GCSE Business Studies Bowton Spice Bazaar Revision Guide

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1 GCSE Business Studies Bowton Spice Bazaar Revision Guide Tips for the Exam Remember context is key when it comes to the case study paper. You should always develop your analysis (explanations) in the context of BSB Explain Use Point, Because, Therefore or Point, Therefore, Therefore Discuss, Recommend, Choose On the one hand, on the other hand conclusion. Perhaps use Point, Because, Therefore, However Section 1 Introduction The evidence says Chloe had to close her restaurant because of poor cash-flow. Cash-flow is the flow of all money into and out of a business. It is important because if you do not have enough money you don t have enough to pay your bills. Most businesses will forecast cash-flow to identify when they might experience cash flow problems. Poor Cash-flow is a Problem because: It means there is not enough cash in the business to meet its day to day expenses. There is a lack of working capital. The business may not have the money needed to buy supplies (eg the food for the restaurant) Staff may not get paid on time which may lead to poor motivation or they may leave Creditors may take legal action to recover any money they are owed. The business may be declared bankrupt and have to cease trading Factor Recession Rising Unemployment Increase in VAT Rise in World Food Prices Falling Bowton Population Impact on Business in Bowton / Chloe s Business In a recession many people face falling incomes and consumer confidence will be low. As a result some people may have less disposable income to spend on luxuries (such as a meal out). Businesses selling these products may see a fall in demand with falling revenue and profit as a result. Those who are made unemployed will have lower disposable incomes and therefore less money to spend (see above). Some businesses may benefit if they are looking for workers as there will be more potential people to employ If VAT rises businesses will have to increase prices and therefore may see a fall in demand. (competitors will be affected as well). This will especially affect luxuries like a restaurant as people s money will go less far. If food prices rise the cost to a restaurant of providing a meal will increase. This will reduce profit margins and ultimately profit unless prices can be increased. The problem is with the economy in a recession any increase in prices is likely to see a fall in demand. If the population of Bowton falls there will be less potential customers for business to sell to reducing demand for Chloe s restaurant and revenue and profit is likely to fall. This may reduce demand generally in the local economy downward multiplier effect

2 Impact on Cash-flow All of the things in the table are likely to have harmed Chloe s cash-flow. The recession, unemployment. VAT and population changes are likely to have reduced revenue meaning that cash inflow may be lower than forecast. The rise in world food prices is likely to have increased cash outflows The EU The evidence mentions the EU. The EU is a group of countries (28 including the UK, France, Germany and Spain) that have agreed to cooperate to make trade as easy between countries as within a country. The EU operates as a single market there is free trade between members. The single market means: No protectionist measures on trade between member states (tariffs, quotas, embargos etc) Elimination of border controls Free movement of labour (people can work in any member state without restriction) Mutual recognition of qualifications Making taxes, industrial and economic laws the same Common standards - labelling, environmental, safety Advantages of the EU to Business Disadvantages of the EU Easier to sell to a Larger Market (BSB can export easily to Europe without tariffs and other restrictions) More Competition for UK Business (It is easy for foreign spice makers from the EU to sell in the UK) Economies of Scale (from above) Free Movement of Labour (means businesses such as BSB can find workers with the skills they need) More competition is bad for inefficient producers as they may lose market share and have to close One Product Fits All (If BSB s spices meet the EU standard they can be sold in any of the 28 countries without being changed) Competitive Market Chloe and Ade have decided to start a business called BSB which imports and sells spices. There are however a number of other businesses doing this in the UK which means the market is competitive. For BSB this means they will need to be very efficient. It may affect their ability to charge high prices and may reduce their profitability unless they are very good For consumers this is good as they have a large amount of choice and prices should be lower. Quality should also be higher as firms compete for their custom.

3 How can BSB change its competitive environment? BSB operates in a competitive market this means there are lots of alternatives for customers to choose as a result it needs to make sure it is efficient and does not charge too much. Strategy Developing, and selling new products Reducing Prices Increasing Advertising / Promotion Explanation / How it might work for BSB If BSB can supply spice blends that its competitors don t supply and that are superior it will have a unique selling point and may be able to gain more customers. If it cuts prices customers may choose it over a competitor. This will raise awareness and persuade people to buy its products. Potential Drawbacks This relies upon it being able to develop appropriate spice blends that are superior to its competitors. It will gain less profit per pouch. If sales don t rise profit will decrease. Customers may cut prices in response leading to a price war in which only the customer benefits. This costs money. If sales do not rise sufficiently the cost of the promotion wont be covered and BSB will make less profit. Taking over or merging with a competitor It will have a bigger market share and will benefit from economies of scale. It is a new business and this is not likely to be an option at this time. If merging control of the business may have to be shared.

4 Section 2 Setting Up BSB is located in a factory on the Bowton Industrial Estate. They considered leasing but decided to take out a mortgage a buy a factory instead. Mortgage Is a long term loan used to finance the purchase of property. It is a secured loan as the property is used as collateral (if you can t meet repayments it can be taken) Leasing This is where an asset is rented rather than purchased Mortgage Advantages BSB will own the factory and the value of the building may increase over time It is normally cheaper to buy a factory in the long term Interest rates are normally lower than other forms of loans as it is a secured loan Disadvantages More money is needed upfront as BSB would have to put a deposit down on the factory The loan has to be repaid and interest has to be paid on the money borrowed. Interest rates are currently low but if they rise repayments may increase affecting BSB s cashflow and profitability Leasing Advantages Less initial finance is needed to rent the factory. No interest has to be paid so not affected if interest rates rise Disadvantages BSB would never actually own the factory (the asset) It would probably work out more expensive over time than buying the asset A good time to buy property? probably because interest rates were low at this time which would reduce their loan repayments. Property was also cheap due to the recession. On the other hand it was a risky time to set up a new business as the economy was still not doing very well Specialist Machinery Sources of Finance The specialist machinery would need to be financed. They would have a number of possible options: Owners Capital they could finance the purchase with any capital they had invested in the business. This would be a cheap option but it is likely they wouldn t have had enough Loan they could have borrowed money from the bank. This would have to be repaid over time with interest. If interest rate rise they could have problems. Especially as they have already borrowed to buy a factory Lease they could rent the machines. This would be cheaper in the short term and they wouldn t have to pay interest but this would be more costly in the long term and they would never own the asset. Hire Purchase this is similar to leasing only the firm will actually own the asset when the last payment is made. It buys the asset in instalments but interest rates can be very high

5 Section 3 Sales The evidence talks about how in the first year (2012) BSB was glad of any orders. The economy was still struggling at this time and as a new business many people would not have been aware of the BSB brand. Objectives In the first year their objectives would have likely to have been to survive and breakeven as many new businesses fail in the first 12 months. They would also have been trying to raise awareness of their brand. In the second year objectives would have likely changed as they are more established. They might now be aiming to make a profit so as to provide an income and return for the owners. After this objectives might have changed to increasing their market share, expanding the product range and as we find out later expansion. Making a good/maximum level of profit will be important as this can be retained to finance any expansion plans. Added Value The evidence seems to suggest a number of ways by which BSB adds value. Added value = the difference between the price of the finished product/service and the cost of the inputs involved in making it Adding Value = the process or the things a business does to ensure it has added value The key benefits to BSB of adding value include: Profit by definition if a business is adding value it is making a profit Charging a higher price Creating a point of difference from the competition (USP) Protecting the business from competitors trying to steal customers by charging lower prices How does BSB add value? BSB adds value through branding. Customers are prepared to pay more for a branded product because they trust/value the product more which means it can charge a higher price and make more profit. BSB adds value through celebrity endorsement. Demand will be higher for the product. People will be prepared to pay more for the spices because it has been endorsed by a celebrity. So they can sell the spices for a higher price and make more profit. BSB adds value by selecting/roasting/blending/packaging the spices. It imports the spices and then processes them so that people are prepared to pay more for the finished product. As a result it can charge more than what it costs to buy the spices and make more profit.

6 BSB s Customers The case study provides information on BSB s customers. These include supermarkets, retailers, wholesalers and people all over the word via the internet. This is good for BSB as they are not having to rely on one or two customers to buy their product. This means that if one or two retailers stop buying they still have lots of other sources of revenue. Whilst their main market seems to be the UK it is good that they also sell to other countries over the internet. They may consider selling more to other countries as this spread the risk. If one market declines or suffers from a recession they still have other markets to sell to. Figure 3 Total Revenue for BSB Revenue is income from sales. (revenue and profit are not the same thing!) Revenue = Price x Quantity Sold What has happened to revenue from 2012 to 2013? - it has increased from 600,000 to 1,900,000 What has happened to sales of Punjabi Masala? - be careful!!! You might be tempted to say they have fallen from 10% to 8%. In fact they have gone up from 60,000 (10% of 600,000) to 152,000 (8% of 1,900,000) Make sure you can work out simple percentages like this using the pie charts. Use the figures in your explanations / answers. Section 4 Production at BSB Section 4 shows the layout of the factory and how the spices are produced. Factory Layout The factory appears to be laid out in an efficient manner. This is important to maximise productivity (output per worker) and to minimise costs. Productivity means they can produce more quickly so as to meet orders and ensure customer satisfaction. It also means more profit if they can sell what they produce. Low Costs are important so as to maximise profits.

7 Just in Time Production / Stock Control Some spices are bought on a just in time basis when BSB only requires a small quantity of the spice. Just in Time Production Is a method of production that aims to keep stock levels at the bare minimum (usually zero). The aim is that stock s of spices arrive in the factory immediately before it is used. Just in Case Production / Stock Control Other spices which BSB uses in large quantities are bought in bulk. This is what is known as just in case stock control. Stock will be ordered in large quantities and reordered when stocks get low. BSB uses this method of stock control for one big reason: Purchasing Economies of Scale It will get a discount when it buys spices in bulk. This reduces the average cost of producing a pouch of these spices. As a result they can charge a lower price and be more competitive or they can make a higher profit margin

8 Methods of Production There are three main production methods these are job, batch and flow. BSB will use Batch Production. Batch Production - This involves making similar or identical items in batches. One type of spice blends is produced for a while and then production is changed to another type. Advantages: Batches can be made to meet specific orders It may be possible to use specialist machines to lower costs Disadvantages: It takes time to switch production. Machinery may need to be set up. It is necessary to hold stock of materials and finished goods. There are costs to stockholding and if stocks cannot be sold or cannot be sold quickly enough the spices may perish and be wasted Specialisation & Division of Labour Specialisation - This is where businesses, individuals and whole economies concentrate on making just a few products or doing a specific job Division of Labour - This is an extension of specialisation where jobs are broken down into a series of small steps. Specialisation and BSB BSB specialises in Spice Blends This is what they are best at doing although there is always a risk that if the demand for spice blends falls (unlikely) that they will be unprofitable Workers Specialise - Workers at BSB specialise in doing specific jobs. This includes Chloe and Ade. One problem with over specialisation is that workers may be unable to do other jobs in the business. BSB may ensure some workers are multi-skilled and are trained to do different jobs. This gives BSB more flexibility as it will be able to move workers around to where they might be needed.

9 Skilled and Unskilled Workers - BSB uses both skilled and unskilled workers to make its spices Skilled workers: - These are necessary to do specialist jobs in the business. Without them the overall quality of the spice blends may be lower and the business may be less efficient. Skilled workers: Can do specialist jobs Need specialist training Will be paid more May be in short supply May not be available locally (need to relocate) Unskilled Workers: - Some jobs require less skill and therefore do not need a skilled worker. This is especially the case when using some machines where the specialist machine reduces the need for a worker to be particularly skilled. Unskilled workers: Cannot take on more skilled tasks Require less specialist training Will be paid less than skilled workers Are probably in plentiful supply in the local area May need more supervision than skilled workers if covering semi-skilled roles Organising Production Ade spends most of his time organising production. This is very important to BSB. Production seems efficient with the production process divided up into parts and tasks are grouped together. There seems to be a logical flow to production in the factory. Lean Production is a Japanese approach that aims to use as few resources as possible. Waste and stocks are kept to a minimum and workers are encouraged to think about ways to improve productivity. Whilst BSB uses JIT (sometimes) it is not clear if production is lean Quality Quality Assurance and Quality Control will be important to BSB Quality Control is a system of checking the quality of finished goods. This is important because: Poor quality goods may not be able to be sold (waste of money) Customers will not be happy if they receive poor quality goods and they may buy from somewhere else in the future Production may be disrupted if the quality of materials produced at an early stage of the process is not good enough for them to be used later on. Quality Assurance are the systems a business has to make sure products are of appropriate quality. This prevents the problems above from occurring and should save the business money as less products will be rejected or returned.

10 Section 5 - Buying Spices BSB and Globalisation Globalisation an expansion of world trade in goods and services leading to greater international interdependence. BSB is a global business because: It buys spices from other countries eg Cardamom from India It sells spice blends in other countries via the internet BSB benefits from globalisation because: it can source spices that couldn t be grown in the UK. It has more potential customers. The prices it pays for its spices are lower as they can be grown in countries with lower wage costs. It can buy from the lowest price country / grower Competition BSB buys it spices from several different producers in different countries. This is good as it should mean it has to pay less for its spices as it can switch to buying from another producer / country if prices rise. This helps keep good profit margins Changing Prices of Spices The evidence suggests that the prices BSB has to pay for spices change regularly for two main reasons: 1. Changes in Demand 2. Changes in the Exchange Rate This is awkward for BSB as it will make it difficult to plan and forecast effectively. It may ultimately affect its profitability. BSB may be able to cope with any increases in price by doing the following: Increasing its prices This may lead to less sales but cost increases are likely to be affecting its competitors as well Buying from different suppliers this may be especially important if exchange rates change as BSB may buy from a country with a more favourable exchange rate. BSB may be reluctant to do this though as it may have built a relationship with its current suppliers and it is vital that it can rely upon them to deliver on time.

11 Exchange Rates and BSB The value of the will have a large impact on BSB Buying Spices BSB imports spices, a change in the value of the will affect the amount BSB has to pay for its spices. For example BSB has ordered some Cardamom and the has risen from 1= INR70 to 1 = INR80. How might this affect BSB? Imagine BSB has placed an order for Cardamom costing INR112,000 What will the price of Cardamom be in s if 1 = INR70? /70 = 1600 What will the price of Cardamom be in s if 1 = INR /80 = 1400 An appreciation (increase in value of the ) will be good for BSB when importing prices as it will be cheaper to buy its spices. In this case it will pay 200 less for the Cardamom order. Selling Spice Blends BSB also exports (sells spices to customers around the world over the internet). An appreciation of the will be bad for BSB when exporting spice blends as the blends will have to be priced more highly in foreign currency to get the same amount of s this means less foreign people may buy them as they are more expensive (less competitive) How will a rise in the value of the against the rupee affect BSB? It will be cheaper for BSB to import its spices. This means its costs/ the costs to make its spice blends will be lower and it will have higher profit margins / make more profit. It may be able to cut prices to be more competitive However However its competitors may also have lower costs and may be able to cut prices If it exports spice blends to India these may be less competitive as they will cost more in INR

12 Section 6 - The Moroccan Special BSB has developed a new spice blend the Moroccan Special it has received an enquiry about an order for 10,000 pouches to be delivered in Definitions and Calculations for 10,000 pouches. Learn and practise these! Break Even Is the level of output where total revenue = total costs Revenue This is income from sales. 2x10,000 = 20,000 Fixed Costs These are costs that do not vary with output. In this case 5000 Variable Costs These are costs that vary directly with output eg raw materials such as spices. The variable cost per unit in this case is 1 (20p+5p+70p+5p). The total variable costs are 1x10,000 = 10,000 Total Costs These are fixed costs plus variable costs. = = Average Costs The cost of making one unit of Moroccan Special. (TC/Output) = 15000/10000 = 1.50 Profit Total Revenue minus Total Costs = 20,000-15,000= 5000 Margin of Safety The difference between the break even level of output and the actual output Gross Profit Revenue minus Variable Costs = = Net Profit Gross Profit minus Expenses (FC) = 10, = 5000 Gross Profit Margin = Gross Profit/Revenue x100 = (10000/20000)x100 = 50% This means for every 1 of spice blend sold 50p or 50% is gross profit Net Profit Margin = Net Profit / Revenue x100 = (5000/20000)x100 = 25% This means for every 1 of spice blend sold 25p or 25% is net profit

13 Break Even Analysis You will have to do this. You need to know how to draw/interpret a chart and how to calculate break even using a formula so learn it! Calculating break-even It is possible to calculate the break even output without constructing a table or drawing a chart. This is done using the following formula: Break Even = Fixed Costs = 5000/1 = 5000 pouches where Contribution Contribution = Selling Price minus Variable Costs (per unit) =2-1 = 1 Benefits of Breakeven to BSB Banks may ask for breakeven analysis to be considered and demonstrated before issuing a loan or finance BSB may need a loan/overdraft to purchase materials. Helps BSB to see if it is worth accepting an order, they can see if the Moroccan special order will be profitable. Helps BSB to estimate the future level of output they will need to produce and sell in order to meet given objectives in terms of profits. Limitations of Breakeven to BSB Break-even forecasts are predictions/estimates. The revenue figure may not be accurate if BSB has to change the price it sells the goods at. The costs figures may not be accurate if the variable costs rise or fall eg if the cost of spices rises or falls or fixed costs change. It does not take into consideration the state of the economy or economies of scale. If the exchange rate changes, the costs may change or if new technology is introduced or if health and safety regulations change.

14 Implications of the Order Accepting a large order such as this will have implications for BSB. The most obvious one being they break even on 5000 pouches of Moroccan Special and 10,000 pouches will generate them profit of In the short term they will have to finance the purchase of the materials etc to fulfil the order and this has cash flow implications. Hopefully they will have sufficient cash within the business to cover this. If not they may need to use their overdraft facility or could purchase the spices using trade credit. If suppliers allow them BSB would get the spices immediately and would have (typically) 30 days to pay. Section 7 - Future Developments The case study identifies an opportunity for BSB to expand and grow. This section provides lots of scope for the examiner to ask some big questions. Should they move to larger premises? Advantages Disadvantages Struggling to meet demand in current It will be costly to build the new factory factory. Expansion will enable them to make more spice blends and potentially make more revenue and profit They may need to increase borrowing to build the new factory. This involves interest and the risk of being affected by rising Interest Rates are currently low so it is cheap interest rates to borrow Risk - the current increase in demand may be It is a good time to expand as the economy is coming out of recession temporary and expansion is a risk as It relies upon them being able to sell the extra Economies of Scale with more output they amount they produce will be able to produce each spice pouch at a lower average cost. This means higher profit margins or they could cut prices to be more Ultimately if they relocate and demand isn t high enough they may experience cash flow problems and be forced out of business competitive. It is likely they will benefit from purchasing economies (bulk buying spices) and marketing economies (spread advertising and distribution costs over more BSB must be careful of diseconomies of scale. Bigger firms can be more difficult to manage and communication may suffer. If this happens average costs may increase units) Conclusion Yes provided demand is likely to remain high. OR Wait to see if demand remains high as it is too risky at present It may depend upon : How much they need to borrow do they have retained profit to use as well? If they have lots of retained profit they may not need to borrow that much. The evidence suggests they are profitable. The rate of interest What is expected to happen to interest rates What is expected to happen to the economy If they expect demand for their products to continue to increase.

15 Social Costs and Benefits of New Factory Social Costs are the costs of business activity to the environment or community Social Benefits are the benefits of business activity to the environment or the community To what extent will the new factory benefit Bowton and its people? Benefits Costs Create jobs in the factory this may reduce unemployment locally Potential environmental impact if built on a greenfield site Create jobs / benefits local businesses if local firms are employed to build the factory May lead to a fall in house prices of people whose houses are near the new factory Benefit local businesses that supply the Pollution, Congestion, Noise etc factory with products or services Mulitplier Effect if jobs are created there will be more demand /spending in the local economy which will benefit local retailers Conclusion Yes because BSB may locate factory somewhere else if they are not given planning permission. This may lead to job losses and may harm the local economy It depends upon: How many new jobs are created Are local firms used to build the factory Where the factory is The environmental impact Yes provided BSB considers the environmental impact / costs of the new factory. Other Really Important Stuff Economies of Scale These are the fall in average costs as the business gets bigger and produces more output. The main types can be remembered using the mnemonic Really Fun Mums Try Making Pies and are as follows: Risk-Bearing Economies This is where a firm can afford to sell a range of products into many different markets. As BSB becomes a bigger firm it may be able to sell to shops in many different countries. This is good as if demand falls in the UK it has other markets to sell to Financial Economies This is where banks are able to lend more money at lower rates of interest to bigger firms. As an established firm with more output and sales BSB may be able to borrow at lower rates of interest for its new factory compared to when it started out Managerial Economies This is where a large firm can employ specialist managers who have expert knowledge. Also if BSB opens its new factory and expands output its managerial costs wont increase proportionately. Eg if it doubles its size it wont need double the amount of managers.

16 Technical Economies This is where a large firm can operate more advanced machinery than smaller firms which reduces average costs as productivity is increased. BSB may be able to benefit from this when using machinery in its new factory. Also the law of increased dimensions means that if its new factory is twice as big it will be less than twice as expensive to run ***Marketing Economies *** - VERY IMPORTANT This is because the cost of a promotional campaign is pretty much a fixed cost. A larger firm will need to spend less per unit advertising its products than a smaller firm. The evidence suggests this is important for BSB. As BSB has more output and sales of spices the marketing costs have been spread over more sales reducing the average cost (cost per pouch) ***Purchasing Economies*** - VERY IMPORTANT This is where a large firm buys its supplies in bulk and so gets them a lower unit price. BSB buys some spices in bulk that it uses regularly and this reduces the average cost of producing pouches of these spices. This is a one reason why BSB does not use JIT stock control for some spice blends. Economies of Scale and BSB (see above as well) It is likely you will get a question on economies of scale and BSB. You might also refer to economies of scale (and diseconomies) when discussing the expansion plans. Diseconomies of Scale This is where average costs can rise as a firm increases its size as bigger firms can be more difficult to manage Impact of Rising Interest Rates on BSB Interest rates currently in the economy are low. If interest rates were to increase it is likely to have an impact on BSB. BSB is likely to have taken out loans when starting the business and has a mortgage it used to purchase its new factory. A rise in interest rates will increase loan repayments and reduce its profit BSB is looking to build a new factory. It is likely they will have to borrow more in order to do this. Again this could raise loan repayments and may make financing the new factory unaffordable If interest rates rise consumers may be paying more back on their mortgages (less disposable income) and may save more and spend less. This could reduce the demand for BSBs spices. However / It depends upon Is BSB highly geared? (does it have lots of loans?) If it has high levels of borrowing it will be affected a lot by a rise in interest rates. If it has relatively low levels of borrowing it wont be affected that much? Does BSB have a fixed rate mortgage? If it does it may be protected from rising rates for a period of time It may not be affected that much as people don t borrow to buy spices and its products are relatively cheap