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ib business management hl notes
IB BUSINESS MANAGEMENT HL

Would hiring a part-time employee for administrative work be beneficial to BusinessX?

UPDATED ON - 26 MAY 2020
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Contents:

 

Research Proposal
 

Research Question
Would hiring a part-time employee for administrative work be beneficial to BusinessX and Mr Smith1?

 

Rationale
BusinessX was started by Mr. Smith in 2009. The business has grown, leaving Mr. Smith with decreasing amounts of time to attend to administrative work and to try to continue to expand the business. However, BusinessX has just broke-even and Mr. Smith is unsure whether hiring an employee is financially viable.

 

Theoretical Framework
Figure1: Key areas of the syllabus to be covered

 

 

Unit     Theory
1.6 Decision Tree
1.8 Lewin’s Force Field Analysis
2.5 Maslow’s and Herzberg’s motivational theories
3.6 Ratio Analysis

 

 

 

 

 

 

 

 

 

 

A decision tree will be constructed because it will assess the expected monetary value of each option. Ratio analysis will be performed because it will give comparisons to the current and predicted financial position of BusinessX. Maslow’s and Herzberg’s theories will be used to assess the motivational impacts this decision will have on BusinessX’s. Finally, Lewin’s Force Field analysis will be used to efficiently evaluate every advantage and disadvantage of change to assist in forming conclusions.

 

 

Methodology
An in-depth interview will be carried out with Mr. Smith. This will be done because he is the centre of the business. He will be greatly affected by any change so his opinions on the proposed question are essential. Also, he will have the greatest knowledge of the business. The interview will gain important information about the business and how the proposed change would affect it. During the interview,  questions will be concerning the amount of time he spends on, and his projections for, the business. Questions will also be asked about his non-financial motivations. Financial records will also be obtained from Mr. Smith because finances will be very important whether either option is plausible.

 

From this information gained a decision tree will be prepared to show the expected monetary value for both options. Ratio analysis will be performed from the financial data to compare BusinessX current position to the projected position of the business with either option. Next, from information gathered from Mr. Smith, the non-financial motivations for either option will be analyzed. All these findings will then be used to create a Force Field Analysis which will show which option would be more favourable to Mr. Smith.

 

Anticipated difficulties
    •     Mr. Smith not being forthcoming with financial records
    •     The limited opinion of the business as only Mr. Smith will be interviewed
    •     Projections will only be based on Mr. Smith’s predictions
    •     Limited financial records being too heavy on initial set-up costs to allow for proper analysis

 

Action Plan
Figure 2: Proposed Action Plan

Date Action Modifications
18/2/11 Confirm availability of business  
19/2/11 Start initial Research proposal  
21/2/11 Organize Interview with Mr. Smith  
4/3/11 Finish Research Proposal  

4/3/11

Confirm Interview

the interview was pushed back a

week

6/3/1

Organize Interview questions

Occurred during the week of 7/3-

12/3

7/3/1

Interview with Mr. Smith

The interview was conducted on

14/3/11

10/3/11-
13/3/11

Prepare the Decision Tree and
complete Ration Analysis
 

14/3/11-
18/3/11

Evaluate non-financial
motivations
 
19/3/11 Complete Force Field Analysis  
24/3/11 Start analysis of result and
organizing a Written Report
 

5/4/11

Summit 1st draft

1st draft was changed to 17/6/11
to allow for more complete draft

15/4/11-
13/5/11

Refine 1st draft and write
executive summary
Draft received back 18/7/11
17/6/11 Final Written Report due Final date changed to 26/7/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive Summary


Mr. Smith owns Lara BusinessX and spends much time on administrative work which he could use for other business activities. Therefore the research question is, “Would be hiring a casual employee for administrative work be beneficial to BusinessX and Mr. Smith?”

 

Initially, the introduction provides background specific to BusinessX current situation. The methodology that was completed for this report was then outlined. From an
interview with Mr. Smith and financial records obtained, a decision tree and ratio the analysis was performed, while motivational implications were looked at through using Maslow’s and Herzberg’s theories. From all findings, Lewin’s Force Field analysis was constructed.

 

Findings showed that while Maslow’s and Herzberg’s theories supported hiring an administrative worker, the decision tree showed it was moved favourable not to hire anyone and ratio analysis came to the same conclusions. Finally, the force field analysis showed overall hiring a casual was not favourable.

 

Recommendations made were to delay the decision until the business was more financially stable but to start researching other implications of hiring someone for
the future. It was also recommended that more research into the predictions of growth for the business and more interviews to be conducted.

 

Introduction


In 2009, Mr. Andrew Smith registered the business BusinessX as an authorized representative of Professional Investment Services Pty Ltd (PIS) 2. PIS holds an
Australian Financial Licence and being an authorized representative means that Mr. Smith is legally allowed to give financial advice3.

 

Currently, Mr. Smith works by himself and specializes in financial advice for the retired. He strives to obtain valued relationships with his clients by providing a friendly and personal service. These relationships are developed by investing time and effort into the clients’ needs. Mr. Smith also gains more clients by creating good relationships in the community. However, currently, his ability to do so is limited due to time spent on administrative work.

 

Research Question


With administrative work utilizing much of Mr. Smith’s time, he had started to question whether hiring a casual employee would be worthwhile. This then leads to this report’s focus:

Would hiring a casual employee for administrative work be beneficial to Lara Financial Solutions and Mr. Andrew Smith?

 

Procedure or Method


Firstly, contact was made with Mr. Smith via e-mail to confirm his availability for participation in this report. In these emails, basic information was also conveyed about the business’s position. Next, an interview4 was arranged where open-ended questions were asked to gain the information necessary for this report. The interview focused on the hours Mr. Smith invested in the business, what his objectives for the business were and his projections for the future. This interview assisted in the understanding of the business and the objectives to ensure that this report addressed its needs. At this interview, copies of the latest financial reports5 were obtained, and these with Mr. Smith’s predictions were used to create a Decision tree and also perform a ratio analysis on current and projected finances. The decision was also analyzed using Maslow’s and Herzberg’s motivational theories. Lastly, a Force Field analysis was prepared to assess the decision being made. These tools allowed a conclusion and recommendations to be made.

 

Main Results and Findings


Mr. Smith was able to supply BusinessX’s current financial details as well as his current predictions for the business. For the last financial year, income totalled $21,368.77 while expenses were $19,134.74.6 The predictions for growth for the next year in the business’ current state were Mr. Smith’s opinions. He predicts that low growth, where income would increase by 20% and costs would increase by 4%, has a 0.15 probability of occurring. Moderate growth has a probability of 0.75 and would result in an increase of 50% for income and 10% for costs. The chance of high growth is predicted to be 0.10 and would produce a 150% increase in income and a 20% increase in expenses.7

 

Hiring an employee to attend to administrative work would increase expenses. With the employee working for 10 hours a week for 46 weeks of the year on $25 an hour8, it would increase the business’s expenses by $11,500 a year. It would also affect the probabilities of the level of success. The chance of low success would decrease to 0.025, the chance of moderate success would change to 0.575 and the chance of high success would increase to 0.4009.

 

Calculations10 can be performed with this knowledge for the expected income and expenses of the business for the next year for all levels of growth. Given this data, a decision tree can be prepared. A decision tree is a diagrammatic representation of two options that are available, displaying their probable outcomes11. The decision tree created12 shows the expected monetary value (EMV) for the net profit before tax at the end of the financial year for if they decide to or not to hire an employee. If no casual is employed, the EMV for the net profit before tax next year is $12161.10 and if a casual is hired, then the EMV for the next year’s returns is $7155.5013.

 

To further compare the two options, the net profit margin (NPM) can be calculated for the business's present state and what is predicted. NPM shows the proportion of sales turnover that is turned into net profit14. To do this the expected value for sales revenue is calculated15. Using this calculation, the NPM is determined. Currently, BusinessX’s NPM is 10.5%. If a causal is not hired then the expected NPM would be 36.6% and if a casual is hired the NPM would be 17.7%16.

 

Another tool to compare the options in relation to BusinessX’s current position is the return on the capital employed ratio (ROCE). This measures the financial performance of a business compared with the amount of capital invested17. This ratio requires the predicted capital employed which is calculated18 by adding the predicted net profit to the previous capital employed as Mr. Smith intends all profits to be returned to the business19. Calculations show that at the end of June 2011, the ROCE ratio was 4.4%. If a casual is hired then ROCE would increase to 19.4% and if a casual is not hired then ROCE would be 12.4%20.

 

There are a number of non-financial motivations to consider which would affect any decision-making. According to Maslow’s motivational theory, people are motivated more than just money. Self-actualization is the most important motivational factor21. Hiring a casual employee would fulfil this as it would mean that there was more time for Mr. Smith to spend time in the community – he finds this rewarding22.

 

Herzberg’s theory outlines hygiene factors; factors that are needed to prevent dissatisfaction leading to less motivation. Work interfering with personal life is considered an element that could result in dissatisfaction23. Hiring someone for administrative work would allow for more personal time for Mr. Smith.24

 

Lastly, a force field analysis is prepared to look at all the factors affecting the change of hiring a casual employee. Using the findings already found in this report, all the forces were considered and given a weighing. The result was that the weighing of the driving forces was 10 while the restraining forces totalled 1325.

 

Analysis and Discussion


First, the interview with Mr. Smith revealed that the employment of a casual results in a greater chance of a greater return. While not hiring results in the chance of high growth being 10%, hiring increases this chance to 40%26. Mr. Smith indicated that increasing growth would be beneficial for him as it would help secure his retirement.27 Even though these values are estimates, it is very likely that hiring a casual would increase the chances of high growth and therefore would be beneficial for Mr. Smith.

 

However, the decision tree prepared showed that not hiring anyone was the more viable option. The EMV for not hiring being $12161.10 and if a casual is hired it is $7155.5028. However, the probabilities used were all the opinions of Mr Smith. They were only estimates made by him and therefore could include an error or could be bias. Nevertheless, the EMV for not employing is nearly double than that of hiring. This shows that not hiring is more likely to be more profitable for BusinessX.

 

Another factor is that the decision tree showed only a 40% chance that hiring someone would produce a profit within a year29. This is another reason against hiring someone, as BusinessX has only just started to make a profit. With such a high chance of making losses again, the risk may not be worth it. However, this is only based on the estimates of Mr Smith and this information with as much confidence as there is in his predictions.

 

Ratio Analysis was performed to compare each option’s effect on the business. The NPM showed that not hiring would be more beneficial (36.6%) than hiring (17.7%)30. Though it is based on the subjectiveness of the decision tree already discussed, it clearly shows the positive significance of having lower expenses by not hiring. ROCE also showed that hiring was the better option financially. The ratio was 19.4% for not hiring and 12.4% for hiring31. It shows that not hiring would be a more efficient way of using the capital employed in the business as it is higher32.

 

Maslow’s theory explains that self-actualization is the most important motivation33. Mr. Smith finds working in the community very rewarding. The extra time to do this would not just improve the number of potential new clients but also his morale. It would make his life more enjoyable on a whole, something he strives for. Also, increased morale would increase his dedication to his business, possible increasing growth further.

 

Herzberg’s theory also explains about the hygiene factors that lead to dissatisfaction if neglected34. Hiring a casual would allow more personal for Mr. Smith. It would help him balance his work and the rest of his life which is very important for him so that his motivation does not decrease. It could also improve his morale as his satisfaction with life increases, possibly improving the quality of effort he puts into the business.

 

The Lewin’s Force Field Analysis takes into consideration of all driving and restraining forces surrounding a change that is being considered35. This was prepared and showed that the totalled weighing of forces for hiring a casual of administrative is 10 and the total weighing of the forces against this is 1336. It shows that when all factors are considered with their worth towards the decision, that there is a larger proportion of factors against hiring an employee.

 

Conclusion and Recommendations


Given the overwhelming financial evidence against hiring a casual for administrative work, I would recommend against it. The decision tree and ratio analysis both show that not hiring anyone is a more financially viable option. Also, the force field analysis shows conclusively that with the data analyzed, it is not constructive option. However, the option of hiring should not be discounted completely. There are strong non-financial motivations for hiring a casual worker supported by Maslow’s and Herzberg’s theories and maybe more viable when the business has greater cash inflow.

 

Therefore my recommendations are:
    •     Hold the decision to hire someone for at least another year to allow for greater cash inflow
    •     Start research into the implications of hiring someone now such as legal obligations and if premises have to be changed so BusinessX is prepared if the option is taken in the future
    •     Undertake more research into other ways to grow the business that have not been explored yet

There are a few limitations to my analysis, however. The predictions are given which I based most of the financial data from were subjective and may have included bias. Therefore more research should be done to determine more reliable and unbiased predictions. Also, with a substantial amount of data coming from only one interview, more interviews should be conducted to ensure a more overall perspective.

 

Appendix 1: Transcript of In-depth Interview with Mr. Smith


 

Question 1: Can you tell me a bit about your business?

I am a financial advisor and this is the service my business provides. I registered my business back in 2009 and I became an authorized representative of Professional Investment Services Pty Ltd (PIS). The first year was very heavy on set-up costs and therefore I made little profit. However, as this business grows more profit has been coming in and just recently I broke even. I am becoming a lot busier and this business has become sustainable.

 

Question 2: What are your current strategies for growing your business?

In this industry, the biggest factor that can attract and hold-onto to clients is trust. I cannot stress this enough. This is why I spend much time in the community creating relationships that can lead to new clients and why I spend much time on pre-existing clients to keep them. Finances are a very personal thing and they must be able to trust you with them. I have also spent a little money on radio advertisements but this is not as effective as creating relationships and trust in the community.

 

Question 3: How many hours a week would do spend on your business and how are these hours spent?

Currently, I work approximately 35 hours a week in relation to this business. 10 of these hours are spent on clients, 10 hours on volunteering my time in the community and approximately 15 hours on administrative work. It is a lot of hours on administrative work but when you are a representative of a company like PIS in is extremely important to have all your records up-to-date in case they come and check up on me.

 

Question 4: If you were to hire someone as a casual for administrative work, how many hours would you expect that they would work and what would you expect to pay them an hour?

I would estimate that there would be approximately 10 hours of work a week for someone I hired, though this could increase in the coming years. I operate for 46 weeks of the year so that would be the time they worked too. A standard initial rate I would expect to pay would most likely be about $25 an hour.

 

Question 5: In your current state, what do you project your growth of revenue and costs are over the next few years and how do you rate the chances of this growth?

If I have what I would consider an average year I have projected that my revenue will increase by about 50% to what is now. Most of my current costs are fixed so if my revenue grew by 50%, I would expect my cost to increase by 10%. However, if I had a poor year in my opinion, I predict my revenue will increase by 20% and my costs by 4%. An exceptional year would result in increases by 150% for revenue and 20% for costs. As to the chances of these circumstances happening? In my current position, I would predict that the chance of a poor year is 15%, the chance of an average year is 75% and the chance of an exceptional year is 10%

 

Question 6: If you were to hire someone for administrative work, how do you predict this would affect the chances of your projected growth?

This would have a huge impact as I would be able to invest a huge more amount of time into my potential and current clients. The chances of a poor year would decrease to 2.5%. The chances of an average year would be 57.5% and the chance of an exceptional year would increase to 40%

 

Question 7: Do you expect the capital employed for this business will change over the next year?

The only change will hopefully be an increase in profits retained. For this stage in the business, I intend all profits I make to be invested straight back into the business.

 

Question 8: What would you consider to be the non-financial advantages and disadvantages of hiring someone if there are any?

First, as well as my community work helping the business, I find it very rewarding. Having more time to spend time in the community would increase my value of life. This would be a very strong reason to hire someone alone. Also, personal time is very important to me and if the pressure of administrative work was somewhat lifted from me, it would mean I could spend more quality time with my family and enjoying life. I am at an age where if my work started to drain my happiness, it would not be worth it and I would retire so it necessary for me to maintain balance.

 

Question 9: Would there be other factors to consider apart from pay if you decided to hire someone?

For me, I hope to retire in 5-8 years and would like, at least for the first 5 years, to average growth of 50% every year, though I welcome larger growth. I hope to sell my business after 5-8 years to set me up for retirement, and therefore the larger the business is, the better off financially I will be in my final years. Also, if I did decide to hire, there would be an issue of where they would work. As you know, I am currently working out of my home. It would be possible for them to work in the corner of my office, though this could lead to some confidentiality issue and clients may feel uncomfortable with another person in the room. Two other options would be to gain my own premises as another investment, or I could share premises with an accountant, a very common practice in this industry.

 

Appendix 2: Profit and Loss Account for Lara Financial Solutions for the year ended 30 June 2011

 

  $AUD
Sale Revenue 21,268.95
Interest received 99.82
Gross Profit 21,368.77
Less Expenses (19,134.74)
Net Profit from Ordinary Activities before income tax 2234.03

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 3: Balance Sheet for Lara Financial Solutions as of 2011

 

  $AUD $AUD
Non-Current Assets    
Property, Plant, and Equipment 30,755.82  
Intangible Assets - Goodwill 25,686.51  
Total Non-Current Assets   56,442.33
Current Assets    
Cash 1,067.88  
Tax 1,655.00  
Total Current Assets   2722.88
Total Current Liabilities   8686.54
Net Assets   50,478.67
Financed by:    
Long-term Liabilities   50,000.00
Retained Profit   478.67
Capital Employed   50,478.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 4: Pre-Calculations for Decision Tree

Figure 3: Expected Income and Expenses for the next year if the employee is not hired37

 

Level of Growth Income Expenses

Net profit before

tax

Low $21368.77×1.2
=$25642.52
$19134.74×1.04
=$19900.13
$5742.39
Moderate $21368.77×1.5
=$32053.16
$19134.74×1.1
=$21048.21
$11004.95
High $21368.77×2.5
=$53421.93
$19134.74×1.2
=$22961.69
$30460.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 4: Expected Income and Expenses for the next year if an employee is hired38

 

Level of Growth Income Expenses

Net profit before

tax

Low $21368.77×1.2
=$25642.52
$19134.74×1.04+$11500
=$31400.13
-$5757.61
Moderate $21368.77×1.5
=$32053.16
$19134.74×1.1+$11500
=$32548.21
-$495.05
High $21368.77×2.5
=$53421.93
$19134.74×1.2+$11500
=$34461.69
$18960.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 5: Decision Tree39

 

 

 

 

Appendix 6: Calculations for NPM

Figure 5: Expected Valu for Sales Revenue the following year40

 

Revenue if not
hired
$25642.52×0.15+$32053.16×0.75+$53421.93×0.1
=$33228.44
Revenue if hired

$25642.52×0.025+$32053.16×0.575+$53421.93×0.4

=40440.40

 

 

 

 

 

 

 

 

Figure 6: Calculation of Net Profit Margin41

 

Position of BusinessX Calculations
Current 2234.03
21268.95 × 100
= 10.5%
Next year if casual not
hired
12161.10
33228.44 × 100
= 36.6%
Next year if casual hired 7155.50
40440.40 × 100
= 17.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 7: Calculations for ROCE

Figure 7: Predicted Capital Employed42

 

Option Calculations
Not Employee

$50,478.67+$12161.10

=$62639.77

Employee

$50,478.67+$7155.50

=$57634.17

 

 

 

 

 

 

 

 

 

 

 

Figure 8: Calculation of ROCE43

 

Position of BusinessX Calculations
Current 2234.03
50478.67 × 100
= 4.4%
Next year if casual not
hired
12161.10
62639.77 × 100
= 19.4%
Next year if casual hired 7155.50
57634.17 × 100
= 12.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 8: Lewin’s Force Field Analysis

 

Driving Forces                                                           Restraining Forces

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