Business Studies

Business plays a vital role in lives, not only by providing various goods and services but also by offering many opportunities to earn livelihood.

Publicity is like advertising. But it is the news carried in the mass media about a product or about an organisation. But money is not paid for it publicity. Publicity can be positive or negative. Publicity is a powerful tool of communication as it can make or break a product or company.

While watching a movie in the cinema hall or a television at home you must have noticed that suddenly there is a break and a model appears on the screen displaying a product, indicating its special features, prices, etc. This is followed by similar appearances relating to other products before the movie is resumed. These displays are known as advertisements which are used by different firms to inform a targeted group of customers about their product, its quality, availability, price etc.

Promotion refers to the process of informing and persuading the consumers to buy certain product. By using this process, the marketeers convey persuasive message and information to its potential customers.

Choice of an appropriate distribution channel is very important as the pricing as well as promotion strategy are dependent upon the distribution channel selected. Not only that, the route which the product follows in its journey from the manufacturer to the consumer also involves certain costs. This in turn, affects not only the price of the product but also the profits.

While a manufacturer of a product is located at one place, its consumers are located at innumerable places spread all over the country or the world. The manufacturer has to ensure the availability of his goods to the consumers at convenient points for their purchase. He may do so directly or through a chain of middlemen like distributors, wholesalers and retailers.

1. Cost Based Pricing

Under this method, price of the product is fixed by adding the amount of desired profit margin to the cost of the product. If a particular soap costs the marketeer Rs. 8 and he desires a profit of 25%, the price of the soap is fixed at Rs 8 + (8 x 25 / 100) = Rs. 10. While calculating the price in this way, all costs (variable as well as fixed) incurred in manufacturing the product are taken into consideration.

Price is the consideration in terms of money paid by consumers for the bundle of benefits he or she derives by using the product or service. In simple terms, it is the exchange value of goods and services in terms of money. Pricing (determination of price to be charged) is another important element of marketing mix and it plays a crucial role in the success of a product in the market.

In order to optimise the product requirements by the consumers, importance should be given to the following elements or components of product mix:

Product refers to the goods and services offered by the organisation for sale. Here, the marketers have to recognise that consumers are not simply interested in the physical features of a product but a set of tangible and intangible attributes that satisfy their wants.

Marketing involves a number of activities. To begin with, an organisation may decide on its target group of customers to be served. Once the target group is decided, the product is to be placed in the market by providing the appropriate product, price, distribution and promotional efforts. These are to be combined or mixed in an appropriate proportion so as to achieve the marketing goal.

Marketing is the performance of those business activities that direct the flow of goods and services from producers to consumers or users.

Importance of Marketing

Marketing is important to the business, consumer as well as the society.

Market

Normally people understand the term market as a place where goods are bought and sold. But, in the context of Marketing, it refers to a group of buyers for a particular product or service. For example, the market for Accountancy textbooks consists of students in Commerce and specialised Accountancy Programmes. Similarly, the market for ladies ready-made garments consists of girls and women, and so on.

The terms marketing and selling are related but not synonymous. Marketing emphasises on earning profits through customer satisfaction. In marketing, the focus is on the consumer’s needs and their satisfaction. Selling, on the other hand, focuses on product and emphasises on selling what has been produced. It is a small part of the wide process of marketing wherein emphasis is initially on promotion of goods and services and eventually on increase in sales volume.

The businessman produces goods and services for consumer's use. These are not necessarily produced at the places where they are consumed or used. Even in villages, now-a-days you find the products manufactured all over India and in other countries are used. This implies that the manufacturers must be making efforts to ensure that their products are in demand and reach the ultimate consumers all over the globe.

The Depositories Act 1996 introduced the depository service system in India. Under the depository system, physical securities are converted into electronic form through the process of dematerialisation.

National Stock Exchange of India was recognised in 1992 and started working in 1994. Ringless trading takes place in NSEI i.e., the trading of securities takes place through network of computers. NSEI provide a nationwide transparent market for different types of securities.

As part of economic reforms programme started in June 1991, the Government of India initiated several capital market reforms, which included the abolition of the office of the Controller of Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for:

The first organised stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock Exchange in 1908. The number of stock exchanges in India went up to 7 by 1939 and it increased to 21 by 1945 on account of heavy speculation activity during Second World War.

The buyers and sellers at the stock exchange undertake two types of operations, one for speculation and the other for investment. Those who buy securities primarily to earn a regular income from such investment and possibly make some long-term gain on account of price rise in future are called investors. They take delivery of the securities
and make full payment of the price. Such transactions are called investment transactions.

Advantages of stock exchanges can be outlined from the point of view of:

  1. Companies
  2. Investors
  3. Society as a whole

Stock exchange is the term commonly used for a secondary market, which provide a place where different types of existing securities such as shares, debentures and bonds, government securities can be bought and sold on a regular basis. A stock exchange is generally organised as an association, a society or a company with a limited number of members. It is open only to these members who act as brokers for the buyers and sellers.

Money always flows from surplus sector to deficit sector. That means persons having excess of money lend it to those who need money to fulfil their requirement. Similarly, in business sectors the surplus money flows from the investors or lenders to the businessmen for the purpose of production or sale of goods and services.

Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc.

The money market is a market for short-term funds, which deals in financial assets whose period of maturity is up to one year.

Money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organisations and the Government to borrow the funds to meet their short-term requirement.

The capital requirement of any business unit can be broadly divided into two categories:

  1. Fixed capital requirement
  2. Working capital requirement

In order to ascertain the amounts of such requirements for any business, one must understand the exact nature of fixed and working capitals and also the various factors that influence their requirement.

In every business unit the amount of profit earned (or loss incurred) during a financial year is ascertained and distributed among its owners. In case of a proprietary concern, the whole amount of profit or loss so ascertained is added to proprietor’s capital and whatever amount is withdrawn by him is termed as drawings and is deducted from his capital.

The financial requirement of a firm can be met through ownership capital or borrowed capital. The ownership capital refers to the amount of capital contributed by the owners. In case of a company, it refers to the amount of funds raised by issuing shares. The main characteristic of the ownership capital is that its contributors are entitled to get dividend out of earnings after the payment of interest and taxes. Hence, the rate of return on such capital depends upon the level of profits earned, and, if there are no profits, no dividend may be paid.

Planning is a systematic way of deciding about and doing things in a purposeful manner. When this approach is applied exclusively for financial matter, it is termed as financial planning. In connection with any business enterprise, it refers to the process of estimating a firm’s financial requirements and determining pattern of financing.

The main objective of financial management is to maximize the wealth of shareholders. The other important objectives of financial management are:

  1. To provide maximum returns to the owners on their investment.
  2. To ensure continuous availability of sufficient funds at reasonable cost.
  3. To ensure effective utilisation of funds.
  4. To ensure safety of funds.

Foreign Sources also play an important part in meeting the long-term financial needs of the business in India. These usually take the form of:

  1. External borrowing
  2. Foreign investments
  3. Deposits from NRIs

The sources of long-term finance refer to the institutions or agencies from, or through which finance for a long period can be procured. In case of sole proprietary concerns and partnership firms, long-term funds are generally provided by the owners themselves and by the retained profits.

Mutual fund refers to a fund established in the form of a trust by a sponsor to raise money through one or more schemes for investing in securities. It is a special type of investment institution, which acts as an investment intermediary that collects or pools the savings of a large number of investors and invests them in a fairly large and well diversified portfolio of sound investments.

Venture Capital is a form of equity finance designed specially for funding high risk and high reward projects of young entrepreneurs. It helps them to turn their research and development projects into commercial ventures by providing them the initial capital and managerial assistance.

The Export and Import Bank of India was set up in January, 1982 to take over the operations of international finance wing of the IDBI and act as an apex institutions in the field of financing foreign trade.

It was set up in 1964 as an investment trust with capital of Rs. 5 crore subscribed by Reserve Rank of India, LIC, State Bank of India and other financial institutions. It has been playing an important role in mobilizing the savings of the community through sale of units under various schemes (most well known being US-64 and master shares) and channalising them into corporate investments.

It was established in 1973 on nationalization of general insurance business in India. Like LIC, its investment priority is socially oriented sectors of the economy, and invests its funds in government securities and shares and debentures of companies.

It was set up in 1956 on nationalisation of life insurance business in India. Primarily it carries on the business of life insurance and deploys the funds in accordance with national priorities and objectives.

These corporations were set up in 1960s and early 1970s by most state governments for promotion and development of medium and large-scale industries in their respective states.

In order to provide financial assistance to all types of industrial enterprises (proprietary and partnership firms as well as companies) most of the states of India have set up SFCs.

It was set up in 1990 as a principal financial institution for the promotion, financing and development of small-scale industrial enterprises. It is an apex institution of all the banks providing credit facility to small-scale industries in our country.

The erstwhile Industrial Reconstruction Bank of India (IRBI), an institution which was set up for rehabilitation of small units has been reconstituted in 1997 as Industrial Investment Bank of India.

In every organisation, different types of work are performed by various groups and no single group can be expected to achieve the goals of the organisation as a whole. Hence, it becomes essential that the activities of different work groups and departments should be harmonised. This function of management is known as co-ordination.

It was set up in 1964 as a subsidiary of Reserve Bank of India for providing financial assistance to all types of industrial enterprises without any restriction on the type of finance and the amount of funds. It could also refinance loans granted by other financial institutions and offer guarantees for the loans raised from the capital market or scheduled banks.

It was set up in 1955 for providing long-term loans to companies for a period up to 15 years and subscribe to their shares and debentures. However, the proprietary and partnership firms were also entitled to secure loans from ICICI.

It is the oldest SFI set up in 1948 with the primary objective of providing long-term and medium-term finance to large industrial enterprises. It provides financial assistance for setting up of new industrial enterprises and for expansion or diversification of activities. It also provides support to modernisation and renovation of plant and equipment in existing industrial units.

Like an individual, companies also set aside a part of their profits to meet future requirements of capital. The portion of the profits, which is not distributed among the shareholders but is retained and reinvested in business, is called retained earnings or ploughing back of profits.

It is a very old method of finance practised in India. When commercial banks were not there, people used to deposit their savings with business concerns of good repute. Even today it is a very popular and convenient method of raising short and medium term finance.

Special Financial Institutions (SFI)

After independence, a large number of financial institutions have been established in India with the primary objective to provide medium and long-term financial assistance to industrial enterprises. Institutions like Industrial Finance Corporation of India (IFCIs), Industrial Reconstruction Bank of India, State Financial Corporation (SFCs), State Industrial Development Corporation (SIDCs), have been established to provide financial support to set up new enterprises as well expansion and modernisation of the existing enterprises.

Shares

  1. Shareholders are the owners of the company. They provide ownership capital which is not refundable unless the company is liquidated.

  2. Shareholders get dividends. Its amount is not fixed as it depends on the profit of the company.

  3. Shareholders are the real owners of the company. They have the right to vote and determine the policies of the company.

  4. No security is required to issue shares.

  5. Share capital is paid back only after paying the debenture holders and creditors.

  6. Risk is high due to uncertainty of returns.