Business Activity
Purpose/Nature of Business Activity
▪ To supply goods and services
▪ People have needs and unlimited wants
▪ Resources are finite, thus scarcity
▪ Opportunity cost: next best choice
▪ Added value is the difference between selling
price and the production cost
▪ Value is added to a good as its value increases
after work is carried out.
▪ Importance of specialization
o Comparative Advantage
o Reduce costs  efficiency
o Concentrate efforts on narrow range of
products  higher quality
Entrepreneurship
▪ Ability, skill and enthusiasm to take risks
▪ Governments support business startups by giving
grants/loans – in order to control unemployment,
inflation and economic growth (increases GDP)
Business Activity (Sectors)
▪ Primary: Produces the raw materials (e.g.
agriculture, fuel extraction)
▪ Secondary: Transforms raw materials to finished
products (e.g. construction)
▪ Tertiary: Provide services to businesses and
individuals (e.g. banking, education)
▪ Reasons for changing: Depends on the economy,
e.g. those with large labor force focus on
secondary sector.
Private/Public Objectives
▪ Private’s objective is to make profit
▪ Public’s objective is to provide to the community
▪ Businesses strive for growth, increase added value
and market survival.
Measuring Business Size
▪ Through output, revenue, employees, outlets,
capital employed (not profit)
▪ Output should only be used for comparison in
same industry/producing same type
▪ Revenue depends on efficiency, not size
▪ Employee/machinery as a comparison depends on
the company basis (labor vs. capital)
Growth of a business
▪ In order to obtain economies of scale
o Managerial  Can employ specialist
o Technical  Afford expensive machinery
o Trading  Discount for bulk
o Financial  More sources for finance, lower
interest rates / trusted by banks
▪ Businesses grow to increase sales/market share,
production, and status/power
▪ Internal (organic) growth is often slow
▪ External growth by taking over or merging
Types of Merger
▪ Horizontal – merging in the same sector
o Reduces no. of competitors in industry
o Economies of scale
o Increase market share
▪ Forward vertical merger
o Assured outlet for products
o Retailer profit goes back to manufacturer
o Prevent retailer from selling products of
other businesses
o Can retrieve market research directly
▪ Backward vertical merger:
o Constant supply of raw materials
o Producer profit goes back to manufacturer
o Prevent supplier from supplying others
o Controlled cost of raw materials
▪ Conglomerate merger:
o Spreads risks
o Transfer of new ideas from one section of
the business to another
Why Some Businesses Stay Small
▪ Businesses offering personal service or specialized
products cannot grow bigger because they will
lose the personal service demanded by customers.
▪ Business operates on the niche/segmented
market (luxury cars, designer bags etc.)
▪ Owners might want to keep a personal touch with
staff and customers. They do not want the
increased stress of running a bigger business.
Business Organization
▪ Sole Traders
o All profits go to him, secrecy, full control,
direct contact with customer, less legal work
o Unlimited liability
o No continuity/legal identity
▪ Partnership Objectives of Stakeholders
o Losses/responsibilities shared ▪ Owners want profit/return on capital, growth of
o Access to more sources of capital business and increase market share.
o Unlimited liability ▪ Workers want good pay, job security/satisfaction
o Slower decision-making (than sole) ▪ Managers want high salaries, job security and
▪ Private Limited Company – LTD growth (so they get more power, status, salary)
o Shares limited to friends and family ▪ Customers want high quality + safe products,
o Limited liability value for money, reliability, good services
o Many legal work, shares cannot be sold ▪ Government wants employment, taxes, increase
without consent of all shareholders in GDP and makes sure laws are obeyed
▪ Public Limited Company – PLC ▪ Community/pressure groups want employment,
o Can sell shares to public protection of rights, security, and makes sure the
o Limited liability business does not harm the environment /
o Many legal work, hard to control corporate social responsibility (CSR)
▪ Joint Ventures
o Two businesses agree to start a new project
together, sharing costs and risks. People in Business
o Expanding knowledge
Importance of Motivation
o Disagreements might occur
▪ Motivation is the reason why people work and it
▪ Franchising
drives them to work better. It results in higher
o Franchisor is a business with an established
productivity and output hence increased profits.
brand, recruits franchisees to sell for them.
▪ Maslow’s Hierarchy of Human Needs
o Faster expansion because the franchisor
o Physiological  Security  Social  Self-
does not have to finance all new outlets
Esteem  Self-Actualization
o Banks more willing to lend to franchisee
▪ Taylor’s Motivation Theory – money is the main
because of established franchisor (lower risk)
motivation; higher salary  increased output
o The failure of one franchise could lead to a
▪ Herzberg’s Motivation Theory
bad reputation of the whole business.
o Hygiene factors – status, security, working
conditions, relationships with other workers
Liability
o Motivation factors – achievement, personal
▪ Liability refers to whether the owners of a
growth, recognition, job satisfaction
company can be held personally responsible for
the debts of the business.
Financial vs. Non-Financial Rewards
▪ Unlimited: the owner is personally liable for all
▪ Wages – paid weekly/daily (blue-collar jobs)
debts incurred in the business
o Time Rate – depends on # hours worked
▪ Limited: the owner is not liable because the
o Piece Rate – depends on # of output (there is
business is a separate legal entity
usually a base pay)
▪ Salaries – paid monthly (white-collar jobs)
Public Corporations
o Usually standard rate
▪ Objective is to keep the price affordable, provide
o Commission  the % of sales as added to
employment, and is accessible
salary depending on the value of goods sold
▪ Businesses that are too important for an
o Bonus  A lump sum paid to employees who
individual to manage are government-owned –
have done well. Usually paid before holidays,
e.g. electricity, water, airline
or at the end of the year
▪ Reduces waste in an industry
o Fringe Benefits refer to added perks
▪ Helps failing businesses by giving grants/subsidy
(healthcare, vacations, education, pension)
▪ Subsidies lead to inefficiency. It is also considered
o Job Satisfaction refers to the employee
unfair for private businesses.
enjoying the job they do (conditions,
▪ Businesses could be run for politics.
colleagues, security, management)
Management
▪ Planning  setting goals for the business
▪ Organizing  effectively delegating tasks
▪ Coordinating  bringing people together
▪ Commanding  guiding/leading subordinates
▪ Controlling  evaluating employee performances
Organizational Structure
▪ Delegation refers giving a subordinate the
responsibility to do given task, but final
responsibility still lies on the person delegating.
▪ Organized using hierarchy; different levels of
authority (those in same level = same authority)
▪ Chain of command shows power passing from
bottom to the top
▪ Span of control is the # of subordinates
Leadership Styles
Trade Unions
▪ Negotiate on behalf of the members on worker
rights, working conditions, pay scales
▪ Provide education/training schemes
▪ Pressuring the government for members’ sake
▪ Collective bargaining  representatives
negotiating with workers’ firms
Recruiting Workers
▪ Main Stages
o Job Analysis  Identifies responsibilities
o Job Description  Lists the responsibilities
and tasks for applying candidates
o Job Specification  Outlines required
qualifications, expertise and experience
o Job is then advertised in appropriate media
o Candidates fill out application forms, which
are short-listed so only few remain
o Interviews are held with the candidates left,
and the ones suitable for the job are selected
▪ Internal Recruitment – for those in the business
already (promotion)
Training Methods
▪ Induction training
o Introducing a new employee to the business
o Lasts one to several days
▪ On-the-job training
o Employees are trained by watching
professionals do the jobs
o Only suitable for unskilled/semi-skilled jobs
o The trainee may do some work
▪ Off-the-job training
o Workers go to another place for training
o Methods are varied and more complex
o Employees still work during the day
Downsizing Workforce
▪ Dismissal – A worker is fired for unsatisfactory
work/behavior (worker’s fault)
▪ Redundancy – Employees are no longer needed,
they are not at fault. The reasons are:
o A business is closing down a factory.
o A business wants to cut costs
o A business has merged/taken over
o New machinery replaces workers.
Legal Controls
▪ Employment Contracts
▪ Discrimination, Health and Safety
▪ National Minimum Wage (NMW)
▪ Unfair Dismissal
o Employees are given some money to
compensate for their lost job.
o If only some employees are to be made
redundant, trade unions will agree with the
fairest way to see who goes. These terms are
negotiated with the HR department.
o Sometimes there will be voluntary
redundancy by members.
Effective Communication
▪ Verbal – one-on-one talks, meetings, video
conference, telephone
▪ Written – letters, reports, notices, faxes, emails
▪ Visual – films, videos, PowerPoint displays,
posters, charts and diagrams
▪ Chain Network – transfer messages from higher
management level  lower levels
▪ Wheel Network – central management passes
message to all departments quickly
▪ Connected Network – create/discuss new ideas
Marketing
Role of Marketing
▪ The main role of marking is to convert the wants
of an individual into a need and this satisfies
customer's needs
▪ Businesses must build (and sustain) customer
relationships in order to identify and satisfy
customer's needs  customer loyalty
▪ Objectives
o Increase revenue, profitability, market share
o To create, maintain or improve the image of
a product/company
o Develop new products/improve existing ones
Market Changes
▪ Factors affecting customer’s expenditure patterns
o The price of the product
o The price of competitor's products
o Changes in disposable income
o Changes in population size and structure
o Changes in tastes and fashion
▪ Lower interest rates  businesses and consumers
alike more likely to borrow
▪ Supply and demand changes
▪ Why markets have become more competitive
o Legal controls that prevents monopoly
o Removal of government intervention
o Providing financial and other assistance to
new and small to medium-sized businesses
o E-commerce and social networks
Niche Market vs. Mass Market
▪ Niche – Selling to a segmented market
o Less competition
o High profit margin are likely, as customers
will usually pay more for the exclusivity
o More specific
o Unlikely to attain economies of scale
o Small changes in consumer spending
patterns could have a very significant impact
▪ Mass – Selling to the market as a whole
o Economies of scale
o Potential for higher sales and profits
o Changes in consumer patterns won’t impact
o Much more competition, need to lower price
and profit margins
o Not all markets are large enough to support a
mass marketing approach
Market Segmentation
▪ Diving consumers in the market by factors such as
age, gender, socio-economic grouping, location
▪ Goods and services can be designed to meet the
specific needs of consumers which increases sales
▪ Marketing strategies can be better targeted
▪ May be possible to charge higher prices
Market Research
▪ Market-oriented  finds a market and creates a
product based on the market demand
▪ Primary research – First-hand data
o Data is up to date, collected for a specific
purpose to tailor to business’ needs
o Costly, time consuming
▪ Secondary (desk) research – secondhand data
o Easier to obtain, quick, cheap
o May be outdated and not specific to what
the business needs
▪ METHODS
o Test market/samples
o Questionnaires
o Interviews
o Postal/Online surveys
o Sampling
▪ Factors influencing the accuracy
o The sample chosen may be too small
o Wrong method used
o People might not answer honestly
o Questions might be biased
o Secondary data may be out of date
PRODUCT
▪ Costs of new product development includes
market research  development  investment
▪ New product development leads to increased
potential sales, revenue, profit and spreads risks
▪ Brand image is the general impression of a
product held by customers/how they recognize
▪ The role of packaging is to protect the product,
provide information, help customers recognize
the product and keep the product fresh
▪ Introduction Phase  prices low to attract
consumers, high promotional activity, basic model
of product available, product may be for sale in
selected outlets
▪ Growth Phase  Some product changes
depending on market feedback, generating brand
image for customer loyalty, continuous high
promotional activity, product widely available
▪ Maturity + Saturation Phase  Prices remain
similar to competitors, product kept in place to
maximize profits, promotional activity to remind
customers, product available more widely
▪ Decline Phase  Price reduced to maintain sales
or finish off remaining stock, advertises new price,
product only available in profitable outlets
▪ PRODUCT DESIGN
o Objective features (specification, quality)
o Subjective features (taste, appearance)
▪ Product Differentiation – Where a feature is
created to differentiate product from similar ones
in the market  Unique Selling Point (USP)
PRICE
▪ Market skimming  Setting a high price for a new
product that is unique or very different from any
other product on the market
▪ Penetration pricing  Setting a low price to
attract customers to buy a new product
▪ Competitive pricing  Setting a price similar to
that of competitor's products which are already
established in the market
▪ Cost-plus pricing  Setting price by adding a fixed
amount (profit) to the cost of production
▪ Promotional pricing  Setting the price of a small
number of products at below cost to attract
customers into the outlet in the hope that they
will buy other products priced to earn a profit
▪ When deciding the price you should consider:
o Nature of the product
o The market competition
o Marketing objectives
o The production and distribution costs
o The brand/image of the business
▪ Price Elasticity – Measure of responsiveness of
the demand/supply to a change in price
o Inelastic – The % change in demand is less
than the % change in price (e.g. fuel)
o Elastic – The % change in demand is greater
than the % change in price (e.g. luxury cars)
DISTRIBUTION
▪ Producer  Consumer
▪ Producer  Retailer  Consumer
▪ Producer  Wholesaler  Retailer  Consumer
PROMOTION
▪ Marketing activities used to inform and persuade
consumers to buy a business's products
o Creating and developing brand image
o Encouraging wholesalers and retailers to
stock the product
▪ Above the Line  Advertising
o Informative (create product awareness)
o Persuasive (aimed at getting them to buy a
firm's product rather than competitors’)
▪ Below the Line  Incentives
o Discounts, loyalty schemes, contests
o Personal selling – Sales staff communicate
directly with consumer to achieve a sale and
form a long-term relationship between the
firm and consumer
▪ Celebrity endorsements and sponsorships
▪ Marketing budget – the amount of money made
available by a business for its marketing activities
during a particular period of time
▪ Businesses must ensure to not spend money on
useless promotion
TECHNOLOGY AND MARKETING MIX
▪ E-commerce – The use of the internet and other
technologies used by businesses to the market
and sell goods and services to customers
▪ Opportunities
o Increased market, reduced costs
o Convenience, wider choice, lower prices
▪ Threats
o Increased competition, unfamiliarity
o Fraud, hacking, no personal service,
returning items are a hassle
MARKETING STRATEGY
▪ Legal controls on marketing strategy
o Prevent faulty and dangerous goods
o Prevent misleading advertising
o Protect consumers from industries where
there is little or no competition (monopoly)
▪ These laws impact the decisions the business has
to make including ALL 4P’s
▪ Entering new markets abroad
o Growing in other countries can increase sales,
revenue and profits due to increase
accessibility (more potential customers)
o Cultural, economic and social differences
might occur and cause problems
o Lack of market knowledge
o Difference in legal controls to protect local
consumers
Analyzing the Business
▪ SWOT – Strengths, Weaknesses, Opportunities,
Threats (Internal)
▪ PEST – The external business environment
o Political  Government policies
o Economic  Demand, inflation,
unemployment, exchange rates
o Social  Age structure, lifestyle
o Technological  New developments can
make existing ones obsolete
Operations Management
Production
▪ Managing resources effectively to produce goods
and services; operations management must:
o Use resources in the most cost-effective way
o Produce the required output to meet
consumer demand
o Meet the quality standard expected
▪ Productivity is a measure of the efficiency of
inputs used in the production process
o Productivity = Output / Workers
▪ Production is the process of converting raw
materials into saleable goods.
▪ To improve labor productivity is achieved by:
o Improving the skill level, motivation
o Introducing automation/technology
o Improving the quality of decisions
▪ Why businesses hold inventories (stocks)
o Raw materials/components for production
o Partly finished goods that have not yet
completed the production process
o Finished goods ready for distribution/sale
▪ Lean production  Minimum waste of resources
▪ Just-in-time inventory control is when businesses
don't hold any inventories and raw materials and
components arrive from suppliers just when they
are needed in the production processes. This
reduces warehousing costs but the business must
have a good relationship with the supplier in
order to achieve this
▪ Kaizen  Continuous Improvement
o This is when workers suggest improvements
that can be made to speed up the production
process and to manufacture efficiently.
Methods of Production
▪ Job production – Produces one at a time
o High quality, tailored to specific needs
o Workers are more motivated and take pride
o Expensive, time consuming
o Cannot attain economies of scale
o Labor intensive
▪ Batch production
o Each batch passes through on stage of
production before moving onto the next
o Offers customer some variety
o Materials can be bought it bulk (cheaper)
o Repetitive work  demotivated workers
o Need to store goods until sold
▪ Flow production
o Produce large quantities of identical goods
using a continuously moving process
o Capital intensive (low labor cost)
o Economies of scale achieved
o Lower unit cost
o Very large capital intensive
o Very repetitive work  demotivated workers
o Not flexible; if one part breaks down, the
whole thing shuts down
o High levels of raw material, work in progress
and finished goods inventories are held
▪ Technology has increase production efficiency
o Producing less waste because computers
make much less mistakes than humans do
o It also makes production more cost effective
and decreases the costs of hiring labor
o Computer aided designs are a very fast way
of producing designs of a product, the color,
size, structures can be easily changed and
altered to suit the consumer’s needs.
o It can also give a 3D visual representation of
the product, which eliminates the need to
actually produce the product and this
decreases costs.
o Very expensive to obtain though, high
startup costs
Costs
▪ Fixed costs – Do not change with output
o Rent, interests, loans/overdrafts, salaries
▪ Variable costs – Costs that are directly
proportional with output
o Raw materials/components, wages
▪ Bills/Utilities CAN BE BOTH (semi-variable) so it
depends on the nature of the question
▪ Total Cost = Variable Costs + Fixed Costs
▪ Direct Costs – Costs directly incurred in
production process  ingredients and materials
used, direct labor (employees)
▪ Indirect Costs – Costs that are NOT directly
incurred in production process  salaries
(managers/supervisors), rent, advertising
BREAK EVEN
𝐹𝐼𝑋𝐸𝐷 𝐶𝑂𝑆𝑇
𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 =
SP per UNIT − VC per UNIT
Break Even Table
Quantity FC VC TC TR Profit/Loss
Break Even Chart
Achieving Quality Production
▪ Quality  Ensuring a good or service that meets
the needs and requirements of its customer
▪ Quality control  Checking the quality of goods
through inspection
▪ Quality assurance  A system of setting agreed
standards for every stage of production
▪ If the product or service does not meet the
requirement of the customer then this may cause
decrease in sales and demand.
Location
▪ Quantitative factors  Cost of site, availability
and cost of labor/transport, market potential,
proximity of suppliers and customers
▪ Qualitative factors  Size of site, legal controls,
infrastructure, ethical/environmental concerns
▪ Factors to consider for operating in a different
country  Trade barriers, economy of country,
legal controls, costs, cultural differences/ethics
▪ Governments may restrict businesses from
operating near local housing or areas that could
be harmed by pollution, etc.
Financial Information and Decisions
Finance Needs and Sources
▪ Internal sources
o Retained profit – Profit remaining after all
expenses, tax and dividends have been paid.
o Sale of non-current assets – Selling non-
current assets such as machinery
o Cash balances – Current cash on hand
o Reducing inventory levels
o Reducing trade receivables (debtors)
▪ External sources (short-term)
o Overdrafts – Agreement where the bank lets
the business spends more than the limit
o Trade credit – Businesses pay cost of
materials at a later date
o Debt factoring – Selling trade receivables to
improve business liquidity
▪ External sources (long-term)
o Bank loan
o Hire purchase – Paid by installments
o Mortgage – For land/building purchase
o Debenture – Bonds issued by companies to
raise long-term finance usually at a fixed rate
o Share issue – Source of permanent capital
available to limited liability companies
▪ Importance of micro-finance
o Micro-finance  Small amounts of capital
loaned to entrepreneurs in countries where
business finance is often difficult to obtain.
o Repaid after a short amount of time
▪ Factors affecting financial decisions
o Size/legal form of business
o Amount required
o Time until repayment
o Existing borrowing
Cash Flow
▪ Cash is important to the business because it
needs to be able to make payments
▪ Cash-flow forecast: An estimate of the future cash
inflows and outflows of a business
o Net Cash Flow (NCF) = Inflows – Outflows
o Closing Balance = Opening Balance + NCF
▪ How to interpret a simple cash-flow forecast
▪ If a lot of the closing balance values are negative,
the owner may decide to get an overdraft of a
short period of time so the business has enough
cash to pay for expenses.
▪ Overcoming short-term cash flow problems
o Ask trade receivables to pay for more goods
more quickly by offering discounts
o Negotiate longer credit terms with suppliers
o Delay the purchase of non-current assets
until the cash flow improves
o Find other sources of finance for the
purchase of non-current assets
▪ Working capital  measure of business’ liquidity
o Important for day-to-day expenses such as
wages, buying raw materials
▪ A business can improve its working capital by
o Decreasing the length of credit sales
o Negotiating long credit terms with suppliers
o Reduce inventory levels
Income Statements
▪ Profit  Reward to business owners for the risk
they put investing their capital into the business.
o Measure the success of a business
o Decide the continuity of a product
o Finance the purchase of non-current assets,
expand the business, develop products
o Attract investors who will provide additional
funds for the business
▪ PROFIT VS. CASH
o Money invested in businesses increases cash
but not profit
o Capital expenditure decreases cash but does
not decrease profit
o Cash is important for the business at all times
o Profit is more important for the long-term
success of the business
▪ Income Statement  Profit/Loss Account
o Includes revenue, gross profit, net profit ,
cost of sales
▪ Profit
o Gross Profit = Revenue – Cost of Sales
o Net Profit = Gross Profit – Overheads
o Retained profit = Net Profit – Expenses/Taxes
Balance Sheets
▪ Balance sheet  accounting statement that
records owner's equity, assets and liabilities of a
business at a particular date
▪ Assets  resources owned by the business
o Current assets are resources that a business
expects to turn to cash before the date of the
next balance sheet
o Non- current (fixed) assets are the resources
that a business does not expect to turn into
cash within a year
▪ Liabilities  debts and payments that will have to
be paid in the future
o Current liabilities are debts and payments
that a business expects to pay before the
date of the next balance sheet
o Non-current (fixed) liabilities are debts and
payments that business expects to pay after
more than a year
▪ Owner's equity  money that a business owes to
its investors (includes capital and retained profit)
▪ A balance sheet shows:
o The assets the business owns
o What the business is owed
o What the business owes
o How to the business finances its activities
▪ Balance sheets are only a snapshot of a business's
financial position at a particular point in time
▪ Not a reliable way to determine business’ worth
Analysis of Accounts
𝐺𝑅𝑂𝑆𝑆 𝑃𝑅𝑂𝐹𝐼𝑇
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = ×100
REVENUE
𝑁𝐸𝑇 𝑃𝑅𝑂𝐹𝐼𝑇
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = ×100
𝑅𝐸𝑉𝐸𝑁𝑈𝐸
▪ Gross/Net Profit Margin  The higher the
percentage the better because it means that the
business earns more gross/net profit for every
dollar they get from revenue
𝑁𝐸𝑇 𝑃𝑅𝑂𝐹𝐼𝑇
𝑅𝑂𝐶𝐸 = ×100
CAPITAL EMPLOYED
▪ Return on Capital Employment  The higher the
percentage the better because this means the
investor gets more money for every dollar they
invest into the business
▪ Current Ratio  C. Assets : C. Liabilities
o 1:1.5 – 1:2 is the ideal ratio  Business has
more cash than it needs to meet its short-
term liabilities and unexpected expenses
o Ratio higher than 1:2  Business is not using
their cash well because they have too much
spare cash or assets are unprofitable
▪ Acid Test Ratio  (C. Assets – Stock) : C. Liabilities
o 1:1 would be the best ratio
o If lower, there’s a risk of the business not
having enough money to pay its liabilities
o If it too high, then cash is being tied up in
unprofitable assets
▪ Liquidity is the ability of a business to pay its
short-term debts.
o The more liquid, the better  Business can
pay its liabilities and unexpected payments
o If business is too liquid  Business has
money tied up in unprofitable assets and that
they are not using their cash wisely
o If the business is not very liquid  Trouble
paying back their liabilities (insufficient cash)
Decision-making
▪ Owners/shareholder  Want to know business
performance and how well money is spent so that
they can get a good return in their investment;
determines continuity
▪ Potential investors  Want to know profitability
before investing
▪ Managers  Compare to last year’s results and
see if they have achieved objectives. They will also
want to see retained profits are so they can
consider buying non-current assets to upgrade
the business
▪ Employees  Want to know profitability because
they want to have job security
▪ Trade payables (Suppliers)  Want to know if the
business can pay debts, affects if they are going to
continue supplying or not
▪ Lenders  Want to know if it will be a risk to lend
money to the business and if they can repay loans
▪ Government  Want to know the profitability
because higher taxes paid
▪ Customers  Want to know if a business will
continue to provide goods/services
External Influences on Business Activity
Government Objectives & Policies
▪ Objectives
o More export  more money coming in
o Less import  less money flowing out
o Low unemployment  less money being
spent on unemployment benefits and more
taxes coming in
o Low inflation  goods/services more
accessible, businesses can expand.
o If inflation increases  people not be able to
afford local goods  buy foreign goods
(cheaper)  affects local businesses
o Economic growth  Gross Domestic Product
(GDP) increase means that more goods and
services have been produced than the year
before which increases the standard of living
and increases business opportunities
▪ BUSINESS CYCLE

▪ Growth  This is when the economy recovers
o Existing businesses grow and make profit
o Increases GDP, falling unemployment
o Raises standard of living
▪ Boom  This is the peak of the business cycle
o Investment & profits are at their higher levels
o Sectors performing at their best
o High demand for goods/services  inflation
o Very low unemployment rates
▪ Recession  This is when the economy shrinks
o Less investment in businesses
o Decline in economic activity
o Falling demand  profit decrease
o Unemployment rises
▪ Slump  This is when the recession is at worst
o Very little investment
o Low production/demand of goods/services
o High unemployment
▪ Changes in Taxes
o Direct tax – charged on personal income or
profit made by business
o Indirect tax – charged on goods/services
Environmental and Ethical Issues
▪ The impact of business to the environment:
o Air pollution (from fumes)
o Land pollution (from waste; can be toxic)
o Thermal pollution (from exhaust fumes)
o Light pollution (from advertising)
o Water pollution (from toxic waste/improper
waste disposal by factories)
o Visual pollution (from power lines, etc)
o Noise pollution (from machines)
▪ Sustainable development  When business has a
positive impact on the environment/stakeholders
o Use renewable energy, recycled packaging,
reduce waste, use energy efficient processes
▪ If business doesn’t response to pressure groups
 ruins their reputation (less customers)  can
lead to further government actions and suing
▪ Ethical issues a business might face
o Failing to tell customers about extra costs
o Providing products that are unsafe to use
o Non-disclosure of risks
o Use of child labor/production in sweatshops
o Dumping – selling products at a very low cost
internationally to drive out competition
o Improper waste disposal
o Exceeding pollution limits set by government
▪ How business might react to ethical issues
o Change practices to satisfy stakeholders!
o Long-term survival will be more successful,
good reputation, increases customers,
motivates workers and attracts investors
o BUT high costs and lower profits
▪ Ethics vs. Profits is still an issue
o Business would care more about profits and
would put the environment/moralities at
stake
International Economy
▪ Globalization  countries are connected with
each other because of the trade of goods/services
▪ Opportunities – Business can access more
markets, increase sales, wider customers, more
brand recognition, economies of scale
▪ Threats – Local businesses may suffer, exchange
rates may cause lower profits, increased
competition for both local and international firms
▪ Tariff – Tax applied to the value of imported and
exported goods
o Governments impose tariff to decrease the
amount of imports so that the economy can
have a positive balance of payments.
▪ Quotas – A physical limit on the quantity of goods
that can be imported and exported
o Governments impose quotas to decrease the
level of competition so that local businesses
can survive.
Multinational Companies (MNC)
▪ More brand recognition, wider customer base,
more sales/profits, spread of risk
▪ But language barriers, high costs, cultural
differences, labor shortage, strict regulation, local
opposition, currency fluctuations
▪ Potential benefits to country/economy of MNC
o Increase in employment, choice of goods and
services, knowledge-sharing, more tax
▪ Potential drawbacks to country/economy of MNC
o Increased competition, environmental
damage, exploitation of labor and natural
resources
o MNCs have less CSR (corporate social
responsibility)
Exchange Rate
▪ Depreciation – when the value of the currency
goes down with respect to another currency
o Imports will be expensive
o Exports are relatively cheaper overseas
o Inflation could occur if a lot of raw materials
are being imported
o More demand for its currency and value rises
▪ Appreciation – when the value of currency
increases with respect to another currency
o Imports will be cheaper
o Exports are relatively expensive overseas
o Local businesses compete with cheaper
imported goods and reduce costs and selling
price, which reduces inflation
o A fall in exports may result in a fall in GDP
and unemployment in affected sectors
Accounting Terminology
*You might get confused because terms in past papers
before 2014 might be different since Cambridge
updated it! Here’s the revised list ☺
Exam tips
▪ Paper 1 – More on knowledge
o 80 marks - worth 50% of grade
o 4 questions per number (usually)
a) 2 marks: Knowledge or application
b) 4 marks: Analysis and/or application
c) 6 marks: Analysis and/or application
d) 6 marks: Evaluation
▪ For the questions with application included you
will need to apply your answers to the case study
by giving figures, names, and/or specific processes
that the business does.
▪ Paper 2 – More on analysis and evaluation
o 80 marks - worth 50% of grade
o 4 questions
a) 8 marks: Analysis and application
b) 12 marks: Discuss and recommend
▪ In your answers for the 12-mark questions you
should usually define what is being asked, then
one advantage and one disadvantage for each
option. Elaborate on the possible effects on the
business.

▪ For formula questions, always write the formula

UK Usage (<2014)  International (2015 Onwards)
Loans repayable after 12 months  Bank loans first and show complete workings.
Loans repayable within 12 months  Bank overdrafts ▪ Always link back to the case study.
Capital  Capital/shareholders’ equity
Cost of goods sold  Cost of sales
Current liabilities (creditors: amounts due within 12
months)  Current liabilities
Interest payable  Finance costs
Final accounts  Financial statements
Trading/profit and loss account  Income statement
Stock  Inventory
Fixed assets  Non-current assets
Long-term liabilities (creditors: amounts falling due
after more than one year)  Non-current liabilities
Net profit  Profit
Purchases  Raw materials
Creditors  Trade payables
Debtors  Trade receivables