Case Study Glossary

Term Definition

Board of Directors The formal meetings of the executive directors of the company at which decisions are taken about the business (e.g. trading, investment, strategy) and issues relating to the company (e.g. dividends, shareholdings)

Chairman The director that chairs the meetings of the Board and the Annual General Meeting with shareholders

Costings The likely costs involved in a product or project

Diversify / Diversification

Getting involved in business activities that are in different markets (e.g. products, customers) compared with the original business.

Downturn A reduction in the strength of the economy – i.e. a less favourable macroeconomic environment

Ethics

Factory units Purpose-built units that are designed to house businesses –often built as clusters of units on what is known as a business park or industrial estate

Family business A business that is controlled (and usually managed) by members of a family

Finance Director Executive director responsible for managing the financial affairs of the business (e.g. budgeting, cash flows, investment appraisal)

Garden grab A method of acquiring land on which it is possible to build new homes. Gardens are classified as “brownfield” sites, not “Greenfield” sites. The crucial distinction means that gardens can be acquired as potential sites for new house building (greenfield sites are more much harder to buy – due to planning restrictions imposed by the green belt)

Geographical spread The geographical area covered by the business – i.e. the locations where LC plc build properties

Green belt In UK town planning, the green belt is a policy for controlling urban growth. The idea is for a ring of countryside where urbanisation will be resisted for the foreseeable future, maintaining an area where agriculture, forestry and outdoor leisure can be expected to prevail

Institutional shareholders Organisations such as pension schemes, fund managers, insurance companies and other professional investors who invest in shares as part managing an investment portfolio. Institutional investors typically hold the majority of shares in a quoted company, although an individual institution may only hold a small proportion

Interest groups Stakeholder groups who have an external interest in the activities of business. E.g. local residents opposed to property development in their locality

Term Definition

Living standards How well people are able to live. It is linked to the amount of money they earn (disposable income). Typically measured by economists as GDP per person

Macroeconomic environment

The overall strength (or otherwise) of the economy. The variables (taken together) which influence demand in the economy. Key macroeconomic variables for LC plc would be: Interest rates / availability of credit Consumer spending Business investment Unemployment

Motion A decision taken at a Board Meeting which had legal power

Non-executive Directors Members of the Board of Directors who do not have Executive responsibility. They attend Board Meetings, but don’t have day-to-day responsibility for business decision-making. Main role should be to provide advice for the Board and to focus on corporate governance issues

Operations Director Executive director responsible for managing the production & operations side of the business (e.g. project managing each property development; probably employment issues too)

Outbid Where a business is unable to match the price being offered by competitors – e.g. unable to match the price being paid for property development land

Owner occupied The owner of the property lives in it! “Owner occupied” is a classification of UK housing tenure used by the UK government to monitoring the UK housing stock. Other classifications are:

- Private rented - Rented from registered social landlords - Rented from local authorities

Planning Director Executive Director responsible for planning. Unclear what roles this would include at LC plc – probably legal issues relating to proposed property developments; perhaps contractual arrangements with suppliers?

Planning laws Legislation which determines the areas on which property (e.g. residential, commercial, industrial) can be developed

Planning permission Permission granted by local authorities for a property development. Obtaining permission often takes a long time, and the process is costly for substantial developments where a developer meets local resistance

Private company Companies whose shares are owned privately. A common form of business organisation.

Private equity company Another kind of professional investor. Also known as a “venture capitalist”

Private shareholders Individuals, businesses or other organisations that own shares for their own account (e.g. an adult investing in a portfolio of shares bought from the London Stock Exchange)

Term Definition

Property development Usually associated with investing in, and developing, commercial property (e.g. retail outlets, office blocks)

Public limited company A form of limited company, usually shortened to “plc”, whose share capital may be offered for sale on a recognised stock exchange.

Risk The chance (probability) that the expected-for returns from an investment are not achieved. A high-risk project has a high probability that the returns will not occur, and perhaps significant losses will be incurred

Shares The means by which ownership of the company is divided. A shareholding is a number of shares – often expressed as a percentage (e.g. “20% of the shares”). In a company, normally one share has one voting right. So someone with a 20% shareholding will control 20% of the voting rights on company decisions

Social environment Factors relating to the size and structure of society that impact the market. For example, the number of adults living alone (single-person households); the relative attractiveness of city-living compared with those who want to live in the suburbs or country

Starter houses New houses built to be priced as affordable for new entrants to the housing market (i.e. lower-price, basic facilities, smaller)

Comprehension worksheet

Question Answer

What was the original business activity of Layton Construction (“LC”)?

House-building Originally focused on building houses in Hampshire before widening the geographic reach of the business

Who are the three Layton children who became involved in the business?

Barbara Gary Sarah

The three new markets suggested by the three children as being suitable for LC diversification were?

Residential flats (1-2 bedrooms) [Barbara] Factory units [Gary] Commercial property – shopping malls [Sarah]

How many people were there on the Board of Directors at the important meeting in 1988?

7 Four executive directors (Jim, Barbara, Gary & Sarah) Three non-execs – Brenda + two family friends

The main concerns raised by Jim at the Board Meeting were?

Risky diversification into other property development markets Lack of finance in the business to support diversification Opposition to the proposal to raise finance by floating the company on the Stock Exchange in order to raise finance (wanted to retain control within the family)

How was the decision to float the company achieved?

Three Layton children voted for the change in ownership structure (60%) supported by two non-execs Note: this change would require a 75% majority of shareholders

After the flotation, what proportion of LC plc did Jim & Brenda own?

None – they decided to sell their shares (probably a substantial sum given they had 20%) and retire to Spain

Post flotation, who had control of the company?

No-one The three Layton children had 40% of the shares combined, with the remained with private and institutional shareholders (including a venture capitalist with 11%)

How did the LC plc business develop as a quoted company?

Strong growth despite some economic downturns Diversified into a broader range of property development

- Still active in traditional owner-occupied house-building

- Small shopping malls (commercial property) - Residential flats - Small factory units on industrial estates

Question Answer

Geographical spread of operations also significantly widened, though remaining with a focus on the south east

LC plc had been trying to gain a share of development opportunities along the M11 corridor and Thames Gateway since 2000. Why had they not been successful?

Main reason – being outbid in the prices offered to landowners Also frustrated by increasingly stringent planning regulations and opposition from interest groups

What change in land-acquisition strategy was proposed by Gary in 2007?

A move towards using Garden Grabbing as a way of acquiring land for residential development + using technology to identify potential sources of land

What concern was raised about Garden Grabbing

A question of ethics – using commercial persuasion to encourage property owners to part with their spare garden land

How much did LC plc pay for its first purchase of land under the Garden Grab strategy?

£2.5m

Before starting the development, what issue arose

A downturn in the economy prompted by a rise in interest rates (heralding the start of the collapse in property prices)

Exam Style Questions This worksheet provides you with a series of exam-style questions based on the Layton Construction case study. These questions are not meant to provide a complete list of all the possible questions that the examiner might throw at you. It is up to you to make sure that your revision covers all the main areas you have studied on the course. However, this guide will help you to see how the information in the case can be used to respond to the kind of questions you will be set. We have focused on the key areas raised in the case.

Business Ownership What this part of the specification is about: You need to understand and be able to explain the advantages and disadvantages of different forms of business ownership, including:

Sole trader

Partnership

Private limited company

Public limited company

Co-operatives

Not-for-profit or charity

Franchise You need to understand that different types of business ownership create different opportunities and constraints and how the type of ownership affects business objectives and decisions.

Sample questions Outline responses

Describe two advantages and disadvantages of Layton Construction Limited being owned by family members

Advantages Disadvantages

Ownership and control of the business is retained within the family

Decisions may be taken for personal rather than legitimate business reasons

Shareholders are likely to have common values – sharing an ethos and beliefs about how things should be done

Restricts ability of the business to raise finance – shares have to be sold to existing or other family members

Potentially quicker decision-making: family members can discuss issues informally and come to agreement easier

Business is less attractive to outside investors whilst family retains control

Less pressure to take profits out of the business via dividends

Family shareholders may have all their “eggs in one basket” – e.g. too reliant on the returns and success

of the company

Describe the main advantages of Layton Construction becoming a public limited company in 1988 and floating on the Stock Market

Advantages Disadvantages

The most important advantage – Layton Construction gets access to new capital to develop the business. The diversification plans of the three Layton children would require Layton Construction to access substantial new sources of finance. Banks would be more likely to lend to the business too if Layton broadened its shareholder base and increased the amount of share capital in the business

Most importantly, the Board of Layton Construction plc now have to consider much wider shareholders' interests when running the company - which are likely to differ from the family's objectives when the business was run privately. For example, external shareholders are likely to emphasise objectives relating to profit growth and dividend payouts.

A float made it easier for the Layton family investors to realise their investment. E.g. Jim & Brenda were able to sell their shares on the open market and retire to Spain.

The business may become vulnerable to market fluctuations beyond its control. There is little that Layton Construction management can do if the property development sector becomes unpopular (share price may fall) or if overall market sentiment drives the value of the business down.

Layton could offer employees extra incentives by granting share options.

The costs of flotation can be substantial and there are also ongoing costs such as higher professional fees.

Being a publicly quoted company can provide customers and suppliers with added reassurance

Public companies have to comply with a wide range of additional regulatory requirements and meet accepted standards of corporate governance

Layton Construction gains a higher public profile – potentially useful when negotiating contracts with suppliers and marketing the various property developments

Increased risk of takeover – though any potential purchaser would need to gain the support of the three Layton children

Sources of Finance What this part of the specification is about: You need to understand and be able to explain the options available for different types of businesses when selecting appropriate sources of finance to fund business decisions. You need to know the differences between the different sources and their advantages and disadvantages. In particular, you need to know about:

Internal versus external sources, giving examples.

Short term versus long term sources of finance, giving examples. You also need to understand how the type of ownership influences business decisions regarding finance.

Sample questions Suggested answers

Explain, with examples from the case study, the difference between short-term finance and long-term finance.

Short term finance is usually only available to business for periods of up to one year. i.e. it will need to be repaid within that time. Examples include trade credit (amounts owed to suppliers) and bank overdrafts. For Layton Construction, the business will make extensive use of a variety of sources of short-term finance. For example, the business will:

- Bank overdraft – likely to be substantial - Owe money to suppliers of building equipment and services (trade creditors) - Credit from sub-contractors (trade creditors) - Leasing of construction equipment (leasing / hire purchase)

Long-term finance is available for periods of over 1 year and is generally suited to financing assets such as plant and machinery, land and buildings. Good examples include mortgages (loans to buy property), finance leases and bank loans. Share capital is also a source of long-term finance Again, as a complex & substantial business, Layton Construction will utilise a range of long-term sources:

- Share capital: raised during the stock market flotation in 1988 + potentially additional share sales since then. This would have been substantial – likely to be £20m++

- Mortgages – raised to finance the purchase of land. A crucial source of finance for a property developer – the value of the land can be used as security for the finance raised until profits are realised by selling the completed property development

- Bank loans: another important source for a property development; may also be secured against specific property developments

Explain, with examples from Layton Construction, the difference between internal finance and external finance.

Internal finance is generated from within the business Examples:

- Profit earned on individual property developments (when completed and sold) – this is known as retained profits

- Interest and other returns received on amounts held in cash or as investments - Sale of surplus assets – e.g. disposing of surplus land or other property assets that are acquired during the

course of business For Layton Construction, retained profits will be the most important source of internal finance External finance is provided by individuals or organisations outside of the business Examples:

- Equity finance raised from the issue and sale of new shares to investors (via the Stock Market) - Bank loans and overdraft facilities - Mortgages - Trade creditors

Budgeting and Budgetary Control What this part of the specification is about: You need to be able to:

Construct simple budgets from given figures and interpret them.

Understand the different types of budgeting available, i.e. historic and zero-based budgeting, including their advantages and disadvantages.

Understand the budgeting process in different contexts and for different types of business.

Understand the purpose of budgetary control and variance analysis and be able to apply them effectively. You also need to understand how budgetary control helps businesses to co-ordinated their future marketing, production and human resources.

Sample questions Suggested answers

Discuss the importance of budgeting to a business like Layton Construction

Budgeting will be an important role within the finance department at Layton Construction. It will be closely linked with the planning team. Why so important? Layton Construction is a public company, whose financial results will be reported on every six months, It is vital that the company has strong financial control processes (a requirement of the Stock Exchange). Budgeting plays a key role in that. Layton takes a risk with each property development that it commits to, with substantial fixed costs and financial outlays up-front. There is a significant uncertainty about what the financial returns will be from each project until it is:

(a) Completed (total costs incurred) (b) Sold (total revenue determined)

For all projects in progress, it is essential that strong budgetary control is maintained so that the project

managers (and Board of Directors at the higher level) can track actual costs and revenues against target (budget) If a project were to incur substantial adverse variances against budget (e.g. costs higher than budget; or sales lower than budget), the effect on Layton Construction’s financial performance may be significant Cash flow budgeting is particularly important:

- In a typical property development, most of the cash outflows arise at the start (e.g. purchase of land) and in the middle of the project (e.g. paying suppliers, labourers). The cash inflows typically arise at the end of the project – once a customer can purchase a flat, occupy an industrial unit or lease a unit in a shopping mall

- Because of the negative cash flows throughout much of a project, it is essential that costs are kept under control and that the timing of cash flows is properly anticipated by the business.

- The cash flow budget therefore needs to link closely with regular and accurate/prudent cash flow forecasting

Break-Even Analysis What this part of the specification is about: You need to be able to:

Classify business costs into fixed and variable.

Know the formula for calculating break-even.

Construct a break-even chart (although you will not be asked to construct a break-even chart in its entirety in the exam).

Calculate break-even using given data and comment on how a business’ break-even point can be changed.

Describe how break-even calculations can be used in business decision-making, e.g. location, purchase of capital.

Identify the limitations of break-even analysis. You will also need to understand the importance of forecasting in calculating break-even. Breakeven is a popular area for the Unit 3 examiner to test your understanding with some calculations. We have included a breakeven worksheet for the garden plot development so that you can practice this important area

Sample questions Suggested answers

Describe some examples of fixed costs that might be incurred by Layton Construction.

Fixed costs are costs that do not change as output changes. Many of Layton Constructions costs will be fixed. The costs incurred will be determined by the scale and complexity of the development. Examples: Fixed costs of buying a plot of land Business rates & property insurance Overheads associated with operating the Head Office and other regional offices (e.g. regional sales teams) Legal and other professional fees Costs of operating as a public limited company (e.g. publication of annual accounts)

Identify two variable costs that might be incurred by Layton Construction.

Variable costs are costs that do change with output. For Layton Construction, it is a little tricky working out what would be a variable cost of a particular development. How can units be identified (in order to calculate the breakeven level)? One way to approach this is to consider a typical residential housing development: The fixed costs associated with the development would include the cost of buying the land and marketing the development to potential house-buyers. These are fixed in that they stay the same regardless of how many houses or flats are built. The variable costs (i.e. those which change with the number of units built) would include:

- Fixtures and fittings added to each unit (e.g. bathrooms, kitchens, plumbing, heating etc) - The labour costs of work done on each unit

Explain why it is important for Sarah to know the breakeven output on the first garden plot development

Key reasons include: - The development is the first garden plot project – so Layton Construction has no experience of seeing

the actual profits or losses that can arise on such a project - The amount invested is significant (£2.5m) - Economic uncertainly means that it is difficult to be certain of the minimum selling price that will be

achieved for each of the 15 proposed units

Identify one limitation of using break-even analysis for a business such as Layton Construction.

The main limitations include:

Forecasting variable costs accurately – the cost of materials or wage rates may increase unexpectedly, which will affect the accuracy of the break-even analysis.

Forecasting fixed costs accurately – for example, there may be unforeseen costs associated with modernising the factory’s production process.

The actual selling price to be achieved. After a period of sustained increases in property prices, Layton Construction is facing a period of significant reductions in selling prices as the housing market bubble bursts

Cash-Flow Forecasts and Statements What this part of the specification is about: You need to be able to:

Calculate and interpret figures within a cash-flow statement or forecast.

Understand the mechanics of cash-flow.

Identify and explain the possible causes of cash-flow problems.

Understand and suggest strategies for resolving cash-flow problems. You will also need to understand the importance and role of cash-flow forecasting in helping a business to improve future marketing, production, finance and human resource activities.

Sample questions Suggested answers

Explain, using examples, the difference between cash-flow and profit.

Cash-flow refers to the amounts of money flowing into and out of a business over a given period of time. Profit, on the other hand, is the difference between the sales revenue generated and the total costs incurred by a business. In the property development industry, the differences between cash flow and profit can be significant. For example, Layton Construction will incur significant cash outflows at the start of a development project, but these will not be initially recognised as costs in the profit and loss account. Take the example of the purchase of land for the garden plot development (£2.5m). This will be a cash outflow. However, the £2.5m will be shown as an asset in the Layton Construction balance sheet (i.e. not a cost) until the development is completed and the houses begin to be sold. Another example would be the purchase of building materials and the payments to construction workers. The

payments are made as required. However, the costs are held as an asset in the accounts as “work-in-progress” until they are released into the profit and loss account when the development is completed.

Describe two benefits for a business such as Layton Construction of drawing up a cash flow forecast.

This is a really important activity for Layton Construction –since the business invests in projects which involve substantial cash outflows upfront, with cash inflows coming much later. Drawing up a cash-flow forecast will have a number of benefits for the company, including:

It will allow Layton Construction to identify any possible cash-flow problems well in advance, e.g. insufficient cash inflow from sales of completed plots to cover expenses that are due to be paid in any particular month.

As a quoted company, Layton Construction will be required to make a statement in its accounts that the business has sufficient cash flow facilities available to allow the business to continue as a going concern. The cash flow forecast is essential to supporting this statement.

Layton Construction is likely to have significant and complex banking and mortgage arrangements – it will need to be able to produce cash flow forecasts for each of its business activities and to consolidate those for the company as a whole as part of the process of keeping their banks informed about the business

Suggest one reason why Layton Construction may experience cash flow problems.

The most likely cause of cash flow problems include:

Lower than expected selling prices or delayed completions on developed units. This is the big risk for Layton Construction – that the expected cash inflows from sales revenues prove less than budgeted or that the sales do not occur quickly after the building work is done.

The next most likely cause of cash flow problems is when the construction costs prove to be larger than expected. For example, Layton Construction may need to pay more than expected to acquire land; or building sub-contractors experience cost-overruns which they are able to pass on.

Importance of Accurate Record Keeping and Technology What this part of the specification is about: You need to understand and be able to explain the importance to businesses of keeping accurate financial records. You also need to understand the consequences of failing to do this. You need to have a clear understanding of the advancement of modern technology within the financial business environment, referring to accounts packages, spreadsheets, databases and order tracking. You need to understand how ICT can be used within a business, and its advantages and disadvantages. You also need to appreciate the effect of modern technology on business efficiency and competitive advantage, including its effects on:

Staff performance and productivity.

Average direct and indirect costs.

Quality and branding.

Sample questions Suggested answers

Identify and briefly explain two reasons why a business should keep accurate financial records.

Reasons for keeping accurate financial records include:

In order to measure the business’ performance – it would be impossible to work out how profitable the business is, for example, without full and accurate records.

In order to monitor the business’ performance – it would also be impossible to analyse the reasons why the business is doing well or badly.

In order to ensure that customers pay on time and debts are paid when they fall due – otherwise, the business will not receive payment for services and risk legal action if it does not or cannot pay its bills.

Legal reasons – accounts of limited companies need to be prepared and published annually, according to the Companies Act 1985. They also need to be audited to ensure that they give a true and fair view.

Identify one internal user and one external user of financial information about Layton Construction.

Internal users (i.e. those within the business) include:

The Board of Directors – as a quoted company, the Board will spend considerable time looking at the historical and future financial performance of the company

Project managers – vital that they have accurate and up-to-date information about the costs and revenues of each development project

External users (i.e. those outside the business) include:

Most importantly – shareholders of Layton Construction plc

Banks and other lenders – who will monitor the company closely, particularly during an economic downturn

Suppliers – including sub-contractors

Government departments – the Inland Revenue, Customs and Excise.

Gary Layton suggested that Barbara’s planning team use technology to identify properties with large gardens. Describe two ways in which technology could be used as part of the Garden Grab strategy

There are two key tasks involved in the garden plot strategy:

(1) Identifying the potential plots Role for technology: Use satellite images (e.g. Google Maps) of target locations to identify potentially suitable properties Searching online and other digital databases (e.g. Land Registry)

(2) Marketing to potential land and property owners Role for technology: Direct marketing to acquired names and addresses (direct mailing campaigns) Online advertising

Analysis of the Current Market Position What this part of the specification is about: You need to identify, understand and explore the importance of SWOT analysis in helping a business to achieve its marketing objectives. You also need to understand the importance of marketing tools and their role in helping a business make the right marketing decisions. You also need to be able to conduct simple investigations into the case study organisation and the market in which it operates, using:

SWOT analysis

PEST analysis

SLEPT analysis

Sample questions Suggested answers

Using evidence from the case study, complete a SWOT analysis of the ice-cream diversification opportunity for Layton Construction

Strengths:

Long-established property development business

Quoted company status – access to capital raising

Risk diversified across main property sectors (residential, commercial & industrial) Weaknesses:

Frequently outbid on land purchases (though potentially a strength –i.e. not paying too much!)

Opportunities:

Expansion of residential property development using brownfield sites (garden grab)

Further geographical expansion

Threats:

Economic downturn, particularly in property market, threatens profitability and cash flow

Competitive threat from much larger and better-financed developers

Using the information provided in the case study, carry out a SLEPT analysis for Layton Construction.

Social:

Changes in household structures affect demand for residential property (e.g. more single-person households; ageing population needing more secure housing

Changes in shopping habits – migrating away from high street shopping to online Legal:

Tougher planning permission guidelines for greenbelt, commercial and industrial developments

More relaxed planning permission for brownfield sites – driven by Govt desire for substantial increase in the housing stock

Economic:

Severe economic downturn – reducing consumer disposable incomes

Collapse of the residential property market – substantial fall in selling prices

Decline in commercial property market – weaker consumer spending has reduced demand for new retail space

Higher rate of business failure putting pressure on industrial unit returns and rents

Credit crunch – tightening availability of finance for businesses (particularly bank loans / overdrafts + substantial reduction in availability of mortgage finance)

Political:

Political pressure to increase UK housing stock (positive)

Political pressure to relieve the effects and problems of the economic downturn Technology:

Property development not subject to significant technological change

Economic Conditions and Market Conditions What this part of the specification is about: You need to understand the various external influences on a business and how these affect decisions regarding future development. These cover the basic principles of:

- Economic indicators, e.g. inflation, unemployment, exchange rates, and interest rates. - Changes in the competitive structure of the market, e.g. increased or decreased competition. - Unpredictable external influences on the market

You also need to identify, analyse and explain how these factors combine to affect a business’ strategic plans and decisions regarding the future.

Sample questions Suggested answers

Analyse the main implications for Layton Construction of the severe economic downturn in the UK

Areas to be explored: Weaker consumer spending:

- Translates directly into weaker retail sales - High number of retailer business failures (effect on Layton Construction rents?) - Increase in supply of available retail units = lower demand for new retail space (Layton’s business is

developing new commercial space) Collapse of the housing market (important)

- Collapse of the residential property market – substantial fall in selling prices - Reduces the profitability of existing residential developments – e.g. the first garden grab

development. The development costs are fixed (e.g. based on original price paid for land + cost of work undertaken so far)

- Reduces the potential returns from future developments (what assumptions should Layton make

about selling prices and the timing of sales. - May help by reducing the price that Layton pay for land in the future

Credit crunch (sources of finance) (also important) Tightening availability of finance for businesses (particularly bank loans / overdrafts + substantial reduction in availability of mortgage finance) Layton Construction share price likely to have fallen significantly – in line with other property developers. Significant adverse effect on the ability of Layton to raise new finance through the issue of shares (rights issue)

Ethical, Legal, Social, Political and Environmental Factors What this part of the specification is about: You need to understand that, in order to stay competitive, businesses need to be seen to have an awareness of non-financial considerations. In particular, you need to have an understanding of:

The difference between laws and ethics and how they affect business decisions.

The differences between legal and ethical responsibility.

The impact of changing social trends on companies and their business focus.

The importance of environmental responsibility in the strategic and day-to-day conduct of business. You also need to know about the cost-benefit approach to these aspects of the external environment as an approach adopted by many businesses.

Sample questions Suggested answers

Briefly explain, using examples, the difference between legal and ethical responsibility.

The law provides a foundation for business responsibility, i.e. businesses must ensure that any decisions made are within the law or risk prosecution. Accepting ethical responsibilities usually requires businesses to go further than this, by doing what is accepted as being morally correct. The main ethical issue raised in the case study is the approach taken to the obtaining land using garden grab.

Discuss whether Layton Construction is behaving responsibly in relation to the garden grab strategy

Start by making the distinction between legal & ethical responsibility: Legally responsible? A well established technique in the residential development market (see this link from The Ecologist) Appendix 4 letter: perfectly reasonable and legal – an approach inviting property owners to participate in discussions

Ethical responsibility? Arguments against?

- Damaging to the local environment of many villages and towns – gardens provide a key habitat for animals and plants; large gardens are part of the heritage of the nation

- Home owners may feel under pressure to agree, particularly if other nearby homeowners agree - Offer may involve inflated expectations of the price that will be offered

Arguments for?

- UK has a shortage of suitable housing stock - Large gardens are often unused – much better to convert them into pleasant residential

accommodation

Stakeholders What this part of the specification is about: You need to understand that there are a number of different groups of individuals who may have a stake in the decision-making process of a business, including:

Owners

Employees

Suppliers

Customers

Pressure groups

Local community You need to understand how these different groups can impact on the decision-making process.

Stakeholder Summary for Layton Construction

Stakeholder group Interest in Layton Construction Potential conflicts with other stakeholders

Shareholders Share price & dividend Financial performance Risk that the business will be able to continue as a going concern Corporate social responsibility

Lenders – who may have security over company assets Directors and managers – external shareholders may wish to see the company take different strategic decisions

Lenders Profitability & cash flow Risk of defaulting on debts (bank loans, mortgages etc)

Shareholders – who will want to receive a dividend

Employees Security of employment Remuneration

Management & shareholders – conflict over pay

Customers Quality of product & customer service After-sales service is particularly important

Management – disputes over quality of service provided

Suppliers Commercial terms for supplying the business Risk that they will not be paid

Management – disputes over the value, status and quality of work performed Timing of payments

Local communities Directly affected by the property development process – before, during (disruption) and after Concerns over damage to local environment (e.g. effect of garden grab, congestion)

Management – e.g. disputes over planning permissions Concerns over disruption from development

Government Profits earned (corporation tax) Collection of VAT , PAYE & NHI on behalf of government Planning authorities (local government)

Management – particularly over planning applications

Tips for the exam

Get hold of some exam style questions before the exam and have a go – The OCR website contains some specimen materials to give you a feel for the exam and your teacher should be able to supply you with similar questions to those you will be facing in a few weeks’ time. Becoming more familiar with the format and the kind of questions you will face will hopefully allow you to settle down more quickly for the real thing. Practising the exam discipline of sticking to time allocations for questions is an effective way of revising in the run-up to the exam and will help you to develop the skill of making each word count.

Try to get hold of the relevant mark schemes too – your tutor should have these. They are designed to help those marking the exam rather than those answering it so they won’t give you model answers. However, they will help you understand what marks are awarded (and not awarded) for, which may give you a clearer picture of what you have to do.

Know the case study inside out - the OCR Applied Business Unit 3 paper is based on a pre-released case study – Layton Construction - that you should receive several weeks before the day of the exam, so you have no excuse. This will make your answers more relevant to the case study and improve your chances of picking up application marks. It should also allow you to pick up evaluation marks if you can devise solutions that are relevant to Layton Construction, the business in the case, rather than firms in general.

Read the questions carefully, highlight trigger words and note the mark allocation – it is vital that you understand exactly what you should be doing before you begin to write, as the time allocation means you can’t afford to waste time making irrelevant points. Suddenly realising that you have misunderstood the question half way through the answer may also make you panic and affect your performance on the rest of the paper.

Use the mark allocation as a guide to how much time you should be spending on each question – make sure that you pay attention to the marks allocated to each element of the question and use this to allocate the time spent on each question appropriately. The Unit 3 exam is 1 hour and 30 minutes long and is worth a total of 100 marks – that’s less than 1 minute to earn each mark. In reality you have even less time than this to think and write down your answers if you allow yourself ten minutes to read and consider the questions properly and then five minutes to read back answers to check for mistakes (see below). That makes it more like forty-five seconds for each mark - in other words an eight-mark question equals six minutes spent! The mark allocation for each part-question and each question in total is clearly indicated next to each question, so use it to divide your time up sensibly – that way you’ll have a better chance of picking up marks for each question.

Don’t be tempted to go over your time allocation for individual questions once you’ve worked this out - those odd minutes here and there soon add up! Extra time spent waffling on, repeating yourself or giving extra examples will rarely earn you many marks, and these are unlikely to make up for missing out questions elsewhere. Being and feeling organised will help you feel calm and in control, which has to be a better state for remembering subject matter than getting flustered and panicking.

Start your answer to each question with a concise but comprehensive definition of the key term, concept or theory that is the subject of the question you are answering - a quick glance of any GCE Applied Business mark scheme will confirm that examiners will award at least some of the marks available if candidates can demonstrate an understanding of the key terms and theories used, so it’s worth defining the relevant concepts, even if you don’t feel totally confident about answering the question as a whole. In addition to this, students often struggle to begin their answers and end up wasting time rewriting parts of the question without earning any marks. A concise definition is a more effective way of ‘getting going’ by increasing your confidence (and that of the examiner) in your ability, as well as earning you valuable marks.

Identify key trigger words in questions – underline them if necessary - these are the words that tell you what to do so it’s important that you understand them. Make sure you understand the difference between outline, explain and evaluate, for example. The question may be asking you to do more than one thing, e.g. ‘outline two possible trade restrictions……… and evaluate their effectiveness.’ It may seem obvious now but exam stress and the desire to finish the paper may cause you to overlook vital instructions.

Remember that this is an applied course - apply your answers to the circumstances given in the questions by giving relevant examples wherever possible.

Make sure you also understand the key terminology for your particular unit – answering questions on SWOT, break-even and stakeholders etc. will be tricky to say the least if you don’t know what these terms mean. The day of the exam is not the best time to start recalling the meaning of concepts and theories explained weeks and months ago – refer to and update the glossary of terms as you go along and test yourself regularly. Try using these terms in your answers too – not only will the examiner be impressed by your knowledge but speaking the language of the subject cuts out lengthy explanations.

Layton Construction

Garden Plot Development – Breakeven Exercise

Part 1

Sarah’s original costings for the garden plot development showed that Layton Construction would make a “considerable profit” at the price the company planned to sell the newly built properties.

Her assumptions were as follows:

Number of plots sold 15

Selling price per plot £375,000

Variable cost per plot £75,000

Fixed cost of land purchase £2,500,000

Marketing and other fixed costs £500,000

Tasks:

Calculate:

(a) The expected sales revenue if all 15 plots are sold

(b) The expected profit on the development assuming that Sarah’s assumptions prove accurate

(c) The breakeven output using the assumptions above

(d) The margin of safety based on selling all 15 plots

Part 2

As a result of the economic downturn, Layton Construction finds it hard to sell the 15 plots (all of which are completed). It is forced to offer a discount on the selling price in order to encourage house-buyers. As a result, Sarah has to adjust her assumptions for the financial returns from the development.

Her revised assumptions are as follows:

Number of plots sold 10

Selling price per plot £325,000

Variable cost per plot £75,000

Fixed cost of land purchase £2,500,000

Marketing and other fixed costs £500,000

Tasks:

Calculate:

(a) The revised profit or loss on the development assuming the above assumptions prove direct

(b) The new breakeven output and margin of safety

(c) The difference between the original and revised profit on the development

SOLUTION

Layton Construction

Garden Plot Development - Breakeven

Original Economic

Assumptions Budget Downturn

Number of plots 15 10

Selling price per plot (£'000) 375 325

Variable costs per plot (£'000) 75 75

Fixed costs - inc land purchase (£'000) 3000 3000

Profit and loss account

Sales revenue (£'000) 5625 3250

Variable costs 1125 750

CONTRIBUTION 4500 2500

Fixed costs 3000 3000

PROFIT / LOSS 1500 -500

Breakeven calculations

Contribution per plot 300 250

Breakeven output 10 12

Margin of safety 5 -2

OCR AS Applied Unit 3 – Exam Topics

Recent key topics examined in Unit 3 are:

Specification Area June 2006 Jan 2007 June 2007 Jan 2008 Jun 2008

Business Ownership

Advantages / Disadvantages of private limited company Identification of internal and external stakeholders Stakeholder conflicts

Objectives for a start-up business Appropriateness of sole trader Internal and external stakeholders

Private ltd companies versus public companies

Identification of stakeholders Defining a sole trader Problems operating as a sole trader Defining a franchise Advantages / Disadvantages of setting up as a franchise

Meaning & significance of limited liability Evaluation of decision to become private company Defining & identifying stakeholders + how they are judged Discussion of influence of stakeholders Conflict of interest

Sources of Finance Sources to finance acquisition of new machinery Stakeholder conflicts

Definition of leasing Alternative methods of financing fixed assets

Budgeting and Budgetary Control

Definition of budget Purposes of budgets Benefits of using variance analysis Calculation and interpretation of variances

Completion of part-finished budget & calculation of variances

Purpose and benefits of budgeting Calculation and interpretation of variances

Completion of budget Calculation of expected profit Identification of items missing from a budget

Break-Even Analysis

Definition of fixed & variable costs Completion & interpretation of break-even chart

Defining break-even Categorising fixed & variable costs Calculation of break-even output & margin of safety Calculation of projected profit Usefulness of break-even

Detailed calculations of profit and loss and break-even

Cash-Flow Forecasts and Statements

Definition of cash flow forecast Benefits of producing a cash flow forecast Completion of part-

Completion of cash flow statement Identification of cash flow problems from data provided

Specification Area June 2006 Jan 2007 June 2007 Jan 2008 Jun 2008

finished cash flow forecast Interpretation of cash flow data & problems

Importance of Accurate Record Keeping and Technology

Advantages of using spreadsheets for cash flow forecasts & budgets Importance of accurate record-keeping

Ways in which ICT could be used Advantages of using ICT Costs associated with the introduction and use of ICT

Three business activities that can be computerised Analysis of case for and against computerisation

Analysis of the Current Market Position

Impact of the external environment on the business SWOT analysis on the case study business Assessment of impact of a new competitor Assessment of three potential options

Evaluation of business proposal Completion of SLEPT analysis

Completion of a PEST analysis Discussion of social and economic issues arising from a decision

Implications of social and political change on the business

Completion of a partial SWOT analysis Role of SWOT in achieving marketing objectives

Economic Conditions and Market Conditions

Evaluation of effects of changing business environment

Definitions of three economic terms Evaluation of the effect on the business of changing economic conditions

The main themes in the Layton Construction plc case study for June 2009 are:

Main point