BUSINESS ORGANIZATION (NBBAB5404/ NBBA5203)

SYLLABUS

Module I: Introduction to Organization

Concepts and objectives of business organization, establishment of a new
business, pre-establishment considerations and social responsibility of business
Meaning, objective and principles of organization, line and staff, functional
organization, concept of scalar chain

Module II: Forms of Business Organization

Sole Proprietorship: Meaning, characteristics and legal requirements.
Partnership firms: Meaning, partnership deed and legal requirements as per
Partnership Act 1932. Joint stock concerns: Meaning, features, kinds of
companies, legal requirements as per Companies Act 2013

Module III: Business Finance

Business Finance: Concept, need and significance. Methods of financing: long
term, medium term and short term. National finance and international finance
Financial institutions: Brief introduction to IFCI, SFC, ICICI, IDBI; Security
market: An introduction to primary and secondary market.

Module IV: Marketing

Marketing: Concept of marketing, four P’s of Marketing. Distribution channel:
Meaning, importance, and significance of middlemen. Advertisement and sales
promotion: Meaning and objectives. Introduction to Consumer Behaviour
 Module 1

What is Business?

Business is an economic activity which involves regular production and or

exchange of goods and services with the main purpose of earning profits.

Or

An entity that provides goods and services to the community in exchange for
money, with the goal of becoming profitable.

What is Organization?

Organisation is defined as a group of persons working together for a common

purpose or goal .

Or

An organization is a group of individuals who work together to achieve

common goals and objectives, often with a structured approach and defined
roles.

Business Organization

A business organization is a structured entity, defined by its legal form (like

sole proprietorship, partnership, LLC, or corporation) and its internal
framework, that coordinates resources (people, capital, materials) to provide
goods/services and achieve common goals, often profit, under legal systems.

Or

A business organisation is an establishment intended to carry commercial

business by producing goods or services and meet the customers’ needs.

CHARACTERISTICS OF BUSINESS ORGANISATION

1. Economic activity: Business is an economic activity of production and

distribution of goods and services. It provides employment opportunities in
different sectors like banking, insurance, transport, industries, trade etc. it is an
economic activity corned with creation of utilities for the satisfaction of human
wants. It provides a source of income to the society. Business results into
generation of employment opportunities thereby leading to growth of the
economy. It brings about industrial and economic development of the country.
2. Buying and Selling: The basic activity of any business is trading. The
business involves buying of raw material, plants and machinery, stationary,
property etc. On the other hand, it sells the finished products to the consumers,
wholesaler, retailer etc. Business makes available various goods and services to
the different sections of the society.

3. Continuous process: Business is not a single time activity. It is a continuous

process of production and distribution of goods and services. A single
transaction of trade cannot be termed as a business. A business should be
conducted regularly in order to grow and gain regular returns. Business should
continuously involve in research and developmental activities to gain
competitive advantage. A continuous improvement strategy helps to increase
profitability of the business firm.

4. Profit Motive: Profit is an indicator of success and failure of business. It is

the difference between income and expenses of the business. The primary goal
of a business is usually to obtain the highest possible level of profit through the
production and sale of goods and services. It is a return on investment. Profit
acts as a driving force behind all business activities. Profit is required for
survival, growth and expansion of the business. It is clear that every business
operates to earn profit. Business has many goals but profit making is the
primary goal of every business. It is required to create economic growth.

5. Risk and Uncertainties: Risk is defined as the effect of uncertainty arising

on the objectives of the business. Risk is associated with every business.
Business is exposed to two types of risk, Insurable and Noninsurable. Insurable
risk is predictable.

6. Creative and Dynamic: Modern business is creative and dynamic in nature.

Business firm has to come out with creative ideas, approaches and concepts for
production and distribution of goods and services. It means to bring things in
fresh, new and inventive way. One has to be innovative because the business
operates under constantly changing economic, social and technological
environment. Business should also come out with new products to satisfy the
growing needs of the consumers.

7. Customer satisfaction: The phase of business has changed from traditional

concept to modern concept. Now a day, business adopts a consumer-oriented
approach. Customer satisfaction is the ultimate aim of all economic activities.
Modern business believes in satisfying the customers by providing quality
product at a reasonable price. It emphasize not only on profit but also on
customer satisfaction. Consumers are satisfied only when they get real value for
their purchase. The purpose of the business is to create and retain the customers.
The ability to identify and satisfy the customers is the prime ingredient for the
business success.

8. Social Activity: Business is a socio-economic activity. Both business and

society are interdependent. Modern business runs in the area of social
responsibility. Business has some responsibility towards the society and in turn
it needs the support of various social groups like investors, employees,
customers, creditors etc. by making goods available to various sections of the
society, business performs an important social function and meets social needs.
Business needs support of different section of the society for its proper
functioning.

9. Government control: Business organisations are subject to government

control. They have to follow certain rules and regulations enacted by the
government. Government ensures that the business is conducted for social good
by keeping effective supervision and control by enacting and amending lawsand
rules from time to time.

10. Optimum utilisation of resources: Business facilitates optimum utilisation

of countries material and non-material resources and achieves economic
progress. The scarce resources are brought to its fullest use for concentrating
economic wealth and satisfying the needs and wants of the consumers.

OBJECTIVES OF BUSINESS ORGANISATION

Business objectives are something which a business organisation wants to

achieve or accomplish over a specified period of time. These may be to earn
profit for its growth and development, to provide quality goods to its customers,
to protect the environment, etc. Thus, the objectives of business may be
classified as;

A. Economic Objectives
B. Social Objectives
C. Human Objectives;
D. National Objectives
E. Global Objectives

• Economic Objectives: Economic objectives of business refer to the

objective of earning profit and also other objectives that are necessary to be
pursued to achieve the profit objectives, which include creation of
customers, regular innovations and best possible use of available resources.
 (i) Profit Earning: Profit is the lifeblood of business, without which no
business can survive in a competitive market. In fact profit making is the
primary objective for which a business unit is brought into existence. Profits
must be earned to ensure the survival of business, its growth and expansion
over time. Profits help businessmen not only to earn their living but also to
expand their business activities by reinvesting a part of the profits. In order
to achieve this primary objective, certain other objectives are also necessary
to be pursued by business, which are as follows:
(a) Creation of customers: A business unit cannot survive unless there are
customers to buy the products and services. Again a businessman can earn
profits only when he/she provides quality goods and services at a reasonable
price. For this it needs to attract more customers for its existing as well as
new products. This is achieved with the help of various marketing activities.
(b) Regular innovations: Innovation means changes, which bring about
improvement in products, process of production and distribution of goods.
Business units, through innovation, are able to reduce cost by adopting
better methods of production and also increase their sales by attracting more
customers because of improved products. Reduction in cost and increase in
sales gives more profit to the businessmen. Use of power looms in place of
handlooms, use of tractors in place of hand implements in farms etc. are all
the results of innovation.
(c) Best possible use of resources: As we all know, to run any business we
must have sufficient capital or funds. The amount of capital may be used to
buy machinery, raw materials, employ men and have cash to meet day-to-
day expenses. Thus, business activities require various resources like men,
materials, money and machines. The availability of these resources is
usually limited. Thus, every business should try to make the best possible
use of these resources employing efficient workers. Making full use of
machines and minimizing wastage of raw materials, can achieve this
objective.
B. Social Objectives:Social objective are those objectives of business, which
are desired to be achieved for the benefit of the society. Since business operates
in a society by utilizing its scarce resources, the society expects something in
return for its welfare. No activity of the business should be aimed at giving any
kind of trouble to the society. If business activities lead to socially harmful
effects, there is bound to be public reaction against the business sooner or later.
Social objectives of business include production and supply of quality goods
and services, adoption of fair trade practices and contribution to the general
welfare of society and provision of welfare amenities.
(i) Production and Supply of Quality Goods and Services: Since the business
utilizes the various resources of the society, the society expects to get quality
goods and services from the business he objective of business should be to
produce better quality goods and supply them at the right time and at a right
price It is not desirable on the part of the businessman to supply adulterated or
inferior goods which cause injuries to the customers. They should charge the
price according to the quality of e goods and services provided to the society.
Again, the customers also expect timely supply of all their requirements. So it is
important for every business to supply those goods and services on a regular
basis.

(ii) Adoption of Fair Trade Practices: In every society, activities such as

hoarding, black marketing and over-charging are considered undesirable.
Besides, misleading advertisements often give a false impression about the
quality of products. Such advertisements deceive the customers and the
businessmen use them for the sake of making large profits. This is an unfair
trade practice. The business unit must not create artificial scarcity of essential
goods or raise prices for the sake of earning more profits. All these activities
earn a bad name and sometimes make the businessmen liable for penalty and
even imprisonment under the law. Therefore, the objective of business should
be to adopt fair trade practices for the welfare of the consumers as well as the
society.

(iii) Contribution to the General Welfare of the Society: Business units

should work for the general welfare and upliftment of the society. This is
possible through running of schools and colleges better education opening of
vocational training centers’ to train the people to earn their livelihood,
establishing hospitals for medical facilities and providing recreational facilities
for the general public like parks, sports complexes etc.

С. Human Objectives: Human objectives refer to the objectives aimed at

the well-being as well as fulfillment of expectations of employees as also of
people who are disabled, handicapped and deprived of proper education and
training. The human objectives of business may thus include economic well-
being of the employees, social and psychological satisfaction of employees
and development of human resources.

(i) Economic Well-being of the Employees: In business employees must be

provided with tan remuneration and incentive for performance benefits of
provident fund, pension and other amenities like medical facilities, housing
 facilities etc. By this they feel more satisfied at work and contribute more for
the business.

(ii) Social and Psychological Satisfaction of Employees: It is the duty of

business units to provide social and psychological satisfaction to their
employees. This is possible by making the job interesting and challenging,
putting the right person in the right job and reducing the monotony of work
Opportunities for promotion and advancement in career should also be
provided to the employees. Further, grievances of employees should be
given prompt attention and their suggestions should be considered seriously
when decisions are made. If employees are happy and satisfied they can put
then best efforts in work.

(iii) Development of Human Resources: Employees as human beings

always want to grow. Their growth requires proper training as well as
development. Business can prosper if the people employed can improve their
skills and develop their abilities and competencies in course of time. Thus, it
is important that business should arrange training and development
programmes for its employees.

(iv) Well-being of Socially and Economically Backward People: Business

units being inseparable parts of society should help backward classes and
also people those are physically and mentally challenged. This can be done
in many ways. For instance, vocational training programme may be arranged
to improve the earning capacity of backward people in the community.
While recruiting its staff, business should give preference to physically and
mentally challenged persons. Business units can also help and encourage
meritorious students by awarding scholarships for higher studies.

D. National Objectives: Being an important part of the country, every business

must have the objective of fulfilling national goals and aspirations. The goal of
the country may be to provide employment opportunity to its citizen, earn
revenue for its exchequer, become self-sufficient in production of goods and
services, promote social justice, etc. Business activities should be conducted
keeping these goals of the country in mind, which may be called national
objectives of business.

(i) Creation of Employment: One of the important national objectives of

business is to create opportunities for gainful employment of people. This can
be achieved by establishing new business units, expanding markets, widening
distribution channels, etc.
(ii) Promotion of Social Justice: As a responsible citizen, a businessman is
expected to provide equal opportunities to all persons with whom he/she deals.
He/ She is also expected to provide equal opportunities to all the employees to
work and progress. Towards this objectives special attention must be paid to
weaker and backward sections of the society.

(iii) Production According to National Priority: Business unitssshould

produce and supply goods in accordance with the priorities laid down in the
plans and policies of the government. One of the national objectives of business
in our country should be to increase the production and supply of essential
goods at reasonable prices.

(iv) Contribute to the Revenue of the Country: The business owners should
pay their taxes and dues honestly and regularly. This will increase the revenue
of the government, which can be used for the development of the nation.

(v) Self-sufficiency and Export Promotion: To help the country to become

self-reliant, business units have the added responsibility of restricting import of
goods. Besides, every business units should aim at increasing exports and
adding to the foreign exchange reserves of the country.

E. Global Objectives: Previously India had very restricted business

relationship with other nations. There was a very rigid policy for import and
export of goods and services. But, now-a-days due to liberal economic and
export-import policy, restrictions on foreign investments have been largely
abolished and duties on imported goods have been substantially reduced. This
change has brought about increase in competition in the market. Today because
of globalization the entire world has become a big market. Goods produced in
one country are readily available in other countries. So, to face the competition
in the global market every business has certain objectives in mind, which may
be called the global objectives. Let us learn about them.

(i) Raise General Standard of Living: Growth of business activities across

national borders makes quality goods available at reasonable prices all over the
world. The people of one country get to use similar types of goods that people
in other countries are using. This improves the standard of living of people.

(ii) Reduce Disparities among Nations: Business should help to reduce

disparities among the rich and poor nations of the world by expanding its
operation. By way of capital investment in developing as well as
underdeveloped countries it can foster their industrial and economic growth.
(iii) Make Available Globally Competitive Goods and Services: Business
should produce goods and services which are globally competitive and have
huge demand in foreign markets. This will improve the image of the exporting
country and also earn more foreign exchange for the country.

Establishment of New Business

The establishment of a new business means founding a new enterprise, often an

innovative startup, that introduces a unique product or service, operates in a
high-uncertainty environment, seeks rapid scalability and growth, and usually
requires external funding (like venture capital) to move beyond initial
development into a viable, market-changing entity, distinct from traditional
small businesses aiming for slower growth. It involves legal creation
(incorporation), securing capital, developing a business model, and entering the
market to meet demand, often with high risk but potential for significant impact.

STEPS TO START A NEW BUSINESS

Step 1: Do Your Research

Most likely you have already identified a business idea, so now it's time to
balance it with a little reality. Does your idea have the potential to succeed?
You will need to run your business idea through a validation process before you
go any further.
In order for a small business to be successful, it must solve a problem, fulfill a
need or offer something the market wants.
There are a number of ways you can identify this need, including research,
focus groups, and even trial and error. As you explore the market, some of the
questions you should answer include:
• Is there a need for your anticipated products/services?
• Who needs it?
• Are there other companies offering similar products/services now?
• What is the competition like?
• How will your business fit into the market?

Step 2: Make a Plan

You need a plan in order to make your business idea a reality. A business plan
is a blueprint that will guide your business from the start-up phase through
establishment and eventually business growth, and it is a must-have for all new
businesses.
If you intend to seek financial support from an investor or financial institution, a
traditional business plan is a must. This type of business plan is generally long
and thorough and has a common set of sections that investors and banks look
for when they are validating your idea.
If you don't anticipate seeking financial support, a simple one-page business
plan can give you clarity about what you hope to achieve and how you plan to
do it. In fact, you can even create a working business plan on the back of a
napkin, and improve it over time. Some kind of plan in writing is always better
than nothing.

Step 3: Plan Your Finances

Starting a small business doesn't have to require a lot of money, but it will
involve some initial investment as well as the ability to cover ongoing expenses
before you are turning a profit. Put together a spreadsheet that estimates the
one-time startup costs for your business (licenses and permits, equipment, legal
fees, insurance, branding, market research, inventory, trade marking, grand
opening events, property leases, etc.), as well as what you anticipate you will
need to keep your business running for at least 12 months (rent, utilities,
marketing and advertising, production, supplies, travel expenses, employee
salaries, your own salary, etc.). Those numbers combined is the initial
investment you will need. Now that you have a rough number in mind, there are
a number of ways you can fund your small business, including:
• Financing
• Small business loans
• Small business grants
• Angel investors
• Crowd funding
Step 4: Choose a Business Structure
Your small business can be a sole proprietorship, a partnership, a limited
liability company (LLC) or a corporation. The business entity you choose will
impact many factors from your business name, to your liability, to how you file
your taxes.
You may choose an initial business structure, and then reevaluate and change
your structure as your business grows and needs change.
Depending on the complexity of your business, it may be worth investing in a
consultation from an attorney or CPA to ensure you are making the right
structure choice for your business.

Step 5: Pick and Register Your Business Name

Your business name plays a role in almost every aspect of your business, so you
want it to be a good one. Make sure you think through all of the potential
implications as you explore your options and choose your business name.
Once you have chosen a name for your business, you will need to check if it's
trademarked or currently in use. Then, you will need to register it. A sole
proprietor must register their business name with either their state or county
clerk. Corporations, LLCs, or limited partnerships typically register their
business name when the formation paperwork is filed.

Step 6: Get Licenses and Permits

Paperwork is a part of the process when you start your own business. There are
a variety of small business licenses and permits that may apply to your situation,
depending on the type of business you are starting and where you are located.
You will need to research what licenses and permits apply to your business
during the start-up process.

Step 7: Choose Your Accounting System

Small businesses run most effectively when there are systems in place. One of
the most important systems for a small business is an accounting system.
Your accounting system is necessary in order to create and manage your budget,
set your rates and prices, conduct business with others, and file your taxes. You
can set up your accounting system yourself, or hire an accountant to take away
some of the guesswork. If you decide to get started on your own, make sure you
consider these questions that are vital when choosing accounting software.

Step 8: Set Up Your Business Location

Setting up your place of business is important for the operation of your
business, whether you will have a home office, a shared or private office space,
or a retail location.
You will need to think about your location, equipment, and overall setup, and
make sure your business location works for the type of business you will be
doing. You will also need to consider if it makes more sense to buy or lease
your commercial space.

Step 9: Get Your Team Ready

If you will be hiring employees, now is the time to start the process. Make sure
you take the time to outline the positions you need to fill, and the job
responsibilities that are part of each position. The Small Business
Administration has an excellent guide to hiring your first employee that is
useful for new small business owners.
If you are not hiring employees, but instead outsourcing work to independent
contractors, now is the time to work with an attorney to get your independent
contractor agreement in place and start your search.
Lastly, if you are a true solopreneur hitting the small business road alone, you
may not need employees or contractors, but you will still need your own support
team. This team can be comprised of a mentor, small business coach, or even
your family, and serves as your go-to resource for advice, motivation and
reassurance when the road gets bumpy.

Step 10: Promote Your Small Business

Once your business is up and running, you need to start attracting clients and
customers. You'll want to start with the basics by writing a unique selling
proposition (USP) and creating a marketing plan. Then, explore as many small
business marketing ideas as possible so you can decide how to promote your
business most effectively.
Once you have completed these business start-up activities, you will have all of
the most important bases covered. Keep in mind that success doesn't happen
overnight. But use the plan you've created to consistently work on your
business, and you will increase your chances of success.
FACTORS TO BE CONSIDERED BEFORE STARTING BUSINESS/ PRE-
ESTABLISHMENT CONSIDERATIONS
1. Idea Validation & Market Research
 Customer Need: Confirm people want your product/service; listen to
potential customers.
 Market Analysis: Study the industry, demand, and competitors.
 SWOT Analysis: Assess your Strengths, Weaknesses, Opportunities, and
Threats.

2. Business Planning & Structure

 Business Plan: Detail your mission, operations, financials, and goals.
 Legal Structure: Choose between Sole Proprietorship, Partnership, LLP,
or Company.
 Team: Decide on partners and hire key personnel with complementary
skills.

3. Financial & Legal Foundations

 Startup Costs: Estimate initial expenses for equipment, materials, etc..
 Funding: Secure capital through loans, investments, or personal funds.
 Legal Compliance: Register your business, get necessary licenses (GST,
PAN, etc.), and understand regulations.

4. Marketing & Operations

 Target Audience: Define your ideal customer (age, location, interests).
 Marketing Strategy: Plan how to reach your customers (online, offline).
 Location: Secure a physical or digital space.

5. Risk Management & Support

 Insurance: Get appropriate business insurance.
 Mentorship & Networks: Seek experienced mentors and build
connections.
 Prepare for Challenges: Plan for unexpected hurdles and potential
failures.
Before establishing a business, key considerations include market research,
creating a comprehensive business plan, securing adequate funding,
addressing legal and regulatory requirements, and planning operations and
human resources.

SOCIAL RESPONSIBILITY OF BUSINESS

The Social Responsibility of businesses to do what is in the interest of the

society. By doing so it will serve it’s own interest also. -Peter F. Drucker

OR

The obligation of an organization's management towards the welfare and

interests of the society in which it operates is called Social Responsibility.

OR

Social Responsibility is an obligation of businessmen to pursue those policies to

make those decisions, or to follow those lines of action which are desirable in
terms of the objectives and values of our society.

-Bowen

WHY SHOULD BUSINESS BE SOCIALLY RESPONSIBLE?

A business must be socially responsible because of the following factors:-

• Public Image:- The activities of business towards the welfare of the

society earn goodwill and reputation for the business as well as good
image in the eyes of the public.

• Government Regulations:- To avoid government regulations

businessmen should discharge there duties voluntarily.

• Survival & Growth:- Every business is a part of the society. So far its
survival & growth, support from the society is very much essential.
 • Employee Satisfaction:- Besides getting good salary and working in a
healthy atmosphere, employees also expect other facilities like proper
accomodation, transportation, education & training.

• Consumer Awareness:- In order to create awareness regarding the

product, a business must be socially responsible.

RESPONSIBILITIES TOWARDS DIFFERENT INTEREST GROUPS

These can be defined as:-

• Responsibility towards Owners:-

Owners are the persons who own the business. They

contribute capital and bear the business [Link] primary responsibilities of
business towards its owners are :-

• Run the business efficiently;

• Proper Utilization of capital & other resources;

• Growth and appreciation of capital

• Regular and fair return on capital investment.

• Responsibility towards Investors:-

Investors are those who provide capital by way

of investment in debentures, bonds, deposits, etc. The primary responsibilities
of business towards its investors are as :-

• Ensuring safety of their investments;

• Regular payment of interest;

• Timely repayment of principal amount.

• Responsibility towards Employees:-

 Business needs employees or workers to
work for it. These employees put their best efforts for the benefit of the
business. The primary responsibilities of business towards its employees
are as :-

• Timely and regular payment of wages and salaries.

• Proper working conditions and welfare amenities.

• Opportunity for better career prospects;

• Job Security as well as social security.

• Timely Training & Development;

• Better living conditions like housing, transport, canteen, creches, etc.

• Responsibility towards Suppliers:-

Suppliers are the one who supply raw

materials and other items required by the manufacturers and traders. The
primary responsibilities of business towards its suppliers are as :-

• Giving regular orders for purchase of goods;

• Dealing on fair terms and conditions;

• Availing reasonable credit period.

• Timely payment of dues.

• Responsibility towards Customers:-

Customer is the king of the market. No

business can survive without the support of its customers. The primary
responsibilities of business towards its customers are as :-

• Product and Services must be able to take care of the needs of the
customers.

• Products & Services must be qualitative.

• There must be regularity in supply of goods & services.

• Prices of goods & services must be reasonable & affordable.

• There must be proper after-sales service.

• Grievances of the consumers, if any, must be settled quickly.

• Responsibilities Towards Competitors:-

Competitors are other businessmen or

organization involved in a similar type of business. The primary
responsibilities of business towards its competitors are as :-

• Not to offer exceptionally high sales commission to distributors, agents,

etc.

• Not to offer consumers heavy discounts and/or free products in every

sale.

• Not to defame competitors through false or ambiguous advertisements.

• Responsibility towards Government:-

Business activities are governed by the rules

and regulations framed by the government. The responsibilities of business
towards its government are as :-

• Setting up units as per guidelines of government;

• Payment of fees, duties and taxes regularly as well as honestly.

• Not to indulge in monopolistic and restrictive trade practices.

• Conforming to pollution control norms set up by the government.

• Not to indulge in corruption through bribing and other unlawful activities.

• Responsibility towards Society:-

A society consists of individuals, groups,

organizations, families, etc. They all are the members of the society. They
 interact with each other and are also dependent on each other in almost all
activities. The responsibilities of business towards society are as :-

• To help the weaker and backward sections of the society.

• To preserve and promote social and cultural values.

• To generate employment opportunities.

• To promote economic growth and development.

ORGANIZATION

• An organization is a structured group of people working together to achieve

common goals or objectives.
Or
Organisation refers to a collection of people who are working towards a
common goal and objective.

Or

Organisation is a place where people assemble together and perform

different sets of duties and responsibilities towards fulfilling the
organisational goals.

• It can take various forms, such as a business, non-profit, governmental

agency, or community group.
• Organizations typically have defined roles, responsibilities, and hierarchies
to facilitate coordination and decision-making.
• They can range from small informal groups to large multinational
corporations, and they exist in virtually every aspect of human society.
FEATURES OF ORGANISATION
1. Hierarchy: Most organizations have a hierarchical structure, with levels of
authority and responsibility. This structure typically includes top management,
middle management, and frontline staff, each with their own roles and decision-
making powers.
2. Division of Labor: Organizations divide work among members based on
their skills, expertise, and roles. This division of labor helps improve efficiency
and specialization, as individuals focus on tasks they are best suited for.
3. Coordination: Effective organizations coordinate activities among their
members to ensure that work progresses smoothly towards common goals. This
coordination may involve communication, planning, and resource allocation.
4. Formalization: Organizations often have formal rules, procedures, and
policies that govern their operations. These formalized systems help provide
clarity, consistency, and accountability within the organization.
5. Goal Orientation: Organizations are driven by specific objectives or goals
that guide their activities and decision-making. Whether it's maximizing profits,
achieving social impact, or delivering services, goals provide a sense of
direction and purpose.
6. Specialization: Organizations often specialize in particular products,
services, or areas of expertise. This specialization allows them to focus their
resources and efforts more effectively, leading to greater efficiency and
competitiveness.
7. Centralization vs. Decentralization: Organizations vary in the degree of
centralization or decentralization of decision-making authority. Some may
centralize decision-making power at the top, while others may decentralize it to
lower levels of the organization.
8. Culture: Organizational culture refers to the shared values, beliefs, norms,
and behaviors that define the organization's identity. A strong organizational
culture can foster cohesion, teamwork, and employee engagement.
9. Adaptability: Successful organizations are often adaptable and able to
respond to changes in their internal and external environments. This may
involve innovation, flexibility, and the ability to learn from past experiences.
10. Size and Complexity: Organizations vary in size and complexity, ranging
from small startups to large multinational corporations. Larger organizations
tend to be more complex, with more layers of management, specialized
functions, and diverse stakeholder relationships.
OBJECTIVES/SIGNIFICANCE/IMPORTANCE OF ORGANISATION

1. Efficiency: Organizations bring structure to chaos. They streamline

processes, allocate resources effectively, and ensure tasks are carried out in a
coordinated manner. This efficiency helps in optimizing time, money, and
effort.
2. Goal Achievement: Whether in business, government, or social endeavors,
organizations are instrumental in setting and achieving goals. They provide a
framework for strategic planning, implementation, and evaluation, driving
progress and success.
3. Coordination: Organizations foster teamwork and collaboration among
individuals with diverse skills and expertise. By clarifying roles,
responsibilities, and reporting structures, they enable smooth coordination of
efforts towards common objectives.
4. Innovation: Organized environments often cultivate innovation. Through
structured processes, dedicated teams, and conducive cultures, organizations
encourage creativity and problem-solving, leading to the development of new
ideas, products, and solutions.
5. Adaptability: In a rapidly changing world, the ability to adapt is crucial.
Organizations with agile structures and adaptive cultures can respond swiftly to
external challenges and opportunities, ensuring resilience and sustainability.
6. Resource Optimization: Organizations manage finite resources such as
capital, manpower, and materials efficiently. Through strategic planning,
budgeting, and resource allocation, they maximize productivity and minimize
waste.
7. Risk Management: Organized systems enable better risk assessment and
mitigation. By implementing robust governance frameworks, compliance
mechanisms, and contingency plans, organizations can anticipate and address
potential threats effectively.
8. Community and Society: Organizations play vital roles in communities and
societies. They create employment, stimulate economic growth, provide
essential services, and contribute to social welfare, thereby enriching the lives
of individuals and fostering development.
EXAMPLES OF SUCCESSFUL ORGANIZATIONS

• World Health Organization (WHO):- A specialized agency of the

United Nations focusing on global public health issues. It coordinates

international efforts to combat diseases and improve healthcare.

• Google:-A multinational technology company that offers internet-related

services, including search engines, online advertising, cloud computing,

and software.

• Tesla:-An electric vehicle and clean energy company that designs and

manufactures electric cars, solar energy products, and energy storage

solutions.

• Microsoft:-A technology company that develops and sells software,

hardware, and services. It is known for products like Windows OS and

Microsoft Office suite.

 • Apple Inc.:- A multinational technology company that is known for its

innovative products such as the iPhone, iPad, and Mac computers.

PRINCIPLES OF ORGANIZATION
The principles of organization are like the rules or guidelines that help
managers structure their organizations in a way that makes work efficient, clear,
and effective. These principles help ensure that the organization runs smoothly,
with everyone knowing their role and how they fit into the bigger picture.

Here's an explanation of some important principles of organization in simple

terms:
1. Division of work: Division of work or specialization alone can give
maximum productivity and efficiency. Both technical and managerial activities
can be performed in the best manner only through division of labour and
specialization.

2. Parity ofAuthority and Responsibility: The right to give order is called

authority. The obligation to accomplish is called responsibility. Authority and
Responsibility are the two sides of the management coin. They exist together.
They are complementary and mutually interdependent.

3. Discipline: The objectives, rules and regulations, the policies and procedures
must be honoured by each member of an organization. There must be clear and
fair agreement on the rules and objectives, on the policies and procedures. There
must be penalties (punishment) for non-obedience or indiscipline. No
organization can work smoothly without discipline preferably voluntary
discipline.

4. Unity of Command: In order to avoid any possible confusion and conflict,

each member of an organization must receive orders and instructions only from
one superior (boss).

5. Unity of Direction: All members of an organization must work together to

accomplish common objectives.

6. Emphasis on Subordination of Personal Interest to General or Common

Interest: This is also called principle of co-operation. Each shall work for all
and all for each. General or common interest must be supreme in any joint
enterprise.

7. Remuneration: Fair pay with non-financial rewards can act as the best
incentive or motivator for good performance. Exploitation of employees in any
manner must be eliminated. Sound scheme of remuneration includes adequate
financial and non-financial incentives.

8. Centralization & Decentralization: There must be a good balance between

centralization and decentralization of authority and power. Extreme
centralization and decentralization must be avoided.

9. Scalar Chain: The unity of command brings about a chain or hierarchy of

command linking all members of the organization from the top to the bottom.
Scalar denotes steps.

10. Order: Fayol suggested that there is a place for everything. Order or system
alone can create a sound organization and efficient management.

11. Equity: An organization consists of a group of people involved in joint

effort. Hence, equity(i.e., justice) must be there. Without equity, we cannot have
sustained and adequate joint collaboration.

12. Stability of Tenure: A person needs time to adjust himself with the new
work and demonstrate efficiency in due course. Hence, employees and
managers must have job management.

13. Esprit de Corps: Esprit de corps is the foundation of a sound organization.

Union is strength. But unity demands co-operation. Pride, loyalty and sense of
belonging are responsible for good performance.

14. Initiative: Creative thinking and capacity to take initiative can give us
sound managerial planning and execution of predetermined plans.

TYPES OF ORGANISATION AND THEIR STRUCTURE

There are two broad categories of organisation, which are:

1. Formal Organisation

2. Informal Organisation

1. Formal Organisation: Formal organisation is that type of organisation

structure where the authority and responsibility are clearly defined. The
organisation structure has a defined delegation of authority and roles and
responsibilities for the members.
The formal organisation has predefined policies, rules, schedules, procedures
and programs. The decision making activity in a formal organisation is mostly
based on predefined policies.

Formal organisation structure is created by the management with the objective

of attaining the organisational goals.

2. Informal Organisation: Informal organisations are those types of

organisations which do not have a defined hierarchy of authority and
responsibility. In such organisations, the relationship between employees is
formed based on common interests, preferences and prejudices.

Organizational Structure

An organizational structure is used to define a hierarchy inside an organization.

Or

Organizational structure is defined as the framework of roles, responsibilities,

authority relationships, and communication channels within an organization.

TYPES OF ORGANIZATION STRUCTURE

There are several types of formal organisation based on their structure, which
are discussed as follows:
1. Line Organisation
2. Line and Staff Organisation
3. Functional Organisation
4. Project Organisation
5. Matrix Organisation

Note:- Your syllabus consists of only two types of organization structure i.e.,
Line & Staff Organization Structure & Functional Organizational Structure.

LINE AND STAFF ORGANIZATION STRUCTURE

• This type of organization structure is in large enterprises.

• The functional specialists are added to the line in line and staff
organization. Here, staff is basically advisory in nature and usually does
not possess any command authority over line managers
 • “Line functions are those which have direct responsibility for
accomplishing the objectives of the enterprises and staff refers to those
elements of the organization that help the line to work most effectively in
accomplishing the primary objectives of the enterprises.”

• In the line and staff organisation, staffs assist the line managers in their
duties in order to achieve the high performance. So, in an organization
which has the production of textiles, the production manger, marketing
manager and the finance manager may be treated as line executives, and
the department headed by them may be called line departments .

On the other hand, the personnel manager who deal with the recruitment,
training and placement of workers, the quality control manager who ensure the
quality of products and the public relations manager are the executives who
perform staff functions.

MERITS OF LINE AND STAFF ORGANIZATION

• Relief to line of executives- In a line and staff organization, the advice and
counseling which is provided to the line executives divides the work
between the two. The line executive can concentrate on the execution of
plans and they get relieved of dividing their attention to many areas.
• Expert advice- The line and staff organization facilitates expert advice to
the line executive at the time of need. The planning and investigation which
 is related to different matters can be done by the staff specialist and line
officers can concentrate on execution of plans.
• Benefit of Specialization- Line and staff through division of whole concern
into two types of authority divides the enterprise into parts and functional
areas. This way every officer or official can concentrate in its own area.
• Better co-ordination- Line and staff organization through specialization is
able to provide better decision making and concentration remains in few
hands. This feature helps in bringing co-ordination in work as every official
is concentrating in their own area.
• Benefits of Research and Development- Through the advice of specialized
staff, the line executives, the line executives get time to execute plans by
taking productive decisions which are helpful for a concern. This gives a
wide scope to the line executive to bring innovations and go for research
work in those areas. This is possible due to the presence of staff specialists.
• Training- Due to the presence of staff specialists and their expert advice
serves as ground for training to line officials. Line executives can give due
concentration to their decision making. This in itself is a training ground for
them.
• Balanced decisions- The factor of specialization which is achieved by line
staff helps in bringing co-ordination. This relationship automatically ends
up the line official to take better and balanced decision.
• Unity of action- Unity of action is a result of unified control. Control and
its effectivity take place when co-ordination is present in the concern. In the
line and staff authority all the officials have got independence to make
decisions. This serves as effective control in the whole enterprise.

DEMERITS OF LINE AND STAFF ORGANIZATION

• Lack of understanding- In a line and staff organization, there are two
authority flowing at one time. This results in the confusion between the
two. As a result, the workers are not able to understand as to who is their
commanding authority. Hence the problem of understanding can be a
hurdle in effective running.
• Lack of sound advice- The line official get used to the expertise advice
of the staff. At times the staff specialist also provide wrong decisions
which the line executive have to consider. This can affect the efficient
running of the enterprise.
• Line and staff conflicts- Line and staff are two authorities which are
flowing at the same time. The factors of designations, status influence
sentiments which are related to their relation, can pose a distress on the
minds of the employees. This leads to minimizing of co-ordination which
hampers a concern’s working.
• Costly- In line and staff concern, the concerns have to maintain the high
remuneration of staff specialist. This proves to be costly for a concern
with limited finance.
• Assumption of authority- The power of concern is with the line official
but the staff dislikes it as they are the one more in mental work.
• Staff steals the show- In a line and staff concern, the higher returns are
considered to be a product of staff advice and counseling. The line
officials feel dissatisfied and a feeling of distress enters a concern. The
satisfaction of line officials is very important for effective results.

FUNCTIONAL ORGANIZATION STRUCTURE

• This is the simplest & the most prevalent form of organizational structure.
• Functional organisational structure refers to the structure in which
different departments are created on the basis of major functions
performed in the organisation.
• Each department has a coordinating head and can be further divided into
separate sections.
• For example, a manufacturing concern will have Marketing Department,
Production Department, Personnel Department and Accounts Department
etc. Marketing Department may be further divided into sections like Sales
Section, Market Research Section etc.

HIERARCHY OF Functional ORGANIZATION

MERITS OF FUNCTIONAL ORGANIZATION

• Specialization- Better division of labour takes place which results in
specialization of function and it’s consequent benefit.
• Effective Control- Management control is simplified as the mental
functions are separated from manual functions. Checks and balances keep
 the authority within certain limits. Specialists may be asked to judge the
performance of various sections.
• Efficiency- Greater efficiency is achieved because of every function
performing a limited number of functions.
• Economy- Specialization compiled with standardization facilitates
maximum production and economical costs.
• Expansion- Expert knowledge of functional manager facilitates better
control and supervision.
• Scope for Training: This system also provides opportunity for
appropriate training to inspectors and supervisors. This aspect
automatically brings flexibility into the organization.

DEMERITS OF FUNCTIONAL ORGANIZATION

• Confusion- The functional system is quite complicated to put into
operation, especially when it is carried out at low levels. Therefore, co-
ordination becomes difficult.
• Lack of Co-ordination- Disciplinary control becomes weak as a worker
is commanded not by one person but a large number of people. Thus,
there is no unity of command.
• Difficulty in fixing responsibility- Because of multiple authority, it is
difficult to fix responsibility.
• Conflicts- There may be conflicts among the supervisory staff of equal
ranks. They may not agree on certain issues.
• Costly-Maintainance of specialist’s staff of the highest order is expensive
for a concern.
• Absence of Initiative: Workers, being always spoon fed with technical
knowledge, shall lose initiative and become a group of mere automation.
The supervisors shall also lose their drive and initiative. Hence, even the
routine work shall become complicated.

SCALAR CHAIN IN MANAGEMENT

• In the field of management, Henry Fayol (a French mining engineer)

introduced this chain.

• Scalar Chain refers to the hierarchical structure of authority and

communication within an organization.

• It is a chain of command that determines who reports to whom and

outlines the channels of communication that exist within an organization.

• Understanding Scalar Chain is critical to ensuring effective management

and communication in any organization.
• Scalar Chain can be defined as a formal line of authority that flows
vertically through an organization. It consists of various levels of
authority and responsibility, with each level having a specific set of tasks
and responsibilities.

• An organisation consists of superiors and subordinates. The formal lines

of authority from highest to lowest ranks are known as scalar chain.

• According to Fayol, “Organisations should have a chain of authority and

communication that runs from top to bottom and should be followed by
managers and the subordinates.”

• Let us consider a situation where there is one head ‘A’ who has two lines
of authority under her/him. One line consists of B-C-D- E-F. Another line
of authority under ‘A’ is L-M-N-O-P. If ‘E’ has to communicate with ‘O’
who is at the same level of authority then she/he has to traverse the route
E-D-C-B-A-L-M-N-O. This is due to the principle of scalar chain being
followed in this situation.

• According to Fayol, this chain should not be violated in the normal

course of formal communication.

• However, if there is an emergency then ‘E’ can directly contact ‘O’

through ‘Gang Plank’ as shown in the diagram. This is a shorter route and
has been provided so the communication is not [Link] practice you
find that a worker cannot directly contact the CEO of the company.

• If at all she/he has to, then all the formal levels i.e., foreman,
superintendent, manager, director etc have to know about the matter.
 However, in an emergency it can be possible that a worker can contact
CEO directly.

Importance of Scalar Chain

The Scalar Chain plays a critical role in ensuring effective management within
an organization. Here are some reasons why it is essential:

• Clearly Defined Roles and Responsibilities: Scalar Chain provides a

clear understanding of who reports to whom and outlines the roles and
responsibilities of each employee. This clarity is necessary to avoid
confusion, conflicts, and duplication of tasks within an organization.
• Efficient Communication: Scalar Chain ensures that communication
flows smoothly from the top-down and bottom-up. It helps to avoid
misunderstandings, delays, and miscommunication in an organization.
• Effective Decision-making: Scalar Chain helps to streamline decision-
making processes by ensuring that decisions are made by the
appropriate level of authority. This ensures that decisions are made in a
timely and effective manner.
• Accountability: Scalar Chain provides a framework for accountability
within an organization. Each employee knows who they are
accountable to and what they are responsible for. This helps to ensure
that employees are held responsible for their actions and decisions.

Understanding the Levels of Scalar Chain

Scalar Chain consists of various levels of authority and responsibility, with each
level having a specific set of tasks and responsibilities. The levels of Scalar
Chain are:

• Top-level Management: This level consists of the highest-ranking

executives, such as CEOs, CFOs, and COOs. They are responsible for
making strategic decisions and setting the overall direction of the
organization.
• Middle-level Management: This level consists of managers who are
responsible for implementing the strategies set by the top-level
management. They are responsible for ensuring that the day-to-day
operations of the organization run smoothly.
• First-line Management: This level consists of supervisors who are
responsible for overseeing the work of the front-line employees. They
are responsible for ensuring that the employees have the resources they
need to perform their duties.
 • Front-line Employees: This level consists of the employees who carry
out the day-to-day operations of the organization. They are responsible
for performing the tasks assigned to them and following the policies
and procedures set by the organization.

Benefits of Scalar Chain

A well-defined Scalar Chain has several benefits for an organization. Some of

the benefits are:

• Clarity of Authority: Scalar Chain provides clarity of authority within

the organization. Employees know who to report to and whom they are
accountable to. It helps avoid confusion and duplication of work,
leading to better coordination and efficiency.
• Clear Communication: Scalar Chain ensures clear communication
within the organization. Communication flows from the top to bottom
and vice versa through the chain of command. It helps in effective
decision-making and better coordination between different
departments.
• Faster Decision-Making: Scalar Chain speeds up the decision-making
process by defining the level of authority that can make decisions. It
reduces the need for unnecessary discussions, and employees know
what level of approval is required for a particular decision.
• Better Control: Scalar Chain helps in better control of the
organization. Managers can monitor the performance of their
subordinates and ensure that they are following the organization’s
policies and procedures.
• Improved Efficiency: Scalar Chain helps in improving efficiency by
reducing delays, avoiding confusion, and ensuring that employees
perform their duties efficiently.

Implementing Scalar Chain in an Organization

Implementing Scalar Chain in an organization requires the following steps:

• Defining the Levels: The first step is to define the different levels of
authority within the organization. These levels should be based on the
organization’s structure and should be well defined to avoid any
confusion.
• Assigning Roles and Responsibilities: Once the levels are defined,
the roles and responsibilities of each level should be assigned. This
 will help employees know what is expected of them and whom they
need to report to.
• Communicating the Chain: It is essential to communicate the Scalar
Chain to all employees to avoid any confusion. The communication
should be clear and should explain the roles and responsibilities of
each level.
• Training: Employees should be trained to understand the Scalar Chain
and the importance of following it. The training should focus on the
benefits of Scalar Chain and how it can help in improving efficiency.
• Reviewing the Chain: It is essential to review the Scalar Chain
periodically to ensure that it is still relevant and meets the
organization’s needs.

Conclusion

Scalar Chain is a crucial concept in management that outlines the hierarchical

structure of authority and communication within an organization. It helps in
improving efficiency, decision-making, and coordination within an
organization. Implementing Scalar Chain requires defining the levels, assigning
roles and responsibilities, communicating the chain, training employees, and
reviewing the chain periodically. A well-defined Scalar Chain can help an
organization achieve its goals efficiently and effectively.
 MODULE 2

FORMS OF BUSINESS ORGANIZATION

A business can be organized in one of several ways, and the form its owners
choose will affect the company's and owners' legal liability and income tax
treatment. Here are the most common options and their major defining
characteristics. Forms of business ownership vary by jurisdiction, but several
common entities exist:

SOLE PROPRIETORSHIP

MEANING

1. As the name suggests, ‘sole’ means ‘only one’ and ‘proprietorship’

implies ‘ownership’.
2. This type of business organisation is also called single ownership or
single proprietorship
3. The sole proprietorship is a form of business that is owned, managed and
controlled by an individual.
4. He has to arrange capital for the business and he alone is responsible for
its management.
5. He is therefore, entitled to the profits and has to bear the loss of business,
however, he can take the help of his family members and also make use
of the services of others such as a manager and other employees.
6. If the business primarily consists of trade, the organization is a sole
trading organization.
7. Small factories and shops are often found to be sole proprietorship
organisations.
8. It is the simplest and most easily formed business organization. This is
because not much legal formality is required to establish it.
9. For instance to start a factory the permission of the local authorities is
sufficient. Similarly to start a restaurant, it is only necessary to get the
permission of local health [Link] again, to run a grocery store, the
proprietor has only to follow the rules laid down by local administration.
Features of Sole Proprietorship
The important features of a sole-proprietary organization include the following:
(i) Individual Initiative: One person is the owner in a sole proprietary form of
organisation.
(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in this form
organisation. If there is a loss he alone has to bear it. Thus the risks of business
are borne by the proprietor himself.
(iii) Management and control: Management and control of this type of
organisation is the responsibility of the sole proprietor. He may, however,
employ a manager or other
people for the purpose.
(iv) Minimum government regulations: The government does not interfere
with the working of the sole proprietorship organisation. However, they have to
comply with the
general laws and rules laid down by government.
(v) Unlimited liability: The sole proprietor has to bear the losses and is
responsible for the liabilities of the business.
If the business assets are not sufficient to meet the liabilities, he may also have
to sell his personal property for that purpose.
(vi) Secrecy: All important decision taken by the owner himself. He keeps all
the business secrets only to himself.

Advantages/Merits of Sole Proprietorship

1. Easy to form: It is very easy and simple to form and organize a sole trader’s
business. There are no legal formalities.
2. Simple to manage: It is a small organization. It can be managed easily by the
owner himself.
3. Profit incentive: Sole trader enjoys all the profits for himself; This profit
motive is an incentive to work hard.
4. Quick decision making: Since he is the sole organizer, he can take quick
decisions. He can act promptly according to the changes in the market.
5. Contact with customers: He is the owner and manager of the concern. He
will be in a position to study the tastes and needs of customers personally since
he establishes good contacts with them.
6. Secrety: He can maintain the business secrets for himself. Maintenance of
secrecy is an important matter in any type of business organization.
7. Smooth running: As he is the sole proprietor there will not be differences of
opinions or disputes. It helps smooth running of the concern.
8. Efficiency and economy: The organization is a small one. He can have close
supervision. He can reduce the costs of the management and all sorts of waste.
Business can be run efficiently.
9. Flexibility: Changes in the business can be adopted at any time. Flexibility is
facilitated by small investment. It can be shifted from place to place very easily.
10. Family training: He takes the help from the members of his family in
maintaining business. His children get training in the business activities.
11. Self employment: Small scale units can be easily started. Nationalized
banks are also helping in this direction.
12. Social advantages: It provides opportunities to a number of individuals.
Many can become entrepreneurs with limited resources.
13. Tax advantages: Income tax is imposed on the personal income of the sole
trader, but not on the profits of the concern. Hence it is advantageous.

DISADVANTAGES / LIMITATIONS OF SOLE PROPRIETORSHIP

Sole trading business suffers from certain serious limitations (disadvantages)

also:

1. Limited capital: Use of limited capital means limited profits only. If

there is any necessity to expand business there may not be sufficient
resources.
2. Limitation of management skills: A sole proprietor may not be able to
manage the business efficiently as he is not likely to have necessary skills
regarding all aspects of the business. This poses difficulties in the growth
of business also.
3. Limited borrowing capacity: The borrowing capacity of a sole trader is
limited to the extent of his financial position.
4. Limitation of Resources: The sole proprietor of a business is generally
at a disadvantage in raising sufficient capital. His own capital may be
limited and his personal assets may also be insufficient for raising loans
against their security. This reduces the scope of business growth.
5. Unlimited liability: The creditors can recover their loan amount not only
from the properties of the business but also from his personal properties.
So his liability is unlimited.
6. Hasty decisions: The sole trader takes all decisions for himself. So there
may be hasty and thoughtless decisions.
7. Short life: If the sole trader does not have children, or if his children are
not interested in continuing the business, the business would come to an
end. There is no guarantee of continuous existence in this type of
business.
8. No division of labour: As it is a small unit, it is not possible to introduce
division of labour in the management.
9. Dependence on employees: If there is expansion of business, it is
inevitable for the proprietor to depend on the paid managers.
[Link] area of operation: The business is small. So the activities
cannot go beyond a certain area.
[Link] of large scale economies: Sole trader’s business is small scale
only. He cannot do his business on large scale due to lack of financial
 resources. So he cannot enjoy large scale economies of production,
buying or selling.

2. PARTNERSHIP
1. Partnership is an association of persons who agree to combine their
financial resources and managerial abilities to run a business and share
profits in an agreed ratio.
2. Since the resources of a sole proprietor to finance, and his capacity to
manage a growing business is limited, he feels the need for a partnership
firm.
3. Partnership business, therefore, usually grows out of the need for
expansion of business with more capital, better supervision and control,
division of work and spreading of risks.
4. Section 4 of Partnership Act, 1932: “The relation between persons who
have agreed to share profits of a business carried on by all or any of
them acting for all.”
Or
As per L.H. Haney, “The relationship between persons who agree to
carry on a business in common with a view to private gain.”
5. According to Partnership Act, there must be two or more persons having
contractual relationship. It is not necessary that the business should be
managed by all the partners but any one or more partners can run the
business on behalf of all the persons. Any partner acting on behalf of
other partners can bind the firm to third parties

6. The persons who have agreed to join in partnership are individually

called “Partners” and collectively a ‘firm’. A partnership firm can be
formed with a minimum of two partners and it can have a maximum of
twenty partners.
7. In a broad sense, a partnership is any cooperative endeavor undertaken by
multiple parties. These parties can be governments, non-profits,
businesses, individuals or a combination, and the goals of the partnership
can vary widely.

FEATURES OF PARTNERSHIP

The features of partnership are as follows:

1. Existence of an agreement: Partnership is formed on the basis of an
agreement between two or more persons to carry on business. It does not
arise out of the operation of law as in the case of joint Hindu family
business. The terms and conditions of partnership are laid down in a
document known as Partnership Deed.
 2. Membership: There must be at least two persons to form a partnership.
The maximum number is 20. But in case of banking business the
maximum is 10 members.
3. Engagement in business: A partnership can be formed only on the basis
of a business activity. Its business may include any trade, industry or
profession. Thus, a partnership can engage in any occupation –
production and/or distribution of goods and services with a view to
earning profits.
4. Sharing of profits and losses: In a partnership firm, partners are entitled
to share in the profits and are also to bear the losses, if any.
5. Agency relationship: The partnership business may be carried on by all
or any of the partners acting for all. Thus, each partner is a principal and
so can act in his own right. At the same time he can act on behalf of other
partners as their agent. Thus, every partner can bind the firm by his acts.
6. Unlimited Liability: The liability of partners is unlimited as in the case
of sole proprietorship. In case some obligation arises then not only the
partnership assets but also the private property of the partners can be
taken for the payment of liabilities of the firm.
7. Common Management: Every partner has a right to take part in the
running of the business. It is not necessary for all partners to participate in
the day-to-day activities of the business but they are entitled to
participate. Even if partnership business is run by some partners, the
consent of all other partners is necessary for taking important decisions.
8. Restriction on transferability of share: No partner can transfer his
share in partnership to any other person. He may, however, do so with the
consent of all other partners.

MERITS OF PARTNERSHIP
A partnership form of organisation offers the following advantages:
1. Ease in formation: A partnership is very easy to form. All that is
required is an agreement among the partners. Even the expenses to be
incurred for registration are-not much.
2. Pooling of financial resources: A partnership commands more financial
resources compared to sole proprietorship. This helps in expanding
business and earning more profits. As and when a firm requires more
money, more partners can be admitted.

3. Wise decisions: In partnership, decisions are taken with the consultation

of all the partners. So naturally the decisions are wiser and more
beneficial.
 4. Pooling of managerial stalls: A partnership facilitates pooling of
managerial skills of all its partners. This leads to greater efficiency in
business operations. For instance, in a big partnership firm, one partner
can handle production function, another partner can look after all
marketing activity, still another can attend to legal and personnel
problems, and so on.
5. Balanced business decisions: In a partnership firm, decisions are taken
unanimously after considering all the major aspects of a problem. This
ensures not only balanced business decisions but also removes difficulties
in the smooth implementation of those decisions.
6. Sharing of risks: Unlike sole proprietary organisation, the risks of
partnership business are shared by partners on a predetermined basis.
This encourages partners to undertake risky but profitable business
activities.

7. Borrowing capacity: The creditors will lend Loans not only on the basis
of the firm’s assets but also based on the personal properties of the
partners. So the borrowing capacity of a firm is more.
8. Expansion of business: Due to the availability of sufficient finance and
skill the business can be expanded very easily.

9. Flexibility: Changes in the business can be adopted easily. There are no

legal restrictions.

LIMITATIONS OF PARTNERSHIP
A partnership form of organisation suffers from the following major limitations:

1. Uncertainty of existence: The existence of a partnership firm is very

uncertain. The retirement, death, bankruptcy or lunacy of any partner can
put an end to the partnership. Further, the partnership business can come
to a close if any partner demands it.
2. Delay in decisions: Sometimes the partners may not agree with one
another in taking decisions. As a result partners will not be in a position
to take quick decisions.
3. Risks of disharmony: In partnership, since decisions are taken
unanimously, it is essential that all partners reconcile their views for the
common good of the organisation. But there may arise situations when
some partners may adopt rigid attitudes and make it impossible to arrive
at a commonly agreed decision. Lack of harmony may paralyse the
business and cause conflict and mutual bickering.
4. Difficulty in withdrawal from the firm: Investment in a partnership can
be easily made but cannot be easily withdrawn. This is so because the
withdrawal of a partner’s share requires the consent of all other partners.
 5. Lack of institutional confidence: A partnership business does not enjoy
much confidence of banks and financial institutions. It is because the
nature of its activities is not disclosed at public and the agreement among
partners is not regulated by any law. As a result large financial resources
cannot be raised by partnership and growth of business cannot be
ensured.
6. No transferability of share: In a firm the partner cannot transfer his
share of interest to others without the consent of the other partners.
7. Lack of secrecy: It may not be possible to maintain secrecy in
partnership because of the number of partners.
8. Unlimited liability: The creditors of a firm can recover their loan
amounts from the personal properties of the partners when the firm’s
sources are not enough. Therefore the personal properties of the partners
are not safe..
9. Internal conflicts: Differences and disputes among the partners are very
common. These conflicts harm the firm as a whole.
[Link] of assets: The partners may use the assets of the firm for their
personal purposes. Misuse of assets is harmful to business interests.

TYPES OF PARTNERS

The various types of partner found in partnership firms are as follows:

1. Active Partner: An active partner is one who takes active part in the
day-to-day working of the business. He may act in different capacities
such as manager, organiser, adviser and controller of all the affairs of the
firm. He may also be called a working partner.

2. Sleeping or Dormant Partner: A sleeping partner is one who

contributes capital, shares profits and contributes to the losses of the
business but does not take part in the working of the concern. A person
may have money to invest but they may not be able to devote time for the
business: such a person may become a sleeping partner. Sleeping partner
is liable for the liabilities of the business like other partners. He cannot
bind the business, i.e., firm, to third parties, by his acts.

3. Nominal Partners: Nominal partners are those who do not have interest
in the business but lend their name to the firm. They do not make any
capital contribution, and are not entitled to take part in management, but
are liable, like other partners, to third parties. Such partners generally
have a pecuniary interest (like a share in the profits) in lending their name
to a firm. However in certain cases they may not have any pecuniary
interest in doing so. For example, a reputed industrialist may, without any
profit motive lend his name to a firm run by his family members.
4. Partner in Profit: A person may become a partner for sharing the profit
only. He contributes capital and is also liable to third parties like other
partners. He is not allowed to take part in the management of the
business. Such partners are associated for their money and goodwill.
5. Partner by Estoppel or Holding Out: When a person is not a partner
but poses himself as a partner, either by words or in writing or by his acts,
he is called a partner by estoppel or by holding out. A partner by estoppel
or by holding out shall be liable to outsiders who deal with the firm on
the presumption of that person being a partner in the business even
though he is not a partner and does not contribute anything to the
business.

6. Secret Partner: The position of a secret partner lies between active and
sleeping partner. His membership of the firm is kept secret from
outsiders. His liability is unlimited and he is liable for the losses of the
business. He can take part in the working of the business.

7. Sub-Partner: A partner may associate anybody else in his share in the

firm. He gives a part of his share to the stranger. The relationship is not
between the sub-partner and the firm but between him and the partner.
The sub-partner is a non-entity for the partnership. He is not liable for the
debts of the firm.
8. Minor as a Partner: A minor is a person who has not yet attained the
age of majority. A minor cannot enter into a contract according to the
Indian Contract Act because a contract by a minor is voidable. However,
a minor may be admitted to the benefits of an existing partnership with
the consent of all partners. The minor is not personally liable for
liabilities of the firm, but his share in the partnership property and profits
of the firm will be liable for debts of the firm.

Meaning and Contents of Partnership Deed

1. Partnership firm can be established with an agreement between the

partners. This agreement may be written or oral. An oral agreement may
be the cause of dispute in future. So, it is better to have a written
agreement in order to avoid future conflicts.

2. The written agreement duly signed by the partners is known as

partnership deed or agreement or Articles of Partnership.
3. It is the written contract between partners. It contains the term and
conditions of the partnership.
4. Partnership deed forms the basis of partnership.
 5. Partnership deed is a document containing all the matters according to
which mutual rights, duties and liabilities of the partners in the conduct
and management of the affairs of the firm are determined.
6. Hence, it contains the terms and conditions of the partnership. It is helpful
in preventing and resolving disputes among the partners. A partnership
deed can be altered at any time with the consent of all the partners.

Main Content of Partnership Deed

Some of the important clauses to be included in a partnership deed are as

follows:
(1) Name of the firm and Its Address: The deed should contain of the firm
and place of its business.
(2) Name and Address of Partners: The deed should also contains the names
and address of all partners.
(3) Nature of Firm’s Business: The nature of business proposed to be carried
and its limitation should be included in it.
(4) Duration of Partnership: It the partnership is established for a fixed
duration or for a fixed work, it should be stated in it.
(5) Partners’ Capitals: The deed should contain the total amount of capital and
contributions by each partner.
(6) Interest on Capital: If the partners decide to change interest on their
capitals, the rate should be mentioned in the deed.
(7) Drawing and Interest on Them: The deed should contain the limit of
drawings by every partner and the rate of interest to be charged.
(8) Division of Profit: Profit and loss sharing ratio should be stated in the deed.
If it is not mentioned partners are authorized to share equally according to
Partnership Act.
(9) Partners’ Salary and Commission: If the partners decide to pay salary and
commission to the partners, the deed should contain the amount of salary or
commission payable to any partner for the services rendered to the business.
(10) Rights and Duties of Partners: If any partner has some special rights and
duties regarding to conducts of business or if the liability of any partner is
limited to the capital invested by him, these facts should also be mentioned in it.
(11) Admission and Retirement of Partners: After the establishment of
partnership some new partners may be admitted and some may retire from the
business. If any definite procedure is to be adopted at the time of admission or
retirement of partner, it should be stated in it.
(12) Death of a Partner: The procedure of calculating the amount due to a
deceased partner and the method of its payment to his successors, should also be
decided and stated in the deed.
(13) Valuation of Goodwill: The method of valuation of goodwill at the time
of admission, retirement or death of a partner should be also be clearly stated in
it.
(14) Revaluation of Assets and Liabilities: The method of revaluation of
assetsand liabilities on admission, retirement or death of a partner should also
be clearly stated in it.
(15) Accounts and Audit: The procedure of keeping accounts and their audit
should also be stated in it.
(16) Dissolution of Partnership: The deed should contain the firm and the
method of the final settlement of accounts.
(17) Arbitration Clause: In case of disputes the method of appointing
arbitrators and their rights should be clearly mentioned.

Rules to be followed in the Absence of a Partnership Deed

1. The partners are entitled to share the profits or losses equally.

2. Partners are not entitled to interest on their capital.
3. No partner will be allowed salary, or any other remuneration for any extra
work done for the firm.
4. No interest will be charged on partners’ drawings.
5. Interest at 6 per cent per annum will be allowed to partners on any loan given
to the firm by them.
6. Every partner has a right to take part in the working of the partnership
business.
7. No person can be admitted into the firm without the consent of all the
existing partners.
8. Every partner should use the partnership property for the benefit of the firm.
9. Every partner has a right to inspect the books of accounts of the firm.

Legal requirements for a Partnership Firm

Procedure for Registering a Partnership Firm

The following steps have been followed while registering for a partnertship
firm:-
Step 1: Application for Registration
An application form (Form 1) has to be filed to the Registrar of Firms of the
State in which the firm is situated along with prescribed fees. It has to be signed
and verified by all the partners or their agents. The application form (Form 1)
can be obtained from the Registrar of the Firms office or it can be downloaded
from the respective state's Registrar of Firms website.
The application can be sent to the Registrar of Firms through post or by physical
delivery, which contains the following details:
 The name of the firm.
 The principal place of business of the firm.
  The location of any other places where the firm carries on business.
 The date of joining of each partner.
 The names and permanent addresses of all the partners.
 The duration of the firm.
Step 2: Selection of Name of the Partnership Firm
Any name can be given to a partnership firm. But certain conditions need to be
followed while selecting the name:
 The name should not be too similar or identical to an existing firm doing
the same business.
 The name should not contain words like emperor, crown, empress,
empire or any other words which show sanction or approval of the
government.
Step 3: Certificate of Registration
If the Registrar is satisfied with the registration application and the documents,
he will register the firm in the Register of Firms and issue the Registration
Certificate. The Register of Firms contains up-to-date information on all firms,
and anybody can view it upon payment of certain fees.
An application form along with fees is to be submitted to the Registrar of Firms
of the State in which the firm is situated. The application has to be signed by all
partners or their agents.
Documents for Registration of Partnership
The documents required to be submitted to Registrar for registration of a
Partnership Firm are:
 Application for registration of partnership (Form 1)
 Certified original copy of Partnership Deed.
 Specimen of an affidavit certifying all the details mentioned in the
partnership deed and documents are correct.
 PAN card and address proof of the partners.
 PAN card and address of the firm.
 Proof of principal place of business of the firm (ownership documents or
rental/lease agreement).
Joint Stock Company
According to The Company's Act, 2013, a “company” means a company
incorporated under this act or under any previous company law [Section 2
(20)].
 According to L.H. Haney, “Company is an artificial person created by law
having separated entity with a perpetual succession and common seal”

A Joint Stock Company is a voluntary association of persons to carry on the

business. It is an association of persons who contribute money which is called
capital for some common purpose. These persons are members of the company.
The proportion of capital to which each member is entitled is his share and
every member holding such share is called shareholders and the capital of the
company is known as share capital.
The Companies Act 1956 defines a joint stock company as an artificial person
created by law, having separate legal entity from its owner with perpetual
succession and a common seal.
Characteristics of Joint Stock Company

1. Artificial Person : A Joint Stock Company is an artificial person as it does

not possess any physical attributes of a natural person and it is created by law.
Thus it has a legal entity separate from its members.
2. Separate legal Entity : Being an artificial person a company has its own
legal entity separate from its members. It can own assets or property, enter into
contracts, sue or can be sued by anyone in the court of law. Its shareholders can
not be held liable for any conduct of the company.
3. Perpetual Existence : A company once formed continues to exist as long as
it is fulfilling all the conditions prescribed by the law. Its existence is not
affected by the death, insolvency or retirement of its members.
4. Limited liability of shareholders : Shareholders of a joint stock company
are only liable to the extent of shares they hold in a company not more than that.
Their liability is limited by guarantee or shares held by them.
5. Common Seal : Being an artificial person a joint stock company cannot sign
any documents thus this common seal is the company’s representative while
dealing with the outsiders. Any document having common seal and the
signature of the officer is binding on the company.
6. Transferability of Shares : Members of a joint stock company are free to
transfer their shares to anyone.
7. Capital : A joint stock company can raise large amount of capital by issuing
its shares.
8. Management : A joint stock company has a democratic management which
is managed by the elected representatives of shareholders, known as directors of
the company.
9. Membership : To form a private limited company minimum number of
members prescribed in the companies Act is 2 and the maximum number is 200.
But in the case of public limited company the minimum limit is 7 and no limit
on maximum number of members.
10. Formation : Generally a company is formed with the initiative of group of
members who are also known as promoters but it comes into existence after
completing all the formalities prescribed in Companies Act 1956.

TYPES OF COMPANIES
The companies can be divided into various categories as defined below:

A. On the Basis of Liability:- Based on liability companies can be divided into

3 parts-

1. Companies limited by shares: It refers to a company in which the

liability of its partners is limited to the amount specified in the
partnership agreement. However, any unpaid amount on the share may be
called upon to settle the liability. Liability against partners can be
enforced during the existence of the company even during liquidation. It
is important to note that no amount can be claimed from the members
after the shares have been fully repaid.
For example- X is a shareholder who has paid 75 for a share
with a face value of 100. The company can call upon X to pay only the
remaining 25 rupees and not exceed that amount. By far the most
important are limited liability companies.
2. Companies limited by guarantee: In this type of company, the liability
of the partners is limited to the amount they undertake to contribute to the
assets of the company in the event of its dissolution. Simply put, the
liability of the shareholders is limited by the amount of the guarantee they
give in the partnership agreement.
During the liquidation of the company, the members are placed
in the position of guarantors for the fulfillment of the company's debt.
Examples of such societies are clubs, trade associations, research
associations, etc.
3. Companies with unlimited liability: It applies to those companies that
do not determine the liability of their members. Members' liability is
unlimited and their assets can be used to satisfy the company's debt. They
may or may not have share capital.

B. On the basis of incorporation of company:-

On the basis of Incorporation, companies can be divided into 2

categories.
1. Statutory Companies: It applies to those companies which are
incorporated by a special Act of Parliament or State Legislature. The
 main objective of this type of company is to provide a public service.
Since they are established under a separate law, the Companies Act, 2013
has limited scope for them. If there is any conflict, the Special Act for the
circumstance will prevail over the Companies Act, 2013.
2. Registered Companies: Companies that are registered under the
provisions of the Companies Act, 2013 or any previous Companies Act
are called registered companies. This type of company is formed when
they have received a certificate of incorporation (ROC).

C. On the basis of number of members

In this category, companies can be divided into 3 parts-

1. Public Companies: A public company is defined in Section 2 (71) of the

Companies Act of 2013. To establish a public company, it is necessary to
have at least 7 partners. One of the special features of a public company
is that there are no restrictions on the buying and selling of shares.
Section 58 stipulates that the shares of a public company are freely
transferable. If the company does not comply with the above provisions,
it will renounce the status of "private company". To transform a public
company into a private company, it is necessary to adopt a special
resolution at the general meeting (3/4 majority).
2. Private companies: A private company [Section 2(68)] refers to an
association of persons whose maximum number of members is limited to
200. A private company cannot invite the general public to subscribe to
its shares or debentures. Shares in a private company are not freely
transferable and cannot be transferred. All such restrictions must be
expressly stated in the Articles of Association (AOA). As with a public
company, a private company can change its status by passing a special
resolution (3/4 majority) at the general meeting.
3. One-Person Company (OPC): According to Section 2(62) of the
Companies Act 2013, a sole proprietorship is a company that has only
one person as a partner or shareholder. The board of directors must have
1 director and its only member can also hold the role of director. In this
type of company, the term "nominee" assumes the highest importance
because, after the death of the original member, the business of the
company would cease. It is therefore necessary to mention the name of
the candidate when registering such a company. It is not followed in other
types of companies because they have perpetual succession.
D. On the basis of Country of Origin:
On the basis of Country of Origin, companies can be divided into two
types:-
 1. Domestic Company: A domestic company is incorporated and registered
in India and operates within the country’s jurisdiction. It is subject to the
regulations and compliance requirements of the Companies Act 2013.
2. Foreign Company: A foreign company, as per Section 2(42) of the
Companies Act 2013, refers to any company that is incorporated outside
India but also holds a place of business in India. Foreign companies
operating in India are required to comply with specific registration,
reporting, and compliance obligations specified under the Companies
Act.

S.N Basis of
Public Company Private Company
o. Differences

1. Public companies are

those whose shares are
Private companies have a
listed on the stock
limited number of members
Meaning exchange, and anyone
and certain restrictions on the
buying the shares
transferability of their shares.
becomes a part of the
company’s ownership.

2. The definition is
The definition is mentioned in
mentioned in Section 2
Definition Section 2(68) of the
(71) of the Companies
Companies Act, 2013.
Act, 2013.

3. Minimum The public company

The private company must
members must have at least 7
have at least two members.
Required members.

4. There can be unlimited There can be a maximum of

Maximum
members in a public 200 members in a private
members
company. company.

5. The ownership is divided The ownership is vested

Ownership among the general among the founders and
public. investors.

6. A minimum of three A minimum of two directors

Directors directors are required in a are required in a private
public company. company.

7. At least one-third of the

Independen There is no such requirement
members must be
 t Director Independent Directors in a private company.

8. It is mandatory to have a
Contract
contract between
with It is optional.
managing directors and
Directors
whole-time directors

9. The public company can

The private company can issue
Issue of issue its securities by
its security by right of
securities Prospectus/ right of issue/
issue/private placement.
private placement.

10. Transferabi The shares of the public The shares of the private
lity of company are freely company have restrictions in
Shares transferable transfer of shares.

11. It is easier for the

Liquidity of
investor to get their It is comparatively difficult.
funds
money back.

12. The private company is

The public company can
Prospectus prohibited from issuing a
issue a prospectus.
prospectus.

13. The word “Public

The word “Private Limited”
Suffix/Prefi Limited” must be added
must be added at the end of the
x at the end of the company
company name.
name.

14. Articles of Must be approved by a Must be approved by all

Associations special resolution. members.

15. If the company’s

members are within one
thousand, the quorum
must be five. If the
company’s members are
Quorum of Two members must be present
more than one thousand
Meetings in the meeting.
and within five thousand,
the quorum must be of
fifteen members
present. If the company’s
members are more than
five thousand, the
 quorum must be thirty.

16. Private companies need not

Disclosure Public companies need to make their financial
requiremen disclose their financial disclosures publicly. It may
ts conditions to the public. provide these disclosures to its
members and investors.

17. Statutory Mandatory. Optional.

Meeting
18. Commence It requires a certificate of It can start a business just after
ment of commencement of receiving a certificate of
Business business after it is incorporation.
incorporated.

Legal Requirements for Formation of a Company (In Short)

Under Section 3(1)(a) of the Companies Act, it is stated that a public company
can be formed lawfully when the formation of company is done seven or more
persons only & in case of private company, it is two. Those people have to
subscribe their names in the memorandum of the company. The company such
formed may be term by company limited. After that it should be get registered
by the registrar of the companies. The major requirement for formation will be
followed by the documentation including-

 Memorandum of Association (MoA) under section 4 of the act.

 Article of Association (AoA) under section 5 of the act.
 A copy of the such agreement.
 A declaration that all the documents are provide as per the requirement under
Section 7(1) of the act.

Under section 7 of this Act, there has been some new requirements introduced
in the formation of company. The new requirement is that every subscriber to
the memorandum has to file an affidavit to the first director of the company in
order to declare that there has been no offence in connection with the person.
Furthermore, the company has to preserve all the documents until the
dissolution of the company it originally filed under section 7(1) of the company
act.
 Legal Requirements for Formation of a Company (In detail)

The entire process of formation of the company can be categorised into

four major phases:

1. Promotion Stage

2. Registration Stage

3. Incorporation Stage
4. Commencement of Business Stage

Let’s break these steps down for better understanding of Procedure For
Formation Of Company.

1. Promotion Stage
The promotion stage marks the initial phase in the formation of a
company. This is where an idea evolves into an actionable business
plan.
Key Steps in the Promotion Stage:

 Identifying a Business Opportunity: Evaluate market demands

and decide on the type of business to establish.
 Feasibility Study: Conduct a thorough analysis of economic,
technical, and legal aspects to ensure the viability of the business
idea.

 Role of Promoters: Promoters play a crucial role in executing the

idea by securing the required capital, preparing essential
documents, and taking the initial steps to establish the business.

2. Registration Stage

The registration stage is when the company becomes a legally

recognised entity under the Companies Act, 2013.
Steps Involved in the Registration Stage:

 Memorandum of Association (MoA): Founders must prepare

and sign the MoA, which outlines the company’s objectives. Public
companies require a minimum of seven signatories, while private
companies need at least two.
  Articles of Association (AoA): This document defines the
internal rules of the company. All MoA signatories must also sign
the AoA.

 List of Directors: Submit a complete list of the company’s

directors to the Registrar of Companies (RoC).

 Consent of Directors: Directors must provide written consent to

act in their roles, which is then submitted to the RoC.
 Registered Office Address: Notify the RoC of the company’s
official address.

 Statutory Declaration: A declaration by a qualified professional

(advocate, secretary, or director) stating that all requirements have
been fulfilled must be filed with the RoC.

When all documents are in order, the RoC issues a Certificate of

Incorporation, officially bringing the company into existence
3. Incorporation Stage

The incorporation stage validates the company’s formation through the

issuance of a Certificate of Incorporation. This certificate acts as proof
that the company is legally established.

Key Points to Note:

 A private company can commence business activities immediately
after receiving the Certificate of Incorporation.

 A public company, however, needs to proceed to the next stage:

Commencement of Business.

4. Commencement of Business Stage

The commencement of business stage is critical for public companies,

as they require an additional certificate to start operations.

Steps for Commencement:

 Issuance of Prospectus: Public companies issue a prospectus

inviting the public to subscribe to shares for raising capital.

 Minimum Subscription Requirement: The company must ensure

the minimum required shares are subscribed to and collect the
corresponding funds.
  Registrar Verification: Submit proof of subscription and collected
funds to the RoC.

 Certificate of Commencement of Business: Once satisfied, the

RoC issues this certificate, allowing the company to officially begin
its operations.

Conclusion

The formation of a company under the Companies Act, 2013 involves a

systematic process, ensuring compliance with legal and financial
regulations. By understanding these stages, students and aspiring
entrepreneurs can gain valuable insights into starting a business
effectively. Whether it’s the promotion stage, the registration stage, or
the final step of commencing business, each phase is essential for
establishing a successful company.
 Module 3
BUSINESS FINANCE
1. Business finance refers to the management of financial resources within
an organization to achieve its objectives.
Or
Business finance involves the management of a company's financial
resources to achieve its objectives and maximise profits.
2. Business finance encompasses the processes, strategies, and tools that
businesses use to make financial decisions, manage resources, and
achieve their financial goals.
3. It encompasses a range of activities such as budgeting, forecasting,
investing, and borrowing.
4. The primary goal of business finance is to ensure that a company has
enough funds to operate efficiently and grow sustainably.
5. Business finance involves planning, directing, organizing, and controlling
the financial activities of a business. Essentially, business finance is the
backbone of any successful enterprise, providing the necessary
foundation for growth and sustainability.
6. It involves making strategic decisions about how to allocate resources,
manage risks, and plan for future financial needs.
7. Effective business finance practices are crucial for maintaining liquidity,
optimising the capital structure, and enhancing the overall financial
performance.
8. The financial requirements of a business can be categorized as follows:
 Fixed Capital: Such funds are used for investments to be made in long-
term projects and assets the benefits from which would be reaped by the
firm over a long period of time. Such capital is used to purchase land and
building, fixtures and other such long-term assets.
 Working Capital: Such funds are used in the day-to-day operations of a
firm. Such operations include holding current assets and settlement of
current liabilities.

Nature/ Features of Business Finance

The nature of business Finance can be defined as follows:-

1. Necessary for all Business:- Finance is the lifeline of all businesses. It is
needed at every step right from promotion, and incorporation to production,
selling, marketing, etc. All kinds and sizes of firms require the use of funds to
carry out all kinds of operations.
2. Depends on Nature and Size of Business:- Different kinds of businesses
have different levels of requirements of funds for their operations. The volume
of funds required depends on the size of the firm. Smaller firms have less
requirements of funds as compared to larger firms.
3. Includes all types of Funds:- Both Owners' Funds and Borrowed Funds are
included in business finance.
4. Required on a Continuous Basis:- Business Finance is required on a
continuous basis during the life of a business enterprise.
5. Wider Term:- Business Finance is a wider term as it involves estimation,
procurement, utilisation and investment of funds.
6. Fluctuating Nature:- Business finance keeps on fluctuating when there is a
change in factors like inflation rate, change in demand, change in supply,
fashion, technology, etc.
7. Determines Size of Business: - The scale of business is determined by the
availability of finance. The more is the availability of funds, the larger is the
size and scale of the business.

NEED & SIGNIFICANCE OF BUSINESS FINANCE

Business finance refers to the funds required for starting, operating, and
expanding a business. It plays a very important role in the success and smooth
functioning of an organization.

1. Establishment of Business:- Finance is necessary for setting up a

business. It helps in purchasing land, building, machinery, and other
basic resources required for production.
2. Smooth Running of Operations:- Adequate finance ensures the smooth
day-to-day functioning of a business, such as paying wages and salaries,
purchasing raw materials, and meeting other operating expenses.
3. Expansion and Development:- Business finance helps organizations
expand their activities by increasing production capacity, introducing
new products, and entering new markets.
4. Purchase of Fixed Assets:- It enables firms to acquire long-term assets
like machinery, equipment, and buildings which are essential for
production.
5. Meeting Unexpected Expenses:- Proper financial resources help a
business deal with emergencies such as economic downturns, sudden
repairs, or market changes.
6. Improvement in Efficiency:- Availability of finance allows businesses
to adopt modern technology and better management practices, which
improves productivity and efficiency.
 7. Maintaining Goodwill and Creditworthiness:- A well-managed
financial system helps a business pay its obligations on time, which
builds trust among investors, banks, and suppliers.
8. Ensures Business Stability:- Adequate finance helps a business
maintain stability during periods of low sales, economic slowdown, or
market fluctuations.
9. Supports Research and Innovation:- Finance allows companies to
invest in research and development (R&D) to create new products and
improve existing ones.
[Link] in Marketing Activities:- Funds are required for advertising,
sales promotion, and distribution, which help in increasing sales and
market share.
[Link] Better Decision Making:- Proper financial planning helps
managers make effective investment and operational decisions for long-
term success.
[Link] Business Expansion:- With sufficient finance, businesses can
diversify into new products or services and explore new opportunities.

TYPES OF BUSINESS FINANCE

Understanding the various types of business finance is crucial for tailoring
financial strategies to the specific needs of a business. Let's explore some
common types:
1. Short-Term Finance:- Short-term finance addresses immediate financial
needs and typically has a repayment period of one year or less. It is often
used for working capital requirements, such as paying suppliers, meeting
payroll, or handling unforeseen expenses. Short-term finance options
include trade credit, bank overdrafts, and short-term loans.
2. Medium-term finance- Medium term finance refers to capital raised for
periods typically ranging from one to five years (sometimes up to 10),
balancing the immediate needs of short-term financing and the long-term
commitments of over five years. It is primarily used for business
expansion, purchasing machinery, or financing specific projects, offering
a balance of moderate risk and returns.
3. Long-Term Finance:- Long-term finance involves securing funds for
projects or investments with a longer time horizon, usually exceeding one
year. This type of finance is suitable for significant capital expenditures,
such as purchasing real estate, expanding production capacity, or
launching new products. Long-term finance options include equity
financing, bonds, and term loans.
4. Internal Finance:- Internal finance is generated from within the business
without external borrowing. It includes retained earnings, where a portion
of profits is reinvested in the company, and depreciation funds, which set
 aside money for replacing assets. Internal finance offers autonomy and
flexibility but may be limited in scale.
5. External Finance:- External finance involves obtaining funds from
sources outside the business. This can include loans from financial
institutions, investments from venture capitalists, or public offerings of
stocks. External finance provides additional capital but may come with
interest payments, dilution of ownership, or other obligations.
6. Project Finance:- Project finance is a specialized form of financing used
for large-scale projects with distinct cash flows. It involves creating a
separate legal entity for the project and securing financing based on its
anticipated revenue. Project finance mitigates risks by isolating the
project's financial structure from the overall business.
METHODS OF BUSINESS FINANCE
There are various methods of business finance, each serving different purposes
and needs. Here are some common types:

1. DEBT FINANCING:- Debt financing involves borrowing money that must

be repaid over a specific period, usually with interest. The borrowed funds can be
used for various purposes, such as expansion, working capital, or capital
expenditures.

Sources of debt financing

 Loans: Businesses can obtain loans from banks, financial institutions, or

alternative lenders. Loans typically have fixed interest rates and
repayment schedules.
 Bonds: Larger corporations may issue bonds to raise capital. Bonds are
debt securities that investors purchase, and the issuing company agrees to
repay the principal amount along with periodic interest payments.

2. EQUITY FINANCING:- Equity financing involves raising capital by

selling ownership stakes in the business. Investors, such as individuals or
venture capitalists, provide funds in exchange for shares or ownership interest
in the company.

Sources of equity financing

 Angel Investors: Individuals who invest their funds in startups or small

businesses in exchange for ownership equity.
 Venture Capitalists: Professional investment firms that fund startups and
growing businesses in exchange for equity.
 Initial Public Offering (IPO): Companies can go public by offering
shares to the public through a stock exchange.
 3. VENTURE CAPITAL:- Venture capital involves investment funds
provided by venture capitalists to startups and small businesses with high
growth potential. These investments are typically exchanged for equity,
giving venture capitalists ownership stakes and a say in company
decisions.
Sources of venture capital

 Venture Capital Firms: Professional firms that pool funds from various
investors to invest in high-potential startups.
 Angel Investors: High-net-worth individuals who provide capital for
startups, often in exchange for convertible debt or ownership equity.

4. CROWDFUNDING

Crowdfunding involves raising small amounts of money from a large number of

people, typically via online platforms. This method allows businesses to generate
funds by presenting their ideas or products directly to potential backers and is
particularly popular for funding an online business, where entrepreneurs can
effectively showcase their digital products or services to potential backers while
validating market demand.

Sources of crowdfunding:

 Reward-Based Platforms: Platforms like Kickstarter and Indiegogo

where backers receive a product or service in return for their support.
 Equity Crowdfunding: Platforms like SeedInvest and Crowdcube where
investors receive equity shares in the company.

METHODS OF FINANCING (IN SHORT)
It refers to the various ways individuals, businesses, and governments acquire
funds. Key methods include debt financing (loans, bonds), equity
financing (selling shares, angel investors), internal funding (retained earnings,
personal savings), and specialized options like crowdfunding, grants, and trade
credit. Finance is generally categorized into personal, corporate, and public
sectors.
Primary Methods of Business Finance
 Equity Financing: Raising capital by selling company ownership shares to
investors, such as venture capitalists or angel investors, which does not require
repayment.
 Debt Financing: Borrowing money that must be repaid with interest, including
bank loans, bonds, and debentures.
 Internal Financing: Utilizing existing resources, such as retained earnings
(past profits), selling assets, or using personal savings.
 Crowdfunding: Raising small amounts of money from a large number of
people, usually via online platforms.
 Trade Credit: A mechanism where suppliers allow a business to purchase
goods or services now and pay later.
 Grants and Subsidies: Funds provided by governments or organizations for
specific projects that usually do not require repayment.
DIFFERENCE BETWEEN INTERNATIONAL AND DOMESTIC
FINANCE

Basis Domestic Finance International Finance

Meaning The business where The business where economic

economic transactions are transactions are conducted across
conducted in the borders with several countries in the
geographical boundaries of world.
one country.

Nationality of Both buyers and sellers Both buyers and sellers belong to
Buyers and belong to the same country. different countries, which makes
Sellers It makes it easier for both business dealings relatively difficult
parties to understand each due to differences in their languages,
other and enter into business attitudes, customs, etc.
deals.

Nationality of Stakeholders(employees, Stakeholders(employees, suppliers,

other suppliers, creditors, etc.) are creditors, etc.) are from different
Stakeholders from one nation. nations.

Mobility of Degree of mobility of Degree of mobility of factors of

Factors of factors of production(land, production(land, labour, etc.) is less
Production labour, etc.) is more as as compared to domestic business.
compared to international
business.

Nature of Customers are Customers are not homogeneous due

Customers homogeneous in their tastes, to different socio-cultural
preferences, consumption backgrounds, tastes, fashions,
patterns, and buying languages, beliefs, customs, etc.
behavior.
 Business Business systems and Business systems and practices are
Systems and practices arehomogeneous less homogeneous as there is
Practices within a country. difference in development level,
infrastructure, market facilities, etc.

Political Domestic business firms are International business faces

System and familiar with the political difficulties in understanding and
Risks system of their country. As coping with the different political
a result, they are in a better systems of every country.
position to understand and
predict its impact on
business.

Business Rules, laws, or taxation Rules, laws, or taxation policies of

Regulations policies of a single country various countries prevail in the case
and Policies prevail in domestic of international business.
business.

Currency Currency of the domestic Currency of more than one country

used country is used. is used.

Risk Less degree of risk High degree of risk.

Order There is a less time gap There is a huge time gap between
Processing between the supply of goods the supply of goods and order.
Time and the order

Effect on It has no effect on the It has a direct impact on the foreign

Foreign foreign reserves of a reserves of a country.
Reserve country.

FINANCIAL INSTITUTIONS

 A financial institution is a company that focuses on dealing with

financial transactions, such as investments, loans, and deposits.
Or
Financial institutions are corporations that provide services related to
money, including deposits, loans, investments, and currency exchange.
Or
A financial institution (FI) is an organization that facilitates the flow of
capital between savers and borrowers.
 A financial institution manages the money of the entire country. It can
be for an individual, a firm, or a government. The list of financial
institutions in every country has to follow guidelines. It ensures that the
practices are fair and contribute to economic growth.
  The financial institutions are banks, insurance businesses, credit unions,
investment banks, etc. All these businesses manage money.
 Financial institutions are economic drivers. These entities provide the
basic essential financial services. These services are collecting deposits,
providing credit or loans, savings investments, or managing money.
 Financial institutions also have regulations. They have a governing
body. The rules are laid for transactions.
 Financial institutions and individuals have to follow these rules. For
example, banks need to follow RBI rules for loans. It must complete the
process. It must include the necessary documents.
 Not following the regulator's rules may lead to fines. The financial
institutions thus follow the government rules.
 Financial institutions are both private and government. Government
banks like SBI or PNB provide financial [Link] entities li ke
HDFC or Kotak are also banks. They offer the same economic services.

FINANCIAL INSTITUTIONS ROLE / FUNCTIONS

The primary functions of financial institutions of this nature are as follows:

 Accepting Deposits i.e Taking the deposits from the general public &
providing interest thereon.

 Providing Commercial Loans i.e., it helps to provide commercial loans

to many businessmans & industries.

 Providing Real Estate Loans i.e., it helps to provide loans for

purchasing assets.

 Providing Mortgage Loans i.e. providing loans by keeping some

amount as a security.

 Issuing Share Certificates i.e. after selling its shares, they issue a share
certificate.

 Motivating the Financial Sector i.e., With presence of more institutions

there will be motivation in the financial area to perform better and take
steps for the strengthening of country. This will lead towards the
prosperity in the country by removing the risk.

 Financing the Small Scale Sector i.e., The provision of short term credit
or working capital to small businesses for its day to day requirement for
purchasing raw material and other inputs like water, electricity, etc. and
for payment of salaries and wages; and long term credit for creation of
 fixed assets like building, land, plant and machinery help the SME sector
to perform better.

How do Financial Institutions Work?

Financial institutions solve the money problem in the economy. The following
points defines its working:-

1. Financial institutions provide a standard base for money flow. It connects

both the savers and borrowers.
2. Savers want to invest money. They approach these financial institutions.
3. On the other hand, borrowers also approach these institutions. They take
the funds from investors and offer them interest.
4. They loan the same to the borrowers and charge them an interest rate.
5. The variance between these two interest rates is the income of the
financial institutions.
6. Without these organizations, these investors and borrowers won't have a
platform. It would lead to a gap.

Types of financial institutions

The financial institutions can further be divided into two types:

1) Banking Institutions or Depository Institutions – This includes banks
and other credit unions which collect money from the public against
interest provided on the deposits made and lend that money to the ones in
need
2) Non Banking Institutions or Non Depository Institutions – Insurance,
mutual funds and brokerage companies fall under this category. They
cannot ask for monetary deposits but sell financial products to their
customers.
3) Development Financial Institutions (DFIs):- DFIs provide long-term
finance for economic and industrial development. They are especially
important for infrastructure and large [Link] eg:- NABARD,
IDBI,etc.
4) Investment Institutions:- These institutions help individuals and
organizations to invest their funds in securities.

5) Specialized Financial Institutions:- These institutions are created for

specific sectors or purposes like export, small industries, etc. For eg:-
EXIM, SIDBI, etc.
6) Insurance Institutions:- Insurance institutions provide risk coverage
and financial protection against uncertainties. For eg:- LIC, GIC
 Industrial Finance Corporation of India (IFCI)

IFCI was established in 1948 as the first Development Financial Institution

(DFI) in India. After independence, industries needed long-term capital, which
commercial banks were unable to provide. IFCI filled this gap by supporting
large and medium-scale industries.

Objectives:-

 To promote industrial growth in India

 To provide medium and long-term finance
 To develop capital markets

Functions:-

 Provides loans and advances for setting up new industries

 Finances expansion, diversification, and modernization projects
 Underwrites shares, debentures, and bonds
 Provides guarantees to industrial firms
 Assists in revival of sick/weak industrial units
 Supports infrastructure and large industrial projects

Importance:-

IFCI played a key role in the early industrialization of India by providing

financial support when other institutions were not well developed.

3. State Financial Corporations (SFCs)

SFCs were established under the State Financial Corporations Act, 1951.
These are state-level institutions created to support small and medium
enterprises (SMEs) and ensure regional balanced development.

Objectives:-

 To promote small and medium industries

 To reduce regional imbalances
 To encourage entrepreneurship in rural and backward areas

Functions:-

 Provide term loans to small and medium enterprises

 Offer working capital support (in some cases)
 Underwrite shares and debentures of SMEs
 Provide guarantees for loans taken from banks
 Assist in modernization and expansion of industries
  Encourage first-generation entrepreneurs

Importance:-

SFCs are important for grassroot industrial development and help in

employment generation at the state level.

3. Industrial Credit and Investment Corporation of India (ICICI)

ICICI was established in 1955 with support from the government, World Bank,
and other institutions. It was initially a development financial institution, but
later transformed into ICICI Bank, one of India’s leading private sector banks.

Objectives:-

 To promote private sector industrial development

 To provide financial and technical services
 To encourage foreign investment and modern technology

Functions:-

 Provides project finance and long-term loans

 Offers banking services (loans, deposits, credit cards, etc.)
 Facilitates international trade and foreign exchange services
 Provides investment banking and advisory services
 Promotes capital market activities
 Supports innovation and new businesses

Importance:-

ICICI has played a major role in modernizing India’s banking system and
promoting private sector growth and globalization.

4. Industrial Development Bank of India (IDBI)

IDBI was established in 1964 as an apex financial institution to coordinate the

activities of all development financial institutions and provide systematic
industrial finance.

Objectives:-

 To promote industrial development in India

 To coordinate activities of financial institutions
 To ensure balanced regional growth
Functions:-

 Provides direct finance (loans and advances) to industries

 Offers refinance facilities to banks and other financial institutions
 Coordinates working of IFCI, SFCs, and other DFIs
 Promotes priority sectors like MSMEs and infrastructure
 Provides technical and managerial assistance
 Helps in policy formulation for industrial growth

Importance:-

IDBI played a crucial role in planned industrial development and acted as a

leader of development banking system in India.

All these institutions together form the backbone of industrial finance in

India. They provide long-term funds, encourage entrepreneurship, support
industries of all sizes, and ensure balanced economic development across
the country.

MEANING OF SECURITIES MARKET

1) The securities market is a part of the financial market where securities

like shares, debentures, bonds, and government securities are issued
and traded.
2) It acts as a link between investors (who have surplus funds) and
companies/government (who need funds).

Components of Securities Market

The securities market has two main components:

1. Primary Market (New Issue Market)

2. Secondary Market (Stock Market)

1. Primary Market (New Issue Market)

The primary market is where new securities are issued for the first time to the
public or selected investors. It is the first stage where companies raise capital
directly from investors.

Objectives

 To raise long-term funds for companies

 To promote industrial growth
 To mobilize public savings

Features
  Deals only in new securities
 No buying and selling of old securities
 Funds go directly to the issuing company
 No fixed geographical location
 Price is usually fixed by the company

Functions of Primary Market

 Capital formation (raising funds)

 Mobilization of savings
 Allocation of resources to productive uses
 Promotes economic development

Participants in Primary Market

Company (issuer); Investors; Merchant bankers; Underwriters; Financial

institutions

2. Secondary Market (Stock Market)

The secondary market is where existing securities are bought and sold among
investors after being issued in the primary [Link] provides a platform for
trading securities.

Examples

 Bombay Stock Exchange

 National Stock Exchange of India

Objectives

 To provide liquidity to investors

 To ensure continuous market for securities
 To determine market price of securities

Features

 Deals in existing securities only

 Continuous buying and selling
 Prices determined by demand and supply
 Provides high liquidity
 Regulated and organized market

Functions of Secondary Market

 Provides liquidity and marketability

  Helps in price discovery
 Facilitates transfer of ownership
 Ensures efficient allocation of resources
 Encourages investment

Participants in Secondary Market

Investors (buyers and sellers), Stock brokers, Dealers and traders, Stock
exchanges, Regulatory authority (like SEBI
 MODULE 4

1. According to American Marketing Association, “ Marketing is the process of

planning & executing conception, pricing, promotion, and distribution of goods
& services to create exchanges that satisfy individuals & organizational goals”.

OR

According to Philip Kotler, “Marketing is a social & managerial process by

which individuals & group obtains what they need & want through creating &
exchanging products & value with others”.

OR

Marketing is the economic process by which the goods and services are
exchanged between the producer and consumer and there values are determined
in terms of money prices.
OR
Marketing is the transfer of goods & services from the place of producer to the
place of consumer.

2. Philip Kotler explained the core concept of marketing in his book – “Marketing
Management”.
3. According to him, every human being has endless needs and demands. There
are many products which can satisfy human wants and demands.
4. These wants and demands can be fulfilled by the exchange of goods and
services.
5. Marketers try to increase demand by making products more attractive,
affordable and easily available.
6. A market is a place where goods and services are exchanged. Marketing means
all those activities that take place in relation to the market.

Hence, marketing is a social process by which individuals and groups obtain

what they need and want through exchanging products and values with others.

Nature/Features/Attributes/Characteristics

These can be defined as follows:-

 Customer Focus:- The main attribute of the marketing is to satisfy the

customer because he is the king of the market.

 Customer satisfaction:- The customer should be satisfied in terms of

quality given to him for the effective functioning of the marketing
activity.
  Customer Value:- It is the responsibility of the company to provide the
valuable product to the customer because he always compares cost paid
by him & the value he gets.

 Objective Oriented:- Each & every marketing activity has been carried
out in order to reach a specified objective. The objective can be to
achieve higher sales, higher profit, customer satisfaction,etc.
 Art & Science:- Marketing is a science because we study various aspects
on a theoretical basis & it becomes an art when theoretical aspects can be
practically applied.
 Exchange Mechanism:- Marketing is a process of exchange because
here we exchange goods for the cost.
 Marketing Environment:- A marketer must be capable of adjusting with
the internal & external environment in order to achieve marketing
objectives effectively.
 Marketing Mix:- Marketing can be defined as a process or an activity
that revolves around 4P’s (i.e., Product, Price, Place, Promotion).

Each & every marketing activity has been carried out in

order to reach a specified objective. The objective can be to achieve higher
sales, higher profit, customer satisfaction, etc.

EVOLUTION/MARKETING ORIENTATIONS/PHILOSOPHIES

Marketing orientation is a business model that focuses on delivering products

designed according to customer desires, needs, and requirements.

Exchange Concept

Production Concept

Product Concept

Sales Concept

Marketing Concept

Societal Concept
These concepts can be defined as follows:-

 Exchange Concept:-

It comprises of:-

 This concept belongs to the ‘Barter system of Exchange’

 ‘Barter system of Exchange’ refers to that system where the goods are
exchanged for the goods.

 This activity of exchanging goods for goods is called ‘Exchange

Concept’.

 Production Concept:-

It comprises of:-

 According to this concept, Companies are focusing on maximizing the

production level.

 The companies are only focusing on the quantity of production rather

than quality of production.

 Higher quantity of production leads to lower per unit cost which again
leads lower price for the product.

 Product Concept:-

It comprises of:-

 According to this concept, the Companies are focusing on ‘Quality’ of

product rather than ‘Quantity’ of product.

 Better product quality leads to higher customer satisfaction as well as

higher sales & profit.

 Sales Concept:-

It comprises of:-

 According to this concept, the Companies are focusing on increasing the

sale for there product & services.

 The companies can use different strategies like Personal Selling, Direct
Marketing, Sales promotion, etc in order to enhance the sales of the
product.
  Marketing Concept:-

It comprises of:-

 According to this concept, the Companies are focusing on providing

goods and services to the customer according to there needs & wants.

 The companies should satisfy the customer by providing quality products

& services.

 Societal Concept:-

It comprises of:-

• Marketing organizations are responsible for promoting Corporate Social

Responsibility(CSR).

• According to this concept, organizations should develop only those

products which are eco-friendly & not harmful for the society.

MARKETING MYOPIA

This concept can be defined as:-

 This Concept was developed by ‘Theodrone Levitt’.

 Marketing Myopia is a marketing strategy that focuses on earning higher

amount of profit irrespective of the fact that the customer is satisfied or
not.

It is the Short- sightedness of the business.

IMPORTANCE/PURPOSE OF MARKETING
It can be defined with the help of following points:-
 To maximize customer satisfaction;
 To decrease the cost of production;
 To enhance sales & profitability;
 To provide higher standard of living;
 To deliver the goods & services as per the needs & wants of the society;
 To increase employment opportunities;
 To increase national income;
 To achieve marketing goals within the limited time & budget;
  To promote ‘Word of Mouth’(WOM) publicity;
 To protect the customer from competitive products.
4 P’s of marketing

1. The four Ps of marketing are product, price, place, and promotion, which
are essential elements for successfully marketing a product or service.
The framework helps businesses decide what to sell, how much to
charge, where to sell it, and how to communicate its value.
2. The model originated in the 1950s and later expanded to include people,
process, and physical evidence in service-based marketing
3. E. Jerome McCarthy, an accounting professor and marketing academic,
introduced the concept of the Four P's of marketing—product, price,
place, and promotion—in his 1960 book Basic Marketing: A Managerial
Approach.
4. These 4 P’s can be defined as follows:-

 Product:-
 A ‘Product’ can be anything that satisfy human needs & wants.
 It considers Product Variety, Product quality, Product design, Product
Features, Brand Name, Packaging, Product Size, Product Service,
Warranty & Guarantee, etc.
 Price:-
 Price can be defined as the cost paid by customer for purchasing the
product.
 It considers Pricing Policy, Tax Price, Price incurred on labeling &
packaging, Mode of payment, Price of pre & post services,
Discount(Company gives), Allowances(Retailers gives), Credit terms,
Payment Period, etc.
 Place:-
 Place can be defined as the location where the goods & services to be
sold to the customer.
 It considers Channel of distribution, Transportation Mode, Location of
outlet, Number of outlet, Design of outlet, Inventory Management , etc.
 Promotion:-
This technique of promotion is followed to give value to your product. It
can be done for two reasons:-
 When the product is new in market,
  When your product is on declining stage.
 It Considers Advertising, Sales Promotion, Direct Marketing ,Personal
Selling, Publicity.
DISTRIBUTION/MARKETING CHANNEL
1. Distribution channel refers to the channel that starts with the
manufacturer and end with the consumer.
OR
Distribution channel is a chain of businesses or intermediaries through
which a good or service passes until it reaches the end consumer.
OR
2. A distribution channel is a chain of individuals or organizations, such
as wholesalers, distributors, and retailers, through which a product or
service passes until it reaches the final buyer or end consumer.
OR
3. Distribution channels act as a bridge between producers and
consumers, ensuring that products are available where and when
customers want them.

4. It can be short or long, depending on the intermediaries needed.

5. A distribution channel is the path from production to consumption.
6. It ensures products reach customers and generates sales and brand
awareness.
7. The network has producers, wholesalers, retailers, and consumers.
8. It affects product prices.
9. It includes middlemen such as wholesalers, retailers, distributors, or the
Internet.
[Link] include supplying market information. Managing financial
operations. While promoting products, maintaining prices, and
minimizing risk.

Features of distribution channel

 Information:-
It refers to the gathering and distributing research and intelligence
information about actors and forces in the marketing environment needed for
planning and aiding exchange
 Promotion:-
It refers to the development and spreading persuasive communications
about an offer.
  Contacts:-
It refers to finding and communicating with prospective buyers.
 Matching:-
It refers to shaping and fitting the offer to the buyer’s needs, including
activities such as manufacturing, grading, assembling, and packaging.
 Negotiation:-
It refers to reaching an agreement on price and other terms of the offer
so that ownership or possession can be transferred.
 Physical distribution:-
It refers to transporting and storing goods.
 Financing:-
It refers to acquiring and using funds to cover the costs or carrying out
the channel work.
 Risk taking:- It refers to assuming the risks of carrying out the channel
work.
IMPORTANCE OF DISTRIBUTION CHANNEL/ SIGNIFICANCE OF
MIDDLEMEN
Marketing channels are essential as they help the business to reach customers.
Before a product or service is released to customers, a company ensures its
basic and important elements, such as product, price, place, and promotion.
Thus, a marketing channel is important for a business because of the following
reasons:
1. Reach More Customers: Marketing channels help to reach more
customers within less time. If a company uses efficient online platforms
where the traffic is more, it can reach more customers within less time.
2. Builds a Healthy Relationship with Customers: Marketing channels
build a healthy relationship between producers and consumers with the
help of interaction related to products and services. This relationship
helps to gain more trust from customers and increase the company's sales.
3. Product-related Information: Marketing channels provide use,
importance, benefits, and strategies regarding products and services. This
helps to encourage the customers for buying the product.
4. Customer Support: Marketing channels provide customer support for all
consumers. This helps customers to interact through phones, emails, and
social media and get their questions and problems solved as soon as
possible.
5. On-time Delivery: Marketing channels help a company make sure that
its products are delivered to the customers at the right time. It is important
to provide the customers with their product on time because otherwise,
the company has a high possibility of losing the customer.
6. Enough Stock: Proper marketing channel also helps a company in
maintaining enough products in stock with itself. The company can easily
store its products in warehouses and supply them according to the
prevailing market demand.
7. Promotion and Ownership Transfer: Intermediaries assist in promoting
products and bridging the gap between producers and consumers. They
facilitate the transfer of title and ownership of goods.
8. Customer Convenience and Service: Channels enhance the overall
customer experience by providing tailored services, such as after-sales
support, in-store experiences, and faster delivery options.
Advertising
1. Advertising is any paid form of non-personal presentation and promotion
of goods, services, or ideas by an identified sponsor.
OR
Advertising is a means of communication with the users of a product or
service.
OR
Advertising is the activity or profession of producing information for
promoting the sale of commercial products or services.
OR
2. Advertising is the act or practice of calling public attention to one's
product, service, need, etc., especially by paid announcements in
newspapers and magazines, over radio or television,etc.
3. It serves as a vital marketing tool using mass media—digital, print, TV,
or outdoor—to build brand awareness, increase demand, and drive
consumer action, such as purchasing or brand adoption.
4. It is a form of marketing communication that aims to persuade or
influence potential customers to take action, such as making a purchase,
trying a product, or changing their attitude towards a brand or idea.
5. Advertising can take many forms, such as print ads in newspapers and
magazines, commercials on TV and radio, billboards and posters, social
media ads, search engine ads, and more.
6. The messaging and creative elements of an advertisement can vary
widely, from humorous and entertaining to emotional and informative.
 ADVERTISING OBJECTIVES
 Broad Objectives:-
It involves:-
• To enhance organisational effectiveness.
• To generate greater profits.
• To improve competitive position.
 Specific Objectives:-
It involves:-
• To increase sales.
• To increase the level of awareness of a given product from current level.
• To generate responses.
 Sub-Objectives:-
It Involves:-
 To convey information.
 To create desire.
 To improve the image of product.
 To offset the effects of a price variation.
SALES PROMOTION
Sales Promotion is short term incentives to encourage purchase or sale of a
product or service.
OR
Sales promotion is a marketing technique designed to create sales for a product
over a defined period of time
OR
Sales Promotion is an action-focused marketing event whose purpose is to have
a direct impact on the behavior of the forms customers.
OR
Sales Promotion is the direct inducement or incentive to the sales force, the
distributor, or the consumer, with the primary objective of creating an
immediate sale.
 Objectives of sales promotion
The basic objectives of sales promotion are:

 To introduce new products: To induce buyers to purchase a new

product, free samples may be distributed or money and merchandise
allowance may be offered to business to stock and sell the product.
 To attract new customers: New customers may be attracted through
issue of free samples, premiums, contests and similar devices.
 To induce present customers to buy more: Present customers may be
induced to buy more by knowing more about a product, its ingredients
and uses.
 To help firm remain competitive: Sales promotions may be undertaken
to meet competition from a firm.
 To increase sales in off season: Buyers may be encouraged to use the
product in off seasons by showing them the variety of uses of the product.
 To increase the inventories of business buyers: Retailers may be
induced to keep in stock more units of a product so that more sales can be
effected.

CONSUMER BEHAVIOUR
Consumer Behaviour can be defined as a decision making process & physical
activity involved in acquiring, evaluating, using & disposing of goods &
services.
OR
Consumer Behaviour deals with various stages that a consumer goes through
before purchasing any product or service.
OR
Consumer Behaviour is the study of consumers and the processes they use to
choose, use (consume), and dispose of products and services
OR
Consumer Behaviour is the study of individuals, groups, or organizations and
the processes they use to select, secure, use, and dispose of products, services,
experiences, or ideas to satisfy needs and the impacts that these processes have
on the consumer and society.
FEATURES OF CONSUMER BEHAVIOR
These can be the various features of consumer behaviour:-
 It is nfluenced by various factors i.e., various Internal & external factors;
  It varies from consumer to consumer;
 It varies from region to region and country to county;
 It varies from product to product;
 It leads to purchase decision i.e., Positive Consumer behaviour leads to
purchase decision.
 It improves standard of living;
 It is a continuous process i.e., because it involves the process starts before
the buying and continuing after purchasing.
 Study of Consumer needs & wants.
STAGES OF CONSUMER BEHAVIOR
These stages can be defined as follows:-
 Cognitive Stage:-
It refers to that stage where the consumer buys a product after
making a logical & reasoning analysis.
For eg:- Investment in speciality goods;
 Affective Stage:-
It refers to that stage where a consumer buys a product due to
having an affection with the product.
For eg:- Purchase of Insurance Policies;
 Conative Stage:-
It refers to that stage where the consumer takes the final decision
i.e. either purchase it or not.
For eg:- Purchase of Luxury car after logical analysis.
STAGES IN CONSUMER BUYING DECISION PROCESS (CBDP)
These stages involved in consumer buying decision process can be defined as
follows:-
 Problem Recognition:-
This is the first step in CBDP. At this step, the consumer
analyses his needs & wants and then decides which product to buy.
 Information Search:-
 After deciding which product to buy, the next step would be
to search the information regarding that product in the market.
 Evaluation & Selection:-
After searching product information, the next step would be
to search for the similar products in the market for evaluation & then choosing
the best product.
 Store Selection & Purchase:-
After selecting the best product, the next step is to select
the store from where the product to buy & then finally purchasing the product
from that store.
 Post Purchase Behaviour:-
After buying & consuming the product, the consumer is
either feeling Cossonant(satisfied) or Dissonant(dissatisfied).If consumer feels
satisfied, he will make a repeat purchase else shift towards another product.

***********SYLLABUS COMPLETED************