Page 1 of 89

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

THE PURPOSE OF COMMERCE

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

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

Trade is essential to those engaged in Secondary Industries to

buy/purchase, raw materials
Such as cotton and selling of finished products goods such as
blankets in order to make a profit

The meaning of commercial activities

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

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

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- to advertise for workers/job vacancies/recruiting required

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

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

Insurance
- is essential to provide security or cover (indemnify) or com-
pensate

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- against any financial losses of building, raw materials, fin-

ished goods, equipment from fire, damage of goods in
transit/theft
- to cover claims from third parties such as employers liability
and public liability

Transport
- is necessary to delivery/carry raw materials and equipment
to the industries
- moves employees to and fro work
- carries finished products to the market
- it can be by road, rail, sea, and air.

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

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Production
The Meaning of Production
- Production covers all activities, which contributes to the sat-
isfaction of the consumers’ demand for goods and services or
needs and wants or gives utilities can be defined as the pro-
vision of goods and services to satisfy human needs and
wants.
- This includes industry both primary (obtains raw materials
from nature) and secondary industries(processes raw mater-
ial into finished products) ,
- Commerce is trade and aids to trade,
- Concerned with the distribution of goods from the producer
to the consume
- and direct service, provides personal and public services to
individual citizens
- such as education provided by the teachers, health care
provided by nurses and doctors, legal advice provided by the
lawyers, security provided by police officers and entertain-
ment provided by the actors.

The three branches of production

An industry is a branch of production that deals with the extrac-
tion raw materials/natural resources from the ground and process/
convert/transform them into semi finished or finished products
(goods)
Commerce is trade and aids to trade, is the branch of production
that deals with the distribution of goods and services from the in-

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dustry(place of extraction or manufacturing) to the Consumers/

place of demand/scarcity
Direct service is a branch of production that plays an indirect role
in production and whose services are essential in enhancing pro-
duction. It provides personal and public services to individual cit-
izens. These includes teachers, doctors, nurses, policemen, lawyers
and any service rendered by service providers.

How the three branches of production are linked to each

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

The Effects of the industry on the environment

- it causes soil acidity and infertility
- waste disposal

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- unplanned settlement
- causes pollution, (air, water and noise)
- occupational health hazards (radiation)

Possible solutions to environmental pollution

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

Human Needs and Wants

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

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

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Goods and Services

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

The Role of Commerce in Production

- Buying of raw materials, spare parts and machinery
- Distributing goods from the producer to the consumer
- This is done by retailers, wholesalers, importers and export-
ers
- With the help of transport, warehousing, banking, advert-
ising, communication and insurance.

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

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(b) Indirect Production

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

STAGES OF PRODUCTION
Production whether direct or indirect can be placed into three
stages. These are primary, secondary and tertiary production.

(a) Primary Production

This is the first stage of production.
It is concerned with the extraction of natural resources from the
ground.
These are either above or underground. The term natural resources
includes:-

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 The minerals underground

 Fish in the water
 Trees in the forest
 Animals in the wild
 Fertile soil and good climate
Most of the outputs of the primary production are in raw or unus-
able form. Generally, the products obtained at this stage have to
go the secondary stage of production for processing in more useful
goods except for some farm products such as apples, water melons,
oranges, peaches can be eaten straight from the farm

(b) Secondary Production

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

(i) Manufacturing Industries

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

(ii) Construction

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This includes building of roads, bridges, houses and other construc-

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

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

Capital

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- includes money, buildings, machinery, raw materials used to

produce further goods
- and all man made assets used in the production of goods
and services.
- Providers of capital are called capitalists/investors
- Capital can be accumulated by savings.
- The reward for capital is called interest.

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

Labour
- This is human effort or energy made/used in the production
of goods and services.
- It can be manual(physical) and skilled(or mental) labour. La-
bour is limited in supply.
- Providers of labour are called workers

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- workers receive/get a wage or salary as their reward for la-

bour

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

The Meaning of Specialisation

- It is the concentration by an individual on a specific task or
occupation or on a narrow range of work within a particular
occupation for which their ability or resources best suits
them
- Such as Teachers, doctors, nurses, lawyers, engineers and
farmers
- Specialisation does not only apply to individuals but also to
countries/regions producing goods or services for which they
are best suited
- Such as Malawi specialises in tea production, Botswana wool,
Mwinilunga in pineapple and china in rice
- It allows division of labour to take place
- It leads to greater skill and efficiency amongst workers and
increased output.

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Specialisation depends on trade and trade depends on spe-

cialisation
- if a person concentrates in only one specific task/product or
performing one task,
- s/he may rely/depend on others to produce needs/wants
which s/he does not produce,
- for example, a farmer depends on the medical doctor for
health and the medical doctor depends on the farmer for
food,
- these can only be obtained by selling his/her surplus labour
in order to buy the goods and services required for his/
her daily survival/living.
- Therefore, without trade specialisation could not take place
- and individuals would have been self sufficient/reliant, that
is, provide all they need by themselves.

Advantages of Specialisation
- workers become skilled
- workers become efficient
- it leads to increased output/high production (mass pro-
duction)
- time is saved because workers do not have to move
from one operation to another
- training is easy as jobs are easy to learn
- everyone’s ability is made use of
- development of specialist machinery to perform the
specialised task becomes easier

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- labour is potentially more mobile as it is often possible

to employ people who do not need any related qualific-
ation and the tasks are simple and easy to learn

Disadvantages/dangers of Specialisation
- work becomes boring
- individual skill and crafts are lost due to use of ma-
chinery
- creates unemployment as greater use of machinery
leads to unemployment
- there is inability of slow workers to keep pace with oth-
ers as the gap between management and workers tend
to be widened
- Products are all the same as the machine takes over,
the goods are made in standard sizes and the choice of
goods available to the consumer becomes limited.
- workers become dependent on each other (in case of ill-
ness, production is disrupted)
- it is difficulty to find employment after loss of job due to
limited skills
- discontent among workers may lead to low productivity
- Occupational hazard/there is a risk of contracting dis-
eases, eg. Those in asbestos industry risk contracting
cancer.

Possible solutions to occupation hazards/dangers

- have constant medical check ups for workers
- provide protective clothing

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- provide milk for workers

- deliberate government policy
- provide entrepreneurship

HOME TRADE
RETAIL TRADE
Retailing is the selling of goods in small quantities to suit the re-
quirements of the consumers. A person who sells the goods in
small quantities is called the retailer.

EFFECTS OF RETAIL ON THE ENVIROMENT

 They cause poor urban sanitation
 Results in the mushrooming of street vendors
 Results in unnecessary littering of the environment
 Causes unnecessary squatting

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 becomes health hazard such as cholera, air pollution and wa-

ter pollution

POSSIBLE SOLUTION TO EFFECTS OF RETAILING ON THE EN-

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

Functions of the retailer

 selling to customers/breaking bulk, the retailer buys the
goods in large quantise from the wholesale or the manufac-
turer and then breaks them into smaller quantities to suit the
consumers
 buying from manufacturers/wholesalers,
 offering variety of goods to meet the consumers wants

 displaying goods in retail shops

 pricing goods before selling them to consumers

 preparing the goods for sale such as packaging them.

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

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 offers delivery service on some goods like furniture and re-

fridgerators
 advertising/promotions/special offers for his/her business
to the public
 providing goods in suitable quantity
 supplying local needs to the consumers
 acting as a link/middleman in the chain of distribution
between the consumers and the wholesaler
 to pass on information to wholesalers on consumers com-
plaints, suggestions or praises on the products
 opens his/her shop to suit the consumers

Factors influencing the choice of site/location

- Cost of site in relation to anticipated turnover and
profit, that is town centre site too expensive
- Is there any competition with the same type of
shops nearby
- Are there sufficient customers in the area requir-
ing sports equipment
- Is the site in the shopping area that is, are there
nearby shops to attract passing trade
- Is there any possibility of trade growth in the area
as a result of population growth or employment
- Security of the shop
- Prices of the goods, the prices of the goods
should be within what the customers or con-
sumers can afford to buy(within the income of the con-
sumer)

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- Accessibility of the shop, the shop should be easily

be accessible by the consumers with less difficulties
- If there is good communication and transport
network and easy accessibility to transport
- source of supply, the shop should be located
where there is reliable source of supply for goods
wanted by the consumers
- Whether the site is in the busy area , for example a
shopping mall at the road junction or simply
in an area where it is able to attract passing trade.

Other factors to be considered if the business is to success-

ful
- experience, have you sufficient experience in business
- Capital have you sufficient capital or the source of cap-
ital to meet the demands of the business envisaged
and to avoid daily cash flow problems
- advertising policy what advertising policy may be
necessary
- prices or range of goods ,what prices or range of
goods are suitable for the area in order to avoid slow
lines
- What quantity will be required to avoid overstocking
- prices or range of goods, what prices or range of
goods is to be used

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- Method of Sale, whether sales assistants will be re-

quired or whether some degree of self service may be
operated
- Whether to deal on the cash basis only or to give credit
- layout for the store, what would be the best form of
layout for the store or the best way to display the
goods/equipment
- What make up will be required to make the required
profit
- Opening and closing time must suit the customers
- Legal requirements
- Name of the shop, the name of the shop must be easy
to remember and eye catching

HINTS ON HOW TO IMPROVE THE BUSINESS

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

Factors to consider when expanding the business

- Have a vision of what you are going to do

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- Concentrate on your original idea. Avoid diverging your

line of business
- Expand in bits. Do not be too ambitious
- There might be need for finding new ways of doing
things, for example, as the business grows, there might
be need for delegation. You might need to employ the
manager to manage the business because good entre-
preneurs are not always good managers
- See to it that there is enough structures to accommod-
ate the expansion
- Focus on your core customers
- Keep record of your business activities
- Make sure there is enough cash coming into the busi-
ness as you spend money on expansion
-
TRENDS IN RETAILING

Retail trade has undergone through a number of changes in

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

used in computerised stock control

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

The reasons for prepackaging the goods includes the follow-

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

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 to help in advertising of the goods

 to allow customers easily identify goods they need

The effect of prepackaging on retail trade

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

advantages of packaging to the manufacturer

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

Advantages of prepackaging to the retailer

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 The goods have a longer shelf life, for example,

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

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Disadvantages of packaging to the manufacturer/producer

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

Disadvantage of Packaging to the Retailer

 It is expensive and wasteful in terms of resources

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

Reasons for Branding

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

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The effects of branding on the Retail Trade

 it has contributed to the development of self service
 customers no longer depend on the shop assistants
for the selection of goods(has resulted in the elimi-
nation of personal service)
 as customers are able to identify and choose the
goods on their own

The advantages of branding to the manufacturer/producer

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

Advantages of branding and prepackaging to the Retailer

- The goods are more easily displayed and
stacked/stored
- it facilitates self service

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- as the customers can easily identify the goods

without help from the staff
- It facitates advertising of the goods
- Customers can easily identify the goods
- Possible reduction of shop assistants due to self
service

Disadvantage of branding the manufacture or producer

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

Disadvantages of Branding to the Retailer

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

Disadvantages of Branding to the consumer

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

Goods are purchased direct from the manufacturer be-

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

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

Advantages of a shopping complex to the:

(a) Retailer
 shops do do compete directly with each other, but
work to stimulate business for one another.
 they are large enough to carry out national wide ad-
vertising to attract the customers from all over the
surrounding areas.

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 they are located outside the town centers where

land is cheap hence saving overhead costs

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

Disadvantages of shopping complexes

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

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 Page 30 of 89

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

CHARACTERISTICS/FEATURES OF SELF SERVICE

 Goods are displayed on the shelves within the easy reach
of the customers,
section by section or according to their families just lije
books in the library
 Customers serve themselves
 Goods are usually prepacked, branded and priced in bar
codes
 Facilities such as trolleys and shopping baskets are pro-
vided for the customers to put their purchases
 Customers pay at check outs/pay desks are installed near
the exist where the customers pay from
 It requires few sales assistants, mainly to replenish the
stock
 It requires large selling space, and large parking area
 Loss leaders are used to attract customers into the shop
 Customers save on time because they serve themselves
 Impulse buying is common

The Development of Self Service

Self service has developed because it has benefits (advan-

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 Page 31 of 89

tages) to both the retailer and the customer.

Advantages of self service to the Retailer

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

Advantages of Self Service to the Consumer/cus-

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

Its development has further been aided by both prepack-

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 Page 32 of 89

aging and branding which enables the goods to be clearly be

distinguished by the customers without assistance.

DISADVANTAGES OF SELF SERVICE to

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

The Retailer/Shop owner

 More trading space is needed and this may lead to high
overhead expenses, especially if the shop is located in
town centres
 Pilferage or shop lifting is very common as the customers
serve themselves and this may cause serious losses to
the retailer
 The retailer have to incur additional costs in securing the
shop shop lifting or thefts by customers
 Constant handling of the goods may result in soiling and
damages to the goods though they are packaged

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 Page 33 of 89

 Needs more capital for the equipment such as baskets,

trolleys, cash registers and display shelves.

ELECTRONIC COMMERCE (E-Commerce)

 Electronic Commerce is the buying and selling of goods and

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

On line shops offer to customers and businesses a variety of high

quality but cheap in price products such as first and second hand
cars, office equipment, furniture etc. Many business people pur-
chase goods from on line shops for resale on local markets.

A person wishing to purchase goods or services on internet has to

visit the website of the on line shop or trader. Website is an inter-
net provider such as Yahoo, Hotmail, Excite etc.

When a person has found the goods or services he/she wants to

buy, he/she will have to make payment. The following are some of
the modes of payment used for on line transactions:

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

line transactions
 Bank transfers
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 Page 34 of 89

 Money transfers
 Western Union etc.

Points to Consider when shopping on internet:

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

 Carry out background check on companies offering on line

stores that you intend to deal with.
 This will avoid internet fraud brought about by unscrupulous
people who set up fake online stores that cheat people out of
their money.

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

 Ensure that the website is secure when you send information

like bank account details to online store. Where a password is
used, the word must have at least five letters for easy remem-
bering. The password must not be written down. This will pre-
vent a wrong person from shopping at the online using your
account.

 It is advisable to start shopping on internet with small items

and then move on to bigger things.
 Spend more time looking for new websites and deals on offer.
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 Page 35 of 89

What is electronic commerce?

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

Advantages of Electronic commerce to:

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

(ii) The consumer

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 Page 36 of 89

- Electronic commerce is open for 24 hours a day and 7 days a

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

Disadvantages of Electronic commerce to the owner of

the online store(or retailer):
- Many people find Electronic commerce too complex to use
being the latest development in retailing.
- Methods of payment for online transaction such as credit
cards are not commonly used in most developing countries
like Zambia, thus limiting online business.
- There is a possibility of credit card fraud.

Disadvantages of Electronic commerce to the consumer

- Unscrupulous people may set up fake online stores that
cheat consumers out of their money.
- Many people do not have computers, and therefore may
have access to internets.

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 Page 37 of 89

- Goods bought especially big items may take a long time to

deliver.
- Goods shown on internet may not be the exact goods de-
livered.

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

CHARACTERISTICS OF A VOLUNTARY CHAIN

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

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 Page 38 of 89

 Goods may be delivered straight to the small retail shops

 Each member retail shop may remain a separate business en-
tity, independently owned and controlled

Functions of the Voluntary Chain

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

Advantages that may be obtained by a retailer who joins a

voluntary chain
- benefits from bulk buying by the wholesaler(s)
- thus reducing prices paid by the retailers
- Able to compete favourably with large scale retailers
- goods may be delivered to the retailers
- national wide advertising is undertaken
- advertising display material are supplied
- advice on stock display is given to the retailers
- financial assistance such as loans for the improvements to
the premises may be available

Advantages of Voluntary chain to the consumer

 consumers are offered good quality service because of the
minimum standard that may be set for member retail shops

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 Page 39 of 89

 consumers may buy a variety of goods at reduced prices

 thereby offering a great service especially to consumers in the
village where large shops do not normally exisit\

Disadvantages of voluntary chains to the retailer

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

Disadvantages of voluntary chains to the consumer

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

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

Reasons for using trading stamps

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

How a Trading Stamp Scheme operates

 stamp trading companies sell trading stamps to retailers who
keep them in their shops

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 Page 40 of 89

 each tome a customer buys goods of a certain value, a retailer

will stick the trading stamp in the specially provided book
 when the page is full the customer may convert the trading
stamps either into cash or goods at a trading stamp company

Adavantages of trading stamps to the stamp trading com-

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

Advantages of trading stamps to the retailer

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

Disadvantages of trading stamps to the retailer

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

Disadvantages of trading stamps to the consumer

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

Explain the meaning of Automatic Vending Machine;

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 Page 41 of 89

- it is a retail machine that releases items required when a

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

CREDIT BUYING AND SELLING

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

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

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 Page 42 of 89

(a) Credit Sales Agreement or Deferred Payment

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

Main Features of Credit sale Agreement

 the buyer takes possession and ownership of the goods of
the product immediately the first instalment is paid
 repayment of the product is made in regular instalments
 the goods can not be repossessed if the buyer defaults in
payment
 however, s/he can be sued for the remaining balance
 is suitable for buying non-durable goods whose value de-
peciates quickly
 where the credit sale agreement is signed away from the
trader’s premises, the buyer may cancel the agreement
within the cooling off period.
 A cooling off period is a period of five days from the date
of signing the credit sale agreement in which the agree-
ment may be cancelled, goods returned and customer’s
deposit refunded, thus returning the parties to their origi-
nal positions

Advantages of Deferred payment to the retailer

 Enables business sales to increase

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 Page 43 of 89

 May avoid wastage of perishables and the risk of goods going

out of fashion
 Has closer personal contact with the customers for possible fu-
ture deals

Advantages of deferred payment to the consumer

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

Disadvantages of deferred payment ot the retailer

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

Disadvantages of deferred payment to the customer

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

(b) Hire Purchase

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 Page 44 of 89

This is the buying of durable goods such as vehicles, furniture

and machinery by initially paying a deposit followed by equal
monthly instalments over a given period of time
The main Features of Hire Purchase
- Initially a deposit is paid followed by equal monthly instal-
ments paid over a period of time until the total price is paid
which includes interest
- Interest is usually expressed as a percentage of the market
price of the item
- The item bought bought may not be sold until the payment is
completed
- This is because, the buyer only becomes the legal owner of
the goods after paying the last intalment,
- hence the item purchased can not be sold until the last in-
stalment is paid
- The buyer has the use of the goods whilst paying for them
- It usually deals with durable goods such as machinery, vehi-
cles, stereos, refridgerators, buildings and furniture.
- In the event of the buyer failing to pay the instalments, the
goods may be repossessed,
- however, it is subjected to certain legal limitations,
- for example, if 1/3 of the purchase price has been paid, then
court order is required
- There is usually a maximum value of transactions

Advantages of Hire Purchase to the Buyer

- it enables the buyer to acquire the goods which s/he can not
afford on cash basis

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 Page 45 of 89

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

Disaadvantages of Hire Purchase to the Buyer

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

Advantages of Hire Purchase to the Retailer

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 Page 46 of 89

 it increases the sale of durable expensive goods hence the re-

tailer has high turnover
 the seller may get high profit margin since interest is charged
 he may get commission if it is financed by the finance com-
pany
 has closer personal contact with the customers for future deals
 retails the right of ownership to the goods until the las instal-
ment is paid

Disaadvantages of Hire Purchase to the Retailer

o Goods repossessed may not be worth reselling
o May suffer bad debts
o It involves a lot of paper work
o The retailer may be forced to employ several shop work-
ers to collect the instalments
o The process of repossessing the goods from the default-
ing customers may take long
o and my be too costly
o Much of the traders capital is tied up in debts hence it re-
quires high capitalinvestiment
o Court action against defaulting customers is very unpopu-
lar and may turnish the image of the trader which may
scale away customers

The differences between Hire Purchase and Deferred Pay-

ment under Credit Sales
o In Hire Purchase, the buyer becomes the legal owner of
the item after paying the last intalment while in deferred
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 Page 47 of 89

the buyer becomes the legal owner of the item immedi-

ately the deposit is paid
o Hire purchase deals with durable goods while credit sales
deals with non durable
o Under Hire Purchase, the goods may be repossessed in
case the buyer defaults in payment while in deferred pay-
ment the goods may not be repossed but the buyer will
only sued for the remaining balance
o Hire Purchase may be financed by the finance company
while credit sales may not be financed by the finance
company
o Under Hire Purchase, the buyer can not sell the goods un-
til all the payments are completed but under deferred
payment thre buyer can sell the good any time as she
becomes the legal owner of the goods as soon as the de-
posit is paid.

The necessity of Hire Purchase to be controlled by legisla-

tion
o the purchaser may not fully understand the contract
worded in legal terms
o the charges may not be clearly be stated and they may
be too high, therefore, the Annual Percentage Rate or
true rate of interest must be stated with the Hire Pur-
chase price and cash price
o repossession of the goods amy occur on trivial grounds if
protection is not given, that is if 1/3 of the purchase price
has been paid the court order is required
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 Page 48 of 89

o some salemen are too persuasive

o cooling off period (contract made outside business
premises can be cancelled) allowed under some circum-
stances

The Role of the finance Company in Hire Purchase

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

why the consumers need protection when buying goods and

services
o different consumers might be charged different prices
(fluctuating prices)
o the consumers might not receive the right content of the
goods (under weight goods)
o advertisers might make false claims (misleading adver-
tisements)
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 Page 49 of 89

o some salesmen are too persuasive to induce to the con-

sumers to buy the goods
o some manufacturers might try to cut the production cost
by using inferior or dangerous ingrediates in the products
o some traders may over charge the consumers by fixing
prices at high levels

WHOLESALE TRADE
Intoduction
The word ‘whole’ simply means bulk and to sale is simply to transact,
trade is the buying and selling of goods and service with a view of
making profit. Wholesale trade ican therefore be defined as the buy-
ing and selling of the goods in bulk(large quantities). A person who
sells the goods in large quantities is known as a wholesaler. A whole-
saler is a connecting link between the manufacturer and the retailer,
and being a middleman functions
Describe the functions of a wholesaler
- Buys goods in bulk from the manufacturer hence clearing the
manufacturers’ production line
- Warehouses the goods awaiting demand to ensure steady flow of
goods, hence preventing price fluctuation(evens out prices) and
allowing the manufacturer to produce the goods ahead of de-
mand
- Breaks bulk and sells goods in smaller quantities to retailer
- Finances the retailer by providing credit and manufacturer by
paying promptly
- Acts as an intermediary between manufacturer and retailer by
passing information/complaints to manufacturers

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 Page 50 of 89

- Provides a variety and wide range of goods for the retailer and
consumer which is gleened from different producers
- Prepares goods for sale by branding and blending them.
- Provides transport (delivery) for goods from manufacturer and to
the retailers premises
- Operating cash and carry warehouse.
- he is a risk bearer, that is by storing the goods on behalf of the
producer or rtailer, the goods may go out of fashion or they may
be gutted by fire or stolen whilst in the warehouse.

Services of wholesaler to manufacturer

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

Services of a wholesaler to the retailer

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 Page 51 of 89

- Sells in relatively smaller quantities to the retailer (breaking

bulk)
- Delivers the goods to the retailer’s premises free of charge/offers
transport
- Provides retailer with market information, which is passed on to
the consumer, so that they are able to know what new goods
are coming on the market.
- Finances the retailer by providing credit
- Provides the retailer with a variety of goods from various manu-
factuers.
- He acts as a reservoir
- He operates a cash and carry warehouse
- He acts as an intermediary between the retailers and the manu-
facturer
- Offers trade discount
- Allows the retailers to have a steady flow of goods at stabilised
prices throughout the year

Services of a wholesaler to the consumer

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

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 Page 52 of 89

How do the functions of a wholesaler affect the consumer

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

Why is a wholesaler reluctant to undertake retailing

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

Reasons for the Decline of the wholesaler

- Growth of large scale retailing outlets who are able to undertake
their own wholesale
- Whole saling functions being undertaken by manufacturer or re-
tailer-saving intermediary cost.
- Some retailers buying directly from manufacturers-reduced costs
- Increase in sale of branded and prepackaged goods-can be sup-
plied directly from manufacturer.
- Demand for speed delivery perishables.
- Increased trade in particular kinds of goods-fragile.

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 Page 53 of 89

- the intoduction of mail order

- some large scale retailers are able to manufacture their own
goods, hence eliminating bo the wholesaler and the producer
- need to cut on the intermediary costs
- increase in trade of perishable goods such as bread and bou-
quets
- increase in trade of technical goods that may require installation
by the manufacturer such as Digital Satelite Television
package(satelite dish) and computers
- demand for speed delivery of the goods such as Newspapers
- increase in trade of goods with low turnover such as furniture

SURVIVAL OF THE WHOLESALER[strategies taken by the

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

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 Page 54 of 89

- does not offer transport

- does not sell on credit

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

Characteristics of a Cash and Carry warehouse (whole-

sale)
- membership may be required
- customers are normally retailers and consumers
- stocks a variety of goods
- they strictly sell on cash basis/no credit facility offered, that is,
retailers must pay by cheque/cash prior to taking goods
- may give special offers, gifts, discounts and loss leaders
- they do bot provide transport or delivery service, that is, the
retailers must transport their own goods, this enables the
wholesaler to cut costs/prices so that smaller retailers com-
pete with larger organizations.

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 Page 55 of 89

- they operate from the warehouse/large buildings

- goods are displayed on shelves in boxes.
- they operate on self service
- customers use trolleys whilst shopping
- They mainly deal in groceries and other goods that do no re-
quire perssonal service
- They open for longer hours

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

Characteristics of a general wholesaler

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

SPECIALIST WHOLESALERS
These are wholsalers who deal in a limited range of goods. They
are usually a source of supply for many retailers and they sell both
home produced and imported goods
Co-operative Wholesale Society

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 Page 56 of 89

This is the wholesale business formed by the co-operative retail so-

cieties

THE MAIN FEATURES OF CO-OPERATIVE WHOLESALE SOCI-

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

MIDDLEMEN IN WHOLESALE TRADE

Factors
 they are agents concerned with selling of goods/services in the
home trade
 they sell in their own names although not theirs

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 They sell on behalf of their principals/someone else or other

people and they do not buy.
 they have possession of the goods and documents of title
 they may sell the goods to the customers on credit

 They are remunerated by a commission

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

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

Merchants
 are principals/traders who buy goods for themselves.
 They import to sell at home.
 They act as wholesalers and provide delivery, warehousing
etc.
 They are remuneration is profit

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 which is the difference between the buying price and the

selling price

MARKETING BOARDS
It is an association of agricultural producers and is established by
an act of parliament.

Functions of the Marketing Board

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

Warehousing

This is the provision of ample accomodation and protection given

to goods from the time they are produced until when they are
needed by consumers.

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Some Goods not usually stored in a warehouse.

1. Jewellery and pharmaceutical products are rarely stored, not

only for security reasons but also because of the high cost of
investment in the stock.

2. Some perishable goods such as bread and vegetables need to

be consumed quickly and are, therefore, rarely stored in a
warehouse.

 They quickly go bad and must be used within a short time.

3. Some goods are so technical and bulky that they are made on
order from consumer e.g. ships and aircraft.

The importance of the warehouse to those in trade

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

equipment, partly finished goods and finished goods awaiting
sales, transportation and processing
- it provides storage for the seasonal goods such as rain
coats, jerseys, Christmas cards etc.
- provides storage for goods in transit (entrepot) trade/stores
goods in entrepot trade
- it allows production to take place ahead of demand
- ensures continuous production of goods
- it evens out prices/stabilises prices/avoids price fluctuations
of goods and it helps to prevent shortages of goods
- reduces pilferage/theft of goods
- it protects goods from adverse/bad weather
elements/conditions
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 Page 60 of 89

- it provides room for the goods to be prepared for sale such

as branding, blending packaging and labelling
- it allows some goods such wine, tobacco, and cheese to
mature
- it provides space for the retailers to inspect the goods
before buying them
- it may be a cold storage or a wholesaler cash and carry
- imported goods may be stored in the bonded warehouse
- thus saving the working capital
- it may be a bonded warehouse which provides storage for
dutiable goods awaiting duty to be paid or imported goods
awaiting re-export
- may be at the airports/ports/bus terminals

Reasons why warehousing is important to the cash and

carry wholesaler

- need to store the goods for customers/small retailer

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

Reasons why warehousing facility is essential to an im-

porter of dutiable goods such as wine
- need to store goods on which duty has not yet been
paid
- enables wine and spirits to mature
- reduces theft/pilferage of goods
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- useful in entrepot trade or when bottling/blending has

to take place or when seeking a buyer who will then
pay the duty hence economising on the traders’ working
capital

Importance of a Bonded Warehouse to an importer of

Coffee
 storage of coffee on which duty has not yet been paid
 allows space for preparing coffee for sale/blending, bot-
tling or packaging
 imported dutiable coffee can be store if the importer
hasn’t got enough money
 allows postponement of duty
 hence economising/maximizing his working capital

Importance of a Bonded Warehousing to an Exporter

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

Types of Warehouses
1. The wholesale Warehouse
The wholesalers buy goods in bulk and keep them in their
warehouses before selling them. Most wholesalers operate

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large warehouses which give them the space not only to pro-
tect the goods but also to break the bulk, prepare goods for
sale and allow retailers to come and inspect the goods before
they buy them.

2. Cold Storage Warehouse

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

3. The Manufacturer’s Warehouse or Depots

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

4. Seaport and Airport Authority Warehouses

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

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

Importance of the Bonded Warehouse

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

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DOCUMENTS USED IN HOME TRADE

THE NEED FOR DOCUMENTATION IN BUSINESS TRANSAC-

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

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of debtors, such as the statement of accounts shows the

amount the buyer owes the seller
 confirms the delivery of goods, such as the delivery note
and the consignment note.

How the buyer may obtain the information s/he requires

before placing an order
- send for a catalogue and price list/trade journal
- send an inquiry to the seller and receive from him/
her a quotation or catalogue or price list
- telephone the supplier and quotation him for any in-
formation
- by attending a trade exhibition/trade fair organised
by the seller
- by asking the seller for demostrations for his/her
goods
- by asking the seller for visits by his/her sales repre-
sentative

DOCUMENTS USED IN HOME TRADE

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

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

Dear Sir/madam

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

Yours faithfully

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 Page 67 of 89

Mulenga Mwanakashi
Purchasing Manager

A tender
This is sent to the seller in response to an advertisement inviting
quotations or estimates for the supply of certain goods or ser-
vices. An estimate is an order to carry out a service or to under-
take work for someone at a certain price. This price is only the
expected cost of the work to be done and is not a definite price.

The terms of payment may include cash and trade discount.

Trade Discount
- it is a reduction from from the list or catalogue price
- it is usually shown or calculated on the invoice
- it is allowed to those in trade(one trader to another) or
customers who are buying to sell again for a
profit/usually refferred to as profit margin
- usually varies with the quantity purchased and with the
custom of that trader
- it encourage bulk buying
- may be varied to avoid the expenses of reprinting the
catalogues
Cash Discount
- it is a reduction from the invoice price
- it is given to encourage prompty payment (early pay-
ment), eg. 5% within 14 days

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- it helps to avoid bad debts and improve/speeds up the

cash flow system of the business
- it enables the retailer to earn a good reputation with the
supplier

The Differences between trade and Cash discount

Cash Discount Trade Discount

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

A Catalogue
 This is usually in form ofa booklet/pamphlet with pictures of
goods
 containing description of the product,
 the terms of payment and terms of sale
 such as trade discount, cash on delivery and cash with or-
der
 The prices may be shown under the article.
 They are usually issued once a year or at longer intervals
 and are normally printed by the outside firm, which makes
them more expensive.
 They are usually used by the supplier as a means of adver-

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tising their goods.

 They are more common in mail order firms.

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

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

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pers A4 box
120 000 per
box

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

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

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

We have pleasure in quoting the following:

Code Quan Description Unit Price

No. tity Price
45231 60 Lounge suit-red K2 000 K120
42351 20 Display Album-grey 000 000 000
43231 20 Card Index-white K4 000 K80 000
42352 60 Card Index-grey 000 000
45321 10 Filing Cabinet-green K4 000 K80 000
000 000
K2 000 K120
000 000 000
K5 700 K57 000
000 000

Prices valid for 21 days Orders over K50 000 000

sent carriage paid
Delivery within 4 weeks of receipt of order
Cash discount 5% if paid with 28days of invoicing
All the prices are subject to 10%Trade discount

Signature.

THE ORDER
This is an instruction to the supplier to supply a particular
good(s).

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It can be made on a special order form or in an ordinary letter.

Orders may also be placed verbally on the phone, but verbal or-
ders must be followed up by a written document to avoid mis-
quotation and the supply of wrong items.
The order contains:
 The description of the goods required;
 The quantity ordered;
 Price, as given in the quotation or catalogue;
 Delivery date and cost of carriage;
 The terms of sale specifying whether there is credit or not
and the discount offered. The importance of the order is
that it confirms the customer’s seriousness in purchasing
the item.

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

Please supply and deliver:

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Quantity Description Price

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

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

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ADVICE NOTE

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

Number of Packages Description

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

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

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

A CONSIGNEMENT NOTE

This is a document used when the seller sending goods to the

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

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charges (if it is not pre-paid).

.An invoice
This is a bill sent by the supplier to his customer containing de-
tails of the goods supplied relevant to the order made,
such as description of goods sent, quantity supplied, price
charged, terms of sale, trade discount and value added tax if
any.

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

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MAZABUKA

Date 5th November 2009

INVOICE NO..: 1642

YOUR ORDER NUMBER: 2542

TO : Chikankata High School

Private Bag S 1
Mazabuka

QUANTITY DESCRIPTION/DE- UNIT TOTAL

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

E&OE
Explanation of the terms:
 2% one month means that 2% cash discount will be allowed
if payment is made within one month
 1% two months means that 1% cash discount will be al-
lowed if payment is made within two months
 Net means that no cash discount will be allowed/full amount
owing to be paid
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 E&OE means Errors and omissions Excepted

NOTE: The address of the sender of the document is al-
ways on top of the document.

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

A CREDIT NOTE
 This is usually printed and typed in red so that it will not be
confused with an invoice or a debit note.
 It is issued when the seller owes the buyer some money
 and totals are usually subtracted from the invoice before it
is paid./reduces the amount indicated on the invoice
 Informs the buyer that his/her account has been credited
 A credit note is sent by the seller to correct an overcharge,
 or to allow for the return of faulty goods
 or empty crates and containers which the buyer has paid
for.
 It is also issued for surplus quantities of goods returned to
the supplier
 Shows the unit price, total price of the goods returned,
trade discount and reasons for the return such as for wrong
goods supplied.
 Shows name and address of the buyer and the seller
 The credit note is important because it corrects the mistake

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that appears on the invoice.

 It is usually printed in red ink to show that money is going
out from the business
CREDIT NOTE NO. ……………………..
Date…………………….…..

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

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

QTY DESCRIPTION PRICE AMOUNT

DEBIT NOTE
This is a document sent to the buyer by the seller if he/she has
been undercharged.
It is issued to claim the extra money outstanding.
In other words the debit note asks the buyer to pay the differ-

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ence or amount by which he/she has been undercharged. It may

be issued if, for example:
 Some delivered items are committed on the invoice
 Pricing errors are made on the invoice
 To increase the amount indicated on the invoice when then
buyer was oversupplied but under charged
 To notify the buyer that his account has be further debited
 Increases the amount indicated on the invoice/it is a supple-
mentary invoice
The importance of the debit note is that it informs the buyer of
the undercharge and claims the extra amount outstanding.

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

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

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Mazabuka

Invoice No. 263867 Dated …………………………..

Quantity Re- De- Model Price Total VAT VAT

turned scrip- No. per cost Rate Amount
tion unit (%)

THE STATEMENT OF ACCOUNT

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

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

 Amount of invoices issued during the month;
 Payments made during the month;
 Credit/debit notes issued during the month and net amount
owing at the end of the month;
This document is important because;
 It confirms the transactions made during the month;
 It reminds the customer that payment is due;
 It enables the buyer to compare the accounting records
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 Page 82 of 89

kept by the supplier with his/her own records.

NOTE: entries made in the debit column increases the balance

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

STATEMENT

SUPREME FURNISHERS
PLOT NO. 87
MAZABUKA BRANCH

TO: Chikankata High School Date

…………………………
Private bag S-1
Mazabuka

Terms:

Date DETAILS Debit (K) Credit (K) Balance

(K)

E&OE

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. A Cheque is sent by the buyer to the seller as one of the

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

Payee Date on which the

cheque is drawn

BARCLAYS BANK (Z) LTD

(Registered Commercial Bank)

Mazabuka Branch Date 31st May 2009

Pay Celtel Mweemba or order

The sum of five Million Kwacha only

K5 000 000

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Signature Crankshaft Banda

Amount in words Amount in figures Signature

of the Drawer

A receipt
This is rarely used today since the cheque act of 1957, the
cheque itself when it has been paid in the seller’s account, and
returned to the drawer, acts as a receipt. If payment is made
through the credit transfer system, the statement and the at-
tached credit transfer slip are stamped by the bank cashier
which act as a receipt.

TRANSPORT
Definition: It is an aid to trade that is concerned with the move-
ment of goods and people from one place to another.
Importance of efficient means of transport
Efficiency means of transport is important to a company or
factory such as Zambia – China Mulungushi Textiles which may a
have branch within and outside the country due to the following
reasons:-

- It creates utility by bringing goods within the consumers’

reach
- Provides consumers with a much wide variety of goods
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 Page 85 of 89

- Enables consumers to enjoy a high standard of living

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

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- Air transport is particularly important to a form for urgently

needed goods or travel worldwide.
- Road transport is important for the carriage of goods and
people door to door.

Factors influencing the choice of transport

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

ENVIROMENTAL PROBLEMS ASSOCIATED WITH TRANSPORT

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- Pollution (air, water, land and noise)

- Ecological changes caused by the construction of the infra-
structure, such as roads, dams, ports, pipeline and rail

The Possible Solutions

- government policy
- civic education

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

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- Raw materials and equipment can be collected on and when

they are needed.
- Own fleet is more convenient as goods can be delivered
when necessary.

Disadvantages of own fleet:

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

Road transport
Road transport is by for the most important form of transport on
most countries. It has drastically increased due to the following
reasons,
Advantages of road transport
- It carries goods direct to their destination without any tran-
shipment.

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- Door to door delivery is possible by road.

- It is convenient and fast over short distances
- It is more flexible as far as time concerned, that is no
timetables and schedule may be followed.
- May be economical due to less capital costs/transhipment
cost.
- Goods may better be protected or less pilferage/theft as the
driver may keep an eye on them all the time.
- Roads reach almost everywhere
- Goods may be delivered anytime
- It is suitable for delivery perishables
- It is suitable for small loads of consignment
- It is suitable for most type of goods
- It is possible to use own fleet of vehicles

Disadvantages of Road transport

- It is slower over long distances than rail
- It is no feasible to ferry large quantities or bulk goods as coal.
- It is reliable to break down and delays due to poor weather
conditions.
- If the vehicle returns empty to the depot the cost of delivery
the load will be most costly than necessary.
- The driver may have to stay overnight at a hotel for long dis-
tances. This may increase over all costs.
- It is not suitable for carrying dangerous goods such as petro-
leum.
- It causes more damages to the environment and ozone layer
due to air pollution emitted

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- By the burning fuel and noise produced by some vehicle.

RAILWAY TRANSPORT
Railway transport is the most ideal form of delivery bulk Cargo such
as coal, Iron ores, building materials, petroleum etc.
Advantages of railway transport over road transport
- Railway transport is faster over long distance than road
transport.
- It is cheaper especially when carrying bulk goods.
- There is no congestion on the railway line (trains are free
from congestion).
- It is not so badly affected by adverse weather conditions
- It is economical in the use of fuel
- A railway line may have direct access to the seaport
- Railway transport has relatively low running costs.
- It is safer for carrying dangerous products such as fuel.
- Special facilities have been developed in railway transport for
carrying bulk deliveries dangerous products such as fuel or
oil, coal, cobalt, cement, iron ores etc.

Disadvantages of Railway transport

- Timetables make railway transport less flexible than road
transport.
- The transhipment of goods, apart from causing inconveni-
ence and damage of goods.
- The expense of equipment and keeping the train in good con-
dition is considerably high.
- door to door delivery is not possible by rail
- It is not suitable for urgent deliveries

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- It is generally slower than road transport over short distance.

- It is not economical for small load, and short distances

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

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

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- They too belong to the shopping conference and their

charges are also fixed.

3. – Tramp vessels (steamers)

- These do not operate on regular routes or fixed timetables
but sail whenever traders want their cargo to be taken.
- They do not carry passengers/carries goods only
- They move from one part to another while awaiting demand
for their services
- They normally hired or chartered by whoever wants their ser-
vices (his/her goods to be ferried)
- Usually a charter part/agreement is signed between the ship
owners and the trader who wants the shop to carry his/her
good.
- Charges are usually based on space available, bulk of the
consignment, weight and distance involved.

SPECIALED VESSELS AND GENERAL CARGO

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

(b) Container ships/vessels

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 are specially designed vessels

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

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

(d) Oil Bulk Ore (OBO) ships

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

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REQUIREMENTS OF A GOOD SEA PORT

The control of seaports and their facilities is done by the Port Au-
thority. The Port Authority assists traders and other users of sea-
ports by taking responsibility for efficiency of the seaport. The fol-
lowing are the requirements of a good sea port/harbour:-
- It should be sited as near as possible to a town or city, but
not near high buildings and cause as litter pollution as pos-
sible.
- It should have speed and efficient roads and rail network to
provide easy access and departure of travellers and goods.
- It should have good equipment and repair service necessary
to keep aircraft flying such as sophiscated radios, radars,
computers and technical equipment.
- It should have customs facilities to regulate the importation
of goods and to check for prohibited goods such as firearms
and mandrax.
- Should have migration offices to ensure that only people with
valid documents do enter or leave the country.
- Should have buildings for hotel and accommodation, police
stations, health centres, banks, restaurants, post offices etc.
- Must have safety procedures such as fire engines and ambu-
lances.
- Must have good warehousing facilities.

Functions of the Port Authority

- They maintain the approach to the port by road, rail sea
etc.
- They provide warehousing facilities for the goods

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- they provide customs and immigration offices

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

Advantage of sea transport

- It is relatively cheap particularly over long distances for the
Carriage bulk goods which are not urgently needed.
- Large quantities/weight can be moved in one vessel, such as
bulk consignment of grains.
- The use of containers keeps costs to a minimum vessel, such
as bulk consignment of grains.

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- The use of containers keeps costs to a minimum and in-

creases the safety goods as it minimise handling of goods in
transit.
- The seaport provides cheap transport linking all containers of
the world as all countries have long sea costs.
- Tranships provide a very flexible service as they bound to
any fixed routes.
- Special vessels, such as oil tankers and reapers can be built
for special cargo.

Disadvantages
- It is relatively slow for urgently needed goods.
- It has high insurance costs because of high risks jettisoning
of goods.
- There is high risk of pilferage and theft.
- It does not offer door to door services as some countries/
areas may not have seaports. (Transhipment is inevitable).
- Bad weather can cause delays and loss of goods.
- Land locked countries like Zambia, Botswana, Lesotho, etc do
not get the full benefit of sea transport.

CONTAINERISATION
 This is the system of transporting or delivering goods by the
use of containers.
 Containers are large metal boxes of standard sizes/specified
sizes
 in which goods are picked at the manufactures premises/
warehouse

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 and are secured by the supervision of customs authorities

 and not opened until they reach their final destination.
 This form of transport is mostly used in road, rail and sea
transport.
 The freight is based on the size of the container
 It reduces handling of the goods
 It reduces the risk of theft and damage to the goods
 It reduces insurance rates

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

Disadvantages

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- not all vehicles and ships are standardized to carry contain-

ers.
- This means the company might still need to hire standard-
ized trucks.
- Not all terminals (Ports) have mechanised container handling
facilities.
- This will require expensive upgrading of ports for them to
be able to handle containers.
- It requires large capital investment to establish container
ports.
- They are not economical for carrying small loads, as there
would be wastage of space.
- Many bulk goods such as timber, iron have limited capacity
in air transport
- as it has weight limits/restrictions.

AIR TRANSPORT
Air transport has seen a marked improvement in recent years and
as a result, there has been a rapid growth in the volume of cargo
traffic and passengers using air transport. Some of these include:
- The increased the importance of air freight due to more air-
ports world wide, bigger air craft and better airport facilities
- The building of larger aircraft which are porter and move reli-
able.
- An improved design such as fuse long and enquire has in-
creased fuel economic.
- Improved loading through large class at the nose and tail has
cut loading capacity.

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- Increased in the number and improvement of handle facilit-

ies, provision of better storage and handle facilities world-
wide has seen remarkable change in air transport.

Advantages of air transport

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

Disadvantages of air transport

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

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Modern Trends in Transport

The modern trends in transport includes the following
 The growth of containerisation of goods by road, rail, sea and
air transport system
 Improvement in roads and motorways
 Improvement in modern handling facilities at airports, seaports
and railway stations
 The growing in importance of high speed trains
 The growing in importance of air transport because of large
aircrafts, large airports, more airports and more air routes al-
lowing more goods to be carried by air
 The development of roll on, roll off ferries
 Improvement in security measures for goods being transpor-
ted
 The increased movement of goods because of the formation of
trading blocks such as the Southern and Central African Devel-
opment Community (SADC), European Economic Community
(EEC) etc.
 The decline in volume of goods carried by railways in many
parts of the world
 The removal of customs barriers at entry points to the country
has facilitated the use of transcontinental vehicles.
 The general improvement in transport facilities have speeded
up the movement of goods worldwide.

Pipeline

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This is the system most used in the delivery of liquids such as

crude oil/petroleum products.

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

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

Insurance

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Insurance is an aid to trade, which under takes to cover risks, that

may or may not (probabilities) in business and if they happen, they
will cause financial losses. It involves the insurer and the insured.

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

Insured: This is the party (person) seeking for insurance or guar-

antee of compensation.
Definition:
Insurance is the legally binding guarantee given by the insurer to
compensate/indemnify/restore or cover the insured for any financial
loss which may be suffered as a result of the occurancy of a spe-
cified event which may or not occur(probabilities). In return for this
guarantee the insured makes a periodic payment called premium to
the Insurer. The premiums are paid into a central fund (pool) for
the claims of the unfortunate few (ones). The profit on the Insur-
ance Company is based on the statistical probability that only a
small percentage of the insured person will ever have to make
claims. Therefore, the premium of many pays the claims of the un-
fortunate few who have suffered financial loss as a result of an in-
surable risk leaving the excess as a profit for the insurer for the ser-
vices he provides. The larger the number of people contributing to
an Insurance pool for a particular risks the less likelihood of that
group suffering a large percentage of less than the average for all
the people open to the risk. This is known as law of average. This
is because there is less chance of loss to the Insurance company.

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When the number insuring a particular risks with it, is large, the
amount or premium likely to be charged is lower.

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

Why it is important for the business people to insure their

items
 If a loss occurs, the businessperson will receive compensation.
Where the business person does not insure, his/her goods and
suffer a loss s/he will receive no compensation and he may
end up going out of business
 It gives people the confidence to continue conducting busi-
nesses knowing well that should they suffer a financial loss,
the insurance company will compensate them
 Claims against business people may be too large and without
insurance, they may not be able to meet huge claims arising

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from the members of public who may suffer losses. It is for

this reason that business people are required by law to take
public liability insurance, for example, employer’s liability in-
surance.

Pooling of Risks
 Pooling of risks is the basis of insurance which enables the for-
tunate ones to help the unfortunate ones.
 A policy holder pays a premium into the pool from which com-
pensation is paid to those who claim.
 The funds in a pool must be sufficient to cover compensation,
administration cases and leave some profits for the insurance
company.
 There is likely to be a separate pool for each risk.
 Some companies like Konkola Copper mine and Mopani Copper
mine may run their own risk, that is use self insurance.
 If there are many who wish to insure against a particular risk,
more premium is contributed, but if there are few calamities,
the premium is low.
 For the principle of pooling of risks to work, the insured per-
sons must not suffer losses all at the same time. If they all
suffer the loss at once, they can be no enough funds in the in-
surance pool to pay everyone.

PRINCIPLES OF INSURANCE
There are the basic ‘rules’ of insurance which are applied to ensure
that the policy is effective and it is not prone (open) to abuse:
(i) Utmost good faith

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 Both the insured and insurer must reveal every relevant and
material facts relating to the policy being undertaken.
 The insured must fill in the proposal form by telling the truth
without leaving out any material facts relating to the con-
tact.
 This enables insurance company to assess the risk and decide
whether of not to accept it and then determine the amount of
premium
 The insurance company must also act in the utmost good faith
by settling material facts relating to the contract.
 The contract may be declared null and void if utmost good
faith is not followed by both parties (breach or utmost good
faith) renders the contract well and avoid.

(ii) Indemnify
 This principal states that the policy holder must be restored/
compensated to his or her former financial position without
making profits out of a loss. In either words he/she must be
placed in the same financial position as before.
 She is not allowed to make profit out of a loss as she may
cause the risk to occur.
 Indemnity does not apply to life assurance and is limited to the
sum insured or the market value of the object, therefore the
insured must not over insure or under insure.
 Contribution applies if the policy holder insured with more than
one insurance company.
 In this case, insurance companies contribute proportional
amounts to make up for the loss.

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 Subrogation applies if the insured is fully compensated/Indem-

nified for the loss E.g. in the case of a vehicle stolen or dam-
aged, the damaged (scrap vehicle) or recovered property be-
longs to the insurance company.
 The principle of average under indemnity means that if the in-
sured does not increase the amount of the cover when the
value of the insured object. increases, he will not receive the
full compensation in the event of the claim, instead he will re-
ceive part of the compensation based on the average cause
or the ratio of the amount to cover the market value of the
object
i.e . amount insured x Amount of compens-
ation
Actual value of object

(iii)Insurable Interest
 It states that only the person who stands to lose financially if
the risk insured against has the legal right to insure the prop-
erty or life
 That is, the person must own the property if s/he has to insure
it.
 It prevents people who are not owners of the item from insur-
ing the property
 If people were allowed to insure items or lives which do not be-
long to them, they might be tempted to deliberately cause the
loss in order to claim compensation
 And thus making profit out of the loss
 This will defeat the principle of indemnity because

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 The insured was not in the position to lose financially hence

s/he could not be indemnified

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

Taking out an Insurance Policy

- The person seeking insurance cover approaches the insur-
ance broker
- S/he obtains and completes the proposal form which an an
application for insurance

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- It gives details of the risk to be covered against and details of

the applicant.
- The proposal form must be filled in utmost good faith.
- The proposal form is important to the insured because;
- It enables the insurance company assess the risk and decide
whether or not to accept the risks and fix/set premium and fi-
nally issue the insurance policy, setting the terms of the con-
tract (it forms the basis of the contract).
- *An insurance policy is a paper written as evidence between
the insurance company and the person insured.
- Where the important information relating to the object being
insured is not disclosed on the proposal form, the contract
may be declared null and void

Procedure involved in making a claim

 Inform the police immediately the loss occurs/happens
 Notify the insurance company of the loss as soon as it hap-
pens(possible)
 Notify the insurance company if the object was insured with
the other insurance company
 Complete the claim form giving full details of the loss suffered
 Insurance company employees (assessors) inspects the dam-
age
 They assess and determine the amount of financial loss
suffered
 In order to arrive at a fair and reasonable amount of compens-
ation, the client signs an agreement of loss form to bind him to
accept the amount of compensation arrived at

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 The insurance company settles the claim by paying money

 Or by paying in kind, eg, buying the same object of the same
model
 The remains of the object are subrogated to the insurance
company

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

The Insurance Broker

- He acts as a link between the insurance company (under-
writer) and the clients as the clients.
- Can not approach the underwriters directly.
- He gives information on the policy for a number of insurance
companies.
- They are not employed by the Insurance company but they
are independent professionals, who are on insurance busi-
ness on their own account.
- They advice clients on the best insurance policy to the dam-
age (scrapped vehicles) or recovered property of the insur-
ance company.
- He may deal with the full amount of the policy recovered

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- He may deal with claims and particular problems affecting

the client.
- They collect premium from their clients on behalf of the in-
surance company.
- They arrange insurance cover and administration (papers)
work or clerical work for their clients.
- Brokers are paid commission by the insurance company for
their work.
- Their commission is known as brokerage.

The Lloyds Insurance Corporation of London

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

Under writers
o These are principals who accept Insurance risks or cover a risk
such as marine
o They receive insurance premiums from the clients
o If the risk occurs they pay out compensation from their own
pockets
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o They are rich people(they need enough resources) with a con-

siderable financial stand, which enables them to meet claims.
o They have unlimited liability
o They work/operates in syndicates (groups)
o They do not have contact with members of the public directly
but through an insurance broker.
o They may be represented by an underwriter agent to “LEAD”
who accepts insurance on his behalf.
o Their remunerations is profits

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

Life Assurance
 The term assurance refers to certainties,
 that is, risks that must certainly occur such as death.
 The term insurance refers to probabilities,
 that is, risks that may or may not happen such as fire, theft,
accident and flood..
The principle of indemnity, does not apply to life assurance. This is
because when a person dies, no amount of monetary compensation
will restore him/her to life. Assurance is looked at as a form of
serving plan rather than insurance. It is true and we all know that
we are going to die but we are not sure when we will die.
Life assurance is a good way of ensuring that surviving members of
the family are taken care of
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Usually, if we live for a very long time and die long after retirement,
it is possible that our savings may be sufficient to meet the de-
mands of our dependants. But if we die young we are likely to
leave a widow and young children with no money to look after
them. This is where life assurance will be helpful.
Life policies are normally sold by insurance agents who are different
from brokers.
Insurance agents usually act on behalf of a particular company.
They never handle premiums. The premiums are paid directly
to the insurance company – Life assurance policy covers the follow-
ing:
(a) Whole life policy
This is a policy under which a person assures his/her life for a cer-
tain sum of money which will be paid to his/her dependants after
his/her death.
- the person divides how much he wants to assure his life for
and the insurance company
calculates the amount of premium to be paid monthly or
yearly.
- The assured pays premium for his/her entire working life until
death.
- To fix premium, the Insurance company will look at the age,
health records occupation as well as the duration and the
amount of cover required – if the assured dies, the money is
then paid to his/her dependants and beneficiaries.

(b) Term Policy

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- This is a policy which covers a person for a fixed period of

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

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

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

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(a) Ordinary fire insurance

- Provides cover/insurance protection to a wide range of prop-
erty such as personal and business buildings, and there con-
tent against damage caused by fire.

(b) Consequential Loss

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

Factors considered when fixing the premium for the insur-

ance.
 The number of people wishing to insure

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 So as to apply the law of big numbers

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

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

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

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

(a) Motor Vehicle Insurance

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 It is compulsory by law far motor vehicle owners to Insure

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

A variety of motor Insurance policy exists. The main ones in-

clude the following:

(i) Third party motor insurance

 Third party motor insurance is the minimum motor insur-
ance
 any vehicle that moves on the road is required to have
 third party provides compensation only to third parties
 for death or body injury caused to them damage to their
property.
 The insured’s own vehicle is not covered.
(ii) Third party, fire and theft motor insurance
This type of insurance covers
- Third parties for death or body injuries caused to them and
their property.
- The insured’s own vehicle
- for accidental damage to the vehicle,

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- injury to the driver, loss of the vehicle by fire, theft or by in-

stant mob justice.

(iii)Full comprehensive
Full comprehensive insurance covers a variety or risks that may
happen to the vehicle. It is therefore the best and at the same time
the most expensive type of motor insurance.

Factors considered when fixing the premium for motor in-

surance
The size of the premium payable on motor insurance depends on
many factors which include the following:
 Experience of the number of accidents the type of vehicle
being insured has been involved in based on statistics in-
surance companies have in their possession.
 The number of people wishing to insure against the risk or
say, road traffic accident, so as to apply the low of big
number.
 The type of motor insurance required whether it is third
party or comprehensive insurance etc comprehensive in-
surance covers many risks and therefore higher are
charged.
 The age of the driver young people are charged higher
premiums because they drive fast, and therefore more likely
to cause accident.
 The purpose for which the vehicle is used e.g. higher premi-
ums are charged on sport cars than on family cars which are
not used for car racing.

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 The value of the vehicle – A new car stolen or damaged

would require more money to repeal than an old car. There-
fore higher premiums are paid on new cars than old ones.
 The number of people using the vehicle premiums are lower
when the motor insurance required is meant to cover one
driver. Higher premiums are charged where the vehicle is
used by many drivers.
 Occupation of the user. The size of premium for a teacher
driver, for example may be less than that of sales person
when is always travelling across the country selling goods.
A teacher is found in class most of the day and is therefore
less likely to cause accidents. Female drivers are usually
better drivers than male drivers and so less premiums for
ladies than gentlemen.

(b) Employer’s Liability Insurance

 This class of accident insurance provides compensation of
employees for deaths, diseases etc
 . Suffered whilst at work
 or as a result of the employer’s negligence
 for example a shutter in Zambia Railways may lose both
legs in an accident while on duty.
 If employer’s liability insurance was taken by Zambia
Railways, then the insurance company would compensate
the injured employee
 without employer’s liability, the employer might not be
able to continue if a substantial claim was made as all the

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money of the company can just be used to pay compensa-

tion to the employee.

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

Examples
(i) A minibus owner may insure his/her minibus against the
possibility of accident happening to members of the pub-
lic whilst travelling on the bus.
(ii) A manufacturer may insure against claims for death or injur-
ies resulting from the use his/her product e.g. a meat pie
manufacturer can insure against the possibility of poison-
ing to members of the public after eating the meat pie.

The money that may be required in compensating injured

members of the public might amount to a billions of
Kwacha. A business without a public liability insurance may
not be able to continue carrying out its business activities if
large claims for deaths or injuries is made on it by members
of the public. It is important therefore that a business takes
up a public liability insurance so that claims made by mem-
bers of the public for injury or deaths are not by insurance
companies. This would leave the operation of the business
unaffected.
(d) Fidelity guarantee Insurance policy

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This class of insurance provides to employing for money or

goods embezzled (stolen) by employees. Company employees
who handle large sums of money such as accountants take Fi-
delity Guarantee insurance and pay premiums. The benefits of
the insurance guarantee policy are however, paid to the em-
ployee when an employee is convicted in a court of law of hav-
ing had stolen goods or cash.

(e) Credit Insurance

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

(f) Theft Insurance

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

(g) Air travel insurance

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

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

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(a) Hull Insurance

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

(b) Cargo Insurance

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

(c) Ship Owners Liability Insurance

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

(d) Freight Insurance

Freight is the sum of money paid to the shop owners whose
shop was hired for the
transportation of goods.
At certain times, freight is not paid in advance until the goods
reach their final destination.

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Freight insurance therefore, covers ship owners against the

possibility of not being paid freight or hire money by clients who
do not pay transport charges in advance.
(e) Sellers interest insurance
Where goods are sent to a buyer in a foreign country and the
buyer refuses to accept delivery of these goods possibly be-
cause he/she is bankrupt, the seller’s interest insurance would
cover the goods while arrangement are being made to sell
them for the best price possible. Compensation is paid to the
seller if the goods are stolen or damaged in anyway before they
are sold.

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

(b) Time policy

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

(c) Mixed policy

Mixed policy requires that a sum of money agreed upon
between the person seeking insurance cover and the in-

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surer is deposited with under risks so that each time a ship

makes a journey the premium is deducted from the amount de-
posited with underwriters. Floating policies are appropriate
where regular shipments of goods are made. They save time
and troubles of taking out separate insurance policies for each
trip made.

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

Particular average refers to any form of cars or injury that may

be suffered whilst the ship or goods are in transit. The losses
suffered may be complete or partial loss but it should be as re-
sult of the risks insured against.
COMMUNICATIONS

Communication is an aid to trade concerned with informing people

on goods and services available, and enabling businesses and indi-
viduals to be in contact with other businesses and relations within
the country and abroad.

Importance of Communications
 provides business people with efficient means of contact
within the business organization
 e.g. communication between the branches of an organization,
or between departments etc.

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 informs the public on goods and services available on mar-

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

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Types of Communication services

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

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

1) Business reply service

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

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2) Poste restante

Poste restante is a postal service provided for visitors and travellers

to town or city where they do not have a permanent address. Let-
ters, of a town from where the letters are collected. For example,
Miss Maambo Phiri, a visitor with no permanent address to Living-
stone city can have her letters addressed as follows

Stamp

Miss Maambo Phiri

Livingstone main post of-
fice
Poste restante
LIVINGSTONE.

In the above example, Miss Lubasi who is expecting to receive

letters from friends, relatives etc. by poste restante service
would be checking for her poste restante letters at Livingstone Main
post office.

3) Data post
Data post is a postal service that provides a speedy, secure and
highly reliable means of sending and delivering urgent and import-
ant packages containing business documents and goods. It’s par-
ticularly useful for exchange of computer materials such as tapes,
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diskettes etc. Data post offers overnight door-to-door delivery of

packages or parcels handed in at post offices counter displaying
data post sign. Packages are given special security treatment.
Data post is operated both locally and internally.

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

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

Upon delivery of a registered article, signature of the person re-
ceiving the item is obtained as proof of delivery.

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

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

6) Cash on delivery (COD)

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A cash on delivery service requires the customer to pay the trade

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

7) Express mail service

Express Mail service is fast and safe. It is used for sending import-
ant and urgent documents. It enables quick sorting and delivery of
mail in return for extra fee from post office customers.
Mail is personally accepted at post office and delivered to the des-
tination. Parcels up to a certain size and weight are delivered
the same day of posting by special messengers. Individuals may
use this service to send special gifts to friends and relations e.g.
birthday presents etc.

8) Private bags
Private bags are used for posting and receiving letters. There are
two keys to a bag. One is kept at the post office another is kept by
the owner of the bag. When letters are locked in the mail bag at
the post office, they can not be removed until the owner opens

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the bag at his or her own place of work. Therefore, private bags
provide more security to letters than post office boxes.

9) Post Office Boxes

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

10) Franking Machine

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

11) Philately
This postal services is concerned with issuing of postal stamps and
historical items of the post office. Philately produces such as post-
age stamps, neckties etc depicting postal services are sold at the
post office.

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There are several more postal services provided by the post office.

The continuing need for postal services

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

 Postal services are usually cheaper than telecommunication

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

B. Telecommunication services
Telecommunication services that are use by people engaged in
commerce include telephones, telegrams, telex, electronic
mail, internet, fax, radio paging, radio messages etc.

1) Telephone

Telephone provides people engaged in commerce with speedy

means of contacting other business people over any distance either
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within the country or abroad. The circumstances in which a tele-

phone may be used include:

 When a customer wishes to inform his or her supplier that he

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

Importance of a telephone to people engaged in commerce

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

A discussion or conversation to clear the problem or seek ad-

vice or take other orders may take place on telephone between
the supplier and his or her customer.

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The problems to people engaged in commerce

a) A telephone does not provide a written confirmation of the con-

versation. Therefore contracts made on telephones are risky be-
cause they may be disputed later.
b) A telephone is not reliable for messages that are highly tech-
nical and complicated in nature. For example it may not be ad-
visable for trader to place for an urgent order for a spare part for a
complicated piece of equipment using a telephone.
c) Communication can prove difficult for telephone users who do
not understand each other’s language.
Telephone services of commercial value to business people.
These include:
 Personal calls: - A person call is a telephone call that spe-
cifies a person to whom the caller wishes to speak
 Local call: -A local call is a telephone call to another tele-
phone number within the same area or within the same tele-
phone exchange
 Trunk call: -Trunk means long distance calls. A trunk call is
another distant exchange.
 International calls: -An international call is a call from one
country to another country e.g. A telephone call
from Botswana to Zambia.
 Transfer Charge Calls: -A transfer charge telephone service
enables telephone subscriber provided he or she agrees to pay
for the telephone call before it is made.
 There are many more telephone services available for busi-
nessmen and individuals.

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

The circumstances in which a teleprinter may be used in-

clude: -
 When sending highly technical and complicated messages e.g.
when a customer
 wishes to place foe an urgent order for a spare part of a com-
plicated piece of equipment.
 When written confirmation of the message is required e.g.
When sending a quotation, letter of query, invoice, statement
of account etc.
Importance of a telex to people engaged in commerce
 Messages may be printed on a teleprinter even when offices
are closed.
 Messages requiring written confirmation may be sent by telex
 Messages of highly technical and complicated may be sent by
telex
 Telex can be used to send computer data

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 Telex offers a twenty-four service and therefore message can

be received even when offices are closed because the record-
ing of message is automatic.
 Foreign languages can easily be translated
 Telex provide instant written messages.

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

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 Fax transmission may be useful to lawyers who may need ex-

act copies of text, signatures, documents etc, needed in
settling court cases.

4) Telegrams

A telegram is a telecommunication service that provides business

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

The use of electronic mail has reduced the use of telegrams service.

5) Confravision (or video conferencing)

Confravission is a communication service that links a group of
people in distance studio location by sound and vision. Confravi-
sion enables people separated by long distances to hold confer-
ences. One of the requirements for holding a confravision is for
people to be at a local television station.
For example, a group of people in Kitwe, Zambia, can hold a con-
ference by confravision with one group in UK. The group in Kitwe
would go to a local radio station and the one in UK would do the
same. The two groups will then be able to exchange ideas on vari-
ous issues.

6) Electronic mail
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Electronic mail is a way of sending messages electronically via the

telephone line without the need to post letters.

The person sending a message by electronic mail first prepares his

or her information on a microcomputer. He or she then transmits
the message via a telephone network to a central computer. The
person receiving that message has to use another microcomputer
and a telephone in order to get the message from the central com-
puter.

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

Advantages of Electronic Mail

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

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

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8) View data

View data is a telecommunication service that enables a person to

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

The most important characteristic of view data service therefore is

that it enables view data customers to send and receive informa-
tion.

The importance of view data to people who are engaged in com-

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

10) Radio Message

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Radios can be used to send urgent radio messages. For example,

the owner of OBO ship who wish to divert his ship from the original
destination because of a local political crisis would communicate his
message to the ship master by radio

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

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

12) Computers
Computers are used for storing and providing of information.
Information in a particular topic can be produced on a visual display
unit (VDU) that is like a television screen within seconds. Com-
puters are used in all fields such as construction, medicine, the law,

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science, economics, accountancy, and commerce. Sooner or later

there will be no office without a computer.

The benefits of a computer include: -

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

ADVERTISING.

INTRODUCTION
Advertising is a French word which means “bring to notice”. Goods
and services produced must be made known or be brought to the
attention of the general public, thereby promoting and maintaining
the manufacturers’ market for the products.
What is the purpose of advertising?

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Aims of Advertising
 to increase the sales
 to widen/increase the market
 to maintain the good will of the business/favourable image
of the business
 to educate the general public on the new and existing
products
 to inform the general public on the nature of the goods and
where the good are found and at what price.
 to introduce or launch new products on the market
 to persuade the general public to buy the product or change
their brand
 to keep/maintain the brand name in the minds of the public
 to sustain or create demand for the product
 Remain competitive
 Achieve market penetration
 Increase market shares

Other purposes for which advertising might be used for

apart from increasing sales
- making announcements in the change of business premises
- death of an employee/termination of employment
- warning customers of a faulty product/withdrawal of a product
- calling for an Annual General Meeting
- Declaration of dividends paid and financial statement
- To make government announcements such as national insur-
ance rates or change of the school calendar by the Ministry
of Education and new tax charges.

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- To make public announcements such as legal and company no-

tices and announcements to public by Zesco of mass electricity dis-
connections and load shedding
- Advertise national campaigns e.g. road safety, health campaign
against HIV/Aids.
- To advertise new jobs and vacancies
- To announce births, deaths, marriages, charity appeals, lost
and found property etc.

How Advertising help companies to maintain and increase

sales
 Advertising helps a company to maintain and increase its sales
by
 informing customers or traders of new goods
 Reminding them of the existing goods.
 Persuading them to purchase the goods
 Inducing customers to change brands
 Using various methods of appeal
 Informing customers where goods are available and what price
 Possibly by reducing prices of goods to customers
METHODS OF APPEAL
Advertising must be effective to reach the intended people and it
must be appealing to them, and cost less in relation to the anticip-
ated sales. To achieve this, the following method of appeal must be
used:

Personality

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famous people may be shown using a product in the advertisement

such as Dr Kenneth Kaunda and Cherise to give the product/service
an acceptable image (Colgate and Ditto)

Ambition for success

The advertisement suggests that the use will be successful in his/
her ambition such as Milo drink and Muzi High School
Work Simplification
The product is shown in the advertisement to simplify work per-
formance such as computers and cell phones
Social Acceptability
The product is claimed to make the user more acceptable to other
people
Health
The product is claimed to make the user more healthier such as life-
buoy and protex
Display of goods
Attractive display of goods on windows and shelves may be used to
win the consumer’s minds.
Excellence
The advertisement suggests that the services offered are of high
quality such as Palmodzi Hotel and Lake Road PTA School
Comedy
comedians may be used so that the advert can easily be re-
membered and the product will easily be bought, such as Bikilon
and Difficult.
Romance

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The advertisement suggests that the user of the product will be

more attractive to the opposite sex, eg Fair and lovely cream, Ro-
mance soap and Geisha

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

B. Persuasive Advertising
 This tries to induce the consumer to buy, by the use of certain
key words, models or ideas
 It aims to create in the mind of the consumer pleasant associ-
ation with product
 For example the use of female models to advertise cars and
tobacco makes appear that buying such goods the consumer
will be able to attract the opposite sex.
 It can be instructional or product oriented

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 Also the advertiser may use a good personality so that there is

the implication that if you buy it you will be as successful as
the famous person advertising it.
 Advertising slogans are usually used to persuade the public to
buy.

Dangers of Persuasive advertising

 It emphases only on the good point of the product, that is it
does not mention the bad side of the product
 It makes people to live beyond their means(extravagant)
 May promote dangerous and harmful products
 It contributes to the lowering of moral standards in the society
 It may go to extremes
 It may be indecent
 It encourages impulse buying
 May mislead or deceive customers

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

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 may be cheaper as cost is spread between several producers

 should increase overall demand for product
 allows competitors to group together for mutual support

Why many companies who use collective advertising find it

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

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

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 may be harmful/emphasises on good points of product only

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

What are the Benefits (Advantages) of Advertising to the

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

What are the benefits (Advantages) of Advertising to the

consumer?
Advantages to consumers:
 They are informed of goods services where they are found of
which they might otherwise not be aware and at what price..
 Especially new products

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 It allows them to choose from a wide range of goods brought

to their notice
 And may improve standards of living for may of the consumers
 It informs them of when, where, price, quantity , size and
brand.
 Competition between manufacturers may lower prices improve
quality of goods and services.
 Advertising revenues subsidizes the prices/cost for newspa-
pers, entertainment, magazines and other forms of media.
 It informs consumers of events, weddings, fairs, and air time
tables.
 Introduced to new products
 Allows for a more choice form a wide range of goods
 Encourages competition between forms – lowers prices/ prices
 Allow for the spread of government information
 Local notices e.g births, marriages, deaths
 Local events notices.

What are the dangers (disadvantages) of Advertising to con-

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

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 Sometimes makes false claims by publicizing only the better

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

What are the dangers (disadvantages) of Advertising to the

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

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How can a manufacturer of breakfast cereal whose products

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

Why it is necessary to control advertise standards or pro-

tect consumers from some forms of advertising?
 Advertisers may attempt to mislead or deceive customers in
an effort to improve sales.
 And may make untrue statements/false
 Some advertising may undermine social standards.

What is a code of Advertising Practice?

 it is a voluntary agreement
 Set- up by the advertisers themselves
 To establish professional standards

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 By which the public are protected

 From dishonest or misleading advertising
 The basis of the code is that all adverts should be legal, de-
cent, honest and truthful.
 And should be prepared with the sense of responsibility to
both the consumer and the advertising industry in general.

What is the purpose of a code of advertising practice?

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

How may such protection be given?

- Protection is given by:-
 A code of Advertising Practice Administered by Advertising
standards Authority
 By law
 The Government
 The Law
 The law has some control over advertising
 The Trade Description Act 1968, the Misrepresentation Act
1967 and the Theft Act 1968 provide some control over un-
truthfulness in advertising.
The Government
May also place control on advertising

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For example, it places a Government health warning on all cigar-

ettes packets sold, like tobacco is harmful for your health

What are Advertising Agencies?

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

Why are most National Advertising Campaigns undertaken

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

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

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

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 What profits are expected from the sale of the product (cost of
advertising must be covered)?

1. National/National Press and Local Newspapers

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

Advantages of Newspaper advertisement

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

Disadvantages of Newspaper advertisements

 they are perishable, as a result advertisements have short life
because very few people keep newspapers for future reference
and they may be used by traders for wrapping things.
 Poor quality of print may reduce the effectiveness of the ad-
verts

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 Newspaper advertisements are not accessible to illiterate

people
 They may not be taken very serious by some readers.

2. Magazines e.g Women’s magazines

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

Advantages of magazines for advertising

 they offer targeted advertising
 they are aimed at a specific class of people who are expected
to buy the product, for example, breakfast cereals in the wo-
men’s magazines is appropriate as it would target the women.
 They may also be seen by many readers other than the person
who bought it
 The advert can be illustrated in a colourful way and on good
quality paper to create aspiration
 Special coupon offers can be made
 They have a long term impact as they can be kept and re-
ferred to later
 It is cheaper to advertise in magazines than television
Disadvantages of magazine advertising

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 they are relatively more expensive than, henceforth, they are

not as widely read as newspapers, as a result they reach fewer
people
 they may have a limited readership
 they appeal only to a certain class of people

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

Advantages of television advertising

 it combines visual impact with sound, so it is very
effective(lasting impression – sound and vision)
 it gives the widest coverage(massive coverage)
 it can be seen by many viewers especially at peak hours
 it can be shown at the right time for the right audience(time
selectivity, that is can be shown at specific time)
 it reaches people’s homes when they are relaxing, so it can
create an aspiration
 can be booked at peak hours, eg. News time
 the advert can be repeatedly be shown
Disadvantage of television advertisements

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

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

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 it has a lasting impression through catchy tune or jingle

Disadvantage of radio advertisements

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

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

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

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

8. Leaflets/Hand Bills
Can be handed out by advertisers

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Normally done by local advertisers such as by a hairdressing salon

showing reduced prices
May be cheaper than either television or Magazines
Not permanent

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

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

11. Illuminated Signs

These are frequently found on premises near busy centres.

12. Trade Journal

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

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13 Trade exhibition/fare

Advantages of Trade Fare

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

Disadvantages of Trade Fares

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

BUSINESS UNITS
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By Business Units we mean the way businesses are owned and op-
erated. These are determined by the way they raise their capital,
ownership, control and objectives. Zambia is a mixed economy,
this means that it has both privately owned businesses (the private
sector) and state owned industries (the public sector).
The following are the various types of business units
1. Sole trader
2. Partnership
3. Private Limited Company
4. Public Limited Company
5. Public Corporation
6. Co-operative
7. Holding company
1. Sole Trader
CHARACTERISTICS OF A SOLE TRADER
- It is owned and contrlled by one person
- Owner raises the capital to operate the business from personal
savings or from borrowing from relatives of friends.
- This is therefore a difficult way to raising capital
- The owner manages the business without assistance from his
employees
- He can therefore make any independent decisions and
changes any time he wants to.
- All the profits go to him (sole proprietor) and has to bear all
the risks or losses.

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- There is no legal distinction between personal property or the

owner or the business and the assets of the business(has no
separate legal entity).
- As a result in such a business the owner has unlimited liability
- Meaning that if the business owes money to a lot of people
such that money from the business can not be enough to re-
pay, the can go to the extent of selling the personal property
in order to recover the money.
- The sole proprietor does not pay company tax but personal in-
come tax.
- It lacks continuity as the business dies with the owner
- Has great flexibility when it comes to decision making
- The owner enjoys all the profits alone
- He provides personal service to her/his clients
- s/he needs little documentation to start the operation of the
business
- does not need to communicate or inform the general public on
the operations of the business

Advantages of a Sole Trader

- No sharing of profits because all profits go to her/him.
- The owner makes independent decisions(has great flexibility)
- He does not pay company tax but only personal income tax
- It is easy to establish such business as there are less formali-
ties required to set up the business
- It is easy to organize and manage because the owner does not
need to consult anyone in making decisions.

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- The owners of the business give personal attention to cus-

tomers.
- Needs less documentation to start the business
- Able to supervise (if any) staff closely

Disadvantages of Sole Trader

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

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

Partnership deed
This written agreement is known as a partnership deed and it
staes the following:

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- The names of the partners

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

Types of Partnership
- the two types of partners are

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

Limited Partnership

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- The type of partnership in which some of the Partners have

limited liability
- This means that the liability or the limited partners is only con-
fined to the amount they have invested in the business.
- However he doesn’t share in the profits
- Although in a limited partnership there must be at least one
general partner whose liabilities is unlimited.
- A limited partnership must not be registered with the register
of the companies

Differences between Ordinary and limited Partnership

- In an ordinary partnership all partners have unlimited liability
where as in limited partnership some partners have limited lia-
bility
- The limited partner do not have the final voice in the Manage-
ment of business though they share in the pofits where as in
an ordinary partnership all the partners take part in the man-
agement of the business.

Types of Partners
- There are three types of partners

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

Sleeping Partner

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

Nominal Partner
- This is a type of partner who allows his name to be used in the
business but does not contribute money towards the capital
neither does he participate in the sharing of the profits.
Characteristics/features of partnership
- Its has two partners and maximumof 20 membersexcept for
professional partnerships who are allowed to be more that
twenty
- A partnership is based on a partnership deed.
- A partnership is not a separate legal entity
- Partner usually have unlimited liability
- Controlled and owned by partners
- A partnership ceases on the death of a member(lacks continu-
ity)
- Easy to set up because they are few documentations e.g. part-
nership deed.
- Accounts of partnership are not made public (they are private)
- Capital is raised through the contributions from the partners

The Advantages of changing from a Sole Trader to a Part-

nership
- They will have more capital than that of a sole trader.
- Partners are able to raise additional capital more easily.

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- The business benefits from the expertise of both/all the part-

ners e.g. one may be an accountant and the other a marketer
- There will be division of labour between/among the partners
- The partners can consult each other (sharing of ideas) in solv-
ing problems.
- The overhead expenses may be saved by closing one shop or
premises and concentrate on one side.
- Additional savings may be made because duplication of ad-
vertising will be avoided.
- There is better utilisation of capital

Disadvantages with the Partnership type of Business

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

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SIMILARITIES BETWEEN THE SOLE TRADER AND THE PART-

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

DIFFERENCES BETWEEN THE SOLE TRADER AND THE PART-

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

JOINT STOCK COMPANIES

- These are a types of business where the owners have limited
liability i.e. their liability is limited to the amount inversed in
the business.
- The owners of limited companies are called share holders be-
cause they buy shares

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- The capital of limited companies is divided into shares and it is

known as share capital.
- Shareholders elect board of directors who control the business.
- The board of directors appoints managing director who is re-
sponsible for day to day running of the business.
- The board of directors appoints managing director who is re-
sponsible for day to day running of the business.
- The share holder have little say or powers in the general run-
ning of the company except that they have a role at the An-
nual General Meeting (A.G.M.)
- the shareholders have limited liability,
- limited companies have separate legal entity from its owners

Procedure in the formation of companies

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

1. MEMORANDUM OF ASSOCIATION
- This is an application to the registrar of companies that a com-
pany may be formed by promoters of the companies. It
relates to the external affairs of the business
- This memorandum is given to the registrar of companies be-
fore a company is incorporated
- It states the following:
- The name of the company with the word Ltd or plc after its
name
- The objective (aim) for which a company is established.

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- The address where the registered company will be situated

(Headquarters)
- The statement that the liability of shareholders is limited.
- The amount of capital showing its divisions (shares)
- A statement whether it is private or public
- The number of shares to be taken by each of the Directors.

Reasons for including these items

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

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

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- the rights of shareholders

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

3. Certificate of incorporation
- It is a confirmation by the registrar of companies that a com-
pany can start trading
- It recognizes the company as a separate legal body
- But a public limited company must first issue the prospectus.
- The certificate or incorporation contains the following informa-
tion:
(a) The name of the company and its registered number
(b)A statement that it has been registered in accordance with
the law.
(c) The signature of the registrar.
4. Prospectus

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- it is an invitation to the public to come and subscribe/buy

shares.
- It gives details of the shares of the company and the price at
which they are offered.
- It also provides details of the company’s past result (history)
as well as as future prospects.
- In other word the prosectus is an advertisement
- The registrar will then issue the certificate of trading so that
the public limited company can start its operations.

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

The two types of limited companies are:

1. Private limited company

2. Public limited company

Characteristic of Private Limited Company

- owners are share holders
- Minimum of two share holders but no maximum number
- It has a separate legal existence from its shareholders
- Shareholders have limited liability i.e. can only lose amount
paid for shares
- It must be registered with the registrar of companies.

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- Many legal requirements to set up a private limited company

e.g. memorandum of association and articles of association
have to be submitted to the registrar of companies.
- a private limited company does not need a certificate of trad-
ing to start operating
- Profits are distributed to share holders as dividends
- Managed by board of directors who are elected by sharehold-
ers
- Board of directors appoints the managing director who is re-
sponsible for the day to day running of the business.
- Capital is raised through Sale of shares
- shares for a private limited company cannot be offered for sale
to the general public i.e. they cannot be quoted at the stock
exchange.
- More capital and borrowing capacity
- There is continuity of business even when one share holder
dies
- Private limited company has LTD after its name
- Accounts are filled with the registrar of companies and are not
published
- The capital and ownership of a private limited company is di-
vided into shares

The Characteristics of Business Units can be summarized as

follows:
- ownership
- capital raised
- control

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- profits
- formation
- relationship (unlimited and limited liability)

Characteristics of Public Limited Company

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

Advantages of a public Limited Company

- All the shareholders have limited liability

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- It has greater borrowing capacity as banks are more willing to

lend money to large businesses
- It has greater continuity as the business continues despite the
death of a shareholder
- It has separate legal entity from its shareholders
- Shares are quoted on the stock exchange hence greater pos-
sibility of raising capital
- They enjoy economies of scale
- It is able to merger or takeover or acquire other businesses

Disadvantages of a Public Limited Company

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

Explanation of the following terms:

Public

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- The general public is invited to buy shares through the pro-

spectors i.e. open to the public.
- And the information regarding the company is made available
to the member of the public.

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

A Separate Legal Entity

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

Board of Directors
- These are leaders of the company.
- They control the business
- They are elected by shareholders at the Annual General Meet-
ing
- They appoint the managing director who is in charge of day to
day running of the business

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- They recommend the rate of divindeds p[ayable to sharehold-

ers

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

AnnualGeneral Meeting
- A meeting held yearly by shareholders of the company.
- At this meeting, Board of Directors gives financial report and
other reports.
- At this meeting accounts of a company are approved nd board
of directors are elected.
- The aims of electing the Board of Directors are as follows
(a) Approve the audited accunts presented by the managing
Director
(b)Elect Board of Directors
(c) Receive the Directors reports
(d)Discuss the affairs of the company
(e) Deal with issues that could not be sealed by the Board of
Directors

Share Capital of the Limited Company

- A share is a unit of capital.
- The capital of a limited company is divided into small units
called shares
- As such the capital of a limited company is known as share
capital

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- There are three types of share capital.

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

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

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

Cumulative Preference Shares

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

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added together to form payment to cumulative preference

shares.

Redeemable Preference Shares

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

The Difference Between Preference and Ordinary Shares

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

What are the sources of finance for public company

1. Debentures
- These are a long term loam to a company which receive a
fixed rate of interest

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- This fixed rate of interest is payable to debenture holders

whether profits are made or not.
- Debenturs holders are creditors to a company
- They have no voting rghts because they are not shares and
have no say in the controlling at the business
- And usually they may have to be secured against assets.
- Debenture holders can force the company into liquidation take
over and sell the business if the company fails to pay interest
or repay capital.

Differences between a share and a Debenture

- Shares represent ownership of a company and receive a divi-
dent out of profit
- Debentures represent a loan to a company and receives inter-
est at a fixed rate whether a company makes a profit or not.
- Debenture holders have no voting rights while some share-
holders have voting rights.
- Shareholders are owners of the compay while debenturehold-
ers are creditors of the company

Loans from commercial Banks (see notes on banking)

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

Overdrafts (see notes on banking)

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

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Share issue/RIGHT ISSUE

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

Ploughing Back the Profits

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

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 retained profit can be used to repair company machinery or

buildings

Trade credit might be used as a source of finance for the

firm by:
- by allowing the firm to purchase goods without immedi-
ate payment for them.
- by allowing the firm to sell goods at increased price be-
fore payment.
- by allowing the firm to pay for goods from the sales rev-
enue.

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

Differences between Public limited Company and Private

limited Company
- A private limited company is open only to private individual
whiles a public limited is open to the public to buy shares
- In a private limited company shares are not freely transferred
whilst in a public limited company shares are freely transfer-
able at the stock exchange market where the buying and sell-
ing of shares takes place
- It is easy to from a private limited company because formali-
ties are less whilst it is harder and more costly to form a public
limited company because they are more formalities in setting
it up.

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- A Public limited company can raise more capital whilst in a pri-

vate limited company the number of shareholders restricts its
capital.
- A Private Limited Company can start trading as soon as it is in-
corporated but a Public Limited Company must wait for the
Certificate of Trading which is given after the norminal capital
has been raised

Similarities between a Private Limited Company and Pub-

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

Why may a private limited Company not wish to become

public
- Cost in time and money in the formation of a plc e.g. stock Ex-
change quotation.

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- Publication of accounts: simplify files accounts with the regis-

trar of companies.
- Public companies may be easilysubject to take over by the
government by obtaining 51% of shares.

Difference between a private limited Company and a Part-

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

Advantages of a private limited company

- a private limited company has greater continuity on the
death of a shareholder
- more capital is available and have borrowing capacity

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- It confers limited liability for all the shareholders

- It is a separate legal entity
- Shareholders are protected from malpractices and fraud
due to some formalities required
- They are not easily subjected to takeovers
- They do not publicise their information

Disadvantages of Private Limited Company

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

Multinational Companies
These are enterprises which have subsidiaries or branches in many
countries. They are usually Public Limited Company. Examples in-
cludes shoprite, BP (Z) Plc, CocaCola Bottlers, First Quantum Miner-
als (FQM) Plc, Unilever South East Africa, PEP Stores, Shoprite
checkers etc. They provide employment to the host government

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and they are a source of income to the host government, hence

they are welcome by most of the countries. Their decision making
is controlled by the head office where the parent company is and
implement to all the subsidiaries.

Advantages of Multinational Companies

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

Disadvantages of Multinational Companies

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

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

Characteristics of a Public Corporation

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

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Difference Between a Public Corporation and a Public

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

ADVANTAGES (arguments for) setting up a Public Corpora-

tion
- the government can control the provision of essential or
strategic goods and services such as electricity
- they are usually big, so they enjoy the economies of
scale which results in cheaper goods and services

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- they provide secure employment to a large number of

the local people
- they help to implement government policies such as on
prices of essential goods an services
- they provide comprehensive services such as health, ed-
ucation and energy
- they are a source of income to the government, thereby
helping to reduce tax
- they reduce duplication of employment and necessary
wastage of resources

Disadvantages (Arguments against) setting public

co-operations
- they can be inefficient and wasteful
- because of their monopolistic nature, they tend to pro-
vide poor quality of goods and services
- all loses made by public corporations are to be borne by
the tax payers
- the “I do not care” attitude dampens the enthusiasm of
workers
- they are too expensive to run and over stretches the tax
payers money
- lack of initiative amongst workers leads to inefficiency
- workers do not usually identify themselves with the en-
terprise
- there is too much bureaucracy and red tape in decision
making

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- they are highly subsidised by the government to keep

them afloat
- some politicians have little commercial expertise or ex-
perience to run businesses along efficient lines.

The Finance of Business Units

A. The Trader’s Capital

The money invested in abusiness is called its capital. It

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

1. Fixed Capital

Fixed capital is the money usd to buy fixed assets i.e.

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

2. Working Capital
Working capital is the money which a business must
have available to meet its day to day expenses such as
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paying workers’ salaries, buying raw materials or stock,

paying water, electricity and telephone bills, and so on.
It also includes money owed to the business by cus-
tomers and balance (as well as cash in the till). Work-
ing capital is, in fact, th amount by which current as-
sets exceed current liabilities. It can be calculated by
the formula:

Working Capital = Current Assets – Current Liability.

The word current here means short term. That is to

say, the assets and liabilities are constantly changing,
for example cash, stock of goods and or raw materials,
and the like.

(a) Working capital can be increased in the following

ways:

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

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

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(b) Working capital can be reduced by the following

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

Adequate working capital is important because it is

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

3. Capital owned

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

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

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

B. Sources of Capital to a Trader

The sole trader and perhaps a partnership will raise

capital from personal savings, borrowing from commer-
cial banks as well as from friends and relatives. A lim-
ited company, especially a public limited company,
however, has many more sources of capital some of
which are given below.

1. The sale of shares

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

2. Debentures

These are not shares but long-term loans given to the

company by the investing public. They may have to be
secured against some assets. A company wishing to
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raise extra capital can borrow money from the public

and issue them with stock certificates showing the
loans. What this means is that the company sells
debentures. They may be issued for a fixed number of
years after which they are redeemed.

It should be made clear that debentures are loans for

which a fixed rate of interest is paid (to debenture hold-
ers) whether the company makes a profit or not. If
the company should be liquidated, debenture holders
are repaid first before the shareholders can get any-
thing. Debentures are, thefore, a safer means of in-
vesting in a company and can bring assured returns if
they are issued by profitable companies.

3. Loans

The traditional way of raising capital is by applying for

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

4. Overdrafts

These are givnen on a current account to help the com-

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

After spwnding large sums in establishing the capital

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

5. Ploughing back profits

When a company makes a good profit, it may decide

not to distribute all of it to the shareholders and instead
retain some of it and reinvest it to expand the business.
The company can also keep some of its profit as a re-
serve to cater for emergency or difficult times.

6. Trade credit

A retailer who has little working capital can approach

the supplier and obtain stock on short term credit. Get-
ting supplies on credit means the retailer takes the
goods and pays for them a few weeks later after selling
them. This helps to increase the retailers’ working cap-
ital, as the goods would be paid for from the sales rev-
enue generated.

7. Leasing or renting equipment

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Leasing enables a company to acquire up-to-date

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

8. Factoring

This enables a company to sell goods to customers on

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

9. Government grants and loans

Another sources of capital to a business is the grants

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

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10. Mortgaging property

Mortgaging refers to getting a loan from a financial in-

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

11. Hire purchase

Buying vehicles or equipment on hire purchase or

credit can also relieve the company of financial prob-
lems. The firm will pay a deposit and get the goods
and then pay the balance outstanding by monthly in-
stalments over a period of 2 to 5 years. The advantage
here is that the company spreads the costs of the item
over a numbr of years hence lessens the financial bur-
den.

Factors to consider before choosing a method of

financing

There are many reasons why a firm may need addi-

tional capital. It could be to finance it expansion or to
upgrade or modernise its operations. But, whatever
the reason, before a business chooses which method to
use to finance its projects the following factors need be
considered.

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

C. THE CAPITAL OF A LIMITED COMPANY

The capital of a limited company is raised by selling

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

Authorised capital

Shares Deben-

Ordinary Prefer- Naked Redeemable Mortgaged Irredeem-

shares ence deben- able
shares tures 198
 Page 199 of 89

The capital of a limited company

1. What are shares?

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

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

1. What are shares?

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

a person buy share in a company he/she is given a
share certificate showing the number, value and type
of share he/she owns. He/she then becomes a share-
holder, in fact, a part-owner of the company. This is
because limited companies are owned by shareholders.
Buying a share I a company is an investment the re-
ward of which is a dividend or share of any profits
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made by the company. The market where shares are

bought and sold is known as the stock exchange.

(a) Types of shares

In general there are two types of shares namely, ordi-

nary shares and preference shares.

(i) Ordinary shares

These are shares which receive variable rates of divi-

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

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(ii) Preference shares

These are shares which receive dividend before the or-

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

 Cumulative preference shares These prefer-

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

 Non cumulative preferenceshares These type of

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

 Redeemable preference shares

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These are shares which will be bought back by the

company at a later date, either out of accumulated
profits from the money got from a fresh sale of shares.
They are usually used to help start a company.

 Participation preference shares

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

Differences between ordinary and preference

shares
There are three main diffferences between ordinary
and preference shares.
 Firstly, preference shares receive a dividend before
ordinary shares, usually at a fixed percentage and
the shares may be cumulative, participating or non-
commutative. Ordinary shares receive a variable
rate of dividend, dependent upon the amount of
profits made. (This means the more profits the com-
pany makes the more individend the ordinary share-
holders are paid and vice versa).
 Secondly, ordinary shares have voting rights so their
holders are the ones who control the company.
Preference shares, on the other hand, have no vot-
ing rights because their holders are assured of their

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fixed rate of dividend one way or the other.

 Lastly, ordinary shares are a more risky form of in-
vestment than preference shares. They only get
dividend after the preference shareholders have al-
ready got, and in bad years when little profits are
made they get nothing at all.

2. Debentures

When a company wants to raise additional capital it

can ussue debentures. A debenture is a loan given to a
company on which a fixed rate of interest must be paid
whether the company makes a profit or not. It is noth-
ing other than a ceritificate showing the amount of
money lent to the company and the interest that must
be paid on it. In case the company is liquidated,
debenture holders must be paid before any of the
shareholders are. The main features of debentures are
that:

 They are long term loans to the company;

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

(a) Types of debentures

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Debentures may be classisfied in two ways:

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

 Naked debentures are the ones issued without

any property or security pledged against them.
They are not very secure.

 Mortgaged debentures have some property

pledged against them. They are more secure and if
the company is liquidated, the proceeds of the sale
of the pledged property are used to pay off the hold-
ers.

(ii) According to redemption, they may be redeemable

or irredeemable.

 Redeemable debentures are usually issued for a

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

 Irredeemable debentures can never be bought

back. The money borrowed against them remains
outstanding until the company is liquidated. The
holders of irredeemable debentures keep getting in-

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terest against their debentures indefinitely.

(b) Differences between debentures and shares
Debentures and shares are fundamentally very differ-
ent.

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

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

E. Business Calaculations

Every firm needs to keep a detailed and accurate

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record of:

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

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

Proper and accurate record is particularly essential:

 if the firm is to calculate and make available to own-

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

1. Profits

Profti is the reward for doing business. The business

person takes the risk of manufactuirn something or pro-
viding some service so as to get profit. The profitability
of a business can be looked at from the point of view of

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either gross profit or net profit.

(a) Gross profits

Gross profit is the differences between the cost of

goods sold and the proceeds from their sale. Put sim-
ply, gross profit is selling price minus cost price.
Gross profit is not the true profit since the expenses in-
curred in selling the goods have not been taken into ac-
count. It is calculated as:

Gross profit = Turnover minus Cost of goods sold.

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

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

The price at which the trader bought the bicycle is

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

Gross Profit, GP = Selling Price – Cost Price

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

(b) Net Profit

This is the true profit obtained from trading. (In other

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words, it is the real reqard of the trader). It is the

amount left after allowances have been made for all
expenses such as rent, salaries, storage, insurance, wa-
ter, telephone and electricity bills, advertising, trans-
port etc. Net profit is very important since it

 enables the trader to know the actual benefit of

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

Net profit is calculated as follows:

Net Profit = Gross profit (plus other incomes) minus Ex-
penses.

In our example above, suppose all the expenses

amount to P15, the net profit would then be calculated
as follows:

Net Profit = Gross Profit – Expenses

i.e. P45 – P15 = P30.

When gross profit is expressed as a percentage of cost

price it is called profit mark-up but when it is ex-
pressed as a percentage of selling price it is called

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profit margin.

The following example shows how the profit mark-up is

calculated:

To use the same example as above, let us say, a trader

goes to the wholesaler and buys a bicycle at P100 and
sells it at P145, the difference being his/her gross
profit.

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

Cost Price

i.e. P145 – 100) x 100 = 31%

145

(d) The relationship between profit mark-up and

profit margin

When profit mark-up Profit margin will be

is
1
/3 ¼
1
¼ /5
2 2
/5 /7
3 3
/8 /11

Table 4 The relationship between profit mark-up and

profit margin

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You arrive at profit margin by adding the numerator to

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

The calculation of gross profit shown above assumes

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

Therefore, in practice, to calculate the gross profit you

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

(i) Determine the value of opening stock.

(ii) Determine the total value of goods bought during

the year.

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

during the year.

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(iv) The difference between (2) and (3) is called Net

purchase of the year.

(v) Add (1) to (4) i.e. opening stock to net purchases to

get the total value of goods available for sale during
the year.

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

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

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

cost of sales.

SUMMARY

 Cost of sales = Opening stock plus net purchases

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

2. TURNOVER

The turnover or net sales is the net value of goods sold

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during an accounting period. It is calculated as follows:

Turnover = Sales minus Returns inwards OR Turnover

= Sales minus Cost of goods sold plus gross profit.

3. COST OF GOODS SOLD

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

calculated as:

Cost of goods sold = opening stock plus net purchases

minus Closing stock or;
Cost of goods sold = Turnover minus gross profit.

4. RATE OF TURNOVER OR RATE OF STOCK TURN

This is the number of times the average stock can be

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

Rate of stock turn = Turnover or

Average stock

Rate of stock turn =Cost of goods sold

Average stock

5. Average Stock

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This is the average number of stock held in the busi-

ness for the accounting period. It is actually the aver-
age of the opening and closing stock. It is calculated
as:

Average stock = Opening + closing stock

2

6. Gross Profit Percentage

This net profit percentage shopws actual average profit

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

Gross profit percentage = Gross Profit x 100

Turnover 1

8. Rate of Return on Capital Invested

The rate of return on capital invested is extremely im-

portant to a businessman or woman for it tells him/her
exactly how much he/she is getting from the invest-
ment. It is calculated as:

Rate of return on capital invested = Net profit x

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100
Capital at start of the year

This ratio helps the businessman or woman to deter-

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

9. Mark up

This is the percentage of gross profit to the cost of

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

Mark up = Gross profit x 100

Cost of goods sold

10. Margin

This is the percentage of gross to turnover or selling

price. It is calculated as:

Margin = Gross profit x 100

Turnover

F. THE BALANCE SHEET

A balance sheet is a statement of the financial position

of the business or an individual at a given time. It
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shows the company’s assets and liabilities. It is usually

drawn a tabular form as follows:

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

TOTAL TOTAL

The Balance sheet

The balance sheet equation can be written as Capital =

Assets minus Liabilities.
1.
THE BALANCE SHEET INTERPRETATION
The balance sheet of a firm shows the financial position
at a particular date. It gives the summary of its re-
serves, capital, liabilities and assets.

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

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Fixed assets are the properties, of a business, whose

values do not change from day to day, e.g. land, build-
ings, equipment, etc.

Current assets are the propertis of a businesses or in-

dividuals and can be divided into fixed or long – term li-
abilities and current liabilities.

(b) Liabilities

This is money owed by a firm to other businesses or in-

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

Long term liabilities are amounts which have to be

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

Current liabilities are short term and have to be paid

in less than a year’s time, for example, creditors (i.e.
goods or stock obtained on credit).

G. HOW PROFITS AND LOSSES AFFECT CAPITAL

When a company makes a profit, its capital increases,

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

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sists.

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

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

investors
 Providing a market where stocks and shares can be sold and
bought.
 Stock exchange approval gives indication to the investors that
the company quoted is reputable.
 It provides a pace where people with savings can invest and
lend those companies that need to raise finance.
 Prepares reports and data concerning all organisation on the
Stock Exchange
 It establishes a code of conduct which members of the stock
exchange must follow.
 Enable government to raise funds.

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 Gives savers opportunity of investing in industry and com-

merce.
 Regulates members of the market
 Provides rules to protect investors against fraud.
 Enables transfer of second hand securities.
 Provides place where prices can be determined freely on basis
of supply and demand.
 Vetting companies applying for stock exchange quotations/list-
ing.

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

(ii) The work of Dealers on the stock exchange

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

© Functions of the Stock Exchange Council

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

(d) Factors that Determine the prices of Shares at

the Stock Exchange
 To supply and demand for the  Recent performance of
shares the company
 Political changes in the coun-  The popularity of the
try e.g. change of government company’s product
 Changes in interest rates or  The general prosperity of
taxation the country
 Strike/industrial disputes in  Changes in market trends
the company
 Take overs and merges being
considered

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(e) Functions of the Contract Note on the Stock Ex-

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

220