Business Studies : Form 3 & 4 2020

TRADE AND AIDS TO TRADE I

Trade – it is the buying and selling of goods and services

Aids to Trade – they are things that help trade to take place.

Importance of Trade
a) It helps to satisfy human needs
b) It creates employment
c) It helps to improve living standards of people
d) It helps interpersonal relationships
e) It helps economic growth of the country
f) It helps in bilateral and multilateral relationships

Types of trade
There are two types of trade: Home Trade and Foreign Trade

(i) Home Trade – it is trade done within the boundaries of one country. It is also
called Domestic or Local trade.

Types of home trade

a) Wholesale trade – this is buying and selling of goods in bulk (large quantities)
b) Retail trade – it is the buying and selling of goods in small quantities (bits)

(ii) Foreign trade – This is the trade among or between countries. It is also called
International trade

Types of foreign trade

a) Imports (m) – these are goods and services bought from outside the country
e.g. Malawi buying goods such as computers etc from South Africa.
b) Exports (x) – these are goods sold to other countries e,g Malawi selling
goods such as sugar, tea, tobacco etc to America
c) Entrepots – these are goods bought from outside the country and later sold
to another country. E,g Malawi buying a car from Japan and later sell to
Zambia.

Major Imports and Exports of Malawi

Major Imports of Malawi Major Exports of Malawi

 Vehicles  Tobacco
 Clothes  Cotton
 Household items  Sugar
 Shoes  Groundnuts
 Building materials  Tea
 Office equipment  Maize flour
 Technology  Coffee
 Food stuffs  Wood

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Importance of foreign trade to Malawi Economy

a) Malawi gets items that it cannot produce on its own
b) It creates international relations e.g. individual to individual, country to country
c) It creates employment e.g. self or formal employment
d) It promotes tourism
e) It helps to boost local businesses
f) It contributes taxes
g) It contributes to foreign reserves
h) Malawi checks on her strengths and weaknesses in production in comparison
to other countries.

Reasons for Doing foreign Trade (Advantages/Importance)

a) A country can have goods and services that it cannot locally produce
b) There is specialisation of labour in producing products in one country than other
countries
c) Because of climatic conditions some crops cannot grow in other countries while
it can do well in another country
d) A country (nation) produces a commodity with which it has more comparative
advantage than other countries
e) Attitude problems i.e. People think that foreign trade is better than local
f) Goods are imported in order to export them to other countries after
modifications.
g) It allows government to earn money through taxes
h) To have something of same use but cheaper.

Disadvantages of foreign trade

a) It kills infant domestic (local) industries
b) Changes in one country may affect a trader in another country e.g. political
instability, rigid trade rules etc
c) A commodity faces risks in transit e.g. robbery
d) Events such as war and floods may make trade impossible
e) Foreign trade may lead to dumping
f) It requires more capital because of extra cost e.g. customs duty, transport,
insurance, research etc.

Challenges of foreign trade

a) Language and Communication – Traders travelling abroad may not know the
local language of the foreign country therefore making communication difficult. It
can be solved by having a local agent interpreter who is trustworthy and use of
common language such as English
b) Lack of Knowledge – traders may not know conditions of trade prevailing in a
foreign country they want to do trade with. This can be solved by conducting a
market research before venturing into foreign trade in order to find out the rules in
the concerned country.
c) Currency differences – Different countries have different currencies which have
unequal value strength. This can be solved by using proper exchange rate and
also using common currency e.g. US dollars

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d) Risks and uncertainities – Goods in transit are subjected to various dangers

such as road accidents, plane crash, storms sinking the vessels, robbery etc.
This can be solved by taking insurance cover against such risks.
e) Licences and Documentation – Absence of legal documents such as passports,
permits, bill of lading, bill of entry etc can make foreign trade impossible. This can
be solved by fulfilling customs formalities and follow rules for controlling imports
and exports.
f) High transport costs – travelling across nations demands exporters and
importers to pay a lot on transport costs. This can be solved by using the most
competitive (reasonable) means of transport.
g) Physical barriers and distance – e.g. mountains, seas. This problem can be
solved by using proper means of transport.
h) Difference is standardisation – Different countries having different measuring
system e.g lbs, metre, yard. This can be solved by using proper metric system of
measuring such as Kg.

Terms used in Foreign Trade

a) Balance of Trade (BOT)

 This is the difference in value between goods exported and goods imported.
 BOT = X – M (Visibles only)
 When exports are more than imports (X > M), it gives a positive balance of
trade and it is called Surplus balance of Trade or favourable balance of trade
 When imports are more than exports (M > X), it gives a negative balance of
trade and it is called deficit balance of trade or unfavourable balance of
trade.
 When exports are equal to imports (X = M), it is said to be balanced or in
equilibrium

b) Balance of Payment (BOP)

 BOP is the difference of a nation‟s total payments to foreign countries and its
receipts from them.
 It includes exports and imports (visibles and invisibles)
 BOP = X – M (Visibles and Invisibles)

Composition of Balance of Payment (BOP)

a) Visible imports and Visible exports – the difference between the two gives
Visible balance of payment
b) Invisibles – it includes imports and export of services and payment of incomes
to and from Malawi. Incomes include rents, interests, dividends, wages etc.
Inflows and outflows give invisible balance of payment.
c) Malawi’s private Investment – they include purchases by Malawians of the
overseas assets e.g. houses and other direct investment abroad by
government.
d) Official financing – include government borrowing from other countries and
withdraws from Malawi to other countries.

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Example
Country X has the following summary of international transactions in billion for the
year 2018:
 Goods exported K52,570  Invisible inflow K32,417
 Good imported K50,032  Invisible outflow K27,330
a) Calculate BOT
b) Calculate BOP

Solution 1

BOT = X – M (visibles only) BOP = X – M (Visibles and Invisibles)

= K52,570 – K50,032 = (K52,570 +K27,330) – (K50,032 + K 32,417)
= K 2,538bn = K79,900 – K82,449
= -K2,549bn

Solution 2
Current account K(billion) K(billion)
Visibles Exports 52,570
Imports 50,032
Visible BOP (BOT) 2,538
Invisibles Exports 27,330 +
Imports 32,417
Invisible BOP -5,087
BOP -2,549

What Happens when imports are more than Exports

a) Government raises tax
b) Reducing money leaving the country
c) Borrowing from IMF and World Bank
d) The government issues Treasury Bills
e) The country may reduce imports by limiting number of import licences
f) The government may sell properties
g) Increase value of exports by encouraging firms to expand into overseas markets

Different Terms Used in Foreign Trade

a) Exchange rate – the price of one currency in terms of another e.g. $1 = MK700
b) Quota – restrictions imposed by countries on value or volume of goods or
services imported, exported or sold.
c) Comparative advantage – where a country is better placed to produce a
commodity, it has more advantages than one other country in terms of production
costs and other factors
d) Tariff – tax imposed on a product when it is imported into a country. Some
foreign countries apply tariffs on exports.
e) CIF – Pricing term indicating that the Cost of the goods, insurance and Freight are
included. C & F is used where insurance is not included.
f) FOB – Free on Board. Seller assumes costs of having goods packaged and
ready for shipment up to FOB point. Buyer assumes costs from FOB point. It also
includes FOR (free on rail) and FOT (free on truck)
g) Free trade – it is the removal of barriers (restrictions) in trade

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TRADE DOCUMENTS

Trade Documents
 These are papers used in transacting between two parties e.g. buyer and seller
 These are legal papers that give facts and information about goods and services.

Importance of Trade Documents

a) They are used to find out prices of products e.g. letter of enquiry
b) they accompany goods e.g. delivery note
c) they show quality and quantity of goods e.g. invoice
d) they show colour of products e.g. catalogue
e) they show where goods come from e.g. certificate of origin
f) they show financial status of the buyer e.g. status inquiry
g) they show title of goods e.g. bill of lading
h) they show evidence (proof) of payment e.g. receipt
i) they help to keep records
j) they provide information on the trading activities
k) they help in politely requesting for payment of goods offered e.g. invoice
l) government is able to ascertain level of total exports and imports per given period
using these documents.

Types of Trade documents

 Home trade documents
 Foreign trade documents

HOME TRADE DOCUMENTS

These are documentations used in home trade. They circulate among wholesalers
and retailers in most cases.

Examples of documents used in Home Trade

 Letter of enquiry  Delivery note
 An order  Quotation/price list/catalogue
 Invoice  Status inquiry
 Credit note  Advice note
 Cheque  Debit note
 Statement of account  Pro-forma invoice
 Receipts

Examples of documents used in foreign trade

 Bill of lading  Indent
 Mates note  Consular invoice
 Airway bill  Bill of entry
 Bill of exchange  Certificate of origin
 Letter of credit

1. Letter of Enquiry

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 It is an enquiry by potential customer to suppliers asking for details of goods

which may be bought.
 Details asked for include : price, quality, size, rates of discount, colour,
quantity, terms of payment and nature of goods in question etc

Example of letter of Enquiry

Kamongo Retailers
P.O. Box 79, Dowa
Tel.: 01661867

24th March, 2019

The Sales Manager
Excel Wholesaler
P.O. Box 3041, Blantyre

Dear Sir,

LETTER OF ENQUIRY

Would you please advise us the prices at which the following items which were
advertised in the Daily Times of 18 th March, 2019 are offered?

U-fresh soap (large)

Exercise books (72 pages)
Carolight (cream)

We would be grateful if you would further inform us of the terms of delivery, including
payment and the duration you take to deliver the goods.

Yours faithfully

L. Madalitso
L. Madalitso
Purchasing Officer

2. Quotation/Price list/Catalogue/Tender

These documents are in response to a letter of Inquiry

a) Quotation - it is a document written by the seller to the buyer giving prices.

A quotation is collected from several suppliers in order to find supplier who
provides best products and/or terms.
b) Price List – it is a document written by the seller to the buyer showing
prices
c) Catalogue – it is a booklet (or a paper) containing products the business is
involved in. It is usually in colour and gives prices of products. It is common
for carpentry shops, kitchenware shops and building materials shop, mail
order etc
d) Tender – it is a document of offer to sell sent by a seller to a buyer in
response to an advertised request.

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Example of a quotation
QUOTATION
Excel Wholesaler
P.O. Box 3041, Blantyre

28th March 2019

Kamongo Retailers
P.O. Box 79, Dowa
Tel.: 01661867

Dear Sir/Madam

DESCRIPTION OF INQUIRED GOODS

Item Description Price

1 U-fresh soap (large) 10,000 /carton
2 Exercise books (72 pages) 2,000 / unit
3 Carolight (cream) 14,000 / carton

Payment terms
One month pay due: 5% cash discount, no interest
Two months pay due: 3% interest
Delivery: within 5 days of receiving an order, Carriage forward

Signed : L. Thom
Sales Officer

Differences between Catalogue and Quotation

Quotation Catalogue
 it is for a specific customer  circulates among general customers
 it has no pictures  it has coloured pictures of goods
 it lists goods enquired for  illustrates general goods
 printed in black & white  printed in colour

Differences between Price List and catalogue

Price List Catalogue

 it is printed in black and white  Printed in colour
 product not shown  Product is shown
 no price deadline  It has a price deadline

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 Discount is not shown  Discount is shown

3. An Order
 It is a trade document that clearly states the details of the goods or services
required.
 It is done after comparing various quotations
 It is sent by buyer to seller

Example of an order
ORDER NO. KR/02

Kamongo Retailers
P.O. Box 79, Dowa
Tel.: 01661867

31st March, 2019

The Sales Manager
Excel Wholesaler
P.O. Box 3041, Blantyre

Dear Sir,

Would you please supply the following items by 2nd May 2019 at our shop next to
SPAR at Mponela Trading Centre.

Item Qty Description Unit Price

1 90 cartons U-fresh soap (large) 10,000 /carton
2 40 cartons Carolight (cream) 14,000 / carton

Purchasing officer: Signed

4. Status Inquiry/ Reference

It is a trade document (or any other way) a supplier uses to make confidential
inquiries about the buyer in question

Types of Status Inquiries

a) Trade Reference/status Inquiry – the supplier obtains information from
another supplier who has dealt with the buyer before.
b) Status Inquiry Agencies – supplier obtains information about the buyer from
some trade organisations.
c) Banker’s Reference / status Inquiry – it allows the supplier to obtain buyer‟s
information from buyer‟s banker. Banker‟s reference status inquiry may be in
two quotations e.g.
 Buyer “MK1,000,000 CAAOT”

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 Buyer “Not good for MK1,000,000 CAAOT”

NB: CAAOT = Current At Any Other Time

Uses of Status Inquiry

a) Helps seller to know financial capability of buyer
b) Gives information on whether buyer has a tendency of defaulting payment or
not.
c) Getting information on the amount of credit to be extended to buyer
d) It helps to know about buyer‟s goodwill and honesty

5. Advice Note
 It is a trade document that informs the buyer that goods ordered are in transit
 It is sent ahead of the goods
 Supplier can use fax, telegram, phone call etc

Functions (or purpose/Uses) of Advice Note

a) To warn buyer to make necessary storage arrangements
b) Indicate to buyer that preparations for payment of goods must start
c) To enable buyer/seller to track down the goods in case they do not arrive at
specified time
d) It shows details of goods sent

6. Delivery Note
 It is a document that is sent to buyer together with the goods normally through
a driver of a delivery vehicle.
 The buyer signs the document as proof for delivery
 It shows list of goods delivered, description of goods, quantity of goods,
delivery vehicle particulars, address of supplier and buyer.

Important Notations (Quotations/terms) on Delivery Note

These are conditions or terms indicated on the delivery note.

a) Carriage paid (free delivery) – it means transport costs have already been
met by seller. Therefore, the invoice total will only bear the cost of goods
ordered.
b) Carriage forward – it means transport costs must be met by the buyer
himself. Therefore, buyer must pay for both cost of transport for goods and
value of the goods.
c) Not Examined – dispatched goods may not be immediately checked
physically for damages, wrong goods, faulty goods or missed goods. As such
buyer adds the notation on the delivery note in order :
 to preserve the right to claim by the buyer
 to save time of delivery by the transporter.

Functions of Delivery Note

a) It lists goods the driver is delivering to the buyer

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b) Buyer cross-checks goods in delivery van against delivery note. This helps to
identify packing/loading errors if any
c) Buyer cross-checks delivery note against his/her order
d) Buyer signs delivery note as evidence of receipt of goods
e) Supplier uses signed delivery note as basis for preparation of an invoice.

Example of Delivery Note

DELIVERY NOTE

Excel Wholesaler
P.O. Box 3041, Blantyre

28th April 2019

Kamongo Retailers
P.O. Box 79, Dowa
Tel.: 01661867

Order No Order date Qty Description

KR/2 07.04.2019 90 cartons U-fresh soap (large)
40 cartons Carolight (cream)

Delivery date: _______________________

Registration No. of delivery vehicle : ______________________
Driver‟s particulars : (Name): _______________________________
ID (if any) : ___________________________________

Received in good condition by :

Name: _______________________________________
Signature : _________________________________

7. Consignment Note
 It is a trade document that is used when the goods are being delivered by a
carrier or transporting agency.
 It is also known as Way Bill
 Buyer signs the document as proof of receipt for goods
 Buyer is known as Consignee while seller is known as Consignor

Differences between Delivery note and Consignment Note

Consignment Note Delivery Note

 Used when supplier hires delivery  Used when supplier uses own vehicle
vehicle

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 Prepared by transport agent  Prepared by supplier

 Shows contract for carriage  It does not show contract
(between supplier and transporter)
 Is issued in triplicate  Is issued in duplicate
8. An Invoice
 It is a document sent by seller to buyer asking for payment of dispatched
goods
 It is used in credit transactions
 An invoice must show the order number for reference
 It shows : quantity of goods, description of goods, unit price, total value, terms
of payment (e.g. discount), VAT (if any), names and addresses of buyer &
seller, order number, Date of sale.

E&OE on invoice

 E&OE means Errors and Omissions Excepted.

 It safeguards seller from any clerical errors that may have occurred in the
course of compiling an invoice.
 It is indicated at the bottom of the invoice.

NB: Mistakes on the invoice must not be corrected by changing the figures or
rubbing. Invoice mistakes are corrected using a Debit Note and a Credit Note

Types of Errors

a) Error of omission – a transaction that is not recorded (or completely left

out)
b) Error of Commission (Clerical error) – a transaction that is calculated
incorrectly

Types of Discount

a) Trade discount – it is a discount that is offered by producer to wholesaler

or retailer for bulk buying. This helps to build up business relationship.
Trade discount is based on List price.
b) Cash discount – it is a reduction in the purchase price of good because of
early (prompt) payment.
c) Quantity discount – it is a discount offered when you buy in large
quantities.

Example of Invoice

Moses Investments, P.O. Box 400, Nkhotakota, Telephone 0995 414051

bought the following goods on credit from B. Chilanga General Dealers, P.O.
Box 280, Mangochi.

i). 30 iron sheets – 32G @ K2,000 each

ii) 20 bags of kumanga cement @ K6.000 per bag

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The invoice to appear with the following given notations :

VAT 10%, Order Ref No. MI/08, Discount (qty) 10%, Invoice No. BCGD/012

INVOICE NO.: BCGD/012

B. Chilanga General Dealers

P.O. Box 280, Mangochi

10th October 2019

Moses Investment
P.O. Box 400, Nkhotakota
Tel.: 0995 414051

Order Ref MI/08

Description Qty Unit Price (K) Total Price (K)
Iron sheets (32G) 30 2,000 60,000
Kumanga Cement 20 bags 6,000 120,000
Sub total 180,000
10
Less10% discount ( / 100 x 180,000 18,000
10
162,000
Add VAT 10% ( /100x 162,000) 16,200
Total Amount 178,200

E&OE

9. Pro-forma Invoice
It is a document a supplier sends when he does not want to sell goods on credit
to the buyer. Or it is a document issued by a seller asking for advance payment
before delivery of the goods.

Conditions for sending a Pro-forma Invoice

 When goods are sent for inspection and approval
 When supplier does not want to sell goods on credit
 When buyer is new to the supplier and fears default of payment by the buyer.

Functions of a pro-forma invoice

 Serves as formal quotation and an ordinary invoice
 Serves as a polite request for payment
 Covers goods sent for approval and inspection
 For customs duty purposes if it is an international trade transaction

10. Credit Note

It is a document sent by seller to the buyer to correct a mistake on an
overcharge on the invoice. It is normally printed in red to:
 Differentiate it from other documents

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 Show the opposite flow of money e.g. from seller to buyer

 To show a negative amount

Uses/conditions for issuing credit note

 When returns on damaged or wrong goods are not replaced
 When goods have been mistakenly overcharged on invoice e.g. charging
K975 instead of K957
 When buyer returns charged packing cases/crates
 When buyer is not interested to cash gift vouchers sent by supplier as gifts.
 When goods ordered are of inferior quality
 When an invoice has been sent to a wrong person

What a Credit note will usually show

 The reason why it is issued
 The goods involved and the value overcharged
 Reference numbers of documents involved in the sale and supply e.g.
invoice number and date

Suppose on Invoice BCGD/012 item (i) was over added by K1,500 the credit
note will be as follows

CREDIT NOTE 001

B. Chilanga General Dealers
P.O. Box 280, Mangochi

17th October 2019

Moses Investment
P.O. Box 400, Nkhotakota
Tel.: 0995 414051

Credited by B Chilanga General Dealers

Particulars Amount (K)
Error on invoice BCGD/012 dated 1,500
10.10.2019 on item (i) iron sheets

Signed: Signed
Sales Manager

11. Debit Note

It is sent by seller or buyer to correct an undercharge on the invoice. It is also

known as a supplementary invoice because it is used to increase invoice amount

Uses of Debit Note

 When invoices are undercharged by seller

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
Used by seller when more goods were sent than invoiced and buyer agrees to
keep them
 Used by purchaser when wrongly overcharged
 Used by buyer when claiming allowance of damaged goods
Example of Debit Note

Suppose the invoice BCGD/012 was undercharged by 5%, draw a debit note.
5
/100 x 180,000 = K9,000

B. Chilanga General Dealers

P.O. Box 280, Mangochi

17th October 2019

Moses Investment
P.O. Box 400, Nkhotakota
Tel.: 0995 414051

Debited by B. Chilanga General Dealers

Particulars Amount (K)
Error on invoice BCGD/012 dated 9,000
10.10.2019 . 5% undercharge

Signed: Signed
Sales Manager

12. Cheque
It is a form of payment used instead of cash

Parties to a cheque
 Drawer – person who writes and signs the cheque
 Drawee – the bank that authorises a cheque
 Payee – the person who receives and cash a cheque
 Payer – one who pays the cheque

13. Receipt
It is a document that shows evidence of payment

Uses of Receipt
a) Source of information for good keeping
b) Shows proof of evidence for payment
c) Safeguards the seller against double claim of already collected goods
d) Safeguards the buyer against double claim of already paid goods
e) Used as reference for past transactions

14. Statement of Account

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It is a summary of monthly transactions between seller and buyer

Characteristics of Statement of Accounts

a) Dates
b) Debit Column (Dr) - Income of business. In this column the goods supplied
changes into sales and invoices received. Debit notes are entered in Dr.
c) Credit column (Cr) - These are expenses of the business. In this column
there are goods returned inwards and outwards expenses, credit notes,
cheques received and discount offered

Uses of statement of account

a) Can be used to calculate an outstanding account balance
b) Can be used to remind a customer to settle their account balance
c) Can be used to avoid disputes with customers

Example of Statement of Account

Suppose William Phiri of P.O. Box 640, Dedza is a customer to T.H. Gute
Wholesalers of P.O. Box 90, Lilongwe and had several transactions with each other
for the month of May 2018 which are :

Date (2018) Transaction K

May 1 Balance b/d 700,000
May 10 Goods supplied 500,000
May 16 Goods returned 50,000
May 20 cheque payment 900,000
May 25 Goods supplied 200,000
May 26 Cash payment 150,000
May 29 Dishonoured cheque 80,000
May 30 cheque payment 300,000

The statement of account would appear as follows

T.H. Gute Wholesalers

P.O. Box 90, Lilongwe
William Phiri
P.O. Box 640, Dedza

Statement of account for the month of May, 2018

Date Particulars Debit (K) Credit (K) Balance (K)
2018
May 1 Balance b/d - - 700,000
May 10 Sales 500,000 - 1,200,000
May 16 Returns - 50,000 1,150,000
May 20 Bank - 900,000 250,000
May 25 Sales 200,000 - 450,000

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May 26 Cash - 150,000 300,000

May 29 Dishonoured cheque 80,000 - 380,000

May 30 Bank 300,000 80,000

Note:
 Items that increase the balance are debited
 Items that reduce the balance are credited
 The balance column shows current balance for every transaction effected

FOREIGN TRADE DOCUMENTS

These are documentations that change hands in international trade. They circulate
among various partners e.g. importers, exporters, and customs offices etc

a) Indent
 These are orders received by an agent of overseas buyers.
 They provide details of the goods required, method of package, means of
forwarding, insurance attached to the goods etc.
 After negotiating the transaction, the exporter‟s bank places a status inquiry
on the importer‟s bank for financial capabilities.

Types of Indent
a) Open Indent – it is an indent or order which has no specifications to guide
the agent. Exporter prepares goods according to their will.
b) Closed (Specific) indent – it is an indent or order which has full particulars
of the exact goods required, or source of goods. Exporter follows importer‟s
demands.

b) Export Invoice – it is a document an exporter prepares giving importer relevant

information about the goods sent abroad. Details include : prices, weight,
markings, and other expenses incurred.
c) Consular invoice – it is also called Certificate Invoice. It is an invoice made in
the presence of a Consul (a person appointed by government to protect local
businessmen of his/her own country on matters of foreign trade malpractice in a
foreign country)
d) Bill of Lading – it is a document that shows title of goods. It is used when
goods are sent by water transport. It is made out in triplicate. A bill of lading
can be negotiated e.g. can be endorsed in favour of someone else.

Contents of a bill of lading

a) Name of the ship
b) Name and address of the exporter and importer
c) Weight of goods
d) Title of goods
e) Port of departure and destination
f) Marks of goods

Types of bill of lading

a) Through bill of lading – used when goods are for one importer

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b) Grouped bill of lading – used when goods belong to different

importers. This saves transport costs
c) Dirty bill of lading – contains notes on faulty or damaged goods
d) Clean bill of lading – does not contain notes on damaged goods
Uses/importance/function of Bill of lading
a) It shows title of goods
b) It is used as a receipt issued by a shipping company to the exporter
c) It shows contract of carriage between the shipping company and the
exporter

Example of Bill of lading

Ref: 004/03
BILL OF LADING
M.M. Tindo & Co. P.O. Box 17, Blantyre
Local vessel Local Port of Loading Consignee
J.J. Wholesalers
Box 20, Mangochi
Monkey Bay Prepaid Freight
(a) H & h 2410
Mimosa 3 x 200Kg Sugar K4,000 K12,000.00
(b) H & H 3631 4 x 50 tonnes rice K7,000 K28,000.00
Total K40,000.00
Free Disposal : if through Bill of Lading Damages : Nil

e) Certificate of Origin – this is a trade document that establishes the true origin
where the goods are made. It provides necessary proof for the basis of
charging preferential customs duties or for the purposes of duty free
f) Packing Note/Packing List – it is a copy of Advice Note that lists all goods,
their weight, quality and marks. It is kept by supplier (consignor/exporter) as
referral document for goods dispatched to importer.
g) Airway Bill – it is a document used to send goods by air and it has to be
signed by Customs officials. It is made in triplicate with copies sent to
consignor, consignee and airline. An Airway Bill is not a document of title and
cannot be negotiated. Airway Bill is also known as Consignment Note.
h) Bill of Entry – it is a document that describes goods and states clearly their
value and destination. It is used for both exports and imports. It is submitted
on Form 34. The document provides reliable statistics for exports and imports
for the computation of Balance Of Trade (BOT).
i) Import/Export Licence (Permit) – it is a document that permits individuals to
either import or export within their limits (quota) at one particular period. In
most countries goods like wild animals, ivory, petroleum products, hides,
ammunition, birds, reptiles require licences. Licences help to (1) protect infant
local industries (2) control movement of products to and from countries.
j) Letter of Credit – it is a document from an importer‟s bank assuring payment
to seller of goods/services provided certain documents have been provided to
the bank. An LC is most times irrevocable (e.g. it cannot be cancelled without
consent of beneficiary, issuing bank and confirming bank, if any. Parties to

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Letter of Credit are: supplier (beneficiary), Issuing bank (importer‟s bank)

advising bank (supplier‟s bank).
k) Shipping Notes – these documents are issued by the shipping company e.g.
i. Advice of shipment – it is a document sent to importer ahead of goods
imported. It serves the same purpose as advice note
ii. The Mate’s note (receipt) – it is a receipt signed and issued by the ship
mate (a rank below ship captain). An exporter receives it when he/she
uses inland water transport such as lake, canal river to connect the
goods to the harbour to be put on board for water transport.
iii. Wharfinger’s note (receipt) – exporter receives this document when
the connecting means of transport to the harbour (port) to board a ship is
road or rail.
l) Bill of Exchange – it is a document which shows that the buyer is prepared to
pay for goods under order. It is used when seller is dealing with buyer for the
first time and is not sure of the financial capabilities of buyer. The buyer signs
the bill and includes words ACCEPTED.
 Parties to B/E: drawer (the one who issues), drawee (the one whom the bill
is drawn) and acceptor (the one who accepts the bill)

Ways of Dishonouring a Bill of Exchange

 Non-acceptance (when bill is not accepted for payment)
 Non payment (when bill is accepted but drawee refuses to pay for it)

Conditions on which Bill of Exchange can be sent :

 Document against Acceptance (D/A) – importer is expected to accept
the Bill and return it back to the exporter
 Document against Payment (D/P) – importer is expected to make
payment first before the exporter forwards the goods.

 D/A can be brought to a discount house/merchant bank to exchange with

money. This is known as discounting a bill or retiring a bill of exchange.
Interest is charged for this service.

Example of a Bill of Exchange

30 January 2018
K500,000
On 30th March 2018, pay Kadwa wholesalers at Victoria Avenue National Bank the
sum of Five Hundred Thousand Kwacha Only. Value Received K500,000

To : M. Tindo Signed : C. Munyowa

Umoyo House Pyramid View Building
P.O. Box 100, Blantyre 18 Kirby Crescent
Durban, South Africa

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TOPIC 2 : BUSINESS ORGANISATIONS I

2.1. Non-profit Making Organisations (NPMO)

It is a business that is not allowed by law to make profit. Its profit is called
SURPLUS. These businesses are managed and controlled by a board of
executives. They have paid staff and volunteers.

Examples of Non-Profit making organisations

a) Charities e.g. Samaritan Trust
b) Professional Bodies e.g. Malawi Law Society, ECAMA, Bankers Association
of Malawi etc
c) Religious bodies e.g. Evangelical Association of Malawi, Muslim Association
of Malawi, Episcopal Association of Malawi, etc
d) Trade Union e.g. Teachers Union of Malawi (TUM), Malawi Congress of Trade
Union (MCTU)
e) Co-operative societies e.g. SACCO, Village Bank, Farmer Clubs etc

Objectives of Non-profit making organisations

a) To support each other in terms of economic activities
b) To provide goods and services at a cheaper price
c) To strengthen professionalism and ethical standards of people‟s career
d) To provide social work for the general public

Functions (importance) of non-profit making organisations

a) Economic activity
b) Representation
c) Accountability and auditing provision
d) Supervision and management of public services
e) Provision for the dissolution of the entity
f) Tax status of the foundation
g) Provision for the amendments of the statutes or articles of incorporation

2.2. Co-operative Societies

 It is a voluntary non-profit making organisation
 It is a business where owners are also customers of the business. It is
registered by the Registrar of Co-operative Society

Characteristics/(Principles) of Co-operative Societies

Formation  A group of people in the private sector subscribe a

small sum of money as capital
 Members have common goal to achieve
Ownership  Co-operatives are owned by members
 Owners of a cooperative society are called members

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Control  A management committee takes care of daily running

of the co-operatives
 The committee is appointed by the members
 Management committee may employ paid chief
executive to implement policies of the co-operative.
Democratic control  Each member is free to join or leave the organisation
 There is a minimum of 10 members
 Each member has one vote
 Posts such as Chairperson, Secretary, treasurer are
filled by voting
 It is a voluntary organisation
Membership  Membership is open to people who are 18 years and
above
 Membership is voluntary
 Membership is not based on tribe, religion etc
Capital Contribution  Capital is raised by members through shares
 Capital may be paid for by cash or by instalment
Distribution of profits  Co-operatives may run internal trading activities e.g.
bottle store, minibus from which profits can be
realised
 Profits are distributed according to shares held
 Profits are called dividends
 Dividends are also distributed according to purchases
 Rate of dividend is decided by the Annual General
Meeting (AGM)
Legal requirements  Once the co-operative society is registered with
(Limited liability) Registrar of Co-operative Society all members have
limited liability
 Hence, Properties cannot be snatched by creditors

Reasons for formation of Co-operative societies

a) To find a market for members products
b) To give loans to members
c) To improve living standards of members
d) To sell goods and services at a cheaper price to members
e) To keep members busy with activities
f) To share business knowledge with each other

Forms of Co-operative Societies in Malawi

a) Agricultural (Marketing/Purchasing) co-operatives – these are co-
operatives that sell farm produce e.g. farm products, dairy products. They
form the co-operatives to gain advantage of (1) sharing costs (2) finding
produce market (3) benefits from economies of buying in bulk.
b) Service providers co-operatives – these are co-operatives that provide
service to the general public e.g. health, education, sanitation, entertainment,
communication etc
c) Retail/ (Consumer) co-operatives – these are co-operatives that buy and
sell different types of products or goods e.g. supermarkets, local food stores

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etc. They usually take advantage of bulk buying and aim at cutting the chain
of distribution short.

Importance of consumer co-operatives

 They buy the product or service that the business makes
 Savings are mobilised locally and returned to members in form of loans
 Interest rates are better than the rates given by banks
 SACCOs encourage women to save especially rural women groups
 They provide quality goods and services at competitive prices

d) Producer co-operatives – these are co-operatives that produce and sell

different products to the customers e.g. coffee producers, tea producers. They
are engaged in production sector either at primary level or secondary level.

Importance of producer co-operatives

 They sell products/services that the businesses and other consumes
want
 Revenues are mobilised locally and returned to members in form of
dividends
 Interest rates are better than those given by banks
 They provide quality goods/services at lowest pricing to consumers
following low interest rates given

e) Communal enterprises – these are projects that people run in partnership

e.g NABW, SACCO

Advantages of Co-operative societies

a) Members learn business skills from each other
b) Some co-operatives provide markets for its members produce
c) When they grow large, they enjoy economies of scale
d) Elimination of middle person in the chain of distribution hence buying goods
at cheaper price
e) Goods and services are sold at a cheaper price because they are not profit
oriented
f) Members are offered loans or assisted with short term loans
g) Members enjoy limited liability with means personal property cannot be taken
away by creditors of the business
h) It is the most democratic type of business
i) Members are kept busy instead of engaging in bad behaviours

Disadvantages of Co-operative Societies

a) Most banks are reluctant to loan out co-operatives because of their not-for-
profit motive
b) There is often a clash in democratic principles because decisions have to be
made unanimously
c) There is lack of capital to run the business
d) Corruption is high among members hence dissolution
e) Losses incurred in the business are met by members
f) There is lack of marketing skills – e.g. failure to add value to products

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g) There is loss of trust among members

h) There is lack of qualified personnel because of poor salaries
i) There is lack of managerial skills to run the business leading to shortage of
goods and accruing losses
j) It takes time to convene meetings to discuss crucial and urgent issues due to
notices and agendas that must be sent to all members

TOPIC 3 : BUSINESS FINANCE 1

Non-Bank Financial Institutions (NBFI)

These are organisations that administer finance but are not registered as banks with
the Banking Act.

Examples of NBFI
Alliance Capital, Pride Malawi, Old Mutual, National Insurance Company (NICO),
Malawi Rural Finance Company (MRFC), FINCA Malawi, SACCO Centres such as
Chitukuko SACCO, Women groups such as Tilemere Bank Group, Malawi Stock
Exchange (MSE), Leasing and Finance (LFC)

Functions (Roles) of NBFI

 Providing hire purchase services  Offering trade credit services
 Providing credit sale services  Offering discounting services
 Providing leasing services  Providing mortgage loans (bonds)
 Providing loans  Providing factoring services
 Providing financial securities  Malawi Stock Exchange (MSE)

Terms and conditions for Non-Bank Services

The following must be fulfilled for NBFI to start operating in Malawi
1) Proposed financial institution, including its legal form, incorporation, Head office,
business place, capital structure, shareholder list, acquisition debt, banking
activities, business plan.
2) Directors, executive officers and principal shareholders including:
 Names and addresses, employment history, positions, nationality, reporting
lines, shareholding etc.
 Information regarding discipline e.g. fraud, investigations etc
 Authority in terms of voting interests
3) Filing fee
4) Inquiries and submission. The applicant must complete the application and the
supporting attachments

SOURCES OF CAPITAL FOR BUSINESS

1) Personal Savings/ Own savings / Own capital

It involves getting capital from your own money.

Advantages of own capital

a) It is free of interest
b) All profits are enjoyed by owner

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c) It is easy to start a business because it requires less capital

Disadvantages of own capital

a) Expansion of business is limited due to less capital
b) It may put strain on family and personal life
c) With time, money may lose value due to inflation

2) Hire Purchase and Credit Sale Agreement

Hire Purchase - it is a trade agreement where one party (hirer /debtor) buys an
item by making monthly payments (instalments). The buyer becomes the owner
after the final instalment. The seller is called Creditor. It is suitable for buying
goods with long life value e.g. furniture, motor vehicle, equipment, cooker etc.
Credit Sale – it is a trade agreement where the buyer (debtor) buys an item and
owns it with first instalment. The first instalment is usually 25% of face value of
property.
Lay-bye – a form of credit sale where a customer gets goods after final
payment.

Hire Purchase Credit Sale

Differences
 Debtor can pay deposit or not  Deposit is required
 Debtor assumers ownership (title) of  Debtor assumes ownership (title) on
goods after final instalment payment of initial deposit
 Item cannot be used as collateral  Item can be used as collateral
 Item can be re-possessed if there is  Defaulter can be sued
default
Similarities
 Both are means of credit buying
 Fixed assets are applicable not perishables
 Payment is made in monthly instalments
 Penalties are faced by debtor who defaults payments

ADVANTAGES OF HIRE PURCHASE AND CREDIT SALE

Advantages to debtor (buyer/hirer) Advantages to seller (creditor)

 Supplier guarantee to repair item  Supplier able to sell more on credit
when faults are detected within terns due to easy payment terms
specified time  More profits are made due to extra
 Paying for the item while using it costs
 Buying durable and expensive items  Relief from huge storage
which could not be bought by cash (warehouse) costs due to high stock
 Goods are high quality and original turn
 More time to test item before  Winning more Market share because
finishing payment of flexible credit terms

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DISADVANTAGES OF HIRE PURCHASE AND CREDIT SALE

To the Buyer (Debtor)

 Restricts buyer‟s choice to shops  It leads to impulse buying (buying
that offer items on these terms once emotionally without budget)
they make it habitual  Debtor can be sued or goods
 Item becomes more expensive than repossessed due to default creating
cash due to no discounts plus bad reputation
travelling  In hire purchases once goods are
repossessed instalments are
forfeited.

To the Seller (Creditor)

 Creditor may not be paid in full if a  Both credit sale and hire purchase
debtor leaves with no traces require large amount of capital to
 Repossessed item may not fetch the keep business going
outstanding balance due to its  Creditor is in danger of risk of
condition creating negative opinion in minds of
 Creditor incurs more costs on legal potential customers when they are
actions e.g. use of sheriffs to dragged to court for failure to settle
repossess the item debts

Example of hire purchase

A Microwave is marked K52,000 cash. It can be sold by either cash or hire

purchase. The hire purchase has the following conditions:
a) a deposit of 20%
b) an interest of 30%
c) the property will be paid in 6 equal instalments

Calculate:
i. An amount of deposit to be paid
ii. Interest to be paid
iii. Hire purchase paid
iv. Difference between cash price and hire purchase price
v. Amount of instalments

Solution
i. Deposit of 20% = 20/100 x K52,000
= K10,400

ii. Interest of 30% = 30/100 x K52,000

= K15,600

iii. Hire purchase = Cash price + interest

= K52,000 + K15,600

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= K67,600

iv. 6 equal instalments = Hire purchase price – deposit

= K67,600 – K10,400
= K57,200
= K57,200 ÷ 6
= K9533.33333333
= K9,533 (rounded off to 3 decimal places)

v. Difference = K67,600 – K52,000

= K15,600

3) Leasing
It is hiring or renting an asset for a specified period. Items that can be leased
are plant and machinery, premises, land and building

Leasing organisations include : Leasing and Finance Co. Ltd, National

Finance Co., Gestetner, Private Vehicle Hire Organisation (PVHO) etc
Parties in Leasing : Lessor (owner of property), Lessee (user of property)

Characteristics of Leasing
a) It involves fixed assets e.g. land, plant and machinery
b) Payment is made in instalments
c) Leasing contract is renewable
d) Maintenance of asset is done by Lessor
e) Repayment period is determined by the working span of the asset
f) Asset can be used upon making initial instalment

Advantages of Leasing
a) Lessee enjoys the property
b) Easy to start a business because assets are already there
c) Lessee chooses machinery or asset best suited for intended purpose
d) Repairs or maintenance are Lessor‟s responsibility
e) Lease contract is renewable
f) Lessor gets more money through rent
g) It is suitable where business is not willing to commit large capital sums to buy
assets
h) It is suitable where technology changes rapidly and that business needs to
update its equipment regularly.

Disadvantages of Leasing
a) Lessee does not own property
b) Leasing contract can be terminated
c) Maintenance is done by the lessor e.g. painting

4) Factoring
It is the process of selling debts to an agency. Factoring is also called Bridging
finance. The factoring company gives cash to a business and takes charge of its

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accounts and documents of title. The factor company benefits from a discount
on receivable and administration charges.

Parties in factoring
 Factor (the company which buys debts)
 Client (seller of debt)
 Recipient ( the debtor of goods)

Example
Mary Phiri has debts which amounted to K800,000. She wants to sell the debts
to Leasing and Finance. Leasing and Finance has the following conditions
a) charges 20% commission
b) charges 5% administration fee

Calculate how much Mary Phiri is going to get.

Face value : K800,000 OR Face value : K800,000

Purchase value : 20/100 x K800,000 Commission = 100% - 20% = 80%

= 80
20% commission = K160,000 /100 x K800,000
= K640,000
Balance = K800,000 – K160,000
= K640,000 Less 5% administration fee
Less 5% administration fee
= 100 – 5% = 95%
= 5/100 x K640,000
= K32,000 = 95/100 x K640,000 = K608,000
Money paid to Mary Phiri = 640,000
Money paid to M. Phiri
(32,000)
K608,000 = K608,000

Advantages of factoring
a) The factoree is free of debts
b) The business is provided with working capital
c) Factoring agencies are more flexible than banks because cash is provided
within 24hrs
d) The business can plan ahead because cash is already there
e) They can also collect debts on behalf of clients
f) Business time and effort is saved because there are no debts
g) It gives complete protection against bad debts
h) The business is provided with immediate cash.
i) A factoree runs away from the risk of credit period extension by the buying
company
j) The business that has opportunities of invoice factoring wins more markets
share because it continues to sell on credit.

Disadvantages of factoring
a) Business does not get full value of its money
b) It is an expensive form of finance because of commissions and fees
c) It creates bad feelings with the customer as the factor presses for payment

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d) The factor can take over the business if the customer (debtor) cannot pay the
debt
e) Factoring company runs risk of losing money in case the buying company
defaults payment since they cannot claim back money already paid to the
factoree.
f) It may lead to over confidence in the behaviour of the client resulting in
overhead or mismanagement

5) Trade credit – it is where payment for purchases is delayed for 30 days. Trade
credit is often interest free and may also attract cash discounts for prompt
payment. It is a solution to the short run cash flow problem
6) Loan and overdrafts – Loan is money that is lent out. The actual amount lent
out is called principal and the cost related to it is called interest. Loans can be
accessed from institutions such as : SACCO, FINCA, MRFC, etc
7) Mortgage – it is a form of a loan whose collateral security is a tangible material
such as a house. This house must have legal title deeds and worth the value of
the loan so that in case of default the house can be turned into cash to recover
the loan. Mortgages are mostly issued by Building Societies. Parties in a
Mortgage: Mortgagor (person getting the loan), Mortgagee (the bank/lending
institution)

Conditions for a Mortgage not to be abused

 There must be collateral security e.g. house title deed
 There must be insurance cover to cover death of the mortgagor
 The bank will give 90% of the value of the property/applied loan

Advantages of a mortgage
 It is an easy way of having a loan to undertake a big project
 The property can be used as security to the loan
 One can have a mortgage or loan without having a property if the
employer guarantees the loan.
Disadvantages of Mortgage
 The property requires maintenance to be in good state
 Cost of repayment can be prohibitive if the wage earner is ill or family has
increased
 Loan repayment deprives the family of luxurious goods owned by others
 Buying property through mortgage is the most expensive means of
borrowing

8) Discounting – it is discounting future cash flows to present values in order to

utilise today‟s value for money. The major role of discounting houses is to retire
(discount) financial securities that bear future maturity dates e.g the holder of
such securities will exchange the securities for cash (retire them). Interest is
charged. First Discount House and Continental Discount House offer this
services on securities such as such as Bills of Exchange, Treasury Bills,
certificate of deposits etc)
9) Malawi Stock Exchange – it is an organised financial market where stocks and
shares can be bought or sold. If a member of the public wishes to buy shares he

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cannot go into the market himself unless via a Stock broker as only members
listed on the market are admitted into the market to buy or sell shares.
10) Foreign financing – Foreign financing is divided into (a) financial aid (b) Non –
financial aid

(a) Financial aid (assistance in form of (i) loans (ii) grants

Types of Financial aid

(i) Foreign developmental grants

(ii) foreign loans

Grant or Donation
It is the amount of money that cannot be paid back

Types of grants
 Free grant – the grant has no conditions attached and it can be used anyhow
 Tied grant – the grant has conditions attached as such the money cannot be
used anyhow.

Examples of International donors

 USAID  African Development Bank (ADB)
 World Bank  International Monetary Fund (IMF)
 CIDA  DFID

Importance of foreign Development Grants

a) Acts as free capital for the business
b) Used to purchase capital assets e.g. cars
c) Used to repay some accrued loans
d) Used to pay good salaries to employees
e) Used to develop and improve business activities e.g. expansion, diversification

(b) Non-financial aid (assistance in form of goods and services)

i. Millitary aid – this is aid in form of peace keeping and training
ii. Input of goods and services – this is donation in form of goods and
services e.g. clothes for flood victims, ambulances etc
iii. Technical aid – this is aid inform of expatriates to train and assist local
people
iv. Technological aid – it is aid in form of new machines and technology
v. Educational aid – teaching people skills of life

Types of Foreign developmental Loan

(a) Soft Loan – it is when the funds are already in receiving country‟s currency e.g.
Malawi Kwacha
(b) Hard Loan – it is when the funds are in the giving country‟s currency e.g. US$,
pound sterling etc

Procedure to obtain foreign loan

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a) Identify the financial lending institution e.g. DFID. This can be done through
internet, newspapers etc
b) Draft a comprehensive business proposal
c) Use a clear covering letter-head with a logo of the business
d) A clear covering letter must contain the following information
 Name of organisation (local business)
 Official and physical address of the local business
 Business goals and objectives
 Expected output
 Competitive strength
 Target group
 Total estimated budget in foreign currency

Problems faced with foreign financing

a) Identification of the funding foreign institution
b) Specification of business proposal
c) Undue influence on the recipient country‟s policies unlike conditions set by the
lenders
d) Debt servicing problem of repayment of the loan with interest

TOPIC 4 : PRODUCTION 1

Production is a process that transforms raw materials (resources) into finished goods

Production Steps

a) Innovation – it involves generating new ideas for new designs, initiating quality
improvements to products and discovery of new technologies, products and
process of production.
b) Planning – A plan establishes standards of performance to be achieved and how
deviations from standards will be handled. Thus it lays a foundation for best
products to be produced. Poor planning leads poor quality and hence low
business returns.
c) Budgeting – it makes sure that the production process does not use a lot of
wastes nor inadequate resources. A budget should have contingencies (a
possibility of something happening or not) in case prices will increase in future due
to inflation.
d) Resource mobilisation – Resources are inputs to production. This stage involves
collection of the resources ready for the production process.
e) Actual Production – this is where the resources are mixed to produce a product
or service required.
f) Quality control/assurance - This stage requires monitoring and control of the
processes in order to produce high quality goods and services.
g) Distribution step (stage) – once goods are manufactured they have to be taken
to the market places. Distribution avoids goods from just piling up and making
capital tied up in idle stock.
h) Utilisation (accomplishment stage) – once the goods are taken to the market
they should satisfy the market demands. Thus, individuals, companies,

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households and nations should use the goods and services that have been
produced.

Production with locally available resources

This involves using two main sets of resources

 transformed resources e.g. the raw materials and components that are
transformed into end products (outputs).
 the transforming resources e.g. machinery, buildings, computers and
people that carry out the transforming processes.

At each stage of production value is added to make the product desirable to the
consumer so that they will pay more for it. It also includes marketing processes such
as advertising, promotion, and distribution that make the final product desirable

Quality Control

Quality is the degree how the product satisfies the consumer.

Control is the process of comparing actual results to goals and objectives and taking
corrective action when necessary.

In Malawi, Boards and Acts that promote quality products are Malawi Bureau of
Standards (MBS), Weights and Measures Act, Consumer Association of Malawi
(CAMA).

Principles of Quality
a) Standardisation – where the best sizes, types and qualities are determined
b) Simplification – involves efforts of making production process less complicated
c) Specialisation – where a company carries only one part of the total production
process or concentrates on a narrow range of products

Techniques of Controlling Quality

a) Control charts – graphs are used to indicate when a process is within control or
out of control
b) Automation – automatic devices are installed that detect or reveal that faults or
defections have occurred, that need attention
c) Poka - Yoke – it is a device designed to prevent repetition of the faults it is
programmed to eliminate
d) Source inspection – it is a technique designed to inspect machines first before
production starts i.e. worn out parts are replaced and defective raw materials are
not used.
e) Self-Checking – a principle which requires the individual worker to be alert to
monitor and check his or her own output

Methods of Ensuring Quality Control

a) Inspection – it involves identifying failures and perhaps rectifying them through

physical and electronic inspection strategies to allocate quality deficiencies. This
helps to prevent faults and elimination of product shortfalls.

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b) Quality Assurance – it looks into the quality of supplies, nature of

clients/customers, training of personnel and engaging internal and external
auditors
c) Total Quality Management (TQM) – it involves the whole company getting
organised in every department, every activity and every single person at every
level i.e. the organisation being active and working properly together.

Importance of Quality Control

a) Faults are minimised leading to economies of scale

b) More revenue is generated because of high quality products offered
c) Increased customer satisfaction
d) Professional workers who are efficient operators get jobs in these industries
thereby reducing unemployment
e) Customers get good quality products that are not a health hazard or that may
cause injury
f) It reduces scraps, returns inwards and customer complaints

Problems (disadvantages) of quality control

a) Inefficient workers are at a risk of losing their job
b) It has led to increased dishonesty on product marks such as forging names to
be put on fake products
c) Inefficient operators may hide faults from auditors for fear of being dismissed.
This weakens the whole production process
d) Setting up quality control standards is a costly investment.

Stock/(Inventory) Control
Stock are goods kept by an organisation either for manufacturing process or for re-
sale. E.g. raw materials, fuels, components, Work-In-Progress (WIP), finished goods
etc.

Stock control is the activity of checking a business or shop‟s stock. Thus,

controlling amount of stock on the shelves and in the stockroom and how re-ordering
happens

Features of stock control software

 Ensuring that products are in shops in right quantity
 Recognising when a customer has bought a product
 Automatically signalling when more products need to be put on the shelf from the
stockroom
 Automatic re-ordering of stock at the right time from main warehouse
 Automatically producing management information reports that could be used both
by local managers and at head office

Stock levels
Stock levels refer to the amount of inventory an organisation holds. A firm will thus
keep maintaining some minimum levels of products under stock to satisfy customer
demand at any particular time. It is dangerous for a firm to keep too high a level of
inventory or keep too low a level of inventory.

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Re-order level – it cautions management to order additional stock

Lead time – it is the time it takes a supplier to deliver the goods once an order is
placed.
Buffer Stock – a level of extra stock that is maintained to mitigate risk of stock-outs
or (shortfall in raw materials or finished goods) due to uncertainities in demand and
supply fluctuations

Stock taking

Stock taking involves physical verification of the quantities and conditions of items
held in an inventory or warehouse.

Different Valuations of Inventory

Stock record card (January – December)

Purchases Issues
2014 K 2014 K
Jan 10 @ K30 each 300 June 7 for K50 350
May 15 @ K40 each 600 October 28 for K50 1680
Sept 30 @ K50 1500 35 2030
55 2400

a) F.I.F.O. (First In First Out) – it follows the chronological order the stock was
received. The first items to be received are the first ones to be issued.

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Example of FIFO inventory Valuation

Date Receipts Issues Balance

2014 K K
Jan 10 at K30 each - 10 at K30 each 300
May 15 at K40 each - 10 at K30 each 300
15 at K40 each
600 900
June - 7 at K30 each 3 at K30 each 90
15 at K40 each 600 690
Sept 30 at K50 each - 3 at K30 each 90
15 at K40 each 600
30 at K50 each 1500 2190
Oct - 3 at K30 each
15 at K40 each
10 at K50 each 20 at K50 each 1000
28

Note :
 balance column shows amount of stock in monetary value after each
transaction
 No stock was issued in January and May. This accumulated the stock items
to 25 items
 In June 7 items were issued out of 25 items at K30 each because 7 items are
included in the first stock items of 10. Note the balance
 No stock issues in September, hence the balance accumulated to 48 items.
 28 items were issued in October at different valuations in the order of cost of
stock purchased. Thus the closing inventory at 31 December 2014 at cost is
valued under FIFO as K1000.

b) L.I.F.O. (Last In First Out) – it demands that the last items to be purchased
are issued out first. If last batch has no enough stock, then the balance needed
is assumed to come from the previous batch left unsold. Suppose instead of 28
items in October, the stores man issues out 40 items, LIFO will be like

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Example of LIFO inventory valuation

Date Receipts Issues Balance

2014 - K K
Jan 10 at K30 10 at K30 each 300
May 15 at K40 - 10 at K30 each 300
15 at K40 each 600 900
June - 7 at K40 each 10 at K30 each 300
8 at k40 each 320 620
Sept 30 at K50 - 10 at k30 each 300
8 at k40 each 320
30 at k50 each 1,500 2120
Oct - 30 at K50 each
8 at K40 each
2 at K30 each 8 at k30 240
40

The operations are the same only that it is now done in an opposite direction (from
the last towards the first). Closing inventory is under LIFO is valued at K240.

c) AVCO (Average Cost method) – The average cost of each receipt of goods is
re-calculated. It follows that all issues are going to be valued at this average
cost until another receipt of goods (stocks) is effected. Then their average
stock is as well calculated. AVCO is also called Weighted Average Cost (WAC).
Suppose 28 items were issued in October, AVCO would be like:

Example of AVCO Inventory valuation

Date Receipts Issues Average No. of units Balance

cost in inventory
2014 K K
Jan 10 at K30 each - 30 10 300
May 15 at K40 each - 36* 25 900
June - 7 at K36 36 18 648
September 30 at K50 each 45** 48 2148
October 28 at K45 45 20 895

The closing inventory under AVCO is valued at K895.

Note :
*In May, this is calculated as follows: inventory 10 x 30 = K300 + inventory received
(15 x K40) = K600 = total K900. Then divide the 25 units (10 + 15) into the total cost
of that inventory i.e. K900 ÷ 25 = K36.
**In September is calculated as follows : inventory 18 x 36 = K648 + inventory
received (30 x K50) = K1500 = total K2148. There are 48 units (18 + 30) in the
inventory so the average is K2148 ÷ 48 = K44.75 (rounded off to K45)

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TOPIC 5 : ENTREPRENEURSHIP 1

Entrepreneurship is the process of running or doing a business

Functions of Entrepreneurs
a) Employing workers
b) Deciding on conducive location (place) for the business
c) Sourcing quality raw materials for high quality products
d) Finding potential markets for products/services

Risks borne by entrepreneurs

a) Losing reputation where the business fails
b) Losing personal properties where creditors confiscate property for failure to repay
back loans
c) Suffering losses incurred in the course of doing the business.

Characteristics of Entrepreneurs

a) Innovative – it is being anxious for new ideas, technologies and discovering new
products for business survival and continuity
b) Willingness to take risks – Entrepreneurs regard failure or slow progress as part
of business. In business expect to win or lose. Risk takers in most cases
succeed in business unlike risk averse people (those who are afraid to take risks).
c) High need of achievements – Entrepreneurs aim at achieving goals and
objectives of the business e.g. expanding the business, mass production,
becoming market leaders etc.
d) High need of self-esteem – This is the desire to have a high status quo,
superiority, self-respect and prestige as well as feelings of accomplishment in the
society.
e) High need of self-confidence – it is being well organised, responsible and never
moved by unfavourable business situations. Patience is needed until when the
business becomes a success.
f) Problem solver – he/she must be able to solve the problems affecting the
business

Rewards to entrepreneurs
a) Profits – Profit is revenue realised after deducting total capital employed
(invested) from total sales. There is gross profit (total sales revenue – cost of
sales) and Net profit (gross profit – expenses). Entrepreneurs use net profit to get
their needs and wants
b) Independence – Entrepreneurs are self- reliant in financial matters as they are
well secured from moments of eventualities such as job loss, funeral etc
c) Satisfaction – Entrepreneurs are fulfilled in life since they are able to get
whatever they want without financial limitations.

Business plan

These are things or activities to be done when the business is launched. A business
plan is also called business proposal

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Purposes of business plan

 To convince the funding institution when seeking financial assistance
 To act as a guide when running the business so that an entrepreneur should not
lose direction
 It helps an entrepreneur in evaluation and checking whether the onset goals have
been met and make improvements where necessary.

Factors to be considered when drafting a business plan

a) A good idea about the product - conducting product and market research to
know how fast the product can sell including its major rivals.
b) Marketing – involves identifying consumers wants and provide exactly what can
satisfy the customer.
c) Financial Statements – involves preparing different financial documents such as
income statement, balance sheet etc in order to predict the going concern of the
business
d) Existing sources of finance – disclosure of some sources of capital for
knowledge of financiers
e) Business growth and diversification – this can reveal the asset base of the
business that can be used for collateral purposes.
f) Business location – a conducive location contributes positively to business
success because more customers are attracted.

Qualities of a good business plan

a) It must be simple, clear and brief
b) It should be realistic and truthful
c) It should be accurate supported with data and figures
d) It must be logical and illustrated and mathematically supported
e) It must be timely

Major contents (components/elements) of a good business plan

1. Aims and objectives of the business – state the reason why you are doing the
business
2. Location and address of the business – state the place where the business
headquarters is situated
3. Mission statement of the business – it is the belief of the business e.g.
Always with you for TNM
4. Resources available – it includes resources already available for the business
such as water, electricity, transport etc
5. Key Personnel – state key positions of people you are going to employ in the
business e.g. accountant, marketing Manager, Human Resources Manager etc
6. Estimated input and output of the business – state number of products you
are going to produce and how much you are going to spend e.g. the budget and
cost.
7. Challenges of the business – state the possible problems you are going to
face in the business

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8. Cashflow statement – it is the measurement of cash in the business. Cash into

the business is called cash inflow while cash out of the business is called cash
outflow
9. Finance – state the sources of capital for the business e.g. Leasing, hire
purchase, factoring personal savings etc
10. Marketing – state the means/ method of advertising your products. State how
product is going to promoted or advertised e.g. radio, TV etc

Setting up a Business

Requirements
Entrepreneurs will have to fulfil some of the following :

 Availability of adequate capital in relation to size of business

 Identification of location for the business in liaison with the relevant authorities e.g.
Ministry of Lands, Local Government Assemblies
 Undergoing appropriate registration process with Registrar of Companies or
Registrar of Co-operative societies. Other businesses may not need registration
processes

Methods of Setting up a Business

1. Establishing an entirely new and unique business

Reasons for establishing new business

 Discovery of new product that needs special designs and logistics
 To select and ideal business location, banker or supplier of raw materials
 To run away from inheriting unruly employees from old existing business
 To avoid taking along with unsettled bills and suffer from outstanding lawsuit
 Desire to use experience from previous job e.g. a cook can open a restaurant.

2. Buying an existing old business

Reasons for buying an existing old business

 to reduce risks and uncertainities which are faced by new business starters
 to take advantage of already organised resources and markets
 the total purchasing price may seem attractive than the cost incurred in
established a completely new business

Factors to consider before buying an old existing business

 examining financial data to know the history of the business and its financial
direction
 examine legal commitments e.g. unsettled bills, overdue rent and lawsuits of
the business
 investigating the stiffness of competition and decide whether they will withstand
it or not
 considering the quality of the buildings to see if they are attractive

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 establishing if the product has a wide market share or if there are prospects of
gaining more markets

Reasons for selling old existing business

 old age of the owner
 long and persistent illness of the owner
 low profitability of the business
 a need to start a new and different nature of business.
 Decision to accept a position with another company

Advantages of buying an old existing business

a) It reduces the risks and uncertainities surrounding a new business
b) There are already experienced employees (inheriting from the same business)
c) Enjoyment of good reputation (good will)
d) It is easy to start because buildings are already there (e.g. availability of assets
in the new business)
e) There is no needs of advertising because the business already has customers
f) No need for registering the business because certificates are available

Disadvantages of buying an old existing business

a) Previous owner can collect money on behalf of the business
b) It is expensive to buy an old existing business because the seller wants to
make a profit
c) A profitable business cannot be sold
d) Legal complications e.g. unsettled bills, lawsuits
e) May inherit unruly workers

3. Franchising

It is using other company‟s name for marketing. In franchising one buys the rights
to use symbols, logos of the parent company. Franchising is common in
businesses such as foodstuffs, petroleum selling companies, car selling
companies etc

Parties in Franchising

Franchisor Franchisee
 Original owner of the name  User of the name
 It is the parent company  It is the one buying the rights to use
the name

The agreement between the franchisor and franchisee is called Franchising

Agreement

Examples of Franchises in Malawi

 Multi Choice (Mw)  Banja Lamtsogolo
 Nandos  Petroda
 Toyota Malawi  Total Malawi
 Puma

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Contents of Franchising Contract

 Cost – you look at how much to pay the fees and loyalties
 Territorial protection /(restrictions) – there must be enough territory to sell
products to meet costs
 Purchase of assets – many contracts specify that franchisees must purchase
equipment and supplies from specified suppliers
 Termination of contract – it can be terminated by giving each other notice.

Advantages of franchising
 It is easy to start the business because capital is provided by the franchisor
 The small company benefits from training programs for technical know how
 Business success is guaranteed due to professional back up and sale of
familiar products
 The small company is insulated against risks and uncertainities which new
business starters face
 A small company enjoys post contract services such as advises on special
problems
 Parent company enjoys a constant flow of revenue through royalties and
percentage sales.
 No need for advertising because it is done by the parent company
 The business enjoys goodwill/good reputation
 All products are provided by the franchisor

Disadvantages of franchising

 There is loss of control for the small company

 Small company cannot cancel out the contract without the parent company‟s
consent
 Small company pays fee and royalties regardless of volume of sales made
 A mistake made by one branch may affect the others
 All purchases are made by the franchisor

SMALL BUSINESSES

Economic roles (Contributions) of small businesses to the Malawi economy.

a) Creation of jobs for Malawians – they employ a lot of workers thereby reducing
unemployment
b) Source of revenue for the government – the government collects revenue
through tax
c) Bringing out special products – Big businesses are sometimes reluctant to
produce certain products due to their low profit margin e.g. pens, pencils hence
they are provided by small businesses
d) Providing specialised services – e.g. watch repair, shoe repair which cannot be
offered by big companies.
e) Aiding big businesses – they sell products on behalf of big companies e.g.
Airtel, TNM, Southern Bottlers etc

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f) Stimulating economic competition – they provide competition to big companies

hence providing low prices to the customers
g) Bringing in innovation (business innovation) – To be innovating means to be
resourceful. They provide new ideas into the business world.
h) Bringing in efficiency in production – competition among many small
businesses has made them improve their production methods hence improved
quality products to the satisfaction of the customers

Challenges (problems) faced by small businesses

1. lack of enough capital : most small scale business do not have enough
capital to run the business. They also find problems in convincing banks to
obtain loans.
2. bad debts: most of goods for small scale businesses are sold on credit to
friends and relatives as a result if they don‟t pay back the debts the business
fails. In addition, they have problems in repaying loans due to them because of
small capital base
3. competition: there is too much competition among small scale businesses
4. lack of marketing skills: most scale business do not advertise their business
due to high costs of advertising.
5. Lack of personnel: to save costs, small businesses employ a small number of
employees in relation to business activities
6. Government regulations & policy: policies to do with tax on businesses may
discourage small business to move forward successfully in a short time
7. Lack of qualified personnel – because of low salaries they cannot employ
well trained people
8. Lack managerial skills – many small businesses are owned by uneducated
people who are unskilled and have poor background concerning business.
9. Narrow customer base – most entrepreneurs are limited to a small area thus
having a small market.

Competitive strengths of small businesses (SWOT ANALYSIS)

SWOT – Strengths Weaknesses Opportunities Threats

For Mrs Phoya who sells second hand clothes in various local markets in Blantyre,
the SWOT analysis would be

STRENGTHS WEAKNESSES OPPORTUNITIES THREATHS

Quality clothes, Lack of capital, Conducive Competition, change
fashion, marketing accounting problems, government policies, of fashion, inflation,
skills, asset base, age limit, laziness, close markets, low political crisis,
customer base, unskilled labour, low interest bank rates, adverse climatic
management ability, resource base wide customer base conditions
business knowledge

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Business Strengths

a) Customer and market knowledge – entrepreneurs often know the customers

personally including their needs as such the entrepreneur can retain their loyalty
by taking trouble to help them.
b) Management flexibility – small business owners have complete control of the
business and they can offer credit facilities to the customers
c) Convenient working hours – small business usually open early and close late in
the night (even during weekend) when big businesses have closed thereby
providing convenience to customers
d) Convenient location – small businesses are located within the communities as
such customers do not have to travel long distances to reach them.
e) Product specialisation – small businesses usually concentrate on a single
product or a narrow range of goods leading to specialisation and hence achieving
perfection.
f) Machinery system – a business must have reliable machines e.g computers,
cars etc

Business weaknesses

a) Poor product /service – small businesses must offer products/ services of high
quality in order to achieve long term goals and remain competitive
b) Unskilled labour – Small businesses have a large number of unskilled labour due
to lack of staff training and low salaries.
c) Poor management – many small businesses have one director who is also the
owner. Management becomes inefficient if the person lacks managerial skills
d) Low resource base – resources such as capital, labour and land are not easy to
acquire by small businesses since most small businesses rely on lending
institutions assistance.

Business opportunities

a) Economic opportunity – where interest rates, inflation and exchange rates are
stable, small businesses must capitalise on them.
b) Social opportunity – a night club business that is located in an area where most
of its customers are socially based is more likely to grow.
c) Technology – the coming in of cell phones and computers has eased many small
businesses to operate

Business Threats

a) Competition – some small business may close down letting only those with better
capital base to remain in the business
b) Government policies – tax policies that crop up much of business profits may
lead to struggling of the business
c) Climatic conditions – agricultural based firms may be highly affected by non-
conducive weather conditions.

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SMALL BUSINESS GROWTH

Reasons for small businesses to expand (grow)

a) For higher profits – an increase in production leads to a fall of unit total cost.
Thus, a firm is able to realise more sales revenue that contributes to less variable
cost and increasing profits.
b) Ensuring business survival - it can be achieved through diversification. When
demand for a particular commodity falls the business can survive through revenue
generated from other products whose markets may be growing.
c) Easy access to credit facilities - an expanded business will own more assets
which can be used as collateral for long term loans.
d) For high status and prestige – small business people want to have more
respect from the society

Methods of small business growth

Business expansion is the horizontal or vertical growth of the business.

a) Internal growth
internal growth occurs when a single business unit expands its scale of operations
within its original management structure. It is easier to achieve if the markets for
the firm‟s products are expanding rapidly. Internal growth can be done through:

 Product research  Market gap analysis

 Market research  Reallocation of factors of production
 Quality control (endowment analysis)
 Product modification  Analysis of competitor products
 Employee training and  development of new products
Development  acquisition of more plant and
machinery
 hiring extra labour etc.

Factors that bring out internal growth

 When the business is able to efficiently utilise its own resources
 Conducting market research
 Market gap analysis (filling in all the vacant posts
 Revising and modifying old existing products
 Competitors knowledge and capitalise on their rival‟s weaknesses

b) External growth
it occurs mainly where two or more business entities join together to form one
larger business unit. External growth includes horizontal, vertical and
conglomerate

i. Vertical merging /(intergration) – it occurs where businesses in the same

industry but at different stages of production process join together. E.g. a
bakery owning or acquiring a mill, transportation and wheat farm (vertical

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intergration backward), or a bakery acquiring transportation and retail shops

(vertical intergration forward)

ii. Horizontal merging /(intergration) – it occurs when business units in similar

stages of production process merge e.g. merging of Napolo and Chibuku
Breweries.

iii. Conglomerate merging /(integration) – it occurs when a business buys or

merges with a firm in a different industry altogether. The operations of the two
firms are therefore not directly related. It is also called diversification.

Methods businesses can use to grow externally

 Business acquisition – involves buying of an already existing business
 Franchising – creating a sister company of an existing business elsewhere
but under domestic management
 Business licence – licensing of intellectual property to third parties
 Business agreements – establishment of business contracts with direct
dealers
 New market – identifying new markets by using means like the internet
 Joint ventures – this is partnership between businesses in order to achieve
savings in certain common areas of operation
 Employees stock ownership plans (ESOP) – it is where a business offers
shares to its employees.
 Customers ideas (in suggestion boxes)
 Government new policies (favourable)

Advantages of business mergers (business growth)

a) There is greater security over vital suppliers hence better control over the quality
of raw materials
b) Chances of increased profits due to increase in the scale of production
c) Mergers result in use of large machines, bulk buying and selling
d) More opportunities of accessing credit facilities
e) Risks are spread over the merger. Thus if one business declines the other may
survive.

Disadvantages of business mergers (business growth)

a) Expansion beyond a certain optimum level may increase unit costs hence
business may experience diseconomies of scale
b) Mergers may lead to monopoly hence exploiting workers
c) Management may not be familiar with new business techniques acquired.

Support and Aids Available for New Businesses

a) Political Support – Peace and stability promoted businesses. Wars, violence are
a threat to business success.
b) Economic Support – business do well in stable economic conditions since they
are able to plan ahead and not disturbed by fluctuating prices

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c) Social Support – high class societies with high incomes provide enough market
for business
d) Technological support – Advancement in modern technologies increase
productivity and hence reduction of unit cost.
e) Short courses – teaching people new skills of life e.g. through MEDI, TEVETA

Other support and aid available to a new business

Nature of support Source of support (aid) Effect
 Finance  Banks  working capital
 Land/buildings  rent  business location
 Customers  buying and selling  business growth
 Laws & regulations  government  Legal support
 Suppliers  materials  Factors of production
 Utility providers  communication  Eases business operations
 Transport  vehicles  Product distribution
 Warehousing  buildings  Keep goods for sale
 Insurance  policies  Cover in case of loss
 Advertising  sales & marketing  Product awareness

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FORM 4
WORK

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TOPIC 6 : TRADE AND AIDS TO TRADE 2

A. Trade Liberalisation

This is the removal of barriers/restrictions to trade in order to give wealth to the

general public. When trade is liberalised, the business community trade the way it
wants in order to make itself better off.

How trade liberalisation can be done

 Reduction of taxes (tariffs, duties etc)
 Reduction or elimination of quotas on goods going in and out of a country
 Reduction of non-tariff barriers e.g. licensing rules

Elements of Liberalisation
The following elements have to be fulfilled for liberalisation to work:
a) Profitability – people must get profit on what they offer for sale
b) Market – the market must be conducive and free from hindrances
c) Government restriction – there must be little or no government intervention
on trade
d) Risk reduction – business must have minimal risks
e) Competition – there must be stiff competition on the market. Competition is
good because :
 Prices are regulated/reduced
 Improves quality of products due to innovations
f) Economic freedom – sellers and buyers must exercise freedom on what they
sell and buy.

Advantages (Benefits) of Liberalisation

a) Private enterprises/businesses grow faster than public ones

b) Trade competitions are high which benefits customers
c) Acts as an incentive for inviting more investors on the market
d) Business people are free to trade the way they want and make profits
e) Gives total choices among producers and agents and customers on products
to trade on
f) A country can export its goods and services hence earn foreign exchange.
g) It creates employment especially in manufacturing and service industries.
h) It enables specialisation of goods/services in which countries have
comparative advantage

Disadvantages/Challenges/problems of Liberalisation

a) May lead to consumer exploitation through higher prices and poor quality
products
b) Low developed countries become dumping sites for poor products
c) Domestic/local industries may close down due to inability to compete with
foreign companies.
d) Unemployment can be created due to closing down of uncompetitive
industries.

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e) Low producing countries become importers than exporters hence a lot of

economic challenges
f) Loss of revenue to government due to closing down of local businesses and
tax holiday given to foreign investors.
g) It may lead to pollution and environmental problems
h) A decline in economic activities in one country may affect its trading partners.

B. Globalisation of Trade

 Globalisation refers to global marketing. It is buying and selling of goods and

services across the globe.
 Globalisation gives rise to global products such as Coke, Philips, Toyota,
Samsung, Nokia etc

Factors that have Encouraged globalisation in Malawi

a) Improved communication – internet, phones, computers enable people to

have access to information of global products
b) Improved education levels – educated people have better knowledge of ICT
gadgets and also take risks in terms of travelling abroad for business.
c) Improved standards of life (status quo and prestige) – economic status of
people has improved and this has increased purchasing power hence able to
buy products in other countries
d) High quality based products – there are a lot of good products which people
admire and strive to purchase them

Advantages/benefits of Globalisation
a) Cheaper prices - Everyone has access to cheaper products e.g. cars,
phones
b) Quality of products in order to retain and satisfy customers
c) Education – it allows people to move with ease from home country to another
in search for better education opportunities
d) Communication – information is easily accessible from all over the world.
e) Transport – goods and services easily move around the world using different
modes of transport.
f) Cheaper raw materials – accessibility of cheap raw materials from other
countries.
g) Foreign currency – countries acquire wealth in form of foreign exchange.
Foreign exchange is used to develop and develop different facilities.
h) Awareness on global environmental issues – more people become aware
of global issues such as global warming, deforestation, sustainable
development etc.
i) Poor countries have access to global markets e.g. Malawi is able to sell to
USA, India etc
j) There is large resource base (plenty of products) which lead to innovations
k) Leads to creation of jobs and businesses for people
l) Leads to economies of scale (i.e. use of low inputs resulting into high outputs)

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Disadvantages/problems/challenges of Globalisation

a) Creates a problem of dumping for poor products

b) Leads to economic instability for countries with less powerful currencies
c) It has created an opportunity for smugglers of unauthorised products e.g.
dangerous drugs
d) Transport and other logistics become a challenge when sourcing products
across the globe
e) The world is less interesting to travel for business because same products are
found everywhere.
f) Loss of culture since people tend to adapt and follow culture of the host
country.
g) Degradation of the environment due to activities such as mining, drilling,
deforestation.
h) Health issues – interaction of people from different countries may contribute to
rise in health risks e.g Ebola outbreak in one country easily spreading to
another through travellers.
i) Loss of jobs due to structural changes in organisations
j) Stiff competition which may affect growth of infant industries in the host
country.

C. Trade Protocol

It is a code of conduct or agreement between or among countries on procedures

for trading with each other. It establishes concrete procedures to be followed
when doing trade.

Types of Trade protocols

1. Bilateral trade protocol – it is an agreement between two (2) countries e.g.

Malawi and USA or between any 2 countries. Malawi‟s trade agreements
include : Malawi – Zimbabwe, Malawi – South Africa, Malawi – China, Malawi
– Botswana, Malawi – Mozambique.

Advantages of Bilateral trade

a) It brings about perfect comparative advantage e.g. each country gets from the
other what is cannot produce
b) The relationship between the two countries is easily built
c) The two countries become one global market
d) Border tariffs/custom duties and interest rates are reduced

Disadvantages/Problems of Bilateral trade

a) Comparative advantage may lead to dumping of poor products

b) Political problems in one country affect the other country‟s economy
c) Local industries in one country may close down due to influx of products from
the other country

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d) Limited number of goods and services are transacted because there are only
two countries

2. Multilateral trade protocols

 It is an agreement among several countries on trade. Mostly, multilaterals
exist among countries in a region which form a block e.g. SADC, EU.
 Malawi‟s multilateral trade agreements include : AGOA, WTO, EBA,
COMESA, SADC etc.
 **Within a multilateral trade agreement, there could be several bilateral
agreements

Advantages of multilateral trade protocols

a) Enhances perfect comparative advantage

b) Political problems in one country may not affect all other countries
c) Wide range of goods and services are transacted because there are several
countries.

Disadvantages of multilateral trade protocols

a) Comparative advantage may lead to dumping

b) One global market makes it less interesting to travel for business
c) Local industries in one country may collapse due to competition.

D. Common Markets

 These are markets that share exactly or approximately same principles of

trading. For Malawi to succeed in a Common market, it must improve its
agricultural production and manufactured products.
 Examples of Common markets are SADC, COMESA, ECOWAS, AGOA,
ACP, EU.

1) SADC: Southern African Development Community

 SADC is a common market for Southern African countries and it was
established in 1992.
 SADC has 14 member states. They include : Angola, Mozambique,
Seychelles, Lesotho, Swaziland, Tanzania, Namibia, Malawi, South Africa,
Zambia, Zimbabwe, Angola, DRC and Botswana

Major objectives of SADC

a) To establish a Free Trade Area (FTA) within the region.
b) To improve investment climate in the region
c) To enhance industrialisation and economic development
d) To liberalise intra-regional trade in goods and services
e) To foster production efficiency in order to meet quota requirement on
international trade markets

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Challenges/problems of SADC as a Common market

a) Poor transport infrastructure e.g. roads, railways

b) Unreliable source of power which affects industrialisation
c) Lack of access to sea routes due to absence of ports
d) Political and social conflict which affects investors
e) High custom duty and border tariff
f) Low production capacity hence unable to meet quota requirements
g) Lack of common currency
h) High rate of HIV AND AIDS infection

2) COMESA : Common Market for Eastern & Southern Africa

 COMESA was established in 1994 replacing Free Trade Area (FTA) for
Eastern & Southern Africa. It is a grouping for countries in Southern and
Eastern Africa. Most SADC member states are also in COMESA.
 Member states include : Kenya, Eritrea, Tanzania, Burundi, Ethiopia,
Madagascar and SADC members.

Major objectives of COMESA

a) To create a regional economic community
b) To ensure greater social and economic co-operation
c) To share the region‟s common heritage and destiny
d) To improve development in areas such as transport, communication,
natural resources, technology etc through reduced tariff among
member states

3) ECOWAS : Economic Community of West African States

 This was established in 1975 with Lagos Treaty. About 15 countries met in
Nigeria and agreed to establish a common market known as ECOWAS
 Member states include : Nigeria, Togo, Senegal, Burkina Faso, Mauritania,
Ghana, Niger, Sierra Leone, Benin, Cape Verde, Cote‟ d‟voire, Gambia,
Guinea Bissau, Liberia and Mali

Major objectives of ECOWAS

a) To promote trade co-operation and self-reliance
b) To harmonise agricultural policies in order to export more agricultural
products
c) To engage for movement of workers and capital among members
d) To develop trade and business among members

Main areas of specialisation in ECOWAS

 Transport, telecommunication and energy
 Trade, customs, immigration and monetary services
 Social and cultural affairs
 Industry, agriculture and natural resources

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4) AGOA : African Growth and Opportunity Act

This is the government of America‟s initiative to allow African countries export
their products to USA on quota and tax free basis.

AGOA’s Major Objectives

a) To allow African countries export to USA on quota and tax free
b) To make Africa reform its efforts and produce high quality products
c) To improve Africa‟s access to USA technical expertise
d) To assist USA markets have African partners

5) ACP : African Carribean Pacific

It is a grouping for about 70 African and Carribean Pacific nations. These are
countries that were colonised by 15 powerful European nations. Malawi being
a former colony of Britain, it is part of ACP

Major objectives of ACP

a) To improve industrial and agricultural co-operation as well as
specialisation
b) To promote and develop trade within financial institutions within the
region.
c) To enhance co-operation and understanding between African and
Caribbean Pacific nations on trade.

6) EU: European Union

 This was formerly known as European Economic Commission (EEC) which
was established in 1967. In 1992, EEC changed to European Union
 It is a grouping for all European nations such as Britain (on the verge of
exiting the group), France, German, Italy, Netherlands, Switzerland,
Belgium etc
 **EU key institutions : The Commission, Council, European Parliament and
the Court of Justice

Major Objectives of EU
a) To boost internal and external trade
b) To eradicate barriers to trade
c) To help in creation of more common markets for the sake of
competition
d) To bring rates of inflation down and deficit under control
e) To assist developing nations develop economically and socially
f) To bring new technologies that are key to industrial development
g) To help internal countries in form of economic bail out

Major achievements of EU
a) Creation of a single currency known as Euro in 1999
b) Adoption of common policies in areas such as agriculture, transport,
trade and law
c) Provision of loans to poor nations through investment bank
d) Creation of a Customs Union (CU) to stimulate trade within the area

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e) Introduction of agriculture common policies e.g. subsidising farmers to

ensure food security

E. ECONOMIC INTEGRATION
 Integration is an act of combining into a complete whole or a larger unit.
 Economic Integration therefore is an agreement among countries in a
geographic region to reduce and remove tariffs and non – tariff barriers in
order to allow free flow of goods and services as well as other factors of
production e.g. labour and capital.
 It aims at co-ordinating monetary and fiscal policies. Economic intergration is
also sometimes known as Regional Integration.

Forms /(Levels) of Economic Integration

1) Preferential Trade Area (PTA)

 This is a trading bloc that gives preferential access to certain products from
participating countries
 This is done by reducing tariffs for these products but by not abolishing it
completely
 PTA is established through trade pact (agreement) and it is the first stage
of economic integration. PTA is also known as Preferential Trade
Agreement

2) Free Trade Area (FTA)

 It is a trade bloc whose member countries have signed a free trade
agreement which eliminate tariffs, import quota and other barriers on most
goods and services
 In an FTA, people are also free to move between member states without
difficulties
 To a greater extent, FTA is considered as an open border.
 FTA is a second stage towards economic integration

3) Customs Union (CU)

 This is a type of trade bloc composed of FTA with a common external tariffs
 Participating countries establish a tax body to regulate taxes within the bloc
 Sometimes taxes may be removed totally in order to facilitate free trade.

THE ROLE OF MALAWI GOVERNMENT IN PROMOTING TRADE

Trade forms an important indicator for Malawi‟s economy. As such, the government
of Malawi must ensure that is promotes trade for the economy to grow. The
government of Malawi promotes trade through Local and Central Governments

A. LOCAL GOVERNMENT
Local government institutions are the Assemblies or Councils. They have
control over its specific geographical area and cannot pass or enforce laws
that will affect a wider area. They are Districts, towns, municipality and city
assemblies.

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Role of Local Government institutions in promoting trade

a) Provision of loans and grants to eligible firms (companies) for possible

expansion
b) Provision of business licences within their areas of jurisdiction in order to
formalise trade
c) Investing in rural and sub-urban sites in order to enhance trade by creating
an enabling environment for business
d) Providing incentives and other services to attract investors
e) Identifying new capital resources for small towns and communities
f) Provision of public utilities such as roads and bridges that facilitate trade
g) Provision of security

B. CENTRAL GOVERNMENT
 The Central government of Malawi includes Ministries, departments and
agencies. They are accommodated at the Capital Hill in Lilongwe
 Examples : Ministry of labour, Ministry of trade, Ministry of Agriculture,
Department of water, irrigation, Police and ACB as well as National Audit
as agencies

Role of Central Government in promoting trade

a) Protect private sector from unfair foreign competition through protectionism

policy
b) Providing security and incentives for trade and investment in order to attract
investors e.g. tax relief and subsidies on goods
c) Providing economic and social infrastructures e.g. roads, railways to
support business
d) Formulating macro-economic policies to promote economic stability that
create conducive environment for business.
e) Creating an enabling legal and regulatory framework that gives businesses
confidence
f) Connecting Malawian investors with foreign trade partners through
participation in international trade fairs
g) Recommending local firms to get loans and grants from international
organisations by acting as a guarantor (surety for a loan)
h) Promoting locally manufactured goods.
i) Providing financial assistance
j) Licensing businesses
k) Establishment of Export Processing Zones.

Roles of Other Institutions (organisations) that promote Trade in Malawi

1. Ministry of Industry, Trade and Tourism

The broad objective of the Ministry is to create a conducive environment for
businesses to flourish (to do well). Its mission is to promote, support and

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facilitate private enterprises efforts in order to make Malawi a manufacturing

based economy

How the Ministry of Industry and Trade promotes trade in Malawi

a) Foreign trade facilitation

 Encouraging producers to produce more and export the products
 Engaging in a multilateral trade agreements so that Malawi broadens
its market base
 Encouraging export development other than imports
 Facilitating export incentives (which are later implemented by MITC)

b) Domestic trade facilitation

 Formalising trade by issuing licences to traders
 Developing rules and regulations aimed at protecting consumers
 Ensuring constant supply of essential products by licenced
suppliers
 Restricting imports to promote exports by banning importation of
any products deemed necessary at that time
 Diversify export markets and consolidate available markets
 Creating a conducive environment to an investor reducing or
eliminating pulling factors in trade as well as ensuring Malawian
traders fully participate in local and international business
activities

c) Policy objectives guiding industrial development

 Offering business licences to operate an industry in a named
area e.g. Makata Industrial area
 Development of export oriented industries
 Development of export incentives to attract more investors
 Development of small and medium scale industries to support
big companies

2. Malawi Investment Trade Centre (MITC)

This is a trade and Inward investment promotion agency. It was established

to promote Malawi as an ideal destination for trade. MITC is a merger of two
institutions – MIPA and MEPC. It is a one-stop investment information centre
for business start ups

Objectives of MITC

a) To provide specialised support to local and foreign investors

b) To promote and facilitate export of products to other countries
c) To give advice to government on policies to do with trade
d) To fast track and ease/minimise the cost of doing business in Malawi
e) Speaking to potential foreign investors to start business in Malawi
f) Identifying joint venture partnerships for investors
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3. Malawi Confederation of Chambers of Commerce and Industry (MCCCI)

 It is a statutory corporation formed by firms in the private sectors. It is run
by a Board of Directors appointed by government. This is an umbrella body
for all chambers of Commerce and Industry.
 Its main role is to promote trade and investment within and outside Malawi.

Functions of MCCCI
a) Organising trade promotion events e.g. trade fairs
b) Advising government on matters regarding trade and economy at large
c) Providing information regarding investment climate in Malawi
d) Advising local companies on products on high demand in international
markets
e) Issuing export documents e.g. Certificate of Origin
f) Holding consultative meeting with government and all stakeholders to find
better ways of promoting trade
g) Providing training in business management
h) Offering business premises to micro and small enterprises

4. Malawi Bureau of Standards (MBS)

 This is a statutory body (state-owned) established to protect consumers. It

ensures that products available on the market meet the required standards.
 It also ensures that producers follow all required standards in products
manufacturing and service provision so that Malawian products get
international recognition.

Functions of MBS (How MBS promotes trade)

a) Adopting standards at international level and enforce them to local
producers to be followed
b) Conducting inspections and spot checks to see if products meet required
standards
c) Conducting tests in laboratories to check level of ingredients in order to
control quality
d) Confiscating and disposing off products of poor quality including expired
products
e) Checking equipment for measurements (weight and length measures) to
ensure that consumers are not cheated.
f) To undertake educational work in connection with standardisation

5. Indigenous Business Associations of Malawi (IBAM)

 This is an association for local business people in Malawi. The main
objective of IBAM is to ensure that Malawians come first in running
businesses.
 IBAM was instituted after noting that several businesses in Malawi and
Africa are owned and run by multinational corporations.

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Functions of IBAM
a) Ensuring that Malawian firms come first in running business as opposed to
foreigners
b) Lobbying government to advocate for the Buy Malawi campaign
c) Ensuring that local products and firms are available in foreign
exhibitions/fairs
d) Lobbying for fair distribution of capital resources for business by
government e.g. land
e) Advocating for provisions of loans from government to local firms
f) Pushing for better environment for business so that local businesses strive
(do well)
g) Lobbying government to enforce protectionism theory in business to ensure
that local industries survive

TOPIC 7 : BUSINESS ORGANISATIONS 2

PUBLIC CORPORATIONS / STATUTORY CORPORATIONS

These are companies that are directly or indirectly owned by the government or
state. They are also known as parastatal organisations or public enterprises or
nationalised industries. They are formed by an Act of Parliament (statute) from
which the name is derived.

Examples of Statutory corporations

 ESCOM  MBC  Malawi Bureau of
 ADMARC  MANEB Standards
 Malawi Housing  University of Malawi  Water Boards (BT,
 MZUNI  Botanic Gardens LL, C.R., N.R.)
 MUST  LUANAR  MIE
 MRA  Malawi Posts Corp

Reasons for formation

a) For profit motives or Commercial motives – some companies are there to
make profit for the government and themselves. They sell their products to the
public and realise revenue

Examples of profit oriented public corporations

 ADMARC – They buy and sell farm produce e.g. maize. They also sell farm
inputs e.g. fertilisers.
 Malawi Housing Corporation – They provide accommodation to Malawians
 Malawi Airlines – They provide air transport
 Water Boards – e.g. Blantyre Water Board, Lilongwe Water Board, Northern
Region Water Board, Central Region Water Board, Southern Region Water
Board
 Road Traffic Directorate – Issuing of driver‟s Licence and Motor Vehicle
Licence

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 Malawi Bureau of Standards – ensure that required standard in products are

met.
 MRA – collecting taxes on behalf of government

b) To provide services – some companies are formed to provide services to the

general public at a small fee or at times for free. They provide services in health,
sanitation, entertainment, road safety etc

Examples of service provider Parastatals

 Malawi Broadcasting Corporations (MBC) – to provide entertainment and
Civic education to Malawians. It also provides information to Malawians
 Malawi Communications Regulatory Authority (MACRA) – to supervise and
monitor radio and TV stations
 National Roads Authority (NRA) – to construct and maintain roads in Malawi
 National Statistical Office (NSO) – conducting population and housing census
 Malawi National Examinations Board (MANEB) – administering national
examinations
 Malawi Institute of Education (MIE) – they provide education curriculum in
Malawi

Characteristics or Features of Public Corporations

a) Ownership – there are no identifiable owners except government itself
b) Formation - they are formed by an Act of Parliament and assented to by the
State President
c) Profits – sometimes these companies make profits for the government. If
they make profits, profits are used for the following reasons :
 To provide social services to the general public e.g. schools, hospitals,
sanitation etc.
 Used by government to pay salaries of civil servants
 Used to pay back loans
 Profits are ploughed back into the business to improved its operations
 Profits are kept to pay future loans
d) Losses – Losses are met by tax payers because treasury will increase tax
e) Capital – capital is provided by the government through treasury. They can
also borrow money from international lending institutions or from other
governments.
f) Management – they are managed by a Board of directors who gets
objectives from government. Day to day activities are run by management
and members of staff.
g) Legal entity – e.g they have powers of a natural person such as they can sue
or be sued, own property in their own name, pay taxes, hold and transfer
property, acquire debts, enter into contracts, etc.
h) They are subsidised by government – in case of financial difficulties
government comes to their rescue.

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Management Chart (Hierarchy) of Nationalised industries or Statutory Corp.

Parliament

Minister

Board of Directors

Board Members

Management

Types of Statutory Corporations

There are four types of statutory corporations

a) Private Corporations – These corporations or companies that make money for

the government and for themselves e.g. ESCOM, Water Boards. They are also
called Commercial Oriented Corporations.
b) Non-Profit making Corporations – These are companies that provide essential
services to the general public on behalf of the government. E.g. University of
Malawi, MBC, National Roads Authority, MACRA, MERA, Malawi Institute of
Education etc
c) Municipalities – These are district and town councils that help government to
work well at local level. E.g. Zomba, Blantyre, Thyolo, Nsanje etc
d) Quasi-public corporations – they are considered private and meet public
demand e.g. TNM, MTL, National banks etc

Advantages/Merits of Public corporations/ Parastatals/ Nationalised

industries

a) They provide essential goods and services at a reasonable price and on

comprehensive scale
b) They are not area-selective as such their services are available to all
Malawians regardless of their status.
c) They make money for the government to provide social services
d) They create jobs. A lot of Malawians are employed in these parastatals thereby
reducing unemployment
e) They assist in the development of the country e.g. ESCOM, Water Boards etc
f) Easy to raise capital because government helps them.
g) They have administrative autonomy hence independence
h) Since decentralisation brings a lot of revenue, sectors can afford good
remunerations to their workers
i) Their liability is limited to the amount of capital invested in the corporation
j) They enjoy support and protection from the government
k) Availability of capital at low interest rates from government owned financial
institutions. In addition, government also acts as guarantor when accessing
loans

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Disadvantages / Problems of Nationalised Industries

 They encourage monopoly type of trade since they do not have competitors in
their business
 There is too much corruption and embezzlement of public funds by workers
when discharging their normal duties
 A lot of failures to meet public demand e.g. blackouts for ESCOM
 They drain a lot of resources from the government because of losses
 Work is not seriously done because of lack of control
 Pilferage (stealing of company items) is common especially among junior
members of staff
 Too much political interference which affects decision making hence poor
quality of services rendered.
 Poor quality products due to lack of competition
 There is limited consumers‟ choice.
 Discourages foreign investment.
 Formation requires lengthy documentation, complicated formalities etc hence
difficult and time consuming to form
 They are suitable for only big businesses and not small businesses.

Additional Examples of Parastatals

 Plant and Vehicle Hire Organisation (PVHO) – they provide transport for hire
 University of Malawi (UNIMA) – they provide tertiary education
 Malawi Rural Finance Company (MRFC) – they provide micro finance loans
to Malawians
 City Assemblies e.g Blantyre – they provide sanitation, street lights, building
roads etc
 Malawi Investment Trade Centre (MITC) – promoting trade in Malawi

PRIVATISATION
 It is the process where the government sell some of its companies to the general
public
 It is the transfer of ownership of companies from public hands to private hands
 It is also called De-nationalisation

Nationalisation
 It is the transfer of ownership from private hands into public hands
 It is the process whereby the government takes over a private company

Examples of Privatised industries in Malawi

 Grain & Milling Company  SUCOMA
 David Whitehead & Sons  Mchenga Coal Mine
 Malawi Book Service  Encor Products Ltd
 Soche Tours & Travel (STT)  Viply
 Chillington Agrimal Mw. Ltd  Brick and Tile Ltd
 Kasungu Inn  Optichem Mw Ltd
 Malawi Savings Bank  Choma Livestock Farm
 Portland Cement Co. Ltd

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Reasons (Objectives) for Privatisation

a) To raise revenue for the government – the money raised from privatisation is
used to provide social services to the general public e.g. health, education etc
b) To reduce monopoly in the economy – government wants to introduce
competition in the country
c) To increase efficiency in the economy – government wants companies to
produce quality products
d) To reduce government borrowing – government wants to reduce public
spending by not borrowing money to finance such corporations.
e) To allow Malawians to own companies – the government wants to give a
chance to Malawians to own shares in companies
f) To promote free market system – free market is when prices are controlled
by demand and supply.
g) To reduce government control – government concentrates on the effective
running of the state

Types (forms) of Privatisation

1) Deregulation – allowing private companies to compete with public companies

e.g. private schools competing with public schools
2) Offering shares to the public – allowing people to buy shares in public
companies e.g. TNM, National Bank, NICO etc
3) Public-Private Partnerships (PPPs) – the government owning a company in
Partnership with a Private company. Government can have 51% shares and
Private company 49% shares e.g. MASM, Mwaiwathu, NBS Bank etc
4) Contracting out work to private firms – government can outsource services
from a private company e.g. the government can hire cleaning services from a
private company
5) Concession – government can rent out the company to be run by another
company e.g. hotels

Advantages of Privatisation
a) Malawians are given a chance to own companies through shares
b) The government is able to have short term revenues in form of taxes
c) It reduces losses for the government
d) It increases efficiency in the economy because companies produce quality
products leading to high profitability
e) It increases competition thereby producing quality products
f) It leads to free market economy thereby giving money to the general public
g) It eliminates political interference since decisions will be made based on
efficiency and profit.
h) It widens consumer choice
i) Government gets huge sums of money from the sale of such companies

Disadvantages (Drawbacks) of Privatisation

a) It leads to job losses – people lose jobs because of the following reasons:
 Automation – machines will replace people

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 New owner can bring own workers

 Through redundancies and retrenchment
b) It leads to capital flight – when companies are sold to foreigners they take
away money from Malawi to their country of origin thereby exploiting Malawians
c) It leads to private monopoly and ownership – when a single public company
is privatised goods and services become expensive
d) Social costs – when companies are privatised there are more social costs e.g
pollution as compared to public ones(they are environmentally unfriendly)
e) Encourages capitalism – those who are rich buy more shares than the poor
making the rich richer than before. The poor remain poor and work for the rich.
f) Loss of Financial base – most of those being privatised are those that are
profitable since investors would not risk buying shares from loss making and
dormant industry e.g. Malawi Savings Banks
g) Abuse of public interest – where a private company is only interested in
making profits it may close down products/services it deems unprofitable e.g.
cutting out phone box or booth services
h) Unethical business practices – this happens where there is too much
competition

Privatisation Commission
This is a body established by an Act of Parliament in 1996 to manage and oversee
privatisation in Malawi

Duties of Privatisation Commission

a) Assumes temporally interim ownership of on going privatised companies
during the period of transition
b) Formulates and recommends to cabinet on preferred companies to be
privatised
c) Carries out any process for a company to change from public to private
d) Implements divestment in accordance to approved privatisation.

TOPIC 8 : BUSINESS FINANCE 2

INSURANCE AND RISK MANAGEMENT

Insurance (Definitions)
 It is the sharing of the loss of a few unfortunate ones among many fortunate ones.
This means that when a person suffers loss, funds are available to compensate
him provided that he has been paying contributions (premium) to the insurance
company.
 It is an arrangement in which a person agrees to pay a fixed sum of money
monthly or annually to service insurance policy so that he/she is compensated
when a risk happens

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 It is the pooling of risks so that when that risk happens money is available for
compensation

Purpose of Insurance
To cover for a loss e.g. providing protection against losses from some risks.

Some terms associated with insurance

 Insured - the customer
 Insurer – the company
 Sum insured – maximum compensation to be offered by the insurance company
when a risk occurs
 Risk – unforeseen or unexpected events that occur resulting into a loss e.g.
accident
 Premium – a fixed sum an insured pays monthly or annually to service a policy.
 Policy document – a document given to an insured containing terms and
conditions of a contract. It shows sum insured.

Institutions that provide insurance services in Malawi

 National Insurance Company of Malawi (NICO)  Charter Insurance Company
 United General Insurance Company (UGI)  Britam Insurance company
 Vanguard Life Assurance  Smile Life
 Prime Insurance Company  MASM etc
 Royal Insurance Company

Main Insurance Principles

1) Insurable Interest
 Insurance cannot be given to somebody who does not have an interest in what
is being insured or cannot suffer any financial loss if the loss that is insured
against happens
 e.g. John cannot insure a house belonging to Jimmy because John has no
insurable interest in the house

2) Utmost Good Faith (Uberrima Fides)

 each party (insurer and insured) to the insurance contract should not conceal
or hide information from each other. Failure to disclose important information
makes the contract useless
 e.g. if a factory contains more highly inflammable materials such as neon, gas
cylinders, petrol containers it must be disclosed to the insurer. This information
will determine the amount of premium to be paid.

3) Indemnity
 insurance aims to restore a person to the position he or she was before the
loss.
 this calls on the insured to be honest when claiming compensation. He or she
should claim the exact value of the loss. No profit out of loss.

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 E.g. if your car suffers damage of K1,200,000, the insurer will indemnify you
up to that amount only.

4) Compensation
 It states that the insured will only be compensated based on the part that has
suffered a loss regardless of the sum insured.
 e.g. if Y insures a car worth K100,000 against road accident but the damage of
the car is worth K20,000 and if the premium was being paid for, then he can be
compensated the value of K20,000 loss or some value lower than K20,000 if
the car has depreciated much.
 this principle does not apply to life assurance and personal accident insurance

5) Subrogation (the right to stand in place of)

 Under this clause, an insurer such as NICO is legally entitled to be placed in
the position of the insured.
 When an insurer makes a payment of claim to the beneficiary the wreckage or
damaged item belongs to the insurance company. E.g. if A‟s car has been fully
compensated for, A cannot sue B for the damage because NICO takes over all
rights and remedies for the damage.
 The guiding principle is that in insurance the insured is not supposed to make
any profit but simply to be compensated for the loss.

6) Proximate Cause
 It states that there must be close connection between the loss and risk for
which the policy was bought.
 E.g. if a house was being insured against fire and destroyed by earthquake,
then it cannot be compensated.

7) Average clause
 It states that if the insured gets compensation according to sum insured but the
money is not enough to repair the damage, he or she will compensate himself
on the other costs of repairing.

8) Contribution
 if the insured obtain insurance cover against same risk from different insurers,
any one insurer or all the insurers will contribute to the loss
 e.g. if a car is insured against risk of accident by SMILE life Insurance and
NICO Insurance at the same time in case of an accident both insurance
companies will contribute towards the compensation

Insuring a property with two or more insurers

Under indemnity, it is possible to insure property with two or more insurers. In this
case, when a risk happens, the insurers will share compensation.

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Example

Timba Building Contractors has a factory worth K10,000,000 and insured with NICO
for K15,000,000 and Prime Insurance for K5,000,000 against fire. The factory is
completely destroyed by fire. Calculate how NICO and Prime Insurance will share
compensation.

Solution
Factory Value = K10,000,000
NICO‟s risk = K15,000,000
Prime‟s risk = K05,000,000
Total risk = K15,000,000 + K5,000,000
= K20,000,000

Ratio of sharing = 15 : 5
Total ratio = 20
15
Nico‟s share = /20 x K10,000,000
= K7,500,000
5
Prime‟s share = /20 x K10,000,000
= K2,500,000
Therefore
NICO‟s share = K7,500,000
Prime‟s share = K2,500,000

Types of Insurance
A business or an individual can seek protection from an insurance company under
the following types of insurance:

1) Fire insurance
 Provides cover for losses of property due to fire and explosions. Property that
can be insured against fire include : entertainment halls, hostels, hotels,
houses, shops, warehouse, fuel service stations etc
 Fire insurance policy may be a floating policy or comprehensive policy.

2) Motor Insurance
 Covers for losses which may occur on motor vehicles. Policies under motor
insurance are as follows:
 Minimum legal cover: where the insurer pays for injuries made to third
parties e.g. pedestrian hit by a car on public roads only
 Third party cover: This does not cover the motor vehicle or its owner. The
Insurer pays for injuries/death and damages to properties of third parties. A
third party is any person other than the insurer (second party) and the
insured (first party).
 Comprehensive cover: it is the most expensive policy for vehicles on the
road. Insurer pays for injuries and damages to third parties including
damage to the vehicle, personal injury to driver, loss/damage of personal
possessions while in the car, new replacement of vehicle etc

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3) Accident insurance
 Covers losses which arise from many aspects of accidents :
 temporary or permanent disability of persons from accidents
 damage of vehicle or machinery through burglary or vandalism
 loss of cash in transit through robbery
 injuries suffered by employees while at work
 sickness
4) Liability insurance
 covers for accidents or losses in the following types
 Employer liability: losses due to employer‟s negligence or carelessness
 Public liability: cover losses claimed by the public as a result of damage
to their property or life
 Professional liabilities: mostly taken by lawyers, doctors, architects,
accountants and engineers to cover against claims due to their personal
negligence. E.g when a doctor does not perform his duties as expected
and a patient dies, the doctor should not pay if the relatives of the
deceased take him to court
 Fidelity bond or Fidelity guarantee: guarantee taken by the employer to
cover embezzlement or theft of funds by employees
5) Life Assurance
 it applies in situations of death of the insured
 in life assurance there is no compensation as life cannot be compensated
 it is called Life Assurance because everyone is assured of death one day.

Policies under Life Assurance include:

 Whole life policy – where a payment is provided on the death of insured
person to his or her beneficiaries. The policy requires that premium must be
paid for the whole life. The insured does not enjoy benefits of his/her savings.
 Term or temporary assurance policies – where a beneficiary gets a
payment only if death occurs during a specified period
 Endowment policies – Premiums are paid for a specified period and the
money can be paid out after the specified period of time e.g. 5, 10, 15, 20
years. An agreed sum is paid (a) at the end of a number of years on maturity
of the policy (b) on the death of the insured person. It will depend on
whichever comes earlier. The policy is being adopted by many because the
owner enjoys benefits of assurance.
 Annuity policy – under this policy, the insured pays premium for whole life
but gets annual fixed sum of money. When insured dies, the whole sum
insured is given to a beneficiary.
 Child Saver/Little Genius Policy – this is a saving for future education of a
child. It is applicable to children with 0 – 13 years. The sum assured plus all
declared bonuses are paid to a school by way of school fees instalments per
term for 6 years.
 Mortgage guarantee policy
o if an individual dies while servicing a mortgage the insurance company
pays for the mortgage
o a mortgage is a form of a loan which is obtained to acquire property and
takes long to be repaid

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6) Marine insurance
 provides cover for risks or losses connected with sea or sea transport.
Compensation on marine insurance is based on whether the ship is set and
timed for that journey. If not set or ill timed, compensation is not given.
 Risks under marine insurance include: storms which may lead to sinking of
the ship, breakdown of ship that may result in damage or loss of property, fire
due to technical fault, capture of ship by unfriendly military forces.
 policies under marine insurance include:
 Hull insurance: this covers for the loss at the sea of the vessel (ship) itself
including all its fixtures such as machinery, furniture etc
 cargo insurance: covers for the loss of cargo (luggage) whilst in transit (in
movement) on the sea
 ship owner’s liability: covers losses arising from the fault of the owner of
the ship or his employee
 freight note : this policy deals with charges for carrying cargo. Ship
owners charge cargo owners freight due on a shipment of goods.
 Floating policy : it describes the insurance cover for situations where the
total insurable amount can be reasonably estimated but cannot be
determined accurately enough for computing correct premium, until the
insurance policy comes to an end

Types of Marine Losses

(1) Total Loss : loss of the whole ship and its cargo. It can be:
a) Actual loss – it occurs when the subject matter is irretrievably lost or
destroyed
b) Constructive loss – it occurs when the subject matter is abandoned
because its actual loss appears inevitable e.g. a wreck or where the cost
of preventing actual loss would exceed the value of property when
repaired e.g. sunken ship.
(2) Partial Loss : only part of the ship or cargo suffers damage. It can be :
a) Particular Average Loss – it is due to purely accidental loss hence
concerns only the owners of the affected property.
b) General Average Loss – it is one that is voluntarily incurred for the
common good. It includes the actual loss and any expenditure reasonably
incurred in an attempt to avert danger or minimise loss.
7) Aviation insurance
Cover for risks or losses connected with the air or air transport via planes

BUSINESS RISKS

A risk – the possibility of incurring losses

Business risk – the possibilities of losses occurring in a business. e.g.

 Business interruption  Bad debts

 Theft and burglary  Motor fleet
 Damage to business premises  Public liability
 Stock damage  Product liability
 Irregular supply of raw materials  Changing trends

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Classification of Business risks

1) Internal Risks – these are risks which arise from events that take place within
the business. These risks can be forecasted E.g.
 Human factors – e.g. dishonesty and negligence of employees, strikes,
lock-outs, incompetence of executive personnel, talents, default in
payment by debtors etc.
 Physical factors – e.g. loss or damage to business property, fire or
theft, failure of machinery & equipment, damage to goods in transit or
stock held in the warehouse etc
 Technological factors – unforeseen changes in the techniques of
production or distribution that may result in technological obsolescence
etc
 Operational factors – e.g. access to credit, cost cutting, advertisement
etc.

2) External Risks – (these are risks which arise due to events occurring outside
the business organisation. These risks cannot be forecasted and are beyond
the business control. E.g.
 Economic factors – these arise from changes in the prevailing market
conditions e.g. price fluctuations, changes in product demand, change
in consumer tastes, changes in income, rising unemployment etc
 Natural factors – these are unforeseen natural calamities such as
earthquakes, floods, cyclones, lighting etc. These can cause loss of
life and business property as well as stock.
 Political factors – these result from political changes in a country .e.g.
violence, riots and revolutions, fall or change of government, civil war
and hostilities with neighbouring countries etc.

RISK MANAGEMENT

Risk Management / mitigation Strategies

These provide a structured and coherent approach to identifying, assessing and
managing risks. The strategies are explained below:

1) Risk Tolerance or Acceptance – a company allows or accepts a certain

level of risks to take place in order to generate some returns. Thus, nothing is
done to lessen the risk. The decision is based on cost and benefit
considerations.
2) Risk Avoidance – This is an action that avoids any exposure to the risk
whatsoever. This is the most expensive of all risk mitigation options. Any
company that completely avoids risks rarely grows in business.
3) Risk Treatment – under this strategy, a company takes action by limiting
company exposure. E.g. a company accepting that a disk drive may fail to
operate and as such backups are set aside.
4) Risk Termination – This is where a company‟s risk is transferred to a willing
third party who may manage it, e.g. outsourcing certain operations such as
payroll services or customer service. This helps the company to focus on their
core competencies.

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INSURANCE FRAUD

Insurance fraud is an act that is committed with the intent to fraudulently obtain
some benefit or advantage to which they are not entitled or someone knowingly
denies some benefit that is due and to which someone is entitled.

Common insurance frauds

 Premium diversion  Misrepresenting facts on

 Inflating actual claims insurance application
 Omission of information in a  Giving false or misleading
claim or insurance transaction information during insurance
 Submitting claims for injuries and transaction
damage that never occurred  Staging accidents

Effects of Insurance frauds

 Loss of innocent lives – people have been maimed or even killed in

insurance schemes such as staged motor vehicle accidents and arsons
 Loss of savings – insurance investment schemes have swindled a lot of
money from trusting and vulnerable citizens such as the elderly.
 High cost of consumer goods – it results from businesses passing their
ever high costs of health and business insurance onto their customers.
 High rates of premium – insurers pass the large costs of insurance frauds to
their policy holders, hence high rates of premiums.
 Loss of jobs – when insurance companies go bankrupt due to swindling by
fraud, people lose their jobs and insurance covers.
 Endangerment of health – there are many swindlers selling fake and non-
existent health policies. Some even perform fake medical care in order to
illegally inflate health insurance claims.
 Loss of money by businesses – fraud leads to high cost of employee
insurance covers and business insurance result in many businesses losing
money annually.

HEDGING

Hedging is a risk management strategy which involves taking action now to

reduce the possibility of future loss e.g. from fluctuation of prices of commodities
or currencies or securities.

Ways (tools & techniques) to Hedge against business risks

1) Contingency planning – it is a plan devised to help an organisation to

respond well to an unplanned event. It is sometimes referred to „Plan B’
since it can be used as an alternative for action if expected results fail to
materialise.

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2) Business continuity – it is the capability of a business organisation to

continue its business operations during and after an occurrence of a
disruptive event, whatever its size or cause.
3) Spot rate – a spot rate is the price for a transaction that is happening
immediately.
4) Forward contract – This is where one buys or sells foreign currency now with
some deposit, say 10% deposit and lock into a rate say K650 per US$ but pay
the remainder later when you need the money. This holds until the maturity of
the contract regardless of any fluctuations to the exchange rate on the market.
Thus partial settlements can be made for the transactions until the maturity of
the contract.

TOPIC 9 : PRODUCTION 2

Types of inputs in production

 Fixed inputs – these are inputs that do not vary with the level of output
(production). Therefore, no relationship exists between fixed inputs and
quantity of the final products produced.
Examples of Fixed inputs:. business premises, equipment

 Variable inputs – variable inputs are those items used in production such
that the amount required will change with the change in the expected level or
volume of output (production). Thus, there is a direct relationship between
variable inputs and the level of volume of output.
Examples of Variable inputs: labour, raw materials, power.

Relationship between inputs and outputs

The result of any production process is output. The nature of the output will be
influenced by the type of inputs that were used in the production process. Thus,
output depends upon input.

Production costs and Cost Function

- Production costs are the costs that are incurred in producing a product
- Cost function is the relationship between inputs used and outputs realised and the
level of prices the firm pays for the inputs.

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Types of Production Costs

 Fixed Costs (FC)  Total Costs (TC)

 Variable Costs (VC)  Marginal Costs (MC)

Fixed costs are expenses or costs that do not change with change in the level of
output. These costs remain constant irrespective of whether the firm is producing or
not. They are expenses incurred in acquiring fixed inputs such as machinery, land
and building used in production. Examples of such costs are rent for business
premises, insurance, salaries for permanent employees etc. They are also called
overheads or indirect costs or unavoidable costs.

Period (Years) Output units (MK’million) Total Fixed Cost

1 0 20
2 4 20
3 6 20
4 10 20
5 20 20

Graphically, the data above is shown as below:

From the table above, the firm used k20,000,000 in Year 1 as inputs and realising
nothing as output (it is assumed that at start, the business made an investment
without a profit). From year 2 to 5 using the same inputs (TFC) the firm is able to
increase outputs from 4 units to 20 units respectively.

Variable costs (VC)

These are costs that change with the change of the firm‟s output (increasing or
decreasing). They represent cost of things that do not last a year e.g. casual
labourers, stationery, raw materials, power etc. These costs obey the diminishing
marginal returns law. Thus, more output is realised with an increase in costs beyond
which the more the costs the less the output realised. Variable costs are also
referred to as direct costs or avoidable costs.

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Period (years) Output Units (MK‟million) Total Variable Costs (TVC)

1 0 0
2 4 10
3 6 15
4 10 25
5 20 30
6 25 45
7 40 60

Graphically, the data is shown as below:

Total Costs (TC)

Total Cost is the sum of all the fixed costs and all the variable costs. It is assumed
that a firm is supposed to invest in business by long –life inputs and then thereafter
employ some short-term inputs such as labour and stationery. Thus :

Total cost = fixed costs + variable costs

Period (years) TFC (K’m) TVC (K’m) Output (Units) TC (K’m)

1 20 0 0 20 + 0 = 20
2 20 10 4 20 + 10 = 30
3 20 15 6 20 + 15 = 35
4 20 25 10 20 + 25 = 45
5 20 30 20 20 + 30 = 50
6 20 45 25 20 + 45 = 65
7 20 60 40 20 + 60 = 80

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Note – TC has the same shape as TVC since they differ by the constant cost (TFC)
hence also obeys the law of diminishing marginal returns.

Average Fixed Costs (AFC)

These are total fixed costs per unit of output incurred in the business. Therefore,
AFC = TFC/Output.

Period (Years) Output units TFC (MK ‘m) AFC (MK ‘m)
1 0 20 Undefined
2 4 20 20/4 = 5
3 6 20 20/6 = 3.3
4 10 20 20/10 = 2
5 20 20 20/20 = 1

The table shows AFC decreases with increases in outputs since our numerator is
constant. The assumption here is that the firm may have gained some experience of
reducing costs over time. (Plot AFC against output)

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Average Variable Cost (AVC)

These are total variable costs per unit of output incurred in the business. Therefore,
AVC = TVC/Output.

Alternatively, since total variable cost is the difference between total cost and total
fixed cost, we can derive average cost by subtracting average fixed cost from total
cost. That is:

AVC = ATC - AFC or TVC = AVC x Q

Average Total Costs (ATC)

It is the total costs divided by output.

ATC = TC/Output or ATC = AVC + AFC or Total cost = AVC x Quantity of output

Just like the average variable cost, the ATC decreases with additional output at
relatively small quantities of output. However, it eventually increases with relatively
larger quantities of output. A U-shaped AVC curve can be used to illustrate this.

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Marginal Costs (MC)

Marginal cost is the change in the total cost that arises when the quantity produced
is incremented by one unit e.g. it is the cost of producing one more unit of a product.
For example, if producing an additional vehicle requires a new factory house,
marginal cost of this extra vehicle includes cost of the new factory house.

MC = Δ TC (Total Cost)
Δ Q (Output)

Δ = change

It is presented graphically as below:

Example (calculation of MC)

Unit of output Total Marginal Cost

(Q) Cost (TC) ΔQ ΔTC (MC)
1 5 1 = (1 – 0) 5 = (5 – 0) 5 = 5/1
2 9 1 = (2 – 1) 4 = (9 – 5) 4 = 4/1
3 12 1 = (3 – 2) 3 = (12 – 9) 3 = 3/1
4 16 1 = (4 – 3) 4 = (16 – 12) 4 = 4/1
5 21 1 = (5 – 4) 5 = (21 – 16) 5 = 5/1
6 29 1 = (6 – 5) 8 = (29 – 21) 8 = 8/1

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The marginal cost curve above decreases sharply with smaller output (Q) and
reaches a minimum at Q =3. As production is expanded to a higher level, it begins
to rise at a rapid rate, thus marginal cost curve is at minimum where cost equals
output = 3.

Please note that marginal costs are derived from VC not FC as such they are subject
to variable proportions.

How to Calculate production costs

Cost of production are costs associated with production divided by the number of
units procured.

Steps to be taken

a) Understand the cost of production formula i.e. FC + VC divided by No. of units

b) Determine the fixed costs. i.e. the costs that do not change based on number of
products produced such as rent, salaries etc.
c) Calculate variable costs i.e. those costs that change based on quantity produced.
d) Add fixed costs to variable costs and divide by the number of items produced.
This equals your cost of production for one item. Therefore, the price to charge
for the product should be greater than the cost of production in order not to make
a loss.

Calculation of Total Revenue and Profits

Total Revenue (TR) is the total receipts of a firm from the sale of any given quantity
of a product. i.e. Total revenue = selling price (P) x quantity (Q)

Suppose company Y has the following product on sale :

Product Price (P) Quantity (Q) Revenue (R)
Bread K250.00 100 K25,000.00
Stock band K300.00 100 K30,000.00
Sugar K450.00 100 K45,000.00
Total Revenue K100,000.00

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Other calculations:
Net sales = Gross sales – (customer discounts, returns, allowances)
Gross profit = Net sales – costs of goods sold
Gross profit percentage = {(net sales – cost of goods sold) / net sales x 100
Operating profit = gross profit – total operating expenses
Net income (or net profit) = operating profit – taxes – interest paid.

The Break – Even Analysis/ Chart

The Break-even point is the level of activity at which total sales revenue is equal to
the total costs (expenses). At this point there is neither a profit nor loss. The break-
even point is represented on a chart by the intersection of two lines, income and
variable cost at point „P‟. Production below the break-even point will always result
into losses and anything above the break-even point will result into profits being
realised by the business.

Line OA represents variation of income at different levels of output. OB represents

the total fixed costs. As output increases, variable costs are incurred meaning that
the total costs (FC + VC) also increase. At low levels of output, costs are greater
than income.

Steps in drawing the B/E chart

1. Produce two axes. Vertical axis for Sales and costs, Horizontal axis for output
2. Add fixed cost line
3. Add variable cost line over and above the FC to know the TC
4. Plot the Sales values and join the plots (Sales volume)
5. Draw the Total cost line.

The B/E units are determined by drawing a perpendicular line to the X axis from
point of intersection where by the Sales Value at B/E is determined by drawing a
perpendicular to the Y axis from point of intersection

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Importance of the break-even analysis

 Helps to determine the break-even point of a business and the profit or loss at
a specific level of output
 Helps to show the behaviour trend of costs and sales
 Helps to find out the safety level at a particular level of activity

Economies of scale
Economies of scale refer to the cost advantage experienced by a firm when it
increases its level of output. The advantage arises due to the inverse relationship
between per-unit fixed cost and the quantity produced. Economies of scale can be
internal (cost advantages that are unique to the firm) or external (cost advantages
that are enjoyed by the entire industry)

Reasons why economies of scale happen

 Buying in bulk – buying in large quantities may result in lower transport and
packaging costs thus lowering average costs.
 Risk bearing economies – some expensive and risky ventures can only be
undertaken by large businesses that are willing and able.
 Specialisation and division of labour – where workers do specific tasks it
leads to efficiency.
 Financial economies – bigger businesses often get bigger rates of interests
and discounts than smaller businesses.
 Spreading overheads – when mergers occur, one head office can be set
thereby reducing operational costs.

Internal economies of scale

 Technical economies of scale – they happen when businesses are able and
willing to invest in expensive and specialist equipment, when there is division of
labour and specialisation etc resulting into fall of cost of production.
 Managerial economies – it happens when a firm uses highly specialised
management to supervise production and oversee human resources. This leads
to efficiency and cost reductions.
 Marketing economies – it happens where a large business is able to negotiate
discounted prices, to spread advertising and marketing budget over large output.
It can also offer huge discounts and after sale services like free transport
 Financial economies – large firms have access to credit facilities with
favourable rates of interest unlike small businesses.
 Risk economies – large scale firms are cushioned from risk of failure due to
having more diversified product range. They are also likely to make huge profits.
 Research and development – a large firm is able to set aside a budget for
carrying out research and development. This helps in production of superior
products thereby leading to an increased market share.
 Welfare economies – an expanding firm is able to afford better housing,
medical care and other fringe benefits for its workers. A satisfied worker is more
committed leading to higher productivity.

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External economies of scale

 Economies of concentration – locating a firm where there are other firms helps
to benefit from some common economies e.g. cheaper power, skilled and trained
labour etc.
 Economies of disintegration – it happens where production is split into several
processes. Some of these processes can be carried out more efficiently by
specialised firms leading into cheap and high quality products.
 Economies of information – it happens where firms pool their resources
together on research to enable all of them to benefit.

Diseconomies of scale
Diseconomies of scale happen when a company or business grows so large that the
costs per unit increase. It takes place when economies of scale no longer function
for the firm.

Internal diseconomies of scale

 Poor communication – in large organisations, it may be difficult to maintain
an effective flow of information between departments, subsidiaries etc. This
can therefore lead to speed of response to be slow.
 Lack of coordination – many levels of management may lead to costs and
creation of more links in the chain of communication.
 Low or lack of motivation – a fall in motivation results in lower productivity
(as measured by output per worker). This leads to inefficiencies.

External diseconomies of scale

 Competition for labour – the demand for labour increases and it becomes
difficult to recruit and retain best workers.
 Increasing employment costs – increased demand for labour and stiff
competition for best workers results in increased price for labour wages.
 Traffic congestion – a concentration of businesses results in the
development of industrial centres. This increases transportation of raw
materials and finished products thus leading to traffic congestion. This may
result in increased journey time and consequently increased expenses.
 Relationship breakdowns between suppliers and buyers – there is
reduced or lack of contact and relationship in large business as the business
owner delegates duties to staff as he or she takes up administrative duties

Reasons for diseconomies of scale

 Increase in cost of transportation of goods to distant markets
 Demotivation of workers due to them feeling unappreciated.
 Poor and ineffective communication in a business
 Lack of control in a business
 A specific process within a business plant cannot produce the same quantity
of output as another related process.

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Factors affecting business location

The location of a business has a direct bearing on the overall operational costs of a
business which determine the profits made and hence the survival of the business in
the market.

Factors that influence the location of a business

a) Cost of premises/land – Cost of rentals or purchasing land for a business must

be reasonable in order not to affect the business profits.
b) Transport network – Road network to the business premises must be easy and
accessible for easy movement of goods and raw materials.
c) Labour costs and skills – labour and skills must be considered in order to
effectively run the business. Most businesses locate where source of labour is
cheap in order to generate more profits.
d) Proximity to customers – a business should be located near customers with
sound income. If a business is located in an area where people have little
income, growth of business becomes affected.
e) Nearness to raw materials – a good business must be located close to source of
raw materials to reduce costs such as transport costs especially where raw
materials are heavy or are required in bulk.
f) Energy costs – some businesses use and require substantial amounts of energy
such as gas and electricity. Security and availability of energy is likely to be more
important than price to such businesses.
g) Government intervention – the government may encourage the setting up of
businesses in some parts of the country while discouraging the same from other
parts through their activities and the policies they adopt.

TOPIC 10 : ENTREPRENEURSHIP 2

Marketing

A market is a public place or building where goods or services are bought and sold.
Marketing is a management process responsible for identifying, anticipating and
satisfying consumer needs profitably.

The marketing process

It involves:

a) Discovery – It is about doing research and performing a detailed market,

customer and competitive analysis. E.g. what your competition is doing, where
your customers are located etc
b) Strategy – information gathered in step 1 is used to help make your decisions as
you create your marketing plans. E.g. how you will go to the market. It is important
to also clearly define goals and objectives, determine appropriate marketing
channels etc.
c) Implementation – it is where all targeted cost- effective marketing campaigns are
put into action and ensuring all resources required are put in place.

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d) Measurement – it is where you take a closer look at the results of the campaign
in order to refine your strategies before moving forward.

Marketing objectives
Marketing objectives have to be Specific (be precise on what to achieve),
Measurable (should be quantifiable), Achievable (should be attainable), Realistic
(should be reasonably achieved with available resources), Timely (should be
achieved within a given time frame). The following are some of the marketing
objectives:-

a) To boost sales – When a product is publicised, more customers know and buy it
and hence more profits.
b) To satisfy human wants – it aims at fulfilling customer requirements using
strategies such as market research.
c) To target market – businesses advertise or promote a product in order to trace
potential buyers.
d) To outperform rival organisations – marketing strategies can be done to
overpower any organisation involved in the same product.
e) For organisational survival and growth – a business may market its products in
order to survive and grow with time.

Market segment, strategy and research

1) Market segment – refers to identifiable group of individuals, families, businesses

sharing one or more characteristics or needs in a homogeneous market. Market
segmentation includes; geographical segmentation. Demographic segmentation,
buyer behavioural segmentation, psychographic segmentation etc.
2) Marketing strategy – refers to measures taken by a business towards achieving
the marketing objectives, hence achieve a competitive advantage.
3) Market research – it is the process of collecting and analysing information that is
required in making marketing decisions. E.g. customer likes/dislikes, market size,
competitors etc

Marketing mix
It is the combination of factors used by a firm to pursue its marketing objectives in
the target market. The factors are called the 4Ps i.e. Product (features and
appearance), Price (how much customers pay for the product), Place (point where
products are made available to customers) and Promotion (how customers are
informed about the products).

Role of marketing mix

Product refers to a good or service that is offered by a firm for sale. Since most
firm‟s revenue comes from the product, the range and quality of product mix has to
be frequently evaluated and amended.

Product Life Cycle

Product life cycle is the cycle through which every product goes from its
development. It has four stages and these are (1) Introduction stage (2) Growth
stage (3) Maturity stage (4) Decline stage

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1) Introduction stage – At this stage, sales are low and potential consumers
are still unaware of the product while others are reluctant to purchase the new
product which they do not know. More costs are also incurred in research and
development, consumer testing, promotions etc. Profits are therefore low or
negative. Marketing strategies include promotional campaigns, low
penetration pricing, high skim pricing.
2) Growth stage – At this stage, potential customers have gathered enough
information and are responding by purchasing the product. There is an
increase in sales and profits. Promotional activities are now aimed at
expanding and stabilising the market share. At this stage competitors may get
attracted to enter the market due to rapid sales and profits. Marketing
strategies include adding new product features, new distribution channels,
lowering prices, more promotional activities (e.g. use of gifts), entering new
market segments, improving product quality
3) Maturity stage – The product is established and the manufacturer aims at
maintaining the market share. In this stage customers are used to the product
and may wish to try new ones on the market. A SWOT analysis may be done
at this stage. If measures are not taken immediately it may lead to decline of
profits/sales. Marketing strategies at this stage include product modification,
exploring new markets, heavy promotional campaigns, improvement in
product quality.
4) Decline stage – At this stage sales decrease. The decline can be due to
market becoming saturated (e.g. all the customers who will buy the product
have already purchased it), consumers switching to a different product, the
product becoming irrelevant or un useful, changes in consumer tastes,
changes in technology etc. Marketing strategies include changing
appearance and composition of product, diversification, discontinuing
production of product or selling remaining stock to another firm, investing less
in unpromising customer groups.

Role of product in the marketing mix

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A product is a good or a service that people buy and sell. The major role of a
product in the mix is to satisfy human wants

Reasons why people buy a product

 Function – one buys a product for specific function
 Appearance – quality of a product matters most to customers
 Prestige – many people buy a product (e.g. car) for society‟s recognition to
attain a high status -quo

Describing types of products

 Meat, hides & skins by Cold Storage
 Biscuits (Universal Industries)
 Fanta and Coke (Southern Bottlers)
 Health services (Ministry of Health) etc

Role of pricing in marketing mix

Price determines increased or reduced sales in business. Price therefore,
 generates revenue
 determines customer behaviour e.g. customer may decide to buy or not
 determines demand for the product

Pricing strategies

 Cost Plus Pricing – it involves working out costs of products and then
determining how much profit should be achieved e.g. adding a percentage of the
cost price as profit.
 Penetration pricing – it is where low prices are set so as to attract a large
number of consumers regardless of losses until they have enough knowledge
and importance of the product.
 Skimming pricing – It is setting of high prices on new product whose demand is
high and the competitors are few. The price is lowered when the product is
established. The business spends heavily on advertising and promotion to get
sales.
 Competitive pricing – A pricing decision may be based on the price levels
charged by other competitors. A competitive price is the one that provides a
competitive edge.
 Promotional pricing – it is where the price of old product may be reduced to
attract more customers or a new product may be designed in such a way that
many customers can be attracted.
 Odd pricing/psychological pricing – it involves fixing a price that is slightly
lower than a round figure. It makes people think that is not expensive.
 Diversionary pricing – This occurs where one product is sold cheaply so that
an associated product which has a high profit margin is automatically sold.

Role of promotion in marketing mix

Promotion of a product is an act of providing information about a product and its
benefits. It aims at persuading customers to consume or continue consuming it.

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Components of promotion
These are controllable and non-controllable

 Controllable components are those that carefully target at achieving some

objectives through
a) Advertisement – it aims at influencing prospective buyers to buy a product
e.g. persuasive advertisement.
b) Sales promotion – it aims at increasing sales e.g. free catalogues, free
gifts, twin-pack packages (two for the price of one) etc
c) Publicity – it concerns public relations thus creation of a good image of a
business. E.g. making donations towards academic sport institutions,
organising events in sports such as football.
d) Personal selling – personally presenting the products to potential
consumers and persuading them to buy the products e.g. showroom,
exhibitions etc
 Non-controllable components concern personal recommendations of a
product by word of mouth to fellow customer.

Role of place in marketing mix

This is viewed in terms of place for business and place for a product to be distributed
to. A good business place should be one easily accessible to customers. Product
distribution helps customers access to a right product when brought to a right place.

Channels of distribution
Distribution channel is the sum of all the activities and processes that are involved
in the movement of a product from the producer to the consumer. Channel of
distribution may be direct where goods move from producer direct to consumer (e.g.
zero level channel) or indirect where intermediaries or middlemen such as Agents,
Wholesalers, Distributors, Retailers etc are involved in between producer and
consumer (e.g. one, two and three level channel)

Apart from how and where to distribute products, the following issues should be
considered:
 Choosing the most appropriate channel
 Deciding how much to spend on product distribution
 Deciding on using one or more channels
 Deciding on selling the product direct to the consumer or using intermediaries.

ZERO LEVEL ONE LEVEL TWO LEVEL THREE LEVEL

CHANNEL CHANNEL CHANNEL CHANNEL
Producer Producer Producer Producer

Final consumer Retailer Wholesaler Agent

Final consumer Retailer Wholesaler

Final consumer Retailer

Final consumer
Niche and Mass marketing

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Niche Marketing refers to concentration of all marketing efforts on a small but

specific and well defined segment of the population. Niches are „created” by
identifying needs, wants and requirements that are being addressed poorly or not at
all by other firms. E.g. car washers along various streets of Blantyre, Lilongwe etc

Mass Marketing is the distribution of a product intended to be sold in large

quantities to a wide range of consumers. Products that are needed by almost every
one in the society are suited for a mass market e.g soap, tissue paper

Consumer Protection
It is a system set aside by either government or NGOOs to monitor business
activities with respect to consumer rights

Reasons for consumer protection

a) Low quality products – Consumers need to be protected against manufacture
and sale of goods that do not meet certain set standards.
b) Misleading information about a product – traders may give false information
about a product as a way of making people to buy the product which would lead to
increased sales.
c) Improper pricing – traders may charge high prices for products which may not be
of high quality.
d) False or deceptive advertisement – in order to boost sales, a trader may use
false advertising to mislead consumers into buying their products.
e) Wrong weights and measures – traders may sell underweight goods or goods in
wrong measures in the name of correct weights and measurements.
f) Hoarding of goods – traders may hold on to goods in order to create artificial
shortages of the goods on the market leading to increased prices.
g) Harmful product – traders may sell products that contain harmful substances to
consumers or that are not suitable for consumption (e.g. expired goods). The laws
are designed to protect consumers of their ignorance that some products may
endanger their health or lives.
h) For the consumer to be informed – the consumer protection ensures that
consumers get timely and understandable information which will enable them to
make responsible decisions about financial transactions.
i) Illiteracy and ignorance – Consumer protection protects consumers who are
illiterate or ignorant on their rights from unscrupulous business people.

Rights of a consumer
a) Right to safety – a consumer needs protection against harmful products,
production processes and services. They have right to return faulty items and
have them replaced with good ones or refunded in full for money paid for the
faulty items .
b) Right to information – consumers need to be informed and protected against
fraudulent, deceitful, dishonest and misleading information, advertising and
labelling. They need to have access to correct information in order to make
informed choices.
c) Right to choose – consumers have a right to access a variety of products and
services at fair and competitive prices.

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d) Right to be heard – consumers have a right to voice out their complaints and
concerns about a product. This aims at having complaints handled efficiently and
responsibly.
e) Right to satisfaction of basic needs – consumers have a right to access basic
goods and services that are essential to their livelihood e.g. clothing, shelter etc.
f) Right to redress – consumers should receive fair settlement of any claims made
including compensation for misrepresentation, unsatisfactory services etc.
g) Right to a healthy environment – consumers have a right to be protected
against environmental problems such as pollution for the well-being of present
and future generations. Some producers have wastes that pollute the environment
hence affecting consumer rights.

Responsibilities of a consumer

a) To report any problems with the products once discovered.

b) To check expiry dates of products before buying or consuming them.
c) To read and confirm the ingredients or composition of products are fit before
consuming them.
d) To question about the price, quality and safety of goods/services they purchase
and use.
e) To gather all information and facts available about a product or service.
f) To be aware of all the impacts and effects of their consumption on other citizens
g) To speak out and inform manufactures of their needs and wants.
h) To understand the environmental impacts and consequences of their consumption
e.g. not to litter or contribute to environmental pollution.
i) To complain and inform businesses and other consumers of their dissatisfaction
with a product or service. It should be done in a fair and honest way.
j) To make own independent and informed consumer choices and decisions

Role of government in protecting the consumer

 Establishing laws in form of Acts to protect the consumers
 Creating government controlled regulatory institutions such as Malawi Bureau of
Standards.to inspect, approve and certify products suitability
 Creating laws that require manufacturers put up warnings for consumers e.g.
smoking kills on cigarettes.
 Banning products which can have a significant external public costs
 Providing information and guidelines that make consumers aware of their rights.
 Creating market places that are fair, competitive for producers, traders and
consumers.
 Establishing state owned enterprises aimed at providing essential goods and
services at affordable prices
 Establishing arms of government such as Ministry of Trade to monitor availability
of essential commodities e.g. salt and sugar. This helps to protect the consumer
from exploitation.

Consumer protection organisations and association

The most recognised organisations involved in consumer protection are :

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 The Consumer Association of Malawi (CAMA)

 Malawi Bureau of Standards (MBS)

Roles (Importance) of consumer protection organisations and association

a) Encourage honesty among business people.
b) Protect businesses from unethical competition
c) Consumer protection laws regulate how financial institutions can collect debts as
well as the interests they can charge.
d) Help to protect business entities interests as they design goods or services with
the interest of the consumers in mind since a business cannot survive without
consumers.
e) The laws guide business people to provide quality goods at reasonable prices.
f) Help to create and promote awareness among consumers about their rights.
g) Act as link between consumers and business people thus ensuring justice in
case of complaints
h) Consumers are safeguarded from exploitation by unscrupulous traders.
i) Improve quality of life of consumers by ensuring safety of products supplied to
them.

Major Acts of Parliament that protect consumers

1) Malawi Bureau of Standards Act (1972) Chapter 51:02 – The Act ensures that
no enterprises should gain advantage in trade by producing at a lower standard.
The Act aims at promoting standardisation in industry and commerce as well as
make arrangements for examination and testing of commodities etc.
2) Weights and Measures Act (1960) Chapter 48:04 – This Act ensures that the
equipment used for weighing or measuring is correct and accurate to ensure
right quantities and measurements as indicated. The Act empowers relevant
departments to undertake regular or random checking and adjusting of the
equipment.
3) Metrication Act (1981) Chapter 48:02 – The Act promotes uniform and metric
system of measurement which is aimed at ensuring competition on similar terms
of trade.
4) Sale of Goods Act (1967) Chapter 48:02 – The Act ensures that traders or
producers do not cheat consumers by giving false description of goods. The Act
gives a consumer the right to return faulty goods and get a replacement or a
refund.
5) Control of Goods Act (1967) Chapter 18:08 – The Act gives authority to the
Minister of Trade to control distribution, sale and price of goods that have been
specified by the Minister.
6) Consumer Protection Act (2002) – The Act provides protection against unfair
trading, misleading adverts, inefficiency and also welcomes complaints from
consumers of some malpractice type of trading.
7) Foods and Drug Act – The Act prohibits producers and traders from including
any substance in commodities that are harmful on consumers. It also requires
labels and packages to show ingredients used in making the commodity.
8) Public Health Act – The Act ensures commodities offered for sale are hygienic
and that premises obey health and construction regulations through regular
inspections of public places such as eating places, butcheries.

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9) Trade Description Act (1987) – The Act prohibits false trade descriptions, false
marks and misstatements in respect of goods provided in the course of trade.
Thus, it protects the buyer from acquiring goods based on wrong descriptions
and pricing.
10) Description of Goods Act – This Act is concerned with the description of
goods. When there is a contract for the sale of goods by description there is an
implied condition that the goods shall correspond with the description.
11) Unsolicited goods and services Act (1971) – The Act provides greater
protection for the recipients of unsolicited goods or of invoices in respect of
unordered goods or services.
12) Consumer Credit Act (1974) – The Act is also called the Hire Purchase Act.
The Act gives a consumer the right to information, right to withdraw from a
transaction or the right to terminate the transaction.
13) Competition and Fair Trading Act (1998) – The Act aims at creating an
enabling environment for business, protecting consumer welfare against
exploitation. It also tries to regulate and monitor monopolies of trade.

TOPIC 11 : HUMAN RESOURCES

It is the term which describes all individuals (personnel) who make up the
workforce of an organisation.

Importance of people in the business

a) they plan for the business - top management e.g managers plan for short
term and long term for the business
b) they work for the business – they are the brains of the business
c) they provide training of workers – they provide new skills and knowledge to
workers
d) they contribute new ideas into the business – new ideas contributed by the
workers will improve the business
e) they sell products on behalf of the business – marketing department sells
products of the business
f) they carry out operation of the business – e.g. supervision, cleaning,
production etc
g) they provide customer care to a business clients – they represent an
organisation to the outside world (clients)

Functions (Approaches) of Human Resources Department

1. Recruitment and Selection

A. Recruitment means inducing (attracting) people to join the business

Sources of Recruitment
They can be internal or external sources

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a) Internal sources – it involves hiring from within the organisation from

present or existing employees or volunteers e.g. promotions, transfers,
upgrading, demotion etc

Advantages of recruitment from Disadvantages of recruitment

Internal sources from internal sources
 Motivates existing employees  People of same culture/
 It is Cost effective practices lead to stagnation of
 Saves on time for orientation organisation
 Ensures retention of talents  Discourages inflow of new and
 Little training required vibrant blood into the
 Promotes loyalty and organisation
commitment among employees  It may restrict choice of
 Increases sense of job security selection
 Gives opportunity for career  Capable individuals may be
development locked out since promotion is
 Organisation retains its based on seniority
investment in its employees  Not all vacancies can be filled
 Management from within
 It leads to demotivation for
those not selected
.
b) External sources – involves hiring from outside the organisation e.g.
i. Walk in – candidates do not submit application letters in advance.
ii. Media advertisement – e.g. newspapers, magazines, TV, radio
etc
iii. Employment exchange (Labour office) – they are run by the
government. They keep date base for job seekers where employers
can access the information when they wish to recruit.
iv. Direct recruitment (factory gate) – mostly for unskilled labour,
Notices for a vacancy are put on the Notice Board or at the gate.
v. Casual callers (unsolicited applications) – these job seekers
casually drop or send applications seeking job opportunities.
vi. Educational institutions (Campus placement) – companies visit
technical, management and professional colleges to recruit
students directly for job positions.
vii. Referrals – involves getting recommendations for candidates from
other sources e.g. former employees, existing employees etc.
viii. Head hunting (Executive search) – a process of recruiting
individuals with relevant work experience working somewhere to fill
senior positions.
ix. Poaching – it involves hiring former or current employees from a
competitor or similar company

Advantages of recruitment from Disadvantages of recruitment from

External sources External sources
 Brings in expertise and experience  It is time consuming
from other organisations  It is an expensive process
 Provides large pool of qualified  It may demoralise existing

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people to choose from employees that have not been

 Brings in new ideas into the considered
organisation  High costs of training new
employees

B. SELECTION
Selection The process of choosing the most suitable person from among the
list of those interested. Selection follows a logical order :

a) Screening applications – screening is done by senior staff or a

screening committee. It checks contents of applications if minimum
requirements have been met.
b) Holding tests (employment tests) – tests are done to gauge (assess)
talents and skills through various ways like intelligence tests, aptitude
tests, proficiency tests etc e.g. checking typing speed for secretaries.
c) Selection interview (employment interview) – the purpose is to find
out suitability of candidate. It is face-to-face interaction
d) Checking references – some qualities such as reliability, loyalty
cannot be judged based on a test. References are sought from
previous employers, educational institutions where candidate studied
etc.
e) Medical examination (of candidate) – candidates selected for the job
go for medical examination. This helps employers to know potential
candidates are physically and mentally fit to perform their duties
thereby reducing accidents, absenteeism, employee turnover.
f) Issue of appointment letter – a formal appointment is issued. It
contains nature of job, remuneration and other terms and conditions
relating to the employment.

2. Induction
It means welcoming new employees into the business and preparing them for
their new roles. It is also called Orientation.

Reasons for induction

 It helps employees to settle as quickly as possible
 It improves the performance of workers
 It assists the worker to know rules and regulations of the business
 It helps an employee to know where to report
 It reduces training costs
 It reduces industrial accidents

3. Training and Development

It is a program in which specific knowledge, skills and abilities are imparted to
employees with the aim of raising their performance level in their existing
roles. It also aims at providing employees with learning opportunities.to
further their growth.

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Methods of Training
a) On-the-job-training – e.g. job rotation, coaching, internship,
demonstrations, projects assignments etc
b) Off-the-job-training – e.g. lectures, conferences, workshop, seminars
etc.
c) Mentoring – it is where an experienced employee mentors (assists),
teaches, advises another, usually the less experienced and often
younger employee.
d) Shadowing – it involves shadowing another employee or spending
time with another employee to see how he or she is doing a particular
job and what the job involves.
e) Role playing – it involves assuming and acting out how situations
might occur in a workplace. It helps to learn how best to handle various
situations before they occur.
f) Job swaps – it involves exchange or swap of jobs between two
employees in different departments of an organisation for a defined
period of time.
g) Internet and e-learning – it is where information is provided online
and it enables the employees to do self-study.

Reasons for training

a) to improve overall productivity level of the organisation
b) to improve individual technical capacity
c) to prepare workers for future challenges
d) to reduce wastage within the organisation
e) to enable employees adopt to changes within the organisation e.g.
introduction of a new machine
f) it endures availability of adequate human resource in case of business
expansions

Importance of Training and Development

a) improves employee performance
b) improves employee satisfaction and morale
c) addresses weaknesses by strengthening skills
d) increased productivity
e) reduces employee turnover
f) reduces need for supervision

4. Dismissal
Dismissal is the termination of employment by an employer against the will of
the employee. Dismissal informally means sacking or firing of workers

Reasons for dismissal

 Unruly behaviour
 Economic downfall of the business
 Non-performance of workers
 Practicing natural wastage (retrenchment, redundancies) etc
 Mismanagement of funds
 Being disrespectful to the boss (insubordination)

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 Gross misconduct or misbehaviour e.g use of drugs, drunkenness, habitual

lateness, refusing to carry out lawful instructions etc
 Skipping from duty without employer knowledge
 Being convicted in a court of law
 Participating in illegal strikes
 Theft or colluding to steal organisation‟s property

5. Compensation and Staff Benefits

These include:
 Monetary e.g. salary
 non-monetary benefits passed on by a firm to its employees e.g.medical
schemes, pension, company owned car etc.

MANAGEMENT

Management activities include Planning, Organising, Staffing, Co-ordinating, and

Controlling.

Management styles and motivation

Style is a distinctive way of doing things. Therefore, management style is the
manner in which a manager carries out his or her duties and how he or she relates
with the people who work under and report to him or her.

Common management styles

(1) Autocratic Management style – it is a management style in which orders are

given from the top management to the employees below and the orders must be
carried out without questions. It is authoritarian or dictatorial style of
management and reflects a master-servant relationship. Managers who adopt
this style of management do not care about people‟s views and instead they
manage with complete power. The military and the police forces use this kind of
management style because instructions given need to be taken seriously and
without questions
(2) Democratic Management style – this is where management and employees
make decisions in consultation with each other. However, management
maintains the overall control. Therefore, decisions are arrived at as a result of
negotiated agreement hence no problem in implementing the decisions. This
type of management style would be appropriate when the nature of work is
simple and repetitive. This style is also called Participative management style.
(3) Bureaucratic Management style – This management style is based upon fixed
official duties performed under a hierarchy of authority (chain of command). This
type of manager ensures that team members follow rules and procedures
accurately and consistently. The manager has the final say in all decisions.
Bureaucratic organisational structures employ numerous layers of management.
(4) Laissez faire Management style – This is a management style in which the
manager is hands-off and employees are left to make decisions on their own.
There is minimum supervision with the manager being the mentor. Employees
consult the manager but the manager is not directly involved in making the final

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decisions. Hence, employees are held fully responsible for the decisions they
make. It is also called delegative style of management.

Employee Motivation

Motivation is an act of giving someone a reason to do something

A pyramid of Maslow’s hierarchy of needs

Maslow
Abraham Maslow recognised that there is a close relationship between human
needs and motivation hence directed his attention towards understanding the
types of needs that motivate human behaviours.

The five levels (hierarchies) of needs are presented in order of importance of the
needs arranged in ascending order from the lowest to the highest need. The
basic needs are at the bottom of the pyramid.

 Physiological needs – These are the basic needs such as food, shelter,
clothing, air, water, sleep. They also include those that are regarded as norm
to meet requirements of the body such as salaries, electricity in the cities.
Once these needs have been satisfied they cease to be motivators.
Employers should ensure their employees are able to meet these needs by
providing them with competitive wages and salaries.

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 Safety and security needs – Human beings require security at home, on

the road, at work etc. Employees therefore want safe working conditions,
salary increments, job security, retirement benefits etc. This makes
employees to join trade unions, buy insurance cover etc. Hence, employers
should provide conducive working environment for their employees and
better future prospects
 Social or affiliation needs – These are the need for love, status quo,
feeling of belonging and human relationship at workplace etc. Employers
should provide warm and friendly working environment to motivate the
employees.
 Ego or esteem needs – These focus on the need for self-respect, respect
from others, self-importance etc. people want to seek recognition,
opportunities for achievement, greater responsibility, moving up the career
ladder etc. The employers need to treat their employees with the esteem
they deserve based on their position in the organisation.
 Self-Actualisation needs – This is the highest level of needs of hierarchy.
It entails the need for self-fulfilment and realisation of one‟s potential.
Employers should encourage career development and provide employees
with training and development opportunities thus help them to realise their
full potential.

Importance of employee motivation

a) Increased output and productivity since workers put in extra effort in their work.
b) High level of staff retention hence low labour turn over
c) Improved quality of work because workers take great pride in their work
d) Promotes harmony and builds co-operative relationships among employees
e) Motivated employees promote organisation‟s good reputation
f) Lowers levels of absenteeism
g) High levels of creativity and innovation which benefits the organisation
h) Raises employee efficiency hence reduced operational costs
i) Improves overall performance

Motivation factors for employees

(1) Financial rewards (7) Giving constructive criticism

(2) Recognition (8) Conducting periodic reviews
(3) Giving face-to-face feedback to (9) Encourage feedback from
employees employees more especially in
(4) Inspiring employees to create a team environments
positive environment (10) Personal satisfaction
(5) Participatory decision-making (11) Flexibility
(6) Training (12) Pleasant work environment
(13) Equity and information

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Financial rewards of an employee

These are monetary incentives that an employee earns as a result of performing
their duties. Where payments are linked to performance they act as a motivator.
These financial rewards include salary, wages etc.

a) Wages - these are payments made to employees (mostly unskilled or casual

labourers) and computed on hourly, daily, weekly or piece work basis. A
worker is eligible for another payment if he or she is selected to work again
another day.
b) Salaries - these are payments made to permanent employees at the end of
every month. The workers are normally issued with a payslip to explain the
content of their pay. Salary always consists of Basic pay, allowances such as
housing, medical, fuel etc. Basic pay plus the allowances gives what is called
Gross salary. However, deductions are made from the gross salary such as
taxes, loan repayments, insurance premiums etc. After the deductions the
employee ends up with Net salary which is the amount at his or her disposal.

Differentiating wages and salaries as methods of payment

Wages Salaries
Normally expressed as an hourly rate Expressed as annual rate
Normally paid on daily basis or a Paid a month in arrears
week in arrears
Calculated based on piece rate and
Calculated in terms of annual figure
time rate divided by 12 months
Paid either in cash or credit transfer
Typically paid automatically into
account
Amount paid depends on hours It is not based on number of hours
worked worked
Normally paid to casual workers Paid to employees on permanent or
contractual basis

c) Bonuses - bonuses are normally paid out at the end of the year to employees
as a sign of saying „thank you‟ for their hard work. The amounts vary
according to how well the organisation has performed in terms of profits
made. Bonuses motivate workers and make them want to work even harder
in the following year.
d) Commissions – commissions are calculated as a percentage of total sales
made by the employee. Commissions can also be given to non-employees
who offer business opportunities to the organisation. The amount paid is a
percentage of the total worth of the deal to the organisation.
e) Premium pay – it is paid based on worker‟s regular hourly wage and add a
percentage e.g. double time or time-and-a-half. It is aimed at motivating
employees to spend extra time on their work, thus meet deadline. Overtime is
an example of premium pay.
f) Fringe benefits – another form of financial reward or motivation and it
includes company cars, pension schemes, sickness benefits, subsidised
meals and travel and staff discounts..

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Factors that determine wages and salaries

a) Skills and experience – an employee who has been at work for many years is
more likely to earn more than a new recruit in the same department doing the
same job. This is so because he/she has accrued experience over his
performance for a long period of service on the same work.
b) Level of training and education – a highly educated and trained individual is
likely to be paid more when hired than one with lower education and training
levels (with an assumption of same job and experience).
c) Demand for supply of labour – When there is more labour in the market than
demanded, people will be willing to accept even lower pay so long they secure
a job than when there is a shortage of labour.
d) Job requirements /demands – Where an employee shoulders many
responsibilities the pay is usually more since they devote most of their time on
the job than those who have less responsibilities.
e) Legal requirements – Governments have policies on minimum or average
wage rate for employees in a particular sector below which no employer is
allowed to pay his or her employees. Hence, employers have to pay within the
required rate otherwise they face the law.
f) Organisation’s capacity or ability to pay – An organisation cannot pay what
it cannot afford. Therefore, organisations pay depending on their performance
and profitability so as not to affect the organisation‟s financial stability.
g) Existing market rate – Organisations in the same business offer similar
salaries so as not to lose good employees to other employers who are ready to
offer them better terms of payments. This motivates workers to remain with
current employer.
h) Performance reviews – most performing employees are considered for pay
increments, bonuses or promotion etc than those that who do not perform well.
i) Trade Unions Bargaining power – A trade union is a voluntary association of
workers established to protect and promote their interests through collective
actions and activities. Through their leaders, they may negotiate for good
working conditions, allowances, salary increment etc.

Describing systems of payment

(1) Piece rate – payment is made according to output or units produced.
Advantages of piece rate system
 The system is deemed just and fair to all
 It is an incentive to increase productivity
 Increase in productivity leads to Higher output and low cost of
production per unit
 Helps workers opportunity to improve their standard of living
 It is easy to distinguish efficient and inefficient workers for
purposes of promotion
 Encourages effort and seriousness at work
 It is a form of contract to worker hence gets more pay
 Owner of work get required standards of work

Disadvantages of piece rate system

 Difficult to fix piece wage rate

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 Earnings of workers are not stable

 Detailed records of production have to be kept
 Rigid quality control becomes necessary as workers may not stress
the importance of product quality
 It is expensive since it takes the form of contract
 Not suitable for jobs that require enough time and care

(2) Time rate – payment is based on a set rate of work per hour, day week or
per month. Hours worked above this time are then paid at an „overtime‟
rate.

Advantages of time rate

 It is the simplest system of payment
 Workers earnings are regular and fixed
 It is an objective system
 There is no pressure to speed up production thus keeping quality
high
 With overtime workers generate more revenue

Disadvantages of time rate

 More payment made for lesser amount of work
 Guaranteed remuneration makes workers complacent
 Calculation of labour cost per unit is difficult
 It provides no incentive for better performance
 Productivity is low due to absence of incentive
 Work is done at slow pace to have overtime rate
 Expensive to owner where many workers have overtime rate

Preparing a pay slip

A pay slip is an evidence of payment given to the employee for a particular month.
It normally shows the following information :

 Employee‟s name  Allowances (if any) eg. House

 Month allowance
 Basic pay  PAYE
 Gross pay  Deductions
 Employment No. (if any)  Net pay etc.

CONSUMER GASES CO. PAY SLIP

Employee’s name: J. Mwenda-Blantyre (ID No. 001) Date : 25/08/2014
Code Description Pay Deduction
001 Basic Salary K20,000.00
002 House Allowance K04,000.00
003 Personal Loan K 500.00
004 Social Club charges K 250.00
005 PAYE K5,850.00

Gross pay K24,000.00 K6,600.00

Net pay K17,400.00

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Calculating gross and net pay

Suppose that Mr Mwenda of Consumer Gases Industry gets K240,000.00 as

annual salary. In August, 2014 he had K500.00 accrued loan, K250 club charges

Assuming that Malawi Revenue Authority has the following tax schedule:
First K3,000.00 Tax free
Next K1,500.00 10%
Next K1,500.00 20%
Excess over 30%

Determine Mr Mwenda‟s net pay for the month of August 2014 if Consumer Gases
regards K4,000 for his house allowance as taxable. In this example, first establish
Mr Mwenda‟s monthly basic pay and gross pay since his house allowance is also
taxable.

Solution
Annual basic pay = K240,000.00
Monthly basic pay = K240,000.00/12
= K20,000
Gross pay = K20,000.00 + K4,000.00
= K24,000.00

Taxable Income Rate Tax

Total K24,000
First K3,000.00 0% 0
Next K1,500.00 10% K150.00
Next K1,500.00 20% K300.00
Excess K18,000 30% K5,400.00

Total Tax payable (PAYE) = K0 + K150.00 + K300 + K5,400.00

= K5,850.00

Net Pay = Gross salary – Tax payable + deductions (if any)

= K24,000.00 – K5,850 + K500.00 (loan) and K250.00 (Club charges)
= K24,000.00 – K6,600.00
= K17,400.00

Mr Mwenda‟s net pay for August = K17,400

TOPIC 12 : TAXATION

Tax is a compulsory payment that people or companies operating in a country pay

to the government.

Taxation is a means by which the government raises revenue from the public by
imposing taxes.

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Purpose of Taxation

a) Raising government’s revenue – taxes are a major source of revenue which

the government use for provision of public utilities e.g. social services.
b) Protection of local industries – Government may impose heavy taxes on
imported goods which compete with goods produced locally. This makes the
imported goods expensive hence it encourages citizens to buy the relatively
cheaper locally manufactured products thus creating a market for local
industries.
c) Equitable distribution of wealth – Progressive taxation can be used to reduce
inequality in a society. This is a system where higher income groups have to
pay more tax thus reducing the gap between the rich and the poor. This can be
done through provision of free medical care, education etc.
d) Discouraging consumption of harmful products – High taxes are imposed
on commodities that are harmful to human health such as alcohol and
cigarettes in order to make them expensive and unaffordable thus reducing the
consumption.
e) Balance of payments – Unfavourable balance of payment problems are
created when imports are more than exports in a country. Taxes on imports can
be increased in order to make imports expensive. Thus, causing a fall in
demand for imported goods.
f) Creation of more employment opportunities – Funds collected from taxes
can be invested in various projects e.g. road works, infrastructure etc aimed at
providing opportunities for the citizens.
g) Control inflation – inflation is persistent increase in general levels of prices of
goods or services over a period of time. Governments impose more taxes
during inflation so as to discourage unnecessary spending by reducing
individual‟s disposable income.

Principles of Taxation
These are concepts that guide government in designing and implementing an
equitable taxation system.

1) Adequacy – taxes should be just enough to generate revenue required for

provision of essential public services
2) Broad basing – taxes should be spread over as wide as possible to sections
of populations, sectors of economy to minimise individual tax burden.
3) Compatibility – taxes should be co-ordinated to ensure tax neutrality and
overall objectives of good governance.
4) Convenience – taxes should be enforced in a manner that facilitates
voluntary compliance to the maximum extent possible e.g. tax should be
collected at the time of receiving incomes not after spending it
5) Earmarking – tax revenue from a specific source should be dedicated to a
specific purpose only when there is a direct cost-benefit link between the tax
source and the expenditure e.g. use of motor fuel tax for road maintenance.
6) Efficiency – tax collection efforts should not cost more than the tax revenues
to be collected.

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7) Equity - A good tax system should be based on the ability of the taxpayer to
pay. e.g. higher tax paid by high income groups and lower tax paid by lower
income groups.
8) Neutrality – taxes should not favour any one group or sector over another. It
should not be designed to interfere or influence individual decision making.
9) Predictability (certainty) – a good tax system should make taxpayers know
how much they have to pay, when and the method of payment. Thus, it should
be very clear to enable the taxpayer plan ahead to avoid confusion and
evasion.
10) Simplicity – a good tax system should be easily understood by average
taxpayers so as to motivate them to pay taxes as required. Taxpayers should
be able to compute their tax liability to avoid corruption, oppression and
evasion.
11) Diversity – There should be a variety of taxes and the tax base should be
wide enough. This ensures that adequate revenue is collected and that
everyone participates in payment of taxes in one way or the other.
12) Flexibility – There should be no rigidity in taxation. A good taxation system
should allow for adjustments and rectification (increase or decrease of taxes)
to meet revenue requirements of the state.
13) Restricted exemptions – tax exemptions must only be for specific purposes
(e.g. encouraging investment) for a limited period.

Forms of Taxes in Malawi

a) Income Tax – it is tax paid on the money that a person or business receives as
income (taxable income). e.g. salaries, wages, rent income, interest on capital
investment, profits from business.
b) Value Added Tax (VAT) – it is a tax on the value added to the product
throughout its production process, starting from the raw material to the final
product.
c) Domestic Excise duty – it is a tax levied on some goods that are
manufactured and sold locally (within a country) and on certain imported
products. It is levied on products such as alcohol and cigarettes to discourage
their consumption.
d) Customs duty – it is tax charged on goods imported into or exported from a
country. These are divided into import duties and export duties.

Types of taxes
 Direct Taxes and Indirect taxes

Direct Taxes
These are taxes which are paid by the person on whom tax has been imposed.
Direct tax is paid by taxpayers through income or capital. It is levied and paid for
by individuals, firms, companies etc. e.g. Income taxes (PAYE), Corporate tax
(paid on profits), Capital gains taxes etc

Advantages of direct taxes

a) Simplicity – easy to administer and understand

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b) Create civic consciousness – society is aware they are paying taxes to

government and hence check on public expenditure to ensure money is not
used on wrong purposes.
c) Equitable – high income earners pay more taxes and low income earners pay
less taxes. In addition, the price of commodity is the same for every person
rich or poor
d) Economical in collection – they are mostly collected at the source (e.g.
Income tax - PAYE) hence reduce extra costs of having to employ people to do
the collections.
e) Certainty – the tax payers know in advance the amount of tax they are
required to pay and when to pay. The authorities also know how much revenue
to expect.
f) Elastic – When government needs more funds in an emergency, income taxes
can be increased by raising their rate.
g) Productive – as a community grows in numbers and prosperity, the return from
direct taxes expands automatically thereby giving more revenue to government.

Disadvantages of Direct taxes

a) Discourage savings – direct taxes reduce individuals‟ income and hence their
ability to save.
b) Discourage people from working hard – the more you earn the more tax you
pay hence people get discouraged from working hard since they do not enjoy
the full earnings of their labour.
c) Reduce investment – high taxation on business profits would discourage
would be investors. Some investors may also decide to transfer their business
to other countries where taxes are low.
d) Arbitrary – rates are charged arbitrarily not based on any scientific procedure.
e) Can easily be evaded – one can submit false return of income and thus evade
the tax thus defrauding government of its revenue. Direct taxes are based on
taxpayer‟s honesty.
f) Huge bureaucracy – direct taxes involve a lot of recording on the part of
taxpayer and the collecting authorities, thus the administration involves a huge
bureaucracy.

Indirect Taxes
It is a tax collected by an intermediary (such as retail store) from the person who
bears the burden of tax (e.g. consumer). It is paid for by the end consumer of
goods or services e.g. customs duties, Sales tax (VAT), Excise tax etc

Advantages of Indirect Taxes

a) Difficult to evade – Indirect tax such as VAT is attached to price of commodity

as such anyone purchasing a commodity pays for it without even realising.
b) Flexibility – government can easily increase or decrease the tax rate
depending on prevailing economic conditions.
c) More revenue collected – tax can be charged on a variety of commodities and
since people are likely to consume the commodities, more revenue will be
generated.

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d) Encourages hard work – to maintain standards of living people will need to

work hard in order to earn more so as to purchase the goods/services they
require.
e) Payment is not compulsory – Those who do not want to pay the tax can
avoid purchasing the taxed commodities.
f) Can be used to promote social welfare – Consumption of harmful
commodities can be reduced by charging high taxes e.g. tobacco, wine etc.
g) Reaches out to the poor – Since every individual should pay a little something
to government, the poor can be reached only through indirect taxation.
h) Convenient – tax payer does not feel the burden much since indirect tax is
paid in small amounts and also because it is paid only when making purchases.
i) Broad basing – Indirect taxes can be spread over a wide range thus making
them more beneficial and suitable.
j) Easy to collect – collection of tax takes place automatically when goods are
bought and sold.
k) Equitable – when imposed on luxuries or goods consumed by the rich, they
are equitable. In such cases only the well-to-do will pay the tax.

Disadvantages of indirect taxes

a) May result into inflation – continued increase in indirect taxes can lead to
inflation since it has direct influence on the price of commodities.
b) Expensive to administer – it requires middlemen in the name of inspectors to
ensure that correct amounts are collected and remitted. Thus, becoming
expensive since inspectors have to be paid.
c) Leads to low savings – As people struggle to satisfy their needs and wants
with increased prices they remain with little to save
d) Lack of civic awareness – the taxes are hidden in the prices of goods or
services and many people are unaware of their existence. A taxpayer may not
feel like he or she is paying taxes hence it does not bring about a sense of civic
responsibility
e) Uncertainty in revenue collection – The government is uncertain about the
amount of revenue expected from indirect taxes and hence can only plan with
estimates.
f) Can have negative effect on international trade – import duties can lead to
complaints by other countries who may find it discriminative against their
exports hence start trade wars.
g) They are regressive – it does not matter whether the buyer is rich or poor, the
prices in the market are the same for all.
h) It discourages industrial growth – e.g. where raw materials are heavily
taxed.

Role of taxation in trade and the economy

 Taxation protects local industries from foreign competition.

 Taxation can be used to eliminate dumping
 To reduce consumption of harmful products
 Taxation raises government‟s revenue
 It encourages savings and investments

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 It accelerates economic growth of a country

Government expenditure on tax revenue

Money collected can be spent in various ways which are classified as :

 Capital expenditure – it is the amount of money spent by Government on
projects (investment goods or assets) aimed at facilitating economic growth
and development in the country. These assets or projects will be around for
an extended period of time. E.g. building roads, dams, schools, purchasing
new computer equipment, construction of bridges etc.
 Recurrent expenditure – it is the amount of money spent by the government
on purchases of consumption of goods and services. These are
goods/services that only last for a limited period of time. E.g. spending on
wages and salaries for civil servants, provision of services such as internal
security, purchase of drugs, stationery etc
 Transfer payments – it is the money spent by government on individuals who
do not directly contribute to a country‟s national income. e.g. bursaries and
scholarships, pensions, grants as development aid, money used famine relief
and other disasters etc.

Methods of collecting tax

The following are the methods used by the Malawi Revenue Authority

1) Pay As You Earn (PAYE) – It is a system where the employer deducts an

amount of tax from the employee salary or wage. The employer is expected to
remit the money to Malawi Revenue Authority not later than 14 th day from the
end of the month for which the tax was deducted.
2) Withholding tax – it is an advance tax deducted from any payment one
receives from some business made e.g. from dividends, agency fees, royalties,
contractual fees etc. It is then remitted to MRA. It is usually applied on persons
(legal or natural) that cannot be traced after they have received payment.
3) Corporate tax – It is paid by companies and other trading organisations on the
profits made and usually calculated at a fixed percentage. It can be paid in
instalments.
4) Capital gains tax – it is tax levied on the increase in the value of assets and it
is only paid when the assets are sold at a profit i.e. when the sale price is more
than the cost price.
5) Non-resident tax – it is the final tax payable by persons not resident in Malawi
on any income arising from a source within Malawi.
6) Fringe benefit tax – Fringe benefit is a collection of various benefits provided
by employer to employee e.g. company car, subsidised meals, education
reimbursements, health insurance etc. Fringe benefit tax is a tax levied on
some fringe benefits that employees receive and enjoy as a result of their
employment. This tax is remitted by the employer.
7) Value Added tax – it is tax levied on the „value added‟ that has been created at
various stages in the production and distribution chain. The standard rate is
16.5%.

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8) Provision tax – it is the estimated total amount of income tax payable by every
business person chargeable with income tax in respect of any year of
assessment. It is estimated by the taxpayer at the beginning of the year of
assessment and it is payable in quarterly instalments.
9) Assessment tax – it is determined by way of tax assessment made after the
end of the year after crediting on that notice of assessment on persons in
business to show the balance of tax payable after crediting on the notice of
assessment advance taxes such as provisional tax, withholding tax, payroll tax.

NB: Transactions made by vendors (e.g. shops) are routed to MRA through a
Machine called Electronic Fiscal Device (EFD). This helps in correct tax
calculations

Calculating different types of taxes

Tax is calculated based on the applicable rate at that time of goods declaration.
PAYE is also calculated based on the applicable formula available at that time.

VAT
It represents a tax on the value added to the product throughout its production
process starting from the raw materials to the final product. It is assumed that the
increase in price of a commodity is a result of value addition.

Example
A distributor sells one tonne of sugar at K200,000. The factory price of the sugar
is K160,000 including expenses. Calculate the Value Added Tax (VAT) if it is
charged at standard rate of 16.5%.

Value added = K200,000 – K160,000 = K40,000

VAT is charged on the value added of k40,000
VAT = 16.5% x K40,000
= K6,000

PAYE calculation

If an employee receives a gross salary of K160,000 per month his or her tax will
be calculated as follows :-

TAXABLE INCOME RATE TAX

Total K160,000.00 0% K0.00
First K20,000.00 0% K0.00
Next K5,000.00 15% K750.00
Excess K135,000.00 30% K40,500.00
Total tax payable is K0.00 + K0.00 + K750.00 + K40,500.00 = K41,250.00

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TOPIC 13: BUSINESS ACCOUNTING

 it is the keeping and recording of information for decision making process

 people who use accounts are called Accountants

Users of Accounting information

1) Management – they need accounting information to make plans and decision

making process.
2) Shareholders (owners) – it helps them to (i) know profitability of the business
(ii) know how much profits they are going to get from the business.
3) Employees (trade union) – to know if their jobs are secure or not
4) Banks/lenders – it helps (i) to know if they will be paid back their loans or not
(ii) to know if the business is credit worthy
5) Tax collector and government agencies – to know how much tax (revenue)
they are going to get from the business.
6) Suppliers – to know if the business will pay them back their debts
7) The public – they are interested in the environmental affairs of the business
8) Customers – they are interested in the profitability and stability of the
business to assess the ability of the business to supply them with goods
/services on regular basis.
9) Potential investors – they may want to know whether the business is worth
investing in or not.

Terms used in Accounting

1) Assets - These are things that the business owns

Types of Assets
a) Fixed assets – these are things used by the business for a long period
of time. They are not meant for re-sale. E.g. cars, land, buildings,
computers, chairs, fittings and fixtures, desks etc
b) Current Assets – They are things that are used within 1 year (12
months) E.g. cash, bank, stocks (these are goods that are for sale),
account receivables, trade receivables and debtors. Current assets are
also known as circulating/ floating/ liquid assets/short-term assets.

2) Liabilities - These are the things the business owes others. These are debts
of the business

Types of Liabilities
a) Short-term liabilities – these are payable within 1 year (12 months.
E.g overdraft, creditors trade, trade payables (accounts payables)
b) Long-term liabilities – these are debts that are payable for many
years. E.g. mortgage, bank loans (2 – 10 years)

3) Capital/Equity - Wealth set aside to produce more wealth. Or Resources put

forward by owners and others. Or Money used to start the business

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Types of Capital
a) Fixed capital – it is capital used for many years E.g. buildings,
machinery, land, cars, computers etc
b) Current capital – capital used within 1 year (12 months). E.g cash,
bank, stocks

4) Accounting equation
Assets = Capital + Liabilities
A =C+L
A–C =L
Assets – Capital = Liabilities

A–L =C
Capital = Assets – Liabilities

5) Revenues/income – money the company earns from its sales of products or

services, and interest and dividends earned from marketable securities.
6) Expenses – money the company spends to produce the goods or services
that it sells (e.g. office supplies, utilities, advertising)
7) Working capital - It is the difference between current assets and current
liabilities. Working capital is capital used on a daily basis.

Working capital = current assets – current liabilities

8) Balance Sheet - It is the summary of assets and liabilities. It shows the

financial position of a business as at a particular time.

9) Depreciation - It is the tear and wear of fixed assets. Or Loss or reduction in

value of fixed assets.

Causes of Depreciation
 Wear and tear  Inadequacy
 Obsolescence  Depletion or physical deterioration of an
 Passage of time asset

Terms used in Depreciation

a) Book Value – The value of an asset at the beginning of accounting period.
It is also called Cost of an asset
b) Residual value – it is the value of an asset at the end of useful life of an
asset. Or it is the value of an asset at the end of accounting period. It is
also called Salvage value or Scrap value

Methods of Depreciation
1) Straight Line method
Depreciation = Book value (cost) – scrap value
Number of years

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Example 1 :
The cost of a Van is K100,000 and its scrap value is K10,000 and has to be
used for 6 years. Calculate depreciation

Depreciation = Book value (cost) – scrap value

Number of years

= K100,000 – K10,000
6

= K15,000/year

Example 2:
A machine is valued at K69,500. The machine is to be depreciated at 20%
per annum on cost. Calculate the amount of depreciation charge per
annum.

Depreciation amount = % of depreciation x cost of machine

= 20 x K69,500
100
= K13,900/year

2) Reducing balance method

Depreciation per annum = (Net book value – scrap value) x rate

Example
An asset has useful life of 3 years. The cost of the asset is K2,000. The
residual value is K500. The Rate of depreciation is 50%. Calculate
depreciation

Years Net book Rate Depreciation (K) Account or

value depreciation (K)
1 2000 – 500 50% 750 750
2 1250 – 500 50% 375 1125
3 875 – 500 50% 187.50 1312.50

Method 2

Depreciation 1st year = (K2,000 – K500) x rate

= 1500 x 50
100
= K750

Cost 2nd year = (K2,000 – K750 – K500) x rate

= 750 x 50
100
Depreciation = K375

Cost 3rd year = (K2,000 – K500 – K375) x rate

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= 375 x 50
100
= K187.50

Total depreciation = K750 + K375 + K187.50

= K1,312.50

Source Documents

These are documents that provide information on transactions carried out in

business. Or they are documents used to get accounting information

Examples of Source documents

 Receipts  Local Purchase Order (LPO)
 Invoices  Cash register receipt
 Credit notes  Computer generated receipt
 Debit notes  Employee time card
 Bank statements  Bank deposit slip
 Purchase orders  Cancelled cheques
 Payment voucher

Books of Original Entry

These are books where information is first recorded before being posted into
Ledgers.

Ledger
It is the book of accounts

Examples of books of original entry

1) Cash Book (cash journal) - it is the book that records cash receipts and
payments
2) Sales day book (sales journal) – it is the book that records credit sales
3) Purchases day book (purchases journal) – it is the book that records
credit purchases.
4) Return inwards journal – it is the book that records return inwards
5) General journal – it is the book that records other transactions e.g. spare
parts, transport money etc.
6) Depreciation journal – it records depreciation of fixed assets.

Contents of Books of Original Entry

1) Date
2) Description/details/transaction
3) Amount
4) Balance brought down (b/d) – it is the difference between receipts and
payments
5) Debit (Dr) – income or receipts of the business
6) Credit (Cr) – payment or expenditure of the business

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Recording Cash in a Cash Book

Cash book - It is the book that records cash receipts and payments

Example
Alinane Enterprises has the following information

June 1 opening balance of cash K100,000

June 2 Purchased goods for cash K5,000
June 5 Purchased furniture. Payment made by cheque K50,000
June 7 Cash sale K30,000
June 8 Paid wages K2,000
June 11 Deposited cash into bank K30,000
June 18 Withdraw K2,500 from bank for office use
June 20 Credit sales of K3,000
June 26 Received dividend of K4,500

Use this information to prepare a cash book

Alinane Cash Book (single column)

Date Description Amount Date Description Amount
(Receipts) (K) (payments) (K)
June 1 Balance b/d 100,000 June 2 Purchases 5,000
June 7 Sales 30,000 June 8 Wages 2,000
June 18 Bank 2,500 June 11 Bank 30,000
June 26 Dividend 4,500 June 30 Balance c/d 100,000
Total 137,000 Total 137,000
Jul 1 Balance b/d 100,000

Mpweche‟s transactions in the month of February 2020

2014 Kwacha
Feb 1 Started business with : cash in hand 200,000
Cash at bank 180,000
2 Bought office equipment in cash 55,000
3 Paid for office furniture and fittings in cash 16,000
4 Bought stationery for office use in cash 1,000
6 Bought goods by cheque 150,000
8 Cash sales 25,000
12 Bought more goods by cash 132,000
14 Cash sales directly banked 45,000
16 Credit sales to Wapona 22,000
17 The owner took some cash from the business for personal use 8,000
20 Received commission in cash 7,000
22 Sold goods and was paid by cheque 72,000
23 Wapona cleared his outstanding debt in cash
25 Paid electricity bill in cash 5,000
Paid salaries by cheque 14,000
26 Cash purchases paid by cheque 122,000
27 Took part of the cash in the business to the bank 27,000

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28 Cash sales paid by cheque 65,000

29 Paid Hawa, a creditor, by cheque 18,000

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Trial Balance
It is a list of accounts and their balances at a given date. The aim of a trial balance
is to check mathematical correctness of accounts

Contents of a Trial Balance

1) Account title
2) Name of the account column – names of account with balances are listed in
this column.
3) Debit column (Dr). – in this column there are:
 Assets  Discount allowed
 Purchases  Carriage inwards and
 Return inwards outwards
 Expenses  Inventories (stocks) – these
 Account receivables are goods that are ready for
 Drawings – money taken by the sale
owner from the business for  Cost of sales
personal use

4) Credit Column (Cr) – these are expenditures. In this column there are the
following things
 Capital  Creditors
 Liabilities  Sales
 Profit  Common stocks (shares)
 Account payables  Return outwards

Steps in preparing Trial Balance

a) List account titles and its amount
b) Compute total debits and total credits
c) Confirm if total debits equal total credits

Example

XYZ Ltd has the following financial transaction

K
Share capital 15,000
Furniture & Fixture 5,000
Buildings 10,000
Creditors 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000
General & administration expenses 2,000

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XYZ Ltd Trial Balance as at 31st December 2020

Account title Debits (Dr) (K) Credits (Cr) (K)

Share capital 15,000
Furniture & Fixture 5,000
Buildings 10,000
Creditors 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000

General & administration 2,000

expenses

Total 30,000 30,000

If the trial balance does not balance what should be done? A Suspense account

Types of Errors in a Trial Balance

1. Errors that may cause a trial balance not to balance

Posting errors
 Debit posted as credit
 Wrong amount posted into account
 Debit or credit omitted
 Column incorrectly added

2. Errors not detected by the Trial Balance

a) Error of omission
 It occurs when a transaction is not recorded
 It occurs when transaction is not recorded in accounting records
b) Error of original entry
 It is when wrong amounts are recorded on both sides
 It is when there are misleading accounts in source documents
c) Error of principle
 It is when entries are made in wrong accounts
d) Compensating errors
 It is when errors in debit side and credit side cancels each other
e) Error of reversal
 It is when a debit account is credited and vice-versa
f) Error of commission
 It is writing wrong names of accounts

An error in a trial balance is corrected by Suspense accounts

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Financial Statements

There are three financial statements

 Balance Sheet
 Trading, Profit and Loss Account
 Cash flow statements

1) Trading, Profit & Loss Account

Trading Account – It is aimed at calculating gross profit/loss made by a

business within a given trading period.
Profit – it is the difference between selling price and cost price
Profit = SP – CP

Types of profits
 Gross profit – it is the difference between sales and cost of sales
Gross Profit = Sales – cost of sales
 Net profit – it is the difference between gross profit and overhead
expenses

Overhead expenses – they are expenses which a business cannot run

without them. They are important expenses for the business. E.g. Water,
electricity, advertising, transport, wages and salaries, insurance, city rates,
discount allowed etc.

Using XYZ Ltd Trial Balance, extract a Trading, Profit and Loss account

Profit & Loss Account : XYZ Ltd for the period ending 31 st July, 2020

MK
Sales 10,000
Cost of sales -8,000
Gross profit -2,000

Less expenses
General and administration expenses 2,000
Net profit/Loss 0000

Net loss it is the difference between expenses and sales. When the expenses
are more than sales it is a loss.

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Example
Calculate the gross profit and net profit from the following given information

K K
Sales 120,000 Opening stock 12,000
Purchases 60,000 Labour 7,000
Rent 5,000 Transport 1,800
Water 1,000 Closing stock 10,000
Commission allowed 700 electricity 1,500

Trading, profit and Loss Account as at 31 st July, 2020

MK MK
Opening stock Sales
Add: purchases _____ Less return inwards
Goods ready for sale
Cost of sales
Less return outwards ______

Trading, Profit and Loss Account as of 31 st July 2020

K K
Opening stock 12,000 Sales 120,000
Add: purchases 60,000
Goods available for sale 72,000
Less: Closing stock -10,000
Cost of sales 62,000

Gross profit 58,000

Overhead expenses 17,000
Net profit 41,000

2) Balance Sheet
It is the summary of assets, liabilities and capital of the business as at a
particular time.
Assets : these are the things the business owns

Types of Assets

Fixed Assets
These are the things that will help the business for a long period of time.
They stay for many years. Fixed assets are not meant for re-sale e.g. land,
building, computers, fittings, fixtures, cars, machinery etc.

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Current Assets
These are things that will help the business for 1 year (12 months).

Hints when preparing a Balance Sheet

 Net profit is added to capital
 Net loss is deducted from capital
 Drawings are deducted from capital
 Investments are added to capital

A balance sheet can be prepared horizontally (T-account or vertically)

Example
Prepare XYZ Balance sheet using the following information

Share capital K15,000

Buildings K10,000
Cash K2,000
Debtors K3,000
Profit K-
Loss K-
Creditors K5,000
Furniture and fittings K5,000

XYZ Balance sheet as at 31st December 2020

Fixed Assets MK
Buildings 10,000
Furniture and fittings 5,000

Current Assets
Cash 2,000
Debtors 3,000
Total 20,000

Capital and equities 15,000

Creditors 5,000
Profit Nil
Loss Nil
Total 20,000

Or

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XYZ Balance sheet as at 31st December 2020

Fixed Assets (MK) MK

Buildings 10,000 Capital and equities 15,000
Furniture and fittings 5,000 Creditors 5,000
Total fixed Assets 15,000 Profit Nil
Loss nil
Current Assets
Cash 2,000
Debtors 3,000
Total current Assets 5,000
Total Assets 20,000 Total equity & Liabilities 20,000

For your practice

Prepare a balance sheet for Mr Ganda for the period ended 31 st March 2020.

K K
st
Stock (31 March 2020) 120,000 Cash at bank 30,000
Pick-up van 680,000 Furniture 230,600
Cash in hand 10,000 Creditors 8,000
Debtors 25,000 Short-term bank loan 50,000

MATHEMATICAL CALCULATIONS IN ACCOUNTING

1. Gross profit = Sales – cost of sales

2. Net profit = Gross profit – overhead expenses
3. Working capital – it is the difference between current assets and current
liabilities. It is capital used on daily basis.
Working capital = current assets – current liabilities
= cash + debtors – creditors
= K2,000 + K3,000 – K5,000
= K5,000 – K5,000
=0
4. Capital or Net worth – it is wealth set aside to produce more wealth
Capital = Assets – Liabilities
Capital = Building + furniture + cash + debtors
= K1,000 + K5,000 + K2,000 + K3,000 - K5,000
= K20,000 – K5,000
= K15,000

3) Cash flow statements

Cash flow is the movement of cash in the business. Cash into the business is
called cash inflow whereas cash out of the business is called Cash outflow.
Cash flow statement is also called Statement of cash. It starts from the first
month of the year to the last month of the year. Cash flow excludes

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transactions that do not affect cash receipts and payments such as

depreciation, write-offs on bad debts, credit losses etc.

Statement of Cash flow from 1st January to 31st December 2019

K
Cash flow from operations 4,000
Cash flow from investment (1,000)
Cash flow from financing (2000)
Net cash flow 1,000

Uses of Cash flow statement

a) To show liquidity of the business.
b) It shows additional information on assets liabilities and equity
c) It is used to compare the business with other businesses
d) It indicates the amount, timing and probability of future cashflows

Reference material
(1) Syllabus for Business Studies for Form 3 & 4 (MIE)
(2) Business Studies for Senior Secondary School Student Book Form 3) by
Msosa Moses, Montfort Media Balaka (2017)
(3) Business Studies for Malawi Forms 3 & 4 Student Book by Visambwe
Edwin, Visa Publishers, Blantyre. (2015)
(4) Achievers Senior Secondary Business Studies Student‟s Book 4 by Kalima
Robert, East African Educational Publishers Ltd, Nairobi (2018)

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