A Level Business (A2) formulas and key terms

Business and its environment

External influences on business activity

• Privatisation = selling a state-owned business to the private sector (profit motive, pressure to cut costs). Nationalisation = taking a private business into state ownership (social objectives, but losses fall on taxpayers).
• Monetary policy = changes in interest rates and the money supply. Fiscal policy = changes in taxation and government spending. Supply-side policy = measures that raise the economy's ability to produce, e.g. training, competition.
• A fall in the exchange rate makes exports cheaper abroad and imports dearer at home. A rise does the opposite.
• Market failure, e.g. pollution not paid for by the polluter, is dealt with by taxes, fines, regulation or subsidies.
• Corporate social responsibility (CSR) = a business taking account of the effects of its decisions on society and the environment, beyond what the law demands.
• Social audit = a report on how well a business has met its social targets. Environmental audit = a check of its environmental impact against its targets and the regulations.
• Multinationals bring jobs, skills, investment and tax revenue to a host country, but profits may be sent home, local firms may be squeezed and the firm may later relocate.

Business strategy

• SWOT: strengths and weaknesses are internal (inside the firm); opportunities and threats are external.
• PEST = political, economic, social and technological factors in the external environment.
• Porter's five forces: rivalry among existing firms, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.
• Ansoff matrix: market penetration (existing product, existing market); market development (existing product, new market); product development (new product, existing market); diversification (new product, new market; the highest risk).
• Decision tree: expected value = sum of (probability × outcome) for each branch; then subtract the cost of the option. Probabilities on the branches from one chance node add up to 1.
• Force field analysis: compare the total score of driving forces (for the change) with the total of restraining forces (against it).
• Core competence = a capability that is hard for rivals to copy, gives customers a benefit and can be used across several products or markets. Contingency planning is done before a crisis; crisis management is the response once it happens.

Human resource management

Organisational structure

• Chain of command = the line of authority from the top of the organisation down through each level.
• Span of control = the number of subordinates who report directly to one manager. For the same number of employees, wider spans mean fewer levels of hierarchy.
• Authority = the power to make decisions and give instructions. Responsibility = the duty to carry out a task. Accountability = having to answer for the result; it cannot be delegated.
• Matrix structure: project teams across functions. Shares expertise, but each employee has two managers, so instructions may conflict.
• Centralisation = decisions kept at head office (consistent, tight control, slow to meet local needs). Decentralisation = decisions passed down to units (fast, local, motivating, less consistent).
• Line functions carry out the main activity with direct authority, e.g. production and sales managers. Staff functions give specialist advice and support, e.g. human resources, legal, IT.
• Functional structure suits one main product or market; structure by product or by geographical area suits firms with very different products or regions.

Business communication

• One-way communication = no feedback from the receiver (fast, but understanding is not checked). Two-way communication = the receiver can reply (slower, but more accurate and more motivating).
• Vertical = between levels of the hierarchy, downward or upward. Horizontal = between people or departments at the same level.
• Spoken: immediate feedback and body language, but no permanent record. Written: a permanent record and good for detail, but slow feedback.
• Electronic: fast and cheap over distance, but can cause information overload. Visual (charts, signs, diagrams): quick impact, but little detail.
• Barriers: jargon or language, noise, information overload, too many levels in the chain (the message is distorted and delayed), poor choice of medium, lack of feedback, low motivation or trust.
• Informal communication (the grapevine) is fast and shows how staff feel, but it can spread inaccurate rumours.
• Poor communication causes mistakes, duplicated work, delay and demotivation, so costs rise and efficiency falls.

Leadership

• Trait theory: effective leaders share personal qualities such as confidence, intelligence and determination. Weakness: different situations need different qualities, and many can be learned.
• Behavioural theory: leadership is a pattern of behaviour (for example, concern for the task and concern for people), so it can be learned.
• Contingency theory: there is no single best style; the best style depends on the situation, the task and the people.
• Power and influence theory, five sources of power: legitimate (position), reward, coercive (punishment), expert (knowledge), referent (being admired and respected).
• Transformational leadership: the leader inspires staff with a vision, challenges old methods and wins commitment to major change.
• Goleman's four competencies: self-awareness (knowing your own emotions), self-management (controlling them), social awareness (understanding other people's emotions; empathy), social skills (managing relationships: persuading, resolving conflict, building teams).

Human resource management (HRM) strategy

• Labour productivity = total output ÷ number of employees (units per worker in the period).
• Labour turnover (%) = number of employees leaving in the year ÷ average number employed × 100.
• Absenteeism rate (%) = number of days absent ÷ total number of possible working days × 100.
• Zero hours contract = no guaranteed hours; the worker is called in and paid only when needed. Annualised hours = a fixed total of hours for the year, spread unevenly to match demand.
• Gig economy = self-employed workers paid for each task, often through an app: no guaranteed income, and usually no sick or holiday pay.
• Management by objectives (MBO) = managers and employees agree measurable objectives linked to the firm's aims, then review performance against them. Risk: staff neglect work that is not measured.
• IT and AI in HRM: faster screening of applicants and answers to routine questions, but software trained on past decisions can repeat past bias.

Marketing

Marketing analysis

• Price elasticity of demand (PED) = % change in quantity demanded ÷ % change in price. It is negative. Ignoring the sign: above 1 is elastic, below 1 is inelastic.
• Elastic demand: a price cut raises total revenue. Inelastic demand: a price rise raises total revenue.
• Income elasticity of demand = % change in quantity demanded ÷ % change in income. Positive = normal good (above 1 = luxury); negative = inferior good.
• Promotional elasticity of demand = % change in quantity demanded ÷ % change in promotional spending. Below 1 means demand responds less than in proportion.
• Percentage change = (new value − old value) ÷ old value × 100.
• Four-period centred moving average = (first four-period average + next four-period average) ÷ 2. It lines the trend up with an actual quarter.
• Seasonal variation = actual sales − trend. Forecast = extrapolated trend + average seasonal variation for that quarter.

Marketing strategy

• Contents of a marketing plan: objectives, resources, research, marketing mix.
• Coordinated marketing mix: every element supports the same image, e.g. premium product, high price, selective outlets, promotion that stresses quality.
• Reasons to sell abroad: a saturated or small home market, higher sales and economies of scale, spreading risk across markets.
• Selecting a market: size and growth, competition, incomes, legal and political conditions, cultural fit, cost of entry.
• Methods of entry, from low risk and low control to high risk and high control: exporting (directly or through an agent), licensing, franchising, joint venture, direct investment in a wholly owned subsidiary.
• Pan-global marketing = one standardised product and marketing mix for all countries: economies of scale and one brand image, but it may ignore local tastes, laws and culture.
• Maintaining local differences = adapting the product and the mix to each country: a better fit with local needs, but higher costs.

Operations management

Location and scale

• average (unit) cost = total cost ÷ output
• Offshoring: relocating a business activity to another country. Reshoring: bringing it back to the home country.
• Internal economies of scale come from the firm's own growth: purchasing (bulk buying), technical, financial, marketing, managerial.
• External economies of scale come from the growth of the whole industry in an area, e.g. skilled local labour and nearby suppliers.
• Internal diseconomies of scale: poor communication, slow decisions, weak coordination and low motivation in a very large firm.
• External diseconomies of scale: congestion and higher land and labour costs when too many firms crowd into one area.
• Qualitative location factors cannot be measured in money, e.g. safety, ethics, infrastructure quality, managers' preferences.

Quality management

• Quality: a product or service that meets customer expectations and is fit for purpose.
• Quality control (QC): inspection or sampling to find defects after they have been made.
• Quality assurance (QA): agreed standards at every stage of production to prevent defects.
• TQM: everyone is responsible for quality; aims are zero defects, right first time and continuous improvement.
• Benchmarking: comparing performance with the best firms in the industry and adopting their best practice.
• defect rate (%) = defective units ÷ units made (or sampled) × 100
• QA and TQM need training, time and staff commitment, so costs rise first and savings come later.

Operations strategy

• Lean production: producing with the minimum of waste (time, materials, inventory, defects, movement).
• Kaizen: continuous improvement through many small changes suggested by workers. Quality circles: small groups of workers who meet to solve quality problems.
• JIT: materials arrive and goods are made only when needed, so inventory is close to zero; it needs reliable suppliers.
• Cell production: small teams each make a complete unit. Simultaneous engineering: development stages done at the same time to cut time to market.
• Critical path: the longest path through the network; its length is the minimum project duration and its activities have zero float.
• total float = latest finish time − duration − earliest start time
• free float = earliest start time of the next activity − duration − earliest start time of this activity

Finance and accounting

Financial statements

• gross profit = revenue − cost of sales
• profit from operations (operating profit) = gross profit − expenses
• profit for the year = profit from operations − finance costs (interest paid, if any) − taxation; retained earnings = profit for the year − dividends
• net current assets = current assets − current liabilities
• net assets = non-current assets + net current assets − non-current liabilities = equity (issued shares + reserves)
• Inventory is valued at the lower of cost and net realisable value (NRV = selling price − costs to complete and sell).
• annual straight-line depreciation = (cost − residual value) ÷ useful life in years

Analysis of published accounts

• current ratio = current assets ÷ current liabilities; acid test ratio = (current assets − inventory) ÷ current liabilities
• capital employed = issued shares + reserves + non-current liabilities; ROCE (%) = profit from operations ÷ capital employed × 100
• gross profit margin (%) = gross profit ÷ revenue × 100; profit margin (%) = profit from operations ÷ revenue × 100
• rate of inventory turnover = cost of sales ÷ average inventory (times a year)
• trade receivables turnover (days) = trade receivables ÷ credit sales × 365; trade payables turnover (days) = trade payables ÷ credit purchases × 365
• gearing (%) = non-current liabilities ÷ capital employed × 100
• dividend yield (%) = dividend per share ÷ market share price × 100; dividend cover = profit for the year ÷ annual dividends; P/E ratio = market share price ÷ earnings per share

Investment appraisal

• Payback period = the time taken for net cash inflows to recover the initial cost; a shorter payback means less risk.
• ARR (%) = average annual profit ÷ average investment × 100
• average annual profit = (total net cash inflows − initial cost) ÷ number of years; average investment = (initial cost + residual value) ÷ 2
• present value = cash flow × discount factor
• NPV = total of the present values of the net cash inflows − initial cost; accept if NPV is positive.
• A higher discount rate gives a lower NPV.
• Payback ignores cash flows after the payback point and ignores profitability; payback and ARR ignore the time value of money.

Finance and accounting strategy

• Debt finance (a long-term loan) raises non-current liabilities and capital employed, so gearing rises.
• Equity finance (a share issue) raises capital employed only, so gearing falls; more shares also lower earnings per share until profit grows.
• earnings per share = profit for the year ÷ number of issued shares
• A lower dividend: dividend yield falls, dividend cover rises and retained earnings (reserves) rise.
• The auditors' report gives an independent opinion on whether the accounts give a true and fair view.
• A ratio has meaning only when compared with earlier years, with similar firms or with a target.
• Limitations of ratios: historical data, different accounting policies, window dressing, inflation, and no qualitative information.