B

BUSSINESS ECONOMICS
NOTES

ABDU SAMAD M.
ROLL NO 01 - CSE S3
 Business Economics
Module - I
Business Economics
Business Economics, also called Managerial Economics, is the application of
economic theory and methodology to business. Decision making means the
process of selecting one out of two or more alternative courses of action. The
question of choice arises because the basic resources such as capital, land,
labour and management are limited and can be employed in alternative uses.
The decision-making function thus becomes one of making choice and taking
decisions that will provide the most efficient means of attaining a desired end,
say, profit maximization.
Scope of Business Economics
As regards the scope of business economics, no uniformity of views exists
among various authors. However, the following aspects are said to generally fall
under business economics.
1. Demand Analysis and Forecasting
2. Cost and production Analysis.
3. Pricing Decisions, policies and practices.
4. Profit Management.
5. Capital Management.
These various aspects are also considered to be comprising the subject matter
of business economic.
Relevance of Business Economics
The significance of business economics can be discussed as under:
1. Business economics is concerned with those aspects of traditional
economics which are relevant for business decision making in real life.
These are adapted or modified with a view to enable the manager take
better decisions. Thus, business economic accomplishes the objective of
building a suitable tool kit from traditional economics.
2. It also incorporates useful ideas from other disciplines such as psychology,
sociology, etc. If they are found relevant to decision making. In fact,
 business economics takes the help of other disciplines having a bearing on
the business decisions in relation various explicit and implicit constraints
subject to which resource allocation is to be optimized.
3. Business economics helps in reaching a variety of business decisions in a
complicated environment. Certain examples are

 What products and services should be produced?

 (ii) What input and production technique should be used?
 (iii) How much output should be produced and at what prices it should be
sold?
 (iv) What are the best sizes and locations of new plants?
 (v) When should equipment be replaced?
 (vi) How should the available capital be allocated?

4. Business economics makes a manager a more competent model builder. It

helps him appreciate the essential relationship Characterizing a given
situation.
5. At the level of the firm. Where its operations are conducted though known
focus functional areas, such as finance, marketing, personnel and
production, business economics serves as an integrating agent by
coordinating the activities in these different areas.
Economic Problem
All societies face the economic problem, which is the problem of how to make
the best use of limited, or scarce, resources. The economic problem exists
because, although the needs and wants of people are endless, the resources
available to satisfy needs and wants are limited.

Scarcity
Scarcity (also called paucity) is the fundamental economic problem of having
seemingly unlimited human wants in a world of limited resources. It states that
society has insufficient productive resources to fulfill all human wants and
needs.
Choice
Given that resources are limited, producers and consumers have to make
choices between competing alternatives. All economic decisions involve making
choices. Individuals must choose how best to use their skill and effort, firms
must choose how best to use their workers and machinery, and governments
must choose how best to use taxpayer's money.
Resource Allocation
It is the apportionment of productive assets among different uses. In free-
enterprise systems, the price system is the primary mechanism through which
resources are distributed among the uses most desired by consumers. In
planned economies and in the public sectors of mixed economies, the decisions
regarding resource distribution are political.
Opportunity Cost
The opportunity cost of an item is what you give up to get that item. When
making any decision, decision makers should be aware of the opportunity costs
that accompany each possible action. In fact, they usually are. College athletes
who can earn millions if they drop out of school and play professional sports are
well aware that their opportunity cost of college is very high. It is not surprising
that they often decide that the benefit of a college education is not worth the
cost.
Marginal Analysis - Cardinal Approach
The Cardinal Approach to the theory of consumer behaviour is based upon the
concept of utility. It assumes that utility is capable of measurement. It can be
added, subtracted, multiplied, and so on. Utility is the measure of satisfaction
from a specific product. Fisher has used the term? Util? as a measure of utility.
Thus in terms of cardinal approach it can be said that one gets from a cup of tea
5 utils, from a cup of coffee 10 utils, and from a biscuit 15 utils worth of utility.
(1) Utility is Subjective
(2) Utility is Relative
(3) Utility and usefulness
(4) Utility and Morality
Initial Utility
The utility derived from the first unit of a commodity is called initial utility
Total Utility
Total utility is the sum of utility derived from different units of a commodity
consumed by a household.
Marginal Utility
Marginal Utility is the utility derived from the additional unit of a commodity
consumed. The change that takes place in the total utility by the consumption of
an additional unit of a commodity is called marginal utility.
MU nth = TU n- TU n-1
Eg:

No. of units Total Marginal

Consumed Utility Utility
0 0 -
1 10 10
2 18 8
3 24 6
4 26 2
5 26 0
6 24 -2
7 21 -3

Law of diminishing returns / Law of diminishing marginal utility

In short, the law of Diminishing Marginal Utility states that, other things being
equal, when we go on consuming additional units of a commodity, the marginal
utility from each successive unit of that commodity goes on diminishing to be
even negative.
Above table can be cited as an example.
Production Possibility Curve
A production–possibility frontier (PPF) or production possibility curve (PPC) is a
graphical representation of possible combination of two goods with constant
resources and technology.

Module – II

Demand
Demand is the quantity of any goods or services is the amount of the good that
buyers are willing and able to purchase.
Factors Affecting Demand
(1) Income
(2) Prices of Related Goods
(3) Tastes
(4) Expectations
(5) Number of Buyers
Law of Demand
Other things equal, when the price of a good rises, the quantity demanded of
the good falls, and when the price falls, the quantity demanded rises.

Supply
It is the amount of a goods and services that sellers are willing and able to sell.
Factors Affecting Supply
(1) Input Prices
(2) Technology of processing
(3) Expectations
(4) Number of Sellers

Law of Supply
Other things equal, when the price of a good rises, the quantity supplied of the
good also rises, and when the price falls, the quantity supplied falls as well.
Price Elasticity of Demand
Price elasticity of demand is generally defined as the responsiveness or
sensitiveness of demand for a commodity to the changes in its price. More
precisely, elasticity of demand is the percentage changes in demand as a result
of one per cent in the price of the commodity.
Percentage change in quantity demanded
e p=
Percentage change in price

Arc Method Of Calculating Price Elasticity

The measure of elasticity of demand between any two finity points on a
demand curve in known as are elasticity. For example, measure of elasticity
between points j and k is the measure of arc elasticity. The movement from
point j to k on the demand curve (D x ) shows a fall in the price Rs.20 to Rs.10 so
that ∆P = 20 ? 10 = 10. The fall in price increases demand from 43 units to 75
units so that ∆Q = 43-75 = -32. The elasticity between points) and k (moving
from) to k) can be calculated by substituting these values into the elasticity
formula as above
Production
Production refers to the transformation of inputs or resources into outputs of
goods and services. For example, if we want to produce wheat, we need land,
fertilizer, water, workers and some machinery. These are called inputs or factors
of production. The output is wheat. The output can also be service rather than a
good. Examples of services are education, medicine, banking, communication,
transportation and many others. To be noted is that “ Production” refers to all
of the activities involved in the production of goods and services, from
borrowing to setting up of expansion of production facilities, to hiring workers,
purchasing raw materials, running quality control, and so on, rather than
referring merely to the physical transformation of inputs into outputs of goods
and services. In a broader sense, activities adding value to the product are part
of the production process.
Production Function
A production function is an equation, table or graph showing the maximum
output of a commodity that a firm can produce per period of time with each set
of inputs. Both inputs and outputs are generally measured in physical rather
than in monetary units. Technology is assumed to remain constant during the
period of the analysis. The general equation of production function is
Q = f (a, b, c, d ….... n, T )
Where Q represent the physical quantity of output per unit of time f, denotes
functional relationship.
a, b, c, d, represent the quantities of various inputs, per unit of time.
Marginal Product Law / Law of Variable Proportion
It states that the quantity of one factor is increased, keeping the other factors
fixed, the marginal product of the factor will eventually decline
Assumptions of the Law of variable proportion
1. Only one factor is varied.
2. The scale of output is unchanged.
3. Technique of production does not change.
4. Units of factor input varied are homogeneous.
Significance of the Law
The business significance of the law of variable proportion is obvious. A careful
producer would not produce in stage I and III. Rationally, the ideal combination
off actor proportion (fixed plus variable inputs) will be when the average
product of labour is maximum.

Cobb–Douglas production function

In economics, the Cobb–Douglas production function is a particular functional
form of the production function, widely used to represent the technological
relationship between the amounts of two or more inputs, particularly physical
capital and labor, and the amount of output that can be produced by those
inputs.
P = P(L, K) = bL α K β
P = total production (the monetary value of goods produced in a
year)
L = labor input (the total number of person-hours worked in a year)
K = capital input (the monetary worth of all machinery, equipment,
and buildings)
b = total factor productivity
α and β are the output elasticities of labor and capital, respectively.
These values are constants determined by available technology.
 Module – III
Concept of Cost
An amount that has to be paid or given up in order to get something.
In business, cost is usually a monetary valuation of (1) effort, (2) material, (3)
resources, (4) time and utilities consumed, (5) risks incurred, and (6)
opportunity forgone in production and delivery of a good or service. All
expenses are costs, but not all costs (such as those incurred in acquisition of an
income-generating asset) are expenses.
Fixed and variable costs
Fixed costs are those that do not vary with output and typically include rents,
insurance, depreciation, set-up costs, and normal profit. They are also called
overheads. Variable costs are costs that do vary with output, and they are also
called direct costs. Examples of typical variable costs include fuel, raw materials,
and some labour costs.
Average Cost
Average fixed costs are found by dividing total fixed costs by output. As fixed
cost is divided by an increasing output, average fixed costs will continue to fall.
Total variable costs (TYC)
ON the other hand, are the total obligations of the firm per time period for all
the variable inputs that the firm use. Variable inputs are those that the firm can
change easily and on short notice. Payment for raw materials, depreciation
associated with the use of the plant and equipment; most of the labour costs,
excise duties are included invariable costs.
Total costs (TC) equal total fixed costs (TFC) plus total variable costs (TVC).
That is
TC = TFC + TYC.
Eg:

1 2 3 4 5 6 7 8
Q TFC TVC TC AFC AVC ATC M
0 100 0 100 - - - -
1 100 25 125 100 125 125 25
2 100 40 140 50 20 70 15
3 100 50 150 33.3 16.6 50 10
4 106 60 160 25 15 40 10
5 100 80 180 20 16 36 20
6 100 110 210 16.7 18.3 35 30
7 100 150 250 14.3 21.4 35.7 40
8 100 300 400 12.5 37.5 50 150
9 100 500 600 11.1 55.6 66.7 200
10 100 900 1000 10.0 90 100 400

Cost Curves
I n economics, a cost curve is a graph of the costs of production as a function of
total quantity produced. In a free market economy, productively efficient firms
use these curves to find the optimal point of production (minimizing cost), and
profit maximizing firms can use them to decide output quantities to achieve
those aims.
Shut down Point
At point where the firm is covering its minimum average variable cost. But at
this point no part of fixed cost is being covered. Therefore, the loss of firm is
equivalent to total fixed cost, where level of output the point is known as “shut
down point”.
Short Run and Long Run Costs
Economist usually distinguish between short run and long run costs on the basis
of functional or operational time period in production activity. The short run
costs are operating costs associated with the change in output. In the short run,
the production function contains a set of fixed factor input and a set of variable
inputs. Short run costs vary in relation to the variation in the variable input
component only. The long run costs are the operating costs associated with the
changing scale of output and the alteration in the size of plant. In the long run
production function all the factor inputs are variable. Their costs are the long
run costs.
Break-even Analysis
The break - even analysis (BEA) has considerable significance for economic
research, business decision making company management, investment analysis
and public policy. Break even analysis is an important technique to trace the
relationship between cost, revenue and profits at the varying levels of output or
sales. In BEA, the break-even point is located at that level of output or sales at
which the net income or profit is zero. At this point total cost is equal to total
revenue. Hence the break -even point is the no profit no loss point. However
the object or the BEA is not just to determine the break - even point (BEP), but
to understand the financial relationship among cost, revenue and the rate of
output .It is also called cost -volume - profit analysis
Eg:

Perfect Competition
Perfect competition is a market system characterized by many different buyers
and sellers. In the classic theoretical definition of perfect competition, there are
an infinite number of buyers and sellers. With so many market players, it is
impossible for any one participant to alter the prevailing price in the market. If
they attempt to do so, buyers and sellers have infinite alternatives to pursue.
Monopoly
A monopoly is the exact opposite form of market system as perfect
competition. In a pure monopoly, there is only one producer of a particular
good or service, and generally no reasonable substitute. In such a market
system, the monopolist is able to charge whatever price they wish due to the
absence of competition, but their overall revenue will be limited by the ability or
willingness of customers to pay their price.
Oligopoly
An oligopoly is similar in many ways to a monopoly. The primary difference is
that rather than having only one producer of a good or service, there are a
handful of producers, or at least a handful of producers that make up a
dominant majority of the production in the market system.

Monopolistic Competition
Monopolistic competition is a type of market system combining elements of a
monopoly and perfect competition. Like a perfectly competitive market system,
there are numerous competitors in the market. The difference is that each
competitor is sufficiently differentiated from the others that some can charge
greater prices than a perfectly competitive firm. An example of monopolistic
competition is the market for music. While there are many artists, each artist is
different and is not perfectly substitutable with another artist.
Subdivisions of Oligopoly – Cartels & Collusions
A cartel is a group of firms that jointly decide on prices and/or quantities and
then try to enforce this decision.
A cartel typically works by raising prices above some competitive or Cournot
level. Because of this, the individual member of the cartel has an incentive to
raise their production levels above their quota.

Module – IV
Circular Flow of Income
Figure presents a visual model of the economy called a circular-flow diagram. In
this model, the economy is simplified to include only two types of decision
makers—firms and households. Firms produce goods and services using inputs,
such as labor, land, and capital (buildings and machines). These inputs are called
the factors of production. Households own the factors of production and
consume all the goods and services that the firms produce.
Simplified or Two Sector Model of Circular flow of income

National Income
It is the net output of commodities and services flowing during the year from
the country’s productive system in the hands of the ultimate consumers. Or
National income is the total money value of all final goods and services
produced in an economy of a country during a specific duration of time,
generally an economic year.
Concepts of National Income – Gross Domestic Product
GDP is the total value of goods and services produced within the country during
a year. This is calculated at market prices and is known as GDP at market prices.
It is the internal contribution in national income
Concepts of National Income – Gross National Product
Gross national product (GNP) is a broad measure of a nation's total economic
activity. GNP is the value of all finished goods and services produced in a
country in one year by its nationals.
GNP = GDP + Income from abroad
Measurement Methods of National Income
1. Product Method
In this method, national income is measured as a flow of goods and services.
We calculate money value of all final goods and services produced in an
economy during a year. Final goods here refer to those goods which are
directly consumed and not used in further production process.
To avoid the problem of double counting we can use the value-addition
method in which not the whole value of a commodity but value-addition (i.e.
value of final good value of intermediate good) at each stage of production is
calculated and these are summed up to arrive at GDP
The money value is calculated at market prices so sum-total is the GDP at
market prices. GDP at market price can be converted into by methods
discussed earlier.
2. Income Method
Under this method, national income is measured as a flow of factor incomes.
There are generally four factors of production labour, capital, land and
entrepreneurship. Labour gets wages and salaries, capital gets interest, land
gets rent and entrepreneurship gets profit as their remuneration.
Besides, there are some self-employed persons who employ their own labour
and capital such as doctors, advocates, CAs, etc. Their income is called mixed
income. The sum-total of all these factor incomes is called NDP at factor
costs.
3. Expenditure Method
In this method, national income is measured as a flow of expenditure. GDP is
sum-total of private consumption expenditure. Government consumption
expenditure, gross capital formation (Government and private) and net
exports (Export-Import).
GDP by expenditure method includes:
(1) Consumer expenditure on services and durable and non-durable goods
(2) Investment in fixed capital such as residential and non-residential
building, machinery, and inventories (I),
(3) Government expenditure on final goods and services (G),
(4) Export of goods and services produced by the people of country (X),
(5) Less imports (M). That part of consumption, investment and
government expenditure which is spent on imports is subtracted from
GDP. Similarly, any imported component, such as raw materials, which is
used in the manufacture of export goods, is also excluded.
Thus GDP by expenditure method at market prices = C+ I + G + (X – M),
where (X-M) is net export which can be positive or negative.
Inflation
Inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time. When the price level rises, each
unit of currency buys fewer goods and services.
Deflation
Deflation is a decrease in the general price level of goods and services.
Deflation occurs when the inflation rate falls below 0% (a negative inflation
rate). ... Deflation is distinct from disinflation, a slow-down in the inflation
rate, i.e. when inflation declines to a lower rate but is still positive.
Trade-Cycle
A trade cycle is composed of periods of Good Trade, characterized by rising
prices and low unemployment percentages, shifting with periods of bad trade
characterized by falling prices and high unemployment percentages.

A full trade cycle has got four phases: (i) Recovery, (ii) Boom, (iii) Recession,
and (iv) depression. The upward phase of a trade cycle or prosperity is
divided into two stages—recovery and boom, and the downward phase of a
trade cycle is also divided into two stages—recession and depression.
Money
The term money is used specifically to refer to currency, which is, in most
cases, not an individual's only source of wealth or assets. In most economies,
this currency is in the form of paper bills and metal coins that the
 government has created, but technically anything can serve as money as long
as it possesses three important properties:
 The item serves as a medium of exchange. In order for an item to be
considered money, it must be widely accepted as payment for goods
and services. In this way, money creates efficiency because it
eliminates uncertainty regarding what is going to be accepted as
payment by various businesses.
 The item serves as a unit of account. In order for an item to be
considered money, it must be the unit that prices, bank balances,
etc. are reported in. Having a consistent unit of account creates
efficiency since it would be pretty confusing to have the price of
bread quoted as a number of fish, the price of fish quoted in terms of
t-shirts, and so on.
 The item serves as a store of value. In order for an item to be
considered money, it has to (to a reasonable degree) hold its
purchasing power over time. This feature of money adds to efficiency
because it gives producers and consumers flexibility in the timing of
purchases and sales, eliminating the need to immediately trade one's
income for goods and services.
Quantity Theory of Money
It is a theory asserting that the quantity of money available determines the price
level and that the growth rate in the quantity of money available determines
the inflation rate
Fischer’s Equation
It estimates the relationship between nominal and real interest rates under
inflation.
Letting r denote the real interest rate, i denote the nominal interest rate, and let
π denote the inflation rate, the Fisher equation is:
I=r+π
Cambridge equation
It attempts to express a relationship among the amount of goods produced, the
price level, amounts of money, and how money moves.
Assuming that the economy is at equilibrium Y is exogenous, and k is fixed in
the short run, the Cambridge equation is equivalent to the equation of
exchange with velocity equal to the inverse of k:
𝟏
I.e. , M = 𝑷𝒀
𝒌

Velocity of Circulation of Money

Velocity of circulation is the amount of units of money circulated in the
economy during a given period of time.
𝑷𝑻
Vt =
𝑴
Vt is the velocity of money for all transactions in a given time frame;
T, is the aggregate real value of transactions in a given time frame;
P, is the price level; and
M, is the total nominal amount of money in circulation on average in the
economy (see “Money supply” for details).
Money Credit Control Methods
Money credit control in India is done by Central Bank or Reserve Bank of India. It
uses various measures for credit control. Some of them are listed below
Open Market Operations
In narrow sense—the Central Bank starts the purchase and sale of Government
securities in the money market. But in the Broad Sense—the Central Bank
purchases and sale not only Government securities but also of other proper and
eligible securities like bills and securities of private concerns. When the banks
and the private individuals purchase these securities they have to make
payments for these securities to the Central Bank. Further, if there is
deflationary situation and the Commercial Banks are not creating as much credit
as is desirable in the interest of the economy. Then in such situation the Central
Bank will start purchasing securities in the open market from Commercial Banks
and private individuals.
With this activity the cash will now move from the Central Bank to the
Commercial Banks. With this increased cash reserves the Commercial Banks will
be in a position to create more credit with the result that the volume of bank
credit will expand in the economy.
Repo Rate
Repo rate is the rate at which the central bank of a country (Reserve Bank of
India in case of India) lends money to commercial banks in the event of any
shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Reverse Repo Rate
Reverse Repo rate is the short term borrowing rate at which RBI borrows money
from banks. The Reserve bank uses this tool when it feels there is too much
money floating in the banking system. An increase in the reverse repo rate
means that the banks will get a higher rate of interest from RBI.

Module – V
Investment Analysis
Investment analysis, defined as the process of evaluating an investment for
profitability and risk, ultimately has the purpose of measuring how the given
investment is a good fit for a portfolio.
Capital budgeting
Capital budgeting, or investment appraisal, is the planning process used to
determine whether an organization's long term investments such as new
machinery, replacement of machinery, new plants, new products, and research
development projects are worth the funding of cash through the firm's
capitalization structure
NPV – Net Present Value
NPV is the acronym for net present value. Net present value is a calculation that
compares the amount invested today to the present value of the future cash
receipts from the investment. In other words, the amount invested is compared
to the future cash amounts after they are discounted by a specified rate of
return.

IRR – Internal Rate Of Return

Internal rate of return (IRR) is a metric used in capital budgeting measuring the
profitability of potential investments. Internal rate of return is a discount rate
that makes the net present value (NPV) of all cash flows from a particular
project equal to zero. IRR calculations rely on the same formula as NPV does.
Profitability index
Profitability index (PI), also known as profit investment ratio (PIR) and value
investment ratio (VIR), is the ratio of payoff to investment of a proposed
project. It is a useful tool for ranking projects because it allows you to quantify
the amount of value created per unit of investment.
ARR – Average rate of return
Accounting rate of return, also known as the Average rate of return, or ARR is a
financial ratio used in capital budgeting. The ratio does not take into account
the concept of time value of money. ARR calculates the return, generated from
net income of the proposed capital investment. The ARR is a percentage return.
The accounting rate of return is calculated by dividing the average annual
accounting profit by the initial investment of the project. The profit is calculated
using the appropriate accounting framework including generally accepted
accounting principles (GAAP) or international financial reporting standards
(IFRS).
Payback Period
The payback period is the length of time required to recover the cost of an
investment. The payback period of a given investment or project is an important
determinant of whether to undertake the position or project, as longer payback
periods are typically not desirable for investment positions. The payback period
ignores the time value of money, unlike other methods of capital budgeting,
such as net present value, internal rate of return or discounted cash flow.
Decisions under various states of outcome and it’s knowledge
An outcome defines what will happen if a particular alternative or course of
action is chosen. Knowledge of outcomes is important when there are multiple
alternatives. In the analysis of decision making, three types of knowledge with
respect to outcomes are usually distinguished:
Certainty: Complete and accurate knowledge of outcome of each
alternative. There is only one outcome for each alternative.
Risk: Multiple possible outcomes of each alternative can be identified and
a probability of occurrence can be attached to each.
 Uncertainty: Multiple outcomes for each alternative can be identified but
there is no knowledge of the probability to be attached to each.
Taking Decisions Under Certainty
If the outcomes are known and the values of the outcomes are certain, the task
of the decision maker is to compute the optimal alternative or outcome with
some optimization criterion in mind.
As an example: if the optimization criterion is least cost and you are considering
two different brands of a product, which appear to be equal in value to you, one
costing 20% less than the other, then, all other things being equal, you will
choose the less expensive brand.
However, decision making under certainty is rare because all other things are
rarely equal.
Linear programming is one of the techniques for finding an optimal solution
under certainty. Linear programming problems normally need computations
with the help of a computer.
Taking Decisions Under Risk
The making of decisions under risk, when only the probabilities of various
outcomes are known, is similar to certainty.
Instead of optimizing the outcomes, the general rule is to optimize the expected
outcome.
As an example: if you are faced with a choice between two actions one offering
a 1% probability of a gain of $10000 and the other a 50% probability of a gain of
$400, you as a rational decision maker will choose the second alternative
because it has the higher expected value of $200 as against $100 from the first
alternative.
Taking Decisions Under Uncertainty
Decisions under uncertainty (outcomes known but not the probabilities) must
be handled differently because, without probabilities, the optimization criteria
cannot be applied.
Some estimated probabilities are assigned to the outcomes and the decision
making is done as if it is decision making under risk.
Cost-Benefit Analysis
Cost–benefit analysis (CBA), sometimes called benefit–cost analysis (BCA), is a
systematic approach to estimating the strengths and weaknesses of alternatives
(for example in transactions, activities, functional business requirements); it is
used to determine options that provide the best approach to achieve benefits
while preserving savings.[1] The CBA is also defined as a systematic process for
calculating and comparing benefits and costs of a decision, policy (with
particular regard to government policy) or (in general) project.
Broadly, CBA has two main purposes:
1. To determine if an investment/decision is sound
(justification/feasibility) – verifying whether its benefits outweigh the
costs, and by how much;
2. To provide a basis for comparing projects – which involves comparing
the total expected cost of each option against its total expected benefits
Resource management
Resource management is the efficient and effective deployment and allocation
of an organization's resources when and where they are needed. Such resources
may include financial resources, inventory, human skills, production resources,
or information technology.

Module – VI

The Balance Sheet

A balance sheet shows:
 The financial situation of the organization at a particular time
 The change from one period (usually a year) to the next
 How much money is in the business?
 The balance of assets Vs liabilities and fixed assets Vs liquid assets
Drawing Up A Balance Sheet
 Add up the (depreciated) value of all fixed assets (premises,
machinery, equipment)and enter the figure on the balance sheet. As
part of this procedure, you may want to list the fixed assets owned
by the organisation and enter their individual valueson an ’asset
register’.
 You may wish to enter the value of these assets at the start of the
year and deduct depreciation to create a ’net asset value’.
 Add up the value of all current assets (cash, stock, work in progress
and debtors) and enter the figure on the balance sheet.
 Add up the value of all liabilities (loans, overdraft, creditors). Don’t
forget to include any tax owed.
 Subtract the value of liabilities from current assets. This gives you a
figure for ‘net current assets’ which is a useful measure of just how
secure the organization is financially. If all your debts fell due
immediately, could you raise enough money by using your current
assets.
 Add the fixed assets to net current assets to create a figure for ’total
net assets’. If the final figure is positive, the organization is ’solvent’.
If negative, the organization is ’insolvent’.
 Now draw up a statement of where the total net assets have come
from.
This would include:
Money invested at the start of the business Grants and loans made
when the business started (their full value)
Reserves (profits kept in the organization year after year)
Profit (or loss) this year
Forecasting techniques
A profit and loss forecast or account is not based on money or cash alone but
rather on the value (positive or negative) of what’s been going on in the
business during a particular period. For instance, a quarterly profit and loss
account would include the value of a sale or an order undertaken in the period
even if the customer had not paid for it. Similarly, the costs of running the
business should include (for instance) a calculation of your power costs even if
the business hasn’t paid its utility bill.