Unit VI- Business and New Economic Environment

Characteristics of Business
1. Economic activity
2. Concerned with production, purchase, sale, exchange of goods and services
3. Profit motive
4. Satisfy human needs

Forms of Business Enterprises

1. Private Sector: Sole trade, Partnership, JHFB, Cooperative Organizations, Joint
Stock Company
2. Public Sector: Govt. companies, Public corporations, Departmental Organizations

Characteristics of Private Sector: Profit motive, no state intervention, private ownership,

independent management

Characteristics of Public Sector: Public accountability, Govt. Control, Service motive, State
ownership

Joint Sector or mixed ownership enterprises: which is owned, managed and controlled jointly
by the public and private sector. Govt. Sector 26%+Pvt. Sector 25%+Pub Sector 49%
Characteristics of Joint Sector: Joint share capital, combined management and mixed ownership.

What is sole trading? Features of Sole Trading

Which is owned, managed and controlled by an individual.
Characteristics of Sole Trading:
1. Easy formation, 2. Unlimited liability, 3. Limited resources, 4. Freedom of choice of the
business, 5.Prompt decisions
Advantages: 1. Easy formation , 2. Prompt decisions 3. Secrecy 4. Personal touch, 5.Economy
6.Freedom of choice of the business
Disadvantages: 1. Limited resources, 2. Unlimited liability, 3.Limited managerial efficiency

Joint Hindu Family Business: Which is owned by the members of a Joint Hindu family. It is
also known as Hindu Undivided Family business (HUF). It is governed by Hindu Law.

Characteristics of Joint Hindu Family Business:

1. Application of hindu law
2. Unlimited liability
3. Membership since birth
4. Membership of minor
5. Restriction on the membership of women
6. Management & Control
 7. Unaffected by death
8. Registration not compulsory
9. Right to own separate assets
Advantages:
1. Automatic formation, 2.Freedom of business, 3.Economy, 4.Freedom of decision
making, 5.Cordial relations, 6.Efficient management
Disadvantages:
1. Limited liability
2. Limited capital
3. Limited managerial ability
4. No link between responsibility and reward
Legal Aspects of JHUF
1.Mitakshara Law: Male child of the family becomes co-owner of the ancestral
property since birth. Applicable to entire India except Assam, Bengal and some parts
of Orissa.
2. Dayabhaga Law: It prevails in Assam, Bengal and Orissa. According to this
system, daughter will become a coparcener

Partnership
It is an agreement between two or more persons to carry on legal business with profit motive. It
may be carried by all or any one of them acting for all.
Characteristics:
1. Agreement, 2.Legal one, 3.Profit motive, 4. Unlimited liability, 5.Utmost good
faith, 6.Restriction on transfer of interest
Advantages:
1. Easy formation, 2.More resource and talent, 3.Legal protection to minor, 4.
Personal relation, 5. Lesser risk
Dis- Advantages:
1. Unlimited liability, 2.Limited resources, 3.Difficulty in transfer of interest,
4.Lack of quick decisions, 5.Temporary life, 6.Lack of initiative
What is Partnership Deed
Written document of the agreement is called Partnership Deed
Contents: 1. Name & Address of the firm , 2. Name & Address of partners,
3.Duration of partnership, 4. Nature of business 5. Profit sharing, 6.Amount of
capital, 7. Rate of interest on capital, 8. Remuneration to partners, 9.
Procedure in case of Admission, retirement, 10. Rights and duties of partners.
Joint Stock Company
Features:
Differences between Public company and Private company:
Advantages and disadvantages:
Public Enterprises and their types
Public enterprise, a business organization wholly or partly owned by the state and controlled
through a public authority. Some public enterprises are placed under public ownership
because, for social reasons, it is thought the service or product should be provided by a state
monopoly.
Public enterprises as a form of business organisation has attained a great deal of significance in
recent times. During 20th century various governments have taken active part in the industrial
and commercial activities. The term public enterprise denotes a form of business organisation
owned and managed by the state government or any other public authority. So it is an
undertaking owned and controlled by the local or state or central government. The whole or most
of the investment is made by the government.

According to N. N. Malaya, “Public enterprises are autonomous or semi-autonomous

corporations and companies established, owned and controlled by the state and engaged in
industrial and commercial undertakings”.

Characteristics: The chief characteristics of public enterprises are

1.Autonomous or semi-autonomous organisation: Public enterprise is an autonomous or semi-

autonomous organisation because some enterprises work under the direct control of the
government and some organisations are established under statutes and companies act.

2.State control: The public enterprises are financed, owned and managed by the government
may be a central or state government.

3.Rendering service: The primary objective of the establishment of public enterprises is to serve
the public at large by supplying the essential goods at a reasonable price and creating
employment opportunities.

4.Useful to various sectors: The state enterprises serve all sectors of the people of the company.
They do not serve a particular section of the people in the community.

5.Monopoly Enterprises: In some specific cases private sectors are not allowed and as such the
public enterprises enjoy monopoly in operation. The state enterprises enjoy monopoly in
Railways, Post and Telegraph and Energy production.

6.A direct channel for use of Foreign money: Sometimes the government receive foreign
assistance from industrially advanced countries for the development of industries. These
advances received are spent through public enterprises.

7.Public accountability: The state enterprises are liable to the general public for their
performances because they are responsible for the nation.
8.Agent for implementing government plans: The public enterprises run as per the whims of
the government and as such the economic policies and plans of the government are implemented
through public enterprises.

9.Financial Independence: Though investment in government undertaking are done by the

government, they become financially independent by arranging finance for day-to-day operation.

There are various types of business houses like agriculture enterprises, business enterprises,
corporate enterprises and trading enterprises. On the basis of different types of business houses,
entrepreneurs are classified as follows:

1. Business entrepreneur: These entrepreneurs conceive the idea of new product or service to
create a new enterprise to and marketing resources in their search to develop a new business
opportunity.

2. Trading entrepreneur: Trading entrepreneur undertakes the trading activities. He is not

concerned with the manufacturing work. These entrepreneurs purchase the finished products
from the manufacture and sell to the customers directly or through a retailer.

He has to identify potential market, stimulate demand for his product line and create a desire
among buyers to go in for his product. These types of entrepreneurs act as middlemen between
manufacturers and customers. They are the wholesalers, retailers, dealers etc.

3. Industrial entrepreneur: Industrial entrepreneur is a manufacturer who sets up and industrial

unit. He identifies the potential needs of customers and manufactures product accordingly.
Industrial entrepreneur is a product oriented man who perceives the opportunity to set up and
industrial unit because of the possibility of making some new product.

He has the ability to convert economic resources and technology into a considerably profitable
venture. They convert raw material into finished products.

4. Corporate entrepreneur: Corporate entrepreneur is an individual who shows his innovative

skill in organizing and managing a corporate undertaking. He has to plans, develops and
manages a corporate body. He is a promoter of the unit. He gets his corporate body registered
under the requisite Act.

5. Agricultural entrepreneur: Agricultural entrepreneurs conduct agricultural activities such as

cultivating and marketing of crops, fertilizers and other inputs of agriculture.

They are motivated to raise the agricultural output through mechanization, irrigation and
application of technologies for dry land agriculture. They cover a broad spectrum of the
agricultural sector and include agricultural and allied occupations.
 CAPITAL
Forms basis for business, its not only money but also money’s worth
It is wealth which is created over a period of time.
Forms of capital: Property, cash or titles to wealth.
Economist view: value of total assets in business
Accountant view: difference between the assets and liabilities
Capital: Total amount of finances required by the business.

Need for capital:

1. To promote business (preliminary exp, documentation, cost of raising capital)

2. To conduct operations
3. To expand and diversify
4. To meet contingencies
5. To pay taxes
6. To pay dividends and interests
7. To replace the assets
8. To support welfare programs
9. To windup

Types of Capital

Fixed capital: Which is acquired and invested in long-term assets. Features of fixed assets ;
permanent in nature, profit generation, low liquidity, needed less frequently. Types of fixed
capital; tangible, intangible and financial fixed assets.

Working Capital: It is used to meet regular or recurring needs of the business. Forms of
working capital; cash, near cash and other assets like stock of RM, WIP and FGs and debtors.

Features of WC: Short life span, smooth flow of operations and liquidity

Components of WC: CA and CA

WC Cycle:

How much to invest in working capital?

Critical question. If more WC earmarked it affects profitability and if less it affects liquidity.
For an optimal approach, it is necessary to determine minimum funds, study the pattern of
receipts and payments and plan in advance the short-term borrowings and investments.

Factors determining the requirement of working capital

1. Nature of business: Mfg require less WC while supermarkets require more WC

2. Length of manufacturing cycle: larger, more is the requirement and vice versa
3. Business cycle: During upwardswing, more is requirement and viceversa
4. Formation stage: More funds required to launch the project
5. Credit policy terms: liberal and stringent
6. Availability of raw-materials
7. Fluctuations in demand
8. Production policies
9. Seasonality
10. Degree of competition: allow more credit period, maintain variety of stocks, spend more
on advertising
11. Growth and expansion plans:
12. Profit margin: Higher margin is a source of wc
13. Amount of taxes: advances taxes
14. Depreciation policy is source for wc
15. Dividend policy: Conservative strategy
16. Reserves policy: from profit certain amount provided for general or specific purpose.
17. Price level:
18. Operating efficiency: If higher the degree of operational efficiency, lower could be the
wc and vice versa.
Methods of raising finance:
Long-term finance: 3 years and above
Medium-term finance: Over one year and less than 3 years
Short-term finance: less than one year
Sources of finance:
1. Long-term finance: Meant for purchase of fixed assets such as land and building ,
plant and machinery.
Own capital:
Borrowed capital:
Equity Share capital: raised through issue shares. He is entitled to dividend when
profit earns. He cannot enjoy as PSH’s enjoy
Preference share capital: enjoy two right over ESH’s. (a) right to receive dividend
and (b) right to return of capital.
Retained earnings: Which are remaining after all the claims.
Long term loans: Which are from fin instns by providing FA as security
Debentures: A certificate issued by company acknowledging the receipt of loan. Deb
Holder is creditor. He is entitled for a fixed rate of interest on deb amount. Ex 12%
debentures. Convertible debs, PCD’s, NCD’s, Secured Debs, Partly securedDebs,
Unsecured Debs, Redeemable Debs, Non-redeemable Debs.
Government grants and loans: If setup in backward areas
2. Medium-term loans: Meant for lease or buy vehicles or computer equipment etc.
whose life is less than three years.
Bank loans: Repayment of the loan and interest are scheduled at beginning and
debited to current account of the borrower.
Hire-purchase: A facility to buy a fixed asset while paying the price over a long
period of time.
Leasing or renting: for specified no. of years. Lessor who owns the asset and who
uses the asset is called lessee.
3. Short-term finance:
Bank overdraft: an arrangement with banker to withdraw more than what he has in his
saving/current account subject to maximum limit. Int charged on day to day basis on
the actual amount overdrawn.
Trade credit: extended by creditors to the debtors.
Debt factoring: Trader agrees to sell his accounts receivable at discount.
Advance from customers: these advances useful to meet working capital needs.
Internal funds: secret reserves, depreciation, tax provisions and retained profits etc,.