Barter
Barter: the exchange of goods for other goods without the use of
money.
Example of barter: exchange banana for breadfruit.
Problem associated with barter
1.lack
of double coincidence of wants- people only not had to find
someone who wanted their surplus, but the person they found had to
offer what they wanted(.i.e. exchange could only take place if each party
has wants what the other has to offer).
2.divisibility of good-some goods could not be split in smaller
pieces(.e.g. if one axe head was worth half of a live pig, then it was not
possible to trade with one axe head because you cannot have ,have half
of a live pig).
3. Store of value-some products, .e.g. meat and vegetables, are
Perishable and cannot be store for long periods of time.
Goods are bulky and difficult to transport-commodities are not
4.
generally acceptable in large quantities
5. The rate of exchange-the right quality acceptable for the other
item
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Money
Money is anything that is commonly acceptable as an instrument,
or medium, of exchange.
Features of exchange
1. It must be acceptable-everyone must be willing to accept it or
use it
2. It must be durable-it must be long lasting sine it pass through
different hands
3. It must be homogeneous-it must be identical in look, size and
weight
4. It must be divisible-easy to divide into smaller pieces so change
could be given
5. It must be relatively scarce-it must be in small amount in that
way the value can be maintain
6. It must be portable-easy to carry around
Function of money
Function of money
Types of Money
PRINCIPLE OF BUSSINESS NOTES
Electronic commerce more popularly called ecommerce is the buying and selling of goods and service
using the internet. It allows for a full range of trading activities over the internet such as advertising,
placing orders, delivery and making payments
An organization is a system that groups people together towards establishing a common goal.
Business organizations are centered on creating goods and services for profit. There are several types
of business organizations that one can start.
Forms of Business Organizations:
Sole Trader
Partnership
Private Limited Liability companies
Public limited Liability Companies
Multinationals
Franchise
Conglomerates
Cooperatives
Nationalized Industries
Local and Municipal Authorities
Government Departments
All forms of business organizations can either be characterized as a part of the private sector or the
public sector.
The Private and Public Sector
All privately owned industries, services and other business activities are a part of the Private Sector.
All industries, services and any other business activities that are owned by the state are a part of the
Public Sector. For example, the commercial banks are a part of the Private Sector, and public schools
and hospital are a part of the Public Sector.
The sole trader
The sole trader as the title suggest is a single business owner. This person may employ several other
persons to work in the organization, but he has to make all decisions, acquire all the capital required
and other resources needed for the business on his own.
Advantages
Benefits of operating alone are: all profits are taken by the owner. Consultations are not necessary for
decision making and the legal requirements for start-up is very simple as the proprietor only needs
to submit the registration documents for the business.
Disadvantages
The sole proprietor must work for long hours resulting in little time for family. There is also limited
capital to inject into the business and he alone bears all the risk of the business. He does not have
limited liability and therefore if the business goes bankrupt he may lose his personal assets e.g. house
PRINCIPLE OF BUSSINESS NOTES
and car. There is a lack of expertise in areas of business where he is not knowledgeable which may
limit success.
Partnership
A partnership business is formed legally by a minimum of two and a maximum of twenty persons in
a business. There are two types of partnership forms:
-Limited Liability Partnership at lease one partner must have unlimited liability
-Unlimited liability Partnership- all partners have unlimited liability.
A deed of partnership must be drafted which set out the terms and conditions of the partnership.
Types of Partners
-Ordinary/General Partners : take an active part in the running of the business.
-Sleeping Partners : invest in the business but do not take an active part in the business.
-Limited Liability Partners : assets will not be lost if the business goes bankrupt.
Advantages
Since more than one person is involved more capital can be raised to inject into the business. There
is more expertise and work load is shared. The risk of the business operation is also shared.
Disadvantages
All partners will be affected by the action of each partner since each person represents the business.
Decision making may be very slow if partners are not in agreement. There are high risks for partners
who do not have limited liability.
Limited Liability Companies
Limited Liability Companies are companies in which shareholders/investors are protected as they
will not lose their personal assets if the business goes bankrupt. They are not liable for the debts of
the company beyond their level of investment. Therefore if a shareholder buys shares in a company
valuing $5000 then he will only lose that $5000 invested and his personal assets.
There are two types of limited liability companies.
1. Private Limited Liability Company
2. Public Limited Liability Company
The Private Limited Company only allows friends, relatives and coworkers to purchase shares and to
be a part of the company. Its privacy is also protected by the fact that unlike the public limited
liability company, it does not have to publish its balance sheet in the newspaper. The public limited
company allows members of the public to purchase shares. The shares/stocks of public limited
companies are traded on the stock market.
PRINCIPLE OF BUSSINESS NOTES
Legally the private limited company can only have a minimum of two and a maximum of fifty
persons to join. Whereas the public limited liability company has a minimum of seven members and
there is no limit to the number of shareholders that can join.
The legal procedures for both these types of companies are lengthy as they must submit the several
documents.
The Companies Act contains the laws relating to companies. To comply with certain requirements
which were laid down by the Companies Act, the promoters of the company must present the
following documents:
-The Memorandum of Association
-The Articles of Association
-Statutory Declaration
-Certificate of Incorporation
-Certificate of Trading
The private limited company may begin trading after receiving the certificate of incorporation, but
the public limited company must issue a prospectus inviting the public to subscribe for shares before
a certificate of trading is issued.
A main advantage of limited liability companies is that their shareholders enjoy limited liability.
This type of business is assured continuity of existence as it has several members. Unlike the sole
trading business that comes to an end if the owner dies or is very ill. These firms can access capital
for expansion by selling shares.
The disadvantages however, are that they are not easy to start due to the number of legal procedures
required. For the private limited liability company, shares are not easily transferable as other
members must agree to have persons join the company. However, shareholders in public liability
companies are not restricted to sell their shares to whomever they wish to.
Multinationals
A multinational company is a global organization directed from a main centre or office. Examples of
Multinational companies in the Caribbean are Shell, Kentucky Fried chicken and Digicel.
Some of the benefits of multinationals to the Caribbean are that they provide employment, introduce
advanced technology and provide well needed goods and services.
However, there are disadvantages. Profits earned are repatriated to the main centre in their home
country. They may exploit the workers by paying low wages and having them work long hours. They
cause unemployment when they close down to take advantage of cheaper labour and lower
operational cost in another country.
PRINCIPLE OF BUSSINESS NOTES
Franchise
some businesses begin by the owner acquiring a franchise to operate under an already existing
business name. A franchise is an agreement between a franchisee (the person requesting permission
to set up business) and the parent company to allow the franchisee to sell its products or services.
Many multinational companies expand into new regions through franchises.
The franchisee bears the name of the parent company. They must abide by all the rules and
guidelines outlined by the parent company to sell its products. It pays royalties (a fee) to the parent
company to operate under its business name.
Conglomerates
This is a group of unrelated companies (e.g. a restaurant, shoe store a travel agency etc,) under one
umbrella. A parent company owns a controlling stake in each company which conducts business
separately.
Nationalized Industries
nationalized industries are government owned and controlled businesses. A chairman and board of
directors are appointed by the government to run them. Businesses run by the government in most
countries tend to be those that provide essential services such as water, electricity and
transportation. Nationalized industries are beneficial to a country as they provide essential goods
and services at very affordable cost or free. For example, a water company providing standpipes to
rural communities. Although beneficial, they operate at high costs to the society as their operations
tend to be inefficient. They are supported by taxpayers money and do not operate on the basis of
making profits.
Cooperatives
They are business entities owned by their members who purchase shares to join them. They are
usually established because of a need existing among a number of persons who wish to acquire
particular goods and services at a reasonable cost. For example, members of a credit union purchase
shares in these entities in order to obtain loans at low interest rates.
There are several types of cooperative, for example, Retail/Consumer cooperatives and Producer
cooperatives. Shares invested in a retail cooperative are used to buy goods in bulk at a very low cost
and then resold to members. Producer cooperatives may include a group of farmers who will obtain
raw material at a low cost.
Profits are distributed to members based on the amount of goods that they buy and not on the
amount of investment that they make in the business. At the annual general meeting, shareholders
elect their management committees from among their members and vote on proposals put forward.
Benefits of being a part of a cooperative are therefore obtaining goods and services at low costs and a
PRINCIPLE OF BUSSINESS NOTES
guaranteed market as members are also customers. A disadvantage is that its management may be
inexperienced as they are chosen from their membership.
Government Departments
These include the government ministries e.g. the Ministries of Finance and Education. A minister is
appointed in charge of each ministry. These departments are very important to the running of
government.
Local and Municipal Authorities are government bodies which are run by elected local officials,
e.g., the Kingston and St. Andrew Corporation (K.S.A.C.) in Jamaica. These bodies fulfill local needs
and allow for more balanced local development. They carry out duties such as cleaning gullies and
drains and fixing community roads.
PRINCIPLE OF BUSSINESS NOTES
Economic Systems
Every economy is faced with a fundamental economic problem. In every economy, whether rich or
poor, there are limited resources and unlimited wants i.e., the resources of a country are not enough
to satisfy the wants of all its citizens. Since the resources of a country is limited and wants unlimited,
choices will have to be made. For example, the government may have to decide whether to spend
more money on schools, hospitals, transportation or on road work. The process of choice begins with
a scale of preference. This is a list of all options in order of preference. For example
Scale of Preference:
-hospitals
-transportation
-schools
-road work
The option to build hospitals being placed at the top of the scale of preference indicates that this
choice is most preferred as it yields the greatest satisfaction from the resources to be spent.
Transportation is the opportunity cost of this choice as it is the second most preferred option that
had to be given up to accommodate the building of hospitals. Opportunity cost is defined as the next
best alternative foregone as a result of making a choice.
Economic Systems
An economic system is a programme that a country uses to organize production and the distribution
of goods and services, to maximize the benefits to its society. Economic systems vary worldwide. In
this lesson we will discuss four types. These are the Subsistence, Free Market, Planned and Mixed
economic systems. Governments choose particular economic programmes that will effectively
manage their economies, bring about economic growth and improve the lifestyles of its citizens. The
following economic questions must be answered by managers of economies.
1. What to produce?
2. How much to produce?
3. What methods of production are to be used?
4. How will goods and services be distributed?
Answers to questions 1, 2, & 4 will depend on the economic system of each country.
Subsistence Economic Systems
The Subsistence economic system as its name suggests are economies in which just enough is
produced by its citizens for their survival. Since there is no surplus wealth is not created. Subsistence
economies exist in many villages in Africa and South America among peoples who live in simple
societies.
PRINCIPLE OF BUSSINESS NOTES
Free Market Economic System also called Free Enterprise or Laissez Faire
Private individuals own the greater share of the property and capital resources that are used in the
production process. There is little or no government intervention in the economic activities of the
country. The government may provide essential services e.g. transportation and water. Therefore the
private sector provides the majority of goods and services.
Advantages
-Competition among business will result in increased quality of output and lower prices.
-Competition also leads to innovation i.e. newly invented goods, services and production processes.
-Consumers are free to choose the goods and services that they wish to purchase and therefore
production is based on their demands.
Disadvantages
-Consumer exploitation by suppliers may go unchecked by government as there is little or no
government intervention.
-There is an unequal distribution of wealth as goods are purchased by only those who can afford it.
-In the case of no government intervention public goods such as postal service, streetlights and roads
are not provided
The Planned or Controlled Economic System
Property and capital resources are owned by the government on behalf of the society. The
government makes all decisions concerning the use of the countrys resources and the distribution of
its output. Goods and services are provided through government-owned and run operations. These
include factories, telephone services, newspapers, television stations, etc.
Advantages
-There is a fair distribution of goods and services as the government determines how goods are
distributed.
-Citizens in these economies enjoy a least a basic standard of living as the government provides all
goods and services.
Disadvantages
-Resources are inefficiently allocated as consumers are not free to indicate their demand for goods
and services. Therefore resources are not sent to where they are most needed but into industries
based on the governments decision.
-The lack of competition reduces innovation and the motivation to produce quality output.
PRINCIPLE OF BUSSINESS NOTES
Role of Government
Regulate business activities to protect consumers. Government agencies ensure product standards as
well as that various legislations are adhered to ensure the protection of consumers rights.
Functions Of A Business
The functions of a business are:
1. To produce high quality goods and services that will satisfy needs and wants.
Entrepreneurs enter business to make profits. They must be very keen in identifying those goods and
services that will create high demand make profits.
2.To create employment
Business will need all categories of workers to carry out the various tasks required to achieve its
goals. If the business is profitable and expands then more workers will be needed for its operations.
3.To make a profit
The reason for the establishment of a business is to make profits. If businesses are not profitable, its
owners will not be encouraged to continue operating. Profits are used to reinvest in the business for
its expansion.
Corporate citizen is the term used to describe the responsibilities that businesses have within their
environment. As a good corporate citizen business must strive to have a good relationship with their
community.
Good corporate citizenship includes:
-Support for the community through community projects, sports and youth clubs.
-Being environmentally aware by reducing pollution
-Providing job opportunities for community members e.g. a holiday work programme
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Questinon 1
Explain two ways in which the barter system limited trade in early economies.
Answer
PRINCIPLE OF BUSSINESS NOTES
A common measure of value did not exist. It was difficult to ascertain the value of goods exchanged.
It therefore would hinder trade as sometimes persons would not want to feel cheated.
A double coincidence of wants must exist for trade to take place. An individual who wishes to trade
must have what other persons want to trade his goods. If this does not exist then trade cannot take
place.
Question 2
State one advantage and one disadvantage of specialization.
Answer
An advantage of specialization is that it increases output.
A disadvantage of specialization is that it discourages quality work because of monotony.
Question 3
Show how two functions of money facilitate trade.
Answer
Money is a common measure of value. Persons can therefore determine the value of commodities
and know how much to accept in exchange for goods and services.
Money is a medium of exchange and therefore accepted by everyone. Persons will not have
difficulties to buy or sell goods and services.
Question 4
Starting a business is a lot of hard work and very costly. Why would an individual want to start a
business?
Answer
An individual may wish to gain financial independence. A successful business can earn high levels of
profits.
Using the skills and knowledge acquired to operate a profitable business.
Question 5
State the form of business organization that you believe is most advantageous to form. Give two
reasons why.
Answer
Choose one of the following:
Sole trader Decisions are made quickly and there is little legal requirement to start the business.
Partnership more capital can be raised, specialization of functions is more efficient
Limited liability Company shareholders are not liable for the companys debts beyond their level of
investment, continuity of existence is assured.
Question 6
PRINCIPLE OF BUSSINESS NOTES
State two differences between the Free Market and the Planned economic systems.
Answer
In the free market economy the consumer is king i.e. the consumer determines what goods and
services are to be produced based on their demand. In a planned economy the government makes
decision concerning the distribution of goods and service.
Competition in a free market economy leads to efficiency and innovation.
However, in a planned economy, the lack of competition reduces innovation and the motivation to
produce quality output.
Question 7
Explain the roles of two stakeholders in business activities.
Answer
The role of the government is to monitor and regulate business activity to ensure that the consumer
is treated fairly.
Employees must work efficiently to create quality goods and services.
Employees must adhere to the rules and relations of the company.
Question 8
Identify a business activity within your community and discuss two contributions of this business to
your community.
Answer
Sallys bakery produces good quality bread in various sizes to meet the requirements of customers.
The prices are also very affordable. The bakery makes it convenient for community members as they
do not have to travel a far distance to obtain this product.
Sallys bakery also employs persons from the community. The bakery is very popular, and so workers
are paid an adequate salary to support their family.
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Finance/Accounts
The accounts department makes and receives all payments on behalf of the business and records all
financial transactions
Marketing
This department creates awareness for the firm products and motivates consumers to buy. They also
carry out market research to identify customers needs
Human Resources/Personnel
The human resource department recruits and selects staff for the business organization. They are
also responsible for staff training and welfare
Functions Of Management
Planning
All managers must plan, that is, setting out steps for the attainment of future organizational
objectives. It involves formulating the policies and programmes for the firm.
Organizing
Organization reduces cost, time, chaos and conflicts. Managers must obtain all the necessary tools,
machinery and personnel for each task and arrange all tasks so that they are done in the most
efficient manner.
Directing
Managers must guide subordinates by giving them instructions to perform the tasks assigned.
Delegating
Delegating duties involves giving others (e.g. supervisors) the authority to have specific tasks
completed through the management of others. Therefore, supervisors will ensure that workers
complete tasks assigned. Delegation reduces the workload of the manager.
Controlling
Managers must continually measure the activities of subordinates, ensuring that all activities
conform to plan.
Coordinating
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Managers must bring together all the various organizational tasks so that the organization may
function harmoniously.
Motivating
Managers must inspire workers to perform their tasks well.
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ponsibilities Of Management
Management must be aware of their responsibilities to the various groups that they interact with for
the successful running of the business.
2. To employees Managers must pay adequate wages and provide good working conditions.
3. To customers Managers must ensure that products are of good quality and are reasonably
priced.
4. To the society Managers must find ways to reduce harmful air pollution and the discharge of
harmful waste created by the production process into rivers and seas.
Organizational Charts
An organizational chart is a diagram of the organization of an enterprise. Its pyramid shape
illustrates the hierarchy system that exists in the organization. The most senior position in the
organization is placed by itself at the apex. The pyramid gets wider towards the bottom depicting the
greater number of workers at its base.
PRINCIPLE OF BUSSINESS NOTES
Those who have the power to issue commands have authority in an organization. In the organization
chart above the sales manager has the authority in the Sales department. All persons with the same
level of authority are placed at the same level on the chart. For example the sales manager and the
accounts manager have the same level of authority in their various departments.
Responsibility is the capacity to accept duties and to carry out their tasks. Both sales supervisors are
responsible to the sales manager.
The chart shows the following:
-each persons position
-the number of levels of managers
-to whom each employee is responsible (reports) to
-the span of or (area) of control for senior staff members.
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The Functional organizational chart combines the straight line of command of the line organization
with horizontal dotted diagonal lines representing functional authority. The dotted diagonal lines in
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the figure above show the authority that the Human Resource Manager has over other departments.
The Human Resource Manager is allowed authority in these department over human resource
matters only e.g. to hire and fire workers. He therefore cannot give directives on production or
marketing matters.
Line and Staff Organizational Chart
The Line and Staff organizational chart combines the line and functional organization with the
addition of staff personnel. Staff workers assist and advise line workers. Staff workers include
consultants, advisors, company lawyers, executive secretary, auxiliary workers etc. Staff officers do
not have authority, that is, the power to delegate tasks to subordinates in the organization. Their
main role is to advise and assist line officers. This is why there are no vertical lines connecting staff
officers to any other member of staff on the chart. They are therefore, placed at the side directly
below the line officer whom they assist or advise.
Committee Organizational Chart
Committees are advisory bodies. They are usually appointed to advise organizations. Examples of
committees include; parent teachers associations and student councils which are committees within
a school organization. Committees usually delegate certain duties to sub-committees. For example,
PRINCIPLE OF BUSSINESS NOTES
an executive committee may appoint a finance committee to advise it on financial matters. Note that
an element of the line organization exists in the committee organization as all sub-committees are
responsible to the executive committee.
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Integrity
It is important for a leader to posses this quality as it makes them trustworthy. They are perceived as
honest and therefore command the respect of their subordinates.
Intelligent
This is a very important characteristic for leaders. It refers to being rational and having good
judgment when making decisions. Leaders are decision makers and therefore need to be intelligent.
This characteristic also refers to shrewdness and therefore describes someone who is smart,
perceptive and wise.
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PRINCIPLE OF BUSSINESS NOTES
Leadership Styles
Autocratic
This type of leader makes all decisions and asks members only to be obedient in following orders.
He will give detailed instructions and closely supervise subordinates.
Advantage
Time is not wasted consulting with others to reach a decision.
Disadvantage
Workers must comply with directives given by the leader and therefore the organization will not
benefit from workers initiative and innovative ideas
Democratic
A democratic leader allows the participation of subordinates in decision making. The leader asks for
progress reports at intervals instead of continuous close supervision.
Advantage
Discussion between management and workers leads an improved relationship.
Disadvantage
The variety of opinions to consider may slow down the decision making process.
Laissez-Faire
This type of leader will give minimum directives and allow maximum freedom for workers to make
decisions about completing their tasks.
Advantage
The firm will benefit from the initiative and innovation of workers.
Disadvantage
It may lead to chaos in the organization. This type of style can only be used with persons that are very
self- motivated and disciplined.
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c. there is a violation of the collective agreement or work rules. (e.g. if employers have not abided by
the agreement between management and the trade union.)
The grievance procedure is a set of steps which employees can use to solve any grievance that may
arise.
STEP 1 - The employee discusses the complaint with his or her supervisor. If the complaint is not
satisfactorily dealt with by the supervisor the employee may take the matter further.
STEP 2 - The employee will discuss the matter with the head of department.
STEP 3 - The employee, along with the union delegate, will discuss the matter with top
management.
STEP 4 - If the grievance still exists, the union official will seek conciliation or mediation from the
Ministry of Labour or any independent body, i.e. the friendly intervention of these bodies into the
dispute for the purpose of adjusting the differences.
STEP 5 - The matter is sent to arbitration, i.e. before the court where the judge will make the final
decision. Therefore both parties; employer and employee must accept the judges decision.
Managers must show care when dealing with workers daily. Workers are not machines and cannot
be treated as such. Managers should try to understand each worker and their various issues. Workers
may have challenges with illnesses, family, financial etc. which may affect their performance on the
job.
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Role Of Teamwork
Many firms adopt a teamwork approach to complete tasks more efficiently. For example a major
Caribbean airline encourages its workers to work as a team to achieve the main task of having each
flight leave on time. Workers therefore move to various positions if needed, to have each flight leave
on time.
Benefits of Teamwork
1. It improves the working relationship among workers
2. It increases communication
3. Skills and knowledge are passed on through the interaction
4. It satisfies the social needs of workers
Groups are formed naturally by persons with similar interest, common goals and similar past
experiences in an organization. The establishment of various clubs, work socials and outings will
encourage greater interaction among workers, better relationships and a teamwork approach to
completing tasks.
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Answer
The marketing department promotes the firms products to encourage sales. Consumers must be
made aware of what is being offered and encouraged to buy. They also conduct market research to
identify the needs and wants of consumers. Companies depend on consumers support for their
success, and so ascertaining consumers taste is very important.
Question 2
Outline two functions of management and say how each is important to the efficient operation of a
business.
Answer
Controlling involves the continuous assessment of the work done by subordinates. Poor quality work
is a reflection of the company and so managers must ensure that quality work is done.
Planning involves outlining all future activities that are required to achieve the organizations
objectives. Planning activities involve all the programmes and policies that will guide the firms path
to success.
Question 3
Give two examples to show how managers can fulfill their responsibilities to one group of business
stakeholders.
Answer
Managers can full their responsibility to customers by proving quality goods and services. A system
that ensures standards should be implemented. Prices must also be affordable. All measures must be
taken to operate as efficiently as possible so that production cost are kept low resulting in affordable
selling prices.
Question 4
(a) Draw an organizational chart of your school or business organization.
(b) Identify the type of organizational chart drawn
(c) Identify the span of control of one person in authority on the chart
(d) Identify two persons at the same level of authority.
Answer
(a)
PRINCIPLE OF BUSSINESS NOTES
Discuss two ways in which teamwork can improve the efficiency of an organization.
Answer
Teamwork gives workers the opportunity to make collaborative decisions and support each other to
accomplish tasks more effectively.
Teamwork allows for specialization in various parts of a task based on the skill of each team member.
Specialization increases output.
Question 10
Discuss two benefits that a business will derive from using Management Information Systems.
Answer
It reduces labour costs as the computer compiles and analyses all the data. This increases the
efficiency of employees and reduces production costs. It provides timely information that helps the
business. This allows for better decision making as information is available when needed.
Role Of An Entrepreneur
An entrepreneur is one who undertakes the risk of investment to create and market a good or service
for financial gains. He is very perceptive and takes advantage of business opportunities that will
generate high profits. Entrepreneurs can be sole traders, partners in a business or a group of
shareholders.
Entrepreneurs are of vital importance to an economy. They are motivated by their own self-interest
to make profits and in so doing provide employment, create goods and services and generate revenue
impacting on the economys level of national income and hence potential for economic growth.
The entrepreneur is a shrewd investor and takes calculated risks i.e. ones that minimize loss when
choosing investment opportunities. The entrepreneur is the conceptualizer of the initial business
idea. He must identify the best resources that suit the business operation and ensure the efficiency of
each resource employed. For example, training workers, using machinery to increase labour
productivity, maximizing the use of factory and shop space and borrowing money at low interest
rates. The entrepreneur must continuously evaluate the performance of his ventures. Information
can be garnered from the balance sheets and Management Information Systems.
Personal Qualities of an Entrepreneur
Entrepreneurship requires the following characteristics for success:
1. The creativity to innovate new product and ideas.
2. The drive and determination to be successful.
3. The ability to take calculated risks.
4. The flexibility to adapt to changes in the market and industry.
PRINCIPLE OF BUSSINESS NOTES
5. Very goal- oriented to purposely and aggressively accomplish task and meet objectives.
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1. Conceptualization
All business ventures begin with the conceptualization of an idea. At this initial stage the product or
service idea is envisioned. Most Entrepreneurs identify a need in the market i.e. a service that is not
being provided or a product that does not exist. If the product or service already exists then ideas to
make improvements may be conceptualized.
2. Research
The entrepreneur is a shrewd investor and takes calculated risks. Before investing money in a
business venture a market research must therefore be done to ascertain the extent of the need for the
product or service. This helps to minimize losses. A market research involves gathering information
about a potential market to help an investor make decisions about entering that market.
3. Identification of resources
What resources are needed to start the business?
If the market research is favourable the entrepreneur must now identify the necessary resources to
operate business. The resources required are land, labour and capital. Land refers to location or
place used to set up a business. This may be bought, rented or family home. Labour employed must
PRINCIPLE OF BUSSINESS NOTES
be qualified and skilled to efficiently carry out their duties. Capital includes money, raw material and
assets such as machinery and equipment.
4. Creation of a business plan
Preparing a business plan is very important before the start of a business. This will help the business
to ascertain whether or not the business will be profitable. A business plan outlines the goals of a
business and the strategies that will be employed to achieve them. Usually financial institutions
require that a business plan be presented when a loan is requested for business investment.
5. Acquisition of funds
There are several ways of acquiring funds to start a business. There are a myriad of financial
institutions that are willing to assist small businesses once their business plans are deemed
workable. The investor must weigh the advantages and disadvantages of acquiring funds from the
various financial institutions. The cost of borrowing i.e. the interest rate charged and the length of
the repayment period are factors to consider.
Funds may be borrowed from friends and relatives that may attract a lower or no repayment cost and
a more flexible repayment schedule. Funds can also be acquired from personal savings. Encouraging
partners or selling shares are ways of avoiding high costs of capital.
6. Operation of a business
A business must be efficiently operated to ensure high quality goods and service. This is important to
keep existing customers and for business growth. Many companies employ an operation manager to
design and oversee its operations. This person develops and manages the various processes used to
create goods and services efficiently to ensure customer satisfaction.
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Human Resources/Personnel
The human resource department recruits and selects staff for the business organization. They are
also responsible for staff training and welfare.
The Purchasing Department
This department is responsible for the purchasing of the firms raw material, stationery and goods for
re-sale.
Customer Service/ Customer Relations Department
This Department bridges the gap between a business and its customers. it deals with customers
queries, advising and assisting customers to place orders and handling customers complaints.
Legal Department
This department is concerned with legal problems that might arise for the company. For example,
compensation for employees and customers, who have brought lawsuits against the company.
Research and Development (R&D)
This department is involved with research to explore ways of improving the companys existing
products, developing new ones and identifying efficient processes to increase production. This
department works closely with the marketing department as products developed must satisfy
consumers needs.
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A business is not considered a legal entity if it is not registered as business in the country where it
operates. All persons desirous of starting a business must first be registered with the government
agency authorized to carry out registration of business in their country.
A sole trader only needs to register his business by meeting the requirements outlined for sole
traders by the registering office and filling out the required documents.
Partnerships are also registered by the completion of a registration document. The names of all the
partners must be listed on the document. Partners in a business are advised to draft a Deed of
Partnership. This document sets out all the rules that govern the partnership and will thus help to
prevent conflict among partners.
The formation of public and private limited liability companies involves the preparation of a number
of documents.
The Companies Act contains the laws relating to companies. To comply with certain requirements
which were laid down by the Companies Act, the promoters of the company must present the
following documents:
1. The Memorandum of Association this document governs the companys relationship with
the outside world. It contains:
(a) The name of the company
(b) The address of the registered office
(c) The objectives of the A statement of limited liability to members
(d) The amount of capital to be raised by the selling of shares and the types of shares to be issued
(e) The number of shares to be taken by the directors
(f) Statement of intent to form a limited liability
2. Articles of Association this document contain the internal rules and regulations which
govern the company. It contains:
(a) The rights and obligations of the directors
(b) The procedures for calling an annual general meeting
(c) Procedures for electing directors
(d) The borrowing powers of the company
In order to effect the registration of a company, the Memorandum and Articles of Association must
be prepared by a lawyer or any person named in the articles as a director or company secretary and
sent to the companies registering office.
3. Statutory Declaration this document states that the promoters of the company have
compiled with the Companies Act. It is a signed statement from each director certifying their
willingness to serve.
PRINCIPLE OF BUSSINESS NOTES
4. Certificate of Incorporation
Once all three documents above have been submitted and the Registrar of Companies is satisfied that
all is in order, it will enter the name of the company on the register, and issue a certificate of
incorporation. The certificate of incorporation is proof that all requirements of the Companies
Act have been complied with. The certificate of incorporation establishes the firm as a legal body.
5. The Incorporated Company
A company always means an incorporated company. If a company is not incorporated, it is really a
large partnership. Every business that has more than twenty shareholders must be registered as an
incorporated company. The advantage of incorporation is that each members liability is limited. At
this stage it is only the private limited company that may begin trading.
6. The Prospectus
The public limited liability company must first publish its prospects inviting the public to subscribe
for shares. This may be a publication in the newspaper or in another public media. The prospectus
will contain information on the assets, liabilities and profit levels of the company.
7. Certificate of Trading
Once the public limited liability company has collected the total amount of share capital stated in the
memorandum, the company will then be issued with a Certificate of Trading. This will allow the
company to start trading.
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Since more than one person is involved, more capital can be raised to inject into the business. There
is more expertise and work load is shared. The risk of the business operation is also shared.
Disadvantages
All partners will be affected by the action of each partner since each person represents the business.
Decision making may be very slow if partners are not in agreement. There are high risks for partners
who do not have limited liability.
Private Limited Liability Company
Advantage
A main advantage of limited liability companies is that their shareholders enjoy limited liability. This
type of business is assured continuity of existence as it has several members. Unlike the sole trading
business that comes to an end if the owner dies or is very ill. This firm can access capital for
expansion by selling shares. This business also has privacy as its balance sheet does not have to be
published.
Disadvantage
The disadvantage is that they are not easy to start due to the number of legal procedures required.
For the private limited liability company, shares are not easily transferable as other members must
agree to have persons join the company. However, shareholders in public liability companies are not
restricted to sell their shares to whomever they wish to.
Public Limited Liability Company
Advantages
A main advantage of limited liability companies is that their shareholders enjoy limited liability. This
type of business is assured continuity of existence as it has several members. Unlike the sole trading
business that comes to an end if the owner dies or is very ill. This firm can access capital for
expansion by selling shares. Note that these advantages are similar to the private limited company.
However, added advantages are that shares are easily transferrable as they may be sold to anyone on
the stock market and it provides a means of investment for shareholders who buy shares at low
prices and sell when stock prices rise.
Disadvantage
The disadvantage however, are that they are not easy to start due to the number of legal procedures
required and that the large size of these businesses tend to be difficult to manage.
Sources Of Capital In Setting Up A Business
Capital is one of the resources required to set up a business establishment.
Capital mainly refers to those assets that are used to start and continuously operate a business.
PRINCIPLE OF BUSSINESS NOTES
Fixed capital includes machinery, equipment and vehicles owned by the company. These assets are
so called because they cannot easily be turned into cash.
Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash
balances. These assets can easily be converted into cash.
Sources of Capital
- Personal savings of the owner or owners
- Assistance from friends and family
- Loan from a financial institution
- Selling shares
The significance of collateral in accessing capital to establish a business
Collateral is anything of value that is used to secure a loan. It is required by financial institutions for
the approval of loans. If the loan is not repaid then the financial institution has the authority to seize
the borrowers collateral. Forms of collateral include: bank balances, motor vehicle, dwelling house,
land, machinery and equipment etc.
Previous | Next Features Of A Business Plan
A business plan is a document outlining the goals of a business and the strategies to achieve these
goals. It is mainly prepared by new businesses or by ones making major changes.
Executive Summary
The Executive Summary is a synopsis of the full business plan. It presents the salient points of the
plan. It contains information on the purpose of the business, its methods of operation and future
expectations.
History of the business
This section gives full details on previous operations of a business. For a new business it will explain
where the idea came from and the reasons for starting the business.
Mission Statement
The Mission Statement gives the overall goal of a business as well as its values. It serves as a guide to
the operation o the business. For example: providing the highest quality goods and services.
Business goals and objectives
The firms short-term, medium-term and long-term goals and the time in which these are to be
achieved is outlined in this section.
Organization
The business must state the ownership structure and give details of the management team.
SWOT Analysis
Looks at the strength and weaknesses of the business
PRINCIPLE OF BUSSINESS NOTES
- Untrue sale price For example, writing the word sale on items for which the price remains the
same.
- The use of market dominance to squeeze firms out of the industry- For example large firms may
drop the price of their goods so low that small firms are unable to compete with them.
Quiz
Question 1
Explain the importance of encouraging entrepreneurial skills and abilities in Caribbean schools.
Answer
Entrepreneurship is important to Caribbean economies. Businesses create jobs, add to GDP and
foreign exchange earnings. They also provide revenue for government in the form of taxes.
Therefore, entrepreneurship skills must be taught in schools. Our students should be prepared to
enter the workplace and to also start businesses. An investment in a programme that prepares
students for entrepreneurship will have longterm impact on a countrys economic growth and
development.
Question 2
Outline and explain the importance of two characteristics required for a successful entrepreneur.
Answer
Creativity is an important characteristic of an entrepreneur. Creativity helps entrepreneurs to
innovate new products and ideas for the success of the business. Entrepreneurs must have the drive
and determination to be successful. Operating a business requires a lot of effort and will to succeed.
Question 3
Three of your past high school friends request your assistance in starting a small business. Advise
them on three important steps that they must take.
Answer
Do a feasibility study to ascertain the viability/feasibility of a business idea. It assesses the
operational costs, expected revenue flows, level of competition etc. Its main purpose is to find out if
the business idea is practical. The business must be registered. This is a legal requirement. Decisions
must be taken on the type of business that you wish to form i.e. either a partnership or a private
limited liability company. Identify sources of capital to purchase machinery, equipment, fixtures and
raw materials.
Question 4
PRINCIPLE OF BUSSINESS NOTES
James & Sons has been operating as a partnership for five years. They have decided to expand
through offering shares to the public. Outline the steps that must be taken by the owners of James &
Sons to establish a public limited liability company.
Answer
Documents that must be submitted to the registrar of companies are the memorandum and articles
of association and statutory declaration. A prospectus must then be published inviting the public to
subscribe for shares. Collecting the capital required as outlined in the memorandum of association,
to be issued with a certificate of trading allowing the company to start trading as a public limited
liability company.
Question 5
Compare two advantages and two disadvantages of a sole trading business and a public liability
company.
Answer
One advantage of a sole trading business is that the owner receives all the profits made. However,
profits are shared among members of a public limited liability company.
The sole trader can also implement new ideas quickly as he does not have to consult anyone else
concerning business decisions. However, new ideas must be ratified by the board of public limited
entities and therefore may take much longer to implement.
One disadvantage is that the sole trader must find all the capital to invest into a business.
A public limited liability company raises capital from shareholders. The sole trader will lose all his
personal assets if the business goes bankrupt. Shareholders in a public limited liability company have
limited liability and therefore will not lose their personal assets if the company goes bankrupt.
Question 6
Outline three features of a business plan.
Answer
The executive summary is a synopsis of the full business plan. It outlines information on the purpose
of the business, its methods of operation and future expectations.
The mission statement conveys the overall goals and value of a business. It speaks to how a company
operates. For example: providing the highest quality goods and services.
A SWOT Analysis outlines the strengths and weaknesses of the business. For example,
Strengths low overhead costs and large market share
Weakness difficulty in sourcing raw materials and sourcing skilled workers.
Question 7
Differentiate between primary and secondary data and give two examples of each.
PRINCIPLE OF BUSSINESS NOTES
Answer
Primary data is originally collected data. This data will be obtained by interviewing, observing or
distributing questionnaires to the sample population.
Secondary data is information that has already been collected by someone else originally. This data
will be therefore obtained from books, newspapers, magazines, libraries and publications of various
institutions.
Question 8
Explain how government may intervene to curtail unethical and illegal practices of business.
Answer
Government uses legislation to guide business practice thus protecting consumers. Laws outlining
accepted standard for manufactured goods and packaging and storing of goods protect consumers.
Taxes are also charged to curb activities such as pollution as a result of production.
Question 9
Explain the importance of a feasibility study to the start up of a business.
Answer
A feasibility study helps individuals to ascertain whether or not a business will be profitable, it also
assesses the possibilities of future income earnings and overall operational costs.
Question 10
List two forms of collateral and explain their importance to the acquisition of funds for a business.
Answer
Collateral is anything of value that is used to secure a loan. It is required by financial institutions for
the approval of loans. If the loan is not repaid then the financial institution has the authority to seize
the borrowers collateral. Forms of collateral include: bank balances, motor vehicle, dwelling house,
land, machinery and equipment etc.
Concept Of A Contract
A contract is an agreement that is enforceable by law. A contract therefore has legal implications for
the parties who enter into a contract. A mere agreement is not legally binding and therefore neither
of the parties is liable if anyone breaks the agreement.
What makes a contract different from an agreement?
A contract requires not only an agreement between parties but also something of value must be
passed from one party to the next to make the contract binding. For example, you offer to sell a
friend your used text books for $1000.00. After inspecting your textbooks the friend agrees and pays
$1000.00. The $1000.00 paid here is the consideration i.e. something of value that is passed from
one party to the next. Consideration is the price paid for a promise. You promised to let your friend
PRINCIPLE OF BUSSINESS NOTES
have your textbooks if he paid $1000.00. This $1000.00 makes the agreement binding. You are
therefore obligated to deliver the books to your friend and cannot decide to sell the books to someone
else or to ask for a higher price.
Your neighbour asks you to mow his lawn after which he will pay you $200.00. You accept this offer
and mow the lawn. The work done here is an act of forbearance. You are giving something of value to
your neighbour to receive payment for the job. The consideration in this case is the work done by
you. It is the price that you have paid for the promise to be paid money for the job. Consideration
passes from promise to promise.
Previous | Next Previous | Next Characteristics Of A Simple Contract
There must be offer and acceptance. The offerer is the party that makes the offer and the offeree is
the person that the offer is being made to. There must a clear offer and clear acceptance for a
contract to be binding.
Consideration is the price paid by one party for the promise of the other. Thus if one party promises
to provide goods or services, something of value must be given in exchange. This may be in the form
of money, goods, services or it may be an act of forbearance.
The capacity to contract Parties to the contract must be over 18 years, of sound mind, not under
the influence of drugs or incarcerated.
There must be no force, misrepresentation or fraud. Persons should not be forced to sign a contract
e.g. blackmail. They should not be lied to e.g. giving the wrong year of a car. Fraud may involve
forging someones signature.
There must be an obvious intention to create legal relations.This is based on the actions of the
parties e.g. offer, acceptance and consideration.
A contract must be legal- thus, agreements made between parties concerning illegal drugs and any
other illegal activity is not a contract.
Differences Between A Simple & A Speciality Contract
A simple contract can be made orally, in writing or by the implications deemed from the actions of
the parties. A specialty contract must be signed by the parties sealed, for example with a company
seal and finally it must be delivered.
Examples of specialty contracts include:
1. Mortgages and leases for over three years
2. Sale of land
3. Contracts of insurance
4. Hire purchase agreements
5. Transfer of company shares
PRINCIPLE OF BUSSINESS NOTES
Mr. Larry was delighted to see a 50% discount on his favourite brand of shoes at a shoe store 15 miles
away. He took sometime off from work to travel to the store. When he arrived at the store he was told
that that the brand advertised was sold out but he could choose from other brands available. Mr.
Larry was very angry and requested that he be refunded his travelling expenses.
Is the owner of the store obligated to refund Mr. Larry his travelling expenses?
Answer
The advertisement appearing in the newspaper is not an offer by the store but an invitation to treat.
Therefore readers were being invited to make an offer for items advertised. The owners of the store
are therefore in no way obligated to Mr. Larry.
Hope stopped at a convenience store on her way home to purchase a few items. She handed the
cashier he credit card and was surprised when she was told that it declined. She apologized and
explained that she did not know why her card declined but she will call the bank in the morning.
Susan further explained that she had just enough cash with her to get home and so she could not pay
for the goods. The cashier was very angry and asked the manager to intervene. The manager insisted
that she pay for the goods.
Is Sandra obligated to pay for the goods?
Answer
Sandra has entered into a contract with the convenience store. She made the offer at the cashier
counter when she presented the goods to be cashed. The cashier accepted the offer by cashing the
goods. In this situation it is up to the manager of the convenience store to accept Hopes apology.
Why Documentation Is Necessary In Business Transactions
Business documents provide information needed for the business to function efficiently. Information
is required for accounting purposes to ascertain whether profits or losses are being made.
Documents are also needed as evidence for example orders placed for goods and payments made.
Documents also provide information on commodities in stock and prices.
Next
(a) Letter of Enquiry is sent by persons who wish to be informed of what goods and services and
the prices of these that a company offers for sale.
PRINCIPLE OF BUSSINESS NOTES
Terms 5% 30 days A Discount of 5% will be given if the customer pays within 30 days. E & OE
means errors and omissions, i.e. if any mistakes were made on the invoice the company will make
the correction.
(g) Pro forma Invoice is a temporary invoice. It is used in cases where funds are being borrowed
from financial institutions to purchase items. The institution may request a pro forma invoice as
proof of items to be purchased when the loan is disbursed. It may also be sent with goods not
ordered and in this instance is a form of advertising. If the customer is interested in the items sent,
an actual invoice is sent.
(h) Credit note is issued to a customer when there has been an overcharge on an invoice due to
faulty arithmetic, when goods have been returned because of damage or refunds requested for goods
not received. A credit note is printed in red.
(i) Debit note is sent to a customer whenever there is an undercharge or omission on the invoice.
(j) Statement of Account is a document from a supplier to a customer outlining all the
transactions carried out over a particular period. A statement is usually sent monthly.
(k)A receipt is given for cash payment.
(l) Stock cards are used to keep a record of all stocks entering and leaving the stockroom. This
procedure ensures that stock level do not fall below a minimum resulting in the depletion of stocks.
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Information On Transport Documents
a. Import License
This document gives a business permission to import goods into a county. It is used by governments
to restrict the importation or to limit the amount of certain goods imported. Quotas are sometimes
used to protect local industries as they specify the quantity of certain goods importers are allowed to
import.
b. Certificate of Origin
PRINCIPLE OF BUSSINESS NOTES
This document states the country in which the goods were manufactured. This is important for
Caribbean countries as goods from other Caribbean countries enter duty free. Goods imported from
outside the region are taxed.
c. Shipping Note
This document provides details about the goods to be shipped, e.g. type and number of items and the
destination of the goods.
d. Bill of Lading
The Bill of Lading is a contract of carriage between the seller of the goods (exporter) and the shipping
company transporting the goods. It is also a document of title as a copy must be presented by the
importer before he can claim the goods.
It includes the following information: The number of packages, the weight of each piece, the
contents, the port of departure and destination, the name of the ship, the senders name and address
and receivers name and address
e. Dirty Bill
If the words dirty are added to the bill of lading, then the goods delivered are damaged.
f. The Airway Bill
This document is used when goods are transported by air. It contains similar information as the bill
of lading. It is not a document of title and the consignee named need not have a copy to collect the
goods.
g. Insurance Certificate (Marine Insurance)
This document provides protection for the goods being shipped against loss or damage at sea.
h. Bill of Sight
This document is completed if for any reason the documents required for importing goods are not
available. It is completed giving details of the consignment and method of transportation.
Instruments Of Payment
The instrument used to make payments will depend on the sum of money being paid and whether
the transaction is a local or an external one.
Cheques
A cheque is an order to the bank to transfer payments from an individuals account (the
payers/drawers account) to credit another individuals account (the payees account) or to pay the
payee on presentation of that cheque.
PRINCIPLE OF BUSSINESS NOTES
Credit Transfer
A customer of a bank may use this system by instructing the bank to transfer money from his account
to an account at any other bank.
Standing Order/Bankers Order
This allows regular monthly payments to be made from a customers bank account to a named payee.
The customer must complete and sign a standing order form instructing the bank to make payments.
Postal orders are cheques issued in specific values by a post office. The value of each postal order is
printed on it and a price depending on its value is paid for each. The postal order will be sent to the
post office of the payee as designated by the payer.
Money Order
These can be purchased from a bank or a post office. They can be used to make payments locally or
overseas, as they are made out in the currency in which they are to be paid. The payee will cash the
money order at his bank.
Telegraphic Money Order
The sender must first pay the sum to be sent over the counter of the post office. A telegram is sent to
the payee informing him to collect money at his local post office. He must present proof of his
identity.
Bank Draft
This is a cheque that is used to make payments overseas. Bank drafts are obtained for a fee from a
bank and are made out to a named payee in foreign currency.
Bill of Exchange
This is used to pay for goods bought overseas on credit. It is an order in writing from an exporter to
an importer requiring payments of a certain sum of money at a fixed future date. The time period
allowed is normally three months.
Letters of Credit/ Documentary Credit
This is a sent from an importers bank to an exporter guaranteeing payment to the exporter for goods
to be supplied. The exporter must present a clean bill of lading, certificate of origin and a certificate
of insurance to the importers bank.
Irrevocable Letter of Credit
Once an exporter receives this letter of credit the importer cannot cancel payments for goods to be
supplied without the exporters permission.
Previous | Next Insurance is a means of protection from financial loss. Insurance is generic for all
types of insurance and assurance. However, insurance differs from assurance in that insurance
covers risks that may occur e.g. theft, fire, accident etc., and assurance covers events that will occur
such as death.
The parties to the insurance contract are the insurer (the company offering protection) and the
insured (the person seeking protection). Payments are made by the insured for this service. The
price charged for insurance is called a premium. The contract is known as the policy.
Insurance Principles
PRINCIPLE OF BUSSINESS NOTES
The purpose of insurance is to compensate persons insured who suffer loss. It is based on the
principle of indemnity, that is, to restore the insured to his original position before he suffered loss.
Insurance therefore as a principle neither makes the insured worse off or better off than before loss
was incurred. For example, if Mr. Green suffered damages valuing $500,000 subsequent to a fire at
his home, he will be compensated exactly $500,000 to repair his house.
Principles of Insurance
Indemnity-Restoring the insured to his original position
Insurable interestThe insured must have a vested interest in what is being insured. For example,
someone is not allowed to insure his neighbours house.
Utmost Good Faith -The insured must be truthful concerning the information pertaining to the
policy contract.
Proximate Cause - The damage caused must be close or proximate to the event insured against. For
example, if someone has an accident policy that includes death occurring as a result of an accident,
this person will not be compensated if death is caused by disease.
Contribution This principle prevents persons insuring identical risks on the same property with
several companies and thus profiting if they suffer loss. For example, an individual may insure his
car with three insurance companies hoping to be compensated by all three. He will not succeed as the
insurance companies will each only pay a portion of the claim.
Average Clause This clause sets a limit to the size of the compensation, which depends on the
proportion of the true value of the asset paid up by the insured. For example, a homeowner insures
his home for $100,000 which is half the true value of $200,000. His house was partially destroyed
by fire on the insurance company for $50,000 worth of damage. The insurance company only paid
him $25,000 as he was only insured for 50% of the true value of the house presently.
Subrogation -This is an extension of the principle of indemnity, that is, the insured should be
reinstated to his exact position before the loss. For example, if a vehicle is totally wrecked and the
insurance company pays the insured the value of the car, the wrecked vehicle will be claimed by
insurance company.
How does insurance Work?
How are insurance companies able to pay its clients large sums of money to compensate them for
loss? They operate on the basis of risk pooling. Premiums from large numbers of persons with the
same risks are pooled and only those who suffer loss are compensated. The insurance company can
predict the percentage of losses based on past data. The premiums charged are based on the number
of losses predicted plus the cost to operate the business and profits to be realized. For example, a
particular insurance company may insure one thousand persons for risk against car theft. Only two
PRINCIPLE OF BUSSINESS NOTES
percent of those insured may suffer lass and therefore the insurance company can afford to assist
those persons.
Types Of Insurance Policies
1.Life Assurance
(a)Whole Life Assurance
Payment will be made upon the death of the insured. The beneficiaries of the insured will be paid.
(b) Endowed Assurance
Payments are made at the end of specific periods. The Endowment policies may be paid at the end of
twenty or thirty years or at the age of retirement. If death occurs before the end of the endowment
period insured, then the beneficiaries of the insured will be paid.
2.Term and Business Insurance
(a) Fire Insurance
Covers loss or damages to assets by fire
(b) Burglary Insurance
Covers loss due to goods stolen and damages to property caused by theft
(c) Bad Debts Insurance
Covers debts that cannot be collected
(d) Plats Glass Insurance
Covers the replacement of shop windows as well as any injury to staff and customers that may be
caused by its breakage
(e) Fidelity Guarantee Insurance
This protects a firm against loss due to the misappropriation of funds by employee, customers or
other persons.
(f) Employers Liability Insurance and Public Liability
Covers injury incurred by staff or visitors on a business location due to the negligence of the firm,
e.g., customers slipping on a wet floor.
(g) Motor Insurance
Third party Only third parties e.g. passengers are covered. The driver and car is not covered.
Comprehensive Covers loss due to damages to the driver and third parties.
(h) Marine Insurance
This policy covers loss due to damages of ships and cargo at sea.
Previous | Next Importance Of Insurance To Businesses
Entrepreneurs invest a wealth of resources into the start-up and continuous operation of a business.
If the entrepreneur suffers any form of loss such as fire or burglary etc. the business may take a long
PRINCIPLE OF BUSSINESS NOTES
time to recover. Insurance is therefore very important to the business community. The principle of
indemnity ensures that an entrepreneur receives enough compensation to continue the business with
minimum effects.
Quiz
Martha offered to sell her prized orchid for $1000. Joseph telephoned her and expressed his great
interest in that variety of orchid. He however could not pay the $1000 she asked but could manage
to pay $800. Joseph then promised that he will visit her later to pay for and collect the orchid.
Later that day Joseph visited Martha with the money to pay for the orchid. Martha informed him
that she had already sold the orchid for $1000. Joseph was furious and told Martha that it was not
only unethical for her to sell the orchid to someone else but it was also illegal.
Question 1
Did a valid contract exist between Martha and Joseph? Explain the reason for your answer.
Answer
A valid contract did not exist between Martha and Joseph.
An offer was initially made by Martha. Joseph wished to obtain the orchid but could not pay the
amount asked by Martha. He therefore made a counter offer of $800.
Martha did not clearly accept his offer and therefore a contract did not exist. Since a contract did not
exist, Martha is allowed to sell the orchid to whomever she chooses.
Question 2
Differentiate between a simple and a specialty contract.
Answer
A simple contract is legally binding if there are an offer, acceptance and consideration. A specialty
contract must have all these in addition to it being documented, signed sealed and delivered.
Question 3
Outline three reasons for the discharge of a contract.
Answer
If the time for which the contract must be executed is passed, then the contract can be brought to an
end because of lapse of time.
If there is a mutual agreement between the parties of a contract to bring the contract to an end.
A contract may also be discharged if one of the parties to the contract dies.
Question 4
You purchased an item from a variety store and were not given a receipt. The owner explained that
he never usually gives a receipt. Explain to him the importance of not only a receipt but two other
business documents to the operation of his business.
PRINCIPLE OF BUSSINESS NOTES
Answer
A receipt is proof of payment for goods or services bought. It not only provides protection for the
purchaser but also is a record of money received by the business. Two other important business
documents are an invoice and a statement of account.
An invoice is a bill outlining the total amount owed by customers for goods or services. It also
informs the customer of deadline dates for payments and any discounts offered. A statement of
account informs customers of all payments made within a specific time period and outstanding
balances at the end of that period.
Question 5
Outline two ways of making payments overseas.
Answer
A bank draft is a cheque which guarantees payment to the receiver from the issuing bank. Bank
drafts can be made out to a payee in foreign currency and thus used for making overseas payments.
Letters of credit are used in international trade to make payments for imports. Payments to
exporters are guaranteed through the bank.
Question 6
Explain the importance of the following documents in international trade:
- Certificate of origin
- Import license
- Bill of lading
- Certificate of insurance
Answer
Certificate of Origin
A certificate of origin states the country in which goods imported were manufactured. It informs
importing countries if goods are to be accepted in the case of a ban and if tariffs to be charged.
Import license
Ensures that approved goods and quantities are imported
Bill of lading
Ensures the safety of goods in transit and delivery to receiver
Certificate of insurance
This ensures that there is financial protection for goods during transit
Question 7
You are a business owner in a Caribbean country and wish to export. Explain how you would ensure
that payments are received for items exported.
PRINCIPLE OF BUSSINESS NOTES
Answer
Request from the importer an irrevocable letter of credit. This ensures receipt of payments once an
order is filled.
Question 8
Explain the purpose of insurance and identify four fundamental principles.
Answer
The purpose of insurance is to indemnify the insured who suffers loss. It ensures that the insured is
returned to the exact position he was financially before the loss occurred.
Four principles of insurance are:
- Utmost Good Faith
- Proximate Cause
- Contribution
- Average Cause
Question 9
Differentiate between Insurance and assurance and give four types of Insurance.
Answer
Insurance refers to the coverage of events that may occur e.g. an accident. Assurance on the other
hand covers events that are inevitable such as death.
Four types of insurance are Bad debt, Plate glass, marine, and employers liability.
Question 10
Show how three types of insurance is beneficial to businesses.
Answer
Bad debt insurance covers any loss that a business might incur if customers do not make payments
on outstanding balances.
Plate glass insurance covers any damage to customers or anyone else due to the accidental breakage
of a shop window. The cost of the window is also covered by the insurance company.
Employers Liability covers injury to staff or visitors on a business location due to the negligence of
the company.
Factors Of Production
The term factors of production refers to the resources that are combined in the production
process to create goods and services.
These are:
Land - natural resource
Labour human resource
PRINCIPLE OF BUSSINESS NOTES