5 Mark Questions
Characteristics of Business Actitivies
The distinguishing features or essential characteristics of business activities are:
1. Economic activity: Business is an economic activity of production and distribution of goods and
services. It provides employment opportunities in different sectors like banking, insurance,
transport, industries, trade etc. it is an economic activity corned with creation of utilities for the
satisfaction of human wants.
2. Buying and Selling: The basic activity of any business is trading. The business involves buying of
raw material, plants and machinery, stationary, property etc. On the other hand, it sells the
finished products to the consumers, wholesaler, retailer etc. Business makes available various
goods and services to the different sections of the society.
3. Continuous process: Business is not a single time activity. It is a continuous process of
production and distribution of goods and services. A single transaction of trade cannot be
termed as a business. A business should be conducted regularly in order to grow and gain
regular returns.
4. Profit Motive: Profit is an indicator of success and failure of business. It is the difference
between income and expenses of the business. The primary goal of a business is us ually to
obtain the highest possible level of profit through the production and sale of goods and services.
It is a return on investment. Profit acts as a driving force behind all business activities.
5. Risk and Uncertainties: Risk is defined as the effect of uncertainty arising on the objectives of
the business. Risk is associated with every business. Business is exposed to two types of risk,
Insurable and Non-insurable. Insurable risk is predictable.
Classification of Business Activities using a Chart
Economic Activities of a Busienss
Economic activities are related to production, distribution, exchange and consumption of goods and
services. The primary aim of the economic activity is the production of goods and services with a view to
make them available to consumer
“Human activities which are performed in exchange for money or money's worth are called economic
activities."
"Human activities which are not performed for money or money's worth are called non -economic
activities."
Here, there is no monetary consideration in exchange for such activities.
E.g. A person goes to temple, a boy helps his friend in studies, etc.
1. Profession: Profession is an occupation carried on by professional people like Doctors, Lawyers,
Engineers, etc. They provide specialized services in return for fees. To become a professional, a man
requires specialized knowledge and professional qualification. For e.g. Doctor needs specialized
knowledge in medicine, a lawyer needs a degree in law, etc.
2. Employment: Employment is a type of occupation under which one person provides his services,
physical or mental to someone else in return for which he gets salary or wage. The person who employs
is called employer and the person who is employed is called employee or worker.
3. Business: Business is an economic activity concerned with production and distribution of goods and
services with the aim to earn profit. It includes all those activities which are directly or indirectly
concerned with production, purchase and sale of goods and services. So the production, marketing,
advertising, warehousing, insurance, banking, etc. are all business activities.
Economic Objectives
1. Profit earning: Profit is the lifeblood of business, without which no business can survive in a
competitive market. In fact profit making is the primary objective for which a business unit is
brought into existence. Profits must be earned to ensure the survival of business, its growth and
expansion over time.
2. Creation of customers: A business unit cannot survive unless there are customers to buy the
products and services. Again a businessman can earn profits only when he/she provides quality
goods and services at a reasonable price.
3. Regular innovations: Innovation means changes, which bring about improvement in products,
process of production and distribution of goods. Business units, through innovation, are able to
reduce cost by adopting better methods of production and also increase their sales by attracting
more customers because of improved products. Reduction in cost and increase in sales gives
more profit to the businessman.
4. Best possible use of resources: As you know, to run any business you must have sufficient
capital or funds. The amount of capital may be used to buy machinery, raw materials, employ
men and have cash to meet day-to-day expenses. Thus, business activities require various
resources like men, materials, money and machines. The availability of these resources is usually
limited.
Social Objectives of a Business
i.
ii.
iii.
Production and supply of quality goods and services: Since the business utilizes the
various resources of the society, the society expects to get quality goods and services
from the business. The objective of business should be to produce better quality goods
and supply them at the right time and at a right price. It is not desirable on the part of
the businessman to supply adulterated or inferior goods which cause injuries to the
customers
Adoption of fair trade practices: In every society, activities such as hoarding, black marketing and over-charging are considered undesirable. Besides, misleading
advertisements often give a false impression about the quality of products. Such
advertisements deceive the customers and the businessmen use them for the sake of
making large profits
Contribution to the general welfare of the society: Business units should work for the
general welfare and upliftment of the society. This is possible through running of
schools and colleges for better education, opening of vocational training centres to trai n
the people to earn their livelihood, establishing hospitals for medical facilities and
providing recreational facilities for the general public like parks, sports complexes etc.
Role of Profit in a Business
Profit is a very important concept for any business – particularly a start-up. Profit is the financial return
or reward that firms or entrepreneurs aim to achieve to reflect the risk that they take.
Given that most firms and entrepreneurs invest in order to make a return, the profit earned by a
business can be used to measure the success of that investment.
Profit is also an important signal to other providers of finance to a business. Banks, suppliers and other
lenders are more likely to provide finance to a business that can demonstrate that it make s a profit (or is
very likely to do so in the near future) and that it can pay debts as they fall due.
Profit is also an important source of finance for a business. Profits earned which are kept in the business
(i.e. not distributed to the owners via dividends or other payments) are known as retained profits.
Retained profits are an important source of finance for any business, but especially start -up or small
businesses. The moment a product is sold for more than it cost to produce, then a profit is earned
which can be reinvested.
Profit can be measured and calculated. So here is the formula:
Profit = total sales less total costs
Types of Industries
There are various types of industries. These are mentioned as follows :I.
II.
III.
IV.
V.
VI.
Primary Industry: Primary industry is concerned with production of goods with the help of
nature. It is a nature-oriented industry, which requires very little human effort. E.g. Agriculture,
farming, forestry, fishing, horticulture, etc.
Genetic Industry: Genetic industries are engaged in re-production and multiplication of certain
spices of plants and animals with the object of sale. The main aim is to earn profit from such
sale. E.g. plant nurseries, cattle rearing, poultry, cattle breeding, etc.
Extractive Industry: Extractive industry is concerned with extraction or drawing out goods from
the soil, air or water. Generally products of extractive industries come in raw form and they are
used by manufacturing and construction industries for producing finished products. E.g. mining
industry, coal mineral, oil industry, iron ore, extraction of timber and rubber from forests, etc.
Manufacturing Industry: Manufacturing industries are engaged in transforming raw material
into finished product with the help of machines and manpower. The fi nished goods can be
either consumer goods or producer goods. E.g. textiles, chemicals, sugar industry, paper
industry, etc.
Construction Industry: Construction industries take up the work of construction of buildings,
bridges, roads, dams, canals, etc. This industry is different from all other types of industry
because in case of other industries goods can be produced at one place and sold at another
place. But goods produced and sold by constructive industry are erected at one place.
Service Industry: In modern times service sector plays an important role in the development of
the nation and therefore it is named as service industry. The main industries, which fall under
this category, include hotel industry, tourism industry, entertainment industry, etc.
Manufacturing Industry and its Types
Manufacturing: Engaged in conversion of raw materials into semi -finished or finished products. E.g.:
Paper Industry, steel industry. Manufacturing Industry is classified into:
i.
ii.
iii.
iv.
Analytical: Different products are produced using same raw materials. E.g.: Crude Oil refining
Synthetic: Various raw materials are used to make one new product. E.g.: Cement is made by
mixing limestone, gypsum, coke etc
Processing: Raw materials go through many stages of processing to get final product. E.g.: Sugar,
paper manufacturing
Assembly: Various components already produced are assembled to get a new product. E.g.:
Automobile Industry, PC manufacturing
Trade and its Types
Trade refers to buying and selling of goods and services for money or money's worth. It involves transfer
or exchange of goods and services for money or money's worth. The manufacturers or producer
produces the goods, then moves on to the wholesaler, then to retailer and finally to the ultimate
consumer.
Trade can be divided into following two types, viz.,
1.
Internal Trade: Internal trade is also known as Home trade. It is conducted within the political
and geographical boundaries of a country. It can be at local level, regional level or national level.
Hence trade carried on among traders of Delhi, Mumbai, etc. is called home trade. Internal
trade can be further sub-divided into two groups, viz.,
a) Wholesale Trade : It involves buying in large quantities from producers or
manufacturers and selling in lots to retailers for resale to consumers.
b) Retail Trade : It involves buying in smaller lots from the wholesalers and selling in very
small quantities to the consumers for personal use.
2. External Trade: External trade also called as Foreign trade. It refers to buying and selling
between two or more countries. For instance, If Mr.X who is a trader from Mumbai, sells his
goods to Mr.Y another trader from New York then this is an example of foreign trade. External
trade can be further sub-divided into three groups, viz.,
a) Export Trade : When a trader from home country sells his goods to a trader located in
another country, it is called export trade. For e.g. a trader from India sells his goods to a
trader located in China.
b) Import Trade : When a trader in home country obtains or purchase goods from a trader
located in another country, it is called import trade. For e.g. a trader from India
purchase goods from a trader located in China.
c) Entrepot Trade : When goods are imported from one country and then re -exported
after doing some processing, it is called Entrepot trade.
Business Risk, Nature and Types
Business Risks
Every business organization contains various risk elements while doing the business. Business risks
implies uncertainty in profits or danger of loss and the events that could pose a risk due to some
unforeseen events in future, which causes business to fail.
Nature of Business Risk
a) Business risks arise due to uncertainties :- Natural calamities, change in demand and prices,
change in technology etc. are some of the examples of uncertainty which create risks.
b) Risk is an essential part of every business :- No business can avoid risk. Risk can be minimized
but can not be eliminated.
c) Degree of risk depends mainly upon the nature and size of business :- For small scale business it
is less and for large scale business it is more.
d) Profit is the reward for risk taking :- An entrepreneur assumes risks and in consideration he gets
reward which is called profit. Greater the risk higher is the chance of profit.
Causes / Types of Business Risks
The Business risk is classified into different types
1. Strategic Risk: These are the risks associated with the operations of that particular industry.
These kind of risks arise from
a) Business Environment: Buyers and sellers interacting to buy and sell goods and services,
changes in supply and demand, competitive structures and introduction of new
technologies.
b) Transaction: Assets relocation of mergers and acquisitions, spin-offs, alliances and joint
ventures.
c) Investor Relations: Strategy for communicating with individuals who have invested in
the business.
2. Financial Risk: These are the risks associated with the financial structure and transactions of the
particular industry.
3. Operational Risk: These are the risks associated with the operational and administrative
procedures of the particular industry.
4. Compliance Risk (Legal Risk): These are risks associated with the need to comply with the rules
and regulations of the government.
5. Other risks: There would be different risks like natural disaster(floods) and others depend upon
the nature and scale of the industry
Hinderances to Trade
All activities that facilitate smooth flow of goods from manufacturing centres to the consumption
centres are called aids or auxiliaries to trade. Aids to trade may be classified into five categories: (i)
transportation, (ii) warehousing, (iii) insurance, (iv) advertising, and (v) banking. These are briefly
explained below.
Transportation:
Selling all the goods produced at or near the production centres is not possible. Hence, goods are to be
sent to different places where they are demanded. The medium which moves men and materials from
one place to another is called transport.
Warehousing: Storage is indispensable in these days of mass production. The goods s hould be stored
carefully from the time they are produced till the time they are sold, hence, the need for warehousing.
Warehouses are also called godowns.
Insurance: The goods may be destroyed while in production process or in transit due to accidents, or in
storage due to fire or theft, etc. The businessmen would like to cover these risks. Insurance companies
come to their rescue in this regard. They undertake to compensate the loss suffered due to such risks.
For this purpose, the business has to take an ‘insurance policy’ and pay a certain amount regularly,
called ‘premium’.
Advertising: Advertising is an effective aid in selling the goods. The producer, through advertisement,
communicates all information about his goods, to the prospective consumers and create in them a
strong desire to buy the product. Advertising can be carried in different ways. It can be indoor or
outdoor.
Communicating with people through advertising, when they are in their homes, is called indoor
advertising. Examples of this type are advertising through newspapers, radio, ‘television, etc.
Communicating with people, when they go out from their homes, is called outdoor advertising.
Examples of this type are advertisements in cinema theatre, wall posters, and hoardings at prominent
places.
Banking: Now-a days we cannot think of business without banks. To start the business or to run it
smoothly we require money. Banks supply money. A bank is an organization which accepts deposits of
money from the public, withdraw able on demand or otherwise, and lends the same to those who need
it. Banks also provide many services required for the business activity.
Auxilarries to Trade
Advertising: Advertising is an effective aid in selling the goods. The producer, through advertisement,
communicates all information about his goods, to the prospective consumers and create in them a
strong desire to buy the product. Advertising can be carried in different ways. It can be indoor or
outdoor.
Communicating with people through advertising, when they are in their homes, is called indoor
advertising. Examples of this type are advertising through newspapers, radio, ‘television, etc.
Communicating with people, when they go out from their homes, is called outdoor advertising.
Examples of this type are advertisements in cinema theatre, wall posters, and hoardings at prominent
places.
Banking: Now-a days we cannot think of business without banks. To start the business or to run it
smoothly we require money. Banks supply money. A bank is an organization which acce pts deposits of
money from the public, withdraw able on demand or otherwise, and lends the same to those who need
it. Banks also provide many services required for the business activity.
Demerits of Sole Trading Concern
a) Limited Capital: In sole proprietorship business, it is the owner who arranges the required capital of
the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s
own funds as well as borrowed funds sometimes become insufficient to meet the re quirement of
the business for its growth and expansion.
b) Unlimited Liability: In case the sole proprietor fails to pay the business obligations and debts arising
out of business activities, his personal properties may have to be used to meet those liabiliti es. This
restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or
expand the business activities.
c) Lack of Continuity: The existence of sole proprietorship business is linked to the life of the
proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of
business operation is therefore uncertain.
d) Limited Size: In sole proprietorship form of business organisation there is a limit beyond which it
becomes difficult to expand its activities. It is not always possible for a single person to supervise
and manage the affairs of the business if it grows beyond a certain limit.
e) Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of
management. He/she may be an expert in administration, planning, etc., but may be poor in
marketing. Again, because of limited financial resources it is also not possible to employ a
professional manager. Thus, the business lacks benefits of professional management.
Features of Sole Trading
1. Single Ownership: A single individual always owns sole proprietorship form of business organization.
That individual owns all assets and properties of the business. Consequently, he alone bears all the
risk of the business. Thus, the business of the sole proprietor comes to an end at the will of the
owner or upon his death.
2. No sharing of Profit and Loss : The entire profit arising out of sole proprietor ship business goes to
the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody
else shares the profit and loss of the business with the sole proprietor.
3. One man’s Capital: The capital required by a sole proprietorship form of business organisation is
totally arranged by the sole proprietor. He provides it either from his personal resources or by
borrowing from friends, relatives, banks or other financial institutions.
4. One-man Control: The controlling power in a sole proprietorship business always remains with the
owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is
free to consult anybody as per his liking.
5. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies that, in case of loss
the business assets along with the personal properties of the proprietor shall be used to pay the
business liabilities.
Types of Partnership Firms
a) General Partnership: A general partnership is a partnership with only general partners. Each general
partner takes part in the management of the business, and also takes responsibility for the liabilities
of the business. If one partner is sued, all partners are held liable. General partnerships are the least
desirable for this reason.
b) Limited Liability Partnerships: A limited liability partnership (LLP) is different from a limited
partnership or a general partnership, but is closer to a limited liability company (LLC). In the LLP, all
partners have limited liability.
c) Particular partnership: When a partnership is formed for the object of conducting a particular
business, it is called particular partnership. The particular undertaking cannot be extended to any
other enterprise and this would last only so long as the business id not completed.
d) Partnership at will: This type of partnership is defined by the partnership Act 1932: "Where no
provision is made by contract between the partner for the duration of their partnership or for the
termination of partnership. Partnership at will can be dissolved by any partner serving notice in
waiting to other partner of his intension to do so.
e) Partnership of fixed term: The organization, which is formed for definite period of time, is called
partnership for a fixed term. At the expiry of this period, the partnership comes to an end unless the
partners have made a contract to the contrary. If the business is continued after the expiry period,
the new partnership will become a partnership at will.
Procedure to Register a Partnership
A partnership firm can be registered whether at the time of its formation or even subsequently. You
need to file an application with the Registrar of Firms of the area in which your business is located.
Application for partnership registration should include the following information:
a)
b)
c)
d)
e)
f)
Name of your firm
Name of the place where business is carried on
Names of any other place where business is carried on
Date of partners joining the firm
Full name and permanent address of partners.
Duration of the firm
Every partner needs to verify and sign the application
Ensure that the following documents and prescribed fees are enclosed with the registration application:
a)
b)
c)
d)
Application for Registration in the prescribed Form – I
Duly filled Specimen of Affidavit
Certified copy of the Partnership deed
Proof of ownership of the place of business or the rental/lease agreement thereof
It may be noted here that the name of your partnership firm should not “contain any words which may
express or imply the approval or patronage of the government except where the government has given
its written consent for the use of such words as part of the firm’s name”.
Once the Registrar of Firms is satisfied that the application procedure has been duly complied with, he
shall record an entry of the statement in the Register of Firms and issue a Certificate of Registration.
Limitations of Cooperative Societies
1. Limited Capital: The amount of capital that a cooperative society can raise from its member is very
limited because the membership is generally confined to a particular section of the society. Again
due to low rate of return the members do not invest more capital. Government’s assistance is often
inadequate for most of the co-operative societies.
2. Problems in Management: Generally it is seen that co-operative societies do not function efficiently
due to lack of managerial talent. The members or their elected representatives are not experienced
enough to manage the society. Again, because of limited capital they are not able to get the benefits
of professional management.
3. Lack of Motivation: Every co-operative society is formed to render service to its members rather
than to earn profit. This does not provide enough motivation to the members to put in their best
effort and manage the society efficiently.
4. Lack of Co-operation: The co-operative societies are formed with the idea of mutual co-operation.
But it is often seen that there is a lot of friction between the members because of personality
differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the
society.
5. Dependence on Government: The inadequacy of capital and various other limitations make
cooperative societies dependent on the government for support and patronage in terms of grants,
loans subsidies, etc. Due to this, the government sometimes directly interferes in the management
of the society and also audit their annual accounts.
Features of Partnership
1. Two or more Members: At least two members are required to start a partnership business. But
the number of members should not exceed 10 in case of banking business and 20 in case of other
business. If the number of members exceeds this maximum limit then that business cannot be
termed as partnership business.
2. Agreement: Whenever you think of joining hands with others to start a partnership business,first
of all, there must be an agreement between all of you. This agreement contains
a) The amount of capital contributed by each partner;
b) Profit or loss sharing ratio;
c) Salary or commission payable to the partner, if any;
d) Duration of business, if any ;
e) Name and address of the partners and the firm;
f) Duties and powers of each partner;
g) Nature and place of business; and
h) Any other terms and conditions to run the business.
3. Lawful Business: The partners should always join hands to carry on any kind of lawful business.To
indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of
the law. Again, doing social or philanthropic work is not termed as partnership business.
4. Competence of Partners: Since individuals join hands to become the partners, it is necessarythat
they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent
persons are not eligible to become the partners. However, a minor can be admittedtothe benefits
of partnership i.e., he can have a share in the profits only.
5. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the business
amongst the partners in the agreed proportion. In the absence of any agreement for the profit
sharing, it should be shared equally among the partners. Suppose, there are two partners in the
business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000
each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs.
15000/-.
Effects of Non Registration
Consequences of Non-Registration: An unregistered partnership firm suffers from the fol-lowing
limitations:
1. It cannot enforce its claims against a third party in a court of law.
2. It cannot claim adjustment for any sum exceeding Rs. 100. Suppose an unregistered firm owes
Rs. 1200 to A and A owes Rs. 1000 to the firm the firm cannot enforce adjustment of Rs. 1000 in
a court of law.
3. It cannot file a legal suit against any of its partners.
4. Partners of an unregistered firm cannot file any suit to enforce a right against the firm.
5. A partner of an unregistered firm cannot file a suit against other partners. Non-registration of a
firm, however, does not affect the following rights:
a) The right of a partner to sue for the dissolution of the firm or for the accounts of a
dissolved firm or to enforce any right or power to realise the property of a dissolved
firm
b) The power of an Official Assignee or Receiver to realise the property of an insolvent
partner.
c) The rights of the firm, or its partners, having no place of business.
d) Any suit or set off in which the claim does not exceed rupees one hundred.
e) The right of a third party to sue the unregistered firm or its partners.
Features of a Cooperative Society
a) Open membership: The membership of a Co-operative Society is open to all those who have a
common interest. A minimum of ten members are required to form a cooperative society. The Co –
operative society Act does not specify the maximum number of members for any co-operative
society. However, after the formation of the society, the member may specify the maximum number
of members.
b) Voluntary Association: Members join the co-operative society voluntarily, that is, by choice. A
member can join the society as and when he likes, continue for as long as he likes, and leave the
society at will.
c) State control: To protect the interest of members, co-operative societies are placed under state
control through registration. While getting registered, a society has to submit details about the
members and the business it is to undertake. It has to maintain books of accounts, which are to be
audited by government auditors.
d) Sources of Finance: In a co-operative society capital is contributed by all the members. However, it
can easily raise loans and secure grants from government after its registration.
e) Democratic Management: Co-operative societies are managed on democratic lines. The society is
managed by a group known as “Board of Directors”. The members of the board of directors are the
elected representatives of the society. Each member has a single vote, irrespective of the number of
shares held. For example, in a village credit society the small farmer having one share has equal
voting right as that of a landlord having 20 shares.
Joint Stock Company Features
a) Legal formation: No single individual or a group of individuals can start a business and call it a
joint stock company. A joint stock company comes into existence only when it has been
registered after completion of all formalities required by the Indian Companies Act, 1956.
b) Artificial person: Just like an individual, who takes birth, grows, enters into relationships and
dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is
called an artificial person as its birth, existence and death are regulated by law and it does not
possess physical attributes like that of a normal person.
c) Separate legal entity: Being an artificial person, a joint stock company has its own separate
existence independent of its members. It means that a joint stock company can own property,
enter into contracts and conduct any lawful business in its own name. It can sue and can be
sued by others in the court of law. The shareholders are not the owners of the property owned
by the company. Also, the shareholders cannot be held responsible for the acts of the company
d) Common seal: A joint stock company has a seal, which is used while dealing with others or
entering into contracts with outsiders. It is called a common seal as it can be used by any officer
at any level of the organisation working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, become binding on the
company.
e) Perpetual existence: A joint stock company continues to exist as long as it fulfils the
requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of
its members. For example, in case of a private limited company having four members, if all of
them die in an accident the company will not be closed. It will continue to exist.
Features of a Private Company
1.
2.
3.
4.
5.
6.
7.
Private Limited Company: These companies can be formed by at least two individuals having
minimum paid–up capital of not less than Rupees one lakh.
As per the Companies Act, 1956 the total membership of these companies cannot exceed
50. The shares allotted to its members are also not freely transferable between them.
These companies are not allowed to raise money from the public through open invitation.
They are required to use “Private Limited” after their names.
They can start business without business commencement certificate.
Private companies need not have statutory meetings.
Private companies don’t have any investment from the government.
Clauses of Memorandum
1. Name Clause: It contains the name by which the company will be established. As you know, the
approval of the proposed name is taken in advance from the Registrar of the companies.
2. Situation Clause: It contains the name of the state in which the registered office of the company
is or will be situated. The exact address of the company's registered office may be
communicated within 30 days of its incorporation to the Registrar of Companies.
3. Objects Clause: It contains detailed description of the objects and rights of the company, for
which it is being established. A company can undertake only those activities which are
mentioned in the objects clause of its memorandum.
4. Liability Clause: It contains financial limit up to which the shareholders are liable to pay off to
the outsiders on the event of the company being dissolved or closed down.
5. Capital Clause: It contains the proposed authorised capital of the company. It gives the
classification of the authorised capital into various types of shares, (like equity and preference
shares) with their numbers and nominal value.
6. Subscription Clause: It contains the name and address of at least seven members in case of
public limited company and two members in case of a private limited company, who agree to
associate or join hands to get the undertaking registered as a company.
Promoters and Their Functions
A promoter conceives an idea for setting-up a particular business at a given place and performs various
formalities required for starting a company. A promoter may be a individual, firm, association of persons
or a company.
1. Identification of Business Opportunity: The first stage in promotion of a business is the
identification of a business opportunity. The promoter visualises that there are opportunities for
a particular type of business and it can be run profitability.
2. Detailed Investigation: At the second stage, various factors relating to the business are studied
from a practical point of view. The demand for the product is estimated and the likely business
share is determined. After determining the prospective demand, the promoter thinks of
arranging finances, labour, raw materials, power, etc.
3. Approval of Name: It is necessary to get the name of the company approved from the Registrar
of Companies. This is done in order to avoid duplication of the name.
4. Signatories to Memorandum: The promoters decide the names of persons to be the signatories
to the memorandum of association. Usually, the first signatories to the memorandum become
the first directors of the company.
5. Appointment of Professionals: The next stage is of raising funds and deciding about various
contracts. So, promoters appoint the brokers and underwriters to ensure the availability of
capital by sale of company’s securities.
6. Preparing necessary Documents: The promoters take steps to prepare various legal documents
of the company which have to be submitted to the Registrar of Companies at the time of
incorporation.
Advantages of Joint Stock Company
1. Huge resources: A company can raise large amount of resources from the genera public by
issuing shares. Since, there is no maximum limit of the number of shareholders ii case of public
company, fresh shares can be issued to meet the financial requirement. Capital can also be
obtained by issuing debentures and accepting public deposits.
2. Limited liability: The liability of the shareholders is limited to the extent of the face value of the
shares held by them or guarantee given by them. The shareholders are not liable personally for
the payment of debt of the company. Thus, limited liability encourages the investors to put their
money in the shares of the company.
3. Transferability of shares: The shares of the public company are transferable without any
restriction. A shareholder can sell his shares at any time to anybody in the stock exchange
Therefore, the conservative and cautious investors are also attracted to invest in the shares of
public company. This brings liquidity to the investors.
4. Stability of existence: A joint stock company enjoys perpetual succession. It continues for a long
period of time because it is unaffected by the death, insolvency of the shareholders directors.
Change of ownership and management also does not affect the continuity of the business.
5. Efficient management: A company can hire the services of professional manager for its
functional areas because of its financial strength. The directors who look after the management
of the company are generally experienced and persons of business acumen Therefore, the
management of a company is sure to be efficient.
Disadvantages of Joint Stock Companies
1. Difficulty in formation: The formation of a joint stock company is very difficult, time taking and
expensive as compared to any other form of organisation. Conceiving the very idea and getting
it implemented is very difficult process. Preparation of the basic documents like memorandum
of Association and Articles of Association, fulfilling legal formalities as per the Act and getting
the business registered needs lot of time, money and expertise.
2. Delay in decision-making: The Board of Directors of the company decides about the policies and
strategies of the company. Certain decisions are taken by the shareholders. The meeting of the
directors or the shareholders cannot be held at any time as and when required. Thus, the
decision making process is usually delayed. The delay in decision-making may result in losing
some business opportunities.
3. Separation of ownership and management: The company is not managed by the shareholders
but by the directors who are the elected representatives of the shareholders. The directors and
managers may lack the personal initiative and motivation to manage the company efficiently as
the shareholders (owners) themselves would.
4. Lack of secrecy: Each and every business strategy is discussed in the meeting of the Board of
Directors. The annual accounts are published and compliance to Government, Tax authorities
etc. are made at regular intervals. Therefore, it is very difficult to maintain business secrecy in a
company form of organization in comparison to sole proprietorship and partnership.
5. Speculation in shares: When profit is earned by manipulating the prices of shares without
actually holding the shares, it is considered as speculation. A company provides scope for
speculation and the directors and managers may derive personal benefit out of this. It is harmful
to the innocent small shareholders who invest their hard earned money with a view to get
higher rate of return.
Features of Department Undertaking
1. Part of government: The undertaking is organized as a major sub-division of one of the
departments or ministries of the Government. It is subject to direct control by the head of
depart-ment. The ultimate authority lies with the concerned minister who is responsible to the
Parliament or State Legislature. The undertaking has no separate entity distinct from the
Government.
2. Government financing: The undertaking is financed through annual budget appropria-tions by
the Parliament or the State Legislature. The revenues of the undertaking are paid into the
treasury. It is wholly owned by the Government.
3. Executive decision: A departmental undertaking is set up by an executive decision of the
Government without any legislation.
4. Accounting and audit: The undertaking is subject to the normal budgeting, accounting and au dit
procedures applicable to other government departments.
5. Civil service code: The enterprise is managed by civil servants whose methods of recruit-ment
and service conditions are the same as for other civil servants of the government.
6. Sovereign immunity: Being an integral part of the Government, a departmental under-taking
cannot be sued without the consent of the government.
Features of Govertnment Companies
The following are the features of a Government Company.
1. Organizational format: The organizational format resembles that of a Joint Stock Company
incorporated under Companies Act, 1956.
2. State ownership: The entire capital or 51% or more of the capital is owned by the Government
or Governments.
3. Nomination of directors: As in case of Public Corporations, even in a Government company the
directors are nominated by the Government (State or Central).
4. Ministerial control: As in the case of Departmental organizations, in a Government Company
too, the overall control is under the concerned minister under whose ministry the company is
formed.
5. Government auditors: The auditors are always appointed by the Government to inspect the
books of accounts of the Government Companies.
Features of Statutory Companies
1. Corporate body: It is a body corporate established through a special Act of Parliament or Stat
Legislature. The Act defines its powers and privileges and its relationship with government
departments and ministries.
2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal. It can
acquire an own property in its own name. It can sue and be sued and can enter into contracts in
its own name.
3. Government ownership: The public corporation is wholly owned by the Central and/ or State
Government (s).
4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings are
provided by the government but it is supposed to be self-supporting. It can borrow money from
the public and is empowered to plough back its earnings.
5. Accounting system: The Corporation’s not subject to the budgetary, accounting and audit
regulations applicable to government departments. It is generally exempt from the rigid rules
applicable to the expenditure of public funds.
6. Management and personnel: A public corporation is managed by a Board of Directors appointed
by the Government. However, its employees need not necessarily be civil servants. They can be
employed on terms and conditions laid down by the corporation itself.
7. Service motive: The primary motive of the corporation is public service rather than private
profits. It is, however, expected to operate in a business-like manner.
Features of MNCs
1. MNCs have managerial headquarters in home countries, while they carry out operations in a
number of other (host) countries.
2. Shareholders: A large part of capital assets of the parent company is owned by the citizens of
the company's home country.
3. Management: The absolute majority of the members of the Board of Directors are citizens of
the home country.
4. Decision Making: Decisions on new investment and the local objectives are taken by the parent
company.
5. Size: MNCs are predominantly large-sized and exercise a great degree of economic dominance.
6. Control: MNCs control production activity with large foreign direct investment in more than one
developed and developing countries.
7. Market Size: MNCs are oligopolistic in character. It is sustained by modern technologies,
management skill, product differentiation and enormous advertising.
8. MNCs contribute significantly to foreign trade.
Features of Joint Ventures
A temporary kind of business activity carried on by more than on individual with a view to earning profit
in a pre-agreed manner without giving a firm name to the business is known as joint venture.
It is a temporary partnership between two or more persons for completing a particular adventure. The
relationship between them is ceased as soon as that particular venture is completed.
The persons who enters into the joint venture agreement are call ed co-ventures.
1.
2.
3.
4.
5.
Joint venture is a special partnership without a firm name.
Joint venture does not follow the accounting concept 'going concern'.
The members of joint venture are known as co-ventures.
Joint venture is a temporary business activity.
In joint venture, profits and losses are shared in agreed proportion. If there is no agreement
regarding the distribution of profit, they will share profit equally.
6. Joint venture is an agreement for polling of capital and business abilities to be employed in
some profitable venture.
7. At the end of venture, all the assets are liquidated and liabilities are paid off: if necessary the
assets and liabilities could be shared by co-ventures.
8. Joint venture always follows cash basis of account
Benefits of E-Banking
The main advantages of E-banking are:1.
2.
3.
4.
5.
6.
The operating cost per unit services is lower for the banks.
It offers convenience to customers as they are not required to go to the bank's premises.
There is very low incidence of errors.
The customer can obtain funds at any time from ATM machines.
The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
The customer can easily transfer the funds from one place to another place electronically.
Core banking
Core Banking is a banking service provided by a group of networked bank branches where customers
may access their bank account and perform basic transactions from any of the member branch offices.
Core banking is often associated with retail banking and many banks treat the retail customers as their
core banking customers. Businesses are usually managed via the Corporate banking division of the
institution. Core banking covers basic depositing and lending of money.
The advancement in technology, especially Internet and information technology has led to new ways of
doing business in banking. These technologies have reduced manual work in banks and increasing
efficiency. The platform where communication technology and information technology are merged to
suit core needs of banking is known as core banking solutions.
Here, computer software is developed to perform core operations of banking like recording of
transactions, passbook maintenance, interest calculations on loans and deposits, customer records,
balance of payments and withdrawal.
This software is installed at different branches of bank and then interconnected by means of computer
networks based on telephones, satellite and the internet. It allows the banks customers to operate
accounts from any branch if it has installed core banking solutions.
Features of Current Account
i.
ii.
iii.
iv.
v.
Big businessmen, companies and institutions such as schools, colleges, and
hospitals have to make payment through their bank accounts.
Since there are restrictions on number of withdrawals from savings bank account, that
type of account is not suitable for them. They need to have an account from which
withdrawal can be made any number of times.
Banks open current account for them. Like savings bank account, this account also
requires certain minimum amount of deposit while opening the account.
On this deposit bank does not pay any interest on the balances. Rather
t h e accountholder pays certain amount each year as operational charge.
For the convenience of the accountholders banks also allow withdrawal of amounts
in excess of the balance of deposit.
This facility is known as overdraft facility. It is allowed to some specific customers
and up to a certain limit subject to previous agreement with the bank concerned.
Features of Savings Account
i.
ii.
iii.
iv.
v.
vi.
If a person has limited income and wants to save money for future needs, the Saving
Bank Account is most suited for his purpose.
This type of account can be opened with a minimum initial deposit that varies from bank
to bank. Money can be deposited any time in this account. Withdrawals can be made
either by signing a withdrawal form or by issuing a cheque or by using ATM card.
Normally banks put some restriction on the number of withdrawal from this account.
Interest is allowed on the balance of deposit in the account. The rate of interest on
savings bank account varies from bank to bank and also changes from time to time.
A minimum balance has to be maintained in the account as prescribed by the bank.
Features of FD Account
i.
ii.
iii.
iv.
v.
vi.
vii.
Many a time people want to save money for long period.
If money is deposited in savings bank account, banks allow a lower rate of interest.
Therefore, money is deposited in a fixed deposit account to earn a interest at a higher
rate.
This type of deposit account allows deposit to be made of an amount for a specified
period. This period of deposit may range from 15 days to three years or more during
which no withdrawal is allowed.
However, on request, the depositors can en-cash the amount before its maturity. In that
case banks give lower interest than what was agreed upon.
The interest on fixed deposit account can be withdrawn at certain intervals of time.
At the end of the period, the deposit may be withdrawn or renewed for a further
period. Banks also grant loan on the security of fixed deposit receipt.
Features of RD Account
i.
ii.
iii.
iv.
v.
This type of account is suitable for those who can save regularly and expect to earn a
fair return on the deposits over a period of time.
While opening the account a person has to agree to deposit a fixed amount once in a
month for a certain period.
The total deposit along with the interest therein is payable on maturity. However, the
depositor can also be allowed to close the account before its maturity and get back the
money along with the interest till that period.
The account can be opened by a person individually or jointly with another, or by the
guardian in the name of a minor.
The rate of interest allowed on the deposits is higher than that on a savings bank
deposit but lower than the rate allowed on a fixed deposit for the same period.
Features of MOD Account and SMS Alerts
i.
ii.
iii.
Is a term deposit which is not fixed at all and comes with a unique break-up facility
which provides full liquidity as well as benefit of higher rate of interest, throu gh the
savings bank account.
One can also keep that deposit intact by availing an overdraft facility, to meet occasional
temporary funds requirements.
Individual banks have their own deposit schemes to suit the current as well as future
needs of the people
SMS banking is a type of mobile banking, a technology-enabled service offering from
banks to its customers, permitting them to operate selected banking services over
their mobile phones using SMS messaging.
Health Insurance
With the increasing cost of health services and medical bills which a common man can not afford, this
class of insurance has a growing market. It is estimated that a family spends an average of 10% of its
monthly income on health care. In India where there is no Social Insurance for the public the individual
has to take care of himself and his family.
A prolonged illness or disability can spell havoc for the family budget and upset all the planning. While
the importance of Health Insurance cannot be denied, it is unfortunate that so far in India the Health
Insurance policy is being purchased by families and individuals who can afford to pay the medical bills.
But the Govt. of India is putting all its efforts to encourage people to buy health insurance and
specialized insurance companies are promoted which are exclusively dealing in health insurance. The life
insurance companies are also permitted to issue the health insurance policy
Banking and its Services
The term ‘Banking’ is defined as “accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdrawals by cheque, draft,
and order of otherwise”
1. Issuing Bank Draft: A bank draft or banker's draft is a check that it guaranteed by the
bank that issues it. In most cases, it lists the bank's main office or branch as the issuer,
and the person or company that is receiving the money as the payee; the name of the
person who requested the draft is often not included.
2. Banker's Cheques: these are negotiable instruments payable to order and attract all
provisions applicable to an order cheque and are valid for six months from the date of
issue. There is virtually no chance that a legitimate bank draft will not be honored and
paid in full.
3. RTGS and NEFT: Here the words 'Real Time' refers to the process of instructions that are
executed at the time they are received, rather than at some later time. On the other
hand "Gross Settlement" means the settlement of funds transfer instructions occurs
individually. The full form of NEFT is "National Electronic Funds Transfer (NEFT). The
NEFT is a nationwide payment system facilitating one-to-one funds transfer.
4. Bank Overdraft: When a business' bank account has a negative balance it is said to be
running a bank overdraft (more precisely an actual bank overdraft). It is a form of
financing in which the bank honors presented checks even when there is no balance in
the business account which results in negative balance in the bank account.
5. Cash Credits: banks offer cash credit accounts to businesses to finance their "working
capital" requirements (requirements to buy raw materials or "current assets", as
opposed to machinery or buildings, which would be called "fixed assets").
Terms used in Insurance Contract
Insurance is a contract between the insurer and insured whereby the insurer undertakes to pay the
insured a fixed amount, in exchange for a fixed sum known as premium, on the happening of a certain
event (like at a certain age or on death), or compensate the actual loss when it takes place, due to the
causes mentioned in the contract.
Some important terms in insurance are:
a)
b)
c)
d)
e)
Insurer: Person who undertakes to indemnify or compensate is called insurer, assurer or
underwriter.
Insured: Person who is indemnified as per the contract is called insured. The insurance
policy holder becomes insured.
Risks: The contingency, happening or event against which the insurance is effected is
called risk.
Premium: The consideration which the insured pays to the insurer for undertaking the
risk is called premium.
Insurance Policy: It is a written document which contains the terms and conditions of
the contract of insurance is called insurance policy.
Benefits of Insurance
1. Risk sharing: on the happening of a risk event, the loss is shared by all the persons
exposed to it. The share is obtained from every insured member by way of premium.
2. Providing certainty: Insurance provides certainty of payment for the risk of loss.
3. Overseas trade development: Marine insurance facilitates the development of overseas
trade of a nation. It makes foreign trade risk free with the help of different types of
marine insurance policies.
4. Feeling of Security: Insurance provides protection against future risk, accidents and
uncertainty. By giving protection against economic loss, insurance provides a feeling of
security among the businessmen.
5. Means of saving and investment: There is an opportunity to save for an individual to
save out of current income for the evening of his life.
6. Capital formation: The accumulated funds of the insurer collected by way of premium
payments made by the insured are invested in various income generating schemes.
Fire Insurance
A contract of fire insurance is a contract whereby the insurer, on payment of premium by the insured,
undertakes to compensate the insured for the loss or damage suffered by reason of certain defined
subject matter being damaged or destroyed by fire. It is a contract of indemnity, that is, the insured
cannot claim anything more than the value of property lost or damaged by fire or the amount of policy,
whichever is lower. The claim for loss by fire is payable subject to two conditions, viz; (a) there must
have been actual fire; and (b) fire must have been accidental, not intentional; the cause of fire being
immaterial.
Its contents are:
a)
b)
c)
d)
e)
f)
g)
Name of the insuered
Name of the insurer
Description of the property insured
Sum insured
Period of insurance
Amount of premium
Risks insured against.
Marine Insurance
Marine insurance is an agreement (contract) by which the insurance company (also known as
underwriter) agrees to indemnify the owner of a ship or cargo against risks, which are incidental to
marine adventures. It also includes insurance of the risk of loss of freight due on the cargo. Marine
insurance that covers the risk of loss of cargo by storm is known as cargo insurance. The owner of the
ship may insure it against loss on account of perils of the sea.
The followings are the different types of marine insurance policies
(a)
(b)
(c)
Time Policy: This policy insures the subject matter for specified period of time, usually for one
year. It is generally used for hull insurance or for cargo when small quantities are insured.
Voyage Policy: This is intended for a particular voyage, without any consideration for time. It
is used mostly for cargo insurance.
Mixed Policy: Under this policy the subject matter (hull, for example) is insured on a particular
voyage for a specified period of time. Thus, a ship may be insured for a voyage between
Mumbai and Colombo for a period of 6 months under a mixed policy.
Perils of Sea
Perils of the sea. Fortuitous accidents or casualties, peculiar to transportation on a navigable water, such
as stranding, sinking, collision of the vessel, striking a submerged object, or encountering heavy weather
or other unusual forces of nature.
They include:
1.
2.
3.
4.
5.
6.
7.
Sinking of the ship
Burning of the ship
Attack fro pirates
Jettison – throwing away of cargo to prevent ship from sinking.
Collision of the ships
Tsunami, storms, cyclone and unfavorable climate conditions
Terrorist attack, attack from enemy countries.
Financial Services Offered by Postal Department
Public Provident Fund (PPF): Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India.
It also serves as a retirement-planning tool for many of those who do not have any structured pension
plan covering them. The account can be opened in designated post offices, State Bank of India branches
and branches of some nationalized banks. ICICI Bank was the first private sector bank which was
authorized to open PPF accounts.
Kisan Vikas Patra (KVP): Kisan Vikas Patra is a saving scheme that was announced by the Government of
India that doubles the money invested in eight years and seven months. The Directorate of Small
Savings Government of India sells these saving bonds through all Post Offices in the country so that the
scheme can be accessed by citizens from all over the country. A KVP can be encashed after two and a
half years from the date of issue at the value it has been bought and the i nterest accrued for the period.
National Savings Certificate (NSC): National Savings Certificates popularly known as NSC is a saving bond
, primarily used for small saving and income tax saving investment in India, part of the Postal savings
system of Indian Postal Service (India Post). These can be purchased from a post office by an adult in his
own name or in the name of a minor, a minor, a trust, two adults jointly. An HUF [Hindu Undivided
Family] cannot purchase NSCs, earlier it was allowed. These are issued for six year maturity and can be
pledged to banks for availing loans. The holder gets the tax benefit under secti on 80C of Income Tax Act,
1961.
Senior Citizen Savings Scheme (SCSS): The account may be opened by an individual, who has attained
age of 60 years or above on the date of opening of the account. Who has attained the age 55 years or
more but less than 60 years and has retired under a Voluntary Retirement Scheme or a Special
Voluntary Retirement Scheme on the date of opening of the account within three months from the date
of retirement.
Allied Services
1. Greeting Post Indian post offers a beautiful and varied range of greeting cards for every occasion.
2. Media Post Indian corporate can use media post which is an innovative and effective vehicle to
advertise their brand through postcards, envelopes, aerogram, telegrams, and also through letter
boxes.
3. Direct Post It is for direct advertising which can be both addressed as well as unaddressed.
4. International Money Transfer Indian post has a collaboration with Western Union financial services,
USA, which enables remittance of money from 185 countries to India.
5. Passport Facilities Indian post has a unique partnership with the ministry of external affairs for
facilitating the process of passport application.
6. Speed Post Indian post has over 1000 destinations covered under the speed post facility in India and
links with 97 major countries across the globe.
Traditional and E-Business Differences
Basis of Distinction
Ease of Formation
Physical presence
Locational requirement
Cost of Setting up
Operating Cost
Traditional Business
Difficult
Required
Proximity to the source of raw
materials or the market for the
products
High
High due to fixed charges
associated with investments in
procurement and storage and
production, marketing and
distribution activities
E-Business
Simple
Not required
None
Low as no requirements of
physical facilities
Low as result of reliance on
network of relationship rather
than ownership of resources
Scope of E-Business
1. B2B (Business to Business) is a business to establish business relationships with businesses such
as McDonald’s, we are only able to buy McDonald’s and Coca-Cola because of the business
partners. Businessmen to establish business partnership is the hope that through the what is
offered to form a complementary development opportunities, our business can be profitable.
Example: maritime network, Alibaba,Tradett,HC network, business network.
2. B2C (Business to Consumer) is that we often see vendors sell goods directly to the user, for
example you go to McDonald’s to eat is B2C, because you just a customer. Example: Flipkart.
3. C2C (Consumer to Consumer), similar to the retail market, the direct object is the end-user
shopping Example: eBay, Quikr.
4. C2B (Consumer to Business), a relatively new concept, meaning by what the customer to choose
their own things, the price of what is required, then the business to decide whether to accept
the customer’s requirements and if the business receiving the customer’s requirements, then
the transaction is successful; if the merchant does not accept the customer’s request, then that
transaction to fail.
Benefits of E-Business
1. Cost-Effective Marketing: Most of these online marketing efforts are very low cost or free, so an
e-business allows for highly cost-effective marketing strategies Since e-businesses mostly
advertise on the internet the cost of advertising or marketing is less.
2. Flexible Business Hours: E-business breaks down the time barriers that location-based
businesses encounter. E-business are active 24/7 which means accessibility of products or
services is greater.
3. Eliminates Geographic Boundaries: As long as someone has an Internet connection, you may be
able to reach and sell your product or service to these visitors to your business website.
4. Reduces Transaction Cost: Running an online business reduces the cost per transaction because
it takes less manpower to complete an online transaction. Once you get your website up and
running, the customer places the order online, which removes the need for a salesperson.
5. Low Overhead Costs: Running an e-business cut back or out most of the costs involved in
running a physical location. E-businesses have less expensive phone, rent and utility bills than
businesses with physical locations.
Limitations of E-Business
1. Less security: The biggest obstacle in the growth of e-commerce is the issue of security. Internet
is not a secured medium of communication. There are tools or options available to hackers
whereby they can not only monitor but also control any data communicated over the internet
2. Less privacy: The nature of internet technology is such that private information of the online
customers can be easily collected and recorded on the server side. The buying pattern of a
customer can be known to an e-shop with the help of certain sophisticated tools. You know that
cookies can be used to track customers online.
3. No physical proximity with items purchased: In certain cases the customers cannot decide about
buying a thing before they can physically examine it. For example, a customer would ideally
want to touch and feel the texture of a piece of cloth before buying.
Features of BPO
Business process outsourcing: (BPO) is the contracting of a specific business task, such as payroll, to a
other party service provider. Usually, BPO is implemented as a cost-saving measure that a company
requires to maintain its position in the marketplace.
BPO is often divided into two categories: back office outsourcing which includes internal business
functions such as billing or purchasing, and front office outsourcing which includes customer-related
services such as marketing or technical support. BPO.
It provides wide range of tactical, powerful, flexible tools which in turn helps in achieving the business
objectives in a cost effective and efficient manner. To put it in simple words a BPO (business process
outsourcing) is a process in which a company delegates some of its business processes to a other party
on payment of some fee by passing over total control of process to them. This in turn cuts the
operational costs considerably resulting into huge profits
Stages in Online Transactions
1. Registration: Before doing online shopping, one need to fill up a registration form with the
online, which imbibes that you hold an 'account' with the online vendor. Amidst various details
'password' is one of the vital sections relating to your 'account', and 'shopping cart' and it is d uly
protected, failing which, anyone can login using your name and shop in your name. Th is may
prove to be troublesome.
2. Placing an Order: Shopping cart would be provided for you to pick and drop the items into it.
Shopping cart can be defined as an online record of what you have picked up while browsing the
online shop similar to a physical shop wherein you can put in and take items out of your cart,
that will help you to make sure what you want to buy and can 'checkout' and choose your
payment options.
3. Payment Mechanism: The above figure clearly states that payment for the purchases through
online shopping may be done through several methods:
a) Cash-on Delivery (CoD): As the name suggests, payment for the goods ordered online
may be paid in cash at the time of physical delivery of goods.
b) Cheque: As an alternate option, the online vendor might arrange for the pickup of the
cheque from the customer. On realization of the cheque, delivery of goods may be
made.
c) Net-banking Transfer: Customers are provided with the facility of electronic transfer of
funds over the internet. In this case, the buyer can transfer the amount towards the
transaction to the goods to the account of the online vendor which will enable him to
proceed to arrange for the delivery of goods.
Arguments against social responsibiilites of business
1. Violation of profit maximisation objective: According to this argument, business exists only for profit
maximisation. Therefore, any talk of social responsibility is against this objective. In fact, business
can best fulfill its social responsibility if it maximises profits through increased efficiency and
reduced costs.
2. Burden on consumers: It is argued that social responsibilities like pollution control and
environmental protection are very costly and often require huge financial investments. In such
circumstances, businessmen are likely to simply shift this burden of social responsibility by charging
higher prices from the consumers instead of bearing it themselves. Therefore, it is unfair to tax the
consumers in the name of social responsibility.
3. Lack of social skills: All social problems cannot be solved the way business problems are solved. In
fact, businessmen do not have the necessary understanding and training to solve social prob lems.
Therefore, according to this argument, social problems should be solved by other specialised
agencies.
4. Lack of broad public support: Here the argument is that the public in general does not like business
involvement or interference in social programmes. Therefore, business cannot operate successfully
because of lack of public confidence and cooperation in solving social problems.
Arguments for Social Responsibility
1. Justification for existence and growth: Business exists for providing goods and services to satisfy
human needs. Though, profit motive is an important justification for undertaking business activity, it
should be looked upon as an outcome of service to the people.
2. Long-term interest of the firm: A firm and its image stands to gain maximum profits in the long run
when it has its highest goal as ‘service to society’.
3. Avoidance of government regulation: From the point of view of a business, gov ernment regulations
are undesirable because they limit freedom. Therefore, it is believed that businessmen can avoid the
problem of government regulations by voluntarily assuming social responsibilities, which helps t o
reduce the need for new laws.
4. Maintenance of society: The argument here is that laws cannot be passed for all possible
circumstances. People who feel that they are not getting their due from the business may resort to
anti-social activities, not necessarily governed by law. This may harm the interest of business itself.
Therefore, it is desirable that business enterprises should assume social responsibilities.
5. Availability of resources with business: This argument holds that business institutions have valuable
financial and human resources which can be effectively used for solving problems. For example,
business has a pool of managerial talent and capital resources, supported by years of experience in
organising business activities.
Responsibilities towards Consumers
Responsibility of business towards consumer extends to:
i.
ii.
Product: Quality goods should be produced and supplied. Distribution system should make
goods easily available to avoid artificial scarcities and after sales service should be prompt.
Buying capacity and consumer preferences should be taken into consideration while deciding
the manufacturing policies. The care must be exercised in supplying the goods of quality which
has no adverse effect on the health of consumers.
Marketing: To avoid being misled by wrong claims about products through improper
advertisements or otherwise, the consumer should be provided full information about the
products including their adverse effects, risks and care to be taken while using the products.
Consumers all over the world are, by and large, dissatisfied because the performance of businessman is
far from satisfactory. Consumer is not the king in our country but a vehicle used by businessmen for
driving towards the goal of profit maximization.
As a result of which the concept of ‘consumerism’ has come up to protect the rights of consumers. Even
the government is interfering in a big way to protect the interests of consumers.
Responsibility Towards Investors
1. Shareholders who are the owners of business should be provided with correct information about
company to enable them to give them true and fair position of the company to enable them to
decide about further investments.
2. Company should provide a fair return on the investment made by shareholders. If shareholders do
not get proper dividend then they will hesitate to invest additional funds in the concern.
3. Shareholders should be kept fully informed about the working of the company for healthy growth of
the business. The Companies Act 1956 also requires company to give full disclosure in the published
statements.
4. Company should strengthen the share prices by its growth, innovation and diversification.
5. At the same time shareholders shall also offer wholehearted support and co-operation to the
company to protect their own interests.
Responsibility Towards Government
1. A number of legislatives are formed from time to time by the government for proper regulation and
control of business.
2. Businessmen should comply with all legal requirements, execute government contracts, pay taxes
honestly and in time, make services of executives available for government, suggest measures and
send proposals to enact new laws for the business.
3. A number of taxes are imposed on business for collecting revenue. Businessmen should pay various
taxes in time and help government in collecting funds.
4. They should not resort to tax evasions rather declare their incomes honestly and correctly.
5. But series of raids conducted on business houses clearly show that businessmen have failed to
discharge their responsibility towards government.
Need for Pollution Control
Pollution prevention or control is needed to preserve precious environmental resources and to improve
the environmental quality so that the preserved resources can be utilized for the benefit of mankind and
the improvement of health and wellbeing of the people. The amount of damage to a particular medium
(air, water, land) varies according to the type of pollutant, the amount of pollutant disposed of, and the
distance from the source of pollution.
1. Reduction of health hazards: There is increasing evidence that many diseases like cancer, heart
attacks and lung complications are caused by pollutants in the environment. Pollution control
measures can not only check the seriousness of such diseases but can also be support ive of a
healthy life on earth.
2. Reduced risk of liability: It is possible that an enterprise is held liable to pay compensation to people
affected by the toxicity of gaseous, liquid and solid wastes it has released into the environment.
Therefore, it is sound business policy to install pollution control devices in its premises to reduce the
risk of liability.
3. Cost savings: An effective pollution control program is also needed to save costs of operating
business. Cost savings are particularly noticeable when improper production technology results in
greater wastes which leads to higher cost of waste disposal and cost of cleaning the plants.
4. Improved public image: As society becomes increasingly conscious of environmental quality, a firm’s
policies and practices for controlling wastes will increasingly influence people’s attitude towards its
working. A firm that promotes the cause for environment will be able to enjoy a good reputation
and will be perceived as a socially responsible enterprise.
5. Other social benefits: Pollution control results in many other benefits like cl earer visibility, cleaner
buildings, better quality of life, and the availability of natural products in a purer form.
Elements of Busines Ethics
1. Top Management Commitment: Top management has a crucial role in guiding the entire
organization towards ethically upright behavior. To achieve results, the Chief Executive Officer (or
CEO) and other higher level managers need to be openly and strongly committed to ethical conduct.
2. Publication of a 'Code': Enterprises with effective ethics programs define the principles of conduct
for the whole organization in the form of written documents which is referred to as the "code". This
involves areas such as fundamental honesty and adherence to laws; product safety and quality;
health and safety in the workplace etc.
3. Establishment of Compliance Mechanisms: Company must ensure that actual decisions and actions
comply with the firm's ethical standards by establishing suitable mechanisms. Some examples of
such mechanisms are: paying attention to values and ethics in recruiting and hiring; emphasizing
corporate ethics in training; auditing performance regularly to analyze the degree of compliance;
and instituting communication systems to help employees report incidents of unethical behavior.
4. Involving Employees at all Levels: Involvement of employees in ethics programs is a must as at
different levels they are the ones who implement ethics policies to make ethical business a reality.
Although it is difficult to accurately measure the end results of ethics programs, the firms can
certainly audit to monitor compliance with ethical standards. The top management team and other
employees should then discuss the results for further course of action.
Merits of Ordinary Shares
1. Equity shares are suitable for investors who are willing to assume risk for higher retu rns;
2. Payment of dividend to the equity shareholders is not compulsory. Therefore, there is no burden on
the company in this respect;
3. Equity capital serves as permanent capital as it is to be repaid only at the time of liquidation of a
company. As it stands last in the list of claims, it provides a cushion for creditors, in the ev ent of
winding up of a company;
4. Equity capital provides credit worthiness to the company and confidence to prospective loan
providers;
5. Funds can be raised through equity issue without creating any charge on the assets of the company.
The assets of a company are, therefore, free to be mortgaged for the purpose of borrowings, if the
need be;
6. Democratic control over management of the company is assured due to voting rights of equity
shareholders.
Demerits of Ordinary Shares
The major limitations of raising funds through issue of equity shares are as follows:
1. Investors who want steady income may not prefer equity shares as equity shares get fluctuating
returns;
2. The cost of equity shares is generally more as compared to the cost of raisi ng funds through other
sources;
3. Issue of additional equity shares dilutes the voting power, and earnings of existing equity
shareholders;
4. More formalities and procedural delays are involved while raising funds through issue of equity
share.
ADR, GDR, IDR
Modern organizations including multinational companies depend upon sizeable borrowings in rupees as
well as in foreign currency. Prominent financial instruments used for this purpose are:
1. Global Depository Receipts (GDR’s): The local currency shares of a company are delivered to the
depository bank. The depository bank issues depository receipts against these shares. Such
depository receipts denominated in US dollars are known as Global Depository Receipts (GDR).
2. American Depository Receipts (ADR’s): The depository receipts issued by a company in the USA are
known as American Depository Receipts. ADRs are bought and sold in American markets like regular
stocks. It is similar to a GDR except that it can be issued only to American citizens and can be listed
and traded on a stock exchange of USA.
3. An Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees i n the
form of a depository receipt created by a Domestic Depository (custodian of securities registered
with the Securities and Exchange Board of India) against the underlying equity of issuing company to
enable foreign companies to raise funds from the Indian securities Markets.
Services of Wholesalers to Manufactuers
The major services offered by wholesalers to the producers of goods and services are given as below:
1. Facilitating large scale production: Wholesalers collect small orders from number of retailers
and pass on the pool of such orders to manufacturers and make purchases in bulk quantities.
This enables the producers to undertake production on a large scale and take advan tage of the
economies of scale.
2. Bearing risk: The wholesale merchants deal in goods in their own name, take delivery of the
goods and keep the goods purchased in large lots in their warehouses. In the process they bear
lots of risks such as the risk of fall in prices, theft, pilferage, spoilage, fire, etc. To that extent,
they relieve the manufacturers from bearing these risks.
3. Financial assistance: The wholesalers provide financial assistance to the manufacturers in the
sense that they generally make cash payment for the goods purchased by them. To that extent,
the manufacturers need not block their capital in the stocks. Sometimes they also advance
money to the producers for bulk orders placed by them.
4. Expert advice: As the wholesalers are in direct contact with the retailers, they are in a position
to advice the manufacturers about various aspects including customer’s tastes and preferences,
market conditions, competitive activities and the features preferred by the buyers. They serve
as an important source of market information on these and related aspects.
Services of Wholesalers to Retailers
1. Availability of goods: Retailers have to maintain adequate stock of varied commodities so that
they can offer variety to their customers. The wholesalers make the products of various
manufacturers readily available to the retailers.
2. Marketing support: The wholesalers perform various marketing functions and provide support
to the retailers. They undertake advertisements and other sales promotional activities to induce
customers to purchase the goods. The retailers are benefitted as it helps them in increasing the
demand for various new products.
3. Grant of credit: The wholesalers generally extend credit facilities to their regular customers. This
enables the retailers to manage their business with relatively small amount of working capital.
4. Specialized knowledge: The wholesalers specialize in one line of products and know the pulse of
the market. They pass on the benefit of their specialized knowledge to the retailers. They inform
the retailers about the new products, their uses, quality, prices, etc.
5. Risk sharing: The wholesalers purchase in bulk and sell in relatively small quantities to the
retailers. Being able to manage with purchase of merchandise in smaller quantities, retailers are
in a position to avoid the risk of storage, pilferage, obsolescence, reduction in prices and
demand fluctuations in respect of the additional goods that they would have to purchase in case
the services of wholesalers are not available.
Department Stores
A departmental store is a large establishment offering a wide variety of products, classified into well defined departments, aimed at satisfying practically every customer’s need under one roof.
1. A modern departmental store may provide all facilities such as restaurant, travel and information
bureau, telephone booth, restrooms, etc. As such they try to provide maximum service to higher
class of customers for whom price is of secondary importance.
2. These stores are generally located at a central place in the heart of a city, which caters to a large
number of customers.
3. As the size of these stores is very large, they are generally formed as a joint stock company managed
by a board of directors. There is a managing director assisted by a general manager and several
department managers;
4. A departmental store combines both the functions of retailing as well as warehousing. They
purchase directly from manufacturers and operate separate warehouses. That way they help in
eliminating undesirable middlemen between the producers and the customers; and
5. They have centralized purchasing arrangements. All the purchases in a department store are made
centrally by the purchase department of the store, whereas sales are decentralized in different
departments.
Role of Chamber of Commerce And Industry
1. Transportation or interstate movement of goods: The Chambers of Commerce and Industry help in
many activities concerning interstate movement of goods which includes registration of vehicles,
surface transport policies, construction of highways and roads.
2. Octroi and other local levies: Octroi and local taxes are the important sources of revenue of the local
government. These are collected on the goods and from people entering the state or the municipal
limits.
3. Harmonization of sales tax structure and Value Added Tax: The Chambers of Commerce and Industry
play an important role in interacting with the government to harmonize the sales tax structure in
different states. The sales tax is an important part of the state revenue.
4. Marketing of agro products and related issues: Streamlining of local subsidies and marketing policies
of organisations selling agro products are some of the areas where the Chambers of Commerce and
Industry can really intervene and interact with concerned agencies like farming cooperatives.
5. Weights and Measures and prevention of duplication brands: Laws relating to Weights and
Measures and protection of brands are necessary to protect the interest of the consumers as well as
the traders. They need to be enforced strictly.
Types of Large Scale Fixed Retail Shops
Mail Order Houses: Mail order houses are the retail outlets that sell their merchandise through mail.
There is generally no direct personal contact between the buyers and the sellers in this type of trading.
For obtaining orders, potential customers are approached through advertisements in newspapers or
magazines, circulars, catalogues, samples and bills, and price lists sent to them by post. All the relevant
information about the products such as the price, features, delivery terms, terms of payment, etc., are
described in the advertisement. On receiving the orders, the items are carefully scrutinised with respect
to the specifications asked for by the buyers and are complied with through the post office.
Chain Stores or Multiple Shops: Chain stores or multiple shops are networks of retail shops that are
owned and operated by manufacturers or intermediaries. Under this type of arrangement, a number of
shops with similar appearance are established in localities, spread over different parts of the country.
These different types of shops normally deal in standardised and branded consumer products, wh ich
have rapid sales turnover.
A departmental store is a large establishment offering a wide variety of products, classified into welldefined departments, aimed at satisfying practically every customer’s need under one roof. It has a
number of departments, each one confining its activities to one kind of product. For example, there may
be separate departments for toiletries, medicines, furniture, groceries, electronics, clothing and dress
material. Thus, they satisfy diverse market segments with a wide variety of goods and services.
Scope of International Business
1. Merchandise exports and imports: Merchandise means goods that are tangible, i. e., those that can
be seen and touched. When viewed from this perceptive, it is clear that while merchandise exports
means sending tangible goods abroad, merchandise imports means bringing tangible goods from a
foreign country to one’s own country.
2. Service exports and imports: Service exports and imports involve trade in intangibles. It is because of
the intangible aspect of services that trade in services is also known as invisible trade. A wide variety
of services are traded internationally.
3. Licensing and franchising: Permitting another party in a foreign country to produce and sell goods
under your trademarks, patents or copy rights in lieu of some fee is another way of entering into
international business. It is under the licensing system that Pepsi and Coca Cola are produced and
sold all over the world by local bottlers in foreign countries.
4. Foreign investments: Foreign investment is another important form of international business.
Foreign investment involves investments of funds abroad in exchange for financial return. Foreign
investment can be of two types: direct and portfolio investments.
Benefits of International Business
Benefits to Nations
1. Earning of foreign exchange: International business helps a country to earn foreign exchange which
it can later use for meeting its imports of capital goods, technology, petroleum products and
fertilisers, pharmaceutical products and a host of other consumer products which otherwise might
not be available domestically.
2. More efficient use of resources: As stated earlier, international business operates on a simple
principle — produce what your country can produce more efficiently, and trade the surplus
production so generated with other countries to procure what they can produce more efficiently.
3. Improving growth prospects and employment potentials: Producing solely f or the purposes of
domestic consumption severely restricts a country’s prospects for growth and employment.
4. Increased standard of living: In the absence of international trade of goods and services, it would
not have been possible for the world community to consume goods and services produced in other
countries that the people in these countries are able to consume and enjoy a higher standard of
living.
Benefits to Firms
1. Prospects for higher profits: International business can be more profitable than the domestic
business.
2. Increased capacity utilization: Many firms setup production capacities for their products which are
in excess of demand in the domestic market.
3. Prospects for growth: Business firms find it quite frustrating when demand for their products starts
getting saturated in the domestic market. Such firms can considerably improve prospects of their
growth by plunging into overseas markets.
4. Way out to intense competition in domestic market: When competition in the domestic market is
very intense, internationalization seems to be the only way to achieve significant growth
Development of International Business
The fundamental reason behind international business is that the countries cannot produce equally well
or cheaply all that they need. This is because of the unequal distribution of natural resources among
them or differences in their productivity levels. International business involves commercial activities that
cross national frontiers.
International business consists of transactions that are devised and carried out across national borders
to satisfy the objectives of the individuals, companies and organizations. These transactions take on
various forms which are often interrelated.
International business is all business transactions — private and governmental — that involve two or
more countries. Private companies undertake such transactions for profits; governments may or may
not do the same in their transactions.
Due to these differences, it is not uncommon to find one particular country being in a better position to
produce better quality products and/ or at lower costs than what other nations can do. In other words,
we can say that some countries are in an advantageous position in producing select goods and services
which other countries cannot produce that effectively and efficiently, and vice versa.
Methods of Entry in International Business
1. Exporting and Importing: Exporting refers to sending of goods and services from the home
country to a foreign country. In a similar vein, importing is purchase of foreign products and
bringing them into one’s home country. There are two important ways in which a firm can
export or import products: direct and indirect exporting/importing
2. Contract Manufacturing: Contract manufacturing refers to a type of international business
where a firm enters into a contract with one or a few local manufacturers in foreign countries to
get certain components or goods produced as per its specifications.
3. Licensing: Licensing is a contractual arrangement in which one firm grants access to its patents,
trade secrets or technology to another firm in a foreign country for a fee called royalty. The firm
that grants such permission to the other firm is known as licensor and the other firm in the
foreign country that acquires such rights to use technology or patents is called the licensee. It
may be mentioned here that it is not only technology that is licensed.
4. Franchising: Franchising is a term very similar to licensing. One major distinction between the
two is that while the former is used in connection with production and marketing of goods, the
term franchising applies to service business. The other point of difference between the two is
that franchising is relatively more stringent than licensing. Franchisers usually set strict rules and
regulations as to how the franchisees should operate while running their business.
5. Joint Venture: Joint venture is a very common strategy for entering into foreign markets. A joint
venture means establishing a firm that is jointly owned by two or more otherwise independent
firms. In the widest sense of the term, it can also be described as any form of association which
implies collaboration for more than a transitory period.