ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

Chapter 1 - Business Environment

LEARNING OBJECTIVES:
After studying this chapter, you should understand:

1. Concept of Business Environment.

2. Importance of Business Environment
3. Dimensions of Business Environment- Elements of Business Environment
4. Micro Environment
5. Macro Environment
6. SWOT Analysis
Concept of Business Environment

Business environment refers to sum total of all individuals, institutions and forces that lie
outside a business enterprise but may influence its functioning and performance.
Business environment is a combination of internal and external factors that influence a
company’s operations. The business can include factors such as ; clients, suppliers; its
competition and owners; improvements in technology; Government laws and activities; and
market, social and economic trends etc.

Main Features;

The main features of business environment are:

1. All the external forces:

Business Environment includes all the forces, institutions and factors which directly or
indirectly affect the Business Organizations.

2. Specific and general forces:

ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

Business environment includes specific forces such as investors, customers, competitors and

suppliers etc. which influence specific enterprise directly. General forces are Social, Legal,

Technological, Political, etc. which affect the Business indirectly.

3. Inter-relation:

All the forces and factors of Business Environment are inter-related to each other. For

example with inclination of youth towards western culture, the demand for fast food is

increasing.

4. Uncertainty:

It is very difficult to predict the changes of Business Environment. As environment is

changing very fast for example in IT, fashion industry frequent and fast changes are taking

place.

5. Dynamic:

Business environment is highly flexible and keep changing. It is not static or rigid that is why

it is essential to monitor and scan the business environment continuously. Shift in tastes and

preferences, development of new technology, completion, are examples of dynamic nature of

business inv.

6. Complex:

It is very difficult to understand the impact of Business environment on the companies.

Although it is easy to scan the environment but it is very difficult to know how these changes

will influence Business decisions. Some-time change may be minor but it might have large

impact. For example, a change in government policy to increase the tax rate by 5% may affect

the income of company by large amount. Similarly other social, economic, political

technological factors may also have a deep effect on the company operations and profits.

7. Relativity:

The impact of Business environment may differ from company to company or country to

country. For example, when consumer organisation CES published the report of finding

pesticides in cold drinks, resulted in decrease in sale of cold drinks, on the other hand it

increased the sale of juice and other drinks.

Importance of Business Environment:
ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

1. First Mover Advantage:

2. Early Warning Signal
3. Customer Focus:
4. Strategy Formulation:
5. Coping with Change:
6. Public Image:
7. Continuous Learning

Chapter 2- Financing

Business Finance refer to the Money and Capital Employed in the business.
 ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

Financing means making money available when it is needed.

Business Finance include the following steps
1. Planning the amount of funds required.
2. Raising the funds required using various sources finance
3. Managing the funds so that there is neither surplus/idle money nor shortage
of money which may affect smooth functioning of the enterprise
4. and Controlling all the money so that it put to the best and most use in the
business.

Q: - What are the capital needs for different types of business organizations and briefly
discuss the sources from which funds can be raised by each of them?
Ans: 1) Sole Proprietorship: Sole proprietor works on small scale. His capital needs are less
as compared to Joint Stock Company or a firm. He can raise his capital needs through the
following sources:-
i) He can invest his own capital.
ii) He can borrow from his friends and relatives.
iii) He can borrow from the bank for short term needs and long term loans may be provided by
financial institutions such as State Financial Institution.
iv) He can retain profits and reinvest in the business.
v) He can take advances from the customers. And he can also buy goods on credit and pay
them later on.
vi) The central or State Govt. may also provide financial support to small scale traders.
2. Partnership:- A partnership business operates on a higher scale as compared to sole
proprietorship. The amount of funds required depends upon the nature and size of business.
A manufacturing concern may require more capital as compared to a trading concern. A
partnership firm can raise funds through the following sources:-
i) Capital contribution by the partners
ii) Borrowing from friends and relatives.
iii) Borrowings from banks and financial institutions
iv) Advances from customers
v) Sometimes partners may also advance loans to the firm.
ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

3. Joint Stock Company:- A Joint Stock Company operates on a large scale. Financial
requirements are huge as compared to a partnership firm. A company can have more
members. The total funds required depend upon many factors such as nature of business,
size of the business etc. It has more options to raise funds. There are various sources for
raising long term as well as short term funds. The following are the sources for raising funds
for long term:
i) Equity Shares
ii) Preference Shares
iii) Debentures
iv) Loans from Special Financial Institutions
v) Ploughing back of profits i.e retained profits
Funds can also be raised for short term through the following sources:
i) Public Deposits
ii) Trade Credits
iii) Advances from Customers
iv) Loans from Banks and other short term borrowings from commercial banks like –
Discounting of bills of Exchange
Bank Overdraft
Cash Credits

Q: - What is fixed capital? Discuss the factors on which requirement of fixed capital
depends.
Ans.: The capital invested in fixed or permanent assets like land and buildings, plant and
machinery, furniture, etc.. is known as fixed or block capital.
Fixed capital is that portion of the capital which is represented by fixed assets. Fixed capital
is known as block capital because it is blocked in fixed assets for a long period of time.
Therefore, it is raised through long term sources like shares, debentures, long term loans and
retained earnings.
The amount of fixed capital required for an enterprise depends on the following factors:-
1.Nature of business a manufacturing enterprise and public utility concerns like water and
sewerage, electricity companies, telephone companies etc require a larger amount of fixed
capital as compared to a trading or commercial concerns.
2. Scale of operations. A large enterprise generally requires greater fixed capital than a
small scale enterprise. For instance, a large scale steel enterprise like the Tata and Iron steel
company requires a huge investment in fixed assets in comparison with a mini steel plant.
3, Nature of products: A company manufacturing consumer goods like toothpaste, cream,
pens etc. will require a smaller amount of fixed capital. On the other hand, a company
ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

manufacturing heavy and capital goods like, machinery, plant, refrigerators, cars etc will
require large amount of fixed capital.
4. Diversity of production line: A company manufacturing multi-products will require large
amount of fixed capital as compared to business unit manufacturing a single product.
5. Degree of mechanization: The technique of production also affects the amount of fixed
capital. A firm using automatic machinery requires greater fixed capital than another firm of
same size using labour or hand tools. For example, a textile mill using power looms needs
more fixed capital than a hand-loom.
6. Mode of acquiring fixed assets: A company purchasing its fixed assets on cash basis
will need large amount of fixed capital as compared to a company which purchases on
installment basis, or lease basis or on rent.
7.Scope of activities. An enterprise which produces all parts of a product will require more
fixed capital than the concern which is engaged in assembling the parts purchased from other
firms.

Working Capital
Every business requires some finance to acquire current assets like raw material, stock of
goods and cash needed for day to day expenses of the business. Funds needed for such
purposes forms a part of working capital. In other words – working capital is that part of the
total capital which is required to meet the day to day expenses of the business and to maintain
a minimum balance in current assets.

Different concepts of working capital:-

Gross working Capital :-It is sum total of all the current assets of the business e.g. cash,
stock, short term investments, debtors, bills receivable, expenses prepaid, incomes
receivable. Current assets keep on circulating in a circular manner. E.g. Cash is used to
acquire raw material, which is converted into finished goods. Finished goods are sold and
converted into receivables (debtors and bills receivables), which ultimately are realized and
converted into cash.
Net Working Capital ;- It means the difference between Current Assets and Current
Liabilities. Excess of current assets over current liabilities represent net working capital.
There are various current liabilities, which have to be met out of the current assets. Current
assets should always be more than the current liabilities; otherwise the business might land
into financial crisis.
Permanent Working capital:- It represent that part of the working capital which remains
permanently blocked in the current assets of the business e.g. minimum balance of Cash that
should always be maintained in the business to meet any emergency requirement, and the
balance of finished goods kept as reserve to meet any emergency order etc.
Variable Working Capital :- It is that part of the working capital which keeps on changing
with the change in the nature and size of the business.
ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

FACTORS DETERMINING REQUIREMENT OF WORKING CAPITAL:-

1.Nature of business. The nature of the business is the basic factor deciding the amount of
working capital. Public utilities undertakings require a very small amount of working capital.
Trading concerns and financial undertakings require relatively large amount, whereas
manufacturing undertakings require a sizeable amount of working capital.
2. Size of business: The working requirements are directly proportional to the size of the
business. It is also affected by the increase and expansion of the scale of business.
3. The proportion of cost of raw material to total cost: Where the cost of raw material
used in manufacturing a product is large in proportion to the total cost, the requirement or
working capital will be large. That is why cotton textiles and sugar mills require huge amount
of working capital. A building contractor also needs large amount of working capital for this
reason.
4. Use of manual labour or machines: - A business undertaking using modern machines
and techniques for production requires small amount of working capital compared to labour
intensive industries where requirement is large due to more burden of payment of wages and
salaries.
5. Seasonal variation:- In certain industries raw material is not available throughout the year.
They have to buy raw material in bulk during the season to maintain uninterrupted production
during the entire year. As such more amount of working capital will be required to keep stock
of raw material.
6. Terms of credit : A company purchasing its raw material for cash and selling its finished
goods on credit will be requiring more amount of working capital. On the contrary if a concern
is in a position to buy its raw material on credit and sell its finished products on cash basis will
require less amount of working capital. The length of the period also effects the requirement
of working capital.
7. Production Policy: In certain industries, the demand for the product is subject to wide
fluctuations due to seasonal variations. If it is decided to keep the production constant
throughout the year to generate sufficient stock for the season, large amount of working capital
will have to be blocked up in finished products. On the other hand if the production policy is to
reduce the production during off-season, the requirement of working capital will reduce
consideration.
8. Working capital cycle: In a manufacturing concern, the working capital cycle starts with
the purchase of raw material and ends with the realisation of cash form the sale of finished
good. The longer the cycle, the more will be the requirement of working capital.

IMPORTANCE/SIGNIFICANCE OF WORKING CAPITAL

Adequate working capital is required to meet day to day working of the business and pay
the operating expenses of the business. Sufficient working capita indicates solvency of the
business. The liabilities are discharged in time and the business attains better image in the
market. Regular payment of salaries and wages boost the morale of employees. The main
points of importance can be discussed under the following headings:-
1.Timely payment of dues. Timely payment of dues to parties and creditors is possible, if
the business has adequate working capital. This will increase the goodwill of the business.
ST ROOP CONVENT SCHOOL CLASS 12: COMMERCE SUBJECT: COMMERCE

2.Ensure solvency of the business : Adequate working capital ensure short-term solvency
of the business. A running business might be closed for want of sufficient working capital
when payment is not made to the creditors and of interest in time.
3.High credit-worthiness: The credit status of the business depends on its ability to pay
outsiders and the promptness with which payments are actually made. Credit-worthiness of
the business is rated high if its working capital position is found satisfactory.
4.Timely payment of Dividend Liquid cash is necessary for the payment of dividends. Due
to scarcity of money, if dividends are not given to shareholders, an adverse reaction may be
created among them. As a result the business may lose its reputation. Therefore, adequate
working is very much needed for timely payment of dividends.
5. Taking advantage of cash discounts: A business having sufficient working capital is able
to take advantage of cash discounts offered by suppliers in return for prompt payments.
6. Meeting daily operating expenses: It is necessary to purchase raw materials, pay wages
and salaries, and incur various expenses in order to keep the flow of production uninterrupted,
the smooth operations of the business largely depend on the adequate working capital
7. Enhancing morale of employees: A business is able to pay wages and salaries regularly
provided it has enough working capital. It enhances the morale of its employees. The sense
of security and the confidence of the workers of the workers depend on the strength o the
working capital of the business.
8. Availing of better market opportunities: In case the market conditions are not favorable
to get good price for the product in the short run, a business with adequate working capital
can wait by holding up stocks in order to secure higher price