Course Code: – ECO – 01
Course Title: – Business Organisation
Assignment Code: – ECO – 01/TMA/2014-15
Coverage: – All Blocks
Maximum Marks: – 100
Attempt all the questions.
1. Describe various sources to raise long term capital by a company.
Solution:-
A company may raise funds for different purposes depending on the time periods ranging from very short to fairly long duration. The total amount of financial needs of a company depends on the nature and size of the business. The scope of raising funds depends on the sources from which funds may be available. The business forms of sole proprietor and partnership have limited opportunities for raising funds. They can finance their business by the following means:-
Investment of own savings
Raising loans from friends and relatives
Arranging advances from commercial banks
Borrowing from finance companies
Companies can Raise Finance by a Number of Methods. To Raise Long-Term and Medium-Term Capital, they have the following options:-
Issue of Shares
It is the most important method. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for public limited companies there are no such restrictions. There are two types of shares :-
Equity shares :- the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.
Preference shares :- dividend is payable on these shares at a fixed rate and is payable only if there are profits. Hence, there is no compulsory burden on the company’s finances. Such shares do not give voting rights.
Issue of Debentures
Companies generally have powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and are recovered by a charge on the property or assets of the company, which provide the necessary security for payment. The company is liable to pay interest even if there are no profits. Debentures are mostly issued to finance the long-term requirements of business and do not carry any voting rights.
Loans from Financial Institutions
Long-term and medium-term loans can be secured by companies from financial institutions like the Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India (ICICI , State level Industrial Development Corporations, etc. These financial institutions grant loans for a maximum period of 25 years against approved schemes or projects. Loans agreed to be sanctioned must be covered by securities by way of mortgage of the company’s property or assignment of stocks, shares, gold, etc.
Loans from Commercial Banks
Medium-term loans can be raised by companies from commercial banks against the security of properties and assets. Funds required for modernisation and renovation of assets can be borrowed from banks. This method of financing does not require any legal formality except that of creating a mortgage on the assets.
Public Deposits
Companies often raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Public deposits can be raised by companies to meet their medium-term as well as short-term financial needs. The increasing popularity of public deposits is due to :-
The rate of interest the companies have to pay on them is lower than the interest on bank loans.
These are easier methods of mobilising funds than banks, especially during periods of credit squeeze.
They are unsecured.
Unlike commercial banks, the company does not need to satisfy credit-worthiness for securing loans.
Reinvestment of Profits
Profitable companies do not generally distribute the whole amount of profits as dividend but, transfer certain proportion to reserves. This may be regarded as reinvestment of profits or ploughing back of profits. As these retained profits actually belong to the shareholders of the company, these are treated as a part of ownership capital. Retention of profits is a sort of self financing of business. The reserves built up over the years by ploughing back of profits may be utilised by the company for the following purposes:-
Expansion of the undertaking
Replacement of obsolete assets and modernisation.
Meeting permanent or special working capital requirement.
Redemption of old debts.
The benefits of this source of finance to the company are :-
It reduces the dependence on external sources of finance.
It increases the credit worthiness of the company.
It enables the company to withstand difficult situations.
It enables the company to adopt a stable dividend policy.
To Finance Short-Term Capital, Companies can use the following Methods:-
Trade Credit
Companies buy raw materials, components, stores and spare parts on credit from different suppliers. Generally suppliers grant credit for a period of 3 to 6 months, and thus provide short-term finance to the company. Availability of this type of finance is connected with the volume of business. When the production and sale of goods increase, there is automatic increase in the volume of purchases, and more of trade credit is available.
Factoring
The amounts due to a company from customers, on account of credit sale generally remains outstanding during the period of credit allowed i.e. till the dues are collected from the debtors. The book debts may be assigned to a bank and cash realised in advance from the bank. Thus, the responsibility of collecting the debtors’ balance is taken over by the bank on payment of specified charges by the company. This method of raising short-term capital is known as factoring. The bank charges payable for the purpose is treated as the cost of raising funds.
Discounting Bills of Exchange
This method is widely used by companies for raising short-term finance. When the goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. Instead of holding the bills till the date of maturity, companies can discount them with commercial banks on payment of a charge known as bank discount. The rate of discount to be charged by banks is prescribed by the Reserve Bank of India from time to time. The amount of discount is deducted from the value of bills at the time of discounting. The cost of raising finance by this method is the discount charged by the bank.
Bank Overdraft and Cash Credit
It is a common method adopted by companies for meeting short-term financial requirements. Cash credit refers to an arrangement whereby the commercial bank allows money to be drawn as advances from time to time within a specified limit. This facility is granted against the security of goods in stock, or promissory notes bearing a second signature, or other marketable instruments like Government bonds. Overdraft is a temporary arrangement with the bank which permits the company to overdraw from its current deposit account with the bank up to a certain limit. The overdraft facility is also granted against securities. The rate of interest charged on cash credit and overdraft is relatively much higher than the rate of interest on bank deposits.
2. “Company form of organization is the most ideal form for all types of businesses.” Discuss.
Solution:
You must be aware that during the second five-year plan period five steel plants were established in India’s underdeveloped areas to give a boost to the industrialization of the country. Do you know who owns these steel plants? It is the Government of India. It has set up a Joint Stock Company known as Steel Authority of India Limited (SAIL) for this purpose. You must have also heard the names of State Bank of India (SBI), National Thermal Power Corporation (NTPC), Grasim Industries Limited (GIL), Reliance Industries Limited (RIL) and Tata Steel Limited. These are all big business units and organised in the form of Joint Stock Companies.
A Joint Stock Company or simply a company is a voluntary association of persons generally formed for undertaking some big business activity. It is established by law and can be dissolved by law. The company has a separate legal existence so that even if its members die, the company remains in existence. Its members contribute money for some common purpose. The money so contributed constitutes the capital of the company. The capital of the company is divided into small units called shares. Since members invest their money by purchasing the shares of the company, they are known as shareholders and the capital of the company is known as share capital.
In India, the joint stock companies are governed by the Companies Act, 1956. According to the Act, a company means ‘a company formed and registered under this Act or an existing company’. An existing company means a company formed and registered under any of the previous Companies Acts. This definition is not exhaustive enough to reveal the basic features of the company. However, based on the definition given in the previous
Companies Act and various judicial decisions, it can be defined as ‘an artificial person created by law, having a separate legal entity, with a perpetual succession’.
One of the first decisions that you will have to make as a business owner is how the business should be structured. All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure. This decision will have long-term implications, so you may want to consult with an accountant and attorney to help you select the form of ownership that is right for you. In making a choice, you will want to take into account the following:
•Your vision regarding the size and nature of your business.
•The level of control you wish to have.
•The level of “structure” you are willing to deal with.
•The business’s vulnerability to lawsuits.
•Tax implications of the different organizational structures.
•Expected profit (or loss) of the business.
•Whether or not you need to re-invest earnings into the business.
•Your need for access to cash out of the business for yourself.
An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships; Corporations and Limited Liability Company follows.
Sole Proprietorship
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship
• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
• Profits from the business flow-through directly to the owner’s personal tax return.
• The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
• Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
• May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
• May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
• Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially as an adjustment to income).
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed; Yes, its hard to think about a “break-up” when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc.
Advantages of a Partnership
• Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax return.
• Prospective employees may be attracted to the business if given the incentive to become a partner.
• The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership
• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Types of Partnerships that should be considered:
1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
2. Limited Partnership and Partnership with limited liability
“Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decision, which generally encourages investors for short term projects, or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.
Corporations
A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A Corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
• Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
• Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.
• Corporations can raise additional funds through the sale of stock.
• A Corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Disadvantages of a Corporation
• The process of incorporation requires more time and money than other forms of organization.
• Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.
Sub-chapter S Corporation
A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.
Limited Liability Company (LLC)
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC’s must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.
Federal Tax Forms for LLC
Taxed as a partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.
In summary, deciding the form of ownership that best suits your business venture should be given careful consideration. Use your key advisors to assist you in the process.
3. Differentiate between the following:
(a) Primary market and secondary market
(b) Wholesaler and Retailer.
(a)Primary Market and Secondary Market
We all know that market is a place where buyers and sellers meet and carry out transaction. In a market, the selling price and the cost price are fixed owing to the demand and supply. However, apart from the very basic concept we need to know deeper about market as it is evolving and growing big day by day.
Capital market generally consists of primary market and secondary market. Primary and secondary market are distinct terms and different from each other.
Primary Market: Primary market considered to be very important as it the place where securities are offered to the public for the first time. So, it is the place where securities are made.
It may happen that a company may need capital for its business. Then the company approaches the primary market and issue shares in an IPO (Initial Public Offering).
Investors buy the company’s share and start sharing risk and returns of the company from then onwards. The company thus gets the capital it required to carry on investments.
After the capital is raised by the company, it gets listed on the stock exchange where the stocks can be traded. The shares are now traded in secondary market.
Secondary market: Secondary market is the place where the shares are traded after their initial offering in the primary market. Therefore, the stock market is considered as secondary market. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are secondary market.
Here, the investors trade among themselves without the involvement of the issuing company. Typically, in primary market prices are set beforehand by the issuing company. But in secondary market prices are not set rather they depend on the forces of demand and supply of the securities.
Maximum trading is done in the secondary market. However, trading in the secondary market does not have any effect on the capital structure of the company. The primary market gives the company an opportunity to increase capital they want to invest.
Conclusion
Primary as well as secondary market is regulated by Securities and Exchange Board of India (SEBI). Recently SEBI has announced reforms to primary market. According to the regulation, companies with market valuation of less than Rs. 4,000 crore can sell 25% or Rs.400 crore, whichever is lower in an IPO.
This move will encourage the companies to raise capital in the primary market. Increased activity in the primary market thus rises corporate investment which in turn boosts economic growth.
(b) Wholesaler and Retailer
Products purchased from your favorite stores often involve distribution from a variety of sources. Getting a product to the market largely requires an effective marketing channel for companies that manufacture durable goods and other products. A supply chain typically features various middlemen between the manufacturer and the consumer, such as distributors, wholesalers and retailers.
Distributors: - Distributors frequently have a business relationship with manufactures that they represent. Many distributors maintain exclusive buying agreements that limit the number of participants or enables distributors to cover a certain territory. The distributor becomes the manufacture’s direct point of contact for prospective buyers of certain products. However, distributors rarely sell a manufacture’s goods directly to consumers. Wholesale representatives and retailers generally find distributors to buy products for resale.
Wholesalers: - Wholesalers generally buy a large quantity of products directly from distributors. High-volume purchase orders typically improve a wholesaler’s buying power. Many distributors provide discounts for a certain number of items purchased or the total amount spent on merchandise. Wholesalers acquire merchandise, such as telephones, computers, bicycles, clothing, televisions and furniture. The goods are frequently destined for retailers.
Retailers: - Retailers consist of small and large for-profit businesses that sell products directly to consumers. To realize a profit, retailers search for products that coincide with their business objectives and find suppliers with the most competitive pricing. Generally, a retailer can buy small quantities of an item from a distributor or a wholesaler. For instance, a retail merchant who wanted to purchase a dozen lamps could contact lighting distributors to inquire about pricing.
Considerations:- Raw materials that become finished products are an important aspect of a manufacturer’s operation, but the selling process must stay on pace with the production schedule or the manufacturer could end up with too many items. Distributors often place large orders for some items, such as bicycles or infant car seats. The main differences among wholesalers, distributors and retailers are based on the entity’s business model and objectives toward merchandising. Some business operations may manufacture and sell products on a retail basis directly to consumers. Using market research, communications skills and established business relationships; wholesalers, distributors and retailers can create strategies for business success.
4. What is stock exchange? Discuss. Also describe in detail its functions.
Solution:-
The securities regulation act of 1956defined stock exchange as “an association, organization, or a individual which is established for the purpose of assisting, regulating , and controlling business in buying ,selling and dealing in securities.” Meaning: This comes under treasury sector, which provides service to stock brokers & traders to trade stocks, bonds and securities. Stock exchanges help the companies to raise their fund. Therefore the companies needs to list themselves in the Stock Exchange and the shares will be issued which is known as equity or a ordinary share and these shareholders are the real owners of the company the Board Of Directors of the Company are elected out of these Equity Shareholders only.
9 Most Important functions of Stock Exchange:
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities include the companies names in the trade list only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of loss making companies. So stock exchange facilitates allocation of investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.
5. Write short notes on the following.
(a) Warehousing
(b) Departmental Organization
(c) Factors influencing choice of channel
(d) Advertisement.
(a) Warehousing
Warehousing refers to the activities involving storage of goods on a large-scale in a systematic and orderly manner and making them available conveniently when needed.
Means holding or preserving goods in huge quantities from the time of their purchase or production till their actual use or sale.
Creates time utility by bridging the time gap between production and consumption of goods
(b) Departmental Organisation:
Depending on the size of your business, number of employees and your potential long-term growth in staff levels, you have several options — such as flat, hierarchical, divisional and departmental — for creating an organizational structure that’s right for you. Determining if a departmental structure will work in your business requires an understanding of your different choices.
Organizational Structure
An organizational structure helps companies staff properly, manage employees, create a chain of command and see to it that all functions are handled. Small businesses often start with a handful of employees, with the owner designating who does what and staff members reporting directly to the boss. As the business grows, this lack of structure can lead to confusion and turf wars, such as whether marketing directs sales or vice versa. Creating a formal organizational structure helps businesses operate based on their current needs as well as take on and manage new employees as the company grows.
Types of Structures
A flat organization is one without different levels, and employees have significant input into how they do their jobs. This is often the structure of start-ups and very small companies. A hierarchical structure has layers and is useful when employees have assistants or subordinates. For example, in a hierarchical structure, the marketing department might have a director who oversees a manager who oversees a coordinator. Using a divisional structure, companies divide responsibilities among different products, services or locations. For example, a company that makes footwear might divide its structure into men’s, women’s and children’s shoes, assigning marketing, HR and IT functions to each. A departmental structure divides the responsibilities of a business into different functions. Different departments fall under the management of the CEO, the CFO or the COO.
Departments
Common parts of a departmental structure include marketing, finance, human resources, information technology, administration and production. Some departments are sub functions of others. For example, the marketing department might oversee separate sales, advertising, public relations and promotions functions or departments. The production department might oversee manufacturing, warehousing and shipping.
Organization Chart
An organization chart of a company with a departmental structure might include titles and department names. For example, the first title on the pyramid would be the CEO. Under that, the chart would show CFO, COO and often a director of marketing. Under the CFO, the accounting department and all of its titles or positions are listed. The COO might oversee production, administration and information technology. Titles within departments often include director or vice president, then manager, then coordinator.
(c) Factors influencing choice of channel
The choice of a suitable channel of distribution is one of the most important decisions in the marketing of products because channel affects the time and costs of distribution as well as the volume of sales.
It also influences pricing and promoting efforts and dealer relations. Choice of a channel of distribution involves the selection of the best possible combination of middlemen or intermediaries.
The objective is to secure the largest possible distribution at minimum cost. The channel must be flexible and efficient. It should be consistent with the declared marketing policies and programmes of the firm.
Such a channel can be selected by evaluating alternative channels in terms of their costs, sales potential and suitability.
The factors affecting the choice of distribution channels may be classified as follows:
Product Considerations
Market considerations
Company considerations
Middlemen considerations:
(d)Advertisement
Advertising is a PAID Non-Personal communication from an identified sponsor using Mass Media to persuade or influence an audience. Sometime for public service announcement Space & Time may be donated.
Advertising is the best-known and most widely discussed Form of Promotion, probably because of its popularity. It is an important tool particularly for companies whose products & services are targeted at mass consumer market; it can be a very cost-effective method for communicating with large audiences