Student Worksheet 6

Business in context

When Sofia Akram was made redundant from her job at a local garage, she decided to use her redundancy money to realize her dream and open a small hotel near the sea.

She found a large house that would suit her needs for sale in a village near the coast, although her redundancy money would only pay the deposit she needed. Still, there was enough accommodation for her to live in the house as well as let four bedrooms. If she sold her own house and took out a mortgage on the new one, she should have enough – with a little left over to help her through the first few months.

‘It’s exciting’, Sofia told her sister Tina. ‘It’s what I’ve always wanted to do. I’ll be my own boss and rise or fall on my own efforts. All the profits will be mine; they will not go to the head office of a big company. I’ll advertise and I think it will be a success.’

Tina was not so sure. ’But you’ll be on your own,’ she said. ‘Think of the long hours you’ll have to put in. it’s not just cooking breakfasts and making beds. You’ll be on call all the time. You’ll have to do the books, take stock, place orders and things like that. You’ve never run a business yourself before. What about the accounts and paperwork? You may not find that as much fun as serving breakfasts and chatting with your guest – but you’ve got to do it, because there won’t be anyone else to do it for you. And what will you do if it all goes wrong? What if you have a poor year and you don’t get as many booking as you hope for? You could lose everything – not just the business, but your home and livelihood as well.’

Question

1. What are the advantages Sofia has put forward for running her own business? (>)
2. What disadvantages has Tina raised? (>)
3. If you were Sofia, what would you do? Give your reasons! (>>>)
   

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Student Worksheet 5

Business in context

Daewoo international started in 1967 as a small textile exporter based in Korea. The company is now leading multinational company. Daewoo’s products include steel, metals, automotive components, machinery, industrial plant, electronics, textiles and chemicals, international  finance and investment, and project management. Daewoo now operates in over 165 countries around the world through a network of over 200 branch offices and subsidiaries.

A major part of Daewoo International is its motor division. Daewoo Motor has been a major force in the development of both Korea’s auto industry and national economy for twenty-five years. It has successfully helped to make Daewoo into a truly global company with an extensive international network integrating research and development, production lines of 12 plants in 11 different countries, in addition to its production facilities in Korea. Daewoo has a worldwide capacity of 2.3 million vehicles per year.

Question

1. In which country did Daewoo start operating? (>)
2. How many countries does Daewoo operate in now? (>)
3. According to the case study, how many different types of goods and services does Daewoo produce? (>)
4. Most people would consider that Daewoo is a large company although it had small beginnings. How do you think Daewoo grew to be the size that it is now? (>>)
5. Do you think that Daewoo benefits from operating in many different countries? Explain your answer! (>>>)

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Student Worksheet 4

Business in context 1

Bus services are necessary in many communities. They are provide convenient means of travel at the right times and they can reduce pollution and traffic congestion. Rahim’s bus service links several small communities with a local town, which is the place of work for many and the site of many schools, the college, and the main shopping and leisure area. Before Rahim, a private firm, took over, a year ago, the bus service was run by the state.

Most buses are full in one direction and almost empty in the other depending on the time of day. In the last year the costs of running the bus service have increased sharply and gradually the service has become less reliable, the buses more uncomfortable and the attitudes of the drivers less friendly. Some morning and evening services have been canceled and the fares have been increased.

Question

1. How has the ownership of the bus service changed?(>)  
2.  What are the main problems faced by the bus service?(>)
3. What are the problems caused to users of the bus service? (>)
4. How might the problems you identified in question 2 and 3 be connected with the change in ownership of the bus service? (>>)
5. Who do you think should own and run the bus service: Rahim or the state? Give reasons for your answer! (>>>)

 Activity 1

1. Find out what industries in your country are nationalized! (>)
   
2. Give reasons why the industries you identified in question 1 were nationalized! (>)
3. Suggest other industries in your country that you think are appropriate for nationalization. Give reasons for your suggestions! (>>>)

Activity 2

1. Find out if any previously nationalized industries have been privatized in your country! (>)
2. Why were they privatized? (>>)
3. What do you think have been the positive and negative consequences of privatizing those industries? Give your reasons! (>>>) 

Student Worksheet 3

Business in context

The government was in a dilemma. The latest statistics showed that more people in the country were smoking, and the incidence of deaths from lung cancer was increasing. this was not good news. The minister looked at the figures.

Soon the anti-smoking lobby would be calling for the government to introduce measures to reduce the number of smokers in the country. they would be countered by the campaigners for freedom to choose.

And then there was the health cost to consider: the minister had calculated that if everybody gave up smoking, the government could make a further reduction in tax. That would benefit everybody, smoker and non-smoker alike.

But the minister also had to consider the country's industry: the tobacco industry was a major employer and exporter. Any action now to reduce smoking in the country could harm employment and even drive the tobacco companies abroad.

It seemed that there were three things the government could do:

• Increase the tax on cigarettes and tobacco in an attempt to reduce smoking - that would upset the campaigners for freedom to choose and the tobacco industry;
• Put on a national television advertising campaign to educate people about the dangers of smoking - at least people could choose for themselves whether to smoke or not, but that would not be enough for the anti-smoking lobby;
• Nothing - after all, was it the government's job to tell people whether they could or couldn't smoke?

All of the alternative would upset somebody. The minister had to choose.

Questions

1. What is the problem that is troubling the minister? (>)
2. Why do you think the government has to deal with the problem? (>)
3. Explain in your own words the three options for action that the minister has outlined? (>>)
4. Which course of action do you think the government should take? Justify your answer! (>>>)

Activity
Read the market, planned and mixed economies studies.

1. Suggest arguments for and against a market economy! (>>)
2. Do you think that a market economy is an effective way of providing the goods and services wanted by society? Explain your answer! (>>>)

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Student Worksheet 2

Business in context

Mission Statement: Local Government

Our mission statement is "striving foe excellence - working with and for our communities".

Our values are to strive for excellence in:

• Focusing on our customers' needs
• Being honest, open and accountable
• Providing equality of opportunities
• Developing our employees
• Making best use of resources
• Working in partnership

Mission Statement: Neptune Shipping Agency Ltd.

Our mission: To be the most successful company supplying Freight Forwarding Services.

Out aims: Service and value for money - Customer care - Environmental commitment - Employment standards.

Mission Statement: International Energy plc

We are passionately committed to:

• Leading in our field
• Operating at the highest levels of efficiency
• Investing for the future
• Stimulating the personal development of employees
• Working for shareholders and satisfying customers
• Protecting and improving the environment in which we operate

Questions

A mission statement is a statement of the general purpose and aims of a business. Read the three mission statement above.

1. What product or service does each of the businesses provide? (>)
2. Who is affected by activities of each business? (>)
3. What are the main purposes of each business? (>)
4. Suggest other purposes each business is trying to fulfill, not included in its mission statement! (>>)
5. Explain why each business was established! (>>>)

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Student Worksheet 1

Business in context 1

Shell is one of the world’s largest oil companies. The company makes products such as petrol and diesel from crude oil. Crude oil is unrefined oil that is found occurring naturally in deposits within the earth. To produce the petrol that people buy from garages Shell must first extract the crude oil from the earth. The company does this by drilling oil wells, many of which are under the sea.

Question:
1. What does Shell produce? (>)
2. Where can you buy Shell’s product? (>)
3. What is Shell’s product made from? (>)

1.1 Activity

Think carefully about the following product and answer the questions: (a) a loaf of bread (b) an oak coffee table and (c) this book.

1. What are the materials that each product is made of? (>)
2. Where do these raw materials come from? (>)
3. Is society keeps using these raw materials will they eventually run out? Explain your answer.(>>>)

Business in context 2
Throughout the world, the demand of petrol and diesel is enormous. Without petrol or diesel people could not travel anywhere in their cars, either on business or for pleasure, and goods could not transported to shops and costumers. People and other businesses are therefor willing to pay for the petrol or diesel that Exxon and other oil companies produce, even though they often complain about the price!
However, think about some of the things you buy regularly - for example clothes or food. The companies that produce these products do so because there is an effective demand for them - enough people are prepare to buy the at their current prices. But think what might happen if price of these products increased. How much would you be prepared to pay them? At what price would you reduce the amount you bought? At what price would you stop buying them all together? What does this tell you about these companies and their products?

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Accounting for Success

Posted by Abd. Ghafar Arif RM

All businesses must produce accounts at the end of year to show how much profit or loss they have made. These accounts are known as final accounts.

Different types of business produce their accounts for different purposes. A sole trader with a small business and employing no one may produce simple accounts so that he or she can report their earning to the tax authorities for income tax purposes. A private or public limited company must produce more complex accounts for both tax purposes and to send to shareholders.

Accounts are used in planning and controlling the activities of a business. They provide a measure of the success of a business in achieving its financial objectives. It is the role of the accounting function to gather financial information about the activities and performance of the business and to prepare, interpret and analyze the accounts. We look in detail at interpreting and analyzing accounts in unit 13.

How much does it cost?

Posted by Abd. Ghafar ARM

All resources cost money. In order to pay the resources it uses, a business must make and sell enough of its goods, or provide enough of its services. It is important, therefore, that when a business is setting up or planning its future activities, it takes all its likely costs into consideration.

Types of costs

Fixed costs

Fixed costs are those costs a business must pay, regardless of whether it actually produces anything or not. These costs do not change no matter how many of its products the business actually makes or sells. Examples of the typical fixed costs of a business are: premises costs (for example, rent and rates); insurance; interest on loans and overdrafts; salaries and wages of employees involved in running the business.

Fixed costs may change in the long term. For example, the rent of a factory may be increased, or salaries may rise following a pay increase. However, doubling its output will not affect the level of rent or salaries that a business has to pay, unless it also has to increase its capacity and rent larger premises.

Variable costs

Variable costs do change with the amount of its products a business producers. The more goods or services produced, the higher the variable costs that have to be paid. The fewer goods or services produced, the lower the variable costs that have to be paid. Examples of the typical variable costs of a business are: raw materials; parts and components; wages of employees directly involved in making the product.

Is there a relationship between output and costs?

What is output?

The total amount of goods or services produced by a business in a given period is called the output of the business. Similarly, the output of an employee, or group of employees, or a machine is the total amount of goods or services produced by that employee, group of employees, or machine in a period of time.

Calculating costs

Businesses need to be able to calculate how much it costs them to produce their output of goods or services. This is called the cost of production, and as you will see when you are studying the accounting and finance units, it is a very important piece of information. Table 11.1 shows the costs of production of a business at different levels of output. The diagram based on the table shows you the relationship between output and costs.

Output (units)	Fixed costs ($)	Variable costs ($)	Total costs ($)
0 1,000 2,000 3,000 4,000 5,000	10,000 10,000 10,000 10,000 10,000 10,000	0 750 1,400 2,150 2,900 3,750	10,000 10,750 11,400 12,150 12,900 13,750

Average costs and marginal costs

By calculating the average costs, or unit costs, of production, a business can tell how much on average it has cost to produce one unit of its goods or services. The formula for calculating average costs is: average cost per unit = total costs/total output.

Often, when a business produces more, the average cost per unit falls. Sometimes, however, when average costs have reached a certain level, they start to increase again, as you can see from figure 11.2. The lower the average costs of production, the more efficient the business is at producing its product.

It is also often important for a business to know its marginal cost of production. Marginal cost is the amount by which total costs increase with the production of one additional unit. If the marginal cost of an additional unit production is greater than the additional sales revenue generated, then the business should not produce the additional unit. 

Direct costs

The direct costs of a business are those costs that are directly incurred in the production process. They include items such as the raw materials and components that are used to produce goods, and the labour (often called direct labour) of the employees who actually make the goods.

Indirect costs

Indirect costs are all the costs of a business that are not directly incurred in the production process. They include items such as the wages and salaries of all other employees (including factory supervisors and themselves), rent and rates, advertising and marketing, telephone, gas and electricity, postage and other general administrative costs. Indirect costs are sometimes called “overheads”.

The break-even point

The break-even point is the volume of goods or service that a business must produce and sell in order to cover its costs. To calculate the break-even point of a product a business must identity the fixed and variable costs incurred and calculate the revenue generated from any given level of sales of the product, by multiplying the price per unit of product by its price.

Calculating the break-even point of a product assumes that its price has two parts. The first part covers the variable costs of producing one unit of the product. The second part contributes to the fixed costs of the business. This is called the contribution. Once enough units of the product have been sold so that contribution from each cover the fixed costs (the break-even point), the contribution from each additional unit sold contributes to the profit of the business.

The break-even point of a product can be calculated mathematically using the break-even calculation formula or by using a break-even chart.

Calculating the break-even point of a product mathematically

The break-even point of a product is the number of contributions (at one contribution per unit of production) require to cover the fixed costs of the business. To calculate the break-even point mathematically the business must know: the selling price per unit of product; the variable costs per unit; the total fixed costs. The formula for calculating the break-even point is:

Selling price per unit – variable costs per unit = contribution

Total fixed costs

----------------------   = break-even point

   Contribution

To find out how much profit a given level of sales will generate, a business can use the formula:

(contribution X units produced) – fixed costs = profit

To find out how many units must be sold to generate a target profit, the formula is:

(Target profit + fixed costs)

-------------------------------------                       

     Contribution per unit

Any change in the level of fixed costs, variable costs or selling price per unit will result in a new break-even point and levels of profit or loss produced by given levels of production and sales.

Having calculated the break-even point of a product, the business can decided whether it is able to produce and sell this number of unit of product in the time period – for example has it enough facilities, such as machinery and employees. If the business can produce and sell more than the break-even level, then it will make a profit. This information will help the business decide whether or not to produce the product.

Calculating the break-even point of a product using a break-even chart

Once the fixed and variable costs of a product and the selling price per unit are known, the break-even point can be plotted graphically on a break-even chart. It is then an easy task to read off the profit or loss that will be produced by any given level of production and sales.

In figure 11.3, the line DD represents the fixed costs of the business, which remain constant for all volumes of output. Line DC is he total cost line (variable costs plus fixed costs), which rises as output increases. Note that the variable costs line starts at the level of fixed costs, since even when nothing is produced, the business still has to pay its fixed costs. Line AA is the revenue line. This starts at 0, since when nothing is sold there is no revenue. The point at which the total cost line and the revenue line interest (B) is the break-even point.

The difference between the point on AA and the corresponding point on DC for a given level of sales is the profit or loss produces by that level of sales. If the volume of sales is higher than the break-even point, the difference between the actual level of sales and the break-even point is called the margin of safety.

Summary

·         All businesses incur costs.

·         The costs of a business can be identified as fixed or variable costs, or direct or indirect costs.

·         The lower the average cost per unit of output, the more efficient the business.

·         Costs are used in forecasting and planning.

·         The break-even point of a business or product is the point at which revenue from sales just covers the running costs of the business or product.

Glossary

Fixed costs: costs that do not vary with the level of output.

Variable costs: costs that vary with the level of output.

Output: the total number produced by a business, employee or machine over a given period of time.

Average costs: the total cost of production divided by total output.

Direct costs: costs that are directly incurred in the production process.

Indirect costs: costs that are not directly incurred in the production process.

Overhead: indirect costs.

Break-even point: the point at which the level of sales of a business exactly equals its costs.

Break-even calculation: a method of calculating the break-even point of a business using the formula.

Break-even chart: a graph showing the break-even point of a business.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Where does the money come from?

Posted by Abd. Ghafar ARM

All businesses need money, or  finance, in order to operate. They need finance for: start-up  items such as premises, equipment and initial advertising; the ongoing running costs of the business, including raw materials, wages and salaries, administrative costs, maintaining and arising from a shortage of cash; expansion, including purchasing additional equipment, larger  premises, or even financing the takeover of other businesses.

Sources of finance

Finance can be generate either from within the business (internal sources), or outside (external sources). 

Internal sources of finance

1.     Profits and reserves

Most businesses retain part of their profits to buy new or replacement machinery and equipment. If the amount retained is not needed immediately, it can be kept as a reserve for future use, either for expansion or in an emergency.

2.     Selling assets

Many businesses have assets such as machinery, vehicles and property that they can sell. If a business needs to raise finance quickly, selling assets may be the best to do this, especially if the assets are surplus to requirements or under-utilized. Selling as asset to a finance house, and leasing it back can be a way of raising finance while retaining use of the asset.

3.     Owners’ capital

Small businesses are usually set up with finance provided by the owners. The advantage of this is that there are no interests or other charges. The disadvantage is that the owners risk losing the money they put into the business.

            External sources of finance

1.     Short-term, medium-term and long –term finance 
     Short-term finance is finance that is required for up to three years; medium-term finance is  required for between three and ten years; long-term finance is required for more than ten years.

2.      Friends and family

Small business owners may be able to borrow from friends and families. Such loans may well be given without security or charging interest. Normally, however, the amount raised will be small and may only be suitable for short-term finance.

3.       Banks

Banks provide two principal types of finance for business: overdrafts and loans.

And overdraft is an agreement whereby the business can draw on its bank account more than it has deposited. Interest charged on the amount overdrawn is usually higher than on finance from other sources, and overdrafts are only appropriate for short-term finance, for example to cover cash-flow problems.

Banks also provide loans, usually for a set period and purpose. Interest is charged on the amount of the loan. With medium- and long-term loans for larger amounts, security is often required so that if the business is unable to repay the loan the bank will be able to sell the item given as security and recover its money. When considering making a loan to a business, a bank will want to see a business plan including budgets, forecast and cast-flow forecast to ensure that the business will be able to repay the loan.

In many Muslim countries, banks are forbidden to charge interest on loans. Instead, Muslim banks may provide finance for business by providing capital in return for a share in the profits of the business.

4.     Hire purchase

Hire purchase is a form of credit arranged through a manufacturer or finance house (like a bank). An item such as a vehicle or large machine is bought and paid for in installments. Each installment includes an element of interest on the purchase price. Although the business making the purchase has use of the item throughout, it does not become the property of the business until the final payment is made.

5.     Trade credit

Most business purchase are made on the basis that payment will be made at a later date, usually within thirty days of purchase or by the end of the following month. This is called trade credit. If the customer has sufficient standing with the supplier, it may be possible to extend the period of credit. While this may give the purchasing business some additional finance for a short time, it is only appropriate for very short-time finance.

6.     Factoring

To overcome the cash-flow problems associated with supplying goods and services on credit and not being paid until some time later, some finance houses provide a factoring service. A factoring house will pay the business up to 80% of the value of its invoices each month immediately. The supplying business therefore business receives an immediate injection of cash without waiting for customers to pay their invoices. The remaining 20%, less the factoring house’s commission, will be received when invoices are paid to the factoring house.

7.     Leasing

An alternative to buying items such as property, machinery and vehicles is for a business to lease them from the supplier or a specialist leasing company. A lease is for a set period of time and while the business leasing the asset (the lessee) has full use of the asset during that time, the asset remains the property of the leasing company (the lessor). Leasing assets avoids paying large sums to purchase assets, enabling the money to be used for other purposes. The length of leases tends to make leasing appropriate as a source of medium- to long-term finance.

8.      Debentures or corporate bonds

Debentures or corporate bonds are long-term fixed-period loans to the business by Individuals or financial institutions. They are secured against the business and carry a fixed rate of interest throughout the period of the debenture. The rate of interest is lower than other types of loan.

9.       Venture capital

Venture capitalists are specialists in providing finance mainly for smaller businesses usually in return for a shareholding in the business. There is thus an element of risk to the person or organization providing the capital. Venture capital is long term, and may be substantial.
10.   Issuing shares

A private or public limited company may raise finance by issuing additional shares, as long as the total number of shares issued is within the company’s authorized capital. In the case of a private limited company, additional shares can only be issued to the present shareholders, or new shareholders, whit the agreement of the current shareholders. Any person or organization such as a financial institution can purchase new shares in a public limited company. Public limited companies are able to obtain very large amounts of finance in this way. The principal advantage of raising finance by issuing shares is that the money raised does not have to be paid back.

11.   Public sector sources of finance

Grants and subsides for business can sometimes be obtained from local and national government or other public bodies. These normally do not have to be repaid, but are usually only available in particular circumstances, and with conditions attached. For example, a government trying to attack new businesses to locate in an area of high unemployment may offer a grant in respect of every new job created.

            How do businesses decide?

When seeking finance, businesses consider various criteria to ensure that the source they choose is appropriate to their needs. The main criteria businesses use are:

1.       How long is the finance required? A bank overdraft may be suitable for short-term finance, but is very costly in the long term, when a loan may be more suitable.

2.       What is the purpose of the finance? A small start-up business may look to finance from its owners in the first place, while an existing company wanting to ensure a regular cash flow could consider factoring.

3.       How much is required? A small amount may be covered by an overdraft, while a successful business seeking large sums in order to expand, perhaps by taking over another company, may seek funding from a venture capitalist, or issue shares.

4.       What risk is involved? All business activity involves some risk. However, a business taking out a loan or overdraft must pay interest. If the business is unsuccessful, the interest must still be paid and the loan repaid. The higher the risk involved, therefore, the more likely a business is to seek finance from issuing shares, venture capitalist or the owners of the business, since these sources do not bear interest or have to be repaid.

5.       Is the gearing too high? The gearing of business is the ratio of long-term loans to the capital employed. If loans amount to more than about 50% of capital employed, the business is said to be highly geared. This means that the business is relying on borrowed money, and has to pay substantial interest charges. A business that is already highly geared will try to avoid taking out further loans since this will only increase gearing.

What do providers of finance consider?

Providing finance to business always involves some risk for the provider. In order to reduce the risk, banks, shareholders, other financial institutions and other providers of finance will therefore consider the following questions:

1.       Will the business be able to make interest or other payments such as dividends? In deciding this, the provider of finance will consider the past financial record of the business, including the business’s accounts, and forecasts of future financial performance.

2.       Is the business too highly geared? The higher the gearing, the higher the risk of providing further finance, since a higher proportion of the capital of the business is in form of loans. If the business fails, it may not be able to repay all the money it owes.

3.       Is the business efficiently managed? Providers of finance will look carefully at the experience and skills of the people who direct or manage the business, te ensure that their money will be well used.

Summary

·         All businesses need money, or finance.

·         Short-term, medium-term or long-term finance can be obtained from internal or external sources.

·         Internal sources include: profits and resources; the sale of assets and owners’ capital.

·         External sources include: loans; hire purchase; trade credit; factoring; leasing; ventures capital and share issues.

·         Choosing a source of finance that is inappropriate to the needs of the business can be a costly mistake.

Glossary

Finance: the money a business needs to operate.

Internal sources of finance: sources of finance within the business or provided by its present owners.

External sources of finance: sources of finance from outside the business or its present owners.

Short-term: a period of up to three years.

Medium-term:  a period of between three and ten years.

Long-term: a period of more than ten years.

Capital: the money invested in a business by its owners.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Is there a best type of business?

Posted by Abd. Ghafar ARM

On e of the first decisions a person setting up in must make is which type of business organization is most appropriate. Choosing the right type of organization involves considering several factors about the business and the person setting it up. Later, as the business develops and grows, its needs, and the needs of its owners, are different, so that a different type of ownership may be more suitable.

Factor influencing the choice of type of business organization

Ownership

Ownership is perhaps the most obvious factor affecting the type of organization appropriate for business. In some cases this will be the factor that dictates the type of organization chosen.

For example, a small trader who intends to work on his or her own in a business, such as that of a dressmaker or plumber, will almost inevitably set up as a sole trader. A sole trader may, however, decide to take on a partner, perhaps to help them in an area of business where they do not feel they have sufficient skills, such as in finance and administration. Setting up a partnership rather than a sole trader business allows for a division of labour, with each partner specializing in one area of the business. Many professional firms are set up in this way.

Where more owners are involved, or where continuity of the business is needed, perhaps in a family business, it may be more appropriate to set up a private limited company. The owners will have a share in the business, which can be increased or transferred if necessary. The death or retirement of one of the shareholders will not affect the existence of the business, and shares can be passed from generation to generation.

Control

The type of organization appropriate for a business very much depends on the amount of control over the running of the business the owners want to keep for themselves. A sole trader has complete control over all decisions regarding the running of the business. Partners share control as set in the partnership agreement.

Control of a limited company is shared by the shareholders in proportion to the number of shares they own. In the case of a private limited company, the shareholders are normally closely involved with the day-to-day running of the company, and control is therefore largely kept within the company. Control of public limited company, on the other hand, passes to the shareholders, who are mainly outside the company itself. It is even possible for a public limited company to be taken over by another company. In this case control would pass to an entirely different company.

Source of finance

We have seen in previous units that more sources of finance are available to incorporated companies than to unincorporated businesses.  This is important if a business needs access to large amounts of finance. While a sole trader may able to finance the purchase of small premises and limited equipment from his or her own resources, a manufacturing business needing a factory and expensive machinery may need the additional sources of finance available to a limited company, including bank and venture capitalists (see unit 10). Businesses requiring really large amounts of capital may need to consider becoming public limited companies by offering shares to the general public, although this is not suitable for start-up businesses.

Use of profits

The owners of unincorporated businesses such as sole traders and partnerships have complete control over the use of any profits of the business. Such profits can be re-invested in the business, perhaps to buy new equipment or fund expansion, or kept by owners. The owners of unincorporated businesses pay normal income tax on the profits of the business as if those profits were their private income.

The profits of limited company, however, must be used, firstly to pay business tax to the government (see unit 12), and secondly to pay a dividend to shareholders as their reward for investing in the company. Only after these items have been paid can a decision be taken on how to use any remaining profits: to re-invest in the company, or perhaps distribute part to employees as a bonus in recognition of their efforts.

Size

The size of a business can be measured in several ways: by sales turnover; by number of employees; by number of outlets. One person can run a small business more easily than a large business, since there is less involved. Larger businesses have to employ specialists in various aspects of running the business, such financial management, administration, personnel and so on.

Generally speaking, therefore, sole traders tend to be the smallest type of businesses, followed by partnerships. Limited companies tend to be larger, with public limited companies the largest of all.

There are some notable exceptions to this, however. JCB is privately owned, although it rivals all but the largest of public limited companies. Similarly, some large firms of accountants, such as Ernst and Young and KPMG, are partnerships although they are as large as many private and public limited companies and operate.

Growth

As a business grows it may have different needs and these will determine which is the most suitable type of organization. A sole trader may need to take on a partner in order to cope with the additional work. If additional finance is required, perhaps to purchase a larger factory or office, or buy more machinery, the business may consider becoming a private or even a public limited company in order to gain access to more sources of finance.

Summary

·         Several factors affect the choice of type of organization for a business.

·        These include: type of ownership; the degree of control the owner requires; the amount of finance needed, how profits are to be used; the size of the business.

·         As the business develops, a different type of organization may be more suitable.

Glossary

Venture capitalist: people or groups willing to provide capital for a business, usually in return for a share in the business and any future profits the business makes.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Other Types of Business Organization

Posted by Abd. Ghafar ARM

Some types of business organizations are a result of co-operation between businesses, either as a joint venture or as one business operating in the name of and providing the products of another. These spread the risks involved between one or more businesses. In a co-operative, all members share the risks and the benefits of the business.

Franchises

A franchise is an agreement allowing one business to trade under the name of and sell the products or services of another. The business granting the franchise is called the franchiser; the business taking put the franchise is called the franchisee.

Taking out a franchise is a way of avoiding many of the risks involved with starting up a business. For the business granting the franchise, it is a way of developing the business and expanding without committing the resources of the business. Success of both franchiser and franchisee depends on close co-operation between both businesses.

The business is owned and run by the franchisee. However, the franchiser usually retains some control over the franchisee in matters of product design and brand name, advertising and service. Some franchisers, such as McDonald’s, control almost the whole of the franchise operation, supplying equipment, ingredients, staff uniforms, training, and setting menus, prices, portion sizes, cooking times and so on.

Where does the money come from?

Sole traders, partnerships or limited companies may own and run franchise, and the sources of finance to purchase the franchise are largely the same as for these types of business. The initial cost of a franchise varies according to the product, type of premises and other equipment required, and the company selling the franchise. Sometimes the franchisers may help with finance for the franchises.

Besides the original purchase price of the franchise, the franchisee has to pay an annual fee, usually based on percentage of sales. This must be paid even if the franchisee has made a loss. In this case the franchisee must apply to his or her bank for a loan or overdraft.

What happens if things go wrong?

The success of a franchise is the responsibility of the franchisee. If the franchisee is a sole trader or partnership they will have unlimited liability (see unit 6) which means they could lose everything if the business goes wrong and they are left with large debts.

However, the success and reputation of the franchiser depends on its franchisees succeeding. It is therefore in the interests of the franchiser to help the franchisee as much as possible.

What are the main advantages of a franchise?

By operating under the name and logo of a well-known company, a franchise business has a much greater chance of success. Apart from providing a proven product, the franchiser may well provide national and local advertising and training in business and other important areas.

Although they are small businesses, franchises operate as though they were part of a large business. This means that they are often able to benefit from bulk purchasing arrangements. Banks, too, are often prepared to make loans to franchisees on the basis that they carry less risk.

There are advantages, too, for the franchiser. By selling franchises, a business is abler to expand without committing its own resources. The risk is spread between businesses, and both benefit from the arrangement in that their success is in part dependent on the other. In addition, by franchising a part of its operation, a business is able to concentrate on its core activity.

What are the main disadvantages of a franchise?

There are also some disadvantages for both franchiser and franchisee. The franchiser is dependent on the franchisee for the success of the business. The franchisee, on the other hand, has less control of their own business than they would if they remained an independent sole trader or partnership. They are tied to the franchiser and their success depends on the success of the franchiser’s product. Franchisers have little control over areas such as product development. The franchisee also has to pay a continuing annual fee, regardless of any loss the business may make.

Co-operatives

Co-operatives are business enterprises that are owned jointly by members, who may be private individuals or other business organizations. They exist for the mutual benefit of members, who share equally in the decision-making and management of the co-operative. Finance is raised by the members, who generally receive a share in the profits of the co-operative.

There are four main types of co-operative:

• Retail co-operatives, which buy goods in bulk at an advantageous price and re-sell them to members as cheaply as possible;
• Trading co-operatives, which are formed to distribute and sell  the products or services of their members (members are usually small businesses, which join together as a co-operatives in order to gain the benefits normally associated with larger businesses – see unit 31) where economies of scale are discussed);
• Worker co-operatives, which are businesses owned and run by their employees;
• Housing co-operatives, which develop, maintain and manage low-cost housing on behalf of their members.

In some countries, where there are a large number of small businesses in an industry, such as farming and agriculture, the formation of co-operatives is encouraged. In India, for example, the government encourages growers in some agricultural industries such as sugar, jute and cotton, to form co-operatives to ensure the sharing of techniques and technology so as to improve efficiency and productivity in farming. However, they are expensive, and often quite beyond the reach of a small farmer. Several small farmers forming a co-operative, however, may well be able to afford one between them. Each farmer in the co-operative can then share use of the combine harvester.

Joint ventures

Increasingly, large projects are being undertaken as joint ventures. Joint ventures may be between two or more businesses in the private sector, or in the private sector and the public sector. For example, new hospital or railway may build as a joint venture between the government and private enterprise. Sometimes a joint venture, such as the development of a new aeroplane, may involve businesses in more than one country. In this way, each business only has to find part of the cost of the project, and the risk is spread between all the businesses in the joint venture.

Public sector organizations

Public sector organizations are owned and run by local or national government. They are mainly large organizations that are either expensive to run and need a considerable amount of capital investment, or are essential services considered too important to be left to private enterprise. In recent years there has been considerable debate over whether the government should be involved with running businesses or whether this is best left in the hands of private individuals.

What types of organization does the government own?

The main types of organizations that the government owns are: centralized organizations that provide essential services, such as security, health and education; nationalized industries, such as steel or coal; and public corporations such as the Post Office.

Many countries are now pursuing policies of privatization (returning nationalized industries to private ownership). Privatized companies are responsible to shareholders, just like any other public limited company. In Brazil, for example, the government has been pursuing a policy of privatizing state-owned companies since the early 1990s. formerly state-owned companies that have now been privatized include the Companhia Vale do Rio Doce (a mining company), the Companhia Siderurgica Nacional (the national steel mill), Rede Ferroviaria Federal SA (the national railway line), and Mafersa ( a manufacturer of railroad  equipment).

Summary

·         Running a franchise operation removes some of the risk involved in a small business.

·         A franchise operates under the name of another company, using their business idea and selling their products or services.

·         Sole traders, partnerships or limited companies may own and run franchises.

·         Co-operatives are owned and run by members for their mutual benefits.

·       Joint ventures can enable businesses to pool resources and spread the risk involved in an enterprise.

·        Organizations owned by the government on behalf of the general public are in the public sector.

·        The government owns different kinds of organizations that are considered to provide essential services that would not be adequately provided if left to private sector businesses.

·       There is considerable debate over whether government should be involved with running businesses.

Glossary

Co-operative: a business organizations formed by members for their mutual benefits.

Joint ventures: an enterprise undertaken by two or more business organizations which pool resources.

Franchise: an agreement allowing one business to trade under the name of and sell the products or services of another.

Franchiser: a business granting a franchise.

Franchisee: a business taking out a franchise.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002

Limited Companies II

Posted by Abd. Ghafar ARM

What is the difference between a public limited company and a private limited company?

The principle difference between a public limited company and a private limited company is that public limited companies can sell their shares to general public. In this way, they have access to virtually limitless funds that they can use to develop the business.

Because their shares can be bought by anyone, large public limited companies, such as Shell and General Motors, are amongst the largest businesses in the world with millions of shares owned by several hundred thousand shareholders. In practice, large financial institutions such as insurance companies and pension funds buy the majority of shares in successful public limited companies. The owners of public limited companies usually, therefore, have little involvement with – or interest in – the running of the company they own. As a limited company grows, therefore, the divorce of ownership from control becomes greater.

In order to offer their shares to the general public, companies that intend to become public limited companies must issue a prospectus describing the company and its prospect, and detail the offer of shares. Subsequently, the PLC must send a copy of its accounts and chairperson’s report to every shareholder each year and lodge its accounts with the Registrar of Companies.

After shares in a public limited company have been sold initially by the company, they can be traded freely on the stock market of the country in which the company is registered, although the company itself will gain no further money from this. The value of the shares on the stock market will reflect how well the company is performing. If the company performs well, its shares are likely to be thought of as a good investment. They will be in demand, and their value will rise. The value of shares is published daily in newspapers, and also on the internet. Public limited companies whose shares are available on the stock market are vulnerable to takeovers, which may result in the present directors losing control.

Why go public?

Most companies who decide to go public (become public limited companies) do so because this gives them access to an almost limitless source of capital. In reality the amount a business can raise depends on how well it is expected to do. Many businesses are able to fund expensive development and expansion programmers in this way.

The major disadvantage is that control of the businesses is divorced from those with an interest in the business itself. Most shareholders of public limited companies are mainly interested in the value of their shareholding and the dividend they receive. The senior directors of the business may be voted in or out at the next shareholders’ AGM, and must act in accordance with the wishes of the shareholders rather than the business itself.

In addition, companies whose shares are freely available on the stock market are liable to takeover, in which case all decision-making on the running of the business will pass into the hands of another company.

Summary

·         Limited companies are incorporated businesses that exist quite separately from their owners.

·         The owners of limited companies are called shareholders and have limited liability.

·         Private limited companies are not allowed to sell their shares to the general public.

·         Public limited companies are among the largest businesses in the world.

·         Public limited companies can sell their shares to the general public, which gives them access to vast source of capital.

·         The owners of public limited companies usually have little involvement in the running of the company.

Glossary

Private limited company: a limited company whose share cannot be sold to the general public.

Public limited companies (plc): a limited company whose shares can be freely bought and sold by members of the public.

Stock market: the market for shares in public limited companies.

Divorce of ownership from control: the delegation of direct control of a limited company from its owners (shareholders) to directors.   

Creditors: people or organization to whom money is owed.

Takeover: the purchase of one company by another: public limited companies are susceptible of this.

Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002