THEORY OF THE FIRM - KCSE BUSINESS STUDIES NOTES, SCHEMES OF WORK, OBJECTIVES, QUESTIONS AND ANSWERS
THE THEORY OF THE FIRM
At the end of this topic, the learner should be able to:
THE THEORY OF THE FIRM COURSE OUTLINE
THEORY OF THE FIRM Definition:
This refers to all those firms producing the same product for a specific market/a group of related firms that compete with one another i.e.
DECISION ON WHAT GOODS AND SERVICES TO PRODUCE
A firm makes a number of important production decisions. Some of the decision may involve;
Factors that influence decisions on what goods and services to produce
Certain factors have to be considered before committing a firm into production of either a new product, adopting or redesigning the existing product.
These factors include;
Whether the firm is product-oriented or market-oriented
Product oriented firms: This is when the nature of the product itself (its functions and unique qualities) are enough to make sure that the product sells e.g. when cars were first developed, its uniqueness sold it
Market oriented firms; these are firms that produce products that are meant to meet the consumer needs e.g. over time cars are being developed to suit consumer needs.
Level of competition
In order to survive in a competitive market, firms must come up with products that consumers prefer.
Firms may therefore develop products which are not currently available or copy rivals ideas and improve on them
Level of available technology
The level of technology has a strong influence on the product that a firm produces
New inventions and innovations often result in new products or improved products
Improved technology may also reduce the costs of production. This means the same output maybe produced using less factors of production or more output may be produced using the same factors of production.
Senior management have the sole responsibility of deciding on what product to produce. A wrong decision may ruin rather than bailed the enterprise. The manager’s ability to design a viable product is therefore a vital factor in product development
In order to determine whether a product will be viable or not, the cost of production and the expected returns should be considered. Funds may only be approved for the product that promises long term benefits to the firm. So if the benefits of the product outweigh the costs, then such product will be developed and if not so, it will be dropped.
Amount and type of capital in the firm
Capital refers to machines, equipment, factories, plants and other human made aids to production.
Both financial and physical capital facilitates the production process. The amount of capital in a business will therefore influence what goods it can produce and in what qualities i.e. a firm with physical capital that is very specific may not be able to produce other type of products e.g. a clothing factory may not be able to produce any other goods such as cement.
Other factors may include;
COST OF PRODUCTION
This is a payment made to the factors of production for their services. Production costs thus refers to the expenses incurred in acquiring factors of production (inputs) The sum total of all payments to the factors of production engaged in its production.
Types of production costs:
These are values of any alternatives forgone. The cost forgone when the choice of one thing requires the next best alternative to be abandoned
A student with only sh.50 may have to decide on whether to buy a textbook or a pair of shoes. If she decides to buy a textbook, the pair of shoes will have to be forgone because it’s not possible to buy both with only sh.500.
The opportunity cost of buying a text book in this case is the cost of the pair of shoes which was abandoned.
Fixed and variable costs
Costs may be classified according to their behavior in relation to various levels of output as follows:
These are expenses which do not change with changes in levels of output/quantity of output. These costs therefore remain the same whether the firm is producing anything or not i.e. whether production is maximum or zero.
This may be represented graphically as:
the theory of the firm questions on topic
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Advantages of public relations
Disadvantages of public relations
5. Point of purchase (Window) display
This is where the items are arranged in the shops strategically, allowing the customers to see them easily. The arrangement is meant to attract the customer’s attention and induce them to buy goods as they pass close to the shop
Advantages of Point of purchase display
Disadvantages of point of purchase
6. Direct mail Advertisement
A form of advertisement which is sent to the potential customers directly in the form of a mail, for example the pricelist being sent to the potential customers.
Advantages of direct mail advertisement
Disadvantages of direct mail advertisement
A booklet that gives information about the product that the organization deals in. It gives the description about the product, the picture as well as the prices of the product.
Advantages of catalogue
Disadvantages of catalogue
8. Guarantee (warranty issue)
An assurance given to the customer that the product will serve as expected if used according to the instructions given by the manufacturer. For the guaranteed period the seller will be willing to maintain repair or replace the product for the customer
Disadvantages of guarantee
This is a reduction in price of the commodity, allowing the buyer to pay less than what he would have paid the goods.
Types of discount
10. Loss leaderSelling the price below the market price to entice the customer to buy
11. Psychological sellingPlaying with the customer’s psychology in terms of pricing by quoting odd prices such as 999, 199, 99, etc. to convince the customer that the price has been reduced
12. Credit facilitiesWhere the customer is allowed to take a product for his consumption and pay for it later. This entices the customer to buy more of the product
13. After sales serviceThese are services offered to the buyer after the goods have been bought. They may be in terms of packaging, transportation or installation which may be offered to the customers free of charge. This makes the customer to buy more goods with confidence
These are activities carried out to increase the sales volume of a business. They are activities out of the ordinary routine of business that is carried out by the seller to increase his sales volume.
The methods of carrying out sales promotion includes all the methods of carrying out product promotion as discussed earlier, that is, shows and trade fair, showrooms, free gifts, free sample, personal selling, advertisement, window display, credit facilities, after sales services, etc.
Factors to consider when choosing a promotion method
Ethical issues in product promotion
These are rules and regulations to be followed when carrying out promotion to avoid violating other people or businesses right. They include;
Trends in product promotion
The following are some changes that have taken place to improve the product promotion activities
PRODUCT PROMOTION (12 LESSONS)
Compensation is paid after the death of the assured
Compensation is paid after the expiry of an agreed period
Premiums are paid throughout the life of the assured
Premiums are paid only during an agreed period
Benefits go to the dependents rather than the assured
The assured benefits unless death proceeds the expiry of the agreed period
Aims at financial security of dependants
Aims at financial security of the assured and dependants
- Term insurance- The insured here covers his life against death for a given time period e.g. 1yr, 5yrs etc. If the policyholder dies within this period, his/her dependants are compensated. If the insured does not die within this specified period, there is no compensation. However, a renewal can be taken.
- Education plan/policies - This policy is normally taken by parents for their children’s future educational needs.
The policy gives details of when the payments are due.
- Statutory schemes - The Government offers some types of insurance schemes which are aimed at improving/providing welfare to the members of the scheme such as medical services and retirement benefits.
A member and the employer contribute, at regular intervals, certain amounts of money towards the scheme.
- Widows and children pension scheme (W.C.P.S)
Characteristics of life Assurance
- It is a cover for life until death or for a specified period of time
- It may be a saving plan
- It is normally a long term contract and does not require an annual renewal
- It has a surrender value
- It has a maturity date when the assured is paid the sum assured bonuses and interests.
- A life assurance policy can be assigned to beneficiaries
- The policy can be any amount depending on the assureds’ financial ability to pay premiums
- The policy can be used as security for a loan
1. General insurance (property insurance)
General insurance is usually divided into;
- Fire insurance/department
- Accident insurance/department
- Marine insurance/department
- These provide compensation for partial or total loss to a vehicle if the loss results from an accident.
- The policy could either be third party or comprehensive.
- Third party policies cover all damages caused by the vehicle to people and property other than the owner and his/her vehicle. This includes pedestrians, fare-paying passengers, cows, fences and other vehicles
Comprehensive policy covers damages caused not only to the third party but also to the vehicle itself and injuries suffered by the owner. Comprehensive policies include full third party, fire, theft and malicious damage to the vehicle.
Personal accident policy
- Injury to the person
- Partial or total physical disability as a result of the injury
- Loss of income as a result of death
In case of a partial or total disability as a result of accident, the insured can be paid on regular periods, e.g. monthly as stipulated in the policy.
Compensation for injuries where one loses a part of his/her body can be done on a lump sum basis.
The insured is also paid the value of hospital expenses incurred if hospitalized as a result of an accident.
Cash and / or Goods in Transit policies
E.g. Goods and cash moved from business to the markets, from suppliers to business etc.
Burglary and Theft policies
Burglary policies are enforceable only if the insured has met the specified safety and precautionary measures for protection of the insured items.
- How much money should be maintained in different kinds of safety boxes?
- Positioning of each of the cash boxes is also an important precautionary measure.
Fidelity Guarantee policies
- The losses may be as a result of embezzlement, fraud, arithmetical errors e.t.c
- The policies may cover specified employees or all the employees
Workmen’s compensation (Employer’s Accident liability)
The employer insures his employee against industrial injuries i.e the employer is only liable for the compensation of workers who suffer injuries at work.
This insurance covers injury, damages or losses which the business or its employees cause to the public through accidents.
The insurer pays all claims from the public up to an agreed maximum
This policy covers firms against losses that might result from debtor’s failure to pay their debts.
This type of insurance covers ships and cargo against the risk of damage or destruction at the sea. The main risks sea vessels are exposed to include; fire, theft, collision with others, stormy weather, sinking etc.
Types of Marine Insurance policies
This policy covers the body of the ship against loss or damage that might be caused by sea perils.
Included here are any equipment, furniture or machinery on the ship.
A special type of marine hull is the part policy, which is for a specified period when the ship is loading, unloading or at service.
This type of policy covers the cargo or goods carried by the ship
The policy is taken by the owners of the sea vessels to cover the cargo being transported. It has the following sub-divisions.
- Voyage policy - Here cargo and ship are insured for a specific voyage/journey. The policy terminates automatically once the ship reaches the destination.
- Time policy - Here insurance is taken to cover losses that may occur within a specified period of time, irrespective of the voyage taken
- Fleet policy - This covers a fleet of ships, i.e. several ships belonging to one person, under one policy.
- Floating policy - This policy covers losses that may occur on a particular route, covering all the ships insured along that route for a specified period
- Mixed policy - This policy provides insurance for the ship and cargo on specified voyages and for a particular period of time. No compensation can be made if the ship was on a voyage different from the ones specified even if time has not expired
- Composite policy - This is where several insurance companies have insured one policy of a particular ship especially when the sum insured is too large to be adequately covered by one insurer.
- Construction policy/builders policy - This covers risks that a ship is exposed to while it is either being constructed, tested or being delivered.
- Freight policy - This is an insurance cover taken by the owner of the ship for compensation against failure to pay hiring charges by a hirer of the ship.
- Third parties liability - This is an insurance policy taken by the owner of the ship to cover claims that might arise from damage caused to other people’s property.
Description of marine losses
This occurs where there is complete loss or damage to the ship and cargo insured. Total loss can be constructive or actual.
In Actual total loss, the claims are as a result of the ships and/or cargos complete destruction. It could also occur;
When a ship and its cargo are so damaged that what is salvaged is of no market value to both the insurer and the insured.
When a ship is missing for a considerable period of time enough to assume that it has sunk.
Constructive total loss occurs when the ship and/or cargo are totally damaged but retrieved. It may also occur;
Where a ship and its cargo are damaged but of market value. This could be as a result of decision to abandon the ship and cargo as the probability of total loss appears imminent.
If the cost of preventing total loss may be higher than that of the ship and its cargo when retrieved e.g. many lives may be lost in the process of trying to prevent total loss.
- General average - This is a loss that occurs as a result of some of the cargo being thrown into the sea deliberately to save the ship and the rest of the cargo from sinking. The losses made are shared by the ship owners and the cargo owners proportionately as the effort was in the interest of both.
- Particular average - This occurs where there is a partial but accidental loss to either the ship or the cargo. When this happens each of the affected party is solidly responsible for the loss that has occurred to his property. A claim can, however be made if the loss incurred amounts to more than 3% of the value insured.
In order to claim for compensation as a result of loss by fire, the following conditions must be fulfilled;
- Fire must be accidental
- Fire must be immediate cause of loss
- There must be actual fire.
Consequential loss policy; (profit interruption policy)
It is offered to protect future earnings of an enterprise after fire damage.
- Sprinkler leakage policy - This provides cover against loss or damage caused to goods or premises by accidental leakages from firefighting sprinklers
- Fire and Related perils policy - This covers buildings which include factories, warehouses, shops, offices and their contents. The policy does not cover loss of profit arising from fire damage.
Characteristics of General Insurance
- It’s a contract of indemnity
- It cannot be assigned even to ones relatives
- The insured must have an insurable interest in the property to be insured
- Premiums charged depends on the degree of risk, the higher the premium charged.
- Compensation for loss can only be up to a maximum of the value of the insured property or the sum insured in case of under insurance.
- It has no surrender value
- It’s normally a short term contract which can be renewed periodically, usually after one year.
Factors to be considered when Determining Premiums to be charged
- Health of the person
- Frequency of occurrence of previous losses
- Extent of the previous losses
- Value of the property insured
- Occupation of the insured
- Age of the person or of the property in question
- Location of the insured(address and geographical location)
- Period to be covered by the policy
- Residence of the insured.
Procedure for taking a policy
- Filling a proposal form
- Calculation of the premium to be paid
- Issuing of cover note (Binder)
- Issuing of the policy
Procedure of claiming compensation
- Notification to the insurer - The insurer has to be notified about the occurrence of any incident immediately.
- Filling a claim form - The insurer provides the insured with a claim form which he fills to give details of the risk that has occurred
- Investigation of the claim - The insurer arranges to investigate the cause of the incident and to assess the extent of the loss incurred. The insurer is then able to establish whether the insured is to be compensated and if so, for how much.
- Payment of claim - On receipt of the report of the assessor, the insurer pays the due compensation to the insured. (Payment of the compensation shows that both the insurer and the insured have agreed on the extent of the loss and the payment is the settlement of the claim)
Insurance and Gambling
insurance questions on topic
Describe the procedures that should be followed when taking an insurance policy. (10 marks)
2. 1996 P2
Explain four ways in which the insurance industry promotes the growth of business enterprises. (5 marks)
3. 1997 P2
Explain four ways in which the insurance industry contributes to the development of Kenya’s economy. (10 marks)
4. 1998 P2
Discuss various insurance policies under which an insurance company would not compensate the insured in the event of the loss. (10 marks)
5. 1999 P2
Discuss various insurance policies that the owner of a supermarket may find it useful for the business. (12 marks)
6. 2000 P2
Explain four benefits of the ‘pooling of risks’ to an insurance company. (8 marks)
7. 2001 P2
Explain the factors that may make it necessary for an insurance company re-ensure.
8. 2002 P2
Explain the meaning of the following terms as used in insurance (10 marks)
i) Uberrimae fidei
iii) Third party motor vehicle insurance
9. 2003 P2
Discuss four circumstances under which an insurance contract may be terminated. (8 marks)
10. 2004 P2
Explain five benefits that could be enjoyed by a person who decided to take out an endowment policy. (10 marks)
11. 2006 Q2 P1
Outline four risks against which a shopkeeper may insure. (4 marks)
12. 2007 Q3 P1
Outline three features of a Re – insurance company
13. 2008 Q22 P1
Elephant Enterprises acquired a building valued at sh 1 000 000 on 1 January 2007. The building was insured with two insurance Companies. Zebra and Simba for sh. 600 000 and Sh.400 000 respectively. In May 2007, fire damaged the building, causing Elephant Enterprises to suffer a loss of 20% of the building value. Determine contribution made by Simba and Zebra to cover the loss. (4 marks)
14. 2009 Q25 P1
KAMAT owned a motor vehicle, valued at sh 1,000,000. He comprehensively insured the car at Sh 800,000. The motor vehicle was involved in an accident and declared a write off. Calculate the amount KAMAT should get from the insurer. (4 marks)
15. 2010 Q11 P1
Outline four differences between insurance and assurance. (4 marks)
16. 2012 Q4a P2
(a) Explain five characteristics of property insurance. (10 marks)
warehousing - kcse business studies notes, objectives, syllabus, schemes of work, questions, answers and more
Q & A
WAREHOUSING (6 LESSONS)
By the end of the topic, the learner should be able to:
- explain the meaning and importance of ware housing to business
- discuss the essentials of a warehouse
- identify the various types of warehouse
- explain the advantages and disadvantages of each type of warehouse.
TOPICS / SUB-TOPIC BREAKDOWN
- Meaning and importance of warehousing
- Essentials of a warehouse
- Types of warehouses
- Advantages and disadvantages of each type of warehouse
A warehouse is a building for storing goods and services until the need for them arises. A warehouse is also usually referred to as a go down, silo or depot.
Warehousing is the process and the systems for relieving goods, protecting them against all types of hazards and ensuring their availability to those who need them. Therefore, it involves three main processes:
- Receiving goods into a warehouse;
- Storing them
- Releasing them to the users.
Importance of Warehousing to Business
- It enables a steady flow of goods into the market as the producers store their commodities and regulating their supply as needs arise;
- It stabilizes the prices by reducing the supply of goods when the market is faced with surplus and increasing the supply whenever there is shortage;
- It protects the goods from adverse weather conditions thereby upholding their quality until they are sold;
- It facilitates the bridging of time between when the goods are manufactured and when they are demanded. This is especially so for goods with seasonal demands;
- It acts as a reserve that can meet a sudden unexpected demand, for instance cereals can be stored in a warehouse just in case a draught strikes;
- It enables ample time and opportunity for such practices like blending, branding, packaging, grading and sorting out of goods before they are sold.
- Warehousing ensures that goods are protected from loss through theft or pilferage;
- It enables buyers to inspect the goods before they buy them;
- Warehousing allows time for some goods to ripen or mature before they are sold, for instance ripe bananas or tobacco leaves;
- It encourages specialization in production and distribution. Producers concentrate on producing while distributors store the goods for sale to the consumers;
- By allowing manufacturers to buy raw materials in bulk as they await their needs to arise, warehousing ensures a continuous production schedule;
- It allows importance ample time to look for a market.
Essentials of a warehouse
- Proper buildings suitable to house various types of goods;
- They should be conveniently located to enhance accessibility by the users;
- Proximity to a good transport network system to ensure smooth movement of goods in and out;
- The warehouse should be equipped with appropriate protection equipment to keep the goods safe from water, sunshine, human animals, excess heat and such factors;
- It should be spacious enough to enable both storage of goods and movement of goods and personnel;
- It should be equipped with proper facilities for handling goods like forklifts and an necessary working materials and tools to facilitate operation;
- It should be equipped with adequate facilities to care for goods for instance coldroom facilitates for perishable goods;
- It should be manned by well trained staff for efficient delivery of services;
- The warehouse should be equipped with an efficient communication network.
- A warehouse should conform to the law of the land.
- It should have proper recording system to monitor movement of goods.
Types of Warehouses
I. Warehouse Types Based on Ownership
These warehouses are owned by individuals for storing goods. They include:
- Wholesalers warehouse – they enable the wholesalers to buy goods from the producers in bulk and prepare them so that they will be ready whenever the retailers need them;
- Producer’s warehouses – they store producer’s goods before the goods are released to the market. They are most conveniently located near the producers or their clients.
- Retailers – they are commonly owned by some large scale retailers like the chain store and supermarkets to suit the purchase of goods in large quantities and sell them gradually.
Advantages of private warehouses
- They enable the manufacturers more control over the manufacturing operations. They enable for instance coordination between the manufacturing process and delivery to the market
- They are usually flexible enough to adapt to the different requirements for different goods by offering special facilities not accessible in public warehouses;
- The owner can custom make the warehouse to suite any need;
- The owner does not incur the cost of hiring space unlike in public warehouse;
- Decision making is independent and therefore quick since the owner does not have to consult;
- The owner is not ted down by procedures of receiving and issuing the goods unlike in public warehouses;
Disadvantages of public warehouses
- When there is low volumes the resources may become underutilized;
- High initial cost of production;
- The owners may suffer some problems associated worth small scale firms like lack of enough funds to employ adequately qualified personnel.
The term public implies that these warehouses can be used any member of the public to store his/her goods whereby the owners of the premises lend parts or the entire warehouse to any individual. To enhance versatility and suitability, the owners site the warehouses strategically near ports. This is because they are most commonly used by importers or exporters.
Many public warehouses offer some additional services like packaging, clerical services, market reports, preparing export samples and insuring the goods. Ownership of the goods in the warehouse is usually proved and transferred from one owner to another through a document known as a warehouse warrant. This enables the owner of the goods to sell goods in the warehouse without having to physically transfer them from one place to another.
Advantages of Public Warehouse
- Public warehouses enable various small scale owners of goods to come together and sell their commodities together thus enjoying the economies of scale;
- The owner does not have to construct his/her own warehouse;
- Very convenient to traders since the goods can be sold while still in the warehouse;
- Goods are insured against some risk like damage by fire and theft;
- Traders can rent space to store their goods;
- The warehouse can offer additional services;
- The trader can access short term loans with the goods in the warehouse as collateral.
- The goods in the warehouse can be used as a collateral for a loan;
Disadvantages of Public warehouse
- Hiring space can eventually be more costly than constructing premises in the long run;
- Space allocation is not a guarantee, it depends on availability;
- The hirer may lose customer contact since they purchase directly from the premises;
- The presence of other suppliers in the warehouse brings in some competition;
- The presence of several hirers may lead to a complication and prolonged documentation and receipting process;
- Inconveniences emanate from the distant location of the warehouse from the hirer’s presence;
ii. Warehouse Types Based on Goods Stored
They store imported goods prior to payment of the duties. The warehouse owner’s offers cash guarantee to assure that the goods will not be released before clearing the duties. Goods under transit to another country may not attract duties, including those that are packaged outside the warehouse. The goods may be sold inside the warehouse and the new owner undertakes the payment of the taxes. Once cleared, the owner is issued with a warrant of release.
Features of Bonded Warehouses
- Goods can be sold while inside the warehouse;
- Goods are released only upon production of the warrant of release;
- Storage charges are made on all the goods under storage;
- Goods can be bonded till custom duty is paid;
- Goods can be inspected or prepared for sale while still in the warehouse;
- Goods can be re-exported while in the warehouse.
Advantages of using Bonded Warehouses to the importer
- Relieves the importer the burden of securing the goods;
- Some goods lose weight while in the warehouse an advantage to those whose amount of tax depends on the weight;
- It offers an opportunity to prepare the goods for sale;
- Some goods improve in quality while in the warehouse due to maturation duration;
- The importer transfers the burden of paying the duty onto a buyer who buys the goods while still in the warehouse;
- The importer can look for the market of the goods even before paying the tax.
Disadvantages of using Bonded Warehouses
- The importer pays rent for the space of goods;
- In case the importer fails to pay the duty, the custom authorities may be auction the goods;
- Withdrawing goods from the warehouse in bits ends up with a higher total tax than a one off fee.
Goods in these types of warehouses are not under the control of the custom authorities. The goods do not have any pending tax. These include locally manufactured goods or imported goods whose duty has been cleared.
Advantages of Free Warehouse
- Cheaper than bonded warehouse since no duties charges;
- Goods do not risk auctioning since there are no taxes charged;
- The warehouses are usually conveniently located for the goods’ owners;
- Release of goods cannot be not delayed by complicated protocols of having to produce signed release warrants
Disadvantages of Free Warehouse
- Inspection of goods is relaxed and therefore it is susceptible to habour illegal goods;
- The storing activity does not earn the government any revenue since no tax is paid;
- Hoarding of goods can occur in these uninspected warehouses.
Current Trends and Emerging Issues in Warehouses
- Computerised monitoring systems are tracking the goods inside and outside the warehouses;
- Conveyor belts and other mechanisms are replacing manual movement of goods in the warehouses;
- Newer designs with improved storage capacities are coming up;
- Better storage facilities like the use of racks is being employed in the warehouses;
warehousing kcse questions and answers
Outline four features of a bonded warehouse (4 marks)
2. 1995 P2
Explain five ways in which warehousing facilitates trade.
3. 1996 P1
Highlight four ways in which a warehouse is useful to a trader. (4 marks)
4. 1997 P1
List three advantages of warehousing to a manufacturer. (3 marks)
5. 1997 P2
Lobo Traders intends to consult a warehouse. Explain five measures that
Lobo would take to ensure smooth functioning of the warehouse
6. 1998 P1
Outline four benefits that consumers get from a warehousing (4 marks)
7. 1999 P1
Outline four factors that a trader would consider in locating a warehouse. (4 marks)
8. 2000 P1
State four benefits that a government gets from a bonded warehouse. (4 marks)
9. 2000 P2
In what ways does warehousing facilitate trade in a country?
10. 2001 P1
State four features of a bonded warehouse (5 marks)
11. 2002 P1
State four advantages of public warehouse to retailers. (4 marks)
12. 2003 P1
The table below contains descriptions relating to some types of warehouse. In the space provided, write the type of warehouse to which each description refers.
In which four ways are consumers likely to suffer in a situation where there is no warehousing?
14. 2007 Q13 P1
Outline four benefits to a business that uses its own warehouse. (4 marks)
15. 2007 Q6a P2
a) Explain five features that you would consider in establishing a warehouse for imported goods. (10 marks)
16. 2008 Q3 P1
State four ways in which a warehouse is of importance to a manufacturer. (4 marks)
17. 2010 Q3 P1
Name the types of warehouses associated with each of the statements given below: (4 marks)
Outline four conditions under conditions under which a warehouse may be considered to operating efficiently. (4 marks)
- Speed; Speed is an important factor when the message is urgent. In such a case telex, fax, telephone, telegram or e-mail would be the most suitable means of communication. Otherwise ordinary mail would be used
- Cost; The cost incurred in using a means of communication vary from one means to another e.g. it is cheaper to send messages by ordinary mail than by telegram or telex
- Confidentiality; some messages are quite confidential and are intended for certain person only. Where confidential messages are involved, appropriate means should be used e.g. registered mail or internal memo enclosed in an envelope
- Distance; the geographical gap between the sender and recipient is very important in determining the means of communication to be used. Some means are suitable for long distances while others are not. Paging and sirens are suitable for short distances. For long distances, fax letters, telephone e.g., e-mail may be appropriate
- Evidence, some means of communication do not provide record of the message communicated while others do. All means of written communication provide evidence of messages communicated.
- Reliability; this is the assurance (certainty) that the message will reach the intended person at the right time in the right form. Face-to-face communication is more reliable than other forms of communication because one can ask for clearly and get answers immediately. For some written information, courier service may be preferred
- Accuracy; this refers to the exactness of the message communicated as intended by the sender. Written messages are generally more accurate than other means of communication.
- Desired impression; The impression created upon the recipient of a message is very important e.g. a telegram or speed post mail will carry some sence of urgency, registered mail will create an impression of confidentiality while use of colourful and attractive letterheads would convey a good image of the business.
- Availability; One may want to telephone, for example, but the services are not there so the person would be forced to use alternative means e.g. letters or radio call.
Barriers to Effective Communication
- Language used; the language used by the sender should be known (understood) by the recipient so that communication can take place
- Poor Listening; the effectiveness of communication will depend on the willingness of the recipient to listen keenly .listening require careful attention and concentration. It may however be the task of the sender of the message to attempt to gain the attention of the listener. Through his/her choice of words and expression among others.
- Negative Attitude; Attitude refers to the feelings of the communicating parties towards each other. It is important that there exists a mutual feeling of trust and respect between the parties concerned in order to avoid bias .If there is mistrust and prejudice then there may be deliberate or unintentional misunderstanding of the message involved.
- Poor Timing ; poor timing leads to breakdown in communication , therefore for effective communication to take place the message must be sent and received at an appropriate time, e.g. a message sent when one is in a hurry may not be properly received or delivered
- Wrong medium ; the medium used to communicate must be appropriate for the message being conveyed otherwise there may breakdown in communication eg one may not convey a confidential message over the telephone effectively
- Prejudgment ; our understanding of the message is often conditional by our earlier experiences and knowledge this may make one individual draw premature conclusion eg a student who always fail in a subject and this time round has improve may be failed by the teacher because he has always failed in the past .
- Ambiguities; it occurs when the sender express in a manner which leads to wrong interpretation. When the receiver interprets the message differently it automatically leads to communication breakdown.
- Emotional responses; emotional responses such as those resulting from hunger or excitement may lead to distortion of message.
- Unclear System within the organization ; if the channel of passing information in an organization are not clear then the message will not get to the right people for whom the messages intended
- Noise; it refers to any disturbing sounds which interfere with concentration or listening ability of the recipient of the message the presence of noise may make it impossible for any message to be received in the right way.
- Unfamiliar; Nonverbal signals; lack of understanding of nonverbal sign may be a barrier to effective communication.
Service That Facilitate Communication
- Mailing services
- Telephone services
- Broadcasting services
This refers to handling of letters and parcels. They are offered by organizations such as postal corporation of Kenya (P.C.K) Securicor courier and Document handling Limited (D.H.L)
Some of the services offered by the postal corporation include;
- Speed post; this is service offered by the post office to send correspondence and parcels to a destination in the shortest time possible. The post office uses the quickest means of transport available to deliver the mail.
- The sender pays the normal postage fee plus a fee for special service. An example of such a service is Expedited Mail Service(EMS) speed post
These include surface mail and air mail.
- Surface Mail; These include letters and parcels delivered by road, rail, water and hand.
- Air Mail; this consists of letters and light parcels delivered by air.
An express mail is/must be presented at the post office counter by the sender and the envelope clearly addressed and a label with the word “express” affixed. Normal postage plus an extra fee (commission) is charged
The mail is delivered to the receivers nearest post office from where the post office makes arrangements to deliver the mail to the receiver within the shortest time possible.
NOTE: For speed post special arrangements to deliver the mail start at the sender’s post office whereas express mail, the arrangements start at the addressers post office.
c) Poste Restante;
This is a service offered by the post office to travelers who may wish to receive correspondence right away from their post office box. The addressee has to inform those who may wish to correspond with him/her of the nearest post office he is likely to use at a particular time
Under this arrangement when addressing the letter, the words poste Restante must be written on the envelope clearly. The addressee must identify himself/herself when collecting the correspondence from the post office.
There is no additional charge made apart from normal postage charges. This service can only be offered for three months in the same town.
This service is offered by the post office for sending articles of value for which security handling is required. A registration fee and a commission is paid. The commission depends on the weight of the article and the nature of registration. The sender is required to draw a horizontal and a vertical line across the faces of the envelope.
A certificate of registration is given to the sender. In case of loss, the sender may be paid compensation on production of the certificate of registration.
A green card is sent to the recipient. The card bears his name and the post office at which the mail was registered. The recipient will be required to identify himself before being allowed to possess the mail.
Items that may be registered include jewels, certificate, land title deeds etc.
b) Business Reply Service;
This is a service offered by the post office to business firms on request. The firm pays some amount to the post office and an account is then opened from which posted charges are deducted.
The service is useful/more common with firms which would like to encourage their customers to reply their letters. Customers are issued with reply card envelopes (or envelopes marked ‘postage paid’)
They can send letters to the business by using these envelopes/the card. The customers then place the card/envelope in the post box and the firm’s post office branch will deduct postage charges from the lump sum amount.
These are services where a service provider receives transports and delivers parcels or important documents to destinations specified by customers in return for payment of fees or charges.
Examples; Akamba bus service, Securicor courier services etc.
ii) Telephone services
- Landline/fixed line services
- Cellular (mobile)phone services
Telkom Kenya, through the post office, provides telephone services which offer direct contact between people who are far apart. It makes conversation between people at any distance possible, as long as there are transmission facilities between them. Urgent matters can be discussed and consultations can take place so that instant decision or actions are taken. The telephone assists organizations to establish a fast and convenient machinery for its internal and external communication network.
ii) Cellular(mobile)phone services
These are hand held telephones with digital links that use radio waves. They are sometimes called cell-phones since they use power stored in a dry cell
In Kenya mobile phone services are provided by safaricom Ltd.(a subsidiary of Telkom Kenya)and Airtel communications Ltd(formally Kencel Communication Ltd)which is a joint venture between a French company and a Kenyan company, yu mobile services and Orange mobile services . This sector therefore greatly benefits from foreign investment to improve services.
The use of this service is popular. Apart from the provision of telecommunication service, cell phones have different attractive features or services such as short messages service (sms) whereby a caller can send a written message. Recent models of mobile phones enable the user to access the internet and send e-mail messages
Advantages of mobile phones
- They are portable
- Written messages can be transmitted easily and cheaply through the short message service(sms)
- Enables both local and international communication.
- The cost of acquiring the equipment is relatively affordable
- Direct feedback is possible
- Has memory for storing written messages
- Has got e-mail capability
Disadvantages of cellular phones
- Some kinds of mobile phones are expensive to buy
- Maintenance expenses of a mobile phone are high. They are also susceptible to damage and repair can be very costly
- Users are greatly inconvenienced in case there is no network coverage
- A special facility where the callers identity is known(displayed on screen)can be abused where recipient does not wish to answer the call
- Mobile phones are a security problem. They are easy targets for thieves
- There is a danger of the radioactive rays or emissions negatively affecting the users health, if such emissions are not adequately controlled
Communication commission of Kenya is a regulatory body that receives applications and issues licenses for radio and television broadcasting stations.
a) Radio stations
Radio broadcasting is a very important mode of giving news and information to people in the whole world.
The liberalization of the communications sector in Kenya in 1999, Kenya has witnessed a mushrooming of FM Stations which are owned by private sector operators e.g. Kiss Radio, Easy FM, Classic FM, Family FM, Kameme etc.
They have helped to spread news and information countrywide. Before liberalization, Kenya Broadcasting cooperation (KBC) radio was operating as a state owned monopoly.
b) Television Stations
Television broadcasting (telecasting) does not reach as wide an audience as radio broadcasting in Kenya. It however serves the same purpose of relaying news and information to Kenyans. Both radio and television stations are widely used for advertising purposes.
The T.V subsector has been liberalized since 1999 and a number of privately owned stations have emerged e.g. Kenya Television Network (KTN) Nation Television, Family T.V etc. Prior to that time KBC television was in operation as a state owned monopoly.
Other services that facilitate communication
Current trends and Emerging issues in communication
The following are some of the current trends and emerging issues in communication;
Telephone Bureaux (Bureaus)
i) Mobile phones (cell phones)
These are hand held telephones with digital links that use radio waves. They have become an important business and social tool. This is because most people and traders want some flexibility to be able to communicate whenever they are.
Other reasons that have led to the popularity of cell phones include:
- Pre-paid services which enable the owners to control communication costs.
- Most cellular phones now allow the owners to browse the internet, check and send mail. This allows business people to communicate research and even place orders.
- Cellular phones have short message services (sms) which enables the owners to send written messages.
This is a service provided through the internet for sending messages.
It is similar to sending a letter through the postal system only that it is done electronically.
Messages can be sent to anyone on the network, anywhere in the world. For this to take place, computers have to be connected to each other to form a network.
To communicate, one is required to have an email address e.g. raeform2@ yahoo.com. Messages arrive at the e – mail address immediately they are sent.
It is only the addressee of the message who can retrieve the message since a password is required to access the mailbox.
E – Mail can also be used to send documents and photographs like certificates by scanning and attaching.
More and more businesses are using e- Mail to communicate with other businesses, their customers and suppliers.
The internet links computers all over the world. Written and oral information is transmitted on the internet through the use of telephone wires, fibre- optic cables and wireless devices.
The internet has changed the way people communicate in the following ways;
- Increased use of electronic mail (e-mail)
- Quick access to information from all over the world.
- Development of home offices and remote offices.
- Use of teleconferencing and video conferencing.
- Development of e-commerce.
The future office will rely largely on computers. Most of the communication will be done through computers. This may result in less use of paper, hence the use of the term “the paperless office”.
Vi) Decline in the use of postal services
Decline in the use of postal services is a result of the impact of the internet. E-mail has become a popular and preferred mode of communication since it is fast and cheap. However, ordinary mail/ use of postal services may not be completely phased out since the government, businesses and people do not regard an e-mail as a binding or formal communication.
Vii) Transformation of language
The language used to pass and receive messages has evolved through time. e.g. the youth have adopted the use of “sheng” in exchanging messages. Such language is largely understood by its youthful users. There is also the use of cell phones to send short text messages; which are highly abbreviated and may use slang whose meaning is only known to the users.
Communication Revision Questions
Communication is the process by which information is passed from one person or place to another.
2. Outline the role played by communication in any given organization
- It is used to give instructions on what should be done at work and during work.
- It enhances good relations among workers thereby promoting and enhancing their efficiency.
- Through communication most organizations have been able to improve their image, for example through advertising.
- It used to improve the relationship between the organization and the customer or clients.
- For coordinating purposes, communication is used to ensure all departments work in harmony.
- The feedback got from the clients or customers helps to improve an organization’s reliability and quality of goods and services offered.
- Communication is used as a tool for management.
- Good decisions are made as communication helps one understand all the necessary matters.
(a) Vertical communication
Involves the flow of information either downwards or upwards, for example, from a senior employee to a junior employee
(b) Horizontal communication
Is also referred to as lateral communication which is passing of information between people of the same rank or status, for example from one departmental manager to another departmental manager
(c) Diagonal communication
This is communication of different people in different levels of management or departments for example a receptionist communicating to a production manager.
4. Distinguish between formal and informal communication
Formal communication is official and documented and follows certain rules for example a worker writing an official letter to an organization’s seniors. Informal communication does not conform to any time, for example communicating to friends and relatives.
5. State the essential elements in communication.
- The sender who is the source of the information being communicated
- The receiver(or recipient) of information
- The message being communicated
- The channel (or medium) through which the message is passed on
- Feedback which is the response or reaction of the recipient.
- Face-to-face communication
- Telephone conversation
- Radio calls conversation.
- A large number of people can receive the information at once for example when addressing in a meeting.
- There is immediate feedback
- Clarification can be made easily and immediately
- This is personal appeal
- It can be very convenient and persuasive
- It is fast since the intended information reaches the recipient immediately.
- It is not easy to know if the message or information has been received particularly if the receivers are many
- It is prone to outside interference due to noise and other forms of disruptions
- In case of incorrect pronunciation of words, there could be distortion of the information
- There is no record for future reference.
- The method is not effective for recipients with learning problems.
- Can take a lot of time to pass intended information.
- Noise may hinder effective communication
- The emotional state of both the sender and the recipient
- Use of the wrong channel to communicate
- Breakdown of a channel used to communicate
- Illiteracy of the recipient particularly for written communication.
- The attitude of the recipient towards the sender and the information being communicated
- Use of difficult vocabulary or words by the sender
- Lack of concentration on the part of the recipient may affect communication
- Poor timing by the sender.
- One gets immediate feedback
- It is fast and can be used to send urgent messages
- There is personal appeal
- The sender has a great opportunity to convince and persuade the recipient.
- It is not very expensive particularly for making calls for a short duration of time
- It can be used even when both the sender and the recipient are far apart
- Written communication provides evidence which may not be there in verbal communication
- Written information can be stored for future reference unlike verbal which cannot be stored and depends on the recipients memory
- It is not prone to distortions and therefore more accurate than verbal communication
- Written communication can be in form of diagrams, illustration and maps which is not possible for verbal communication
- Some written communication such as letters would be cheaper and time saving than verbal communication, for example making long telephone calls.
- Written communication can be used for confidential messages, for example registered mails.
- Written is not very persuasive or convincing
- There is no personal touch
- It can only be used by literate
- It can be slow where letters take time to reach the recipient
- It takes time to get a feedback from the recipient
- Messages cannot be enhanced by gestures, that is, body language or face expressions
- It can be expense to file all the written communication
- Gestures, which may include signs and symbols
- Information is more attractive and appealing
- Can reach many people at once
- It can be used even for those who cannot read and write
- Immediate feedback is received from the way the recipient behave
- Can be entertaining
- Can be misinterpreted, for example if the receiver does not understand the signs or gesture
- Not suitable for passing confidential information
- It is not possible for the recipient to give a feedback
- Gesture and signs are only suitable to those who can understand them
- The initial cost of preparing these forms of communication may be high for the sender
- It may take a lot of time to prepare these forms of communication
- Registered mail, for sending valuable or confidential information.
- Speed post services offered by the post office to send letters parcels using the quickest means possible
- Poste restante, usually used by those without postal addresses
- Business reply service which enables customers and clients to reply to a business without having to pay for postage stamps
- Broadcasting services through various radio stations
- Print media such as the various newspapers, magazines and journals
- Internet services which connect one to the world wide website
- Telephone services
- Mobile or cell phone use
- Internet which uses inter linked computers to the world wide website
- Fax, which can be used to send written messages very fast
- Information and telephone bureaus where one can make local and international calls
- Move towards a paperless office.
- Transformation of language.
- The cost because some are more expensive than others
- Availability of the means
- Reliability or assurance that the message will reach the recipient
- The distance between the sender and the recipient.
- The literacy level of both the receiver and the recipient
- The confidential nature of the information being sent
- The urgency of the message
- If there is need for evidence or need for future reference
- The desired impact of the means upon the recipient.
- Her friends may be illiterate and may be unable to read the message received
- Her friends may not have a receiving machine and will be unable to get the information
- It can be expensive to use as the sender pays a subscription fee and rental fee while he and the recipient pays for the sent message
- It can be expensive to buy the teleprinters used in receiving and sending information
- Telex may only send written messages but cannot be used to send maps, diagrams and charts
- When communicating to someone who has a hearing problem
- If one wishes to pass a secret or coded message
- If both the receiver and the sender are far apart but can see each other
- It can be used in case there is a language barrier
- In an environmental where there is a lot of noise or physical interference to other forms of communication, sign language may be used
- It can be appropriate where both the recipient and the sender understand the signs.
Q & A
COMMUNICATION TOPIC OBJECTIVES.
- Explain the meaning and importance of communication
- Describe the lines of communication
- Explain the essential of effective communication
- Discuss the advantages and disadvantages of each means of communication
- Discuss the factors that influence choice of an appropriate means of communication
- Identify the barriers to effective communication
- Discuss services that facilitate communication
- Discuss trends in communication.
- Meaning and importance of communication
- Lines of communication
- Formal and informal
- Essential of effective communication
- Barriers to effective communication
- Forms and means of communication
- Advantages and disadvantages of communication
- Choice of an appropriate means of communication
- Services that facilitate communication e.g. courier, postal, telecommunication
- Trends in communication e.g.
- Facsimile (fax)
- Development in the internet e.g. e-mail; e-commerce
Meaning of communication
- Communication is the transfer or conveyance of messages or information from one person to another.
- Communication is the process of sending and receiving meaningful messages, information and ideas between two or more people located at different points in space.
Effective communication is vital/important for business in that it serves the following purposes.
Importance of communication (purposes)
- To give and obtain information - For an organization to run smoothly there should be proper flow of information within the business and also between the firm and outsiders e.g. the manager may inform members of staff about a planned meeting. Similarly the business may receive a letter of inquiry from a customer
- To clarify issues and points through proper communication - the organization is able to clarify confusing issues from within and without the firm for example in cases where there are many managers. It would be necessary to clarify the responsibilities of each manager.
- To enhance public relations - Good/efficient communication enables the business to create a more positive image and a favorable reputation of itself to outsiders and overcome prejudices and negative attitudes that people may have against the business.
- To start and influence Action - Proper communication enables the business to get new ideas make plans and ensure that they are implemented in the desired way.
- Improving customer service - Good communication helps in reducing errors providing customers with desired feedback and assisting in handling inquiries more efficiently
- Giving instructions - Through proper communication management is able to get work done by issuing instructions (procedures and orders)e.g. a supplier may be instructed when and where to deliver the goods ordered.
- To give Reassurance - Information is needed to reassure people that their performance is good e.g. an employee may feel better is he/she is served with a “will done“ memo or a “customer of the year” award.
- Confirming arrangements - Through communication arrangements are confirmed for example confirmation of meetings conferences or details of transactions
- Co-coordinating departments of the firm - Charges in one department are communicated to other departments that have a direct bearing to those changes e.g. when sales increase the sales department informs the production department so as to increase production proportionality
- Modifying behavior of persons within or outside the organization - Through effective communication persons are trained and counseled and as a result their behavior knowledge and attitudes change
- Sender – this is the person who writes, speaks or sends signs (symbols or signals) and is the source of the information.
- Receiver - this is the person to whom the information or the message is sent.
- Message – this is the information that is transmitted from the sender to the receiver. It may be spoken, written or in the form of symbols.
- Feedback – this is the response to the sender’s message. A message is said to have been understood if the receiver provides the desired feedback.
Lines of communication
A. According to levels
This can either be:
Vertical communication can be divided into two parts:-
- Downward communication
- Upward communication
- Training juniors
- Evaluating performance
- Delegating duties
- Solving the problems facing workers
- Inspiring and motivating the juniors(giving rewards)
- Submitting reports
- Giving suggestion
- Submitting complaints a grievances
- Making inquiries
Horizontal communication (lateral communication)
- Co-ordination and harmonization of different activities.
- To create teamwork within the department.
- To exchange ideas in order to develop human resources.
- To reduce goal blindness among different departments.
- To create a sense of belonging among department heads thus acting as a motivating factor.
b) According to nature of message
This can either be;
- Formal communication
- Informal communication
Formal communication is also known as official communication as it is the passing of information meant for office purposes.
Formal systems of communication are consciously and deliberately established.
Informal communication may also take the form of gossips and rumor-mongering.
Informal communication usually supplements formal communication as is based on social relations within the organization.
Note: Both formal and informal communication is necessary for effective communication in an organization.
Essentials of Effective communication
- The sender/communicator - This is the person from whom the message originates. He/she encodes the message i.e. puts the message in the communicative form.
- Message - This is the information to be sent. It is the subject matter of communication and may contain words, symbols, pictures or some other forms which will make the receiver understand the message
- Encoding - this is the process of expressing ones ideas in form of words, symbols, gestures and signs to convey a message
- Medium/channel - this refers to the means used in communicating. This could be in the form of letters, telephones and emails among others.
- The receiver - this is the person for whom the message is intended. The receiver decodes the message for proper understanding.
- Decoding - this is the process of interpreting or translating the encoded message to derive the meaning from the message
- Feed-back - this refers to the reaction of the receiver of the message. This maybe a reply /response which the receiver sends back to the sender.
Forms and Means of Communication
- Oral communication
- Written communication
- Audio –visual communication
- Visual communication
It is also known as verbal communication
Means of communication
This involves two or more people talking to each other. The parties are usually near each other as much as possible to ensure effective communication.
It is suitable where subject matter of discussion require convincing persuasion and immediate feed-back.
It may be used during meetings, interviews, seminars, private discussions, classrooms e.t.c
It is the most common means of oral communication
Advantages of face-to-face communication
- Provides for immediate feedback
- Has personal appeal
- Body language can be easily expressed
- One can persuade or convince another
- It is the simplest communication to use
- It is direct i.e. does not pass through intermediaries
- Convenient for confidential messages.
Disadvantages of face-to-face communication
- No record for future reference
- Can be time consuming
- Messages can be distracted
- Not suitable when people are far apart
- Unsuitable for the dumb and deaf
This form of communication is commonly used in offices and homes. It is useful in sending messages quickly over short and long distances.
It is however not suitable for sending;
- Confidential messages
- Long and detailed reports, charts and graphs
- Messages that would require reference or evidence
Installation is done on application by the subscriber (applicant).He/she pays the installation fee in addition; the subscriber is sent a monthly bill with the charges for all the calls made during the month.
The charges for calls depend on the time spent time of the day of the week and distance of the recipient from the caller e.g. it is cheaper to call at night than during the day. It is also cheap to make calls during public holidays and weekends than on weekdays.
There are also mobile phones which have no physical line connection to exchange and may be fixed to a vehicle or carried in pockets. In Kenya these services are provided by safaricom, Airtel, orange and Yu mobile communications.
Advantages of Telephones
- Relatively fast
- Has personal appeal
- Provides for immediate feedback
- One can persuade or convince another
- Suitable for long distance communication
Disadvantages of Telephone
- Can be expensive especially over long distances
- No record for future reference
- Lacks confidentiality
- Not convenient for dumb and deaf
- Can be time consuming
Reasons why mobile phones have become popular
- They are portable and can be conveniently carried around.
- It is not very expensive especially when making local calls.
- Relatively cheap to acquire.
- Some mobile phones can record conversations / calls thereby acting as evidence.
- Can be used to send short text messages (sms)
- Can be used anywhere since they are portable.
This involves transmitting information by use of radio waves i.e. without connecting wires between the sender and the receiver
The device used is called a radio telephone. It is commonly used in remote areas where normal telephone services are lacking or where telephone services are available but cannot be conveniently used e.g. policemen on patrol in different parts of a town
Radio transmission is a one way communication system i.e. only one person can speak at a time. It is therefore necessary for the speaker to say ‘over’ to signal the recipient that the communication is through so that the recipient can start talking. To end the conversation, the speaker says ‘over and out’
The radio calls are commonly used by the police, game rangers, researchers, foresters, ship owners and hotels situated in remote areas. They are also used for sending urgent messages such as calling for an ambulance and fire brigade
Note; Radio calls are not confidential since they use sound frequencies that can be tapped by any radio equipment that is tuned to that frequency
Advantages of Radio calls
- Relatively fast
- Has immediate feedback
- Has personal appeal
- Provide room for one to persuade and convince another
- Suitable for remote areas
- Convenient for long distances
Disadvantages of Radio calls
- No record for future reference
- Lacks confidentiality
- Messages are sent one way at a time
- Can be expensive
- Cannot be used by dumb and deaf
- Can be time consuming.
This is a means of communication used to locate staff or employers who are scattered in an organization or who are outside and need to be located urgently
When within the organization portable receivers, lighted signals, bells, loudspeakers etc. are used
When outside the organization employees are contacted using portable receivers (pocket-size) used to send messages through sms (short message services)
The paying system can only be used within a certain radius. When using a portable receiver, the caller will contact the subscriber by calling the post office which will then activate the pager.
The subscriber is then informed to contact the originator of the message.
Paging is mostly used in emerging cases
Usually messages intended for a wide audience can be transmitted through a radio more quickly and economically than by using other forms of communication.
Radio is used for different reasons apart from advertising e.g. for formal notices, and venue for activities
Advantages of oral/verbal communication
- Very effective method of communication since the recipient can be persuaded/convinced
- It is relatively faster method of communication
- The sender can get immediate feedback
- It indicates some sense of regard hence more appealing.
Disadvantages of oral/verbal communication
- Has no records for future reference
- Is an expensive method especially if the two parties are far apart
- Is not good for confidential messages
- It is not suitable for confidential messages
- It may be time wasting especially where one needs to be convinced
This involves transmission of messages through writing. It is the most formal way of communication because the information is in recorded form and can be used for reference
Means of written communication
Letters are the most commonly used means of communication.
There are two categories of letters;
- Formal letters
- Informal letters
Business letters are written to pass messages and information from businessmen to customers and vice versa e.g. letters of inquiry and acknowledgement notes.
It can also be used between employees and employers in an organization e.g. a complimentary note.
Official letters are letters between people in authority and others that touch on the activities of the organization e.g. an application letter for an advertised vacancy in an organization.
Formal letters have a salutation clause which usually starts with “Dear Madam “or “Dear Sir”. It also bears the addresses of both the sender and the recipient, a subject heading and a complimentary clause ending with “Yours faithfully”.
b) Informal Letters; these are letters between friends and relatives
They are also known as Personal letters
This is a means of communication provided by the post office. The sender obtains the telegram form from the post office and fills the message on it in capital letters and hand it over to the post office employees at the counter. Alternatively the sender may use a telephone to read the message to the post office. The post office then transmits the message to the recipient post office.
The charges of a telegram are based on the number of words used, the more the words used the higher the charges. However there is a standing charge.
Telegrams are used for sending urgent messages.
Note; Due to changing technology telegrams have lost popularity. Short messages can now be sent by cell phones (mobile phones) using the short messages services (sms)
This is a means of communication used to send short or detailed messages quickly by use of a teleprinter. The service is provided by the post office on application.
A message is sent by use of two teleprinters one on the senders end and another on the recipients end. When sending information through a teleprinter which is a form of electric typewriter producing different electric signals, its keys are pressed and automatically the message is printed at the recipient’s machine.
Telex saves time for both the sender and recipient as the messages are brief precise and received immediately. However it’s an expensive means of communication
This involves transmission of information through a fax machine. Both the sender and the receiver must have a fax machine. These machines are connected using telephone lines
Fax is used to transmit printed messages such as letters, maps, diagrams and photographs. To send the information, one dials a fax number of the required destination and then the document is fed into the sender’s machine. The receiving machine reproduces the document immediately. It is used for long distance photocopying service.
v) Memorandum (Memo)
This is printed information for internal messages within an organisation. It is normally used to pass information between departments or offices in an organization.
Memoranda have no salutation or complimentary clause. They are suitable for informing the officers within an organization of matters related to the firm.
A memo is pinned on the notice board of an organization if it is meant for everybody otherwise passed to the relevant staff.
This is a written communication used to inform a group or the public about past current or future events. It is usually brief and to the point. It can be placed on walls, in public places, on trees, in newspapers or on notice boards.
These are statements/within records of findings recommendations and conclusion of an investigation/research. A report is usually sent to someone who has asked for it for a specific purpose.
These are many copies of a single letter addressed to very many people when the message intended for each is the same.
This is an outline of the items to be discussed in a meeting. It is usually contained in a notice to a meeting sent in advance to all the participants of the meeting. The notice of the meeting contains;
- The date of the meeting
- The venue of the meeting
- Time of the meeting
- Items to be discussed
These are records of the proceedings of a meeting. Keeping minutes of certain meetings is a legal requirements e.g. companies
Keeping minutes for other meetings are for management purposes to ensure that decisions made at the meetings are implemented
Advantages of written communication
- It can be retained for future reference
- Some like letters are relatively cheap(can produce many copies)
- It is suitable for confidential messages
- Allows for inclusion of fine details
- It is not prone to distortion of messages
- Can be used as evidence
- Can be addressed to many people.
Disadvantages of written communication
- It lacks personal appeal
- It takes time to prepare and reach the recipient
- Suitable for the literate only
- Immediate feedback may not be possible
- Does not offer room for persuasion and convincing
- It may be expensive because it involves a lot of paperwork and time.
- Not suitable if the sender and the receiver do not share a common language.
This is the process of passing information by use of diagrams, drawings pictures, signs, and gestures etc.
A photograph is an image (visual representation of an object as it appeared at the time when the photograph was taken
Photographs are self-explanatory and may not be accompanied by any narration or explanation. The recipient is able to get the message at a glance.
Refer to marks, symbols, drawings or gestures whose purpose is to inform the public about such things as directions, distances, dangers and ideas.
Examples; road signs, traffic lights and danger signs on electricity poles
This means of communication can only be effective if the meaning of the sign used is understood.
Graphs; these are used to show and illustrate statistical information
Charts; these are diagrams which show or illustrate the flow of an idea e.g. an organization chart illustrates the whole organization structure indicating the chain of command
Advantages of visual communication
- It can be used to pass confidential information
- The information may be obtained at once
Disadvantages of visual communication
- Can only be used by people who can see
- The information may be wrongly interpreted
- It may be an expensive method of communication
- Cannot be used for long distances
This is a form of communication in which messages are sent through sounds and signs.
This form of communication ensures that the receiver gets the message instantly.
It is suitable where both the sender and the receiver know the meaning of specific sounds and signs.
Means of Audio-visual communication
- Television (TV); this is a device that transmits information inform of a series of images on a screen accompanied by sound. It is a very effective method of communication since it combines the advantages of image and sound. A television can be a very suitable means of sending urgent messages especially when it gives live coverage of events.
- Siren; this is a device used to produce a loud shrill sound accompanied by a flashing light. It is commonly used by the police, ambulances, and the fire brigade and security firms to alert the public of the danger involved e.g. the ambulance siren conveys the message that somebody is seriously sick and therefore other motorists should give way.
Advantages of Audio-visual communication
- It reaches many people
- It is more appealing than other means of communication
- Reinforces verbal communication
- May have a lasting effect on the receiver
- Suitable where receivers are illiterate.
Disadvantages of Audio-visual communication
- It is suitable to those people who can interpret the messages correctly
- It is not suitable for confidential messages
- Preparation may take long.
This is when the message is transmitted through sounds. Examples include
- A whistle; this is a device which is blown to produce a sharp shrill sound to alert or warn the public or employees in an institution. It is normally used by security guards when there is danger. In some organization, a whistle is used to announce change in shifts
- Horn; This is also an instrument that is used to produce sound which passes different information depending on the way it is blown. Other methods of audio communication include drums, alarms, and bells among others
Advantages of Audio communication
- Is a faster method of communication
- It can reach several people at once
- The message is received instantly
Disadvantages of Audio communication
- The message may be interpreted wrongly
- It can only be used within a certain radius at a time
- It distracts people’s attention
communication questions and answers
Outline four reasons why a business person may prefer written communication to verbal communication. (5 marks)
2. 1997 P1
State five services offered by the post office. (5 marks)
3. 1998 P1
State four advantages of verbal communication. (4 marks)
4. 1999 P1
Highlight four advantages of using telex as a means of communication. (4 marks)
5. 1999 P2
Discuss the factors that a firm may consider in choosing a method of communication within the firm
6. 2000 P1
State four features of effective communication. (4 marks)
7. 2001 P1
State four reasons why the post office is still popular as a means of sending letters. (4 marks)
8. 2001 P2
State reasons for use of letters in business communication.
9. 2002 P1
Give four reasons why a person would send a message by mail rather than by telephone. (4 marks)
10. 2003 P1
Highlight four factors that may limit the use of telephone as a means of communication in Kenya. (4 marks)
11. 2004 P1
State four problems that may interfere with the effectiveness of face to face communication. (4 marks)
12. 2006 Q15 P1
Give four reasons why one would prefer a letter to a telephone to send a message. (4 marks)
13. 2007 Q2 P1
The following terms relate to communication: vertical, horizontal, formal and informal. Write the appropriate term of communication associated with each of the following statements.
b) Explain four advantages of transaction business through e-commerce. (8 marks)
15. 2008 Q5 P1
Outline four benefits that may accrue to a business person who uses e-mail to communicate. (4 marks)
16. 2009 Q12 P1
Outline four circumstances under which face to face communication may be ineffective.
17. 2012 Q5 P1
Outline one circumstance under which each of the following telecommunication services may be used:
- Radio call
(b) Explain five elements of effective communication. (10 marks)
Q & A
- Explain the meaning and importance of transport to business
- Explain the essential elements of transport
- Describe the modes and means of transport
- Discuss advantages and disadvantages of each means of transport
- Discuss the factors which influence choice of appropriate means of transport
- Discuss trends of transport.
GUIDELINES ON TOPICS
- Meaning and importance of transport
- Essentials of transport
- Modes and means of transport
- Advantages and disadvantages of each means of transport
- Choice of appropriate means of transport
- Trends in transport e.g.
MEANING OF TRANSPORT
Importance of Transport to Business
- Bridging the gap between producers and consumers/ linking consumers to producers-Transport links consumers to producers which enable the consumers to obtain the goods they need.
- Employment creation-Transport helps in solving unemployment problem by creating job opportunities. For example, people may be employed as drivers, pilots, mechanics and road constructors.
- Promotes specialization-Transport enables people to specialize in jobs they are best at. For example; producers would concentrate in production only while other people carry out distribution.
- Making goods and services more useful-Through transport goods are moved from a place where they are least required to a place where they are most required thereby making them more useful.
- Improving people’s standard of living-It enables consumers to get a variety of goods and services thereby improving the standards of living.
- Availing a wide market for products-It helps producers to widen the markets for their products by enabling them access to areas they would otherwise not have accessed
- Increased production/ facilitates mass production-Due to the wider market created through transport, producers are able to increase the volume of goods produced.
- Avoiding wastage-Transport makes it possible for surplus goods to be disposed of by taking them to areas where they are required. Perishable goods such as flowers, fruits and vegetables can also be transported fast hence minimizing/ avoiding wastage.
- Promoting development of industries-Through transport, raw materials can be taken to manufacturing industries and also finished goods to the market. Similarly, it promotes development of service industries such as tourism.
- Adds value to goods and services- creates utility in goods by moving them from the point of production to where they are needed thereby adding their value.
- Leads to the opening of new markets- Goods and services can be taken to new areas with ease.
- It facilitates the movement of labour- people can easily move from where they stay to where they work.
ESSENTIAL ELEMENTS OF TRANSPORT
- Unit(S) of carriage
- Methods of propulsion
A. Unit(S) of carriage
b. Methods of propulsion
- Natural ways-As the name suggests, natural ways are the ways that are provided by nature. They are therefore free to acquire. They include airways and seaways.
- Man-made ways-These are ways that are made available by human being. They include roads, canals and railways. Man made ways are usually expensive to construct and maintain.
d. Terminals (terminuses)
MODES OF TRANSPORT
- Land transport
- Water transport
- Air transport
Advantages of Human Porterage
- Could be the only means of transport available
- Compliments other means of transport
- Flexible as it has no fixed time table or routes
- May be a cheap means compared to other means of transport
- Readily available when required
- Convenient over short distances
Disadvantages of human Porterage
- Not suitable for long distances
- They add onto congestion on roads
- Not suitable for transporting heavy and bulky goods
- It is relatively slow
- Relies on human energy which is exhaustible
Advantages of carts
- Compliments other means of transport
- Relatively cheap to hire
- Initial buying and maintenance cost is low
- Appropriate in remote areas where other means are not available
- Readily available for hire
- Can carry fairly heavier and bulky goods
- Convenient for transporting goods over short distances
Disadvantages of carts
- May not be suitable for transporting heavy and bulky goods
- Cause traffic jams on roads leading to congestion and accidents
- Not suitable for transporting goods over long distances
Vehicles are either passenger or goods carriers. Passenger carriers may be buses, matatus, taxis and private cars while goods are transported using Lorries, pick-ups, tankers and trailers. Vehicles are expensive to acquire and maintain. The convenience of vehicles may depend on the nature of the road on which they travel.
Some roads are impassible especially when it rains while others are usable throughout the year (all weather roads).Of special concern in road transport is the matatus. These are privately owned passenger vehicles which were introduced to supplement the existing mainstream transport companies that were inadequate at independence. They got their name from the amount of fare they used to charge originally that is, mapeni matatu. The operators have to obtain the relevant documents such as insurance cover in order to be allowed to operate. Their owners may form associations which take care of their interests along given routes or in certain areas.
Advantages of matatus
- They supplement regular bus companies, especially in remote areas where they are the only means.
- They fill up faster than buses hence save time
- They are more flexible since they can change routes easily depending on demand
- They reach out into the interior of rural areas where big buses cannot access
- They are more flexible with the fares they charge
- They are easier to hire as most of them are readily available
- They are cheaper to acquire as compared to buses
Disadvantages of matatus
- Some matatus are poorly maintained to the extent of being unroadworthy
- Most drivers are reckless as they rush to compete for customers. They pick or drop passengers anywhere
- In some cases, touts use impolite language when dealing with passengers
- They may cause noise pollution such as unnecessary hooting and loud music
- They may cause congestion in towns unnecessarily because of careless driving and parking
- Uncalled for sudden increase in fares at peak hours, during the night and on public holidays
- Their operation is concentrated on peak hours, rarely operating at night.
- They at times unexpectedly change their route hence causing breach of contract.
Advantages of vehicles
- Most readily available means of transport
- Relatively fast compared to carts and human Porterage
- Relatively cheaper over short distances
- Flexible as it can offer door to door service
- Vehicles may be available for transporting special goods
- Roads are widely spread thereby making many areas accessible.
Disadvantages of vehicles
- Acquisition and maintenance costs are high
- May not be suitable for transporting heavy and bulky goods over long distances as compared to railways
- Traffic jams in roads may cause delays
- Vehicle transport is prone to accidents which may lead to loss of goods and life
- Some roads may be impassible especially during the rainy seasons.
The terminuses of trains are the railways stations. Therefore; the goods to be transported by trains have to be taken to the railway station. Railway transport is suitable for heavy and bulky goods as well as passengers. There are two types of trains: cargo and passenger train.
Advantages of Trains
- Relatively secure as cases of theft and accidents are rare
- Enables a transporter to plan for the transport of his/her goods as trains follow a fixed time table
- Economical for transporting heavy and bulky goods over a long distance
- Trains may have facilities for carrying special types of goods e.g. gas, petrol and vehicles
- Where shunting facilities are available trains may deliver goods up to or from the owner’s premises
Disadvantages of Trains
- Not flexible as trains follow a strict time table
- Railway lines are expensive to construct and to maintain
- Not all areas are served by railway lines
- Not suitable for transporting urgently required or perishable goods as it is slow
- Unsuitable for transporting goods over short distances
- Trains are expensive to acquire and maintain
Products flow by the force of gravity or pressure from an original station. If the original terminal is at a higher level than the receiving terminal, the force of gravity is adequate to move the product. But if the receiving terminal is at a higher level than the original than the originating terminal, then power is required to pump the product uphill. For example, petroleum from Mombasa which is at sea level needs pressure to pump it to all the receiving stations.
Advantages of pipeline Transport
- It is labour saving as it requires minimal manpower
- It is environmentally friendly since it is free of noise or smoke
- It may be constructed in areas where it is difficult to construct roads or railway lines. For example, over rugged terrain
- Pipelines allow continuous flow of the goods being transported
- It ensures that road damage is reduced as the number of tankers is reduced on roads
- It helps to reduce accidents that may be caused by tankers on roads
- It reduces delays arising from congestion on roads
- Maintenance costs are reduced as it relies on gravitational force and booster stations along the way
- It may not be affected by adverse weather conditions
Disadvantages of pipeline Transport
- A leakage not detected in good time may lead to high losses
- Initial construction cost is high
- Accidents leakages may lead to environmental pollution
- It is unidirectional that is, travels only in one direction
- It can transport only one product at a time
- It is not flexible since once a line is laid, it cannot be adjusted according to transport patterns or demands
- Generates comparatively fewer job opportunities as it is capital intensive
- It is vulnerable to sabotage by enemies.
- Once laid, it is difficult to reroute or relocate.
Water hyacinth has however been a threat to transport on the lake. Most rivers in Kenya are not navigable due to reasons such as:
- Too small
- Presence of rapids and waterfalls
- Too shallow
- Most are seasonal
- High gradient
Types of Water vessels
A ship is a large vessel that transports people or goods through water. Their sizes however vary depending on quantity of goods and passengers they carry. Ships help in connecting countries or places which borders the sea. They load and offload in terminals referred to as harbors found at sea ports. For example, the Kilindini harbor is found in the port of Mombasa.
Ships that transport people are referred to as passenger ship while those that transport goods are referred to as cargo ships. Cargo ships are c are convenient for carrying heavy and bulky goods.
Ships may also be classified as either liners or tramps.
These are ships that are owned and operated by shipping companies called conferences. Each conference is responsible for specifying the route on which each liner would operate the rates to be charged and setting the rules and regulations to be followed by the members.
Characteristics of liners
- Have fixed routes
- Follow a fixed time table
- Charges are fixed
- Call at specified ports along the route at specified intervals
- Travel at regular intervals.
These are ships that do not follow a regular route or time table. Their routes therefore depend on demand. During times when demand is high, they charge higher rates and when demand is low they lower their rates. Tramps can therefore be likened to matatus. Tramps may be owned by either individuals or firms.
Characteristics of tramps
- Do not have a fixed rate. They therefore move to wherever there are goods or passengers to carry.
- Have no set time tables. They therefore move according to demand
- Their fares change according to demand.
- Their travelling patterns are irregular and therefore cannot be relied upon
When a trader hires an entire ship to transport goods to a given destination, he/she and the ship owner signs a document called a charter party. This document shows the terms and conditions under which the goods would be transported.
Other information included in the agreement are destination, nature of the goods and freight charges. When the ship is hired to carry goods for a given journey the document signed is referred to as voyage charter. On the other hand, if the ship is hired to transport goods for a given period of time, the document signed is called time charter.
Ships may be specially built to carry special commodities. These may include tankers specially built to transport petroleum products and other liquids. Refrigerated ships may also be available to transport perishable commodities such as meat, fish and fruits.
Boats and Ferries
Advantages of water transport
- Sea transport is economical to the owner as the number of employees to carriage volume ratio is less compared to road transport
- Suited for transporting heavy and bulky goods
- It is cheap as the way is natural and free
- Connects countries of the world which border the sea
- Special types of ships are available for transporting goods
- Large volume can be carried thereby reducing cost per unit
- Not affected by traffic congestion.
- Some ships can be very luxurious for passengers and may even provide swimming pools.
- At the port/dock, there are many depots for storage of goods.
Disadvantages of water transport
- Sea-sickness, sea-pirates and storms may occur
- They are slow therefore not suitable for transporting perishable and urgently required goods
- It is expensive to construct and maintain artificial harbors
- Unfavorable weather conditions may affect water transport
- Sea transport is not accessible to land locked countries
- Lack of loading and off-loading facilities may lead to delay
- Cost of acquiring and maintaining ships is high.
- Theft of cargo and other valuables may occur during loading and offloading.
Aeroplanes are fast compared to other means of transport i.e. they are the fastest means of transport. They are therefore suitable for transporting urgently required goods like drugs and perishable goods Such as flowers over long distances.
Aircrafts may be classified as either passenger planes or cargo planes. Passenger planes transport people from one place to another. On the other hand, cargo planes transport light cargo to the required destinations. Aeroplanes may be fitted with special facilities for handling special goods. Aeroplanes are expensive to acquire and to maintain. Their operations may also be affected by weather conditions.
Advantages of Air Transport
- There is less handling of goods on the way since aeroplanes may move direct to the final destinations.
- The way does not require construction or maintenance as it is natural and free.
- Planes can move through places where other means cannot, such as over the earth poles and across high mountains/ planes are not hampered by physical barriers.
- Have efficient interconnections between airlines all over the world which makes it convenient
- Suitable for long distance travelers especially from one continent to another
- Very fast therefore suitable for transporting perishable and urgently required goods.
- Chartered planes can be used to reach remote areas.
- The movement of aircrafts is smooth therefore suitable for transporting fragile goods such as glassware and eggs.
- Passengers are given the highest degree of comfort and personal attention making it the most comfortable means of transport.
Disadvantages of Air Transport
- Causes noise pollution
- Air fields are not available in all places
- Cannot be conveniently used to carry heavy and bulky goods
- Expensive to acquire and maintain aircrafts
- Requires highly trained manpower e.g. air traffic controllers, pilots e. t. c
- Unfavorable weather conditions such as fog, mist and heavy rains smay cause delay
- It is an expensive means of transport in terms of freight charges
- Not suitable for transporting inflammable goods such as cooking gas and petrol
- In case of accidents results are catastrophic/ accidents are rare but fatal.
- Has limited carrying capacity which should not be exceeded.
- It is not flexible.
- Most air fields/ terminals are located some distance away from town/ city centers and therefore require transport or railway links that are affected by jams occasionally causing delays.
- Recent hijackings by terrorists have made air transport an insecure means especially for transporting valuables.
Containers are designed in a way appropriate to transport goods by ships, train, lorry or by air. To safeguard the goods against risks such as theft and unfavorable weather conditions the containers are sealed immediately after goods have been packed. The sealed containers are then transported up to the final destination where they are off-loaded. The consignee can then break the seal.
Goods can be transported in containers as Full Container Load (F.C.L) or as Less Container Load (L.C.L).Full container load applies where the container is filled with goods belonging to one person. In FCL, goods are delivered to the consignee intact. On the other hand, less than container load applies where a container is filled with goods belonging to several consignors. This may be the case where a single consigner does not have enough goods to fill a container. When such a container reaches the destination, it is opened and the various consignees take their goods.
There are special handling facilities for loading and offloading containers onto and from the units of carriage.
Apart from the container depot at Mombasa, Kenya Ports Authority (K.P.A) has established inland container depots referred dry ports. An example of a dry port is found at Embakasi in Nairobi. The establishment of dry ports aims at relieving congestion at the sea port. It also aims at making handling of cargo easier and efficient for inland importers and exporters.
When containers are off loaded from ships at Mombasa, they are loaded into special container trains called railtainer which transports them by railway to the inland container depot at Embakasi. Containers can also be transported by specially designed trucks between the ports or from the port to consumer’s destination.
Advantages of containerization
- Minimizes the risks of loss or damage of goods as containers are sealed at source
- Containers are lifted with devices which make movement and handling easy
- Saves time and labour in loading and off-loading due to use of machines
- Containers sealed at source in presence of customs officials may not be opened until they reach their final destination. This reduces delay.
- Special containers are available for goods requiring special attention like chemicals.
- Insurance costs are relatively low as risks are less
- Space is saved when containers are used as opposed to when individual items are packed in the carrier.
- Can carry large quantities of cargo if packed well.
- Containers are tough structure, which offer protection to sensitive and fragile goods.
Disadvantages of containerization
- They are expensive and this increases the cost of transporting goods
- Contributes to unemployment since it is capital intensive
- Not suitable for transporting small quantities of goods.
- Requires special handling equipment which may be expensive
- May not be suitable for goods with irregular shapes.
- Training labour force is long and expensive.
- They may be used to smuggle illegal goods.
- The large trucks used on the road increase road damage and may increase accidents.
Factors that influence the choice of appropriate means of transport
- Cost; The cost of transporting a good should be reasonable; except where other factors should be considered such as need for quick delivery. Otherwise should be proportional to the value of goods transported.
- Nature of goods; the nature of goods should be considered when choosing a means of transport. For example, perishable goods require a fast means. Similarly, heavy and bulky goods require a means of transport convenient for such goods e.g. trains and ship.
- Reliability; the means chosen should be able to deliver the goods to the required place at the right time and in the right form.
- Urgency; for goods that are urgently required, the fastest means available should be chosen.
- Safety and Security; the means chosen should ensure that the goods on transit are secure against loss, theft or physical damages.
- Distance; some means of transport are suitable for long distances while others are suitable for short distances. If goods are to be transported for long distances, air, sea or railway transport would be appropriate, otherwise roads would be suitable for short distances.
- Availability of means; the means of transport to be selected should be based on its availability. For example, where there is only one means of transport, it would be the only one to be chosen.
- Flexibility; this is the ability of means of transport to be manipulated to suit the convenience of the transporter. Where flexibility is required, then the means that would provide such should be chosen. For example a matatu is usually more flexible than an aeroplane.
- Terminals; some means of transport may have their terminals near the transporter than others. In this case, the transporter should choose the means whose terminals are conveniently accessible to facilitate loading and offloading of goods.
- Value of goods to be transported- goods of high value require special handling and high security during transportation.
TRENDS IN TRANSPORT
- Pipeline and containerization
- Electric trains are replacing diesel engines
- Underground tunnels for trains are being used to ease congestion on the surface
- Dual-carriage roads are being developed in various parts to ease congestion and minimize accidents
- Development of planes with larger carrying capacity and speed is a major feature in the transport industry
- Use of bicycles commonly known as boda boda are a common feature in towns, bus terminals and rural areas, supplementing other means of transport to ferry people and cargo to their destinations. The bicycles are being modified to make them more convenient. It is not unusual to find a bicycle (boda boda) which has been fitted with facilities such as:
- Motors to increase their speed and reduce energy applied by the cyclist.
- Music systems to entertain passengers and more comfortable seats.
- Motor cycles are also being used as bodabodas in various areas. Similarly, the three wheeled vehicles commonly known as ‘Tuk Tuk’ is a major feature in cities and most towns.
- Private personal vehicles with less carrying capacity e.g. four-seater vehicles are being used as matatus. The vehicles are convenient to the passengers as they:
- Fill up within a shorter time compared to larger vehicles
- May accommodate each of the customer’s interests.
- Passenger vehicles are being fitted with radios, music systems and videos to entertain customers as they travel. However, some forms of entertainment may not be conducive to all.
- Fill up within a shorter time compared to larger vehicles
TRANSPORT kcse questions
Give three disadvantages of railway transport in Kenya. (4 marks)
2. 1995 P1
Give three disadvantages of railway transport in Kenya (3 marks)
3. 1995 P2
Explain five reasons that may account for continued use of handcarts as a mode of transport in Kenya. (12 marks)
4. 1996 P1
State four circumstances under which a businessman would choose to transport goods by air? (4 marks)
5. 1996 P2
The oil pipeline has recently been extended from Nairobi to western Kenya. Explain five benefits that may be accounted to the country from the extension. (10 marks)
6. 1997 P1
Outline four reasons why a school in Kisumu may prefer to transport its sixty students to a music festival in Nairobi by train rather than by bus. (4 marks)
7. 1998 P1
List four disadvantages of using containers to transport goods. (4 marks)
8. 1998 P2
Discuss five factors that have hindered the expansion of railway transport in Kenya.
9. 1999 P1
Give five reasons why a manufacturing firm would be located in an area well served by good road network. (4 marks)
10. 1999 P1
Outline four limitations of containerization. (4 marks)
11. 1999 P2
Explain five features of an efficient transport system (8 marks)
12. 2000 P1
State four reasons why road transport is popular in Kenya. (4 marks)
13. 2000 P2
Explain the advantages of pipeline as a mode of transporting oil products. (12 marks)
14. 2001 P1
State four ways in which the nature of goods would influence the choice of transport. (4 marks)
15. 2002 P1
Outline four reasons why a transporter of goods from Mombasa to Nairobi may prefer rail transport to road transport. (4 marks)
16. 2002 P2
Outline five factors that should be considered when choosing a means of transport. (10 marks)
State the unit of carriage for each of the following modes of transport. (5marks)
Explain six advantages of containerization as a mode of transport. (10 marks)
19. 2004 P1
List four ways in which transport promotes growth of trade. (4 marks)
20. 2004 P2
Discuss six factors that may discourage the use of pipeline as a means of transporting petroleum products in a country. (12 marks)
21. 2005 P2
Discuss five circumstances under which a trader may choose to transport goods by rail. (10 marks)
22. 2006 Q5a P2
a) Outline five factors that may limit the use of containers as a method of transporting goods in a developing country. (10 marks)
23. 2007 Q11 P1
State four circumstances under which air transport may be used to ferry goods (4 marks)
24. 2008 Q14 P1
Outline four factors that a trader would consider in choosing a mode of transport. (4 marks)
25. 2009 Q11 P1
Outline four factors that should be considered in the choice of a means for transporting perishable goods (4 marks)
26. 2009 Q2a P2
(a)Explain five demerits that may be associated with water transport. (10 marks)
27. 2010 Q18 P1
State four reasons why flower exporters would transport their produce by air rather than by sea. (4 marks)
Q & A
GOVERNMENT AND BUSINESS;
- explain reasons for Government involvement in business
- explain how the Government gets involved in business
- discuss the merits and demerits of government involvement in business activities
- discuss the importance of consumer protection.
- Government involvement in business activities
- Government involvement in business e.g.
- Trade promotion
- Provision of public utilities
- Enabling environment
- Merits and demerits of Government involvement in business
- Consumer protection
- Need for consumer protection
- Methods of consumer protection
- Producing goods and services
- Distributing goods and services
- Advising producers and traders
- Promoting trade and economic development.
- Protecting consumers against exploitation by producers and traders.
- As a consumer of goods and services.
Reasons for Government involvement in business
- To prevent exploitation of the public by private business persons especially in the provision of essential goods and services such as sugar, transport, communication etc. the Kenya Bureau of standards (KEBS) regulates the quality of goods consumed in Kenya.
- To provide essential goods and services in areas where private individuals and organizations are unwilling to venture because of low profits/ high risks involved.
- To provide essential goods and services which private organizations and individuals are unable to provide due to the large amount of initial capital required b e.g. generation of electricity, establishment of airlines etc.
- To attract foreign investment by initiating major business projects.
- To stimulate economic development in the country e.g. by providing social services.
- To provide goods and services which are too sensitive to be left in the hands of the private sector e.g. provision of firearms.
- To create employment opportunities by initiating projects such as generation of electricity.
- To prevent foreign dominance of the economy by investing in areas where the locals are not able to.
- To redistribute wealth where returns are very high.
- To prevent establishment of monopolies.
Methods of Government Involvement in Business
This refers to Rules and restrictions the government requires business units to follow in their business activities. Through this method, the government ensures high quality goods and services and puts in control measures to protect consumers from exploitation. The government regulation measures include;
A license is a document that shows that a business has been permitted by the government to operate. It is usually issued upon payment of a small fee.
Licensing is the process of issuing licenses to businesses.
Some of the reasons why the government issues licenses include;
- Regulating the number of businesses in a given place at any given time to avoid unhealthy competition.
- To control the type of goods entering and leaving the country.
- To ensure there are no illegal businesses.
- To ensure that traders engage only in trade activities that they have been licensed for.
- To ensure that those who engage in professional activities meet the requirements of the profession.
- To raise revenue for the government.
- Kenya bureau of standards (KEBS) whose main responsibility is to set standards especially for the manufactured goods and see to it that the set standards are adhered to/ met. Goods that meet such standards are given a diamond mark of quality, to show that they are of good quality.
- The ministry of public health to ensure that businesses meet certain standards as concerning facilities before such businesses can be allowed to operate. Such standards may include clean toilets, clean water and well aerated buildings.
i) Training The government takes keen interest in training and advising people in business about business management strategies and better ways of producing goods and services. The government offers these services through seminars and courses. This is mainly done by the Kenya Business Training Institute (K.B.T.I).
Reasons for government training include;
- To expose business persons to modern developments in management.
- Introduce modern technology and skills in management
- Educate the business people on efficient methods of operating a business e.g., effective methods of advertising and keeping books of accounts.
- Expose business people to problems/ challenges facing them and their possible solutions for example, problems of raising capital and identifying investment opportunities.
- Impart proper business ethics e.g. good customer relations and honesty.
- Creating awareness of the available profitable business opportunities in their environment.
- Expose business people to government policies regarding business activities in the country.
- Educate business people on how to use available resources to minimize costs and maximize profits.
- Expose people to other opportunities that exist in the import and export market.
This is a government initiated and supported policy to encourage local business people to enter into business. This is aimed at increasing the volume and variety of goods and services traded in.
Trade promotion is classified as either external trade promotion or internal trade promotion.
a) External trade promotion
- The purpose of external trade promotion is to encourage local business people to enter into the export market.
- It also intended to attract foreign investors into the country.
- In Kenya, external trade promotion is done through the department of external trade in the ministry of trade and industry.
- External trade promotion may also be done by Commercial attaches.
- Explore and identify new markets for more export opportunities.
- Research and analyze markets for exports from their home countries.
- Keep statistics of products such as volumes, packaging size and method of manufacturing.
- Attend meetings, seminars and workshops on trade patterns of the countries and keep data for new markets of exports.
- Publish and advertise their country’s exports in business journals and magazines.
- Select buyers, agents and distributors of the home country’s exports.
- Inform traders in their home countries of the standards required for exports.
- Assist sales missions from their home countries by organizing educational tours for them.
- Organize visits to trade fairs and exhibitions for business people from their home country.
- Make detailed reports on commercial activities that may help improve the exports of their countries.
- Keep information on prices paid for exports and terms of payments( conditions to be filled before the payment is made)
- Be aware of the rules that govern payment in international trade.
- Be aware of the working of the regional organizations that operate in developing countries such as the East African Community (E. A. C), Inter-Governmental Authority for Development (I.G.A.D), Common Market for Eastern and Southern Africa (COMESA), Economic Commission for Africa (E.C.A) and African Growth Opportunity Act (A.G.O.A).
This is done by the government through the ministry of trade. The ministry carries out various activities that are aimed at helping local traders to start and run their businesses.
Such activities include:-
- Advising business people on matters such as type of goods and services to producers, source of finances where to locate their business and legal formalities required for various businesses.
- Training business persons on appropriate ways of carrying out business
- Offering business persons financial assistance to enable them to start and run their businesses
- Creating an enabling environment for business to thrive
- Providing incentives such as tax exemptions to encourage local businesses.
- Organizing shows, trade fairs and exhibitions through which local traders may promote their goods and services or from which investors may obtain business ideas.
Public utilities are essential services such as water, transport and sewerage, power and communication which are provided by either the central government or local authorities. Public utilities are essentially non-profit making enterprise and their main aim is to provide essential services.
The sources of finance include local authorities for public utilities include local taxes government grants, private and public loans and charges such as rent, rates
The government creates a conducive environment in which business people are able to start and sustain their businesses.
The ways in which the government creates an enabling environment are:-
A subsidy is a financial assistance given by the government to business to make it easier for them to sell their products at lower prices.
The government may subsidize operations of a business in order to reduce its running costs
An incentive is something that is offered in order to encourage one to do something.
In order to attract business people and encourage them to invest, the government may offer various incentives e.g. tax, holidays, duty free privileges and favourable expatriate protection that safeguards the interests of foreigners who invest in the country
This refers to instituting legal measures/ regulations to shield local industries from foreign competition.
For the government to help a firm sustain itself, it may introduce import duties and quotas.
Import duties have the effect of making imported goods expensive. In comparison to locally manufactured goods.
Quotas have the effect of reducing the quantity that can be imported.
iv. Loan Guarantee
Lending international agencies may insist that for them to lend money to local business persons, the host government must act as a guarantor to help the local firm benefit from funds by offering the required guarantee.
Merits of government involvement in business
- The government is able to carry out business that require a large amount of capital which may not be possible with private investors. E.g. Kenya Power and lightening company.
- It ensures essential goods and services are provided to the public e.g. water and sewerage service provision.
- Business started and run by the government’s help to solve unemployment problems.
- To contribute income so as to finance various government services. E.g. education, medical and security
- Businesses run by the government help create competition which may make private investor improve quality and charge reasonable prices for the goods or services they offer.
- It enables reduction of foreign domination of the country’s economy
Demerits of government involvement in business
Political interference affects the operations of the business activities initiated by the government thus negatively influencing their performance.
b) Managerial problems
Because of the complexity of some business activities, managerial problems may arise due to employment of unqualified personnel and embezzlement of funds
c) Lose making
Some business activities that are government run have a tendency of making losses. This may derail public resources as money is used in areas that are not helping Kenyans.
d) Hinder competition
The government may operate as a monopoly hence hindering competition leading to provision of poor services
e) Inhibitive regulation
Through licensing and legislation, the government may discourage participation of private enterprise by passing inhibitive regulations
f) Low quality
They offer low quality goods and services
Sometimes the government interferes with the price mechanism in areas of commodity prices, interest rates and exchange rates.
The government ensures that the consumers are not cheated by adopting measures that control the activities of business people and traders.
Need for consumer protection
- To ensure that consumers get high quality goods from business people or manufacturers. i.e. provided with standardized goods.
- To ensure that consumers buy goods in the required quantity, right equipment to be used in weighing and measuring.
- To ensure that goods sold to the consumers are charged fair prices.
- To ensure safety and standard measures in construction of business premises and adhered to buildings. For examples; schools, hospitals, warehouses and supermarkets should be firm and safe.
- To ensure that contracts between business people and consumers are respected. Producers and traders might fail to honor contract entered into with the consumers as regards the sale of commodities
- To protect consumers against discriminatory practices by traders selling goods to some consumers and refusing to sell to others.
- To ensure health standards are maintained. Premises where production takes place should be clean and hygiene. E.g. butcheries and eating places.
- To ensure that commodities are readily available to the consumers. Producers and business people might create artificially shortages by hoarding restricting production.
- To protect consumers from false advertising due to ignorance of consumers concerning products the producers may take advantage of misleading to buy goods they don’t require through advertising
- Kenya Consumer Organisation
- Health Inspectorate
- Price Control Advisory Board
- Kenya Bureau of Standards
- Department of Weights and Measures
Methods of consumer protection
- Government initiated consumer protection
- Consumer- initiated method
- Non-governmental organizations (NGOs)
Several methods are used by the government to protect consumers. These include:-
i) Setting up standards
The Kenya Bureau of Standards carries out the following functions
- That goods and services offered to the consumers by manufacturers are of the right quantity.
- It ensures that commodities are examined and test before being sold.
The government ensures that equipment used for weighing and measuring are correct and accurate. It is done by regular checking and adjusting of the equipment. Consumers are issued with receipts indicating the quantity, size and price which can be used as an evidence in case of complaint by consumers.
Manufacturers and business people are required to get a license before they can operate. This ensures that there is control on the type of business carried out.
iv) Foods and drugs Act.
The government ensures goods sold to the consumers do not contain any harmful products that may affect the health of consumers. This is done by indicating the ingredients on the packaging. Side effects of the commodity should be disclosed. Those selling certain types of foods and drugs be licensed.
v) Trade description Act / sale of goods Act
This ensures that a producer or trader does not cheat the consumer by providing false description of commodities. It requires that goods that are offered for sale are of good quality and right standards.
vi) Public health Act.
The government trains officers in public health to ensure that they inspect the level of hygiene in all business circles. They look at hygiene in terms of sanitation in schools, hospitals and other public places. They ensure goods sold to consumers are sold by people who are in good health and are sold in hygienic conditions.
vii) Price Control
They government may set a price beyond which a commodity should not be sold especially for essential goods and services.
It is also a requirement that traders display price lists or price tags for the goods and services they sell.
viii) Rent tribunal Act.
Ensures that tenants are not overcharged by the landlords
These are voluntary organizations set by consumers to protect themselves against exploitation by traders.
Ways used by consumers to protect themselves.
- Through consumer associations.
- Consumer cooperative societies
- Writing letters to the press
- Dealing with complaints about defective items bought by members
- Making sure commodities are not hoarded and that a regular supply is maintained
- Ensuring that health and safety regulations are adhered to.
- Ensuring that essential goods and services are available and that their prices are fair
- Educating their members on their rights and consumers.
- Ensuring that weights and measurements of commodities are correct.
- Dealing with complaints about defective items bought by members
- Making sure commodities are not hoarded and that a regular supply is maintained
- Ensuring that health and safety regulations are adhered to.
- Ensuring that essential goods and services are available and that their prices are fair
- Educating their members on their rights and consumers.
- Ensuring that weights and measurements of commodities are correct.
- Lack of support from the government
- Lack of capital to finance their Organisation
- Ignorance of consumers about their rights
- Reluctance of many consumers to join these associations so that they may voice their complaints as a group.
- Lack of initiative from consumers to check on trader’s performance and report cases of non-compliance to quality and price.
Consumer cooperative societies
Letters to the press
The same media may also be used to identify markets where better quality products and better terms are available.
Some non-governmental organisations participate in activities aimed at protecting the consumer e.g. public law institute.
They ensure that standards are maintained by both the producers and traders e.g. Kenya Association of Manufacturers (K.A.M)
Traders to charge same prices for a particular product e.g. retail price maintenance (R.P.M)
Emerging trends in business and Government
Corruption has adversely affected running of government business and bodies to protect consumers-traders conceal the expiry dates of products and sell goods of low quality.
ii) Drug abuse
False advertisement in producers such as cigarettes and unauthorized wines and spirits continue to harm consumers. The government ensures that these are not affected.
Goods of poor quality produced in other countries may find way into the country. This is because they are being sold at low prices.
Non- Governmental organisations have come up to assist in consumer protection and education to traders.
BUSINESS AND GOVERNMENT QUESTIONS AND ANSWERS
State four ways in which the Kenya Government protects consumers (4 marks)
2. 1996 P1
State four ways in which a government may regulate business activities (4 marks)
3. 1997 P1
Outline four reasons why a government may find it necessary to protect consumers. (4 marks)
4. 1997 P2
Explain 5 problems that farmers may face when they sell their produce though marketing boards. (10 marks)
5. 1998 P1
Outline four reasons why the government participates in business protection. (4 marks)
6. 1998 P2
Explain in the business malpractice that consumer needs to be protected against by the government. (10 marks)
7. 1999 P1
Highlight four limitations of using consumer initiated methods in consumer unfair business practices by traders. (4 marks)
8. 1999 P2
Explain how the Kenya national chamber of commerce and Industry (KNCCI) promotes development of businesses activities in Kenya. (10 marks)
9. 2000 P1
State four reasons why a government may want to be involved in commercial activities (4 marks)
10. 2001 P2
Discuss the problems faced by KETA (10 marks)
11. 2004 P1
State four reasons why a government may want to be involved in commercial activities (4 marks)
12. 2004 P2
Outline five measures that the government of Kenya has put in place to protect consumers from unscrupulous business practices. (10 marks)
13. 2005 P1
Give four functions of the Kenya external trade authority. (4 marks)
14. 2005 P2
Explain 5 reasons why consumers need protection against malpractices by some traders. (10 marks)
15. 2006 Q3 P1
Give four ways in which a government may participate in the operations of a state corporation. (4 marks)
16. 2007 Q1 P1
State four types of complaints that a consumer organization may receive from consumers. (4 marks)
17. 2008 Q25 P1
Outline four reasons why the government may use regulatory measures to protect consumers against exploitation. (4 marks)
18. 2009 Q2 P1
Outline four ways in which Commercial Attaches may promote, trade between their country and others (4 marks)
19. 2012 Q4 P1
Highlight four ways in which consumers may protect themselves against exploitation by traders (4 marks)
Q & A
Note: Private sector comprises of business organizations owned by private individuals while the public sector comprises business organizations owned by the government
1. Sole Proprietorship
The capital is contributed by the owner and is usually small. The main source is from his savings and other sources can be from friends, bank or getting an inheritance
The owner enjoys all the profits alone and also suffers the losses alone
The owner is personally responsible for the management of the business and sometimes he is assisted by members of his family or a few employees. He remains responsible for the success or failure of his/her business.
The sole proprietor has unlimited liability meaning that incase of failure to meet debts, his creditor can claim his personal property
There are very few legal requirements to start the business unit.
Sole proprietorship is flexible; it is very easy to change the location or the nature of business.
Sources of capital
- Borrowing from friends, banks and other money lending institutions such as industries and commercial Development corporation(ICDC)and Kenya industrial estates
- Personal savings
- Getting goods on credit
- Getting goods on hire purchase
- Leasing or renting out one’s properties
- Donations from friends and relatives
- Ploughing back profit.
Some sole proprietorship may be big business organizations with several departments and quite a number of employees. However, the sole proprietor remains solely responsible for the success of failure of the business
Advantages of sole proprietorship
- The capital required to start the business is small hence anybody who can spare small amounts of money can start one.
- Few formal/legal procedures are required to set up this business
- Decision making and implementation is fast because the proprietor does not have to consult anybody
- The trader has close and personal contact with customers. This helps them in knowing exactly what the customers need and hence satisfying those needs
- A sole proprietor is able to assess the credit-worthiness of his or her customers because of close personal relationship. Extending credit to a few carefully selected customers reduce the probability of bad debts.
- The trader is accountable to him/herself
- A sole trader is able to keep the top secrets of the business operations
- He/she enjoys all the profit
- A sole proprietorship is flexible. One can change the nature or even the location of business as need arises.
Disadvantages of sole proprietorship
- Has unlimited liability. This means that if the assets available in the business are not enough to pay all the business debts the personal property of the owner such as house will be sold to meet the debts
- There is insufficient capital for expansion because of scarce resources and lack of access to other sources
- He/she is overworked and has no time for recreation.
- There is lack of continuity in the sole proprietorship i.e. the business is affected by sickness or death of the owner.
- A sole proprietorship may not benefit from advantages realized by large scale enterprises (economies of large scale) such as access to loan facilities and large trade discounts.
- Lack of specialization in the running of the business may lead to poor performance. This is because one person cannot manage all aspects of the business effectively. One maybe a good salesman for examples but a poor accountant.
- Due to the size of the business, sole proprietorships do not attract and retain highly qualified and trained personnel.
Dissolution of sole proprietorships
- Death or insanity of the owner.
- Transfer of the business to another person- this transfers the rights and obligations of the business to the new owner.
- Bankruptcy of the owner- this means that the owner lacks the financial capability to run the business.
- The owner voluntarily decides to dissolve the business e.g. due to continued loss making.
- Passing of a law which renders the activities of the business illegal.
- The expiry of the period during which the business was meant to operate.
It is owned by a minimum of 2 and a maximum of 20 except for partnership who provide professional services e.g. medicine and law which have a maximum of 50 persons.
Characteristics of partnership
- Capital is contributed by the partners themselves.
- Partnership has limited life that is it may end anytime because of the death, bankruptcy or withdrawal of partners.
- Each partner acts as an agent of the firm with authority to enter into contracts.
- Partners are co-owners of a business, having an interest or claim in the business.
- Responsibility, profit and losses are shared on an agreed basis.
- All partners have equal right to participate in the management of the business. This right arises from the interest or claim of the partner as a co-owner of the business.
Types of partnership
- According to the type/liability of partners
- According to the period of operation
- According to their activities.
Under this classification, partnerships can either be;
i) General/ordinary partnership- Here all members have unlimited liability which means in case a partnership is unable to pay its debts, the personal properties of the partner will be sold off to pay the debts.
ii) Limited partnerships- In limited partnership members have limited liabilities where liability or responsibility is restricted to the capital contributed.
This means that incase the partnership cannot pay its debts; the partners only lose the amount of capital each has contributed to the business and not their personal property. However, there must be one partner whose liabilities are unlimited.
(b) According to the period/duration of operation
When partnerships are classified according to duration of operation, they can either be;
i. Temporary partnership - These are partnerships that are formed to carry out a specific task for a specific time after which the business automatically dissolves.
ii. Permanent partnerships - These are partnerships formed to operate indefinitely. They are also called a partnership at will.
(c) According to their Activity- Under this mode of classification, partnerships can either be:
- Trading partnerships - This is a partnership whose main activity is processing, manufacturing, construction or purchase and sale of goods.
- Non – trading partnerships - This is a partnership whose main activity is to offer services such as legal, medical or accounting services to members of the public.
Classification of partners
i) Role played by the partners
- Active partner; He is also known as acting partner as he plays an active part in the day-to-day running of the business.
- Sleeping/dormant partner; He does not participate in the management of the partnership business. Although he invests his capital in the partnership, his profit is lower as he is not active. He is also referred to as passive or silent partner.
- General partner; He/she has unlimited liabilities.
- Limited partner; He/she has limited liabilities
- Major partner; this is a partner who is 18 years and above. He is responsible for all debts of the business.
- Minor partner; this is a partner who has not attained the age of 18 years but has been admitted with the consent of other partners. Once he reaches 18 years, he then decides if he wants to be a partner or not. Before he attains the age of 18, he takes part in the sharing of profits but does not take part in the management of the business.
- Nominal/Quasi partner; He does not contribute capital but allows the business to use his/ her name as a partner; for the purpose of influencing customers or for prestige. He/she can also be a person who was once a partner and has retired in form of a loan. This loan carries interest at an agreed rate. The quasi partner shares the profit of the business as a reward for using his/her name.
- Real partner; He/she is one who contributes capital to the business.
- A secret partner; is one who actively participates in the management of the firm but is not disclosed to the public. In most cases secret partners are also limited partners.
- A retiring partner; Also known as outgoing partner is one who is leaving a partnership. He may retire with the consent of all the other partners or according to a previous agreement.
- Incoming partner; is one who is admitted to an existing partnership.
The agreement can either be oral (by use of mouth) or within down. A written agreement is called a partnership deed.
The contents of the partnership deed vary from one partnership to another depending on the nature of the business, but generally it contains;
- Name, location and address of the business
- Name, address and occupation of the partners
- The purpose of the business
- Capital to be contributed by cash partner
- Rate of interest on capital
- Drawings by partners and rate of interest on drawings
- Salaries and commissions to partners
- Rate of interests on loans from partners to the business
- Procedures of dissolving the partnership
- Profit and loss sharing ratio
- How to admit a new partner
- What to do when a partner retires dies or is expelled
- The rights to inspect books of accounts
- Who has the authority to act on behalf of other partners?
In case a partnership deed is not drawn, the provisions of partnership act of 1963 (Kenya) applies. The act contains the following rights and duties of a partner;
- All partners are entitled to equal contribution of capital
- No salary is to be allowed to any partner
- No interest is to be allowed on capital
- No interest is to be charged on drawings
- All profits and losses are to be shared equally
- Every partner has the right to inspect the books of accounts
- Every partner has the right to take part in decision making
- Interest is to paid on any loans borrowed by partners (The % rate varies from one country to another)
- During dissolution the debts from outside people are paid first then loans from partners and lastly partners’ capital.
- No partner should carry out a competing business
- Any change in business such as admission of new partners must be through the agreement of all existing partners.
- Compensation must be given to a partner who incurs any loss when executing the duties of the business.
Sources of capital
- Partners contribution
- Loans from banks and other financial institutions
- Getting items on hire purchase
- Trade credit
- Ploughing back profit
- Leasing and renting.
Advantages of partnership
- Unlike sole proprietorship, partnership can raise more capital.
- Work is distributed among the partners. This reduces the workload for each partner
- Varied professional/skilled labour; various partners are professionals in various different areas leading to specialization
- They can undertake any form of business agreed upon by all the partners
- There are few legal requirements in the formation of a partnership compared to a limited liability company.
- Losses and liabilities are shared among partners
- Continuity of business is not affected by death or absence of a partner as would be in the case of a sole proprietorship
- Members of partnership enjoy more free days and are flexible than owners of a company
- A Partnership just like sole proprietorship is exempted from payment of certain taxes paid by large business organizations.
Disadvantages of partnership
- A mistake made by one of the partners may result in losses which are shared by all the partners
- Continued disagreement among the partners can lead to termination of the partnership
- Decision-making is slow since all the partners must agree
- A partnership that relies heavily on one partner may be adversely affected on retirement or death of the partner
- A hard working partner may not be rewarded in proportion to his/her effort because the profits are shared among all the partners
- There is sharing of profits by the partners hence less is received by each partner
- Few sources of capital, due to uncertainty in the continuity of the business few financial institutions will be willing to give long-term loans to the firm.
Dissolution of partnership
- A mutual agreement by all the partners to dissolve the business
- Death insanity or bankrupting of a partner
- A temporary partnership on completion of the intended purpose or at the end of the agreed time.
- A court order to dissolve the partnership
- Written request for dissolution by a partner
- If the business engages in unlawful practices
- Retirement or admission of a new partner may lead to a permanent or temporary dissolution
- Continued disagreements among the partners
Incorporated Forms of Business Units
It is a body of persons who have joined together to do collectively what they were previously doing individually for mutual benefit.
In Kenya the co-operative movement was started by white settlers in 1908 to market their agricultural produce. In this case, they knew that they could sell their produce better if they were as a group and not alone
Principles of co-operatives
Membership is open and voluntary to any person who has attained the age of 18 years. No one should be denied membership due to social, political, tribal or religious differences. A member is also free to leave the society at will
ii) Democratic Administration
The principle is one man one vote. Each member of the co-operative has only one vote irrespective of the number of shares held by him or how much he buys or sells to the society
iii) Dividend or repayment
Any profit/surplus made at the end of every financial year should be distributed to the members in relations to their contribution.
Part of the profit may be retained/reserved/put in to strengthen the financial position of the society.
iv) Limited interest on share capital
A little or no interest is paid on share capital contributed (co-operatives do not encourage financial investment habits but to enhance production, to encourage savings and serve the members)
v) Promotion of Education
Co-operative societies should endeavor to educate their members and staff on the ideas of the society in order to enhance/improve quality of decisions made by the concerned parties.
Education is conducted through seminars, study tours, open days
vi) Co-operation with other co-operatives
C-operatives must learn from each other’s experience since they have a lot in common.
Their co-operation should be extended to local national and international.
Features of co-operatives
- Membership is open to all persons so long as they have a common interest. Members are also free to discontinue their membership when they desire so
- Co-operative societies have a perpetual existence; death, bankruptcy or retirement of a member does not affect its operations
- They are managed in a democratic manner. Every member has one vote when electing the managerial committee irrespective of the number of shares held.
- The main aim is to serve the interest of the members where profit is not the overriding factor.
- Co-operative societies have limited liabilities
- There must be a minimum of 10 people with no maximum membership.
- Co-operatives have a separate legal entity from the members who formed it i.e. they can own property sue and be sued
- Any profit made by the society is distributed to the members on the basis of the services rendered by each member but not according to the capital contributed.
There must be a minimum of 10 persons and no maximum no.
The members draft rules and regulations to govern the operations of the proposed society i.e. by-laws, which are then submitted to the commissioner of co-operatives for approval
The registrar then approves the by-laws and issues a certificate of registration
If the members are unable to draw up their own by-laws, the co-operative societies Act of 1966 can be adopted in part or whole
The management committee elects the chairman, secretary and treasurer as the executive committee members, who act on behalf of all the members and can enter into contracts borrow money institute and depend suits and other legal proceedings for the society
The committee members can be voted out in an A.G.M if they don’t perform as expected.
Types of Co-Operatives Societies in Kenya
i) Nature of their activities
- Producer co-operatives
- Consumer co-operatives
- Savings and credit co-operatives
- Primary co-operatives
- Secondary co-operatives
A) Producer co-operatives
- Obtaining better prices for their members products
- Providing better storage facilities for their products
- Providing better and reliable transport means for moving the products from the sources to the market and building feeder roads
- Providing loans to members
- Providing services of grading, packing and processing to the members
- Providing farm inputs e.g. fertilizers, seeds, insecticides e.t.c on credit to members
- Educating and advising members on better methods of farming through seminars, field trips, films and demonstration
KCC-Kenya Co-operative Creameries
K.P.C.U-Kenya Planters Co-operatives Union
K.G.G.C.U-Kenya Grain Growers Co-operative Union
b) Consumer Co-operatives
Their aim is to eliminate the wholesalers and retailers and hence obtain goods more cheaply
The co-operatives allow their members to buy goods on credit or in cash
Members of the public are also allowed to buy from the society at normal prices thereby enabling the society to make more profits
The profits realized is shared among the members in proportion to their purchases i.e the more a member buys, the buyer his/her share of profit
Examples;-Nairobi consumer co-operative union, Bee-hive consumer co-operative society and City-chicken consumer co-operative society
- Sell goods of high quality
- Sell goods to members at fair prices
- Sell goods to other people at normal prices thereby making more profit
- Buy goods directly from the producers thereby eliminating middlemen. They are therefore able to make more profit
- Can give credit facilities to the members
- Can pay interest on capital to the members
- Sell a variety of goods to the members at a place where they can easily get them
- They face stiff competition from large scale retailers such as supermarkets and multiple shops who buy goods directly from the producers and sell-them to consumers at low prices
- Cannot offer to employ qualified staff
- Majority of their members have low income, so raising off capital is a problem
- Kenya, being an agricultural country, produces enough subsistence goods for itself. It therefore does not require consumer co-operatives
- Reluctance of non-members to buy from the shops lowers the turn-over
- Mismanagement of the shops is rampant
Savings and credit co-operatives societies (SACCO’S)
Their money earns goods interest and when one has a significant amount saved, he/she become entitled to borrow money from the society for any personal project e.g. improving their farms, constructing houses, paying school fees etc.
The SACCOS charge lower interest on loans given to members than ordinary banks and other financial institutions.
The societies have few formalities or requirements to be completed before giving a loan. These are:
- Members salary
- Members saving
- Guarantee from fellow members
Most SACCO’S have insured their members savings and loans with co-operative insurance services (CIS).This means if a member dies his/her beneficiaries are not called upon to repay the loan and the members savings/shares is given to the beneficiaries.
They are the main institutions that provide loans to most people who do not qualify for loans from commercial banks because they do not ask for securities such as title deeds required by the bank.
Primary co-operative societies
Consumer co-operative societies and most SACCO’S are primary co-operative societies because they are composed of individuals.
Most primary co-operative societies operate at the village level, others at district levels and a few at national levels.
Secondary co-operative societies
They are generally composed of primary co-operative societies as their members
They are either found at district levels or at national levels.
Advantages of co-operative societies;
- Since the properties of co-operatives are owned collectively, they are able to serve the interest of the members affectively
- They have limited liability
- Membership is free and voluntary
- Members share profits of a co-operative through dividend that are given
- They have improved the standards of living of their members through increased income from their produce and through savings from incomes.
- Co-operatives benefit their members through giving them credit facilities and financial loans which they could not have got from local banks
- They are run on a democratic basis i.e. all members have an equal chance of being elected to the management committee.
- Many co-operatives are large scale organizations hence able to get the benefits of large scale organizations e.g. low production costs leading to low prices of products
- Co-operative enjoy a lot of support from the government and when they are in financial and managerial problems, the government steps in to assist them
- Majority of the co-operatives are small in size and therefore cannot benefit from economies of scale.
- Members have a right to withdraw from the society and when they do, co-operatives refunds the capital back which might create financial problems to the society.
- Corruption and embezzlement of funds is a problem for many co-operatives.
- Most co-operatives are not able to attract qualified managerial staff hence leading to mismanagement.
- Many suffer from political interference. Sometimes; the election of the management committee is interceded with by some people with personal interest in certain candidates hence the best person may not be elected to run the affairs of the society. This leads to poor management and inefficiency.
- Members may not take keen interest in the affairs of a co-operative society because their capital contribution is small.
Dissolution of co-operative societies
- Order from commissioner of co-operatives
- Voluntary dissolution by members
- Withdrawal of members from the society leaving less than ten members
- If the society is declared bankrupt
Limited Liability Companies (Joint Stock Companies)
The act of registering a company is referred to as incorporation. Incorporation creates an organization that is separate and distinct from the person forming it.
A company is a legal entity that has the status of an ‘’artificial person”. It therefore has most of the rights and obligations of a human being. A company can therefore do the following;
- Own property
- Enter into contracts in its own name.
- Borrow money.
- Hire and fire employees.
- Sue and be sued on its own right.
- Form subordinate agencies, i.e., agencies under its authority.
- Disseminate or spread information.
Features of Companies (Limited Liability Companies)
The members have limited liabilities.
Companies have perpetual life which is independent of the lives of its owners. Death, insanity or bankruptcy of a member does not affect the existence of the company. (This is referred to as perpetual existence or perpetual succession)
A company is created for a particular purpose or purposes.
The promoters submit the following documents to the registrar of companies:
i) Memorandum of Association
This is a document that defines the relationship between the company and the outsiders. It contains the following:
a) Name of the company/Name clause; -The name of the company must be started and should end with the word “Limited” (Ltd).This indicates that the liability of the company is limited.
Some companies end their names with “PLC” which stands for “Public limited company” which makes the public aware that although it is a limited liability company it is a public not private.
b) The objects of the company/objective clause;-This set out the activities that the company should engage in
The activities listed in this clause serve as a warning to outsiders that the company is authorized in these activities only.
c) Situation clause;-Every company must have a registered office where official notices and other communication can be received and sent
d) Capital clause;-It also states that the amount of capital which the business can raise and the divisions of this capital into units of equal value called shares i.e. authorized share capital also called registered or nominal share capital.
It also specifies the types of shares and the value of each share
e) Declaration clause:-This is a declaration signed by the promoters stating that they wish to form the company and undertake to buy shares in the proposed firm
The declaration is signed by a minimum of seven promoters for public limited company and a minimum of two for private company.
The memorandum of association also contains the names of the promoters
The promoters signs against the memorandum showing details of their names, addresses, occupation and shares they intend to buy. Each signatory should agree to take at least one share.
ii) Articles of Association
This is a document that governs the internal operations of the company
It also contains rules and regulations affecting the shareholders in relation to the company and in relation to the shareholders themselves.
It contains the following;
- Rights of each type of shareholder e.g. voting rights
- Methods of calling meeting and procedures
- Rules governing election of officials such as chairman of the company, directors and auditors
- Rules regarding preparation and auditing of accounts
- Powers, duties and rights of directors
- Methods dealing with any alterations on the capital.
iv) Declaration that registration requirements as laid down by law (by the companies act) have been met. The declaration must be signed by the secretary or a director or a lawyer.
v) A statement signed by the directors stating that they have agreed to act as directors.
vi) A statement of share capital- this statement gives the amount of capital that the company wishes to raise and its subdivision into shares.
Once the above documents are ready, they are submitted by the promoters to the registrar of companies. On approval by the Registrar and on payment of a registration fee, a certificate of incorporation (certificate of registration) is issued
The certificate of incorporation gives the company a separate legal entity.
Sources of capital
A share is a unit of capital in a company e.g. if a company states that its capital is ksh.100, 000 divided into equal shares of ksh.10 each.
Each shareholder is entitled to the company’s profit proportionate to the number of shares he/she holds in the company.
Types of shares
- Ordinary shares
- Preference shares
Ordinary shares have the following rights:
- Have voting rights
- Have no fixed rate of dividends. The dividends on them vary according to the amounts of profit made
- They have a claim to dividends after the preference shares
- If the company is being liquidated, they are paid last after the preference shares
They have the following characteristics;
- Have a fixed rate of sharing profits(dividends)
- Have a prior claim to dividends over the ordinary shares
- Have no voting rights
- Can be redeemable or irredeemable. Redeemable shares are the ones that can be bought back by the company at a future date while irredeemable ones are ones that cannot be bought back
- Can be cumulative or non-cumulative. Cumulative shares are the ones that are entitled to dividends whether the company makes profit or not. This means if the company makes a loss or a profit which is not enough for dividends in a certain year, the dividends to cumulative shares are carried forward to the next year(s) when enough profit are made
This refers to loans from the public to a company or an acknowledgement of a debt by a company
They carry fixed rate of interest which is payable whether profit are made or not.
They are issued to the public in the same way as shares.
They can be redeemable or irredeemable.
Redeemable debentures are usually secured against the company’s assets in which case they termed as secured debentures or mortgaged debentures.
NB: Where no security is given, the debentures are called unsecured /naked debentures.
3. Loans from bank and other financial institutions;-A company can borrow long term or short term loans from banks and other money lending institutions such as Industrial and Commercial Development Corporation [I.C.D.C]
4. These loans are repayable with interest of the agreed rates.
5. Profits ploughed back;-A company may decide to set aside part of the profit made to be used for specified or general purposes instead of sharing out all the profit as dividends. This money is referred to as a reserve.
6. Bank overdraft;-A customer to a bank may make arrangements with the bank to be allowed to withdraw more money than he/she has in the account.
7. Leasing and renting of property.
8. Goods brought on credit.
9. Acquiring property through hire purchase.
Types of Companies
Private limited company has the following characteristics;
- Can be formed by a minimum of 2 and a maximum of 50 shareholders, excluding the employees,
- Does not advertise its shares to the public, but sells them privately to specific people
- Restricts transfer of shares i.e. a shareholder cannot sell his/her shares freely without the consent of other shareholders.
- Can be managed by one or two directors. A big private company may however, require a board of directors
- Can start business immediately after receiving the certificate of incorporation without necessarily having to wait for a certificate of trading.
- It does not have an authorized minimum share capital figure.
- Has a separate legal entity and can own property, enter into contracts, sue or be sued.
- Has limited liability.
- Has a perpetual existence.
Advantages of private limited company
ii)Legal personality: A private company is a separate legal entity from its owners. Like a person, it can own property, sue or be Sued and enter into contacts
iii)Limited liability: Shareholders have limited liability meaning that they are not responsible for the company’s debts beyond the amount due on the shares
iv)Capital: They have access to a large pool of capital than sole proprietorship or a partnership. They can borrow money more easily from financial institutions because it owns assets which can be pledge as security
v)Management: A private company has a larger pool of professional managers than a sole proprietorship or a partnership. These managers bring in professional skills in their own areas which are of great advantage to a private company
vi)Assured continuity of the business: Death, bankruptcy or withdrawal of a shareholder does not affect the continuity of the company
vii)Trading: Unlike a public company a private company can commence trading immediately upon receiving a registration certificate.
Disadvantages of a private company
ii)Capital: A private company cannot invite the public to subscribe to its shares like a public limited company. It therefore limited access to a wide source of capital.
iii)Share transfer: The law restricts the transfer of shares to its members/shareholders are not free to transfer their share
Public limited companies have the following characteristics:
- Can be formed by a minimum of 7(seven) shareholders and no set maximum.
- Cannot start business before it is issued with a certificate of trading. This is issued after the certificate of incorporation and after the company has raised a minimum amount of capital
- It’s managed by a board of directors.
- The shares and debentures are freely transferable from one person to another.
- It advertises its shares to the public/ invites the public to subscribe for/buy its shares and debentures.
- Must publish their end of year accounts and balance sheets.
- Must have an authorized minimum share capital figure.
- Has a separate legal entity and can own property, enter into contracts, sue or be sued.
- Has limited liability.
- Has a perpetual existence.
Advantages of public limited company
They can also borrow money from financial institutions in large sums and have good security to offer to the lenders.
ii) Limited liability: Like private companies, public limited company’s shareholders have limited liability i.e. the shareholders are not liable for the company’s debts beyond the shareholders capital contribution.
iii) Specialized management: PLC’S are able to hire qualified and experienced professional staff.
iv) Wide choice of business opportunities: Due to large amount of capital a public company may be suitable for any type of investment
v) Share transferability: Shares are freely transferable from one person to another and affects neither the company’s capital nor its continuity.
vi) Continuity: PLC has a continuous life as it is not affected by the shareholders death, insanity, bankruptcy or transfer of shares
vii) Economies of scale: Their large size enables them to enjoy economies of scale operations. This leads to reduced costs of production which raises the levels of profit
viii) Employee’s motivation: They have schemes which enable employees to be part owners of the company which encourages them to work harder in anticipation of higher dividends and growth in the value of the company’s shares.
ix) Share of loss: Large membership and the fact that capital is divided into different classes’ means that the risk of loss is shared and spread.
x) Shareholders are safe guarded; Publicity of company accounts safeguard against frauds.
Disadvantages of public limited companies
ii) Legal restrictions: A public company must comply with many legal requirements making its operations inflexible and rigid
iii) Alienation of owners: Shareholders non-participation in management is a disadvantage to them
iv) Lack of secrecy: The public limited companies are required by law to submit annual returns and accounts to the registrar of companies denying the company the benefit of keeping its affairs secret. They are also required to publish their end of year accounts and balance sheets.
v) Conflicts of interests: Directors may have personal interests that may conflict with those of the company. This may lead to mismanagement.
vi) Decision making; Important decision are made by the directors and shareholders. The directors and shareholders meet after long periods which make decision making slow/delayed and expensive.
vii) Diseconomies of scale: The large size and nature of business operations of public limited companies may result in high running/operation costs and inefficiency
viii) Double taxation: There is double taxation since the company is fixed and dividends distributed to the shareholders are also taxed
ix) Inflexibility: Public limited companies cannot easily change its nature of business in response to the changing circumstances in the market. All shareholders must be consulted and agree.
Dissolution of a Company
- Failure to commence business within one year - If a company does not commence business within one year from the date of registration, it may be wound up by a court order on application of a member of the company.
- Insolvency – when a company is not able to pay its debts, it can be declared insolvent and wound up.
- Ultra- vires – this means a company is acting contrary to what is in its objective clause. In such a case, it may be wound up by a court order.
- Amalgamation – two or more companies may join up to form one large company completely different from the original ones.
- Court order – the court of law can order a company to wind up especially following complaints from creditors.
- Decision by shareholders – the shareholders may decide to dissolve a company in a general meeting.
- Accomplishment of purpose or expiry of period of operation – a company may be dissolved on accomplishment of its objects, or on expiry of period fixed for its existence.
The Role of Stock Exchange as a Market for Securities
- Stock: a group of shares in a public limited company, Stocks are formed when all the authorized shares in a particular category have been issued and fully paid for.
- Stock exchange market: is a market where stocks from Quoted companies are bought and sold, Stock exchange markets enable shareholders in public companies to sell their shares to other people, usually members of the public interested in buying them.
- A Quoted Company: is a company that has been registered (listed) as a member of the stock exchange market. Companies that are not quoted cannot have their shares traded in the stock exchange market.
- Securities: this could either refer shares or documents used in support of share ownership.
- Initial Public Offer (I. P. O): refers to situations in which a company has floated new shares for public subscription ( Has advertised new shares and has invited members of the public to buy them.
- Secondary market: The market that deals in second hand shares i.e. the transfer of shares from one person or organization to another.
A person wishing to acquire shares will do so either at an IPO or in the secondary market. However, an investor cannot buy or sell stocks directly in the stock exchange market. They can only do so through stock brokers.
Roles of the Stock Exchange Market
- Facilitates buying of shares- it provides a conducive environment to investors who want to buy shares in different companies.
- Facilitates selling of shares- it creates a market for those who wish to sell their shares.
- Safeguarding investors’ interests- it monitors the performance of the already quoted companies and those found not meeting expectations are struck off. Companies who want to be quoted must also attain a certain standard of performance.
- Provides useful information- it provides timely, accurate and reliable information to investors which enable them to make decisions on the investments to make. The information is passed on through mass media and stock brokers.
- Assist companies to raise capital- it assists companies to raise capital by creating an environment through which companies issue new shares to members of the public in an IPO.
- Creation of employment- it creates employment for those who facilitate the buying and selling of shares eg stock brokers, stock agents etc.
- Raising revenue for the government- the government earns revenue by collecting fees and other levies/ dues from activities carried out in the stock exchange market.
- Availing a variety of securities- it avails a variety of securities from which an investor can choose from. The market therefore satisfies needs of various investors eg investors who wish to buy from different companies can do so in the market.
- Fixing of prices- the stock exchange market is in a position to determine the true market value of the securities through the forces of demand and supply. This is of great importance to both the buyer and the seller.
- Measures a country’s economic progress- the performance of securities in the stock exchange market may be an indicator of a country’s economic progress e.g a constant rise in prices and volumes of securities traded within a given period of time would indicate that the country’s economy is positively growing.
- Promotes the culture of saving- it provides investors with opportunities to channel their excess funds. Such people act as role models to other members of the society who may emulate them thereby promoting a saving culture.
- Public corporations are formed to perform certain/specific functions on behalf of the government.
- They are formed to provide essential services that are generally in the public interest, and that may require heavy initial capital investment which few private investors can afford
- They are formed by the act of parliament.
- Kenya Railways corporation- provides railway transport
- Telkom Kenya-provides telecommunication services
- Postal corporation of Kenya
- Industrial and commercial Development corporation (ICDC)- financial and management services
- Mumias and Chemelil sugar companies.
- Kenya air ways- provide air transport services. Etc.
Characteristics/features of public corporations
- They are formed by the government under the existing laws i.e formed by an act of parliament eg education act
- Initial capital is provided by the government.
- They are jointly owned by the government and members of public/private investors.
- They are set up to perform certain specific functions on behalf of the government
- They are managed by a board of directors appointed by the government or appointed by the government and the joint owners.
- They have an entity of their own and can own property, enter contracts, sue and be sued
- They have limited liability
- Some operate without a profit motive while others have a profit motive
When formed by an act of parliament, the Act defines its status obligations and areas of operation. The Act outlines the following;
- Proposed name of the corporation
- Aims and objectives
- Goods or services to be produced and provided
- Location(Area of operation)
- The appointment of top executives
- The powers of the Board of directors
- The ministry under which it will operate
The chairman and the board of directors are responsible for the implementation of the aims and objectives of the corporations.
The chairman of the board of directors reports to the government (president) through the relevant minister.
The managing director who is usually the secretary of the board of directors in the chief executive officer of the corporation
Sources of capital
- The initial capital is usually provided by the government as a vote of expenditure for the ministry concerned. Those corporations jointly owned by the government and the public raise capital through the sale of shares
- Financial institutions in form of loans
- Retained profits/profits ploughed back.
- Hire purchase.
Advantages of public corporations
- Initial capital is readily available because it is provided by the government
- Can afford to provide goods and services at low prices which would otherwise be expensive if they were left to the private sector.
- Most of them produce goods and services in large quantities thereby reaping the benefits of large scale production
- Some are monopolies. They hence enjoy the benefits of being a monopoly e.g. they do not have to incur costs advertising since there is no competition
- They can be bailed out/assisted by the government when in financial problems
- They have limited liability
- Money for research and development can be made readily available by the government
- Through corporations the government is able to remove foreign domination in the country
- They can afford to hire qualified personnel.
Disadvantages of public corporations
- They are managed by political appointees who may not have the necessary managerial know how.
- When they make losses, they are assisted by the government and this could lead to higher taxation of individuals
- Lack of competition due to monopoly leads to inefficiency and insensitivity to customers feelings.
- Political interference may hamper efficiency in the achievement of set goals and objectives.
- Decision making is slow and difficult because the organizations are large.
- They may lack close supervision because of their large sizes.
- There is embezzlement of large sums of money leading to loss of public funds
- The government is forced to provide goods and services to its citizens in all parts of the country where at times its uneconomical to provide them because the costs of providing them may surpass the returns
- Public funds are wasted by keeping poorly managed public corporations.
- Diseconomies of scale apply in these business units because they are usually very large scale organizations e.g. decision making may take long.
Dissolution of public corporations
- Persistent loss making
- Bankruptcy- where the corporation cannot pay its debts.
- Change in the act of parliament that formed the corporation.
- Mismanagement, resulting in poor management of the corporation.
A parastatal is a state cooperation which is owned by the government
The formation, management, source of capital and dissolutions are discussed above
Trends in Forms of Business Units
This refers to the sharing of worlds resources among all regions i.e. where there are no boundaries in business transactions
Some companies referred to as multinationals, have branches in many parts of the world e.g. Coca-Cola Company
Globalization has been made possible and effective through the development and improvement of information and technology organization i.e.
- World website (internet); one can acquire and order for goods through the internet. This is referred to as Electronic Commerce (E- Commerce) and E- Banking.
- Mobile phones technology has revolutionized ways of life and business and even remote areas have been opened up.
This occurs when two independent business enterprises combine to form one large organization
Levels of combinations
i)Vertical combination; This is when businesses engaged in different but successive levels of production combine e.g. primary(extractive) level combines with secondary(manufacturing)level or secondary level combining with tertiary level.
Example; A company producing cotton (raw materials) combining with a textile industry.
ii)Horizontal combination; this is where business enterprises of the same level combine e.g. secondary and secondary levels etc.
Types of Amalgamation/combination
a) Holding companies
A holding company is one that acquires 51 percent or more shares in one or more other companies.
The various companies entering into such a combination are brought under a single control.
These companies are controlled by the holding company and are called Subsidiaries.
The subsidiary companies are however allowed to retain their original names and status, but the holding company appoints some members to be on the board of directors of these subsidiaries, so as to control their activities.
Holding companies are usually financial institutions because they are able to buy controlling shares in subsidiary companies
b) Absorptions (takeovers)
This refers to a business taking over another business by buying all the assets of the other business which then ceases to exist.
Example; Kenya Breweries took over the castle company in Kenya
c) Mergers( Amalgamation);
This is where two or more business organizations combine and form one new business organizations.
The merging companies cease to exist altogether.
This is a group of related firms/ companies that agree to work together in order to control output, prices and markets of their products – O. P. E. C (organization of petroleum exporting countries) is an example.
This is the process of transferring / selling state owned corporations to public limited companies or private investors. This is done by the Government selling their shareholding to members of the public. The main aim is to:
- Improve efficiency
- Generate revenue for the government.
- Reduce government control
- To break monopolistic practices
- To reduce government expenditure on corporations that relies on government subsidy.
(f) Burial Benevolent Funds (B. B. F); some SACCOS have started systems / funds to assist their members financially in burials through creation of BBF.
(g) Front Office Savings Account (FOSA); SACCOS have expanded their services to members by introducing FOSA. The account enables members to conveniently deposit and withdraws money. A member may also be provided with an ATM card which enables him/her to withdraw money at various pesa points/ ATM’s.
Franchising ; this is where one business grants another the rights to manufacture, distribute or produce its branded products using the name of the business that has granted the rights eg General motors’ has been granted franchise to deal in Toyota, Isuzu and Nissan vehicles.
Trusts; this is where a group of Companies work together to reduce competition. Trusts may also be formed where a company buys more than 50% of shares in a competing company so as to reduce competition.
Performance contracts; Employees in state corporations are expected to sign performance contracts in order to improve their efficiency. Other private institutions are also adopting the same practice.
forms of business units questions & answers
In the spaces provided, indicate by writing true or false whether each of the following statements is true or false about articles of association of a company. (5 marks)
Explain five principles under which cooperative societies should be managed (10 marks)
Explain five problems that farmers encounter when they sell their produce through marketing boards. (10 marks)
Outline 5 circumstances under which the government may find it necessary to nationalize an industry. (10 marks)
State five advantages of sole proprietorship form of business (5 marks)
Explain five sources of short term finances available to a business organization. (10 marks)
State four advantages of a partnership over a sole –proprietorship. (4marks)
Currently the government of Kenya is involved in privatizing public corporations. Explain five reasons that could make the government retain some of the corporations. (10 marks)
Describe five disadvantages of running a business as a sole proprietor (10 marks)
Highlight benefits an investor gets by buying debentures. (4 marks)
Highlight four benefits of joining a savings and credit co – operative society. (4 marks)
State four advantages of a hawker over a shopkeeper. (4 marks)
Highlight four factors that may have hindered the growth of co-operative movements in Kenya. (4 marks)
Explain five reasons why a public limited company may prefer to raise finance through issue of ordinary shares instead of debentures.
Outline the differences between a private limited company and a public corporation. (10 marks)
In the spaces provided below, indicate with a tick whether each of the following statements related to preferences or ordinary shared. (3 marks)
Outline four features of a sole proprietorship form of business organization (4 marks)
In what ways do multinational corporations differ from locally owned firms. (10 marks)
Outline four features of trade credit as a source of finance (4 marks)
State four reasons why a government may find it necessary to nationalize some industries. (4 marks)
In the spaces provided name the type of business organization described by each of the following features.
Outline four measures that can be taken to improve efficiency of parastatals in Kenya. (4 marks)
Outline 4 reasons why the government may decide to nationalize some business enterprises. (10 marks)
Explain the factors that make it difficult for many Kenyan to purchase houses through building societies. (6 marks)
Outline four ways in which a savings and credit co – operative society can raise capital. (4 marks)
Outline four features of a private company (4 marks)
Draw five differences between public limited company and a partnership form of a business. (10 marks)
Outline four features of a private company (4 marks)
List four sources of short – term finance for a business enterprise (4 marks)
Describe the problems associated with a sole proprietorship form a business (10 marks)
Explain six benefits that a company would get by raising capital through sale of ordinary shares (12 marks)
Wafula who recently retired would like to invest his retirement benefits in either of two business options. Explain five factors that Wafula should consider in choosing the business to invest. (10 marks)
2006 Q1 P1
State four advantages of operating a partnership form of business. (4 marks)
2006 Q3 P2
a) Explain five benefits that may accrue to a community that is involved in trading activities. (10 marks)
b) Outline five benefits that a Savings and Credit Cooperative society (SACCO) provides to its members. (10 marks)
2007 Q21 P1
Highlight four ways in which the running of public corporations may be improved. (4 marks)
2008 Q2 P1
Outline four features of a Private Limited Company. (4 marks)
2008 Q1a P2
a) Explain five features that differentiate a Public Limited Company from a partnership form of business. (10 marks)
2009 Q24 P1
Outline four benefits that accrue to the government as a result of privatization of public enterprises (4 marks)
2009 Q1a P2
(a)Explain five features of sole proprietorship form of business (10 marks)
2012 Q2 P1
State four benefits that a farmer may derive from being a member of a producer Cooperative. (4 marks)
2012 Q3 P1
Highlight three benefits of globalization to a business enterprise (3 marks)
2012 Q6a P2
(a) A school leaver plans to start a retail business. Explain five types of small scale retail shops the person may start. (10 marks)
- Identify the various forms of business units.
- Explain the characteristics of each form of business unit.
- Discuss the formation and management of each form of business unit.
- Discuss the sources of capital of each form of business unit.
- Discuss the role of stock exchange as a market for securities.
- Explain the advantages and disadvantages of each form of business unit.
- Recognize the circumstances under which each form of business units may be dissolved.
- Discuss trends in business ownership.
gUIDELINES ON TOPICS
8.21 Business units
a) Sole proprietorships
d) Private companies
e) Public companies
f) Public corporations
8.22 Features of each form of business unit
8.23 Formation and management of each form of business unit
8.24 Sources of capital for each form of business unit
8.25 Role of stock exchange market as a market for securities
8.26 Advantages and disadvantages of each form of business unit
8.27 Dissolution of business units
8.28 Trends in business ownership e.g.
- How payment is expected
- When payment is expected
- What is included in the quoted price? Etc.
Terms of payments are broadly categorized into two;
- Cash payments
- Deferred payments(credit payments)
a. Cash Terms of payments
a) Spot cash-This is where payment is done at the point of purchase.Mainly used in retail businesses where customers are required to pay as they get the goods or receive the service.
b) Cash on Delivery (C.O.D)
-This is where the buyer pays for the goods (or services) as soon as they are delivered to his or her premises.
c) Cash with order (C.W.O)
This is where the buyer is required to pay for the goods when making the order for the goods or the services.
Circumstances under which C.O.D and C.W.O are appropriate
- When the buyer is new to the seller
- Where the buyer’s credit worthiness is in doubt
- Where the seller is operating mail order stores(C.W.O only)
- Where C.W.O or C.O.D is the policy of the business
- If the cost of collecting debts is considered high by the seller
- When a seller is to make goods based on unique specification provided by a particular buyer(C.W.O only)
- Where the seller wants to avoid tying up business capital in debts.
this is where payment should be made within a few days (normally seven days) after delivery.
Prompt cash period allows them to examine the goods and check the invoice to certify its corrections
b. Deferred payments
The period within which a buyer is supposed to pay the seller is referred to as credit period and is expressed in terms of days.
Terms of payments in credit transactions are usually agreed upon by the seller and the buyer depending on;
- Capital base/financial stability of the seller
- The nature of the goods supplied
- The relationship between the buyer and the seller
- The credit worthiness of the buyer
- Character-The behavior of the buyer in terms of honesty, which determines the probability of the buyer honoring his /her debt obligations
- Capacity-The buyer’s ability to pay as indicated by past business performance records or the profitability and the value of his/her assets.
- Capital-The financial position of the buyers business or how much the buyer’s business is worth.
- Collateral-These are the properties of value pledged by the buyer as security for the credit
- Condition-The effect of the existing economic conditions on the buyer’s ability to pay his/her debts.
Forms of Deferred payments (credit payments)
Under these forms, goods and services are sold to the buyer who is expected to pay for them at a future date or within a given period
The buyer may also be required to pay for goods or services on installments.
Discounts may be allowed to encourage the buyer to pay on time.
The ownership of the goods passes to the buyer immediately after entering the contract. The seller should however ensure the buyer will pay by:
- Ascertaining the credit worthiness of the buyer
- Asking the buyer to guarantee payment by signing some documents e.g. bill of exchange
- Asking the buyer to have someone else to guarantee the payment
- Asking the buyer to pledge (mortgage) some of his/her property as security.
Factors to consider when giving credit
- Credit worthiness of the buyer
- Repayment period
- Amount of goods the customer wants
- Availability of adequate stock
- Honesty i.e. reliability of the customer
- Frequency at which the customer buys from the seller
- Seller’s intention to attract and retain customers.
Examples of open trade credit
- Is a form of credit extended to a trader or a customer for a very short time, usually not more than a week
- It is a common form of credit between retailers and their customers.
- It is also referred to as prompt cash because payment is made within a short time.
- A form of credit extended when a seller allows the buyer to pay/settle his/her debt after one month
- The buyer can continue taking goods from the seller up to the end of the month.
- It is a form of credit usually allowed by retailers to salaried workers for goods such as food items and newspapers
- Are usually operated by large scale retailers to approved customers
- The retailer keeps an account of the customer in his/her books
- To operate budget accounts;
- A deposit is required
- Regular payments are to be made
- There is a maximum amount of credit to be allowed
- The customer may be charged for any special services given by the seller called “after sale services”
- This is credit given by a trader to another trader when goods are bought for selling
- Payments for the goods is made after selling the goods or within an agreed period of time
- Plastic money (credit cards) enables the holder to obtain goods and services on credit form specific suppliers (people willing to accept the cards)
- They also enable the holders to obtain money from specific banks and other specified financial institutions
- They are available to adults of approved credit worthiness
- Some credit cards can only be used locally while others like visa cards can be used both locally and internationally.
- When a customer makes a purchase using the card, the seller electronically verifies the validity of the card and whether the credit-card holder/customer has sufficient credit to cover the purchase. If all is well, the credit card customer signs a specific form that have been filled by the trader. Such forms are usually provided by the card company to the trader. The trader and the card holder retain a copy each and the other copies are sent either to the credit card company or to the trader’s bank.
- The company that issues the cards
- The card holder
- The trader
Examples of companies that issue credit cards include; Barclays card, American Express, Access cards and Visa cards.
Advantages of credit card
- They are safer to carry around than cash
- Convenient to carry around
- Enables the holder to get goods and services from specified sellers without paying immediately
- Some are acceptable both locally and internationally
- Enables the holder to get money from specified banks
- Increases credit rating of an individual.
Disadvantages of credit cards
- To acquire the credit card, the applicant is required to have an established credit record
- The holder is charged high interest rate by the card company
- It is prone to abuse through fraud
- Interest is charged if there is delay in payment
- Can only be used by those who are 18 years and above
- Holder may be tempted to overspend
- Their use is limited to only specific areas(urban areas)
- Faces stiff competition from other means of payment such as cheques, money orders and postal orders.
- Only few businesses accept the cards
- Long procedures are involved in getting the cards
- The cards can only be affected by people with high income.
To Hire: Means to use someone else’s property for a payment
Hire purchase: Is a method of hiring property with an option to buy.
The term of payment for a hire purchase are;
- The buyer pays an initial deposit (down payment)
- The remaining amount (balanced is paid in equal monthly installment spread over an agreed period of time
- The installments paid include interest which usually makes the overall price paid relatively higher than would be the case if the goods were obtained on cash terms.
The buyer can only possess the commodity but not own it. Therefore the buyer cannot sell the goods to another person before all installments are paid
Ownership of the goods remains with the seller. The goods are ‘on hire’ to the buyer.
After completing the payment (after the last installment has been made), a certificate is issued to the buyer as proof of transfer of ownership
In case the buyer fails to make payment/defaults in payment; the seller can repossess the goods. However if the buyer has paid two thirds of the total/hire purchase price at the time of defaulting, the seller has no legal right to repossess the goods.
The seller can only recover the remaining amount of money through a court action
The seller must display both the cash price and the hire-purchase price on the items to enable the buyers to decide under what terms they want to buy the goods.
A written agreement has to be entered into by both the seller and the buyer. The agreement safe-guards the intervals of all of them
Examples of hire purchase businesses operating in Kenya include; Africa Retail Traders (ART), Kukopesha, Singer and Amedo.
For salaried people, the hire purchase has introduced a system where the installments are deducted directly from the buyer’s salary every month. This is called the check-off system. In this system, no deposits/down payments are required. The buyer’s employer takes up the duty of remitting the deposits to the seller on a monthly basis.
Advantages of Hire purchase To the buyer
- The buyer acquires possession and use of goods immediately after entering into the contract
- Installments to be paid are pre-determined, so the buyer knows and is able to budget for this amount
- One can acquire expensive goods/items which are difficult to get on cash terms
- Payment is spread over a long duration of time making it convenient/suits the buyer’s income
- Raises standards of living despite limited resources.
Advantages of Hire purchase to the seller
- The goods belongs to the seller until the last installment is paid
- He/she can repossess the goods in case the buyer defaults in payments
- The seller is able to make more profit due to higher prices in the long run
- The sales volume increase due to greater ability by customers to pay/more buyers are attracted to hire purchase terms leading to more sales
- No refund is payable to a buyer for goods repossessed from him/her
- Due to the check-off system, chances of non-payment are minimized.
Disadvantages of Hire purchase to the buyer
- The hire purchase price is higher than the cash price.
- The goods belong to the seller until the last installment is made
- Because of the easy payment terms, the buyer may be tempted to overspend which might lead to financial problems
- The variety of goods sold on hire purchase terms is limited to those goods that are durable
- If the buyer defaults in payment, the already paid ones are treated as hire charges and are not refunded.
- Goods may be repossessed if the buyer defaults in payment
Disadvantages of Hire purchase to the seller
- Goods repossessed can only be sold as second hand
- There is a lot of documentation and filing of information/records
- The cost of operating the business is usually very high
- The risks of loss on hire purchase sales are normally high as some buyers may default in payment
- High amount of capital is needed to finance a hire purchase business
- A lot of money is spent on repair of damaged goods
- A lot of capital is tied and held in stock and debts.
In this form of credit selling, the buyer is not required to pay a down payment. Payment for the goods is made in equal installments spread over a period of time. These installments cover interest and related costs of selling.
Other features of installment buying
- The ownership and possession of goods passes on to the buyer immediately the first installment is paid
- Once the goods have been sold, they cannot be repossessed by the seller even if the buyer defaults in payment.
- In case the buyer defaults in payment, the seller can obtain compensation through court action.
- There is a written agreement between the buyer and the seller(creditor)
- The buyer may dispose of the goods before paying for them fully
- Can be used for non-durable goods
- Means of payment provided by the post office
- Means of payments provided by the commercial banks
- Means of payments which arise from private arrangements between sellers and buyers
- Other means of payment.
Legal tender means everyone is obliged by law to accept them as a means of payment i.e. no one can refuse to accept them as they are backed by the law. Notes and coins are available in different denominations as follows;
Coins; 5cents, 50cents, sh.1, sh.5, sh.10 and sh.40
Notes; sh.10 .sh.20, sh.50, sh.100, sh.200, sh.500 and sh.1000.
Coins are suitable for settling small debts and are acceptable as legal tender up to a certain maximum e.g. 50cents coins the maximum is sh20 and sh.1 the maximum is ksh.100.
Advantages of cash as a means of payment
- It is the only means of payment which is a legal tender
- Convenient for settlement of small debts
- Convenient to people with or without bank accounts
- Cash is readily usable
Disadvantages of cash as a means of payment
- Not convenient to carry around
- Cash can be lost or stolen easily as it is readily usable
- Payment is difficult to prove unless a receipt is issued
Circumstances under which cash payment is appropriate
- Where the amounts involved are small
- Where the payee (receiver) does not accept other means of payment
- Where cash is the only means available
- Where the payee requires cash(money) urgently
- Where there is need to avoid expenses associated with other means of payments
b. Means of payments provided by the banks
They also lend money to customers. Examples of commercial banks include: Commercial bank of Kenya, National bank of Kenya, Barclays bank, and Co-operative bank e.t.c
There are various means of payments provided by the commercial banks. They are;
- Bank drafts/bankers cheques
- Credit transfers
- Standing orders
- Traveler’s cheques
- Telegraphic transfers
- Debit cards
- Electronic fund Transfer(E.F.T)
This is a written order by an account holder with the bank (drawer) to the bank (drawee) to pay on demand a specified amount of money to the named person (payee) or the bearer
Parties to a cheque
- Drawer -This is the person or institution who writes and issues the cheque.He is usually a current account holder with the bank
- Payee -The person or institution to be paid
- Drawee -The bank(where the drawer has an account)
- Date when it is issued
- Name of the drawer
- The name of the payee, except in bearer cheques
- The name of the drawee (bank)and branch from where it is issued
- Amount to be paid in figures and in words
- The account number of the drawer
- The signature of the drawer
- The cheque number and bank code
- The appropriate revenue stamps
Types of cheques
- Open cheques
- Crossed cheques
- Bearer cheques
- Order cheques
This is a cheque that can be presented for payment over the counter. You present it and cash is paid to you.
This is a cheque that bears two parallel lines on the face. This means the cheque cannot be cashed over the counter. The cheque is deposited in an account (payee’s account)
The payee then withdraws the money from his/her account
A crossed cheque can be opened by the drawer signing twice on its face.
A crossing can be general or special
General crossing - general crossings only contains the two parallel lines. This implies that the cheque will be paid through any bank in which it is deposited.
Special crossings-Has other instructions included in the crossing i.e;
- Not negotiable-Means the cheque can be transferred by the payee to a third party, but he third cannot transfer the cheque (only the original payee can transfer the cheque)
- Account payee only-Means the cheque should be deposited in the account of the payee.
- Not transferable-Means there is no negotiation or transfer of the cheque
iv) Order cheque -The cheque bears the name of the payee. The bank pays this particular payee the amount stated in the cheque after proper identification
Dishonoring a cheque
A cheque can be dishonored due to the following reasons:
- Insufficient funds in the account
- If the signature on the cheque differs from the drawers specimen signature in the bank.
- If the cheque is stale i.e. presented for payment after six months from the date of issue.
- If the cheque is postdated - meaning the cheque is presented for payment earlier than the date on the cheque
- If the amount in figures is different from the amount in words
- If there are alterations on the cheque which are not countersigned by the drawer
- If the cheque is torn, dirty or default making it illegible
- If the account holder(drawer) is dead and the bank is aware of the fact
- If the drawer instructs the bank not to pay the particular cheque
- If the cheque contains errors which need to be corrected
- If the drawer becomes bankrupt or insane
- If the drawer has closed his/her account.
Advantages of using cheques
- They are more secure than notes and coins because if they are lost or stolen, they can be traced to the person who cashed them.
- They are convenient to carry and can be used to pay large sum of money which would be otherwise inconvenient to pay using cash
- They can be transferred to a third party to make payment/cheques are negotiable
- Payment can be made by cheque without the need to travel to make payment
- They provide a record of payment because of the counterfeits.The counterfeits acts as proof that payment has been made.
- Under special circumstances, they can be cashed or discounted before maturity.
Disadvantages of using cheques
- Cheques can be dishonored
- Requires the payee to go to the bank and in some cases to have an account
- The drawer pays some charges e.g. charges for the cheque book
- Can only be issued by an account holder/the drawer must have an account
- They are not readily acceptable by everybody
- They do not provide immediate cash.
Circumstances under which a cheque is appropriate as a means of payment
- Where the amount of money involved is large
- Where the policy of the business demands so
- Where a cheque is the only means available
- Where there is need to avoid other risks associated with other means of payments
This is a cheque drawn on a bank i.e. a cheque drawn by one bank to another requesting the latter bank to pay a named person or institution a specified sum of money and charge it to the drawing bank
It can also be drawn by a bank on the request of a customer. The customer fills in an application form obtained from a bank and hands it over to the bank together with the money she wants to transfer and a commission for the service.
The bank then prepares the cheque and gives it to the applicant who can then send it to the payee
A bank draft has the drawing bank’s guarantee for payment. It is therefore more readily acceptable than personal cheques.
It is suitable when urgency is desired in the payment as it is more readily acceptable.
This is a means of payment provided by commercial banks to their current accounts holders who want to pay many people using one cheque/at the same time
One cheque is drawn and is usually accompanied by a list of the people to be paid, the amount to be paid to each person and the addresses of the bank branches where the payment is to be made.
The bank then ensures that a credit transfer is affected to the various bank branches and each payee is paid
A credit transfer is usually used by employers to pay salaries to their staff members.
This is an instruction to a bank by an account holder to pay a named person or an organization a fixed amount of money at regular intervals over a specified period of time or until stopped
It is a very useful means of payment for business people as it enables them to regularly pay their recurrent bills e.g. water, insurance, electricity, loan payment, hire purchase payment etc.
This is a cheque drawn by one bank to another requesting the latter to pay a specified sum of money to a named bearer, who usually would have bought that cheque from issuing bank. The cheque holder pays the value of the cheque plus the charges for the services to the issuing bank.
-Traveler’s cheques are usually issued in fixed denominations and are very convenient for travel purposes, hence their name. They enable a person to travel without having to carry a lot of cash. The cheques are also readily acceptable as a means of payment.
This is a method /means of transferring money offered by commercial banks to anybody who wants to send money to another
The sender is required to fill an application form and provide the following information among others:
- His/her name
- The amount of money to be remitted
- Name of the payee
- The bank where the money would be paid
The method is fast and safe.
These are plastic cards issued by financial institutions e.g. banks that enables a person to purchase goods and services from any business that accepts them.
Debit cards are used to make payments from money held in ones accounts and are therefore an alternative to cash payments. Examples are ATM cards.
EFT is a method of transferring money from one account to another where computers are used. The sender is required to fill an electronic fund transfer form provided by the bank which instructs the bank to transfer money from his/her account to a named account.
Information is then sent to the payee’s bank electronically and the amount in the account is increased accordingly. The method is very fast.
c. Means of payments provided by the post office
The means of payments provided by the post office to facilitate payments includes,
- Money orders
- Posta pay
- Postal orders
- Postage stamps
- Premium bonds
A money order facilitates the transfer of money from one person to another through the post office (and/or bank)
A money order is usually for a specified sum of money usually purchased with cash from the post office
A person wishing to send money using this method visits a post office and completes an application form. Some of the details contained/given in the form include;
- The amount of money to be remitted
- Name of the payee
- The name of the post office where the money order will be cashed
- Name and address of the sender
- Whether the money order is to be ordinary or sent by telegraph
- Whether the sender wishes to be informed if the money has been paid
- Whether the money is to be paid through a bank account or at the post office counter.
Telegraphic money orders, the post office sends a telegram to the payee informing him/her to go to the post office and claim the money.
Before payment is made, the payee must;
- Identify himself/herself by producing an ID card
- Identify the person who sent the money.
Money order may be open or crossed. A crossed money order bears two parallel lines drawn diagonally on its face and must be deposited in the bank account of the payee. It cannot be cashed over the counter at the post office.
An open money order can be presented for payment at the post office counter.
Circumstances under which money order is appropriate
- Where it is the only means available
- Where other means are not acceptable
- Where there is need to avoid inconveniences or risks associated with other means
This is an Electronic Fund Transfer (EFT) service offered by the postal corporation of Kenya, for sending and receiving money instantly from various destinations both locally and internationally.
The person sending money fills in a form called ‘send form’ giving the following details;
- Name, address and telephone number of sender
- Name, address and telephone number of receiver
- Pay city, town and location of the receiver
- Signature of the sender
- Amount to be sent
The transfer is done via the internet through a machine that gives a twelve-digit number for the transaction called the ‘Transaction control number’(TCN). The sender then conveys this number, amount sent and pay location to the recipient and instructions to the recipient to visit the named post office for payment. This message is usually conveyed through the quickest means possible such as a telephone call
The sender is given a copy of the processed ‘send form’ as proof that money has been sent. The post office retains the original for record purposes.
When the receiver visits the post office, he/she will fill a ‘receiver form’ giving the following details;
- The transaction number(i.e. the twelve-digit number)
- The expected amount
- The name, address and telephone number of the sender
- The city town or location of the sender
- Signature of the receiver.
The recipient/payee is then given the money, a copy of the receive form as proof of having received the money. The paying post office retains a copy as proof of payment.
Advantages of using Posta pay as a means of payment
- Accessibility-Posta pay outlets (post offices) are located countrywide to eliminate movement over long distances to get money
- Ease of use-Sending or receiving money is easy as one only needs to fill a form which is processed immediately
- Speed-the transfer of money is instant (fast)
- Security-Confidentiality in the transmission of money is provided and money is only paid to the person intended
- Convenience-Posta pay services are offered for long hours during the day and pay locations are conveniently located
- Affordability-Posta pay services are relatively affordable as large amounts can be sent at reasonable costs.
Postal orders are sold by the post office for the purpose of remitting money
They are available in fixed denominations of sh.5, 10.20,40,60,80,100 and 200
On buying a postal order, the sender pays for both the face value of the postal order and a commission charged for the service
Postal orders just like money orders are issued with counterfoils that the sender will keep as evidence of remittance in case the person to whom he/she remits the money does not receive it.
The sender writes the name of the payee on the postal order as a safety measure.
Payment to the bearer can be made in any post office with postal order facilities
Postal orders may also be crossed or open (see crossed and ordinary money orders)
- Where the amounts involved are small
- Where it is the only means available
- Where there is need to avoid inconveniences and risks associated with the other means of payment.
Differences between postal orders and money order
It can be cashed at any post office
Can only be cashed at a specific post office
Are in fixed denominations
Varies according to the needs of the remitter
Does not require any application form to make a remittance
Requires the filling of an application form in making remittance
Can be cashed by the bearer
Can only be cashed by the payee
Value can be increased by affixing revenue stamps
Value cannot be increased by affixing revenue stamps
Postage stamps may be used to pay small amounts of money. The person to whom the stamps are sent can then use them for sending mail and/or to pay someone else.
Premium bonds are issued by the post office in denominations of sh.10 and sh.20.They mature after a given period, after which one can cash them.
Bearers can also enter into draws so as to win money.
Premium bonds can be used to settle debts, but it is not a safe method because they can be cashed by anybody i.e. by the bearer.
Circumstances under which postage stamps and premium bonds are used
- Where the amounts involved are small
- Where they are the only means available.
a. Means and payments which arise from private arrangements between the sellers and the buyers
- I Owe you (IOU)
- Bill of exchange
- Promissory note.
This is unconditional order, in writing, addressed by one person to another, requiring the person to whom it is addressed by one person to another, requiring the person to whom it is addressed to pay on demand, or at a stated future date, the sum of money on the bill to the drawer, or a named person or to a bearer.
- Order-is a command not a request
- Unconditional-Without condition i.e. no use of such words as ‘if’ or ‘whom’
- The bill must be in writing
- Amount of money must be clearly stated
- Payee must be named. He/she can be the drawer or someone else or the bearer
- Date of payment must be stated or can be determined e.g. ‘Two months from the date of today’ or Three days after 31st January 2012’
If the buyer/debtor signs the bill “accepted” then he/she cannot deny responsibility for the debt since he/she has acknowledged responsibility for the date.
Procedure for preparing a bill of exchange
Step 1.The creditor prepares the draft and sends to the debtor.
Step 2.The draft and after accepting the conditions laid therein, he/she signs on it and write the words “accepted”. He/she then sends it back to the creditor. At this point the draft becomes a bill of exchange.
Step 3.The creditor receives the bill and may:
- Keep it until maturity when he would present it to the debtor (accepted) for payment
- Discount it with a bank. This is presenting to a bank or any financial institution and receiving cash against it before the maturity date. One is however charged(discounting charge) for the service
- Negotiate it -Using it to pay someone else apart from the payee.
Parties to a bill of Exchange
- Drawer-This is the person who gives the debtor the written order to pay the value of the bill of exchange(the creditor)
- Drawee-This is the person to whom the order to pay is given (Debtor).He or she accepts the bill.
- Payee-This is the person to whom the payment is to be made. The payee may be the drawer, or
Essentials of a bill of Exchange
- It must be signed by the drawer(creditor)
- It must be accepted by the drawee(debtor)
- It must be accepted unconditionally
- It must bear appropriate revenue stamps
Advantages of using Bill of exchange
- The holder may pass rights on the bill to another person
- Date of payment is determined
- Acceptance by the debtor makes it legally binding
- The payee may receive money before due dates by discounting
Disadvantages of using a bill of exchange
- It may be dishonoured on maturity
- Cash may not be readily available as banks may be reluctant to cash bills from debtors of doubtful financial backgrounds
- It is an expensive form of credit as the creditor may lose part of the face value of bill in form of discount
Circumstances under which a bill of exchange is appropriate.
- When the creditor wants to be assured that the payment would be done
- Where the creditor wants money while the debtor is not able to raise it before the end of the credit period
- Where the creditor wants to use the debt to pay another debt.
Features of a promissory note
- There are two parties i.e. the drawer (debtor) and the payee (creditor)
- There is a promise to pay
- It is written by the debtor to the creditor
- It does not require acceptance since it is signed by the person committing to pay the money
- The writer/maker is liable on the note as he/she is the debtor.
The seller/lender may keep it until maturity and then present it for payment or may discount it with the banks before maturity.
Similarities between a bill of exchange and a promissory note:
- Both act as evidence of the acknowledgement of a debt
- Both may be discounted or endorsed before maturity
- Both are negotiable i.e. can be transferred from one person to another
- Both are legally binding
- Both allow for adequate time within which to organize for the payment of the value of the bill or note.
Differences between a promissory note and a bill of exchange
Bill of Exchange
Drawn and signed by the debtor
Drawn and signed by the creditor
It does not need to be accepted
It must be accepted by the debtor for it to be valid
The drawer and drawee are one person
The drawer is the creditor and the drawee is the debtor
IOU is an abbreviation of ‘I owe you’
It is a written acknowledgement by a buyer of a debt arising from the purchase of goods and services on credit. It is written and signed by the buyer and sent to the seller
If the seller accepts it, then the buyer can receive goods and services on credit.
Though the IOU does not usually indicate the specific date of payment, the buyer acknowledges the debt and accepts responsibility to pay at a suitable future date
NOTE: The use of IOU is restricted to commercial transactions involving parties who have dealt with each other for a long time; hence they know each other well.
d. Other means of payment
- Credit cards
- Mobile money transfer services e.g. M-Pesa.
These are plastic cards that enable a person to purchase goods or services on credit from any business willing to accept the card
They are both a means of payment and a term of payment
This is a means of money transfer services provided by mobile phone service providers to their customers (subscribers)
It can only be used to transfer money between people subscribed to the same mobile phone network e.g. from one safaricom subscriber to another safaricom subscriber, Airtel to Airtel etc.
The sender must register for the money transfer service and is issued with a PIN (personal identification number)
When money is sent, both the sender and the receiver will receive a message confirming the transfer.
A person can send money anytime anywhere so long as he/she has value in his/her m-pesa, pesa pap account.
Each mobile service provider has a range of value that can be transferred using this method.
A small transaction fee is charges for the transfer i.e. for sending and withdrawing
- Confidentiality-The secret PIN protects the value in the customer’s account
- Ease of use-The service is easy to use as the agents assists to carry out transaction
- Speed-Money transfer is an instant service conveyed to the receiver via the short message service(SMS)
- Convenience-The service is convenient to both the sender and the receiver, as they only need to go to the nearest agent(money can be sent/deposited or received anywhere)
- Accessibility-The agents e.g. m-pesa agents are located in most parts of towns and also in rural areas. Money can hence be sent and received anywhere and anytime.
- Affordability-The service charges are very low for registered users and very affordable for non-registered users
- Security-Relatively secure when the sender uses the correct phone number of the receiver.
A business transaction is a deal between two or more people involving exchange of goods and services in terms of money.
Business transaction may take place on cash basis; in which case goods are paid for before or on delivery or a short while after delivery
Business transaction may also take place on credit basis; which means payment is made after a specified period from the date of delivery of the goods or the provision of the services
There are various business documents that are used in various stages of business transactions as discussed below;
a) Documents used at the inquiry stage
This is the first stage in transaction. An inquiry is a request by a prospective buyer for information on available goods and services. It is aimed at establishing the following;
- Whether the goods or services required are available for sale
- The quality or nature of the products available
- The prices at which the goods or services are being sold
- The terms of sale in respect to payment and delivery of goods or services
i) Letter of inquiry;
This is a letter written by a potential buyer to the seller to find out the goods and services offered by the seller.
A letter of inquiry can be general or specific. A specific letter of inquiry seeks for information about a particular product.
Reply to an inquiry
The seller may reply to the letter of inquiry by sending any of the following documents;
- Price list
- A catalogue
- A tender
This is a list of items sold by the trader together with their prices. The information contained in a price list is usually brief and not illustrated and may include;
- Name and address of the seller
- List of the goods and services
- The recommended unit prices of the products
- Any discounts offered
ii) A catalogue;
A catalogue is a basket which briefly describes the goods a seller stocks.It is normally sent by the seller to the buyer when the buyer sends a general letter of inquiry. It usually carries illustrations on the goods stocked, and could be in the form of attractive and colorful pictures
The content of a catalogue includes the following;
- Name and address of the seller
- Details of the products to be sold; inform of pictures and illustrations
- The prices of the products
- After-sales services offered by the seller
- Packaging and posting expenses to be incurred
- Delivery services to be used
- Terms of sale
c) Quotation; this is a document sent by a seller to a buyer in response to a specific letter of inquiry. It specifies the conditions and terms under which the seller is willing to supply the specified goods and services to the buyer.
The content of a quotation includes the following;
- Name and address of seller
- Name and address of the buyer
- Description of goods to be supplied
- Prices of the commodities
- Terms of sale i.e. discounts, time of supply, delivery
- Total of the goods to be supplied
d) A Tender
This is a document of offer to sell sent by a seller to a buyer in response to an advertised request
Tenders contain the following;
- Date when the tender advertisement was made
- Mode of payment
- Date of making document
- Discounts given
- Name and address of prospective seller called the tenderer
- The prices at which the goods can be provided
- Period of delivery
- Mode of delivery
The winning tender is usually awarded on the of the lowest quoted price although the buyer is not obliged to accept this especially if quality is likely to be low
Tenders are not binding unless accepted by the buyer.
After receiving replies to inquiry in form of price list, catalogue or Quotation, a prospective buyer will study the terms and conditions stated in them, and then may decide to buy products or not.
i) An Order
If a prospective buyer decides to purchase an item(s), he or she then places an order
An order is a document sent by a potential buyer to a seller requesting to be provided with specified products under specified terms and conditions
An order issued for goods is called a local purchase order (LPO)
An order issued for services is called a local service order (LSO)
Ways of making an order
- Filling an order form. This is a pre-printed document that is used for making orders
- Writing an order letter
- Sending an e-mail, faxing or sending a short text message
- Giving a verbal order. Verbal orders have the disadvantage in that they can be misunderstood and there would be no record of items ordered
A written order may contain the following;
- Name and address of the buyer
- Name and address of the seller
- The number of the order
- Quantities ordered and total amount to be paid
- Description of the goods ordered
- Price per item
- Special instructions on such matters as packaging and delivery
On receiving the order, the seller sends the buyer an acknowledgement note
An acknowledgement note is a document sent by the seller to the prospective buyer to inform him/her that the order has been received and it is being acted upon.
After sending the acknowledgement note, the seller has to decide whether to extend credit to the buyer or not. At this stage, the seller has the following options;
- If the seller is convinced that the buyer is credit worthy, arrangements are made to deliver the ordered goods or services to the buyer.
- If the seller is not sure of credit worthiness of the buyer, a credit status inquiry can be issued to the buyer’s bankers or to other suppliers who deal with the buyer to ascertain the credit worthiness.
- If the buyer is not creditworthy, then a polite note or a proforma invoice can be sent to him/her
A proforma invoice
Functions of a proforma invoice
- A polite way of asking for payment before the goods are delivered
- Sent when the seller does not want to give credit
- Used by importers to get customers clearance before goods are delivered
- Issued to an agent who sells goods on behalf of the seller
- Show what the buyer would have to pay if the order is approved
- Can be used to serve as a quotation
Circumstances under which a pro-forma invoice may be used
- If the seller does not want to give credit
- If the seller wants to sell goods through an agent
- If the seller wants to get clearance for imported goods
- If the seller wants it to function as a quotation
- If the seller wants to inform the buyer what he/she pay if the order is approved etc.
Documents used at the Delivery stage
- The seller can ask the buyer to collect the goods
- The seller can deliver the goods to the buyer using his/her own means of transport
- The goods can be delivered to the buyer through public transport
- The services(s) can be rendered to the buyer at the sellers or the buyer’s premises or at any convenient place.
i) Packing note; before delivery goods are packed for dispatch. This is a document prepared by the seller showing the goods contained/packed in every container, box or carton being delivered to the buyer. A copy of the packing note is packed with the goods to make/help the buyer have a spot check.
The contents of a packing note include;
- Description of goods packed
- Quantities of goods packed
- The means of delivery
ii) Advice note; this is a document sent by the seller to the buyer to inform the buyer that the ordered goods have been dispatched. It is usually sent through the fastest means possible.
- It contains the following;
- The means of delivery
- A description of the goods
- The quantity dispatched
- Name and address of buyer and seller.
Functions of an advice note
- Informing the buyer that the goods are on the way so that in case of any delay in delivery, the buyer can make inquiries.
- Alerting the buyer so that necessary arrangements can be made for payments when the goods arrive
- Can serve as an acknowledgement note, where one is not sent
When the goods reach the buyer, he/she confirms that the goods are the ones ordered for and that they are in the right condition by comparing the delivery note, the order and the goods. If the buyer is satisfied with the goods, he/she signs the two copies, retains the original and send the copy back to the seller. This serves as evidence that the goods have been received in the right condition and in the right quantities.
Some businesses keep delivery books in which the buyer signs to indicate that goods have been received in good condition. A delivery book is used by the seller if he/she delivers goods by himself/herself as an alternative to a delivery note
- Name and address of the seller
- Name and address of the buyer
- Date of delivery
- Delivery note number
- Description of the goods delivered
- Quantities of the goods delivered
- Space for the buyer to sign and comment on the condition of the goods received.
This is a document prepared by a transporter to show that he/she has been hired to deliver specified goods to a particular buyer. This document is used when goods are delivered to the buyer by public means of transport e.g. by trains.
The seller is the consignor, the buyer is the consignee and the goods the consignment
The transporting company prepares the consignment note and gives the seller to complete and sign. The seller then returns the note to the transporter (carrier) who takes it together with the goods to the buyer.
On receiving the goods, the buyer signs the consignment note as evidence that the goods were actually transported.
The content of a consignment note includes the following;
- Details of the goods to the transported
- Name address of seller (consignor)
- Name and address of buyer (consignee)
- Terms of carriage and conditions of transporting the goods
- The transportation cost
- Handling information
- Destination of goods
The contents of the goods received note include;
- Date of the document
- Name and address of the buyer
- Name and address of the seller
- Corresponding purchase order
- Details of goods received
- Date the goods were received.
- Wrong type of goods
- Excess goods
- Wrong quality goods
A goods returned note is a document sent by a buyer to a seller to inform him/her that certain goods are being returned to the seller.
Where the goods are returned because of damage, the note may be referred to as the damaged goods note.
The contents of the goods returned note include;
- Details of goods that have been returned to the seller
- Date goods are returned
- The number of (GRN)
- Order number
- Delivery number
- Name and address of both buyer and seller
This stage involves the seller requesting or demanding for payment from the buyer for the goods or services delivered.
Some of the documents used at this stage include;
This is a document sent to the buyer by the seller to demand for payment for goods delivered or services rendered.
There are two types of invoices namely;
- Cash invoice-This is sent when payment is expected immediately after delivery thus acting as a cash sale receipt
- A credit invoice-This is sent when a buyer is allowed to pay at a later date.
Functions of an invoice
- It shows the details of goods sold i.e. quantity delivered, unit price, total value of the goods and terms and conditions of sale.
- It is a request to the buyer to make payment
- It serves as an evidence that the buyer owes the seller a certain amount of money
- It is used as a source document in recording the transaction in the book of accounts.
- Invoice number
- Name and address of the seller
- Name and address of the buyer
- Date document is prepared
- Details of goods repaired
- Unit prices of goods delivered
- Total value of goods
- Discounts offered
- E and O.E printed at the bottom
On receiving the invoice, the buyer verifies the contents using the local purchase order and the delivery note. If the invoice is in order, the buyer makes arrangements to pay the amount stated.
Businesses which offer services issue a document called a bill, which serves the purpose of an invoice.
Differences Between the invoice and pro-forma invoice
The pro-forma invoice
It is issued after goods and services have been delivered
It is issued before goods and services have been delivered
It shows the total value of the goods or services on credit
Shows the total value of goods and services to be bought
It is used to demand payment for products sold on credit
It is used to demand for payment in advance for products to be bought
Used as a basis for making payment for products already bought
Used as a basis for preparing payment for products not yet bought
Serves as a notice of payment for products bought on credit
Serves as a Quotation for products to be bought.
This is a document sent by the seller to the buyer (credit buyer) to correct an overcharge. It is used to inform the buyer that the amount payable by him/her has been reduced
An overcharge is an excess amount charged beyond the right price.
Causes of overcharge may include;
- Arithmetical errors like wrong addition
- Price overcharges
- Inclusion of wrong or unordered items in the invoice
- Failure to deduct the allowable discounts
- Return of goods (damaged goods)
- Failure to note the return by the buyer of packing cases or containers used to deliver goods to him/her
- Use of wrong price list.
A credit note is usually printed in red to distinguish it from other documents.
Contents of a credit note include;
- Name and address of the seller and the buyer
- Credit note number
- Date document is prepared
- Description and value of goods returned by buyer (in case that was done)
- Total overcharge
Reasons why a seller would send a credit note to a buyer/circumstances under which a credit note is sent to a buyer.
- When there is an overcharge in an invoice
- When the original invoice had indicated items that were not supplied
- When the buyer returns empty cases/crates that had been charged in the invoice.
- When the buyer returns some goods to the seller
- If the buyer was entitled to a discount which was not given or taken care of in the invoice.
This is a document sent by the seller to the buyer to correct an undercharge on the original invoice. It is used to inform the buyer that the amount payable by him has been increased.
A debit note acts as an additional invoice.
An undercharge arises when amount charged on products is less than their right price.
Causes of undercharge include;
- Price undercharges on items
- Arithmetic errors/mistaken in calculation
- Omission of items in the invoice
- Retention of crates and containers that were not involved by the buyer
- Deductions of more discount than what was give/intended
Circumstances under which a debit note will be sent to the buyer
- When there is an undercharge in the invoice
- If the buyer had been given a discount that was not due to him
- If some items had been omitted in the original invoice
- If the buyer decides to retain some empty containers or crates
Differences Between a debit note and a credit note
Issued to correct an undercharge on the invoice.
Issued to correct an overcharge on the invoice.
Written on blue or black.
Usually written in red
Issued when containers have not been returned
Issued when containers have been returned.
Documents used at the payment stage
The documents used at the payment stage include:
This is a document issued to the buyer by the seller as proof that payment has been made.
Payment can be done in cash, cheque, other forms of money or in kind
The receipt also serves as a source document for making entries in books of accounts.
Contents of the receipt include;
- Date of payment
- Name of the person making payment
- Name of person/institution receiving payment
- Amount paid in words and figures
- Means of payment
- Receipt number
- Signature of person issuing the receipt.
A receipt serves the same purpose as the cash sale slip
This is a document prepared by the seller and sent to the buyer, giving a summary of all the dealings/transactions between them during a particular period of time, usually a month. It has the following details;
- Date when it was prepared
- Name and address of the seller
- Name and address of the buyer
- Account number
- Date column-where the date of each transaction is recorded
- Particulars (Details)column-where the explanation of each transaction is shown
- Money column
Credit column-Decrease in the amounts payable due to overcharges corrected or payments recorded.
Balance column-Amount owing after each transaction (Balance outstanding)
- Any discounts allowed to the buyer
- Date when the buyer is expected to clear the balance
- Terms of credit etc.
An IOU (I owe you) is a document written by the buyer and sent to the seller to acknowledge a debt.
- It does not specify date when settlement will be made.
- It acts as evidence that a debt exists.
Summary of documents used in home trade
Document sent by buyer
Document sent by seller
Letter of inquiry
Goods received note
Goods returned note
Pro forma invoice
Statement of account
There are wholesalers who carry out retailing but that do not make them retailers.
Classification of wholesalers/Types of wholesalers
- According to the range of goods they handle
- According to the geographical area in which they operate
- According to their method of operation.
Under this classification, wholesalers may be any of the following;
- General merchandise wholesalers
- General line wholesalers
- Specialized wholesalers
The word merchandise means goods.
The general merchandise wholesalers stock and sell a wide variety of goods e.g. hardware, clothes, cosmetics and foodstuffs. The retailers who buy from these wholesalers are thus able to get a wide variety of goods for resale.
They are also called general wholesalers or full-line wholesalers
b) General line wholesalers
These are wholesalers who deal in a wide variety of goods within the same line e.g. textbooks, duplicating papers and other types of stationary.
c) Specialized wholesalers
These are wholesalers who deal in a particular good from a given line e.g. in the line of grains, they may specialize in maize only.
Under this category wholesalers may be;
- Nationwide wholesalers
- Regional wholesalers.
These are wholesalers who supply goods to traders in all parts of the country.
They establish warehouses or depots in different areas from Kenya National Trading Corporation (KNTC)
b) Regional Wholesalers
These are wholesalers who supply goods to certain parts of the country only. They may cover a county, District, division etc.
Under this classification, wholesalers can be;
- Cash and carry wholesalers
- Mobile wholesalers
- Rack jobbers
b) Mobile wholesalers/Track distributors; these are wholesalers who use vehicles to move from place to place supplying goods to retailers e.g. soda distributors, bread distributors, beer distributors etc.
c) Rack jobbers
These wholesalers specialize in selling certain/particular products to other specialized wholesalers. They buy goods from producers or from other countries for reselling.
E.g. some wholesalers buy horticultural products from producers and sell to other wholesalers in urban areas
Rack jobbers usually stock their goods in shelves or racks from which customers select the goods to buy. Customers may be allowed to pay for the goods after they have sold them.
d) Drop shippers
These are wholesalers who make orders for goods from manufacturers/producers but do not take them from the producer’s premises. They then look for the buyers for the goods and supply the goods directly from the producers
Alternate classification of wholesalers
- Those who buy goods store them in warehouses and sell them to traders without having added anything to them.
- Wholesalers who act as wholesaler’s agents or brokers. These are middlemen who are paid a commission for their work e.g. commission agents
- Those who after buying the goods and storing them prepare them for sale. They break bulk, pack, brand, sort, grade and blend the goods
- Breaking bulk-Reducing a commodity into smaller quantities for the convenience of the buyer e.g. buying sugar from the producer in sacks and selling it in packets.
- Packing-Putting goods in packets and boxes ready for sale.
- Branding-Giving a product a name by which it will be sold
- Sorting-Selecting goods to desired sizes, weight, colour and qualities
- Grading-Putting goods in groups of similar qualities to make it easier to price them
- Blending-It involves mixing different grades of a product to achieve qualities like taste and colour.
Functions of a wholesaler
Services of wholesalers to the producers
- They relieve the producers the problem of distribution by buying goods from them and selling to retailers
- They relieve the producers of some risks they would experience e.g. damage, theft, fall in demand etc.
- Save the producers from the problem of storage by buying goods and keeping in their warehouses
- They prepare goods for sale on behalf of the producers
- They get feedback from consumers on behalf of producers
- They promote products through advertising, displays, trade fairs and exhibitions
- They finance producers by buying goods from them and paying in cash.
- They stock a wide variety of goods in large quantities relieving the retailer from buying from different producers
- They avail goods at places convenient to retailers
- They break bulk for the benefit of retailers
- They offer transport facilities to retailers
- They offer advisory services to retailers regarding market trends
- They offer credit facilities to retailers
- They engage in product promotion on behalf of retailers
- They sort, blend, pack and brand goods saving retailers from having to do it.
- They ensure a steady supply of goods to retailers hence consumers are not faced with shortages
- They ensure a stable supply of goods hence there will be stability in market prices
- They enable consumers to enjoy a wide variety of goods
- They break the bulk of goods thus enabling the consumer through the retailer to get the goods in convenient quantities
- They prepare goods for sale e.g. branding, blending and packaging
- Pass information to consumers through retailers about the goods e.g. new products, new prices and their use.
Classification of Retail Trader
- Small scale retailers
- Large scale retailers
1. Small-scale Retail businesses/small scale Retailers
Small scale businesses are easy to start and in most cases they are operated as one-man’s business.
A small scale trader serves the needs of people in the immediate neighborhood and deal mainly in fast moving goods such as foodstuffs, detergents, kerosene etc.
Categories and Types of small scale
a) Small scale Traders without shops
- Itinerant Traders (Hawkers and peddlers)
- Roadside sellers
- Open air market Traders
- Single shops
- Tied shops
- Mobile shops
- Market stalls
- Mail order stores
a) Small scale Retailers without shops
These are retailers who move from place to place selling their goods either on foot, by bicycles or motor cycles
They move from town to town, door to door and from village to village selling their goods. Their goods may include clothes, utensils and foodstuffs. Customers can buy goods without having to travel to look for them
Examples of itinerant traders are hawkers and peddlers (Hawkers move around on bicycles, handcarts or motorcycles while peddlers walk around)
The itinerant traders require a license from the local authorities in order to sell their goods.
Characteristics of itinerant Traders
- Are found mainly in densely populated areas
- Move from place to place in search of customers
- They are very persuasive
- Their prices are not controlled.
- They require little capital to start
- They are convenient because they bring goods closer to the people
- The business is flexible in that they can move from place to place. They can also change from line of business to another
- Few legal formalities are required
- They usually do not suffer bad debts because they sell in cash.
- The traders get tired because of moving from one place to another while carrying goods.
- The business is affected by bad weather conditions
- The traders sale a limited range of goods
- It is difficult to transport goods from one place to another.
- Do not offer guarantee, in case items are to be found defective
- They are constantly in conflict with the local government.
These are traders who sell their goods at places where other people pass by and at busy places such as along busy roads, bus stages, road junctions and entrances to public buildings.
They place their goods on trays, cardboards, empty sacks and mails
They sell items such as fruits, utensils, sweets, clothing and some hardware.
iii. Open-air market Traders.
Open air markets are places set aside by the government through the local authorities where people meet to buy and sell goods. Traders selling similar commodities are allocated a special area. Such markets are open on particular days of the week.
The variety of goods sold here is wide and include agricultural produce, clothing, household items, animals, foodstuffs and even furniture.
The traders move from one market to another depending on the various market days.
Advantages of small-scale retailers without shops
- They require a small amount of capital to start and operate their businesses.
- They are convenient since they take goods to the customers within their reach.
- They incur low costs of doing business
- Most of their goods are low-priced and hence more affordable to customers.
- The business is flexible. It is easy to change from one business to another
- They require few legal requirements
- The financial risks involved in these businesses are minimal
- They do not suffer bad debts since they sell on cash bases
- They interact at personal level with the customers and can convince them to buy their goods.
- It is tiring for traders to move from place to place especially if the goods are heavy and the distance covered are long
- The traders face stiff competition from other traders with more resources
- They offer a limited variety of goods
- They are affected by unfavorable weather condition
- Lack of permanent operating premises denies them a chance to develop permanent customers
- They face a lot of certainty, especially in terms of a steady flow of income
- They sometimes sell defective or low quality goods because customers expect to pay little money for them.
b) Small scale Retailers with shops
These are small shops or structures found mostly in residential areas, busy streets, highly populated areas or inside building where people pass by or work
They deal in fast-moving items and groceries such as; sodas, cakes, sweets, cigarettes, and newspapers etc. some kiosks also sell food.
ii. Market stalls
These are permanent stands found in market places, especially those operated by the various local authorities
They are of different designs depending on the goods they sell or services they offer.
They are rented or leased by individuals from local authorities
They deal in fast moving household goods though some may specialize in other products such as clothing and shoes.
Examples are stalls at Muthurwa markets, Kariokor, and most municipal markets
Advantages of kiosks and market stalls
- They are small, hence easy to start and operate
- They are conveniently located close to their customers
- They require little capital to start
- They tend to have a loyal group of customers since they have permanent premises
- They incur relatively low running costs
- They give personal attention to their customers
- They are flexible since the owner can change from one business to another easily.
Disadvantages of kiosks and market stalls
- They provide a limited range of products
- They usually do not have adequate higher capital for expansion
- They charge relatively higher prices than the retailers without shops
- They face stiff competition from more established retail businesses
- They sometimes suffer from bad debts
- Due to their size, they do not enjoy economies of scale
- For market stalls the hours for operation are controlled by the local authority concerned.
- Single shops are mostly located in the trading or market centres in rural areas or in the residential areas of high towns
- They are operated from fixed premises
- They are usually run by one person who may get assistance from him/her family or employ attendance
- Some deal in one line of commodity such as houses, clothing, groceries or electronics
Advantages of single shops
- Minimal capital is required
- Running costs are usually low as the owner may use the services of family members
- They may offer credit facilities to some customers
- They are easy to start because only a license is required
- They usually have a loyal group of customers
- Flexibility. The owner can change his or her line of business at will
- They are easy to start since the owner does not have to meet any manufactures requirements
- Products prices are fixed by the shop owners
- The owner has the freedom of creativity and independence
- They are convenient since they ensure goods are within easy reach of their customers.
Disadvantages of single shops
- Expansion is difficult due to limited funds
- They face stiff competition from large businesses
- The absence of the owner may result in closure and loss of business
- May suffer bad debts
- Provide limited variety of goods
- The operations of the business are affected by the owner’s commitment.
These are shops that mainly sell the products of one particular manufacture or are owned by a specific supplier of certain goods. The shops are owned or controlled by the manufacturer, and are thus tied to the manufacture.
The manufacture/supplier designs the organization of the shop and its appearance e.g. painting hence they look alike. The supply closely supervises the shops.
Examples of tide shops include; Bata shops which sell shoes made by Bata Company, petrol station like National, Kobil, and total etc.
Advantages of Tied shops
- Availability of goods is assured at all times
- The supplier carries out promotion for the goods
- The manufacturer/supplier can easily give credit to the shops
- Customers can return or change faulty goods at any of the shops
- The shops are easily identifiable due to their similarity
- Traders are financed by the manufacture
- They get loyal customers who keep buying their branded products
- Advertisement expenses are met by the manufacture
- They get technical advice from the manufacture
- Some operate from permanent premises owned by the manufacture.
Disadvantages of Tied shops
- Decision making is slow because the manufacturer must be consulted
- The variety of goods is limited
- The shops cannot sell goods from any other manufactures even if customers require them
- Prices are fixed by the manufacture and sometimes profit margins may be low
- They inhibit the retailers creativity and innovations
- There is a likelihood of disagreements between the manufacture and the tied shop owners.
Differences/Distinction between a tied shop and single shop.
Owner is free to stock whatever he/she wishes
Dealership can be withdrawn if operators stock competing products
Owned by individual or a group of people
The owner is normally the manufacturer
Sells products from different manufacturers
Sells products from a single manufacturer
Design of shop according to owners wish
Shops usually have the same design
Prices of goods determined by shop owner or different manufactures
Prices of goods set by the manufacturer
Operators not trained by manufacturers
Operators are usually trained by manufacturer
These are retail shops found in institutions such as schools, colleges, hospitals and army barracks.
- They stock a variety of consumable goods such as sodas, bread, tea, groceries and other things used by the people in that institution.
- They are run by the institutions management or by individuals on retail business
- Most of them operate without a license as they are considered to be part of the institution. Their hours of operation are sometimes regulated by the institution
Advantages of canteens
- Some do not pay any rent, thus they incur low overhead costs
- They often require low capital to start
- Some offer credit facilities to their customers
- They are situated at ideal location which is convenient for their customers
- They are assured of a market as they cater for people in particular institution.
- The market is limited to people in a particular institution
- They do not open throughout/they open for limited hours e.g. after classes in schools
- They close down when the targeted customers are not available e.g. during school holidays.
- They may suffer from bad debts
- They are difficult to expand due to insufficient funds
these are coin or card operated machines used to sell commodities like drinks, stamps, and snacks etc. Examples are coffee shops, ATM’s etc.
- They dispense goods or services once a coin or a card is inserted and instructions keyed in.
- They operate without an attendant
- They are usually placed at strategic places such as busy streets, office buildings, shopping centres and hospitals.
Advantages of vending machines
- Commodities can be bought anytime because no attendant is required
- They save the owner the cost of employing a shop attendant
- They can be put strategically to boost sales e.g at institutions
- They are fast and accurate
- They are not affected by weather changes
- They provide goods and services on cash basis protecting the owner from the burden of bad debts.
Disadvantages of vending machines
- They provide a limited range of products
- Break-downs or stock-outs may discourage customers
- Maintenance costs are high due to regular servicing, repairs and sometimes vandalism
- The owner may incur losses through fraud and use of inappropriate coins and cards by consumers.
- Customers are forced to carry coins and cards in order to obtain goods or services
- Their use is limited to customers who are familiar with how the machine works
- They are mainly found in urban areas, thereby locking out the people in rural areas.
- Mobile shops, like itinerant traders move from town to town or village to village selling their goods.
- They have vehicles that they have converted into a shop from which customers can buy their goods
- They visit different towns at regular intervals.
Advantages of small scale Retailers
- Easy to raise capital to start
- Retailers are in close contact with the consumers and may give credit to credit worthy customers.
- Are able to use free or cheap labour from family members
- The risks involved in their businesses are small
- The business is simple to start and manage
- Few legal formalities required to start and run the business
- The trader can easily change from one form of business to another i.e. the business is flexible
Disadvantages of small scale retailers
- Traders have limited access to loan facilities
- They may not afford to hire specialists or technical staff
- May suffer bad debts if they give credit to customers without proper assessment
- Do not enjoy economies of scale
- Have a low turnover because of the little capital invested
LARGE SCALE RETAILERS
- Require large amounts of capital to start and maintain
- They operate from larger fixed premises
- They operate mainly in urban areas
- They have a large labour force
- Buy goods in large quantities from wholesalers or directly from producers and are therefore allowed large trade and quantity discounts and other favourable credit facilities
- Require the services of specialists such as salespersons and accountants
- May occupy one large premise or several premises in the same town or in different towns
- They have large stocks and large sales volumes
TYPES OF LARGE SCALE RETAILERS
A supermarket is a large scale self-selection/self-service store that deals mainly with household goods such as utensils, foodstuffs and clothes. It has the following features;
Features of supermarkets
- Requires large capital to start
- They stock a wide variety of goods
- Offers self service facilities
- Goods have price tags or bar codes
- Prices of goods are fixed
- No credit facilities are offered
- Sell at comparatively low prices
- Goods are systematically arranged for easy selection
- Shoppers are provided with baskets or trolleys for convenience
- There is minimal interaction between buyer and seller
- There are employees who pack goods for customers at the pay points.
Advantages of supermarkets
- Prices may be relatively low because they buy their goods in bulk and are given discounts
- Saves time as customers are able to get most goods they require under one roof
- Self-service saves the customers time
- Few attendants are employed thereby reducing the monthly wage bill
- Impulse buying leads to more sales, hence high profits
- Bad debts are avoided because there are no credit sales.
- The price tags on goods help customers to monitor their spending.
Disadvantages of supermarkets
- Do not offer credit facilities to customers
- Do not deliver goods to the customer’s premises
- Are found mainly in urban areas
- May incur losses due to pilferage of goods
- Impulse buying may lead the customers to buying goods they may not need.
- They are expensive to start and operate due to the large amount of capital required
- Prices are fixed and bargaining is not accepted, which discourages some customers
- Minimal personal interaction limits chances for making more sales
A hypermarket is a large shopping complex/centre comprising a variety of businesses managed by different people all housed in one building
Examples; village market, sarit centre, Tuskeys-Kisumu, Nakumatt mega city-Kisumu e.t.c
Features/Characteristics of Hypermarkets
- Are served with good access roads
- They have ample parking space
- Many businesses in one building
- Located in the outskirts of town
- Offer a variety of goods and services
- Occupy a large space.
Advantages of Hypermarkets
- Offer ample and secure parking space to customers
- Customers can do all their shopping in one building
- They are usually open for long hours
- They may provide credit facilities by accepting credit cards
- There is less traffic congestion as hypermarkets are located away from urban centres
- Provide a wide variety of goods and services to customers under one roof.
- They have fair prices that are customer friendly.
Disadvantages of Hypermarkets
- Are only convenient to customers who have cars because they are situated away from city centres
- They serve limited number of people due to their location
- They require large amount of capital to establish
- They can easily exploit their customers since their prices are not controlled
- Require large amount of space which are not available in central business district (CBD)
- They spend a lot of security to safeguard properties
Are large scale businesses with separate branches which are managed and organized centrally. The branch managers are accountable to the head office. Examples; African Retail Traders (ART), White Rose dry cleaners, Nakumatt, Tuskys, Uchumi e.t.c
Characteristics/features of chain stores
- Are managed centrally from a head office
- Prices are standard for all their products in all their branches
- All branches deal in the same type of products
- Sales are decentralized i.e. the various shops situated in different places act as selling points or branches
- Purchases of stock are centralized i.e. buy stock buy stock in bulk centrally and distributed to the different branches
- Goods can be transferred from one shop to another where the need for them is higher
- The shops operate under one name and are similar in appearance and interior layout
Advantages of chain stores/multiple shops
- They enjoy large trade discounts since they buy their goods in bulk centrally and is passed to consumers in form of low prices
- Common costs such as those of advertising are shared
- Goods that do not have a high demand in one branch can be transferred to another where their demand is high
- They are easily identified by their colour and design
- They have low operational costs because of the centralized buying, storage, advertising and accounting
- They serve a large number of customers because they are spread in many towns and cities
- The similarity of the shops in appearance and services serves as an advertising tool
- Risks such as losses are spread among many shops
- It is possible to pay for goods in one branch and pick them up in another.
Disadvantages of chain stores/multiple shops
- Large amount of capital is required to start and maintain the business
- They cater mainly for the urban areas as they are situated in those places
- Organizational problems may occur due to their large size
- No credit facilities are offered except those operating exclusively on hire purchase schemes
- Response to market changes is slow due to the slow decision making
- Decision making is slow as the head office must be consulted
- Lack of personal touch with customers
- Absence of personal touch between employer and employee may reduce incentives for hard work among staff
- People tend to shy away from buying similar products such as clothes and this may reduce sales.
This is a group of single shops operating under one roof with a centralized management
Each shop/department specializes in a particular line of products and is headed by its own department manager.
Characteristics of departmental stores
- Each department has its own manager
- Each department sells only one line of products
- All departmental managers are answerable to a general manger
- They offer a wide variety of goods at relatively low prices
- They sell goods strictly on cash basis
- They are usually in town centres
- Goods are not transferable from one department to another as each has its own variety of goods.
Advantages of departmental stores
- Customers can buy/access a wide variety of goods at fair prices under one roof.
- They can afford to hire trained qualified experienced staff who provide quality services
- They buy goods in large trade discounts. This enables them to sell at low prices.
- Each department is able to make independent and quick decisions that affect its operations.
- The independence of departments ensures that the weakness of one department does not affect each other.
- Savings can be made on some activities such as product promotion by centralizing them.
Disadvantages of Departmental stores
- A large amount of capital is required to start and maintain the stores
- They require a large number of customers to operate profitably
- It is difficult to give personal attention to customers
- They cater mainly for the urban communities in which they are located
- They strictly sell their goods on cash basis
- Operational costs are high due to the wide variety of services offered
- Their large size could encourage theft and pilferage of goods
- The independence of departments can make central control difficult.
This is a type of retail business where business is carried out through the post office, telephone or email
- Ordering of the goods is done through the post office telephone or email and delivering of goods is done by post or courier
- There is no personal contact between the seller and the buyer and buyers get information from advertisements.
- Goods are dispatched on the basis of cash with order (CWD) or cash on delivery (COD).
- They sell the goods through the post office
- They operate on cash with order (CWO) or cash on delivery (COD) terms
- Heavy advertisement are involved
- Customers do not visit the selling premises.
- There is no personal contact between the buyer or the seller
- All transactions are done through the post office
- They deal with goods that are less bulky, have high value, and are durable and not too fragile
- May have large warehouses
Advantages of Mail order stores
- They reach customers who are far for away from the shopping centres
- Do not require the services of sales personnel or shop attendants for skilled labour since selling is routine
- Total control of distribution is possible
- Payments is made with order or delivery so there is little chance of bad debts
- Eliminates the loss associated with shop space, thus saving on rent
- Supply of goods is based on order thus a trader requires little working capital
- The method eliminates trips to congested stores and lengthy waits queues
- Do not require large storage space for goods.
Disadvantages of Mail order stores
- Advertising and postage costs may increases the price of goods
- There is lack of personal contact between the seller and the buyer
- There is limited variety of goods on offer
- Customers do not have the opportunity of inspecting goods before buying
- There are no credit facilities
- The method is only suitable for those who can read and write
- Should there be a problem with the post office. e.g. industrial action like strikes, the business may be affected
- Difficult to operate in places where post office services are poor or unavailable
- Chances of being defrauded are high.
FUNCTIONS OF RETAILERS
Services Rendered to consumers
- Offers credit facilities; Retailers are in close contact with the consumers and some may give them credit facilities
- After-sales services; Retailers who sell technical goods e.g. cars, electronics e.t.c may offer after sale services to consumers e.g. transport, installation repair e.t.c
- Provision of variety of goods; Retailers stock a wide variety of goods from different wholesalers and manufactures enabling the consumers to have a wide choice.
- Advising consumers; Retailers may offer advice to consumers on choice and use of products
- Availing needed goods; Retailers make goods available to consumers at the right time and place
- Breaking bulk; Retailers sell goods to consumers in convenient quantities
- Accumulating bulk
- Stabilizing prices, by ensuring that goods are continuously available to consumers.
- Retailers store goods and relieve the wholesalers the burden of storing goods and the storage costs
- They relieve the wholesalers the burden of transportation
- Retailers advice wholesalers on market trends(on consumers demand)and give valuable information
- They help in distribution of goods to the consumers
- They help in breaking bulk on behalf of the wholesaler
- They finance wholesalers to continue with their operations through paying for the goods
- They relieve the wholesaler of some risks that arise from the storage of goods such as theft, fire and accidents.
- Through wholesalers retailers provide very vital information to manufactures about market demand
- They advertise goods on behalf of producers
- They sell and market goods to consumers. This relieves the manufactures the task and risk of retailing
- They store goods on behalf of the producers
- They break bulk on behalf of producers to consumers
- They finance producers by buying and paying cash
BUSINESS STUDIES FORM 3 NOTES
BUSINESS STUDIES NOTES
CHAIN OF DISTRIBUTION
DOCUMENTS USED IN HOME TRADE
ECONOMIC DEVELOPMENT AND PLANNING
FORM 3 BUSINESS STUDIES NOTES
FORMS OF BUSINESS UNITS
Introduction To Business Studies
Means Of Payments
MONEY & BANKING
SATISFACTION OF HUMAN WANTS
Terms Of Payments
THE LEDGER AND THE CASHBOOK
THEORY OF THE FIRM