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INTRODUCTION TO COMMERCE

Meaning of commerce and commercial activities

Commerce. This is the study of how man organizes the exchange and distribution of

goods so as to satisfy the needs of a consumer in the most efficient manner.

Or; this is the study of trade and aids trade in a country.

Exchange. This is the giving of a good or service by an individual to another in return

for money or another good or service.

Commercial activities. These are the ones which enable the movement of goods from

the producer to the consumer.

Note. Commercial activities are divided into two i.e. those related to the actual buying

and selling of goods and those that assist in the buying and selling of goods. The actual

buying and selling of goods is called trade while the activities which help in the buying

and selling of goods are called aids to trade.

THE SCOPE OF COMMERCE

Commerce is divided into two divisions/branches i.e. trade and aids to trade.

TRADE

This is the buying and selling of goods and services with the intention of making a

profit.

Note. A trader is a person who buys goods with an intention of re-selling them at a

profit.

FORMS OF TRADE

Trade is divided into two main categories i.e. home trade and international trade.

1. Home trade/internal trade. This is trade carried out within the geographical

boundaries of a country. It is trade carried out between two or more traders of the same

country.

Note. Home trade may be carried out at two levels i.e. retail and wholesale.

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i) Retail trade. This involves the buying of goods in large quantities from the

wholesaler and selling them in small quantities to the consumer.

ii) Wholesale trade. This involves the buying of goods in large quantities from the

manufacturer and selling them to the retailer in large quantities.

2. International trade/foreign trade. This is trade carried out across the boundaries of

a country.

Note. International trade consists of import trade and export trade.

i) Import trade. This is the buying of goods from another country.

Note. Imports are goods bought from outside the country and brought into the country.

ii) Export trade. This is the selling of goods to another country.

Note. Exports are goods sold to traders outside the country.

AIDS TO TRADE

These are the services that facilitate the smooth running of trade. These services are

auxiliary to trade and without them trade would be very difficult. These services include:

1. Transport. This refers to the movement of goods and services or people from one

place to another.

2. Communication. This is the transmission of messages or information from one

person or place to another.

3. Banking. This is the service that accepts and safeguards money and other valuables of

businessmen or public, settles debts and finances business transactions.

4. Warehousing. This refers to the storing of goods or raw materials awaiting demand,

sale and clearance or processing.

5. Insurance. This is the service that undertakes to safeguard and compensate the few

businessmen and organizations which might suffer from some risks insured against.

6. Advertising/sales promotion. This is an activity involving publication of facts or

opinions about a particular good or service so as to promote sales.

7. Market research. This is an aid to trade by which producers come to know what

peoples' opinions are regarding a particular good or service.

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ILLUSTRATION OF THE DIVISIONS OF COMMERCE (COMMERCIAL

ACTIVITIES)

From the above illustration, it can be seen that both the branches of commerce i.e. trade

and aids to trade aim at bridging the gap between the producer and the consumer.

The activities of people engaged in commerce stretch from the place of production to the

shop (premises) of the retailer from where the consumer buys his goods.

It is from this that it is said that the main aim of commerce is to bridge the gap between

the producer and the consumer.

Commerce and Economics

Commerce is a branch of economics. Economics is concerned with the satisfaction of

unlimited human needs using the scarce resources. According to economics, the

resources are never enough to satisfy all the needs and it therefore becomes necessary to

exercise choice.

TRADE

HOME TRADE

RETAIL TRADE

WHOLESALE TRADE

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On the other hand, Commerce is concerned with the processes of exchange and

distribution of goods conducted by businessmen who aim at making a profit out of their

activities. Therefore, commerce is sometimes referred to as business economics.

Commerce and Business

Business is a very wide term that applies to any activity carried out with an intention of

making a profit while standing a risk of loss. A person may be in business as a trader, a

manufacturer, a farmer or a transporter.

On the other hand, commerce applies to activities related to trade and aids to trade only.

Commerce and Production

Commerce follows production. This is because for goods to be distributed, they must

have been manufactured. i.e. transformed to a more useful form. However, the

production process does not become complete until the goods reach the consumer.

This implies that production involves both commercial activities and direct services.

However, the actual transformation of goods to a more useful form is only part of the

whole process and this can be termed as “industry”.

Therefore, production involves three branches i.e. commerce, direct services and

industry.

i) Commercial activities. This refers to activities concerned with the distribution and

exchange of goods and services. i.e. getting the goods within the access or reach of the

consumers.

Commercial activities are divided into two i.e. those related to the actual buying and

selling of goods (trade) and those that assist in the buying and selling of goods (aids to

trade).

ii) Direct services/activities. This refers to those services that require personal contact

with people in need.

Examples of direct activities include medical care, transport, teaching, advisory services,

consultation services, etc.

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iii) Industry. This refers to part of the production process that is concerned with

bringing goods into the form that can be consumed.

It is divided into primary industries and secondary industries.

Illustration of the branches of Production

REASONS WHY COMMERCE IS STUDIED/TAUGHT IN SECONDARY

SCHOOLS

1. To provide students with knowledge that will enable them to understand the business

environment in Uganda.

2. To enable students to appreciate the impact of commercial activities on the society in

which they live.

3. To acquire commercial knowledge and skills in order to carry out commercial

activities.

4. To equip students with the basic knowledge of commercial language commonly used

in business/Uganda.

5. To encourage students develop neatness and orderliness in the work and paying

attention in everyday work.

6. To help students acquire basic commercial knowledge for the purpose of employment.

7. To introduce students to wider fields of study at a higher level e.g. economics,

entrepreneurship, business administration, etc.

IMPORTANCE OF STUDYING/TEACHING COMMERCE

1. It provides students with knowledge that will enable them to understand the business

environment in Uganda.

COMMERCE

PRODUCTION

INDUSTRY

EXTRACTIVE MANUFACTURING BANKING

INSURANCE

TRANSPORT

COMMUNICATION

ADVERTISING

WARE HOUSING

MARKET RESEARCH

CONSTRUCTIVE

DIRECT SERVICES

TEACHING

MEDICAL CARE

ADVISORY

CONSULTATION

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2. It enables students to appreciate the impact of commercial activities on the society in

which they live.

3. It helps acquire commercial knowledge and skills in order to carry out commercial

activities.

4. It equips students with the basic knowledge of commercial language commonly used

in business/Uganda.

5. It encourages students develop neatness and orderliness in the work and paying

attention in everyday work.

6. It helps students acquire basic commercial knowledge for the purpose of employment.

7. It introduces students to wider fields of study at a higher level e.g. economics,

entrepreneurship, business administration, etc.

SATISFACTION OF NEEDS/WANTS

Needs/wants. These refer to the desires of man/individual in order to survive as a human

being.

TYPES OF NEEDS

1. Basic/primary needs. These refer to those human needs which are necessary for ones

physical survival. They are the basic necessities in life which a person cannot do

without.

Examples of basic needs include food, water, clothing, shelter, medical care and air.

2. Secondary needs. These are desires of mans which he can do without but they make

life comfortable.

Examples include luxury cars, mobile phones, etc.

3. Economic needs. These are the ones which involve desire for scarce goods and

services which have price or exchange value.

Examples include food, education, clothing, etc.

4. Non-economic needs. These involve the desire for free goods which are gifts of

nature and exist in natural abundance. Such goods have no exchange value but give

satisfaction to an individual. Examples include air, water, sunshine,

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CHAPTER 2: PRODUCTION

This is an activity aimed at bringing about a physical change in a good so as to make it

useful. A good would be required by a consumer only if it has an ability to satisfy his

need.

Or; this is the creation of utility in a good or service.

UTILITY. This is the ability of a good or service to satisfy human wants/ needs.

Or; this is the satisfying capacity or power of a commodity.

TYPES OF UTILITY

1. Form utility. This involves changing the form of a good at any stage of production

from raw material to finished form. Here, utility is added onto a commodity by

turning/changing it into a form that can satisfy a persons needs efficiently.

Examples of form utility include; transforming wood into furniture, changing raw cotton

into a dress which is more useful to a person, joining bricks cement to make a house

which is more useful to man.

2. Place utility. This involves making goods available at the places where they are

needed by the consumers. This kind of utility is created by transferring a commodity

from the place of production to the market place. Here, the goods are made available to

the buyers and hence they become more useful when they are bought and used by

consumers.

Examples of place utility include; bringing books and pens in schools, ringing medicine

and drugs in hospitals and clinics.

3. Time utility. This involves enabling goods to reach the consumers in the right time. It

involves storing of goods by sellers and releasing them at the time of scarcity when they

are needed by the buyers.

Examples of time utility include; providing warm clothing during winter, lawyers and

advocates being available during judgments.

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4. Service utility. This involves provision of personal services directly to consumers by

professional like doctors, lawyers, etc.

5. Marginal utility. This is the additional benefit/satisfaction derived by a consumer

from the consumption of an additional unit of a commodity at a given time.

6. Average utility. This is the utility derived per head from the consumption of a given

stock of a commodity. It is utility per head.

TYPES OF PRODUCTION

1. Direct production. This refers to producing goods and services for ones own

consumption/use.

Examples of direct production include; making a table for own use, growing of food for

home use, sewing of clothes for own use, molding utensils and tools for own use,

making shoes for own use, etc.

ADVANTAGES OF DIRECT PRODUCTION

1. It encourages self reliance i.e. it avoids dependence on other people or countries.

2. A variety of goods are produced hence wider choice.

3. It promotes self employment.

4. It avoids the problem of price fluctuation.

5. It minimizes the cost of production through using own or family labour.

DISADVANTAGES OF DIRECT PRODUCTION

1. It leads to production of low quality goods.

2. It limits creation of employment opportunities.

3. It leads to low out of goods and services.

4. It leads to a low tax base and hence low tax revenue.

5. It leads to under utilization of the available resources.

6. It limits development of infrastructures e.g. roads.

7. There is limited innovation and creativity.

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2. Indirect production. This refers to production of goods and services for

sale/exchange. Indirect production involves a person concentrating on doing what he/she

is best suited to do so that he/she exchanges it for what he/she cannot produce.

Examples of direct production include; making furniture for sale, growing of food for

sale, sewing of clothes for sale, molding utensils and tools for exchange, making shoes

for exchange, etc.

Note. Indirect production is the same as commercial production.

ADVANTAGES OF INDIRECT PRODUCTION

1. It leads to high output of goods.

2. It encourages high quality production since it encourages competition.

3. It leads to increased government revenue.

4. It creates more employment opportunities.

5. It encourages exploitation of available resources.

6. It encourages trade between countries.

7. It leads to increased skills.

DISADVANTAGES OF INDIRECT PRODUCTION

1. It encourages dependence on other people or countries.

2. It leads to over exploitation of available resources.

3. It leads to over production i.e. surplus output.

4. It leads to unemployment in case of production breakdown.

5. It leads to increased costs of production resulting into high prices for goods and

services.

STAGES/OCCUPATIONS/CLASSIFICATIONS OF PRODUCTION

1. Industry. This is that part of the production process that is concerned with bringing

goods into the form in which they can be consumed.

The industry is classified into two main groups i.e. the primary industry and secondary

industry.

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i) Primary/extractive industry (primary production). This involves extraction gifts of

nature/raw materials from where they are available for further production. Here, the

human effort is restricted either to looking after the process or to removing goods from

where they are available.

Examples of extractive industry/primary production include; agriculture, fishing,

mining, hunting, oil drilling, forestry, lumbering, etc.

ii) Secondary industry/secondary production. This is where raw materials made

available by primary industry are transformed into a more useful form. For instance

when a textile mill uses cotton grown cotton farmers who are engaged in primary

production transforms it into cloth that is in a more useful form.

Examples of secondary production include; Oil refining, Sugar processing, Coffee

processing, and Maize milling

Note. Secondary industries may either be manufacturing industries or constructive

industries.

Examples of manufacturing industries include; Textile mills, Sugar factories, Maize

mills and Oil refineries, etc.

Examples of constructive industries include; Road making/construction, Hose building,

Car construction and Bridge making, etc.

The third stage of production comes from commerce and direct services i.e. tertiary

production.

2. Tertiary production. This is a stage of production involving provision of services.

Note. There are two forms of services i.e. direct services and indirect services.

i) Direct/personal services or activities. These refer to those services that require

personal contact with people in need.

Examples of direct services include; Medical care, Teaching, Advisory services, and

Consultation services, etc.

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ii) Indirect/commercial services. These refer to activities/services concerned with the

distribution and exchange of goods and services i.e. getting the goods within the access

of consumers. Such services may not require personal contact with people in need.

Examples of indirect services include; Insurance, Advertising, Banking, Transport,

Communication, and Warehousing, etc.

FACTORS/AGENTS OF PRODUCTION

This refers to the things necessary for production. These include land, labour, capital,

organisation and entrepreneur.

1. Land. This is a factor of production that includes all gifts of nature that are freely

available on, above or under the surface of the earth.

Examples of land include; land for agricultural produce, factory construction, minerals,

fish, crude oil, forest wood, water, air, sunshine, climatic conditions, etc.

Hence land is the most important of production. The reward for land is rent.

2. Labour. This refers to human effort either mental or physical to any production

process. The reward for labour is salary or rent.

Note. For any human effort to be called labour, it must be aimed at production and paid

for.

3. Capital. As a factor of production, it refers to already produced goods used in

production of other goods.

Examples of capital include; tools, machines, equipment and means of transport

(vehicles) used by people involved in production.

The reward for capital is interest.

SOURCES OF CAPITAL

1. Own sources. This is where an entrepreneur starts a business using his/her sources of

funds such as passed/accumulated savings, personal income, etc.

2. Gifts and offers. This is where one starts business using gifts and offers from friends,

well-wishers and relatives.

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3. Suppliers credit/trade credits. This is where someone starts business using goods

that have been supplied to him on credit.

4. Sale of personal assets/property. These include buildings, land, cars and other assets

that can be sold off to raise money to start a business.

5. Loans (borrowing). This is from family members, friends, well-wishers, financial

institutions like banks, savings and credit comparative societies, government for instance

Entandikwa, Bona bagaggawale, etc.

6. Sale of shares to the general public so as to raise money required for the intended

purpose for instance different companies in Uganda like Uganda Clays at particular

periods sell their shares to the public so as to raise more capital for the firm. Hence, sale

of shares is an important source of business finance.

7. Inherited property from deceased parents or relatives like land, buildings, vehicles,

etc. which they can sell and receive income which can be used to as business capital.

8. Donations/grants got from donors or funding agencies who may inject money in

business for specific individuals like orphans, HIV/AIDS victims, etc. Such donors may

include the Uganda Women Effort to Save Orphans, The Aids Support Organization,

Charity Organizations, etc

4. Organisation. This refers to a factor of production that brings together and properly

coordinates land, labour and capital to make production possible.

Or; this refers to the efforts of managers and organizers who coordinate the three basic

factors of production with a view of making the production process efficient. The efforts

of such organizers and managers must be paid for. Hence the reward for organisation is

salary.

5. Entrepreneur. An entrepreneur is the person who undertakes the project in the face

of risk.

He provides the necessary money to arrange and pay for the above four factors of

production. He buys land or pays rent; he buys the necessary raw materials, hires

laborers, provides capital (tools and machinery) and employs organizers.

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The outcome of this is a good or service, which the entrepreneur sells or exchanges for

other goods. Form the proceeds of sale, he pays other factors of production and the

balance constitutes his profit.

This therefore means that the reward for the entrepreneur is profit. However, if the

proceeds for sale are less than what is required to pay other factors, the entrepreneur

meets the deficit. He thus stands the risk of loss. This means that the bearing of risks in

the production process falls on the entrepreneur.

Note. Land, labour and capital are considered as the basic factors of production. This is

because for any good to be produced, we need raw materials which are in most cases

provided by nature (land), we musty use some human effort (labour) to convert the raw

material into a good and we would need machines (capital) to help in human efforts.

One could succeed in making an item, however poor, without any help from the other

two factors of production, but one will always need land, labour and capital.

GOODS AND SERVICES

A good. This refers to any physical item that can be offered by one party for acquisition

by another to satisfy his/her needs.

A service. This refers to any intangible item offered by one party to another to give

satisfaction to the one who has been served.

TYPES OF GOODS

1. Consumer goods. These are goods that are ready for consumption/use by the

consumer.

Examples of consumer goods include: Food stuffs, Clothes, Stationery, Cars, Radio,

Shoes, etc.

2. Capital goods/producer goods. These are goods used in production of other goods.

Examples of producer goods include: Machinery, Tools and equipment, Furniture and

fittings, Buildings, etc.

DIVISION OF LABOUR AND SPECIALISATION

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Division of labour. This is the splitting of work among different workers who are

involved at different stages in the production of a commodity.

Specialisation. This is where an individual/region/country concentrates in the

production of a given commodity or service he/it can produce best and leave the rest of

the activities to others.

TYPES OF SPECIALISATION

1. Specialisation by craft/profession/skill. This is where people concentrate on

activities they can do best depending on their skills, profession (training) and talents.

2. Specialisation by process. This is whereby an activity is broken down into many

stages, each stage being worked upon by different people. For instance in a textile firm,

some workers belong to the spinning section, others in weaving section, others in dying

section, etc.

3. Specialisation by area/region. This is where each area or region concentrates in the

production of what it can do best because of the resources available and then exchange

with what others produce.

For instance Irish potato growing in kabala and Mattoke growing in central/Buganda

region.

4. International specialisation. This is where a country concentrates on the production

and exportation of a commodity in which it incurs low cost and leaves the production of

other commodities to other countries.

For instance Uganda specializing in the production and exportation of coffee where the

cost of production is low while Japan specializes in the production and exportation of

cars where the production cost is low.

ADVANTAGES OF SPECIALISATION/DIVISION OF LABOUR

1. It allows a person to gain more skills and experience and become efficient while

handling a task continuously.

2. It saves time since working time and again on one job increases ones speed hence

saving time.

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3. It reduces fatigue/saves energy as work is shared, a person does not easily get tired

since he/she does not move from one task to another.

4. It encourages exploitation of ones talent fully due to continuous working on the same

work.

5. Specialisation encourages mass production leading to increased output.

6. It enables use of machines hence production of standardized goods.

7. It promotes trade through exchange.

8. Better quality goods are produced because experts are employed.

9. Specialisation allows tools and machines to be put to better use.

DISADVANTAGES OF SPECIALISATION/DIVISION OF LABOUR

1. Specialisation leads to boredom/monotony while one is working.

2. It leads to mass production which may result in surplus which can be put to waste due

to lack of market.

3. Specialisation leads to exhaustion of resources as it calls for over exploitation of

resources.

4. It leads to loss of craftsmanship as a result of using machines which leads to decline in

hand skills especially in craftsmanship.

5. It leads to unemployment because of territorial/regional specialisation that leads to

overdependence on one product without market. Sometimes use of machines displace

workers leading to technological unemployment.

6. Break down of process in the absence of a skilled worker at one stage affects the

entire process because continuity requires him/her.

7. There is lack of responsibility because one job is completed by different workers i.e.

accountability is lacking.

8. A fall or change in demand affects the specializing country or individual.

Chapter 3: THE CONCEPT OF PRICE, DEMAND AND SUPPLY

Meaning of price

Price. This is the exchange value of a good or service in terms of money.

METHODS OF DETERMINING PRICE FOR GOODS AND SERVICES

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1. Bargaining/haggling. This is where price is determined through

negotiation/bargaining between the buyer and the seller.

2. Resale price maintenance. This is where the producer/manufacturer establishes a

fixed price for the resale of his product by retailers or other distributors.

Examples of commodities whose prices are determined through this method include air

time, newspapers, magazines, journals, postage stamps, etc.

3. Auctioning/bidding. This is where there is only one seller against many buyers who

asks buyers for their offers/bids and the highest bidder takes the product.

4. Agreement or signing of treaties. This is where both the buyer and the seller come

together in an agreement to fix a common price for the product.

For example international commodity agreements for coffee, tea, etc.

5. Collusion. This is where producers come together to fix one price for their products

without considering consumers for example taxi fare charges by UTODA.

6. Price leadership. This is where the biggest firm or low cost firm takes the lead to fix

a price and other firms or producers follow for example shell petrol company usually

takes the lead in setting fuel prices in Uganda.

7. Government price legislation. This is where the government fixes price especially

for essential commodities. It does this by setting either a minimum price or maximum

price.

i) Maximum price. This is the price fixed by government below the equilibrium price to

protect consumers such that it becomes illegal for producers to sell above it.

ii) Minimum price. This is the price fixed by government above the equilibrium price to

protect producers especially farmers such that it becomes illegal for consumers to buy

below it.

Equilibrium price. This is the market price where quantity demanded of a commodity

is equal to the quantity supplied.

Illustration of equilibrium price, minimum price and maximum price

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Price

D

O Commodity

DEMAND

This is the amount/quantity of goods a buyer is willing to buy at a given price in a given

period of time.

Or; this is the desire and willingness of a consumer to buy a given commodity for a

given price in a given period of time.

FACTORS INFLUENCING DEMAND FOR A COMMODITY

1. Price of the commodity. The higher the price of a commodity, the lower the amount

demanded and the lower the price of a commodity, the higher the quantity demanded.

2. Prices of other commodities. Increase in the price of substitutes leads to a increase in

demand of the commodity in question while a decrease in the price of a complementary

good leads to an increase in demand of a related good.

3. Level of income of the buyer. High level of consumers income leads to high demand

while low level of income of the consumer leads to low demand.

4. Future expectations about price changes. Expected increase in price by buyers in

the near future may force them to buy more commodities currently hence an increase in

demand and stability of prices in the market leads to low demand by buyers.

5. Population size/size of the market. A greater number of buyers increases demand

and the fewer the number of consumers, the lower the demand.

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6. Quality of the commodity. Low of a product leads to low demand for such a

commodity while good quality of a product increases its demand.

7. Consumer tastes and preferences/fashion. Favorable or desirable taste for a

commodity leads to high demand while unfavorable taste or fashion for a commodity

limits its demand.

8. Seasonal factors. Favorable seasons for particular commodities lead to high demand

for such commodities for example success cards during times of exams, umbrellas and

gum boots during rainy season, etc. on the other hand, unfavorable seasons leads to low

demand for such commodities.

9. Government policy of taxation and subsidization. Taxation leads to high prices for

goods and services resulting into low demand while government subsidies reduces prices

for goods and services leading to high demand.

10. Level of advertising for a commodity. Attractive and persuasive advertising

increase the demand for a commodity while limited advertising lowers the level of

demand.

11. Prevailing economic conditions. During an economic depression, there is low

demand for goods and services while during economic prosperity or boom, demand

increases.

12. Level of consumer addiction/habit. Consumers who are highly addicted to

particular commodities lead to high demand for such commodities for example smokers

of cigarette while lack of such habit or addiction leads to low demand.

CAUSES/FACTORS LIMITING THE DEMAND FOR A COMMODITY

1. High prices for a commodity.

2. Decrease in the price of substitute goods.

3. Increase in price for complementary goods.

4. Expected decrease in price by buyers in the near future.

5. Low level of consumer income.

6. Small market size/ existence of few of buyers.

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7. Low quality of goods and services being offered.

8. Unfavorable taste or fashion for a commodity limits.

9. Unfavorable seasons for particular commodities for example success cards.

10. Government policy of taxation.

11. Limited level of advertising of the commodity.

12. Economic depressions that leads to low economic activities and low purchasing

power.

13. Limited consumer addiction.

CAUSES/FACTORS NECESSARY FOR HIGH DEMAND FOR A

COMMODITY

1. Low prices for a commodity.

2. Increase in the price of substitute goods.

3. Decrease in price for complementary goods.

4. Expected increase in price by buyers in the near future.

5. High level of consumer income.

6. Big market size/ existence of a large number of buyers.

7. Good quality of goods and services being offered.

8. Favorable taste or fashion for a commodity limits.

9. Favorable seasons for particular commodities for example success cards.

10. Government policy of subsidization.

11. Increased level of advertising of the commodity.

12. Economic booms that lead to more economic activities and high purchasing power.

13. High levels of consumer addiction.

SUPPLY

This is the amount/quantity of goods a producer is willing to put on market at a given

price in a given period of time.

FACTORS INFLUENCING SUPPLY OF A COMMODITY

1. Price of the commodity. The higher the price of a commodity, the greater the amount

supplied and the lower the price of a commodity, the lower the quantity supplied.

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2. Prices of other commodities. Increase in the price of substitutes leads to a decrease

in supply of the commodity in question while an increase in the price of a

complementary good leads to an increase in supply of a related good.

3. Future expectations about price changes. Expected increase in price by producers

in the near future may force them to hoard commodities hence a decrease in supply and

stability of prices in the market encourages more supply by producers.

4. Cost of production. A decrease in cost of production increases supply but increase in

the cost of production reduces supply.

5. Number of producers. A greater number of producers increases supply and the fewer

the number of producers, the lower the supply.

5. Level of demand/size of the market. An expansion in the market for a commodity

increases supply and a decrease in market for a commodity reduces supply.

6. Gestation period. A longer gestation period reduces supply and a shorter one

increases the supply of a commodity.

7. Government policy of taxation and subsidization. Taxation reduces supply and

subsidization increases supply.

8. Nature/level of technology in use. Efficient technology speeds up production hence

supply increases and use of poor technology limits output hence supply reduces.

9. Natural factors. Bad weather conditions cause limited supply for agricultural

products and favorable climatic conditions lead to high supply of such commodities.

10. Political environment/condition. Political instability discourages production hence

supply declines and political stability encourages increase in production and supply.

11. Objective of the firm/producer. Producers who want to maximize sales normally

increase supply but those who aim at maximizing profits usually limit supply.

CAUSES/FACTORS LIMITING THE SUPPLY OF A COMMODITY

1. Low prices for a commodity.

2. Increase in the price of substitutes leads.

3. Decrease in price for complementary goods.

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4. Expected increase in price by producers in the near future.

5. Increase in the cost of producing a commodity.

6. Greater number of producers of a commodity.

7. Expansion in the market size for a commodity.

8. Longer gestation period for a commodity.

9. Government policy of taxation.

10. Use of low levels of technology in production.

11. Bad weather conditions in case of agricultural products.

12. Political instability that discourages production hence limiting supply.

13. Existence of producers who aim at maximizing profits.

CAUSES/FACTORS NECESSARY FOR HIGH SUPPLY OF A COMMODITY

1. High prices for a commodity.

2. Decrease in the price of substitute goods.

3. Increase in the price of a complementary good.

4. Expected decrease in price by producers in the near future.

5. Decrease in the cost of producing a commodity.

6. Decrease in number of producers of a commodity.

7. Expansion in the market size for a commodity.

8. Shorter gestation period for a commodity.

9. Government policy of subsidization that lowers the costs of production.

10. Use of high/advanced technology in production.

11. Favorable weather conditions incase of agricultural products.

12. Political stability that encourages production hence increasing supply.

13. Existence of producers who aim at maximizing sales.

Chapter 4: SIZE AND LOCATION OF A BUSINESS

Business. This refers to any economic activity which is carried out with an aim of

making profit through the satisfaction of human wants.

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A firm. This refers to any production unit which is under proper control and

management for instance Kakira Sugar factory, Tororo cement factory, Tembo steel

rolling mill.

An industry. This is a group or collection of firms producing similar or related products

for example, soap industry, bread industry, cement industry, etc.

THE SMALL FIRM

A small firm is one that operates on a small scale.

Examples of small scale firms include shops, bakeries, millers, etc.

CHARACTERISTICS OF SMALL FIRMS

1. Their periodical sales are relatively higher than those of micro businesses.

2. They may use some basic and simple technology in their production systems.

3. They require little capital to be started.

4. They are generally easy to start and operate and may not require formal registration.

5. They operate from fixed premises that are of a permanent nature e.g. shops.

6. The majority of small businesses produce for local markets.

7. They employ family labour (including extended family) but the total number of

people employed may not exceed 20 people.

8. The relatively well established small businesses may produce for export either directly

or through large businesses.

REASONS FOR THE CONTINUED EXISTENCE OF SMALL FIRMS

1. Inadequate capital to start and operate large scale firms. Many business people

have little capital that can only be used to start a small scale firm.

2. Existence of small and ready market for this type of business since most of the

items dealt in are household goods needed by most people.

3. Flexibility. Small firms are more flexible than large firms i.e. it is easy to change

from one type of business to another.

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4. Simplicity in management. A small firm is very simple to manage since it involves

no board meetings, there is direct contact with employees, and there are no majority

decisions.

5. Personal service needed to be offered to customers for instance lawyers, accountants,

etc.

6. Lack of personal contact in large scale firms. The owners of small businesses can

easily maintain a personal contact with their customers.

7. Government policy of encouraging and funding small firms by giving them loans.

8. Limited liability which is desired by businessmen who feel safe to have full control

of the business.

9. Ease of formation. It is easy to start a small scale firm since not many legal

formalities are involved like legal documents as it is the case with large scale firms.

ADVANTAGES OF SMALL SCALE FIRMS

1. They help in improving entrepreneurial skills.

2. They provide a variety of goods and services thereby increasing consumer choice.

3. They are a source of revenue to government through paying taxes.

4. They provide employment opportunities to people hence improving on their living

standards.

5. They help in making use of the available redundant resources.

6. They promote the development of local technology.

7. They promote commercialization of the economy.

DISADVANTAGES OF SMALL SCALE FIRMS

1. They limit development of infrastructure like roads.

2. There is production of low quality products.

3. There is production of low output.

4. The cause under utilization of available resources.

5. They provide limited job opportunities.

6. They cause unnecessary competition and duplication of products.

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BUSINESS EXPANSION

A business establishment may expand either through natural growth or amalgamation.

Natural growth. This is whereby a firm grows itself through ploughing back its earned

profits. Here, the firm may grow itself because of its owners policy of not withdrawing

all the profits from the business operations.

If this is practiced continuously, capital keeps growing and the firm will be able to buy

more assets and operate on a much larger scale. The entrepreneur may even admit

partners to cope with expansion or to facilitate it.

At some later stage, he may find it more convenient to convert his business into a private

company and eventually into a public limited company.

AMALGAMATION/INTEGRATION/MERGING/COMBINATION OF

BUSINESS

This is the combination or joining together of two or more firms.

FORMS OF AMALGAMATION/MERGING (MERGERS)

Firms may combine in different ways. These include;

1. Horizontal integration. This is where two or more firms producing similar or related

products and at the same level of production join together to form one large firm.

Examples of horizontal mergers include; Mukwano soap industry joining with Mbale

soap works, Kakira sugar works joining with Lugazi Sugar Corporation.

2. Vertical integration. This is where two or more firms producing similar or related

products but at different levels of production join together to form one large firm.

Examples of vertical integration include; Tea processing factory joining with Tea

grower, Tea processing factory joining with Tea wholesaler, Bread factory joining with

wheat grower.

3. Lateral mergers. This is where two or more firms producing similar or related

products join together to form one large firm to improve or enjoy marketing economies

together.

For example beer factory joining with whisky distiller.

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4. Conglomerate/diversifying mergers. This is where two or more firms producing

totally unrelated products join together. This type of merging is usually practiced such

that if there is a fall in demand or loss in one good, the merged firms can depend on the

other.

For example beer factory joining with beef manufacturer.

5. Absorption or merger. This is where one company takes over the business of

another.

All the assets of the business are taken over except debts. Here, the company to be taken

over is wound up while the absorbing company will retain its entity/name. The

shareholders of the liquidating company will be issued with shares in the new company.

For example Caltex Petrol Company in Uganda was taken up by Total Uganda limited,

Agip was taken up by Shell Uganda limited.

6. Complete amalgamation or consolidation. This is where all companies intending to

amalgamate are dissolved to form a new company to take over their business.

A new company is formed to take over the assets and liabilities of the amalgamated

firms and the shareholders of the old companies are issued with shares in the new

company.

7. Holding company. This is where companies enter into combination by retaining their

entities but one of them acquires control of the others by taking the largest shareholding.

For example 51% or more of the shares that enables such a company to gain full control

over these other companies.

The company with the largest shareholding is called the holding company while the

others would be called subsidiary companies.

8. Cartel arrangement. This is where various firms producing similar or related

products agree to sell their products through a central selling agency.

Here, only member companies can sell their products through this agency. The firms

come together to agree to charge one price for their products so as to avoid competition.

The output for each firm to supply is also determined together.

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9. Consortium. This is where two or more firms join or pool together their resources to

accomplish a given task for a given time and after the completion of the task, the

consortium comes to an end.

For instance Roko Construction Company may join Zzimwe Construction Company to

build a road.

10. Franchising. This is where a company allows another company to use or buy its

brand name or techniques of production. For example Coca Cola Company allowing

Century Bottling Company to use its name.

REASONS WHY FIRMS MERGE

1. To widen market share by avoiding competition between themselves.

2. To exploit the available resources effectively.

3. To reduce costs of production by coming together.

4. To minimize unnecessary product duplication and wastage of resources.

5. To increase on the level of output and sales.

6. To share business risks together e.g. machine breakdowns, fire, theft, etc.

7. To get access to better technology/methods of production.

8. To get easy access to capital in form of loans from lenders.

9. To get easy access to skilled labour such as managers, engineers, accountants, etc.

10. To improve on the efficiency of production.

ADVANTAGES OF MERGING OF FIRMS

1. It widens market share of the merged firms by avoiding competition between them.

2. It encourages exploitation of the available resources effectively.

3. It reduces costs of production like advertising due to large scale production.

4. It helps to minimize unnecessary product duplication and wastage of resources.

5. It increases on the level of output and sales as a result of large scale production.

6. It enables the merged firms to share business risks together.

7. Firms are able to get access to better technology/methods of production.

8. It enables firms to get easy access to capital in form of loans from banks due to

presence of collateral security.

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8. Firms are able to get easy access to skilled labour such as managers, engineers, etc.

9. It minimizes unnecessary competition for raw materials which leads to high output.

10. It leads to improved management/efficiency in production since it encourages

specialisation.

DISADVANTAGES OF MERGING OF FIRMS

1. It leads to loss of independence and identity of firms.

2. It encourages over exploitation of the available resources.

3. It encourages monopoly power leading to overcharging of consumers.

4. It encourages over production leading to wastage due to limited market.

5. It leads to unemployment as many workers are substituted for machines.

6. It leads to inefficiency in management to large size.

7. Merging leads to increased taxes levied by government which limits the profits.

FACTORS LIMITING MERGING OF FIRMS

1. Unfavorable government policy that may be against merging.

2. Production of unrelated products which makes merging of firms difficult.

3. Fear of loss of jobs when machines replace labour.

4. Fear of loss of identity and independence by firms.

5. Fear of loss of customers by firms.

6. Long distances between firms intending to merge.

7. Fear of loss of sources of raw materials.

8. Differences in sizes of firms intending to merge.

9. Existence of limited market that cannot consume all output.

10. Fear of sharing risks and losses of other firms.

THE LARGE FIRM

A large firm is one which operates on a large scale.

Examples of large businesses in Uganda include Kakira Sugar Works, Mukwano

Industries, Tea Estates in Western and Eastern Uganda, Roofings Ltd, etc.

CHARACTERISTICS OF LARGE FIRMS

1. They may employ more than 100 people.

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2. They require a lot of capital to be started.

3. They operate from well established and permanent business premises.

4. Their production methods are specialised and automated and produce in large

quantities.

5. They may be producing for both local and foreign markets.

6. In most cases, they result from medium sized businesses growing and becoming large.

ECONOMIES OF SCALE

Economies of scale refer to the advantages enjoyed by a firm as it expands the scale or

level of production leading to low cost of operation.

TYPES OF ECONOMIES OF SCALE

There are two types of economies of scale i.e. internal and external economies of scale.

1. Internal economies of scale. These are the advantages of large scale production

enjoyed by one firm.

Here, the reduction in cost of operation depends on the size of the individuals firm.

2. External economies of scale. These are advantages of large scale production enjoyed

by together by the industry.

Here, the reduction in cost depends on the size of the industry, not the firm.

EXAMPLES OF ECONOMIES OF SCALE

1. Managerial economies. These are advantages enjoyed by a large firm by being able

to employ better staff based on specialisation that leads to low cost of management.

2. Financial economies. These are advantages enjoyed by a large firm by being able to

easily access financial assistance from lenders to existence of collateral security.

3. Marketing economies. These are advantages enjoyed by a large firm by being able to

sell/market its output at lower costs.

4. Transport economies. These are advantages enjoyed by a large firm by owning its

own means of transport such that it can transport large output at once which minimizes

transport costs.

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5. Labour economies. These are advantages enjoyed by a large firm by being able to

employ highly skilled and specialised labour.

6. Storage economies. These are advantages enjoyed by a large firm by being able to

have enough storage facilities for its output.

DISECONOMIES OF SCALE

This refers to the disadvantages suffered by a firm when it over expands its scale of

production leading to an increase in production costs.

EXAMPLES OF DISECONOMIES OF SCALE

1. Managerial diseconomies. As a firm over expands, management becomes inefficient

and difficult.

2. Financial diseconomies. These are the disadvantages suffered by an over expanding

firm by acquiring loans at high interest rates.

3. Marketing diseconomies. As a firm over expands, a lot of money is spent on

advertising and market research.

4. Transport diseconomies. As a firm over expands, a lot of money is spent buying,

maintaining and servicing of delivery vans.

5. Labour diseconomies. As a firm over expands, a lot of money is spent on acquiring,

maintaining and training of labour.

6. Storage diseconomies. Large output requires a lot of storage facilities which

increases storage costs of a firm.

ADVANTAGES OF LARGE SCALE FIRMS

1. They encourage development of infrastructure like roads.

2. They create more employment opportunities.

3. They encourage full utilization of resources.

4. They offer training facilities for local labour.

5. They contribute lots revenue to the government in form of taxes.

6. They encourage capital inflow by investors.

7. They encourage high quality output.

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8. They act as a source of foreign exchange by producing for export.

DISADVANTAGES OF LARGE SCALE FIRMS

1. They cause technological unemployment when machines are used to replace labour.

2. They lead to pollution of the environment.

3. They encourage over exploitation of available resources.

4. They encourage over production leading to resource wastage.

5. They encourage capital outflow by the foreign investors.

6. They encourage rural-urban migration with its associated problems.

LOCATION AND LOCALIZATION OF AN INDUSTRY

Location of an industry. This is the site/position/place where an industry is situated or

established.

FACTORS INFLUENCING LOCATION OF AN INDUSTRY

1. Availability of raw materials. Manufacturers prefer to locate their factories near the

source of raw materials so as to minimize transport expenses.

2. Availability of labour. Labour intensive industries are usually situated where cheap

labour is available for example, sugarcane and tea plantations.

3. Availability of market. Manufacturers prefer to locate their factories near to the

market so as to save on transporting finished goods.

4. Availability of power. Capital intensive industries are usually located where power

for running the machines is readily available.

5. Availability of ancillary/support services. Manufacturers prefer to locate their

factories near to the banks, communication facilities, insurance services, health centres,

refreshment spots, etc. all of which help in the smooth running of trade.

6. Cost of land. Manufacturers prefer to locate their factories in suburbs of towns and

rural areas where land is cheaper than in the centers of major towns.

7. Availability of room for expansion. Usually, manufacturers select sites with enough

land that allows expansion if desired at a later stage.

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8. Accessibility. Usually, manufacturers select sites which can easily be linked to roads

so as to ease movement of raw materials to the firm and finished goods to the market.

9. Political climate/availability of security. Manufacturers prefer to locate their

factories in areas that are politically stable so as to minimize losses.

10. Government policy on rural development and fair distribution of industries.

Manufacturers prefer to locate their factories in remote areas so as to benefit from the

tax rebates, free or cheaper land and financial assistance offered by the government.

Localization of an industry. This is the concentration of a particular type of industry in

one area/town.

Or; this is the concentration of many firms in one area.

ADVANTAGES OF LOCALISATION OF AN INDUSTRY

1. It leads to easy accessibility to raw materials, labour, power and other resources which

help to reduce costs of production.

2. It encourages growth of the service sector i.e. it leads to growth of banks, insurance

firms and financial institutions in the region.

3. It leads to development of infrastructure. When industries get localized in an area,

roads, roadways and power plants are built in the area in due course of time.

4. It creates employment opportunities to a number of people in the localised area for

instance workers in different factories in the localised area.

5. It facilitates growth of capital goods industry. In course of time, factories for

production of machines and equipment required for industries are established.

6. It facilitates development of commerce. Commerce and trade usually progress in the

region where industries are localised.

7. It encourages competition among firms in the localised area which enables people to

enjoy better quality goods and services at affordable prices.

8. It encourages specialisation among the different firms and this leads to increased

output.

9. It encourages exploitation/utilization of idle resources such as land, labour, etc.

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10. It leads to development of ancillary/other industries that use by-products of the big

industry.

11. It makes it easy for the government to provide assistance to the many firms in the

localised area at minimum cost.

DISADVANTAGES OF LOCALISATION OF AN INDUSTRY

1. Localisation of industries causes pollution of environment in form of air, water and

noise pollution which increase in industrial areas.

2. Decline in demand for the products of localised industry leads unemployment in the

region.

3. Localisation leads to industrial disputes in form of strikes, lookouts, etc. in industrial

belts.

4. It leads to social evils like industrial slums and unhealthy living conditions, criminal

activities, etc. in industrial areas.

5. It leads to increased cost of living and pressure on local facilities such as education,

health, sanitation and public transport.

6. It encourages over production which at times leads to wastage of resources.

7. It encourages over exploitation of resources at times leading to their depletion.

8. Localisation leads to displacement of people from their original homes in trying to

create space for the localised industry.

9. It creates regional imbalance. When industries get localised in few regions, these

regions make rapid economic progress while other regions of the country remain

economically backward.

CHAPTER 5: HOME TRADE

This is trade carried out within the geographical boundaries of a country. It is trade

carried out between two or more traders of the same country.

TYPES OF HOME TRADE

Home trade may be carried out at two levels i.e. retail and wholesale.

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1. Retail trade. This is the selling of goods to the final consumer.

Or; this is the buying of goods in large quantities from the wholesaler and selling them

in small quantities to the consumer.

Retailing. This is the act of selling goods to the consumer.

A retailer. This is a trader who sells goods to the consumer.

FACTORS CONSIDERED WHEN SETTING UP A RETAIL BUSINESS

1. Location of the business. Retailers usually prefer setting up their businesses near the

likely customers for the type of goods the retailer intends to sell.

2. Level of competition/existence of other retail businesses. Some retailers prefer

setting up their businesses where similar retail shops already exist while others prefer to

set up business where there is a need for such a shop.

3. Expertise/knowledge of the retailer. Retailers usually prefer setting up businesses

similar to those in which they have enough working experience.

4. Sources of finance. Usually, retailers first identify ways of funding their businesses

before getting started.

5. Source of stock. Retailers prefer to set up their shops near the source of stock so as to

minimize transport expenses.

6. Availability of market. Retailers prefer to set up their businesses in places with large

numbers of people who serve as market for the business for the business to survive.

7. Total project costs. Retailers usually consider the how much capital will be required

depending on the size of the business.

8. Terms and conditions of sale. This could be selling on cash basis or credit basis.

9. Nature of goods required by customers. Retailers normally set up businesses

dealing in goods needed by the market they intend to serve.

10. Local and government regulations. This could be taxes levied by government,

trading license requirements, etc.

QUALITIES OF A GOOD RETAILER:

1. A good retailer should be courteous/ pleasant when dealing with customers.

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2. A good retailer should be open and honest to his customers.

3. A good retailer should be able to settle his financial and tax obligations in time.

4. A good retailer should be clean himself and even the work environment.

5. A good retailer should be a good buyer. A good retailer should be able to buy more

economically i.e. he should know when, what and where to buy.

6. A good retailer should be cooperative with suppliers i.e. he should be able to pay the

suppliers promptly to be assured of steady supply.

7. A good retailer should be a good administrator i.e. he should be in position to control

his business stock, assets and check on the activities of his workers.

8. A good retailer should be able to forecast the demand of his customers, change in

tastes and preferences, fashion and knowledge of the business.

8. A good retailer should practice good or efficient salesmanship e.g. he should be able

to advise customers, give after sales services, give discounts, serving customers for long

hours, offering credit to trustworthy customers, etc.

FUNCTIONS OF THE RETAILER IN HOME TRADE

1. Breaking bulk by buying from the manufacturer in large quantities and selling to

consumers in small quantities they can afford.

2. Bringing goods nearer to the consumers thereby saving transport costs of the

consumers.

3. Storing goods until they are needed by the consumers thus saving them buying large

stock at a time.

4. Providing information to the consumers about new products, new fashions and

relative prices.

5. Providing credit facilities to trustworthy customers thereby enabling them to maintain

their standard of living.

6. Offering advice to his customers as regards qualities, way of use of product and

assisting customers in making correct choice.

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7. Offering after-sales services to customers regarding technical know how for example

repairs of machinery.

8. Stoking goods from different manufacturers so as to provide variety and choice.

9. Displaying goods in order to give his customers an opportunity to select the most

suitable ones for them.

10. Financing the wholesaler by paying for his goods he buys thus availing him working

capital.

11. Keeping the wholesaler informed of the market conditions and therefore enabling

him to make accurate forecast of future requirements.

12. Relieving the wholesale the burden of storage by buying from him in large

quantities.

13. Connecting the wholesaler to the consumers.

14. Saving the wholesaler the trouble of dealing with small orders from consumers.

SERVICES OFFERED BY THE RETAILER TO THE CONSUMERS/PUBLIC

1. He buys and breaks the bulk thereby making it easy to sell to consumers in quantities

they can afford.

2. The retailer sometimes transports goods to the customers premises thereby saving

them transport costs.

3. Stores goods until they are needed by consumers thus saving them buying large stock

at one time.

4. He displays his goods in order to give his customers an opportunity to select the most

suitable for them.

5. He serves as a source of information to the consumers about the new products, new

fashion and relative prices.

6. He offers credit facilities to his trustworthy customers thereby enabling them to

maintain their standards of living.

7. Offers advice to his customers as regards qualities, way of use of product and assists

in making the correct choice.

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8. He stocks goods from different manufacturers thus providing a consumer variety and

choice.

8. Sometimes offers after sales services to customers regarding technical knowhow e.g.

repairs of machinery.

SERVICES OFFERED BY THE RETAILER TO THE WHOLE SALER/

PRODUCER

1. He finances the wholesaler by paying for his goods he buys thus availing the

wholesaler with working capital.

2. Saves the wholesaler the trouble/burden of dealing with small orders from consumers.

3. The retailer links/connects the wholesaler to the consumers.

4. Helps the wholesaler to advertise the goods for instance through attractive display.

5. He relieves the wholesaler the burden of storage by buying in large quantities.

5. He keeps the wholesaler informed of the market conditions and therefore enables him

to make accurate forecast of future requirements.

6. Transports goods bought from the wholesaler to his premises thereby relieving the

wholesaler.

TYPES OF RETAILERS

Retailers are classified into two broad groups i.e. small scale retailers and large scale

retailers.

SMALL SCALE RETAILERS

These are retailers who invest little amount of capital in business, hold small stocks and

offer a limited range of services.

FEATURES OF SMALL SCALE RETAILERS/RETAILING

1. They operate with small capital base because they have limited access to loans.

2. They offer limited variety of goods/services.

3. They operate on a small scale and may not have their own business premises.

4. They have a small turnover and a small profit margin.

5. They usually hold small stocks of goods.

6. They usually sell direct to consumers.

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7. They occupy a very small space/area because of the nature of the stock held.

8. They are flexible in operation and can change line of trade according to market

demand.

9. They operate in a limited area and offer services to a few customers i.e. have a small

market.

ADVANTAGES OF SMALL SCALE RETAILERS

1. They bring goods nearer to the consumers thereby reducing consumers transport

problems.

2. They sell gods in small affordable quantities thereby breaking bulk.

3. Small scale business is easy and cheap to start and run as it requires little capital and

does not require a lot of legal formalities and documents.

4. They incur minimum operational costs like rent, electricity, etc.

5. Itinerant traders, hawkers and mobile shops are able to capture more market and sell

more by moving from place to place.

6. The business is flexible i.e. one can switch from one business to another easily.

7. They are conveniently located i.e. they are located within easy reach by consumers.

8. There is proper customer care by small scale retailers due to personal contact.

9. They are easy to administer and control than large scale retail businesses.

10. They are exposed to low risks of loss caused mainly due to change in fashion, taste

or accidents.

DISADVANTAGES OF SMALL SCALE RETAILERS

1. They operate on a small scale and employ little capital hence unable to spend on sales

promotion.

2. They hold limited stock and hence their sales volume is low.

3. Most of the small scale retailers do not have well established fixed premises.

4. They are unable to modern equipments like computers to ease their operations.

5. They offer their goods at relatively higher prices since their cost per unit is high.

6. They buy their stock is small quantities hence do not benefit from trade discounts.

7. They are unable to employ skilled labour.

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TYPES OF SMALL SCALE RETAILERS

1. ITINERANT or Travelling traders

These are retailers who carry goods on their bodies, bicycles or motor cycles moving

from home to home, village to village and town to town selling goods.

Examples are peddlers/peddlers, hawkers, barrow boys, mobile shops.

PEDDLERS/Pedlars

These are itinerant traders who carry goods on their bicycles or motor cycles moving

from home to home, village to village and town to town selling goods.

FEATURES OF PEDDLERS/PEDDLERS

1. They have no fixed premises/shops.

2. They move from place to place selling goods.

3. They sell a limited variety of goods/limited stock.

4. They sell/deal in light or portable goods which they can easily carry.

5. They require limited capital.

6. Bargaining is possible.

7. They normally visit densely populated residential areas.

HAWKERS

These are traders who use a particular means of transport especially motor vehicles

moving from one place to another and carry goods on their bodies as they do the selling

of goods.

FEATURES OF HAWKERS

1. They have no fixed premises/shops.

2. They move from place to place selling goods.

3. They sell a limited variety of goods/limited stock.

4. They sell/deal in light or portable goods which they can easily carry.

6. They require limited capital.

7. Bargaining is possible.

8. They normally visit densely populated residential areas.

9. They do not follow a time-table.

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MOBILE SHOPS

These are itinerant traders who carry goods on their van or lorry moving from home to

home and town to town selling goods. They usually follow a regular timetable and sell to

specific markets on specified days of the week for instance suppliers of bread and soda.

FEATURES OF MOBILE SHOPS

1. They have no fixed premises/shops.

2. They move from place to place selling goods.

3. They sell/deal in a variety of goods.

4. They often follow a time-table visiting villages on specified days of the week.

5. Bargaining is possible.

6. They normally visit densely populated residential areas.

7. They are common in urban centers.

8. They move to markets on regular intervals i.e. on particular days.

BARROW BOYS

These are itinerant traders who carry goods on their wheelbarrows moving from home to

home or in busy places like bus parks or taxi parks selling goods.

ROAD-SIDE SELLERS/Street travelers

These are retailers who operate along streets, next to a market place, bus stop or public

halls. They offer small items like cigarettes, sweets, match boxes, fresh fruit,

newspapers, magazines, etc.

FEATURES OF ROAD-SIDE TRADERS

1. They have no fixed premises/shops.

2. They require limited capital.

3. They sell small items like cigarettes, sweets, match boxes, fresh fruit, etc.

4. Bargaining is possible.

5. They operate along heavy traffic roads.

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SINGLE SHOPS

These are retail businesses usually owned and run by one person who may be helped by

his wife or children.

FEATURES OF SINGLE SHOPS

1. They operate from fixed premises.

2. They are usually owned and run by one person.

3. Usually offer a limited variety of goods.

4. Often sell one class of item like clothes, books, groceries, etc.

5. They have little capital.

TIED SHOPS

This is a type of single shop which sells products of one manufacturer only.

Examples of tied shops in Uganda include all petrol stations and retail shops run by Bata

Shoe Company.

FEATURES OF TIED SHOPS

1. They operate from fixed premises.

2. They sell products from one manufacturer.

3. Usually operate from urban centers.

4. Their prices tend to be fixed.

5. Usually offer a limited variety of goods.

REASONS WHY THE NUMBER OF SMALL SCALE RETAILERS/HAWKERS

IS ON INCREASE IN UGANDA

1. Small capital is required to start the business hence even low income people can

afford to start and run the business.

2. The operational costs are minimal for example, no or little money s spent on rent,

electricity, wages, etc.

3. Limited legal formalities are required for the business for instance there are no or few

legal documents are required for the establishment of a small scale retail business.

4. High levels of unemployment which makes the business a source of employment to

many people.

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5. Existence of good transport net work which enables hawkers, peddlers and mobile

shops to move to various places.

6. Existences of ready market for this type of business since most of the items they sell

are household goods needed by most people.

7. Some traders operating on large scale sometimes find it convenient to give their goods

to small scale retailers for sale.

8. Sometimes retail business is carried out as a side income generating business by those

who are employed and earning salary or wages.

REASONS WHY SMALL SCALE RETAILING IS PREFERRED TO LARGE

SCALE RETAILING

1. Less capital is required to start a small scale retail business unlike a large scale retail

shop.

2. Small scale retail businesses are easy to manage and supervise than large scale retail

businesses.

3. Small scale retail shops can be conveniently located anywhere like in villages, suburbs

unlike large scale retail businesses.

4. Unlike in large scale retail businesses, there is personal contact between the proprietor

and the customer in small scale retail businesses.

5. There is greater flexibility of operation in small scale retailing unlike in large scale

retailing.

6. Decision making is easy and faster since there is nobody to consult unlike in large

scale retailing where consultations have to be made before any decision is made.

7. There is secrecy and confidentiality in business dealing and profits unlike in large

scale retailing.

8. Formation of small scale retail businesses is easy as there are few legal formalities to

go through compared to large scale retailing.

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9. There are lower operational costs like rent, electricity, wages than it is the case with

large scale retail businesses.

PROBLEMS FACED BY SMALL SCALE RETAILERS

1. Inadequate business management skills and poor record keeping.

2. Limited working capital due top inadequate security to access loans.

3. Limited market for the products due to stiff competition and low incomes of people.

4. High tax rates which take away the would be profits.

5. High rates of inflation which make price fixing difficult.

6. High prices of utilities like electricity leading to high operational costs.

7. Undeveloped transport facilities especially in rural areas which make movement hard.

8. Insecurity due to civil wars, robbers, etc. all of which make trading difficult.

LARGE SCALE RETAILERS

These are retailers with large capital at their disposal which enables them to stock in

great/large quantities and a greater economy.

FEATURES OF LARGE SCALE RETAILING/RETAILERS

1. There is centralized buying of stock.

2. They operate with large capital base because have access to loans.

3. They offer variety of goods/services.

4. They operate on a large scale and may have their own business premises.

5. They have a large turnover and a great profit margin.

6. They usually hold large stocks of goods.

7. They occupy a big space/area because of the nature of the stock held.

8. They operate in a large area and offer services to many customers i.e. they have a big

market.

ADVANTAGES OF LARGE SCALE RETAIL OUTLETS

1. They operate on a large scale and employ a lot of capital hence able to spend on sales

promotion.

2. They carry a lot of stock and their sales volume is bigger.

3. They operate from well established fixed premises.

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4. They buy stock in greater quantities hence enjoy trade discounts.

5. They charge relatively lower prices since their cost per unit is low.

6. They are able to use modern equipments like computers to ease their operations.

7. They employ skilled labour/specialists.

8. They offer after sales services like transport, installation, etc.

9. They offer guarantee i.e. they promise compensation in case of fault.

10. They offer hire purchase facilities to customers.

11. They ensure steady supply of goods thus helping in stabilizing prices.

12. They advertise goods to the consumers which increases consumer awareness.

13. They offer a variety of goods which broaden consumers choice.

DISADVANTAGES OF LARGE SCALE RETAILERS

1. A large amount of capital is needed since the business stocks a great variety of goods.

2. There are high costs of operation due to high rentals and large staff leading to high

wage bills.

3. There is loss of personal contact where customers have to forego the personal touch

especially when they buy goods from supermarkets where there is self service.

4. There is stocking of only standard goods which are in regular demand and which can

be sold quickly hence individual tastes are not catered for.

5. The business is associated with administrative difficulties especially when the number

and size of branches increase, control by the headquarters difficult and expensive.

6. There is greater risk of loss caused by change in fashion, tastes, accidents, theft and

high operating expenses like advertising, rents, maintenance costs, wages, etc.

7. They are not able to cater for the needs of the poor as they are normally located in

urban areas.

8. There is in most cases absence of credit facilities since large scale retailers serve many

customers who are normally strangers.

9. There exist chances of pilferage as it is hard to exercise a close watch on all

customers.

TYPES OF LARGE SCALE RETAILERS

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SUPERMARKETS

These are large stores that stock many household items. Such items include eatables,

utensils, drinks, light electrical appliances, clothing and other goods of a household

nature.

Examples of supermarkets in Uganda include; Capital shoppers, Shoprite, Nakumat,

Uchumi, etc.

CHARACTERISTICS OF SUPERMARKETS

1. There is self service retailing where a customer picks any item he/she needs from the

shelves.

2. They stock a variety of domestic items like eatables, utensils, drinks, etc.

3. There is strictly no credit i.e. sales are on a cash basis.

4. Goods are pre-packed and bear price tags i.e. they are pre-priced.

5. Prices are fixed and not negotiable.

6. Trolleys and baskets are provided for shoppers to carry goods.

7. There are numerous exists at which payment is made.

8. Sales psychology is scientifically applied to attract buyers i.e. they operate on a

system of open display.

HYPERMARKETS

A hypermarket is a large retail facility carrying a wide range of products under one roof.

It is a superstore combining a supermarket and departmental store resulting into an

expansive retail outlet. Hypermarkets allow customers to satisfy their routine shopping

needs in one trip.

CHARACTERISTICS OF HYPERMARKETS

1. They offer a wide range of products under one roof.

2. They offer a very large parking space for their customers.

3. They provide ancillary services like restaurants, banks, etc.

4. They are usually located in major cities/towns.

5. There is self service retailing where a customer picks any item he/she needs from the

shelves.

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6. There is strictly no credit i.e. sales are on a cash basis.

7. Goods are pre-packed and bear price tags i.e. they are pre-priced.

8. Prices are fixed and not negotiable.

9. Trolleys and baskets are provided for shoppers to carry goods.

10. There are numerous exists at which payment is made.

11. Sales psychology is scientifically applied to attract buyers i.e. they operate on a

system of open display.

12. They occupy a big trading space/area because of the nature of the stock held.

13. They have a very large turnover and a great profit margin.

14. There is centralized buying of stock.

DEPARTMENTAL STORES

These refer to a number of single shops under one roof and one management. The store

is divided into a number of independent departments, each of which stocks only one

class of goods and is managed by a departmental manager.

CHARACTERISTICS OF DEPARTMENTAL STORES

1. There are many shops in the same building/under one roof and under one ownership.

2. Each shop stocks one class of goods.

3. Each department carries out its own purchasing, advertising and book-keeping.

4. They provide ancillary services like restaurants, banks, etc.

5. They offer a wide variety of goods.

6. They are normally situated in central shopping areas of big towns.

MULTIPLE SHOPS/CHAIN STORES

These are a number shops owned and controlled by one firm, stocking the same classes

of goods and often similar in appearance. They operate numerous branches scattered in

different towns but under the same ownership.

Examples of multiples shops in Uganda include; BATA Shoe manufacturing Company

shops, Shell Petrol Company shops, etc.

CHARACTERISTICS OF MULTIPLE SHOPS

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1. There are many shops/branches scattered in different towns but under the same

ownership.

2. They deal in very small range of related products.

3. They all have similar frontal appearance and method of display.

4. The prices of products are fixed by headquarters and are similar in all shops.

5. Purchasing is centralized and selling is decentralized.

6. They deal mainly on cash basis.

7. All branches are controlled centrally.

DIFFERENCES BETWEEN DEPARTMENT STORES AND MULTIPLE SHOPS

1. Multiple shops are owned and managed by one proprietor but scattered in different

areas while department stores are a number of shops under one roof and management.

2. Multiple shops stock similar range of goods while departmental stores stock a variety

of unrelated goods.

3. Multiple shops charge identical prices for similar goods while departmental stores

charge different prices.

4. Multiple shops have centralized purchasing while departmental stores have

decentralized purchasing.

5. In multiple shops, risks are widely spread in different branches while in departmental

stores there are higher risks since goods are under one roof.

6. Multiple shops have similar appearances and shop outlay while departmental stores

have different shop layout and may be different.

MAIL-ORDER SHOPS

This is where goods are sold and delivered through the post and not across the counter.

It is where shopping is done by post. These traders have no shops, but have a warehouse

and an office. Business depends on getting orders through extensive advertising in

newspapers and house journals, and by using catalogues and brochures.

CHARACTERISTICS OF MAIL-ORDER SHOPS

1. Goods are sold and delivered through the post.

2. The traders have no shops, but have a warehouse and an office.

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3. They are usually located in major cities/towns where there are post office services.

4. Customers are offered credit facilities.

5. Agents are employed to deliver and collect payment for the goods.

6. They deal with expensive goods but of low appeal to customers i.e. not commonly

needed by ordinary people.

7. They do a lot of advertising in newspapers and house journals, and by using

catalogues and brochures.

COOPERATIVE STORES

This is a retail outlet owned by a number of members aiming to attain a common

objective. Members elect their representatives who run the store. The sales are either

restricted to members only or are marked with two prices, for members and non-

members, with members getting goods slightly cheaper than non-members.

ORGANISATION OF A LARGE SCALE RETAIL SHOP

A large scale retail business is divided into four major departments i.e. purchases

department, sales department, accounts department and administration department.

1. Purchase Department. This department is concerned with buying of goods for

resale. It divided into different sections i.e. buying, stores, transport, and records

sections.

Orders are placed by the buying section, which maintains an up-to-date list of suppliers;

goods are received and held by the stores section; they are distributed to branches by the

transport section; documents regarding purchases are held and processed by the records

section.

2. Sales Department. This department is responsible for sales, sales promotion, delivery

and consumers service.

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3. Accounts Department. This department is responsible for preparing the payroll,

collecting cash, making cash payments (disbursements), keeping track of purchase

orders and sales, and maintaining up-to-date record of the business assets.

4. Administration Department. This department co-ordinates, directs and controls the

activities of other departments.

It also has the responsibility of recruiting staff, maintaining their records, dealing with

legal matters, drawing up budgets, formulating policies, etc.

MODERN TRENDS IN RETAIL TRADE/RETAILING

In the recent years, the volume of retail trade has expanded and the size of retail outlets

has also increased as we find more and more supermarkets, departmental sores and

hypermarkets coming on the scene.

The small scale retailer still exists and will probably always be there, but a much larger

share of the market is being taken up by large scale retailers. New developments have

directly contributed to this drastic increase in large scale retailing, i.e. installment selling,

pre-packaging branding, blending, automatic vending, etc.

INSTALLMENT SELLING

This is where a customer deposits some money as part payment and keeps on paying in

small bits until the price for the item is finally completed. Depending on the policy of the

enterprise, the customer may or may not take the item with him/her until he/she has paid

fully.

Installment payment is used when a customer does not have the capacity (enough

money) to pay for the goods or services to be provided. There are two forms of

installment selling i.e. hire purchase and deferred payment.

HIRE PURCHASE

This is a method of installment selling where the ownership of the goods remains that of

the seller until the last installment is paid and in the event of default of agreement, the

seller repossesses the goods.

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On signing the agreement, the buyer can take the possession of the commodity and use

it but however, the ownership in the property rests with the seller until the buyer pays

the final installment.

If the buyer fails to pay any installment, the seller is entitled to take back the article and

the buyer will have no claim over the installments he has already paid. The amount paid

will be treated as hire charges for the article.

The commodities normally bought under hire purchase include furniture, machinery,

motor vehicles, refrigerators, etc.

ADVANTAGES OF HIRE PURCHASE

i) To the seller/owner

1. More goods are sold through this system hence high turnover.

2. High turnover saves warehousing cost and insurance.

3. Higher prices are charged to consumers hence more profits to the seller.

4. Articles sold can be recovered and resold.

5. Goods advertise themselves as customers constantly visit the seller.

6. It enables the seller to dispose off his goods which would have otherwise got spoilt.

7. It promotes good relationship between the seller and his customers and this

encourages more buying and selling.

ii) To the buyer/hirer

1. Consumers are able to buy expensive items sold on hire purchase.

2. Hire purchase is a form of savings in form of durable goods.

3. An asset bought can be used to generate income to pay for itself.

4. The property under hire purchase can act as collateral security to apply for loans.

5. Hire purchase is an alternative funding line to bank overdrafts.

6. The deposits made by the hirer are lower than with business loans.

7. Hire purchase tends to promote the buyers standards of living as it puts him in

position to buy expensive commodities which are of high quality.

DISADVANTAGES OF HIRE PURCHASE

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i) To the seller/owner

1. It ties the sellers working capital in debts and this may affect the smooth running of

the sellers business.

2. It requires a lot of book keeping and record keeping which may be expensive to the

seller.

3. The seller may not easily sell the repossessed item, for it will be a second hand item.

4. In case of nonpayment by the buyer, the seller may have to take him to courts of law

and this destroys the business name and is also time wasting.

ii) To the buyer/hirer

1. The buyer is over burdened by the regular payments.

2. Buyers may be induced to buy goods that they cannot actually afford.

3. The buyers property may be repossessed by the seller and the already paid

installments may not be refunded.

4. It is expensive as the buyer ends up paying more money for an item which would have

cost less if paid immediately wholesomely.

5. It is inflexible i.e. difficult to escape the outstanding settlement if say, an item is no

longer required.

DEFERRED PAYMENT

This is a system of installment selling where ownership of the goods goes to the buyer

immediately the first installment is paid and in the event of default of agreement, the

seller sues the buyer.

In case of failure by the buyer to pay all the installments, the seller cannot repossess the

property but may sue him in Court for unpaid amounts.

ADVANTAGES OF DEFERRED PAYMENT

i) To the seller/owner

1. More goods are sold through this system hence high turnover.

2. High turnover saves warehousing cost and insurance.

3. Higher prices are charged to consumers hence more profits to the seller.

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4. Goods advertise themselves as customers constantly visit the seller.

5. It enables the seller to dispose off his goods which would have otherwise got spoilt.

6. It promotes good relationship between the seller and his customers and this

encourages more buying and selling.

ii) To the buyer/hirer

1. The buyer can use the property even before completing the installments.

2. Consumers are able to buy expensive items and payments are made gradually.

3. An asset bought can be used to generate income to pay for itself.

4. The property bought can act as collateral security to apply for loans.

5. It serves as an alternative funding line to bank overdrafts.

6. The deposits made by the hirer are lower than with business loans.

7. It tends to promote the buyers standards of living as it puts him in position to buy

expensive commodities which are of high quality.

8. Hire purchase is a form of savings in form of durable goods.

PRE-PACKAGING

This refers to the process of wrapping or compressing of goods in special containers to

protect them from spoilage, breakage, leakage, pilferage, contamination, etc. in the

process of transit, storage and use.

It helps to make goods easy to handle and also makes them attractive to customers. Most

products sold today are sold pre-packed for example, tea-leaves, cooking oil, etc.

OBJECTIVES/AIMS OF PACKAGING

1. To ease handling of products by the retailers.

2. To allow self service with packaged products.

3. To speed up shopping for customers as the goods are pre-weighed and wrapped.

4. To create a good product image hence promoting sales.

5. To ease of selling i.e. packaged goods can easily be sold by automatic machines.

6. Packaged goods are easily delivered to customers for instance by mail order services.

7. To protect goods especially food products and chemicals against atmospheric germs

and contamination.

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8. To educate the customers about the content and the usage of the product through

instructional labels on packaged goods.

8. To ease display of products by the retailer.

ADVANTAGES/IMPORTANCE OF PACKAGING

1. It makes handling of products so much easier and convenient for the retailers.

2. Self service is also possible with packaged products.

3. It speeds up shopping for customers as the goods are pre-weighed and wrapped.

4. Goods packed well and attractively create a good product image which promotes

sales.

5. The products are usually packed in relatively small sizes which make display easier.

6. Ease of selling i.e. packaged goods can easily be sold by automatic machines.

7. Packaged goods are easily delivered to customers for instance by mail order services.

8. It helps to protect goods especially food products and chemicals are protected against

atmospheric germs and contamination.

9. Instructional labels on packaged goods serve as a guide to educate the customers

about the content and the usage of the product.

DISADVANTAGES OF PACKAGING

1. Packaging is expensive and adds costs which must be borne by the consumer.

2. Manufacturers use attractive packages which are deceitful to the consumers.

3. Goods of incorrect quantity are at times packaged hence cheating consumers.

4. Consumers at times buy low quality goods.

5. Some packaging materials do not easily decompose hence resulting into

environmental degradation.

BRANDING

This refers to the process of giving a particular product a distinctive name so as to make

it different from others.

It is a name intended to identify products of an entrepreneur and to differentiate them

from those of other competitors. For instance, branding makes Close up to be different

from Delident although they are all tooth pastes.

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FUNCTIONS/ADVANTAGES OF BRANDING

1. Branded goods are easier to handle and sell as they are in most cases pre-packaged.

2. It helps consumers in making choice during shopping.

3. It enables easy identification or differentiation of different goods.

4. Branded goods are uniformly priced and therefore there is no cheating of consumers.

5. It saves time during selling and buying since there is no bargaining due to fixed

prices.

6. It easy to advertise hence less money is spent on advertisement.

7. Quality is always assured in order to maintain brand royalty.

7. Branded goods are not easily forged by competitors because of patent right law.

ADVANTAGES OF BRANDING TO THE RETAILER

1. It reduces the advertising costs of the retailer since no further advertising is needed.

2. Time is saved as pre-packaging and weighing are already done by the manufacturer.

3. Branded goods are easier to handle and sell as they are in most cases pre-packaged.

4. Branded goods are not easily forged by competitors because of patent right law.

5. Branding creates a good product image which promotes sales.

6. It increases the retailers turnover/sales as the goods are already known to the

consumers.

7. It is easy for the retailer to order for the goods directly from the manufacturer without

prior inspection of the goods.

ADVANTAGES OF BRANDING TO THE CONSUMER

1. The consumer is assured of standard quality and quantity of goods.

2. Branded goods are uniformly priced and therefore there is no cheating of consumers.

3. It helps consumers in making choice during shopping.

4. It enables easy identification or differentiation of different goods.

5. It is possible for the consumer to deal directly with the manufacturer.

6. Consumers have a wide choice due to variety.

7. It saves time for the consumer that would be wasted in studying and comparing goods

before buying.

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DISADVANTAGES OF BRANDING

1. Branding is expensive and adds costs which must be borne by the consumer.

2. It creates brand royalty and one may be forced to buy only one brand and forget

others.

3. It makes choice by consumers difficult especially with similar brands.

4. Expired goods may be packed in well known brand packages.

5. It does not give choice to people who would want to bargain.

6. The retailer needs to have a lot of capital to be able to stock many brands.

7. Branded goods are deceitful to the consumers.

8. It is difficult to give trade discounts or credit to customers since most prices are fixed.

SELF-SERVICE

This is a system where a very item carries a price tag such that a customer simply moves

through the shop from shelf to shelf, picking up any item he/she needs.

The customer then takes the items to the counter where money is paid to the cashier after

inspecting the items.

ADVANTAGES OF SELF SERVICE

1. The retailer has enough time to serve many customers because there is no bargaining.

2. It minimizes losses from bad debtors since no credit facilities are given to customers.

3. It reduces the operational costs since there is no need for many shop attendants.

4. Self service encourages impulse buying due to attractive display of goods hence high

turnover.

5. There is self advertising of the goods because of the attractive display of the goods.

6. Customers are free to make their own choices without undue influence of the

attendants.

7. Varieties of goods are stocked for self service which widens consumer choice.

8. It saves time since the customer himself picks what he wants.

9. High quality goods are usually offered to the customers thereby improving their

standard of living.

DISADVANTAGES OF SELF SERVICE

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1. Some untrustworthy customers can easily pocket some small items because of limited

number of attendants.

2. Customers cannot exercise their bargaining power/skill because prices are already

indicated on the goods.

3. There are no personal services or advice given to the customers like after sales

services.

4. No credit facilities are given to the customers.

5. It encourages impulsive buying which interferes with the customers budget.

6. There is no personal contact between the retailer and the customers.

AUTOMATIC VENDING/Automatic selling

This involves the selling of goods through a coin-operated machine.

Or; this is where goods are sold with the aid of an automatic vending machine.

It is common for selling small items like sweets, stamps, cigarettes, etc. Automatic

vending is well known for selling pre-priced goods to customers at any time of the day.

ADVANTAGES OF AUTOMATIC VENDING

1. It serves customers without any attendants hence minimize operation costs.

2. It is a fast means of selling goods.

3. It is convenient since it operates throughout the day i.e. 24hours.

4. It is accurate.

DISADVANTAGES OF AUTOMATIC VENDING

1. It is only limited to urban centers.

2. The machines are expensive to install thereby making prices high.

3It is not convenient for bulky goods.

4. It does not offer credit facilities.

5. No after sales services are offered.

6. There is no bargaining.

BLENDING

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This refers o the process of combining or mixing different substances of the same

product together to as to make the product of the desired quality or characteristic.

Blends can influence colouring, strength, easy of washing, easy of spinning, cost, etc.

RESALE-PRICE MAINTENANCE

This is where the manufacturer fixes the price for his product so that it is sold to final

consumers at the indicated prices.

For example, newspapers, airtime, magazines, postage stamps, etc.

BAR CODING

This is a process of labelling goods with thin black lines with different numbers that are

used to describe the commodity and its price automatically with the aid of computerized

machines.

It is common in supermarkets and book stores for pricing and stock updating of goods.

Bar coding works with the assistance of a computer that records every item and sends

back the price to the cahier/sales manager.

AUCTIONING

This is where goods are assembled before potential buyers by the seller and they are

asked to give their offers/bids and the highest bidder takes the commodity.

This system is common during fundraising occasions in schools, churches, mosques and

when somebodys goods are sold by court.

TENDER

This is an offer given to the public through advertising to supply specified goods or

services.

The advertisement invites willing suppliers of given goods or services to offer them.

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AFTER SALES SERVICE

These refer to the services given by the seller to the buyer after the buyer has purchased

some items.

For example offering free transport and advice on how to handle the goods bought.

LOSS LEADER POLICY

This is a practice by large scale retailers to keep their prices as low as possible.

It is done to fight competition from small scale retailers by selling their goods at low

prices.

GOODWILL

This is the loyalty that outgoing owner of the business has established with the old

customers i.e. the right to represent oneself as the successor to an already established

business.

Here, old customers may continue buying from the business even if it is sold to a new

person because of the loyalty they have for the former owner of the business.

WHOLE SALE TRADE

This is the selling of goods in large quantities to another trader or business. Basically,

wholesale suppliers sell to retail outlets and retail outlets sell to the consumers.

Wholesaling. This is the act of selling goods to another trader or business.

A wholesaler. This is a trader who buys goods in large quantities from various

producers and sells them mainly to retailers or institutions rather than consumers.

CHARACTERISTICS OF WHOLESALE TRADE

1. There is usually supply of goods for resale or industrial use.

2. There is buying goods in large quantities with a view of reselling them to the retailers.

3. It is carried out by wholesalers who are neither producers nor retailers.

4. Wholesalers ordinarily deal in a limited line of goods.

5. Wholesalers are less engaged in sales promotion.

6. There is no dealing directly with consumers.

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QUALITIES OF A GOOD WHOLESALER

1. He/she should be able to know the market for his stock i.e. he should be one who buys

and stocks goods required by the market.

2. He should be able to stock variety of goods by possessing enough working capital to

buy from different manufacturers.

3. He should be able to audit his books of accounts so as to minimize losses.

4. He should avoid business malpractices like smuggling of goods, dodging of taxes, etc.

5. A good wholesaler must be honest.

TYPES OF WHOLESALERS

1. Nationwide Wholesalers. These are wholesalers who operate on a large scale and

have large warehouses in all major towns of the country.

They supply goods to retailers in all parts of the country and they offer a wide range of

goods.

2. Regional Wholesalers. These are wholesalers who operate in particular areas or

trading centers. They offer variety of commodities or a specialized range of them.

3.General Wholesalers. These are wholesalers who offer a variety of goods in a number

of fields. They employ large capital and have large warehouses. They deal in goods like

hardware, foods, groceries, etc.

4. Specialized Wholesalers. These are wholesalers who concentrate/specialize in a

particular field and offer variety within that field. For instance, dealers in stationery,

hardware, etc.

5. Mobile/truck wholesalers. These are wholesalers who move from place to place

selling goods to retailers from vans or Lorries. They may sell specific products or a

variety of goods.

6. Cash and carry wholesalers. These are wholesalers who sell to retailers under cash

basis at relatively lower prices.

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Once products have been purchased, the customer is responsible for carrying their

products away from the place of purchase.

This type of business demands that customers do the majority of the work in exchange

for lowered prices.

FEATURES OF CASH AND CARRY WHOLESALERS

1. They do not offer credit facilities.

2. They do not provide delivery services to their customers.

3. They stock large amounts of goods and make them readily available to the customers.

4. They sell goods in bulk.

5. They sell their goods at wholesale prices i.e. relatively lower prices.

6. They do their business from a warehouse.

FUNCTIONS OF A WHOLESALER IN HOME TRADE

1. Providing a link between the producer and the retailer.

2. Keeping prices stable by ensuring a steady supply.

3. Transporting goods from the producer to his warehouse and then to the retailers shop.

4. Providing the manufacturer with ready working capital by paying for the goods ought

promptly.

5. Breaking bulk by selling goods in small quantities that retailers can afford.

6. Providing storage facilities for the goods bought from the manufacturer by keeping

them in his warehouse.

7. Preparing goods for sale by grading, pre-packing and pricing goods which reduces the

retailers workload and enables him/her to serve customers faster.

8. Providing consumers with steady supplies throughout the year by holding large stocks

ad releasing them regularly.

9. Advising the retailer on a range of goods to be held, prices to be charged, services to

be offered, etc.

SERVICES OF THE WHOLESALER TO THE MANUFACTURER

1. Wholesalers own large warehouses, thus help the manufacturer to reduce storage

costs.

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2. Buys goods in bulk, thus clears the manufacturers production line hence saving him

certain risks like fall in demand, fall in price, etc.

3. Wholesalers pay promptly and make large payments, thus providing the manufacturer

with working capital.

4. Wholesalers undertake market research, thus enabling the manufacturer assess the

demand for his/her products.

5. Wholesalers often transport produce for small scale producers like farmers thereby

relieving them of transport problems.

6. Wholesalers brand goods under their own names which saves some manufacturers

from additional costs.

SERVICES OF THE WHOLESALER TO THE RETAILER

1. Helps in breaking bulk by selling goods in quantities which retailers can afford to buy.

2. Relieves the retailer of storage problems by storing goods in his warehouse.

3. Some wholesalers deliver goods to the retailers, thus saving them from transport costs.

4. Extends credit facilities to trustworthy retailers hence enabling them to operate on

small capital.

5. Provides the retailer with a variety of goods and choice since he/she stores goods from

a number of manufacturers.

6. Wholesalers are conveniently situated which assures the retailer of immediate delivery

whenever necessary.

7. Advises the retailer on a range of goods to be held, prices to be charged, services to be

offered, etc.

8. Grades, pre-packs and prices goods which reduces the retailers workload and enables

him/her to serve customers faster.

SERVICES OF THE WHOLESALER TO THE PUBLIC

1. Helps consumers to get steady supplies throughout the year by holding large stocks ad

releasing them regularly.

2. Helps to keep prices stable by ensuring a steady supply.

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3. Helps in bringing goods nearer the consumers by transporting them to the retailers

shop.

THE CHAIN OF DISTRIBUTION

This refers to the arrangement or path through which products move from the producer

to the final consumer.

The distribution channel consists of a set of business entities (middlemen) who

participate in the distribution of goods and services as a link between the manufacturer

and the consumer.

STEPS INVOLVED IN THE DISTRIBUTION OF GOODS FROM THE

MANUFACTURER TO THE CONSUMER

1. The manufacturer may sell his products to a wholesaler or to a large scale retailer.

Some manufacturers operate their own retail outlets.

2. The wholesaler sales goods to the retailer. Usually, only small scale retailers would

buy goods from a wholesaler, but some large scale retailers may also buy their supplies

from him.

3. Some small scale retailers may buy their supplies from a large scale retailer, or a retail

shop operated by the producer himself.

4. The retailer sells goods to the consumers.

Illustration of the chain of distribution

From the above diagram, the position of a wholesaler appears to be of great importance

to both the producers and retailers.

MANUFACTURER

WHOLESALERS

MANUFACTURERS RETAIL OUTLETS

LARGE SCALE RETAILERS

SMALL SCALE RETAILERS

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FACTORS INFLUENCING THE DISTRIBUTION OF GOODS AND SERVICES

1. Nature of the product. Producers of bulk and heavy products like industrial

machinery and perishable items sell directly to the final consumers.

On the other hand, light and durable goods are sold through the middlemen as they can

be easily kept for sometime in the stores of the middlemen for example television sets,

radios, refrigerators, washing machines and computers.

2. Value of the product. High value commodities which not need a lot of handling are

distributed directly to the final consumers. On the other hand, low value products so as

are distributed through middlemen so as to minimize the distribution costs.

3. Urgency of the product. Products which are needed urgently are sold directly to the

final consumers while goods which are not urgently needed by the consumers may be

distributed through other channels.

4. Nature and size of the market. For a small market situated/located in a narrow area,

direct selling is preferable. On the hand, in a market is composed of numerous and

widely scattered buyers, direct sale is not economical especially if the purchases are in

small quantities.

5. Nature of the business. Manufacturing and trading business can use all distribution

channels available while for agri-businesses and single product firms direct selling is

preferable.

6. Level of competition in the market. High levels of competition in the market require

direct selling while low levels of competition in the market allow the entrepreneur to sell

through middlemen.

7. Availability of storage facilities. Entrepreneurs who lack storage facilities in distant

parts of the country use middlemen i.e. retailers or wholesalers so as to minimize

distribution costs. On the other hand, entrepreneurs with own retail outlets use direct

selling.

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8. Distribution policies of an enterprise. Firms that desire control over distribution and

are financially stable use direct selling. On the other hand, firms that lack sufficient

funds sell through middlemen so as to reduce on the distribution costs.

9. Amount of goods to be bought by the consumer. Producers whose customers buy

on a large scale sell directly. On the other hand, sell through middlemen is suitable for

entrepreneurs whose customers buy in small quantities.

10. Availability of middlemen. Absence of the desired type of middlemen calls for

direct selling. On the other hand, existence of the required middlemen who are able and

willing to provide all the relevant services to the customers enables the entrepreneur to

sell through them.

11. Scale of production. Small scale producers who lack sufficient capital to handle the

marketing task of their output sell their products through middlemen while large scale

producers tend to have enough capital to handle the marketing costs and therefore can

directly to the customers.

MIDDLEMEN IN HOME TRADE

Middlemen. This refers to wholesales, retailers, and agents that serve as intermediaries

between the manufacturer (producer) and his customers/clients. In this case, the

manufacturer/producer becomes the principal.

TYPES OF MIDDLEMEN

1. Merchant middlemen. These are middlemen who buy goods and handle them as

their property before reselling.

They use their own capital to stock the goods they need. Merchant middlemen include

retailers and wholesalers.

2. Agent middlemen. An agent middleman is a person who employed by another person

to represent him in dealing with third party. Agent middlemen are divided into two i.e.

brokers and commission agents.

i) Brokers. A broker is an agent who sells goods on behalf of his/her client. He acts as

an agent for others in negotiating contracts, sale or purchase in return for a fee or

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commission but he does not possess the goods under sale. A broker earns a

commission/fee known as a brokerage.

ii) Commission agents/commercial agents. These are agents who sell goods on behalf

of the principal for a commission. Commercial agents earn a commission for each job

performed, usually a percentage of the profit got from the items sold. They conduct

business under their own names and are responsible for meeting the ideal conditions

requested by the principal and must stay within the provided budget or the price of sale.

Commission agents are of two categories i.e. Factor agents and Del- credere agents, etc.

iii) Factor agent. This is a commission agent who possesses goods for sale as he looks

for possible buyers. He stores goods in his own warehouse as he looks for possible

buyers. He is authorized to collect any payment on behalf of his principal. An example

of a factor agent in Uganda is spear Motors Ltd. A factor agent earns a commission for

goods sold on behalf of his principal.

iv) Del credere agent. This is an agent who guarantees that his principal will receive

payment for the goods he has sold on his behalf. He promises to pay the principal for the

goods sold by him whether buyer pays or defaults and because of this risk, this agent

earns a higher commission. Del credere agent earns fee known as Del credere

commission.

CIRCUMSTANCES/CONDITIONS/SITUATIONS/STATE UNDER WHICH A

WHOLESALER MAY BE ELIMINATED FROM THE CHAIN OF

DISTRIBUTION

1. Where a manufacturer has his own retail outlets.

2. Where there are large scale retailers who buy directly from the manufacturer.

3. In case of mail order business done through the post.

4. In case of perishable or fragile and urgently required goods.

5. In case of technical goods that require after sales services.

6. When goods are sold on special order for instance contracts, tenders, etc.

7. When goods are branded and widely advertised e.g. Bata shoes, electronics.

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8. In case of expensive or slow selling goods.

9. Where the manufacturer appoints his own agents in different parts of the country such

that goods are sold directly to the consumers.

10. Where there are large scale consumers who buy in large quantities like schools,

hospitals, prisons, etc.

11. In case of syndicate buying where many consumers combine and buy as one

consumer e.g. consumer cooperatives.

12. Where production is on a small scale the producer may decide to sell directly to final

consumers.

WAYS THROUGH A WHOLESALER MAY BE ELIMINATED FROM THE

CHAIN OF DISTRIBUTION

1. Through the manufacturer operating his own retail outlets.

2. Through large scale retailers who buy directly from the manufacturer.

3. By conducting mail order business done through the post.

4. Through selling goods on special order for instance contracts, tenders, etc.

5. By branding and widely advertising goods e.g. Bata shoes, electronics.

6. By dealing in perishable or fragile and urgently required goods.

7. Through dealing in technical goods that require after sales services.

8. Through the manufacturer appointing his own agents in different parts of the country

such that goods are sold directly to the consumers.

9. Through syndicate buying where many consumers combine and buy as one consumer

e.g. consumer cooperatives.

10. Through consumers buying in large quantities for example schools, hospitals,

prisons, etc.

PROBLEMS FACED BY TRADERS IN HOME TRADE

1. Limited working capital due top inadequate security to access loans which hinders the

day-to-day running of the business.

2. Poor transport and communication facilities especially in rural areas which make

movement hard.

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3. Low levels of training leading to inadequate business management skills and poor

record keeping.

4. Small scale operation due to limited working capital hence traders cannot buy their

goods in large quantities and therefore cannot take advantage of trade discounts.

5. Limited market for the products due to stiff competition and low incomes of people.

6. High tax rates which take away the would be profits.

7. High rates of inflation which make price fixing difficult.

8. High prices of utilities like electricity leading to high operational costs.

9. Insecurity due to civil wars, robbers, etc. all of which make trading difficult.

COMMERCIAL TRANSACTIONS

A transaction. This is any dealing between two parties involving exchange of goods for

money (price or consideration). Hence there are always two parts of a transaction i.e.

(i) the transfer of goods or services by the seller,

(ii) the payment for them by the buyer.

A commercial transaction. This is one where one or both of the parties involved are

traders.

TYPES OF TRANSACTIONS

1. A cash transaction. This is one where payment for goods is made as soon as the

goods are handed over to the buyer.

Or; this is where transfer of goods or services and payment are executed simultaneously.

Here, payment is either made using cash or bank cheque. All cash transactions are

supported by a document called cash sale slip.

A cash sale slip. This is a document issued by the seller to the buyer when goods have

been sold for cash.

Example of a cash sale slip

67

TOTTTTTTTTTTTTT

2. Credit transaction. This is where payment is made some time after the transfer of

goods or services.

GYADI ENTERPRISES LIMITED

P.O. Box 423, Iganga (U) email:gyadient@yahoo.com

“Suppliers of text books and stationery”

Mobile: 0774-509017 0704-509017

TO: Kiira College Butiki

P.O. Box 1181, Jinja (U)

S/No. Description Quantity Unit price

(Shs)

Amount

(Shs)

1 UACE & Colleges Entrepreneurship Education Text Books 2nd Edition By Gyaza Azedi

10 30,000 300,000

2 OLevel Entrepreneurship Education

Text Books 1st Edition By Gyaza Azedi 10 25,000 250,000

3 Straight Approach To A Level Entrepreneurship Education 1st Edition By Gyaza Azedi

10 12,000 120,000

4 Commerce Made Simple 1st Edition By Gyaza Azedi

30 20,000 600,000

E&O.E TOTAL 1,270,000

Goods once sold are not returnable

Thank you, Signature : Igyaza.

Name : IMRAN GYAZA

Title : Cashier

CASH SALE Date 7/8/2012

No. 154

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Or; this is any business dealing between two people where payment for goods or

services is made at a future date.

Here, the buyer obtains the goods or services and promises to pay at a later date.

STEPS AND DOCUMENTS INVOLVED IN CREDIT TRANSACTIONS

A credit transaction goes through a number of steps and each step raises a document that

shows details of a transaction. Each document has its own content and it is prepared in a

special format. The following illustration will enable us understand these steps properly.

The following transaction took place between ARISTOC BOOKLEX LTD, retailers in

books stationery and GYADI ENTERPRISES LTD, suppliers of text books and

stationery.

1. Birth of an idea (creating awareness). This involves making the public aware of the

existence of a business goods or services.

Before any transaction takes place, the seller must first make the public aware of the

existence of his/her goods or services. This can be done in various ways which may

include:

i) The sellers may place regular advertisements in local newspapers or magazines,

through radio or television.

ii) They may arrange exhibitions.

iii) They may attend international book festivals.

iv) They may send circulars or leaflets to retailers about books published and stocked by

them.

v) They may employ travelling salesmen to visit various retailers in the country.

2. Making inquiries. This involves contacting a number of suppliers inquiring about the

goods offered by them, their terms, services, methods of payment, etc.

An inquiry may be made orally or by writing a letter. Orally, Aristoc Booklex may either

ring up the Sales Manager of Gyadi Enterprises Ltd and ask for necessary details or visit

their offices personally. Alternatively, they may write an inquiry letter.

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Letter of Inquiry (Inquiry note). This is a document sent by the buyer to the supplier

inquiring about various types of goods and services, their prices, terms and conditions of

payment, mode of delivery, discounts if any, etc.

TYPES OF LETTER OF INQUIRY

i) A general letter of inquiry. This asks for general information i.e. information

concerning various types of goods and services, their prices, terms and conditions of

payment, mode of delivery, discounts if any, etc.

ii) A specific letter of inquiry. This looks at a particular product, its price, terms and

conditions of payment, discounts if any, etc. It clearly specifies the area of particular

interest.

iii) Replying of the inquiry. This involves answering an inquiry letter and it can be

done by sending a price list, a price current, a catalogue or a quotation

3. Price list. This is a list of items offered by the supplier together with their respective

prices.

A price list does not carry a lot of information and it is commonly used when the

commodities listed are well known or are popular brands.

Price current. This is a price list made where there are no standard prices i.e. where the

prices are ever fluctuating.

In this case, a supplier sends a list known as a price current to show the prevailing prices

at that time.

Or; Catalogue. This is a booklet that briefly describes each item offered for sale and its

price. It is more illustrative, attractive and more informative than a price list.

Or; Quotation. This is a document sent by the supplier to the buyer after receiving the

letter of inquiry.

In the quotation, the potential supplier states prices for his/her products, the terms and

conditions for payment and delivery, the lead time, specifications of his/her products,

warranty and discounts to the buyers if any.

It is sent by the seller to the buyer according to the specifications given by the buyer.

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4. Placing an order. Having received all the necessary information from the supplier,

the retailer (buyer) may decide to place an order requesting for the supply of a particular

item(s).

An order can be made verbally, by writing an order letter or by filling a pre-printed order

form.

However, it is not wise for a businessman to place orders verbally as problems may arise

due to misunderstanding of instructions, lack of proof of order, etc.

If, however, there is an urgent need for the goods and there is no time to go through the

formalities of writing an order, verbal orders may given but these should be followed by

written orders as soon as practicable.

Local Purchase Order (purchase order/order form).This is a document sent by the

retailer (buyer) to the potential supplier requesting to be supplied with the goods or

services at the quoted prices.

It indicates the description of items needed by the buyer, the purchase price, address of

the buyer, etc. Order forms are usually pre-printed.

5. Deciding on the method of payment. At this stage, the seller decides whether or not

to extend credit facilities.

Most transactions between wholesalers and retailers are credit transactions and most

transactions between retailers and consumers are cash transactions.

If the seller decides to refuse credit, or if the buyer himself prefers to pay cash, the

following alternatives are available.

i) Cash with order (C.W.O). Here, the buyer sends money along with the order.

ii) Cash on delivery (C.O.D). Here, the seller collects money when he delivers the

goods. This term is also applicable when goods are sent through the post, with post

offices being instructed to deliver the parcel against a stated payment.

iii) Spot cash. Here, the buyer pays for the goods as he collects them from the sellers

premises. When the buyer pays in cash for the goods, he is issued with a document

called a cash sale slip that evidences the receipt of money by the seller.

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6. Credit status inquiry. At this stage, the seller ascertains the creditworthiness of the

buyer who is asking to be extended credit.

This inquiry is necessary especially if it is the first transaction between them. The seller

may get confidential report on the creditworthiness of the prospective customer from

different sources through writing credit status inquiry letter to them.

These include:

i) Bankers to the buyer. Here, the supplier may ask one of the bankers where the

prospective customer has an account.

ii) Other suppliers. The buyer may be required to mention another supplier from whom

information about his paying habits may be obtained.

iii) Other customers. Here, the supplier may ask one of his regular clients who may

happen to know his prospective customer, about his creditworthiness.

iv) Trade Association. If the prospective buyer happens to be a member of a trade

association e.g. Chamber of Commerce, the supplier may approach the associations

office for a confidential report on him.

7. Deciding on the credit terms. After Gyadi Enterprises Ltd have received a favorable

reply to their credit status inquiry letter, they may now consider granting credit to

Aristoc Booklex Ltd and decide about the length of the credit period. A credit period

usually ranges from seven days to one month for normal orders, and from one to three

months for larger orders.

A seven days or less length of credit period is often referred to as prompt cash.

Wholesalers usually offer discounts to their customers to encourage them to settle their

accounts quickly and also to encourage large quantity purchases. (This is discussed in

detail at the end of this chapter).

8. Packing the goods. At this stage, the order received from the prospective buyer is

now passed by the suppliers sales department to the warehouses packing section.

The goods are then packed in appropriate cases or packets, and the contents of each

packet are noted on a document/sheet called package sheet.

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Package sheets are usually written in quadruplicate, i.e. in four copies. The original

copy is placed inside the packet/case, one copy is sent to the buyer by post or together

with the delivery note, one copy is sent to the accounts department and the last copy is

retained by the warehouse for its own records.

9. Delivering of goods ordered for. This involves the physical transfer of goods from

the seller to the buyer.

At this stage, a delivery note is prepared by the seller and it is signed by the buyer to

evidence the delivery of goods.

Goods ordered for may be delivered by the seller, collected by the buyer in his own

vehicle or transported through a public carrier. However, the supplier may send the

buyer a dispatch note before delivering the goods.

A dispatch note/ advice note. This is a document sent by the potential supplier to the

buyer informing him/her that the goods have been dispatched (sent) and are on the way.

A dispatch note enables the buyer to make arrangements for sale of the old stock as well

as preparing his/her store in advance. It is sent separately to reach the purchaser before

the arrival of the goods.

Note. A dispatch one takes the same format like that of a delivery note.

Delivery note (Goods delivery note). This is a document showing details of goods that

have been delivered to the buyer.

It accompanies goods that have been supplied to the buyer and it indicates the goods

supplied, type, quantity, date of delivery, mode of transport, etc. a delivery note may be

sent with or without a package sheet.

It is usually sent together with the package sheet when the quantity of goods being sent

is large and several package sheets are prepared.

10. Invoicing. This is where the seller informs the buyer of the amount due from him.

The seller does this by preparing a document called an invoice.

An invoice .This is a document sent by the supplier to buyer indicating the amount of

money due from the buyer.

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It clearly shows the quantity of items sent to the buyer, the unit price and the total price

(amount) due from the buyer.

Note 1. An invoice is sent only if the goods are sold on credit and it serves two major

purposes i.e. it notifies the buyer of the amount due from him and it also serves as

evidence or proof of the debt due to the seller, who uses it for accounting purposes.

Note 2. An invoice is at times referred to as a bill. A bill is usually issued when the

payment is asked for “services rendered”.

Hence an invoice implies that payment is being asked for “goods sold”. It is normally

issued by doctors, lawyers, technicians, and other professional people to their clients.

An invoice shows the following details:

i. Name and address of the seller

ii. The invoice number

iii. Date of invoice

iv. Name and address of the buyer

v. A brief description of the goods sold

vi. Quantity supplied

vii. The unit price of goods sold

viii. The total cost of the goods sold

ix. Discounts if any allowed

x. Order number of the buyer

xi. Delivery note number

xii. E &O.E i.e. Errors and Omissions Excepted. This expression means that the seller

deserves the right to correct any mistake which may appear on the invoice.

It informs the buyer that such errors which may appear on the invoice are not intended

and will be subjected to correction.

11. Receiving goods and services bought/purchased. This refers to the process of

receiving goods and services that have been bought or ordered by a business and

delivered by the supplier.

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On receiving the goods purchased or ordered, the buyer performs the following

activities/steps;

Inspect the goods to see that they are not damaged.

i) Make a record in his stores record books of the description and quantity of the goods

received.

ii) Verify the goods received with the copy of order placed and delivery note or package

sheets received.

Note. If no delivery note is received from the seller, the buyer may himself issue a goods

received note that shows the details of goods received to the seller.

12. Receiving of an invoice. This refers to the process of receiving a document from the

supplier indicating the amount of money due from the buyer.

On receiving an invoice, the buyer performs the following activities/steps:

i. Verifying the invoice with a copy of the order placed to ensure that he has been

invoiced for the goods actually he ordered.

ii. Verifying the invoice against the package sheet, delivery note or goods received note

to ensure that the goods invoiced have actually been received.

iii. Checking the prices and trade discounts allowed if any, to ensure that no overcharge

has been made and that due discount has been allowed.

iv. Checking the calculations and arithmetical accuracy of the invoice against totals,

multiplications, calculation of trade discount if any, percentages, etc.

v. Passing on the invoice to the accounts department to prepare a cheque, if the invoice

is found accurate in all the above aspects. If, however, the invoice is received from a

regular supplier, the accounts department keeps it in a pending file till the end of the

month, when all invoices received from a particular supplier are paid by means of a

single cheque.

13. Correcting discrepancies in an invoice. If an invoice, upon checking, is found

incorrect, the buyer takes appropriate steps to ensure that he pays only the correct

amount. An incorrect invoice may lead to either an over-charge or an under-charge.

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An over-charge in an invoice may result from;

i) Incorrect pricing

ii) An error in trade discount calculation

iii) In totaling or

iv) Inclusion of wrong items.

Incase of an over-charge, the seller should be informed of the error and will issue a

credit note to rectify/correct the invoice.

Credit note. This is a document issued by the seller to the buyer to correct an over-

charge in the invoice.

It informs the buyer that he has “credited” by the seller the amount of over-charge in the

invoice.

Note. A credit note is usually printed in red to distinguish it from the invoice.

14. Returning of goods. If a buyer on receipt of goods from the seller finds some or all

of them defective or unsatisfactory, he may return such goods and claim a “credit” for

their cost.

When returning such goods, the buyer prepares a goods returned note. A copy of the

goods returned note is sent to the seller; another copy to the accounts department and

one is retained by the warehouse/store for its own record purposes.

On receipt of goods returned by the buyer, a seller issues a credit note to acknowledge

the receipt of such goods and agreeing to relieve the buyer from the responsibility to pay

for them.

Therefore, a credit note may also be issued if any goods are returned by the buyer to the

seller as unsatisfactory.

An under-charge in an invoice may result from:

i) Incorrect pricing

ii) An error in trade discount calculation

iii) In totaling or

iv) Omission of an item.

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To correct an under-charge in an invoice, the seller prepares a document called a debit

note.

Debit note. This a document sent by the seller to the buyer to correct an under-charge in

an invoice.

It is the opposite of a credit note and is usually drawn in the same way except for the

colour i.e. a debit note is usually printed in blue or black unlike a credit note which is

usually printed in red.

A debit note debits the buyer i.e. it performs the same function as an invoice. Hence

most firms do not keep separate debit note forms but issue an additional invoice to

correct an under-charge in a previously issued invoice.

15. Preparing a statement of account. In case of big transactions between the buyer

and the seller, the seller may provide additional services of preparing and sending

monthly statements of account.

Statement of Account. This is a document sent by the seller to the buyer at periodical

intervals normally every month showing the transactions which have taken place during

a given period of time.

It is sent to the buyer at the end of the month demanding for payment. The statement of

account normally starts with an opening balance at the beginning of a given period.

The statement of account indicates the following information:

i)The amount due from the buyer at the beginning of the month.

ii) List of invoices issued during the month.

iii) Total value of credit notes issued during the month.

iv) Total value of debit notes if any issued to the buyer during the month,

v) Total remittances (payments) received during the month.

vi) Amount due at the end of the month and

vii) The corresponding dates

The statement of account has four columns i.e.

i) Date. This records the date of the transaction.

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ii) Details. It gives a brief description of the transaction that took place.

iii) Debit. It records the opening balance and list of invoices issued during the month.

iv) Credit. This shows the total value of credit notes issued and total payments received

during the month.

Note. The difference between the debit and credit columns is called a “balance” and this

gives the amount due to the buyer at the end of the month.

16. Receiving a statement of account. On receiving of a monthly statement of account,

a buyer takes the following steps:

i) Checks it against previous statement to ensure that the opening balance is correct.

ii) Verifies it with invoices received during the month.

iii) Verifies it with credit notes received during the month.

iv) Verifies any payment made during the month.

v) Prepares a cheque for payment.

17. Paying for the goods. After receiving a statement of account, the buyer

verifies/proves the statement of account and prepares to settle his/her account/debt either

by cash or by cheque.

When the buyer pays for the goods, he/she is issued with a receipt. However, it is not

necessary to issue a receipt if payment is made by cheque.

This is because a cheque is evidence of payment in itself.

Receipt. This is a document that acknowledges settlement of a debt.

It is given by the supplier to the buyer when the buyer settles his/her debt for the goods

that were once taken on credit. A receipt acts as evidence of payment and marks the end

of a credit transaction. It acknowledges receipt of amount of money due from the buyer.

DISCOUNTS

A discount. This is a reduction in the original price of a good or commodity.

Or; this is a reduction in the price charged by the seller to the customer hence an

allowance given to traders on goods purchased.

TYPES OF DISCOUNTS

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1. Trade discount

This is an allowance made if goods are sold by one businessman (usually a

manufacturer) to another businessman (retailer) on goods whose price is either fixed or

controlled or is generally known.

For instance sugar, soap, cigarettes, books, etc.

2. Quantity discount

A trade discount is a reduction in the price paid for goods bought in large quantities. It is

an allowance given to a customer for buying goods in large quantities.

A quantity discount is given as an addition to a trade discount. For example, a

wholesaler in books may allow say, 25% trade discount on all books sold by him to

bookshops whatever the quantity involved, and an additional 5% quantity discount if at

least 100 copies are bought of each title ordered.

Note. It is important to note that if a retailer allows a price reduction due to the size of an

order from a consumer, such reduction is not a trade discount, but a quantity discount.

Both the trade and quantity discounts are expressed as percentage of the gross value of

the goods sold.

Example

If Kadoma bought 10 crates of Soda at Shs 150,000 and he was given a trade discount of

15%. Calculate;

(a)Trade discount that was earned by Kadoma.

(b)The amount that he actually paid.

(a) Trade discount = Percentage discount x the cost price

= 15 x 150,000

100

Trade discount = Shs. 22,500

(b) Amount actually paid = Cost price - trade discount

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= 150,000 - 22,500

= Shs. 127,500

Or;

Amount actually paid = (100-15) x cost price

100

= 85 x 150,000

100

= Shs. 127,500

Cash Discounts

A cash discount. This is a reduction in price allowed to customers to encourage them to

pay their debts promptly/quickly or in time.

Or; this is an allowance a seller gives to a customer when payment is made within a

specified period of time.

A cash discount is calculated as a percentage of the total amount due and is usually

between 1 and 2 ½ per cent.

TYPES OF CASH DISCOUNTS

i) Discount allowed

This is an allowance given by the business to its customers on goods sold to them on

credit in order to encourage them to pay promptly. Discount allowed is a loss to the

business.

Example

A firm sold goods on credit worth Shs 12,000 to Ochan and was to allow him a cash

discount of 2 ½ % if he pays in time. If the Ochan paid in time,

i) Calculate the amount of cash discount.

ii) How much Ochan paid.

Solution

i) Cash discount = Percentage discount x cost price

= 2.5 x 12,000

80

100

= Shs. 300

Amount paid = (100-2.5) x cost price

100

= 97.5 x 12,000

100

= Shs. 11,700

Or; Amount paid = Cost price — Cash discount

= 12,000 - 300

= Shs. 11,700

ii) Discount received

This is an allowance received by the business from its suppliers for paying its debts in

time. Discount received is regarded as an income to the business.

2. Cash and Trade Discounts Combined

At times, a customer may be given a trade discount on buying goods and at the same

time he may be allowed a cash discount so as to settle his debt in time.

Example

Alex bought 50 boxes of water at Shs 8,000 each. The supplier allowed him a 25%

discount because of buying in large quantities and a 5% cash discount if he pays within

one month. If Alex paid within the stated period, calculate;

i) Trade discount

ii) Cash discount

iii) Amount he actually paid

Solution

Trade discount = Percentage discount x cost price

But cost price = Quantity bought x Unit price

= 50 x 8,000

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= Shs. 400,000

(i) Trade discount = 25 x 400,000

100

= Shs. 100,000

(ii) Cash discount = Percentage discount x price after trade discount

= 5 x (400,000 - 100,000)

100

= Shs. 15,000

(iii) Amount actually paid = (100-25) cost price x (100-5)

100 100

= 75 x 400,000 x 95

100 100

= Shs. 285,000

Or;

Amount actually paid = Cost price — (trade discount + cash discount)

= 400,000 — (100,000 + 15,000)

= Shs. 285,000

Or;

Amount actually paid = Price after trade discount — cash discount

= 300,000 — 15,000

= Shs. 285,000

CHAPTER 8: INTERNATIONAL TRADE/ FOREIGN TRADE

This is trade carried out across the boundaries of a country.

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Or; this is the buying and selling of goods and services between countries.

International trade involves the physical transfer of goods from one country to another.

Regional trade. This is the trade among countries that are geographically close together,

especially on the same continent.

Hence, these three words international trade, foreign trade and regional trade can be used

interchangeably.

TYPES OF INTERNATIONAL TRADE

1. Import trade. This is the buying of goods from another country.

Note. Imports are goods bought from outside the country and brought into the country.

2. Export trade. This is the selling of goods to another country.

Note. Exports are goods sold to traders outside the country.

BILATERAL TRADE, MULTILATERAL TRADE AND ENTREPOT TRADE

Bi-lateral trade. This refers to trade between only two countries.

Or; this is where a country has a great part of her foreign trade with only one country.

Multi-lateral trade. This is a form of trade among many countries.

Or; this is where a country trades with a number of countries, buying from some and

selling to others.

Entrepot trade. This is the re-exportation of goods that were previously imported.

Or; this is a form of transport where imports are re-exported.

For example, a number of commodities exported to East African countries like Uganda,

Rwanda and Burundi are first imported into Kenya via Mombasa.

The imports are housed in bonded warehouses and then sent to their final destination by

road, rail or by occasionally by sea.

The best example here is petroleum products. Kenya imports these products for her own

use as well as for re-export to neighboring countries. The foreign exchange from this re-

export comes to Kenya, thereby cutting down her imports bill.

WHY INTERNATIONAL TRADE IS CARRIED OUT

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1. To obtain goods or services which a country cannot produce at home because of the

need to specialize.

2. To achieve and maintain good international relationships with other countries.

3. To dispose off the surplus/excess goods a country is producing.

4. To promote international specialization where countries specialize in production and

exportation of commodities where they have the greatest comparative cost advantage.

5. To solve or assist in times of crisis or disasters, natural calamities like famine floods,

etc.

6. In order to acquire better technology and skilled labour from more developed

countries.

7. To raise government revenue through taxes imposed on imports and exports.

8. To promote competition which encourages production of better quality goods?

9. Differences in geographical conditions/climate hence countries produce different

items which calls for international interdependence.

10. Differences in the availability of natural resources like soils, minerals, etc. which

calls for international interdependence.

11. Differences in the level of industrial development hence, some goods are

uneconomic to produce in some countries but others can produce them efficiently.

ADVANTAGES INTERNATIONAL OF TRADE

1. It enables obtain goods or services which a country cannot produce at home because

of the need to specialize.

2. It enables promotes international understanding as people move across boarders.

3. It enables a country to dispose off the surplus/excess goods a country is producing.

4. It allows citizens of a country to enjoy a variety of goods.

5. It encourages a country to specialize in production of a commodity she does better.

6. It promotes peace among countries as they depend on one another for goods and

services.

7. It promotes competition between local and foreign industries hence quality products

are realized.

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8. It encourages exploitation of idle resources.

9. It is a source of government revenue through taxation.

10. It creates more employment opportunities for the locals.

11. It is a source of foreign exchange to the country.

DISADVANTAGES OF INTERNATIONAL TRADE

1. It leads to exhaustion of resources in a bid to increase output for export.

2. It discourages growth of local industries as goods imported from developed countries

out-compete the locally manufactured ones.

3. Foreign trade may lead to importation of harmful goods like cigarettes, drugs which

may affect the health of the residents of the importing country.

4. It encourages dependence of one country on another or others which hinders self-

sufficiency/reliance.

5. Developed countries gain at the expense of developing countries due to differences in

level of technology and industrial development which leads to trade imbalances.

6. It results into imported inflation especially when goods are imported from countries

suffering from inflation.

7. Foreign trade may lead to conflict/war as different countries compete with each other

in finding out new markets and sources of raw materials for their industries.

8. It encourages over specialization which may be disastrous for a country that relies

heavily on the export of one commodity only, especially during price fluctuations and

unexpected fall in demand for such a commodity.

9. It poses a danger of starvation where a country depends for her food mainly on

foreign countries and there outbreaks a war in the exporting countries.

10. It encourages unnecessary trade retaliations as countries try to revenge against some

undesirable gestures from trading partners.

INTERNATIONAL TRADE RESTRICTIONS

These refer to the measures a country takes to control her imports so as to some extent

reduce the disadvantages of international trade and to protect her home industries from

competition with imported goods.

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TOOLS/METHODS/TECHNIQUES/WAYS/STEPS OF RESTRICTING

INTERNATIONAL TRADE

1. Imposing heavy import tariffs/duties/taxes. This is where the government imposes

taxes on imported goods and services which increases the price of such goods and

therefore it becomes economical to buy the locally made goods.

2. Fixing import quotas. This is where a country decides upon the maximum quantity

of a certain good to be imported in a given period such that any trader who wishes to

import a commodity has to seek permission from relevant authorities. This permission is

given in form of an import license by the Ministry of trade and industry and the central

bank. A country would not issue import licenses in excess of the predetermined quota.

3. Imposing total bam/embargo. This is where a country bans/completely stops the

importation of a particular type of good so as to protect home industries.

4. Exchange control. This is where the government restricts the amount of foreign

currencies to be purchased by domestic traders or the purchase of the domestic currency

by the foreigners so as to control import trade.

5. Giving subsidies to local producers. This lowers the production costs of local

producers as well as the prices for the locally manufactured goods hence making them

cheaper than the imported ones. Subsidies can be in form of money, machines or

equipment.

6. Devaluation. This is where the government deliberately lowers the value of a local

currency in relation to the foreign currency. It makes exports cheaper while imports

become expensive.

7. Quality control measures. These are tools put to inspect the goods being imported so

that poor quality goods are not allowed into the country.

8. Advanced payments on imports. This is where government may demand importers

to pay import duty before the goods are brought into the country.

WHY INTERNATIONAL TRADE IS RESTRICTED

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1. To protect infant industries against competition from developed countries so that they

can achieve significant economies of scale.

2. To protect consumers in the domestic country from consumption of

undesirable/harmful goods.

3. To raise government revenue through imposing taxes on imported goods.

4. To guard against imported inflation by controlling the volume of imports coming from

counties affected by inflation.

5. To retaliate against some undesirable gestures from trading partners.

6. To attain self-reliance by reducing over dependence on other countries for survival in

form of imports.

7. To create more employment opportunities for the locals through protecting local

industries.

8. To reduce balance of payments problem through restricting imports and reducing

expenditure on them.

9. To encourage exploitation of the local resources so as to increase local production.

10. To guard against dumping where manufacturers export products to other countries at

prices below those charged in the home.

Note.

Dumping. This is the selling of goods abroad at a give-away price i.e. selling of goods

to other countries at prices below those charged in the home.

ADVANTAGES OF TRADE RESTRICTIONS

1. It protects infant industries against competition from developed countries so that they

can achieve significant economies of scale.

2. It protects consumers in the domestic country from consumption of

undesirable/harmful goods.

3. It leads to increase in government revenue through imposing taxes on imported goods.

4. It protects against imported inflation by controlling the volume of imports coming

from counties affected by inflation.

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5. It encourages self-reliance by reducing over dependence on other countries for

survival in form of imports.

6. It creates more employment opportunities for the locals through protecting local

industries.

7. It improves on the balance of payments problem through restricting imports and

reducing expenditure on them.

8. It encourages exploitation of the local resources so as to increase local production.

9. It discourages dumping of poor quality or duplicate goods into the country.

DISADVANTAGES OF TRADE RESTRICTIONS

1. It leads to limited variety of goods in the country which limits consumer choice.

2. It makes local firms inefficient due to absence of competition.

3. It encourages monopoly power among local producers thereby leading to

overcharging of consumers.

4. It reduces on international friendship/understandings between countries.

5. Trade restriction in form of subsidies increases government expenditure.

6. It encourages trade malpractices like smuggling of goods.

7. It limits inflow of foreign resources like technology, skilled labour, capital, etc.

WAYS OF IMPROVING EXPORT TRADE (EXPORTS)

1. Export Compensation. This is where an exporter is entitled to claim a certain

percentage of the value of his exports from the government. This enables such an

exporter to charge less for his goods to importers, thereby making his products more

attractive to them.

2. Customs Drawback. This is where a manufacturer is refunded fully or partially the

customs duty he had paid on importation or a raw material that is used to manufacture

finished goods for export.

3. Government Agencies. These are bodies or organizations set up by governments to

help their exporters in finding new markets for their products. They arrange exhibitions

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in foreign countries to attract customers, provide useful information and education to

local businessmen by organizing courses and seminars.

TERMS OF TRADE

This is the ratio of a countrys export prices to its import prices.

Or; this is the value of a countrys exports relative to that of its imports.

Favorable terms of trade. This is where the export prices of a country rise faster than

its import prices.

Unfavorable terms of trade. This is where the prices of a countrys imports rise faster

than its export prices.

Visible trade. This is the exchange of goods between countries. It consists of the import

and export of goods.

Invisible trade. This is the exchange of services between nations/countries. It consists

of the import and export of services.

Examples of such services include; tourism, banking, insurance, etc. For example, the

profits/earnings made by foreign banks in Uganda are invisible imports for Uganda and

they are invisible exports for states owning the foreign banks in Uganda.

Balance of trade. This is the difference between the value of visible exports and visible

imports of a country.

A favorable balance of trade. This is where a country exports more goods than she

imports during a given year.

An unfavorable balance of trade. This is where a countrys imports exceed its exports

during a given year.

Balance of payments. This is to the difference between total receipts for both visible

and invisible exports and total payments for both visible and invisible imports of a

country for a given year.

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Favorable balance of payments. This is where a countrys total receipts from exports

exceed its total expenditure on imports.

Unfavorable balance of payments. This is when a countrys total expenditure on

imports exceeds its total receipts from exports.

INTERNMEDIARIES/MIDDLEMEN IN INTERNATIONAL TRADE

These are specialized traders who assist businessmen in acquiring raw materials, semi-

finished goods or finished goods from countries abroad.

They include;

1. Import Merchants. These are traders who buy goods from a broad in their own name

and sell them locally. They resemble wholesalers. Their profit consists of the difference

between the cost and selling price of goods imported.

2. Import Brokers. These are people who do not buy or sell goods themselves but

arrange deals between buyers and sellers. They possess expert knowledge of technical

details and offer their services for a fee called brokerage which is calculated as a

percentage of the cost of the goods bought through them.

3. Import Commission Agents. These are people who import goods at overseas sellers

risk and are paid on a commission basis. They are sent consignments by overseas sellers

and they use their knowledge of local market conditions in selling the goods at best

prices. They deduct their commission from the proceeds of sale and remit the difference.

They dont take any risks and goods remain unsold, they can return them at the exporters

expense.

TYPES OF IMPORT COMMISSION AGENTS

1. Del-credere agent. This is a middleman who guarantees payment to his overseas

suppliers.

He guarantees the collection of debts from his clients, and if any client fails to pay, he

undertakes to pay the amount due himself.

A del-credere agent is paid an extra commission called del-credere commission, for

providing the guarantee.

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2. Forwarding agent. This agent engaged in collection, shipment and delivery of goods.

Forwarding agents transport and deliver goods on behalf of overseas sellers e.g.

Interfreight Uganda Limited.

DOCUMENTS USED IN INTERNATIONAL TRADE

1. Bill of Lading. This is a document containing the details of goods loaded into the

ship, the terms and conditions under which the goods have been accepted by the shipper

and the shipping charges.

Contents of the Bill of Lading

i) Name and address of the buyer.

ii) Name of the ship.

iii) Port of destination.

iv) Nature of goods being loaded onto the ship.

v) Shipping terms and conditions.

vi) Shipping charges.

When the Bill of Lading is signed by the Captain of the ship, it becomes evidence of the

receipt of goods by the shipper.

Functions/uses of the Bill of Lading

i) It is a receipt for the goods by the shipper.

ii) It is a contract of carriage.

iii) It is a document of title to the goods, i.e. a person named on this document can claim

the goods.

Note. A seller usually gets the Bill of Lading from the shipping company and sends it to

the buyer along with his invoice and insurance certificate to enable him to receive the

goods when the ship docks at the port of destination.

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2. Certificate of Origin. This is a document that specifies the country of origin of the

goods being sold. It helps customs officers to calculate correctly the customs duty on

such goods.

3. Indent. An indent is a request to the agent to place an order on behalf of the importer

with an appropriate exporter.

Note. An indent may either be open or a closed indent.

i) Closed indent

This is an order by the importer placed with an agent to purchase goods from a named

exporter. It is a request where the importer or buyer specifies the exporter from whom to

buy the goods.

ii) Open indent

This is where the importer simply sends the order to an agent without specifying the

supplier or manufacturer of the goods i.e. the agent is free to buy goods from any

exporter.

4. Proforma Invoice. This is a document sent by the seller to the buyer if payment for

the goods is required before delivery.

It serves the same purpose as an invoice except that it does not hold the receivers address

liable to pay and it does not debit the receivers account like what an invoice does.

5. Freight Note. This is a document drawn by the shipping company indicating the

charge for shipping the goods.

It is forwarded to the exporter who pays the amount and gets it receipted.

6. Letter of Credit. This is a means by which an importer obtains credit and the

exporter gets an assurance of payment of amounts due to him.

7. Letter of Hypothecation. This is a letter from an exporter to his bank, authoring the

bank to sell goods being exported for the best price it can get, if the bank cannot obtain

payment on a bill of exchange.

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8. Consular Invoice. This is an invoice/document that has been seen and signed by the

consulate or embassy of the country to which the goods are being exported.

It helps the consul to sort out undesirable goods.

9. Bill of exchange. This is an “unconditional order in writing, addressed by one person

to another, signed by the person giving it, requiring the person to whom it is addressed

to pay on demand or at a stated future date, a sum of money to a certain period or to the

order of that person or to bearer”.

10. Bill of site. This is a document to the customs officials when full description of the

goods is available so as to allow the goods to be loaded.

11. Charter party. This is an agreement signed between the owner of the ship (shipper)

and the trader when the trader hires the ship for a given period of time. It gives the

chartering businessman (trader) full control over the ship for the period of contract.

12. Airway bill. This is a contract between the importer and the airline company for the

goods transported by air.

13. Shipping note. This is a document issued by the shipping company to the seller

giving details and conditions of carriage.

14. Weight note. This is a document showing the quantity of goods delivered at the

dock and person responsible for all the cost.

It helps to determine the dock charges.

15. Freight note. This is a document showing the cost of transport from one port to

another.

16. Calling forward note. This is a document that informs the exporter (seller) the date

and time by which the goods should be at the dock ready for loading on to a particular

ship.

TERMS OF SALE IN FOREIGN TRADE

There are a lot of expenses involved in any import transaction. Some of these expenses

may be paid by seller and included in the price quoted to the buyer.

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It is important that an exporter clearly indicates what, if any expenses are included in

price and what are to be paid by the seller himself.

These are;

1. Ex-works/Ex-factory/Loco. This means that the price quoted includes only the cost

of goods as they leave the factory (works), and all other expenses are to be paid by the

buyer.

2. Free on Rail (F.O.R). This means that charges for carriage to the nearest railway

station from the sellers factory are included, but railway freight is not included.

3. Delivered Docks (D.D). This means that the price quoted includes the cost of carriage

to the docks.

Note. Docks are places where ships wait for cargo.

4. Free Alongside Ship (F.A.S). This means that the price quoted includes the cost of

carriage to the docks, dock handling charges and dock dues, but not loading expenses.

5. Free on Board (F.O.B). This means that the price quoted includes the cost of carriage

to the docks, dock handling charges, dock dues and also loading expenses.

6. Cost and Freight (C. & F). This means that the price quoted includes the cost of

carriage to the docks, dock handling charge, dock dues, loading expenses and also the

shipping freight charges.

7. Cost, Insurance and Freight (C.I.F). This includes all expenses mentioned above

and also insurance premiums to cover the goods against marine risks.

8. Loaded. This means that the price quoted includes all costs to the port of destination,

plus unloading charges.

9. In Bond. This means that the price quoted includes the cost of handling into a bonded

warehouse.

10. Duty Paid. This means that the price quoted, in addition to all the above expenses,

includes the payment of any customs duty.

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11. Free of expense (Franco). This means that the price quoted includes all charges up

to and including delivery of the goods to the premises of the buyer.

PROBLEMS FACED IN INTERNATIONAL TRADE/ FACTORS THAT LIMIT

INTERNATIONAL TRADE

1. Differences in currencies. Countries have different currencies with different values

which makes trade between them difficult.

2. Long distances. The distances involved in international trade are far greater than those

in home trade and this leads to high transport costs.

3. A lot of documents are involved where goods may not be allowed into another

country without certain documents for instance certificate of origin.

4. Trade barriers applied by countries. These limit the movement of goods across

national boundaries.

5. High level of risks involved for example damage, of goods in transit, loss of goods on

the way, etc.

6. Differences in measurements where different countries have different weight and

measures causing a problem to the traders.

7. Cultural differences leading to varying tastes and preferences from one country to

another. This limits market for particular goods.

8. Language barriers or differences due very many languages existing in the world hence

making communication in foreign trade difficult.

9. Political instabilities in form of wars within or between boundaries which make

foreign trade difficult.

WAYS/MEASURES OF PROMOTING REGIONAL/INTERNATIONAL TRADE

IN UGANDA

1. Removing of trade barriers and restrictions for instance through trade liberalization,

reduction of tariffs, etc.

2. Easing the movement of people across boarders for example by issuing East African

passports.

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3. Easing foreign exchange purchase through Forex Bureaus local and international

banks.

4. Holding and participating in international trade fairs and exhibitions and shows.

5. Promoting national peace, security and stability in the region.

6. Establishing and promoting export and import promotion agencies to promote trade

e.g. Uganda National Chamber of Commerce and Industry.

7. Exchanging trade delegations from partner/friendly trading countries.

8. Improving transport and communication facilities in the region.

9. Encouraging exportation of many non-traditional exports to ensure variety.

10. Forming and promoting of economic groupings like East African Community,

COMESA, etc.

ECONOMIC INTEGRATION/TRADE COOPERATION

This is where countries in a particular region agree to reduce customs duties across their

national boundaries or remove the duties completely to allow or encourage trade among

themselves.

It is aimed at encouraging trade among the member states and at the same time

discourage trade with non-member states.

CONDITIONS NECESSARY FOR SUCCESSFUL ECONOMIC INTEGRATION

1. The member states must be relatively at the same level of development so as to avoid

superiority and inferiority complex.

2. The member states must share common boundaries i.e. the countries must be in a

given region e.g. East African countries.

3. The member states must have same political ideologies to avoid political differences

e.g. capitalistic ideologies, socialistic ideologies, etc.

4. The member countries must produce different goods if trade in the area is to succeed.

5. The countries in the region must preferably have the same size of population or same

geographical size.

FORMS/STAGES/LEVELS OF ECONOMIC INTEGRATION

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1. Preferential trade area (PTA). This is the stage where member states agree to lower

taxes across there national boundaries but charge high taxes on goods coming from non-

member states.

2. Free trade area. This is where member states agree to remove all taxes/tariffs across

their national boundaries i.e. they allow free movement of goods across their national

boundaries but each member state maintains its own tariff against non-member states.

3. Customs union. This is the stage where member states agree to remove all taxes

among themselves like in free trade area but they agree to charge a common tariff barrier

against non-member states.

4. Common market. This is a trade cooperation where member states agree to remove

all tariffs among themselves, charge a common tariff against non-member states and in

addition, the member states allow free movement of factors of production in the region

e.g. COMESA.

5. Economic community. This is the stage of economic integration which has all the

features of a common market and in addition, the member states have joint ownership of

certain enterprises, joint or same economic policies.

6. Economic union. This stage has all the features of economic community and in

addition, there is adoption of one currency in the region e.g. European Union.

ADVANTAGES OF ECONOMIC INTEGRATION

1. It encourages trade creation where countries are able to move away from high cost

trade with non-member states and begin to trade at low cost within the region

2. It creates more employment opportunities in the region when countries establish a

common market.

3. It creates regional peace or friendship among the member states as it brings about

political cooperation and mutual understating among member states.

4. It enables member states to sell off their surplus or excess output in the region i.e. it

acts as a vent for surplus.

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5. It leads to increased volume and variety of goods in the region hence improved

standards of living.

6. It stimulates the establishment and development of industries in the region as it

encourages competition.

7. It increases the bargaining power of the member states i.e. it enables member states to

bargain for higher prices for their exports in the world market.

8. It leads to access to foreign aid from international organizations like World Bank,

IMF and from developed countries.

9. It allows joint research and collection of information at low cost i.e. it allows sharing

of skilled labour and capital.

10. It encourages competition between member countries thereby resulting into better

quality goods and services in the region.

DISADVANTAGES OF ECONOMIC INTEGRATION

1. It leads to loss of revenue to the government as tariffs are reduced or removed

completely.

2. It leads to trade diversion effect where member states lose the opportunity of trading

at low cost with non-member sates and they are forced to trade among themselves at

high cost.

3. It leads to surplus or over flooding of the market in the region especially where

countries in the region are producing similar products.

4. It leads to loss of political identity where regional political ideas are adopted.

5. Member states are forced to buy poor quality goods within the region and less

opportunity of buying goods from the non-member sates.

6. Free movement of goods across national boundaries of the member states makes the

local industry to be out competed.

7. It encourages uneven distribution of benefits or industries which leads to uneven

development in the region.

8. It loss of skilled labour to other countries, especially developed countries in the

region.

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9. Member states sometimes act in the interest of all and therefore, the national interests

are not satisfied.

10. The movement of goods may be in one direction leaving other member sates with

limited goods.

FACTORS LIMITING THE DEVELOPMENT OF ECONOMIC INTEGRATION

1. Differences in the levels of development between or among countries.

2. Differences in political ideologies e.g. capitalistic ideologies against socialistic

ideologies.

3. Differences in culture, religion, beliefs, etc.

4. Differences in population or geographical sizes of countries.

5. The desire to earn revenue by the countries in the region.

6. Lack of one or common currency among the countries in the region.

7. Language barriers or differences due very many languages existing in the world hence

making communication in the region difficult.

8. Political instabilities in form of wars within or between boundaries which make trade

difficult.

9. Poor transport and communication facilities in some countries which makes

movement difficult.

FORMS OF BUSINESS OWNERSHIP

Business units in East Africa, Uganda inclusive are classified into two broad groups or

sectors, i.e. the private sector and the public sector. The private sector consists of

businesses owned by private individuals and the public sector comprises establishments

owned by the government.

Business units owned by individuals are:

(i) Sole traders

(ii) Partnerships

(iii) Joint stock companies

(iv) Co-operatives

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The public sector consists of the following units:

(i) Public corporations

(ii) Parastatals

(iii) Local government authorities

FACTORS CONSIDERED WHEN SELECTION A BUSINESS UNIT

1. Commencement of business operations. Sole proprietors and partnerships can start

business operations as soon as they pay and obtain a trading license.

However, a limited liability company cannot start operations until it is registered with

the registrar of companies and has been given a certificate of incorporation.

In addition, the business may register Value Added Tax if its sales/income falls within

the VAT registration threshold.

2. Liability of the business owners. A sole trader is responsible for the debts of the

business up to the extent of selling his/her personal property.

On the other hand, companies have limited liabilities where the shareholders are only

responsible for the debts of the business to the extent of their capital contribution only.

3. Continuity of the business. Incase of death or bankruptcy of the owner, the sole

proprietorship business comes to an end.

Likewise in partnership death, bankruptcy or retirement of a major/general partner can

lead to closing of the business depending on the provisions of the partnership agreement.

On the other hand, under companies there is perpetual succession whereby if one of the

shareholders dies, the company can continue existing like nothing has happened to it

since a company is a separate person or entity from its owners.

4. Capital and how it can be raised. A sole proprietor must on his/her own raise all the

necessary capital that his/her business requires to start.

This also applies to partnership business where capital is raised by the partners in the

business of two to a maximum of twenty members.

However, in a company capital is raised through selling shares to the public.

SOLE TRADE/Sole Proprietorship

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A sole trader or sole proprietor. This is a person who owns a business alone/singly.

Sole proprietorship or sole trade. This is a form of business organization whereby one

man finances, controls and manages the affairs of the business alone.

Or; this is a business setting in which an individual introduces his own capital, uses his

own skill and intelligence in the management of the business affairs and is solely

responsible for the results of its operations.

Sole proprietorship is sometimes called the ones man's business.

Note. Sole proprietorship is the most common and simplest form of business in East

Africa.

CHARACTERISTICS OF SOLE PROPRIETORSHIP BUSINESS

1. The business is owned by a single individual.

2. The business is managed and controlled by the owner himself since is it small.

3. The necessary capital to run the business is provided by the sole owner.

4. The proprietor himself bears all the risks.

5. There is unlimited liability where the sole trader is personally liable for the debts of

the business.

6. There is no separate legal entity, i.e. the sole trader and his business are considered as

one where all assets and liabilities of the business are personal assets and liabilities of

the proprietor.

7. There is minimum government regulation i.e. sole traders are not governed by any

special act or ordinance.

8. There is independent decision making where planning and direction of the business

lies in the hands of the sole proprietor.

REASONS WHY MOST BUSINESSES UNITS IN UGANDA ARE SOLE

PROPRIETORSHIP

1. To enjoy top secrecy since the sole trader is the only person who knows his business

secrets and has a better chance to preserve them.

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2. Flexibility of the business whereby the sole trader can make decisions and changes in

a minimum of time, he can change from one type of business to another or its premises.

3. To establish direct contact with customers and employees since the business is on

small scale.

4.There is easy and quick decision making due to independency in decision making

relating to the affairs of the business without consulting anybody.

5. To enjoy all the profits and this provides him a very high degree of incentive to work

hard.

6. Ease of formation since the business requires no legal formalities and it does not

require a lot of capital.

7. To enjoy freedom from government regulation as sole proprietorship is the least

regulated form of business organization.

8. Ease of coordinate because of its small size where the sole owner can take all

decisions and supervise every part of the business.

ADVANTAGES OF SOLE PROPRIETORSHIP

1. The sole trader enjoys top secrecy since he is the only person who knows his business

secrets and has a better chance to preserve them.

2. The business is very flexible. The sole trader can make decisions and changes in a

minimum of time; he can change from one type of business to another or its premises.

3. The sole trader is able to establish as direct contact with his customers and employees

since the business is on small scale.

4. There is easy and quick decision making due to independency in decision making

relating to the affairs of the business without consulting anybody.

5. The sole proprietor takes all the profits and this provides him a very high degree of

incentive to work hard.

6. The business is easy and cheap to set up since it requires no legal formalities and it

does not require a lot of capital.

7. There is freedom from government regulation. Sole proprietorship is the least

regulated form of business organization.

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8. It is easy to coordinate because of its small size where the sole owner can take all

decisions and supervise every part of the business.

DISADVANTAGES/SHORTCOMINGS OF SOLE PROPRIETORSHIP

1. The capital resources are limited which makes expansion of the business difficult, if

not impossible.

2. There is unlimited liability where the sole trader is personally responsible for the

debts of the business to the extent of selling his personal possessions.

3.There is often lack of continuity in this type of the business its success depends on the

owners ability and effort whose sickness or bankruptcy immediately puts the business

into difficulties and his/her death must mean its end.

4. It is difficult for a sole trader to get financial assistance from banks due to lack of

collateral security.

5. There is a possibility of coming up with wrong decisions in the business due to

independent decision making.

6. It is difficult to carry out research in the business due to low profit levels and fear of

risks.

7. The sole trader works for long and irregular hours each day and has less time for

holidays and this leads to fatigue and exhaustion.

8. There is poor management and inefficiency due to absence of specialization and

division of labour.

9. There are no proper records maintained in a sole trade business due to poor record

keeping.

PARTNERSHIPS

A partnership. This is a relationship which subsists/exists between two or more persons

who have agreed to carry on business with the view of making profits.

Or; this is an association of between two to twenty persons or fifty in the case of

professionals like doctors, lawyers, etc. who have come together or who have pulled

together their capital and management resources to establish a firm with a view of

making profits.

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Each of these persons is called a partner. The relationship that exists between these

partners is referred to as the partnership and the business is called a firm.

When a sole trader finds it hard to cope with the increasing problems of an expanding

business, he/she takes on employees or associates in business to help him/her and this

may convert his/her business into a partnership business in which there is joint

ownership.

In East Africa partnerships are mostly found in professionals and most firms in

accountancy, law, media and estate agency workers are organized as partnerships.

MEMBERSHIP

A partnership consists of a minimum number of two and a maximum of twenty

members.

However, the Partnership Act provides that the maximum number of partners in a firm

that offers personal and professional services may be fifty (50), if each of the partners is

a professionally qualified person, e.g. a firm of practicing accountants may have a

maximum of fifty partners if each of them is a professionally qualified accountant.

CHARACTERISTICS OF PARTNERSHIP BUSINESS/PROPERTIES OF

PARTNERSHIP

1. Membership ranges from two to twenty or two to fifty incase of professional services.

2. It results from contractual agreement between or among partners.

3. Management is carried out by all the partners.

4. Each partner is an agent of the firm i.e. there is a principal-agent relationship.

5. A partnership firm has no separate legal existence.

6. There is no transfer of capital without knowledge of other partners.

7. Major decisions are taken by majority and based on mutual understanding.

8. There is unlimited liability where all partners except limited partners are personally

liable for all the debts of the partnership.

9. The firm is registered with the registrar of business names.

10. Each partner must act on good faith with each other and present true accounts.

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11. There is division of profits or losses between or among the partners to the firm.

12. The purpose of any partnership business is to make profit.

13. A partnership has limited life in that it may be dissolved at any time.

14. There is co-ownership of contributed assets i.e. all assets contributed into the firm

are owned by the partnership.

15. Business capital is got from partners whereby partners contribute capital and no

appeal is made to the public for subscriptions.

TYPES OF PARTNERSHIP

1. Permanent partnership. This is a partnership intended to continue indefinitely, i.e.

its end is not known at the time of formation.

2. Temporary partnership/joint venture. This is a partnership formed for a specified

period or specified purpose, at the end of which the partnership is dissolved.

For example, Roko Construction Company and Stirling Construction Company may

form a partnership for the purpose of constructing a road and after the completion of the

project the two cease to be partners.

3. Limited partnership. This is a partnership where all members in the firm have

limited liabilities except for the general partner.

4. Ordinary partnership. This is where all members have equal rights and

responsibilities and liabilities of the members are unlimited.

TYPES OF PARTNERS

1. Active partner. This is a partner who contributes capital, shares profits and losses

and in addition takes an active role in the day-to-day affairs of the business.

He takes part in the management of the business and often be given a fixed area of

responsibility e.g. sales, accounts, etc.

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2. Dormant partner/sleeping partner/silent partner. This is a partner who contributes

capital, shares profits and losses, responsible for the debts of the business, but does not

in take an active role in the day-to-day running of the business.

This usually happens when one has either a full-time job or another business to attend to

and if he has faith in the active partners.

3. Limited partner. This is a partner whose liability towards the firms debts is limited

to a stated sum, usually the capital contributed by him.

4. General partner. This is a partner whose liability towards the firms debts is

unlimited i.e. he may be called upon to meet the firms debts from personal resources if

the firm fails to settle them.

Note. The partnership Act provides that all partners cannot limited, i.e. there must be at

least one general in a firm who has unlimited liability.

6. Major partner. This is a partner who is over 18 years of age.

7.Minor partner. This is a partner who is under 18 years of age. A minor partner is not

liable for the debts of the business beyond his capital but, unlike a limited partner, he has

a right to act on behalf of the business.

8. Real partner. This is a partner who contributes capital inform of property, takes an

active part in the running of the business, shares profits and losses and is responsible for

the debts of the business.

9. Quasi partner/nominal partner. This is a person who does not contribute any

capital or take any part in running of the business but allows the firm to use his name as

a partner. He is generally not responsible for the debts of the firm except when a creditor

acts solely on the assumption that he (quasi partner) is a real partner.

Note. Partners sometimes find it useful to convince a reputable businessman to allow

them to use his name as a partner in exchange for a small share in profit.

10. Partner by estopel. This is one who is actually not a partner but who represents

himself as one.

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He is not a partner in actual sense but the way he behaves/conducts himself makes other

people to believe him as a partner. He does not contribute any capital towards the

formation of the business.

11. Retiring partner. This is a partner who has withdrawn from the partnership but he

is liable for all the debts and losses which were incurred by the firm before his

withdrawal.

FORMATION OF A PARTNERSHIP

A partnership rests on a contract among persons. Therefore, its formation does not

involve any special legal problems. Law does not make it compulsory for a partnership

firm to be registered.

For example, if Mr. Wambuzi and Mr. Lubega desire to trade as “M/s Wambuzi and

Lubega Wholesalers”, they dont need to apply for ant registration.

But registration becomes necessary in view of the fact that an unregistered firm has

certain disabilities. For example, an unregistered firm cannot file suit in court to enforce

rights against outside parties under a contract.

Hence, if Mr. Wambuzi and Mr. Lubega decide to run the business under a name other

than their own personal names, e.g. WALU Wholesalers, they will be required to

register this name with the Registrar of Business Names.

They will also be required to print their personal names on all documents sent by their

firm, e.g. letters, catalogues, etc. so that all the people with whom they deal remain

informed of the true owners of the firm.

In Uganda, the same form as that filled by sole proprietors is filled by partners and

submitted to the registrar who will clear usage of name and thereafter issue a Certificate

of Registration.

WAYS OF FORMATION

1. By word of mouth. Here, the partners agree through spoken words that they have

formed a partnership and acknowledge it. They do not need to put it in writing.

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2. Implied partnership. This arises from the course of dealings. In this case, there is no

explicit agreement either by word of mouth or written but, the partnership relationship is

implied from behaviour or actions of the people concerned.

For example when a person always sells gods on behalf of another and shares in the

profits and people believe he is a partner. While there may be no agreement, there is an

implied partnership.

3. Partnership by holding out. This is a form of implied partnership where a person

who is not a partner by word of mouth or deed acts in such a manner as described above,

in the implied partnership.

He is said to be holding out as a partner if the public deal with him believing that he is

one.

4. In writing (partnership deed). Here, partners agree and put their agreement in

writing. A partners written agreement is called a partnership deed.

THE PARTNERSHIP AGREEMENT (DEED)

A partnership deed. This is a written agreement or document which outlines the basis

on which the partnership business is being formed and conducted.

It spells out the rights and obligations of the partners.

CONTENTS OF THE PARTNERSHIP DEED

1. Name, address and location of the firm.

2. Name, address and occupation of each partner.

3. Status or type of each partner e.g. active partner, general partner, etc.

4. Capital to be contributed by each partner.

5. Ratios in which profits and losses are to be shared among partners.

6. The rights of each partner e.g. drawings allowable, interest on capital salaries, etc.

7. The duties allocated to each partner.

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8. Methods of calculating goodwill at the time of retirement, death or admission of a

new partner.

9. The manner in which books of accounts of the firm would be kept/prepared.

10. The procedure to be adopted at the time of dissolution of the partnership.

11. The duration of the partnership business.

12. The nature/purpose for which the partnership is formed.

13. How the management committee is to be elected.

Note. It is essential that intending partners have an agreement in a partnership deed. This

is because by putting intentions in writing, partners will be more clear and precise in

their objectives and a permanent record is evidence of the terms actually agreed upon.

In the absence of a partnership deed, the provisions of the partnership Act will come in

operation. The Act defines the rights and duties of a partner and is substitute for the

deed.

This Act states that:

i. Every partner has a right to take part in the conduct of the business.

ii. Incase of any difference arising as to ordinary matters connected with the business,

the decision may be taken by the majority of the partners.

iii. No change may be made in the nature of the business without the consent of all

partners.

iv. All profits and losses are to be shared equally by the partners.

v. No interest is to be allowed on capital.

vi. No salary is to be allowed to any partner.

vii. 5% interest is to be paid on any loans advanced to the business by any partner.

vii. Every partner will have a right to inspect the firms books of accounts.

RIGHTS AND DUTIES OF PARTNERS

1. The firm must compensate a partner for liabilities incurred by him in the conduct of

the business.

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2. If a partner has private business that competes with the partnership, all profit made by

him should be surrendered to the firm.

3. No partner may be expelled without dissolving the partnership.

4. All partners are personally liable for the debts incurred by the firm.

5. No new partner may be admitted without the consent of all partners and no partner

can sell his share to any outsider without the consent of all other partners.

6. Every partner who has access to the firms funds or properties must display utmost

good faith and present true accounts.

7. Every partner has a right to act on behalf of the business, to sign documents on its

behalf and to bind under contract as long as he acts within the provision of their

partnership deed.

DISSOLUTION OF A PARTNERSHIP

This refers to a change in the relation of partners caused by any partner ceasing to be

associated in the carrying on of the business.

CIRCUMSTANCES/CONDITIONS/SITUATIONS/STATE UNDER WHICH A

PARTNERSHIP MAY BE DISSOLVED

1. Incase partners agree voluntarily to dissolve the partnership.

2. If it is a temporary partnership, at the expiry of a specified period or fulfillment of the

purpose of partnership, the partnership comes to an end.

3. If a partner notifies the others in writing of his intention to dissolve the partnership.

4. If a partner becomes insane or bankrupt or dies, a partnership may be dissolved.

5. Incase of operation of courts of law where a partner or another interested party may

apply to the court of law to have the partnership dissolved.

6. Incase of frustration e.g. if a law is introduced banning the activities being carried out

by the firm.

REASONS WHY PROFESSIONAL FIRMS OPERATE AS PARTNERSHIPS

1. To raise more capital from partners since they are two or more.

2. To allow work to be shared among partners so that no one partner is overworked.

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3. To benefit from specialization where each partner concentrates in his area of

specialization.

4. To share losses and liabilities and hence reduce what each partner would bear.

5. To encourage easy business expansion by acquiring loans from lending banks and by

admitting new partners.

6. To enjoy limited liabilities incase of a limited partner where members are not

personally liable for the business debts.

7. To enjoy business enjoys secrecy since they are not required to publish their accounts

to the public.

8. To have shared decision making for better business decisions.

9. Ease of formation. This business is fairly simple since less legal formalities are

involved.

ADVANTAGES OF PARTNERSHIP BUSINESS

1. More capital is raised from partners since they are two or more.

2. Work is shared among partners hence no one partner is overworked.

3. There is better combination of talents hence each partner concentrates in his area of

specialization.

4. Losses and liabilities are shared and this reduces what each partners would bear.

5. Formation of the business is fairly simple since less legal formalities are involved.

6. The business can easily expand by acquiring loans from lending banks and by

admitting new partners.

7. In a limited partnership, partners enjoy limited liabilities.

8. The business enjoys secrecy since they are not required to publish their accounts to

the public.

9. Better decisions are made due to consultations among partners that allows shared

decision making.

10. Incase of disagreements, mutual discussions among partners are likely to come to

solution.

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DISADVANTAGES OF PARTNERSHIP BUSINESS

1. The death, bankruptcy or withdrawal of a major partner affects the existence of the

business.

2. Except a limited partner, all partners have unlimited liabilities where they are

personally liable for the debts of the firm.

3. There exist disagreements among partners due to plurality of persons leading to

different views from the different partners.

4. There is non-transferability of interest where no partner can transfer his/her share

without the consent of all partners.

5. In case of ordinary partnership, the maximum number of members cannot exceed

twenty which leads to limited finances.

6. There is delayed decision making since all major decisions must be taken by the

consent of all partners,

7. A partnership has a limited life and it may be ended anytime by death,

bankruptcy/insolvency or resignation/withdrawal of any capable member of the firm.

8. The sharing of profits reduces somebody's willingness to work hard since all profits

received are shared by all partners which reduces the amount receivable.

9. Double taxation is possible under this type of business ownership. A partnership and

the partners may be taxed as separate entities yet the business could be the only

livelihood to its owners.

10. There is risk of implied authority due to the contractual relationship among the

partners whereby all partners may be held liable for the acts or misconducts of their

follow members.

ADVANTAGES OF A PARTNERSHIP OVER SOLE PROPRIETORSHIP

BUSINESS

1. A partnership raises more capital than sole proprietorship

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2. The burden of losses/liabilities is distributed to all partners unlike in sole trade.

3. Partnerships have better combination of talent compared to sole proprietorship.

4. The work is divided among partners which reduces load for each partner unlike in

sole trade.

5. The business can easily be expanded through admission of new partners unlike in sole

proprietorship.

6. The absence of a member does not stop a partnership from operation but once a sole

trader is away, the business comes to a standstill.

7. Partnerships have better chances of acquiring loans than a sole proprietor since a sole

trader lacks collateral security.

8. There is shared decision making that result into better decisions compared to a sole

trader who may make poor decisions.

9. Incase of limited partners, they have limited liabilities unlike in sole proprietorship

where there is unlimited liabilities.

JOINT STOCK COMPANIES

A joint stock company. This is a corporate body or association of persons having joint

capital for the purpose of carrying out business to earn profits.

Or; this is a business unit owned by a number of individuals called shareholders.

A joint stock company is a “corporate body” because it is created under Law and has an

entity of its own, quite separate from the owners that make it up.

The Law defines a joint stock company as a fictitious but a legal person that can enter

into contracts, own properties, incur liabilities, sue others, be sued by others, and do

anything for which it is formed. The last part is what makes a joint stock company to

differ from a real person in that an individual can do any thing that is legal, but a

company can do only those things for which it has been formed.

For example, an individual can run any type of business but if a company is formed for

the purpose of say, carrying out insurance, it can only carry out this type of business.

TYPES OF JOINT STOCK COMPANIES

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1. Statutory companies. These are companies created by the Act of Parliament i.e. they

are government companies like Bank of Uganda.

2. Registered companies. These are companies formed and registered under the

Companies Act.

TYPES OF REGISTERED COMPANIES

1. Private limited companies. These comprise of twenty (20) to fifty (50) members,

excluding employees.

2. Public limited companies. These have a minimum number of seven (7) members but

with no maximum limit.

3. Limited companies. A limited company is one where the liability of members is

limited to a stated amount, usually the capital contributed.

4. Unlimited companies. These are companies where the liability of members is

unlimited like those of sole traders and general partners.

5. Companies limited by shares. These are companies where the liability of

shareholders is limited to the face value of shares held them.

Thus if one holds a share of Shs. 10,000 face value in a particular company, the

maximum he can lose in the event of winding up/closing/bankruptcy is Shs. 10,000.

If such a shareholder has only paid, say, Shs. 8,000 on that share, he may be called upon

to pay the balance of Shs. 2,000, and no more, if the company fails to pay its creditors.

6. Companies limited by guarantee. These are companies with no share capital where

the liability of members is limited to the amount of money a member guarantees or

promises or pledges to pay at the time of taking membership.

If such a company is liquidated, and its assets are not found sufficient to meet the debts,

members would be asked to contribute up to the maximum of the amount guaranteed by

them at the time of taking membership.

In Uganda, examples of companies limited by guarantee include football clubs.

FORMATION OF ACOMPANY

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For a company to be formed there must be some people who bring out an idea of

forming one and setting its operation. Such founder members are known as promoters.

The promoters are required to submit the Registrar of Companies the following

documents: Memorandum of association, Articles of association, Certificate of

incorporation, prospective, certificate of trading, list of directors, statement signed by the

directors and a declaration that necessary requirements have been complied with.

1. Memorandum of Association. This is a document that governs the external

relationship between the company and the public.

Or; this shows/lays down the powers and limitations of the company.

Or; this is an application by the promoters to the Registrar of Companies showing their

need to be formed into a company and it must be signed by all the promoters.

CONTENTS/CLAUSES OF THE MEMORANDUM OF ASSOCIATION

i. Name Clause. This clause states the name of the company with the word Limited at

the end which serves as a reminder to the people dealing with the company that the

liability of its members is limited.

ii. Situation Clause. This gives the location/place where the registered office to which

notices can be sent is situated/located.

iii. Objects Clause. This Clause outlines the aims and objectives for which the company

is being formed. It is the most important clause when forming a company.

iv. Capital Clause. This gives details about the stated share capital the company wishes

to have.

It contains the following information:

(i) The total amount of share capital

(ii) The units (shares) into which the share capital is divided

(iii) The value of each share

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(iv) The types of shares

v. Liability Clause. This clause states that the liability of the members shall be limited.

vi. Declaration Clause. This states the desire of the promoters to form themselves into a

limited company. This clause sets out the names and addresses of the promoters and the

number of shares each has agreed to take.

2. Articles of Association/Table A of the companys Act. This is a document that

governs the internal organization of the company. It lays down the rules and regulations

about the internal organization of the company.

CONTENTS OF ARTICLES ASSOCIATION

i) The rights and powers of each type of shareholders.

ii) The qualifications, duties and powers of Directors.

iii) The methods or procedure of calling and conducting general meetings.

iv) Rules governing election and removal of directors and auditors.

v) Auditing the books of accounts.

vi) The issue and transfer of shares, etc.

3. List of Directors. This gives the names and addresses of Directors.

4. Statement signed by Directors stating that they agree to act as such.

5. A Declaration that all necessary requirements have been duly complied with and the

directors agree to act as such.

6. Certificate of Incorporation. This is a document that gives legal existence to the

company. It brings the company into existence as a separate legal entity. When the

required documents are presented to the Registrar of Companies and everything is found

satisfactory, a Certificate of Incorporation may be issued. It allows a private limited

company to commence business.

7. Prospectus. This is a document that invites the public to subscribe for shares. It is

used by a public limited company to advertise shares to the public inviting the public to

subscribe so as to raise the capital required. It is usually printed in newspapers or may be

sent directly to people who are likely to be interested.

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8. Certificate of Trading/certificate of commencement. This is a document that allows

a public limited company to commence business. It is issued by the Registrar of

Companies after:

(i)The minimum share capital has been raised

(ii)The directors have paid for shares taken by them

(iii)The directors have filed a declaration that the above requirements have been met.

PUBLIC LIMITED COMPANIES

A public limited company. This is a business unit consisting of a minimum number of

seven members but no definite maximum number of shareholders who have pooled their

resources together to run a business with a view of making profits.

Public companies are large in size and therefore have greater issued share capital.

Examples of public limited companies in East Africa include Pan World Insurance

Company, Greenland Investment, East African Breweries Ltd and East African

Industries Ltd.

FEATURES OF PUBLIC LIMITED COMPANIES

1. The liability of members is limited.

2. They have an entity of their own quite separate from the members that make it up i.e.

they can sue and can be sued.

3. They have a minimum number of seven members but with no upper limit of number

of shareholders.

4. Their capital is divided into units of uniform values and each of such units is called a

share.

5. The owners of the company are those who hold shares in it and such people are called

shareholders.

6. Shares of the public companies are freely transferable without any restriction.

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7. They cannot start business without a Certificate of Trading/Commencement of

Business.

8. The public company is not affected by bankruptcy, insanity or death of a shareholder.

9. Directors who are elected by shareholders from among themselves conduct the affairs

of the company.

10. Annual accounts must be published to the public for instance in form of newspapers.

ADVANTAGES OF PUBLIC LIMITED COMPANIES

1. The liability of members is limited hence the financial collapse of the company does

not affect the social status and the financial position of the shareholders.

2. The company is much better placed to raise greater amount of capital through the sale

of shares and debentures to the public.

3. The death, bankruptcy or withdrawal of one member cannot affect the existence of the

business.

4. Employment of specialists is possible due to large capital.

5. Specialization or division of labour can easily be exploited because of big

membership and larger scale operation.

6. They have large chances of improving their capital through selling shares, debentures

or borrowing from financial institutions.

7. Company shares are freely transferable hence, an incentive to investors as they are

assured of converting their holding in the business into cash at any time they wish.

8. There is a possibility of issuing different types of shares to suit the investment habits

of the different types of people.

9. Shareholders are safeguarded against fraud by the publicity of company accounts.

10. Employees may be allowed and encouraged to buy shares in the company thereby

giving them added incentives to work harder hence increased production.

11. If a company has been making good dividends, a shareholder would be able to sell

his shares at a much higher price than the nominal value and thus making financial

gains.

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DISADVANTAGES OF PUBLIC LIMITED COMPANIES

1. Formation of public limited company is a long and expensive procedure.

2. The shareholders do not have a direct control over the running of the business since

they normally employ experts to undertake the administrative activities of the firm.

3. The directors employed to manage the company may have their own interests that may

conflict with the intended interests and objectives of the company.

4. There is slow and expensive decision making since all important decisions are taken

by the directors and more important issues handled by the shareholders.

5. Many public companies grow beyond their optimum points hence experience

diseconomies of scale for instance managerial diseconomies.

6. It is usually difficult to keep business secrets in public companies as they are required

by law to disclose certain information to the public.

7. It is difficult to establish direct contact with customers and employees since the

business is on large scale.

8. Public limited companies are subject to a number of legal regulations which hinder the

smooth operations of the business. For example they are required by law to file their

returns, publish their accounts, etc.

PRIVATE LIMITED COMPANIES

A private limited company. This is a business unit consisting of a minimum of two but

a maximum of fifty shareholders exclusive of the past and present employees who have

put together their capital and management resources with an aim of making profits.

Private companies are very desirable and they are just a developed form of partnership.

They are normally small with few shareholders and this allows the shareholders to have

direct control over the business affairs.

Examples of private limited liability companies in Uganda include Madhivan group of

companies, British American Tobacco Uganda Limited (B.A.T), Foam industries for

example Royal Foam, etc.

CHARACTERISTICS OF PRIVATE LIMITED COMPANIES

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1. The liability of members is limited.

2. They have an entity of their own quite separate from the members that make it up.

3. The minimum number of members is two and the maximum is fifty excluding past

and present employees.

4. Their capital is divided into units of uniform values and each of such units is called a

share.

5. The owners of the company are those who hold shares in it and such people are called

shareholders.

6.The shares of private companies are not freely transferable i.e. private companies are

not allowed to offer their shares to the general public and shareholders wishing to sell

their shares in a private companies have to seek permission from all other members or

directors.

6. Private companies can commence business as soon as they receive the certificate of

incorporation. They do not have to wait for certificate of trading as it is the case with

public companies.

7. Private companies are not required to publish their accounts as it is the case with

public companies.

8. The public company is not affected by bankruptcy, insanity or death of a shareholder.

9. Directors who are elected by shareholders from among themselves conduct the affairs

of the company.

ADVANTAGES OF PRIVATE LIMITED LIABILITY COMPANIES

1. Private companies can attract capital so easily from the investing public because of

limited liability that the owners enjoy.

2. The liability of members is limited hence the financial collapse of the company does

not affect the social status and the financial position of the shareholders.

3. The death, bankruptcy or withdrawal of one member cannot affect the existence of the

business.

4. Employment of specialists is possible due to large capital.

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5. Specialization or division of labour can easily be exploited because of big

membership and larger scale operation.

6. They have large chances of improving their capital through selling shares or

borrowing from financial institutions.

7. There is a possibility of issuing different types of shares to suit the investment habits

of the different types of people.

8. Economies of scale are easily reaped as a result of their large scale operation and lump

sum capital stock.

9. There is independency i.e. a private company is free from legal restrictions which

apply to public companies for instance publishing of their accounts, filing of returns, etc.

10. The promoters of private companies usually keep control of their businesses by

holding majority of the shares unlike in the case of public companies whereby directors

are the ones to take decisions and run the business.

DISADVANTAGES OF PRIVATE LIMITED COMPANIES

1. Formation of public limited company is a long and expensive procedure.

2. A private company cannot appeal to the general public to buy shares as it is the case

with public companies hence leading to smaller capital.

3. Shares of private companies are not easily transferable and this may be a disincentive

to speculative investors.

4. Total membership of private companies is restricted in number hence the expected

capital structure is limited.

5. The principal benefits of large scale activities cannot be achieved for example

expansion in size is limited compared to public limited companies.

6. It is difficult to establish direct contact with customers and employees since the

business is on large scale.

7. The shareholders do not have a direct control over the running of the business since

they normally employ experts to undertake the administrative activities of the firm.

8. There is slow and expensive decision making since all important decisions are taken

by all the shareholders.

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DIFFERENCES BETWEEN PRIVATE LIMITED COMPANIES AND PUBLIC

LIMITED COMPANIES

1. Membership in a private limited company ranges from two to fifty while in a public

limited company members range from seven to infinity.

2. Shares of a private limited company are not freely transferable while those of a public

limited company are freely transferable.

3. Private limited companies do not call the public for capital inform of selling shares

while public limited companies are free to call upon the public for funds inform of

selling shares or debentures.

4. Private limited companies can start business after acquiring a certificate of

incorporation while the public limited company has to acquire both the certificate of

incorporation and certificate of trading.

5. Private limited companies do not publish their accounts to the public while public

limited companies do.

6. In a private limited company, the owners have direct control over their affairs while in

public limited companies directors have control over the companys affairs.

7. Public limited companies at times can only prepare the Memorandum of Association

and can be guided by Table A of the Company Act while private limited companies have

to prepare both the Memorandum of Association and Articles of Association.

8. In private limited companies, the minimum number of directors is one while in a

public limited company, the minimum number of directors is two.

ADVANTAGES OF LIMITED LIABILITY COMPANIES OVER OTHER

FORMS OF BUSINESS UNITS

1. Specialization/division of labour can easily be exploited compared to a sole trader.

2. More capital is raised with the large number of shareholders than in the case of sole

trade or partnership.

3. Members enjoy limited liability unlike in sole trade or partnership except for limited

partners.

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4. The death or bankruptcy or withdrawal of one member cannot affect the existence of

the business compared to sole trade or partnership.

5. Employment of specialists is possible due to large capital unlike sole trade or

partnership where capital tends to be small.

6. They have greater chances of improving their capital through selling shares,

debentures or borrowing from financial institutions unlike sole traders or partnerships.

7. Company shares are freely transferable hence, an incentive to investors unlike in sole

trade or partnership where owners interest is not transferable.

8.There is a possibility of issuing different types of shares to suit the investment habits

of the different types of people than it is the case in sole trade or partnership.

9. Shareholders are safeguarded against fraud by the publicity of company accounts

unlike in partnership.

LIQUIDATION/WINDING UP OF A COMPANY

This refers to the process of selling off all the assets of a company/business and paying

off its creditors.

Liquidation of a company represents the last stage in its life. A company may be

liquidated voluntarily by shareholders, by the court upon petition from an unsatisfied

creditor.

If the members wish to liquidate the company, the directors are required to file a

declaration of solvency.

A declaration of solvency. This is a document stating that the directors believe that the

assets of the company will be sufficient to pay off its debts. A liquidator is appointed by

the shareholders.

Assets are sold and advertisements are placed in newspapers for creditors to come

forward to prove and claim their debts. If any monies remain after settling all debts, they

are distributed among shareholders.

If directors are unable to file a declaration of solvency, because they think that the assets

will not be sufficient to pay off the companys liabilities, a meeting of creditors is called.

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Creditors then appoint a liquidator of their own choice who supervises the sale of assets

and payments to creditors. In this case, the liquidation is said to be creditors voluntary

winding up.

REASONS WHY/CIRCUMSTANCES UNDER WHICH A COMPANY MAY

WIND UP

1. Where the shareholders pass a resolution at a meeting to wind up the company i.e.

voluntary winding up.

2. If the period, if any fixed for the duration of the company by its articles of Association

expires.

3. When the company can no longer carry out its business because of lack of funds

(indebtedness).

4. If the creditors apply to court for the company to be liquated on the grounds that it has

not paid its debts or is unable to meet its financial obligations.

5. In case it is found out that the number of shareholders does not correspond with the

minimum number.

6. If it does not commence business within a year of issue of the certificate of

incorporation.

7.If the activities or operations of the company become illegal.

SHARES

A share. This is a unit of capital of a joint stock company.

Or; this is a unit of capital of a company contributed by an individual.

When one buys a share in a particular company, he/she becomes a shareholder of that

company.

TYPES OF SHARES

1. Ordinary Shares (Equity Shares). These are shares owned by shareholders with no

fixed rate of dividend from the companys annual profits.

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Dividend. This is the profit distributed to shareholders.

CHARACTERISTICS OF ORDINARY SHARES

1.They have no fixed rate of dividend i.e. the amount of profit allocated to them depends

upon what remains after all the creditors and other shareholders with a prior claim have

been paid.

2. There is no special security for such investments other than the soundness of the

company.

3. When the company is winding up, the shareholders are repaid money after the other

shareholders and creditors.

4. In good years, the ordinary shareholders may receive higher rates of dividends than

the other shareholders but in bad years, there may be no returns at all.

Preference Shares. These are shares owned by shareholders with a fixed rate of

dividend from the companys annual profits.

CHARACTERISTICS OF PREFERENCE SHARES

1. They earn a fixed rate of dividend say 5% or 10% preference shares

2. The dividend is paid after the creditors but before the ordinary shareholders get

anything

3. Capital repayment is also after the creditors but before the ordinary shareholders.

4. The preference shareholders stand a proportionately lesser risk than the ordinary

shareholders but also earn a lower rate of return

TYPES OF PREFERENCE SHARES

1. Accumulative Preference Shares. These are shares entitled to a fixed rate of

dividend until they are paid.

Thus if the company none or little profit in a particular year and the directors decide to

declare no dividend for that year, these shares will get a two years dividend in the

following year. In other words, their dividend keeps on accumulating till it is paid.

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2. Non-accumulative Preference Shares. These are shares entitled to a fixed rate of

dividend, but for only years for which a dividend is declared.

Thus if a company declares no dividend in year one and year two but declares dividends

in year three, the shareholders of non-accumulative preference shares will only get one

years dividend in the third year.

3. Redeemable preference shares. These are shares which can be bought back

(redeemed) by the company after a stated period.

4. Irredeemable preference shares. These are shares that cannot be bought back by the

company.

ISSUE OF SHARES

Once a company receives a certificate of incorporation, it can offer its shares to the

public. The promoters are required to state a minimum amount which they need to

commence the business.

This amount must be raised by the sale of shares before the company is allowed to

commence its business.

Applications for the issue of shares are invited through the press advertisements. A

prospectus of the company is prepared which contains the necessary information about

the company, including the Memorandum of Association.

Members of the public are invited to apply for shares, usually through specially

appointed banks that distribute prospectuses and application forms, and receive

applications for shares and money on behalf of the company.

UNDERWRITING

This is a situation where a commercial bank or an insurance company or a shares broker

promises/undertakes/guarantees to buy any shares of a company that may not be taken

up by the public.

It usually happens when a company feels that it will not be able to sell all the shares it is

offering and therefore, it may get a commercial bank, or insurance company or a shares

broker to underwrite the issue.

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The underwriter is paid a small commission, called underwriting commission for this

guarantee.

SHARE CAPITAL

This is the capital of a company. It is called share capital because it is raised by selling

shares.

TYPES OF SHARE CAPITAL

1. Nominal/Authorized/Registered Share Capital. This refers to the maximum

amount a company may raise by selling shares.

For example, if a company wishes to sell 3,000 ordinary shares of Shs. 1,000 each, its

nominal share capital would be Shs. 3,000,000. This capital is stated in the

Memorandum of association.

2. Called Up Share Capital. This is the amount that the shareholders have been asked

to pay.

For example, if the above company has sold 2,500 of its ordinary shares but has asked its

shareholders to pay only Shs. 800 per share, its called up share capital would be Shs.

2,000,000. The balance on these shares on these shares (Shs. 500,000) would be called

uncalled capital.

3. Paid Up Share Capital. This is the amount that has actually been received from the

shareholders.

For example, if in the case of the above company a shareholder holding 500 shares has

failed to pay a call of Shs. 150 per share, the paid up share capital of the company would

be Shs. 1,925,000 i.e.

Called Up Capital 2500 x 800 = 2,000,000

Less Capital in arrears 500 x 150 = 75,000

Paid Up Capital = 1,925,000

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4. Issued Share Capital. This is the total face value of the shares that have been issued,

whether or not the full amount against them has been called up.

For example, we have seen in the above example that a company has issued 2500 shares

of Shs. 1,000, although only Shs 800 has been called per share. The issued share capital

of this company would be Shs. 2,500,000 (2500 shares of Shs. 1,000).

5. Minimum Share Capital. This is the amount stated by the promoters when making

application for registration of the company as the minimum amount required to

commence trading effectively.

DEBENTURES

A debenture. This is a document that evidences that a company has borrowed a

specified sum of money from the person named on its face, and undertakes to pay a fixed

rate of interest for the loan.

Or; this is a loan certificate representing a certain sum of money lent by the public to the

company.

If a company finds its authorized/registered capital inadequate for its long-term financial

needs, it can raise money by selling debentures.

Debentures are of fixed amounts and usually bear a fixed rate of interest. Whereas

interest on shares is paid out of profits, the interest on debentures is an expense to the

company which must be paid whether the company is running at a profit or not.

TYPES OF DEBENTURES

1. Naked debentures. These are debentures that are not secured i.e. no property is

pledged against them.

If the company goes bankrupt, the holders of naked debentures rank among the ordinary

creditors of the company.

2. Mortgaged debentures. These are debentures that are secured i.e. some property is

pledged against them.

In the event of the companys liquidation, the proceeds of the sale of the pledged property

are used to pay off the holders of mortgage debentures.

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3. Redeemable debentures. These are debentures bought back by the company i.e. the

amount borrowed against them is refunded by the company after a specified minimum

period and before a specified maximum period.

4. Irredeemable debentures. These are debentures that are never refunded. The money

borrowed against them remains outstanding till the company is liquidated.

DIFFERENCES BETWEEN SHARES AND DEBENTURES

1. Shares are paid a dividend while debentures are paid interest.

2. Shares are usually irredeemable while debentures are usually redeemable.

3. Most share holders have a right to vote on the affairs of the company while debenture

holders do not.

4. The return on debentures is restricted to a stated percentage while except for

preference shares, there is no limit on the dividends paid on shares.

4. A share is a unit of capital while a debenture is a unit of loan. This means that a

shareholder is one of the owners of the company but a debenture holder is only a

creditor.

5. When the company is liquidated, debenture holders are paid only the face value of the

debentures held by them plus any outstanding interest while if the assets realize more

than the amount necessary to pay off creditors, shareholders may receive much more

than the face value of their shares.

THE STOCK EXCHANGE

This is a market where already issued shares and stocks are bought and sold.

Stocks. These are fixed interest loans comprising of government bonds, public bodies

loans, and public companies debenture stocks, etc.

In Uganda, the market where shares are bought and sold is referred to as the Uganda

Securities Exchange (USE).

The Uganda Securities Exchange is licensed and regulated by the Capital Markets

Authority. The Uganda securities exchange (stock exchange) was formed in May 1997

upon receiving its license from the Capital Market Authority.

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ROLES/FUNCTIONS OF THE STOCK EXCHANGE

1. It provides ready market to those who want to buy and sell shares.

2. It sets prices for securities i.e. shares of different companies listed on the stock

exchange.

3. It provides companies with the facility to raise capital for expansion through selling

shares to the investing public.

4. It helps to direct a large part of savings by members of the public to invest in joint

stock companies which help in the mobilization of domestic savings.

5. It provides investors with an opportunity to sell their shares when they find a more

attractive security to buy.

6. It publishes useful information in statistical and summary form about various

companies for guidance of booth the investors and the relevant companies.

7. It is used as a measure of a countrys economic progress i.e. stock indices is taken as

indicators of economic progress.

8. It provides the opportunity for small investors to own shares of the same companies as

large investors.

9. It facilitates growth of the related financial institutions like insurance companies and

other financial institutions encourage and support savings.

10. It provides an avenue for divestiture of state owned enterprise e.g. Uganda Clays,

New Vision Publication Ltd, etc.

11. It enables government to raise capital for development projects by selling securities

known as bonds.

12. It facilitates company growth through takeover bid or merger agreement through the

stock market.

13. It enables companies to get long-term finances through selling shares than getting

loans with high interest.

14. It is a source of employment to those who work in it e.g. brokers and jobbers.

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MEMBERS OF THE STOCK EXCHANGE

1. Brokers. These are people who buy and sell shares on behalf of others.

Anybody wishing to buy shares must approach a broker, who will brief him/her on

various matters and offer advice on different types of shares his customer is interested in

buying.

Similarly, a person who wishes to sell his/her shares must also approach a broker who

will try to get him the best possible price. A broker is paid for his services on a

commission basis.

2. Jobber. This is a middleman in the exchange of stocks and securities among brokers.

He is a middleman who buys and sells shares on his own account.

He trades in shares in much the same manner as a wholesaler deals in merchandise.

However, a jobber does not intend to hold shares for investment purposes.

His/her intention is to buy them when they are cheap and sell them as soon as prices rise,

but not to hold them and earn dividends against them.

Note. A broker must buy and sell shares through a jobber. No member of the public is

allowed to sell his shares directly to a jobber.

This is so because if jobbers were allowed to deal directly with the members of the

public, who are not well versed in share prices and related matters, jobbers might exploit

them.

Hence by having a broker in between, who acts mainly on behalf of the members of the

public, their interest is protected.

The difference between the price a jobber pays for the shares he buys and the price he

charges for the same shares when he sells them is called the jobbers turn and this

constitutes his profit.

TYPES OF JOBBERS

1. Bulls. These are jobbers who buy shares when they are cheap expecting to sell them at

a high price.

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2. Bears. These are jobbers who sell shares at a high price and wait to buy back cheaply

when the price falls.

3. Stags. These are jobbers who deal in new issues (stag) and they buy shares in the

hope that prices will soon rise and sell them at a profit within a short period of time.

SPECULATION

The activities of bulls, bears and stages are called speculation.

This is because they all buy or sell shares with a view to make profit when prices

change.

They use their expertise to judge as to which shares value is likely to increase or

decrease in the coming few days and accordingly make their moves.

To an ordinary person, the activities of bulls, bears and stages appear very similar to

gambling, except that whereas a jobber puts his money on stake on the basis of his

judgment, a gambler has no means of predicting the outcome of the bet and relies on

luck.

SECURITIES/PRODUCTS TRADED IN STOCK EXCHANGE

A security. This is any document that gives its holder a right to money or other property

not actually in possession for example a share certificate.

These are;

1. Bearer securities. These are securities that can be transferred by mere delivery

without a transfer form being made out or the transfer being registered by the issuing

company.

2. Blue chips. These are shares in companies of high repute and sound financial history.

3. Bonds. A bond is a loan security issued by a government, nationalized corporation or

a company that carries a fixed rate of interest.

Note. Company bonds are also called debentures.

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4. Gilt-edged. This is a security that is absolutely safe in respect of both the capital

redemption and payment of interest. The best example here is bonds issued by

governments.

5. Portfolio. A portfolio is a collection of various securities held by an investor or

institution.

6. Stock. This a bond issued by a government of local authority signifying a debt.

COMMON TERMS USED IN STOCK EXCHANGE

1. Par Value of Shares/Nominal/face Value of Shares. Par value of a share refers to

the value written on its face.

Or; is the amount for which the shareholder is responsible in the event of a companys

inability to meet its liabilities.

Note. The total par value of a companys shares represents its share capital.

2. Market Value of Shares. This refers to the value at which a share sells on the stock

exchange.

3. Dividends. A dividend is the amount paid out of profits by a company to its

shareholders. Usually, dividends are paid in cash and represent the shareholders return

on the investment held by them.

4. Bonus Shares. These are shares issued usually free by a company to its members out

of accumulated reserves.

It means conversion of distributable profits (reserves) into a permanent share capital.

The effect of the issue of these shares is that the reserves are converted into share capital

and hence rendered a permanent status. They can no longer be distributed as dividends.

Note. The act of issuing bonus shares is called capitalization of reserves and a bonus

issue is called scrip issue.

5. To Go Public. This is an act of converting a private company into a public company,

thereby enabling it to obtain a stock exchange quotation and sell its shares to the general

public.

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6. Institutional investor. This is an institution that makes a business of investing its

funds in various securities, aiming to make profits both by earning dividends or interest

and by selling its investments at a higher price at an opportune moment e.g. insurance

companies.

7. Issuing House. This is a bank that specializes in launching of new issues.

8. Underwriter. This is an institution, or a person who guarantees to a company

launching a new issue that all its shares will be sold.

If any portion of the underwritten issue remains unsubscribed, the underwriter buys that

portion himself.

Note. The underwriter is paid a commission called underwriting commission.

9. Yield rate. This is the rate that shows the true return to an investor on his investment.

It is calculated by expressing the amount of interest or dividend received in a year from a

security as a percentage of its market value.

For example, if a share in Uganda Clays Ltd is being quoted at Shs. 120 but has a par

value of only Shs. 80, with 20% dividend, the yield rate would be arrived at as follows:

Dividend amount = 20% of par value of share

= 0.2 x 80

= Shs. 16

Yield rate = Dividend amount x 100

Market value

= 16 x 100

120

= 13.3%

10. Rights Issue of Shares. This is where the existing members in a company are given

a “right” to buy shares out of the new issue. This right is proportionate to their present

shareholding.

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A company that has profitably operated for some years and now wishes to raise more

capital by selling new shares is likely to command a market price higher than its par

value. Such a company may decide to benefit its members by restricting the new issue to

members only, or by selling the new issue at two prices i.e. a lower price for existing

members and a higher price to other applicants.

However, the shareholders can transfer their right to buy new shares to anybody they

desire (outsiders) at a higher price so as to earn profit.

SELLING PRICES

Shares may be bought and sold at the stock exchange at cum-div or ex-div, cum-rights or

ex-rights, cum-cap or ex-cap prices.

1. Cum-div. Cum-div stands for “with dividend”. After a company has declared

dividends but has not yet paid them, a seller may offer his shares at cum-div price. Here,

the buyer becomes entitled to the dividend that has already been declared.

2. Ex-div. Ex-div stands for without “dividend”. After a company has declared

dividends but has not yet paid them, a seller may offer his shares at ex-div price. Here,

the seller receives the already declared dividend when it is paid by the company and the

buyer becomes entitled only to subsequent dividends, but not to the one that may have

been declared before the date of purchase of shares by him.

Note. A seller would ask for a higher price if he sells shares cum-div than when he sells

them ex-div.

If a security carries interest instead of dividend, for example debentures, the terms may

be modified as cum-interest and ex-interest.

3. Cum-rights. Cum-rights implies with the “right to buy shares out of the new rights

issue” i.e. when a company has announced a rights issue, the buyer becomes entitled to

the right to buy shares out of the new rights issue.

4. Ex-rights. Ex-rights implies without the “right to buy shares out of the new rights

issue” i.e. the seller retains the right to buy shares out of the new rights issue.

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Note. A seller would ask for a higher price if he sells shares cum-rights than if he is

selling them ex-rights.

5. Cum-cap. Cum-cap stands for cum-capital. If a company has declared a bonus issue

but has not yet issued the free bonus shares, the seller may sell his shares cum-cap. Here,

the buyer will get the free bonus shares in addition to the ones he is now buying when

the company actually issues them.

6. Ex-cap. Ex-cap stands for ex-capital. If a company has declared a bonus issue but has

not yet issued the free bonus shares, the seller may sell his shares ex-cap. Here, the seller

retains the right to receive the free bonus shares, hence the buyer only getting the shares

he is now buying.

QUOTED & UNQUOTED COMPANIES

A quoted company. This is one whose shares are bought and sold on a stock exchange.

Members of the stock exchange are allowed to deal in shares of only those companies

that are approved by the stock exchange council.

A company wishing to be approved by the stock exchange council must make a formal

application giving all the relevant details of its business and financial position. If it is

approved, its name will be listed on the stock exchange list and the price of its shares

quoted, hence the term quoted company.

Note. Only public companies can be quoted at the stock exchange because their shares

are freely transferable. .

Unquoted companies. This is one whose shares are not traded on a stock exchange.

Note. All private companies are unquoted, while some public companies may also

decide not to obtain a stock exchange quotation.

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Obtaining a Quotation. This is the act by a company of applying to the Stock

Exchange Council to allow its shares to be included in the Stock Exchange list.

ADVANTAGES OF QUOTED COMPANIES

1. Shareholders find ready market if the want to dispose of their shareholdings.

2. A quoted company stands a better chance of obtaining loans because creditors view

quoted companies more favorable.

3. A quoted company is always aware of the market value of its shares, which serves as a

guide to the investors about the company.

4. A company quoted serves as a guarantee to a new investor who is not fully conversant

with share dealings.

6. They are required to submit their final accounts to the stock exchange council and

from these accounts useful statistics are prepared by the council and made available to

the quoted companies.

STEPS INVOLVED IN THE PURCHASE OF SHARES

1. Approaching a broker. A member of the public wishing to buy shares approaches a

broker who is known as a buying broker.

2. Making inquiries. This is where the buying broker inquires from other brokers if they

have any client who wishes to sell the particular type of shares.

3. Negotiating for the price and writing out a contract note to be sent to the client by the

buying broker.

The contract note gives information about; price of share, brokerage, amount of stamp

duty, or transfer duty, registration fee of the new shareholders name and details of shares

to be bought.

4. Making out a stock transfer form by the selling broker and getting it signed by the

seller for whom he is acting.

5. Issuing the stock transfer form and share certificate by the selling broker to the buying

broker.

6. Making payment by the buyer to the buying broker.

7. Paying the selling broker by the buying broker.

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8.Paying the seller by the selling broker after deducting the selling brokers commission

and tax on capital (if any) on the sale of the shares.

CO-OPERATIVE SOCIETIES

A co-operative society. This is a body of people who have agreed to co-operate with

each other to attain a common objective/goal.

Or; this is a voluntary association formed with a purpose of benefiting its members

through doing a certain thing or act collectively which they were previously doing

individually.

Unlike the other forms of organizations discussed so far, which have one of their main

objectives as making profit, co-operatives differ as profit is not their main objective.

Their fundamental objective is organizing and rendering service to members.

FEATURES OF CO-OPERATIVE SOCIETIES

1. The capital of a co-operative society is raised from members by way of share capital.

2. The owners of a co-operative society are necessarily the consumers or suppliers.

3. They enjoy a separate and independent status distinct from that of its members.

4. At least ten (10) people are required to form a co-operative society.

5. They are voluntary association that any person can join and leave at any time on

his/her free will.

6. Shares are not freely transferred as it is in a limited liability company.

7. They are subject to control by government for instance in Uganda, co-operative

societies are registered under the Co-operative Societies Act 1963 with a minimum of

ten people.

8. Profits/surplus made by co-operative societies is distributed among members in form

of dividends at the end of the trading period basing on services rendered by a member to

the success of the co-operative society.

9. They are controlled by an elected committee of management who are also members of

the society and this is done democratically where each member is entitled to only one

vote irrespective of the number of his/her shares.

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10. Part of the profit/surplus which is not retained is paid out to the members as interest

on capital contributed.

PRINCIPLES/POLICIES OF COORPERATIVE ORGANISATION

1. Open and voluntary membership. This means that membership is open to all those

who can fulfill the regulations of co-operatives and should not be limited by social,

political, tribal, racial or religious differences.

However, they should be adults i.e. 18 years and above with contractual capacity. This

principle provides that to become or not to become a member of co-operative society is a

sole discretion of the person concerned i.e. nobody is forced into registration as a

member. Any person can join and leave at any time.

2. Democratic administration/control. This principle states that the affairs of the co-

operative must be administered collectively and democratically where each member

must have a vote; hence one man, one vote.

Management is elected by all members on the basis of one man one vote in their

meetings where they lay down policies which must be followed to promote their

common interest. This is the basic principle of cooperative societies.

3. Dividend or repayment. This principle states that profits/surplus made by a co-

operative society during a year should be passed on to the members in form of dividends

or repayment at the end of the trading period.

Dividends are distributed according to each members contribution to the firm. If it is a

producers co-operative society, one will be paid according to how much he/she has sold

to the co-operative and if it is a consumers co-operative one will be paid according to

how much he/she has bought from the co-operative.

On the other hand, if it is a thrift and loan co-operative, one will be paid according to the

capital he/she has put in the co-operative society.

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4. Limited interest on share capital. This principle it states that no interest should be

paid on share capital contributed by the members but if the society's constitution

provides for such interest, it should be fixed and known to all members.

The reason for this is that by no paying any interest on share capital or by paying only a

small rate the society is able to pay better dividends to its members.

5.Co-operation with other co-operatives. This principle states that cooperative

societies must cooperate with other cooperatives at local, national and international

levels.

This is because these co-operatives have a lot of things in common, this makes a co-

operative society to be part of the others for example, if co-operative society “B” has

motor vehicles, they can be used to transport goods of co-operative society “C” that does

not have means of transport.

6. Share capital. A minimum share capital must be contributed by each member.

However, one may hold several shares up to the upper limit that may be specified.

7. Neutrality in social, political and economic differences. In order to promote unity

of the co-operatives, members are supposed to remain neutral from all political,

religious, social and economic differences.

8. Education of members. Co-operatives should provide education to members on co-

operative affairs and successful business techniques according to the set objectives of the

organization.

FORMATION OF A CO-OPERATIVE SOCIETY

At least ten (10) people are required to form a co-operative society. They must have

regulations governing them and submit their willingness to form a society to the

Registrar of Co-operatives.

If the registrar finds it worthwhile, he/she registers the society and issues a certificate of

registration which gives it legal powers to commence business. Therefore, people who

want to be registered as co-operators must fulfill the following:

i) A society must have at least ten members capable of entering into contract.

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ii) Members have to draw up regulations to govern them.

iii) Members should be put together by common bond for instance they should be

belonging to a common occupation, village or locality.

iv) Members should present a joint application to the registrar of co-operatives and

particulars relating to membership, share capital, objectives, etc.

TYPES OF CO-OPERATIVE SOCIETIES

1. Consumers Co-operative Societies. These are associations formed by ordinary

people with the aim of buying their requirements collectively and at relatively cheap

price.

They are formed to buy goods from suppliers in large quantities at reasonable prices and

distribute goods to members at a minimum economic price possible. This is the oldest

form of co-operative society.

In Uganda examples of consumer co-operative societies include Lugazi sugar factory

consumers co-operative society and Makerere consumers co-operative society.

Note. The dividends under consumers co-operatives are paid to members according to

how much each has purchased from the society.

2. Producers Co-operative Societies. These are cooperative societies formed to enable

members to market their products collectively.

They are owned and operated by small producers to collectively produce, process,

transfer and market their products so as to fight competition from large scale producers

and retain the profit for the owners.

The society may supply members with raw materials, tools, equipment and other inputs

at lower prices than market prices to enable them compete with large scale producers.

Producer co-operatives have been successful in agriculture and industry and in East

Africa their success is as a result of continued support and protection given to them by

the government.

Examples of producers co-operatives in Uganda include Busoga Growers co-operative

society and Banyankole Kweterana co-operative society.

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Note. The dividends under producers co-operatives are paid to members according to

how much one sells to the society.

3. Savings and Credit (Thrift and Loan) Co-operatives. These are financial

associations/institutions formed for purposes of extending short-term financial assistance

to members and encouraging a habit of thrift (saving) among them.

Members can obtain loans from the co-operative society for various purposes like

improving on the farming methods, buying basic inputs, construction of storage

facilities, buying stock, etc. An example in Uganda is Mengo Teachers Co-operative

Savings and Credit Society.

Note. The word thrift means the quality of being careful not to spend too much money.

The dividends under Savings and Credit Co-operatives are paid to members according to

the capital he/she has put in the co-operative society.

4. Transport Co-operative Societies. These are formed to assist consumer co-

operatives and producer co-operatives and they do not exercise any control over any

primary society. They are formed just to assist primary and secondary societies.

FUNCTIONS OF COOPERATIVE SOCIETIES

1. Getting best prices for the produce by their members thereby making it a profitable

occupation.

2. Collecting, storing and some times processing produce before selling it.

3. Providing members with tools, seeds, fertilizers, insecticides, short-term loans, etc.

4. Providing expert advice and training to members about better methods of production

so as to enable them produce more and better crops.

5. Transporting produce for their members hence saving them transport costs.

6. Providing channels of distribution of whatever loans and help government wishes to

give to members.

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7. Enabling members to buy their requirements at the cheapest prices.

ADVANTAGES OF CO-OPERATIVE ORGANIZATIONS

1. The liability of members is limited to their capital contributions just like limited

companies with the exception of those co-operatives with unlimited liability i.e. the

smaller co-operatives.

2. The death, bankruptcy or withdrawal of one member cannot affect the existence of the

business.

3. The management of co-operatives is in the hands of the management committee which

is elected by all members on the basis of one man one vote which encourages democratic

management.

4. Cooperatives can attract capital so easily from the investing public because of limited

liability that the owners enjoy.

5. They have large chances of improving their capital through borrowing from financial

institutions.

6. Economies of scale are easily reaped as a result of their large scale operation and lump

sum capital stock.

7. Being voluntary organizations, they are easy to form i.e. they do not involve tedious

legal formalities as it is the case with companies.

8. Governments usually provide various privileges and assistance to co-operative

societies because they are viewed as organizations assisting the poor.

9. Specialization or division of labour can easily be exploited because of big

membership and larger scale operation.

10. They cater for the weaker and poorer sections of people by availing them services

cheaply hence they render an important social service for instance consumers co-

operatives.

11. They facilitate the raising of their economic status and thus attempt to reduce

inequalities in terms of income and wealth for example the credit co-operatives.

12. Employment of specialists is possible due to large capital.

PROBLEMS FACED BY COOPERATIVE SOCIETIES

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1. Inadequate collateral security to apply for bank loans.

2. Inadequate funds to finance the business activities since co-operatives are formed by

weaker and poorer people who have limited resources.

3. Lack of committed and skilled administrators, as those who are appointed

democratically tend to be not trained and have their own personal commitments.

4. Language differences due to existence of so many tribes and languages which tends to

hinder effective communication among members.

5. There is lot government interference in their operations like appointment of managers,

election of management committee, passing of budgets, preparation of accounts, etc.

6. Price fluctuations which have made this type of business unattractive and hence have

discouraged members/people to venture in co-operatives.

7. Political instability in some parts of the country where they face theft of their assets

during periods of war and this has discouraged their operation.

8. Inability to save, since co-operatives are in most cases formed by weaker and poorer

people with limited resources.

9. There is slow and expensive decision making since some matters require General

Meetings.

10. There is lack of secrecy as co-operative societies are required to disclose fully their

operations to the members therein who cannot consequently keep the business secrets.

THE PUBLIC SECTOR

This is one where the business activities are controlled by the government. It consists of

establishments/enterprises that are owned and controlled by the government and engaged

in commercial activities.

FORMS OF PUBLIC ENTERPRISES

The public sector consists of the following units: Public corporations, Parastatals and

local government authorities.

1. Public Corporation. This is a joint stock company in which a government holds

either all the capital, or a majority of it.

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It is usually created by an Act of parliament which clearly defines its aims and objects.

Public corporations are formed to provide basic commodities to people at reduced prices

e.g. National Water and Sewerage Corporation (NWSC) in Uganda.

Public corporations operate as ordinary joint stock companies and aim to make a profit

out their operations.

However, these profits are surrendered to the government to provide social services.

Like joint stock companies, public corporations have a share capital which is raised by

selling shares.

2. Local Authorities. They include city, municipal or county councils that may perform

certain commercial functions for example supply of water, bus services, primary

schools, sports grounds.

They finance the purchase of fixed assets by borrowing from the government and

repaying the loan from the revenues earned by them for instance Kampala City Council

Authority (KCCA)

3. Parastatal body. This is an organization set up by government to perform certain

functions that may not necessarily be profit motivated.

However, such bodies provide commercial; services and actually make profits. Unlike

public corporations, Para-statal bodies do not have share capital for example marketing

boards.

4. Marketing boards. These are trading organizations set up by governments to buy

agricultural produce from farmers and sell it to consumers or processors through various

agents.

The major aim of marketing boards is to assist small scale farmers by eliminating

unhealthy competition between them and to ensure a steady supply of essential

commodities to consumers.

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TYPES OF MARKETING BOARDS

1. Commodity marketing board. This is a marketing board which handles only one

commodity or agricultural produce e.g. coffee marketing board.

2. Produce marketing board. This is a marketing board that handles a number of crops.

3. Statutory marketing boards. These are marketing boards set up governments by Act

of parliament.

4. Voluntary marketing boards. These are marketing boards set up producers

themselves. They are registered as corporate bodies and their powers and areas of

operation are defined by their articles and memorandum of association.

5. Advisory marketing boards. These are marketing boards set up to provide expert

advice to the farmers.

FUNCTIONS OF MARKETING BOARDS

1. Buying produce from farmers at reasonable prices hence enabling them to make some

profits.

2. Collecting produce from shambas of farmers where it grows from and storing it

thereby saving them transport and storage costs.

3. Carrying out research into agricultural and marketing problems i.e. conducting control

through research.

4. Giving assistance to farmers in form of fertilizers, pesticides, farming tools, best etc.

at reduced prices; quality seeds, loans, etc.

5. Stabilizing prices for agricultural produce which protects farmers from losses that

may result from price fluctuations.

6. Controlling production by use of quotas so as to control over and under production.

7. Selling produce to local processors or auctioning it thereby providing ready market

for farmers produce.

8. Extending advisory services e.g. expert advice and training to farmers.

PROBLEMS FACED BY MARKETING BOARDS

1. Poor quality produces where farmers mix poor grades with the quality ones.

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2. Transport problems due to bad roads and weather which make movement difficult.

3. Over production where farmers harvest in excess/surplus leading to price fluctuations.

4. Competition from businessmen who privately offer better pay for farmers.

5. Price fixing is difficult where prices fluctuate with the world price market price.

6. Natural disasters like floods, droughts which at times lower yields.

7. Political intervention whereby unskilled administrators may be nominated and the

mess up the board.

8. Corruption and embezzlement of funds by managers which distort the smooth running

of business.

9. Insufficient finance to buy produce from farmers.

10. Inadequate storage facilities which limit output.

11. Political instability in some parts of the country which makes production by farmers

difficult.

REASONS FOR GOVERNMENT PARTICIPATION IN BUSINESS

ACTIVITIES (Reasons for setting up public enterprises)

1. To provide essential services which if left to the private sector would lead to

consumer exploitation e.g. water, electricity, etc.

2. To minimize foreign ownership through nationalization of industry i.e. buying shares

in these businesses.

3. To reduce profit repatriation whereby profit earned by government can be ploughed

back into business.

4. To provide services that are not profitable but are essential e.g. garbage collection.

5. To provide employment opportunities for the citizens.

6. To promote regional balance by setting up enterprises in rural areas that are usually

neglected by the private sector.

7. To minimize wasteful competition due to duplication of services e.g. railway.

8. To ensure national security e.g. through production and supply of arms, money, etc.

i.e. certain activities are risky to be left to the private sector

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9. Certain investments require large sums of capital/money which private sectors may

not afford.

ADVANTAGES OF PUBLIC ENTERPRISES

1. They provide essential services which if left to the private sector would lead to

consumer exploitation e.g. water, electricity, etc.

2. They help to minimize foreign ownership through nationalization of industry i.e.

buying shares in these businesses.

3. They reduce profit repatriation whereby profit earned by government can be ploughed

back into business.

4. They provide services that are not profitable but are essential e.g. garbage collection.

5. They provide employment opportunities for the citizens.

6. They minimize wasteful competition due to duplication of services e.g. railway.

7. They help to promote national security e.g. through production and supply of arms,

money, etc. i.e. certain activities are risky to be left to the private sector

8. They undertake investments that require large sums of capital/money which private

sectors may not afford.

DISADVANTAGES OF PUBLIC ENTERPRISES

1. The government is forced to provide essential services to all citizens and the loss

sustained is passed on to the general public in the form of increased taxes.

2. They discourage private investment especially when operating in a field where private

business also operates.

3. They encourage monopoly power which s characterized by poor services to the public

due to lack of competition e.g. inefficiency in water supply.

4. Government enterprises are usually large organizations hence suffer from

diseconomies of scale.

5. The performance of public enterprises is often poor since there is no profit motive and

employees are not directly answerable to the real owners of the business.

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6. The management of public enterprises is usually in the hands of politicians who may

make decisions that are economically unsound due to little or no knowledge of business

techniques.

PROBLEMS FACED BY PUBLIC ENTERPRISES

1. Political interference whereby political employees without required skills may be

appointed.

2. Corruption and embezzlement of funds by managers which distort the smooth running

of business.

3. Lack of personal initiative since there is no profit motive and employees are not

directly answerable to the real owners of the business.

4. Stiff competition from private companies which discourages government effort.

5. Inadequate funds to finance the business activities as services are provided at zero or

little profit.

6. They suffer from slow and expensive decision making due to bureaucracy

8. Lack of skilled manpower to run the affairs of the business.

9. Political instability in some parts of the country where they face theft of their assets

during periods of war and this has discouraged their operation.

MEASURES THAT CAN BE TAKEN TO IMPROVE THE PERFORMANCE OF

PUBLIC ENTERPRISES

1. Ensuring political stability in the country so as to encourage commercial activities.

2. Fighting corruption and embezzlement of funds.

3. Improving management through training more labour in the public sector.

4. Soliciting for more funds to be invested in the public enterprises.

5. Improving on the existing infrastructure like roads, railway lines, etc.

6. Encouraging privatization of public enterprises.

PRIVATISATION

This is the transfer of ownership and management of publics enterprises from the

government to private individuals.

REASONS FOR PRIVATISATION/SALE OF PUBLIC ENTERPRISES

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1. To bring about efficiency as a result of competition from private firms.

2. To cut down government expenditure on public enterprises.

3. To generate government revenue from the sale of public enterprises.

4. To eliminate corruption and embezzlement of government funds.

5. To create more employment opportunities in the private sector.

6. To attract private investment by attracting foreign investors hence increasing foreign

inflow.

7. To encourage private initiative due to competition that encourages creativity by

private individuals.

8. To expand the tax base through increased investment and production in the private

sector.

9. To allow the government to concentrate on provision of essential services that cannot

be provided by the private sector e.g. security, education, health, etc.

10. To reduce unnecessary bureaucracy in service delivery which is common in the

public sector?

ADVANTAGES OF PRIVATIZATION OF PUBLIC ENTERPRISES

1. It brings about efficiency as a result of competition from private firms.

2. It helps to cut down government expenditure on public enterprises.

3. It generates government revenue from the sale of public enterprises.

4. It helps to fight corruption and embezzlement of government funds.

5. It creates more employment opportunities in the private sector.

6. It attracts private investment by attracting foreign investors hence increasing foreign

inflow.

7. It encourages private initiative due to competition that encourages creativity by

private individuals.

8. It expands the tax base through increased investment and production in the private

sector.

9. It enables the government to concentrate on provision of essential services that cannot

be provided by the private sector e.g. security, education, health, etc.

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10. It helps to reduce unnecessary bureaucracy in service delivery which is common in

the public sector.

DISADVANTAGES OF PRIVATIZATION

1. It increases consumer exploitation due charging high prices by the private firms.

2. It leads to unemployment in the short run as some workers are cutoff in the privatized

firms in a bid to reduce the cost of production.

3. It increases foreign dependency especially when most enterprises are sold to

foreigners.

4. It leads to irrational exploitation of resources because private firms are profit

motivated.

5. It reduces provision of essential goods and services that are less profitable to the

private businesses.

6. It leads to price fluctuations as prices in the private sector depend on the forces of

demand and supply.

7. It results into profit repatriation as most enterprises are sold to foreigners.

8. It increases income inequality as some people in the private sector exploit others and

become rich.

9. It increases product duplication that results into resource wastage.

LIMITATIONS/PROBLEMS FACED IN PRIVATIZATION OF PUBLIC

ENTERPRISES

1. High rates of corruption in the privatization unit by government officials.

2. Underdeveloped capital market that limits sale of shares in public enterprises.

3. High administration costs in the form of advertisement, the many people employed in

the privatization unit, high cost of repairing the enterprises before they are sold, etc.

4. Political sabotage from some politicians who oppose the government programmes of

privatization in order to fail it.

5. Existence of a small market that discourages potential of the public enterprises.

6. Political instability in some areas which discourages potential buyers.

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7. High levels of poverty among nationals which results into selling of public enterprises

to foreigners, hence promoting economic dependency.

8. High opposition from the public due to high levels of ignorance about the benefits of

privatization.

CONTROL OF THE PRIVATE SECTOR

Government is responsible for the control of the private sector in order to protect the

well-being of its citizens.

If this is not done, the objective of the private business to maximize profits would soon

start hurting the general public.

WAYS OF CONTROLLING THE PRIVATE SECTOR

1. Setting up national bureaus of standards responsible for setting standards for quality

of various products made or imported into the country.

2. Instituting price controls on all the essential goods and services so as to minimize

consumer exploitation by profit motivated sellers.

3. Through consumer protection whereby government enforces laws that ensure that a

consumers interest is protected.

4. Exchange control whereby the government restricts the amount of foreign currencies

to be purchased by domestic traders.

5. Through instituting financial control measures such as import restrictions aimed at

maintaining the value of a countrys currency.

6. Through trade licensing where no trader is allowed to conduct business without

holding a trade license.

WAYS IN WHICH THE GOVERNMENT CAN SUPPORT THE PRIVATE

SECTOR

1. Funding research and development in those areas where the private sector cannot

afford.

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2. Funding the development of infrastructure like transport and communication net

work.

3. Encouraging privatization of formally state owned enterprises so that the public sector

does not compete with the private sector.

4. Formulating and enforcing laws that protect private property rights in place.

5. Ensuring political stability in the country so as to encourage commercial activities.

6. Providing a guaranteed initial customer buy helping the private sector to get market

for their output at profitable prices.

7. Organizing and participating in international trade exhibitions and trade fares.

8. Encouraging government sponsored insurance so as to enable private businesses to

access insurance protection at affordable costs.

8. Extending financial assistance to private businesses at zero or affordable interest rates.

CONSUMER PROTECTION

This consists of the various laws enforced by the government to ensure that a consumers

interest is protected, and he/she is not cheated of his/her hard-earned money.

REASONS FOR CONSUMER PROTECTION

1. To protect consumers against high prices especially during scarcity of goods and

services.

2. To guard against consumption of harmful/dangerous/expired goods.

3. To protect consumers from being cheated by use of standardized weights and

measures.

4. To protect consumers from misleading and persuasive advertisements.

5. To protect consumers from consuming any type of imports dumped from other

countries.

METHODS OF CONSUMER PROTECTION

1. Weight and measures Act/Law. This is a business law that ensures that

entrepreneurs use the recommended weighing scales and measurements when selling

goods to consumers.

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2. Food and Drugs Act. This Law ensures that expired drugs and bad foods are not sold

to consumers.

3. Trade description Act. This Law emphasizes specifications for goods produced e.g.

warnings on consumption of certain goods like tobacco.

4. Encouraging formation of business associations to ensure satisfactory standards of

business products e.g. Uganda Manufacturers Association.

5. Instituting price controls on all the essential goods and services so as to minimize

consumer exploitation by profit motivated sellers.

6. Encouraging formation of consumers Associations to protect consumers interests.

7. Issuing licenses to only approved traders to conduct business.

GOVERNMENT REVENUE

Governments provide a number of free or subsidized services to their people e.g.

education, health, maintenance of law and order, defense, assistance to farmers and

businessmen.

These services require a lot of finance which comes from different sources.

SOURCES OF GOVERNMENT REVENUE

1. Use of taxation where government imposes taxes on economic activities to raise

income.

2. Use of fees where people pay for certain services rendered by government.

3. Use of fines and penalties imposed on crime makers like drink drivers on the road.

4. Use of rates imposed on urban private property like land and buildings in strategic

locations of the city.

5. Use of grants and gifts dominated by good Samaritans both within and abroad to

finance certain projects like famine or drought.

6. Use of market dues imposed on traders who put their goods in markets constructed by

government.

7. The government can get loans from either within or abroad to finance its development

programmes.

8. Government can engage in gambling like betting and lotteries to get money.

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9. Sale of government securities like stock, shares, treasury bills and bonds to get money

for public use.

10. Profits from government enterprises that export goods abroad.

11. Money got through compulsory saving schemes like NSSF, insurance companies and

pension scheme to finance expenditures.

12. By privatization where government enterprises are sold off to private individuals to

get money.

13. Rent on government property such as government buildings, spaces and residences.

14. Use of licenses paid by traders to public authorities to get permission for operating

businesses within the country.

TAXATION

This is the process through which governments obtain money from eligible persons by

application of the law.

Or; this is the legal compulsory transfer of funds from the public to the fiscal authority

irrespective of the exact amount of benefits rendered to the tax payer by the government.

A tax. This is a compulsory charge levied by the government or any other competent

authority on persons (individuals, corporations or other legal entities) or on businesses in

order to finance government activities.

Or; this is the amount of money paid by a business to the tax authority. Taxes are usually

collected by a government agency.

In Uganda, this role is preformed by Uganda Revenue Authority (URA) for the central

government revenue and Local administrations for local government taxes.

REASONS WHY GOVERNMENT IMPOSES/LEVIES TAXES

1. To raise government revenue by imposing direct and indirect taxes on different

economic activities in the country.

2. To redistribute income through progressive taxation in which rich people pay more

than the poor.

3. To protect infant industries imposing high taxes on imports to make them expensive.

4. To correct balance of payment by imposing high taxes on imports to limit

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5. To ensure price stability by imposing high taxes to limit consumption.

6. To discourage consumption of undesirable commodities by imposing high taxes on

such goods.

7. To control monopoly by imposing lump sum and specific taxes on such firms.

8.To regulate economic activities in the country by lowering or raising taxes.

9. To promote forced saving for the people in the country.

10. To ensure steady economic growth by providing tax incentives to traders.

11. To discourage dumping by imposing high taxes on cheap imports to limit them.

12. To create more employment by imposing low taxes to local traders.

13. To achieve balanced regional development by imposing high taxes on developed

regions to develop poor areas.

MERITS/ADVANTAGES/IMPORTANCE OF TAXATION IN A COUNTRY

1. It is a source of government revenue to finance tits expenditures.

2. It protects infant industries by making imports expensive on the local market.

3. It improves on the balance of payment by limiting expenditure on imports.

4. It discourages consumption of harmful products like drugs, spirits, cosmetics, etc.

5. It reduces income inequality through progressive taxation.

6. It checks on the rate of inflation by ensuring stable prices in the economy.

7. It regulates on the level of economic activities in the country.

8. It controls monopoly power through imposing high taxes on such activities.

9. It limits exportation of scarce goods to make it available on the local market.

10. It promotes the level of employment in the country.

11. It is used as a means of forced savings like NSSF and pension.

DISAVANTAGES OF TAXATION

1. It reduces peoples welfare because it reduces peoples incomes.

2. It reduces peoples saving due to limited income.

3. It discourages investment due to high taxes on traders.

4. Some taxes discourage hard work like progressive taxes.

5. Taxes divert resources from highly taxed to non-taxed activities.

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6. It creates resentment towards government especially high taxes on incomes.

7. Some taxes worsen income inequalities like regressive taxes in which the poor pay

more taxes than the rich.

8. It increases the costs of production especially high taxes on raw materials.

9. It reduces the benefits and volume of trade especially high taxes on imports.

10. Taxation tends to be inflationary due to high cost of production.

11. Taxation promotes trade malpractices like smuggling.

PRINCIPLES OF TAXATION

This refers to the rules (guidelines) followed when devising a tax system. These include

the following:

1. Equity or fairness. This suggests that a tax payer should pay a tax according to his

level of income.

2. Economy or efficiency or cheapness. This states that the cost of tax collection

should low not exceeding 5 % of the tax revenue collected.

3. Comprehensiveness. This suggests that taxes should cover a wide range of economic

activities to raise enough revenue for government.

4. Certainty. This states that the nature of tax, amount to be paid, when to pay and

where to pay should be well known to the tax payer.

5. Convenience. This states that the time, place and method of tax payment should be

favorable to the tax payer.

6. Consistency. This is where the tax carries the same meaning for many years so as to

avoid public resentment.

7. Productivity. This suggests that a good tax should promote hard work in the

economy.

8. Flexibility. This suggests that a good tax should change according to the prevailing

economic conditions in the country.

9. Simplicity. This suggests that a good tax should be simply understood by both tax

payers and tax collectors.

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10. Neutrality or impartiality. This suggests that taxes should be paid by everybody so

long as one qualifies to do so.

Explain the features of a good tax system.

1. A good tax system should promote equity or fairness.

2. A good tax system should be efficient or cheap.

3. A good tax system should be comprehensive.

4. A good tax system should be certain.

5. A good tax system should be convenient.

6. A good tax system should be consistent.

7. A good tax system should be productive.

8. A good tax system should be flexible.

9. A good tax system should be simple.

10. A good tax system should be neutral or impartial.

CLASSIFICATION/TYPES OF TAXES

a) Classification of taxes according to one's income paid as tax

1. Proportional Tax. This is one where the tax rate is constant regardless of the

different levels of income. eg. corporation tax which is currently 30%.

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2. Progressive tax. This is where the tax rate increases with the increase in the tax

payers income.

3. Regressive tax. This is one where the rate of tax decreases with the increase in

the tax payers income.

b) Classification of taxes according to method/mode of calculation of tax

1. Advalorem tax. This is a tax imposed as a percentage of the price/value of the

commodity. E.g. items like jewelry, cosmetics, cellular phones, etc.

2. Specific tax. This is a tax imposed on a fixed amount of each unit of a tax base or

commodity like per bag or per litre. eg. 100,000/= per tonne of maize flour.

c) Classification of taxes according to method/mode of payment

Under this classification, there are two broad categories of taxes i.e. direct and

indirect taxes.

DIRECT TAXES

These are the taxes levied on the income and property of individuals and business

entities. The burden of the tax is directly borne by the person paying it.

TYPES/FORMS OF DIRECT TAXES

1. Income tax. This is a tax levied on profits or incomes earned by an individual or

business. It is either personal income tax or corporation tax.

2. Personal income tax. This is a tax levied on the income of individuals. It is

normally a progressive tax.

3. Corporation tax. This is a tax imposed on the profits of a company.

4. Wealth Tax. This is a tax imposed on accumulated wealth, capital or savings of an

individual or business. It may be levied on land, buildings, shares or other

investments.

5. Capital gains tax. This is a tax imposed on financial assets that increase in value

between the time of purchase and sale. eg. stocks, bonds, precious metals, etc.

6. Estate duty. This is a duty levied on the estate of the deceased person.

7. Gift Tax. This is a tax imposed on gifts or gratuitously acquired property.

Explain the merits of direct taxes in Uganda.

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1. Direct taxes provide] revenue to government imposed on economic activities.

2. Direct taxes promote fair distribution of income since are progressive in nature.

3. Direct taxes control inflation by reducing consumption.

4. Direct taxes promote hard work since are compulsory to the tax payer.

5. Direct taxes regulate the level of economic activities in the country.

6. Direct taxes regulate monopoly power through taxes on such firms.

7. Direct taxes are flexible in nature since can be increased or reduced any time.

8. Direct taxes are certain since the amount paid is known in time.

9. Direct taxes are simple to understand by tax payers due to the simple language

used.

10. Direct taxes promote economic growth by increasing production of goods.

11. Direct taxes protect infant industries by making imports expensive.

Outline the demerits of direct taxes.

1. They discourage saving due to reduced incomes of people.

2. They reduce peoples welfare as it reduces peoples incomes.

3. Direct taxes discourage hard work especially progressive taxes.

4. Direct taxes promote resentment towards government like high taxes.

5. Some direct taxes increase income inequalities like regressive taxes.

6. Direct taxes lead to high costs of administration due expensive collection costs.

7. Direct taxes are not convenient in nature since are paid at once.

8. Direct taxes are discriminative in nature like progressive taxes.

9. Forces people to divert production from highly taxed goods to avoid paying taxes.

10. They discourage investment especially high taxes on raw materials.

11. They increase the cost of production due to high taxes on raw materials.

INDIRECT TAXES

These are taxes that are levied on goods and services, paid by an individual or business

entity and shifted to the final consumer.

These taxes are voluntary in the sense that you can pay them if you opt to buy the goods

or consume services on which they are levied.

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TYPES/FORMS OF INDIRECT TAXES

1. Customs duty. This is a tax imposed on either imports or exports of a country.

Note. Tax on imports is referred to as import duty while tax on exports is export duty.

2. Excise duty. This is a tax imposed on locally produced goods and services.

3. Sales tax. This is a tax levied as a percentage on goods or services sold.

4. Value Added Tax (VAT). VAT is a tax paid by a customer at the time of purchase of

a commodity.

Or; this is a tax on consumption of goods and services. VAT is levied on value added at

every stage in the chain of production or distribution of goods and services.

State the merits of indirect taxes.

1. They cover a wide range of economic activities in the country.

2. They are only paid when people buy goods and services.

3. They improve on balance of payment by limiting expenditure abroad.

4. Indirect taxes discourage consumption of undesirable goods.

5. They are less felt and resented since one pays when buying goods.

6. They are impartial in nature because are paid by anyone who buys a commodity.

7. They are economical in collection because companies pay direct on government

accounts.

8. They promote hard work especially regressive taxes.

9. They protect local infant industries by making imports expensive.

10. Indirect taxes regulate the level of economic activities in the country.

11. Source of government revenue as imposed on different economic activities.

Outline the merits of indirect taxes in Uganda.

1. They increase income inequality especially regressive taxes.

2. They tend to be inflationary due to high cost of production.

3. They reduce peoples welfare to high prices of goods and services.

4. They result into malpractices. This is because they force people to engage in

smuggling as a way of dodging taxes.

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5. They misallocate resources due to fear to avoid high taxes.

6. They promote public resentment since it makes life expensive.

7. They result into inefficiency like production of poor quality goods.

8. They discourage investment due to high cost of production.

9. They increase the cost of production due to high cost of raw materials.

11. Revenue collection is uncertain due to unstable prices.

Define the following terms.

1. Tax evasion. This is a deliberate refusal by the tax payer to pay the tax assessed on

him. It is illegal and punishable in courts of law for example, smuggling.

2. Tax avoidance. This is where the tax payer exploits the loopholes in the tax system to

pay less or no tax at all.

3. Taxable capacity. This is the ability of the tax payer to pay the tax assessed on him

and remains with enough disposable income to live a standard of living is accustomed to.

4. Tax base. This is an economic entity (activity, income, person, firm, property, etc) on

which a tax is imposed.

5. Dead weight tax. This is the tax which leads to closure of an economic activity which

forms the tax base.

Outline the factors that affect the level of tax revenue in Uganda.

1. Level of tax avoidance.

2. Level of tax evasion.

3. Level of skilled manpower.

4. Level of taxable capacity.

5. Level of development of infrastructure.

6. Level of political climate.

7. Level of tax base.

8. Degree of political interference.

9. Level of economic stability.

10. Size of the industrial sector.

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FACTORS FOR LOW TAX REVENUES IN UGANDA

1. High levels of tax avoidance where some tax payers exploit the weak tax laws to pay

lesser taxes.

2. High rates of tax evasion where many people use illegal means to refuse to pay taxes

imposed on them.

3. High levels of corruption due to tax officials who use part of the revenue for their

private benefits.

4. Limited tax sources due to limited range of economic activities which are taxed.

5. Poor tax administration due to lack of required skills by people who assess and collect

taxes in the country.

6. High costs of administration due to a lot of money put on tax assessment and

collection.

7. Low taxable capacity where most people are poor and hence cannot pay taxes

imposed on them.

8. Political instability which prevents tax collectors from accessing taxable sources.

9. Poor infrastructure due to high cost of transport that makes it difficult for tax

collectors to assess taxes.

10. High levels of tax exemptions due to many people who are freed from taxes.

11. Frequent tax exemptions due to many people who are freed from taxes.

12. Shortage of skilled personnel to handle effective tax collection.

13. Political interference especially from opposition politicians on some taxes.

WAYS OF IMPROVING ON TAXES IN UGANDA

1. Fight corruption through imprisonment of officials who steal public funds.

2. Ensure political stability to allow tax collectors assess taxes effectively.

3. Sensitize the masses on the importance of taxes to increase tax payments.

4. Encourage use of fair tax system on all income groups.

5. Encourage proper use of taxes to attract more people pay taxes.

6. Improve on a countrys infrastructure to ease movement of tax collectors.

7. Develop a tax payers friendly system of tax collection for all types of tax payers.

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8. Train personnel with necessary skills of effective tax assessment.

9. Strengthen and implement tax laws to limit tax dodgers.

10. Improve and strengthen tax administration to encourage more people pay taxes.

UGANDA REVENUE AUTHORITY (URA)

This was set up in 1991 by the URA statute No. 6 of 1991 as a central body for the

assessment and collection of taxes in the country.

FUNCTIONS/ROLE OF URA

1. To assess and collect taxes for government expenditure.

2. To give accountability to the Ministry of Finance for all the revenue collected.

3. To facilitate trade and investment in the country.

4. To advise government on matters of policy related to tax administration.

5. To reduce dumping of goods in the country.

6. To discourage production and/or consumption of harmful products e.g. cigarettes,

alcohol etc.

7. To protect domestic infant firms against foreign and local competition.

8. To regulate the level of economic activities in the country.

9. To re-distribute income and wealth among individuals or firms or sectors.

MEASURES USED BY URA TO INCREASE REVENUE IN UGANDA

INSURANCE

This is an aid to trade which aims to compensate the unfortunate traders for the losses

suffered out of the risk insured.

Or; this is the protection against events which may or may not occur such as fire, theft,

accidents, etc.

Or; this is a promise of compensation for future losses in exchange for a periodic

payment.

An individual or organisation may seek protection against the insurable risks with the

insurance companies but must pay for the service an amount known as premium.

What is meant by the term Assurance? This is the cover against events that must

happen at a given time like retirement, old age and death.

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HOW INSURANCE COMPANIES WORK

Insurance companies work on the theory that only a few people out of a given lot are

likely actually to suffer a loss.

If each of the persons involved contributed a small amount, there would be sufficient

money available to pay compensation to those who have been unfortunate enough to

experience a loss. This process is the pooling of risks by members.

In the event of loss the insured person or business entity is evaluated on the basis of the

type of insurance taken is if found appropriate is compensated for the actual loss and no

more.

COMMON TERMS USED IN INSURANCE

1. Risk. This is the event against which insurance is taken out.

Or; this is something that can cause financial loss to a business. E.g. Machinery

breakdowns, theft, fire, death, burglary, looting, storms and floods, dishonest of

workers, change in demand, etc.

There are two types of risks namely;

a) Insurable risks. These are risks that can be legally insured. This implies that an

entrepreneur will only take out insurance against risks that can legally be insured.

Such risks include death, fire, machinery breakdown, theft, etc.

As can be seen, an entrepreneur can to a reasonable degree control these risks (except

death) by taking appropriate measures in and out of his/her business.

b) Non-insurable risks. These are risks that cannot be legally insured and in the event

of their occurring, the insurance company cannot be legally compelled to compensate.

E.g. acts of war, floods, lightening, etc.

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2. Pooling of risks. This is where people exposed risks make small financial

contributions (premium) to the insurance company which makes a pool from which

compensation is made.

3. Insurer. This is the insurance company that provides the insurance cover or

protection.

Or; this is the company that receives the premium and guarantees protection to the

insured.

In Uganda examples of insurance companies in Uganda include National Insurance

Company (NIC), Excel Insurance, Jubilee Insurance, Greenland Insurance, etc.

4. Insured. This is the person or company that takes out an insurance policy and is

promised compensation by the insurer in the event of loss.

5. Premium. This is the amount of money paid by the insured to the insurer as

consideration for insurance cover provided by the insurer.

Note. This money forms a pool from which compensation is made to those who suffer

losses.

6. Sum insured. This is the total value of the property insured as stated by the owner at

the time of applying for insurance.

Or; this is the value the insurer would compensate the insured in case of loss.

However, the amount paid as premium depends on this sum insured which can either be;

a) Under insurance. This is where the insured under declares the value of his property

at the time of taking up an insurance policy and pays less premium.

In the event of the loss he will be paid only the sum insured which is less than the actual

property insured.

b) Over insurance. This is where the insured over declares the value of his property at

the time of insuring.

In this case the insured will be charged a higher premium but in the total loss of the

property, he will only be paid the correct value of the property.

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Note. Over insurance and under insurance may lead to cancellation of the insurance

contract.

7. Re-insurance. This is where the insurance company insures the same risk with

another insurance company.

Or; this is a practice where an insurance (insurer) company transfers a portion of its risk

to another (re-insurer). E.g. taking up an insurance for a large air craft.

8. Co-insurance. This is the spreading of risks by an insurance company among several

insurance companies.

Or; this is a practice where valuable goods are insured by more than one insurance

company.

Certain properties are too valuable and the risks involved too great to be effectively

covered by one insurance company.

For such cases, insurers prefer to spread the risk among several insurance companies,

insuring only a portion with each company.

9. Assessor. This is an insurance expert who determines the amount of compensation to

be paid to the insured in the event of loss.

10. Actuary. This is an insurance specialist who calculates the amount of premium to be

paid by the insured.

11. Surrender value. This is the money given back to the insured when he decides to

cancel the insurance contract before the specified period.

Or; this is the amount of premium refunded to the insured who cancels the insurance

contract.

Note. He cannot get all the money secured by the insurer as part of it is used to process

the exit.

12. No claim bonus. This is the discount given to the insured when he makes no claim

from his policy. This reduces the amount of premium that may be paid to the insured in

future should the risk occur.

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13. Policy. This is the agreement between the insured and the insurer containing all

terms and conditions of the insurance contract.

14. Settlement. This is the compensation given to the insured in the event of loss which

can either be cash, repair of the asset, etc.

15. Proposal form. This is a form filled by a person applying for insurance and is

willing to pay the premium.

16. Cover note. This is the document issued by the insurer when the insured pays the

first or initial premium and is accepted by the insurer. It is followed by issuance of a

policy.

17. Insurance policy. This is a document of insurance which constitutes the

contract/agreement between the insured and the insurer. It contains all the terms,

conditions and warranty of the contract.

18. Claim form. This a document filled by the insured claiming compensation in the

event of loss.

19. Renewals. This is the act of extending the contract for further period after expiry of

the first one.

20. Loss. This is the happening of events against which insurance is taken.

There are two types of losses i.e. total loss and partial loss.

a) Total loss. This is when the whole property is completely destroyed.

b) Partial loss. This is when only a part or portion of the property is destroyed.

PRINCIPLES/DOCTRINES OF INSURANCE

1. Utmost Good Faith (Contract Uberrimae Fides). This requires the person applying

for insurance to disclose all the relevant facts about the property being insured to enable

the insurer assess its premium rightly.

E.g. a person who wishes to take a life insurance but does not disclose that he has a

chronic disease at the time of taking out the policy will not be compensated if dies of a

chronic disease.

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2. Subrogation. This states that in the event of loss after the insured has been fully

compensated the claim, the rights the insured had over the scrap is passed over to the

insurer. E.g. if Dickson Capoloni insures his car against an accident and is paid for the

loss, the car wreckage is taken over by the insured.

3. Indemnity. This requires that the person insuring does not make any profit or gain

from his property, but in case of loss, the insurer only restores him to his original

financial position before the loss.

E.g. if fire destroys one's shop, which he insured, the role of the insurance is to help him

to re-establish his shop.

4. Proximate cause. This states that there must be fairly a close connection between the

cause of the loss and the actual risk insured against to enable the insured to be

compensated. E.g. if a restaurant is insured against theft by fire, he cannot be

compensated because the cause of the accident (fire) is not the insured risk (accident).

5. Insurable interest. This principle requires that a person or firm insures only the

property in which he stands to incur a financial loss in the event of destruction.

E.g. an entrepreneur should not insure his friend's property because he has no insurable

interest in it.

6. Contribution. This states that in the event of loss of the property insured in more than

one insurance company, compensation is shared by the co-insurers.

Note. The first five are regarded as the basic principles of insurance i.e. utmost good

faith, insurable interest, indemnity, doctrine of proximate cause and subrogation.

STEPS INVOLVED IN TAKIN UP AN INSURANCE POLICY

1. Making inquiries with the insurance company or insurance agents like brokers

through filling a proposal form.

2. The insurance expert calculates the premium that the applicant is likely to pay

3. The applicant is requested to pay the first premium and a temporary agreement known

as a cover note is given to him by the insurer.

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4. The insurance policy is later given to him after the grace period of 30 days which is an

agreement between the insured and the insurer showing all the terms and conditions of

the contract.

5. The claim should be made immediately the loss occurs by the insured to the insurer

stating the details of the loss.

6. The insurer arranges to survey the property to assess the extent of loss and this is

carried by the assessors.

7. On receipt of the survey report, the insurer pays the due compensation to the insured.

This makes the end or expiry of the contract as soon as the claim is settled.

What is meant by the term Gambling?

This is an act of game where people work on probability or chance/luck. E.g. betting

over the winners of football matches, winners of an election, etc.

Outline the similarities between gambling and insurance.

1. In both cases, many people contribute towards a common pool.

2. At least two or more members are involved. E.g. in insurance there is the insured and

the insurer while in gambling there are gamblers.

3. In both cases, either chance or misfortune determines who takes money from the pool.

4. Many people contribute but one or few take the money.

5. They both involve some element of gaining by either party. E.g. if the risk does not

happen, the insurer takes all the money while in gambling, the winner benefits.

Give the differences between gambling and insurance.

1. Insurance aims at helping an unfortunate person who suffers a loss while, in

gambling, the money paid to a winner is a prize.

2. In insurance, the event insured may never happen while in gambling, the event

speculated must happen to decide the winner.

3. One must have insurable interest in the property is insuring while there is no such a

condition for a gamblers.

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4. Insurance is a legal business which is recognized by the state yet, gambling in most

cases is illegal and a social crime in society.

5. Insurance helps the unlucky ones to be restored to their original position while in

gambling, one person must gain while others lose.

6. In gambling, the winner does not suffer any loss while in insurance, it is the loss

sufferer who is compensated.

7. There is utmost good faith in insurance while in gambling people use a lot of tricks to

win.

8. In insurance, money paid (premium) can be in installments or in full while in

gambling it is paid at once in full amount and taken at once by the winner.

9. In insurance only one party, the insured contributes money while in gambling all the

parties must contribute the money to be taken by the winner.

10. To undertake a policy in insurance, some procedures must be followed like

documents are used while in gambling, documents may not be used.

Define an insurance agent.

This is a person who is authorized by insurance company to issue temporary cover notes

and accept premiums from the insured. The agent is paid commission out of the

premium paid.

CLASSES/TYPES OF INSURANCE IN BUSINESS

There are two main classes of insurance namely; Life Assurance and General insurance.

LIFE ASSURANCE

This is the insurance (cover) against an event that must occur like life or death, old age,

retirement, etc.

Here, one can take on life assurance for retirement where he benefits or against his won

life where its only his dependants who benefits after his death.

TYPES OF LIFE INSURANCE POLICIES

1. Whole life policy. This requires payment of premiums throughout the life of the

insured, or until death. The sum insured is only paid to the dependants.

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2. Endowment policy. This requires payment of premium for a specified period of time

with the sum insured becoming payable on his death or at the expiry time which ever is

earlier. This policy is meant to benefit the insured after retirement from the job or during

old age.

3. Group life assurance. This is where families or business partners take out insurance

to provide pension during old age. Small businesses take up such policies for their

employees. It can also be taken up by a cooperative society.

4. Sickness policy. This covers against specified diseases or all forms of curable

diseases. The insurer pays for the medical bills of the insured and other expenses

involved depending on the contract.

Note. Life insurance policies are basically saving plans taken out more by individuals.

PROPERTY/GENERAL INSURANCE

This is insurance of a property that the insured has an insurable interest in. It has three

sections or departments namely; Accident, Fire or Marine insurance.

TYPES OF GENERAL INSURANCE

1. Accident insurance department. This covers a wide range of possible risks that may

happen in the work place, homes, while driving, while in overseas, or on holiday.

POLICIES UNDER ACCIDENT DEPARTMENT

i) Motor policy. This is one which covers vehicles, property or people injured or

destroyed in an accident. This is compulsory to all drivers because it protects the owners

and drivers on the road in traffic accidents.

The policy caters for car repairs, or replacements, compensate the injured drivers and

any passengers.

It may be third party or comprehensive in that;

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a) Comprehensive policy. This covers all parties involved in an accident. E.g. damage

to the vehicle, property, injury to the driver, passenger or other people like pedestrians.

b) Car theft policy. This covers the losses incurred after theft of the vehicle.

Note. The third party is compulsory to for all motor vehicle owners and it is called third

party because it involves three parties namely; the insurance company, the insured and

any other person like cyclist, driver, pedestrian, passenger and other vehicles.

ii) Personal Accident policy. This covers an individual against accidents caused by

motor vehicles.

iii) Employers liability policy. This is taken by employers to protect workers against

injured during work.

Or; this is one which protects the employers against injury caused by negligence or

mistakes by his workers.

iv) Public liability policy. This is taken by shop owners factories or contractors to cover

against injures to members of the public as a result of the factory or business operation.

v) Fidelity Guarantee. This covers against the dishonesty of employees who may steal

cash or goods of the business. E.g. embezzlement, forgery, fraud by employees by like

cashiers, bursars, accountants, managers, etc.

vi) Cash in Transit. This covers against loss of cash or money while in transit from one

place to another.

vii) Goods in transit policy. This covers against loss of goods while in transit from one

place to another.

viii) Plate glass policy. This covers against loss or injury caused to the public or

workers by plate glass used in windows and doors f commercial buildings.

ix) Bad debts policy. This covers the losses arising from the customers failure to pay

the firms debts.

x) Aviation and Aviation hull policy. This covers personal accidents and cargo

damages due to air craft crushes.

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xi) Machinery break down and consequential loss. This covers against loss resulting

from machinery breakdown and consequential losses.

FIRE DEPARTMENT

This consists of insurance covers for domestic premises and their contents.

POLICIES UNDER FIRE INSURANCE

i) Fire insurance policy. This protects business against loss resulting from fire

outbreak.

ii) Theft and burglary. This covers against loss resulting from theft or burglary of the

business property. It is common with banks, factories, companies, and other business

people.

iii) Floods, lightning, war and rioting. This protects the property against loss caused

by fire and lighting strikes.

iv) Consequential loss insurance. This protects against loss of earnings following fire

outbreak or other damages to property caused by fire.

v) Buildings and content insurance. This protects against loss due to fire, theft, floods,

the building and its contents.

MARINE INSURANCE DEPARTMENT

This is the insurance of ships and goods in ships. This department is divided into two

namely;

a) Marine Hull insurance. This protects ship owners from accidental damage to their

ship and its fixtures for a particular journey or period.

Or; this is one which protects vessels from damage or loss due to a storm or collision of

ships on the sea.

b) Marine Cargo insurance. This is an insurance policy which covers goods in ships or

in ports.

c) Ship owners liability. This covers ship owners for the possible damages to other

ships or injury to passengers or crew members and pollution of the water or beaches.

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d) Freight insurance. This provides ship owners with compensation if not paid for their

transport services during delivery of goods or cargo.

POLICIES ISSUED UNDER MARINE INSURANCE

1. Voyage policy. This protects the vessels of the insured for a particular journey.

Or; this is an insurance policy which provides coverage for goods in transit by sea

during the entire transit period irrespective of how long it takes.

2. Time policy. This is an insurance policy that covers risks arising during a specified

period. E.g. Three months.

3. Floating policy. This covers loss on a particular route for a specified period of time.

4. Open policy. This is an insurance policy that provides cover against loss or damage to

goods on any journey at any time.

5. Mixed policy. This is an insurance policy that covers the aspects of both a voyage

policy and a time policy.

MARINE LOSSES

1. Actual total loss. This is where the vessel or goods are damaged completely on the

sea.

2. Constructive total loss. This is where the ship or cargo is repairable or recoverable

respectively. However, if the ship or cargo suffers a partial damage, it is referred to as

Average in marine insurance.

The average may be general or particular.

i) General Average. This is where some of the cargo has to be abandoned so as to

secure the safety of the ship and the rest of the cargo. In this case, the loss is borne by

the ship owners and thus the owners of cargo are saved.

ii) Particular Average. This is where part of the cargo or the ship suffers damage and

the partial loss sustained is borne by either the owner of the ship or cargo as the case

may be.

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Note. While taking out a marine insurance policy, the insured must clearly state if he

wishes to be covered for both general and particular average as well as total loss.

What is meant by insurance policy contract?

This is a document of insurance which constitutes the agreement between the insured

and the insurer. It contains all the terms, conditions and warranties of the contract. It is

the most important document of insurance.

HOW INSURANCE COMPANIES MAKE PROFIT

The main source of income for insurance companies is premiums and their main

expenses are claims and administration costs.

Another important source of income for insurance companies are investments made out

of the premiums that are not immediately required.

These are invested in profit bearing securities which forms a part of the insurance

companies profits.

FACTORS CONSIDERED IN DETERMINING THE PREMIUMS TO BE PAID

BY THE INSURED

1. The type of the policy. High premium is paid for very expensive and valuable assets

and properties than cheap ones. E.g. ship owners liability has a higher premium than

motor accident policy.

2. Age of the property. Old items are charged high premiums because they face more

risk of damage than the new ones.

3. Nature of property. Delicate (fragile) and inflammable goods like glass and fuels are

charged high rates because they stand a high risk of damage compared to others.

4. Age of the person. Older people in case of life insurance pay high premium than

young ones because of their life expectance factor.

5. Level of precautions. Lower premiums are paid by the insured who take strict

precautions to prevent the occurrence of the problem.

6. The statistical record. Frequent happening of the risk results into high premium

compared to limited occurrence of the risk.

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7. The number of the applicants. More people applying for the policy reduces the

amount of premium compared to limited people going for the same policy.

PROBLEMS FACING THE INSURANCE INDUSTRY IN UGANDA

(Reasons why insurance services are not commonly used in Uganda)

1. Insurance services in Uganda are limited to urban areas at the expense of villages.

2. Insurance benefits are invisible and only realized after their occurrence to the insured.

3. Business people in Uganda lack huge valuable assets worth insuring due to high

poverty.

4. Many insurance companies are still small and hence have limited capital for

expansion.

5. Insurance companies are charged high taxes by the government.

6. Political instability in some areas affects the insurance industry.

7. The procedure of taking up an insurance policy is difficult and not understood by

many people due to high level of illiteracy.

8. There is little awareness about insurance which makes people ignorant about such

services.

9. The insurance society is misunderstood as a gamble and curse to society thus has

limited market.

10. Insurance contract is regarded as additional expense which increases the cost of

running the business.

11. There is excessive competition among the insurance companies such that some

companies do not have clients and can not male profits.

12. Loss of trust among people in insurance business. Some insurance companies are

reluctant to compensate the insured and others take long to settle the insured clam.

13. Many businesses in Uganda operate on small scale and hence there is no need for

insurance for example a hawker of ground nuts.

14. Inflation has affected the insurance business because of increasing prices of goods

and services which increases the operational expenses of the insurance company and

hence lowers the profits.

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BENEFITS/ROLE OF INSURANCE IN DEVELOPMENT OF TRADE

1. Life assurance policy acts as collateral security to provide business finance.

2. It acts as a means of saving for the people. E.g. whole life insurance, where the

insured saves money for the whole of his life to benefit his dependents.

3. It gives confidence to business people to undertake investment since they are

safeguarded against all risks like fire, theft, etc.

4. It ensures continuity of business by compensating the unfortunate few who suffer

losses.

5. Insurance companies act as trustees to their clients who would like to get loans from

commercial banks.

6. Insurance promotes trade because traders are able to import or export without fear of

loss.

7. It contributes to growth of the economy through pooled resources which are invested

in infrastructure like roads.

8. Customers increase their trust in the entrepreneurs business as a result of the

assurance in his/her business continuity.

SERVICES OFFERED BY INSURANCE COMPANIES TO THE BUSINESS

COMMUNITY

1. They compensate the unfortunate few who suffer loss and therefore restore them back

to business.

2. They give business community confidence to undertake risky business ventures.

3. They contribute to growth of the economy through pooled resources that are invested.

4. They help to reduce the cost of social services in that funds are provided jointly to

assist victims.

5. They all individuals and business people to save money that can be used to cover

unexpected emergencies for example life assurance.

6. Insurance companies also give loans to businessmen who operate on large scale and

have collateral security.

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7. Incase of life policy, it can be used for getting a loan.

TRANSPORT

This is the movement of raw materials, products and people from one place to another.

It is an important aids to trade because it makes commodities available to consumers at

the right time and place.

It is the most important commercial activity that helps to bridge the gap between the

producer and a consumer through the “actual movement of goods”.

ELEMENTS OF TRANSPORT

1. Way. This refers to anything along which a unit of carriage moves from one place to

another. Eg. on land, by air, on water, etc.

Ways are either natural like water and air or man-made like roads, railway lines or

bridges. Natural Ways are free but man-made Ways cost large sums of money to

construct and to maintain.

2. Unit of carriage. This is the facility used to move raw materials, products and people

from one place to another. E.g. trucks, lorry, train, ship, boats, an aeroplane, wagon, etc.

3. Method of propulsion/motive power unit. This refers to the power/ force/energy

that drive the unit of carriage.

Or; this is the driving force of the unit of carriage. E.g. petrol engine, jet engine and

electric motor. The choice of the method of propulsion depends on the size of the truck,

ship, etc; speed desired and the fuel available.

4. Terminal. This is the starting or ending point in the transportation process of raw

materials, products or people.

Or; this is the place where goods are loaded and off-loaded. Eg. railway station, car and

bus park, air port, etc.

Note. The starting terminal of one unit of carriage is the end point of another.

For example, a railway station marks the end of the journey of goods by train, but they

must still be moved from the railway station to the place they are needed by say, trucks.

FORMS OF TRANSPORT

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The there are three major forms of transport namely; Land, Air and Water transport.

Land transport may be by road, railway and pipeline. Water transport by sea or inland

water ways like rivers, lakes or canals.

AIR TRANSPORT

This is the transportation of goods or people by air. It is the fastest form of transport for

cargo and people over long distances.

It can either be managed by government or the private sector.

Examples of goods commonly transported by air transport are perishables and they

include; Vegetables, Flowers, Beef & Butter and other perishable goods.

ADVANTAGES OF AIR TRANSPORT

1. It is the fastest means of transport suitable for perishables, people and urgently needed

goods.

2. It is a very comfortable form of transport with the state of the art facilities like foods,

videos, drinks, goggle maps, etc offered on planes.

3. It provides better security and protection for passengers and cargo due to strict

security precautions used on planes.

4. It is more convenient for carrying valuables and delicate/fragile goods over long

distances.

5. It is not affected by traffic congestion and jam on the way like road transport.

6. It is more reliable as it has a fixed time table of arrival and departure.

7. It has special classes for different categories of people hence can cater for such

arrangements.

8. There is less documentation associated with transporting cargo by air than sea.

9. There are less insurance costs charged on goods transported by air due to less time

and damages.

10. Aeroplanes are used to make aerial spray of pesticides and insecticides.

11. There is no need to spend any money on the construction of any air way compared to

trains or roads.

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12. It promotes national defense because modern wars are conducted with the help of

aeroplanes.

DISADVANTAGES OF AIR TRANSPORT

1. Air transport is very expensive for both passengers and cargo due to heavy capital

investment and maintenance costs.

2. It can be affected by bad weather conditions like fog which can lead to cancelling of

some flights.

3. It has a limited carrying capacity and therefore not suitable for carrying bulky and

cheaper goods.

4. It is not suitable for carrying certain highly flammable goods like petroleum.

5. In case of accident by air transport nothing can be saved if the accident is fatal.

6. Air transport is limited in developing countries due to high costs of construction and

maintenance of ports.

7. It causes air and noise pollution which affects the health of people.

8. There is a possibility of goods being loaded on a wrong flight.

9. In case luggage gets lost, it doesnt come on time.

LAND TRANSPORT

Land transport may be by road, rail or by pipeline.

This involves the movement of goods and passengers from one place to another on

roads. It involves movement of goods and passengers by trucks/trailers, Lorries and

buses.

ROAD TRANSPORT

This is where physical goods, raw materials and people are moved by vehicles, on land

from one place to another.

The unit of carriage here include; bicycles, wheel barrows, animals like camels, etc and

sometimes human porterage.

Note. Road transport is the central method of transport on which all other forms rely.

ADVANTAGES OF ROAD TRANSPORT

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1. Road transport is flexible in that it can easily switch to other routes offer door to door

services and is most accessible to many parts of the country.

2. It is cheap and fast over short distances because of low operational costs and handling

charges.

3. It is cheap to maintain and construct roads since some of the inputs are stones and

labour obtained locally.

4. It is not restricted to operating on a fixed time table since it allows movement of

goods and people at any time of the day.

5. It facilitates advertising where business creates awareness by use of logos, phrases,

paintings and printed materials on the sides of vehicles.

6. It promotes enroute selling of goods and services hence suitable for itinerant trading

compared to other forms of transport.

7. It is suitable for short distances and good for delivering perishables over short

distances.

8. Insurance companies charge lower premium rates for road transport than others due to

the nature of losses in the event of accidents.

Explain the reasons why road transport is popular in Uganda

DISADVANTAGES/PROBLEMS FACED WITH ROAD TRANSPORT

1. Poor roads especially murram roads that are easily damaged by heavy rains and

traffic.

2. High costs of transport due to high prices of fuel.

3. Highway robberies which lead to heavy losses to the businessmen.

4. Loss of goods in transit due to high rates of accidents.

5. Delays in delivery of goods due heavy traffic congestions.

6. Damages on goods in transit which cause losses to the traders.

7. It can only handle limited quantity of bulky and heavy raw materials like timber, coal,

cement compared to railway transport hence not economical over long distances.

8. It increases social costs in terms of air pollution, noise and damage which increase

government expenditure.

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9. It slower to plan for return journeys because no time table is used which increases

operational costs.

10. Road transport is more prone to accidents than other forms due to poor roads and the

poor state of vehicles.

RAILWAY TRANSPORT

This involves that movement of goods and passengers by wheeled vehicles running on

rail tracks especially the train.

Railway transport started in 1825 and in Eat Africa the first railway line was laid in

1901.

Each country has its own policy framework for railway transport management and in

Uganda its mainly in the hands of private investors. E.g. rift valley Railway Company.

What is meant by the term a railway or railroad?

This is a guided means of land transport, designed to be used by trains for moving both

passengers and freight.

ADVANTAGES OF RAILWAY TRANSPORT

1. It is cheaper to use over long distances compared to the road hence it facilitates long

distance travel.

2. Large quantities of goods are delivered at a time because of a large carrying capacity.

3. Its carrying capacity is flexible in that elastic it can be increased by adding more

wagons.

4. It is a source of employment for people who work in it like loading and offloading

cargo.

5. It is a source of revenue to government through taxing the goods carried by this

system.

6. It facilitates transport of bulky goods which are not easily transported through motor

vehicles. E.g. copper and coal.

6. It helps in the quick movement of goods from one place to another at the time of

emergencies like famines and scarcity.

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7. It is possible to plan for return journeys since trains are time tabled compared to

others.

8. It can transport goods to certain destinations without charging the unit of carriage

where extensions are constructed for private traders.

9. It is the safest form of transport due to limited accidents and breakdown compared to

other forms of transport.

10. It offers special services where specialised containers carry special items like fuel

and livestock.

11. It does not suffer problems of congestion since its way is always clear.

12. It is economical to run on a large train in terms of labour because one driver and one

guard can manage a train with 35 carriages, each with a load of up to 20 tons compared

to road transport.

DISADVANTAGES OF RAILWAY TRANSPORT

1. It is very slow for short distances hence unsuitable for perishables and urgently

needed goods.

2. It is very expensive to set up and maintain since it requires stations and calling centers

at different points of the country.

3. It is not flexible because it cant deliver goods from door to door since its routes are

fixed.

4. It is not readily available because it operates on a fixed time table.

5. Chances of damages are high due to increased handling from one wagon to another

during transit.

6. It is associated with delays at stations which delays delivery of goods to their

destinations at times leading to pilferage.

7. It is unsuitable and uneconomical for carrying small consignments over short

distances.

8. Railway transport is mostly found in towns that are provided with this facility at the

expense of villages.

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9. It involves much time and labour in booking and taking delivery of goods through

railways as compared to road transport.

10. As railways require huge initial capital, they may give rise to monopolies and work

against public interest at large.

CIRCUMSTANCES WHEN A TRADER MAY PREFER RAILWAY

TRANSPORT

1. When the goods involved are heavy and bulky.

2. When the weather conditions are not favorable for road transport like during heavy

storms.

3. When the return load is planned as trains follow a fixed time table.

4. When road transport is the only form of transport available in the area.

5. Where goods are not urgently needed like speed and urgency not considered in the

contract.

6. Where there is need to avoid traffic congestion in the delivery of goods or raw

materials.

7. When the goods to be transported are not perishable.

8. When the goods have a direct destination. E.g. from Malaba to Mombasa.

9. Where special type of cargo is to be transported using special designed wagons of the

train.

10. For reliability as trains operate on a fixed time table.

PIPELINE TRANSPORT

This is the movement of gases and liquids like water, gas and petroleum products from

one place to another through a pipe line. Other products include; kerosene, diesel, jet

fuels, gasoline, white oils, etc.

In Uganda pipeline transport is commonly used by national water and Sewarege

Corporation for transporting water and disposing sewerage.

ADVANTAGES OF PIPELINE TRANSPORT

1. Large volumes of goods can be transported from one place to another.

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2. It is suitable for transporting goods on rough terrain where it is difficult to construct

roads and railways.

3. It is cheap and easy to maintain once the pipeline is constructed.

4. It provides a reliable, fast and regular service unless there is a major problem.

5. It is a safe and reliable mode of transport with fewer accidents.

6. There are less risks of pilferage of the goods compared to other means of transport.

7. It is flexible in that even those ion rural/remote areas can be served.

8. It is not affected by bad weather conditions like road transport.

9. It reduces the rate of deterioration of roads as the number of huge tankers is reduced

by pipeline transport.

10. It reduces the number of road accidents due to reduced number of heavy tankers on

roads.

11. It is convenient since it involves zero or little handling operations like in sea

transport.

12. It requires little labour and hence less troublesome.

DISADVANTAGES OF PIPELINE TRANSPORT

1. Pipes are very expensive to construct and install.

2. Pipes may contaminate water due to rusting.

3. It is limited to transportation of gases and liquids.

4. It may lead to pollution and environmental degradation due to leakage of petrol

products.

5. It may be wasteful if not used to full capacity.

6. Pilferage and leakages are not easy to detect in time resulting into heavy losses.

7. Natural disturbances like earth quakes can break pipes leading to losses.

8. It is not flexible because once pipes are laid they remain in the same place which

makes it difficult to serve other areas.

9. It reduces employment opportunities as less labour is required.

WATER TRANSPORT

Water transport may be by sea, or by lakes, rivers or canals.

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LAKE TRANSPORT

This involves the movement of goods and people on lakes using small steamers and

boats. The volume of goods transported by this means is however not very large.

Steamers. These are ships or boats that are powered/operated by steam i.e. steamships.

ADVANTAGES OF LAKE TRANSPORT

1. It is suitable for products with long lead times.

2. It is free and does not require any special infrastructure like roads, and airports, hence

being cheap.

3. It promotes international trade e.g. Lake Victoria that connects the three East African

countries of Uganda, Kenya and Tanzania.

4. It is ideal for transporting heavy and bulky goods which may not be transported by

road transport.

5. It requires cheap motor engines/powers than for airplanes.

DISADVANTAGES OF LAKE TRANSPORT

1. Lakes do not allow large ships to be used.

2. It serves very few towns that have access to lakes.

3. It is a very slow means of transporting goods hence leading to delays in delivery.

4. Delays in loading and off-loading process may affect the quality of goods.

5. It could prove to be more expensive than rail and road transport.

SEATRANSPORT

This is the movement of goods and passengers water, lakes, rivers, canals and sea.

It is mostly used by countries surrounded by suitable water bodies.

It involves use of various vessels to carry goods and passengers that include the

following;

1. Liners or Ocean liners. These are ships that follow a regular time table used in

sailing on fixed routes and have a dual purpose.

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Note. Liners may be passenger liners or cargo liners. They are organized in liner

conferences or group of liners operating a long a given route following particular rules

and regulations.

What is a liner conference?

This is an organisation of liners come together and work collectively to regulate

competition in the industry.

2. Tramp steamers or tramps. These are ships which do not follow a regular timetable

or route but can go any where they find business.

They are sometimes referred to as chattered ships because they can hired by companies

to deliver goods and their charges are determined by the demand and supply of steamers

and liners at the time.

What is meant by a Charter party?

This is the agreement written the shipping company and the owner of the goods to be

carried.

Or; this is a contract by which the owner of a ship lets it to others for use in transporting

a cargo.

A charter party can either be a voyage charter or time charter party.

i) Voyage charter party. This is one which constitutes a contract of carriage for a given

period or voyage.

ii) Time charter party. This is one which constitutes the contract of carriage for a given

period of time.

The charter party contains some of the following information;

i) Name and tonnage of the vessel.

ii) Name of the vessel captain.

iii) Names of the letter to the fright and the freighter.

iv) The place ant time agreed upon for loading and discharge.

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v)The price of the fright.

vi) The demurrage or indemnity in case of delay.

vii) Such conditions as the parties may agree upon.

3. Bulk carriers. These are large vessels purposely built and designed to transport

specific goods like crude oil put in containers, perishables in refrigerated ships or car

carrier ships.

4. Container ships. This is built to carry large but standard containers.

5. Roll-on Roll-off. These are large ferries used to carry vehicles which are driven on

and off until they reach the final destination.

6. Obo ships. These are bulky oil carriers which use different holds to transport a mixed

cargo at the same time their holds can be completely sealed one from the other.

WATER TERMINALS

These are starting and ending points in water transport which may include ports,

harbours, and all accessible sea sides with adequate equipment.

Or; they are places where ships anchor for loading and offloading cargo.

A good terminal should have the following;

i) It should have enough space wide range of cargo and people.

ii) It should have adequate equipment to handle all kinds of cargo like loaders,

automatic cranes, etc.

iii) It should have a good communication system to make business transactions easy

and simple.

iv) It should have adequate security for safe custody of cargo and workers.

v) It should have supportive commercial services like banking, and insurance to

facilitate trade.

vi) It should have skilled staff to repair and service the vessels, accountants for

accounting and book keeping.

What is meant by the term Demurrage?

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This is an extra charge imposed on the hired ship if not unloaded within the required

time.

Define Stevedore?

These are people employed to assist loading and offloading of ship.

ADVANTAGES OF SEA TRANSPORT

1. The “way” is free i.e. no country has to pay anything for the use of the sea.

2. Very large ships may be built to increase tonnage and reduce carriage costs.

3. Special ships like oil tankers may be constructed to carry special types of goods.

4. It is suitable for long distances that other forms of transport may not afford.

5. It is suitable for heavy goods like machinery which may not be carried by other forms.

6. Small power is needed to drive a vessel, so that large vessels are possible and

economies can be achieved.

DISADVANTAGES SEA TRANSPORT

1. It is a very slow means of transporting goods and results into delayed delivery.

2. It is very difficult to monitor the location of goods while in transit.

3. It is subjected to a lot of Customs and Excise restrictions

4. Landlocked countries which have no access to the sea are ignored by the form of

transport e.g. Uganda.

5. Large sums of money are needed to construct artificial harbours where the natural

ones are non-existent.

6. It is characterized by port congestion which leads to delays in delivery of goods.

7. Pilfering of cargoes is common which leads to heavy losses though containerization is

doing much to reduce this.

8. Delays in shipping and port handling may affect the quality or flavor of cargo.

9. The possibility of contamination of cargo is great because sea water is corrosive and

also liable to affect the quality and flavor of cargoes.

ADVANTAGES OF WATER TRANSPORT

1. It is free from traffic congestion compared to road transport.

2. It promotes international trade by bringing many counties together.

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3. It does not require any special infrastructure like roads, and airports.

4. It requires cheap motor powers than for airplanes.

5. Water transport possesses a high load carrying capacity compared to other forms.

6. Most important in security of nation

LIMITATIONS OF WATER TRANSPORT

1. Area of water transport is restricted as lakes, rivers and oceans are free gifts of nature.

2. It is a very slow means of transporting goods and results into delayed delivery.

3. The danger of sinking of boats and ships makes this form of transport less safe.

4. High chances of attack on boats sailing through.

5. In deep sea if boat gets in to storm, it becomes difficult to rescue.

6. In waterfalls having many drafts, water transportation does not work.

7. Special maintenance for water tightness of ships is costly.

CONTAINERISATION

This is a modern system of transporting goods in standard metal or wooden containers.

Or; this is the packing of goods in standard and sealed containers by the exporter or his

agent and then sent to the buyer.

This is in two forms;

i) Full container load (FCL). This is where the load in the container belongs to one

owner or was filled by one importer.

ii) Less container load (LCL). This is where the container is filled with goods of

different owners or importers.

ADVANTAGES OF CONTAINERIZATION

1. It enables accommodation of large quantities of goods within the container.

2. It protects goods from bad weather conditions e.g. sunshine, rain, etc.

3. It saves time and labour due to use of modern machines in loading and offloading of

cargo.

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4. Insurance premiums are low due to limited risks involved in containerization. E.g.

safety.

5. Special containers may be built to handle special types of goods e.g. chemicals, gasses

thus reduced risks.

6. It safeguards goods from loss or damage since containers are properly sealed and

handled.

7. It minimizes the cost of constructing warehouses since goods are safely kept in

containers.

8. It eases the transportation of goods by road on trucks.

9. It saves space as containers take up small space compared to packets not in

containers.

10. Containers are used for other purposes like offices, shops which benefits the owner

after carrying goods.

11. It minimizes cases of pilferage/theft as the contents in containers are not known or

exposed.

DISADVANTAGES OF CONTAINERIZATION

1. It is not suitable for small quantities of goods which cannot fill the container.

2. It requires special machinery which may prove expensive to construct and maintain.

3. Containerization increases the cost of goods to the importer.

4. It reduces employment opportunities as machines are used to handle the

goods/containers.

5. It is not suitable for certain items like living things and items of awkward or irregular

shape.

6. It is not suitable for perishable goods because containers are mostly transported by

slower means of transport as they are bulky.

7. A lot of space is required for construction of port terminals mainly for storage

purposes.

8. It requires training of workers specialized handling particular tasks of

containerization.

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9. There is a lot of congestion in areas where containers are loaded and offloaded which

delays transportation.

SEA PORT

This is a harbour or town having facilities for seagoing ships.

It is a land facility designated for reception of personnel or materiel moved by sea,

DRY PORT/INLAND PORT

This is an inland terminal directly connected by road or rail to a seaport and operating as

a centre for the transshipment of sea cargo to inland destinations.

In addition to their role in cargo transshipment, dry ports may also include facilities for

storage and consolidation of goods, maintenance for road or rail cargo carriers and

customs clearance services.

The location of these facilities at a dry port relieves competition for storage and customs

space at the seaport itself.

TRANSPORT COMPANIES

These are organizations or individuals who make a business of carrying other peoples

goods from one place to another.

Such organizations are called common carriers. Common carries may be local or

universal

Local common carriers operate on fixed routes and accept goods for only those

destinations that are served by their routes.

Universal common carriers operate on a much wider scale and accept goods for any

destination within a country.

RIGHTS AND DUTIES OF CARRIERS

The rights, duties and responsibilities of common carriers are defined by the carries Act

of 1930 and they include:

1. Carriers have a right to demand payment of charges in advance. However, they do not

exercise this right in the case of regular customers with whom they have arrangements

for monthly payments.

2. They have a right to refuse delivery of goods until their charges have been paid.

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3. They must exercise due care and deliver the goods without unreasonable delay, or

they are liable for damages.

4. Carriers are responsible for the safety and prompt carriage of goods and their

responsibility ends when:

i. they deliver the goods at the consignees address.

ii. twenty four hours after they have informed the consignee of the arrival of goods.

Note. If the goods are not collected within the above specified time, a carrier assumes

the position of a warehouseman and becomes entitled to charge an additional fee for this

service.

CONSIGNMENT NOTE

This is a document of instruction by the consignee to the transport company (consignor)

telling them what to do with the goods.

Usually, larger transport companies have their own consignment notes printed which

they ask the consignor to fill in and sign.

They usually print the terms and conditions under which the goods are accepted for

transport on the back of the consignment note.

Therefore, a consignment note may also be defined as a document prepared by a

consignor and countersigned by the carrier as a proof of receipt of consignment for

delivery at the destination.

It is used as an alternative to bill of lading especially in inland transport. Any

businessman wishing to send his goods through a common carrier, hands over the goods

along with a consignment note.

Consignor. This is the person sending goods.

Consignee. This is the person to whom goods are sent.

Consignment. These are the goods being sent by the consignor to the consignee.

Note. A consignment note is neither a contract of carriage nor a negotiable instrument.

TERMS OF DELIVERY

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Goods may be sent under two terms i.e. either at companys risk (C.R) or at owners risk

(O.R)

When goods are sent at companys risk, the transporter is responsible for the safety of the

goods. However, when goods are sent at owners risk, the transporter is liable only if the

goods are destroyed by the negligence of the transporters employees.

Note. Transporters usually charge higher rates for companys risk to cover the insurance

premium.

POST OFFICE AS A CARRIER

Goods may be sent through parcel post. The Post Office accepts both air and surface

mail parcels. They however charge higher rates than common carriers and are often

slower at delivery.

Here, the person sending a parcel is issued with a receipt if he prefers to register it and

the addressee is notified of the arrival of the parcel.

Delivery is against identification or post box authority card.

FACTORS THAT DETERMINE THE MODE OF TRANSPORT TO BEUSED

1. Nature/kind/type of goods. Perishable and fragile goods which need special handling

require a fast means of transport like air or road transport other than water transport.

2. Cost of transport. The cost of transport should be relatively cheap compared to the

value of goods to be carried to avoid the goods becoming to expensive.

3. Size of load. Bulky goods are best transported by rail and Lorries while light goods

could be transported by air or road.

4. Distance to cover. For goods crossing continents and oceans, water transport would

be used while roads would be preferable for short distances.

5. Speed and urgency of goods. For goods that are required urgently, a fast mode like

air transport is preferable compared to railway or water transport.

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6. Value of goods. Valuable goods like precious minerals (gold, diamond, and mercury),

computers, watches, televisions, etc. may be transported easily by air than water

transport.

7. Flexibility. The method to select should flexible in order to make delivery of goods to

the final destination if possible for example road transport.

8. Availability and safety of the mode. The mode selected should be one that is safe

and reliable and safe for transporting goods whenever need arises.

IMPORTANCE/ROLE OF TRANSPORT IN DEVELOPMENT OF TRADE

1. It helps in the movement of goods from one place to another i.e. from the point of

production to market thereby creating utility.

2. It helps in the movement of people/traders as they carryout trade.

3. Transport facilitates advertising of goods and services hence creating market and

promoting production.

4. It enables labour and other factors of production to be moved at the time they are most

needed hence facilitating production.

5. It helps in the transportation of commercial documents like letters, invoices, contracts,

etc. to areas of need.

6. It improves the standards of living by availing consumers a variety of goods, hence

widening their choice.

7. It helps in the transferring of surplus raw materials and products from areas of plenty

to areas of scarcity which stabilizing prices.

8. It promotes specialization and exchange since finished goods are transported from

areas of production to the market.

9. It widens market for goods and services by facilitating the sale of goods and services

in distant places, leading to mass production.

10. It enables and supports agriculture leading to its commercialization since agricultural

products can be carried to the market centers.

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11. Transport promotes tourism by helping in the easy movement of tourists which

increases government revenue.

12. It is a source of employment to those in transport industry hence earning them

income.

13. It makes it easy to exploit new and distant resources like forests, oil, etc.

PROBLEMS FACING THE TRANSPORT INDUSTRY

1. High construction and management costs which makes it expensive to construct

bridges across water bodies, roads in hilly areas and maintaining them.

2. Roads are damaged by heavy rains destroying bridges and digging ditches in roads

making them impassable.

3. Inadequate technical skills with few engineers qualified to construct roads and

bridges.

4. High levels of corruption which makes construction of roads very costly and

unaffordable.

5. High levels of robbery by thugs on the roads in which travellers are robbed of their

property and cash.

6. Existence of limited transport networks in the country.

7. There are few roads in the country and those available are not planned leading to

congestion during rush hours.

8. Some areas in Uganda are not accessible by any form of transport especially the hilly

and highlands.

COMMUNICATION

This is the act or means of producing, conveying, receiving and understanding of

information between persons who may or may not be in one place.

Or; this is the passing on information from one person or area from one area to another.

Just as it important to transport goods from one place to another, it is equally important

that information and ideas be conveyed from one person to another.

Today, the commercial world is a very large and a very wide place.

EFFECTIVE COMMUNICATION

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This is the transferring information from the sender to the receiver with information

being understood by the receiver as communicated by the sender.

ESSENTIALS/ PRINCIPLES OF EFFECTIVE COMMUNICATION

These refer to the aspects which must be taken into account in all media of

communication. These are;

1. Correctness. The message given should be as correct as possible in order to avoid

misconceptions.

2. Clarity. The message should be as clear as possible. The communicator must be clear

about the objective of the communication, what is to be communicated and the medium

to be used for this purpose.

3. Completeness. The message should include facts the receiver needs to know about

the subject matter on which it is being communicated.

4. Conciseness. The sender should give the message in the fewest words possible. i.e.

not be too wordy to confuse the receiver.

5. Preciseness. The message should be specific to the point i.e. it should not be vague or

too general.

6. Courteous. The sender should be as sincere while giving the message to avoid

hurting the receiver.

7. Consideration. The sender should have the receiver in mind when sending the

message. i.e. use positive words other than negative sentences.

8. Timing. The message should be conveyed at a time when the receiver is able to

receive or listen to it.

9. Environment. This should be good to facilitate the intended receiver get the message

well.

THE COMMUNICATION PROCESS

This is the systematic way/steps followed to convey a message between different parties.

This can be illustrated below;

An illustration of the communication process

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1. Sender. This is the source of the message. He originates an idea or a thought, and he

initiates the communication.

2. Message. The message is the form in which the sender encodes the information he

wants to send.

It may be in any form that can be experienced and understood by the receiver, using any

of the five senses.

A message may be oral whereby it is heard, it may be written and read by receivers, it

may be felt by touch, it may be seen or it may be tasted.

3. Encoding. This is when the sender translates the idea or thought into some symbols.

The sender encodes the message in form of words or gestures that he believes have the

same meaning and will convey the required meaning to the receiver.

4. Medium/channel. This is the method of transmission of the message from the sender

to the receiver. It is usually inseparable from the message. The medium includes paper

for written, air or phone for oral message, cameras and video equipment for visual

message, etc.

5. Receiver. The receiver is the person who receives the message from the sender. This

is the person for whom the message is intended. The receiver may be more than one

person.

6. Decoding. This is the process by which the receiver interprets the message and

translates it into meaningful information. Decoding is a two step process involving

perceiving the message and then interpreting it.

7. Feedback. Feedback is the reversal of the communication process, in which a reaction

to the senders message is expressed.

Communication is effective only if the desired message has been properly encoded,

transmitted, decoded and understood.

Sender Message Encoding Medium Receiver Feedback Decoding

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Feedback goes through the same steps as the original communication. It can take the

form of a nod of a head, spoken acknowledgement, letters, certain actions like increased

output and others.

TYPES OF COMMUNICATION

ORAL COMMUNICATION

This is where information or messages are passed verbally from one person to another

through the word of mouth.

It includes individuals conversing with each other through direct contact, speeches,

presentations, meetings, discussions, through telephone, radio, television or recorded

messages.

ADVANTAGES OF ORAL COMMUNICATION

1. There is high level of understanding and transparency as it is interpersonal i.e. it based

on two-way communication

2. It is very fast and time saving for instance communication by telephone.

3. It is easy and pleasant to use for example telephone.

4. It is cost effective i.e. it saves money and efforts e.g. telephone.

5. Feedback is spontaneous thus decisions can be made quickly without delay.

6. It encourages teamwork and group energy e.g. meetings.

7. It is flexible in that it allows changes in decisions previously taken.

8. It is suitable in case of problem resolution i.e. it enables conflicts/differences to be put

to an end by talking about them.

9. It simplifies and facilitates the transmission of information between people working in

different areas

10. It improves employees morale in an organization.

11. It encourages international trade for example use of telephones.

DISADVANTAGES OF ORAL COMMUNICATION

1. Oral communication has no formal record of transaction hence lacks reference.

2. Oral communication is not easy to maintain and unsteady.

3. Lengthy and distant communications cannot be effectively conveyed verbally.

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4. Long speeches in case of meetings consume a lot of time hence time wasting.

5. Oral communication is unfair because it does not favour the deaf.

6. There may be misunderstandings when the information is not complete.

7. Oral communication costly especially when sending messages over long distances.

8. Oral communication is associated with distortions and selfishness especially in

meetings.

TELEPHONE COMMUNICATION

This is the transmission of messages through telephone. It involves transmission of

speech over a distance either by electric signals or radio signals.

A telephone. This is an instrument that converts voice and other sound signals into a

form that cab transmitted.

ADVANTAGES OF TELEPHONE COMMUNICATION

1. It is convenient and easy to use.

2. It allows immediate two-way communication.

3. It is much faster than the channels of communication, hence it is time saving.

4. It is possible to contact any person at any time because of this it is much faster.

5. Telephone service allows for communication over great distances, across large bodies

of water and even on the slopes of the highest mountains.

6. Mobile telephones can be a lifesaver in an emergency, especially in remote areas.

DISADVANTAGES OF TELEPHONE COMMUNICATION

1. It is more difficult to establish a close and harmonious relationship on the telephone.

2. It is difficult to avoid misunderstandings ad you cannot use visual behaviour to get

feedback.

3. It cannot be used by the deaf.

4. Judgment is only based on the words you can hear and the way they are being said.

5. It is not possible to see the other person you are communicating to which deprives you

most of the information you would normally have about him/her i.e. body language, eye

contact, etc.

WRITTEN COMMUNICATION

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This is communication in form of printed messages.

Or; this is one which involves writing and reading which may take the form of letters,

notices, newspapers, etc.

It takes forms like printing letters, memos, newspapers, magazines, journals, posters,

business cards, catalogues, telegrams, financial statements like the balance sheets,

income statements, etc. and writing of information while communicating to one another

for instance use of business letters, office memos, reports, policy manuals, etc.

ADVANTAGES OF WRITTEN COMMUNICATION

1. There is a lesser chance distort the messages carried on with written communication.

2. Written communication assists in proper delegation of responsibilities to subordinates.

3. It is usually made in a systematic manner and with a lot of care, thus it is more

accurate.

4. It has a large scope in that a firm can send written messages all over the world.

5. It is suitable for detailed messages like use of letters.

6. Business secrets are maintained in written communication.

7. Effective written communication develops and enhances an organizations image.

8. It caters for the deaf provided they can read and write.

9. It services as documentary evidence by providing records that can be used for future

use.

10. As written communication is kept as a permanent record, it has legal acceptance in

eye of law.

11. Written communication creates a positive image or goodwill among the customers.

12. Written communication does not involve the physical movement of the person which

saves on the risk of movement.

DISADVANTAGES OF WRITTEN COMMUNICATION

1. It is only applicable to those who can read and write.

2. Telegram messages may be too brief to provide the necessary information.

3. It is time wasting prepare, write, read and interprete written work.

4. Delays in reply are common with letters that go for long distances.

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5. Written messages take long to reach the receiver especially in developing countries.

6. It is expensive in terms of stationery, employees and postage.

6. People may not always read written messages.

7. Effective written communication requires great skills and competencies in language

and vocabulary use which is inadequate.

8. Poor writing skills and quality have a negative impact on organizations reputation.

FORMS OF WRITTEN COMMUNICATION

1. Electronic mail (e-mail). This is a way of sending messages through computers.

Or; this is a system of world-wide electronic communication in which a computer user

can compose a message and send it.

2. Memorandum (office memo). This is an official note from one person to another in

the same organization. Memos are mainly used to communicate short messages.

COMPONENTS/CONTENTS OF A MEMO

1. Heading. This gives the business name, address, telephone number, e-mail, etc.

2. Document title. This gives the document identification i.e. MEMO.

3. From. It shows where the Memo is coming from.

4. To. It indicates the person to whom the Memo is addressed.

5. Date. This shows the date when the Memo was written

6. Reference. This is used to assist in identification of the subject matter and to whom

the Memo is being written.

7. Subject heading. This gives a brief indication of the content of the Memo.

8. Body of the memo/content. It shows the details of the content of the Memo a

paragraph form.

9. Enclosures. This states any other document attached to the Memo.

10. Carbon copy (C.C). It shows a copy or copies of the Memo circulated to other

officers in the organization who may need to know about the information

communication.

Note. Unlike the business letter, the Memo has no salutation and supplementary close.

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Example

Write a Memo to your purchasing manager asking him to write a letter to your suppliers

complaining about faulty supplies.

Below is an illustration of an office memo would appear:

Notices & posters.

A notice. This is a piece of paper or a sign giving information, a warning, etc. that is put

in a place where every one can read it. Notices are usually put on the organizations

notice board(s).

Below is an illustration of a notice

ROSA ENTERPRISES LIMITED P. O. Box 319, Lugazi

TEL: 0759 242321

From : Managing Director

To : The purchasing Manager

Ref : GEL/M1/PM/24/02/08

Date : 24th February 2008

Subject: FAULTY SUPPLIES

Can you write to MK Wholesalers and tell them we are really unhappy with their last order. Say we are sorry but we cant simply accept the goods in their current condition. Say we want the goods replaced at once or we will have to cancel the order. Ask them to let us know what they are going to do about it. Thank you Suzie.r ROSA Kirabo Managing Director

INTERNAL MEMO

BALYANE YOUNG CHRISTIAN SCHOOL P. O. BOX 112 Kampala

Tel: 0414 510266

23 February 2009

To: All Teaching Staff SUBJECT: LATE COMING: It has been noticed with great concern that almost 60% of staff have been arriving late this week. This notice serves to remind all staff members that you should be at the workplace

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Business letters/correspondence. This is a method of written communication which

involves writing letters and sending them through the post office to be delivered to the

addressee or they may be directly delivered.

A letter. This is a message written down or printed on paper and usually put in an

envelope and sent to somebody, an organization or business.

It is used to send information from the business organization to an individual or another

business organization on specific areas of interest between the business and the

addressee.

COMPONENTS/CONTENTS OF A BUSINESS LETTER

1. Letterhead. This is a pre-designed and printed paper showing the business name,

address, telephone, e-mail, vision, mission, slogan, etc. Instead of using a plain paper,

this is the paper that may be used to write a business letter.

2. Reference (Our Reference). This is used to assist in identification of the subject

matter and to whom the letter is being written.

NOTICE

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Each business organization adopts its way of referencing its letter and documents.

Reference can be done either on the basis of the sender, subject, addressee, the month

date and year, etc. e.g. GEL/L2/ISS/30/01/2012 where GEL is an abbreviation of the

business name Rosa enterprises Limited), L2 means letter two, ISS is an abbreviation for

the addressee (Iganga Secondary School) and date i.e. 30 January 2012.

Note. Each business organization can adopt its own referencing that is convenient to it.

3. Date. All letters should have a date. The date can be written as 30 January 2012 or

January 30, 2012.

4. Inside address. The inside address gives the name and address of the addressee i.e.

the person or organization to whom the letter is being addressed. Each item should have

a separate line.

5. Salutation. This refers to the formal greeting used to commence the letter. For

instance “Dear Sir” used in case of the addressee is a man or “Dear madam” used in case

the addressee is a lady.

A personal name can also be used, for example Dear peter, if the addressee is known to

the sender or you may use the title of the person or department.

6. Subject heading. This gives a brief indication of the content of the letter. Capital

letters or bold print is used.

It is in most cases indicated as indicted as RE: …. The subject heading is always

underlined.

7. Body of the letter. This gives information to the addressee (receiver). It is usually

presented in form of paragraphs to show different ideas in the letter.

8. Complementary close. This is a general closing to the letter. Normally, we use yours

faithfully or yours truly if Dear sir/madam has been used or yours sincerely if the name

of the receiver has been used.

Notice that when you are writing your closing of more than one word, only the first

word is capitalized and is always followed by a comma (,) for instance Yours faithfully,

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9. Signatory. All business letters should be signed. The signature should always be

written in ink, neatly and legibly below the closing.

10. Name of the sender and title (designation). This is the person who has written the

letter. These two are written below the signature i.e. signature, name and the title each

appearing on an independent line.

11. Enclosures. If the letter has any other document enclosed, it should be stated by

using the abbreviation (Ecn”.)

12. Carbon copy (C.C). A copy or copies of the letter can be circulated to other officers

who may need to know about the information communication.

FORMAT OF A BUSINESS LETTER

There are two ways of presenting a business letter i.e. the blocked format style and the

indented format/style.

1. Blocked format. This is one where all parts of the letter begin from the left margin.

Modern business organizations use blocked style. Here, paragraphs are indicated by

skipped lines as illustrated below:

Example

Write a letter to your supplier complaining about goods you ordered and have since

never been received.

ROSA ENTERPRISES LIMITED P. O. Box 319 Lugazi TEL: 0759 242321 Our Ref: GEL/OD3/MK/29/04/07 29th April 2007 The Sales Manager MK Wholesalers P. O. Box 461 Tororo Dear Sales Manager, RE: DELAYED DELIVERY On April 4

th 2007, we ordered 50 boxes of soap and we enclosed a cheque for Ugx

350,000/=. You have cashed the cheque but the goods have never arrived. According to your quotation dated April 3

rd 2007, the goods were supposed to be delivered

one week from order. What happened? If for any reason our order cannot be fulfilled, then I think you should refund the firms money or else maybe we place another order. We look forward to hearing from you soon. Yours truly,

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2. Semi-blocked format. This is one where all parts of the business letter except the

senders address and the complementary close begin from the left margin as illustrated

below.

This normally used on a pre-designed and printed paper showing the business name,

address, telephone, e-mail, vision, mission, slogan, etc. i.e. letterhead as illustrated

below.

Semi-blocked format

Indented format

ROSA ENTERPRISES LIMITED

P. O. Box 319 Lugazi TEL: 0759 242321

Our Ref: GEL/OD3/MK/29/04/07 29th April 2007 The Sales Manager MK Wholesalers P. O. Box 461 Tororo Dear Sales Manager, RE: DELAYED DELIVERY On April 4

th 2007, we ordered 50 boxes of soap and we enclosed a cheque for Ugx.

350,000/=. You have cashed the cheque but the goods have never arrived. According to your quotation dated April 3

rd 2007, the goods were supposed to be delivered

one week from order. What happened? If for any reason our order cannot be fulfilled, then I think you should refund the firms money or else maybe we place another order. We look forward to hearing from you soon.

Yours truly, Edinie

NEKESA Edina

Purchasing Manager C.c Storekeeper C.c Accountant

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This is referred to as the traditional business letter.

3. Indented format/style. This is referred to as the traditional business letter where the

date and reference appear on the same line.

The inside address and salutation are blocked. The subject heading is centered while the

paragraphs are indented. The complementary close, signature, name and title of the

sender begin from the centre as illustrated below.

ROSA ENTERPRISES LIMITED

P. O. Box 319 Lugazi TEL: 0759 242321

Our Ref: GEL/OD3/MK/29/04/07 Date: 29th April 2007 The Sales Manager MK Wholesalers P. O. Box 461 Tororo Dear Sales Manager,

RE: DELAYED DELIVERY

On April 4th 2007, we ordered 50 boxes of soap and we enclosed a cheque for Ugx

350,000/=. You have cashed the cheque but the goods have never arrived.

According to your quotation dated April 3rd

2007, the goods were supposed to be delivered one week from order. What happened?

If for any reason our order cannot be fulfilled, then I think you should refund the firms money or else maybe we place another order.

We look forward to hearing from you soon.

Yours truly,

Edinie

NEKESA Edina

Purchasing Manager C.c Storekeeper C.c Accountant

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Note. C.C means a carbon copy was sent to the storekeeper and the accountant.

Business reports. A report is a communication tool used to explain complex situations

that cannot be ordinarily explained in a simple letter or meeting where a variety of issues

may be considered.

Or; this is information which has been thoroughly researched and presented in an orderly

manner either orally or in written form.

In business, reports are important in two perspectives. They report to superiors the

numerous and complex things that take place in an organization on a periodical basis.

And two, they are used when there is need to study or investigate a non-regular

occurrence or need to understand issues not common in day to day management.

State any two qualities of a good report.

1. It must be on one clearly defined subject.

2. It omits irrelevant information.

3. It includes everything the reader needs to know.

4. It must be well organized and logical in its structure.

5. It must be accurate and up to date.

6. It must be clearly presented.

7. It follows the required the format.

8. It should not contain too much technical details (jargons)

9. It must be written in a concise and simple format.

CONTENTS OF A BUSINESS REPORT

1. Heading/letterhead. This gives the business name, address, telephone number, e-

mail, etc.

2. Date. This shows the date when the Report was written

3. To. It indicates the person to whom the Report is addressed.

4. From. It shows where the Report is coming from.

5. Subject heading/title. This gives a brief indication of the content of the Report.

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6. Body of the report/content. It shows the details/findings of the content of the Report.

Findings are facts that emerge from the investigations. They are reported either in their

raw form or in summary. Different statistical methods can be used to present the

findings in a raw form.

7. Summary. Some long reports may include a summary of the major findings. The

summary is intended to guide the reader especially the busy managers, so that if they

wish, they may look at a specific finding in detail.

8. Conclusions. Conclusions are drawn from findings. Here, the various facts drawn

from the investigations are analyzed and from the analysis, certain new facts emerge.

The new facts are presented from the point of view of the report writer as some kind of

an opinion.

9. Recommendations/suggestions. Most reports have recommendations at the end.

Recommendations form part of the purpose of the investigation and the report.

Note. If a report is made by lower level managers and sent to senior manager, they make

suggestions. On the other hand, reports by senior mangers or consultants include

recommendations.

Carbon copy (C.C). It shows a copy or copies of the Report circulated to other officers

in the organization who may need to know about the information communication.

EXAMPLE OF A MONTHLY REPORT

WANYANGE GIRLS SECONDARY SCHOOL

P. O. BOX 1209, JINJA (U)

Telephone:

Health Care Services Centre

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October 30, 2019

To: Headmistress

Wanyange Girls S.S

From: The School Nurse

Wanyange Girls S.S

Subject: REPORT ON THE OPERATIONS OF THE SCHOOL HEALTH

SERVICES

The following is a report on the operations of the School Health Services for the

information of the Board as requested:

CURRENT STAFFING

Designation Number of staff

School doctor 1

Visiting doctors 2

Nurses 3

Laboratory technicians 1

Filing clerk 1

DUTY ROTA

Daily coverage of 8:00am-9:00pm. Staff working is in shifts to accommodate these 13

hours i.e. 8:am-3:00pm and 3:00pm-9:00pm.

Number of cases per day

1. Number of patients seen on average is between 15-20 per day and 300-500 per month

mostly of common ailments and injuries.

2. The centre refers about 3-4 patients per month either for consultation or complicated

cases.

3. About 20-30 laboratory cases are carried out per month.

Services offered at the centre

1. Dispensing of drugs.

2. Health talks to students and staff.

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3. Pregnancy tests.

4. Counseling of patients.

5. Voluntary counseling and testing.

6. Health inspection of school premises and offering advice accordingly.

7. Out-patient management.

8. Minor surgical procedures.

9. Thirteen hour observation of critical patients.

10. Referral of serious or complicated cases.

11. Laboratory services.

12. Other activities include:

i) Providing monthly reports to management.

ii) Preparation of drug orders.

iii) Keeping stock records of equipment of the centre.

Challenges

1. Irregular drug supplies.

2. Low Doctor: Patient ratio.

3. Limited quick transport for emergency cases.

4. Limited space.

5. Increased workload.

6. Increased number of non-entitled staff (relatives of staff) turning up for treatment.

7. Uncooperative patients.

8. Increased dental cases.

Summary

Despite the challenges, the Health Centre has managed to serve about 700 patients a

month and is able to minimize referrals as well as handles emergencies efficiently. We

look forward to solutions for the outlined challenges.

Suggestions

1. Recruit more doctors.

2. Recruit more staff.

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3. Provision of an ambulance.

4. Decentralize purchases.

5. Offer dental services.

6. Sensitize staff on the issue, and revisit medical policy.

7. Partition rooms and put up shades outside, and probably expand the existing building.

Note. Business reports may be annual reports, which show the business annual

operations and financial performance, or reports on the feelings of the customers

regarding a particular good or service.

POST OFFICE SERVICES

A post office. This is a facility in charge of sorting, processing, and delivering mail to

recipients.

Or; this is a public department responsible for the transportation and delivery of the

mails.

SERVICES RENDERED BY THE POST OFFICE

1. Postal order. This is a written order for the payment of a sum of money, to a named

payee, obtainable and payable at any post office.

The sender writes the name of the payee and the address on the face of the postal order

and encloses it in an envelope which is also well addressed to the payee. Postal orders

are paid at any post office within the country of issue.

They may be crossed and therefore paid through a bank current account.

Note. The sender of the postal order is required to pay a fee to the post office for the

service and this fee is called poundage.

2. Money order. This is an order for the payment of a specified amount of money

payable at a named post office. Money orders are used to send large amounts of money

than postal orders.

Under this method, the money is given to the payee by the nearest post office. The payee

is required to identify himself and name the person who sent the money order. A money

order may be crossed such that money is put to the account of the payee.

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Note. Unlike postal orders, money orders are paid at specific post office hence higher

poundage is paid for sending a money order than a postal order.

3. Telegraphic money order. This is a method of sending money to someone in urgent

need of cash.

The sender places cash with a telegraph office, which then wires the telegraph office at

the city of destination to disburse the cash or acceptable equivalent (money order).

4. Telegram services. A telegram is a message transmitted by telegraph. It is used to

send brief information.

The addressee receives a printed copy of the message either on the same day or the

following day. The cost of sending a telegram depends on the number of words used and

the distance. Hence, it is necessary to use few words as possible when sending a

telegram message.

EXAMPLE OF A GOOD TELEGRAM MESSAGE

Manager,

Part of stock you sent was damaged, please do something.

Edgar

5. Telex (Teleprinter). This is a service which provides a direct link between

subscribers and other users where the message typed by the sender is automatically

printed at the receivers send.

The Teleprinter resembles a type writer in appearance. When the message is typed on

ones machine it automatically appears at the machine were the information ids being

sent.

The advantage with a telex is that even if the machine is not attended to, it will receive

calls and take the printed message.

Note. This type of communication is common with sophisticated departments and

organizations like Embassies, Airlines and National Assemblies.

6. Facsimile (Fax). This is a service that enables transmission of written information,

drawings, maps, etc electronically.

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Or; this is a service which involves transmission of information in a telegraphic form or

its original form.

Or; this is the telephonic transmission of scanned-in printed material (text or images),

usually to a telephone.

The machine is connected to a telegraphic machine or telephone wire to a similar

machine at the receivers send.

7. Registered Letters (Registered Post). This is a service provided by post office for

sending valuable articles or documents handled with extra care.

Under this system, letters are registered at the post office before they are sent to ensure

their safety. Registered post is not put in the letter box, but it is handed to the post office

and a receipt is issued.

The charges for sending a registered post depend on the value of the contents in addition

to the first class rate.

Note. Under registered post, the Post Office undertakes to compensate the sender if the

mail/letter is lost.

8. Certificate of Posting (Recorded Delivery). This is a system where mail/letters are

sent under a certificate.

Or; this is a document issued by the post office as a proof of posting or written record as

evidence of delivery.

A letter sent under a certificate is recorded by the post office and a certificate is issued,

which may be produced as evidence if the need arises. It is suitable for sending legal

notices and important documents safely.

9. Business Reply Post. This is mainly used by businessmen who require to be replied

without putting the addressee to any expense.

Here, a card or envelope is enclosed within a letter by the sender such that the addressee

makes the reply using that card or envelope without meeting any postage expense for the

reply.

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Pre-addressed reply postcard (business reply card) or envelope (business reply envelope)

is mailed free by a responder.

10. Express Delivery (Express Post/Speed post). This is a postal service where letters

are normally delivered on the same day of posting.

Or; this is a system where mail is collected and delivered by a special messenger to the

addressee. The charges depend on the distance and weight of the parcel. Express

packages are usually marked with the word EXPRESS.

11. Post Restante. This service is available to travellers who are likely to be in a

particular town for only a short time and hence have no post box number but would

require their messages to be delivered to them by the post office.

Such people may advise/inform their friends of the town they are likely to be in on given

dates so that their letters can be sent to that particular post office. Such letters may be

addressed as, say:

Ms. Kirabo Rosa

Post Restante

Iganga Post Office, Uganda

Under this system, people expecting to receive letters go to the post office and are given

their mail upon production of satisfactory identification papers.

13. Selecta post. This is a service in which the post office arranges letters or mails

according to departments.

Or; this is a service where the organization requests the post office to arrange its mails

according to its departments..

Here, when letters are being sent, the address on the envelope should show the

department to which the letter is addressed to allow easy sorting of mail by the post

office.

This service is suitable for large organizations like universities and ministries.

Other services rendered by the Post Office include:

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i) Baking services.

ii) Telephone services.

iii) Printing and distributing Post Office directories.

iv) Carrying letters within the country and abroad.

Sample question

Explain the services offered by the post office in your country

1. Delivery of ordinary mail e.g. letters, packets, newspapers, magazines through the sale

of postage stamps.

2. Effecting payment to payees through postal orders, money orders and telegraphic

money orders.

3. Offering telecommunication services for example telegrams, and telex; internet, etc.

4. Offering transport services for example Post bus.

5. Providing banking services for example Post bank.

6. Offering registered mail services for a special fee.

7. Expedited Mail Services (EMS) for urgently needed mails.

8. Post Restante services especially to travelers.

9. Business reply services.

REASONS WHY TRADERS ARE MOVING AWAY FROM POST OFFICE

1. High operating costs making it expensive for the customers.

2. Inefficiency in service delivery characterized by delays in delivering mails.

3. Existence of better services being offered by the private competing companies.

4. Insecurity especially with parcels that are at go missing or tampered with.

5. Advancement in technology for example ability of most people to own mobile phones

and internet services.

IMPORTANCE OF COMMUNICATION TO THE PRODUCER

1. It helps the producer to inform the consumers about the goods and services available

on the market.

2. It enables the firm to get the consumers opinions and complaints about its goods,

helping it to produce according to their preferences.

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3. It helps the producer to get more customers, widen its market and increases its sales

and profits.

4. It enables speedy execution of contracts of sales and purchase between the producer

and the customer.

5. It enables the firm to establish a good reputation with its customers which improves

its public relations.

6. Good internal communication helps a firm to avoid losses by enabling employees to

inform the management about the breakdown in machinery or shortages in time.

7. It eliminates shortages and wastages in the market by informing the producer of the

existing demand and supply conditions in the market.

8. Good internal communication promotes understanding between the management and

workers.

9. It enables producers to import raw materials and other inputs fro distant sources

without their physical movement.

IMPORTANCE OF COMMUNICATION TO THE CONSUMER

1. It enables the consumer to be aware of the nature of goods and services available on

the market.

2. It enables consumers to purchase goods and services from distant sources without

actual movement or physical movement with he producer.

3. It enables the consumers to convey their opinion to the producers about particular

commodities.

4. It enables quick execution of contract of sales and purchase between consumers and

producers.

5. It e3nables consumers to be in close contact with producers which helps to demand

and supply prices stable.

6. It promotes the exchange of ideals and knowledge at both local and international

level.

7. It promotes understanding between the producer and consumer which helps in solving

misunderstandings.

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ROLE OF COMMUNICATION IN THE DEVELOPMENT OF TRADE

1. It brings about meaningful contacts between buyers and sellers.

2. It creates and sustains interest for example advertising.

3. It cuts down costs and saves time in all business activities due to fewer movements.

4. It avails information at the right time and place i.e. it saves life and property.

5. It brings about exchange of views and avoids confusion and misunderstandings.

6. It facilitates changes avoids resistance and loss confidence in those making changes

e.g. changes in business policy and regulars.

7. It helps in keeping good relationships with old customers and creating new ones.

8. It aids market research through the use of interviewing, questionnaires, and customers.

9. It enables the organization to identify suppliers who are competent and can avail them

with various inputs like raw materials used in the production process.

10. It opens and promotes trade by linking up various markets through transferring

surplus goods from other markets up so that shortages in one market can be solved.

11. It helps to link the entrepreneur to important services and needs like banking

services, insurance, transport, etc. which help in the day today running of the business

for example the use of telephone services.

12. It helps to link the entrepreneur to important services and needs like banking

services, insurance, transport, etc. which help in the day today running of the business

for example the use of telephone services.

FACTORS CONSIDERED WHEN CHOOSING A CHANNEL/MEDIUM OF

COMMUNICATION

1. Speed and urgency of the message. Urgent information should be sent through the

telephone other than letters which tend to take long.

2. Confidentiality (Secrecy) of the message. Confidential information can be sent

through letters since they can be kept secretly than other means of communication like

telegram.

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3. The cost involved. Letters are cheaper compared to telephones while face to face

communication is cheaper than all.

4. Distance involved/Coverage of the media. Letters and telephones are suitable for

long distances compared to face to face communication.

5. Nature of the message to be communicated. For messages that require giving

detailed information, use of letters is more effective compared to telegram.

6. Immediate feedback. Messages requiring immediate feedback should be sent using

telephone or face to face communication.

7. Need for reference or record. Messages requiring record of reference should be sent

using letters instead of telephone, radio or face to face communication.

8. Personality of the recipient. Communication to people with hearing disabilities is

normally done through the use of body language and visual communication while verbal

communication is ideal for the blind.

9. Safety of the information. An important document should be sent through the

registered post or under the certificate of posting.

10. Class or status of the target group. Written communication is fit for the elite class

while face to face is better for the illiterates.

11. Length of the message. Information that needs a lot of details, technical instructions

requires written means like letters or reports to make messages clear.

12. Degree of accuracy. One can send more accurate information in a letter, telegram

and fax which economizes on the use of words.

FACTORS WHICH LIMIT (BARRIERS) TO EFFECTIVE COMMUNICATION

A barrier to communication. This is any hindrance that stops the receiver from getting

the intended message the way the sender sent it.

These are;

1. Noisy environment. Noisy surroundings caused by vehicles, running machines and

animals may destruct people communicating orally and effectively.

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2. Poor preparation of the message. This is where the sender fails to prepare the

information and facts in a logical way and makes it hard for the receiver to understand

what is in the message.

3. Attitudes of the parties involved. When one of the parties involved is not interested

in the message being sent then the sender will be wasting time.

4. Language differences. This is where the sender uses a language not familiar to the

receiver. Eg. an entrepreneur using Luganda to communicate to an Iteso who does not

understand it at all.

5. Distrust. This results from lack of credibility of the message being sent. For instance

people who never keep their promises lack trust from others. In this case, any message

given will not be taken seriously.

6. Wrong addresses. Once the information is sent to a wrong or unclear address, its

likely that it will not reach the receiver.

7. Non verbal communication. Non-verbal factors like body movements, clothing,

gestures, postures, eye movements and facial expressions may distort meaning of a

message.

8. Use of improper channel. This is where the sender uses a means of communication

which the receiver does not access or have. Eg. sending a newspaper to someone who

cannot read and write.

9. Incompleteness of the message. When the message sent by the sender does not

include all the facts that the receiver needs to know about the subject matter on which

communication is based, it hinders effective communication.

10. Long distances between the sender and the receiver. The messages sent for long

distances at times may get lost or lose meaning to the receiver.

11. Emotional problem of the sender. This is where the sender is too worried, afraid,

excited or nervous such that he is not be able to organize his message properly.

12. Poor planning of response. This is mainly caused by failure to effectively think of

the response in time due to distraction coming from the sender.

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13. Poor personality of the sender. This may be in form of poor mannerism of the

sender who may hurt the receiver in the process of sending the message.

WAYS OF OVERCOMING BARRIERS TO EFFECTIVE COMMUNICATION

1. Explaining to the receiver so that he/she gets to share the meaning of the message with

the sender in order to overcome differing perceptions.

2. By using simple, direct, natural language while communicating so as to overcome

language differences.

3. Understanding and changing peoples behaviors to ensure maturity of organizational

members in order to overcome emotional problems.

4. By understanding or being aware of the meaning of different gestures, body

movements, clothing, postures, eye movements, facial expressions and other powers of

non verbal communication.

5. Creating trust by building confidence through understanding, discussing issues and

creating an atmosphere of trust so as to restore credibility.

6. Eliminating physical noise like running machines, it can be switched off or those

communicating can move away in order to overcome this distraction.

7. Planning well before any form of communication on what he wants to say, why he is

saying it, how he will say it.

SALES PROMOTION & ADVERTISING

Sales promotion. This is the creating of demand by the trader or producer so as to

increase sales.

Or; this refers to any activity or campaign done to boost the sales of a trader or firm.

FORMS/METHODS OF SALES PROMOTION IN UGANDA

(Ways a trader can use to increase sales/profits)

1. Giving free samples of products to customers when introducing products to the

market.

2. Offering price reductions (discounts) or lower prices to traders to attract sales.

3. Renovating of business premises like painting them so as to improve on their quality.

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4. Personal selling which involves employing salesmen who go on moving from

home/door to home/door or offices advertising the products.

5. Organizing prize winning competitions where awards are given to lucky winners.

6. Sponsoring different activities and games where people are involved so as to attract

their attention e.g. football, music festivals, health campaigns, etc.

7. Giving gifts to customers free of charge with the intension of creating awareness of

the advertisers name and message.

8. Branding which involves giving a product a distinctive name and use of attractive

trade marks.

9. Offering credit facilities and installment selling like hire purchase to trustworthy

customers.

10. Using attractive packaging materials in order to position the products in the minds of

the buyers for example, the containers of blue band and those of different cosmetics.

11. Using attractive display through proper arrangement of the products outside and

inside the business premises.

12. Using non-productive value methods like providing free and convenient parking

space, sales guides to customers, etc.

13. Being polite to the customers for instance through caring for the customers needs.

14. Intensive advertising of products in newspapers, radio, television, posters, sign posts,

music, banners, bill boards, electronic displays (neon signs), calendars, brochures etc.

ADVERTISING

This is the means through which producers and sellers spread information about what

they have, sell and market in an attempt to increase sales.

Or; this is the spreading of information about the existence of a product available for

sale.

AIMS/PURPOSE/OBJECTIVES OF ADVERTISING

1. To stimulate buying by encouraging people to buy products put on market.

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2. To arouse customers interest like on television and in magazines to increase peoples

interest for the goods and services of the producer.

3. To create desire by indicating the benefits and satisfaction one gets from using a

particular good or service. Eg. “Colgate makes your teeth stronger”, “smoke Boss

cigarette and become a boss”.

4. To pass on information to the public about product. Eg. its quality, price, use, where

it can be found, etc.

5. To introduce new products or designs, new styles, fashions and taste of a product by

creating customer interest for it. Eg. a new brand Samsung cellular phone, a new model

of Mercedes Benz car.

6. To create confidence in consumers in using a good or service. Eg. "You Have Got

what You want" for Pilsner Lager, "People who Think Differently" for Club beer, etc.

7. To attract new customers through advertising a product by giving its good qualities

attracts customers for instance, “Pau Clere for a smooth skin”, “Fair and Lovely for a

lovely skin which is smooth”.

8. To sustain customers by advertising products continuously with an aim of keeping the

already existing customers in the market.

For example MTN, UTL, Century Bottling Company, etc continuously advertise so as to

maintain their market share.

TYPES OF ADVERTISING

1. Informative advertising. This is where the customers are made aware about the

availability of the product or service on the market without persuading them to buy.

Eg. bread is sold here, buy your animal feeds from Janet and company limited, we sell

spare parts upstairs, cigarettes can be harmful to your health.

2. Persuasive/competitive advertising. This is one where customers are persuaded to

buy a product or service by making them more attractive than others.

Or; this aims at persuading the public that a certain product or service is different or

superior to others.

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Eg. There is no substitute to Tiptop, Omo removes dirt and stains that ordinary powder

leaves behind, if you want to get ahead buy and drive a Mercedes Benz, etc.

3. Mass or collective advertising. This is where many businesses dealing in related

goods or services carry out advertising together as a group.

4. Direct advertising. This is one intended for a particular) group of consumers.

Or; this is one which appeals to a limited number of people.

Eg. use of a newspaper for literates, television for those who have them, Fair and

Lovely powder for babies, etc.

5. Indirect advertising. This is advertising of goods or services to the general public.

Or; this is the advertising of the products or services to the public as a whole.

Here, no particular class of customers is targeted but the general public for example

advertising that Omo washes brightest.

Note. Many advertisements follow under indirect advertisement.

IMPORTANCE/FUNCTIONS OF ADVERTISING

1. It informs customers of the availability of different products and services on the

market.

2. It widens the market by attracting many customers to buy the products.

3. It helps the producer to regain the lost customers by attracting them to buy the newly

produced goods and services.

4. It informs the public about the changes in prices and other offers on the market like

gifts, competition, etc.

5. It helps to introduce new products and services and enable consumers compare them

with which exist on the market.

6. It helps the firm to improve on the quality of goods and services based on the level of

competition in the industry.

7. It improves on the living conditions of the people by increasing the product variety

and choice.

8. It improves on the organizations image by sustaining the market and increasing sales.

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9. It encourages production of more output and informs customers of where the products

are which saves their time.

ADVERTISING MEDIUM/MEDIA

This refers to the several channels/methods through which advertising messages are

conveyed to the public.

Or; this is the means through which messages for sales are passed on to customers or

users.

An advertising medium. This refers to the channel through which an advertising

message is delivered to the prospective customers.

Mention any two examples of advertising medium used in Uganda.

1. Television.

2. Radio.

3. Newspapers.

4. Magazines.

5. Window display.

6. Bill boards.

7. Posters.

8. Signposts.

9. Stickers.

10. Neon signs.

11. Fair and exhibitions.

12. Cinemas and films.

METHODS/WAYS OF ADVERTISING

RADIO ADVERTISING

This is where advertisements are broadcast from transmitting broadcasting radio

stations.

In Uganda, the radio stations that make advertisements include radio Simba, CBS,

UBC, Sanyu FM, Capital FM, Radio One and many others.

ADVANTAGES OF RADIO ADVERTISING

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1. The message has a wide coverage in the country and abroad.

2. The advertisement is usually presented in many languages hence reaching many

people.

3. It is easier and cheaper to prepare the message by the traders.

4. It is repetitive and therefore has a lasting effect on the customer.

5. It is very fast in that there is instant dissemination of information.

6. It is suitable for the blind as they can hear.

7. Some radio adverts are entertaining to the customers like those with music.

7. It allows corrections in the messages to be made immediately.

8. It is good for both the literate and illiterate societies as it only involves listening.

DISADVANTAGES OF RADIO ADVERTISING

1. It lacks illustrations and pictures and therefore it is not suitable for advertising goods

that require a visual image.

2. It is not suitable for the deaf and those with hearing problems.

3. The cost of advertising may be high especially with repetitive adverts.

4. It only caters for people who have radios.

5. Messages are aired for a very limited time and therefore may disappear from the

minds of customers.

6. There is no immediate feedback from the listeners.

7. Some radio programmes are controlled by government which limits adverts for some

products.

8. Radio advertisements tend to exaggerate messages by using persuasive words which

may convince a person to buy a good or serve of poor quality.

9. Customers may be irritated with adverts that are interrupted with music and other

programmes.

10. The targeted market may miss out information like teenagers who enjoy music but

hate commercial programmes.

TELEVISION ADVERTISING

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This is where adverts are brought to the attention of the viewers and listeners through

use of a television screen.

Here, the adverts are taken to Television stations where they are processed and broad

cast.

Under television advertising, products are demonstrated and well seen.

In Uganda, Television stations that advertise include UBC Television, WBS Television,

NBS TV, TOP TV, Record TV, etc.

ADVANTAGES OF TELEVISION ADVERTISING

1. It demonstrates the product with realistic sight and sound, colour and movement.

2. It covers a large audience or viewers at the same time.

3. It is flexible in that adverts can be placed at the right time for the customer. Eg.

towards or after news.

4. It is desirable for both literate and illiterate societies as it does not require reading and

writing.

4. It is suitable for advertising goods that require explanation, demonstration and

visualization.

5. It is fast because it makes messages be received immediately as soon as they are broad

cast.

6. There is immediate feedback from the listeners through responding to the advertised

goods.

7. Television advertisements can emotionally motivate the consumers by showing many

people about a product or service at a time.

DISADVANTAGES OF TELEVISION ADVERTISING

1. The lifespan of the advertised message is short unless recovered.

2. It is expensive especially with small population.

3. It is difficult to modify television adverts unlike adverts of print media.

3. It is limited to a few who have televisions as televisions are relatively expensive to

buy.

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4. It is not suitable for the blind as they cannot see and read the pictures and words

respectively.

6. It provides no room for reference as once the message is seen, it is forgotten.

7. It is limited to a particular geographical area where certain areas like hilly or

mountainous areas are not reached.

8. It is a complicated procedure as it involves hiring scriptwriters, actors, video editors,

or an advertising agency.

9. Less creative adverts on televisions attract few customers.

PRESS ADVERTISING

This involves disseminating of information to prospective customers through the use of

written information. Eg. use of newspapers, magazines, etc.

Newspapers. These are printed publications consisting of folded unstapled sheets

containing news, articles, advertisements and correspondence.

Examples of newspapers in Uganda include New Vision, Monitor, the Observer, red

pepper, etc.

ADVANTAGES OF NEWSPAPER ADVERTISING

1. Newspapers are cheap and can be afforded by many people hence the message

becomes effective.

2. Newspapers have a permanent record hence they provide room for reference.

3. They have better local market penetration than magazines.

4. Newspapers are found in different languages, hence they favour all those who can

read and write the language used.

5. It favors both the deaf and the dump as it involves reading and seeing.

6. Newspapers are attractive because they carry illustrations and pictures.

7. There is immediate feedback from the readers through responding to the advertised

goods.

8. It is suitable for classified adverts like car sales, land, etc.

9. Newspapers have a wider coverage as they can be sent to distant places within the

country.

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10. Changes can easily be made in the advertisements when there is need.

11. Newspapers have several standard sizes with different rates and sizes to suit the

requirements of traders.

DISADVANTAGES OF NEWSPAPER ADVERTISING

1. It only favors the audience that can read and write.

2. It has limited coverage since it is mostly found in urban areas not catering for

villagers.

3. This method of advertising is not suitable for the blind as it involves reading.

4. Many people find it time wasting and as a luxury to read newspaper adverts.

5. Newspapers are found in limited languages hence not catering for all.

6. It requires one to buy a newspaper daily which is quite expensive.

7. Limited readership especially among the youths who are particular on certain topics

hence neglecting the adverts that might have been made.

8. There is a possibility of poor printed image quality which makes attraction of readers

difficult.

What is a magazine/periodical?

This is a periodical publication containing articles and illustrations typically covering a

particular subject.

Mention the merits of using magazines to advertise goods and services in Uganda.

1. It is attractive because a magazine carries illustrations and pictures.

2. A magazine has a large life span as it can be stored for quite a long period of time

than newspapers.

3. A magazine provides a permanent record as it can be stored for quite a long period of

time.

4. A magazine has a wide coverage as it is circulated both domestically and

internationally.

5. A magazine helps to build a brand image though using attractive colors and images.

Outline the demerits of magazine advertising.

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1. It is not flexible like newspapers as any mistake in the adverts cannot easily be

changed. ie it is produce once a month.

2. Advertising using magazine is more expensive compared to newspapers.

3. Some magazines carry immoral pictures which may not be good for public

consumption.

4. Magazines tend to be more persuasive than informative through exaggerating

information.

5. Magazines are usually found in limited languages especially foreign languages

neglecting the local ones.

What is a trade exhibition?

This is an arrangement where a seller of a product makes the goods known to the

consumers by displaying in any place.

What is a trade fair?

This is an arrangement where different producers of goods or services assemble

themselves in a particular place and display their goods to the general public. Eg. UMA

State two merits of trade fairs and exhibitions to the producer.

1. Exhibitions are open to the general public which enables the trader to promote his

products to a large audience.

2. It promotes market research to gain general opinion about the products being

advertised.

3. Exhibiting at an event is a cost effective alternative to most other promotional

strategies.

4. It provides the manufacturer the opportunity to directly interact with an interested and

enquiring public.

5. International trade fairs and exhibitions promote international relations.

Give the merits trade fairs and exhibitions to the consumer.

1. Consumers have an opportunity to examine and compare different products from

different producers.

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2. Consumers enjoy products at relatively low prices as producers are promoting the

sales.

3. Consumers get chance to be educated about the use of new products due to existence

direct contact with the producer.

State the disadvantages of trade fairs and exhibitions.

1. Displaying at a trade show can also be costly is expensive to organize.

2. Exhibitions and trade fairs are not suitable for the blind.

3. They are limited to very few areas urban areas hence remote areas are not catered for.

4. Trade fairs and exhibitions are in most cases temporary hence they have a short life

span.

5. Travelling to trade shows can be costly.

6. There are always limited points of sale which leads to overcharging of consumers.

7. There is a bit of competition at all shows which leads to limited sales.

What is Window display?

This involves placing goods behind glass windows of shops, well arranged in order to

attract customers who pass by and influence their choice.

State two merits of window display.

1. It helps slow selling items to sell more swiftly/quickly.

2. It cab arranged at a low cost compared to a trade fair.

3. An appealing and effective window display produces interest to any person who

passes by the traders hop.

4. It is used in promoting items on sale, introducing wide range of items for the new

shopping seasons.

Give two demerits of window display.

1. Window display does not favor the blind.

2. Window glasses are expensive.

3. Attractive window displays are misleading and deceitful to the consumers.

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4. Window display may make the choice difficult for consumers.

What is meant by direct mail/postal publicity?

This is where adverts are sent directly to the prospective customers through the mail.

Eg. use of brochures, catalogues, circulars, letters, newsletters on one-to-one basis via

ordinary mail (post office) or email.

Outline two advantages of direct mail in business.

1. It allows for immediate feedback and response from customers.

2. It enables the producer/suppliers target specific market and get information about his

products.

3. It is easy to follow up earlier sent mails and to check results.

4. Direct mail can be tailored to personal customer needs based on previous transactions

and gathered data.

Mention the demerits of direct mail to traders.

1. It is costly in terms of postage charges and stationery.

2. It appeals to individuals but not the general public.

3. Mails can easily get lost or misplaced.

What is outdoor advertising?

This is where adverts are displayed outside shops, on tree trunks, outside stadiums and

along streets.

Or; this is one which involves the use of posters, billboards, electronic displays (neon

signs), signposts and banners.

Give examples of outdoor advertising

1. Posters. These are fixed or posted on walls in busy public places.

2. Signpost. This is an identification, sign or guide.

3. Billboards. These are placed along heavy traffic roads, strategic places like parks,

roundabouts and crossings.

4. Neon signs. These involve the use of electric lights or neon tubes and are normally

fixed on buildings or at heavy traffic centers.

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5. Banners. These are pieces of clothes having advertising messages in a printed form.

They are usually fixed on electric poles and trees in busy centers.

Mention any two advantages of outdoor advertising.

1. They provide 24 hour exposure to the public eye.

2. They are flexible i.e. outdoor advertising can be located in any areas where it can be

effective.

3. They have are relatively cheap as they can be displayed at low cost.

4. They have a large attention span for instance those stuck in traffic or waiting at the

bus stop and looking for something to pass time.

5. It can reach the widest audience in the shortest period of time.

State the disadvantages of outdoor advertising.

1. They are affected by bad weather conditions e.g. heavy rains especially posters and

banners.

2. They are not suitable for the blind as they involve seeing.

3. They are limited to a small geographical area for example signposts.

4. Installing and maintaining neon signs are expensive.

What is a Cinema/film?

This is medium used to advertise household goods in cinema halls to teenagers.

State the merits of Cinema advertising.

1. It is affordable and with the positive response locally, regionally or nationally.

2. It covers relatively wide area which makes it possible to reach a large audience.

3. Messages can be received visually hence making them clear as there is interaction of

the sight and sound.

4. It is desirable for both literate and illiterate societies as it does not require reading and

writing.

5. It is suitable for advertising goods that require explanation, demonstration and

visualization.

6. There is immediate feedback from the listeners through responding to the advertised

goods immediately.

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7. Cinema advertisements can emotionally motivate the consumers by showing many

people about a product or service at a time.

Give the demerits of Cinema advertising.

1. The cost to advertising is high, especially for a small business.

2. It provides no room for reference as once the message is seen, it is forgotten.

3. Producing a cinema advertisement is a complicated procedure as it involves hiring

scriptwriters, actors, video editors, or an advertising agency.

4. It is not suitable for the blind as they cannot see and read the pictures and words

respectively.

5. If cinema advertisements are not creative then people do not show interest to see them

and do not buy the products.

6. It is difficult to modify cinema advertisements unlike advertisements of print media.

WHAT IS Specialty advertising?

This is where entrepreneurs offer special articles to their customers bearing their brand

names, trade marks and symbols.

The articles/products that may be given out include T-shirts, key holders, pens, caps,

umbrellas, etc.

FACTORS CONSIDERED WHEN SELECTING AN ADVERTISING MEDIUM

1. Social class to which the medium appeals. Newspapers appeal to the ordinary

people while television appeals to the high people.

2. Age group of customers. Magazines, television, cinema and films appeal most to the

teenagers and youths while advertisements for the adults and aging people are done

through the radio and newspapers.

3. Geographical area that media can cover. Newspapers, the radio and television have

a wider coverage than outdoor advertising and window display that target customers in a

small area like a trading centre.

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4. Cost of the medium. Expensive products are better advertised through expensive

media like the television, newspapers and magazines while cheap goods and services are

advertised through cheep means like the radio.

5. Economic status of the target group. Traders use television, newspapers or

magazines while advertising to the rich while the radio and out door advertising appeals

mostly to the ordinary people.

6. Nature of the product being advertised. Television, billboards and posters is more

appropriate for goods or services to be advertised and require a visual image while

goods or services which require giving detailed information to be advertised are better

advertised through written forms of communication like newspapers and magazines.

7. Speed and urgency of the information. Urgent information on gods or services in

the market should be advertised in the fast media like the radio and television while

magazines, trade fairs and exhibitions tend to take long.

SPECIALISED ADVERTISING AGENCIES

Specialized advertising agencies are specialized bodies which carryout the design,

arrangement and production of advertisements for interested producers.

Or; these are business organizations that help to design adverts, select thee media and

carry out promotional campaigns on behalf of a business.

The advertising agency consist of the following; the advertiser/ business, the advertising

agent and the media owner

Examples of advertising agencies in Uganda include Media Consultants (U) Ltd, etc.

TYPES OF INFORMATION TO BE GIVEN TO AN ADVERTISING AGENT

In order to enable the advertising agency to design a suitable advertisement, the producer

should provide particular information to the agency. Such information may include:

1. Name of the business.

2. Location of the business.

3. Name of the product.

4. Nature of the product.

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5. Price of the product. This enables to select the suitable advertising medium.

6. The target market or customers the advertisement is aimed at.

7. The strength of the product I terms of demand and quality.

8. The weakness of the product in terms of demand and quality.

9. The amount of money the business wants to use for advertising.

Mention the services offered by an advertising agency.

1. They offer expert advice on the medium to be used.

2. They design and arrange for installation of neon signs, sign boards, etc.

3. They design newspaper advertisements, brochures, pamphlets, catalogues, etc.

4. They arrange for publication or broadcast of advertisements at a very short notice and

competitive prices.

5. They handle all arrangements for sales promotion campaigns, checking entries

received, dispatching prizes, etc.

6. They design and make cinema and television slides and they also arrange to screen

these slides.

7. They arrange for printing posters, leaflets through having contacts with printing

presses.

ADVANTAGES OF ADVERTISING TO THE PRODUCER

1. It informs the customers on the availability of goods and services on the market.

2. It helps the producer to retain the customers by reminding them about the usual

products.

3. It persuades customers to buy more of the goods and services which increase sales.

4. It helps the producer intensive adverts to out compete its competitors.

5. It helps to create the good will or image for the organisation.

6. It creates direct contact between the businessman and the customers such that

middlemen are not able to increase prices.

7. It promotes sale of goods and services of a business by informing people about them

and asking them to buy the advertised goods.

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8. It helps the businessman to retain his/her market share so that he/she does not lose

some of the customers to the other businessmen/competitors.

9. It encourages product research and development activities which enables producers to

improve the quality of their products.

DISADVANTAGES OF ADVERTISING TO THE PRODUCER

1. It leads to wasteful competition through excessive expenditures on adverts.

2. It reduces the producers profit margins since it is costly.

3. It leads to closure of weak or high cost firms in the market.

4. It leads to movement from one producer to another without increase in total demand

in the market.

ADVANTAGES OF ADVERTISING TO THE CONSUMER

1. It saves the consumers time by informing them of where the goods are found.

2. It helps consumers to access a variety of goods on the market.

3. It informs consumers about the price, quality, size, etc. of the product.

4. It explains the use and value of the products to the consumer.

5. It informs the consumers about the new products on the market.

6. It leads to competition among traders/producers thus leading to better or improved

quality of goods and services.

7. It increases consumers awareness about the changes in prices and other offers on the

market.

DISADVANTAGES OF ADVERTISING TO THE CONSUMER

1. It increases the cost and prices goods due to expensive adverts.

2. Some adverts are deceitful or misleading and force consumers to buy substandard

goods. Eg. any woman can look young with ambi.

3. Repetitive adverts force consumers to buy goods they are not prepared for.

4. Intensive adverts create monopolies which charge high prices on consumers.

5. Advertising may lead to brand loyalty which may result into exploitation of

consumers.

6. Some advertisements may have negative effects on morals of society.

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7. Advertising points out only the positive effects of a product and the negative ones are

left out e.g. adverts for beer and cigarettes do not point out the harmful effects.

8. It encourages luxury where some consumers live above beyond their means.

CHAPTER 18: MARKET RESEARCH

This is an aid to trade by which producers come to know what peoples' opinions are

regarding a particular good or service.

Or; this is the systematic process of collecting and analyzing information relating to

markets and opinions of the public about the products of a firm to enable present and

future decision making.

Or; this is the process of collecting and analyzing information relating to demand for a

good or service in order to identify market opportunities and problems.

AIMS/OBJECTIVES OF CARRYING OUT MARKET RESEARCH FOR A

PRODUCT

1. To find out the type and nature of product preferred by customers at a given time.

2. To find out the quality of products consumers desire to buy.

3. To determine the quantity/volume of products to be put on the market i.e. how much

is likely to be bought now and in the future.

4. To find out consumers reactions on the prevailing prices.

5. To increase sales/turnover of a firm.

6. To determine the best channel of distribution of goods and services for possible areas

where the distribution channel is most appropriate.

7. To find out and follow-up the effectiveness of advertising and sales promotion on the

sales of a particular product.

8. To assess the level of competition with rival firms for instance Crown Bottlers may

carry out market research to determine its market share and how its products are

competing with those of Century Bottling Company.

METHODS OF CONDUCTING MARKET RESEARCH

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1. Sampling method (Area retail tests). This is where the manufacturer selects an area

which reasonably represents the entire market to carry out the test using sample

products.

The product is then launched on to that particular area for instance a town, a city, a

village and research is done thereafter. Respondents may be required to answer

questions on different aspects of the product like price, quality, brand name, etc.

The answers are then analyzed to help the manufacturer modify his commodity before

supplying it to the entire market.

2. Questionnaire method (consumer surveys). This method involves asking all

respondents similar structured questions.

The questions are presented in written form and sent to respondents who are supposed to

return the questionnaires after filling in the required information.

3. Interviewing. This method is used to collect information about customers knowledge,

opinions, attitudes, preferences and their buying patterns.

It involves face to face discussions between the researcher and the respondents about

the problem at hand.

4. Observation method. This method involves watching/observing certain factors in a

given market in order to arrive at general conclusions about the entire market.

For example a firm wishing to start processing fruits may observe the consumers to find

out whether they buy processed juice or not in order to enable it make decisions of

whether to process or not to process fruits.

This method can be used to collect information which people do not want to give freely.

5. SWOT analysis. This method involves collecting data by a business through

gathering information about its Strengths, Weaknesses, as well as information about

Opportunities and Threats from the outside environment.

6. Surfing/use of the internet. This is where information is gathered through surfing

from different websites from the internet.

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BENEFITS/IMPORTANCE OF MARKET RESEARCH TO THE PRODUCER

1. Market research helps the producer to assess/check the effectiveness of his/her

advertising and promotional activities.

2. It helps the producer to find out the response of customers to new product

developments that he/she has introduced in the market.

3. It helps the producer identify problems in the current product or service and find areas

for improvement in the product or service so as to fulfill the customers' demands.

4. It helps the producer to identify changing market trends that may affect his/her sales

and profit levels presently and in the future.

5. It helps the producer to find out his/her market share i.e. the number of customers

he/she is serving in the market.

6. It helps the producer to find out who his/her customers are, where they live, what the

customers want and when they want it, their buying patterns, etc.

7. It helps the producer to know what peoples' opinions are regarding a particular good

or service.

8. It helps the producer to assess the most favored designs, sizes, styles, flavors and

packages which consumers want most.

9. It helps the producer to identify his/her competitors, their activities and strategies and

device various ways of out competing them.

10. It helps the producer to collect information which can be used as a basis for

marketing decision making.

CHALLENGES FACED WHEN CONDUCTING MARKET RESEARCH OF A

GIVEN PRODUCT

1. Language difference. Given the fact that Uganda lacks a national language,

researchers sometimes miss the information they desire to get due to inability to

communicate in the languages understood by the different respondents/consumers.

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2. Inadequate/insufficient funds. It is very expensive to carry out market assessment.

Small firms with limited capital may not be able to undertake it and this greatly affects

their planning.

3. Inadequate kills to handle data collection. There is limited skilled manpower to

effectively and efficiently handle market assessment. This leads to inaccurate

interpretation of information from the public.

4. Inadequate communication facilities. Accessibility of some areas of the country is

difficult due to poor road network. Therefore, information from such areas cannot easily

be got by researchers.

5. Inadequate co-operation from the consumers or public. Some people refuse to

answer the questions; others give wrong answers while some chase away the

researchers. All these distort research findings and conclusions.

6. Changes in demographic factors like population, age, sex, etc. all of which affect the

findings.

7. Competitors who sabotage effective data collection.

8. Insecurity/hostility in some areas which hinders effective data collection.

9. There is also a possibility of getting information from a biased sample/source.

WAREHOUSING

This is the storing of goods or raw materials awaiting demand, sale and clearance or

processing.

A warehouse. This is a place where goods or merchandise are stored. It is a storehouse.

CHARACTERISTICS/ESSENTIALS OF A GOOD WAREHOUSE

1. It should be accessible i.e. it should be situated in an ideal location.

2. It should be safe and free from rodents and destructive insects.

3. It should have both loading and off-loading facilities/equipment.

4. There should be tight security in place to guard the goods in store.

5. It should have appropriate and speedy transport in place.

6. It should have efficient and well trained staff.

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7. It should have proper storage and preservative equipment e.g. facilities for

perishables.

8. It should have a suitable building that allows room for future expansion.

TYPES OF WARE HOUSES

1. Private Warehouse. This is a storage facility owned by the firm whose goods are

stored in it.

Or; this is a private store which is owned and operated by more developed merchants i.e.

wholesalers and manufacturers to fulfill their storage requirements consistently.

Wholesalers warehouses are located at the wholesalers premises while manufacturers

warehouses are located near manufacturing or production points.

Note. Manufacturers who do not have their own stores usually keep their goods in

public warehouses.

2. Public warehouse/General/Non-bonded warehouse. This is a warehouse that

provides short-term or long-term storage to companies on a month-to-month basis.

It is operated in accordance with the Law for the purpose of storing goods for other

people (common public) at profit.

The “word public” means that any member of the public can rent them ands store goods

there. Public warehouses are usually found near airports, docks, railway stations and

harbours.

Note. Goods stored in a public must be insured against fire, theft and damage. Examples

of goods kept in public ware houses include:

i) Duty Paid goods. These are goods whose customs duty has already been paid.

ii) Duty Free goods. These include goods imported by or for diplomats or by

government are not taxable. They may also include goods that the government

encourages businessmen to import e.g. medicine and education inputs.

3. Bonded warehouses. These are warehouses where importers keep their goods which

have not paid customs duties.

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Or; this is where imported goods are kept pending payment of customs duty. Such goods

cannot be released from the warehouse until the duty/tax is cleared.

Other goods that can be kept in a public warehouse include reprimanded or illegal

goods. Bonded warehouses are owned by customs departments or by the government.

They are managed by government officials but do not necessarily belong to the

government.

Private warehouses are often hired by customs officials for this purpose. Bonded

warehouses are usually located near the ports and are operated either via the government

or by custom authorities.

Importers often take some time to arrange for payment of customs duties and are

charged for storage while goods lie in a bonded warehouse.

Some traders sell the goods to other traders in bond. In this case, the buyer pays the

customs duties in addition to the cost of the goods to the seller/importer.

ADVANTAGES OF A BONDED WAREHOUSE TO THE IMPORTER

1. If the importer decides to re-export the goods, duty is exempted on re-exports, but

pays only storage charges.

2. If the importer sells goods while in bond, the liability for customs duty passes on to

the buyer.

3. The importer may get out the goods in small quantities as he makes partial payments

of the total customs duty required.

4. It enables the importer to pay exact tax in case of goods that lose weight or value.

5. No duty is collected until merchandise is withdrawn for consumption.

6. It enables the importer to look for buyers before paying the duty.

ADVANTAGES OF A BONDED WAREHOUSE TO THE GOVERNMENT

1. Government has assurance of revenue collection from imported goods.

2. It helps the government to control/check smuggling.

3. Undesirable goods can easily be detected and prohibited to enter a country.

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4. It minimizes tax evasion since goods cannot be released before clearing the import

duties.

ORGANISATION OF A WARE HOUSE

Warehouses are organized according to the quantity and nature of goods to be stored. A

typical warehouse is topped by the owner who could be a sole trader, a number of

partners or a joint stock company.

Next in ranking is the General Manager who is usually the executive, responsible for the

entire concern.

The business is divided into two main wings i.e. Administration and specialist wings.

ADMINISTRATION WING

This has two departments i.e. the Secretarys Department and the Accounts Department.

a)Secretarys Department. This department is headed by an officer called Secretary or

Office Manger and it handles all correspondence, records, legal affairs and personnel

matters.

This department is responsible for:

i) Keeping up to date with correspondence.

ii) Maintaining the necessary files.

iii) Appointing staff members.

iv) Arranging for training of personnel.

v) Maintaining staff records.

vii) Advising management on matters of legal importance e.g. company registration,

dividends, etc.

b)Accounts Department. This department is headed by the Chief Accountant and

handles all accounting work. It is responsible for:

i) Preparing of invoices and statements to be sent to customers.

ii) Receiving and effecting payments on behalf of the business.

iii) Preparing of budgets and enforcing cost systems.

iv) Preparing of wage sheets and paying of wages.

v) Preparing of final accounts at the end of each financial year.

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vi) Ensuring the all financial commitments of the business are conveniently met.

SPECIALIST WING

This has three departments i.e. Purchases, Sales and Sales Promotion departments.

a) Purchases Department. This department is headed by the Purchases Manager

responsible for buying for buying stock to the warehouse.

It may be divided into several sections depending upon the range of goods handled by

the business e.g. Cosmetics Section, Food Grain Section, Drinks Section, Canned Food

Section, Clothing Section, etc. Each department of these departments is headed by a

Chief Buyer.

This department is responsible for:

i) Maintaining a list of regular suppliers.

ii) Placing orders with the most suitable manufacturer.

iii) Receiving goods from suppliers.

iv) Packing, blending or branding goods.

v) Maintaining stores records.

b) Sales Department. This department is headed by a Sales Manager and it is

responsible for the profitability of the business. It is concerned with:

i) Receiving orders from customers.

ii) Maintaining a list of regular customers.

iii) Arranging for transport of goods from the warehouse to the retailers premises.

iv) Maintaining a regular sales force and arranging for its training.

v) Enforcing a strict credit control.

c) Sales Promotion Department. This department is headed by a Sales Promotion

Manager and it is responsible for:

i) Handling all advertisements.

ii) Printing catalogues, price lists, etc.

iii) Attending to customers complaints.

iv) Participating in trade shows.

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v) Arranging for special demonstrations of goods offered by the business.

ADVANTAGES/IMPORTANCE/ROLE OF WAREHOUSING IN

DEVELOPMENT OF TRADE

1. It helps to keep goods under appropriate conditions and avoid damages to the goods.

2. It facilitates continuous production of goods by enabling storage of raw materials

required for production of goods.

3. It encourages continuous supply of seasonal goods by storing them in warehouses so

as to supply them all through the year.

4. It helps to meet demand fluctuations in the market by storing surplus output so as to

supply it during periods of scarcity.

5. It helps to reduce transportation costs as warehouses tend to be located close to the

industries.

6. It allows flexibility in production scheduling as well as marketing by ensuring that

raw materials are available whenever required for production or for sale.

7. The mechanical applicants used in warehouses allow effective handling of heavy and

bulky goods without any breakage.

8. The goods which are stored in warehouses are well guarded and insured which helps

to reduce losses.

9. It provides and creates employment for the unskilled, semi-skilled and highly skilled.

10. Warehouses provide a variety of services to their clients for example processing,

blending, packing, grading, shipping, etc, of goods to get sale.

11. It provides business with the opportunity to expand by producing popular goods in

large quantities and storing the in a warehouse.

HOW WAREHOUSING FACILITATES TRADE

1. Through keeping goods under appropriate conditions and avoid damages to the goods.

2. Through facilitating continuous production of goods by enabling storage of raw

materials required for production of goods.

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3. Through encouraging continuous supply of seasonal goods by storing them in

warehouses so as to supply them all through the year.

4. Through meeting demand fluctuations in the market by storing surplus output so as to

supply it during periods of scarcity.

5. By reducing transportation costs as warehouses tend to be located close to the

industries.

6. By allowing flexibility in production scheduling as well as marketing by ensuring that

raw materials are available whenever required for production or for sale.

7. Through allowing effective handling of heavy and bulky goods without any breakage

with the aid of mechanical applicants.

8. By safeguarding goods which are stored in warehouses well this helps to reduce

losses.

9. Through providing and creating employment for the unskilled, semi-skilled and

highly skilled.

10.Through providing a variety of services to their clients for example processing,

blending, packing, grading, shipping, etc, of goods to get sale.

11. By providing business with the opportunity to expand by producing popular goods in

large quantities and storing the in a warehouse.

MONEY & BANKING

Money. This refers to anything which is generally acceptable as a medium of exchange

for goods and services and settlement of debts within a given country in a given period

of time.

FORMS OF MONEY

1.Metallic money. This refers to coins made out of various metals like gold, silver,

bronze, nickel, etc.

A coin is a piece of metal of a given size, shape, weight and fineness whose value is

certified by the State.

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Note. The right of minting coins is the monopoly of the State and the department of

government minting coins is called the Mint.

TYPES OF COINS

i) Standard coins/full-bodied coins. A standard coin is one whose face value is equal to

the value of the metal i.e. it is one whose exchange value fixed by the issuing authority is

equal to its intrinsic value.

ii) Token coins. A token coin is one whose face value is more than the real or metal

value. Token coins are usually made of cheap metals like copper, bronze or nickel. They

are generally of lower denominations and are issued primarily as a form of subsidiary

money which is to be used for small change only.

They are useful as convenient means for the payment of small sums.

3. Paper money/bank notes. This is money made out of paper. It consists of currency

notes issued by Central Bank of the Country to be used by the general public.

ADVANTAGES OF PAPER MONEY

1. It is economical as paper is much cheaper than any metal.

2. It is very convenient to carry paper money from place to place.

3. It is easier to store paper notes compared to coins.

4. It is easier to count paper notes than metallic coins.

5. Supply of paper money is easily adjustable as per the need of the economy.

6. It economizes the use of precious and scarce metals by serving as representative

money.

DISADVANTAGES OF PAPER MONEY

1. Durability of paper money is much less than metallic money.

2. There is a danger of over issue of notes as they can be easily printed.

3. Paper money is easy to forge.

4. Paper money lacks general acceptability if the people lose confidence in the

government for one reason or the other.

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5. Paper money can circulate within the domestic economy only i.e. it is not acceptable

for making foreign exchange payments unless it is a key currency like dollar.

4. Bank deposits/bank money/credit money. This is money which is put or deposited

by the general public for safe custody in banks.

FEATURES/CHARACTERISTICS OF GOOD MONEY

1. Acceptability. This feature means that everyone must accept money as a legal tender

to purchase goods and services.

2. Durability. This means that money should last for a long time.

3. Portability. This means that money should be easy to carry around.

4. Scarcity. This means that money must be scarce enough to be valuable.

5. Divisibility. Good money is one that can be divided into smaller units to allow all

kinds of transactions.

6. Stability in value. This means that money should not easily lose value so that people

can use it consistently for both current and future dealings.

7. Cognizability. This means that good money should be easy to recognize i.e. the

general pubic must be able to differentiate between different denominations as well as

correct money and fake money.

8. Uniformity/homogeneity. This means that all features appearing on the same

denomination of currency in terms of colour, size, texture, shape, etc, must be similar.

9. Malleability. This means that money should be malleable so that it could be made

into new money.

FUNCTIONS OF MONEY

1. Money provides a medium of exchange acceptable to all people in exchange of goods

and services.

Individuals sell their goods and services for money and later on they use this money to

buy other commodities hence acting as a medium of exchange.

2. It provides a measure of value that enables different commodities to be valued at their

true worth.

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The prices of different goods and services are expressed in terms of money and hence

one can easily compare the value of different goods in view of their prices.

3. It serves as a store of value where individuals can store part of their wealth since it

can be kept for longer periods for instance a farmer can sell perishable items like

tomatoes, gets money and stores it for other needs. In this case, money is acting as a

store of value.

4. It acts as a standard of deferred payment by enabling settlement of debts in future in

respect to goods purchased on credit.

5. It serves as a unit of account by enabling business transactions to be recorded in

monetary units such as shillings, pounds, dollars, etc. Therefore, the use of money

facilitates business book keeping, accounting, costing and budgeting.

COMMON TERMS USED IN MONEY

1. Currency. This refers to a generally acceptable form of money printed/made and

issued by a government to be used in the country.

2. Legal tender. This refers to the money which by Law must be accepted as a medium

of exchange and for payment of debts.

3. Fiduciary issue. This refers to money issued by the Central Bank which is not backed

by gold/foreign exchange reserves.

4. Fiat money. This refers to money printed and issued out of government directive and

it is not backed by gold reserve/foreign exchange reserve.

Note. Before money came into existence, people used to exchange goods or services for

other goods r services.

BARTER TRADE/ Barter exchange

This is the method of exchange by which goods or services are directly exchanged for

other goods or services without the use of money.

ADVANTAGES OF BARTER OF BARTER TRADE

1. It solves the problem of scarcity of foreign exchange in international trade.

2. It widens the market for surplus not sold under the monetary system.

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3. It solves Balance of payment problem i.e. it encourages exchange of goods value for

value.

4. It eliminates the problem of currency differences among trading countries.

5. It promotes good relationship among trading countries.

6. It avoids the problem of under or over production since goods are produced just to

meet the needs of the society.

7. It avoids resource wastage as personal and natural resources are utilized to meet the

needs of the society.

8. It avoids unequal distribution of wealth because there is no possibility of storing

commodities.

9. It encourages specialization and division of labour as people specialize in producing

what they can do best so as to exchange for what they dont have.

DISADVANTAGES/LIMITATIONS/DIFFICULTIES/PROBLEMS OF BARTER

TRADE

1. It encourages double coincidence of wants which involves great difficulty and

wastage of time.

Note. Double coincidence of wants means that a person who wants to exchange his/her

goods for others has to look for someone who needs his/her goods and at the same time

needs what he/she has.

2. There is absence of a common measure of value hence it becomes difficult to

determine the true value of a commodity using another commodity.

3. There is lack of divisibility of goods due to the fact that all goods cannot be divided

and subdivided.

4. Goods and services cannot conveniently be transported from one place to another for

exchange to take place.

5. There is absence of a proper and convenient means of storing wealth or value due to

physical deterioration or change in tastes.

6. It does not facilitate deferred/future payments as future payments are written in terms

of specific goods whose quality keeps declining with time

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BANKING

This is an aid that accepts and safeguards money and other valuables of businessmen or

public, settles debts and finances business transactions.

A bank. This is a financial institution that accepts deposits from those who have some

money in excess of their immediate needs, safeguards the money so received, makes it

available to its true owners, advances loans and performs other related banking services.

CHARACTERISTICS/FEATURES OF A BANK

1. Dealing in money. A bank is a financial institution that deals with other peoples

money i.e. money given by depositors.

2. Individual/firm/company. A bank may be a person, firm or a joint stock company. A

banking company means a company which is in the business of banking.

3. Acceptance of deposit. A bank accepts money from the people in the form of

deposits which are usually repayable on demand or after the expiry of a fixed period.

4. Giving advances. A bank lends money in the form of loans to those who require it for

different purposes.

5. Payment and withdrawal. A bank provides easy payment and withdrawal facility to

its customers in the form of cheques and drafts. It also brings bank money in circulation.

6. Provides agency and utility services. A bank provides various banking facilities and

agency services to its customers.

7. Profit and service orientation. A bank is a profit oriented institution.

8. Ever increasing functions. In banking, there is continuous expansion and

diversification as regards the functions, services and activities of a bank.

9. Serves as a connecting link. A bank acts as a connecting link between borrowers and

lenders of money by collecting money from those who have surplus and give the same

money to those who are in need of money.

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10. Banking business. A banks main activity should be doing business of banking

which is not subsidiary to any other business.

11. Name identity. A bank should always add the word “bank” to its name to enable

people to know that it is a bank that is dealing in money.

TYPES OF BANKS

1. Savings banks. These are banks which accept deposits from customers who may

want to save small amounts of money.

They are mainly intended to provide a safe place for keeping money and to promote the

habit of thrift/saving among individuals.

They offer very few services to their customers compared to commercial banks as they

mostly serve low income earners for example FINCA UGANDA LTD.

2. Commercial banks/joint stock banks. A commercial bank is a financial institution

which offers a wide range of banking services to the business community/people/general

public.

It is a joint stock company established by government or shareholders. Hence

commercial banks are often called joint stock banks.

Examples of commercial banks in Uganda include Crane bank, Centenary bank, Stanbic

bank, Barclays bank, Standard Chartered bank, Bank of Baroda, Post bank, etc.

3. Central banks. A central bank is a government institution established to control,

guide and assist commercial banks in the country and to provide banking services and

financial advice to the government for example Bank of Uganda.

4. Merchant banks. A merchant bank is one that specializes in accepting and

discounting bills of exchange and in assisting traders in international trade.

It is a bank established for importers and exporters to have access to loans for carrying

out international trade. Hence its major function is connected to international trade for

example Cairo International Bank.

5. Specialized banks. These are banks that serve a special type of customer or are aimed

at providing a special type of service.

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Examples of specialized banks include Cooperative banks and Development banks.

COMMERCIAL BANK

This is a financial institution which offers a wide range of banking services to the

business community/people/general public.

FUNCTIONS/SERVICES OFFERED BY COMMERCIAL BANKS

1. They safeguard surplus cash through opening up bank accounts e.g. savings and

current accounts.

2. They provide a means of payment i.e. by cheques, credit transfers, bank drafts, etc.

3. They provide working capital to their customers by extending short-term loans and

long-term loans.

4. They safeguard valuable documents, jewellery, etc for customers.

5. They provide advice on investment and tax matters.

6. They act as referees for their clients for example on credit status inquiry.

7. They act as trustees for their clients i.e. commercial banks can be entrusted with

property of the clients when they die.

8. They guarantee payment to oversea suppliers in foreign trade by giving letters of

credit.

9. They often act as foreign exchange agents for their clients.

10. They buy and sell securities or bonds on behalf of their clients who are traders.

11. They transfer money through telegraphic money transfer, travelers' cheques to other

places.

BANK ACCOUNTS

A businessman in Uganda may open a Savings, a Current or a Fixed Deposit Account

with a commercial bank.

SAVINGS ACCOUNTS

These are accounts where money is withdrawn by use of a passbook. They are offered

by both savings and commercial banks.

FEATURES/CHARACTERISTICS OF SAVINGS ACCOUNTS

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1. Account holders are required to deposit a minimum initial deposit when opening a

savings account. This differs from bank to bank.

2. Account holders are required to maintain a certain minimum balance at all times. This

varies with different banks.

3. Money can be deposited at any time.

4. Withdrawals are allowed only once a week and there is a limit on the maximum

amount that may be withdrawn at a time.

5. No overdrafts are allowed. However, a balance in a savings account may be used as

security when applying for an overdraft against a current account, if a person operates

both accounts.

6. No cheque books are provided i.e. an account holder wishing to withdraw money has

to go to the bank personally.

7. Account holders are issued with a bank passbook which contains a record of their

deposits and withdrawals.

8. Banks allow interest on deposits held in savings account. However, the rate of interest

allowed differs from one bank to another.

Note. Savings accounts suit the needs of individuals more than businessmen who have to

withdraw money very frequently and who often seek overdraft facilities.

ADVANTAGES OF SAVINGS ACCOUNTS

1. They encourage savings habit among salary earners and others who have fixed

income.

2. They enable the depositor to earn income by way of saving bank interest.

3. Saving account passbook acts as an identity and residential proof of the account

holder.

4. They provide facilities such as Electronic Fund Transfer (EFT) to other peoples

accounts.

5. They help to do online shopping via facilities like internet banking.

6. They help to keep record of all online transactions carried on by the account holder.

7. They provide immediate funds as and when required through ATM.

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FIXED DEPOSIT ACCOUNT

This is an account which is opened for a particular fixed period by depositing particular

amount.

The term “fixed deposit” means that the deposit is fixed and is repayable only after a

specific period is over. Under fixed deposit account, money is deposited for a fixed

period say six months, one year, five years or even ten years.

Hence the money deposited in this account cannot be withdrawn before the expiry of

period. This account is suitable for those who have a large sum of money which they do

not intend to use in the near future.

FEATURES/CHARACTERISTICS OF FIXED DEPOSIT ACCOUNTS

1. A fixed deposit account is opened with not less than a certain minimum amount for a

specific period.

2. Money can be deposited only once i.e. no further deposit is allowed before expiry of

the fixed deposit period.

3. Withdrawals are not allowed before the expiry of the fixed period.

4. Interest paid on fixed deposit accounts is higher than that paid on savings accounts.

5. Depositor is issued with a fixed deposit receipt which he must present at the expiry of

the deposit period when claiming for his money and interest earned.

6. The main purpose of fixed deposit accounts is to enable the account holders to earn a

higher rate of interest on their surplus funds.

ADVANTAGES OF FIXED DEPOSIT ACCOUNTS TO THE ACCOUNT

HOLDER

1. Fixed deposit accounts encourage savings habit for a long period of time.

2. They enable the depositor to earn a high interest rate.

3. They help depositors to get loans from the bank.

4. On maturity of the fixed deposit period, the amount can be used to purchase assets.

ADVANTAGES OF FIXED DEPOSIT ACCOUNTS TO THE BANK

1. The bank gets the funds for a longer period of time.

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2. The bank can lend funds on fixed deposit accounts for short-term loans to

businessmen hence making money in form of interest.

3. The bank can invest such funds in profitable areas.

CURRENT ACCOUNT

There are accounts where money is withdrawn by use of cheques. Current accounts are

offered by commercial banks only and are ideally suited to the needs of businessmen.

FEATURES/CHARACTERISTICS OF CURRENT ACCOUNTS

1. A minimum initial deposit is required at the time of opening a current account.

2. Banks allow overdraft facilities to their current account holders upon arrangement.

3. There is no minimum balance required to be maintained i.e. an account holder can

withdraw all his deposits.

4. An account holder can deposit any amount, at any time, in any form i.e. cash, cheques,

drafts, postal orders, etc.

5. An account holder can withdraw any amount at any time on demand, i.e. without

giving any notice.

6. Current account holders are provided with cheque books and money is withdrawn

using cheques.

7. Account holders are issued with a bank statement at the end of each month sowing the

transactions between the current account holder and the bank for each month.

8. Banks pay no interest on deposits held in a current account as they are payable on

demand and may not be safely lent.

ADVANTAGES OF CURRENT ACCOUNTS

1. No minimum balance is required to be maintained on a current account.

2. Deposits can be made in any amount and at any time.

3. Withdrawals can be made in any amount at any time.

4. Account holders of current accounts are provided with overdraft facilities.

5. Cheque books are provided which are very convenient means of payment.

6. It is convenient to use for other means of payment i.e. standing orders, credit transfers,

etc.

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REASONS WHY CURRENT ACCOUNTS ARE PREFERRED TO FIXED

DEPOSIT ACCOUNTS

1. The minimum initial deposit is lower in current accounts than in fixed deposit

accounts.

2. No minimum balance is required to be maintained on the current account compared to

a fixed deposit account.

3. Deposits can be made in any amount and at any time in current accounts unlike fixed

deposit accounts where no further deposit is allowed before expiry of the fixed deposit

period.

4. Withdrawals can be made in any amount at any time in current accounts unlike in

fixed deposit account where withdrawals are not allowed before the expiry of the fixed

period.

5. Account holders of current accounts are provided with overdraft facilities unlike those

of fixed deposit accounts.

6. Cheque books are provided to current account holders which are very convenient

means of payment unlike in fixed deposit accounts.

7. It is convenient to use for other means of payment i.e. standing orders, credit transfers,

etc. with a current account than in fixed deposit accounts.

PRCOESS OF OPENING A CURRENT ACCOUNT

1. Providing the bank with two letters of reference stating that the applicant is suitable to

be offered a current account i.e. one from the banks existing customer and another from

the applicants employer or local council.

2. Providing identification by the applicant through producing his identity card, driving

license or passport or registration certificates incase of partnerships and joint stock

companies.

3. Filling an application form for opening up a current account and signing two

specimen signature cards provided by the bank.

4. Receiving an account number issued by the bank to the applicant.

5. Making an initial deposit by the applicant after receiving the account number.

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6. Applying for and receiving a cheque book from the bank.

PROCESS OF DEPOSITING MONEY ON A CURRENT ACCOUNT

1. Filling a pay-in slip in duplicate by the account holder. This could be for cash or

cheque deposits.

2. Receiving the duplicate pay-in slip after being stamped and signed by the receiving

cashier.

3. Keeping the duplicate pay-in slip by the account holder for record purposes.

PROCESS OF WITHDRAWING MONEY FROM A CURRENT ACCOUNT

A person wishing to withdraw money from his current account must write/draw a

cheque.

This means that no money can be withdrawn from a current account without writing a

cheque by the account holder to his bank.

A CHEQUE

This is a written order from a current account holder to his bank to pay a specified sum

of money to the person named on it or to the bearer of the cheque.

FEATURES/CHARACTERISTICS OF A CHEQUE

1. It contains an unconditional order issued by the customer to his bank i.e. it does not

contain a request for payment.

2. The payee to whom payment is to be made must be certain.

3. It must mention the exact amount to be paid i.e. the amount to be paid by the banker

must be certain.

4. It must be duly dated by the customer of the bank i.e. it must indicate clearly the date

when it has been written.

5. It has three parties i.e. the Drawer, Drawee and Payee.

6. It is drawn by a current account holder on his specific bank mentioned therein.

7. It must be signed by the customer i.e. the account holder writing it.

8. It must be paid on demand when presented for payment.

9. It is an instrument in writing i.e. a cheque must be written in ink pen or ball point pen.

PARTIES TO A CHEQUE

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i) Drawer. This is the person/account holder who writes and signs a cheque.

ii) Drawee. This is the banker (bank) to whom a cheque is drawn.

iii) Payee. This is the person to whom the cheque is made payable i.e. the bearer of the

cheque.

OTHER PARTIES TO A CHEQUE

i) Endorser. This is the person to whom the cheque has been written and signs it at the

back to transfer it to another individual.

ii) Endorsee. This is the person or firm in whose favour the payee transfers a cheque i.e.

the new payee.

SPECIMEN OF A CHEQUE

Drawee Payee

ENDORSEMENT OF A CHEQUE

This refers to the act of signing on the back of a cheque by the payee so as to transfer the

right to receive money against the cheque to a new payee. For example, basing on figure

52, let us suppose that KALENZI TOM transfers the right to receive money against the

cheque to KASADHA PETER.

He can do so by signing his name and putting the name of Kasadha Peter on the back of

the cheque. In this case, Kalenzi Tom, who signed his name at the back of the cheque, is

CENTENARY BANK LIMITED P.O.Box 700 Plot No. 333 Bugiri Branch Date: 21/11/2012 Pay KALENZI TOM or order Uganda Shillings five million

MATYAMA STATIONERY Authorized signature klinsm.

Authorized signature ……..…

3020545390 177000 0220444

Date

21/11/2012 Payee

KALENZI TOM

Amount

5,000,000 Sign:

klinsm. 0220444

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the endorser while Kasadha Peter, in whose favour the right to receive money against the

cheque has been transferred, is the endorsee and the new payee.

TYPES/FORMS OF CHEQUES

1. Bearer cheque. This is a cheque where no payee is named and can be cashed by

anybody who presents it across the counter.

Example of a bearer cheque

2. Order cheque. This is a cheque where the payee is named and cannot be cashed by

anybody who presents it across the counter.

An order cheque is payable to the person named on its face (the payee) or to his order. If

the payee wishes to transfer the right to the right to receive money against an order

cheque, he must endorse it, that is, he must sign his name on the back of the cheque and

name the new payee.

Example of an order cheque

CENTENARY BANK LIMITED P.O.Box 700 Plot No. 333 Bugiri Branch Date: 21/11/2012 Pay Cash or order Uganda Shillings five million MATYAMA STATIONERY Authorized signature klinsm.

Authorized signature …………

3020545390 177000 0220444

CENTENARY BANK LIMITED P.O.Box 700 Plot No. 333 Bugiri Branch Date: 21/11/2012 Pay KALENZI TOM or order Uganda Shillings five million MATYAMA STATIONERY Authorized signature klinsm.

Authorized signature …………

3020545390 177000 0220444

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3. Post-dated cheque. This is a cheque bearing a future date for payment. A posted

cheque cannot be honoured earlier than the date on it hence it has to be presented for

payment not before the future date indicated.

4. Anti-dated cheque. This is a cheque bearing a date earlier than the date on which it is

presented to the bank. Such a cheque is valid up to six months from the date of the

cheque.

5. Stale cheque. This refers to a cheque presented for payment six months from the date

of issue of the cheque. A stale cheque is not honoured by the bank.

Note. Cheques may be open or crossed.

OPEN/UNCROSSED CHEQUES

An open cheque is one payable across the counter and may be payable to anybody

holding it or to a named person or his order.

An open cheque where no payee is named is called a bearer cheque while one where the

payee is named is called an order cheque.

CROSSED CHEQUE

This is a cheque that bears two parallel lines across its face. These two parallel lines are

called crossings and are usually drawn on the upper left-hand of a cheque.

Note. A crossed cheque cannot be presented for payment across a counter i.e. it must be

deposited in a bank account.

Crossings may be general or special crossings.

GENERAL CROSSINGS

General crossings may take one of the following forms:

Two parallel lines, with no words between them.

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Effect of the crossings

The two parallel lines, with no words between them imply that the cheque has to be

deposited through the bank account for cashing and not across the counter.

1. Two parallel lines with words “& Co.” between them.

Effect of the crossings

The two parallel lines, with the words “& Co.” between them implies that the cheque

has to be deposited through the bank account for cashing and not across the counter.

Note. A crossed cheque with or without the words “& Co.” is different from an order

cheque only in the respect that whereas an order cheque can be cashed across the

counter, such a crossed cheque must be presented through a bank account.

1. Two parallel lines with the words “NOT NEGOTIABLE” between them.

CENTENARY BANK LIMITED P.O.Box 700 Plot No. 333 Bugiri Branch Date: 21/11/2012 Pay or order

Uganda Shillings …………………………………

MATYAMA STATIONERY Authorized signature ………….

Authorized signature …………

3020545390 177000 0220444

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Effect of the crossings

The two parallel lines, the words “NOT NEGOTIABLE” between them imply that

although a named payee can transfer rights to receive money against the cheque, the new

payee will not have better title to the cheque than the original himself had.

1. Two parallel lines with the words “ACCOUNT PAYEE ONLY” between them.

Effect of the crossings

The two parallel lines, the words “ACCOUNT PAYEE ONLY” between them

instructs the bank that payment against the cheque should be made if it is presented for

collection through the bank account of the named payee on the cheque i.e. the cheque

cannot be endorsed or negotiated.

SPECIAL CROSSINGS

Special crossings consist of two parallel lines with the name of the bank and branch

between them. The words, “NOT NEGOTIABLE” and “ACCOUNT PAYEE

ONLY” may be added to a special crossing to make it more effective.

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Effect of the crossings

A specially crossed cheque implies that the cheque can only be presented for payment

through the bank and branch named between the crossings.

Note. A specially crossed cheque is the safest method of effecting payments by a

cheque.

OTHER USE OF CROSSINGS

Crossings may also be used to indicate the amount payable against the cheque. This is

done by writing between the lines the maximum amount payable against the cheque e.g.

“NOT EXCEEDING SHS. 1,000,000”

Effect of the crossings

A crossed cheque with the words “NOT EXCEEDING a given maximum amount

indicted between the lines” instructs the bank that payment against the cheque should

not exceed the amount indicated between the lines.

ADVANTAGES OF PAYING BY CHEQUE

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1. It is convenient i.e. writing a cheque is easier and faster than counting large sums of

money.

2. It is very safe especially when it is a crossed cheque.

3. A cheque ensures accuracy of payment and avoids mistakes.

4. A cheque against which payment is already made acts as a receipt i.e. proof of

payment.

5. It easier to carry large sums of money since it is light and portable.

6. It is easy to pay many people using one cheque through credit transfers.

7. Counter foils in cheque books act as a record of payment for future reference

purposes.

8. A post-dated cheque can be used to make payment if there no immediate cash i.e.

cheques facilitate deferred payments.

9. It allows effective transfer of money without leaving the bank.

DISHONOURING A CHEQUE

This involves refusing payment against the cheque by the banker/bank.

CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED

(Conditions under which a commercial bank may refer a cheque to the Drawer)

1. If the drawer does not have sufficient funds on his/her account with the bank.

2. If the drawer is dead or has become bankrupt or insane and the bank is informed, any

cheque issued becomes illegal.

3. If the drawer has instructed the drawee bank not to honor the cheque.

4. If the cheque is stale i.e. presented six months after the date on the cheque.

5. If the cheque is post-dated i.e. presented for payment before the date of maturity.

6. If the drawer has closed his account with the drawee.

7. If a cheque is mutilated/damaged/disfigured or defaced/spoilt or made dirty.

8. If the cheque is not signed by the drawer or if the signature differs from the specimen

held by the bank/ Incase of insufficient signatures incase of a joint account.

9. If the cheque has an error in it e.g. when amount in words and the amount in figures

do not agree, a cheque nit dated or not counter signed, etc.

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10. Where the bank suspects forgery in the cheque, i.e. forged signature.

Note. When a cheque is dishonored if the drawer does not have sufficient funds on

his/her account with the bank, is marked as “R/D” (Refer to Drawer) or “I/F”

(Insufficient Funds)

WHY CHEQUES ARE NOT WIDELY USED IN UGANDA

(Reasons why some people are reluctant to accept cheques as a means of payment)

1. Lack of accounts. People without accounts in banks cannot accept crossed cheques.

2. Delays in payment. It takes time i.e. four working days for cheques to mature

especially if they are of cross banks, hence people who need immediate funds to carryout

certain activities may be reluctant to accept checks.

3. Lack of information. The majority of the people in Uganda live in rural areas which

lack banking services so they are ignorant about cheques.

4. Loss of trust in banks due to closure of many banks hence people are reluctant to

accept post-dated cheques in fear that the bank may close before the cheque being

cashed.

5. Majority of the people in Uganda are small income earners who save their money with

microfinance institutions where there is no use of cheques.

6. High levels of illiteracy amongst people where majority of peoples cannot read and

write hence they are not ready to accept payment through the use of cheques.

7. Limited number of commercial banks in the country where many areas have limited

access to banking services.

8. High levels of bouncing cheques that are dishonored by banks for various reasons

hence people are reluctant to accept payment by cheques especially with new clients.

9. Fear of meeting costs of bank charges on cheque books by account holders.

WAYS OF KEEPING A CHEQUE SAFE

(Precautions that a Drawer can take to ensure the security of his cheque)

1. Ensuring use of crossed cheques that cannot easily be cashed across the counter.

2. Always report loss of cheques or cheque books to the bank and police.

3. Do not leave unnecessary gaps between the words and figures when filling a cheque.

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4. Always keep the cheque book under key and lock and the keys kept away from

exposure.

5. Avoid signing black cheques as necessary amounts can easily be filled in by imposters

and withdraw the money.

6. Avoid exposing the authorized signature as people can easily forge it and withdraw

money from the account.

OTHER SERVICES OFFERED BY COMMERCIAL BANKS

1. Bank loans. This is the amount of money obtained/borrowed from a bank with a view

of repaying it at a later date with interest before a fixed date.

FACTORS CONSIDERED WHEN GIVING OUT LOANS

1. Loan size. This is the amount of money/loan a lending institution is willing to give to

the borrower.

2. Interest rate. Interest is the amount of money the borrower has to pay to the lender

for taking and using the loan.

It is usually expressed in percentage for example borrowing at an interest rate of 25%

per annum.

3. Loan fees and services charges. These are charges that the borrower may be required

to pay on top of interest charges for instance loan application fees, loan processing fees,

etc.

4. Size of loan installments. This refers to all small parts of the loan which will be paid

at a time for example weekly, monthly, quarterly and half yearly or annually.

5. Loan period. This is the period the borrower is going to spend using the borrowed

money for instance one year in case of a short term loan or above one year in case of a

long term loan say five years.

6. Value of collateral security. This refers to any asset or property which lending

institutions ask for so that in case the borrower fails to repay the loan, they can sell it to

recover the loan for example land title, buildings, car log book, etc.

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7. Referees or guarantors. These are people or organizations that may be required to

give a confidential report about the borrower. They could be the employer of the

intending borrower, an institution, etc.

8. Cash flow statement. A cash flow statement is a document that shows cash received

by the business from different sources and the flows of cash out of the business in a

given period of time.

Some lending institutions today require this statement to assess the ability of the

borrower to manage the loan basing on his/her cash inflows and out flows especially

organizations like schools, hotels, etc.

9. Area of location or operation of the business to be funded. Sometimes lending

institutions do not advance loans to people operating in certain places for instance areas

where there are political instabilities like northern Uganda as they would be risking their

money.

10. Sectorial bias. Under this term and condition, some loans may be given with the

view of promoting certain groups of people, sectors, activities or areas. Therefore,

borrowers who fall into such categories will be given priority by the lenders for instance

loans given to the poor in war affected areas.

2. Bank overdraft. This is where a current account holder withdraws money in excess

of the balance on his/her bank account.

3. Standing order. This is an instruction to the bank by an account holder to pay a

specified sum of money to a named person at regular and specified intervals for a

specified period of time.

It is a very useful service provided by the commercial banks to those businessmen who

are very busy and have a large number of regular commitments to meet.

Examples of payments that can be made using standing orders include hire purchase

installments, rent, loan repayments, insurance premiums, etc. Banks charge a small fee

for this service.

Example of a standing order

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ADVANTAGES OF USING A STANDING ORDER

1. It reduces transaction costs e.g. transport.

2. It eliminates the possibility of skipping payments to creditors.

3. It is quick and time saving one signs all cheques at ago/at once.

4. It is a proof of payment.

5. It minimizes the risk of holding cash.

6. It saves the user the inconvenience of making regular bills.

4. Bank draft/ demand draft/ Cheque Draft. This is a cheque drawn by one bank

against funds deposited into its account at another bank, authorizing the second bank to

make payment to the individual named in the draft.

Or; this is a cheque drawn on the bank itself and the bank issues it only if a person

requesting has paid an equivalent amount of money to the bank.

Or; is a type of cheque where payment is guaranteed to be available by the issuing bank.

Example of a bank draft

CENTENARY BANK LIMITED P.O.Box 700 Plot No. 333 Bugiri Branch Date: 21/11/2012 Exchange for Uganda Shillings 2,000,000 On demand pay to the order of MASABA JOHN the sum of

Uganda Shillings two million only Value Received ………………..

To: For: CENTENARY BANK LIMITED CRANE BANK LIMITED WFlex

Jinja branch Bank officer

MATYAMA STATIONERY Authorized signature ………….

Authorized signature …………

MATYAMA SECRETARIAL BUREAU P.O.BOX 200, BUGIRI

TELEPHONE: 0778-100200

STANDING ORDER

From: Director 2nd January 2013 Matyama Secretarial Bureau P.O.Box 200, Bugiri To: Centenary Bank Bugiri Branch With effect from 1st Febuary 2013 and every 1st of the subsequent month until expressly cancelled by us, please pay to MALIBU STATIONERS from account of MATYAMA SECRETARIAL BUREAU of P.O.Box 200, Bugiri, account number3020545390 Centenary Bank, Bugiri branch the sum of Uganda shillings Two hindred thousand only (Shs. 200,000) Debiting our account with this amount plus your charges. Jmatyama Joseph Matyama Director

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DIFFERENCES BETWEEN A BANK DRAFT AND A CHEQUE

1. The person using the bank draft for payment does not appear on the document instead,

it is the name of the recipient that appears.

2. The person making payment by a bank draft gets a copy of the draft from the bank.

3. There are added security measures such as a hologram on the bank draft.

4. The amount and person to whom the bank draft is payable is specified and is payable

on demand.

ADVANTAGES OF USING A BANK DRAFT

1. The level of security is greater than with a personal cheque.

2. There is guaranteed payment with a bank draft as the draft is drawn on the bank itself

rather than the persons bank account.

3. It is a very convenient and faster means for settlement of debts.

4. Bank drafts are used in making large payments.

5. They help in speeding up payment than personal cheques as they are paid on demand.

6. Bank drafts have no fees with them.

5. Credit transfers. This is a service offered by commercial banks used for settling

many debts/creditors using one cheque.

When using credit transfer, a businessman only needs to prepare a list of people he

wants to be paid, specify the amount to be posted to each of them, the total amounts, and

pay the total by one cheque.

Most employers prefer to use this method of payment to pay salaries to their staff

members, who are encouraged to open bank accounts.

6. Credit cards. These are cards issued by commercial banks to their clients and give

the account holder authority to buy goods at shops specified by the issuing bank for

amounts up to an agreed maximum.

Here, the selling shop presents the bill to the issuing bank the credit card and is paid

promptly after subtracting a pre-agreed commission. The issuing bank then bills the

card-holder and either asks for prompt cash or in installments in which case is charged

on unpaid monthly balances.

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7. Travellers cheques. These are cheques issued by commercial banks in fixed

denominations to a person who pays for them in advance.

They are very useful to businessmen who travel a lot.

A person wishing to buy travellers cheques pays their value and a small service charge to

the issuing bank. The bank then issues him with the cheque leaves and asks him to sign

them in the presence of a bank officer.

When presenting these cheques for payment, the holder must countersign the cheques in

the presence of an officer of the paying bank.

The two signatures will be compared and if found similar, payment would be made

against the cheque.

Most banks authorize hotels and major shops to accept their travellers cheques.

CHEQUE CLEARING HOUSE

A clearing house is a place where different banks settle amounts that become payable to

each other as a result of their clients transactions.

FINANCIAL MARKETS

These are markets that deal in the sale and purchase of stocks (shares), bonds, bills of

exchange and foreign currency.

A financial market consists of those who borrow or lend money regardless of their

physical situation.

TYPES OF FINANCIAL MARKETS

1. Money Market or Discount Market. A money Market is one that deals in very short

term loans.

It consists of borrowers and lenders who deal in very short term loans. On the other

hand, a Discount Market is one that deals only in bills of exchange.

DEALERS IN MONEY MARKET/DISCOUNT MARKET

1. Businessmen borrowing from commercial banks, by way of loans or overdrafts.

2. Businessmen borrowing from discount houses, or merchant banks against bills of

exchange.

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3. The central bank by way of providing short term loans to discount houses and

commercial banks, and at times borrowing short term loans from these banks.

4. Discount houses borrowing money from commercial banks against bills of exchange

or in loan form.

Note. A Discount House is a firm that buys and discounts bills of exchange.

2. Capital Market. This is a financial market that deals in long-term loans. The

borrowers here could be businessmen or private individuals, financing companies or

government by way of long-term borrowing through issue of stocks and at the same time

extending loans.

3. Securities Market. This is a market where already issued shares and stocks are

bought and sold. The securities market is commonly known as a stock exchange.

4. Foreign Exchange Market. This is a financial market that deals in sale and purchase

of foreign currencies.

PROBLEMS FACED BY COMMERCIAL BANKS IN UGANDA

1. High levels of corruption and embezzlement of money bank officials.

2. Loss of confidence by the public in banks due to continued closure of banks.

3. High levels of ignorance among people about the services offered by commercial

banks.

4. High bank rate charged by the Central bank on commercial banks. This makes loans

advanced by commercial banks expensive hence discouraging borrowing by

businessmen.

5. Limited creditworthiness among customers/borrowers who discourage commercial

banks from lending money.

6. Insecurity to the property and money for example highway robbery or robbery of

money I the banks by thieves.

7. Competition from other financial institutions like microfinance institutions limiting

the number of customers available to commercial banks.

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8. Low levels of savings among the people due to poverty which limits the amount of

money in commercial banks for lending.

9. Most of the commercial banks are concentrated in urban areas thereby limiting the

number of customers from rural areas.

10. Political instability in some areas of the country which discourages investors towards

banking business for examples occupied by rebels.

11. High levels of inflation which discourages people from saving as they dont want to

receive their money when it has lost value.

12. High levels of forgery due to modern technology which at times lead to heavy losses

to the unfortunate banks which may receive fake notes as deposits.

WAYS OF IMPOROVING THE PERFORMANCE OF COMMERCIAL BANKS

IN UGANDA

1. Encouraging use f crossed cheques so as to minimize fraud in banks.

2. Maintaining the bank rate by the Central Bank low so as to enable commercial banks

to extend loans to the public at low interest rates.

3. Introducing Automatic teller Machines (ATMs) to enable banks serve their clients at

their convenient times throughout the day and night.

4. Ensuring tight security in commercial banks for example through employing security

guards and police to protect money and property of commercial banks.

5. Encouraging workers to open up savings/salary accounts with commercial banks so

that there salaries are paid through bank accounts.

6. Encouraging the development of infrastructure by government like roads, power to

encourage spread of commercial banks even to rural areas.

7. Fighting corruption and embezzlement of money by bank officials in commercial

banks.

8. Encouraging the development of many banks and other financial institutions so as to

increase competition hence resulting into efficiency in commercial banks.

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9. Maintaining political stability especially in areas of instability so as to increases levels

of production and savings.

10. Sensitizing the masses through the media and press about banking services and

informing them of the proper features on money.

CENTRAL BANK

This is a government institution established to control, guide and assist commercial

banks in the country and to provide banking services and financial advice to the

government for example Bank of Uganda.

FUNCTIONS OF THE CENTRAL BANK

The major functions of a Central Bank e.g. Bank of Uganda are discussed bellow.

1. Currency issue. The Central Bank issues currency in form of coins and notes and

replaces worn out or torn notes.

2. Banker to the government, that is, it receives deposits and pays on behalf of the

government from various sources e.g. income tax.

3. Lender to the government against securities and it is a manager of the public debt.

4. Advisor to the government on financial and economic matters.

5. Exchange control by managing the rate at which local currency is exchanged for

foreign currencies hence maintaining stability of a countrys currency.

6. Banker to commercial banks by way of keeping deposits of commercial banks and

lending money to them and controlling all their banking activities i.e. credit control

clearing system.

7. Banker to International Agencies like IMF, W.H.O, W.F.P, etc who are connected to

the country through the central bank.

8. Control of commercial banks by advising and directing them on all matters of

importance like government monetary policies.

9. Lender of last resort to commercial banks and other financial institutions by way of

advancing loans to them.

MONETARY POLICY

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This refers to the deliberate government policy through the Central Bank to

regulate/control money supply in circulation to achieve certain objectives The monetary

policy aims at increasing or reducing the money supply in circulation so as to achieve

certain objectives.

Note. When the government wants to increase money supply in circulation,

expansionary monetary policy is encouraged.

However, when there is need to reduce money supply in circulation, restrictive

monetary policy is applied.

TOOLS/ METHODS OF MONETARY POLICY

These refer to the instruments/guidelines used by the Central Bank to either increase or

reduce money supply in circulation.

METHODS/TOOLS USED BY THE CENTRAL BANK TO CONTROL

COMMERCIAL BANKS

1. Bank Rate. By increasing bank rates, commercial banks are deprived of loanable

funds which increases interest charged by commercial hence discouraging borrowing by

businessmen while lowering bank rates reduces interest charged by commercial hence

encouraging borrowing by businessmen.

2. Open Market Operations. When there is excess money in circulation, the Central

Bank sells securities and when there is little money in circulation, it buys securities.

3. Compulsory or Special Deposits. Government through the Central Bank demands

commercial banks deposits a portion of their deposits with the Central Bank which

reduces the money available to commercial banks for lending purposes. On the other

hand, absence of such deposits increases the money available to commercial banks for

lending purposes.

4. Cash Ratio. When the Central Bank instructs the commercial banks to keep a higher

percentage of the deposits received by them in cash form, this results into less cash being

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available to commercial banks for lending while a lower percentage of the cash ratio

increases the cash available to commercial banks for lending.

5. Selective Credit Control. The Central Bank instructs commercial banks to give loans

to selected sectors of the economy only e.g. agricultural sector or industrial development

which reduces the amount available for lending to other sectors.

6. Moral Suasion/Persuasion. The Central Bank instructs commercial banks to exercise

a general restraint in giving loans to businessmen which discourages borrowing by

businessmen while absence of such restraints encourages more borrowings by

businessmen.

7. Legal Reserve Requirements. Increase in legal reserve requirements reduces money

available to commercial banks for lending while decrease in legal reserve requirements

increases money available to commercial banks for lending.

CHAPTER 21: MEANS OF PAYMENT

This chapter looks at the methods of paying/settling debts arising out of transitions by

businessmen.

MEANS OF PAYMENT AVAILABLE TO TRADERS IN EAST AFRICA

There e are different means of payment of debts depending on the nature of the

transaction that has taken place i.e. means of payment made available by the Central

Bank, means of payment made available by commercial banks, means of payment made

available by post office and means of payment between traders themselves.

MEANS OF PAYMENT MADE AVAILABLE BY THE CENTRAL BANK

1. Cash. This is the most common form of payment consisting of currency notes and

coins issued y the Central Bank. Most retailers in East Africa refuse to accept payments

in any form other than cash. The fact that currency notes and coins are legal tender

makes them most readily acceptable.

Note. Cash as a means of payment is used in home trade only.

MEANS OF PAYMENT MADE AVAILABLE BY COMMERCIAL BANKS

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Commercial banks provide a number of convenient means of payment such; cheques,

bank draft, standing orders, credit cards, travellers cheques

Note. Travellers cheques are used mainly in international trade, bank drafts re used in

both home and international trade while cheques, standing orders and credit transfers are

used in home trade only.

MEANS OF PAYMENT MADE AVAILABLE BY POST OFFICE

1. Registered Letters (Registered Post). This is common with sending valuable goods

and money. Under this system, letters are registered at the post office before they are

sent to ensure their safety.

Registered post is not put in the letter box, but it is handed to the post office and a

receipt is issued. The charges for sending a registered post depend on the value of the

contents in addition to the first class rate.

Note. Under registered post, the Post Office undertakes to compensate the sender if the

mail/letter is lost.

2. Postal Order. This is a written order for the payment of a sum of money, to a named

payee, obtainable and payable at any post office.

The sender writes the name of the payee and the address on the face of the postal order

and encloses it in an envelope which is also well addressed to the payee. Postal orders

are paid at any post office within the country of issue.

They may be crossed and therefore paid through a bank current account.

Note. The sender of the postal order is required to pay a fee to the post office for the

service and this fee is called poundage.

3. Money Orders. This is an order for the payment of a specified amount of money

payable at a named post office.

Money orders are used to send large amounts of money than postal orders. Under this

method, the money is given to the payee by the nearest post office.

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The payee is required to identify himself and name the person who sent the money

order. A money order may be crossed such that money is put to the account of the payee.

Note. Unlike postal orders, money orders are paid at specific post office hence higher

poundage is paid for sending a money order than a postal order.

4. Telegraphic Money Order. This is a method of sending money to someone in urgent

need of cash.

The sender places cash with a telegraph office, which then wires the telegraph office at

the city of destination to disburse the cash or acceptable equivalent (money order).

5. International Money Orders. An international money order is a money order which

is payable to someone living in a foreign country.

6.Postage Stamps. These are means of payment used in settlement of very small debts

from a debtor who lives in a far away village and to whom any other means of payment

is not conveniently available.

The postage stamps so received are used for sending letters.

Note. A part from international money orders, all the means of payment provided by the

post office are used in home trade only.

MEANS OF PAYMENT BETWEEN TRADERS THEMSELVES

There are two means of payment between traders themselves i.e. bills of exchange and

promissory notes.

1. Bills of exchange. This is an “unconditional order in writing, addressed by one person

to another, signed by the person giving it, requiring the person to whom it is addressed

to pay on demand or at a stated future date, a sum of money to a certain period or to the

order of that person or to bearer”.

FEATURES/CHARACTERISTICS OF A BILL OF EXCHANGE

1. It must be signed by the drawer.

2. It must be accepted by the drawee.

3. It must be unconditional.

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4. It must bear appropriate revenue stamps.

Example of a bill of exchange

Date of bill

Acceptance

Drawee and acceptor Drawer

Drawer. This is the person who gives the bill of exchange. He is the person to whom the

drawee owes money, usually as a result of the drawer selling goods to the drawee.

Drawee. This is the person to whom the bill of exchange is addressed. Usually, the

person to whom the sum of money should be paid by the drawee is named by the drawer

on the bill of exchange. Such a person is called a payee. The drawer may, if he so

desires, name no payee on the bill of exchange and make it payable to the bearer, i.e. to

anybody holding it.

Note. A bill of exchange differs from a cheque in only one respect i.e. a bill of exchange

to become a legally enforceable document; it must be accepted by the drawee.

ACCEPTANCE

This is the act of writing words “Accepted” across the face of the bill of exchange and

signing his name as the drawee.

12th December 2012

Three months after date, pay me or my order the sum of Uganda shillings Two million only, value received.

Jsmubiru

Joshua Mubiru. To: Imran Gyaza P.O.Box 423, Iganga (U)

REVENUE STAMP

282

A bill of exchange is not valid unless it has been accepted. After acceptance, a drawee

becomes legally responsible for the amount stated in the bill and the payee needs not to

prove the debt in a court of law in any other form except producing the bill.

Before a bill is accepted, it is called a draft and a drawee is called an acceptor.

Note. The bill of exchange is used in both home trade and foreign trade.

TYPES OF BILLS OF EXCHANGE

1. Sight Bill. This is a bill of exchange payable on demand.

2. Usance Bill. This is a bill of exchange payable after maturity date. This implies that

the drawee will be required to pay the amount of the bill three moths after the date on the

bill.

Usually, three days are allowed from this date to allow the drawee to make arrangements

for payment. These days are called days of grace.

3. Trade Bills. A trade bill is a bill of exchange where the drawee is required to pay for

the goods bought by him. It is a bill of exchange resulting from a trading activity.

Note. Most bills of exchange are trade bills.

4. Inland Bills. This is a bill of exchange where payment is required by one person from

another of the same country i.e. if both the drawer and the drawee are from the same

country. Inland bills are used in home trade.

5. Foreign Bills. This is a bill of exchange where payment is asked from a person from

another country. Foreign bills are used in international trade.

8. Retired Bill. This is a bill of exchange settled by the drawee before the maturity date.

9. Accommodation Bill. This is a bill of exchange which is accepted not for value but to

oblige a businessman.

If a businessman finds himself short of money but feels that within a short period he will

have enough, he may get a reputable person to accept a bill drawn by him without giving

him any value i.e. selling him any goods.

283

He can then discount the bill with a commercial bank and get ready cash against it.

When the maturity date arrives, he pays the amount direct to the discounting bank.

HONOURING A BILL OF EXCHANGE

This is the act of paying the amount against the bill of exchange by the drawee. When a

bill matures, it must be presented to the drawee.

A drawee is under no legal obligation to pay the amount against a bill of exchange

before it matures, but if he so desires he can contact the drawer or payee and pay him,

getting the bill of exchange in return.

DISHONORING A BILL OF EXCHANGE

This refers to the act of failing/refusing to pay the amount on the bill of exchange by the

drawee.

CONDITIONS UNDER WHICH A BILL OF EXCHANGE MAY BE

DISHONOURED

There are two conditions under which a bill of exchange may be dishonored i.e.

1. If the drawee refuses to accept the bill i.e. dishonor of the bill of exchange by non-

acceptance.

2. If the drawee doesnt pay a certain amount of money when the bill is shown on

maturity i.e. dishonor of the bill of exchange by non-payment.

Note. If a bill of exchange is dishonored, the payee has two courses of action to him i.e.

i) He may agree to extend the maturity date. In this case, he may ask the drawee to

accept a fresh bill, of a slightly larger amount to include the interest, in place of the

original bill, payable at a later date.

ii) He may take legal action to recover the money. In this case, the payee asks a

government-appointed person, called a Notary Public, to approach the drawee on his

behalf and demand payment.

284

If the drawee fails to pay, the Notary Public makes a note to this effect on the bill and

return to the payee. This is referred to as noting a bill.

This proves that the drawee has refused to honor the bill and entitles the payee to

proceed with instituting a lawsuit against him.

ENDORSING A BILL OF EXCHANGE

This is the act of signing on the back of a bill of exchange by the drawer so as to transfer

the right to receive money against it to a new payee.

DISCOUNTING A BILL OF EXCHANGE

This is the act of paying the drawer the amount against the bill of exchange less interest

for the unexpired period. The interest deducted is called “discount”. Usually,

commercial banks lend money against bills of exchange thereby acting as discounting

houses.

HOLDER IN DUE COURSE

This is the person who holds a bill of exchange before it becomes due for payment. He is

the last person in whose favour a bill has been endorsed.

ADVANTAGES OF A BILL OF EXCHANGE

1. It acknowledges a debt hence someone holding it does not have to prove at a court of

law the conditions giving rise to the debt.

2. It may be discounted before date which enables the seller to get ready cash almost

immediately after the sale of goods.

3. It allows enough time for the buyer to sell off the stock he has bought as payment is

made at its maturity.

4. An accommodation bill of exchange helps a trader out of temporary finance

difficulties.

PROMISORY NOTES

This is a document wherein one person promises to pay another person, or his order, a

specified sum of money at a certain date.

285

Promissory notes are rarely used in trade. Their main use is by money lending

institutions who ask their debtors to sign a promissory note when advancing loans to

them.

Note. Promissory notes are mainly used in home trade.

Example of a promissory note

Fig. 59 Promissory note

Advantages of Promissory Notes

i) They acknowledge a debt hence someone holding it does not have to prove at a court

of law the conditions giving rise to the debt.

ii) They may be discounted before date which enables the seller to get ready cash almost

immediately after the sale of goods.

iii) They allow enough time to the buyer/borrower to sell off the stock he has bought as

payment is made at its maturity.

SIMILARITIES BETWEEN BILLS OF EXCHANGE AND PROMISSORY

NOTES

i) Both evidence the acknowledgement of a debt.

ii) Both may be discounted before maturity.

DIFFERENCES BETWEEN BILLS OF EXCHANGE AND PROMISSORY

NOTES

2nd January 2013

Three months after date, I promise to pay Joshua Mubiru or his order, a sum of Uganda shillings Two million only, value received.

REVENUE STAMP

Imgyaza

IMRAN GYAZA

286

i) A promissory note is drawn and signed by the person who owes money whereas a bill

of exchange is drawn and signed by the person demanding money.

ii) A bill of exchange needs to be accepted by the drawee while there is no such a

requirement for a promissory note, where a buyer or borrower simply draws a

promissory note, signs it and sends it to the seller or lender, who may either keep it

before maturity date.

NEGOTIABLE INSTRUMENT

This is a document where a named payee can transfer the rights to receive money

against it to a new payee.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

i) It entitles the holder to receive a certain sum of money or value.

ii) It can be negotiated, i.e. the right attached to it can easily be transferred by one holder

to another, either by simple delivery of the document or by endorsement.

iii) A person holding it has no better title to it than the person who gave it to him had.

Give three examples of negotiable instruments.

i) Bills of exchange

ii) Cheques

iii) Promissory notes

CHAPTER: 22 BUSINESS CALCULATIONS

Financial statements

The whole aim of accounting is to produce a true and fair report of the results of the

operations of a business unit during its financial year. This is found in the Trading and

Profit and Loss Accounts (income statement). The balance sheet must also give a true

and fair statement of the business financial position at a certain date, with respect to its

assets, liabilities and owners equity.

INCOME STATEMENT (Trading and profit account)

287

This is a financial statement which shows the gross profit or gross loss and net profit or

net loss of a business organization for a given period of time.

PURPOSE OF THE INCOME STATEMENT

It is used to determine the financial performance of a business at the end of a given

trading period.

COMPONENTS OF THE INCOME STATEMENT

1. Stock. Stock refers to goods available for sale at a profit. There are two types of

stock recorded in the income statement i.e.

2. Opening stock/stock at start. This refers the value goods that are available to start

with in the new period. It is also known as stock at start and it is usually recorded in the

trial balance as opening stock or Stock 1st January or otherwise depending on when the

financial year of the business starts.

3. Closing stock/stock at close/stock at hand/stock in trade. This refers to the value of

goods that remain unsold by the end of the trading period. It is usually recorded as stock

31st December or stock 30

th June.

4. Sales/selling price. Sales refer to stock or goods sold in a given period of time.

5. Sales returns/returns inwards. These are goods once sold by the business but are

later returned by customers to the business.

6. Net sales/turnover. This refers to the actual amount of money received after selling

goods at the end of the period. It refers to the difference between sales and sales returns.

7. Purchases. Purchases refer to goods bought for resale in a given period with an aim

of making profits.

8. Purchases returns/returns outwards. These are goods once bought by the business

but are later returned to the suppliers.

9. Net purchases. This refers to the actual amount of money spent on goods bought in a

given period of time. It refers to the difference between purchases and purchases returns.

10. Expense/overheads. An expense is money used to buy or pay for a good or service

that helps the business to get an income.

1

- Gross loss if any from the

trading account.

- Carriage outwards/carriage

on sales

- Salaries and wages

- Electricity bills/expenses

- Heating and lighting

- Advertising

- General expenses

- Rent and rates

- Goods stolen

- Warehousing expenses

- Insurance premium

- Interest on loans

- Discount allowed

- Telephone expenses

- Bad debts

- Depreciation of fixed assets

- Transport expenses

- Motor repairs

- Postage

- Commission paid

- Cleaning

- Miscellaneous expense

- Increase in provision for

bad debts, etc.

11. Incomes/gains. Income refers to money received or made by the

business from the sale of goods and services. Examples of such incomes

include the following.

- Gross profit from the trading account which is the opening balance in

the profit and loss account.

- Discount received

- Interest received

- Rent received

- Commission received/earned

- Decrease in provision for bad debts.

DEFINITION OF TERMS AND FORMULAE

i) Net purchases

Net purchase = Purchases — Purchases returns

2

ii) Cost of goods available for sale/goods available for sale. This refers to

the cost price/value of stock available for sale in a given trading period. It is

obtained by adding purchases to opening stock i.e.

Cost of goods available for sale = Net purchases + opening stock.

Or;

Cost of goods available for sale = Purchases + opening stock.

ii) Cost of sales/cost of goods sold/Cost price/Sales at cost. This refers to

the cost price of goods sold during a given trading period.

Cost of sales = opening stock + purchases — closing stock.

Note. We use purchases when there are no purchases returns

Or;

Cost of sales = cost of goods available for sale — closing stock

iii) Net sales/turnover

Net sales/ turnover = sales — sales returns

iv) Gross profit. This refers to the excess of sales or net sales over cost of

sales.

Or; this is the overall profit of a business before considering its expenses.

Gross profit is obtained by deducting the cost of sales from net sales or

sales i.e.

Gross profit = Net sales — cost of sales

Or;

Gross profit = sales — cost of sales

Note. We use sales when there are no sales returns

v) Gross loss. This refers to the excess of cost of sales over net sales.

Therefore, gross loss is the over all loss of the business.

Gross loss = cost of sales — net sales

Or;

Gross loss = cost of sales - sales

3

vi) Net profit. This refers to the excess of gross profit over expenses. It is

obtained when the gross profit/gross income is greater than the total

expenses/overheads

Net profit = Gross profit - expenses

Note. Expenses are at times referred to as overheads

vii) Net loss. Net loss refers to the excess of expenses over gross profit. It is

obtained when the total expenses are greater than the gross profit.

Net loss = expenses — Gross profit

viii) Stock taking. This refers to the process of physical counting and

valuation of goods or property at any point in time by the business.

ix) Stock valuation. This refers to the act of finding out the value of stock

held by a business at a particular time.

Stock may be valued at cost or at market or selling price. However, it is

common to value stock at cost.

Example 1

The following information is available from the books of Kabiswa Traders

for the year ending 31st December 2012.

ITEM SHS

Stock, 1st January, 2012 1,140,000

Years Purchases 9,210,000

Years Sales 10,694,000

Returns outwards 340,000

Returns inwards 164,000

Expenses 1,340,000

Stock, 31st December, 2012 1,740,000

Calculate:

(a) Turnover/Total net sales

(b) Total net purchases

4

(c) Total cost of sales

(d) Gross profit

(e) Net profit

Solutions

(a) Turnover/Total net sales

= Sales — Returns inwards

= 10,694,000 - 164,000

= Shs. 10,530,000

(b) Total net purchases

= Purchases — Returns outwards

= 9,210,000- 340,000

= Shs. 8,870,000

(c) Total cost of sales

= Opening stock + total net purchases — Closing stock

= 1,140,000 + 8,870,000 - 1,740,000

= Shs. 8,270,000

(d) Gross profit

= Turnover - Total cost of sales

= 10,530,000 - 8,270,000

= Shs. 2,260,000

(e) Net profit

= Gross profit - Expenses

= 2,260,000- 1,340,000

= Shs. 920,000

PROFITABILITY AND EFFICIENCY RATIOS IN THE INCOME

STATEMENT

5

Profitability ratios in the income statement give an indication of the level of

returns that the owner is getting on his sales in the business. They include;

gross profit margin, mark-up on cost, net profit margin and rate of return on

capital.

1. Margin/Gross profit margin/gross profit ratio. This refers to gross

profit expressed as a percentage of sales or net sales.

2. Mark-up. This refers to gross profit expressed as a percentage of cost of

sales/cost price. It is the percentage by which the cost price is increased to

get the selling price.

3. Net profit margin/net profit ratio. This refers to net profit expressed as

a percentage of sales or net sales.

EFFICIENCY RATIOS

These measure the level of efficiency of business activities. They consider

the way the business uses its assets to generate income in terms of sales.

Therefore, efficiency ratios indicate how many times an asset is turned into

sales. Efficiency ratios are at times called activity ratios and they include;

4. Average stock. This is average of opening and closing stock of a

business.

Gross profit margin = Gross profit x 100 Sales

Mark up = Gross profit x 100 Cost of sales

Net Profit ratio = Net Profit x 100 Sales

Average stock = Opening stock + Closing stock 2

6

5. Rate of stock turn/stock turn. This is the number of times a business

replaces its stock in a given trading period. It indicates the number of times

in a year the average stock can be sold off. Rate of stock turn measures the

speed at which stocks are cleared or moved.

Note. The standard unit for rate of stock turn is times.

Example 2

A firm had the following records as at 31st December 2006.

ITEM SHS

Stock at 1-01-2006 182,400

Stock at 31-12-2006 213,600

Purchases 1,382,900

Sales 1,966,900

Returns outwards 34,100

Returns inwards 51,000

Overheads 200,000

Determine the firms

(a) (i) Turnover

(ii) Net purchases

(iii) Goods available for sale

(iv) Cost of Sales

(v) Average stock

(vi) Rate of stock turn

(b) (i) Gross profit

(ii) Net profit

(iii) Margin

(iv) Mark-up

Rate of stock turn = Cost of sales Average stock

7

(v) Net profit margin

Solutions

(a) (i) Turnover

= Sales — Returns inwards

= 1,966,900- 51,000

= Shs. 1,915,900

(ii) Net purchases

= Purchases — Returns outwards

= 1,382,900- 34,100

= Shs. 1,348,800

(iii) Goods available for sale

= Opening stock + Net purchases

= 182,400 + 1,348,800

= Shs. 1,531,200

(iv) Cost of Sales

= Goods available for sale — Closing stock

= 1,531,200 - 213,600

= Shs. 1,317,600

Or;

Cost of Sales

= Opening stock + Net purchases — Closing stock

= 182,400 + 1,348,800 - 213,600

= Shs. 1,317,600

(v) Average stock

= Opening stock + Closing stock

2

= 182,400 + 213,600

8

2

= Shs. 198,000

(vi) Rate of stock turn

= Cost of sales

Average stock

= 1,317,600

198,000

= 6.655 times or 7 times

(b) (i) Gross profit

= Turnover — Cost of sales

= 1,915,900- 1,317,600

= Shs. 598,300

(ii) Net profit

= Gross profit — Overheads

= 598,300 — 200,000

= Shs. 398,300

(iii) Mark-up

= Gross profit x 100

Cost of sales

= 598,300 x 100

1,317,600

= 45.4%

(iv) Margin

= Gross profit x 100

Turnover

= 598,300 x 100

1,915,900

= 31.2%

(v) Net profit margin

9

= Net profit x 100

Turnover

= 398,300 x 100

1,915,900

= 20.8%

Example 3

Gidudus books of accounts revealed the following records:

PARTICULARS SHS

Opening stock 400,000

Gross profit 820,000

Average stock 500,000

Rte of stock turn 8

Calculate the:

(i) Cost of sales

= Average stock x Rate of stock turn

= 500,000 x 8

= Shs. 4,000,000

(ii) Closing stock

= 2 (Average stock) — Opening stock

= 2 x 500,000 — 400,000

= Shs. 600,000

(iii) Net purchases

= Cost of sales + Closing stock — Opening stock

= 4,000,000 + 600,000 — 400,000

= Shs. 4,200,000

10

(iv) Net sales

= Cost of sales + Gross profit

= 4,000,000 + 820,000

= Shs. 4,820,000

(v) Mark-up

= Gross profit x 100

Cost of sales

= 820,000 x 100

4,000,000

= 20.5%

(vi) Margin

= Gross profit x 100

Net sales

Where net sales

= Cost of sales + gross profit

= 4,000,000 + 820,000

= 4,820,000

= 820,000 x 100

4,820,000

= 17%

Example 4

Apios books of accounts showed the following records:

Turnover Shs. 984,000

Margin 25%

Expenses 49,200

Calculate

(a) Total cost of sales

(b) Gross profit

(c) Net profit

11

(d) Net profit as a percentage of the turnover

(e) Expenses ratio

Solutions

(a) Total cost of sales

= Turnover — Gross profit

Where gross profit

= 25% of turnover

= 246,000

Total cost of sales

= 984,000 — 246,000

= Shs. 738,000

(b) Gross profit

= Turnover — Total cost of sales

= 984,000 — 738,000

= Shs. 246,000

(c) Net profit

= Gross profit — Expenses

= 246,000 — 49,200

= Shs. 196,800

(d) Net profit as a percentage of the turnover

= Net profit x 100

Turnover

= 196,800 x 100

984,000

= 20%

(e) Expenses ratio

= Expenses x 100

Turnover

12

= 49,200 x 100

984,000

= 5%

Example 5

Study the following trading account and answer the questions below:

WANDERA TRADING ACCOUNT

Shs Shs

Opening stock 750,000 Sales

1,200,000

Purchases 250,000

Gross profit 400,000 Closing stock

200,000

1,400,000 1,400,000

(a) Determine (i) Average stock

(ii) Sales at cost

(iii) Rate of turnover

(b) Express the gross profit as a percentage of

(i) the selling price

(ii) Cost price

Solutions

(a) (i) Average stock

= Opening stock + Closing stock

2

= 750,000 + 200,000

2

= Shs. 475,000

13

(ii) Sales at cost

= Opening stock + Purchases — Closing stock

= 750,000 + 250,000 — 200,000

= Shs. 800,000

(iii) Rate of turnover

= Sales at cost

Average stock

= 800,000

475,000

= 1.68 times

(b) (i) Gross profit as a percentage of the selling price

= Gross profit x 100

Sales

= 400,000 x 100

1,200,000

= 33.3%

(ii) Gross profit as a percentage of the cost price

= Gross profit x 100

Cost price

= 400,000 x 100

800,000

= 50%

BALANCE SHEET

This is a financial statement of capital liabilities and assets of an individual

or business organization on a particular date.

Or; this is a financial statement which shows the financial position of an

individual or business organization on a particular date.

PURPOSE OF THE BALANCE SHEET

14

It is used to determine the financial position of a business on a particular

date.

COMPONENTS OF THE BALANCE SHEET

There are three components that make up the Balance sheet i.e. assets,

capital and liabilities.

ASSETS

Assets refer to properties of value acquired by a business for use. There are

two types of assets i.e. fixed assets and current assets.

Fixed Assets (Non-current assets)

These are properties of value acquired by a business for use over a long period

of time i.e. more than one year. Examples of current assets include;;

Land, Buildings, Machinery,

Furniture, Fixtures and fittings,

Motor vehicles, Equipment and

tools, Text books, etc.

DEPRECIATION

This refers to loss of value by a fixed asset.

Note. Apart from land, all fixed assts usually lose value overtime

Current Assets

These are properties of value used by a business for a short period of time i.e.

not exceeding one year. Examples of current assets in business include;

Stock, Debtors, Cash at bank

(bank), Cash in hand (cash),

Prepaid expenses, Incomes earned

but not yet received

LIABILITIES

These are financial obligations of the business to the outsiders.

Or; this is the debt which must be paid for by the business to the owners or

others. There are two types of liabilities i.e. long-term liabilities and short-

term liabilities.

Long term liabilities

These are the debts of the business that are payable over a long period of

time i.e. over one year. Examples of long-term liabilities in business

2

include; Bank loan, Individual loan, Debentures, Capital creditors i.e. when

a fixed asset is acquired on credit

Current liabilities/Short term Liabilities

These are debts of the business payable within a short period of time not

exceeding one year. Examples of current liabilities in business include;

Creditors, Bank overdraft/short-term loans, Accrued/unpaid expenses,

Incomes received in advance

CAPITAL

This is the amount of money or stock of goods contributed by the proprietor

to start and operate a business. It may be in form of cash or any other

property.

This therefore means that the assets of the business are given by the capital

contributed by the owner plus what it owes to the outsiders i.e. liabilities

hence, the accounting equation which states that; Assets = Capital +

Liabilities.

This therefore means that if the balance sheet is properly prepared, the two

sides must be equal.

TYPES OF CAPITAL

1. Capital owned/equity capital/owners equity. This refers to the amount

of money that the business owes the owner of shareholders. It is given by;

Capital owned = Total assets — Total liabilities

2. Borrowed/Loaned Capital. This refers to long-term liabilities of a

business. It is money payable to the owners after a long period of time.

Therefore, it is given by;

Borrowed capital = Total long term liabilities

3. Fixed Capital. This refers to money of the business tied up in fixed

assets. It is given by;

3

Fixed capital = Total fixed assets

4. Circulating/circulatory//floating capital. This refers to the amount of

money of the business tied up in current assets of a business. It is given by;

Circulating capital = Total current assets.

5. Liquid capital. This refers to the total value of all current assets in the

business less its stock.

Liquid capital = Total current assets - stock

6. Working Capital. This refers to the excess of current assets over current

liabilities of a business. It is the amount of money required to run the

business on a daily basis. It is given by;

Working capital = current assets — current liabilities

Note. In a situation where the business has no/zero working capital, it is

said to be over trading.

7. Capital employed/net worth. This refers to the total amount of money

invested in business. It is therefore given by either;

Capital employed = Fixed assets + working capital

Or;

Capital employed = capital owned + Borrowed capital

SOLVENCY AND INSOLVENCY

Solvency. This is a situation where a business has more assets than

liabilities.

A business is said to be solvent if it is capable of meeting its debts from its

own resources. Insolvency is a situation where the liabilities of a business

exceed its assets.

A business is said to be insolvent if it is unable to pay off its debts and

remain in operation.

RATIOS IN THE BALANCE SHEET

These give an indication of the level of returns that the owner is getting on

his sales or capital that has been invested in the business. They include;

4

1. Rate of return on capital invested. This refers to the net profit for the

period expressed as a percentage of the capital at the beginning of the

period. It measures the profitability of the owners investment in the

business.

2. Rate of return on capital employed. This refers to net profit expressed

as a percentage of capital employed.

3. Working capital ratio/current ratio. This refers to the ratio of current

assets to current liabilities. It measures the capacity of current assets of a

business to meet its current liabilities.

4. Quick asset ratio/acid test ratio/liquidity ratio. This ratio shows the

ability of the business to pay its immediate debts with current assets that are

easily convertible into cash.

It is the comparison between easily realizable assets with current liabilities

so as to discover the extent to which a business can meet its current

liabilities from its liquid assets.

Note. Quick assets are those that can quickly be converted into cash with

minimum loss.

Example 1

Study the balance sheet below and answer the questions that follow.

MR. ROGERSS BALANCE SHEET AS AT 31ST

DECEMBER, 2005

Capital & Liabilities Fixed Assets Shs

Rate of return on capital invested = Net Profit x 100 Owners equity

Rate of return on capital employed = Net Profit x 100 Capital employed

Current ratio = Current assets Current liabilities

Quick asset ratio = Current assets - Stock Current liabilities

5

Shs

Capital

110,000

Long term liabilities

Loans ( to firm)

50,000

Current liabilities

Creditors

60,000

220,000

Shs

Motor vehicle

100,000

Current Assets

Stock 60,000

Debtors 28,000

Bank 24,000

Cash 8,000

12,0000

22,0000

You are also provided with the following information:

i) Opening stock value at Shs. 32,000

ii) Purchases for the year were Shs. 120,000

iii) Returns outwards amounted to 2.5% of purchases

Calculate the:

(i) Net purchases

(ii) Cost of sales

(iii) Average stock

(iv) Rate of stock torn to the nearest whole number

(v) Working capital

(vi) Circulating capital

6

Solutions

i) Net purchases

= Purchases — purchases returns

But returns outwards = 2.5% of purchases

= 2.5 x 120,000

100

= Shs. 3,000

Hence, net purchases

= 120,000 — 3,000

= Shs. 117,000

ii) Cost of sales

= Opening stock + Net purchases — Closing stock

= 32,000 117,000 — 60,000

= Shs. 89,000

iii) Average stock

= Opening stock + Closing stock

2

= 32,000 + 60,000

2

= 92,000

2

= Shs. 46,000

iv) Rate of stock torn to the nearest whole number

= Cost of sales

Average stock

= 89,000

46,000

= 2 times

v) Working capital

7

= Current Assets — Current Liabilities

= 120,000 — 60,000

= Shs. 60,000

vi) Circulating capital

= Total current liabilities

= Stock +Debtors +Bank +Cash

= 60,000 + 28,000 + 24,000 + 8,000

= Shs. 120,000

Example 2

Study the balance sheet below and answer the questions that follow.

KINTUS BALANCE SHEET AS AT 31ST

DECEMBER, 2004

Capital & Liabilities

Shs

Capital

2,000,000

Debentures

1,500,000

Bank loan

1,350,000

Creditors

800,000

Bank overdraft

760,000

6,410,000

Assets Shs

Furniture

1,600,000

Equipment

1,800,000

Stock

1,450,000

Debtors

1,080,000

Cash

480,000

6,410,000

8

Calculate:

(i) Capital owned

(ii) Borrowed capital

(iii) Liquid capital

(iv) Working capital

(v) Fixed capital

(vi) Capital employed

Solutions

i) Capital owned

= Total Assets — Total liabilities

But total assets = Furniture + Equipment + Stock + Debtors

+ Cash

= 1,600,000 + 1,800,000 + 1,450,000 +

1,080,000 + 480,000

= Shs. 6,410,000

Total liabilities = Debentures + Bank loan + Creditors +

Bank overdraft

= 1,500,000 + 1,350,000 + 800,000 + 760,000

= Shs. 4,410,000

Hence capital owned

= 6,410,000 — 4,410,000

= Shs. 2,000,000

(i) Borrowed capital

= Total long-term liabilities

9

= Debentures + Bank loan

= 1,500,000 + 1,350,000

= Shs. 2,850,000

Or;

Borrowed capital

= Total Assets — (Capital owned + Total current liabilities)

But total current liabilities = Creditors + Bank overdraft

Hence borrowed capital

= 6,410,000 — (2,000,000 + 800,000 + 760,000)

= 6,410,000 — 3,560,000

= Shs. 2,850,000

ii) Working capital

= Current assets — Current liabilities

But current assets = Stock + Debtors + Cash — Stock

= 1,450,000 + 1,080,000 + 480,000

= Shs. 3,010,000

Current liabilities = Creditors + Bank overdraft

= 800,000 + 760,000

= Shs. 1,560,000

Hence working capital

= 3,010,000 - 1,560,000

= Shs. 1,450,000

(ii) Liquid capital

= Total current assets — stock

= 3,010,000 — 1,450,000

= Shs. 1,560,000

10

(iii) Fixed capital

= Total fixed assets

= Furniture + Equipment

= 1,600,000 + 1,800,000

= Shs. 3,400,000

(iv) Capital employed

= Total fixed assets + Working capital

= 3,400,000 + 1,450,000

= Shs. 4,850,000

Or;

Capital employed

= Capital owned + Borrowed capital

= 2,000,000 + 2,850,000

= Shs. 4,850,000

Example 3

A retailer had the following records for 1997 and 1998:

Particulars 1997

SHS

1998

SHS

Total cost of sales

Average mark-up

Expenses

480,000

25%

48,000

480,000

40%

134,400

11

Capital

Average stock at

cost

160,000

60,000

230,000

96,000

(a) Calculate for each year the:

(i) Turnover

(ii) Net profit

(iii) Rate of return on capital

(b) Determine using the rate of turnover the year the retailer did better.

Give reason.

Solutions

(a)

1997 1998

(i) Turnover

= Cost of sales + gross profit

But gross profit = 25% of cost of

sales

= 25 x 480,000

100

= Shs. 120,000

Hence Turnover

= 480,000 + 120,000

= Shs. 600,000

(i) Turnover

= Cost of sales + gross profit

But gross profit = 40% of cost of

sales

= 40 x 480,000

100

= Shs. 192,000

Hence Turnover

= 480,000 + 192,000

= Shs. 672,000

12

(ii) Net profit

= Gross profit — Expenses

= 120,000 — 48,000

= Shs. 72,000

(ii) Net profit

= Gross profit — Expenses

= 192,000 - 134,400

= Shs. 57,600

(iii) Rate of return on capital

= Net profit x 100

Capital

= 72,000 x 100

160,000

= 45%

(iii) Rate of return on capital

= Net profit x 100

Capital

= 57,600 x 100

230,000

= 25%

(b)

1997 1998

Rate of turnover

Rate of turnover

13

= Cost of sales

Average stock

= 480,000

60,000

= 8 times

= Cost of sales

Average stock

= 480,000

96,000

= 5 times

The year the retailer did better was 1997 as he was able to replace stock 8

times compared to the 5 times in 1998.

Example 4

(a) Mr. Katos accounts showed the following as at 30th

June 1997.

Fixed asserts Shs. 500,000

Current assets Shs. 220,000

Long-term liabilities Shs. 200,000

Current liabilities Shs. 180,000

Using the above information, calculate:

(i) Capital owned

(ii) Capital employed

(iii) Working capital

(b) In addition, Katos books also had the following information:

Opening stock Shs. 120,000

Closing stock Shs. 150,000

Net purchases Shs. 820,000

Net sales Shs. 982,000

14

Expenses Shs. 12,000

Calculate:-

(i) Cost of sales.

(ii) Gross profit.

(iii) Net profit.

(iv) Rate of turnover.

Solutions

(a)

(i) Capital owned

= Total assets — Total liabilities

But total assets = Fixed assets + current assets

= 500,000 + 220,000

= Shs. 720,000

Total liabilities = Long-term liabilities + current liabilities

= 200,000 + 180,000

= Shs. 380,000

Hence capital owned

= 720,000 — 380,000

= Shs. 340,000

(ii) Capital employed

= Capital owned + Borrowed capital

But borrowed capital = Total long-term liabilities

= Shs. 200,000

Hence capital employed

= 340,000 + 200,000

= Shs. 540,000

(iii) Working capital

= Current assets — Current liabilities

15

= 220,000 — 180,000

= Shs. 40,000

(b)

(i) Cost of sales

= Opening stock + Net purchases — Closing stock

= 120,000 + 820,000 — 150,000

= Shs. 790,000

(ii) Gross profit

= Net sales — Cost of sales

= 982,000 — 790,000

= Shs. 192,000

(iii) Net profit

= Gross profit — Overheads

= 192,000 — 12,000

= Shs. 180,000

(iv) Rate of turnover

= Cost of sales

Average stock

But average stock = Opening stock +Closing stock

2

= 120,000 + 150,000

2

= Shs. 135,000

Hence rate of turnover

= 790,000

135,000

= 5.85 times or 6 times