BUSINESS AND NEW
ECONOMISC ENVIRONMENT
- Easy to
start and easy to close: The form of business organization
should be such that it should be easy to close. There should not be
hassles or long procedures in the process of setting up business or
closing the same.
- Division of
labour: There
should be possibility to divide the work among the available owners.
- Large
amount of resources: Large
volume of business requires large volume of resources. Some forms of
business organization do not permit to raise larger resources. Select the
one which permits to mobilize the large resources.
- Liability: The liability of the owners
should be limited to the extent of money invested in business. It is
better if their personal properties are not brought into business to make
up the losses of the business.
- Secrecy: The form of business
organization you select should be such that it should permit to take care
of the business secrets. We know that century old business units are still
surviving only because they could successfully guard their business
secrets.
- Transfer of
ownership: There
should be simple procedures to transfer the ownership to the next legal
heir.
- Ownership,
Management and control: If
ownership, management and control are in the hands of one or a small group
of persons, communication will be effective and coordination will be
easier. Where ownership, management and control are widely distributed, it
calls for a high degree of professional’s skills to monitor the
performance of the business.
- Continuity: The
business should continue forever and ever irrespective of the
uncertainties in future.
- Quick
decision-making: Select such a form of business
organization, which permits you to take decisions quickly and promptly.
Delay in decisions may invalidate the relevance of the decisions.
- Personal
contact with customer: Most of the
times, customers give us clues to improve business. So choose such a form,
which keeps you close to the customers.
- Flexibility: In times
of rough weather, there should be enough flexibility to shift from one
business to the other. The lesser
the funds committed in a particular business, the better it is.
- Taxation: More profit means more tax. Choose such
a form, which permits to pay low tax.
SOLE PROPRIETORSHIP:
Features of sole
proprietorship
- It
is easy to start a business under this form and also easy to close.
- He
introduces his own capital. Sometimes, he may borrow, if necessary
- He
enjoys all the profits and in case of loss, he lone suffers.
- He
has unlimited liability which implies that his liability extends to his
personal properties in case of loss.
- He
has a high degree of flexibility to shift from one business to the other.
- Business
secretes can be guarded well
- There
is no continuity. The business comes to a close with the death, illness or
insanity of the sole trader. Unless, the legal heirs show interest to
continue the business, the business cannot be restored.
- He
has total operational freedom. He is the owner, manager and controller.
- He
can be directly in touch with the customers.
- He
can take decisions very fast and implement them promptly.
- Rates
of tax, for example, income tax and so on are comparatively very low
Advantages of
sole proprietorship
- Easy
to start and easy to close: Formation of a sole trader from
of organization is relatively easy even closing the business is easy.
- Personal
contact with customers directly: Based on the tastes and
preferences of the customers the stocks can be maintained.
- Prompt
decision-making: To improve the quality of services to the
customers, he can take any decision and implement the same promptly. He is
the boss and he is responsible for his business Decisions relating to
growth or expansion can be made promptly.
- High
degree of flexibility: Based on the profitability, the
trader can decide to continue or change the business, if need be.
- Secrecy: Business
secrets can well be maintained because there is only one trader.
- Low
rate of taxation: The rate of income tax for sole traders is
relatively very low.
- Direct
motivation:
If there are profits, all the profits belong to the trader himself. In
other words. If he works more hard, he will get more profits. This is the
direct motivating factor. At the same time, if he does not take active
interest, he may stand to lose badly also.
- Total
Control:
The ownership, management and control are in the hands of the sole trader
and hence it is easy to maintain the hold on business.
- Minimum
interference from government: Except in matters relating to
public interest, government does not interfere in the business matters of
the sole trader. The sole trader is free to fix price for his
products/services if he enjoys monopoly market.
- Transferability: The legal
heirs of the sole trader may take the possession of the business.
Disadvantages of
the sole proprietor
- Unlimited
liability:
The liability of the sole trader is unlimited. It means that the sole
trader has to bring his personal property to clear off the loans of his
business. From the legal point of view, he is not different from his
business.
- Limited
amounts of capital: The resources a sole trader can
mobilize cannot be very large and hence this naturally sets a limit for
the scale of operations.
- No
division of labour: All the work related to different
functions such as marketing, production, finance, labour and so on has to
be taken care of by the sole trader himself. There is nobody else to take
his burden. Family members and relatives cannot show as much interest as the
trader takes.
- Uncertainty: There is
no continuity in the duration of the business. On the death, insanity of
insolvency the business may be come to an end.
- Inadequate
for growth and expansion: This from is suitable for only
small size, one-man-show type of organizations. This may not really work
out for growing and expanding organizations.
- Lack
of specialization: The services of specialists such as
accountants, market researchers, consultants and so on, are not within the
reach of most of the sole traders.
- More
competition:
Because it is easy to set up a small business, there is a high degree of
competition among the small businessmen and a few who are good in taking
care of customer requirements along can service.
- Low
bargaining power: The sole trader is the in the receiving end in
terms of loans or supply of raw materials. He may have to compromise many
times regarding the terms and conditions of purchase of materials or
borrowing loans from the finance houses or banks.
Partnership
Partnership is an improved from of sole trader in
certain respects. Where there are like-minded persons with resources, they can
come together to do the business and share the profits/losses of the business
in an agreed ratio. Persons who have entered into such an agreement are
individually called ‘partners’ and collectively called ‘firm’. The relationship
among partners is called a partnership.
FEATURES OF
PARTNERSHIP
- Relationship:
Partnership is a relationship among persons. It is relationship resulting
out of an agreement.
- Two
or more persons: There should be two or more number of persons.
- There
should be a business: Business should be conducted.
- Agreement: Persons
should agree to share the profits/losses of the business
- Carried
on by all or any one of them acting for all: The
business can be carried on by all or any one of the persons acting for
all. This means that the business can be carried on by one person who is
the agent for all other persons. Every partner is both an agent and a
principal. Agent for other partners and principal for himself. All the
partners are agents and the ‘partnership’ is their principal.
- Unlimited
liability:
The liability of the partners is unlimited. The partnership and partners,
in the eye of law, and not different but one and the same. Hence, the
partners have to bring their personal assets to clear the losses of the
firm, if any.
- Number
of partners:
According to the Indian Partnership Act, the minimum number of partners
should be two and the maximum number if restricted, as given below:
10
partners is case of banking business
- Division
of labour:
Because there are more than two persons, the work can be divided among the
partners based on their aptitude.
- Personal
contact with customers: The partners can continuously be
in touch with the customers to monitor their requirements.
- Flexibility: All the
partners are likeminded persons and hence they can take any decision
relating to business.
PARTNERSHIP DEED
The written agreement among the partners is called
‘the partnership deed’. It contains the terms and conditions governing the
working of partnership. The following are contents of the partnership deed.
- Names
and addresses of the firm and partners
- Nature
of the business proposed
- Duration
- Amount
of capital of the partnership and the ratio for contribution by each of
the partners.
- Their
profit sharing ration (this is used for sharing losses also)
- Rate
of interest charged on capital contributed, loans taken from the
partnership and the amounts drawn, if any, by the partners from their
respective capital balances.
- The
amount of salary or commission payable to any partner
- Procedure
to value good will of the firm at the time of admission of a new partner,
retirement of death of a partner
- Allocation
of responsibilities of the partners in the firm
- Procedure
for dissolution of the firm
- Name
of the arbitrator to whom the disputes, if any, can be referred to for
settlement.
- Special
rights, obligations and liabilities of partners(s), if any.
Kind of partners
- Active
Partner:
Active partner takes active part in the affairs of the partnership. He is
also called working partner.
- Sleeping
Partner:
Sleeping partner contributes to capital but does not take part in the
affairs of the partnership.
- Nominal
Partner:
Nominal partner is partner just for namesake. He neither contributes to
capital nor takes part in the affairs of business. Normally, the nominal
partners are those who have good business connections, and are well places
in the society.
- Partner
by Estoppels: Estoppels means behavior or conduct. Partner
by estoppels gives an impression to outsiders that he is the partner in
the firm. In fact be neither contributes to capital, nor takes any role in
the affairs of the partnership.
- Partner
by holding out: If partners declare a particular person
(having social status) as partner and this person does not contradict even
after he comes to know such declaration, he is called a partner by holding
out and he is liable for the claims of third parties. However, the third
parties should prove they entered into contract with the firm in the
belief that he is the partner of the firm. Such a person is called partner
by holding out.
- Minor
Partner:
Minor has a special status in the partnership. A minor can be admitted for
the benefits of the firm. A minor is entitled to his share of profits of
the firm. The liability of a minor partner is limited to the extent of his
contribution of the capital of the firm.
Advantages Of Partnership
- Easy
to form:
Once there is a group of like-minded persons and good business proposal,
it is easy to start and register a partnership.
- Availability
of larger amount of capital: More amount of capital can be
raised from more number of partners.
- Division
of labour:
The different partners come with varied backgrounds and skills. This
facilities division of labour.
- Flexibility: The
partners are free to change their decisions, add or drop a particular
product or start a new business or close the present one and so on.
- Personal
contact with customers: There is scope to keep close
monitoring with customers requirements by keeping one of the partners in
charge of sales and marketing. Necessary changes can be initiated based on
the merits of the proposals from the customers.
- Quick
decisions and prompt action: If there is consensus among
partners, it is enough to implement any decision and initiate prompt
action. Sometimes, it may more time for the partners on strategic issues
to reach consensus.
- The
positive impact of unlimited liability: Every
partner is always alert about his impending danger of unlimited liability.
Hence he tries to do his best to bring profits for the partnership firm by
making good use of all his contacts.
Disadvantages of partnership:
- Formation
of partnership is difficult: Only like-minded persons can start
a partnership. It is sarcastically said,’ it is easy to find a life
partner, but not a business partner’.
- Liability: The
partners have joint and several liabilities beside unlimited liability.
Joint and several liability puts additional burden on the partners, which
means that even the personal properties of the partner or partners can be
attached. Even when all but one partner become insolvent, the solvent
partner has to bear the entire burden of business loss.
- Lack
of harmony or cohesiveness: It is likely that partners may
not, most often work as a group with cohesiveness. This result in mutual
conflicts, an attitude of suspicion and crisis of confidence. Lack of
harmony results in delay in decisions and paralyses the entire operations.
- Limited
growth:
The resources when compared to sole trader, a partnership may raise little
more. But when compare to the other forms such as a company, resources
raised in this form of organization are limited. Added to this, there is a
restriction on the maximum number of partners.
- Instability: The
partnership form is known for its instability. The firm may be dissolved
on death, insolvency or insanity of any of the partners.
- Lack
of Public confidence: Public and even the financial
institutions look at the unregistered firm with a suspicious eye. Though
registration of the firm under the Indian Partnership Act is a solution of
such problem, this cannot revive public confidence into this form of
organization overnight. The partnership can create confidence in other
only with their performance.
Joint stock company
The joint stock company emerges from the limitations
of partnership such as joint and several liability, unlimited liability,
limited resources and uncertain duration and so on. Normally, to take part in a
business, it may need large money and we cannot foretell the fate of business.
It is not literally possible to get into business with little money. Against
this background, it is interesting to study the functioning of a joint stock
company. The main principle of the joint stock company from is to provide
opportunity to take part in business with a low investment as possible say
Rs.1000. Joint Stock Company has been a boon for investors with moderate funds
to invest.
Features of joint
stock company
- Artificial
person:
The Company has no form or shape. It is an artificial person created by
law. It is intangible, invisible and existing only, in the eyes of law.
- Separate
legal existence: it has an independence existence, it separate
from its members. It can acquire the assets. It can borrow for the
company. It can sue other if they are in default in payment of dues,
breach of contract with it, if any. Similarly, outsiders for any claim can
sue it. A shareholder is not liable for the acts of the company.
Similarly, the shareholders cannot bind the company by their acts.
- Voluntary
association of persons: The Company is an association of
voluntary association of persons who want to carry on business for profit.
To carry on business, they need capital. So they invest in the share
capital of the company.
- Limited
Liability:
The shareholders have limited liability i.e., liability limited to the
face value of the shares held by him. In other words, the liability of a
shareholder is restricted to the extent of his contribution to the share
capital of the company. The shareholder need not pay anything, even in
times of loss for the company, other than his contribution to the share
capital.
- Capital
is divided into shares: The total capital is divided into
a certain number of units. Each unit is called a share. The price of each
share is priced so low that every investor would like to invest in the
company. The companies promoted by promoters of good standing (i.e., known
for their reputation in terms of reliability character and dynamism) are
likely to attract huge resources.
- Transferability
of shares:
In the company form of organization, the shares can be transferred from
one person to the other. A shareholder of a public company can cell sell
his holding of shares at his will. However, the shares of a private
company cannot be transferred. A private company restricts the
transferability of the shares.
- Common
Seal:
As the company is an artificial person created by law has no physical
form, it cannot sign its name on a paper; so, it has a common seal on
which its name is engraved. The common seal should affix every document or
contract; otherwise the company is not bound by such a document or
contract.
- Perpetual
succession:
‘Members may comes and members may go, but the company continues for ever
and ever’ A. company has uninterrupted existence because of the right
given to the shareholders to transfer the shares.
- Ownership
and Management separated: The shareholders are spread over
the length and breadth of the country, and sometimes, they are from
different parts of the world. To facilitate administration, the
shareholders elect some among themselves or the promoters of the company
as directors to a Board, which looks after the management of the business.
The Board recruits the managers and employees at different levels in the
management. Thus the management is separated from the owners.
- Winding
up:
Winding up refers to the putting an end to the company. Because law
creates it, only law can put an end to it in special circumstances such as
representation from creditors of financial institutions, or shareholders
against the company that their interests are not safeguarded. The company
is not affected by the death or insolvency of any of its members.
- The
name of the company ends with ‘limited’: it is
necessary that the name of the company ends with limited (Ltd.) to give an
indication to the outsiders that they are dealing with the company with
limited liability and they should be careful about the liability aspect of
their transactions with the company.
Advantages of joint stock company
- Mobilization
of larger resources: A joint stock company provides
opportunity for the investors to invest, even small sums, in the capital
of large companies. The facilities rising of larger resources.
- Separate
legal entity: The Company has separate legal entity. It is
registered under Indian Companies Act, 1956.
- Limited
liability:
The shareholder has limited liability in respect of the shares held by
him. In no case, does his liability exceed more than the face value of the
shares allotted to him.
- Transferability
of shares:
The shares can be transferred to others. However, the private company
shares cannot be transferred.
- Liquidity
of investments: By providing the transferability of shares,
shares can be converted into cash.
- Inculcates
the habit of savings and investments: Because the share face
value is very low, this promotes the habit of saving among the common man
and mobilizes the same towards investments in the company.
- Democracy
in management: the shareholders elect the directors in a
democratic way in the general body meetings. The shareholders are free to
make any proposals, question the practice of the management, suggest the
possible remedial measures, as they perceive, The directors respond to the
issue raised by the shareholders and have to justify their actions.
- Economics
of large scale production: Since the production is in the
scale with large funds at
- Continued
existence:
The Company has perpetual succession. It has no natural end. It continues
forever and ever unless law put an end to it.
- Institutional
confidence:
Financial Institutions prefer to deal with companies in view of their
professionalism and financial strengths.
- Professional
management:
With the larger funds at its disposal, the Board of Directors recruits
competent and professional managers to handle the affairs of the company
in a professional manner.
- Growth
and Expansion: With large resources and professional
management, the company can earn good returns on its operations, build
good amount of reserves and further consider the proposals for growth and
expansion.
Disadvantages of joint stock company
- Formation
of company is a long drawn procedure: Promoting a joint stock
company involves a long drawn procedure. It is expensive and involves
large number of legal formalities.
- High
degree of government interference: The government brings out
a number of rules and regulations governing the internal conduct of the
operations of a company such as meetings, voting, audit and so on, and any
violation of these rules results into statutory lapses, punishable under
the companies act.
- Inordinate
delays in decision-making: As the size of the organization
grows, the number of levels in organization also increases in the name of
specialization. The more the number of levels, the more is the delay in
decision-making. Sometimes, so-called professionals do not respond to the
urgencies as required. It promotes delay in administration, which is
referred to ‘red tape and bureaucracy’.
- Lack
or initiative: In most of the cases, the employees of the
company at different levels show slack in their personal initiative with
the result, the opportunities once missed do not recur and the company
loses the revenue.
- Lack
of responsibility and commitment: In some cases, the
managers at different levels are afraid to take risk and more worried
about their jobs rather than the huge funds invested in the capital of the
company lose the revenue.
- Lack
of responsibility and commitment: In some cases, the managers
at different levels are afraid to take risk and more worried about their
jobs rather than the huge funds invested in the capital of the company.
Where managers do not show up willingness to take responsibility, they
cannot be considered as committed. They will not be able to handle the
business risks.
Public
enterprises
Public enterprises occupy an important position in
the Indian economy. Today, public enterprises provide the substance and heart
of the economy. Its investment of over Rs.10,000 crore is in heavy and basic
industry, and infrastructure like power, transport and communications. The
concept of public enterprise in Indian dates back to the era of
pre-independence.
Genesis of
Public Enterprises
In consequence to declaration of its goal as
socialistic pattern of society in 1954, the Government of India realized that
it is through progressive extension of public enterprises only, the following
aims of our five years plans can be fulfilled.
- Higher
production
- Greater
employment
- Economic
equality, and
- Dispersal
of economic power
The
government found it necessary to revise its industrial policy in 1956 to give
it a socialistic bent.
Need for Public
Enterprises
The
Industrial Policy Resolution 1956 states the need for promoting public
enterprises as follows:
- To
accelerate the rate of economic growth by planned development
- To
speed up industrialization, particularly development of heavy industries
and to expand public sector and to build up a large and growing
cooperative sector.
- To
increase infrastructure facilities
- To
disperse the industries over different geographical areas for balanced
regional development
- To
increase the opportunities of gainful employment
- To
help in raising the standards of living
- To
reducing disparities in income and wealth (By preventing private
monopolies and curbing concentration of economic power and vast industries
in the hands of a small number of individuals)
Features of
Public Enterprises
- Under
the control of a government department: The
departmental undertaking is not an independent organization. It has no
separate existence. It is designed to work under close control of a
government department. It is subject to direct ministerial control.
- More
financial freedom: The departmental undertaking can draw funds
from government account as per the needs and deposit back when convenient.
- Like
any other government department: The departmental undertaking is
almost similar to any other government department
- Budget,
accounting and audit controls: The departmental undertaking has
to follow guidelines (as applicable to the other government departments)
underlying the budget preparation, maintenance of accounts, and getting
the accounts audited internally and by external auditors.
- More
a government organization, less a business organization . The set
up of a departmental undertaking is more rigid, less flexible, slow in
responding to market needs.
Advantages of Public
Enterprises
- Effective
control:
Control is likely to be effective because it is directly under the Ministry.
- Responsible
Executives:
Normally the administration is entrusted to a senior civil servant. The
administration will be organized and effective.
- Less
scope for mystification of funds: Departmental undertaking
does not draw any money more than is needed, that too subject to
ministerial sanction and other controls. So chances for mis-utilisation
are low.
- Adds
to Government revenue: The revenue of the government is
on the rise when the revenue of the departmental undertaking is deposited
in the government account.
Disadvantages of
Public Enterprises
- Decisions
delayed:
Control is centralized. This results in lower degree of flexibility.
Officials in the lower levels cannot take initiative. Decisions cannot be
fast and actions cannot be prompt.
- No
incentive to maximize earnings: The departmental undertaking does
not retain any surplus with it. So there is no inventive for maximizing
the efficiency or earnings.
- Slow
response to market conditions: Since there is no competition,
there is no profit motive; there is no incentive to move swiftly to market
needs.
- Redtapism
and bureaucracy: The departmental undertakings are in the
control of a civil servant and under the immediate supervision of a
government department. Administration gets delayed substantially.
- Incidence
of more taxes: At times, in case of losses, these are made
up by the government funds only. To make up these, there may be a need for
fresh taxes, which is undesirable.
Public corporation
Definition
A public corporation is defined as a ‘body corporate
create by an Act of Parliament or Legislature and notified by the name in the
official gazette of the central or state government. It is a corporate entity
having perpetual succession, and common seal with power to acquire, hold,
dispose off property, sue and be sued by its name”.
Features of
Public Corporation
- A
body corporate: It has a separate legal existence. It is a
separate company by itself. If can raise resources, buy and sell
properties, by name sue and be sued.
- More
freedom and day-to-day affairs: It is relatively free from any
type of political interference. It enjoys administrative autonomy.
- Freedom
regarding personnel: The employees of public
corporation are not government civil servants. The corporation has
absolute freedom to formulate its own personnel policies and procedures,
and these are applicable to all the employees including directors.
- Perpetual
succession:
A statute in parliament or state legislature creates it. It continues
forever and till a statue is passed to wind it up.
- Financial
autonomy:
Through the public corporation is fully owned government organization, and
the initial finance are provided by the Government, it enjoys total
financial autonomy, Its income and expenditure are not shown in the annual
budget of the government, it enjoys total financial autonomy. Its income
and expenditure are not shown in the annual budget of the government.
However, for its freedom it is restricted regarding capital expenditure
beyond the laid down limits, and raising the capital through capital
market.
- Commercial
audit:
Except in the case of banks and other financial institutions where
chartered accountants are auditors, in all corporations, the audit is
entrusted to the comptroller and auditor general of India.
- Run
on commercial principles: As far as the discharge of
functions, the corporation shall act as far as possible on sound business
principles.
Advantages of Public
Corporation
- Independence,
initiative and flexibility: The corporation has an autonomous
set up. So it is independent, take necessary initiative to realize its
goals, and it can be flexible in its decisions as required.
- Scope
for Redtapism and bureaucracy minimized: The
Corporation has its own policies and procedures. If necessary they can be
simplified to eliminate redtapism and bureaucracy, if any.
- Public
interest protected: The corporation can protect the public
interest by making its policies more public friendly, Public interests are
protected because every policy of the corporation is subject to ministerial
directives and board parliamentary control.
- Employee
friendly work environment: Corporation can design its own
work culture and train its employees accordingly. It can provide better
amenities and better terms of service to the employees and thereby secure
greater productivity.
- Competitive
prices:
the corporation is a government organization and hence can afford with
minimum margins of profit, It can offer its products and services at
competitive prices.
- Economics
of scale:
By increasing the size of its operations, it can achieve economics of
large-scale production.
- Public
accountability: It is accountable to the Parliament or
legislature; it has to submit its annual report on its working results.
Disadvantages of Public
Corporation
- Continued
political interference: the autonomy is on paper only and
in reality, the continued.
- Misuse
of Power:
In some cases, the greater autonomy leads to misuse of power. It takes
time to unearth the impact of such misuse on the resources of the
corporation. Cases of misuse of power defeat the very purpose of the
public corporation.
- Burden
for the government: Where the public corporation ignores the
commercial principles and suffers losses, it is burdensome for the
government to provide subsidies to make up the losses.
Government Company
- industrial
undertakings (such as Hindustan Machine Tools, Indian Telephone
Industries, and so on)
- Promotional
agencies (such as National Industrial Development Corporation, National
Small Industries Corporation, and so on) to prepare feasibility reports
for promoters who want to set up public or private companies.
- Agency
to promote trade or commerce. For example, state trading corporation,
Export Credit Guarantee Corporation and so such like.
- A
company to take over the existing sick companies under private management
(E.g. Hindustan Shipyard)
- A
company established as a totally state enterprise to safeguard national
interests such as Hindustan Aeronautics Ltd. And so on.
- Mixed
ownership company in collaboration with a private consult to obtain
technical know how and guidance for the management of its enterprises,
e.g. Hindustan Cables)
Features of Government Company
- Like
any other registered company: It is incorporated as a
registered company under the Indian companies Act. 1956. Like any other
company, the government company has separate legal existence. Common seal,
perpetual succession, limited liability, and so on. The provisions of the
Indian Companies Act apply for all matters relating to formation,
administration and winding up. However, the government has a right to
exempt the application of any provisions of the government companies.
- Shareholding: The
majority of the share are held by the Government, Central or State, partly
by the Central and State Government(s), in the name of the President of
India, It is also common that the collaborators and allotted some shares
for providing the transfer of technology.
- Directors
are nominated: As the government is the owner of the entire
or majority of the share capital of the company, it has freedom to
nominate the directors to the Board. Government may consider the requirements
of the company in terms of necessary specialization and appoints the
directors accordingly.
- Administrative
autonomy and financial freedom: A government company functions
independently with full discretion and in the normal administration of
affairs of the undertaking.
- Subject
to ministerial control: Concerned minister may act as the
immediate boss. It is because it is the government that nominates the
directors, the minister issue directions for a company and he can call for
information related to the progress and affairs of the company any time.
Advantages of
Government
Company
- Formation
is easy:
There is no need for an Act in legislature or parliament to promote a
government company. A Government company can be promoted as per the
provisions of the companies Act. Which is relatively easier?
- Separate
legal entity:
It retains the advantages of public corporation such as autonomy, legal
entity.
- Ability
to compete:
It is free from the rigid rules and regulations. It can smoothly function
with all the necessary initiative and drive necessary to complete with any
other private organization. It retains its independence in respect of
large financial resources, recruitment of personnel, management of its
affairs, and so on.
- Flexibility: A
Government company is more flexible than a departmental undertaking or
public corporation. Necessary changes can be initiated, which the
framework of the company law. Government can, if necessary, change the
provisions of the Companies Act. If found restricting the freedom of the
government company. The form of Government Company is so flexible that it
can be used for taking over sick units promoting strategic industries in
the context of national security and interest.
- Quick
decision and prompt actions: In view of the autonomy, the
government company take decision quickly and ensure that the actions and
initiated promptly.
- Private
participation facilitated: Government company is the only
from providing scope for private participation in the ownership. The
facilities to take the best, necessary to conduct the affairs of business,
from the private sector and also from the public sector.
Disadvantages of
Government
Company
- Continued
political and government interference:
Government seldom leaves the government company to function on its own.
Government is the major shareholder and it dictates its decisions to the
Board. The Board of Directors gets these approved in the general body.
There were a number of cases where the operational polices were influenced
by the whims and fancies of the civil servants and the ministers.
- Higher
degree of government control: The degree of government control
is so high that the government company is reduced to mere adjuncts to the
ministry and is, in majority of the cases, not treated better than the subordinate
organization or offices of the government.
- Evades
constitutional responsibility: A government company is creating
by executive action of the government without the specific approval of the
parliament or Legislature.
- Poor
sense of attachment or commitment: The members of the Board
of Management of government companies and from the ministerial departments
in their ex-officio capacity. The lack the sense of attachment and do not
reflect any degree of commitment to lead the company in a competitive environment.
- Divided
loyalties:
The employees are mostly drawn from the regular government departments for
a defined period. After this period, they go back to their government
departments and hence their divided loyalty dilutes their interest towards
their job in the government company.
- Flexibility
on paper:
The powers of the directors are to be approved by the concerned Ministry,
particularly the power relating to borrowing, increase in the capital,
appointment of top officials, entering into contracts for large orders and
restrictions on capital expenditure. The government companies are rarely
allowed to exercise their flexibility and independence.
CHANGING BUSINESS
ENVIRONMENT TO POST LIBERALIZATION SCENARIO
Capital AND CAPITAL BUDGETING
Types of fixed
assets
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Factors
determining the working capital requirements
- Nature
or character of business: The working capital requirements
of a firm basically depend upon the nature of its business. Public utility
undertakings like electricity, water supply and railways need very limited
working capital as their sales are on cash and are engaged in provision of
services only. On the other hand, trading firms require more investment in
inventories, receivables and cash and such they need large amount of
working capital. The manufacturing undertakings also require sizable
working capital.
- Size
of business or scale of operations: The working capital
requirements of a concern are directly influenced by the size of its
business, which may be measured in terms of scale of operations. Greater
the size of a business unit, generally, larger will be the requirements of
working capital. However, in some cases, even a smaller concern may need
more working capital due to high overhead charges, inefficient use of available
resources and other economic disadvantages of small size.
- Production
policy:
If the demand for a given product is subject to wide fluctuations due to
seasonal variations, the requirements of working capital, in such cases,
depend upon the production policy. The production could be kept either
steady by accumulating inventories during stack periods with a view to
meet high demand during the peck season or the production could be
curtailed during the slack season and increased during the peak season. If
the policy is to keep the production steady by accumulating inventories it
will require higher working capital.
- Manufacturing
process/Length of production cycle: In manufacturing business,
the requirements of working capital will be in direct proportion to the
length of manufacturing process. Longer the process period of manufacture,
larger is the amount of working capital required, as the raw materials and
other supplies have to be carried for a longer period.
- Seasonal
variations:
If the raw material availability is seasonal, they have to be bought in
bulk during the season to ensure an uninterrupted material for the
production. A huge amount is, thus, blocked in the form of material,
inventories during such season, which give rise to more working capital requirements.
Generally, during the busy season, a firm requires larger working capital
then in the slack season.
- Working
capital cycle: In a manufacturing concern, the working
capital cycle starts with the purchase of raw material and ends with the
realization of cash from the sale of finished products. This cycle
involves purchase of raw materials and stores, its conversion into stocks
of finished goods through work–in progress with progressive increment of
labour and service costs, conversion of finished stock into sales, debtors
and receivables and ultimately realization of cash. This cycle continues
again from cash to purchase of raw materials and so on. In general the
longer the operating cycle, the larger the requirement of working capital.
- Credit
policy:
The credit policy of a concern in its dealings with debtors and creditors
influences considerably the requirements of working capital. A concern
that purchases its requirements on credit requires lesser amount of
working capital compared to the firm, which buys on cash. On the other
hand, a concern allowing credit to its customers shall need larger amount
of working capital compared to a firm selling only on cash.
- Business
cycles:
Business cycle refers to alternate expansion and contraction in general business
activity. In a period of boom, i.e., when the business is prosperous,
there is a need for larger amount of working capital due to increase in
sales. On the contrary, in the times of depression, i.e., when there is a
down swing of the cycle, the business contracts, sales decline,
difficulties are faced in collection from debtors and firms may have to
hold large amount of working capital.
- Rate
of growth of business: The working capital requirements
of a concern increase with the growth and expansion of its business
activities. The retained profits may provide for a part of working capital
but the fast growing concerns need larger amount of working capital than
the amount of undistributed profits.
METHODS
AND SOURCES OF FINANCE
Methods
of finance
1.
Long
term finance
2.
Medium
term finance
3.
Short
term finance
SOURCES
OF FINANCE
1.
Long term
finance:
long term finance available for a long period say five years and above. The
long term methods outlined below are used to purchase fixed assets such as land
and buildings, plant and so on.
a)
Own capital : irrespective
of the form of organization such as soletrader, partnership or a company, the
owners of the business have to invest their own finances to start with. Money
invested by the owners, partners or promoters is permanent and will stay with
the business throughout the life of business.
b)
Share capital : normally in
the case of a company, the capital is
raised by issue of shares. The capital so raised is called share capital. The
share capital can be of two types, preference share capital and equity share
capital.
c)
Debentures: debentures are
the loans taken by the company. It is a certificate or letter by the company
under its common seal acknowledging the receipt of loan. A debenture holder is
the creditor of the company. A debenture holder is entitled to a fixed rate of
interest on the debenture amount.
d)
Government
grants and loans:
government may provide long term finance directly to the business houses or by
indirectly subscribing to the shares of the companies. The government gives
loans only if the project satisfies certain conditions, such as setting up a
project in a notified area, or ventures into projects which are beneficial for
the society as a whole.
2.
Medium term
finance
a.
Bank
loans ; bank loans are extended at a fixed rate of interest. Repayment of the
loan and interest are scheduled at the beginning and are usually directly
debited to the current account of the borrower. These are secured loans.
b.
Hire
purchase: it is a facility to buy a fixed asset while paying the price over a
long period of time. In other words , the possession of the asset can be taken
by making a down payment of a part of the price and the balance will be repaid
with a fixed rate of interest in agreed number of installments.
c.
Leasing
or renting: where there is a need for fixed assets, the asset need not be
purchased. It can be taken on lease or rent for specified number of years. The
company who owns the assets is called lessor and the company which takes the
asset on lease is called lessee. The agreement between the lessor and lessee is
called a lease agreement.
d.
Venture
capital: this form of finance is available only for limited companies. Venture
capital is normally provided in such projects where there is relatively a
higher degree of risk. For such projects, finance through the conventional
sources may not be available. Many banks offer such finance through their
merchant banking divisions, or specialist banks which offer advice and
financial assistance. The financial assistance may take form of loans and
venture capital.
3.
SHORT TERM
FINANCE
a.
Commercial
paper: it is new money market instrument introduced in india in recent times.
Cps are issued in large denominations by the leading, nationally reputed,
highly rated and credit worthy, large manufacturing and finance companies in
the public and private sector. The proceeds of the issue of commercial paper
are used to finance current transactions and seasonal and interim needs for
funds.
b.
Bank
overdraft: this is special arrangement with the banker where the customer can
draw more than what he has in his saving/ current account subject to a maximum
limit. interest is charged on a day to day basis on the actual amount overdrawn
.
c.
Trade
credit: this is short term credit facility extended by the creditors to the
debtors, normally, it is common for the traders to buy the materials and other
supplies from the suppliers on credit basis. After selling the stocks the
traders pay the cash and buy fresh stocks again on credit. Sometimes , the
suppliers may insist on the buyer to sign a bill.
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