to be in future ● organising : preparing and organising resources to achieve objectives ● commanding : control and supervision of subordinates ● co-ordinating : making sure all different parts are working together ● controlling : checks if plan is working

trade union: ● negotiating with employers to improve pay and working conditions,high wage demands increase costs ● resolves conflict ● providing legal support and advice ● providing services for members : like pension,insurance,holiday schemes etc. ● protects job security ● membership fee ● provide a single point of contact between employers and employees, simpler,efficient ● could use industrial action like strikes to force employers to meet demands, disrupts production of company and can make employees lose wages

internal recruitment ● filled more quickly ● know how business works ● business knows strength and weaknesses of applicants ● more motivated as chance of promotion ● better candidate may be outside of business ● conflict within workplace ● no new ideas ● another vacancy to fill, since employee leaves previous job

external recruitment ● new ideas ● wider choice of applications ● avoids conflict ● takes longer ● more expensive ● needs training ● don't know the business

advertising a job ● specialist magazines can target potential employees interested in this industry/type of work ● online recruitment sites which can reach large numbers of people/include detailed information but not everyone has access to the internet ● recruitment agencies which saves administration time but recruitment agencies charge a fee for their services ● government run job centres as no cost to the business but only reach those people who are actively looking for a job

part time and full time employees ○ attract well qualified employees who need flexible hours ○ help bs keep experienced staff ○ provides greater flexibility ○ allow for changes in working hours depending on demand ○ more productive ○ increases skills and experience of workforce

○ no need to take time off ○ increase in induction and training costs ○ communication problems ○ quality of service is rendered criteria that selects which employees for redundancy ● productivity ● how often employees are late or absent ● age legal controls over employment issues ● contracts of employment ● unfair dismissal ● discrimination ● minimum wage ● minimum age (child labour) ● health and safety

effective communication : message is sent use correct medium, received by right person, receiver understands, receiver provides feedback needed bc : reduces risk of mistakes , enables fast decision making, quicker responses to market changes, improves coordination, improves motivation of workforce,improves customer relationships problems of ineffective communication : poor sales, incorrectly done or unfinished tasks,business reputation damaged, recruitment and selection problems, employee motivation falls, risk of accidents (employee getting hurt)

Marketing role of marketing is : identifying customer needs, satisfying customer needs , maintaining customer loyalty, building customer relationships

why consumer spending patterns change ● price of product ● price of competitors products ● changes in income ● changes in population size and structure ● changes in tastes and fashion ● brand images

why some markets are more competitive ● government intervention in markets ○ legal controls (do not allow individual firms to dominate the market) ○ selling public sector organisations to private (privatisation) ○ removal of government controls(deregulation) ○ providing financial assistance to small businesses ● growth of free trade ● development of e-commerce and social media networks

how businesses respond to changing spending patterns and increased competition

● product development ● more efficient ● increased promotion ● look for new markets

niche marketing ● benefits ○ small firms can survive ○ less competition ○ exclusive products ● limitations ○ might attract competitors due to opportunity of earning high profits ○ economies of scale unlikely to be achieved ○ small changes in consumer spending is significant mass marketing ● benefits ○ large scale production, economies of scale ○ high sales and profits ○ changes in spending is not that significant ● limitations ○ more competition ○ all markets are not large enough to support mass marketing ○ consumers want customized products benefits to segmentation

• goods and services can meet specific needs of consumers

• small firms can compete in few segments

• identifies a segment of consumers who require specialised needs that are not satisfied

• marketing strategies are targeted

• higher prices

benefits of market oriented approach ● risk of new products failing is reduced ● products meet the needs of consumers last longer uses of market research info ● identify consumer needs ● discover market size ● provide info about the business’s existing products and markets ● identify the strengths and weaknesses of competitor products ● decide on price of product ● predict changes and trends in consumer tastes and fashion primary research ● benefits ○ up to date ○ specific purpose ○ not available to competitors

● limitations ○ costly ○ time consuming ○ risk of data being inaccurate secondary research ● benefits ○ cheap ○ easier and quicker ● limitations ○ not up to date ○ not for specific purpose need for sampling : it is a part of the total market that can be used for market research

why market research not accurate sometimes :

• sample chosen may be too small

• business may have chosen wrong type of method

• consumers not answered truthfully

ch 12 : marketing mix role of packaging : protect , provide info, help consumers recognise the product,promote brand image, easy to transport the product extension strategies : find new markets, find new uses, adapting the product or packaging to appeal to customers, more advertising

place : channels of distribution ● producer to consumer ○ profit earned by producer ○ producer controls all part of marketing mix ○ quickest method of getting the product to the consumer ○ producer has direct contact with consumer ○ consumer cannot try the product ○ delivery costs are high ○ storage costs and promotional activities paid by producer ● producer to retailer to consumer ○ consumer can try product ○ cost of inventory and advertising is lesser ○ retailers are conveniently located ○ retailer takes some profit ○ producer loses control ○ producer pays delivery costs ○ retailers sell competitors products as well ● producer to wholesaler to retailer to consumer ○ buys in bulk ○ wholesaler advertises and pays transport and storage costs ○ helps producer sell to larger market ○ takes profit ○ producer loses control ● producer to agent to wholesaler to retailer

○ specialist knowledge of market ○ more loss of profit for producer aims of promotion

• attracting attention of consumers

• persuading consumers to buy

• explaining how product is better than competitors

• developing brand image legal controls related to marketing

• protect consumers from faulty and dangerous goods

• prevent businesses from using advertising to mislead consumers

• protect consumers from being exploited when there is lesser competition problems of entering foreign markets

• differences in language and culture

• economic differences (average income)

• social differences(age structure)

• differences in legal controls

• lack of market knowledge (business doesn't know, consumers don't know the bs) methods to overcome this ● international franchising ● licensing : a business in one country permits a firm in another to produce its branded product under licence and they understand the local market ● joint venture ○ reduces risk, brings different expertise, market and product knowledge is shared, mistakes made will reflect both parties, different business culture

Operations Management fixed costs factory rent,salary of managers variable costs raw materials what can businesses use cost data for: ● setting prices ● break even analysis ● whether to continue or stop producing a product economies of scale: ● financial economies easier to borrow money with lower interest rates ● managerial economies specialist managers improve quality of bs decisions ● marketing economies average costs of marketing do not rise as bs grows ● purchasing economies discounts on bulk purchases ● technical economies uses latest technology to produce high levels of output diseconomies of scale ● poor communication : managers do not communicate directly with employees ● lack of commitment : employees are demotivated, high labour turnover, poor quality ● weak coordination : control of many departments is hard, managers may be working towards different objectives break even analysis

• easy to construct and interpret

• provides bs with useful info

• can show effect of a decision to change costs or revenues

• can help with other bs decisions like relocation

• assumes that all costs and revenues are represented by straight lines

• not easy to separate costs into fixed and variable

• assumes that all output is sold - does not allow for inventories and handling costs importance of quality ● develop a strong brand image - easier to introduce new products as customers trust ● keep customers and attract new ● reduce customer complaints and returns ● charge at premium price ● encourage wholesalers and retailers to stock ● lengthen product life cycles

Financial information and decisions why business needs finance:

• to set up business(start up capital)

• day to day expenses (working capital)

• purchase of non current(fixed) assets

• invest in latest technology

• finance of expansion of bs

short term finance : day to day expenses, unexpected expenses, short term debts long term finance : salaries, purchase of non current assets

internal sources of finance: ● retained profits ● sale of non current (fixed) assets ○ sale of unwanted non current assets ○ sale and leaseback of wanted non current assets ○ no direct cost, can raise large amounts of money ○ future fixed costs will increase due to leasing charges ● use of working capital ○ cash balances financing capital expenditure ○ reducing inventory levels ○ reducing trade receivables external sources of finance : ● short term sources ○ overdrafts withdraw money greater than balance , flexible ○ trade credits lending money for cost of raw materials for a length of time ○ debt factoring debt factoring company will provide immediate cash for customer credit (trade receivables) ● long term sources ○ bank loan, leasing, hire purchase ○ mortgage (specifically for purchase of land or buildings) ○ debenture (bond that bs sells to raise large sums, gives collateral assets ) ○ share issue (selling of shares, permanent capital) debt financing : does not change ownership, interest is charged equity financing : does not need to be repaid, dilutes the ownership of company

alternative sources : microfinance(small amounts of capital loaned to entrepreneurs)

crowdfunding ● no/low interest so does not increase cash outflows,allows for the public reaction to be tested which could lead to more customers, no need to repay/permanent so does not add to its liabilities/debt ,no collateral needed ● no guarantee can raise full amount,must repay everyone if cannot raise full amount so must find another source,competitors may learn more about your business before launch, not a stable source of finance, a lot of paperwork factors influencing choice of finance

• size and legal form of business : bigger companies pay lesser interest, easy to borrow from banks and lenders. unincorporated businesses cannot raise finance by share issue,

• amount required : if large, cannot be found in internal sources of finance, will need debentures or share issue

• length of time - longer it is, more costly it will be to repay due to interest. long term finance like bank loans or debentures can be used.in short term, overdraft is most flexible

• existing borrowing : more difficult to borrow if bs already has borrowing. greater risk

why is cash required for a business :

• pay employees wages

• pay suppliers for goods and services

• pay rent,utilities for premises financing a short term cash shortage:

• ask trade receivables to pay quicker by offering discounts

• negotiate longer credit terms

• delay purchase of non current assets or find other sources of finance to purchase how bs can improve working capital :

• reduce inventory levels

• negotiate longer credit terms with suppliers

• reduce amount of time to receive payments from customer on credit terms

gross profit : difference between revenue earned and cost of making the products profit is used to : ● measure success, a reward to owners for the risk ● measure performance of managers ● deciding whether to continue producing a product ● finance purchase of non current assets, expand the business etc ● attract investors who will give additional funds why profit is important to different stakeholders : ● owners/shareholders : profit after tax belongs to them ● shareholders : higher dividend payment, value of market share rises if high profit ● employees : job security, good pay, profit sharing schemes ● lenders : how quickly bs can repay loans ● government : more tax received ● suppliers : if they will continue to purchase raw materials ● managers : measure the performance, retained profit is imp source of finance

non-current(fixed)assets : resources that business owns and expects to use for more than one year like buildings and machinery current assets : resources that will be converted to cash within a year like inventory, trade receivables current liabilities : short term debts like trade payables non current liabilities : long term debts like bank loans mortgages and debentures owners equity : amount of money invested by owner how to interpret statement of financial position:

• assets the business owns

• what the business is owed

• what the business owes

• how the business finances its activities how to improve gross profit margin : ● increase revenue without similar increase in costs ● reduce costs without similar decrease in revenue profit margin : ● improve gross profit ● reduce expenses return on capital employed : how much profit is earned from what is invested in the business. capital employed is the amount invested in the business by the owners, or borrowing.

benefits of ratio analysis ● can compare ratios over time and identify trends ● compares with competitors to see how successful bs is ● can identify profitability and liquidity limitations of ratio analysis ● compare past data, not future ● do not include strengths and weaknesses of a bs ● external factors like legislation,exchange rates and economic factors are not shown ● all businesses do not prepare ratios the same, so can be different

why and how accounts are used

• owners : how bs is performing and if they are getting good returns

• potential investors : to see if they will receive returns from investing

• managers : if financial objectives have been achieved. retained profit is imp source

• employees : job security, higher wages

• lenders trade payables : have sufficient cash to pay debts

• government : tax

• customers : if they will be supplied with goods and services, maybe even at low price

External influences on business activity government economic objectives

• positive balance of payments : more exports than imports

• low inflation : better standard of living, pay for luxury items

• low unemployment : contribute to total output,improve economic growth, income tax, no need to pay unemployment benefits

• economic growth : gdp value of goods and services produced in a year business cycle

• growth : positive outlook for new bs, existing ones grow and make profit ,lower unemployment, higher standards of living

• boom : highest levels, performing at their best, demand for goods and services increase (inflation), low unemployment

• recession : decline in economic activity, more unemployment, falling demand lower profits, less investment in new and existing businesses

• slump : low bs confidence to invest, low production of goods and services, high unemployment,reduced demands of products,prices may fall tax rates direct taxes : income tax and corporation tax indirect taxes :

• value added tax : added to price of some goods

• import tariffs/customs duty : helps government control number of imports so local bs don't lose sales

• sales tax : paid on purchase of some items

• excise duty : paid by manufacturer on production of some goods government borrows using treasury bills and bonds or from other countries(expensive).

externalities: negative externalities social costs such as increased traffic congestion or noise levels due to setting up a hospital positive externalities social benefits such as more employment, easy access

pressure groups ● demonstrations : protests abt a business’s actions or policy ● boycotting : refusing it purchase the business’s products ● petitioning : making a written or oral complaint ● lobbying : attempting to influence the policy making of the government ● increase awareness globalisation ● opportunities ○ can access more markets, increase in sales ○ cost of labour may be cheaper ○ increased competition, so they reduce costs, encouraging sales ● threats ○ local bs may suffer as foreign companies sell at cheaper price ○ exchange rate fluctuations may result in lowered profit ○ competition will increase ○ marketing and distribution costs will increase tariffs : tax applied on value of imported and exported (for positive balance) quota : physical limit on quantity(for local businesses) multinational company ● for a business ○ easier access to raw materials if they set up operations where found easily ○ labour : if there is plentiful supply,it is cheap but if there is shortage, may need to fly in specialist employees and managers which is expensive ○ can benefit from economies of scale ○ access to bigger markets

○ lower production costs ○ spreading of riskcan depend on multiple markets ○ can charge at premium prices ○ lack of info about local market ,strict regulations ○ language barrier and cultural differences ○ currency fluctuations ○ local opposition, political instability ● for host country ○ increases choice and quality of product and employment ○ more tax and reputation, infrastructure ○ new ideas and knowledge, improves balance of payments ○ influence government policies ○ increased competition ○ environmental damage,exploitation of labour ○ may send profit back to home country (repatriation of profit) formulas labour productivity = total output/number of production employees total costs = fixed costs + variable costs margin of safety = actual sales break even output profit = revenue total costs revenue = selling pricequantity sold gross profit = revenue cost of sales profit = gross profit expenses gross profit/revenue 100 = gross profit margin profit/revenue100 = profit margin return on capital employed = profit/capital employed 100 current ratio = current assets/current liabilities acid test ratio (current assets inventories)/ current liabilities

terms to use evaluation question : missing out on business opportunity,cash outflows, inflows,profit margin, market share, disposable income (remaining income), immediate effects