basic finance

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INTERNATIONAL BUSINESS SKILLS COURSEWARE

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FIRST EDITION First Print 2010

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ABP Intermediate AwardBusiness Basics and Finance

Association of Business Practitioners (ABP)

APPROVED COURSEWARE

BASIC BUSINESS AND FINANCEContents

-RXVSHYGXMSRXSFEWMGFYWMRIWWERHRERGI Module Learning Outcomes 02

Module Design 02

Learning & Teaching Methods 05

Assessment Type & Weighting 05

How to get the most from this booklet 06

Section1 Introduction to common business XIVQMRSPSK] The internal and external environments 09

The internal environment 10

The external environment 12

Identify the market and market competitors 20

Section 2 Legal structures for business 27The need for the correct legal structure 35

Importing and Exporting, an overview of the legal requirements 39

Importing 39

Exporting 41

Legal obligations when dealing with customers 42

vii Basic Business and Finance

Section 3 Making use of resources 47The importance of Effective Business Planning 49

Conducting market research and understanding markets 52

SWOT and PEST analysis to understand a businesss competitive advantage 55

Section 4 Basic Financial Planning 65Understanding How to Calculate and Raise Finance 67

Setting a Budget and Breakeven Analysis 70

The Importance of Cash Flow 74

1IEWYVMRKERH-RGVIEWMRK4VSX

Section 5 Managing a business 83Developing an Effective Workforce 85

How to make the best use of technology 91

Differences between Leading and Managing an Organisation 94

Motivating and Communicating with Employees 96

viii BBPSD 2010. All Rights Reserved.

BASIC BUSINESS AND FINANCEIntroduction

Business now plays a fundamental part in our lives. Take a look around you now and almost everything you can see has been touched by a business of one type or another. The desk you are sitting at, the chair you are sitting in, the clothes you are wearing and the pen you will write with have all been created by business. Without business we would not be able to enjoy a number of things that we now take for granted. However operating a business is challenging and is dependent on a number of different factors that we consider in this booklet.

The vast amount of businesses that exist in the world mean that there are many differing types and styles for an organisation to choose from. This richness and diversity ensure that organisations are always looking for ways in which to improve on what they do and hence organisations are keen to employ people with a good understanding of many of the more common successful business techniques.

This module considers some of the fundamental basic business functions and structures that are internationally recognised as being effective and also takes a closer look at how FYWMRIWWIWSVKERMWIXLIMVRERGIW

1 Basic Business and Finance

The module is a core component of the ABP intermediate Diploma in International Business Skills programme.

Module Learning Outcomes After successfully completing this module students will be able to:

L1 Identify and appreciate everyday business terminology.L2 Distinguish between the various legal structures for a business.L3 Appreciate the importance of transforming resources into goods and services.0%TTP]FEWMGRERGMEPTPERRMRKVIWSYVGIWL5 Appreciate the main issues in managing a business.

Module Design: This module introduces everyday business terminology and relates this to the more common legal business entities. The different internal and external factors that affect a business are explained and their importance explored. &EWMG RERGMEP TPERRMRK MW MRXVSHYGIH ERH XLIVI MW E JSGYWSRQEOMRK FIWX YWISJEZEMPEFPIVIWSYVGIWTEVXMGYPEVIQTLEWMWMWTPEGIHSRXLIMQTSVXERGISJGEWLS[XSthe business.The module is subdivided into 5 sections. Each of these 5 sections deals in more depth with one of the overall modules learning outcomes, L1 to L5 listed above. Thus Section 1 corresponds to L1, Section 2 to L2, etc.

2 BBPSD 2010. All Rights Reserved.

The following table provides a brief description of each section in the business communication module.

Section Title Learning Outcomes Covered in this Section

Section 1:Introduction to common business terminology

Appreciate the difference between the internal and external environment.

Understand and appreciate the importance of the different functions of the internal environment

Understand and appreciate the importance of the different functions of the external environment

Identify the market and market competitors


Section 2: Legal structures for business

Identify the legal structures available to a business and appreciate the differences between them.

Appreciate the importance of having the correct legal structures for businesses of different types and sectors.

Understand the importance of international legal systems when exporting and importing goods and services.

Understand the legal obligations of business when dealing with customers.

Section 3: Making use of resources

Understand the importance of effective business planning

Appreciate how to conduct market research and understand markets.

Be able to apply SWOT and PEST analysis to understand a businesss competitive

advantage An awareness of the importance of

operational decisions.


Section 4: Basic Financial Planning

Understand how to calculate and raise RERGI

Be able to set a budget and use break-even analysis

9RHIVWXERHXLIMQTSVXERGISJGEWLS[ &I EFPI XS QIEWYVI TVSX ERH YRHIVWXERHLS[XSMRGVIEWITVSX

Section 5: Managing a business

Understand how to develop an effective workforce

Be aware of how and when to make best use of technology

Understand the difference between leading and managing an organisation

Motivating and communicating with employees.

Learning & Teaching Methods: A suitable mix of lectures, tutorials, workshops, case studies, videos and hands on practical exercises. The module has 20 hours of formal contact teaching.


Assessment Type & Weighting: The module will be assessed by a formal examination of 1 hour duration.

How to get the most from this booklet

=SY[MPPKEMRQSVIFIRIX[LIRWXYH]MRKXLMWFSSOPIXMJ]SYWXSTERHVIIGXEXXLIend of each section. This module contains 5 sections and you should look back at the learning outcomes for each section as you complete the section and ensure that you are comfortable with each learning outcome. If you are not sure about one of the learning outcomes, or any aspect of that section then look back at the associated tutorial notes and exercises you have done in class.

Also dont forget that this is YOUR booklet, so make notes in it as you go along that will help your understanding as you are learning. Remember that learning is an active exercise and you need to engage fully with the text, it is not the same as casual reading.

Finally, we hope you enjoy this booklet and get as much pleasure in studying aspects of business as we do!


Section 1Introduction to common business terminology

Learning Outcomes

The learning outcomes covered in this section are:

%TTVIGMEXIXLIHMJJIVIRGIFIX[IIRXLIMRXIVREPERHI\XIVREPIRZMVSRQIRX9RHIVWXERHERHETTVIGMEXIXLIMQTSVXERGISJXLIHMJJIVIRXJYRGXMSRWSJXLIMRXIVREPenvironment.9RHIVWXERHERHETTVIGMEXIXLIMQTSVXERGISJXLIHMJJIVIRXJYRGXMSRWSJXLII\XIVREPenvironment.-HIRXMJ]XLIQEVOIXERHQEVOIXGSQTIXMXSVW


Introduction

Having an understanding of everyday business terminology means that you will be able to comprehend more thoroughly the meaning of terms, structures and the general business environment. This section will carefully lead you through both the internal and external environments in which business operates and how to identify markets and the associated competition. Studying both the internal and external IRZMVSRQIRXWMWEYWIJYPVIQMRHIVSJNYWXLS[QER]MRYIRGIWXLIVIEVIEJJIGXMRKEbusiness in one way or another, some within and some outside of our control.


The Internal and External Environments

There are many factors that affect the overall operation of a business and these are described as the internal or the external environments. Whilst it is not always possible to have complete control over these environments, particularly the external, it is important that they are recognised and understood as they will affect the decision making process. If an important customer moves their business to a competitor this may have serious repercussions for a business. The appearance of a new competitor from overseas may well affect the business, as could the failure to invest in technological change that would maintain a competitive edge.


The internal environment

The internal environment of any business is made up of many differing functions. These include its mission statement, structure, policies, cultures and resources. The last one is a large list of elements meaning the people, information, facilities, MRJVEWXVYGXYVIQEGLMRIV]IUYMTQIRXWYTTPMIWERHRERGI0IXYWXEOIEPSSOEXWSQIof these differing aspects individually.

Mission Statement In many countries, it is the law that a company must declare what it is in business to do, in other words its overall aim. This is its Mission Statement. It is at its best when it is a short and memorable sentence which explains what it does and its objectives. It should also give a sense of underlying purpose and direction.

Structure The formal structure of a business is usually the hierarchical arrangement SJTISTPIERHEGXMZMXMIW8LIWXVYGXYVIHIXIVQMRIWLS[MRJSVQEXMSRS[WXLVSYKLthe business, which department is responsible for the various activities and where the authority levels lie. The organisation chart is usually a diagram illustrating the PMRIWSJEYXLSVMX]ERHLS[GSQQYRMGEXMSRS[W[MXLMRXLIFYWMRIWW

Policies These are the guidelines that provide employees in the appropriate positions of authority with the guidance necessary to understand how to make the decisions to address various events that regularly occur within the business. These guidelines show everything from the way the organisation runs its business to how it manages its people. It is likely that there will be policies concerning nearly all activities for the business.


Culture The culture of a business is to a large extent its own character and style and just as individuals, it is true of a company. One of the main components that make up a companys culture is the values it holds. These can range from empowering and encouraging employees to take more decisions in their job roles to its recognition of achievement or even to the way a company may recognise length of service or similar.

Resources Are the people, information technology, infrastructure, machines, IUYMTQIRX ERH RERGI SJ XLI FYWMRIWW 3J XLIWI TISTPI VIQEMR XLI WMRKPI QSWXMQTSVXERXVIWSYVGISJER]FYWMRIWW8LIWM^IERHQEKRMXYHISJXLISXLIVVIWSYVGIWwill much depend on the type of business concerned. For instance, a manufacturing business will differ considerably from those of a business whose activities are purely SJGIFEWIH


The external environment

Having considered some of the aspects of the internal environments of a business let us now look at some of the external environments. Firstly, let us consider and examine some of the external environments over which we may have some control or at least a closer view to enable us to make rapid responses to minimise any damaging effects. These include customers, suppliers, and competitors who are known as stakeholders within the business. We also have control over whether we wish to be a socially responsible business. Then we can look at some of the external IRZMVSRQIRXW[LIVI[ILEZIRSGSRXVSPSVMRYIRGI8LIWIMRGPYHIIGSRSQMGERHTSPMXMGEPIRZMVSRQIRXWXLIPIKEPIRZMVSRQIRXWERHREPP]XLIXIGLRSPSKMGEPERHWSGMEPenvironments.

Customers, Suppliers, Competitors Customers demand satisfaction with the product or services they purchase and use. Where the product is not unique they will be continuously looking for improvements in prices and terms. - Suppliers will require continual attention to ensure consistent quality and price. Finally, competitors will continually apply pressure in the market place. These 3 external factors allow us in most cases to respond quickly to change.


Example

Let us consider the position of a food manufacturer supplying one of the major supermarket groups such as Tesco or Asda, Sainsburys or Morrisons. All these are very challenging customers wanting the best in terms of price, service and quality at all times. If we were a manufacturer of their own label baked beans for instance, we [SYPHFIWYTTP]MRKETVSHYGX[MXLSYXQER]WMKRMGERX974 WYRMUYIWIPPMRKTSMRXWand as a result it would be easier for these customers to look around for the best offers they can obtain. It is in instances such as these where prices and quality need to be monitored, particularly as competitors who can manufacture the product will be constantly attempting to win the business. It should, however, be possible for a business to respond quickly to these external factors.



1,000,000

5,000,000

10,000,000

20,000,000

Social A socially responsible business observes the following key standards:

It ensures the waste it produces stays at a minimum, it creates wealth, it treats its employees acceptably, it shows respect for the environment, MXMWIJGMIRX[MXLMXWVIWSYVGIWERHMXVIHMWXVMFYXIWWSQISJMXWTVSXW

back to the community who made them.

The top ethical issues in the business world are currently recognised as the following:

Using child labour Dealing with corrupt governments Damaging the environment


Economic Economic issues can have a major impact on business. Poor economic performance by the country can lead to poor demand at home because consumers have little disposable cash. Similarly, currency performance can affect exporting and importing depending on the direction of the movement. If our currency is strong then we can buy imports at more attractive prices, but our exports become expensive. If our currency is weak, imports are more expensive but our exports become more competitive. The point is that the economy can change very rapidly and it is sometimes HMJGYPXJSVEFYWMRIWWXSVIEGX8LIWIGLERKIWEVIQSVIHMJGYPXXSJSVIGEWX


Political - Nowadays the UK has a mixed economy This is the same as many countries in the developed world. It means that there is a mixture of goods supplied by either the public sector (government) or the private sector (privately run business). Apart from producing a sound economy the government has less scope to intervene. Monetary policy is now controlled in the UK by the Bank of England (i.e. the control SJMRXIVIWXVEXIW8LIVILEWFIIRWSQIWYTTSVXJSVEJI[QENSVIQTPS]IVWMRHMJGYPX]FYXLMXLIVXSXLIKSZIVRQIRXLEWEHSTXIHEPEMWWI^JEMVIETTVSEGLEPXLSYKLXLIRI[UK government is introducing change. Much of course will depend on the political GSQTPI\MSRSJXLI+SZIVRQIRXSJXLIHE]EWXS[LIXLIVFYWMRIWWMWPMOIP]XSFIRIXfrom government spending programmes.

Legal - Governments have passed many pieces of legislation in recent years to ensure that both consumers and employees are protected from poor business practice. In the UK these include such things as the Trade Descriptions Act and the Employment Relations Bill respectively. All these, combined with competition legislation such as XLI3JGISJ*EMV8VEHMRKPIKMWPEXMSRHSRSXTVIGPYHIFYWMRIWWJVSQTVSWTIVMRKFYXrequire strict adherence. Those mentioned represent only a few of the elements of the legislation.


Technological- Generally speaking, the affects of new technology have been considerable. It has led to advancement in people working from home (teleworking), MRGVIEWMRK PIZIPW SJ SYXTYX ERH TVSHYGXMZMX]QSVI I\MFMPMX] MRQERYJEGXYVMRK ERHreduced times to develop new products. Whilst there have been a few negative effects such as job losses in some sectors, many processes are now assisted by the RI[W]WXIQERHXLIEWWSGMEXIHFIRIXW


Activity

Can you think of any other external factors that may have any effect on the operation of a business either to its advantage or disadvantage?


Identify the market and market competitors

Understanding the market within which the business operates and the competitive position is essential in order to gain a thorough understanding of the business. Without some of this basic information it is not possible to make informed planning or strategy decisions. It is rather like practicing archery with your eyes closed or trying to play a game of football with a blindfold on. In both cases not knowing where you are shooting or where your target is would make it impossible to play.

-HIRXMJ]MRK]SYVQEVOIXMWXLIVWXTVSGIWW-J]SYHSRXLEZIXLMWMRJSVQEXMSRXLIVIare many sources where it is readily available. For instance, the internet or references at the local library and there are research companies who undertake regular market reports that will identify most of the key data. This will identify much of the following key data required:

Market size: This is usually expressed in value terms based on the manufacturers selling prices (MSP) or at the retail selling price ( RSP ). This data is important to be able to track the market for growth or decline and also to be able to estimate your own market share performance.

Market competition: This will identify the current competition in the market with estimates of their market share. It will often include some further details concerning performance and may also attempt to consider some of their strengths and weaknesses.


Distribution: This will highlight the major channels of distribution that will show how the product or products reaches the marketplace and will sometimes indicate the national regional variations. If it is a product for the export market it will show many of the major export countries.

Customers: Based on the distribution details, it should be possible to make some accurate assessments of the customers buying the product. Certainly, if we are working MRXLIGSRWYQIVKSSHWQEVOIXXLIRIPHVIWIEVGLGERLIPTGSQTMPIXLMWMRJSVQEXMSRThe above information is the very least you need to know about the market identity in order to establish some understanding.

Obtaining a detailed knowledge of your competitors activities can be a little bit more challenging but some is available through published research as already discussed. Assuming they are limited companies then it is possible to obtain a copy of their annual accounts in the UK from companies house.

(ITIRHMRKSRXLIMVWM^IXLMW[MPPTVSZMHIHIXEMPWSJXLIMVTVSXERHPSWWEGGSYRXWWSit will be possible to understand their performance. What we are really trying to do is build up a picture of their strengths and weaknesses and try and establish how they may be a threat and indeed establish any vulnerability which could provide an opportunity.


Example

As mentioned, learning some of the detail we require to build an understanding of a market can be readily obtained without cost. If we wish to study an example of a product within the consumer goods market then it can be particularly straightforward. For instance, should we wish to understand the performance of Nescafe and the coffee market in a particular country, then much of the information is readily available, both through libraries and the Internet where market research details covering QEVOIXWM^IWXLIGSQTIXMXMSRMRXLEXTVSHYGXEVIEHMWXVMFYXMSRERHGYWXSQIVW[MPPFIavailable.


Activity

Try to conduct some simple research within your own class. Choose some consumer TVSHYGXWERHRHSYX[LMGLSRIMWYWIHERHXLSWI[LMGLEVIQSWXTSTYPEVSVSXLIVbrands of that product that are preferred.


Overview

In Section 1 we have carefully studied the internal and external environments. We should now have a clear understanding of the differences between the two. We have been through in some detail the various factors that make up these two environments and you should by now feel comfortable with their different meanings and effects.

You should also understand why having thorough market information for the business is so important. Here we have covered how to undertake some desk research, GSRWMHIVIH[LIVIXLIMRJSVQEXMSRQE]FIEZEMPEFPIERHREPP]EPPXLIHMJJIVIRXX]TIWof information that we need to know to understand the market place in which our business may operate.


Notes...


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United Kingdomhttp://www.bbpsd.org.uk

basic finance

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common business xivqmrspsk

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legal structures

legal requirements

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