Cambridge IGCSE Business Studies (0450) – Lecture Notes
1 Understanding Business Activity
Key concepts
- Purpose of business – to satisfy human needs and wants by producing goods or services.
- Needs vs. wants – needs are essential for survival; wants are desires that go beyond basic needs.
- Classification of businesses
- Primary (extraction), secondary (manufacturing), tertiary (services).
- Private (sole trader, partnership, limited company) vs. public sector.
- Enterprise & growth – entrepreneurship, start‑ups, organic growth, mergers & acquisitions.
- Business objectives – profit, growth, market share, survival, social & ethical aims.
- Stakeholder objectives – shareholders, employees, customers, suppliers, community, government.
AO focus
- AO1 – define terminology and describe the purpose of business.
- AO2 – explain how different objectives influence decision‑making.
- AO3 – analyse the impact of stakeholder objectives on a real business.
- AO4 – evaluate the advantages and disadvantages of a chosen business objective.
Typical exam question
“Explain why a business might adopt both profit‑maximising and social‑responsibility objectives.”
2 People in Business
Motivation
- Maslow’s hierarchy of needs (physiological → self‑actualisation).
- Herzberg’s two‑factor theory – hygiene factors vs. motivators.
- Financial (salary, bonuses) and non‑financial (recognition, career development) rewards.
Organisational structure
- Flat vs. tall hierarchy.
- Functional, divisional and matrix structures.
- Advantages and disadvantages of each.
Management functions & leadership styles
- Planning, organising, leading, controlling.
- Autocratic, democratic, laissez‑faire – impact on employee morale and productivity.
Recruitment, training & development
- Internal vs. external recruitment; selection methods (interview, assessment centre, psychometric test).
- Induction, on‑the‑job training, apprenticeships, CPD.
Trade unions & employee relations
- Purpose of trade unions, collective bargaining, industrial action.
- Strategies for good employee relations (communication, fair pay, health & safety).
Communication
- Formal vs. informal channels; vertical, horizontal, diagonal communication.
- Barriers to effective communication and ways to overcome them.
AO focus
- AO1 – state and explain key motivational theories.
- AO2 – apply a suitable organisational structure to a given business scenario.
- AO3 – analyse the effect of a change in leadership style on staff performance.
- AO4 – evaluate the benefits and drawbacks of using trade unions in a modern workplace.
Typical exam question
“A small retail chain wants to improve staff motivation. Recommend two motivational techniques and justify your choices.”
3 Marketing
The marketing mix (4 Ps)
| Product | Price | Place | Promotion |
|---|
| Design, quality, brand, warranty, after‑sales service. |
Pricing objectives, discounts, credit terms. |
Distribution channels, logistics, location of outlets. |
Advertising, sales‑promotion, public relations, personal selling. |
Market research & segmentation
- Primary (questionnaires, interviews) and secondary (published data) research.
- Segmentation criteria – demographic, geographic, psychographic, behavioural.
- Niche vs. mass marketing – when each is appropriate.
Pricing methods
- Cost‑plus, target‑return, competition‑based, psychological pricing.
- Impact of price elasticity of demand.
Promotion & e‑commerce
- Online advertising, social media, email marketing, SEO.
- Legal & ethical issues – misleading advertising, data protection.
AO focus
- AO1 – define the 4 Ps and give examples.
- AO2 – use market‑research data to recommend a target market.
- AO3 – analyse how a change in price would affect sales and profit.
- AO4 – evaluate the advantages and disadvantages of using digital promotion for a start‑up.
Typical exam question
“A company is launching a new sports drink. Using the marketing mix, suggest how it could position the product in a competitive market.”
4 Operations Management
Production methods
- Job production – one‑off, custom items (e.g., bespoke furniture).
- Batch production – groups of identical items (e.g., bakery loaves).
- Flow (mass) production – continuous, high‑volume output (e.g., car assembly).
Productivity
Productivity = Output ÷ Input. Ways to improve: training, better equipment, process redesign.
Lean production & quality
- Eliminate waste (over‑production, waiting, transport, excess inventory, motion, defects, over‑processing, unused talent).
- Quality control (inspection, statistical process control) vs. quality assurance (systems such as ISO 9001).
Location decisions
- Factors – transport costs, labour availability, market proximity, government incentives, environmental impact.
- Methods – break‑even location analysis, factor‑rating, cost‑benefit analysis.
Break‑even analysis (core)
Key concepts
- Fixed costs (FC) – do not vary with output (rent, salaries).
- Variable cost per unit (VC) – varies directly with each unit (materials, direct labour).
- Total cost (TC) – \(TC = FC + VC \times Q\).
- Price per unit (P) – selling price.
- Total revenue (TR) – \(TR = P \times Q\).
- Break‑even point (BEP) – where \(TR = TC\).
- Margin of safety (MOS) – difference between expected sales and BEP.
Core formula
\[
\text{BEP (units)} = \frac{FC}{P-VC}
\]
Constructing a simple break‑even chart (single‑product)
- Horizontal axis = output (units); vertical axis = cost / revenue (£).
- Draw a horizontal line at the level of FC (fixed‑cost line).
- From the point (0, FC) draw the total‑cost line with slope = VC.
- From the origin (0, 0) draw the total‑revenue line with slope = P.
- The intersection of the TC and TR lines is the BEP.
- Shade the area above TR and below TC (loss) to the left of BEP; shade the area above TC and below TR (profit) to the right.
Worked example (core)
FC = £20 000, VC = £5 per unit, P = £12 per unit.
| Units (Q) | Total Cost (TC) £ | Total Revenue (TR) £ |
|---|
| 0 | 20 000 | 0 |
| 2 800 | 34 000 | 33 600 |
| 2 900 | 34 500 | 34 800 |
Calculate BEP:
\[
\text{BEP}= \frac{20\,000}{12-5}=2\,857\text{ units (≈ £34 284 revenue)}
\]
Target‑profit calculation
\[
Q_{\text{target}} = \frac{FC + \text{Target profit}}{P-VC}
\]
For a desired profit of £15 000:
\[
Q_{\text{target}} = \frac{20\,000+15\,000}{12-5}=5\,000\text{ units}
\]
Margin of safety
\[
\text{MOS}_{\text{units}} = Q_{\text{actual}} - \text{BEP}
\qquad
\text{MOS}_{\%}= \frac{\text{MOS}_{\text{units}}}{Q_{\text{actual}}}\times100
\]
Limitations (AO4 – evaluation)
- Assumes a single product or fixed product mix.
- Price (P) and variable cost (VC) are treated as constant.
- All output is sold – no inventory build‑up or stock‑outs.
- Fixed costs are truly fixed; economies of scale and bulk discounts are ignored.
- Market demand fluctuations are not reflected.
Typical exam questions
- “How would a £2 increase in selling price affect the BEP and profit area?”
- “Calculate the margin of safety if the business expects to sell 6 000 units.”
- “Explain two limitations of break‑even analysis.”
Extension (optional for higher‑ability students)
- Interpolation technique to locate BEP between two data points.
- Sensitivity analysis – show how changes in FC, VC or P shift the chart.
- Multi‑product break‑even (weighted‑average contribution margin).
AO focus for operations
- AO1 – describe different production methods and why a business chooses one.
- AO2 – calculate BEP, target profit and margin of safety using the given formulas.
- AO3 – analyse the impact of a change in fixed costs on profitability.
- AO4 – evaluate the usefulness and limitations of break‑even analysis for decision‑making.
5 Financial Information and Decisions
Sources of finance
| Internal | External |
|---|
| Retained earnings, sale of assets, owner’s capital. |
Bank loans, overdrafts, hire‑purchase, leasing, equity finance (shares), venture capital, government grants. |
Cash‑flow forecasting
- Cash inflows – sales receipts, loan proceeds, asset sales.
- Cash outflows – purchases, wages, rent, interest, tax.
- Simple forecast table (month‑by‑month) to identify surplus or deficit.
Working capital
Working capital = Current assets – Current liabilities. Adequate working capital ensures smooth day‑to‑day operations.
Income statement (profit & loss account)
| Item | Explanation |
|---|
| Sales (revenue) | Total amount earned from customers. |
| Cost of goods sold (COGS) | Direct costs of producing the goods sold. |
| Gross profit | Sales – COGS. |
| Operating expenses | Admin, marketing, depreciation. |
| Operating profit | Gross profit – operating expenses. |
| Interest & tax | Finance costs and statutory tax. |
| Net profit | Final profit after all deductions. |
Statement of financial position (balance sheet)
- Assets – current (cash, stock) and non‑current (plant, buildings).
- Liabilities – current (payables, short‑term loans) and non‑current (long‑term debt).
- Owner’s equity – capital + retained earnings.
Key ratios
| Category | Ratio | Formula | Interpretation |
|---|
| Profitability | Gross profit margin | \(\frac{\text{Gross profit}}{\text{Sales}}\times100\) | Higher = more efficient production. |
| Net profit margin | \(\frac{\text{Net profit}}{\text{Sales}}\times100\) | Overall profitability. |
| Liquidity | Current ratio | \(\frac{\text{Current assets}}{\text{Current liabilities}}\) | Ability to meet short‑term obligations. |
| Quick ratio | \(\frac{\text{Current assets – Stock}}{\text{Current liabilities}}\) | Liquidity without relying on inventory. |
| Efficiency | Inventory turnover | \(\frac{\text{COGS}}{\text{Average stock}}\) | How quickly stock is sold. |
Analysis of accounts (AO3)
- Identify trends – rising costs, falling profit margins.
- Compare ratios with industry benchmarks.
- Link financial data to business decisions (e.g., price changes, cost‑cutting).
AO focus
- AO1 – name the main sources of finance and the purpose of a cash‑flow forecast.
- AO2 – prepare a simple income statement and calculate two profitability ratios.
- AO3 – analyse a set of accounts to comment on the financial health of a business.
- AO4 – evaluate the suitability of different financing options for a start‑up.
Typical exam question
“A company’s income statement shows sales of £120 000 and COGS of £72 000. Calculate the gross profit margin and comment on what it reveals about the business.”
6 External Influences on Business Activity
Economic environment
- Economic cycles – expansion, peak, recession, trough.
- Inflation, deflation and their impact on costs and pricing.
- Unemployment levels affecting labour supply and consumer demand.
Government policy
- Fiscal policy – taxation and public spending.
- Monetary policy – interest rates, credit controls.
- Regulation – health & safety, consumer protection, environmental legislation.
Environmental & ethical issues
- Sustainability, carbon footprints, recycling.
- Corporate social responsibility (CSR) – ethical sourcing, fair trade.
Globalisation
- International trade – imports, exports, tariffs, quotas.
- Multinational enterprises (MNEs) – benefits (economies of scale) and challenges (cultural differences).
- Exchange rates – impact on import costs and export revenue.
Legal constraints
- Company law, employment law, intellectual property rights.
- Consequences of non‑compliance – fines, reputational damage.
AO focus
- AO1 – describe two ways in which government policy can affect a business.
- AO2 – apply the concept of exchange‑rate fluctuation to a UK exporter.
- AO3 – analyse how a recession might influence a retailer’s marketing strategy.
- AO4 – evaluate the importance of CSR for a multinational clothing brand.
Typical exam question
“Explain how a rise in interest rates could affect both the borrowing costs and consumer demand for a new car.”
Break‑even Analysis – Quick Reference Checklist (for the exam)
- State the definition and write the core formula \(\displaystyle \frac{FC}{P-VC}\).
- Identify the three lines on the chart – fixed‑cost, total‑cost, total‑revenue – and label the BEP.
- Read profit or loss by comparing the vertical positions of TR and TC at the required output.
- Calculate margin of safety (units and %).
- Show how a change in FC, VC or P moves the relevant line and affects the BEP.
- Use the target‑profit formula when asked for a specific profit level.
- Mention at least two limitations of the break‑even model (AO4).