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PRIVATIZATION

This is the selling off of state-owned organizations to private sector owners.

Firms in the private sector have to make a profit to survive. In order to make a
profit in competitive market firms must be efficient.

Reasons for Privatization:

• The sale of state assets generates a great deal of income for the government,
which can be spent on other state projects.
• Nationalized industries lacked the incentive to make a profit, since their
main aim is to provide a public service. As a result, their costs tended to be
high and they often made losses.
• Many people believed that nationalized industries are overstaffed. They
argued that if they are in the private sector, they would be focus to cut costs
in order to improve their service and rather a profit for the shareholders.
• Once these organizations have been sold to the private sector there would
be little political interference. They would be free to determine their own
investment levels, prices and growth rates.
• Privatization puts responsibility for success purely in the hands of the
managers and staff who work in the org. this can lead to strong motivation
as they have a direct involvement in the work they do.
• Private businesses have access to the various sources of finance like selling
of shares, debentures, loans, leasing etc.

Arguments against Privatization:

• Many of the nationalized industries are important for the development of
the economy such as electricity, gas, railway etc. to put them in private
hands might destroy their existence.
• If business conditions become move worse than private owners may not
guarantee supply of services.
• Ownership of industries might be transfer in the possession of foreign
investors like PTCL.
• Breaking up nationalized industries in several times, will reduce the benefit
of economies of scale.
• Private owners can exploit consumers with high prices.
• Some of the newly privatized businesses have cut back on staffing level,
increased rate of unemployment in an economy.

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PUBLIC PRIVATE PARTNERSHIP

These are public sector services that are managed and funded through a
partnership of Govt. and private sectors organization.

Following are two types of PPP:

Govt. Funded:
In this partnership Govt. provide finance but the management of the organizations
will be controlled by the private business that will develop all policies regarding
operations, H.R, marketing etc.

Private Sector Funded:

In this partnership agreement financial arrangement is the responsibility of
private sector but the management handed over or controlled by Govt. e.g. public
transport funded by Daewoo International.

Benefits of PPP:

1. Speedy, efficient and cost-effective delivery of projects.

2. It gives value for money to the taxpayer.
3. Innovation and diversity in the provision of public services.
4. Effective utilization of state assets to the benefits of all users of public
services.

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MULTINATIONALS

Firms with production bases in more than one country; they may have locations
around the world but have their headquarters in one country, e.g. Unilever, Shell,
Honda etc.

Reasons for Becoming Multinationals:

• To make Use of Resources Abroad:

Sometimes the multinational wants to locate where raw material is easily
available.

• Closer to Overseas Market:

The companies want to locate near to the overseas markets because to
attract more overseas customers and generates more sales and profit.

• Restriction on Home Companies:

Sometimes the government prevents the firms too big in country and
through this the organization creates monopoly but a firm wants to expand
and this will be possible through multinationals.

• Tax Advantages or Government Grants:

The companies want to save the cost of business. This is also a reason for
becoming multinationals because to gain tax advantages or grants from the
overseas market.

Advantages to Multinationals:

1. Transportation Cost:
The multinational businesses locate close to different markets; this can cut
the transportation costs.

2. Import Quotas and Tariffs:

The multinational mostly locates where no limit and taxes on importing
and exporting of goods.

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3. Lower Labor Cost:
The multinational mostly located where cheap labor of business, so the less
labor cost.

4. Raw Materials:
The multinationals enjoy the quality of raw and cheap raw material.

5. Government Incentives:
Sometimes government gives the incentives such as government grants,
subsidies, lower taxes etc.

Disadvantages to Multinationals:

1. Geographically Distant:
It is difficult to controlling bases which are geographically distant.

2. Communication Problems:
Different languages used in different countries so, it is also a disadvantage
to the location of business into another country due to communication
problems.

3. Common Objectives:
Due to geographically distant the common objective does not implement
easily.

4. High Media Attention:

Multinationals operates more than one country usually they face high level
of media attention

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Advantages to the Country where a Multinationals Locate:

1. Provides Jobs:
The multinationals provide job opportunities this will reduce the
unemployment from the country and economic development in the
country.

2. Pays Taxes:
The multinationals pay taxes to the government and this tax government
used to the development of the country such roads, hospitals, educational
institutions etc.

3. Provides Skills and Management Techniques:

Multinationals shares the skills and management techniques to those
people or workers where multinationals locate. These skills beneficial for
their local employees.

4. Provides Goods and Services:

Multinationals provides standardized goods and good quality services as
used at international levels.

5. Reduces the Level of Imports:

It will reduce the level of imports because standardized product produce in
the country, so no need to import these goods.

Disadvantages to the Country where Multinationals Locate:

• May Not Share Skills or Knowledge:

The disadvantages to the country where multinational locate if the
company not share the skills and management techniques to the employees.

• May Not Invest in A Country:

Sometimes business transfers the amount to the base country and not
invests in that country where located. This is the negative effect on this
country where multinational located.

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• May Not Train Locals:
Sometimes multinationals do not train the local employees this is a
negative effect on the employees and their country.

• May Pressurize Government:

Sometimes the companies are too big and pressurize the government for
fewer taxes.

BUSINESS GROWTH

Internal Growth:
It is a situation in which an existing business expands without joining hands with
any other firm. Usually, a profitable firm is able to finance companion by
reinvesting its retained profits. Although, internal growth is time consuming
process but may less expensive as compared to external growth.

External Growth:
In this strategy businesses depend by means of taking over or merging with
another business such as Faysal Bank took as RBS. Although, such method is less
time consuming but the proctor firm has to by more than 50% shares.

1. Vertical Integration:
In this integration businesses must be within the same industry but at different
stage of production. Following are two main categories of vertical integration.

Following are two main categories of vertical integration.

(a) Backward Vertical Integration

In this integration the next stage of production integrates previous stage of
production but within same industry such as Sony Company has taken over
Columbia Pictures.

(b) Forward Vertical Integration

In this integration the previous stage of production integrates the next stage
of production but within the same industry such as Nestle Kit Kat brand
has takeover Chocolate retail shops in Ireland.

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2. Horizontal Integration:
In this integration businesses must be within same type of industry & at same
stage of production (primary, secondary, tertiary) such as bank to bank.

• Firm can increase market share.

• Firm can enjoy the benefit of economies of scale.
• It can eliminate at least one competitor from the industry.
• It might create job insecurity for the workforce and reduce their
motivational level.
• Horizontal integration leads limited choice for customers and creates
monopoly in the market.

3. Conglomerate / Diversification / Lateral Integration:

In this type of integration businesses expand in different types of industry such
as Unilever operates in number of industries like chemicals, foods, plastics &
cosmetics etc. In case of diversification firms spread the risk of business
failure over the different industries.

• Friendly Merger:
When a business is facing production problems and wants to continue under
the control of a sound company.

• Hostile Takeover:
A takeover which goes against the wishes of the target company’s
management and board of directors, it is opposite of friendly takeover.

• Synergy:
The term synergistic effect refers to an increased intensity caused by the
combination of two substances on an organism.
For example, two medications taken together might have a more potent effect
on the body than either would alone, which is a synergistic effect. Another
illustration of synergistic effect can be seen in the concept of teamwork. In
most cases several employees working together on a project results in
increased productivity and more efficient use of resources.

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STRATEGIC ALLIANCES

These are agreements between firms in which each agrees to commit resources
to achieve an agreed set of objectives. These alliances can also be formed with a
wide variety of stakeholders.
For example, a big departmental store creates a strategic alliance with bank to his
credit machine and credit cards in order to increase his sales, revenue and profits.

This is long terms agreement between two or more separate organizations for
their mutual benefits, while preserving their separate identity

A potentially good partner will have strengths that complement weaknesses of

the other partner. One of the partners could not do this alone.
It reduces the risk of the venture.

It gives the benefits of synergy which mean more strength when combined than
they have independently.

Problems Resulting From Rapid Growth:

Growth is a common business objective, especially for established businesses in
the private sector. However, rapid business growth is not without its problems,
when these are not properly tackled. These problems can even lead to business
failure.

First of all, finance is the core problem for rapidly expand business. They can’t
easily arrange huge amount of capital in order to support rapid growth of the
business. Because firms immediately need more machinery, raw material,
workforce and other resources. These factors could lead to cash flow problems
and long-term borrowing.

Secondly, existing management may be unable to cope with problems of

controlling larger operation than before. There will be a lack of co-ordination b/w
the branches of an expanding firms. Another core area of the business is
marketing plan which may not be suitable if a business rapidly increases its range
of products from national to international markets.

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EXTERNAL INFLUENCES
An external influence is a factor beyond a firm’s control that can affect its
performance. Examples include, changes in legislation, technology, demographic
factors and economic factors like interest rates, inflation, taxation etc.

Nearly all government passed laws regarding consumer protection, labor

protection and environmental protection.

Moreover, technological changes may also have positive and negative impacts on
business performance. Businesses can introduce wide variety of goods with the
help of CAD and CAM technology. They can also produce high quality products
at cheap price due to a technical economy. Furthermore, they can reduce labor
cost due to capital intensive approach but need to pay for species expertise like
engineers, technician etc. A key technological change is the arrival of interact,
driven 24/7 services such as online shopping so the firm can easily capture remote
areas customer’s without setting-up physical outlets in those areas.

Fiscal Policy:

• Tax Rate
• Govt. Spending

In this policy govt. uses two main instruments like tax rate and public sector
spending. If govt reduces tax rates and increases its spending in public sector then
that approach can positively influence activities of private sector. In this way
there will be increase in product demand which will improve production scales
and profit level of the firm. In this case higher spending in public sector will
reduce rate of unemployment.

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Monetary Policy:

• Interest Rate
• Supply of Money

In this policy govt considers interest rates and supply of money in order to control
high rate of inflation. If govt increases interest rate then private sector business
might postpone expansion plans. Due to high rate of interest it will be difficult to
manage working capital of the business. In case of working capital firm may have
cash flow problems due to delay in payments by debtors and early demand of
payment from creditors.

Exchange Rate Policy:

It means to compare the value of one currency with another currency.

$ Rs
1 85
1 80 (Appreciation in PKR)
1 90 (Depreciation in PKR)

If the value of local currency has been appreciated then imports will become
cheaper but increase cost of exports.

In this case importers can reduce cost of product and increase their profit margins,
but on the other hand exporters will lose sales revenue and profit levels.

Trading Blocs:
In this approach govt. of different countries develop specific trading blocs in
order to promote trade between all these countries. Trading blocs have no trade
barriers such as import duties, quota system etc. This approach plays significant
role in order to improve economic stability.
Quota System:
An imported quota system is a physical limit to the quantity of a product that can
be imported.

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Import Tariffs:
An import tariff is a tax collected on imported products.
Embargo:
An embargo is the partial or complete prohibition of commerce and trade with a
particular country.
Dumping:
Dumping is an informal name for the practice of selling a product in a foreign
country for less than either (a) the price in the domestic country, or (b) the cost
of making the product. It is illegal in some countries to dump certain products
into them, because they want to protect their own industries from such
competition.

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CONSUMER PROTECTION LAWS

• Description Law
• Weight & Measure Law
• Price Discrimination Law

Description Law:
According to this law manufacturing firms cannot misguide their customers about
components or raw material use in the finish products.

Weight & Measure Law:

According to this act both the manufacturing and trading firm must not sell
underweight or inaccurate measurement products in the market.

Price Discrimination Law:

According to this law firms must not charge unfair prices from consumers in a
particular market.

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EMPLOYEES PROTECTION LAWS

• Health and Safety Law

• Minimum Wage Law
• Dismissal Law
• Redundancy Law

Health and Safety Law:

According to this law following facilities must be exist
• Normal rate of temperature
• Ventilation
• Fire doors must not be locked
• Proper heat & lighting system
• Surface of floor must not be slippery

Minimum Wage Law

According to UK minimum wage law at least £ 6.5 per hour must be paid by
employer in an industry. If firm does not consider minimum wage law then the
following problems might occur:

• Demotivation in workforce
• High labor turnover rate
• Increase rate of industrial unrest (strike)

Dismissal Law:
Following are provisions of fair dismissal

• Illegality
• When worker is physically assault (Disable).
• When employee have inappropriate skills in order to perform
particular task.

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Following are provisions of unfair dismissal

• Being a member of trade union.

• When employee refuses to work on public holidays.
• When employee refuses to work after normal working hours.
• When employer adopts inaccurate procedure of dismissal.

Redundancy Law:
According to redundancy law the firm must pay redundancy amount only those
employees who worked as permanent employees & have worked at least one
whole year in an organization.

WHY DO NEW BUSINESSES OFTEN FAIL?

The most common reasons for new enterprises failing are:

• Lack of Capital.
• Less range of products.
• Unmotivated workforce.
• Below standard products.
• Inexperience management.
• Inappropriate marketing policies.
• Inappropriate location of premises.

ETHICAL ISSUES

Ethics can be defined as a system of moral values or decide what is right and what
is wrong.

OR

It means the behavior or attitude of an enterprise must be positive towards

customers, employees and society.

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For example, advertising directed towards children might be legal but many see
it as unethical.

Problems in Short run:

• Price will be high.

• Profit margins will be low.
• Small number of customers.
• Increase cost of production.

Benefits in Long run:

• Good publicity.
• Improve brand image.
• Large number of customers.

Corporate Social Responsibility:

It is responsibility of a business to consider ethical issues and fulfill its Corporate
Social Responsibility. Ethics is defined as moral values or decides what is right
and what is wrong. Businesses should deeply consider the effects of these ethical
actions on stakeholders.

A strong sense of corporate responsibility was displayed by Orange, the cell

phone company, when it introduced tree shaped transmitters which blended in
with the surrounding area.

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IMPACT OF TECHNOLOGY ON BUSINESS ACTIVITY

1. Investment Cost:
Firms need to invest large amount of capital.

2. Improve Quality:
To improve quality of products or services.

3. Enhance Brand Image:

Firms might improve brand image in the industry.

4. Improve Working Skills:

Management might improve working skills of workforce.

5. Wide Range of Products:

Firms might introduce different range of products in market.

6. Advertise Products:
Firms can effectively advertise their products and services and capture remote
areas customers.

7. High Cost of Production:

Investment in new technology will lead to high cost of production in short run.

8. Need Experts:
Firms need to recruit some special expertise such as engineers, mechanics and
technicians etc.

1. Job Insecurity:
New technology could lead to job insecurity which might demotivate the
workforce.

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SECTION 2

MANAGEMENT BY OBJECTIVES (MBO):

Management by objectives (MBO), also known as management by results
(MBR), is a process of defining objectives within an organization so that
management and employees agree to the objectives and understand what they
need to do in the organization in order to achieve them.

Advantages:
1. Helps and increases employee’s motivation.

2. Managers are more likely to compete with another manager.

3. It reduces conflicts and ambiguity.

4. It leads to good Planning.

5. Identify problems.

6. Develop leadership qualities.

Disadvantages:
1. Failure to give guidelines to goals.

2. Danger of inflexibility.

3. Failure to teach philosophy of MBO.

4. Managers’ competition may lead to tug of war.

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TRADE UNION
A group of workers in which members of union join together to protect their
rights.
Functions of Trade Union:
• To provide job security for union members.

• To improve working conditions.

• To improve working environment.

• To provide training programs for unskilled workers.

ORGANIZATIONAL STRUCTURE
It shows the level of management and division of duties or responsibilities within
an organization.

It indicates:
• Who has overall responsibility for decision making?

• The formal relationships between different people and departments –

individual workers can identify their position in the business and who is
their immediate ‘line’ manager

• Formal channels of communication both vertical and horizontal, this will

aid the investigation of communication problems if messages are not being
received in time by the correct people

• The identity of the supervisor or manager to whom each worker is

answerable and should report to is made clear.

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Chain of Command:
This is the route through which authority is passed down in an organization such
as from the chief executive and the board of directors.
Span of Control:
The number of subordinates reporting directly to a manager.

(Narrow Span) (Wider Span)

Advantages of Wider Span of Control:

1. It creates more delegation opportunities among workers because large
number of subordinates working under a superior

2. It generates more new ideas because work divided among large number of
subordinates.

3. It leads to short chain of command; it proves effective communication

process

Disadvantages of Wider Span of Control:

1. Superior cannot closely control the large number of subordinates.

2. It might be a time-consuming method; when conflict in the opinions of

subordinates.

3. It might difficult to create co-ordination among large number of

subordinates.

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Advantages of Narrow Span of Control:

1. Superior can closely control the small number of subordinates.

2. There is no conflict in the opinions of subordinates because a smaller number

of subordinates and it leads to the faster decision making.

3. Co-ordination can be created easily among subordinates due to a smaller

number of subordinates.

Disadvantages of Narrow Span of Control:

1. There are no / less delegation opportunities among employees due to a
smaller number of subordinates.

2. Fewer ideas are generated due to a smaller number of subordinates.

3. It leads to long chain of command so less effective communication process.

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DELEGATION
Passing down the authorities to subordinates in an organization
Advantages of Delegation:
1. Gives senior managers more time to focus on important strategic roles

2. Shows trust in subordinates and this can motivate

3. Develops and trains staff for more senior positions

4. Helps staff to achieve fulfillment through their work (self-actualization).

Disadvantages of Delegation:
1. If the task is not well defined or if inadequate training is given, then
delegation is unlikely to succeed

2. Delegation will be unsuccessful if insufficient authority (power) is given to

the subordinate who is performing the tasks

3. Managers may only delegate the boring jobs as they do not want to do, this
will not be motivating.

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DIFFERENT TYPES OF ORGANIZATIONAL STRUCTURE:

The Hierarchical (Or Bureaucratic) Structure:
This is one where there are different layers of the organization with fewer and
fewer people on each higher level.
CHIEF
EXECUTIVE

DIRECTORS

MIDDLE MANAGERS

SUPERVISORS

LINE WORKERS

Advantages of Hierarchical Disadvantages of Hierarchical

Organizations: Organizations:
Authority and responsibility are clearly The organization can respond slowly to
defined changing customer needs and the
Clearly defined promotion path. market within which the organization
operates.
There are specialists’ managers and the Communication across various
hierarchical environment encourages sections can be poor especially
the effective use of specialist horizontal communication.
managers.
Employees are very loyal to their Departments can make decisions
department within the organization. which benefit them rather than the
business as a whole especially if there
is Inter-departmental rivalry.

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Matrix Structure:
An organizational structure that create project teams that cut across traditional
functional departments.

Advantages:
1. Individuals can be chosen according to the needs of the project.

2. The use of a project team is able to view problems in a different way as

specialists have been brought together in a new environment.

3. Project managers are directly responsible for completing the project within
a specific deadline and budget.

Disadvantages:
1. A conflict of loyalty between line managers and project managers over the
allocation of resources.

2. Projects can be difficult to monitor if teams have a lot of independence.

3. Costs can be increased if more managers (i.e. project managers) are created
through the use of project teams.

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Centralization:
Keeping all of the important decision-making power within head office or the
centre of the organization
Decentralization:
Decision making powers are passed down the organization to empower
subordinates and regional/product managers.
Advantages of Centralization:
1. A fixed set of rules and procedures in all areas of the firm should lead to
rapid decision making there is little scope for discussion.

2. The business has consistent policies throughout the organization. This

prevents any conflicts between the divisions and avoids confusion in the
minds of consumers.

3. Senior managers take decisions in the interest of the whole business

4. Central buying should allow for greater economies of scale.

5. Senior managers at central office will be experienced decision makers.

Advantages of Decentralization:
1. More local decisions can be made that reflect different conditions the
managers who take the decisions will have local knowledge and are likely
to have closer contact with consumers.

2. More junior managers can develop and this prepares them for more
challenging roles.

3. Delegation and empowerment are made easier and these will have positive
effects on motivation.

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DELAYERING
Delayering is a term in management and corporate restructuring that refers to a
planned reduction in the number of layers of a management.

Advantages:
1. It offers opportunities for delegation, empowerment and motivation as the
number of managers is reduced and more authority is given to shop-floor
workers.

2. It can improve communication within the business as messages have to pass

through fewer levels of hierarchy.

3. It can remove departmental rivalry if department heads are removed as the

workforce is organized in teams.

4. It can reduce costs as fewer employees are required and employing middle
managers can be expensive.

Disadvantages:
1. Not all organizations are suited to flatter organizational structures - mass
production industries with low-skilled employees may not adapt easily.

2. De-layering can have a negative impact on motivation due to job losses,

especially if it is really just an excuse for redundancies.

3. A period of disruption may occur as people take on new responsibilities and

fulfill new roles.

4. Those managers remaining will have a wider span of control which, if it is

too wide, can damage communication within the business.

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ACCOUNTABILITY, AUTHORITY AND RESPONSIBILITY
Responsibility:
Responsibility indicates the duty assigned to a position. The person holding the
position has to perform the duty assigned. It is his responsibility. The term
responsibility is often referred to as an obligation to perform a particular task
assigned to a subordinate. In an organization, responsibility is the duty as per the
guidelines issued.

Authority:
Authority is the right or power assigned to an executive or a manager in order to
achieve certain organizational objectives.
A manager will not be able to function efficiently without proper authority. It is
an essential accompaniment of the job of management.
Without authority, a manager ceases to be a manager, because he cannot get his
policies carried out through others. Authority is one of the founding stones of
formal and informal organizations.
An Organization cannot survive without authority. It indicates the right and
power of making decisions, giving orders and instructions to subordinates.

Accountability:
Every employee/manager is accountable for the job assigned to him. He is
supposed to complete the job as per the expectations and inform his superior
accordingly. Accountability is the liability created for the use of authority. It is
the answerability for performance of the assigned duties.

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Line Managers:
Managers who have direct authority over people, decisions and resources within
the hierarchy of an organization
For example, the sales director will have line authority over the sales managers
for each of the different products the firm sells.

Staff Managers:
Managers who are specialists, provide support, information and assistance to line
managers
Staff managers do not have line authority over others. They are specialists who
are employed to give advice to senior line managers. They might be economists,
specialist market researchers or scientific experts advising on the environment
impact of certain products or processes. They perform a supporting role to the
line managers but do not take decisions. Due to their professional status and
experience they can be very well paid and they are often accused of having less
loyalty to the business as their services might be in great demand by a wide range
of firms. This could lead to them being attracted by better rewards in other
organizations.

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BUSINESS COMMUNICATION
Importance of Communication:
Exchange of information, ideas, facts and gestures. Communication is simply
about sending and receiving information whereas effective communication does
not consider only exchange of information it includes four important elements
such as “Authorized sender, authorized receive, appropriate channel to
communication and feedback”.
Effective communication is essential for organizations. Without it, employees do
not know what they are supposed to do, why they are supposed to do it, how to
do it or when to do it. Similarly, managers have little idea of how the business is
performing, what people are actually doing or what their customers think. It links
the activities of all the various parts of the organization. It ensures that everyone
is working towards a common goal and enables feedback on performance. For
example, co-ordination between production, finance, marketing and human
resources departments will lead to accurate planning and to work in the best
interest of the whole organization. By communicating effectively the
management is able to explain the objectives of the organization and employees
can have an input into the decisions that are made. Effective communication is
also vital for successful decision making. To make good decisions managers need
high quality information. If they do not know what is happening in the market,
they are less likely to be successful. If, however, their market knowledge is good
that are more likely to develop an appropriate marketing plan. Effective
communication provides managers with the information they need.

Good communication is also extremely important to motivate employees. People

need to know how they are getting on, what they are doing right and in which
areas they could improve. To ensure that communication is motivating, managers
need to ensure that employees.
• Understand the objectives of the organization as a whole.
Understand why their job is important and how it contributes to the overall
success of the firm.

• Know how the job should be completed.

• Know how they are performing.

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Effective communication with shareholders is also important in order to inform
and discuss business profitability and financial performance. In this way
companies may build up confidence level of shareholders to explore financing
opportunities.

Types of Communication:
1. One Way Communication:

Information is transferred in one direction only, from the sender to the receiver.
There is not opportunity for the receiver to give feedback to the sender. It
represents autocratic leadership in which leaders do not take feedback from
subordinates. It does not create trust worthy relationships among workers.
It might demotivate the work force since managers do not prefer their feedback.
It lost the opportunity of generating new ideas because employees are not being
involve in discussion.

2. Two – Way Communication:

It always includes feedback from the receiver to the sender and lets the sender
know that the message has been received accurately. It represents democratic
leadership in which boss discuss the matter with subordinates. The main
disadvantages are that it can be a time-consuming method.
Secondly it can reduce some employees understanding and acceptance of their
place in the company hierarchy.

3. Vertical Communication:

This is the transmission of information between different levels of the

organizational hierarchy. Top-down communication usually consists of orders,
policy decisions, directions and instructions. Communication that flows upward
typically involves information from the front lines to the seniors about what’s
going on at the lower level. It might include complaints, suggestions, and requests
for clarification or news about trends.

Following Are the Main Weakness of Vertical Communication:

• It usually maintains long chain of command in large organization which
delays the operational processes of the business.

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• In this communication, if the boss’s role of direction is seen by doubtful
eyes by the subordinates, the chain of command and discipline may be
broken.

• It is commanding (Top-down) in nature, so there is no opportunity of the

workers to become efficient.

• Information may lose its originality.

• Superiors can neglect to send message to their subordinates.

4. Horizontal Communication:

It takes place when people at the same level within an organization pass
information. An example might be, finance manager is telling to the marketing
manager about funds available for a sales promotion.
The main problem of this channel is that departments may become hostile
towards each other if they don’t understand the problems that each face.
Secondly, management may have a greater problem maintaining control as
horizontal communication between employees exposed to each other through the
communication process.
Finally, it may create a lack of discipline if strict procedural rules of
communications are not imposed and followed.

Methods / Mediums of Communication:

1. Oral Communication:

This is the process of expressing information or ideas by word of mouth. Oral

communication can be either formal or informal. Examples of formal include,
presentation at business meetings, classroom lectures etc., whereas informal
includes face to face conversation during different occasions like launch time and
Gossip etc.
Strengths of Oral Communication:
1. There is high level of understanding and transparency in oral
communication as it is interpersonal.

2. There is flexibility for allowing changes in the decisions previously taken.

3. The feedback is spontaneous in case of oral communication. Thus,

decisions can be made quickly without any delay.

4. The conflicts and many issues can be put an end by taking them over.

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5. It is essential for teamwork.

6. It can be best used to transfer private and confidential information.

Weaknesses:
1. It is less authentic than written as it is informal and not as organized as
written.

2. It does not provide written evidence.

3. It requires attentiveness and great receptivity on part of the receivers.

2. Written Communication:

It involves any type of message that makes use of the written word through
manual techniques like report, letter, application etc.
Strengths:
1. It provides written evidence in case of a dispute.

2. Easy to distribute among large numbers of employees.

3. It assists in proper delegation of responsibilities.

Weakness:
1. Costs are huge in terms of stationary and the manpower employed in writing
/ typing and delivering letters.

2. The feedback is not spontaneous.

3. It requires great skills and competencies in language and vocabulary.

3. Electronic Communication:
Communication using electronic media known as electronic communication.
Such communication allows transmission of information using computer, fax
machine, ride conferencing and satellite network.
Strengths:
1. This is the fastest methods of communication for remote areas.

2. World has become a global village and communication around the globe
requires a second only.

3. It saves time and money.

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4. It allows instant feedback like SMS, email.

5. Business managers can easily control operations across the globe.

Weaknesses:
1. Frequent change in technology requires expensive investment.

2. Data may not be retrieved due to system error or fault with the technology.

3. Information might be received by authorized person such as fax messages.

4. Visual Communication:

This is the communication of information through visual display such as pie-

charts. Graphs, tables, pictures etc.
Strengths:
1. Oral communication becomes more meaningful when graphs, pictures and
diagrams are used with it.

2. Easy explanation has made the visual more popular.

3. Visual techniques help to prevent the wastage of time.

4. Artful presentation leads to quick understanding.

Weaknesses:
1. Sometimes visual presentation of information becomes more complex. The
receiver can’t understand the meaning such as pie-charts.

2. This technique is considered as an incomplete method. It can be

successfully used with oral communication.

3. Sometime it takes too much time to construct charts or diagrams.

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Barriers to Effective Communication:
Communication Barriers reasons why communication fails
Failure in One of the Stages of the Communication Process:
• If there is too much information.

• A misleading or an incomplete message.

• If a receiver forgot part of a long message.

• If the channel of communication is too long.

Overcome / Reducing Communication Barriers:

• Build in feedback.

• The message is clear and precise.

• Establish trust between senders and receivers.

• Make the communication are clear to all involved.

• Keep the communication channel as short as possible.

• Ensure that physical conditions are appropriate for messages to be heard or

received in other ways.

Why is Effective Communication Important?

• The number and quality of ideas generated by the staff, if staff is asked for
their ideas then this can assist with problem solving.

• Speed of decision making the more people who have to receive and react
to a message, then the slower will be the decision-making system.

• Reduces the risk of errors and incorrect understanding of a poorly

expressed message will lead to incorrect responses. This could lead to
many internal problems such as the wrong products being made or
incorrect prices being set.

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SECTION 3

MARKETING PLANNING

• Marketing plan is a detailed report on marketing strategy marketing

objectives marketing budget.
• The understanding of an effective marketing plan depends on the following
elements.
• It must fit together with mission of the business / corporate objectives.
• Where the firm is new (situational analysis)
• Where does the business wish to be in the future? This involves the
business setting objectives to be achieved.

How Will A Business Achieve Its Objectives?

A business must decide how to get where it wants to go. It will have
marketing strategies which it will use to achieve its objectives. Marketing
strategy does not give details of the 4P’s or marketing mix tactics. It
considers only long term or strategic decision like mass or niche marketing
approach. The final strategy depends greatly on the company’s mission and
objectives, situational analysis and resources of the business.
Marketing Mix:
Right after the marketing strategy, an appropriate 4P’s policy needs to
develop in order to implement marketing plan in result-oriented way.
Marketing Budget:
A successful marketing plan always considers financial constraints. An
effective marketing strategy and 4P’s tactics depend greatly on availability
budget is a plan of what the business hopes to achieve in the forth coming
period. It focuses mainly upon sales revenue, marketing expenditures and
profit.

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Benefits of Marketing Plan:

• It enables the firms that they must constantly evaluate and develop their
marketing policies. It allows them to do this and can be seen as a means of
ensuring the survival of the business.
• This leads to better co-ordination of the different elements of the
marketing. It should also allow all employees and all areas of the business
to be aware of marketing objectives, helping to ensure that they pull in the
same direction.
• It makes sure that human and financial resources are used where they are
most needed.
• Business will set marketing objectives and targets in their marketing plan.
Management as a result, will have a clear set of criteria against which they
can evaluate the success of products.
• It should make banks feel more confident about offering loans to a firm.
Shareholders may also be more confident about buying shares in a
business.
• It may encourage greater employee motivation. They feel more secure that
the business has planned for the future.

Elasticity:

The demand for a product can be influenced by other factors apart from price
such as consumer incomes. The elasticity concept can also be used to measure
the change in demand for a product due to following changes.

1. Income Elasticity of Demand:

It measures change in demand following a change in consumer incomes.

= % change in demand / % change in income

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If the answer is in negative elasticity will represent interior goods whereas
positive elasticity represents normal / expensive / highly branded goods.

2. Promotional Elasticity of Demand:

It measures change in demand due to change in promotional spending on a

product

If answer is elastic then increase in promotional spending will be beneficial.

3. Cross Elasticity of Demand:

It measures the change in demand for a product due to change in price of another
product.

If the result is negative then the two products are complements to each other or
jointly demanded like the demand of CDs will increase if price of CD is being
reduced. If the result is positive then the two products are substitutes like demand
of coke will rise if Pepsi increases the price of their products.

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IMPORTANCE OF RESEARCH AND DEVELOPMENT
Research involved the inquiry and discovery of new ideas in order to solve a
problem or create an opportunity whereas development involves changing ideas
into commercial products. Businesses invest in R&D may enjoy the following
benefits.

1. New Products:

R&D leads to the development of new products so firms will enjoy a competitive
advantage in the market. If they can obtain a patent, they will be able to sell the
products without competition from other business for a period. During this time
they may be able to raise price and make higher profits, examples include,
Microsoft, Dyson etc.

2. New Materials:

Some R&D projects develop new synthetic materials which helped to reduce the
use of natural resources. They might be more durable heat resistant and cheaper.
Dupont created tactel, a light weight fabric with great strength. Wish to buy it to
allow the firm to make profit. If the product fits in with the business objectives,
if it is legal and if the technology is available to produce it.

3. Development:

The third stage is the actual development of the product. This may involve
technical development of a prototype. Some preliminary testing may be carried
out to find out whether or not the product actually meets consumer’s needs.

4. Test Marketing:

It occurs when a new product is tested on a small, representative section of the

total market. The test market area should share characteristics which are similar

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to those found in the market as a whole. The benefit of test marketing is the high
degree of reliability of results gained. It is carried out because of the high cost
and risk of launching a product in a large market.

5. Commercialization and Launch:

This is the final stage and any problem found during test marketing must be
solved. The firm will then decide on the marketing package it will use to give the
product launch the greatest chance of success.

6. New Production Techniques:

New technology in production processes is capable of cutting costs and raising

productivity like CAD and CAM. In addition, new technology is often safer,
cleaner and more ergonomically designed. This helps to make the working
environment better for employees.

7. Image:

It is often argued that investment in R&D helps to enhance firm’s image.

Consumers may be impressed by businesses which are committed to R&D. e.g.
a pharmaceutical company develops an effective vaccination to combat Aids
would receive a huge amount of positive publicity.

8. Motivation:

Investment in R&D creates opportunities for creativity and invention many

employment positions in the R&D department will help staff to satisfy their
higher order needs. Such as esteem and self-actualization.

9. Consumer Benefits:

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Consumers enjoy an increasing variety of goods and services as new products
come into the market.

IMPORTANCE OF MARKETING / SALES FORECASTING

Businesses are keen to know about what might happen in the future. Anything
they can product accurately will reduce their uncertainty and will allow them to
plan. One of the most important forecasts that need to be made is the prediction
about future sales. This forms the basis of most of the other plans within the
organization. For example:

The human resource plan will need to be based on the expected level of
sales, a growth in sales may require more staff.
• The cash flow forecast will depend on projected sales and the payment
period.
• The profit and loss forecasts will depend on the level of revenue predicted.
• The production scheduling will depend on what output is required.
• Inventory management will depend on the likely production and demand
over a period.

Moving Averages (Method of Sales Forecasting)

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Before starting the concept of moving averages, it is essential to understand the
concept of time series analysis. This method of sales forecasting is based
completely on past sales data. Sales records are maintained over time and when
they are presented in date order, should be known as time series. The most basic
method of predicting sales based on past result is termed “Extrapolation”. It
means when past sales results are plotted on a time series graph, the line can be
extended / extrapolated, into the future along the trend of the past sales. But this
method can only be used when past sales patterns are stable and will remain so
in the future.

On the other hand, the method of moving averages can be used when past sales
patterns are inconsistent either due to seasonal variation or on obvious reason. It
is useful in prediction of seasonal variation but the method is fairly complex.
Moreover, forecasts further into the future become less accurate as the
prosecutions made are entirely based on past data whereas external factors can
change.

4
8 Quarter Moving Average
Quarter Seasonal
Year Quarter Sales Moving Average Seasonal
Moving Variation
Total (Trend) Variation
Total

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2012 1 120000
2 140000
3 190000 146250 +43750 +51670
4 130000 580000 150000 -20000 -15400
2013 1 130000 590000 1170000 156250 -26250 -33300
2 160000 610000 1200000 163750 -3750 -4600
3 220000 640000 1250000 167500 +52500 +51670
4 160000 670000 1310000 168750 -8750 -15400
2014 1 130000 670000 1340000 172500 -42500 -33300
2 170000 680000 1350000 176250 -6250 -4600
3 240000 700000 1380000 181250 +58750 +51670
4 170000 710000 1410000 187500 -17500 -15400
2015 1 160000 740000 1450000 191250 -31250 -33300
2 190000 760000 1500000 193750 -3750 -4600
3 250000 770000 1530000
4 180000 780000 1550000

How to calculate forecasted sales in Q 1 2016?

Answer: Step 1: Identify moving average sales from graph (extrapolated line)
which is 205000

Step 2: Adjust average seasonal variation of Q 1 in 205000 this will

give forecasted sales figure in Q 1 2016.

= 205000 – 33300

= 171700 Answer

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INTERNATIONAL MARKETING AND GLOBALIZATION
Implications for Marketing of Increased Globalization:

Globalization refers to the integration of the world’s economy. It is suggested that

as globalization takes place, national economies are becoming integrated into a
single global economy with similar characteristics. Evidence of the integration of
the world’s economy can perhaps be seen in businesses that design and market
their products to a world market, such as Coca – Cola.

• Following are three important features of globalization:

• The growing importance of international trade.
• The rise of the multinational business.
• The emergence of businesses which think globally about their strategy.

Importance of International Marketing:

It means selling products in markets other than the original domestic market.

• The following aspects explain the importance of international marketing:

• When domestic market becomes saturated or stops growing and
competition is intense a more to another country can boost sales revenue.
• It leads to higher profitability due to rapid sales growth and low costs
benefits like cheap labor, govt. incentives etc.
• It spreads risks since business are much less dependent on economic and
legal constraints in the home market.
• Poor trading conditions in the home market like sales of luxury car in
Germany and Greece fell due to financial crisis, but continued to increase
in China.

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Difference between Global Localization and Pan Global Marketing:

Pan global marketing means adopting a standardized marketing mix policy across
the world as if the entire world were a single market whereas global localization
means adapting the marketing mix policy to national and resigned tastes and
cultures.

Advantages of Pan Global Marketing:

1. The same product can be product for all markets which allows the benefits
of substantial economics of scale.
2. A standardized identity for the product can be established.
3. It attempts to reduce differences between consumers in different countries.

Disadvantages of Plan Global Marketing:

1. Legal differences can greatly influence marketing mix elements like

product, price, promotion etc.
2. Brand names do not always translate effectively into other languages.
3. Economic and cultural differences might lead to unsuccessful marketing
mix policy.

Note: Advantages and disadvantages of global localization just opposite.

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Methods of Entry into International Markets:

International market entry modes differ in degree of risk they present, the control
and commitment of resources they require and the return on investment they
promise.

Following are the main methods of entry:

1. Exporting:

This is the process of selling of goods and services produced in one country to
other countries. There are two types of exporting, direct and indirect.

2. Direct Exports:

Represent the most basic mode of exporting made by a holding company.

Capitalizing of economies of scale in production concentrated in the home
country and affording better control over distribution. It works the best if the
volumes are small.

Advantages:

1. Control over selection of foreign markets.

2. Good information feedback from target market.
3. Better protection of trade marks. Patents and goodwill.
4. Potentially greater sales & profits.

Disadvantages:

1. Higher start – up costs and higher risks as opposed to indirect exporting.

2. Greater information requirements.
3. Longer time to market as opposed to indirect exporting.

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3. Indirect Exports:

This is the process of exporting through domestically based export

intermediaries.

Advantages:

1. Fast market access.

2. Concentration of resources towards production.
3. Low risk for companies that consider their domestic market.
4. No direct handling managerial problems.

Disadvantages:

1. No control over distribution, sales, marketing etc.

2. Wrong choice of distributor may lead to business failure.
3. Potentially lower sales and profit.

Licensing:

An international licensing agreement allows foreign firms, either exclusively or

non-exclusively to manufacture a proprietor for a fixed term in a specific market.
Licensing is quite similar to franchising but the only difference is that licensing
is a part of franchising and terms and conditions are less countless relatively.

Advantages:

1. Obtain extra income for technical know – how and services.

2. Quickly expand without much risk and large capital investment.
3. Highly Attractive for Companies That Are New in International Business.

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Disadvantages:

1. Loss of control of the discuss manufacture and marketing operations and

practices leading to loss of quality.
2. Risk of having the trademark and reputation ruined by an incompetent
partner.

3. Franchising (Already Discussed In Section – I)

4. Joint Venture (Already Discussed In Section – I)

Importance of Product in Mix:

A product is a good or service that is bought and sold within a market. Products
are developed so that they satisfy a specific consumer need or want that has been
targeted by the business. This means paying close attention to a number of the
features of the product including design, functions, quality and its brand image
into the market. These aspects of a particular product must be balance with other
elements of marketing mix, price, place and promotion in order to establish
success of that product. Businesses should also consider its point of actual
differentiation to penetrate good status in mind of targeted customer.

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SECTION 4

ENTERPRISE RESOURCE PLANNING [ERP]

This is a management system that integrates all aspects / departments of the
business into a single computer-based system to meet the needs of all
organizational users. Its scope moves into H.R.M, sales and marketing financial
accounting as well as to co-ordinate those outside of the organization. The main
aim of ERP is to improve efficiency of operations and competitiveness. An
important application of ERP supply chain management in which all of the stages
in the production process from obtaining raw materials to selling to the consumer
can be performs more efficiently and effectively.
For example, when a customer orders a new car with many options, such as
satellite navigation, the ERP program stores the details in the computer data base.
As the car is being assembled, the necessary components have already been
ordered by the computer system to arrive just in time. Each worker on the
production line has a computer printout of which parts must be added at each
stage. Once the car is completed, the customer is invited to the factory to pick the
car or it can be delivered. The payment for the car is recorded via the computer
system in the firm’s account.
An important good of ERP is to facilitate the flow of information so business
decision can be date driven. ERP modules can help an organization’s
management like supply management and finance.

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H.R.M and financial accounting, for this reason development of a new ERP
system in house can involve huge investment, employees retraining and data
analytics etc.
The purchase department initiates the purchase process by raising the purchase
order. Purchase orders are created when there is shortage of material for
production of finished goods on receipt of goods, a receipt note is residing. The
receipt note is raised, stock accounts are updated.

INVENTORY MANAGEMENT
Purpose, Benefit and Cost of Inventory
The term inventory refers to stock which business prefer to minimize because its
holding is very costly. In practice, a variety of stocks are help for different
reasons.
1. Raw Materials and Components:

These are purchased from suppliers before production. They are stored by firms
to cope with changes in production levels. These are held to allow for variation
in supply and to take benefit of bulk buying discounts and anticipated price rises.
2. Work in Process:

These are partly finished goods and usually held to introduce greater flexibility
in production processes.
3. Finished Goods:

The main purpose for keeping finished goods is to cope with changes in demand
and stock. If there is a sudden rise in demand, a firm can meet urgent orders by
supplying customer, from stock holdings.
Efficient stock control involves finding the right balance since its essential to
minimize storage costs (lighting, heating, rent). Wastage costs (out dated as
damage stocks) and opportunity costs (capital ties up into stocks).

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Importance of Inventory Management:
Stock control is the management process that makes sure stocks are ordered,
delivered and handled in the best possible way. An efficient inventory
management system will balance need to meet customer demand against the cost
of holding stock. If the purchasing function has been efficient the business will
receive the right quantity and quality of stock at the right time which will smooth
the production process, improves output quality and creates customer
satisfaction.
However, once the stocks are inside the firm, they must be handled and used
correctly. Whereas possible, a firm will want to use its oldest stock first according
of FIFO (First in first out) method. This means stocks do not deteriorate and
reduces wastage costs of the business. Super markets always put new stock at the
back of the shelf to encourage shoppers to take the older stock first.
An effective inventory management system should support CAD software to
minimize wastage of raw materials, well trained and highly motivated staff are
the best ways to avoid wastage of finished goods which have been produced
below standard. Moreover, strong relationship with suppliers is the backbone of
effective inventory management that ensures several benefits like right time
deliveries, right quantity at right price and successful implementation of just in
time (JIT) system. Effective and efficient inventory management system also
involves arrangements of appropriate storage conditions that must be suitable for
nature of stocks like cold storage facility for perishable items (meat, fish, fruits
etc).
For a firm, the optimum / economic level of stock to hold will be where that total
costs of holding stock are the lowest. The total costs involve number of factors
like storage, wastage and opportunity costs (cost of holding stock) and lost orders,
loss of the firm’s reputation, workers and machines idle time (cost of holding no
stocks / stock out costs).

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METHODS OF INVENTORY MANAGEMENT
JUST-IN-TIME (JIT) STOCK CONTROL
According to this system raw material or components must be purchased when
needed in the production line. JIT avoids high stocks level and maintain particular
stocks at zero level.
• Producers must have excellent relations with suppliers.

• Accurate forecasted product demand and production schedule.

• Firm needs multi-skilled workforce and flexible machinery.

Advantages:
1. Lower stock holding means a reduction in storage space which saves rent and
insurance costs.

2. As stock is only obtained when it is needed, less working capital is tied up in

stock.

3. Less time is spent on checking and re-working the product of others as the
emphasis is on getting the work right first time.

Disadvantages:
1. There is little room for mistakes as minimal stock is kept for re-working faulty
product.

2. Production is very reliant on suppliers and if stock is not delivered on time,

the whole production schedule can be delayed.

3. There is no spare finished product available to meet unexpected orders,

because all products are made to meet actual orders – however, JIT is a very
responsive method of production.

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BUFFER INVENTORY
One of the most important tasks in stock control is to maintain the right level of
stocks. This involves stocks must not be allowed to run out, so that production is
halted and customers are let down. The term buffer stock is used to describe stock
held for unforeseen / unexpected rises in demand or breaks in supply. The greater
the risk of late deliveries, than the higher will have to be the buffer stock level. It
is used to reduce the incidence of stock out situations in sales and thus provide
better customer service. Without appropriate buffering manufacturing processes
would slow, expenses would increase and profit would decrease. Its
implementation tends to increase efficiency in production and keep operations
running smoothly.

Interpretation of Inventory Control Charts:

One way in which a firm analyses its stock situation is by using stock control
charts. These line graphs look at the level of stock in the firm over time. Managers
will be able to see from these charts how stock levels have changed during the
period, and will be able to note any unusual events with which they may need to
be concerned. A typical stock control chart will look like that shown in the
following figure 1.1. On this chart there are four lines, which represent the levels
described below:

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Stock Levels:
This line shows how stock levels have changed over this time period. As the stock
is used up, the level of stock gradually falls from left to right. When a delivery is
made, the stock level leaps up wards in a vertical line.
Maximum Stock Level:
This shows the largest amount that the firm is either willing or able to hold in
stock. It depends on numbers of factors like size of warehouse, production and
demand rate, nature of stock etc.
Buffer / Minimum Stock: Already Discussed
Re-order level:
This is a trigger quantity when stocks fall to this level a new order will be sent in
to the supplier.
Lead Time:
This is the normal time taken between ordering new stocks and their delivery.
The longer the lead time, the higher the re-order stock level should be

CAPACITY UTILIZATION
What is Capacity Utilization and Maximum Capacity?
Capacity utilization is the proportion of maximum output capacity is being used.
A company producing 1500 units a week whereas the maximum output capacity
of 2000 units then capacity utilization is 75%.
It is measured the formula.
Actual Output / Maximum Output * 100
On the other hand, maximum capacity is achieved when the firm is making full
use of all the resources available like labor time, machinery, raw material etc.

Relationship between Fixed Cost and Capacity Utilization

Fixed costs are constant or do not change in relation to output for a certain time
period. This means that whether capacity utilization is 50% or 100%. Fixed cost
will not change on the other hand, there is an inverse relationship between
average fixed cost and capacity utilization.
When capacity utilization is high, fixed cost per unit tends to fall because it
spreads over many units and vice versa. This cuts the cost per unit, which
enhances the producer either to cut prices to boost demand or to enjoy large profit
merging.

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Drawbacks of Operating at 100% Capacity
Workers who are working at full capacity will have no time to relax and will need
to work as hard as possible at all times. This may make workers feel overworked.
Managers subject to high stress levels because no time available to make up for
mistakes.
If a firm is working at full capacity, its machinery is assumed to be working all
the time. This means that there is no down time available for routine maintenance.

What is Capacity Shortage and How to overcome it?

It occurs when the required output level is greater than the maximum capacity.
The problem of capacity shortage might be overcome through the following
strategies.
Outsourcing / Subcontract
Advantages:
1. It does not require expensive investment.

2. It is more flexible as compared to business expansion.

3. Customers are not required to wait a long period of time to fulfill their
orders.

Disadvantages:
1. Producer has no direct control over quality of outsourcing.

2. Increase unit cost due to transport and suppliers profit margin.

3. Delivery time may be uncertain.

Page 432 (23.1) Activity (Hotel’s excess capacity)

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Why Excess Capacity Creates and How to Overcome it?
It occurs when the required output level is less than the maximum capacity. It
creates due to either seasonal downturn or economic reclusion.
In case of seasonal downturn firms may use no. of strategies to increased capacity
utilization such as maintain output load, introduce flexibility in production
process etc.
On the other hand, increase of economic reclusion firms may also use different
strategies like increased promotion budget rationalization in order to improve
capacity utilization.
Rationalization means reducing maximum capacity by closing a factory or
production scale on long term basis.

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LEAN PRODUCTION & QUALITY MANAGEMENT
What is Lean Production?
This is an approach to production developed in Japan. Toyota, the Japanese car
manufacturer, was the first company to adopt this approach.
Its aim to reduce the quality of resources used up in production. Lean producers
use less of everything, including transportation, over processing, inventory, cheap
labor, factory space, materials, capital and time. As a result, lean production raises
productivity and reduces costs. The number of defective products is reduced, lead
times are cut. Lean producers are also able to design new products more quickly
and can offer customers a wider range of products to choose from. Lean producers
have to follow up the following elements of lean production.
Kaizen: (Continuous Improvement)
It means continuous improvements in work practices which are base around
people and their ideas rather than investment in new technology. This is the main
difference b/w Japanese and Western approaches to management in the past. In
case of western management, business improve efficiency and quality through
one of improvement that is based on investment in new technology. In the above
diagram solid line represents one off improvement where productivity remains
the same for long periods of time, then suddenly rises. The increased in followed
by another period of stability before another rise. On the other hand, dotted line
shows the Japanese continuous improvements. To work effectively, Kaizen
requires a people-based culture within the organization. This culture must be
communicating and accepted by all those working at the company. Any Kaizen
program should be to convince all employees that they have two jobs to do such
as doing their routine job and then looking for ways of improving it. It is based
on the brief that the production line worker is the real expert. This means knowing
more about the causes of problems and their solutions then the highly qualified
engineers who sits in an office Kaizen recognizes the fact that any company’s
greatest resource is its staff.
Moreover, to operate Kaizen successfully employees cannot be allowed to work
as isolated individuals. Team working is vital to the process of continuous
improvement. These teams are designed by taking employees from different
departments, each cell has a team leader and below that a single level of
hierarchy. Each cell produces a complete unit of the product and also responsible
for its quality and lead times.

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Just in time: (already discussed)
Simultaneous Engineering / Time Based Management:
It is a project management approach that helps firm to develop and launch new
product more quickly. It involves reducing the amount of time businesses take
carrying out certain tasks. This can be achieved by performing different task at
the same time rather than one after the other. This can be known as time-based
managements or network analysis approach. This is an important feature of lean
production because it eliminates the wastage of time which is a valuable resource
of the business. Furthermore, SME is very essential for technological firms where
they have to introduce new products earlier than competitions.
All of the areas involved in a project are planned together.
Benefits:
• The new product is brought to manage much more quality.

• The firm may be able to share skimming price.

• It improves staff commitment to the project.

• It gives competitive advances

Flexibility:
It is a key factor for the success of a business especially for technological firms.
The management should be capable of making necessary adjustments to its
policies in order to cope up with rapidly changing in modern business
environment. It is recommended that a multi skilled workforce is employed so
that there is no interruption in a particular process. Changing from one design of
product to continue required flexible working in two main areas.

1. Multi skilled workforce able to perform different jobs on different range of

products.

2. Flexible machinery often highly automates that can quickly switch from one
design to another.

Cell:
This is lean approach in which the product line is split into several self-contained
small production units. Each individual cell is responsible to produces a complete
unit of work. Each cell has a team leader and below that a single level of hierarchy
made up of multi-skilled workers. The performance to each cell is measured
against pre-set taken.

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• Team Productivity

• Team Quality

• Team Work

• Team Motivation

What is Quality?
It could be described as those features of a product or service that allow it to
satisfy customer’s exceptions at given price level.
A reputation for good quality brings no. of benefits for the organization. It will
generate a high level of repeat purchases and therefore a longer product like cycle.
It may also enhance brand image and reduce customer complains costs.
Moreover, marketing department may set premium price which will raise profit
margins. High quality makes products easier to place, retailers are more likely to
stock products with a good reputation.
How Do Businesses Manage Quality?
Quality Control:
It is a traditional way to manage quality and is based on inspection of finished
goods. Quality control inspectors check the output on sample basis, below
standard limits must be set aside for rework or scrap into the market. The problem
with this system is that quality is being checked at the end of production process
when resources have been utilized. This method of inspection might be expensive
because qualified inspectors have to be used and such checks can involve
damaging the product, for example dropping computer or cell phones to continue
see if they still work.
Quality Circles:
It is a work group of employees who meet regularly to discuss their quality
problems, investigate causes, recommend solutions and take connective actions.
Generally, quality circle is a small group of employees belonging to the similar
work area.

Objectives:
• Improvement in quality of product manufactured by the organization.

• Improvement in method of production.

• Development of employees participating in quality circles.

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• Promotion morale of workers.

Quality Assurance:
This system is based on setting pre-determined quality standards at all stages in
the production of a good or service in order to ensure that customer’s satisfaction
is achieved. It puts much more emphasis on prevention of poor quality by
designing and producing according to set standards of the organization. The
quality assurance department will need to consider all areas which are essential
for high quality output. These might include, design, inputs, delivery system, after
sale services etc.
Total Quality Management:
This is very close to Kaizen approach; it also requires commitment from the
whole organization, not just the quality control department. The business
considers quality in every part of the business process such as from design right
through to sales. Under TQM employees can no longer think that quality is
someone else responsibility. In this approach, every worker should think about
the quality of the work they are performing because the next employee internal
customer of the previous one. If the one employee finds out below standard work
then it should be sent back to the previous employee. In addition, they should be
empowered / delegated with responsibility of checking the quality level before
passing their work on the next production stage. The main aim of TQM to cut he
casts of defective products by encouraging all staff to get it right first time and to
achieve zero defects.
Benchmarking:
It is a technique used by some businesses to help them discover the best methods
of production available and then adopt them. The aim of bench marking is to
improve performance and quality standards.

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PROJECT MANAGEMENT
A project can be defined as a unique activity, which has a particular start and end
time with consumable resources like construction of layover, motorway etc.
The project management is responsible to deliver the project and to ensure that
effectiveness and efficiency are achieved across the entire project. Network or
critical path analysis is a diagrammatic way of showing how a complex project
can be completed in the shortest possible time.
Moreover, project management has three following objectives in relation to any
project.
• Timely Completed

• Quality Oriented

• Within Cost Budget

Reasons of Project Failure:

The following can threaten the success of a project.
1. Poor Management:

Many project leaders have only technical knowledge and they may not have the
proper management skills for controlling large projects.
2. Poor Planning:

Managers have not made use of the network analysis as a planning method. They
have not broken down into its serious activities and estimated time.
3. Lack of Control
It is essential to be able to monitor the progress of projects, otherwise it is
impossible to decide whether they will meet cost and time budgets.
3. Insufficient Budget:

Due to insufficient budget of finance risk of project failure might increase over
the time period.
4. Unrealistic Deadlines:

There is often pressure from users for project to be completed quickly. Project
teams may have suggested a time frame that is unrealistic.

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Critical Path:
The sequence of activities that must be completed on time for the whole project
to be completed by the agreed date.

What is the Earliest Start Time?

The earliest time at which an activity may begin in the schedule of a project; it
equals the earliest time that all predecessor activities can be completed.
What is the Latest Finish Time?
The time by which a portion of a project must end. If that portion does not begin
by the latest start time, the finish time for the whole project will be delayed.

The diagram of network analysis can be constructed with the help of following
information of a particular project.

Activity Time Preceding

Activities
A 4 -
B 6 A
C 7 A
D 8 B
E 10 C
F 9 D.E
G 5 F

Critical Path = ACEFG = 35 Days

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A -
B A
C A
D A
E B
F CE
G B
H BD
I BD
J F,G,H

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Dummy Activity:
This is simulating activity which is shown by a dotted line on a network diagram.
It does not consume either time or resources.

A -
B -
C -
D A,B
E B,C

Calculations moves

Advantages of Network Analysis

5. Determines float times.

6. Widely used in industry.

7. Can define multiple, equally critical paths.

8. Displays dependencies to help scheduling.

9. Evaluates which activities can run parallel to each other.

10. Helpful for scheduling, monitoring, and controlling projects.

11. The activities and their outcomes can be shown as a network.

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Disadvantages of Network Analysis

1. CPA can be complicated, and complexity increases for larger projects.

2. Does not handle the allocation of resources.

3. The critical path is not always clear and needs to be calculated carefully.

4. Estimating activity completion times can be difficult.

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SECTION 5

INVESTMENT APPRAISAL
“Evaluate the profitability or desirability of an investment project”.
All businesses require capital equipment (fixed assets) such as machinery,
premises and vehicles. The purchase of such assets is known as capital investment
and is undertaken for the following reasons:
• To replace existing equipment which is out-of-date or obsolete
• To expand the productive capacity of the business
• To reduce the production costs per unit (to achieve economies of scale).
• To produce new products and, therefore, break into new markets

Capital investment involves an element of uncertainty, because expenditure is

incurred today in order to produce some benefit in the future.

Methods of Investment Appraisal:

• Payback Period
• Average Rate of Return
• Net Present Value
• Internal Rate of Return.

PAYBACK PERIOD
The length of time required to recover the cost of an investment.

Year Annual Net Cash Flows ($)

0 (500,000)
1 300,000
2 100,000
3 100,000
4 100,000

If a project costs $4 million and is expected to pay back $1m per year, the payback
period will be four years. This can then be compared with the payback on
alternative investments.
From the above data payback period is 3 years.

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Advantages:
• Payback period is simple and easy to understand.
• Payback period gives more importance on liquidity for making decision
about the investment proposals.
• Payback period deals with risk. The project with a shortest PBP has less
risk than with the project with longest PBP.

Disadvantages:

• In the calculation of payback period, time value of money is not

recognized.
• Payback period gives high emphasis on liquidity and ignores profitability.
• Only cash flow before the payback period is considered. Cash flow
occurred after the PBP is not considered.

AVERAGE RATE OF RETURN (ARR)

The amount of profit or return that an individual can expect based on an
investment made. It divides the average profit by the initial investment

Average profit (net cash flow)

ARR (%) = x 100
Initial capital cost

How to calculate ARR:

1. Add all positive cash flows = $18m
2. Less Investment = $18m - $10m = 8m (this is total profit)
3. Divide by life span = $8m / 4 = $2m (per year profit)

4. Calculate the % return of return = $2m / $10m * 100 = 20%

Advantages:
• It is easy to understand and calculate.
• This is a simple capital budgeting technique and is widely used to provide
a guide to how attractive an investment project is.
• Another advantage is familiarity. The ARR concept is a familiar concept
to return on investment (ROI), or return on capital employed.

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Disadvantages:
• This technique does not adjust for the risk to longer term forecasts.
• ARR does not take into account the time value of money.
• This technique can be calculated in a wide variety of ways and hence lead
to different outcomes.

NET PRESENT VALUE

The difference between the present value of cash inflows and the present value
of cash outflows. NPV is used in capital budgeting to analyze the profitability of
an investment or project.
The three stages in calculating NPV:
1. Multiply discount factors by the net cash flows. Cash flows in year 0 are
never discounted, as they are today’s values already.
2. Add the discounted cash flows.
3. Subtract the capital cost to give the NPV.

Year Net Cash Flow 10%Discount Discounted Cash

$m Factor Flow $m
0 (5) 1 (5)
1 2 0.91 1.82
2 2 0.83 1.66
3 2 0.75 1.50
4 3 0.68 2.04

NPV= $ 2.02m ($7.02m – $5m)

Advantages:
• Considers all the cash flows.
• Considers the time value of money.
• Tells whether the investment will increase the firm's value.
• Considers the risk of future cash flows (through the cost of capital).

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Disadvantages:

• Expressed in terms of dollars, not as a percentage.

• The value of discounted factors is not accurate because it is totally based
on assumptions.
• Requires an estimate of the cost of capital in order to calculate the net
present value.

INTERNAL RATE OF RETURN

The discount rate often used in capital budgeting that makes the net present value
of all cash flows from a particular project equal to zero. Generally speaking, the
higher a project's internal rate of return, the more desirable it is to undertake the
project.

Advantages:

• By giving a percentage rate of return, different projects costing different

amounts can be compared.
• The IRR is easily compared with the rate of interest or the criterion rate of
the business.
• It avoids the need to choose an actual rate of discount.

Disadvantages:

• The calculation is very slow without a computer.

• By giving an exact result, it can mislead business users into giving that
investment appraisal is a precise process without risk and uncertainties.

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Qualitative Aspects of Investment Appraised:

Investment appraised techniques provide numerical results, which are

important in taking investment decisions. However, managers have to
consider qualitative aspects which can’t be expressed in numerical values.
These factors play an important role in long term survival and growth of a
particular business.

These factors might include:

Company Objectives: If the business is considering on objective of long-

term growth then investment in R&D and mechanized system is more
viable.
Company Strategy: If the business is suffering from low price imported
competition, it may seek higher added value and different investment will
be more suitable.
Confidence in The Data: Data used in investment appraised should come
from an independent source and be based on realistic figures.
Human Relation: Investment in mechanical system might lead to
redundancies and damage relations with work force.
Ethical Consideration: Along with much other business decision,
managers are taking more of ethical stance when choosing an investment
project. E.g. a chemicals producer might decide to build a new plant in a
location which does reduce environmental damage. Such a decision might
help to enhance the image of a company.

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COSTING METHODS
Costing methods provide managers with financial information on which to base
decisions. They help to identify the profitable activities avoid waste and provide
information for cost cutting strategies.

1. Full / Total costing:

• It involves both variable cost and fixed cost in order to calculate cost
of particular product.
• Business produces several products, so it is difficult to calculate cost
of one product.
• Full / Absorption costing will solve this problem.

Limitations of Full / Absorption Costing

1. It faces the problem of allocating the overheads
2. It could result in misleading costing because the allocation of
overheads is not based on any actual overheads incurred.
3. It is usually criticized by using arbitrary way.

Contribution / Marginal Costing

• Costing method that allocates only direct costs to cost / profit centers,
not overhead costs.
• Contribution is the amount of money left over offer a sales when all the
direct / variable costs have been deducted.

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A B C Total

Revenue 80000 90000 50000 220000

V.C 40000 15000 40000 95000

Contribution 40000 75000 10000 125000

Overheads 30000 50000 20000 100000

Profit / Loss 10000 25000 (10000) 25000

Whether to stop product “C”

Profit of A.B = 35000

- Overheads of “C” = 20000

Profit = 15000

ACCOUNTING FUNDAMENTALS

Users of Business Accounts:

1. Business Manager:
Business manager is interested to see the accounts in order to measure the
current performance of the business against targets, previous performance
and competitors as well.

2. Banks:
Give loans to the business, to assess performance to allow increase overdraft
facilities or loans.

3. Creditors:
It tells business is secure and able to pay off its debts.

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4. Customers:
They will be assured of future supplies of the goods they are purchasing.

5. Government and Tax Authorities:

It calculates how much tax is due to the business, to determine that the
business is likely to expand and create more job opportunities.

6. Investors / Shareholders:
It helps to know the value of the business and their investment in it. To check
either the business is becoming more or less profitable.

7. Workforce:
It helps to judge that the business is secure & have enough money to pay
wages and salaries.

Limitations of Published Accounts:

Following information is not available in business accounts.

• Details of the sales and profitability of each good or service produced by
the company and of each division or department.
• The research and development plans of the business and proposed new
products.
• The precise future plans for expansion of the business.
• The performance of each department or division.
• Evidence of the company’s impact on the environment and the local
community although this social and environmental audit is sometimes
included voluntarily by companies.
• Future budgets or financial plans.

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ACCOUNTING CONCEPTS AND CONVENTIONS

Income Statement
[Trading and Profit & Loss Account]
1. Trading Account:
This account shows how gross profit or gross loss has been made during the
trading period.
i. Sales Revenue / Turnover / Total Revenue / Income:
This is the total value of sales made during the trading period. Formula of sales
revenue
Number of units sold × price per unit
ii. Cost of Sales:
This is the direct cost of goods sold during the trading period.
iii. Gross Profit:
This is the positive difference between sales and cost of sales.

2. Profit and Loss Account:

This account calculates both the net profit and the profit after tax.
i. Expenses / Overheads:
These are indirect expenses which cannot be directly identified with number
of units sold during the trading period.

ii. Net Profit / Operating Profit:

This is the profit made before interest and tax but after deducting cost of sales
and overheads from the sales revenue.

3. Profit and Loss Appropriation Account:

This account shows how profit after tax has been distributed between the
dividend and retained profit.
i. Dividend:
This is the share of the firm’s profits paid to shareholders as a return for their
investment into the business.
ii. Retained profit:
This is the profit left after all deductions have been made from the sales
revenue and re-invest into the business.

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USES OF PROFIT AND LOSS ACCOUNTS
1. Measure and Compare the Performance:
It might be used to measure and compare the performance of a business over
time or with other firms.
2. Actual Profit Compare with Expected Profit:
The actual profit data can be compared with the expected profit levels of the
business.
3. Bankers & Creditors:
Bankers and creditors will need the information in order to decide whether to
borrow money or not.
4. Investors:
Investors may assess the value of investing money into a business from the
level of profits.

4. Balance Sheet
As at 31, 12, 2008
$ $
Non-current assets (building and machinery) 200000
Current assets (debtors, stock, cash) 50000
Current liabilities (creditors, bank overdraft) (20000)
Working capital 30000
Net assets 230000
Financed by:
Share capital 10000
Retained profit 80000
Bank loans 50000
230000
Capital Employed = $ 230000

$50000 $180000
Non-equity / loan capital / Equity / shareholders funds
Debt capital / borrowed capital Owned capital

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Balance Sheet:
It shows financial position of a business for a specific time period.
1. Non-Current Assets:
These are long term assets and not for resale purpose such as building,
machinery etc.

2. Current Assets:
These assets can be converted into cash within a year such as stocks, debtors
etc.

3. Current Liabilities:
These are short term debts and have to be repaid within a year such as
creditors, bank overdraft etc.

4. Working Capital:
This is the difference between current assets and current liabilities. This
capital is required for day to day expenses of the business.

5. Long term Liabilities:

These are long term debts which have to be repaid after more than one year
such as bank loans.

6. Capital Employed:
This is the total capital which includes both the equity capital and non-equity
capital.

7. Intangible Assets:
Items of value that do not have a physical presence, such as patents and
goodwill.
8. Inventories:
Stocks held by the business in the form of materials, work in progress and
finished goods.
9. Accounts Receivable (Debtors):
The value of payments to be received from customers who have bought goods
on credit. Also known as ‘trade receivables.
10. Accounts Payable (Creditors):
Value of debts for goods bought on credit payable to suppliers. Also known
as ‘trade payables’

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CONTENTS OF PUBLISHED ACCOUNTS

Goodwill:
Arises when a business is valued at or sold for more than the balance-sheet value
of its assets
Example:
If a business A buys out business B for $2 million, yet the net asset value of B is
only $1.5 million, then A has paid $0.5 million for the ‘goodwill’ of business B.
Why might business A have been prepared to pay this extra $0.5 million?
Goodwill has value when the business being sold is well known, well established
and has good trading links with both customers and suppliers. A newly formed
business does not yet have goodwill, but an existing business is said to be a ‘going
concern’ with the intangible advantages listed above. Hence, other firms are
prepared to pay a price exceeding net asset value in order to purchase this
goodwill.

There are two accounting treatments regarding goodwill:

• It should not appear as an asset of an existing business because it is so
difficult to value and can disappear rapidly, for example with an accident
that damages the environment and destroys a firm’s reputation.
• It will appear on the balance sheet of a business that has bought another
firm and has paid for goodwill. It will appear as a non-current intangible
asset. However, this should be taken off the balance sheet (written off) as
soon as possible for the same reason as above.

Depreciation of Assets:
“The decline in the estimated value of a non-current asset over time”
Assets decline in value for two main reasons:
• Normal wear and tear through usage
• Technological change making either the asset or the product.

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Net Book Value:

The current balance-sheet value of an asset.
Non-current asset = original cost – accumulated depreciation
Example:
A firm of lawyers purchases three new computers costing $3,000 each.
Experience with previous computers suggests that they will need to be updated
after four years. At the end of this period the second-hand value of each machine
is estimated to be just $200. Using straight line depreciation, the annual
depreciation charge will be:

$9,000 - $600 = $8,400/4 = $2,100

For each of the four years of the useful life of these computers a depreciation
charge of $2,100 will be made. This will be included in the firm’s overhead
expenses on the profit and loss account. On the balance sheet, the annual
depreciation charge will be subtracted from the value of the computers. At the
end of four years, each computer will be valued at $200 on the balance sheet.

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RATIO ANALYSIS
Comparison between two financial figures in order to calculate and analyze
business performance.

PROFIT MARGIN RATIOS

These are used to assess how successful the management of a business has been
at converting sales revenue into both gross profit and net profit.

1. Gross Profit Margin:

This ratio shows how much gross profit as a percentage from the sales revenue.
It is calculated through this formula.
Gross profit
Gross Profit Margin (%) = × 100
Sales revenue

Gross Profit Sales Revenue Gross Profit

$000 $000 Margin
A press Ltd 125 250 125/250 × 100
= 50%
B press Ltd 800 3,200 800/3,200 × 100
= 25%

2. Net Profit Margin:

This ratio compares net profit (profit after all costs have been accounted for
but before interest and tax has been deducted) with sales revenue.

Net profit
Net profit margin (%) = × 100
Sales revenue

Net Profit Sales Revenue Net Profit

$000 $000 Margin
A press Ltd 50 250 50/250 × 100
= 20%
B press Ltd 500 3,200 500/3,200 × 100
= 15.6%

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The profitability gap between these two businesses has narrowed. Whereas the
difference in gross profit margins was substantial, the net profit margins are much
more alike. This suggests that A has relatively high overheads (impacting on
lower net or operating profit) compared with sales, when contrasted with B.

B could narrow the gap further by reducing overhead expenses whilst maintaining
sales or by increasing sales without increasing overhead expenses.

LIQUIDITY RATIOS
These ratios assess the ability of the firm to pay its short-term debts.
Liquidity:
The ability of a firm to pay its short-term debts

1. Current Ratio:
This compares he current assets with the current liabilities of the business.

Current assets
Current Ratio =
Current liabilities

All figures as at 31/12/12 ($000)

Current Current Current
Assets Liabilities Ratio
A press Ltd 60 30 60/30 = 2
B press Ltd 240 240 240/240 = 1

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2. Acid-Test Ratio:
Also known as the quick ratio, this is a stricter test of a firm’s liquidity. It ignores
the least liquid of the firm’s current assets – inventories (stocks).

Acid-Test ratio: Liquid assets

Current liabilities

Liquid Assets: current assets – inventories

(Stocks) = liquid assets

All figures as at 31/12/12 ($000)

Liquid Current Acid-Test
Assets Liabilities Ratio
A press Ltd 30 30 1
B press Ltd 180 240 0.75

Limitations of Ratio Analysis

• One ratio result is of very limited value – it needs to be compared with
results from other similar businesses and with results from previous years
to be more informative.
• Comparing results with those of other businesses should be done with
caution. Different businesses may have slightly different ways of valuing
assets and some accounts may have been window dressed.
• Financial statements can only measure quantitative performance and this
is true of the ratios based on them. Other information of a qualitative nature
is necessary before the full picture of a company’s position and
performance can be fully judged.

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FURTHER RATIOS ANALYSIS OF PUBLISHED ACCOUNTS

PROFITABILITY RATIOS

1. Return of Capital Employed (ROCE):

It compares profit with the capital that has been invested in the business.

Return on Capital Employed (%):

Net or operating profit

× 100
Capital employed

Capital Employed:
The total value of all long-term finance invested in the business. It is equal to
(non-current assets + current assets) – current liabilities or non-current liabilities
+ shareholders’ equity

Net/Operating Capital Employed Return on Capital

Profit $m $m Employed ROCE

A Ltd 50 400 50×100/400 = 12.5%

B Ltd 500 5,000 500×100/5000 = 10%

Financial Efficiency Ratios

There are many efficiency or activity ratios that can be used to assess how
efficiency the assets or resources of a business are being used by management.
1. Inventory (stock) Turnover Ratio:
Modern stock-control theory (JIT) focuses on minimizing in inventories. This
ratio records the number of times the stock of a business is bought in and resold
in a period of time. In general terms, the higher this ratio is, the lower the
investment in inventories will be. If a business bought stock just once each year,
enough to see it through the whole year, its inventory turnover would be 1 and
investment in inventories high.

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Cost of goods sold

Inventory (stock) turnover ratio =
Average Stock

2. Debtor Collection Period / Debtors Day Ratio:

Debtors
Debtors Collection Period = * 365
Sales

GEARING RATIOS
These are the ratios which tell about the level of long-term loans of a firm.
1. Gearing / Debt Ratio:

Long term liabilities

Gearing Ratio = * 100
Capital Employed

Capital Employed = Total Capital

• The company whose non-equity capital is less than 50% is called “Low
Geared”
• The company whose non-equity capital is more than 50% is called “High
Geared”

2. Interest Cover Ratio:

Net Profit
Interest Cover Ratio =
Interest Charges

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INVESTORS RATIOS / SHAREHOLDERS RATIOS

These ratios are helpful to investors in which they can judge the rewards & returns
against investment made in business.
1. Earnings Per Share Ratio (EPS):

Profit after Tax

EPS =
No of Shares Issued
2. Dividend Per Share:

Dividend Amount
Dividend per Share =
No of Share Issued

3. Dividend Yield Ratio:

Dividend per Share

Dividend Yield Ratio = * 100
Market Price per Share

4. Dividend Cover:

Earnings per Share

Dividend Cover =
Dividend per Share

5. Price Earnings Ratio:

Market Price per Share

Price Earnings Ratio =
Earnings per Share

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BUDGETS
A budget is a detailed financial plan for future time period.

Planning for the future is important for all organizations. If no plans are made an
organization drifts without real direction.

Advantages

1. It coordinates activities between departments.

2. Budgets translate strategic plans into action.
3. Once the budgeted period has ended, variance analysis will be used to
compare actual performance with the original budgets.

Disadvantages

1. Budgets can cause perceptions of unfairness.

2. Budgets can create competition for resources and politics.
3. Budgets can demotivate employees because of lack of participation

Zero Base Budgeting

• A zero-based budgeting start from a “zero base.
• Every function within an organization is analyzed for its needs and
costs.
• A method of budgeting in which all expenses must be justified for
each new period.

Uses of Zero-Base Budgeting

1. Efficient allocation of resources, as it is based on needs and benefits
rather than history.
2. Detects inflated budgets.
3. Increases staff motivation by providing greater initiative and
responsibility in decision-making.
4. Identifies and eliminates wasteful and obsolete operations.

Flexible Budgeting
• This is revised budget at different output level.
• It shows different expense levels depending upon changes in the amount
of actual revenue.
• If sales or production will change then cost will also change.

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Uses of Flexible budgeting

1. A flexible budget enables to analyze the actual output from expected
output.
2. It helps to compare actual costs with the budgeted costs.
3. Flexible budget helps to fulfill the objectives of cost control.

Variances
A variance is the difference between a budgeted, planned or standard cost and the
actual amount incurred/sold.

Variances can be computed for both costs and revenues.

Adverse and Favorable Variances

Adverse:
When the difference between budgeted figures is less than an actual figure.

Favorable:
When the difference between budgeted figures is more than an actual figure.

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