CBSE Class 9 Elements of Business Unit IV: Fundamental Areas of Business

Unit IV: Fundamental Areas of Business

(a) Finance – meaning
(b) Marketing – meaning
(c) Human Resources – meaning

(a) Finance – meaning

Business is concerned with the production and distribution of goods and services for satisfying needs of the society. For carrying various activities, business requires money. Finance is, therefore, called the lifeline of any business. Sourcing of such funds and their management are called business finance.
A business cannot function without adequate funds being available to it. The initial capital contribution by an entrepreneur is not always sufficient to take care of the financial requirements of the business. So, a businessman has to explore other sources of funds from which the requirements of the business can be met. A clear assessment of the financial needs and identification of various sources of finance are of paramount importance. The financial need of the business can be divided into two main categories:
(a) Fixed capital requirements
(b) Working capital requirements

(1) Fixed Capital:

Fixed capital is required to arrange permanent or fixed assets of a company like land and building, plant and machinery, furniture and fixture etc. The funds invested in fixed capital remain in use for a long time. It should be remembered that the amount of fixed capital will depend on the nature of the business a firm is engaged with. For example, a trading concern may require less amount of fixed capital than a manufacturing entity which require big infrastructural facilities. Needless to say, that a large company will require greater fixed capital investment than smaller companies.

(2) Working Capital:

The financial planning of an enterprise does not end with arrangement of fixed capital. Working capital or running capital is like blood flowing in the body of the business. No matter how small or big is the business it needs funds for day-to-day operations. The working capital of a business is held in the form of stock of material, cash for meeting expenses like salaries, wages, taxes and rent. The amount of working capital required varies from one business concern to another. A business unit selling for credit or having slow sales turnover would require more working capital.

General factors affecting Fixed and Working capital:

The requirement of Fixed and Working capital increases with the growth and expansion of business. At times additional funds are required for upgrading the technology employed or capacity expansion to reduce costs. Larger funds may be required for building higher inventories for a festive season or to meet current debts. More funds may also be necessary for upgradation of technology to meet market challenges or for shifting business from current location.

Sources of business finance:

The sources of funds available to a business includes retained earnings, trade credit, lease financing, public deposits, commercial paper, issue of shares and debentures, loans from commercial banks, financial institutions and international sources of finance.

An effective appraisal of various sources must be instituted by the business to achieve its main objectives. The selection of a source of business finance depends on factors such as cost, financial strength, risk profile, tax benefits and flexibility of obtaining funds. These factors should be analyzed together while choosing an appropriate source of finance.

A business can raise funds from various sources. Each of these sources has unique characteristics. A choice has to be made after careful consideration of several factors like relevant situation, purpose, cost and associated risk. If a business wants to raise funds to fixed capital requirements, long term funds may be necessary. If it is for working capital needs, short term sources may be tapped. The sources of funds can be categorized using different basis:

(i) Ownership basis – owners’ funds and borrowed funds
(ii) Period basis – Long term funds and short-term funds
The classification can be shown as follows:

Sources of Funds
Period Basis			Ownership Basis
Long term	Medium term	Short term	Owner’s funds	Borrowed fund
1. Equity shares	1. Bank Loan	1. Trade credit	1. Equity shares	1. Debentures
2. Retained earnings	2. Public deposit	2. Factoring	2. Retained earnings	2. Bank Loan
3. Preference shares	3. Loan from financial institution	3. Bank Loan		3. Loans from financial institutions
4. Debentures	4. Lease finance	4. Commercial Papers		4. Public Deposit
5. Bank Loan				5. Lease Finance
6. Loans from financial institutions				6. Commercial Papers

Equity Shares:
Equity shares is the most important source of raising long term capital. Equity shares represent ownership of a company and the capital raised through equity shares is known as owner’s capital.
Equity shares is a prerequisite to the formation of a company. Equity shareholders get dividends out of profits earned by the company. They have a right to participate in the management of the company through voting rights.

Merits:
(i) Equity capital serves the purpose of long-term capital needs of the company and is the bedrock of capital structure.
(ii) Payment of dividend to the equity shareholders is not compulsory. Therefore, there is less burden on the company.
(iii) Equity shares prove credit worthiness of the company.
(iv) Funds can be raised without creating any charge on the assets of the company.
(v) Democratic control of company affairs is ensured through voting rights of shareholders.

Limitations:
(i) Does not give steady income to shareholders
(ii) Issue of additional equity shares dilutes the earnings of existing shareholders.
(iii) More procedural formalities raise the cost of shares.

Preference Shares:

The capital raised through issue of preference shares is called preference share capital. This is so called because preference shareholders have preferential right of repayment over equity shareholders in the event of liquidation of the company. Preference shareholders get fixed rate of dividend with preferential treatment over equity shareholders.

Merits:
(i) Preference Shares give reasonably steady income and is safe as an investment
(ii) It does not interfere with the controlling rights of equity shareholders
(iii) Preference shareholders are given priority over equity shareholders when it comes to returning the amount of share capital if the company goes into liquidation.
(iv) Preference shareholders do not create any charge against the assets of the company.

Limitations:
(i) Preference shares are not for those investors who want to take risk for higher returns.
(ii) Preference shares dilute the claims of equity shareholders.
(iii) Cost of preference share is higher as dividend declared on such share is higher than the interest paid on debentures.

Debentures:
Debentures are an important instrument for raising long term capital. A company can raise funds through issue of debentures which bear a fixed rate of interest. The debenture issued by a company is an acknowledgement that the company has borrowed a certain amount of money which it promises to repay at a future date. Debenture holders are therefore termed as creditors of the company. Issue of debenture requires that the issue is rated by credit rating company like CRISIL that record credit worthiness and perceived risk of lending.

Merits:
(i) It is preferred by investors who want fixed income and lesser risk.
(ii) Debentures are fixed charge funds and do no participate in profits of the company.
(iii) Debentures do not carry voting rights and hence do not interfere in the management .
(iv) Financing through debentures is less costly than preference shares.

Limitations:
(i) As fixed charge instruments, debentures are a permanent burden on a company.
(ii) Redeemable debentures due for repayment can be a headache at the time of financial difficulty.
(iii) Every company has limited borrowing capacity. With the issue of debentures, other options become difficult to choose.

Commercial Banks:

Commercial Banks occupy a vital position as they provide funds for different purposes as well as for different time frames. Banks offer loans in the form of Cash credits, Overdrafts, Term loans, Discounting of bills and issuing Letters of Credit. Rate of interest vary from bank to bank. The loan can be repaid on one time basis or in instalments.

Merits:
(i) Banks provide timely finance to businesses to tide over crisis.
(ii) Secrecy of the business can be maintained.
(iii) It is an easier source of funds as documentation is minimum.

Limitations:
(i) Funds are generally available for short periods.
(ii) Banks make detailed investigation about the company’ affairs and may ask for security of assets or personal guarantee.
(iii) In some cases difficult terms and conditions may be imposed.

Financial Institutions:

The government sponsored financial institutions all over the country provide finance to business organisations. They provide both owned capital and loan capital for long- and medium-term requirements and supplement traditional financial agencies like commercial banks. Thus, if the bank provides working capital the state financial corporations can offer long term loans. These institutions also conduct technical feasibility studies market surveys.

Merits:
(i) Financial Institutions provide long-term finance.
(ii) These institutions also provide financial, managerial and technical advice.
(iii) Repayment of the loan can be made in instalments.
(iv) Funds are even made available in crisis situation.

Limitations:
(i) Financial institutions have rigid criteria for granting loans.
(ii) Financial Institutions may have their nominees in the board of directors.
(iii) Certain restrictions like dividend payment may sometimes be imposed.

Retained Earnings:

A company does not generally distribute all its earnings or profits as shareholder dividends. A part of the net earnings may be retained for company’s own use. This is known as retained earnings. It is a source of internal financing or self- financing and is also known as ploughing back of profit.

Merits:
(i) It is a permanent source of funds which does not involve any explicit cost.
(ii) Internally generated funds offer greater flexibility and operational freedom.
(iii) It enhances the capacity of the business to absorb unexpected losses.
(iv) May increase the market price of equity shares of a company.

Limitations:
(i) Excessive ploughing back will affect dividend payout causing dissatisfaction among shareholders.
(ii) Profits keep fluctuating, so this is an uncertain source of funds.
(iii) As there is no explicit cost involved, the funds may find sub-optimal use.

Trade Credit:

Trade credit is the credit extended by one trader to another for purchase of goods and services. Such credit appears in the books as ‘Sundry Creditors’. Trade credit is commonly used by business organisations as a source of short-term financing.

Merits:
(i) Trade credit is a convenient and continuous source of funds.
(ii) If the credit worthiness of the buyer is established, trade credit is readily available.
(iii) Can help stock build-up in anticipation of increased sales.
(iv) It does not create any charge on the assets of a company

Limitations:
(i) Availability of easy trade credit may provoke companies into overtrading.
(ii) Limited amount of funds can be generated.
(iii) This could be a costly source of fund as the seller would mark-up the price accordingly.

Lease Financing:

A lease is a contractual agreement whereby one partywho is the owner of an asset grants the other party the right to use the asset in return for a periodic payment called lease rentals. It is like renting of an asset particularly machineries and is often used for modernisation and diversification. Here, the owner of the asset is known as ‘lessor’ while the user is called the lessee. The terms and conditions of the lease agreement are given in the lease contract which is executed for a specific time frame. This type of agreement is often prevalent in the acquisition of electronics items where technological changes occur rapidly. But, while opting for such lease financing the cost of leasing must be compared with the cost of owning the same.

Merits:
(i) Assets can be acquired at lower investment.
(ii) Simple documentation leads to easier finance.
(iii) Lease rentals are deductible from taxable profits.
(iv) It is a kind of finance that does not dilute control of the business neither does it affect debt raising from other sources.
(v) The risk of obsolescence is borne by the lessor offering greater flexibility to the lessee to replace the asset.

Limitations:
(i) A lease agreement may impose certain restrictions on the use of assets.
(ii) Normal business may be affected if the lease agreement is not renewed.
(iii) Comparative cost of acquirement is higher.
(iv) Lessee never becomes owner. Thus, he is not entitled to any residual value.

Public Deposits:

The deposits that are raisedby organisations directly from the public are known as public deposits. Rates offered in such deposits are usually higher than that offered on bank deposits. Persons opting for such deposits are issued a deposit receipt as an acknowledgement of the debt. Companies generally invite public deposits for a period of three years and they can take care of the short-term and medium- term financial requirements. The acceptance of public deposits is regulated by the Reserve Bank of India.

Merits:
(i) The procedure of obtaining deposits is simple.
(ii) Cost of public deposits is generally lower than the cost of borrowings from banks.
(iii) Public deposits do not create charge on the assets of the company.
(iv) The depositors do not have voting rights, so control of the company is not compromised.

Limitations:
(i) Deposits can be availed only by reputed companies.
(ii) Public response is not always certain.
(iii) Large fund target is difficult to meet.

Factoring:

Factoring is a financial service and the organisations that provide such services are called factors.
Factoring services include the following:
(a) Discounting of bills and collection of the clients’ debts. Under this the receivables on account of sale of goods or services are sold to the factor at a certain discount. The factor becomes responsible for all credit control and debt collection from the buyer and provides protection against any bad debt i.e. the factor assumes all the credit risk.
(b) Providing information about the credit worthiness of the buyer. The organisations that provide factoring services include ‘SBI Factors and Commercial Services Ltd.’, ‘Canbank Factors Ltd’ apart from non-banking financial companies.

Merits:
(i) Obtaining funds through factoring is cheaper than bank credits.
(ii) With the help of factors, cash flow is accelerated.
(iii) It does not create any charge on assets.
(iv) The client can concentrate on other functional areas.

Limitations:
(i) This source is expensive when invoices are numerous.
(ii) The advance finance available from the factors is generally available at higher interest rate.
(iii) Factors being third parties, some customers may not be interested to work with them.

Commercial Paper:

Commercial Paper is an unsecured promissory note issued by a firm to raise short term fund. It is issued by one firm to other business firms, insurance companies, pension funds and banks. The amount raised by commercial paper is generally very large.

Merits:
(i) A commercial paper is sold on an unsecured basis and does not contain any restrictive condition.
(ii) It is freely transferable instrument.
(iii) It provides more funds than other sources.
(iv) The maturity of the commercial paper can be tailored to suit requirements of the issuing firm.

Limitations:
(i) Only financially sound and highly rated firms can raise money through commercial papers.
(ii) Raising money through commercial paper depends upon excess liquidity available with the suppliers of funds.
(iii) Extending the maturity of the paper is not possible.

(b) Marketing – meaning:

Marketing is a highly specialised part of business management. It is totally consumer oriented and integrates research, advertising and distribution of products to satisfy customer requirements. Conceptually, marketing can be approached from two standpoints:

1. Traditional Marketing approach
2. Modern Marketing approach

1. Traditional marketing: It involves planning out the distribution of a product or range of products through multiple channels. This is more like direct sales and is more about physical distribution of goods and services. Two main channels of traditional marketing/distribution are:

(i) Wholesalers/Distributors
(ii) Retailers in many formats

(i) Wholesalers do not come into contact with direct consumers. It is a business to business or B to B exchange that buys product from manufacturers in bulk and gets special rates for that. Thereafter they sell or distribute the goods in retail channels at a higher rate. They act as intermediaries or middlemen working between manufacturers and retailers.

(ii) Retailers are businesses who reach out to final consumers and sit in the final stage of the distribution channel. Retailers are also middlemen who act between the wholesaler and the consumer. The retail distribution network can be subdivided into following channels:

Departmental stores are huge stores spread over large area which sell consumer items of every use and variety.

Chain stores/Multiple store: Chain stores are a chain of retail outlets spread across towns and cities that sell a particular range of product under a single brand name. These are dedicated retail stores that sell one kind of product under a single brand name like ‘Bata India Ltd’.

Neighbourhood stores: These are retail utility stores which caters to a localised population. They are mostly run by the owners themselves and have a close connection with buyers. These shops often allow credit facilities to known customers.

Itinerant retailers: Itinerant retailers are traders who move around to sell their goods and services rather than having a fixed place of business. These retailers include street hawkers, vendors, makeshift traders.

2. Modern marketing: It is a much wider concept than traditional marketing. It includes market research, advertising and product planning. It is based on anticipation of future demand, analysis of trends and guiding consumers to more satisfying options. So marketing is more customer-oriented stimulating their interest and continuously cultivating them to generate more sales. Modern marketing faces the challenge of satisfying a target group in the face of intense competition but without sacrificing profitability.

E- marketing: These are online entities that offer endless range of products by routing them through individual websites. Here, the seller offers goods on the website listing detail of the products and their prices and accepts payment through payment gateways. There is no direct contact between the buyer and the seller and physical verification is not possible. The seller displays pictures of the products with detailed specifications. After order is placed and payment is made the seller would ship the materials through delivery agents. It is somewhat like the old mail-order business but here the entire operation is done online.

Shopping malls are a modern concept which cater to customers’ delight. They house outlets of different brands and also other exclusive stores which sell a variety of branded and non-branded goods. They are very popular with consumers because they offer an enticing ambience and also have multiplexes, food courts and restaurants to entertain them.

Objectives of marketing:

1. Business expansion: It is a well- known fact that sales is the lifeline of any business. The main objective of business is to expand business by way of creation new demand and sustaining the existing one. This is done through several channels like expansion of distribution network, advertising and other sales promotion methods.

2. Market feedback: Marketing network provides vital feedback about consumer reaction to products, gathers information about quality and explores scope for improvements. It also collects information about competitors, their pricing and trade terms so that effective policies can be worked out. But the most important feedback is whether the customers are satisfied with the product. This is also crucially important for product planning.

3. Branding and goodwill: Marketing is the most influential factor for brand creation. If a particular brand is well entrenched in the market, a company can reap long term benefits out of it. A branded item, which creates brand consciousness and generates huge goodwill value, is treated as a long-term asset of the company.

4. Improving Quality of life: The marketing network is not just about routine marketing practice, it aims to inform and educate people about new products, their advantages and how they can create a better life for themselves. Nowadays, people can compare and choose among a host of products as per their priorities, in other words they can make an informed choice.

(C) Human Resources – meaning:

While countries are endowed with natural resources, they need human resources in the form of skilled manpower to convert them into wealth. In order to turn human beings into a resource creator, proper education and training are required. Physical resources are rendered useless without the intervention of human resources. Together, they increase the GDP of a country. In terms of value, human resources are expected to create wealth by offering their services. The more trained they are, the more will be their value. Thus, we see that human resource is the catalyst of wealth creation in a country and deserves special attention.

Objectives of human resource development:

1. Employment generation:
Specialised training and skill development are essential part of human resource development. An untrained workforce is not employment ready and hence not a productive resource. So, proper employment and consequent wealth creation is possible only when target population has expertise and experience.

2. Higher income:
Stray workforce cannot demand proper salaries and are trapped in a low-wage cycle. With specialised training, they can justify the demand for higher salary. The higher the income the higher is the contribution to GDP.

3. Self- reliance:
When a country has sufficient trained manpower it becomes self-reliant and does not have to depend upon foreign countries for technological assistance. This is a huge confidence builder for the economy.

4. Dynamic Society:
When the population of a country is educated and highly trained it creates an aura of dynamism in the country. This can lead to inspirational entrepreneurship in the country leading to more employment and more income.

Human resource development- some techniques:

1. Training and mentoring
2. Leadership development
3. Performance appraisal
4. Talent management
5. Feedback

CBSE Class 9 Elements of Business Unit IV: Fundamental Areas of Business – Completed

The following topics have been completed in Unit IV: Fundamental Areas of Business:

(a) Finance – meaning
(b) Marketing – meaning
(c) Human Resources – meaning