Macro Economic, Seta & 3 Star2

8/8/2019 Macro Economic, Seta & 3 Star2

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MACRO ECONOMIC

AWARENESS

&

YOUR QUALITY MANAGEMENT

SYSTEM

The New Boost For Your Business

Expiry Date : 29 February 2005 Revision date : 30 March 2005 1


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1. THE BUSINESS ENVIRONMENT

Before we deal with the issue of quality management, it is important to have a basic understandingof economics and the financial world.

Introduction

The business world is a system of individuals and organisations, which, in a market economy,

produces goods and services to meet peoples needs. The single most important characteristic ofthe business world as it is seen in the so-called First World or the developed countries of the West

and Asia, is the freedom of individuals to start or close a business enterprise, to buy and sell shares

in businesses and to produce, within limits, any product or service the market requires.

Accordingly, the developing world aspires to this level of economic interaction.

This economic system, in which individuals themselves decide what to produce, how to produce it

and at what price to sell their products, is called a free-market system or a market economy. This

system is also followed in the South African economy. It is a complex system comprising varioustypes of small and large business organisations that mobilise the resources of the country to satisfy

the needs of its inhabitants.

Each and every individual within a countrys economy a form part of, and is affected by, the

economy. Everybody uses money, acts as a consumer and relies on the receipt of income to financepurchases. As changes such as inflation rising or interest rates falling occur within the economy so

each individual is affected. However, it is often the collective activities of individuals that drive

changes in the interest rate or inflation of the country. In looking at the role of the individual and

the business within the economy, the concept of quality and quality control is very important, asthis is the pivotal point on determining improvements in productivity. The concept of quality is

about applying the principle of continuously engaging in self analysis, self measurement andaligning of behaviour to ensure that original intentions of quality are met. By constantly ensuringthat we deliver what we promised, we automatically align ourselves to economic targets. This in

turn enables higher profits and higher GDP per capita.

Issues such as taxation, price setting by the state and levels of unemployment affect us all. For the

producer, issues such as trade unions, costs of imported machinery and nationalization are

important considerations. These factors affect us all by influencing the cost of every product we

consume as well as every other aspect of our daily lives. Similarly, economic decisions we make inour private and business lives do not affect our lives alone but that of many others. For example,

the decisions we made as individuals to all buy cell phones, created an industry and a demand for

mobile solutions beyond anyones expectation level!

Example

A retail company, for example: Pick n Pay, provides a much needed service to the community. Bymeans of distribution, job creation and needs satisfaction. The retail company itself pays salaries to

employees who use this to buy products. The retail company itself is a buyer, thus stimulating

demand for consumables. This in turn leads to stimulus of production, which in turn causes another

affect on economic activity elsewhere.



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1.2 WHAT IS ECONOMICS?

Definition

Economics is as old as the human race: it is probably the first art which man acquired. When some

of the cavemen went out to hunt while others remained to defend the fire, or when skins weretraded for flint axes, we so the beginning of economics. Therefore economics is a study of the

economic problems and variables of the community as a whole, with the improved well-being of

the community as its preconceived goal.

Traditional economist describes the term economics as: the study of how humans use their

limited resources to their disposal in order to satisfy as many of their endless needs and desires aspossible. Formally stated, economics is the study of man's behaviour in acquiring and utilizing

the limited factors of production in order to maximize utility .

Economics studies only a small section of human behaviour and is, for example not concernedwith what makes a criminal mind. Economics is limited to study human decisions collectively -

macro emotions in buying and selling of those material goods and services that satisfy their needs.

It is the decisions humans make which are of a material nature, which is of interest to economists.These include careers, what goods to buy, when and where to buy and what to do with savings, on

an individual level. Questions such as how many labourers to employ, to expand or not, and the

role of trade unions from the producers point of view need to be answered. What taxes are levied,levels of education, the access to private ownership and the protection of individual rights as well

as the availability of hospitals, roads and other are looked at from a national point of view.

The concept of Quality in economics enables societies to measure standards and set targets for

improvements. This creates a cycle of continuous improvement.

Example

There is an economic aspect to almost any topic we care to mention education, religion,

employment, housing, transport, defence, etc. By constantly looking at how to improve the

national education system, we serve the principle of quality.

1.3 KEY CONCEPTS

The concept of the business cycle refers to the amount of economic activity within a country,measured by the GDP (production) within a country. Economic activity is not stable all the time,

but constantly fluctuating. During periods of high economic activity - known as a boom or

upswing, economic growth increases (production) and is often accompanied by increased

spending, increased investment and employment. During periods of reduced (or low) economicactivity, unemployment increases while investment and growth decreases. This is known as a

recession or a depression if it is particularly severe and it continues for an extended period of time.



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How interest rates are determined: Supply and demand of money, determine the interest rates

being charged. The interest rate is the cost of lending money. The interest rate is monitored by theSouth African Reserve Bank (SARB). Money is offered at a particular interest rate by the financial

sector. If potential borrowers are of the opinion that the rate is too high, they will delay their

application for credit until the cost is less.

The prime-lending rate is the best overdraft rate paid by the best clients of the bank. The primerate is also that interest rate quoted the most, thus the most representative rate. All other interest

rates move with the prime rate.

The importance of saving: If people deposit money in financial institutions, that money is not

spent on goods and services. This is thus reducing the inflationary potential within the economy asthat money does not chase goods and services. The savings will also have an effect on the prices,

as demand is less. This money so saved, is lent out by financial institutions to other enterprises for

expansion. For the enterprise (interest) the cost of capital is a vital component of total costs.

The BA rate stands for the Bankers Acceptance rate. A BA is aprivate banknote that guarantees

the holder repayment of the sum displayed on it. The bank has thus accepted a deposit (of usuallyR250 000 or more) from an investor for a specific period of time, (usually ninety days), at a

specific interest rate which will be paid at the end of the period.

What happens if banks lend out more money than they receive? Banks go the South African

Reserve Bank -SARB (the lender of last resort) and borrow from the SARB at the official bank

rate. (The official bank rate is 3% less than the prime rate, which accounts for the profit of the

bank.) This situation is known as a shortage in the money market. Thus the bank rate affects allinterest rates charged to bank clients, not only the prime rate. In this way, monetary policy can

affect the economy as a whole.

The importance of the gold price: Gold is SA's biggest export item (approximately 30%), hence ithas a major effect on the South African economy. If the gold price or exports are low, downward

pressure is put on the Rand, causing upward pressure on interest rates.

The exchange rate: The exchange rate refers to the value of one currency in terms of other

currencies i.e. the Yen to the Mark or the Dollar. It thus refers to the supply and demand for Rand,

which is used for exports, investment, imports and dis-investment. If there is an excess of Rands inthe market, the value will decrease, leading to a decrease in the exchange rate.



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Quality: It is the degree to which a set of inherent (inborn) characteristics adheres/fulfils to

predetermined requirements. Or in other words, how does a situation measure up to its own

intentions?

Quality Control: It is the degree to which outputs are measured against predetermined

requirements. (Quality)

TQM: Total :Quality Management refers to the collective activity of implementing, monitoring

and constantly improving on, a quality system.TQM is about the notion thatHuman behaviour

can be facilitated to lead to increasing efficiency. This in turn leads to higher profitability whichin its turn leads to a reduction in poverty.

QMS: A quality Management System, or QMS is an integrated set of systems and procedures

aimed at improving quality in an organisation. A Quality Management System (QMS) is the wayyour organisation directs and controls those business activities which are associated with quality. It

consists of your organizational structure toghether with the planning, processes, resources and

documentation that you use to achieve your quality objectives, to provide improvement of your

products and services and to meet your customers requirements.

ISO: International Starndards Organization developed the ISO system, which is a of standards towhich a quality management system (QMS) has to conform.



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1.4 THE ECONOMIC CYCLE

Definition & background

One of the basic principles in economics is that if I spend R1.00, somebody else earns it. From this

economists have developed the economic cycle to illustrate how money flows between people inexchange for productive services, such as labour, or goods and services designed to satisfy human

needs. In the most simple case exchange takes place between the individuals who supply theirlabour services to a firm, or group of firms, in exchange for a wage and in turn use these wages topurchase goods and services from the producers. The economic cycle is thus a never ending

activity between the sectors of the economy. These sectors are also discussed in 1.5.

Over and above the individual, who acts both as consumer and supplier of the production factors,and business organisations, who employ the production factors in the creation of goods and

services to satisfy mans needs, the state and foreign sectors also play an important part in the

economy of any country. For example, government spends large sums of money on just abouteverything from stationary to travel and accommodation, thus acting as a huge consumer. Through

macroeconomics the role of the state is demonstrated in its taxation policies, their ability to affect

disposable income of consumers, their ability to enforce laws influencing and regulating theeconomy.

The mobility of labour, pricing structures, the availability of credit and restrictions on theproduction, consumption and importation of certain commodities are influenced by state policy,

while state expenditure will play an important part in determining the levels of skill of the labour

force, the availability of health care and may result in the creation of jobs, and incomes for

productive use of the scarce resources of the' country.

Financial institutions act as vital intermediaries between those groups who have surplus funds and

those with a shortage. For South Africa, the foreign sector supplies technology in the form of better

production techniques and consumer goods giving a better life-style to consumers. Having aQuality Management System implemented ensures better performance of producers and a better

life-style for Consumers. Quality management makes it easier to obtain capital for the erection ofmines and factories to produce wealth, to create jobs for the population, and to stimulate an export

market for minerals, agricultural produce and manufactured goods produced in our country.



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Figure 1.1: The economic Cycle.

In order to better understand the interrelationships that exist between the different sectors of the

economy we are going to gradually assemble different parts of a model. In our case our model

wont be of a little plastic airplane but rather the parts of our model will be the different parts, orsectors of the economy. If we can correctly place each sector in its place, in relation to all the other

parts of the economy, we will have a far better idea of the functioning of the real world economy.

Like the plastic airplane our model will only be a representation, of a real world economy, and the

individual student, manager, consumer and politician must understand that the real world is far

more complex than any model can describe with one hundred percent accuracy. It must always be

remembered that humans has yet to discover all the answers. For this very reason, we need toensure that we drive the concept of constantly looking for ways to improve everything we do.

As such Quality Management ensures that the continuous cycle is constantly reviewed andmeasured against predetermined standards. This enables business to improve all the time.


MARKET FOR FACTORS OF PRODUCTION

HOUSEHOLDS BUSINESS

ENTERPRISES

MARKET FORCONSUMER GOODS

Income Expenditure

IncomeExpenditure

Final GoodsAnd Services

COMMODITIES MONEY

Factors of Production


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1.5 SECTORS WITHIN THE ECONOMY

Introduction

Parts of an economy are usually referred to as sectors of that economy. For example, the

agricultural sector is part of the economy that producers agricultural commodities.

1.5.1 The Government (State)

The termgovernmentis used in economics in a broad sense to include all public officials, agencies,

government bodies, and other organisations belonging to or under the direct control of federal

state, and local governments. For example, in the United States, the term governmentincludes,among others, the president, the Federal Reserve System, city councils, commissions and

regulatory bodies, legislative bodies, and police forces. In South Africa, the term government

includes all levels of national and provincial parliament, municipalities and other state controlledagencies and companies. The state plays an important role in the economic cycle by means of the

expenditure of the State and how the expenditure is financed whether by loans or through taxes.

The concept of a Quality Management System in the Government is essential in all sections andsectors to insure that products, services and management is correctly delivered against the original

plan or standard. Thus, to ensure that performance is in line with expectation.

Government as a player in the economic cycle: The state plays an important role in the economic

cycle by means of the expenditure of the state, and how the expenditure is financed whether by

loans or through taxes.

1.5.2 Producers (Business Firms)

A firm or a business is defined as the unit that employs factors of production to producecommodities that it sells to other firms, to households, or to government. A business firm is often

called a producer. Elementary economic theory gives firms several attributes. Business firms arethe principal users of factors of production. Having a Quality Management System in place ensures

the best managed services and products. In factor markets where factor services are bought and

sold the roles of firms and households are thus reversed from what they are in commodity markets:

In factor markets, firms do the buying and households do the selling. The business uses theeconomic resources from the households and after the transformation process, sells it to the

households in the form of goods and services for the households to consume/use.

Business Organizations (Firms): The business uses the economic resources from the households

and after the transformation process, sells it to the households in the form of goods and services forthe households to consume/use.



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1.5.3 Consumers (Households)

A household is defined as all the people who live under one roof and who make joint financial

decisions or are subject to others who make such decisions for them. The members of thehouseholds are often referred to as consumers because they buy and consume most of the

consumption goods and services.

The households offer their resources to the organization to be utilised. For example, the household

offers labour, capital (in the form of savings) and in return the households receive an income e.g.

salary, interest. This income that the household receives can be used the way that they see fit,either spending or saving it.

Households: The households offer their resources to the organization to be utilised (labour, capital)and in return the households receive an income (salary, interest). This income that the household

receives can be used the way that they see fit, either spending or saving it.

1.5.4. Foreign Sector

It is widely accepted that no country can function without obtaining goods and services fromforeign countries. The foreign sector can thus be a source or destination of goods and services.

Exports (X) are when goods and services are sold to other countries, and in return, the business,

receive money. This money then flows into the economic cycle, for the goods, which were sold.

Exports from South Africa include minerals such as gold, diamonds and platinum.

Imports (M) happen when business buy goods from foreign countries for use in South Africa.

Goods are thus received which have to be paid for. Money is then sent out of the country to pay forthese goods. If export (X) increase, it means that we are able to sell our goods overseas, thus

boosting national income. More money is thus flowing into the country. Production has to beincreased, and this leads to increased work opportunities within this country as well as an increasein the national income.

However, as we have seen, certain goods are imported while others are exported, thus M (imports)

must be excluded and exports (X) included if we wish to determine total production within the SAeconomy. Exports, which are made here but sold elsewhere, must thus be added while imports,

which are made elsewhere but which are bought here must be subtracted.

GDP = C + G + I + (X - M)

The economic cycle thus shows the flow of money in the economy, and by looking at the various

components of the cycle; we are able to determine what the effect will be should certain events

occur. Often, foreign companies will only purchase South African products if such manufacturercan ensure ISO Standards in their Production. The ISO standard give foreign companies the

assurance that the manufacturer operates in accordance known international benchmark.



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1.6 FLOWS IN THE ECONOMIC CYCLE

Two main flows can be identified in the economic cycle. A flow of goods and services frombusiness sector to the households, and the flow of resources to the business sector. The households

thus provide capital and labour, while the business sector produces various products.

The flow of money: The money is for the goods and services, which are purchased from thebusiness sector, or it can be seen as income for the households in the form of wages or interest.

Expenditure (C) is on goods and services, which have been produced by the business sector. ThusC = Y = the value of production (P). The value of production (P) can be determined by means of

calculating the cost of the various production factors such as wages, rent and interest. We have said

that expenditure (C) = Income (Y). It is therefore implied that everyone spends all of his or herincome on consumables, which is not necessarily true. A certain amount may be set aside every

month and deposited in an account at a bank. A lot of households also save contractually, by means

of insurance policies. This money is set aside and not spent on products. Such action is known as

savings. Savings is thus not only the money that is deposited in a bank, but includes moneyflowing to pension funds, unit trusts and life assurance companies.

Investment (I) The financial institutions make the money that is deposited, and lend it to variousgroups who need financing e.g., business organizations and the government. The bank charges the

business interest to lend the money, which are the costs of lending money. The business uses the

money to invest in new machinery, equipment or in new factories. Only businesses that producecan invest. The investment (I) is therefore part of the flow in the economic cycle.

Government (G) The government plays a major role in the economic cycle. The role of thegovernment is seen in three main areas:

1. Taxation (TX): Taxation provides the government with the income that it needs to keep services

running. The businesses and households pay taxation to the government; thus it flows out of thecycle.

2. Transfer payments (TR): There are certain sectors, which require government assistance for avariety of reasons. Such sectors include pensioners and the disabled; the government gives these

people a monthly amount, which is used to Purchase goods and services, which they need.

3. Government spending: The government has to spend money on a variety of goods that are

needed. The people who work for the state must be paid salaries, and this is the greatest expense of

the government. Government expenditure is known as the current expenditure of thegovernment. Government expenditure is thus on education, health and defence.

Quality Management in the Economic Cycle involves setting standard operational procedures

and measuring performance against it.



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1.7 SUPPLY AND DEMAND

Prices

The price that a person sees on a product is the sacrifice that has to be made so as to obtain that

product. For example, if a-chocolate were R1, you would have to decide whether you would spendyour R1 on a chocolate, or whether you would save it, or spend it on something else. Prices are

expressed in currency (R/c) and the consumer has freedom to decide whether he will pay it or not.

Determining Prices

For a certain group of products such as petrol and agricultural products, the government is involved

in the setting of prices by means of marketing control board type institutions and priceregulation.

When the government is not involved in the setting of prices, the prices are determined by meansof the supply and demand mechanism - also known as the free market.

Demand

The demand for cell phones and airtime in South Africa is a good example of how consumer

(households) needs are driving a market. As more people want cell phones, the business sector (for

cell phones) produce more, but also at a higher price. As prices keep on increasing, consumersslowly start resistingAt a certain level of prices, consumers start to withdraw. So, the higher the

price of the products, the less the quantities that will be demanded by consumers.

1.8 BANKING

The banking part of the business sector consists of a number of different institutions. These

include Commercial banks such as FNB & Standard bank, Merchant banks, such as RandMerchant bank, Corporate Financing, such as Braittand Capital Partners.

Commercial Banks. The commercial banks are those banking organisations that form the first line

of contact between the public and the financial markets. Commercial banks can be defined as those

banks that carry out a business, a substantial part of which consists of accepting deposits that canbe withdrawn by cheque or even cash. Commercial Banks make their profit by charging a higher

interest on money that is borrowed from them than the interest they pay on money received as

deposits. The most important functions of the commercial banks are listed as:

Accepting of deposits, especially current accounts.

Extension of credit, especially overdraft facilities.

Payments and collections by way of the clearing system.

Rendering of financial services.

Acting as authorised currency dealers.



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Merchant Banks. Merchant Banks, as their name implies, deal primarily with the corporate sector.

Merchant banks often have ties to the commercial banking sector. For example, RMB private bank

will manage the private accounts of business people whilst RMB Merchant will service the samepeople in business. Their main functions include:

Corporate finance.

Corporate lending.

Money and capital markets. Derivative markets.

International services.

Investment management.

Quality is of paramount importance in banking. Every Bank is governed by a QMS that involves

standards, procedures, audits and checks. Without these, the financial Flow of the economy would

be a disaster.

1.9. EIGHT BUSINESS FUNCTIONS

1.9.1 Human Resources

Thepersonnel function, or Human Resources, is responsible for the appointment, development and

maintenance of the human resources of the organisation. To enable the organisation to operate at a

profit, this function has to appoint the right people and provide them with the right training so as tomake the best use of them and retain them in the business. The concept of a Quality Management

System will ensure that Human Resources will be able to function according to written procedures.

This in turn will ensure maximum performance and act as a profit driver.

Example:

In large organisations there is a personnel department headed by a personnel manager. The task ofthis department is the provision, development, retention & control of staff in a systematic &

scientific manner.

Diagrammatic representation of the personnel function

Personnel Activities


Provision of

Personnel Recruitment

Selection

Placement

Merit Determine

Remuneration

Research

Retention of Staff

Development

of Personnel Education

Training

Develo ment

Creation of an

organisational

climate Job

Enrichment

JobEnlargement

Creation of a

favourablework


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1.9.2 Public Relations

The public relations function of an enterprise has to create a favourable, objective image of theorganisation, establishing good relations with those directly or indirectly concerned with the

business and its products or services. The concept of a QMS enables Public Relations to operate

swiftly against written procedures. This delivers comfort to clients in knowing how their needs willbe met.

Example:

It is becoming more difficult lately for cigarette companies to advertise. Winstons P.R. peoplecame up with the idea to donate a certain percentage of profits to Wildlife conservation e.g.: The

Eagle. This enables the Company to promote its product as well as create a positive image of itself

to the public. This cycle of continuous improvement in Public Relations prompted the company tocome up with more innovative ways of managing its corporate image.

1.9.3 Marketing

The marketing function is responsible for the marketing of the products or services of the business

enterprise. This includes the assessment of the market and the needs of consumers as well as thedevelopment of a strategy to satisfy those needs profitably.

The concept of a QMS in Marketing ensures that the Services and Products comply with standardsand spelled out requirements. This enables maximum delivery of performance.

Example:

Sometimes you will come across a person asking you to fill out a questionnaire outside a shoppingcentre. These questionnaires help the businesses or supermarkets understand & realise the publics

needs. This enables the Supermarket to provide you with a better product or service, thus

increases its sales & keeping the customer happy. The feedback so obtained is used in the quality

loop a feedback circle that prompts continuous improvement.

1.9.4 Production

The production or operational management function includes that group of activities concerned

with the physical production of products (or services), namely the establishment and layout of theproduction unit and the conversion of raw materials and semi-finished products into finished

products for the market.

Example:

Joshua Doors factory will receive the raw materials (wood); these raw materials will then be

converted into a chair or table by means of an assembly plant. Different machines will cut, shapeand assemble the furniture into the desired finished product. The finished product will then be sent

to the showroom floor for sale to the consumer.

The introduction of a QMS in production ensure that all products are manufactured according tostandard requirements. This enables easy testing and comparing of products. Since standards are

defined, it is easy to detect variances.



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1.9.5 Administration

The Administration function is included in most of the other functions mentioned. Administrationis the core of the business, it cannot function without it. Typing important documents, corporate

governance, compliance, quality management, issuing invoices, ordering and stock replenishment,

filing and paying of bills are just some examples.

Example:

Spar will receive a delivery of stock from its suppliers; the invoice is then handed to the financedept. for payment. The invoice is filled and a cheque sent to the suppliers for the payment of the

goods received. Without these simple admin duties, a business will not run smoothly. Having a

QMS ensures that Admin will be managed precisely in accordance to standard operatingprocedures. The implementation of the QMS ensures best overall performance.

1.9.6 Purchasing Management

The purchasing function is responsible for the acquisition of all products and materials required by

the business to function profitability, namely raw materials, components, tools, equipment and, inthe case of a dealer, the inventory. The purchasing manager has to be in contact with suppliers, so

that he is aware of new products and knows the prices at which goods can be bought. He also has

to keep the inventory up to date, to ensure continuity of functioning.

A QMS will ensure that Purchasing gets managed in the best way with the engagement of standard

operating procedures and performance based trading.

Example:

The purchaser will receive numerous prices and catalogues from their various suppliers. The

purchasing department must then select the best product, quality & price. Once this has beenestablished, the purchaser will purchase the stock for the company. A purchase of bad product e.g.

Low-grade machinery can lead to the collapse of the assembly line. This in turn will lead to loss ofsales for the company.

1.9.7 General Management

The function of general management includes an examination of the management process as a

whole. The planning that management has to do, the organisation that it has to establish its plans,the leadership that management has to assume to get things done and the control that has to be

exercised over the whole process. This requires surveying different management approaches that

may be adopted.

A QMS will require regular Management reviews, thus ensuring continuous improvement of

management procedures.



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Example:

Without a Store Manager, a shop would not be able to function. Store Managers tasks wouldinclude the management of: Human Resources, Public Relations, Marketing, Production,

Administration, Purchasing & Finance.

1.9.8 Finance

The financial function includes the acquisition, utilisation and control of the money the enterpriseneeds to finance its activities, to buy materials and equipment. The financial function aims to

maximise profits.

By following Standard Operating Procedures and forms, Finance will ensure that performance will

be more efficient overall.

Example:

The finance department will invest the firms money in the best possible way to ensure maximum

return on investment, the purchasing of new machinery to improve production & salary structuring.

1.10. THE WORLD OF FINANCE

1.10.1 Definition of Finance

Finance is an essential aspect of all organisations, whether profit-making or not. Before any

organisation can do anything, it must have some resources, which have a monetary value. Finance

is therefore as vital at the start as is the product itself. Finance is fundamentally concerned withsources of funding, how and where the funding is applied, and with the control of the funds. It is

also an unavoidable tool when reviewing and assessing the performance and position of any

organisation.

1.10.2 Investment

Investment is the function of making your money more. There are various types of investments

such as Unit Trusts, Purchasing shares and fixed deposits to earn a higher interest rate. If you

invest a certain amount of money each month into a retirement annuity, your investment will lookafter you in your old age. Therefore investment is very important, especially in large organisations,

which deal in large volumes of money, as money can always make more money, invested wisely.

1.10.3 Controlling Capital

Controlling capital is how you manage the funds of the company or if you own 51% or more of thecompany, you control the capital.

1.10.4. Diversification

Diversification in this instance means making sure all your eggs are not all in one basket in order to

eliminate the risk of one breaking. A good example is one of Chinese Insurance Where 50 boats



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carrying a cargo of vegetables, fruit and supplies all carry a portion of each others cargo. Thus to

ensure that if one boat sinks, or the cargo is damaged, they dont loose all their cargo (income).

It is important to diversify your interests in business. If you have the bulk of your investments

invested in one organisation and it collapses for any economic reason, you stand to loose

everything. Whereas if you diversify your interests into different investments, it lowers the risk.

1.10.5 Dividends

A dividend is the percentage of the profit you receive after the company, which you invested in,

makes a profit. Dividends are usually paid in cash, but they may also be paid in kind, or by means

of bonus issues. The capital structure of a company comprises a mix of debt and equity. Equityincludes the original invested capital and the earnings, which the company has chosen to retain.

Payment of dividends reduces the retained earnings.

1.10.6 Liquidity

The term liquidity refers to how much the company has in liquid cash. In other words, how muchcan it actually spend and pay in cash at any given point in time. This for example, always effects a

merger or acquisition strategy. A company that is cash rich is often sought after, especially when

such a company is listed and trading for a value less than its cash.

1.10.7 Solvency

Solvency refers to the degree to which assets exceed liabilities. For example, a hairdresser owns

equipment worth R600 000 and has debt of R200 000. The assets exceed liabilities 3 times. The

solvency ratio is thus 3.

1.10.8 Profitability

Profitability refers to the profit made in relation to the money spent to do so. For example, if a

hairdresser had to spent R200 000 in establishing a shop and know makes R100 000 per year in

profits, the profitability of the shop is:

Net Income x 100

Capital 1

Or R100 000 x 100

R200 000 1= 50%

1.10.9 Listing

Listing is the term used when a company which has a minimum net earnings after tax (of R1million, depending on which sector it lists in) lists on the Johannesburg Stock Exchange. A

Company, which lists on the Stock Exchange, can only do so after adhering to regulations and

meeting certain requirements. Once listed, the shares of the company is traded on the exchange.



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1.10.10 Time Value of Money

The time value of money bears a direct relation to the opportunity of earning interest on aninvestment. This is the opportunity rate of return on investment. The opportunity to earn interest in

the interim period is foregone if an amount is expected some time in the future rather than received

immediately. If you were to choose between receiving a cash gift of R500 today or in a yearstime, what would you prefer? Naturally the R500 today. Why? Because R500 received today is

worth more than R500 expected one year from now. It can be invested now to earn interest, this isthe pure time value of money. In principle, the time value of money refers to the fact that a R1

received today is worth more than R1 received next year. This relates to the opportunity of earninga profit with the R1 that is received today making it R2 by next year. The use of capital therefore

has a time implication.

The approach to future value the relationship between future and present value FV and PV, the

original value of the investment, is expressed as what we call a return on investment ROI.

1.10.11 Sources of Finance

Every organisation needs finance to conduct its operations. The financial manager must consider

the broad categories of finance to be raised, the mix of debt and equity and the cost of the finance.

Financial Markets: In the market place where everyday commodities are traded, sellers have goodsto sell and buyers are looking for goods to be purchased. Finance is also a commodity, which is

traded in the market place.

Money and capital markets.

Primary and secondary markets.

Formal and over-the-counter (OTC) markets.

Johannesburg Stock Exchange (JSE). Financial Institutions.

1.10.12 Cost of Capital

The cost of capital of a company is the rate that must be earned in order to satisfy the combined

required rates of return of the firms providers of capital.

1.10.13 Capital Structure

Capital structure refers to the ratio between your equity and borrowed capital, such as debentures.

For example, a company obtained R200 000 to start. R100 000 was put in by the entrepreneur, who

had some savings. R50 000 was borrowed from the bank, whilst her mother in law put in the rest asan investment and owns 25% of the company.



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1.10.14 Financial Gearing (Leverage)

Gearing refers to the ratio of own versus borrowed capital. If a new company needs R100 to startwith and borrows R50 and uses R50 of the owners own money the business is 50% geared in

other words, 50% borrowed capital.

1.10.15 Break-even analysis

Rand break-even point is reached when total costs are equal to total income and where no profit orloss is made. The introduction of a QMS in a business can limit the cost of mistakes, thus reducing

production cost. When production cost drops, so does break even point.



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1.11. INTRODUCTION TO QUALITY MANAGEMENT

1.11.1 What is Quality Management ?

Quality Management is an extension of the administration and management functions. Quality

management has to do with :1. Documenting your Vision, Mission and Business Objectives.2. Setting Standards according to which business procedures will be measured. Developing

Standard Operating Procedures. Record keeping is also documented and described in thisphase.

3. Documenting job descriptions and work instructions plus supporting documents andpolicies.

4. Developing standard forms such as letterheads, Fax cover sheets and company documentssuch as invoices, cheque requisitions, all accompanied by a form register.

Quality management systems are not just for large companies. Quality management systems areabout how the business is managed and can be applied to all sizes of business as well as allfunctions of business management, such as your marketing, sales and finance activities. Qualitymanagement system standards should not be confused with product standards.

The use of product standards, quality management system standards and quality improvementapproaches are all means of improving your customers' satisfaction and the competitiveness ofyour business.

The installation of a QMS has one major objective though, namely to ultimately, improve theproductivity, profit and capacity of your business. In the context of the Services Seta, the QMSproject has, as an objective, to build capacity of business and to improve the quality of serviceofferings within the industry.

Quality management systems should not result in excessive bureaucracy or paperwork or lack of

flexibility. Remember all businesses already have a management structure and this should be thebasis on which the quality management system is built. You may find that you are alreadycarrying out many of the requirements included in the standard but have not stated how they aredone. The first step of a QMS is thus the fact that you are already successfully in business.

The current key documents from the ISO 9000 consist of the following:

ISO 9000-Which sets out the concepts, principles, fundamentals and vocabulary for qualitymanagement systems,ISO 9001 -Which sets out the requirements to be met,ISO 9004 -Which provides guidance for continual improvement of an organization's overallperformance.ISO 19011 -Which provides guidelines on auditing quality management systems (andenvironmental management systems as well).Even though the first three of the above standards have been substantially revised comparedwith the 1994 editions, and there are some new requirements in the 2000 edition of ISO 9001,they are still not about imposing something totally new on your business.If you are only now adopting ISO 9001,your system might be effective, but probably informaland not well documented.If your system already exists and is based on one of the 1994 editions, it will need to be updatedto ISO 9001:2000, which may require some changes to your documentation.In both cases, the advice given in this programme (see next set of material on actual QMStraining) is relevant.



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Some customers in both the private and public sectors are looking for the confidence that can beprovided by a business with an effective quality management system.While meeting these expectations is one reason for having a quality management system, thereare other reasons and some of these are listed here.

1.11.2. TQM Process Approach

STAGE 1: INTERVENTION ONE: Business Management & Macro economic awareness of

quality. SMEs will attend a seminar in their various groups. Each SME will be given a practical

task to complete. This task will constitute an element in the creation of the final QMS documentfor each SME.

STAGE 2: (TIER 1): INTERVENTION TWO: Developing a Business Plan (Quality

perspective). Each SME will be assisted in the developing of a business plan. This business planwill be documented with the view to incorporating it into the final QMS document. Monitoring

Visits to companies will be held during the implementation period and an assessment day will

also be presented to ensure that documentation is correct for progressing to Stage 3

STAGE 3 : (TIER 2): INTERVENTION THREE: Developing a functional procedures manual

for an SME as part of a QMS. Each SME will be assisted to develop a QMS document based ona set of procedures that has been generically developed. Every SME will be given a toolkit to

assist in the development of the QMS. Monitoring Visits to companies will be held during the

implementation period and an assessment day will also be presented to ensure thatdocumentation is correct for progressing to Stage 4

STAGE 4 : (TIER 3): INTERVENTION FOUR: Developing an actual QMS manual. SMEs

will be assisted in the development of a QMS as part of the continuous mentoring that will beprovided. Monitoring Visits to companies will be held during the implementation period and an

assessment day will also be presented to ensure that documentation is correct for progressing toStage 5

STAGE 5 : (TIER 4): INTERVENTION FIVE: Internal use of Forms throughout the company,

including Management Reviews, and Continues Improvement. Monitoring Visits to companieswill be held during the implementation period and an assessment day will also be presented to

ensure that documentation is correct for progressing to Stage 6

STAGE 6: INTERVENTION SIX: Certification. Each SME that successfully completes the

program will be certified as internally compliant (Certification of Competency). During the

project, RIMS will, via an accredited provider, submit the training part of the program foralignment with unit standards and accreditation. Accordingly, individuals will be certified as

competent once they have completed the entire program.



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1.11.3 HOW TO DEVELOP A CORPORATE VISION

a) What is a corporate vision?

Remember when you were little? Remember when you said one day when I grow up, when Iam big, I am going to be a doctor/nurse / fireman?

A corporate vision is the one day when I am big for a business.

The best way to create a vision for your company is to take some time off and ponder on thequestion of what you would like your business to look like :

1. In five years from now2. In an ideal world3. In the best format you can imagine

Discuss these visions with your staff and family.

Finally, write your visions down and frame it. Hang it up in your office.

Example : To be the biggest provider of broad based human empowerment.

b) What is your corporate mission?

If a vision is the destination, the mission is the road map of how to get there. The best way todevelop a mission is to ask yourself how you will attain the vision in 5 easy steps. Again, writeyour mission down and frame it.

c) What about Objectives?

Once you have written down your mission, it is time to break the mission and vision intoObjectives. Consider Objectives as things that you have to do over the next 3 years in order toachieve the vision and mission. An easy way of developing objectives is to work according to the8 functions of business. The following guideline seems to work well:

1. Identify the 8 business functions and set 4-6 objectives for each one.2. Take each objective and unpack it into to 4 tasks to be performed monthly.3. Take each task and unpack into 4 activities to be performed daily.

Once you have identified these list of required tasks, it is easy to cluster them into procedures,

job descriptions and the like. This is the start of your QMS. Once you have mapped out therequired activity, the real fun can begin!

Example: To facilitate human development by training, continuous mentoring and regular qualityimprovements.



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1.12 THE 3-STAR SERVICES SECTOR GRADING SYSTEM:

Distinguishing the Best from the Rest

1.12.1 What will a grading system do for me?

A grading system sends out important messages about your business. It recognises that:

STAR 1

You comply with the Employment Equity Act, the Skills Development Act, and any other

legislation that directs your relationship with your staff, your most important asset.Your workplace skills planning process is in place, it is inextricably linked to your business's

employment equity targets, and it is being implemented.

Irrespective of the size of your business, your staff are encouraged to achieve their personal and

collective continuous development objectives.As a team, management and staff are planning for the real and probable manpower needs of the

future by using learnerships and benefiting from other discretionary funding windows of the

SSETA.

STAR 2

Your company has systems in place that are designed to manage all resources effectively andthat these systems are achieving their purpose.

Your systems are International Standards Organisation (ISO) compliant or ISO recognised.

Your human resources management system is effective and has either Investors in People statusor is Investor-in-People compliant.

STAR 3

Your company is focused on your clients and customers.

Your staff are competent to be client-centric.Your clients recognise and appreciate the client-centric strategy of your company and that this

strategy is successful.You are driven by your clients' changing needs and perceptions of your service excellence.

There are additional benefits to having a STAR 3 rating. SSETA will

Subsidise STAR 3 companies to become members of the Proudly South African Campaign.Establish a national marketing campaign to encourage consumer awareness of the value of doing

business with a STAR 3 company.

Enter into memoranda of understanding with local, provincial, and national government

organisations, such as the Gauteng Shared Services Board, to ensure that these organisations dealexclusively with STAR 3 companies.



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1.12.2 How do I achieve a STAR grading?

STAR 1

Applying for and achieving a STAR 1 rating is simple:Apply to SSETA for a clearance letter for STAR 1.

SSETA's Compliance Department will arrange an audit.Trained assessors (SSETA moderators) will conduct the audit.

The SSETA file on your company will be evaluated.Workplace Skills Plans (WSP) participants in your company will be interviewed.

The Skills Development Facilitator (SDF) will be the principal contact person in your company

and will also take responsibility for any remedial action required.Trained senior verifiers in the Compliance Department will moderate the work of the assessor.

STAR 2

Apply to SSETA for a clearance letter for STAR 2.

If your company has ISO or IPP certificates, no audit will be necessary.

If your company is applying for ISO/IPP compliance status, then the SSETA ComplianceDepartment will arrange an audit (as for STAR 1).

STAR 3

Apply to SSETA for a clearance letter for STARs 3.The Compliance Department will appoint an assessor who will guide your company through the

process.

ALL STARS

You must sign a contractual undertaking, including a code of good practice.

You will be issued with a SSETA certificate when you have complied.

The certificate is valid for 24 months, after which you will be audited again. (This renewal auditis less strenuous than the initial audit.)

SSETA will publish the names of all the companies that have achieved STAR grading.



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1.12.3 How much will it cost me?

The total costs of the audit and certification will cost you nothing as a Services SETA member; it

will be funded by SSETA.STARs 2 and 3 will cost you nothing if an assessment is not required. If, however, an assessment

is required, then a pre-assessment report on what needs to be addressed will cost R2 000. Thecosts of the final assessment will be:

R1 000 up to 30 employees R1 500 for 31 to 50 employees

R2 000 between 51 and 150 employees

R4 000 for over 150 employees

Once you have been awarded certification, you will be required to pay a small annual registration

fee. This fee depends on the number of employees in your company: R500 a year for up to 30 employees

R800 a year for 31 to 50 employees

R1 500 a year for between 51 and 150 employees

R2 000 a year for over 150 employees

After 24 months, there is a small charge for the renewal audit:

STAR 1 will cost the same as the annual fee. STARs 2 and 3 will cost 50% of the assessment fee.

All fees will be deducted from the Implementation Grant.

Documents

Macro Economic, Seta & 3 Star2