HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

COMMERCE
 Commerce includes all the activities which contribute to the transfer of surplus goods from
the original producer to the final consumer at the right time, at the right place, in the right
quantity and at the right price.
 To effect this transfer efficiently, both trade and aids to trade are required.
 Trade means the actual buying and selling of goods with a view to making a profit. It
involves satisfying directly or indirectly the wants of consumers by transporting the 'right'
goods, both final and intermediate, from the producers to the consumers.
 There are two main types of trade:
 Home trade is carried out among the people of the country itself. It may be wholesale or
retail. A wholesaler buys from the producer and sells to the retailer who in turn resells to
the final consumer.
 Foreign trade is trade between the people of one country and the rest of the world. It
may be import trade or export trade, both of which are normally wholesale in nature.
 Trade cannot be carried on without aids to trade. So aids to trade are the various activities
carried on to help carry out trade. The aids to trade include banking, transport,
communications, warehousing, advertising and insurance.
 Everyone, whether in the capacity of a final consumer or a producer such as a farmer, a
manufacturer, a trader or even a doctor, requires the services of commerce, i.e. trade and aids
to trade.
 Commerce is needed in the production process, before and after the production of raw
materials and finished goods.

Forms of Specialization
Specialization at country level occurs when a certain country devotes itself mainly to
produce certain products which it exports to other countries.
Specialization at region level occurs when a particular region in a country devotes its self in
producing certain types of products, which is used by all the country.
Specialization at town level occurs when a particular city in a country devotes its self in
producing certain types of products, which is used by all the country.
Specialization at firm level occurs when a firm is divided into departments and within
departments individual workers have their own specialized duty.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

PRODUCTION
Production is the process by which raw materials are transformed into finished goods to satisfy
the requirements of consumers or other organizations. In addition to being in the right form, the
goods must be in the right place at the right time before the process of production is complete.

Branches or stages of Production:

Primary Production
This is the first stage of production and is called the extractive stage. In this stage, raw materials
are extracted from the surface of the earth or from the sea. Workers are employed in mining,
fishing, quarrying, forestry and farming. In this stage the raw materials are unusable and have to
be sent to the manufacturing industries to be changed in to goods that can be used.

Secondary Production
In this stage, the raw materials are transformed into semi-finished or finished products. The
goods are made ready for sale to the final consumers in this stage. Textile industry, building and
construction industry, chemical industry, etc, are examples of the manufacturing work carried
out in this stage.
Tertiary Production
The transfer of goods from the factories to the final consumers is the work that is carried out in
the tertiary stage. In this stage there are many activities which are broadly divided in to two:
Commercial Services: This includes workers in communications, finance, insurance,
wholesaling and retailing. These workers are involved in getting the goods to the final consumer.
Direct Services: People in this group work to provide a direct service rather than delivering
goods to the consumers. Teachers, doctors, nurses, lawyers, civil servants, policemen, etc, are
examples of people providing direct services.

Chain of Production:
Primary, secondary and tertiary industries are the stages in the chain of production, which is the
process by which raw materials reach the consumer as finished goods or services. Each stage of
production, value is increased. For example, consider a chain of production for a wooden table.
In the primary stage trees are cut down and sawn into planks. In this stage planks (raw materials)
are very cheap. In the secondary stage the wood is shaped into a table. In the production process
of wooden table, manufacturer uses labours, machines, raw materials and other materials needed
to finish the product. Overhead costs such as rent, fuel and power, insurance, telephone charges
etc. are also incurred in the production process. Therefore at the end of the secondary stage, the
value of the table will be much higher compared to the primary stage. When selling the tables to
the wholesalers, manufacturer also adds a profit margin. In the tertiary stage , the wholesalers
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

and retailers will add profit margin when selling the tables. Therefore, value increases at each
stage of production until it reaches the final consumers.

The chain of production for a wooden table would be as follows:

Primary- a tree is cut down and sawn into planks.
Secondary- the wood is shaped into a table.
Tertiary- the table is transported and sold by a retailer.
Another way of classifying production is as follows:
• Direct Production: This is producing goods and services for the producer’s own use. For
example, when a man grows food crops for his own use or a man builds his own house or
makes his own furniture, it is called direct production.
• Indirect Production: This involves specialization in a particular type of work. For
example, a man specializes in ensuring that the quality of a product is standardized. There
is division of labour, which leads to specialization.

DIVISION OF LABOUR
In an industry there are many firms and each firm has many departments. In each department
there are many workers. Each worker has his own specialized job. This is the principle of
division of labour. For example, in the finance industry there are many banks. Each bank has a
number of departments like the accounts department, the clearing department, the payments and
receipt department, etc. Within each department there are many workers and each worker has his
own job. In the receipts and payments department, some workers deal with cheques, while others
deal with the computers and clerical work.

Division of labour at Individual Level

This is breaking down of a productive activity into tasks so that each person performs a
particular task that he is most skilled in. For example a person may be solely responsible for only
cutting the fish in a fish-canning factory.

Division of Labour at Regional Level

This happens when a particular region in a country is involved in producing a particular
product. This may be due to the availability of natural resources in that particular region. For
example, Feevah, an island in the Maldives is specialized in farming because the soil is very
favourable for cultivation.

Division of Labour at National Level

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Sometimes a country may specialize in producing one line of goods. This is also due to the
availability of resources or favourable climatic conditions in that particular country. For
example, Malaysia specializes in producing rubber; Maldives specializes in fish, Cuba in sugar,
and Brazil in coffee.

Advantages of Specialization
• Individual workers can concentrate on the work that they are most suited for.
• Practice makes perfect. Workers doing the same work hundreds of times a day will
become perfect in their work.
• Division of labour allows a great saving of tools and equipment.
• When there is division of labour, there are chances of new techniques and ideas being
developed.
• Division of labour leads to an increase in the output per worker.
• Increase in output results in lower costs for the consumers.
• This also results in the need to exchange the surplus in one area with that of another area.
• Specialization leads to less breakages and damages resulting in less wastage.

Disadvantages of Specialization:
• Each department depends on the other departments. If there is a break down in one
department, then the whole industry may get affected.
• There are chances of boredom as the workers are doing the same work hundreds of times
a day.
• As machinery becomes more elaborate it replaces labour causing unemployment.
• Division of labour normally leads to a decline in craftsmanship.
• As machinery takes over, the choice of goods available to consumers is reduced.

Explain the ways in which industry, commerce and direct services are inter-related and
interdependent.
All human beings have unlimited wants. Human wants can be satisfied by production.
Production takes place in industries. Industries produce goods and services to satisfy human
wants. All goods and services produced should reach the final consumers. Here commerce assists
a lot. Commerce includes trade and aids to trade. Commerce does see that all those goods and
services being produced should reach the final consumers. In this regard, banking, insurance,
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

communications, warehousing and transport assist the industries so as to reach the goods and
services to the final consumers.
Direct services are those services which are performed directly to the people who receive
them. This is concerned with the provision of personal services. Direct services are not
concerned with the distribution of goods. They enable the private individuals to make use of
health facilities (eg, using doctors) and obtaining knowledge and skills (eg, using teachers) as
well as relying on the maintenance of law and order and other personal services (eg, hair
dressing, journalist). Direct services help the firms’ employees to be better educated and
healthier and therefore they will be more productive.
Direct services like education, health services, professional services assist industries in
such a way that both skilled and unskilled workers are available for those industries. Clerical
staff offer their services for a smooth running of both trade and commercial activities. Thus,
commerce, industries and direct services are interdependent to each other
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

RETAIL TRADE
Retailer
A retailer is a middleman who buys goods from the manufacturer or from the wholesaler and
sells to the many consumers. A retailer’s functions are numerous:

FUNCTIONS OF A RETAILER:
• Provides goods in convenient quantities.
• Provides goods in convenient locations.
• Provides goods in convenient times.
• Provides a variety of goods.
• May provide pre-sales and after-sales services.
• May provide credit facilities.
• May provide delivery service for some goods.
• Deals with customers’ complaints.
• Provides advice and information to customers.
• May provide self-service.
• Acts as a channel of distribution between customers and the manufacturers of goods
TYPES OF RETAILERS
LARGE SCALE RETAILERS
General features

1. A large-scale retailing business is normally run as a public limited company.

2. The capital needed is very large.
3. The large assets owned make it easier for the company to raise money from the bank or the
public in the form of debentures.
4. The retailers normally buy in bulk direct from the manufacturers.
5. Some retailers may even have their own factories.
6. As such, the retailers can do away with the services of the wholesalers.

MULTIPLE SHOP or CHAIN STORES:.

Features:
• It consists of many similar branch shops in different areas or under one roof.
• Each shop is under the direct control of a branch manager.
• The head office controls all the branch shops.
• Every shop is decorated in the same manner, has the same name and sells the same goods
at the standard prices fixed by the head office.
• The chain stores mostly deal in one line of goods (clothes, food, shoes & medicine).
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• The stores mostly operate as public limited companies.

• The head office sends out inspectors to make regular checks on all the branches.

Advantages:
• The stores buy goods from the manufacturers in bulk and hence get discounts. So they are
able to sell goods to consumers at competitive prices.
• They have large capital and are able to employ specialists in such matters as buying,
publicity, window display, etc,.
• Losses sustained in one branch can be absorbed in the profits made by other branches.
• There is economy in advertising as all the branches are included in one advertisement.
• Slow-selling lines and surplus stock in one area can be transferred to more promising
areas, instead of clearing it off at a loss.

Disadvantages:
• There is too much centralized control from head office. So branch managers do not have
any freedom.
• Credit facilities are not offered. So the stores may lose their customers.
• There is lack of personal touch between the branch shops and the customers.

DEPARTMENTAL STORES:
Features:
• It consists of many departments all in one building.
• Department stores are located in the centre of large cities.
• Each department is under the control of a manager and the head office controls all the
departments.
• Each department specializes in one line of goods, for example, furniture, hardware,
clothes, foodstuff, etc.
• Many conveniences to the shoppers including toilets, restrooms, saloons, telephone
booths, car parking facilities, etc, are provided.
• Goods are pre-packed and the prices are clearly marked.
• Many department stores are owned by very large firms.

Advantages:
• The department stores buy goods from the manufacturers in bulk and are able to get
discounts. Hence they can sell goods to consumers at competitive prices.
• They have large capital and are able to employ specialists in such matters as buying,
publicity, window display, etc,.
• There is economy in advertising as all the departments are included in one advertisement.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Losses sustained in one department can be absorbed in the profits made by other
departments.
• More customers are attracted as conveniences such as lounges, restaurants, car parking
facilities, etc, are provided.
• Shopping can be done under one roof. This makes it very convenient for customers.

Disadvantages:
• There are high overheads because of the many facilities provided. This increases the price
of goods.
• As departmental stores are located in the centre of towns and cities, high rental charges
increase the unit price of goods.
• There is very little freedom for individual departments as there is strict control from the
head office.
3. SUPERMARKETS:
Features:
• These are self-service shops with floor space of more than 186 square metres.
• They sell mostly foodstuff and household goods.
• Goods are pre-packed, well displayed and self-service is encouraged.
• Amenities such as car parking, toilets, restaurants, etc are provided.
• Supermarkets sometimes brand their own goods.
• Prices are very competitive because of the high rate of sales.

Advantages:
• The supermarkets buy goods from the manufacturers in bulk and are able to get
discounts. Hence they can sell goods to consumers at competitive prices.
• Self-service reduces the wage costs of the supermarket.
• Customers benefit from quick service as the goods are pre-packed and well displayed.
• Supermarkets buy from the manufacturers who brand the goods using the supermarkets’
own labels.
• Customers are attracted because of the amenities and the large variety of goods that are
provided by the supermarket.

Disadvantages:
• Self-service encourages pilfering and shop lifting.
• Customers do not enjoy any personal service.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

HYPERMARKETS
Features:
• Hypermarkets usually have more than 5000 square meters of selling space.
• Hypermarkets offer a great variety of foodstuff and a wide range of other goods.
• They buy directly from manufacturers and sell at competitive prices.
• Hypermarkets are usually found outside towns and cities.
• They provide large car parking space.
• Goods are pre-packed, well displayed and self-service is encouraged.
• To encourage non-car owners, they provide free bus service to and from the
hypermarkets.
• Amenities such as lounges, swimming pools, toilets, restaurants, child care centers, etc,
are provided to make shopping comfortable for customers.

Advantages:
• The hypermarkets buy goods from the manufacturers in bulk and are able to get
discounts. Hence they can sell goods to consumers at competitive prices.
• Self-service reduces the wage costs of the hypermarket.
• Customers benefit from quick service as the goods are pre-packed and well displayed.
• Amenities such as lounges, swimming pools, toilets, restaurants, child care centers, etc,
are provided to make shopping comfortable for customers.
• Customers are attracted because of the amenities and the large variety of goods that are
provided by the hypermarket.
• They provide free bus service to and from the hypermarkets.

Disadvantages:
• Hypermarkets lead to a decline of business in the town centers.
• Self-service encourages pilfering and shoplifting.
• Customers do not enjoy any personal service.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

FRANCHISING:
Examples: Kentucky Fried Chicken and MacDonald’s.

Features:
• This is a process whereby the owners of a business allow others to run branches in return
for certain payments.
• The owner of the business is called a franchiser and the people who operate the retail
outlets are called franchisees.
• The franchisee has to rent or buy his business premises.
• The franchisee has to pay the franchiser a certain sum of money for the permission to run
the retail outlet.
• The franchisee also has to pay royalty to the franchiser for the purpose of using his name.
• All the shops selling the particular franchised products are decorated in the same style
and use the same name.
Advantages to the Franchiser:
• The franchiser has the advantage of attracting more capital from the franchisees.
• The franchiser also receives a share of the franchisee’s profit (royalty).
• As the number of retail outlets increase, the franchiser’s name spreads more.

Advantages to the Franchisee:

• The franchisee has the advantage of selling a product that is well established in the
market.
• Franchisees benefit by having an easily recognizable shop, which is well advertised.

Advantages to the Customer:

• The customer knows he is buying a known product whose quality is guaranteed when he
buys from a franchised outlet.
• It is very easy for a customer to identify a franchised outlet.

Disadvantages to Franchiser:
• The franchiser loses his customers who go away to the franchised outlets for their
convenience.

Disadvantages to Franchisee:
• It is very expensive to buy a franchise.
• The franchisee has to pay the franchiser royalty.
• The franchisee has no freedom regarding decorating his shop, etc.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

VOLUNTARY CHAINS

Features:
• These groups are organized by wholesalers and they allow small retailers to join and
enjoy the benefits of large-scale retailing.
• The retailers buy goods from the wholesalers within the group at agreed prices.
• The retailer has to keep his premises and services up to a standard specified by the
organization.
• All the retailers have the same name given by the group.
• Advertising is done nationally by the whole group.
• These chains are found mostly in grocery trade.
Advantages:
• The retailers place orders with wholesalers within the group and can get discounts.
• Advertising expenses are reduced as the whole group is nationally advertised.
• The retailer can get loans from the group for renovation and decoration.
• The group lays down standards for retailers to follow, thus making them more efficient.

Disadvantages:
• The retailer does not have much freedom as the group makes most of the policy
decisions.
• The representatives of the group decide upon even the advertising, window display,
selection of goods, etc.

RETAIL CO-OPERATIVE SOCIETIES:

Definition: A cooperative is a non-profit making voluntary organization where members

associate on the basis of equal rights to obtain economic and social benefits for themselves.

Features:
• Membership is opened to anyone prepared to buy a share in the society.
• Control is vested among the members. The members elect a management committee by
the principle of “One man-One vote”.
• The societies must be registered with the Registrar of Societies under the Cooperative
Ordinance.
• The members enjoy limited liability.
• They have separate legal entity of their own, separate from the owners.
Advantages to the Co-operative:
• It can raise a large capital at low interest rates.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• It is exempted from paying taxes on profit.

• Members buy goods from the cooperative as they enjoy patronage dividend based on
their purchases. Thus the cooperative is ensured of a regular clientele.

Advantages to the Members:

• Members receive interest on capital, which they have invested in the cooperative.
• Each member receives rebates, patronage dividends or trading stamps in proportion to
their purchases.
• Members receive other benefits like educational aid, group insurance, etc.

Disadvantages:
• With the separation of management from ownership, members lose interest, as they do
not participate in the running of the business.
• There is inefficiency in the business as the elected management committee consists of
ordinary people.
• There are a limited variety of goods offered by the cooperatives.
• Sometimes in order to pay patronage dividend, the prices of goods are increased.
• Many of the retail cooperatives are too small to take advantages of large-scale retailing.

SMALL SCALE RETAILERS

General features

1. A small-scale retailing business is normally run as a sole proprietorship or as a partnership.

2. The small amount of capital needed is raised from personal savings, or borrowed from friends
and relatives. If the retailer has some collateral security (e.g. house, land, lucrative business), he
might be able to obtain some money from a bank in the form of a loan or an overdraft.
3. Small retailers obtain a great variety of goods in small quantities from wholesalers. They are
not able to go direct to the manufacturers since purchases are not made in bulk.
4. The sole proprietor normally serves his customers with the help of some assistants. Therefore,
he has the opportunity to get to know his regular customers well.
5. Small-scale retailers usually operate only one outlet, normally at a convenient location. Some
very successful ones may open branches in other parts of the city.
1. STREET MARKETS:
Features:
• These markets are operated by owners of shops who wish to increase their sales and by
producers of agricultural goods.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• These owners and producers rent stalls at a number of different markets on different days.
• Mostly agricultural goods are sold in a fresh condition.
• They are opened mostly on holidays.
• The overheads are very low.

Advantages:
• These shops are opened mostly on holidays to enable customers to do their shopping
conveniently.
• Customers can get goods very cheap as goods are sold mostly by producers of
agricultural goods.
• Customers can get goods in a fresh condition.
• As overheads are low, the goods are sold very cheap.

Disadvantages:
• Damaged, stolen or second-hand goods may be sold.
• No credit facilities are allowed.
• There are no after-sales services provided.
• These markets are not opened everyday.

2. Hawkers
Hawkers are the small-scale traders who carry the goods by using some form of transport like
handcart. They are also selling the goods like vegetables, fruits, etc.

3. Peddlers

Peddlers are the small-scale retailers who carry the goods on their heads or bags. They are selling
the goods, which have low unit valve like pen, pencil, etc.

4. Vending Machines: -
Features:
• These machines are placed at the entrance of public places like cinemas, parks and
supermarkets.
• The customer has to insert the correct amount of money into the machine, press a button
or turn a lever and the goods come out.
• Such machines are either bought or hired by the operator.
• Goods like cold bottled drinks, hot drinks, cigarettes, sweets, etc, are sold in this way.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Advantages to the Operator:

• The machines provide great savings in labour cost.
• They can be located in convenient spots and do not need a shop.

Advantages to the Customer:

• Customers can get these goods at any time.
• They do not have to depend on going to a shop and are relieved of pressure from shop
assistants.

Disadvantages:
• The cost of installing the machine is considerable.
• The machine can be easily broken into and the money pilfered.
• It causes an inconvenience to the customers if the machines break down.
• Prices are high.
• Machines are sometimes jammed and it is often difficult to find anyone that can help or
to get a refund.

SELLING TECHNIQUES, TREND IN RETAILING AND IMPLICATIONS OF E-

COMMERCE

1. BRANDING AND PACKAGING:

Features:
• Branding means the selling of goods under a trademark or brand name of the
manufacturer, wholesaler or retailer. The trademark is clearly displayed on the package or
the container.
• The aim is to differentiate the goods of one manufacturer from those of others.
• Branded goods are of uniform size, weight, and quality and sometimes price.
• Packaging of goods serves as a protection for the products gives them an attractive
appearance and helps to identify branded products.

Advantages to Manufacturer:
• The manufacturer is able to create brand loyalty amongst consumers for his brand of
products.
• It increases turnover and results in economies of scale.

Advantages to the Retailer:

• The retailer does not have to weigh or pack the goods.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• As instructions are printed on the labels of goods, there is no need for the retailer to have
specialized knowledge.
• The retailer need not advertise branded goods.
• The retailer can offer self-service as the goods are already branded and packed.
Advantages to the customer:
• The customers need not waste time inspecting the goods as they are already branded and
packed.
• Customers may be able to enjoy a wider choice of goods.
• Customers are well informed about the product as the instructions are printed on the
labels of the products.

Disadvantages:
• Manufacturers have to spend large amounts of money on competitive advertising.
• A retailer has to stock different brands of the same product to meet consumers’ demand.
• Branding and packaging increases the price of goods for consumers.
• Branding leads to imitation of goods, which affects customers.

2. SELF SERVICE:
Features:
• The customer is allowed to choose the products by himself with a trolley or a basket.
• This system is widely used by large retailers.
• Self-service is impossible without branding and packaging.
• This service has been developed to make shopping convenient for the modern busy
housewives.

Advantages to the Retailer:

• It is very economical as it cuts down the cost of employing shop assistants.
• Self-service increases turnover as it encourages impulsive buying.
Advantages to the Customers:
• The customer can select the goods he needs quickly as they are already pre-packed.
• The customer can take his own time to select the goods without pressure from shop
assistants.

Disadvantages:
• Much capital is needed, as shops must be large and spacious.
• More variety of goods is needed. This result in capital tied up in stock.
• Self-service leads to pilfering and shoplifting.
• Customers are deprived of personal service.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Customers may be tempted to buy goods they do not require.

• Safety measures like cameras, mirrors, etc, have to be installed to avoid pilfering.

3. AFTER-SALES SERVICE
1. After-sales service is an undertaking made by the retailer, or sometimes the manufacturer or
its agent, to repair any faults which occur to the article sold within a certain time. Sometimes, the
undertaking could also be to provide some maintenance service at regular intervals for a definite
period of time from the time of sale of the article to ensure the efficiency of the article.
2. Sometimes, this undertaking is known as a warranty and the period that such an undertaking
holds is the warranty period.
3. After-sales services are normally provided for permanent or durable goods such as machinery,
motor cars, television sets, and other domestic electrical appliances.
4. Since durable goods and machinery are highly technical and complex, retailers who are
normally trained agents of the manufacturer, or the manufacturer's sole agent undertake the all-
important task of providing after-sales service, for a fixed charge.

Positive effects of after-sales service

On the manufacturer and the retailer

1. Good and efficient after-sales service gives the product a good image and increases its
competitiveness with its rivals (i.e. the same type of product, but of a different brand). Thus, its
sales may increase. For example, consumers would certainly hesitate to buy a particular make of
car if it is reputed to come with poor after-sales service.

On the consumer

1. He is assured of an efficiently working product at least within the warranty period.

2. Should mechanical faults become apparent after the article is in use, the consumer is assured
of getting it repaired free of charge if it is still within the warranty period. If the fault is still not
rectified, he may get a replacement.
3. He is assured of expert technical advice with regard to maintenance and use of the article since
the manufacturer would ensure that the technical staff providing the after-sales service are
properly trained.

Negative effects of after-sales service

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

On the manufacturer and the retailer

1. High overheads are needed to maintain a technically-trained staff. Sometimes, there is the
need to maintain workshops fitted with proper equipment at strategic points throughout the
country.
2. Sometimes, there is the need to replace a defective article if the fault cannot be detected or is
beyond repair. The replacements have to be written off as losses.

On the consumer

1. More often than not, the cost of after-sales services is included in the selling price of the
article. To that extent, the consumer is paying a higher price for the good, especially if he does
not avail himself of such services.
2. After-sales service is only available during the warranty period. If the fault is only detected
after this period, the consumer has to pay the repair bill himself.

4. BAR CODING
Instead of using price tags for each item of good, bar codes are used nowadays. A bar code
consists of parallel black stripes of different widths with different spacing between the stripes,
printed on the wrapper itself. The arrangement of the stripes can be read by using special
scanners. The information is then sent to a computer to be processed. Information as to type of
goods, its price and weight can be readily accessed. For example, the UPC (Universal Product
Code) bar code system is widely used in the supermarket industry for standard recognition for
goods sold and manufactured.

Positive effects of bar coding:

On the retailer
1. It saves time and hence labour cost, since vital information such as price, type of good can be
read accurately, easily and quickly by special scanners that are linked to computers at the
checkout points. This avoids the possibility of human error if the counter personnel has to key in
vital information. Such information will then be passed on to a central computer. The retailer can
make use of the data thus collected to manage his business efficiently.
2. It helps management greatly in controlling and supervising the movement of inventory in the
premises. The retailer will be able to know at the end of the day how much of each type of good
was sold. New inventory can then be ordered whenever the need arises. The retailer saves
because he need not hold excess stock.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

On the customer
The time taken by the cashier to arrive at the total amount payable by the customer is shorter.
Thus, the customer can check out faster.

Negative effects of bar coding

On the retailer
1. A high initial capital outlay in terms of buying equipment and training of staff is needed. The
whole retail outlet has to be fully computerized.

On the customer
1. He does not remember the cost of each item he intends to buy since the bar code can only be
read by the special scanner. He is then not able to do a quick calculation of the prices before he
pays at the cash counter.
RECENT TRENDS IN RETAILING
E-COMMERCE (ELECTRONIC COMMERCE)
E-commerce (electronic commerce or EC) is the buying and selling of goods and services on the
Internet, especially the World Wide Web. In practice, this term and a new term, "e-business," are
often used interchangeably. For online retail selling, the term e-tailing is sometimes used.

1. MAIL ORDER FIRMS:

Features:
• Mail order business is run by manufacturers or specialist mail order warehouses.
• They sell goods to customers by sending expensive catalogues or by local part-time
agents (housewives).
• Goods are ordered with the help of post or with the help of the part-time agents.
• Goods ordered are sent to the buyers by parcel post.
• The method of payment is cash on delivery (C.O.D.) or cash with order (C.W.O.).
• Payments can be made in installments if the part time agents are collecting the money.

Advantages:
• The mail order firms buy goods in bulk directly from the manufacturers and sell at
competitive prices.
• There is no need for expensive large buildings.
• There is no need to employ qualified sales staff.
• The catalogues and part-time agents act as a permanent advertisement.
• Customers can buy goods on credit and pay in installments.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Customers can return unwanted goods, but they must do so within a time limit.
• There is no need for the customers to visit the shop as the goods are sent to the
customers’ doorstep.

Disadvantages:
• The high cost of catalogues and advertising increases the cost of sales per unit.
• There are high operational expenses in the form of commission to agents, cost of
packaging and postal charges.
• There is a risk of bad debts as customers may default in their payments.
• There is a lack of personal contact between the mail order firm and the customer.
• The mail order firm has difficulty in selling goods that are returned by customers.
• Customers cannot inspect the goods if payment is by C.O.D or C.W.O.
• No after sales service is provided.
• Sometimes there may be a delay in the delivery of goods.
• The mail order firms take a long time to refund money for goods returned by customers.

2. SHOPPING BY PHONE
Telephone marketing is a convenient way to learn about and buy products and services without
leaving the comfort of your home.
Some of the benefits of telephone shopping include:
• Shopping 24 hours per day, seven days a week;
• Buying goods and services with credit;
• Comparison shopping with a variety of merchants;
• Locating hard-to-find items — this can be especially convenient for those with unusual
hobbies or interests;
• Getting help and information before and after a sale;

3. SHOPPING BY TELEVISION
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

TV has become nowadays an effective media not only for advertisement but also for effective
sales through live product demonstration. Consumer durables, consumer goods, home appliances
are demonstrated on TV. The consumers who watch the advertisements and the product
demonstration can place orders by phone SMS, E-mail or by fax. The goods will be delivered by
Post.

4. TELESALES
It is the recent development in large scale retailing trade. The large scale retailers send SMS to
the customers’ mobile phones and advertise the product thereby sell the goods. It is the current
trend that the expertised sales staff talk over the phone to the customers, detail about the
product, convince them, and make them to buy the product or service. Telesales deliver the
goods to the door step of the customers. Telesales have become more popular with selling of
electronic goods, electrical goods, home appliances, offering car loan, housing loan, credit cards
etc.,

Advantages of telesales to the large scale retailers/manufacturers

• Cost of advertising is very less.
• Sales promotion over phone is very easy.
• Expenditures to be incurred on salesmen are cut-off.
• Expanding of market to regional or national will be so easy.
• Advantages of telesales to the customers
• Shopping becomes so easy
• Customers get their goods/services at their door step.

Disadvantages of telesales to the large scale retailers/manufacturers

• Persuading the customers will be so difficult since there can be no product demo or exhibit.
• It is difficult to cover huge customers over a region or across the country.

Disadvantages of telesales to the customers

• Telesale products or services are not subject to trustworthy since the retailer has no
permanent selling place.
• Customer satisfaction over product/service offered through telesales may not be 100% since
the products may not be according to the specifications.
• Telesales firms take a very long time to refund the amount to the customers when
faulty/damaged/dissatisfied goods are returned.

ADVANTAGES OF LARGE SCALE RETAILING TO THE RETAILER

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Retailers can get better trade and cash discounts when they buy from manufacturers in
bulk quantities.
• Large retailers can afford to employ specialists for each department. Hence goods and
services are of better quality and standard.
• Some large retailers are able to brand their goods using their own labels and thus are able
to create brand loyalty among consumers.
• Large retailers buy in bulk and so have their own fleet of transport vehicles.
• Large retailers provide self-service and so are able to cut down expenses of hiring shop
assistants.
• As large retailers buy in bulk they are able to sell at competitive prices. This increases
sales and the profit of the retailer.
• Large retailers can afford to carry out sales promotions in order to increase their sales.
• Large retailers are able to afford to use the latest sophisticated cash tills and computer
terminals to making shopping convenient for the retailer and the customers.

ADVANTAGES OF LARGE SCALE RETAILING TO THE CUSTOMERS

• Customers are able to get goods at competitive prices as the large retailers buy in bulk
directly from the manufacturers.
• Customers find it convenient to do their shopping under one roof as large retailers
provide a great variety of goods.
• Self service and the various amenities provided by large retailers makes it even more
convenient for the customers to do their shopping.

DISADVANTAGES OF LARGE SCALE RETAILING TO THE RETAILER

• Large capital is needed as large retailers need to buy a large variety of goods direct from
the manufacturers in bulk quantities.
• As the shop expands and the branches and departments increase, control becomes more
difficult and expensive.
• There are high operating expenses and these can be covered only by a high turnover in
sales.
• There is a greater risk of loss through pilfering and shoplifting as self-service is provided.
DISADVANTAGES OF LARGE SCALE RETAILING TO THE CUSTOMERS

• Customers do not enjoy personal services from these large retailers.

• Large retailers normally do not provide credit facilities.
• As large retailers provide many amenities, consumers may get the goods at higher prices.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

HOW WHOLESALERS ARE AFFECTED BY THE GROWTH OF LARGE SCALE

RETAILERS?

The establishment and popularity of large retail outlets like the multiple and the variety chain
stores which have the financial and technical resources to buy in bulk direct from the
manufacturer have contributed to the decline of the wholesaler. Nowadays most of the
manufacturers prefer to sell goods direct to the large scale retailers. By selling direct to the large
scale retailers, the manufacturers are able to sell goods on bulk consignment where the payment
is made for the consignment by the large scale retailers immediately. The manufacturers get the
benefits of more profit percentage as the wholesalers are eliminated in this way. Manufacturers
also get in touch with the final consumers through large scale retailers as they perform the
function of customers personal service through pre-sale and after-sale service. Most importantly
a large scale retailer can deal with many manufacturers’ goods at wide range. As these functions
cannot at all be performed by wholesalers, the wholesale trade has become of less importance.

SURVIVAL OF THE SMALL RETAILER

The reasons for the survival of the small retailer are as follows:
(a) able to give better personal advice and service.
(b) assess the credit-worthiness of each customer and may be willing to give credit.
(c)They might undertake delivery of goods - e.g. daily newspaper, fresh bread, daily provisions.
(d) convenient for them to call whenever they run out of supplies.
(e) The small amount of capital needed makes it easy for people to enter the retail trade. Not
much skill and expenses are needed to start a business.
(f) The small shop does not have as many overheads as a large retailer, and hence can sell most
items at a slightly lower price.
(g) The small shop is easier to manage. The small retailer is helped by members of his family. .
(h) By becoming a member of a voluntary chainthe small retailer may be able to get his
supplies on more favourable terms from the wholesalers in his chain as well as enjoy other
benefits like advertising, credit and insurance.

Advantages of the small retailer

(Note that the above points from (a) - (h) may be used in the discussion on the advantages of the
small retailer.)

Disadvantages of the small retailer

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

1. Jack of all trades and master of none

The small retailer does not employ any specialist buyer. He himself undertakes the tasks of
buying as well as selling, store-keeping and display, not to mention book-keeping and
administration. Since he cannot be an expert in every field, it is very likely that he is less
efficient and hence, his costs in relation to turnover are higher than those of the larger retailers.
2. Lower trade discount

Since the small retailer gets his goods from the wholesaler, it is natural that he will have to pay a
higher price for his goods since he gets a lower trade discount.

REASONS WHY A SMALL RETAILER BUYS FROM THE WHOLESALER

1. Small capital

2. Limited market

3. Small turnover

4. Need for credit

5. Variety of goods

6. Regular visits from the wholesalers

HOW A SMALL RETAILER CAN MAKE HIS BUSINESS MORE SUCCESSFUL?

• Location: The small retailer can change the location of his shop if his business is not
good in terms of competition and demand.
• Service: The small retailer can improve his services in order to earn more goodwill and
secure a regular market.
• Prices: The small retailer may be buying goods at very high prices. So he can change the
wholesaler from whom he is buying goods.
• Quality: The quality of his goods may not be very good and hence he may be losing his
customers. So the retailer must buy better quality goods.
• Variety: The retailer must try and provide better variety of goods in order to increase his
number of customers.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Shop Layout: The retailer must keep his shop clean and display his goods very neatly.
This will attract more customers.
• Publicity: The retailer must advertise more in order to attract more customers

WHOLESALE TRADE
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Wholesale trade deals with the bulk buying of goods from various manufacturers either locally
or from overseas and the breaking down of this bulk into smaller quantities which are then sold
to the retailer. Middlemen, be they wholesale merchants, merchantile agents or wholesalers
provide this intermediate link in the chain of distribution before the goods are sold to the
retailers.

THE ROLE OF THE WHOLESALER IN THE CHAIN OF DISTRIBUTION

CHANNELS OF DISTRIBUTION
. In reality, the channels used are very varied and often complex, and there is much overlapping.
Channel 1: When a manufacturer sells direct to the consumer
1. This occurs when customers post orders for books or magazines direct to the publishers who
then send them their orders direct as in mail order or e-commerce. This ensures the publisher of
selling to as many people as possible, including those who live far away. In this way, they
increase their sales. Consumers, too, benefit since they are assured of getting the latest issue or
publication early.
2. It also occurs when something is made specially for a customer such as a suit or made-to-
order furniture. Consumers who demand individuality in design for such personal effects
normally have to pay more than what they have to pay for the same type of good which is mass-
produced.
3. It also occurs in the case of expensive and highly specialized goods which are purchased only
occasionally by governments or big private companies. Examples of these kinds of goods are
aeroplanes, ships, railway rolling stock, and the like. Buyers prefer to go direct to the
manufacturers so that they may be able to discuss their individual requirements as well as the
terms of purchase.
4. This channel of distribution, however, is not suitable for all kinds of goods.

Channel 2: When a manufacturer sells to the retailers who in turn sell to the consumers

1. Most of these retailers are large stores that have the financial resources to buy in bulk direct
from the manufacturers. The main advantage of bulk buying is the large discounts given that
enable these retailers to compete successfully with the small retailers in terms of ability to offer a
greater variety of goods at competitive prices.
2. In many cases, manufacturers open their own retail shops, for example, those selling footwear
and medicine. These manufacturers have resources large enough to open retail outlets of their
own throughout the country.
3. Sometimes, the retailers may be 'tied' to the manufacturer. For example, petrol stations sell
only one brand of petrol.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Channel 3: When a manufacturer sells to a wholesaler or a wholesale merchant who in

turn sells in smaller quantities to retailers (shops), who in turn sell to the consumers

1. This occurs when producers themselves are unable to market the excess goods themselves
because of financial constraints or the lack of access to widely dispersed markets due to a lack of
contacts, commercial know-how and the like or owing to the fact that it is just not commercially
profitable for the producers to do so themselves. This is true of most rural produce like fish,
padi, vegetables, eggs, poultry, etc. which are easily perishable. These are often sold to dealers
(wholesalers) who then pack them properly and transport them quickly to the big towns and
cities either in the same country or overseas, where they are sold to various retailers, who in turn
sell them to the consumers.
2. Locally manufactured goods like ordinary household essentials which are stocked by small
retailers are often distributed in this way since the retailers buy in too small a quantity to make it
viable for the manufacturer to sell direct to them.

3. Goods which are sold in this way become more expensive because of the cost of distribution
and profit margins required by the wholesaler and retailer. Moreover, consumers have no direct
contact with manufacturers or producers. However, consumers are assured of a wide variety of
goods produced by many producers.
4. The producer is free to devote all his attention and resources to the actual work of producing
the goods since the marketing aspect of his goods is already in the hands of the wholesaler. At
the same time, the producer is assured that his goods are marketed over a wide geographical
area.
[Link] retailer needs little capital as he needs to maintain only a small stock. He does not need to
keep large stocks because it is easy for him to get new and, hence, fresher stocks from his
supplier (wholesaler) once his stocks are depleted.
6. General wholesalers normally stock a wide range of goods and need a substantial amount of
capital to finance their large warehouses, stocks and advertising and to pay the salaries of their
salesmen. These tend to operate on a national or regional basis.
Specialist wholesalers, however, deal mainly in a particular trade in a particular area, for
example, a wholesaler of building materials, in fruit, in vegetables, etc.
8. Sometimes, a wholesale merchant may import directly from an overseas supplier. Like the
wholesaler, he then sells it to the retailers in smaller quantities.

Channel 4: When an overseas manufacturer appoints a sole agent

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

1. This is done in the home market to manage the sale and distribution of goods as well as to
provide after-sale services. The sole agent is responsible for getting reliable retailers to market
the goods throughout the country. Such sole agents are appointed to sell imported cars, cosmetics
and electrical goods.

FUNCTIONS OF THE WHOLESALER

1. Bulk buying
1. The wholesaler buys goods in bulk from the producers or manufacturers in the hope that he
will be able to resell them at a profit.
2. Sometimes, he may import the goods from foreign countries, but he usually buys from
importers or their brokers, or from commission agents acting for overseas exporters.
3. A wholesaler has specialist buyers who are in very close contact with the market and who
know the various sources of supply.

2. Risk bearing
1. The wholesaler makes his purchases based on up-to-date and reliable information on the likely
tastes and preferences of consumers. He buys in advance of demand.
2. He will make huge profits if he anticipates demand correctly.
3. He bears the risk of loss in cases where anticipated demand for his purchases does not
materialize, if products are damaged, spoilt or stolen, or if retailers default. In case tastes change,
he may even have to sell off the goods at a loss. Prices may fall or goods may go out of fashion
before they can be passed on to the consumers.

3. Warehousing
[Link] wholesaler stores the goods which are purchased in advance before they are distributed to
the retailers This would even out the flow of goods. In times of glut, they can be kept off the
market, and in times of shortage, released. This would prevent severe fluctuations in prices.

2. In some trades, the wholes~er grades, sorts, packs or prepares the goods for sale. He may sell
under his own brand name.

4. Breaking bulk
1. The wholesaler breaks bulk or divides the goods bought into smaller quantities.
2. He sells the goods in smaller quantities to various retailers.

5. Transportation
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

1. The wholesaler provides transport for goods from the suppliers to suitable depots in the
various cities, and from there, to the retailers' shops.
2. If retailers were to buy from a cash-and-carry wholesaler, they have to provide their own
transport.

6. Finance
1. The wholesaler finances the retailer by allowing him extended credit.
2. He finances the producer indirectly by paying him promptly.

7. Information
1. The wholesaler acts as a liaison between the retailers and producers by informing producers of
the retailers' reactions to their goods, and acquainting retailers with new products and other
developments in the market.

TYPES OF WHOLESALERS:
General Wholesaler:
• They operate on national and regional basis.
• They stock a large variety of goods in their warehouses and thus need large capital.
• They advertise nationally.
• They employ salesmen to obtain orders from retailers and pay them salaries.
Specialist Wholesaler:
• They restrict their activities to a particular trade and to a particular area.
• They offer credit facilities and delivery service.
• Examples are wholesale fruit and vegetables markets.

Cash-and-Carry Wholesaler:
• They do not allow credit facilities.
• They do not provide delivery services.
• They sometimes sell even to the general public.
• They sell mostly low-priced goods, which sell quickly.

TRENDS IN WHOLESALING
The current retail trade is characterized by an increasing number of large-scale retailers being set
up in the traditional market made up largely of small-scale retailers. The wholesale trade,
threatened as such by these developments, has had to undergo certain changes in recent years in
order to survive. Today the wholesale trade is characterized not only by the independent
wholesaler, but by the cash and carry wholesaler as well as the voluntary chain.
 HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Voluntary chains
Groups of independent retailers or shopkeepers who join with wholesalers to gain the benefits of
bulk buying. When ordering goods, all the members put their orders together through the
wholesaler who is also a member. The wholesaler is then able to obtain goods in bulk direct from
the producer at a discount.

It helps small-scale retailers to combat the competition from Large - scale retailers e.g.
supermarkets. They are able to offer goods at competitive prices, give special offers and attract
more customers.

Voluntary chains are found mostly in the grocery trade e.g. SPAR, Square Deal, Wavy Line

They are normally organised via the wholesaler. The group will undertake national advertising
on behalf of the group. It may provide finance and shopfitting for retail members who have to
keep their shops to a certain standard. Goods are delivered direct to the retailer. Advice on
pricing, display and stock may be given.
Cash-and-Carry Wholesaler:
• They do not allow credit facilities.
• They do not provide delivery services.
• They sometimes sell even to the general public.
• They sell mostly low-priced goods, which sell quickly.

INSTANCES WHERE THE WHOLESALER IS STILL NEEDED:

• In foreign trade, the wholesaler has the experience and contact that an overseas firm
cannot do without.
• The wholesaler is still important where the producers are still small-scale producers.
• The wholesaler is important where production is seasonal and irregular in quantity.
• The small retailers who dominate the market do not have large finance to buy directly
from the manufacturers. Hence wholesalers are still needed.

DECLINE OR ELIMINATION OF THE WHOLESALER:

• Manufacturers, nowadays, produce branded goods, which are pre-packed into convenient
sizes.
• Through advertisements, manufacturers are able to create and maintain a market for their
own products.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• The establishment of large retailers like multiple stores and departmental stores has the
finance to buy goods directly from the manufacturers.
• The improvement in transport and communication has made it faster and easier for the
manufacturer to deliver goods and contact the widely scattered retailers.
• Some manufacturers open their own retail shops and sell goods directly to the consumers.
• Manufacturers have decided to sell goods directly to the retailers as the retailers would
sell the goods faster than the wholesaler would.

HOW THE WHOLESALER SERVES THE

MANUFACTURER, THE RETAILER AND THE CONSUMER

By carrying out the above functions, the wholesaler not only helps the manufacturer or primary
producer, but also the retailer and the consumer as well.

Services to the manufacturer

Low storage expenses

1. The wholesaler absorbs the goods produced by the manufacturer as they are being made. The
manufacturer is, therefore, relieved from paying the expenses of storage -that is, rent, insurance,
wages, utilities as well as the loss of interest due to money capital tied up in stocks.
2. The manufacturer of goods in seasonal demand such as winter clothing, greeting cards for
various festivals, etc. is able to continue production throughout the year as the wholesalers are
willing to absorb the products when they are being produced. No manufacturer can survive if his
factory is forced to close down for a few months in a year for there are costs to be met even if
there is no production. These costs include depreciation on plant and equipment, interest on loans
and wages of administrative staff.
3. All goods are produced before there are orders for them from the retailers. The manufacturer is
relieved of the risk of loss should the anticipated demand for these goods from consumers fail to
materialize. It is the wholesaler who has bought the goods in bulk who will have to bear the risk
of loss.

Reduced cash flow problems

1. By paying the manufacturer promptly, the wholesaler reduces the amount of working capital
required by the manufacturer and allows the latter to continue production smoothly. The
manufacturer will, therefore, have a regular inflow of cash after selling off each batch of
production. This reduces the amount he has to borrow.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Low marketing cost

1. Should the manufacturer undertake to market the goods himsel{ he will incur a lot of expenses
for transport, advertising as well as administration since it is conceivable that some of the smaller
retailers would prefer credit.
2. However, if he were to sell through the wholesalers, he would deal with only a few major
customers who buy in bulk and who can pay him cash fairly promptly. This would reduce his
marketing costs.

Services to the retailer

Purchase of small quantities
1. A wholesaler's willingness to sell in small quantities is a boon to a small retailer who only
places small orders and is unable to get his stock directly from the manufacturer as the latter only
sells in bulk. Transporting orders of small quantities all over the country would be costly for the
manufacturer.

Reduced cash flow problems

1. Awholesaler provides credit to a retailer and reduces the latter's capital requirements. A
producer is often not willing to grant credit to a retailer since it would increase his working
capital.
2. As a result, the retailers have time to sell the goods before they have to pay for them.

Low goods preparation cost

1. A wholesaler simplifies a retailer's work since the goods are already graded and prepacked
into convenient quantities and sizes.

Low storage expenses

1. A retailer is always assured of delivery of fresh stocks from the wholesaler's warehouse if he
runs short. This reduces the amount of stock he needs to hold at a time, hence saving on costs of
storage, insurance and risk, in case demand is below expectations.

Wide choice of related products

1. A wholesaler offers a variety of goods made by various manufacturers, both local and abroad.
This saves the retailer time which would otherwise have to be spent in dealing with each
manufacturer individually. The retailer is also kept up-to-date on the latest products available.
The information supplied by the wh~esaler is much less likely to be biased than that supplied by
the manufacturer.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Low wholesale prices

1. A cash-and-carry wholesaler who is a wholesale 'supermarket' offers a retailer goods at
cutprices although the latter may have to arrange for his own transport. Lower prices are possible
due to savings in cost which are a result of:
(a) no credit facility - sales are on 'cash' basis
(b) no delivery service
(c) self-service - no need to employ huge staff
(d) goods stocked are those that sell quickly.

Services to the final consumer

Regular supply at steady prices

1. Consumers are assured of a regular SUpply of goods throughout the year at steady prices since
the wholesaler releases the goods when required.
2. This is particularly important for goods which are produced seasonally such as rice but whose
demand is regular.
3. This is because a wholesaler buys goods when they are plentiful, and hence prices are
comparatively low, and releases them in times of shortage without raising prices unduly.
Convenient shopping and wider choices

1. The wholesaler enables the small retailers to compete with the large retailers, especially in
suburban areas where rentals are lower than in the city centre. Thus, consumers are assured of
getting the goods they want from the retailer nearest to their homes. Usually, the large retailer is
situated in the city centre.
2. The consumer is assured of a wider choice of goods even at the smaller shops, since the
retailers get their supplies from a number of wholesalers, who would in turn obtain their supplies
from many producers.
3. Since wholesalers encourage the setting up of a number of smaller retailers, consumers have a
wider choice of shops.

Consumer demand
1. Since the wholesaler is in closer contact with the public through feedback from retailers, he
can ensure that a consumer's opinion of a particular good generally reaches the manufacturer,
with whom he too has close contact. In this way, products can be improved in line with
consumer demand.

INTERMEDIARIES
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Merchants

1. These middlemen are principals who trade on their own account and therefore own the goods
and earn profits from their trading activities. Exporters and importers are the merchants in
foreign trade while the wholesalers are merchants engage4 in home trade.

Forwarding agents
Forwarding agents are middlemen in international trade who specialise in moving goods from
country to country. They arrange transport, documentation, customs clearance, insurance, storage
so that the owner of the goods does not have to do this e.g. DHL, FED EX.

Merchantile agents

1. These middlemen act on behalf of their principals in finding would-be sellers and would-be
buyers of the goods and services of their principals. They do not own the goods and services.
They earn commissions for their services. Some merchantile agents act as 'brokers' and some as
'factors.

Broker
A broker is a middleman who:
• Finds buyers for the seller.
• Does not take possession of the goods.
• Cannot sell in his own name.
• Cannot sell at his own price.
• Receives commission for his services.

Factor
A factor is a middleman who:
• Finds buyers for the seller.
• Takes possession of the goods.
• Can sell in his own name.
• Can sell at his own price.
• Makes a profit out of sale.
Del Credere Agent
A del credere agent is a middleman who:
• Finds buyers for the sellers.
• Takes possession of the goods.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Guarantees to sell all the goods.

• Receives higher commission for his services.

BUSINESS DOCUMENTS
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

A business document is a form that provides details of a transaction and the evidence that the
transaction has taken place.

IMPORTANCE OF DOCUMENTS IN COMMERCE

Documents are important in commerce because they:
(a) provide written record of transactions that have occurred
(b) form the basis for recording entries in the accounting records

Features of documents

1. Although every business document has its own special functions, all documents must have the
following features:
(a)date of issue (b) nature of transaction
(c)parties to transaction (d) amount
(e)terms and conditions of transaction

2. In addition, most business documents may have reference numbers.

Documents of home trade

Letter of enquiry
1. It is sent by the buyer to the seller to find out about goods required - their availability, their
prices and the terms of payment.
2. It informs the seller of the goods required, the quantity, the time and the terms of delivery.
3. The buyer may write letters of enquiry to several suppliers to request for quotations so as to
compare prices and terms of payment.

Quotation
It is sent by the seller to the buyer to inform the buyer of goods requested, giving all the relevant
information: types of goods, their brands, their respective prices, the terms of delivery and the
terms of payment.

Catalogue and price list

Sometimes, instead of sending a quotation, the seller may send a catalogue containing detailed
and classified information of the various types of goods offered for sale. The goods, which are
either described or illustrated in the catalogue, have a catalogue number each for reference (when
placing orders). Prices are not quoted in the catalogue as they may fluctuate often. Instead, a
separate price list is sent together with the catalogue.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Order
1. It is sent by the buyer to the seller to place an order for goods. It states the type, brand,
quantity and price of the goods (as given in the quotation) as well as the terms of delivery, the
terms of payment and the expected delivery date.
2. Sometimes, the seller may supply the buyers with order forms for filling in the details of the
goods required.

Invoice
1. It is sent by the seller to the buyer to notify the buyer of the amount due on the goods supplied,
stating also the type, quantity, price and terms of payment.
2. It is a bill used for goods sold on credit. (Goods sold for cash need not have invoices. They are
billed with cash receipts instead.)
3. It is used to write up the Sales Journal (in the case of a sales invoice) or the Purchases Journal
(in the case of a purchase invoice).

Advice note
1. It is sent by the seller to the buyer to inform the buyer that the goods have been dispatched.
2. It informs the buyer of the quantity and type of goods (minus its prices), date and means of
dispatch.
3. It helps the receiving firm to make arrangements for the receipt and the stocking of the goods
that are due to arrive.
Delivery note
1. It is sent by the seller to the buyer to inform the buyer of the goods delivered, stating the
quantity and type of goods delivered and quoting the order number, if any.
2. It usually arrives together with the goods so that the buyer can check the goods delivered.
3. A copy is usually handed back to the one who has delivered the goods as proof of delivery.

Credit note
1. It is not an invoice and to distinguish it from an invoice, it is printed in red.
2. It is made out by the seller to the buyer when:
(a) the goods sold have been overcharged in the invoice
(b) the buyer returns the goods (damaged, of the wrong type or specifications, etc.)
(c) the buyer returns empty containers for which he has been charged in the invoice
3. It informs the buyer that his account is credited, decreasing the amount that he owes.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Statement of account
1. It is sent by the seller to the buyer at the end of every month.
2. It summarizes the monthly transactions between the buyer and the seller.
3. It shows the amount of goods bought, the returns made, the payments, and cash discounts, if
any, all of which can be checked by the buyer with the invoices, credit and debit notes and the
receipts received to date.
4. The balance outstanding is the amount that the buyer owes.
5. It serves as a reminder to the buyer to pay up his debt.
6. It enables the buyer to check his books of account and notify the seller if there is any error.

Receipt
1. It is a proof of money received, issued by the seller to the buyer when the buyer makes his
payment.
2. When payment is made by cheque, it is not necessary to issue a receipt since the cheque serves
as proof of payment.

DIFFERENCE BETWEEN CASH DISCOUNT AND TRADE DISCOUNT:

TRADE DISCOUNT
CASH DISCOUNT
• This is a deduction off the invoice • This is a deduction off the list price of
price of goods purchased on credit. goods purchased.
• This is given to encourage prompt
payment. • This is given to encourage bulk
• The rate of cash discount depends on purchases.
the period of credit allowed. • The rate of trade discount depends on
• The buyer forfeits the discount if he the quantity purchased.
does not pay within the given period.
• It is treated as an expense in the • Buyer is entitled to the discount even if
ledger accounts. he fails to pay within the given period.
• It does not appear in the ledger but is
recorded in the books of original entry.
Mark- up
Mark – up is the gross profit as a percentage of cost of goods sold.

Mark-up = Gross profit X 100

Cost of goods sold
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

INTERNATIONAL TRADE

SIMILARITIES BETWEEN HOME TRADE AND FOREIGN TRADE:

• Objective: Businessmen involved in home trade and foreign trade buy and sell goods for
the same objective. That is to make a profit.
• Dependence: Both, home trade and foreign trade depend very much on aids to trade.
That is there is much dependence on transport, insurance, finance, warehousing, etc,
• Specialization: Both, home trade and foreign trade depend very much on specialization,
whether it is national, regional or personal.

DIFFERENCES BETWEEN HOME TRADE AND FOREIGN TRADE:

• Meaning: Home trade is buying and selling goods within the country, while foreign trade
means buying and selling goods between countries.
• Distance: The distance involved in foreign trade is much greater than the distance
involved in home trade. This means that air or sea transport has to be arranged in foreign
trade, whereas road and rail transport can be used in home trade.
• Trade Barriers: In foreign trade, there are trade barriers like customs duties, quotas and
embargoes, levied on imports and some exports. There are no such trade barriers in home
trade.
• Types: Home trade includes wholesaling and retailing, whereas foreign trade includes
importing, exporting and entrepot trade.
• Languages: In home trade, there would be no difficulty regarding language, as the same
language is spoken. But in foreign trade, translators would be required as each country
speaks a different language.
• Currencies: In home trade, the problem of exchange rate would not arise, as the same
currency is used for payments. But in foreign trade, each country uses a different
currency. So the problem of exchange rate would arise.
• Technical Requirements: In home trade, the same technical specifications for goods are
required. But in foreign trade, each country has a different technical specification. So
manufacturers would have to produce goods according to different technical
specifications.
• Methods of Payment: In home trade cheques are the most favored means of payment. In
foreign trade, bills of exchange, letters of credit and cable transfers are the most suitable
means of payment.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Cultural Differences and Requirements: In home trade, there is not much need for
market research as there are no differences in taste and fashion. But in foreign trade, each
country has a different culture, taste and fashion. So first market research has to be
carried out and then goods exported accordingly.

IMPORTANCE OF INTERNATIONAL TRADE

• Some raw materials do not occur naturally in the country has to be imported.
• It is cheaper to import some goods than to produce them. For example bananas in UK.
• Selling goods and services abroad provides the country with foreign currency.
• By selling abroad the country gains the benefits of wider markets.
• International trade creates employment opportunities in the country
• Consumers in the country will have a wider variety of goods from all over the world.
• It increases country’s income, which results in a higher standard of living.
• It helps to maintain friendly foreign relationships with other countries.
• Income can be earned by exporting the excess goods and services.

THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET

 No country in the world is self sustained. By nature, every country has some resources in
its limit and some resources are unlimited by nature. Economics clearly has defined that
resources are scarce in nature; so, countries must be interdependent if it wants to satisfy
the wants and economical needs to the growing population.
 No countries can be interdependent in today’s market. The best examples could stand
with reference to today’s market is, satellite services. E.g. Coca Cola, cars, electronic
goods etc.
 Today every country wants to consume goods and services at the cheapest price and at
the best advanced technology. To produce these goods and services in its own country
with the available resources, it may not be possible to achieve the task due to lack of
resources, lack of capital and lack of technological advancement. All these factors have
led to interdependence of countries within a global market.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

VISIBLE TRADE AND INVISIBLE TRADE

International trade

Visible trade Visible trade

(Trade in goods only) (Trade in services only)

Visible Visible Invisible Invisible

Exports imports Exports imports

BALANCE OF TRADE AND BALANCE OF PAYMENTS

1. The Balance of Payments figures for a country show the amount of currency being received
from other countries and that being paid to other countries as a result of many different types of
transactions over a given period, usually a year.
The Balance of Payments can be broadly divided into two main sections:
(a) The Current Account consists of:
(i) the Balance of Trade (difference between visible exports and visible imports)
(ii) the Balance of Services or Invisible Balance (difference between invisible exports and
invisible imports)
(iii) transfers items
(b) The Capital Account consists of:
(i) the capital items (inflows or outflows)
(ii) official financing (adding to or drawing from foreign reserves)

2. The difference in value between visible exports and visible imports is called Balance of Trade.
If the visible export value exceeds the visible import value, the Balance of Trade is said to be
favourable or in surplus. If the visible import value exceeds the visible export value, then the
Balance of Trade is said to be unfavourable or in deficit.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

3. A country's Balance of Trade can be assessed from annual statistical records obtained from
customs declaration forms for imports and exports. The Balance of Trade is very important
because:
(a) All imports have to be paid for with the proceeds received from the sale of exports.
(b) Thus, in the long run, a country cannot import more than it exports.
(c) If the Balance of Trade has been unfavourable for many successive years, then the
government has to take steps to discourage imports and encourage exports.

4. A country also exports and imports services: shipping, educational, tourist, etc. Singapore
exports shipping services when a foreigner travels in a Singaporean ship. The total value of
services exported within a year forms the invisible exports, whilst that of services imported
forms the invisible imports.

5. 'Transfer items' refers to interest, profits and dividends sent abroad as a result of foreigners
investing in the home country. It also includes the repatriation of interest, profits and dividends
from abroad to the home country as a result of its nationals investing abroad.

6. 'Capital items' refers to the amount of money which have flowed into or out of a country.
(a) Examples of capital outflows are as follows:
(j) Nationals invest in businesses abroad, buy properties or shares abroad.
(ii) The government in the home country gives monetary aid to other countries.
(iii) Nationals in the home country lend to nationals or organizations or governments of other
countries.
(b) Examples of capital inflows are as follows:
(i) Nationals sell off their properties, businesses and shares abroad and bring the money home.
(ii) The government in the home country receives monetary aid from overseas.
(iii) Nationals or government in the home country borrow from abroad.

7. It is very unlikely that total receipts will exactly be equal to total payments over a particular
year.
(a) If total payments exceed total receipts, we have a Balance of Payments deficit.
(b) If total receipts exceed total payments, there is a surplus in the Balance of Payments.

8. A country's balance of payments is of utmost importance.

(a) If the country continues over a period of years to experience a Balance of Payments deficit, it
will eventually not have enough foreign exchange to pay its creditors.
(b) No country wishes this to happen for it will cause economic ruin in the long run.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

9. If a country does not have sufficient foreign currency to pay its creditors abroad, it can
temporarily borrow money from the International Monetary Fund (IMF) which is specially set up
to help countries having Balance of Payments problems. However, this would mean that
foreigners can now control the economic policies of the government of such a country.

10. The calculation of Balance of Trade and Balance of Payments can be seen as follows:

Illustration
Country A
Balance of Payments for the Year 1998
Value of goods exported $4,000 million
Value of goods imported $4.800 million
Balance of Trade 1998 -$800 million
Value of services exported $8,000 million
Value of services imported $7.000 million
Invisible balance +$1,000 million
Net transfers - $ 50 million
Balance on Current Account +$150 million
Capital items +$200 million
Total currency flow (net) +$350 million
(a) The figure shows that the Balance of Trade for Country A in 2009 is unfavourable or adverse
because the cost of goods imported is higher than those exported by $800 million.
(b) In the same period, however, Country A has a net positive balance of $1,000 million from her
invisible trade. Money earned from her export of services abroad exceeded her import of services
from abroad.
(c) The overall amount of net transfers of interest, profits and dividends abroad is $50 million.
(d) Country A has a favourable balance on Current Account of $150 million in 1998.
(e) In 2009, Country A has an overall net inflow of capital of $200 million.
(f) In 2009, Country A has a surplus of $350 million on her Balance of Payments. This means
that Country A receives $350 million more than what she paid out to the rest of the world in the
same period.
(g) Since the Balance of Payments is positive in 2009, this means the central bank of Country A
can build up her reserves of foreign currency. This reserve can be used to pay for future deficits
or to repay funds previously borrowed from the IMF.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

AIMS OF TRADING BLOCKS:

• To eliminate customs duties and quotas on the import and export of goods between
member states.
• To establish common customs tariff and a common commercial policy towards non-
member countries.
• To allow the free movement of persons and capital between member states.
• To establish common policies for agriculture and transport.
• To prohibit harmful business practices which restrict competition within the Common
Market.

ADVANTAGES OF FREE TRADE:

• There are no tariffs and quotas among member countries.
• There is free movement of goods and services among member countries.
• There is free movement of people among member countries.
• Workers can be hired from any member country without any restrictions.
• There is free movement of money and capital.
• There is better relationship among member countries.

DISADVANTAGES OF FREE TRADE:

• Home industries get affected.
• Infant industries get affected.
• Loss of revenue for the Government when foreign currency goes out.
• It sometimes causes unemployment.
• It causes imbalance of power among member countries.
• There is sometimes a drain of wealth.

IMPORTANCE OF FREEPORTS IN INTERNATIONLA TRADE

IMPORTANCE
• Free ports encourage a fair international trade practices.
• Free ports encourage free movement of goods within a trade region.
• Good economic relationship can be developed and maintained among countries.

RESTRICTIONS ON INTERNATIONAL TRADE:

Tariffs: These are import duties, such as the customs and excise duties of the United Kingdom.
These have the effect of raising the price of the imported goods and therefore making them less
competitive when compared to home products.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Subsidies: These are given to home producers, which makes their goods cheaper and therefore
more competitive when compared with the prices of overseas products.
Quotas: These are physical restrictions on the amount of goods that can be imported into a
country over a period of time. For example, the United Kingdom has set a limit on the number of
Japanese cars that can be imported into the United Kingdom.

Embargoes: These are bans on importing certain items from overseas.

Reasons for restricting trade:
• To raise revenue from tariffs.
• To protect existing industries from overseas competition.
• To protect infant industries which are not yet strong enough to compete with established
overseas firms.
• To restrict dumping of foreign goods.

DIFFICULTIES FACED BY EXPORTERS:

• Distance.
• Language Differences
• Cultural Differences and Local Requirements
• Technical Differences
• Trade Barriers.
• Customs Regulations
• Documentation
• Payment.
• Insurance
• Risk of Non-Payment: The importer may not pay the exporter for the following reasons:
• because he does not want to pay.
• because he becomes insolvent.
• because payment is prevented by the importer’s government.
• because of war.

CUSTOMS AUTHORITIES:
Functions:
• Statistics: They collect a wide range of statistical data showing the pattern of trade and
the movement of goods.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Control: They supervise the movement of goods in and out of the country ensuring that
prohibited goods are not imported or exported.
• Revenue:The customs authorities collect the duty payable on imports.
• Enforcement of Quotas: The customs authorities ensure that the goods imported are
according to the limit imposed by the government.
• Bonded Warehouses: The customs authorities control these warehouses by supervising
the withdrawal of goods.
• Public Health: They have certain functions in connection with the control of infectious
diseases.

.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

BUSINESS ORGANISATIONS

DIFFERENCES BETWEEN PRIVATE AND PUBLIC SECTOR:

PRIVATE SECTOR PUBLIC SECTOR

• Meaning: Industries that are owned Industries that are owned and controlled by
and controlled by private individuals the government are found in the public
are found in the private sector. sector.

• Formation: These industries are

formed by agreement or by These industries are formed by an Act of
registration with the Registrar of Parliament.
Companies.

• Finance: Finance is provided by the

Finance is provided by the government, by
owner, by issuing shares or
issuing securities or by borrowing from
debentures, or by borrowing from
financial institutions.
banks.

• Management: These industries are

These industries are controlled by a minister
managed by the owner, or a board of
who is helped by a managing committee.
directors or by a managing
committee.
Service is the main aim of the public sector.
• Objectives: Profit is the main aim of
the private sector.
There is no personal interest as there is no
profit motive. Hence there is no efficiency.
• Personal Interest: Profit makes the
private sector to have more personal
interest, which results in efficiency.
In public enterprises, the policies cannot be
changed but can be amended.
• Flexibility: Private enterprises are
more flexible and can change their
business tactics very easily.
The profits of the public corporations are
used for the general expenses of the
• Profits: The profits of the private
government and the economic development
sector are enjoyed by the owners of
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

the business and it is used for the of the country.

expansion of their business.

MAIN FORMS OF BUSINESS ORGANIZATION IN PRIVATE SECTOR

SOLE TRADER:
Features:
• Ownership: This is a business unit, which is owned and controlled by a single person.
• Capital: The capital is provided by the sole trader himself. It is small and so his business
is also small. He may get capital by borrowing from his family members, friends or from
the bank.
• Management: The sole trader manages all the affairs of his business. It becomes difficult
especially if his business expands. He is helped by his family members.
• Profit and Loss: The sole trader enjoys all the profits and suffers all the losses himself.
He does not have to share it with anyone.
• Objective: The main aim of the sole trader is to make maximum profit.
• Liability: The sole trader has unlimited liability. Even his personal assets can be taken
for business debts.
• Flexibility: The sole trader’s business is very flexible. He can change his business tactics
easily as he is the only person who makes all the decisions.
• Legal Entity: The sole trader has no separate legal entity. The sole trader and his
business are one and the same. Anything the sole trader does will affect his business.

Advantages of sole trader

• Formation: It is very easy to form. There are no complex legal procedures. The business
only has to be registered.
• Personal Interest: With the profit motive, the sole trader has personal interest in his
business and works very hard in order to increase his profit. As a result there is
efficiency.
• Decision Making: The sole trader makes all his decisions. He does not have to waste time
discussing ideas with others.
• Profits: The sole trader enjoys all the profits himself. He does not have to share his profits
with anyone.
• Control and management: The sole trader controls the business himself. So there is direct
relationship between the employees and the sole trader.
• Personal attention: The sole trader is able to have personal contact with his customers.
This ensures a better employer-customer relationship.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Flexibility: The sole trader can change his business tactics at any time. He does not have
to rely on anyone.
• Privacy: The sole trader can keep all the business secrets to himself. He does not have to
share it with others.
Disadvantages of sole trader
• Limited Capital: The sole trader is the only person who provides capital. It is limited and
so expansion is not possible.
• Unlimited liability: The sole trader has unlimited liability. Even his personal assets can be
taken for business debts.
• Uncertainty: The death, insolvency or insanity of the sole trader will bring his business to
an end.
• Losses: The sole trader has to suffer all the losses himself.
• Hasty decisions: As there is no one to advise the sole trader, his decisions may sometimes
be fatal for his business.
• Control: It will be very difficult for the sole trader to control all the affairs of his business
especially if it expands.
• Lack of specialization: As the sole trader business is small and he does all the work
himself, he cannot have experts to work for him.
• Legal entity: The sole trader has no separate legal entity. Anything the sole trader does
will affect his business.

PARTNERSHIP
Features:
• Definition: The relationship between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.
• Formation: It is formed by agreement among persons to do a business and to share the
profits and losses of the business.
• Number of members: It can be owned by two to twenty persons in ordinary partnership
business. There is no limit to the number of partners in a professional partnership
business.
• Capital: The partners provide capital for the business. They may provide their own
resources or they may take loans.
• Profits and losses: The profits and losses are shared among the partners in an agreed
ratio according to the terms of agreement.
• Unlimited liability: The partners also have unlimited liability. Even their personal assets
can be taken for business debts.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Control and Management: All the partners can control the affairs of the business and
have a right to access books of accounts at any time. However one or more partners may
manage the business on behalf of all the partners.
• Agency relationship: One or more partners can act on behalf of all the partners. This is
possible only in partnership business.

Advantages of partnership
• Easy formation: Partnership is formed by agreement. There are no legal complications
in forming a partnership business.
• Large capital: All the partners contribute capital. It is large and so the business can be
large. There are more chances of expansion.
• Management: As all the partners play an active role in the management of the business,
it becomes much easier to control the business.
• Sharing of losses: The losses are borne by all the partners. Hence the burden of loss is
not so great as in sole proprietorship business.
• Better decisions: Ideas are discussed by all the partners and the best decisions are taken.
So business dealings are more efficient.
• Flexibility: By agreement the partners can change their business tactics very easily.
There are no legal complications in changing business tactics.
• Pooling of expertise: All the partners contribute towards the management of the
business. So each partner contributes his expertise and there will be better efficiency in
the management of the business.

Disadvantages of partnership
• Lack of continuity: The death, insolvency or insanity of any partner brings the business
to a temporary halt.
• Future conflicts: Partnership is based on agreement. So if there is any disagreement
between partners it could be fatal for the business.
• Small capital: As there is a limit to the number of partners in a partnership business,
capital can be raised only from the 20 partners. It is small when compared to the capital
of a limited company.
• Unlimited liability: The partners have unlimited liability. Even their personal assets can
be taken for business debts.
• No separate entity: There is no separate legal entity. Anything the partners do will affect
the business.
• Danger of implied authority: As there is agency relationship, there is a danger of
implied authority. A dishonest partner might cheat the other partners.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

SIMILARITIES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP

• Objectives: Both have profit motives.
• Liability: Sole traders and partners have unlimited liability. Even their personal assets
can be taken for business debts.
• Legal Entity: Sole traders and partners have no separate legal entity. The business and
the owners are one and the same. Anything the owners do will affect the business.
• Uncertainty: The death, insolvency or insanity of the sole trader or a partner will bring
their business to an end.
• Private Sector: Both the business units are found in the private sector
DIFFERENCES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP

SOLE PROPRIETORSHIP PARTNERSHIP

• Meaning: A business, which is A business, where two or more than two
owned and controlled by a single join and agree to share the profits and
person. losses of the business.
• Formation: When a person decides It is formed by agreement among persons
to start the business. It is very easy to do a business and share the profits and
as there are no complex legal losses of the business.
formalities.
• Members: There is a single owner. There are 2-20 partners for ordinary
partnerships and there is no limit for
professional partnerships.
• Capital: Capital is provided by the The partners provide the capital themselves
sole trader. It is small and so his or they may borrow from banks. As there
business is also small. He may raise are many partners the capital is large and so
the capital by himself or by their business is also large.
borrowing from his relatives, friends
or from banks. The partners manage all the affairs of their
• Management: The sole trader business. Sometimes one partner may
manages all the affairs of his manage the business on behalf of all the
business. He is helped by his family partners.
members. The partners share the profits and losses in
• Profits and Losses: The sole trader an agreed ratio.
enjoys all the profits and suffers all
the losses. All the partners discuss and make the best
• Decision Making: The sole trader decisions.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

makes all the decisions himself. It is

quick but sometimes hasty. Unless all the partners agree, they can
• Flexibility: The sole trader’s change their business tactics.
business is more flexible. He can
change his business tactics at
anytime. There is agency relationship. One partner
• Agency Relationship: There is no can act on behalf of all the other partners.
agency relationship. The sole trader
acts for himself.

LIMITED COMPANIES

Features:

• Formation: A company is formed by registration under the Company Act.

• Ownership: A company is owned by its shareholders as they provide capital for the
business.
• Capital: A company can raise capital by issuing shares or debentures and by borrowing
from other financial institutions.
• Management: A company is managed by a board of directors, who are elected by the
shareholders by the principle of “One man-One vote”.
• Control:A company is controlled by its shareholders as they elect the board of directors.
So a person having more shares has more control over the company.
• Liability: The shareholders have limited liability. They are liable for business debts up to
the nominal value of shares they hold in the company. Their personal assets cannot be
taken for business debts.
• Legal Entity: A company is recognized as a separate legal entity. It can enter into
contracts, sue and be sued in its own name. Anything the shareholders do will not affect
the company and vice versa.
• Objectives: The main aim of a limited company is to make profit.
• Perpetual Succession: The death, insolvency or insanity of a shareholder will not affect
the business.
• Profits: When a company earns a profit, part of the profit is kept for future use and the
remaining profit is distributed to the shareholders as dividend.
• Privacy: A company does not have any privacy. The accounts of a company must be
filed annually with the registrar of companies. The accounts of a public limited company
must also be published in the newspapers.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

FORMATION OF A LIMITED COMPANY:

A company is formed by filing the following documents with the registrar of companies and by
following the rules under the Company Act:
• Memorandum of Association contains the following:
• Name of the company.
• Registered office
• Objectives of the company.
• Statement of limited liability.
• Amount of share capital.
• Number of shares to be taken by each director.
• Statement of intent to form a limited company.

• Articles of Association: contains the internal rules of the company

• The rights and obligations of the directors.
• Procedure for calling a general meeting of the company.
• Procedure for electing the directors.
• Borrowing powers of the company.

• Statutory Declaration: This document confirms that all necessary legal requirements
have been complied with. It also contains a signed statement from each director,
signifying willingness to serve.

• Certificate of Incorporation: This is issued by the Registrar of Companies. It

establishes the company as a separate legal body. The company can enter into contracts,
sue and be sued in its own name. Anything the shareholders do will not affect the
business.

• Certificate of Trading: A private company can now collect money from shareholders
and start business. A public limited company must first certify that it has collected money
for its shares. The Registrar will then issue the Certificate of Trading so that the public
limited company can start its business.

CAPITAL OF LIMITED COMPANIES:

A company can raise capital in the following ways:
• By issuing shares.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• By issuing debentures.
• By borrowing from financial institutions.

• By issuing shares: A company can raise capital by issuing shares. There are two types of
shares – ordinary or equity shares and preference shares.

Features of Ordinary Shares or Equities:

• The money given for shares is never returned to the shareholders.
• The ordinary shareholders get dividend out of profit and only if there is sufficient profit.
• The ordinary shareholders are paid dividend after the preference shareholders are paid.
• The ordinary shareholders can attend the Annual General Meeting and elect the board of
directors.
• The ordinary shareholders are the owners of the company.
• The ordinary shareholders have more control over the company as they elect the board of
directors by the principle of “one share – one vote”.
• When a company closes down, the ordinary shareholders are paid last.

Features of Preference shares:

• The money given for shares is never returned to the shareholders.
• The preference shareholders get fixed rate of dividend in return.
• The preference shareholders are paid dividend before the ordinary shareholders.
• The preference shareholders can attend the Annual General Meeting and elect the board
of directors if they are paid in arrears.
• The preference shareholders are the owners of the company.
• When a company closes down, the preference shareholders are paid before the ordinary
shareholders.

CALCULATION OF SHARE DIVIDEND:

A company issued the following shares, which were fully paid up for:
6.5% Preference shares 200,000 @ $0.50
Ordinary shares 200,000 @ $1.00
The company also issued debentures worth $150,000, which carried an interest of 8%. The
net profit available for distribution before paying the debenture interest was $45,000. The
company decides to distribute three fourths of the net profit to the shareholders and to keep
the balance as ploughed back profit.
Calculate: i. Debenture interest;
ii. ploughed back profit;
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

iii. preference dividend;

iv. rate of dividend per ordinary share.

Profit $ 45,000
Debenture interest (150,000x8/100)= $ 12,000
Balance Net profit $ 33,000

Profit to be distributed to shareholders:

$ 33,000x3/4= $ 24,750
Preference share dividend $100,000x6.5/100= $ 6,500
Profit to be given to ordinary shareholders $ 18,250

Dividend per ordinary share($18,250/200,000)= $ 0.09

Rate of dividend per ordinary share=
Dividend per ordinary share x 100
Value per ordinary share

$ 0.09 x 100 = 9%
$1.00

Plough back profit = 33000 – 24750 = 8250

• By issuing Debentures: A company can also raise capital by issuing debentures. The
following are the features of debentures:
Features of Debentures:
• These are like stock or long-term loans given to the company.
• The debentures carry a fixed rate of interest and are repayable on a fixed day.
• The debenture holders are paid interest every year whether the company makes a profit or
loss.
• The debenture holders are secured against the property of the company.
• The debenture holders are the creditors of the company.
• The debenture holders can sell their claims on the stock exchange.
• When a company closes down, the debenture holders are paid first.

• By borrowing from Financial Institutions: A company can also borrow money from
banks and other financial institutions.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

DIFFERENCES BETWEEN SHARES AND DEBENTURES:

SHARES DEBENTURES
• Share capital is an investment. Debenture capital is a loan.
• Shareholders are the owners of the Debenture holders are the creditors of the
company. company.
• Shareholders earn dividend, which
is paid out of profits. Debenture holders earn fixed rate of
• Shareholders have voting rights interest, whether profits are made or not.
and hence have control over the Debenture holders have no voting rights
company. and hence have no control over the
• Shareholders cannot face a company.
company into liquidation.
Debenture holders can force a company
• Shareholders are not secured
into liquidation on non payment of
against the property of the
interest,
company.
• When a company closes down the Debenture holders are secured against the
shareholders are paid after the property of the company.
debenture holders. When a company closes down the
debenture holders are paid first.
PRIVATE LIMITED COMPANY
Features:
• It is registered under the Companies Act with the word ‘Ltd’ as part of its name.
• The business is a separate legal entity from its shareholders. The company can enter into
contracts, sue and be sued in its own name.
• All the shareholders have limited liability. They are liable for business debts up to the
nominal value of shares they hold in the company.
• The company is controlled by a board of directors, elected by the shareholders by the
principle of ‘one share-one vote’.
• Ownership is opened to private individuals, whose shares are not transferable without the
consent of the other shareholders.
• The company is not allowed to issue shares to the general public.
• The company can start their business after receiving the Certificate of Incorporation from
the registrar.
Advantages:
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• The private limited company has independent legal status. It can enter into contracts, sue
and be sued in its own name. Anything the shareholders do will not effect the company.
• The shareholders of a private limited company enjoy limited liability. They are liable for
business debts up to the nominal value of shares they hold in the company.
• With limited liability, the company is able to attract more capital.
• In a private company, the founders of a business can usually keep control of it by holding
majority of the shares.
Disadvantages:
• The shareholders in a private company can transfer shares only with the consent of the
other shareholders.
• A private company is not allowed to appeal to the public for extra capital.
• The accounts of the company must be filed annually with the Registrar of Companies.

PUBLIC LIMITED COMPANY

Features:
• It is registered under the Companies Act with the word ‘Plc’ as part of its name.
• The business is a separate legal entity from its shareholders. The company can enter into
contracts, sue and be sued in its own name.
• All the shareholders have limited liability. They are liable for business debts up to the
nominal value of shares they hold in the company.
• The company is controlled by a board of directors, elected by the shareholders by the
principle of ‘one share-one vote’.
• Shares can be issued to the general public and the shares are freely transferable.
• The company can start their business after the Certificate of Trading is issued.

Advantages:
• The public limited company has independent legal status. It can enter into contracts, sue
and be sued in its own name. Anything the shareholders do will not effect the company.
• The shareholders of a public limited company enjoy limited liability. They are liable for
business debts up to the nominal value of shares they hold in the company.
• With limited liability, the company is able to attract more capital.
• A public limited company is allowed to appeal to the public for extra capital.
• There is no restriction on the transfer of shares.
• Public limited companies are normally larger than other companies. As such they enjoy
economies of scale.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Disadvantages:
• The formalities of forming a public limited company are quite complex.
• Sometimes a public limited company grows so big that it becomes difficult to manage.
• Once established, a public limited company has to comply with many regulations.
• The accounts of a public limited company must be published, so there can be little
secrecy about its affairs.
• The owners of the public limited company can exercise very little control over it.
• Raising capital can be very expensive as normally a merchant bank is hired to organize
the share issue.

DIFFERENCES BETWEEN PRIVATE LIMITED AND PUBLIC LIMITED

COMPANIES:
PRIVATE LIMITED COMPANY PUBLIC LIMITED COMPANY
• The name should end with the word The name should end with the word ‘plc’.
‘pvt ltd co’.
• Shares are issued to private
individuals and family members. Shares can be issued to the general public.
Shares are freely transferable.
• Shares can be transferred only with
the consent of all the shareholders.
• It is easier and less costly to form. It is more difficult and expensive to form.
• The company can start its business The company can start its business after the
after the Certificate of Incorporation Certificate of Trading is issued.
is issued.
• A director must be a shareholder.
• It can secure family control. A director need not be a shareholder.
Control is in the hands of shareholders with
the largest shares.

MULTINATIONAL COMPANIES
Multinational companies are companies that have subsidiaries or branches in more than one
country. They are usually large, public limited companies who aim to obtain a large share of the
global market. They are controlled from head office where the parent company is located
Examples of multinational companies are Nestle, Guinness Stout, Unilever, Shell, Exxon, IBM .
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Importance of and reasons for multinationals in the global economy

Multinationals: good or bad?

There is considerable debate as to whether multinationals and their activities are good or bad for
economies and their people.

1. Job creation and employment.

One argument put forward in favour of multinationals is that they create jobs. For example, the
establishment of the Toyota plant near Derby created a lot of local jobs and was welcomed
by many people in the area. The disadvantage is that multinationals can just as easily pull
out of a country as stay in. If they feel that it is more advantageous to set up elsewhere they
can close down large plants at a moment's notice.
2 The balance of payments
3 Technology and expertise
4 Social responsibility
Multinationals have received the most scathing criticism for the social costs of some of their
activities, e.g. destroying local communities, pollution, etc.
5 Government control
The size and financial power of multinationals can make it difficult for governments to control
them. For example, MNEs may be able to win concessions as a result of their size and influence.
Some corporations evade taxation by transferring profits from one country to another, declaring
high profits in low-tax countries and low profits in high-tax countries.

Multinationals have many advantages for the host country:

• paying taxes to boost the country’s revenue employment
• transfer of knowledge, skills and technology
• bringing foreign exchange
• providing vital goods and services within the country
• may improve the infrastructure of the country
• may provide useful competition for home industries
• may require supplies from local companies

Multinationals also have many disadvantages for the host country:

• they may exploit underdeveloped countries
• they may bring in their own experts rather than train local people
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• they often pay higher salaries and so attract employees at the expense of local
industries
• they may take back all the profits of their business to their own country - drain on
foreign exchange
• they are centrally controlled and so do not take account of local conditions
• they may close down factories and leave the country as quickly as they have
come.

FINANCE AND BANKING RESEARCHED ON 09 JULY 2016

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

ROLE OF BANKS
Banks play very important roles as financial intermediaries in trade and commerce. They bring
the savers and the lenders together, i.e. funds are transferred from the savers to those who wish to
borrow or invest the funds. To encourage the savers to deposit funds with them, the banks pay
them a certain rate of interest on their deposits. On the other hand, the bank charges those who
wish to make use of these funds at a higher rate of interest. This charge is to cover the cost of the
funds (interest paid to the savers), administrative and operational expenses and to earn some
profits for the shareholders.

MAIN FUNCTIONS OF BANKS

With the expansion of trade and commerce, banks began to play more important roles to
facilitate trade and commerce. Their functions are as follows:
(a) To provide safe keeping for cash deposited in the current, savings and fixed deposit accounts
(b) To provide a convenient and safe means of making payments through the current account or
by way of bank drafts, bank transfers and bills of exchange
(c) To provide finance by way of loan, overdraft, or discounting bills of exchange
(d) To provide finance in foreign trade by way of documentary credit or discounting foreign
bills of exchange
(e) To give advice on financial investment or on the credit standing of the customers

SERVICES OF COMMERCIAL BANKS

1. Accepting deposits

2. Providing a convenient means of making payments

3. Lending to customers
4. Other services

1. ACCEPTING DEPOSITS
Savings Account
• These are known as time deposits or deposit accounts.
• Seven days notice of withdrawal is required.
• Interest is paid on these accounts.
• There are no bank charges for operating such an account.
• It is suitable for investors with small savings.

Fixed Deposit:
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Large amounts of money can be deposited for a fixed period.

• Higher rates of interest are paid on this account.
• There are no bank charges for this account.
• A certificate of deposit is given to the accountholder.
• Money deposited can be withdrawn only when the specified date expires.

Current / cheque accounts

• Money can be deposited and withdrawn at any time.
• Overdrafts, standing orders, direct debits and credit transfers are allowed on these
accounts.
• No interest is paid on these accounts.
• There are bank charges for operating such accounts.
• It is suitable for businessmen, who need to deposit and withdraw money at any
time.

DIFFEERENCE BETWEEN SAVING ACCOUNT, FIXED DEPOSIT ACCOUNT AND

CURRENT ACCOUNT
Saving account Fixed deposit account Current account
1. It can be opened with a 1. It can only be opened with 1. It can only be opened with a
minimum deposit of $1. a minimum of $500 (or certain minimum sum ($500 in
2. No recommendation is $1000 in some banks). some banks).
required to open account. 2. No recommendation is 2. Recommendation is required
3. Account holder is given required to open account. to open account.
a passbook for all deposits
into and withdrawals from 3. Account holder is given a 3. Account holder is given a
the account. fixed deposit certificate cheque book for making
4. Money can be which can be presented for withdrawals by cheques.
deposited and withdrawn payment upon the expiry
anytime although date.
withdrawal at a branch or 4. Amount of deposit remains 4. Cash and cheques can be
ATM is limited to a fixed and can only be deposited anytimes and
certain amount. withdrawn when the withdrawals without notice can
5. It earns lower interest specified period expires be made by means of cheques.
than the fixed deposit unless the depositor is
account. willing to forgo the interest.
5. It does not earn interest
5. It earns a higher rate of (unless the amount deposited is
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

interest since the bank is very large) as the deposit is

certain as toi the duration of subject to withdrawal on
6. Account holder need the funds at its disposal. It demand.
not pay bank charges for can make use of the money
operating the account. for investments and for loans.
6. Account holder need not 6. Account holder has to pay
7. It is suitable for the pay bank charges for bank charges for operating the
individual who wishes to operating the account. account when the deposit falls
save small sums of below a certain minimum
money. amount.
7. It is useful to the 7. It is useful to the
businessman who has excess businessman who needs a
funds which can be set aside convenient and safe method of
to earn interest. His deposit facilitating his receipts and
account enables him to build payments. He can make use of
up sufficient reserves to the other current account
finance his business when the services like overdraft,
need arises. standing order, direct debiting
and credit transfer.

Paying in slip
It is a form used for paying money into bank account

Bank statement
A regular intervals, or on request, the bank will send to a customer a bank statement which
provides a record of all that has taken place.
Amount which reduce the balance in the account are shown in the payments column, and the
amounts which increase the balance in the accounts are shown in the receipts column. As each
payment or receipt is recorded a new figure is shown as a new balance figure in a third column.

2. PROVIDING A CONVENIENT MEANS OF MAKING PAYMENTS

The cheque system

A cheque is an order to a bank to pay a stated sum to the bearer of the cheque or a named person.

Contents of a Cheque:
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Date: The date is written on the top right hand corner of the cheque. A cheque has to be
presented to the bank within six months of the mentioned date on the cheque. If not the
cheque will be a stale cheque and it will be dishonoured.
• The Drawee: This is the bank on which the cheque is drawn. This is printed on the
cheque and helps when queries arise.
• The Branch Code Number: This appears on the top right hand corner and at the bottom
of the cheque.
• The Payee’s Name: This is written on the top line of the cheque.
• Amount: The amount should be written in words and in figures. The amounts should be
the same. If not the cheque will be dishonoured.
• The Drawer’s Name: This is printed or written at the bottom of the cheque.
• The Drawer’s Signature: The drawer’s signature should appear below the drawer’s
name. If the signature is not the same as the specimen signature given to the bank, the
cheque will be dishonoured.
• The Cheque Number: This appears at the bottom left hand corner of the cheque.
• The Account Number: The cheque number also appears at the bottom of the cheque.
This helps in the automatic handling of cheques.
Types of Cheque:
Open Cheque
Anyone who finds an open cheque can cash it. So it is not safe to send an open cheque. This
cheque is sent to persons who do not have bank accounts. Money for this type of cheque can be
received over the counter.

Bearer Cheque
This has bearer written on the cheque. This cheque has the same features of an open cheque.

Crossed Cheque
When two parallel lines are drawn across the face of a cheque, it becomes a crossed cheque.
Such a cheque has to be deposited in the bank account and sent for clearing. Money is not paid
over the counter in the case of a crossed cheque. There are different types of crossings:
• General Crossing: These cheques can be paid into any bank. General crossed
cheques with “A/c Payee Only” written within the two parallel lines have to be
paid into the account of the payee only.
• Special Crossing: These cheques must be paid into the bank written between the
two parallel lines.
• Not Negotiable Crossing: The payee cannot negotiate such cheques to another
person.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Dishonoured Cheques
A cheque may be dishonoured for the following reasons:
• There may not be sufficient funds in the drawer’s account to make the payment.
• The cheque may be a stale cheque. That is it is presented to the bank six months after the
mentioned date on the cheque.
• The drawer’s signature may not be the same as the specimen signature.
• The amount written in words and figures may not be the same.
• The cheque is mutilated or defaced.
Credit transfers
1 A current account holder can instruct his bank to pay directly into the bank account of the
payee. The bank will debit his account and credit the account of the payee.
2. Credit transfer system can be used to make single or multiple payments. Single credit transfers
are frequently used by debtors to pay bills.
3. This facility is useful to the businessman who has to make a large number of payments at one
time to those with bank accounts. Credit transfers can be used to pay salaries, rents, hire
purchase instalments, etc. In the payment of salaries, for example, the employer has only to make
out one cheque for the total amount together with a list of the employees' names and account
numbers and the amount of salary to be credited.
4. This method of payment is advantageous because it is:
(a) convenient - both to payer and payee as the former is spared the trouble of writing and
posting several cheques, and the latter need not go to the bank to cash the cheque.
(b) economical - the payer pays the stamp duty for only one cheque and he also saves on
postage.
(c) safe - there is no risk of cheques getting lost or being dishonoured.

Standing order or banker’s orders:

1 These are orders to a banker to pay regularly a fixed sum of money from one's current account
in order to settle recurring payments like mortgage repayments, hire purchase transactions, rents,
insurance premiums, subscriptions to clubs, etc.

Advantages

1. Regular commitments are met punctually

2. Debtors need not remember due dates for payments.
3. Creditors need not send reminders to debtors to pay up their debts.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Disadvantages
1. The current account holder using the facility is informed of the payment made by the bank on
his behalf only when he receives the monthly bank statement, so it is possible that he may
inadvertently overdraw his account if he has only a small balance in it.
2. It is restricted to only payments of a specific amount and where payments are of an irregular
sum or have increased in amounts, new instructions have to be made to the bank. To overcome
this problem, direct debiting facilities are provided to the customer.

Direct debit:
1. The bank may provide direct debiting facilities for payments of varying amounts at irregular
intervals.
(a) Under this arrangement, when the supplier sends an invoice to the buyer a direct debit form is
also sent to the buyer's bank informing the latter to debit the buyer's bank informing the latter to
debit the buyer's account and to transfer the money to his account. Such payments have to be
authorized by the buyer.
(b) This saves the buyer the trouble of remembering due dates of payment and sending off
cheques.
(c) The supplier or creditor gets prompt settlement of debts.
(d) This differs from standing orders in that it is the creditor who gives payment instructions and
not the debtor. The amount and date of payment are not fixed as in the case of standing orders.

Remittance

[Link] are used to send money from one place to another without the actual physical
movement of cash. Examples of bank remittances include bankers' cheques, bank drafts, mail
transfers and telegraphic transfers:
(a) A bankers' cheque or cashier's order is a bank's cheque drawn upon itself. It can beused for
payments of any amount within the same town. It is highly acceptable since the drawer of the
cheque is a bank.
(b) A bank draft is an unconditional order in writing drawn by one bank on another
requesting the drawee bank to pay a third party on demand a specified sum of money.
(c) A mail transfer is a written instructions given by a remitting bank to its branch or agent bank
to pay a certain sum of money to a third party Such a remittance is sent by mail. The remitter has
to pay the commission and postal charges.
(d) A telegraphic transfer is an instruction that is cabled or telexed to a branch or agent bank by
the remitting bank to pay a certain sum of money to a third party. The remitter will be charged
commission and cable or telex cost.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

2. All local remittances are payable in local currency while foreign remittances are payable in
foreign currencies drawn on an overseas bank. For the latter, the remitter has to pay the
equivalent amount in local currency
3. To the remitter, bank remittances are safe, cheap and convenient to use. To remitting bank,
remittance service provides income from commission, foreign exchange and the short-term use
of interest-free funds.

Documentary credits (letter of credit)

Documentary credit is a letter of undertaking issued by importer’s bank (hereafter called the
issuing bank) to pay an overseas exporter against the exporter’s shipping documents such as the
bill of lading, certificate of insurance, invoice, etc. which must adhere strictly to the terms and
conditions of letter of credit. The exporter can receive payment for the amount due the instant he
deposits the shipping documents with the agent bank (or advising bank) which is in his country.

Bank draft
• It is a cheque drawn by one bank on another bank, demanding that the latter pay a
specified sum to the payee named on the draft.
• The advantages of using the bank draft to remit money are the same as those of a
cashier's order.
• It can be used to remit money to other towns in the same country or even abroad.

Debit cards
This is an example of the Electronic Funds Transfer at the Point Of Sale (EFTPOS). Payments
are made electronically from personal accounts to retailers’ accounts. Connect and Switch are
examples of debit cards. For this system:
• There should be electronic equipment installed at the retail outlet.
• There should be cards with Personal Identification Numbers issued to bank’s
customers.
• There should be a system for transmitting messages from the retailer’s terminal to
the bank’s terminal.
The customer’s card is inserted in the retailer’s terminal and if there is sufficient money in the
customer’s account, the right amount will be transferred from the customer’s account to the
retailer’s account.

Credit cards:
This enables the customer to obtain instant credit and also cash advances. The bank charges
interest from the day cash is withdrawn or from the day goods are bought on credit. The
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

advantage to the retailer is the increase in sales. The best- known credit cards in UK are
Barclaycard, Access and Trust card.
The bank gives the credit card to the customers, who can then get credit from retailers. The
retailers prepare three copies of the bill. One is sent to the bank, one is given to the customer and
one is kept by the retailer. The bank pays the retailer immediately on receiving the copy of the
bill. At the end of the month the bank sends the statement to the customer who has to pay the
money within 25 days on receiving the statement. Interest is charged on the amount of goods
purchased.
ElectronicFundTransfers
EFT offers several services that consumers may find practical:
• Automated Teller Machines or 24-hour Tellers are electronic terminals that let you bank
almost any time. To withdraw cash, make deposits, or transfer funds between accounts,
you generally insert an ATM card and enter your PIN. Some financial institutions and
ATM owners charge a fee, particularly to consumers who don't have accounts with them
or on transactions at remote locations.
-Pay-by-Phone Systems let you call your financial institution with instructions to pay certain
bills or to transfer funds between accounts. You must have an agreement with the institution to
makesuchtransfers.

• Personal Computer Banking lets you handle many banking transactions via your personal
computer. For instance, you may use your computer to view your account balance,
request transfers between accounts, and pay bills electronically.

• Point-of-Sale Transfers let you pay for purchases with a debit card, which also may be
your ATM card. The process is similar to using a credit card, with some important
exceptions. While the process is fast and easy, a debit card purchase transfers money -
fairly quickly - from your bank account to the store's account. So it's important that you
have funds in your account to cover your purchase. This means you need to keep accurate
records of the dates and amounts of your debit card purchases and ATM withdrawals in
addition to any checks you write. Your liability for unauthorized use, and your rights for
errorresolution,maydifferwithadebitcard.

3. LENDING TO CUSTOMERS

[Link] banks lend money to their customers in the following ways:

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

(a) by extending a direct loan in which the borrower's bank account is credited with the amount
of the loan and interest is paid on the full loan.
(b) by giving overdraft facilities to their customers who are able to withdraw more than the
amount deposited in their current accounts after making prior arrangements with the bank.
Interest is charged on the amount overdrawn.
(c) by discounting bills for their customers. Bills are documents bearing the promise of either
the government (i.e. Treasury bills) or well-known banking houses or persons of good credit
standing (i.e. bills of exchange) to pay a stated sum of money at a stipulated date.
2. Banks purchase these bills from their customers at a discount on their face value. The discount
is interest earned by the banks for holding the bills until maturity. The bank pays the holder of
the discounted bill the amount stated less the interest on the sum for the number of days still to
run before the due date.
3. Discounting bills is a kind of credit facility offered by the bank to its customers because the
bank advances payment to a customer who has allowed his debtor a certain period of credit, and
collects the debt from the debtor (i.e. the customer's debtor) when it falls due.
4. The commercial bank is able to carry out its lending activities for the following reasons:
(a) It knows from experience that only a small portion of its customers' deposits is
withdrawn as cash at any one time; so it keeps a sufficient amount of cash to meet such
withdrawals.
(b) It can use the rest of the deposits in the bank profitably by either investing or lending them to
customers. In fact, the commercial bank can lend out many times more than the cash deposited
with it through multiple credit creation, subject to the limits imposed by the Central Bank with
regard to the ratio of cash to total deposits.
(c) It pays interest to its depositors to encourage them to keep their money in the bank. The
interest rate charged on loans and overdrafts will be higher so that the difference earned is used
to pay for operating expenses and any residue becomes the bank's profits.
5. The differences between overdrafts and loans are summarized in the following table:
Bank overdraft Bank loan
1. Customer must have current account. He is 1. Borrowers need not have a current. If he
allowed to overdraft his account up to a certain has a current account, then his account is
amount for an agreed period. The amount of debit credited with the agreed amount of the loan
balance outstanding is the amount of the overdraftfor an agreed period of time, while a special
taken. loan account is debited with the same
amount.
2. Less formalities are observed as borrower need 2. The borrower has to go through the
not fill in forms whenever he wants credit. Being formal procedure of applying for loan. If he
already a customer of the bank, the borrower need is not a customer of the bank, he needs
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

not have reference as to his financial standing. references. The bank must be satisfied with
Security is unnecessary if he amount of overdraft the borrower’s financial position, security
required is small. on the loan and the purpose of the loan.
3. Interest is charged on the actual amount and the 3. Interest is charged on the whole amount
number of the days the account is overdrawn, e.g. borrowed for the full period of the loan
if the account is overdrawn by $2,000 for 100 irrespective of whether the loan is fully used
days and the interest rate is 10% per annum then or not. For example, for a loan of $2,000 for
the interest charged a year at 8% per annum, interest charged for
= 10/100 $2000 100/365 = $54.79 the year
Total amount payable at the end of 100 days = 8/100 $2000
=$2000 + 54.79 = $2054.79 =$160
Toal amount payable at the year
=$ 2,000 + $160
=$2,160
4. Any money paid into the customer’s account 4. Money paid into the borrower’s account
reduces the overdraft, e.g. a customer overdraws doesn’t reduce his debts. However, when the
his account by $2000 on 1 January and pays into loan is repaid periodically under standing
his account $1,000 on 30 June and another $1000 orders, interest is payable on the reduced
on 31 December. No other withdrawals or amounts standing to the debit of the loan
payments are made into his account during the account. For example, a borrower takes a
year. The rate of interest on the overdraft is 11% bank loan of $2000 on 1 January at an
per annum. interest rate of 10% per annum. The loan is
Interest payable to be repaid in two half-yearly instalments.
= Amount standing to his debts rate of interest Amount payable per period
Period the outstanding amount is overdrawn = Instalment + interest payable
Interest payable up to 30 June where
=$2000 11/100 ½ (i) Instalment = Loan/ No. of instalments
=$110
Interest payable up to 31 December (ii) Interest payable
= $ 1,000 11/100 ½ = Interest rate per annum instalment period
=$ 55 Amount outstanding
(Amount outstanding = Loan – Instalment
Total amount of interest payable for the year paid to date)
=$110 + $55 = $165. 30 June : 1st instalment
Interest payable for overdraft is $165 while the Amount payable
interest payable on the bank loan for the same = $ 1000 + [10/100 ½ $2000]
amount and the same period is $150. This is =$1000 + $100
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

because the rate of interest charged on a bank =$1100

overdraft is higher than for a bank loan. ( In 31 December : 2nd instalment
practice, interest on overdraft is calculated on a Amount payable
monthly basis, hence increasing the total debit = $1000 + [ 10/100 ½ $1000]
balance by the amount of the added interest = $1000 + $50
payable. So in actual fact the customer will have = $1050
to pay a large interest than that calculated above.)Total amount paid by the end of the year
=$ 1100 + $1050
= $2150
( If repayment is not made periodically, total
amount payable at the end of the year
= $2000 + [10/100 $2000]
= $2000 + $200
= $2200
The borrower saves $50 ($2200 - $2150) if
he pays by instalments.
5. As the banker doesn’t know when and how 5. Since the banker is certain as to the
much of the agreed amount he would be called amount of the loan demanded, he charges a
upon to provide for the customer, he charges a lower rate of interest.
higher rate of interest because of this element of
uncertainty.
6. An overdraft is suitable for the customer who is [Link] is suitable for the borrower who is
unsure to how much, when and for how long he sure that he will require the loan for a
needs credit, e.g. loans for business purpose like certain time, e.g. loans for personal purposes
the purchase of goods for sale. like the purchase of household equipment

MODERN TRENDS IN BANKING

Automated Teller Machine (ATM) service

Banks that have computerized their systems of operation are providing ATM services to their
savings and current account holders. This facility enables the customer to perform banking
transactions anytime in the day at ATMs installed outside the bank and at key locations. Some of
the banking transactions include withdrawals up to a certain amount each day, transfer of funds
between accounts, deposit of cash or cheques, bank balance enquiry, request for cheque books
and statements of accounts. Some banks in Singapore have even extended the ATM service to
include payments of purchases and bills at participating shops or organizations where special
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

machines are installed. The ATM cards can be used at these machines to authorize payment (e.g.
NETS service at major shopping complexes.)

Tele-banking
As an extension of ATM services, some banks have introduced tele-banking services to their
customers. Customers can pay bills or make loan repayments to pre-authorized corporations,
check bank balances, order cheque books, request statements of accounts through the use of their
telephones. Tele-banking operates 24 hours a day anywhere via the push-button telephone linked
with the bank's computer centre. With the widespread use of such services, together with ATM
and credit card facility, a cashless and chequeless society is emerging.

Internet Banking
Internet banking enables the account holder to instantly search his statements; sign up to
receive free mobile text alerts; pay bills and transfer money between accounts.
Banking online is the convenient way to:
• Check the account balances and transactions,
• cut down on paperwork by stopping the postal statements,
• pay bills like credit cards and utility bills,
• transfer money between your accounts or into someone else's bank account,
• set up, change or cancel standing orders and view or cancel Direct Debits.

Night Safe facility

A special wallet provided by the bank is inserted in to safe in the outside of the wall of the
bank to which customers are given the key. The following day the wallet is opened by the
customer or bank Clark and customer account is credited accordingly
Sources of finance for business.
Businesses essentially need finance for the short-term and the long-term.
Long Term Sources of Finance---Long term sources of finance are those that are needed over a
longer period of time - generally over a year. The reasons for needing long term finance are
generally different to those relating to short term finance.
Long term finance may be needed to fund expansion projects
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Large-scale development of plant and equipment may cost millions of pounds. Long term
finance is needed for this type of development.
It is important to remember that in most cases, a firm will not use just one source of finance but a
number of sources. There might be a dominant source of funds but when you are raising
hundreds of millions of pounds it is unlikely to come from just one source.

Short term finance

Short term sources of finance are those that are needed over a short period of time - generally up
to a year.

Internal or external - where's the money coming from?

Internal sources of finance are available to the firm, but these may be more limited in scope and
for large projects, the firm may be forced to turn to banks or other institutions (external sources)
to help them raise sufficient funding.
Internal sources
Internal sources are often preferable to a firm as they will usually be cheaper and perhaps easier
to arrange at short notice. However, the potential for arranging large amounts of finance may be
low. The main internal sources are:
• Profit- the company of course has to be profitable for this to be a source, and it must be
available in cash. Often this is not viable as they may have paid the profit in dividend to the
shareholders, or perhaps already tied the money up for other reasons.
• Reduce working capital - the firm may be able to raise some money for investment if they
can reduce their stock level (through improved stock control) or perhaps improve their credit
control and ensure that they collect their debts more promptly and delay payment to creditors
for as long as is possible.
• Sale of assets or perhaps sale and leaseback - this will depend on the value of the assets,
but the firm may either be able to sell surplus assets (if they have any) or perhaps sell
existing assets that they use to a specialist leasing company and then lease them back. This
will give them access to some capital, though they are then burdened with annual leasing
costs.
• Owner's Capital-Some people are in a fortunate position of having some money which they
can use to help set up their business. The money may be the result of savings, money left to
them by a relative in a will or money received as the result of a redundancy payment. This
has the advantage that it does not carry with it any interest. It might not, however, be a large
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

enough sum to finance the business fully but will be one of the contributions to the overall
finance of the business.
External sources
• Loans - this is where the banks start to come into play. Banks will lend for either short-term
or long-term purposes, but the nature of the loan will tend to differ. The main types are:
• Overdrafts - this is a short-term facility where you can spend money, to an agreed limit, as
you want. The bank will charge interest on any overdraft amount. They may only offer this as
a short-term facility, but it can be very valuable for firms to fill short-term shortages of
working capital or any possible brief cash flow problems.
• Long-term loans - long-term loans usually refer to lending over five years. The bank lends
you a sum of money for a set time at an agreed rate of interest. It is more expensive than an
overdraft, but lasts longer. The bank may well want some sort of guarantee for this type of
loan to ensure that they get it back. It could perhaps be secured against an asset of the
business.
• Debentures - a debenture is specialised form of loan. It is effectively a loan from people to
the firm that will be repaid at a fixed date. Between the issue of the debenture and the
maturity date, the firm will pay a set level of interest. They are a common way for businesses
to raise money and are relatively low risk, though this will depend on the stability of the
business.
• Shares - limited companies or plcs can issue shares. These shares can be issued at a certain
price though this price will depend on the profitability of the company and its prospects, so
how successful the issue is will depend on how the markets view this.
• Factoring debts - the firm may be able to sell their debts to a specialist debt-factoring
company. This means that the firm sells their debts to the factoring company who pay them a
proportion of the debts immediately. In this way the firm raises some immediate finance. The
debt factoring company make their money by collecting the whole debt when it is due
(having only paid the original firm a proportion of the debt).

Raising funds - which source is best?

The choice of source of funds that a business makes will depend on a number of factors. These
include:
• Cost- this has to be one of the most important. To use an overdraft for the medium to long-
term may be an expensive way of raising money and so businesses need to look carefully at
the cost of each of their loan options. This will mainly be the rate of interest charged, but
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

there may be other costs as well (charges for debt factoring, leasing charges and so on). For
example, share issues can carry high administration costs.
• Uses of Funds: When a company undertakes heavy capital expenditure, it is usually funded
by a long-term source of finance. For example; building of a new plant may be financed by a
share issue or a mortgage. Revenue expenditure tends to be financed by short-term sources.
For example, Purchase a large amount of raw materials may be funded by trade credit or a
bank overdraft.
• Financial outlook- the financial strength of a business may also be a key determinant. If the
business already has a very high gearing ratio, then they may want to look carefully to see if
they can access internal sources of funds before borrowing even more. They may also find
that banks and other lenders are going to be less willing to lend if they are not in a strong
financial position.
• Legal status - a sole trader will be unable to issue shares and may also face much higher
rates of interest on loans as they may be considered a greater risk. The business status may
therefore influence the routes that are available to them for raising money.
• Time period - the company needs to plan ahead carefully to see how long they will need the
funds for. The shorter the time period, the more they may be able to reduce the cost of the
borrowing. If it is very long-term finance required then they may want to look at debentures
or share issues. In the short-term, a simple overdraft may be the most flexible solution.

DIFFERENCE BETWEEN SHORT TERM AND LONG TERM FINANCING

SHOR TERM FINANCE LONG TERM FINANCE

Short term finance is raised for meeting the Long term finance is raised to meet the long
day to day requirements of the business term requirements of a business such as
such as meeting various expenses, purchase buying a fixed.
of goods, raw materials, payment of wages
to employees etc.
It is to be repaid within in a period of two It is to be repaid over five years or more.
years.
Bank overdraft is an example of short term Issuing more shares and using retained
finance. profits are examples of long term finance.

TYPES OF LONG TERM FINANCE

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

1. Issuing shares
A company can raise capital by issuing shares. There are two types of shares – ordinary or equity
shares and preference shares.

Advantages of rising finance by issuing shares

• The money given for shares need not be returned to the shareholders.
• No need of keeping a security for shares.
• The ordinary shareholders are paid dividend only if there is sufficient profit.
• The company can keep some shares to sell in future. So that if the company needs finance
in future, those shares can be sold.
• Preference shares are paid fixed rate of dividend. Even if the company makes very high
profit, preference shares will be paid same amount of dividend every year.
• Unlike debenture holders, shareholders cannot force the company into liquidation.

CALCULATION OF SHARE DIVIDEND:

A company issued the following shares, which were fully paid up for:
6.5% Preference shares 200,000 @ $0.50
Ordinary shares 200,000 @ $1.00
The company also issued debentures worth $150,000, which carried an interest of 8%. The
net profit available for distribution before paying the debenture interest was $45,000. The
company decides to distribute three fourths of the net profit to the shareholders and to keep
the balance as ploughed back profit.
Calculate:
Rate of dividend per ordinary share.

Profit $ 45,000
Debenture interest (150,000x8/100)= $ 12,000
Balance Net profit $ 33,000

Profit to be distributed to shareholders:

$ 33,000x3/4= $ 24,750
Preference share dividend $100,000x6.5/100= $ 6,500
Profit to be given to ordinary shareholders $ 18,250

Dividend per ordinary share ($18,250/200,000)= $ 0.09

Rate of dividend per ordinary share=
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Dividend per ordinary share x 100

Value per ordinary share

$ 0.09 x 100 = 9%
$1.00

2. Issuing Debentures
It is a loan to a company repayable at a fixed date.
Features of Debentures
• Debenture will be an expensive source compared to other source of finance such as
retained profits
• Debenture carries a fixed rate of interest.
• They are normally secured against some property owned by the company. If the company
fails, the agreed property must be sold and the proceeds used to repay the debenture
holders.
• If the debenture holders do not receive their annual interest, they can force the company
into liquidation.
• The money collected from debentures should be repaid at a certain date.

3. Commercial mortgages
A mortgage is a form of loan, which is taken out against property (real estate). The definition of
property may include a house, a flat, or an apartment, although mortgages cannot be taken out
against any other assets such as a vehicle, stocks and shares, or other investments. A mortgage
can also be taken out against an office, a shop or a factory (this is known as a commercial
mortgage), or against a property which the owner intends to rent out to other tenants (buy-to-let
mortgage).

Some companies may own the freehold of real estate premises in the form of factories, office
accommodation or warehouses. These assets will have a value in the company’s accounts. If the
business wants to raise a capital sum for investment in new assets, it could take out a commercial
mortgage with a property company. Normally the maximum mortgage will be between 60% and
70% of the property value.

The premises themselves are used as security, and the mortgage loan will usually be for the long
term.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

The advantage of this arrangement is that the business can continue to use the premises as
before, but must service the commercial mortgage in terms of interest payments and eventually
repaying the capital sum. Another advantage is that any increase in property values over time
still belongs to the business and not the property company to which it has been mortgaged.

4. Bank loans
Loan is a specified sum of money lent by a bank to a customer, usually for a specified time, at a
specified rate of interest. In most cases bank asks for some form of security (collateral security)
for loans.

Features of bank Loan

• It is a formal way of borrowing from a bank for a period of 2-5 years
• It is relatively simple to arrange once the banks lending criteria have been met.
• Generally collateral securities will be required to obtain bank loan.
• It is repaid in periodical instalments along with the fixed rate of interest.
• Features of retained profits.
• This means the capital raised by the company by re-investing or ploughing back the past
profits of the company.
• It is best suited for long term requirements of the business.
• It might not be suitable for fast expansion programmes.

5. Sale and leaseback

This option relates to property (real estate assets). ‘Where a business owns premises and needs to
raise finance, it may sell the premises and simultaneously arrange to lease it back. The business
would be converting the premises into cash, but will continue to be able to use it as before. Such
arrangements are generally very long term to guarantee the continued availability of the asset to
the organisation.

The advantage of this method, compared to the commercial mortgage option, is that 100% of the
freehold value is realised, which is higher that is possible with a mortgage. However, on the
other hand, the business will not enjoy any future increase in the property’s market value. Sale
and leaseback may also be possible for certain types of capital equipment, such as large
machinery.

TYPES OF SHORT TERM FINANCE

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

1. Bank overdraft
Some businesses may need to withdraw money from their accounts when there are insufficient
funds in their accounts. They may request their banks to allow them to overdraw from their
accounts for a short period. Interest will be charged on the amount overdrawn. This is an
informal way of borrowing money from the bank.
Features of bank overdraft
• It is suitable way for short term finance.
• It is not suitable for large amount of finance.
• Comparing to bank loan, the rate of interest is high for overdraft, and in long run, it will
be very expensive.
Advantages of Bank overdraft
• Company faces an immediate shortage of cash and bank overdraft is the best suited short
term loan.
• It is very easy to obtain as there are least formalities to be followed.
• Bank overdraft is a suitable source of finance when we do not know the exact amount
required and for how long it is required.
• Interest will be charged only for the amount overdrawn and for the period for which it is
overdrawn.

Disadvantages of bank overdraft

• It is not suitable for large amount of finance.

• Comparing to bank loan, the rate of interest is high for overdraft, and in long run, it will
be very expensive.

2. Factoring
Factoring is the sale of accounts receivable. By selling invoices, the seller gets cash sooner than
if he collects the money by himself. The factor company that purchases receivables (invoices)
takes title to the invoices and collects them when they are due. That company also assumes
responsibility for all of the costs, as well as the hard work that comes with customer debt
collection.

The factoring company makes its money by charging its customer a percentage of the value of
the invoices it has factored. This is usually done on a monthly basis.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Most factoring is called "non - recourse," meaning that the factor company purchases all
rights in the invoices and the seller has no responsibilities for collection. The factor's
estimated cost and time in making collections is considered into the discounted purchase price of
the receivables. In some states, however, "recourse" factoring is also permitted. In recourse
factoring, the seller of the invoice are secondarily responsible for any invoices not collected.
The factor company undertakes debt collection, but the seller of the invoice remains finally
responsible to repay any portion of the cash price that went uncollected.

Invoice factoring can be seen as an alternative to an overdraft for a business.

Advantages of factoring
1. Quick cash:
By selling invoice, the seller can receive cash quickly. Therefore his cash flow problem and
liquidity problem can be reduced.

2. No debt:
Factoring is a sale of assets (invoices), not a loan.

Disadvantages of factoring
1. Cost:
Traditional loans will typically be less expensive than the costs of factoring.

2. Possible harm to customer relations:

Collection actions taken by the factor company may endanger the business relationship with one
of your customers. A factor company has little interest in preserving your future relationship
with the debtor.

3. Leasing
If a business needs assets such as a new computer system or fleet of vehicles, it has the choice of
buying them or leasing them.

In practice, leasing is a form of hire under which the business has the use of the fixed assets such
as computers or vehicles for an agreed period. The business leasing the assets has to look after
maintenance.

Leasing is particularly advantageous in situations of uncertainty or where the business is not

willing to commit large capital sums to buy assets. It can also make sense where technology
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

changes rapidly and a business needs to update its equipment regularly. Further, leasing can have
tax advantages for both the business leasing the assets and the lessor.
Leasing is available to all types of [Link] some cases, there may be an option to buy the
assets at the end of the lease. This arrangement is called lease/purchase
Advantages of Leasing
• There is no need of making immediate lump sum payment.
• Leasing company will sometimes provide maintenance service.
• As computers (for example) are highly sophisticated, it may go out of date soon and then it
will be easy to replace. Purchased computers will have to be kept for longer to recover the
investment.
• Leasing is a cheap method of finance, comparing to many other methods.

4. Trade credit
Another possible solution to the short term cash flow problem is to try to find ways of delaying
payments to suppliers. To achieve this, a business will try to discuss trade credit terms with its
suppliers.

When trade credit terms can be arranged, the business can order materials from suppliers and
perhaps process them into finished goods for sale before it has to pay for them.

The major advantage of trade credit is that it is interest free. Some suppliers who give trade
credit will also offer cash discounts to buyers who pay early.

5. Hire Purchase Agreement

The customer can hire goods and can buy them at the end of the hire period. Consumer durable
goods like freezers etc. are sold in this way. The goods remain the property of the seller till the
last payment is made.

Features of Hire purchase

• The hire purchase agreement is an agreement to hire with an option to purchase.
• Ownership lies in the hands of the seller till the buyer pays the full amount.
• If the buyer fails to pay the installment, the goods will be repossessed by the seller.
• Hire purchase is suitable for capital goods

Advantages of hire purchase to the buyer

• It enables the poor people to obtain goods.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Goods can be bought immediately and the payments can be made in installment.
• Good quality goods can be bought when they are needed the most.
Advantages of hire purchase to the seller
• It helps to increase the sales.
• If the payment is not made the seller can take back the goods by low.

Disadvantages of hire purchase to the buyer

• Goods once bought cannot be sold until the last installment has been paid up.
• Goods can be bought only from those sellers who offer hire purchase credit.
• The prices of the goods are high.
• Hire purchase restricts the purchase of goods to only those that are large and have a resale
value.
• Hire purchase system motivates the people to buy unnecessary luxury items.

Disadvantages of hire purchase to the seller

• Risk of bad debts.
• Goods repossessed may not be in a good condition and may have little resale value.
• Hire purchase buying increases the capital required by the seller to run the business.
• More administrative expenses insure to record and keep track of installment due.

METHODS OF SELF FINANCING

Retained Profits (plough back profits) and savings

When a business makes a profit, a proportion will generally be paid out to the owners — in the
form of drawings in the case of sole traders and partnerships or dividends on shares in the case
of limited companies and PLCs. The rest of the profit will be retained in the business and can be
used to finance the growth of the business in the form of new investment in plant and machinery.

Features of retained profit

• This means the capital raised by the company by re-investing or ploughing back the past
profits of the company.
• It is best suited for long term requirements of the business.
• It might not be suitable for fast expansion programmes.

Advantages of using Retained profit or ploughed back profit

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• It is available without about any formalities

• Interest need not be paid
• No capital will be tied up.
• There is no need of repayment.

BUSINESS FINANCE
Capital
Capital refers to the value of the things owned by a business.
Capital = Assets – liabilities
1. Fixed Capital
This consists of the durable (long lasting) assets of a business which are used over a long period
of time and are tied up in permanent use, for example, land, buildings, machinery, furniture,
motor vehicle etc.

2. Working Capital
Working Capital is the amount of capital, which is available to the day to day running of the
business. It is the excess of current assets over current liabilities.

Working Capital = Current Assets – Current Liabilities

WC = CA – CL

Current Assets
Current assets are those assets, which can be converted into cash within a short period of time,
generally one year period. E.g. stock of goods, debtors, cash at bank, cash in hand etc.

Current Liability
Current liabilities are those liabilities of the business which has to be paid within a short period
of time, generally one year. E.g. Creditors, Bank O/D, short term loans etc.

Working capital is also known as circulating capital or Revolving Capital. For example, cash is
used to buy raw material, which is transferred into finished goods. Then the finished goods are
sold in the market and realize the cash. This process goes on in business.
Advantages of working capital
Sufficient working capital enables a firm to:
• Make prompt payment to the creditors and be able to enjoy cash discounts.
• Take advantage of change in price of raw materials by making bulk purchase of seasonal
goods.
• Obtain loans from banks and other financial institutions.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Make prompt payment of expenses like wages, salaries, rent, interest etc.
• Ensure smooth working of the business.

Ways of increasing the working capital.

• Investing more cash capital by the owner.
• Obtaining loans and advances from banks or other sorces of finance.
• By making profit on it’s trading.
• By selling some of its fixed assets for cash.
• By issuing new shares and debentures ( in the case of Public Limited Companies)

Reasons for reduction in working capital

• The owner of the business withdraw cash for his personal use.
• Thew company declaring a dividend, which increases the current liability of the
company.
• The company making loss on its trading.
• The purchase of fixed assets for cash.

Working Capital Ratio (Current Ratio)

It is the ratio of current assets to current liabilities. It can be calculated by dividing current assets
with current liabilities. This ratio is used to show the extent of the business financial stability. 2:1
is the generally accepted working capital ratio.

Working Capital Ratio = Current Assets

Current Liabilities

3. Turnover
Turnover is another name for net sales. Net sales means sales minus sales returns. A business can
make profit only when there is turnover. High turnover results in high profit., but increase in
profits doesn’t have direct proportion to increase in turnover.

Turnover = Sales – Sales Return

4. Profit
Business is carried on mainly to make profit. This is done by purchasing goods at lower price
and selling them at high price after charging its condition. Generally profit is calculated by
deducting cost of goods sold and expenses from sales. But profits can be correctly estimated only
after considering the following points:

• Turnover
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Turnover is another name for net sales. Net sales means sales minus sales returns. A
business can make profit only when there is turnover. High turnover results in high
profit., but increase in profits doesn’t have direct proportion to increase in turnover.

• Cost of Goods Sold

Cost of Goods Sold includes the total cost of goods purchased for sales and all direct
expenses incurred on the goods for making them ready for sale.
Cost of goods sold = OP stock + net purchase + direct expenses = closing stock or Sales –
Gross Profit.

• Gross Profit.
Gross Profit is the difference between turnover and cost of goods sold. Gross profit is not
true profit, because it is the profit before deducting any expenses incurred in selling the
goods such as rent of premises, wages, interest on capital etc. High gross profit shows
that there is enough profit to meet the expenses and leaves a certain amount as net profit.

Gross Profit = Net Sales – Cost of Goods Sold

• Net Profit
Net Profit is the true profit obtainable from trading. It is amount remaining after
deducting all expenses from the gross profit.

Net Profit = Gross Profit + other incomes – expenses.

Percentage of Profit

• Margin
Margin is the gross profit as a percentage of sales (turnover). Margin is also known as
Gross profit turnover or Gross profit margin.

Margin = Gross Profit X 100

Sales
• Mark- up
Mark – up is the gross profit as a percentage of cost of goods sold.

Mark-up = Gross profit X 100

Cost of goods sold
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Net Profit Percentage or NP Turnover = Net profit X 100

Turnover

Remember:If Mark-up is 25% = ¼ , then margin should be ¼ + the numerator of mark-up to

the denominator of margin. Then it should be 1/5. It is equal to 20%.

Reasons for fall in Gross Profit Percentage

• Increase in cost of goods sold.
• Unnecessary expenses incurred.
• Inefficiency of workers.
• Loss or damage of stock.
• Lower selling price.
• Changes in fashion, taste etc.

Reasons for Rise in Gross Profit Percentage

• Decrease in cost of goods sold.
• Increased efficiency.
• Reduction in unnecessary expenses.
• Decrease in loss due to theft or damage.
• Increased selling price.

How to Increase Net Profit Percentage?

Net profit percentage can be increased by increasing turnover, reducing cost of goods sold and
reducing expenses.
Turnover can be increased by increasing selling price, using more advertising, sales promotion or
by allowing more credit.
Cost of goods sold can be reduced by purchasing goods in bulk at a lower price or by finding out
better and cheaper suppliers
Expenses can be reduced by reducing costly advertising, reducing the number of employees or
reducing free services offered.
Capital and Profit.
A businessman can get a clear picture of the profitability of his business only when he compares
the profit with the capital invested. By this he can find out the percentage of profit on the capital
invested and also can compare the profit with what he could have earned by investing the money
in banks or building societies.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Rate of Stock Turnover or Stock Turnover

Rate of stock turnover is a measurement of how immediately goods are sold in a given period of
time, usually one year. This ratio is generally expressed in terms of times. Rate of Turnover may
vary from firm to firm. For high quality, expensive items rate of turnover will be low because
such goods are sold very slowly. But for perishables like fresh fish, vegetables, fruits,
newspapers etc the rate of turnover will be high because these goods are sold quickly.

Rate of Stock Turnover = Cost of Goods Sold

Average Stock

Average Stock = Opening Stock + Closing Stock

2
Importance of Rate of Stock Turnover
A firm with high rate of stock turnover will be more efficient because:
• Less capital will be tied up.
• Expenses are spread over a large volume of sales.
• Stocks are quickly sold off and the cash so recovered can be used to pay off creditors.
• Frequent purchase of stock from its suppliers makes it possible to buy in more favourable
terms.
• Loss due to damage, spoilage and changes in fashion will be very low.

How to improve the rate of stock turnover?

1. By reducing the size of the average stock needed. This can be done by eliminating the slow
lines or by placing smaller orders with suppliers.
2. By cutting prices, especially for luxury goods, if demand is price elastic
3. By advertising and sales promotion.
4. By offering credit
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

ADVERTISING

PURPOSES OF ADVERTISING

To in form
1. Advertising serves to inform the public of the availability of a new product or service which is
being sold in the market, e.g. advertising a new brand of toilet soap or announcing the opening of
a new hairdressing salon.
2. This is aimed at creating a demand for the new product. The new product has to be made
known to the public before the goods are actually available for sale. The advertisement also
serves to induce the wholesalers and the retailers to stock up the new goods.
3. This type of advertising is called informative advertising. It is not only restricted to new
products but is also used to inform people of new uses of a product, of how a product works, of
new price changes, of names and addresses of retailers selling a certain product, or even of a new
bus timetable.
4. What is important is that it makes no attempt to persuade but merely informs the public of the
availability of the product, its uses and advantages, price, quality, terms of sale, etc.
5. Under informative advertising the following goods and services are advertised:
- Advertising in Trade and Technical Journals: These advertisements contain technical
information about goods.
- Advertising of Particular Events: Trade fairs, exhibitions, concerts and sporting activities are
examples of such advertising. In this type people are informed about such events and are
persuaded to attend such events.
- Advertising of Employment Opportunities: In this type people come to know about the various
employment opportunities available.

To persuade
1. Advertising also serves to persuade the public to buy some goods or services, e.g. a company
seeks to induce the public to buy its particular brand of detergent in preference to others or a
travel agency advertises the better quality of service it can provide to its customers.
2. This type of advertising is called persuasive advertising. It not only informs but also persuades
the public into purchasing the advertised product by using subtle techniques. It aims at extending
the demand for the good or service advertised. In other words, an advertiser aims to increase the
sale of its product. By selling more, a firm increases its revenue and might pay a lower unit cost
as goods are produced on a larger scale. The net profit of the firm would then increase if these
benefits are greater than the costs of advertising.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

To remind
1. Advertising also serves to remind consumers of existing products; that the product may be
needed in the near future and where the product can be bought.
2. It is necessary for the advertiser to draw the attention of consumers to his product constantly
and to keep away from other competitive brands which may be heavily advertised.
3. It aims to keep the name of the product before the public. For example, a newspaper
advertisement may carry a picture of a bottle drink or a bus may carry the name of a firm. They
say nothing but serve a useful purpose in reminding the public of the name of the product or
service. Many products are branded to distinguish them from similar products. Brand names are
registered so other competitors cannot copy them. Some brand names are so well known that
advertisements often show only the brand name and the product itself is not mentioned.
4. This type of advertising is called reminder advertising. A related form of advertising is
reinforcement advertising which seeks to assure current purchasers that they made the right
choice.
5. Reminder advertising aims at sustaining the demand for the good or service advertised.

BENEFITS OF ADVERTISING
• Advertising increases profits and therefore the producer can lower the price of his goods.
• Advertising helps in providing information to the customer of a particular product.
• Advertising helps in launching new products.
• Advertising helps to introduce new products, thus improving the standard of living.
• It is believed that advertised goods are of better quality than other goods.
• Advertising maintains the price of newspapers at a reasonable level.
• It helps to increase sales.
• It provides employment opportunities.
• It helps to create goodwill for the firm.
• It gives wide choice to customer.
• It helps the salesman in their efforts of promoting sale.
• New product can find market only through advertising
• Advertising provides employment opportunities
SOCIAL ASPECT OF ADVERTISING

Positive:
1. It generates employment.
2. It yields revenue for the public media which is indirectly an income for the government.
3. It educates the society.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Negative:
1. Ads can mislead the customers to try out the lice goods.
2. Ads can turn the society towards flair for sex, and violence.
3. Ads can lead to waste of resources.

DANGERS OF ADVERTISING:

To consumer:
1. Consumers are misled by advertisements.
2. Customers may have difficulty in choosing a brand.
3. Customers may make unnecessary purchase.
4. Customers may be irrational in buying.

To producer:
1. Production costs increase.
2. The expenditure may not be justifiable.
3. The manufacturer may incur financial loss, if he engages in competitive advertising.

Reasons why consumers need protection against some forms of advertising:

• Advertisements may be misleading.
• Advertisements may contain false information.
• Goods may be incorrectly labeled.
• Some advertisements may be dirty and unsuitable.
• Some adult advertisements may be shown at inappropriate timings.

TYPES OF ADVERTISEMENTS

Persuasive Advertising
In this type the advertiser tries to persuade the public to buy his product, by explaining the
various good qualities that the product possesses over other products.

Competitive Advertising
This is carried out by different producers of different brands of the same product. Each producer
tries to compete with other producers in trying to capture the market. The advertiser uses
techniques that are persuasive and aggressive to achieve his target. Example, the advertiser
claims that his product is best in terms of quality/performance/durability.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Example: Biggs Butter is best.

Informative Advertising
In this type information is passed on to the consumers about availability of products, changes in
fashion and how to use the products. Under informative advertising the following goods and
services are advertised:
• Advertising in Trade and Technical Journals: These advertisements contain
technical information about goods.
• Advertising of Particular Events: Trade fairs, exhibitions, concerts and sporting
activities are examples of such advertising. In this type people are informed about
such events and are persuaded to attend such events.
• Advertising of Employment Opportunities: In this type people come to know
about the various employment opportunities available.

Generic Advertising (Collective)

When all the producers in one industry combine to advertise their product, it is called generic
advertising. These advertisements are usually sponsored by trade associations. The producers
group together to share the costs and to promote the product hoping to increase the overall sales
of the product.
Example: Drink more tea.
ADVERTISING MEDIA:
Type of Advantage Disadvantage
medium
(a) Newspaper 1. There is a wide target audience. It 1. It has a short life span
is read by many people.

2. Circulation cost per exposure is 2. The advertisements have to compete

low. It is one of the cheapest media with other advertisements for the
of reaching a large number of readers attentions.
prospective buyers.

3. It is suitable for products or 3. The written advertisement message

services in general demand, e.g. can reach only the literates.
films, electrical appliances.

4. It enables the advertiser to present 4. Advertisements are many and

the products in some details, e.g. varied such that it takes effort to find
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

technical details about a car. advertisement one is looking for.

5. The advertiser can have the choice 5. The paper quality is low compared
of national or regional coverage. with those used for magazine.
6. Unlike advertisement in the 6. As an advertising medium the
magazine which must be submitted newspaper doesn’t have the same
weeks ahead, advertisements in the impact as the television.
newspaper can be inserted or
cancelled at shorter notice.
7. The advertiser can obtain
response from the readers by
providing telephone numbers or by
means of coupons or contest.
8. Newspapers have the capacity to
accept a large number of
advertisements compared with the
limited time on television.
(b) Magazine 1. The paper quality is better 1. It is inflexible, as advertisements
compared with that used for the must be placed weeks before the date
newspaper. of the publication.
2. An advertisement in the magazine 2. There is limited readership as the
enjoys a longer life span than that in readers are specific.
the newspaper. 3. It is infrequent as the magazine is
3. The targeted audience of the published only periodically.
advertisement can be reached mare 4. As an advertising medium, it
easily. E.g. a firm selling computer doesn’t have same impact as
software could advertise in a television.
computer magazine or a firm selling
cash register can advertise in a trade
journal.
4. As the advertising message is
directed at the intended audience
there will be less wasteful
circulation.
5. It is suitable for advertising
messages which are long and have to
be read in a leisurely manner.
(c) Radio 1. The advertising message can be 1. There is lack of visual elements and
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

reached large number of people even as such, they are less effective when
in remote areas. visual impact is needed.
2. It is much cheaper to produce 2. It’s life span is very short compared
advertisements of this medium than with the newspaper and the magazine.
a television commercial. 3. Audience attention is low when
3. The use of sound such as music broadcasting is being used to provide
and oral makes radio a more lively a background for other activities.
advertising medium than static
medium such as newspaper and
magazine.
4. The advertising message can
reach the target market effectively
through special interest programme
such as children’s or women’s
programmes.
5. With radio sets that are portable
or fitted in motor vehicles, radio
message can be received widely.
(d) Television 1. The advertiser can demonstrate 1. It is not suitable when detail
the product with realistic sound s, information is required. The
colors and movements because of newspaper and the magazine are better
effects. The television is one of advertising media if more information
those media that have high is required by the prospective buyers.
persuasive impact i.e. the ability to 2. It is not suitable if the target
stimulate consumers. audience is small due to high cost.
2. The television commercials can 3. There is high absolute cost – the
reach a large number of viewers as cost in producing an airing television
they have wide exposure. commercial is very high and requires
3. Advertisements can be repeated to big budget.
the point where a large number of 4. The life span of a given advertising
viewers have seen the message is short unless it is recorded.
advertisements to create an effective 5. There is less audience selectively as
and lasting impact. television commercials tend to reach
4. The advertisement can be directed mass audience, whereas the magazine
at national or regional audience. can be more selective.
5. The time chosen for airing an
advertisement can suite the target
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

audience, e.g. Toys can be

advertised during children’s
programme.
6. There is high audience attention
and personal impact.
7. The use of the product can be
demonstrated and explained.
8. The viewers can be invited to
respond immediately by dialing a
telephone number.

(e) Cinema 1. High audience attention is 1. There is limited coverage as it is

received as there are fewer limited to film goers.
distractions compared with house 2. It is less popular with the event of
viewing of television. videotapes, which are used to
2. Its wide screen gives extra scope demonstrate and advertise the use of
for more dramatic and realistic household products at shopping
impact compared to television. centers.
3. Advertisements on films make 3. It is a non-interactive medium, as
full use of the audiovisual effects the audience cannot respond
with movements and colors. immediately.
(f) Direct mail 1. Audience selectively is practiced 1. It is limited only to the literate.
as the advertising message will be 2. It is limited to the mailing list the
mailed only to selected target firm can secure.
groups. 3. Cost of direct mail per prospective
2. Flexibility can be exercised. client is relatively high. It suffers from
3. There is no competition with the the stigma of being classified as ‘junk
same medium. mail’.
4. Wasteful circulation is kept to a
minimum as it reaches only the
market it is intended for.
(g) Outdoor 1. There is an impact of large size 1. There is no audience selectivity.
hoarding and and colors. 2. There are creative limitations as
sign e.g. 2. Flexibility can be exercised. messages are limited to simple, short
signboard, neon 3. There is high repeat exposure. and clear statements.
lights, poster 4. It is a low cost medium. 3. No audio- kinetic impact can be
5. Low competition is expected. made.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

6. The advertising message can 4. It is open to vandalism, especially

reach a large number of people. the posters.
(h) Pamphlet 1. There is intensity of market 1. It may fall into the hands of those
and sample coverage within a certain area. not interested in the product.
2. There is an advantage of personal 2. There is limited circulation as they
impact. have to be handed to person to person.
3. Advise and explanation can be
given when necessary.
(i) Traveling 1. It is effective because it brings 1. The coverage is limited to certain
salesman products to the homes of consumers. areas.
2. Salesmen can demonstrate the 2. Salesman may not be welcome in
uses of the product to the consumers. by home owners.
3. High cost of employing sales
personal can be incurred.
(j) Window 1. It is attractive to shoppers and 1. It can reach only shoppers and
display and exhibition visitors. exhibition visitors.
exhibition 2. Uses and advantages of product 2. The frequency of holding an
can be explained and demonstrated. exhibition is not high.
3. Products can be shown to targeted
audience
4. can give further information
5. Products can actually be seen and
examined

(k) The internet 1. It is an interactive medium where 1. The coverage is limited only to
the user can key in input and obtain those who surf the internet and visit
response immediately. the website.
2. The medium uses multimedia to 2. The advertising message placed has
create realism in advertisements. to compete with many other messages
3. The advertiser can place the for attentions.
advertisements in a popular website
or he can create his own home page.
4. The advertising message has
longer life span than a television
commercial or a radio message as
the user can always go back to the
website previously visited.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

5. The advertising message can

reach selected target groups.
6. The cost of advertising in this
medium is relatively low compared
with the television.
Catalogues 1. can give full details 1. maybe expensive to
2. can be shown in colors produce/circulate
3. can show all the products in one 2. may reach only a selected group
catalogue 3. limited to the literate
4. can be referred to repeatedly

FACTORS AFFECTING THE CHOICE OF MEDIA

The choice of advertising media depends on the following factors:

Nature of the product or service

1. The medium chosen must fit the product or the service to be advertised. Goods, especially new
ones that require explanations and demonstrations are best advertised at trade fairs and
exhibitions. Alternatively, salesmen can visit homes to demonstrate the use of household
appliances, etc. Women's clothes are best shown in fashion shows or women's magazines.
Services such as self-service petrol kiosks and Automated Teller machine (ATM) services are
best demonstrated over the television network as television commercials combine sight, sound
and movement which can create a more dramatic impact than the other media. Besides,
television commercials can reach a large number of viewers.

Target market
1. Target market refers to the group of people that the advertisement is aimed at. Groups of
people may differ in terms of income, age or sex. The medium chosen must fit the target group,
i.e. the group of people who will likely buy the product or service. For example, if you are trying
to reach the female market, then women's magazines may be appropriate. If you are trying to
reach to children, then you may select television as the medium especially during children's
programmes.

Extent of market: Local, national, international

1. If wide coverage is needed for a certain advertisement, the national newspaper will be a more
appropriate medium than the local newspaper. However, the local newspaper will be useful for
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

tapping the local market, e.g. selling used car or renting a room or a house. Television is
probably the most popular medium for disseminating any advertising message to the mass
market which includes both the literate and the illiterate. For example, advertisers can reach the
world market through live telecast of football or boxing which has international appeal.

Cost
1. The cost of using the medium should be considered in relation to the budget or the amount of
funds available and the circulation of the medium. For example, a small firm intends to advertise
the sale of used cars but it has allocated a small budget for this purpose. As such, we can rule out
television as a choice as the cost of advertising on television is very high. Instead, the firm may
put a small advertisement in the newspaper.
2. The advertiser should also weigh the relative benefits of the media with their relative costs
when making a choice. Although the cost of advertising on television may be high, the size of
the audience it will reach is great, resulting in lower cost per exposure.
3. The standard criterion for comparing media is cost per thousand, i.e. the cost of reaching 1000
members of the target audience. Cost per thousand enables the advertiser to compare the cost of
different media, such as television versus radio or magazine versus newspaper.

Flexibility
1. Flexibility refers to the ease with which the advertiser can change the advertisement so as to
adapt to different conditions and circumstances. As a medium, the magazine generally has less
flexibility than the newspaper. As the former requires the finalized layout weeks before
publication, the advertisement in the magazine cannot be changed easily, whereas the
advertisement in a newspaper can be changed days before its publication. Radio provides greater
flexibility as the advertiser can change the advertisement more easily, even on the day the
advertisement is aired.

Noise
1. The 'noise level' refers to the level of distraction for the targeted audience. The noise level for
an advertisement in the newspaper is great, meaning that other advertisements in the newspaper
as well as news reports distract the reader's attention from the advertising message. On the other
hand, television commercials encounter a lower level of distraction because the commercials are
aired one at a time and can capture the viewers' attention. Compared with the newspaper and the
television, the cinema encounters the lowest level of distraction as a medium - an advertising
message can capture the full attention of the audience in a cinema.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Lifespan
The lifespan of an advertisement refers to the length of time an advertisement will be on display.
Different media have different life spans. For example, a radio or a television commercial has
short lifespan - it will last only for a few seconds. Listeners cannot replay the commercial unless
they record the programme. On the other hand, an advertisement in the newspaper or the
magazine has a longer lifespan as the advertisement can be read and re-read several times. It can
also be filed and passed on to other people.

METHODS OF APPEAL
Devices and methods of appeal e.g. music, colours, famous people and emotions.
“SEARCHE”

Social acceptance:
A consumer could make more friends if a particular brand of deodorant is used.
Economy:
Bike manufacturers advertise their products highlighting the less fuel
consumption and more milage.
Ambition and success:
The customer can be persuaded that if he buys a particular brand of cloths
he could get a better job.
Romance:
If a woman buys a particular cream she could become more beautiful and
attractive.
Comedy:
If an advertisement is amusing the product shown will be remembered by
the consumers and therefore they might buy it.
Hero worship:
A well-known personality can be used to advertise the product. It is hoped
that consumer will buy the product because of the appeal of the
personality.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Easy life:
Buying a new brand of washing machine will give the consumer more
leisure.
SALES PROMORTION
Sales Promrtion, element of the marketing process that can close the sale of good or services to a
potential customer by providing the incentive to buy. Sales promotion, advertising, and
salesmanship are the major techniques used in merchandising products to the public.
Salesmanship often takes the form of a face-to-face encounter between the buyer and seller; the
presentation is set up to convince customers that the product on sales is essential to their
satisfaction. The lack of personal feedback between buyer and seller is sometimes considered a
drawback of the advertising approach. Selling by telephone, although it is significantly less
effective than selling, is still considered an important method of merchandising. Since the 1980s,
a growing promotional technique has been use in-home shopping programs on cable television
channels and computer networks.
DISTINCTION BETWEEN ADVERTISING AND SALES PROMOTION
Advertising aims at persuading customers whereas sales promotion aims at promoting sales.
Advertising is done through indoor and outdoor advertising media whereas sales promotion is
done through gifts, price reductions, special offers, point of sale, offers, sponsorship and trade
fairs and exhibitions. Sales promotion might be carried out for a specific period whereas
advertising needs to be carried out through out the life of the product.

METHODS OF SALES PROMOTION

Free samples
This is the best way of introducing a product. It is very expensive as samples are given to every
household.
Price reduction
Customers often expect household articles to be offered at reduced prices. Some producers
distribute coupons to customers. The customer can use these coupons for part payments.
Competition
Sometimes competitions are held. Customers have to purchase several packets of the producer’s
goods to enter the competition.
Free gifts
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Gifts such as glasses, caps or cups may be given to customers if they buy the producer’s goods.
Point of sales
In a trade fair or exhibitions, the producer of a product has a stall where the salesmen do a free
product demonstration and at the spot, sale is done with offers and gifts.

Loss leaders:In this method the retailers advertise that they are selling a well-known product at a
low price. The other products will be charged at a higher price. The consumers visiting the shops
buy all the goods. So the retailer can increase sales without losing any money.

Sponsorship
The manufacturer or a wholesaler or a large scale retailer come forward to sponsor a musical
programme, or a film, or a drama, or a sport event on a public media like TV, Radio, National
daily etc., by incurring all the expenditure to conduct the programmes. The manufacturer or a
wholesaler or a large scale retailer advertise their product/service while a film, or a drama, or a
sport event on a public media like TV, Radio, are either telecast or broadcast so that they can
draw public attention.
Special offers
During festivals many traders announce special offers. These offers carry a special discount or a
free service during a specific period of time. Customers tend to buy more when there are offers.
Example, during New Year eve, manufacturers announce 20 – 30% special offers on certain
range of consumer goods like home appliances, consumer durables and fabric items.

MODERN TRENDS IN ADVERTISING

DIGITAL BILLBOARDS
This is an advertising media. In this media, very large screens are used to display the
advertisement. Digital billboards are placed in busy streets so that the advertised messages can
be reached to large number of people. The information about the product is given orally to
passersby.

Internet
This is the recent development in communication. Through World Wide Web, information can
be browsed. Nowadays, advertisers wish do advertise through Internet as ads can be seen by
millions through out the world.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

The internet 1. It is an interactive medium 1. The coverage is limited only to

where the user can key in input those who surf the internet and
and obtain response visit the website.
immediately. 2. The advertising message placed
2. The medium uses multimedia has to compete with many other
to create realism in messages for attentions.
advertisements.
3. The advertiser can place the
advertisements in a popular
website or he can create his own
home page.
4. The advertising message has
longer life span than a television
commercial or a radio message
as the user can always go back to
the website previously visited.
5. The advertising message can
reach selected target groups.
6. The cost of advertising in this
medium is relatively low
compared with the television.

E-COMMERCE
E-Commerce, abbreviation for electronic commerce, usually defined as the conduct of business
online, via the internet. Until recently, e-commerce was limited mainly to large companies and
their suppliers, who connected their computer together to speed up ordering and payment system.
Today, millions of people are involved in e-commerce on the internet when, for example, they
visit World Wide Web sites to buy books or CDs, order flowers or pizzas, or check their bank
accounts.

In the narrow definition of e-commerce, the term covers the buying and selling of goods and
services using computer communications.

Successful e-commerce ultimately leads to some form of payment, and ideally this will involve
“electronic fund transfer” (EFT): in other word, the payment will be made via an electronic
message, not in physical form such as cash or a cheque.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Advantages of E-commerce to the customers

• Online catalogues can be viewed
• Their is much bigger choice for products
• Products review can be obtained before we buy the goods
• Orders can be placed 24 hours a day
• Goods or services are usually cheaper on internet as the middlemen are cut
• Once the customer has placed an initial order, the customer details are stored and makes
shopping online very fast
• You can buy goods and services from anywhere in the world

Advantages to the traders

• Global marketing is easy
• Can offer goods at highly competitive price
• Payments can be collected easily and fast through online
• Middlemen are not required so the selling cost can be cut down
• Traders can provide or demonstrate any product information through online

Disadvantages to the customers

• The product seen on online may not be matching with the product specification
• No customer and trader direct dealing

Disadvantages to traders
• Increase through sales is too difficult as the accessibility to internet for the customer is
too narrow
• Absence of customer personal service can discourage online shopping
• The sales cost through online shopping can be more when compared to direct
• Selling

COMMUNICATION
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

 Communication is the process by which information is sent and received between

individuals or groups. It is said to be effective if the message is received in the
same way as it is sent.
 This means that the message sent is unambiguous and directly understood by the
receiver in the form as it was intended by the sender.
 The receiver's response in words and actions, i.e. the feedback shows how
effective the message has reached him.
 However, at any point in the process, interferring noise or distortions to the
message may reduce the effectiveness of the communication.
NECESSITY FOR EFFICIENT AND FAST COMMUNICATION IN TRADE

• There must be a convenient and efficient system of communication among businessmen

as they need to contact one another over business deals.
• Vital information may be required by the businessmen to be transferred quickly whenever
required from any source.
• Large organizations have many departments and branches scattered all over the country.
So there is a need to link all departments and branches.

WAYS IN WHICH EFFICIENT AND FAST COMMUNICATION HELP TRADE

• Facilitates trade and business transactions.

• Expands trade to overseas markets.
• Promotes the development of highly organized market.
• Creates an efficient international banking and financial system.

IMPORTANCE OF EFFECTIVE COMMUNICATION IN COMMERCE

In commerce, it is important that information is transmitted effectively because of the following
reasons:

1. Facilitation of business transactions and trade

2. Expansion of trade to include overseas markets.
3. Promotion of the successful marketing of a product
4. Creation of an efficient international banking and financial system
5. Promotion of the development of highly organized markets

6. Enhancement of effective interdepartmental and inter-branch communication

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

METHODS OF COMMUNICATION
1. Information can be encoded into various transmittable forms. The methods or forms by which
communication can be transmitted include both verbal or non-verbal types.
2. When oral communication is made, information, messages or ideas are put into spoken words
which will then be carried by the various media or channels of communication (e.g. audio media
or audio-visual media) to the receiver.
3. Written communication, on the other hand, uses the written word to convey messages or
thoughts that will be carried to the receiver via the written, printed or electronic media.
4. Oral or spoken communication can take the following forms:
(a) direct face-to-face communication between individuals
(b) speech/talk given to a group of individuals
(c) oral reports presented at meetings
(d) individual contact through electronic devices such as the telephone, intercom, public address
system, tape recorder. (Note that the parties are not communicating face-to-face to one another.)
5. Written communication may take the following forms:
(a) handwritten
(b) typed
(c) printed
(d) electronically generated document, e.g. telegram, telex or electronic mail
6. Spoken communication has the advantage of immediate feedback over written
communication. This type of communication is favoured in situations where the sender Iof a
message requires an immediate response from the receiver.
7. Written communication, on the other hand, has the advantage that a permanent record of the
communication exists for future reference. This type of communication is suitable where binding
of contract or confirmation of information is essential.

INTERNAL AND EXTERNAL COMMUNICATION

Oral
(a) telephone
(b) conference or seminar
(c) meeting

Written
(a) business letter (b) telex
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

(c) fax (d) telegram

(e) electronic mail (f) advertisement
(g) leaflet or brochure or press release

4. Communication with external parties must be:

(a) formal (b) clear
(c) accurate (d) rapid

Telephonic
(a) When information is transmitted in telephonic form, the telephone is used as the tool of
communication.

Advantages
(i) Immediate response is received from the receiver.
(ii) Communication is direct and personal.
(iii) It is fast and cheap.

Disadvantages
(i) There is no written record of call.
(ii) There is no or limited non-verbal cues as feedback.
(iii) The receiver has to take the call.

ELECTRONIC COMMUNICATION
(a) Information can be transmitted electronically through facsimile transmission or via computer
network. For facsimile transmission, exact copies of documents can be sent from one fax
machine to another in any location that is linked by telephone.
(b) In this modern age of information technology, networking via computers either within a firm
or among branch firms or with any location, local or overseas, connected to the Internet is
becoming a cheap and convenient means of electronic communication. Voice, data and images
are transmitted globally with great speed within the computer network.

Advantages
(i) It is cheap because it is the cost of a local phone call.
(ii) It is convenient because the sender does not need to go to the post office to send messages.
(iii) It is fast because information can be sent instantaneously throughout the world.
(iv) The same message can be sent to different people at the same time.
(v) Text files and animated images can be transmitted electronically together with the message.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Disadvantages
(i) Its use is limited to only those who are linked to the computer network.
(ii)Its response is only immediate when both the sender and receiver are interconnected through
the Internet.

Types of Electronic Communication

Telefax / Facsimile service

1. The telefax or facsimile transmission is a popular and effective means of instant printed
communication. It is versatile in what it can transmit and the service is relatively cheap.
2. Business enterprises can send and receive pictures, diagrams, drawings, graphics, charts,
handwritten or typed documents electronically to and from destinations locally or overseas by
means of the facsimile service.
3. An exact copy of document can be transmitted electronically from one facsimile machine to
another in any location linked by telephone. This service is useful to banks, legal, shipping,
advertising and construction firms. Singapore Telecom provides this service for those who do not
have facsimile machines. It receives the facsimile messages on behalf of the customer who can
either collect the message or have it delivered to him personally.

Intranet
The computer network within a company enabling employees to keep in contact with one
another. May be in one building or many branches. Enables the management to put information
on to the network for use by employees, company policy, sample documents. Speeds up
communication within an organisation.

Electronic mail (E – mail)

[Link] mail, or more commonly known as e-mail, is a system of text messages and their
attached files sent through computer networks that are connected to the Internet.
2. The advantages of e-mail as a means of communication are as follows:
(a) It is cheap because messages are sent overseas at the cost of a local telephone call.
(b) It is fast because messages can be sent instantaneously.
(c) It is convenient because files, video segments, sound clips and illustrations can be attached to
e-mail messages.
(d) A single message can be sent to several destinations at the same time.
(e) The computer need not be switched on, unlike the facsimile machine, to receive messages
and unlike the telephone which requires the receiver to be present to receive the message. The e-
mail message remains in the mail box until the receiver retrieves it.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Teleconferencing
1. Teleconferencing allows more than two people at different sites to be connected by phone and
to talk and hear each other at the same time. A more advanced form of teleconferencing is video
teleconferencing which is an audio visual communication facility that allows a face-to-face
interaction with business associates in distant locations. Business associates can be seen
communicating interactively from specially equipped conference rooms located at different sites
as if they are face-to-face with each other. This is especially useful for organizations like
multinational corporations with offices and business spread over a number of locations, locally
or overseas. This is an excellent alternative to the normal face-to-face meeting which is often
hindered by distance, cost and time constraints.
Videoconferencing
Videoconferencing technology allows people at two or more locations to see and hear each other
at the same time.
Video communication enables one of the partners of the business, who lives abroad, to actively
participate in all Board meetings. It also allows the separate sales divisions of the company in
other countries in to interact whenever considered necessary.
Videoconferencing allows the company to collaborate more easily and frequently and means the
various company functions located in different locations can be in immediate contact whenever
necessary.

Face-to-face communication
(a) Face-to-face communication is the simplest form of oral communication usually involving
two or more individuals. The sender and receiver of information are in direct contact.
Information is transmitted through the use of verbal and non-verbal symbols (e.g. a person's
facial expression, gestures, posture, tone of voice). The sender and receiver can engage in
discussions about the message, with the receiver responding by asking questions, agreeing or
disagreeing and the receiver repeating or giving more information, and giving his response.

Advantages
(i) Communication is interactive because it is two-way.
(ii) It is immediate and it is possible to get instant feedback.
(iii) There is more chance of the information being effectively and successfully communicated.
(iv) It can take a variety of forms:
(a) private discussion or conversation
(b) instruction
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

(c) formal discussion

(d) formal meeting
(e) interview
(f)conference or seminar

Disadvantages
(i) There is no permanent record.
(ii) It may not be planned just as carefully as in written communication.

CHOICE OF METHOD OF COMMUNICATION

The choice of method of communication between individuals or firms depend on the following
factors:

Cost
1. Where two methods of communication are equally efficient, the cheaper method will be
preferred. Mail service is by far the cheapest mode of external communication while the more
sophisticated the telecommunication service is, the higher the cost. However, individuals who
have access to computer-mediated communication system may find the electronic mail the most
economical way of sending messages to others who are also connected to the computer network.
The sender and the receiver may be in different countries but the cost of communication is that
of a local telephone call.

Urgency
1. If information is required to be sent urgently, express mail delivery or courier service would
be faster than ordinary mail. However, if instant communication is required, the telephone, the
telex, the facsimile service or the electronic mail will serve better. The higher cost may be
justified by the results obtained through its speed.

Accuracy of in formation
1. Information sent through letters, telex, facsimile or e-mail will be more accurately transmitted
compared to the telephone or even the telegram which economizes on the usage of words. This is
because communication is written and detailed information can be communicated.

Record of information
1. The telephone has the disadvantage of not providing any written record of a conversation or
communication. The letter or telex service will serve better as a form of communication when a
businessman wishes to bind the other party to any business contract or where proof of transaction
is required.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Safety and security

1. To ensure that a message is received, it is sometimes necessary to send it by registered post
and recorded delivery. The use of courier service for safe delivery of important documents is
becoming increasingly popular. Courier service may be relatively more expensive than registered
post and recorded delivery but the delivery may be faster.

Convenience
1. Sometimes, the choice of communication depends on what is convenient and available for use
to both the sender and the recipient.
2. Telegraphic service may have to replace telephone service so as to send messages urgently to
remote areas with no telephone lines.
3. Electronic mail may be cheap, fast and convenient but it can only be done via the Internet.

Confidentiality
1. Where confidential information is to be transmitted, the telex or facsimile may not be suitable
as messages may be retrieved by others. A telephone call may not be appropriate too as the call
can be overheard. Information enclosed in an envelope and sent by registered post and
recordeddelivery ensures confidentiality. For the same reason, it may be necessary to enclose an
internal memo with confidential information, in a sealed envelope..

POST OFFICE
The Post Office provides many services to the public, which is divided into two groups.
The two groups are (a) traditional mail services and (b) financial services.

• Ordinary Post: The Post Office delivers first-class and second-class letters inland and
abroad by ordinary post at a relatively low cost. The aim of the Post Office is to deliver
90 per cent of the first-class inland letters the following working day.
• Registered Post: When cash or important documents have to be sent through the Post
Office, it is most safe to send it by registered post. For this letter a receipt is given on
payment of an additional fee, which is fixed according to the weight or contents of the
letter. The Post Office takes special care of such letters. If such a letter is lost the Post
Office will pay a small compensation.
• Recorded Delivery Service: This is a proof showing that the letter was posted and also
delivered. For this service a charge is made and the customer is given a receipt as a proof
of delivery. Later, on receipt, the addressee has to sign for the delivered letter. A
compensation is payable if the letter is not delivered.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

•Business Reply Service: This enables the public to send business reply letters without
paying for a stamp. Traders who are using this service must first obtain a licence and
deposit an advance amount with the Post Office.
• Airmail: There are two types of airmail; first-class and second-class. The aerogramme is
very popular now for its speed and cheapness. The only disadvantage is that the writing
space is limited.
• Parcel Post: The Post Office also undertakes to deliver parcels for which they charge a
moderate amount. The Post Office has recorded a growth in delivery of parcels inspite of
competition from other private carriers. The maximum parcel weight accepted is 25kgs.
For foreign parcels, the weight, the distance and the mode of transport used, determine
the rate to be charged for the parcel.
• Franking Machines: Some large companies post hundreds of letters everyday and it is
not possible to stick stamps on each letter. So they are allowed to use franking machines,
which print the postage payable on the envelopes. A meter is attached to these machines,
which record the total postage payable to the Post Office.
• Datapost: Datapost has been developed to meetthe punctual delivery of some letters.
There is a freefone link to all Datapost service centers so that customers can arrange
collection times for their urgent parcels, letters and documents. These packages will be
delivered the following working morning.
• Private Boxes: These are offered at the Post Office for rent on payment of a fee for a
certain period. Letters are kept in these boxes and the owner collects them at his own
time. Each private box holder holds the key to the box. This service avoids mis-delivery
of letters.
PAYMENT THROUGH THE POST OFFICE:
• Giro Bank:
This system allows payment to be made from any branch of any bank to any branch of any bank.
Anyone above the age of fifteen can open a Giro Bank account. In this system, payments are
made direct to the bank and the amount is then transferred to the creditor’s account via the
computer system.
The following are the advantages:
• There is no need of bank account, but the creditor must have one.
• There is no risk of the cheque getting lost as it is paid direct into the bank.
• Payments can be made from any branch, any bank to any branch, any bank.
• Account holders can deposit money into their accounts from any branch any bank.
• Many people can be paid using one Giro Bank slip.
• The payments are much faster as the transfers are done by computer.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Giro Bank account holders are provided with pre-paid first class envelopes for their
remittances.
The following are the disadvantages of Giro Bank:
• Range of Services: The Giro Bank provides its customers with fewer services when
compared with the retail banks.
• Post Office Congestion: The Post Offices have all kinds of other business to contract. So
the Post Office is always crowded with different kinds of customers. So the bank
customers find it very difficult.
Postal Orders:
• Postal orders are issued from 25pence to £20.
• A fee is charged for issue of the postal order.
• The postal orders are not negotiable.
• Only the payee can collect the money from the post office.
• Postal orders can be crossed like cheques.
DIFFERENCES BETWEEN POSTAL ORDERS AND CHEQUES:
POSTAL ORDERS CHEQUES
• Postal orders are issued by the Post Cheques are issued by the banks.
Office.
• Postal orders are issued from 25
pence to £20. Cheques can be issued for any amount.
• The Post Office charges an amount Banks charge an amount for operating the
for each postal order issued. account.
• There is no need of having an For operation of cheques, the customer
account to use a postal order. must have a bank account.
• Encashment is made at the Post
Office. Encashment is made at the bank.
• Postal orders are not negotiable.
Cheques can be negotiable.

SAVINGS THROUGH THE POST OFFICE:

• National Savings Bank: They offer ordinary accounts, which are small savings and easy
withdrawals for a fixed rate of interest. The interest is tax-free up to £70. They also offer
investment accounts, which have higher rates of interest and withdrawals need one
month’s notice.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

•National Savings Certificate: They are issued for different amounts and can be cashed
with a week’s notice on their maturity. No income tax is payable on interest for these
certificates. Some of these issues are index-linked.
• Premium Bonds: There is no interest paid, but the holders have a right in a draw for cash
prizes each week. The prizes are up to £250000. Subscribers can buy a minimum of £100
worth of bonds and a maximum holding £10000.
IMPORTANCE OF POST OFFICE:
• With written communication there is evidence of contract.
• Words may be misheard over the telephone.
• There are no telephone facilities in all places.
• Post Office is needed to send payments.
• Post Office is needed to send parcels.
• Post Office is needed to send original documents.
• Telecommunication services are very expensive.
• Written communication is needed to keep track of goods in international trade.
• Government needs documents for calculations to prepare balance of payments record.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

CONSUMER PROTECTION

Reasons why consumers need protection

• Prices might be fixed artificially high either by one firm or by a group of firms acting
together.
• Misleading price reductions might be offered.
• Customers might not receive the correct weight or quantity of goods.
• Advertisements might make false claims for goods.
• Inferior and even dangerous ingredients and components might be used in production to
keep costs down.

METHODS OF SAFEGUARDING THE CONSUMERS

1. CONSUMER PROTECTION LAWS

a) Sale of Goods Act 1979:
The main provisions are:
• Goods must suit the purpose for which they are sold.
• Goods sold by description must fit the description.
• Goods sold by sample must correspond with the sample.
• Goods must be of merchantable quality.

In the event of any of these conditions not being fulfilled, buyers are normally entitled to choose
whether the retailer refunds the money, replaces the goods or repairs them.
b) Trade Description Act 1968:
This Act lays down penalties for traders who deceive the public by making false claims for their
goods and inaccurate price comparisons. It is an offense to claim that an article is worth £10 and
is sold for £7, when actually it is worth less than £10. Likewise a seller should not claim that his
articles are unbreakable or waterproof unless they actually are. This Act is enforced by trading
standards officers.
c) Fair Trading Act 1973:
This Act is controlled by a Director General who is assisted by the Consumer Protection
Advisory Committee. There are some recommendations:
• Retailers are not allowed to quote manufacturers’ recommended prices.
• Shopkeepers are forbidden to have notices such as, “No Cash Refunded” as it will mislead a
consumer as to his rights.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Traders who are selling goods must not pretend to sell them as private citizens.
• The Act sets codes of practise for traders to follow so that customers are satisfied.
d) Consumer Protection Act 1987:
Sometimes consumers are endangered by goods they buy. This Act imposes a duty on
manufacturers to supply safe products. Failure to do so may render a firm to pay unlimited
compensation. For example, a gas burner must have a guard, which prevents clothing from
touching the flame.
e) Food and Drugs Act 1955:
This Act controls the contents of food products and their labeling. It is enforced by the local
environmental health department. It is also concerned with the ingredients in food items. For
example:
• Jam must contain a minimum proportion of the named fruit.
• Meat pies must contain 25% of meat.
• At least 50% by weight of sausages must be meat.

2. CONSUMER PROTECTION AGENCIES (ORGANIZATIONS)

a) National Consumer Council:

The NCC, which was established in 1975 by the Government, has members from trade unions,
parliament, industry and independent consumer organizations. Their role is to make the
consumers’ view known to the government. The NCC has made strong representations to the
government about bus services, optical services and shop opening hours.

b) Citizens Advice Bureau:

Their role is to act as a mediator between consumers and traders in areas where there is no
consumer protection agencies.
c) The Media:
The press, television and radio are very important in dealing with individual complaints. Some
newspapers run their own consumer protection agencies. They make a consumer aware of his
rights.
e) The Consumers’ Association:
The Consumers’ Association is an independent and non-profit making organization. It publishes
a monthly magazine “Which?”. In its report, “Which?”, the list of good and bad points of a
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

particular product are published. This enables a consumer to choose the best product from a
range of products. The association also advises its consumers on consumer problems. The
association also publishes “Gardening From Which?” and “Holiday Which?”, which deal with
pregnancy restaurants, health, divorce and taxes.
f) Codes of practice,
Industries establish voluntary code of practice for the guidance of their members and the
protection of consumer. The advertising standard authority is an example. Though the consumers
are protected by trade description Act, the advertising standard authority maintains code of
practice. It is described as example the Retail Trading Standard Association, The British Electro
Technical Approval Board.

3. OTHER MEANS OF SAFEGUARDING CONSUMERS

Self Protection
 Consumer awareness while they consume goods or services
 The customers should be able to check all the particulars when goods or services supplied
to them.
 Most retailers are prepared to correct genuine mistakes
 Further, where genuinely faulty goods are concerned the retailer will probably have little
trouble in obtaining the refund from manufacturer.

TRANSPORT:
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

.IMPORTANCE OF TRANSPORT
1. Transport is necessary to provide for the physical movement of people and goods from where
they are abundant (such as plantations, mines, farms) to the factory where they are needed as raw
materials for the manufacture of finished goods, or where they are processed.
2. Transport is again necessary to send these processed or finished goods to their markets, and
ultimately, to the final consumers, both domestic and foreign.
3. A fast, cheap and efficient transport system has led to the extension of both local and overseas
markets.
4. This has enabled producers to specialize and engage in large-scale production with its related
cost savings. It has also led to different regions specializing in those goods in which they find
comparative advantage in producing on a commercial basis. Trade between different regions
within and outside the country expanded.
5. Consumers all over the world can now buy goods produced in far-off countries. Thus, they
have greater choice. Standards of living have improved.
6. The main means of transport in home trade are by road, rail, rivers and canals whilst in foreign
trade they are by air and sea.

CHARACTERISTICS OF DIFFERENT METHODS OF TRANSPORT

WATER TRANSPORT
Water transport is cheaper than various modes of transport of land transport. In land transport
large amount of capital is required for the construction and maintenance of roads and railways.
But in water transport, it is not necessary except in the case of canal transports. The cost of
running expenditure is also less.
Inland water ways
Transporting the goods by using the rivers and canals are called inland water ways. It requires
navigable rivers free from rapids and constant silting.
Advantages of inland water ways
1. Transport by water is a cheap means of inland transport for heavy and bulky goods like logs,
grain and metals.
2. Building materials can be carried in larger quantities than by road or train.
3. Loading and unloading will be easy.
Disadvantages of inland water ways
1. Its speed is slower than road, railway and air transport.
2. It is not reliable.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

3. It provides services to limited areas.

4. Canals may be expensive to build and maintain.

PIPELINES

Advantages of pipelines

1. Liquid and gaseous goods like liquefied natural gas and petroleum are transported over long
distances from the place of production to the refineries, and from there, to the consumers in their
homes via pipelines because this is the safest and most economical method to transfer such
hazardous (inflammable) materials in bulk. Goods in bulk like wheat are also transferred via
pipelines from the silos (places of storage) at the ports into special bulk carriers. Maintenance
costs are low because very little labour is needed and fuel costs are lower than that required if
vehicles were used to transport these goods.
2. Loss due to pilfering and evaporation is minimized.
3. It is not affected by weather conditions.
4. There is less pollution of the environment compared to vehicles.

Disadvantages

1 High initial capital cost is involved in installing the whole system, which is normally laid
underground.
2 It is rather limited in use. Once built, these pipelines can only be used the particular type of
product for which it was originally installed. Long-term use must be guaranteed to make the
laying of the pipelines a viable project.

ROAD TRANSPORT
Advantages:
• Flexibility: Goods can be delivered right up to the customer’s doorstep. Even remote
areas can be reached by road. In road transport, the direction can be changed very easily.
• Timetables: There is no specific timetable for a road journey. The transport can be
arranged at any time and is even available at short notice.
• Economy: There is heavy competition in road transport resulting in efficiency and lower
charges for customers. Employers have to meet the expenses for return journeys. So
drivers can take loads on return journeys at lower rates.
• Motorways: The motorway system has developed and has linked industrial centers with
consumers. Goods can now be delivered very fast.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Vehicles: Vehicles have increased in size and efficiency. This allows more freight to be
transported at one time.
• Suitability: Road transport is suitable for carrying small quantities of goods over short
distances.
• Containerization: Goods are now packed in containers, sealed and then transported.
Damages caused by rainwater and sunlight can be avoided. Theft of goods can also be
avoided. The containers are loaded and unloaded with the help of cranes. So breakages
can be minimized. Perishable goods can be transported in freezed containers.

Disadvantages:
• Bulk: It is not suitable to carry bulk goods by road as it incurs a great cost. Moreover the
vehicles are small when compared with the quantity that the railways can carry.
• Congestion and delays: The heavy road congestion has become a problem resulting in
delays in transporting goods to industrial centers. This problem does not arise in railways.
• Social costs: Private concerns are only worried about expenses such as driver’s wages,
fuel, tax, etc. They do not take into account the expenses on pollution, maintaining the
road system, signaling system, accidents, etc. These costs are met by the society and are
called social costs. These costs are very high.
• Slow traveling time: A road journey will take more time especially for long distances
when compared with railways. Road journeys could also be slowed down because of
traffic jams.
RAIL TRANSPORT:
Advantages:
• Cheap: Rail is the cheapest mode of land transport for long journeys, especially for
bulky and heavy goods. If the goods are to be sent by road, then many lorries have to be
hired and lorry drivers paid. But for a rail journey only the freight charges have to be
paid.
• Speed: It provides faster services for goods and passengers especially over long
distances. There are no traffic jams, to slow down the journey.
• Bulk commodities: Railways are very suitable for the transport of bulk commodities like
coal, petroleum and iron and steel.
• Containerization: Goods are now packed in containers, sealed and then transported.
Damages caused by rainwater and sunlight can be avoided. Theft of goods can also be
avoided. The containers are loaded and unloaded with the help of cranes. So breakages
can be minimized. Perishable goods can be transported in freezed containers.

Disadvantages:
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Transshipment: When goods are transported by rail, lorries have to be arranged to carry
the goods to and from the railway station. So most of the customers prefer to use road
transport for the whole journey.
• Delays: Railways follow a strict timetable, which leads to delays for customers needing
immediate transport of goods.
• Short journeys: Railways are only suitable for carrying goods over long distances. They
are not suitable for short journeys.
• Timetables: This is the biggest problem for railways as trains are not available at short
notice. They follow strict timetables, which cause delays.
• Changing output: In recent years more emphasis has been shown on consumer goods,
which are carried by road. With the decline of the coal industry and the steel industry, the
need for the railways has also declined.
• High capital costs: Capital costs are heavy. Maintenance of tracks and railway rolling
stock is also very expensive.
Recent Improvements in Rail freight Transport:
• Many loss-making lines and stations have been closed.
• Diesel and electric locomotives, which give a faster service, are now being used.
• The signalling system and rail tracks have been improved.
• The freight transport is now operated by computer.
• The express parcel delivery by passenger train has been developed.

SEA TRANSPORT:
Advantages:
• Cheap: Sea transport is cheap for carrying bulky and heavy goods over long distances.
Moreover the fuel needed to run a ship is much less when compared with air transport.
• Bulk: Thousands of tones of goods can be delivered in a single journey. Oil tankers can
deliver four hundred thousand tones of oil in a single journey.
• Flexibility: Ships go where business takes them. Hence they are flexible and exporters
can transport goods easily.
• Facilities: Ships are specially built. Perishable goods can be transported in refrigerated
vessels. There are ships for transporting raw materials. There are sophisticated loading
and unloading facilities for ships.
• Short notice: Ships can be arranged at short notice to carry goods to any part of the
world.
• Containerization: Goods are now packed in containers, sealed and then transported.
Damages caused by rainwater and sunlight can be avoided. Theft of goods can also be
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

avoided. The containers are loaded and unloaded with the help of cranes. So breakages
can be minimized. Perishable goods can be transported in freezed containers.
Disadvantages:
• Slow Speed: Sea transport is not suitable for goods urgently needed because of its slow
speed. So hence not all types of goods can be transported by sea.
• Documentation: Documents involved in transporting goods by sea are more in number
and are very complex.
• Other costs: Expenses for insurance premium, packing costs, storage and port charges
are very high and as a result increase the cost price of goods.

AIR TRANSPORT
Advantages:
• Aircrafts are now built larger to carry more goods.
• Mail, newspapers, medicine and perishable goods can be transported very quickly by air.
• Aircrafts are now available at short notice.
• Goods sent by sea need special packing for protection. But this is not so in the case of air.
• As the risks involved in transporting goods by air are less the insurance charges are low.
• The documents used in air transport are less complicated when compared with the
documents used in sea transport.
• As there are no obstructions, aeroplanes can take the shortest route.

Disadvantages:
• Airfreight transport is very expensive because of high capital investment and
maintenance costs.
• As aircrafts have limited cargo capacity, bulky goods cannot be sent.
• Usually airports are located outside the cities, so road transport has to be arranged to
carry the goods to and from the airport. This results in higher costs and wastage of time.
• Bad weather may restrict flights.

FACTORS INFLUENCING THE CHOICE OF TRANSPORT

• Distance: Although the cost of haulage increases with distance, the cost of rail and
shipping services does not increase in proportion to distance travelled. Thus it is more
economical to use rail or shipping services over long distances, whilst road transport is
faster and cheaper for short distances.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Nature of the Goods: Perishable goods need quick delivery and minimum handling.
Specially constructed trucks can be used to transport vegetables, fish and milk. In foreign
trade, air transport can be used to transport perishable goods. Products like oil can be
transported in oil tankers in foreign trade and by pipelines or oil trucks in home trade.
• Quantity: Bulky goods are normally transported by railway in home trade and by sea in
foreign trade.
• Value of Goods: Expensive goods, which are small and light are normally transported by
air. In home trade, it is not advisable to send expensive goods by rail. Road transport is
more suitable for expensive goods since the problem of transshipment does not arise.
• Risk of damage: Fragile goods, which are easily breakable and need careful handling are
normally sent by sea or air.
• Urgency: Goods, which are urgently needed, are sent by air.
• Convenience: The most convenient mode of transport is the one most available with the
least formality. Road transport is considered to be the most convenient mode of transport,
with its door-to-door delivery service.
• Cost: The consignor would normally choose the most economical mode of transport,
unless the factor of urgency arises. Sea and rail would be most economical for bulk
goods. Air and road would be most economical for urgency goods.

MODES OF TRANSPORT

1. Passenger liner - This is normally used for carrying passengers, mail and some express cargo.
It has a regular time-table and only calls at major ports.
2. Cargo liner - This is mainly used for carrying a variety of cargo and sometimes a few
passengers. It has a regular itinerary.

Transportation via liners - This can be planned ahead as space on ships can be booked ahead.
Charges are made according to published tariff rates fixed by the shipping conference.
3. Tramp - This is essentially a cargo ship which does not belong to any special line of services
or sail to any special place. It is normally chartered to carry a full load of one type of cargo to a
certain specified destination where it unloads the whole bulk.
4. Bulk carrier - This is a ship which is specially built to carry a particular type of cargo, e.g. a
bulk carrier is for iron ore.
5. Tanker -This is a special bulk carrier which carries liquids or gases such as oil or liquefied
natural gas.
6. OBO ship -This is an ore-bulk-oil carrier which uses different holds to transport at one time a
mixed-bulk cargo. It has holds which can be completely sealed off one from the other.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

7. Roll - on, roll - off or Ro - Ro ship - This is a highly specialized ship that allows loaded
vehicles like trucks, trailers, passenger cars, etc. to be driven aboard through ramps at the stern
and sides. Using a system of interior ramps, these vehicles are driven to their proper positions,
either below decks or topside. At their destinations, they are driven off the ship in reverse to the
loading operation.
8. Container ship - This is built to carry large standard sized containers. (See Containerization)
9. Liners - Liners follow fixed routes and timetables. These liners carry mixed cargo and belong
to shipping conferences, which determine the fares, the freight charges and the frequency of
journeys.
10. Coastal Shipping - Sometimes goods are transported around the coast rather than inland.
Some large ocean going tankers find it very difficult to travel along the coast. So goods are
carried by these coastal ships.
11. Ferries - These are small boats that carry passengers over very short distances. These ferries
also provide roll-on/roll-off facilities.
12. Delivery vans –Mostly wholesalers and large scale retailers make use of delivery vans for
shorter distances for small consignments. Free door delivery service is facilitated by delivery
vans. Most probably, delivery vans are owned by these traders.

Differences between a Tramp Ship and a Cargo Liner:

CARGO LINER TRAMP SHIP
• It follows a regular route and • It has no route or timetable but goes
timetable. wherever there is business.
• It carries a variety of cargo. • It usually carries only one type of
cargo in bulk.
• The freight rates are determined by
• The freight rates for goods and
bargaining at the time when the ship
passengers carried are fixed by the
is chartered.
owners at the shipping conferences.
• It is subject to charter.
• Tramp ships can be chartered either
for a voyage or for a period of time.
• Generally more control and
• There is not much control and
supervision are exercised over the
supervision exercised.
ship activities.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

OWN FLEET OPERATION

Most of manufactures, wholesalers and retailers prefer to operate their own fleet of vehicles to
deliver the good for them. Such vehicles may be owned, leased or hired by the firms.
Advantages of own fleet operation
1. It could be cheaper than using transport firms vehicles.
2. Own vehicles can carry free advertisement for the firms.
3. The vehicles are always on hand. Therefore, the traders can use them at any time to carry the
goods.
4. The firm can use its own drivers which reduces the risk of theft and damage.
Disadvantages of own fleet operation
1. More capital could be needed.
2. If the vehicles are not fully used it would be more expensive than using road transport firms.
3. Additional cost for servicing employment to drivers, garaging and licensing the vehicles are
created.

CONTAINERIZATION
1. Containerization involves the stacking of goods in large metal containers. These containers
usually conform to international standards of 20 ft x 8 ft x 8 ft or 40 ft x 8 ft x 8 ft. The goods are
stacked into the container either at the consignor's premises or at the container terminal and
transported as a single unit.
2. These standard sized containers can be transferred between different forms of transport,
especially between road, rail and sea, as Lorries, rail wagons and ships have been specially
designed to hold them. This integration of different methods of transport ensures that goods are
facilitated by using special cranes.
3. There is an increasing tendency for shippers to send general cargo like mail bags, etc. in
containers.
Advantages of containerization

• As cranes are used for loading and unloading containers, there is speed in their
transportation. Moreover lorries carrying containers can drive directly on to a ship.
• Containers are sealed and opened at its destination. So damages caused by rainwater and
sunlight can be avoided.
• Theft of goods can also be avoided.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• As the containers are loaded and unloaded with the help of cranes, breakages can be
reduced.
• Containers reduce the need to employ labourers to carry the goods. This reduces
expenses.
• Containers, which can be stacked, reduce the need for warehousing.
• As there is increased safety in using containers, the insurance cost is reduced.
• Refrigerated containers can be used to transport perishable goods.
Disadvantages of containerization
• High capital costs are involved in purchasing and maintaining containers.
• High training costs are incurred in training labour to handle the loading and unloading of
containers.
• Containers occupy a lot of space and hence large space is needed to keep the containers.
• The weight of the containers, reduce the amount of goods that can be transported.
• Containers are loaded and unloaded with the help of cranes. This replaces human labour
thus causing unemployment.

OTHER TRENDS IN TRANSPORT

Charter transport
Traders might charter either a part of transport or they might charter the whole transport only for
their use. When chartering a road way or sea way or air way, the traders can be assured of fastest
delivery of goods to the destinations. Charter transports can benefit the traders in transport cost
too. Charter transport exist in all the countries. In UK the London Baltic Exchange offers
chartering of sea and aircrafts for domestic and international trade activities.

Express road routes

HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

It does means that the special road routes away from the city limit to facilitate fastest transport in
dispatching goods. The road transport system is away from hassles of city traffic and road
congestion when there is an efficient system of bye-pass road around the city it can speed up the
delivery. In every country there are national high ways that can connect to major city routes.

Recent improvements in air transport

• The increase in size of aircrafts makes it more economical to run them.

• Improvements to design, e.g. the fuselage and engine improve fuel efficiency and reduce
fuel costs. Larger doors, from the tail and nose reduce loading and unloading time, thus
save labour costs. Cargoes of larger size can now be transported by air.
• With technological improvements, aircrafts are now faster and more reliable. More
safety features in aircrafts, e.g. the 'auto-pilot, improve landing and navigation of the
aircrafts.
• With an increase in the number of airports and better handling facilities now available in
most airports, less time is wasted.
• Nowadays, special lightweight containers are available for air cargo.

Recent Improvements in Rail freight Transport:

• Many loss-making lines and stations have been closed.
• Diesel and electric locomotives, which give a faster service, are now being used.
• The signaling system and rail tracks have been improved.
• The freight transport is now operated by computer.
• The express parcel delivery by passenger train has been developed.

TRANSPORT DOCUMENTS

Bill of lading

1. The bill of lading is the most important export document whenever goods are sent by ship. It is
issued by the shipping company.

2. The key information in a bill of lading are as follows:

(a) The name of the shipping company.
(b) The name of the shipper (beneficiary) or his agent.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

(c) The name of the carrying vessel.

(d) The names of the ports of shipment and discharge.
(e) The identification (shipping) marks and numbers.
(f) The number of containers, cases, packages or individual items.
(g) A description of the goods in general terms consistent with the description of the goods in the
letter of credit.
(h) Evidence that the goods have been received for shipment or shipped (loaded) on board and its
date.
(i) The name of the consignee (if not made out 'to order') and also the name and address of the
'notify party' wherever applicable.
(j) Whether freight has been prepaid or payable at destination.
(k) The number of originals issued (A bill of lading is normally issued in a set of three originals;
anyone of which may be used to take delivery and possession of goods. It is important that the
consignee must secure all the originals.)
(l) The date of issuance and the signature of the ship's master or the carrier or his agent.

3. Bills of lading are normally issued in a 'set' of two or more transferable copies, all of which
must be signed by the master of the ship who makes a note on the bills of lading, of the number
of copies issued and any damages to the goods taken on board. He then keeps one copy for
reference. The other copies are sent to the foreign importer by separate mail or returned to the
exporter (consignor).

4. However, if the exporter has arranged for the importer to open a letter of credit in the
exporter's favour in a local bank, then the bills of lading together with the other shipping
documents such as the invoice, the consular invoice, the marine insurance policy and a certificate
of origin must be lodged by the exporter at the local bank, together with the bill of exchange.

5. It is one of the documents that has to be submitted to the advising bank before the shipper can
secure payment in the letter of credit.

6. The functions of a bill of lading are as follows:

(a) It acts as an advice note indicating the quantity and description of goods sent by a named
ship.
(b) It is a receipt of goods in good condition on board, signed by the master of the ship. Any
damage to goods is noted.
(c) It is evidence of a contract of carriage between the shipper and the shipowner.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

(d) (i) It is a document of title to goods described therein. This means that the holder of the
bill of lading can claim the goods when he hands it over to the Port Authority at the port
of discharge.
(ii) When delivery of goods has taken place, all other copies of the bill of lading are
rendered invalid.
(e) Since it is a document of title it can be used as a basis for negotiating for a letter of credit
from the bank.
(f) (i) It informs the customs authorities of the type of imports/exports and the country of
origin or destination respectively.
(ii) It allows the customs to see at a glance whether the imports or exports are taxable.
(iii) It helps in the recording of statistics.
(g) It may be used as a document in support in the event of an insurance claim.
Consignment note / Delivery note
1. It is sometimes called a rail and road consignment note or a delivery note. It is normally
prepared by the road/rail transport company or a freight forwarder.

2. The key information in a consignment note/delivery note are as follows:

(a) The name and address of the sender (consignor).
(b) The name and address of the recipient (consignee).
(c) The number of packages or cases.
(d) The marks and numbers on the packages or cases.
(e) A brief description of the goods.
(f) The place of departure and the date of departure.
(g) The time of collection and delivery.
(h) The time of arrival.
(i) The type of haulier and the vehicle number.
(j) The signature of the carrier. (if its a Rail Consignment Note, it is stamped by the Station
master).
(k) The freight charged.

3. The functions of a delivery note are as follows:

(a) This is an advice note, indicating the quantity and description of goods being despatched on a
certain date by the named road or rail transport agency.
(b) It is evidence of a contract of carriage but is not negotiable.
(c) It is not a document of title but should be despatched with other documents for it shows the
date of despatch of the goods which is useful for exchange and import control purposes.
(d) It is a receipt for goods and a document for delivery.
(e) It is also on a note of freight charges.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Airway bill / Air consignment note

1. An airway bill is a very important document used whenever goods are sent by air.

2. An airway bill is issued by an airline company in a set of 12 copies. However, only three
copies are originals - the first is for the carrier, the second for the consignee and the third is for
the shipper. The balance 9 (nine) copies are retained by the airline company for administrative
purposes. It corresponds to a Bill of Lading but it is only used when goods are sent by air.

3. The key information in an airway bill are as follows:

(a) The name of the airline company or carrier.
(b) The name and address of the shipper (beneficiary).
(c) The names of the airports of departure and destination, flight number and actual flight date.
(d) A description of the goods in general terms, its weight and the freight charged, its declared
value
(e) The number of pieces sent.
(f) Evidence (by and authorized signature) that the goods have been received by the carrier or its
agent, and the date of issuance.
(g) The name and address of the consignee and also the name and city of the carrier's agent.
(h) The status of the freight charges prepaid or payable at destination.

4. It is normally prepared in triplicate by the consignor. The part marked for the 'Carrier' has to
be signed by the consignor. The part marked for the 'Consignee' travels with the goods. The third
part is signed by the carrier and returned to the consignor.

5. The consignee is usually the bank that issues the letter of credit, and the party to be notified
when the goods arrive is the importer

6. The functions of an airway bill are as follows:

(a) It is an advice note indicating all the key information stated above.
(b) It is evidence of contract of carriage but is not negotiable.
(c) It is not a document of title. The delivery of goods is not dependent upon the presentation of
the Airway Bill but rather the goods will be delivered to the named consignee against proof of
identification at the airport of destination.
(d) It should be despatched with other documents for it shows the date of despatch which is
useful for exchange and import control purposes.
(e) It may be used as a receipt to be signed by the consignee on the delivery of the goods.
(f) It is also a note of freight charges.
 HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

INTERNATIONAL TRANSPORT

Services offered at seaports

Port Authorities, e.g. Port of Singapore Authority, are responsible for maintaining the efficiency of
the port. They may provide the following facilities:
• dock facilities to enable ships to dock, load, unload, fuel and be repaired
• good transport connections inland - linking the port by road and rail networks
• mechanised handling facilities - gantries, cranes, pumps for unloading
• warehousing, bonded warehousing and offices for shipping companies, customs,
immigration
• ship repair yards - dry docks
• deep water access - pilots, dredging, navigational aids specialised facilities for handling
certain types of cargo, e.g. container handling equipment
• security and emergency facilities

Efficient seaport facilities are important because they enable ships to ‘turnaround quickly’ so cutting
dock and freight costs. They enable goods to be imported and exported efficiently so increasing
the volume of world trade

Services offered at airports

Airport authorities are responsible for maintaining the efficiency of the an airport. They may
provide the following facilities -
• services for passengers, e.g. lounges, toilets, shops, trolleys, walkways, restaurants etc
• security and emergency services, e.g. X-ray, security people, fire service, first aid and
health facilities
• areas for customs and immigration to function
• warehousing and bonded warehousing
• hangars, refuelling and repair facilities for aircraft
• facilities for various airlines operating at the airport, e.g. storage, offices, desks in the
airport
• communication facilities air traffic control
• runways
• links with the city they serve, e.g. road, rail, monorail, helicopter
 HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

WAREHOUSING:

FUNCTIONS OF WAREHOUSING
1. A balance between supply and demand
Goods that are seasonally produced are stored in large quantities in the warehouse so that the
supplies can be spread out throughout the year to meet the regular demand for the goods, e.g.
wheat, padi and other agricultural products. Meanwhile, goods which are seasonal in demand can
be stored in the warehouse during the off-peak season and are released only whenever they are
needed, e.g. festive cards, Christmas decorations, winter clothing.

2. Storage of goods at various stages of production

Warehousing is required at every stage of production. Raw materials are stored in the warehouse
before production starts. Intermediate products are stored until they are needed for further
production (or they may be sold to other producers as components of final products) and the
finished products are sent to the warehouse to await distribution to the final consumers.

3. A place for product assembly, product aggregation and bulk breaking

Warehouses are located at convenient places where the products from different factories are
brought together for economical assembly, aggregation and bulk breaking. An assortment of
goods in smaller lots will eventually be sent to their final destinations.

4. Specialized services
Activities like weighing, sorting, grading, blending, bottling, packing and branding can be
carried out in the warehouse. It is equipped with specialized apparatus and facilities to perform
the above services.
5. A place for display of goods
Goods can be viewed and examined at the warehouse by potential buyers before placing
purchase orders, or even by bankers, before giving out loans to the traders who use these goods
as security. A warehouse can even be turned into a large retail outlet where small retailers and
consumers can shop for goods on a cash-and-carry basis.

IMPORTANCE OF WAREHOUSING

1. Stability of prices of goods

Prices of goods in the market are stabilized because supply is regulated to meet demand. This is
possible because goods stored in the warehouse can be released whenever there is a shortage of
goods to meet the excess demand, and in times of glut, the excess supply can be stored in the
warehouse.
 HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

2. Aids in production
With the distribution and warehousing functions taken over by specialists, the producer can
concentrate on the production of goods without having to worry whether his goods would be sold
or not. He can also engage in large-scale production of goods so as to enjoy economies of scale.
A good example of how warehousing aids production is the car assembly industry. During
periods of low demand for cars, warehousing allows the manufacturer of car components to
continue with production in order to build up stocks that are required to meet the higher level of
production during periods of rising demand.

3. An opportunity for saving on transportation costs

Saving on transportation costs can be made as there is bulk distribution of goods from the
factories to the warehouse which in turn distribute them in smaller quantities to the various
customers. The warehouse is conveniently located near the markets so that the goods can be
delivered promptly and at low transport cost.

4. Cost savings passed on to the consumers

Some wholesalers have turned warehouses into retail outlets where their customers can purchase
goods directly from them. The savings in costs by the wholesalers (e.g. lower overheads, no
transport costs, bulk purchases and cash sales) are passed onto the consumers in the form of
lower-priced goods, e.g. cash-and-carry warehouses and hypermarkets.

5. Facilitation of foreign trade

Exporters have their goods ready in the warehouse near the port to await the arrival of ships to
take them abroad. This is necessary because of the intermittent arrival of ships. Meanwhile, large
shipments of goods from abroad may await collection in the warehouse by importers. For the
above reasons, warehouses are usually located near the harbour, airport or railway terminals.
Where goods are processed immediately upon arrival, warehousing facilities ensure a continuous
flow through the conveyors. Dutiable imported goods that are to be re-exported have to be stored
in bonded warehouses. No duty is required to be paid so long as the goods are stored here.
Bonded warehouses are important to the importers who need to pay duty on their imports only
when they are removed from the warehouse. In the meantime, the importers can process and
pack their goods while they are in the bonded warehouse

TYPES OF WAREHOUSE

1. BONDED WAREHOUSE
1. Bonded warehouses store dutiable goods which cannot be removed until duty on them has
been paid. Dutiable imports that are meant for re-export may also be kept here until they are
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

shipped overseas. However, if customs duty has already been paid on these imports, a drawback
or refund can be obtained when the goods are re-exported.
2. These warehouses are under the control of the Custom and Excise Authorities. The owner of
such warehouses have given a bond to the Custom and Excise Authorities not to remove the
goods from the warehouse without payment of duty. Usually, a customs officer is present to
ensure this is adhered to. Those that are owned by the government are called customs
warehouses while those that are privately owned are called licensed warehouses.

Functions of bonded warehouse

1. They provide a space for imported goods to be stored until the duty is paid.
2. They enable the Customs and Excise Authorities to check on the entry of goods into the
country and to collect the customs duties payable.
3. They facilitate commerce because businessmen can carry on trade easily.

Importance of bonded warehouse

To the trader
1. Whilst goods are still in the bonded warehouse, the trader (importer) has access to these goods
to perform the necessary operations like grading, packing and labeling, to prepare them for sale
as in the case of other warehouses.
2. The trader need not remove all his goods at once until it is convenient for him to do so. He can
make delivery of small quantities of the goods as he sells them by paying the duty and
warehouse rent to date. This enables him to make use of his working capital for other purposes.
3. The trader can sell the goods while they are still in bond, leaving the payment of duty to the
buyer or, alternatively, get a loan on the security of the stored goods.
4. The entrepot trader who imports with the aim of re-exporting the goods can store his goods in
the bonded warehouse while waiting for transhipment of his goods to other countries.

To the manufacturer
1. (a) The manufacturer is assured of regular orders from overseas buyers who are freed from the
financial strain of paying at once for the import duties on goods, since the latter can make use of
the bonded warehouse.
(b) In this way, the manufacturer's turnover will increase and he can reap the benefits of large-
scale production.
2. (a) The manufacturer who makes use of imported raw materials can perform some of the
processing functions in the warehouse while the goods are still in bond.
(b) He only withdraws and pays duty for those goods he requires.
(c) As his financial resources need not be used to pay all the import duties at once, he is able to
put them to alternative uses to expand his business.
 HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

To the government
1. It enables collection and prevents evasion of customs duties.
2. It provides information on the goods imported and exported.
3. It gives the government some control over the goods imported and exported.

2. COLD STORAGE
1. It is a special warehouse with refrigeration plants for storing perishables like meat, fish, fruit,
vegetables, etc.
2. It is usually set up at terminal points like harbours, railway stations, airports.
3. It aids foreign trade as it provides cold storage facilities to exporters and importers of
perishable goods. Without these facilities, trade in such goods would be hindered.

3. CASH-AND-CARRY WAREHOUSE
1. It is a self-service warehouse operated by manufacturers or wholesalers, where small retailers
or even consumers can buy goods in bulk at low prices.
2. The small retailers or consumers pay cash for goods purchased and pick up these goods their
own vans or cars.
3. Goods are sold at low prices in these warehouses because of the following reasons:
(a) bulk purchases
(b) no credit facilities available
(c) no delivery facilities provided
(d) savings in handling, bulk-breaking, assembly and other distributive and warehousing costs
4. Hypermarkets like Carrefour and Makro are examples of cash-and-carry warehouses.

4. RETAILERS’ REGIONAL DISTRIBUTION CENTRES

These are large warehouses usually at large road junctions which supply many branches of a
large-scale retailer e.g. supermarket. This type of regional distribution centres enable the stores
to save on storage space at their premises. These centres may make deliveries every day using
own transport fleet.

5. MANUFACTURER'S WAREHOUSE
1. The manufacturer produces goods in anticipation of demand and as soon as the goods roll off
the production line, the finished goods are sent to the warehouse to be stored until they are
required.
 HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

2. The manufacturer's warehouses store only the type of goods produced by the manufacturer.
3. Some manufacturers may have their own warehouses or depots to store raw materials and
finished products while other manufacturers may rent warehouses. Some may depend on
wholesalers to supply the warehousing facilities.

6. RETAIL WAREHOUSE OR DEPOT

1. Some large-scale retailers, like supermarkets and departmental stores, make direct bulk
purchases from manufacturers and may have their own warehouses or depots to store their
goods.
2. Goods can be packed and branded in these warehouses which act as distributing centres for all
the branches of the department store or supermarket. In this way, goods sold in all the branches
can be standardized.
3. Where goods need to be kept fresh, e.g. fruit, vegetables, meat and other perishable goods,
cold storage facilities are available in these warehouses. Where such facilities are absent, the
large-scale retailer can hire facilities from a cold storage.

7. WHOLESALE WAREHOUSE
1. The specialist wholesaler assumes the responsibility and undertakes the risk and work of
warehousing and distribution of goods to their destinations.
2. The wholesale warehouses store a variety of goods bought from many producers.
3. While the goods are stored in the warehouse, bulk breaking, sorting, weighing, grading,
packing and branding activities can be carried out to prepare the goods for distribution.
4. Highly specialized warehousing equipment are used to handle the various warehousing
functions.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

INSURANCE

Introduction
Insurance is a promise by one person/ business to make compensation to other
person/business against its financial losses as a result of a certain specific reason.

Terms in Insurance
1. Insurer/Underwriter: One who provides insurance.
2. Insured: One who gets insurance cover.
3. Beneficiary: Is the person who will get payment against insurance claim from
insurance.
4. Assessor/Actuaries: Somebody employed by an insurance company to assess risks
and fix premiums
5. Sum Insured: Is amount which the insurer promises to pay at the maximum.
6. Premium: Amount which is to be paid on order to buy an insurance cover. Once paid
it is non-refundable. Premiums are to be paid on annual basis.
7. Insurance Policy: Contract of Insurance.
8. Cover Note: A document of transitional nature which acts a proof of insurance
before insurance policy is issued.
9. Claim form: Is a written document which has to be submitted by the beneficiary to
the insurer to the payment against financial loss.
10. Proposal form: Document on which written data about the insured is collected. On
basis of this data premium are calculated.
Why insurance cover is obtained
1. It gives confidence to the person/business.
2. It can be obtained as a measure of saving for a certain future plan.
3. As an investment
4. It can give financial protection.
5. Sometimes it is a obligation.
Types of Risks
1. Insurable Risks
Those risks against which probabilities of occurrence can be mathematically calculated on
the basis of available past data for example theft, accident.
2. Non-Insurable Risks
Those risks against which probability of occurrence cannot be mathematically determined for
example failure in exam and change in fashion.
How Insurance Works
• Insurance works on the basis of pooling of risks.
• All people who have a same type of risk, make payment of premiums to the insurer.
• Of all the people under insurance policy, only few suffer financial loss, they claim
and get their payment out of the total premiums submitted.
How Insurer makes Profit
• Only few of the total insured, claim their loss.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

• Insurer will invest the money of premiums wisely making sure he has
enough liquidity.
How Insurance Company uses Premiums
1. To make claim payments.
2. Meet administrative expensive.
3. To reinsure.
4. To invest.
Factors effecting the Premium
1. Size of Poll
2. Intensity of Risk
3. No of Risks
4. Sum Insured
5. Previous claim history

Principles and Doctrines of Insurance

1. Insurable Interest
• Applied to all types of insurance.
• Only those things can be insured, loss of which directly effects the
insured/beneficiary in terms of financial loss.

2. Utmost Good Faith

• Applies to all types of insurance.
• Nothing should be concealed from the insured.
• Failure to disclose the truth make the policy void.
3. Indemnity/Compensation
• Applies to all types of insurance except life assurance and personal
accident insurance.
• Insurer will try to compensate the loss.
61
ı Insurer will try to bring the insured to the position it was before loss.
ı Insurer will not provide any benefit to the insured.
ı For example if your 5 years old car is damaged beyond repair, the insurer will give
the money from which you would be able to buy the car of the sa me model which is
5 years old, instead of making payment from which you can buy a new car.

a. Contribution
If insured tries to obtain insurance cover against the same risk from different
insurers, all the insurers will contribute to the loss.
b. Subrogation
Once insurer has made the payment of the claim to the
Beneficiary the wreckage belongs to him.

Types of Insurance
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

a) General Insurance
a) Fire Insurance: Building due to fire.
b) Contents Insurance: Contents
c) Comprehensive Fire Insurance: Building, Contents, Riots, Floods and
Earthquakes.
d) Consequential Loss Insurance: Loss of profit while rebuilding is going on.

b) Motor Insurance
a) Minimum Legal C over: Injuries to third party on public roads
only.
b) Third Party Cover: Includes injuries and
damage to properties of third parties.
c) Third Party, fire and theft: Third Party plus, damage to car by theft or
fire.
d) Comprehensive: A s in C) plus damage to vehicle, personal injuries to
driver and loss or damage of personal possessions while in car.

c) Accidental Insurance
a) Care Insurance: Theft, Accident and 3rd Party.
b) Medical Policy Insurance:
c) Cash in Transit Insurance: Covers against loss due to robbery of cash in transit.
d) Workman compensation Insurance:
Compulsory for employers to insure their employees against any accident during
working hours.

d) Liability Insurance
a) Employer Liability: For accidents at work owing to employers negligence.
b) Public Liability: To cover claims made by the public as a result of damage to their
property or life.
c) Professional Liabilities: Taken by lawyers, doctors, architects and engineers to cover
against claim s due to their personal negligence.
d) Insurance of Interest/ Fidelity bond: Guarantee by to cover embezzlement of
employs.

e) Life Assurance
a) Whole Life policy: Lump sum payable at death.
b) Endowment policies: Agree sum payable at the end of a number of years on
the maturity of the policy, death whichever is sooner.
c) Family income protection policy: Paid on death of insured in series of
regular payment.
d) Mortgage payment Insurance: On the death of legal mortgager, company
pays.
e) Group Insurance: Taken by s mall employer for employees in place of
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

pension scheme for employees

f) Marine Insurance
a) Ship and installation
b) Passengers
c) Crew
d) Port and installation
e) Cargo
f) Fright
g) Public Liability

g) Aviation Insurance
a) Planes
b) Crew
c) Passengers
d) Port Installation
e) Public Liability
f) Cargo
Evaluating Insurance Quotation Depends upon
1. Risks covered.
2. Claim payment history of insurer.
3. Financial worth of insurer.
4. Terms and conditions of insurance.
5. Amount of Premium.

Middle Men in Insurance

Brokers Agents
1. Independent entity. Works on behalf of insurer .
2.
Job to bring the seller and buyer Job is to sell insurance policies on
together. Commission basis.
3.
Provides risk management advice to the Does not provide advice.
client.
Effecting an Insurance Policy
1. Buyer will contact insurer for covering a certain risk.
2. Insurer will appoint a surveyor.
3. Surveyor will check the insured and get necessary information on the proposal form.
4. On the basis of information collected on the proposal form, the insurer will calculate
the premium.
5. Buyer will pay the premium and will get the premium receipt and cover note from
the insurer.
6. After a few days insurance policy is issued.
HWARE IRVINE BATANAI 114/16

COMMERCE PERSONAL NOTES

DATE……………

Effecting Insurance Claim

1. After the accident, Insured or beneficiary will contact insurer and the police
department.
2. Insurer will appoint a surveyor.
3. Surveyor will contact the insured or beneficiary and give him/her a claim form.
4. The insured/beneficiary will fill in the claim form and provide all
relevant documentary evidence.
5. If the surveyor and police department find out correctness of the claim, payment will
be made to the beneficiary.