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ST. PAULS UNIVERSITY
UNIT: DMA 100 INTRODUCTION TO BUSINESS
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DEFINATION
The production of goods and services.
It is the process of creating wealth and it is an activity that result in creation of goods and services with the
objective of satisfying human wants.
The process of production is not complete until the product has reached the consumer. I.e. the last stage of
production is consumption.
For production to be complete the service of distribution e.g transport wholesale traders retailers banking and
insurance and warehousing must be available.
Production function
In order to produce any goods or service certain valuables known as factors of production must be combined
in certain in certain ratios.
These valuables or agents on factors of production are land, labor, entrepreneurship and capital
Land
These means all those factors which are given by nature face of cost to human being like soil, sunshine
rainfall, rivers, seas e.t.c.
The main features of land
a) It is a basic factor of production.
b) Its supply is limited human beings cannot create more nature factors.
c) Fertility of different pieces of land is different.
d) Human beings can increase the productivity of land by using greater units of labor and capital.
The price of land is rent or loyalty.
Labor
Labor means any mental or physical efforts of human beings made for any material benefit. Mental labor
involves a lot of brainwork and minimum physical effort e.g. the work of a doctor or an accountant is mental
labor.
Physical labor involves more physical effort and less mental work e.g. the work of farm worker and carpenter
is physical labor. Any human effort, which is not made for any material benefit cannot be, regarded as labor
e.g mother looks after her children without any reward so is cannot be labor.
Labor is also importance factor of production. It is needed to use land and capital. Without labor land and
capital cannot produce anything.
The price of labor is wages and salaries.
Capital
Capital means all those goods, which are man-made and are helpful for further production e.g machine, tools
buildings e.t.c.
It is third factor of production and it is fundamental importance these days. Capital increases productivity of
land and labor.
ORGANISATION
It means combine other three factors of production i.e. land labor and capital. The person who organizes the
business is called organizer/entrepreneur.
Functions of an entrepreneur
a) To start the business.
b) To employ land, labor and capital.
c) To pay the reward of land, labor and capital
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d) To look after the production.
e) To sell the production in the marker.
f) To take the responsibility of profit and loss.
The reward for the service of an organizer is profit.
Entrepreneur
Is the person who is responsible for the profit and loss he is the risk bearer.
Organizer
Is the person who supervises the whole process of production he acquires the services of land, labor and
capital and then pays their reward.
Direct and indirect production
Direct production
It means the production of goods and services by an individual for his own use on consumption.
It is known as subsistence production e.g. a farmer planting maize as food for him.
Indirect production
It means the production of those goods and services that are produced by a person in order to sell these goods
to somebody else. In a textile factory, cloth is produced but this cloth is sold in a market. Those persons who
use the cloth are not the one who produces it.
Levels of production
Definition;
Levels of production means different stages of production these can be
levels of production.
Levels of production
Primary
secondary
tertiary
Farming hunting forestry fishing
Manufacturing
constructive
Commerce
direct service
1. Primary production
This is the first stage of production and it includes hunting, fishing, farming, forestry, e.t.c. also known as
extractive industries.
The output or production of this stage is ran material that is used as input for the production of finished goods.
Minerals like coal, iron, and petroleum are used in the manufactory industries. Agricultural products like
cotton and sugarcane the used to produce cloth and sugar. The output of primary production is used for the
secondary production mostly and sometime sold to the final consumer also e.g. a fruit grower can sell oranges
or apples to the consumer.
2. Secondary production
It is the second stage the output of primary production is used as input of secondary production. Production
includes all those processes, which increase the value or utility of commodities. The third stage of production
starts after the completion of goods in this stages the gives are transferred from the factory to the final
consumer.
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Tertiary production means to provide services after the secondary production these services may be classified
as commercial services of e.g. retailers wholesalers, banks, insurance, transport e.t.c. personal or direct
services are that of doctors, advocates, teaches e.t.c.
Relative importance of level of production
The satisfaction of human wants depends on the availability of goods and services in a country.
If more goods and services are available then human wants can be satisfied easily for the grater supply of
goods and service production must be increased.
The increase in primary production results in development of agriculture sectors and extraction of more
mineral.
Thus increased primary production is the base for the establishment and development of industrial sector.
Greater production of manufacturing goods and construction for services in this way wholesale and retail
transport insurance and blankly enterprises are established the increase production generates more income in
the country.
Natural income is the market value of all those goods and services, which are produced in a country during a
particular period.
Conclusion
Primary, secondary and tertiary sectors of production are important role in generating income in a country.
There must be proper co-ordination among different levels of production.
Extractive industries
These industries are related to agriculture, mining and fishing. The mineral extraction like coal, iron, and
petroleum are used in the manufacturing industries.
Agricultural sectors provide raw materials to manufacturing industries.
Constructive industries
These are industries related to the construction of building dams and roads. The construction industries play
an important role in the establishment of manufacturing industries and expansion of commercial activities.
Classification of occupations
Refers sources of earning money for substance e.g farming, manufacturing, trade e.t.c. Different persons
adopt different occupations for example;
a) Some people activate the soil and produce agricultural commodities e.g maize, coffee, tea.
b) Some people adopt fishing as an occupation they sell fish to earn money.
c) Some people convert raw material into finished goods i.e manufacturing
d) Some people buy and sell goods they are called traders they may be retailer as wholesale traders.
e) Some provide their service. They are called professionals i.e doctors, teacher.
f) Some people work as employees such as factory worker clerks house servants e.t.c. They work under
an agreement or rules of services and perform such work as may be assigned to them by the
employers.
Remuneration for such work takes the form of wages or salaries and allowance.
Methods of remuneration
Remuneration
Means one reward for the services of laborer or employees remuneration of employees consists of;
a) Basic pay – Is daily, weekly or monthly wages.
b) Labor related – Cost e. holiday, pay over time premium laborer must be paid as fair remuneration for
their services and some incentives must be given to them to motivate for hard work.
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There are various methods of remuneration for their services e.g.
i)
According to performance.
ii)
According to time spent by an employee or employers work.
Types of remuneration
Time rate method
Payment is made on the basis of time that may be an hour day week or month. A certain sum of money is set
for each of the above units of time the hourly rate is multiplied by the number of his worked during a
particular month and there is wage.
Advantages
a) It is convenient method and wages can be calculated easily.
b) Employees can forecast their income and they are ensured to receive this income.
c) It eliminates the need to measure the performance of the workers.
d) It’s more suitable the jobs where work cannot be divided into smaller units of drive typist.
Disadvantages
a) Discourages to more efficient workers because they receive the same amount with a lazy ones.
b) Requires close supervision of employees otherwise they do not show interest in their work.
Piece rate method
Under this method an employee is paid per unit of product article or per job completed. It is used only if work
can be divided into uniform pieces as is often possible for factors jobs.
Advantages
a) Provides an incentive to more efficient worker. They are paid according to work done.
b) It does not require close supervision of employees.
c) Provides the employers an easy way of determining labour cost per unit of a product.
Disadvantages
a) Workers can provide inferior/poor quality products in order to provide greater quantity.
b) Not applicable to job which are not easy to divide in small pieces.
c) It does not ensure a stable monthly income of workers.
High time rate for other time
Normal working hours is paid at the normal time rate but for overtime worked during weekdays, and at
weekends.
LARGE SCALE ORGANISATION.
Some business organization cannot be learn by one person because they are large in size and they are complex
in form, the difference in sizes and form of business organization is determined by the capital invested
(capital base) the techniques of production and the nature of business activities.
The trends of expansion by business is to become large scale organization with intention of ripening
(harvesting) large scale benefits due to large scale operations.
Reasons of expansions of business organizations
i)
Large-scale operation result in a higher production leading to low average cost per unit and
therefore profit.
ii)
The cost of production is reduced enabling producers to lower prices of their goods which
results of high commodity.
iii)
When business expands its production capacity it is able to secure or command a big
market share which enables it to control the price.
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iv)
If expansion involves completion of two or more firms then the business are able to avoid
wasteful competition.
v)
Business expansion results in the specialization because they bring together a combination
of qualification experiences and talents of different personnel.
Forms of business expansion
1. Natural growth
Business grows gradually they increases in size following plough back of the profit, when profits are
continuously ploughed back it results in the growth of the capital base.
The increased capital is used in buying more assets that enable a business to operate in a large scale.
2. Business amalgamation or combination
Business increases in size when the or more firms complain to form one large organization, these
combinations is also known as business integration.
PAGE (A)
TYPES OF BUSINESS COMBINATIONS
i)
Horizontal combination
These involve combining business firms operating some types of operation and are at the same level of
production especially textile companies combining to gather to make one large textile company.
ii)
Vertical combination
Involves combined firms an aging indifferent level of production e.g. a textile factory combining with cotton
producing firms these is known as backward vertical integration, where one textile factory combines with a
textile wholesaler this is known as forward vertical integration.
NB: Firms acquire other firms in order to expand their operation firms that were formally separate entity as
brought together under a common management, the bigger formed firm is able to have a more control of the
market.
These reduce the marketing cost and competition in the market.
Types of large scale organization.
1. The cartels
Cartels are formed under several independent firms agree to establish a central selling agency through which
products are sold the firm certain their independence as producers e.g. on producing and exporting countries
(OPEC).
Advantages
 Member firms are able to eliminate unnecessary competition.
 Firms can influence the price at which they sell their product hence they are able to maximize their
profit.
 They control their output by setting quotas for all members.
 Member firms terrain their independence of operation.
 Cartels may enjoy the advantage of monopoly because they are able to collude and control the market.
Disadvantages of cartels.
 Some firms may demand a higher share of the market and at expense of the list efficient ones.
 Member firms have a right to withdraw from the association. This weakens the association control
power.
 Only member firm of the cartel sell through the central selling agency. Other members are locked out.
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Amalgamation/trusts
In this case the business that intends to amalgamate dissolve trust and they loose their individual identities
completely and new business is created, the new company takes over the liability of the dissolved company.
The shareholder of the dissolved company can be issued with shares of the new company.
Holding companies
This is a company, which acquires 51%, or more shares in one or more companies.
This gives such a company controlling powers of the company that is held.
The various companies enter in such a combination are brought under the control of a single company that is
the holding company.
Companies that are controlled that are held are called subsidiary companies.
They are allowed to retain their original names and status i.e they are around to retain their identity.
Most holding companies are financial institution because they are able to buy controlling shares.
The holding companies are able to control and direct the policies of subsidiary companies.
Nationalized industry
A situation where different industries are put under the control of the public corporation by the state is known
as nationalization.
Nationalized industries are those that were in the hand of
and have been taken by the state.
The industries that ate nationalized are those that cannot be left in the hands of the private investors.
Nationalizes industries are not profit motivated the profit made is the government revenue which is used in
various development.
Reasons why the government may nationalize private industries
1. When resources in private hands are being misused.
2. When resources in private hands tend to be used to undermine the security of the
state.
3. When the industries are providing goods of a strategic nature of weapons (guns)
4. When industries are discriminating in the distribution of their goods and services.
5. When the government wants to reduce foreign domination and therefore intends to
increase local participation in managing various industries.
6. When social cost such as pollution arising from activities of private industries cause
adras effect to the economy more so to the environment.
Advantages of nationalized industries
1. Through nationalized the government ensures that basic industries are operated in the national
interest and not mainly on profit motives.
2. by nationalizing industries the government ensures that the consumers are not exploited by
private men in the provision of essential goods and service.
3. The government is able to expand the nationalized industries by inserting more capital.
4. The government is able to carry out its economic policy through nationalized industries
because its has control over them.
5. Nationalized industries are normally subsidence by the government and therefore change lower
prices for their goods and services to their consumers.
6. Nationalization enables the government control industries which might be very sensitive and
which should not be left at the hands of private investors.
7. Nationalized industries ensure that essential goods and services are fairly distributed through
out the country.
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Disadvantages pf nationalized industries
1. The management may be weak since the directors are mainly political appointees
2. Public corporation may not respond to the consumer needs since they are many cases
monopolies.
3. Nationalized industries suffer firm political interference making it different for them to achieve
their objectives.
4. Most of the managers of these types of industries may not be honest because they could be
sacked any time especially if there is a change in the government.
5. Some nationalized industries are too large and therefore decision-making is slow.
6. There may be a waste of public funds especially when some of these industries are poorly
managed.
Merger/absorption
This is a combination in which a company takes over the business of another but not new company is
established.
The company being merged is liquidated while the one taking over the business of the liquidated company
retains its identity.
The company that takes over the business of the liquidated company issues share to the already liquidated
company.
Multinational co-operation
These are corporations whose business corporation and activities are carried out in two or more countries.
They operate worldwide. The various branches in different countries are controlled by a parent company e.g
Barclays bank, coco cola e.t.c.
Characteristics of multinationals
1. They possess a lot of capital
2. They have a great influence on the international trade.
3. They assist developing countries by contributing to the tax revenue, which is used for different
development project.
4. They train local people so as to create the necessary manpower that adds on the increase
employment level country.
Advantages of multinational companies
1. They facilitate transfer of manufactured goods from developing countries to developing results
in raised world living standards.
2. They foster development co-operation among various nations using their capital and the
contact they have in the main countries this is due to the influences in the international market,
in this way they are able to remove the barriers to trade.
3. They create employment for the local people in various subsidiaries.
4. They assist in developing technology through out the world through the research they carry
out.
NB: Multination has the necessary finance for larging product research.
5. They assist developing countries for finding market for the raw materials produced in the
developing countries.
Disadvantages of multinationals.
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1. They use their great influenced and power to influence the political of the countries
governments to their advantage.
2. They mainly experiment leaving very few jobs for the local people especially at the
management level.
3. They may introduce foreign technology, which may not be appropriate for the country and
may have an adverse effect on local conditions.
4. They repatriate resources from less developed countries to developed countries.
5. Through their influence over international market they may control prices to achieve expense
of consumer within a country.
BUSINESS FINANCE
A business enterprise may obtain finance for its operations from different sources.
The source can be classified in 3 different ways;
a) According to the relationship of the persons providing the funds to the firm receiving it.
 Equity
 Quasi equity
 Debts
c) Classified according to the duration for which finance may be retained
 Permanent
 Long term – refundable after a long duration of time.
 Short term – a firm is required to refund within a short time usually within one year.
d) Classified according to the origin
 Internal – generated from within the firm.
 External – Generated from outside the firm.
Equity
This is the capital provided by the real owner of the business in a joint stock company the real owners are the
ordinary shareholders.
They provide ordinary share capital also called equity capital. Equity capital also includes the reserve i.e
excess profit remaining after distribution of dividends reserves therefore forms a big proportion of a big
equity.
Features/characters of equity capital
a) It is permanent
The company only on liquidation cannot refund the amount received from the shareholders and that is when
the company is being dissolved.
b) It has a nominal cost
This means the company is not obliged to pay any dividend to ordinary shareholders.
c) Equity holders are entitled to residual profit.
That is dividends are payable only after setting other.
Classes of capital
Equity holders are entitled to all properties of the company after the other classes of capital have been paid.
Only equity holders have a voting right to decide on important policy matters of the company.
Quasi equity
This consists of capital provided by preference shareholders.
Features of quasi equity
i)
Preference shares are part of the company share capital hence the preference share shareholders
are owners of the company.
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ii)
iii)
Preference shares are paid dividends out of profit before the ordinary shareholders.
Preference shares holders’ claims on the company properties come before equity holders but after
the creditors.
iv)
Dividends payable to the preference shares holders are fixed and usually are accumulative.
v)
Usually preference share capital is redeemable.
vi)
Preference shareholders claim both dividends and company properties that come before the equity
holders.
vii)
Usually preference shareholders have no voting right and no say in the company’s management.
Types of preference shares
1. Accumulative preference shares
These shares are entitled to a fixed rate at dividends until they are paid, if a company makes non-or little in a
particular year the share will get the unpaid dividend in the year when the company makes profits.
2. Non accumulative preference shares
These are entitled to a rate of dividend but only for the year when a dividend is paid.
3. Redeemable preference shares
These are share that are bought base that is redeemed by the company after a stated period of time.
4. Irredeemable preference shares
This share cannot be bought back by the company but can be bought back to somebody else.
5. Participating preference share
These shares besides getting the fixed rate of dividend they enjoy a second share of profit that may remain
together with the ordinary share holders which is additional advantage. If the company into liquidation hey
further participate in the surplus assets of the company.
6. Non participating preference shares
The holders of these shareholders only receive their dividends.
7. Convertible preference shares
The holders of this share have a right of converting their shares into ordinary shares as it is stated in the article
of association. This may come, as results of their holders need to have some power in the management of the
company.
8. Deferred/founder shares
These are shares taken by the promoters of a company normally the holders of this shares receive dividend
only after all claims of the reference and ordinary shareholders have been met.
The differed share can be converted to ordinary shares or preference shares.
Debt finance
This is also called loan capital
It is business finance borrowed from other persons or from other business institutions.
In the joint stock company debt finance may consist of the following.
a) Loan from long term lending institution e.g CFC
b) Loans from commercial banks
c) Borrowing against a bill of exchange
d) Bank overdraft
e) Trade credit from which goods and services are obtained.
Debentures
This is a document that evidence that a company has borrowed a specified sum of money from a person
named on its face and undertakes to pay a fixed rate of interest of loan.
Debentures are of fixed amount the payer a fixed rare of interest.
Interest payable to a debenture holder is an expense to the company therefore the interest must be paid
whether the company makes profit or not.
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Differences between shares and debentures
a) A share is a part of capital while a debenture is a loan to the company.
b) A shareholder is a owner of the company while a debenture holder is a creditor to the company.
c) Share holders receive debentures payable only when companies make profit but a debenture holder
must receive interest whether the company is making profit or not.
d) Some shareholders have a voting right while debenture holding have no voting right.
MONOPOLY
This is a market in which there is a single producer a single seller who controls the whole supply of a single
commodity, which has no close substitutes.
Conditions of a monopoly
 There must be one producer or seller.
 The commodity produced by the producer must have no close substitute – this ensures that there must
not be any rival to a monopolies.
Monopoly situations may arise due to the following reasons
a) The ownership of all-important raw material may enable any person or an organization to
enjoy the monopoly power.
b) Procession of knowledge of techniques may create monopoly situations.
c) Providing legal facilities e.g patent the government may give rights may create monopolies.
d) Heavy cost of starting a business may give raise artificially monopoly may be created through
the agreement existing producers.
e) The government to provide some essential services of water, electricity e.t.c, may establish
monopoly.
NB; A monopoly market is not considered a god type of market due to the following reasons.
i)
A monopoly changes too high price for his product these affects the welfare of the
consumers.
ii)
A monopoly does not take any interest in improving the quality of his product this
make consumers get inferior goods at higher prizes.
iii)
A polis tic market the level of output is too low this result in a decrease in
production and decrease in unemployment.
iv)
A monopolistic than use his power to restrict entry of new firms and therefore
discouraging fair competition.
Government control of monopoly
The government can adopt some measures to control monopolies. These are;
1. Taxation
The government can impose higher taxes on the products of monopolies. Higher taxation can discourage the
products. The government can adopt the tax control policy i.e the monopolistic may be forced by the
government to changes some specific prices only.
BUSINESS FINANCE
Sources of finance
a) Money market
This is a market for short term funds i.e finance that is be in the business for a period of not more than four
years. In this market the following finances are bought and sold.
i)
Bank overdraft
ii)
Short term loan
iii)
Promissory note
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iv)
Bills of exchange
v)
Trade credit or finance unkind
vi)
Government treasury bill
vii)
Advances
The following financial institutions sell the above finances;
i)
Commercial banks
ii)
The government
iii)
Discounting
iv)
Discounting houses
v)
Merchants banks e.t.c.
The buyers of these finances are;
 Individuals
 Companies
 The government.
Characteristics of this finances bought and solid in this market are;
i)
Securities bought and sold are highly negotiable i.e. they can be bought and sold
easily e.g. government treasury bill, bill of exchange promissory bill e.t.c.
ii)
This finance is usually very expensive.
iii)
This finance is used to solve liquidity of concerned parties.
iv)
This finance is usually not secured and such depends upon the goods of the
borrower and the buyer.
v)
It is not a perfect market balance the demand for such finance far exceeds its
supply and many times the central banks intervenes in the market to influence the
prices i.e. the rate of interest on this finances.
Services offered by AA money market
1. It offers finances to solve liquidity problems of individual companies.
2. It offers a medium through which securities are discounted therefore making
them highly negotiable.
3. The market offers advice to concerned parties as to which kind of finances will
meet their financial needs e.g. banks.
4. The market set the prices of different markets this is used as a measure of
economic activities of a given country at a given point in tie e.g. when interest
are high it makes finances expensive thus slows down the demand for short
term finances. This also slows down the economic growth in a country.
5. It acts as channels through which short term investments inform of treasury bills
in the government fixed deposit account are infected.
6. It acts a main source of finance for small business in Kenya e.g retailers and
wholesalers.
7. The markets bring together the borrowers and the buyers and the sellers of
short-term finances.
Reasons why money market are not fully developed in Kenya
1. Most of the businesses in Kenya are in small-scale business and in many cases
they lack the credit necessary which is very essential for a business to be able
offered to participate fully in this market.
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2. The altitudes of the savers has contributed a great deal in slowing down the
development in this market a large number of business men in kenya prefer to
keep their money at home mostly due to fear of taxation than to put it in bank
account this withholds finance from circulation which should have been
available to lend to other parties on short term basis.
3. There is a hot of ignorance among kenya business men as to which finance are
available in this market e.g. invoice discounting, bills of exchange this has
restricted the number of buyers and sellers of such money in this market.
4. cost of short term finance is very prohibitive in kenya because interest rate are
very high thus reduces the number of parties buying money in this market e.g.
the cost of overdraft in kenya is very high.
5. Most of population in Kenya is made up of low-income groups this have little
or he income to save.
6. Short-term investment in kenya are few and very risky and this is because the
investment climate has favored long-term investments
7. Short term loans in most cases call for securities which many would be
borrowers do not have this limit the available of this money also the problem of
security is made more complex by most finance institutions that the securities
from the borrowers be comprehensively insured which increases the cost of this
kind of money in this case there has being a lot of devoting by African
enterprises which has limited the finance available to be rent to other business.
8. The central bank of Kenya has concentrated in the development of capital
market giving little attention to the developing money market.
9. Due to poor management of African business it has hindered may of them from
obtaining short-term finances.
Solutions to the above problems
1. The government, the banks and the finance and institutions should educated indigenous
business men on the importance o credit worthiness of the principles of sound business
management using the mass media short courses and seminars.
2. The government introduces no tax, low-income earners so that they can have some savings
from where short-term finances can be obtained.
3. There should be education by commercial bank’s and financial institutions as to the advantages
with savings with a bank.
4. There should be mass education through radio, radio, and TV e.t.c. by the commercial banks to
arouse awareness of the money available in the money market and how to obtain this money.
5. The central bank should extreme lending rates by commercial banks to bring them to
affordable levels to the borrowers.
6. The major of people in Kenya are farmers hence there should be an improvement in farming
techniques so as to boost the income of the farmers.
7. The government should look into possibilities of reclaiming semi-arid apart of Kenya so as to
make them productive and boost incomes which can then be saved.
CAPITAL MARKET
The capital market is for long-term finance that will be available for seven year and above. This market is
market is more developed than the money market in Kenya because the central banks have put move effort
into this area.
- These market have two subsidiary market
 Security market/ long term securities
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 Long term loan market
Security market, which is long-term securities, e.g. shares debentures and government stock.
Long term loan market for such finances as long term loans, mortgage finance, hire purchase finance e.t.c.
Services rendered by capital market
1. The market offers long-term finances/is necessary for obtaining fixed assets for companies and
for the development purpose in general.
2. The market provides permanent finance, which is necessary for a strong financial base e.g.
share capital.
3. The market provides services in the form of advise to investors on the investment that is viable
e.g. the advice given by the stock exchange brokers to the investing public.
4. It enables company and individuals to obtain long-term finance, which they then sell in the
money market as short-term loans.
5. The market acts as channel through which foreign investments find their way in Kenya inform
of foreigners buying shares in Kenya, which they have to buy in their own currencies, and this
acts as a source of foreign exchange.
Reasons why capital market are more developed in kenya than money market.
1. It is easier for them to get access to capital market because in most cases they have the goods
which of the borrowed and their own assets act as security for money borrower.
2. There are less risks of misuse of funds from thus marker because these are available inform of
fixed assets and not in form of money which can easily be misused.
3. Long-term finances available in this market are relatively cheaper.
4. Long-term finances available in this market are capable for paying for themselves.
5. Kenya and as a developing country requires a long term investment so as to accumulate fixed
assets which are necessary a pay for the development of the economy in general.
6. The central bank has facilitated the development of financial institution, which provides
finance on long-term bases such as mortgage house e.t.c.
7. The market has enabled creation of institution like agricultural finance corporation (AFC)
industrial and commercial development corporation (IDCD) e.t.c. These institutions have
inspected a lot of long-term finance in agricultural based industries, which have lead into an
increase of economic development.
8. The government development plan has caused emphasized the development of this market by
instructing such financial institutions as insurance companies to channel all their savings into
long terms investorment and also to make available finances on long term bases to industries
and the building industry. This has lead to move development in the economic sector of the
country.
PURPOSES OF COMBINATIONS
REFER TO NOTES PAGE A
Purposes of combination
Advantages
1. There is use of idol working capital i.e. the total working capital of the business units working
separately normally exists its requirements. There is therefore a waste of scarce resources of the
country in the form of idol capital if the business units combines the idol capital can be put to the best
use.
2. Saving in capital expenditure; the growth of business combinations reduces wasteful competition,
replaces outdated and obsolete machinery and reduces the capital expenditure.
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3. A large-scale operation is able to produce goods on large scale and thus avails the economies of largescale operation.
4. The combination of business units reduces unnecessary administration expenses, retains efficient
persons and pays them well.
5. There is a reduction in selling expenses i.e the formation of combination reduces total expenditure of
total men and advertisement for the sale of that large business organization.
6. Stability in prices i.e. the business combination eliminates competition and provides stability in prices
i.e. all the business units after combining are guided by a common price policy hence the prices do not
keep on a hanging.
7. A large business combine has greater credit worthiness and is in a better position to raise capital for its
business requirements.
8. A combine makes it possible for the utilization of technical know how on a cooperative basis.
9. A large combines for a needy for shares and debentures.
Circulation combination (mixed combination)
It is a merger of firms producing all together different commodities under a central agency e.g. a cotton
combining with a plastic factory and a sugar industry.
The main objective of creation combination is to obtain the benefit of developing a common management.
Diagonal combinations
It is brought about by combining two or more than two business units providing anxiety services in the line of
production e.g. an industrial organization combines with the firm engage in repairing machine and tools.
The main advantage of the diagonal combination is that it makes bigger business units self sufficient in repair
and to ensure speed and continuity.
Simple associations
1. Trade association
This is a voluntary association of the merchants industrialist’s traders engaged in the same kind if simple
trade.
The objective of trade association is to look after the economic interest of economic trade or industry the
members contributes of or monthly quality or yearly bases.
Their main objectives is to discuss common problems faced by them in the availability of raw materials faced
by them in the availability of raw materials, wages for the labor the price of their product the state policy also
the distribution of bonuses therefore protects the economic interest of the members and also encourages
friendly relations among themselves.
Chambers of commerce
This is a voluntary association of traders, businessmen, industrialists, financers who work for the benefit of
commercial community in a country the association remains in touch with ministry of commerce.
General men agreements
In this agreements rival parties in a business make unwritten agreements to act in an agreed manner the
person s owning the business units retain their individuality but they are bond to act in accordance to the
terms and regulations of their oral agreements.
The main idea behind the general men agreement is to avoid cut throw among competing business units and
restrict out put according to the demand
in the market.
Federations
1. Pool
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This is an agreement made by members producing or dealing in similar product for the regulation of prices of
their product that pool provides a machinery to control the factors affecting the price of the commodity. The
pool for instance eliminates competition among the rival producers by restricting of the output of each firm,
division of market to the members fixing the price to be changed from the customer’s e.t.c.
Pools are sometimes classified according to the purpose for which they are formed the main types are;
1. Production pool
This is formed to restrict the output of each firm according to an agreement among the competing firms.
When production is according to the existing demand it does not lead to the over production, there is no
competition, among the firm which would result in lowering the prices of the product.
Disadvantage
It affects the efficiency of the progressive firms
2. Market pool
According to this method the market is divided among the member a member cannot sell his product in the
territory of the other member of the pool.
The pooling of the market may be local notional or international
3. Income or profit pool
Under this system the price is fixed by a central
made up of the representative of the members the
price is fixed in accordance to the productive capacity of each business.
Advantages of a pool
a) It is easy to form.
b) It reduces advertising expenditure.
c) It avoids over production of goods.
Disadvantages
a) Members often disregard the pool agreements.
b) The efficient firms suffer since they cannot produce goods according to their capacity.
c) They work for limited period of time.
d) There is no legal penalty if a member violates the term of agreement.
STOCK EXCHANGE MARKET
This is an organized capital market for securities, which includes share, debentures and stock.
The stock exchange in Kenya is a small market made up of 60 quoted companies.
Nairobi Stock Exchange Market
Nairobi exchange market has two subsidiary markets.
a) Primary market
b) Secondary market
Primary market
This is a market for new shares to new shareholders.
Secondary market
This is a market for second hand shares i.e. a market for shares changing hands amongst individuals.
Companies who need to sell shares in stock exchange must arrange with the stock exchange council to obtain
a quotation.
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Quotation
This is a process by which a company’s name will appear of the stock exchange list as one of the companies
whose shares can be bought and sold in the stock exchange market.
Requirements to be fulfilled by companies needing quotation of Nairobi Stock Exchange Market
a) Should be a company registered with the registrar of companies as a limited company in accordance to
the company’s act cap 486.
b) Such a company should have a full paid capital minimum of 2 million Kenya shillings.
c) Must be ready to offer for sale to the public 20% at the issued share capital.
d) Must provide the following information to the capital market authority;
 It’s current directors.
 It’s lawyers.
 The company’s secretary.
 The company’s auditors.
e) Should provide the political subsidiaries if any to the Nairobi stock exchange the following;
 Copies of audited balance for the previous five years
 Articles of association
f) Should pay a hearing fee of Ksh.1000
Reasons why a number of qualified companies are not quoted
(i)
Families who value their control own most of the companies operating in Kenya and hence they
cannot go public.
(ii)
The companies operating in Kenya are able to get cheap debt finance other than the NSE.
(iii) There are complex formalities.
(iv)
Going public means loss of secrecy to the public because public companies are required to publish
their annual account and also share holders are required to inspect the various co-operate banks.
(v)
Going public is an expensive means of raising finance.
(vi)
Some companies may not go public due to their being required to pay co-operation tax.
(vii) A highly profitable company would want to retain profit of which it can grow.
(viii) Most companies in Kenya may not have long interest in the country.
(ix)
Most companies in Kenya may not be maintaining proper banks of account and therefore they are
able to convince to obey their shares.
Incentives the government gives companies to induce them to go public
i)
They give exemption for any imported raw materials.
ii)
The government gives preferential treatment to public companies in allocation of foreign exchange
for important or raw materials.
iii)
By becoming shareholders in those shares companies.
iv)
Offering protection against importation of similar quoted companies e.g. beer, cigarette e.t.c.
v)
Government caries promotional activities for their products in foreign market free of charge
through trade fares, exhibitions e.t.c. and also provide good infrastructures and which enables
them accessibility to their raw materials.
vi)
It gives guarantee in repatriation of profit by the foreign investors.
Advantages that a company obtains by being quoted on NSEM
i)
Is able to raise finances through sale of its shares and obtaining finances inform of debentures.
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ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
Shareholders of a quoted company have avenue where they can sell their shares.
A company that is quoted is able to raise permanent finance by way of selling its securities to the
members of the public e.g. ordinary shares and other types of preference shares.
A quoted company is always aware of market value of its shares and this saves as a guide on
which investors make an opinion about the stability of a company.
A quoted company is able to enjoy national and international prestige and these enhances its
goodwill to the members of the public.
A quoted company is a proved by the NSE council on the basis of its viability. Goodwill to the
members of the public.
A quoted company is viewed as credit worthy from the point of view of creditors this will enable
it attract credit finance on favorable terms.
A quoted company is able to compare itself with other quoted companies. This will enable it
develop appropriate management policies.
Quoted companies are able to enjoy privileges that are given by the government to induce other
companies to be quoted e.g. tax allowances, allocation of foreign exchange protection of
competitors.
Disadvantages of being quoted in the NSEM
i)
A quoted company lose its secrets through;
 Publication of the company’s accounts.
 The rights of shares holders to inspect the books
ii)
Increase the companies profit term to decline this will be reviewed to the members of the public
which may lower the market value of its shares.
iii)
Companies whose profit record are not impressive may be dropped out of the stock exchange
quotation this may lead to a such company being put into receivership.
iv)
Being quoted may lead to loss of control of company to the incoming shareholders who may
change the company’s policy.
v)
A quoted company is required to go through many formalities.
vi)
Being quoted is very expensive.
CAPITAL STRUCTURE OF A COMPANY
Definition
This is a company’s long term financial or the relationship between various sources of finance that the
company has used in financing.
These include;
1. Ordinary shares
2. Various classes of preference shares
a) Redeemable or non redeemable
b) Participation of non-participating.
c) Cumulative of non-cumulative.
d) Convertible or non convertible
3. Reserves
This includes retained earning and capital reserves
4. Debt finances
Which include long-term loans, short and medium short-term loans, debenture.
NB: Capital structure is also used to explain the relationship (proportion) between various sources of finance
that a company has used in its financing e.g
Hawking company limited has the following information in its books of accounts
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Ordinary share capital
7% preference share capital
12% debentures
Capital employed
Amount Ksh.
800,000
400,000
150,000
1,350,000
Proportion
59.20%
29.63%
11.11%
Proportion of ordinary share capital
800,000 x 100 = 59.20%
1350
400,00 x 100 = 29.63%
1350
150,00 x 100 = 11.11%
1350
Factors influencing company’s structure
1. Availability of securities of collateral
Companies with fixed assets can be able to raise long-term finance more easily and they have higher debt
finance than companies without securities.
2. Availability of finance in the market, which are influenced by the prevailing economic condition and
the policies of the central bank.
3. The cost of finance
4. The degree of
in a given industry.
5. Stability of future sale, which leads to stable profit in future.
6. The size of the company as it is retracted by the size of its sales activities.
7. The attitude of the management towards borrowing finances from outside sources.
Importance of capital structure to a company
1. It influences the company ability to raise finance when the need arises.
2. It influences a company’s share prices.
3. It may also influence its future growth and expansion.
4. It may also influence the companies’ dividend policy since most of its profits will be used in financing
repayments of the borrowed capital.
Financial institution
These are institution which gets money inform deposits and lead this money to the public as long term loans.
Commercial are included and this offer various banking services.
Factors responsible for rapid development of financial institution in Kenya.
1. The country has had a stable political atmosphere, which is conducive for economic development
more so for the development of financial market is the ones that lead to the financial instruction.
2. There has been an increase savings habit among Kenya as regards saving habits. The mount is saved
with various financial institutions.
3. There has been an increase in par capital income due to development in agricultural growth in the
tourism sectors and the industrial sectors.
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4. There has been an increase in foreign investment, which has created employment leading to an
increase in the income available to the Kenya which if saved with the financial institutions.
5. Government policies; this has enable the growth of the various sub-sectors e.g jua-kali sector and
small industries. This has lead to income which has been saved with the financial institutions
NB; Nairobi is a home to several international organization e.g UNEP, habitat e.t.c.
The development of co-operation movement in Kenya has resulted in increase income. This is saved with
financial institutions.
Differences between commercial banks and financial institutions
COMMERCIAL
FINANCIAL
a) They are allowed to create money through
a) These are not allowed to create money, as
lending it is done through the multiplier
they don’t use cheque in their payments.
effect.
b) They engage in the real estate.
b) Are not allowed to invest in building
c) They lend long term by way of mortgage
estates.
loans.
c) Usually banks lend short-term and little
d) Are not allowed to operate such current
long-term basis.
accounts.
d) Are allowed to offer current account to their
e) Are not allowed to deal in foreign
customers.
currencies.
e) Most commercial banks are agents of the
f) Not allowed to deal in foreign currencies.
central bank in that they purchase foreign
g) Not allowed to finance import export trade.
currencies through bureau and change on
h) Are not members of clearing house?
behalf of central bank.
i) Are not affected by monetary twis as some
f) Are allowed to finances foreign trade by
may not be under strict control of the central
way of later credit and import/export credit
bank.
facilities.
j) They lend to specific areas, which are
g) Must be members of clearing house.
created to finance e.g. hp, lease, finance and
h) Are used as tools to control money suppliers
building finance.
in the economy through credit squeeze open
k) Are not active in capital market than in
market operation selective credit control
money market.
and cash reserve basis.
i) Lending is more diversified to
accommodate different sector of economy.
j) Are more active in money market than in
capital market.
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Roles played by capital market authority (CMA)
1. The CMA and the stock exchange brokers fix prices of shares, which are bought bt potential investors.
2. These authorities are responsible for creation of conducive atmosphere for long-term securities.
3. It is responsible for development of securities e.g debenture.
4. Promoting the demand for this security by advertising.
5. Creation of right atmosphere for underwritten and brokers.
6. Helps in removing any barriers in transfer of securities.
7. Helps in
investor’s confidence by creating a stable investment climate.
8. It encourages institutional investors like insurance company to invest in public securities
Roles played by commercial bank in the development of Kenya
a) Financial roles
Banks offer personal agricultural business and in some cases mortgage loans. Most of these finances are
short-term basis e.g.
Overdraft – This vary for the period of one month to a maximum of one year and are used as bridging finance
or finance working capital.
Short term loans – They range from three months to a maximum of four years and they are expensive.
By discounting bill of exchange – May be for a period no exceeding three months known as assurance base.
Documentary credit – Bank offer this type of service to business engaged in foreign trade.
b) Non financial roles
They serve as safe custody from depositors saving e.g. saving account, current account, and investment
account, fixed deposit.
They offer transfer facilities e.g acting in trust for money or properties whose owners to different reason
cannot look after them due to death.
Banks provide means of payments through cheques.
 Cheques
 Standing orders
 Credit transfer
 Bankers cheques
 Mail and telephone transfer of money, which minimizes the risk due to theft.
They offer managerial services to business to business men inform of consultancy services.
They provide tax planning and tax management facilities to business and companies.
They provide foreign exchange to businessmen operating in foreign trade by acting as agent between the
central bank and the businessmen/companies.
They provide credit status information to customer and other parties to access the financial performances.
They offer brokerage services whereby they by or sell shares on debentures on behalf of their client.
They act as underwritten for the share issued by companies to the public.
They provide guarantee services to the customer for acquisition of finance.
They offer safe custody for variables, which are kept in strong rooms e.g. gold, degrees, title deed and
diplomas and they access the risks and viability of a venture.
The undertake feasibility studies on behalf of their clients to access the investment potential of a given
project.
They offer specialized series e.g. national bank of Kenya, which offers loan facilities to civil servant.
They offer higher purchases facilities for their customers e.g. merchants banks.
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INSURANCE COMPANIES IN KENYA
Insurance companies have accumulated substantial amount of savings from premiums paid
by their
customers.
This amount of money is invested in government boards; stocks share, housing mortgages e.t.c.
Insurance companies have therefore a very importance role in the economic development of Kenya.
Roles played by the insurance companies in Kenya
1. They provide cover for most risks. These have enabled business to undertake
various business ventures, which would have otherwise impossible.
2. They have accumulated large sum of money that acts as a source of finance to
companies selling shares debentures and other types of commodities.
3. They provide technical services e.g risks management.
4. They provide underwritten facilities for newly issued shares acts as a source of
finance.
5. They contract houses which they sell to the policyholders and other interested
parties at favorable terms.
6. They encourage savings by issuing specific types of policies e.g educational
policy – these ensure education for the children in their advanced stages.
Reasons behind fast growth of insurance companies in Kenya
1. There gas was increase in awareness amongst the Kenya population as regards
the needs to insure their lives and their properties.
2. There has been an increase in the standard of living of the average Kenya’s that
requires the standard of living to be maintained to the beneficiaries even after
death.
3. There has been a stable political atmosphere in the country.
4. There has been a steady growth in the economy of Kenya, which has lead to an
increased growth in the industrial sector.
5. There has been a tremendous growth in education facilities the educated group
has brought about an increase in demand for insurance.
6. The roles have made compulsory insurance loaners on some specific areas e.g.
motor vehicles, workmen, competitor e.t.c.
7. Due to increase in income of the average Kenyan there has been need to save
some of this income by taking up insurance policy.
HIRE PURCHASE FIRMS
These have also increased in number due to the rapid growth of the capita market in Kenya. They provide
long-term finance in form of the hire purchase asset.
Roles played by hire purchase companies in Kenya
i)
They budge the gap created by lack of funds to finance a given assets whose cost
may beyond the ability of other financial institution.
ii)
They allow business to trade in on old assets so as to acquire new ones.
iii)
They enable small-scale business to acquire assets that may have been expensive
at softer terms.
iv)
They create employment either directly of indirectly.
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v)
vi)
vii)
They provide a cheap source of finance because the installments are paid for a
long period of time.
They assist in raising the level o standards of living by enabling business and
individuals to buy assets they may not have afforded under a normal
circumstance.
They offer a guarantee on the asset purchased on hire purchase.
Examples of hire purchase in Kenya
i)
Kenya finance co-operative.
ii)
Credit finance co-operative limited.
iii)
Diamond trust (KL)
iv)
Kenya Limited.
BUILDING SOCIETIES IN KENYA
The building industry in Kenya has grown very fast in accordance to the government policy of providing
adequate shelter.
The building industry has registered a number of building societies e.g. housing finance company in Kenya
(HFCK), home loans building society.
Roles played by building societies in Kenya
a) They provide mortgage loans for purchase of houses these loans re payable over a long period of time.
b) Some building societies have contracted estates which they sell to Kenyans these has reduced the
house shortages in the urban areas.
c) They also offer long term fixed deposit account at reasonable rates of interest.
d) They offer usual facilities which act as custody for depositors money.
INFLATION
This means a trend of rapid raise in price level.
Inflation gap
This is access of anticipated expenditure over the actual price of the available output.
Key
X o.t – Anticipated expenditure = inflationary gap.
Types of inflation
a) Creeping inflation
This describes a steady raising level of prices e.g as the one experienced in Kenya.
When a price raise 2 to 3% per annum, this type of inflation is considered helpful because it induces more
investment.
b) Hyper inflation
This is also known as a run away gallopian inflation, this is where inflation is characterized by prices raising
at a very fast rate and at a very high levels so that confidence in the currency is destroyed.
This type of inflation has taken place in German, china, and Uganda e.t.c.
In this type of inflation currency in circulation becomes unacceptable able and a new currency must be issued.
c) Rapid inflation
In this case prices raise at a rate of 6% all over this inflation is harmful and it must be controlled.
d) Moderate inflation
It may --------
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Suppressed
This relate to conditions which effective demand is greatly in excess in supply. The effect in price and
increase is suppressed by the government activities e.g. price control.
NB: Inflation spiral
This refers to the situation in which price increases lead to demand for higher wages, which when granted
increased the production cost resulting in another increase in price.
Causes of inflation
i)
Rapid increase in demand.
This may result in a raise in price level this may be brought about;
If the population of a country is increasing rapidly and individuals have a desire to buy more to achieve
higher levels of satisfaction, then this increases in demand where they result in the raise in price level.
The raise in price level as a result of increase in demand is called demand pool inflation.
ii)
Increase in cost of production
When cost of production raises prices also go up the cost of production may raise due to higher wages.
iii)
Lack of supply
The shortage of goods also results in the raise of price level. This shortage may be due to decrease in
production.
iv)
Increase in investment
The amount of money invested by the government on various developments protects results in creased supply
of money in circulation. This results in the raise price level.
v)
Social evils
e.g. smuggling holds e.t.c. Creates artificial shortage and prices go up.
Effects of inflation
Inflation is harmful for the economic, social and political stability of any country. It results in unfair
distribution of income during inflation the rich become richer and the poor become poorer.
Inflation also stimulates social evils. It disturbs proper working of any economy.
It affects the development activities of a country since the purchasing power of the people is greatly decreased
and people can loose their confident in purchasing owner of their currency.
Anti inflationary measures
These are measures, which may be adopted to control or remove inflation.
They are divided in three groups
 Monetary measures
 Fiscal measures
 Non- monetary
Monetary measures
These are measures adopted by the central bank to control or remove inflation.
a) Bank rate policy
During inflation banks rate is raised this means commercial banks where borrow less they have less money to
lend. The commercial banks are also raise their interest rate on loans this discourages borrowing and this
reduces the supply of money in circulation.
b) Open market operation
During inflation the central bank sellers sells securities, which decreases the supply of money in circulation.
c) Reserve requirement
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During inflation reserve requirement is reserved by the central banks and commercial banks have less money
at their disposal this helps control the supply of money in circulation.
d) Rationing of credit
Commercial banks get loan from the central bank up to a certain limit during inflation this limit is decrease.
e) Consumers selective credit control
According to this method the central banks discourages the purchase of commodity on installment basis. This
is able to check the rate of inflation.
Fiscal measures
These are measures adopted by the government to control or remove the inflation.
i)
Public expenditure
During inflation the government reduces its expenditure as a result money supply in circulation decreases and
prices fall.
ii)
Taxation
The government imposes more taxes during inflation due to higher taxes the purchasing power of individuals
fall. These reduce the volume of money in circulation.
iii)
Public borrowing
The government borrows money from individuals and uses this money to produce more goods and services.
This increases the supply of goods and leads to a fall in the level of prices.
Non-monetary measures
These are measures, which are adopted by the government.
a) Wages adjustments
Wages are raised at regular intervals to enable the individual maintain their purchasing power at the same
level.
b) Output adjustment
The government takes steps to increase the production of goods and services. This leads to an increase in
supply of goods, which leads to a decrease in price level.
c) Price control
The government fixes Price of some necessities and these ones cannot be raised without the person of the
government.
d) Rationing
According to this method the purchase of some specific commodity is controlled therefore individuals can
purchase a specific quantity only during inflation.
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Purpose of the course
The purpose of the unit is to enable students understand the wide range of interrelationship amongst the
fuctional areas of business enterprise (marketing,human resource management,operation
management,finanace and accounting) and its external environment.
Learning outcomes
By the end of the course the students should be able to;
1. Describe the breadth of issues involved in management and administration
2. Examine the various management functions
3. Discuss business policies,plans,markets systems.
Course Description
The course is designed to enable students understand the wide range of interrelation ship amongst the
functional areas of business enterprise (marketing,human resource management). Topics covered include;
definition of Commerce,Aids ti aids pto trade,Occupational nature of buying and selling,domestic and
foreighn otrade,types of business organization,legal limitations,humanitarian and community
ventures,channels of
distribution,producesrs,stocklist,wholesalers,middlemen,retailers,warehousing,indentors,manaufacturer
representatives.
SUBJECT: INTRODUCTION TO BUSINESS
1
TOPIC
SUB-TOPIC
HOURS
Commerce
- Definition of commerce
4
- Commercial goods and services
2
Production
- Definition of production
8
- Nature of buying and selling
- Direct and indirect production
3
Aid to trade
- Banking
8
- Transport
- Insurance
- Warehousing
- Communication
- Product promotion
CAT ONE
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4
Forms of
business units
- Incorporated and non-corporate
20
- Sole proprietorship
- Partnership
- Public corporation
- Joint stock companies
- Cooperative societies
- Municipalities
- Women to youth enterprises
- Community ventures
- Complex business organization, mergers , joint ventures, franchise
holders manufacturers under license
5
Channels of
distribution
- Producers
16
- Stockiest
- Wholesalers
- Middlemen
- Retailers
- Warehouse
- Indenters
- Manufacturer representative
-
MAIN EXAM
Instructional methods
This course will be taught through a combination of illustrated lectures, tutorials, group discussion, instructor
designed handouts, and summary Notes.
The specific instructed materials to be used to deliver include:

Lectures, class discussion, research and presentations and group discussions.
27