Business Management Sample Paper 1

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Business Management

Sample Paper 1Questions and Suggested Solutions


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NOTES TO USERS ABOUT SAMPLE PAPERS

Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance

to students and their teachers regarding the style and type of question, and their suggested solutions, inour examinations. They are not intended to provide an exhaustive list of all possible questions that may

be asked and both students and teachers alike are reminded to consult our published syllabus (see

www.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics.

There are often many possible approaches to the solution of questions in professional examinations. It

should not be assumed that the approach adopted in these solutions is the only correct approach,

particularly with discursive answers. Alternative answers will be marked on their own merits.

This publication is copyright 2011 and may not be reproduced without permission of Accounting

Technicians Ireland.

Accounting Technicians Ireland, 2011.


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INSTRUCTIONS TO CANDIDATES

Answer FOUR questions in total. QUESTION 1 IN SECTION A ISCOMPULSORY AND MUST BE ANSWERED. Answer ANY THREE questions inSection B. If more than the requisite number of questions are answered,then only the requisite number, in the order filed, will be corrected.

Candidates should allocate their time carefully.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on page 2 overleaf.


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SECTION A

(COMPULSORY QUESTION)

QUESTION 1 (COMPULSORY)

(a) Describe the main elements of Maslows Hierarchy of Needs.

10 Marks

(b) Comment on the relevance of the above theory in todays business

environment.

10 Marks

(c) Describe two criticisms of this theory.

5 Marks

Total 25 Marks


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SECTION B

(ANSWER ANY THREE QUESTIONS IN THIS SECTION)

QUESTION 2

(a) Identify and explain three elements of the marketing mix for a product.10 Marks

(b) Think of two products you use on a regular basis and outline the element ofthe marketing mix that is likely to be particularly important in each case

giving reasons in support of your answer.

10 Marks

(c) Differentiate between market segmentation and market positioning.

5 Marks

Total 25 Marks

QUESTION 3

(a) Write a detailed explanatory paragraph on the following roles of a manager.

- Interpersonal roles

- Informational roles

- Decisional roles

10 Marks


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(b) Explain what is meant by PEST analysis and comment on its relevance in

the strategy formulation in an organisation of your choice.

10 Marks

(d) Describe two limitations of planning as a managerial function.5 Marks

Total 25 Marks

QUESTION 4

(a) Explain what is meant by the term Change Management and outline the

features of one recognised model for managing change in organisations.

10 Marks

(b) Outline the typical stages of team development and explain why they are

relevant. 10 Marks

(c) Describe briefly what you understand by the term charismatic leadership.

5 Marks

Total 25 Marks

QUESTION 5

(a) Describe the stages of Product Life Cycle (PLC) of a typical product drawing

on examples of products with which you are familiar. 10 Marks

(b) Comment on the relevance of the PLC as a marketing tool.

10 Marks

(c) Explain when market-skimming and market-penetration-pricing strategies

are likely to be appropriate. 5 Marks

Total 25 Marks


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QUESTION 6

(a) Identify and briefly describe the stages in the Systems Development Life

Cycle (SDLC) for IT systems.

10 Marks

(b) Off the shelf packages have many advantages over custom built systems.Describe FOUR such advantages.

10 Marks

(c) Outline briefly the main elements involved in Contingency Planning.

5 Marks

Total 25 Marks

QUESTION 7

(a) Explain how you would monitor a firms profitability and liquidity.

10 Marks

(b) Describe two short-term sources of finance available to organisations.

10Marks

(c) Distinguish between ordinary shares and preference shares.

5 Marks

Total 25 Marks


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Suggested Solutions

Section A

Question 1

Part A

Maslows Need Hierarchy theory states that human motivation is dependent on the

desire to satisfy various levels of needs and that the type of behaviour exhibited

may be influenced / result from the particular need to be fulfilled at a given time.

Maslow argued people are motivated by physiological, safety, belonginess, esteem

and self actualisation needs. He suggests these five basic needs exist in a hierarchy

that runs from lower level deficiency needs to higher growth needs.

Physiological needs: These needs relate to the basic survival needs which allow

for continued existence, such as food, water and adequate shelter.

Safety needs: These needs relate to physical and psychological safety from

external threats to our well being, such as the need for security and protection.

These needs take effect when physiological needs have been met.

Social needs: This level of need relates to the need for company and

companionship, and for a sense of personal belonging. The needs for personal

contact and interaction with other people tends to be triggered when physiological

and safety needs have been met.

Esteem needs: This is the first level of growth needs, which relates to the need

for a sense of self-esteem and a feeling of personal self-worth. They become salient

once the first three levels of deficiency needs have been satisfied.


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Self-actualisation needs: The final level in the hierarchy refers to the need for

personal growth, and the development of ones full potential and capabilities. This

need level is different from others in that such needs can rarely be fully satisfied or

fulfilled. The more they are satisfied the stronger the needs become.

Actualisation

Esteem

Social

Safety

Physiological

Part B

Maslows theory is a general theory not specifically designed for organisations.

However it has relevance to understanding peoples motives within organisational

settings.

It highlights that different levels of needs may take precedence at different times in

peoples lives. It presents these needs in a form people can identify with and easily

understand. It also takes a dynamic view of need satisfaction, in that when one

need is satisfied, others in the hierarchy become stronger.

It also highlights that once a need is satisfied, it tends to be less of a motivating

factor in a persons life.


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Overall the theory has wide application and most people can identify with its

suggestions. It enhances managers understanding of the motivational variables at

play with people in organizations.

Part C

The theory is universalistic in nature. It assumes that people move in a sequential

manner from one level to the next. However in reality people may have a number

of unfulfilled needs at various levels of the hierarchy at the one time.

The theory does not reflect the how the motivational process is played out. People

may construct or perceive their needs differently. It does not reflect how

expectancy and equity interact with peoples needs and it makes no mention of the

impact of peoples perceptions of power differentials.

Maslow, himself, warned that the model takes into account only basic needs.

Other needs, such as the need for aesthetics, exist outside the hierarchy.


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Section B

Question 2

Part A

Any product or service you consume is generally made available to you through a

marketing process that addressed four vital ingredients.

These four factors are known as the Marketing Mix, which can be defined as the

strategic combination of product decisions with decisions regarding packaging,

pricing, distribution, credit, branding, service, complaint handling and other

marketing activities.

Product. Designing products of high quality and high-perceived value added to the

consumer is a vital part of any business. Marketers must communicate with

consumers and constantly adapt the product to changing market demands.

Many factors have to be considered at the product level

- the range of products to satisfy the different segments of the market- the intangibles as well as the tangibles consumers evaluate when buying a

product

- Product differentiation how to emphasise the products distinguishingcharacteristics

- differences between consumer and industrial markets- branding

Price is a critical factor of the marketing mix, that is, it is the only factor that

produces revenue. Many firms base their pricing policy on cost factors alone, and

do not take into account the dynamics of the market. In the market a product may

be successful at a certain price but not at another.


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There are many factors, which determine the price of a product

- market structure- economic conditions- competitive conditions- type of product perishable or long lasting- type of customer disposable income bracket- strategic objectives- legal issues- cost- price elasticity

Promotion, relates to all communications with markets and consumers, including

promotional activity, selling and sales, and marketing research. The design of

effective products, pricing and distribution strategies are redundant if the

communication strategy is not well designed or the selling and sales strategy is not

integrated.

The key issues to be addressed within Promotion and Communications are as

follows:

- Promotion and promotion mix- The Marketing Communications Process- Marketing Research

Promotion is defined as an attempt by marketers to persuade others to participate

in an exchange with them. The promotional mix is the combination of tools

marketers use to promote their products and services and is made up of the

following

- personal selling- publicity- public relations- sales promotion


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- advertising- word of mouth

Place, or distribution. Critical to the marketing process is the ability to physically

get the product from where it was produced to a place where the customer can

purchase, view or consume it most conveniently.

This involves setting up the most appropriate distribution channels, modes of

transport, storage facilities and the management of a network of relationships withwholesalers and retailers.

The key issues in distribution from a marketing perspective are

- utility and marketing intermediaries

- physical distribution and logistics- channels of distribution

Part B

In this section students should elaborate on the importance of the different

elements in the marketing mix for two products they use regularly.

For example, they may wish to think about products such as laptops and basic

foods and explain the elements of the mix considered most relevant to products in

these categories.

Part C

Market Segmentation

Market segmentation consists of breaking the total market into segments that

share common properties, such as the common wants of consumers, or their

purchasing power, geographical location, or buying attitudes or practices. The


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ultimate degree of segmentation is customised marketing where sellers design a

separate product for individual buyers. Airline manufacturers such as Boeing

customise products. However for smaller businesses it is not profitable to customise

products at the individual level, so manufacturers identify classes of buyers who

differ in their broad requirements.

Typical segmentation variables include:

Demographic - Age range 18 to 30, Gender male or female; Geographic - Location urban, rural, national or international; Family life cycle single, married no children, married young children, etc.; Socio- economic status professional, managerial, skilled workers, unskilled

etc.;

Psychographic- Activities (leisure, sports, entertainment, shopping behaviour)- Interests (role perceptions, levels of social interaction)- Opinions (on topics such as politics, sports, social and moral

issues)

Benefits include a better matching of customer needs, targeting of customer

groups, tailoring of strategies and opportunities for growth.

Market Positioning.

Positioning is the act of designing the companies offering and image to occupy a

meaningful and distinctive place in target customers minds. The essential principle

of competitive positioning is that it is concerned with how customers in different

parts of the markets perceive the competitive companies, products / services or

brands.

A products positioning is the way it is defined by consumers on important

attributes it is the place the product occupies in the consumers mind.


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Question 3

Part A

Mintzberg suggests, that rather than look at the functions of the manager, it is

more beneficial to view the key roles that they play. He isolated ten roles common

to all managers and grouped them into three major categories; interpersonal,

informational and decisional.

Interpersonal Roles

More than anything else management jobs are people intensive. Most managers

spend between 60% and 80% of their time in face-to-face communication with

others. If management is getting things done through people, managers need to

be good at interacting with individuals and teams. As a Figurehead, the manager

handles ceremonial and symbolic activities for the organisation. In the Leader role

managers motivate and encourage workers to achieve organisational objectives.

They need to be able to read situations, provide direction, persuade and influence.

In the Liaison role managers deal with others outside their units.

Informational Roles

Not only do managers spend most of their time in face-to-face contact with others,

but they spend time obtaining and sharing information. Indeed, Mintzberg foundmanagers spend a considerable amount of their time getting and sharing

information with others. In this regard management can be viewed as gathering

information by scanning the business environment and listening to others in face-

to-face conversations, and then sharing this information with people inside and

outside the organisation. In the Monitor role, managers scan the environment for

information, actively contact others for information, and interpret how it impacts


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the business in terms of opportunities and threats etc. The Disseminator and

Spokesperson roles refer to the transmission of information to others who require

it, inside and outside the organisation, respectively.

Decisional Roles

Time spent obtaining and sharing information is not an end in itself. The time spent

obtaining information is useful if it helps in making good decisions. Managers need

to balance competing interests and choose among alternatives. Through decisional

roles, strategies are formulated and implemented. The Entrepreneur role involves

the initiation of change, thinking about the future and devising ways to deal with

current and future problems. The Disturbance Handler role involves the

resolution of conflicts between individuals and teams. The Resource Allocator

involves making decisions on how to allocate resources to meet stated objectives.

The Negotiator role refers to the formal negotiation and bargaining activity

necessary to attain appropriate outcomes for the managers area of responsibility.

Part B

PEST analysis is a technique for analyzing the macro environment of an

organization under the following headings political and legal, economic, socio-

cultural and technological environments.

Analysis of the Political and Legal environment involves considering the impact of

changes in Taxation requirements, Safety regulations, Consumer protection

legislation, Parties in Government, EU Developments etc.

Consideration of the levels of demand within the economy, interest rates, foreign

exchange rates, grants, inflation etc. are indicative of the economic variables to be

monitored and considered.


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The Socio-Cultural environment encompasses issues of a demographic nature, such

as, changes in the structure of the population age, gender, income distribution,

emigration etc.; and issues of a cultural nature, such as, language, customs,

religion etc.

The Technological environment includes consideration of the threats and

opportunities arising from IT and scientific developments in various areas.

PEST analysis is an important part of the environmental scanning process whichfeds in to strategy formulation.

Part C

Despite the significant benefits associated with planning, planning is not a cure-all.

Plans wont fix organizational problems. In fact, many management authors believe

planning, if not done properly, can harm companies in a number of ways:

It may impede responsiveness to change. Sometimes people become so committed

to achieving the goals set forth in their plans, or on following the strategies and

tactics spelled out in them, that they fail to see that their plans arent working or

that their goals need to change.

Some times plans may create a false sense of certainty. Planners may feel that

they know exactly what the future holds for their competitors, their suppliers and

their companies. However, all plans are based upon certain assumptions about

environmental factors over the planning period. If the assumptions turn out to be

false then plans based on them are likely to fail.


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Question 4

Part A

Change is so pervasive in business today that a whole new branch of management

theory has evolved, concerned with the management of change. Theorists of

change management have used different strands of thinking in the social sciences

concerned with how individuals and organisations react to change.

They have developed many models of organisational change, among them Action

Research, LEWINS 3 Step Planned Change Models, Kotters (Eight Stage) Change

Process model etc. Common to most is the recognition of the need for phased

strategies to unlock the inertia of the status quo, usually involving research,

feedback and adjustments; most models also emphasise the need for continuous

monitoring of the results of the change process.

There may be resistance to change from organisations or individuals. Individuals

may feel their working habits are being disrupted or that they are not being

adequately compensated etc. Areas of the organisation may feel their expertise or

power is being undermined or their needs are being ignored and so on.

A well managed change process should include a strategic picture of its aims, a

coherent set of phases, the maximum involvement of those most closely affected,

an emphasis on securing the commitment of everyone involved and perhaps a

change in the behaviour of employees and in the culture of the organisation.

Organisations of the future are likely to be conducive to the flow of information and

strategy from the bottom up as well as vice versa, and they may well be able to

cope and even thrive on continuous change.

According to social psychologist, Kurt Lewin, change is a function of the forces that

promote change and the opposing forces that slow or resist change. Change forces

lead to differences in the form, quality, or condition of an organisation over time.


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By contrast resistance forces support the status quo, that is, the existing conditions

and organisation.

Resistance to change is caused by self-interest, misunderstanding and distrust and

a general intolerance for change. People resist change out of self-interest because

they fear the change will cost or deprive them of something they value. For

example, resistance to change might stem from a fear that the changes would

result in a loss of pay, power, responsibility, or even perhaps one's job.

People also resist change because of misunderstanding and distrust; they don't

understand the change or the reasons for it, or they distrust the people, typically

management, behind the change. Resistance isn't always visible at first, however.

In fact some of the strongest resisters may initially support changes in public

nodding and smiling their agreement, but then ignore the changes in private.

Management consultant, Michael Hammer, calls this deadly form of resistance the

kiss of yes.

Resistance may also come from a generally low tolerance to change. Some people

are simply less capable of handling changes than others. People with a low

tolerance to change feel threatened by the uncertainty associated with change and

worried that if they won't be able to learn the new skills and behaviours needed to

successfully negotiate the change in their companies. Because resistance to

change is inevitable successful change efforts require careful management.

According to Kurt Lewin, managing organisational change is a basic process of

unfreezing, change intervention, and refreezing. Unfreezing is getting the people

affected by change to believe that the changes are needed. During the change

intervention itself, workers and managers change their behaviour and work

practices. Refreezing is supported by reinforcing the new changes so that they

stick.

Given the choice between changing and not changing, most people would rather

not to change. Because resistance to change is natural and inevitable, managers


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need to unfreeze resistance to change to create successful change programmes.

The following methods can be used to manage resistance to change; education,

communication, participation, negotiation, top management support and coercion.

Part B

Group / Team development is not random, but evolves over definitive stages. The

five generic stages of development are forming, storming, norming, performing andadjourning.

Forming

This stage of team development is characterised by initial orientation and

acquaintance. The team is formally introduced and given its task or brief. Team

members typically start testing the water with other team members to

understand; What exactly is required from them? What the other team members

are like etc.? The first steps in jockeying for position emerge at this stage. The

team leader should focus on the facilitation of social interaction and the clear

statement of objectives and roles / requirements.

Storming

This is a stage of team development in which individual personalities and roles

emerge, and the potential for conflict or misunderstanding of individual roles

becomes an issue.

At this stage a team may break into factions if not properly managed, and this has

a serious effect on the overall cohesiveness of the group. At this stage a team

leader must ensure healthy participation by all members, to ensure that ideas are

proposed, disagreements are minimised, and conflicts are dealt with appropriately.


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Norming

This is the stage of team development when many of the conflicts that emerged

during the earlier stages are resolved and team harmony and unity evolves. (e.g.

boundaries are clearly established). A team leader at this stage should focus on the

team rather than individual performance and assist in the clarification of team

roles, norms and values if any confusion or conflict still exists.

Performing

The focus moves from the assurance of team cohesion towards problem solving and

the accomplishment of the task at hand, although the socio-emotional roles should

not be discarded. The team at this stage is highly co-ordinated and focused on their

individual roles. Team leader activity is heavily focused on the facilitation of high

performance.

Adjourning

In this stage of team development members prepare for the teams disbandment.

The brief of the team has been met and is put to bed. Various emotions prevail at

this stage from complete satisfaction / elation to depression. The team leader is

focused on task accomplishment and reward where appropriate.

Part C

Charisma is a Greek word meaning gift from God. The Greeks saw people with

charisma as divinely inspired and capable of incredible accomplishments. German

Sociologist Max Weber viewed charisma as a special bond between leaders and

followers. Weber wrote that the special qualities of charismatic leaders enable them

to strongly influence followers.

Charismatic leaders have strong, confident, dynamic personalities that attract

followers and enable the leaders to create strong bonds with their followers.


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Followers trust charismatic leaders, are loyal to them, and are inspired to work

toward the accomplishment of the leaders vision.

Charisma therefore is a very strong form of referent power possessed by relatively

few individuals. It is based on an individuals ability to influence others through

their own inspirational qualities rather than through any position power.

Charismatic leaders tend to share personality traits such as a strong need for

power, self confidence and strong beliefs in their own ideas.


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Question 5

Part A

A product is a physical good, service, idea, person, or place that is capable of

offering tangible and intangible attributes that consumers find necessary or

worthwhile to exchange money or some other unit for. Factors to take into

consideration when managing the product element of the marketing mix can

include size, features, quality, branding, benefits, packaging and presentation.

All products have a life cycle - this model includes four stages through which

individual products develop over time and extends from introduction to

obsolescence. The pre-launch stage (as seen in diagram below) refers to the

marketing activities prior to the launch or commercialisation of the new product.


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Introduction

Low sales & high costs as the product is being introduced to the market Competition is limited Customer type is known as an innovator Core objective is to generate awareness among the target audienceGrowth

Rising sales, costs declining and profits being achieved Growing number of competitors entering the market Customer type is known as an early adopter Core objective is to increase demand in order to increase market shareMaturity

Sales & profits reach their peak, cost per customer is low Competition is intense Customer type is known as middle majority Core objective is to maximize profit and maintain market shareDecline

Sales & profits decline Number of competitors have reduced Customer type is known as a laggard Core objective is to milk the brand

Part B

The PLC concept helps interpret product and market dynamics and can be used for

planning and control.

Not all products follow the product lifecycle. Some products are introduced and die

off quickly; others stay in the mature stage for a long time. Some enter the decline

stage and are then cycled back into the growth stage through strong promotion or

repositioning.


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Whilst the exact shape and length of a products lifecycle may not be known in

advance, the companys task is to recognise the lifecycle pattern of its offerings and

to devise appropriate marketing strategies for its portfolio.

Some criticisms of the concept have been put forward:

1. Duration of the PLC stages is unpredictable2. Difficult to tell which stage the product is in3. Not marketing orientated4. Misleading objective and strategy prescriptions5. PLC pattern is the result of marketing strategies rather than an inevitable

course that sales must follow

6. Not all products follow the classic PLC curve

Part C

Market-skimming pricing occurs when prices are set high initially when a new

product is introduced to the marketplace with a view to gradually lowering its price

as the product moves through the stages of the Product lifecycle (PLC).

It is suitable as a strategy when the products quality and image justifies its higher

price, demand is likely to be price inelastic and there is a realistic perceived value

in the product.

Market penetration pricing is a strategy employed by a firm seeking to extend its

market share. Certain conditions favour its use.

- Elastic demand- The offering is not unique- No distinct price-market segments- Volume is critical to the business strategy


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professionals, and experts to develop a working approach to, and set of

specifications for the design.

Construction

MIS is a highly specialised activity that combines both art and logic. Systems

construction involves selecting appropriate computer equipment and creating/

buying the specific computer programs that are needed to meet system

requirements. Even the best designs require numerous interdependent decisions.

Large project teams must co-ordinate closely to ensure that the system

components will work together flawlessly.

Testing and Implementation

Implementation involves extensive User-IT co-ordination as the transition is made

from the predominantly technical, IT-driven task of construction to the user-driven

management of the completed system. Whether the system is bought or made, the

implementation phase is very much a joint effort. Extensive testing, which disrupts

normal business operations, must be performed; training is required, work

procedures and communication patterns likewise are affected.

It is essential to the realisation of the benefits of the new system that these

changes are carefully managed.

Operations

In many systems formal procedures are in place that specify that operating

personnel must sign-off on a new system. The specific criteria for testing and

approval are defined as part of the system design phase. This control mechanism

distributes responsibility and authority for systems development and serves as an

important quality-control mechanism.


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After the system is built and installed, measures must be developed to assess

actual service delivery, and its cost effectiveness and quality. While many believe

post-implementation audits are inadequate for all systems projects. In recent

times increasing attention is being focused on the lack of control of end-user

developed systems.

Part B

Packages are available immediately to use whereas custom-built system may takemonths or years to develop.

Packages are generally well established and proven products, whereas custom-built

systems must be extensively tested and inevitably have teething problems when

implemented.

Packages come complete with full documentation (user guides etc.) whereas such

information must be specially prepared for each custom-built system.

Packages are generally the result of considerable investment of time, money and

professional expertise by package developers.

Training and support can be obtained from the package supplier rather than having

to be provided from internal resources.

The better packages undergo continuous enhancement and improvement by their

developers and the purchaser has access to a sequence of upgrades over the life

of the package.


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Part C

Contingency planning (also called Disaster Recovery Planning and sometimes

Business Continuity Planning) focuses on plans for the restoration of

communication and computing services after they have been disrupted (e.g. after a

fire or major security breach).

These plans are necessary as we recognize that no security is going to be 100%fool proof. A UPS system, for example, is an Uninterruptible Power Supply that acts

as a backup should there be a power cut. Essentially a very large battery, the UPS

would have a certain amount of power and should provide enough time to properly

power-down the system so that data is not lost. Other elements of a contingency

plan would include:

- The importance of proper back ups- Alternate work spaces (or hot sites, with spare IT equipment)- Contact lines (phone numbers, e-mail lists, etc.)- A proper and well practiced evacuation plan.

Question 7

Part A

Cash is the lifeblood of any business. Profitability is a close second. If we are to

survive and thrive we need to have mechanisms to monitor these two important

dimensions of our activities.

Liquidity is generally monitored through short term cash budgets and profitability

via monthly accounts. It is vital that we plan our cash requirements and ensure we

have funds on hand to meet our needs. Likewise it is vital that we know the

sections of our business that are working (e.g. In a hotel are each of the


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following segments profitable accommodation, food, bar etc) and those that are a

drain on our resources.

Many of the activities in our business could easily run out of control. Food, for

example, could be pilfered or wasted.

A system of budgetary control is a useful way to monitor a firms profitability and

liquidity.

Budgetary control refers to the analysis, recording and reporting on the activities

and financial well being of the organisation. It involves forecasting likely outcomes

of plans in an attempt to control the future for the organisation. It is a bread and

butter activity for the financial team, in that it ensures effective monitoring of

current activities, and gives invaluable information about performance in relation to

plans.

Financial control of activities is vital to all organisations. Many smaller firms, for a

variety of reasons, such as lack of expertise or over-trading, opt for informal rather

than formal systems of control. This can be catastrophic for the small firm as the

true performance or profitability cannot be gauged.

Budgetary control requires that realistic profit and loss and cash flow forecasts are

prepared at the beginning of the period and that they be updated normally on a

quarterly basis as the year progresses. Due care and consideration is required in

interpreting variances from budget to ensure managers are held accountable for all

those matters that fall within their sphere of control

The cash flow forecast may be used to determine if company borrowing is required

or if surplus funds are likely to be available for re-investment. Comparing actual

performance against forecasted profit and loss account projections allows

management to monitor margins on a regular basis and to take appropriate

corrective action before deviations become too serious.


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Comparisons against budgets may be done in a number of ways but ideally it

should be integrated with the system of responsibility accounting in place in the

company by department etc. Indeed it may be wise to prepare financial reports

on a weekly basis should this be deemed necessary. It is also important to

incentivise those with the authority to make decisions. (e.g. in the case of a

restaurant one may link the Chefs bonus to the margin earned by the Food section

etc.)

At a higher level rolling budgets should be in place whereby outturns for the year

are updated on a quarterly basis.

Part B

Bank Borrowings

Commercial banks extend short-term facilities mainly in the form of overdraft

arrangements. Generally commercial banks reserve the right to cancel overdraft

facilities at short notice. In practice it is probably not to the banks advantage to

pursue this policy to the letter, as they might needlessly force the borrower into

financial difficulties.

Utilising bank facilities in a proper manner will ensure the maintenance of a flexible

and comparatively cheap source of finance. Bank borrowings are flexible in that

interest is only payable on the amount outstanding and not on a fixed advanced

sum as is the case with the borrowings from other financial institutions. Bank

borrowings are also comparatively cheaper than long-term loans due to the fact

that the risk involved is smaller given that the lending period is shorter.

The security required by banks differs depending on the risks involved. They might

require personal guarantees in the case of a private company or, alternatively,

floating or fixed charges on the assets of the company, or indeed, both.


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Bank lending rates are normally set one to two percent above the bank rate. Bank

lending rates can therefore fluctuate upwards or downwards during the period in

which the monies are advanced. This can be an advantage or a disadvantage

depending on the direction of the change when compared to other forms of

advances made by financial institutions at fixed interest rates.

Trade Credit Taken

Those companies experiencing difficulties in acquiring bank-borrowing facilities will,

if possible, take greater credit by delaying payments to the suppliers of their goods

and services. However, this is not to say that companies can use this form of

finance recklessly. There are certain costs involved. Normally companies supplying

goods will offer a discount for prompt settlement of invoices, e.g. 1% if settlement

is made within one month of the date of the invoice of the goods. 1% per month is

equal to a cost of 13.7% p.a. In periods of low interest rates this form of finance is

the most expensive. In times of low interest rates there is more incentive to settle

accounts with creditors within the credit period allotted.

A company can only use this source of finance to a certain degree as misuse of

credit facilities offered, in the long run, may result in suppliers refusing to supply

the goods or services required. This can be a critical factor with companies that rely

heavily on a limited number of suppliers.

Part C

Ordinary Shares

Ordinary shareholders are members of the company holding voting rights. They

own a share of the companys assets and a share of any profits earned after all

prior claims have been met.


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Ordinary shares or Equity, as they are termed, are a permanent source of finance.

Ordinary shareholders provide seed capital to allow the business to develop and

grow. There are no fixed repayment or interest charges to be paid in the case of

equity. Equity also provides the owners with authority to influence policy and

direction.

Equity may be raised through offers for sale, public issues, placing, tender or rights

issues

Equity is generally regarded as an expensive source of finance when compared to

loan finance, as the dividends to equity holders unlike loan interest are not tax

deductible. Another disadvantage of equity is the potential for change in the

balance of control between existing and new shareholders.

Preference Shares

Preference shareholders have the right to a fixed dividend rate which is paid before

anything can be distributed to ordinary shareholders. They may be cumulative or

non-cumulative. With non-cumulative preference shares, when profits are poor and

no preference dividend is paid in the year, the dividend is foregone forever. In the

case of cumulative preference shares previously unpaid dividends can be recouped

in future years. In order to make the preference shares more attractive, they may

be entitled to some further participation in the profits over and above their fixed

rate of dividend, after a certain rate of dividend has been paid to the ordinary

shareholders. This type of preference share is called a participating preference

share. Preference shares may also carry the right to priority with regard to

repayment of capital in the event of a company being wound up. A company may

issue redeemable preference shares which it can redeem at some future date. In

setting the dividend rate applicable to preference shares attention should be given

to current and anticipated future interest rates. Unlike interest payments,

preference dividends are not allowable deductions for taxation purposes. For this

reason they hold few attractions for the majority of companies and tend not to be

sed as a so ce of finance

Documents

Business Management Sample Paper 1