current assets, e.g. inventory, trade receivables, cash

1 Understanding Business Activity

Learning Objectives

• Explain why businesses exist and the different purposes they serve.
• Classify businesses by sector, size and legal structure.
• Identify common business objectives and the main stakeholder groups.
• Describe the basic components of a business plan.

1.1 Purpose of Business

• Needs vs. wants – businesses provide goods and services to satisfy human needs and wants.
• Scarcity & opportunity cost – limited resources mean choices must be made; the next best alternative foregone is the opportunity cost.

1.2 Classification of Business Activity

Criterion	Categories	Examples
Sector	Primary, Secondary, Tertiary (service)	Farming (primary), Car manufacturing (secondary), Banking (tertiary)
Size	Micro, Small, Medium, Large	Family‑run bakery (micro), Regional supermarket chain (large)
Legal structure	Sole trader, Partnership, Private limited company (Ltd), Public limited company (PLC), Franchise, Joint‑venture	Local coffee shop (sole trader), Tech start‑up Ltd (private limited)

1.3 Business Objectives

• Profit maximisation (short‑term) – primary aim of most for‑profit firms.
• Growth – increase market share, sales, or geographical presence.
• Survival – especially relevant for start‑ups and SMEs.
• Social/ethical aims – corporate social responsibility, environmental stewardship.

1.4 Stakeholders

People or groups that can affect or are affected by the business.

Stakeholder	Interest
Owners / shareholders	Profit, return on investment
Employees	Job security, wages, working conditions
Customers	Quality, price, service
Suppliers	Timely payment, long‑term contracts
Government	Tax revenue, compliance with regulations
Community / NGOs	Environmental impact, ethical conduct

1.5 Business Plan – Key Components (simple template)

1. Executive summary
2. Business description & objectives
3. Market analysis (size, trends, segmentation)
4. Marketing & sales strategy
5. Operations plan (location, production, suppliers)
6. Financial projections (cash‑flow forecast, profit & loss, balance sheet)

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2 People in Business

Learning Objectives

• Explain how motivation, leadership and organisational structure influence performance.
• Describe the recruitment, selection and training cycle.
• Identify effective communication methods in the workplace.

2.1 Motivation

• Intrinsic vs. extrinsic – personal satisfaction vs. pay, bonuses.
• Common theories (briefly):
  • Maslow’s hierarchy of needs – physiological → self‑actualisation.
  • Herzberg’s two‑factor theory – hygiene factors (salary, conditions) and motivators (recognition, achievement).
• Practical examples: performance‑related pay, employee‑of‑the‑month awards, training opportunities.

2.2 Leadership & Management Styles

Style	Key features	When most effective
Autocratic	Decisions made by manager, clear directions	High‑pressure, routine tasks
Democratic	Team involvement in decisions	Creative or problem‑solving work
Laissez‑faire	Minimal supervision	Highly skilled, self‑motivated staff

2.3 Organisational Structure

• Hierarchical (tall) – many levels of management; clear authority.
• Flat (horizontal) – few levels; faster communication.
• Common forms:
  • Functional – grouped by specialist function (marketing, finance).
  • Divisional – separate units for product lines or geographic regions.
  • Matrix – dual reporting (function & product).

2.4 Recruitment, Selection & Training Cycle

1. Identify vacancy & write job description.
2. Advertise (online, newspaper, recruitment agency).
3. Shortlist applicants & conduct interviews/tests.
4. Select the best candidate and make an offer.
5. Induction – introduce to policies, culture, team.
6. On‑the‑job training & development (formal courses, mentoring).
7. Performance appraisal – feedback and future training needs.

2.5 Communication

• Formal channels – memos, reports, emails, meetings.
• Informal channels – grapevine, casual conversation.
• Barriers – language, cultural differences, physical distance; overcome with clear language, visual aids, feedback loops.

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3 Marketing

Learning Objectives

• Explain the role of marketing in a business.
• Analyse market changes and segment a market.
• Apply the 4 Ps (product, price, place, promotion) to a real‑world example.
• Identify key legal, ethical and foreign‑market considerations.

3.1 The Role of Marketing

• Creates, communicates and delivers value to customers.
• Helps a business understand demand, set prices, choose distribution channels and build brand loyalty.

3.2 Market Changes

Driver of change	Effect on marketing
Technological advances	New product possibilities, digital advertising, e‑commerce.
Social trends	Shift towards sustainability, health‑conscious products.
Economic conditions	Disposable income influences price sensitivity.
Competitive actions	Need for differentiation, promotional offers.

3.3 Market Segmentation Worksheet

Use the table below to identify a target market for a new product (e.g., a smartwatch).

Segmentation basis	Criteria	Potential segment
Demographic	Age 18‑35, income £30k‑£60k	Young professionals
Geographic	Urban areas	City dwellers
Psychographic	Tech‑savvy, fitness‑oriented	Active lifestyle group
Behavioural	Early adopters, frequent app users	Innovators

3.4 The Marketing Mix (4 Ps) – Example: “Eco‑Brew” Coffee Shop

• Product – Fair‑trade, organic coffee, reusable cups.
• Price – Premium pricing (£3.50 per cup) justified by ethical sourcing.
• Place – Central city location, plus online ordering for delivery.
• Promotion – Social‑media campaigns, loyalty card, local newspaper ads.

3.5 Legal & Ethical Controls on Marketing

• Advertising standards (e.g., ASA in the UK) – no misleading claims.
• Consumer protection – right to return faulty goods, clear price display.
• Data protection – GDPR compliance when collecting customer data.
• Ethical issues – targeting vulnerable groups, use of stereotypes.

3.6 Marketing Internationally

• Standardisation vs. adaptation – decide whether to keep the same marketing mix or modify for local tastes.
• Barriers: language, cultural norms, legal restrictions, tariffs.
• Example: Fast‑food chain adapting menu for halal markets.

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4 Operations Management

Learning Objectives

• Identify different production methods and their suitability.
• Explain the concepts of cost, economies of scale and break‑even analysis.
• Discuss quality control and location decisions.

4.1 Production Methods

Method	Typical output	Advantages	Disadvantages
Job production	One‑off, customised items (e.g., bespoke furniture)	High flexibility, high quality	High cost per unit, low volume
Batch production	Limited runs of similar items (e.g., bakery cakes)	Balanced cost and flexibility	Set‑up time between batches
Flow (mass) production	Large volumes of identical goods (e.g., cars)	Low unit cost, high efficiency	Low flexibility, high capital investment

4.2 Costs in Operations

• Fixed costs – do not vary with output (rent, salaries).
• Variable costs – change directly with production (raw materials, direct labour).
• Total cost = Fixed cost + Variable cost

4.3 Economies of Scale

When average cost per unit falls as output rises, usually because fixed costs are spread over more units or bulk buying discounts are obtained.

4.4 Break‑Even Analysis

Shows the level of sales needed to cover all costs.

• Break‑Even Point (units) = Fixed Costs ÷ (Selling price per unit – Variable cost per unit)
• Break‑Even Point (value) = Break‑Even units × Selling price per unit

4.5 Quality Management

• Quality control – inspection, testing, standards (e.g., ISO 9001).
• Quality assurance – processes that prevent defects (e.g., Six Sigma, Total Quality Management).

4.6 Location Decisions

Factor	Why it matters
Proximity to market	Reduces transport costs, faster delivery.
Access to raw materials	Lower input costs, reliable supply.
Labour availability & cost	Influences operating expenses.
Infrastructure	Roads, ports, utilities affect efficiency.
Government incentives	Tax breaks, grants can tip the balance.

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5 Financial Information and Decisions

5.1 Sources of Finance

Source	Type	Typical use	Key advantages	Key disadvantages
Owner’s capital / retained earnings	Internal, long‑term	Start‑up costs, expansion	No interest, retains control	Limited amount available
Bank overdraft / short‑term loan	External, short‑term	Working‑capital gaps	Quick access	Interest payable, must be repaid quickly
Trade credit (payables)	External, short‑term	Purchase of inventory	No cash outlay initially	May affect supplier relationships if delayed
Hire‑purchase / leasing	External, long‑term	Acquisition of equipment	Spreads cost, retains ownership (lease)	Interest/finance charges increase total cost
Shares (equity finance)	External, long‑term	Large capital projects	No repayment obligation	Dilutes ownership, dividends payable
Debentures / bonds	External, long‑term	Major expansion or acquisition	Fixed interest, no ownership loss	Interest must be paid regardless of profit

5.2 Cash‑Flow Forecasting

A cash‑flow forecast shows expected inflows and outflows over a future period (usually 12 months). It helps avoid cash shortages.

Month	Cash Inflows	Cash Outflows	Net Cash Flow	Cumulative Balance
Jan	£ 30,000	£ 25,000	£ 5,000	£ 5,000
Feb	£ 28,000	£ 27,000	£ 1,000	£ 6,000
…	…	…	…	…

Key tip for exams: always start with the opening cash balance, add inflows, subtract outflows, and record the closing balance for the next month.

5.3 Income Statement (Profit & Loss Account)

Item	Explanation
Sales (Revenue)	Total amount earned from selling goods/services.
Cost of Goods Sold (COGS)	Opening stock + purchases – closing stock.
Gross profit	Sales – COGS.
Operating expenses	Wages, rent, utilities, depreciation, marketing.
Operating profit	Gross profit – operating expenses.
Interest expense	Cost of borrowing.
Profit before tax	Operating profit – interest.
Tax	Corporation tax (usually a % of profit before tax).
Net profit (or loss)	Profit before tax – tax.

5.4 The Main Elements of a Statement of Financial Position (Balance Sheet)

5.4.1 Classification of Assets

Category	Definition	Typical items	Presentation notes
Current assets	Expected to be converted into cash, sold or consumed within one year (or the operating cycle, whichever is longer).	Cash & cash equivalents, trade receivables, inventory, pre‑payments.	Listed in order of liquidity – most liquid first.
Non‑current assets	Resources that will provide economic benefit for more than one year.	Property, plant & equipment (PPE), intangible assets, long‑term investments.	Recorded at cost less accumulated depreciation (or amortisation for intangibles).

5.4.2 Classification of Liabilities

Category	Definition	Typical items	Presentation notes
Current liabilities	Obligations expected to be settled within one year (or the operating cycle).	Trade payables, short‑term bank loan/overdraft, accrued expenses, current portion of long‑term debt.	Listed in order of maturity – earliest due first.
Non‑current liabilities	Obligations that will be settled after more than one year.	Long‑term bank loan, mortgage, deferred tax liability.	Recorded at the amount of principal to be repaid (interest is an expense).

5.4.3 Owner’s Equity

Component	Explanation	Presentation notes
Capital / Share capital	Original amount invested by owners or shareholders.	Shown as a separate line item.
Retained earnings (or profit & loss account)	Accumulated profit not withdrawn.	Adjusted for any drawings or dividends.
Reserves (optional at IGCSE)	Specific amounts set aside (e.g., revaluation reserve).	Usually not required for the exam.

5.4.4 Typical Layout (example)

Assets		Liabilities & Owner’s Equity
Cash and cash equivalents	£ 12,500	Trade payables	£ 15,200
Trade receivables	£ 28,300	Short‑term bank loan	£ 8,000
Inventory	£ 45,200	Current tax payable	£ 2,500
Total current assets	£ 86,000	Total current liabilities	£ 25,700
Property, plant & equipment	£ 120,000	Long‑term loan	£ 50,000
Total non‑current assets	£ 120,000	Total non‑current liabilities	£ 50,000
Total assets		£ 206,000
Capital (owner’s investment)	£ 100,000
Retained earnings	£ 80,300
Total owner’s equity	£ 180,300
Total liabilities & equity		£ 206,000

5.4.5 Key Concepts for Current Assets

• Cash and cash equivalents – recorded at face value; no depreciation.
• Trade receivables – recorded at invoiced amount less an allowance for doubtful debts.
  • Allowance = Total receivables × Estimated % doubtful (e.g., 2 %).
• Inventory – valued using one of the approved methods:
  • FIFO (first‑in, first‑out)
  • Weighted‑average cost
  • Specific identification (for unique items)
  The chosen method influences Cost of Goods Sold and profit, especially when prices are rising or falling.
• Pre‑payments – payments made in advance for expenses (e.g., insurance); recorded as assets until the expense is incurred.

5.5 Ratio Analysis (IGCSE level)

Ratio	Formula	Interpretation
Current Ratio	\(\displaystyle \frac{\text{Current Assets}}{\text{Current Liabilities}}\)	Measures ability to meet short‑term obligations; > 1 is generally satisfactory.
Quick (Acid‑test) Ratio	\(\displaystyle \frac{\text{Cash} + \text{Trade receivables}}{\text{Current Liabilities}}\)	Excludes inventory; shows most liquid resources.
Gross Profit Margin	\(\displaystyle \frac{\text{Gross profit}}{\text{Sales}} \times 100\%\)	Indicates efficiency of production/purchasing.
Net Profit Margin	\(\displaystyle \frac{\text{Net profit}}{\text{Sales}} \times 100\%\)	Shows overall profitability after all expenses.
Return on Capital Employed (ROCE)	\(\displaystyle \frac{\text{Operating profit}}{\text{Capital employed}} \times 100\%\)	Assesses how well the business uses its capital.
Debt‑to‑Equity Ratio	\(\displaystyle \frac{\text{Total liabilities}}{\text{Owner’s equity}}\)	Higher values indicate greater financial risk.

Interpreting a Simple Statement of Financial Position (exam tip)

1. Calculate the Current Ratio and Quick Ratio using the figures provided.
2. Compare with typical benchmarks (Current ≈ 2, Quick ≈ 1).
3. Comment on liquidity – can the business meet short‑term debts without selling inventory?
4. Calculate the Debt‑to‑Equity Ratio to discuss long‑term solvency.
5. Suggest two actions to improve liquidity (e.g., tighten credit control, negotiate longer payment terms with suppliers).

Common Examination Questions (Finance)

• Define each type of current asset and give a real‑world example.
• Explain how inventory is valued using FIFO and why it may produce a higher profit when prices are rising.
• Calculate the current ratio, quick ratio and gross profit margin from a given set of figures.
• Discuss the impact of a large allowance for doubtful debts on the presentation of trade receivables.
• Identify sources of finance suitable for a start‑up versus a mature manufacturing firm.
• Interpret a short SFP and suggest two measures to improve the business’s solvency.

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6 External Influences on Business

Learning Objectives

• Analyse how economic cycles, government policy, and globalisation affect business decisions.
• Identify key environmental and ethical issues and their impact on operations and marketing.

6.1 Economic Environment

Phase of the cycle	Typical business impact
Expansion	Higher consumer spending, increased demand, possible inflation.
Peak	Capacity constraints, rising costs, competition intensifies.
Recession	Reduced sales, tighter credit, need for cost‑cutting.
Recovery	Gradual increase in demand, opportunities for new products.

6.2 Government Policy

• Fiscal policy – taxation and public spending; affects disposable income and business costs.
• Monetary policy – interest rates set by the central bank; influences borrowing costs.
• Regulation – health & safety, environmental standards, competition law.
• Example: Introduction of a carbon tax may increase production costs for a manufacturing firm.

6.3 Environmental & Ethical Issues

• Carbon footprint, waste management, sustainable sourcing.
• Corporate social responsibility (CSR) – charitable giving, community projects.
• Ethical dilemmas – child labour, animal testing, fair trade.
• Impact on marketing – “green” branding can attract environmentally conscious consumers.

6.4 Globalisation

• Opportunities: access to larger markets, cheaper inputs, economies of scale.
• Risks: exchange‑rate fluctuations, cultural differences, increased competition.
• Strategic responses: export, joint ventures, localisation of products.

6.5 Case Study Prompt (exam style)

“A UK‑based clothing retailer is planning to expand into the EU. Discuss three external factors that could influence