Exercise 9. True or false?
1. To increase market share it is sometimes necessary to decrease the price.
2. A profit-maximization objective can't be used during a long period of time.
3. A penetration strategy is one when a product is priced very high.
4. Odd pricing is based on studying people's psychology.
Exercise 10. Match the words and their definitions:
1. Management a. The art of getting things done through people and other resources.
2. Planning b. Allocating resources, assigning tasks and establishing the organization objectives.
3. Organization c. Anticipating future trends and determining the best strategies and tactics to achieve organizational objectives.
4. Leadership d. Measuring performance relative to objectives and standards and taking corrective actions where necessary.
5. Controle e. Establishing values, sharing visions, creating enthusiasm an maintaining focus on a few, clear objectives.
Management is the art of getting things done through people and other resources.
The four primary managerial functions are planning, organization, leadership, and control. Other functions include stuffing (personnel), directing, reporting, and budgeting.
But management is much more complex than doing a few tasks. A good manager must know about the industry the firm is in and all the technological, political, competitive, and social factors affecting that industry. He or she must also understand the kind of people who work in the industry and what motivates them. Finally, a manager must be skilled in performing various managerial tasks, especially technical tasks, human relations tasks, and communications tasks.
Planning
Planning includes anticipationg future trends and determining the best strategies and tactics to achieve organizational objectives. Most planning follow similar patterns. Planning answers three fundamental questions for business:
1. What is the situation now? What is the state of the economy? What opportunities exist for meeting people’s needs? How much competition is there?
2. Where do we want to go? What objectives do we want to accomplish?
3. How can we get there from here? This is the most important part of planning which takes three forms:
1. Strategic (long-range) planning determines the major objectives of the organization and the policies and strategies for obtaining and using resources to achieve those objectives. At this stage the company decides which customers to serve, what products or services to sell, and the geographic areas in which the firm will compete.
2. Tactical planning is the process of developing detailed, short-term decisions about what is to be done, who is to do it, and how it is to be done.
Whereas strategic planning is done by the top managers of the firm, tactical planning is more often done by managers at lower levels of the organization. Tactical planning may involve setting annual budgets and deciding on the details of how to meet the strategic objectives.
3. Contingency planning is the preparation of alternative courses of action that may be used if the primary plans do not achieve the objectives of the organization. The economic and competitive environments change so rapidly that it is wise to have alternative plans of action ready in anticipation of such changes.
Exercise 11. True or false?
1. Strategic planning is the process of making short-term decisions.
2. Strategic planning is mainly done by top managers.
3. Contingency planning is the same as tactical planning.
4. It's necessary to have alternative plans in case of changes in economic environment.
Organization
Organization means allocating resources, assigning tasks, and establishing procedures for accomplishing the organization objectives. When organizing, a manager develops a structure or framework that relates all workers, tasks, and resources to each other. That framework is called the organization structure and pictures who reports to whom and who is responsible for each task.
An important part of organizing is staffing, getting the right people on the business team. Today it is called human resources management because it is as important to develop the potential of employees, as it is to recruit good people in the first place.
Exercise 12. True or false?
1. Organizational structure is a picture showing who reports to whom in the company.
2. Stuffing is a part of an organization structure.
Leadership
Leadership today is not just good management. It is also a matter of establishing values, sharing visions, creating enthusiasm, and maintaining focus on a few, clear objectives.
There are different leadership styles.
Autocratic leadership means making managerial decisions without consulting others, and implies power over others.
Bureaucratic leadership is based on inflexible routine supported by rules, regulations, and policies.
Diplomatic leadership is based on skill and tact in convincing employees to follow the leader's decisions.
Democratic leadership means that managers set work together to make decisions.
Laissez-faire leadership means that managers set objectives and employees are relatively free to do whatever it takes to accomplish those objectives. Many scientists and doctors work best under laissez-faire leadership.
Employee-controlled leadership consists of having employees set objectives, and management handle administrative matters. Many universities are run this way.
Participative management involves employees in setting objectives and making decisions; consultive, democratic and laissez-faire leadership are all forms of participative management.
One manager may use a variety of leadership styles depending on whom he is dealing with and the situation.
Exercise 13. True or false?
1. Autocratic leadership is based on tact in convincing people to follow the leader's decisions.
2. Every manager uses only one leadership style.
3. Democratic management is an example of participative management.
4. Doctors and scientists usually better work under bureaucratic leadership.
Control
The control function involves measuring performance relative to objectives and standards and taking corrective action when necessary. The control function, therefore, is the heart of the management system because it provides the feedback that enables managers to adjust to any deviations from plans and to changes that have occurred in the environment that have affected performance.
Controlling consists of the following steps:
1. Setting clear standards;
2. Monitoring and recording performance (results);
3. Comparing results against plans and standards;
4. Communicating results and deviations to the employees involved;
5. Taking corrective action when needed.
Tasks and skills at different levels
of management
A manager must have three categories of skills.
Technical skills involve the ability to perform tasks of a specific department such as selling or accounting.
Conceptual skills refer to a manager’s ability to picture the organization as a whole and the relationship of various parts to perform tasks such as planning and controlling.
Human relations skills include leadership, communication, motivation, coaching, and training.
The higher up one goes in management, the more time is spent on conceptual and human relations functions and less on technical functions.
Exercise 14. True or false?
1. Top managers spend more time on technical function than on the others.
2. Conceptual skills refer to ability to perform specific tasks.
Exercise 15. Match the words and the definitions:
1. Accounting A document reporting the results of company operations over a particular period of time.
2. Income statementA financial statement that reports the financial position of a firm at a specific time.
3. Balance sheetAcquiring funds for the firm and managing funds within a firm.
4. FinancingRecording data from transactions and preparing financial statements.
Accounting
Accounting process consists of two major functions:
1. Recording data from transactions;
2. Preparing financial statements.
Transactions include buying and selling goods and services, acquiring insurance, using supplies, and paying taxes. After the transactions have been recorded, they are usually classified into groups that have common characteristics. For example, all purchases are grouped together, as are all sales transactions. Other kinds of accounting documents are: purchasing documents, payroll records, bank documents, travel and entertainment records. The business is thus able to obtain needed information about purchases, sales and other transactions that occur over a given period of time. The methods used to record and summarize accounting data into reports is called an accounting system. One purpose of accounting is to help managers evaluate the financial condition and the operating performance of the firm so that they may take better decisions. Another is to report financial information to people outside the firm such as owners, creditors, suppliers, and the government (for tax purposes).
When recording the original transaction documents in a journal the accountant places them in certain accounts.
Accountants use five major accounts to prepare financial statements:
1. Assets. Assets are what a business owns, property that have money value. Assets include the following:
· Cash (cash on hand and deposits in banks)
· Accounts receivable (money owed to a business from customers who bought goods on credit)
· Inventory
· Investments
· Land
· Equipment
· Buildings
· Motor vehicles
· Patents
· Copyrights
Assets are divided into three categories:
1) Current assets (items that can be converted to cash within one year),
2) Fixed assets (items such as land, buildings and fixtures that are relatively permanent),
3) Other (intangible) assets (patents and copyright).
2. Liabilities. Liabilities are what the business owes to others. They include:
· Accounts payable (money owed to others for merchandise and services purchased on credit, but not paid for yet),
· Accrued expenses payable (expenses the firm owes that haven’t been paid),
· Bonds payable (these represent money loaned to the firm that it must pay back).
Liabilities are divided into two categories:
Current liabilities or obligations that must be paid within one year, such as accounts payable.
Long term liabilities or obligations that will not be paid within one year, such as bonds.
3. Owners’ equity. It is assets minus liabilities. For sole proprietors, owners’ equity means the value of everything owned by the business minus any liabilities of the owners (for example, outstanding loans). For corporation, the owners’ equity account records the owners’ claims to funds they have invested in the firm (capital stock) plus earnings kept in the business and not paid out in dividends (retained earnings).
4. Revenues. Revenues is the value of what is received for goods sold, services rendered, and from other sources. That includes sales revenues, rental revenues, commissions, royalties.
5. Expenses. They are costs incurred in operating the business, such as rent, utilities, salaries and wages, insurance, advertising etc.
Financial documents
The two most important financial statements are: the income statement and the balance sheet.
1. The income statement is also called profit and loss statement. It summarizes all the resources that came into the firm from operating activities (called revenue), money resources that were used up (called cost of goods sold and expenses), and what resources were left after all costs and expenses were incurred (net income or net loss). It reports the results of operating over a particular period of time.
2. The balance sheet is the financial statement that reports the financial position of a firm at a specific time. The words "balance sheet" imply, that the report shows a balance, an equality between two figures. That is the balance sheet shows a balance between assets and liabilities plus owner’s equity.
The formula Assets = Liabilities + Owners’ equity is the basis for the balance sheet.
On the balance sheet, you list assets in a separate column from liabilities and owner’s equity. The assets are equal to or are balanced with the liabilities and owners’ equity.
Exercise 16. True or false?
1. Accountants use two major accounts to prepare financial statements.
2. The main financial statements are purchasing documents and payroll records.
3. Liabilities are what a business owns.
4. Long term liabilities must be paid within a year.
5. The basis of a balance sheet is a formula Assets = Liabilities + Owners’ Equity.
Finance
Finance is the function in a business that is responsible for acquiring funds for the firm and managing funds within the firm (planning, using and controlling money effectively).
A financial plan for a business specifies the amount of money needed for various time periods and the most appropriate sources and uses of funds.
Long-term financing is money, obtained from the owners of the firm and lenders who do not expect repayment within 2 or more years. Long-term capital is used to buy long-term assets such as a plant and equipment and to finance any expansions of the organization. Initial long-term financing comes from three sources:
1. Equity capital comes from the owners of the firm in a form of personal savings, friends’ loans, and mainly sale of stock.
Advantages of selling stock are:
· Because stockholders are owners of the business, their investment never has to be repaid.
· There is no legal obligation to pay dividends (a share of the profits) to stockholders; therefore, income can be used for additional growth.
· Selling stock improves the condition of the balance sheet. Because no debt is incurred, the corporation is stronger financially and able to borrow funds more easily.
However, there are some disadvantages:
· Because stockholders are owners of the firm, they can vote through the board of directors, on who will manage the firm and what the policies will be. Having other owners takes away some freedom and control from those who started the firm and invested much time and effort in getting it started.
· Equity financing is relatively expensive form of fund rising. It is more costly to pay dividends than interest because dividend income is taxed twice – it is taxed at the corporate level and taxed again as income to the stockholders.
2. Retained earnings is income that the firm earns from its operating. As dividends a taxed twice, both the corporation and the stockholders may prefer that the company keep (retain) those profits and reinvest them. This benefits stockholders because the company can prosper and grow using those profits. It also benefits the firm in that it has more money to use. The profits that the company keeps are called retained earnings, therefore, because they are retained rather than paid out in dividends.
3. Debt financing. A financial alternative to selling stock is to sell bonds. A bond is the certificate that shows that a person has loaned money to a firm. With debt financing the company has a legal obligation to pay interest payment to bond holders. The amount of interest a company is willing to pay to borrow funds is written on the bond. How high that interest rate must be depends on how risky the company is and what the prevailing interest rate is.
The advantages of selling bonds are the following:
· Unlike stockholders, bondholders have no vote on corporate affairs, thus management retains control over the firm. Bondholders are creditors, not owners.
· Bonds are more flexible than stock. Whereas stockholders have ownership forever, bondholders represent more temporary sources of funds that can be tapped when needed.
Bonds also have their drawbacks:
· Bonds are an increase in debt (liabilities) and may make it more difficult to obtain other financing.
· Interest on bonds is a legal obligation. A corporation cannot delay or halt such payment as they may do with dividends.
· Interest payments on bonds affect the firm’s cash flow negatively in that they come out of the cash account.
Short-term financing. Small business rarely use stocks and bonds as sources of capital. Day-to-day operations of the firm call for careful management of short-term financial needs. Cash may be needed for additional inventory or bills may come due unexpectedly, so a business sometimes needs to obtain short-term funds when other funds run out. Short term funds are those that are scheduled for repayment in less than a year. Short-term financing includes trade credit, family and friends, commercial banks, factoring, commercial paper, and internal sources.