MANAGEMENT, ECONOMICS AND ACCOUNTANCY

INTRODUCTION:
Management: Meaning and definition, Scope of management, Principles of management;
Scientific management- Definition, Characteristics. Functions of Management: Planning-
Definition, Process, Characteristics. Organizing; Definition of organization, Characteristics,
Types, Principles of organization. Centralization and Decentralization; Definitions, Features,
Merits and Demerits. Communication; process of communication- channels- media and barriers.
Staffing: Meaning and functions of personnel management. Coordination : Definition, steps to
achieve effective coordination. Controlling: Definition and process.
UNIT-II (9+3) Economics: Meaning and definition, scope; Micro and macro-Assumptions-
Methods and usefulness of economics. Laws of economics-Differences with laws of physical
sciences. Factors of Production: Meaning, definition and characteristics of Land-Labor-capital
and entrepreneur. Division of Labor: Types, advantages and disadvantages. Forms of Business
Organization: Sole Proprietor ship, Partnership firm, Types of Partners Cooperative society &
Joint stock company-features-Types of Joint stock companies-Merits and demerits.
UNIT-III (9+3) Double Entry System and Book Keeping: Accounting concepts and
conventions, Overview of accounting-cycle. Journal-meaning and journalisation; Ledger-
meaning, Ledger posting, Balancing; Two- column-cash book (cash and bank), Preparation of
trial balance.
UNIT – IV (9+3) Preparation of Final Accounts: Trading Account, profit and loss account and
Balance Sheet with simple adjustments. Text Books: 1. Y.K Bhushan, Business Organization and
Mamgt., Sultan Chand,2012, (Unit I) 2. K.K. Dewett, Modern Economic Theory., Pearson Ed.,
2010 (Unit II). 3. T S Grewal. Introduction to Accountancy.,

UNIT-I
Meaning of Management

According to Theo Heimann, management has three different meanings, viz.,

Management as a Noun : refers to a Group of Managers.
Management as a Process : refers to the Functions of Management i.e. Planning, Organising,
Directing, Controlling, etc.
Management as a Discipline : refers to the Subject of Management.
Management is an individual or a group of individuals that accept responsibilities to run an
organisation. They Plan, Organise, Direct and Control all the essential activities of the
organisation. Management does not do the work themselves. They motivate others to do the
work and co-ordinate (i.e. bring together) all the work for achieving the objectives of the
organisation.
Management brings together all Six Ms i.e. Men and Women, Money, Machines, Materials,
Methods and Markets. They use these resources for achieving the objectives of the organisation
such as high sales, maximum profits, business expansion, etc.
Features of Management
Following image depicts fourteen important features of management.
The nature, main characteristics or features of management:
 Continuous and never ending process.
 Getting things done through people.
 Result oriented science and art.
 Multidisciplinary in nature.
  A group and not an individual activity.
 Follows established principles or rules.
 Aided but not replaced by computers.
 Situational in nature.
 Need not be an ownership.
 Both an art and science.
 Management is all pervasive.
 Management is intangible.
 Uses a professional approach in work.
 Dynamic in nature.
Now let's briefly discuss each feature of management.

1. Continuous and never ending process

Management is a Process. It includes four main functions, viz., Planning, Organising, Directing
and Controlling. The manager has to Plan and Organise all the activities. He had to give proper
Directions to his subordinates. He also has to Control all the activities. The manager has to
perform these functions continuously. Therefore, management is a continuous and never ending
process.
2. Getting things done through people
The managers do not do the work themselves. They get the work done through the workers. The
workers should not be treated like slaves. They should not be tricked, threatened or forced to do
the work. A favourable work environment should be created and maintained.
3. Result oriented science and art
Management is result oriented because it gives a lot of importance to "Results". Examples of
Results like, increase in market share, increase in profits, etc. Management always wants to get
the best results at all times.
4. Multidisciplinary in nature
Management has to get the work done through people. It has to manage people. This is a very
difficult job because different people have different emotions, feelings, aspirations, etc.
Similarly, the same person may have different emotions at different times. So, management is a
very complex job. Therefore, management uses knowledge from many different subjects such as
Economics, Information Technology, Psychology, Sociology, etc. Therefore, it is
multidisciplinary in nature.
5. A group and not an individual activity
Management is not an individual activity. It is a group activity. It uses group (employees) efforts
to achieve group (owners) objectives. It tries to satisfy the needs and wants of a group
(consumers). Nowadays, importance is given to the team (group) and not to individuals.
6. Follows established principles or rules
Management follows established principles, such as division of work, discipline, unity of
command, etc. These principles help to prevent and solve the problems in the organisation.
7. Aided but not replaced by computers
Now-a-days, all managers use computers. Computers help the managers to take accurate
decisions. However, computers can only help management. Computers cannot replace
management. This is because management takes the final responsibility. Thus Management is
aided (helped) but not replaced by computers.
8. Situational in nature
Management makes plans, policies and decisions according to the situation. It changes its style
according to the situation. It uses different plans, policies, decisions and styles for different
situations.
The manager first studies the full present situation. Then he draws conclusions about the
situation. Then he makes plans, decisions, etc., which are best for the present situation. This is
called Situational Management.
9. Need not be an ownership
In small organisations, management and ownership are one and the same. However, in large
organisations, management is separate from ownership. The managers are highly qualified
professionals who are hired from outside. The owners are the shareholders of the company.
10. Both an art and science
Management is result-oriented. Therefore, it is an Art. Management conducts continuous
research. Thus, it is also a Science.
11. Management is all pervasive
Management is necessary for running a business. It is also essential for running business,
educational, charitable and religious institutions. Management is a must for all activities, and
therefore, it is all pervasive.
12. Management is intangible
Management is intangible, i.e. it cannot be seen and touched, but it can be felt and realised by its
results. The success or failure of management can be judged only by its results. If there is good
discipline, good productivity, good profits, etc., then the management is successful and vice-
versa.
13. Uses a professional approach in work
Managers use a professional approach for getting the work done from their subordinates. They
delegate (i.e. give) authority to their subordinates. They ask their subordinates to give
suggestions for improving their work. They also encourage subordinates to take the initiative.
Initiative means to do the right thing at the right time without being guided or helped by the
superior.
14. Dynamic in nature
Management is dynamic in nature. That is, management is creative and innovative. An
organisation will survive and succeed only if it is dynamic. It must continuously bring in new
and creative ideas, new products, new product features, new ads, new marketing techniques, etc.

NATURE OF MANAGEMENT
Universal process: Wherever there is human activity, there is management. Without efficient
management, objectives of the company can not be achieved.
Factor of production: Qualified and efficient managers are essential to utilization of labor and
capital.
Goal oriented: The most important goal of all management activity is to accomplish the
objectives of an enterprise. The goals should be realistic and attainable.
Supreme in thought and action: Managers set realizable objectives and then mastermind action
on all fronts to accomplish them. For this, they require full support form middle and lower levels
of management.
Group activity: All human and physical resources should be efficiently coordinated to attain
maximum levels of combined productivity. Without coordination, no work would accomplish
and there would be chaos and retention.
 Dynamic function: Management should be equipped to face the changes in business
environment brought about by economic, social, political, technological or human factors. They
must be adequate training so that can enable them to perform well even in critical situations.
Social science: All individuals that a manager deals with, have different levels of sensitivity,
understanding and dynamism.
Important organ of society: Society influences managerial action and managerial actions
influence society. Its managers responsibility that they should also contribute towards the society
by organizing charity functions, sports competition, donation to NGO’s etc.
System of authority: Well-defined lines of command, delegation of suitable authority and
responsibility at all levels of decision-making. This is necessary so that each individual should
what is expected from him and to whom he need to report to.
Profession: Managers need to possess managerial knowledge and training, and have to conform
to a recognized code of conduct and remain conscious of their social and human obligations.
Process: The management process comprises a series of actions or operations conducted towards
an end.
SCOPE OF MANAGEMENT
Although it is difficult to precisely define the scope of management, yet the following areas are
included in it:
1.  Subject-matter of management: Planning, organizing, directing, coordinating and
controlling are the activities included in the subject matter of management.
2.  Functional areas of management: These include:
Financial management includes accounting, budgetary control, quality control, financial
planning and managing the overall finances of an organization.
Personnel management includes recruitment, training, transfer promotion, demotion,
retirement, termination, labor-welfare and social security industrial relations.
Purchasing management includes inviting tenders for raw materials, placing orders, entering
into contracts and materials control.
Production management includes production planning, production control techniques, quality
control and inspection and time and motion studies.
Maintenance management involves proper care and maintenance of the buildings, plant and
machinery.
Transport management includes packing, warehousing and transportation by rail, road and air.
Distribution management includes marketing, market research, price-determination, taking
market risk and advertising, publicity and sales promotion.
Office Management includes activities to properly manage the layout, staffing and equipment of
the office.
Development management involves experimentation and research of production techniques,
markets, etc.
3. Management is an inter-disciplinary approach: For the correct implementation of the
management, it is important to have knowledge of commerce, economics, sociology, psychology
and mathematics.
4. Universal application: The principles of management can be applied to all types of
organizations irrespective of the nature of tasks that they perform.
5. Essentials of management: Three essentials of management are:
 Scientific method
 Human relations
 Quantitative technique
6. Modern management is an agent of change: The management techniques can be modified
by proper research and development to improve the performance of an organization.
14 Principles of Management of Henri Fayol
14 principles of Management are statements that are based on a fundamental truth. These
principles of management serve as a guideline for decision-making and management actions.
They are drawn up by means of observations and analyses of events that managers encounter in
practice. Henri Fayol was able to synthesize 14 principles of management after years of study,
namely:
1. Division of Work
In practice, employees are specialized in different areas and they have different skills. Different
levels of expertise can be distinguished within the knowledge areas (from generalist to
specialist). Personal and professional developments support this. According to Henri
Fayol specialization promotes efficiency of the workforce and increases productivity. In
addition, the specialization of the workforce increases their accuracy and speed. This
management principle of the 14 principles of management is applicable to both technical and
managerial activities.
2. Authority and Responsibility
In order to get things done in an organization, management has the authority to give orders to the
employees. Of course with this authority comes responsibility. According to Henri Fayol, the
accompanying power or authority gives the management the right to give orders to the
subordinates. The responsibility can be traced back from performance and it is therefore
necessary to make agreements about this. In other words, authority and responsibility go together
and they are two sides of the same coin.
3. Discipline
This third principle of the 14 principles of management is about obedience. It is often a part of
the core values of a mission and vision in the form of good conduct and respectful interactions.
This management principle is essential and is seen as the oil to make the engine of an
organization run smoothly.
4. Unity of Command
The management principle ‘Unity of command’ means that an individual employee should
receive orders from one manager and that the employee is answerable to that manager. If tasks
and related responsibilities are given to the employee by more than one manager, this may lead
to confusion which may lead to possible conflicts for employees. By using this principle, the
responsibility for mistakes can be established more easily.
5. Unity of Direction
This management principle of the 14 principles of management is all about focus and unity. All
employees deliver the same activities that can be linked to the same objectives. All activities
must be carried out by one group that forms a team. These activities must be described in a plan
of action. The manager is ultimately responsible for this plan and he monitors the progress of the
defined and planned activities. Focus areas are the efforts made by the employees and
coordination.
6. Subordination of Individual Interest
There are always all kinds of interests in an organization. In order to have an organization
function well, Henri Fayol indicated that personal interests are subordinate to the interests of the
organization (ethics). The primary focus is on the organizational objectives and not on those of
the individual. This applies to all levels of the entire organization, including the managers.
7. Remuneration
Motivation and productivity are close to one another as far as the smooth running of an
organization is concerned. This management principle of the 14 principles of management
argues that the remuneration should be sufficient to keep employees motivated and productive.
There are two types of remuneration namely non-monetary (a compliment, more responsibilities,
credits) and monetary (compensation, bonus or other financial compensation). Ultimately, it is
about rewarding the efforts that have been made.
8. The Degree of Centralization
Management and authority for decision-making process must be properly balanced in an
organization. This depends on the volume and size of an organization including its hierarchy.
Centralization implies the concentration of decision making authority at the top management
(executive board). Sharing of authorities for the decision-making process with lower levels
(middle and lower management), is referred to as decentralization by Henri Fayol. Henri
Fayol indicated that an organization should strive for a good balance in this.
9. Scalar Chain
Hierarchy presents itself in any given organization. This varies from senior management
(executive board) to the lowest levels in the organization. Henri Fayol ’s “hierarchy”
management principle states that there should be a clear line in the area of authority (from top to
bottom and all managers at all levels). This can be seen as a type of management structure. Each
employee can contact a manager or a superior in an emergency situation without challenging the
hierarchy. Especially, when it concerns reports about calamities to the immediate
managers/superiors.
10. Order
According to this principle of the 14 principles of management, employees in an organization
must have the right resources at their disposal so that they can function properly in an
organization. In addition to social order (responsibility of the managers) the work environment
must be safe, clean and tidy.
11. Equity
The management principle of equity often occurs in the core values of an organization.
According to Henri Fayol, employees must be treated kindly and equally. Employees must be in
the right place in the organization to do things right. Managers should supervise and monitor this
process and they should treat employees fairly and impartially.
12. Stability of Tenure of Personnel
This management principle of the 14 principles of management represents deployment and
managing of personnel and this should be in balance with the service that is provided from the
organization. Management strives to minimize employee turnover and to have the right staff in
the right place. Focus areas such as frequent change of position and sufficient development must
be managed well.
13. Initiative
Henri Fayol argued that with this management principle employees should be allowed to express
new ideas. This encourages interest and involvement and creates added value for the company.
Employee initiatives are a source of strength for the organization according to Henri Fayol. This
encourages the employees to be involved and interested.
 14. Esprit de Corps
The management principle ‘esprit de corps’ of the 14 principles of management stands for
striving for the involvement and unity of the employees. Managers are responsible for the
development of morale in the workplace; individually and in the area of communication. Esprit
de corps contributes to the development of the culture and creates an atmosphere of mutual trust
and understanding.
In conclusion on the 14 Principles of management
The 14 principles of management can be used to manage organizations and are useful tools for
forecasting, planning, process management, organization management, decision-making,
coordination and control.
Although they are obvious, many of these matters are still used based on common sense in
current management practices in organizations. It remains a practical list with focus areas that
are based on Henri Fayol ’s research which still applies today due to a number of logical
principles.
Meaning, Definition Characteristics and Features Scientific Management

Meaning
The term scientific management is the combination of two words i.e. scientific and management.
The word “Scientific” means systematic analytical and objective approach while “management”
means getting things done through others. In simple words Scientific management means
application of principles and methods of science in the field of management. “Scientific
management is the art of knowing best and cheapest way”. It is the art of knowing exactly what
is to be done by whom it is to be done and what is the best and cheapest way of doing it.
Scientific methods and techniques are applied in the field of management i.e., recruitment,
selection, training, placement of workers and methods of doing work in the best and cheapest
way.
The Scientific management can be studied under the following heads:
 Primary principles of scientific management as evolved by F.W. Taylor.
 Secondary principles of scientific management.

Definitions of Scientific Management

The main definitions of scientific management are as follows:
According to Fredrick Winslow Taylor, “Scientific management means knowing exactly what
you want men to do and seeing that they do it in the best and the cheapest way.”
According to Harlow Person, “Scientific management characterizes that form of organisation and
procedure in purposive collective effort which rests on principles or laws derived by the process
of scientific investigation and analysis, instead of tradition or on policies determined empirically
and casually by the process of trial and error.”
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According to Jones, “Scientific management is a body of rules, together with their appropriate
expression in physical and administrative mechanism and specialized executives, to be operated
in coordination as a system for the achievement of a new strictness in the control and process of
production.”
According to Lioyd, Dodd and zynch, In broad outline “Scientific management seeks to get the
maximum from methods, men materials machines and money and it controls the works of
production from the location and layout of the worker to the final distribution of the product.”
According to Peter F. Drucker, ” Scientific management is the organized study of work, the
analysis of work into its simplest element and the systematic improvement of the workers”.
Characteristics / Features of Scientific Management
The main characteristics or features of scientific management are as follows:
Approach: It is a systematic, analytical and objective approach to solve industrial problems.
Economy: The basis of scientific management is economy. For implementing economy, all the
unnecessary elements of production are eliminated and a sincere effort is made to achieve
optimum production at the minimum cost.
A Definite plan: The main characteristic of scientific management is that before starting and
work there must be a definite plan before as and the work is to be done strictly according to that
plan.
Discards old methods: It discards the age old methods of rule of thumb and hit or miss approach.
Emphasis: It lays emphasis on all factors of production, men, material and technology.
Techniques: It implies scientific techniques in methods of work, recruitment, selection and
training of workers.
Attempts: It attempts to develop each man to his greatest efficiency and prosperities.
Method: It attempts to discover the best method of doing a work at the cheapest cost.
A definite Aim: It is another main characteristic of scientific management. Scientific
management is the process of organizing, directing, conducting and controlling human activities.
Hence there must be a definite aim before the managers, so that the human activities be
organized directed conducted and controlled for achieving that aim or aims.
changes in attitude: It involves a complete change in the mental attitude of workers as well as the
management.
A Set of Rules: There must be a set of rules in accordance with the laid plan so that the
objectives can be achieved. According to F.W. Taylor, It is no single element but rather the
whole combination that constitutes the scientific management.

FUNCTIONS OF MANAGEMENT
Management has been described as a social process involving responsibility for economical and
effective planning & regulation of operation of an enterprise in the fulfillment of given purposes.
It is a dynamic process consisting of various elements and activities. These activities are
different from operative functions like marketing, finance, purchase etc. Rather these activities
are common to each and every manger irrespective of his level or status.
Different experts have classified functions of management. According to George & Jerry,
“There are four fundamental functions of management i.e. planning, organizing, actuating and
controlling”.
According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to
control”. Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for
Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for reporting
& B for Budgeting. But the most widely accepted are functions of management given by
KOONTZ and O’DONNEL i.e. Planning, Organizing, Staffing, Directing and Controlling.
For theoretical purposes, it may be convenient to separate the function of management but
practically these functions are overlapping in nature i.e. they are highly inseparable. Each
function blends into the other & each affects the performance of others.
1. Planning
It is the basic function of management. It deals with chalking out a future course of action
& deciding in advance the most appropriate course of actions for achievement of pre-
determined goals. According to KOONTZ, “Planning is deciding in advance - what to do,
when to do & how to do. It bridges the gap from where we are & where we want to be”.
A plan is a future course of actions. It is an exercise in problem solving & decision
making. Planning is determination of courses of action to achieve desired goals. Thus,
planning is a systematic thinking about ways & means for accomplishment of pre-
determined goals. Planning is necessary to ensure proper utilization of human & non-
human resources. It is all pervasive, it is an intellectual activity and it also helps in
avoiding confusion, uncertainties, risks, wastages etc.
2. Organizing
It is the process of bringing together physical, financial and human resources and
developing productive relationship amongst them for achievement of organizational
goals. According to Henry Fayol, “To organize a business is to provide it with everything
useful or its functioning i.e. raw material, tools, capital and personnel’s”. To organize a
business involves determining & providing human and non-human resources to the
organizational structure. Organizing as a process involves:
 Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.
3. Staffing
It is the function of manning the organization structure and keeping it manned. Staffing
has assumed greater importance in the recent years due to advancement of technology,
increase in size of business, complexity of human behavior etc. The main purpose o
staffing is to put right man on right job i.e. square pegs in square holes and round pegs in
round holes. According to Kootz & O’Donell, “Managerial function of staffing involves
manning the organization structure through proper and effective selection, appraisal &
development of personnel to fill the roles designed un the structure”. Staffing involves:
 Manpower Planning (estimating man power in terms of searching, choose the
person and giving the right place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.
4. Directing
 It is that part of managerial function which actuates the organizational methods to work
efficiently for achievement of organizational purposes. It is considered life-spark of the
enterprise which sets it in motion the action of people because planning, organizing and
staffing are the mere preparations for doing the work. Direction is that inert-personnel
aspect of management which deals directly with influencing, guiding, supervising,
motivating sub-ordinate for the achievement of organizational goals. Direction has
following elements:
 Supervision
 Motivation
 Leadership
 Communication
Supervision- implies overseeing the work of subordinates by their superiors. It is the act
of watching & directing work & workers.
Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to
work. Positive, negative, monetary, non-monetary incentives may be used for this
purpose.
Leadership- may be defined as a process by which manager guides and influences the
work of subordinates in desired direction.
Communications- is the process of passing information, experience, opinion etc from
one person to another. It is a bridge of understanding.
5. Controlling
It implies measurement of accomplishment against the standards and correction of
deviation if any to ensure achievement of organizational goals. The purpose of
controlling is to ensure that everything occurs in conformities with the standards. An
efficient system of control helps to predict deviations before they actually occur.
According to Theo Haimann, “Controlling is the process of checking whether or not
proper progress is being made towards the objectives and goals and acting if necessary, to
correct any deviation”. According to Koontz & O’Donell “Controlling is the
measurement & correction of performance activities of subordinates in order to make
sure that the enterprise objectives and plans desired to obtain them as being
accomplished”. Therefore controlling has following steps:
a. Establishment of standard performance.
b. Measurement of actual performance.
c. Comparison of actual performance with the standards and finding out deviation if
any.
d. Corrective action
PLANNING
Planning is the process of thinking about the activities required to achieve a desired goal. It
involves the creation and maintenance of a plan, such as psychological aspects that require
conceptual skills. There are even a couple of tests to measure someone’s capability of planning
well. As such, planning is a fundamental property of intelligent behavior. An important further
meaning, often just called "planning" is the legal context of permitted building developments.
Also, planning has a specific process and is necessary for multiple occupations (particularly in
fields such as management, business, etc.). In each field there are different types of plans that
help companies achieve efficiency and effectiveness. An important, albeit often ignored aspect of
planning, is the relationship it holds to forecasting. Forecasting can be described as predicting
what the future will look like, whereas planning predicts what the future should look like for
multiple scenarios. Planning combines forecasting with preparationof scenarios and how to react
to them. Planning is one of the most important project management and time management
techniques. Planning is preparing a sequence of action steps to achieve some specific goal. If a
person does it effectively, they can reduce much the necessary time and effort of achieving the
goal. A plan is like a map. When following a plan, a person can see how much they have
progressed towards their project goal and how far they are from their destination.
Planning process[edit]

Example of planning process framework.

Patrick Montana and Bruce Charnov outline a three-step result-oriented process for planning:[7]
1. choosing a destination
2. evaluating alternative routes
3. deciding the specific course of the plan
In organizations, planning can become a management process, concerned with defining goals for
a future direction and determining on the missions and resources to achieve those targets. To
meet the goals, managers may develop plans such as a business plan or a marketing plan.
Planning always has a purpose. The purpose may involve the achievement of certain goals or
targets.
Major characteristics of planning in organizations include:
 Planning increases the efficiency of an organization.
 Planning reduces risks.
 Planning utilizes with maximum efficiency the available time and resources
 The following are the essential characteristics of planning which describe the nature
of planning:
 1.  Planning is primary function of management:
 The functions of management are broadly classified as planning, organisation, direction
and control. It is thus the first function of management at all levels. Since planning is
involved at all managerial functions, it is rightly called as an essence of management.
 2.  Planning focuses on objectives:
 ADVERTISEMENTS:
  Planning is a process to determine the objectives or goals of an enterprise. It lays down
the means to achieve these objectives. The purpose of every plan is to contribute in the
achievement of objectives of an enterprise.
 3.  Planning is a function of all managers:
 Every manager must plan. A manager at a higher level has to devote more time to
planning as compared to persons at the lower level. So the President or Managing
director in a company devotes more time to planning than the supervisor.
 4.  Planning as an intellectual process:
 Planning is a mental work basically concerned with thinking before doing. It is an
intellectual process and involves creative thinking and imagination. Wherever planning is
done, all activities are orderly undertaken as per plans rather than on the basis of guess
work. Planning lays down a course of action to be followed on the basis of facts and
considered estimates, keeping in view the objectives, goals and purpose of an enterprise.
 5.  Planning as a continuous process:
 Planning is a continuous and permanent process and has no end. A manager makes new
plans and also modifies the old plans in the light of information received from the
persons who are concerned with the execution of plans. It is a never ending process.
 6.  Planning is dynamic (flexible):
 ADVERTISEMENTS:
 Planning is a dynamic function in the sense that the changes and modifications are
continuously done in the planned course of action on account of changes in business
environment.
 As factors affecting the business are not within the control of management, necessary
changes are made as and when they take place. If modifications cannot be included in
plans it is said to be bad planning.
 7.  Planning secures efficiency, economy and accuracy:
 A pre- requisite of planning is that it should lead to the attainment of objectives at the
least cost. It should also help in the optimum utilisation of available human and physical
resources by securing efficiency, economy and accuracy in the business enterprises.
Planning is also economical because it brings down the cost to the minimum.
 8.  Planning involves forecasting:
 Planning largely depends upon accurate business forecasting. The scientific techniques of
forecasting help in projecting the present trends into future. ‘It is a kind of future picture
wherein proximate events are outlined with some distinctness while remote events appear
progressively less distinct.”
 9.  Planning and linking factors:
 A plan should be formulated in the light of limiting factors which may be any one of five
M’s viz., men, money, machines, materials and management.
 10.  Planning is realistic:
 A plan always outlines the results to be attained and as such it is realistic in nature.
 

The following are the essential characteristics of planning which describe the nature
of planning:
1.  Planning is primary function of management:
The functions of management are broadly classified as planning, organisation, direction and
control. It is thus the first function of management at all levels. Since planning is involved at all
managerial functions, it is rightly called as an essence of management.
2.  Planning focuses on objectives:
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Planning is a process to determine the objectives or goals of an enterprise. It lays down the
means to achieve these objectives. The purpose of every plan is to contribute in the achievement
of objectives of an enterprise.
3.  Planning is a function of all managers:
Every manager must plan. A manager at a higher level has to devote more time to planning as
compared to persons at the lower level. So the President or Managing director in a company
devotes more time to planning than the supervisor.
4.  Planning as an intellectual process:
Planning is a mental work basically concerned with thinking before doing. It is an intellectual
process and involves creative thinking and imagination. Wherever planning is done, all activities
are orderly undertaken as per plans rather than on the basis of guess work. Planning lays down a
course of action to be followed on the basis of facts and considered estimates, keeping in view
the objectives, goals and purpose of an enterprise.
5.  Planning as a continuous process:
Planning is a continuous and permanent process and has no end. A manager makes new plans
and also modifies the old plans in the light of information received from the persons who are
concerned with the execution of plans. It is a never ending process.
6.  Planning is dynamic (flexible):
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Planning is a dynamic function in the sense that the changes and modifications are continuously
done in the planned course of action on account of changes in business environment.
As factors affecting the business are not within the control of management, necessary changes
are made as and when they take place. If modifications cannot be included in plans it is said to be
bad planning.
7.  Planning secures efficiency, economy and accuracy:
A pre- requisite of planning is that it should lead to the attainment of objectives at the least cost.
It should also help in the optimum utilisation of available human and physical resources by
securing efficiency, economy and accuracy in the business enterprises. Planning is also
economical because it brings down the cost to the minimum.
8.  Planning involves forecasting:
Planning largely depends upon accurate business forecasting. The scientific techniques of
forecasting help in projecting the present trends into future. ‘It is a kind of future picture wherein
proximate events are outlined with some distinctness while remote events appear progressively
less distinct.”
9.  Planning and linking factors:
A plan should be formulated in the light of limiting factors which may be any one of five M’s
viz., men, money, machines, materials and management.
10.  Planning is realistic:
A plan always outlines the results to be attained and as such it is realistic in nature.
 Organization: Meaning, Definition, Concepts and Characteristics!
Meaning:
An entrepreneur organizes various factors of production like land, labour, capital, machinery,
etc. for channelizing them into productive activities. The product finally reaches consumers
through various agencies. Business activities are divided into various functions, these functions
are assigned to different individuals.
Various individual efforts must lead to the achievement of common business goals. Organization
is the structural framework of duties and responsibilities required of personnel in performing
various functions with a view to achieve business goals through organization. Management tries
to combine various business activities to accomplish predetermined goals.
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Present business system is very complex. The unit must be run efficiently to stay in the
competitive world of business. Various jobs are to be performed by persons most suitable for
them. First of all various activities should be grouped into different functions. The authority and
responsibility is fixed at various levels. All efforts should be made to co-ordinate different
activities for running the units efficiently so that cost of production may be reduced and
profitability of the unit may be increased.
Definitions:
Louis Allen, “Organization is the process of identifying and grouping work to be performed,
defining and delegating responsibility and authority and establishing relationships for the
purpose of enabling people to work most effectively together in accomplishing objectives.” In
the words of Allen, organization is an instrument for achieving organizational goals. The work of
each and every person is defined and authority and responsibility is fixed for accomplishing the
same.
Wheeler, “Internal organization is the structural framework of duties and responsibilities
required of personnel in performing various functions within the company………… It is
essentially a blue print for action resulting in a mechanism for carrying out function to achieve
the goals set up by company management”. In Wheeler’s view, organization is a process of
fixing duties and responsibilities of persons in an enterprise so that business goals are achieved.
Koontz and O’Donnell, ‘The establishment of authority relationships with provision for co-
ordination between them, both vertically and horizontally in the enterprise structure.” These
authors view organization as a coordinating point among various persons in the business.
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Oliver Sheldon, “Organization is the process so combining the work which individuals or groups
have to perform with the facilities necessary for its execution, that the duties so performed
provide the best channels for the efficient, systematic, positive and coordinated application of the
available effort”. Organization helps in efficient utilization of resources by dividing the duties of
various persons.
Spriegel, “In its broadest sense organisation refers to the relationship between the various factors
present in a given endeavor. Factory organisation concerns itself primarily with the internal
relationships within the factory such as responsibilities of personnel, arrangement and grouping
of machines and material control. From the standpoint of the enterprise as a whole, organisation
is the structural relationship between the various factors in the enterprise”.
Spriegel has given a wide definition of the organization. He has described it as the relationship
among persons, factors in the enterprise. All factors of production are coordinated in order to
achieve organisational objectives.
George Terry, “Organising is the establishing of effective authority relationships among selected
work, persons, and work places in order for the group to work together efficiently”. According to
Terry organisation is the creation of relationship among persons and work so that it may be
carried on in a better and efficient way.
C.H. Northcott, ‘The arrangement by which tasks are assigned to men and women so that their
individual efforts contribute effectively to some more or less clearly defined purpose for which
they have been brought together”. According to Northcott the purpose of organisation is to co-
ordinate the activities of various individuals working in the organisation for the attainment of
enterprise goals.
L.H. Haney, “Organisation is a harmonious adjustment of specialised parts for accomplishment
of some common purpose or purposes”. Organisation is the adjustment of various activities for
the attainment of common goals.
Characteristics of Organisation:
Different authors look at the word ‘organisation’ from their own angle. One thing which is
common in all the viewpoints is that organisation is the establishment of authority relationship
among persons so that it helps in the achievement of organisational objectives.
Some of the characteristics of organisation are studied as follows:
1. Division of Work:
Organisation deals with the whole task of business. The total work of the enterprise is divided
into activities and functions. Various activities are assigned to different persons for their efficient
accomplishment. This brings in division of labour. It is not that one person cannot carry out
many functions but specialisation in different activities is necessary to improve one’s efficiency.
Organisation helps in dividing the work into related activities so that they are assigned to
different individuals.
2.  Co-Ordination:
Co-ordination of various activities is as essential as their division. It helps in integrating and
harmonising various activities. Co-ordination also avoids duplications and delays. In fact,
various functions in an organisation depend upon one another and the performance of one
influences the other. Unless all of them are properly coordinated, the performance of all
segments is adversely affected.
3.  Common Objectives:
All organisational structure is a means towards the achievement of enterprise goals. The goals of
various segments lead to the achievement of major business goals. The organisational structure
should build around common and clear cut objectives. This will help in their proper
accomplishment.
4.  Co-operative Relationship:
An organisation creates co-operative relationship among various members of the group. An
organisation cannot be constituted by one person. It requires at least two or more persons.
Organisation is a system which helps in creating meaningful relationship among persons. The
relationship should be both vertical and horizontal among members of various departments. The
structure should be designed that it motivates people to perform their part of work together.
5.  Well-Defined Authority-Responsibility Relationships:
An organisation consists of various positions arranged in a hierarchy with well defined authority
and responsibility. There is always a central authority from which a chain of authority
relationship stretches throughout the organisation. The hierarchy of positions defines the lines of
communication and pattern of relationships.
5 Main Types of Organisation
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According to different methods of distribution of authorities and responsibilities, the organisation
are of following types: 1. Line or Scalar Organisation 2. Functional Organisation 3. Line and
Staff Organisation 4. Line, Staff and Functional Organisation 5. Committee Organisation.
Type # 1. Line or Scalar Organisation:
This type of organisation is also known as departmental or military type of organisation.
In this type of organisation business activities are divided into three groups, namely finance and
accounts, production and sales. Each of this department is sub-divided into certain self-contained
departments, i.e., sections.
Each departmental head has sole control over his section and has full authority to select his
labour, staff, purchase of raw materials, stores and to set the standards of output, etc. Foreman of
each shop trains new men and supervises the quality of output.
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In such a system superior exercises a direct authority over his subordinates who become entirely
responsible for their performance to the commanding superior. No operation is under two bosses:
The following is the chart of line organisation:

This is known as military type organisation, because in military discipline is of high order.
Orders and instructions issued from the top have to be followed by the lowers. Similarly in this
type of organisation, order of General Manager are to be carried out, without any say by subor-
dinates and hence no chances of shifting of responsibility as in military and hence known as
military type organisation.
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As in this organisation, the flow of authority moves from top to bottom in vertical lines,
therefore, this is also called line or scalar organisation.
Advantages:
1. A clear-cut division of authority and responsibility, hence no scope of shifting the
responsibility.
2. Strong in discipline.
3. It permits quick decisions.
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4. As responsibility of each individual is fixed, hence faults can be easily and quickly known.
5. Everybody from top to bottom remains busy like a machine and hence total cost of product
will be less.
6. It is simple to understand.
7. Flexible and able to extend or contract.
Disadvantages:
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1. It requires different departmental heads to be expert in their respective functions, hence lack of
specialisation.
2. Departmental heads are over-burdened with various routine jobs, hence no time for further
expansion and planning.
3. Certain people become key points and they are loaded maximum with work.
4. Chances of accidents, wastage of material and labour are more because of insufficient
knowledge of all the work by one man.
5. Chances of delay in reaching the orders of General Manager or any other departmental head
upto the workers and, therefore, possibility of distortion, due to long channel.
6. Over-burdened foreman may not be able to give sufficient time for each job and will cause
wastage and error.
7. It has no means of rewarding good workers.
Applications:
1. Such organisations are suitable for factories of small and medium size, in which subordinate
and operational staff is not too much.
2. Suitable for continuous process such as sugar, paper, oil refining, spinning and weaving
industries etc.
3. Suitable where labour problems are not difficult to solve.
4. Suitable where automatic plants are used.
Type # 2. Functional Organisation:
The difficulties in finding all round qualified man to be foreman in the line organisation are
overcome with this type of organisation. He is replaced by various functionalised people.

This system is advantageous because each supervisor is specialised in a particular field and he
attends to one factor in all the departments. Below is its layout:
In chart (b) these different bosses are just like foreman. In some factory, they are called foreman
and in another factory they may be designated as gang boss, speed boss etc. Each boss goes to
individual workman for instructing and guiding about his activity.
Chart (b) is a short and simplified form showing the structure of functional type of organisaion,
chart (c) shows the order of authority and the stages in the organisation.
In this, specialised people like chemists, purchasers, engineers, designers etc. are employed
under the production superintendent and everybody is supposed to give his functionalised advice
to all other foreman (bosses) and workers. Every foreman (boss) will go to individual worker for
his related function.
This type of organisation is sometime called “Taylor’s organisation” as it was for the first time
introduced by F.W.Taylor. Taylor said that the well qualified foreman required brain, education
(special or technical knowledge), manual strength, tact, energy, honesty, judgment or common
sense and good health.
He believed that a man with three of these qualities could be hired at any time. If four were
required, it was necessary to secure a higher priced man. The man combining five of the qualities
was hard to find and the one with six, seven or eight almost impossible to discover.
Therefore, Taylor employed functionalised bosses and as far as the workman was concerned,
instead of coming in contact with the management at one point, only he was to receive his daily
orders and help directly from eight different bosses. Four of these were located in the planning
room and four in the shop as shown in chart (c).
Advantages:
1. Due to specialisation quality of work is better.
2. This system provides more specialised knowledge and guidance to individual workers through
experts.
3. It helps mass production by standardisation and specialisation.
4. If any operation needs improvement, it can be improved even upto the last moment.
5. Considerable expansion of the factory is possible.
6. Since for every operation expert guidance is there, hence wastage of material will be minimum
which will reduce prime cost.
7. Unnecessary overloading of responsibilities will not be there, as was in the case of line
organisation.
8. No special knowledge of workers is required as the instructions are supplied by drawing and
experts.

Disadvantages:
1. It is complicated from control point of view as every functionalized expert feels himself to be
superior than the other and there is no one-man control over the workers. Therefore, it makes
discipline problem difficult to solve among lower level.
2. By employing high waged experts, the total cost of job may become high.
3. As line workers will not be using their skill, their initiative cannot be utilised.
4. Shifting of responsibility is possible.
5. The failure of any of the expert will largely affect the production because, if any expert tells
wrong operation, there is no other body to correct him. This will result in large wastage of
material.
6. Proper co-ordination of the work of different departments is required but it is difficult to
maintain as everybody is working individually.
Application:
In practice a pure functionalised system is rarely found. In fact, a factory where responsibilities
are divided on a functional basis, line relationship may also exist. This is suitable for large
manufacturing concerns which are capable of expansion in future.
Type # 3. Line and Staff Organisation:
In a firm of large size operating on big scale, managers cannot give careful attention to every part
of management. They are unable to think and plan. They are busy with ordinary task of
production and selling. Hence ‘Some Staff is deputed to do other works like investigation,
research, recording, planning and advising to managers.
Thus staff brings specialisation by assisting the line officers. The line maintains discipline and
stability. Staff provides expert information and helps to improve the overall efficiency. Thus the
staffs are ‘thinkers’ while lines are ‘doers’.
A staff man usually controls one function of business of which he is an expert. Usually the staff
has no administrative authority, but an expert in some phase of operation. He reports to the
executive and gives the advice on the subject of his specialty.
Advantages:
1. It is a planned specialised system.
2. Quality of product will be better.
3. Wastage will be less.
4. Expert knowledge is available.
5. Sufficient time is available to general manager for future planning and expansion.
6. Discipline problem is solved because of line relationship.
Disadvantages:
1. Sufficient expert knowledge and guidance is not available as compared with functional type.
2. Lack of responsibility among higher levels and hence the discipline as a whole will be poor.
3. The overhead cost of product may rise, because of high salaried staff.
4. The slackness of any section or department will largely affect whole working.
Application:
Now-a-days this type of organisation is preferred for medium and large scale industries,
depending upon internal structure, nature of productive activities and span of business area. It is
applied in automobile industries and other intermittent nature of industries.
Type # 4. Line, Staff and Functional Organisation:
Because of scientific methods, enough market competition and complications in the business, to
obtain a sound system, the combination of line, staff and functional type of organisation is
required.
In this system, as regards the discipline and output are concerned, the workers are kept under the
direct control of foreman.
As regards quality, the inspector will have the proper authority to control the quality and he can
directly order the workman as in the functional organisation.
In the staff relationship, there may be research department for the analysis of raw materials,
semi-finished and finished products to withstand market competition.
In this way all the three are combined together and as this is complicated in nature, therefore,
also called complicated type of organisation.
Application:
Now-a-days this pattern is followed by all government and private concerns, in which much
complicated processes or operations are involved, i.e., in big chemical plants, electricity boards,
steel plants and other huge undertakings.
5. Committee Organisation:
A committee is a group of persons formed for the purpose of giving advice on certain important
problems, which cannot usually be solved by an individual. It helps by pooling the thoughts of
several persons on problems involving several functions and offered for criticism. Therefore,
now-a-days many large companies add a network of committees to the line and staff
organisation.
These committees may be either “Permanent” sometimes referred to as standing committees or
they may be organised to serve a temporary function only. Examples of committees are Research
Committee, Co-ordination, and Advisory Committee, Purchase Committee, Education
Committee etc.

A committee is a tool for the development of ideas and recommendations of policy and
procedure. It brings better plans and policies for operations and results in better co-operation in
their execution. The final decision to put committee recommendations into action rests with the
line. The committee simply performs advisory function.
Actually, the committee is similar to the staff and several owners think it a costly substitute for
staff but it is found that no other method is so effective in solving common problems or in
getting new ideas as committee organisation of collective judgment.
Fundamental Principles:
Committee like other forms of organisation should be varied according to the needs of a given
organisation.
However, there are certain basic principles given below, which must be considered:
1. In this, members should be minimum, i.e., generally 3 to 5. This is found by experience that
too many members result in much wasted time by lengthy discussions and delayed decisions.
2. The chairman of the committee must prepare the agenda to be discussed much in advance of
the meeting and circulate among the members so that they can get sufficient time to think over
the problems to be discussed.
3. The chairman must control the behaviour and discipline among the members when the
meeting is held so that there is least wasted time and thought.
4. Meetings should begin and end at fixed time.
5. Duties, authorities and responsibilities must be clearly defined and owing to circumstances
they can be subject to changes.
6. The meetings should be conducted from an agenda containing those things which require
attention arranged in the order of their importance.
7. All the members must realise that more time can be wasted unless each member cooperates
sincerely to save the time of other members.
Advantages:
1. Since “two” heads are better than “one”, quick and valuable decisions can be taken.
2. By this, time schedule and proper follow up are instituted which causes speedy action.
3. Decision taken is impersonal which leave the chairman free from personal criticism.
4. As the members are from the plant side, they know better what is going on in the shops and
can give the correct suggestions and team up with other persons and departments.
5. There is a stimulus towards co-operative action.
6. Expert knowledge is utilised.
Disadvantages:
1. Sometimes the committees may be too large in strength which cause delayed actions and
wasted time.
2. It is an expensive form of organisation as outside members are paid travelling allowance and
honorarium for attending the meetings.
3. Committees tend to hang on after its usefulness is over.
4. As members are from different departments, they may not reach to a final conclusion at all.
5. It functions very slowly.
6. As there is joint responsibility of members. Hence, it amounts to irresponsibility, as “Every
body’s business is no body’s business”.
Top 14 Principles of an Organization
1.  Principle of Objective:
The enterprise should set up certain aims for the achievement of which various departments
should work. A common goal so devised for the business as a whole and the organization is set
up to achieve that goal. In the absence of a common aim, various departments will set up their
own goals and there is a possibility of conflicting objectives for different departments. So there
must be an objective for the organization.
2.  Principle of Specialisation:
The organization should be set up in such a way that every individual should be assigned a duty
according to his skill and qualification. The person should continue the same work so that he
specialises in his work. This helps in increasing production in the concern.
3.  Principles of Co-ordination:
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The co-ordination of different activities is an important principle of the organization. There
should be some agency to co-ordinate the activities of various departments. In the absence of co-
ordination there is a possibility of setting up different goals by different departments. The
ultimate aim of the concern can be achieved only if proper co-ordination is done for different
activities.
4.  Principle of Authority and Responsibility:
The authority flows downward in the line. Every individual is given authority to get the work
done. Though authority can be delegated but responsibility lies with the man who has been given
the work. If a superior delegates his authority to his subordinate, the superior is not absolved of
his responsibility, though the subordinate becomes liable to his superior. The responsibility
cannot be delegated under any circumstances.
5.  Principle of Definition:
The scope of authority and responsibility should be clearly defined. Every person should know
his work with definiteness. If the duties are not clearly assigned, then it will not be possible to fix
responsibility also. Everybody’s responsibility will become nobody’s responsibility. The
relationship between different departments should also be clearly defined to make the work
efficient and smooth.
6.  Span of Control:
Span of control means how many subordinates can be supervised by a supervisor. The number of
subordinates should be such that the supervisor should be able to control their work effectively.
Moreover, the work to be supervised should be of the same nature. If the span of control is
disproportionate, it is bound to affect the efficiency of the workers because of slow
communication with the supervisors.
7.  Principle of Balance:
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The principle means that assignment of work should be such that every person should be given
only that much work which he can perform well. Some person is over worked and the other is
under-worked, then the work will suffer in both the situations. The work should be divided in
such a way that everybody should be able to give his maximum.
8.  Principle of Continuity:
The organization should be amendable according to the changing situations. Everyday there are
changes in methods of production and marketing systems. The organization should be dynamic
and not static. There should always be a possibility of making necessary adjustments.
9.  Principle of Uniformity:
The organization should provide for the distribution of work in such a manner that the uniformity
is maintained. Each officer should be in-charge of his respective area so as to avoid dual
subordination and conflicts.
10.  Principle of Unity of Command:
There should be a unity of command in the organization. A person should be answerable to one
boss only. If a person is under the control of more than one person then there is a like-hood of
confusion and conflict. He gets contradictory orders from different superiors. This principle
creates a sense of responsibility to one person. The command should be from top to bottom for
making the organization sound and clear. It also leads to consistency in directing, coordinating
and controlling.
11.  Principle of Exception:
This principle states that top management should interfere only when something goes wrong. If
the things are done as per plans then there is no need for the interference of top management.
The management should leave routine things to be supervised by lower cadres. It is only the
exceptional situations when attention of top management is drawn. This principle relieves top
management of many botherations and routine things. Principle of exception allows top
management to concentrate on planning and policy formulation. Important time of management
is not wasted on avoidable supervision.
12.  Principle of Simplicity:
The organizational structure should be simple so that it is easily understood by each and every
person. The authority, responsibility and position of every person should be made clear so that
there is no confusion about these things. A complex organizational structure will create doubts
 and conflicts among persons. There may also be over-lapping’s and duplication of efforts which
may otherwise be avoided. It helps in smooth running of the organization.
13. Principle of Efficiency:
The organization should be able to achieve enterprise objectives at a minimum cost. The
standards of costs and revenue are pre-determined and performance should be according to these
goals. The organization should also enable the attainment of job satisfaction to various
employees.
14. Scalar Principle:
This principle refers to the vertical placement of supervisors starting from top and going to the
lower level. The scalar chain is a pre-requisite for effective and efficient organization.
 
Centralization
In any business organization, concentration of authority and powers in the hands of top
management is referred to as centralization, everything which goes to reduce the importance of
subordinates role in an organization is known as centralization. In such a type of office
organization, the authority and powers of each and every activity lies in the hands of top few, say
office manager and his immediate subordinate, and other subordinates play the second and
subsequent fiddles. In fact, they are not to play any role. Instead they asked to work and only
work according to the dictates of what the boss wants and orders.
Centralization of the powers in respect of planning and control in not a new thing in any
management. But centralization refers to the reduction of subordinates to a naught. Thus,
treatment accorded to them is only that of a machine. Subordinates are asked only to function as
a machine whereas the top management functions as operators. In fact, this position has brought
disrepute to the term centralization in modern management set-up.
Features of centralization:
1. Top level managers concentrate and reserve the decision-making power.
2. Execution decided by the top level management with the help from the other levels of
management.
3. Lower levels management do the jobs which directed and controlled by the top managers
Advantages of Centralization
 Facility for personnel leadership.There is absolutely no doubt that the centralized
Office organization helps in establishing a personnel leadership which may even be able to
convert a losing business house into a profitable one because of strong, efficient, purposeful
and non controversial central leadership.
 Equitable distribution of work.  In order to group together and economies the working
as well as cost the grouping of two and more departments into one also placing the same under
one control goes a long way in equitably distributing in workload not only between different
departments but between individual worker as well. This brings economy and speed.
 Uniformity of activities. Obviously when centralized, the activities will be either in the
hand of one individual or a few one but under his (one) direct, control. This will result into
uniformity of activities and thereby ensuring uniform decision and uniform process.
 Specialization. Specialization of work as well as process and handling of the work by the
staff who has specialized in the work he is handling are a few of the meaningful advantages of
specialization.
 Economy.  The uniformity of activities and specialization of work lead to economic
operation and best utilization of the staff services. This brings efficiency and smoothness as
well. All these bring economy.
 No duplication of work. Centralized personal leadership, uniformity of activities and
specialization leave no scope for duplication of work in the office. Thus extra labor and extra
cost involved in duplication is avoided and economy is ensured.
 Quick decision. For taking advantage of rare opportunities coming in the way, it is
necessary that decision should be quickly taken lest the opportunity so available may be
slipped away. Centralized office organization helps in such a quick decision.
 Greater flexibility.  In case of any emergency arising the uniformity of activities help in
adjusting the activities, procedure and decisions taken. This adjustment ensures flexibility the
opportunity for which is available in centralized office organization in greater degree.
 Standardization and training facilities enhanced. Centralized office organization helps
in standardizing the work and thereby helps in extending the training facilities to everyone and
every work in the organization which needs specialization, standardization and attention The
new staff member can easily pick up the work and can easily be accommodated and adjusted
in such a set-up.
 Effective control. Uniformity in activities, specialization and standardization facilitates
greater degree or supervision, effective co-ordination, self and departmental integration and
thus ensure effective control.
 Fixing of responsibility is facilitated. It is possible in decentralized system to locate the
fault and detect the deviations and thus is able to pinpoint and take effective measures to
improve by knowing and then fixing the responsibility and thereby improving the      working
and efficiency.
Disadvantages of Centralization
However, a centralized set-up suffers from the following disadvantages:
 Delay in work. Quick decision is possible but only at the top level, since decision is take
only by the top, it is not possible to take quick decision whenever the top is neither available
nor is in a mood to take one. This results in delaying the work since it is the top who is to take
decision and none else.
 Bureaucracy. Bureaucracy leads to red tapism. A centralized set-up breads red-tapism
which does not only delay the work but also sometimes helps in the raining of eye brows
because bureaucracy always leads to discrimination.
 Distinctive to subordinates. Subordinate in such a set up only is required to implement  
whatever it is asked to carry out. No independent decision making authority. A mechanical
working always creates mental reservation. The subordinate does not take imitative nor is he
allowed to do so. Thus there remains no charm in either the work or the organization as he
knows fully well that no upper ladder is there for him as he is not allowed to take any
initiative.
 No loyalty. Since the initiative is not there, charm is not there. Zeal is absent. No
involvement is there. Only the implementation of job is there. This means “work like a
machine as ordered.” Such a psychology always never works. Thus neither the work for the
organization is treated as own one, obviously from a servant loyalty can be expected only
when he is allowed to think that he is very much the part of the department and the
organization. This is always missing. This brings lack of loyalty among the working force.
 Lack of secrecy. Secrecy in a centralized set up cannot be maintained as the orders and
decisions flow from one place and conveyed to all. Moreover, all work at a place, under one
roof, one control and one office department. Thus secrecy even if tried cannot be maintained
as effectively as might be required.
 Decentralisation: Meaning, Advantages and Disadvantages of Decentralisation!
 Meaning:
 Decentralisation can be viewed as an extension of delegation.
 ADVERTISEMENTS:
 When a part of the work is entrusted to others, it is known as delegation. Decentralisation
extends to the lowest level of the organisation.
 A few definitions are given below:
 1. “Decentralisation refers to tire systematic effort to delegate to the lowest levels all
authority except that which can only be exercised at central points.” —Louis A. Allen
 2. “Decentralisation means the division of a group of functions and activities into
relatively autonomous units with overall authority and responsibility for their operation
delegate to timd of cacti unit.’—Earl. P. Strong
 ADVERTISEMENTS:
 3. “Decentralisation is simply a matter of dividing up the managerial work and assigning
specific duties to the various executive skills.”
 —Newman, summer and Wairen
 Thus, decentralisation is concerned with the decentralisation of decision-making
authority to the lower levels in managerial hierarchy.
 Degree of Decentralisation:
 The degree of decentralisation is determined by:
 (a) Nature of the authority delegated,
 (b) How far down in the organisation it is delegated,
 (c) How consistently it is delegated.
 So, the degree of decentralisation is determined by the authority given. For example,
manager A in a company is given the authority to buy certain material worth Rs. 1500
whereas manager B is allowed to do similar type of work to the extent of Rs. 4500.
 ADVERTISEMENTS:
 It is clear that the degree of decentralisation is less in case of A. Similarly decisions about
the matters referred, measure the degree of decentralisation depending upon the power to
take decisions vested in an officer without the need of getting consent of somebody else.
 Advantages of Decentralisation:
 1.  Reduces the burden on top executives:
 Decentralisation relieves the top executives of the burden of performing various
functions. Centralisation of authority puts the whole responsibility on the shoulders of an
executive and his immediate group. This reduces the time at the disposal of top
executives who should concentrate on other important managerial functions. So, the only
way to lessen their burden is to decentralise the decision-making power to the
subordinates.
 2.  Facilitates diversification:
 Under decentralization, the diversification of products, activites and markets etc., is
facilitated. A centralised enterprise with the concentration of authority at the top will find
 it difficult and complex to diversify its activities and start the additional lines of
manufacture or distribution.
 3.  To provide product and market emphasis:
 A product loses its market when new products appear in the market on account of
innovations or changes in the customers demand. In such cases authority is decentralised
to the regional units to render instant service taking into account the price, quality,
delivery, novelty, etc.
 4.  Executive Development:
 When the authority is decentralised, executives in the organisation will get the
opportunity to develop their talents by taking initiative which will also make them ready
for managerial positions. The growth of the company greatly depends on the talented
executives.
 5.  It promotes motivation:
 To quote Louis A. Allen, “Decentralisation stimulates the formation of small cohesive
groups. Since local managers are given a large degree of authority and local autonomy,
they tend to weld their people into closely knit integrated groups.” This improves the
morale of employees as they get involved in decision-making process.
 6.  Better control and supervision:
 Decentralisation ensures better control and supervision as the subordinates at the lowest
levels will have the authority to make independent decisions. As a result they have
thorough knowledge of every assignment under their control and are in a position to
make amendments and take corrective action.
 7. Quick Decision-Making:
 Decentralisation brings decision making process closer to the scene of action. This leads
to quicker decision-making of lower level since decisions do not have to be referred up
through the hierarchy.
 Disadvantages of Decentralisation:
 Decentralisation can be extremely beneficial. But it can be dangerous unless it is
carefully constructed and constantly monitored for the good of the company as a whole.
 Some disadvantages of decentralisation are:
 1. Uniform policies not Followed:
 Under decentralisation, it is not possible* to follow uniform policies and standardised
procedures. Each manager will work and frame policies according to his talent.
 2. Problem of Co-Ordination:
 Decentralisation of authority creates problems of co-ordination as authority lies dispersed
widely throughout the organisation.
 3. More Financial Burden:
 Decentralisation requires the employment of trained personnel to accept authority, it
involves more financial burden and a small enterprise cannot afford to appoint experts in
various fields.
 4. Require Qualified Personnel:
 Decentralisation becomes useless when there are no qualified and competent personnel.
 5. Conflict:
 Decentralisation puts more pressure on divisional heads to realize profits at any cost.
Often in meeting their new profit plans, bring conflicts among managers.
 Communication Process
Definition: The Communication is a two-way process wherein the message in the form of
ideas, thoughts, feelings, opinions is transmitted between two or more persons with the intent of
creating a shared understanding.
Simply, an act of conveying intended information and understanding from one person to another
is called as communication. The term communication is derived from the Latin
word “Communis” which means to share. Effective communication is when the message
conveyed by the sender is understood by the receiver in exactly the same way as it was intended.
Communication Process
The communication is a dynamic process that begins with the conceptualizing of ideas by the
sender who then transmits the message through a channel to the receiver, who in turn gives the
feedback in the form of some message or signal within the given time frame. Thus, there are
Seven major elements of communication process:

1. Sender: The sender or the communicator is the person who initiates the conversation and
has conceptualized the idea that he intends to convey it to others.
2. Encoding: The sender begins with the encoding process wherein he uses certain words or
non-verbal methods such as symbols, signs, body gestures, etc. to translate the information into a
message. The sender’s knowledge, skills, perception, background, competencies, etc. has a great
impact on the success of the message.
3. Message: Once the encoding is finished, the sender gets the message that he intends to
convey. The message can be written, oral, symbolic or non-verbal such as body gestures, silence,
sighs, sounds, etc. or any other signal that triggers the response of a receiver.
4. Communication Channel: The Sender chooses the medium through which he wants to
convey his message to the recipient. It must be selected carefully in order to make the message
 effective and correctly interpreted by the recipient. The choice of medium depends on the
interpersonal relationships between the sender and the receiver and also on the urgency of the
message being sent. Oral, virtual, written, sound, gesture, etc. are some of the commonly used
communication mediums.
5. Receiver: The receiver is the person for whom the message is intended or targeted. He
tries to comprehend it in the best possible manner such that the communication objective is
attained. The degree to which the receiver decodes the message depends on his knowledge of the
subject matter, experience, trust and relationship with the sender.
6. Decoding: Here, the receiver interprets the sender’s message and tries to understand it in
the best possible manner. An effective communication occurs only if the receiver understands the
message in exactly the same way as it was intended by the sender.
7. Feedback: The Feedback is the final step of the process that ensures the receiver has
received the message and interpreted it correctly as it was intended by the sender. It increases the
effectiveness of the communication as it permits the sender to know the efficacy of his message.
The response of the receiver can be verbal or non-verbal.
A communication channel is a type of media that is used to transfer a message from one person
to another.  In business specifically, communication channels are the way information flows in
the organization within, and with other companies. 

Importance of a Communication Channel

Communication channels affect how inefficient or efficient the flow of information is within a
company. This lack of communication could cause employees to lack the knowledge of what the
company expects of them, leaving them uninformed.   Also without an effective communication
channel, employees lose focus on the big picture and lose their company mind, which goes on to
affects their decision making and productivity in the workplace.

This harms the overall organizational objectives as well.  For an organization to be run
effectively, a good manager should be able to communicate to their employees what is expected
of them, make sure they are fully aware of company policies and any upcoming changes.
Communication channels should be included by managers to enhance the productivity of their
workers and to also ensure the well being and smooth running of their company.

Types of Communication

With technology advancing, the number of communication channels has significantly increased
over the past few years. Many new types of channels exist today including video conferencing,
mobile technology, electronic bulletin boards and also fax machines. As time progresses so many
more channels will be introduced and implemented within the work place. These new types of
channels help organizations communicate with the several workers to ensure their message has
been sent. Choosing the type of communication channel is very important, these channels are
grouped into three main categories:  formal, informal and unofficial.

Formal Communication Channels

 Sends information including goals, policies and procedures of an organization

  Messages follow a chain of command
 Flows from managers to their subordinates
 Examples include business plan, customer satisfaction survey, annual reports, employer's
manual, review meetings. 
Informal Communication Channels
 The strict hierarchical web of communication cannot function efficiently on its own and
hence there exists a different communication channel. 
  This type of communication channel may disrupt the chain of command, a good manager
needs to find the fine balance between the formal and informal communication channel to
ensure the best type of communication.
 Examples include, lunch time gathering, water cooler talk etc. 
 Quality circles, team work, different training programs are outside of the chain of
command are also informal communication channels.
Unofficial Communication Channels
 Sometimes communication that takes place in an organization are interpersonal. 
 Talks of sports, politics and TV shows are seen between co-workers. 
 The unofficial communication channel in an company is the company's 'grapevine.' It is
this that cause rumors.
  'Grapevine' discussions often form groups, which translate into friendships outside of the
organization. 
  A good manager should be aware of information circulating in this unofficial
communication channel and should take positive measures to prevent false information
from spreading.
 Social gatherings between co-workers are a type of unofficial communication channel.
Types of Communication Medium
We divide the different types of communication medium into two different categories:
1. Physical media
2. Mechanical media (everything that is not No. 1)
This site focus on the internal communication. Our listings of types of communication medium
therefore exclude external media.
Physical media
With physical media we mean channels where the person who is talking can be seen and heard
by the audience. The whole point here is to be able to not only hear the messages but also to see
the body language and feel the climate in the room. This does not need to be two-way channels.
In certain situations the receiver expect physical communication. This is the case especially
when dealing with high concern messages, e.g. organizational change or down sizing. If a
message is perceived as important to the receiver they expect to hear it live from their manager.
 Large meetings, town hall meetings
 Department meetings (weekly meetings)
 Up close and personal (exclusive meetings)
 Video conferences
 Viral communication or word of mouth
Large meetings
Large meetings have got great symbolic value and should be used only at special occasions. This
channel works very well when you need to get across strategic and important messages to a large
group of people at the same time, creating a wide attention, get engagement or communicate a
 sense of belonging. Large meetings are excellent when you want to present a new vision or
strategy, inform about a reorganisation or share new values. The opportunity for dialogue is
limited at large meeting, of course but you can create smaller groups where dialogue can be
performed.
Weekly departmental meetings
In the weekly meetings you and your group communicate daily operative issues, gives status
reports and solves problems. Weekly meetings are also used to follow up on information from
large meetings, management team meetings etc from a “what’s-in-it-for-us-perspective”. This
type of smaller group meetings gives good opportunities for dialogue. This channel is often the
most important channel you have as a manager, because that’s where you have the opportunity to
build the big picture, you can prepare for change, you can create ownership of important
strategies and goals etc. This is a favourite among the types of communication medium.
Up close and personal
This is a form of meetings where, often, a senior manager meets with a “random” selection of
employees to discuss and answer questions. Some managers use this as a on going activities on a
monthly basis. It can also be used in specific projects or campaigns e.g. launching new strategies.
Viral communication
Or viral marketing as it is also called works external as well as internal and refer to marketing
techniques that use pre-existing social networks to produce increases in awareness or knowledge
through self-replicating viral processes. It can be word-of-mouth delivered or enhanced by the
network effects of social media.
Mechanical media
The second of the two types of communication medium is mechanical media. With mechanical
media we mean written or electronic channels. These channels can be used as archives for
messages or for giving the big picture and a deeper knowledge. But they can also be very fast.
Typically though, because it is written, it is always interpret by the reader based on his or her
mental condition. Irony or even humour rarely travels well in mechanical channels.
 E-mail
 Weekly letters or newsletters
 Personal letters
 Billboards
 Intranet
 Magazines or papers
 Sms
 Social media
E-mail
E-mail is a good channel for the daily communication to specific target groups. It is suitable
mainly for up-to-date and “simple” messages and where there is no risk of misunderstanding, E-
mail is an important supplement to weekly meetings and the Intranet. Invitation to and agenda
for meetings can with advantage be sent out with e-mail before the meeting, while background
facts and minutes from meetings is well suited to be stored on the Intranet.
Some short e-mail tips:
 Write short and to the point.
 Target your messages to the audience and avoid sending unnecessary all-employees-e-
mails.
 Set up your subject line to describe what the e-mail is about.
 Clearly state if the message is for information or for action.
 Avoid attaching large documents if possible. Post a link or direct to the source instead.
Weekly letters
Managers that have large groups of employees and who has difficulties in meeting all of them
often choose to publish a personally weekly letter. It is sort of a short summary of news with
personally reflections. Many employees often appreciate it because it has the potential to give the
“what’s-in-it-for-us” angle. They can also contain summaries and status in tasks, projects or
issues – yesterday, today and tomorrow.
Personal letters
At special occasions it can be justified to send a personal letter to employees in order to get
attention to a specific issue. E.g. pat on the back letter after extra ordinary achievements. Or it
can be a letter with your personal commentary on an ongoing reorganisation that affects many
employees. One other example is a letter that summarizes the past year and wishes all the best
for the holidays.
Billboard
One of the most forgotten types of communication medium is clearly the billboard. Especially
today, when everything is about social media. But the good thing with the billboard is that you
can use billboards to inform people who does not have computers and/or access to the Intranet or
to reach people that work part time and does not attend weekly meetings.
 News summary
 Weekly letters
 Minutes from meetings
 Schedules
 Holiday lists
You can also use the billboard to gather ideas e.g. for items for upcoming meetings
Intranet
The Intranet is of course one of the most used types of communication medium and a very
important communication channel and work tool for you as a manager, but it is also your job to
help your employees prioritise and pick out the information on the Intranet, as well as translating
messages into local consequences. Ask your self: what information concerns you employees? In
what way are they concerned? How do I best communicate this to my employees? Weekly
meeting or your weekly letter can be a suitable channel to discuss or inform of information found
on the Intranet.
Employee magazine
A Magazine offers the opportunity to deepen a specific issue, explain context, describing
consequences or tell a story. It also has the opportunity to reach many employees. If you want to
create a broad internal understanding of strategic messages the magazine can be a good vehicle
to use e.g. by writing an article based on an interview with you. As were the case with the
Intranet you also have to “translate” the information in the magazine to your employees. You can
ask yourself: What does the content in a specific article mean to us? How shall I best
communicate it to the employees?
Sms
Or text messaging to the mobile phone is one of the new types of communication medium and
not a very widely used channel but where it is used it is proven very effective. Some companies
use it as an alert system e.g. for giving managers a head start when something important will be
published on the Intranet. The advantage with Sms is that it is fast. But it should be used rarely
as an exclusive channel. Some companies use it as a subscription tool where you can subscribe to
e.g press-releases.
Social media Wikipedia describe social media as “Media designed to be disseminated through
social interaction, created using highly accessible and scalable publishing techniques. Social
media supports the human need for social interaction, using Internet- and web-based
technologies to transform broadcast media monologues (one to many) into social media
dialogues (many to many). It supports the democratization of knowledge and information,
transforming people from content consumers into content producers. Businesses also refer to
social media as user-generated content (UGC) or consumer-generated media (CGM).”
More and more companies are using social media in their external marketing, setting up twitter
and Facebook accounts etc. But these channels are also used internal where managers become
“friends” on Facebook with their employees or where managers use blog and twitter targeting
their employees.

Some of the important barriers to communication have been discussed below:

1. Physical Barriers:
A communication is a two-way process, distance between the sender and the receiver of
the message is an important barrier to communication. Noise and environmental factors
also block communication. 
2.  Personal Barriers:
Personal factors like difference in judgment, social values, inferiority complex, bias,
attitude, pressure of time, inability to communicate, etc. widen the psychological distance
between the communicator and the communicate. Credibility gap i.e., inconsistency
between what one says and what one does, also, acts as a barrier to communication.
3.  Semantic or Language Barriers:
Semantic is the science of meaning. The same words and symbols carry different
meanings to different people. Difficulties in communication arise when the sender and
the receiver of the message use words or symbols in different senses. The meaning
intended by the sender may be quite different from the meaning followed by the receiver.
People interpret the message in terms of their own behaviour and experience. Sometimes,
the language used by the sender may not at all be followed by the receiver.
4. Status Barriers (Superior-Subordinate Relationship):
Status or position in the hierarchy of an organization is one of the fundamental barriers
that obstructs free flow of information. A superior may give only selected information to
his subordinates so as to maintain status differences. Subordinates, usually, tend to
convey only those things which the superiors would appreciate.
This creates distortion in upward communication. Such selective communication is also
known as filtering. Sometimes, “the superior feels that he cannot fully admit to his
subordinates those problems, conditions or results which may affect adversely on his
ability and judgment. To do so would undermine his position as a superior being in the
formal organization.” This causes distortion in downward communication. A subordinate
may also feel reluctant to report his shortcomings or may not seek clarification on
instructions which are subject to different interpretations for fear of loss of prestige in the
eyes of the superior.
5.  Organizational Structure Barriers:
Effective communication largely depends upon sound organizational structure. If the
structure is complex involving several layers of management, the breakdown or distortion
in communication wall arise. It is an established fact that every layer cuts off a bit of
information. In the words of W.C. Bennis, “Communication gets distorted particularly as
it goes up the hierarchy.”
Moreover, information travelling through formal structure introduces rigidity and causes-
delay because of long lines of communication. Similarly, lack of instructions for further
conveying information to the subordinates and heavy pressure of work at certain levels of
authority also act as barriers to effective communication.
6.  Barriers Due to Inadequate Attention:
Inadequate attention to the message makes communication less effective and the message
is likely to be misunderstood. Inattention may arise because of over business of the
communicate or because of the message being contrary to his expectations and beliefs.
The simple failure to read notices, minutes and reports is also a common feature.
Whatever be the reason, communication remains only a one-way process and there is no
understanding of the message, if the receiver pays little attention to the message. In the
words of Joseph Dooher. “Listening is the most neglected skill of communication.” “half
listening is like racing your engine with the gears in neutral. You use gasoline but you get
nowhere.”
7.  Premature Evaluation:
Some people have the tendency to form a judgment before listening to the entire
message. This is known as premature evaluation. As discussed in the previous point,
“half-listening is like racing your engine with the gears in neutral. You use gasoline but
you get nowhere.” Premature evaluation distorts understanding and acts as a barrier to
effective communication.
8.  Emotional Attitude:
Barriers may also arise due to emotional attitude because when emotions are strong, it is
difficult to know the frame of mind of other person or group. Emotional attitudes of both,
the communicator as well as the communicate, obstruct free flow of transmission and
understanding of messages.
9.  Resistance to Change:
It is a general tendency of human beings to stick to old and customary patterns of life.
They may resist change to maintain status quo. Thus, when new ideas are being
communicated to introduce a change, it is likely to be overlooked or even opposed. This
resistance to change creates an important obstacle to effective communication.
10.  Barriers Due to Lack of Mutual Trust:
Communication means sharing of ideas in common. “When we communicate, we are
trying to establish a commonness.” Thus, one will freely transfer information and
understanding with another only when there is mutual trust between the two. When there
is a lack of mutual trust between the communicator and the communicate, the message is
not followed. Credibility gaps, i.e., inconsistency in saying and doing, also causes lack of
mutual trust which acts as a basic obstacle to effective communication.
11.  Other Barriers:
There may be many other barriers, such as un-clarified assumptions, lack of ability to
communicate, mirage of too much knowledge of closed minds, communication overload,
 shortage of time, etc., which cause distortion or obstruction in the free flow of
communication and thus make it ineffective. Failure to retain or store information for
future use becomes a barrier to communication when the information is needed in future.
STAFFINIG:

Staffing is one of the most important functions of management. In fact, it is the process of filling
vacant position by appointing the right personnel at the right job, at the right time. Hence,
everything will occur in the right manner. It is universal truth that human resource is one of the
greatest parts of every organization, because in any organization all other resources like- money,
material, machine etc can be utilized efficiently and effectively by the positive efforts of the
human resource. Thus, it is too important that each and every personnel in organization should
be appointed at the right job, according to their ability, talent, aptitude and specializations. So
that, organization can achieve it’s pre-set goals in the proper way by the hundred percent
contribution of man-power. On the whole it is clear that staffing is an essential function of every
business organization.   

Some important definitions of Staffing:

According to A. K. Singh, “Staffing is the process of providing jobs to deserving people, through
the function of recruitment, selection and training with-a-view to getting benefits from them, for
the achievement of pre-set goals of organization.

According to Theo Heimann, “Staffing is concerned with the placement, growth and
development of all those members of the organization whose function is to get the things done
through the efforts of other individuals. 
 Unit-II
ECONOMICS – DEFINITION AND NATURE & SCOPE OF ECONOMICS –
DIVISIONS OF ECONOMICS
MEANING OF ECONOMICS: Economics is the science that deals with production, exchange
and consumption of various commodities in economic systems. It shows how scarce resources
can be used to increase wealth and human welfare. The central focus of economics is on scarcity
of resources and choices among their alternative uses. The resources or inputs available to
produce goods are limited or scarce. This scarcity induces people to make choices among
alternatives, and the knowledge of economics is used to compare the alternatives for choosing
the best among them. For example, a farmer can grow paddy, sugarcane, banana, cotton etc. in
his garden land. But he has to choose a crop depending upon the availability of irrigation water.
Two major factors are responsible for the emergence of economic problems. They are: i) the
existence of unlimited human wants and ii) the scarcity of available resources. The numerous
human wants are to be satisfied through the scarce resources available in nature. Economics
deals with how the numerous human wants are to be satisfied with limited resources. Thus, the
science of economics centres on want - effort - satisfaction. Economics not only covers the
decision making behaviour of individuals but also the macro variables of economies like national
income, public finance, international trade and so on.
DEFINITIONS OF ECONOMICS: Several economists have defined economics taking
different aspects into account. The word ‘Economics’ was derived from two Greek words, oikos
(a house) and nemein (to manage) which would mean ‘managing an household’ using the limited
funds available, in the most satisfactory manner possible.
i) Wealth Definition Adam smith (1723 - 1790), in his book “An Inquiry into Nature and
Causes of Wealth of Nations” (1776) defined economics as the science of wealth. He explained
how a nation’s wealth is created. He considered that the individual in the society wants to
promote only his own gain and in this, he is led by an “invisible hand” to promote the interests of
the society though he has no real intention to promote the society’s interests. Criticism: Smith
defined economics only in terms of wealth and not in terms of human welfare. Ruskin and
Carlyle condemned economics as a ‘dismal science’, as it taught selfishness which was against
ethics. However, now, wealth is considered only to be a mean to end, the end being the human
welfare. Hence, wealth definition was rejected and the emphasis was shifted from ‘wealth’ to
‘welfare’.
ii) Welfare Definition Alfred Marshall (1842 - 1924) wrote a book “Principles of Economics”
(1890) in which he defined “Political Economy” or Economics is a study of mankind in the
ordinary business of life; it examines that part of individual and social action which is most
closely connected with the attainment and with the use of the material requisites of well being”.
The important features of Marshall’s definition are as follows: a) According to Marshall,
economics is a study of mankind in the ordinary business of life, i.e., economic aspect of human
life. b) Economics studies both individual and social actions aimed at promoting economic
welfare of people. c) Marshall makes a distinction between two types of things, viz. material
things and immaterial things. Material things are those that can be seen, felt and touched, (E.g.)
book, rice etc. Immaterial things are those that cannot be seen, felt and touched. (E.g.) skill in the
operation of a thrasher, a tractor etc., cultivation of hybrid cotton variety and so on. In his
definition, Marshall considered only the material things that are capable of promoting welfare of
people. Criticism: a) Marshall considered only material things. But immaterial things, such as the
services of a doctor, a teacher and so on, also promote welfare of the people. b) Marshall makes
a distinction between (i) those things that are capable of promoting welfare of people and (ii)
those things that are not capable of promoting welfare of people. But anything, (E.g.) liquor, that
is not capable of promoting welfare but commands a price, comes under the purview of
economics. c) Marshall’s definition is based on the concept of welfare. But there is no clear-cut
definition of welfare. The meaning of welfare varies from person to person, country to country
and one period to another. However, generally, welfare means happiness or comfortable living
conditions of an individual or group of people. The welfare of an individual or nation is
dependent not only on the stock of wealth possessed but also on political, social and cultural
activities of the nation.
iii) Welfare Definition Lionel Robbins published a book “An Essay on the Nature and
Significance of Economic Science” in 1932. According to him, “economics is a science which
studies human behaviour as a relationship between ends and scarce means which have alternative
uses”. The major features of Robbins’ definition are as follows: a) Ends refer to human wants.
Human beings have unlimited number of wants. b) Resources or means, on the other hand, are
limited or scarce in supply. There is scarcity of a commodity, if its demand is greater than its
supply. In other words, the scarcity of a commodity is to be considered only in relation to its
demand. c) The scarce means are capable of having alternative uses. Hence, anyone will choose
the resource that will satisfy his particular want. Thus, economics, according to Robbins, is a
science of choice. Criticism: a) Robbins does not make any distinction between goods conducive
to human welfare and goods that are not conducive to human welfare. In the production of rice
and alcoholic drink, scarce resources are used. But the production of rice promotes human
welfare while production of alcoholic drinks is not conducive to human welfare. However,
Robbins concludes that economics is neutral between ends. b) In economics, we not only study
the micro economic aspects like how resources are allocated and how price is determined, but we
also study the macro economic aspect like how national income is generated. But, Robbins has
reduced economics merely to theory of resource allocation. c) Robbins definition does not cover
the theory of economic growth and development.
iv) Growth Definition Prof. Paul Samuelson defined economics as “the study of how men
and society choose, with or without the use of money, to employ scarce productive resources
which could have alternative uses, to produce various commodities over time, and distribute
them for consumption, now and in the future among various people and groups of society”. The
major implications of this definition are as follows: a) Samuelson has made his definition
dynamic by including the element of time in it. Therefore, it covers the theory of economic
growth. b) Samuelson stressed the problem of scarcity of means in relation to unlimited ends.
Not only the means are scarce, but they could also be put to alternative uses. c) The definition
covers various aspects like production, distribution and consumption. Of all the definitions
discussed above, the ‘growth’ definition stated by Samuelson appears to be the most satisfactory.
However, in modern economics, the subject matter of economics is divided into main parts, viz.,
i) Micro Economics and ii) Macro Economics. Economics is, therefore, rightly considered as the
study of allocation of scarce resources (in relation to unlimited ends) and of determinants of
income, output, employment and economic growth.
SCOPE OF ECONOMICS: Scope means province or field of study. In discussing the scope of
economics, we have to indicate whether it is a science or an art and a positive science or a
normative science. It also covers the subject matter of economics.
i) Economics - A Science and an Art
a) Economics is a science: Science is a systematized body of knowledge that traces the
relationship between cause and effect. Another attribute of science is that its phenomena should
be amenable to measurement. Applying these characteristics, we find that economics is a branch
of knowledge where the various facts relevant to it have been systematically collected, classified
and analyzed. Economics investigates the possibility of deducing generalizations as regards the
economic motives of human beings. The motives of individuals and business firms can be very
easily measured in terms of money. Thus, economics is a science. Economics - A Social Science:
In order to understand the social aspect of economics, we should bear in mind that labourers are
working on materials drawn from all over the world and producing commodities to be sold all
over the world in order to exchange goods from all parts of the world to satisfy their wants.
There is, thus, a close inter-dependence of millions of people living in distant lands unknown to
one another. In this way, the process of satisfying wants is not only an individual process, but
also a social process. In economics, one has, thus, to study social behaviour i.e., behaviour of
men in-groups.
b) Economics is also an art. An art is a system of rules for the attainment of a given end. A
science teaches us to know; an art teaches us to do. Applying this definition, we find that
economics offers us practical guidance in the solution of economic problems. Science and art are
complementary to each other and economics is both a science and an art.
METHODS OF ECNOMICS;
ii) Positive and Normative Economics Economics is both positive and normative science.
a) Positive science: It only describes what it is and normative science prescribes what it ought to
be. Positive science does not indicate what is good or what is bad to the society. It will simply
provide results of economic analysis of a problem.
b) Normative science: It makes distinction between good and bad. It prescribes what should be
done to promote human welfare. A positive statement is based on facts. A normative statement
involves ethical values. For example, “12 per cent of the labour force in India was unemployed
last year” is a positive statement, which could is verified by scientific measurement. “Twelve per
cent unemployment is too high” is normative statement comparing the fact of 12 per cent
unemployment with a standard of what is unreasonable. It also suggests how it can be rectified.
Therefore, economics is a positive as well as normative science.
iii) Methodology of Economics Economics as a science adopts two methods for the discovery
of its laws and principles, viz.,
(a) deductive method and (b) inductive method.
a) Deductive method: Here, we descend from the general to particular, i.e., we start from certain
principles that are self-evident or based on strict observations. Then, we carry them down as a
process of pure reasoning to the consequences that they implicitly contain. For instance, traders
earn profit in their businesses is a general statement which is accepted even without verifying it
with the traders. The deductive method is useful in analyzing complex economic phenomenon
where cause and effect are inextricably mixed up. However, the deductive method is useful only
if certain assumptions are valid. (Traders earn profit, if the demand for the commodity is more).
b) Inductive method: This method mounts up from particular to general, i.e., we begin with the
observation of particular facts and then proceed with the help of reasoning founded on
experience so as to formulate laws and theorems on the basis of observed facts. E.g. Data on
consumption of poor, middle and rich income groups of people are collected, classified, analyzed
and important conclusions are drawn out from the results. In deductive method, we start from
certain principles that are either indisputable or based on strict observations and draw inferences
about individual cases. In inductive method, a particular case is examined to establish a general
or universal fact. Both deductive and inductive methods are useful in economic analysis.
iv) Subject Matter of Economics Economics can be studied through
a) traditional approach and (b) modern approach.
a) Traditional Approach: Economics is studied under five major divisions namely
consumption, production, exchange, distribution and public finance. 1.Consumption: The
satisfaction of human wants through the use of goods and services is called consumption.
2.Production: Goods that satisfy human wants are viewed as “bundles of utility”. Hence
production would mean creation of utility or producing (or creating) things for satisfying human
wants. For production, the resources like land, labour, capital and organization are needed. 3.
Exchange: Goods are produced not only for self-consumption, but also for sales. They are sold to
buyers in markets. The process of buying and selling constitutes exchange. 4. Distribution: The
production of any agricultural commodity requires four factors, viz., land, labour, capital and
organization. These four factors of production are to be rewarded for their services rendered in
the process of production. The land owner gets rent, the labourer earns wage, the capitalist is
given with interest and the entrepreneur is rewarded with profit. The process of determining rent,
wage, interest and profit is called distribution. 5. Public finance: It studies how the government
gets money and how it spends it. Thus, in public finance, we study about public revenue and
public expenditure.
b) Modern Approach
The study of economics is divided into:
i) Microeconomics and ii) Macroeconomics.
1. Microeconomics analyses the economic behaviour of any particular decision making unit
such as a household or a firm. Microeconomics studies the flow of economic resources or factors
of production from the households or resource owners to business firms and flow of goods and
services from business firms to households. It studies the behaviour of individual decision
making unit with regard to fixation of price and output and its reactions to the changes in
demand and supply conditions. Hence, microeconomics is also called price theory.
2. Macro economics studies the behaviour of the economic system as a whole or all the
decision-making units put together. Macroeconomics deals with the behaviour of aggregates like
total employment, gross national product (GNP), national income, general price level, etc. So,
macroeconomics is also known as income theory. Microeconomics cannot give an idea of the
functioning of the economy as a whole. Similarly, macroeconomics ignores the individual’s
preference and welfare. What is true of a part or individual may not be true of the whole and
what is true of the whole may not apply to the parts or individual units. By studying about a
single small-farmer, generalization cannot be made about all small farmers, say in Tamil Nadu
state. Similarly, the general nature of all small farmers in the state need not be true in case of a
particular small farmer. Hence, the study of both micro and macroeconomics is essential to
understand the whole system of economic activities.
BASIC ASSUMPTION OF ECONOMICS
1. Economic Rationality: Economics deals with economic behaviour of man, which is highly
unpredictable and uncertain. Man is not a machine, which will work according a set pattern. He has a free
will. It is, thus, very hard to predict which taste individuals have (why some prefer cake to ice cream,
white to red cars and so on) and in which way they will respond to various economic stimuli. Despite this
empirical truths there are also, however, distinct regularities about human behaviour. For example, if the
price of a commodity the good increases and all other things remaining same, people will tend to buy less,
if inflation takes place, workers will ask for more money wages for the same work. These regularities
indicate normal behaviour or normal responses and considered any deviation as abnormal such as buying
less when price falls. While deducing any theory, economists assume that human being acts in a normal
rational manner. Rationality in economics means maximization of gains. It means that a consumer will
allocate his scares resources towards various wants in such a manner that his satisfaction is maximum,
producer being rational will try to maximize his profits. Rational human behaviour is thus the most basic
assumption in economics. If we did not make this assumption, we would never “reach anywhere” in
economics.
2.Ceteris paribus is another assumption, which is often made. Ceteris paribus means other things being
equal. By other things we mean factors other than the one under observation. For example, if we are
studying demand of coffee in relation to its price, we assume other factors; which affect the demand for
coffee, such as income of consumers, taste and preference etc., as given. If we allow these factors also to
change, we will not be able to measure the effect of price of tea on its demand correctly and objectively.
Therefore we make the assumption – ceteris paribus.
3. Perfect Competition: Another as very common assumption amongst economists is the assumption of
perfect competition. Economists, especially classical economists, assumed that competition was perfect.
However, this assumption was introduced more for theoretical convenience than for practical utility.
Equilibrium: Another common assumption, which forms the basis of most of the economic theories, is
that of ‘equilibrium’. Equilibrium is a condition from which no deviation is desired. It is the optimal
position for decision making.
4.Capitalist Economy: Economic 'analysis, especially price theory, has been developed in the context of
a developed capitalist economy. Such an economy assumes the existence of private property, freedom of
enterprise, profit motive, private initiative, perfect competition and absence of government interference.
The existence of free market conditions with free demand and supply is a necessary feature of a capitalist
system. These conditions may not be present in any other economic system, particularly in backward and
developing economies. Hence the conclusion and policy formulations applicable to developed capitalist
.economies cannot be applied to developing and underdeveloped economies which are partially or fully
controlled economies.
5.Static Economy: Economics studies the problem of allocation of limited resources as between different
goods and services on the assumption that the technology and resources are given in an economy. The
economy is producing maximum amount of national income with the given technology and resources. In
other words, economics studies a static economy with a given system of wants, resources and technology.
Naturally, the conditions and policy formulations derived from static economy will have to be changed
for a dynamic economy.

FACTORS OF PRODUCTION:
In economics, factors of production, resources, or inputs are which is used in the production
process to produce output—that is, finished goods and services. The utilized amounts of the
various inputs determine the quantity of output according to the relationship is called
the production function. There are three basic resources or factors of
production: land, labour and capital. The factors are also frequently labelled "producer goods or
services" to distinguish them from the goods or services purchased by consumers, which are
frequently labeled "consumer goods". All three of these are required in combination at a time to
produce a commodity.
There are two types of factors: primary and secondary. The previously mentioned primary
factors are land, labour (the ability to work), and capital goods. Materials and energy are
considered secondary factors in classical economics because they are obtained from land, labor
and capital. The primary factors facilitate production but neither become part of the product (as
with raw materials) nor become significantly transformed by the production process (as with fuel
used to power machinery). Land includes not only the site of production but natural
resources above or below the soil. Recent usage has distinguished human capital (the stock of
knowledge in the labour force) from labour.[1] Entrepreneurship is also sometimes considered a
factor of production.[2] Sometimes the overall state of technology is described as a factor of
production.[3] The number and definition of factors varies, depending on theoretical purpose,
empirical emphasis, or school of economicsThe classical economics of Adam Smith, David
Ricardo, and their followers focuses on physical resources in defining its factors of production,
and discusses the distribution of cost and value among these factors. Adam Smith and David
Ricardo referred to the "component parts of price"[6] as the costs of using:

 Land or natural resource — naturally occurring goods like water, air, soil, minerals,
flora, fauna and merryweather that are used in the creation of products. The payment for use
and the received income of a land owner is rent,loyalties, commission and goodwill .
  — human effort used in production which also includes technical and marketing
expertise. The payment for someone else's labor and all income received from one's own
labor is wages. Labor can also be classified as the physical and mental contribution of an
employee to the proLaborduction of the good(s).
 The capital stock — human-made goods which are used in the production of other
goods. These include machinery, tools, and buildings. They are of two types, fixed and
working. Fixed are one time investments like machines, tools and working comprises of
liquid cash or money in hand and raw material

The classical economists also employed the word "capital" in reference to money. Money,
however, was not considered to be a factor of production in the sense of capital stock since it is
not used to directly produce any good. The return to loaned money or to loaned stock was styled
as interest while the return to the actual proprietor of capital stock (tools, etc.) was styled as
profit. See also returns
Marx considered the "elementary factors of the labor-process" or "productive forces" to be:

 Labor
 The subject of labor (objects transformed by labor)
 The instruments of labor (or means of labor).

The "subject of labor" refers to natural resources and raw materials, including land. The
"instruments of labor" are tools, in the broadest sense. They include factory buildings,
infrastructure, and other human-made objects that facilitate labor's production of goods and
services.
This view seems similar to the classical perspective described above. But unlike the classical
school and many economists today, Marx made a clear distinction between labor actually done
and an individual's "labor power" or ability to work. Labor done is often referred to nowadays as
"effort" or "labor services." Labor-power might be seen as a stock which can produce a flow of
labor.
Labor, not labor power, is the key factor of production for Marx and the basis for Marx's labor
theory of value. The hiring of labor power only results in the production of goods or services
("use-values") when organized and regulated (often by the "management"). How much labor is
actually done depends on the importance of conflict or tensions within the labor process.
Neoclassical economic
Neoclassical economics, one of the branches of mainstream economics, started with the classical
factors of production of land, labor, and capital. However, it developed an alternative theory of
value and distribution. Many of its practitioners have added various further factors of production
(see below).
Further distinctions from classical and neoclassical microeconomics include the following:

Capital — This has many meanings, including the financial capital raised to operate and
expand a business. In much of economics, however, "capital" (without any qualification)
means goods that can help produce other goods in the future, the result of investment. It
refers to machines, roads, factories, schools, infrastructure, and office buildings which
humans have produced to create goods and services.

Fixed capital — This includes machinery, factories, equipment, new technology,
buildings, computers, and other goods that are designed to increase the productive potential
of the economy for future years. Nowadays, many consider computer software to be a form
of fixed capital and it is counted as such in the National Income and Product Accounts of the
United States and other countries. This type of capital does not change due to the production
of the good.

Working capital — This includes the stocks of finished and semi-finished goods that
will be economically consumed in the near future or will be made into a finished consumer
good in the near future. These are often called inventory. The phrase "working capital" has
also been used to refer to liquid assets (money) needed for immediate expenses linked to the
production process (to pay salaries, invoices, taxes, interests...) Either way, the amount or
nature of this type of capital usually changes during the production process.

Financial capital — This is simply the amount of money the initiator of the business has
invested in it. "Financial capital" often refers to his or her net worth tied up in the business
(assets minus liabilities) but the phrase often includes money borrowed from others.

Technological progress — For over a century, economists have known that capital and
labor do not account for all of economic growth. This is reflected in total factor
productivity and the Solow residual used in economic models called production
functions that account for the contributions of capital and labor, yet have some unexplained
contributor which is commonly called technological progress. Ayres and Warr (2009)
present time series of the efficiency of primary energy (exergy) conversion into useful work
for the US, UK, Austria and Japan revealing dramatic improvements in model accuracy.
With useful work as a factor of production they are able to reproduce historical rates of
economic growth with considerable precision and without recourse to exogenous and
 unexplained technological progress, thereby overcoming the major flaw of the Solow Theory
of economic growth.[8]

FORMS OF BUSINESS ORGANISATION:

Business Organisations 5 FORMS OF BUSINESS ORGANISATION
(1) Sole proprietorship
(2) Partnership
(3) Joint Hindu Family
(4) Cooperative Society
(5) Joint Stock Company Let us now learn in detail the exact nature of these forms of business
organisation, excluding Joint Stock Company which will be taken up in the next lesson. 5.3
1.SOLE PROPRIETORSHIPEx: Gopal runs a grocery shop in the local market. He buys
goods from the wholesale market and sells it to the customers as per their requirement. By doing
so he earns some profit. He had started his business two years ago by investing Rs. 1 lakh, which
he had borrowed from his friend. Today, he is running his business successfully, earning a good
profit, prietor or a sole trader.
Definition of Sole Proprietorship J.L. Hanson: “A type of business unit where one person is
solely responsible for providing the capital and bearing the risk of the enterprise, and for the
management of the business.” Thus, ‘Sole Proprietorship’ from of business organisation refers to
a business enterprise exclusively owned, managed and controlled by a single person with all
authority, responsibility and risk. Now you can workout certain characteristics of sole
proprietorship form of business organisation.
CHARACTERISTICS OF SOLE PROPRIETORSHIP FORM OF BUSINESS
ORGANISATION
(a) Single Ownership: The sole proprietorship form of business organisation has a single owner
who himself/herself starts the business by bringing together all the resources.
(b) No Separation of Ownership and Management: The owner himself/herself manages the
business as per his/her own skill and intelligence. There is no separation of ownership and
management as is the case with company form of business organisation. A sole proprietor
contributes and organises the resources in a systematic way and controls the activities with the
objective of earning profit.
(c) Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organisation does not involve any legal formalities. Thus, its formation is quite easy and
simple.
(d) No Separate Entity: The business unit does not have an entity separate from the owner. The
businessman and the business enterprise are one and the same, and the businessman is
responsible for everything that happens in his business unit.
(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same
time, the entire loss is also borne by him. No other person is there to share the profits and losses
of the business. He alone bears the risks and reaps the profits.
(f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his
business assets are not enough to pay the business liabilities, his personal property can also be
utilised to pay off the liabilities of the business.
(g) One-man Control: The controlling power of the sole proprietorship business always
remains with the owner. He/she runs the business as per his/her own will. Gopal is happy in
running his business in sole proprietorship form because he enjoys many benefits in doing this
business.
MERITS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION (a) Easy to
Form and Wind Up: It is very easy and simple to form a sole proprietorship form of business
organisation. No legal formalities are required to be observed. Similarly, the business can be
wind up any time if the proprietor so decides.
(b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the
sole proprietary organisation. So he/she can take quick decisions on the various issues relating to
business and accordingly prompt action can be taken.
(c) Direct Motivation: In sole proprietorship form of business organisations. the entire profit of
the business goes to the owner. This motivates the proprietor to work hard and run the business
efficiently.
(d) Flexibility in Operation: It is very easy to effect changes as per the requirements of the
business. The expansion or curtailment of business activities does not require many formalities
as in the case of other forms of business organisation.
(e) Maintenance of Business Secrets: The business secrets are known only to the proprietor. He
is not required to disclose any information to others unless and until he himself so decides. He is
also not bound to publish his business accounts.
(f) Personal Touch: Since the proprietor himself handles everything relating to business, it is
easy to maintain a good personal contact with the customers and employees.
LIMITATIONS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION (a)
Limited Resources: The resources of a sole proprietor are always limited. Being the single owner
it is not always possible to arrange sufficient funds from his own sources. Again borrowing funds
from friends and relatives or from banks has its own implications. So, the proprietor has a limited
capacity to raise funds for his business.
(b) Lack of Continuity: The continuity of the business is linked with the life of the proprietor.
Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the
continuity of business is uncertain.
(c) Unlimited Liability: You have already learnt that there is no separate entity of the business
from its owner. In the eyes of law the proprietor and the business are one and the same. So
personal properties of the owner can also be used to meet the business obligations and debts.
(d) Not Suitable for Large Scale Operations : Since the resources and the managerial ability is
limited, sole proprietorship form of business organisation is not suitable for large-scale business.
(e) Limited Managerial Expertise: A sole proprietorship from of business organisation always
suffers from lack of managerial expertise. A single person may not be an expert in all fields like,
purchasing, selling, financing etc.

II.PARTNERSHIP : ‘Partnership’ is an association of two or more persons who pool their

financial and managerial resources and agree to carry on a business, and share its profit. The
persons who form a partnership are individually known as partners and collectively a firm or
partnership firm. Let’s assume that Gopal joins hand with Rahim to start a big grocery shop.
Here both Gopal and Rahim are called partners who are running the partnership firm jointly.
Both of them will pool their resources and carry on business by applying their expertise. They
will share the profits and losses in the agreed ratio. In fact, for all terms and conditions of their
working, they have to sit together to decide about all aspects. There must be an agreement
between them. The agreement may be in oral, written or implied. When the agreement is in
writing it is termed as partnership deed. However, in the absence of an agreement, the provisions
of the Indian Partnership Act 1932 shall apply. Partnership form of business organisation in India
is governed by the Indian Partnership Partnership Deed contains the terms and conditions for
starting and continuing the partnership firm It is always better to insist on a written agreement in
order to avoid future litigation.
Defintion: Business Organisations Act, 1932 which defines partnership as “the relation between
persons who have agreed to share the profits of the business carried on by all or any of them
acting for all”.
CHARACTERISTICS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION Based on
the definition of partnership as given above, the various characteristics of partnership form of
business organisation, can be summarised as follows:
(a) Two or More Persons: To form a partnership firm atleast two persons are required. The
maximum limit on the number of persons is ten for banking business and 20 for other businesses.
If the number exceeds the above limit, the partnership becomes illegal and the relationship
among them cannot be called partnership.
(b) Contractual Relationship: Partnership is created by an agreement among the persons who
have agreed to join hands. Such persons must be competent to contract. Thus, minors, lunatics
and insolvent persons are not eligible to become the partners. However, a minor can be admitted
to the benefits of partnership firm i.e., he can have share in the profits without any obligation for
losses.
(c) Sharing Profits and Business: There must be an agreement among the partners to share the
profits and losses of the business of the partnership firm. If two or more persons share the
income of jointly owned property, it is not regarded as partnership.
(d) Existence of Lawful Business: The business of which the persons have agreed to share the
profit must be lawful. Any agreement to indulge in smuggling, black marketing etc. cannot be
called partnership business in the eyes of law.
(e) Principal Agent Relationship: There must be an agency relationship between the partners.
Every partner is the principal as well as the agent of the firm. When a partner deals with other
parties he/she acts as an agent of other partners, and at the same time the other partners become
the principal.
(f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as
well as individually liable for the debts and obligations of the firms. If the assets of the firm are
insufficient to meet the firm’s liabilities, the personal properties of the partners can also be
utilised for this purpose. However, the liability of a minor partner is limited to the extent of his
share in the profits.
(g) Voluntary Registration: The registration of partnership firm is not compulsory. But an
unregistered firm suffers from some limitations which makes it virtually compulsory to be
registered. Following are the limitations of an unregistered firm. (i) The firm cannot sue
outsiders, although the outsiders can sue it. (ii) In case of any dispute among the partners, it is
not possible to settle the dispute through court of law. (iii) The firm cannot claim adjustments for
amount payable to, or receivable from, any other parties.
MERITS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION (a) Easy to Form: A
partnership can be formed easily without many legal formalities. Since it is not compulsory to
get the firm registered, a simple agreement, either in oral, writing or implied is sufficient to
create a partnership firm.
(b) Availability of Larger Resources: Since two or more partners join hands to start partnership
firm it may be possible to pool more resources as compared to sole proprietorship form of
business organisation.
(c) Better Decisions: In partnership firm each partner has a right to take part in the management
of the business. All major decisions are taken in consultation with and with the consent of all
partners. Thus, collective wisdom prevails and there is less scope for reckless and hasty
decisions.
(d) Flexibility: The partnership firm is a flexible organisation. At any time the partners can
decide to change the size or nature of business or area of its operation after taking the necessary
consent of all the partners.
(e) Sharing of Risks: The losses of the firm are shared by all the partners equally or as per the
agreed ratio.
(f) Keen Interest: Since partners share the profit and bear the losses, they take keen interest in
the affairs of the business.
(g) Benefits of Specialisation: All partners actively participate in the business as per their
specialisation and knowledge. In a partnership firm providing legal consultancy to people, one
partner may deal with civil cases, one in criminal cases, another in labour cases and so on as per
their area of specialisation. Similarly two or more doctors of different specialisation may start a
clinic in partnership.
(h) Protection of Interest: In partnership form of business organisation, the rights of each partner
and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask
for dissolution of the firm or can withdraw from the partnership.
(i) Secrecy: Business secrets of the firm are only known to the partners. It is not required to
disclose any information to the outsiders. It is also not mandatory to publish the annual accounts
of the firm.
LIMITATIONS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION A partnership
firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that the liability of
the partners is unlimited i.e., the partners are personally liable for the debt and obligations of the
firm. In other words, their personal property can also be utilised for payment of firm’s liabilities.
(b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity or the
retirement of any partner brings the firm to an end. Not only that any dissenting partner can give
notice at any time for dissolution of partnership.
(c) Limited Capital: Since the total number of partners cannot exceed 20, the capacity to raise
funds remains limited as compared to a joint stock company where there is no limit on the
number of share holders.
(d) Non-transferability of share: The share of interest of any partner cannot be transferred to
other partners or to the outsiders. So it creates inconvenience for the partner who wants to
transfer his share to others fully and partly. The only alternative is dissolution of the firm.
(e) Possibility of Conflicts: You know that in partnership firm every partner has an equal right to
participate in the management.
TYPES OF PARTNERS. (A) Based on the extent of participation in the day-to-day management
of the firm partners can be classified as ‘Active Partners’ and ‘Sleeping Partners’. The partners
who actively participate in the day-to-day operations of the business are known as active partners
or working partners. Those partners who do not participate in the day-to-day activities of the
business are known as sleeping or dormant partners. Such partners simply contribute capital and
share the profits and losses. (B) Based on sharing of profits, the partners may be classified as
‘Nominal Partners’ and ‘Partners in Profits’. Nominal partners allow the firm to use their name
as partner.
(C) Based on Liability, the partners can be classified as ‘Limited Partners’ and ‘General
Partners’. The liability of limited partners is limited to the extent of their capital contribution.
This type of partners is found in Limited Partnership firms in some European countries and USA.
So far, it is not allowed in India. However, the Limited liability Partnership Act is very much
under consideration of the Parliament. The partners having unlimited liability are called as
general partners or Partners with unlimited liability. It may be noted that every partner who is not
a limited partner is treated as a general partner.
(D) Based on the behaviour and conduct exhibited, there are two more types of partners besides
the ones discussed above. These are (a) Partner by Estoppel; and (b) Partner by Holding out. A
person who behaves in the public in such a way as to give an impression that he/she is a partner
of the firm, is called ‘partner by estoppel’. Such partners are not entitled to share the profits of
the firm, but are fully liable if some body suffers because of his/her false representation.
Similarly, if a partner or partnership firm declares that a particular person is a partner of their
firm, and such a person does not disclaim it, then he/she is known as ‘Partner by Holding out’.
Such partners are not entitled to profits but are fully liable as regards the firm’s debts.
III. JOINT HINDU FAMILY FORM OF BUSINESS ORGANISATION After knowing about
sole proprietorship and partnership forms of business organisation let us now discuss about a
unique form of business organisation that prevails only in India and that too among the Hindus.
The Joint Hindu Family (JHF) business is a form of business organisation run by Hindu
Undivided Family (HUF), where the family members of three successive generations own the
business jointly. The head of the family known as Karta manages the business. The other
members are called co-parceners and all of them have equal ownership right over the properties
of the business. The membership of the JHF is acquired by virtue of birth in the same family.
There is no restriction for minors to become the members of the business. As per Dayabhaga
system of Hindu Law, both male and female members are the joint owners. But Mitakashara
system of Hindu Law says only male members of the family can become the coparceners. While
the Dayabhaga system is applicable to the state of West Bengal, Mitakshara system of Hindu
Law is applicable to the rest of the country. Business Studies 103 Notes MODULE -2 Business
Organisations.
CHARACTERISTICS OF JHFFORM OF BUSINESS ORGANISATION From the above
discussion, it must have been clear to you that the Joint Hindu family business has certain special
characteristics which are as follows: (a) Formation: In JHF business there must be at least two
members in the family, and family should have some ancestral property. It is not created by an
agreement but by operation of law. (b) Legal Status: The JHF business is a jointly owned
business. It is governed by the Hindu Succession Act 1956. (c) Membership: In JHF business
outsiders are not allowed to become the coparcener. Only the members of undivided family
acquire co-parcenership rights by birth.. (d) Profit Sharing: All coparceners have equal share in
the profits of the business. (e) Management: The business is managed by the senior most member
of the family known as Karta. Other members do not have the right to participate in the
management. The Karta has the authority to manage the business as per his own will and his
ways of managing cannot be questioned. If the coparceners are not satisfied, the only remedy is
to get the HUF status of the family dissolved by mutual agreement. (f) Liability: The liability of
coparceners is limited to the extent of their share in the business. But the Karta has an unlimited
liability. His personal property can also be utilised to meet the business liability. (g) Continuity:
Death of any coparceners does not affect the continuity of business. Even on the death of the
Karta, it continues to exist as the eldest of the coparceners takes position of Karta. However, JHF
business can be dissolved either through mutual agreement or by partition suit in the court.
MERITS OF JHF FORM OF BUSINESS ORGANISATION Since Joint Hindu Family business
has certain peculiar features as discussed above, it has the following merits.
(a) Assured Shares in Profits: Every coparcener is assured of an equal share in the profits
irrespective of his participation in the running of the business. This safeguards the interest of
minor, sick, physically and mentally challenged coparceners.
(b) Quick Decision: The Karta enjoys full freedom in managing the business. It enables him to
take quick decisions without any interference.
(c) Sharing of Knowledge and Experience: A JHF business provides opportunity for the young
members of the family to get the benefits of knowledge and experience of the elder members.
(d) Limited Liability of Members: The liability of the coparceners except the Karta is limited to
the extent of his share in the business. This enables the members to run the business freely just
by following the instructions or direction of the Karta.
(e) Unlimited Liability of the Karta: Because of the unlimited liability of the Karta, his personal
properties are at stake in case the business fails to pay the creditors. This clause of JHF business
makes the Karta to manage business most carefully and efficiently.
(f) Continued Existence: The death or insolvency of any member does not affect the continuity
of the business. So it can continue for a long period of time.
(g) Tax Benefits: HUF is regarded as an independent assessee for tax purposes. The share of
coparceners is not to be included in their individual income for tax purposes. After knowing the
merits let us see the limitations of Joint Hindu Family form of business organisation. 5.5.3
LIMITATION OF JHFFORM OF BUSINESS ORGANISATION
(a) Limited Resources: JHF business has generally limited financial and managerial resource.
Therefore, it is not considered suitable for large business.
(b) Lack of Motivation: The coparceners get equal share in the profits of the business
irrespective of their participation. So generally they are not motivated to put in their best.
(c) Scope for Misuse of Power: Since the Karta has absolute freedom to manage the business,
there is scope for him to misuse it for his personal gains. Moreover, he may have his own
limitations.
(d) Instability: The continuity of JHF business is always under threat. A small rift within the
family may lead to seeking partition.
IV.COOPERATIVE SOCIETY You have learnt about Sole Proprietorship, Partnership and Joint
Hindu Family as different forms of business organisation. You must have noticed that while
there are many differences among them in respect of their formation, operation, capital
contribution and liabilities, there is one similarity that they all are engaged in business to earn
profit. However, there are certain organisations which undertake business activities with the
prime objective of providing service to the members. Although they also earn some amount of
profit, but their main intention is to look after some common interest of its members. They pool
available resources from the members, utilise the same in the best possible manner and share the
benefits. These organisations are known as Cooperative Societies. Let us learn in detail about
this form of business organisation. The term cooperation is derived from the Latin word ‘co-
operari’, where the word ‘Co’ means ‘with’ and ‘operari’ mean ‘to work’. Thus, the term
cooperation means working together. So those who want to work together with some common
economic objectives can form a society, which is termed as cooperative society. The important
objectives of cooperative society form of business organisation are service in place of profit,
Mutual help in place of competition, Self help in place of dependence, and moral solidarity in
place of unethical business practices.
The Section 4 of the Indian Cooperative Societies Act 1912 defines Cooperative Society as “a
society, which has its objectives for the promotion of economic interests of its members in
accordance with cooperative principles.”
CHARACTERISTICS OF COOPERATIVE SOCIETY Based on the above definition we
can identify the following characteristics of cooperative society form of business organisation:
(a) Voluntary Association: Members join the cooperative society voluntarily i.e., by their own
choice. Persons having common economic objective can join the society as and when they like,
continue as long as they like and leave the society and when they want.
(b) Open Membership: The membership is open to all those having a common economic interest.
Any person can become a member irrespective of his/her caste, creed, religion, colour, sex etc.
(c) Number of Members: A minimum of 10 members are required to form a cooperative society.
In case of multi-state cooperative societies the minimum number of members should be 50 from
each state in case the members are individuals. The Cooperative Society Act does not specify the
maximum number of members for any cooperative society. However, after the formation of the
society, the member may specify the maximum member of members.
(d) Registration of the Society: In India, cooperative societies are registered under the
Cooperative Societies Act 1912 or under the State Cooperative Societies Act. The Multi-state
Cooperative Societies are registered under the Multi-state Cooperative Societies Act 2002.
Once registered, the society becomes a separate legal entity and attain certain characteristics.
These are as follows. (i) The society enjoys perpetual succession (ii) It has its own common seal
(iii) It can enter into agreements with others (iv) It can sue others in a court of law (v) It can own
properties in its name (e) State Control: Since registration of cooperative societies is compulsory,
every cooperative society comes under the control and supervision of the government. The
Cooperative Societies having area of operation in more than one state are known as Multi-state
Cooperative Societies.
Every society has to get its accounts audited from the cooperative department of the government.
(f) Capital: The capital of the cooperative society is contributed by its members. Since, the
members contribution is very limited, it often depends on the loan from government. and apex
cooperative institutions or by way of grants and assistance from state and Central Government.
(g) Democratic Set Up: The cooperative societies are managed in a democratic manner. Every
member has a right to take part in the management of the society. However, the society elects a
managing committee for its effective management. The members of the managing committee are
elected on the basis of one-man one-vote irrespective of the number of shares held by any
member. It is the general body of the society which lays down the broad framework within
which the managing committee functions. (h) Service Motive: The primary objective of all
cooperative societies is to provide services to its members. (i) Return on Capital Investment: The
members get return on their capital investment in the form of dividend. (j) Distribution of
Surplus: After giving a limited dividend to the members of the society, the surplus profit is
distributed in the form of bonus, keeping aside a certain percentage as reserve and for general
welfare of the society.
TYPES OF COOPERATIVE SOCIETIES You know cooperative organisations are set up in
different fields to promote the economic well-being of different sections of the society. So,
according to the needs of the people, we find different types of cooperative societies in India.
Some of the important types are given below. (a) Consumers’ Cooperative Societies: These
societies are formed to protect the interest of consumers by making available consumer goods of
high quality at reasonable price. (b) Producer’s Cooperative Societies: These societies are
formed to protect the interest of small producers and artisans by making available items of their
need for production, like raw materials, tools and equipments etc. (c) Marketing Cooperative
Societies: To solve the problem of marketing the products, small producers join hand to form
marketing cooperative societies. (d) Housing Cooperative Societies: To provide residential
houses to the members, housing cooperative societies are formed generally in urban areas. (e)
Farming Cooperative Societies: These societies are formed by the small farmers to get the
benefit of large-scale farming. (f) Credit Cooperative Societies: These societies are started by
persons who are in need of credit. They accept deposits from the members and grant them loans
at reasonable rate of interest.
MERITS OF COOPERATIVE SOCIETY The cooperative society is the only form of
business organisation which gives utmost importance to its members rather than maximising its
own profits. After studying its characteristics and different types, we may now study the merits
of this form of business organisation. (a) Easy to Form: Any ten adult members can voluntarily
form an association get it registered with the Registrar of Cooperative Societies. The registration
is very simple and it does not require much legal formalities. (b) Limited Liability: The liability
of the members of the cooperative societies is limited upto their capital contribution. They are
not personally liable for the debt of the society. (c) Open Membership: Any competent like-
minded person can join the cooperative society any time he likes. There is no restriction on the
grounds of caste, creed, gender, colour etc. The time of entry and exit is also generally kept open.
(d) State Assistance: The need for country’s growth has necessitated the growth of the economic
status of the weaker sections. (e) Stable Life: The cooperative society enjoys the benefit of
perpetual succession. The death, resignation, insolvency of any member does not affect the
existence of the society because of its separate legal entity. (f) Tax Concession: To encourage
people to form co-operative societies the government generally provides tax concessions and
exemptions, which keep on changing from time to time. (g) Democratic Management: The
cooperative societies are managed by the Managing Committee, which is elected by the
members. The members decide their own rules and regulations within the limits set by the law.
LIMITATIONS OF COOPERATIVE SOCIETY Although the basic aim of forming a
cooperative society is to develop a system of mutual help and cooperation among its members,
yet the feeling of cooperation does not remain for long. Cooperative societies usually suffer from
the following limitations. (a) Limited Capital: Most of the cooperative societies suffer from lack
of capital. Since the members of the society come from a limited area or class and usually have
limited means, it is not possible to collect huge capital from them. Again, government’s
assistance is often inadequate for them. (b) Lack of Managerial Expertise: The Managing
Committee of a cooperative society is not always able to manage the society in an effective and
efficient way due to lack of managerial expertise. Again due to lack of funds they are also not
able to derive the benefits of professional management. (c) Less Motivation: Since the rate of
return on capital investment is less, the members do not always feel involved in the affairs of the
society. (d) Lack of Interest: Once the first wave of enthusiasm to start and run the business is
exhausted, intrigue and factionalism arise among members. This makes the cooperative lifeless
and inactive. (e) Corruption: Inspite of government’s regulation and periodical audit of the
accounts of the cooperative society, the corrupt practices in the management cannot be
completely ignored.
JOINT STOCK COMPANY
A Joint Stock Company is a voluntary association of persons to carry on the business. It is an
association of persons who contribute money which is called capital for some common purpose.
These persons are members of the company. The proportion of capital to which each member is
entitled is his share and every member holding such share is called shareholders and the capital
of the company is known as share capital. The Companies Act 1956 defines a joint stock
company as an artificial person created by law, having separate legal entity from its owner with
perpetual succession and a common seal. Shareholders of Joint Stock Company have limited
liability i.e liability limited by guarantee or shares. Shares of such company are easily
transferable. From the above definition the following characteristics of a Joint Stock Company
can be easily identified:
1. Artificial Person : A Joint Stock Company is an artificial person as it does not possess any
physical attributes of a natural person and it is created by law. Thus it has a legal entity separate
from its members.
2. Separate legal Entity : Being an artificial person a company has its own legal entity separate
from its members. It can own assets or property, enter into contracts, sue or can be sued by
anyone in the court of law. Its shareholders can not be held liable for any conduct of the
company.
3. Perpetual Existence : A company once formed continues to exist as long as it is fulfilling all
the conditions prescribed by the law. Its existence is not affected by the death, insolvency or
retirement of its members.
4. Limited liability of shareholders : Shareholders of a joint stock company are only liable to
the extent of shares they hold in a company not more than that. Their liability is limited by
guarantee or shares held by them.
5. Common Seal : Being an artificial person a joint stock company cannot sign any documents
thus this common seal is the company’s representative while dealing with the outsiders. Any
document having common seal and the signature of the officer is binding on the company.
6. Transferability of Shares : Members of a joint stock company are free to transfer their shares
to anyone.
7. Capital : A joint stock company can raise large amount of capital by issuing its shares.
8. Management : A joint stock company has a democratic management which is managed by
the elected representatives of shareholders, known as directors of the company.
9. Membership : To form a private limited company minimum number of members prescribed
in the companies Act is 2 and the maximum number is 50. But in the case of public limited
company the minimum limit is 7 and no limit on maximum number of members.
10. Formation : Generally a company is formed with the initiative of group of members who are
also known as promoters but it comes into existence after completing all the formalities
prescribed in Companies Act 1956.
Advantages and Disadvantages of Joint Stock Company
The advantages of forming a company rather than carrying on partnership business are as
follows:
1. Large Capital:
The outstanding advantage is that it allows vast mobilization of capital which otherwise is not
possible to arrange. In a public company, there is no limit to the number of members. A very
large number of people acquire interest in the company by purchasing shares.
The fact that shares are transferable given an added advantage to the company for attracting
greater number of people. No other form of business organisation is so well adopted in raising
large amounts of capital as the Joint Stock Company.
2. Vast Scope of Expansion:
The vast capital collected by means of shares coupled with the earnings of the company
contribute sufficient scope for its expansion. The company offers an excellent scope of self-
generating growth. The managerial talents supported by vast finance leads to huge earnings and
to ultimate expansion of the business and growth.
3. Limited Liability:
The liability of the members of the company is limited. Members cannot be called upon to pay
anything more than the nominal value of the shares held by them. This encourages people who
have little to save to invest money in the company, thus providing ample capital for initial outlay
and expansion of the business.
4. Permanent Existence:
The life of the company does not depend on the life of its members. Law creates the company
and can dissolve it. The death, insolvency or the transfer of shares of members does not, in any
way, affect the existence of the company.
In nut shell it may be said:
“Members may come, members may go;
But the company goes on forever.”
5. Transferability of Shares:
The shares in a company are transferable and members can transfer their shares without the
consent of other members of the company. The company is listed with the Stock Exchange and
hence company’s shares are readily sold and purchased. As shares are freely transferable, a
shareholder can convert his holding into cash. This facility coupled with the limited liability has
an encouraging investment by general public.
6. Democratization of Ownership:
The fact that relatively small amount of capital can be mobilised and employed collectively
results in what Marshall call ‘Democratization’ of ownership as distinguished from the control of
business.
While it permits all types of people, big or small, venturesome or cautious, to become part
owners, it permits the use of skill and initiative of the able entrepreneur, his expert knowledge
and business ability which would otherwise be lost to the community.
7. Diffused Risk:
The risk of loss is to be shared by the large number of shareholders and the possibility of huge
hardship on few persons as in the case of partnership or sole trader does not exist. Moreover, the
risk of loss is also limited to the extent of the value of share.
There is no need for the wealthy men to bear the burden of the business as large capital can be
collected from far and wide, and from rich and poor, controlled under one management.
8. Organized Intelligence:
The power of capital is supplemented by organised intelligence which makes for increased
efficiency of direction and management. The skill and flexibility of administration is enhanced as
a result of limited liability and entity idea.
The wisest and the most skillful directors may be chosen and one found inefficient or indifferent
could be removed. The company being independent on any single man, the organized
intelligence of the Board of Directors and other top managers is available for sound and bold
policies.
9. Tax Relief:
A company pays income-tax as a separate legal person at a flat rate fixed by the Finance Act
from year to year. In case of higher incomes, the- rate is lower than that charged in case of sole
proprietors and partners.
10. Social Advantage:
The social advantage of company form of organisation is that it affords employment to so many
persons, produces articles which otherwise would have been imported and affords opportunity to
middle and lower class of people to become members of the company and earn profits.
Disadvantages of Joint Stock Company:
Despite so many advantages it has got many disadvantages which are as follows:
1. Difficulty in Formation:
The legal requirements and formalities required to be completed are so many. The cost involved
is quite heavy. It has to approach large number of people for its capital. It cannot start its
business unless certificate of incorporation has been obtained. This is granted after a long time
when all the formalities are completed.
2. Reckless Speculation Encouraged:
This form of organisation encourages reckless speculation in shares at stock exchanges. This is
an evil of great magnitude in our country because in many cases stock exchanges act as ‘bush
agencies’, rather than aid to sound investment or stability. Sometimes the management of Joint
Stock Company encourages speculation in shares for its personal gains.
3. Fraudulent Management:
Frauds have been a common feature of many a company. The promoters and directors may
indulge in fraudulent practices. The company law has devised various methods to check the
fraudulent practices but they have not proved to check them completely.
4. Delay in Decision-Making:
In this form of organisation, decisions are not made by single individual. All important decisions
are taken by the Board of Directors. Decision-making process is time-consuming. So many
opportunities may be costly because of delay in decision-making. Promptness of decisions which
is a common feature of sole tradership and partnership is not found in a company.
5. Monopolistic Powers:
There is, generally, tendency for company organisation to form themselves into combinations
exercising monopolistic powers which may react detrimentally to other producers in the same
line or to consumers of the commodity produced.
6. Excessive Regulation by Law:
The State that creates the company, minutely watches the activities of the company organisation.
A company and the management have to function well within the law and the provisions of
Companies Act are quite elaborate and complex.
At every step, it is necessary to comply with its provisions lest the company and the management
should be penalised. The penalties are quite heavy and in several cases, officers in default can be
punished with imprisonment. This hampers the proper functioning of the company.
7. Conflict of Interests:
The management does not care for the interest of shareholders because the management is not
the owner. Actually, the management body is not composed of owners, it is composed of those
who have no interest in the business.
It is only the few who govern the way they like. Though, in theory, company is a democracy but
in actual practice it is oligarchy. The lack of interest between the company and its management
encourages manipulation and speculation.
8. Lack of Secrecy:
The management of companies remains in the hands of many persons. Every important thing is
discussed in the meetings of Board of Directors. Hence secrets of the business cannot be
maintained. In case of sole proprietorship and partnership forms of organisation, such secrecy is
possible because a few persons are involved in the management.
9. Bureaucratic Approach:
The bureaucratic habit of company officials to shirk trouble of some initiative because they get
no direct benefit from it; often retard the growth. This leads to classification of social organism
and leveling down the character. The company organisation does not enjoy the same flexibility
and promptness in the making as other organisations do. The delays in taking the decision affect
the growth of the business.