Chap. No. Title Page No.

1 Concept and Scope of Business 2

2 Trade and its Classification 26
3 Sole Proprietorship 48
4 Partnership 56

5 Company 78
6 Share Capital 106
7 Company Meetings 116
8 Management of a Company 122
9 Winding up of a Company 128
10 Co-operative Ownership 141
11 Business Combination 146

12 Entrepreneurship 161
13 Finance 170
14 Risk and Insurance 188
15 Understanding the Mechanics of Marketing 204
16 Human Resource in an Organization 225
17 Business Cycle and Product Life Cycle 237
18 Information Technology and E-Commerce 244

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 CONCEPT AND SCOPE OF BUSINESS
Technically, the word ‗Business‘ means ‗a state of being busy‘. All creative human
activities relating to the production of goods or services for satisfying human wants are
known as ‗Business‘. It is also a gainful procedure through which individuals and groups
exchange goods and services.

Definition:

―Every human activity which is engaged in for the sake of earning profit may be called
business.‖

―Business is an enterprise which makes, distributes or provides any article of service

which the other members of the community need and are able and willing to pay for it.‖

Purpose of business:

A business is any organization that uses resources to meet the needs of customers by
providing a product or service that they demand. There are several stages in the
production of finished goods. Business activity at all stages involves adding value to
resources, such as raw materials and semi-finished goods, and making them more
desirable to - and thus valued by - the final purchaser of them. Without business activity,
we would all still be entirely dependent on the goods that we could make or grow
ourselves - as some people in virtually undiscovered native communities still are.
Business activity uses the scarce resources of our planet to produce goods and services
that allow us all to enjoy a very much higher standard of living than would be possible if
we remained entirely self- sufficient.

What do businesses need to produce goods and services?

Factors of production

These are the resources needed by business to produce goods or services. They include:

Land - this general term includes not only land itself but all of the renewable and non-
renewable resources of nature, such as coal, crude oil and timber.

Labour - manual and skilled labour make up the workforce of the business.

Capital - this is not just the finance needed to set up a business and pay for its continuing
operations, but also all of the man-made resources used in production. These include
capital goods, such as computers, machines, factories, offices and vehicles.

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Enterprise - this is the driving force, provided by risk-taking individuals, that combines
the other factors of production into a unit capable of producing goods and services. It
provides a managing, decision-making and coordinating role.

Businesses have many| other needs before they can successfully produce the goods and
services demanded by customers.

Concept of Adding Value:

A business adds value to the raw materials it uses to produce the good or service it sells.
Added value is one of the key objectives of any business. If a customer is prepared to pay
a price that is much greater than the cost of materials used in making or providing a good
or service, then the business has been successful in adding value‘. In simple words value
addition is the difference between the cost of purchasing raw materials and the price the
finished goods are sold for.

Scope or Components of Business

Business activities can be divided into two parts

 Industry
 Commerce

Industry:

Industry is a branch or a part of business. It includes all those activities, which, are
related with production of goods. There are two types of goods. If the final consumer
uses the goods, these are named as ―Consumer goods‖ e.g. cloth, tooth paste etc. If the
goods are used for the further production of goods etc these are called ―Producer goods or
capital goods‖.

Commerce:

Commerce is another part of business. Commerce links the producers with consumers. It
deals with buying and selling of good and all those activities which are related to the
transfer of goods from the place of production to the ultimate consumers.

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 Characteristics of Business:
Entrepreneur:
There must be someone to take initiative for establishing a business. The person who
recognized the need for a product or service is known as entrepreneur. The entrepreneur
is a key figure in the process of economic growth. The quality of entrepreneurship
existing in any region determines to a large extent the development of that region. The
Business activity exists to produce consumer goods or services that meet the needs of
customers. Entrepreneur visualizes a business, combines various factors, of production
arid puts them into a going concern.
Economic Activities:
Business includes only economic activities. All those activities relating to the production
and distribution of goods and services are called economic activities. These activities are
undertaken with economic motive.

Deals in Goods and Services:

Business always deals in goods and services. The goods include both consumer goods
like clothes, shoes, and tooth paste, and-industrial goods like raw material, tools and
machinery. Services refer to intangible items. Teaching, transporting companies, banks
and insurance sectors are examples of service providing businesses.

Risk:

The business involves a greater element of risk and uncertainty. In fact, a businessman
tries to foresee the future uncertainties and plan his business activities accordingly. The
factors on which business depends are never certain, so the business opportunities will
also be uncertain. If a businessman is able to foresee future uncertainties and is also able
to bear them, then he will be successful, otherwise he may be forced out of business.

Profit:

Profit is the most important character of business. Business is started for' purpose of
earning profit. Profits are driving force of every business activity. The incentive of
earning profits keeps a person in business and is also necessary for the continuity of the
business.

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Production:

Business always deals in production of goods and services: The object of business is to
provide goods and services to society for the purpose of earning profits. The goods must
be produced or manufactured so that these can be sold in market.

Sales:

Sales are related with the transfer of values. The production for personal use does not
come under the scope of business. A business must involve exchange of goods and
services. The exchange of goods and services is undertaken with a profit motive.

Finance:

Finance is another important character of business. No businessman can start business

without finance. Finance is the lifeblood of every business organization. In the absence
of finance the volume of business activities goes down.

Business enterprises cannot move a step without finances. The finances are required for
providing fixed and working capital.

There are two basic sources of finance;

 Debit Financing or loans

 Owner‘s Financing or Capital

Management:

Every enterprise needs an organization for its successful working. Various business
activities are divided into departments, sections and jobs-. An organization creates the
frame work for managerial performance and helps in coordinating various business
activities.

The success of every business depends on better management. Management is

responsible to control all business activities management put money, men material .and
machinery in business.

Regularity:

In business, only those' transactions are included which have regularity and continuity.
An isolated transaction will not be called business, even if the person earns profit from
that deal. A person builds a house for himself, but later on sells it on profit. We will not

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call it business. On the other hand if a house building society builds houses and sells
them, this will be called business. So the transactions should have continuity otherwise
they will not be a part of business.

Creation of Utility

The goods are provided to the consumers as per their likings and requirements. Business
creates various types of utilities in goods so that consumers may use them. The utility
may be form place utility, time utility etc.

Consumer Satisfaction:

The ultimate aim of business is to supply goods to the consumers. The goods are
produced for the consumers. If the consumer is satisfied then, he will purchase the same
thing again; otherwise he will go in for an alternative commodity. The businessman
should try to satisfy the consumers so that the demand for his products may be there. The
existence and expansion of business depends upon the liking of the consumers for the
products of that business. The commodities should also be made available when they are
needed.

Planning:

Planning is the most important character of business. Planning is related with all the
business activities. Planning is always based on past experience. Planning is also related
with future. Planning is the most important character of business. Proper planning can
remove all business problems.

Objectives of Business
Profit is not the only objective of business. Every work is started with an objective. The
objective is a goal, the achievement of which is a necessity- and all efforts are
concentrated for the fulfillment of the objective.

The main objective of a business undertaking is to earn profits. Profit-earning is

considered necessary for the survival of the business. Now-a-days, the values of society
have changed and society expects more from the business than merely earning profits.
The objectives of the business may be categorized as under;

 Profit Earning

Profit is the basic incentive to business pursuits. Profits are needed to face various
uncertainties like trade cycle, change in demand pattern, and fluctuations in money

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markets. A business needs profits not only for its existence but also for expansion and
diversification. The investors want an adequate return on their investments, workers want
higher wages and the entrepreneur needs money for reinvesting. All these demands and
requirements will be met only when some profits are charged. The profit motive does not
mean that the businessman should start exploiting consumers by charging higher prices or
selling low quality goods. The businessman should charge a reasonable profit and it will
be beneficial to the business and the society.

 Production of Goods:

The profit can be earned only when some exchange of goods and services takes place. So
the next objective is to produce more goods and sell them to the consumers. The
producers estimate the demands for goods and produce accordingly.

A businessman creates place and time utilities and meets the requirements of the society,
so tangible form of wealth is produced in the form of goods.

 Creating Markets

The aim of the businessman is to sell products. Marketing consists of these efforts which
effect transfers in ownership of goods and care for their physical distribution. Marketing
covers all those activities which relate to the creation of time, place and possession
utility. The businessman searches for new consumers for increasing his sales. An effort is
made to retain old consumers by supplying them better quality goods at reasonable
prices. The new markets are also exploited to keep a steady demand for goods

 Technological Improvement:

In the world of competition everybody tries to sell its products by offering good quality
products at lower prices. This is possible when latest technology is used for producing
goods. There should always be an endeavor to increase production and reduce costs. The
businessman should try to device new methods so that may be keep pace with the
changing business world.

 Satisfaction of Consumers:

The‘ consumers should be provided quality goods at reasonable prices. The tastes^
likings and requirements of the consumers should be given due weight age. The business
is meant for consumers and their satisfaction should be the main objective of the
business. So responsibility to consumers means setting up and maintaining standards of
quality and service in addition to reasonable price.

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  Satisfaction of Shareholders:

In the present business world, ownership and management are in two different hands. The
shareholders are spread all over the country and they have no access to the day-to-day
working of the business. The management should give reasonable return on the money
invested by shareholders. The shareholders should also feel that their money is not
misused by the management.

 Availability of Goods:

The business should ensure the supply of goods to meet the requirements of the society.
The business should estimate the total demand for various commodities and adjust the
production accordingly.

 Supply of Quality Goods:

The supply of quality goods and services to consumer at reasonable prices is the
responsibility of the business. The business should aim at consumer satisfaction. The
supply of adulterated goods, poor in quality, unusable or harmful to health will be against
business ethics. A business cannot flourish in the long run if it ignores consumers It is the
duty of the business to study wants and needs of consumers and provide them with
quality goods at reasonable prices.

 Cooperation with the Government:

Business should cooperate with the Government in helping it to achieve the objective of
socialistic pattern of society. The Government has fixed priorities for the execution of
major policies for the growth and development of the nation. These things lead to a
situation of suspicion and misunderstanding between businessmen and the Government.
The business community should adopt a positive approach towards policies of the
Government and should help it in solving national problems.

 Creation of More Employment:

The business can help the society by creating more and more job opportunities. The
expansion of business not only helps in employing more persons in the factory but it has
a multiple effect. Persons are required at various levels in the channels of distribution
from the producers to the consumers. The business community should plough back its
profits for further expansion of business activities which will ultimately create new job
opportunities.

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  Utilizing National Resources properly:

The business should put the scarce national resources to the best possible use. Wastage of
anything will not only be the loss of the enterprise but it will be a national loss. A
business is not free to damage or cause deterioration of natural resources.

Quality of Good Businessman:

Introduction:

A good businessman must have different qualities. A successful business cannot be

conducted without good planning, courtesy, decision making, hard work and
foresightness.

Definition of Businessman:

―A person who is engaged in buying and selling of goods and services to earn profit.‖

Qualities of A Good Businessman:

If a person is unable to do anything cannot do business well because business is very

complex. Fast changes are taking place in every field in.

Following are the basic personal skills and qualities of good businessman.

Ability to plan:

The most important quality of businessman is planning. Good planner can make the
better decision for his business. A business without planning is just like a ship without
rudder.

Activator:

A good businessman must have the quality of activator. He must activate his workers for
earning more profits.

Bold or Courageous:

Courage is a .great asset of businessman. A good businessman should be courageous and

bold person. With the help of boldness and courage, a businessman can face the problems
of business.

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Cooperation:

Businessman must cooperate with workers and customers with the help of cooperation, a
good businessman can run business well.

Courtesy:

Courtesy is to business what oil is to machinery. It costs nothing but it builds reputation.
So businessman has to win the heart of every one with his polite manners. . .

Decision making:

A good businessman should be honest and sincere in public dealing. The businessman
reputation depends upon his honesty. A good businessman should have the ability of
decision making.

Discipline:

A good businessman must have the ability of discipline. He should care about discipline
of the business. If he is regular and in time then employees will follow him.

Evaluator:

A businessman must have the ability to check the working performance of business. He
can make the business in this way successful.

Foresight:

A good businessman must have the ability of foresightness. Foresightness means an eye
on future planning is the success of business.

Hardworking:

A businessman must be hard working, without hard work businessman cannot be

successful. It is a correct saying that hardworking is the key of success.

Initiator:

The business world is moving at a very fast speed. A businessman should have the ability
to take initiation by producing new things and view methods of marketing the products
and service.

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Negotiation or communication Skills:

If a businessman is good negotiator then he can run his business well because without
good communication he cannot impress his customers. He must have the ability of
written and oral communication and customer dealing.

Quality of leadership:

A good businessman must have the ability of leadership. With the help of this quality a
businessman can lead his employees in a better way.

Responsibility:

A good businessman should be responsible .He is responsible for all business activities
like quality of goods, prices and conditions etc.

Reviewer:

A good businessman has to review his mistakes, which he did in past and tried best never
do it again in his life

Sound financial management:

Finance is the most important quality of businessman. Without finance business cannot
be started. A good businessman gets finance from all available sources.

Self Confidence:

A good businessman should have self-confidence, without self confidence he cannot

make quality decision and business suffers a loss.

Tact:

A good businessman is a tactful person. He has to handle the persons or his customers
very tactfully. It helps to earn profit in future.

Technical Skills:

A good businessman should have technical skill. So he completes knowledge to earn

profit.

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 FUNCTIONS OF A BUSINESS

The following are the main functions of the business.

Risk Taking:

In modem business, every businessman faces many risks. It is the main function of the
entrepreneurs to reduce the unexpected uncertainties, or loss. Every businessman takes
risk and starts his business. Therefore, the risk taking is the final responsibility of
businessman. A businessman always is ready to face risk in his business and faces
uncertainties.

Management:

The process activity or study of carrying out the task of ensuring that number, of diverse
activities is performed in such a way that defined objective is called management.

The businessman is considered as one of the most important factors of production in

modern times or in modern era.

Advertisement:

It is the duty of a businessman to make advertisement explaining the superiority and

quality of his goods through media. Advertisement is done to create an increase in the
demand or sale of his goods or products.

Combination:

A businessman tries his best to combine the four factors of production in such a way that
the cost of product should be minimum and on the other hand profit should be maximum.

Organization:

Sound and perfect organization structure brings benefits to the business and makes it
prosper. Function of the businessman is to manage the business: A businessman must
make conscious efforts to manage the business effectively. Effective management can
solve many problems of the business. .

Planning:

Planning is the most difficult function in business in modern time. Planning is largely
concerned with the determination of policy for plant and follows them through
production. When a businessman starts his business he has to decide that what work each

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worker has to do and he also fixes the responsibilities of the each worker and distributes
the authority to each worker. He has to prepare the plan or scheme of production types of
goods to be produced and its quantity.

If planning is affective then business goes upwards and vice versa. Profit of businessman
depends upon good planning.

Finance:

Finance plays a vital role in the establishment of a business. Finance is so necessary that
the businessman should invest his own finance/Capital. He has to trade out a capitalist to
make provision for capital for the investment. He tries obtain finance at the lowest
possible rate of interest from the banks and' other financial institutions to run the
business. Finance is called the lifeblood of economy. More capital means more business.

Innovation:

Innovation is essential and plays an important role in modem business. Businessman

makes arrangements for introducing innovation, which helps in the increase of production
on one hand, and reducing costs on the other. Innovations may take the form of the
introduction of new methods, in the process of production or introducing improvement in
the existing methods. It also include discovery of new markets, raw materials and‘ new
techniques of production. In short businessman tries his best to find out new productive
techniques and new form of business. Innovation is part and parcel of business. So
businessman tries to introduce new productive techniques and news forms of business.

Importance of Business

Better Standard of Living:

The business improves the living standard of the people. The circular flow of income
between the household and the business forms creates development in the society. In the
absence of this activity the flow of income stops and the standard of living goes down.

Investment Opportunities:

Business provides the investment opportunity to the investors. The business provides
income by means of investment.

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New Technology:

The business organization provides for the optimum use of technology in improvement.

Demand of goods:

The various numbers of products that we use in our daily routine exist only due to the
business. It is the business, which meet the local and foreign demand for goods. It also
helps and promotes other fields like banking, transport, communication and marketing
etc.

Employment Opportunities:

It provides employment to a large number of people. It is impossible for the government

to provide the employment to the whole population. It is the business sector which helps
the government in solving the problems of unemployment.

International Relations:

When there is mass production of goods, they will be exported abroad and this will bring
friendly relations between the countries. The trade relations become the basis of
cooperation in other fields like science, art, defense etc.

Large Production:

Business helps in efficient use of factors of production and thus reduces the cost of
production.

Use of Resource:

It makes possible to use idle resource of the country through the business. In absence of
business the natural gift of .goods like crude oil, gas minerals, electricity, coal and pig
iron etc remains idle.

New Products:

The research and development program of the business helps the consumers by
introducing new products and improving the existing things. As the needs of the business
increases it leads to a number of innovations.

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 Business Environment and Social Responsibility
Business Environment:

Business environment refers to the conditions prevailing in a society in which a business

is to be operated. It is defined as the total of all things external to business firms and
industries, which effect their organization and operation. The number and scope of
environmental factors, which effect business, is broad. There should be included all
aspects of our social, scientific, economic, political and cultural life which have some
bearing upon business.

Relationship of Environment to Business:

To understand fully the nature of business, its structure, its organization and its behavior,
one must look not only at the business properly, but also at the environment within which
business operates. More specifically, this means that business exists in surroundings
external to its direct or operating components of firms and industries.

The significant elements of environment for a business house comprise persons, physical
resources and climate, economic and market conditions, altitudes and laws of the land.
These elements effect the course of action of the company.

Business and its environment interact. In our business-oriented society, business has
influenced environmental conditions probably as many as or even more than
environmental forces have shaped business.

The firm depends upon its environmental conditions for the resources and opportunities
necessary for its existence. The environment determines the limits of the firms' activities.
The environment contributes valuable resources to the business firm only if the firm
provides the desired goods or services to the environment. A firm must look to public
needs and attitudes remain sensitive to human values and alert to the social set up. Good
businesses, therefore, are always responsive to the total environment in which they
operate.

Economic Environment

Business is greatly influenced by the economy of the country. Its operational success

15
depends upon an adjustment and meeting the requirements of the economy. The
important factors that are to be looked into and effectively handled are:

Desires, Customers and Markets:

The purpose of business is to anticipate desires of people and purpose goods and services
accordingly to satisfy them. Let these goods and services so produced be carried
effectively to the place of customers. But it is not possible unless businessman produces
them at proper time and makes them available to customers at reasonable price. Hence,
timing of production and reasonable price. Hence, timing of production and reasonable
price of products are important considerations. Further, the intensity of competition
existing in the market and the degree of marketing strategies to be adopted also are
important points to be considered by a business entrepreneur.

Availability:

Businessmen must assess the source or sources of capital as well as the cost at which it is
available. For a developing country like ours, obtaining capital is not so easy. It is
definitely a problem as its availability depends upon will and capacity of people to save
and invest existence of good capital and money market, and economic and financial
policy of the government etc.

Availability of Labour:

Operational efficiency of a business enterprise greatly depends upon the availability of

labour at a reasonable price. If such manpower in the shape of skilled and unskilled
workers is sufficiently available to a business according to its requirement and within
reasonable wage rate, it can carry on its activities and expect profit. But to get workers at
right time and at right price is not so easy. There are many factors that influence their
availability.

Level of Productivity:

Productivity at a reasonable level depends upon how the activities are planned, organized,
directed and controlled. The use of the latest production techniques, machines,
manpower, and motivation and techniques of people to work sincerely and devotedly are
some of the requirements to achieve the desired level of productivity.

Imaginative Entrepreneurship

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The success of an entrepreneur depends upon the quality of his imagination and skill.
More he is intelligent, imaginative, and farsighted, more he is effective in grabbing the
opportunity and playing his role in the economic growth and betterment of people.

Qualified and Capable Manager

The competent role of managers has greatly improved the efficiency of work operation,
reduced cost and enhanced capability to face challenge of competition. The science of
management is undergoing a fast improvement in the light of research, study, experiences
and observation. Every business enterprise is struggling to avail the benefit of intelligent,
qualified, and competent managers.

Market Size

Market size of a business depends upon its production policy and programme. If its
production target is limited, it will have a small market. On the other hand, if it has a
large-scale production programme, it has to expand its market. Such business enterprises
even go to international markets. Desire to expand the size of market causes them to
adopt new marketing strategies and planned efforts to go as deep to different places as
possible and create as many customers as it could be.

Price Levels and Inflation

In case if price level is changing fast, it becomes difficult for a business enterprise to plan
its activities that would ensure a reasonable gain. Changing price, levels make the cost of
capital, production, distribution, and profit unpredictable and uncertain. But still then we
find entrepreneurs coming up with fair guess and estimation to make their business
operate with better results and survive the vagaries of changing price levels and inflation.

Government Fiscal and Monetary Policy

Government collects revenue through taxes, duties, fees etc, and spends the same on
administration, public utilities like roads, bridges, canals, buildings, hospitals etc. Greater
burden of taxes imposed by the government on people may reduce their ability to save
and could affect investment climate. Similarly, monetary policy, which influences supply
of money within the country, does also have its impacts on business activities. Central
Bank of the country as controller of credit plays its role to regulate money supply
together with the government.

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Social and Cultural Environment

Businesses produce goods and services for people who dwell in the society. Thus the
number of people, their age and educational composition has great significance for
business. What a person buys or the service he consumes is a reflection of his religious
and cultural constraints. Thus the cultural religious and ethnic pressures have a vital
bearing on the affairs of the business.

1. Population Growth
for a businessman, population growth presents both opportunities and problems.
Opportunities arise from the fact that there are continually more consumers to buy
business output and more workers to produce and sell it. Problems are caused by
the fact that as more people want and need jobs, businesses must make them
available otherwise the society will have to face the menace of unemployment.

2. Population Composition

(a) Age-Wise Composition

Different age groups have different demands. Young people are interested in
automobiles, musical instruments, sport equipments etc. Older people may be
interest in medical care and health, food etc.

(b) Education Standard

An illiterate population can be easily deceived. Gone are the days of the sellers
society. The society where consumers are educated is the buyers society.
People can well judge between good and bad and reap the economies of
modern technology.

(c) Economic Standards

Higher income people can afford to satisfy tastes that people of lower incomes
cannot. Thus when the medium family income increases, the market for
business products and services also expands.

(d) Changing Job Opportunities

With increased investment in human resources, the opportunities to improve
labour productivity are enhanced. The occupational shifts have been towards

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 professional, technical, managerial jobs and in service industries. The
opportunities for farm workers, craftsmen, machine operators etc, is declining
substantially.

3. Social Attitudes and Beliefs

Businesses have to take into account the attitudes, desires, beliefs, tastes, problems
and customs of the consumers. These aspects vary in individuals, groups and even
nations. Americans hold attitudes like respect for all individuals, strong regard for
education, faith in science and technology, belief in innovation, belief in competition,
belief in an environment cleansed of air and water pollution, lovable communities
with decent housing, safe streets, efficient transportation, educational and cultural
opportunities. Such social beliefs have a considerable impact on business climate.

4. Pluralism

The society is broken down into many kinds of groups' consumers, investors, labour
organizations, managers, government's bureaucrats and politicians, religious groups,
racial groups etc. In everything that business managers do, they must be alert to this
pluralistic feature of the society. While the existence of so many interest groups tends
to complicate business operations, they constitute a major safeguard against
dominance of the society by any single interest group.

Technological Environment

There has always been a strong link between business and technology. Any business that
wishes to survive in a changing world must be aware of the modern technological
changes and also use technology to develop and modernize its products or services, to
meet cost competition and to improve marketing. The alert businessman must not only be
aware o technological changes affecting his operations and his customs, he needs to
forecast the state of the art so that he will have time to use it successfully before he finds
his products or processes obsolete. This he must also do so that he is the first one to put
up a new product at the suitable time in the market and not lag behind which will be a
degrading position in the world of competition.

Political Environment

Political environment has a great impact on the establishment, operation, growth and
expansion of business. Stable political climate makes things more certain and predictable.

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Businessman fined themselves in a better position to estimate future and plan their
business. In other worlds, greater is the political stability, better may be the opportunity
for successful business. That is the reason why we often witness flight of capital from the
country where there is political instability or where policy of government frequently
changes.

Legal Environment

Every business is encircled by the laws, regulations, and court decisions of the land.
Almost each and every decision made by a businessman should be within the permissible
limits of laws and regulations of the country. He should know that his action or decision
might be subjected to a challenge in the court of law. Thus all decisions and steps should
be within the framework of the law of the land. This success depends upon how he meets
all legal requirements. We know that in certain cases rules and regulations may be
burdensome. But they all aim at creating an atmosphere that is best suited to good
conduct of business and protect the interests of customers and workers as well.

Social Responsibility in Business:

A large part of an organization's response to its environment is called SOCIAL
RESPONSIBILITY.

Definition:
"Social Responsibility has been defined as the organization's obligation to take actions
that protect and improve the welfare of the society as a whole, along with advancing its
own interests."

Basically business is said to possess this responsibility because of its extreme power to
influence societal conditions.
Responsibility towards Environment
Business has the social responsibility to factor in ‗negative externalities‘ like pollution -
in fact any economic model that still regards the environment as an externality is
ultimately an anti-growth model. As the economic system has grown more interconnected
and vast over the years, so too has the idea of business itself.
Responsibility towards Stakeholders

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Today business has a responsibility towards its stakeholders – customers and society at
large are more aware of the negative impacts of business as usual. They want cleaner and
more ethical products and services. Business today also has a responsibility towards the
environment – it cannot keep endlessly extracting resources without consequence.
Responsibility towards Resources
Resources like air, water, biodiversity, fossil fuels are the very building blocks upon
which a successful business is built. With the rapid depletion of these essentials, business
needs to learn to deal with the ominous constraint of environmental degradation. Even
big business today needs to adapt towards a social entrepreneurship model in order to
survive.
The social responsibility of business is not just the limiting aspect of its responsibility
towards societal and environmental protection, but it is towards the protection of the
notion of business itself. The responsibility of business therefore is to not merely to
generate profit, but to ensure a steady flow of capital that can be diverted towards the
higher pursuits of society building. Without the realization of this responsibility,
business will soon burn itself out.

Importance of Business in Society and its Role in Development of a country:

Business and industry play a crucial role in the social and economic development of a
country. Increasing prosperity, a major goal of the development process, is contributed
primarily by the activities of business and industry. Business enterprises, large and small,
formal and informal, provide major trading, employment and livelihood opportunities.
Business opportunities available to women are contributing towards their professional
development, strengthening their economic role and transforming social systems. It is
through business that economic, financial and infrastructural development can possibly
happen. The existence and expansion of business are justifications of the importance of
business. Business provides a lot of services to the human beings that highlight its
significance. These services are as follows:

1. Supply of Goods and Services:

Business provides goods and services to the society. Business produces different
products, which are sold or supplied to the society. The creator created and creates
things, but processing, the individuals or business does reprocessing and

21
 preservation and ultimately new utility is created. So business provides goods and
services to the society.
2. Harnessing Capital and other Resources in Production:
Business collects the drifts of savings from different individuals, especially
through banks and financial institutions and employs those in productive activities
and, thus, harnesses capital in economic activities to utilize natural resources in
utility creation or value addition, and consequently, helps production, employment
and resource utilization.
3. Self-employment and Provision of Employment:
Business provides employment to the businessman. Further, in the production,
distribution and services of business a large number of individuals are employed
by the business organization and income generation occurs for them and others.
4. Preservation of Natural Resources:
Business creates new utility to the natural resources by preservation and value
addition. Different new products are created by business operation, without which
a lot of natural resources would have been wasted.
5. Research, Development and Innovation:
Business continuously makes research on alternative uses of resources, develops
new products and methods, and makes new innovations.
6. Income Generation:
Business generates income for the individuals. Business Utilizes factors of
production like land, labor, capital and organization; and generate incomes like
wage, rent, interest and profit to the factor-owners.
7. Interesting Natural Income:
Business preserves natural resources, and creates new utility. Consequently,
national income (NI), per capita income (PCI), gross domestic products (GDP),
etc, increase.
8. Contribution to Social Development:
Business contributes to the social development also. Business growth increases
national income, which contributes to social development. Profitable corporations
provide a lot of money as corporate taxes in the hand of the government, which the

22
 government uses in the development activities of the country. Besides, modern
corporate business contributes a lot for Corporate Social Responsibility (CSR),
which ultimately enhances social welfare.
9. Contribution in the Development of Education, science and Technology:
Business contributes toward the development of education, innovates new
technology and applies theory (s) of science for better production and human
welfare.
10. Development of International Relations:
Business imports necessary commodities and exports new or surplus products to
foreign countries. In this way, a foreign relation develops.

Importance of Business and Industries

Industries play a dominant role in the economic development of a country. Western

countries enjoy all comforts and luxuries of life due to higher productivity of goods and
services in their countries. This is due to industrialization.

Importance of Industries in Economic Development

1. Increase in National Income

Progress of industrial sector of the country results greater production of goods and
services. Output of goods and services is known as GDP. Increase in national income
increases per capital income of the people. Higher per capital increases general welfare of
people and standard of living of masses improves.

2. Increase in Employment Opportunities

Industries creates many types of employment opportunities. Disguised unemployment
prevailing in agricultural sector is removed as labor moves for jobs to the cities. Increase
in employments results increased savings, which is utilized for further investment in
industries.

3. Increase in Productive Capacity

Industrialization increases productive potential. Specialization results in mass production
of superior quality goods at a cheaper cost. Greater employment opportunities increase
income; income increases demand for goods for goods and services and increases in

23
demand increases investment in industries and other sectors of economy. Effective
demand through acceleration principle increases investment and a small investment
through multiplier effect increases national income many times and in order to meet
demand of people productive capacity develops.

4. Development in Agriculture
Agriculture is backbone of the economy of Pakistan whereas agriculture itself depends
upon the progress of industries. Industries produce all inputs that are needed by
agriculture such as fertilizers, insecticides and machinery etc. Agricultural output such as
cotton, sugarcane, edible oils, fruits, tobacco etc becomes input for industries. All these
factors increase income of farmers. Thus agriculture and industries are inter-dependent
sectors of economy.

5. Increase in Government Revenue

Industries provide revenue to the Govt. through different sources such as tax on the profit
of the company, income tax, sales tax, excise duty, import duty, export duty. Thus
industries provide a greater proportion of taxes to the Govt.

6. Improvement in Balance of Payments

Exports of industrial goods increases foreign exchange earnings. Likewise processing of
raw material reduces expenditure on imports and foreign exchange earnings improve
balance of payments of Pakistan.

7. Economic Stability and Political Domination

Arms, ammunitions, communication appliances, vehicles and other defense requirements
are produced by domestic industries, which make defense of Pakistan strong.
Industrialization provides economic and political stability. It provides name and fame in
international community. Hence a political domination is achieved.

24
 Exercise Questions:
1. What is Business? Describe purpose and nature of a business.
2. What are main objectives of business? What do businesses need to accomplish
their objectives?
3. Define business. What are the functions of a business?
4. Describe the characteristics of a business.
5. Explain the scope or components of a business.
6. What are the qualities of a good businessman?
7. Explain the importance of business
8. What do you mean by business environment? Explain its dimensions and scope.
9. What role does business and industries play in the economic development or
prosperity of a country?
10. Describe social responsibility in business.

25
 Trade and its Classification
Trade:

Trade is a basic economic concept that involves multiple parties participating in the
voluntary negotiation and then the exchange of one's goods and services for desired
goods and services that someone else possesses. Trade, also called goods exchange
economy, is to transfer the ownership of goods from one person or entity to another by
getting a product or service in exchange from the buyer. Trade is also called commerce
or transaction.

Definitions:

1. The act or process of buying, selling, or exchanging commodities, at either wholes

ale or retail, withina country or between countries: domestic trade; foreign trade.
2. The business of buying and selling commodities; commerce.
3. A purchase or sale; business deal or transaction.
4. The act or an instance of buying or selling; transaction.
5. An exchange of items, usually without payment of money.
6. Any occupation pursued as a business or livelihood.

A mechanism that allows trade is called a market. The original form of trade was barter,
the direct exchange of goods and services. Later one side of the barter was the
metals, precious metals (poles, coins), bill, and paper money. Modern traders instead
generally negotiate through a medium of exchange, such as money. As a result, buying
can be separated from selling, or earning. The invention of money (and later credit, paper
money and non-physical money) greatly simplified and promoted trade. Trade between
two traders is called bilateral trade, while trade between more than two traders is called
multilateral trade.

Trade exists for man due to specialization and division of labor, most people
concentrate on a small aspect of production, trading for other products. Trade exists
between regions because different regions have a comparative advantage in the
production of some tradable commodity, or because different regions' size allows for the
benefits of mass production. As such, trade at market prices between locations benefits
both locations.

There are various obstacles that can hinder the smooth running of trade. The activities
that are involved in removing these obstacles are known as aids to trade. These obstacles
and the activities that are performed to eliminate them are as follows:

26
The hindrance of place:

Goods are produced at few places, but consumed at different places. This geographical
distance between a manufacturer and a consumer can be eliminated by transport.

The hindrance of persons:

There are limited numbers of producers as compared to consumers. These producers and
consumers are linked to each other through various intermediaries such as wholesalers,
retailers, etc.

The hindrance of time:

There are some products that are produced during a particular season, but are in demand
throughout the year. These products are needed to be stored and released at the time of
requirement. This obstacle is eliminated by warehousing.

The hindrance of finance:

There is a time gap between the production and sales of goods. If there is a need for
finance to conduct trade activities during this period, it is met by banks. Banks
and financial institutions help a businessman by providing overdrafts, loans, etc.

The hindrance of risk:

Risk can be in the form of fire, theft, accidental loss, human error, etc. This risk can be
eliminated by insurance companies.

The hindrance of knowledge:

When a new product is produced, it should come into the knowledge of consumers. This
can be eliminated by advertisements and salesmanship.
Great deals of difficulties are experienced in the course of exchange of goods and
services.

The activities which help in overcoming those difficulties or hindrances are called aids-
to-trade or "auxiliaries to trade".

Aids to Trade
Trade or exchange of goods involves several difficulties, which are removed by
auxiliaries known as aids to trade. It refers to all those activities, which directly or
indirectly facilitates smooth exchange of goods and services. Aids to Trade are the

27
activities which are necessary for smooth flow of goods from producers to consumers.
These activities facilitate trade by removing various barriers in the buying and selling of
goods. Aids to trade includes Transport, Communication, Warehousing, Banking,
Insurance, Advertising, Salesmanship, Mercantile agents, Trade promotion organizations
in a country and Global organizations for international trade. Auxiliaries ensure smooth
flow of goods from producers to the consumers.

The various aids to trade in commerce are explained in following points:-

1. Transport

In the modern times there is a vast distance between centers of production and centers of
consumption. This difficulty is removed by an important aid to trade known as transport.
Transport creates place utility.

There are several kinds of transport such as air, water and land transport. The
geographical distance between producers and consumers is removed with the help of
transport.

28
Communication

Communication means transmitting or exchange of information from one person to

another. It can be oral or in writing. It is necessary to communicate information from one
to another to finalize and settle the terms of sales such as prices of goods, discount
allowed, facility of credit, etc.

Modern means of communication like telephone, telex, telegraph, email, teleconference,

etc., plays an important role in establishing contact between businessman, producers and
consumers.

Warehousing

There is a time gap between production and consumption. In other words, goods, which
are produced at one time, are not consumed at the same time. Hence, it becomes
necessary to make arrangements for storage or warehousing. Agricultural commodities
like wheat and rice are seasonal in nature but are consumed throughout the year, on the
other hand goods such as umbrellas and woolen clothes are produced throughout the year
but are demanded only during particular seasons. Therefore goods need to be stored in
warehouses till they are demanded. So it creates time utility by supplying the goods at
right time to consumer.

29
Insurance

It is regarded as the best means of reducing risks of the business. Insurance reduces the
problem of risks. Business is subject to risks and uncertainties. These are inevitable in the
field of business. Risks may be due to fire, theft, accident or any other natural calamity. .
Insurance covers the risks of loss to goods in transit and in warehouse on account of theft
and fire. Insurance companies who act as risk bearer cover risks. Insurance tries to reduce
risks by spreading them out over a greater number of people. The rate of premium
depends upon the type of risks and the period for which the risk is covered.

Banking
Banking solves the problem of finance. Businessmen receive money and also pay money
in large amounts. It is risky to carry large amount of cash from one place to another. Here
comes Banking as a solution. Banking and financial institutions solves the problem of
payment and facilitate exchange between buyer and seller. The businessmen may also
require short-term and long-term funds. Banks provide such finance to businessmen.
Banks also advances loans in the form of overdraft, cash credit and discounting of bills of
exchange.

Advertising

Advertising fills the knowledge gap and it solves the difficulty of information. Exchange
of goods and services possible only if producers can bring the products to the consumers.
Advertising and publicity are important mediums of mass communication. Advertising
helps the consumers to know about the various brands manufactured by several
manufacturers. The mediums used to advertise products are Radio, Newspapers,
Magazines, TV, Internet, etc.

Salesmanship

It facilitates personal selling. Many a times sales force is required to book orders directly
from dealers or customers. Salesmanship is very much required in the sales of services
and industrial goods. Again the sales force plays an important role in direct marketing,
especially in the case of selling insurance policies

Mercantile Agents

It removes personal difficulties. Mercantile agents are middlemen who form a link
between the buyers and the sellers. They do not carry on business in their own name. In
the process of distribution, producers and consumers are unable to have direct contact, as

30
consumers are spread over a vast area. Mercantile agents remove this difficulty of
personal contact.

There are several types of mercantile agents such as brokers, commission agents,
auctioneers, underwriters, insurers, etc.

Trade Promotion Organizations in a Country

They attend to difficulties of promotion and development of trade at national level. These
are the organizations established by the business community to protect and promote their
interest. They play promotional and developmental role for members. They do market
research work, act as clearing house of information, put their grievances before the
government, make representations, and help business community in many ways.

The examples include Chambers of Commerce, Export Promotion Councils, Indian

Institute of Packaging, etc.

Global Organizations for International Trade

They attend to promotion and development of trade at international level. The main
objective of global organizations is to promote International trade. It helps exporters and
importer by collecting information about international marketing trends.

The examples of such global organizations are World Bank, IMF, WTO, etc.

Trade and Exchange

The words "exchange" and "trade" refer to the same activity--people who have one thing
and want a different thing can exchange or trade it voluntarily with each other.

1. To give in return for something received; trade

2. To give and receive reciprocally; interchange: exchange gifts; exchange ideas.
3. To give something in return for something received; make an exchange.
4. The act, process, or an instance of exchanging
5. To make an exchange; engage in bartering, replacing, or substituting
one thing for another.

The word "exchange" tends to emphasize trades within a single country or locale. The
world "trade" tends to emphasize international aspects. Regardless, the activity of
exchanging or trading is the same, whether it is with your neighbor or someone living
clear across the world.

31
 THE MECHANISM OF EXCHANGE

Barter System:

The direct exchange of one commodity or service for another without the use of money is
called ―Barter‖ in economics. So barter system is that system in which no money exists.

Definition:

Barter system is a form of trading in which goods are - exchanged directly for other
goods without the use of money as an intermediary.

Inconveniences or Difficulties of Barter System:

Double co-incident of wants:

The barter system needs the matching of wants. The-exchange of goods is possible if the
wants of two parties coincide. For example a person having a table wants to exchange it
with chair. He has to find another person who wants to exchange his chair with table.
This problem of the barter system makes transactions difficult. Resultantly less number
of transactions and small volume of trade.

Common measure of value:

The barter system had no common measure Of value. There is no medium to measure the
value of goods. For example a man has a cow and the other has goats and both are willing
to trade. The owner of cow estimates the value of one cow equal to five goats. But the
owner of goals estimates the value of one cow equals to four goats. The exchange cannot
take place unless both of them estimate the same value.

Tax collection:

The taxes are collected for the economic development. The amount collected is spent on
education, hospitals, roads etc. when tax is collected in the forms of goods it is very
difficult for the government to spend such goods for development projects. Another
problem is that the amount of storage and collection charges may be more than the
amount of the tax collected.

Store of Value:

The barter system does not provide the facilities of storage of wealth for longer time
period. Some commodities are perishable in nature like vegetable,, fruits etc. J'hese goods
lose their whole value if stored for longer time.

32
Another problem is that the storing of goods also increases the storing cost.

Transfer of value:

The barter system does not help to transfer wealth from one place to another. The
movable and immovable wealth cannot be shifted from one place to another because
sometimes the carriage cost is much higher than the actual cost of wealth. The movement
of land and buildings is not possible at all. The economic progress becomes zero or even
negative due to this problem.

Sub division:

Many goods are not divisible. Sometimes this fact becomes a very big problem in
exchange.

Future Payments:

Under barter system it is very difficult to lend goods to other people. With the passage of
time the value of goods may fail or rise. So it becomes difficult to make payments in the
future.

Economic Measurements:

Under barter system it was not possible to measure economic variables both at micro &
macro level.

Estimation and Budgeting Problem:

Under barter system it is very difficult to estimate expenses and income. The people &
the government cannot make any estimate of their income & revenue because it is not
possible to forecast the value of the goods with any reasonable certainty.

Comparison of Living Standards:

Living standard of people is a measuring rod of .the economic growth of any country. It
is not possible to compare the living standards of people under barter system because
there is no unit to express the wealth o people.

How the use of money has reduced the problems of barter system Revenue
collection?

The use of money has removed the problem of tax collection. When tax is collected in the
form of money only then the Government can use it for the developmental projects.

33
Common Measure of Value:

Because money, of value as common measure of values. It has become possible to

express the economic values of all the things with the help of money.

Store of Value:

All the values can be converted and store in terms of money. It was not possible in Barter

Transfer of Value:

Value can be transferred very easily from one place to another place at a very low cost
and at a very high speed.

Inconvenience of Sub Division:

The use of money solved the problem of subdivision of goods. The. use of . money has
made it possible to buy goods both of lower and higher values.

Ease of Borrowing and Lending:

The money has removed the inconvenience of future payments'. Now the loans can be
taken from banks and financial institutions. The future payments can be stated in terms of
money. '

Measurement of Efficiency:

Under barter system there was no standard of measuring efficiency. The use of money
has made it possible to measure output, costs and efficiency in term of definite units of
N
money.

Investment and Saving:

Money has made it possible and extremely easy to invest and save. Now we can save our
wealth by investing it in different saving schemes.

Further we can save our wealth in form of foreign exchange, gold, silver etc which can
easily be converted into cash when required.

Medium of exchange:

The use of money eliminates .the problem of double coincidence of wants. Now anyone
can buy anything and sell anything for money. There is no need to find a person who is in

34
need of a thing which you have in surplus. In money economy people sell their goods and
services for money and use that money for purchase of other goods.

Development Process:

In a barter economy the process of development is slow. Wit]i the use of money
technology has developed, research work has increased; trade has expanded which results
in overall economic development.

Increase in Foreign Investment:

Money has made possible the huge foreign investment in today‘s world. Under barter
system the foreign investment was impossible but the use of money made it possible
because in money economy wealth can easily be transferred from one place to another.

The Money System:

Exchanging goods under barter economy led to the use of commodities that could serve
as common denominators of value and medium of exchange. It was discovered that some
commodities proved more generally acceptable in exchange than others, someone always
wanted them and everyone wanted them at some time. These much desired commodities
were shells; slaves, cattle, stones, skins, arrows, grains, cowries, furs and feathers, beads,
tea and tobacco, iron,, copper, silver and gold. When this came about, there existed an
indirect method of exchanging goods with some commonly accepted commodity as the
intermediary called the money system. In its origin, money was any generally accepted
commodity which served as a medium of exchange and measured the values of the goods
to be exchanged. General acceptability is the prime requisite of a satisfactory money
commodity. Most of the above commodities were tried, but except gold and silver all of
them were found wanting in some respect or the other. They were finally replaced by
gold and silver. The latest form of money is the paper money, which is decidedly the
most convenient and the most economical type. This money system had certain distinct
advantages over the barter system and did away with many of the inconveniences of the
older system.

Credit System:

The money system provided a much more satisfactory means of exchanging goods and
facilitated greatly the trade and commerce. But as population increased and markets
became world-wide, there were more demands for goods, exchanges increased in number
and size. Moreover, people did not always want to pay for the goods at the time they

35
obtained them. They preferred to wait until they sold them in order to get money with
which to pay. Thus, people who had dealings with one another began to keep accounts
and sell goods without asking for payment at once: In this way the credit system
developed. This is a system whereby something of value is obtained at one time for a
promise to pay for it at another. Today, by far the large part of all exchange transactions
is done on a credit basis rather than by the direct use of money. Goods today are to a
large extent bought and sold on credit and paid by means of a cheque or a bill of
exchange or a bank draft. In all the intricate financial processes of modem production and
exchange, credit enters.

Wholesalers
The word wholesaler has been derived from the word wholesale, which means to sell
goods in bulk or in relatively large quantities. A wholesaler is a trader who purchases
goods enlarge quantities from manufacturers and resell them to retailers is small
quantities.

Functions of Wholesaler:

Selling:

The wholesaler keeps the goods in warehouse .He sells them to the retailers who are often
scattered over a large area. The retailers contract wholesaler when goods are sold and this
process continue over the years. The wholesaler, thus, helps in the dispersion process of
marketing.

Market Information:

Wholesaler provides valuable market inform to retailers and manufactures. The retailers
are informed about the type and quality of goods available in the market for sale. The
manufacturers are informed about the changes in tastes and fashion of consumers so that
the manufacturers produce the goods according to the changes in the tastes and fashion of
consumers so that the manufacturers produce the goods according to the chanters in the
tastes and fashions of the consumers

Transportation:

Wholesalers buy goods in the bulk from the producers and transport them in their own
godown the wholesaler also provides the facility of transporting goods from warehouse to
the retailers shop.

36
Financing:

This is an important function of wholesaler, A wholesaler usually bus goods on cash from
the producers and sells on credit to the retailers in this way he provides financing
facilities to trade transaction.

Risk:

The wholesaler bears all the trade and financial risks of the business, since he buys goods
in bulk for making them available to retailers in small quantities. He takes all the risk
involved in marketing of goods. He not only assumes the risk of loss arising from a
sudden fall in the prices of goods but also the risks of damage, deterioration in quality,
spoilage etc in his warehouse.

Grading and packing:

Wholesaler sorts out the goods according to their quality size shape content etc and then
pack them carefully to sell them to the retailers.

Storage:

A wholesaler stores the goods in his warehouse. He makes them available improper and
required quantities as and when retailers require them.

Assembling:

The wholesaler buys goods from different manufacturers producing the same line of
goods. He assembles them in this warehouse for the purpose of sale to the retailers.

Retailer
The word retailer is taken from French word ‗retail.‘ which means to divide into small
pieces. The retailers sell the goods in small quantity to public. The retailers are the need
of present world for equal distribution of wealth and creation of employment for
themselves. Retailer is a business organization that sells primarily to ultimate consumers.

Functions of Retailers:

The main functions performed by a retailer are as follows:

Selling:

37
 The goods are purchased, assembled for sale at a profit to the customers. The retailer
employs different methods of selling the goods at a faster rate.

Storing:

A retailer depending upon his resources also stores goods to meet the future demand of
the consumers.'

Assembling:

A retailer deals in a variety of goods. He buys the different goods in reasonable quantity
from a variety of wholesalers. He displays these goods in his shop for sale to the
customers. .

Financing:

A retailer also sells goods to his dependable customers on weekly or monthly credit.

Advice to Customers:

The efficient retailers give tips to the customers about the merits of the new products
displayed at the shop.

Provision of Information:

The retailers provide up to date information to the manufacturers‘ representatives about

the sale position and the defects pointed out by the customers about the products. The
manufacturers are thus able to improve the quality of goods.

Foreign Trade
Foreign trade means buying and selling of goods and services between different
countries. The world trade implies an exchange of goods and services for money or for
other goods and services. If the citizens within a country conduct an exchange of goods
or business, it is called domestic or home trade. In case the goods and services are
exported to a foreign country or imported from abroad, it is named as foreign trade.
Foreign trade in other words is business on an international scale. Foreign trade acts as a
connecting people of different countries.

Definition:

―International trade is concerned with the buying and selling of commodities between the
different countries of the world.‖

38
 IMPORTANCE OF FOREIGN TRADE TO A COUNTRY

There are two sides of foreign trade

(1) Export

(2) Import

The importance advantages of foreign trade in brief are as under:

Monopolies:

International trade discourages the formation of monopolies in a country. If there is a

combination of certain business units and they raise the prices of goods higher than the
market the government imports those goods to reduce the prices in the country.

International relations:

Foreign trade is helpful to better international relations among the different countries.
Foreign trade brings the people of different countries close to each other. It can bring
better understanding and harmony among the various nations.

Employment opportunities:

Another advantage of foreign trade is the creation of employment for people. As the
foreign trade expands it creates jobs and provides better employment opportunities for the
people both in and outside the country.

Natural calamities:

International trade discourages the formati6n of monopolies in a country. If there is a

combination of certain business units: and they raise the prices of goods higher than the
market the government imports those goods to reduce the prices in the country.

Communication and transport:

One of the advantages of foreign trade is the development of transport and

communication. The trade between the countries led to development in the means of
communications and transport.

39
Advantages to consumers:

Foreign trade solves the marketing problems of the producers by making the entire world
as one market. The consumers are able to get" those goods, which are not produced in
their countries

Controlling prices:

Foreign trade helps to stable prices due to supply of goods in time. Foreign trade
equalizes prices of goods throughout the world. In case of ^.shortage the goods are
important to maintain price level.

Use of natural resources:

Foreign trade helps each, country to specialize in the production of those goods for which
it is best suited.

Goods:

It enables a country to obtain goods by importing which it cannot produce due to higher
costs.

Export Trade
Export trade means, -sale of goods services to prior countries. A country may have
surplus goods and services.‘ There may be shortage of such items in other countries.
They can buy goods and services in order to meet their demand. The export trade is
facing competition at world level. Different countries can buy goods and services in-
order to meet the demand.

Definition:

Export trade includes activities engaged in sending commodities from a country to other
countries.

Procedure Involved In Exporting Of Goods

Enquiry:

An exporter may receive an enquiry from buyers regarding price and other terms on
which the goods can be supplied to them. The exporters send the quotations.

40
Received order

The first step in export, is to receive an order for the goods, the order contains full
information of goods required such as a quantity, quality price insurance packing of
goods.

Obtaining Letter of Credit (L/C):

As soon as the confirmed indent is received from the buyer, the exporter would demand a
letter of credit from the foreign buyers. The exporter for safeguarding his economic
interest demands a letter of credit.

Packing and forwarding:

On receiving order the exporter has to arrange goods for exporting. The goods should be
carefully packed and must contain maximum quantity in the minimum space.

Preparation invoice:

An exporter after meeting all the formalities prepares the invoice. The invoice is prepared
according to the terms and conditions of sale.

Shipment of goods:

The exporter sends the packed goods to; the dock/airport to the custom authorities for
necessary scrutiny.

Mate receipt:

If the mate is satisfied with the packing and the number of packets as per documents he
will issue a mate‘s Receipts.

Bill of lading:

Bill of lading is the most important document international trade. Bill of lading is an
acknowledgement of the receipt of goods of ship in the master of the ship. Bill of lading
contains the name of the ship place of loading, place of destination in the name 6f
consignee, description of goods date of freight etc. Being a title of goods, it can be
transferred by endorsement in favor of any other person. Airway Bill is an equivalent to
bill of lading or goods service by air.

41
Insurance to the importer:

The exporter will send all the documents about the goods to the importer. He wills also
information about the date of reaching the ship at the port of destination.

Satisfactory receipt of goods:

If the importer is satisfied about goods received will send a • satisfactory report the
export. The transaction between the two is then considered closed. If there is any
complaint about shortage or quality goods it is then settled through correspondence or
mutual agreement.

Import Trade
Introduction:

Import trade means, purchase of goods and services from foreign countries Import trade
helpful in removing the shortage of goods in any country. The importers like exporters
also face a number of problems, the problems of langlauf difference cultural differences,
technical, differences, standardization of goods, tariff barriers customs regulations
documentation payments insurance etc. arise more acutely in the import of goods by the
government, of a country.

Definition:-

Imports are goods and services brought from another country.‖

Procedure of Import

The main stages involved in an import transaction re as under:

Obtaining an import license:

The CCI&E after necessary check and verification would issue the license and have It
registered with the State Bank of Pakistan also. The goods, which are placed under free
list, do not require any license.

Placing order:

An importer after obtaining an import license and quotations places an order (Indent) for
the goods to the overseas exporter.

42
Obtaining foreign exchange:

The exchange control department of State Bank Pakistan an importer makes

arrangements for the payment of goods to the exporter. The payment is generally made
through a letter of credit.

Advice of shipment:

An importer has to Waite for the receipt of advice note from the exporter. The exporter to
the importer sends the advice note just after the shipment of goods.

Payment of the bill:

The exporter sends documents to the banks of the importer to take.

Delivery of good:

If documents are d/a (document s against acceptance) then these will be handed over to
the importer as soon as the accepts the bill

Released goods:

The final stage involved in the import transactions in the clearance of goods. The
importer may get the goods cleared from the port directly through middlemen called
import merchants import commission, houses import brokers.

Role of Foreign Trade in Economic Development

The role of foreign trade can be judged by the following faces:

Foreign Trade and Economic Development:

Foreign trade plays very important role in the economic development of any country.
Pakistan also exports a lot of agricultural product to other countries and imports the
capital goods from other countries. Therefore, it is not wrong to say that economic
development of a country depends of foreign trade.

Foreign Exchange Earning:

Foreign trade provides foreign exchange which can be used to remove the poverty and
other productive purposes.

43
Market Expansion:

The demand factor plays very important role in increasing the production of any country.
The foreign trade expands the market and encourages the producers. In Pakistan home
market is very limited due to poverty. So it is necessary chat we should sell our product
in other countries.

Increase in Investment:

Foreign trade encourages the investor to increase the investment to produce more goods.
So the rate of investment increases.

Foreign Investment:

Besides the local investment, foreign trade provides incentives for the foreign investors to
invest in those countries where there is a shortage of investment.

Increase in National Income:

Foreign trade increases the scale of production and national income of the country. To
meet the foreign demand we increase the production on large scale so GNP also
increases.

Decrease in Unemployment:

With the rise in the demand of goods domestic resources are fully utilized and it increases
the rate of development in the country and reduces the unemployment in the world.

Price Stability:

Foreign trade helps to bring stability in price level. All those goods which are short and
prices are increasing can be imported and those goods which are surplus can be exported.
There by stopping fluctuation in prices.

Specialization:

There is a difference in the quality and quantity of various factors of production in

different countries. Each country adopts the specialization in the production of those
commodities, in which it has comparative advantage. So all trading countries enjoy profit
through international trade.

44
Remove Monopolies:

Foreign trade also discourages the monopolies. Where every any monopolist increases
the prices, government allows the import of goods to reduce the prices in the country.

Removal of Food Shortage:

India is also facing the food shortage problem. To remove the food shortage India has
imported the wheat many times. So due to foreign trade we are solving this problem for
many years.

Agricultural Development:

Agricultural development is the back bone in our economy. Foreign trade has played very
important role for the development of our agriculture sector. Every year we export rice,
cotton, fruits and vegetables to other countries. The export of goods makes our farmer
more prosperous. It inspires the spirit of development in them.

Import of Consumer Goods:

India and Pakistan imports the various consumer goods from other countries, which are
not produced inside the country. Today the shortage of any commodity can be removed
through international trade.

To Improve Quality of Local Products:

Foreign trade helps to improve quality of local products and extends market through
changes in demand and supply as foreign trade can create competition with the rest of the
world.

External Economics:

External economics can also be achieved through foreign trade. The industries producing
foods on large scale in Pakistan and India are enjoying the external economics due to
international trade.

Competition with Foreign Producers:

We can compete with the foreign producers in foreign trade so it improves the quality
and reduces the cost of production. It is also an advantage of foreign trade.

45
Useful for the World Peace:

Today all the countries are tied in trade relations with each other. Hence, foreign trade
also contributes to peace and prosperity in the world.

Import of Capital Goods and Technology:

The inflow of capital goods and technology in the less developed countries has increased
the rate of economic development, and this is due to foreign trade.

Import Substitution:

These countries not only produce import substitute, but also reduce deficit in balance of
payment of their countries.

Better Understanding:

Foreign trade provides an opportunity to the people of different countries to meet,

discuss, and exchange views and ideas related to their social, economic and political
problems.

Dissemination of Knowledge:

Foreign trade is also responsible for dissemination of knowledge and learning from
developed countries to under developed countries.

Interdependence:

Foreign trade is responsible for creating economic depending and establishing economic
interest in the economy of the countries having trade relations.

Factors Productivity:

Through foreign trade the productivity of labour and capital and organization increases.
Demand make them mobile on national as well as international level which helps
underdeveloped countries to develop and maintain a high level of growth of developed
countries.

46
 Exercise Questions

1. What is trade? What type of obstacles may occur in the process of trade?
2. What are aids to trade?
3. What is the difference between trade and exchange?
4. Describe the importance of trade.
5. Explain the mechanism of exchange
6. Differentiate between whole seller and retailer.
7. Define foreign trade.
8. Explain the procedure of export.
9. Explain the procedure of import.
10.Describe the role of foreign trade in the economic development of a country.

47
 Sole Proprietorship

―Sole means one and proprietorship means ownership‖ The sole proprietorship is the
simplest, oldest and most common business form under which only
one individual acquires all the benefits and risks of running an enterprise. It is as old as
the civilization itself. The sole proprietorship is not a legal entity. It simply refers to a
person who owns the business and is personally responsible for its debts. One person is
the sole manager, financer, controller and risk bearer.

Definition:

―A business that legally has no separate existence from its owner. Income and losses are
taxed on the individual's personal income tax return‖

The definition clearly explains that a sole proprietorship, also known as the sole trader,
sole ownership or simply a proprietorship is a type of business entity that is owned and
run by one individual and in which there is no legal distinction between the owner and
the business. Some formal definitions of a sole proprietorship are "a business owned by
one person who is entitled to all of its profits" (Glos & Baker) and "a business owned and
controlled by one man even though he may have many other persons working for him"
(Reed & Conover).

The individual entrepreneur owns the business and is fully responsible for all its debts
and legal liabilities. The owner receives all profits (subject to taxation specific to the
business) and has unlimited responsibility for all losses and debts. Every asset of the
business is owned by the proprietor, and all debts of the business are the proprietor's.

Features of Sole Proprietorship:

The main characteristics of sole proprietorship are as under;

Ownership

The ownership of business in sole proprietorship is owned by one person.

Profit

The single owner bears full risk of business, therefore, he gets total benefit of the busines
s as well as total loss.

48
Size

The size of business is usually small. The limited ability and capital do not allow the
expansion of business.

Management and control

Being small in size, it is managed by the owner himself. However, he may have some
paid workers to assist him. In any Case, the ultimate control rests in his hands.

Finance
The necessary capital to run the business is provided by the sole owner. However, he may
borrow from other sources such as friends or bank as need arises.

Risk
The proprietor himself bears all the risks. Nobody else has any stake in the business.

Relationship with customers

The sole trader tries to keep good relationship with his customers. The customers are
generally personally known to the proprietor and their orders are higher valued.

Capital

In sole proprietorship, the capital is normally provided by the owner himself. However, if
additional capital is required, such capital can be increased by borrowing.

Easy Dissolution

The sole proprietorship can be easily dissolved, as there are no legal formalities involved
in it. The decision of the proprietor alone ends the business.

Easily Transferable

Such type of business can easily be transferred to another person without any restriction.

Freedom of Action

In sole proprietorship, single owner is the sole master of the business, therefore, he has fu
ll freedom to take action or decision.

49
Formation

Formation of sole proprietorship business is easy as compared to other business, because

it does not require any kind of legal formality like registration etc.

Legal Entity

In sole proprietorship, the business has no separate legal entity apart from the sole traders

Legal status
In law, the sole trader and his business are considered as one, In other words, all the
assets and liabilities of the business are the personal assets and liabilities of the
proprietor. We can say that the owner and the business exist together. In other words, the
two are considered as one in the eyes of Law.

Legal Restriction

There are no legal restrictions for sole traders to set up the business. But there may be leg
al restrictions for setting up a particular type of business.

No legal formalities

The sole trader can set up or close the lawful business as and when he likes the operation
of his business is not governed by any special act or ordinance.

Limited Life

The continuity of sole proprietorship is based on good health, or life or death of the sole
owner.

Success of Business

The success and goodwill of the sole proprietorship is totally dependent upon the ability o
f the sole owner.

Secrecy

A sole proprietorship can easily maintain the secrecy of his business.

Unlimited Liability

A sole proprietor has unlimited liability. In case of insolvency of business, even the
personal assets are used by the owner to pay off the debts and other liabilities.

50
 Merits of Sole Proprietorship
Easy to start and dissolve:

A sole proprietorship can be set up easily and quickly. No legal formalities and
expenditure are involved in the establishment of a proprietorship. There is no need to
associate others or to enter into any agreement.

Only a license may be needed in special cases. The proprietor can start business
operations as and when he desires. Similarly, a sole proprietorship can be closed down
very easily and quickly.

Motivation to work:

The proprietor alone is entitled to receive all the profits of business and he alone has to
bear all losses. There is a direct relationship between effort and reward.

Therefore, there is an incentive to work hard. The proprietor is motivated to make the
best possible use of his skills and resources to maximise profits.

Quick decisions:

The sole proprietor is completely free to take decisions and to implement them. He need
not consult others or seek their approval. Quick decisions and prompt actions help to
improve the efficiency of business operations.

Independent control:

The sole proprietor enjoys complete freedom of action. No legal formalities are to be
complied with and there is no government interference in day-to- day operations.

Retention of business secrets:

The sole proprietor can keep the secrets of his business to himself. These secrets are not
known to competitors or others.

Personal contact:

A sole proprietor is in a position to maintain intimate contacts with his customers and
employees. He-can cater to the requirements of each and every customer. Close personal
touch increases the competitive strength of the business.

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Flexibility:

A sole proprietorship is small in size and has a simple management structure. Therefore,
it can be adapted easily to suit the changing conditions in the market. The line of business
can be easily changed or modified.

Economy:

The management of proprietorship is inexpensive. As the proprietor himself is the

manager, cost of management is very low. Borrowing capacity is high due to the
unlimited personal liability of the owner.

Tax benefits:

The owner of a sole proprietorship is not required to file a separate business tax
report. Instead, they will list business information and figures within their individual tax
return. This can save additional costs on accounting and tax filing. The business will be
taxed at the rates applied to personal income, not corporate tax rates.

Social utility:

Sole proprietorship provides an opportunity for gainful self-employment to persons with

limited money. It offers a way of earning an honourable living to those who do not want
to work under others.

It also facilitates equitable distribution of income and wealth. It leads to the development
of personal qualities such as self- reliance, initiative and responsibility.

Demerits of a Sole Proprietorship:

Sole proprietorship suffers from the following drawbacks:

Limited capital:

The financial resources of a proprietor are very limited. His funds are not adequate
enough to start large-scale operations.

Lack of specialization:

The managerial ability of the proprietor is limited. All the qualities such a judgement,
wisdom, etc. required for success in business are rarely found in one person the proprietor
is overburdened with too many tasks.

52
He may commit errors of judgment and his decisions may be hasty. Sole proprietorship
cannot afford to employ professional experts. As a result, the benefits of division of
labour are not available.

Unlimited liability:

The proprietor is personally liable for all the losses of business. Fear of loss of personal
property due to failure of business makes the proprietor very cautious and conservative.
As a result, the business may fail to grow and keep pace with new developments in its
particular field.

Uncertain life:

Sole proprietorship does not enjoy continuity of existence. It is dependent on the life of
the proprietor. Business may come to a standstill due to the illness, insolvency and death
of the proprietor. His successors may not be capable enough to carry on the business
successfully.

Limited scope for expansion

Due to limitations of capital and management, proprietorship business cannot grow and
expand to a large size. Its goodwill and bargaining position are also weak.

Thus, one man control is the best in the world provided the man is big enough to manage
everything. But such a man is not available. Therefore, sole proprietorship is suitable
only for small and simple businesses.

Difficulty in raising capital:

Since the initial funds are usually provided by the owner, it can be difficult to generate
capital. Sole proprietorships do not issue stocks or other money-generating investments
like corporations do.

Scope of Sole Business in Developing Countries like Pakistan

If the owner is capable of handling all business activities then one man control is best in
the world. Sole Proprietorship plays an important role especially in developing countries
like Pakistan. Sole proprietorship can be started with small capital amount without any
legal formalities.

53
Sole Proprietorship is suitable for developing countries because of the following reasons:

 Unemployment
 No Control Over Market
 Equal Distribution of Wealth

Unemployment:

There is lack of employment opportunities in developing countries. Single owner

business is suitable for removing unemployment.

No Control over Markets:

Sole Proprietorship business has limited control over market. So prices in the country
remain stable.

Equal Distribution of Wealth:

Sole owner business is best of equal distribution is wealth in the society.

One man business has limited scope and it will be suitable only when the business is
small and under direct supervision of the owner. In sole proprietorship, an individual
normally introduces his own capital and invests his own skill and intelligence in the
management of its affairs and is solely responsible for the outcomes of its operations.
When the business expands and the needs the services of experts and other persons are
appointed for control and supervision, then other forms of organizations will be more
suitable and successful.

54
 Exercise Questions:

1. What is sole proprietorship? What are its main characteristics?

2. What are the advantages and disadvantages of sole proprietorship?
3. What is the scope of single owner business in developing countries?
4. On what points the sole proprietorship is preferred to other form of business
organizations?
5. What do you understand by sole trading concern? Discuss its pros and cons?

55
 Partnership
A partnership is a type of business entity in which partners (owners) share with each
other the profits or losses of the business undertaking in which all have invested.
Partnerships are often favored over corporations for taxation purposes, as the partnership
structure does not generally incur a tax on profits before it is distributed to the partners
(i.e. there is no dividend tax levied). However, depending on the partnership structure and
the jurisdiction in which it operates, owners of a partnership may be exposed to greater
personal liability than they would as shareholders of a corporation. Partnership is a mean
of bringing together the persons who can contribute capital, skill for the expansion of
business. In the ordinary business number of partners shall exceed than twenty. In case of
banking business they may not exceed than ten. This type of business organization is very
popular in our country.

Definition:

According the partnership Act 1932 it is defined in the following words:

"Partnership is the relation between persons who have agreed to share profit of business
carried on by all or any of them acting for all."

Main Characteristics or Features of Partnership

Agreement:

Without agreement partnership cannot be formed. The agreement may be written or oral.
But it must be written on settle the disputes.

Registration:

It is not necessary that a partnership may be registered. But in case of registered firm
many problems can be created.

Number of Partners:

In a partnership there should be at last two partners. In ordinary business the partners
must not exceed the twenty, in case of banking not more ten.

56
Profit and Loss Distribution:

The basic aim of partnership is to earn profit. This profit is distributed among the partners
according their agreement. In case of loss also all the partners share in it.

Business:

The object of the partnership is to carry on the business. It may be production or trading.
It should be according the laws of the state.

Unlimited Liability:

The liability of the partner is not limited to his invested amount. In case of loss the
private property of the partner also used to pay the business obligations.

Entity:

Law has not granted it any legal entity, it is not independent from the partners. It has not
separate entity from its members.

Share in Capital:

According to the agreement every partner contributes his share. It is not necessary all the
partners should contribute equally. Some people provide only skill and ability to become
a partner.

Management:

All the partners can participate actively in the business management. Sometimes only few
persons are allowed to handle the business affairs.

Payment of Tax:

Every partner pays the tax on his share of profit individually.

No Audit:

In the partnership there is no restriction for the audit of accounts. So this type of
organization may operate freely.

57
Partners are Agent:

Every partner stands as an agent and principal to one another. In the position of an agent
one can do contract with other parties on behalf of the firm.

Transferability of Shares:

No one partner can transfer his share to any other person without the consent of the
existing partners.

Dissolution:

It is a temporary form of business. It operates at the pleasure of the partners. It is

dissolved if a partner leaves dies or declared bankrupt or insane. Partners can also
dissolve it by obtaining the degree from the court.

Free Operation:

There are no strict rules and regulations to control the partnership activities in our country
i.e. no restriction for the audit of accounts, submission of various reports and other copies
to any government authority. So this organization may operate freely without any
interference.

Mutual Confidence:

The business of the partnership cannot be conducted successfully without the element of
mutual confidence and cooperation of partners. So the members must have trust and
confidence in each other.

Position:

One partner is an agent as well as principal to other partner. He can bind the other person
by his act. In the position of an agent he can make contract with another person or parties
on behalf of his concerned firm.

58
 Advantages of Partnership:
The advantages claimed for partnership are as follows:

Easy Formation:

The formation of partnership is very easy. Simply an agreement among the partners in
oral or written words can bring a partnership into existence. It includes very less legal
formalities and expenses.

Large Resources:

A partnership is in a position to accumulate large resources as more than one contributes

capital. The added financial strength of the partners can be utilised to increase the scale of
operation of the business. New partners can be admitted to meet the additional
requirement of fund.

Diverse Skills and Expertise:

Partnership provides a scope for association of persons with diverse skills and expertise.
Partners having expertise and skills in different functional areas of business can manage
the business efficiently.

Flexibility of Operations:

Like that of sole proprietorship the partnership can bring changes in its operation easily
and quickly looking at the changing circumstances. Such changes cannot be implemented
in a company with ease because of the restrictions imposed.

Sharing of Risk:

The losses of the firm and other associated risk in business are shared by the partners.
Hence, the share of risk of each partner is less in comparison to sole proprietorship.

Benefits of Unlimited Liability:

Since the liability of the partners is unlimited it acts as great check against speculative
activities and partners shall not be careless in managing the business. Further, the firm
enjoys good credit standing and easily obtains loans because the creditors can realize
their loan amount from the private property of the partners.

Promptness in Decision Making:

59
Since the partners meet quite frequently, they can arrive at decisions promptly. Thus,
business opportunities requiring quick decision shall not be lost.

Close Supervision:

Partners take active part in the management of the business. The close supervision of
partners eliminates wastage and leads to greater efficiency.

Reduced Management Cost:

Since different functional areas are managed by the partners themselves, the huge
managerial expenses can be saved to a great extent.

Secrecy:

There is no statutory obligation on the part of partnership to publish the accounts of the
firm. Hence, the business secrecy can be maintained to a certain extent.

Protection of Minority Interest:

Every partner has a right to participate in the management. All important decisions are
taken unanimously by the partners. There is no scope to disregard the interest of a
minority group of partners.

Relationship between Effort and Reward:

There is a direct relationship between effort put by partners and reward. If the business is
managed efficiently, the reward shall b< in the form of more profit, better customer
satisfaction and good image of the business.

Disadvantages of Partnership:
Even though, partnership form of business is comparatively better than sole
proprietorship form of business, still it is not the only best option available to an
entrepreneur. The following are some of the important shortcomings of partnership form
of organization which must b carefully studies before finalization of this form of
business.

Limited Capital:

There is a limit to the maximum number of partners in a partnership Therefore; the

capital that can be raised from the partners is limited. Large-scale business requires huge
capital and partnership is not the proper form to meet the requirement.

60
Unlimited Liability:

Like that of the sole proprietorship, unlimited liability is a important drawback of

partnership. The risk of loss of private property of the partnership influences the partners
to avoid further risk and play safe.

Instability:

There is instability in existence because a successful firm can be dissolve on the death,
insolvency or lunacy of a partner. The difference of opinion may also bring about closure
of the business. The sudden closure of a successful business is a great social loss.

Risk of Implied Authority:

A partner acts as an agent of the firm and his acts bind the firm and other partners. A
dishonest or incompetent partner may lead the firm in difficulties because the other
partners shall have to pay for the dishonesty or inefficiency < a partner.

Lack of Harmony:

Difference of opinion is the natural consequence in partnership. The conflicts and lack of
harmony among the partners may not be beneficial for the business and sometimes even
that lead to dissolution of the firm.

Non-Transferability of Interest:

No partner can transfer his interest in a firm to third party without the consent of the other
partners. Thus, a partner does not enjoy the freedom of converting his interest in the firm
into

Lack of Public Confidence:

There is no legal binding on the firm to publish accounts. The public may suspect that the
firm is earning huge profit at the cost of the consumers. Thus, the firm lacks confidence
of the public.

Cautious Approach:

The very approach of unlimited liability makes the partners over cautious. This restricts
the partners in taking up any risky ventures and thus misses ma business opportunities.

61
 Registration of Partnership Firm
The registration of a partnership is not compulsory but it is better to register the business,
partnership can, be registered under partnership Act 1932.

Application:

A printed form must be obtained from registrar office for registration.

Basic Information

Application form must be filled by partners and provide following information:

 Name of business
 Place of business
 List of business
 Date of joining
 Duration of business

Signatures

The application must be signed by each partner or by his or her agents,

Registration Fee

A prescribed fee must be paid for registration. A challan form is obtained from registrar
office.

Partnership Agreement

A partnership agreement must be prepared in writing. Agreement includes all the terms
and conditions of business.

Submission of Form

Application form with agreement and copies of ID cards must be submitted to registrar
for registration.

Verification of Form

After the submission of form to registrar the registrar verifies the information given in the
form.

62
Certificate of registration

If registrar is satisfied with information given, he will issue the certificate of registration.

Advantages of Registration

If partnership is registered public shows more confidence in business. Business can get
credit benefit from public and financial institution.

Credit Facility

Partnership business can get more credit facility due to registration. Because financial
institution shows more confidence on registered business

Tax Advantage

If partnership business is registered, the profit is distributed among all partners and then
tax is charged on personal income of partner so the registered business pays less tax as
compared to unregistered business.

Clear Terms

Written agreement is required for the registration of partnership due to which written
agreement terms are clear to partners.

Government Facility

Registered business gets more facilities from government. Government provides facilities
like protections and credit facilities.

Goodwill

Good reputation of a partnership firm increase due to registration. No other business can
use the name of registered business.

Legal Protection of Partner:

All partners can go to the court of law against each other for any dispute among them.

Protection of Firm:

The registered firm can file case against debtor‘s creditors and any partner for any breach
of agreement.

63
Protection of Creditors:

The creditors can easily recover their amount from any partner. The names of the partners
are stated in the registration.

Protection of New Partner:

New partner can go to the court for their protection of his rights in the business due to his
registration.

Protection of Outgoing Partner

Retiring partner can send a notice to register. After this notice the retiring partner is free
from all responsibilities.

Disadvantages/ Effects of Non-Registration

Partner

A partner of an unregistered firm is not allowed to file a suit in the court against other
partners and firms.

Firm

An unregistered firm cannot file case against other business (third party)

Third Party

The third party has rights to file case against unregistered firm and its partners.

Registration of partnership is not compulsory by law. Partners can register the business to
get the advantage of registration.

Types/Classification of Partners
A person who contributes capital into partnership is called partner. After getting the
status of partner he is- considered owner of the business.

―Partner is a person who contributes his share of capital into partnership business for the
purpose of making profit‖

Following are the main types of partners in partnership.

64
Active partner

A partner who takes active part in the management of business is called active partner.
He invests capital in business. He shares profit and loss of business. Active partner is also
responsible for all loans of business.

Silent partner

A partner who does not take part in management of business is called silent partner. He
invest capital in business and also shares profits and losses of business

Secret partner

A partner whose name is kept secret from public is called secret partner. He invests
capital in business. He also takes part in management of business. He also shares profit
and loss of business. He is responsible for all liabilities of business.

Sleeping partner

A partner who does not take part in management and also not known to public is called
sleeping partner. He invests capital and also shares profit and loss of business.

Senior Partner:

A partner who is senior in age, experience or capital is known as senior partner.

Junior partner

A partner who is junior in age, experience or capital point of view is known as junior
partner.

Incoming partners (New partner)

A partner who namely joins business with the consent of all old partners is called as
incoming partner.

Outgoing partner (retired partner)

A partner who leaves business with the consent of other partners is called an outgoing
partner. The retired partner is entitled to receive capital from business.

65
Major Partner

A partner whose age is 18 years or more is called major partner. He is a regular partner of
business.

Quasi Partner

A person who has retired from business but does not withdraw capital from business is
called Quasi partner. Now his capital is considered as loan and he receives interest on
capital. He is also called deferred creditor of business.

Salaried Partner

A partner who receives salary for his service in management of business ia called salaried
partner. He receives salary rather than profits or both.

Insolvent Partner

A partner who is unable to pay loan and court declared him as insolvent. Now other
patens are not responsible for insolvent partners.

Limited Partners

A partner whose liability is limited .He is not responsible to pay business loan. He cannot
take part in management of business, he invests capital and receives profit of business.

Nominal Partner

A nominal partner is one who lends his name to the firm. He does not contribute any
capital nor does he share profits of the business. He is known as a partner to the third
parties. On the strength of his name, the business may get more credit in the market or
may promote its sales. A nominal partner is liable to those third parties who give credit to
the firm, on the assumption of that person being a partner in the firm.

Partner in Profits

A person may become a partner for sharing the profits only. He contributes capital and is
not liable to third parties like other partners. He is not allowed to take part in the
management of the business. Such partners are associated for their money and goodwill.

Partner by Estoppels by Holding Out

66
When a person is not a partner but poses himself as a partner, either by words, or in
writing or by his acts, he is called a partner by estoppel or by holding out. A partner, by
estoppels or by holding out, shall be liable to an outsider, who deals with the firm, on the
presumption of that person being a partner in the business, even though he is not a partner
and does not contribute anything to the business:

Minor as a Partner

A partner who is below eighteen years of age , called Minor Partner. A minor is a person
who has not yet attained the age of majority. A minor cannot enter into a contract,
according to the Partnership Act because a contract by a minor is void. However a minor
may be admitted to the benefits of an existing partnership with the consent of all partners.
The minor is not personally liable for liabilities of the firm, but his share, in the
partnership property and profits of the firm, will be liable -for the debts of the firm.

Rights and Liabilities of a Minor:

A minor has a right to such share of property and of profits of • the firm as may be agreed
upon by all the partners. A minor may inspect the accounts of the firm or take note of the
accounts. The personal property of the minor is not liable for the debts of the firm. But
his share, in property of the firm and profits, is liable for the debts and cogitations of the
firm.

So long as a minor remains a partner he cannot file a suit against other partners for an
account or for the payment of his $hare in the property or profits of the firm. At any time
within six months of his attaining majority (i.e. Competing 18 years of age), the minor
may give public notice of the fact, that he has decided to become or not to become a
partner in the firm. In case he does not give any such notice, within six months, it shall be
presumed that he has opted to become a partner.

In case a minor decides to become a partner, he will be personally liable to third parties
for all acts of the firm, since he was admitted to the benefits of the firm. If a minor
decides not to become a partner, his rights and liabilities continue to be those of a minor
up to the date on which he gives public notice. His share will not be liable for' any acts of
the firm done after the date of the notice.

67
 Kinds of Partnership
General Partnership

In this type of partnership the liability of members is unlimited. All the partners
personally and collectively are liable for the obligations of the firm. All partners can take
part in the working of the business. In Pakistan this kind of partnership exists. The
registration of the firm is not compulsory, but certain privileges are available to the firm,
which is registered.

Limited Partnership

This type of partnership is not prevalent in Pakistan but it exists in some other countries
like England. Under this partnership the liability of some partners is limited and the
liability of others is unlimited There must be at least one partner whose liability should be
unlimited. The partners with limited liabilities are liable only up to the capital they have
invested.

The partners with limited liability are called special partners and partners with unlimited
liability are called active or general partners. The special partners cannot take active part
in the working of the business. The death or insolvency of a special partner does not
affect the continuity of firm. On the other hand the firm is controlled and managed by
general partners. Limited partnership encourages those persons who want to invest but do
not want to take risk of unlimited liability.

Particular Partnership

When a partnership is started for certain work it is called particular partnership. When the
work is completed, the partnership comes to an end. The partnership may also be for a
limited period, it will be dissolved at the expiry of that period.

Partnership-at-Will

This type of partnership is not started for a fixed period or for a particular purpose. The
partnership-at- will continues up to the time the partners have faith in each other. The life
of partnership is not limited to time and work it can be dissolved when all the partners
want dissolution or any one of the partners gives notice for dissolution of the firm. The
strength of this partnership depends upon mutual trust and confidence among the
partners.

68
 Partnership Agreement/ Deed
A written agreement among partners is called Partnership Deed. The partnership deed
includes all important clauses like name of business, contribution of capital by various
partners, sharing of profits or losses, mode of management etc. Any dispute arising later
on will be settled according to clauses of the partnership deed can be called the
constitution of partnership. Though partnership deed is not necessary but it is advisable to
write a partnership deed to avoid any misunderstanding among the partners.

Definition

―The document which includes all the provisions of partnership is called partnership
agreement.‖

Following are the main provisions of a partnership agreement:

Name of Business:

Name of business should be written in partnership agreement.

Nature of Business:

Nature of business should be written.

Duration of business:

Duration of partnership whether it is for fixed period or for indefinite period.

Amount of capital:

The total amount of capital and the share of each partner should be written.

List of Partners:

The name and addresses of each partner should be written in agreement.

Profit Ratio:

The profit ratio of each partner should be written in agreement.

Location:

The address of the business should be written in agreement

69
Date of Start:

Date of starting business should be written in agreement

Change in Agreement:

The rules relating to change in agreement should be written.

Death of Partner:

The partnership agreement should contain .the rules relating the death Of partner.

Witnesses:

The witness of agreement is also written in it.

Ways of Dissolution:

The ways under which the firm may be dissolved

Settlement of Account:

The rules relating the settlement of accounts should be written.

Amount of Profit:

The amount of profit relating the employees (as bonus) should be mentioned.

Valuation of Assets:

The rules relating the valuation of assets should be written

Interest on Capital:

The percentage of interest on capital should be written in agreement.

Amount of Salary:

The amount of salary payable to any partner should be written clearly.

Rights and Duties:

The details relating the rights and duties of each partners.

Entry of New Partner:

The rules relating the entry of partner must be written.

70
Loan and Interest:

The rules relating the loan and interest on loan must be written in Partnership agreement.

Audit of Accounts:

The rules relating the audit of account should be written.

Dealing Bank:

The name of dealing bank should be written in agreement

Division of Work:

The details of division of work among all partners must be written.

Minor Partner:

The rules relating the admission of minor partner should be stated in the partnership deed.

This is not the exhaustive and final list of clauses, which can be inserted in the
partnership deed. Any clause mutually agreed by the partners can be made a part of
partnership deed. If the partnership deed is silent on some point, then provisions of the
partnership act will apply. It the partnership deed is silent about the distribution of profits
then all the partners will be entitled to equal share of profits and losses.

Rights, Duties and Liabilities Partners

Partnership agreement includes the rights and duties of every partner. The rights and
duties are decided by partners in agreement.

Rights of A Partner

Following are the main rights of partners according to Partnership Act 1932.

Right to Take Part in Management:

Every partner has right to take part in the management of the partnership business.

Right to Receive Profit:

Every partner has right to share profit of business according to agreement. In the absence
of an agreement profits is distributed equally.

71
Right to Receive Interest on Loan:

Every partner has right to receive interest on loan, which is provided by him to business.

Right to Receive Interest on Capital:

A partner has right to receive interest at the rate of 6% per .annum according to
agreement.

Right of Consultation:

A partner has right to express his opinion in all business matters. All decisions must be
with the consent of all partners. No change may be made in the nature of business
without consent of all partners.

Right to Use Property:

Every partner has the right to use the business property. The business property must be
used for the purpose of business.

Right to Check Books:

Every partner has a right to check and copy the books of account in Partnership business.

Right to Continue:

A partner has a right to continue in the partnership business. He cannot be expelled

without any solid reason from partnership business.

Right of Compensation:

A partner has a right to be compensated by the partners in respect of expenses incurred by

him or any losses suffered by him in the conduct of his business.

Right to Use Emergency Powers:

A partner has power to act in an‘ emergency powers for protecting the business from loss.
He is responsible for any loss caused due to his any wrong decisions.

72
 Duties of Partners
Common Advantage:

It is the duty of every partner to carry on business to the common advantage not for
personal advantage. Partners are bound to carry on the business to the greatest common
advantage.

Sincere:

Every partner must be sincere with other partners for the best interest of business.

Keep the Accounts:

A partner is bound to keep and prepare correct accounts of business. Every partner shall
work honestly and carefully to his duties of business.

Provide Full Information:

Every partner is an agent of other partner so he is responsible to provide full information

of business to all partners

Compensation for Fraud:

Every partner is responsible to compensate for any loss caused by his fraud in business.

Compensation for Neglect:

Every partner is responsible for any loss caused due to his willful neglecting business.

Share Losses:

Every partner is responsible to share losses of business according to agreement.

Work without Remuneration:

Every partner is responsible to work hard without any remuneration in absence of an

agreement.

Use Property:

The property of the business must be used for the common benefit of all partners.

73
Act within Powers:

Every partner is bound to act within his powers. He should not be exceeding his
authorities in business.

Liabilities of Partners:

Following are the main liabilities of partners in partnership business.

Joint Liability:

Every partner is responsible to carry on business so every partner is jointly responsible

for the business loans and losses.

Liability of New Partner

A new partner cannot be held responsible for the loss, before the date of his admission in
partnership

Liability of Retiring Partner:

Retiring partner is not responsible for any loss after his retirement from partnership
business.

Liability of Insolvent Partner:

The partnership business is not responsible for any liabilities of insolvent partner after the
date of which the order of insolvency made by court.

Dissolution of Partnership and Dissolution of Partnership Firm

The partnership Act 1932 introduced a difference between the dissolution of partnership
and dissolution of partnership firm as under:-

Dissolutions of Partnership

―If one or more partners are separated from partnership but other partners continue
business, it is called dissolutions of partnership.‖

Dissolution of Partnership Firm

―If partnership is dissolved among all partners or except one, it is called dissolution of
partnership firm.‖

74
Example

If there are four partners A, B, C and D, and one partner dies, retires or becomes
insolvent but other partners continue business, it is a case of dissolution of partnership. If
all partners are separated from business it is case of dissolution of partnership firm.

Ways/Modes of Dissolution of Partnership Firm

Dissolution by Agreement

Partnership firm may-be dissolved with the consent of all partners, it- is called dissolution
by agreement

Dissolution by Notice

When a partnership is at will, the partnership firm may be dissolved by any partner giving
the notice in writing to all the other partners of his intention to dissolve the firm. The firm
is dissolved from the date written in the notice. If no date is written, it would be dissolved
from the date of the serving the notice.

Compulsory Dissolution

Following are the reasons of compulsory ―dissolution‖

 Unlawful business
A partnership of business is dissolved when business of the firm becomes
unlawful, due to happening of any event.

 Insolvency of partners
A partnership firm shall be dissolved, when all the partners becomes insolvent.

Contingent Dissolution

The partnership firm may be dissolved due to following reasons:

 Death of partner
On the death of a partner the partnership firm may be dissolved.

 Insolvency of partner
When one partner becomes insolvent, partnership firm may be dissolved.

75
  Expiry of period
If partnership firm is for fixed period, after the expiry of period, partnership firm
may be dissolved.

 Completion of work
A firm may be formed to complete a particular work. The completion is the end of
the firm

Dissolution by Court

The partners can apply to the court for dissolution of partnership firm due to the
following cases:

Breach of Agreement

If a partner breaches the agreement of partnership, the court may issue the order of
dissolution. .

Unsound Mind

When a partner has become unsound mind any partner can go to the court for the
dissolution of partnership firm.

Unable to Perform Duty

When a partner has unable to perform his duties, the other partners can move to the court
for dissolution of partnership firm.

Misconduct

When a partner is guilty of misconduct in the operation of business the court may issue
order dissolution.

Transfer of Share

If a partner transfer his share to the third person in partnership without the consent of all
partners then the partnership may b dissolved.

Regular Losses:

When the partnership firm cannot be carried on expect of loss.

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Other Grounds:

The court may issue the order of dissolution of the firm on any other grounds considered
fit by the court of law.

Exercise Questions:
1. What is partnership? What are its main characteristics?
2. Define Partnership. Describe its merits and demerits?
3. Who is a partner? What are the various types of partners in partnership firm?
4. Discuss the registration process of a partnership firm. Describe the benefits of
registration.
5. Discuss the types of partnership firms.
6. What is a partnership deed? Describe its main contents.
7. What are the consequences of non registration of a firm?
8. Explain the rights, duties and obligations of partners as per partnership agreement.
9. Define dissolution of a firm and explain the circumstances under which a firm can
be dissolved.
10. What is the difference between dissolution of a firm and dissolution of a
partnership? Under what circumstances a firm may be dissolved?

77
 COMPANY

A company may be defined as an association where two or more persons come together
for a common business goal. It has what is termed 'separate legal personality' meaning it
is treated as an entity separate from its shareholders. Consequently, the liabilities of a
company cannot be extended to its shareholders. The liability of shareholders is limited to
the amount unpaid on their shares.
Another comprehensive and clear definition of a company is given by Lord Justice
Lindley, ―A company is meant an association of many persons who contribute money or
money‘s worth to a common stock and employs it in some trade or business, and who
share the profit and loss (as the case may be) arising there from. The common stock
contributed is denoted in money and is the capital of the company. The persons who
contribute it, or to whom it belongs, are members. The proportion of capital to which
each member is entitled is his share. Shares are always transferable although the right to
transfer them is often more or less restricted‖.

As a legal entity, a company has, subject to the Companies Act and to such limitations as
are inherent in its corporate nature, the capacity, rights, powers and privileges of an
individual. This entails that a company can own property, sue and be sued and enjoys
perpetual succession, among others. However, since a Company, unlike a human being,
is an artificial person, it can only act through an agent, namely, a Board of Directors.

Features of a Company:

The distinctive features of the company form of organization are as follows:

1. Separate legal existence:

A company has a distinct legal entity independent of its members. It can own property,
make contracts and file suits in its own name. Shareholders are not the joint owners of the
company's property. A shareholder cannot be held liable for the acts of the company.
Similarly, members of the company are not its agents. There can be contracts between a
company and its members. A creditor of the company is not a creditor of its members.

2. Perpetual succession:

Perpetual succession means continued existence. A company is a creation of the law and
only the law can bring an end to its existence. Its life does not depend on the life of its
members.

78
The death, insolvency or lunacy of members does not affect the life of a company. It
continues to exits even if all its members die. Members may come and go but the
company goes on until it is wound up.

3. Limited liability:

As a company has a separate legal entity, its members cannot be held liable for the debts
of the company. The liability of every member is limited to the nominal value of the
shares bought by him or to the amount of guarantee given by him.

For instance, if a member has 50 shares of Rs. 10 each, his liability is limited to Rs 500.
Even if the assets of the company are insufficient to satisfy fully the claims of the
creditors, no member can be called to pay anything more than what is due from him.

However, if the members of the company so desire, they may form a company with
unlimited liability.

4. Transferability of shares:

The capital of a company is divided into parts. Each part is called a share. These shares
are generally transferable.

A shareholder is free to withdraw his membership from the company by transferring his
shares. However, in actual practice some restrictions are placed on the transfer of shares.

5. Common seal:

Being an artificial entity, a company cannot act and sign itself. Therefore, it acts through
human beings. All the acts of the company are authorized by its common seal.

The name of the company is engraved on its common seal. The common seal is affixed
on all important documents as a token of the Company's approval.

The common seal is the official signature of the company. Any document which does not
bear the common seal of the company is not binding on the company.

6. Separation of ownership and control:

Members have no right to participate directly in the day-to-day management of a

company. They elect their representatives, called directors, who manage the company's
affairs on behalf of the members.

79
Thus, the ownership of a company is distributed among the shareholders while
management is vested in the board of directors. The management of a company is
delegated and centralized.

7. Voluntary association:

A joint stock company is a voluntary association of certain persons formed to carry out a
particular purpose in common. Members of a company can join it and leave it at their
own free will.

8. Artificial legal person:

A company is an artificial person created by law. It exists only in contemplation of law. It

is competent to enter into contracts and to own property in its own name. But it does not
take birth like a natural person and it has no physical body of a natural human being.

9. Corporate finance:

The share capital of a company is generally divided into a large number of shares of
small value. These shares are purchased by a large number of people from different walks
of life.

10. Statutory regulation and control:

Government exercises control through company law over the management of joint stock
companies. A company is required to comply with several legal formalities and to file
several documents with the Registrar of Companies.

Types of Companies
Chartered companies:

This type of company does not exist in Pakistan. Chartered companies were established
by the Crown in England by grant of a charter to persons assenting to be incorporated.
Examples are: Bank of England (1694) and East India Company (1600). The objects and
powers of such companies were defined in the charter issued by the Crown.

Statutory companies:

These are companies established by Special Act as described in the preceding figure. A
company may be incorporated by means of a Special Act of Parliament and such a
company is called a statutory company. Such companies are usually formed to carry out

80
some special undertaking. For example, railway, water,. power, and gas. Instances of
such companies are State Bank of Pakistan, State Life and PIA. [see section 503]

Registered companies:

Companies registered under the Companies Ordinance, 1984 are called registered
companies. As compared to statutory companies, which are established by a Special Act,
these companies are registered under a general law, namely the Companies Ordinance,
1984. For example, Habib bank limited Pakistan petroleum limited.

Kinds of Registered Company

There are four type of registered company

Company Limited by Shares

A company in which the liability of members is limited up to face value of their shares is
called company limited by shares.

These companies are mainly formed for the purpose of earning; maximum profits. It is
essential for such companies to use the word limited at the end of their name so .that the
people know that the liability of its members is limited.

Examples of such companies are Habib Bank Limited, Askari Bank Limited, Habib sugar
Limited etc.

There are two types of companies limited by share.

Private Limited Company

A company in which

 The maximum number of members is fifty and minimum number of members is

two
 A company which cannot issue share to general public
 A company in which members cannot transfer their shares
 These companies must use the word ‗Private limited or Pvt Ltd‘ as a part of its
name.

Public Limited Company

A company in which

81
  The minimum number of members is seven, and there is no maximum limit
 A company which can issue shares to general public
 A company in which member can transfer their shares.
 These companies must use the word limited or Ltd as a part of its name.

There are two main kinds of public limited company.

Listed Company:

A Company which is listed with stock exchange, is called listed Company

Examples of such companies are ICI Limited and Habib Bank Limited etc.

Unlisted Company

A company which is not listed with stock exchange is called unlisted company

Example of such company is Pakistan Steel Mill Limited.

Company Limited Guarantee

A company in which members give a guarantee to contribute a specific amount to the

assets of company on it winding up is called company limited by guarantee.

These companies are formed by the economic development of the country. Examples are
Karachi Stock Exchange Guarantee limited, Lahore Stock Exchange Guarantee limited
and Islamabad Stock Exchange Guarantee

There are two types of Company Limited by Guarantee

 Company having share capital

 Company having no share capital

Unlimited Company:

A company in which the liability of members is unlimited is called unlimited company.

Unlimited liability means the personal properties of members is responsible to pay
companies loans. The unlimited companies, due to great risk do not exist in Pakistan.

82
 Comparison of Public & Private Company

Public Company Private Company

There must be seven members for formation of There must be at least two members to
a public company. There is no maximum limit form a private company. The maximum
over the number of members . limit is 50.

Public Ltd. Company can sell its shares to Private Ltd. Company cannot sell its shares
public. to public.

The shares of public limited company can be The shares of private limited are not
transferred easily. transferable.

Public company has to get certificate of Private company can start its business after
commencement to start its business. obtaining certificate of incorporations.

In public company shareholders elect the In private company owner run the
management by voting. management.

Public company is suitable for large scale Private company is suitable for medium
business. and large scale business.

Public company cannot obtain loan after is Private company can obtain loan after its
incorporation incorporation.

Public company has to follow strict legal Private company has to face less legal
restriction. restrictions- compared to public company

Public company can be listed in stock Private limited company cannot be •listed
exchange in stock exchange

In directors meetings the minimum number of In directors meeting the minimum number
directors in four or one third ‘ of directors is two

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 In public company there is a restriction of There is no restriction on private company
minimum subscription for allotment of shares for allotment of shares

It is compulsory for public company to issue In case of private company there is no

prospectus after obtaining certificate of restriction for issue of prospectus
incorporation.

There must be at least seven directors to There must be at least two directors in
manage business affairs private company

It is compulsory for public company to hold There is no. compulsion for private
statutory meeting. company to call statutory meeting

Public company must publish its annual There is no restriction for publication of
performance report annual report

In public company, directors have to give The directors of private company are not
consent that they are ready to act as directors. required to given their consent

Every company public company must use the Private company has to mention word
word ―Limited‖ after its name ―Private Limited‖ with its name.

In public company, there must be at least seven There- must be at least two promoter
promoters. in case of private company.

Public company has to publish the account in Private company has more secrecy
newspaper, so there is less chance of secrecy in as compare to public limited company.
public company There is no„ condition of publish of
accounts.
The powers of directors are so wide un4er The powers of directors are not so
articles of association wide as that of public company

Audit of account is required by public limited There is no need of Audit in private

company. limited company.

84
 Advantages of Incorporation

The advantages of incorporation are more or less the same as the distinctive features of
the company already mentioned. We may list some of these with emphasis on the
advantaged:

Separate legal entity: A company being a legal person bears its own name. Its existence
is distinct from its members, who can pursue their own personal businesses without in
any way being affected by the business of the company.

The property and rights of a company are vested in it, so that it is never necessary to
transfer its assets when there is a change in its membership.

Limited liability:

A primary motive for setting up a company is to achieve limited liability for its members.
The liability of members of a company (except an unlimited one) to contribute toward
satisfaction of the company‘s debts and liabilities is limited, whereas partners are liable
without limit to contribute toward payment of the partnership‘s debts and liabilities.

Permanent existence not affected by death or insolvency of members:

The life of the company is permanent. The law gives it life and the law can take it away.
The death, insolvency or the transfer of shares of members does not affect the life or
constitution of the company, unlike a partnership that may have to be dissolved or
radically altered as stated above.

Tax advantages:

Another advantage may come from tax benefits however, this is debatable and may vary
from case to case. In Pakistan, for example, a partnership registered under the Income
Tax Ordinance, 1979 may enjoy greater tax benefits.

85
Distribution of income among family members without splitting up the assets:

The income and assets of a family are usually split up due to the operation of the laws of
inheritance, especially in Islamic law. The company form, therefore, provides an
advantage, that is, of distributing income among family members along with the benefit
of ease of transfer of property.

Shares in a company are freely transferable:

This advantage is related to the previous one. The transferee becomes a member of the
company and succeeds to all the rights of the transferor. When we say this, we are in
reality talking about a public company. In the case of a private company there are some
restrictions on the transfer of shares.

The floating charge:

Another advantage is that of the floating charge, something that cannot be implemented
within a partnership. In fact, financial institutions put pressure on businesses to
incorporate so that the facility of floating charge is made available. In practice, both
floating and fixed charges are used.

Organization:

Perhaps one of the most important advantages of incorporation is that of organization. As

the business grows, the corporate form is structured to adapt to different organizational
forms, especially the decentralized model. The affairs of a company are managed by its
directors, and its members have no right to take part in the management, whereas every
member of a partnership may take part in its management.

86
 Disadvantages of Incorporation:

Incorporation is not without its price. There are a number of disadvantages:

Difficult and costly formation:

The formation of a company involves a difficult and cumbersome procedure. This also
involves money. The memorandum and articles of association have to be printed and fees
have to be paid. As compared to this a partnership may be formed with a few hundred
rupees.

Government interference and submission of reports:

Trading as an incorporated company involves a lot of paperwork and constant disclosure.

The company form entails the submission of constant reports to the Corporate Law
Authority. The requirements become more cumbersome if the company adopts the public
form. In addition to this, as a sole trader the owner owes no duties to anyone in respect of
his control of his business, except that he must pay his taxes arid comply with other gen-
eral legislation applicable to him. Once the business is incorporated and he becomes a
director, he is a fiduciary, and owes duties not to make secret profits and not to use his
powers for an improper purpose.

Maintenance of books and requirements of audit:

Besides the above reports, a company needs to maintain a number of books and has to
have its accounts audited. All the paper work involved becomes very expensive,
especially the secretarial and accounting systems of large companies.

Separation between ownership and management and loss of personal touch:

This problem exists in large companies and sometimes the power politics within the com-
pany proves to be harmful. The company slowly becomes an impersonal institution and
the personal touch present in other forms is lost.

87
Neglect of minority and fraudulent practices:

In a public company, it is the majority that makes most of the decisions. In a partnership,
on the other hand, the minority may have a decisive say in the affairs of the business. The
company form may also be misused by promoters with ulterior motives.

Difficulty of winding up:

A very lengthy, expensive and cumbersome procedure is involved in the winding up of a

company. A member alone cannot dissolve a company and his death or bankruptcy does
not affect the company

Stages/Steps of Formation of Company

The idea of forming a company is conceived either by a person or by a group of persons

known as promoters. The investors are so widely scattered that somebody has to take the
initiative of bringing them together for participating in an industrial venture. The
prompters take a lead for bringing men, money, materials and machinery together for
establishing an industrial enterprise.

Promotion of a Company

Definition:-

Promotion may be defined as the discovery of ‘business opportunities, and the

subsequent organization of funds, property and managerial ability into a business concern
for the purpose of making profits there from. Promotion is considered as putting an idea
into practice.‖

Promoters of a Company

Definition:-

―A promoter is one, who undertakes to form a company with reference to a given object
and set it going.‖

88
 Types of Promoters

Professional Promoters

These persons provide their services for formation of company as profession are called
professional promoters. They retire after the formation of company. They get
remuneration for their services.

Part time promoters:

These persons provide their services for the formation of company as part time job are
called part time promoters. They retire after the formation of company They get
remuneration for their services.

Promoters (Owners):

These persons form the company for their own benefits. These persons work as a active
member after the formation of company.

Functions of Promoters:

Following are main functions of promoters

 To conceive, the idea of company.

 To selects the name of company.
 To select the suitable persons who are willing to act as director of company
 To select the bankers of company.
 To select the legal advisor of company.
 To select the first auditors of company.
 To select the suitable‘ place of company.
 To make the contracts with other companies.
 To pay the all initial expenses of company.

89
  To arrange for the issue of shares.
 To submit the all legal documents to registrar.
 To make the contracts with underwriter
 The prospectus is issued by promoters and must be filed with registrar
 To get the trading certificate and certificate of commencement of business

Rights of promoter:

Followings are the rights of promoters:

 To receive the remuneration

 Right to receive the expenses of company
 Right to receive the amount from co promoters.

Liabilities of Promoters:

Following are the main liabilities of promoters:

 Promoters is responsible for all contract made by him.

 Promoter is responsible for any fraud or mistake in the legal documents
 The personal property of promoters is responsible even after his death.
 Promoter is responsible to disclose the secret profit earned by him

Remuneration of promoters:

The promoters have right to get remuneration for their services. That may be paid in cash,
shares and debentures.

90
 Stages of Formations

Following are the stages of formation of company.

Promotion stage

 Idea
 Verification
 Resources
 Plan

Incorporation /Registration Stage

 Name
 License
 Preparation of legal documents
 Preparation of legal documents Memorandum of Association Articles of
Association
 Fee
 Other documents
 Submission of documents
 Verification of documents
 Certificate of incorporation.

Capital Stage/ Subscription Stage

 Contract with underwriter

 Contract with bankers
 Issue of prospectus
 Issue of shares

Commencement stage

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  Shares (Minimum subscription)
 Payment of shares
 Declaration
 Certificate of commencement of business

Promoting stages

The first stage of formation of company is called promotion stage. Following steps are
taken promotion stage.

Discovery of an idea

The first stage in company promotion is the conception of a new idea. A person
visualizes that there are opportunities for a particular type of business and it can be
profitably run. The idea may be to exploit a new area of natural resources or more
profitable enters in an existing line of business. He develops the idea with the help of
technical experts in that field. If they are convinced that profitable avenues are available
in that line of business then the idea is taken forward for more exhaustive analysis.

Detailed Investigations

At the second stage various factors relating to that business are studied from a practical
point of view. The promoters will estimate total demand for the product. There may be
certain concerns already in that type of business and so he will determine his share of
demand. After determining the prospective demand for goods he will think of arranging
finances for the venture. The possible sources of finances are discussed in detail. The
availability of power, labour, raw materials and machinery is also considered.

Assembling the requirements

After making sure that the proposition is Practical and profitable, the promoters proceed
to assemble the requirements. He persuades some more persons to join hands him by

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becoming directors or founder members. If he has invented something new, he should get
it registered in his name.

The promoter selects the factory site, decides about plant and machinery and contacts
suppliers of raw material, etc.

Instead of going for purchases he uses, option methods.The contracts are finalized by
paving option money: and the ultimate purchase is done only when the company is
incorporated. If the company fails to cuie up, the promoter only loses option money.

Financing the Proposition

The promoter decides about the capital structure of the company. The requirements of
finances are estimated first. Then the sources from which this money will come are
determined. How much share capital will be issued, the types of the shares to be issued,
and the nature of loans, whether debentures or borrowing from financial institutions for a
longer period all are finalized. Greatly commercial banks are helpful only in financing
working capital requirements. The financial requirements for short period and long period
are estimated separately.

Plan:

After the verification of the idea, the promoters prepare a plan for formation of company.
They start working after the planning.

Incorporation I Registration Stage:

Following steps are taken in this stag

Name

Promoters propose the name of the company. The name of company should be different
from other registered companies.

License

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The application for license is submitted to the federal government before the registration
of company.

Preparation of legal documents:

Following legal documents are prepared by the promoters.

 Memorandum of association
 Articles of association

The public and private company shall pay the amount of duty on share capital and
prescribed fee.

Other documents:

Following other documents are submitted to registrar‘s office.

Registrar office:

A document relating the registered office of company.

List of Directors

A list of person and their particulars who are willing to act as directors of company.

Written Consent

The written consent of the persons who are willing to act as directors of company

Nominal capital:

A statement of the nominal capital with, which the company wants to be registered.

Qualification of shares:

A written declaration by the directors to take up their qualification of shares.

Declarations:

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A declaration by an advocate that all the requirement of company‘s ordinance have been
completed'. .

Submission of documents:

All the legal documents must be submitted to Registrar office for registration

Verification of comments:

The registrar verifies the legal documents for the purpose of registration.

Certificate of Incorporation:

After verification of legal documents the registrar issues the certificate of incorporation.
Certificate of incorporation means company been registered and become legal person.
Now private limited company can start its working.

Capital Stages/ Subscription Stage

Following steps are taken in capital or subscription stage

Contract with underwriter:

The promoters make the contract with the underwriters for the sale of company‘s shares.
The underwriter provides guarantee that, the sale of company‘s shares within the time
period.

Contracts with bankers:

The promoters make the contract with the bankers for the sale of company‘s shares. Bank
will receive the application of company‘s shares.

Issue of Prospects:

The company issues the prospects*Prospectus is an advertisement or offer to general

public for the sale company‘s shares

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Issue of Shares:

On the receipt of application, the company issues the shares to applicant.

Commencement Stage:

Following steps are taken in commencement stage:

Shares (Minimum Subscription):

A declaration relating the allotment of shares. The shares payable in cash have been
allotted and the amount has been received by issue of shares.

Payment of shares:

Amount of all share have been received. The directors must purchase the shares.

Submission of prospectus:

The company has filed a prospectus with the registrar.

Declaration:

A declaration by the company secretary is the conditions of companies ordinance. The

condition of declaration is that minimum •subscription has been completed.

Certificate of commencement of business:

After checking all the documents the registrar issued a certificate of commencement of
business. Now public limited company can start its business.

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 Basic Legal Documents

Meaning:

―The documents, which are required for the registration company, are called basic legal
document‖. '

Memorandum of Association

Introduction:

Memorandum of association is the most important legal document of company. It defines

the relationship between company and outside world.

The memorandum of association is the character of the company it include all the objects
of formation of company.

Contents of Memorandum of Association

The Name Clause:

A company being a separate legal entity must have a name. A company may select any
name which does not resemble the name of any other Registered company and it should
not contain the words like king, queen, emperor, government bodies, and the names of
world bodies like U.N.O., W.H.O., world banks etc. The name should not be
objectionable in the opinion of the government. The word limited‘ must be used at the
end of the name a Public and Private Limited‘ is used by a Private Company. These
words are used to ensure that all persons dealing with the companies should know that
the liability of its members is limited.

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If the company has a name which is undesirable or resembles with the name of any other
existing company, this name can be changed by passing an ordinary resolution. If the
companies otherwise wants to change its name, it can do so by passing a special
resolution and by getting the permission of the central.

Registered Office Clause

Every company should have a registered office, the address of which should be
communicated to the Registrar of companies. This helps the Registrar to have
correspondent with the company. The place of registered office can be intimated to the
registrar within 30 days of incorporation or commencement of business, whichever is
earlier.

A company can shift its registered office from one place to another in the same town with
intimation to the Registrar.

Objects Clause

This is one of the important clauses of the Memorandum of Association. It determines the
rights and powers of the company and also defines its sphere of activities. The object
clause should be decided carefully because it is difficult to alter this clause later on. No
activity can be taken up by the company which is not mentioned in this object clause.
Moreover the investors i.e. shareholders will know the sphere of activities which the
company can undertake. The choice of the object clause lies with the subscribers to the
memorandum. They are free to add anything to it provided it is not contrary to the
provisions of the companies ordinance and other laws of the land.

State separately the main objects and other objects. Main objects will include, object to
be pursued by the company on incorporation and objects incidental or ancillary to the
attainment of the main objects. Other objects will include all other objects which are not
included in the main, objects.

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The object clause offers protection to the shareholders by ensuring that the funds raised
for undertaking are not going to be risked in any other undertaking. The creditors also
feel protected by this clause. By confining the activities within a specified field, it serves
the public interest also.

The object clause can be changed to enable a company to carry on its activities more
economically, or by improved means or to carry on some business which under existing-
circumstances may conveniently .be combined with the object clause.

The object clause can be altered only by passing a special resolution and by getting a
confirmation from the court.

Liability Clause

This clause states that the liability of the members is limited up to the value of shares
held by them. It means that the members will be liable to pay only the unpaid balance of
their shares. The liability of the member may be limited or unlimited.

Capital Clause

This clause states the total -capital of the proposed company. The division of capital into
equity- share capital and Preference share capital should also be mentioned. The number
of shares in each category and their value should be given. If some special rights and
privileges are conferred on any type of shareholders, mention may also be made in this
clause to enable the public to know the exact nature of capital structure of the company.

Association Clause

This clause contains the names of signatories to the memorandum of association. The
memorandum must be signed by at least seven persons in the case of a public limited
company and by at least two persons in case of a private limited company. Each
subscriber must take at least one share in the company. The subscribers declare that they
agree to incorporate the company and agree to take the shares stated against their names.

99
The signatures of the subscribers are attested by at least one witness each. The full
addresses and occupation of subscribers and the witnesses are also given.

Change In Memorandum of Association:

The change in Memorandum of Association *is very difficult It requires long and
complicated process. The change in Memorandum of Association is possible with the
approval of shareholders, Registrar and Federal Government.

Articles of Association:

The articles of association are the rules and regulations of the company. These are the
rules to manage the internal affairs of company and to achieve objects stated in
memorandum.

Articles of association is a document that governs the running of a company. It sets out
voting rights shareholder, conduct of shareholders and directors meeting, powers of the
management.

Contents of Articles:

 Name of company
 Address of Company
 The rules relating the appointment of directors of company
 The rules relating the appointment of managing agent of the company.
 The rules relating the meetings of company
 The rules relating the notices of meetings of company
 The rules relating the formation of common seal of company
 Appointment of the directors
 Powers and duties of directors
 Filling of vacancies
 Alteration of share Capital

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  Transfer of shares from seller to the buyer
 General meeting of the company
 Transfer of shares to legal heirs
 Proceedings of directors Meetings
 Rights of various classes of shareholders
 Disqualification of directors.
 Dividends and reserves
 Accounts and the audit
 Winding up of a company

HOW TO CHANGE THE ARTICLES OF ASSOCIATION

The contents of articles of association can be changed with the approval of shareholders
and registrar.

Difference between Memorandum of Association and Articles of Association

Memorandum Articles

The memorandum of Association is the charter The article of association is the by the laws of the
of the company. It states the object of the company.
company.

The article of association states the rules of

The memorandum of association states the
conduct, the business as stated in the
work which a company can do.
memorandum of association.

The article of association is not necessary. A

The memorandum of association is necessary
company can adopt table A of the companies
for the registration of the company.
ordinance 1984.

The memorandum of association is- the The article of association is the relationship
relationship between the company and the between the members and the management of the
outside public. company.

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The memorandum of association can be altered
The article of association can be altered by a
only by special resolution and involve other
special resolution at any time.
legal formalities

The memorandum of association is the primary The article of association is secondary and helping
and basic documents. It is more important than documents. The importance of this document is
other documents after, memorandum of association.

A company can go beyond the scope of article of

A company cannot go beyond the scope of association. Any act beyond its scope is not illegal
memorandum of association any act beyond its and can be ratified by passing a special resolution
scope is illegal and cannot be ratified

The article of association is under the

The memorandum of association is under the
memorandum of association and companies
companies ordinance, the MOA cannot contain
ordinance. The article of association cannot
any thing contrary to the ordinance.
contain any thing contrary to both.

The memorandum of association has usually The article of association has many clauses. It is
six clauses. A company, can add more clauses not limited to six clauses. Table a has 85 clauses
as per its requirements for operating the company.

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 Prospectus
This document is advertised for raising the capital. In this the general public is invited to
purchase the shares. An attested copy of prospectus should be submitted to registrar‘s
office. It also contains the date of issue.

Definition:

―Prospectus is a document that gives details about a new issue of shares and invites the
public to sale of shares or debenture.‖

Contents of Prospectus

 The main objects of the company with the names, occupations and addresses of
the signatures of the memorandum and the number of shares subscribed by them
and also the number and classes of shares if any and the nature of interest of the
holders in the property and profit of the company together with the number of
redeemable preference shares with the date and method of redemption.
 The number of shares if any fixed by the articles as the qualification of director
and the remuneration of the directors for their services.
 The name and address of directors, managing director, Managing agent,
secretaries and treasures and manager.
 Subscribed capital of a body corporate which manages the company as managing
agents of secretaries and treasures.
 The minimum subscription.
 The substance of any contract or arrangement giving to any person option or
preferential rights to subscribe for any shares in our debentures of a company.
 The numbers description and of shares and debentures which within the two
preceding years have been agrees to be issue or otherwise than in cash together
with the consideration.
 The name, occupations and addresses of venders of any property acquired by the
company and the amount paid or payable in cash shares or debentures to the

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 vendor and where there are more venders than one or the company is a. sub buyer,
the amount paid or payable to each vendor.
 The name description, address and occupation of each promoter or officer, of the
company to whom any amount as commission for subscribing or agreeing to
subscribe for any shares or debentures or for underwriting them is paid within the
two preceding years.
 The amount of estimated amount of preliminary expenses and the persons by
whom any of these expenses have been paid or are payable.
 The data and time of the opening and closing of subscription.
 The number, description and amount of shares and loans.
 Full particulars of the nature and extent of the interest if any of every director or
promoter.
 Basis of allotment of shares.
 Underwriting names and opinion of directors about the underwriting if any.
 The names and addresses of the auditors of the company.
 The right of voting at meeting of the company.
 Details of reserves or profits of the company if capitalized.
 Time and place for inspection of the copies of all balance sheet and profit and loss
account.
 Pending legal proceeding if any.

STATEMENT IN LIEU OF PROSPECTUS

If a company is not in a position to submit prospectus at the time of registration, then

another statement containing all necessary information is sent to registrar‘s office. This
statement is known as ―statement in Lieu of Prospectus‖.

if a public company is not issuing a prospectus on its formation it then must file a
statement in lieu of prospectus which is defined as a public document prepared in the
second schedule of the company ordinance by the every such public company which does
not issue a prospectus on its formation by filling with the registrar before allotment or
shares of debentures and signed by every person who is named therein. A statement in

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Lieu of prospectus gives practically the same information as prospectus and is signed by
all the directors or proposed directors. In case the company has not allowed to allot any
of its shares or debentures.

A statement in Lieu of prospectus contains the following information

• Name of Company.

• Statement of Capital

• Description of the Business

• Names, Address and occupations of directors

• Estimated initial expense

• Material contracts

• Director‘s interests

• Minimum subscription

Exercise Questions:

1. What is a company? Discuss its characteristics.

2. What are the main types of companies registered under the companies‘ ordinance?
3. What are the advantages and disadvantages of a company?
4. Discuss various types of companies.
5. Differentiate between a private limited company and a public limited company.
6. Discuss the basic legal documents of a company.
7. Who is a promoter? Explain different types of promoters.
8. Discuss functions, rights, duties and liabilities of promoters.
9. Explain the stages of formation of a company.
10. Explain Memorandum of Association? What are its contents?
11. How a Memorandum of Association can be altered?
12. Differentiate between Memorandum and Articles of Association.
13. What is a statement in lieu of prospectus?

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 SHARE CAPITAL
Capital of a Company:

The capital of a company can be describes in many ways. From the legal and accounting
perspective the capital of the company is classified on the basis of the amount stated in
the capital clause of the Memorandum of Association. Capital is fixed after careful
analysis of the present need and future requirements of the company. The capital of the
company is generally divided into the following categories.

Nominal Capital/Authorized Capital/ Registered Capital or Capital the Company is

Authorized to Issue

Every company limited by shares is required to have a nominal capital with which it is
registered. The term ―share capital‖ has not been defined in the Ordinance, but wherever
it is used the sense conveyed is that of the nominal or authorized capital. This capital is to
be mentioned in the memorandum of association. The nominal capital of a company is
divided into shares and is equal to the nominal value of all its shares. It is this capital that
the directors are authorized to issue for which reason it is also called the authorized
capital or registered capital. This is the maximum amount of capital a company can raise.
It can be altered through an ordinary resolution.

Issued Capital

Issued capital is a reality; authorized capital is merely a limit. The nominal capital in
its original or altered form sets the limit of capital available for issue. Accordingly, the
issued capital of the company can never exceed its nominal capital. The nominal capital
is merely an authority and not capital in the real sense. The issued capital is a reality as it
is the amount paid by shareholders or promised. Under certain circumstances a
preemptive right of existing shareholders may attach itself to issued capital.

Un-issued capital:

The difference between the nominal capital and the issued capital is called the unissued
capital. The term allotted capital is sometimes used, but there is no difference in practice
between the two. This point, however, needs to be compared with the idea of subscribed
capital below.

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Subscribed Capital and Minimum Subscription

A company makes an offering. The amount of shares offered is not the issued capital.
The public may subscribe this offer in whole or in part. The amount subscribed is called
the subscribed capital. The company may proceed to allot this capital and issue it. Thus,
the issued capital will be the same thing as the amount subscribed, unless the company
decides not to allot part of the subscribed capital due to some reason.

The term ―minimum subscription‖ is described no allotment shall be made of any share
capital of a company offered to the public subscription unless the amount stated in the
prospectus as the minimum amount which in the opinion of the directors must be raised
by the issue of share capital... has been subscribed, and the full amount thereof, has been
paid to and received in cash by the company.‖

Called-up capital, paid-up capital and unpaid capital

When the nominal capital is issued in whole or in part, each of the persons to whom it is
issued becomes liable to pay to the company the nominal value of the shares taken. The
amount is paid when the company makes a call on him or by installments fixed on the
issue by the articles. In practice, calls are very rare.

Called- up capital is the total amount called upon the shares issued and payable at a
certain date. Paid-up capital is the total amount paid-up or credited as paid up on shares
issued.

In business communications when reference is made to the capital of the company what
is intended is the paid-up capital of the company. As long as something remains uncalled
on an issued share, there is an unpaid liability for the balance, and the total amount of
these liabilities will be regarded in the books of the company as uncalled capital. There
may also be an amount that has been called but has not been paid by the shareholders,
due to calls in arrears. A shareholder of a company limited by shares may have both types
against his name. This is his liability for the debts of the company. It is, however, limited
to such an amount and he cannot be asked for more.

Equity share capital

The term includes the issued share capital, except shares limited to a specified amount as
regards dividend and capital. This is the meaning for company law in general, and
confines the meaning to ordinary shares.

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―Equity share capital means, with reference to any such company, all share capital which
is not preference share capital.‖

Kinds of shares in general

Ordinary shares or common stock:

Voting shares that represent ownership interest in companies with lowest priorities with
respect to payment of dividends and distribution of assets upon winding up.

Preference shares:

Shares that has priority over ordinary Shares as to payment of dividend and distribution
of assets on winding up. Dividend payments are usually a fixed percentage of the
nominal value of the shares.

Cumulative preference shares:

These are the same as above, but if the specified dividends are not paid in a given year
they must be paid in a subsequent year before an ordinary share or other dividends are
paid. This implies that the return is fixed.

Participation preference shares:

The owner is entitled to receive the preference shares dividend before dividend on
ordinary shares is paid and then additional dividends after payment of dividend on
ordinary shares.

Convertible preference shares: Preference shares with an option to convert the shares
into a specified number of ordinary shares either in the issuing company or in some other
company.

Redeemable or callable preference shares: Preference shares-issued with the express

condition that the issuing company has the right to repurchase the shares as specified.
Thus, when interest rates in the market fall below the dividend rate, the company would
definitely like to buy this expensive loan back. In case the rates are high, the position
would be reversed.

General note on preference shares: Preference shares are shares with preferences. This
means that holders of preference shares have priority over holders of common shares as
to dividends and to payments upon winding up. Preference shares may or may not have
the right to vote. Holders of preference shares are investors who have adopted a rather

108
cautious position in their relationship to the company. They have a stronger position that
common shareholders, but they do not share in the full prosperity of the company if it
grows successfully over time. Accordingly, this type of capital is cheaper for a growing
company, but more expensive for a company facing hard times.

Advantages of Ordinary or Equity Shares:

Non-Recurring Fixed Payments:

Equity shares are not a burden on the resources of the company. If the company has
sufficient profits and the directors also recommend, dividend may be declared.

No Charge:

The company gets equity capital without creating of any charge on the assets of the
company.

Long-Term Funds:

During the life time of the company, the question of refunding the equity capital does not
arise. So this capital forms the permanent long-term resource-base of the company.

Capital Formation:

Since the equity shares are of small face value, even poor people can because members of
big companies. This helps the capital formation of the country.

Credit Worthiness:

Creditors will readily lend money to the company which is having a huge amount of
equity capital.

Ownership:

Equity shareholders are the real owners of the company. They have full voting rights.
They elect directors to manage the company.

Rights Issues:

If new equity shares are issued by an existing company, they are first of all to be offered
to the existing shareholders. Such shares are called as rights shares.

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Disadvantages of equity shares:

Dilution in control:

Each sale of equity shares dilutes the voting power of the existing equity shareholders
and extends the voting or controlling power to the new shareholders. Equity shares are
transferable and may bring about centralization of power in few hands. Certain groups of
equity shareholders may manipulate control and management of company by controlling
the majority holdings which may be detrimental to the interest of the company.

Trading on equity not possible:

If equity shares alone are issued, the company cannot trade on equity.

Over-capitalization:

Excessive issue of equity shares may result in over-capitalization. Dividend per share is
low in that condition which adversely affects the psychology of the investors. It is
difficult to cure.

No flexibility in capital structure:

Equity shares cannot be paid back during the lifetime of the company. This characteristic
creates inflexibility in capital structure of the company.

High cost:

It costs more to finance with equity shares than with other securities as the selling costs
and underwriting commission are paid at a higher rate on the issue of these shares.

Speculation:

Equity shares of good companies are subject to hectic speculation in the stock market.
Their prices fluctuate frequently which are not in the interest of the company.

Advantages to Investors:

Investors or equity shareholders may enjoy the following advantages:

More Income:

Equity shareholders are the residual claimant of the profits after meeting all the fixed
commitments. The company may add to the profits by trading on equity. Thus equity
capital may get dividend at high in boom period.

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Right to Participate in the Control and Management:

Equity shareholders have voting rights and elect competent persons as directors to control
and manage the affairs of the company.

Capital profits:

The market value of equity shares fluctuates directly with the profits of the company and
their real value based on the net worth of the assets of the company. an appreciation in
the net worth of the company's assets will increase the market value of equity shares. It
brings capital appreciation in their investments.

An Attraction of Persons having Limited Income:

Equity shares are mostly of lower denomination and persons of limited recourses can
purchase these shares.

Other Advantages:

It appeals most to the speculators. Their prices in security market are more fluctuating.

Disadvantages to investors:

Equity shares have the following disadvantages to the investors:

Uncertain and Irregular Income:

The dividend on equity shares is subject to availability of profits and intention of the
Board of Directors and hence the income is quite irregular and uncertain. They may get
no dividend even three are sufficient profits.

Capital loss During Depression Period:

During recession or depression periods, the profits of the company come down and
consequently the rate of dividend also comes down. Due to low rate of dividend and
certain other factors the market value of equity shares goes down resulting in a capital
loss to the investors.

Loss on Liquidation:

In case, the company goes into liquidation, equity shareholders are the worst suffers.
They are paid in the last only if any surplus is available after every other claim including
the claim of preference shareholders is settled. It is evident from the advantages and

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disadvantages of equity share capital discussed above that the issue of equity share
capital is a must for a company, yet it should not solely depend on it. In order to make its
capital structure flexible, it should raise funds from other sources also.

Debentures:
The term debenture is defined in the companies act as,‖ Debenture includes debenture
stock, bounds any other securities of a company whether constituting a charge on the
assets of the company or not‖. A debenture is a document given by a company as
evidence of a debt to the holder usually arising out of a loan and most commonly secured
by a charge.

According to palmer, the world ‗debenture‘ signifies ―any instrument under seal
evidencing a deed, the essence of it being the admission of indebtedness.‖ In other words
debenture is a document creating or acknowledging an indebtedness of the company
which may or may not be secured.

Debenture means a document issued by the company as an acknowledgement of

indebtedness to its debenture-holders and giving an undertaking to repay the debt at a
specified date or at the option of the company. These are the instruments for raising long
term debt capital. Debenture holders are the creditors of the company to which company
pays the interest at a fixed rate and at the intervals stated in the debenture. No voting
rights are given to the debenture holders. Usually debentures are secured by charge on the
assets of the company. Following are the features of debentures:

Features or Characteristics of Debentures:

 Debenture is an instrument of loan.

 Interest is paid at fixed rate every year and debentures is known as "fixed cost
bearing capital".
 Debenture has common seal of the company.
 Debenture is redeemable at a fixed and specified time.
 Debenture-holders are the creditors of company not owners.
 Debenture is a form of long-term borrowed capital.
 Debenture-holders have no right to cast vote in company's general meeting.
 At the time of liquidation, first priority is given to debenture-holders at the time of
repayment.
 Debentures can be issued to fulfill the requirement of huge capital. Small firms
most often find it more expensive source of financing.

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Advantages/Merits of Debenture Issue:

 It enables a company to raise funds for a specific period.

 No dilution of control as debenture holders don‘t possess voting rights

 Debenture (debt) enables the company to Trade on equity. It can pay dividend to
equity shareholders at a rate higher than overall ROI.

 Debenture holders entitled to a fixed rate of interest. Eg: 10% debenture

 They enjoy priority over other unsecured creditors with respect to debt repayment.

 Suitable for conservative investors who seek steady ROI with little or no risk.

 Interest on debentures is treated as expense and is tax deductible.

 Company can adjust its gearing in accordance to its financial plan.

 Debenture holders are regarded as creditors of the company and they receive
preference over equity shareholders and preference share holders.

Disadvantages/Demerits of Debenture issue:

 They have a fixed maturity; hence provision has to be made for repayment.

 There is a limit to which funds can be raised through debentures.

 It is risky if the company fails to pay interest or principal installment on time, as

debenture holders can file petition for winding up the company.

 It is not suitable for a company with fluctuating earnings as it may also lead to
fluctuations in payment of dividend payable to equity shareholders.

 With more risk, you get more return. Debentures being secure investments, returns
are less.

 Like ordinary shares, debenture holders will not be regarded as owners of the
company and have no voting rights.

Debentures differ on the basis on terms and conditions on which they are issued.

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Kinds of Debentures:

Secured/Mortgage Debentures:

Debentures secured against assets of the company .i.e. if the company is winding up,
assets will be sold and debenture holders will be paid back. The charge/mortgage may be
fixed or a floating charge. If it is fixed, charge is on a specific asset say plant, machinery
etc. If it is floating charge, it means it is on general assets of the company.

Unsecured/Naked Debentures:

Debentures not secured against assets of the company .i.e. if the company is winding up,
assets will be not be sold in order to pay the debenture holders. In other words, no charge
is created on the assets of the company which means that there is no security of interest
and principal payment. The creditworthiness and soundness of the company serves as a
security.

Redeemable Debentures:

Debentures which have to be repaid within a certain specified period. E.g.: 5% 2 years
Rs. 1000 debenture means redeemable period is 2 years(5%:interest/coupon payment).
After redemption, they can be reissued.

Irredeemable/Perpetual Debentures:

These can be paid back at any time during the life of the company .i.e. there is no
specified period for redemption. Hence they are also called Perpetual Debentures.
Nonetheless if the company has to wind up, then they have to repay the debenture
holders.

Registered Debentures:

As the name suggested, these are debentures that are registered with the company. It
records all details of debenture holdings such as name, address, particulars of holding etc.
Interest shall be paid only to the registered holder (treated as a non-negotiable
instrument). They can be transferred by a transfer deed.

Bearer Debentures:

These can be transferred by mere delivery. Company does not hold records for the
debenture holder. Interest will be paid to the one who displays the interest
coupon attached to the debenture.

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Zero Coupon Debentures:

Does not have a specified interest rate, thereby to compensate, they are issued at a
substantial discount. Interest: Difference in face value and issue price.

Specific Coupon rate Debentures:

Debentures are normally issued with an interest rate which is nothing but
the coupon rate. It can be fixed or floating. Floating is associated with the bank rates.

Convertible Debentures (Fully/ Partly convertible):

Debentures which can be converted to either equity shares or preference shares by the
company or debenture holders at a specified rate after a certain period. A company can
also issue partly convertible debentures whereby only a part of the amount can be
converted to equity/preference shares.

Non Convertible Debentures (NCDs):

These can‘t be converted into equity/preference shares.

Exercise Questions:

1. What is share capital? What are its various kinds?

2. Define shares. What are various kinds of shares?
3. Discuss advantages and disadvantages of equity shares.
4. Explain the advantages and disadvantages of ordinary shares to investors.
5. What is a debenture? Explain its features.
6. Explain pros and cons of debenture issue.

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 COMPANY MEETINGS
The management of the company is undertaken through meetings of the company‘s
shareholders, at least where major decisions are to be taken. The meetings are usually
called by directors, but may also be called by the shareholders. In case of default the
Commission may call a meeting, either of its own accord or on the application of
members.

Types of Meetings in a Company:

Meetings

Directors Creditors
Members/Shareholders

General Borad Meetings Debenture-Holders

Class Meetings Meeting
Meetings
(When Needed)

Statutory Committe Meetings

Meeting

Creditors &
Annual Contributors Meetings
Meetings (at Liquidation)

Extraordinary
Meetings

The meetings of the shareholders are of three types:

1. The Statutory Meeting.

2. Annual General Meeting.
3. Extra-Ordinary General Meeting.

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These are all general meetings as they are attended by all the members. In some juris-
dictions another meeting called the “Class Meeting” is also permitted. This is a meeting
for a certain class of shareholders whose rights are affected, for example, a meeting of the
preference shareholders.

The Statutory Meeting and the Statutory Report

The' statutory meeting is the first meeting of the members of the company after it com-
mences business. It is held once in the lifetime of the company. Every company limited
by shares and every company limited by guarantee and having a share capital shall,
within a period of not less than three months, nor more than six months, from the date at
which the company is entitled to commence business, hold a general meeting of the
members of the company, which shall be called ‗the statutory meeting.

Thus, the following companies are required to hold the statutory meeting:

1. Every public company limited by shares.

2. Every public company limited by guarantee and having a share capital.

The following are the requirements pertaining to such a meeting:

1. It is to be held three months after the commencement of business, but not later
than six months after such date.
2. Twenty-one days before the date on which the meeting is held, the directors shall
forward a report, called ―the statutory report,‖ to every member. The report is to
be certified by the CEO and two other directors. After certification a copy is also
to be sent to the registrar and to the auditors.
3. The report includes, among other things, the following:
 List of members.
 Shares allotted and the amounts received for them.
 Particulars of the directors, managers and secretary.
 Particulars of contracts that have to be approved.
 Finally, it includes the details of the company affairs along with fees
and brokerage paid.

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The members present are at liberty to discuss any matter relating to the formation of, the
company.

The Annual General Meeting (AGM):

The annual general meeting is a required meeting under the Ordinance. It is an annual
meeting through which the shareholders control the affairs of the company. They may
raise questions about the affairs of the company including it accounts. It is, therefore, the
annual general meeting that protects the interests of the shareholders. The meeting is
important as the following matters are usually considered:

1. Annual accounts of the company.

2. Declaration of dividend.
3. Retirement and appointment of auditors.
4. Directors retire by rotation and new directors are appointed in their place.

The following provisions, apply to the annual general meeting (AGM):

 The meeting must be held every year.

 The first AGM is to be held within 18 months of incorporation.
 Every subsequent AGM is to be held within four months of the closing of
company‘s annual financial year. When it is not the first AGM, then, in the case of
a listed company the Commission, and in any other cases the registrar, may for
any special reason extend the time (up to sixty days) within which the AGM may
be held.
 The gap between two AGMs is not to be more than 15 months.
 Notice of the date of the meeting is to be sent twenty-one days before such date to
the shareholders. In the case of a listed company the notice is also published.
 The AGM of a listed company is to be held in the town in which the registered
office of the company is situated.
 Default invokes penalties for all officers‘ party to the default.

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The Extraordinary General Meeting

All general meetings of a company, other than the annual general meeting and the
statutory meeting are called extraordinary general meetings. Such meetings are called to
deal with some urgent special business that cannot be postponed till the AGM.

Calling of meeting by directors:

The directors may at any time call an extraordinary general meeting of the company to
consider any matter which requires the approval of the company in a general meeting.

On the requisition of members:

The directors shall, on the requisition of members representing not less than one tenth of
the voting power on the date of the deposit of the requisition, forthwith proceed to call an
extraordinary general meeting.

 The requisition shall state the objects of the meeting.

 It will be signed by the requisitionists.
 The requisition will be deposited at the registered office of the company.
 If the directors do not proceed within twenty-one days from the date of the req-
uisition being so deposited to cause a meeting to be called, the requisitionists, or a
majority of them in value, may themselves call the meeting.
 The meeting so called shall be held within three months from the date of the
deposit of the requisition.
 The meeting will be called in the same manner as that in which meetings are to be
called by directors.
 Any expense incurred by the requisitionists as a result of delay on the part of the
directors shall be repaid to the requisitionists by the company.

Notice of an extraordinary general meeting shall be sent to the members at least

twenty-one days before the date of the meeting, and in the case of a listed company shall
also be published. A shorter notice period will require approval of the registrar.

Non-observance of these provisions entails penalties.

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 Meetings of the Board of Directors and Other Meetings
Meetings of the Board of Directors:

The directors manage the company and for this purpose they have to call regular meet-
ings. This means that they generally act collectively.

Some rules for the proceedings of directors are listed below:

 Quorum for a meeting of directors of a listed company shall not be less than one-
third of their number or four, whichever is greater.
 The directors of a public company shall meet at least once in each quarter of a
year.
 If the above two provisions are violated, the chairman of the directors and the
directors shall be liable to fines.

Meetings of Creditors:

In the case of voluntary winding up it is the company that calls a meeting of the creditors
of the company on the day following the general meeting of the company at which the
resolution for voluntary winding up is to be proposed.

Meetings of Debenture-Holders:

The meetings of debenture holders may be held from time to time in accordance with the
debenture trust deed says that debenture holders have voting rights only at such
meetings. Such meetings are usually held when the terms and conditions of the
debentures are to be altered. A meeting may also be held at the time of reconstruction and
amalgamation.

Legal Validity of Meetings

The following requirements must be met for a valid meeting:

It must be called by the proper authority.

The proper authority is usually the Board of Directors. To call a valid meeting, the
meeting of the BoD must also be valid.

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A proper notice must be sent to those who attend the meeting.

There are requirements for notices of various meetings and these should be sent at the
proper time. In the case of listed companies the notice has to be published in newspapers
as well.

The contents of the notice must be complete.

The contents of a notice usually include the time and place of meeting, the nature of the
business to be transacted whether general or special.

Quorum of the meeting must be complete.

This is done on a petition by members having not less than ten per cent of the voting
power. The reasons include a material defect or omission in the notice or irregularity in
the proceedings of the meeting that prevented members from using effectively their
rights. The petition has to be made within thirty days of the meeting.

Exercise Questions:

1. Define company meeting. What are various types of company meetings?

2. What is a statutory report? Discuss its contents.
3. What are the essentials of a meeting?
4. Discuss legal validity of meetings.

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 MANAGEMENT OF A COMPANY
In sole proprietorship the business is owned and managed by one person and is operated
for one‘s own profit. In partnership all or a few partners take the responsibility of
managing the affairs of the firm. Contrary to both of these forms of business are
corporations. The evolution of public ownership has created a separation between
ownership and management.
In an attempt to create a corporation where stockholders' interests are looked after, many
firms have implemented a two-tier corporate hierarchy. On the first tier is the board of
governors or directors: these individuals are elected by the shareholders of the
corporation. On the second tier is the upper management: these individuals are hired by
the board of directors.

Board of Directors:

Elected by the shareholders, the board of directors is made up of two types of

representatives. The first type involves individuals chosen from within the company. This
can be a CEO, CFO, manager or any other person who works for the company daily. The
other type of representative is chosen externally and is considered to be independent from
the company. The role of the board is to monitor a corporation's managers, acting as an
advocate for shareholders. In essence, the board of directors tries to make sure that
shareholders' interests are well served.

Board members can be divided into three categories:

 Chairman – Technically the leader of the corporation, the board chairman is

responsible for running the board smoothly and effectively. His or her duties
typically include maintaining strong communication with the chief executive
officer and high-level executives, formulating the company's business strategy,
representing management and the board to the general public and shareholders,
and maintaining corporate integrity. A chairman is elected from the board of
directors.

 Inside Directors – These directors are responsible for approving high-level

budgets prepared by upper management, implementing and monitoring business
strategy, and approving core corporate initiatives and projects. Inside directors are
either shareholders or high-level managers from within the company. Inside
directors help provide internal perspectives for other board members. These
individuals are also referred to as executive directors if they are part of company's
management team.

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  Outside Directors – While having the same responsibilities as the inside directors
in determining strategic direction and corporate policy, outside directors are
different in that they are not directly part of the management team. The purpose of
having outside directors is to provide unbiased and impartial perspectives on
issues brought to the board.

Management Team
As the other tier of the company, the management team is directly responsible for the
company's day-to-day operations and profitability.

 Chief Executive Officer (CEO) – As the top manager, the CEO is typically
responsible for the corporation's entire operations and reports directly to the
chairman and board of directors. It is the CEO's responsibility to implement board
decisions and initiatives, and to maintain smooth operation of the firm with senior
management's assistance. Often, the CEO will also be designated as the company's
president and therefore be one of the inside directors on the board (if not the
chairman). However, it is highly suggested that a company's CEO should not also
be the company's chairman to ensure the chairman's independence and clear lines
of authority.

 Chief Operations Officer (COO) – Responsible for the corporation's operations,

the COO looks after issues related to marketing, sales, production and personnel.
More hands-on than the CEO, the COO looks after day-to-day activities while
providing feedback to the CEO. The COO is often referred to as a senior vice
president.

 Chief Financial Officer (CFO) – Also reporting directly to the CEO, the CFO is
responsible for analyzing and reviewing financial data, reporting financial
performance, preparing budgets and monitoring expenditures and costs. The CFO
is required to present this information to the board of directors at regular intervals
and provide it to shareholders and regulatory bodies such as the Securities and
Exchange Commission of Pakistan (SECP). Also usually referred to as a senior
vice president, the CFO routinely checks the corporation's financial health and
integrity.

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Managers:
Managers are people who steer an organization towards meeting its' business objectives.
Management has been described as: 'the process of planning, organizing, leading and
controlling the efforts of organization members and of using all organizational resource
to achieve stated organizational goals.' A manager's job is to maintain control over the
way an organization does things, and at the same time to lead, inspire and direct the
people under them. In a company the shareholders will elect a board of directors to
represent their interests. A Managing Director will be appointed who has overall
responsibility for running the company. The managing director with help from other
directors will appoint senior managers to run the company.

Types of Managers:

The type of managers appointed will depend on the structure of the company. Possible
structures will include:

 Regional managers when an organization operates on a regional basis

 Functional managers when an organization is split up into various functions e.g.

human resources, finance, sales etc

 Departmental managers when an organization is split up into departments e.g. a

school, or a retailing outlet

 General Managers - for example, an office or factory may have a general manager
who functional managers report to. Each manager in an organization is given an
area of responsibility. Typically they will have targets and objectives to meet
which fit into the organizations overall targets and objectives.

Responsibilities of Managers:

Managers are typically responsible for:

 Establishing, prioritizing, and making sure that objectives are met

 Establishing a framework for communications, and patterns of work within their

area of responsibility e.g. department

 Communicating targets, goals and results to people that work for them

 Motivating employees

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  Setting out the administrative arrangements for their area of responsibility

 Creating, monitoring, and making sure that budgets are achieved.

A key managerial responsibility is for the management of resources.

 The sorts of resources that a manager will be responsible for will include:

 People - directing the activities and looking after people

 Financial - using financial resources in the best possible way for the organization
in line with profit and sales targets.

 Materials - making sure that materials are used in the most productive way with
the minimum waste

 Machinery and equipment - using the most appropriate machinery and equipment,
and making sure that it is maintained, replaced and updated where necessary

 Time - ensuring efficient use of time

 Buildings - making sure that premises are safe and are being used in the best
possible way

 Information - making sure that the organization uses the most effective
information processing technologies.

Shareholders:
Shareholders are the owners of a company. They hold shares entitling them to a share in
the profits and the right to be represented by directors at board meetings. Directors are the
elected representatives of shareholders. Executive directors are responsible for ongoing
decision making in the business. Non-executive directors provide regular advice to the
company but are not directly involved in the day to day supervision of the company.

Common Shareholders' Main Rights:

1. Voting Power on Major Issues

This includes electing directors and proposals for fundamental changes affecting
the company such as mergers or liquidation. Voting takes place at the company's
annual meeting. If you can't attend, you can do so by proxy and mail in your vote.

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 2. Ownership in a Portion of the Company
Previously we discussed the event of a corporate liquidation where bondholders
and preferred shareholders are paid first. However, when business thrives,
common shareholders own a piece of something that has value. Said another way,
they have a claim on a portion of the assets owned by the company. As these
assets generate profits, and as the profits are reinvested in additional assets,
shareholders see a return in the form of increased share value as stock prices raise.

3. The Right to Transfer Ownership

Right to transfer ownership means shareholders are allowed to trade their stock on
an exchange. The right to transfer ownership might seem mundane, but the
liquidity provided by stock exchanges is extremely important. Liquidity is one of
the key factors that differentiate stocks from an investment like real estate. If you
own property, it can take months to convert your investment into cash. Because
stocks are so liquid, you can move your money into other places almost
instantaneously.

4. An Entitlement to Dividends
Along with a claim on assets, you also receive a claim on any profits a company
pays out in the form of a dividend. Management of a company essentially has two
options with profits: they can be reinvested back into the firm (hopefully
increasing the company's overall value) or paid out in the form of a dividend. You
don't have a say in what percentage of profits should be paid out - this is decided
by the board of directors. However, whenever dividends are declared, common
shareholders are entitled to receive their share.

5. Opportunity to Inspect Corporate Books and Records

This opportunity is provided through a company's public filings, including
its annual report. Nowadays, this isn't such a big deal as public companies are
required to make their financials public. It can be more important for private
companies.

6. The Right to Sue for Wrongful Acts

Suing a company usually takes the form of a shareholder class-action lawsuit

Shareholder rights vary from state to state, and country to country.

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Exercise Questions:

1. Discuss the main tiers of a company management.

2. Who are managers? What are their responsibilities?
3. Define shareholders. Discuss the rights of shareholders.
4. Discuss key managerial responsibility.
5. Discuss different types of managers.

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 WINDING UP OF A COMPANY
A company is a legal person formed under law. Undoubtedly company is supposed to run
on long term basis and has long life but not so long that it cannot die at all. The term
‗winding up‘ of a company may be defined as the proceedings by which a company is
dissolved (i.e. the life of a company is put to an end). Thus, the winding up is the process
of putting an end to the life of the company. And during this process, the assets of the
company are disposed of, the debts of the company are paid off out of the realized assets
or from the contributories and if any surplus is left, it is distributed among the members
in proportion to their shareholding in the company. The winding up of the company is
also called the ‗liquidation‘ of the company. The process of winding up begins after the
Court passes the order for winding up or a resolution is passed for voluntary winding up.
The company is dissolved after completion of the winding up proceedings. On the
dissolution, the company ceases to exist. So, the legal procedure by which the existence
of an incorporated company is brought to an end is known as winding up.

Distinction between Winding up and Dissolution:

Winding up:

Winding up of a company is the process whereby its life is ended and its property is
administered for the benefit of its creditors and members. An administrator, called the
liquidator, is appointed and he takes control of the company, collects its assets, pays its
debts and finally distributes any surplus among the members in accordance with their
rights.

The main purpose of winding up is that when a company cannot carry on its business, the
surplus that is left is to be distributed among the claimants, that is, members and
creditors.

Dissolution:

Dissolution puts an end to the existence of the company. Dissolution takes place when:

 When the affairs of a company have been completely wound up; or

 When the Court is of the opinion that the official liquidator cannot proceed with
the winding up of the company for want of funds and assets; or

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  The court is of the opinion that for any other reason whatsoever, it is just and
reasonable in the circumstances of the case that an order of dissolution of the
company be made,

The Court shall make an order that the company be dissolved from the date of the order,
and the company shall be dissolved accordingly. Such dissolution of the company does
not extinguish any right of, or debt due to, the company against or from any person.

A copy of the order is forwarded within fifteen days by the official liquidator to the
registrar, who makes in his books a minute of the dissolution of the company.

Modes of Winding Up of a Company

Company‘s ordinance explains the following modes of winding up of a company,

 Compulsory winding up by court.

 Voluntary winding without the intervention of the court.
 Voluntary winding up with the intervention of the court, that is, under the
supervision of the court.

Compulsory Winding Up by the Court

Winding of a company by an order of the court is called compulsory winding.

Reasons for Compulsory Winding Up

Special Resolution Passed by the Company:

According to if the company has, by special resolution, resolved that the company be
wound up by the Court. In such a case, the court may order the winding up on the petition
of the company itself or of a contributory. The resolution, therefore, becomes a ground
for the petition. The resolution is sufficient and no other ground-is needed for presenting
the petition. This type of winding up is not common as the members are usually eager to
keep the company running.

Default in Holding Statutory Meeting or Delivering Statutory Report to the Regis-

trar:

According to a company is required to hold its statutory meeting within 3 to 6 months.

After this a report has to be filed with the registrar. A section of company‘s ordinance

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states that if default is made in delivering of the statutory report to the registrar or in
holding the statutory meeting or any two consecutive annual general meetings, it
becomes a ground for compulsory winding up by the court. The petition may be
presented by the registrar or by a contributory.

Failure to Commence Business:

A ground for compulsory winding up is provided if a company does not commence its
business within a year from its incorporation, or suspends its business for a whole year.
Petition is presented by the registrar or a contributory. Where the failure to commence
business is due to general depression, and the company wishes to continue business, the
court may deny the petition.

Reduction in Membership:

A ground for winding up by court is provided where the number of members is reduced,
in the case of private company, below two or, in the case of any other company, below
seven. Clause inserted in 2002 says that ―if the company ceases to have a member‖ it is a
valid ground.

Inability to Pay Debt:

When company is unable to pay its debts, a ground for winding up establishes.
Company‘s ordinance provides detailed rules for understanding the inability to pay debts
are summarized below.

 Where a creditor to whom a sum exceeding one per cent of the paid-up capital of
the company or fifty thousand rupees, whichever is less, is due, has served a
notice, demanding payment, on the company.
 Where an execution or other process issued on a decree or order of any court or
any other competent authority in favor of a creditor of the company is returned
unsatisfied in whole or in part.
 Where it is proved to the satisfaction of the Court that the company is unable to
pay its debts.

Incorporation for Fraudulent Purposes:

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 States that where a company is conceived or brought forth for, or is or has been carrying
on, unlawful or fraudulent activities, it is a valid ground for winding up. Provides a
further ground and that is where the company is run and managed by persons who fail to
maintain proper and true accounts, or commit fraud, misfeasance or malfeasance in
relation to the company.

Failure of the Main Object of the Company:

The main object of the company may fail to materialize. In such a case winding up is
called for. The company usually carries on business not authorized by the memorandum.

Majority Running Company against the Interests of the Minority:

Where a company is conducting its business in a manner oppressive to any of its

members or persons concerned with the formation or promotion of the company or the
minority shareholders, it becomes a ground for winding up.

Deadlock in the Management of the Company:

Where company is managed by persons who refuse to act according to the requirements
of the memorandum or articles or the provisions of the Ordinance or fail to carry out the
directions or decisions of the Court or the registrar or the Commission given in the
exercise of powers under the Ordinance, it is a valid ground for winding up.

Where a listed company ceases to be a listed company:

Where the court is of the view that it is just and equitable that the company be
wound up:

If the Court is of opinion that it is just and equitable that the company should be wound
up. This is a wide power and may include some of the above grounds, thus, deadlock in
the management of the company may be such a ground.

Persons entitled to apply for compulsory winding up

An application to the Court for the winding up of a company shall be by petition

presented by.

 The company, or
 A creditor or creditors (including any contingent or prospective creditor or
creditors), or

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  A contributory or contributories (where the number of members. is reduced) or
 All or any of the aforesaid parties, together or separately, or
 The registrar (with the previous sanction of the Commission), or
 The Commission or by a person authorized by the Commission in that behalf (only
after investigation into the affairs of the company).

Provisions Applicable to Compulsory Winding Up

Commencement of Winding up:

Winding up of a company by the court shall be deemed to commence at the time of the
presentation of the petition for the winding up. This means that winding up will not
commence from the time of the court order for winding up, but from the time of the
presentation of the petition for winding up. Where the company passes a resolution for
voluntary winding up, and this leads to a petition, the winding up will commence from
the time of the passing of the resolution.

Powers of Court on Petition

With respect to the powers of the court, the following may be especially noted.

Court may stay of proceedings against the company:

The court may, at any time after presentation of the petition for winding, and before
making an order for its winding up, restrain further proceedings in any suit or proceeding
against the company, upon such terms as the court thinks fit.

Court may make an order on the petition:

On hearing a winding up petition the court may exercise the following powers.

 The court may dismiss the petition with or without costs.

 Court may adjourn the hearing conditionally or unconditionally subject to the
limitation imposed in section 9.
 It may make an interim order.
 The court may make an order for winding up the company.
 The court may pass any other order that it deems just (like refusing winding up
and making an order for improving the management of the company).

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  Where the petition is presented on the ground that winding up is just and equi-
table, the court may refuse to make an order of winding up, if it is of opinion that
some other remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of pursuing that
other remedy.
 Where the petition is presented on the ground of default in delivering the statutory
report, the court may, instead of making a winding up order, direct that the
statutory report be delivered.
 The court, however, is not to refuse to make a winding up order on the ground
only that the assets of the company have been mortgaged to an amount equal to or
in excess of those assets, or that the company has no assets.
 Where the Court makes an order for the winding up of a company, it shall
forthwith cause intimation thereof to be sent to the official liquidator appointed by
it and to the registrar.

Consequences of winding up order

Guidelines issued by the SECP list the following important consequences of winding up
of company:

As regards the company itself:

Winding up does not mean that the company has ceased to exist. The company exists as a
corporate entity with all the rights of such entity, with only change that its management
and administration is to be carried on through liquidator/liquidators till the final
dissolution of the company.

As regards the shareholders:

A new statutory liability as contributories comes into existence. Every transfer of shares
or alteration in the status of a shareholder, after the winding up has commenced by the
order of the Court, shall unless approved by the liquidator, be void.

As regards the creditors:

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  They cannot file or continue suits against the company, except with the leave of
the Court.
 They cannot proceed with the execution, if they have obtained decrees already.
 They must lodge their claim and prove their debt before the liquidator.

As regards the management:

On appointment of a liquidator, all the powers of the directors, chief executive and other
officers, shall cease, except for the purpose of giving notice of resolution to wind up and
appointment of liquidator and filing of consent of liquidator and so on. According to
within fifteen days from-the date of the making of the winding up order, the petitioner in
the winding up proceedings and the company shall file a certified copy of the order with
the registrar, who will shall forthwith make a minute thereof in his books relating to the
company, and shall simultaneously notify in the official Gazette that such an order has
been made. The order shall be deemed to be notice of discharge to the servants of the
company, except when the business of the company is continued.

As regards the disposition of company‟s property:

All such dispositions are void unless undertaken with the leave of the court or the
liquidator.

Procedure for winding up of company and filing of petition before respective High
Court

The simplified procedure listed in the Winding up guide issued by the SECP is as
follows:

 The company shall pass special resolution by 3/4th majority of the members of the
company stating that the company be wound up by the court. This is the case
where the company itself intends to file a petition. The company will file the
special resolution on Form 26 with the registrar.
 A list of the assets will be prepared to ascertain that the company is unable to pay
its debts.
 A list of the creditors is to be prepared.
 In case the company defaults in payments, the creditor or creditors have to make a
decision for the filing of the winding up petition.

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  In case if the Commission or Registrar or a person authorized by the Commission
intend to file a petition, they should not file such a petition, unless an investigation
has been conducted.
 Advocates have to be engaged for the preparation and filing of the petition.

Appointment of official liquidator

A person appointed to carry out the winding up of a company is called liquidator, while
the liquidator appointed by the court is called official liquidator.

Liquidators

A person appointed to carry out the winding up of a company is called liquidator. If the
winding up is through Court, the term used for such person is official liquidator. The
duties of liquidator include getting in and realising the property of the company, to pay its
debts, and to distribute the surplus (if any) among the members. The official liquidator
acts under the supervision of the Court, through a recognized reporting system.

General Powers of Liquidator:

The winding up guide issued by the SECP summarizes the general powers of the liq-
uidator as follows:

 To institute or defend any suit, action, prosecution or other legal proceeding, civil
or criminal on behalf of the company.
 To carry on the business of the company so far as may be necessary for the
beneficial to it.
 To pay the creditors.
 To make any compromise or arrangement with creditors.
 To compromise all calls and liabilities to calls, debts and liabilities capable of
resulting in debts.
 To sell the movable and immovable property and things in action of the company
by public auction or private contract, with power to transfer to any person or to
sell the same in parcels.

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  To do all acts and to execute all deeds, receipts and other documents in the name
and on behalf of the company and for that purpose to use in the company‘s seal
when necessary.
 To draw, accept, make and endorse any bill of exchange or promissory note in the
name and on behalf of the company.

Voluntary Winding Up
Kinds of voluntary winding up

Voluntary winding up of a company is of two kinds:

 Members‘ voluntary winding up.

 Creditors‘ voluntary winding up.

Member‘s voluntary winding up is winding up where a ―declaration of solvency‖ is made

and delivered to the registrar where it is proposed to wind up a company voluntarily, the
majority of the directors, including the chief executive, may, at a meeting of the board of
directors make a declaration verified by an affidavit to the effect that they have made a
full inquiry into the affairs of the company, and that having done so, they have formed
the opinion that:

 The company has no debts; or

 That it will be able to pay all its debts in full within such period not exceeding
twelve months from the commencement of the winding up.

Reasons for members‟ voluntary winding up

 When the period (if any) fixed for the duration of the company by the articles
expires; or
 an event (if any) occurs, on the occurrence of which the articles provide that the
company is to be dissolved and the company in general meeting has passed a
resolution requiring the company to be wound up voluntarily; or
 If the company resolves by special resolution that the company be wound up
voluntarily. .

Consequences of members‟ voluntary winding up

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 Voluntary winding up shall be deemed to commence at the time of the passing of the
resolution for voluntary winding up. The company ceases to carry out business just on
commencement of winding up. However, it can carry on its activities and business for
beneficial winding up of the company.

Provided that the corporate state and corporate powers of the company shall, notwith-
standing anything to the contrary in its articles, continue until it is dissolved.

Procedure for Members‟ Voluntary Winding Up

The winding up Guide issued by the SECP summarizes the steps to be followed for mem-
ber‘s voluntary winding up under the provisions of the Ordinance and Rules:

Declaration of Solvency under and Calling a General Meeting:

A declaration, as mentioned above, is made by the directors on Form 107 prescribed

under Rule 269 of the Rules duly supported by an auditor‘s report. The directors also
make a decision in their meeting that the proposal is to be submitted to the shareholders.
They, then, call a general meeting (annual or extra ordinary) of the members.

Special Resolution Passed by Company:

The company, on the recommendations of directors, decides that the company be wound
up voluntarily. A special resolution is passed in the general meeting (annual or extra
ordinary) appointing a liquidator and fixing his remuneration. On the appointment of
liquidator, the Board of directors ceases to exist.

Notification and Filing of Notice with Registrar:

A notice of the resolution is published in the official Gazette within 10 days and also
published in the newspapers simultaneously. A copy of the notice is filed with the
registrar.

Notice of Appointment of Liquidator:

A notice of appointment or change of liquidator is to be given to registrar by the company

along with his consent within 10 days of the event.

Notice by Liquidator:

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The liquidator, within fourteen days of his appointment, publishes in the official Gazette
a notice of his appointment and delivers it to the registrar as well. He does so under on
Form 110 prescribed under Rule 271 of the Rules.

Liquidator to Call Meeting of Creditors if Assets are not Adequate:

Where the liquidator feels that all the claims of the creditors cannot be met, he must call a
meeting of creditors and place before them a statement of assets and liabilities.

Return of Creditors Meeting to be Filed with Registrar:

A return of convening the creditors meeting together with the notice of meeting is to be
filed by the liquidator with the registrar, within 10 days of the date of meeting.

General Meeting where Winding up Continues beyond one year:

If the winding up continues beyond one year, the liquidator is to summon a general
meeting at the end of each year and make an application to the Court seeking extension of
time.

Return of General Meeting Convened:

A return of each general meeting convened together with a copy of the notice, accounts
statement and minutes of meeting is to be filed with the registrar within 10 days of the
date of meeting.

Report by Liquidator on Winding up:

When the affairs of the company are fully wound up, the liquidator shall make a report
and account of winding up in the final meeting called on Form 111 prescribed under Rule
279 of the Rules.

Notice of Final Meeting to be published:

The notice of the final meeting is to be published in the Gazette and newspapers at least
10 days before the date of meeting.

Copy of Report to be sent to Registrar after Final Meeting:

Within a week after the meeting, the liquidator is to send to the registrar a copy of the
report and accounts on Form 112.

Creditors‟ Voluntary Winding Up

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Creditor‘s voluntary winding up is winding up where a ―declaration of solvency‖ has not
been made and delivered to the registrar. Accordingly, the issue of creditors‘ voluntary
winding up will arise where the company is unable to pay its debts in full. In such a case
the interest of the creditors is involved and they are given the power to control and
supervise up the winding up of the company.

When such a situation arises, the company calls a meeting of the creditors of the com-
pany to be summoned for the same day on which a general meeting at which the
resolution of voluntary winding up to be proposed. The meeting of the creditors may be
called for the next day as well.

Procedure for creditors‟ voluntary winding up

The winding up Guide issued by the SECP summarizes the steps to be followed for credi-
tor‘s voluntary winding up under the provisions of the Ordinance and Rules:

Special Resolution in General Meeting:

First of all, the company passes a special resolution in the general meeting of the
members of the company for which following steps are to taken:

 BoD approves the agenda of the general meeting especially the draft special
resolution for winding up of the company.
 Notice of the general meeting along with copy of the draft special resolution is
given to the members at least 21 days before the general meeting.
 Special resolution is passed by 3/4th majority of the members of the company and
the members appoint a person to be liquidator of the company.
 Special resolution on Form 26 is filed with the registrar.

Meeting of Creditors Called:

Meeting of creditors is called at 21 days notice, (simultaneously with sending of the

notices of the general meeting of the company). Notice of creditors‘ meeting is sent by
post and also advertised in the official Gazette and a newspaper. The creditors pass a
resolution of voluntary winding up of the company, and appoint a liquidator.

Notice of Resolution and Consent of Liquidator Given to Registrar:

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 Notice of the resolution passed at the creditor‘s meeting is given by the company to the
registrar along with consent of the liquidator, within ten days of the passing of the
resolution. The creditors may also appoint a committee of inspection consisting of not
more than five persons.

Liquidator to Realize Assets and Meet Claims:

The liquidator is to realize the assets, prepare lists of creditors, admit proof, settle list of
contributories, make such calls as may be necessary. He is then to pay secured creditors,
pay the costs including the liquidator‘s own remuneration, and pay preferential claims.
After meeting all the claims of creditors, and after adjusting all claims and rights, he is to
distribute the surplus on pro rata basis.

Liquidator to Seek Extension Where Winding Up Extends Beyond One Year:

In the event of the winding up continuing for more than one year, the liquidator shall
summon a general meeting of the company and a meeting of creditors at the end of the
first year from the commencement of the winding up and lay before the meetings an
audited account of receipts and payments and acts and dealings and of the conduct of
winding up during the preceding year together with a statement in the prescribed form
and containing the prescribed particulars with respect to the proceedings and position of
liquidation and forward by post to every creditor and contributory a copy of the account
and statement together with the auditors‘ report and notice of the meeting at least ten
days before the meeting required to be held.

Liquidator to Present Accounts and Final Report:

The liquidator prepares the accounts, gets them audited and also presents a final report to
the creditors. These are also sent to the registrar, who on receiving the report, account and
the return is required to register them after scrutiny.

Exercise Questions:

1. What do you mean by winding up of a company?

2. What is the difference between winding up and dissolution of a company?
3. Who is a liquidator? State the powers of liquidator.
4. Discuss the modes of winding up.

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 CO-OPERATIVE OWNERSHIP

Definition:

A cooperative is defined as an autonomous association of persons united voluntarily to

meet their common economic, social, and cultural needs and aspirations through a
jointly-owned and democratically-controlled enterprise.

A cooperative is a member-owned business organization with at least five shareholders,

all of whom have equal voting rights regardless of their level of involvement or
investment. However, every shareholder is expected to help run the cooperative.

Like a company, a cooperative is a separate legal entity and shareholders, directors,

managers and employees are not liable for any debts incurred unless those debts are the
result of flagrant recklessness, negligence or fraud. Cooperatives promote a democratic
style of management and promote the concepts of sharing resources and delegation to
increase competitiveness.

A cooperative usually only allows a limited distribution of profits to

members/shareholders (some don't allow any). They are formed primarily to provide a
service to members rather than any financial gain. A cooperative may also be defined as a
business owned and controlled equally by the people who use its services or who work at
it. Cooperative ownership is an economic model that can create great benefits for our
communities and member-owners. The cooperative model is powerful if we focus proper
attention on the owner side of that compound word, ―member-owners‖.

For cooperatives, owner equity and patronage refunds are tried and true tools that create
and maintain a mutually beneficial relationship between the cooperative and its owners.

Features:

The main features of co-operative ownership are:-

 It is a voluntary organization as a member is free to leave the society and

withdraw his capital at any time, after giving a notice.

 The minimum number of members is 10, but there is no limit to the maximum
number of members. However, the members must be residing or working in the
same locality.

 Registration of a co-operative enterprise is compulsory. A co-operative society

may be registered with the Registrar of Co-operatives Societies.

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  After registration a co-operative enterprise becomes a body corporate independent
of its members i.e. a separate legal entity.

 It is subject to the provisions of the Co-operative Societies Act, 1912 or State Co-
operative Societies Acts. It has to submit annual reports and accounts to the
Registrar of Societies.

 The liability of every member is limited to the extent of his capital contribution.

 The shares of co-operative society cannot be transferred but can be returned to the
society in case a member wants to withdraw his membership.

 Being a separate legal entity a co-operative enjoys continuity of existence which is

not affected by death, insolvency, retirement, etc. of the members.

Types of Cooperatives:

There are different types of co-operatives.

Housing cooperative

A housing cooperative is a legal mechanism for ownership of housing where residents

either own shares reflecting their equity in the co-operatives real estate, or have
membership and occupancy rights in a not-for-profit co-operative and they underwrite
their housing through paying subscriptions or rent.

Building cooperative

Members of a building cooperative (in Britain known as a self-build housing co-

operative) pool resources to build housing, normally using a high proportion of their own
labor. When the building is finished, each member is the sole owner of a homestead, and
the cooperative may be dissolved.

Retailers' cooperative

A retailers' cooperative (known as a secondary or marketing co-operative in some

countries) is an organization which employs economies of scale on behalf of its members
to get discounts from manufacturers and to pool marketing. It is common for locally-
owned grocery stores, hardware stores and pharmacies. In this case the members of the
cooperative are businesses rather than individuals.

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Utility cooperative

A utility cooperative is a public utility that is owned by its customers. It is a type of

consumers' cooperative. In the US, many such cooperatives were formed to provide rural
electrical and telephone service.

Worker cooperative

A worker cooperative or producer cooperative is a cooperative that is owned and

democratically controlled by its "worker-owners". There are no outside owners in a
"pure" workers' cooperative, only the workers own shares of the business, though hybrid
forms in which consumers, community members or capitalist investors also own some
shares are not uncommon. Membership is not compulsory for employees, but generally
only employees can become members.

Producer cooperatives

This refers to people engaged in production in separate enterprises, whether these are
farms, fishing boats, forests, artist studios, or craft workshops. The co-op members are
the independent producers, and they man cooperate in many possible ways. They may
buy farm inputs, equipment, and insurance, hire managers and sales people, market and
advertise together, or operate storage or processing facilities or a distribution network.

Consumers' cooperative

A consumers' cooperative is a business owned by its customers. Employees can also

generally become members. Members vote on major decisions, and elect the board of
directors from amongst their own number. A well known example in the United States is
the REI (Recreational Equipment Incorporated) co-op, and in Canada: Mountain
Equipment Co-op. The world's largest consumers' cooperative is the Co-operative Group
in the United Kingdom, which offers a variety of retail and financial services. The UK
also has a number of autonomous consumers' cooperative societies, such as the East of
England Co-operative Society and Midcounties Co-operative.
Migros is the largest supermarket chain in Switzerland and keeps the cooperative society
as its form of organization. Coop is another Swiss cooperative which operates the second
largest supermarket chain in Switzerland after Migros.

Agricultural cooperative

Agricultural cooperatives are widespread in rural areas. Agricultural marketing

cooperatives, some of which are government-sponsored, promote and may actually

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distribute specific commodities. There are also agricultural supply cooperatives, which
provide inputs into the agricultural process.

Summary

In our society, we are programmed to look out for number one; we are not taught how to
create, maintain and share the ownership of community assets and common wealth. The
cooperative structure offers us an economic means to meet our common needs through
democratically owned businesses. When many of today‘s food co-ops were established,
we wanted to create an alternative to the capitalist society, but many of us threw out the
baby with the bath water. Rejecting concepts equated with capitalism—profit, equity,
ownership, and management—too many food co-ops went out of business clinging to
their idealism.

Fortunately, we can look to the cooperative principle, along with the generations of
businesses that existed before us throughout the worldwide cooperative movement, to
establish effective and sustainable structures that balance the needs of individuals and of
business, so both can prosper. If co-op members only look at personal gain, they miss the
power of cooperation. The opposite is also true: if cooperatives don‘t offer meaningful
benefits to its owners, cooperative leaders have missed the point. Cooperatives must
balance the needs of the owners and the needs of the business they own. Owner equity
investment and patronage refunds are effective tools to create the right balance.

Cooperatives do offer an alternative—a business model in which no one benefits at the

expense of others, that builds a community rather than drains its resources. The owners of
any type of business provide capital, and in return expect some control and some return
on their investment. In investor-owned businesses, those with the most money to invest
have the most control and get the greatest share of the benefits. In a cooperative, owners
provide capital equitably, have only one vote regardless of amount of investment, and
receive their benefit or return based on how much they use the co-op. Ultimately a co-
op‘s success is dependent on its understanding and effectively implementing the
economics of ownership within the principles of democracy.

Advantages

 Act as 'schools of democracy' due to their democratic member control.

 Inclusive and open membership.

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  Facilitate up skilling and capacity building due to their principle of 'education,
training and information'.

 Lower economic vulnerability due to risk pooling.

 Greater generation of ideas and debate due to existence of multiple owners.

 Allow for greater input into policy dialogues due to their tendency to federate into
larger bodies at national and international levels.

 Collective action can open up national and international markets, as seen with
many examples in the Fair trade market.

 Lower input and distribution costs due to greater economies of scale.

Disadvantages:

 Possibility of conflict between members;

 Longer decision-making process;

 Participation of members required for success;

 Extensive record keeping necessary;

 Less incentive to invest additional capital.

 1member 1 vote draw

 Inability to provide efficient managerial services

Exercise Questions:

1. Define cooperative ownership. What are its features?

2. Discuss different types of cooperatives
3. What are the advantages and disadvantages of cooperatives?

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 BUSINESS COMBINATION
Business combination is the joining of two or more companies to form a single
organization of the conduct of business activities.

Business combination is an associating of many independent business units. Due to

nature of work combination may be horizontal, vertical, circular, lateral and service.
Ownership basis the business combination has three forms, simple association federation
and a consolidation

Causes of Business Combination:

Following are the causes of business combination.

Lack of Capital:

It is a greatest problem for small business. So small units may form business combination
to overcome the problem of capital, and expand the business on large scale.

Loan Facility:

The business combination provides better credit facilities. The idle funds of one member
unit are available for other members.

Enhancing Production:

Business combination provides large capital to small units and with the help of this they
increase their production.

Growth of big organization:

One of the major causes of business combination is the development of big organizations,
Joint stock companies has also made possible for small units to form combination. Big
organization can create monopoly and earn maximum profit.

Skilled Management:

Small business is unable to hire services of skilled persons. So business combination also
removes the problems of better management for small units. Better and experts
managements are an asset of business which can increase the profitability of business.

146
Better Technology:

A small business cannot achieve the benefits of better technology. So business

combination also solves this problem with the help of large capital.

Sharing risk:

Some industrialist units combined to minimize the risks of

 Chance of loss
 Heavy liability
 Chances of dissolution

Assets:

The combination is healthful in raising the value of assets of the company in the market.
The value of assets of a company may be below its cost in the market. After the
combination the share value goes up in a stock exchange due to reputation of other
companies.

To Gain Control over production:

Over production is the wastage of economic resources. But it is possible to control the
problem of over production through business combination.

To Gain Control over supply:

Control over supply of products, is possible due to combination of many business units.
The control can be achieved by regulating the volume of supply.

To Gain Control over market:

The combination helps to create market at home and abroad. Combination leads towards
monopoly over the products and the market. The prices are fixed without any fear. The
products are acceptable all over the country.

Reduce Competition:

One of the major causes of business combinations to reduced the competition among
firms. Due to hard competition among firms the rate of profit decreases. Business
combination increases the rate of profits.

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Merits of Business Combination:

Following are the merits of business combination.

Large capital:

Lack of capital is a greatest problem for small business. So small units may form business
combination to overcome the problem of capital, and expand the business on large scale.

Loan Facility:

The business combination provides better credit facilities. The idle funds of one member
unit are available for other members. Due to large funds , business units can increase
production and profit.

Large product:

Business combination provides large capital to small units and with the help of this they
increase their production.

Growth of big organization:

One of the major causes of business combination is the development of big organizations
Joint stock companies has also made possible for small units to form combination. Big
organizations can create monopoly and earn maximum profit.

Growth of Business/Size of Business:

Small farms are not in position to expand their business. But in business combination it is
possible to expand business due to following reasons:

 Larger Capital
 Better management.

Better Management:

Small business is not in a position to hire services of skilled persons. So business

combination also removes the problems of better management for small units. Better and
expert management is an asset of business which can increase the profitability.

Better research:

A small business cannot achieve the benefits of better technology. So business

combination also solves the problem with the help of large capital.

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Better Technology:

A small business cannot achieve the benefits of better technology. So business

combination also provides this facility to small units. Better technology helps to
introduce new products.

Business Stability:

The large business units can easily come to form combination. The stability in business is
linked with profit. The profit can be earned due to control over supply of goods and
services.

Economy in product:

It is important to lower cost of production. So main industrial units combine together to

achieve in various sectors of production.

Sale:

Combination achieves economics in different sectors which lower the cost per unit .So it
can reduce the sale price in the market for the object of increasing sale volume.

Saving in selling expenses:

Central department in business combination incurs all the selling and distributing
expenses, so business combination helps to reduce the cost of production.

Sharing risk:

Some industrialist units combined to minimize the following risks

 Chance of loss
 Heavy liability
 Chances of dissolution

Transport and communication:

Fast means of communication and transport have combined the different business units,
so fast development in the means of communication plays important role information of
combination.

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Assets:

The combination is beneficial in enhancing the value of assets of the company in the
market. The value of assets of a company may be below its cost in the market. After the
combination the share value goes up in a stock exchange due to reputation of other
companies.

Control over production:

Over production is the wastage of economic resources. But it is possible to control the
problem' of over production through business combination, with the help of business
combination, goods can be produced according to consumers demand.

Control over supply:

Control over supply of products is possible due to combination of many business units.
The control can be achieved by regulating the volume of supply.

Control over market:

The combination helps to create market at home and abroad. Combination leads towards
monopoly over the products and the market. The prices are fixed without any fear. The
products are acceptable all over the country.

Competition:

One of the major causes of business combinations to reduced the competition among
firms. Due to hard competition among firms the rate of profit decreases. Business
combination increases the rate of profits.

Demerits of Business Combination:

Following are the demerits of business combinations.

Creation of monopoly:

The main aim of business combination is to control the market. It creates and artificial
shortage which is always against public interest. The sharp rise n price create big
problems for poor people of the society.

Concentration of wealth:

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The division between rich and poor must be eliminated. Growth of combination has
concentrated the wealth into few hands. It has divided the society into two groups rich
and poor.

Over capitalization:

The risk of over capitalization is always present in the combination. Over capitalization
means a portion of the capital would remain idle. The rate of profits on the capital
invested would decrease.

Management problem:

Management of the combination becomes complicated due to large size of business. Due
to this size and high growth rate increase managerial inefficiency is found in business
combination.

Lack of personal control:

Due to big organization it is not possible to maintain direct relation with employees and
consumers. So business may suffer lose due to absences of personal contacts. High level
management cannot know the liking and disliking of customers.

Problem for small firms:

The formation of business combination is harmful for small firms. Small business may
suffer bad effects of monopoly. Small firms cannot use modern technology and media of
advertising.

Public opinion:

The public opinion is always against the growth of business combination. The big
industrialist always exploits the customer and increases their profit. The sharp rise in
price of goods creates problems for the poor people.

Chance of fraud:

The productive resources are measured by the combination. A small amount is used for
better production. There is no economic use of resources under business combination.

Political corruption:

Big industrialist creates corruption in the political life of the country. Sometimes they are
found in such activities, which are also against national interest.

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Problem for labor:

Business combination is a major problem for labor. A business combination is in a

position to control labor and the volume of employment. The workers are forced to work
at lower wages.

Investor fund:

The production resources are misused by the* combination. The investors are attracted to
join combination for high profits. The companies fail to earn sufficient profit due to
unwise policies of management.

Risk of business:

The risk of business is more because future is uncertain. The income decreases due to
change in sales. The public does not like monopoly. There is a business risk on account
of change in management.

Types of Business Combination

Horizontal combination

When two or more similar nature of business unties are combined under one management
it is called horizontal combination.

If numbers of firms producing sugar are combined under single management it is called
horizontal combination. It is also known as parallel combination.

Advantages of Horizontal Combination:

1. To reduce cost per unit

2. To reduce competition
3. To higher the services of skilled persons
4. To reduce selling expense
5. To achieve better quality of production
6. To increase the profit
7. To supply goods at lower cost
8. To use improved methods of production
9. To achieve benefits of large production
10. To control over production.

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Vertical Combination:

When various departments of large industrial units combine under single management it
is called a vertical combination. Under vertical combination, firm purchasing of raw
material to selling of product all stages are linked up by the unit.

If the business units engaged in cotton spinning cotton weaving cotton processing and
cotton wholesaling are combining together, it is called vertical combination.

Advantages of vertical combination:

 Regular supply of raw materials

 Economy in purchasing raw material
 For better selling of goods
 For reduce per unit cost
 To control over production
 To reduce middle‘s man commission
 For better management

Circular Combination:

When the industrial and business units of different natures are combining under one
management it is called circular combination Different types of business units combine
the shares under circular of one management into one large concern, it is a circular
combination, Circular combination is also called mixed or complementary combination

If sugar chemical paper and glass industries are combined together under single
management, it is called circular combination.

Advantages of circular combination:

1. To establish relation between industrial and business units

2. For better management of business
3. To achieve the economies in different sectors of production
4. To increase the efficiency of business and if industry
5. For better credit facility
6. For saving in advertising expense
7. For better research system.

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Diagonal combination:

The diagonal or services combination take place taken a main business unit, combine
with different firms which supply helping goods and services. When two or more than
two business units perform subsidiary services, if they combine under the main industry it
is called diagonal combination.

If repairing and distributing units are combined with textile industries it is called diagonal
combination. In this way the performance of Textile Industry will be increase.

Advantages of diagonal combination:

 To maintain the quality of products

 To reduce per unit cost
 To increase efficiency of business

Lateral Combination:

When different units combine their works on the basis of allied nature of work it is called
&. Lateral combination. There are two types of lateral combination. The business units
make different types of goods and have in common either raw material or final products.

Types of Lateral Combination

Convergent lateral combination:

When different firms producing different things supply their products to one big business
for making the final product the combination will be convergent combination.

The paper mill link company printing company and binding company can combine their
work to make books etc.

Divergent lateral combination:

When different firms producing different products from the same raw material, combine
it is called divergent lateral combination.

The machine company, ship builders, locomotive factory make different products from
the same raw material i.e. steel.

Advantages of lateral combination:

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The supply of raw materials becomes regular\the selling expense are reduce.

Forms of Combination
The businessmen are free to combine their business. When ownership becomes the basis
of combination, it is knows as forms of combination.

There are 3 main forms of business combination;

 Association
 Federations
 Consolidations

Association:

Trade Association:

The trade association is a no n profit organization of business competitors for the

promotion of economic interest of members. The trader doing similar business makes an
association for developing friendly relations and exchange of ideas relating to their
business. The trade association does not deal with production, sales and prices policies.
They sit together to solve their common problems like government labor raw material,
transport storage and so on.

Chamber of Commerce:

A chamber of commerce is voluntary association of manufacturers, merchant‘s banker‘s

financier‘s transporters insurers and so on. The members are engaged in the business in
particular areas or region. The chamber of commerce is set up to protect the rights of the
members and it is a nonprofit organization.

 The representations are made to the government

 The disputes among the members are settled. The trade exhibitions are arranged to
boot up sales.
 The commercial information is provided to members
 The journals and business reports are published.
 The business conferences are held
 The chamber of commerce and industry issue the certificate of origin relating to
export of goods. The legation matters are opposed or supported.

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Federations:

Pool:

A pool is an association of business units doing similar work. A formal agreement is

made usually in writing to follow certain common policies. Every business unit keeps its
separate autonomy in the internal management the purpose is to earn more profit for
member by controlling the production market and prices of t he goods and services.

The types of pool are output income market patent price exports and traffic. The output
pool deals with the problems of over production. The output is regulated by fixing the
quota or limiting the period of production. The income pool deals with the fixation of
prices as well as output. The whole revenue of the combined units can be pooled an after
deducting the expenses the 'amount is distributed among the members. The market pool
deals with the divisions of market on the basis of customers, products or areas .It can also
deal with prices output and quota allocation. The patent pool is formed to take over the
patient rights held by the different business units. The price pool is concerned with the
fixing of the prices. The price at base city is determined and transport cost is added to
find out the prices at their cities. The export pool deals with the export matter. The
exporters of one country try to compete their rivals in other countries. The traffic pool
relates to transport companies. They can agree to eliminate competition by regulating the
area of working.

Advantages:

The competition is eliminated the members keep their separate entity. It is flexible and
can be adjusted the formation of a pool is simple. It does not increase any liability of the
members.

Cartel:

A Cartel is a voluntary association of business units doing similar work for the regulation
of sales and market in order to improve the profitability of its member units. In fact a
cartel is an output pool plus profit pool or a pool-with common marketing agency. It is
combination of independent business units for dealing with the output prices purchase
market and terms of sales in order to eliminate free competition. There are various types
of cartels operating in the business world. These cartels include price quality condition
output and market .The price cartel deal with the lowest price below which the members

156
should not sell their goods. There is a need to regulate the output. The quality cartels can
fix the grades of various products being made by the members and the prices of all grades
are also fixed. The output cartel is concerned with the fixation of production quota for
each member. The market cartel is involved in the division of market among he members
at home and abroad. A cartel maybe set up with common sale agency. Such a cartel is
called syndicate.

Advantages:

 There is reasonable return on output to monopoly.

 The selling and advertising expresses are reduced.
 The members can concentrate on production through better management and
technology.
 The prices are controlled and economic development starts on a long term basis.

Disadvantages:

 They are not better than monopolies.

 High prices encourage the outsiders to come into the same field.
 The cartel may not go a long way due to stability. The cartel protects the poor and
efficient business units to do business for a longtime.
 The formal agreement is also known as open price agreement or trade condition
agreement. The traders in a city can enter into formal agreement to allow ten
percent cash sales discount, one month‘s credit a delivery of goods at the business
place only.

Consolidation:

Trust:

A trust is a combination of business in the same industry. As per agreement the

shareholders of the members units transfer a controlling part of their shares to a aboard of
trustees in exchange of trusts certificates. A trust is a vertical type of. Combination in
which the raw material passes through different process for converting it into finished
product. A trust is formed by the member unit through temporary consolidation in which
these are holder of the different business units under a trust agreement transfer a major

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part of the shares to aboard of trustees in exchange for trust certificates. In this way the
member units are not free. The control management controls these.

Advantages:

 The economies of scale can be achieved in purchased and production marketing

management and finance.
 The ample resources of the trust increase the credit standing of the members and
more funds a can be raised.
 The life of the trust is long as per agreement so there is a stability in its working
due to control administration.

Disadvantages:

 A monopoly is created and the consumers lose due to high prices.

 The new investors are discouraged.
 It is no flexible so a trust cannot be dissolved easily.
 There may be of overcapitalization due to pooling of resources.

Holding company:

A holding company is separate business unit that controls the policies of the other
companies through ownership of more than fifty percent equity shares directly or
indirectly. A holding company can appoint directors in subsidiary company. It can
control dividend policy and can make changes in articles of association. There are various
kinds of holding companies. The operating company is also doing business of producing
selling goods plus investment in other companies. The sub holding company is a
subsidiary one company and hold for another company. The finance company is expert in
promoting marketing and under writing the securities of other companies. The investment
company has interest in profits of other companies and purchases shares just to earn
income. The consolidated company is set up to take over the stock of many existing
companies.

Advantage:

 It can be formed easily by purchasing majority of ordinary shares.

 There is less risk of loss and more gain in controlling the subsidiary.

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  It has long life due to holding of shares.
 It has flexibility because shares can be sold.
 It is a boon for investors because value of shares goes up.
 The subsidiary companies keep their separate entity.

Disadvantages:

 The majority of shareholders suffer due to small holding the resources of the
subsidiary companies are exploited by the holding companies for their own
benefit.
 The management of subsidiary company becomes lazy because policies are
framed by the holding companies.

Amalgamation:

An amalgamation is a form of business combination in which one new company is

formed to take over the business of two or more existing companies, which lose their
separate entity.

Advantages:

 The combination among the member units is eliminated permanently.

 The combination cannot be cancelled at all so it is stable.
 There is equal treatment for all the shareholders of combining business units.
 The management of the new company has large scale business can available in the
field of production purchase sales management and finance.
 The consumers do not suffer because monopoly cannot be created.

Disadvantages:

 There is a danger of over civilization .Big business may be difficult to manage.

 There is no secrecy because information is published as per law.
 It is not flexible because company‘s information is published as per law.
 It is not flexible because company once sold cannot purchase back.
 The formation is much difficult because the consent of three fourth of the
members is required for it.

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Merger:

A merger is as form of business combination in which one big company purchased the
business of two or more companies, which lose their separate entity. In fact it is a
combination which is formed by the outright purchases of assets of member business
units and the emerging of such assets into a single business unit. The shareholder of big
company is not affected but the merger affects the members of the small companies.

Advantages:

 The rights of all shareholders are not disturbed.

 The competition among member units is over.
 The economies of scale are available in the field of finance
 Marketing management purchase and production.
 The corporate law permits the combination of business units and
 There is no ban on it.
 The facilities of research can be made available in the field of
 Operation of company.

Disadvantages:

 The separation of the business units is not possible later on.

 The over capitalization may lead to low return on capital.
 The giant business is difficult to manage.

Exercise Questions:

1. What is business combination? What is the cause of it?

2. Discuss different types of business combinations.
3. State the merits and demerits of business combinations.
4. Differentiate between horizontal and vertical combination.
5. State the difference between association and federations.
6. What is the difference between chamber of commerce and trade associations?

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 ENTREPRENEURSHIP

The word entrepreneur is derived from the French entreprendre, meaning ―to undertake.‖
According to Histrich and Peter (1998), entrepreneurship is the dynamic process of
creating incremental wealth. The wealth is created by individuals who assume major risks
in terms of equity, time, and career commitment or provide value for some product or
service. It is the process of creating something new with value by devoting the necessary
time and effort, assuming the accompanying financial, psychological, and social risks,
and receiving the resulting rewards of monetary, personal satisfaction and independence.

Entrepreneurship is the act of being an entrepreneur. An entrepreneur uses his/her

business acumen to undertake innovations and finance to produce economic goods. This
may result in new organizations or may be part of revitalizing mature organizations in
response to a perceived opportunity. The most obvious form of entrepreneurship is that of
starting new businesses (referred as a startup company). In recent years however, the
term has been extended to include social and political forms of entrepreneurial activity
often referred to as social entrepreneurship.

Entrepreneurs are the pioneers of today‘s business success. Their sense of opportunity,
their drive to innovate, and their capacity for accomplishment have become the standard
by which free enterprise is now measured. Today, an entrepreneur is an innovator or
developer who recognizes and seizes opportunities; converts those opportunities into
workable or marketable ideas; adds value through time, effort, money, or skills; assumes
the risks of the competitive marketplace to implement these ideas; and realizes the
rewards from the efforts.

The meaning and definition of an entrepreneur varies with discipline. For example, an
economist sees entrepreneurs as those who bring resources, labour, materials, and other
assets into unusual combinations that make their value greater than before, and also those
who introduce changes, innovations, and a new order to generate profit. A psychologist
defines entrepreneurs at the behavioral term of achievement. To a psychologist,
entrepreneurs are individuals who are driven to seek challenges and accomplishments.

Although each of these definitions views entrepreneurs from a slightly different

perspective, they all contain similar notions, such as:

 Newness

 Wealth

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  Organizing

 Creating

 Risk taking

Entrepreneurs are catalysts for economic change who use purposeful searching, careful
planning and sound judgment when carrying out the entrepreneurial process.

Importance of Entrepreneurship:

Entrepreneurship is important in today‘s world. It is a catalyst for economic change and

growth. The role of entrepreneurship in economic development involves more than just
increasing per capita output and income. It involves initiating and constituting change in
the structure of business and society. This change is accompanied by growth and
increased output. One theory of economic growth depicts innovation as the key for
economic growth in developing new products or services for the market. Innovative
activities also stimulate investment interest in the new ventures being created. Thus,
entrepreneurship through its process of innovation creates new investment of new
ventures, which result in economic development. As more ventures are being created,
new jobs will be produced, thus reducing the unemployment rate.

Entrepreneurship, through its creativity and innovation process produces new products
and services to fulfill human needs. It provides specific products or services needed by
customers. In producing goods and services, they will find better ways to utilize
resources, and reduce waste. For that, society will get better goods and services at a
cheaper price.

Entrepreneurship helps to improve the lives of millions of people through the new
products and services they bring to the market. Moreover, entrepreneurs are also
extremely generous in donating substantial portions of their wealth to eminently worthy
causes. Therefore, entrepreneurs are individuals who create wealth, as well as promote
wealth distribution.

Myths Regarding Entrepreneurship:

There are many myths about entrepreneurship. These myths arise because of the lack of
research on entrepreneurship. Kuratko and Hodgetts (2004) have discussed ten myths of
entrepreneurship as follows:

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Myth 1

Entrepreneurs are doers, not thinkers

Although entrepreneurs tend to be toward action, they are also thinkers. They are actually
often very methodical people who plan their moves carefully. They also have other
alternatives set if their plan fails. This shows that entrepreneurs are both thinkers and
doers.

Myth 2

Entrepreneurs are born, not made

Some entrepreneurs and non-entrepreneurs say that the characteristics of entrepreneurs

cannot be taught or learned. Entrepreneurial characteristics are innate traits and one must
be born with it to become entrepreneurs. However, research has proven that
entrepreneurship can be taught and studied. Entrepreneurship has models, processes, and
case studies that allow the topic to be learned.

Myth 3

Entrepreneurs are always inventors

Although many inventors are also entrepreneurs, numerous successful entrepreneurs are
not inventors. For example, Ray Kroc did not invent the fast-food franchise, but his
innovative ideas made McDonald‘s the largest fast-food enterprise in the world.
Successful entrepreneurs use creative and innovative ideas in their ventures and these
characteristics can be learned.

Myth 4

Entrepreneurs are academic and social misfits

This belief arises because some business owners started their successful enterprise only
after dropping out of school or quitting a job. Historically, educational and social
organizations did not recognize entrepreneurs. Today, the entrepreneur is no longer
considered a misfit. They are now viewed as professionals.

Myth 5

Entrepreneurs must fit the “Profile”

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Many books and articles have presented checklists of characteristics of the successful
entrepreneur. These lists were neither validated nor complete; they were based on case
studies and on research findings among achievement-oriented people. Today, we realise
that a standard entrepreneurial profile is hard to compile. Many successful entrepreneurs
today did not have all the profile of the successful entrepreneur when they started their
venture.

Myth 6

All entrepreneurs need is money

It is true that venture needs capital to survive; it is also true that a large number of
business failures occur because of a lack of adequate financing. To entrepreneurs, money
is a resource but not an end in itself.

Myth 7

All entrepreneurs need is luck

To be at ―the right place at the right time‖ is always an advantage. However, ―luck
happens when preparation meets opportunity‖. What are important and needed for the
entrepreneur to seize an opportunity are planning, preparation, determination, desire,
knowledge and innovativeness.

The Role of The Entrepreneur

New business ventures started by entrepreneurs can be based on a totally new idea or a
new way of offering a service. They can also be a new location for an existing business
idea or an attempt to adapt a good or service in ways that no one else has tried before.

Entrepreneurs have:

 Had an idea for a new business

 Invested some of their own savings and capital
 Accepted the responsibility of managing the business ° accepted the possible risks
of failure.

Characteristics of Successful Entrepreneurs

The personal qualities and skills needed to make a success of a new business venture
include:

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Innovation:

The entrepreneur may not be an ‗inventor‘ in the traditional sense, but they must be able
to carve a new niche in the market, attract consumers in innovative ways and present their
business as being ‗different‘ from others in the same market.

This requires original ideas and an ability to do things differently - this is the skill of
innovation.

Commitment and Self-Motivation:

It is never an easy option to set up and run your own business. It is hard work and may
take up many hours of each day. A willingness to work hard, keen ambition to succeed,
energy and focus are all essential qualities of a successful entrepreneur.

Multi-Skilled:

An entrepreneur will have to make the product (or provide the service), promote it, sell it
and count the money. These different business tasks require a person who has many
different qualities, such as being keen to learn technical skills, able to get on with people
and good at handling money and keeping accounting records.

Leadership Skills:

The entrepreneur will have to lead by example and must have a personality that
encourages people in the business to follow him/her and be motivated by him/her.

Self-Confidence and an Ability to „Bounce Back‟:

Many business start-ups fail, yet this would not discourage a true entrepreneur who
would have such self-belief in themselves and their business idea that he or she would
‗bounce back‘ from any setbacks.

Risk Taking:

Entrepreneurs must be willing to take risks in order to see results. Often the risk they
take is by investing their own savings in the new business.

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 Entrepreneurship vs Wage Employeement

Wage Employment

 Work for Others

 Follow Instructions

 Routine Job

 Earning is fixed, never negative

 Does not create wealth

Entrepreneurship

 Own Boss

 Make own plans

 Creative activity

 Can be negative sometimes, generally surplus

 Creates Wealth, contributes to GDP

Businessman and Entrepreneurship

Businessman – A person who gets into business for making money.

Entrepreneur – A person who gets into business for solving problems, creating value
and changing the way things work.

Businessman or business person Entrepreneur

1. Starts a business from an existing idea or Starts a business from his own unique
concept idea or concept

2. Has many business rivals His business rival is himself

3. Focuses on competition Focuses on cooperation

4. Is always busy on his business ―busyness‖ Is only busy in preparing his new

166
 enterprise

5. Don‘t have enough time for his family and Have a lot of time for his family and
personal life personal life

6. His business gives him a living He gives life to his business

7. Traditional Innovative and revolutionary

8. Stays safe Risk taker and accountable

9. Worried Excited

People (i.e., employee, customer, public)

10. Profit oriented
oriented

11. Has an active income or profit Has a passive income or profit

12. Hire people to increase business

Hire people to give them productivity
productivity

13. A market player A market leader

14. Has not yet achieved financial freedom Has achieved financial freedom

15. Only gives importance to a part of the Gives importance to the business world as
business world (atomistic) a whole (holistic)

From the comparisons above, we can learn that entrepreneurship is not an easy feat
compare to merely doing business. We can also realize that an entrepreneur is a business
person who has evolved into a more complete person – one that is not simply a business
person but a real human being. Being a businessman is good. Being profit oriented,
market player, business competitor, traditional, busy and active income earner is not bad
since all business owners have been on those stages. Even the successful entrepreneurs,
before they succeed, have been into that. It is just that they have taken the right move to
evolve into a better and even the best businessmen that they can be.

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 Entrepreneurial Education:

Hansemark (1998) states that traditional education is marked as only a transformation of

knowledge and abilities, while entrepreneurship education, in contrast, is held up as the
model for changing attitudes and motives. Entrepreneurship and entrepreneurship
education, beside evident advantages, like promoting business start-ups, has also a wider
market potential. Two of the more important prerequisites for success, in starting a new
business, are the desire or the ability to do so. Entrepreneurial attitudes are not only
required in the course of a classic entrepreneurial career, but they are also clearly in high
demand independent employment relationships. Entrepreneurship education seeks to
propose people, especially young people, to be responsible, as well as enterprising
individuals who became entrepreneurs or entrepreneurial thinkers who contribute to
economic development and sustainable communities.

The Consortium for Entrepreneurship Education (2008) states that entrepreneurship

education is not just about teaching someone to run a business. It is also about
encouraging creative thinking and promoting a strong sense of self-worth and
empowerment. Through entrepreneurship education, students learn how to create
business, but they also learn a lot more. The core knowledge created via entrepreneurship
education includes:

 The ability to recognize opportunities in one‘s life.

 The ability to pursue opportunities, by generating new ideas and found the needed
recourses.

 The ability to create and operate a new fi rm.

 The ability to think in a creative and critical manner.

So, beside knowledge and skills in business, entrepreneurship education is mainly about
the development of certain beliefs, values and attitudes, with the aim to get students to
really consider entrepreneurship as an attractive and valid alternative to paid employment
or unemployment.

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Exercise Questions:

1. Define entrepreneurship and entrepreneur.

2. What are the myths associated with entrepreneurs?
3. What is the importance of entrepreneurship?
4. Differentiate between entrepreneurship and wage employment.
5. Discuss the role of entrepreneur. What are characteristics of an entrepreneur?
6. Explain the characteristics of a successful entrepreneur.
7. Write down the difference between an entrepreneur and a businessman.
8. Discuss the need and importance of entrepreneurial education and activities.

169
 FINANCE

If we trace the origin of finance, there is evidence to prove that it is as old as human life
on earth. The word finance was originally a French word. In the 18th century, it was
adapted by English speaking communities to mean ―the management of money.‖ Since
then, it has found a permanent place in the English dictionary. Today, finance is not
merely a word else has emerged into an academic discipline of greater significance.
Finance is now organized as a branch of Economics. Furthermore, the one word which
can easily replace finance is ―EXCHANGE." Finance is nothing but an exchange of
available resources.

Finance is not restricted only to the exchange and/or management of money. A barter
trading system is also a type of finance. Thus, we can say, Finance is an art of managing
various available resources like money, assets, investments, securities, etc.

At present, we cannot imagine a world without Finance. In other words, Finance is the
soul of our economic activities. To perform any economic activity, we need certain
resources, which are to be pooled in terms of money (i.e. in the form of currency notes,
other valuables, etc.). Finance is a prerequisite for obtaining physical resources, which
are needed to perform productive activities and carrying business operations such as
sales, pay compensations, reserve for contingencies (unascertained liabilities) and so on.

Hence, Finance has now become an organic function and inseparable part of our day-to-
day lives. Today, it has become a word which we often encounter on our daily basis.

Definition:

Finance is defined in numerous ways by different groups of people. Though it is difficult

to give a perfect definition of Finance following selected statements will help you deduce
its broad meaning.

1. In General sense,

"Finance is the management of money and other valuables, which can be easily converted
into cash."

2. According to Experts,

"Finance is a simple task of providing the necessary funds (money) required by the
business of entities like companies, firms, individuals and others on the terms that are
most favorable to achieve their economic objectives."

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3. According to Entrepreneurs,

"Finance is concerned with cash. It is so, since, every business transaction involves cash
directly or indirectly."

4. According to Academicians,

"Finance is the procurement (to get, obtain) of funds and effective (properly planned)
utilization of funds. It also deals with profits that adequately compensate for the cost and
risks borne by the business."

Features of Finance:

The main characteristics or features of finance are as below.

1. Investment Opportunities

In Finance, Investment can be explained as a utilization of money for profit or returns.

Investment can be done by:-

1. Creating physical assets with the money (such as development of land, acquiring
commercial assets, etc.),

2. Carrying on business activities (like manufacturing, trading, etc.), and

3. Acquiring financial securities (such as shares, bonds, units of mutual funds, etc.).

Investment opportunities are commitments of monetary resources at different times with

an expectation of economic returns in the future.

2. Profitable Opportunities

In Finance, Profitable opportunities are considered as an important aspiration (goal).

Profitable opportunities signify that the firm must utilize its available resources most
efficiently under the conditions of cut-throat competitive markets.

Profitable opportunities shall be a vision. It shall not result in short-term profits at the
expense of long-term gains.

For example, business carried on with non-compliance of law, unethical ways of

acquiring the business, etc., usually may result in huge short-term profits but may also
hinder the smooth possibility of long-term gains and survival of business in the future.

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3. Optimal Mix of Funds

Finance is concerned with the best optimal mix of funds in order to obtain the desired and
determined results respectively.

Primarily, funds are of two types, namely,

1. Owned funds (Promoter Contribution, Equity shares, etc.), and

2. Borrowed funds (Bank Loan, Bank overdraft, Debentures, etc).

The composition of funds should be such that it shall not result in loss of profits to the
Entrepreneurs (Promoters) and must recover the cost of business units effectively and
efficiently.

4. System of Internal Controls

Finance is concerned with internal controls maintained in the organization or workplace.

Internal controls are set of rules and regulations framed at the inception stage of the
organization, and they are altered as per the requirement of its business.

However, these rules and regulations are monitored at various intervals to accomplish the
same which have been consistently followed.

5. Future Decision Making

Finance is concerned with the future decision of the organization. A "Good Finance‖ is
an indicator of growth and good returns. This is possible only with the good analytical
decision of the organization. However, the decision shall be framed by giving more
emphasis on the present and future perspective (economic conditions) respectively.

Conclusion on Finance

Finance to be more precise is concerned with the management of,

1. Owned funds (promoter contribution),

2. Raised funds (equity share, preference share, etc.), and

3. Borrowed funds (loans, debentures, overdrafts, etc.).

At the same time, Finance also encompasses wider perspective of managing the business
generated assets and other valuables more efficiently.

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No business activity can take place without some finance - or the means of purchasing
the materials and assets needed before the production of a good or provision of a service
can take place. Finance decisions are some of the most important that managers have to
take. Inadequate or inappropriate finance can lead to business failure - in fact, shortage of
liquid funds is the main reason for businesses failing. Selecting an inappropriate source of
finance can prove to be expensive for a business or could even lead to a loss of control by
the original owners.

Why Finance is needed in Business Activity:

Finance is required for many business activities.

 Setting up a business will require cash injections from the owner(s) to purchase
essential capital equipment and, possibly, premises. This is called start-up capital.
 All businesses will have a need to finance their working capital - the day-to-day
finance needed to pay bills and expenses and to build up stocks.
 When businesses expand, further finance will be needed to increase the capital
assets held by the firm - and, often, expansion will involve higher working capital
needs.
 Expansion can be achieved by taking over other businesses. Finance is then
needed to buy out the owners of the other firm.
 Special situations will often lead to a need for greater finance. For example, a
decline in sales, possibly as a result of economic recession, could lead to cash
needs to keep the business stable
 Apart from purchasing fixed assets, finance is often used to pay for research and
development into new products or to invest in new marketing strategies, such as
opening up overseas markets.

Some of these situations will need investment in the business for many years - or even
permanently. Other cases will need only short-term funding - this is usually defined as
being for around one year or less. Some finance requirements of the business are for
between one and five years and this is referred to as medium-term finance. No one source
or type of finance is likely to be suitable in all cases. Managers will have to decide which
type and source of finance are best in each case.

Sources of Finance:

Companies are able to raise finance from a wide range of sources. It is useful to classify
them into;

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  Internal money raised from the business‘s own assets or from profits left in the
business
 External money raised from sources outside the business.

Another classification is also often made, that of short-, medium- and long-term finance.

Sources of Finance

Internal External

Retained Profit Long Term Medium Term Short Term

Share issue Bank Overdraft

Sales of Assets Leasing
Debentures Bank Loan
Hire Purchase
Long-Term Loans Creditors
Medium-Term Loan
Grants Factoring

Reductions in
Working Capital

Internal Sources of Finance

Profits Retained in the Business:

If a company is trading profitably, some of these profits will be taken in tax b| the
government and some is nearly always paid out to the owners or shareholders. If any
profit remains, this is kept (retained) in the business and becomes a source of finance for
future activities.

Retained profits—if in a liquid form—are a very significant source of funds for

expansion once invested back into the business; these retained profits will not be paid out
to shareholders, so they represent a permanent source of finance.

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Sale of Assets

Companies often find that they have assets that are no longer fully employed. These
could be sold to raise cash. In addition, some businesses will sell assets that they still
intend to use, but which they do not need to own.

Reductions in Working Capital

When businesses increase stock levels or sell goods on credit to customers (debtors), they
use a source of finance. When companies reduce these assets - by reducing their working
capital - capital is released, which acts as a source of finance for other uses.

This type of capital has no direct cost to the business, although, if assets are leased back
once sold, there will be leasing charges. Internal finance does not increase the liabilities
or debts of the business, and there is no risk of loss of control by the original owners as
no shares are sold. Solely depending on internal sources of finance for expansion can
slow down business growth, as the pace of development will be limited by the annual
profits or the value of assets to be sold. Thus, rapidly expanding companies are often
dependent on external sources for much of their finance.

External Sources of Finance Short-Term Sources

There are three main sources of short-term external finance:

1. Bank overdrafts
2. Trade credit
3. Debt factoring.

Bank Overdrafts

A bank overdraft is the most ‗flexible‘ of all sources of finance. This means that the
amount raised can vary from day to day, depending on the particular needs of the
business. The bank allows the business to ‗overdraw‘ on its account at the bank by
writing cheques to a greater value than the balance in the account. This overdrawn
amount should always be agreed in advance and always has a limit beyond which the
firm should not go.

This form of finance often carries high interest charges. In addition, if a bank becomes
concerned about the stability of one of its customers, it can ‗call in‘ the overdraft and
force the firm to pay it back.

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Trade Credit

By delaying the payment of bills for goods or services received, a business is, in effect,
obtaining finance. Its suppliers, or creditors, are providing goods and services without
receiving immediate payment and this is as good as ‗lending money‘. The downside to
these periods of credit is that they are not ‗free‘ - discounts for quick payment and
supplier confidence are often lost if the business takes too long to pay its suppliers.

Debt Factoring

When a business sells goods on credit, it creates a debtor. The longer the time allowed to
this debtor to pay up, the more finance the business has to find to carry on trading. One
option, if it is commercially unwise to insist on cash payments, is to sell these claims on
debtors to a debt factor. In this way immediate cash is obtained, but not for the full
amount of the debt.

Sources of Medium-Term Finance

There are two main sources of medium-term external finance:

1. Hire purchase and leasing

2. Medium-term bank loan

Hire Purchase and Leasing

These methods are often used to obtain fixed assets with a medium lifespan - one to five
years. Hire purchase is a form of credit for purchasing an asset over a period of time. This
avoids making a large initial cash payment to buy the asset.

Leasing involves a contract with a leasing or finance company to acquire, but not
necessarily to purchase, assets over the medium term. A periodic payment is made over
the life of the agreement, but the business does not have to purchase the asset at the end.
This agreement allows the firm to avoid cash purchase of the asset.

Neither hire purchase nor leasing is a cheap option, but they do improve the short-term
cash-flow position of a company compared to outright purchase of an asset for cash.

Long-Term Finance

The two main choices here are debt or equity finance. Debt finance increases the
liabilities of a company. Debt finance can be raised in two main ways:

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 1. Long-term loans from banks
2. Debentures (also known as loan stock or corporate bonds)

Long-Term Loans from Banks

These may be offered at either a variable or a fixed interest rate. Fixed rates provide more
certainty, but they can turn out to be expensive if the loan is agreed at a time of high
interest rates. Companies borrowing from banks will often have to provide security or
collateral for the loan; this means the right to sell an asset is given to the bank, if the
company cannot repay the debt.

Long-Term Bonds or Debentures

A company wishing to raise funds will issue or sell such bonds to interested investors.
The company agrees to pay a fixed rate of interest each year for the life of the bond,
which can be up to 25 years. (Long-term loans or debentures are usually not secured on a
particular asset. When they are secured, which means that the investors have the right if
the company ceases trading to sell that particular asset to gain repayment, the debentures
are known as mortgage debentures) Debentures can be a very important source of long-
term finance. Sale of shares - equity finance

All limited companies issue shares when they are first formed. The capital raised will be
used to purchase essential assets.

Advantage of Debt Finance:-

 As no shares are sold, the ownership of the company does not change or is not
‗diluted‘ by the issue of additional shares.
 Loans will be repaid eventually so there is no permanent increase in the liabilities
of the business.
 Lenders have no voting rights at the annual general meetings.
 Interest charges are an expense of the business and are paid out before corporation
tax is deducted, while dividends on shares have to be paid from profits after tax.
 The gearing of the company increases and this gives shareholders the chance of
higher returns in the future.

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Advantage of Equity Finance:-

 It never has to be repaid; it is permanent capital.

 Dividends do not have to be paid every year; in contrast, interest on loans must be
paid when demanded by the lender.

Money and Finance

Money

Money is anything that is generally accepted as payment for goods and services and
repayment of debts. The main functions of money are distinguished as: a medium of
exchange, a unit of account, a store of value, and occasionally, a standard of deferred
payment. Money is an abstraction, idea or concept, token instances of which are the
physical bills or coins which are carried and traded.

Finance

Finance is the science of funds management. The general areas of finance are business
finance, personal finance, and public finance. Finance includes saving money and often
includes lending money. The field of finance deals with the concepts of time, money and
risk and how they are interrelated. It also deals with how money is spent and budgeted.

Financial Resources and Financial Assets

Financial Resources

The most important element in business is funding. Even the most basic home business
incurs a multitude of startup costs, including registering a business name, obtaining a
business telephone line and printing business cards. Financial resources can be obtained
from a variety of sources, the easiest being from the personal accounts of the company‘s
founder. Alternatively, loans and lines of credit may be granted from financial
institutions, friends and relatives, private investors and even the United States
government. In addition, many grants are offered from private and public sources to
entrepreneurs of all demographics and personal situations.

Financial Assets:

A financial asset is an intangible representation of the monetary value of a physical item.

It obtains its monetary value from a contractual agreement of what it represents. While

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a real asset, such as land, has physical value, a financial asset is a document that has no
fundamental value in of itself until it is converted to cash. Common types of financial
assets include certificates, bonds, stocks, and bank deposits.

One of the most common types of financial assets is a certificate of deposit (CD). A CD
is an agreement between an investor and a bank in which the investor agrees to keep a set
amount of money deposited in the bank in exchange for a guaranteed interest rate. The
bank may offer a higher amount of interest payment since the money is to remain
untouched for a set period of time. If the investor withdraws the CD before the end of the
contract terms, he or she will lose out on the interest payments and be subject to financial
penalties.

Another type of financial asset is a bond. Bonds are often sold by corporations or
governments to investors in order to help fund short-term projects. They are a type of
legal document detailing the amount of money an investor loaned a borrower and the
length of time it needs to be paid. A bond represents how much interest is guaranteed to
be returned to the investor along with the original loan amount.

Stocks are one of the only financial assets that do not have an agreed upon ending date.
Investing in stock means the investor has part ownership of a company and shares in the
company‘s profits and losses. He or she can keep the stock for any length of time or
decide to sell it to another investor.

Money that is deposited into a bank account also counts as a financial asset, rather than a
real asset. When cash is put into a bank account, the proof of the funds is a bank
statement that summarizes the value of the account. Deposited cash is not considered
a physical asset because the bank uses the money to fund its business and agrees to return
it when the account holder decides to withdraw it.

A financial asset is typically given a maturity date in a contractual claim. If it remains

untouched and unconverted to cash by that date, its value will usually increase. Cashing
out an asset before its maturity date can ultimately cost a person financial penalties
because it violates the terms of the agreement.

International Monetary Fund

International Monetary Fund or IMF is a finance monitoring organization formed on

December 1945.Primary purpose of IMF is to develop policies regarding money
monitoring, uniform standards for currency exchange and stable payment systems that
should be mutually accepted by all the member countries of IMF. At present number of

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registered countries with IMF are 182, operations in 110 countries with 2600 employees.

Functions of IMF are to develop fair and monitor currency exchange rates among all the
countries. IMF also provides short term loans to its member countries so they could bring
their imbalanced payment system into balance. One more important function of IMF is to
draw lending money model for borrower countries. In this way IMF also acts as Debtor.

IMF also provides Training and Technical assistance in the areas of finance management
system, Tax system, banking system development to its member countries through its
Monetary and Exchange Affairs Department, the Fiscal Affairs Department, and the
Bureau of Statistics. The Legal Department, the Bureau of Computing Services, and the
area departments also coordinate. IMF also helps to draw a systematic system for foreign
transactions to take place. It provides advice on microeconomic development.

Every member of IMF provides a fixed quota of money to IMF. Size of amount is based
on the ability of government to pay.

Objectives:

Following were the main objectives of this fund;

 To promote exchange rate stability among the different countries.

 To make an arrangement of goods exchange between the countries.
 To promote short term credit facilities to the member countries.
 To assist in the establishment of International Payment System.
 To make the member countries balance of payment favourable.
 To facilitate the foreign trade.
 To promote the international monetary corporation.

Functions of IMF Fund

1. Merchant of Currencies:-
IMF main function is to purchase and sell the member countries‘ currencies.

2. Helpful For The Debtor Countries :-

If any country is facing adverse balance of payment and facing the difficulty to get the
currency of creditor country, it can get short term credit from the fund to clear the debt.

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The IMF allows the debtor country to purchase foreign currency in exchange for its own
currency upto 75% of its quota plus an addition 25% each year. The maximum limit of
the quota is 200% in special circumstances.

3. Declared of Scarce Currency:-

If the demand of any particular country currency increases and its stock with the fund
falls below 75% of its quota, the IMF can declare it scare. But IMF also tries to increase
its supply by these methods.

Purchasing: IMF purchases the scare currency by gold.

Borrowing: IMF borrows from those countries scare currency who has surplus amount.

Permission: IMF allows the debtor countries to impose restrictions on the imports of
creditor country.

4. To promote exchange stability: The main aim of IMF is to promote exchange

stability among the member countries. So it advises the member countries to
conduct exchange transactions at agreed rates. On the other hand one country can change
the parity of the currency without the consent of the IMF but it should not be more than
10%. If the changes are on large scale and IMF feels that according the circumstances of
the country these are essential then it allows. The country can not change the exchange
rate if IMF does not allow.

5. Temporary aid for the devalued currency: When the devaluation policy is
indispensable or any country then IMF provides loan to correct the balance of payment of
that country.

6. To avoid exchange depreciation: IMF is very useful to avoid the competitive

exchange depreciation which took place before World War 2.

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 World Bank:
The World Bank is an international financial institution which is affiliated to the United
Nations. The World Bank looks to improve the economic development of its members
through technical and financial assistance. It is particularly important as a source of
financial assistance (loans) to the developing world for capital programs. The World
Bank has its headquarters is in Washington DC.

The World Bank comprises of two of the five bodies which makes up the World Bank
Group. The International Bank of Reconstruction and Development (IBRD) gives loans
to middle-income developing countries, and was created two aid the reconstruction of
European countries after World War II.(The IBRD was founded at the Bretton Woods
Conference in 1944, and became operational the following year.) The International
Development Association (IDA) gives loans and grants to the world's poorest developing
countries. The IDA was created in 1960 to complement the IBRD.

The World Bank was founded at the Bretton Woods Conference in 1944 (along with
the International Monetary Fund) with the aim of reducing world poverty.

The World Bank provides financial and technical assistance to emerging

market countries. The World Bank is not actually a bank in the common sense. Instead, it
consists of two development institutions -- the International Bank for Reconstruction and
Development (IBRD) and the International Development Association (IDA), owned by
186 member countries.

The Bank is closely affiliated with three other organizations --the International Finance
Corporation (IFC), the Multilateral Guarantee Agency (MIGA), and the International
Centre for the Settlement of Investment Disputes (ICSID) -- that support its goal of
reducing worldwide poverty. The five organizations make up the World Bank Group.

Functions:

The World Bank provides low-interest loans, interest-free credits and grants to
developing countries. In the past, this usually occurred when they were in danger
of sovereign debt default, itself often a result of overspending and extensive borrowing.
Many countries then devalued their currencies, which resulted in hyperinflation. To
combat this, the Bank often required austerity measures, where the country must agree to
cut back on spending and support its currency.

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The World Bank loans are usually to invest in education, health, and infrastructure. The
loans can also be used to modernize a country's financial sector, agriculture, and natural
resources management. The Bank's goal is to "bridge the economic divide between poor
and rich countries, to turn rich country resources into poor country growth and to achieve
sustainable poverty reduction."

To achieve this goal, the Bank focuses on six areas:

1. Overcome poverty by spurring growth in the poorest countries, focusing on

Africa.

2. Offer reconstruction to poor countries emerging from war, a major contributing

factor to extreme poverty.

3. Provide a customized development solution to help those middle-income countries

overcome problems that could throw them back into poverty.

4. Spur governments to act on preventing climate change, controlling communicable

diseases, (especially HIV/AIDS and malaria), managing international financial
crises, and promoting free trade.

5. Work with the League of Arab States to improve education, build infrastructure
and provide micro-loans to small businesses in the Arab world.

6. Share its expertise with developing countries, and its knowledge with anyone via
reports and its interactive online database.

Stock Exchange and Commodity Exchange:

Stock Market or Stock Exchange

There is not a single stock market, per se, but a number of stock exchanges in different
countries. In the United States, for example, two of the most prominent are the New York
Stock Exchange and the Nasdaq Stock Market. On these exchanges, traders representing
customers buy and sell ownership shares of publicly traded companies. In these trades, a
seller seeking a certain price for a certain number of shares is matched up with a buyer
who is willing to pay that price for either the entire number of shares or a portion of
them.

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Commodities Market or Commodity Exchange

The commodities market is also made up of more than one entity. There is the cash
market and the futures market. On these markets, too, traders representing clients buy and
sell, but what they buy and sell depends on the market in which they are working. The
cash market deals in actual commodities, which are tangible items such as bushels of
grain or head of cattle. The futures market deals in contracts to provide or receive a
certain amount of commodities at a set point in the future. Traders are not dealing in the
commodities, but the contracts for them.

Similarities

Both stock exchanges and commodities exchanges involve traders buying and selling
something -- a share of stock in one case, a commodity or commodities contract in the
other. Likewise, these markets are made up of multiple entities that handle certain types
of trading. For example, the NYSE and Nasdaq deal in stocks, and companies that sell
shares must decide with which one to list their shares. The Chicago Board of Trade and
Chicago Mercantile Exchange deal in futures, in one case grain and the other animals and
their products.

Differences

The fundamental differences between the stock market and the commodities market are
the products they deal with, and thus the manner in which they work. The stock market
deals in ownership shares of a company, while the futures market deals in contracts to
provide or receive a shipment and the cash market deals in the actual items in the
shipment. In addition, while a share of stock represents an actual -- albeit minute --
percentage of ownership in the company, it is essentially paper (although few companies
issue actual stock certificates in the 21st century). Cash market commodities are actual
pigs, cows or portions thereof. Futures market contracts are paper like stocks, but they do
not provide ownership in any way: You do not own a commodity; you have a contract to
own it.

Importance or Functions of Stock Exchange:

We discuss about major functions of stock exchange under these headings:-

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Providing a ready market

The organization of stock exchange provides a ready market to speculators and investors
in industrial enterprises. It thus, enables the public to buy and sell securities already in
issue

Providing a quoting market price

It makes possible the determination of supply and demand on price. The very sensitive
pricing mechanism and the constant quoting of market price allow investors to always be
aware of values. This enables the production of various indexes which indicate trends etc.

Providing facilities for working

It provides opportunities to Jobbers and other members to perform their activities with all
their resources in the stock exchange.

Safeguarding activities for investors

The stock exchange renders safeguarding activities for investors which enables them to
make a fair judgment of a securities. Therefore directors have to disclose all material
facts to their respective shareholders. Thus innocent investors may be safeguard from the
clever brokers.

Operating a compensation fund

It also operates a compensation fund which is always available to investors suffering loss
due the speculating dealings in the stock exchange.

Creating the discipline

Its members controlled under rigid set of rules designed to protect the general public and
its members. Thus this tendency creates the discipline among its members in social life
also.

Checking functions

New securities checked before being approved and admitted to listing. Thus stock
exchange exercises rigid control over the activities of its members.

Adjustment of equilibrium

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The investors in the stock exchange promote the adjustment of equilibrium of demand
and supply of a particular stock and thus prevent the tendency of fluctuation in the prices
of shares.

Maintenance of liquidity

The bank and insurance companies purchase large number of securities from the stock
exchange. These securities are marketable and can be turned into cash at any time.
Therefore banks prefer to keep securities instead of cash in their reserve. This facilities
the banking system to maintain liquidity by procuring the marketable securities.

Promotion of the habit of saving

Stock exchange provides a place for saving to general public. Thus it creates the habit of
thrift and investment among the public. This habit leads to investment of funds
incorporate or government securities. The funds placed at the disposal of companies are
used by them for productive purposes.

Refining and advancing the industry

Stock exchange advances the trade, commerce and industry in the country. it provides
opportunity to capital to flow into the most productive channels. Thus the flow of capital
from unproductive field to productive field helps to refine the large scale enterprises.

Promotion of capital formation

It plays an important part in capital formation in the country. its publicity regarding
various industrial securities makes even disinterested people feel interested in investment.

Increasing Govt. Funds

The govt. can undertake projects of national importance and social value by raising funds
through sale of its securities on stock exchange.

According to MARSHAL, ―Stock exchange are not merely the chief theaters of business
transaction, they are also barometers which indicate the general conditions of the
atmosphere of business.

Role of Commodity Exchanges

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  Exchanges can concentrate on the trade in futures and options contracts, as do
most of the exchanges in western countries or they could primarily function as
centers for facilitating physical trade - in both cases, they draw their primary
strength from their capacity to act as a focal point for trade transactions, and to
increase the security of these transactions.

 Well-organized commodity exchanges form natural reference points for physical

trade, and in this way, they help the price discovery process. If a commodity
exchange manages to link different warehouses in the country, this allows trade to
take place more efficiently.

Exercise Questions:

1. What do you mean by finance? Discuss various definitions of finance.

2. Describe the features of finance.
3. Why finance is needed in business activity?
4. Explain different sources of finance.
5. What is IMF? Discuss its role and functions.
6. Explain the functions and role of World Bank.
7. Differentiate between the following:
 Money and Finance
 Financial Assets and Financial Resources
 Stock Exchange and Commodity Exchange

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 RISK AND INSURANCE
Introduction

We are exposed to many situations that many cause a loss (perils). The primary purpose
of insurance is to provide economic protection against losses that may be incurred due to
a chance of an event happening such as death, illness, or accident. This type of protection
is provide through an insurance policy, which is simply a device used by companies to
accumulate funds to have enough reserves to meet these uncertain losses.

Definitions:

Risk

Risk can be defined as uncertainty regarding loss:

 the inability to work and earn an income due to disability is a risk

 the destruction of a home due to hurricane is a risk the loss of family income due
to death is a risk

 the potential for an automobile accident is a risk

 the chance of someone slipping on your icy driveway is a risk

CONCEPTS

Peril

A peril is the cause of a possible loss (the event that is insured against)
examples: illness, theft, hurricane, collision, fire, liability, etc.

Hazards

A hazard is a condition that may create or increase the chance of loss arising from a given
peril. There are three basic types of hazards to remember.

The Three Basis Types of Hazards:

1. Physical Hazards
2. Moral Hazards
3. Morale Hazards

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Physical Hazards

They are physical characteristics pertaining to the individual or property that increase the
chance of loss. Examples include: building a house in a flood zone, past medical history
or high blood pressure.

Moral Hazards

These are actions that people initiate to increase risk and the chance of loss (Dishonesty/
Willingness to generate or prevent loss). Examples include: overstating the amount of
vehicle damage to your insurance company; or drug additions/alcoholism related events
that lead to loss.

Morale Hazards

Individual tendencies that arise from attitude or state of mind causing indifference to loss
(Carelessness). Examples include: a robbery occurs because you failed to lock doors; or
automobile catches on fire because you neglected to add oil.

Insurable Risks

Risks are generally divided into two classes:

 Pure risks and

 Speculative risks.

Pure Risks:

These risks involve only the chance of loss, there is never an opportunity for gain or
profit.

Examples: injury from an accident, loss of home from an earthquake.

Only Pure Risks are Insurable

Speculative Risks:

These risks involve both the chance of gain or loss.

Examples: Gambling at the race track, or investing in the real estate market.
Speculative Risk is not Insurable

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Elements of an Insurable Risk

 Loss must not be Catastrophic

 Loss must be Unexpected or Accidental

 Loss produced by the risk must be Definite and Measurable

 Must be a significantly large number of homogeneous exposure units to make the

losses reasonable predictable

Risks can also be evaluated on an economic scale comparing static and dynamic risks:

Static Risks are the losses that are caused by factors other than a change in the economy
(for example- hurricanes, earthquakes, other natural disasters)

Dynamic Risks are the result of the economy changing (examples- inflation, recession,
and other business cycle changes). Dynamic risks are not insurable.

Response to Risk

Risk Control

Risk Avoidance

A risk may be avoided if the individual refuses to accept risk by not engaging in an action
that creates a risk (removal of the peril).

Consider the following risk avoidance instances:

 Taking the bus rather than buying a car

 Renting a home rather than buying it

 Not buying an office building without a sprinkler system

Risk Diversification

Risk diversification, also known as risk sharing, is a method of reducing your total
exposure to risk by sharing the responsibility with another party.

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Consider the following risk diversification strategies:

 Forming a limited partnership for your business

 Hedging contracts

 Health insurance with deductibles and co-payments

Risk Reduction

Risk reduction is the process of diminishing risk through the implementation of loss
prevention methods or implementing safety features or improvements.
Consider the following risk reduction techniques:

 Mounting smoke detectors in your building

 Installing hurricane shutters on your home

 Put a burglary system on your vehicle

Risk Financing

Risk Retention

Risk retention is the act of accepting risk and confronting it if and when it occurs. In this
process, no action is taken to avoid, transfer, or reduce risk.
Consider the following risk retention actions:

 Self-insurance

 Coinsurance in various insurance policies

 Utilizing deductibles in insurance contracts

Risk Transfer

Risk transfer is the practice of shifting risk responsibility either through an individual or
an insurance contract. The most effective way to handle risk is to transfer it so that the
loss is consumed by another party.
Consider the following risk transfer solutions:

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  Purchasing an insurance policy

 Obtaining high protection limits on your auto policy

 Reassign the risk to another individual

Self-Insurance

Self-insurance is the process of an individual or company acting like an insurance

company to cover its own risks. This involves evaluating a large number of similar
potential losses, the ability to predict the overall losses with some degree of accuracy, and
the establishment of a formal fund for future losses and their possible fluctuations.

Self-Insurance for both companies and individuals has its pros and cons:

Advantages:

 Avoid the cost of premiums for commercial or personal insurance

 Reserves can be invested in short-term money market instruments and later used
by the company or individual when the insurance is no longer needed

Disadvantages:

 Company/individual is exposed to a catastrophic loss

 Services provided by the insurance company are assumed

 Income taxes may be due on the interest/profit from the reserve cash

Insurance Contract

The insurance contract is a legal document that spells out the coverage, features,
conditions and limitations of an insurance policy. It is critical that you read the contract
and ask questions if you don't understand the coverage. You don't want to pay for the
insurance and then find out that what you thought was covered isn't included.

Insurance terminology you should know:

Bound: Once the insurance has been accepted and is in place, it is called "bound". The
process of being bound is called the binding process.

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Insurer: A person or company that accepts the risk of loss and compensates the insured
in the event of loss in exchange for a premium or payment. This is usually an insurance
company.

Insured:

The person or company transferring the risk of loss to a third party through a contractual
agreement (insurance policy). This is the person or entity that will be compensated for
loss by an insurer under the terms of the insurance contract.

Insurance Rider/Endorsement:

An attachment to an insurance policy that alters the policy's coverage or terms.

Insurance Umbrella Policy:

When insurance coverage is insufficient, an umbrella policy may be purchased to cover

losses above the limit of an underlying policy or policies, such as home owners and auto
insurance. While it applies to losses over the dollar amount in the underlying policies,
terms of coverage are sometimes broader than those of underlying policies.

Insurable Interest:

In order to insure something or someone, the insured must provide proof that the loss will
have a genuine economic impact in the event the loss occurs. Without an insurable
interest, insurers will not cover the loss. It is worth noting that for property insurance
policies, an insurable interest must exist during the underwriting process and at the time
of loss. However, unlike with property insurance, with life insurance, an insurable
interest must exist at the time of purchase only.

Principles of Insurance

(1) Indemnity

A contract of insurance is a contract of indemnity. Indemnity means that the insured in

case of loss against which the policy has been insured, shall be paid the actual amount of
loss not exceeding the amount of the policy i.e. he shall be fully indemnified. The
purpose of contract of insurance is to place the insured in the same financial position, as
he was before the loss. Suppose, a person insured his factory for Rs.20 lakhs against fire,
the factory is partially burnt and it is estimated that a sum of Rs.10 lakhs will be required

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to restore it to the original condition. The insurer is liable to pay Rs.10 lakhs only. The
exceptions to the rule are found in Personal Accident policies, Agreed Value policies in
marine insurance and Valuables and reinstatement policies in Engineering insurance.
These are also contracts of indemnity but by a special application of the principle, the
amount of indemnity is decided at the time of entering into the contract itself. In certain
forms of insurance, the principle of indemnity is modified to apply. For example, in
marine or fire insurance, sometimes, certain profit margin that would have earned in the
absence of the event, is also included in the loss. Under life insurance, the insurer is
required to pay the fixed amount in the event of death or on the expiry of the period of
the policy. Thus the contract of life insurance is not insurance as such but it is an
assurance. This is due to the reason that life cannot be indemnified i.e. the life of a person
cannot be valued in terms of money and therefore the question of compensation of actual
loss does not arise. Thus a contract of life insurance is a contract of guarantee.

(2) Utmost Good Faith

The doctrine of utmost good faith applies to all forms of insurance. Both parties of the
insurance contract must be of the same mind at the time of contract. There should not be
any fraud, non-disclosure or misrepresentation concerning the material facts. An
insurance contract is a contract of absolute good faith where both parties of the contract
must disclose all the material facts truly and fully as insurance shifts risk from one party
to another. As in insurance insured knows more about the risks than the insurer, so there
must be utmost good faith and mutual confidence between insured and insurer. For
instance, if a person suffers from a serious invisible disease but does not disclose this fact
while getting his life insured, the insurance company can avoid the contract. Similarly the
insurer must exercise the same good faith in disclosing the scope of the insurance, which
he is prepared to grant. Breach of good faith renders the contract voidable ab initio at the
discretion of the aggrieved party. A material fact is a fact which would influence the
mind of an insurer in deciding whether he should accept the risk, on what terms and what
premium he should charge. The utmost good faith says that all material facts should be
disclosed in true and full form. It means that the facts should be disclosed in that form in
which they really exist. There should no false statement and no half-truth nor any silence
on the material facts. What is a material fact depends upon the circumstances of the
particular case.

Insurable Interest

For an insurance contract to be valid, the insured must have an insurable interest in the
subject matter of insurance. It means that the insured must have an actual pecuniary

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interest. The insured must be so situated with regard to the thing insured that he would
have benefit by its existence and loss from its destruction. For instance, a person has
insurable interest in his life or in the life of the spouse but he has no insurable interest in
the life of a stranger. The owner of a building has absolute insurance interest. If this
building is financed by banks then financiers too have their interest in the property but is
limited to the extent of their financial commitment only. The insurable interest must exist
both at the time of the proposal and at the time of claims but in case of life insurance,
insurable interest must exist only when the policy is taken.

Essentials of a Valid Insurable Interest:

The essentials of a valid insurable interest are the following:

(a) There must be a subject matter to be insured.

(b) The insured should have monetary relationship with the subject matter.

(c) The relationship between the insured and the subject matter should be recognized by
law i.e. there should not be any illegal relationship between the insured and the subject
matter.

(d) The financial relationship between the insured and the subject matter should be such
that the insured is financially benefited by its existence or survival and will suffer
economic loss at the destruction or death of the subject matter.

The subject matter is life in life insurance, property and goods in property insurance,
liability and adventure in general insurance. Insurable interest is essentially a pecuniary
interest, no emotional or sentimental loss, like an expectation or an anxiety, could be the
ground of the insurable interest.

(4) Proximate Cause

The rule of proximate cause says that the cause of the loss must be proximate or
immediate and not remote. If the proximate cause of the loss is a risk insured against, the
insured can recover. If the risk insured is the outcome of a remote cause, which is not
insured against, then the insurer is not bound to pay compensation. Proximate cause
means the active efficient cause that sets in motion a chain of events, which brings about
a result, without intervention of any force started and working actively from a new and
independent source. That means proximate cause is the cause which in a natural and
unbroken series of events is responsible for a loss or damage. If there is a single cause of
the loss, the cause will be proximate cause and if the cause of loss was insured, insurer

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will have to indemnify the loss. When a loss has been brought about by two or more
causes, the question arise as to which is the proximate cause. If the causes occurred in
form of chain, they have to be observed seriously. For the policy to cover the loss must
have an insured peril must occur in the chain of causation that links the proximate cause
with the loss.

The proximate cause is not necessarily, the cause that was nearest to the damage either in
time or in place, but is rather the cause that was actually responsible for loss.

(5) Subrogation

The doctrine of subrogation is a corollary to the principle of indemnity and applies only
to fire and marine insurance. According to it, when an insured has received full indemnity
in respect of his loss, all rights and remedies which he has against third person will pass
on to the insurer. The insurer‘s right of subrogation arises only when he has paid for the
loss and this right extend only to the rights and remedies available to the insured in
respect of the thing to which the contract of insurance relates. If the insured is in a
position to recover the loss in full or in part from a third party due to whose negligence
the loss may have been occurred, his right of recovery is subrogated (substituted) to the
insurer on settlement of the claim. The insurers, thereafter, can recover the claim from the
third party or in case the lost property is recovered or the damaged property fetches any
value, the insurer will be its owner.

Example: Suppose, a house is insured for Rs.2 lakhs against fire, the house is damaged by
fire and the insurer pays the full value of Rs.2 lakhs to the insured. Later on the damaged
house is sold for Rs.20, 000. The insurer is entitled to receive the sum of Rs.20, 000.

(6) Contribution

When an insured obtains more than one policy on one risk, the principle of contribution
comes into play. The aim of contribution is to distribute the actual amount of loss among
the different insurers who are liable for the same risk under different policies in respect of
the same subject matter. That means the insured may effect more than policy to cover the
same risk, he/she cannot recover in total more than a full indemnity (sum insured). In
other words, the right of contribution arises when

(a) There are different policies which relate to the same subject matter

(b) The policies cover the same peril which caused the loss

(c) All the policies are in force at the time of the loss and

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(d) One of the insurers has paid to the insured more than his share of the loss. However,
the principle of contribution does not apply to life insurance.

(7) Mitigation of Loss

In the event of a mishap, the insured must take all possible steps to mitigate or minimise
the loss to the subject matter of insurance. He should act in the same manner in which he
would have acted in the absence of the insurance cover. This means that it is the duty of
the insured to make a reasonable effort and take all available precautions to save the
insured property.

(8) Warranties

There are certain conditions and promises in the insurance contract which are called
warranties. Warranties which are mentioned in the policy are called express warranties.
There are certain warranties which are not mentioned in the policy.

These warranties are called implied warranties. Warranties, which are answers to the
question, are called affirmative warranties. The warranties fulfilling certain conditions or
promises are called promissory warranties. Warranty is the very important condition in
the insurance contract which is to be fulfilled by the insured. On breach of warranty the
insurer becomes free from his liability. Therefore insured must have to fulfill the
condition and promises during the insurance contract whether it is important or not in
connection with the risk. If warranties are not followed, the other party may cancel the
contract whether risk has occurred or not. However, when the warranty is declared illegal
and there is no reverse effect on the contract, the warranty can be waived.

Types of Insurance

The insurance can be divided from two angles: from business point of view and from the
risk point of view.

Business Point of View

The insurance from business point of view can be categorized into:

 Life Insurance,

 General Insurance, and

 Social Insurance

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(1) Life Insurance

Life Insurance is different from other insurance in the sense that the subject matter of
insurance is life of human being. The insurer will pay the fixed amount of insurance at
the death or at the expiry of certain period. At present, life insurance enjoys maximum
scope because each and every person requires the insurance. This insurance provides
protection to the family at the premature death or gives adequate amount at the old age
when earning capacities are reduced. Types of insurance plans offered in our country:

 Term assurance plans

 Whole life plans

 Endowment assurance plans

 Assurances for children

 Family income policy

 Life annuity Joint life assurance

 Pension plans

 Unit linked plan

 Policy for maintenance of handicapped dependent

 Endowment policies with health insurance benefits

(2) General Insurance

The general insurance includes property insurance, liability insurance and other forms of
insurance. Fire and marine insurance comes under property insurance. Liability insurance
includes motor, theft, fidelity and machine insurances to a certain extent. The strictest
form of liability insurance is fidelity insurance whereby the insurer compensates the loss
to the insured when he is under the liability of payment to the third party. Types of
insurance policies available are:

 Health insurance

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  Medi-claim policy

 Personal accident policy

 Group insurance policy

 Automobile insurance

 Worker‘s compensation

 Liability insurance

 Aviation insurance

 Business insurance

 Fire insurance policy

 Travel insurance policy

(3) Social Insurance

The social insurance is to provide protection to the weaker sections of the society who are
unable to pay the premium for adequate insurance. Pension plan, disability benefits,
unemployment benefits, sickness insurance and industrial insurance are the various forms
of social insurance.

Risk point of view

Insurance can be divided into property, liability and other forms of insurance.

(1) Property Insurance

Under the property insurance property of a person is insured against a certain specified
risks. The risk may be fire or marine perils, theft of property or goods, damage to
property at accident. Examples of this are:

 Home insurance

 Business insurance

 Commercial insurance

Marine Insurance

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 Marine insurance provides protection against loss of marine perils. The marine perils are
collision with rock, or ship attacks by enemies, fire and capture by pirates etc. These
perils cause damage, destruction or disappearance of the ship and cargo and non-payment
of freight. So, marine insurance insures ship (Hull), cargo and freight. Types of policies
are:

 Voyage policies

 Time policies

 Valued policies

 Hull insurance

 Cargo insurance

 Freight insurance

Fire Insurance

Fire insurance covers risks of fire. In the absence of fire insurance, the fire waste will
increase not only to the individual but to the society as well. With the help of fire
insurance, the losses, arising due to fire are compensated and the society is not losing
much. The individual is protected from such losses and his property or business or
industry will remain in the same position in which it was before the loss. The fire
insurance does not protect only losses but it provides certain consequential losses also.
Policies available in this insurance are:

 Consequential loss policy

 Comprehensive policy

 Valued policy

 Valuable policy

 Floating policy

 Average policy

Miscellaneous Insurance

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The property, goods, machine, furniture, automobile, valuable goods etc., can be insured
against the damage or destruction due to accident or disappearance due to theft. There are
different forms of insurances for each type of the said property whereby not only property
insurance exists but liability insurance and personal injuries are also insured.
Miscellaneous insurance covers:

 Motor

 Disability

 Engineering and aviation risks

 Credit insurance

 Construction risks

 Money insurance

 Burglary and theft insurance

 All risks insurance

(2) Liability Insurance

The general insurance also includes liability insurance whereby the insurer is liable to
pay the damage of property or to compensate the loss of personal injury or death. The
examples of this type of insurance are fidelity insurance, automobile insurance and
machine insurance. Examples are:

 Third party insurance

 Employees insurance

 Reinsurance

(3) Other Forms

Besides the property and liability insurances, there are certain other insurances, which are
included under general insurance. The examples of such insures are export credit
insurances, state employees insurance, etc. whereby the insurer guarantees to pay certain
amount at the happening of certain events. Examples are:

 Fiduciary insurance

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  Credit insurance

 Privilege insurance

Importance or Benefits of Insurance:

As insurance is a system of sharing risk that seems to be too great to be borne by one
individual we can list out the benefits derived by individual and society from the
insurance.

Indemnifies Loss:

Insurance restores people to their former financial position as if no loss had occurred. It
helps them to remain financially secure without running into debt after a loss. It also
helps business firms to carry on their normal business operations without interruption
even after the loss occurs.

Reduces Worry and Fear:

Insurance helps in reducing anxiety and fear before and after the loss occurs, as it is
known that the insurance company will compensate the loss.

Makes Available Funds For Investment:

Investments are the base of an economic development and mostly these investments are
the result of savings. An insurance company is a major instrument for the mobilization of
the savings of people, which are thereafter canalized into investment for economic
growth. Insurance provides the continuity in trade and commerce, by covering the risks
that could retard the economy and thereby indirectly helps the economy to grow.

Provides Employment to a Large Number Of People:

Insurance industry offers regular full time employment to a large number of people in
the country. Besides them a number of agents, professionals etc. are also engaged by the
industry to render professional services.

Educates People About Loss Prevention:

Insurance companies also engage themselves in educating people about loss prevention.

Insurance Enhances Credit Worthiness:

Insurance policies are often offered as collateral security for credit as well.

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Social Benefits :

Above all we derive social benefits when people with peaceful minds carry on their
operations properly and in a better way. Thus insurance‘s contribution to the economy as
a whole is valuable as it avoids economic hardships to people.

Exercise Questions:

1. Define risk. What are different types of risks?

2. Differentiate between a peril and a hazard.
3. Explain pure risk and speculative risk.
4. Discuss different response to risk.
5. What is insurance? Discuss basic principles of insurance.
6. What is the importance of insurance in business?
7. Discuss different types of insurance.

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 UNDERSTANDING THE MECHANICS OF MARKETING
Introduction:

The term marketing has evolved over time; today marketing is based around providing
continual benefits to the customer following a transactional exchange. The Chartered
Institute of Marketing defines marketing as 'The management process responsible for
identifying, anticipating and satisfying customer requirements profitably'.

Definition:

Philip Kotler defines marketing as 'satisfying needs and wants through an exchange
process'

Customers will only undertake the exchange, if they feel that their needs are being
satisfied, clearly the transactional value cannot be more than the amount customers are
prepared to pay to satisfy their need.

P.Tailor suggests that 'Marketing is not about providing products or services it is

essentially about providing changing benefits to the changing needs and demands of the
customer'.

What does marketing involve?

Marketing requires co-ordination, planning, implementation of campaigns and employees

with the appropriate skills to ensure marketing success. Marketing objectives, goals and
targets have to be monitored and met, competitor strategies analyzed, anticipated and
exceeded. Through effective use of market and marketing research an organization
should be able to identify the needs and wants of the customer and try to deliver benefits
that will enhance or add to the customers lifestyle, while at the same time ensuring that
the satisfaction of these needs results in a healthy turnover for the organization.

The History and Evolution of Marketing:

The field of marketing has developed over time, each of these time are characterized with
different practices and challenges, but despite all, one thing that remained common and
certain at the center of every stage of development is exchange of goods and services, and
ideas.

The field of marketing is very much lucrative, challenging, innovative, and creative. Here
is marketing, as it was, as it is, and as it would be the history of marketing can be group
into three innovative stages or eras:

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· The production era

· The sales era

· The marketing era

(1) The production era:

The production era is the stage in marketing when the mindset of many producers is to
device effective strategies on how to increases production output to meet it growing
demands with their limited resources. Instead of carrying out effective researches to
identify what the market need and want, Producers in this era tend to think of what seams
economical to produce with their resources. However, the production era was defective
because the producer failed to take into considerations what the market needs and want.

The Production era is dated from the second half of the 19th century into the first half of
the 20th century. The production era of marketing coincided with industrial revolution in
the united state of America and it was characterized by the introduction of rail
transportation system, electricity, division of labor, assembly line. Industrialization led to
mass production at lower cost per unit, and mass production also led to standardization as
replacement for custom made products.

In this era, the producers believed that price was the factor to decide Purchas, hence
employ mass production strategies to reduce price will encourage the consumers to
patronize the product brand. But the production era was said to be defective as a result of
the producers‘ inability to be consumer focused it is just one thing that remained
common and certain at the center of every stage of the evolution of marketing.

(2)The sales era:

After the production era, second face of the innovative marketing stages is the sales era.
The sales era is an era when producers is more focused on how to sale their product to the
buyers. The sales era started in the 1930 as a result of the huge mass production arising
from the production era which had now started to subsidies. The producers in the
production era had sophisticated the market with many quantities of products beyond
what the market could demand. This led to decrease in demand, and increase in
competitions.The situation encouraged producers to employ effective strategies to
communicate their products to the consumers and give them more reasons to patronize
their product instead of that of similar competitors.

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The producers tend to believe in this sales era that aggressive sales strategies are more
than enough to make the consumers buy their product. However, like the production era,
the sales era was also defective because they failed to pay focused to the need and want
of the consumers.

(3)The marketing era:

The marketing era is terms as the current and most effective era. This era started in the
1950s as a result of the defect of the production and sales era. In this era, it has done on
producers that mere aggressive sales strategy, promotions, skill sales personnel‘s is not
just sufficient enough to encourage or persuade consumers to buy. Hence, producer now
realizes that the consumers have their choices that must be respected. The marketing era
however, encourage producers to engage themselves in effective marketing objectives
which seek that 'consumer satisfaction is the key'. Consumers have their needs and wants,
and it remains the duties of a good marketing program to identify these consumers, their
needs and wants, and then develop effective products to suit and satisfy these identified
consumers‘ needs.

Today, the field of marketing has been affirmed as one of the most challenging, lucrative,
innovative and creative field of all. These can be demonstrated by the changing faces and
strategies that are been employed by marketers to reach consumer satisfaction.

Many forms of technologies is now been employ to create a closer relationships with the
consumers. The advancement of mobile communications, internet marketing like website,
blogs, social medial, mails etc has come to complement the traditional forms of
marketing such as personal selling etc. Marketing is innovational because it changes and
will always change as consumer behaviors and life styles changes.

As a marketing practitioner or intending marketer, you need to be well informed and

equipped with current market trends so as to remain competitive.

Functions of Marketing:

To achieve success in marketing effort one need to have a glimpse of the big pictures and
the activities you need to perform in achieving your set marketing objectives, these
activities is referred to as the function of marketing. It refers to those specialize activities
that a marketer must perform in order to achieve his set marketing objectives.

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The functions of marketing are;

· Researching

· Buying

· Product development and management

· Production

· Promotion

· Standardization and grading

· Pricing

· Distribution

· Risk bearing

· Financing

· After sales-service

(1) Research function:

The research function of marketing is that function of marketing that enables you to
generate adequate information regarding your particular market of target. You must
carry out adequate research to identify the size, behavior, culture, believe, genders etc.
of your target market segment, their needs and want, and then develop effective
product that can meet and satisfy these market needs and want.

(2) Buying function:

The function of buying is performed in order to acquire quality materials for
production. When you design a good product concept, you should also ensure you're
buying the essential materials for the product. This function is carried out by the
purchase and supply department, but your specifications of materials goes a long way
in assisting the purchasing department to acquire the necessary materials needed for
production.

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(3) Product development and management:
Product development is an essential function of marketing since it was the duties
of the marketing department to identify what the market need or want and then
design effective product based on the identified need and want of the market.
Product development passes through some basic stages carried out by the
marketers to develop a targeted market specified product. And you can also
manage your product by evaluating it performance and changing them to fit the
current market trend.

(4) Production function:

Production is the function performs by the production department. Though, this is
interrelated to the department of marketing, because your product must possess the
essential characteristics that can meet the target market needs and want as
identified during your market research, such characteristics as in your product
Test, Form, Packaging etc.

(5) Promotion function:

Promotion is one of the core functions of marketing since your finish product must
not remain in the place of production, hence, a marketer must design effective
communication strategies to informing the availability of his product to his target
market. You must be able to design effective strategies to communicate your
product availability and features to your target market, such strategies as in;
advertisement, personal selling, public relation etc.

(6) Standardization and grading:

The function of standardization is to establish specified characteristics that your
product must conform to, such standard as in having a specify test, ingredient etc.
That makes your product brand so unique. Grading comes in when you sort and
classify your product into deferent sizes or quantities for different market segment
while maintaining your product standard.

(7) Pricing function:

You perform the function of pricing on your product offerings by designing
effective pricing systems base on your product stage and performance in the
product life cycle. Price is the actual value consumers perceive on your product, so
a marketer should ensure that the value of his product is not too high or too low to
that of his costumers.

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(8) Distribution function:
The function of distribution is to ensure that product is easily and effectively
moved from the point of production to the target market, the kind of transportation
system to employ e.g. Road, rail, water or air, and ensures that the product can be
easily accessed by customers. Marketer should also design the kind of middlemen
to engage in the channel of distribution, their incentives and motivations etc.

(9) Risk bearing function:

The process of moving a finished product from the point of production to the
point of consumptions is characterized with lots of risks, such risks as in product
damaging, pilferage and defaults etc. So an effective packaging system is needed
to protect the product, good warehouse for the storage of product until they are
needed, effective transportation system to speedily deliver the product on time.

(10) Financing function:

Financing deals with the part of marketing to providing incomes for your business.
It refers to how you can raise capital to start operation and remain in business. It
refers to your modes of payment for the goods and services transferred to your
costumers.

(11) After sales-service:

In a more complex and technical product, a marketer should make provision in
order to assist his customers after they have purchased your product. In terms of
machines or heavy equipment product that requires installation or maintenance,
most marketing organization renders such services like installing the machine or
maintaining it for stipulated periods on time for free or by a little service charge.

After sales services is an effective marketing strategy to building a long lasting customer
relationship, staying ahead of your competitors while making profit for your
organization.

Adequate understanding of these functions enables a marketer to know what is required

to be done to having an effective transfer of ownership between him and his costumers,
creating a big picture of his business, while also making profit for his organization.

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 Major Concepts in Marketing

Needs and Wants

The satisfaction of buyers‘ needs is at the heart of a market economy, and is the core
theme of Marketing. To put it more simply, a need is a feeling of being deprived
of somethingdesirable. You may be in a state in which you are not feeling satisfied (say
you are feeling hungry). So you visualize—a more desirable (but unattained, yet) state,
that of having a full stomach. Hence there is a gap between your current
state (hunger) and desirable state (satiated palate). This gap leads to a need being felt.

Wants:

Wants are somewhat different. While needs are basic to human beings, (since nobody
ever needs to tell us that we need to feel hungry, thirsty, etc.) wants are not. Later in our
life when we become part of various informal and formal groups (family, friends,
school, club, workplace, etc) we develop the concepts of friendship social approval,
beauty, and so on. These are our acquired needs. The product concept that adequately
satisfies our biogenic or acquired needs becomes successful. In fact
the job of the marketer is to identify unfulfilled / inadequatelyfulfilled / partially fulfilled
need. But then today a need can be met in a number of alternative ways. A
variety of products can satisfy the same need. Wants exist for those objects that can
potentially satisfy a need. A visually impaired person can either wear spectacles, contact
lenses, or now he can go in for corrective surgery.

Market:

Definition:

An aggregate of people who, as individuals or as organization, has needs for products in

a products class and who has the ability, willingness and authority to purchase such
product.

Market Classifications

How is a market classify, a market can be classified into two

1. The consumers' market and

2. The industrial market

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(1)The consumer's market:

The market is comprises of individuals and organization that purchases a particular

product for their personal consumptions, they are also referred to as the ultimate users.
For instance, a family man who purchases an automobile to convey himself and his
family is an ultimate user of the automobile product. Also, consider a woman who
purchases a bag of rice for it family consumptions. These are few examples of consumer's
market.

(2)The industrial market:

Unlike the consumers' market, the Industrial market is comprises of those organizations
that purchases a particular product for a business or for reproduction purposes. These
market can also be referred to as a business market since the buyers sole aim are to
further their production for goods and services.

In the business market, producers buy a finished product of another producer in order to
make raw materials for its own product or services. For instance, consider an ice-cream
producer who had purchase milk produced by another producer in order to facilitate his
ice cream production, also, consider a woman who purchases a bag of rice with the sole
aim of cooking and reselling it in her restaurant instead of for her personal or family
consumption. These are few example of the industrial market.

The business market can also be grouped as

· The producers market and

· The resellers' market

(1) The producers' market:

This market is comprises of those producers who purchases another producers finished
product and then transform it into another product brand.

(2) The resellers' market:

This market is including that business enterprise that purchases a product or service for
the sole aim of reselling. These resellers do not tamper with the physical nature of these
products. For instance, a channel member who purchases a particular producer's product
brand and take it to the market for reselling, this reseller can be classified under the
'resellers market'

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This concept of market classification and grouping is to enable a marketer or intending
marketers to choose the Field of expertise. Depending on your business capital and
equipments you can choose to become a producer or to become a reseller.

However, Comprehensive understanding of this concept enables a marketer to put the

market first in his marketing plans and every decision making.

Product:

According to Alderson (1957) a product can be defined as ―a bundle of utilities

consisting of various product features and accompanying services".

A product is the goods and services that you as a seller or market have to offer
to your market for an exchange of complementary value. A product can be tangible,
intangible, idea, or a combination of both.

A tangible product is that product that is physical in nature. A physical product is that
product that can be seen, touched or moved E.g. Car, mobile phone, clipper etc.

An intangible product is that product that cannot be seen, touched or moved. An

intangible product can only be felt, smelled or experienced, it‘s also refers to as the
services that you as a seller or marketer have to offer to your market for A
complementary exchange of value E.g. a hair cut is a barber‘s product, the experience
and satisfaction gained when a passenger board a cab or flight, a medical examination is
the doctor‘s product.

An idea is refers to a concept, philosophies etc providing psychological stimuli‘s that

aids in solving a problem.

Combinations of both elements are refers to a situation where a seller‘s product is

comprises of physical goods, services and or ideas.

For instance, consider a marketer who sold a new product concept (idea) to an
organization (buyer), help develop the idea into a physical form (tangibility), and
rendered effective and satisfactory services in helping the organization on the product, in
these case, the marketer have offered a product comprise of more than one elements.

A product is anything of value that you as a seller or marketer have to offer to your target
market.

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Market Research:

Market research this is the process of collecting, recording and analyzing data about the
customers, competitors and market.

Market research is a broad and far-reaching process.

It is concerned not just with finding out, as accurately as possible, whether consumers
will buy a particular product or not, but also with trying to analyse their reaction to:

 Different price levels

 Alternative forms of promotion
 New types of packaging
 Preferred means of distribution and so on.

The results of market research can, therefore, have a great impact on decisions made in
all areas of the marketing process. Market research is itself a growth industry as most
research is undertaken by specialist agencies working for other businesses.

The Need for Market Research:

To reduce the risks associated with new product launches

By investigating potential demand for a new product or service the business should be
able to assess with some degree of accuracy the likely chances of a new product
achieving satisfactory sales. No research can guarantee success. However, market
research is still a key part of new product development (NPD) and most firms would aim
to check market conditions before planning the, launch of a new product.

To predict future demand changes

A travel firm may wish to investigate social and other changes to see how these might
affect the demand for holidays in the future.

To explain patterns in sales of existing products and market trends

Market research is not just undertaken for new or planned products; it needs to be
conducted for existing products too.

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To assess the most favored designs, flavors, styles, promotions and packages for a
product

Consumer tests of different versions of a product or of the proposed adverts to promote it

will enable a business to focus on the aspects of design and performance that consumer‘s
rate most highly. These can then be incorporated into the final product.

Market research can, therefore, be used to discover information about:

 Market size and consumer tastes and trends

 The product and its perceived strengths and weaknesses
 The promotion used and its effectiveness
 Competitors and their claimed unique selling propositions
 Distribution methods most preferred by consumers
 Consumers‘ preferences for packaging of the product.

Consumer Behavior:

Consumer behavior is the process involved when individuals or groups select, use, or
dispose of products, services, ideas or experiences (exchange) to satisfy needs and
desires.

The term consumer behavior is defined as the behavior that consumer display in
searching for, purchasing using, evaluating and disposing of products and services that
they expect will satisfy their needs.

Consumer behavior focuses on how individuals make decisions to spend their available
resources (time, money, effort) on consumption-related items that includes what they
buy, why they buy, when they buy it, where they buy it, how often they buy it, how often
they use it, how they evaluate it after the purchase and the impact of such evaluations on
future purchases, and how they dispose of it.

Two different kinds of consuming entities: the personal consumer and the organizational
consumer.

Personal Consumer: Buys goods and services for his or her own use, for the use of the
household or as a gift for a friend. The products are bought for final use by individuals,
who are referred to as end users or ultimate consumers.

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Organizational Consumer: Includes profit and non-profit businesses, government
agencies (local, state, national) and institutional (e.g. schools, hospitals, and prisons), all
of which buy products, equipment, and services in order to run their organizations.

Segmentation, Targeting, and Positioning:

Market Segmentation:

Market segmentation involves dividing a market into distinct groups of buyers with
different needs, characteristics or behavior who might require separate products or
marketing mixes. Market consists of buyers and, buyers differ in one or more ways. They
may differ in their wants, resources, locations, buying attitudes, and buying practices.

Market Positioning:

Market positioning involves the formulation of competitive positioning for a product and
a detailed marketing mix and developing a distinct image for the product or service in the
mind of the consumer that will differentiate with the competitors.

Market Targeting:

It is the process of evaluating each market segments‘ attractiveness and selecting one or
more segments to enter.

Understanding the 4 + 3Ps (7Ps) of marketing:

The marketing field can be so challenging and often innovating. The innovative field of
marketing requires regular strategic and effective decision making in ensuring that
consumers get full satisfaction for their consumptions which are the sole objective of
marketing while making sufficient profit for the organization. To achieve this set
objective of consumers' satisfactions, you as a marketing manager must make decisions
regarding to their marketing mix.

Marketing mix is the set of tools that the firm uses to pursue its marketing objectives in
the target market (kotler 1997). Marketing mix- also refers to as marketers‘ controllable
tools are the variables which marketers can control in order to achieve a desired market
reactions towards their product offerings at a particular point in time.

Albeit, many tools do exist for marketing managers to utilize, but few of the most popular
tools are referred to as the 'Ps' of marketing.

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Formerly, we can identify these four(4) marketing controllable 'Ps' as utilized by most
marketing managers to achieving a set marketing objectives; these Ps are referred to as
controllable because they are the variable tools which marketers can control to achieve a
desirable market reactions.

These 4Ps are;

 Product

 Promotion

 Price

 Place/distribution

Product:

This refers to the tangible product and services that the marketer have in his offerings. It
refers to it packaging, shape size, portability, engineering features, and the supportive
services rendered after sales to increase consumer satisfaction. In order to achieve some
desired objective on the product, marketers can choose to develop more attractive and
effective product to meet identified sets of needs and want of the target market.
Marketers can also choose to modify an existing product to a more refined suitable brand
e.g. by modifying it shapes, packages etc. To meet with consumers need and wants.

Promotion:

The promotion variable involves all strategies which the marketer employs to
communicate it product offerings to the target market. The objective is to;

 Create product awareness

 Educate the market and
 Also to create a good organizational image

Marketers make promotional decisions like;

 The promotional massage to pass across

 The best media to use in passing these massages
 The most effective form of promotion in every market situations and
 The cost effects on the kind of promotional method to employ.

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Price variable:

Price refers to the value which consumers‘ places on a particular marketer‘s product
offering, and it is often express in monetary terms. Price is a critical tool of marketing
because it effects goes a long way to determine the demands of the product offering in the
market, and it can also hinder or catapult an organization's returns on investments. An
effective price is that price that reflects the actual value of a particular marketer‘s
product. So to achieve a set desire, marketer must make critical decisions regarding to the
organization‘s pricing policies.
The consumers' sensitivities to prices in the target market go a long way to affect a
marketers pricing decision making. Also; you as a Marketer must make decisions to the
amount of discount to be allowed in order to encourage demand. In terms of a new
product, marketers make decision on the pricing method to employ in order to encourage
purchase, most especially at the introduction stage.

Place/distribution variable:

The distribution variable is another controllable which marketers can employ to

determine, where, when and how he want it product offerings to circulate within the
target market, the necessary mechanism to employ for an effective transfer of goods and
services to the target market in order to achieve the objective of marketing which is
consumers' satisfaction. One of the strategic duties of a Marketing manager is to ensure
that product are available to the market at the right time, in the appropriate quantity, and
at the right place while also ensuring minimal transportations and storage cost in order to
reduce huge cost acquirement on a product.

The marketing manager also makes decisions regarding to,

 The kind and numbers of retail outlets to carry its product.

 The geographical location to cover with it product.

 The numbers of storage houses to be employed

 The selection of meddle men to distribute its product

 The mode of transportation to encourage in order to having an effective

distribution of it product etc.

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However, these days marketers have recognized and encourage the following added 3Ps
to it marketing strategies, haven realized their effectiveness to an organization's
marketing strategies.

The following 3ps are;

 People

 Process and

 Physical evidence

People:

People refer to the marketing personals that carry out these marketing activities. These
people who provide the services to the target market now forms other marketing tools
since there level of creativity, skills, and product and market awareness goes a long way
to influence purchase. Marketing manager now invest adequate amount of time in
training their marketing personnel in order to equip them with the necessary skills
required to have positive influence in the target market.

Process:

The process here refers to the ways in which marketer employ to providing relevant and
supportive services to their customer in order to give them more satisfaction for their
patronage. Marketing manager must make key decisions such as the kind of after sales
service, home delivery etc. to employ because these process when effectively employed
will go a long way to create brand loyalty and also a long lasting relationship with the
customer.

Physical evidence:

This is the physical environment of the business, it has formed other marketing tools
because consumers are likely to be influence by what they see and most organizations
today are accesses by their physical structures. In order to Influence costumers‘
confidence to the organization, marketing manager must ensure a more conducive
atmosphere to attract more customers while realizing marketing objectives.

All of these controllable variables are very much important to the marketer because it‘s
one of the most important keys use to open and close and adjust doors of opportunities in
the target market. While any adjustment on these controllable mixes can have effect on

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the marketing objective, marketing managers must then decide on the volumes and
amount of adjustment to make on these 7Ps in any given market situations.

Channels of Distribution:

A channel of distribution or trade channel is defined as the path or route along which
goods move from producers or manufacturers to ultimate consumers or industrial users.
In other words, it is a distribution network through which producer puts his products in
the market and passes it to the actual users. This channel consists of producers,
consumers or users and the various middlemen like wholesalers, selling agents and
retailers(dealers) who intervene between the producers and consumers. Therefore, the
channel serves to bridge the gap between the point of production and the point of
consumption thereby creating time, place and possession utilities.

These channels of distribution are broadly divided into four types:-

 Producer-Customer:

This is the simplest and shortest channel in which no middlemen is involved and
producers directly sell their products to the consumers. It is fast and economical
channel of distribution. Under it, the producer or entrepreneur performs all the
marketing activities himself and has full control over distribution. A producer may
sell directly to consumers through door-to-door salesmen, direct mail or through
his own retail stores. Big firms adopt this channel to cut distribution costs and to
sell industrial products of high value. Small producers and producers of perishable
commodities also sell directly to local consumers.

 Producer-Retailer-Customer:

This channel of distribution involves only one middlemen called 'retailer'. Under it,
the producer sells his product to big retailers (or retailers who buy goods in large
quantities) who in turn sell to the ultimate consumers. This channel relieves the
manufacturer from burden of selling the goods himself and at the same time gives
him control over the process of distribution. This is often suited for distribution of
consumer durables and products of high value.

 Producer-Wholesaler-Retailer-Customer:

This is the most common and traditional channel of distribution. Under it, two
middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his
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 product to wholesalers, who in turn sell it to retailers. And retailers finally sell the
product to the ultimate consumers. This channel is suitable for the producers
having limited finance, narrow product line and who needed expert services and
promotional support of wholesalers. This is mostly used for the products with
widely scattered market.

 Producer-Agent-Wholesaler-Retailer-Customer:

This is the longest channel of distribution in which three middlemen are involved.
This is used when the producer wants to be fully relieved of the problem of
distribution and thus hands over his entire output to the selling agents. The agents
distribute the product among a few wholesalers. Each wholesaler distribute the
product among a number of retailers who finally sell it to the ultimate consumers.
This channel is suitable for wider distribution of various industrial products.

Marketing Intermediaries:

Marketing intermediaries, also known as middlemen or distribution intermediaries are

an important part of the product distribution channel. Intermediaries are individuals or
businesses that make it possible for the product to make it from the manufacturer to
the end user, essentially facilitating the sales process. According to Business
Dictionary, the four basic types of marketing intermediaries are agents, wholesalers,
distributors and retailers.

Agents

The agent as a marketing intermediary is an independent individual or company

whose main function is to act as the primary selling arm of the producer and represent
the producer to users. Agents take possession of products but do not actually own
them. Agents usually make profits from commissions or fees paid for the services they
provide to the producer and users.

Wholesalers

Wholesalers are independently owned firms that take title to the merchandise they
handle. In other words, the wholesalers own the products they sell. Wholesalers
purchase product in bulk and store it until they can resell it. Wholesalers generally sell
the products they have purchased to other intermediaries, usually retailers, for a profit.

Distributors

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 Distributors are similar to wholesalers, but with one key difference. Wholesalers will
carry a variety of competing products, for instance Pepsi and Coke products, whereas
distributors only carry complementary product lines, either Pepsi or Coke products.
Distributors usually maintain close relationships with their suppliers and customers.
Distributors will take title to products and store them until they are sold.

Retailers

A retailer takes title to, or purchases, products from other market intermediaries.
Retailers can be independently owned and operated, like small ―mom and pop‖ stores,
or they can be part of a large chain, like Walmart. The retailer will sell the products it
has purchased directly to the end user for a profit.

Marketing Communication:

Marketing communication helps to develop brand awareness, which means that

consumers translate product information into perceptions about the product‘s attributes
and its position within the larger market. Businesses also use marketing communication
to retain the product‘s current customer base, and to cement relationships with customers
and suppliers, notes "Reference for Business." Marketing communication strategy defines
the business‘s plan for product information dissemination and brand awareness
development.

Promotion:

Promotions are decisions about advertising, personal selling, sales promotion and
publicity used to attract potential customers. Companies use promotion to inform people
about their products and services and also to enhance their public image and reputation.

There are two methods of promotion:

Product promotion: promotion method businesses use to convince consumers to select

its products or services.

Institutional promotion: promotion method used to create a favorable image for a

business, help it advocate for change, or take a stand on trade or community issues.

Types of promotional activities:

Product and service promotion is the most common form of marketing. Promotional
activities can include:

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Advertising: Advertising is a form of non personal promotion. It is when companies pay
to promote ideas, goods, or services in a variety of media outlets. It can be found
everywhere. With advertising, a company engages in a one-way communication to the
prospect or customer.
Examples: magazines, newspapers, television, websites, city buses, etc.

Personal selling: Effective personal selling relies on good interpersonal and

communication skills, excellent product and service knowledge and the ability to sell
product benefits to prospective customers. Basically personal selling is one-to-one
communication between seller and prospective purchaser. It generates direct contact with
prospects and customers. It is one of the most expensive forms of promotion.
Examples: personal meetings, telemarketing, e-mails, and correspondence

Direct Marketing:

Direct marketing is a type of advertising directed to a targeted group of prospects and

customers rather than to a mass audience. Two forms of direct marketing are printed by
mail, or direct by e-mail. The goals of direct marketing are to generate sales or leads for
sales representatives to pursue. Direct marketing allows a business to engage in one-way
communication with is customers about product announcements, special promotions,
bulletins, customer inquiries, and order confirmations.

Examples: direct mail, e-mail

Sales Promotion:

Sales promotion basically represents all marketing activities other than personal selling,
advertising, and public relations. Sales promotions are used to stimulate purchasing and
sales and the objectives are to increase sales, inform potential customers about new
products, and create a positive business or corporate image.
Examples: coupons, product samples, point-of-purchase displays

Public Relations:

Public relations activities enable an organization to influence a target audience. Most of

the time, public relation campaigns try to create a favorable image for a company, its
products, or its policies. Companies give news releases to announce newsworthy
developments about a company's products or services, distribution channels, facilities,
operations, partners, revenues and earnings, employees, and events.

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Publicity is one tactic that public relations professionals use. This means bringing
newsworthy information to the public.

Examples: a campaign to encourage businesses to donate computers to schools, donating

to hospitals, donating to a cause

Online marketing

Online marketing is often cost-effective and is becoming increasingly important to

businesses. Developing a separate online marketing plan to evaluate your options and
help implement your strategy is vital in the modern marketplace.

Be aware that your online marketing may require different training to other forms of
marketing. Depending on the type of business you run and your own particular marketing
strategy, you and your staff may need to prioritize learning how to run or edit a website or
effectively use social media, before learning how to communicate over the phone, or
face-to-face.

Importance of Marketing:

Marketing plays the following important roles to;

 The producer
 The consumer
 And the general economy etc

(1) The manufacturers: The producers produces goods or services, and that product
investment are not to remain in that place of production, so the marketers buy out
the various struggles and challenges it takes to locating and bringing the product
closer to the consumers, and help influence the consumers through the various new
product adoption process such as the Awareness – interest – Evaluation – trial –
Adoption process, and help in developing effective strategies to promote the
product throughout it life cycles, while also helping the manufacturers and
investors get sufficient returns on investments. Marketing also plays the important
role of helping producers in new product identification and development process
through effective market research.

(2) The consumers: The consumers have needs and wants that they want to satisfy, so
the marketers buys these concept of 'consumer's needs/wants, then seek to

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 satisfying these needs/want by buying out the stress and time it takes to find and
locating manufacturers in the factory, the marketers are also influential in the
consumer‘s standard of living by introducing to the consumer's cognizant, product
that they deemed of essential. The marketers also help the consumers to breaking
the bulky natures of manufacturer's products through product assortments.

Exercise Questions:

(1) Define marketing. What are the different approaches to the study of marketing?
(2) What is a product? What is the main classification of product?
(3) What is market? Explain the classification of market.
(4) What is meant by marketing mix? Discuss marketing mix for physical goods
and service products.
(5) What is market research? What is the purpose of market research?
(6) Explain consumer behavior.
(7) Discuss the channels of distribution for consumer goods.
(8) What do you know about sales promotion? Discuss objectives and methods of
sales promotion.
(9) What are the advantages and disadvantages of advertising? What are its various
methods?
(10) What are the main channels of distribution?
(11) Discuss marketing communication and promotion.

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 HUMAN RESOURCE IN AN ORGANIZATION

Human Resource:

Human resource is that resource that resides in the knowledge, skills, and motivation of
people. Human resource is the least mobile of the four factors of production, and
(under right conditions) it improves with age and experience, which no other resource can
do. It is therefore regarded as the scarcest and most crucial productive resource
that creates the largest and longest lasting advantage for an organization.

Importance of Human Resource Management

An organization cannot build a good team of working professionals without good Human
Resources. The key functions of the Human Resources Management (HRM) team include
recruiting people, training them, performance appraisals, motivating employees as well as
workplace communication, workplace safety, and much more. The beneficial effects of
these functions are discussed here:

Recruitment and Training:

This is one of the major responsibilities of the human resource team. The HR managers
come up with plans and strategies for hiring the right kind of people. They design the
criteria which is best suited for a specific job description. Their other tasks related to
recruitment include formulating the obligations of an employee and the scope of tasks
assigned to him or her. Based on these two factors, the contract of an employee with the
company is prepared. When needed, they also provide training to the employees
according to the requirements of the organization. Thus, the staff members get the
opportunity to sharpen their existing skills or develop specialized skills which in turn, will
help them to take up some new roles.

Performance Appraisals
HRM encourages the people working in an organization, to work according to their
potential and gives them suggestions that can help them to bring about improvement in it.
The team communicates with the staff individually from time to time and provides all the
necessary information regarding their performances and also defines their respective
roles. This is beneficial as it enables them to form an outline of their anticipated goals in
much clearer terms and thereby, helps them execute the goals with best possible efforts.
Performance appraisals, when taken on a regular basis, motivate the employees.

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Maintaining Work Atmosphere

This is a vital aspect of HRM because the performance of an individual in an organization

is largely driven by the work atmosphere or work culture that prevails at the workplace. A
good working condition is one of the benefits that the employees can expect from an
efficient human resource team. A safe, clean and healthy environment can bring out the
best in an employee. A friendly atmosphere gives the staff members‘ job satisfaction as
well.

Managing Disputes

In an organization, there are several issues on which disputes may arise between the
employees and the employers. You can say conflicts are almost inevitable. In such a
scenario, it is the human resource department which acts as a consultant and mediator to
sort out those issues in an effective manner. They first hear the grievances of the
employees. Then they come up with suitable solutions to sort them out. In other words,
they take timely action and prevent things from going out of hands.

Developing Public Relations

The responsibility of establishing good public relations lies with the HRM to a great
extent. They organize business meetings, seminars and various official gatherings on
behalf of the company in order to build up relationships with other business sectors.
Sometimes, the HR department plays an active role in preparing the business and
marketing plans for the organization too.

Any organization, without a proper setup for HRM is bound to suffer from serious
problems while managing its regular activities. For this reason, today, companies must
put a lot of effort and energy into setting up a strong and effective HRM.

Core Functions of Human Resource Management:

1. Recruitment:

Recruitment is the process of attracting, screening, and selecting employees for an

organization. The different stages of recruitment are: job analysis, sourcing, screening and
selection, and on boarding.

The Four Stages

a) Job analysis involves determining the different aspects of a job, such as

through job description and job specification. Job description describes the tasks

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 that are required for the job. Job specification describes the requirements that a
person needs to do that job.

b) Sourcing means using several strategies to attract or identify candidates. Sourcing

can be done by internal or external advertisement. Advertisement can be done by
local or national newspapers, specialist recruitment media, professional
publications, window advertisements, job centers, or through the Internet.

c) Screening and selection is the process of assessing the employees who apply for
the job. The assessment is conducted to understand relevant skills, knowledge,
aptitude, qualifications, and educational or job related experience of employees.
Some ways of screening are screening resumes and job applications, interviewing,
and job related or behavioral testing.

d) After screen and selection, the best candidate is selected. On boarding is the
process of helping new employees become productive members of an
organization. A well-planned introduction helps new employees become fully
operational quickly and is often integrated with the company and environment.

2. Selection:

Selection is the process of selecting a qualified person who can successfully do a job and
deliver valuable contributions to the organization. The term can be applied to many
aspects of the process, such as recruitment, selection, hiring, and acculturation. However,
it most commonly refers to the selection of workers. A selection system should depend
on job analysis. This ensures that the selection criteria are job related.

3. Orientation:

Employee orientation, also commonly referred to as on boarding or organizational

socialization, is the process by which an employee acquires the necessary skills,
knowledge, behaviors, and contacts to effectively transition into a new organization (or
role within the organization). Orientation is a reasonably broad process, generally carried
out by the human resource department, that may incorporate lectures, videos, meetings,
computer-based programs, team-building exercises, and mentoring. The underlying goal
of incorporating these varying on boarding tactics is to provide the employee enough
information to adjust, ultimately resulting in satisfaction and effectiveness as a new
employee.

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Organization Socialization Model

A good way in which to envision this process is through understanding the organization
socialization model. This chart highlights the process of moving the employee through
the adjustment stage to the desired outcome:

 New Employee Characteristics - Though this segment of the model overlaps with
other human resource initiatives (such as recruitment and talent management), the
characteristics of an employee are central to the strategies best employed as they
move through the orientation process. Characteristics that are particularly useful in
this process are extroversion, curiosity, experience, pro-activeness, and openness.

 New Employee Tactics - The goal for the employee is to acquire knowledge and
build relationships. These relationships in particular are central to understanding
company culture alongside acquiring resources to help expedite the on boarding
process.

 Organizational Tactics- The organization should similarly seek to emphasize

relationship building and the communication of knowledge, particularly
organizational knowledge that will be useful for the employee when navigating the
company. The company should also employee many of the resources mentioned
above (videos, lectures, team-building exercises) to complement the process.

 Adjustment - Through combining the above three inputs, the employee should
move through the adjustment phase as they acclimate to the new professional
environment. This should focus primarily on knowledge of the company culture
and co-workers, along with increased clarity as to how they fit within the
organizational framework (i.e. their role).

 Outcomes - The goal of effectively orienting the employee for success is twofold:
minimize turnover while maximizing satisfaction. The cost of bring new
employees into the mix is substantial, as a result high turnover rates are a
significant threat to most companies. Ensuring that the on boarding process is
effective significantly reduces this risk. Additionally, achieving high levels of
employee satisfaction is an enormous competitive advantage, as satisfied
employees are motivated and efficient.

4. Development:

Employee development helps organizations succeed. Human resource development

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consists of training, organization, and career development efforts to improve individual,
group, and organizational effectiveness.

 Training

Training is one of the most important ways to develop employees. Training is

organizational activity intended to improve the performance of individuals and groups in
organizational settings. Training and development has three important steps: training,
education, and development.· Training: This activity focuses on an individual's current
job and is evaluated based on that current job.· Education: This activity focuses on jobs
an individual might hold in the future and is measured based on those potential jobs.·
Development: This activity focuses on potential future activities of the organization and is
therefore extremely challenging to evaluate.

 Training and Development

There are several categories of stakeholders that are helpful in understanding training and
development. The sponsors of training and development are senior managers. The clients
of training and development are business planners. Line managers are responsible for the
coaching, resources, and performance. The participants are the people who actually go
through the training and development process. The facilitators are Human Resource
Management staff. The providers are specialists in the field. Each of these stakeholder
groups has their own agenda and motivations, which can cause conflict with the agendas
and motivations of other stakeholder groups.

 Talent Development

Talent development refers to an organization's ability to align strategic training and career
opportunities for employees. Talent development, part of human resource development, is
the process of changing an organization, its employees, its stakeholders, and groups of
people within it, using planned and unplanned learning, in order to achieve and maintain
a competitive advantage for the organization.

5. Performance Evaluation

Performance evaluation or performance appraisal is the process of assessing an

employee‘s job performance and productivity. The assessment is conducted based on
some pre-established criteria that align with the goals of the organization. Some other
aspects are also considered to assess the performance of the employee, for example,
organizational citizenship behavior, accomplishments, potential for future improvement,

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strengths and weaknesses, etc. The management of performance plays a vital role to the
success or failure of the organization. An ineffective performance evaluation system
creates high turnover and reduces employee productivity. This is why performance
evaluation is very important for every organization.

6. Career path management

Career path management refers to the structured planning and the active management
choice of a employee‘s professional career. The results of successful career planning are
personal fulfillment, a work and life balance, goal achievement, and financial security. A
career refers to the changes or modifications in employment through advancement during
the foreseeable future. There are many definitions by management scholars of the stages
in the managerial process. The following classification system with minor variations is
widely used:

 Development of overall goals and objectives.

 Development of a strategy.

 Development of the specific means (policies, rules, procedures, and activities)

to implement the strategy.

 Systematic evaluation of the progress toward achievement of the selected goals

and objectives to modify the strategy, if necessary.

Job Analysis:

In simple terms, job analysis may be understood as a process of collecting information

about a job. The process of job analysis results in two sets of data:

 Job Description and

 Job Specification.

These data are recorded separately for references.

A few definitions on job analysis are quoted below

 Job analysis is the process of studying and collecting information relating to the
operations and responsibilities of a specific job. The immediate products of this
analysis are job descriptions and job specifications.

 Job analysis is a systematic exploration of the activities within a job. It is a basic

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 technical procedure, one that is used to define the duties, responsibilities and
accountabilities of a job.

 A job is a collection of tasks that can be performed by a single employee to

contribute to the production of some products or service provided by the
organization. Each job has certain ability recruitments (as well as certain rewards)
associated with it. Job analysis is the process used to identity these requirements.

Specifically, job analysis involves the following steps:

(1) Collecting and recording job information

(2) Checking the job information for accuracy.
(3) Writing job description based on the information
(4) Using the information to determine the skills, abilities and knowledge that are
required on the job.
(5) Updating the information from time to time.

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In summary Job Analysis is a process of obtaining all pertaining job facts is classified
into two i.e. Job Description and Job specification

Job Description:

Job Description is an important document, which is basically descriptive in nature and

contains a statement of job Analysis. It provides both organizational information‘s (like
location in structure, authority etc) and functional information (what the work is).

It gives information about the scope of job activities, major responsibilities and
positioning of the job in the organization. This information gives the worker, analyst, and
supervisor with a clear idea of what the worker must do to meet the demand of the job.

Earnest Dale has developed the following hints for writing a good job description: -

 The job description should indicate the scope and nature of the work including all-
important relationships.
 The job description should be clear regarding the work of the position, duties etc.

More specific words should be selected to show:-

a) The kind of work

b) The degree of complexity

c) The degree of skill required

d) The extent to which problems are standardized

e) The extent of worker‘s responsibility for each phase of the work

Contents of Job Description:

Following are the main content of a job description it usually consist of following details
or data.

• Job title / Job identification / organization position

• Location

• Job summary

• Duties

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• Machines, tools and equipment

• Materials and forms used

• Supervision given or received

• Working conditions

• Hazards

Job identification or Organization Position:

This includes the job title, alternative title, department, division and plant and code
number of the job. The job title identifies and designates the job properly. The
department, division etc., indicate the name of the department where it is situated and the
location give the name of the place.

Job Summary:

This serves two important purposes. First is it gives additional identification information
when a job title is not adequate; and secondly it gives a summary about that particular
job.

Job duties and responsibilities:

This gives a total listing of duties together with some indication of the frequency of
occurrence or percentage of time devoted to each major duty.

Relation to other jobs:

This gives the particular person to locate job in the organization by indicating the job
immediately below or above in the job hierarchy.

Supervision:

This will give an idea the number of person to be supervised along with their job titles
and the extent of supervision.

Machine:

These will also give information about the tool, machines and equipment to be used.

Working Conditions:

It gives us information about the environment in which a job holder must work.

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Hazards:

It gives us the nature of risks of life and limb, their possibilities of occurrence etc.

Job Specification:

It tells us, what kind of person to recruit and also under what qualities that person should
be tested. Job Specification translates the job description into terms of the human
qualifications, which are required for performance of a job. They are intended to serve as
a guide in hiring and job evaluation. Job specification is a written statement of
qualifications, traits, physical and mental characteristics that an individual must possess
to perform the job duties and discharge responsibilities effectively. In this, job
specification usually developed with the co-operation of personnel department and
various supervisors in the whole organization.

Job Specification Information:

The first step in the program of job specification is to prepare a list of all jobs in the
company and where they are located. The second step is to secure and write up
information about each of the jobs in a company. Usually, this information about each of
the jobs in a company. Usually this information includes:

1. Physical specifications: Physical specifications include the physical qualifications or

physical capacities that vary from job to job. Physical qualifications or capacities

2. Include physical features like height, weight, chest, vision, hearing, ability to lift
weight, ability to carry weight, health, age, capacity to use or operate machines, tools,
equipment etc.

3. Mental specifications: Mental specifications include ability to perform, arithmetical

calculations, to interpret data, information blue prints, to read electrical circuits, ability to
plan, reading abilities, scientific abilities, judgment, ability to concentrate, ability to
handle variable factors, general intelligence, memory etc.

4. Emotional and social specifications: Emotional and social specifications are more
important for the post of managers, supervisors, foremen etc. These include emotional
stability, flexibility, social adaptability in human relationships, personal appearance
including dress, posture etc.

5. Behavioral Specifications: Behavioral specifications play an important role in selecting

the candidates for higher-level jobs in the organizational hierarchy. This specification

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seeks to describe the acts of managers rather than the traits that cause the acts. These
specifications include judgments, research, creativity, teaching ability, maturity trial of
conciliation, self-reliance, dominance etc.

Employee Specification: -

Job specifications information must be converted into employee specification

information in order to know what kind of person is needed to fill a job. Employee
specification is a like a brand name which spells that the candidate with a particular
employee specification generally possess the qualities specified under job specification.
Employee specification is useful to find out the suitability of particular class of candidates
to a particular job. Thus, employee specification is useful to find out prospective
employees (target group) whereas job specification is useful to select the right candidate
for a job.

Uses of job specification: -

The uses of this job specification are;

 Physical characteristics, which include health, strength, age range, body size,
weight, vision, poise etc.
 Psychological characteristics or special aptitudes:- This include such qualities as
manual dexterity, mechanical aptitude, ingenuity, judgment etc.
 Personal characteristics or fruits of temperament – such as personal appearance,
good and pleasing manners, emotional stability, aggressiveness or submissiveness.
 Responsibilities: - Which include supervision of others, responsibility for
production, process and equipment, responsibility for the safety of others and
responsibility for preventing monetary loss.
 Other features of a demographic nature: Which are age, sex, education, and
experience and language ability.
 Job specifications are mostly based on the educated gneisses of supervisors and
personnel managers. They give their opinion as to who do they think should be
considered for a job in terms of education, intelligence, training etc.

Job specifications may also be based on statistical analysis. This is done to determine the
relationship between

 Some characteristics or traits.

 Some performance as rated by the supervisor

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Exercise Questions:

1. Define human resource. Explain the importance of human resource in an

organization.
2. State the difference between job analysis, job specification, and job description.
3. What are the core functions of human resource management?
4. Define job description. What are its contents?
5. Define job specification. What are its contents and uses?

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 BUSINESS CYCLE AND PRODUCT LIFE CYCLE
Business Cycle:

Business Cycle refers to the alternations or the fluctuations in the economic activities.
Broadly these variations are of two types- expansion and contraction.

However, a typical classification divides it into 4 phases which are-

1. Growth (or Expansion)

2. Peak /Boom (Prosperity)

3. Contraction

4. Recession

Expansion Phase: In this phase, the economy is usually in a very strong position which
is signified by full employment levels and huge demand for consumer goods. However,
due to high demands, there comes a time when demands exceeds supply and hence prices
start rising which in turn gives rise to inflation. So, the end of this phase is marked by the
birth of rising prices and inflation.

Prosperity Phase: Here, the inflation further gets fire as now people start demanding
higher wages due to increased prices which again in turn gives rise to inflation. Thus, this
stage is characterized by an upward spiraling effect. This phase is shown as the top of the
curve in the graph above.

Contraction Phase: At this stage, the prices are too high and therefore the spending
starts getting gradually decreased as now people cannot afford these prices. As the
spending decreases, the demand goes down and thus the firms now have an excess of
manpower which is not required,. So it leads to laying off of workers and cutting
expenses. This obviously gives rise to a negative or a bearish sentiment in the market.

Recession Phase: As demand decreases, the prices also decrease and this in turn leads to
a fall in the overall GDP of the economy combined with rise of unemployment. All this
signifies a recessionary phase of the economy.

These are thus the 4 wide phases of the business economy. And after recession, the cycle
repeats again with the expansion or the recovery phase where low prices eventually
increase demand and positive sentiment flows in again and demand starts rising with an
increased need of supply and hence the process continues.

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 Product Life Cycle:

To explain product life cycle first we should understand what is product.

Product:

Definition:

A product is the item offered for sale. A product can be a service or an item. It can be
physical or in virtual or cyber form. Every product is made at a cost and each is sold at a
price. The price that can be charged depends on the market, the quality, the marketing and
the segment that is targeted. Each product has a useful life after which it needs
replacement, and a life cycle after which it has to be re-invented.

Types of Products:

Consumer Products:

A consumer product is any tangible product for sale that is used by a person or household
for non-business purposes. A consumer product is generally any tangible product for sale
that is used for personal, family, household or non-business purposes. To determine
whether an item is a consumer product requires a factual finding, on a case-by-case basis.
This will vary from one jurisdiction to another.

Shopping Products

Shopping goods are those goods that consumers will want to be able to compare and
contrast with others before they make a purchasing decision. Convenience goods are
those that require little effort on the part of the buyer, while shopping goods require
research and comparison. Since shopping goods are highly researched, and product
information is evaluated by buyers, a retailer's ability to differentiate themselves becomes
important. With shopping goods, retailers attempt to provide strong promotions to sway
the buyer. They also expect strong support from manufacturers.

Specialty Products

Specialty goods are those considered unique by the buyer, who will go to great lengths to
get them. Price is almost never a determining factor in choosing between specialty
goods. Consumers instead choose specialty goods primarily based on quality, style,
scarcity, or personal preference. Sellers of specialty goods need not be conveniently
located, because buyers will seek them out, even if it involves considerable effort.
Specialty goods include: men's suits, women's bags, and expensive watches.

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Unsought Products:

An unsought good is one that is not actively sought out by a consumer, but is instead
purchased due to fear, precaution, need, etc. As opposed to convenience, shopping, and
luxury goods, consumers do not actively seek out unsought goods. Marketers must
actively and aggressively market such goods in order to arouse interest in them. There are
many examples of unsought goods becoming sought goods, either due to increased
awareness of their positive aspects by consumers, or by marketers who have successfully
changed the consumer psyche.

Examples:

Fire extinguishers and encyclopedias are unsought goods. Life insurance is an example of
a good that is often seen as a sought good because awareness of its benefits has grown.

Unsought Goods are goods that the consumer does not know about or does not normally
think of buying. Purchases of unsought goods may arise due to danger or the fear of
danger.

Business Products

Business products are sold to other businesses, as opposed to convenience, shopping, and
specialty products, which are sold to consumers. Business products represent a very
important product category, and in the case of some manufacturers, they are the only
product sold. These are goods that are sold to other businesses, and used to produce other
goods. Industrial products can either be categorized from the perspective of the producer
and how they shop for the product, or from the perspective of the manufacturer, how they
are produced and how much they cost. Business products are marketed differently than
convenience, shopping and specialty products, due to their different nature as well as the
different nature of the prospective buyers. A useful way to divide business products is
into farm products and manufactured products, as they are marketed differently. There are
different types of manufactured products, such as semi-manufactured products, parts, raw
materials, and machinery.

New Product Development

Before a product can embark on its journey through the four product life cycle stages, it
has to be developed. New product development is typically a huge part of any
manufacturing process. Most organizations realize that all products have a limited
lifespan, and so new products need to be developed to replace them and keep the

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company in business. Just as the product life cycle has various stages, new product
development is also broken down into a number of specific phases.

Developing a new product involves a number of stages which typically center around the
following key areas:

The Idea: Every product has to start with an idea. In some cases, this might be fairly
simple, basing the new product on something similar that already exists. In other cases, it
may be something revolutionary and unique, which may mean the idea generation part of
the process is much more involved. In fact, many of the leading manufacturers will have
whole departments that focus solely on the task of coming up with ‗the next big thing‘.

Research: An organization may have plenty of ideas for a new product, but once it has
selected the best of them, the next step is to start researching the market. This enables
them to see if there‘s likely to be a demand for this type of product, and also what specific
features need to be developed in order to best meet the needs of this potential market.

Development: The next stage is the development of the product. Prototypes may be
modified through various design and manufacturing stages in order to come up with a
finished product that consumers will want to buy.

Testing: Before most products are launched and the manufacturer spends a large amount
of money on production and promotion, most companies will test their new product with
a small group of actual consumers. This helps to make sure that they have a viable
product that will be profitable, and that there are no changes that need to be made before
it‘s launched.

Analysis: Looking at the feedback from consumer testing enables the manufacturer to
make any necessary changes to the product, and also decide how they are going to launch
it to the market. With information from real consumers, they will be able to make a
number of strategic decisions that will be crucial to the product‘s success, including what

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price to sell at and how the product will be marketed.

Introduction: Finally, when a product has made it all the way through the new product
development stage, the only thing left to do is introduce it to the market. Once this is
done, good product life cycle management will ensure the manufacturer makes the most
of all their effort and investment.

Thousands of new products go on sale every year, and manufacturers invest a lot of time,
effort and money in trying to make sure that any new products they launch will be a
success. Creating a profitable product isn‘t just about getting each of the stages of new
product development right, it‘s also about managing the product once it‘s been launched
and then throughout its lifetime.

Product Life Cycle:

The product life cycle is an important concept in marketing. It describes the stages a
product goes through from when it was first thought of until it finally is removed from the
market. Not all products reach this final stage. Some continue to grow and others rise and
fall.

The main stages of the product life cycle are:

 Introduction – researching, developing and then launching the product

 Growth – when sales are increasing at their fastest rate

 Maturity – sales are near their highest, but the rate of growth is slowing down,
e.g. new competitors in market or saturation

 Decline – final stage of the cycle, when sales begin to fall

This can be illustrated by looking at the sales during the time period of the product.

A branded good can enjoy continuous growth, such as Microsoft, because the product is
being constantly improved and advertised, and maintains a strong brand loyalty.

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Stages of Product Life Cycle:

The product life cycle has 4 very clearly defined stages, each with its own characteristics
that mean different things for business that are trying to manage the life cycle of their
particular products.

Introduction Stage:

This stage of the cycle could be the most expensive for a company launching a new
product. The size of the market for the product is small, which means sales are low,
although they will be increasing. On the other hand, the cost of things like research and
development, consumer testing, and the marketing needed to launch the product can be
very high, especially if it‘s a competitive sector.

Growth Stage:

The growth stage is typically characterized by a strong growth in sales and profits, and
because the company can start to benefit from economies of scale in production, the profit
margins, as well as the overall amount of profit, will increase. This makes it possible for
businesses to invest more money in the promotional activity to maximize the potential of
this growth stage.

Maturity Stage:

During the maturity stage, the product is established and the aim for the manufacturer is

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now to maintain the market share they have built up. This is probably the most
competitive time for most products and businesses need to invest wisely in any marketing
they undertake. They also need to consider any product modifications or improvements to
the production process which might give them a competitive advantage.

Decline Stage:

Eventually, the market for a product will start to shrink, and this is what‘s known as the
decline stage. This shrinkage could be due to the market becoming saturated (i.e. all the
customers who will buy the product have already purchased it), or because the consumers
are switching to a different type of product. While this decline may be inevitable, it may
still be possible for companies to make some profit by switching to less-expensive
production methods and cheaper markets.

Extension strategies

These extend the life of the product before it goes into decline. Again businesses use
marketing techniques to improve sales. Examples of the techniques are:

Advertising – try to gain a new audience or remind the current audience

Price reduction – more attractive to customers

Adding value – add new features to the current product, e.g. video messaging on mobile
phones

Explore new markets – try selling abroad

New packaging – brightening up old packaging, or subtle changes such as putting crisps
in foil packets or Seventies music compilation

Exercise Questions:

1. Define business life cycle. What are the stages of business life cycle?
2. What is a product? What are its different types?
3. Discuss new product development process.
4. Define product life cycle. Explain the stages of product life cycle.
5. Discuss the extension strategies of product life cycle.

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 INFORMATION TECHNOLOGY AND E-COMMERECE
IT (information technology) is a term that encompasses all forms of technology used to
create, store, exchange, and use information in its various forms e.g. business data, voice
conversations, still images, motion pictures, multimedia presentations, and many other
forms. It refers to anything related to computing technology, such as networking,
hardware, software, the Internet, or the people that work with these technologies. Many
companies now have IT departments for managing the computers, networks, and other
technical areas of their businesses. Since we live in the "information age," information
technology has become a part of our everyday lives.

Information technology (IT) has become a vital and integral part of every business plan.
From multi-national corporations who maintain mainframe systems and databases to
small businesses that own a single computer, IT plays a role. The reasons for the
omnipresent use of computer technology in business can best be determined by looking at
how it is being used across the business world.

Communication

For many companies, email is the principal means of communication between employees,
suppliers and customers. Email was one of the early drivers of the Internet, providing a
simple and inexpensive means to communicate. Over the years, a number of other
communications tools have also evolved, allowing staff to communicate using live chat
systems, online meeting tools and video-conferencing systems. Voice over internet
protocol (VOIP) telephones and smart-phones offer even more high-tech ways for
employees to communicate.

Inventory Management

When it comes to managing inventory, organizations need to maintain enough stock to

meet demand without investing in more than they require. Inventory management systems
track the quantity of each item a company maintains, triggering an order of additional
stock when the quantities fall below a pre-determined amount. These systems are best
used when the inventory management system is connected to the point-of-sale (POS)
system. The POS system ensures that each time an item is sold, one of that item is
removed from the inventory count, creating a closed information loop between all
departments.

Data Management

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The days of large file rooms, rows of filing cabinets and the mailing of documents is
fading fast. Today, most companies store digital versions of documents on servers and
storage devices. These documents become instantly available to everyone in the
company, regardless of their geographical location. Companies are able to store and
maintain a tremendous amount of historical data economically, and employees benefit
from immediate access to the documents they need.

Management Information Systems

Storing data is only a benefit if that data can be used effectively. Progressive companies
use that data as part of their strategic planning process as well as the tactical execution of
that strategy. Management Information Systems (MIS) enable companies to track sales
data, expenses and productivity levels. The information can be used to track profitability
over time, maximize return on investment and identify areas of improvement. Managers
can track sales on a daily basis, allowing them to immediately react to lower-than-
expected numbers by boosting employee productivity or reducing the cost of an item.

Customer Relationship Management

Companies are using IT to improve the way they design and manage customer
relationships. Customer Relationship Management (CRM) systems capture every
interaction a company has with a customer, so that a more enriching experience is
possible. If a customer calls a call center with an issue, the customer support
representative will be able to see what the customer has purchased, view shipping
information, call up the training manual for that item and effectively respond to the issue.
The entire interaction is stored in the CRM system, ready to be recalled if the customer
calls again. The customer has a better, more focused experience and the company benefits
from improved productivity.

Role of IT and Existence in Business Environment

The role of information technology systems in a business environment can be classified

into four broad categories. These categories include function performance,
communication through networking, management and enterprise roles.

Information technology provides commercial and industrial systems for businesses. These
systems enable businesses to function effectively and efficiently.

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Function IT Systems

Function IT systems are applications that allow individuals to function effectively in the
workplace. Examples of common IT systems that enhance workplace functions are word
processor applications, spreadsheet applications, statistical analysis software and
computer aided design (CAD) programs. Employees can work and perform their task
individually or collectively using these specialized software technologies.

Network IT Systems

Network IT systems allow effective communication within and outside an organisation.

Examples range from simple e-mail (electronic mail) to blogs, wiki sites, IM (instant
messaging) and electronic conferencing systems. These types of technologies promote
interaction and collaboration among working groups and also facilitate quick information
flow at all levels.

Management IT systems

Management IT systems (MITS) can be defined as planned applications that are designed
to process data and transform the processed data into useful information for management
decision making.

It should be noted that Management Information systems (MIS) are subsets of Enterprise
IT systems (this is explained later on in this article). However, because of the vital role
MIS play in a business environment, it is considered here as a major information
technology for businesses.

In a typical scenario, management operates at different levels and so it is possible to apply

management information systems at these varied levels.

Basic examples of management information systems are human resources management

systems, financial management information systems and marketing management
information systems.

Enterprise IT Systems

Enterprise IT systems are technologies designed to integrate and manage entire business

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processes for large organizations. Typically, enterprise application software is hosted on
large servers over a computer network. Transmission of information can either be internal
or external.

Examples of enterprise information systems may be accounting software, health care

specific software or Electronic Data Interchange (EDI). Another good example of
software application within this category is Customer relationship management software
(CRM).

The role of Information technology in business is wide and varied. It can be said that IT
provides a huge range of capabilities that enhance management performance at all levels.
It is therefore important to understand the four major categories of IT systems and their
functions and roles in a business environment.

E-Commerce and E-Business

Introduction:

E-commerce is buying and selling using an electronic medium. It is accepting credit and
payments over the net, doing banking transactions using the Internet, selling commodities
or information using the World Wide Web and so on.

E-Business in addition to encompassing E-commerce includes both front and back-office

applications that form the engine for modern E-commerce. E-business is not just about E-
commerce transactions; it's about re-defining old business models, with the aid of
technology to maximize customer value. E-Business is the overall strategy and E-
commerce is an extremely important facet of E-Business.

Thus e-business involves not merely setting up the company website and being able to
accept credit card payments or being able to sell products or services on time. It involves
fundamental re-structuring and streamlining of the business using technology by
implementing enterprise resource planning (ERP) systems, supply chain management,
customer relationship management, data ware housing, data marts, data mining, etc.

E-Commerce Definition

E-commerce is ―any transaction completed over a computer-mediated network that

involves the transfer of ownership or rights to use goods and services,‖ defines the U.S.
Census Bureau. Transactions aren't required to have a price and include both sales and
items like free downloads. E-commerce includes transactions made on the internet,

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Intranet, Extranet, World Wide Web, by email and even by fax.

E-Business Definition

E-business is broader than e-commerce; including the transaction based e-commerce

businesses and those who run traditionally but cater to online activities as well. An e-
business can run any portion of its internal processes online, including inventory
management, risk management, finance, human resources. For a business to be e-
commerce and e-business, it must both sell products online and handle other company
activities or additional sales offline.

Different types of e-commerce/ IT Domains

The major different types of e-commerce are

Business-to-business (B2B)

Business to-consumer (B2C)

Consumer-to-consumer (C2C)

Mobile commerce (m-commerce)

Business-to-government (B2G)

Business to Business (B2B) e-commerce

B2B e-commerce is simply defined as e-commerce between companies. This is the type
of e-commerce that deals with relationships between and among businesses. About 80%
of e-commerce is of this type, and most experts predict that B2B ecommerce will
continue to grow faster than the B2C segment.

B2C E-Commerce

Business-to-consumer e-commerce, or commerce between companies and consumers,

involves customers gathering information; purchasing physical goods (i.e., tangibles such
as books or consumer products) or information goods (or goods of electronic material or
digitized content, such as software, or e-books); and, for information goods, receiving
products over an electronic network.

B2C e-commerce reduces transactions costs (particularly search costs) by increasing

consumer access to information and allowing consumers to find the most competitive

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price for a product or service. B2C e-commerce also reduces market entry barriers since
the cost of putting up and maintaining a Web site is much cheaper than installing a
―brick-and-mortar‖ structure for a firm.

Consumer-to-consumer e-commerce

This type of e-commerce is characterized by the growth of electronic marketplaces and

online auctions, particularly in vertical industries where firms/businesses can bid for what
they want from multiple suppliers. It perhaps has the greatest potential for developing
new markets. Customer to customer (C2C) exchanges involves transactions between and
among consumers. Examples of such exchanges include auction websites, classified ads,
games, jobs, web based communications and personal services. C2C is also referred as
peer to peer (P2P).

Consumer-to-business (C2B)

These transactions involve reverse auctions, which empower the consumer to drive
transactions. A concrete example of this when competing airlines give a traveler best
travel and ticket offers in response to the traveler‘s post that she wants to fly from New
York to San Francisco.

M-Commerce

M-commerce (mobile commerce) is the buying and selling of goods and services through
wireless technology i.e. handheld devices such as cellular telephones and personal digital
assistants (PDAs).

Business to Government e-commerce

Business-to-government e-commerce or B2G is generally defined public sector. It refers

to the use of the Internet for public procurement, licensing procedures, and other
government-related operations. This kind of e pilot/leading role in establishing e-
commerce; and second, it is assumed that the public sector has the greatest need for
making its procurement system more effective.

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Exercise Questions:

1. What do you know about information technology? Discuss the role of IT in

business.
2. Define e-commerce. What is its scope and role?
3. Define e-business. Explain its scope and role.
4. Discuss the different type of IT domains.
5. What are the different types of e-commerce?

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