mula5a9 mgt131

MGT 131 Business Eighth Edition PRIDE / HUGHES / KAPOOR

Name : Section: ID :

Good Luck

Summarized & Organized by Ali Abdullah Salman (BIS)

2

:::TOPICS:::

CHAPTERS PAGES Ch.1: EXPLORING THE WORLD OF BUSINESS Why Study Business 4 Business: A Definition 4 Types of Economic System: (Exclude Capitalism in USA) Include Definition of mixed economy with examples 4-6 Types of Competition 6-7 Ch.2: BEING ETHICAL & SOCIALLY RESPONSIBLE Business Ethics Defined 8 Ethical Issues 8 Factors Affecting Ethical Behavior 8 Encouraging Ethical Behavior – Code of Ethics Only 8 Social Responsibility 8 Two Views of Social Responsibility 8-9 Ch.5: CHOOSING A FORM OF BUSINESS OWNERSHIP Sole Proprietorships 10 Partnership 10-12 Corporation (Exclude Domestic, Foreign and Alien Corporation) 12-14 Other Types of Business Ownership (Excluding S- corporation) 14 Ch.6:SMALL BUSINESS ENTREPRENEURSHIP & FRANCHISES Small Business: A Profile 15 The Importance of Small Business in our Economy 16 The Pros and Cons of Small Business 16 Developing a Business Plan 16-17 Franchising 17 Ch.7: UNDERSTANDING THE MANAGEMENT PROCESS What is Management? 18 Basic Management Functions 18-20 Kinds of Managers 20-21 Ch.9: PRODUCING QUALITY GOODS AND SERVICES What is Production? 22 The Conversion Process 22-23 Where Do New Products and Services come from? 23 Planning For Production 23-26 Ch.10: ATTRACTING AND RETAINING BEST Human Resources Management: An Overview 27 Human Resources Planning 27-29 Job Analysis 29 Recruiting, Selection, and Orientation 29-31


3

Ch.13: BUILDING CUSTOMER RELATIONSHIPS THROUGH EFFECTIVE MARKETING Definition of Marketing 32 Utility: The Value added by Marketing 32 The Marketing Concept 32-33 Markets and Their Classification 33-34 Developing Marketing Strategies 34-36 Ch.17: ACQUIRING, ORGANIZING AND USING INFORMATION The Nature of Information 37 Business research 37-38 The Information System (MIS) 38-39 Ch.20: MASTERING FINANCIAL MANAGMENT What is Financial Management? 40-41 Planning – The Basis of Sound Financial Management 41-42

:::END OF THE TOPICS:::


4

Ch.1: EXPLORING THE WORLD OF BUSINESS

Why study business? 1- For help in choosing a career. 2- To be a successful employee. 3- To start your own business. 4- To become a better-informed consumer and investor. E-Business: is the organized effort of individuals to sell and produce, for a profit, the products and services that satisfy the society’s needs through the Internet.

Business: A Definition Business: is the organized effort of individuals to sell and produce, for a profit, the products and services that satisfy the society’s needs. To be successful, a business must perform three activities, It must:

1) Be organized. 2) Satisfy needs. 3) Earn profit. Profit: what remains after all business expenses have been deducted from sales revenue. Four resources must combine to start and operate a business: 1-Material: raw materials, buildings, and machinery used in manufacturing processes. 2-Human: people who furnish their labor to the business in return of wages. 3-Financial: the money required to pay employees, purchase materials, and generally to keep the business operating. 4-Information: resource that tells the managers of the business how effectively the other resources are used. Types of business: 1- Manufacturing businesses: process materials into tangible goods 2- Service businesses: produce services, such as haircuts or legal advice. 3- Marketing intermediaries: buy products from manufacturers and then resell them.

Types of Economic System Economics: is the study of how wealth is created and distributed. Economic system OR Economy: the way in which people deal with the creation and distributing of wealth. Factors of production: the resources used to produce goods and services, and they are: 1-Natural resources: crude oil, forests, minerals, land, and water. 2-Labor: human resources such as managers and workers.


5

3-Capital: money, facilities, equipment, and machines. 4-Entrepreneurship: the willingness to take risks. Four basic economic questions: 1- What and how much goods and services will be produced? 2- How will these goods and services be produced? 3- For whom will these goods and services be produced? 4- Who owns and controls the major factors of production? Types of economic system: 1- Capitalism 2- Command Economies. (1) Capitalism:

Capitalism: An economic system in which individuals own and operate the majority of business that provide goods and services.

Adam Smith is the father of the capitalism (his book the wealth of nations). Adam believed that each person should be allowed to work toward his/her own economic gain without interference from the government.

The French term laissez faire describes Smith’s capitalism and it means “let the do” (as they see fit).

Four fundamental issues: 1) The creation of wealth is the concern of private individuals, hence

resources must be owned by private individuals. 2) The owners of these resources should be free to determine how to use

them. 3) The economic freedom ensures the existence of competitive markets that

allow both buyers and sellers to enter and exit as they choose. 4) The economic role of government is limited to protecting competition.

Market economy: an economy system in which individuals and businesses decide what to produce and buy, and the market determines prices and quantities. Consumers: individuals who purchase goods or services to their own personal use. (2) Command Economies: an economy system in which the government decides what to produce, how to produce it, who gets it, and at what price to sell it.

a) Socialism: The key industries (transportation, utilities, and communications) are owned and controlled by the government.

What to produce and how to produce it are in accordance with national goals.

The distribution of goods and services –who gets what- is controlled by the state.


6

Aims of socialist countries: 1) equitable distribution of income. 2) the distribution of social services to all who needs them. 3) the elimination of poverty. 4) elimination of the economic waste.

Examples of socialist countries: Britain, France, Sweden, and India.

b) Communism: Karl Marks is the father of the communism. All economic resources are owned by the government. The basic economic questions are answered through centralized state planning.

Examples: North Korea and Cuba. Mixed economy: an economy that exhibits elements of both capitalism and socialism.

Types of Competition Competition: rivalry among businesses for sales to potential customers. Types of competition:

1) Pure (perfect) competition. 2) Monopolistic competition. 3) Oligopoly. 4) Monopoly.

(1) Pure Competition: the market situation in which there are many buyers and sellers of a product, and no single seller is powerful enough to affect the price of that product.

• Many buyers and sellers. • Single product. • Price determined by the market. • All buyers and sellers know everything about the product.

Supply: the quantity of a product that producers are willing to sell at each of various price. Demand: the quantity of product that buyers are willing to purchase at each of various price. Market price: the price at which quantity demand is exactly equal to the quantity supplied. (2) Monopolistic Competition: A market situation in which there are many buyers with a relatively large number of sellers.


7

• The products are very similar in nature and trying to satisfy the same need. • Each seller attempts to make its product different from the others. • The producer has some limited control over the price of the product.

(3) Oligopoly: a market situation (or industry) in which there are few sellers. • These sellers are quite large, and each seller has considerable control over

price. • The market actions of each seller can have a strong effect on competitor’s

sales. • Product differentiation is the major competitive weapon.

(4) Monopoly: a market (or industry) with only one seller that has complete control over price.

• The firm in a monopoly position considers the demand for its product and set the price at the most profitable level.

Natural monopoly: an industry that requires a huge investment in capital and within which any duplication would be wasteful.

Type of competition

Number of sellers The product The price

Pure competition Many sellers Single product

No single buyer or seller in powerful enough to affect the price

Monopolistic competition

Relatively large number of sellers

The products are very similar in nature and trying to satisfy the same needs

Each producer has some limited control over the price

Oligopoly Few sellers

Product differentiation is the major competitive weapon

Each seller has considerable control over the price

Monopoly One seller The seller has complete control over the price


8

Ch.2: BEING ETHICAL & SOCIALLY RESPONSIBLE

Business Ethics Defined Ethics: the study of right and wrong of the morality of the choices individuals make. Business Ethics: the application of moral standards to business situations.

Ethical Issues 1- Fairness & Honesty. 2- Organizational Relationships. 3- Conflict of Interest. 4- Communications.

Factors Affecting Ethical Behavior 1- Individuals. 2- Social. 3- Opportunity.

Encouraging Ethical Behavior – Code of Ethics Only

Code of Ethics: a guide to acceptable and ethical behavior as defined by the organization. Whistle-Blowing: informing the press or government officials about unethical practices within one’s organization.

Social Responsibility Social Responsibility: the recognition that business activities have an impact on society and the consideration of that impact in business decision making.

Two Views of Social Responsibility (1) Economic model: the view that society will benefit most when business is left

alone to produce and market profitable products that society needs.

1. Business primary responsibility is to make profit. 2. Resources should be used to maximize profit not to solve societal problems. 3. Social problems are the responsibility of government. 4. Social problems affect society but not the business it self.

(2) Socioeconomic Model: the concept that business should emphasize not only

profits but also the impact of its decisions on society.

1. Business is part of society. 2. Business import resources from society. 3. Helping in social problems create stable environment.


9

4. Socially responsible business reduce government interventions.

Comparison Between Economic Model & Socioeconomic Model

Economic primary Emphasis is on: 1. Production. 2. Exploitation of natural resources. 3. Internal, market-based decisions. 4. Economic return (profit). 5. Firm’s or manager’s interest. 6. Minor role for government.

Socioeconomic primary Emphasis is on: 1. Quality of life. 2. Conservation of natural resources. 3. Market-based decisions, with some

community controls. 4. Balance of economic return and social

return. 5. Firm’s and community’s interest. 6. Active government.


10

Ch.5: CHOOSING A FORM OF BUSINESS OWNERSHIP

Sole Proprietorships Sole Proprietorships: a business that is owned (and usually operated) by one person. Advantages of sole proprietorships:

Ease of start-up: - Sole proprietorship is the simplest and cheapest way to start a business. - Start-up requires no contracts, agreements, or other legal documents. - The sole proprietorship can be established without the service of attorney. - The sole proprietor pays no special start-up fees or taxes.

Retention of all profits OR Pride of Ownership. Flexibility:

A sole proprietor is completely free to make decisions about the firm’s operations. For example, a sole proprietor can switch from retailing to wholesaling without waiting or asking for anyone’s approval. Also the sole proprietor can respond to change in market conditions quickly.

Possible tax advantages: Profits are taxed as personal income of the owner, and the sole proprietor doesn’t pay the special state and federal income taxes that corporations pay.

Secrecy: Sole proprietors are the most Secrecy in the information.

Disadvantages of sole proprietorships:

Unlimited liability: A legal concept that holds a business owner personally responsible for all the debts of the business.

Lack of continuity: The sole proprietor is the business. If the owner dies or declared legally incompetent, the business ceases to exist.

Lack of money: Lenders are usually unwilling to lend large sums to sole proprietorship. Only one person can be held responsible for repaying such loans.

Limited management skills. Difficulty in hiring employees:

The sole proprietor may find it hard to attract competent help.

Partnership Partnerships: a voluntary association of two or more persons act as co-owners of a business for profit. Types of partners: (1) General Partners: is a person who assumes full or shared responsibility for operating a business.


11

General partnership: a business co-owed by two or more general partners who are liable for everything the business does. (2) Limited partners: is person who contributes capital to the business but has no management responsibility or liability for losses beyond the amount he/she invested in the partnership. Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it. Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership.

• Units of ownership in MLPs can be sold to investors to raise capital. • Profits from MLPs are reported as personal income.

The partnership agreement: It should state:

Who will make the final decisions. What are the duties of each partner. The investment each partner will make. How much profit or loss each partner receives. What happen if a partner wants to dissolve the partnership or dies.

Advantages of partnership:

Ease of start-up: The legal requirements are often limited to registering the name of the business and purchasing necessary licenses or permits.

Availability of capital and credit: Partnerships have greater assets and stand a better chance to obtaining the loans they need.

Retention of profits: All profits belong to the owners of the partnership.

Personal interest: General partners are very concerned with the operation of the firm.

Combines business skills and knowledge: Partners often have complementary skills. The weakness of one partner can be offset by another partner’s strength.

Possible tax advantages: Partners are taxed only on their incomes from the business.

Disadvantages of partnership: Unlimited liability:

Each general partner has unlimited liability for all debts of the business.


12

Lack of continuity: Partnership are terminated if any one of the general partners dies, withdraws, or declared legally incompetent.

Effects of managements disagreements: When partners begin to disagree about decisions, policies, or ethics, distrust may build and get worse as time passes.

Frozen investment: It is easy to invest money in a partnership, but it is difficult to get it out.

*note: The main advantages of a partnership over the sole proprietorship are the added capital and management expertise of partners.

Corporation

Corporations: an artificial person created by law, with most of the legal rights of a real person, including rights to start and operate a business. Stock: the shares of ownership of a corporation. Stockholder: a person who owns a corporation’s stock. Close corporation: a corporation whose stock is owned by relatively few people and is not sold to the general public. Open corporation: a corporation whose stock is bought and sold on security exchanges and can be purchased by any individuals. Incorporation: the process of forming a corporation. The corporation charter: a contract between the corporation and the state, in which the state recognize the formation of the artificial person that is the corporation. And it includes the following formation:

• Firm’s name and address • Incorporator’s name and address • Purpose of the corporation • Maximum amount of stock and types of stock to be issued • Rights and privileges of stockholders • Length of time the corporation is to exist

Common stock: stock owned by individuals or firms who may vote on corporate matters, but whose claims on profit are subordinate to the claims of others.


13

Preferred stock: stock owned by individuals or firms who usually do not have voting rights, but whose claims on profit are paid before those of common stock owners. Dividend: a distributing of earnings to the stockholders of a corporation.

Proxy: a legal listing issues to be decided at a stockholder’s meeting and enabling stockholders to transfer their voting rights to other individuals. *note: The incorporators and original stockholders meet to elect their first board of

directors. Corporate Structure: Board of directors: It is the top governing body of a corporation, the members of which are elected by the stockholders.

Directors are elected by stockholders. Board members can be chosen from inside the corporation or outside it. The major responsibilities of the board of directors are to set company goals

and develop general plans (or strategies) to meet those goals. Corporate officers: the chairman of the board, president, executive vice president, corporate secretary, treasurer, or any other top executive appointed by the board of directors. Advantages of corporations:

Limited liability: A feature of corporate ownership that limits each owner’s financial liability to the amount of money that she/he has paid for the corporation’s stock.

Ease of raising capital: Corporations can borrow from lending institutions; they can also raise additional money by selling stock.

Ease of transfer of ownership. Perpetual life:

The withdrawal, death, or incompetence of a key executive or owner does not cause the corporation’s termination.

Specialized management: Corporations are able to recruit skilled, knowledgeable, and talented managers, because they pay big salaries and are large enough to offer considerable opportunity for advancement.

Disadvantages of corporations:

Stockholders(owners) elect Board of Directors appoints Officers hire Employees


14

Difficulty and expense of formation: Charter fees- attorney’s fees- registration costs associated with selling stock.

Government regulation: - A corporation must meet various government standards before it can sell its stocks on the public. - It must file many reports on its business operation and finance with the local state. - It must make periodic report to its stockholders. - Its activities are restricted by law to those spelled out in its charter.

Double taxation: Corporate profits are taxed twice, once as a corporate income and second as the personal income.

Lack of secrecy: Open corporations cannot keep their operations confidential because they are required to submit detailed reports to the government and to stockholders.

Other Types of Business Ownership

Limited liability company (LLC): a form of business ownership that provides limited-liability protection and is taxed like a partnership. Government-Owned Corporation: a corporation owned and operated by a local, state, or federal government. Quasi-Government Corporation: a business owned partly by the government and partly by private citizens or firms. Not-For-Profit Corporation: a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit. Cooperative: an association of individuals or firms whose purpose is to perform some business function for its members. Joint Venture: an agreement between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time. Syndicate: a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital.


15

Ch.6: SMALL BUSINESS, ENTREPRENEURSHIP & FRANCHISES

Small Business: A Profile Small business: one that is independently owned and operated for profit and is not dominant in its field. And it include:

1. Manufacturing. 2. Retailing. 3. Construction. 4. Services… etc.

Industries that attract small businesses: Distribution industries 33%

- Include: retailing, wholesaling, transportation, and communications. - 75% of the small distribution firms are retailers (sale of good

directly to consumers). Ex: clothing and jewelry stores, bookstores, and pet stores.

- 25% of the small distribution firms are wholesalers (purchase products in large quantity form the manufactures and then resell them to retailers).

Service industries 48% - 75% of small service firms provide non financial services as medical and

dental care, hair cutting, restaurant meals, and dry cleaning. - 8% of small service firms provide financial services such as accounting,

insurance, and real estate. Production industries 19%

- These industries require relatively large initial investment. - These industries include: construction, mining, and manufacturing industries.

People in Small business are motivated by:

Personal Factors: 1) Independence. 2) Desire to create a new business. 3) Willingness to accept a challenge. 4) Special expertise. 5) Loss of a job.

Family Motives. Age Factor. Knowledge and Ability.

Why small businesses fail? • Lack of management skills and experience. • Lack of money and capital. • Poor planning OR Expansion related problems.


16

The Importance of Small Business in our Economy Providing technical innovation. Providing employment. Providing competition. Filling needs of society and other businesses.

The Pros and Cons of Small Business

Advantages of small business: • Personal relationship with customers and employees:

Small business owners often become involved in the social, cultural, and political life of economy. These personal relationships are major competitive weapon.

• Ability to adapt to change: The owner of small business doesn’t need anyone’s permission to adapt change. Beside that the personal relationships wit customers help him to be aware of changes in people’s needs.

• Simplified record keeping. • Independence:

Small business owners don’t have to punch in and out, bid for vacation times, and take orders from superiors.

• Other advantages: Ability to keep all profits - the ease and low cost of going into business - ability to keep business information secret.

Disadvantages of small business:

• Risk of failure: Small businesses run a heavy risk of going out of business.

• Limited potential: The owner may have technical skill, and have started a business to put this skill to work. Such a business is unlikely to grow into big business.

• Limited ability to raise capital: Small businesses have a limited ability to obtain capital. Personal loans from lending institutions provide only one-fourth of the capital required by small businesses.

Developing a Business Plan

It is a carefully constructed guide for the person starting a business. or it is a concise document that investors can examine to see if they would

like to invest. When constructing a business plan, the business person should keep it: easy

to read, uncluttered, and complete.


17

It should answer the four questions banking officials and investors are most interested in:

1. What exactly is the nature and missions of the new venture? 2. Why is this new enterprise a good idea? 3. What are the business person’s goals? 4. How much will the new venture cost?

Franchising

Franchise: a license to operate an individually owned business as through it were part of a chain of outlets or stores. Franchising: the actual granting of a franchise. Franchisor: an individual or organization granting a franchise. Franchisee: a person or organization purchasing a franchise. Types of Franchising Arrangements:

1) A manufacturer authorizes a number of retail stores to sell a certain brand-name item. - This franchising arrangement is one of the oldest. - Ex: Passengers cars and trucks, farm equipment, shoes, and petroleum.

2) A producer licenses distributors to sell a given product to retailers. - Ex: soft drink industry

3) A franchisor supplies brand names, techniques, or other services instead of a complete product. - The primary role of the franchisor is the careful development and control of

marketing strategies. - Ex: holiday inns, McDonald’s, dairy queen, and KFC.

What can causes the failure of both franchisee and franchisor? To rapid expansion, inadequate capital or management skills and other problems.

Advantages & Disadvantages of Franchising: Advantages Disadvantages

- To Franchisor: 1) fast distribution. 2) more sales and profits. - To Franchisee: 1) to start a business with limited capital. 2) advertisement tools and facilities are available.

- To Franchisor: NONE - To Franchisee: 1) pay for the franchisor. 2) must work hard. 3) franchisor competitive.


18

Ch.7: UNDERSTANDING THE MANAGEMENT PROCESS

What is Management? Management: the process of coordinating people and other resources to achieve the goals of the organization. Main Resources of Management: 1) Material resources: The tangible, physical resources an organization uses. Ex. - steel, glass, fiberglass are material resources for General Motors.

- books, classrooms, desks, and computers are material resources for a college or university.

- Beds and operating room equipment are material resources for a clinic.

2) Human resources: Perhaps the most important resources of any organization are its human resources (people). 3) Financial resources: The funds the organization uses to meet its obligations to investors and creditors. 4) Information: A business that does not adapt to change (change in economy, consumer markets, technology, politics) will probably not survive. And to adapt to change a business must know what is changing and how it is changing.

Basic Management Functions The Management Process (Management Functions):

1. Planning 2. Organizing 3. Leading and motivating 4. Controlling

1. Planning:

Planning is Establishing organizational goals and deciding how to accomplish them.

a) Establishing goals and objectives b) Establishing plans to accomplish goals and objectives

Mission: a statement of the basic purpose that makes an organization different from others.


19

Strategic planning: the process of establishing an organization’s major goals and objectives and allocating the resources to achieve them.

a) Establishing goals and objectives: Goal: an end result that the organization is expected to achieve over a one to ten years period. Objective: a specific statement detailing what the organization intends to accomplish over a shorter period of time. Goals and objectives can deal with variety of factors such as: Sales, company growth, costs, customer satisfaction, and employee moral. Optimization: a balancing process conflicting goals. b) Establishing plans to accomplish goals and objectives: Plan: an outline of the actions by which the organization intends to accomplish its goals and objectives.

There are several types of plans:

Strategy - An organization’s broadest set of plans, developed as a

guide for major policy setting and decision making. - It is set by the board of directors and top managers. - The strategy designed to achieve the long-term goals of

the organization. - It defines what business the company is in or wants to

be in. Tactical plan

- It is a smaller-scale plan developed to implement a strategy.

- It covers a one to three years period. - Tactical plans may be updated periodically as

conditions and experience dictate. - Tactical plans can be changed more easily than

strategies because of their more limited scope. Operational plan

- It is a type of plan designed to implement tactical plans.

- It established for one year or less. - It deals with how to accomplish the organization’s

specific objectives. Contingency plan

It is a plan that outlines alternative courses of action that may be taken if the organization’s other plans are disrupted or become ineffective.


20

2. Organizing the enterprise: Organizing: The grouping of recourses and activities to accomplish some end results in an efficient and effective manner.

3. Leading and Motivating (Directing):

Leading: the process of influencing people to work toward a common goal. Motivating: the process of providing reasons for people to work in the best interests of the organization. Directing: the combined processes of leading and motivating.

* The leading and motivating function in concerned with the human resources within the organization.

4. Controlling and ongoing activities:

Controlling: the process of evaluating and regulating ongoing activities to ensure that goals are achieved.

The control function includes three steps: a) Setting standards b) Measuring actual performance c) Taking corrective action The steps in control function must be repeated periodically until the goal is achieved.

Kinds of Managers

Top managers: - A top manager is an upper-level executive who guides and control

overall fortunes of the organization. - Top managers constitute a small group. - They are responsible for developing the organization’s mission and

they also determine the firm’s strategy. - Ex. Of top managers: president, vice president, chief executive

officer, and chief operating officer. Middle managers:

- A middle manager is a manager who implements the strategy and major policies developed by top managers.

- Middle management comprises the largest group of managers in most organizations.

- They develop tactical plans and operational plans. - They coordinate and supervise the activities of first line managers. - Ex. Of middle managers: division manager, department head, plant

manager, and operations manager. First-line managers:


21

- A first line manager is a manager who coordinates and supervises the activities of operating employees.

- They spend most of their time working with and motivating their employees, answering questions, and solving day-to-day problems.

- Ex. of first line managers: office manager, supervisor, and foreman.

Areas of management: • Financial managers:

- A financial manager is a manager who is primarily responsible for the organization’s financial resources.

- Specific areas within financial management are accounting and investment.

- Many of the CEOs (chief executive officer) and presidents are people who get their basic training as financial managers.

• Operations managers: - An operations manager is manager who manages the systems that

convert resources into goods and services. - Operations management has been equated with manufacturing. - Operations management has produced a large percentage of

today’s company CEOs and presidents. • Marketing managers:

- A marketing manager is responsible for facilitating the exchange of products between the organization and its customer or clients.

- Specifics areas within marketing are marketing research, advertising, promotion, sales, and distribution.

- A sizable number of today’s company presidents have risen from the ranks of marketing management.

• Human resources managers: - A human resources manager is charged with managing the

organization’s human resources programs. - The human resources manager:

1) Engages in human resources planning. 2) Designs systems for hiring. 3) Training. 4) Evaluating the performance of employees. 5) Ensures that the organization follows government regulations.

• Administrative managers:

An administrative manager (general manager) is a manager who is not associated with any specific functional area but who provides overall administrative guidance and leadership.


22

Ch.9: PRODUCING QUALITY GOODS AND SERVICES

What is Production? Operations management: all activities managers engage in to produce goods and services. Operations manager: person who manages the systems that convert resources in to goods and services. The most successful firms have focused on:

1- Reducing production costs. 2- Replacing outdated equipment with art manufacturing equipment. 3- Using computer-aided and flexible manufacturing systems. 4- Improving control procedure.

Analytic process: a process in operation management in which raw materials are broken into different component parts. Synthetic process: a process in operations management in which raw materials or components are combined to create a finished product. Today’s successful operations managers must:

1. Be able to motivate and lead people. 2. Understand how technology can make a manufacturer more productive and

efficient. 3. Appreciate the control processes that help lower production costs and improve

quality. 4. Understand the relationship between the customer, the marketing of a product,

and the production of a product.

The Conversion Process Utility: the ability of a good or service to satisfy a human need. Types of utility: Form, place, time, and possession Form utility: utility created by converting raw materials, labor, and other resources into finished products. Conversion process vary in terms of: 1- Focus:

The focus of a conversion process is the resource or resources that comprise the major or most important input.

2- Magnitude:


23

The magnitude of a conversion process is the degree to which the resources are physically changed by the conversion.

3- Number of production processes: - larger firms that make a variety of products use multiple production process. - smaller firms use one production process or very few production processes.

Service economy: an economy in which more effort is devoted to the production of services than to the production of goods. The production of services is different from the production of manufactured goods in the following:

1) Services consumed immediately and cannot be stored. 2) Services are provided when and where the customer desires the service. 3) Services are usually labor intensive. 4) Services are tangible, and it is more difficult to evaluate the customer

satisfaction.

Three major activities involved in operations management: 1) Product development. 2) Planning for production. 3) Operations control.

Where Do New Products and Services come from? 1) Research and development 2) Product extension and refinement

Research and development (R&D): a set of activities intended to identify new ideas that have the potential to result in new goods and services. There are three general types of R&D: 1- basic research:

• Aimed at uncovering new knowledge. • Its goal is scientific advancement, without potential use.

2- applied research: • Discovering new knowledge with some potential use.

3- development and implementation: • Using new or existing knowledge to use in producing goods and services.

Planning For Production

Planning for production involves three major phases: 1. Design planning. 2. Facilities planning and site selection. 3. Operational planning.


24

1. Design planning: - Design planning: the development of a plan for converting a product idea into

an actual product. - It involves decisions about: product line, required capacity, and use of

technology. Product line

- Product line: a group of similar products that differ only in relatively minor characteristics.

- During this stage, management must determine how many different product variations there will be.

- Important issues in deciding on the product line are: 1) Balance customer preferences and production requirement 2) Identify the most effective combination of product alternative.

- Marketing managers play an important role in making product-line decisions. - Product design: the process of creating a set of specifications from which a

product can be produced. Required capacity

- Capacity: is the amount of products or services that an organization can produce in a given time.

- Operations managers must determine the required capacity. - Determining the required capacity in turn determines the size of the production

facility. - If the facility is built with to much capacity, valuable resources will be wasted.

If the facility offers insufficient capacity, additional capacity may have to bee added later.

Use of technology

- Management must determine the degree to which automation will be used to produce goods or services.

- Hence management must choose between a labor-intensive technology and a capital-intensive technology.

- Labor-intensive technology: is a process in which people must do most of the work.

- Capital-intensive capacity: is a process in which machines and equipment do most of the work.

2. Facilities Planning and Site Selection:

- Managers must decide whether they will build a new plant or refurbish an existing factory.

- A business will choose to produce a new product in an existing factory if: 1) The existing factory has enough capacity to handle customer demand for both the new product and established product.


25

2) The cost of refurbishing an existing factory is less than build a new one. - In determining where to locate production facilities, management must

consider a number of variables: • Geographic location of suppliers of parts and raw materials. • Locations of major customers. • Transportation costs to deliver finished product to customers. • The cost of land and construction required to build a new production

facility. • Local and state taxes. • The amount of financial support offered by local and state government.

Human resources:

At this stage, human resources and operations managers work closely together. Human resources manager have to recruit employees with appropriate the skills. Plant layout: the arrangement of machinery, equipment, and personnel within a

production facility. Three general types of layout are used:

1) Process layout: - It used when different operations are required for working in different parts

of a product. - The plant is arranged so that each operation is performed in its own

particular area. - Once the operation in one area is completed, the work process is moved to

another area. - Ex. Of process layout: auto repair shop.

2) Product layout: - It used when all products undergo the same operations in the same

sequence. - Work stations are arranged to match the sequence of operations. - Ex. Of product layout: assembly line.

3) Fixed-position layout: - It used when very large product is produced. - Aircraft manufacturers and shipbuilders apply this method because of the

difficulty of moving a large product like an airplane or ship. - The product remains stationary while people and machines are moved as

needed to assemble the product. 3. Operational Planning:

Operational planning focuses on the use of production facilities and resources. The objective of operational planning is to decide the amount of products or services each facility will produce during a specific period of time.


26

Four steps are required: Step 1: Selecting a planning horizon:

- A planning horizon is the period during which a plan will be effect. - A common planning horizon for production plans is one year. - Before each year is up, management must plan for the next. - Firms that operate in a rapidly changing business environment may select a short planning horizon.

Step 2: Estimating market demand:

The quantity demanded must be estimated for the time period covered by the planning horizon.

Step 3: Comparing market demand with capacity:

- Market demand and facility’s capacity to satisfy the demand must be compared. - One of three outcomes may result: demand exceeds capacity, or capacity exceeds demand, or capacity and demand equal. - If they are equal, the facility should be operated at full capacity. But if market demand and capacity are not equal, adjustment may be necessary.

Step 4: Adjusting products or services to meet demand:

What happens when the market demand exceeds the capacity? The firm may do one of the following: - Operating the facility over-time with existing personnel or by starting a new shift work. - Subcontract a portion of the work to another producers. - If the excess demand is permanent, the firm may expand the current facility or build another one. - Ignore the excess demand.

What happens when the capacity exceeds the market demand?

The firm may do one of the following: - Laid off workers and part of the facility shut down. - Operate the facility on shorter-than-normal workweek. - Shift the excess capacity to the production of other goods or services. - Selling unused capacity.


27

Ch.10: ATTRACTING AND RETAINING BEST

Human Resources Management: An Overview Human resources management (HRM): all the activities involved in acquiring, maintaining, and developing organization’s human resources.

Acquisition: Getting people to work for the organization. - Human resources planning: determining the firm’s future resources needs. - Job analysis: determining the exact nature of the position to be field. - Recruiting: attracting people to apply for positions in the firm. - Selection: choosing and hiring the most qualified applicants. - Orientation: acquainting new employees with the firm.

Maintaining:

Motivating employees to remain with the firm and to work effectively. - Employee relations: increasing employee job satisfaction. - Compensation: rewarding employee effort through monetary payments. - Benefits: providing rewards to ensure employee well-being.

Development:

- Training and development: teaching employees new skills, new jobs, and more effective ways of doing their present jobs.

- Performance appraisal: assessing employees’ current and potential performance levels.

HRM is a shared responsibility of line managers and staff HRM specialists:

• Human resources planning and job analysis: done by staff specialist, with input from line managers.

• Recruiting and selection: handled by staff experts, and line managers in hiring decisions.

• Orientation: orientation programs are devised by staff specialist, and the orientation itself carried out by both staff specialist and line managers.

• Compensation systems (and benefits): developed and administered by the HRM staff.

• Training and development: it is the joint responsibility of staff specialist and line managers.

• Performance appraisal: it is the job of the line manager, although the HRM staff personnel design the firm’s appraisal system.

* In very small organizations, the owner is usually both a line manager and the staff HRM specialist.

Human Resources Planning


28

Human resources planning: the development of strategies to meet a firm’s future human resources needs. 1. Forecasting Human Resources Demand:

• Planners should base forecast of the demand for human resources on as much relevant information as they can gather.

• The firm’s strategic plan will provide information about future business ventures, new products, and projected expansion or contractions of particular product lines.

• HRM staff uses all this information to determine both number of employees the firm will require and their qualifications. planners use a wide range of methods to forecast specific personnel needs.

2. Forecasting Human Resources Supply:

• The forecast of the supply of human resources must take into account both the present work force and any changes or movements that may occur within it.

• When forecasting supply, planners should analyze the organization’s existing employees to determine who can retrained to perform required tasks.

• Two useful techniques for forecasting human resources supply are : 1) Replacement chart: a list of key personal and their possible replacements within a firm. 2) Skills inventory: a computerized data bank containing information on the skills and experience of all present employees.

A replacement chart is a list of key personnel and their possible replacements within the firm. The chart is maintained to ensure that top managers positions can be failed fairly quickly in the event of unexpected death, resignation, or retirement. A skills inventory is a computerized data bank containing information on the skills and experience of all present employees. It is used to search for candidates to fill new or newly available positions. A skills inventory is useful when a assessing whether a company can do a specific project.

3. Matching Supply With Demand:

Once they have forecasts of both the demand for personnel and the firm’s supply of personnel, planners can devise a courses of action for matching the two. * When demand is predicted to be greater than supply, plans must be made to recruit and select new employees. The timing of these actions depends on the types of positions to be failed. * When supply is predicted to be greater than demand, the firm must take steps to reduce the size of its work force. Several methods are available:


29

a) Laid off: Dismiss the employees from the work force until they are needed again.

b) Attrition: It is the normal reduction in the work force that occurs when employees leave the firm. Attrition may be a very slowly process.

c) Early retirement: People who are within the a few years of retirement are permitted to retire early with full benefits.

d) Firing: This is the last resort, and because of it its negative impact, this method is generally used only when absolutely necessary.

Job Analysis

Job Analysis: It is a systematic procedure for studying jobs to determine their various elements and requirements. The job analysis for a particular position consists of two parts:

1. A job description 2. A job specification

Job description: a list of the elements that make up a particular job.

Job analysis must includes: 1. duties the job holders must perform 2. conditions under which the job must be performed 3. responsibilities 4. the tools and equipments that must be used on the job

Job specification: a list of the qualifications required to perform a particular job.

It includes the skills, abilities, education, and experience the jobholder must have. The job analysis is not only the basis of recruiting and selecting new employees, it is also used in other areas of human resources management.

Recruiting, Selection, and Orientation

• Recruiting: It is the process of attracting qualified job applicants. - because it is a vital link in a costly process, recruiting needs to

be systematic rather than haphazard process. - One goal of recruiters is to attract the right number of

applicants. External recruiting: It is the attempt to attract job applicants from outside the organization. - among the means available for external recruiting are: internet

web sites, newspaper advertising, recruiting on college campuses, using employment agencies.


30

- it is best to match the recruiting means with kind of applicants being sought.

- The primary advantage of external recruiting is that it enables the firm to bring in people with new perspectives and varied business backgrounds.

- A disadvantage of external recruiting is that it is often expensive, especially if private employment agencies must be used.

Internal recruiting:

Considering present employees as applicants for available positions. - Current employees may be considered for promotion to higher-

level position, or also may be transfer from one position to another at the same level.

- Promoting internally provides strong motivation for current employees and helps the firm retain quality personnel.

- The primary disadvantage of internal recruiting is that promoting a current employee leaves another position to be filled.

- Internal recruiting may be impossible in many situations. For example when there is no qualified employee to fill the new position, or the firm may be growing rapidly.

• Selection: The process of gathering information about applicants for a position

and then using that information to choose the most appropriate applicant.

- In selection the idea is not to hire the person with the most qualifications but to choose the applicant with the qualifications that are most appropriate for the job.

- Selection made by one or more line managers. HRM personnel usually help the selection process.

- Common means of obtaining information about applicants qualifications are:

Employment applications - An employment application is useful in collecting information on a

candidate’s education, work experience, and personal history. - The data obtained form applications are used to: identify applicants who are

worthy of further scrutiny, and to familiarize interviewers with t heir backgrounds.

- A resume is a one or tow page summary of the candidate’s background and qualifications. It may include a description of the type of job the applicant is seeking.


31

Employment tests - Tests administered to job candidates focus on aptitudes, skills, abilities, or

knowledge relevant to the job that are to be performed. - Such tests indicate how well the applicants will do on the job. Interviews - It is the most widely used selection technique. - Job candidates are usually interviewed by al least one member of the HRM

staff and buy the person for whom they will be working. Candidates for higher-level jobs may also meet with a department head.

- Interviews provide an opportunity for the applicant and the firm to know more about each other.

- Interviewers can pose problems to test the candidates abilities. They can probe employment history more deeply.

- Interviewing may the be the stage at which discrimination enters the selection process.

- In a structured interview, the interviewer asks only a prepared set of job-related questions.

References - A candidate is asked to furnish the names of references people who can

verify background information and provide personal evaluations of the candidate.

- Applicants tend to list only references who are likely to say good things about them. That’s why personal evaluation obtained form references may not be of much value.

Assessment centers - It is used to select current employees for promotion to higher level

management positions. - A group of employees sent to the center for two or three days , and

participate in activities designed to simulate the management environment and predict managerial effectiveness.

- Although this technique is gaining popularity, the expense involved limits its use to larger organizations.

• Orientation: It is the process of acquainting new employees with an organization.


32

Ch.13: BUILDING CUSTOMER RELATIONSHIPS THROUGH EFFECTIVE MARKETING

Definition of Marketing

Marketing: the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchange that satisfy individual and organizational objectives.

Utility: The Value added by Marketing Utility: the ability of a good or service to satisfy the human need. There are four kinds of utility:

1. Form utility: the utility created by converting production inputs into finished products.

2. Place utility: the utility created by making a product available at a location where customers wish to purchase it.

3. Time utility: the utility created by making a product available when customer wish to purchase it.

4. Possession utility: the utility created by transferring title (or ownership) of a product to the buyer.

Marketing may indirectly influence form utility, it only adds value in the form

utility. Place, time, and possession utility are directly created by marketing. Place, time, and possession utility have real value in terms of both money and

convenience.

The Marketing Concept Marketing concept: a business philosophy that involves the entire organization in the process of satisfying customers’ needs while achieving the organizations’ goals. (1) Evolution of the marketing concept:

1- production orientation (from the industrial revolution – 1920) - business effort was directed mainly toward the production of

goods. - Consumer demand for manufactured products was so great. - Business emphasis was placed on increased output and

production efficiency.

2- sales orientation (1920 –1950) producers had to direct their efforts toward selling goods rather than just

producing goods that consumers readily bought. This new sales orientation was characterized by increased advertising,

enlarged sales forces, and high pressure selling technique.


33

Manufacturers produced the goods they expected consumers to want. 3- customer orientation ( 1950 – today)

Business people recognized that their enterprises involved not only producing and selling products, but also satisfying customers’ needs.

The organization had to first determine what customers need and then develop goods and services to fill those particular needs.

Relationship marketing: developing mutually beneficial, long-term partnership with customer to enhance customer satisfaction to simulate long-term customer loyalty.

(2) Implementing the marketing concept:

To implement the marketing concept, a firm must: 1. Obtain information about its present and potential customers. 2. Use this information to pinpoint the specific needs and potential customers

toward which it will direct its marketing activities. 3. Mobilize its marketing resources to provide, price, promote, and distribute a

product. 4. Obtain marketing information regarding the effectiveness of its efforts.

Markets and Their Classification

Market: a group of individuals or organizations, or both, that need products and have the ability, willingness, and authority to purchase such products. Markets are broadly classified as consumer or industrial markets. 1) Consumer markets:

Purchasers and/or individual household members who intend to consume or benefit from the purchased products and who do not buy products to make profits.

2) Industrial markets (business to business market):

These markets purchase specific kinds of products to use in making other products, for resale or for day-to-day operations. a) Producers markets: Individuals and business organizations that buy certain products to use in the manufacture of other products. b) Reseller markets: Intermediaries such as wholesalers and retailers that buy finished products and sell them for a profit.


34

c) Governmental markets: Federal, state, country, and local government. They buy goods and services to maintain internal operations and to provide citizens with such products as highways, education, water, and national defense. d) Institutional markets: Churches, not-for-profit private schools and hospitals, civil clubs, fraternities and sororities, charitable organizations.

Developing Marketing Strategies

Marketing strategy: a plan that will enable an organization to make the best use of its resources and advantages to meet its objectives. A marketing strategy consist of:

1. The selection and analysis of a target market. 2. The creation and maintenance of an appropriate marketing mix.

Marketing mix: a combination of product, price, distribution, and promotion developed to satisfy a particular target market. Target market: a group of individuals or organizations, or both, for which firm develops and maintains a marketing mix. When selecting a target market, marketing managers take either the undifferentiated approach or the market segmentation approach. 1. Undifferentiated approach: directing a single marketing mix at the entire market

for a particular product. This approach assumes that individuals customers in the target market have similar needs, and therefore the organization can satisfy most customers with a single marketing mix. This marketing mix consist of one type of product with little or no variation, one price, one promotional program, and one distribution system to reach all customers in target market. Product that marketed with the undifferentiated approach include staple food items, such as sugar and salts.

2. Market segmentation approach:

Marker segment: a group of individuals or organizations within a market that share one or common characteristic.


35

Market segmentation: the process of dividing a market into segments and directing a marketing mix at a particular segment or segments rather than at the total market. There are two types of marketing segmentation approach: Concentrated market segmentation

The organization directs a single marketing mix at a single marker segment. Differentiated market segmentation

The organization focuses multiple marketing mixes on multiple market segments. Creating a Marketing Mix:

A business firm controls four important elements of marketing. These are the product itself, the price of the product, the means of distribution, and the promotion of the product.

A firm can vary its marketing mix by changing any one or more of these

ingredients to reach its target market.

The product ingredient of the marketing mix includes decision about the product’s design, brand name, packaging, warranties.

The pricing ingredient concern with both base prices and discounts of various

kinds.

The distribution ingredient transportation, storage, and the selection of intermediaries.

The promotion ingredient focuses on providing information to target markets.

The major forms of promotion are advertising, personal selling, sales promotion, and public relations.

The ingredients of the marketing mix are controllable elements.

Marketing Strategy and the Marketing Environment: The marketing environment includes a number of uncontrollable elements. The forces that make up the external marketing environment are: • Economic forces: The effects of economics conditions on customers’ ability and willingness to buy.

• Sociocultural forces: Influences and society and its culture that result in change in attitudes, beliefs, customs, and lifestyles.


36

• Political forces: Influences that arise through the actions of elected and appointed officials.

• Competitive forces: The actions of competitors, who are in t he process of implementing their own marketing plans.

• Legal and regulatory forces: Laws that protect consumers and competition, and government regulations that affect marketing.

• Technological forces: Technological changes that, on the one hand, can create new marketing opportunities or, on the other, can cause products to become obsolete almost overnight.


37

Ch.17: ACQUIRING, ORGANIZING AND USING INFORMATION

The Nature of Information • The more information that a manager has, the less risk there us that a decision will

be incorrect. • Information produces knowledge and empowers managers and employees to make

better decisions. • Without correct and timely information, individual performance will be

undermined so will the performance of the entire organization. • Business people use information rules to shorten the time spent analyzing choices. • Information rules emerges when business research confirms the same results each

time it studies the same or a similar circumstances. Data: numerical or verbal description that usually result from some sort of measurement. Ex. Wage level, amount of profit, retail prices. * Data can be nonnumerical. A description of individual as a “tall, athletic person” would qualify as data. Information: data presented in a form useful for a specific purpose. Database: a single collection of data stored in one place that can be used by people through-out an organization to make decisions. * The organization must establish a procedures for gathering, updating, and processing facts in the database.

Business research 1- secondary research: The original research done by someone else. 2- primary research:

a- Qualitative research: a process that involves the descriptive or subjective reporting of information discovered by a researcher. b- Quantitative research: a process that involves collection of numerical data for analysis through a survey, experiment, or content analysis.


38

A number of different methods can be used to conduct Qualitative & Quantitative: Qualitative Research Methods Quantitative Research Methods 1- Observation: the act of nothing or recording something, such as the facial expressions of shoppers in a retail store. 2- Interviews: a conversation conducted by a researcher with an individual to elicit responses and information. 3- Focus group: a conversation conducted by a researcher with a small group of people to elicit responses and information.

1- survey: a research method that relies on asking the same question to a large number of people to elicit responses and information. 2- experiment: a research method that involves the use of two or more groups of people to determine how people in each group react to different research variables. 3- content analysis: a research method that involves measuring particular items in a written publication, television program or radio program.

Which research method to choose ? The decision about which research method or methods to use is often based on a combination of factors, including limitations on time and money, and the need or concern for accuracy and validity. Managers rely on the results of proven research methods until those methods no longer work well.

The Information System (MIS)

Management information system (MIS): a system that provides managers with the information they need to perform their jobs as effectively as possible. The purpose of an MIS is to distribute timely and useful information from both internal and external sources to the decision makers who need it. Information technology officer: a manger at the executive level who is responsible for ensuring that a firm has the equipment necessary to provide the information the firm’s employees and managers need to make effective decisions. In many forms the MIS is combined with a marketing information system. Managers’ Information Requirements The specific type of information managers need depend on their are of management and level within the firm.


39

Financial managers: are most concerned their firm’s finances. They study its debts and receivables, cash flow, future capitalization needs, financial ratios, present state of the economy, interest rates. Operations managers: are concerned with present and future sales levels and

with availability of the resources required to meet sales forecast. The need to know the cost of producing their firm’s goods and services, including inventory costs. Marketing managers: need to have information about their firm’s product mix

and the products offered by competitors. They have to have information concerning target markets, current and projected market share, and development within channels of distribution. Human resources management: concern with anything that pertains to their

firm’s employees. Examples include wage levels and benefits packages both within their firm and in firms that compete for valuable employees. Administrative managers: are concerned with the coordination of

information, material, human, and financial resources. Administrators must ensure that all employees have access to the information they need to do their jobs, and that the information is used in a manner consistent. * a management information system MIS must be tailored to the needs of the organization.


40

Ch.20: MASTERING FINANCIAL MANAGEMENT

What is Financial Management? Financial management: all the activities concerned with obtaining money and using it effectively. Short-Term Financing: Money that will be used for one year or less or one

operating cycle of the business. The operating cycle of the business may be longer than one year and is the amount time between the purchase of raw materials and the sale of finished products to wholesalers, retailers, or consumers. There are many short-term needs, but cash flow and current inventory needs are two of which financing in often required. Cash Flow: is the movement of money into and out of an organization. What causes cash-flow problems? Extension of credit – Unanticipated emergencies Speculative Production: the time lag between the actual production of goods and when the goods are sold.

Long-Term Financing: Money that will be used for longer than one year.

Long term financing is needed to:

1- start a new business. 2- business expansions and mergers. 3- product development. 4- marketing. 5- replacement of equipment that has become obsolete.

Proper financial management can ensure that: • Financing priorities are established in line with organizational goals and objectives. • Spending is planned and controlled in accordance with established priorities. • Sufficient financing in available when its needed. • Excess that cash invested in certificates of deposit (CDs), government securities, or conservative, marketable securities. * Banks, insurance companies, and investment firms have a need for workers who can manage and analyze financial data. So do businesses involved in manufacturing, services, and marketing.


41

Colleges and universities, not-for-profit organizations, and government entities also need finance workers. People in finance must have certain traits and skills. They must: 1. Be responsible and honest because they are working with other people money. 2. Have a strong background in accounting and mathematics. 3. Know how to use computer to analyze data. 4. Be an expert at both written and oral communication.

Planning – The Basis of Sound Financial Management Financial plan: a plan for obtaining and using the money needed to implement an organization’s goals. The steps of financial planning: 1. Establishing organizational goal and objectives. 2. Budgeting for financial needs. 3. Identify sources of funds. Financial planners must make sure that financing needs are realistic and that sufficient is available to meet those needs. 1. Establishing Organizational Goals and Objectives:

2) Goals and objectives must be specific and measurable so they can be translated into dollar costs and financial planning can proceed. 3) Goals and objectives must be realistic. Otherwise, they my be impossible to finance to achieve.

2. Budgeting for Financial Needs:

Budget: a financial statement that projects income and/or expenditures over a specified future period. 1. From the budgets, the financial manager determines what funding will be

needed and where it may be obtained. 2. The budgeting process begins with the construction of budgets for sales and

various types of expenses for individual departments. 3. Budgeting accuracy is improved when budgets are constructed for separate

departments and for shorter period of time.

Cash budget: a financial statement that projects cash receipts and expenditures over a specified period. In the traditional approach of budgeting each new budget is based on the dollar amounts contained in the budget for the preceding year.


42

The problem of this approach is that it leaves room for padding budget items to protect the interest of the budgeter or his/her department. This problem is eliminated through zero-base budget. Zero-base budget: a budgeting approach in which every expense in every budget must be justified. Capital budget: a financial statement that estimates a firm’s expenditures for major assets and its long-term financing needs. Capital budget is used to develop a plan for long-term financing needs.

3. Identify Sources of Funds:

The four primary sources of funds are: sales revenue, equity capital, debit capital, and proceeds from the sales of assets. (1) Sales revenue: future sales revenue provides the greatest part of firm’s financing. One of the primary reasons for financial planning is to provide management with adequate lead time to solve cash-flow problems. (2) Equity capital: money received from the owners or from the sale of shares of ownership in the business. Equity capital is used almost exclusively for long-term financing. (3) Debit capital: borrowed money obtained through loans of various types. Debit capital may be borrowed for either short-term or long-term use. (4) Proceeds from the sales of assets: A firm acquires asset because it needs them for it business operations. Therefore, selling assets is a drastic step. But it may be reasonable as a last sort when neither equity capital nor debit capital can be found. Assets also may be sold when they are no longer needed.

Once the needed funds have been obtained, the financial manager is responsible for ensuring that they are properly used. This is accomplished through a system of monitoring and evaluating the firm’s needs.

mula5a9 mgt131

Documents