INTRODUCTION

In this outcome you will find out about the role of the following 4 functional departments in a business:

Marketing Operations HR Finance

WHAT IS A MARKET?

A MARKET for a good or service exists when BUYERS (people who have money and want products) and SELLERS (people who have things to sell for money) are in contact with each other and are able to buy and sell.

WHAT IS MARKETING ALL ABOUT?The MARKETING DEPARTMENT in a business is responsible for

IDENTIFYING buyers’ needs and wants in a market and then PROVIDING products that will satisfy these needs and wants.

This work by the Marketing Department is very important to a business, because if it is done properly then it can bring the following benefits.

POSITIVE BUSINESS IMAGE INCREASED BUYER HAPPINESS (CONSUMER SATISFACTION) MORE REPEAT PURCHASES BY BUYERS (CONSUMER LOYALTY) INCREASED SALES INCREASED PROFITS LESS CHANCE OF RUNNING OUT OF MONEY AND FAILING

MARKET RESEARCH

MARKET RESEARCH involves:

GATHERING information about buyers’ needs and wants; GATHERING information about buyers’ opinions of your

business; GATHERING information about competitors actions; GATHERING information about buyers’ opinions of

competitors; ANALYSING this information to improve marketing decisions.

MARKET SEGMENTATION

Within any type or size of market, there can be various separate groups of buyers. This is due to differences that they may have in the following areas.

GENDER RELIGION GEOGRAPHICAL LOCATION TYPE OF JOB LEVEL OF INCOME LEVEL OF EDUCATION FAMILY STRUCTURE (eg no children, 5 children, etc)

Each of these distinct groups of buyers is known as a MARKET SEGMENT, and each segment may want different goods and services provided in differing ways.

For example, busy professionals may want 24 hour supermarkets that sell ready-made meals while a house husband may be happy to buy ingredients for meals during the day. This is because the professional may be too busy to shop during the day or make a meal whereas the house husband may not.

This idea of grouping buyers into segments is called MARKET SEGMENTATION, and it is important because it can lead to higher sales and profits.

For example, magazines aimed at 50 year olds are different in content and appearance to magazines aimed at teenagers so that each segment gets what they want and keeps buying the product.

PRODUCT

The PRODUCT part of the Marketing Department’s work involves trying to maximise satisfaction and sales by providing goods and services that

buyers want.

When trying to provide products that buyers want, the Marketing Department will have to think about the following issues.

1 BRANDING

A BRAND is something that is used to identify a product or a business itself. Things that can be used to develop a brand include a specific NAME, SLOGAN (catchphrase) or DESIGN. For example, Coca Cola uses specific colours and designs (eg curvy bottle) to identify its’ products and the whole company.

The main reasons why businesses use brands are:

BUYERS BELIEVE BRANDS MEAN QUALITY; WILLINGNESS TO PAY MORE FOR BRANDS INCREASES PROFITS; IT’S EASY TO IDENTIFY PRODUCTS AMONGST OTHERS IN A MARKET; IMAGE OF BRAND CAN ENCOURAGE CONSUMER LOYALTY.

0

£

Time

Decline

Maturity

Growth

Introduction

SALES

PROFITS

2 THE PRODUCT LIFECYCLE

This is the series of stages that a product goes through from when a business first sells it, until when a business stops selling it. During each stage of the lifecycle, sales and profits will vary as follows.

Sales Profits

INTRODUCTION

SALES will start to rise SLOWLY as people become aware of the product.

PROFITS will start to appear SLOWLY as sales rise and start up costs are repaid.

GROWTHSALES will start to rise QUICKLY as many people begin to use the product.

PROFITS will start to rise QUICKLY as sales rise sharply.

MATURITY

SALES will start to SLOW DOWN as almost everyone who wants the product will have it.

PROFITS will be MAXIMISED as the maximum number of sales is made.

DECLINE

SALES will start to FALL as people start to use other better or newer products. Eventually there will be no sales and the product will be withdrawn.

PROFITS will start to FALL as sales fall. Eventually there will be no profits as there are no longer any sales.

CHANGE!

4 EXTENDING LIFECYCLES FOR EXISTING PRODUCTS

The Product Lifecycle shows businesses that if their products are left alone then they will all go into decline due to problems with their marketing mix, eg high prices, poor promotion, etc. This means that it is important that businesses try to make sure that the GROWTH and MATURITY phases of the lifecycle are as long as possible in order to maximise profits. This is known as EXTENDING A PRODUCT LIFECYCLE.

A business can extend a product lifecycle through any of the following activities which are known as EXTENSION STRATEGIES.

CHANGING OR MODIFYING THE PRODUCT CHANGING PRODUCT PACKAGING CHANGING WHERE PRODUCTS ARE SOLD CHANGING PRICES CHANGING METHODS OF PROMOTION AND ADVERTISING

Examples of businesses that have extended their product lifecycles so that they do not enter DECLINE include MARS BARS with new packages and slogans, JIF changing its name to CIF, and COCA COLA creating Diet Coke with Lemon.

PRICE

The PRICE part of the Marketing Department’s work involves trying to maximise sales by providing goods and services at a price that buyers

are happy to pay.

When trying to decide on the best price for a product, the Marketing Department should consider the BUSINESS AIMS and the TYPE OF PRODUCT before choosing a strategy.

PLACE

The PLACE part of the Marketing Department’s work involves trying to maximise sales by providing goods and services in the right place

and at the right time for buyers.

When trying to decide where to sell products and how to get them to these places, the Marketing Department will have to think about the following issues.

1 CHANNEL OF DISTRIBUTION

The Channel of Distribution for a product is the way that it is sold to buyers. The main options available are as follows.

Channel ofDistribution

Description

WHOLESALER Wholesalers buy LARGE amounts of a product from manufacturing businesses and then sell them at a profit to other businesses or the final buyer. Examples include Macro, Costco, etc. This method is good for getting goods QUICKLY to LARGE markets, but it does mean that the manufacturer will lose out on some profits to the wholesaler.

RETAILER Retailers buy products from manufacturing businesses or wholesalers and then sell them at a profit to the final buyer. Examples include Asda, WH Smith, etc. This method is good for getting goods QUICKLY to SMALL to MEDIUM markets, but it does mean that the manufacturer will lose out on profits to the retailer.

DIRECT SALES Direct sales involve a business selling its own products to final buyers in ANY market for MAXIMUM PROFIT, or to SPECIALIST BUYERS to deliver the SUPPORT THEY NEED. The main methods used for direct sales are SALESPEOPLE, the INTERNET AND MAIL ORDER (CATALOGUES).

METHOD OF DISTRIBUTION

The Method of Distribution for a product is the way that it is transported to its’ Channel of Distribution. The main options available are as follows.

ROAD (eg lorry, van, etc) RAIL PLANE

Factor Description

MARKET SIZE LARGE markets will require a variety of transport methods including road to get products to its’ many parts.

PRODUCT NATURE

Some products are PERISHABLE (which means that they will go off quickly) and so will have to use specialised quick methods of distribution. For example, fresh food may be flown to its market to prevent it going off.

METHOD COST The method used will depend on the amount of FINANCE AVAILABLE and the costs of the method. For example trains may be used instead of lorry due to lower costs.

INFRASRUCTURE The method used will depend on the INFRASTRUCTURE options available. For example planes may not be used because there is no available airport.

BOAT

PROMOTION

The PROMOTION part of the Marketing Department’s work involves trying to

maximise sales by making sure that buyers know about products and are encouraged to purchase them.

This work on Promotion carried out by the Marketing Department involves the some or all of the following activities. The main METHODS (ways) of advertising that a business can use are below.

Method Examples Features

BROADCAST ADVERTS

TV Radio Cinema Internet

These methods are ATTENTION GRABBING, but usually only LARGE businesses can afford the HIGH COSTS of using them for WIDE market coverage.

PRINTED ADVERTS

Newspaper Local Paper Magazines Flyers Letters

These methods provide LOYALTY, but usually only LARGE businesses can afford the HIGH COSTS of WIDE market coverage. However, SMALLER businesses may also be able to afford limited use eg in LOCAL PAPERS.

OUTDOOR ADVERTS

Bus Posters Taxis Shelters Billboards

These methods are ATTENTION GRABBING, but usually only LARGE businesses can afford the HIGH COSTS of WIDE market coverage.

When preparing adverts, the following ideas should be considered so that the market targeted by them take notice.

SLOGANS (a saying for the product – eg the future is Orange) JINGLES (short saying made into a song – eg Coke: always Coca

Cola) SONGS (eg “I’m so excited” – Crunchie) BRANDING (identity and image that people identify with) SPONSORSHIP (name carried by others, Carling and Celtic/Rangers) ENDORSEMENTS (famous people recommending the product)

2 PROMOTIONAL ACTIVITIES

The aim of the promotional activities is to encourage buyers to buy products by giving them a special offer. The main methods of promotion that a business can use are:

BUY ONE GET ONE FREE (BOGOF) SPECIAL OFFERS (eg one child free for each adult) DISCOUNTS MONEY OFF VOUCHERS FREE GIFTS COMPETITIONS FREE SAMPLES/TASTINGS

THE MARKETING MIX

The MARKETING MIX is the specific combination of PRODUCT, PRICE, PLACE and PROMOTION (the 4P’s) that a business has chosen in order to try and satisfy the needs of the buyers in their market.

For example, Walkers crisps marketing mix is:

PRODUCT – range of flavours of crisps PRICE – market price PLACEMENT – wholesalers and retailers PROMOTION – all types of advertisements, and competitions

If Walkers put their price up to £1.50 per packet of crisps then sales would drop even though they are good quality, well advertised and easy to buy. This is because this level of price upsets the overall marketing mix and therefore the overall appeal of the product.

INPUT

PROCESS

OUTPUT

Here RAW MATERIALS (basic parts) for a good or service are brought together.

Here RAW MATERIALS are worked on to help create a good or service.

This is a FINISHED GOOD OR SERVICE ready for FINAL BUYER (or more work by another business).

WHAT IS OPERATIONS ALL ABOUT?

The OPERATIONS DEPARTMENT is concerned with efficiently providing the goods and services that the business wants to sell.

The 3 main stages of the PRODUCTION PROCESS that the Operations Department uses to provide required products can be seen below.

STOCK CONTROL

The STOCK CONTROL part of the Operations Department’s work deals with keeping the correct amount of STOCKS for the business.

Stock in a business is an UNUSED AMOUNT of something, and the main types of stock are:

RAW MATERIALS (basic parts still to be used); WORK IN PROGRESS [WIP] (products started but not yet finished); FINISHED GOODS (products that are ready to be sold to customers).

Having these stocks available has the following ADVANTAGES for a business.

LARGE ORDERS OF STOCK CAN MEAN DISCOUNTS PREVENTS STOCK OUTS (lack of any stock) NO STOCK OUTS MEANS THAT WORK CAN START WHEN REQUIRED NO STOCK OUTS MEANS NO WORK STOPPAGES NO STOCK OUTS MEANS NO LOST SALES DUE TO LACK OF STOCK

However, having stocks can have the following DISADVANTAGES for a business.

EXTRA LABOUR COSTS (eg extra wages for security and warehouse staff)

EXTRA STORAGE COSTS EXTRA INSURANCE COSTS RISK OF LOSING MONEY ON STOCKS THAT BECOME UNSELLABLE

(eg due to changes in fashion, out of date (OBSOLETE), etc)

CHOOSING A SUPPLIER

The Operations Department’s work on CHOOSING A SUPPLIER deals with deciding who the business should buy its’ RAW MATERIALS from.

The main factors that a business has to consider when choosing which supplier to use can be seen below.

Factor Description

PRICE A business will want to use a supplier that MINIMISES price. This is to minimise costs and so maximise profits.

QUALITY A business will want to use a supplier that has HIGH quality materials. This is to make sure that poor quality materials do not result in poor quality finished goods and unhappy customers.

CONTINUITY A business will want to use a supplier that can CONTINUE to supply to them. This is to minimise the inconvenience of changing suppliers and losing discounts, etc.

RELIABILITY A business will want to use a supplier that is RELIABLE. This means that they can always supply in the same way. This is to minimise the inconvenience of unexpected poor quality, lack of stock, delays, etc.

PRODUCTION METHODS

The Operations Department’s work on PRODUCTION METHODS deals with deciding on the best way to actually MAKE goods and services.

The different Production Methods that the Operations Department can use to produce goods and services can be seen below.

1 JOB PRODUCTION

When Job Production is used then ONE JOB is started and finished at a time, and every job that is undertaken will be different. Work here is usually LABOUR INTENSIVE. Examples of job production include JEWELLERY, TAILOR MADE CLOTHES, ROADS, BRIDGES, SHIPS, etc.

The main ADVANTAGES of Job Production are as follows.

VERY FLEXIBLE METHOD OF PRODUCTION HIGH LEVELS OF BUYER SATISFACTION AS PRODUCT MEETS NEEDS HIGH LEVELS OF SATISFACTION CAN MEAN HIGH PRICES VARIETY IN WORK FOR STAFF CAN BE MOTIVATING

The main DISADVANTAGES of Job Production are as follows.

HIGH COSTS DUE TO NEED FOR HIGHLY PAID SKILLED STAFF SLOW PROCESS WHICH DOES NOT SUIT HIGH DEMAND

BATCH PRODUCTION

When Batch Production is used then ONE BATCH (a group of IDENTICAL items) is started and finished at a time, and every batch that is started can be SLIGHTLY different. Work here is usually CAPITAL INTENSIVE.

Examples of batch production include PIZZAS (one batch ham another batch mushroom), SOUP (one batch tomato and one batch chicken), etc.

The main ADVANTAGES of Batch Production are as follows.

SOME FLEXIBILITY ALLOWS VARIETY IN PRODUCT RANGE VARIETY IN THE PRODUCT RANGE MEETS MANY BUYERS NEEDS MEETING MANY BUYERS NEEDS CAN INCREASE SALES CAN PRODUCE LARGE AMOUNTS OF PRODUCTS QUITE QUICKLY RUNNING COSTS CAN BE LOW AS LOTS OF CAPITAL CAN BE USED RUNNING COSTS CAN BE LOW AS STAFF USED NEED FEW SKILLS

The main DISADVANTAGES of Batch Production are as follows.

SIMPLE SIMILAR PROCESSES CAN BE BORING FOR STAFF IF STAFF ARE BORED THEN THEY CAN BE DEMOTIVATED CAPITAL PROBLEMS CAN HALT PRODUCTION AND RUIN A BATCH PLANNING IS NEEDED TO PREVENT WHOLE BATCHES BEING WASTED

FLOW PRODUCTION

When Flow Production is used then only ONE IDENTICAL ITEM is made in LARGE quantities through a series of simple LINKED steps. Work here is CAPITAL INTENSIVE and may be completely AUTOMATED. Examples of flow production include TELEVISIONS, FRIDGES, MICROWAVES, etc.

The main ADVANTAGES of Flow Production are as follows.

HIGH LEVELS OF PRODUCTION CAN MEAN SUPPLIER DISCOUNTS SUPPLIER DISCOUNTS CAN LOWER UNIT COSTS AND PRICE LOWER PRICE CAN RESULT IN MORE SALES RUNNING COSTS CAN BE LOW AS STAFF USED ARE LESS SKILLED RUNNING COSTS CAN BE LOW AS STAFF USED NEED FEW SKILLS

The main DISADVANTAGES of Flow Production are as follows.

NEED FOR HIGH PRODUCT DEMAND OR MANY THINGS WILL BE UNSOLD

SIMPLE SIMILAR PROCESSES CAN BE BORING FOR STAFF IF STAFF ARE BORED THEN THEY CAN BE DEMOTIVATED CAPITAL PROBLEMS CAN HALT PRODUCTION PLANNING IS NEEDED TO PREVENT PRODUCTION STOPPING

QUALITY

The Operations Department’s work on QUALITY deals with making sure that products are up to suitable standards.

QUALITY

ASSURANCE

Quality assurance is all about CHECKING EACH PART OF PRODUCTION to check it has been completed properly and if not that problems are corrected.

TOTAL QUALITY MANAGEMENT

TQM is all about checking EVERY AREA OF THE BUSINESS (not just production) to make sure that work is being completed properly and if not that any problems are corrected. This thorough method of quality assurance ensures higher standards throughout the business and so less wastage and more profits.

QUALITY CIRCLES Quality Circles involve managers LISTENING TO THE STAFF who complete production as experts. Quality Circles can maintain and improve quality because they allow managers to use the advice from the workers who have the best understanding of production (due to their day to day role within it).

QUALITY STANDARDS

Quality Standards are levels of quality for DIFFERENT AREAS OF BUSINESS ACTIVITY that are set and recognised outside of a business. Common quality standards include the following.

BS 5750 (production quality) ISO 9000 (production quality) INVESTORS IN PEOPLE (staff quality)

MYSTERY SHOPPER

Mystery shoppers visit a business to check on the quality of CUSTOMER SERVICE by asking staff for help and solutions. This information is then given to managers for them to act on in order to improve or develop quality.

WHAT IS HUMAN RESOURCE MANAGEMENT (HRM) ALL ABOUT?

The HRM DEPARTMENT in a business is responsible for managing the WORKFORCE so that the business has enough suitably

qualified staff to carry out all necessary tasks in an efficient way.

The main activities that are involved in this work by the HRM Department are as follows.

STAFF RECRUITMENT STAFF SELECTION STAFF TRAINING CONDITIONS OF SERVICE EMPLOYEE RELATIONS

This work by the HRM Department is very important to a business, because if it is done properly then it can bring the following benefits.

INCREASED STAFF MOTIVATION MORE WORK IS COMPLETED BY MOTIVATED STAFF BETTER QUALITY WORK BY MOTIVATED STAFF POSITIVE BUSINESS IMAGE INCREASED SALES INCREASED PROFITS LESS CHANCE OF RUNNING OUT OF MONEY AND FAILING

STAFF RECRUITMENT

The RECRUITMENT part of the HRM Department’s work involves trying to encourage suitable people to apply for any VACANCIES (openings)

that the business has.

The main stages involved in recruitment when a vacancy has been identified can be seen below.

1 CARRY OUT A JOB ANALYSIS

Job Analysis involves finding out exactly what a job involves by identifying:

• TASKS TO BE COMPLETED IN THE JOB• TECHNOLOGY THAT IS USED IN THE JOB• KNOWLEDGE AND SKILLS NEEDED FOR THE JOB• INTERPERSONAL SKILLS NEEDED FOR THE JOB• LEVEL OF INITIATIVE NEEDED FROM STAFF

Job Analysis can be carried out by:

• ASKING CURRENT JOB HOLDER (if there is one)• WATCHING CURRENT JOB HOLDER (if there is one)• ASKING MANAGER WHO NEEDS THE MEMBER OF STAFF

2 PREPARE A JOB DESCRIPTION

A Job Description uses information from the Job Analysis to identify and record the following main details about a JOB.

JOB TITLE and DEPARTMENT POSITION IN BUSINESS PURPOSE OF THE JOB DUTIES OF THE JOB (ie work to be done) WORKING CONDITIONS (ie hours, holidays, etc) TARGETS TO BE MET

3 PREPARE A PERSON SPECIFICATION

A Person Specification uses information from the Job Description to identify and record the following main details about the type of PERSON that would be suitable for the job.

PHYSICAL CHARACTERISTICS (eg fitness, etc) QUALIFICATIONS (eg Highers, Degree, etc) SKILLS (eg words per minute on a word processor) INTERESTS/HOBBIES PERSONALITY CIRCUMSTANCES (eg ability to work in different

areas)

These details in the Person Specification will usually be spilt into the following categories for later use.

ESSENTIAL (these qualities must be present in a candidate) DESIRABLE (extra qualities that would be present in a “perfect”

candidate)

4 PREPARE JOB ADVERTISEMENT(S)

When a business has details about their job vacancy and the type of person needed to fill it (from the Job Description and Person Specification), then it can create a JOB ADVERTISEMENT. The purpose of a Job Advertisement is to tell people the following details about a vacancy in order to encourage them to apply for it.

Job advertisements can be placed in either (or both) of the following different ways depending on who the business wants to apply for the vacancy.

INTERNAL ADVERTISEMENTS EXTERNAL ADVERTISEMENTS

DESCRIPTION

Advertisements placed to attract applications from people who already work for the business.

Advertisements placed to attract applications from people who DO NOT already work for the business.

METHODS

STAFF MEMOS or E-MAIL STAFF NOTICEBOARDS BUSINESS NEWSLETTER

PAPERS and JOURNALS JOB CENTRES RECRUITMENT AGENCIES

BENEFITS

Internal adverts are CHEAP to place Existing staff can QUICKLY fill the post Existing staff are QUICK to retrain Existing staff are CHEAP to retrain

External methods can be better quality

Large number of people to choose from

More likely to find a “perfect” person NEW “outside” ideas

DRAWBACKS

There are NO new “outside” ideas Not always many people to choose

from Less chance of finding “perfect”

person

External methods can be EXPENSIVE New staff can take TIME to fill the post New staff can take TIME to train New staff can be EXPENSIVE to train

STAFF SELECTION

The SELECTION part of the HRM Department’s work involves trying to decide who is the best person (from those who have been recruited) to

fill a VACANCY.

The main stages involved in selection (after recruitment is complete and people have applied for the vacancy) can be seen below.

1 CHOOSE THE BEST APPLICANTS

When all applications have been received, the HRM Department will check their details against the Person Specification and choose one of the following options.

DETAILS MATCH THE PERSON SPECIFICATION

These applicants will be contacted (by phone, letter, etc) to ask them to come to the business for an INTERVIEW about the vacancy.

DETAILS DO NOT MATCH THE PERSON SPECIFICATION

These applicants will be contacted (by phone, letter, etc) to tell them POLITELY that they have been unsuccessful and so WILL NOT be asked to attend an interview about the vacancy.

In order to make this process as easy and quick as possible, many businesses now only use APPLICATION FORMS during recruitment. This is because Application Forms can make sure that all information provided is on specific topics that make it easy to see if the applicant matches the Person Description.

2 INTERVIEW THE BEST APPLICANTS

An Interview is a meeting between one staff member (ONE TO ONE INTERVIEW) or several staff members (PANEL INTERVIEW) and a job applicant.

The aim of an interview is for the staff of the business and the job applicant to find out more information about each other by discussing specific questions.

3 TEST THE BEST APPLICANTS

Testing may be carried out to back up or get more information about a job applicant. Tests can take any (or all) of the following formats.

PRACTICAL TESTING(to assess a skill, eg typing test)

PSYCHOLOGICAL TESTING (to assess personality, eg leadership ability)

RECRUITMENT AND SELECTION SUMMARYPREPARE JOB ANALYSIS

PREPARE JOB DESCRIPTION(using Job Analysis)

PREPARE PERSON SPECIFICATION(using Job Description)

PREPARE ADVERTISEMENT

RECRUITMENT

STAFF TRAINING

The STAFF TRAINING part of the HRM Department’s work involves

trying to make sure that staff have the skills and knowledge that they need to do their jobs.

The types and methods of training that HRM can organise for staff can be seen below.

1 INDUCTION TRAINING

Induction Training is training for NEW members of staff so that they:

UNDERSTAND THEIR NEW ROLE; ARE ABLE TO CARRY OUT THEIR TASKS; ARE NOT AFRAID OF FITTING INTO THEIR NEW POSITION.

Induction training is usually carried out IN THE BUSINESS itself BEFORE staff take up their new position.

2 ON-THE-JOB TRAINING????

3 OFF-THE-JOB TRAINING

????

PREPARE ADVERTISEMENT

Industrial ActionThe main types of Industrial Action that staff can take can be seen below.

Industrial Action Description

STRIKE This involves the workers who are unhappy NOT COMING TO WORK. This has to be authorised by the workers TRADE UNION (body that represent the interests of workers), and will result in LOST WORK and UPSET CUSTOMERS for the business, and LOST WAGES for the staff.

PICKETING This involves the workers who are unhappy going on strike, and then peacefully protesting at their OWN WORKPLACE ONLY try and PERSUADE OTHER WORKERS to join them.

GO SLOW This involves the workers who are unhappy doing their work as SLOWLY as they can but without actually breaking their contract terms. This can result in LESS WORK and UPSET CUSTOMERS for the business.

WORK TO RULE This involves the workers who are unhappy doing only what is EXACTLY in their contract terms. This can result in LESS WORK and UPSET CUSTOMERS for the business.

OVERTIME BAN This involves the workers who are unhappy doing NO overtime (extra hours of work). This can result in LESS WORK and UPSET CUSTOMERS for the business, and LOST WAGES for the staff.

WHAT IS FINANCE ALL ABOUT?

The FINANCE DEPARTMENT in a business is responsible for RECEIVING PAYMENTS, MAKING PAYMENTS, and

monitoring FINANCIAL PERFORMANCE.

This work by the Finance Department is very important to a business, because if it is done properly then it can bring the following benefits.

MORE MONEY AVAILABLE FOR MARKETING, WAGES AND OPERATIONS BETTER BUSINESS PERFORMANCE MORE SATISFIED BUYERS AND HIGHER SALES MORE PROFITS BETTER CASHFLOW (ie cash available) LESS CHANCE OF RUNNING OUT OF MONEY AND FAILING

DEALING WITH PAYMENTS RECEIVED

The DEALING WITH PAYMENTS RECEIVED part of the Finance Department’s work is all about making sure that any money received

from salesis recorded and banked.

The business will receive money from buyers as payment for the goods and services that they have bought. These payments can take any of the following forms.

CASH CHEQUE (instruction to a bank to make a payment) CREDIT CARD PAYMENTS (repay the credit card co – can be with

interest) DEBIT CARD PAYMENTS (electronic transfer between bank accounts)

When these payments are received, the Finance Department will complete the following activities to process the payment.

CHECK THAT THE AMOUNT PAID IS CORRECT RECORD THE PAYMENT DEDUCT THE PAYMENT FROM ANY BALANCE OWED PAY CASH OR CHEQUE PAYMENTS INTO THE BUSINESS BANK ACCOUNT

PAYING FOR BUSINESS ACTIVITIES

The PAYING FOR BUSINESS ACTIVITIES part of the Finance Department’s work is all about paying for the use of all of the resources

that the business uses.

The main payments that have to be made for activities that keep the business running are as follows.

STAFF WAGES (this is known as PAYROLL) PROFIT PAYMENTS TO OWNERS RENT OF PREMISES INSURANCE FOR PREMISES LIGHT, HEAT AND POWER FOR PREMISES PURCHASE OF RAW MATERIALS STORAGE OF STOCKS TRANSPORT OF FINISHED GOODS TAXES ON PROFITS PURCHASE OF NEW PREMISES PURCHASE OF NEW EQUIPMENT

EXTERNAL FINANCE

External finance is money that comes from someone OUTSIDE of the business.

The main types of LONG TERM EXTERNAL FINANCE are as follows.

Finance Description Available for how long?

Availableto who?

MORTGAGE This is a loan to buy PROPERTY, eg factory. Mortgages must be repaid with INTEREST or the lender can sell the SECURED property to get their money back. However, despite this, mortgages are NOT equity finance.

LONG TERM(10+

years)

Any business

DEBENTURE

This is a personal loan only available to a PLC. Debentures must be repaid with INTEREST or the lender can push for liquidation. However, despite this, debentures are NOT equity finance.

LONG TERM(10+

years)

PLC ONLY

SALE AND LEASEBACK

If a business sells it assets and then rents them back, then it can release the cash tied up in them.

LONG TERM(10+

years)

Any

business

VENTURE CAPITALIST

Here part of the business is sold to a VENTURE CAPITALIST. This is an outside party who invests in businesses to make money though DIVIDENDS and selling their share later for profit. This is EQUITY capital.

LONG TERM(10+

years)

Any business

The main types of MEDIUM TERM EXTERNAL FINANCE are as follows.

Finance Description Available for how long?

Availableto who?

LOAN This is money that must be repaid with INTEREST. Loans are NOT equity finance. Loans are often SECURED which means they asset they are used to buy can be taken if repayments are not made.

MEDIUM TERM(1-10 years)

Any business

HIRE PURCHASE

Here the business buys an asset (eg van) by paying the purchase price and INTEREST over a period of time. The business looks after and uses the asset while it is paying for it and will own it after the final payment.

MEDIUM TERM(1-10 years)

Any

business

LEASE Here the business uses an asset (eg van) by making a rental payment. Here even though the business is paying for the use of the asset, it will NEVER own it. However, rented assets will be repaired and upgraded by their owner rather than the business itself.

MEDIUM TERM(1-10 years)

Any

business

GRANTS Here the business receives a sum of money that DOES not have to be repaid. This is usually from a Government body which is looking to support businesses is run down areas.

MEDIUM TERM(1-10 years)

Any

business

The main types of SHORT TERM EXTERNAL FINANCE are as follows. However, it should be noted that businesses which often rely on these short term methods of finance, are likely to be suffering cash flow problems and so may be close to failing.

Finance Description Available for how long?

Availableto who?

OVERDRAFT This is a small loan that allows a business to spend more money than it has in its bank account. Overdrafts are automatically repaid as soon as money is paid into the bank.

SHORT TERM

(<1 year)

Any business

DEBT FACTORING

Here the business sells debts people owe to a collection company. This gives the business most of the money that it is owed all at once. The collection company is happy to do this as they will make a profit by charging interest on the debts due.

SHORT TERM

(<1 year)

Any

business

TRADE CREDIT

Here the business tries to get people who owe money to pay quickly while the business itself takes as much CREDIT as it can get. This can provide some cash as money is coming in from people paying but it not having to be spent straight away.

SHORT TERM

(<1 year)

Any

business

PREPARING THE FINAL ACCOUNTS OF THE BUSINESS

The Final Accounts of a business are prepared to provide financial information about its’ performance and current position. The two documents that together are known as the Final Accounts are the “Trading and Profit and Loss Accounts” and the “Balance Sheet”. Details of both of these documents can be seen below.

1 TRADING, PROFIT AND LOSS ACCOUNT

This document aims to show how much of a PROFIT (extra money earned) or LOSS (decrease in money available) a business has made during a period of time (usually 1 year). The main parts of the Trading, Profit and Loss Accounts are as follows.

TRADING ACCOUNT

This shows GROSS PROFIT (money made from just buying and selling products). It is calculated by subtracting COST OF SALES (purchasing and manufacturing costs of products sold) from SALES.

PROFIT AND LOSS ACCOUNT

This shows NET PROFIT (amount of money left for owners after paying all other EXPENSES [running costs]). It is calculated by subtracting EXPENSES from GROSS PROFIT.

PREPARING BUDGETS

A BUDGET is a PLAN for what should happen during a specific period of time in the FUTURE (eg a month, a year, etc).

There are many types of budgets that can be prepared for a business (eg SALES BUDGET – future sales, PRODUCTION BUDGET – future output, etc) but perhaps the most important one is the CASH BUDGET.

A Cash Budget shows CASHFLOW (ie the amount of cash that will flow in and out of a business) over a future period of time. This information highlights whether the business will have SURPLUSES (ie extra cash) or DEFICITS (ie shortages of cash that may cause the business to stop operating) in the future.

The main parts of a Cash Budget are as follows.

OPENING BALANCE (cash available at start) RECEIPTS (cash flowing in from sales, etc) CASH AVAILABLE (total cash available during a period before payments) PAYMENTS (cash flowing out from bill payments, wages, etc) CLOSING BALANCE (cash available at end)

The layout and structure of a Cash Budget can be seen below.

Cash Budget for A King for Jan 2006 – Mar 2006

£ £ £Jan Feb Mar

OPENING BALANCE 10,000 5,000 0

RECEIPTSCash Sales 5,000 2,500 2,500Credit Sales 5,000 2,500 2,500Bank Loan 10,000 - -

+ TOTAL RECEIPTS 20,000 5,000 5,000

= CASH AVAILABLE 30,000 10,000 5,000

PAYMENTSRent 500 500 500Wages 5,000 5,000 5,000Cash Purchases 2,000 2,000 2,000Credit Purchases 2,500 2,500 2,500Purchase of Equipment 15,000 - -

- TOTAL PAYMENTS 25,000 10,000 10,000

= CLOSING BALANCE 5,000 0 - 5,000

NB The CLOSING Balance for one period in the Cash Budget will be the OPENING Balance for the next period. For example, as you end January with £5,000 cash, then you start February with £5,000 cash.

ANALYSING THE BUDGETS OF THE BUSINESS

As you have seen, budgets are prepared by a business so that it can see in advance what should happen to it in the future. This is beneficial for a business as this can mean that it is less likely to fail. This is because the business can

take action to deal with or prevent problems that show up in the budget before they actually happen.

Action Description

USE SURPLUSES

Plans can be made to use any Surpluses (extra funds) highlighted by the Cash Budget for the activities below.

SAVING AND INVESTMENTS LARGE PURCHASES (eg new machinery, etc)

PREVENT or DEAL WITHDEFICITS

Any Deficits (shortages of funds) highlighted by the Cash Budget can be avoided or dealt with by the activities below.

ARRANGE AN OVERDRAFT TO COVER SHORTAGE ARRANGE LOANS TO COVER SHORTAGE SELL OFF STOCKS TO RAISE CASH SELL OFF ASSETS TO RAISE CASH CUT BACK ON NON ESSENTIAL INVESTMENTS LOWER STAFF COSTS (eg part time, redundancies) LOWER LAND COSTS (eg move to cheaper premises) INCREASE SALES (eg new marketing) ENSURE DEBTORS PAY UP QUICKLY TRY TO DELAY PAYMENTS TO CREDITORS

FUNCTIONAL DEPARTMENTS SUMMARY

To carry out production and so provide goods and services, businesses must carry out certain tasks (or FUNCTIONS) in an organised way.

The main way in a business structure that these functions are organised is through FUNCTIONAL DEPARTMENTS. These are groups of workers and resources that all do the SAME type of work in the business.

The main functional departments and their activities can be seen below.

Function Activities Involved

MARKETING MARKET RESEARCH (info on customers and competitors)DECISIONS ABOUT PRODUCT TO BE SOLDDECISIONS ABOUT PRODUCT PRICESDECISIONS ABOUT PRODUCT PLACEMENTDECISIONS ABOUT PRODUCT PROMOTIONTHE MARKETING MIX (THE ABOVE 4 P’S)

OPERATIONS GETTING AND STORING RAW MATERIALSPRODUCING GOODS AND SERVICESDISTRIBUTING GOODS AND SERVICES

FINANCE RECORDING FINANCIAL (money) TRANSACTIONSPAYING BILLS AND WAGESTRACKING PROFITS AND CASH

HUMAN RESOURCES (HRM)

RECRUITING AND SELECTING STAFFSTAFF HEALTH AND SAFETYSTAFF TRAININGSTAFF DISCIPLINE AND WELFARE