TOPIC 1 UNDERSTANDING THE BUSINESS SYSTEM The concept of business and profit Definition of Business An organization that provides

goods and services to earn profits. Definition of Profit The difference between a businesss revenues and its expenses. Factors of Production Resources used in the production of goods and services, which include: 1. 2. 3. Labor (or human resources) the physical and mental capabilities of people as they Contribute to economic production Capital the funds (money) needed to create and operate a business enterprise Physical resources tangible things that organizations use to conduct their business (include natural resources and raw materials, office and production facilities, computers, Etc). Information resources data and other information used by business (market forecast, Economic data, specialized expertise and knowledge of people) Entrepreneurs people who embrace the opportunities and accept the risks inherent in Creating and operating business.

4. 5.

Economic System A nations system for allocating its resources among its citizens, both individuals and organizations. Economic systems around the world The way a business is conducted in one country differs from the way it is conducted in another country, depending on its economic system.

Types of economic system Different types of economic systems manage the factors of production in different ways. There are generally three types of economic systems being practiced today, namely planned economy, market economy and mixed market economy. 1. Planned Economy Economy that relies on a centralized government to control all or most factors of production and to make all or most production and allocation decisions. The two most basic forms of planned economies are: 1. Communism government owns and operates ALL sources of production. y Proposed by Karl Marx, 19th century German economist. y Individuals ultimately contribute according to their abilities and receive Economic benefits according to their needs. y Government ownership of production factors to be temporary, once society Matured, workers would gain direct ownership. y Example: Cuba, North Korea, Vietnam and PR of China. Socialism government owns and operates ONLY SELECTED major sources of production. y y y Government may control banking, communications, transportation and Industries that produce basic goods such as oils and steel. Smaller business still private owned. Example: England and France.

2.

2. Market Economy Economy in which individuals control production and allocation decisions through supply and demand. What is Market? A mechanism for exchange between the buyers and sellers of a particular good or service (both seller and buyers enjoy freedom of choice) y Input market - market in which firms buy resources from supplier households (eg: labor, capital in the forms of stocks, etc.) Output market market in which firms supply goods and services in response to Demand on the part of household

Capitalism market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive ( shows the gap between the rich and poor).

3.

Mixed Market Economy

Economy system featuring characteristics of both planned and market economies. y Planned Economy + Market Economy = Mixed Market Economy

Privatization y y y Process of converting government enterprise into privately owned companies. Helps reduce cost, boost efficiency and productivity and increase profit. Most former Eastern bloc countries are now adapting market mechanisms through privatizations.

Demand and supply in a Market Economy A market economy consists of many different markets that function within that economy. Laws of Demand and Supply Law of Demand The principle that buyers will purchase (demand) more of a product as its price drops and less as its price increases. Law of Supply The principle that suppliers will offers (supply) more a product for sale as its price increase and less as its price decrease. Demand The willingness and ability of buyers to purchase a product (a good and services) Supply The willingness and ability of procedure to offer a good or service for sale. Demand and Supply Schedule Assessment of the relationships between different levels of demand and supply at different price level (based on affordability) Demand Curve (refer appendix) Graph showing how many units of a product will be demanded (bought) at different prices. Supply Curve Graph showing how many units of a product will be supplied (offered for sale) at different prices.

Market Price (Equilibrium Price) Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal. Surplus Situation in which quantity supplied exceeds quantity demanded. y Qs > Qd = Surplus

Shortage Situation in which quantity demanded exceeds quantity supplied. y Qd > Qs = Shortage

Degrees of Competition Competition When two or more businesses vie for the same resouces or customers. Perfect Competition Market or industry characterized by numerous small firms producing an identical product. Monopolistic Competition Market or industry characterized by numerous buyers and relatively numerous sellers trying to differentiate their products from those competitors. Oligopoly Market or industry characterized by handful of (generally large) sellers with the power to influence the prices of their products. Monopoly Market or industry in which there is only one producer, which can therefore set the prices of its products. Economic Goals Stability Condition in which the balance between the money available in an economy and the good produced in it is growing at about the same rate. (enough goods to satisfy the demand and enough money to buy the needs and wants) Inflation The phenomenon of widespread price increases throughout an economic system. It is also a sign of economic growth.

Unemployment Level of joblessness among people actively seeking work in an economic system. Recession The period characterized by decrease in employment, income and production. Example: in early 1980s and recently in Malaysia. Depression Particularly severe and long-lasting recession, example: in 1930s which affected much of the world. Managing the Economy Fiscal Policies Government economic policies that determine how the government collects and spends its revenues. Monetary Policies Government economic policies uses to control the size of its money supply.

TOPIC 2 CONDUCTING BUSINESS 1. Definition of Entrepreneur Business persons who accept both the opportunities and the risks involved in creating and operating a new business venture. Advantages Disadavantages 2. Definition of Franchise Arrangement in which a buyer (franchisee) purchases the right to sell goods/services of the seller (franchiser/sor) Advantages y y y y y Existing standardized policies, procedures, equipment, store design and marketing Strategy (advertising) by parent company (franchiser). Business is already established no need to build from scratch. Chances of failure are reduced franchise outlet is usually a carbon copy of every other outlet. Minimum risk. Access to big business management skills (experts).

Disadvantages y y y y y Expensive to form high start up cost (depending on franchises). Does not guarantee success. Limits independence and creativity. Agreements are difficult to terminate. Franchisees may also have continued obligations to contribute percentage of sales to parent company.

3. Definition of Sole Proprietorship A business owned and usually operated by one person who is responsible for all of its debts. Advantages y y y y y y y Enjoy certain degree of privacy Total freedom in decision making, control and management. Low start-up capital involved. Pay only personal income tax. Easy to establish very minimal regulations/restrictions. Easy to dissolve. No sharing of profit.

Disadvantages y y y y y Limited capital only from personal savings or loan from family/friends. Unlimited liability have to hear all loss and can involved personal assets. Lack of continuity/stability if the owner dies or unable to continue the business activities, then it will be closed down. No specialization the owner is involved in all areas of the business. Limited resources financial (difficult to get bank loan) and skilled workers (low salary offered) due to its small size.

Example: grocery shop, hair salon, small coffee shop. 4. Definition of Partnership A business with two or more owners (2-20 owners) who share in both the operation of the firm and in financial responsibility for its debts. y General partnership one who assumes full or shared operational responsibility of a business, his/her liability is unlimited.

Advantages . The ability to grow by adding new talent and money. . Easy to make loan from a bank. Disadvantages y y y y Unlimited liability have to bear all loss regardless of capital contribution. It can involve personal assets. Lack of continuity/stability it will be dissolved if there is any disagreement between partners or if one of the partners dies/leaves/insane. Difficult to transfer ownership/frozen investment all partners must agree whe any of the partners wishes to retire or transfer ownership. No guidance for resolving internal conflicts.

Example: clinic(doctor), consultation firms (company secretary, management people), legal firms(lawyers), accounting firms (accountants). 5. Definition of Corporation A business that is legally considered an entity separate from its owners and is liable for its own debts. Owners liability extends to the limits of their investments. A corporation may perform the following activities: 1. 2. 3. 4. Sue and can be sued Buy, hold and sell property Make and sell products Commit crimes and be tried and be punished for the crimes done Corporations may be either public or private.

Advantages y y y y y y Larger size of capital can be gained from the selling of shares to the public. Limited liability legal principle holding investors liable for a firms debt only to the limits of their personal investments in it (biggest advantage). Easy transfer of ownership selling of shares/ownership through stock markets. Specialized management team board of directors and knowledgeable managers. More opportunities to grow more capital gained and more specialized management team. Perpetual life withdrawal, death or incompetence of any stockholder is not cause for the corporation to be terminated.

Disadvantages y y y y y y Costly to establish relatively complex and costly process (need attorney to help complete the legal forms). Government regulation many regulations and restrictions (Companies Act 1965). Double taxation corporation pay corporate income tax on profits and shareholders pay individual income tax on dividends received. Tender offer an offer to buy shares directly to a corporations shareholders. Lack of secrecy detailed reports on the corporation management and financial reports are made public to government agencies and stockholders. Misuse of power when Board of Director is not the owner of the company elements of personal interest could take place.

Double Taxation Situation in which taxes may be payable both by corporation on its profits and by shareholders on dividend incomes. Public Corporation (Public Held) Corporation whose stock is widely held and available for sale to the general public. (two no limit of shareholders) Private Corporation (Closely Held) Corporation whose stock is held by only a few people and is not available for sale to general public. (two 50 shareholders). Most corporations started out as a private corporation before turning it into public by issuing stock to the public to raise additional money. Stockholders / Shareholders The owners of shares of stock in a corporation. They are the true owners of a corporation. Stocks Share of ownership in a corporation.

There are two types of stock; preferred stock and common stock. 1. Preferred Stock stock that guarantees its holders fixed dividends and priority claims over assets but no corporate voting rights. 2. Common Stock stock that pays dividends, offers last claims over assets but guarantees corporate voting rights. Board of Directors (BOD) Governing body of a corporation that reports to its shareholders and delegates power to run its day-to-day operations, but remains responsible for sustaining its assets. Officers Top management team of a corporation. Chief Executive Director (CEO) Top manager hired by the board of directors to run a corporation. The CEO who is responsible for the firms overall performance will normally lead a group of office/managers to run the dayto-day operations.

TOPIC 3 ORGANIZING THE BUSINESS ENTREPRISE Definition of organizational structure Specification of the jobs to be done within an organization and the ways in which they relate to one another. In every organization, each has basic components that have the same fundamental purpose each component performs its own function while working together with others. Determinants of Organization Among the elements that determine the organization structure are as follow: 1. Purpose the purpose of the organization generally shapes the organization structure. 2. Mission what re the targets/aims that the organization wants to achieve local/international market? 3. Strategy different strategies used to achieve the mission will create a different organizational structure. 4. Size a small organization will have a different structure than the larger organization. 5. Technology an organization with a more advanced technology might need fewer workers which will result in different structure than a more traditional company. 6. Environmental changes political background, economics situation, consumer behaviors are among other factors that determine different structures. Chain of Command Organizational Chart Diagram depicting a companys structure and showing employees where they fit into its operations. Chain of Command Reporting relationship within a company. y y It is represented by the solid lines connecting each other in the organization chart. It also shows who gives/receives command to/from whom.

10

The Building Blocks of Organizational Structure The two activities in developing the structure of any business which are also the building blocks of organizational structure are: 1. Specialization : determining who will do what. 2. Departmentalization : determining how people performing certain task can be best grouped together. Job Specialization The process of identifying the specific jobs that need to be done and designating the people who will perform them. It is natural part of organizational growth. Advantages y y y Specialized jobs are learned more easily Can be performed more efficiency than non-specialized jobs Easier to replace people who leave the organization

Disadvantages If it is only a small organization with little workload, overspecialization could created boredom and job dissatisfaction among workers. Departmentalization Process of grouping jobs into logical units. y y y In departmentalization, control and coordination are narrowed and made easier and the specific units that performed could be identified easily. Departmentalization also allows the firm to treat a department as a profit center , a separate unit responsible for its own costs and profits. It helps managers to calculate the costs and profits of the department and use the information in making decisions about advertising and promotional event, space allocation, etc.

The most common types of departmentalization: 1. Customer Departmentalization Departmentalization according to types of customers likely to buy a given product. 2. Product Departmentalization Departmentalization according to specific products being created. 3. Process Departmentalization Departmentalization according to production processes used to create a good or service.

11

4. Geographic Departmentalization Departmentalization according to areas served by a business. 5. Functional Departmentalization Departmentalization according to groups functions or activities. The Decision Making Hierachy In establishing the decision making, the most fundamental issues involved in organization is who make which decisions? The development of the decision making hierarchy generally results from a three-step process: 1. Assigning tasks : determining who can make decisions and specifying how they should be made. 2. Performing tasks : implementing decisions that been made. 3. Distributing tasks: determining whether the organization is to be centralized. Assigning Tasks: Responsibility and Authority Responsibility Duty to perform an assigned task. Authority Power to make the decisions necessary to complete a task. y Most of the time, in any organization, a person who has to perform certain task will need an authority to perform it. So it is very important for the companys policies to be consistent on who is supposed to do what and who is entitled to do what.

Performing Tasks : Delegation and Accountability Delegation Assignment of a task, responsibility or authority by a manager to a subordinate. y y It involves specific relationship between managers and subordinates. Fear of delegation some small-business managers may have trouble delegating effectively due to the following reasons : 1. The feeling that employees can never do something as well as the manager can. 2. The fear that something will go wrong if someone else takes over a job.

3. The lack of time of long range planning because the manager is bogged down in day-to-day operations. 12

4. The sense of being in the dark about industry trends and competitive products because of he time the manger devotes to day-to-day operations. Accountability Liability of subordinates for accomplishing tasks assigned by managers. y A subordinate could be reprimanded, punished or even dismissed if he/she does not perform the task properly and promptly.

Distributing Authority : Centralization and Decentralization The patterns of authority throughout a company may ne centralized or decentralized. In a centralized organization, most decision making authority is held by upper-level managers. y Most lower level decisions must also be approved by upper management before they can be implemented. It has a tall organizational structure multiple layers of management before relatively narrow spans of control. It is typical of small businesses and done to maintain standardization.

In a decentralized organization, much decision making authority is delegated to level management at points below the top. y y The company is less bureaucratic and normally more responsive to its environment. It has a flat organizational structure with relatively few layers of management and relatively wide spans of control. It is normally adopted by larger company

Forms of Authority A company must decide on who will have authority over whom. There are three forms of authority; line authority, staff authority and committee and team authority. 1. Line Authority Organizational structure in which authority flows in a direct chain of command from the top of the company to the bottom. Line Departmet Department directly linked to the production and sales of a specific product. 2. Staff Authority Authority based on expertise that usually involves advising line managers.

13

Staff Members Advisors and counselors who aid line departments in making decisions but do not have the authority to make final decisions. 3. Committee and Team Authority Authority granted to committees or work teams involved in a firms daily operations. Work Teams Groups of operating employees who are empowered to plan and organize their own work and to perform that work within a minimum of supervision.

Forms of Organizational Structure Generally, there are four forms of organizational structure; is determined by the relationships between group functions and activities. 1. Functional Organization Form of business organization in which authority is determined by the relationships between group functions and activities. y y Used by most small to medium-size firms, structured around basic business functions (marketing, operations, finance, etc) and adopts centralization. Advantages: smoother coordination and specialization within functional areas (experts are normally hired).

2. Divisional Organization Organizational structure in which corporate as autonomous businesses under the larger corporate umbrella. y It relies on product departmentalization. It is structured around several divisions and each division usually has its own identity.

Division Department that resembles a separate business in producing and marketing its own products. 3. Matrix Organization Organizational structure in which teams are formed and team members report to two or more managers. y y Matrix structure normally involves a line manager and a staff manager and it relies heavily on committee and team authority. It is normally a temporary structure, installed to complete a specific project. Once the project has been completed, the structure will be disbanded.

14

4. International Organization Approaches to organizational structure develop in response to the need to manufacture, purchase, and sell it global markets. y Companies which adopt this structure would set up any of their business activities at different places all around the world taking advantage of the market response. Example: they manufacture the products in third world countries and sell at the developed countries.

Informal Organization Formal versus informal organization. The formal organization of a business is the part that can be seen and presented in chart form. In reality, all organizations also have another dimension an informal organization. Informal Organization Network, unrelated to the firms formal authority structure, of everyday social interactions among company employees. y Many large companies support and encourage informal organization just as much as they support formal structure. They believe that informal interaction among employees stimulates the kind of discussions and group processes that can help solve organizational problems. However, the informal organization can also reinforce office politics that put the interests of individuals ahead of those of the firm. Distorted or inaccurate information communicated without management input or review could also create serious problems. Grapevine Informal communication network that runs through an organization. Informal group Groups of people who decide to interact among themselves.

y y

Intrapreneuring As businesses expand, new ideas, innovation and creativity tend to be neglected in the battle for more sales and profits. To counteract it, companies could adopt intrapreneuring. Process of creating and maintaining the innovation and flexibility of a small-business environment within the confines of a large organization.

15

TOPIC 4 CONDUCTING BUSINESS ETHICALLY AND RESPONSIBLY Ethics in the Workplace Definition of Ethics Beliefs about what is right and wrong or good and bad in actions that affect others. y y Differs according to an individuals personal values and morals and social concept. Varies from one situation to another, from one person to another and from one culture to another.

Definition of Ethical Behavior Behavior confirming to generally accepted social norms concerning beneficial and harmful actions. Unethical Behavior Behavior which does not conform to generally accepted social norms concerning beneficial and harmful actions. Ethical and unethical behavior is determined partly by individual and partly by culture. Business Ethics Ethical or unethical behaviors by employees in the context of their jobs. Steps in making ethical judgements: 1. Gather the relevant factual information (data gathering) not rumors or unfounded talk. 2. Analyze the fact to determine the most appropriate moral values (analysis) based on individual and social concepts. 3. Make an ethical judgement based on the rightness or wrongness of the proposed activity or policy. Company Practices and Business Ethics In todays competitive business world, many large firms have encouraged ethical behaviour in the workplace. They established their own codes of conduct and developed clear ethical positions on how the firm and the employees should conduct their businesses.

16

Demonstrating Commitment When a firm shows an attitude of honesty, openness and frankness in managing any crisis, conflicts or problems that arise, they are formally demonstrating their commitment to ethical practices. For example in 1982, Johnson & Johnson announced a product recall on Tylenol pain reliever capsules which were found laced with cyanide. Though J&J took a crucial step by making it public, their commitment to the public pays back when both the company and brand bounced back much more quickly than thought possible. There are two common approaches in demonstrating commitment: 1. Adopting written codes 2. Instituting ethics programs Adopting Written Codes The companies that adopted written of ethics are formally acknowledgement their intent to do business in an ethical manner. Among the big names are J&J, McDonalds and Dell Computer. Example: Hewlet-Packet and its The HP Ways (since 1957) written code of ethics: y y y y y We have trust and respect for individuals. We focus on a high level of achievement and contribution We conduct our business with uncompromising integrity We achieve our common objective through teamwork We encourage flexibility and innovation

Instituting Ethics Programs Top management plays an important role in educating the employees on the issues of ethics in the workplace. They should set an example for ethical behavior that others in the company must follow. Periodic ethics training attended by managers can be conducted to remind them of the importance of ethical decision making and to update them on the most current laws and regulations that might be particularly relevant to their firms. y Levi Strauss & Co, with the support of the top management, addresses issues including workforce diversity, employee empowerment and recognition, honest communication and ethical management practices in their Aspiration Statement. Levi is also strict about enforcing International Labor Organization (ILO Geneva Convention) standards on child labor. Texas Instruments providing ethical hot lines numbers that an employee can call, either to discuss the ethics of a particular problem or situation or to report unethical behavior or activities by others.

17

SOCIAL RESPONSIBILITY Definition of Social Responsibility The attempt of a business to balance its commitments to groups and individuals in its environment, including customers, other businesses, employees, and investors. Social Responsibility y y y y Is an attempt of a firm to balance different commitments. Reflects the ethics of the individuals employed by a firm (the employees), especially its top management. Can be encouraged and enforced, whether by government agencies or by customers. Can also be shaped by the demands of investors and behavior of other firms.

Areas of Social Responsibility There are four areas of social responsibility: 1. Responsibility toward the Environment (air, water, land). Business organizations have the responsibility to ensure that air, water and land are not being polluted through the conduct of their business activities. Pollution The injection of harmful substances into the environment. Air Pollution Characterized by low air quality (carbon monoxide from automobiles, smoke from open Burning and other chemicals from manufacturing plant) and acid rain. Water Pollution Rivers, streams and lakes are normally polluted by chemical and waste dumping while Sea is normally polluted by oils spoils from ships and oils tankers. Land Pollution Two key issues: o o How to restore the quality of land that has been damaged, How to prevent future contamination.

18

Toxic waste which is dangerous chemical and/or radioactive by products of manufacturing processes, is one major concern in land pollution. y y y The illegal way of dumping toxic waste has become a serious threat to the society lately. Toxic waste must be stored, it cannot be destroyed or processed into harmless material. Recycling, the re-conversion of waste materials into useful products, is a healthy, alternative to waste dumping.

2. Responsibility toward Customers A company that does not act responsibly toward its customers will ultimately lose their trust and thus their business. Social responsibility toward customers generally falls into two categories, namely: a. Providing quality products, and b. Pricing products fairly. Consumer Rights In Malaysia, Kementerian Dalam Negeri dan Hal Ehwal Pengguna is the authority responsible for protecting consumers rights. Consumerism A form of social activism dedicated to protecting the rights of consumers in their dealings with businesses. The four basic consumer rights identified by the J.F. Kennedy administration in the early 1960s and the emergence of another additional two more rights ever since are: 1. 2. 3. 4. 5. 6. Consumers have a right to be save products. Consumers have a right to be informed about all relevant aspects of a product. Consumers have a right to be heard. Consumers have a right to choose what they buy. Consumers have a right to be educated on the purchase. Consumers have a right to courteous service.

Unfair Pricing In Malaysia, it is more rampant during festive seasons. publicize the goods under controlled item list. The authority will normally

Collusion Occurs when two or more firms collaborate on such wrongful acts as price fixing.

19

Ethics in Advertising Listing of ingredients, labeling of product packages, expiry date, target consumers and misleading/controversial advertisements are being focused on when dealing with the ethics in advertising. 3. Responsibility toward Employees y y y Responsibility toward employees includes the activities of recruiting, hiring, training, promoting and compensating. Equal opportunity for reward and advancement without regard to race, sex or other irrelevant factors are part of being socially responsible to the employees. The workplace should also be physically and socially safe.

Ethical commitment In a socially responsible company, individuals should be able to confidently report findings or unethical behaviors to the higher level managers and not find themselves in trouble with their employers. Whistleblower Employee who detects and tries to put an end to a companys unethical, illegal, or socially irresponsible actions by publisizing them. 4. Responsibility toward Investors Managers, who are not the true owner of a company, could abuse their responsibilities to investors in several ways such as: 1. Improper financial management paying excessive salaries to senior managers, extravagant retreats to expensive resorts, frivolous perks including ready access to corporate jets, lavish expense accounts and memberships at plush clubs. 2. Check Kiting illegal practice of writing checks against money that has not yet been credited at the bank on which the checks are drawn. 3. Insider trading someone who uses confidential information to gain from the purchase or sale of stocks. 4. Misrepresentation of finances Every corporation must confirm to generally accepted accounting practices (GAAP) but if, for example, a manager projects profits far in excess of what the company actually expect to earn, he has acted unethically.

20

Implementing Social Responsibility Programs The differences in opinion on to what extend a company should be responsible to the society has led to corporation adopting a variety of approaches to it. The four (4) stances that an organization can take concerning its obligations to society fall along a continuum arranging for the lowest to the highest degree of socially responsible practices. Below are the most common approaches to social responsibility: 1. Obstructionist Stance Approach to social responsibility that involves doing as possible and may involve attempts to deny or cover up violations. y The lowest degree of social responsibility and hav little regard for ethical conduct. Have the capability of denying or covering up any wrongdoings.

2. Defensive Stance Approach to social responsibility by which a company meets only minimum legal requirements in its commitments to groups and individuals in its social environment. y Just do what is required legally and nothing more. However, very unlikely to cover up wrongdoings, will generally admit to mistakes, and will take appropriate corrective action.

3. Accommodative Stance Approach to social responsibility by which a company, if specially asked to do so, exceeds legal minimums in its commitments to groups and individuals in its social environment. y Firms responds voluntarily to participate in social programs if requested and convinced that the program are worthy of their support.

4. Proactive Stance Approach to social responsibility by which a company actively seeks opportunities to contribute to the well-being of groups and individuals in its social environment. y Highest degree of social responsibility. The firms view themselves as citizens in the society and proactively seek opportunities to contribute.

21

Managing Social Responsibility Programs 1. Top management support must start at the top. Top management must embrace a strong stand on social responsibility and develop a policy statement outlining the commitment. 2. Strategic planning a committee of top managers must develop a plan detailing the level of management support and must set specific priorities. 3. Appointment of Director one executive must be put in charge of the firms agenda and monitor the program. The director needs to ensure that the implementation must be consistent with the firms policy statement and strategic plan. 4. Social audit systematic analysis of a firms success in using funds earmarked for meeting its social responsibility goals must be conducted occasionally

22

TOPIC 5 UNDERSTANDING ACCOUNTING SYSTEMS What is Accounting and Who uses Accounting Information Accounting Comprehensive system for collecting, analyzing, and communicating, financial information. Bookeeping The recording of accounting transactions. Accounting Information Systems Organized means by which financial information is identified, measured, recorded and retained for use in accounting statements and management reports. Financial Accounting System Field of accounting concerned with external users of a companys financial information. Example: consumer group, unions, stockholders and government agencies. Managerial Accounting System Field of accounting that serves internal users of a companys financial information. Example: managers and employees (i.e.: accountants, engineers, purchasing staff, etc). Users of Accounting Information There are numerous of accounting information: 1. Business managers to set goals, develop plans, set budget and evaluate future prospects. 2. Employees and unions to get paid and to plan for and receive such benefits as healthcare, insurance, vacation time and retirement pay. 3. Investors and creditors to estimate returns to stockholders, determine a companys growth prospects and determine whether it is a good credit risk before investing or lending. 4. Tax authorities to plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time. 5. Government regulatory agencies to fulfill their duties. For example, KLSE requires firms to file financial disclosures so that potential investors have valid information about a companys financial status.

23

Accounting Terms Certified Public Accountant (CPA) Accountant licensed by the state and offering services to the public. They normally provide auditing, tax and management services. Audit Systematic examination of a companys accounting system to determine whether its financial reports fairly present its operations. Companies must normally provide audit reports when applying for loans or selling stock. Tax services They are the services provided by the CPAs which include assistance with tax return preparation and tax planning. Management Advisory Services Specialized accounting services to help managers resolve a variety of business problems (example; from personal financial planning to planning corporate merger). Journal Chronological record of a firms financial transactions, including a brief description of each. Ledger Record, divided into accounts and usually compiled on a monthly basis, containing summaries of all journal transactions. Fiscal Year Twelve-month period designated for annual financial reporting purposes. The Accounting Equation y Assets = Liabilities + Owners Equity

Asset Any economic resource expected to benefit a firm or individual who owns it. Liability Debt owed by a firm to an outside organization or individual. Owners Equity Amount of money owners would receive if they sold all of a firms assets and paid all of its liabilities. y Assets Liabilities = Owners equity

Owners equity consists of two sources of capital: y y The amount that the owners originally invested Profits earned by and reinvested in the company 24

Double-Entry Accounting Bookkeeping system that balances the accounting equation by recording the dual effects of every financial transaction. Financial Statement Any of several types of reports summarizing a companys financial status to aid in managerial decision making. y Financial statements fall into three broad categories balance sheets, income statements and statement of cash flows.

Balance Sheet Financial statement detailing a firms assets, liabilities, and owners equity. y It is also sometimes called statements of financial position as they show a firms financial condition at one point in time.

Current Asset Asset that can be converted into cash within the following year. Fixed Asset Asset with long-term use or value, such as land, building and equipment. Intangible Asset Nonphysical asset, such as patent or trademark, that has economic value in the form of expected benefit. Income Statement (profit and loss statement) Financial statement listing a firms annual revenues, expenses and profit or loss. y Revenues Expenses = Profit (or loss)

Revenues Funds that flow into a business from the sale of goods or services Cost of Goods Sold Total cost of obtaining materials for making the products sold by a firm during the year. Gross Profit (or gross margin) Revenues from goods sold minus cost of goods sold. Operating Expenses Costs, other than the cost of goods sold, incurred in producing a good or service.

25

TOPIC 6 UNDERSTANDING MARKETING PROCESSES AND CONSUMER BEHAVIOR

Marketing The process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods and services to create exchange that satisfy individual and organizational objectives. Consumer Goods Products purchased by consumers for personal use. y Firms that sell products to consumers for personal consumption are engaged in consumer marketing.

Industrial Goods Products purchased by companies to produce other products. y Firms that sell their products to other manufacturers are engaged in industrial marketing.

Services Intangible products, such as time, expertise, or an activity that can be purchased. y Insurance companies, airlines, investment counselors, health clinics and public accountants all engage in service marketing, either to individuals or to other companies.

Marketing is also relevant to the promotion of ideas, for example: television advertising and other promotional activities to sell the goods/services. Relationship Marketing Marketing strategy that emphasizes lasting relationships with customers and suppliers.

26

The Marketing Mix ( 4Ps ) Marketing Mix Also known as the 4Ps of marketing, marketing mix is a combination of product, pricing, promotion, and place (distribution strategies used) to market products. 1. Product Good, services or idea that is marketed to fill consumer needs and wants. Product Differentiation Creation of a product or product image that differs enough from existing products to attract consumers. 2. Pricing Selecting the most appropriate price at which to sell it. y It is often a balancing act it should cover the costs involved in producing the product but at the same time it should be competitive enough to the consumers and the competitors. Both low and high price strategies can be effective in different situations:  Low prices larger sales volumes.  High prices limit market size but increase profits per unit and could also imply a high quality product. 3. Promotion Techniques for communicating information about products. The most important promotional tools are:

Advertising any form of paid non-personal communication used by an identified sponsor to persuade or inform potential buyers about a product. Example: advertisement in magazines, television, internet, etc. Personal selling also known as person-to-persona sales. Involved mostly industrial goods due to the technical know-how and detailed information possessed by the sales representative. Consumer goods, such as insurance clothing and stereo equipment are also best promoted through this method. Sales promotions consumers are tempted to buy by offering premiums (usually free gifts), coupons, package inserts, discounts, etc during the promotion. Normally for relatively inexpensive items.

27

Public relations all communication efforts directed at goodwill/favorable attitudes toward the organization and its products.

building

Publicity, which refers to a firms efforts to communicate to the public through mass media, however, can sometimes hurt a business because it is not paid, nor the content is controlled by the firm.

4. Place (distribution) It refers to distribution activities, concern with getting products from producers to consumers. y Placing of products in the proper outlet, e.g. retail store, which requires decisions about several distribution activities. Example: transportation options, warehousing, inventory control and distribution channels. Target Marketing and Market Segmentation Differences in tastes, interests, goals, lifestyles and other needs and wants has led the marketers to think in terms of target marketing. For most companies, selecting target markets is the first step in the marketing strategy. Target Market Group of people that has similar wants and needs and that can be expected to show interest in the same products. Market Segmentation Process of dividing a market into categories of customer types or segments. y For example, segmentation of the radio market is could be done according to age, consumer attitude, product use and location.

Identifying Market Segments In identifying market segments, researches look at several different influences on consumer behavior. Three of the most important market segments are; geographic, demographic and psychographic.

28

1. Geographic variable geographical units, from countries to neighborhoods, that may be considered in developing a segmentation strategy. Example: segmentation for urban and rural areas. 2. Demographic variables characteristics of populations such as age, income, gender, ethnic background, marital status, race, religion and social class that may be considered in developing a segmentation strategy. 3. Psychographic variables consumer characteristics such as lifestyles, opinion, interests, and attitudes that may be considered in developing a segmentation strategy. Sometimes, it can be changed by marketing efforts. Example: promoting of desirability and safety of using credit rather than cash. Understanding Consumer Behavior Consumer Behavior Study of the decision process by which customers come to purchase and consume products. There are four major influences on consumer behavior that could explain consumer choices and predict future purchasing behavior, namely: 1. Psychological influences include an individuals motivations, perceptions, ability to learn and attitudes. 2. Personal influences include lifestyle, personality and economic status. 3. Social influences include family culture (the way of living that distinguishes one large group from another), subculture (smaller groups, such as ethnic groups, with shared values) and social class (the cultural ranking groups according to such criteria as background, occupation and income).

29

The Consumer Buying Process Marketers use the information gathered through this process to develop marketing plans. 1. Problem/Need Recognition The buying process begins when the consumer recognizes a problem to the existing products or the need to purchase new products. 2. Information Seeking Once the need has been recognized, consumer often seeks information, either from personal sources (relatives, friends), marketing sources (advertisement, sales rap), public sources (websites, internet) or experiences. 3. Evaluation of alternatives By analyzing the product attributes that apply to a given product such as color, taste, price, prestige, quality and service record, you will consider your choice and decide which product best meets your needs. 4. Purchase Decision The decision to purchase the product whether now or later. Buy decisions are based on rational motives, emotional/irrational motives or both. y What is Relational Motives? Reasons for purchasing a product that are based on a logical evaluation of product attributes such as cost, quality and usefulness. y What is Emotional/Irrational Motives? Reasons for purchasing a product that are based on non-objective factors such as sociability, imitation of others and aesthetics (motives that are common). Many spur of the moment decisions are emotionally driven. 5. Post-purchase Decision The decisions made after you have purchased and consumed the product. Whether you are satisfied or not with the products.

30