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INTRODUCTION TO COMMERCE
 Commerce is trade and aids to trade or all activities that aids the distribution
of goods and services from the primary production to the consumer.
TRADE
 Trade is the buying and selling of goods and services with view of making
profit. Trade is divided into two categories, which is home and foreign trade.
 Home trade is trade done within a country and is divided into retail and
wholesale trade, retail trade is the selling of goods in small quantities while
wholesaling is the selling of goods in bulk (large quantities). The person who
sells goods in large quantities is called the wholesaler.
 Foreign trade is trade done between two or more countries (outside) and is di-
vided into imports and exports. Exports are the goods going out of the coun-
try while imports are the goods coming into the country. Aids to trade exist to
help trade to function, if there was no trade there would be less reason for the
aids to trade to exist but commerce would still exist because it also assists pri-
mary and secondary industry to function

THE PURPOSE OF COMMERCE

The purpose of commerce is to satisfy human needs and wants.
It aims to organise the most efficient distribution of goods and services in order to
satisfy the human needs and wants, where as trade aims at making profit. Profit is
the reward of doing trade.

Aids to Trade
Commercial activities are essential to those engaged in Secondary Industries such as a
Manufacturer of textiles in the following ways:

Trade is essential to those engaged in Secondary Industries to buy/purchase, raw ma-

terials
Such as cotton and selling of finished products goods such as blankets in order to
make a profit

The meaning of commercial activities

- Includes all activities concerned with the distribution of goods and services
and raw materials or partly finished products
- At all stages of production
- And includes trade and aids to trade
- That is Banking, Insurance, warehousing, advertising, transport and com-
munication
- Trade is essential for the purchase of raw materials/finished goods
- And sale of goods and services at a profit

Advertising
- to obtain information on sources and suppliers/where to get goods for sale or
the raw materials to be used in the industry
- to persuade potential customers to buy goods and services available on the
market
- increases the sales

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- to advertise for workers/job vacancies/recruiting required staff

- to give information to customers

- it can be by television, radio, newspapers, electronic mail (e-mail), telegram,
fax, magazines, posters etc.
Banking
- is essential for depositing receipts from sales
- It facilitates payments, through credit transfer, standing orders, discounting
bills of exchange, cheques and direct debit .
- provides finance for the customers who are in need of more money through
loans and overdrafts

Communication
- is essential to contact suppliers of raw materials and customers
- and to settle queries or payments,
- allows customers to place orders
- it organises survey to promote business activities
- allows all forms of business information to travel and finalise their transac-
tions through telephone, Electronic-mail, telex, fax, internet, letter, data
post, cellular phone

Insurance
- is essential to provide security or cover (indemnify) or compensate
- against any financial losses of building, raw materials, finished goods,
equipment from fire, damage of goods in transit/theft
- to cover claims from third parties such as employers liability and public li-
ability

Transport
- is necessary to delivery/carry raw materials and equipment to the industries

- moves employees to and fro work

- carries finished products to the market
- it can be by road, rail, sea, and air.

Warehousing
- is essential for the storage/keeping of raw materials awaiting procession
- and finished goods/products awaiting demand or orders from the customers
as some goods are seasonal such as Jerseys, raincoats
- It protect from adverse weather conditions and deterioration etc.
- It allows production to take place in anticipation of demand
- It evens out prices/avoids price fluctuations and helps to prevent shortages

- It protects the goods from adverse weather conditions

Production
The Meaning of Production
- Production covers all activities, which contributes to the satisfaction of the
consumers’ demand for goods and services or needs and wants or gives utili-

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ties can be defined as the provision of goods and services to satisfy human
needs and wants.
- This includes industry both primary (obtains raw materials from nature)
and secondary industries(processes raw material into finished products) ,
- Commerce is trade and aids to trade,
- Concerned with the distribution of goods from the producer to the consume
- and direct service, provides personal and public services to individual citi-
zens
- such as education provided by the teachers, health care provided by nurses
and doctors, legal advice provided by the lawyers, security provided by po-
lice officers and entertainment provided by the actors.

The three branches of production

An industry is a branch of production that deals with the extraction raw materi-
als/natural resources from the ground and process/convert/transform them into semi
finished or finished products (goods)
Commerce is trade and aids to trade, is the branch of production that deals with the
distribution of goods and services from the industry(place of extraction or manufac-
turing) to the Consumers/place of demand/scarcity
Direct service is a branch of production that plays an indirect role in production and
whose services are essential in enhancing production. It provides personal and public
services to individual citizens. These includes teachers, doctors, nurses, policemen,
lawyers and any service rendered by service providers.

How the three branches of production are linked to each other

- all branches contribute to production either indirectly or directly
- they are interdependent in their roles
- as they bring about the provision of goods and services in order to have util-
ity/satisfy human needs and wants
- goods extracted/produced must be taken/distributed through trade and aids
to trade
- in the process roles of policemen needed to maintain law and order may be
needed, roles of lawyers to uphold justice may be needed, medical facilities
provided by nurses and doctors may be needed by producers and manufac-
turers as well as other service providers

The Effects of the industry on the environment

- it causes soil acidity and infertility
- waste disposal
- unplanned settlement
- causes pollution, (air, water and noise)
- occupational health hazards (radiation)

Possible solutions to environmental pollution

- government policy
- Civic education
- Provision of public utilities
- Provision of dust bins
- Provision of posters in the industrial area.

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Human Needs and Wants

Needs
These are basic that that we require in order for us to survive (survival motive) or the
things that we can not do without. There are three basic human needs, that is, food,
shelter and clothes. To deny one food, shelter and clothes is actually the violation of
human rights.

Wants
These are the things that we need in order to improve the quality or standard of our
life or to live a more meaningful, enjoyable and luxurious life. We can do without
them. This includes a radio or a television to provide us with news and entertain-
ment, a car to move us to far places, a refrigerator to keep our drinks or food cool, a
cellular phone to contact or talk to our friends and relatives. We can not die without
these things.

Goods and Services

All these things which we need in our day to day life are called goods and services.
Goods are the physical or the tangible things that we can see, touch, and weigh or
measure. Services on the other hand refers to the work done by other people, they
are intangible (we can not see them or touch them) such as medical treatment, enter-
tainment, security, tourism and transport.

The Role of Commerce in Production

- Buying of raw materials, spare parts and machinery
- Distributing goods from the producer to the consumer
- This is done by retailers, wholesalers, importers and exporters
- With the help of transport, warehousing, banking, advertising, communica-
tion and insurance.

TYPES OF PRODUCTION
(a) Direct Production
- This is the production of goods for one’s own use
- It is done on subsistence level without need for exchange/trade
- it directly satisfies one’s needs and wants such as a farmer who grows only
enough maize or keeps enough live stock for his own consumption is involve
in direct production.
- If people where to provide all that they need by themselves, they would little
or no need for trade. In other words they would be self sufficient

(b) Indirect Production

- This is the production of goods for the benefit of others/sale.
- It involves trading of what has been produced so as to obtain what one can
not produce.
- Therefore it depends on trade and makes people to specialise In one field so
as to sell their value.
- This is the most common type of production in the modern society, where
few people satisfy their needs directly by themselves.
- In this type of production people co-operate with each other to satisfy the
needs or wants of everyone.
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- People usually engage in one particular occupation which they are best
suited and sell their products or labour in exchange of the goods or services
they need.
- For example a farmer sells his farm products to other people like doctors to
obtain medical services or even to buy machinery to be used on the farm.

STAGES OF PRODUCTION
Production whether direct or indirect can be placed into three stages. These are pri-
mary, secondary and tertiary production.
(a) Primary Production
This is the first stage of production.
It is concerned with the extraction of natural resources from the ground.
These are either above or underground. The term natural resources includes:-
 The minerals underground
 Fish in the water
 Trees in the forest
 Animals in the wild
 Fertile soil and good climate
Most of the outputs of the primary production are in raw or unusable form. Gener-
ally, the products obtained at this stage have to go the secondary stage of production
for processing in more useful goods except for some farm products such as apples,
water melons, oranges, peaches can be eaten straight from the farm

(b) Secondary Production

This is the second stage of production. It is the transforming of raw materials
into semi finished or finished goods. It consists of manufacturing and construction
industries

(i) Manufacturing Industries

This is the transformation of raw materials into useable products such as the making
of shoes, biscuits, vehicles, clothes, blankets, television sets and radios. In some cases
the raw materials are turned into semi manufactured goods into one factory and then
sent to another factory to be finished into a better and more complex product. For
example a steel industry makes steel and sends it to the car-manufacturing factory to
manufacture car parts before they are assembled into a car, which is very useful to
us.

(ii) Construction
This includes building of roads, bridges, houses and other construction work. This
process uses both products from the primary and secondary industries to assemble or
build a house, bridge or dams. The builder for example uses rocks extracted by
quarrying, cement extracted by mining, timbers extracted by forestry, steel, paint,
roofing sheets, window glasses and nails obtained from manufacturing and many oth-
ers to build a house.
© Tertiary Production
This is the third and last stage of production. It involves the provision of services
that helps in the transfer of finished goods from the factory to the consumer. There
are two services involved. Firstly the commercial services which involves storing of
goods, transporting them, advertising them, insuring, providing finance and selling
them. Secondly, there are also direct services, which plays an indirect role. For in-
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stance, the services of the doctor, policemen, nurses, doctor, musicians, actors, law-
yers, architects and sportsmen may appear to be remote from the process of produc-
tion and distribution of goods, but they are not. Doctors and nurses, for instance,
make invaluable contribution to production, by making people health, strong and
ready to work, they indirectly aid production.

FACTORS OF PRODUCTION
Before the goods and services are produced, there must be capital, someone with the
idea or the skill to organise the business, land and labour. These are referred to as
the factors of production.

Capital
- includes money, buildings, machinery, raw materials used to produce fur-
ther goods
- and all man made assets used in the production of goods and services.
- Providers of capital are called capitalists/investors
- Capital can be accumulated by savings.
- The reward for capital is called interest.

Enterprise or organisation
- The ability to organise the other factors of production
- Enterprise involves making decisions
- Such as expansion of the business, ploughing back, buying a new motor ve-
hicle
- For production to take place, someone must have the idea and the skill to
organise, direct and control the production process.
- This person/provider is known as the entrepreneur or organiser. He is re-
sponsible for deciding what should be produced, how to produce it, where
and when to produce it. This decision involves risks and a special skill.
- The entrepreneur gets profit/loss as his/her reward.

Labour
- This is human effort or energy made/used in the production of goods and
services.
- It can be manual(physical) and skilled(or mental) labour. Labour is limited
in supply.
- Providers of labour are called workers
- workers receive/get a wage or salary as their reward for labour

Land
- includes all kinds of natural resources found on earth and underground
- Land refers to buildings, minerals underground, rocks of the crust, fish in
the water, trees and all other natural resources. It therefore, includes the
earth and the oceans and everything which grows in them.
- Providers of land are called landlords
- Landlords receive rates/rents/loyalties as their reward

The Meaning of Specialisation

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- It is the concentration by an individual on a specific task or occupation or on

a narrow range of work within a particular occupation for which their abil-
ity or resources best suits them
- Such as Teachers, doctors, nurses, lawyers, engineers and farmers
- Specialisation does not only apply to individuals but also to
- countries/regions producing goods or services for which they are
- best suited
- Such as Malawi specialises in tea production, Botswana wool,
- Mwinilunga in pineapple and china in rice
- It allows division of labour to take place
- It leads to greater skill and efficiency amongst workers and
- increased output.
Specialisation depends on trade and trade depends on specialisation
- if a person concentrates in only one specific task/product or
- performing one task,
- s/he may rely/depend on others to produce needs/wants which s/he
- does not produce,
- for example, a farmer depends on the medical doctor for health
- and the medical doctor depends on the farmer for food,
- these can only be obtained by selling his/her surplus labour in order to buy
the goods and services required for his/her daily survival/living.

- Therefore, without trade specialisation could not take place

- and individuals would have been self sufficient/reliant, that is,
- provide all they need by themselves.

Advantages of Specialisation
- workers become skilled
- workers become efficient
- it leads to increased output/high production (mass production)
- time is saved because workers do not have to move from one
- operation to another
- training is easy as jobs are easy to learn
- everyone’s ability is made use of
- development of specialist machinery to perform the
- specialised task becomes easier
- labour is potentially more mobile as it is often possible to employ
people who do not need any related qualification and the tasks
- are simple and easy to learn

Disadvantages/dangers of Specialisation
- work becomes boring
- individual skill and crafts are lost due to use of machinery
- creates unemployment as greater use of machinery leads to
- unemployment
- there is inability of slow workers to keep pace with others as the gap
between management and workers tend to be widened
- Products are all the same as the machine takes over, the goods are
made in standard sizes and the choice of goods available to the con-
sumer becomes limited.
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- workers become dependent on each other (in case of illness,

- production is disrupted)
- it is difficulty to find employment after loss of job due to limited
skills
- discontent among workers may lead to low productivity
- Occupational hazard/there is a risk of contracting diseases,
- e.g. Those in asbestos industry risk contracting cancer.

Possible solutions to occupation hazards/dangers

- have constant medical check ups for workers
- provide protective clothing
- provide milk for workers
- deliberate government policy
- provide entrepreneurship

HOME TRADE
RETAIL TRADE
Retailing is the selling of goods in small quantities to suit the requirements of the con-
sumers. A person who sells the goods in small quantities is called the retailer.

EFFECTS OF RETAIL ON THE ENVIROMENT

 They cause poor urban sanitation
 Results in the mushrooming of street vendors
 Results in unnecessary littering of the environment
 Causes unnecessary squatting
 becomes health hazard such as cholera, air pollution and water pollution

POSSIBLE SOLUTION TO EFFECTS OF RETAILING ON THE

ENVIRONMENT
 Deliberate Government policy such as keep Zambia clean campaign
 Civic education
 Provision of dust bins/rubbish pits
 Provision of public utilities such as toilets
 Building more markets

Functions of the retailer

 selling to customers/breaking bulk, the retailer buys the goods in large quan-
tise from the wholesale or the manufacturer and then breaks them
 into smaller quantities to suit the consumers
 buying from manufacturers/wholesalers,
 offering variety of goods to meet the consumers wants
 displaying goods in retail shops
 pricing goods before selling them to consumers

 preparing the goods for sale such as packaging them.

 giving after sales services and pre-sales service
 offering credit to trusted customers
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 giving advice/personal service to consumers especially on new goods

 offers delivery service on some goods like furniture and refridgerators

 advertising/promotions/special offers for his/her business to the public

 providing goods in suitable quantity
 supplying local needs to the consumers
 acting as a link/middleman in the chain of distribution between the
 consumers and the wholesaler
 to pass on information to wholesalers on consumers complaints, suggestions or
praises on the products
 opens his/her shop to suit the consumers

Factors influencing the choice of site/location

- Cost of site in relation to anticipated turnover and profit, that
is town centre site too expensive
- Is there any competition with the same type of shops nearby
- Are there sufficient customers in the area requiring sports
equipment
- Is the site in the shopping area that is, are there nearby shops
to attract passing trade
- Is there any possibility of trade growth in the area as a result of
population growth or employment
- Security of the shop
- Prices of the goods, the prices of the goods should be within
what the customers or consumers can afford
to buy(within the income of the consumer)
- Accessibility of the shop, the shop should be easily be accessible
by the consumers with less difficulties
- If there is good communication and transport network and
easy accessibility to transport
- source of supply, the shop should be located where there is reli-
able source of supply for goods wanted by the consumers
- Whether the site is in the busy area , for example a shopping
mall at the road junction or simply in an area where
it is able to attract passing trade.

Other factors to be considered if the business is to successful

- experience, have you sufficient experience in business
- Capital have you sufficient capital or the source of capital to meet the
demands of the business envisaged and to avoid daily
- cash flow problems
- advertising policy what advertising policy may be necessary
- prices or range of goods ,what prices or range of goods are
- suitable for the area in order to avoid slow lines
- What quantity will be required to avoid overstocking
- prices or range of goods, what prices or range of goods is to be used
- Method of Sale, whether sales assistants will be required or whether
some degree of self service may be operated
- Whether to deal on the cash basis only or to give credit

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- layout for the store, what would be the best form of layout for the
store or the best way to display the goods/equipment
- What make up will be required to make the required profit
- Opening and closing time must suit the customers
- Legal requirements
- Name of the shop, the name of the shop must be easy to remember
and eye catching

HINTS ON HOW TO IMPROVE THE BUSINESS

 The service offered must be good with a smile
 Prices should be as competitive (low) as possible
 Quality products should be worth the price
 Provide a wide variety of goods and services
 The shop should be clean and attractive
 The goods should be well displayed in appropriate sections
 If possible find a better supplier offering better terms
 Improve on the facilitation of after sales service
 Improve on the credit buying rates to the customers
 Advertise locally

Factors to consider when expanding the business

- Have a vision of what you are going to do
- Concentrate on your original idea. Avoid diverging your line of
business
- Expand in bits. Do not be too ambitious
- There might be need for finding new ways of doing things, for
- example, as the business grows, there might be need for
- delegation. You might need to employ the manager to manage the
business because good entrepreneurs are not always good
- managers
- See to it that there is enough structures to accommodate the
- expansion
- Focus on your core customers
- Keep record of your business activities
- Make sure there is enough cash coming into the business as
- you spend money on expansion
-

TRENDS IN RETAILING
Retail trade has undergone through a number of changes in recent. Trends are
changes or developments which have taken place in retail trade
The main changes has been due to the following reasons:
The change in the pattern of spending due to the rising in the standard of living
- Fewer customers now request for the delivery service resulting in lowering the
retailers cost
- the quickening pace of modern life and shopping
- The growing pressure of competition among retailers and rising labour costs.
- The need to save/cutting intermediary costs
- New technological development which has brought about the use of cash
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registers, computers which are now widdely used in computerised

stock control

PREPACKAGING
Pre-packaging is the putting of goods in distinctive packets of standard sizes
such as boxes, bottles, wrappers, tins, cartons etc. by the manufacturer before
(prior) selling them to wholesalers, retailers or consumers. It allows a customer to
handle the goods without damaging the content.

The reasons for prepackaging the goods includes the following:

 to facilitate the branding of the goods, that marking names on the
goods
 to give a longer shelf life to the goods
 to facilitate self service of the googs
 to allow the goods to be put in amounts suitable for the consumers
 to prevent damage to the goods while they are in transit or in store
 to reduce the possibility of goods being contaminated
 to make transportation, storage and display of the goods easier
 to attract the customers with distinctive packaging
 to protect the goods when handled by the customers
 to save time of weighing and wrapping goods each time customers ask
for them
 to help in advertising of the goods
 to allow customers easily identify goods they need

The effect of prepackaging on retail trade

 it has contributed to the development of self service
 as goods can be displayed on the shelves and remain there for
 a long time
 and customers can serve themselves
 names of the products can easily be written on the packages

advantages of packaging to the manufacturer

 Without packaging, the brand name could not be shown on the goods
 The package may be made distinctive to attract customers
 Packaging prevents damage to the goods both in sore and in transit
 The goods may be packed in amounts suitable for the consumers
 It make transportation and storage of goods easier
 It preserves the life of goods over a longer period of time
 It builds brand loyalty
 It establishes the quality of the goods
 It faciltates advertising

Advantages of prepackaging to the retailer

 The goods have a longer shelf life, for example, tinned fish and Bonita
milk can stay on the shelves for months without going bad
 as the goods are protected when handled by the customers
 pretects the goods from contamination due to constant handling by
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consumers
 Speeds up the service by eliminating the need for weighing and
wrapping of the goods
 It attracts the customers to buy the goods
 Prevents goods from damage while in store or transit
 It facilitates branding of goods
 It facilitates advertising of goods
 staff is kept at a minimum hence saving costs
 Allows instruction to be written on the packag
 It helps to build brand loyalty
Advantages of packaging to the consumer
 Goods can easily be carried
 Goods can easily be handled
 Doods can easily be identified
 Benefits from improved hygiene and preservation of the goods
 Goods are packed in suitable amounts for the consumers
 Requires less help from the shop assistant as the package contains
relevant instructions
 Goods may be cheaper

Disadvantages of packaging to the manufacturer/producer

 More money is spent on the materials and decorative writing,
 Therefore it may be wasteful in terms of money and other resources
spent on it
 Packaging materials may pollute the enviroment especially where
empty cans, plastics,tins and boxes are thrown anywhere
 Much of the space in storage houses and transporting vehicles is taken
up by packages

Disadvantage of Packaging to the Retailer

 It is expensive and wasteful in terms of resources

BRANDING
Branding means the use of a name or mark to distinguish one producer’s product
from another. It makes the product unique and easy to identify.

Reasons for Branding

 To enable the goods be identified
 To allow the goods be advertised
 To facilitate self service in retail shops
 To assist producers in setting standards of quality for their goods
 To build brand loyalty
 To enable the goods be displayed on the shelves so that they can be sold
in self service shops

The effects of branding on the Retail Trade

 it has contributed to the development of self service
 customers no longer depend on the shop assistants for the selection of
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goods(has resulted in the elimination of personal service)

 as customers are able to identify and choose the goods on their own

The advantages of branding to the manufacturer/producer

- branding helps to distinguish its products from those of its
competitors
- once the brand name is registered, no other company may be
allowed to use the same name again
- establishes the company’s name as representing a quality of
standard of the goods
- and may create a brand loyalty and reputation of the business
- branding allows/enables the product to be advertised
- branding facilitates display of the goods in a self service store.
- Branding gives the goods an individual identity

Advantages of branding and prepackaging to the Retailer

- The goods are more easily displayed and stacked/stored
- it facilitates self service
- as the customers can easily identify the goods without help from the
staff
- It facitates advertising of the goods
- Customers can easily identify the goods
- Possible reduction of shop assistants due to self service

Disadvantage of branding the manufacture or producer

 More money is spent when advertising similar products in an effeffort
to make an important differences between them

Disadvantages of Branding to the Retailer

 He may be forced to stock many brands of the same type of good in
order to satisfy the consumer,s needs
 This may results in stock piling

Disadvantages of Branding to the consumer

 may be forced to pay more due to the cost of advertising and packaging
 excessive advertising campaigns to promote the sale of the brands may
be false, misleading and harmful to the consumers

Goods are purchased direct from the manufacturer because:

 it is cheaper as goods are purchased in large quantity/bulk
 it is sufficient to enable better terms to be negotiated than be obtained
from the wholesaler such as large trade discount, this allows goods to
be sold at a lower price than a small retailer
 in the case of supermarkets, the goods can be delivered direct to
regional warehouses and distributed direct according to branch
requirements
 supermarket chains are large enough to undertake the functions
 of the wholesaler

Shopping complexes
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A shopping complex is a variety of shops in the same location, under different

management and do not compete directly with each other but work to stimulate
business for one another. An example of a shopping complex in Zambia is Manda
Hill and Arcades situated along the great East Road in Lusaka. It is also referred to
as a shopping mall.

Advantages of a shopping complex to the:

(a) Retailer
 shops do do compete directly with each other, but work to stimulate
business for one another.
 they are large enough to carry out national wide advertising to attract
the customers from all over the surrounding areas.
 they are located outside the town centers where land is cheap hence
saving overhead costs

(b) Consumers
 they purchase all their requirements from one place since there is a
variety of shops in the same locaation, such as chemists, department
store, etc.
 they are locaated in free trafic areas
 they are easily accessible by the customers as they are near the bus
stops
 they have extensive parking for the customers
 they also provide banking facilities and other additional ammenities
such as restaurants and entertainment like video shows.
 may offer competitive prices/goods may be low priced
 the atmospere is very conducive for shopping

Disadvantages of shopping complexes

 supermarkets at shopping complexes incur extra expenditures on
providing parking facilities and on the staff employed to retrieve the
trolleys used to take the goods to the nearby car park
 a large area of land is required for avariety of shops and car park
 consumers cover long distances to reach the shopping complexes and
they have to pay for taxi and mini bus fares.

SELF SERVICE
Self service is the method of selling where the goods are well displayed on the shelves
within the easy reach of the customers. It was firstly used in supermarkets, but
nowadays it is used by main retail outlets.

CHARACTERISTICS/FEATURES OF SELF SERVICE

 Goods are displayed on the shelves within the easy reach of the customers,
section by section or according to their families just lije books in the library
 Customers serve themselves
 Goods are usually prepacked, branded and priced in bar codes
 Facilities such as trolleys and shopping baskets are provided for the
customers to put their purchases
 Customers pay at check outs/pay desks are installed near the exist where the
customers pay from
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 It requires few sales assistants, mainly to replenish the stock

 It requires large selling space, and large parking area
 Loss leaders are used to attract customers into the shop
 Customers save on time because they serve themselves
 Impulse buying is common

The Development of Self Service

Self service has developed because it has benefits (advantages) to both the
retailer and the customer.

Advantages of self service to the Retailer

- less staff is required (possible reduction) as customers serve
themselves
- thus saving on labour costs, tht is low wage bill to be paid
- the use of loss leaders attracts customers into the shop
- the staff requires less specialised knowledge as the goods are
packaged and instructions are written on them
- it leads to impulse buying which results in high turnover and profit

Advantages of Self Service to the Consumer/customer

- possibly quicker service (saves time)
- has more time to browse and choose the goods at leisure without
being pestered by the salesmen
- the consumer is able to compare brands
- prices may be cheaper due to the use of loss leaders
- goods are attractively displayed in relevant sections hence making it
easier for the customers to find the goods

Its development has further been aided by both prepackaging and branding
which enables the goods to be clearly be distinguished by the customers without
assistance.

DISADVANTAGES OF SELF SERVICE to

the customer
 May lead to (encourages) impulse buying
 Lacks personal service/attention such as advice
 It is not suitable for the old and illiterate people
 Services such as delivery and/or credit may not easily be arranged,
though credit may be accepted through the use of credit card/cheque
cards
 The customer can not closely inspect the goods before buying them
because they are usually prepacked
 May be delayed at check out points especially during peak shopping
hours

The Retailer/Shop owner

 More trading space is needed and this may lead to high overhead expenses,
especially if the shop is located in town centres
 Pilferage or shop lifting is very common as the customers serve themselves
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and this may cause serious losses to the retailer

 The retailer have to incur additional costs in securing the shop shop lifting or
thefts by customers
 Constant handling of the goods may result in soiling and damages to the
goods though they are packaged
 Needs more capital for the equipment such as baskets, trolleys, cash registers
and display shelves.

ELECTRONIC COMMERCE (E-Commerce)

 Electronic Commerce is the buying and selling of goods and services on

 internet.
 Electronic commerce is also referred to as on line shopping.
 Electronic commerce is one of the latest trends in retailing.
 Electronic commerce is about using computers as on line shops.
 On line shops are open for 24 hours a day and 7 days a week.

On line shops offer to customers and businesses a variety of high quality but cheap in
price products such as first and second hand cars, office equipment, furniture etc.
Many business people purchase goods from on line shops for resale
on local markets.

A person wishing to purchase goods or services on internet has to visit the website of
the on line shop or trader. Website is an internet provider such as Yahoo,
Hotmail, Excite etc.
When a person has found the goods or services he/she wants to buy, he/she will have
to make payment. The following are some of the modes of payment used for on line
transactions:

 Credit cards -The most popular method of payment for on line

transactions
 Bank transfers
 Money transfers
 Western Union etc.

Points to Consider when shopping on internet:

When shopping on internet, you should consider the following points:

 Carry out background check on companies offering on line stores that you in-
tend to deal with.
 This will avoid internet fraud brought about by unscrupulous people who set
up fake online stores that cheat people out of their money.

 Consider the legal terms of the online store you intend to deal with.
 This will enable you to know the policies of the company on matters such as
shipping, liabilities, refunds, delivery policy etc.

 Ensure that the website is secure when you send information like bank

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 account details to online store. Where a password is used, the word

 must have at least five letters for easy remembering. The password must not
be written down. This will prevent a wrong person from shopping at the
online using your account.

 It is advisable to start shopping on internet with small items and then move on
to bigger things.
 Spend more time looking for new websites and deals on offer.

What is electronic commerce?

- Electronic Commerce is the buying and selling of goods and
- services on internet.
- Electronic commerce is also referred to as on line shopping using
computers connected to the internet through the world wide
- website.
Explain the advantages and disadvantage of Electronic Commerce to
(i) the retailer or trader
(ii) the consumer

Advantages of Electronic commerce to:

(i) The owner of the online store (or retailer)
- The whole world is one huge market for internet users. Thus the market for
online store products is worldwide.
- Business is conducted by on 24 hours a day and 7 days a week.
- Shop buildings do not need to be expensively furnished because
- customers do not visit them.
- The online store may be located on outskirts of a town where land is
cheaper.
- Goods are not soiled or damaged in any way because customers do not han-
dle them.

(ii) The consumer

- Electronic commerce is open for 24 hours a day and 7 days a week, and
therefore consumers are able to purchase goods and services at any time.
- Consumers are able to purchase a variety of high quality goods, which are
cheap in price and may not be available locally.
- Online stores offer convenient shopping from the comfort of a consumer’s
home.
- Internet customers are able to decide on how they want their goods
- packaged.
- Online stores save consumers’ time and money from travelling to far places
in search of goods.
- No postage of letters for inquiries required.

Disadvantages of Electronic commerce to the owner of the online

store(or retailer):
- Many people find Electronic commerce too complex to use being the
- latest development in retailing.

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- Methods of payment for online transaction such as credit cards are not
commonly used in most developing countries like Zambia, thus limiting
online business.
- There is a possibility of credit card fraud.

Disadvantages of Electronic commerce to the consumer

- Unscrupulous people may set up fake online stores that cheat consumers out
of their money.
- Many people do not have computers, and therefore may have access to
- internets.
- Goods bought especially big items may take a long time to deliver.
- Goods shown on internet may not be the exact goods delivered.

VOLUNTARY CHAINS
This is another change that has taken place in the retail trade. They are usually a
group of independent retailers who have joined with the wholesaler in order to reap
the benefit of bulk buying. Members of the voluntary chain put their orders together
with the wholesaler who is also a member, the wholesaler is then able to buy goods in
bulk from the producer at factory price at a great discount.

CHARACTERISTICS OF A VOLUNTARY CHAIN

 They are mainly found in grocery trade
 They are normally organised by the wholesaler
 Individual retailers place their orders together with the wholesaler, who then
place a single order with the manufacturer
 The retailer gets the goods at factory price
 Policy/decisions are taken by representatives elected to the management
committee of the organisation
 The group undertakes national advertising and provides the members with
advertising leaflets and posters
 Ratail shop member trade under nationally known labels
 Member retail shop may commit themselves to purchasing goods from the
parent wholesaler
 There are some controls on the prices small retail shops may charge on the
goods
 Goods may be delivered straight to the small retail shops
 Each member retail shop may remain a separate business entity,
independently owned and controlled

Functions of the Voluntary Chain

- enable a large number of small retailers to obtain the advantage of bulk
buying
and to compete with large scale retailers if they agree to buy from cer-
tain wholesalers
- advertising assistance is offered such as national advertising
- credit/financial assistance may also be available

Advantages that may be obtained by a retailer who joins a voluntary chain

- benefits from bulk buying by the wholesaler(s)
- thus reducing prices paid by the retailers
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- Able to compete favourably with large scale retailers

- goods may be delivered to the retailers
- national wide advertising is undertaken
- advertising display material are supplied
- advice on stock display is given to the retailers
- financial assistance such as loans for the improvements to the premises may
be available

Advantages of Voluntary chain to the consumer

 consumers are offered good quality service because of the minimum standard
that may be set for member retail shops
 consumers may buy a variety of goods at reduced prices
 thereby offering a great service especially to consumers in the village where
large shops do not normally exisit\

Disadvantages of voluntary chains to the retailer

 the parent wholesaler may control the prices charged to the consumers
 member retail shops may not have total freedom to decide on the type of goods
to sell

Disadvantages of voluntary chains to the consumer

 prices may not be cheaper than those offered in large retail shops
 some consumers may not like the range of goods decided upon for sale by
voluntary chains

Trading Stamps
 are used as a form of trade discount or price reduction
 it is also one of the forms of sales promotion method

Reasons for using trading stamps

 to promote the sales of the business
 to encourage customer’s loyalty

How a Trading Stamp Scheme operates

 stamp trading companies sell trading stamps to retailers who keep them in
their shops
 each tome a customer buys goods of a certain value, a retailer will stick the
trading stamp in the specially provided book
 when the page is full the customer may convert the trading stamps either into
cash or goods at a trading stamp company

Adavantages of trading stamps to the stamp trading company

 it makes profit on the sale of trading stamps
 benefits from large discount obtained when buying goods in bulk meant for
free gifts to customers

Advantages of trading stamps to the retailer

 benefits from the increase in the sales of goods
 encourages customers loyalty

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Disadvantages of trading stamps to the retailer

 cost of trading stamps increases business overheads
 the retailer is inconvienced by the additional time and trouble of distributing
trading stamps to consumers

Disadvantages of trading stamps to the consumer

 may have difficulties in exchanging trading stamps for cash or goods
 may pay for the cost of trading stamps in high price of goods
 the consumer may be forced to accept goods not desired in exchange for
trading stamps


Explain the meaning of Automatic Vending Machine;

- it is a retail machine that releases items required when a coin/token is

pressed in the slot
- used in busy central sites such as hotels, bus and rail stations
- sells the goods such as drinks, chocolates, cigarettes and stamps
- can be hired or be bought
- it is a labour saving retailing machine
- it is available 24 hours daily

CREDIT BUYING AND SELLING

In recent years, credit buying and selling has become very common especially in the
sell of consumer durable goods such as motor car, computers, stereos,cookers,
refridgerators and television sets, as these type of goods may require more money for
the consumer to procure them
Reasons why businesses purchses on credit
- do not have the capital to pay immediately
- it a common practice and businesses are encouraged to do so
- may sell the goods bought before payment is due and use the money to pay
for the debt
- it is a short term form of financing the business
- to overcome cash flow problems/liquidity problems

There are two major forms of buying and selling on credit. Namely;

(a) Credit Sales Agreement or Deferred Payment

Is the buying of non durable goods such as clothes and food on credit by which
the customer becomes the legal owner of the product immediately the first
instalment is made

Main Features of Credit sale Agreement

 the buyer takes possession and ownership of the goods of the product
immediately the first instalment is paid
 repayment of the product is made in regular instalments
 the goods can not be repossessed if the buyer defaults in payment
 however, s/he can be sued for the remaining balance
 is suitable for buying non-durable goods whose value depeciates quickly

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 where the credit sale agreement is signed away from the trader’s
premises, the buyer may cancel the agreement within the cooling off
period.
 A cooling off period is a period of five days from the date of signing the
credit sale agreement in which the agreement may be cancelled, goods
returned and customer’s deposit refunded, thus returning the parties to
their original positions

Advantages of Deferred payment to the retailer

 Enables business sales to increase
 May avoid wastage of perishables and the risk of goods going out of fashion
 Has closer personal contact with the customers for possible future deals

Advantages of deferred payment to the consumer

 Takes possession and ownership of the goods immediately the first payment is
made
 The retailer can not repossess the goods if the buyer defaults in payment
 Enjoys the use of the goods while still paying for them

Disadvantages of deferred payment ot the retailer

 May suffer bad debts
 Goods may not be repossessed
 Where court proceedings are initiated, they may take too long and are too
costly
 He loses the right of ownership to the goods immediately the buyer makes the
first payment
 May require extra capital to finance goods taken on credit

Disadvantages of deferred payment to the customer

 May be forced live beyond his means by getting a lot of goods on credit
 Thus burdening himself/herself with instalment payments
 Prices may be higher than the cash price

(b) Hire Purchase

This is the buying of durable goods such as vehicles, furniture and machinery
by initially paying a deposit followed by equal monthly instalments over a given
period of time
The main Features of Hire Purchase
- Initially a deposit is paid followed by equal monthly instalments paid over a
period of time until the total price is paid which includes interest
- Interest is usually expressed as a percentage of the market price of the item
- The item bought bought may not be sold until the payment is completed
- This is because, the buyer only becomes the legal owner of the goods after
paying the last intalment,
- hence the item purchased can not be sold until the last instalment is paid
- The buyer has the use of the goods whilst paying for them
- It usually deals with durable goods such as machinery, vehicles, stereos,
refridgerators, buildings and furniture.
- In the event of the buyer failing to pay the instalments, the goods may be
repossessed,
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- however, it is subjected to certain legal limitations,

- for example, if 1/3 of the purchase price has been paid, then court order is
required
- There is usually a maximum value of transactions

Advantages of Hire Purchase to the Buyer

- it enables the buyer to acquire the goods which s/he can not afford on cash
basis
- the buyer has the use of the goods whilst paying for it
- some goods may pay for themselves such as tractors /vehicles, stereos,
machinery, cookers and refridgerators
- the buyer may obtain the goods on current price to beat inflation
- by spreading payments over a period of time, he can save money for other
needs
- it may improve the standard of living of the buyer
- it is an indirect way of saving though not in form of cash but property

Disaadvantages of Hire Purchase to the Buyer

- may take on the great burden by forcing him to live beyond his means
- in case the buyer defaults in payment the goods may be repossessed and the
buyer will lose both the money paid and the article
- goods are expensive as interest is added to the cash price
- the buyer only becomes the legal owner of the item after paying last
instalment
- hence he can not sell the article until the last instalment is paid
- he may be tempted to go into many Hire Purchase agreement
- he may buy good he does not need

Advantages of Hire Purchase to the Retailer

 it increases the sale of durable expensive goods hence the retailer has high
turnover
 the seller may get high profit margin since interest is charged
 he may get commission if it is financed by the finance company
 has closer personal contact with the customers for future deals
 retails the right of ownership to the goods until the las instalment is paid

Disaadvantages of Hire Purchase to the Retailer

o Goods repossessed may not be worth reselling
o May suffer bad debts
o It involves a lot of paper work
o The retailer may be forced to employ several shop workers to collect
the instalments
o The process of repossessing the goods from the defaulting customers
may take long
o and my be too costly
o Much of the traders capital is tied up in debts hence it requires high
capitalinvestiment
o Court action against defaulting customers is very unpopular and may
turnish the image of the trader which may scale away customers
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The differences between Hire Purchase and Deferred Payment under Credit Sales
o In Hire Purchase, the buyer becomes the legal owner of the item after
paying the last intalment while in deferred the buyer becomes the legal
owner of the item immediately the deposit is paid
o Hire purchase deals with durable goods while credit sales deals with
non durable
o Under Hire Purchase, the goods may be repossessed in case the buyer
defaults in payment while in deferred payment the goods may not be
repossed but the buyer will only sued for the remaining balance
o Hire Purchase may be financed by the finance company while credit
sales may not be financed by the finance company
o Under Hire Purchase, the buyer can not sell the goods until all the
payments are completed but under deferred payment thre buyer can
sell the good any time as she becomes the legal owner of the goods as
soon as the deposit is paid.

The necessity of Hire Purchase to be controlled by legislation

o the purchaser may not fully understand the contract worded in legal
terms
o the charges may not be clearly be stated and they may be too high,
therefore, the Annual Percentage Rate or true rate of interest must be
stated with the Hire Purchase price and cash price
o repossession of the goods amy occur on trivial grounds if protection is
not given, that is if 1 /3 of the purchase price has been paid the court
order is required
o some salemen are too persuasive
o cooling off period (contract made outside business premises can be
cancelled) allowed under some circumstances

The Role of the finance Company in Hire Purchase

o The arrange Hire purchase and leasing terms
o the finance company provides finance by paying the supplier of the
goods the cash price for the item and the buyer becomes indebted to the
finance company who collects the instalments
o the raise money for Hire Purchase by allowing high rate of interest and
deposit allowing the seller commission on introduction
o the seller is essentially acting as an agent between the finance company
and the buyer
o the finance company makes it profit by charging interest on the amount
lent

why the consumers need protection when buying goods and services
o different consumers might be charged different prices (fluctuating
prices)
o the consumers might not receive the right content of the goods (under
weight goods)
o advertisers might make false claims (misleading advertisements)
o some salesmen are too persuasive to induce to the consumers to buy the
goods
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o some manufacturers might try to cut the production cost by using

inferior or dangerous ingrediates in the products
o some traders may over charge the consumers by fixing prices at high
levels

WHOLESALE TRADE
Intoduction
The word ‘whole’ simply means bulk and to sale is simply to transact, trade is the buying and selling
of goods and service with a view of making profit. Wholesale trade ican therefore be defined as the
buying and selling of the goods in bulk(large quantities). A person who sells the goods in large
quantities is known as a wholesaler. A wholesaler is a connecting link between the manufacturer
and the retailer, and being a middleman functions
Describe the functions of a wholesaler
- Buys goods in bulk from the manufacturer hence clearing the manufacturers’ production
line
- Warehouses the goods awaiting demand to ensure steady flow of goods, hence preventing
price fluctuation(evens out prices) and allowing the manufacturer to produce the goods
ahead of demand
- Breaks bulk and sells goods in smaller quantities to retailer
- Finances the retailer by providing credit and manufacturer by paying promptly
- Acts as an intermediary between manufacturer and retailer by passing
information/complaints to manufacturers
- Provides a variety and wide range of goods for the retailer and consumer which is gleened
from different producers
- Prepares goods for sale by branding and blending them.
- Provides transport (delivery) for goods from manufacturer and to the retailers premises
- Operating cash and carry warehouse.
- he is a risk bearer, that is by storing the goods on behalf of the producer or rtailer, the
goods may go out of fashion or they may be gutted by fire or stolen whilst in the
warehouse.

Services of wholesaler to manufacturer

- Buys goods in large quantities/bulk from manufacturer in this way the manufcturer is
able to clear his production lines and have less truck on his premises.
- Finances the manufacturer by paying promptly/paying within the credit period and this
affords manufacturer to have constant supply of goods.
- Provides information to manufacturer and this enables manufacturer to assess the present
and future of state of market.
- He acts as a middleman between the manufacturer and the retailer
- Warehouses seasoned goods on behalf of manufactures and therefore prevents a shortage
and price changes.
- Prepares goods for sale (branding, prepackaging and blending)
- Partly finished goods and becomes responsible of the wholesaler for finished process.

Services of a wholesaler to the retailer

- Sells in relatively smaller quantities to the retailer (breaking bulk)
- Delivers the goods to the retailer’s premises free of charge/offers transport
- Provides retailer with market information, which is passed on to the consumer, so that
they are able to know what new goods are coming on the market.
- Finances the retailer by providing credit
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- Provides the retailer with a variety of goods from various manufactuers.

- He acts as a reservoir
- He operates a cash and carry warehouse
- He acts as an intermediary between the retailers and the manufacturer
- Offers trade discount
- Allows the retailers to have a steady flow of goods at stabilised prices throughout the year

Services of a wholesaler to the consumer

- he ensures a stead flow of goods
- he stabilises the prices throughout the year
- he provides the consumers with a variety of goods
- he provides the customers with information from the wholesaler , such as consumer’s
complaints and suggestions
- offers special promotions that are passed on to the consumer
- he gives credit facilities to the retailer which results in an increase of retail shops being
opened near consumer’s home

How do the functions of a wholesaler affect the consumer

- May add to cost of goods
- Offer cash and carry service to customers
- Providers variety to retailer passed on to customer
- Offer special promotion passed on to consumer
- Offers cash and carry services to some retailer cheaper prices to consumers
- Introduces retailer to new products passed to customer.

Why is a wholesaler reluctant to undertake retailing

- Could be in competition with his own customers
- Can not afford to run both kinds of business
- Would need to live moe staff
- Would spread resources too thinly and so might not be effective in either.
- Would need to have two different kinds of Premises in very diffderent location

Reasons for the Decline of the wholesaler

- Growth of large scale retailing outlets who are able to undertake their own wholesale
- Whole saling functions being undertaken by manufacturer or retailer-saving
intermediary cost.
- Some retailers buying directly from manufacturers-reduced costs
- Increase in sale of branded and prepackaged goods-can be supplied directly from
manufacturer.
- Demand for speed delivery perishables.
- Increased trade in particular kinds of goods-fragile.
- the intoduction of mail order
- some large scale retailers are able to manufacture their own goods, hence eliminating bo
the wholesaler and the producer
- need to cut on the intermediary costs
- increase in trade of perishable goods such as bread and bouquets
- increase in trade of technical goods that may require installation by the manufacturer
such as Digital Satelite Television package(satelite dish) and computers
- demand for speed delivery of the goods such as Newspapers
- increase in trade of goods with low turnover such as furniture
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SURVIVAL OF THE WHOLESALER[strategies taken by the wholesaler for the continued

existence]
Despite the above factors working against the wholesaler, he has taken the following steps to
remain competitive:-
- formation of voluntary chains
- small retailers register as members and are supplied with the goods by the wholesaler
- and are conviniently situated where the retilers have established their shops
- small scale retailers do not have enough capital
- therefore they still depend on the wholesaler to supply them with the goods, to offer
them credit facility and delivery service.
- they operate co-operative wholesale society
- operates a cash and carry warehouse as well as retail in the same premises
- does not offer transport
- does not sell on credit

TYPES OF WHOLESALERS
CASH AND CARRY WHOLESALER
The cash and carry wholesaler is normally located on the outskirts of town and
probably on the
industrial area of business site.
Reasons for the location
- no need for prime retail site for display
- retailers will have own transport to travel and collect their goods
- site less costly and prices or costs must be kept as low as possible
- large space required for car park or delivery bays

Characteristics of a Cash and Carry warehouse (wholesale)

- membership may be required
- customers are normally retailers and consumers
- stocks a variety of goods
- they strictly sell on cash basis/no credit facility offered, that is, retailers must
pay by cheque/cash prior to taking goods
- may give special offers, gifts, discounts and loss leaders
- they do bot provide transport or delivery service, that is, the retailers must
transport their own goods, this enables the wholesaler to cut costs/prices so
that smaller retailers compete with larger organizations.
- they operate from the warehouse/large buildings
- goods are displayed on shelves in boxes.
- they operate on self service
- customers use trolleys whilst shopping
- They mainly deal in groceries and other goods that do no require perssonal
service
- They open for longer hours

GENERAL
They deal in a wide range of goods and they usually have branches in many parts of the
country

Characteristics of a general wholesaler

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- they are usually run by limited companies

- they operate either on regional or national level
- they give credit facilities to the retailers
- they may employ agents to collect orders from the retailers
- they carry out the functions of a wholesaler
- they provide delivery service to the retailers
- retailers are mostly account holding customers
- they offer all the functions of a wholesaler

SPECIALIST WHOLESALERS
These are wholsalers who deal in a limited range of goods. They are usually a source of
supply for many retailers and they sell both home produced and imported goods
Co-operative Wholesale Society
This is the wholesale business formed by the co-operative retail societies

THE MAIN FEATURES OF CO-OPERATIVE WHOLESALE SOCIETY

 membership is open to all co-operative retail society wishing to become mem-
bers
 they are controlled by Board of Director elected from representatives of the
co-operative retail society
 they break the bulk for the members
 they supply members with the variety of goods
 to reduce dependence on other wholesalers, they carry out manufacturing
goods, farming and obtaining own labels
 capital is provided by co-operative retail society in direct proportion to the
number of members they have
 profits are shared as dividends amongst members according to the purchases
made
 they are located on the outskirts of town for the following reasons; land is
cheap and readily available, the members have to provide their own transport
to move the goods.

MIDDLEMEN IN WHOLESALE TRADE

Factors
 they are agents concerned with selling of goods/services in the home trade
 they sell in their own names although not theirs
 They sell on behalf of their principals/someone else or other people and they
do not buy.
 they have possession of the goods and documents of title
 they may sell the goods to the customers on credit

 They are remunerated by a commission

 And when they guarantee payment by buyers,
 they get an extra del Credere commission
 in addition their normal commission for bearing risks such as bad debts.

Brokers
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 Are agents concerned with both buying and selling of goods/services

 on behalf of the principal/someone else or other people
 they do not have possession of the goods nor do they sell in their own name
 they merely bring buyer and seller together or into contact.
 They are remunerated by commission called brokerage

Merchants

 are principals/traders who buy goods for themselves.

 They import to sell at home.
 They act as wholesalers and provide delivery, warehousing etc.
 They are remuneration is profit
 which is the difference between the buying price and the selling price

MARKETING BOARDS
It is an association of agricultural producers and is established by an act of parlia-
ment.

Functions of the Marketing Board

 To ensure the efficient marketing of agricultural products
 to restrict undue fluctuations or variations in prices
 collection and storage of agricultural products
 to maintain a steady supply of goods on the market
 purchases total supply and releases quantities as appropriate
 fix prices of agricultural products
 advices farmers/producers
 supplies farm inputs and equipment to the farmers such as seeds and fertiliser
 offers loans to farmers
 carries out agricultural research
 gives producers a sure price/market
 gives consumers a steady supply of the goods

Warehousing

This is the provision of ample accomodation and protection given to goods from the
time they are produced until when they are needed by consumers.

Some Goods not usually stored in a warehouse.

1. Jewellery and pharmaceutical products are rarely stored, not only for security
reasons but also because of the high cost of investment in the stock.
2. Some perishable goods such as bread and vegetables need to be
3. consumed quickly and are, therefore, rarely stored in a warehouse.
 They quickly go bad and must be used within a short time.
4. Some goods are so technical and bulky that they are made on order from con-
sumer e.g. ships and aircraft.

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The importance of the warehouse to those in trade

- it provides a place for the storage of raw materials, equipment,

- partly finished goods and finished goods awaiting sales,
- transportation and processing
- it provides storage for the seasonal goods such as rain coats, jerseys,
Christmas cards etc.
- provides storage for goods in transit (entrepot) trade/stores goods in en-
trepot trade
- it allows production to take place ahead of demand
- ensures continuous production of goods
- it evens out prices/stabilises prices/avoids price fluctuations of goods and
it helps to prevent shortages of goods
- reduces pilferage/theft of goods
- it protects goods from adverse/bad weather elements/conditions
- it provides room for the goods to be prepared for sale such as
- branding, blending packaging and labelling
- it allows some goods such wine, tobacco, and cheese to mature
- it provides space for the retailers to inspect the goods before buying them
- it may be a cold storage or a wholesaler cash and carry
- imported goods may be stored in the bonded warehouse
- thus saving the working capital
- it may be a bonded warehouse which provides storage for dutiable goods
awaiting duty to be paid or imported goods awaiting
- re-export
- may be at the airports/ports/bus terminals

Reasons why warehousing is important to the cash and carry wholesaler

- need to store the goods for customers/small retailer

- offers large variety of goods from manufacturers
- breaks the bulks, prices the goods, displays the goods
- enables retailers to chose their own goods using trolleys and pay for
them at the checkouts

Reasons why warehousing facility is essential to an importer of dutiable goods

such as wine
- need to store goods on which duty has not yet been paid
- enables wine and spirits to mature
- reduces theft/pilferage of goods
- useful in entrepot trade or when bottling/blending has to take place
or when seeking a buyer who will then pay the duty hence economising
on the traders’ working capital

Importance of a Bonded Warehouse to an importer of Coffee

 storage of coffee on which duty has not yet been paid
 allows space for preparing coffee for sale/blending, bottling or packag-
ing

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 imported dutiable coffee can be store if the importer hasn’t got enough
money
 allows postponement of duty
 hence economising/maximizing his working capital

Importance of a Bonded Warehousing to an Exporter of locally

produced Computer Software
 to protect the computer software from damage/theft/bad weather
 storage of computer software pending export and awaiting transport
 storage of the computer software needing further packaging

Types of Warehouses
1. The wholesale Warehouse
The wholesalers buy goods in bulk and keep them in their warehouses
before selling them. Most wholesalers operate large warehouses which give
them the space not only to protect the goods but also to break the bulk, pre-
pare goods for sale and allow retailers to come and inspect the goods
before they buy them.

2. Cold Storage Warehouse

This is a form of specialist warehouse used mainly for the storage of
perishables like fruits, fresh meat, fresh milk butter cheese etc. Goods can be
exported throughout the world without the fear that they would go bad on
transit.

3. The Manufacturer’s Warehouse or Depots

They store raw materials, components, tools, spares and machinery necessary
for production to take place. They also store finished products before
transporting or selling them. To the manufacturer, Warehousing
provides a reservoir of raw materials that enables production to go on
without interruption. It also enables them to keep a stock of finished goods that
will be able to meet the demand of their customers most of the time.

4. Seaport and Airport Authority Warehouses

They facilitates the worldwide distribution of goods in international trade. This
makes it possible for goods to be stored while on transit, either at sea ports or
airports may be because transport is not immediately available or because they
are awaiting customs clearance.

5 Bonded Warehouses
 These are used for the storage of dutiable goods
 on which duty has not yet been paid.
 They are under the strict control of the customs and excise authorities.
 Goods are only released from them when the duty is paid.
 Goods may be sold whilst in the bonded warehouse
 To raise more money to pay for the duty
 If there is inadequate working capital
 Therefore maximising working capital
 The goods may be blended or prepackaged but not manufactured

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Importance of the Bonded Warehouse

 They are very important as they facilitate international trade and
 also enable the customs authorities to enforce the payment of duties.
 they allow the preparation of the goods for sales such as bottling, blend-
ing, grading, branding, etc
 they enable goods to be offered for sale whilst in the bonded
 warehouse
 they enable the exporter to postpone payment of customs duty
 and thus economising on the working capital
 they allow the importer to transfer payment of customs duty to the new
buyer
 they allow the exporter to avoid payment of customs duty on goods for
re-export
 they encourage entrepot trade because of the avoidance of duty

DOCUMENTS USED IN HOME TRADE

THE NEED FOR DOCUMENTATION IN BUSINESS TRANSACTIONS

In business there is need to provide a written record of all the transactions
that take place not only for the sake of evidence but also to enable the
parties involved to keep track of their activities. For this matter a number
of documents have evolved and are in use on a daily basis. Documents are
important in business for the following reasons:
 they provide a record of goods bought and sold by the business, such
as purchases as sales invoice
 they enable business activities to be controlled by providing a record
of income and expenditure such as the receipt and cheque
 they make it possible for information to be passed on to other
traders, such as the catalogue or quotation
 enables business debts to be collected by providing a record of
debtors, such as the statement of accounts shows the amount the
buyer owes the seller
 confirms the delivery of goods, such as the delivery note and the
consignment note.

How the buyer may obtain the information s/he requires before placing an
order
- send for a catalogue and price list/trade journal
- send an inquiry to the seller and receive from him/her a
quotation or catalogue or price list
- telephone the supplier and quotation him for any
information
- by attending a trade exhibition/trade fair organised by the
seller
- by asking the seller for demostrations for his/her goods
- by asking the seller for visits by his/her sales representative

DOCUMENTS USED IN HOME TRADE

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AN INQUIRY
This is a letter prepared by the buyer and is sent to the supplier
asking for the availability of goods, their sizes, prices, delivery dates and
terms of sales.
It is possible to make a verbal inquiry on the telephone, and ask for a
quotation although verbal inquiries may not be taken seriously.

ENQUIRY
The Salvation Army
Zambia Territory
Chikankata High School
PRIVATE BAG S 1
MAZABUKA
DATE ………………
TO BUDGET STORES
Mazabuka Branch

Dear Sir/madam

Please quote your best terms for the supply of the following:
1 60 Lounge suit- red
2 20 Display albums- grey
3 20 Card index cabinet - white
4 60 Card index cabinet - grey
5 10 Fling cabinet - green

Yours faithfully

Mulenga Mwanakashi
Purchasing Manager
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A tender
This is sent to the seller in response to an advertisement inviting quotations or
estimates for the supply of certain goods or services. An estimate is an order to
carry out a service or to undertake work for someone at a certain price. This
price is only the expected cost of the work to be done and is not a definite price.

The terms of payment may include cash and trade discount.

Trade Discount
- it is a reduction from from the list or catalogue price
- it is usually shown or calculated on the invoice
- it is allowed to those in trade(one trader to another) or customers
who are buying to sell again for a profit/usually refferred
to as profit margin
- usually varies with the quantity purchased and with the custom of
that trader
- it encourage bulk buying
- may be varied to avoid the expenses of reprinting the catalogues
Cash Discount
- it is a reduction from the invoice price
- it is given to encourage prompty payment (early payment), eg. 5%
within 14 days
- it helps to avoid bad debts and improve/speeds up the cash flow
system of the business
- it enables the retailer to earn a good reputation with the supplier

The Differences between trade and Cash discount

Cash Discount Trade Discount

It reduces bad debts It saves the reprinting of catalogue
Aids cash flow of the business Encourages repeat orders
Reduction from the invoice Reduction from the catalogue price
price
Encourages the buyer to pay It encourages bulk buying
promptly/quick payment

A Catalogue
 This is usually in form ofa booklet/pamphlet with pictures of goods
 containing description of the product,
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 the terms of payment and terms of sale

 such as trade discount, cash on delivery and cash with order
 The prices may be shown under the article.
 They are usually issued once a year or at longer intervals
 and are normally printed by the outside firm, which makes them more
expensive.
 They are usually used by the supplier as a means of advertising their
goods.
 They are more common in mail order firms.

A Price List
 This is usually used with the catalogue.
 Each item in the catalogue is numbered and the same number is shown
in the price list, along the price for the item.
 A number of price list may be issued for use with only one catalogue
because of the cost of reprinting catalogues when prices change.
 The buyer will usually obtain a list from several firms and compare
prices, taking careful note of the respective terms offered by each.
 It shows the list of goods in stock with their prices
 The description of the goods such as the colour, quantity and quality.

PRICE LIST
BOOK WORLD,
P. O. BOX 300001,
LUSAKA.
Ref No. Description Price
CO 12 Carbon papers A4 65 850 per box
D125 Ball pens (assorted) 45 000 per box
D127 Pencils (assorted) 30 000 per box
D150 Erasers 20 000 per box
P250 Quality bond papers 120 000 per box
A4

THE QUOTATION
 This is a reply to the inquiry.
 It is usually sent by the supplier to the customer.
 contains a detailed description of goods asked for/available such as
colour and quality,
 the price at which goods are offered,
 terms and conditions of sales including terms of payment and delivery
date.
 The customer uses the quotation to compare prices and conditions
offered by various suppliers before placing the order.
 It shows name and address of the seller
 Shows the date when it was written

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BUDGET STORES
MAZABUKA BRANCH
LIVINGSTONE ROAD
MAZABUKA
QUOTATION NO.. 384120
QUOTATION
TO. Chikankata High School
Private Bag S 1
Mazabuka

In reply to your enquiry dated ……………………

We have pleasure in quoting the following:

Code No. Quantit Description Unit Price Price

y
45231 60 Lounge suit-red K2 000 000 K120 000 000
42351 20 Display Album-grey K4 000 000 K80 000 000
43231 20 Card Index-white K4 000 000 K80 000 000
42352 60 Card Index-grey K2 000 000 K120 000 000
45321 10 Filing Cabinet-green K5 700 000 K57 000 000

Prices valid for 21 days Orders over K50 000 000 sent
carriage paid
Delivery within 4 weeks of receipt of order
Cash discount 5% if paid with 28days of invoicing
All the prices are subject to 10%Trade discount

Signature.

THE ORDER
This is an instruction to the supplier to supply a particular good(s).
It can be made on a special order form or in an ordinary letter.
Orders may also be placed verbally on the phone, but verbal orders must be
followed up by a written document to avoid misquotation and the supply of
wrong items.
The order contains:
 The description of the goods required;
 The quantity ordered;
 Price, as given in the quotation or catalogue;
 Delivery date and cost of carriage;
 The terms of sale specifying whether there is credit or not and the
discount offered. The importance of the order is that it confirms the
customer’s seriousness in purchasing the item.

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BUDGET STORES
MAZABUKA BRANCH
LIVINGSTONE ROAD
MAZABUKA
Your Ref. 364120 Our
Ref. 81434
ORDER FORM
Order No. 461710
Date …………………..
To. Chikankata High School
Private Bag S 1
Mazabuka

Please supply and deliver:

Quantity Description Price
60 Lounge suit –red K120 000 000
20 Card index-grey K 80 000 000
20 Card index-white K 80 000 000
20 Display album-white K 80 000 000
10 Filing Cabinet - green K 57 000 000
K417 000 000

ADVICE NOTE
The advice note is sent to advise the buyer that the goods ordered have been
despatched.
It is usually sent ahead of the goods.
It specifies the method of transport used, date of despatch, quantity and
description of the goods.
If the goods do not arrive within a reasonable period of time the buyer should
advise the seller.
As the advice note usually shows what is on the invoice,
it provides an opportunity for the buyer to spot any mistakes, which can be
corrected quickly or in advance, and to prepare the necessary space for the
goods when they arrive.

ADVICE NOTE
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BUDGET STORES
LIVINGSTONE ROAD
MAZABUKA BRANCH
MAZABUKA
Delivered to: ………………………………
………………………………
………………………………..
…………………………………
Date Despatched: ……………………………..
Order No. ……………………………………. Dated:
………………….

Number of Packages Description

Received in good order and condition :
Customer’s signature:

A DELIVERY NOTE
It usually contains the same information as the advice note .
it is sent with the goods in order to assist the buyer to check the goods on
arrival.
It is used only when the seller is using his or her own transport to deliver the
goods to the buyer’s premises
A duplicate copy is signed by the buyer acknowledging receipt of the goods.
The delivery note is usually the same as the invoice, except that the prices are
Omitted

The purpose of the delivery note is:

 To provide the buyer with details of goods being delivered such as
quantity of the goods and the description of the goods
 To help the buyer check the goods on their arrival
 To enable the driver deliver the right type and amount of goods
 To allow the seller obtain receipt of deliver

A CONSIGNEMENT NOTE

This is a document used when the seller sending goods to the buyer by hired
transport.
It is a request and instruction to the carrier to accept and deliver a certain
consignment to the consignee.
It is made out in triplicate.
The carrier’s driver will sign one copy and give it to the sender who will keep it
as his/her receipt.
It contains the address and name of the consignee;
a description of the goods;
the quantity of goods or number of packages;
and a statement of who is responsible for any possible damage to the goods and
freight charges.
The consignment note is sent together with the goods and the consignee signs it
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to acknowledge receipt of them when the goods arrive.

The carrier will then produce this copy when claiming the freight charges (if it
is not pre-paid).

.An invoice
This is a bill sent by the supplier to his customer containing details of the goods
supplied relevant to the order made,
such as description of goods sent, quantity supplied, price charged, terms of
sale, trade discount and value added tax if any.
It is important because :
 It shows the quantity of the goods supplied, the unit and total price
 It tells the buyer the amount he/she owes the supplier and,
 Shows the details and description of the goods,
 Discount given(trade discount) and Value Added Tax(VAT)
 It shows name and address of the buyer and seller
 It is used by the supplier to start the accounting process
 It is the request for payment for the goods supplied by the seller
 It is form the basis of a contract of purchas or sale of the goods between
the buyer and the seller
 It gives details of goods supplied to the buyer
 The buyer may also verify if everything ordered has been sent by
checking the invoice against the order (if there is no delivery note).
INVOICE
BUDGET STORES
MAZBUKA BRANCH
MAZABUKA

Date 5th November 2009

INVOICE NO..: 1642

YOUR ORDER NUMBER: 2542
TO : Chikankata High School
Private Bag S 1
Mazabuka

QUANTITY DESCRIPTION/DETAI UNIT TOTAL AMOUNT(K)

LS PRICE(K)
50 White collarless shirt 45 000 2 250 000
50 Navy blue neck ties 9 000 450 000
50 Royal blue trousers 100 000 5 000 000
TOTAL 7 700 000
1 540 000
Less 20% trade discount 6 160 000
Terms: 2% one month, 1% two months and net three months

E&OE
Explanation of the terms:
 2% one month means that 2% cash discount will be allowed if payment
is made within one month
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 1% two months means that 1% cash discount will be allowed if payment

is made within two months
 Net means that no cash discount will be allowed/full amount owing to be
paid
 E&OE means Errors and omissions Excepted
NOTE: The address of the sender of the document is always on top of the
document.

A PROFORMA INVOICE
is a special type of invoice sent before the goods are delivered if there is any
doubt about the credit standing of a new customer, or if the goods are being
sent on approval. It shows same information as the invoice.

A CREDIT NOTE
 This is usually printed and typed in red so that it will not be confused
with an invoice or a debit note.
 It is issued when the seller owes the buyer some money
 and totals are usually subtracted from the invoice before it is
paid./reduces the amount indicated on the invoice
 Informs the buyer that his/her account has been credited
 A credit note is sent by the seller to correct an overcharge,
 or to allow for the return of faulty goods
 or empty crates and containers which the buyer has paid for.
 It is also issued for surplus quantities of goods returned to the supplier
 Shows the unit price, total price of the goods returned, trade discount
and reasons for the return such as for wrong goods supplied.
 Shows name and address of the buyer and the seller
 The credit note is important because it corrects the mistake that appears
on the invoice.
 It is usually printed in red ink to show that money is going out from the
business
CREDIT NOTE NO. ……………………..
Date…………………….…..

………………………………..
…………………………………
………………………………..
………………………………..

To: ………………………………….
………………………………………….
…………………………………………..
…………………………………………..

QTY DESCRIPTION PRICE AMOUNT

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DEBIT NOTE
This is a document sent to the buyer by the seller if he/she has been
undercharged.
It is issued to claim the extra money outstanding.
In other words the debit note asks the buyer to pay the difference or amount by
which he/she has been undercharged. It may be issued if, for example:
 Some delivered items are committed on the invoice
 Pricing errors are made on the invoice
 To increase the amount indicated on the invoice when then buyer was
oversupplied but under charged
 To notify the buyer that his account has be further debited
 Increases the amount indicated on the invoice/it is a supplementary
invoice
The importance of the debit note is that it informs the buyer of the undercharge
and claims the extra amount outstanding.

The seller has a right and obligation to issue both the credit and debit notes if
the letters “E&OE” are printed on the invoice. This means Errors and
Omissions Excepted”, so if any mistake is made on the invoice the seller can
issue the note to make the necessary correction.

Debit Note
BUDGET STORES
LIVINGSTONE ROAD
PLOT NO. 87
MAZABUKA BRANCH
MAZABUKA
Date ……………………
TO: Chikankata High School
Private Bag S-1
Mazabuka

Invoice No. 263867 Dated …………………………..

Quantity Description Model Price Total VAT VAT Amount
Returned No. per unit cost Rate
(%)

THE STATEMENT OF ACCOUNT

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This is a summary of all transactions made between the buyer and seller during
the month. It is sent by the supplier to the buyer every month. The main
pieces of information contained in the statement of account are:

 The balance owing at the beginning of the month, if any;

 Amount of invoices issued during the month;
 Payments made during the month;
 Credit/debit notes issued during the month and net amount owing at the
end of the month;
This document is important because;
 It confirms the transactions made during the month;
 It reminds the customer that payment is due;
 It enables the buyer to compare the accounting records kept by the
supplier with his/her own records.

NOTE: entries made in the debit column increases the balance figure and
entried made in credit column reduces the balance figure
The last figure in the balance column shows the amount of money the buyer
owes the seller at the end of the month

STATEMENT

SUPREME FURNISHERS
PLOT NO. 87
MAZABUKA BRANCH

TO: Chikankata High School Date

…………………………
Private bag S-1
Mazabuka
Terms:
Date DETAILS Debit (K) Credit (K) Balance (K)

E&OE

. A Cheque is sent by the buyer to the seller as one of the method payment for
goods. Since the date on the cheque is the day on which the purchaser paid the
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supplier, the cheque acts as a record of date of payment. Payment for the
goods could also be made by standing order, credit transfer or direct debit. The
cheque contains the following information:
 The date on which the cheque is drawn
 The name of the payee
 The bank on which the cheque is drawn/name of the drawee
 The drawer’s name and signature
 Amount to be paid both in words and figures

Drawee

Date
Payee

BARCLAYS BANK (Z) LTD

(Registered Commercial Bank)
Mazabuka Branch Date 31st May 2009

Pay Celtel Mweemba or order

The sum of five Million Kwacha only

K5 000 000

Signature Crank-
shaft Banda

Amount in words Amount in figures

Drawer’s signature
A receipt
This is rarely used today since the cheque act of 1957, the cheque itself when it
has been paid in the seller’s account, and returned to the drawer, acts as a
receipt. If payment is made through the credit transfer system, the statement
and the attached credit transfer slip are stamped by the bank cashier which act
as a receipt.
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TRANSPORT
Definition: It is an aid to trade that is concerned with the movement of goods and
people from one place to another.
Importance of efficient means of transport
Efficiency means of transport is important to a company or factory such as Zambia –
China Mulungushi Textiles which may a have branch within and
outside the country due to the following reasons:-

- It creates utility by bringing goods within the consumers’ reach

- Provides consumers with a much wide variety of goods
- Enables consumers to enjoy a high standard of living
- It levels out supply by transferring goods from where they are produced to
where they are needed, therefore helps to prevent scarcity
- Provides more opportunity for specialisation
- This leads to cheaper goods to consumers
- It clears the line of production for manufacturers
- It is used for the delivery of raw materials to the factory.
- It is used to ferry partly finished and finished goods to the warehouses and
customers.
- Used to move equipment or space parts to the factory, offices and
- between sites.
- Allows the executive/management to travel between offices and
- factories.
- Allows sales represents/agents to move efficiently both within the
- country and overseas to meet their customers.
- It enables goods to reach the customer at the right time, right place, right
condition in order to satisfy human wants.
- It may bring revenue to the company if it operates its own fleet of
- vehicles.
- It encourages tourism throughout the world.
- It provides employment to those who work in various transport forms.
- It helps countries to develop their economics by opening up wider market
for the products.
- The above would usually include sea and air transport for overseas transac-
tions or road and rail transport for transactions within the country.
- Air transport is particularly important to a form for urgently needed goods
or travel worldwide.
- Road transport is important for the carriage of goods and people door to
door.

Factors influencing the choice of transport

The following are the factors that may influence the choice of transport.
- Cost of transport; for example sea transport being cheaper than air trans-
port.
- Speed of transport or urgency required such as perishable goods and phar-
maceutical goods need to be delivered quickly of the fast means of transport.
- Size or bulk and weight of the consignment for example oil by pipeline or
tankers not by air.
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- Value of the goods; for example, coal can’t bear the cost of road transport
but rail.
- the nature of goods; for instance, products like oil require special finilities.
- Accessibility of transport to the terminals
- The reputation and reliability of the transport/carrier of the goods.
- Security or safety involved e.g. air trasnport
- The distance involved.
- Type of transport
- Flexibility of the transport

ENVIROMENTAL PROBLEMS ASSOCIATED WITH TRANSPORT

- Pollution (air, water, land and noise)
- Ecological changes caused by the construction of the infrastructure, such as
roads, dams, ports, pipeline and rail

The Possible Solutions

- government policy
- civic education

FORMS OF TRANSPORT
Own fleet
Many large companies find it more convenient to buy, and operate own fleet of trucks
for
delivery goods and collecting raw materials
Advantages of own fleet:
- It can be cheaper if the company produces enough goods to keep the trucks
busy.
- It gives direct contact between customers and supplier. This means prob-
lems can be identified and solved more quickly before they
- become too serious/big.
- Better care can be taken to the goods as the business will be handling its own
goods
- Deliveries can be arranged more flexible with respect to time and routes.
- The Company’s vehicle can be painted with advertisements on the sides so
the fleet provides free advertisement for the business whenever the vehicle
goes.
- The use of own fleet means that fewer documentation will be required.
- Raw materials and equipment can be collected on and when they are
needed.
- Own fleet is more convenient as goods can be delivered when
- necessary.

Disadvantages of own fleet:

- It is expensive to operate one’s own fleet of vehicles, as vehicles have to be
bought, licence used, maintenance fuel and insurance.
- Drivers, have to be paid regularly and transport managers have to be paid.
- Long distance deliveries to over seas customers for example, may not be pos-
sible on own fleet. This simply means that sea; air or possibly rail has to be
hired even if the company has its own fleet.
- It may not be economical to have its own fleet if the output is too small.
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- The other problem of road transport like traffic congestions, limit the carry-
ing
- capacity and the fact that trucks have to return empty from trip, remains a
problem.

Road transport
Road transport is by for the most important form of transport on most
countries. It has drastically increased due to the following reasons,
Advantages of road transport
- It carries goods direct to their destination without any transhipment.
- Door to door delivery is possible by road.
- It is convenient and fast over short distances
- It is more flexible as far as time concerned, that is no timetables and sched-
ule may be followed.
- May be economical due to less capital costs/transhipment cost.
- Goods may better be protected or less pilferage/theft as the driver may keep
an eye on them all the time.
- Roads reach almost everywhere
- Goods may be delivered anytime
- It is suitable for delivery perishables
- It is suitable for small loads of consignment
- It is suitable for most type of goods
- It is possible to use own fleet of vehicles

Disadvantages of Road transport

- It is slower over long distances than rail
- It is no feasible to ferry large quantities or bulk goods as coal.
- It is reliable to break down and delays due to poor weather conditions.
- If the vehicle returns empty to the depot the cost of delivery the load will be
most
- costly than necessary.
- The driver may have to stay overnight at a hotel for long distances. This
may increase over all costs.
- It is not suitable for carrying dangerous goods such as petroleum.
- It causes more damages to the environment and ozone layer due to air pollu-
tion
- emitted
- By the burning fuel and noise produced by some vehicle.
RAILWAY TRANSPORT
Railway transport is the most ideal form of delivery bulk Cargo such as coal, Iron
ores,
building materials, petroleum etc.
Advantages of railway transport over road transport
- Railway transport is faster over long distance than road transport.
- It is cheaper especially when carrying bulk goods.
- There is no congestion on the railway line (trains are free from
- congestion).
- It is not so badly affected by adverse weather conditions
- It is economical in the use of fuel
- A railway line may have direct access to the seaport
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- Railway transport has relatively low running costs.

- It is safer for carrying dangerous products such as fuel.
- Special facilities have been developed in railway transport for carrying bulk
deliveries dangerous products such as fuel or oil, coal, cobalt, cement, iron
ores etc.

Disadvantages of Railway transport

- Timetables make railway transport less flexible than road transport.
- The transhipment of goods, apart from causing inconvenience and damage
of goods.
- The expense of equipment and keeping the train in good condition is consid-
erably high.
- door to door delivery is not possible by rail
- It is not suitable for urgent deliveries
- It is generally slower than road transport over short distance.
- It is not economical for small load, and short distances

Sea transport
This is by for the most important form of water transport for the carriage of goods.
There are various classifications of vessels used in sea transport and these are:-
1. Passenger lines
- These are mainly used for the carriage of passengers to various parts of the
world.
- They may curry some Cargo such as mails.
- They follow strict timetables and schedules
- They cannot wait for any delayed Cargo or passengers to arrive.
- They follow fixed routes
- They usually call at the main parts of the world.
- Their main advantage of this form of transport is that transport can be
planned ahead of time and space.
- The charges are usually fixed jointly by the shipping conference to which
their owners belong.

2. Cargo lines
- These are ships used mainly for the delivery of goods although they may also
carry few passengers
- They operate on fixed routes and adhere to regular timetable.
- The ship will leave the port on time even if some of the scheduled cargo has
not yet arrived.
- They too belong to the shopping conference and their charges are also fixed.

3. – Tramp vessels (steamers)

- These do not operate on regular routes or fixed timetables but sail whenever
traders want their cargo to be taken.
- They do not carry passengers/carries goods only
- They move from one part to another while awaiting demand for their ser-
vices
- They normally hired or chartered by whoever wants their services (his/her
goods to be ferried)

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- Usually a charter part/agreement is signed between the ship owners and the
trader who wants the shop to carry his/her good.
- Charges are usually based on space available, bulk of the consignment,
weight and distance involved.

SPECIALED VESSELS AND GENERAL CARGO

Such ships are specialty designed for a specific purpose
(a) Roll on and Roll off ships (Roros) or vessels
- These are specially designed to allow vehicles to drive on and off with its
cargo/passengers without difficulties.
- It speeds up door to door delivery to overseas destination eliminating delays
on loading of goods (serving time)
- It also reduces possibilities of pilferage and damage to the goods in transit
/on routes.

(b) Container ships/vessels

 are specially designed vessels
 usually cellular in design
 to carry standardised containers
 which may be metal or wooden
 in order to save space on board when storing containers on board
 and maximise security of the goods.
 The problem of loading and unloading is eliminated (simplified)
 as cranes are able to load and unload quickly.
 Such vessels assist in turn-round time on ports
 and serving harbour dues or levies (reducing freight cost).

(c) Tankers
- These are bulk carriers specially designed to carry liquids
- Such as oil and any bulk liquid.
- They are specially designed to minimise safety, and loading and
- unloading liquids.
- There size helps to cut off freight charged and harbour dues.
- They are able to ferry large amount of oil demands worldwide.

(d) Oil Bulk Ore (OBO) ships

- They are large ships specially designed to carry one type of goods at a time.
- They are also known as bulk carriers
- Oil tankers are a good example of OBO ships.

REQUIREMENTS OF A GOOD SEA PORT

The control of seaports and their facilities is done by the Port Authority. The Port
Authority assists traders and other users of seaports by taking
responsibility for efficiency of the seaport. The following are the requirements of a
good sea port/harbour:-
- It should be sited as near as possible to a town or city, but not near high
buildings and cause as litter pollution as possible.
- It should have speed and efficient roads and rail network to provide easy ac-
cess and departure of travellers and goods.

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- It should have good equipment and repair service necessary to keep aircraft
flying such as sophiscated radios, radars, computers and
- technical equipment.
- It should have customs facilities to regulate the importation of goods and to
check for prohibited goods such as firearms and mandrax.
- Should have migration offices to ensure that only people with valid docu-
ments do enter or leave the country.
- Should have buildings for hotel and accommodation, police stations, health
centres, banks, restaurants, post offices etc.
- Must have safety procedures such as fire engines and ambulances.
- Must have good warehousing facilities.

Functions of the Port Authority

- They maintain the approach to the port by road, rail sea etc.
- They provide warehousing facilities for the goods
- they provide customs and immigration offices
- the provide ship repair yards
- they provide landing facilities such as lock gates, buoys and wharves.
- they maintain port equipment and charge users
- provides communication by radio and telephone
- they provide markets, dock rooms, banking facilities, rest houses and
restaurants for passengers
- provides offices for agents
- provides security offices such as police offices
- provides health and sanitation facilities
- provides efficiency labour supply by hiring dock labourers
- engineers, maintaining good industrial relations and
- licensing lighter men
- the provide refuelling and fresh water
- they dredge the port to maintain the depth
- they levy port labours and dock dues to pay for the above
- they undertake all clerical work concerned with the above

Advantage of sea transport

- It is relatively cheap particularly over long distances for the Carriage bulk
goods which are not urgently needed.
- Large quantities/weight can be moved in one vessel, such as bulk
- consignment of grains.
- The use of containers keeps costs to a minimum vessel, such as bulk con-
signment of grains.
- The use of containers keeps costs to a minimum and increases the
- safety goods as it minimise handling of goods in transit.
- The seaport provides cheap transport linking all containers of the world as
all countries have long sea costs.
- Tranships provide a very flexible service as they bound to any fixed routes.
- Special vessels, such as oil tankers and reapers can be built for special cargo.

Disadvantages
- It is relatively slow for urgently needed goods.
- It has high insurance costs because of high risks jettisoning of goods.
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- There is high risk of pilferage and theft.

- It does not offer door to door services as some countries/areas may not have
seaports. (Transhipment is inevitable).
- Bad weather can cause delays and loss of goods.
- Land locked countries like Zambia, Botswana, Lesotho, etc do not get the
full benefit of sea transport.

CONTAINERISATION
 This is the system of transporting or delivering goods by the use of
 containers.
 Containers are large metal boxes of standard sizes/specified sizes
 in which goods are picked at the manufactures premises/warehouse
 and are secured by the supervision of customs authorities
 and not opened until they reach their final destination.
 This form of transport is mostly used in road, rail and sea transport.
 The freight is based on the size of the container
 It reduces handling of the goods
 It reduces the risk of theft and damage to the goods
 It reduces insurance rates

Advantages of containerisation
- Increased speed of delivery
- as containers can be transferred quickly/past between different form of
transport.
- Goods are not taken out of the containers until they reach their final desti-
nation
- which eases the problem of loading and saves time.
- Eliminates the use of warehouses as the containers can be stocked
- outside.
- Increases safety as there is less risk of pilferage thefts and damage.
- There is a quick turn round for vehicle/ship,
- which may reduce transport costs or handling costs.
- T.I.R. (Transport International Routier) allows increased speed through
customers.
- Packing and insurance costs are reduced as containers improve safety of
goods.

Disadvantages
- not all vehicles and ships are standardized to carry containers.
- This means the company might still need to hire standardized trucks.
- Not all terminals (Ports) have mechanised container handling facilities.
- This will require expensive upgrading of ports for them to be able to han-
dle containers.
- It requires large capital investment to establish container ports.
- They are not economical for carrying small loads, as there would be wastage
of space.
- Many bulk goods such as timber, iron have limited capacity in air transport
- as it has weight limits/restrictions.
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AIR TRANSPORT
Air transport has seen a marked improvement in recent years and as a result, there
has been a rapid growth in the volume of cargo traffic and passengers
using air transport. Some of these include:
- The increased the importance of air freight due to more airports world wide,
bigger air craft and better airport facilities
- The building of larger aircraft which are porter and move reliable.
- An improved design such as fuse long and enquire has increased fuel eco-
nomic.
- Improved loading through large class at the nose and tail has
- cut loading capacity.
- Increased in the number and improvement of handle facilities,
- provision of better storage and handle facilities worldwide has seen remark-
able change in air transport.

Advantages of air transport

- The speed of our transport is particularly essential for urgent
- deliveries and emergencies.
- Packaging and Insurance costs are minimal due to short transit period.
- There is more security for goods as there is less chances of theft/pilferage.
- There is less damage, to goods due to less handlings and travelling time.
- It operates on direct routes
- It is economical over long distances
- Airports may even be found in jungles/deserts.

Disadvantages of air transport

- It has higher operational cost.
- Aircrafts have a limit carrying capacity, very sensitive to weight and size of
Cargo.
- It relies on other forms of transport.
- It is not suitable for short list distances
- It may also cause noise and pollution
- If a phone crushes usually there is total loss of lives and Cargo.
- There is a threat of hi-jacking aeroplanes

Modern Trends in Transport

The modern trends in transport includes the following
 The growth of containerisation of goods by road, rail, sea and air transport
system
 Improvement in roads and motorways
 Improvement in modern handling facilities at airports, seaports and railway
stations
 The growing in importance of high speed trains
 The growing in importance of air transport because of large aircrafts, large
airports, more airports and more air routes allowing more goods to be carried
by air
 The development of roll on, roll off ferries
 Improvement in security measures for goods being transported

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 The increased movement of goods because of the formation of trading blocks

such as the Southern and Central African Development
 Community (SADC), European Economic Community (EEC) etc.
 The decline in volume of goods carried by railways in many parts of the world
 The removal of customs barriers at entry points to the country has
 facilitated the use of transcontinental vehicles.
 The general improvement in transport facilities have speeded up the move-
ment of goods worldwide.

Pipeline

This is the system most used in the delivery of liquids such as crude oil/petroleum
products.

Advantages of pipeline
o They are cheaper to maintain
o They carry large volumes of goods
o They save on labour
o There is no congestion or does not pollute the environment
o Can be used for alternative fluids/gases/liquids
o May offer direct delivery/door to door
o Goods are protected from contamination

Disadvantages of pipeline
o The initial cost of constructing a pipeline is too high
o It is not suitable for irregular cargo
o It is limited to transportation of fluids
o It has no return loads
o Can easily be attacked by enemies in times of war/ open to sabotage
o It requires many pumping stations if the gradient is high
o There could be high losses in case of leakages
o May be subject to theft/vandalism
o Leakage may pollute the environment

Insurance
Insurance is an aid to trade, which under takes to cover risks, that may or may not
(probabilities) in business and if they happen, they will cause financial
losses.
It involves the insurer and the insured.

Insurer
This is the party (insurance Company) which under take/ giving the cover or
Insurance

Insured: This is the party (person) seeking for insurance or guarantee of

compensation.
Definition:
Insurance is the legally binding guarantee given by the insurer to

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compensate/indemnify/restore or cover the insured for any financial loss which may
be suffered as a result of the occurancy of a specified event which may or not oc-
cur(probabilities). In return for this guarantee the insured makes a
periodic payment called premium to the Insurer. The premiums are paid into a cen-
tral fund (pool) for the claims of the unfortunate few (ones). The profit on the Insur-
ance Company is based on the statistical probability that only a small percentage of
the insured person will ever have to make claims. Therefore, the
premium of many pays the claims of the unfortunate few who have suffered
financial loss as a result of an insurable risk leaving the excess as a profit for the in-
surer for the services he provides. The larger the number of people
contributing to an Insurance pool for a particular risks the less likelihood of that
group suffering a large percentage of less than the average for all the
people open to the risk. This is known as law of average. This is because there is less
chance of loss to the Insurance company. When the number insuring a particular
risks with it, is large, the amount or premium likely to be charged is lower.

Purpose/Functions of Insurance
- To pool the risks of many insured persons and spread the financial losses of
the unfortunate few over the fortunate few over the fortunate many.
- It reduces the risk of financial loss by giving indemnity i.e. giving
- security to the insured.
- It reduces, fear by increasing funds, which might otherwise have to be set
aside in case of a calamity.
- It allows businessmen and businesswomen to enter into large-scale
- contract, which might otherwise be avoided for fear of loss.
- It is also on invisible export and means of saving for some people (in the case
of an endowment policy)

Why it is important for the business people to insure their items

 If a loss occurs, the businessperson will receive compensation. Where the
business person does not insure, his/her goods and suffer a loss s/he will re-
ceive no compensation and he may end up going out of business
 It gives people the confidence to continue conducting businesses knowing well
that should they suffer a financial loss, the insurance company will compensate
them
 Claims against business people may be too large and without insurance, they
may not be able to meet huge claims arising from the members of public who
may suffer losses. It is for this reason that business people are required by law
to take public liability insurance, for example,
 employer’s liability insurance.

Pooling of Risks
 Pooling of risks is the basis of insurance which enables the fortunate ones to
help the unfortunate ones.
 A policy holder pays a premium into the pool from which compensation is
paid to those who claim.
 The funds in a pool must be sufficient to cover compensation, administration
cases and leave some profits for the insurance company.
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 There is likely to be a separate pool for each risk.

 Some companies like Konkola Copper mine and Mopani Copper mine may
run their own risk, that is use self insurance.
 If there are many who wish to insure against a particular risk, more premium
is contributed, but if there are few calamities, the premium is low.
 For the principle of pooling of risks to work, the insured persons must not suf-
fer losses all at the same time. If they all suffer the loss at once, they can be no
enough funds in the insurance pool to pay everyone.

PRINCIPLES OF INSURANCE
There are the basic ‘rules’ of insurance which are applied to ensure that the policy is
effective and it is not prone (open) to abuse:
(i) Utmost good faith
 Both the insured and insurer must reveal every relevant and material facts re-
lating to the policy being undertaken.
 The insured must fill in the proposal form by telling the truth without leaving
out any material facts relating to the contact.
 This enables insurance company to assess the risk and decide whether of not to
accept it and then determine the amount of premium
 The insurance company must also act in the utmost good faith by settling ma-
terial facts relating to the contract.
 The contract may be declared null and void if utmost good faith is not followed
by both parties (breach or utmost good faith) renders the contract well and
avoid.

(ii) Indemnify
 This principal states that the policy holder must be restored/compensated to
his or her former financial position without making profits out of a loss. In
either words he/she must be placed in the same financial position as before.
 She is not allowed to make profit out of a loss as she may cause the risk to oc-
cur.
 Indemnity does not apply to life assurance and is limited to the sum
 insured or the market value of the object, therefore the insured must not over
insure or under insure.
 Contribution applies if the policy holder insured with more than one
 insurance company.
 In this case, insurance companies contribute proportional amounts to make up
for the loss.
 Subrogation applies if the insured is fully compensated/Indemnified for the
loss E.g. in the case of a vehicle stolen or damaged, the damaged (scrap vehi-
cle) or recovered property belongs to the insurance company.
 The principle of average under indemnity means that if the insured does not
increase the amount of the cover when the value of the insured object. in-
creases, he will not receive the full compensation in the event of the claim, in-
stead he will receive part of the compensation based on the average cause or
the ratio of the amount to cover the market value of the object
i.e . amount insured x Amount of compensation
Actual value of object

(iii) Insurable Interest

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 It states that only the person who stands to lose financially if the risk insured
against has the legal right to insure the property or life
 That is, the person must own the property if s/he has to insure it.
 It prevents people who are not owners of the item from insuring the property
 If people were allowed to insure items or lives which do not belong to them,
they might be tempted to deliberately cause the loss in order to claim compen-
sation
 And thus making profit out of the loss
 This will defeat the principle of indemnity because
 The insured was not in the position to lose financially hence s/he could not be
indemnified

Proximate cause
This doctrine entails that the insurance company can only compensate a person who
has suffered a loss if the risk insured against is the immediate cause of the loss.
- There is no compensation payable if the loss caused by the risk is not insured
against
- For instance, if Mr. Masimpe assures his life against death by motor acci-
dent and as he is travelling from Mazabuka to very far place, he dies of a
heart attack no compensation would be paid, this is because, the immediate
cause of his death is a risk which he did not insure his life against.
- The application of this doctrine of proximate cause is further
- illustrated in fire insurance.
- A fire insurance policy will not only cover losses caused directly by fire, but
use of water or demolition of part of the building to prevent the spread of
fire to other parts or to neighbouring building.

Taking out an Insurance Policy

- The person seeking insurance cover approaches the insurance broker
- S/he obtains and completes the proposal form which an an application for
insurance
- It gives details of the risk to be covered against and details of the
- applicant.
- The proposal form must be filled in utmost good faith.
- The proposal form is important to the insured because;
- It enables the insurance company assess the risk and decide whether or not
to accept the risks and fix/set premium and finally issue the
- insurance policy, setting the terms of the contract (it forms the basis of the
contract).
- *An insurance policy is a paper written as evidence between the
- insurance company and the person insured.
- Where the important information relating to the object being insured is not
disclosed on the proposal form, the contract may be declared null and void

Procedure involved in making a claim

 Inform the police immediately the loss occurs/happens
 Notify the insurance company of the loss as soon as it happens(possible)
 Notify the insurance company if the object was insured with the other
 insurance company
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 Complete the claim form giving full details of the loss suffered
 Insurance company employees (assessors) inspects the damage
 They assess and determine the amount of financial loss suffered
 In order to arrive at a fair and reasonable amount of compensation, the client
signs an agreement of loss form to bind him to accept the amount of compen-
sation arrived at
 The insurance company settles the claim by paying money
 Or by paying in kind, eg, buying the same object of the same model
 The remains of the object are subrogated to the insurance company

An Insurance Policy
 It is a document which sets out terms and conditions of an insurance
 Covering the precise risk
 Period of cover
 Exceptions such as life assurance like suicide
 And the amount of premium to be paid

The Insurance Broker

- He acts as a link between the insurance company (underwriter) and the cli-
ents as the clients.
- Can not approach the underwriters directly.
- He gives information on the policy for a number of insurance
- companies.
- They are not employed by the Insurance company but they are
- independent professionals, who are on insurance business on their own ac-
count.
- They advice clients on the best insurance policy to the damage (scrapped ve-
hicles) or recovered property of the insurance company.
- He may deal with the full amount of the policy recovered
- He may deal with claims and particular problems affecting the client.
- They collect premium from their clients on behalf of the insurance com-
pany.
- They arrange insurance cover and administration (papers) work or clerical
work for their clients.
- Brokers are paid commission by the insurance company for their work.
- Their commission is known as brokerage.

The Lloyds Insurance Corporation of London

This is international/ world market for Marine insurance and other risks such as
aviation and life insurance.
o They have a high reputation to meet claims under writers offers
o insurance cover when approached by brothers
o Lloyds of London corporation is not on insurance but rather an
o organisation which provides accommodation and other facilities for the
member (underwriter and brokers who wish to provide or negotiate
o insurance business.
o The Lloyds co-operation originated in the 18 th Century from a coffee house.

Under writers
o These are principals who accept Insurance risks or cover a risk such as marine
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o They receive insurance premiums from the clients

o If the risk occurs they pay out compensation from their own pockets
o They are rich people(they need enough resources) with a considerable finan-
cial stand, which enables them to meet claims.
o They have unlimited liability
o They work/operates in syndicates (groups)
o They do not have contact with members of the public directly but through an
insurance broker.
o They may be represented by an underwriter agent to “LEAD” who
o accepts insurance on his behalf.
o Their remunerations is profits

Branches of insurance
Because there are many risks facing individuals and businesses, many different in-
surance policies have been designed to offer various insurance cover. These are:-

Life Assurance
 The term assurance refers to certainties,
 that is, risks that must certainly occur such as death.
 The term insurance refers to probabilities,
 that is, risks that may or may not happen such as fire, theft, accident and
flood..
The principle of indemnity, does not apply to life assurance. This is because when a
person dies, no amount of monetary compensation will restore him/her to life. Assur-
ance is looked at as a form of serving plan rather than insurance. It is true and we all
know that we are going to die but we are not sure when we will die.
Life assurance is a good way of ensuring that surviving members of the family are
taken care of
Usually, if we live for a very long time and die long after retirement, it is
possible that our savings may be sufficient to meet the demands of our
dependants. But if we die young we are likely to leave a widow and young
children with no money to look after them. This is where life assurance will be help-
ful.
Life policies are normally sold by insurance agents who are different from
brokers.
Insurance agents usually act on behalf of a particular company. They never handle
premiums. The premiums are paid directly to the insurance
company – Life assurance policy covers the following:

(a) Whole life policy

This is a policy under which a person assures his/her life for a certain sum of money
which will be paid to his/her dependants after his/her death.
- the person divides how much he wants to assure his life for and the
- insurance company
calculates the amount of premium to be paid monthly or yearly.
- The assured pays premium for his/her entire working life until death.
- To fix premium, the Insurance company will look at the age, health records
occupation as well as the duration and the amount of cover
- required – if the assured dies, the money is then paid to his/her
- dependants and beneficiaries.
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(b) Term Policy

- This is a policy which covers a person for a fixed period of time e.g. twenty
years.
- The premium is cheaper as the insurance company does not have to pay
anything if the person lives up to the period covered.
- It may act as a form of saving for some people.
- She/he can take the policy for the duration of the loan.
- It is good for someone buying a house through mortgage.
- If he/she dies before furnishing paying for the loan, the procedures are used
to pay off the loan.
- The main disadvantages of this policy is that no value at the end of its full
period.

© ENDONMENT POLICY
Under this policy the assured is covered for certain period of time.
- The period may be from 5 years to 20 years.
- It provides compensation in money (sum assured) either at maturity date or
death of the assured person whichever comes first.
- Endowment policy serves two useful purposes f:
- Endowment policy profit with profit assures the assured person to share
profit made by the insurance company from the premiums.

Fire Insurance
- Fire is a risk that has caused untold misery to mankind.
- The major Insurance cover available are

(a) Ordinary fire insurance

- Provides cover/insurance protection to a wide range of property such as per-
sonal and business buildings, and there content against damage caused by
fire.

(b) Consequential Loss

 this is the loss of profit suffered as result of an insured risk
 for example; a trader may insure his/her retail shop against fire.
 If later fire totally destroys the retail shop,
 then the trader has not only lost the business buildings and contents
 but also the profit she/he was making.
 The loss of profit is a consequence of fire destroying business building and the
contents.
Therefore, a consequential loss insurance provides compensation for:
 Loss of normal business profits as a result of an insured risk. e.g. fire
 Business expenses required to be paid when the business buildings are not
in use.
 i.e. expense that may continue to be paid after the building are
 destroyed are salaries, interest on loan etc.
 Renting or an alternative building.

Factors considered when fixing the premium for the insurance.

 The number of people wishing to insure
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 So as to apply the law of big numbers

 Type of cover required
 Age of the person or the object
 Purpose for which the object is used for
 Value of the object
 Number of people using the object
 Security gadgets fitted to the object
 Make of the object
The size of the premium for pure insurance depends on the likely hold of fire break-
ing out and the following are some of the factors considered are.

 Materials used in the construction of the building i.e. whether

 materials are bricks or wood or concrete and whether roofing is a thatch
or iron sheets or asbestos.
 Whether inflammable materials such as petrol, diesel, paraffin etc are
stored in the house or not.
 Nature of the surroundings of the house i.e. whether there is danger of fire
breaking out from the neighbouring houses or not.
 Whether additional fire protection facilities are available or not e.g. fire
brigade services provided by local government.

Accidental Insurance
This branch of insurance covers a wide range of Insurance policies and includes the
following:

(a) Motor Vehicle Insurance

 It is compulsory by law far motor vehicle owners to Insure
 against loss or damage to third parties.
 In a contract of motor insurance, the two parties actually
 connected with the Contract of Insurance are the insurer who is
known as the first party
 and the insured person who is called the second party.
 The third party is any member of the general public
 to whom death or body injury may be caused
 e.g. passengers, pedestrians, other motorists etc.

A variety of motor Insurance policy exists. The main ones include the fol-
lowing:

(i) Third party motor insurance

 Third party motor insurance is the minimum motor insurance
 any vehicle that moves on the road is required to have
 third party provides compensation only to third parties
 for death or body injury caused to them damage to their property.
 The insured’s own vehicle is not covered.

(ii) Third party, fire and theft motor insurance

This type of insurance covers
- Third parties for death or body injuries caused to them and their property.
- The insured’s own vehicle
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- for accidental damage to the vehicle,

- injury to the driver, loss of the vehicle by fire, theft or by instant mob jus-
tice.

(iii) Full comprehensive

Full comprehensive insurance covers a variety or risks that may happen to the vehi-
cle. It is therefore the best and at the same time the most expensive type of motor
insurance.

Factors considered when fixing the premium for motor insurance

The size of the premium payable on motor insurance depends on many factors which
include the following:
 Experience of the number of accidents the type of vehicle being
 insured has been involved in based on statistics insurance companies have
in their possession.
 The number of people wishing to insure against the risk or say, road traffic
accident, so as to apply the low of big number.
 The type of motor insurance required whether it is third party or compre-
hensive insurance etc comprehensive insurance covers many risks and
therefore higher are charged.
 The age of the driver young people are charged higher premiums
 because they drive fast, and therefore more likely to cause accident.
 The purpose for which the vehicle is used e.g. higher premiums are
charged on sport cars than on family cars which are not used for car rac-
ing.
 The value of the vehicle – A new car stolen or damaged would require
more money to repeal than an old car. Therefore higher premiums are
paid on new cars than old ones.
 The number of people using the vehicle premiums are lower when the mo-
tor insurance required is meant to cover one driver. Higher premiums are
charged where the vehicle is used by many drivers.
 Occupation of the user. The size of premium for a teacher driver, for ex-
ample may be less than that of sales person when is always travelling
across the country selling goods. A teacher is found in class most of the
day and is therefore less likely to cause accidents. Female drivers are usu-
ally better drivers than male drivers and so less premiums for ladies than
gentlemen.

(b) Employer’s Liability Insurance

 This class of accident insurance provides compensation of
 employees for deaths, diseases etc
 . Suffered whilst at work
 or as a result of the employer’s negligence
 for example a shutter in Zambia Railways may lose both legs in an acci-
dent while on duty.
 If employer’s liability insurance was taken by Zambia Railways, then
the insurance company would compensate the injured
 employee

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 without employer’s liability, the employer might not be able to continue

if a substantial claim was made as all the money of the company can just
be used to pay compensation to the employee.

Public Liability
Public liability insurance covers business owners and manufacturers against claims
by members of the public for deaths, accidents etc. caused to them due to business
owner’s negligence.

Examples
(i) A minibus owner may insure his/her minibus against the possibility of ac-
cident happening to members of the public whilst travelling on the bus.
(ii) A manufacturer may insure against claims for death or injuries
(iii) resulting from the use his/her product e.g. a meat pie manufacturer can
insure against the possibility of poisoning to members of the public after
eating the meat pie.
The money that may be required in compensating injured members of the
public might amount to a billions of Kwacha. A business
without a public liability insurance may not be able to continue
carrying out its business activities if large claims for deaths or
injuries is made on it by members of the public. It is important therefore
that a
business takes up a public liability insurance so that claims made by mem-
bers of the public for injury or deaths are not by insurance companies.
This would leave the operation of the business
unaffected.

(d) Fidelity guarantee Insurance policy

This class of insurance provides to employing for money or goods
embezzled (stolen) by employees. Company employees who handle large sums
of money such as accountants take Fidelity Guarantee insurance and pay pre-
miums. The benefits of the insurance guarantee policy are
however, paid to the employee when an employee is convicted in a court of law
of having had stolen goods or cash.

(e) Credit Insurance

Credit insurance provides cover to traders for losses resulting from bad debts
i.e. loss of money due to non-payment by customers who obtained goods one
sources on credit but later fail to pay for them.

(f) Theft Insurance

This, class of insurance provides compensation to insured persons whose goods
are stolen from homes or businesses or goods in transit.

(g) Air travel insurance

This class of insurance provides compensation to insured person who
suffer deaths or
injuries caused by air accident.

4. Marine Insurance
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Marine Insurance Covers losses or damage to property and life caused by sea
risks. The main types of marine insurance are:

(a) Hull Insurance

This class of marine insurance covers losses caused to the body of the ships, its
machinery and fixtures. The sea risks that may cause loss or damage to the ship
or goods including bad weather, collision with other ships, fire, sinking of a ship,
bond storage in the ship, theft, etc.

(b) Cargo Insurance

Cargo Insurance covers importers and Exporters for loss or damage to goods
being transported by sea transport to various parts of the world.

(c) Ship Owners Liability Insurance

This class of insurance covers ship owners against claims that may be made
against them.
(i) Death or injuries caused to crew members and passengers.
(ii) Loss or damage caused to other shop in a collision.
(iii) Loss or damage caused to beaches etc.

(d) Freight Insurance

Freight is the sum of money paid to the shop owners whose shop was hired for
the
transportation of goods.
At certain times, freight is not paid in advance until the goods reach their final
destination.
Freight insurance therefore, covers ship owners against the possibility of not be-
ing paid freight or hire money by clients who do not pay transport charges in
advance.

(e) Sellers interest insurance

Where goods are sent to a buyer in a foreign country and the buyer
refuses to accept delivery of these goods possibly because he/she is
bankrupt, the seller’s interest insurance would cover the goods while
arrangement are being made to sell them for the best price possible. Compen-
sation is paid to the seller if the goods are stolen or damaged in anyway before
they are sold.

MARINE POLICIES
Types of marine policies include;
(a) Voyage policy
This type of marine policy is taken out for a particular journey e.g. from Dar e
slam to
New York: USA: Cargo insurance is usually taken on voyage policy
rather than on a time policy.

(b) Time policy

Time policy is marine insurance taken for a particular period of time to cover
the hired ship,
for instance for a period of six months.
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(c) Mixed policy

Mixed policy requires that a sum of money agreed upon between the
person seeking insurance cover and the insurer is deposited with
under risks so that each time a ship makes a journey the premium is
deducted from the amount deposited with underwriters. Floating policies are
appropriate where regular shipments of goods are made. They save time and
troubles of taking out separate insurance policies for each trip made.

MARINE LOSS
Marine costs may be classified as:
(a) Particular average

Particular average refers to any form of cars or injury that may be suffered
whilst the ship or goods are in transit. The losses suffered may be complete or
partial loss but it should be as result of the risks insured against.

COMMUNICATIONS

Communication is an aid to trade concerned with informing people on goods and ser-
vices available, and enabling businesses and individuals to be in contact with other
businesses and relations within the country and abroad.

Importance of Communications
 provides business people with efficient means of contact within the business
organization
 e.g. communication between the branches of an organization, or between de-
partments etc.
 informs the public on goods and services available on markets, where they can
get them and at what price.
 enables businesses to be conducted world wide. Today, the whole world is one
huge market. No matter where a person lives, the various
 facilities available allow him or her to conduct businesses anywhere in the
world.
 widens the markets for the firm’s products in both home and overseas trade.
 enables customers and suppliers in home and overseas trade to be
 contacted speedily
 by telephones, fax, electronic mail, telex, internet, air mail etc. thereby allow-
ing for quick:
 Placement of orders for goods urgently required e.g. spare parts etc
 Dealing with customers’ complaints, and for
 Settlement of payment and queries that may arise in a business
 transaction.
 enables businesses to compete with one another.
 enables businesses to penetrate new markets or widening of markets.
 allows businesses to be in contact with sales representatives in home and
overseas markets.
 enables businesses to be in contact with stock markets world wide for de-
tailed information on existing share prices.
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 is essential in organizing surveys or trade fairs to promote business

 activities.

Types of Communication services

The two main types of communication services are postal services and
telecommunication services.

A. Postal services
Postal services are services provided by post offices for posting and
delivering of letters, parcels etc. The following are just some of the postal
services:

1) Business reply service

 is a postal service that enables licensed businesses use
 to receive replies or orders from potential clients
 using special envelopes or forms provided by the seller
 which do not require postage stamps to be affixed on them.
 The firms are issued with licences to use business reply service
 by the post office on payment of a deposit.
 Used by mail order firms
The reason why firms use a Business rely service is to encourage customers corre-
spond with them since there is no additional expense on postage of letters. Mail order
companies usually use business reply services to encourage customers to order
goods from them.
Business reply service may be used to send first and second-class mail. First class
mails are letters that are required to be delivered the same day of posting. Sec-
ond class mails include mails that do not require urgent delivery.

2) Poste restante
Poste restante is a postal service provided for visitors and travellers to town or city
where they do not have a permanent address. Letters, of a town from where the
letters are collected. For example, Miss Maambo Phiri, a visitor with no per-
manent address to Livingstone city can have her letters addressed as
follows

Stamp

Miss Maambo Phiri

Livingstone main post office
Poste restante
LIVINGSTONE.

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In the above example, Miss Lubasi who is expecting to receive letters from
friends, relatives etc. by poste restante service would be checking for her poste
restante letters at Livingstone Main post office.

3) Data post
Data post is a postal service that provides a speedy, secure and highly reliable means
of sending and delivering urgent and important packages containing business docu-
ments and goods. It’s particularly useful for exchange of
computer materials such as tapes, diskettes etc. Data post offers overnight door
-to-door delivery of packages or parcels handed in at post offices counter
displaying data post sign. Packages are given special security treatment. Data post
is
operated both locally and internally.

4) Registered letters
This post service enables valuable items such as cash notes to be sent through the
post office. An envelope or package being used in sending items by
registered letter must have a large blue cross on it. Compensation in proportion to
the value of packet and registration fee paid on posting is paid if the item gets lost in
the post office.

A certificate of posting is issued to the sender as proof of posting. Upon delivery of

a registered article, signature of the person receiving the item is
obtained as proof of delivery.

5) Recorded delivery
Recorded delivery is a postal service used when proof of delivery is required. It is
used when sending important documents such as examination certificates, plans,
designs, legal documents etc.

Recorded delivery letters travel together with ordinary mail but are separated at the
delivery point where they are recorded in a book and signature requested from the
person receiving letters.

6) Cash on delivery (COD)

A cash on delivery service requires the customer to pay the trade charge before the
goods can be delivered to him or her. Mail order companies that sell goods through
the post office mainly use cash on delivery. The post office acts as an agent for the
seller. For example, a mail order company in South Africa can send a parcel by post
to a customer in Livingstone, Zambia. On receipt, the Livingstone main post office
will send an advice note to the customer requesting him or her to collect the parcel.
The customer will only be given a parcel on payment of trade charge specified by the
sender of goods for collection on delivery.
All items sent on cash on delivery service are registered on posting.

7) Express mail service

Express Mail service is fast and safe. It is used for sending important and
urgent documents. It enables quick sorting and delivery of mail in return for
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extra fee from post office customers.

Mail is personally accepted at post office and delivered to the destination.
Parcels up to a certain size and weight are delivered the same day of posting by
special messengers. Individuals may use this service to send special gifts to
friends and relations e.g. birthday presents etc.

8) Private bags
Private bags are used for posting and receiving letters. There are two keys to a bag.
One is kept at the post office another is kept by the owner of the bag. When letters
are locked in the mail bag at the post office, they can not be
removed until the owner opens the bag at his or her own place of work. Therefore,
private bags provide more security to letters than post office boxes.

9) Post Office Boxes

A post off ice box is used for receiving letters only. An individual or
organization renting a post box collects letters from the post office at any time.

10) Franking Machine

Franking machine prints postal impressions on envelopes. The postal
impressions show the amount of postage, place and date of posting. Franking
machines are used by organizations that send many letters at once. They save time in
affixing postage stamps on each letter.
A franking machine can be bought or hired from a company that sale
manufactures franking machines. However before the franking machine can be
used, a license to use it must be obtained from the post office. The post office sets me-
ters for the franking machines. The hirer of franking machine pays the post office
according to units of postage value used.

11) Philately
This postal services is concerned with issuing of postal stamps and historical items of
the post office. Philately produces such as postage stamps, neckties etc depicting
postal services are sold at the post office.
There are several more postal services provided by the post office.

The continuing need for postal services

Despite the abundant sophisticated telecommunication systems currently available in
our communities, there will be a continuing need for postal services. The reasons for
continuing need for postal services include the following:

 Postal services are usually cheaper than telecommunication services, and

therefore there will always be people using the cheaper postal
 services for their communication in preference to expensive
 telecommunication services.
 Postal services are used in sending goods in parcels at distant places. It is not
possible for one to send a parcel of goods by telephone or by fax, or by telex.
Therefore, there will be a continuing need for postal services.

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 Postal services do not require special equipment to transmit or to receive

messages. Thus postal services are usually used to send messages to the
remotest areas.

B. Telecommunication services
Telecommunication services that are use by people engaged in commerce in-
clude telephones, telegrams, telex, electronic mail, internet, fax, radio pag-
ing, radio messages etc.

1) Telephone

Telephone provides people engaged in commerce with speedy means of contacting

other business people over any distance either within the country or abroad. The
circumstances in which a telephone may be used include:

 When a customer wishes to inform his or her supplier that he or she was sent
with wrong or incorrect quantity or type of goods.
 When a trader needs to hold a discussion or conversation with a
 customer.
 When a person wants to speak to a particular person
 When a person wants an immediate response to a query etc.
 When a person wishes to leave a message on answering machine.
 When the supplier wishes to urgently inform his or her customer of a con-
signment of goods before it arrives.
 When a potential customer wishes to discover the company stocked an item
that he or she needs urgently.
 When a businessman wishes to conduct an urgent business with a client.
 When a fax machine is not available

Importance of a telephone to people engaged in commerce

A telephone provides immediate contact between businessmen over a distance
locally or internally

A discussion or conversation to clear the problem or seek advice or take other

orders may take place on telephone between the supplier and his or her cus-
tomer.

The problems to people engaged in commerce

a) A telephone does not provide a written confirmation of the conversation.

Therefore contracts made on telephones are risky because they may be disputed
later.
b) A telephone is not reliable for messages that are highly technical and compli-
cated in nature. For example it may not be advisable for trader to place for an
urgent order for a spare part for a complicated piece of
equipment using a telephone.
c) Communication can prove difficult for telephone users who do not
understand each other’s language.
Telephone services of commercial value to business people.
These include:
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 Personal calls: - A person call is a telephone call that specifies a

 person to whom the caller wishes to speak
 Local call: -A local call is a telephone call to another telephone number within
the same area or within the same telephone exchange
 Trunk call: -Trunk means long distance calls. A trunk call is another distant
exchange.
 International calls: -An international call is a call from one country to another
country e.g. A telephone call from Botswana to
 Zambia.
 Transfer Charge Calls: -A transfer charge telephone service enables
 telephone subscriber provided he or she agrees to pay for the telephone call
before it is made.
 There are many more telephone services available for businessmen and indi-
viduals.

2 Telex Service
Telex uses teleprinter, which is a combination of typewriter and telephone for
sending written messages via a typewriter keyboard over any distance locally or
internationally. Each teleprinter has a telex number, which is used to connect
one teleprinter with another to a telex line
The message is sent first by dialling the telex number of the receiving
teleprinter. As the message is being typed on the sending teleprinter, the same
message is automatically being received on the receiver’s teleprinter,

The circumstances in which a teleprinter may be used include: -

 When sending highly technical and complicated messages e.g. when a cus-
tomer
 wishes to place foe an urgent order for a spare part of a complicated piece of
equipment.
 When written confirmation of the message is required e.g. When
 sending a quotation, letter of query, invoice, statement of account etc.
Importance of a telex to people engaged in commerce
 Messages may be printed on a teleprinter even when offices are closed.
 Messages requiring written confirmation may be sent by telex
 Messages of highly technical and complicated may be sent by telex
 Telex can be used to send computer data
 Telex offers a twenty-four service and therefore message can be received even
when offices are closed because the recording of message is
 automatic.
 Foreign languages can easily be translated
 Telex provide instant written messages.

3) Facsimile (fax)
Fax is telecommunication service which is used for sending and receiving exact copies
of documents including exact copies of signature, pictures, diagrams and text over
any distance either locally or internationally.
Each fax machine has a fax number that is used to connect one fax machine with an-
other by way of telephone numbers.
The message is sent by first calling the fax number of the receiving fax machine.
Once an initial contact is made, the document will be put on the fax machine for
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transmission. As the copy comes out of the sending fax machine, the exact copy
of the same document is being obtained at the receiving fax machine. A fax ma-
chine is indeed a long distance photocopier.
Importance of a fax to people engaged in commerce
 A fax can be used to send and receive messages when the office is closed on 24
hours basis.
 A fax provides an instant written communication
 A fax can be used to transmit highly technical and complicated messages.
 Foreign languages can be easily translated.
 Fax transmission may be useful to lawyers who may need exact copies of text,
signatures, documents etc, needed in settling court cases.

4) Telegrams

A telegram is a telecommunication service that provides business people with a s

seedy means of sending urgent written messages to most parts of the country or
the world. The message is telephoned or faxed to the post office nearest to the
addressee and then delivered by hand. The charge for a telegram is calculated
per word and therefore unnecessary punctuated marks and statements should be left
out in the message.

The use of electronic mail has reduced the use of telegrams service.
5) Confravision (or video conferencing)
Confravission is a communication service that links a group of people in
distance studio location by sound and vision. Confravision enables people sepa-
rated by long distances to hold conferences. One of the requirements for holding a
confravision is for people to be at a local television station.
For example, a group of people in Kitwe, Zambia, can hold a conference by con-
fravision with one group in UK. The group in Kitwe would go to a
local radio station and the one in UK would do the same. The two groups will
then be able to exchange ideas on various issues.

6) Electronic mail

Electronic mail is a way of sending messages electronically via the telephone line
without the need to post letters.

The person sending a message by electronic mail first prepares his or her
information on a microcomputer. He or she then transmits the message via a
telephone network to a central computer. The person receiving that
message has to use another microcomputer and a telephone in order to get the
message from the central computer.

Electronic mail works much in the same way like the traditional post mailbox that
the letters (ie the messages) are sent in an electronic form and the post boxes (ie.
Computers) are opened via the telephone

Advantages of Electronic Mail

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 Electronic mail is fast

 Electronic mail gives a written record of communication
 Electronic mail has many facilities such as internets
 Information is secret since subscribers use secret codes or pass word to access
information.
 Electronic Mail allows the use of computers.

7) Teletext
Teletext is a communication service that enables people who have television with
teletext to obtain a wide variety network into a television or a computer reports,
sports, news, cooking hints and other items of general interest

8) View data

View data is a telecommunication service that enables a person to transmit

information through a telephone network into a television or a through the same view
data network.

The most important characteristic of view data service therefore is that it

enables view data customers to send and receive information.

The importance of view data to people who are engaged in commerce

include:-
 It provides electronic mails
 It enables goods and services to be advertised
 It enables goods to be ordered on sale order forms transmitted by the supplier
to the customer’s view data. (i.e. computer) screen.
9) Radio paging
A person to be contacted carries a bleeper and when it indicated that he or she is
wanted by giving a bleezing or buzzing sound. The person picks up the
nearest telephone, dials a number and is then put through to his or her call.
Radio paging is usually used in large working places such as hospitals factories,
plants etc.

10) Radio Message

Radios can be used to send urgent radio messages. For example, the owner of OBO
ship who wish to divert his ship from the original destination because of a local
political crisis would communicate his message to the ship master by radio

11) Internet
Internet is a global network of computers which allows users to access world wide in-
formation. It is used for education, entertainment, business, electronic mails, adver-
tisements, and World Wide Web.
Advantages of Internet
 Attractive and interesting adverts are shown in colour
 It has the widest coverage
 It combines visual impact with sound
 The user is able to receive the response immediately/it is fast

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Disadvantages of Internet
 It is expensive to maintain the website
 Needs specialised equipment (computers) to access the information
 May have limited coverage in certain countries

12) Computers
Computers are used for storing and providing of information.
Information in a particular topic can be produced on a visual display unit (VDU)
that is like a television screen within seconds. Computers are used in all fields
such as construction, medicine, the law, science, economics,
accountancy, and commerce. Sooner or later there will be no office without a
computer.

The benefits of a computer include: -

 It provides speeder response to customer enquiries about the availability of
good sin the retail shop, warehouse or factory
 It improves customer’s relation due to fewer arithmetic errors more timely in-
voices and statement of accounts.
 It provides Internet facilities useful for advertising the business and for sale of
goods.
 It provides electronic facilities useful for exchange of information
 between the departments.
 It allows for managers to make better decisions
 It simplifies the resolving problems in various fields of work
 It improves the flow of information between information users
 It is useful in stock control and storerooms etc.

ADVERTISING.

INTRODUCTION
Advertising is a French word which means “bring to notice”. Goods and
services produced must be made known or be brought to the attention of the general
public, thereby promoting and maintaining the manufacturers’ market for the prod-
ucts.
What is the purpose of advertising?
Aims of Advertising
 to increase the sales
 to widen/increase the market
 to maintain the good will of the business/favourable image of the business
 to educate the general public on the new and existing products
 to inform the general public on the nature of the goods and where the good
are found and at what price.
 to introduce or launch new products on the market
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 to persuade the general public to buy the product or change their brand
 to keep/maintain the brand name in the minds of the public
 to sustain or create demand for the product
 Remain competitive
 Achieve market penetration
 Increase market shares

Other purposes for which advertising might be used for apart from increasing sales
- making announcements in the change of business premises
- death of an employee/termination of employment
- warning customers of a faulty product/withdrawal of a product
- calling for an Annual General Meeting
- Declaration of dividends paid and financial statement
- To make government announcements such as national insurance rates or
change of the school calendar by the Ministry of Education and new tax
charges.
- To make public announcements such as legal and company notices and an-
nouncements to public by Zesco of mass electricity disconnections and load
shedding
- Advertise national campaigns e.g. road safety, health campaign against
HIV/Aids.
- To advertise new jobs and vacancies
- To announce births, deaths, marriages, charity appeals, lost and found property
etc.

How Advertising help companies to maintain and increase sales

 Advertising helps a company to maintain and increase its sales by
 informing customers or traders of new goods
 Reminding them of the existing goods.
 Persuading them to purchase the goods
 Inducing customers to change brands
 Using various methods of appeal
 Informing customers where goods are available and what price
 Possibly by reducing prices of goods to customers

METHODS OF APPEAL
Advertising must be effective to reach the intended people and it must be appealing to
them, and cost less in relation to the anticipated sales. To achieve this, the following
method of appeal must be used:

Personality
famous people may be shown using a product in the advertisement such as Dr Ke n-
neth Kaunda and Cherise to give the product/service an acceptable image (Colgate
and Ditto)

Ambition for success

The advertisement suggests that the use will be successful in his/her ambition such as
Milo drink and Muzi High School
Work Simplification
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The product is shown in the advertisement to simplify work performance such as

computers and cell phones
Social Acceptability
The product is claimed to make the user more acceptable to other people
Health
The product is claimed to make the user more healthier such as lifebuoy and protex
Display of goods
Attractive display of goods on windows and shelves may be used to win the con-
sumer’s minds.
Excellence
The advertisement suggests that the services offered are of high quality such as
Palmodzi Hotel and Lake Road PTA School
Comedy
comedians may be used so that the advert can easily be remembered and the product
will easily be bought, such as Bikilon and Difficult.
Romance
The advertisement suggests that the user of the product will be more attractive to the
opposite sex, eg Fair and lovely cream, Romance soap and Geisha

Types of Advertising
A. Information Advertising
 This gives publicity by merely starting facts.
 It therefore gives services and does not seek to induce the consumer to buy the
product.
 Examples information advertising would include health warning on a
 packet of cigarettes, the use of safety belts in a motor vehicle, the
 announcement of an election results etc.
 It is aimed at creating a demand for a new product(usually used when launch-
ing a new product on the market), changes made in the product and reminds
the people of the existing products.

B. Persuasive Advertising
 This tries to induce the consumer to buy, by the use of certain key words,
models or ideas
 It aims to create in the mind of the consumer pleasant association with prod-
uct
 For example the use of female models to advertise cars and tobacco makes ap-
pear that buying such goods the consumer will be able to attract the
 opposite sex.
 It can be instructional or product oriented
 Also the advertiser may use a good personality so that there is the
 implication that if you buy it you will be as successful as the famous person
 advertising it.
 Advertising slogans are usually used to persuade the public to buy.

Dangers of Persuasive advertising

 It emphases only on the good point of the product, that is it does not
 mention the bad side of the product
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 It makes people to live beyond their means(extravagant)

 May promote dangerous and harmful products
 It contributes to the lowering of moral standards in the society
 It may go to extremes
 It may be indecent
 It encourages impulse buying
 May mislead or deceive customers

C. Collective/Generic Advertising
 It is where a group of organizations in the same trade or industry join together
to advertise the product for mutual benefit instead of competing with each
other.
 They promote a product in general terms.
 For instance, the advertisement could be arranged by a Marketing Board,
Tourist Board.
 Examples would include the advertising of eggs, milk industries, insurance
companies and banking institutions.

Advantages of Collective Advertising

 gives general information about the product
 may be cheaper as cost is spread between several producers
 should increase overall demand for product
 allows competitors to group together for mutual support

Why many companies who use collective advertising find it essential to use
competitive advertising
 to defeat competitors
 to sell more goods
 to earn greater profits
 to give information on new products
 to obtain greater market share
 to emphasise own particular products
 to make use of other media
 to target different markets/market segments
 may not believe collective advertising is effective

Competitive Advertising
 This is undertaken by an individual company/competitors usually
 promoting it’s own product.
 By brand name
 Against similar products of competitors
 The product is highly high lighted as the most outstanding
 For example Uni-Lever South East Africa may advertise its products as the
most outstanding ones.

Dangers of Competitive Advertising to the Consumer

 adds to cost of the product
 may be misleading
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 may be harmful/emphasises on good points of product only

 encourages impulse buying
 provided insufficient information
 may promote dangerous products
 encourages spending beyond means/being extravagant

What are the Benefits (Advantages) of Advertising to the manufacturer?

Advantages of advertising to the manufacturer:
 Enables the manufacturer to publicize the products
 Informs on both new and existing products
 Enables manufacturer to persuade the public to buy the product.
 Which may lead to increased sales ( stimulating demands)
 Increased sales may lower costs
 And increased profit may result
 Advertising brings competition amongst manufacturers of similar products
 Manufacturing may obtain information from advertisements on goods and
services which are available
 Manufacturers may advertise for staff vacancies.

What are the benefits (Advantages) of Advertising to the consumer?

Advantages to consumers:
 They are informed of goods services where they are found of which they might
otherwise not be aware and at what price..
 Especially new products
 It allows them to choose from a wide range of goods brought to their notice
 And may improve standards of living for may of the consumers
 It informs them of when, where, price, quantity, size and brand.
 Competition between manufacturers may lower prices improve quality of
goods and services.
 Advertising revenues subsidizes the prices/cost for newspapers,
 entertainment, magazines and other forms of media.
 It informs consumers of events, weddings, fairs, and air time tables.
 Introduced to new products
 Allows for a more choice form a wide range of goods
 Encourages competition between forms – lowers prices/ prices
 Allow for the spread of government information
 Local notices e.g births, marriages, deaths
 Local events notices.

What are the dangers (disadvantages) of Advertising to consumers

 Encourages overspending/impulse buying
 Makes people buy what they do not need
 and indeed what might harm them e. g smoking
 Encourages duplication of brands
 Encourages discrimination as a result of persuasive, as or appeals to the emo-
tions
 It may mislead the consumers

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 Sometimes makes false claims by publicizing only the better points of the
product are mentioned.
 It may exploit the consumers, such as sex appeals and hero worship
 It may restrict the consumer’s choice of goods
 It contributes to the lowering of moral standards(moral decay) in the
 society

What are the dangers (disadvantages) of Advertising to the manufacturer

 It may add to the cost of production especially if it is unsuccessful. The goods
therefore, may become too expensive for the consumer to buy
 Much money is used on advertising, and many people feel would be better
spent on improving the quality and efficiency of the product
 It may lead to reduction of competition, large firms are able to afford the best
type of the media as well as the wide spread of the media.
 In consequence, the small firms may not be able to compete and possibly close
down
 some advertisements may not only be misleading but also wasteful, for
 example a firm may advertise similar goods in direct competition of each
other, giving the impression that the goods are competing against each
 other, when in fact they are made by the same manufacturer
 this leads to duplication and waste of resources

How can a manufacturer of breakfast cereal whose products are well known
justify the expense of a national advertising campaign?
 The manufacturer of breakfast cereals must continue to advertise his
 well-known products because:-
 The manufacturer must keep his products before the public
 To keep them informed that the products are still available
 Otherwise the public might buy his competitor’s goods, which were
 continuing to the advertised.
 It is also necessary to persuade new customers to buy the manufacturer prod-
ucts in preference to their existing brands.
 A national advertising campaign is necessary because breakfast cereal is a
family product nationally distributed and formed in most households.
 It is therefore necessary to reach most consumers in the country.

Why it is necessary to control advertise standards or protect consumers from some

forms of advertising?
 Advertisers may attempt to mislead or deceive customers in an effort to im-
prove sales.
 And may make untrue statements/false
 Some advertising may undermine social standards.

What is a code of Advertising Practice?

 it is a voluntary agreement
 Set- up by the advertisers themselves
 To establish professional standards
 By which the public are protected
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 From dishonest or misleading advertising

 The basis of the code is that all adverts should be legal, decent, honest and
truthful.
 And should be prepared with the sense of responsibility to both the consumer
and the advertising industry in general.

What is the purpose of a code of advertising practice?

 To protect consumers from misleading dishonest, untruthful advertisement
 From unscrupulous advertisers
 By laying down rules, which require that all advertisement are legal, honest,
decent and truthful

How may such protection be given?

- Protection is given by:-
 A code of Advertising Practice Administered by Advertising standards Au-
thority
 By law
 The Government
 The Law
 The law has some control over advertising
 The Trade Description Act 1968, the Misrepresentation Act 1967 and the
Theft Act 1968 provide some control over untruthfulness in advertising.
The Government
May also place control on advertising
For example, it places a Government health warning on all cigarettes packets sold,
like tobacco is harmful for your health

What are Advertising Agencies?

These are separate firms specialising in helping the product of a seller to reach po-
tential buyers and stimulating demand.
They are a business which specialists in helping the seller with his advertising re-
quirements.
What are the functions of advertising agencies?
they perform such functions as:-
 Giving advice and assistance on choice of media
 Reserving or booking space or time on media
 Placing the advert on the media
 Creating or preparing or designing the advertisement.
 Undertaking market research relating to packaging price etc.
 Produce the advertisement
 They supply market information on what will stimulate an increase in demand
of the goods(market research).
 They assist in general public relations work for the seller.

Why are most National Advertising Campaigns undertaken by advertising agencies

Advertising agency used because:-
 it may not be economic for the company to have its own full time advertising
staff or department.
 Or it may not have staff with necessary experience in large scale advertising.
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 An advertising agency however undertakes work for many.

 And has highly specialised staff to assist with all aspects of advertising Such
as:-
 Give advice on choice of media
 Booking space and time on media
 Produce the advertisement
 Market research-commercial with obtained information.
What should you consider when designing an advertisement for a part- time job in a
shop?
 Content of the advertisement
 Display of the Advertisement
 Layout of the advertisement or the key words.
 Where the advertise to be placed
 Cost of advertising
 Whether it is a one-off or a repeat

Advertising Media
A channel for communicating advertisement
Factors which would influence the choice of media
The factors which would influence the choice of media are
 what type/ class of person will buy the product (i.e to what type of person is
the product aimed (Target group).
 What area is to be covered by advertising campaign i.e Extent of Market
 What type of the product i.e nature of the product (some must be demon-
strated)
 How much is the advertising budget for the campaign (how much can the
company afford e.g T. V expensive.
 What profits are expected from the sale of the product (cost of advertising
must be covered)?

1. National/National Press and Local Newspapers

Commonly used because of it’s wide coverage
Large number of consumer
But limited only to those who are literate

Advantages of Newspaper advertisement

 they give a wider national coverage
 they are relatively cheap than television adverts
 the advert can be placed in appropriate places in the paper to catch the eyes of
the leaders
 information can be stored and referred to later, so it gives a long life to adverts
 the use of daily newspapers for advertising ensures an immediate coverage of
the intended audience.
 The advert may be more detailed
 It may be passed on to others
 Can circulate amongst readers
 Space can easily be booked

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Disadvantages of Newspaper advertisements

 they are perishable, as a result advertisements have short life because very few
people keep newspapers for future reference and they may be used by traders
for wrapping things.
 Poor quality of print may reduce the effectiveness of the adverts
 Newspaper advertisements are not accessible to illiterate people
 They may not be taken very serious by some readers.

2. Magazines e.g Women’s magazines

 This can give attractive coloured illustration of Advertisements]
 Can be kept people for a quite a length time (more permanent)
 Special coupon offers can be made.
 Magazines may be seen by a number of customers
 Magazines may have limited leadership
 And appeal only to a certain classes e. g to women

Advantages of magazines for advertising

 they offer targeted advertising
 they are aimed at a specific class of people who are expected to buy the prod-
uct, for example, breakfast cereals in the women’s magazines is appropriate as
it would target the women.
 They may also be seen by many readers other than the person who bought it
 The advert can be illustrated in a colourful way and on good quality paper to
create aspiration
 Special coupon offers can be made
 They have a long term impact as they can be kept and referred to later
 It is cheaper to advertise in magazines than television
Disadvantages of magazine advertising
 they are relatively more expensive than, henceforth, they are not as widely
read as newspapers, as a result they reach fewer people
 they may have a limited readership
 they appeal only to a certain class of people

3. Television
 it reaches a wide range of customers
 Visual impact as well as sound( Easy to remember what you see and hear)
 It shows (demonstrated) visually) the usefulness of the product, its quality and
how it is used.
 It can be shown or appropriate times for housewives/family
 It is very expensive
 Not always well received by the viewing public

Advantages of television advertising

 it combines visual impact with sound, so it is very effective(lasting impression
– sound and vision)
 it gives the widest coverage(massive coverage)
 it can be seen by many viewers especially at peak hours

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 it can be shown at the right time for the right audience(time selectivity, that is
can be shown at specific time)
 it reaches people’s homes when they are relaxing, so it can create an aspiration
 can be booked at peak hours, eg. News time
 the advert can be repeatedly be shown

Disadvantage of television advertisements

 it is very expensive
 it is not always well received by the viewers
 they tend to be short lived and may not produce a long lasting impact
 they are very few television sets in rural areas
 not all the places have television signals
 some people may take them as entertainment
 they may be submerged in a large number of others if not well planned

4. Radio
 Reaches a wide range of customers, even people in remote areas in the coun-
try.
 Many people own Radio
 Cheaper for the producer to advertise on Radio
 Advertisements are broadcasted at various times during their programmes
transmissions.
 Advantages of radio advertising
 it has the widest coverage
 many people have access to the radio
 radio signals reach almost everywhere, including the remotest place
 many radio stations are now available, this provides an opportunity to target a
particular ethnic group
 repeated adverts are possible
 the specific audience can be targeted at specific time/language
 it is cheaper than television
 it has a lasting impression through catchy tune or jingle

Disadvantage of radio advertisements

 the advert can only be heard and not seen- no visual stimuli
 the advert may only be received by a secondary audience who may not may
much attention to the advert
 radio adverts tend to be short lived

5. Window Dressing
Designed to attract consumers into a retail outlet
And keep their attention to buy goods when inside the store.

6. Free samples
Are often given to advertise a product which is new on the market
For example a brewery may allow its customers a free first point of a new beer to
persuade them to buy more of it afterwards.

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7. Posters
Can be seen on hoardings everywhere
Persuades and informs the local people or community
Local people can afford the type of media
Cheaper than any other forms of media
They convey the message visually to passers by
Advertisements can be placed on bill boards or on sports stadium headings.

8. Leaflets/Hand Bills
Can be handed out by advertisers
Normally done by local advertisers such as by a hairdressing salon showing reduced
prices
May be cheaper than either television or Magazines
Not permanent

9. Plastic Bags
Can be printed with the name of a firm and given away with each purchase.
This is a cheap form of advertising.

10. Clothing
Manufacturing will often print their name or symbol in a prominent place for every
one to see
For example the word “Levi” is seen on Jessie and Pullovers.
Footballers have sponsor’s name displayed on their football shirts.

11. Illuminated Signs

These are frequently found on premises near busy centres.

12. Trade Journal

Used by companies when:-
Targeting a particular group
As trying to attract wholesalers and retailer
Because arising to sell through them
Able to give detailed information (full description)
Wholesalers and retailers read these magazines
Other means of advertising may not be so effective.

13 Trade exhibition/fare

Advantages of Trade Fare

o customers are able to see the actual product/service
o able to target certain group for various products/goods
o clever display may attract/encourage impulse buying

Disadvantages of Trade Fares

o customers who do not attend shows may miss out
o as it appeals only to people who attend the show
o or are passing near the exhibition place

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BUSINESS UNITS

By Business Units we mean the way businesses are owned and operated. These are
determined by the way they raise their capital, ownership, control and objectives.
Zambia is a mixed economy, this means that it has both privately owned businesses
(the private sector) and state owned industries (the public sector).
The following are the various types of business units
1. Sole trader
2. Partnership
3. Private Limited Company
4. Public Limited Company
5. Public Corporation
6. Co-operative
7. Holding company
1. Sole Trader
CHARACTERISTICS OF A SOLE TRADER
- It is owned and contrlled by one person
- Owner raises the capital to operate the business from personal savings or from
borrowing from relatives of friends.
- This is therefore a difficult way to raising capital
- The owner manages the business without assistance from his employees
- He can therefore make any independent decisions and changes any time he
wants to.
- All the profits go to him (sole proprietor) and has to bear all the risks or losses.
- There is no legal distinction between personal property or the owner or the
business and the assets of the business(has no separate legal entity).
- As a result in such a business the owner has unlimited liability
- Meaning that if the business owes money to a lot of people such that money
from the business can not be enough to repay, the can go to the extent of
selling the personal property in order to recover the money.
- The sole proprietor does not pay company tax but personal income tax.
- It lacks continuity as the business dies with the owner
- Has great flexibility when it comes to decision making
- The owner enjoys all the profits alone
- He provides personal service to her/his clients
- s/he needs little documentation to start the operation of the business
- does not need to communicate or inform the general public on the operations
of the business

Advantages of a Sole Trader

- No sharing of profits because all profits go to her/him.
- The owner makes independent decisions(has great flexibility)
- He does not pay company tax but only personal income tax
- It is easy to establish such business as there are less formalities required to set
up the business
- It is easy to organize and manage because the owner does not need to consult
anyone in making decisions.
- The owners of the business give personal attention to customers.
- Needs less documentation to start the business
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- Able to supervise (if any) staff closely

Disadvantages of Sole Trader

- It is difficult to raise capital and hence difficult to expand
- May not enjoy the economies of large scale production due to limited capital
such as favourable discount from the manufacturer
- Unable to employ specialist workers in order to provide the expertise to the
business
- He has unlimited liability
- There is no legal distinction between the owner nd the business
- Lack of continuity in case of death or illness of the owner.
- Suffers all the losses alone
- Has all the worries/risks of the business

Partnership
- A partnership is merely agreement, usually in writing by means of which
several individuals trade together with view of making profit. A written
arrangement usually take the form of Articles of Partnership or Partnership
Deed

Partnership deed
This written agreement is known as a partnership deed and it staes the following:
- The names of the partners
- The name of the business
- The amount of capital each partner contributes
- The ratio in which partners are to share contributes
- The ratio in which partners are to share the profits/losses
- Also the rate of interest payable on capital e.g. 6% of each partner’s capital
- The duration of the partner ship.
- The amount each partner may withdraw for private use
- The manner in which the accounts are to be kept and audited.
- Whether any partner is going to receive a salary or not
- The rights of each partner
- The procedure of admittinf a new patner
- In the case of disputes how shall they be resolved

Types of Partnership
- the two types of partners are

Ordinary Partnership
- All the partners in this partnership have unlimited liability i.e. they all stand
to lose their personal property in case of business failures.
- In this partnership each partner has equal powers and responsibility
- Each partner takes an active part in the management of the business.

Limited Partnership
- The type of partnership in which some of the Partners have limited liability
- This means that the liability or the limited partners is only confined to the
amount they have invested in the business.
- However he doesn’t share in the profits
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- Although in a limited partnership there must be at least one general partner

whose liabilities is unlimited.
- A limited partnership must not be registered with the register of the compa-
nies

Differences between Ordinary and limited Partnership

- In an ordinary partnership all partners have unlimited liability where as in
limited partnership some partners have limited liability
- The limited partner do not have the final voice in the Management of business
though they share in the pofits where as in an ordinary partnership all the
partners take part in the management of the business.

Types of Partners
- There are three types of partners

Active Partner
- This is a type of partners who take active role in the running of the business
and has unlimited liability.

Sleeping Partner
- This is a type of partner who does not take part in the running of the business
but has contributed some money towards the capital and only participates in
the sharing of the profits.

Nominal Partner
- This is a type of partner who allows his name to be used in the business but
does not contribute money towards the capital neither does he participate in
the sharing of the profits.

Characteristics/features of partnership
- Its has two partners and maximumof 20 membersexcept for professional
partnerships who are allowed to be more that twenty
- A partnership is based on a partnership deed.
- A partnership is not a separate legal entity
- Partner usually have unlimited liability
- Controlled and owned by partners
- A partnership ceases on the death of a member(lacks continuity)
- Easy to set up because they are few documentations e.g. partnership deed.
- Accounts of partnership are not made public (they are private)
- Capital is raised through the contributions from the partners

The Advantages of changing from a Sole Trader to a Partnership

- They will have more capital than that of a sole trader.
- Partners are able to raise additional capital more easily.
- The business benefits from the expertise of both/all the partners e.g. one may
be an accountant and the other a marketer
- There will be division of labour between/among the partners
- The partners can consult each other (sharing of ideas) in solving problems.
- The overhead expenses may be saved by closing one shop or premises and con-
centrate on one side.
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- Additional savings may be made because duplication of advertising will be

avoided.
- There is better utilisation of capital

Disadvantages with the Partnership type of Business

- The Profits of partnership have to be shared amongst partners
- There may be disagreements between/among the partners
- Decisions may not be so speedy
- Decisions are binding on all partners even if one of them has not been con-
sulted and may cause problems.
- Relationship in partners can be broken up by conflict between partners
- Capital may be more difficult to withdraw
- Lacks continuity as the Partnership becomes dissolved on the death/retirement
of an individual partner
- Partners have unlimited liability except for limited partners in limited part-
nership
- Lack of capital may limit expansion
- Membership in partnership is limited to 20; this restricts the firm’s ability to
raise more capital.
- The business has no separate legal entity

SIMILARITIES BETWEEN THE SOLE TRADER AND THE PARTNERSHIP

 both the sole trader and the partnership have unlimited liability
 both have no separate legal entity
 both lacks continuity as they come to an end upon the death of the partner or
sole trader.
 Both are directly controlled by the owners
 Both keep their financial records separately

DIFFERENCES BETWEEN THE SOLE TRADER AND THE PARTNERSHIP

 A sole trader is formed by one person while the partner is formed by 2 to 20
people except for professional partnerships
 A sole trader does not share profits with any one while profits of a partnership
are shared amongst the partners
 There is no division of labour in sole trader while in partnership there is divi-
sion of labour
 A sole trader raises capital from personal savings while capital in partnership
is raised from contributions from the partners

JOINT STOCK COMPANIES

- These are a types of business where the owners have limited liability i.e. their
liability is limited to the amount inversed in the business.
- The owners of limited companies are called share holders because they buy
shares
- The capital of limited companies is divided into shares and it is known as share
capital.
- Shareholders elect board of directors who control the business.
- The board of directors appoints managing director who is responsible for day
to day running of the business.
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- The board of directors appoints managing director who is responsible for day
to day running of the business.
- The share holder have little say or powers in the general running of the com-
pany except that they have a role at the Annual General Meeting (A.G.M.)
- the shareholders have limited liability,
- limited companies have separate legal entity from its owners

Procedure in the formation of companies

- There are certain legal requirements that must be before a limited company
can be formed.
The following are the requirements:

1. MEMORANDUM OF ASSOCIATION
- This is an application to the registrar of companies that a company may be
formed by promoters of the companies. It relates to the external affairs of
the business
- This memorandum is given to the registrar of companies before a company is
incorporated
- It states the following:
- The name of the company with the word Ltd or plc after its name
- The objective (aim) for which a company is established.
- The address where the registered company will be situated (Headquarters)
- The statement that the liability of shareholders is limited.
- The amount of capital showing its divisions (shares)
- A statement whether it is private or public
- The number of shares to be taken by each of the Directors.

Reasons for including these items

- The name of the company is there because no other name will be mixed
with the name of another company.
- The company must state the objective of the company because it is re-
quired in order to make known what the company is going to do.
- The company must state the address where it will be situated for easy
contact
- The statement that liability is limited to show that shareholders’ liability
is limited to the amount invested.
- A statement of amount or capital is necessary in order to let what would
be shareholders to know the amount to shares and types.

2. Articles of Association
- it is a document setting out the constitution and regulations (set of rules) of a
registered company.
- These rules are drawn up to govern the internal affairs/working of the
company.
There rules include:
- the rights of shareholders
- the powers of directors
- the procedure of meeting
- the procedure of dividing profits
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- the procedure of dividing profits

- borrowing powers of company
- The issue and transfer of shares
- The method of audit
- the articles of association is then submitted to the registrar of companies.
- The registrar of companies examines the two documents (memorandum of
association and articles of associations)
- If the registrar is satisfied, he allows the company to start by issue certificate
of corporation.

3. Certificate of incorporation
- It is a confirmation by the registrar of companies that a company can start
trading
- It recognizes the company as a separate legal body
- But a public limited company must first issue the prospectus.
- The certificate or incorporation contains the following information:
(a) The name of the company and its registered number
(b) A statement that it has been registered in accordance with the law.
(c) The signature of the registrar.
4. Prospectus
- it is an invitation to the public to come and subscribe/buy shares.
- It gives details of the shares of the company and the price at which they are
offered.
- It also provides details of the company’s past result (history) as well as as
future prospects.
- In other word the prosectus is an advertisement
- The registrar will then issue the certificate of trading so that the public limited
company can start its operations.

5. Certificate of Trading
- It is authority issued by the registrar of companies to allow the formed
company to start the business.

The two types of limited companies are:

1. Private limited company

2. Public limited company

Characteristic of Private Limited Company

- owners are share holders
- Minimum of two share holders but no maximum number
- It has a separate legal existence from its shareholders
- Shareholders have limited liability i.e. can only lose amount paid for shares
- It must be registered with the registrar of companies.
- Many legal requirements to set up a private limited company e.g. memoran-
dum of association and articles of association have to be submitted to the regis-
trar of companies.
- a private limited company does not need a certificate of trading to start oper-
ating
- Profits are distributed to share holders as dividends
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- Managed by board of directors who are elected by shareholders

- Board of directors appoints the managing director who is responsible for the
day to day running of the business.
- Capital is raised through Sale of shares
- shares for a private limited company cannot be offered for sale to the general
public i.e. they cannot be quoted at the stock exchange.
- More capital and borrowing capacity
- There is continuity of business even when one share holder dies
- Private limited company has LTD after its name
- Accounts are filled with the registrar of companies and are not published
- The capital and ownership of a private limited company is divided into shares

The Characteristics of Business Units can be summarized as follows:

- ownership
- capital raised
- control
- profits
- formation
- relationship (unlimited and limited liability)

Characteristics of Public Limited Company

- The company is owned by share holders
- It is a separate legal entity
- Share holders have limited liability
- Set up by minimum of two shareholders but no maximum
- Registered with the registrar of companies
- Many legal requirements e.g submits memorandum and articles of association
- And it requires trading certificate
- Capital is raised through the sale of shares to the public
- It issues a prospectus in order to appeal to the public for them to buy shares
- Share holders elect a board of directors at the Annual General Meeting.
- Board of directors controls the workings of the company
- Day to day running of the business in under the control of managing director
- Public limited company has the motives of making profits
- Profits are distributed to share holders as dividends
- Name ends with PLC after the name of the company.

Advantages of a public Limited Company

- All the shareholders have limited liability
- It has greater borrowing capacity as banks are more willing to lend money to
large businesses
- It has greater continuity as the business continues despite the death of a
shareholder
- It has separate legal entity from its shareholders
- Shares are quoted on the stock exchange hence greater possibility of raising
capital
- They enjoy economies of scale
- It is able to merger or takeover or acquire other businesses

Disadvantages of a Public Limited Company

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- It has more cost and more legal formalities in forming a public company, for
example registration of the company with the registrar of companies and issu-
ing of the prospectus
- They are subject to takeover if another company buys 51% of shares
- Management of the public Limited Company becomes difficult as the company
grows in size
- The separation between shareholders and the people managing the company
may lead to conflicts with the shareholders
- The publication of financial accounts for public inspection reduces the privacy
of a public limited company
- There are more formalities in running a public limited company, eg holding of
the Annual General Meeting and quoting of the share on the stock exchange.

Explanation of the following terms:

Public
- The general public is invited to buy shares through the prospectors i.e. open to
the public.
- And the information regarding the company is made available to the member
of the public.

Limited
- This means that the liability of individual shareholders is confined/restricted
to the amount they have invested in the business.
- Therefore the shareholders’ personal possessions are not risk
- This protection enables small investors to invest in industries without fear.
- And therefore enables companies to obtain larger amount of capital.

A Separate Legal Entity

- This means that the company has its own legal existence
- It is separate from that of its shareholders
- Thus a company can enter into contracts in its own name and it can sue or be
sued.

Board of Directors
- These are leaders of the company.
- They control the business
- They are elected by shareholders at the Annual General Meeting
- They appoint the managing director who is in charge of day to day running of
the business
- They recommend the rate of divindeds p[ayable to shareholders

Managing Directors
- He is charge of day to day running of the business
- He co-ordinates policy matter of the company

AnnualGeneral Meeting
- A meeting held yearly by shareholders of the company.
- At this meeting, Board of Directors gives financial report and other reports.
- At this meeting accounts of a company are approved nd board of directors are
elected.
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- The aims of electing the Board of Directors are as follows

(a) Approve the audited accunts presented by the managing Director
(b) Elect Board of Directors
(c) Receive the Directors reports
(d) Discuss the affairs of the company
(e) Deal with issues that could not be sealed by the Board of Directors

Share Capital of the Limited Company

- A share is a unit of capital.
- The capital of a limited company is divided into small units called shares
- As such the capital of a limited company is known as share capital
- There are three types of share capital.
1. Authorised or nominal capital, the maximum capital the company is allowed to
issue to its shareholders
2. Issued Capital, the amount of capital already taken up by the shareholders
3. called up capital or paid up capital, the amount of capital already taken up,
received and paid for by the shareholders
These include:
1. Founder or Deferred Shares
- These are sahres sold to the original founders of the company.
- The holders of these shares receive a divident after the claim of all other
shareholders have been met.
- They are referred to as deferred shares because at times they may not receive
the dividends in a given year but will have to be paid the following year.

2. Ordinary Shares
- These received divident after preference shareholders have been paid
- These receive a variable rate of divident dependent on the profit made
- And have voting rights
- Ordinary shares are more to risk form of investiment than preference shares
so it appropriate.
- For example when a company is forced into liquidation, the ordinary
shareholders are usually the last in the distribution of assets.

3. Preference Shares
- These receive divident before ordinary shares.
- They receive a fixed ate of dividends, e.g. 8% of K100,000 preference shares
means
8 x 100 =K8,000
100
- Preference shareholders have no voting right at the A.G.M. therefore have no
say in the running of the company.
- In the invent of business failure, they have the first claim in the distribution of
company assets.
- Prefrence shares may be participating preferences shares or cumulative
preference shares and redeemable preference shares.
Participation Preference Shares
- These have the right to claim in the excess profits
- They are able to receive a bonus from profits made in a good trading year.
- They receive such bonus fter payments have been made to all types of shares.
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Cumulative Preference Shares

- These have a claim to divident arrears.
- This means that if the business cnnot aford to give the cumulative preference
the right amount of divident in one year, the amount to be paid is carried
forward in the next year.
- It may be a number of years before te business makes a good profits and all
divident arrears from previous years will be added together to form payment
to cumulative preference shares.

Redeemable Preference Shares

- These are type of shares which a company buys back from such shareholders
after a given period of time e.g. 3 years.
- This means that after such a given period of time any holder of such shares
ceases to be a shareholder.

The Difference Between Preference and Ordinary Shares

- Preference Shares receive divident before ordinary shares usually at a fixed
rate (percentage)
- Preference shareholders have no voting rights
- And they may be participating, cumulative and redeemable preference shares
Whiles ordinary share:
- Receive a variable rate of divident (no fixed percentage) dependent on the
profits made.
- And they have voting rights
- Ordinary shares are more risk form of investment than preference shares

What are the sources of finance for public company

1. Debentures
- These are a long term loam to a company which receive a fixed rate of interest
- This fixed rate of interest is payable to debenture holders whether profits are
made or not.
- Debenturs holders are creditors to a company
- They have no voting rghts because they are not shares and have no say in the
controlling at the business
- And usually they may have to be secured against assets.
- Debenture holders can force the company into liquidation take over and sell
the business if the company fails to pay interest or repay capital.

Differences between a share and a Debenture

- Shares represent ownership of a company and receive a divident out of profit
- Debentures represent a loan to a company and receives interest at a fixed rate
whether a company makes a profit or not.
- Debenture holders have no voting rights while some shareholders have voting
rights.
- Shareholders are owners of the compay while debentureholders are creditors
of the company

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Loans from commercial Banks (see notes on banking)

- for a specific sum of money repayable by instalments
- usually for capital items

Overdrafts (see notes on banking)

- they overdraft on a current account
- usually to meet day to day expenses

Share issue/RIGHT ISSUE

The reason for the choice of share issue include:
- Share issue can attract capital from many potential investors.
- No interest is paid on capital raised.
- The large sum of money required for the purchase of additional premises
and equipment can be easily raised by sale of shares to public.
- There is not repayment of capital once a person has bought shares.
- Shareholders can pay for shares in instalments.
- Share issue can be used to raise more money only if the company has not
exceeded its
authorised capital.
The sale of shares of a public limited company is easily organised through stock
exchanges

Ploughing Back the Profits

- A company that makes good profit may not distribute all of it to its
shareholder
- May retain some of the profits to fund business activities
- where some profits are put back into the bussiness
The reasons for the choice of ploughing back the profit as a method of financing
includes:
 no collateral security may be required
 there is no cost of borrowing the money
 retained profits are readily available
 some profits may be kept for emergency or difficult times
 retained profit can be used to repair company machinery or buildings

Trade credit might be used as a source of finance for the firm by:
- by allowing the firm to purchase goods without immediate payment
for them.
- by allowing the firm to sell goods at increased price before payment.
- by allowing the firm to pay for goods from the sales revenue.

Leasing of Equipment
- this is where company property is mortgaged.

Differences between Public limited Company and Private limited Company

- A private limited company is open only to private individual whiles a public
limited is open to the public to buy shares
- In a private limited company shares are not freely transferred whilst in a
public limited company shares are freely transferable at the stock exchange
market where the buying and selling of shares takes place
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- It is easy to from a private limited company because formalities are less whilst
it is harder and more costly to form a public limited company because they are
more formalities in setting it up.
- A Public limited company can raise more capital whilst in a private limited
company the number of shareholders restricts its capital.
- A Private Limited Company can start trading as soon as it is incorporated but
a Public Limited Company must wait for the Certificate of Trading which is
given after the norminal capital has been raised

Similarities between a Private Limited Company and Public Limited Company

- Both are registered with a registrar of companies
- Both are separated legal entity from their shareholders
- Shareholders for both enjoy limited liability
- Both companies submit memorandum of Association and Articles of
Association
- A minimum of 2 members and no limit is required for both companies
- Both are subject to company tax of the profit earned per annum.
- Bot are legally required to hold an Annual General Meeting
- Both are owned by the shareholders
- They are both controlled by the Board of Directors

Why may a private limited Company not wish to become public

- Cost in time and money in the formation of a plc e.g. stock Exchange
quotation.
- Publication of accounts: simplify files accounts with the registrar of
companies.
- Public companies may be easilysubject to take over by the government by
obtaining 51% of shares.

Difference between a private limited Company and a Partnership

- A private limited company has two to unlimited number of shareholders
whilst a partnership limied to 20 partners.
- In a private limited owners are shareholders wishing in a partnership, owners
are partners.
- A private limited company shareholders have limited liability while partners
have unlimited liability.
- A private limited company has continuity on the death of a member whilst
with a partnership no continuity on death of a pertner.
- Many legal requiremnet to set up a private limited company e.g.
memorandum of association aand Articles or Association whilst with a
partnership it is easy to up few documents required e.g. partnership deed.
- A private limited company has more capital and have borrowing capacity
whilst partnership lack capital and borrowing capacity to expand.

Advantages of a private limited company

- a private limited company has greater continuity on the death of a
shareholder
- more capital is available and have borrowing capacity
- It confers limited liability for all the shareholders
- It is a separate legal entity
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- Shareholders are protected from malpractices and fraud due to some

formalities required
- They are not easily subjected to takeovers
- They do not publicise their information

Disadvantages of Private Limited Company

- more formalities in forming of a private limited company e.g. register with
registrar of companies.
- More formalities in the running of a company e.g. the Annual General
Meeting must be held each year.
- Activities of private limited company are limited to what is memorandum of
Association.
- Private limited company cannot advertise their shares through the prospectus
to the public
- If it want to expand further it should become a public limited company
- It is less flexible than a sole trader because its activities are restricted by the
Meomorandum of Association and Article of Association

Multinational Companies
These are enterprises which have subsidiaries or branches in many countries. They
are usually Public Limited Company. Examples includes shoprite, BP (Z) Plc,
CocaCola Bottlers, First Quantum Minerals (FQM) Plc, Unilever South East Africa,
PEP Stores, Shoprite checkers etc. They provide employment to the host government
and they are a source of income to the host government, hence they are welcome by
most of the countries. Their decision making is controlled by the head office where
the parent company is and implement to all the subsidiaries.

Advantages of Multinational Companies

- They pay tax to the host government which boosts the economy of the country
- They bring new technological skills to the country
- They provide employment to the local citizens
- They bring foreign exchange
- They provide vital goods and services
- they improve mutual understanding between the host country and the parent
country

Disadvantages of Multinational Companies

- They tend to exploit the underdeveloped economies
- They usually bring their own experts instead of training the locals to
participate in the decision making process
- They can prevent the transfer of technology by ensuring that all the research
is done in the parent country
- They disadvantage the local industries by offering better conditions of service
and salaries
- They are centrally controlled and do not take into account of the conditions in
the host country when changing policies
- The companies take back home with them to their home countries all the
profits made in the host country. This drains away the host country’s foreign
exchange reserves

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Public Corporation
These are state owned businesses and they are referred to as nationalize
industries. It can either be controlled by either the central or local government
for conducting business for the benefit of its citizens. It is set up by an act of
Parliament.

Characteristics of a Public Corporation

- Ownership:They are owned by the government on behalf of all the citizens in
the country i.e. community as a wide.
- Formation: It is set up by an act of parliament.
- Control: Board of directors are appointed by a minister in charge of ministry
- It is the minister who has the overall responsibility
- And it is the board of directors who take charge of the day to day running of
the business
- Parliament investigates the working of corporations through select committees
- Source of Capital: Capital is raised through the government grants (loan) e.g.
by the government giving treasure advances from taxation bonds.
- Purpose: The motive for setting up public corporation is to provide goods and
services at reasonable price
- Therefore profits are used for improvement of infrastructures e.g. education
and helath service.
- Public corporation may plough back any profits they may make and they may
borrow money from the banks.

Difference Between a Public Corporation and a Public Limited Company

- A public limited company is owned by shareholders whilst a public
corporation is owned by the government.
- In a public limited company, profits are distributed to share holders as
dividend as for a public corporation, profits are used for improvement of
infrastructures.
- For a public limited company, capital is raised through sale of shares to the
public whilst in a public corporation capital is raised through government
grants.
- In a public limited company board of directors are elected by the shareholders
whilst in a public corporation board of directors are appointed by a minister
in charge of a ministry.
- Board of directors control the working of public limited company whilst
parliament investigate the working of corporation through select committees.
- The public limited company is set up by a minimum of two shareholders whilst
the corporation is set up by an act of parliament.
- The motive of selling up the public limited company is to make profit while
that of a public corporation is to provide service.

ADVANTAGES (arguments for) setting up a Public Corporation

- the government can control the provision of essential or strategic
goods and services such as electricity
- they are usually big, so they enjoy the economies of scale which results
in cheaper goods and services
- they provide secure employment to a large number of the local people

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- they help to implement government policies such as on prices of

essential goods an services
- they provide comprehensive services such as health, education and
energy
- they are a source of income to the government, thereby helping to
reduce tax
- they reduce duplication of employment and necessary wastage of
resources

Disadvantages (Arguments against) setting public co-operations

- they can be inefficient and wasteful
- because of their monopolistic nature, they tend to provide poor quality
of goods and services
- all loses made by public corporations are to be borne by the tax payers
- the “I do not care” attitude dampens the enthusiasm of workers
- they are too expensive to run and over stretches the tax payers money
- lack of initiative amongst workers leads to inefficiency
- workers do not usually identify themselves with the enterprise
- there is too much bureaucracy and red tape in decision making
- they are highly subsidised by the government to keep them afloat
- some politicians have little commercial expertise or experience to run
businesses along efficient lines.

The Finance of Business Units

A. The Trader’s Capital

The money invested in abusiness is called its capital. It includes
everything that is used in the business from the money used to set it up
to the labour hired and equipment purchased to help run it. The
capital of a business consists of fixed capital and working capital.

1. Fixed Capital

Fixed capital is the money usd to buy fixed assets i.e. items which are
bought to be used permanently over a period of years and which
enable the business to run. Fixed assets do not form part of the end
product or they are not for general sale. They include land, buildings,
machinery, furniture, office equipment, and motor vehicles. All these
are used to enable production to take place or to enable business to
generate profit.

2. Working Capital
Working capital is the money which a business must have available to
meet its day to day expenses such as paying workers’ salaries, buying
raw materials or stock, paying water, electricity and telephone bills,
and so on. It also includes money owed to the business by customers
and balance (as well as cash in the till). Working capital is, in fact, th
amount by which current assets exceed current liabilities. It can be
calculated by the formula:
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Working Capital = Current Assets – Current Liability.

The word current here means short term. That is to say, the assets
and liabilities are constantly changing, for example cash, stock of
goods and or raw materials, and the like.

(a) Working capital can be increased in the following ways:

 By the injection of more cash by the owners of the business

 By borrowing from outside sources and in the case of public
limited companies, by issuing debentures.
 By ploughing back profits made during past trading years.
 By selling some of the fixed assets (thereby increasing the cash
balance).

(b) Working capital can be reduced by the following ways:

 By the owners of the business withdrawing cash for their own use;
 By the company making a loss on its trading;
 By purchasing more fixed assets for cash.

Adequate working capital is important because it is what enables the

company to pay its creditors promptly and buy or replace stock easily
without looking for further financial assistance. Lack of working
capital will not only restrict expansion but may push the business into
insolvency, closure or liquidation.

3. Capital owned

This is the total amount that the business owes its owners. It is a
measure of the net worth of a business. It is calculated as assets minus
external liabilities. Capital owned can be increased by a company
making a profit and decreased by the company making a loss.

4. Capital employed
The capital employed is the sum of the company’s assets, both fixed
and current that the company has invested, whether borrowed or not.
It is in fact, the amount of wealth or assets which are being usedin the
company to earn income. It is calculated as: Total assets minus
debtors.

5. Liquid capital
This refers to thoose assets, such as cash at bank till and any assets
that can be easily converted into cash e.g. stocks and bonds held by the
business.

B. Sources of Capital to a Trader

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The sole trader and perhaps a partnership will raise capital from
personal savings, borrowing from commercial banks as well as from
friends and relatives. A limited company, especially a public limited
company, however, has many more sources of capital some of which
are given below.

1. The sale of shares

The capital of a limited company is divided into units of uniform value
called shares. The company raises its capital by selling these shares to
the public and such a capital is known as the share capital. Different
types of shares are discussed in detail at a later stage in this chapter.

2. Debentures

These are not shares but long-term loans given to the company by the
investing public. They may have to be secured against some assets. A
company wishing to raise extra capital can borrow money from the
public and issue them with stock certificates showing the loans. What
this means is that the company sells debentures. They may be issued
for a fixed number of years after which they are redeemed.

It should be made clear that debentures are loans for which a fixed
rate of interest is paid (to debenture holders) whether the company
makes a profit or not. If the company should be liquidated, debenture
holders are repaid first before the shareholders can get anything.
Debentures are, thefore, a safer means of investing in a company and
can bring assured returns if they are issued by profitable companies.

3. Loans

The traditional way of raising capital is by applying for a loan. A loan

from commercial banks, insurance companies and other financial
institutions can be very vital to a business. Loans are usually given for
a specific purpose, mainly for the purchase of capital items and are
repayable by instalment with interest.

4. Overdrafts

These are givnen on a current account to help the company or business

meet its day to day expenses. It is normally given for short term needs
only and interest has to be paid on fluctuating daily overdraft balance.

After spwnding large sums in establishing the capital items necessary

for production to take place, a company may find itself short of
working capital. It can then obtain an overdraft to help run the
business, i.e. by stock, pay bills and salaries and so forth.

5. Ploughing back profits

When a company makes a good profit, it may decide not to distribute

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all of it to the shareholders and instead retain some of it and reinvest it

to expand the business. The company can also keep some of its profit
as a reserve to cater for emergency or difficult times.

6. Trade credit

A retailer who has little working capital can approach the supplier and
obtain stock on short term credit. Getting supplies on credit means
the retailer takes the goods and pays for them a few weeks later after
selling them. This helps to increase the retailers’ working capital, as
the goods would be paid for from the sales revenue generated.

7. Leasing or renting equipment

Leasing enables a company to acquire up-to-date equipment or

machinery without the large amounts of money needed to buy it cash.
Lease agreement eneables a firm to obtain equipment by paying a
monthly rental fee which includes maintenance. At the end of the lease
period the ownership is usually transferred to the company.

8. Factoring

This enables a company to sell goods to customers on credit and then

sell their invoices to a finance company at less than the full amount.
For example, a furniture dealer like Supreme Furnishers may sell a
lounge suite to a customer for P1000 on credit and take the invoice to a
finance company and get P900 for it. In this case, Supreme Furnishers
gets its money immediately, leaving the factor to collect the amount
outstanding and deal with any possible bad debts.

9. Government grants and loans

Another sources of capital to a business is the grants offered by the

government. For example, the Financial Assistance Policy (FAP) in
Botswana, which provides firms a certain amount of money, to help
them set up a manufacturing business in the country, has been very
helpful to many companies.

10. Mortgaging property

Mortgaging refers to getting a loan from a financial institution and

offering the company’s assets such as buildings and or land as
security. It is also an important souce of capital.

11. Hire purchase

Buying vehicles or equipment on hire purchase or credit can also

relieve the company of financial problems. The firm will pay a deposit
and get the goods and then pay the balance outstanding by monthly
instalments over a period of 2 to 5 years. The advantage here is that
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the company spreads the costs of the item over a numbr of years hence
lessens the financial burden.

Factors to consider before choosing a method of financing

There are many reasons why a firm may need additional capital. It
could be to finance it expansion or to upgrade or modernise its
operations. But, whatever the reason, before a business chooses which
method to use to finance its projects the following factors need be
considered.

 Interest rates
 Amount of finance repayment
 Time allowed or duration of the loan
 Security available, which the company can provide
 Purpose and availability of the various methods.

C. THE CAPITAL OF A LIMITED COMPANY

The capital of a limited company is raised by selling shares or

debentures. The total amount of money that a limited company is
allowed to raised through issuing shares is called authorised capital.
This may be issued in stages as and when the company wants extra
capital. The actual amount of capital which has been raised and paid
for at any one time is called issued capital.

Authorised capital

Shares Debentures

Ordinary Preference Naked Redeemable Mortgaged Irredeemable

shares shares debentures

The capital of a limited company

1. What are shares?

A share is a unit of a limited company’s capital. When a person buys a

share in a company he/she is given a share certificate showing the
number, value and type of share he/she owns. He/she then becomes a
shareholder, in fact, a part-owner of the company. This is because
limited companies are owned by shareholders. Buying a share in a
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company is an investment the reward of which is a dividend or a share

of any profits made by the company. The market where shares are
bought and sold is known as the stock exchange.

1. What are shares?

A share is a unit of a limited company’s capital. When a person buy

share in a company he/she is given a share certificate showing the
number, value and type of share he/she owns. He/she then becomes a
shareholder, in fact, a part-owner of the company. This is because
limited companies are owned by shareholders. Buying a share I a
company is an investment the reward of which is a dividend or share
of any profits made by the company. The market where shares are
bought and sold is known as the stock exchange.

(a) Types of shares

In general there are two types of shares namely, ordinary shares and
preference shares.

(i) Ordinary shares

These are shares which receive variable rates of dividend dependent

upon the profits made. They normally get dividends after the
preference shares have already received theirs. Ordinary shares have
voting rights. This is possibly because ordinary shares are a more
risky form of investment, so it is appropriate for their holders to be
responsible for all decision making in the company. Anyone who holds
a majority of ordinary shares controls the company because each
share has one vote at annual general meetings.
If
The company fails altogether, the holders of ordinary shares will only
be paid after all the debts of the company have been paid. In
exceptionally good years, when good profits are made, however,
ordinary sharholders may get more dividends than preference
shareholders. All companies issue ordinary shares.

(ii) Preference shares

These are shares which receive dividend before the ordinary shares.
They get a fixed rate e.g. 10%, which means when the company makes
a profit each preference shareholders gets a dividend equal to 10% of
the value of shares they hold. Preference shares have no voting rights
at annual general meetings. By selling preference shares a company
can raise capital without the exisiting owners losing control over it.
There are four main types of preference shares and these are:

 Cumulative preference shares These preference shares get a fixed

dividend every year. If in one year no profits are made, they are
paid ina rrears in the next year when profits are made. But even
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if the company makes a very big profit, they receive no more than
their fixed rate of return.

 Non cumulative preferenceshares These type of preference shares

do not have any right arrers of dividend. So if the company makes
no profit this year, they get nothing and the next year the
company makes a good profit they will still get their fixed amount
and nothing else (even if better than usual profits are realised.)

 Redeemable preference shares

These are shares which will be bought back by the company at a later
date, either out of accumulated profits from the money got from a
fresh sale of shares. They are usually used to help start a company.

 Participation preference shares

There is another type of preference shares called participating
preference shares which entitle the holders to get a bonus if a very big
profit is made in the particular year. Their holders also participate in
decision making in the company.

Differences between ordinary and preference shares

There are three main diffferences between ordinary and preference
shares.
 Firstly, preference shares receive a dividend before ordinary
shares, usually at a fixed percentage and the shares may be
cumulative, participating or non-commutative. Ordinary shares
receive a variable rate of dividend, dependent upon the amount of
profits made. (This means the more profits the company makes
the more individend the ordinary shareholders are paid and vice
versa).
 Secondly, ordinary shares have voting rights so their holders are
the ones who control the company. Preference shares, on the
other hand, have no voting rights because their holders are
assured of their fixed rate of dividend one way or the other.
 Lastly, ordinary shares are a more risky form of investment than
preference shares. They only get dividend after the preference
shareholders have already got, and in bad years when little profits
are made they get nothing at all.

2. Debentures

When a company wants to raise additional capital it can ussue

debentures. A debenture is a loan given to a company on which a fixed
rate of interest must be paid whether the company makes a profit or
not. It is nothing other than a ceritificate showing the amount of
money lent to the company and the interest that must be paid on it. In
case the company is liquidated, debenture holders must be paid before
any of the shareholders are. The main features of debentures are that:

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 They are long term loans to the company;

 Debenture holders are not the owners of the company they are
creditors of the company;
 Debenture holders are paid a fixed rate of interest every year
irrespective of the level of profits;
 Debentures may be redeemable as they are loans.

(a) Types of debentures

Debentures may be classisfied in two ways:

(i) According to the security pledged against them, they may be
naked or motorgaged.

 Naked debentures are the ones issued without any property or

security pledged against them. They are not very secure.

 Mortgaged debentures have some property pledged against them.

They are more secure and if the company is liquidated, the
proceeds of the sale of the pledged property are used to pay off the
holders.

(ii) According to redemption, they may be redeemable or

irredeemable.

 Redeemable debentures are usually issued for a fixed period of

time and can be bought back by the company. This means the
amount borrowed against them is repaid by the company possibly
after the expiry of the fixed period.

 Irredeemable debentures can never be bought back. The money

borrowed against them remains outstanding until the company is
liquidated. The holders of irredeemable debentures keep getting
interest against their debentures indefinitely.
(b) Differences between debentures and shares
Debentures and shares are fundamentally very different.

 A share is a unit of capital whilst a debenture is a loan borrowed

from members of the public.
 A shareholder is a part-owner of the company and may vote but a
debenture holder is a creditor and has no voting right.
 Shares a re paid dividends when profits are made but debentures
are paid interest, whether or not the company makes a profit.
 Shares are usually irredeemable although they may be
transferred, whilst debentures are redeemable as they are oloans.
 When a company is liquidated, debenture holders are paid only
the face value (plus any outstanding interests) of the debentures
held. But, if more money is raised by the sale of assets
shareholders may get more than the face value of their shares.
 The interest paid to debenture holders is fixed but dividends paid
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to especially ordinary shareholders is variable.

E. Business Calaculations

Every firm needs to keep a detailed and accurate record of:

 the value of assets, that is, properties owned by the firm;

 the value of liabilities, that is, the amount owed by the business to
others;
 changes in assets and liabiolities;
 the value of sales; and
 the value of purchases.

Proper and accurate record is particularly essential:

 if the firm is to calculate and make available to owners details of

the value of the fime and profits made;
 if managers are to effectively control the firm and plan its future
developments;
 so that tax can be assessed (both income tax, corporation tax and
value added tax);
 to meet the provision of the Company’s Act 1980, which requires
that a company’s account be filled in the company registration
office annually.

1. Profits

Profti is the reward for doing business. The business person takes the
risk of manufactuirn something or providing some service so as to get
profit. The profitability of a business can be looked at from the point
of view of either gross profit or net profit.

(a) Gross profits

Gross profit is the differences between the cost of goods sold and the
proceeds from their sale. Put simply, gross profit is selling price minus
cost price. Gross profit is not the true profit since the expenses
incurred in selling the goods have not been taken into account. It is
calculated as:

Gross profit = Turnover minus Cost of goods sold.

For example: If a trader buys a bicycle at P100 from the wholesaler

and sells it at P145 the difference is his/her gross profit.

The price at which the trader bought the bicycle is called cost price.
(C.P) and the price at which the trader sold the bicycle is called the
selling price (SP.). The gross profit is calculated as follows:

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Gross Profit, GP = Selling Price – Cost Price

i.e. GP = SP – CP.
In our example, GP = P145 – 100 = P45.

(b) Net Profit

This is the true profit obtained from trading. (In other words, it is the
real reqard of the trader). It is the amount left after allowances have
been made for all expenses such as rent, salaries, storage, insurance,
water, telephone and electricity bills, advertising, transport etc. Net
profit is very important since it

 enables the trader to know the actual benefit of trading;

 enables the trader to compare what he/she investments;
 it assists in forward planning;
 it helps him/her to obtain a loan from the bank;
 it is important for tax purposes

Net profit is calculated as follows:

Net Profit = Gross profit (plus other incomes) minus Expenses.

In our example above, suppose all the expenses amount to P15, the net
profit would then be calculated as follows:

Net Profit = Gross Profit – Expenses

i.e. P45 – P15 = P30.

When gross profit is expressed as a percentage of cost price it is called

profit mark-up but when it is expressed as a percentage of selling price
it is called profit margin.

The following example shows how the profit mark-up is calculated:

To use the same example as above, let us say, a trader goes to the
wholesaler and buys a bicycle at P100 and sells it at P145, the
difference being his/her gross profit.

Percentage mark-up = Selling Price – Cost price x 100

Cost Price

i.e. P145 – 100) x 100 = 31%

145

(d) The relationship between profit mark-up and profit margin

When profit mark-up is Profit margin will be

1
/3 ¼
1
¼ /5
2 2
/5 /7
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3 3
/8 /11

Table 4 The relationship between profit mark-up and profit margin

You arrive at profit margin by adding the numerator to the

denominator while using the same numerator. When margin is given
you do the opposite (i.e. subtracting the numerator from the
denominator).

The calculation of gross profit shown above assumes that the trader
buts only one commodity, the bicycle. In practice traders, usually buy
several types of goods. Also at the beginning of the year there could
have been some old stock of unsold goods carried forward from the
previous year. The stock at the beginning of the year is called opening
stock and the stock of goods lying unsold at the end of the year is
called closing stock.

Therefore, in practice, to calculate the gross profit you have to sum up

the total value of goods sold during the year, called Turnover. . You
can do this following the steps given below.

(i) Determine the value of opening stock.

(ii) Determine the total value of goods bought during the year.

(iii) Find out if any goods were returned to the supplier during the
year.

(iv) The difference between (2) and (3) is called Net purchase of the
year.

(v) Add (1) to (4) i.e. opening stock to net purchases to get the total
value of goods available for sale during the year.

(vi) Find the value of closing stock by stocktaking.

(vii) Subtract (6) from (5) i.e. closing stock from the goods available
for sale, to get the final cost of goods sold during the year. This is
called the “Cost of Sales”.

(viii) Calculate the gross profit i.e. Net sales minus cost of sales.

SUMMARY

 Cost of sales = Opening stock plus net purchases minus closing

stock.
 Net Sales = cost of sales minus gross profit.
 Gross profit = net sales minus cost of sales.
 Net profit = gross profit minus expenses.
 Expenses = gross profit minus net profit.
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2. TURNOVER

The turnover or net sales is the net value of goods sold during an
accounting period. It is calculated as follows:

Turnover = Sales minus Returns inwards OR Turnover = Sales minus

Cost of goods sold plus gross profit.

3. COST OF GOODS SOLD

This is the cost price of goods that have been sold. It is calculated as:

Cost of goods sold = opening stock plus net purchases minus Closing
stock or;
Cost of goods sold = Turnover minus gross profit.

4. RATE OF TURNOVER OR RATE OF STOCK TURN

This is the number of times the average stock can be sold in an

accounting period. (It is actually the number of times a firm orders
and sells out its stock each year.). It is calculate as follows:

Rate of stock turn = Turnover or

Average stock

Rate of stock turn = Cost of goods sold

Average stock

5. Average Stock

This is the average number of stock held in the business for the
accounting period. It is actually the average of the opening and closing
stock. It is calculated as:

Average stock = Opening + closing stock

2

6. Gross Profit Percentage

This net profit percentage shopws actual average profit made adter
taking into account all costs and expenses incurred. It is also known as
the net profit percentage of turnover. It is calaculated as:

Gross profit percentage = Gross Profit x 100

Turnover 1

8. Rate of Return on Capital Invested

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The rate of return on capital invested is extremely important to a

businessman or woman for it tells him/her exactly how much he/she is
getting from the investment. It is calculated as:

Rate of return on capital invested = Net profit x 100

Capital at start of the year

This ratio helps the businessman or woman to determine the

probability of his/her business. He/she is thus able to decide whether it
is worthwhile or not to keep his/her money in that investment.

9. Mark up

This is the percentage of gross profit to the cost of goods sold or the
percentage of profit to cost price. It is calculated as follows:

Mark up = Gross profit x 100

Cost of goods sold

10. Margin

This is the percentage of gross to turnover or selling price. It is

calculated as:

Margin = Gross profit x 100

Turnover

F. THE BALANCE SHEET

A balance sheet is a statement of the financial position of the business

or an individual at a given time. It shows the company’s assets and
liabilities. It is usually drawn a tabular form as follows:

ASSETS LIABILITIES
Buildings Capital
Shop fittings, vehicles, machinery Bank loan
Stock (raw material/goods) Creditors
Cash (at bank and in till)

TOTAL TOTAL

The Balance sheet

The balance sheet equation can be written as Capital = Assets minus

Liabilities.

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1. THE BALANCE SHEET INTERPRETATION

The balance sheet of a firm shows the financial position at a particular

date. It gives the summary of its reserves, capital, liabilities and assets.

(a) Assets

These are the properties of a business. Assets can be divided into two:
fixed assets and current assets.

Fixed assets are the properties, of a business, whose values do not

change from day to day, e.g. land, buildings, equipment, etc.

Current assets are the propertis of a businesses or individuals and can

be divided into fixed or long – term liabilities and current liabilities.

(b) Liabilities

This is money owed by a firm to other businesses or individuals and

can be divided into fixed or long-term liabilities and current liabilities.

Long term liabilities are amounts which have to be repaid over a

number of year, for example, a ten year loan or mortgage on premises.

Current liabilities are short term and have to be paid in less than a
year’s time, for example, creditors (i.e. goods or stock obtained on
credit).

G. HOW PROFITS AND LOSSES AFFECT CAPITAL

When a company makes a profit, its capital increases, especially if it is

reinvested in the business. A loss, however, represents a decrease in
capital and may eventually lead to the closure of the company if it
persists.

STOCK EXCHANGE
(a) Describe the functions of a stock exchange and ex[plain its
importance to investors
(b) Expain the role of :
(i) stock broker
(ii) dealers on the stock exvhange
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© What are the functions of the stock exchange council?

(d) What factors determine the price of shares on the stock exchange?
(e) What are the functions of the contract note on the stock exchange?

(a) Functions of the Stock Exchange and its importance to investors

 Providing a market where stocks and shares can be sold and bought.
 Stock exchange approval gives indication to the investors that the company
quoted is reputable.
 It provides a pace where people with savings can invest and lend those
companies that need to raise finance.
 Prepares reports and data concerning all organisation on the Stock Exchange
 It establishes a code of conduct which members of the stock exchange must
follow.
 Enable government to raise funds.
 Gives savers opportunity of investing in industry and commerce.
 Regulates members of the market
 Provides rules to protect investors against fraud.
 Enables transfer of second hand securities.
 Provides place where prices can be determined freely on basis of supply and
demand.
 Vetting companies applying for stock exchange quotations/listing.

(b) (i) The Work of the Stock Brokers on the Stock Exchange
Because members of the public are not allowed to trade on the stock exchange:
 the Stock broker acts as agents, buying and selling shares on behalf of the
general public.
 They try hard to obtain the best possible prices for their clients
 The brokers compare prices in the market and usually buy and sell acording
to their clients’ instructions
 They prepare a contract note setting out the amounts to pay or receive their
commission.
 The arrange for share certificate’s or stock transfer forms to be dealt with.
 The broker advise their clients on matters relating to market conditions.

(ii) The work of Dealers on the stock exchange

 These are principal who buy and sell shares on their own behalf with a hope of
making profit
 They deals with stock brokers only as the members of the public are not
allowed to deal directly with them
 The may specialise in certain types of securities such as dealing in oil shares or
mining shares

© Functions of the Stock Exchange Council

 to control the admission of new members
 to discipline members who are guilty of misconduct
 to formulate the stock exchange rules
 to settle disputes between members
 to provide information services to members
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 to accept and publish shares of companies to be quoted on the stock exchange.

(d) Factors that Determine the prices of Shares at the Stock Exchange
 To supply and demand for the shares  Recent performance of the
 Political changes in the country e.g. company
change of government  The popularity of the
 Changes in interest rates or taxation company’s product
 Strike/industrial disputes in the  The general prosperity of the
company country
 Take overs and merges being  Changes in market trends
considered

(e) Functions of the Contract Note on the Stock Exchange

 Informs the client number of shares bought or sold
 Shows the type and the unity price of shares
 Shows the commission to be paid by the client
 Shows the total amount to be paid or due to the client
 Shows settlement date, when payment or delivery of share to be made

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