Syllabus A: The Business Organisation, Its Stakeholders..

Syllabus A1. The purpose and types of business organisation

Syllabus A2. Stakeholders in business organisations
Syllabus A3. Political and legal factors affecting business
Syllabus A4. Macro-economic Factors
Syllabus A5. Micro Economics Factors
Syllabus A6. Social and Demographic Factors
Syllabus A7. Technological Factors
Syllabus A8. Environmental Factors75
Syllabus A9. Competitive Factors79

Syllabus B: Business Organisation Structure, and Govern .

Syllabus B1. The Formal and Informal Business Organisation8

Syllabus B2. Business Organisation Structure and Design
Syllabus B3. Organisational Culture in Business
Syllabus B4. Committees in Business Organisations

SyllabusB5. GovernanceandSocialResponsibilityinBusiness Syllabus C: Accounting

and Reporting Systems and Co Syllabus C1. The relationship

between accounting and business Syllabus C2. Accounting and
Finance Functions within Business Syllabus C3. Principles of Law
and Regulation Governing Accoun Syllabus C4. The Sources and
Purpose of Internal and External. Syllabus C5. Financial Systems,
Procedures and Related IT App Syllabus C6. Internal Controls,
Authorisation, Security and Comp Syllabus C7. Fraud and Fraudulent
Behaviour and Their Prevent \
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 Syllabus A: The Business
Organisation, Its
Stakeholders
Syllabus A1. The purpose and types of business organisation

Syllabus A1a. Define ‘business organisations’ and explain why they are formed.

Define business Organisation

Organisations are defined as:
“social arrangements for the controlled performance of collective goals” (Buchanan

and Huczynski)

There are different types of organisations, all of which, whether they are profit or non-

profit must concentrate on coordinating the 3 points.

These are:
Social Arrangement
Collective Goals
Control of Performance

Types of organisation
Accountants are employed by different types of organisation. Organisations can be

divided into two main types:

Business organisation: Business organisations engage in commercial and

industrial activities, with the purpose of making a profit.

Not for profit: Not-for-profit organisations do not seek to make a profit, they exist to
provide a benefit to the public, such as good government or key services such as health,

education, a police.

They can be divided into two main types:

Public sector organisations: these are government departments or organisations that are

funded by the government

Non-government organisations: these are not-for-profit organisations that are partly or

wholly funded from non-government sources.

Examples are charities, clubs and societies.

Syllabus A1b. Describe common features of business organisations.

Features of Business Organisations

The common features of a business organisation:

1 made up by a group of people who work together for the achievement of set goals –

different people do different things or specialise in one activity

2 have business strategies to achieve goals/objectives

2 have a vision and a mission

3 have a culture which is formed by the organisational values

4 have structures (such as department, teams and divisions) and a sound system i.e.

systems and procedures

5 have inputs which are processed and provide an output

6 have customers besides other stakeholders

Syllabus A1c. Outline how business organisations differ.

Different Business Organisation

HOW BUSINESS ORGANISATIONS DIFFER:

0 Size of the organisation (number of employees)

1
2 Number of organisational levels (tall or flat organisation)
3 Span of control (That is the number of people directly under the responsibility
of one manager)
4 Centralisation versus decentralization (this refers to the extent to which
decision making power is delegated down the organisational hierarchy)
5
6 Criteria for departmentation (For example by geography, by product, by function etc)
7
8 Motive - Profit or non-profit
making 9
Ownership – some organisations are owned by private owners or shareholders. These
are private sector organisations. Public sector organisations are owned by the
government.
10 Technology – Computer firms will have high use of technology but a corner shop would
have very low use.
Syllabus A1d. List the industrial and commercial sectors in which business organisations operate.

Industrial & Commercial Sectors

Sectors in which business organisations operate

Industrial sector includes companies that manufacture parts as well as those that

assemble them into finished products.

A number of specific industries fall under the industrial umbrella, including automotive,

aeronautics (aircraft building), textiles, pharmaceutics, bioengineering and metal casting.

Food refineries and packagers generally fall under the industrial category because of the

types of facilities necessary for production.

Commercial private sector industries are additionally subdivided in two ways

= commercial industries who sell goods to the general public.

This includes traditional outlets such as grocery stores, specialty shops, department
stores and drug stores, but also includes online outlets such as online clothing stores
or online book sellers.

Some commercial private sector industries buy from manufacturers and sell to retailers.

Not all commercial industries involve wholesalers.

In some cases, the retailer can buy directly from the manufacturer.

Industries that commonly use wholesalers include manufactured office supplies

and home goods.

In summary, the main industries in which organisations operate are:

1 agriculture
2 manufacturing
3 extractive raw materials
4 energy
5 retailing/distribution
6 intellectual production
7 service industries
Syllabus A1e. Identify the different types of business organisation and their main characteristics:

0Commercial
1 Not-for-profit
Public sector

0 Non-governmental organisations

0 Cooperatives

Types of Business Organisation

Different business organisations

A very important difference within the structure of organisations is the difference between

profit orientated (Commercial) and non-profit orientated organisations.

There is also a distinction between their primary and secondary goals.

The secondary goals exist to support the primary goal.

The primary goal of a profit making company is to maximise shareholders’ wealth.

Business organisations come in all different shapes and sizes including sole traders,

partnerships and LTD.

A Limited company has a separate legal personality from its owners (shareholders).
The shareholders cannot normally be sued for the debts of the business unless they have
given some personal guarantee.

Their risk is generally restricted to the amount that they have invested in the company when
buying the shares (limited liability).

1 The ownership and control of a limited company are legally separate.

Shareholders are the owners but have limited rights over the day to day running of the

company.They provide capital and receive a return.

Shareholders could be large institutional investors (such as insurance companies and

pension funds), private individuals, or employees.

2 Directors are appointed by shareholders to run the company.

participate in the daily operations of the organisation and

are independent and are not involved in the day to day

running of the business. They are invited to join in an advisory capacity to

exercise overall guidance.

Co-operatives
Co-operatives are organisations in which there are members, and all members:

1 are actively involved in its activities, and

2 share in the benefits that the co-operative provides.

23 In a workers’ co-operative, a number of individuals co-operate to carry out related

activities, such as operating a farm or a factory.
They work for the co-operative and they share the benefits that the co-operative
provides.
24 A number of individuals might form a co-operative for the purchase and use of expensive
equipment.
Each member of the co-operative is entitled to some use of the assets.
For example, a number of small farmers might form a co-operative to purchase and use
expensive agricultural equipment.
25 In a retail co-operative society, the members buy goods and services from the retail
outlets of the co-operative society, and each year they receive a share of the profits that
the society has made.

A mutual association or organisation is owned by the member/clients that such

organisation exists for.
Generally mutual organisations deal with intangible products such as financial
services, example, ACCA
A non-profit organisation (NFP) works with a prime intention (primary goal) of providing a good or
a service to different sectors of society for which they are set up to provide a benefit.

For example, a school is set up to provide education.

Charities, such as, the Red Cross is set up to provide a medical service.

Public Sector organisations are owned or run by the government. They are funded by and
accountable to the government.

A major challenge that any government faces is that of balancing their limited resources with
a huge demand for public services.
eg
23 Hospitals

24 Armed Forces

25 Centrally funded agencies

26 Most schools & Universities

27 Government Departments

A non-governmental organisation is an independent voluntary association of people acting

together for some common purposes.

These organisations often support such things as: conservation issues, environmental

change etc.
Syllabus A2. Stakeholders in business organisations
 Syllabus A2a. Identify the main stakeholder groups and the objectives of each group.

Stakeholders
Define Stakeholders
A stakeholder is a group or individual who has an interest in what the organisation does, an
expectation of the organisation.
It is important that an organisation understands the needs of the different stakeholders.

Internal stakeholders
External stakeholders
Connected stakeholders
The diagram below lists some of the most important stakeholders of an organisation.

Agency
Sylla Define stakeholders and explain the agency relationship in business and
bus how it may vary in different types of business organisation.
A2a.
Agency Relationship
Agency is defined in relation to a principal. What?! Well all this means is an owner (principal)
lets somebody run her business (manager).
The agent is doing this job on behalf of someone else.
Footballers, film stars etc all have agents. They work on behalf of the star. The star hopes
that the agent is working in their best interest and not just for their own commission…

Principals and Agents

A principal appoints an agent to act on his or her behalf.

In the case of corporate governance, the principal is a shareholder and the agents are the
directors.
The directors are accountable to the principals

Agency Costs

A cost to the shareholder through having to monitor the directors

Over and above normal analysis costs
A result of comprised trust in directors

Syllabus A2b. Define internal, connected and external stakeholders and

explain their impact on the organisation.

Internal, Connected and external Stakeholders

Stakeholders

Internal stakeholders are intimately associated to the organisation and their objectives are

likely to have a strong influence on how it is run.

5888Employees

5889Management
jobs / careers, money, promotion prospects and benefits.

Pursuit of individual goals rather than shareholder interests

Resignation

Connected Stakeholders

Connected stakeholders can be viewed as having a contractual relationship with the

organisation.The objective of satisfying the shareholders needs to be fulfilled,
however, customers and finance objectives must be met if the company is to
succeed.

23 Shareholders – interested in shareholders’ wealth measured by profitability, P/E

ratios, market capitalisation
Response risk if interests are not recognised
Sell shares (e.g. to predator) or vote against management (e.g. at AGM)

24 Customers – interested in the company’s products

Response risk if interests are not recognised
Buy elsewhere
Damage reputation (e.g. bad publicity)
Legal action
25 Suppliers – interested in building long term relationship, on time payment of goods and
profitable sales
Response risk if interests are not recognised
Refusal of credit
Stop supplying
Legal action (e.g. for unpaid debts)
26 Finance providers - like banks interested in loan security
Response risk if interests are not recognised
Denial of credit
Higher interest charges

External Stakeholders
External stakeholders have quite diverse objectives and have varying ability to ensure that
the organisation meets its objectives.

23 Non-governmental organisations
Interests to defend
Human rights
 Response risk if interests are not recognised
Legal action
Environmental pressure groups
Interests to defend Protecting the environment Human rights
Response risk if interests are not recognised
Publicity Direct action Sabotage
Pressure on government
Government and regulatory agencies – interested in tax, compliance with legislation and employment opportunities

Response risk if interests are not recognised

Tax increases
Regulation
Legal action
Tariffs
26 Trade unions – interested in protecting their members.
Response risk if interests are not recognised
Legal action
Direct action

Syllabus A2cd. Identify the main stakeholder groups and the objectives of each group.
23 Explain how the different stakeholder groups
interact and how their objectives may conflict with
one another.

How different Stakeholder groups interact

Stakeholder Groups

The needs/expectations of the different stakeholders may conflict.

Stakeholders Conflict

employees versus managers jobs/wages versus bonus (cost efficiency)

customers versus shareholders product quality / service levels versus profit/dividend

general public versus shareholders effect on the environment versus profit/dividend

managers versus shareholders vehicle for exposing managerial skills vs dividend

stream and increase in the value of shares.
23 Managers prefer short-term decisions which bring them short-term profit
(bonuses) however
Shareholders prefer Long-term decisions which bring them return in long-term.
24 Business expansion may require additional share issues or loans, which will reduce
financial independence

Syllabus A2e. Compare the power and influence of various stakeholder

groups and how their needs should be accounted for, such as under the
Mendelow framework

The Mendelow Framework

Understanding the Influence of each Stakeholder (MENDELOW)

This framework is used to attempt to understand the influence that each stakeholder has
over an organisation’s strategy.
The idea is to establish which stakeholders have the most influence by estimating each
stakeholder’s individual power over – and interest in – the organisation’s affairs.
The stakeholders with the highest combination of power and interest are likely to be those
with the most actual influence over objectives.
The Mendelow Framework

23
Is the stakeholder’s ability to influence objectives

24
Is how much the stakeholders care

25
= Power x Interest

However, it is very hard to effectively measure each stakeholder’s power and interest

The ‘map’ is not static; changing events can mean that stakeholders can move around the
map
Mendelow Framework – explanation

23 A) Low power, low Interest - Minimal effort

24
These can be largely ignored, although this does not take into account any moral or

ethical considerations.

It is simply the stance to take if strategic positioning is the most important objective.

25 B) Low power, high interest - Keep informed

26
Can increase their overall influence by forming coalitions with other stakeholders in order

to exert a greater pressure and thereby make themselves more powerful.

The management strategy for dealing with these stakeholders is to ‘keep informed’.

27 C) High power, low interest - Keep satisfied

28
29 All these stakeholders need to do to become influential is to re-awaken their interest. This
will move them across to the right and into the high influence sector, and so the
management strategy for these stakeholders is to ‘keep satisfied’.

30
D) High power, high interest - Key players

Those with the highest influence.

The question here is how many competing stakeholders reside in that quadrant of the

map.

If there is only one (eg management) then there is unlikely to be any conflict in a given

decision-making situation.

If there are several and they disagree on the way forward, there are likely to be

difficulties in decision making and strategic direction.

Syllabus A3. Political and legal factors affecting business

Syllabus A3a. Explain how the political system and government policy affect the organisation.

External Analysis
External Analysis

PEST analysis

The main components that an organisation should study in order to carry out an
are:

P olitical environment/ Legal environment

E conomical environment/ Demographics
S ocial environment / Environmental environment
echnological environment
Political Environment

Organisational decisions are strongly affected by developments in the .

The political environment has its own system or framework. It regulates society therefore it

regulates the system.

23 Policies and Laws (for example laws regarding housing, education, defense,
healthcare, energy and environment)

24 Taxation

25 Local Councils

26 Authorities

27 Overall conduct of its economic policy

Legal Environment

Laws come from a number of sources. Common law, parliamentary and government
regulations are derived from it.

Factors Examples
general legal framework basic ways of doing business, negligence
criminal law theft, insider dealing, bribery, deception
company law directors & their duties, reporting requirements
employment law dismissal, minimum wage, equal opportunities
health & safety law fire precautions, safety procedures
data protection use of information about employees/customers
marketing & sales laws to protect consumers
environment pollution control, waste disposal
tax lawcorporation tax, income tax, sales tax
 Syllabus A3b. Describe the sources of legal authority, including supra-
national bodies, national and regional governments.

Sources of Legal authority

Sources of legal authority include the following:

5888 United Nations resolutions (can be either substantive or procedural)

5889 International Court of Justice

5890 Other international agreements that apply to signatories (e.g. The

World Trade Organisation sets rules on trade between member states)

5891 European Parliament

5892 European Courts

NATIONAL

National Governments through Acts of Parliament

Senior Courts (e.g. House of Lords in UK, The Supreme Court in the USA)
Other major courts through the principles of case law and the setting of precedents

5893 REGIONAL
5894 Regional/Federal Government (e.g. Welsh assembly in the UK, State
Government in the USA) Local councils can issue by-laws in many countries (a
law that is less important than a general law or constitutional provision)
 Syllabus A3c. Explain how the law protects the employee and the
implications of employment legislation for the manager and the
organisation.

Law protections for employee

Employment Legislation

In the UK, many employees are taking early retirement perhaps as a result of corporate
downsizing but many people still search for work at an older age and there are pressure
groups seeking to ban ageism.

People resign for many reasons, personal and occupational. Employees who are
particularly valuable should be encouraged to stay.

Particular problems the employee has been experiencing (example salary) may be
solvable, though not always in the short term.

In any case, an exit interview, when the leaver explains the decision to go, is a valuable
source of information.

The statutory minimum period of notice to be given is determined by the employee’s length
of continuous service in the employer’s service.

is dismissal that breaches the contract of employment.

is dismissal without a good reason for which the legal concept protects
the employee.

23 by employer,
24 by the employee,
25 fixed contract without renewal.
 Syllabus A3d. Identify the principles of data protection and security.

Data protection and security

Principles

There has been a growing concern that the ever-increasing amount of information

about individuals held by organisations could be misused.

e existence of computerised data about an individual, whether correct or incorrect, could be transferred to unauthorised third parties at high

23 to protect individual privacy (and not that of organizations)

24 to harmonise date protection legislation

The Principles of the Data Protection Act 1998

5888 Personal data shall be processed fairly and lawfully and, in particular, shall
not be processed unless:

5888 At least one of the conditions in Schedule 2 is met

5889 In the case of sensitive personal data, at least one of the conditions in
Schedule 3 is also met

5889 Personal data shall be obtained only for one or more specified and lawful purpose,
and shall not be further processed in any manner incompatible with that purpose or
those purposes.
5890
5891 Personal data shall be adequate, relevant and not excessive in relation to the
purpose(s) for which they are processed.

5892 Personal data shall be accurate and, where necessary, kept up to date.
5893 Personal data processed for any purpose or purposes shall not be kept for longer
than is necessary for that purpose or those purposes.

5894 Personal data shall be processed in accordance with the rights of data subjects
under this act.

5895 Appropriate technical and organisational measures shall be taken against

unauthorised or unlawful processing of personal data and against accidental loss or
destruction of, or damage to, personal data.

5896 Personal data shall not be transferred to a country or territory outside the
European Economic Area unless that country or territory ensures an adequate level of
protection for the rights and freedoms of data subjects in relation to the processing of
personal data.

There are several possible risks to data at the place of work. These include:

5888 Human error

5889 Technical error
5890 Catastrophic error
5891 Malicious damage
5892 Dishonesty

Syllabus A3e. Explain how the law promotes and protects health and safety in the workplace.

Health and Safety in workplace

Law Promotion and Protection

5888 An employer has legal obligations under UK & EU law

5889 The accidents and illness cost the employer money
5890 The company’s image in the marketplace and society may suffer

23 All work practices must be safe.

24 The work environment must be safe and healthy.

25 All plant and equipment must be maintained to the necessary standard.

26 Information, instruction, training and supervision should encourage safe working
practices.

Employers must provide training and information to all staff.

27 The safety policy should be clearly communicated to all staff.

Employers must carry out a risk assessment, generally in writing, of all work hazards.
Assessments should be continuous.
They must assess the risks to anyone else affected by their work activities.
28 They must introduce controls to reduce risks.

Syllabus A3f. Recognise the responsibility of the individual and organisation

for compliance with laws on data protection, security and health and safety..

Compliance with Laws

Data protection, security and health & safety

People should be able to be confident that they will not be exposed to excessive risk

when they are at work.

This means that risk and danger must be actively managed.

This is the main reason why security has become so important in today's world.

Data is protected by secured information technology apart from being secured by law.

To take reasonable care of their own health and safety.

23 To take reasonable care not to put other people - fellow employees and members of the

public - at risk by what they do or don't do in the course of their work.

24 To co-operate with the employer, making sure they get proper training and

understand and follow the company's health and safety policies.

25 Not to interfere with or misuse anything that is been provided for their health, safety or

welfare.
 To report any injuries, strains or illnesses you suffer as a result of doing their job.
26 To tell the employer if something happens that might affect their ability to work.

Syllabus A3g. Outline principles of consumer protection such as sale of goods and simple contract.

Principles of consumer protection

Sale of goods and simple contract

are designed to ensure fair trade competition and the free

flow of truthful information in the marketplace.

The laws are designed to prevent businesses that engage in fraud or specified unfair

practices from gaining an advantage over competitors and may provide additional protection

for the weak and those unable to take care of themselves.

Consumer Protection laws are a form of government regulation which aim to protect

the rights of consumers.

23 Unfair Contract Terms Act 1977 is an act of Parliament of the United Kingdom which

regulates contracts by restricting the operation and legality of some contract terms.

They are intended to provide broad protection for consumers, and business practices

which are likely to distort consumers' decisions regarding their purchases generally

fall within this act.

Certain kinds of unfair term can have that distorting effect, for instance

through misleading consumers about their rights.

24 Under contract law, the money you give in exchange for the goods is referred to as the

“consideration”.

For a contract to take place there must be agreement between the parties. This

requires an offer made by one party and acceptance by the other party.
25 An important point about contracts is that they do not have to be written. They do not

even have to be spoken.

A customer picking up something in a supermarket and walking to the checkout is

making an offer to the shop, and that offer is implied by his behaviour.

26 When one party to a contract fails to carry out his part of the agreement, the other

party can take legal action against him for breach of contract.

So if a business has a customer who is failing to pay, they can take him to court.
27 When one party makes a misrepresentation to the other, the contract is void.

is an act of the Parliament of the United Kingdom which regulates English contract law and

UK commercial law in respect of goods that are sold and bought. The Sale of Goods Act

performs several functions.

The Act lays down a small number of compulsory legal rules, but these restrictions are

minimal: the bulk of the Act is concerned with an array of presumptions and implied terms,

which aim to reflect the commercial expectations in the most commonly agreed sales

contracts.

In the absence of contrary agreement these terms will govern a contract within the Act's remit. The Act applies to co
transferred for a monetary.

Imagine you are about to enter into a contract for the purchase of some

What might you be concerned about?

You may want the goods delivered for a particular occasion or date

Are the goods stolen, i.e. does the seller have a right to sell the goo

25 You would expect the goods to be the same type and quality as the description or any

sample

26 The goods should be reasonable quality and suitable for their purpose
Syllabus A4. Macro-economic Factors

Syllabus A4a. Define macro-economic policy and explain its objectives

Macro-economic policy
Definition

is concerned with the total (aggregate) scenario of economic issues that determine a

person's economic well-being as well as that of one's family and everyone s/he knows.

These issues involve the of the nation, rather than that of

particular individuals.

5888 Do citizens find it easy or difficult to find jobs? (Unemployment rate)

5889 On average are prices rising rapidly, slowly, or not at all? (Concept of inflation)

5890 How much total income is the nation producing, and how rapidly is total income
growing year after year? (Productivity)

5891 Is interest rate charged to borrow money high or low?

5892 Is the Government spending more than it collects in tax revenue?

(Government budget)

5893 Is the nation as a whole accumulating assets in other countries or is it becoming

more indebted to them? (Foreign trade deficit)

Each of the above questions involve a central macroeconomic concept that affect the

factors of production – land, labour, capital and entrepreneurship.

The basic task of macroeconomics is to study the behaviour of the policy objectives, namely

economic growth, inflation, unemployment and balance of payments and why each matter to

individuals and what the government can do (if anything) to improve macroeconomic

performance.

The study of economics can be divided into two:

Macroeconimics

is the study of the economic behaviour of individual consumers, firms and industries.
Microeconimics

considers aggregate behaviour, and the study of the sum of individual economic

decisions.

Syllabus A4b. Explain the main determinants of the level of business activity in the economy and how
variations in the level of business activity affect individuals, households and businesses.

Business Activity in the Economy

The economy is rarely in a stable state because of the various changing

factors which influence it

An interesting factor is the multiplier.

A multiplier is basically a factor of proportionality that measures how much an X variable
changes in response to a change in some Y variable.

Determinants of the level of Business Activity

When consumers are confident, they tend to demand more whilst higher
business confidence results in higher investment.
Confidence is generally put at a threat when there is political instability, disasters,
unemployment and high inflation.

23

23 AD – Aggregate Demand
24 C – Consumer Spending
25 I – Investment by firms
26 G – Government Spending
27 X – Demand for exports
28 M – Imports
 Under the current method of presentation of the UK balance of payments statistics,
current account transactions are sub-divided into four parts.
23 Trade in goods
24 Trade in services

25 Income

26 Transfers.

24 When journalists on economists speak of the balance of payments they are usually
referring to the deficit or surplus on the current account.

The government of a country with a balance of payments deficit will usually be

expected to take measures to reduce or eliminate the deficit by one or more of the
following measures:

y known as devaluation
mports, such as tariffs or import quotas or exchange control regulations
aggregate demand in the domestic economy
switching policies which transfer resources and expenditure away from imports and towards domestic products while the last is an ex

If firms raise their finance it will result in higher levels of investment.

Lower interest rates will make capital cheaper.

Advancements in technology results in efficient work practices and can improve productivity.
A well-educated work force can also result in better and more productive work.
 Government can affect aggregate demand through fiscal policy (the blend of government
spending and taxation).

If Government spending increases then the overall aggregate demand will increase

A strengthening currency will make exports of a particular country more expensive and
in that case imports will result to be cheaper.

What are the impacts of having an appreciating (strengthening) currency?

Most developing countries have economies based largely on exports that are competitive
in global markets because of low prices.

A case in point nowadays is China.

When those countries’ currency gains in value, they are no longer able to offer exports

to the global market at the same low prices that they planned to.

This may cause importers (of other countries) to look elsewhere, to countries with lower

valued currency resulting in better prices.

It may also be the case that the importers will start ordering less from the said

country having an appreciating currency.

Currency appreciation at home means that money made elsewhere won’t stretch as

far in supporting the domestic economy

 Syllabus A4c. Explain the impact of economic issues on the individual, the household and
the business:Inflation

0 Unemployment

Stagnation
International payments disequilibrium..

Economic Issues
The impact of economic issues on the individual, the household and the

business

The inflation rate is the percentage rate of increase in the economy's average level of prices.

A high inflation rate means that prices on average are rising rapidly, while a low inflation rate
means that prices on average are rising slowly.

In inflationary periods, retired people or those about to retire are those of the biggest
losers since their hard-earned savings will buy less and less as prices go up.

While a high inflation rate harms those who have saved in the past, it helps those who
have borrowed.

It is this capricious aspect of inflation, taking from some and giving to others, that
makes people dislike inflation.

People want their lives to be predictable, but inflation throws a monkey wrench into
individual decision making, creating pervasive uncertainty.

An inflationary gap exists in an economy when aggregate demand (total demand in

an economy) is greater than the full employment level of income.

One important measure of the general rate of inflation in the UK used over many years
has been the Retail Price Index (RPI).
The RPI measures the percentage changes month by month in the average level of prices
of the commodities and services, including housing costs, purchased by the great majority of
households in the UK.
The items of expenditure within the RPI are intended to be a representative list of items,
current prices for which are collected at regular intervals.

Causes of inflation

Demand pull inflation arises from excess demand over productive capacity of

the economy.

It is a situation when demand exceeds supply and prices rise.

Demand pull inflation only exists when unemployment is low.

Considering the case scenario in the graph below, P1, that is price 1 was the

original price when national income was Y1.

When demand pull takes place, the curve AD1 shifts to AD2 since demand

increases (too much money chasing too few goods).

As a result, P1 increases to P2 reflecting inflation and Y1 increases to Y2 reflecting an

increase in national income.

When P1 decreases to P3, that means that demand decreased, shifting AD1 to

AD3 resulting in a decrease in national income from Y1 to Y3.

In a situation when inflation is rising, demand side policy which is controlled by

the government would focus on reducing aggregate demand through tax rise, cuts

in government spending and higher interest rates.

This is done in an effort to regularise inflation to control it from continuing to rise.

•

This is a result of increases in the costs of production thus short-run aggregate supply

(SRAS) shifts from SRAS1 to SRAS2. Its effect leaves an increase in price from P1 to

P2.

Thus, this increase in price is in fact inflation. Cost-push inflation arises whether or not

there is a demand for supply, for example, an increase in the cost of wages.
Cost of import rises regardless of whether there is a high demand for supply,

for example, an increase in oil prices.

The same explanation sticks from point no. 2 case scenario.

Monetary inflation means an increase in the supply of money. There is a debate whether

an increase in money supply is a cause of inflation or whether an increase in the money

supply is a symptom of inflation.

What happens is that the more supply in money, the more people will buy thus demand

will increase.
 As a result, if this increase in demand occurs faster than the expansion in the supply of

goods and services, then, inflation will take place.

Monetarists (supply side view) argue that a good tool to fight such inflation is to

decrease the supply of money and increase interest rates.

Once inflation has started to rise, there may be “expectational inflation”, that is, people

will start expecting inflation to rise even higher.

A general held view of future inflation therefore, sets for example, wages accordingly.

This is known as the wage-price spiral.

Unemployment rate is the number of jobless individuals who are actively looking for work

divided by the total of those employed and unemployed.

The higher the overall unemployment rate, the harder it is for each individual who wants

to find work.

Everyone fears a high unemployment since it raises the chances that they will be laid off

from their present work, will be unable to pay their bills etc.

1 Spending more money directly on jobs

2 Encouraging growth
3 Encouraging training in job skills
4 Offering grant assistance to employers
5 Encouraging labour mobility
 Types of unemployment

Category Comments

real wage caused when the supply of labour exceeds demand but real wages

ade unions which resist a fall in wages. abolishing (put an end to) closed shop agreements and minimum wage regulations are policies

frictional difficulty in matching quickly workers with jobs. possibly caused by

lack of knowledge of job opportunities. usually temporary

seasonal especially in certain trades as farming etc

structural occurs during long-term change in conditions. for example, a

long-term change in a community that relies on one particular industry

technological a form of structural that occurs then new technology arises.

cyclical or matches economic climate trends such as boom, decline, recession

demand- and recovery. demand for labour fluctuates as demand rises and falls

deficient
1 This is a combination of unacceptably high levels of unemployment and

unacceptably high levels of inflation.

During the 1970 in the UK a major rise in the price of crude oil took place. This

meant that the cost of energy rose and therefore rendered some products

unprofitable.

National income fell and both prices and unemployment rose. Any long term major

increase in costs could have this effect.

2 A “fundamental disequilibrium” exists when outward payments have a

continuing tendency not to balance inward payments.

Disequilibrium may occur for various reasons.

Some may be grouped under the head of structural change (resulting from changes in

tastes, habits, institutions, technology, etc.).

A fundamental imbalance may occur if wages and other costs rise faster in relation to

productivity in one country than they do in others. Imbalance may also result when

aggregate demand runs above the supply potential of a country, forcing prices up or

raising imports.

For example, a war may have a profoundly disturbing effect on a country’s economy
 Syllabus A4de. Describe the main types of economic policy that may be
implemented by government and supra-national bodies to maximise
economic welfare.
0 Recognise the impact of fiscal and monetary policy measures on the individual, the
household and businesses.

Economic Policy
The main types of economic policy

A macro-economic policy relates to economic growth, inflation, unemployment and the

balance of payments.

The objectives are:

1 Achieve economic growth

2 Control price inflation

3 Achieve full employment

4 Achieve balance between import and export

The impact of fiscal and monetary policy

Fiscal policy (Keynesian view) has to do with the government’s decisions about spending

and taxes.
This provides a method of managing aggregated demand in the economy.
There are several elements to the fiscal policy and that of the budget:

Expenditure

The government spends money both nationally and regionally on such things as health

services, educational, roads, policing.

It also provides commercial incentives to the private sector through grants.

To spend the money on public services the government needs an income.

 The majority of the income comes from taxes although some come from direct charges

like National Health Service charges.

A regressive tax takes a higher proportion of a poor person’s salary than a

rich person’s.

Example - road tax.

A proportional tax takes the same proportion of income in tax from all levels of income.

A progressive tax takes a higher proportion of income in tax as income rises. Example

– Income tax.

Should a governments’ spending exceed its income then it must borrow.

The amount it must borrow is known as the PUBLIC SECTOR NET CASH
REQUIREMENT (PSNCR).
This has a profound effect of the fiscal policy as a whole
.
2. Budget surplus and Budget Deficit
Should the government use its fiscal policy to influence demand in the economy then it
needs to choose either expenditure changes or tax changes, as its policy instruments,
or a combination of both. The government could:

Increase demand by directly spending more itself, for example, future investment
and spending on the health service or employing more people. If the government was to
influence demand by spending more, this would have to be financed either through
increasing taxes or borrowing. However, by increasing taxes, organisations, households
and individuals would have less to spend.

Increase demand indirectly by reducing taxation - Tax cuts are often followed by cuts in
government spending. Therefore, total demand will not be stimulated within the economy.
Again, tax cuts could also be funded by an increase in government borrowing. Should the
government decide to lower tax then organisations, households and individuals would have
more money after tax thus have the ability to spend more. When the government is running
a budget deficit it means that total public expenditure exceeds revenue. As a result, the
government has to borrow through the issue of government debt.
If the government sector is taking in more revenue than it is spending, there is a budget
surplus allowing the government to repay some of the accumulated debt, of perhaps
cut the burden of tax or raise government expenditure.

Monetary Policy looks at the supply of money, the monetary system, interest rates,
exchange rates and the availability of credit.
All of which are highly important to organisations, households and
individuals. Businesses can be affected by governments' taxation policies outlined within
the fiscal policy AND equally affected by high interest rates set out within the monetary
policy.
In the UK, the ultimate objective of monetary policy in recent years has been
principally to reduce the rate of inflation to a sustainable low level.
The intermediate objectives of monetary policy have related to the level of interest rates,
growth in the money supply, the exchange rate of sterling, the expansion of credit and
the growth of national income.

This is an intermediate target and should be seen as a medium term target.

The argument is that by increasing money supply this will raise prices and incomes

and this will increase the demand for money to spend.

There are however three short-term unpredictable effects:

0 May cause erratic (sudden) interest rates

1 Time lag. It takes time to cut government spending!

2 Time lag before control over money supply alters expectations

There are suggestions that there is a direct relationship between interest rates and the

levels of expenditure in the economy or put simply, between interest rates and inflation.

A rise in interest rates will raise the price of borrowing.

This could lead to a reduction in investments through the economy should

organisations perceive the high rate to be relatively permanent.

 Profits would fall due to higher borrowing rates and organisations may have to consider a

reduction in inventory levels.

For individuals, there is less likelihood of borrowing for house purchases.

A strong reason for pursuing an interest rate policy is that it can be implemented rapidly

compared to other target policies.

There are few reasons why the exchange rate plays an important part of the
monetary policy
1 If exchange rates fall, exports become cheaper to overseas buyers and so more
competitive in export markets. However, imports will become more expensive.
2 Therefore, a fall in exchange rates might be good for a domestic economy, by
giving a stimulus to exports and reducing demand for imports.
3 An increase in exchange rates will have the opposite effect, with dearer exports
and cheaper imports. If this happens, there should be a reduction in the rate of
domestic inflation.
4 However, the opposite would happen with a fall in exchange rates therefore,
adding to the rate of domestic inflation.
5 Rates of domestic inflation need to be controlled prior to introducing a robust target
for the exchange rates due to some country’s being heavily dependent on
overseas trade

Monetary policy can act as a subsidiary to fiscal policy. As a budget is usually a once a
year event, the government may need to use non-fiscal measures to control the
economy.
These are typically:
1 Low interest rates or lack of credit control to stimulate bank lending
2 High interest rates to stop bank lending
3 Strict credit control to reduce lending and reduce demand on the economy

Supply-side economic policies are mainly designed to improve the supply-side potential
for an economy, make markets and industries operate more efficiently and thereby
contribute a faster rate of growth of real national output. There are two broad
approaches to the supply-side.
Firstly policies focused on product markets where goods and services are produced
and sold to consumers and secondly the labour market is bought and sold.
Syllabus A5. Micro Economics Factors
Syllabus A5a. Define the concept of demand and supply for goods and services.

Demand & Supply of Goods & Services

The concept of demand and supply for goods and services

Microeconomics looks into the individual people and firms within the economy.

It tends to be more scientific in its approach than macro economics.

Analyzing certain aspects of human behavior (including groups and organizations that have

a two-way operation relationship with the business), microeconomics shows how individuals

and firms respond to changes in price and why they demand what they do at particular price

levels.

An organisation’s micro environment consists of itself and its current and potential

customers, suppliers and intermediaries.

The competition also has a key influence on the micro environment.

1 Materials
2 Money
3 Men (human resources)
4 Machines
5 Management

Utility is the word used to describe the satisfaction or benefit a person gets from
the consumption of goods.
Total utility is the total satisfaction that people derive from spending their income and
consuming goods.
Marginal utility is the satisfaction gained from consuming one additional unit of a good or the
satisfaction forgone by consuming one unit less.

Demand for goods and services

Five main variables influence the quantity of each product that is demanded by each
individual consumer:

1 The price of the product – creates a movement in the demand curve

2 The prices of other products – creates a shift in the demand curve
3 The consumer’s income and wealth – creates a shift in the demand curve
4 Various sociological factors – creates a shift in the demand curve
5 The consumer’s tastes – creates a shift in the demand curve
A basic economic hypothesis is that the lower the price of a product, the larger the quantity
that will be demanded, other things being equal.
This in fact reflects a downward sloping curve as in below diagram.

A, B and C are points on the demand curve.

Each point on the curve reflects a direct correlation between quantities demanded (Q) and
price (P).

So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
The demand relationship curve illustrates the negative relationship between price and
quantity demanded.

The higher the price of a good the lower the quantity demanded (A), and the lower the
price, the more the good will be in demand (C).

Supply for goods and services

Four major determinants of the quantity supplied in a particular market are:

1 The price of the product – creates a movement in the supply curve

2 The prices of factors of production – creates a shift in the supply curve
3 The goals of producing firms – creates a shift in the supply curve
4 The state of technology – creates a shift in the supply curve
The amount of a product that firms are able and willing to offer for sale is called
quantity supplied.

Supply is a desired flow; how much firms are willing to sell per period of time, not how much
they actually sell.

The quantity of any product that firms will produce and offer for sale is positively related to
the product’s own price, rising when price rises and falling when price falls.

This in fact reflects an upward sloping curve as in below diagram.

A, B and C are points on the supply curve.

Each point on the curve reflects a direct correlation between quantities supplied (Q) and
price (P).
At point B, the quantity supplied will be Q2 and the price will be P2, and so on.

When supply and demand are equal (i.e. when the supply function and demand
function intersect) the economy is said to be at equilibrium.
At this point, the allocation of goods is at its most efficient because the amount of goods
being supplied is exactly the same as the amount of goods being demanded.
Thus, everyone is satisfied with the current economic condition.

At the given price, suppliers are selling all the goods that they have produced
and consumers are getting all the goods that they are demanding.
Syllabus A5b. Explain elasticity of demand and the impact of substitute and complementary goods.
Elasticity of Demand
Elasticity of demand and the impact of substitute and complementary
goods

If Pizza Hut raises its prices by ten percent, what will happen to its revenues?
The answer depends on how consumers will respond. Will they cut back purchases a little
or a lot?
This question of how responsive consumers are to price changes involves the economic
concept of elasticity.

The most common elasticity measurement is price elasticity of demand.

It measures how much consumers respond in their buying decisions to a change in price.
Price elasticity of demand (PED) is a measure of the extent of change in the market
demand for a good in response to a change in its price.

The coefficient of PED is measured as:

Since demand usually increases when the price falls, and decreases when the price
rises, elasticity has a negative value.

However it is usual to ignore the minus sign and just describe the absolute value of
the coefficient.

1 If we are measuring the responsiveness of demand to a large change in price, we can

measure elasticity between two points on the demand curve, and the resulting measure is
called the arc elasticity of demand.

eg

Annual demand at €1.10 per unit is 700,000 units.

Annual demand at €1.20 per unit is 650,000 units.

Average quantity over the range is 675,000 units.

Average price is €1.15.

0 change in demand = 50,000 / 675,000 x 100% = 7.4%

1 change in price = 10c / 115c x 100% = 8.7%

Price elasticity of demand = -7.4 / 8.7 = -0.85

Demand is INELASTIC over the demand range considered, because the price elasticity
of demand (ignoring the minus sign) is less than 1.
Price elasticity of demand is considered to be elastic.
When the answer is greater than 1 (ignore the minus sign).
Factors that determine the value of price elasticity of demand

The more (and closer) substitutes available in the market the more elastic demand
will be in response to a change in price.
In this case, the substitution effect will be quite strong

Necessities tend to have a more inelastic demand, whereas luxury goods and services
tend to be more elastic.

For example, the demand for cinema tickets is more elastic than the demand for bus
travel.
The demand for vacation air travel is more elastic than the demand for business air

travel.

It may be the case that the smaller the proportion of income spent, taken up with
purchasing the good or service, the more inelastic demand will be.

Goods such as cigarettes and drugs tend to be inelastic in demand.Preferences are such
that habitual consumers of certain products become desensitized to price changes.

Demand tends to be more elastic in the long run rather than in the short run.

Income elasticity of demand

Income elasticity of demand = % change in quantity demanded / % change in income

Demand for a good is income elastic if income elasticity is greater than 1 and it is inelastic
between 0 and 1.
Goods whose income elasticity of demand is positive are said to be NORMAL
GOODS, meaning that demand for them will rise when household income rises.
If income elasticity is negative, the commodity is called an INFERIOR GOOD since
demand for it falls as income rises.

Cross elasticity of demand

Cross elasticity involves a comparison between two products.

The concept is a useful one in the context of considering substitutes and complementary
products.
Cross elasticity of demand = % change in quantity demanded of good A / % change in the
price of good B
Syllabus A5c. Explain the economic behaviour of costs in the short and long term.

Economic Behaviour of Costs

The economic behaviour of costs in the short and long term

The short run is a period of time in which the quantity of at least one input is fixed and
the quantities of the other inputs can be varied.
The long run is a period of time in which the quantities of all inputs can be varied.
There is no fixed time that can be marked on the calendar to separate the short run from the
long run.
The short run and long run distinction varies from one industry to another."

0
2 In the long run, firms change production levels in response to (expected)
economic profits or losses, and the land, labour, capital and entrepreneurship
(factors of production) vary to reach associated long-run average cost.

3 The long run is associated with the long run average cost (LRAC) curve in
microeconomic models along which a firm would minimize its average cost (cost per unit)
for each respective long-run quantity of output.

Long run marginal cost (LRMC) is the added cost of providing an additional unit of
commodity from changing capacity level to reach the lowest cost associated with
that extra output.

4 The concept of long-run cost is also used in determining whether the long-run is
expected to induce the firm to remain in the industry or shut down production.

5 The long run is a planning and implementation stage. Here a firm may decide that it
needs to produce on a larger scale by building a new plant or adding a production line.

6 The firm may decide that new technology should be incorporated into its production
process.
The firm thus considers all its long-run production options and selects the
optimal combination of inputs and technology for its long-run purposes.

Long-run decisions are risky because the firm must anticipate what methods of production
will be efficient, not only today, but also for many years in the future, when the costs of
labour and raw materials will no doubt have changed.
7 The decisions are also risky because the firm must estimate how much output it will
want to product.

8 Is the industry to which it belongs growing or declining?

9 Will new products emerge to render its existing products less useful than
an extrapolation of past sales suggest?

Once the decisions are made and implemented and production begins, the firm is operating
in the short run with fixed and variable inputs.
1 The short run is the conceptual time period in which at least one factor of production is
fixed in amount and others are variable in amount.
2 Costs that are fixed, say from existing plant size, have no impact on a firm's short-
3 run decisions, since only variable costs and revenues affect short-run profits.
4 In the short run, a firm can raise output by increasing the amount of the
variable factor(s), say labour through overtime.

Syllabus A6. Social and Demographic Factors

Social & Demographic trends

Effects on business outcomes and the economy

1 population
wealth
2 education and training
3 health
4 social structure, attitudes, values and tastes

What causes population to grow?

Higher birth rates Lower rates of death Immigration
0
Due to improvement in technology and in particular the pharmaceutical area a lower rate
of death is resulting during the years. Also, education about nutrition helped in extending
the life expectancy for both males and females.
There is an improvement in the general social conditions like the conditions of housing
(or shelter).
A growing population offers a larger labour market or “workforce”.
Therefore an increase in modern day birth rate would mean younger people within the
workforce such as in the case of Ireland.
This is compounded by a falling death rate and more elderly people continuing to work.
Economic growth often results in higher disposable incomes with the knock an effect of
greater demand for (most) products.
The four fastest growing economies in the world are the “BRIC” -
0 Brazil Russia India China

3. Education and training

An educated workforce is a key driver of economic growth, e.g. in China 99% of
the youth population in now literate compared to 70% in the 1980s.
Increasing standards of education and greater access to IT have made the internet a
major channel for selling and advertising.

In many western countries the population is becoming increasingly overweight. This

places greater demands on healthcare providers.
More than 12% of South Africans are infected by HIV. South Africa's declining life
expectancy (currently 51 years) is a major concern, especially as the population
structure has changed with fewer people in their middle ages.
This is normally the most economically active and skilled group who support the
elderly and younger groups.

Many countries are finding the demand for housing growing faster than the population
An increasing concern about the ozone layer, testing on animals
Many women are back to work
Changes in public attitudes towards recycling have resulted in opportunities for
recycling firms
Changes in tastes and fashions can have a damaging effect on organisations that fail
to anticipate the changes.
 Social structure, Values, Attitudes and Tastes
Impact of Organisations:

Topic Impact

health & diet growing market for sports related goods

employee health programmes
new food - added vitamins etc
demand for organic foods
increase in part-time roles
women in work the sex discrimination act
equal pay & value
promotion & seniority
equal opportunities

environmental media coverage fuels public concern

world disaster = public attention

The Business Response

Business agenda Response

green products exploit ecological friendliness
as a marketing tool
change working practices knowledge leads to consumer strength.
bad publicity has led to improvements
limits there may be limits to how much consumers
will change their lifestyles
education & confusion consumers wrongly educated
environmental impact assessments review process and finished product
 Measurements taken by Government
Medium and long-term impact of demographic change

1 Governments of countries with low birth rates often introduce tax advantages and
other financial incentives to encourage women to have more children.
This is the case scenario in Singapore for example.
2 Another common policy is to encourage immigration. Both Canada and Australia have
been promoting this for over a decade.
3 Governments in countries with rapidly rising populations often put in place policies to
discourage large families, e.g. the “one child” policy adopted by China.
4 The increasing percentage of the population aged over 65 is creating a pensions crisis
in many countries.
The main concern is that the taxes received from a smaller proportion of workers will
be insufficient to meet the pension demands of a growing retired population without
huge increases tax rates.
5 Typical government responses include rising the retirement age and encouraging
private and occupational pension schemes.

1 The percentage of single-parent families in the UK rose from 7% in 1971 to 23% in 2005.
The UK government has focused on enabling single parents to return to work through
a mixture of childcare vouchers and tax credits.

2 Among others this has created extra demand for childcare services and after-school
clubs.

3 Concerns over the effects of smoking have resulted in bans on tabacco advertising on
television in many countries and the ban from smoking in public in-door areas.

4 Concerns over obesity are giving rise to increasing pressure on government to

legislate in a similar way in the fast food industry.

5 In the South Africa the government has put in place many initiatives to raise awareness
to AIDS and sexual health.

The global community is under greater pressure to provide cheap drugs to help.
 Syllabus A7. Technological Factors
Syllabus A7a. Explain the potential effects of technological change on the
organisation structure and strategy:
Technological Change

Organisation structure and strategy

A change in technology has had a major impact on the structure and strategy
of organisations.
This has encouraged the flattening of organisational hierarchies and offering a wider span
of control.

More and more companies are “empowering” employees or outsourcing, cutting out the
need for middle management

Downsizing is the term used to refer to a situation when a company is reducing the
number of employees without necessarily reducing the work or output.

1
Many organizations have recently been delayering. Middle line jobs are reducing.
Organizations are increasing the average span of control, reducing management
levels and becoming flatter. Why?

Information technology reduces the need for middle managers to process information.

Empowerment - Many organisations, especially service businesses, are keen to delegate

authority down the line to the lowest possible level.

Front line workers are allowed to take decisions, which is often the best way to stay
flexible and responsive to customer demands.

Outsourcing has to do with contracting out specific operations or services to an external

vendor. Outsourcing can help remove the uncertainty of costs and replace it with a fixed
price.

It encourages planning as many of the outsourced contracts are long-term. It also can
benefit from economies of scale.

An outsourcing organisation can also share staff and expertise between clients. It
also gives both companies lots of flexibility.

Outsourcing can work on a project basis, for example a marketing company or

PR organisation helping to launch a particular product.

1 Confidentially of information or techniques

2 Competitive advantage
3 Locked into an unsatisfactory contract
4 Lethargy (not very productive) towards cost implications
 Information Technology & Information sytems
Effects of IT and Information Systems on Business Processes
routine processing increase in volume, speed and accuracy
digital information people like to print stuff out!
& record keeping managers have access to more information
more detailed planning is possible
information for control possible
better decision making due to better information
news skills/ways employees to utilise it
of working new systems require new ways of working
technological commits an organisation to continual change
customer service database, website etc = better customer service

information markets organisations have had to look upon information

as a commodity and to look more closely at
how this affects their business
developments in improvements and developments in communication
communication are having a huge impact on businesses. email is
quick and efficient, voice mail allows flexibility,
technology can route incoming calls and personalise
communication. computer conferencing encourages
communication and video conferencing improve
face to face contact and reduce travel costs
it & the
there's
employee/
a reduced need to follow chains of command information overload
employer relationship
nature of work
close business relationship regardless of location flexible working arrangements
greater monitoring and control
these are the same issues that are affected during downsizing due to developments in communications
 Sources of Internal and External Information

Information can be gathered either via internal or external sources

1 A system needs to be devised to gather this information. The types of internal

information could be:
Accounting Records
HR & Personnel Information
Payroll
Production Information

2 The system should take into account such things as:

What data/information?
When?
By who? What
method?
Process, filed and communicated?

External information is gathered via a formal or informal collection of data from outside
sources.
For example a formal process would read something like this:
A companies HR department should gather information regarding changes in
employment law or indeed a marketing manager should periodically assess the external
market through market research etc to ensure all information is gathered to make an
informed decision.

Informal information gathering occurs naturally as employees become aware of the

environment around them.
 Syllabus A8. Environmental Factors
Physical Environment
Environmental Conditions

A country's territorial size, geographical location, natural resources, climate, rivers, lakes and
forests constitute its physical environment.

Businesses are mainly concerned with either systematic change in environmental

conditions such as global warning or result of sudden and unexpected natural events such
as floods, storms and earthquakes.

What is important for businesses is to realise that business behavior must be adjusted
to expected variations in physical conditions.

Just as companies successfully operate within an envelope of changing economic conditions

(economic growth, inflation, unemployment) so they operate within an envelope of varying
physical conditions.

0 Air pollution (emissions from industries)

1 Water pollution (discharges from industries
2 Soil pollution (when waste is disposed ruthlessly it damages the soil)
3 Global warning

4 Ozone Depletion (the ozone layer protects the entry of harmful ultraviolet rays from
corning to the earth)

Efficient and effective Ways

Ways to limit damage to the environment

1 Store and handle hazardous substances safely

2 Prevent water pollution from site drainage
3 Separate hazardous waste from other waste types
4 Store and transport waste in suitable containers such as skips
5 Avoid causing a nuisance (irritation) from dust or noise
emissions 5
6 Use an environment management system (An EMS will help the business manage and
control its activities, including emissions and discharges, resource use, and waste in a
planned way)

Economic Sustanability

Benefits to a range of stakeholders

Economic sustainability is the term used to identify various strategies that make it possible to
utilise available resources to best advantage.The idea is to promote usage of those
resources that is both efficient and responsible, and likely to provide long-tem benefits.
In the case of a business operation, economic sustainability calls for using resources so
that the business continues to function over a number of years, while consistently returning
a profit.
Economic sustainability forces a company to look on the internal and external implications of
sustainability management.

1 the financial performance of a company;

2 how the company manages intangible assets;
3 its influence on the wider economy; and
4 how it influences and manages social and environmental impacts

There is some consensus that sustainability is desirable for individual businesses to prevent
the devastating and inefficient impacts of corporate premature death, and to enable and
protect social and environmental initiatives, which tend to be the product of more mature
businesses.
Economic sustainability can be seen as a tool to make sure the business does have a future
and continues to contribute to the financial welfare of the owners, the employees, and to the
community where the business is located.

Syllabus A9. Competitive Factors

SWOT Analysis
What is SWOT Analysis?

1. Strengths
what an organisation can do

2.weaknesses
what an organisation cannot do

3.Opportunities
potential favorable conditions for an organization
4. Threats
potential unfavorable conditions for an organisation

SWOT analysis is an important step in planning and its value is often underestimated
despite the simplicity in creation.

1 Strenghts and weaknesses

2 A manager must begin to think in terms of what the firm can do well and where it
may have deficiencies.Strengths and weaknesses exist internally within a firm, or in
key relationships between the firm and its customers.SWOT analysis must be
customer focused to gain maximum benefit. Strength is really meaningful only when
it is useful in satisfying the needs of a customer.
2
Opportunities and Threats.

Focus on the external environment when looking for Opportunities and Threats.
Opportunities and Threats can occur in the competitive, economic, political/legal,
technological, or socio-cultural environments.
The main sources of competitive advantage

Competitive advantage occurs when an organisation acquires or develops an attribute

or combination of attributes that allows it to outperform its competitors.

Competitive advantage is a key determinant of superior performance and it will ensure

survival and prominent placing in the market.

Some of the main sources of competitive advantage include:

Synergy
1 Effective leadership
2 Teamwork
3 Learning organization
Economies of scale
4 Differentiation
5 Cost leadership

Value Chain & Network

Competitive advantage

Competitive advantage or the competitiveness of an organisation can be achieved by

the way in which it organises and performs its activities.

Value activities are the activities by which an organisation creates value in its products.
A Value chain describes the activities of the organisation that add value to purchased
inputs.
Primary activities are those involved in the production of goods or service. Support services
supply assistance.

The linkages are the relationships between activities. Managing the value chain,
which includes relationships with suppliers, can be a source of strategic advantage
over competitors in the industry.

1 A restaurant has to buy food, cook it and then serve it to customers.

2 Customers purchase value.
A customer compares your product with similar competitors.
3 The business creates value by ensuring their product (food, effective service etc)
is either more efficient or that they are providing a unique product or service.
Porter developed his value chain to determine whether and how a firm's activities
contribute towards its competitive advantage.
Activity Comments
 inbound logistics receiving, handling and storing inputs to the production
system, warehousing, transport, inventory control etc

operations convert resources into final product. people are also a

resource in service industries

outbound logistics storing the product & distributing products. packaging,

testing, delivery etc

marketing & sales information customers about sales, persuading them

to buy, advertising, promotions etc
after sales serviceinstalling products, repair, upgrading, spare parts etc

procurement buying the resources inputs to the primary activities

technology product design, improving processes and/or resource

development utilisation

human resource recruiting, training, development and rewarding people

management

firm infrastructure planning, finance, quality control, porter believes this

can be of great strategic importance for an organisation

Porter's Five Forces Model

Level of competitiveness

stated that a firm wishing to obtain a competitive advantage over its rivals is faced with
two choices:

Cost Leadership vs Differentiation OR Degree of Focus

1 With this strategy, the objective is to become the lowest-cost producer in the industry.

2 Many market segments in the industry are supplied with the emphasis
placed minimising costs.
3 If the achieved selling price can at least equal (or near) the average for the market,
then the lowest-cost producer will (in theory) enjoy the best profits.
4 This strategy is usually associated with large-scale businesses offering "standard"
products with relatively little differentiation that are perfectly acceptable to the majority of
customers.

5 Occasionally, a low-cost leader will also discount its product to maximise sales,
particularly if it has a significant cost advantage over the competition and, in doing so,
it can further increase its market share.
6 Example from the car industry – Nissan, Ford, Honda

1 In a differentiation strategy a firm looks for ways to be unique along some

dimensions that are widely valued by buyers.

It selects one or more attributes that buyers perceive as important and uniquely positions

itself to meet those needs and it is rewarded for its uniqueness with a premium price.

2 One can differentiate in design, brand image, customer service.

3 Example from the car industry – BMW, Jaguar, Mercedes

FOCUS

 A focused strategy chooses a segment or group of segments in the industry and

tailors its strategy to serving them at the exclusion of others.

 This segment can be a particular buyer group, segment of the product line or
geographic market.
 There are two variations to this strategy - a cost focus where a firm seeks a cost
advantage in its target segment and a differentiation focus where a firm seeks
differentiation in its target segment.
 The target segments must either have buyers with unusual needs (differentiation
focus) or the production and delivery system that best serves the target segment
must differ from that of others industry segments.
A cost focus exploits differences in cost behaviour in some segments.

 Example from the car industry – Ferrari and Rolls Royce

Together these forces determine the overall profit potential of the industry.

Looking at an individual firm, its ability to earn higher profit margins will be determined by
whether or not it can manage the 5 forces more effectively than competitors.

A new entrant into an industry will bring extra capacity and more competition.

The strength of the threat and the new entrant will depend on two things:

1 Strength of the barriers of entry

2 The response of existing competitors in the marketplace

A substitute product is a good product or service from another industry that satisfies that

customer need.

Customers require better quality products and service at a lower price.

By satisfying these, an organisation or industry may force down the profitability of

suppliers in the industry.

How strong the customer’s position is, depends on a number of factors:

1 How much the customer buys

2 How critical the product is to the customers business
3 Switching costs (switching from one supplier to another)
4 Are the products standard items (easily copied?)
5 The customers own profitability (low customer profits = lower prices from suppliers)
6 Awareness of customers purchasing staff/price awareness
7 When the quality of the product is more important to the customer, the customer is
less likely to be price sensitive
 Suppliers are able to exert pressure for higher prices however this depends on several

other factors:

 Are they more than one or two dominant suppliers (charge monopoly prices)

 The threat of new entrants

 Whether the supplier has other customers or substitute products

 Importance of the suppliers product to the customers business

 Has the suppliers got a differentiated product

 Are the switching costs too high

The intensity of competition within the industry will affect the profitability of the industry.

Competitive actions could be:

1 Price competition
2 Advertising battles
3 Sales promotion campaigns
4 Introducing new products
5 Improving sales aftercare
6 Providing guarantees or warrants
 Syllabus B: Business Organisation
Structure, and Governance
Syllabus B1. The Formal and Informal Business Organisation
Informal Organisation

Organisational Structure

Organisational structure is a pattern of responsibilities showing the connections between

the individuals engaged in the collective activity and the responsibilities of each of them.

The field of organisational structure lends itself to scientific treatment.

Yet, such treatment appeared to have become too formal, bearing the stamp of
an engineering approach seeking scientific precision and a logical form!

As a result, there has appeared a countervailing (offsetting) theory of

which focuses attention on human relations and the way in which
the actions of the people in the organisation deviate from the plan.

The formal organisation is one which logically groups activities, delineation of authority
and responsibility and the establishment of relationships to enable people to work most
effectively together in accomplishing the objectives of the business.

It is important to note that these formal relationships emerge from the definition of the
responsibilities attached to the holder of the post, for example, a relationship between
the labourer and the supervisor because he is responsible for him.

Such formal relations can be set out in detail with as much precision as is desired in the
form of job specifications and the general nature of their inter-relations can be set forth in
an organisational chart.

However, there is the existence of the informal organisation which depends on the
personalities of the people occupying the various positions in the organisational
structure.

Impact of informal organisation on the business

Social Forces

Social forces of various types from the wider community outside the business infiltrate into
the organisation and influence the relationships of its members and the way it works.
It is obviously important that such informal relations shall not conflict with those
established by the formal structure.
Informal organisations can become detrimental or beneficial to the formal organisation
depending on how it is managed. Informal organisations are loosely structured, flexible and
spontaneous.

1 Employee commitment
2 Knowledge sharing
3 Speed
4 Responsiveness
5 Co-operation

1 Social groupings may act collectively against organizational interests

2 Morale-damaging rumors
3 Employees may suffer if they excluded from the social grouping
 Syllabus B2. Business Organisation Structure and Design
Mintzbergs 5 building Blocks
Henry Minztberg

Henry Minztberg produced an organisational ideology divided into 5

organisational configurations

that help in understanding better how an organisation should be structured.

It is important to add that these configurations may not exist in real world but can be very
helpful for someone who would like to understand the realities of an organisational structure.
1. = Top Management

Strategic Apex has to do with the top management and those who make the
rules (decision makers)

It drives the direction of the business through control over decision-making.

0 = Management

– performs the managerial functions of control over resources, processes and

business areas.

3. = Normal employees of the firm

– performs the routine activities of the organisation, also known as the “do-er's”.

4. = No line management responsibilities. Produce systems manuals

etc These are the people who guide the operating core in being efficient in their jobs.

They drive efficiency through rules and procedures.

0 = Secretarial, cleaning, repairs, IT etc

– support all the companies' activities and provides expertise and service to
the organisation.

Whichever group is most powerful dominates the organisation structure

Most powerful group Structure

Strategic Apex Entrepreneurial. Leaders give sense of direction

Operating Core Highly skilled workers with lots of influence e.g. Schools, hospitals

Middle Line Localised and divisionalised company

Remember that poor performance in a company may simply be due to having an

inappropriate structure for the environment and the strategies it follows
Mintzbergs 6 Configurations

Entrepreneurial. Strategic apex gives direct control, little middle line, support staff
or technostructure. Owner are often managers. Flexible, quick to react

Technostructure dominant. Controls through regulations. Slow to react to change

Needs standardisation in simple, repetitive and stable environments. Typically found in
large, mature organisations

Operating Core dominant. Highly skilled professionals abound

Machine bureaucracy generates its own standards BUT professional bureaucracy
standards come from the outside
It's "the power of expertise"

Middle line dominant. Division leaders powerful and often able to restrict strategic apex
influence
The autonomy in the Professional Bureaucracy are individuals—BUT—in the
Divisionalised Form they are units in the middle line Each division has its
own structure.
Divisions are created according to markets served

Complex and disordered. Extensive teamwork/project type work. Support staff very
important as close relationship to external suppliers can be vital. Innovation is a strength
here
No standardisation
Most suitable structure for innovative organisations which hire and give power to
experts Project managers are particularly numerous

All member share a common set of beliefs. Difficult to accept change. Only suitable
for small, stable environments.
Structures

Different
Structural Organisation
Every organisation exists for the purpose of carrying out certain predetermined
objectives and its structure must be necessarily to promote these objectives.

Thus an organisational structure is not fixed, it can change as the need requires.

It is also important to note that in different organisations one might find different
organisational structures whilst one may also find different structures in the same
organisation.

In any given case the organisation structure owns much to the historical background of the
firm and to the personalities of those who managed it in its formative years.

Other influences which are equally relevant and possibly more persistent in determining
organisation structure are the type of markets and customers to which the business sells,
the type of product sold and the system of technology in used to produce the product.

Methods of Grouping Activities

The process of dividing and grouping the tasks which have to be performed into convenient

units of management may be termed .

The board of directors and the chief executive must decide on the major divisions of activity.

The heads of each division will then have their own units, sections, branches
or departments.

This method is used when a firm decides to group according to the product in question.

This method is mainly used by, for example a department store which sells soaps,
hair products, feet products, makeup and fragrances.

When a variety of products of different types are being manufactured or sold there is
always a danger that some products or lines will receive too little attention in selling
and general promotional activities.

This danger can be met by forming an organisational structure on the basis of

product groupings.
Advantages Disadvantages

accountability increases the overhead costs

specialisation fail to share resources

co-ordination

This method has a great deal in its favour where the organisation is based
on geographically scattered units.

For example, the branches of a bank may be grouped in this way under regional offices.
Of great importance is the need for securing due attention to local factors because a
full appreciation is not always possible at a distance.

Departmentalisation may take place on the basis of function.

Some functions may include Sales, Marketing, Purchasing and Research
& Development.
Advantages Disadvantages

pools expertise focus on processes & inputs not customers and outputs

avoids duplication communication problems

helps recruitment, development etc poor co-ordination

works well with centralised creates vertical barriers

businesses
Economies of scale may be achieved

Control is very high

Economies of scale - arise when unit costs fall as output rises.

0

Is designed to encourage employee flexibility and multiple reporting.

A matrix structure organisation is formed by a team of people coming from different

sections of the organisation.

This team is formed for a period of time to work on an assigned project.

The main advantage with a matrix structure is that the best people are chosen for
a specific project thus expecting better results.

A matrix structure is led by a project manager and all team members have to report
to him whilst working on this project.

On the other hand, the same members of this project have to report to their line manager
when they are doing their normal job (they report only issues that has to do with their
normal job).

This situation may lead to a conflicting loyalty towards who is really managing!

This type of structure is built around the owner manager and is typical with
small companies in the early stages of their development.
The entrepreneur often has specialist knowledge of the product or service.

An organisation may organize its activities on the basis of types of customer or market
segment.

Organisation structures are rarely composed of only one type of organisation. Hybrid
structures involve a mix of structures.

The Shamrock Approach

1 Core Workers – receive good promotion, security and status prospects relative to
others and are often managers, team leaders and professional staff.
2 Interface Workers – low skilled labour that are generally called when needed for
example part-time, seasonal staff – these type of workers are becoming more
dominant and more demanded.
3 Suppliers – temporary and self-employed with general skills as needed, for
example, consultants.
 Basic Organisational Structure Concepts

Separation of Direction and Management

Ownership and management of larger organisations are often separated.

The separation of ownership and management has proven enormously beneficial to both
owners and managers, since it brings together those who have capital but not necessarily
the skills or time to run a business and those who have managerial skills but not
necessarily the capital.

In order to ensure that managers are managing the business in the best interests of the
owners, many safeguards/controls are put in place, which will lead to, for example, formal
organisation structures being set up for an organisation.

The term refers to the number of employees/subordinates directly

responsible to a superior.
Therefore, if a manager of a large organisation has 10 subordinates, the span of control is
10.
A number of factors influence a span of control:

1 Capabilities often limit the span of control (ability/inability to manager people)

2 Nature of the workload

3 Geographical. If over a wide area this becomes more difficult

4 Subordinates work. If they do a similar tasks

5 Nature of problems. If problems that take a lot of time to solve, it would suggest a
narrow span of control (less people to manage)

6 A good interaction between subordinates would suggest a wide span of control as they
are able to help each other
7 The level of support required

A
refers to all levels between the very top and the lowest in
hierarchy. ( the )

Fayol emphasised the need of having reporting relationships from top executive to the
ordinary shop operative or driver, sensible, clear and understood.

This is the process of reducing the number of management levels from the bottom to the top.
Here organisations are increasing the average span of control, reducing management levels
and becoming flatter.

If the span of control is very limited, the number of organisational levels (scalar chain) will
increase, as the organisation grows in size, the organisational structure becomes .

The fact that the number of immediate subordinates is limited at each level tends to
create close supervision and increased dependence of the subordinate on his principal.

0 organisation is one which has a smaller number of organisational levels

(scalar chain) and thus a wider span of control.
 Anthony Hierarchy
The characteristics of the strategic, tactical and operational levels in the
organisation

0 is applied by top managers.

It is basically the planning for the long-term future including the definition of where the
organisation needs to go and how to get there.

1 looks at the medium term and is more of a specific nature than

the strategic planning.
It looks at the departmental level and specifies how to use resources.

• looks at the short term (day to day) and is very detailed.

This type of planning has a main concern of controlling what is set for the short

term.
 Centralisation & Decentralisation
The difference between...

• implies that there exists more than one level within an organisation and
that decisions are made only by the highest level.

Therefore, one may say that a centralised organisation has a central authority and no
decisions are made at lower levels.

encourages the existence of more than one centre of decision-making.

A decentralised company empowers lower levels within the hierarchy to take decisions.

Advantages of Advantages of
Centralisation Decentralisation

easy co-ordination of decision decisions are delegated = less

stress for senior management

wider view of consequences and improves motivation

problems

balance interests of different greater awareness of local

functions problems

quality of decisions better due to quicker decision making

skill level of senior management

cheaperless managers! develops skill level of junior

managers

crisis decisions taken quickly separate responsibilities

standardised procedures decisions can be made locally

 Business Organisation
Roles and functions of the main departments

This department has achieved great importance in today's competitive world.

Organisations are always on the look out to improve their products (process
research) or even to create portfolio innovation to be better and ahead of competition
(product research).

The main roles of an R&D department besides improving and inventing products is
to anticipate customer needs and this is why most of the time R&D falls under the
umbrella of Marketing.

Purchasing is regarded as a very important management function in an organisation.

The main reason for this is that firms must be able to purchase goods and services at an
acceptable price and quality.
The purchasing manager has to obtain the best purchasing mix.

1 Quantity
2 Quality
3 Price
4 Delivery

Production or operation

The main job of the production department is to convert raw materials into finished
goods.
They are also after using the methods of production which are the most efficient for the
production in question.
This is only made possible if good planning is conducted prior to the implementation
of production.
Costs are to be monitored all the time thus wastage should be avoided as much
as possible

This department or function has to do with the delivery of a service directly to the
end consumer.
For example an accountancy firm falls under this category. To ensure the best service
for all clients, good time management is to be enforced.
The salient characteristics of services are:
1 Intangibility
2 Inseparability (from service provider)
3 Variability
4 Ownership (you can never be an owner of a service)
5. Marketing
The main concern in a marketing department is the consumer. This department tries to
identify customer needs and wants, try to accommodate them in the best possible way
and better then the competitors and in the case of a profit making organisation, all this
must be at a result of a profit.
Many people think that Marketing is purely sales. In fact, Sales is only one are of
marketing.
The main difference between a marketing oriented firm and a sales oriented firm is that
the latter generates profits through sales volumes whilst marketing oriented firms incur
profits by establishing long term customer satisfaction.

The Administration department should support the other departments by

processing administrative requests such as correspondence, photocopying etc.
These people must have excellent communication skills to coordinate the needs
between the departments.

It is important that the finance department has continuous links with the
other departments.

The main role of this department, though, is to manage the finances of an

organisation by monitoring income and expenditure.

It is also in charge of preparing the final accounts and to raise finances of the company.

This is generally done by either issuing shares or taking loans.

8.Human resources

Human resources management (HRM) is in charge of recruiting and selecting

employees, motivating employees and making the most effective use of human
resources.
Marketing in an organisation
The role of marketing in an organisation

Marketing touches all of us every day of our lives.

We wake up in the morning and brush our teeth with Sensodyne toothpaste, shave with

Gillette Sensor razor and use Dove shower gel.

We put on a pair of Guess jeans and Nike running shoes whilst heading to the kitchen.

We serve ourselves some Kellogg's Special K cereal and drink a cup of Nescafe coffee.

We go to work, switch on the radio and most of the time we end up bombarded with ongoing

commercials.

1 Marketing was defined by the American Association as:

“the process of planning and executing the conception, pricing, promotion and
distribution of ideas, goods, and services to create exchanges that satisfy individual and
organisational objectives”

2 Philip Kotler defines Marketing as:

“the analysis, planning, implementation and control of programmes designed to bring
about desired exchanges with target audiences for the purpose of personal or mutual
gain.
It relies heavily on the adaptation and co-ordination of product, price, place and
promotion for achieving effective response”

All the above definitions are correct but because of the difficulty of incorporating all the
facets of marketing into a simple definition some additional key points are important to be
added.

1 Marketing focuses on the needs and wants of the marketplace

2 Marketing is concerned with satisfying the needs and wants

3 Marketing involves analysis, planning and control

4 Marketing focuses on achieving customer satisfaction to achieve its business

objectives, thus a marketing oriented firm is one that has changed the marketing
philosophy into an overall business philosophy

IS MARKET ALL ABT. SELLING? NO – although we all tend to be bombarded with

different commercials through different media channels, marketing is not only sales.
The latter is only the tip of the marketing iceberg.

A FEATURE OF MARKETING RATHER THAN SALES

It tends towards long term satisfaction of customer needs.

The Marketing Mix also known as the 4 P's is comprised of:

Product Price Place Promotion

is anything that can be offered to a market for attention, for acquisition, use or
consumption that might satisfy a want or a need.

A product can be either a good or a service that is perceived together with its tangible and
intangible attributes.

One might think the key product decision for a manufacturer of floor detergent is to focus on
creating a formula that cleans more effectively.

In actuality, while decisions related to the consumable parts of the product are extremely
important, the TOTAL product consists of more than what is consumed.

The total product offering and the decisions facing the marketer can be broken down
into three key parts:

• - the overall benefit of buying the product

• – the brand and quality you are purchasing

• - anything over and above the purchase such as delivery

In order to make a profit, a business should ensure that its products are priced above their
total average cost.
In the short-term, it may be acceptable to price below total cost if this price exceeds the
marginal cost of production – so that the sale still produces a positive contribution to
fixed costs.
If the business is a monopolist, then it can set any price.
At the other extreme, if a firm operates under conditions of perfect competition, it has
no choice and must accept the market price.
The reality is usually somewhere in between. In such cases the chosen price needs to
be very carefully considered relative to those of close competitors.
Consideration of customer expectations about price must be addressed.
Ideally, a business should attempt to quantify its demand curve to estimate what volume
of sales will be achieved at given prices.
Sometimes a company is not free to price its product at any level it chooses.
For example, there may be price controls that prohibit pricing a product too high.
Pricing it too low may be considered predatory pricing or “dumping” in the case of
international trade.
Offering different price for different consumers may violate laws against price discrimination.
Finally, collusion with competitors to fix prices at an agreed level is illegal in many countries.

COST – CUSTOMERS – COMPETITION – CORPORATE OBJECTIVES

1 .Cost-plus pricing involves the determination of all fixed and variable costs
associated with products or services.

After the total costs attributable to the product or service have been determined,
managers add a desired profit % to each unit such as a 5 or 10 percent markup.
The goal of the cost-oriented approach is to cover all costs incurred in producing or
delivering products or services and to achieve a targeted level of profit.

2 .Going rate pricing is when a company sets its price of a product according to the
price being charged by competitors offering similar products.

This is generally practised when there is a market leader and the other companies try
and meet his prices.

This method can be rather dangerous for small companies who are trying to compete
with bigger companies that enjoy benefits resulting from economies of scale.

.The practice of ‘price skimming’ involves charging a relatively high price for a short
time where a new, innovative, or much-improved product is launched onto a market.
The objective with skimming is to “skim” off customers who are willing to pay more
to have the product sooner; prices are lowered later when demand from the “early
adopters” falls.
1 .Penetration pricing involves the setting of lower, rather than higher prices in order
to achieve a large, if not dominant market share.

This strategy is most often used by businesses wishing to enter a new market or build on
a relatively small market share.

This will only be possible where demand for the product is believed to be highly
elastic, i.e. demand is price-sensitive and either new buyer will be attracted, or existing
buyers will buy more of the product as a result of a low price.

2 .Discrimination pricing takes place when a different price is charged either to

different people or else during peak and off-peak.

For example, some public transport services entitle a pensioner to pay a different price
than a person under 61 of age.

The dial-up internet charges are higher during peak hours.

Place is also known as channel or distribution. It is the mechanism through which goods
and/or services are moved from the manufacturer/service provider to the user or consumer.
These are companies or persons that help in some way or other for goods and services to
be distributed from manufacturers in order to reach consumers.

0 Agents Wholesalers Retailers Financial companies Transport companies

1 moving the goods efficiently

2 breaking bulk
3 consolidating goods (retail stores carry a wide assortment of goods from different
manufacturers—e.g., supermarkets span from toilet paper to cat food)
4 added services (e.g., demonstrations and repairs)

1 Personal Selling is an oral presentation in a conversation with one or more

prospective buyers for the purpose of making a sale.
2 Advertising is any paid form of non personal presentation and promotion of ideas, goods
or services by an identified sponsor.

3 Sponsorship is where an organization pays to be associated with a particular

event, cause or image.
Companies will sponsor sports events such as the Olympics or Formula One.
The attributes of the event are then associated with the sponsoring organisation.

4 Direct marketing is any unsolicited (spontaneous) contact a business makes with existing
or potential customers in order to generate sales or raise awareness.
Direct marketing allows a business to generate a specific response from targeted
groups of customers.
5 Public Relations is the art and science of managing communication between an
organisation and its key public constituents to build, manage and sustain its
positive image.

AIDA is a communication model which can be used by firms to aid them in promoting their
product or services.
AIDA is an Acronym for:
1 Attention Interest Desire Action

Beyond the 4P's other elements of the marketing mix have come to light through the work
of Kotler amongst others.

People Process Physical Evidence

An essential ingredient to any service provision is the use of appropriate staff and people.
Recruiting the right staff and training them appropriately in the delivery of their service is
essential if the organisation wants to obtain a form of competitive advantage.

Consumers make judgments and deliver perceptions of the service based on the
employees they interact with.

Staff should have the appropriate interpersonal skills, attitude and service knowledge to
provide the service that consumers are paying for.

Process refers to the system used to assist the organisation in delivering the service.

Physical Evidence is the element of the service mix which allows the consumer again
to make judgments on the organisation. Physical evidence is an essential ingredient of
the service mix.

Consumers will make perceptions based on their sight of the service provision which
will have an impact on the organisations perceptual plan of the service.

The focus of a strategic plan is on the entire organisation. It has to do with the vision of an
organisation spelling out where the organisation would like to go in the future and how to
get there.

On the other hand, a marketing plan spells out the activities related to marketing (product,
price, place and promotion) activities.

It is only after formulating a very good strategic plan can a marketing plan be prepared.
 Analysis implies the examination of the present situation.
This is generally conducted by a SWOT analysis (strengths, weaknesses, opportunities,
threats).

At the time of performing analysis, long term goals are established.

It is then the time to choose the best methods or strategies to achieve the goals.
One has to decide where to compete and how to compete and if staying in the
local market or expanding in the international markets.

If a company manages to choose the right strategies, it would help in the execution or
implementation of such strategies.
It is only at this stage that the long-term strategy can be translated into other plans
such as:

marketing management

operations/production accounting/finance
computer information systems research and development

Organisational Culture
Culture

is defined by Charles Handy as being - “the way we do things around here”.

By this Handy means the sum total of the beliefs, knowledge, attitudes, norms and
customers that prevail in an organisation.

The main components of Culture

If one had to analyse Culture in more detail, one might say that organisational culture forms
in response of two major challenges that confront every organisation:

which has to do with how the organisation copes with its constantly changing
external environment;
 which has to do with the establishment of effective working relationships among
the members of an organisation.
The national culture, customs and societal norms of a country also shape the cultures
of organisations operating in it.
The dominant values of a national culture may be reflected in the constraints imposed on
organisations by others.
For example, a country's form of government may have a dramatic impact on how an
organisation does business.

Factors that shape Culture of Organisation

The factors that shape the culture of the organisation
The six major influences on the culture of an organization

– how large is the organisation in terms of turnover, physical size and employee numbers

– how technologically advanced is the organisation either in terms of its products, or its productive processes

– how diverse is the company either in terms of product range, geographical spread or cultural make-up of its stakeholders

– how old is the business or the managers of the business – how experienced are the strategic level decision makers

– what worked in the past? Do decision makers have past successes to draw upon; are they willing to learn from their mistakes?

organisation owned by a sole trader? Are there a small number of institutional shareholders or are there large numbers of small shareh

:
 Contribution on Culture
The contribution made by writers on culture

Schein argues that there exists a strong influence on organisational culture by who leads
the organisation.

He further commented that if leaders are to lead then it is essential that they understand the
levels of organisational culture.

Schein's Cultural theory is sometimes represented as the Iceberg Concept

are the aspects of culture that can easily be seen like for example the way that people
dress.

are the strategies and goals of an organisation, including company slogans.

are difficult to identify as they are unseen and exist mainly at the unconscious level.
 Handy – Four Cultural Types
In 1972, Harrison classified an organisation into four different types only for Charles Handy
to popularise them by using Greek Gods!

Zeus (Power Culture) the all-powerful head of the gods, an organisation dominated by
the personality and power of one person, often the founder or owner.

Then there was the Apollo (Role Culture) organisation, dominated by rules and
procedures, after Apollo the God of harmony and order. In this version of culture,
people describe their job by its duties, not by its purpose.

It is a bureaucratic organisation, where the structure determines the authority and

responsibility of individuals and there is a strong emphasis on hierarchy and status.

Athena (Task Culture), the warrior goddess, was the symbol of the project organization,
the culture that dominates consultancies, advertising agencies and, increasingly, all
innovative businesses.

In this type of culture, people describe their position in terms of the results that they
are achieving. It is after accomplishing a task.

Lastly there was the Dionysian (Person) culture, one in which the individual has
the freedom to develop his or her own ideas in the way they want - an artists'
studio, perhaps, or a university.

They are hard to manage, these Dionysian places, but increasingly necessary if you want to employ really creative people.

No. The world is not that simple. In fact every organisation, just like every individual, is
different from every other one, but what they are includes a different mix of the same four
basic cultures.

The trouble is that some get stuck in one of them instead of mixing all four.
Handy matched its cultural models to Robert Anthony’s classification of
Managerial activity.

is concerned with direction-setting, policy making and crisis handling. Therefore it suits
power culture.

is concerned with establishing means to corporate ends therefore suits a task culture.

is concerned with routine activities therefore it suits role culture.

Hofstede – International perspectives of Culture

Hofstede looked for national differences between over 100,000 of IBM's employees in
different parts of the world, in an attempt to find aspects of culture that might influence
business behaviour.
Power distance measures how subordinates respond to power and authority.

In high-power distance countries (Latin America, France, Spain, most Asian and African
countries), subordinates tend to be afraid of their bosses, and bosses tend to be
paternalistic and autocratic.

In low-power distance countries (the US, Britain, most of the rest of Europe), subordinates
are more likely to challenge bosses and bosses tend to use a consultative
management style.

It suggests that a society's level of inequality is endorsed by the followers as much as by

the leaders.

Power and inequality, of course, are extremely fundamental facts of any society and
anybody with some international experience will be aware that 'all societies are
unequal, but some are more unequal than others'.

In individualistic countries (France, Germany, South Africa, Canada, etc.), people are
expected to look out for themselves.

Solidarity is organic (all contribute to a common goal, but with little mutual
pressure) rather than mechanical.

Typical values are personal time, freedom, and challenge.

In collectivist cultures (Japan, Mexico, Korea, Greece) individuals are bounded through
strong personal and protective ties based on loyalty to the group during one's lifetime
and often beyond (mirrored on family ties).

Masculinity versus its opposite, femininity, refers to the distribution of roles between the
genders which is another fundamental issue for any society to which a range of solutions
are found.

The IBM studies revealed that

A) women's values differ less among societies than men's values;
B) men's values from one country to another contain a dimension from very
assertive and competitive and maximally different from women's values on the one side, to
modest and caring and similar to women's values on the other.

The assertive pole has been called 'masculine' and the modest, caring pole 'feminine'. The
women in feminine countries have the same modest, caring values as the men; in the
masculine countries they are somewhat assertive and competitive, but not as much as the
men, so that these countries show a gap between men's values and women's values.

Uncertainty avoidance

Uncertainty avoidance deals with a society's tolerance for uncertainty and ambiguity; it
ultimately refers to man's search for Truth.

It indicates to what extent a culture programs its members to feel either uncomfortable
or comfortable in unstructured situations.
Unstructured situations are novel, unknown, surprising and different from usual.
Uncertainty avoiding cultures try to minimize the possibility of such situations by
strict laws and rules, safety and security measures, and on the philosophical and
religious level by a belief in absolute Truth;

'there can only be one Truth and we have it'.

People in uncertainty avoiding countries are also more emotional, and motivated by inner
nervous energy.

The opposite type, uncertainty accepting cultures, are more tolerant of opinions
different from what they are used to; they try to have as few rules as possible, and on
the philosophical and religious level they are relativist and allow many currents to flow
side by side.

People within these cultures are more phlegmatic and contemplative, and not
expected by their environment to express emotions.

Long-term orientation versus short-term orientation deals with Virtue regardless of Truth.

Values associated with Long Term Orientation are thrift and perseverance;

Values associated with Short Term Orientation are respect for tradition, fulfilling social

obligations, and protecting one's 'face'.

Both the positively and the negatively rated values of this dimension are found in the

teachings of Confucius, the most influential Chinese philosopher who lived around 500

B.C.; however, the dimension also applies to countries without a Confucian heritage.
 Purposes of Committees
The basis of committees

is a group of people assigned a task that they are expected to carry out as a
group.

The key objective of the rules of procedure for committees is to facilitate the smooth running
of a committee.

Its actions can only be group actions – individual members have no valid power to act or to
decide anything apart from the group.

If, in fact, they do act apart from their fellows and their acts are accepted as valid, then the
committee is a mere facade without any real substance!

In theory, when acting as a committee, all members enter it as equals.

They will normally elect a chairman and a secretary if the proceedings are to be formal
and record is meant to be kept.

2 The ad hoc committees which are created for a specific reason and on temporary basis

3 The formal committees are part of the organisational structure with

specifically delegated duties and authority
4 Audit committees – review the company's accounting policies and internal
controls,annual financial statements and the audit report with the company's external
auditors

The most common complaint brought against committee work is the amount of time which
it consumes in relation to the results achieved.

This is the same thing as saying that committees are an expensive instrument of
administration.

This is because the modern world has far too many of them and their proceedings are
not always successful.

Committees proliferate not only within businesses but also outside in connection with
trade associations and government departments and they make increasing demands upon
the time of managers.

Each different point of view expressed by the members of the committee must be
ventilated and attempts made to construct a bridge between them.

Even if a simple majority vote is all that is needed, considerable time may be taken up
to avoid any appearance of stifling the expression of minority opinion.
 Jobs assigned to committees are expected to achieve better results than that of a
single person because of the nature of group decision taking.

From this point of view, therefore, the committee will probably be employed in those
cases where group deliberation and judgement are likely to be of better quality than that
of an individual - “two heads are better than one”.

 gather information

 disseminate information or instructions – delegating authority to employees or managers

 generate ideas

 make or implement decisions – committees may give a voice in the making of

the decisions before being implemented

 coordinate the efforts of a number of people from divergent disciplines –

bringing parties together for discussion in the hope of finding reconciliation

 act as a delaying mechanism – and thus achieving time

 oversee a function or procedure

Types of Committee
Types of committees used by business organisations

Board of Directors – group of people that govern the organization

ing Committee

rsee a major project, generally IT based.

ften involved in deciding how to allocate scarce IT resources and planning for future system development.
s safety Committee Ethics committee
ccounting Standards Board (ASB)

s to promote consistency in corporate reporting by creating financial reporting standards to which major businesses are expected to ad
Remuneration Committee
– in charge of setting the salaries of Directors

Advantages & Disadvantages of Committees

Committees

Advantages Disadvantages

consolidation of authority sometimes too large to work

delegate effectively time consuming and can be expensive

blurring responsibilitiescan delay matters due to other work loads

delay or gain time frequent or infrequent attendance

incorrect or ineffective decisions

can invite compromise

Chair & Secretary of a Committee

The Chairperson

Responsibility for the efficient running of the committee meeting rests with the chair.

While everyone has some responsibility for a well-run meeting, the chair will, in the
end, make the greatest contribution to the success of the meeting.

The chair must ensure that all discussion is orderly, that every individual has an opportunity
to participate and that a decision is made on each topic before proceeding.

The chair must ensure impartiality during discussions, maintain an open mind, and not
influence the final decision.

If, for any reason, the chair feels compelled to join the discussion, other than to provide
factual information to the assembly, or to express an opinion, he/she must vacate the
chair during discussion on the topic and ask another director to chair the meeting.

When that topic is dealt with, the official chair may resume the position and continue with

the meeting.
The Committee Secretary
One of the busiest people at the meeting is the secretary.

This person is responsible for taking notes, documenting progress and procedures and
eventually producing a set of minutes that accurately reflects the decisions made by
the committee.

The secretary is responsible for having copies of the laws, policies and previous minutes (in
the case of a continuation meeting) available should members of the committee require
them during the course of the meeting.

One must also mention that the work of the secretary is not only during the meeting.

The secretary has different tasks both before and after the meeting.

Before the meeting the secretary must fix the date, book the venue, think for any
refreshments needed and make sure there is also access for people with disability in
case one of the attendants has such a condition.

S/he needs to prepare and issue the agenda and other relevant documents.

After the meeting, the secretary has the role of preparing the minutes and sending them
to all members of the committee after having them signed by the chair.

Responsibility for correspondence rests with the secretary.

 Syllabus B5. Governance and Social
Responsibility in Business
Ownership & Control
Separation of ownership and control

The separation of ownership and control is a situation where decision makers do not own
a major share of the wealth effects of their decisions.

However, the shareholders will want to build in safeguards to ensure that the managers run the business in the inte

The Stewardship Theory

Agency Theory
Stakeholder Theory

This views the management of the organisation as the “stewards” of its assets, charged with

their employment and deployment in ways consistent with the overall strategy of the

organisation.

Other groups take little or no part in the operations of the company. They receive information

via reports, accounts etc.

Technically, the shareholders have the right to dismiss stewards via a vote at the AGM

(Annual General Meeting).

A very different approach to governance is held within that of the agency theory.

It believes that rather than acting as a steward of the company the management seeks to
service their own interests.

They will only look after the performance of the company if it coincides with their
personal goals.
 This theory looks at the bigger picture.It believes that the management has a duty of care,
not just to the owners of the company but also to the wider community of interest, or
stakeholders.

Contemporary Organisations
Corporate governance and social responsibility

Although shareholders own a company, the responsibility for directing and controlling it rests
with the board of directors.

mpany is directed, administered and controlled. It includes the appropriate role of board of directors and of the auditors of a company.

be sensitive to the needs and wants of all the stakeholders in its business operations, not just the shareholders.

uld make decisions based not only on financial factors, but also on the social and environmental consequences of their actions.

ce and an understanding of the social impact have been highlighted with the business community. Imposing strict corporate governanc

In May 1991, due to lack of confidence in the financial reporting and the ability of external
auditors to provide the assurances required by the users of financial statements, the
Cadbury Committee was set up. This led to the 2003 Combined Code of Corporate
Governance.

Features of poor corporate governance

Sometimes the single individual may bypass the board to action their own

interests. The presence of NON-EXECUTIVE directors on the board if felt to be an

important safeguard against domination by a single individual.

Boards that meet irregularly or fail to consider systematically the organisation's risks are

weak.

Employees who are not properly supervised can create large losses for the organisation

through incompetence, negligence or fraudulent activity.

External auditors may not carry out the necessary questioning of senior management

because of fear of losing the audit.

Emphasis on short-term results can lead to the concealment of problems or errors or

manipulation of accounts to achieve desired results.

 Responsibility of Organisations

To maintain appropriate standards of corporate governance

and corporate social responsibility

The traditional view has been that offers no business

benefits, and destroys shareholder value by diverting resources away from commercial
activity.

Such traditionalists argue that companies should operate solely to make money for
shareholders and that it is not a company's role to worry about social responsibilities.

Companies pay taxes to government, and it is governments and charities that should
be responsible for social matters.
 This traditional view is losing support amongst all sizes of businesses.

monitor changing social expectations manage operational risks

identify new market opportunities

retain key employees

By aligning the company's core values with the values of society, the company can improve
its reputation and ensure it has a long-term future.

The Balanced Scorecard approach emphasises the need to provide the user of a set of
accounts with information which addresses all relevant areas of performance objectively.

This information should include both financial and non-financial elements, and the usual
balanced scorecard approach is to report performance from four separate perspectives:

financial perspective
customer perspective
internal perspective (internal efficiency)
innovative perspective

Effective Corporate Governance

The main recommendations of best practice

Whilst company law refers only to “directors” in general, two types of directors
have emerged.
Those who are involved in the day-to-day execution of management are known

as executive directors and those who primarily only attend board meetings are known
as non-executive directors.

Non-executive directors should provide a balancing influence and play a key role in reducing
conflicts of interest between management and shareholders.

The UK’s Higgs report provide a useful summary of the role of non-executive summary.

Strategy
– setting direction
Performance
– should scrutinize the performance of management in meetings goals and objectives

Risk
 – should ensure that risk management is robust
Remuneration committees

Director’s remuneration should be set via a “remuneration committee” consisting

of independent non-executives.

Due to directors being paid large salaries etc for a number of years (and being seen as
major corporate abuse) The Greenbury committee in the UK set out principles to
demonstrate what a good remuneration policy should look like:

Directors remuneration should be set by independent members of the board

Bonuses etc relate to measurable performance or enhance share value

Full transparency of directors remuneration

So, for example the package will need to attract, retain and motivate directors of
sufficient quality.

There is also a balance between this and the shareholders interests.

The different levels of management/directorship

The ability for managers to leave
Individual performance
Overall organisational performance

Audit committees

An audit committee of independent non-executive directors should liaise with external

audit, supervise internal audit, and review the annual accounts and internal control.

Audit committees are very significant due to their responsibilities for supervising and
offering an overall review.

They should have close interest in the work of the internal audit.

 Improve the quality of financial reporting, by reviewing the financial statements

 Reduce opportunity for fraud by creating a climate of discipline and control

 Enable the non-executive to play a positive role by giving an independent judgment

 Help the finance director, by providing the forum to raise concern in

situations that otherwise may be difficult

 Strengthen the position of the external auditor but providing a channel of

communication and forum for issue of concern
  Provide a framework within which the external auditor can assert their

independence in the event of a dispute

 Strengthen the position of the internal auditor

 Increase public confidence and credibility in the financial statements

Public oversight

The public is a legitimate stakeholder, thus it has the right to know how a particular
company is being governed.

One can also mention that the public has the right to be involved in the governance
process of companies.

The most obvious means of public oversight of corporate governance is via the publication
of Annual Reports and Accounts.

Companies should also discuss their plans with their representatives of various stakeholder
groups including journalists and local politicians.

Relations with shareholders

There should be a dialogue with shareholders based on the mutual understanding of

objective.

The board has responsibility for ensuring that a satisfactory dialogue with shareholders

takes place.

• The has a key role in this.

Nomination committee
A nomination committee should be in place for selecting board members and
making recommendations to the board.
It should consist of a majority of non-executive directors and should be responsible for
finding suitable applicants to fill board vacancies and recommending them to the board
for approval.

Corporate Social Responsibility

philosophy is based on the idea of being sensitive

to the needs and wants of all the stakeholders in the business, not just the shareholders.
 The analysis involves doing research to determine:

.Who are the key stakeholders of the business?

.What are their needs?

Economic activities often impact those who are not involved in the activity.

For example, a corporation manufacturing automobiles generates pollution and the cost of

this pollution is borne by nearby residents.

External costs (or benefits) arising from economic activities are referred to as externalities.

While firms of any size can create externalities, multinational corporations can use their

political influence to avoid bearing responsibility for significant external costs.

Syllabus C: Accounting and

Reporting Systems and
Compliance
Syllabus C1. The relationship between accounting and business
functions
Syllabus C1a. Explain the relationship between accounting and other key functions within
the business such as procurement, production and marketing

Accounting & Purchasing Procurement

The relationship

The purchasing/buying function is responsible for placing and following up orders.

It coordinates with the accounting department as follows:

establishing credit terms the accounting department will work with the
buying department to liaise with suppliers to
obtain a credit account and to negotiate credit
terms which are acceptable.
 prices the accounting department can advise the buying department on the maximum price that
should be paid to maintain margins

payment payments may be approved by the buying

department but are made by the
accounting department
data capture e.g. orders order details will be input by buying department
and details passed to accounting department
inventory the purchasing department will consult with the
inventory section of the accounting department
to determine the quantity of items already in
stock and therefore the quantity required
budgeting the accounting department will consult with the buying department on likely costs in preparing
budgets
 Financial considerations in Production
The production department plans and oversees the production of goods

It liaises with the accounting department as follows:

Cost measurement, the production department measures quantitiesof materials and

allocation, time used;
absorption the management accountant gives a monetary value to them.
costs are
then allocated and absorbed to calculate production costs
based on advice
given by the production department.
Budgeting the production department will decide how many items of what
type are to
be produced. the cost of producing these will be determined by
the
accounting and production departments together, and
incorporated into the
overall budget.

Cost vs quality the production and accounting departments will discuss the
features that
can be included in products and the raw materials that should
be used.
they should agree which better quality materials and features
justify the
extra cost, and discuss how to maximise quality and profit.

Inventory the production department will liaise with the inventory section to ensure
that there are sufficient raw materials in stock for the production that is
planned.
 Financial issues Associated with Marketing
The marketing department coordinates with the accounting department
as follows:

The accounting department will discuss the likely sales volume of each product with the
marketing department, in order to produce the sales budget.

The accounting department will help the marketing department in setting a budget, and
in monitoring whether it is cost effective.

For example, they could help in measuring new business generated as a result of
different advertising campaigns.

The accounting department will have input into the price that is charged.

Often products are priced at cost plus a percentage.

Even if the marketing department determines the price based on market forces they need
to consult with the accounting department to ensure that costs are covered.

The accounting department can provide the marketing department with information on
sales volumes for each product, to help the marketing department in determining market
share. In many companies there can be a great deal of antagonism between marketing and
accounting, especially over pricing and cost control.

Companies very often provide services to customers, at the same time as a sale or
afterwards, e.g. a computer retailer may charge an extra fee to help customers set up their
system, or a car dealer may provide car servicing.

There are several issues about which the service departments may need the input of the
accounting
department.

This is the hourly rate which the company charges clients.

It should be higher than salary, as it should include a share of overheads, e.g. training
and any profit the company wishes to make.

However if the Chargeout rate is too high customers will not use the service.

Many accounting firms base Chargeout rates for their staff on roughly three times
that person’s salary.
Problems arise in determining the amount of overhead to be included in the chargeout
rate. Also, if the service takes longer to provide than expected, the company may not be
able to pass on the extra cost.

Market conditions may mean that the chargeout rate contains a very low profit element.

The company may question whether it is worth carrying out these services.

The problem is that the benefits are intangible and not easy to measure, but
nevertheless real.

A company with effective service provision has happier customers, and happy customers
are more likely to buy from the company in the future, therefore leading to lower selling
costs. But it is very difficult to measure these benefits.

Syllabus C2. Accounting and Finance

Functions within Business
Formulation implementation and control
Groups that may have an interest in the financial information:

•
They supervise the activities of the organisation and need this information to
plan effectively, take control and forecast future earnings.

•
They need to assess how effectively the company is being run.

Suppliers need to understand the credit worthiness.

Customers need to be confident that the company is not going to close down.

•
Banks need this information to approve credit, loans and overdrafts.

Need to know this information to assess business profits and tax payable by the
company.
•
Need to know this information as their future salaries, wages etc depend on the financial
stability of the organization.

•
May need this information for their clients.

•
Government may need this information to assess their allocation of resources and for
national statistics.

Organisations may well have a substantial impact on the local economy or indeed
on environmental issues such as pollution.

The finance director has a seat upon the board of directors and is responsible for routine

accounting and the broader financial policies.

The responsibilities within a large finance/accounting department may be passed down to

less senior staff such as:

Routine accounting
Providing reports for other departments
Cashiers duties and cash control

This position has equal status to the Financial Controller but with
separate responsibilities:
Cost accounting
Budgets and budgetary control
Financial management of projects

Raising funds by borrowing

Investing surplus funds
 Cash flow control

refers to the art of planning the business at the highest possible level.

It is the duty of the company’s leader (or leaders) including also the accounting function.

Strategic management focuses on building a solid underlying structure to a business that

will subsequently be fleshed out through the combined efforts of every individual employed
with the organisation.

formulate policy implement policy by establishing procedures to be followed

control performance

is designed to achieve the organisation’s objectives, so the starting point must be to

identify the objectives.
The purpose of setting objectives is to convert mission into performance targets, create
yardsticks to track performance and push the firm to be inventive, intentional and focused.

– outcomes that relate to improving a firm's financial performance, e.g. to maximise

the reported profits after tax, subject to treating each stakeholder group properly.
 – outcomes that will result in greater competitiveness and stronger long-term market
position, e.g. become leader in a new product introduction in the next 5 years ending
2014.

is the establishment of objectives, and the formulation, evaluation and selection of the
policies, strategies, tactics and action required to achieve them. The planning process is
conventionally split into 3 timescales:

strategic planning tactical planning operational planning

Once a plan has been adopted, it is then possible to control the activities of the business
to seek to achieve the plan’s outcomes. Planning and control are thus interrelated terms.

budgetary control, and

the establishment of standards.

is a plan expressed in quantitative (normally financial) terms for either the whole of a
business or for the various parts of a business for a specified period of time in the future.

is the establishment of budgets relating the responsibilities of

managers to the requirements of a policy, and the continuous comparison of actual with
budgeted results.

For example, a company’s sales budget may be drawn up for each quarter of the
next calendar year, either in units sold or in money amounts.

As the year goes by the actual sales will be compared with the budgeted sales, and the
sales director will be asked to explain any large differences between the two (budget
variances).

It is the management accounting section in the accounting function that has

particular responsibility for budgeting and standard costing matters.
 Main accounting & reporting functions
The main accounting and reporting functions in business

Whenever a business transaction takes place (a sale or a purchase, or payment of

wages, etc.), there is a need to record the transaction in the accounting records.

The transaction is first entered in the books of prime entry (or ‘books of original entry’).

The main books of prime entry are:

the purchases day book
the sales day book
the cash book
the petty cash book
the journal

On a regular basis (e.g. monthly), the day books are totaled and the totals for the period are
entered into the ledger accounts.
For example, if the sales day book is totaled at the end of each month, the total sales for the
month are posted into the ledger accounts of the business.

At the accounting year end of the business, the balance is calculated on each ledger
account, and these balances are taken, with any necessary adjustments as recorded in
the journal, to become the financial statements of the organisation for the period.

The main financial statements produced each year are:

• a at the year end, showing the assets

owned and the liabilities owed, and how these net assets are financed.

• an for the year, showing the revenues

earned and the costs incurred, leading to the net profit or loss arising for the year.

• a , statement of cash flow summarising the cash receipts for the

year and the cash payments paid out, to help readers of the accounts to understand
the liquidity of the business.

Companies must send a copy of their financial statements to their shareholders each year.

Large companies must appoint external auditors each year to give their independent
opinion on whether the published financial statements have been drawn up properly and
whether they give a true and fair view.

GAAP (Generally Accepted Accounting Practice) is a set of rules governing accounting.

The rules may derive from:

company law accounting standards international accounting

standards and statutory requirements stock exchange requirements
Management Accounting & Performance management

The main management accounting and performance management

functions in business

Management accounting Financial accounting

Why information is for internal use, eg. managers for external use, eg. shareholders
mainly produced and employees creditors, banks, government
Purpose of to aid planning, controlling and to record the financial performance
information decision making in a period and the financial
position
at the end of the period.
Legal requirement none limited companies must produce
financial accounts
Formats management decide on the format and content of financial
information that they require and accounts must follow accounting
the most useful way of standards and company law.
presenting it
Nature of financial and non-financial mostly financial
information
Time period historical and forward looking mainly a historical record
Examples of decision making that management accountants can
help management with are:

– what products or customer segments are currently profit making or loss making?

– should products be made in house with available resources or should

their manufacture be outsourced to somewhere cheaper?

– should the prices of strongly selling items be increased to try and increase
overall profit?

– should a new machine be bought for the factory to replace an old machine near
the end of its useful life?
One should appreciate that simply preparing an income statement for the year, as a
financial accountant does, is a valuable exercise in itself, but is of no immediate help in
answering all the above sorts of questions.

Management accountants are needed to address these issues.

The process involves planning and control.

Planning involves the setting of the various budgets (sales budget, manpower budget,
etc.) for the appropriate future period.

All the budgets of the various parts of the business need to be coordinated, to ensure that
they are complementary and in line with the overall company objectives and policies.
Once the budgets have been set and agreed for the future period, the control element
of budgetary control is ready to start.

This control involves comparison of the plan in the form of the budget with the actual
results achieved for the budget period.

Any significant divergences between the budgeted and the actual figures should be
reported to the appropriate manager so that any necessary action can be taken.

Main functions & treasury functions

The functions of the treasury

Treasury management is the corporate handling of all financial matters, the generation of

external and internal funds for business, the management of currencies and cash flows, and

the complex strategies, policies and procedures of corporate finance

Roles of the Treasury management

 Cash management

 Managing financial risks

 Raising finance

 Sourcing finance

 Currency management

 Effective taxation administration

The Association of Corporate Treasurers

Cash management the treasury section will monitor the company's

cash balance and decide if it is advantageous
to give/take settlement discounts to/from
customers/suppliers even if that means the bank
account will be overdrawn.

the treasury section

Financing
will monitor the company's investment/borrowings to ensure they gain as much interest incom
little interest expense as possible.

Foreign currency the treasury section will monitor foreign exchange

rates and try to manage the company's affairs so
that it reduces losses due to changes in foreign
exchange rates.

Tax the treasury section will try to manage the

company's affairs to legally avoid as much tax as
possible.

The role of the finance function in determining business tax liabilities

One of the roles of the finance function is to calculate the business tax liability and to
mitigate that liability as far as possible within the law.

is the legal use of the rules of the tax regime to one’s own advantage, in order to
reduce the amount of tax payable by means that are within the law.
is the use of illegal means to reduce one’s tax liability, for example by deliberately
misrepresenting the true state of your affairs to the tax authorities.
 The directors of a company have a duty to their shareholders to maximise the post tax profits
that are available for distribution as dividends to the shareholders, thus they have a duty to
arrange the company’s affairs to avoid taxes as far as possible.

However, dishonest reporting to the tax authorities (e.g. declaring less income than actually
earned) would be tax evasion and a criminal offense.

While the traditional distinction between tax avoidance and tax evasion is fairly clear,
recent authorities have introduced the idea of tax mitigation to mean conduct that
reduces tax liabilities without frustrating the intentions of Parliament, while tax avoidance
is used to describe schemes which, while they are legal, are designed to defeat (nullify)
the intentions of Parliament.

Thus, once a tax avoidance scheme becomes public knowledge, Parliament will
nearly always step in to change the law in order to stop the scheme from working.

Responsibilities of the finance function

The finance function of any company is responsible by law for:

maintaining proper accounting records that contain an accurate account of the income and
expenses incurred, and the assets and liabilities pertaining to the company.

calculating the tax liability arising from the profits earned each year, and paying amounts
due to the tax authorities on a timely basis.

In practice, most companies (particularly small companies) will seek the advice
of external tax specialists to help them calculate their annual tax liability.

Investment appraisal and financing viable investments

Investment appraisal is concerned with long term investment decisions, such as whether
to build a new factory, buy a new machine for the factory, buy a rival company, etc.

Typically money is paid out now, with an expectation of receiving cash inflows over
a number of years in the future.

rtunity worthwhile? If so, then how is it to be financed?

ered an investment opportunity that requires paying out
nflows of €2m in one year’s time and €2m in two years’ time, during a period when interest rates are 5%, you can see that this investm

interest, it would be worth €1.05m in one year’s time.

However the investment will give you €2m in one year’s time and another €2m in two
years’ time.

So the investment is worthwhile.

The second question is how this €1m required now should be financed.

Perhaps there is a surplus €1m sitting unused in a bank account.

It is more likely that fresh funds will be required, possibly by issuing new shares, or
possibly by raising a loan(e.g. from the bank).

There are advantages and disadvantages of each possibility.

Advantages of issuing new ordinary shares:

Dividends can be suspended if profits are low, whereas interest payments have to be
paid each year.

The bank will typically require security on the company’s assets before it will advance a
loan.

Perhaps there are no suitable assets available.

Advantages of raising loan finance:

Interest payments are allowable against tax, whereas dividend payments are not an
allowable deduction against tax

No change is required in the ownership of the company, which is governed by who owns
the shares of the company.

Generally the finance function and the treasury function will work together in appraising
possible investment opportunities and deciding on how they should be financed.

Management of working capital

A company must also decide on the appropriate level of investment in short term net assets,
i.e. the levels of:

inventory

trade receivables (amounts due from debtors for sales on credit)

cash balances

trade payables (amounts due to creditors for purchases on credit).

There are advantages in holding large balances of each component of working capital, and

advantages in holding small balances, as below.

Advantage of large balance Advantage of small balance

low holding costs. less risk of obsolescence costs.
Inventorycustomers are happy since they can be immediately provided
with goods
 Trade receivables customers are happy since they less risk of bad debts, good
like credit. for cash flow.

Cash creditors are happy since bills more can be invested elsewhere
can be paid promptly to earn profits.

Trade payables preserves your own cash suppliers are happy and may
offer discounts

Internal & External Auditor

The main functions of the internal auditor and the external auditor

Internal auditing External auditing

se management on Role
whetherto provide an opinion to the
anisation has sound systemsshareholders on whether the financial of internal controls to protect thestatements give a true and fair vie

Legal basis generally not a legal requirement.legal requirement for large

companies, public companies and
corporate governance recommends that if a listed company does not have an internal audit department, it should annually assess the
many public bodies

anagement. covers determined by the auditor in order to all areas of the organisation,carry out his statutory duty to report. operation

Approach increasingly risk based. assess risks. inreasingly risk based. test underlying
evaluate systems of control. test transactions that form the basis of
operations of systems. make the financial statements.
recommendations for improvements
Responsibility to advise and make ecommendations
to form an opinion on whether the financial statements give a true an
on internal control and corporate
governance.
fair view
 Audit and assurance
The main audit and assurance roles in business

is an independent activity, established by management to examine and evaluate the

organisation’s risk management processes and systems of control, and to make
recommendations for the achievement of company objectives.

Internal auditors have an unavoidable independence problem.

They are employed by the management of the company and yet are expected to give an
objective opinion on matters for which management are responsible.

is the independent examination of the evidence from which the financial statements are
derived, in order to give the reader of those statements confidence as to the truth and
fairness of the state of affairs which they disclose.

The fact that employees of the company know that their work may be inspected by
external auditors may encourage them to document their work properly and
dissuade them from fraud.
 Syllabus C3. Principles of Law and Regulation
Governing Accounting
Basic Legal Requirements

Basic legal requirements in relation to keeping and submitting proper

records and preparing financial accounts

Accountability refers to the state of being accountable, liable or answerable for actions
and conduct.

In most countries there will be a government department set up to oversee the regulation
and accounts of companies.

Thus, companies in a particular country are accountable to this government department.

In the UK, this government department (regulatory body) is Companies House.

Most countries have a law which governs the preparation of financial statements.

The name of this law varies from country to country, as does the content.

The companies’ legislation in many commonwealth countries is based on the UK

Companies Act.

The Companies’ Acts in the UK require that financial statements are prepared which give

true and fair view, that is, they follow accounting standards, follow generally-accepted
best practice and have information of sufficient quantity (adequately detailed) and quality
(reasonably accurate) to satisfy the reasonable expectations of the users.

Under companies’ legislation, directors are responsible for producing

financial statements which give a true and fair view.

Consequences of Failing to Comply

he broad consequences of failing to comply with the legal requirements for maintaining accounting record
e proper accounting records and preparing financial statements that do not give a true and fair view are criminal offences and may lea

The responsibility is that of the directors and they can be fined for failure to comply.

authorities if records are found to be incorrect; the tax authorities could investigate, and if the tax paid is too low, then, the company is
 If the poor accounting records means that the financial statements do not give a true and fair
view, and if this is detected by the auditor, the external auditor could give a qualified audit
report.

This will damage the company's reputation and could make it harder to borrow money and
to get shareholders to invest.

Poor accounting records could also mean that the company has inadequate records
of receivables and payables.

It could therefore fail to collect money owed from customers which will damage cash flow,
and pay suppliers on time which could lead to suppliers cancelling credit facilities.

These issues could eventually lead to financial difficulties and the company going out of
business.

The accounting function which is very keen to be “self-regulated” has to follow the
requirements of the Companies Act and tax authorities in order to avoid the company facing
legal action.

By the 1970's, this meant that there was a multitude of different accounting
standard worldwide making it very difficult for investors to compare the financial
statements of companies in different countries.

In 1973, the International Accounting Standards Committee (IASC) was formed to try to
harmonise (make similar) accounting standards in different countries.

In 2001 the IASC was replaced by the International Accounting Standards Board (IASB).

International Accountancy Professions

How the international accountancy profession regulates itself through

the establishment of reporting standards and their monitoring

ccounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reportin

The IASB operates under the oversight of the International Accounting Standards Committee Foundation (IASCF).

The international accountancy profession regulates itself through the

International Accounting Standards Board (IASB). A new standard starts life as Discussion Paper (DP).

The IASB assigns a working group to develop a new standard, following input from

the Standards Advisory Council (SAC) and produces a first draft with some points for discussion.

This is then made available for public comment.

The views expressed on the Discussion Paper (DP) are taken into account in producing the
next draft, known as Exposure Draft (ED).
Again public comment is invited.
Finally, an IFRS is issued.
The IFRS may later be amended if necessary.

The objectives of the IASB are:

Under the IASCF Constitution, the objectives of the IASB are:
to develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in financial statements and other financial reporting to help
participants in the world's capital markets and other users make economic decisions

to promote the use and rigorous application of those standards; and

in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate,
the special needs of small and medium-sized entities and emerging economies; and

to bring about convergence of national accounting standards and International

Accounting Standards and International Financial Reporting Standards to high quality
solutions

to promote consistency in corporate reporting by creating financial reporting standards

Syllabus C4. The Sources and Purpose of

Internal and External Financial
External Reports

There are 3 types:

The income statement lists revenues and expenses and calculates the company's net

income or net loss for a period of time.

Net income means total revenues are greater than total expenses.

Net loss means total expenses are greater than total revenues.

It serves as the basic measuring stick of profitability.

The income statement provides important financial information to business managers,

investors, lenders, and analysts.

The Statement of Cash flows

The statement of cash flows reports the cash receipts, cash payments, and the net change
in cash resulting from the operating, investing, and financing activities of a company during
the period.

The cash flow statement is intended to:

provide information on a firm's liquidity and its ability to change cash flows in future
circumstances

provide additional information for evaluating changes in assets, liabilities and equity

improve the comparability of different firms' operating performance by eliminating the

effects of different accounting methods

indicate the amount, timing and probability of future cash flows

The Statement of Financial Position

The statement of financial position shows what resources are owned by a business

("assets") and what it owes to other parties ("liabilities") at a particular point in time.

It also shows how much has been invested in the business and what the sources of that

investment finance were.

 Management Accounting Reports

Main purposes of management accounting reports

Cost schedules are used to calculate the cost of producing products for a period of time.
The cost of goods amount is transferred to the finished goods inventory account during
the period and is used in calculating cost of goods sold on the income statement.
Cost schedules are needed at regular intervals to enable managers to keep a check on
what the business is spending.
Cost Schedules may be produced for the following areas:

Wages and salaries

Departmental costs

Cost of sales

Selling expenses

Administration costs

Schedules may be split by PRODUCT or PROCESS, depending on the level detail required
by management.

For example, if a business makes cars then the overall cost of producing a car can be
broken down by each part that the car is made from and the cost of performing the
process to build the car.

By listing the cost of each part or process a detailed analysis of the cost can be achieved.

Budgets are part of a company's planning system.

It is a set of interlinked plans that quantitatively describe an entity's projected future
operations.

A budget is used as a yardstick against which to measure actual operating results, for
the allocation of funding, and as a plan for future operations.

 Most businesses will prepare a BUDGET.

 This may be a budget for the year ahead, showing projected sales, the costs
involved in generating those sales, overheads and projected profit.

 Budgets may be produced for the business as a whole and for individual
departments.

 The finance department will also produce a CASH FLOW BUDGET (or Cash
Flow forecast) identifying the amounts of cash likely to come into and out of the
business. This will enable the department to identify potential problems and
arrange overdraft facilities in advance.
Once a budget is established, one of the main financial tasks is to explain variances
between actual performance (Cost schedules) and the budget.

It may be things have changed from the budget.

Volume may have changed increased, or there may have been unexpected
price increases.

For example, if the cost of certain car parts and processes is greater than budget, then
steps can be taken to reduce them and therefore keep the overall cost of producing the
car down.

Performance reports are made regularly and are usually on a monthly basis.

are needed to manage cash inflows and outflows.

An organisation's working capital is:

Inventory Receivables Payables Cash

Businesses need cash to pay their debts.

Cash is created when raw materials are converted into products that are sold to customer.

 Show the value of materials and finished products held in stock and the length of
time they have been held for.

 Holding large amounts of inventory reduces the availability of cash because it is

tied up in assets.

 The business should monitor inventory to make sure it is converted into finished
products and cash afterwards.

RECEIVABLES REPOTS

 Show how much customers owe the business and how long the debt has
been outstanding.

 Holding large amounts of receivables reduces the availability of cash because it is

tied up in assets.

 By analysing receivables, decisions can be taken over which debts should be chased
up.
PAYABLES REPOTS

 Show how much the business owes its suppliers and how long have debts
been outstanding.

 Delaying paying debts increases the availability of cash because it is not paid
until necessary.

 The business should pay its debts, but not so early that it does not make use of
periods of credit, nor so late that it faces legal action for not paying what it
owes.

 Show how much cash and liquid assets the business has.

 It is important to ensure sufficient cash is available as required to pay business

expenses and other commitments.

Syllabus C5. Financial Systems, Procedures and Related IT

Applications
Objectives & Policies

An organisation’s system requirements in relation to the objectives

and policies of the organisation

Accounting systems lay down procedures and guidelines that reflect the Company’s policies.

Term Meaning

system a group of independent but interrelated elements comprising

a unified whole, a process for obtaining an objective

policy a guiding principle

procedurea series of acts, a set sequence of steps

guideline a recommended approach for conducting a task

In an organisation there are many transactions and roles therefore, an organisation may opt
to implement more formal rules and procedures policy to ensure the management are able
to keep control of the activities.

For example, having in place an “authorisation policy” for the purchase of accepting new
customers, new suppliers etc.
In a smaller organisation, such procedures and rules can be communicated orally by the
management, however in a larger organisation this might not be impossible therefore a
more formal procedure may be needed.

This could be in the shape OF

Effective systems and procedures should ensure that:

 Relationships with customers are effectively managed

 Relationships with suppliers are effectively managed

 Office functions interrelate properly and are not duplicate

Main Financial Systems

The main financial systems used within an organisation

Purchasing is an important area to control particularly if items are of a high value.

The organisation is likely to insist on a specific authorisation procedure especially for

the purchase of non-current assets.

Details of purchases recorded on invoices

Details of returns to suppliers for which credit notes are received

Details of payments to suppliers

Features Aims
ordering * all orders for, and, expenditure on, goods and services
are properly authorised, and are for goods and services
that are actually received and are for the company.
* orders are only made to authorised suppliers
* orders are made at competitive prices
Receipts & invoices * goods/services used only for the organisation's purposes
* goods/services only accepted if ordered & authorised
* goods/services are accurately recorded
* liabilities recognised for all goods/service
* credits for which the business is due are claimed
* a receipt is needed to ensure a business establish a liability
Accounting * expenditure is authorised - goods actually received
 * expenditure is recorded in the nominal and purchase ledger
* credit notes recorded
* entries made to the correct ledger
* cut-off is applied correctly to the ledger

For sales, businesses want only to give credit to those customers who can settle their debts.
The sales ledger will help track what is owed by each customer.

Inputs to a sales ledger system include:

Amendments – customer details, new customers etc

Transaction data – Sales, customer payments, credit notes

Features Aims

Ordering & granting goods/service to only to customers with good credit rating
of credit cutomers pay promptly
orders recorded correctly
orders are fulfilled

Despatch & invoicing* despatches of goods are recorded

goods/services sold are correctly invoiced
all invoices raise relate to goods/service supplied
credit notes only given for valid reasons

Recording, accounting * sales invoiced and recorded

& credit control* credit notes issues and recorded
entries in sales ledger made to the correct ledger
cut-off applied
doubtful debtors identified

Payroll

The key functions of payroll are:

 Documents and authorisation of staff changes

 Calculation of wages and salaries

 Payment of wages and salaries

 Authorisation of deductions
Features Aims

Setting of wages & employees are only paid for work they have done
salaries gross pay calculated correctly and authorised

Recording of wages &* gross/net pay and deductions are accurately recorded
salaries* wages & salaries paid are recorded correctly in the
bank and cash records
wages & salaries are correctly recorded in thegeneral ledger

Payment of wages & * the correct employees are paid

salaries

Deductions * statuary and non-statuary deductions have been calculated

correctly and authorised
* the correct amounts are paid to the taxation authorities

Cash & Working Capital

Cash and petty cash and therefore working capital must be regularly reconciled.

The forms of payment to a business could be through:

 Company cheque

 Bank transfer

 Internet transfer

 Standing order/direct debit

A control of receipt
is fundamental if the company is to keep a healthy cash/working capital position.
Therefore:

Receipts must be banked promptly

The record of receipts must be complete

The loss of receipts through theft or accident must be prevented

Cash controls must be strict.

They should apply to the smallest and the largest of transactions.

 The three main steps to applying control over cash/working capital payments are:

 Documentary evidence to prove that the purchase is required

 An authorisation of the payment

 Restricting the authority to actually make the payment to a certain number of individuals

Policies & Procedures for handling Cash

Why is it important to adhere to policies and procedures for handling

client’s money
 Financial transactions are properly carried out

 The assets of the business are safeguarded

 Accurate and timely management information is produced

Weaknesses in Accounting Systems

Weaknesses, potential for error and inefficiencies in accounting systems

 Cash or cheques going missing

 Excessive bad or doubtful debts

 Customers not paying within credit terms

 Suppliers not being paid on time

Unauthorized purchases being made

Failure to produce accounts or other reports at the specified time

Improvements to Accounting Systems

Improvements to accounting systems to prevent error and fraud and to improve overall efficiency
Cheques over a certain amount of money need two signatories

Authorization limits for purchase orders

Authorization for petty cash and expenses claims
Effective credit control procedures
  Computer security procedures and access levels

Controls & Procedure in Business & IT Systems

Why appropriate controls are necessary in relation to business and it
systems and procedures

•
– if a sale is made on credit the goods are sent out with a promise from the customer to
pay in the future therefore the management of the business must be as certain as they can
be that this new customer can, and will, pay for the goods which means that the credit
controller must be happy that the new customer has a good credit rating and is fairly
certain to pay for the goods

– this is money going out of the business therefore it is essential that these are
necessary and valid expenditures so a responsible official must authorize them

– one of the largest payments made by most organizations is that of the wages bill for
their employees.

It is essential that only bona fide employees are paid for the actual hours that they have
worked therefore authorization of the payroll is a very important part of any business
 Computers & IT Software Applications
Computers & IT Software Applications

“A spreadsheet is essentially an electronic piece of paper divided into rows and columns
with a built in pencil, eraser and calculator. It provides an easy way of performing numerical
calculations”

Spreadsheets have many uses within the business arena.

From creating balance sheets, income statements, financial accounts etc but also
help develop an informed and structured decision.

A database has many uses and consists of “pooled” data available to not only the accounts
department but usually the whole organisations.

Common data for all users

That extra effort is required in different departments to avoid duplication
Conflicts between departments who have conflicting data are avoided

Shared information. Different users within different departments should be able to

access the same information
The integrity of the database must be preserved.
The database should meet the requirements of all users
The database should be capable of evolving
Manual system

Advantages Disadvantages

low capital costs slower at performing calculations more likely to

make calculations errors analysis of

no computer experience required
information is more time-consuming less easy
easy to correct errors (whitening fluid)
to audit

can review transactions for logical sense

while entering/performing calculations

Automated system

AdvantagesDisadvantages

quicker capital cost

can perform more complex calculations training cost, especially for older staff

fewer errors less easy to correct errors

more security (passwords) systems can crash

easier to sort and analyse data

 Syllabus C6. Internal Controls, Authorisation,
Security and Compliance
Internal control & Internal check
Internal control

is the process designed and affected by management to provide reasonable

assurance on: (Definition based on the Auditing Practices Board ‘Glossary of Terms’)

reliability of financial reporting

effectiveness and efficiency of operations, and

compliance with applicable laws and regulations.

is an element of internal control, concerned with ensuring that no single task

is executed from start to finish by only one person.

Each individual’s work is subject to an independent check by another person in the course
of that other person’s duties.

The purpose of internal checking is to reduce the likelihood of errors and fraud.

Errors should be reduced since an employee will take more care over their work if they
know it is going to be looked at by someone else.
 the control environment

 the entity’s risk assessment process

 control activities

 the information system relevant to financial reporting

 monitoring of controls.
The term ‘internal control’ can refer to any of these five components.

The control environment is the overall attitude of management regarding internal

controls and their importance.

It encompasses management’s philosophy, e.g. a commitment to integrity and ethical

values, a formal organisation structure and proper training of staff.
 Internal Financial Controls

The purpose of internal control is implied to help management achieve

the entity’s objectives

 the orderly and efficient conduct of the business

 the safeguarding of assets
 the prevention and detection of fraud and error
 the accuracy and completeness of the accounting records, and
 the timely preparation of reliable financial information.

 Internal controls are there to prevent risks occurring or to minimise the impact
of risks (i.e. to help prevent things going wrong).
 Even when controls are in place documents may still get lost or portable assets
may go missing.
 The level and extent of internal controls required depend on what the risks are if
such controls fail.
 It is particularly important that stringent controls exist where there are associated
legal requirements.

 Most internal controls are of great interest to the external auditor.

 If internal controls are believed to be very reliable from the external auditor point of
view, that will mean that the amount of

of transactions and resultant balances in the

ledger accounts will be reduced.

 Internal controls are fundamental to internal auditors.

They have to make decisions on the extent of reliance on controls to manage
risks to provide assurance that the corporate governance requirements as being
met.
 Responsibilities of Management
The responsibilities of management for internal financial control
It is management’s responsibility to establish proper internal control arrangements within
their company.

This responsibility may derive from statutory requirements or from general

corporate governance arrangements.

This requirement is set out more clearly in the Combined Code on Corporate Governance.

Principle C2 of the Code states that: ‘The board should maintain a sound system of
internal control to safeguard shareholders’ investment and the company’s assets.’

Provision C2.1 of the Code goes on to explain that the board should, at least annually,
conduct a review of the effectiveness of the system of internal controls and should report to
shareholders that they have done so.

This review must cover all material controls, including financial, operational and compliance
controls and risk management systems.

The changes in the nature and extent of significant risks since the last annual
assessment.

The scope of management’s ongoing monitoring of risks, including the reports

management has made to the board and any relevant work by internal audit.

The incidence of any significant control failings or weaknesses that have been identified
during the year.

Internal financial control is part of overall internal control.

Although the auditors, for example, will be particularly interested in testing and reporting
on the financial controls, the board is responsible for all the controls in the company:
financial, operational and compliance controls.
 Security of IT Sytems & Software
General and application systems controls in business

One possibility is:

Authorisation

Comparison

Computer controls

Arithmetical controls (include pre-list, post-lists and control totals)

Maintaining a trial balance and control accounts

Accounting reconciliations

Physical controls.

is a process to assess the quality of internal control performance

over time.

It involves assessing the design and operation of controls on a timely basis and
taking necessary corrective actions.

Compliance failures may arise because of lack of staff motivation or through poor
training and supervision.
Alternative analysis of internal controls

These are controls that prevent risks occurring.

For example, authorisation controls should prevent fraudulent or erroneous transactions

taking place.

Other preventive controls include segregation of duties, recruiting and training the right
staff and having an effective control culture.

These are controls that detect if any problems have occurred.

They are designed to pick up errors that have not been prevented.

These could be exception reports that reveal that controls have been circumvented (for
example, large amounts paid without being authorised).

Other examples could include reconciliations, supervision and internal checks.

These are controls that address any problems that have occurred.

Basically, corrective controls are aimed at restoring the system to its expected state.

Having backup configuration files or hard drive images that can be reloaded to restore
the state are both good examples.

So where problems are identified, the controls ensure that they are properly rectified.

Clearly the most powerful type of control is preventative.

It is more effective to have a control that stops problems occurring rather than to detect
or correct them once they have occurred.

There is always a possibility that it is too late to sort out the problem.
Classifications Details

discretionary controls which are subject to human discretion

non-discretionary controls automatically provided by the system and

cannot be overridden eg. use of password

voluntary controls chosen by the organization to support

management

mandated required by law and imposed by external

authorities

manualthese controls demonstrate a one-to-one relationship between the processing functions and
controls and the human functions

automated these controls are programmed procedures

designed to prevent, detect and correct errors all the way through processing

Internal audit is a management control, as it is a tool used to ensure that other internal controls are working satisfac

– concerned with overall management’s performance including outputs of the system

and efficiency of the organization.

– based on testing and evaluation of the internal controls including compliance tests
to see that controls are applied as they should and substantive tests used to discover
errors and omissions.
 Different Systems
Information systems and technologies have become vital components of
successful businesses and organisations.

An information system is an organised combination of people, hardware, software,

communications networks and data resources that collects, transforms and disseminates
information in an organisation.

Information systems provide an organisation with support for business

operations, managerial decision making and strategic advantage.

Electronic data processing, transaction processing system

and management information system

 Until the 1960s, the role of information systems was simple transaction
processing, record-keeping, accounting and other electronic data processing
(EDP) applications or transaction processing system (TPS).

 Then, another role was added, as the concept of management information

systems (MIS) was conceived.

 This new role focused on providing managerial end users with predefined
management reports that would give managers the information they needed for
decision-making purposes.

Decision support systems

 By 1970s, it was evident that the prespecified information products produced by

such management information systems were not adequately meeting many of
the decision-making needs of management.
 So the concept of decision support systems (DSS) was born.

 The new role for information systems was to provide managerial end users with ad
hoc and interactive support of their decision-making processes.
 This support would be tailored to the unique decision-making styles of managers as
they confronted specific types of problems in the real world.

Executive information systems, expert support systems and knowledge-

based systems

 In the 1980s, several new roles for information systems appeared.

 It became evident that most top executives did not directly use either the reports
of information reporting systems or the mathematical analytical modeling
capabilities of DSS, so the concept of executive information systems (EIS)
was developed.
  These information systems attempt to give top executives an easy way to get the
critical information they want, when they want it, tailored to the formats they
prefer.

 Expert support systems (ESS) and other knowledge-based systems forged a

new role for information systems.
 Today, expert systems can serve consultants to users by providing expert
advice in limited subject.

 Finally, the rapid growth of the Internet, intranets, extranets in the 1990s has
dramatically changed the capabilities of information systems in business.
 Such global internet work is revolutionising and supporting business operations
and management of different enterprises.

Features of Information Systems

Level Systems

Executive Support Systems (ESS)

Pools data from internal and external sources and helps form a strategic
picture. Needs flexibility, the ability to provide a quick response and to analyse data.

2. Management Information Systems (MIS)

o Converts mainly internal information and provides reports that enable
managers to make appropriate decisions. Needs to support structured
decisions, report on existing operations, internal focus and be relatively
inflexible.
 Decision Support System (DSS)
o Combines data and analytical models or data analysis tools to support
decision making. Needs flexibility, be user-friendly and offer
alternatives.
Knowledge LEVEL Systems (KLS)

 Knowledge Work Systems (KWS)

o Integrate new knowledge into an organisation.
 Office Automation Systems (OAS)
o Designed to increase the productivity of data and information workers. These
include email, word processing etc.

 Transaction Processing Systems (TPS)

o Performs and records routine transactions. For example, Sales orders,
purchasing orders, payroll, registration etc.
 Syllabus C7. Fraud and Fraudulent Behaviour
and Their Prevention
Fraud & their Prevention in Business
The circumstances
Fraud is an intentional act by one or more individuals among management, those
charged with governance, employees or third parties, involving the use of deception
to obtain an unjust or illegal advantage. (Auditing Practices Board – Glossary of
Terms)

For example, managers may deliberately select inappropriate accounting policies.

Employees may seize the proceeds of cash sales and omit to enter the sale into
the accounting records.

Third parties may send bogus (fake) invoices to the company, hoping that they
will be paid in error.

The prerequisites of fraud

There are three prerequisites for fraud to occur:

All three are usually required – for example an honest employee is unlikely to commit fraud
even if given the opportunity and motive.

Fraud is more likely to occur in a business environment with poor or no controls.

If the control environment is soft and management has implemented few specific
control activities, then the potential for fraud is high.

 management domination by one person, or a small group of people

 unnecessarily complex corporate structure

 high turnover rate of key accounting personnel

 personnel who do not take leave/holidays

 understaffed accounting department

 volatile business environment

 inadequate working capital

 deteriorating quality of earnings

 inadequate segregation of duties

 lack of monitoring of control systems

  unusual transactions – in cash, or direct to numbered bank accounts

 payments for services disproportionate to effort

 significant transactions with related parties

 inadequate IT systems.

Different Types of Fraud

In the organisation and the implications of fraud for the organisation

 Financial statement fraud, e.g. ‘window dressing’ and ‘cooking the books’

o Window Dressing/Cooking the books are the deceptive practices of using

accounting “tricks” to make a company's balance sheet and income
statement appear better than they really are.

 A normally used trick is to enter transactions before year end and then they are
reversed out after the year end.

 Misappropriation of assets – stealing physical assets or selling property

 False insurance claims

 Using the company’s assets for personal use.

 Sales ledger fraud – ‘teeming and lading’

  Teeming and lading is a type of fraud normally on the sales ledger whereby the
receipts of later debtors are allocated to pay off earlier debtors

 Purchase ledger fraud

 Skimming schemes
 Skimming schemes is when the fraudster diverts small amounts from a large number
of transactions, believing that no one will bother to investigate the small
differences individually, although in the aggregate they can total to a worthwhile
sum.

 Payroll fraud.

 False billing fraud – third parties sending bogus invoices to the company

 Bank account fraud

 Advance fee fraud (419 fraud)

 *Advance fee fraud is a trick where a company is invited to pay a modest fee up
front in the promise of being paid a large amount in the future.

 Ponzi/Pyramid schemes

 *Ponzi/Pyramid schemes are fraudulent investments offers that involve paying

abnormally high returns to early investors out of the new money paid in by
subsequent investors, rather than from any genuine underlying business.

There is a spectrum of implications of fraud, including:

 Misuse of assets

 Loss of assets

 Financial difficulties

 Collapse of the company

 Role & Duties of Managers in Fraud Detection
The fraud detection and prevention process

 the duties of the board of directors

 the duties of the audit committee

 the duties of employees generally (including senior employees below board level).

The board of directors is required by the Combined Code to maintain a sound system of
internal control.

At least annually, the board should conduct a review of the effectiveness of the internal
control system and should report to shareholders.

The audit committee is required by the Combined Code to monitor and review
the company's internal control and risk management systems.

This should ensure the continuing effectiveness of the controls in preventing and
detecting fraud.

The specific duties of employees are set out in their contract of employment and in what
they are told to do by their supervisors, but there will always be an implied duty to act
honestly and to report suspected or actual frauds encountered to supervisors.

Fraud prevention and detection is the responsibility of every employee in a company, not
just the board of directors.

Money Laundering
Illegally-Obtained Money

 is the practice of covering the origins of illegally-obtained money.

 Ultimately, it is the process by which the proceeds of crime are made to

appear legitimate.

 Laundering allows criminals to transform illegally obtained gain into

seemingly legitimate funds.

 It seems to be a worldwide problem.

 Criminals want their illegal funds laundered because they can then move their money
through society freely, without fear that the funds will be traced to their criminal
deeds.

 In addition, laundering prevents the funds from being confiscated by the police.
 Money Laundering - Steps

Money laundering usually consists of three steps

Placement,

Layering and

Integration.

Putting illegal funds from the illegal activity into apparently legitimate business activity or
property
e.g. Open a cash sales business (Hair dressing) and put the illegal funds in to the bank
account there as a cash income.

Involves the wire transfer of funds through a series of accounts in an attempt to hide the
funds' true origins.

involves buying of legitimate goods, using the cash after the layering stage
 Reporting Suspicions of Money Laundering

Reported to the appropriate authorities

Today, most financial institutions globally, and many non-financial institutions, are required
to identify and report transactions of a suspicious nature to the financial intelligence unit in
the respective country.

For example, a bank must perform due diligence by verifying a customer's identity
and monitor transactions for suspicious activity.

To do this, many financial institutions utilize the services of special software to

gather information about high risk individuals and organizations.

If a suspicious transaction is identified then this should be reported immediately either to a

nominated Money Laundering Reporting Officer (MLRO) within their organisation or SOCA
(Serious Organised Crime Agency)

For Accountants, the most worrying aspect of the law on money laundering relates to the

offence of .

It is relatively straightforward to identify actual “knowledge” of money laundering and

therefore of the need to disclose it, but the term “suspicion” of money laundering is not
defined.

The nearest there is to a definition is that suspicion is more than mere speculation but
falls short of proof or knowledge.

It is a question of judgement.