LO1
Types of business decisions
Strategic– decisions made by top management that affect the long-term direction of a business.
Long term (Senior Management)
Tactical– decisions made by middle management that aim to meet strategic objectives. Medium
term (Senior or Middle Management)
Operational– day-to-day decisions made by staff at all levels that help the business to run smoothly.
Criteria used when making business decisions
Internal factors
- Attitude to risk
- Organisational objectives
- Core competencies of a business
- Impact on internal stakeholders
- Business ethics
- Financial considerations
- Time
- Opportunity cost
External factors
- Level and nature of risk
- Impacts on external stakeholders
- Degree of uncertainty
- Changes in market
- Changes in external environment
The use of different types of information when making business decisions
- Internal information
o Pro: readily available, cheaper.
o Con: requires keeping accurate data/ doesn’t consider external environment
- External information
o Pro: large amount of info available/ easy to access online
o Con: data can be confusing/ costly
- Qualitative information
o Pro: allows deeper understanding
o Con: difficult to analyse/ time consuming
- Quantitative information
o Pro: easy to analyse/ can deduce trends
o Con: does not tell you why/ can appear more factual than it actually is
- Historic information
o Pro: can be used to predict forecasted data/ does not require skill to collect
o Con: if there has been internal/ external changes historic data is not as useful
- Forecasted information
o Pro: can help prepare contingency plans/ can predict cash flow shortages
, o Con: prediction (might not happen)/ requires skill
- Primary research information
o Pro: can be tailored to a business’s needs
o Con: costly/ time consuming
- Secondary research information
o Pro: Easier/ quicker/ accurate
o Con: Expensive to obtain/ different sources might give conflicting information
How to judge the validity of information used to make decisions
- Reliability
o If a piece of research is to be repeated, will the researchers get the same result?
- Bias
o Has the research influenced the outcome?
- Relevance
o Can the information selected be used to answer the question or solve the problem?
- Complexity
o Is the information too difficult to understand?
- Degree of detail
o Does the level of detail match the type of decision being made?
- Currency
o Is the information up to date?
- Intended use
o Is the information appropriate to what it will be used for?
- Quality
o Is the quality of the information chosen up to standard?
The purposes, benefits and importance of communication
- With internal and external stakeholders
o Effective communication with stakeholders eases the decision-making process
o Customers and the local community also need to be informed of a decision that has
a direct impact on them.
o If the decision involves huge financial commitment they must inform lenders.
- With the media
o Media have to be dealt with sensitively, especially in crisis and they can easily
damage business reputation.
Factors affecting the quality of decision making
- Access to relevant information
- Access to decision-making tools
o E.g. multi voting/ decision tree
- Availability of finance
- Key personnel
- Training of managers
- Power differentials and potential for bias
, o Senior management are more likely to pay attention to information that confirms
their beliefs and favour decisions that appear to benefit only those in power.
- Consultation
Opportunity costs: Opportunity cost measures the cost of any choice in terms of the next best
alternative foregone.
LO2
Profitability Data
Costs
- Fixed costs do not change according to sales, e.g. rent, insurance
- Variable costs change depending on the level of output, e.g. raw materials, direct labour
Total costs = Fixed costs + Variable costs
Revenue = Selling prices x Units sold
Profit = sales revenue – total costs
Gross profit = Revenue – Total variable cost
- The money left over after taking the costs of goods and services (variable costs) from the
sales revenue.
- The greater the difference between revenue and cost of sales, the higher the gross profit.
Net profit/ loss = Gross profit – Expenses
- This calculates the money left over after taking away expenses (fixed costs) from gross profit.
Net profit ratio = (net profit/ revenue) x 100
- This is a comparison of a business’s net profit with its sales revenue, expressed as a
percentage.
Gross profit ratio = (gross profit/ revenue) x 100
- This measures the profitability of the goods and services provided by a business.
Business performance data
- Consumer satisfaction
o Finding out how satisfied the customers of a business are with the quality and price
of goods and services provided.
Types of business decisions
Strategic– decisions made by top management that affect the long-term direction of a business.
Long term (Senior Management)
Tactical– decisions made by middle management that aim to meet strategic objectives. Medium
term (Senior or Middle Management)
Operational– day-to-day decisions made by staff at all levels that help the business to run smoothly.
Criteria used when making business decisions
Internal factors
- Attitude to risk
- Organisational objectives
- Core competencies of a business
- Impact on internal stakeholders
- Business ethics
- Financial considerations
- Time
- Opportunity cost
External factors
- Level and nature of risk
- Impacts on external stakeholders
- Degree of uncertainty
- Changes in market
- Changes in external environment
The use of different types of information when making business decisions
- Internal information
o Pro: readily available, cheaper.
o Con: requires keeping accurate data/ doesn’t consider external environment
- External information
o Pro: large amount of info available/ easy to access online
o Con: data can be confusing/ costly
- Qualitative information
o Pro: allows deeper understanding
o Con: difficult to analyse/ time consuming
- Quantitative information
o Pro: easy to analyse/ can deduce trends
o Con: does not tell you why/ can appear more factual than it actually is
- Historic information
o Pro: can be used to predict forecasted data/ does not require skill to collect
o Con: if there has been internal/ external changes historic data is not as useful
- Forecasted information
o Pro: can help prepare contingency plans/ can predict cash flow shortages
, o Con: prediction (might not happen)/ requires skill
- Primary research information
o Pro: can be tailored to a business’s needs
o Con: costly/ time consuming
- Secondary research information
o Pro: Easier/ quicker/ accurate
o Con: Expensive to obtain/ different sources might give conflicting information
How to judge the validity of information used to make decisions
- Reliability
o If a piece of research is to be repeated, will the researchers get the same result?
- Bias
o Has the research influenced the outcome?
- Relevance
o Can the information selected be used to answer the question or solve the problem?
- Complexity
o Is the information too difficult to understand?
- Degree of detail
o Does the level of detail match the type of decision being made?
- Currency
o Is the information up to date?
- Intended use
o Is the information appropriate to what it will be used for?
- Quality
o Is the quality of the information chosen up to standard?
The purposes, benefits and importance of communication
- With internal and external stakeholders
o Effective communication with stakeholders eases the decision-making process
o Customers and the local community also need to be informed of a decision that has
a direct impact on them.
o If the decision involves huge financial commitment they must inform lenders.
- With the media
o Media have to be dealt with sensitively, especially in crisis and they can easily
damage business reputation.
Factors affecting the quality of decision making
- Access to relevant information
- Access to decision-making tools
o E.g. multi voting/ decision tree
- Availability of finance
- Key personnel
- Training of managers
- Power differentials and potential for bias
, o Senior management are more likely to pay attention to information that confirms
their beliefs and favour decisions that appear to benefit only those in power.
- Consultation
Opportunity costs: Opportunity cost measures the cost of any choice in terms of the next best
alternative foregone.
LO2
Profitability Data
Costs
- Fixed costs do not change according to sales, e.g. rent, insurance
- Variable costs change depending on the level of output, e.g. raw materials, direct labour
Total costs = Fixed costs + Variable costs
Revenue = Selling prices x Units sold
Profit = sales revenue – total costs
Gross profit = Revenue – Total variable cost
- The money left over after taking the costs of goods and services (variable costs) from the
sales revenue.
- The greater the difference between revenue and cost of sales, the higher the gross profit.
Net profit/ loss = Gross profit – Expenses
- This calculates the money left over after taking away expenses (fixed costs) from gross profit.
Net profit ratio = (net profit/ revenue) x 100
- This is a comparison of a business’s net profit with its sales revenue, expressed as a
percentage.
Gross profit ratio = (gross profit/ revenue) x 100
- This measures the profitability of the goods and services provided by a business.
Business performance data
- Consumer satisfaction
o Finding out how satisfied the customers of a business are with the quality and price
of goods and services provided.
