Year 11 Homework Tasks
Business Studies Calculations
During year eleven, it is essential that you develop your understanding of key business calculations. This includes each of the following:
- Gross Profit
- Net Profit
- Gross Profit Margins
- Net Profit Margins
- Current Ratio
- Acid Test Ratio
- % Change
Gross Profit & Net Profit
These calculations can be worked out by taking figures from the Profit & Loss Account.
Gross Profit can be calculated by Sales Revenue - Cost of Sales.
Example: If a business has Sales Revenue of £120,000 and Cost of sales of £26,000, you would calculate the Gross Profit by doing the following:
£120,000 - £26,000 = £94,000
Gross Profit = £94,000
Net Profit can be calculated by Gross Profit - Expenses / Overheads.
Example: If a business has a Expenses of £20,000 and a Gross Profit of £94,000, you would calculate the Net Profit by doing the following:
£94,000 - £20,000 = £74,000
Net Profit = £74,000
Gross and Net profit figures can be compared with previous years.
Gross & Net Profit Margins
These calculations can be worked out by taking figures from the Profit & Loss Account.
The Gross Profit Margin can be calculated by Gross Profit
Sales Revenue X 100 = %
Example: If a businesses Gross Profit is is £94,000 and their Sales Revenue is £120,000, you would calculate their Gross Profit Margin by doing the following:
£94,000
£120,000 X 100 = 78%
The Net Profit Margin can be calculated by Net Profit
Sales Revenue X 100 = %
Example: If a businesses Net Profit is is £74,000 and their Sales Revenue is £120,000, you would calculate their net Profit Margin by doing the following:
£74,000
£120,000 X 100 = 62%
Remember: The higher the percentage, the bigger the level of profit made by the business.Gross and Net Profit Margin figures can be compared with previous years.
Percentage Change
You may also be required to calculate the percentage change in figures. This could refer to the Sales Revenue or another figures included on the profit & Loss Account. This is calculated by:
Difference
Original X 100 = %
Example: If a business has Sales Revenue of £20,000 in 2009 and Sales Revenue of £24,000 in 2010 and wanted to calculate the percentage change you would do the following:
The difference between £20,000 and £24,000 is £4,000. The original figure is the 2009 value of £20,000, therefore, we would complete the following:
£4,000
£20,000 X 100 = 20%
The Current & Acid Test Ratio's
Liquidity is an important measure of a business's financial performance. If a business is facing liquidity problems, this means that they will not be able to fulfil their debts. If the business is unable to raise cash to improve its liquidity, it may be forced to stop trading. The information needed to calculate both The Current and Acid Test Ratios, come from the Balance Sheet.
The Current ratio compares the value of the current assets that a business has with the figure for its current liabilities. By comparing these two figures, it is possible to see whether a business has enough assets that it may sell for cash to enable them to pay their short-term debts. The formula for this ratio is:
Current Ratio = current assets
current liabilities = ? :1 ( This :1 represents each pound of debt a business has)
A good current ratio figure is normally said to be higher than 2:1 which is the standard figure for this ratio. This, in turn, means that a business has £2.00 for each £1.00 of debt that they have to pay.
The Acid Test ratio is a harder test of a firm's ability to pay off it's debts. It compares the current assets, minus stock, with the current liabilities. It is possible to see whether a business has enough assets that it may sell easily for cash to enable it to pay its short term debts. The answer to an Acid Test ratio calculation will always be written as a ratio and will be written in the form of of 2:1 or 1:1. The formula for an Acid Test ratio is:
Acid Test Ratio = Current Assets - Stock = ?:1
Current Liabilities
For more information about how to calculate the Acid Test Ratio, please access the video link below:
Growing Businesses
A Growing Business is a business that is in a state of growth and increasing in size. If a business has a small number of senior managers who are making important decisions, then this is called 'Centralisation'. On the other hand, when employees, who work in all areas of the business, make decisions, we call this 'Decentralisation'. For more information on both Centralisation and Decentralisation, please access the video clip below:
Businesses may not always decide to Decentralise and this can be dirtectly linked to the employees and the skills that they have as well as the financial position of the business. For further information on Decentralisation and Centralisation, as well as examples of advantages and disadvantages, please access the link below:
Centralisation & Decentralisation
Centralisation will occur when a small number of senior managers will make all the important decisions within a business. Decentralisation will allow employees, who work in all areas of a business, to make all the decisions, this will often lead to better decisions being made. It is also likely that decisions will be made a great deal quicker. It can also reduce the pressure on senior managers and this allows them to concentrate on key issues that are important for business growth. One of the main challenges of decentralisation relates to the training that may be needed. This may take time and could also be quite expensive. It can also be a challenge to ensure that communication is forthcoming between employees. The employees of a business also must be aware of specific objectives or goals.
Production
There are three main types of Production - these are Job, Batch & Flow Production. Each of these is very different and depends on a number of production factors, for example, the types of product being produced and how many are being produced. For further information about these specific methods of production, please access the video link below:
For further information about Flow Production, check out the video link below:
For more information on Batch Production, access the video link below:
People in Business
Large businesses will have a large number of employees, all of whom have different responsibilites and roles to play. Some examples of key terminology when discussing people in businesses include:
- An Organisational Chart
- Wide Span of Control
- Narrow Span of Control
- Line Manager
- Span of Control
Delegation
Be careful not to confuse delegation with decentralisation - this is a common mistake that can be made during the exam! For more information on Delegation, access the link below:
Delegation Information
Some examples of Revision Resources on key topics can be found below. Click on the relevant links to access these materials:
Business Types
Legislation & Motivation
Legal Structures & Market Research
Marketing Mix
Motivation Employees
Production
The Profit & Loss Account
Franchises
Setting Up A Business
The Balance Sheet
For further information on delegation - visit the link below:
Business Expansion
Business Growth / Expansion is a common business objective. There are three main types of growth that you could be tested on in the exam and these are the following:
Internal Growth - this happens if a business sells more of its own products
External Growth - this happens if one firm joins with another
Selling Franchises
One of the key ways that Internal is different to external is that it tends to be slower, however, this also allows it to be more manageable. If a business joins together, their size will change and this can prove to be problematic. View the clip below which outlines and identifies possible problems that businesses may encounter as they expand:
One of the key problems could be that it is difficult to manage new staff as well as the fact that a business may change their policies and ways of doing things - this can take time to implement. Two key terms that are associated with External Growth are:
A merger
A takeover
Some tips that a business may need to consider to ensure that a merger is successful can be found in the video clip below:
If one business is looking to takeover another, they would consider the information contained in this short clip below:
A merger will occur when one or more firms join together and they then create a joint business. An example that you could discuss is that of Activision and Blizzard who merged in a deal worth $18.8bn. In a merger, the shareholders of each of the firms become shareholders of the new, bigger business.
A takeover, which is otherwise known as an Acquisition, happens if one business gains control of another business and buys it up. For example, in 2005, the shareholders of Reebok sold their shares to Adidas and are no longer owners of the business.
There are two types of growth - these are known as:
Internal Growth (Organic Growth)
External Growth
For further information on Organic Growth, please access the video link below:
The three stages of Production are:
Primary - where the raw materials are extracted in preparation for manufacturing a product
Secondary - where the raw materials are used to manufacture a product
Tertiary - where the product is distributed to its customer(s)
Types of Integation
Horizontal Integration: This occurs when one firm joins another and they are part of the same production process. For example, the Royal Bank of Scotland bought Natwest in 2007.
Vertical Integration: This occurs when one firm joins another who are at a different stage of the same production process. There can also be backward vertical integration, which a firm joins with its suppliers or forward vertical integration, when a firm joins with its distributors.
Conglomerate Integration: This occurs when one firm joins together with another firm that are part of a different type of production process.
For further information and the characteristics associated with these types of growth, visit the link
below:
One of the main benefits of Integration is economies of scale. This is where the cost per unit falls as a business expands. For more information on economies of scale, visit the link below:
Further examples of advantages of integration include the fact that vertical integration can ensure a firm keeps control of its suppliers or distribution - this can help to reduce costs as well as improving reliability and quality. Conglomerate integration can spread risks as a firm is operating in more than one market. This will mean that a fall in demand within one market, will be offset by an increase in demand in another market. One of the main problems associated with business growth / integration is that of diseconomies of scale. These are the problems involved with controlling and motivating staff in a bigger business. For more information on this topic, please use the video clip below:
Other examples of problems will include culture clashes where firms are used to doing things in different ways. For example, this could see problems with policies and approaches and these can lead to problems with efficiency and decision making.
Franchises
One of the main ways that businesses can grow is becoming a franchise. This occurs when one business sells the rights to another business to allow it to trade under their name and sell their products. The franchisor will sell the rights and will provide training and advice to the franchisee who buys the franchise. This is one of the quickest ways in which a business can grow. For further information on a franchise, visit the video clip below:
There are numerous advantages of selling a franchise. The franchisor will obtain a fee from the franchisee and gain a percentage of their profits. It is also important for the franchisee to set up the new outlet and this will allow the overall business to grow much faster than if the original business had to provide all the money for the new stores. The franchisee will take a percentage of the profits and should be motivated to make the business a great success - this way it allow everyone to benefit. It is also important for franchises to learn from each other, which helps the business to do better overall and make more money. A disadvantage of franchises is that the original owner will no longer own the entire business as most of the profits will go to the franchisee. One of the key issues, is that if there are problems with quality of one franchise, this can damage the whole business. It is important to continually check the quality of all franchises. A franchise can also be an entrepreneurial option - see the video clip below for information on how this can sometimes be a viable option for an entrepreneur:
Stakeholders
Stakeholders are a very important part of a business. These can come in two categories, external and internal. Watch the clip below which discusses stakeholder groups and their importance:
Growth can be very important for Stakeholders, for example, employees will have much more job security and receive greater rewards if a business is growing and doing well. They are likely to be very proud to work for a successful business and will want to stay longer. It is also likely that will have greater opportunity for promotion and new challenges. Growth of a business will also benefit suppliers and they will benefit from additional orders and more opportunities to supply the bigger business, they grow as well. There will also be benefits for the local community as it is likely that a business will recruit people locally and help the community to grow. One of the main ways that the government will grow is through higher income tax that is paid by employees. Also, increased employment will result in less money being paid in benefits to the unemployed. You may find that employees will no longer feel part of a business as in a large firm they are likely to be one of thousands and do not count as individuals. One of the key issues for growth is the fact that a large number of businesses will encounter communication problems as employees may not be aware of what is going on. Also, many businesses will not seem like they are investing in the community - for example, they may move their production from one location to overseas. The government may not benefit if the business relocates some of its production overseas or expands. Each individual stakeholder group and the way they are affected, will depend on how the business treats them. Some businesses look to involve their stakeholders in the decision making process, although others do not. Many businesses will choose to focus on their shareholders as oppose to their stakeholders. As they get bigger, many firms will try to bully their stakeholders and use their power to gain more profits. In an effort to protect their interests, Stakeholders can attempt to do the following:
Encourage the government to force the business to change its policies.
Boycott the products and force the business to change its policies.
A strike could see employees stop working and bring production to a halt. Some employees may strike in an effort gain a wage/salary increase or may be in response to bad treatment.
Complaints can be made by such stakeholders as employees, suppliers, the community or the government.
Shareholders also have the opportunity, if they dislike some of the decisions that are made, to vote against the business at the Annual General Meeting (AGM). They can call for the directors to resign and may also look to sell their shares which is likely to drive down the price of the business.
Companies
Under the 1980 Company ACt, there are two types of company in the UK, these are Private & Public Limited Companies. Both of these companies are owned by their shareholders and both have limited liability. For further information on limited liability, access the link below:
A private limited company does not sell its shares publicly. There are often restrictions in place on who is able to obtain shares but this is generally friends and family members. A public limited company will generally advertise its shares on the Stock Exchange. For further information on the Stock Exchange and how this works, visit the video link below:
Public limited companies will often have very high start up costs of around £50,000. It is not possible to place restrictions on the shares and who can purchase these, therefore, it would be possible for a rival company to purchase shares. In the event that a private limited company wants to become a public limited company, then this process is called flotation. To do this, a company must sell its shares to the general public and the firm must meet the regulations of the Stock Exchange. For further information on both public and private limited companies and the advantages and disadvantages associated with them, access the video clip below:
Private & Public Limited Companies
Many of the shares that public limited companies make available on the Stock Exchange are owned by financial institutions which includes the likes of banks and insurance companies. A percentage of around 14% of shares are owned by individuals.
Two other types of company that you will need to be aware of are:
Holding Company and Subsidiary Company
Visit the link below to access further information on these types of company:
Business Objectives
As a business grows, it is increasingly likely that their objectives will change. If a business has achieved some of the initial objectives they will set new ones. They may also identify that some of their aims were not realistic. Business aims and objectives will always change over time - entrepreneurs thoughts during start up are generally focused on survival. Once this has been achieved, the owner may think more about other areas to target as new objectives. The video clip below identifies typical examples of business objectives and their importance:
It is important for businesses to assess the suitability of their objectives, especially once they are established. To encourage growth, they are likely to have to spend money on new equipment and new premises. Bigger firms tend to dominate their markets and this will often mean that they can cheaper materials as they are such an important customer. Big companies are also more well known - this will help when launching new products as shops are willing to stock their products and customers are more likely to try them. If a business increases in size, it is less likely that they will be at risk from hostile takeovers as they are worth a lot more and will be more expensive to buy.
What is Market Share?
As part of the growth objective, a business will look to dominate the market and have the highest market share. being the market leader means having the largest market share and dominating the market. This will bring a number of benefits such as:
Greater power of suppliers, distributors and other firms in the industry.
For further information on why market share is important, access the video clip below:
The dominant firm in a market will be able to set a price that others follow because they do not want to start a war with the biggest business in the market. In an effort to improve a business and encourage growth, businesses will look to develop new products. This can help to give it an advantage over the competition. For further information on innovation and its importance, access the link below:
Businesses will often move into new markets in an attempt to grow in size. By diversifying, a firm will be able to spread its risks. Access the video link below for further information on Diversification:
The majority of businesses will start off by selling in their own country or region. Once they begin to expand, they will often start to get orders from abroad and begin to export. If these orders from overseas continue, they may set up stores in other countries. The reasons why this may be a good idea of a business include:
Larger amount of potential customers
This can offer a growing market
It allows growth when further expansion in the UK could be problematic
Can be a way of avoiding government restrictions
This can help reduce risk
When a business increases in size, they will often bring outside investment. This can be seen when a business floats and becomes a public limited company. These investors will want to see progress in the business in the form of growth and higher dividends. Managers, therefore, will be under high pressure to deliver higher profits. It is possible for a business to calculate the rate of growth and this can be worked out using the following calculation:
The change in value X 100
The change in value
Imagine a business had sales of £200,000 and this increases to £250,000. To find the rate of growth you would calculate this as the following:
50,000 X 100
200,000
= 25%
Businesses will also have to make decisions regarding their environmental and ethical stance. Business ethics refers to whether a business decision is seen as morally right or wrong. An ethical decision is made on the basis of what you think is right.
For further information on business ethics, visit the video clip below:
Some decisions that businesses may make regarding ethics could include:
Whether or not products were made abroad. How much are staff paid and are they treated fairly? Is child labour involved?
Whether or not customers are well informed about the ingredients of a product. Do the adverts create a false impression of the product?
Are suppliers paid on time or are they kept waiting?
Some examples of environmental considerations include:
Does the company recycle and if so, how much?
What does the company do to conserve energy?
How does the company control its emission levels?
Business Location
Entrepreneurs will carefully consider the location of their business. Some internet entrepreneurs even start up their businesses in their own homes! As a business grows, the owners will have to make additional location decisions. These might include:
Would the business benefit from bigger premises?
Would it be profitable to open up additional shops?
Would expansion abroad be a good idea?
A growing business would have to consider the following:
The level of risk
The costs involved
The possible impact upon revenues
The availability of resources
Access the link below to identify ways in which businesses can grow:
Many business will look to locate overseas. This can be a way of paying cheaper labour - wages in countries such as China and India are much lower than in the UK. It also provides businesses with the opportunity to access resources that are not necessarily available in the UK. For example, growing bananas is easier in South America than in England. Some governments will provide financial incentives as they are keen to attract foreign businesses to their country and therefore offer lower tax rates. Businesses will also avoid protectionist measures by foreign governments. Some governments want to help their own firms and so they protect them from overseas competition. This can be done by having taxes on foreign goods or by limiting the number of foreign goods that can be allowed to enter a country. The key terms that you will need to be aware of are:
Tariff - a tax on foreign goods that are imported
A quota is a limit that is placed on the number of goods that can be imported
When a business imports, this means that a product is purchased from abroad
There are also some examples of locating overseas, these may include:
Some countries will have different rules and regulations and this will affect how a business will treat its employees and how they advertise their product or service.
It is also likely that different countries will contain customers who have different tastes - their products may need to be altered to suit different markets. This may be very expensive.
Some further information about businesses who have expanded in size can be accessed through the link below:
Sources of Finance
A source of finance is a place where a business may look to find money. You will find that large businesses are going to have more substantial amounts of finance when compared to small businesses. Despite this, both small and large businesses will use similar sources of finance such as bank loans and mortgages. A large business may wish to use the following sources of finance:
Selling unwanted or unused assets
A loan or mortgage
Selling of shares
Use retained profits
Growing businesses will want to use finance for a number of reasons, this may include:
Raw materials
Recruitment
New property purchase
Machinery, equipment and vehicles
Some examples of alternative sources of finance that businesses may use because of uncertainty in the economy can be accessed through the video clip below:
The different sources of finance that are available to businesses can be found by visiting the clip below:
You will need to be aware of the advantages and disadvantages of the different sources of finance. Some examples are highlighted below:
Retained Profits Advantages:
This can be arranged straight away and there are no interest payments.
Retained Profits Disadvantages:
Shareholders may oppose this decision to use these profits, but this is only available to profitable businesses.
Selling Assets Advantages:
This may allow a business to lease these back and therefore keep them and there are no interest payments.
Selling Assets Disadvantages:
A lot of many businesses do not have suitable assets, whilst leasing assets means that they will have to make regular payments.
Bank Loans / Mortgages Advantages:
These are quick to arrange and payments are made over a long period of time.
Bank Loans / Mortgages Disadvantages:
A business will have to pay interest and banks may require an asset as collateral.
Selling Shares Advantages:
There are no interest payments.
Selling Shares Disadvantages:
The owners may lose control of a company and this is something which is only available to companies.
When a business chooses a source of finance, they have a number of factors to consider. They will need to consider the following:
How much do they need to raise?
What type of ownership and legal structure do they have?
How profitable is the business?
What assets do they own?
Business performance and future prospects
The Profit & Loss Account
A business will prepare a profit and loss account. This is one example of a financial document and will be prepared for a number of reasons, these include:
This is a legal requirement
This will help business managers and assist in making decisions
This will help to guide investors
For further information on the importance of a profit and loss account, access the video clip below:
A profit and loss account is a financial statement which will show a businesses revenues and costs over a period of time - this is usually one year. This will allow owners to identify if the business has made a profit or loss. This is otherwise known as an income statement.
A profit and loss account will have five main sections - these are:
Revenue
Cost of Sales
Gross Profit
This is equal to revenue - total costs
Overheads
These are costs which do not alter when the level of production changes. This may include:
Salaries
Insurance costs
Interest on loans or mortgages
These are sometimes called expenses.
Net Profit
Net Profit Calculation video
Two key terms that you need to be aware of when discussing a balance sheet are:
Assets
Liabilities
An Asset is something which is owned by a business, whilst a liability is something which is owed by a business.
A balance sheet will set out both the assets and liabilities. It will identify where a businesses finance has come from and how this money has been spent. For further information about how a balance sheet is constructed, as well as the difference between fixed and current assets, access the video clip below:
The two types of liabilities that you may be required to discuss in the exam are:
Current Liabilities: These are debts that a business will have to pay in a year such as tax and money owed to suppliers. For further information on Current Liabilities, access the video clip below:
Long-term liabilities: These are debts which have to be paid back over many years. This may include a loan or a mortgage. They are otherwise known as non-current liabilities. For further information on Long-term liabilities, access the video clip below:
A Balance Sheet will set out the assets and liabilities that a business has. An asset is something that the business owns, whilst a liability is something they owe. A business will keep Fixed Assets for many years and this includes such things as vehicles and shops. These are used to help the business create revenue and help it make profits. These are otherwise known as 'non-current' assets. Current Assets are slightly different in that the business only; expects to keep them for a short period of time (this is normally less than one year) This will include such things as cash, as well as stocks of raw materials. These assets are often used by businesses to settle debts they might have. For further information on Fixed Assets, view the short clip below:
For further information on Current Assets, view the short video clip below:
A Balance Sheet gets its name because the two parts of the document will 'balance' and equal each other. The value of the assets that are owned by the business, after it has paid its debts, are called 'net assets employed'. This will equal the amount of money that is put into the business by its shareholders. This called total equity. One of the other key terms that you need to be aware of is Liquidity. This refers to the amount of money that a business has and shows whether or not they can pay off their debts over a period of time. For the calculations used in regards to Liquidity, please visit the top of this page where you will be shown how to calculate all relevant ratios.
Organisational Structure
All businesses have some form of organisational structure. This is designed to show the roles that each employee will have within a business, as well as who reports to who. These roles and responsibilities are outlined in an organisational chart. This will show how each individual employee will fit into the business and also shows who is the line manager for each employee and the people who managers are responsible for. A Line Manager can be classified as an employee's immediate superior or boss. Each manager has a span of control - this means the number of employees that they directly manage. A director or manager will not have a span of control that is too wide as it can be difficult to manage this number of employees. It is recommended that the maximum span of control should be no more than six people. There will be different layers of authority within a business and known as levels of hierarchy. Businesses will use either of the following types of organisational structure:
Flat Organisational Structure: This has a wide span of control and few levels of hierarchy.
Tall Organisational Structure: This has a narrow span of control and larger number of levels of hierarchy.
Two other key terms that you need to be aware of are:
Authority: The power to control others within a business.
Delegation: Passing down authority to more junior employees.
Recruitment of Staff
When a business grows, it is likely to recruit new employees. In the case that the wrong person was appointed in a position, this could have difficult consequences - this may include:
The employee being unable to do the job properly
Time and money would be needed to replace and then recruit an employee
It is important to pick the right employees from those who applied for the job. This is called selection.
Some examples of documents that are used in the recruitment process include the following:
Job Description - title, hours and tasks of the job as well as who the employee is responsible to.
Person Specification - educational qualifications, vocational or professional qualifications, ability to work as part of a team.
Job advert - the title of the job, information about the business, the location of the job, working hours and holiday offered, pay rates, how to apply and a closing date for applications.
Curriculum Vitae (CV) - a document which sets information about a person and this will include qualifications, employment history and interests.
The Selection Process
Businesses will use a number of different techniques to select the best candidate for a job. These will include:
Interviews
Psychometric tests
Assessment centres
Training, Appraisal & Motivation
Training refers to a range of activities that are used to give employees job-related skills, knowledge and experience. This will include:
Induction Training - the first type of training an employee will have once they start a new job. This allows them to become more familiar with a business.
On-the job Training - this is given in the workplace and may involve new employees who learn from others that are more experienced.
Off-the-job training - This takes place outside of the business. This can help to bring new ideas into a business.
Employees will have to go through an Appraisal. This is where a business will make a judgement about an employee's performance over a period of time. Employees will be set targets and there will also be systems in place which monitor this. Many businesses are successful because they have employees who work hard and are descried as 'motivated'. This relates to the will or desire to do something. Some people believe that employees are motivated by the promise of rewards but others believe it is just through enjoyment of the tasks. For further information on motivating employees, view the video clip below:
Some examples of different ways that businesses will motivate their employees include:
Financial methods such as a piece-rate pay system where they are paid for what they produce.
Bonuses
Fringe benefits such as private health care or a company car
Shares in the business
Non-financial methods such as demanding jobs and decision making as well as a variety of duties and working in teams. Other methods also include training.
There are generally two types of management styles and motivation, these are:
Authoritarian leadership
Democratic leadership
For information on Autocratic leadership, access the following link: Authoritarian
For more information on Democratic leadership, access the following link:
Businesses will attempt to keep their employees by doing the following:
Spend heavily on recruitment
High pay rates
Appropriate management style
Encouraged progression and development
Help and assistance from experienced workers
Operations Management
When a business increases in size, they will need to produce on a much larger scale. This means that their production methods may alter. If a business is producing on a large scale, they will use flow production techniques and this sees an item move continuously from stage of the production process to another. This will allow large numbers of the product to be produced. The simple clip below compares the different production methods that a business may use:
Flow production will allow for specialisation. This occurs when individuals focus on a limited number of tasks. This type of production method is relatively cheap per unit although it is often expensive to purchase the equipment and the initial costs are high. It is also quite risky and can lack any element of flexibility. This can also lead to boredom and dissatisfaction for staff.
Efficiency
Efficiency refers to how well a business uses its resources to produce and manufacture. If a business does not use many resources, then the cost per unit will be low. An inefficient business will have much higher unit costs. Efficiency can depend on a number of factors, for example:
The management of employees
The effectiveness of suppliers
Investments in machinery and technology
The way the products are produced
Look at the video clip example below which shows how Business Link use their resources efficiently:
Some businesses will use Lean Production techniques and these are designed to reduce the amount of waste during production. Waste is inefficient and if a business can reduce this it will be able to cut costs. Visit the link below which discusses Lean Manufacturing methods:
To further develop your understanding of Just In Time manufacturing methods, visit the link below. Just in time production literally means 'made to order'. This will also reduce waste.
McDonalds have also used Just in Time manufacturing methods. Watch the short clip below which highlights how they use this method:
Some businesses will use the 'continuous improvement' approach to production - this is referred to as 'Kaizen'. This is an approach to production which aims to achieve change through a series of small steps. The video below discusses the Kaizen approach to production and also explains how this has been implemented by Toyota.
Employees will need to be involved in helping the business improve. They will be used in the following ways:
Work closely with managers
Find better ways of doing things - relations between employees and managers needs to be good. They also need to be motivated.
Checking quality on a regular basis
A business will face many challenges as it increases in size. The business and its size can be calculated by the following:
The Value of sales (Revenue / Turnover)
Market Share
The value of the business (The value of its assets minus its liabilities)
The value of the businesses shares (Market price of a share X number of shares) - this is know as Market Capitalisation (Also, see the short video clip below to help you with this topic)
The number of employees
The number of stores they have
The number of employees
There are undoubted benefits as a business increases in size. These include the following:
Economies of scale
More power in a particular market
More status - easier to launch new products in the future
More rewards for staff
There are also disadvantages associated with growth. These include the following:
Long decision making process
Employees feel isolated as there are so many of them - can lead to demotivation
Can lead to less efficiency
Diseconomies of scale
It is often a good idea for businesses to remain small as it allows owners to keep control over the whole business. They are able to keep a much closer eye on what is happening within the business and they are able to make decisions very quickly. As a business grows, they will begin to employ more people and also sell in more markets. There can be inconsistencies in the business approach as mistakes are made when people start doing things their own way. Many businesses will outsource work to other businesses and this can sometimes cause problems. What is Outsourcing?
It is essential that businesses maintain their quality even if they do outsource. Quality involves meeting customer requirements to a high standard. Quality can be measured in a number of ways - three popular examples that businesses might use are:
Customer surveys and questionnaires
Mystery Visitors
Checklists given to staff to check quality
Samples
Achieving better quality is deemed to be cost-efficient. The costs involved include:
The costs of inspection and checking
The costs of training staff to check their quality
The costs of poor quality include:
Recalling faulty products
Mistakes in products
Replacing goods
Waste
The cost of goods produced that no-one wants
Legal cases if a business is sued
For further information on Quality, watch the video clip below:
To maintain quality, a business should make sure its suppliers are reliable and that their products are of good quality. They should also train staff to now their jobs properly as well as inspecting the products made at each stage of the process. A business should also aim to encourage staff to contribute to improving the production process. Each of the above techniques are examples that are associated with Total Quality Management. This will involve all employees in the process of preventing mistakes in order to achieve zero defects. Watch the video clip below which discusses Total Quality Management:
Quality is important for a number of reasons:
Customers are more likely to come back and recommend a business if they know they can trust the quality. This will make it easier for a business to release new products in future. If a business works to avoid mistakes, this will save them money - for example, in 2001, Airbus had to check all of their A380 aircraft after cracks were found in the wings. Watch the clip below and consider how this affected Airbus:
If a business produces a quality product, they will be able to charge more money because customers can count on its reliability.
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