Cambridge IGCSE/A‑Level Business – Complete Syllabus Notes
1. Business & Its Environment (AS – Topic 1)
1.1 What is a business?
- Enterprise – an organisation that combines resources to produce goods or services for profit.
- Objectives – profit maximisation, growth, survival, market share, corporate social responsibility (CSR).
- Stakeholders – owners, managers, employees, customers, suppliers, government, community.
1.2 Business structure
| Structure | Key Features | Typical Example |
|---|
| Sole trader | Owned by one person, unlimited liability, simple set‑up. | Local bakery |
| Partnership | Two or more owners, shared liability, partnership agreement. | Law firm |
| Private limited company (Ltd) | Separate legal entity, limited liability, shares not publicly traded. | Tech start‑up |
| Public limited company (PLC) | Shares listed on a stock exchange, ability to raise large capital. | British Airways |
1.3 Size & scale
- Micro (≤ 10 employees), small (10‑49), medium (50‑249), large (≥ 250).
- Scale of operations influences economies of scale, market power and financing options.
1.4 External environment
- PESTLE – Political, Economic, Socio‑cultural, Technological, Legal, Environmental factors.
- Impact on strategic choices, e.g., Brexit (political) affecting import duties.
Check‑your‑understanding
Identify two PESTLE factors that could affect a UK‑based clothing retailer.
2. Human Resource Management (AS – Topic 2)
2.1 Workforce planning & recruitment
- Analyse labour demand (forecasting) and supply (internal talent pool, external labour market).
- Recruitment methods: internal (promotion, transfer) vs external (advertising, agencies, online portals).
2.2 Motivation theories
| Theory | Key Idea | Implication for managers |
|---|
| Maslow’s Hierarchy of Needs | Physiological → Safety → Social → Esteem → Self‑actualisation | Provide a mix of pay, security, team‑building and development opportunities. |
| Herzberg’s Two‑Factor Theory | Hygiene factors (salary, conditions) prevent dissatisfaction; motivators (recognition, achievement) create satisfaction. | Ensure good working conditions and design jobs that offer achievement. |
| Vroom’s Expectancy Theory | Performance = Expectancy × Instrumentality × Valence | Link clear targets to rewards that employees value. |
2.3 Management styles & leadership
- Autocratic – decisions made by manager alone.
- Democratic – employees consulted; higher morale.
- Laissez‑faire – minimal direction; works with highly skilled teams.
2.4 Training, appraisal & development
- Induction, on‑the‑job, off‑the‑job, e‑learning.
- Performance appraisal methods: self‑assessment, 360° feedback, Management by Objectives (MBO).
Check‑your‑understanding
Explain how Vroom’s expectancy theory could be used to improve sales staff performance.
3. Marketing (AS – Topic 3)
3.1 The marketing mix – 4 Ps
| Product | Price | Place | Promotion |
|---|
| Features, quality, branding, life‑cycle. |
Pricing strategies – cost‑plus, penetration, skimming. |
Distribution channels – direct, retail, online. |
Advertising, sales promotion, public relations, personal selling. |
3.2 Market research & segmentation
- Primary (surveys, focus groups) vs secondary (industry reports).
- Segmentation criteria – demographic, geographic, psychographic, behavioural.
- Targeting & positioning: choose attractive segment(s) and craft a positioning statement.
3.3 Product life‑cycle (PLC)
- Introduction – low sales, high costs, heavy promotion.
- Growth – rapid sales rise, economies of scale.
- Maturity – sales peak, price competition.
- Decline – sales fall, consider harvesting or divestment.
Example – Fast‑food chain
A UK chain launches a vegan burger (Introduction), sees rapid uptake (Growth), then introduces value meals to maintain market share (Maturity), and finally phases out the product when consumer trends shift (Decline).
4. Operations Management (AS – Topic 4)
4.1 Transformational process
Input → Transformation (manufacturing, service delivery) → Output.
4.2 Capacity utilisation & efficiency
- Capacity utilisation = (Actual output ÷ Potential output) × 100%.
- Over‑capacity leads to higher unit costs; under‑capacity wastes resources.
4.3 Production methods
- Job production – customised, high labour cost (e.g., bespoke furniture).
- Batch production – groups of identical items (e.g., bakery batches).
- Flow (mass) production – continuous, high volume (e.g., car assembly).
4.4 Inventory control
Key formulas:
- Economic Order Quantity (EOQ) – \(\displaystyle EOQ = \sqrt{\frac{2DS}{H}}\)
D = annual demand, S = ordering cost, H = holding cost per unit.
- Reorder point (ROP) – \(\displaystyle ROP = d \times L\)
d = average daily usage, L = lead time (days).
Worked EOQ example
Annual demand = 12 000 units, ordering cost = £30, holding cost = £2 per unit.
EOQ = √(2 × 12 000 × 30 ÷ 2) = √(360 000) ≈ 600 units
5. Finance & Accounting (AS – Topic 5)
5.1 Sources of finance
| Source | Type | Key Advantages | Key Disadvantages |
|---|
| Bank loan | Debt | Fixed interest, retains ownership. | Repayment obligation, may require security. |
| Share issue | Equity | No mandatory repayments, spreads risk. | Dilutes existing shareholders, may lower EPS. |
| Retained earnings | Internal equity | No external cost, signals confidence. | Limits cash available to owners. |
| Leasing | Hybrid | Access to assets without large upfront cost. | Higher total cost over life of asset. |
5.2 Working capital management
- Current assets – cash, receivables, inventory.
- Current liabilities – trade payables, short‑term loans.
- Working capital = Current assets – Current liabilities.
5.3 Key financial statements (quick refresher)
- Profit & Loss Account (Income Statement) – revenue, cost of sales, operating expenses, profit before tax, profit after tax.
- Balance Sheet – assets, liabilities, shareholders’ equity at a point in time.
- Cash‑flow Statement – cash from operating, investing, financing activities.
5.4 Fundamental ratios (pre‑lude to A‑level investment ratios)
| Ratio | Formula | Interpretation |
|---|
| Current ratio | Current assets ÷ Current liabilities | Liquidity; >1 indicates ability to meet short‑term debts. |
| Gross profit margin | Gross profit ÷ Sales × 100% | Production efficiency and pricing power. |
| Net profit margin | Net profit ÷ Sales × 100% | Overall profitability after all expenses. |
| Return on Capital Employed (ROCE) | EBIT ÷ Capital employed × 100% | How well capital is used to generate profit. |
6. A‑Level Business – Investment Ratios (Syllabus 10.1‑10.1.5)
6.1 Earnings per Share (EPS)
\[
\text{EPS} = \frac{\text{Profit attributable to shareholders}}{\text{Number of ordinary shares outstanding}}
\]
- Basic EPS – uses current shares only.
- Diluted EPS – adds potential shares from convertibles, options, etc.
6.2 Price/Earnings (P/E) Ratio – Core focus
\[
\text{P/E} = \frac{\text{Market price per share}}{\text{EPS}}
\]
- What it measures: the amount investors are willing to pay for £1 of earnings.
- Trailing P/E: uses the most recent 12‑month EPS.
- Forward P/E: uses analysts’ forecast EPS for the next 12 months.
- Units: both numerator and denominator are in the same currency; the ratio itself is unit‑less.
Interpretation guide
| P/E range | Typical implication |
|---|
| High (above industry average) | Market expects strong future growth or perceives a premium brand. |
| Low (below industry average) | Growth expectations are modest; may indicate undervaluation or sector weakness. |
| Very high (e.g., > 30) | Possible over‑valuation or speculative hype. |
| Negative or undefined | Company is making a loss – P/E cannot be calculated. |
Worked example
| Company | Market price per share (£) | Profit attributable to shareholders (£) | Ordinary shares (m) | EPS (£) | P/E |
| Delta plc | 22.50 | 9.0 m | 6.0 m | 1.50 | 15.0 |
Interpretation: A P/E of 15 is close to the industry average of 14‑16, suggesting the market expects moderate growth.
6.3 Dividend‑related ratios
- Dividend Yield = \(\displaystyle \frac{\text{Annual dividend per share}}{\text{Market price per share}} \times 100\%\)
- Dividend Cover = \(\displaystyle \frac{\text{EPS}}{\text{Dividend per share}}\)
6.4 Price/Book (P/B) Ratio
\[
\text{P/B} = \frac{\text{Market price per share}}{\text{Book value per share}}
\]
- P/B < 1 may indicate the assets are undervalued by the market.
- P/B > 1 suggests investors are paying a premium for intangible assets or growth potential.
6.5 Summary table of investment ratios
| Ratio | Formula | What it measures | Typical interpretation |
|---|
| EPS | \(\displaystyle \frac{\text{Profit to shareholders}}{\text{Shares outstanding}}\) | Profit per ordinary share | Higher = more profit available per share |
| P/E | \(\displaystyle \frac{\text{Market price}}{\text{EPS}}\) | Price paid for £1 earnings | High = growth expectations; Low = possible undervaluation |
| Dividend Yield | \(\displaystyle \frac{\text{Dividend per share}}{\text{Market price}} \times 100\%\) | Cash return from dividends | Higher = attractive for income investors |
| Dividend Cover | \(\displaystyle \frac{\text{EPS}}{\text{Dividend per share}}\) | How many times earnings cover the dividend | Cover ≥ 2 = safe; lower = risk of cut |
| P/B | \(\displaystyle \frac{\text{Market price}}{\text{Book value per share}}\) | Market value vs accounting net assets | P/B < 1 = possible undervaluation; > 1 = premium |
| ROCE | \(\displaystyle \frac{\text{EBIT}}{\text{Capital employed}} \times 100\%\) | Efficiency of capital use | Higher = better return on capital |
6.6 Limitations of the P/E ratio
- Undefined for companies with negative earnings.
- Highly sensitive to accounting policies (e.g., depreciation methods).
- Ignores capital structure – two firms with identical earnings but different debt levels can have the same P/E.
- Does not reflect future cash‑flow risk or changes in dividend policy.
7. Decision‑Making & Investment Appraisal (A‑Level – Topic 10.3)
7.1 Pay‑back period
Calculate the number of years required for cumulative cash inflows to equal the initial outlay.
Decision rule: Accept if the pay‑back ≤ the firm’s maximum acceptable period.
7.2 Average Rate of Return (ARR)
\[
\text{ARR} = \frac{\text{Average annual accounting profit}}{\text{Average investment}} \times 100\%
\]
Decision rule: Accept if ARR ≥ required rate of return.
7.3 Net Present Value (NPV)
\[
\text{NPV} = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t}
\]
- \(C_t\) = cash flow in year t.
- \(r\) = discount (required) rate.
Decision rule: Accept if NPV > 0.
7.4 Internal Rate of Return (IRR)
The discount rate that makes NPV = 0. Accept if IRR ≥ required rate of return.
Worked NPV example
Initial outlay = £120 000; cash inflow = £40 000 per year for 4 years; discount rate = 10 %.
NPV = -120 000 + 40 000/(1.10) + 40 000/(1.10)² + 40 000/(1.10)³ + 40 000/(1.10)⁴
= -120 000 + 36 364 + 33 058 + 30 053 + 27 321
= £6 796 (positive)
Conclusion: Project adds value – should be accepted.
7.5 Qualitative factors to accompany quantitative appraisal
- Strategic fit with long‑term objectives.
- Impact on brand reputation and market share.
- Regulatory, environmental or health & safety considerations.
- Technological risk and potential for obsolescence.
8. Strategic Use of Ratios (A‑Level – Topic 10.4)
- Financing decisions – High gearing may force equity issuance, which can dilute EPS and affect the P/E ratio.
- Dividend policy – Falling dividend cover may lead management to retain earnings, reducing dividend yield.
- Growth planning – A consistently high P/E signals market confidence; firms may pursue expansion projects with positive NPV.
- Share‑price management – Share buy‑backs reduce share count, raise EPS and potentially increase the P/E ratio, signalling confidence to investors.
9. Links to Earlier AS‑Level Foundations (Topics 1‑5)
- Topic 1 (Business & Environment) – Provides the context for why investors care about growth, risk and stakeholder expectations.
- Topic 2 (HRM) – Labour productivity directly influences profitability ratios such as ROCE and net profit margin.
- Topic 3 (Marketing) – Marketing mix decisions affect revenue growth, which is reflected in EPS and the P/E ratio.
- Topic 4 (Operations) – Efficient operations improve margins and cash‑flow, enhancing NPV and ARR calculations.
- Topic 5 (Finance & Accounting) – Supplies the raw figures (profit, equity, assets) needed for all investment ratios.
10. Practice Questions
- Company X has a market price of £25 per share and an EPS of £1.25.
a) Calculate the P/E ratio.
b) Explain what a P/E of 20 would suggest about market expectations.
- Beta plc pays an annual dividend of £0.80 per share. Its share price is £20. EPS = £2.00.
Calculate the dividend yield and the dividend cover.
- Discuss two limitations of using the P/E ratio as the sole indicator of a company’s value.
- A project requires an initial investment of £50 000 and will generate cash inflows of £15 000 per year for 5 years. Using a discount rate of 8 %, calculate the NPV and advise whether the project should be accepted.
- Compare the strategic implications of a high P/E ratio versus a low dividend yield for a mature manufacturing firm.
11. Quick Revision Summary
- Investment ratios translate accounting data into market‑focused indicators: EPS, P/E, dividend yield, dividend cover, P/B, ROCE.
- Accurate calculation requires up‑to‑date figures from the profit & loss account, balance sheet and current market price.
- Interpretation is never in isolation – always compare with industry averages, historical trends and competitor data.
- All ratios have limitations; combine them with investment appraisal techniques (NPV, IRR, pay‑back, ARR) and qualitative considerations.
- Understanding how ratios influence strategic decisions (financing, dividend policy, growth plans) links analysis to real‑world business action.