CONTENT

Unit 1 Business Concept and Environment Analysis ................................1

Chapter 1 Enterprise ...................................................................................................................... 1
1.1 Purpose of business ............................................................................. 1
1.2 Economic Choices and Opportunity Cost ..............................................1
1.3 Role of Entrepreneurs and Interpreneurs ............................................. 2
1.4 Business Plans .....................................................................................2
Chapter 2 Business Structure and Size ....................................................................................... 3
1.1 Overview of economic sectors ............................................................... 3
1.2 Busness Ownership ............................................................................. 3
1.3 Business Size .......................................................................................4
1.4 Business Growth ..................................................................................5
Chapter 3 Business Objectives ..................................................................................................... 6
1.1 Objectives of businesses .......................................................................6
1.2 SMART objectives .................................................................................6
1.3 Stakeholders vs Shareholders benefits ................................................. 6
Unit 2 Human Resource Management ...........................................................8
Chapter 4 Introduction to HRM .................................................................................................... 8
1.1 Purpose and Role ................................................................................. 8
1.2 Workforce planning .............................................................................. 8
1.3Recruitment and Selection .................................................................... 9
1.4 Redundancy and Dismissal .................................................................. 9
1.5 Employee morale and welfare ............................................................... 9
1.6 Training ............................................................................................. 10
1.7Unions and Collective Bargaining ........................................................ 10
Chapter 5 Motivation ................................................................................................................... 11
1.1 Why a business might want to motivate employees .............................11
1.2 Maslow’s hierarchy of needs (diagram) ................................................11
1.3 Herzberg’s motivators and hygiene factors .......................................... 12
1.4 Motivation tools that can be used in practice ......................................12
Chapter 6 Management .............................................................................................................. 13
1.1 Traditional Manager vs Fayol & Mintzberg vs McGregor ......................13
Unit 3 Market Analysis and Development .................................................14
Chapter 7 Nature of Marketing .................................................................................................. 14
1.1 Usefulness of marketing ..................................................................... 14
1.2 Demand and Supply Analysis .............................................................14
1.3 Market Segmentation ......................................................................... 15
Chapter 8 Market research ......................................................................................................... 17
1.1 Purposes of Market Research ............................................................. 17
1.2 Reliability and Biasness Issues ...........................................................17
Chapter 9 Marketing mix (Product & Price) ............................................................................. 19
1.1 Concept of Marketing Mix ...................................................................19
1.2 Product .............................................................................................. 19

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 1.3 Product Life cycle and Boston Matrix ..................................................20
1.4 Price Strategy Considerations .............................................................21
1.5 Promotion Methods ............................................................................ 21
1.6 Place .................................................................................................. 22
Unit 4 Operations Management .................................................................. 23
Chapter 10 Concept of Operation Management ......................................................................23
1.1 Measuring Productivity ...................................................................... 23
1.2 Raising Productivity ........................................................................... 23
1.3 Labour Intensive vs Capital Intensive ................................................. 23
1.4 Production Methods ........................................................................... 24
Chapter 11 Inventory Management ...........................................................................................25
1.1 Concept of Inventory Management ......................................................25
1.2 JIT ..................................................................................................... 26
Chapter 12 Capacity Utilisation and Outsourcing ................................................................... 27
1.1 Measurement of Capacity Utilisation .................................................. 27
1.2 Dealing With Under-Utilisation ...........................................................27
1.3 Outsourcing ....................................................................................... 27
Unit 5 Financial Analysis and Appraisal .................................................. 28
Chapter 13 Business Finance .................................................................................................... 28
1.1 Concept Of Business Finance ............................................................. 28
1.2 Sources of Finance ............................................................................. 28
Chapter 14Forecasting and Managing cash flow ....................................................................29
1.1 Cash Inflows; Cash Outflows; And Net Cash Flow ...............................29
1.2 Managing Cash Flow Problems ........................................................... 29
Chapter 15 Costs and Budgets .................................................................................................. 30
1.1 Types of costs .....................................................................................30
1.2 Some Important Formulas ..................................................................30
1.3 Costing Methods ................................................................................ 30
1.4 Break-even Analysis ........................................................................... 30
1.5 Budgets ............................................................................................. 31
1.6 Variance Analysis ...............................................................................32

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3
UNIT 1 BUSINESS CONCEPT AND ENVIRONMENT
ANALYSIS

Chapter 1 Enterprise

1.1 Purpose of business

A business is an organisation that uses resources to meet the needs of customers by

providing goods and services that the customers may demand. This is often accomplished
by following these steps:
 Identify needs
 Acquire necessary raw materials to allow production to take place
 Produce the goods and/or services
 Deliver/distribute the goods/services

To accomplish the above steps, four factors of production are normally employed. These
include, land, labour, capital and enterprise. A brief description of these are made as
follows:
 Land --- includes all rare resources of nature, e.g., coal, wood, timber and water.
 Labour --- human capital (work force) of business
 Capital --- Economically capital refers to tools and machinery needed to facilitate
production. These may be generally referred to as capital goods, e.g. computers,
machines, factories.
 Enterprise --- This refers to the risk taking of entrepreneurs. Traditionally, this factor
of production is controversial as some economists (such as Marxists) would demean
this factor.

1.2 Economic Choices and Opportunity Cost

As with all economic choices, due to the limitation of available resources, it is practically
necessary for people to make “sacrifices” when making choices. In other words, as a
person chooses one option, he/she is inevitably foregoing other possible options. This
abandonment of other possible options is referred to as opportunity cost. To be precise, in
economics, opportunity cost is often used to refer only to the second best option foregone
(instead of all other choices).

Although some might argue that affluence of modernity may have rendered opportunity
cost an obsolete concept, this is not necessarily so. Since time is still a scarce resource in
modern society, “opportunity cost” is unlikely to be irrelevant in foreseeable future.

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1.3 Role of Entrepreneurs and Interpreneurs

Some valuable qualities of successful entrepreneurs and intrapreneurs:

 Innovative
 Commitment and self-motivation
 Multi-skilled
 Leadership skills
 Self-confidence
 Risk-taking
Barriers that deter entrepreneurs and intrapreneurs
 Lack of opportunity or inability to identify opportunity
 Lack of capital
 Competition
 Poor interpersonal skills
Distinction between risk and uncertainty
In day to day use, these two terms have no differences. In business scenario, it might be
helpful to make a distinction between the two.

Risk is ordinarily used to refer to inherently existent chance of failure that cannot be
eliminated. It is often believed that a businessman should not shy away from risks as long
as the return justify assuming the risks.

Uncertainty, on the other hand, is given a different connotation. Uncertainty refers to

increased cost/risks due to unforeseeable turn of events. This may sometimes be due to a
force of nature or larger economic/social/legal turn of events. For example, the Covid 19
rendered a huge impact on all restaurants and tourism businesses. This was impossible to
predict, counter or defend against prior to the pandemic’s outbreak.

1.4 Business Plans

Typical outline of a business plan:

 Executive summary
 Description of business opportunity
 Marketing and sales strategy
 Management Personal
 Operations --- premise to be used, production facilities, IT systems
 Financial forecasts
Benefits and limitations of business plans
On the one hand, business plans help business owners to attract investment and plan its
business beforehand. This allows businesses to allocate resources and apportion risks
accordingly. On the other hand, it should be noted that plans are only plans and can only
go so far. In particular, plans are prone to rising uncertainty and change of circumstances.

----------------------------- End of Chapter ------------------------------

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Chapter 2 Business Structure and Size

1.1 Overview of economic sectors

A common way of classifying economic activities is by reference to primary, secondary

and tertiary sectors.
Primary --- Basic extraction and processing of natural resources
Secondary --- Manufacturing and processing of interim products or raw materials into
consumer goods
Tertiary --- Provision of goods and services to customers

A fourth sector of quaternary sector is now being coined but this has not yet been widely
accepted. Quaternary sector refers to high tech sector such as IT, web design, satellite
communication, etc.

It can be seen from the above table that more developed countries rely more heavily on
tertiary and quaternary sectors while poorer countries tend to rely more on primary and
secondary sectors.

1.2 Busness Ownership

Different types of business ownership:

Sole Trader Partnership Private Public
Company Company
Ownership Sole ownership Joint ownership Can be solely Joint ownership
owned or jointly
owned
Limited Liability Not possible Can be limited Can be limited Can be limited
by guarantee or by shares
shares
Regulatory Basically none Some mild Mild regulatory Tight regulatory
Requirement regulatory requirement requirement
requirement for
general
partnership

Other business forms that are commonly seen today:

 Cooperatives --- a collective union of producers or workers

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 Franchises --- a legal contract between a franchiser and franchisee
 Social enterprises --- use profit to benefit society

Advantages and disadvantages of changing business ownership:

Advantages: Access to more finance; gaining legal identity; protecting ownership through
limited liability.
Disadvantages: Legal costs and formalities; loss of control; profits sharing

1.3 Business Size

Measurement of Business Size

The relative size of a business may be measured by reference to the following criteria:
 Number of employees
 Revenue
 Capital employed
 Market capitalisation

 Market share

Significance of small businesses

Importance of small businesses

 Employment creation
 Consumer choices
 Competition for larger businesses
 Suppliers for downstream businesses
 Lower costs
 Flexibility

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1.4 Business Growth

Types of growth: Organic (internal) vs Inorganic (external through mergers and takeovers)

-------------------------------------- End of Chapter ------------------------------------

5
Chapter 3 Business Objectives

1.1 Objectives of businesses

Private Sector Social Entreprises Public Sector

 Profit maxmisation  Economic (profit to  Provide efficient and
 Profit satisficing reinvest) reliable service/goods
 Growth  Social (provide support to  Encourage economic
 Revenue society) and social development
maximising  Environmental  Create employment
 Increasing (collectively known as Triple  Meet financial targets
shareholder returns Bottom Line)  Achieve environmental
standards

1.2 SMART objectives

S --- Specific
M --- Measurable
A --- Achievable
R --- Realistic and relevant
T --- Time limited

1.3 Stakeholders vs Shareholders benefits

Stakeholders should be distinguished from shareholders as the former refers to any party
that may be positively or adversely affected by a business’ behaviours or omissions. This
may encompass parties such as customers, suppliers and employees.

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More and more business academics have shifted research focus on how a business
should try to satisfy not merely shareholders interests but also stakeholders. This is
closely connected with Corporate Social Responsibility (CSR) theories advocated by
Carroll, for example. Other theorists, including Friedman, are of the opinion that the main
responsibility of business should to its shareholders.

------------------------------------------ End of Chapter --------------------------------------------

7
UNIT 2 HUMAN RESOURCE MANAGEMENT

Chapter 4 Introduction to HRM

1.1 Purpose and Role

Human resource management involves the management of human resources in a

business. This is a broad topic and has been given greater academic and practical
accentuation over the years. In this note, it is not practical to cover all elements of HRM so
the key aim is to give a rough idea of the key concepts that examination may possibly
touch on.

Some of the responsibilities a HR manager may be required to tackle:

 Workforce planning
 Recruitment and selection
 Training
 Appraisal, remuneration and dismissal
 Managing employment relationship
 Monitoring and motivating staff morale

1.2 Workforce planning

The first element to workforce planning normally involves a workforce audit. This would
require HR manager to determine how many employees should be employed. How many
employees are required for a business depends on many factors, including:
 Demand for the product
 Productivity level
 Objectives of the business
 Changes in employment law
 Labour turnover and absenteeism rate

The HR manager then must match existing and/or potential employees with the
appropriate vacancies/positions. This might require the HR manager to assess the skills
and competencies of the workforce in question.

To ensure that production is not disrupted, the HR manager must also take into
consideration absenteeism and turnover rate. If turnover rate is high, the HR manager
should either address the reason behind this or seek to prepare backups or reserves in
case resignation happens.

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1.3 Recruitment and Selection

The following procedures are typical for a recruitment process:

 Drawing up a job description
 Drawing up a person specification
 Preparing a job advertisement
 Making a shortlist of applicants
 Interviews or Assessment Centres
The process may be simplified/modified for internal recruitment (recruitment from the
organisation’s existing personels) but its fundamentals should remain unchanged.

Once the appropriate employee has been selected, he/she should be offered a legally
binding employment contract. Note that failure to do so may involve significant legal risks
for the organisation.

1.4 Redundancy and Dismissal

Redundancy is different from dismissal in that redundancy is one of the many potentially
fair reasons of dismissal. Therefore, in a redundancy, the employer need not be liable for
hefty punitive damages payable to the employee. However, as the employer still needs to
pay statutory redundancy payment, the difference in amount may depend on the situation.
In other cases of dismissal, the employer may need to pay attention to potential claims of
unfair dismissal.

1.5 Employee morale and welfare

Modern human resource management theories has shifted away from viewing employees
as indistinguishable units of factors of production and begin to recognise the uniqueness

9
of individuals as an asset of business. As a result, how employee morale may be lifted has
become a part of the core responsibility of human resource managers. In addition to
financial rewards, other non-financial welfare have also been utilised to achieve this end.

Some of these welfare include:

 Flexible work arrangements
 Respecting diversity and equality in workplace
 Elimination of discrimination
 Benefits such as paid leave and gift cards

1.6 Training

Types of training:
 Induction
 On-the-job
 Off-the-job

Modern businesses tend to prefer flexibility over specialisation. As a result, many

businesses will invest to train employees to enable the latter to be multi-skilled. In addition,
training may help employees to become intrapreneurs in the future and create further
value to both the business and the employee himself/herself.

1.7 Unions and Collective Bargaining

Employees tend to be weaker party in a labour dispute and therefore many employees will
seek to harness the power of collective bargaining. This makes trade union a common
occurrence in modern day businesses. A good human resource manager should
appreciate the risks when dealing with industrial actions.

--------------------------------------------- End of Chapter ------------------------------------------------

10
Chapter 5 Motivation

1.1 Why a business might want to motivate employees

A motivated staff can bring the following benefits to a business:

 Increase in productivity
 Reducing labour turnover rate and absenteeism
 Encourage employees to contribute suggestions
 Reducing the probability of product defects
 Improving employees’ willingness to accept responsibility

1.2 Schools of Motivation Theories

Taylor’s Maslow’s Herzberg’s
Scientific Human Needs Two-Factor
Management
Core of Managing with Meeting Employees are
theory scientific employees motivated by
methods needs motivators and not
(see the by hygiene factors.
hierarchy of Hygiene only
needs diagram keeps employees
below) from leaving
Main Tool Wage levels Depends on the After satisfying the
based on employee’s hygiene factors,
output level relative position motivate by
on the motivators
hierarchy of
needs

1.2 Maslow’s hierarchy of needs (diagram)

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1.3 Herzberg’s motivators and hygiene factors

Hygiene factors: company policy and administration, supervision, salary, relationships

with others and working conditions
Motivators: achievement, recognition for achievement, the work itself, responsibility and
advancement

1.4 Motivation tools that can be used in practice

Financial motivators:
 Time based wage rate
 Piece rate
 Salary
 Commission
 Bonus payment
 Performance related pay
 Profit sharing
 Share-ownership schemes
 Fringe benefits (job benefits such as healthcare, childcare etc.)

Non-financial motivators:
 Job rotation (allow workers to do different tasks)
 Job enlargement (increasing the loading of tasks on existing workers)
 Job enrichment (gives some decision making authority)
 Job redesign
Note: There is a very thin line between the above three and in practice, there is really no
need to distinguish the three.
 Training and development
 Opportunities for promotion and increased status
 Employee participation in management
 Teamworking and quality circles
 Empowerment (higher level of freedom and independence in the way jobs are
completed)

--------------------------------------- End of Chapter -------------------------------------------

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Chapter 6 Management

This chapter pertains to the role of management in terms of HRM and analyses how a
manager can carry himself in the company’s strategic human resource management so
as to fully utilise the human resource potential of the company’s labour force.

1.1 Traditional Manager vs Fayol & Mintzberg vs McGregor

It was conventionally accepted that the role of a manager include:

 Planning
 Organising
 Directing
 Controlling
However, how these objectives can be achieved may vary from person to person and
different theories had been adduced as to how this may be accomplished.

Fayol and Mintzberg, for instance, believed that the core of a manager’s responsibilities
include fulfilling the five functions:
1. Planning objectives for less senior managers
2. Organising resources to accomplish the objectives
3. Commanding, directing and motivating employees
4. Coordinating activities and organisational bodies
5. Controlling and measuring performance

McGregor observed that two distinct management approaches exist and may affect
managers’ relationship with their employees. These two distinct approaches are named as
Theory X and Theory Y.

Theory X managers view workers as lazy and dislike work. Naturally, Theory X managers
tend to be autocratic leaders.
Theory Y managers view workers as enjoying work. This type of managers tend to lean
towards democratic style of leadership.

In practice, it is likely that any one manager will be a hybrid of the two extremes and be
much more flexible and unpredictable.

----------------------------------------- End of Chapter ----------------------------------

13
UNIT 3 MARKET ANALYSIS AND DEVELOPMENT

Chapter 7 Nature of Marketing

1.1 Usefulness of marketing

Marketing can be defined as “the management process responsible for identifying,

anticipating and satisfying customer requirements profitably”.

Marketing is commonly perceived as comprising market research, product and packaging

design, pricing, advertising, distribution and customer services. To be effective, a
corporation’s marketing strategy should work hand in hand with its corporate strategy.
Some examples of marketing strategy include penetrating existing market, entering new
market and develop existing products.

1.2 Demand and Supply Analysis

According to the theory of classical economics, in a free and perfect market, a market will
be able to clear any excesses (demand or supply) as long as the market allows price to
operate freely. This theory (idealistic it may be) is useful for us to understand how a
market and stakeholders in the market respond to changes in market conditions.

Demand is defined as the quantity of goods/services that consumers (in a given market) is
willing and able to buy at any specified price in a given period of time.

Supply is defined as the quantity of goods/services that producers/suppliers (in a given

market) is willing and able to sell at any specified price in a given period of time.

According to arguments by classical economists, a free market will always settle at a

point of equilibrium where the demand and supply cancels out each other and the
market suffers neither shortage (excess demand) nor surplus (excess supply).

Diagrammatically, this can be illustrated as shown above. Note that the demand curve
slopes downward because the relationship between quantity demanded and price is
inversely related.

14
This understanding of demand and supply has many complications as far as marketing is
concerned. It should be fairly easy to see that a seller can afford to charge higher prices
and lose fewer customers if the demand curve has a steeper slope (elasticity of demand
is low).

Marketing strategies have the intended effect of reducing the price elasticity of demand,
i.e., making consumers less sensitive to price changes and therefore, one of the goal of
business study is to study how marketing moves can effectively help businesses to
“desensitise” their targeted customers.

1.3 Market Segmentation

A number of terminologies will be frequently used in the rest of this notes and therefore
can be useful to identify these terms and distinguish between them. It should be noted that
these terms are not mutually exclusive or inclusive.
Markets:
 Industrial market vs Consumer market
 Local, national and international market
 Market oriented vs product oriented ---- this refers to different mindset a business
may display and affects various aspects of the business’ behaviour.
 Mass marketing vs Niche Marketing --- Mass marketing refers to selling a market
that demands only standardised goods/services (undifferentiated products). Niche
marketing refers to selling to a specific market that has unique preferences
(differentiated products).

Market segmentation may be conducted based on the following criteria:

 Geographical differences
 Demographic differences --- This includes demographic factors such as age,
gender, income, family size, etc.
 Psychographic differences --- this refers to lifestyles, personalities, values and
attitudes. For example, customers may be classified based on whether they are

15
vegetarians or support environment protection.

----------------------------------- End of Chapter ------------------------------------------

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Chapter 8 Market research

1.1 Purposes of Market Research

The aim of market research may include:

 Identify features of market
 Reduce risks of new product launches
 Identify consumer characteristics
 Explain certain observed patterns in sales of existing products and/or market trends
 Predict future demand changes
 Assess the most popular designs, promotions, styles and packaging for a product

Market research may be categorised into:

 Primary research --- first hand collection of data, e.g. questionnaire, interview,
observation, test marketing and focus group (discussion with existing/potential
customers)
 Secondary research --- Use of data that has been collected by another party.
Secondary research is often used for its low cost and time saving benefits.

1.2 Reliability and Biasness Issues

In a market research (especially a primary one), sampling is a concept that cannot be

overlooked. The core reason for sampling is that it is impractical and costly to test all
targeted research population. Therefore, picking a portion of the population is a vital step.
This is known as sampling. Naturally, this also may cause the issues of reliability and
biasness. As a result of this, a sound market research should ensure it has as large and

17
diverse a sample population as possible.

Examples of research biasness:

 Sampling bias (picking a particular segment of population over other segments)
 Questionnaire biasness (due to design of the questionnaire, the questions may be
leading)
 Other biasness beyond control of researcher (e.g., environment that the respondent
is interviewed)

------------------------------------- End of Chapter --------------------------------------

18
Chapter 9 Marketing mix (Product & Price)

1.1 Concept of Marketing Mix

Marketing mix refers to a range of tactical decisions for marketing of a product. It is a “mix”
of five interrelated decisions, often called the 5Ps.

People Marketing Promotion

Mix

Place
Product

Price

People --- The customers to sell to

Place --- The channels through which products reach customers
Price --- The price level to sell at
Product --- The products to design, produce and sell
Promotion --- The promotional methods to employ so that customers are aware of the
products and more prone to buy

1.2 Product

Product development is important to a business for a multitude of reasons, including:

 Catering to consumer taste and preferences
 Facing increasing competition
 Harnessing benefits of technological developments
 Taping new market opportunities
 Risk diversification
 Improved brand image
 Use of excess capacity

A successful product should seek to offer a unique selling point (USP) to the correct
market segment.

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1.3 Product Life cycle and Boston Matrix

Product life cycle and Boston Matrix are tools used when a business is making a product
portfolio analysis. This means analysing whether the business should launch a new
product or improve on existing ones.

Product Life Cycle

The concept of product life cycle revolves around the understanding (and presumption)
that product, like any living organism, has a lifespan. The life of a product would therefore
undergo various stages just like a human or dog (or any living organism). These stages
are named; introduction, growth, maturity and decline.

It is argued that success of a product needs to be tailored in accordance with its

corresponding stage in the product life-cycle. Brief description of the various stages:
Introduction --- When product has just been launched after development and testing.
Growth --- Growth of sales if product is well received.
Maturity/Saturation --- Sales reach its historic peak and begin to fall.
Decline --- Sales begin to decline steadily. This is the stage where businesses may want
to consider introducing extension strategies.

Boston Matrix

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The Boston Matrix enshrines the product life cycle concept and can be utilised to make a
more comprehensive analysis of all products that the business has to offer. In particular,
the business may assess the “relative value” of the products and decide what to do.

A number of dimensions are taken into account by the Boston Matrix and this is an
improvement over a simple reference to the product life cycle analysis. Firstly, other
products that the business has to offer is considered. Secondly, the relative market
conditions are weighed.

Cash Cow: Low market growth, high market share

Star: High market growth, high market share
Question Mark: High market growth, low market share
Dog: Low market growth, low market share

1.4 Price Strategy Considerations

A manager will probably need to take into consideration the following aspects when
determining price strategies:
 Costs of production
 Competitors
 Market price and price elasticity of demand
 Business and marketing objectives
 The status and nature of product

Some common pricing strategies:

 Cost based, e.g., mark up, cost plus and contribution cost
 Competition based., e.g., price discrimination and dynamic pricing.
 Product/market objectives based., e.g, penetration pricing, market skimming
 Psychological based., e.g., $999 instead of $1001.

1.5 Promotion Methods

Some commonly used promotional methods are:

 Advertising Promotion --- includes informative and persuasive advertising. The
median through which the advertised information is delivered can be limitless,
including print, broadcast and internet, etc.
 Sales promotion --- e.g., price offers, loyalty reward programmes, money-off
coupons, etc.
 Direct Promotion --- e.g., direct mail, telemarketing, personal selling.
 Digital Promotion --- e.g., social media, email, online website, smartphone, search
engine, viral marketing etc.
 Branding & Packaging

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1.6 Place

Conventionally, businesses rarely can sell to customers directly. Most often than not,
producers have to rely on wholesalers and retailers to ensure manufactured goods reach
the targeted customers. This results in the issue of distribution channel. In many
circumstances, distribution channels itself is a valuable asset to many businesses., e.g.
refer to Coca-cola and Pepsi entering Chinese market.

However, with the development of technology and social trends, it becomes possible and
often favourable to displace intermediaries channels with direct selling. This is
displayed by the following diagrams.

The above is achievable because of many reasons, this note shall simply list a few of the
endless possibilities:
 E-commerce
 Social media distribution
 TV selling
 Outlets/ Factory selling to customers

------------------------------ End of Chapter -----------------------------

22
UNIT 4 OPERATIONS MANAGEMENT

Chapter 10 Concept of Operation Management

Operation management involves managing the process of converting factors of

production into products/services. The four factors of production are: land, labour, capital
and enterprise.

One of the key responsibilities of operation managers is to utilise resources efficiently so

as to cut cost and increase output level with the same level of input. It is therefore
important for managers to effectively measure and monitor productivity.

1.1 Measuring Productivity

Productivity is measured by the following equation:

Total output in a given time period
Productivity (of a particular factor of production) =
Total units of input factor of production

1.2 Raising Productivity

Productivity could be increased by:

 Training employees
 Motivating employees
 Improving equipment productivity
 Streamlining production procedure
 More efficient management

Distinction between efficiency and effectiveness. In business sense, efficiency refers to

the output level per unit of input of resources. Effectiveness, on the other hand, is often a
term used to refer to the degree that businesses can meet demands and needs of
customers. Some would refer to effectiveness as the ability of a business to meet its
set objectives.

1.3 Labour Intensive vs Capital Intensive

In operations management, it is vital for a manager to appreciate that a labour intensive

product may vary considerably from a capital intensive product. This may affect a number
of factors:

23
 Scale of production
 Standardisation of products
 Variations and diversity in consumer needs
 Efficiency of distribution channel
 Value added to each unit of product
 Fixed cost
 Financing cost (interests on loans)
 Skill level required of workers
 Cost of labour in relation to cost of capital

1.4 Production Methods

Similar to the distinction between labour intensive and capital intensive production, a
competent manager should choose production methods appropriate for the business’
products and its customer groups.

 Job production --- single, one off products

 Batch production --- Identical products in groups go through production process
together
 Flow production --- Individual products move from stage to stage of the production
process without waiting for any other products
 Mass customisation --- generic designs that allow customers to make individualised
customisation based on personal preferences. This is now possible due to
advancement in computer controlled technology and multi-skilled workers.

When a business seeks to switch from one type of production to another, it is important to
take note of:
 Cost involved
 WIP inventory
 Worker skills becoming inapplicable
 Worker motivation may be negatively impacted
 Correct and accurate estimation of market condition and prediction of future
development is needed

-------------------------------- End of Chapter --------------------------------

24
Chapter 11 Inventory Management

Inventory control is important to a business because it can help a business cut down
holding cost and at the same time keep the risk of running out of inventories when the
need arises at an acceptable level.

1.1 Concept of Inventory Management

Inventory includes the following three types of items:

 Raw materials and components
 Work in progress
 Finished goods

Holding High Level of Inventory

Benefits Costs
Reduces risk of lost sales Opportunity cost high
Allows for uninterrupted production Storage cost
Large order of supplies reduces cost Risk of waste and obsolescence

It is logical to deduce that there should be an “optimal” level of inventory level so as to

strike a balance between the pros and cons of holding high level of inventory. This
relationship is illustrated by the diagram below:

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An inventory control chart outlines some of the key information that inventory control
involves. Firstly, the business should set a minimum inventory level (buffer inventory
level) so as to ensure that scarcity of inventory does not impede business performance.
Secondly, the business should set a maximum inventory level and this level should not
be too high so as to limit holding cost. The business must then make accurate estimation
of the time it takes for the inventory stock level to fall from maximum inventory level to
buffer inventory level. Re-order consignment should be made before the stock level falls
too low. When this should be made depend on the lead time it takes for the re-order stock
to arrive.

1.2 JIT

Just-in-time (JIT) inventory management is a practice/notion first implemented by

Japanese firms from the 1970s. The concept of JIT is simple and straightforward --- keep
inventory level as low as possible (bare minimum to keep the business going) and
make reorders only when it is absolutely necessary. This can help to keep holding and
storage cost low and make the firm profitable.

The issues associated with JIT are also considerable:

 Demanding on management level
 High risks of shortage of inventory
 Vulnerability to supply chain breakage
 Susceptible to price changes due to market fluctuations
 Impossible to enjoy economies of scale that are normally associated with high
inventory level
 Employees tend to face high pressure levels and must be able to multi-task

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Chapter 12 Capacity Utilisation and Outsourcing

1.1 Measurement of Capacity Utilisation

Maximum capacity refers to total possible level of sustained output a business can
achieve in a given time period. Capacity utilisation refers to the proportion of the maximum
capacity that is currently being used.

Capacity utilisation is measured by the formula:

������� ������ �����
Rate of capacity utilisation = × 100%
������� ������ �����

A high rate of capacity utilisation is normally preferred for the simple reason that fixed cost
accrue over time no matter whether the production capacity has been fully utilised or not.
This is especially true for businesses that sustain significant fixed cost but has rather mild
marginal cost (the cost of providing an additional unit of goods/services).

1.2 Dealing With Under-Utilisation

If the under-utilisation is a short term issue, this may be resolved by increasing inventory
stock level; allowing other products to be produced; and adjusting employment contracts.
Note that these measures do have their downsides and may not be applicable in all
situations.

Long term under-utilisation can be a strong signal that either the products offered or the
targeted market is inappropriate. This may lead the business to two options:
rationalisation or product development. Alternatively, if new market may be found in
time, rationalisation may be avoided.

1.3 Outsourcing

Outsourcing refers to diverting responsibilities that were traditionally internally conducted

to external organisations. This may involve production; management; specialised tasks
such as tax planning and accountancy; or even employment contracts.

Some of the key reasons a business might want to outsource:

 Reducing operating cost
 Increased flexibility
 Improvement in expertise and skills
 Reducing strain on business resources
Note that outsourcing may cause many complications, including dismissal disputes;
deterioration in product qualities; customer dissatisfaction; security leaks; and social/legal
repercussions.
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UNIT 5 FINANCIAL ANALYSIS AND APPRAISAL

Chapter 13 Business Finance

1.1 Concept Of Business Finance

Working capital = current assets - current liabilities

Capital expenditure vs revenue expenditure

1.2 Sources of Finance

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Chapter 14 Forecasting and Managing cash flow

1.1 Cash Inflows; Cash Outflows; And Net Cash Flow

Sources of cash inflows: 1. owners’ capital injections; 2. bank loans; 3. customers’ cash
purchases; 4. trade receivables payments.

Sources of cash outflows: 1. Lease payment for premises; 2. annual rent payment; 3.
utility bills; 4. wage payments; 5. payments to suppliers.

Closing balance = Opening balance + [cash inflows - cash outflows]

1.2 Managing Cash Flow Problems

Cash flow problems may stem from:

 Lack of planning
 Poor credit control
 Allowing customers too long to pay debts
 Expanding too rapidly
 Unexpected events

Ideally, cash flow issues may be improved by better cash flow forecasts, improving
receivables by reducing account receivable ages, etc. However, these are of course
susceptible to restrictions posed by realistic business environments.

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Chapter 15 Costs and Budgets

1.1 Types of costs

Costs of a business can be categorised into:

 Direct costs (incurred by a particular cost centre)
 Indirect costs (overheads)

Alternatively, costs can also be categorised into fixed and variable depending on whether
the cost is related to a factor of production that can be altered or not in the short run.

1.2 Some Important Formulas

����� ���� �� ����������

 Average Cost =
������ �� ����� ��������

 Contribution = Revenue − Attributed cost (average variable cost)

Fixed cost
 Break even level of output =
Contribution per unit

1.3 Costing Methods

a. Full costing --- allocates all costs to each product

b. Contribution or Marginal costing --- Contribution of a product is the revenue gained
from selling a product less its marginal (variable direct) costs.

Contribution costing involves allocating costs to each profit/cost/products and can involve
very complex accounting principles and techniques such as ABC. It is not necessary for
candidates to be aware of how these techniques work, it is sufficient to appreciate that
such an approach exists.

1.4 Break-even Analysis

Break-even analysis refers to analysing, with the input of fixed costs, revenue and
contribution, the level of output required for the business to recoup its initial investment
into the business. It may be done graphically or by calculation.

30
Graphical representation of break-even analysis

A margin of safety refers to the difference between current level of output and the break
even level of ouput. It is often expressed in percentage form:
(production output − break even output)
Margin of safety % = break even output
x 100%

1.5 Budgets

Benefits of budgets:
 Planning
 Allocating resources
 Setting targets
 Coordination
 Controlling and monitoring
 Measuring and assessing performance

Drawbacks of benefits:
 Lack of flexibility
 Focus on the short term
 Unnecessary spending
 Training on budgets
 Budgets for new projects

Types of Budgeting
1. Incremental budgeting
2. Zero budgeting
3. Flexible budgeting

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1.6 Variance Analysis

Variance measures the differences between planned performance targets and actual
performances and seek to explain how the variance has occurred.

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32