Business Studies Form 1 Notes : CHAPTER SEVEN – HOME TRADE

CHAPTER SEVEN

HOME TRADE

Trade is the buying and selling of goods and services with the aim of making a profit.

Importance of Trade

• Provides a variety of goods and services.
• Helps producers dispose of their surplus produce.
• Creates employment.
• Encourages specialization and division of labor.
• Promotes social relations and understanding among the parties involved.
• Ensures a steady supply of goods and services.
• Helps one acquire what one may not be able to produce.

Classification of Trade

Trade is divided into home trade and foreign trade.

Home trade is carried out within a country’s boundaries, while foreign trade is conducted between two or more countries.

Foreign trade may be bilateral (between two countries) or multilateral (among many countries).

Home trade may further be classified into wholesale and retail trade.

Wholesale Trade

This involves buying goods and services from producers and manufacturers in large quantities and selling them to retailers in smaller quantities.

The person who does this is called a wholesaler.

Functions of Retailers

These can be discussed based on the services they render to wholesalers, producers, and consumers.

Services Rendered to Consumers

• Credit facilities – retailers may give credit to trusted customers due to personal contact.
• After-sale services – including transport, installation, repair, and maintenance.
• Offer advice on product choice and use.
• Make goods available at the right time and place.
• Breaking bulk – reducing large quantities to convenient sizes.

Services Rendered to Wholesalers

• Assist in distributing goods to consumers.
• Relieve wholesalers of transportation and storage burdens.
• Provide valuable market information to wholesalers.

Services Rendered to Manufacturers

• Provide information on consumer demand.
• Market the manufacturer’s products.
• Advertise goods on behalf of the manufacturer.

Retail Trade

Retailers can be small scale or large scale.

Small Scale Retailers

• Form the majority of retail traders.
• Found in most parts of the country.
• Often operated as one-person businesses.
• Easy to start due to low capital requirements.

Classification of Small Scale Retailers

Divided into two main groups:

• Small scale retailers without shops.
• Small scale retailers with shops.

Small Scale Retailers Without Shops

Itinerant Traders

• Carry goods on bicycles, motorcycles, or on their heads.
• Move from town to town, village to village, and door to door selling goods.
• Sell items like clothes, plates, cups, vegetables, etc.
• Are persuasive, sometimes leading customers to buy unnecessary goods.
• Examples include hawkers and peddlers; hawkers use bicycles or motorcycles, peddlers walk.

Characteristics of Hawkers and Peddlers

• Mostly found in densely populated areas.
• Move from one shopping center or village to another, and door to door.
• Persuasive in selling.
• Prices are not controlled.

Advantages of Itinerant Traders

• Flexible, moving from place to place.
• Require little capital to start and operate.
• Convenient, bringing goods to customers.
• Sell in cash, avoiding bad debts.
• Few legal formalities required.

Disadvantages

• Affected by weather due to open-air operations.
• Difficult to transport goods.
• No guarantees on defective items.

Roadside Sellers

• Sell goods at busy roadsides, streets, bus stages, road junctions, and entrances to schools and public buildings.
• Deal with fast-moving goods like sweets, roasted maize, and fruits.
• Display goods on trays, cardboards, sacks, or mats.

Open Air Market Traders

• Located in convenient, central places where people meet to buy and sell.
• Pay entrance fees to bring goods.
• Markets are administered by local authorities.
• Open on specific days of the week.

Automatic Vending Machines

• Coin-operated machines selling items like cigarettes, drinks, and stamps.
• Jukeboxes and telephone coin boxes are vending machines selling services.

Small Scale Retailers With Shops

Single Shops (Unit Shops)

• Have fixed premises.
• Usually run by one person with family or employee assistance.
• Some specialize in one line of commodities such as clothes or groceries.

Tied Shops

• Sell exclusively products of one manufacturer.
• Owned and controlled by the manufacturer who designs the shop’s appearance.
• Manufacturer offers goods on credit to the trader.
• Examples include Bata shops and petrol stations like Shell and Kenol.

Kiosks

• Small shops or simple structures selling fast-moving goods like newspapers, sweets, and soft drinks.
• Located in strategic places such as busy street corners and residential areas.

Market Stalls

• Permanent stands found in markets.
• Open daily.
• Constructed and owned by local authorities.
• Each stall deals with a particular good or service.
• Rented or leased by individuals from local authorities.
• Examples include Kariokor and City Markets in Nairobi.

Canteens

• Retail shops in institutions like schools, colleges, hospitals, and army barracks.
• Sell mainly to people working in the institution.
• Run by the institution’s management or individuals on a rental basis.
• Offer items like tea, sodas, sugar, and other foodstuffs.

Mobile Shops

• Move from village to village, town to town selling goods.
• Use converted vans, lorries, or buses arranged as shops.

Advantages of Small Scale Retailers

• Easy to raise capital to start.
• Close contact with consumers, allowing credit to trustworthy customers.
• Low business risks.
• Simple to operate and manage.
• Few legal formalities.
• Easy to switch products.

Disadvantages

• Limited access to loans.
• Do not hire specialist or technical staff.
• May suffer bad debts.
• Do not enjoy economies of scale.
• Low turnover due to limited capital.

Large Scale Retailers

• Operate mainly in urban areas.
• May occupy a single large building or several premises in various locations.
• Require large capital to start.
• Buy goods from wholesalers and manufacturers in large quantities.
• Receive trade discounts and favorable credit facilities.
• Employ specialists like salesmen, storekeepers, accountants, and managers.
• Management is centralized; stock purchases are made at the head office.
• Branches submit monthly returns to headquarters.

Types of Large Scale Retailers

• Supermarkets
• Large self-selection stores dealing mainly with household goods such as utensils, foodstuffs, and clothes.
• Goods are well displayed on shelves with price tags.
• Buyers pick goods and pay at cashiers near the exit.

Features of Supermarkets

• Require large capital to start.
• Stock a variety of goods.
• Offer self-service facilities.
• Goods have price tags.
• Prices are fixed.
• No credit facilities offered.
• Sell at comparatively low prices.

Advantages of Supermarkets

• Buy goods in large quantities, obtaining good trade discounts and offering lower prices.
• Customers get all goods under one roof, saving time.
• Employ few attendants, reducing wage bills.
• Impulse buying increases sales due to well-displayed goods.
• Do not sell on credit, avoiding bad debts.

Disadvantages

• No credit facilities.
• No delivery to customers’ premises.
• Lack personal services.
• Losses due to pilferage.
• Impulse buying may lead customers to buy unwanted goods.

Chain Stores (Multiple Stores)

• Large scale businesses with separate branches managed centrally; branch managers report to head office.
• Examples include Deacons and African Retail Traders (ART).
• Standard prices across all branches.
• Similar shop fronts, appearance, and displays.

Characteristics of Chain Stores

• Centralized purchases and sales.
• Uniform outward appearance and interior layout.
• All branches deal in the same type of product.

Advantages of Chain Stores

• Buy goods in large quantities, obtaining good trade discounts.
• Cost of running is controlled at head office; advertising is centralized.
• Slow-moving goods can be transferred between branches.
• Identical goods and similar shop fronts publicize the business.
• Serve a wider market due to wide spread.
• Goods sold on cash basis, reducing bad debts.

Disadvantages of Chain Stores

• Require large capital.
• Customers may avoid buying identical products.
• Do not offer credit facilities except for hire purchase schemes.
• Lack personal touch with customers.

Departmental Stores

• Comprise many single shops under one roof and management.
• Each department deals in a different line of goods, managed by a departmental manager.
• Located in town centers.
• Kenya currently has no departmental stores.

Advantages of Departmental Stores

• Wide variety of goods under one roof.
• Buy goods in large quantities at lower prices, passing savings to customers.
• Generally open for long hours.
• Offer adequate parking facilities.
• Employ qualified staff providing high-quality services.

Characteristics of Departmental Stores

• Offer a wide variety of goods at lower prices.
• Attractive and convenient to shop in.
• Usually situated in town centers.
• Provide services such as restaurants, reading rooms, and post offices.
• Each department managed by a departmental manager.

Disadvantages of Departmental Stores

• Require large capital.
• May run some departments at a loss to attract customers.
• Cater mainly to urban communities.
• Lack personal contact with customers.
• Large size poses management challenges.

Hypermarkets

• Large shopping centers housing various businesses under one roof, managed by different people.
• Located away from city centers with good access roads and ample parking.
• Example: Sarit Centre in Nairobi’s Westlands.

Characteristics of Hypermarkets

• Good access roads.
• Ample parking space.
• Many businesses in one building.
• Attractive and convenient shopping.
• Located on town outskirts.
• Offer a variety of goods and services.

Advantages of Hypermarkets

• Extensive parking for customers.
• One-stop shopping, especially for bulk monthly supplies.
• Save space, reducing rents and rates.
• Usually open for long hours.
• Provide credit facilities by accepting credit cards.

Disadvantages of Hypermarkets

• Located away from city centers, serving mainly those with cars.
• Require large space not available in Central Business Districts.
• Prices are not controlled and subject to bargaining.

Mail Order Stores

• Retail trade conducted through the post office.
• Customers place orders via post; goods are delivered the same way.
• Information obtained from advertisements in print media, journals, and radio.
• Goods dispatched mostly on cash with order (C.W.O) or cash on delivery (C.O.D) basis.

Characteristics of Mail Order Stores

• Sell goods through the post office.
• Advertise via print media, roads, journals, cinemas, etc.
• All transactions handled through the post office.
• Customers do not visit selling premises.
• Goods dispatched mostly on cash with order or cash on delivery basis.

Advantages of Mail Order Stores

• Reach customers far from shopping centers.
• No transport facilities required.
• Total control of distribution possible.
• No need for salesmen.

Disadvantages of Mail Order Stores

• High advertising costs increase prices.
• Customers cannot inspect goods before purchase.
• Limited variety of goods sold.
• No personal contact between buyer and seller.
• Suitable only for literate customers.
• Post office problems (e.g., strikes) may affect business.

Wholesale Trade

• Involves selling goods in large quantities to traders for resale.
• Wholesalers are classified by product range, geographical area, and method of operation.

According to Range of Goods Handled

• General merchandise wholesalers.
• General line wholesalers.
• Specialized wholesalers.

According to Geographical Area

• Nationwide wholesalers.
• Regional wholesalers.

According to Method of Operation

• Cash and carry wholesalers.
• Mobile wholesalers.

General Merchandise Wholesalers

• Deal in a wide range of distinct product lines, e.g., hardware, clothing, foodstuffs, chemicals.

General Line Wholesalers

• Deal with a wide range of products within one line, e.g., hardware.

Specialized Wholesalers

• Deal in particular goods from a given product line, e.g., foodstuffs.

Nationwide Wholesalers

• Distribute goods all over the country.
• Establish warehouses or depots in different areas to supply customers.

Regional Wholesalers

• Offer products to certain parts of the country only.
• May cover a location or district.

Cash and Carry Wholesalers

• Operate on a self-service basis like supermarkets.
• Traders pick goods and pay cash.
• No transport or credit facilities offered.

Mobile Wholesalers

• Use vehicles to sell goods to traders.

Rack Jobbers

• Specialize in selling particular products to specialized wholesalers.

Alternative Classification of Wholesalers

• Those who buy, store, and sell goods without adding anything.
• Those who prepare goods for sale by breaking bulk, packing, branding, grading.
• Those who organize distribution but do not physically handle goods (e.g., motor cars).
• Wholesalers’ agents or brokers paid commission for their work.

Definitions of Terms Used in Wholesale Trade

Breaking Bulk

Reducing large quantities to convenient sizes, e.g., buying cartons and selling in packages to retailers.

Packing

Putting goods into packets and boxes.

Branding

Giving a product a name for sale.

Sorting

Selecting goods by size, weight, color, and quality.

Grading

Grouping goods by similar quality to facilitate pricing.

Blending

Mixing different grades to achieve desired taste, color, or quality.

Services of Wholesalers to Producers

• Act as link between producers and retailers.
• Relieve producers of risks like price falls due to demand drops.
• Save producers storage problems.
• Conduct market research.
• Transport, break bulk, pack, brand, sort, grade, and blend goods.
• Promote products through advertising, shows, displays, films, exhibitions, and trade fairs.

Services of Wholesalers to Retailers

• Ensure goods are available at convenient locations, saving transport costs.
• Break bulk for retailers.
• Offer transport facilities, reducing operating costs.
• Provide market trend advice.
• Offer credit facilities.
• Engage in sales promotion, saving retailers the effort.
• Grade, sort, blend, pack, and brand goods, saving retailers costs.

Services of Wholesalers to Consumers

• Ensure steady supply of goods to retailers, preventing shortages.
• Ensure stable supply, maintaining steady prices.
• Provide variety of goods.
• Break bulk to provide goods in desired quantities.
• Inform consumers about goods through retailers.

Documents Used in Home Trade

Documents used to show that a business transaction has taken place.

Letter of Inquiry

• Request by a potential buyer for information about goods sold by a seller.
• Can be oral or written; a written inquiry is called a letter of inquiry.
• Seller may reply with a catalogue, quotation, or price list.

Catalogue

• Booklet briefly describing goods stocked by a seller.
• Sent in response to a general inquiry.

Contents include:

• After-sale services offered.
• Packaging and posting expenses.
• Delivery services.
• Terms of sale.

Quotation

• Sent when inquiry is specific.
• Shows terms of sale, prices, and description of goods.

Price List

• List of items sold with prices.
• Information is brief and not illustrated.
• Cheaper to print than catalogues.

Local Purchase Order

Sent by buyer after receiving catalogue, quotation, or price list.

Can be verbal or written.

Contents include:

• Names and addresses of buyer and seller.
• Order number.
• Quantities ordered and total amount.
• Description of goods ordered.
• Price per item.
• Special instructions on packaging and delivery.

Acknowledgement Note

Document sent by seller to buyer confirming receipt of order and that it is being processed.

Packing Note

• Sent with dispatched goods.
• Used to check that packed goods match the order.

Contents:

• Quantities packed.
• Brief description of goods.
• Means of delivery.

Advice Note

• Informs buyer that goods have been dispatched.

Contains:

• Means of delivery.
• Description of goods.

Functions:

• Inform buyer goods are on the way to allow inquiries if delayed.
• Alert buyer to prepare payment arrangements.

Delivery Note

• Sent with goods to be delivered.
• Made in triplicate: one copy with seller, two with goods to buyer.
• Buyer checks goods against note and signs if satisfied.
• One signed copy kept by buyer, one returned to seller.

Contents of Delivery Note

• Names and addresses of seller and buyer.
• Date of delivery.
• Delivery note number.
• Description and quantities of goods.
• Space for buyer’s signature and comments on goods condition.

Consignment Note

If seller lacks transport, a transporter delivers goods and issues a consignment note to the seller.

Contents:

• Details of goods transported.
• Names and addresses of seller (consignor) and buyer (consignee).
• Terms and conditions of carriage.
• Seller completes note, returned to carrier who delivers goods to buyer.
• Buyer signs note upon delivery.

Invoice

• Sent by seller to buyer demanding payment for goods delivered.
• Two types: cash invoices and credit invoices.
• Cash invoice is paid immediately, acting as a receipt.
• Credit invoice allows payment at a later date.

Functions of an Invoice

• Shows details of goods sold.
• Requests payment from buyer.
• Used as source document for accounting.

The letters E & OE (errors and omissions excepted) printed at the bottom mean the seller reserves the right to correct errors or omissions.

Pro-forma Invoices

Functions

• Polite request for payment before goods are sent.
• Sent when seller does not want to give credit.
• Issued to agents selling goods on behalf of seller.
• Used by importers for customs clearance.
• Can serve as a quotation; used in home and foreign trade.

Damaged Goods Notes / Returned Goods

• Buyer returns damaged goods with a damaged goods note.
• Prepared in triplicate: two copies to seller, one retained by buyer.
• Seller issues a credit note upon receipt.

Credit Note

Document issued to correct overcharge or reduce amount due on invoice.

Issued under these circumstances:

• Goods returned due to damage or not matching order.
• Packing cases or containers returned.
• Arithmetic errors causing overcharge.

Printed in red.

Debit Note

• Used to correct undercharges on previously sent invoices.

Errors Leading to Debit Note

• Calculation mistakes.
• Omission of items.
• Price undercharge.

Statement of Account

Sent when transactions are on credit, summarizing all transactions between buyer and seller over a period.

Includes:

• All invoices.
• All credit notes.
• Debit notes.
• All receipts.

Contents

• Names and addresses of buyer and seller.
• Account number.
• Date column.
• Details column.
• Money column with debit, credit, and running balance.
• Terms of credit.

Receipt

Proof of payment.

Contains:

• Date of payment.
• Name of payer.
• Amount paid in words and figures, and payment method.
• Name of payee.
• Revenue stamp if amount exceeds minimum.
• Receipt number.

IOU (I Owe You)

Written acknowledgment of debt by debtor without specifying settlement date.

Means of Payment

• Form or manner in which payment is made for goods and services.

Cash

Payment using coins or banknotes.

Advantages of Cash Payment

• Only legal tender recognized by law.
• Convenient for small debts.
• Accessible to people with or without bank accounts.

Disadvantages

• Not convenient for large amounts.
• Can be stolen.
• Difficult to prove payment without receipt.

Circumstances for Cash Payment

• Small amounts involved.
• Payees do not accept other means.
• Cash is the only means available.
• Urgent need for payment.
• To avoid expenses.

Cheques

Written order by account holder to bank to pay a specified amount to bearer.

• Drawer – person who writes the cheque.
• Payee – person to be paid.
• Drawee – the bank.

Open and Crossed Cheques

Open cheque – cashed over the counter.

Crossed cheque – deposited only into an account.

Crossed by two parallel lines; crossing can be general (just lines) or special (with instructions).

Dishonored Cheque

Cheque refused payment by bank (bounced cheque).

Circumstances

• Insufficient funds.
• Signature mismatch.
• Post-dated cheque.
• Stale cheque (presented after six months).
• Drawer closed bank account.
• Death, insanity, or bankruptcy of drawer.
• Alterations on cheque.

Advantages of Cheques

• More secure than cash.
• Convenient to carry.
• Reduces travel.
• Used for future reference.
• Negotiable – can pay third party.

Disadvantages

• Payee must visit bank.
• May be dishonored.
• Only issued by account holders.
• Some refuse personal cheques.

Circumstances for Using Cheques

• Large amounts involved.
• Organizational policy requires it.
• Cheque is only payment means.
• To avoid risks.

Bill of Exchange

Unconditional written order from one person to another to pay on demand.

Terms

• Command, not request.
• Unconditional.
• Written document.
• Amount clearly stated.
• Payee named.
• Date of payment stated.

Advantages

• Rights transferable.
• Payment date determined.
• Acceptance by debtor makes it legally binding.
• May be discounted.

Disadvantages

• May be dishonored on maturity.
• Cash may not be ready.
• Expensive.
• Circumstances for use:
• Creditor wants payment assurance.
• Creditor wants money but debtor cannot pay immediately.
• Creditor wants to use debt to pay another debt.

Promissory Note

Document where a person promises to pay another a specified sum at a stated date.

Money Order

Sold by post office; sender fills application form.

Information includes:

• Amount to remit.
• Name of recipient.
• Name of post office to cash.
• Name and address of sender.

Sender submits form, money, and commission over the counter.

Payee must:

• Identify self.
• Identify sender.

Sender keeps counterfoil as evidence.

Postal Order

Sold by post office in fixed denominations (5, 10, 20, 50, 100).

Additional stamps in shillings may be needed.

Circumstances

• Small amounts involved.
• Only means available.
• To avoid risks.

Postage Stamps

Used to pay small amounts.

Premium Bonds

Issued by post office in denominations of 10 and 20, mature after a period.

Used to settle debts but unsafe as they can be cashed by anyone.

Bankers Cheque (Bank Draft)

Cheques drawn on a bank; applicant fills form and pays money to bank.

Cheque prepared and given to applicant.

Circumstances

• Large amounts involved.
• Payee wants payment guarantee.

Terms of Payment

Arrangement between buyer and seller on how debts are settled.

Cash

Payment made immediately.

May be cash on delivery (C.O.D) or cash with order (C.W.O).

C.O.D – payment on delivery.

C.W.O – payment when placing order.

Benefits of C.O.D / C.W.O

• Reduces risk of bad debt.
• Working capital readily available.
• Few records needed.
• No time wasted.

Circumstances

• Buyer new to seller.
• Buyer’s creditworthiness doubtful.
• Mail order business.
• Policy requires it.

Deferred Payments

Goods and services paid for in future, in lump sum or installments.

Open Trade Credit

• Goods sold on credit with future payment in installments.
• Seller ensures buyer will pay by:
• Checking creditworthiness.
• Requesting guarantees or security.

Factors to Consider When Giving Credit

• Creditworthiness.
• Repayment period.
• Amount of goods.
• Stock availability.
• Reliability.
• Buying frequency.
• Intention to attract and maintain customers.

Cash discount – discount to encourage prompt payment.

Examples of Open Trade Credit

• Simple credit – short term, not more than a week.
• Monthly credit – payment monthly.
• Budget accounts – regular deposits and payments, maximum credit, charges for special offers.
• Trade credit – goods bought for resale.
• Credit card facilities – allow purchases from suppliers accepting cards (e.g., Barclays, American Express, Access, Visa).

Advantages of Credit Cards

• Obtain goods without immediate payment.
• Convenient to carry.
• Access money from specified banks.
• Increase credit rating.
• Safer than cash.
• Some cards accepted internationally.

Disadvantages

• Requires established credit record.
• High interest rates.
• Prone to fraud.
• Interest charged on late payments.
• Minimum age 18 years.
• Risk of overspending.
• Limited acceptance areas.
• Competition from other payment methods.
• Few businesses accept cards.
• Lengthy application procedures.
• Mostly affordable by high-income individuals.

Hire Purchase

• Method of hiring property with option to buy.
• Buyer pays deposit; balance spread over time.
• Ownership remains with seller until final payment.
• Buyer cannot sell goods before final payment.
• Certificate of completion issued after final payment.

Advantages to Buyer

• Use goods immediately after contract.
• Fixed installments.
• Can afford expensive goods.

Disadvantages to Buyer

• Goods belong to seller until last payment.
• May buy beyond means.
• More expensive than cash.
• Limited goods available.

Advantages to Seller

• Increase sales volume.
• Higher profits.
• Goods remain seller’s property until paid.

Disadvantages to Seller

• High operating costs.
• Repossessed goods sold as second-hand.
• High risk of loss.
• Large capital required.

Installment Buying / Credit Purchase

Similar to hire purchase but ownership passes to buyer immediately after down payment.

Other Terms

• Discounts – allowance reducing price below marked price.
• Quantity discount – encourages bulk buying.
• Trade discount – allowed by trader to another for resale profit.
• Cash discount – encourages prompt payment by credit customers.

Circumstances for Deferred Payment

• Customer’s creditworthiness is unquestionable.
• To attract and retain customers.
• To increase sales.
• To dispose of slow-moving stock.

Standing Order

Instruction by account holder to bank to make regular payments of specified amounts to a person until cancelled.