HUM-203-F: Fundamentals Of

Management
B.Tech 3 sem
Faculty name:Dr. Neetu
Department of management studies

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Syllabus
Section-A
Meaning of management, Definitions of Management, Characteristics of management, Management
Vs. Administration. Management-Art, Science and Profession. Importance of Management.
Development of Management thoughts. Principles of Management. The Management Functions,
Inter-relationship of Managerial functions. Nature and Significance of staffing, Personnel
management, Functions of personnel management, Manpower planning, Process of manpower
planning, Recruitment, Selection; Promotion - Seniority Vs. Merit. Training - objectives and types of
training.
Section-B
Production Management: Definition, Objectives, Functions and Scope, Production Planning and
Control; its significance, stages in production planning and control. Brief introduction to the concepts
of material management, inventory control; its importance and various methods.
Section-C
Marketing Management - Definition of marketing, Marketing concept, objectives & Functions of
marketing. Marketing Research - Meaning; Definition; objectives; Importance; Limitations; Process.
Advertising - meaning of advertising, objectives, functions, criticism.
Section-D
Introduction of Financial Management, Objectives of Financial Management, Functions and
Importance of Financial Management. Brief Introduction to the concept of capital structure and
various sources of finance.

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Unit-1

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Meaning 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.
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Definitions:
According to Harold Koontz,
"Management is the art of getting things done through and with people
in formally organised groups."
Harold Koontz gave this definition of management in his book "The
Management Theory Jungle".
According to Henri Fayol,
"To manage is to forecast and to plan, to organise, to command, to coordinate and to control."
Henri Fayol gave this definition of management in his book "Industrial
and General Administration".
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To be cont..
According to Peter Drucker,
"Management is a multi-purpose organ that manages business
and manages managers and manages workers and work."
This definition of management was given by Peter Drucker in his
book "The Principles of Management".
According to Mary Parker Follet,
"Management is the art of getting things done through people."

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Features of
Management
1. Continuous and never ending process
2. Getting things done through people
3. Result oriented science and art
4. Multidisciplinary in nature
5. A group and not an individual activity
6. Follows established principles or rules
7. Aided but not replaced by computers
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8. Situational in nature
9. Need not be an ownership
10. Both an art and science
11. Management is all pervasive
12. Management is intangible
13. Use a professional approach in work
14. Management is dynamic in nature
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Difference between
Administration /Management

Nature of work
Administration: It is concerned about the determination of objectives and major
policies of an organization.
Management: It puts into action the policies and plans laid down by the administration.
Type of function
Administration:It is a determinative function.
Management: It is an executive function.
Scope
Administration:It takes major decisions of an enterprise as a whole.
Management: It takes decisions within the framework set by the administration.
Level of authority
Administration:It is a top-level activity.
Management: It is a middle level activity.
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To be cont
Nature of status
Administration:It consists of owners who invest capital in
and receive profits from an enterprise.
Management: It is a group of managerial personnel who use
their specialized knowledge to fulfill the objectives of an
enterprise.
Nature of usage
Administration:It is popular with government, military,
educational, and religious organizations.
Management: It is used in business enterprises.
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 Decision making
Administration:Its decisions are influenced by public opinion, government
policies, social, and religious factors.
Management: Its decisions are influenced by the values, opinions, and beliefs of
the managers.
Main functions
Administration:Planning and organizing functions are involved in it.
Management: Motivating and controlling functions are involved in it.
Abilities
Administration: It needs administrative rather than technical abilities.
Management: It requires technical activities
Management handles the employers.
Administration handles the business aspects such as finance.
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Management as an art,
science, and profession
Management is an Art Art consists different components
like knowledge and skills that are applied to achieve some
specific goals.
Management consists following things components of art.
Knowledge, skills and creativity of person.
Applied in practices.
Regularity
Result oriented
Improvement through continuous practice.

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Management as a science
Science is a systematic body of knowledge developed by
research, experiences, experiments, observation etc. science is
valued and verifiable.
Followings are a major components of management, such
component prove management as a science.
Systematized body of knowledge
Continuous application and observation
Universal application
Cause and effect relationship
Validity and verifiable.
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Management as a
profession
Management is also regarded as a profession because the
concept and component of the activities behavior and nature of
professionals.

Followings component are included in profession.

Formal and advance education
Body of Systematized knowledge.
Formation of professional association.
Service oriented or priority to service.
Code of conduct or ethics.
Discipline
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Importance of Management

Encourages Initiative
Encourages Innovation
Facilitates growth and expansion
Improves life of workers
Improves corporate image
Motivates employees
Optimum use of resources
Reduces wastage
Increases efficiency
Improves relations
Reduces absenteeism and labor turnover
Encourages Team Work
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Evoloution of
management thought
1.Pre-Scientific Management Era (before
1880)
2.Classical management Era (1880-1930)
3.Neo-classical Management Era (19301950)
4.Modern Management era(1950-on word)

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Classical Management
includes
1.Scientific Management School
2.Administration Management school
3.Bureaucracy Management

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Neo- classical Management includes

1.Human relation school

2.Behavioral Management School

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Modern Management:
includes

1.Social system school

2. Decision theory school
3. Quantitative Management school
4.System Management school
5.Contingency Management school.

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Principles of
management

Principles of management:

A principle refers to a fundamental truth. It establishes cause and effect relationship between
two or more variables under given situation. They serve as a guide to thought & actions.
Therefore, management principles are the statements of fundamental truth based on logic
which provides guidelines for managerial decision making and actions

There are 14 Principles of Management described by Henri Fayol.

Division of Labor
Party of Authority & Responsibility
Principle of One Boss
Unity of Direction
Basis
Unity of command
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To be cont

Unity of direction
Equity
Order
Discipline
Initiative
Fair Remuneration
Stability of Tenure
Scalar Chain
Espirit De Corps (can be achieved through unity of command)
Centralization & De-Centralization

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Functions of management and their

inter-relationship:

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Personnel management
According to Edwin. B. Flippo, Personnel management is the planning, organizing,
compensation, integration and maintainance of people for the purpose of contributing to
organizational, individual and societal goals.
Nature of Personnel Management

Personnel management includes the function of employment, development and compensation- These
functions are performed primarily by the personnel management in consultation with other departments.
Personnel management is an extension to general management. It is concerned with promoting and
stimulating competent work force to make their fullest contribution to the concern.
Personnel management exist to advice and assist the line managers in personnel matters. Therefore,
personnel department is a staff department of an organization.
Personnel management lays emphasize on action rather than making lengthy schedules, plans, work
methods. The problems and grievances of people at work can be solved more effectively through rationale
personnel policies.
It is based on human orientation. It tries to help the workers to develop their potential fully to the concern.
It also motivates the employees through its effective incentive plans so that the employees provide fullest
co-operation.
Personnel management deals with human resources of a concern. In context to human resources, it
manages both individual as well as blue- collar workers.
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Functions of Personnel
Managers
The functions of a personnel manager can be
broadly classified into two categories :1. Managerial functions
2. Operative functions

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Managerial functions:

Planning this involves formulating the future course of action. Planning includes determining in
advance the personnel programs and changes required that would contribute to the achievement of
organizational goals.
Organising it involves establishing an intentional structure of roles for people in an organization.
Structural considerations such as the chain of command, division of labour, and assignment of
responsibility are party of the organizing function. The organizing function establishes
relationships among employees so that they can contribute collectively towards the attainment of
an organisation's goals.
Staffing This is the process of obtaining and maintaining capable and competent personnel in
various positions at all levels. It broadly encompasses manpower planning, recruitment, placement,
induction and orientation, transfer, career progression, promotion and separation.
Directing it involves directing all the available resources towards the common organizational
goals. Thus, direction is a vital management function, which ensures maximum employee
contribution and also helps in establishing sound industrial and human relations. It also involves
coordination between different departments.
Controlling it invoves the measurement of performance against goals and plans, identifies
deviations and by placing the process back on track, helps in the accomplishment of plans.
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Operative functions
These can be classified into four broad areas, employment, development, compensation and employee relations.

Employment it involves procuring and employing individuals with suitable knowledge, skills,
experience and aptitude necessary to perform various jobs. It includes functions such as job analysis,
human resource planning, recruitment, selection, placement and induction.
1. Job analysis involves preparing job description, job specification, job requirements and employee
specification and providing the guides, plans and basis for job design and redesign.
2. Human resource planning involves forecasting the human resource requirements of an organization and
the future supply of human resources. It also involves assessing the possibility of developing the human
resources to match the requirements.
3. Recruitment is the process of seeking and attracting prospective candidates against a vacancy in an
organization.
4. Selection is the process of identifying and establishing the credentials of a candidate for a job to ensure
success.
5. Placement is decided based on the needs of the organization.
6. Introducing a new employee to the organization, its business, the organization culture, its values and
beliefs, practices and procedures is termed as induction.

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Training and development

This process aims to train and develop employees to improve and update their knowledge and
skills, so as to help them perform their jobs better. The process also includes developing the
attitudes, beliefs and values of the employees to match the organizational needs. This
comprises of performance appraisal, training, management / executive development, career
planning and development.
1. Performance appraisal is the process of evaluating the performance of an employee on the
job and developing a plan for improvement.
2. Training is the systematic development of the knowledge, skills and attitudes required to
perform a job.
3. Development is the concept of developing the employees in an organization to meet future
changes and challenges.
4. Career planning and development refers to identifying one's career goals and formulating
plans of reaching them. It attempt to harmonize an individuals career aspirations with
organizational needs.

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Compensation
It is governed by the principle of rewarding an employee extrinsically during and after the course of
his job for his contributions to the organization adequately, equitably and in a fair manner. It
encompasses salaries, incentives, bonus and fringe benefits. This function comprises of Job
evaluation, wage and salary administration, incentives, bonus and fringe benefits.
1. Job evaluation is the systematic determination of the value of each job in relation to other jobs in
the organization.
2. The process of formulating and operating a suitable wage and salary program is known as wage and
salary administration.
3. Incentives are the rewards an employee earns in addition to regular salary based on his performance
or of the collective performance.
4. Bonus is primarily a share in the surpluses and is often directly related to the organization
performance.
5. Fringe benefits are monetary and non-monetary benefits including disablement benefits, housing
facilities, canteen facilities, conveyance facilities, educational facilities, recreational facilities, medical
and welfare facilities, post retirement benefits, etc.

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Employee relations & services

This function deals with employees as a social group that contributes to the organization, it includes
1. Maintaining employee records, analyzing them and developing information needed for managerial
decision making.
2. Increasing employee productivity
3. Keeping the employees satisfied and motivated
4. Maintaining a healthy and effective human organization.
5. Counseling services and developing employees into complete individuals and responsible citizens.
6. Developing policies, rules, guidelines and procedures relating to employee behaviour and ensuring their
implementation and observance.
7. Developing team building, team management and leadership skills in employees.
8. Developing a fast and suitable grievance management system to redress grievances.
9. Compliance with labor laws.
10. Personnel research.
11. Enhancing the quality of work life and personal life of the employees.

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MANPOWER
PLANNING:

Manpower planning means planning means deciding the number and type
of the human resources required for each job, unit and the total company
for a particular future date in order to carry out organizational activities.
Manpower planning may be viewed as foreseeing the human resources
requirement of an organization and the future supply of human resources
and
(i) making necessary adjustments between these two and organizational
plans and
(ii) foreseeing the possibility of developing the supply of manpower
resources in order to match it with the requirements by introducing
necessary changes in the functions of human resources management.

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process of manpower
planning

Analysing the corporate and unit level strategies.

Demand Forecasting: Forecasting the overall human resources requirements in
accordance with the organisational plans.
Supply Forecasting: Obtaining the data and information about the present inventory of
manpower and forecast the future changes in the human resources inventory.
Estimating the net manpower requirement.
In case of future surplus than plan for redeployment.
In case of future deficit, forecast the future supply of manpower from all sources with
reference to plans of other companies.
Plan for recruitment, development and internal mobility if future supply is more than or
equal to net manpower requirements.
Plan to modify and adjust the organizational plan if future supply will be inadequate with
reference to future net requirements.
Degree of uncertainty and length of planning period.

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Importance of
manpower planning

to recruit and retain the manpower of required quality and quantity.

to foresee the employee turnover and make the arrangements for minimizing turnover and
filling up of consequent vacancies.
to meet the needs of the programmes of expansion, diversification etc.
to foresee the impact of technology on work, existing employees and future human resource
requirements.
to improve the standards, skill, knowledge, ability, discipline etc.
to assess the surplus or shortage of manpower and take measures accordingly.
to maintain congenial industrial relations by maintaining optimum level and structure of
human resources.
to minimize the imbalances caused sue to non-availability of human resources of the right
kind, right number in right time and right place.
to make the best use of its human resources and
to estimate the cost of human resources.

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Recruitment:

Refers to the process of attracting, screening, and selecting a qualified person for a job. At
the strategic level it may involve the development of an employer brand which includes an
'employee offering'.
The stages of the recruitment process include: job analysis and developing a person
specification; the sourcing of candidates by networking, advertising, or other search methods;
matching candidates to job requirements and screening individuals using testing (skills or
personality assessment); assessment of candidates' motivations and their fit with
organisational requirements by interviewing and other assessment techniques. The recruitment
process also includes the making and finalising of job offers and the induction and onboarding
of new employees.

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Recruitment process

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The recruitment and selection is the major function of the human resource department and recruitment
process is the first step towards creating the competitive strength and the strategic advantage for the
organisations. Recruitment process involves a systematic procedure from sourcing the candidates to
arranging and conducting the interviews and requires many resources and time. A general recruitment
process is as follows:
Identify vacancy
Prepare job description and person specification
Advertising the vacancy
Managing the response
Short-listing
Arrange interviews
Conducting interview and decision making
The recruitment process is immediately followed by the selection process i.e. the final interviews and the
decision making, conveying the decision and the appointment formalities.

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Sources Of
Recruitment

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Difference between
recruitment and selection
Both recruitment and selection are the two phases of the employment process. The differences between the two
are:
1. Recruitment is the process of searching the candidates for employment and stimulating them to apply for
jobs in the organisation WHEREAS selection involves the series of steps by which the candidates are
screened for choosing the most suitable persons for vacant posts.
2. The basic purpose of recruitments is to create a talent pool of candidates to enable the selection of best
candidates for the organisation, by attracting more and more employees to apply in the organisation
WHEREAS the basic purpose of selection process is to choose the right candidate to fill the various
positions in the organization.
3. Recruitment is a positive process i.e. encouraging more and more employees to apply WHEREAS
selection is a negative process as it involves rejection of the unsuitable candidates.
4. Recruitment is concerned with tapping the sources of human resources WHEREAS selection is
concerned with selecting the most suitable candidate through various interviews and tests.
5. There is no contract of recruitment established in recruitment WHEREAS selection results in a contract
of service between the employer and the selected employee.

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Promotion

Promotion is advancement of an employee to a better job better in terms of greater

responsibility, more prestige or status, greater skill and especially increased rate of pay or
salary.-Paul Pigors and Charles A. Myers
Seniority vs. Merit in Promotions
Seniority is an employees length of service in a position, job grouping, or farm operation. An
individual who has worked on a farm for three years has more seniority than one who has
worked for two. Merit, in contrast, refers to "worth" or "excellence." Merit is more difficult to
measure than seniority. In the context of promotion, it relates to relevant qualifications as well
as effectiveness of past performance.
Promotion by seniority
In a straight seniority systemwhere the only factor in allocating jobs is length of servicea
worker would enter the organization at the lowest possible level and advance to higher
positions as vacancies occur. All prospective farm supervisors and managers would work their
way up through the ranks, for example, from hoer to irrigator and so on, up to equipment
operator and eventually into management. In a seniority system, length of service is the chief
criteria for moving up the ladder.

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To be cont

Advantages
Employees get to experience many jobs on the way up the promotional ladder, provided that they stay
long enough and openings develop. Jobs can be grouped into different ladders such that experience on one
job constitutes good training for the next.
Cooperation between workers is generally not hindered by competition for subjectively determined
promotions.
Workers need not seek to gain favor with supervisors (through non-productive means) to obtain
advancement. If, for example, a supervisors direction violates the interests or policy of the ranch,
employees would have less fear of reprisal for not following it.
Disadvantages
Some employees may not be able or want to do certain jobs into which a strict seniority system would
propel them. (Not all tractor drivers would make good foremen, or would like to be foremen.) Employees
should be able to opt not to accept an opportunity for promotion.
Ambitious workers may not be willing to "wait their turn" for higher-level jobs that they want.
Employee motivation to work as well as possible is not reinforced.
Immigrant or ethnic groups new to agriculture, and women, would be underrepresented in higher levels
for a long time (since they are the last hired and have least seniority).
Employers would tend to hire over skilled people at entry level, so they have the capacity for promotio
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Promotion by merit
Promotions based on merit advance workers who are best qualified for the position, rather
than those with the greatest seniority. When present employees are applying for a position, a
workers past performance is also considered. Effective performance appraisal helps build
trust in the system.

Advantages
Employee job-related abilities can be better matched with jobs to be filled.
Motivated and ambitious employees can be rewarded for outstanding performance.
Performance is fostered.
People can be hired for a specific job, rather than for ability to be promotable.

Disadvantages
Merit and ability are difficult to measure in an objective, impartial way.
Supervisors may reward their favorites, rather than the best employees, with high merit ratings.
Disruptive conflict may result from worker competition for merit ratings.
Unlawful discrimination may enter into merit evaluations.

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Training

is the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or
practical skills and knowledge that relate to specific useful competencies. Training has specific goals of
improving one's capability, capacity, and performance.

Types & methods of training at work

Induction training: is important as it enables a new recruit to become productive as quickly as possible.
It can avoid costly mistakes by recruits not knowing the procedures or techniques of their new jobs. The
length of induction training will vary from job to job and will depend on the complexity of the job, the size
of the business and the level or position of the job within the business.
On-the-job training With on the job training, employees receive training whilst remaining in the
workplace.The main methods of one-the-job training include:
Demonstration / instruction - showing the trainee how to do the job
Coaching - a more intensive method of training that involves a close working relationship between an
experienced employee and the trainee
Job rotation - where the trainee is given several jobs in succession, to gain experience of a wide range of
activities (e.g. a graduate management trainee might spend periods in several different departments)
Projects - employees join a project team - which gives them exposure to other parts of the business and
allow them to take part in new activities. Most successful project teams are "multi-disciplinary"

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To be cont
Off-the-job training This occurs when employees are taken away from their place of work to
be trained. Common methods of off-the-job training include:
Day release (employee takes time off work to attend a local college or training centre)
Distance learning / evening classes
Block release courses - which may involve several weeks at a local college
Sandwich courses - where the employee spends a longer period of time at college (e.g. six
months) before returning to work
Sponsored courses in higher education
Self-study, computer-based training

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Objectives of Training

Improve the efficiency of workforce

Make workers multi-skilled and flexible
Introducing a new process or new machinery
Reduce wastage of material and time
Adapt to change
of workforce
Make workers multi-skilled and flexible

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Unit-2

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Production
Management
Production management means planning,
organising, directing and controlling of
production activities.
Production management deals with converting
raw materials into finished goods or products.
It brings together the 6M's i.e. men, money,
machines, materials, methods and markets to
satisfy the wants of the people.
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Objectives
1. RIGHT QUALITY: The quality of product is established based upon the customers needs.
The right quality is not necessarily best quality. It is determined by the cost of the product and
the technical characteristics as suited to the specific requirements.
2. RIGHT QUANTITY: The manufacturing organization should produce the products in right
number. If they are produced in excess of demand the capital will block up in the form of
inventory and if the quantity is produced in short of demand, leads to shortage of products.
3. RIGHT TIME: Timeliness of delivery is one of the important parameter to judge the
effectiveness of production department. So, the production department has to make the
optimal utilization of input resources to achieve its objective.
4. RIGHT MANUFACTURING COST: Manufacturing costs are established before the
product is actually manufactured. Hence, all attempts should be made to produce the products
at pre-established cost, so as to reduce the variation between actual and the standard (preestablished) cost.

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Importance of Production
Management

Accomplishment of firm's objectives : Production management helps the business firm to achieve all its objectives. It
produces products, which satisfy the customers' needs and wants. So, the firm will increase its sales. This will help it to
achieve its objectives.
Reputation, Goodwill and Image : Production management helps the firm to satisfy its customers. This increases the firms
reputation, goodwill and image. A good image helps the firm to expand and grow.
Helps to introduce new products : Production management helps to introduce new products in the market. It conducts
Research and development (R&D). This helps the firm to develop newer and better quality products. These products are
successful in the market because they give full satisfaction to the customers.
Supports other functional areas : Production management supports other functional areas in an organisation, such as
marketing, finance, and personnel. The marketing department will find it easier to sell good-quality products, and the finance
department will get more funds due to increase in sales. It will also get more loans and share capital for expansion and
modernisation. The personnel department will be able to manage the human resources effectively due to the better
performance of the production department.
Helps to face competition : Production management helps the firm to face competition in the market. This is because
production management produces products of right quantity, right quality, right price and at the right time. These products are
delivered to the customers as per their requirements.
Optimum utilisation of resources : Production management facilitates optimum utilisation of resources such as manpower,
machines, etc. So, the firm can meet its capacity utilisation objective. This will bring higher returns to the organisation.
Minimises cost of production : Production management helps to minimise the cost of production. It tries to maximise the
output and minimise the inputs. This helps the firm to achieve its cost reduction and efficiency objective.
Expansion of the firm : The Production management helps the firm to expand and grow. This is because it tries to improve
quality and reduce costs. This helps the firm to earn higher profits. These profits help the firm to expand and grow.

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Scope

Screening and design result of production, through research and product

development ( R and D )
Equipments screening and process.
Production Planning and goods which will is processed.
Job(activity duty design.
Four p's place of business.
compilation of Equipments from plant.

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Functions of Production
Management

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Production planning &

control:

Planning and control involve generally the organization and planning of

manufacturing process. Especially it consists of the planning of routing, scheduling,
dispatching inspection, and coordination, control of materials, methods machines,
tools and operating times. The ultimate objective is the organization of the supply
and movement of materials and labour, machines utilization and related activities,
in order to bring about the desired manufacturing results in terms of quality,
quantity, time and place Production planning without production control is like a
bank without a bank manager, planning initiates action while control is an adjusting
process, providing corrective measures for planned development. Production
control regulates and stimulates the orderly how of materials in the manufacturing
process from the beginning to the end.

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STEPS OF PRODUCTION PLANNING AND

CONTROL

Production planning: Production planning may be defined as the technique of foreseeing every step in a
long series of separate operations, each step to be taken at the right time and in the right place and each
operation to be performed in maximum efficiency. It helps entrepreneur to work out the quantity of material
manpower, machine and money requires for producing predetermined level of output in given period of time.

Routing: Under this, the operations, their path and sequence are established. To perform these operations the
proper class of machines and personnel required are also worked out. The main aim of routing is to
determine the best and cheapest sequence of operations and to ensure that this sequence is strictly followed.
In small enterprises, this job is usually done by entrepreneur himself in a rather adhoc manner.

Routing procedure involves following different activities.

(1) An analysis of the article to determine what to make and what to buy.
(2) To determine the quality and type of material
(3) Determining the manufacturing operations and their sequence.
(4) A determination of lot sizes
(5) Determination of scrap factors
(6) An analysis of cost of the article
(7) Organization of production control forms.

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Scheduling: It means working out of time that should be required to perform each operation and also the
time necessary to perform the entire series as routed, making allowances for all factors concerned. It mainly
concerns with time element and priorities of a job.

The pattern of scheduling differs from one job to another which is explained as below:

Production schedule: The main aim is to schedule that amount of work which can easily be handled by plant
and equipment without interference. Its not independent decision as it takes into account following factors.
(1) Physical plant facilities of the type required to process the material beingscheduled.
(2) Personnel who possess the desired skills and experience to operate the equipment and perform the type of
work involved.
(3) Necessary materials and purchased parts.

Master Schedule: Scheduling usually starts with preparation of master schedule which is weekly or monthly
break-down of the production requirement for each product for a definite time period, by having this as a
running record of total production requirements the entrepreneur is in better position to shift the production
from one product to another as per the changed production requirements. This forms a base for all
subsequent scheduling acclivities. A master schedule is followed by operator schedule which fixes total time
required to do a piece of work with a given machine or which shows the time required to do each detailed
operation of a given job with a given machine or process.

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Manufacturing schedule: It is prepared on the basis of type of manufacturing process involved. It is very
useful where single or few products are manufactured repeatedly at regular intervals. Thus it would show
the required quality of each product and sequence in which the same to be operated.
Scheduling of Job order manufacturing: Scheduling acquires greater importance in job order
manufacturing. This will enable the speedy execution of job at each center point.
Loading: The next step is the execution of the schedule plan as per the route chalked out it includes the
assignment of the work to the operators at their machines or work places. So loading determines who will
do the work as routing determines where and scheduling determines when it shall be done. Gantt Charts
are most commonly used in small industries in order to determine the existing load and also to foresee how
fast a job can be done. The usefulness of their technique lies in the fact that they compare what has been
done and what ought to have been done.
Production control: Production control is the process of planning production in advance of operations,
establishing the extract route of each individual item part or assembly, setting, starting and finishing for
each important item, assembly or the finishing production and releasing the necessary orders as well as
initiating the necessary follow-up to have the smooth function of the enterprise.
Dispatching: Dispatching involves issue of production orders for starting the operations. Necessary
authority and conformation is given for:

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1.
2.
3.
4.
5.

Movement of materials to different workstations.

Movement of tools and fixtures necessary for each operation.
Beginning of work on each operation.
Recording of time and cost involved in each operation.
Movement of work from one operation to another in accordance with the route sheet.
Dispatching is an important step as it translates production plans into production.
Follow up: Every production programme involves determination of the progress of work, removing
bottlenecks in the flow of work and ensuring that the productive operations are taking place in accordance
with the plans. It spots delays or deviations from the production plans. It helps to reveal detects in routing
and scheduling, misunderstanding of orders and instruction, under loading or overloading of work etc. All
problems or deviations are investigated and remedial measures are undertaken to ensure the completion of
work by the planned date.
Inspection: This is mainly to ensure the quality of goods. It can be required as effective agency of
production control.
Corrective measures: Corrective action may involve any of those activities of adjusting the route,
rescheduling of work changing the workloads, repairs and maintenance of machinery or equipment, control
over inventories of the cause of deviation is the poor performance of the employees. Certain personnel
decisions like training, transfer, demotion etc. may have to be taken. Alternate methods may be suggested
to handle peak loads.

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Importance of production planning

& control

Better Service to Customers

Fewer Rush Orders
Better Control of Inventory
More Effective Use of Equipment
Reduced Idle Time
Improved Plant Morale.
Good public image
Lower capital requirements

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Material management

For running any industry or business, we need a number of resources. These resources are
popularly known as 5 M's of any Industrial activity i.e.
Men,
Machines,
Materials,
Money and
Management.
All these resources which are basic inputs, are important but their relative importance depends
upon the particular type of industry and also other environmental factors. Earlier, when many
modern machines were not even known, whole activity was around men.
But now the importance has shifted from men to machines and in the present environment
materials are the life blood of any industry or business and for their proper running, materials
should be available at proper time in proper quantity at proper place .

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Objectives Of Materials
Management

The objectives of integrated materials management can be classified in

two categories ;
Primary and
Secondary.
Primary Objectives: Following may be identified as primary objectives
which are to be achieved.
(a) To purchase the required materials at minimum possible prices by
following the prescribed purchase policies and encouraging healthy
competition.
(b) To achieve high inventory turnover i.e. to meet materials requirement
of the organization by keeping low average stocks so that the capital
locked up in materials is turned over a large no of times.

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(c) To incur minimum possible expenditure on administrative and other

allied activities related to purchase of materials and also to keep the
materials in stock till they are finally delivered to the users.
(d) To ensure that continuity of supply of materials to the users is
maintained by avoiding out of stock situation.
(e) To supply materials of consistent quality i.e. of quality which meets
user specification and is fit for service.
(f) To keep the wage bill of the department low by ensuring proper
distribution of work among staff and not employing surplus staff.
(g) To maintain good relationship with the suppliers of materials and also
develop new suppliers for the products for which reliable suppliers do not
exist.

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To be contd.
(h) To ensure training and development of personnel employed in the
department so that good industrial relations are maintained.
(i) To maintain proper and up-to-date records of all stores transactions and
purchases.
Secondary Objectives:
(a) To assist technical/design department in developing new materials and
products which may be more profitable to the organization.
(b) To make economic 'make or buy' decisions.
(c) To ensure standardization of materials
(d) To contribute in the product improvement.
(e) To contribute in the development of inter departmental harmony.
(f) To follow scientific methods of forecasting prices and future
consumption of materials.
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Inventory management
Inventory control is the process of deciding what and
how much of various items are to be kept in stock.
Inventory management is primarily about specifying
the quantity and quality of stocked goods. It is
required at different locations within a facility or
within many locations of a supply network to precede
the regular and planned course of production and
stock of materials.

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Objectives:
Determine items to be stocked;
Determine when and how much stock and
replenish;
Keep suitable records; and
Weed out obsolete items;

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Benefits:

Adequate supply of materials, stores, & spares.

Reduces investment in resources
Availability of material at economical cost
Exact and accurate delivery dates
Schedule will be maintained
Increase in overall efficiency
Material will be protected
Delays & interruptions are reduce
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TYPES OF
INVENTORIES
Inventories may be classified as under:(1) Raw materials and production inventories:
(2) In-process inventories:
(3) M.R.O. Inventories:
(4) Finished goods inventories:
(a) Movement and transit inventories:
(b) Lot-size inventories:
(c) Fluctuation inventories:
(d) Anticipation inventories:

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Techniques/ methods

Stock Levels:
Maximum Stock Level
Minimum Stock level
Re-ordering level
Danger level
Economic Order Quantity (EOQ)
Perpetual Inventory
ABC analysis
FSN analysis
VED analysis

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Reordering Level

Re-ordering level is a level at which the storekeeper will initiate the steps to purchase fresh
supplies. This level is called re-ordering level or ordering level. This level usually lies between
minimum and maximum stock level. This level will usually be higher than the minimum stock
level to cover unexpected delay in delivery of fresh supplies or abnormal usage of materials.
Following points need to be taken into consideration while fixing the re-ordering level

1. Economic ordering quantity

2. Rate of consumption
3. Time required for the delivery of fresh supply. Following formulas can be used for
calculating the re-ordering level.

Reorder level = Maximum consumption x Maximum re-order period

or
Reorder level = Minimum level + consumption during the time required to get fresh deliveries

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Minimum Stock
Level
Minimum stock level is a level of stock which must be kept in store at all
times. This is a level of an item of material below which the stock in hand is
not allowed to fall. The objective of this limit is to avoid the possibility of
interruption of production due to shortage of material. The following points
needs to be taken into consideration while fixing the minimum stock level.
Time required for the fresh supply of material - Lead time
Rate of consumption of material during the lead time.
Reorder level
Following formula can be used for determine the minimum stock level
Minimum stock level = Reorder level - (Normal consumption x Normal
reorder period)

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Maximum stock level

Maximum stock level is a quantity of material above which the stock of

any item should not be allowed. To avoid blocking of working capital and
making undue investments in stock, maximum stock level is to be fixed. It
also helps to maintain proper quality of raw materials. Following points
must be taken into consideration while fixing maximum stock level:
Availability of storage space
Cost of carrying the inventory
Amount of working capital available
Economic ordering quantity
Possibility of change in market trend
Normal rate of consumption of material during the reordering process.
Time necessary for fresh delivery of materials.
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Possibility of loss due to deterioration/evaporation etc.

Price fluctuation.
Insurance costs if any.

Following formula is normally in use for calculating Maximum stock level.

Maximum stock level = Reorder level + reorder quantity - (maximum
consumption X minimum re-order period)

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Danger Level

Danger level is a level below the minimum level. This is a level at which
urgent action must be taken to procure new stock otherwise the stock may
exhaust and could affect the production. This level is calculated by taking
into account the time required to get the materials by the shortest possible
means. Generally following formula is used to calculate the Danger level:
Danger level = average consumption x Maximum reorder period for
emergency purchase.

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Average stock level

Average stock level can be determined by using the following formula:

Average Stock Level = 1/2 of (Maximum stock level + Minimum Stock
level)
or
Average Stock Level = Minimum stock level + half of reorder quantity)

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Economic Order
Quantity (EOQ)
The Economic Order Quantity (EOQ) is the number of units that a
company should add to inventory with each order to minimize the total
costs of inventorysuch as holding costs, order costs, and shortage costs.
The EOQ is used as part of a continuous review inventory system in which
the level of inventory is monitored at all times and a fixed quantity is
ordered each time the inventory level reaches a specific reorder point. The
EOQ provides a model for calculating the appropriate reorder point and the
optimal reorder quantity to ensure the instantaneous replenishment of
inventory with no shortages. It can be a valuable tool for small business
owners who need to make decisions about how much inventory to keep on
hand, how many items to order each time, and how often to reorder to
incur the lowest possible costs.

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EOQ can be calculated with the help of the following formula:

EOQ= 2ASPC
Where;
A = annual usage in quantity
S = cost of order place.
P = price of material per unit
C= cost of storage material
O= economic order quantity

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Perpetual Inventory

Perpetual inventory is the term used to describe the continuous real-time

tracking of quantities of a product. Perpetual quantities must take into
account any activity that increases or decreases inventory from a specific
location / bin. This includes receiving, put-away, replenishment, order
picking, bill of material picking, inventory movements and inventory
adjustments. Individual quantities must be maintained for every bin that
contains the product.
As product is moved from one bin to another, or from a bin to customer
order or bill of material, quantities must be balanced and Units of Measure
(see below) must be taken into account. The sum of the quantities of all the
bins containing the product is known as the Warehouse, Facility or Logistic
Center Total.

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ABC analysis

ABC analysis is a type of analysis of material dividing in three groups

called A-group items, B-Group items and C-group items For the purpose of
exercising control over materials. Manufacturing concerns find it useful to
divide materials into three categories.
An analysis of the annual consumption of materials of any organization
would indicate that a handful to top high value items (less than 10 per cent
of the total number) will account for a substantial portion of about 70 per
cent of total consumption value.
Remember: 10% of total number of items carries 70% of value. - "A"
group itemsSimilarly, a large number bottom items (over 70 per cent of the
total number of items) account for only about 10 percent of the
consumption value.

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 Remember: 70% of total number of items account for only about 10% of
consumption value - "C"-group items. Between these two extremes will fall
those items the percentage number of which is more or less equal to their
consumption value.
Remember: 20% of total number of items account for only about 20%
consumption value - "B" group items.
Items in the top category are treated as "A" items, items in the bottom
category are called as "C" category items and the items that lie between the
top and the bottom are called "B" category items. Such an analysis of
materials is known as ABC analysis or Proportional parts value analysis.
The following steps will explain to you the classification of items into A, B
and C categories.

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1. Find out the unit cost and and the usage of each material over a given
period.
2. Multiply the unit cost by the estimated annual usage to obtain the net
value.
3. List out all the items and arrange them in the descending value. (Annual
Value)
4. Accumulate value and add up number of items and calculate percentage
on total inventory in value and in number.
5. Draw a curve of percentage items and percentage value.
6. Mark off from the curve the rational limits of A, B and C categories.

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FSN analysis
In F-S-N analysis, items are classified according to their rate of consumption.
The items are classified broadly into three groups: F means Fast moving, S
means Slow moving, N means Non-moving. The FSN analysis is conducted
generally on the following basis:The last date of receipt of the items or the last
date of the issue of items, whichever is later, is taken into account.The time
period is usually calculated in terms of months or number of days and it
pertains to the time elapsed seems the last movement was recorded.
FSN analysis helps a company in identification of the following
a)
The items to be considered to be active may be reviewed regularly on
more frequent basis.
b)
Items whose stocks at hand are higher as compared to their rates of
consumption.
c)
Non-moving items whose consumption is nil or almost in significant.

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VED analysis

VED Analysis means....Vital, Essential and Desirable Analysis... It is the

Analysis for monitoring and control of stores and spares inventory by
classifying them into 3 categories viz., Vital, Essential and Desirable. The
mechanics of VED analysis are similar to those of ABC Analysis.

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Unit-3

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Marketing
Management

Concept of marketing
The marketing concept holds that the key to achieving organizational goals
consists in determining the needs and wants of target markets and
delivering the desired satisfactions more effectively and efficiently than
competitors1. Under marketing concept, the emphasis on selling
satisfaction and not merely on the selling a product.
The objective of marketing is not the maximization of profitable sales
volume, but profits through the satisfaction of customers. The consumer is
the pivot point and all marketing activities operate around this central
point. It is, therefore, essential that the entrepreneurs identify the
customers, establish a rapport with them, identify their needs and deliver
the goods and services that would meet their requirements & satisfaction.

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The components of marketing concept are as under:

a. Satisfaction of Customers: In the modern era, the customer is the focus
of the organization. The organization should aim at producing those goods
and services, which will lead to satisfaction of customers.
b. Integrated marketing: The functions of production, finance and
marketing should be integrated to satisfy the needs and expectations of
customers.
c. Profitable sales volume: Marketing is successful only when it is capable
o maximizing profitable sales and achieves long-run customer

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Definition

American Marketing Association Marketing (Management) is the

process of planning and executing the conception, pricing, promotion, and
distribution of ideas, goods, and services to create exchanges that satisfy
individual and organizational goals.
Philip Kotler defines marketing as 'satisfying needs and wants through an
exchange process
P.Tailor of www.learnmarketing.net suggests that 'Marketing is not about
providing products or services it is essentially about providing changing
benefits to the changing needs and demands of the customer.

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Marketing vs. Selling

Marketing
Focuses on Customers needs.
Customer enjoys supreme importance.
Converting customers needs into product.
Profits through customer satisfaction.
Emphasis is given on product planning and development to match products
with the market.
Integrated approach to marketing is practiced.
The principle of caveat vendor (let the Seller beware) is followed.

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Selling:
Focuses on sellers needs.
Product enjoys supreme importance.
Converting product into cash.
Profits through sales volume.
Emphasis is placed on sale of products already produced.
Fragmented approach to selling is practiced.
The principle of caveat emptor (let the buyer beware) is followed.

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Objectives:
1. To

understand and apply Demand theory into the Practical

world
2. To obtain Knowledge and skill about different production
laws and technique
3. To have an idea about Price-Output determination under
different market situations
4. To know about various alternative theories of firm

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Functions of marketing management

1.
Understand the marketplace and customer needs and wants.
2.
Design a customer-driven marketing strategy.
3.
Construct a marketing program that delivers superior value.
4.
Build profitable relationships and create customer delight.
5.
Capture value from customers to create profits and customer quality
6.
Exchange is the act of obtaining a desired object from someone by offering something in
return.
7.
Marketing management is defined as the art and science of choosing target markets and
building profitable relationships with them.
8. Market segmentation refers to dividing the markets into segments of customers.
9. Target marketing refers to choosing which segments to go after.
10. The value proposition is the set of benefits or values a company promises to deliver to
customers to satisfy their needs.

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811.Under the marketing concept, customer focus and value are the paths to sales and profits.
The job is not to find the right customers for your product but to find the right products for your
customers.
12. Customer-driven marketing is about understanding customer needs and creating products and
services that meet existing and latent needs.
13. The marketing mix is the set of tools (four Ps) the firm uses to implement its marketing
strategy. It includes product, price, promotion, and place.
14. Customer Relationship Management: CRM
The overall process of building and maintaining profitable customer relationships by delivering
superior customer value and satisfaction
15. The key to building lasting customer relationships is to create superior customer value and
satisfaction.

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16. customer satisfaction depends on the products perceived performance relative to a buyers
expectations.
15. If the products performance falls short of expectations, the customer is dissatisfied. If
performance matches expectations, the customer is satisfied. If performance exceeds
expectations, the customer is highly satisfied or delighted.
17. Basic Relationships are often used by a company with many low-margin customers. For
example, Procter & Gamble does not phone or call on all of its Tide consumers to get to know
them personally. Instead, P&G creates relationships through brand-building advertising, sales
promotions, and its Web site.

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Marketing Research

Marketing Research has two words, viz., "Marketing" and "Research".Marketing

means buying and selling activities.Research means a systematic and complete
study of a problem. It is done by experts. It uses scientific methods.Thus, we can
say, Marketing Research is a systematic method of collecting, recording and
analysing of data which is used to solve marketing problems.
Definitions of Marketing Research: Definitions of Marketing research are :1. According to American Marketing Association (AMA),
"Marketing Research is the systematic gathering, recording and analysing of data about
problems relating to the marketing of goods and services."
2. According to Philip Kotler,
"Marketing research is a systematic problem analysis, model building and fact finding
for the purpose of improved decision-making and control in the marketing of goods
and services."

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3. According to Paul Green and Donald Tull,

"Marketing research is the systematic and objective search for, and analysis of,
information relevant to the identification and solution of any problem in
the field of marketing."
4. According to David Luck, Donald Taylor and Hugh Wales,
"Marketing Research is the application of scientific methods in the solution of
marketing problems."

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Features of Marketing
Research

Wide and Comprehensive Scope :

Systematic and Scientific
Science and Art
Collects and Analyses Data.
Continuous and Dynamic Process
Tool for Decision-Making.
Benefits Company and Consumers.
Similar to Military Intelligence
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 Applied Research
Connected With Marketing Information Syatem
(MIS)
Reduces Gap between Producers and Consumers
Uses Different Methods
Has Few Limitations
Accurate Data Collection and Critical Analysis

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Importance of
Marketing Research

Success of an organization depends largely on marketing management. If

marketing is not carried properly, a business can't be run profitably.
For successful implementation of marketing process, marketing research is
of upmost necessity.
Consumer oriented and competitive markets have further increased the
importance of marketing research.
Marketing research provides valuable information which provides basis for
sound and accurate decisions.
In other words, top management is greatly facilated in the process of
decision making with the help of marketing research.

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Marketing research has brought the producer and the ultimate consumer
very close to each other by crossing the walls raised by marketing
intermediaries in between. It has greatly filled the communication gap
between the producer and the consumer.
It studies in detail the buying habits of consumers, their taste and
preferences, needs, opinions and reaction etc.
Marketing research provides valuable information with regard to new
developments and innovations brought about by rapid growth of science
and technology.

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On account of these developments, prompt adjustments and changes in various policies viz,
advertising, sales pricing and distribution etc, have got to be made so that a business concern
can keep itself up-to-date in the dynamic market place.
Marketing management has accepted the real challenge of finding new customers, new
products and new markets with the help of vital instrument of marketing research.
Marketing research has greatly reduced the possibility of error and has provided right goods at
right place.

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Limitations of
Marketing Research
1. It requires large finances on account of its costly techniques. Small firms can't afford it.
2. Its techniques are applicable in gathering and interpreting information from human beings. The
information given by individuals may not be correct which ultimately affects the results shown
by marketing research.
3. It provides only probable, complex, and abstract solutions where as traditional management
expects, simple and concrete solutions.
4. It can't be carried out successfully when some executives prefer to rely more on their own
judgment and decisions.
5. It can be profitably and effectively carried out by experts possessing sound knowledge of
statistics, data processing and operational research etc. These competent and expert personnel
may not be available.

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Marketing research
process
Stages of marketing research process
Step 1: Problem Definition
Step 2: Development of an Approach to the Problem
Step 3: Research Design Formulation :steps

Secondary data analysis

Qualitative research
Methods of collecting quantitative data (survey, observation, and experimentation)
Definition of the information needed
Measurement and scaling procedures
Questionnaire design
Sampling process and sample size
Plan of data analysis

Step 4: Field Work or Data Collection

Step 5: Data Preparation and Analysis
Step 6: Report Preparation and Presentation

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Advertising

According to Wood, "Advertising is causing to know to remember, to do."

According to Wheeler, "Advertising is any form of paid non-personal presentation of ideas,
goods or services for the purpose of inducting people to buy."
According to Richard Buskirk, "Advertising is a paid form of non-personal presentation of
ideas, goods or services by an identified sponsor."
According to William J. Stanton, "Advertising consists of all the activities involves in
presenting to a group, a non-personal, oral or visual, openly sponsored message regarding
disseminated through one or more media and is paid for by an identified sponsor."

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Features of advertisement

It is directed towards increasing the sales of business.

Advertising is a paid form of publicity
It is non-personal. They are directed at a mass audience and nor at the individual as is in the
case of personal selling.
Advertisement are identifiable with their sponsor of originator which is not always the case
with publicity or propaganda.

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Objective / Functions of
advertising

The purpose of advertising is nothing but to sell something -a product, a service or an idea.
The real objective of advertising is effective communication between producers and
consumers. The following are the main objectives of advertising:
Preparing Ground for New Product
Creation of Demand
Facing the Competition
Creating or Enhancing Goodwill
Informing the Changes to the Customers
Neutralizing Competitor's Advertising
Barring New Entrants

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Importance of
Advertisement

Benefits to Manufacturers
It increases sales volume by creating attraction towards the product.
It helps easy introduction of new products into the markets by the same manufacturer.
It helps to create an image and reputation not only of the products but also of the producer or
advertiser. In this way, it creates goodwill for the manufacturer.
Retail price, maintenance is also possible by advertising where price appeal is the promotional
strategy.
It helps to establish a direct contact between manufacturers and consumers.
It leads to smoothen the demand of the product. It saves the product from seasonal fluctuations by
discovering new and new usage of the product.
It creates a highly responsive market and thereby quickens the turnover that results in lower
inventory.
Selling cost per unit is reduced because of increased sale volume. Consequently, product overheads
are also reduced due to mass production and sale.
Advertising gives the employees a feeling of pride in their jobs and to be in the service of such a
concern of repute. It, thus inspires the executives and worker to improve their efficiency.
Advertising is necessary to meet the competition in the market and to survive.
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Benefits to Wholesalers and Retailers

Easy sale of the products is possible since consumers are aware of the product and
its quality.
It increases the rate of the turn-over of the stock because demand is already created
by advertisement.
It supplements the selling activities.
The reputation created is shared by the wholesalers and retailers alike because they
need not spend anything for the advertising of already a well advertised product.
It ensures more economical selling because selling overheads are reduced.
It enables them to have product information.

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Benefits to Consumers
Advertising stresses quality and very often prices. This forms an indirect guarantee
to the consumers of the quality and price. Further large scale production assumed
by advertising enables the seller to seller product at a lower cost.
Advertising helps in eliminating the middlemen by establishing direct contacts
between producers and consumers. It results in cheaper goods.
It helps them to know where and when the products are available. This reduces
their shopping time.
It provides an opportunity to the customers to compare the merits and demerits of
various substitute products.
This is perhaps the only medium through which consumers could know the varied
and new uses of the product.
Modern advertisements are highly informative.

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Benefits to Salesmen
Salesmanship is incomplete without advertising. Advertising serves as the forerunner of a
salesman in the distribution of goods. Sales is benefited the advertisement in following ways:
Introducing the product becomes quite easy and convenient because manufacturer has already
advertised the goods informing the consumers about the product and its quality.
Advertising prepares necessary ground for a salesman to begin his work effectively. Hence
sales efforts are reduced.
The contact established with the customer by a salesman is made permanent through effective
advertising because a customer is assumed of the quality and price of the product.
The salesman can weigh the effectiveness of advertising when he makes direct contact with
the consumers.

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Benefits to Community or Society

Advertising, in general, is educative in nature. In the words of the late President Roosevelt of
the U.S.A., "Advertising brings to the greatest number of people actual knowledge concerning
useful things: it is essentially a form of education and the progress of civilization depends on
education."
Advertising leads to a large-scale production creating more employment opportunities to the
public in various jobs directly or indirectly.
It initiates a process of creating more wants and their satisfaction higher standard of living.
For example, advertising has made more popular and universal the uses of such inventions as
the automobiles, radios, and various household appliances.
Newspapers would not have become so popular and so cheap if there had been no
advertisements. The cheap production of newspapers is possible only through the publication
of advertisements in them. It sustains the press.
It assures employment opportunities for the professional men and artist.
Advertising does provide a glimpse of a country's way of life. It is, in fact, a running
commentary on the way of living and the behavior of the people and is also an indicator of
some of the future in this regard.
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Criticism of advertising

1. Increased price of the product

2. Multiplication of Needs
3. Deceptive
4. It Leads to Monopoly
5. Harmful for the Society
6. Wastage of precious national resources

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Unit-4

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Financial Management
Financial Management means planning,
organizing, directing and controlling the
financial activities such as procurement and
utilization of funds of the enterprise. It means
applying general management principles to
financial resources of the enterprise.

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Scope/Elements

Investment decisions includes investment in fixed assets (called as capital budgeting).

Investment in current assets are also a part of investment decisions called as working capital
decisions.
Financial decisions - They relate to the raising of finance from various resources which will
depend upon decision on type of source, period of financing, cost of financing and the returns
thereby.
Dividend decision - The finance manager has to take decision with regards to the net profit
distribution. Net profits are generally divided into two:
Dividend for shareholders- Dividend and the rate of it has to be decided.
Retained profits- Amount of retained profits has to be finalized which will depend upon
expansion and diversification plans of the enterprise.

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Objectives

To ensure regular and adequate supply of funds to the concern.

To ensure adequate returns to the shareholders which will depend upon the earning capacity,
market price of the share, expectations of the shareholders.
To ensure optimum funds utilization. Once the funds are procured, they should be utilized in
maximum possible way at least cost.
To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate
rate of return can be achieved.
To plan a sound capital structure-There should be sound and fair composition of capital so that
a balance is maintained between debt and equity capital

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Functions of Financial
Management

Estimation of capital requirements

Determination of capital composition
Choice of sources of funds Investment of funds.
Disposal of surplus
Dividend declaration
Retained profits
Management of cash
Financial controls

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Capital Structure

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as
long-term finance. The capital structure involves two decisionsType of securities to be issued are equity shares, preference shares and long term
borrowings( Debentures).
Relative ratio of securities can be determined by process of capital gearing. On this basis, the
companies are divided into two Highly geared companies- Those companies whose proportion of equity capitalization is
small.
Low geared companies- Those companies whose equity capital dominates total
capitalization.

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Factors Determining
Capital Structure

Trading on Equity
Degree of control
Flexibility of financial plan
Choice of investors
Capital market condition
Period of financing
Cost of financing
Stability of sales
Sizes of a company

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Sources of funds

A company might raise new funds from the following sources:

The capital markets:
i) new share issues, for example, by companies acquiring a stock market listing for the first
time
ii) rights issues
Loan stock
Retained earnings
Bank borrowing
Government sources
Business expansion scheme funds
Venture capital
Franchising.
leasing

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Equity share

Equity shares or ordinary shares are those shares which are not preference shares.
Dividend on these shares is paid after the fixed rate of dividend has been paid on
preference shares. The rate of dividend on equity shares is not fixed and depends
upon the profits available and the intention of the board. In case of winding up of
the available and the intention of the board. In case of winding up of the company,
equity capital can be paid back only after every other claim including the claim of
preference shareholders has been settled. The most outstanding feature of equity
capital is that its holders control the affairs of the company and have an unlimited
interest in the company's profits and assets. They enjoy voting right on all matters
relating to the business of the company. They may earn dividend at a higher rate
and have the risk of getting nothing. the importance of issuing ordinary shares is
that no organisation for profit can exist without equity share capital. This is also
known as risk capital.

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Advantages of equity shares:

Advantages of company: The advantages of issuing equity shares may be summarized as below:
I. Long-tern and Permanent Capital: It is a good source of long-term finance. A company is not
required to pay-back the equity capital during its life-time and so, it is a permanent sources of
capital.
II. No Fixed Burden: Unlike preference shares, equity shares suppose no fixed burden on the
company's resources, because the dividend on these shares are subject to availability of profits and
the intention of the board of directors. They may not get the dividend even when company has
profits. Thus they provide a cushion of safety against unfavorable development

III. Credit worthiness: Issuance of equity share capital creates no change on the assets of the
company. A company can raise further finance on the security of its fixed assets.

IV. Risk Capital: Equity capital is said to be the risk capital. A company can trade on equity in bad
periods on the risk of equity capital.

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V. Dividend Policy: A company may follow an elastic and rational dividend policy
and may create huge reserves for its developmental programmes.
Advantages to Investors: Investors or equity shareholders may enjoy the
following advantages:
I. More Income: Equity shareholders are the residual claimant of the profits after
meeting all the fixed commitments. The company may add to the profits by trading
on equity. Thus equity capital may get dividend at high in boom period.
II. Right to Participate in the Control and Management: Equity shareholders
have voting rights and elect competent persons as directors to control and manage
the affairs of the company.
III. Capital profits: The market value of equity shares fluctuates directly with the
profits of the company and their real value based on the net worth of the assets of
the company. an appreciation in the net worth of the company's assets will increase
the market value of equity shares. It brings capital appreciation in their investments.
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IV. An Attraction of Persons having Limited Income: Equity shares are mostly of lower
denomination and persons of limited recourses can purchase these shares.

V. Other Advantages: It appeals most to the speculators. Their prices in security market are
more fluctuating.

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Disadvantages of equity shares:

Disadvantages to company: Equity shares have the following disadvantages to the

company:
I. Dilution in control: Each sale of equity shares dilutes the voting power of the existing
equity shareholders and extends the voting or controlling power to the new shareholders.
Equity shares are transferable and may bring about centralization of power in few hands.
Certain groups of equity shareholders may manipulate control and management of company
by controlling the majority holdings which may be detrimental to the interest of the company.

II. Trading on equity not possible: If equity shares alone are issued, the company cannot
trade on equity.

III. Over-capitalization: Excessive issue of equity shares may result in over-capitalization.

Dividend per share is low in that condition which adversely affects the psychology of the
investors. It is difficult to cure.
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IV. No flexibility in capital structure: Equity shares cannot be paid back during the lifetime
of the company. This characteristic creates inflexibility in capital structure of the company.

V. High cost: It costs more to finance with equity shares than with other securities as the
selling costs and underwriting commission are paid at a higher rate on the issue of these
shares.

VI. Speculation: Equity shares of good companies are subject to hectic speculation in the
stock market. Their prices fluctuate frequently which are not in the interest of the company.
Disadvantages to investors: Equity shares have the following disadvantages to the
investors:
I. Uncertain and Irregular Income: The dividend on equity shares is subject to availability
of profits and intention of the Board of Directors and hence the income is quite irregular and
uncertain. They may get no dividend even three are sufficient profits.

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II. Capital loss During Depression Period: During recession or depression periods, the
profits of the company come down and consequently the rate of dividend also comes down.
Due to low rate of dividend and certain other factors the market value of equity shares goes
down resulting in a capital loss to the investors.

III. Loss on Liquidation: In case, the company goes into liquidation, equity shareholders are
the worst suffers. They are paid in the last only if any surplus is available after every other
claim including the claim of preference shareholders is settled. It is evident from the
advantages and disadvantages of equity share capital discussed above that the issue of equity
share capital is a must for a company, yet it should not solely depend on it. In order to make its
capital structure flexible, it should raise funds from other sources also.

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Preference shares

Preference shares. Sec. 85(1) of the Companies Act defines preference shares as
those shares which carry preferential rights as the payment of dividend at a fixed
rate and as to repayment of capital in case of winding up of the company. Thus,
both the preferential rights viz. (a) preference in payment of dividend and (b)
preference in repayment of capital in case of winding up of the company, must
attach to preference shares. The rate of dividend on these shares is fixed and the
dividend on these shares must be paid before any dividend is paid to ordinary
shares. Directors, however, may decide not to pay any dividend to any class of
shareholders even if there are sufficient profits. But, if any how, they decide to pay
the dividend, preference shareholders will get the priority to pay the ordinary
shareholders.

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Preference shares may be classified according to the rights attached to

them as follows:
Cumulative and Non-cumulative Preference shares
Cumulative preference shares enjoy the right to receive the dividend in
arrears for the years in which company earned no profits or insufficient
profits, in the year in which company earns profits. In other words,
dividend on these shares will go on accumulating until it is paid in full with
arrears, before any dividend is paid on equity shareholders. In case of noncumulative preference shares dividend does not accumulate and therefore,
no arrears of dividend will be paid in the year of profits. If company does
not have any profits in a year, no dividend will be paid to non-cumulative
preference shareholders.

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Redeemable
and
Irredeemable
Preference
Shares
Redeemable preference shares can be redeemed on or after a period fixed
for redemption under the terms of issue or after giving a proper notice of
redemption to preference shareholders. The companies Act, however,
imposes certain restrictions for the redemption of preference shares.
Irredeemable preference shares are those shares which cannot be redeemed
during the lifetime of the company.

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Convertible and Non-convertible preference shares

Where the preference shareholders are given a right to covert their holding into ordinary
shares, within a specified period of time, such shares as known as convertible preference
shares. The holders of non-convertible preference shares have no such right of conversion.
Participating and Non-participating Preference Shares
The holders of participating preference shares have a right to participate in the surplus profits
of the company remained after paying dividend to the ordinary shareholders and preference
shareholders at a fixed rate. The preference shares which do not have such right to participate
in surplus profits, are known as non-participating preference shares.

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Advantages of
Preference shares

(A) Advantages from Company point of view:

The company has the following advantages by issue of preference shares.
I. Fixed Return: The dividend payable on preference shares is fixed that is
usually lower than that payable on equity shares. Thus they help the
company in maximizing the profits available for dividend to equity
shareholders.

II. No Voting Right: Preference shareholders have no voting right on

matters not directly affecting their right hence promoters or management
can retain control over the affairs of the company.

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III. Flexibility in Capital Structure: The company can maintain flexibility in its capital
structure by issuing redeemable preference shares as they can be redeemed under terms of
issue.

IV. No Burden on Finance: Issue of preference shares does not prove a burden on the finance
of the company because dividends are paid only if profits are available otherwise no dividend.

V. No Charge on Assets: No-payment of dividend on preference shares does not create a

charge on the assets of the company as is in the case of debentures.

VI. Widens Capital Market: The issue of preference shares widens the scope of capital
market as they provide the safety to the investors as well as a fixed rate of return. If company
does not issue preference shares, it will not be able to attract the capital from such moderate
type of investors.

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(B) Advantages from Investors point of view:

Investors in preference shares have the following advantages:
I. Regular Fixed Income: Investors in cumulative preference shares get a fixed rate of
dividend on preference share regularly even if there is no profit. Arrears of dividend, if any, is
paid in the year's) of profits.

II. Preferential Rights: Preference shares carry preferential right as regard to payment of
dividend and preferential as regards repayment of capital in case of winding up of company.
Thus they enjoy the minimum risk.

III. Voting Right for Safety of Interest: Preference shareholders are given voting rights in
matters directly affecting their interest. It means, their interest is safeguarded.

IV. Lesser Capital Losses: As the preference shareholders enjoy the preferential right of
repayment of their capital in case of winding up of company, it saves them from capital losses.

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V. Fair Security: Preference share are fair securities for the shareholders during depression
periods when the profits of the company are down.

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Disadvantages of
Preference Shares

The important disadvantages of the issue of preference shares are as below:

(A) Demerits for companies:
The following disadvantages to the issuing company are associated with
the issue of preference shares.
I. Higher Rate of Dividend: Company is to pay higher dividend on these
shares than the prevailing rate of interest on debentures of bonds. Thus, it
usually increases the cost of capital for the company.
II. Financial Burden: Most of the preference shares are issued cumulative
which means that all the arrears of preference dividend must be paid before
anything can be paid to equity shareholders. The company is under an
obligation to pay dividend on such shares. It thus, reduces the profits for
equity shareholders.
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IV. Adverse effect on credit-worthiness: The credit worthiness of the company is seriously
affected by the issue of preference shares. The creditors may anticipate that the continuance of
dividend on preference shares and suspension of dividend on equity capital may depreive
them of the chance of getting back their principal in full in the event of dissolution of the
company, because preference capital has the preference right over the assets of the company.

V. Tax disadvantage: The taxable income is not reduced by the amount of preference
dividend while in case of debentures or bonds, the interest paid to them is deductible in full.

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(B) Demerits for Investors:

Main disadvantages of preference shares to investors are:
I. No Voting Right: The preference shareholders do not enjoy any voting right except in
matters directed affecting their interest.

II. Fixed Income: The dividend on preference shares other than participating preference
shares is fixed even if the company earns higher profits.

III. No claim over surplus: The preferential shareholders have no claim over the surplus.
They can only ask for the return of their capital investment in the company.

IV. No Guarantee of Assets: Company provides no security to the preference capital as is

made in the case of debentures. Thus their interests are not protected by the assets of the
company.
III. Dilution of Claim over Assets: The issue of preference shares involves dilution of equity
shareholders claim over the assets of the company because preference shareholders have the
preferential right on the assets of the company in case of winding up.

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EXTERNAL SOURCES OF FINANCE

Debt or Loan Capital

Funding provided by outside banks and lenders is generally referred to as debt or loan capital.
It is usually provided for a fixed period of time, with repayments evenly spread out over the
length of the loan.
Interest is paid on the loan at regular intervals, although interest rate holidays (where the
lender agrees not to take interest for a short period of time) can be negotiated if the business is
struggling to fund the debt.
Loan capital is provided for more than 1 year and so is a long term form of finance.
Any loan shorter than 1 year is classified as current liabilities or debt.

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Advantages

The advantage of this form of finance is that it is often easier to access and
use for specific purposes like buying fixed assets, such as machines or
property.
Payment is spread out over the useful revenue-earning life of the asset.
If the loan has a fixed interest rate, and interest rates rise in the future, the
loan could be a very smart investment

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Disadvantages of Loan Capital:

The disadvantages is that lenders have to be paid even if the business does not make a profit.
Any default (not paying the loan on time) can lead to the lender controlling future decision
making, in effect they call the shots.
Equally if the loan is secured against an asset then the asset can be seized if payments are
missed.
If the loan has fixed interest rate, and interest rates fall, the business may find itself with a
very undesirable loan, that is a burden on the business.
However, large and very profitable organizations may be able to renegotiate terms with
lenders

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EXTERNAL SOURCES OF FINANCE

Venture Capitalists
These are specialist bankers who are more
prepared to share the risks of starting a new
business enterprise than traditional banks.
Venture capitalists invest in the share capital
of the business and provide loan capital for the
business.
Venture capitalists only target companies with
great expansion or growth potential
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Advantages of Venture
Capitalists
The advantages are that they often provide business
help and contacts - perhaps for export drives or for
identifying new technologies or partners.
They sit as non-executive directors to protect their
investments.
They will ensure that there is a planned exit route for
the investment in maybe five to seven years, often
through a stock market floatation or via a trade sale.

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Disadvantages of
Venture Capitalists
The disadvantages are many for the existing
shareholders as venture capitalists impose profit or
sales targets.
If the businesses they invest in fail to expand as
planned the venture capitalists can automatically
increase their equity stakes, often from that of a
minority investor to being the controlling one.
However, many organizations have used venture
capital successfully and benefited from the business
advice of their managers.
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EXTERNAL SOURCES OF FINANCE

Grants from governments

Governments, successful entrepreneurs such as Bill Gates &
large corporations keen on promoting their social
responsibilities, are all increasingly seeking to help the smaller
business sector with grants and soft loans.
Soft loans are loans with more relaxed payment terms and
lower than usual interest rates.
While the sums may be small they can make a big difference
to a projects viability.
Often the problem is identifying what grants are actually
available, although the internet has made the research easier.
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EXTERNAL SOURCES OF FINANCE

(Short Term)

There are several types of short term finance:

Bank Overdraft
Trade Credit
Factoring
Leasing.

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EXTERNAL SOURCES OF FINANCE

Leasing
When purchasing assets such as new machines
or vehicles it can be sometimes be useful to
consider leasing as a source of finance.
Many airlines lease purchase their aircraft.
GE, a large US finance company, is one of the
largest leasing businesses in the world.
Equally leasing can be arranged with firms
own bank.
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Advantages of Leasing
The advantages are that the business does not need to find a large initial
lump sum to buy the equipment and can thus pay for the asset from its own
revenue.

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Disadvantages of
Leasing
The disadvantages are that the ownership of
the asset does not pass to the business until the
last payment has been made and the business
will probably be paying a reasonably high
level of interest.

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