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Befa Unit 1 Businesss Environment Business Forms PDF
Befa Unit 1 Businesss Environment Business Forms PDF
UNIT-1
Business and new economic environment
Characteristic features of business; Features and evaluation of sole
proprietorship; Partnership; Joint stock company; Public enterprises and their
types; Changing business environment in post- liberalization scenario.
Business Organisation
Meaning
Business organisation refers to all necessary arrangements required to conduct a
business. It refers to all those steps that need to be undertaken for establishing
relationship between men, material, and machinery to carry on business efficiently for
earning profits. This may be called the process of organising. The arrangement which
follows this process of organising is called a business undertaking or organisation. A
business undertaking can be better understood by analysing its characteristics.
Characteristics
1. Distinct Ownership : The term ownership refers to the right of an individual or a
group of individuals to acquire legal title to assets or properties for the purpose of
running the business. A business firm may be owned by one individual or a group of
individuals jointly.
2. Lawful Business : Every business enterprise must undertake such business which is
lawful, that is, the business must not involve activities which are illegal.
3. Separate Status and Management : Every business undertaking is an independent
entity. It has its own assets and liabilities. It has its own way of functioning. The profits
earned or losses incurred by one firm cannot be accounted for by any other firm.
4. Dealing in goods and services : Every business undertaking is engaged in the
production and/or distribution of goods or services in exchange of money.
5. Continuity of business operations : All business enterprise engage in operation on a
continuous basis. Any unit having just one single operation or transaction is not a
business unit.
6. Risk involvement : Business undertakings are always exposed to risk and
uncertainty. Business is influenced by future conditions which are unpredictable and
uncertain. This makes business decisions risky, thereby increasing the chances of loss
arising out of business.
Features of business:
1. Perception: they are able to predict how you will receive their message
2. Precision: they create a "meeting of the minds" .When the finish expressing
themselves share the same mental picture.
3. Credibility: they are believable. you trust their information
4. Control: They shape your response, they can make you laugh, cry and change your
mind and take action.
5. Congeniality: They maintain friendly, pleasure relations with you regardless
whether you agree with them or not.
Definition of firm:
Hansn: The firm may be defined as an independently administered business unit.
“A firm is a business unit which hires productive resources for the purpose of
producing goods and services”.
From the above features of a firm, it will be clear that a firm has to perform several
functions simultaneously – i.e. to produce a commodity, to sell and distribute the
commodity, to advertise the commodity and to perform all those things which will be
required to survive competition. To cap it all, the firm is expected to make as much as
possible. Theoretically speaking, a firm is expected to organize all the factors of
production in the most profitable manner. If one studies the structure and function of
modern firm the above definitions will appear to be too simple, because in modern
times the firm is expected to perform so many other functions.
1. Easy to start and easy to close: The form of business organization should be
such that it should be easy to start and easy to close. There should not be
hassles or long procedures in the process of setting up or closing the business.
2. Division of labour: There should be possibility to divide the work among the
available owners. The idea is to pool the expertise of all the people in business
and run the business most efficiently.
3. Large amount of resources: Large volume of business requires large volume of
resources. Some forms of business organizations do not permit to raise larger
resources. Select the one which permits to mobilize the large resources.
4. 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.
5. 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.
6. Transfer of ownership: There should be simple procedures to transfer the
ownership to the next legal heir.
7. 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 skills to
monitor the performance of the business.
8. Continuity: The business should continue forever and ever irrespective of the
uncertainties in future.
9. 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.
10. Personal contact with customers: Most of the times, customers give us clues to
improve business. So choose such a form which keeps you close to the
customers.
11. 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.
12. Taxation: More profit means more tax. Choose such a form which permits to
pay low tax.
Types of business Organizations
A business organization is concerned with how production and sale of a commodity
are organized.
A. Private Sector :
In a capitalist economy, the first four types of business organizations are set up in
the private sector. The private sector is owned by private individuals, families or
groups of individuals. It is characterized by private ownership in the means of
production, economic freedoms and profit motive.
In addition to the first three types of business organization, there are also Joint
Hindu Family Firms in the private sector in India and Business Organizations of the
New Millennium.
B. Public Sector :
The public sector includes public or state enterprises like railways, post sand
telegraphs, etc. The public sector is owned and controlled by the State. In India we
have also a number of public enterprises like Hindustan Machine Tolls, Life
Insurance Corporation, Bharat Heavy Electrical Ltd. ect. They are constituted as
companies, public corporations and departmental undertakings.
C. Joint Sector :
Joint sector organizations or enterprises are jointly owned by the public and
private sectors. But day-today management is left to the private sector.
A. Definition: Individual or sole proprietorship which is also called sole trader ship or
sole single entrepreneurship or proprietary firms is the most common, the
simplest and the oldest form of business organization.
2. PARTNERSHIP:
It is basically a relation between two or more persons who join hands to form a
business organisation with the objective of earning profit. The persons who join hands
are individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the
business is carried on is called ‘firm name’. Sultan Chand & Co, Ram Lal & Co, Gupta &
Co are the names of some partnership firms.
The partners provide the necessary capital, run the business jointly and share the
responsibility. You must be thinking how much capital each partner contributes? Do all
the partners jointly manage the business or can any of them manage the business on
behalf of others? Who will take the profits? If there is any loss then who will suffer the
loss? Yes, these are the few questions that might be coming to your mind. Actually,
when you invite your friends to start such a business, it should be the duty of all of you
to decide (i) the amount of capital to be contributed by each one of you; (ii) who will
manage; (iii) how will the profits and losses be shared. Thus, there must be some
agreement between the partners before they actually start the business. This
agreement is termed as ‘Partnership Deed’, which lays down certain terms and
conditions for starting and running the partnership firm.
This agreement may be oral or written. Actually, it is always better to insist on a
written agreement among partners in order to avoid future controversies.
Kinds of Partners: In a partnership firm you can find different types of partners. Some
may actively participate in the business while others prefer not to keep themselves
engaged actively in the business activities after contributing the required capital. Also
there are certain kinds of partners who neither contribute capital nor actively
participate in the day-to-day business operations. Let us learn more about them.
The name of the public company ends with the word ‘limited’ (Ltd.)
• Based on nationality : Based on nationality the companies can be divided into two
types :
1. Foreign Company: Foreign Company is a company incorporated outside India
but established a place of business within India. Foreign companies come
under the purview of the Indian Companies Act, 1956.
2. Indian Company: A Company incorporated in India under the Indian
Companies Act, 1956.
3. Types of Shares: The capital of a company can be divided into three types of
shares:
I. Equity or Ordinary Shares: Such shares form the main basis of the finance
of a company. The holders of such shares get divided only after the
preference shareholders are paid out of its profits. Hence they bear
maximum risk. This is because they do not get any divided if the company
does not make any profit. At times when profits high, they get much more
than the rate of dividend paid to preference shareholders.
II. Preference Shares: These shareholders enjoy a preferential or prior right
over equity shareholders to the profit of a company. They are entitled to a
fixed rate of dividend after paying interest on debentures and before any
dividend is paid to equity shareholders.
III. Deferred Shares: They are called the Promoters’ or Management’s of
Founders’ shares. The holders of such shares are paid dividend last out of
the profits left after meeting the claims of ordinary and preference
shareholders and reserve funds. Normally they are issued to promoters of
a company but they may also be issued to public. If dividend paid to other
classes of shareholders is restricted, the deferred shareholders will enjoy
a bigger share of profits. But if there are no profits, they do not get
anything.
PUBLIC ENTERPRISES
Example Example
1. Posts & Telegraph 1. Food Corporation of India Example
2. Railways 2. Industrial Finance 1. Hindustan Machine Tools Limited
3. All India Radio (AIR) Corporation of India 2. Steel Authority of India Limited
4. DoorDarshan (TV) 3. Life Insurance Corporation of India 3. Hindustan Shipyard Limited
5. Ordnance Factories 4. Unit Trust of India
5. State Trading Corporation
Departmental Companies:
Departmental Undertaking form of organisation is primarily used for provision of
essential services such as railways, postal services, broadcasting etc. Such
organisations function under the overall control of a ministry of the Government and
are financed and controlled in the same way as any other government department.
This form is considered suitable for activities where the government desires to have
control over them in view of the public interest.
Departmental undertakings are the oldest among the public enterprises. A
departmental undertaking is organised, managed and financed by the Government. It
is controlled by a specific department of the government. Each such department is
headed by a minister. All policy matters and other important decisions are taken by
the controlling ministry. The Parliament lays down the general policy for such
undertakings.
The main features of departmental undertakings are as follows:
(a) It is established by the government and its overall control rests with the minister.
(b) It is a part of the government and is managed like any other government
department.
(c) It is financed through government funds.
(d) It is subject to budgetary, accounting and audit control.
(e) Its policy is laid down by the government and it is accountable to the legislature.
Statutory companies:
Statutory Corporation (or public corporation) refers to a corporate body created by
the Parliament or State Legislature by a special act which define its powers, functions
and pattern of management. Statutory corporation is also known as public
Corporation. Its capital is wholly provided by the government. Examples of such
organisations are Life Insurance Corporation of India, State Trading Corporation etc.
The Statutory Corporation (or Public Corporation) refers to such organisations which
are incorporated under the special Acts of the Parliament/State Legislative Assemblies.
Its management pattern, its powers and functions, the area of activity, rules and
regulations for its employees and its relationship with government departments, etc.
are specified in the concerned Act. Examples of statutory corporations are State Bank
of India, Life Insurance Corporation of India, Industrial Finance Corporation of India,
etc. It may be noted that more than one corporation can also be established under the
same Act. State Electricity Boards and State Financial Corporation fall in this category.
The main features of Statutory Corporations are as follows:
(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.
(b) It is an autonomous body and is free from government control in respect of its
internal management. However, it is accountable to parliament and state legislature.
(c) It has a separate legal existence. Its capital is wholly provided by the government.
(d) It is managed by Board of Directors, which is composed of individuals who are
trained and experienced in business management. The members of the board of
Directors are nominated by the government.
(e) It is supposed to be self sufficient in financial matters. However, in case of necessity
it may take loan and/or seek assistance from the government.
(f) The employees of these enterprises are recruited as per their own requirement by
following the terms and conditions of recruitment decided by the Board.
Government Companies:
Government Company refers to the company in which 51 percent or more of the paid
up capital is held by the government. It is registered under the Companies Act and is
fully governed by the provisions of the Act. Most business units owned and managed
by government fall in this category.
As per the provisions of the Indian Companies Act, a company in which 51% or more of
its capital is held by central and/or state government is regarded as a Government
Company. These companies are registered under Indian Companies Act, 1956 and
follow all those rules and regulations as are applicable to any other registered
company. The Government of India has organised and registered a number of its
undertakings as government companies for ensuring managerial autonomy,
operational efficiency and provide competition to private sector.
The main features of Government companies are as follows:
(a) It is registered under the Companies Act, 1956.
(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its
own name.
(c) The annual reports of the government companies are required to be presented in
parliament.
(d) The capital is wholly or partially provided by the government. In case of partially
owned company the capital is provided both by the government and private investors.
But in such a case the central or state government must own at least 51% shares of the
company.
(e) It is managed by the Board of Directors. All the Directors or the majority of
Directors
are appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its
auditors are Chartered Accountants appointed by the government.
(g) Its employees are not civil servants. It regulates its personnel policies according to
its articles of associations.
Advantages of Public Enterprises:
1. Social Welfare: Some of the public enterprises like post and telegraphs are not
run for earning profit while other enterprises like HMT as in India run for profits.
But the profits earned by them are utilized for improving services rendered or
for further expansion of their activities. In certain fields the state enterprises
may work more efficiently than private enterprises. This is particularly the case
with public utility services for electricity, water railway service, etc.
2. Sufficient Capital: It is also quite likely that the private sector may not be in a
position to raise enough capital for a project or an industry. But the government
can raise any amount of capital from various sources for investment in any
project or an industry. Hence such projects industries are stated in the public
sector.
3. Large-Scale Production: On account of large scale production, they can enjoy
the economics of large-scale production because the government, has therefore
undertake such big investment in the interest of the society for a long period.
For ex: construction and management of river linking projects, etc.
4. Convertible profits: The profits based enterprises can convert their profits into
another enterprises which are facing survival problems in line with serving the
society and also for the equal development of the all departmental and other
enterprises for Nation’s growth.
5. Balanced Development: They can contribute to a balanced regional
development by locating public enterprises in less developed areas and thereby
reduce the regional income inequalities.
6. Control by people: the working of the public enterprises is subject to the
criticism of the people and the Members of Parliament. Hence, if there is
anything wrong in the working of the public enterprises, it would be set right.
So the public enterprises are ultimately controlled by the people themselves.
Disadvantages:
1. Inefficient management: The government officials may take a long time in
taking decisions as well as action. Hence the government enterprises may be
run with excessive social cost of operation. This may be so because all of them
may be possess much business experience.
2. Lack of Incentives: The public enterprises may not create incentives for hard
work for their workers. The managers may not take risk. This is because their
acts as questioned.
3. Bureaucracy and Corruption: Bureaucracy and corruption may obstruct the
growth of public enterprises. The bureaucrats may not take quick action
because they have followed the established procedures. Hence they may cause
losses to the public enterprises. This would involve a burden to the taxpayers.
4. Political considerations: Political considerations may determine appointments
transfers and promotions. Hence right man may not be placed in the right place.
Such a policy is detrimental to the efficient working of the public enterprises.
Further, bribery and corruption may predominate. Also an enterprise may be
located in a particular area out of the political rather than economic
considerations.
5. Transferring officials: If there might be frequent transfers of the government
officials, this would disturb the smooth working and also development plans of
the government enterprises.
Why Privatisation?
It is resorted to for any one or more of the following reason:
a. To raise revenues for the government through sale of assets of
public enterprises
b. To extend the State ownership to private entrepreneurs.
c. To improve efficiency through competition
d. To improve the performance of the a PSEs
Privatization may take in the following forms:
1. Liquidation: The assets of the Public enterprise, in case of liquidation, are sold
off to a private entrepreneur for a consideration
2. Management Buyout: Employees may form a cooperative and take over the
ownership of the PSE. They may raise the necessary finances form financial
institutions for this purpose. They also get dividends as owners.
3. Holding company pattern: A holding company is one which has working control
of one or more companies called subsidiaries. It was a part or whole of the
share capital of subsidiaries. The main purpose of holding company is to own
shares in other companies and to exercise control over the same.
4. Liberalization: It is as a strategy of privatisation refers to an attempt to permit
and promote competition in areas where previously there was none. Earlier
road transport was totally controlled by state road transport corporations.
Today, the government has permitted private bus operators to run their buses
on State Road Transport corporation (SRTC)routes.
5. Leasing: By this the govt. transfers the physical possession of PSE butnot its
ownership to a private agency with certain conditions and for a specific period.
After the expiry of the lease period the government takes back the possession
of PSE.
6. Denationalization: When the Govt. transfers the ownership of a public
enterprise to entrepreneurs in the private sector , the public enterprise is said
to be denationalized.
7. Joint venture: When part of the ownership (ranging from 25-50 %) in public
enterprise is transferred to the private sector, it is said to be a joint venture.
The percentage of transfer in the ownership is governed by a number of factors
such as govt. policy, financial conditions of PSE, etc.
8. Restructuring: The Govt. May prefer to restructure ailing or sick PSEs by
redefining or restructuring the whole set of operational or commercial activities
or just the issues governing financial matters.
9. Disinvestment: One of the main objectives of privatization is to raise resources
for the govt. In India, disinvestment is the process of withdrawing the
investments made by the govt. in a public enterprise. In keeping with the NIP of
1991, the govt. has been following a disinvestment strategy in respect of PSEs.
Disinvestment as a current trend has been discussed earlier under public sector
reforms.
10. Franchising or contracting out: when private firms are allowed and encouraged
to make bids to run services that were previously exclusively run by the public
sector, the work is said to be franchised or contracted out.
11. Operational strategies: Several measure can be initiated for the privatization of
a public enterprise without resorting to any of the above measures. It may
directed to:
a. Increase production by offering special incentives and overtime to the
workers
b. Outsourcing the public enterprises which doesn’t have the competition
c. Buy from the market by special tenders such items as may be costly to
produce internally
d. Raise funds from the National or International capital market and so on.
GLOBALISATION
It means ‘integrating’ the economy of a country with the world economy with a view
to eliminating supply bottlenecks, improving investment climate, providing a wide
choice of quality goods and services to the ultimate customers. In general globalization
is characterised by the following parameters:
• Reduction of trade barriers among different countries across the world.
• Creation of a conducive environment in which thre can be perfect mobility of
factors of production such as capital and human resources among countries.
• Ensuring free flow of technology across the countries
Policy measures towards globalization:
1. Full Convertibility: A country’s currency is fully convertible when it allows its own
exchange rate to be determined in the international market without official
intervention. The govt. of India has been lifting exchange control measures in a phased
manner and is working towards full convertibility.
2. Liberalising imports: This is more of a strategic measure that makes available to
domestic producers quality machinery and other key inputs, which are likely to
facilitate quality output for exports. The gov. has in keeping with the requirements of
the World Banks to bear lowering import tariffs on goods, except those mentioned in
the negative list and allowing free import of all goods, including charges have been
drastically reduced to facilitate imports.
3. Attracting Foreign Capital: The size of foreign directo investment is one of the major
indicators of globalization of an economy. The NIP, 1991, announced a list of high
technology and investment priority industries where automatics permission was
granted for direct foreign investment upto 51% to 100% foreign equity. They can
invest in Indian capital markets provided they are registered with Securities and
Exchange Board of India (SEBI). They can use their trademarks in India, take back their
profits to their respective native countries, deal in immovable property in India etc.
and 100% DFI is allowed in select sectors such a pharma, tourism, infrastructure,
telecom, etc.
India and the WTO:
India was one of the 118 countries that signed the final Act of the Uruguay Round at
Marrakesh in April 1994, which paved the way for setting up of the WTO in 1995. India,
which was one of the founder members of general agreement in Tariffs and Trade
(GATT), has now become a founder member of the WTO. The WTO agreement was
ratified on December, 1994, and this has far reaching implications for strengthening
global trade and economic growth
It is to be noted that GATT which was promoted by 23 countries in 1947, including
India, was not a formal organization but only a legal arrangement to promote
international trade through tariff reduction, etc.
Environment in Post Liberalization Scenario:
Economic reforms, as envisaged in NIP of 1991, are now 20 year old and there is now
ample evidence to assess their impact on Indian Economy. The Indian industry for over
40 years since independence was predominantly operating in a regulated and
protected economy and hence remained an underperformer. During the
implementation of LPG policies, it would sustain extremely well the pressures in the
new competitive environment.
The impact of economic reforms can be outlined as follows:
1. Attention to World Market: Many companies are setting their eyes on global
markets. With their prudent financial polities, they have emerged cash rich and with
liberal flow of foreign direct investments, they are poised to improve in world clas
ratings. For instance, Tata Steel emerged as the world’s fifth largest steel company
with its recent acquisition of Corus Group, UK. This many companies are now directing
their efforts towards the world market.
2. Improvement in Work culture: Everywhere, including in Govt. organizations, there
is noticeable change in the work culture. The employees have realized the need for
observing speed in response, customer focus and organisations have been focusing on
‘high performing work culture’. The workers/employees have become more quality
and cost conscious.
3. Focus on Capital Intensive Technologies/processes: For long time, the focus was on
labour intensive policies sand processes. Not considering the philosophy that ‘capital
intensive technologies will increase unemployment’, most industries have been
focusing on capital intensive technologies. So many ATMs set up by banks across every
urban area are an example for this.
4. Downsizing and Rightsizing: With a view to reducing the salary bill and enchancin
the productivity per employee, every organization, without exception, has reduced the
number of employees (headcount) significantly through voluntary retirement schemes.
5. Awareness and Stress on quality and R&D: The customer earlier used to trade of
between price and quality. This trend has changed now. The quality awareness levels
have considerably improved.
6. Scale Economies: It is common to find leading companies in every sector to
double/triple their volume of production to attain scale economics through rapid
technological growth and increased productivity.
7. Aggressive Branch Building: The market place became increasingly competitive in
view of domestic companies becoming more aggressive in promoting their brands and
foreign companies invading Indian markets through their cost-effective quality
Products/Services.
In extent of these, there have been many positive developments now encouraging the
Country to think in terms of strengthening these reforms further and moving to
second-generation reforms.
Compiled by
N. Aruna Kumari