AS Level Business formulas and key terms

Business and its environment

Enterprise

• Land = natural resources; labour = human effort and skills; capital = man-made aids such as machines and vehicles; enterprise = the risk-taking and organising of the other three.
• Value added = selling price − cost of bought-in materials and components.
• Opportunity cost = the benefit of the next best alternative given up (not all the alternatives).
• Risk can be estimated from past data; uncertainty cannot be predicted or measured.
• Entrepreneur: starts and owns the business and risks own money. Intrapreneur: an employee who innovates inside an existing business.
• Business plan contents: the product, market research, the people, operations plan and financial forecasts (costs, sales, cash flow).
• A multinational has operations (not just sales) in more than one country.

Business structure

• Sole trader: one owner, full control, keeps all profit, unlimited liability.
• Partnership: two or more owners share capital, skills, profit and (normally) unlimited liability.
• Private limited company: shares sold privately, limited liability, cannot sell shares to the general public.
• Public limited company: shares can be sold to the public and traded on a stock exchange; accounts are published; risk of takeover.
• A company is a separate legal person from its owners, so it continues when shareholders change (continuity).
• Franchise: the franchisee pays a fee and royalties to use the franchisor's brand and system.
• Co-operative: owned and run by its members, usually one member one vote. Social enterprise: trades to meet a social or environmental aim and reinvests most of its surplus.

Size of business

• Market capitalisation = number of shares issued × current share price.
• Market share (%) = firm's sales ÷ total market sales × 100.
• Horizontal integration: same industry, same stage of production.
• Backward vertical integration: joining with a supplier. Forward vertical integration: joining with a customer, such as a retailer.
• Conglomerate integration: joining with a firm in an unrelated industry, to spread risk.
• Merger: two firms agree to join. Takeover: one firm buys control of another; it is hostile if the target's directors oppose it.
• Joint venture or strategic alliance: firms work together on a project but stay separate.

Business objectives

• Order from broad to specific: mission statement → aims → objectives → strategy → tactics.
• SMART = specific, measurable, achievable, realistic, time-limited.
• Triple bottom line = economic (profit), social (people) and environmental (planet).
• CSR: a business considers the interests of society and the environment, going beyond what the law requires.
• Decision-making stages: set objectives → gather and analyse information → choose an option → implement → review against the objective.
• Objectives are broken down into targets and budgets for departments and individuals.
• Ethical decisions follow what is morally right, even when this raises costs or cuts short-term profit.

Stakeholders in a business

• Shareholders own part of a company; stakeholders are everyone with an interest. All shareholders are stakeholders, but not the other way round.
• Internal: owners/shareholders, managers, employees. External: customers, suppliers, lenders, government, local community.
• Suppliers want regular orders and prompt payment; lenders want interest and repayment on time.
• Government wants taxes paid, laws obeyed and jobs created.
• Stakeholders have rights (e.g. employees: fair pay, safe conditions) and responsibilities (e.g. employees: do the job as the contract says).
• Accountability: a business must explain and justify its actions to its stakeholders, e.g. directors report to shareholders.
• A stakeholder has more influence when the business depends on it and cannot easily replace it.

Human resource management

Human resource management (HRM)

• Labour turnover (%) = number of employees leaving in a year ÷ average number employed × 100.
• Job description = the duties and responsibilities of the job. Person specification = the qualifications, skills and qualities of the ideal person.
• Internal recruitment is cheaper, quicker and motivating; external recruitment brings new ideas and a wider choice.
• Redundancy: the job is no longer needed (not the worker's fault). Dismissal: the worker is removed because of conduct or poor performance.
• Unfair dismissal: no valid reason or no fair procedure, e.g. sacked for pregnancy or for joining a union.
• Induction = introducing a new employee to the firm; on-the-job = training while working; off-the-job = training away from the workplace.
• Collective bargaining: a trade union negotiates pay and conditions with the employer for all its members.

Motivation

• Maslow, from the bottom: physical (physiological) → safety → social → esteem → self-actualisation (self-fulfilment). A need motivates only until it is satisfied.
• Herzberg motivators: achievement, recognition, the work itself, responsibility, advancement.
• Herzberg hygiene factors: pay, working conditions, company policy, supervision, job security. They prevent dissatisfaction but do not motivate.
• Vroom: expectancy (effort → performance), instrumentality (performance → reward), valence (value of the reward). If any one is zero, motivation is zero.
• Piece rate = pay per unit made. Commission = a percentage of the value of sales made. Salary = fixed annual pay, paid monthly.
• Job enrichment = more responsibility and challenge. Job enlargement = more tasks at the same level. Job rotation = moving between tasks.
• Empowerment = giving employees authority to make their own decisions about their work.

Management

• Fayol's five functions: planning, organising, commanding, coordinating, controlling.
• Mintzberg interpersonal roles: figurehead, leader, liaison.
• Mintzberg informational roles: monitor, disseminator, spokesperson.
• Mintzberg decisional roles: entrepreneur, disturbance handler, resource allocator, negotiator.
• Autocratic: the manager decides alone and gives orders. Democratic: staff take part in decisions. Laissez-faire: staff are left to decide how to work. Paternalistic: the manager decides, but in the interests of staff, like a parent.
• Theory X manager: believes workers dislike work, avoid responsibility and need control. Theory Y manager: believes workers enjoy work and seek responsibility.
• Theory X leads to an autocratic style; Theory Y leads to a democratic or laissez-faire style.

Marketing

The nature of marketing

• Market share (%) = firm's sales ÷ total market sales × 100.
• Market growth (%) = change in total market sales ÷ original market sales × 100.
• Demand rises (curve shifts right): price and quantity both rise. Supply rises (curve shifts right): price falls and quantity rises.
• Price above equilibrium gives excess supply (a surplus); price below equilibrium gives excess demand (a shortage).
• Segmentation: geographic (where people live), demographic (age, gender, income, family size), psychographic (lifestyle, attitudes, personality).
• B2C: many buyers, mass advertising, emotional appeal. B2B: few large buyers, personal selling, long-term relationships.
• CRM: it usually costs less to keep an existing customer than to win a new one.

Market research

• Primary methods: questionnaires and surveys, interviews, focus groups, observation, test marketing.
• Secondary sources: government statistics, trade journals, market research reports, the internet, the firm's own sales records.
• Primary: up to date and specific to the firm, but costly and slow. Secondary: cheap and quick, but may be out of date or not specific.
• Quantitative data answers 'how many?'; qualitative data answers 'why?'.
• A larger and more representative sample gives more reliable results but costs more.
• Bias comes from leading questions, a sample of the wrong people, or too small a sample.
• Mean = total ÷ number of values. Median = the middle value in order. Mode = the most common value.

The marketing mix

• Goods are tangible (can be touched and stored); services are intangible and are used as they are produced. A USP is a feature that no rival product offers.
• Life cycle: introduction (low sales, usually a loss), growth (sales rise fast, profit appears), maturity (sales level off, competition is strong), decline (sales fall). An extension strategy, such as a new market or a new version, delays decline.
• Boston Matrix: star = high share, high growth; cash cow = high share, low growth; question mark (problem child) = low share, high growth; dog = low share, low growth. Cash from cash cows funds stars and question marks.
• Skimming = high launch price, lowered later. Penetration = low launch price to win market share. Competitive = price set in line with rivals. Psychological = e.g. $9.99 instead of $10.
• Price discrimination = different prices to different groups for the same product. Dynamic pricing = price changes as demand changes.
• Cost-based pricing: selling price = unit cost + (mark-up % × unit cost).
• Advertising informs or persuades through paid media; sales promotion is a short-term incentive to buy (e.g. a discount). Channels: producer → consumer (direct), producer → retailer → consumer, producer → wholesaler → retailer → consumer.

Operations management

The nature of operations

• Added value = selling price − cost of bought-in materials and components.
• Labour productivity = total output ÷ number of workers (units per worker in a time period).
• Efficient = low waste and low cost per unit. Effective = achieves the aim. A business can be efficient without being effective.
• Capital intensive = high share of machinery in production: low unit cost at high output, but high fixed costs and little flexibility. Labour intensive = high share of labour: flexible and personal, but higher unit labour cost.
• Job = one-off products made to order. Batch = groups of identical items, one group after another. Flow = continuous production of identical items on a line.
• Mass customisation = flexible, computer-controlled flow production that gives each customer some choice at close to mass-production cost.
• Moving from job or batch to flow needs large capital spending, retraining and steady high demand. Sustainable operations usually raise costs at first but can cut waste and improve the firm's image.

Inventory management

• Buffer inventory = the minimum level held in case of late deliveries or a sudden rise in demand.
• Lead time = time between placing an order and receiving the delivery.
• Re-order level = (daily usage × lead time in days) + buffer inventory.
• Maximum inventory = buffer inventory + re-order quantity. Time between deliveries = re-order quantity ÷ daily usage.
• JIT: materials arrive only when needed for production. It cuts holding costs and frees working capital.
• JIT needs reliable suppliers, good communication and flexible workers. Risks: production stops if a delivery is late, and bulk-buying discounts are lost.
• Supply chain management = planning and controlling the flow of materials and goods from suppliers through to the final customer.

Capacity utilisation and outsourcing

• Capacity utilisation (%) = current output ÷ maximum possible output × 100.
• Current output = maximum output × utilisation %. Maximum output = current output ÷ utilisation %.
• Fixed cost per unit = total fixed costs ÷ output. It falls as utilisation rises.
• To raise utilisation: increase sales (promotion, lower prices, new markets), take on work for other firms, or cut capacity (sell or rent out assets, close a site).
• Spare (excess) capacity = 100% − capacity utilisation %.
• Outsourcing benefits: lower costs, specialist skills, fixed costs become variable, the firm can focus on its core activities, extra capacity when demand is high.
• Outsourcing drawbacks: less control over quality and delivery, dependence on the supplier, risk to reputation and to confidential information, possible job losses.

Finance and accounting

Business finance

• Working capital = current assets − current liabilities.
• Current assets = inventory + trade receivables + cash. Current liabilities = trade payables + overdraft and other debts due within one year.
• Capital expenditure = spending on non-current assets that last more than one year (e.g. machinery, buildings). Revenue expenditure = day-to-day spending (e.g. wages, rent, materials, repairs).
• Profit = revenue − costs. Net cash flow = cash inflows − cash outflows.
• Bankruptcy: a legal process for an individual (such as a sole trader) who cannot pay debts.
• Liquidation: the company stops trading and its assets are sold to pay creditors.
• Administration: an appointed administrator runs an insolvent company and tries to rescue it or get a better result for creditors.

Sources of finance

• Internal: owners' investment, retained earnings, sale of unwanted assets, sale and leaseback, cutting working capital (less inventory, faster collection of receivables).
• Short-term external: bank overdraft, trade credit, debt factoring (selling unpaid invoices to a factor for immediate cash, less a fee).
• Long-term loans: bank loan, mortgage (secured on property), debentures (long-term loan certificates issued by a company, paying fixed interest).
• Equity: share capital, new partners, venture capital (funds for risky young firms in return for a share of ownership). No interest and no repayment, but control is diluted.
• Leasing = paying to use an asset that the firm never owns. Hire purchase = paying in instalments and owning the asset after the last payment.
• Micro-finance = very small loans to people who cannot get normal bank loans. Crowd funding = small amounts from many people, usually online. Government grants normally do not have to be repaid.
• A firm that already has high debt should avoid more loans: interest must be paid whatever the profit.

Forecasting and managing cash flows

• Net cash flow = total cash inflows − total cash outflows.
• Closing balance = opening balance + net cash flow.
• Opening balance of a month = closing balance of the month before.
• Inflows include cash sales, payments from trade receivables, loans received and owners' capital. Outflows include wages, rent, payments to suppliers, loan repayments and purchases of assets.
• Depreciation is not a cash flow, so it never appears in a cash flow forecast.
• To improve cash flow: speed up inflows (shorter credit to customers, debt factoring, selling assets, sale and leaseback) or slow down and cut outflows (longer credit from suppliers, leasing instead of buying, lower inventory, cutting costs).
• An overdraft or loan covers a shortage but must be repaid with interest.

Costs

• Total cost = fixed costs + (variable cost per unit × output). Average cost = total cost ÷ output. Marginal cost = extra cost of producing one more unit.
• Contribution per unit = selling price − variable cost per unit. Total contribution = contribution per unit × units sold.
• Profit = total contribution − fixed costs. Contribution is not profit.
• Break-even output = fixed costs ÷ contribution per unit.
• Margin of safety = actual (or planned) output − break-even output.
• Output for a target profit = (fixed costs + target profit) ÷ contribution per unit.
• Special order with spare capacity: accept if the price is above variable cost per unit, since fixed costs do not change. Check also for effects on existing customers and prices.

Budgets

• Variance = actual figure − budgeted figure; then label it favourable (F) or adverse (A).
• Revenue or profit: actual above budget = favourable; actual below budget = adverse.
• Costs: actual below budget = favourable; actual above budget = adverse.
• Incremental budget = last period's budget plus or minus a percentage. Quick to set, but past waste is carried forward.
• Flexible budget: flexed variable cost budget = budgeted cost per unit × actual output.
• Zero budgeting: every budget starts at zero and all spending is justified. It removes waste but takes a lot of management time.
• Benefits of budgets: planning, coordination, control, motivation through targets. Drawbacks: inflexible, can demotivate if imposed or unrealistic, may encourage short-term thinking or wasteful spending to use up the budget.