Business Studies Notes form 3 & 4 - Copy
Business Studies Notes form 3 & 4 - Copy
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.
(ii) Foreign trade – This is the trade among or between countries. It is also called
International trade
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
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
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.
1. Letter of Enquiry
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?
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
Example of a quotation
QUOTATION
Excel Wholesaler
P.O. Box 3041, Blantyre
Kamongo Retailers
P.O. Box 79, Dowa
Tel.: 01661867
Dear Sir/Madam
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
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
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
Dear Sir,
Would you please supply the following items by 2nd May 2019 at our shop next to
SPAR at Mponela Trading Centre.
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
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.
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.
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.
Excel Wholesaler
P.O. Box 3041, Blantyre
Kamongo Retailers
P.O. Box 79, Dowa
Tel.: 01661867
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
E&OE on 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
Types of Discount
Example of Invoice
VAT 10%, Order Ref No. MI/08, Discount (qty) 10%, Invoice No. BCGD/012
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.
Suppose on Invoice BCGD/012 item (i) was over added by K1,500 the credit
note will be as follows
Signed: Signed
Sales Manager
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
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
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.
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
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
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.
etc. They usually take advantage of bulk buying and aim at cutting the chain
of distribution short.
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)
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.
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
= K67,600
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
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
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
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
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)
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
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
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.
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
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,
households and nations should use the goods and services that have been
produced.
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
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
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 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.
Stock taking
Stock taking involves physical verification of the quantities and conditions of items
held in an inventory or warehouse.
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.
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
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:
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)
TOPIC 5 : ENTREPRENEURSHIP 1
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
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
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.
Setting up a Business
Requirements
Entrepreneurs will have to fulfil some of the following :
establishing if the product has a wide market share or if there are prospects of
gaining more markets
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
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
SMALL BUSINESSES
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
For Mrs Phoya who sells second hand clothes in various local markets in Blantyre,
the SWOT analysis would be
Business Strengths
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.
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
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:
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
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.
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
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
FORM 4
WORK
A. Trade Liberalisation
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.
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.
B. Globalisation of Trade
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)
Disadvantages/problems/challenges of Globalisation
C. Trade Protocol
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
d) Limited number of goods and services are transacted because there are only
two countries
D. Common Markets
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 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
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.
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.
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
Objectives of MITC
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
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
Parliament
Minister
Board of Directors
Board Members
Management
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
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
a) It leads to job losses – people lose jobs because of the following reasons:
Automation – machines will replace people
Privatisation Commission
This is a body established by an Act of Parliament in 1996 to manage and oversee
privatisation in Malawi
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
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.
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
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.
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
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
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
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.
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
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
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.
HEDGING
TOPIC 9 : PRODUCTION 2
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.
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.
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.
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.
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)
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:
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.
MC = Δ TC (Total Cost)
Δ Q (Output)
Δ = change
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.
Steps to be taken
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.
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
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)
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.
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.
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
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.
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.
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).
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.
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
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.
Components of promotion
These are controllable and non-controllable
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.
Final consumer
Niche and Mass marketing
Consumer Protection
It is a system set aside by either government or NGOOs to monitor business
activities with respect to consumer rights
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.
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
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.
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.
It is the term which describes all individuals (personnel) who make up the
workforce of an organisation.
Sources of Recruitment
They can be internal or external sources
B. SELECTION
Selection The process of choosing the most suitable person from among the
list of those interested. Selection follows a logical order :
2. Induction
It means welcoming new employees into the business and preparing them for
their new roles. It is also called Orientation.
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.
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
MANAGEMENT
decisions. Hence, employees are held fully responsible for the decisions they
make. It is also called delegative style of management.
Employee Motivation
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.
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
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..
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.
(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.
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
TOPIC 12 : TAXATION
Taxation is a means by which the government raises revenue from the public by
imposing taxes.
Purpose of Taxation
Principles of Taxation
These are concepts that guide government in designing and implementing an
equitable taxation system.
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.
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
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
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.
The following are the methods used by the Malawi Revenue Authority
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
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%.
PAYE calculation
If an employee receives a gross salary of K160,000 per month his or her tax will
be calculated as follows :-
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)
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
Causes of Depreciation
Wear and tear Inadequacy
Obsolescence Depletion or physical deterioration of an
Passage of time asset
Methods of Depreciation
1) Straight Line method
Depreciation = Book value (cost) – scrap value
Number of years
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
= 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.
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
Method 2
= 375 x 50
100
= K187.50
Source Documents
Ledger
It is the book of accounts
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
Example
Alinane Enterprises has the following information
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
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
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
Example
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
If the trial balance does not balance what should be done? A Suspense account
Posting errors
Debit posted as credit
Wrong amount posted into account
Debit or credit omitted
Column incorrectly added
Financial Statements
Balance Sheet
Trading, Profit and Loss Account
Cash flow statements
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
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.
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
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.
Current Assets
These are things that will help the business for 1 year (12 months).
Example
Prepare XYZ Balance sheet using the following information
Current Assets
Cash 2,000
Debtors 3,000
Total 20,000
Or
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
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)