Business Studies Higher Level Junior Certificate Theory Related Notes by Sryan Bruen

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1 Business Studies Higher Level Junior Certificate Theory Related Notes by Sryan Bruen Banking Reasons why to save money To pay for something you can't afford right now (e.g. A car) To provide an income for the future (e.g. Pension) In case of unforeseen events (e.g. Illness) Investing refers to where you put your savings to work to earn an income called interest. People invest to make a profit. Simple Interest Formula: Principal (Sum saved) x Time (years) x Rate of interest 100 Compound Interest With compound interest, the interest is added to the principal so that you get interest on the interest. This means you get more interest in the long run. The CAR (Compound Annual Rate) is the rate you get when taking this into account. It is higher than the simple interest rate. DIRT DIRT (Deposit Interest Retention Tax) is a tax paid on the interest that you receive on your savings. Methods of investing 1. Commercial banks 2. Building societies 3. Credit unions 4. Insurance companies

2 5. An Post 6. Prize bonds 7. Stock markets Commercial banks A commercial bank consists of two different types of accounts where the person can invest in. Deposit account (also known as a Savings account) Money is deposited and can be withdrawn on demand Interest is paid You pay DIRT Current account Chequebook Debit (Laser) card Overdraft (i.e. borrowing money) (You will pay interest on this) Building societies Deposit account Limit on how much you can withdraw on demand Credit unions Savings account When you save money, you become a member. You get a share of any profit the Credit Union makes. You do not pay DIRT on interest received. If a member dies, insurance will double the value of the deposit. Lending Loans up to three times the value of shares held (i.e. savings). If a member dies, insurance pays off the loan. The interest rate may be lower than the commercial banks. Insurance companies Endowment policy Fixed regular payments are made. After an agreed period, a tax free lump sum is paid out. Used to save for a pension or to pay off a mortgage. An Post Deposit account National Instalment Savings Scheme (NISS)

3 Save a fixed sum each month for a year. The money is left on deposit for one to five years. The longer you leave the money in the account, the higher the interest rate paid. The interest is tax free. Prize bonds Sold in units of 10 euro. No interest is paid. Each bond is entered in a weekly prize draw. Can be cashed in at any time for the original cost. Stock markets (Buy shares in a company) If you sell the shares, you may make a capital gains profit. The company may pay a dividend. Capital Gains Tax (CGT) is payable on any profit you earn. Income Tax is payable on dividends. How to open a current account 1. Fill in an application form In the application form, you must show the following: Photo identification Proof of address Specimen signature Operating a current account Current accounts are used to make day-to-day payments. Paypath gives the account holder the advantage to have their money directly lodged into their account. The employer does not need to have large amounts of cash on the premises and does not need to take time to fill in cheques for each employee. Plus he / she does not have to take time off work to go to the bank. Making payments from a current account can be done by: Cheque Credit transfer Bank draft Standing order Direct debit Difference between Standing Order and Direct Debit Standing order is an instruction to pay a FIXED sum into a bank account at regular intervals.

4 Direct debit is the permission given to a company to take money directly from the customer's account and the sum VARIES. Methods of making payments (those ones above are only current account methods) Cash Credit card Charge card Debit card Store card Postal money order Traveller's cheques Factors to consider when choosing a method of payment The cost to you and the recipient Security: Will your payment be safe from theft until the right person cashes it? Convenience to you and to the payee Terms Payee - The person receiving payment. Their name follows the word 'Pay' on the cheque. Drawer - The person writing the cheque. Drawee - The bank on which the cheque is drawn. Negotiating a cheque - Bringing the cheque to a bank to get money for it. Stale cheque - A cheque presented to the bank more than six months after it was written. The bank will not accept it. Blank cheque - A signed cheque which has at least one piece of information left out. Endorsed cheque - The payee has signed the back of the cheque so someone else can negotiate it. Post-dated cheque - A cheque with a date in the future on it. It cannot be negotiated before that date. Receipt cheque - A cheque that must be signed by the payee before it can be negotiated. Dishonoured cheque - The drawee bank has refused to pay out on the cheque. Perhaps the drawer doesn't have enough money in their account. Stopped cheque - The drawer has instructed the bank to dishonour the cheque. Crossed cheque - Two parallel lines on the face of the cheque means the cheque must be paid into a bank account. Further instructions may be written between the lines. A cheque is crossed to make it as safe as possible (A/C Payee only must be written in between these parallel lines to make it as safe as

5 possible). Open cheque - A cheque that is not crossed. Money Money is anything of value that is widely accepted as payment for goods and services. There are many different currencies, money is divided into. *Tip: Always for definitions, include at least TWO sentences. One sentence will NOT get you full marks. Bartering meant swapping goods or services one person has for goods or services another person has. Bartering very rarely exists in modern times except between friends. Disadvantages of bartering: Both people involved in the barter must have a good or service that the other person needs and wants. Both items involved in the barter would have to be of equal value. The goods have to be carried around, which would be difficult if they are bulky. Ireland along with 16 other European countries that use the currency, Euro is part of an Economic and Monetary Union (EMU). Advantages of a single currency to Ireland: Firms that import or export goods between eurozone (EMU) don't have to worry about exchange rate changes. Irish firms that trade with other eurozone countries save money as they no longer have to pay commission for changing currency. Ireland has lower interest rates than it had in the past. Ireland can expect to have lower inflation rates than it had in the past. Insurance Insurance is protection against a loss you hope will not happen. Assurance is protection against a loss you know will happen.

6 Reasons for Adequate Insurance You must cover all possible risks. You must insure enough to cover full amount of loss. Terms Exclusion clause is situations that cannot be insured. Policy excess/excess clause is that the insured person may have to pay the first 100 of the compensation themselves. Compensation is the money you get when you make a claim. Principles of Insurance Insurable interest is when in order to insure something you must benefit from its existence and suffer from its loss. Utmost good faith is when you must tell all relevant information when filling out an application for insurance. Indemnity is when you cannot make a profit from insurance. Contribution is if a risk is insured with two insurance companies, each will pay half of the compensation. Subrogation passes the legal right of the insured over to the insurer to claim from a third party who caused the loss. Average Clause If you only insure an item for a fraction of the value, you only get the same fraction compensation. Formula: Sum insured X claim = compensation Documents Proposal form: Application form for insurance Policy: Contract of insurance Cover note: Temporary policy Certificate of insurance: Proof of insurance Claim form: A form you fill out when a loss occurs and you want compensation People in Insurance Broker: Gives advice on insurance and sells insurance on behalf of lots of companies Agent: Sells insurance for only one company Actuary: Calculates insurance premiums Loss adjuster: Calculates the value of the loss and works for the insurance company Loss assessor: Calculates the value of the loss and represents the insured Steps Involved in Taking Out Insurance 1. Decide what risks you want covered.

7 2. Fill out proposal form. 3. Pay your premium. 4. File your policy in a safe place. Steps Involved in Making a Claim 1. Contact guards and insurance company. 2. Obtain estimates of lost/stolen items. 3. Fill out claim form. 4. Talk to assessor and agree on compensation. Premium Calculation Terms Premium is the cost of insurance. Risk effects are things that cause premiums to be high or low. Loading is extra premium for a higher risk. Discount is money taken off premium for a lower risk. No claims bonus is when you get a discount if you did not claim for any accidents the previous year. Renewal date is the date you must have your premium paid by. Days of grace may be given to you. They are a few extra days to pay your premium. Types of Personal Insurance PRSI (Pay Related Social Insurance) is the statutory deduction from your salary. Medical insurance is used in case you get sick or need an operation immediately. Personal accident insurance covers people who are injured due to an accident. Salary protection provides an income in case you can t work due to illness. Pension plan provides you with lump sum and income for your retirement. Holiday insurance provides you with health care if you get sick on holidays. Types of Business Insurance Theft insurance: Theft of equipment and stock Fire insurance: Damage to premises, equipment and stock Consequential loss: Covers the firm for loss of profits while a business is closed as a result of fire or flood Fidelity guarantee: Compensates an employer for loss of cash arising from dishonest workers Cash in transit: Covers theft of cash while in transit between the business and back Goods in transit: Covers theft or damage to goods while been transported Motor insurance: Compulsory covers damage or injury caused by motor vehicles

8 Employers liability: Employees injured at work Public liability: Customers injured while visiting the business Product liability: Injury to customers using the product Bad debts: Loss due to customers not paying their debts Reasons for Business Insurance Protection of assets against fire and theft Protection against legal action as a result of accidents to the public or staff Legal reasons motor insurance Economics Economics is the study of how people and businesses with limited income make decisions about what they spend their money on. Factors of Production Land is the natural resources available in a country that can be used to produce goods and services. The payment for land is rent. Labour is a human effort that helps to produce goods and services. The payment for labour is wages. Capital is anything that is made by humans that is then used to help to produce other goods and services. The payment for capital is interest. Enterprise is using all the factors of production and taking a risk to set up a business. People who supply enterprise are called entrepreneurs. The payment for enterprise is profit. Types of Economic Systems Centrally planned economy Here the government of the economy makes all the decisions about the production of goods and services. E.g. Cuba. Free enterprise economy Here the citizens of the country are free to make all the decisions about the production of goods and services with little interference from the government. E.g. USA. Mixed economy This is a combination of the two other economies and sees a sharing approach to the production of goods and services. E.g. Ireland. Terms Opportunity cost is the item we do without when we have to make a choice between two or more actions. It is impossible to satisfy everybody s needs and wants. Inflation is the increase in the general level of the price of goods and services over a period of time. Deflation is the decrease in the general level of the price of goods and

9 services over a period of time. Rate of Inflation (The increase in prices in year 2) / (The level of prices in year 1) X 100 The official measurement of inflation is called the consumer price index (CPI). Causes of Inflation An increase in the cost of producing goods is passed onto the consumer so that the manufacturer can maintain profits. The demand for goods is greater than the supply of goods. Consumers will compete with each other, thus pushing up the prices. The cost of importing goods increases. Increases in indirect taxes. Effects of Inflation Increases the cost of living. It causes demands for wage increases to compensate for the inflation. It discourages saving because people decide to spend their money before its value decreases any further. Terms Economic growth occurs when more goods are produced in a country one year than were produced the previous year. It creates employment and improves standard of living. Gross domestic product is a total amount of goods and services produced in an economy in one period. Gross national product is the GDP profits sent out of the country by foreign owned companies located in the country, plus profits returned to the local firms based abroad. i.e. it is the amount of money left in the country for spending or saving. Recession is if less goods and services are produced in two consecutive quarters then the national economy is officially in a recession. Foreign Trade Foreign trade is the sale of products and services from one country to another. Importing is the purchase of goods and services from other countries for sale in Ireland. Exporting is when Irish goods and services are sold to other countries.

10 Invisible and Visible Trade Visible trade is the import or export of physical goods. Invisible trade is the import or export of services. Reasons for Importing Goods Ireland does not have natural resources that are necessary for everyday living. Ireland s climate is not suitable for growing certain products. Skills and traditions that are needed to produce some goods are only available in certain countries. Certain goods are not produced in Ireland, so if we want to have them, we must import them. Reasons for Exporting Goods Some courtiers are not able to produce large quantities of food products because their land or climate is unsuitable. Some goods can only be manufactured in a certain country because the skills and traditions are only available here. Countries do this to increase their sales and profits. The Balance of Trade The balance of trade is the difference between the visible exports and the visible imports of a country. The formula is: Visible exports visible imports. The Balance of Payments The balance of payments is the difference between the total exports and the total imports of a country. The formula is: Visible exports + invisible exports; visible imports + invisible imports; total exports total imports. Exchange Rate An exchange rate is the quantity of a foreign currency that can be bought or sold for one euro. Foreign currencies can be bought or sold in banks. Import Substitution Trying to reduce imports by encouraging Irish people and firms to buy Irish goods instead of imported goods. The European Union Ireland joined the EU in There were 9 countries in it at that time. Today there are 28 members.

11 The business of the EU is carried out by EU and the European Commission. Croatia is the newest member. Benefits of EU Membership Irish firms can sell their products/services in a huge market and this has increased their sales and profits. Irish people are allowed to live or work in any of the other member states. Ireland has received large amounts of money in the form of grants from the EU. Many firms have located in Ireland because we are a member of the EU. Enterprise Ireland Enterprise Ireland is the state agency that offers advice, information and support to firms that are or wish to get involved in foreign trade. Forms of Business Sole Trader A person that owns and runs their own business. Characteristics: One person provides all the money Makes all the decisions Keeps all the profit. Advantages: Easy to set up Keep all the profits Make all the decisions Personal contact with customers. Disadvantages: Unlimited liability (if your business fails you could lose all your own personal wealth) Business ends when the owner dies. Private Limited Company (Ltd.) A business that is owned by 1-99 people. Characteristics: 1-99 owners called shareholders Shares cannot be bought by the general public

12 Shareholders receive a vote for every share they own Must have ltd. after its name Shareholders receive a share of the profits called a dividend Usually owned by solicitors and accountants. Advantages: Limited liability (If the business fails, you can only lose the money that you invested in the company. Your own personal wealth cannot be touched) Business continues even when an owner dies Easier to raise finance as you have up to 99 shareholders. Disadvantages: Legal documents are needed to set up a company More costly to set up Decision making and profits are shared. Co-Operative A business owned and run by its members. Each member has an equal say in the running of the business. Characteristics: Each member must buy at least one share Each member has only one vote. Advantages: Democratic as each member has an equal say The members of the co-operatives have limited liability. Disadvantages: For members who own a lot of shares They only get one vote Profits are shared in the form of dividends. Types of Co-Operatives Producer co-op - Owned and run by the customers of the co-op. Retail co-ops - A group of retails join together. Worker co-ops - Owned by the workers in the business. State Owned Business A business which is set up, financed and controlled by the government. Another name for this is a semi-state body.

13 Characteristics: A government minister is responsible for each state company They appoint a board of directors The government keeps the profits or re-invests it in the company. Advantages: Ensure that essential services are provided for all people in the country Provide employment to a large number of people. Disadvantages: Some are in a monopoly position which means that they have no competition and this can lead to in-efficiency and higher prices and some make losses which are covered by the tax payer. People At Work Terms Work - is when a person does something productive. You work when you do homework, study or help at home. Therefore, you get nothing in return as in payment. Employment - is when a person gets paid to work. If you have a job in a shop, you are employed. Unemployment - if a person is looking for employment but cannot find a job, they are said to be unemployed. To be counted as unemployed, you must be between the ages of 16 and 66, available for work and not in full-time education. A person must be looking for work to be counted as unemployed. The Labour Force - consists of everybody who is available to work. This includes the employed, unemployed and self-employed. Types of employees Unskilled - work which does not require any special training. It often involves physical labour and the rate of pay tends to be low, e.g. bin collector. Semi-skilled - work which requires some training. Most semi-skilled workers are trained to use one machine or do one job, e.g. a person trained to use a sewing machine. Skilled - work which requires specialist training to do a particular job. E.g. carpenters and hairdressers are skilled. Professional - workers that have a professional qualification(s), usually from a university. They need this particular qualification to do particular work. E.g. teachers, solicitors and doctors are professional.

14 Natures of work Manual - involves physical work, e.g. gardening. Clerical - involves typing, filing etc, e.g. receptionist. Creative - requires imagination, e.g. writer. Administrative - involves supervising or managing the work of others, e.g. manager. The employee's rights and responsibilities Rights Fair day's pay To be treated equally to other employees Fair number of paid holidays per year To join a union To work in a healthy, safe environment Responsibilities Good punctuation (be on time) Obey all rules and regulations Not to give away company secrets Co-operate with other workers To look after your employer's property Rewards & risks of self-employment Rewards You are your own boss You make all the decisions You keep all the profits Your own suitable working times Decide what product or service to sell Risks Unlimited liability - If the business fails, you risked losing everything May have to work long hours Have to provide the capital to set up and run the business You make all the decisions Organisational Structure Typical organisational chart (comes up nearly every year): Shareholders Board of directors

15 Managing director Department managers Supervisors Staff workers Marketing Terms A market is all the people and places involved in the buying and selling of a product / service. Marketing means identifying customers' requirements and making a profit. Marketing mix The marketing mix is a combination of marketing techniques that can be used to successfully satisfy consumers' requirements profitably. This includes the 4 p's: 1. Place 2. Product 3. Price 4. Promotion Product development means create a new product or update or change a current product. It is in other words the process of creating a new product or altering an existing one. USP = Unique Selling Point Promotion involves a range of activities by which the firm tries to influence the target market to purchases its product. Examples of promotion include: 1. Sales promotion 2. Public relations 3. Advertising Sales promotion: All activities other than direct advertising, that firms use to promote their products and increase their sales. For example, free samples, sponsorship, discounts, competitions and joint selling. Public relations means establishing and maintaining a good company image in the mind of the public. For example, Donations and sponsorship.

16 A good advertising campaign should have: 1. Attention - Get the attention of the customer. 2. Interest - Create an interest in the product. 3. Desire - Should create a desire to have the product. 4. Action - You should go out then and buy the product. Price When choosing a price, you have to consider the cost of production and then making a profit from it. You also have to know what your competitors are charging. Place When considering where to sell the product(s), you have to think of a suitable channel of distribution. Terms Target market - Group of consumers identified as being the people most likely to buy the product. Market segmentation - Means subdividing the market into specific groups of people who have common characteristics. Market research is the collecting, recording and analysing of information about a product and the market for the product. Aims of market research 1. To find out what products customers want. 2. To get a name for your product. 3. To see what type of advertising you can use. 4. To see what would be a good price. 5. To see what type of competition there is in the market. Types of market research Desk research: Use info that has already been collected or published. E.g. statistics, internet and reports. Field research: Gathering new info by going out into the market. E.g. questionnaires, observation, consumer panels. Delivery & Transport Systems Delivery systems are facilities used to transport people and goods from one place to another.

17 Factors to consider when choosing a delivery system: 1. Cost 2. Reliability 3. Convenience 4. Speed 5. Types of goods 6. Destination Road Transport Advantages: Fast over short distances Relatively cheap Not subject to timetables Disadvantages: Subject to traffic congestion Bad weather Slow over long distances Not suitable for bulky goods Rail Transport Advantages: Fast over long distances Suitable and cheap for bulky goods Not subject to traffic congestion Reliable and safe Disadvantages: Usually subject to timetable Fixed routes only Must be used in conjunction with another means of transport Expensive over short distances Sea Transport Advantages: Suitable for bulky goods Cheap over long distances Suitable for containers Disadvantages: Slow over long distances Must be used in conjunction with another means of transport Subject to weather conditions

18 Usually subject to timetable Air Transport Advantages: Fast over long distances Suitable for small expensive goods Safe Disadvantages: Expensive for short distances Subject to weather conditions Not suitable for bulky goods Must be used in conjunction with another means of transport Fixed routes only Pipelines Advantages: Cheap to operate Very good safety record Disadvantages: Expensive to set up Suitable only for gases and liquids Courier A person or company used to deliver documents and small, value packages by hand. Pallets and forklifts A pallet is a platform, usually wooden, onto which goods are loaded to make it easy to move them. A forklift is an easy manoeuvrable transport device used to load pallets on and off trucks. Transport developments in Ireland The Dublin Port Tunnel Terminal 2 at Dublin Airport An Luas State involvement in transport Iarnród Éireann Bus Éireann Dublin Bus

19 Business Documents Letter of enquiry (Buyer to seller) Quotation (Seller to buyer) Order (Buyer to seller) Delivery docket (Seller to buyer) Invoice (Seller to buyer) Credit note (Seller to buyer) Debit note (Seller to buyer) Statement (Seller to buyer) Cheque (Buyer to seller) Receipt (Seller to buyer) NOTE: There is very little theory related learning in Business Documents.