1.physical resources (2005.6) (1)

BTEC HIGHER NATIONALSBTEC HIGHER NATIONALS

MOTOR VEHICLE MOTOR VEHICLE MANAGEMENT AND MANAGEMENT AND

TECHNOLOGYTECHNOLOGY

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BTEC Higher National in Motor Vehicle BTEC Higher National in Motor Vehicle Management & Technology. Unit Management & Technology. Unit

2.Managing Resources2.Managing Resources 22

IntroductionsIntroductions

Name

Job

Experience

Other Interests etc

UNIT 2:UNIT 2:

MANAGING RESOURCESMANAGING RESOURCES

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Managing Resources: learning Managing Resources: learning outcomesoutcomes

1.1. IInvestigate the use of nvestigate the use of Physical ResourcesPhysical Resources

2.2. Critical Factors Critical Factors affecting selection and useaffecting selection and use

3.3. Planning, Monitor & ControlPlanning, Monitor & Control of physical of physical resourcesresources

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What is the importance of good What is the importance of good management?management?

Show video presentation Show video presentation

Soap Opera

With Gerry Robinson

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Activity Activity

Using a paper sheet develop a left and right Using a paper sheet develop a left and right column of good vs. bad traits of a manager.column of good vs. bad traits of a manager.

Say 10 minutes?Say 10 minutes?

We will then discussWe will then discuss

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Strategic or Operational?Strategic or Operational?

From your key points let us decide where they fit From your key points let us decide where they fit within the following?within the following?

Operational controlOperational control Managerial controlManagerial control Strategic planningStrategic planning

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Operational controlOperational control

Routine programmed actionsRoutine programmed actions Closed systems requiring a performance to be Closed systems requiring a performance to be

measurablemeasurable Information available to aid control Information available to aid control Short termShort term

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Managerial controlManagerial control

Regular but more formal and central to policy Regular but more formal and central to policy Information less available decision-making Information less available decision-making

more central to forecastingmore central to forecasting Perspective is one of business units as opposed Perspective is one of business units as opposed

to departmentsto departments Medium-termMedium-term

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Strategic planningStrategic planning

Irregular and non-routineIrregular and non-routine Little proven or evaluated market information Little proven or evaluated market information

availableavailable Open decision-making systems (no effective Open decision-making systems (no effective

data response)data response) No effective data availableNo effective data available Longer-termLonger-term

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Management theoriesManagement theories

Classical to scientific managementClassical to scientific management

Frederick Winslow Taylor (1856-1915) Henry Ford (1863-1947) Henri Fayol 1841-1925

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Classical Management: a brief Classical Management: a brief Introduction Introduction Born into a wealthy Philadelphia Quaker family in Born into a wealthy Philadelphia Quaker family in 1856, Taylor became an apprentice machinist in a 1856, Taylor became an apprentice machinist in a firm of engineers before joining the Midvale Steel firm of engineers before joining the Midvale Steel Company in 1878, where he developed his scientific Company in 1878, where he developed his scientific management ideas. management ideas. The company manufactured locomotive wheels and The company manufactured locomotive wheels and axles, and it was here that he rose to the position of axles, and it was here that he rose to the position of shop superintendent by 1887. In this role, he shop superintendent by 1887. In this role, he observed that workers used different, and mostly observed that workers used different, and mostly inefficient, work methods. He also noticed that few inefficient, work methods. He also noticed that few machinists ever worked at the speed of which they machinists ever worked at the speed of which they were capable, a practice that he labelled systematic were capable, a practice that he labelled systematic soldiering. soldiering.

Frederick Winslow Taylor (1856-1915)

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TaylorismTaylorism

Taylor perceived workforces’ operations as Taylor perceived workforces’ operations as ‘systematic ‘systematic soldiering’ soldiering’ and attributed this tendency to deliberately avoid and attributed this tendency to deliberately avoid hard work for the following main reasons:hard work for the following main reasons:

The view among the workers that an increase in output would The view among the workers that an increase in output would result in redundancies. result in redundancies.

Poor management controls, which made it easy for them to work Poor management controls, which made it easy for them to work slowly in order to protect their own best interests. slowly in order to protect their own best interests.

The choice of methods of work, which was left entirely to the The choice of methods of work, which was left entirely to the discretion of the workers, who wasted a large part of their discretion of the workers, who wasted a large part of their efforts using inefficient and untested rules of thumb. efforts using inefficient and untested rules of thumb.

As a result Taylor developed ‘Scientific Management’ to As a result Taylor developed ‘Scientific Management’ to overcome this – overcome this – Standardization.Standardization. The System not The ManThe System not The Man

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Henry FordHenry Ford

By 1920, the name of Henry Ford By 1920, the name of Henry Ford had became synonymous not only had became synonymous not only with his Model T motor car but also with his Model T motor car but also with his revolutionary techniques of with his revolutionary techniques of mass production. Ford established his mass production. Ford established his company in 1903. In the 1890s, it company in 1903. In the 1890s, it was skilled craftsmen who built was skilled craftsmen who built motor cars. Ford claimed that there motor cars. Ford claimed that there were not enough of them to meet the were not enough of them to meet the level of car production that he level of car production that he wanted, and that was why, in his wanted, and that was why, in his view, deskilling of work was view, deskilling of work was necessary. necessary. Henry Ford (1863-1947)

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FordismFordism

Ford's goal was 'continuous improvement' rather than Ford's goal was 'continuous improvement' rather than the 'one best way'. the 'one best way'.

Ford's objective was to increase his control by Ford's objective was to increase his control by eliminating uncertainty (Ford and Crowther, 1924). eliminating uncertainty (Ford and Crowther, 1924).

Among his major innovations were: Among his major innovations were: Analysis of jobs using time-and-motion techniques; Analysis of jobs using time-and-motion techniques; Installation of single-purpose machine tools to Installation of single-purpose machine tools to

manufacture standardized parts; manufacture standardized parts; Introduction of the assembly line. Introduction of the assembly line.

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Henri FayolHenri Fayol

Fayol's list of managerial activities Fayol's list of managerial activities provides a definition of management. provides a definition of management. He is credited with 'inventing' He is credited with 'inventing' management, as a discrete activity, and management, as a discrete activity, and defining its constituent elements. defining its constituent elements. Interestingly, the word Interestingly, the word management management is is not translatable into all languages, nor not translatable into all languages, nor does the concept exist in all cultures. does the concept exist in all cultures. Managing of course occurs, but it is not Managing of course occurs, but it is not always treated as anything special or always treated as anything special or separate. separate.

Henri Fayol 1841-1925)

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Henri FayolHenri Fayol

He stressed methods rather than personalities, He stressed methods rather than personalities, seeking to present the former in a coherent and seeking to present the former in a coherent and relevant scheme. This formed his theory of relevant scheme. This formed his theory of organization. Unlike Taylor, Fayol focused on organization. Unlike Taylor, Fayol focused on the top of the hierarchy and moved downwards. the top of the hierarchy and moved downwards. However, like Taylor, he too believed that a However, like Taylor, he too believed that a manager's work could be reviewed objectively, manager's work could be reviewed objectively, analysed and treated as a technical process which analysed and treated as a technical process which was subject to certain definite principles which was subject to certain definite principles which could be taught. Fayol's list of six management could be taught. Fayol's list of six management activities, originally developed some 80 years activities, originally developed some 80 years ago, remain broadly intact to this day ago, remain broadly intact to this day

Henri Fayol 1841-1925)

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Henri Fayol – Classical Management Henri Fayol – Classical Management TheoryTheory

Henri Fayol: Engineer and Management Theorist Henri Fayol: Engineer and Management Theorist identified six principal business operational identified six principal business operational categories found within a typical organization: categories found within a typical organization:

I.I. TechnicalTechnical

II.II. CommercialCommercial

III.III. FinancialFinancial

IV.IV. SecuritySecurity

V.V. AccountingAccounting

VI.VI. Management. Management.

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Henri Fayol – Classical Management Henri Fayol – Classical Management TheoryTheory

Henri Fayol identified six Henri Fayol identified six ManagementManagement activities: activities: I.I. ForecastingForecasting – predictions of future events – predictions of future eventsII.II. PlanningPlanning – develop action to meet demand – develop action to meet demandIII.III. OrganizingOrganizing – combination of all resources and – combination of all resources and

the allocation of responsibilities for department the allocation of responsibilities for department and individualand individual

IV.IV. CommandingCommanding – the directing of human resources – the directing of human resourcesV.V. Co-ordinatingCo-ordinating – synthesizing the efforts – synthesizing the effortsVI.VI. ControllingControlling – monitor of progress against plans – monitor of progress against plans

and implementing corrective actions when and implementing corrective actions when appropriateappropriate

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Fayol’s general principlesFayol’s general principles1.1. Division of labourDivision of labour2.2. AuthorityAuthority3.3. DisciplineDiscipline4.4. Unity in commandUnity in command5.5. Scalar principles (line of authority)Scalar principles (line of authority)6.6. Unity in directionUnity in direction7.7. Individual interest; subordinationIndividual interest; subordination8.8. RemunerationRemuneration9.9. CentralizationCentralization10.10. OrderOrder11.11. Equity in treatmentEquity in treatment12.12. Employment stabilityEmployment stability13.13. Initiative opportunityInitiative opportunity14.14. Espirit de corps – Espirit de corps – (promotion of team spirit and effort)(promotion of team spirit and effort)

OUTCOME 1OUTCOME 1

Investigate the use of physical Investigate the use of physical resourcesresources

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Investigate the use of physical Investigate the use of physical resourcesresources

Assess and report the utilisation of different Assess and report the utilisation of different physical resourcesphysical resources

Describe the critical factors which affect the Describe the critical factors which affect the selection and use of physical resourcesselection and use of physical resources

Produce recommendations for selection and Produce recommendations for selection and use of physical resourcesuse of physical resources

Explain the processes for investigating and Explain the processes for investigating and recommending the use of physical resources.recommending the use of physical resources.

1 Physical Resources Within 1 Physical Resources Within Planning, Control and MonitorPlanning, Control and Monitor

Critical Factors Influencing the Critical Factors Influencing the Selection of Physical ResourcesSelection of Physical Resources

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1.1.1.Planning Categories 1.1.1.Planning Categories

Planning is a management function, which is Planning is a management function, which is intended to appraise specific courses of action or intended to appraise specific courses of action or activities in pursuit of the organization’s aim. The activities in pursuit of the organization’s aim. The layers of planning align to the managerial layers of planning align to the managerial divisions within an organizational structure, but divisions within an organizational structure, but broadly fall into the following categories:broadly fall into the following categories:

► ► Corporate longer-term planning.Corporate longer-term planning.► ► Operational budgetary planning.Operational budgetary planning.► ► Tactical or divisional medium, short-term Tactical or divisional medium, short-term

planning.planning.

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1.1.1.Planning Categories1.1.1.Planning Categories

The corporate and operational planning provides The corporate and operational planning provides to a greater extent the strategic planning for to a greater extent the strategic planning for the organization. the organization.

This deals chiefly with the development and life This deals chiefly with the development and life of the company and its operating aims. of the company and its operating aims.

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1.2. Critical factors1.2. Critical factors The Divisional and tactical planning is the action of The Divisional and tactical planning is the action of

developing, implementing, monitoring and developing, implementing, monitoring and controlling specific departmental objectives by controlling specific departmental objectives by departmental management, in order to achieve the departmental management, in order to achieve the strategic aims. strategic aims.

The reality of drawing up plans will incur many The reality of drawing up plans will incur many obstacles and difficulties that the management will be obstacles and difficulties that the management will be required to overcome. required to overcome.

These critical factors are considered as measures of These critical factors are considered as measures of resource within the performance forecasting: a resource within the performance forecasting: a component of the planning process.component of the planning process.

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1.2. Critical Factors1.2. Critical Factors

The principal resource within an organization is The principal resource within an organization is its human resource; its people: this its human resource; its people: this organizational topic is dealt with within organizational topic is dealt with within sections 3 and 4. sections 3 and 4.

The focus of this section will be the The focus of this section will be the understanding of physical resources and how understanding of physical resources and how to assess their value within the planning and to assess their value within the planning and monitor process.monitor process.

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1.2. Critical factors1.2. Critical factors

Forecasting concerns the probability of future Forecasting concerns the probability of future events or trends occurring, which will directly events or trends occurring, which will directly or indirectly influence the business, either as or indirectly influence the business, either as an opportunity or threat. From this the an opportunity or threat. From this the management plan will attempt to turn their management plan will attempt to turn their resources into a strength in dealing with the resources into a strength in dealing with the opportunity as opposed to a threat.opportunity as opposed to a threat.

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1.2.1.Financial Constraints:1.2.1.Financial Constraints:

The financial health of an organization and its The financial health of an organization and its business is paramount. The basic needs for any business is paramount. The basic needs for any motor retail business’ financial structure is: motor retail business’ financial structure is: provision of working capital; the increase in provision of working capital; the increase in capital wealth and the cost effective utilization capital wealth and the cost effective utilization of funds, capital and assets. of funds, capital and assets.

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Essentially the responsibility of financial Essentially the responsibility of financial structure is the domain of the proprietor or structure is the domain of the proprietor or board of directors and finance advisor. board of directors and finance advisor.

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1.2.1.Financial Constraints1.2.1.Financial Constraints::

The accepted method of financial control is The accepted method of financial control is through the budgeting system, where a master through the budgeting system, where a master budget is devised of which each department budget is devised of which each department whether cost or revenue focused is linked as a whether cost or revenue focused is linked as a component part. component part. Diagram 1.1.Diagram 1.1.

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1.2.1.Financial Constraints:1.2.1.Financial Constraints: Financial directive from proprietor or board of

directors

Business Plan and Operational

objectives set for the budgeted financial

year.Expressed as a Master Budget

Departmental budget

Department/Divisional plan and forecast

Requirements:LabourSkill

TrainingEquipmentVehicles

ITMarketing

Requirements:BuildingsServices

StockCapital fixtures

InvestmentGrowthProfit

Diagram 1.1

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The departmental budget places the financial The departmental budget places the financial constraints, effectively the spending capability constraints, effectively the spending capability upon the department. upon the department.

Within the budget process will be an element of Within the budget process will be an element of flexibility and it is within this area that a flexibility and it is within this area that a manager has the opportunity to develop a manager has the opportunity to develop a business case to support a particular business business case to support a particular business venture that they believe will grow the venture that they believe will grow the profitability of the business.profitability of the business.

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1.2.2. Competition and Demand:1.2.2. Competition and Demand: Within the business plan an appropriate assessment of the Within the business plan an appropriate assessment of the

environment in respect of demand by the population, and environment in respect of demand by the population, and the competition to supply the service aligned to your own the competition to supply the service aligned to your own business. business.

Detailed information of market area customer spend power Detailed information of market area customer spend power and vehicle utilisation is available from National statistics and vehicle utilisation is available from National statistics data, specialist agencies and marketing experts within data, specialist agencies and marketing experts within motor industry manufacturers and institute organizations. motor industry manufacturers and institute organizations.

However at a minimum a SWOT analysis should be However at a minimum a SWOT analysis should be undertaken to evaluate current and potential business undertaken to evaluate current and potential business opportunities. opportunities. Diagram: 1.2.Diagram: 1.2.

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Diagram 1.2Diagram 1.2Competitor AnalysisCompetitor Analysis

Competition Strengths and weaknesses

Name Location Strength Weakness Opportunities Threats

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1.2.3. Company and Departmental 1.2.3. Company and Departmental Objectives: PolicyObjectives: Policy

The company policy will align the department to The company policy will align the department to its core objectives through the budgetary its core objectives through the budgetary meeting and agreement processes. meeting and agreement processes.

The setting of objectives at department level to The setting of objectives at department level to meet these demands will invoke the appraisal meet these demands will invoke the appraisal of resources available to delivering the of resources available to delivering the objectives set.objectives set.

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The department budget will most certainly The department budget will most certainly reflect seasonal trends and this will be of reflect seasonal trends and this will be of particular importance to retail operations particular importance to retail operations within areas of particular public and within areas of particular public and recreational attraction such as coastal resorts recreational attraction such as coastal resorts and major route locations.and major route locations.

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The physical resources: premises, vehicles and The physical resources: premises, vehicles and equipment in supporting the primary role of an equipment in supporting the primary role of an After-sales retail business will need to be After-sales retail business will need to be dependable if the staff are to achieve the best dependable if the staff are to achieve the best customer service and from which the managers customer service and from which the managers thus derive the optimum profitability.thus derive the optimum profitability.

Activity:Activity: Discuss effective resource requirements Discuss effective resource requirements

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1.2.4. Legal Requirements:1.2.4. Legal Requirements:

This will entail the consideration of maintenance This will entail the consideration of maintenance agreements with regard to the general agreements with regard to the general workshop equipment and the essential workshop equipment and the essential consideration of legislative controls of the consideration of legislative controls of the following:following:

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Health and Safety legislation. Responsibility of the Health and Safety legislation. Responsibility of the employer may include the following areas depending on employer may include the following areas depending on national or EU laws:national or EU laws:Provide and maintain safe premises , plant and systems Provide and maintain safe premises , plant and systems of work that are safe and without risk to health or of work that are safe and without risk to health or safety.safety.Make provision for the safety and absence of risk to Make provision for the safety and absence of risk to health in connection with the use, handling, storage and health in connection with the use, handling, storage and transporting of articles and substancestransporting of articles and substances ( See Risk ( See Risk Assessment Example in Study Guide)Assessment Example in Study Guide)

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Provide information, instruction, training and Provide information, instruction, training and supervision to ensure the health and safety of supervision to ensure the health and safety of all its employeesall its employees

Provide a maintenance and working Provide a maintenance and working environment which is safe and without risk to environment which is safe and without risk to health and has adequate facilities and health and has adequate facilities and arrangements for the welfare of employeesarrangements for the welfare of employees

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Health and Safety at Work extends to include the Health and Safety at Work extends to include the following main equipment types:following main equipment types:

Vehicle lifts/hoistsVehicle lifts/hoists Jacking beams and hydraulic bench liftsJacking beams and hydraulic bench lifts Axle standsAxle stands

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Cranes and hydraulic hoistsCranes and hydraulic hoists Chains, chain blocks, slings and other types of Chains, chain blocks, slings and other types of

mechanical lifting tacklemechanical lifting tackle Air receiversAir receivers Abrasive wheelsAbrasive wheels Respiratory systemsRespiratory systems Accident recovery systems: including: repair, Accident recovery systems: including: repair,

recovery and first-aid equipment recovery and first-aid equipment

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1.2.5. Performance and Efficiency: 1.2.5. Performance and Efficiency:

At this point we should consider the life and At this point we should consider the life and obsolescence of equipment and the related obsolescence of equipment and the related impact of these resources upon the cost of impact of these resources upon the cost of replacement and incurred burden upon replacement and incurred burden upon projected revenues and business opportunities.projected revenues and business opportunities.

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1.2.5. Performance and Efficiency:1.2.5. Performance and Efficiency:

Group Activity 1.1 – use a paper sheetGroup Activity 1.1 – use a paper sheet

Working within your groups draw up a SWOT Working within your groups draw up a SWOT analysis of your own business or a business analysis of your own business or a business familiar to you specific to competition and familiar to you specific to competition and demand within your location. demand within your location.

You should consider seasonal influences and You should consider seasonal influences and physical restrictions that would affect sales physical restrictions that would affect sales and customer perception.and customer perception.

1 Physical Resources Within 1 Physical Resources Within Planning, Control and MonitorPlanning, Control and Monitor

The Process of Physical Resource The Process of Physical Resource Assessment and RecommendationAssessment and Recommendation

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1.3 Introduction1.3 Introduction

Nigel Slack (2001): identifies medium, short-Nigel Slack (2001): identifies medium, short-term planning as dealing with planning in term planning as dealing with planning in detail. detail.

A process of looking ahead in a disaggregated A process of looking ahead in a disaggregated manner as the medium term plan concentrates manner as the medium term plan concentrates more greatly toward the shorter term.more greatly toward the shorter term.

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1.3 Introduction1.3 Introduction

This can create a difficult environment from This can create a difficult environment from which the departmental manager must make which the departmental manager must make his decisions related to capital expenditure on his decisions related to capital expenditure on physical resources. Refer Diagram 1.3.physical resources. Refer Diagram 1.3.

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Balance between planning and control Balance between planning and control activities long to short-term. activities long to short-term. Diagram 1.3 Diagram 1.3

Long-term planning and controlLong-term planning and controlYears/monthsYears/monthsUses aggregate demand forecastsUses aggregate demand forecastsDetermines resources to an aggregate demandDetermines resources to an aggregate demandFinancially biased objectivesFinancially biased objectivesMedium-term planning and controlMedium-term planning and control Months/weeksMonths/weeksUses partially aggregate demand forecastsUses partially aggregate demand forecastsDetermines resources and contingenciesDetermines resources and contingenciesObjectives combine financial and operational Objectives combine financial and operational concernsconcernsShort-term planning and controlShort-term planning and controlDays/hoursDays/hoursUses totally disaggregated forecasts based upon Uses totally disaggregated forecasts based upon demanddemandMakes interventions to resources to correct Makes interventions to resources to correct deviations from planned objectivesdeviations from planned objectivesSpur of the moment Spur of the moment consideration of operational consideration of operational objectivesobjectives

CONTROL

Years/months

Months/weeks

Weeks/days

Days/hours

PLANNING

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1.3.1. Demand1.3.1. Demand

The tactical operating management will be able to The tactical operating management will be able to identify with the identify with the instant instant demands of their demands of their environment to take up operating opportunities. environment to take up operating opportunities.

Diagram 1.3 identifies the characteristics of the short Diagram 1.3 identifies the characteristics of the short term planning and medium term planning, term planning and medium term planning, specifically 12 months and less. specifically 12 months and less.

At this level managers will be continually balancing At this level managers will be continually balancing efficiency quality revenue and expenditure in order to efficiency quality revenue and expenditure in order to control the focus and reduce the negative variance control the focus and reduce the negative variance from the budget control. from the budget control.

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1.3.1. Demand1.3.1. DemandLet us consider a potential Let us consider a potential Spur of the moment Spur of the moment

situation. situation.

Consider the group activity conducted relating to Consider the group activity conducted relating to competitor and environmental SWOT analysis. competitor and environmental SWOT analysis.

Let us now consider that a hypothetical Let us now consider that a hypothetical opportunity or threat has arisen in the form of opportunity or threat has arisen in the form of recent planning permission for a new office recent planning permission for a new office building to house in excess of 3,500 employees building to house in excess of 3,500 employees whose major commuter route is by road. whose major commuter route is by road.

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1.3.1. Demand1.3.1. DemandAs a Service Manager you have a limited tyre, exhaust and As a Service Manager you have a limited tyre, exhaust and

battery fitting facility and rely upon the Parts Department battery fitting facility and rely upon the Parts Department Manager for your supply of stock, most of which is Manager for your supply of stock, most of which is ordered in because the demand for your services in this ordered in because the demand for your services in this sector is only a small component of your current sector is only a small component of your current customer base. customer base.

You believe this largely to be because your current You believe this largely to be because your current customer base, is largely local with a limited spend value customer base, is largely local with a limited spend value in this service sector.in this service sector.

Additionally as a result of local knowledge you benefit Additionally as a result of local knowledge you benefit from discounted factor components supplied by a local from discounted factor components supplied by a local tyre specialist.tyre specialist.

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You have refrained from investing in new You have refrained from investing in new equipment centred to this service facility, as equipment centred to this service facility, as the revenue comes from what you consider to the revenue comes from what you consider to be an be an Independent Demand Independent Demand situation, where situation, where planning is very difficult due to fluctuation in planning is very difficult due to fluctuation in customer demand. customer demand.

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However within your SWOT analysis you However within your SWOT analysis you believe you have identified an opportunity to believe you have identified an opportunity to secure additional service work plus an secure additional service work plus an opportunity to control and improve tyre and opportunity to control and improve tyre and ancillary sales as an addition to the service ancillary sales as an addition to the service work.work.

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Your decision to consider this opportunity as a Your decision to consider this opportunity as a Dependent Demand, Dependent Demand, although has risk attached, is although has risk attached, is profitable as it is centred to the fact that the new office profitable as it is centred to the fact that the new office block is sited literally within walking distance. block is sited literally within walking distance.

You believe this benefit of location will provide a You believe this benefit of location will provide a governed demand largely as a result of the outsider governed demand largely as a result of the outsider employees commuting by car to work. employees commuting by car to work.

In addition, although your main workshop is busy you In addition, although your main workshop is busy you only measure a 90% efficiency overall for your 10 only measure a 90% efficiency overall for your 10 productive staff and believe that sufficient work from productive staff and believe that sufficient work from this new opportunity will take up this shortfall in this new opportunity will take up this shortfall in labour efficiencylabour efficiency

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Dependent demandDependent demand

The example here shows the demand for tyres in a car plant is dependent Upon the manufacturer’s production schedule

Slack: 1998

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Independent demandIndependent demandWhereas in the example of tyre sales within the Independent model does not rely on any one single determining factor, but is linked to a whole host of Similar and different sales alike.

Slack: 1998

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Group Assignment TasksGroup Assignment Tasks

Prepare tasks 1a and 1b as instructed on your Prepare tasks 1a and 1b as instructed on your assignment sheetassignment sheet

Time allowed: 2 hoursTime allowed: 2 hours

A final draft of all tasks should be handed A final draft of all tasks should be handed in by the date specified in your schedulein by the date specified in your schedule

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Applying Costings to Applying Costings to Purchase of ResourcesPurchase of Resources

When purchasing equipment or other resources it is necessary to plan and project the costs of use over a given period. This can be done using methods such as ‘payback period’ (PP) or ‘net present value’ (NPV)

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Example Payback Period (PP) and Net Present Example Payback Period (PP) and Net Present Value (NPV) – using the project valuesValue (NPV) – using the project values

0 £22,000 £0 -£22,000

1 £1,500 -£20,500

2 £3,500 -£17,000

3 £5,000 -£12,000

4 £10,000 -£2,000

5 £10,000 £8,000

6 £10,000 £18,000

7 £10,000 £28,000

Payback Period

Project years

Initial outlay

Expected cash inflow

£'s

Revenue £'s

Using Using PPPP cost benefit analysis cost benefit analysis

the project returns profit the project returns profit

in year 5in year 5

NET PRESENT VALUE (NPV)

Project years

Initial outlay

Expected cash

inflow £'s

Discount factor Projected value of

cash inflows £'s

NPV adjusted

revenue £'s10%

0 £22,000 £0 1 0 -£22,000.00

1 £1,500 0.909090909 £1,363.64 -£20,636.36

2 £3,500 0.826446281 £2,892.56 -£17,743.80

3 £5,000 0.751314801 £3,756.57 -£13,987.23

4 £10,000 0.683013455 £6,830.13 -£7,157.09

5 £10,000 0.620921323 £6,209.21 -£947.88

6 £10,000 0.56447393 £5,644.74 £4,696.86

7 £10,000 0.513158118 £5,131.58 £9,828.44

Using NPV cost benefit analysis at 10% discount factor the project returns profit in year 6

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NPV

ActivityActivity

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PROJECT A B C D

Investment 15k 18k 10k 18k

Year 1 income 7k 6k 5k 4k

Year 2 income 4k 6k 5k 5k

Year 3 income 3k 6k - 6k



Work out the Net Present Value for each project at the end of its’ life cycle using a discount factor of 10%

Activity - SolutionActivity - Solution

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PROJECT A B C D

Investment 15k 18k 10k 18k

Year 1 - 10% discounted

6.363k 5.454k 4.545k 3.636k


3.304k 4.956k 4.13k 4.13k


2.253k 4.506k - 4.506k


1.366k 4.098k - 4.781k


0.621k 3.726k - 4.968k

Total 13.907k 22.740k 8.675k 22.021k

NPV -1.093k 4.740k -1.325 4.021k

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Summary Summary

Reflect outcome 1 – PHYSICAL RESOURCESReflect outcome 1 – PHYSICAL RESOURCES

Discuss Discuss

2.Plan, Monitor and Control2.Plan, Monitor and Control

Utilization Factors and Affect Upon Utilization Factors and Affect Upon Efficiency CriteriaEfficiency Criteria

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2.1. Introduction2.1. Introduction

The operating department budget should identify The operating department budget should identify all costs and revenues expected to be incurred all costs and revenues expected to be incurred and produced. Within the after-sales and produced. Within the after-sales departments of a retail motor dealer, labour departments of a retail motor dealer, labour sales play a dominant role within the body, sales play a dominant role within the body, paint and service department.paint and service department.

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2.1. Introduction2.1. Introduction

Hence labour utilisation is a very important and Hence labour utilisation is a very important and extensively measured performance of any extensively measured performance of any workshop. And usually the bigger they are the workshop. And usually the bigger they are the more complex the measurements get.more complex the measurements get.

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2.1. Utilization Factors:2.1. Utilization Factors:

In planning the utilization of the physical In planning the utilization of the physical resources modern workshops make use of resources modern workshops make use of computer software programmes to calculate computer software programmes to calculate the inter-related efficiency and revenue rates. the inter-related efficiency and revenue rates.

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Within the motor Industry throughput is Within the motor Industry throughput is measured on a continual basis with measured measured on a continual basis with measured analysis occurring on a monthly cycle. It is analysis occurring on a monthly cycle. It is important to recognise that within the make-up important to recognise that within the make-up of the budget certain trend and seasonal of the budget certain trend and seasonal fluctuations may or may not be accounted for. fluctuations may or may not be accounted for.

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It is imperative that the department manager It is imperative that the department manager make themselves aware of any particular make themselves aware of any particular accruals or pre-payments of expenses and any accruals or pre-payments of expenses and any aggregation of revenues set out by the aggregation of revenues set out by the accountant in the interest of the company accountant in the interest of the company policy and master budget. policy and master budget.

The alternative to this is shear frustration!The alternative to this is shear frustration!

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2.1. Utilization Factors:2.1. Utilization Factors:The following are the main measures of utilization that The following are the main measures of utilization that

impact upon the measure of efficiency and impact upon the measure of efficiency and profitability of a department: profitability of a department:

Human resourcesHuman resources Workshop loading Workshop loading Available labour hoursAvailable labour hours Sold hoursSold hours Attended hoursAttended hours Bought hours (Including bonuses and overtime)Bought hours (Including bonuses and overtime) Absences (Lost hours)Absences (Lost hours)

Labour EfficienciesLabour Efficiencies

It is important to not only monitor labour It is important to not only monitor labour efficiencies, but also to include them in efficiencies, but also to include them in planning or costing when carrying out planning or costing when carrying out investment appraisals for physical resourcesinvestment appraisals for physical resources

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Labour efficiencies spreadsheet

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Physical ResourcesPhysical Resources► ► Equipment depreciationEquipment depreciation► ► Company vehicle utilisation costs (Insurance, Tax, Company vehicle utilisation costs (Insurance, Tax,

Road fund licence, Fuels, etc…)Road fund licence, Fuels, etc…)► ► Company vehicle depreciation costs.Company vehicle depreciation costs.► ► Recovery vehicle costs (Standing costs).Recovery vehicle costs (Standing costs).► ► Recovery vehicle downtime (Idle time).Recovery vehicle downtime (Idle time).► ► Driver’s hours regulation. (Routes and associated Driver’s hours regulation. (Routes and associated

costs).costs).

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Group Assignment TaskGroup Assignment Task

Prepare tasks 2a and 2b as instructed on your Prepare tasks 2a and 2b as instructed on your assignment sheetassignment sheet


A final draft of all tasks should be A final draft of all tasks should be handed in by the date specified in your handed in by the date specified in your scheduleschedule

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ReferencesReferences

IMI Management books (current)IMI Management books (current)Armstrong: Human Resource Management 2001Armstrong: Human Resource Management 2001Biddle: Evander: Human aspects of Management 1990Biddle: Evander: Human aspects of Management 1990Nigel Slack: Operations Management 2001 Nigel Slack: Operations Management 2001 David Farnham: Employee relations In ContextDavid Farnham: Employee relations In ContextPeter Atrill: Financial Management for Non-specialistsPeter Atrill: Financial Management for Non-specialistsPeter Atrill & Eddie McLaney: Accounting and Finance Peter Atrill & Eddie McLaney: Accounting and Finance

for non-specialistsfor non-specialistsJ. R. Dyson: Accounting for Non-Accounting StudentsJ. R. Dyson: Accounting for Non-Accounting Students

Sources of CapitalSources of Capital

There are a considerable number of available sources There are a considerable number of available sources of finance available to limited liability companies, of finance available to limited liability companies, although they vary depending upon the type of entity. although they vary depending upon the type of entity.

Central and local government, for example, are Central and local government, for example, are heavily dependent upon current tax receipts for heavily dependent upon current tax receipts for financing capital investment projects, while charities financing capital investment projects, while charities rely on loans and grants. rely on loans and grants.

Sources of CapitalSources of Capital

The sources of finance available to companies The sources of finance available to companies depend upon the time period involved:depend upon the time period involved:

The short-termThe short-term The medium-termThe medium-term The long-termThe long-term

Short-term Finance Short-term Finance

Trade creditTrade credit is a form of financing common in is a form of financing common in all companies (and all other entities). An entity all companies (and all other entities). An entity purchases goods and services from suppliers purchases goods and services from suppliers and agrees to pay for them some days or and agrees to pay for them some days or weeks after they have been delivered. weeks after they have been delivered.

Short-term FinanceShort-term Finance

Bank overdraftsBank overdrafts are a form of loan where the are a form of loan where the bank's customer is allowed to draw out more bank's customer is allowed to draw out more from the bank than has been deposited. from the bank than has been deposited.

08/04/2308/04/23BTEC Higher Nationals in Motor Vehicle BTEC Higher Nationals in Motor Vehicle

Management & TechnolgyManagement & Technolgy 8181

You normally pay an arrangement fee when an You normally pay an arrangement fee when an overdraft is set up. A 'limit' up to which you overdraft is set up. A 'limit' up to which you can borrow will be granted by the bank, and can borrow will be granted by the bank, and reviewed annually, when it can be increased, reviewed annually, when it can be increased, decreased or renewed at the same level. A decreased or renewed at the same level. A renewal fee is payable for this service. renewal fee is payable for this service.

Short-term FinanceShort-term Finance

Short-term Finance - OverdraftShort-term Finance - Overdraft

An entity's overdraft may have to be secured by a An entity's overdraft may have to be secured by a floating charge. This means that the bank has a floating charge. This means that the bank has a general claim on any of the entity's assets if the entity general claim on any of the entity's assets if the entity cannot repay the overdraft. There is usually an cannot repay the overdraft. There is usually an upper limit, the amount overdrawn can usually be upper limit, the amount overdrawn can usually be called in at any time, and the interest charge may be called in at any time, and the interest charge may be high. The main advantages of an overdraft are that it high. The main advantages of an overdraft are that it is flexible and that interest is normally only charged is flexible and that interest is normally only charged on the outstanding balance on a daily basis. on the outstanding balance on a daily basis.

Bills of Exchange Bills of Exchange

A bill of exchange is simply an invoice that A bill of exchange is simply an invoice that has been endorsed (i.e. accepted) by a has been endorsed (i.e. accepted) by a merchant bankmerchant bank; the legal holder to obtain ; the legal holder to obtain immediate finance can then sell it. immediate finance can then sell it.

The The interest charged depends upon the interest charged depends upon the creditworthiness of the parties involvedcreditworthiness of the parties involved; ; clearly, if an entity has a poor reputation, it clearly, if an entity has a poor reputation, it will expect to pay more interest. will expect to pay more interest.

Commercial Paper Commercial Paper

Commercial paperCommercial paper is a form of short-term is a form of short-term borrowing used by large listed companies.borrowing used by large listed companies.

It is a bearer documentIt is a bearer document, i.e. a person to , i.e. a person to whom the document is payable without whom the document is payable without naming that person. naming that person.

The minimum amount permitted is The minimum amount permitted is £100,000£100,000. . This form of borrowing therefore is not This form of borrowing therefore is not appropriate for very many entities. appropriate for very many entities.

Sources of Medium-term FinanceSources of Medium-term Finance

Banks may be prepared to Banks may be prepared to loanloan a fixed amount to a a fixed amount to a customer over the customer over the medium- to long-termmedium- to long-term period. period.

The loan may be The loan may be secured on the company's assetssecured on the company's assets and the and the interest charge may be variableinterest charge may be variable. .

Regular repayments of both the Regular repayments of both the capital and the capital and the interestinterest will be expected. will be expected.

Bank loans are a common form of financing but the Bank loans are a common form of financing but the restrictions often placed on the borrower may be restrictions often placed on the borrower may be particularly particularly demandingdemanding. .



Bank Working Capital FinanceBank Working Capital Finance

Finance arranged through bank-owned Finance arranged through bank-owned companies companies

Finance houses, which are specialist Finance houses, which are specialist companies owned in the main by the major companies owned in the main by the major banks, offer alternative ways of obtaining banks, offer alternative ways of obtaining fixed assets: fixed assets:




Hire purchaseHire purchase

An HP agreement from a finance house enables a An HP agreement from a finance house enables a business to acquire an asset on the payment of a business to acquire an asset on the payment of a deposit and to pay back the cost plus interest over a deposit and to pay back the cost plus interest over a set period, at the end of which ownership of the asset set period, at the end of which ownership of the asset passes to the borrowerpasses to the borrower

Hire purchase is often used to finance vehicles and Hire purchase is often used to finance vehicles and machinerymachinery




LeasingLeasing

With a leasing agreement, the business has use With a leasing agreement, the business has use of assets such as cars and computers bought by of assets such as cars and computers bought by the finance house. The business pays a regular the finance house. The business pays a regular 'rental' payment, normally over a lease period 'rental' payment, normally over a lease period of two to seven yearsof two to seven years



LeasingLeasing

Ownership of the asset does not normally pass to Ownership of the asset does not normally pass to the business because the asset (the car, the the business because the asset (the car, the computer) will have become out-of-date and computer) will have become out-of-date and will need renewing at the end of the lease will need renewing at the end of the lease period. period.

Clearly a lease is not a loan, but it can Clearly a lease is not a loan, but it can substantially reduce the financial requirements substantially reduce the financial requirements of a business when it needs to acquire assets of a business when it needs to acquire assets such as computer equipment and fleets of such as computer equipment and fleets of company cars. company cars.




Factoring - working capital financeFactoring - working capital finance

Many banks also provide factoring services Many banks also provide factoring services through specialist factoring companiesthrough specialist factoring companies



Factoring - Working Capital Factoring - Working Capital FinanceFinance

A business may have valuable financial resources tied up A business may have valuable financial resources tied up because its customers owe it money and have not yet because its customers owe it money and have not yet paid. A factoring company will effectively 'buy' these paid. A factoring company will effectively 'buy' these debts by providing a number of services:debts by providing a number of services:

-- It will lend up to 80% of outstanding customer It will lend up to 80% of outstanding customer debtsdebts

-- It will deal with all the paperwork of collecting It will deal with all the paperwork of collecting customer debtscustomer debts

-- Insure against non-payment of debtsInsure against non-payment of debts



Factoring - Working Capital Factoring - Working Capital FinanceFinance

Factoring releases money due to the business Factoring releases money due to the business and allows the business to use it in its general and allows the business to use it in its general operations and expansion plans. It is therefore operations and expansion plans. It is therefore a valuable source of short-term finance. a valuable source of short-term finance.



Bank Fixed Asset Finance Bank Fixed Asset Finance

Business loanBusiness loan

This is a fixed medium-term loan, typically for This is a fixed medium-term loan, typically for between 3 and 10 years, to cover the purchase between 3 and 10 years, to cover the purchase of capital items such as machinery or of capital items such as machinery or equipment. Interest is normally 2% to 3% over equipment. Interest is normally 2% to 3% over base rate, and repayments are by instalmentsbase rate, and repayments are by instalments



Bank Fixed Asset FinanceBank Fixed Asset Finance

Commercial mortgageCommercial mortgage

If you are buying premises for your business you If you are buying premises for your business you can arrange to borrow long-term by means of a can arrange to borrow long-term by means of a commercial mortgage, typically up to 80% of commercial mortgage, typically up to 80% of the value of the property, repayable over a the value of the property, repayable over a period of up to 25 yearsperiod of up to 25 years




Your premises will be taken as security for the Your premises will be taken as security for the loan: if the business fails, the premises will be loan: if the business fails, the premises will be sold to repay the bank. sold to repay the bank.




Finance for companies: venture capital Finance for companies: venture capital There There are many specialist banks - 'merchant banks' - are many specialist banks - 'merchant banks' - and investment companies which offer advice and investment companies which offer advice and financial assistance to limited companies and financial assistance to limited companies looking for capital. This financial assistance looking for capital. This financial assistance takes the form of loans and venture capital, takes the form of loans and venture capital, which provides finance for fixed assets and for which provides finance for fixed assets and for working capital. working capital.




Venture capital companies will view these Venture capital companies will view these companies as investment opportunities and companies as investment opportunities and will put in money in the form of loans or will put in money in the form of loans or purchase of shares, or both. In return, they purchase of shares, or both. In return, they may expect an element of control over the may expect an element of control over the company and will possibly insist on having a company and will possibly insist on having a director on the board of the company. director on the board of the company.




A venture capital company considering investing A venture capital company considering investing will look for a business with good sales and will look for a business with good sales and profit record - or potential. profit record - or potential.

Sources of Medium-term FinanceSources of Medium-term Finance

Credit salesCredit sales are a form of borrowing in which are a form of borrowing in which the purchaser agrees to pay for goods (and the purchaser agrees to pay for goods (and services) provided on an instalment basis over services) provided on an instalment basis over an agreed period of time. an agreed period of time.

Once the agreement has been signed, the legal Once the agreement has been signed, the legal ownership of the goods is passed to the ownership of the goods is passed to the purchaser and the seller purchaser and the seller cannot reclaimcannot reclaim them. them.

LeasingLeasing

Leasing is a form of rentingLeasing is a form of renting. A fixed asset (such as a . A fixed asset (such as a car or a printing press) remains legally in the car or a printing press) remains legally in the ownership of the lessor. In the case of some leases, ownership of the lessor. In the case of some leases, the asset may never actually be returned; in effect, the the asset may never actually be returned; in effect, the lessee becomes lessee becomes de facto de facto the owner. the owner.

Leasing can be expensive, although if the lessor passes Leasing can be expensive, although if the lessor passes on what can sometimes be some very generous tax on what can sometimes be some very generous tax allowances, it can be a reasonably economic method allowances, it can be a reasonably economic method of financing projects. of financing projects.

Long-term FinanceLong-term Finance

Long-term finance can generally be obtained from the Long-term finance can generally be obtained from the following sources. following sources.

Debentures are formal long-term loansDebentures are formal long-term loans made to a made to a company; they may be for a certain period or open-company; they may be for a certain period or open-ended. Debentures are usually secured on all or some ended. Debentures are usually secured on all or some of an entity's assets. Interest is payable, but because it of an entity's assets. Interest is payable, but because it is allowable against corporation tax, debentures can is allowable against corporation tax, debentures can be an economic method of financing specific projects. be an economic method of financing specific projects.


Loan capital, for example is a form of borrowing Loan capital, for example is a form of borrowing in which investors are paid a regular amount in which investors are paid a regular amount of interest and their capital is eventually of interest and their capital is eventually repaid. repaid.

The investors are creditors of the entity but they The investors are creditors of the entity but they have no voting rights. have no voting rights.


Unsecured loan stock is similar to debenture Unsecured loan stock is similar to debenture stock except that there is no security for the stock except that there is no security for the loan. loan.

The interest rate tends to be higher than that on The interest rate tends to be higher than that on debenture stock because of the greater risk. debenture stock because of the greater risk.

Convertible unsecured loan stock gives Convertible unsecured loan stock gives stockholders the right to convert their stock stockholders the right to convert their stock into ordinary shares at specified dates. into ordinary shares at specified dates.


Eurobond loan capitalEurobond loan capital can be obtained by can be obtained by borrowing overseas in the 'Euro' market. The borrowing overseas in the 'Euro' market. The loans are usually unsecured and they are loans are usually unsecured and they are redeemed at their face value on a certain date. redeemed at their face value on a certain date.

Interest is normally paid annually; the rate Interest is normally paid annually; the rate depends partly on the size of the loan and depends partly on the size of the loan and partly on the particular issuer. partly on the particular issuer.

Share CapitalShare Capital

Although the law recognizes that Although the law recognizes that limited liability limited liability companies are separate entity’scompanies are separate entity’s with a life of their with a life of their own the law likewise recognises the corporate own the law likewise recognises the corporate responsibility and governanceresponsibility and governance needed by the needed by the owners. owners.

Only one person is now required to form a private Only one person is now required to form a private company (two for a public company),company (two for a public company), and that and that person (or persons, if there is more than one), agrees person (or persons, if there is more than one), agrees to make a capital contribution by buying a number of to make a capital contribution by buying a number of shares. shares.


The capital of a company is known as its share The capital of a company is known as its share capital. The share capital will be made up of a capital. The share capital will be made up of a number of shares of a certain denomination, number of shares of a certain denomination, such as 20p, 50p, and £1. such as 20p, 50p, and £1.


A member may hold only one share, or many hundreds A member may hold only one share, or many hundreds of thousands, depending upon the total share capital of thousands, depending upon the total share capital of the company, the denomination of the shares, and of the company, the denomination of the shares, and the amount that he wishes to contribute. the amount that he wishes to contribute.

The maximum amount of capital that the company The maximum amount of capital that the company envisages ever raising has to be stated. envisages ever raising has to be stated.

This is known as its This is known as its authorized share capitalauthorized share capital, although , although this does not necessarily mean that it will issue shares this does not necessarily mean that it will issue shares up to that amount. up to that amount.


There are two main types of shares: There are two main types of shares:

Ordinary shares Ordinary shares Preference shares. Preference shares.

Rights IssuesRights Issues

Expansion of the company could be financed by Expansion of the company could be financed by increasing the number ofincreasing the number of ordinary shares available ordinary shares available, , either on the open market or to existing shareholders either on the open market or to existing shareholders in the form of a rights issue. in the form of a rights issue.

An increase in an entity's ordinary share capital dilutes An increase in an entity's ordinary share capital dilutes the holding of existing shareholders and all the holding of existing shareholders and all shareholders will expect to receive shareholders will expect to receive increasing increasing amounts of dividend. amounts of dividend.


Ordinary sharesOrdinary shares do not usually entitle the do not usually entitle the shareholder to any specific level of dividend shareholder to any specific level of dividend and the rights of other types of shareholders and the rights of other types of shareholders always take precedence over the rights of the always take precedence over the rights of the ordinary shareholders, e.g. if the company ordinary shareholders, e.g. if the company goes into liquidation. goes into liquidation.

Preference SharesPreference Shares

Alternatively, new or additional Alternatively, new or additional preference preference sharesshares could be offered; preference could be offered; preference shareholders would have an automatic right to shareholders would have an automatic right to a certain percentage level of dividend, and so a certain percentage level of dividend, and so the issue of preference shares limits the the issue of preference shares limits the amount of dividend available to ordinary amount of dividend available to ordinary shareholders. shareholders.


Preference shareholdersPreference shareholders are normally entitled to a are normally entitled to a fixed level of dividend, and they usually have priority fixed level of dividend, and they usually have priority over the ordinary shareholders if the company is over the ordinary shareholders if the company is liquidated. Sometimes the preference shares are liquidated. Sometimes the preference shares are classed as cumulative; this means that if the company classed as cumulative; this means that if the company cannot pay its preference dividend in one year, the cannot pay its preference dividend in one year, the amount due accrues until such time as the company amount due accrues until such time as the company has the profits to pay all of the accumulated has the profits to pay all of the accumulated dividends. dividends.


The amount of share capital that it has actually The amount of share capital that it has actually issued is known as the issued share capitalissued is known as the issued share capital. .

Sometimes when shares are issued, prospective Sometimes when shares are issued, prospective shareholders are only required to contribute to them shareholders are only required to contribute to them in instalments. in instalments.

Once all of the issued share capital has been received in Once all of the issued share capital has been received in cash, it is described as being fully paid. cash, it is described as being fully paid.

Debentures LoansDebentures Loans

Companies often borrow money in the form of Companies often borrow money in the form of debentures. debentures.

Companies issue stocks called debentures, Companies issue stocks called debentures, which are essentially long-term (over 15 which are essentially long-term (over 15 years) bondsyears) bonds. .

Debentures have advantages both to the Debentures have advantages both to the companies, which issue them, and to the companies, which issue them, and to the investors who buy them. investors who buy them.


The investor has the advantage of a high level of The investor has the advantage of a high level of securitysecurity, since most debentures are secured by a , since most debentures are secured by a charge on the assets of the companycharge on the assets of the company, however they , however they may not be secured at allmay not be secured at all. .

In addition, debenture holders can appoint a receiver if In addition, debenture holders can appoint a receiver if the firm is in financial trouble and they rank above all the firm is in financial trouble and they rank above all other loan creditors and shareholders when a failed other loan creditors and shareholders when a failed company's assets are being redistributed. company's assets are being redistributed.


Companies are obliged in law to pay interest on, Companies are obliged in law to pay interest on, and repay the capital of, debentures, regardless and repay the capital of, debentures, regardless of whether the firm is making a profit or a of whether the firm is making a profit or a loss!loss!


A debenture loan may be secured on specific A debenture loan may be secured on specific assets of the company, on its assets generally, assets of the company, on its assets generally, or it might not be secured at all. or it might not be secured at all.

If it is secured and the company cannot repay it If it is secured and the company cannot repay it on its due repayment date, the debenture on its due repayment date, the debenture holders may sell the secured assets and use the holders may sell the secured assets and use the amount to settle the amount owing to them. amount to settle the amount owing to them.


Debentures, like shares, may be bought and sold Debentures, like shares, may be bought and sold freely on the Stock Exchangefreely on the Stock Exchange. .

The nearer the redemption date for the repayment for The nearer the redemption date for the repayment for the debentures, the closer the market price will be to the debentures, the closer the market price will be to their their nominal nominal (i.e. their face, or stated paper) value, (i.e. their face, or stated paper) value, but sometimes if they are to be redeemed at a but sometimes if they are to be redeemed at a premium (i.e. in excess of their nominal value), the premium (i.e. in excess of their nominal value), the market price may exceed the nominal value. market price may exceed the nominal value.


holders are holders are not shareholdersnot shareholders of the company, and they of the company, and they have no voting rights. have no voting rights.

From the company's point of view, one further From the company's point of view, one further advantage of raising capital in the form of debenture advantage of raising capital in the form of debenture loans is that for taxation purposes the interest can be loans is that for taxation purposes the interest can be charged as a business expense against the profit for charged as a business expense against the profit for the year (unlike dividends paid to shareholders). the year (unlike dividends paid to shareholders).

Information, Rights and Company Information, Rights and Company AccountsAccounts

Disclosure of It is necessary for both public and private Disclosure of It is necessary for both public and private companies to supply a minimum information amount companies to supply a minimum information amount of information to their members. of information to their members.

Ordinary Shareholders have no common right to the Ordinary Shareholders have no common right to the access of company assets property or information.access of company assets property or information.

This restraint is imposed in order to protect the This restraint is imposed in order to protect the employed management from pressure of liaison employed management from pressure of liaison rather than managerrather than manager..


Instead, shareholders in both private and public Instead, shareholders in both private and public companies have to be supplied with an annual report companies have to be supplied with an annual report containing at least the minimum amount of containing at least the minimum amount of information required by the Companies Act 1985. information required by the Companies Act 1985.

The company also has to file (as it is called) a copy of The company also has to file (as it is called) a copy of the report (or abbreviated version) with the Registrar the report (or abbreviated version) with the Registrar of Companies. This means that, on payment of a of Companies. This means that, on payment of a small fee, the report is open for inspection by any small fee, the report is open for inspection by any member of the public who wants to consult it. member of the public who wants to consult it.


Company accounts are very similar to those of Company accounts are very similar to those of sole sole traderstraders. .

They do, however, tend to be more detailed, and some They do, however, tend to be more detailed, and some modificationsmodifications have to be made in order to comply have to be made in order to comply with various with various legal requirementslegal requirements. .

It must be clearly understood that any limited liability It must be clearly understood that any limited liability company is regarded as being a separate entity, company is regarded as being a separate entity, i.e. i.e. separate from those shareholders who own it separate from those shareholders who own it collectively, and separate from anyone who works collectively, and separate from anyone who works for it.for it.

ResponsibilitiesResponsibilities

Directors are the most senior level of management. Directors are the most senior level of management. They are responsible for the day-to-day running of They are responsible for the day-to-day running of the company, and they answer to the shareholdersthe company, and they answer to the shareholders. .

Directors are officers of the company, and any Directors are officers of the company, and any remuneration paid to them as directors is charged remuneration paid to them as directors is charged as an expense of the businessas an expense of the business. .

Directors may also be shareholders, this detail must be Directors may also be shareholders, this detail must be disclosed and should not be confused with salary all disclosed and should not be confused with salary all benefits subject to tax.benefits subject to tax.

OfficeOffice

The distinction between employees and shareholder-The distinction between employees and shareholder-employees is an important one.employees is an important one.

This is especially the case in very small companies This is especially the case in very small companies where both employees and shareholders may be one where both employees and shareholders may be one and the same. and the same.

Thus shareholder employees exhibit no common traits Thus shareholder employees exhibit no common traits with shareholders or partnerships. with shareholders or partnerships.

The main difference is that the shareholder The main difference is that the shareholder employee has a vested interest in the performance employee has a vested interest in the performance of the organisationof the organisation

Capital GearingCapital Gearing

The investment ratio: capital-gearing ratio will be The investment ratio: capital-gearing ratio will be discussed in detail within the Finance delivery Unit 4.discussed in detail within the Finance delivery Unit 4.

Linked to the Return On Capital Employed it can Linked to the Return On Capital Employed it can present problems of interpretation.present problems of interpretation.

As outlined companies are financed out of a mixture of As outlined companies are financed out of a mixture of share capital, retained profits and loans. share capital, retained profits and loans.

Loans may be long-term (such as debentures), or short-Loans may be long-term (such as debentures), or short-term (such as credit given by trade creditors). term (such as credit given by trade creditors).


If a company, therefore, finances itself from a If a company, therefore, finances itself from a high high level of loanslevel of loans, there is obviously a higher risk in , there is obviously a higher risk in investing in it. This arises for two main reasons:investing in it. This arises for two main reasons:

1.1. The The higher the loanshigher the loans, the more , the more interestinterest that the that the company will have to pay, and that may affect the company will have to pay, and that may affect the company's ability to pay an company's ability to pay an ordinary dividendordinary dividend..

2.2. If the company cannot find the cash to repay its loans, If the company cannot find the cash to repay its loans, the ordinary share holders may not get any money the ordinary share holders may not get any money back if the company goes into liquidation.back if the company goes into liquidation.


As far as item 1 is concerned, there will be no particular As far as item 1 is concerned, there will be no particular problem arising if profits are problem arising if profits are increasingincreasing, because the , because the interest on its loans will become a smaller and interest on its loans will become a smaller and smaller proportion of the total profit. smaller proportion of the total profit.

But it could become a problem if profits are But it could become a problem if profits are fallingfalling and and the interest has to be paid out of a continuing decline the interest has to be paid out of a continuing decline in profit. It might then be difficult to payout any in profit. It might then be difficult to payout any ordinary dividend. ordinary dividend.


There are many different ways of calculating capital There are many different ways of calculating capital gearing. As indicated above, the entity will have been gearing. As indicated above, the entity will have been financed by a combination of shareholders' funds and financed by a combination of shareholders' funds and loans.loans.

The relationship between them can be expressed in two The relationship between them can be expressed in two most common methods as follows:most common methods as follows:

1.1. LoansLoans//Shareholders' funds + LoansShareholders' funds + Loans

2.2. LoansLoans//Shareholders' fundsShareholders' funds


The first method, since it expresses a percentage, The first method, since it expresses a percentage, it appears clearer, i.e. ‘it appears clearer, i.e. ‘xx% of the company has % of the company has been financed by loans’. been financed by loans’.

The second method shows the loans represent a The second method shows the loans represent a certain proportion of the shareholders' funds certain proportion of the shareholders' funds (including preference shares). (including preference shares).

Shareholders' Funds and LoansShareholders' Funds and Loans

These include the following items:These include the following items: -- Ordinary share capitalOrdinary share capital -- Preference share capital (Note 1)Preference share capital (Note 1) -- Share premium accountShare premium account -- Capital reservesCapital reserves -- Revenue reservesRevenue reserves -- Other reservesOther reserves -- Profit and loss accountProfit and loss account

Shareholders' Funds and LoansShareholders' Funds and Loans

Loans may (but will not necessarily) include the following Loans may (but will not necessarily) include the following items: items:

-- Preference share capital (Note 1)Preference share capital (Note 1) -- Debentures Debentures -- Loans Loans -- OverdraftsOverdrafts -- Provisions Provisions -- Accruals Accruals -- Current liabilities Current liabilities -- Other amounts due for paymentOther amounts due for payment

NotesNotes

Notes: Notes:

(1) Some accountants exclude preference share (1) Some accountants exclude preference share capital from shareholders' funds because they capital from shareholders' funds because they regard it as a type of loan. regard it as a type of loan.

(2) In a complex group structure, you might also (2) In a complex group structure, you might also come across other items that could be classed come across other items that could be classed as loans. as loans.


The following is a straightforward definition of The following is a straightforward definition of capital gearing: capital gearing:

Preference shares + Long-term loansPreference shares + Long-term loansTotal Shareholders' funds + Long-term loans Total Shareholders' funds + Long-term loans

x 100 x 100 = = xx%%

ActivityActivityUsing the following data please calculate the Using the following data please calculate the

capital gearing ratio for the 3 businessescapital gearing ratio for the 3 businesses

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Business Long term loans Ordinary shares Preference shares RATIO

A £680,000.00 £2,000,000.00 £1,500,000.00

B £40,000.00 £70,000.00 £350,000.00

C £10,000.00 £30,000.00 £110,000.00

ActivityActivityAnswersAnswers

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Business Long term loans Ordinary shares Preference shares RATIO

A £680,000.00 £2,000,000.00 £1,500,000.00 52.1%

B £40,000.00 £70,000.00 £350,000.00 85.0%

C £10,000.00 £30,000.00 £110,000.00 80.0%


A company that has financed itself out of a A company that has financed itself out of a high proportion of loanshigh proportion of loans (e.g. in the form of a (e.g. in the form of a combination of preference shares and long-combination of preference shares and long-term loans) is known as a term loans) is known as a highly geared highly geared company. company.

Conversely, a company with a Conversely, a company with a low levellow level of of loans - is regarded as being loans - is regarded as being low-gearedlow-geared. .


Note that high and low in this context are Note that high and low in this context are relative terms. As indicated above, a highly relative terms. As indicated above, a highly geared company is potentially a higher risk geared company is potentially a higher risk investment, as it has to earn sufficient profit to investment, as it has to earn sufficient profit to cover the interest payments and the preference cover the interest payments and the preference dividend before it can payout any ordinary dividend before it can payout any ordinary dividend. dividend.


This should not be a problem when profits are This should not be a problem when profits are rising, but if they are falling, then they may rising, but if they are falling, then they may not be sufficient to cover even the preference not be sufficient to cover even the preference dividend. dividend.

The gearing ratios make up important elements The gearing ratios make up important elements of the overall capital and investment ratio of the overall capital and investment ratio analysis.analysis.

Capital Structure and Financial Capital Structure and Financial RiskRisk

In addition to an assessment of the short-term liquidity In addition to an assessment of the short-term liquidity position of a company, it is also important to examine position of a company, it is also important to examine the the overall means by which a company finances its overall means by which a company finances its operationsoperations. .

It is usual for a company to be financed partly by loans It is usual for a company to be financed partly by loans from banks and other lenders and partly by the funds from banks and other lenders and partly by the funds of its ordinary shareholders. of its ordinary shareholders.


These two sources of finance are normally These two sources of finance are normally referred to respectively as referred to respectively as debt and equitydebt and equity, , and the relationship between the two gives a and the relationship between the two gives a measure of the measure of the gearing gearing of the company. of the company.

Gearing has important implications for the long-Gearing has important implications for the long-term stability of a company because of its term stability of a company because of its effect on financial risk. effect on financial risk.


The providers of loan capital (debt) require a fixed The providers of loan capital (debt) require a fixed amount of interest to be paid to them each year, amount of interest to be paid to them each year, irrespective of the level of profits earned. irrespective of the level of profits earned.

The providers of equity capital do not enjoy a fixed The providers of equity capital do not enjoy a fixed reward each year, but are entitled to a percentage of reward each year, but are entitled to a percentage of the residual profits after all other payments including the residual profits after all other payments including interest charges have been met. interest charges have been met.

ExampleExample

For example, if an all-equity firm earns operating profits after tax of £200,000, then the amount accruing to ordinary shareholders, either as dividends or retained profits, will be £200,000. If in the next year the profits fall by 25 per cent to £150,000, then the amount accruing to ordinary shareholders will also fall by 25 per cent.

Example continuedExample continued

However, if the company were geared, i.e. if it However, if the company were geared, i.e. if it were financed partly by loans requiring an were financed partly by loans requiring an after-tax fixed-interest payment of, say, after-tax fixed-interest payment of, say, £75,000 per year, then the profits available to £75,000 per year, then the profits available to ordinary shareholders in the first year would ordinary shareholders in the first year would be £125,000 (£200,000 minus interest of be £125,000 (£200,000 minus interest of £75,000), but in the second year these would £75,000), but in the second year these would fall to £75,000 (£150,000 minus interest of fall to £75,000 (£150,000 minus interest of £75,000), a decline of 40 per cent. £75,000), a decline of 40 per cent.

ConverselyConversely

Conversely, if profits had risen by 25 per cent to Conversely, if profits had risen by 25 per cent to £250,000, the earning available to the ordinary £250,000, the earning available to the ordinary shareholders in the geared company would shareholders in the geared company would have increased to £175,000 (£250,000 minus have increased to £175,000 (£250,000 minus £75,000), an increase of 40 per cent. £75,000), an increase of 40 per cent.

Return Debt Vs. EquityReturn Debt Vs. Equity

Nevertheless, Nevertheless, gearing does have its advantagesgearing does have its advantages. It . It might be reasonable to expect that the benefits of a might be reasonable to expect that the benefits of a fixed amount of interest every year and priority over fixed amount of interest every year and priority over shareholders on liquidation should make the cost of shareholders on liquidation should make the cost of debt capital cheaper than that of equity. debt capital cheaper than that of equity.

In other words, the In other words, the average return expected by average return expected by lenders should be lower than the average return lenders should be lower than the average return expected by shareholdersexpected by shareholders. .

Tax AllowTax Allow

Furthermore, the interest payable on loan capital is an Furthermore, the interest payable on loan capital is an allowable expense when determining taxable profit, allowable expense when determining taxable profit, whereas dividends are a distribution out of the after-whereas dividends are a distribution out of the after-tax profits. tax profits.

Thus, for a company that pays corporation tax at the rate Thus, for a company that pays corporation tax at the rate of, say, 35% on its taxable profits, the after-tax cost of, say, 35% on its taxable profits, the after-tax cost of interest payments will be reduced in the same of interest payments will be reduced in the same proportion, because every £100 paid in interest will proportion, because every £100 paid in interest will reduce taxable profit by £100 and therefore tax reduce taxable profit by £100 and therefore tax payable by £35. payable by £35.


To the extent that debt is a less expensive source of To the extent that debt is a less expensive source of finance than equity, then initially the use of gearing finance than equity, then initially the use of gearing might be beneficial, providing that the advantages of might be beneficial, providing that the advantages of lower-cost debt more than compensate for the lower-cost debt more than compensate for the disadvantages caused by increased financial risk. disadvantages caused by increased financial risk.

However, as gearing increases, the financial-risk effect However, as gearing increases, the financial-risk effect will begin to outweigh the benefits of low- cost debt. will begin to outweigh the benefits of low- cost debt.

Balance?Balance?

This implies the existence of some optimal level This implies the existence of some optimal level of gearing that a company should try to of gearing that a company should try to achieve. achieve.

Empirical evidence would suggest that Empirical evidence would suggest that companies no longer assume that one specific companies no longer assume that one specific level of gearing is appropriate all the time and level of gearing is appropriate all the time and in all the circumstances. in all the circumstances.


For example, during the downturn of an For example, during the downturn of an economic cycle companies will attempt to economic cycle companies will attempt to reduce their gearing and then reverse it on the reduce their gearing and then reverse it on the upturn. upturn.

This will minimize the risks concerning non-This will minimize the risks concerning non-payment of interest in poor trading conditions payment of interest in poor trading conditions on the one hand, and on the other hand enable on the one hand, and on the other hand enable the company to gain the benefits of the gearing the company to gain the benefits of the gearing on the upturn in profits. on the upturn in profits.


The ever widening portfolio of types of long- The ever widening portfolio of types of long- and short-term capital available to a company and short-term capital available to a company may make life more complex for financial may make life more complex for financial managers, but at the same time it will managers, but at the same time it will hopefully reduce the financial risks by the hopefully reduce the financial risks by the better matching of fund type with corporate better matching of fund type with corporate need. need.

Legal Duties for CompaniesLegal Duties for Companies(UK)(UK)

The forming of limited companies requires The forming of limited companies requires complex procedures and structure when complex procedures and structure when compared to sole trader and partnershipscompared to sole trader and partnerships

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Documentation Documentation


Companies House, a government-owned agency, Companies House, a government-owned agency, regulates Companies. regulates Companies.

All companies have to register with Companies All companies have to register with Companies House and are issued with the company House and are issued with the company equivalent of a birth certificate - the equivalent of a birth certificate - the Certificate of IncorporationCertificate of Incorporation. .


Small businesses such as Small businesses such as sole traders and sole traders and partnershipspartnerships require relatively little in the require relatively little in the way of paperwork. way of paperwork.

Setting up a limited company, on the other hand, Setting up a limited company, on the other hand, requires substantial documentation. requires substantial documentation.


In addition, a company will also need two further In addition, a company will also need two further documents: documents:

-- The Memorandum of AssociationThe Memorandum of Association - which - which states what the company can dostates what the company can do

-- The Articles of AssociationThe Articles of Association - the internal - the internal 'rulebook' of the company 'rulebook' of the company

Refer to Refer to Automotive IndependentAutomotive Independent registration registration

Limited CompanyLimited Company

A company registered in accordance with the A company registered in accordance with the provisions of the Companies Acts is a separate provisions of the Companies Acts is a separate legal entity distinct from its owners or legal entity distinct from its owners or shareholders, and its directors or managers. It shareholders, and its directors or managers. It can enter into contracts and sue or be sued in can enter into contracts and sue or be sued in its own right. It is taxed separately through its own right. It is taxed separately through Corporation Tax. Corporation Tax.

Limited CompanyLimited Company

There is a divorce between management and There is a divorce between management and ownership, with a board of directors elected by ownership, with a board of directors elected by the shareholders to control the day-to-day the shareholders to control the day-to-day running of the business. running of the business.

There need be only There need be only two shareholderstwo shareholders and and one one directordirector, and , and shareholders can also be shareholders can also be directors. directors.

AdvantagesAdvantages

The advantage of this form of business is that the The advantage of this form of business is that the liability of the shareholders is limited by the liability of the shareholders is limited by the amount of capitalamount of capital they put into the business. What is they put into the business. What is more, a company has unlimited life and can be sold more, a company has unlimited life and can be sold on to other shareholders. on to other shareholders.

There is no limit to the number of shareholders. There is no limit to the number of shareholders. Therefore a limited company can attract Therefore a limited company can attract additional risk capital from investors who may not additional risk capital from investors who may not wish to be involved in the day-to-day running of wish to be involved in the day-to-day running of the businessthe business. .

AdvantagesAdvantages

Also, because of the regulation they face, Also, because of the regulation they face, bankers prefer to lend to companies rather than bankers prefer to lend to companies rather than sole traders, although they may still require sole traders, although they may still require personal guarantees. Clearly this is the best personal guarantees. Clearly this is the best form for a growth business that will require form for a growth business that will require capital and will face risks as it grows. capital and will face risks as it grows.

DisadvantagesDisadvantages

Nevertheless there are some disadvantages to this form Nevertheless there are some disadvantages to this form of business. Under the Companies Acts, a company of business. Under the Companies Acts, a company must keep certain books of account and appoint an must keep certain books of account and appoint an auditor. It must file an annual return with Companies auditor. It must file an annual return with Companies House, which includes accounts and details of House, which includes accounts and details of directors and shareholders. directors and shareholders.

This takes time and money and means that competitors This takes time and money and means that competitors might have access to information that they would not might have access to information that they would not otherwise. otherwise.

IncorporationIncorporation

The easiest way to set up a company is to buy one ‘off the The easiest way to set up a company is to buy one ‘off the shelf' from a Company Registration Agent at a cost of shelf' from a Company Registration Agent at a cost of approximately £24.99: approximately £24.99: http://www.ukplc.nethttp://www.ukplc.net. .

This avoids the entire tedious form filling that is This avoids the entire tedious form filling that is otherwise required. It also saves time. Agents will also otherwise required. It also saves time. Agents will also show you how to go about changing the company's show you how to go about changing the company's name if you want to. name if you want to.

Investor InformationInvestor Information Public Limited Companies...are able to offer shares to and Public Limited Companies...are able to offer shares to and

raise funds from the general public, although this is not raise funds from the general public, although this is not compulsory. compulsory.

Some are run privately but prefer having the status of a plc. Some are run privately but prefer having the status of a plc. Plc's must have a minimum of:Plc's must have a minimum of: 2 directors, 2 directors, a qualified company secretary, a qualified company secretary, and a minimum share capital of £50,000.and a minimum share capital of £50,000. Most public limited companies in the United Kingdom have Most public limited companies in the United Kingdom have

their shares listed on the London Stock Exchange, and hence their shares listed on the London Stock Exchange, and hence they are often referred to as listed companies. they are often referred to as listed companies.

E.g. E.g. http://www.douglas-cs.co.uk/plc..

Investor InformationInvestor Information

Any company that does not make its shares available to Any company that does not make its shares available to the public is regarded as being a the public is regarded as being a private companyprivate company. .

Like public companies, private companies must also Like public companies, private companies must also have an authorized share capital, although no have an authorized share capital, although no minimum amount is prescribed. Otherwise, they are minimum amount is prescribed. Otherwise, they are very similar to public companies in respect of their very similar to public companies in respect of their share capital requirements. share capital requirements.

Summary of Advantages and Summary of Advantages and DisadvantagesDisadvantages

Sole trader Partnership Limited company

Advantages Easy to form Minimum of regulation

Easy to form Minimum of regulation

Limited liability Easier to borrow money Can raise risk capital through additional shareholders Can be sold-onPays Corporation Tax

Disadvantages

Unlimited Personal liability More difficult to borrow money Pay personal tax

Unlimited personal liability for partnership More difficult to borrow money 'Cease trading' whenever partners change Pay personal tax

Must comply with Companies Acts Greater regulation Greater disclosure of information

Formation of a Limited CompanyFormation of a Limited Company

The Companies Act generally allows one or The Companies Act generally allows one or more persons to form a company for any more persons to form a company for any lawful purpose by subscribing to its lawful purpose by subscribing to its memorandum of association. memorandum of association.

A public company or an unlimited company A public company or an unlimited company must have at least two subscribers. must have at least two subscribers.


There are four main types of company: There are four main types of company: Private company limited by shares - members' Private company limited by shares - members'

liability is limited to the amount unpaid on shares liability is limited to the amount unpaid on shares they hold. they hold.

Private company limited by guarantee - members' Private company limited by guarantee - members' liability is limited to the amount they have agreed to liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up. contribute to the company's assets if it is wound up.

Private unlimited company - there is no limit to the Private unlimited company - there is no limit to the members' liability. members' liability.


Public limited company (PLC)Public limited company (PLC) –. –.

The company's shares may be offered for sale to The company's shares may be offered for sale to the general public and members' liability is the general public and members' liability is limited to the amount unpaid on shares held by limited to the amount unpaid on shares held by them.them.


Ready-made companies are available from Ready-made companies are available from company formation agents, these companies company formation agents, these companies are available to the public through various are available to the public through various media and information sites and this is media and information sites and this is relatively simple to put into operation.relatively simple to put into operation.


However incorporating a company yourself means you However incorporating a company yourself means you will need to send the following documents, together will need to send the following documents, together with a registration to the Registrar of Companies:with a registration to the Registrar of Companies:

• A memorandum of association.A memorandum of association.• Articles of association (except in some specific Articles of association (except in some specific

circumstances; ref; - Companies House).circumstances; ref; - Companies House).• Companies House formsCompanies House forms• Form 10Form 10• Form 12Form 12

The Memorandum of AssociationThe Memorandum of Association

This document sets out:This document sets out:

·· The company's name.The company's name. ·· Where the registered office of the company Where the registered office of the company

is situated (in England, Wales or Scotland).is situated (in England, Wales or Scotland). ·· What it will do (its objects). The object of What it will do (its objects). The object of

a company may simply be to carry on business a company may simply be to carry on business as a general commercial company.as a general commercial company.

The Memorandum of AssociationThe Memorandum of Association

Other clauses to be included in the memorandum Other clauses to be included in the memorandum depend on the type of company being incorporated. depend on the type of company being incorporated.

The form of memorandum for each type of company is The form of memorandum for each type of company is set out in a set of tables called The Companies set out in a set of tables called The Companies Regulations, 1985. Regulations, 1985.

Each subscriber in front of a witness who must attest the Each subscriber in front of a witness who must attest the signature must sign the company’s memorandum signature must sign the company’s memorandum delivered to the Registrar. delivered to the Registrar.

Articles of AssociationArticles of Association

This document sets out the rules for the running This document sets out the rules for the running of the company's internal affairs. Companies of the company's internal affairs. Companies House provides model articles. A company House provides model articles. A company may adopt the whole of the model reference as may adopt the whole of the model reference as its articles or any part of it. its articles or any part of it.

Form 10 Form 10

This form gives details of the first director(s), This form gives details of the first director(s), secretary and the intended address of the secretary and the intended address of the registered officeregistered office. As well as their names and . As well as their names and addresses, the company's directors must give addresses, the company's directors must give their date of birth, occupation and details of their date of birth, occupation and details of other directorships they have held within the other directorships they have held within the last five years. Each officer appointed and last five years. Each officer appointed and each subscriber (or their agent) must sign and each subscriber (or their agent) must sign and date the form. date the form.

The Registered OfficeThe Registered Office

It is the address of a company to which It is the address of a company to which Companies House letters and reminders will be Companies House letters and reminders will be sent. The registered office can be anywhere in sent. The registered office can be anywhere in England and Wales (or Scotland if your England and Wales (or Scotland if your company is registered there).company is registered there). The registered The registered office must always be an effective address for office must always be an effective address for delivering documents to the company. delivering documents to the company.

If a company changes its registered office address If a company changes its registered office address after incorporation, the new address must be after incorporation, the new address must be notified to Companies House on Form 287. notified to Companies House on Form 287.

Appointed OfficersAppointed Officers

Every company must have formally appointed company Every company must have formally appointed company officers at all times. officers at all times.

A private company must have at least: A private company must have at least: One director - but the company's articles of One director - but the company's articles of

association may require more than oneassociation may require more than one One secretary - formal qualifications are not required. One secretary - formal qualifications are not required.

A company's sole director cannot also be the A company's sole director cannot also be the company secretary. company secretary.


A public company must have at least: A public company must have at least: Two directors; Two directors; One secretary - formally qualified. One secretary - formally qualified. All company officers have wide All company officers have wide

responsibilities in law.responsibilities in law.


After incorporation, you must tell Companies House After incorporation, you must tell Companies House about: about:

The appointment of a new officer - use Form 288a; The appointment of a new officer - use Form 288a; An officer's resignation from the company - use An officer's resignation from the company - use

Form 288b;Form 288b; Changes in an officer's name or address or any of Changes in an officer's name or address or any of

the other details originally registered on Form 10 - the other details originally registered on Form 10 - use Form 288c. use Form 288c.

Company DirectorshipCompany Directorship

General exemptions: General exemptions:

Where you are an Where you are an un-discharged bankrupt or un-discharged bankrupt or disqualified by a court from holding a disqualified by a court from holding a directorshipdirectorship, unless given leave to act in respect of a , unless given leave to act in respect of a particular company or companies; particular company or companies;

In the case of plc's or their subsidiaries, you are In the case of plc's or their subsidiaries, you are over over 70 years of age70 years of age or reach 70 years of age while in or reach 70 years of age while in office, unless you are appointed or re-appointed by office, unless you are appointed or re-appointed by resolution of the company in general meeting of resolution of the company in general meeting of which special notice has been given. which special notice has been given.

Form 12Form 12

Form 12 is a statutory declaration of Form 12 is a statutory declaration of compliance with all the legal requirementscompliance with all the legal requirements relating to the incorporation of a company. It relating to the incorporation of a company. It must be signed by a must be signed by a solicitorsolicitor who is forming who is forming the company, or by one of the people named the company, or by one of the people named as a director or company secretary on Form as a director or company secretary on Form 10. 10.

Company NamesCompany Names

The registration of the company name is controlled The registration of the company name is controlled by Companies House to avoid duplication, offence by Companies House to avoid duplication, offence and misrepresentation. and misrepresentation.

In addition certain constraints are also in place to avoid In addition certain constraints are also in place to avoid infringement of patent or property. It is also infringement of patent or property. It is also important to check whether the chosen name is important to check whether the chosen name is similar to any other names already on the register. If similar to any other names already on the register. If your chosen name is too similar to another name, an your chosen name is too similar to another name, an objection can be brought to the Secretary of State.objection can be brought to the Secretary of State.

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Group Assignment TasksGroup Assignment Tasks

Prepare tasks 3 and 4 as instructed on your assignment sheetPrepare tasks 3 and 4 as instructed on your assignment sheet


A final draft of all tasks should be handed in by the date A final draft of all tasks should be handed in by the date specified in your schedulespecified in your schedule

1.physical resources (2005.6) (1)

Business

Transcript of 1.physical resources (2005.6) (1)