Unit- 1 Business Management

Business management is the process of planning, organizing, directing, and controlling the
activities of a business or organization to achieve its goals and objectives.

Business management is the process of planning, organizing, and controlling a company’s

operations, resources, and personnel to achieve its goals efficiently. It involves crucial
functions like strategic planning, organizing resources, leading teams, and controlling
operations. Business managers make decisions about finances, marketing, HR, technology,
and more to guide the organization’s strategy and optimize performance.

Effective business management is essential for organizations of all types to organize activities
in an efficient way that promotes growth and success.
What is Business Management?

Business management is the process of planning, organizing, and controlling a company’s

operations, resources, and personnel to achieve its goals efficiently. It involves crucial
functions like strategic planning, organizing resources, leading teams, and controlling
operations. Business managers make decisions about finances, marketing, HR, technology,
and more to guide the organization’s strategy and optimize performance.

Effective business management requires strong leadership abilities, problem-solving skills,

and communication expertise. Managers must be able to adapt to evolving conditions inside
and outside the organization over time. They carry responsibility for critical choices that
impact budgets, processes, staffing, and infrastructure in order to meet objectives.

While technical expertise in a field is important, managers must also utilize ‘soft skills’ to
resolve conflicts, connect with staff, and foster a positive culture.

Key Elements of Business Management

The main functions of business management include planning, organizing, leading, and
controlling.

 Planning involves establishing goals and strategies to achieve them through strategic,
tactical, and operational plans.
 Organizing structures tasks, teams, roles, and responsibilities to execute plans.
 Leading refers to guiding teams by communicating vision, motivating, directing,
coaching, and supporting employees using interpersonal skills to rally and inspire.
 Controlling oversees operations, monitors progress, evaluates performance to reach
goals, and takes corrective actions when needed.
Planning

Planning involves setting goals, creating strategies to achieve them, and allocating resources.
It is done at multiple levels – strategic (long-term, big-picture), tactical (mid-range
objectives), and operational (day-to-day activities). Good plans consider challenges,
opportunities, timelines, and budgets. Planning works best when managers collaborate with
employees in strategy development.
Organizing

Organizing structures and available resources to accomplish plans. It involves assigning

tasks, setting authority levels, and coordinating teams and departments. As businesses
change, organizing must be adjusted – adding staff, realigning departments, and updating
processes. Effective organizing facilitates communication and collaboration for efficient
operations.
Leading

Leading refers to managing people – motivating, directing, and communicating with

employees. Good leadership provides vision, clarity, support, and empowerment to teams.
Leading utilizes various interpersonal skills to bring out the best in people. Different
situations call for different leadership approaches – directing, coaching, supporting, or
delegating.
Controlling

Controlling oversees operations to ensure goals are met as planned. It monitors performance,
budgets, and deadlines and makes corrections when needed – addressing underperforming
staff or reallocating resources. Controlling measures progress analytically against standards
and takes preventative or corrective action. Record-keeping and reporting provide data to
inform operational improvements.
How Does Business Management Work?

Here is an example of walking through the four management functions in a real-life scenario:

 Step 1: Planning

A retail clothing store manager does sales forecasting and sets a goal to increase revenue by
10% this year. She plans to open an e-commerce store and add new product lines to
accomplish this.

 Step 2: Organizing

The manager structures her staff by hiring a web developer to create the e-commerce site,
assigning sales associates to manage the new products, and expanding the marketing team to
promote the website and new merchandise.

 Step 3: Leading

The manager rallies her department heads, providing clarity on the growth vision and new
sales objectives. She oversees training on the new processes and technology, motivating
teams to drive success.

 Step 4: Controlling

The manager tracks daily sales figures, web traffic, and inventory levels. When some new
products underperform, she makes pricing adjustments and shifts marketing budgets to better-
performing areas. By correcting course as needed, the overall year-end revenue goal is
achieved.

This example shows how the management functions might progress in a typical business
scenario – planning the growth goal, organizing staff and resources to support it, leading
teams during the transition, and controlling operations to stay on track. The linkage of
strategy across the functions illustrates the integrated nature of management.

Business management is applicable to various types of organizations, including corporations,

small businesses, non-profit organizations, and government agencies. Managers at different
levels, such as top-level executives, middle managers, and supervisors, oversee different
aspects of the business and ensure its success.
Business Management Definition by Business Types

Although the core management fundamentals remain almost the same for all types of
business, their definitions vary a little due to their different operational dissimilarities.
What is Global Business Management?

Global business management refers to overseeing international company operations across

multiple countries, adapting strategy and functions like marketing, supply chains, and human
resources to diverse cultures, policies, and regulations.
What is International Business Management?

International business management involves leading organizational strategy, functions,

and resource allocation for operations spanning multiple countries. It requires adapting to
different cultures, laws, markets, and trade policies.
What is Small Business Management?

Small business management refers to the oversight of operations, budgets, personnel, and
growth strategy for businesses with just a few employees filling core roles in a cost-efficient
way.
What is Drug Store Business Management?

Drug store business management encompasses the leadership and coordination of retail
pharmacy and convenience store locations, focusing on regional expansion, inventory and
supply chains, and delivering health products.
What is Agriculture Business Management?

Agriculture business management deals with the oversight of farming operations from
cultivation to distribution, managing crop cycles, machinery, storage, and sales channels, and
responding to policy, regulations, and climate factors.
What is Sports Business Management?

Sports business management involves directing strategy for sports teams, leagues, media
partnerships, events, facilities, and merchandise, applying business principles while balancing
fan engagement and competitive success.
What is Farm Business Management?

Farm business management focuses on planning, budgeting, account management, and long-
term improvements for agricultural operations, overseeing livestock, equipment, crop
cultivation, staff, and regulatory compliance.
What is General Business Management?

General business management refers to the broad administration of an organization’s

operations, resources, budgets, and personnel to ensure coordination across departments and
progress toward the company’s objectives.
After understanding different business management types, it’s crucial to recognize its
significance within an organization.
Importance of Business Management

Business management is important for a company’s smooth operation and success. It

provides planning, organization, and control that ensures efficient workflows, clear
communication, and well-defined processes. This leads to improved productivity and reduced
wasted resources.

Furthermore, business management supplies direction and guidance to motivate employees,

align activities with organizational strategy, and adapt to changing environments. Without
proper management, companies would struggle to function, achieve goals, or remain
competitive in dynamic markets.
Benefits of Proper Business Management

The benefits of business management are the tangible improvements and gains companies
experience from effective management practices. This includes increased profitability since
streamlining operations and better financial decisions lead to higher profits. It also includes
improved efficiency as organized workflows and clear communication increase productivity
and reduce wasted resources.

Additionally, business management enhances employee satisfaction through positive culture

and growth opportunities, creating a happier and more motivated workforce.
In summary, the key benefits are improved finances, productivity, and workforce engagement
– all contributing to success. Proper business management directly creates these
advantageous outcomes.

 Enhanced Efficiency: Proper business management ensures streamlined operations,

optimized processes, and effective resource allocation, leading to improved efficiency
and productivity.
 Effective Decision-Making: With sound business management practices in place,
leaders can make informed decisions based on accurate data, market insights, and
strategic analysis, resulting in better outcomes.
 Organizational Alignment: Proper business management fosters alignment between
goals, strategies, and actions across different departments, ensuring everyone is
working towards a shared vision.
 Adaptability and Resilience: Effective management equips businesses to navigate
challenges and changes in the market by fostering adaptability, resilience, and the
ability to seize opportunities.
 Improved Financial Performance: Strong business management practices enable
effective financial planning, budgeting, and cost control, leading to improved
profitability and financial stability.
 Employee Engagement and Retention: Proper management creates a positive work
environment, fosters employee engagement, recognizes talent, and promotes
professional growth, resulting in higher job satisfaction and employee retention.
 Customer Satisfaction and Loyalty: Through efficient management, businesses can
consistently deliver high-quality products and services, resulting in increased
customer satisfaction, loyalty, and positive brand reputation.
 Innovation and Growth: Effective management encourages a culture of innovation,
fosters creativity, and nurtures entrepreneurial thinking, enabling businesses to drive
growth and stay ahead of the competition.
 Risk Mitigation: Proper management practices include risk assessment, mitigation
strategies, and contingency planning, minimizing potential threats and ensuring
business continuity.
 Sustainable Success: By implementing proper business management, organizations
can achieve long-term success, sustainable growth, and a solid foundation for future
expansion and development.

Business management encompasses various approaches and methodologies tailored to

different organizational needs. Let’s explore some common types of business management
with examples.
Types of Business Management With Examples

There are various types of business management approaches that organizations adopt based
on their goals, industry, and internal dynamics. Here are some commonly recognized types of
business management:
Financial Management

Financial management encompasses activities related to managing the organization’s

financial resources. It includes budgeting, financial planning, investment decisions, and
financial analysis to ensure financial stability and growth.

Example: The CFO oversees the budgeting, planning, reporting, and analysis of all financial
data to manage profits, cash flow, and growth opportunities.
Marketing Management

Marketing management focuses on promoting products or services, identifying target

markets, and building strong customer relationships. It involves market research, branding,
advertising, pricing, and developing marketing strategies to drive sales and customer loyalty.

Example: The VP of Marketing sets branding guidelines, manages advertising campaigns,

analyzes customer data, and oversees social media to build brand awareness and loyalty.
Sales Management

Sales management is about driving an organization’s sales activities and overseeing the sales
team. This involves recruiting and training salespeople, establishing sales targets and quotas,
analyzing sales data, and implementing sales strategies to boost revenue. It also includes
motivating and supporting sales reps, planning sales operations, and forecasting future sales.

Example: The Sales VP monitors rep performance metrics, designs sales incentive programs,
analyzes trends, and adjusts regional targets to motivate the team to drive revenues.
Human Resource Management

Human resource management involves managing the organization’s workforce. It includes

tasks such as recruitment, training, performance management, employee relations, and
creating a positive work culture.

Example: The HR department leads recruiting, onboarding, training, payroll and maintaining
workplace culture to acquire and retain talented staff across the organization.
Strategic Management

This type of management focuses on long-term planning and setting the overall direction of
the organization. It involves analyzing the competitive landscape, identifying opportunities,
and developing strategies to achieve sustainable growth and competitive advantage.

Example: The CEO defines long-term goals, and analyzes trends and industry shifts to
identify growth opportunities to gain competitive advantage.
Production Management

Production management focuses on the operation and control of manufacturing processes that
convert raw materials into finished goods. This involves planning, scheduling, supervising,
storing, and controlling materials, inventory, machines, and production activities to ensure
efficient workflow and optimal resource utilization.

Example: The VP of Manufacturing oversees factory workflow, machinery, quality control,

supply chain coordination, and labor cost analysis to optimize the fabrication of private label
products.
Service Management

Service management involves coordinating and overseeing various interconnected activities

that comprise a service. This requires conceptualizing, designing, delivering, supporting, and
improving end-to-end services to ensure seamless customer experiences and meet business
objectives.

Example: The Customer Service department designs help desk systems, product return
processes, and loyalty programs to ensure seamless, positive customer experiences.
IT Management

IT management deals with all technology resources and activities within an organization.
This covers planning, coordinating, controlling, and leading the acquisition, development,
maintenance, and use of information technology tools to achieve business goals and gain a
competitive advantage.
Incident response planning is another crucial aspect of IT management. Developing
a comprehensive incident response strategy ensures swift and effective action when security
breaches occur, minimizing potential damage and downtime.

Example: The CIO oversees software development, cybersecurity measures, data storage
systems, and tech support to leverage technology to enhance productivity and data safety.
Project Management

Project management focuses on leading the work of a team to achieve all project goals within
given constraints like scope, time, and budget. This involves planning project activities,
securing resources, delegating tasks, monitoring progress, overseeing quality, mitigating
risks, and completing deliverables according to plan.

Example: The PMO utilizes tools like Gantt charts, risk registers, and status reports to plan
and execute initiatives like new store openings within budget and designated timelines.

You can find different tools on this website (plagiarism checker, paraphraser, AI detector,
etc.)
Risk Management

Risk management involves identifying, assessing, and prioritizing risks to minimize, monitor,
and control the probability or impact of unfortunate events. This requires analyzing
exposures, implementing risk control strategies, and specifying resources to provide
reasonable assurance for achieving objectives.

Example: The Risk Manager oversees policy compliance, audits processes, assesses systems,
and develops contingency plans to mitigate brand, legal, and data vulnerabilities.
Change Management

Change management refers to the process of managing change to achieve a desired outcome.
It involves establishing strategies and plans, communicating shifts in policy or procedure,
securing stakeholder commitment, providing training, reinforcing changes, and evaluating
progress for long-term change optimization.

Example: The Change Management Lead clearly communicates upcoming initiatives, trains
staff on new systems, and regularly follows up to ensure workplace changes are adopted
smoothly.
Environmental Management

Environmental management deals with the impacts of human activities on the environment
through sustainable practices. This involves establishing policies, setting targets,
implementing programs, monitoring progress, and fostering continuous improvement to
mitigate ecological issues and keep environmental impacts under control.
Example: The Sustainability Lead tracks energy usage, waste production, packaging, and
recycling to minimize ecological footprint through LEED certified buildings and renewable
energy.
Procurement Management

Procurement management focuses on acquiring goods, services, or works from external

sources. This involves procurement planning, vendor selection, contract management,
purchasing, inventory management, and performing quality assurance to obtain the best value
when outsourcing expertise or buying raw materials.

Example: The Sourcing Manager vets suppliers, negotiates contracts, oversees purchase
order systems, and manages inventory to acquire quality materials and services at optimal
cost.
Community Management

Community management entails building, nurturing, and managing an online community to

facilitate connections. This involves establishing guidelines, encouraging participation,
mediating interactions, sharing relevant content, providing support, and analyzing data to
create a welcoming space for collaboration or discussion.

Example: The Community Manager fosters customer engagement by moderating discussion

forums and social media, sharing special offers and surveys, and monitoring feedback to
understand customer needs.
Operations Management

Operations management focuses on the efficient production and delivery of goods and
services. It involves optimizing processes, managing resources, and ensuring smooth
operations to meet customer demands while minimizing costs.

Example: The COO analyzes supply chain bottlenecks, production capacity, inventory
levels, and distribution networks to ensure efficient, on-time delivery of products to stores
and customers.

These are just a few examples, and it’s important to note that different organizations may
combine or adapt these management approaches based on their unique needs and
circumstances.

Effective business management requires a systematic and structured approach to coordinate

and align various organizational components.
What are Management Aims and Objectives?
A management objective refers to the primary goal of a management team or system. These
goals dictate the actions, decisions and regulations created by an organization's management.
Managers often share goals with employees and executives to develop a consistent purpose
and strategy for all members of the organization.

Here are 11 common objectives for management teams to improve and develop the
operations of an organization:

1. Optimising Resources
Management teams work to use resources effectively to provide the most output possible.
This objective creates the ability to increase profits by reducing the ratio of resource costs to
profits. Management teams implement logistic strategies and procedures to identify and
reduce processes that create waste and require extra resources.

2. Increase Efficiency
Increasing the efficiency of operations, production and services allows for greater production,
sales and profits. Management systems track the processes, duration and flow of the
workplace to determine methods that provide more efficient outcomes. Managers may work
with other employees and department leaders to create and implement new processes and
requirements.

3. Maximise Profits
Management teams aim to find the balance between maximizing profits and promoting a
beneficial workplace for employees. Maximizing profits includes working with various
departments and leaders such as accountants, supervisors and executives to determine areas
that require improvements and changes. Managers can achieve maximum profit objectives by
identifying unnecessary expenses and waste and creating new procedures for more efficient
operations.

4. Promote Personal development

An effective management team prioritizes the growth and development of its employees.
Providing opportunities such as seminars, mentorship programs, training resources and
internal promotions allows employees to develop new skills and advance their careers. The
personal development and growth of employees can also contribute to the growth, quality and
efficiency of work produced and can help management achieve multiple objectives
simultaneously.

5. Maintain Quality
Management teams handle the regulations, procedures and parameters for the production and
distribution of products and services. A primary objective of management includes
maintaining the quality standards necessary for the organization. The team collaborates with
other departments, supervisors and employees to create, implement and maintain quality.

6. Uphold workplace morale

The environment, attitudes and morale of an organization can affect the overall production
and profits. Positive morale among employees creates intrinsic motivation for employees to
complete tasks and contribute greater effort. Management teams work to uphold morale by
implementing effective authority structures, creating incentive programs and responding to
employee feedback. Valuing employees and ensuring positive relations increases morale and
motivates individuals to continue to grow.

7. Reduce Risk
Many management positions focus on forecasting and projecting results and changes. One
main objective for managers includes using planning and predictions to reduce opportunities
for risks and losses. Reducing risk factors such as safety issues, wasted resources and extra
expenses can help increase profits and eliminate loss.

8. Generate Business stretegies

Management teams often use higher-level critical thinking and abstract strategy to improve
operations and profits. The team collaborates with executives, leaders and stakeholders to
generate, pitch and implement overall business strategies or frameworks. Creating an
effective and consistent business strategy can help identify and narrow objectives for all
employees to reach a common goal.

9. Coordinate Workflows
The workflow and internal structure of an organization can influence productivity and
efficiency. Management teams may include or work with logistics, engineering and
production professionals to develop logical and expedited workflows, internal structures and
facility designs. Managers may also utilize tools such as organization charts, flow diagrams
and procedure audits to evaluate and communicate workflow operations.

10. Identity Talent

An organization's management aims to identify, acquire and maintain top candidates and
employees. Managers may work with recruiters to establish hiring requirements, evaluate
candidates and create recruitment offers. Identifying and gaining talented and qualified
employees increases the knowledge, expertise and production of the organization as a whole.

11. Ensure Availability

Management teams work to handle, maintain and predict the availability of resources, goods
and services. To achieve this objective, managers may project and forecast the needs of the
organization or public and monitor issues such as shortages. Predicting and handling issues
allows the management team to plan and implement changes to prevent production and
distribution delays.
Functions of Business Management

Management is described as the process of planning, organising, directing and controlling the
efforts of organisational members and of using the resources of the organisation to achieve
specific goals. Luther Gulick has given a keyword “PODSCORB”.

1. P → Planning
2. 0 → Organising
3. S → Staffing
4. D → Directing
5. Co → Coordination
6. R → Reporting and
7. B → Budgeting

The most widely accepted classification of management functions is given by Koontz and
O’Donnell which includes planning, organizing, staffing, Directing and Controlling.

1. Planning: Planning is the basic and first function of management. It is the function of
determining in advance what is to be done and who is to do it. A plan is a future course of
action. Planning implies setting goals in advance and developing a way of achieving them
efficiently and effectively. Planning is necessary to ensure proper utilisation of human and
non-human resources.
2. Organisaing: It is the process of bringing together, physical, financial and human
resources. It develops productive relationship amongst them for achievement of
organisational goals. Organising is the management function of assigning duties, grouping
tasks, establishing authority and allocating resources required to carry out a specific plan.
Organising as a process involves.
 Identification of activities
 Classification of activities
  Assignment of duties
 Delegation of authority and creation of responsibility
 Coordinating authority and responsibility relationships.
3. Staffing: It includes finding the right people for the right job. This is also known as the
human resource function and has assumed greater importance in the recent years staffing
involves.
 Man – power planning
 Recruitment, selection and placement
 Training and Development
 Remuneration
 Performance appraisal
 Promotions and Transfer
4. Directing: Directing function involves leading, influencing and motivating employees to
perform the tasks assigned to them. It is that part of managerial function that actuates the
organisational methods to work efficiently for achievement of organisational objectives
Directing has the following elements:
 Supervision
 Motivation
 Leadership
 Communication
 Delegation
 Coordination
5. Controlling: It is the management function of monitoring organisational performance
towards the attainment of organisational goals. It implies the measurement of actual
performance against the set standards and connecting the deviations if any so as to ensure the
achievement of organisations goals. Controlling has the following steps:
 Establishment of standards
 Measurement of actual performance
 Comparison of actual performance with the set standards and finding out deviations if
any
 Taking corrective action.
 Principles of Management
Henry Fayol, also known as the Father of Modern Management Theory, gave a new
perception on the concept of management. He introduced a general theory that can be applied
to all levels of management and every department. He envisioned maximising managerial
efficiency. Today, Fayol’s theory is practised by the management to organise and regulate the
internal activities of an organisation.

(i) Division of Work:Work is divided into small tasks/ jobs. A trained specialist who is
competent is required to perform each job. Thus, division of work leads to specialisation.
According to Fayol, “The intent of division of work is to produce more and better work for
the same effort. Specialisation is the most efficient way to use human effort.” In business
work can be performed more efficiently if it is divided into specialised tasks; each
performed by a specialist or trained employee. This results in efficient and effective output.
Thus, in a company we have separate departments for finance, marketing, production and
human resource development etc. All of them have specialised persons. Collectively they
achieve production and sales targets of the company. Fayol applies this principle of division
of work to all kinds of work – technical as well as managerial. You can observe this
principle at work in any organisation like hospital or even a government office.
(ii) Authority and Responsibility: According to Fayol, “Authority is the right to give
orders and obtain obedience, and responsibility is the corollary of authority. The two types
of authority are official authority, which is the authority to command, and personal authority
which is the authority of the individual manager.” Authority is both formal and informal.
Managers require authority commensurate with their responsibility. There should be a
balance between authority and responsibility. An organisation should build safeguards
against abuse of managerial power. At the same time a manager should have necessary
authority to carry out his responsibility. For example, a sales manager has to negotiate a deal
with a buyer. She finds that if she can offer credit period of 60 days she is likely to clinch
 the deal which is supposed to fetch the company net margin of say ` 50 crores. Now the
company gives power to the manager to offer a credit period of only 40 days. This shows
that there is an imbalance in authority and responsibility. In this case the manager should be
granted authority of offering credit period of 60 days in the interest of the company.
Similarly, in this example this manager should not be given a power to offer a credit period
of say 100 days because it is not required. A manager should have the right to punish a
subordinate for wilfully not obeying a legitimate order but only after sufficient opportunity
has been given to a subordinate for presenting her/his case.
(iii) Discipline: Discipline is the obedience to organisational rules and employment
agreement which are necessary for the working of the organisation. According to Fayol,
discipline requires good superiors at all levels, clear and fair agreements and judicious
application of penalties. Suppose management and labour union have entered into an
agreement whereby workers have agreed to put in extra hours without any additional
payment to revive the company out of loss. In return the management has promised to
increase wages of the workers when this mission is accomplished. Here discipline when
applied would mean that the workers and management both honour their commitments
without any prejudice towards one another.
(iv) Unity of Command: According to Fayol there should be one and only one boss for
every individual employee. If an employee gets orders from two superiors at the same time
the principle of unity of command is violated. The principle of unity of command states
that each participant in a formal organisation should receive orders from and be
responsible to only one superior. Fayol gave a lot of importance to this principle. He felt
that if this principle is violated “authority is undermined, discipline is in jeopardy, order
disturbed and stability threatened”. The principle resembles military organisation. Dual
subordination should be avoided. This is to prevent confusion regarding tasks to be done.
Suppose a sales person is asked to clinch a deal with a buyer and is allowed to give 10%
discount by the marketing manager. But finance department tells her/ him not to offer
more than 5% discount. Now there is no unity of command. This can be avoided if there is
coordination between various departments.
(v)Unity of Direction: All the units of an organisation should be moving towards the same
objectives through coordinated and focussed efforts. Each group of activities having the
same objective must have one head and one plan. This ensures unity of action and
coordination. For example, if a company is manufacturing motorcycles as well as cars then
it should have two separate divisions for both of them. Each division should have its own
incharge, plans and execution resources. On no account should the working of two
divisions overlap. Now let us differentiate between the two principles of unity of
command and unity of direction.
(vi) Subordination of Individual Interest to General Interest: The interests of an
organisation should take priority over the interests of any one individual employee
according to Fayol. Every worker has some individual interest for working in a company.
The company has got its own objectives. For example, the company would want to get
maximum output from its employees at a competitive cost (salary). On the other hand, an
employee may want to get maximum salary while working the least. In another situation
an individual employee may demand some concession, which is not admissible to any
 other employee like working for less time. In all the situations the interests of the
group/company will supersede the interest of any one individual. This is so because larger
interests of the workers and stakeholders are more important than the interest of any one
person. For example, interests of various stakeholders, i.e., owners, shareholders,
creditors, debtors, financers, tax authorities, customers and the society at large cannot be
sacrificed for one individual or a small group of individuals who want to exert pressure on
the company. A manager can ensure this by her/his exemplary behaviour. For example,
she/he should not fall into temptation of misusing her/his powers for individual/ family
benefit at the cost of larger general interest of the workers/ company. This will raise
her/his stature in the eyes of the workers and at the same time ensure same behaviour by
them.
(vii) Remuneration of Employees: The overall pay and compensation should be fair to
both employees and the organisation. The employees should be paid fair wages, which
should give them at least a reasonable standard of living. At the same time it should be
within the paying capacity of the company. In other words, remuneration should be just
and equitable. This will ensure congenial atmosphere and good relations between workers
and management. Consequently, the working of the company would be smooth.
(viii) Centralisation and Decentralisation: The concentration of decision-making
authority is called centralisation whereas its dispersal among more than one person is
known as decentralisation. According to Fayol, “There is a need to balance subordinate
involvement through decentralisation with managers’ retention of final authority through
centralisation.” The degree of centralisation will depend upon the circumstances in which
the company is working. In general large organisations have more decentralisation than
small organisations. For example, panchayats in our country have been given more powers
to decide and spend funds granted to them by the government for the welfare of villages.
This is decentralisation at the national level.
(ix) Scalar Chain: An organisation consists of superiors and subordinates. The formal
lines of authority from highest to lowest ranks are known as scalar chain. According to
Fayol, “Organisations should have a chain of authority and communication that runs from
top to bottom and should be followed by managers and the subordinates.” Let us consider
a situation where there is one head ‘A’ who has two lines of authority under her/ him. One
line consists of B-C-D-E-F. Another line of authority under ‘A’ is L-M-N-O-P. If ‘E’ has to
communicate with ‘O’ who is at the same level of authority then she/he has to traverse the
route E-D-C-B-A-L-M-N-O. This is due to the principle of scalar chain being followed in
this situation. According to Fayol, this chain should not be violated in the normal course of
formal communication. However, if there is an emergency then ‘E’ can directly contact ‘O’
through ‘Gang Plank’ as shown in the diagram. This is a shorter route and has been
provided so that communication is not delayed. In practice you find that a worker cannot
directly contact the CEO of the company. If at all she/he has to, then all the formal levels
i.e., foreman, superintendent, manager, director etc have to know about the matter.
However, in an emergency it can be possible that a worker can contact CEO directly.
(x)Order: According to Fayol, “People and materials must be in suitable places at
appropriate time for maximum efficiency.” The principle of order states that ‘A place for
everything (everyone) and everything (everyone) in its (her/his) place’. Essentially it
 means orderliness. If there is a fixed place for everything and it is present there, then there
will be no hindrance in the activities of business/ factory. This will lead to increased
productivity and efficiency.
(xi) Equity: Good sense and experience are needed to ensure fairness to all employees,
who should be treated as fairly as possible,” according to Fayol. This principle emphasises
kindliness and justice in the behaviour of managers towards workers. This will ensure
loyalty and devotion. Fayol does not rule out use of force sometimes. Rather he says that
lazy personnel should be dealt with sternly to send the message that everyone is equal in
the eyes of the management. There should be no discrimination against anyone on account
of sex, religion, language, caste, belief or nationality etc. In practice we can observe that
now a days in multinational corporations people of various nationalities work together in a
discrimination free environment. Equal opportunities are available for everyone in such
companies to rise.
(xii) Stability of Personnel: “Employee turnover should be minimised to maintain
organisational efficiency”, according to Fayol. Personnel should be selected and appointed
after due and rigorous procedure. But once selected they should be kept at their post/
position for a minimum fixed tenure. They should have stability of tenure. They should be
given reasonable time to show results. Any adhocism in this regard will create
instability/insecurity among employees. They would tend to leave the organisation.
Recruitment, selection and training cost will be high. So stability in tenure of personnel is
good for the business.
(xiii) Initative: Workers should be encouraged to develop and carry out their plans for
improvements according to Fayol. Initiative means taking the first step with self-
motivation. It is thinking out and executing the plan. It is one of the traits of an intelligent
person. Initiative should be encouraged. But it does not mean going against the established
practices of the company for the sake of being different. A good company should have an
employee suggestion system whereby initiative/suggestions which result in substantial
cost/time reduction should be rewarded.
(xiv) Esprit De Corps: Management should promote a team spirit of unity and harmony
among employees, according to Fayol. Management should promote teamwork especially
in large organisations because otherwise objectives would be difficult to realise. It will
also result in a loss of coordination. A manager should replace ‘I’ with ‘We’ in all his
conversations with workers to foster team spirit. This will give rise to a spirit of mutual
trust and belongingness among team members. It will also minimise the need for using
penalties.

Business Finance
Business Finance means the funds and credit employed in the business. Finance is the foundation
of a business. Finance requirements are to purchase assets, goods, raw materials and for the other
flow of economic activities. Let us understand in-depth the Meaning of Business Finance.

Meaning of Business Finance

According to B.O. Wheeler Meaning of Business Finance includes those business activities that
are concerned with the acquisition and conservation of capital funds in meeting the financial
needs and overall objectives of a business enterprise.”

Business is identified with the generation and circulation of products and services for fulfilling
of needs of society. For successfully doing any operation, business requires money which is
known as business finance. Therefore, funds are known as the lifeblood of any business. A
business would not function unless there is adequate money accessible for use.

The capital contributed by the businessman to establish the business isn’t adequate to meet the
financial needs of the business. Consequently, the businessman needs to search for an option to
generate funds. A research of the financial needs and options to fulfill those needs must be done
with a specific end goal to arrive at effective financial management to maintain the business.

The fundamental necessities of business would be to buy a plant or apparatus, or it could be to

buy raw materials, development of a business that prompts more enrollments, paying wages and
so on. The money related necessities of a business can be classified as follows:

 Fixed Capital Requirement: In order to begin a business, money is required to buy

fixed assets like land, building, plant and machinery. This is called the Fixed
Capital Requirement.

 Working Capital Requirement: A business needs funds for its day to day activities.
This is known as Working Capital Requirements. Working capital is required for
the purchase of raw materials, paid salaries, wages, rent, and taxes.

 Diversification: A company needs more funds to diversify its activities to become

a multi-product company e.g. ITC.

 Technology upgrading: Finances are needed to adopt the latest technology for
example use of particular software and the latest computers in business.

Importance of Business Finances

We now know the meaning of Business Finance, let us learn its importance. Business finance is
an essential requirement for the establishment of any business. Money is actually the most
important tool to bridge the gap between production and sales. Let us take a look at some of the
important functions of business finances.

 We require business finances to meet certain contingencies and any unexpected

problems that may arise

 Necessary for the promotion of sales

 A requirement to avail any business opportunities that may present themselves.
Nature of Business Finance
The nature of the business finance is enumerated in the points mentioned below –
1. Business Finance consists of different kinds of funds – short, medium and long term
as and when required by the business.

2. Any type of business needs this business finance, it is utmost for the organization.
3. The volume required differs from business to business, small business requires less
business finance in contrast to the large business firms.
4. In different times of the business season, requirements differ. In peak seasons
business demands for huge business finance.
5. The amount of business finance determines the scale of operations conducted by the
company.

Significance of Business Finance

To highlight the significance of business finance, we point the following as mentioned:
1. A firm with a good amount of business finance will require less time and hassles to
start the business venture.
2. With the business finance in hand, the owners can buy the raw materials as needed for
production.
3. The business firm can easily pay his dues and other payments with the help of
business finance.

4. Uncertain risk and Contingencies can be tackled with business finance in hand.
5. Good financial capacity of the business will attract talented workforce, also highly
efficient technology can also be available with a strong financial background.

Scope of Business Finance

Business finance helps in studying, analyzing and allocating the business funds and other
covers done by the business is done as mentioned:

1. Analysis and Research of Financial Statement

2. Financial Planning and Controlling
3. Capital Structure Management
4. Raising Capital
5. Investing Capital
6. Managing the finance risk.
Need and Importance of Sources of Business Finance
The main resources of Business Finance are revenues from business operations, investor’s
own finances, venture capital, loans from financial institutions. Businesses need finances to
meet their day-to-day finances which can be covered by these sources.
The importance of the sources of business finance are:
1. Meeting Goals.

2. Short term activities

3. Long term activities
4. Achieving financial goals.

All such activities are governed and administered by the financial department in each
organization. Businesses need this finance to sustain their growth. Companies pool money
from the public in return of shares of the company, this also a type of procurement of
business finance.
Sources of Business Finance
1. Retained Earnings: In most cases, a firm does not pay out all of its profits as
dividends to its shareholders. A part of the net earnings may be kept in the company
for future use. This is referred to as "retained profits." It is a source of internal
finance, self-financing, or 'profit plowing.' The amount of profit available for
reinvestment in a company is determined by a variety of factors, including net profits,
dividend policy, and the company's age.
2. Trade Credit: A trade credit account is a line of credit given by one business to
another for the purchase of products and services. Trade credit allows you to buy
supplies without having to pay right away. Such credit shows up in the buyer of
goods' records as sundry creditors' or 'accounts due.'
3. Public Deposit: Public deposits are deposits raised directly from the general public
by organizations. Public deposit interest rates are often greater than those provided on
bank deposits. Anyone interested in making a monetary contribution to an
organization might do so by completing a designated form. In exchange, the
organization gives a deposit receipt as proof of payment. While depositors receive a
greater interest rate than banks, the cost of deposits to the firm is lower than the cost
of bank borrowings.

4. Commercial paper: In the early 1990s, commercial paper became a popular form of
short-term financing in our country. Commercial paper is an unsecured promissory
note that a company issues to generate capital for a limited period of time, usually 90
to 364 days. It is distributed to other businesses, insurance companies, pension funds,
and banks by a single company. The sum raised via CP is usually rather substantial.
Because the loan is completely unsecured, only companies with a solid credit rating
may issue a CP. The Reserve Bank of India is responsible for its regulation.
Financial Management
Financial management is the practice of making a business plan and then ensuring all
departments stay on track. Solid financial management enables the CFO or VP of finance to
provide data that supports creation of a long-range vision, informs decisions on where to
invest, and yields insights on how to fund those investments, liquidity, profitability, cash
runway and more.
Financial management is the way a business manages its money. It includes cash flow
management, handling risks, taxation, forecasting, investing strategies, and plans regarding
assets & liabilities.

Goals and Objectives of Financial Management

Financial Management refers to the process of efficient acquisition, utilization, and
distribution of finance and then disposal of surplus or profit to run the organization
smoothly. Financial management helps in finding the answer to various questions like what
should be the size and composition of fixed assets, what should be the amount and
composition of current assets, what should be the amount of long-term and short-term
financing, what should be the fixed debt-equity ratio in the capital, etc.

Objectives of Financial Management

A financial manager is responsible for making the decisions to bring effective financial
management to the organization. His/her decisions should be gainful for the shareholders as
well as the company. So the decisions which increase the value of the share in the market are
considered to be good and fruitful. Increased value of shares fulfills many other objectives
also but it does not means that the manager should use manipulative activities to raise the
prices of the shares. This boom must come with the growth of the organization, with the
increase in profits, and with the satisfaction of all the parties which are directly or indirectly
associated with the firm.

Some of the prime objectives of financial management are as follows:

1. Profit Maximization

A business is set up with the main aim of earning huge profits. Hence, it is the most important
objective of financial management. The finance manager is responsible to achieve optimal
profit in the short run and long run of the business. The manager must be focused on
earning more and more profit. For this purpose, he/she should properly use various methods
and tools available.

2. Wealth Maximization

Shareholders are the actual owners of the company. Hence, the company must focus on
maximizing the value or wealth of shareholders. The finance manager should try to distribute
maximum dividends among the shareholders to keep them happy and to improve the
goodwill of the company in the financial market. The declaration of dividend and payout
policy is decided with the help of financial management. A proper dividend policy related to
the declaration of dividends or retaining the company's profit for future growth and
development is part of dividend decisions. But this is based on the performance of the
company and the amount of profit earned. Better performance means a higher value of shares
in the financial market. In nutshell, the finance manager focuses on maximizing the value of
shareholders.
3. Maintenance of Liquidity

With the help of proper financial management, the manager can easily monitor the regular
supply of liquidity in the company. But it is not as easy as it sounds. To maintain the proper
cash flow, the manager must keep an eye over all the inflows and outflows of money to
reduce the risk of underflow and overflow of cash. The finance manager is responsible to
maintain an optimal level of liquidity in the organization. Healthy cash flow means a higher
possibility of survival and success of the business. Because it helps the business to deal with
uncertainty, timely payment of dues, getting cash discounts, making day-to-day payments
without delays, etc.

4. Proper Estimation of Financial Requirements

Financial management also helps the finance manager in estimating the proper financial
needs of the company. This means the estimations related to the requirement of capital to
start or run a business, the need for fixed and working capital of the company, etc., can be
done with effective management of finance. If this management will not be present in the
company then there will be a higher possibility of having a shortage or surplus of
finance. For this estimation, a financial manager checks various factors like the technology
used by the organization, the number of employees working, the scale of operations, and the
legal requirements of the company to run its business.

5. Proper Mobilization

Financial management helps in the effective utilization of sources of finance. It means

without wasting them and getting the maximum benefit from the available resources. The
finance manager is responsible for managing the different sources of funds such as shares,
debentures, bonds, loans, etc. So, after estimating the financial requirements, the manager
must decide which source of the funds he/she should use to avail the maximum benefit.

6. Proper Utilization of Financial Resources

With proper financial management, the organization can make optimum utilization of
financial resources. To achieve this, a financial manager has various tools that he/she can
use. They include managing receivables, better management of inventory, and effective
payment policy in hand. This will not only save the finance of the organization but will also
reduce the wastage of other resources.

7. Improved Efficiency

Financial management is also beneficial in increasing the efficiency of all sections and
departments of the organization. If the finance is effectively distributed to all the
departments then they will work efficiently. It will support the company to achieve its targets
easily which will be further helpful for the growth of the entire company.

8. Meeting Financial Commitments with Creditors

Financial management is helpful in the timely payment of dues to the creditors. The
financial manager can list out the creditors, their due amount, and due date from the
financial accounts and can make their payments on time. This will increase the goodwill of
the company in the market and creditors will also provide the goods to the company on credit
without having any problem. So, if there will be strong management of finance then the
company will be able to meet the financial commitments with creditors easily.

9. Creating Reserves

The business environment is full of uncertainty such as sudden changes in customers'

preferences, climate change, natural calamity, change in technology, etc. To overcome
such unplanned issues, the company should have a sufficient amount in the form of reserves.
The company can create reserves over the year by having an optimal dividend payout
policy. The company should also keep some part of profits in the form of reserves. The
reserves are not only helpful in dealing with unwanted situations but also to expand the
business and face contingencies in the future. This benefit can only be taken if the company
has effective management of finance.
10. Decreases the Cost of Capital

This objective includes measuring the cost of capital, risk evaluation, and calculating the
approximate profits out of a particular project. Financial managers are responsible for the
effective investments of available funds in the current or fixed assets to get the maximum
benefits or ROI.

11. Decreases Operating Risk

There are lots of risks and uncertainties that a financial manager has to face in the day-to-
day operations of the business. Financial management helps in reducing these issues and
gives the solutions to deal with the problems. It can avoid the high-risk allocation of
capital for the expansion and growth of the business. Other than this, FM also tells how the
decisions can be taken with a proper consultancy.

12. Balanced Structure

Financial management also provides a balanced capital structure to the company. In other
words, it brings a proper balance between the various sources of capital such as loans,
equity, bonds, retained earnings, etc. This balance is required for flexibility,
liquidity, and stability in the organization as well as the economy.

13. Developing Financial Scenarios

With the help of financial management, financial scenarios can be developed. It can be done
by forecasts and the current state of the company. But for this purpose, the financial manager
has to assume a wide range of possible outcomes as per the current and future market
conditions.

14. Measure Your Success

The prime motive of any organization is to earn huge profits. So, we can say that the success
of a company is based on its revenue. Financial management not only helps in earning more
revenue but also in measuring the success of the company. With proper financial reports or
accounts, the organization can compare its current year's performance with the previous
year's performance.
Other than this, the financial manager can also compare the performance of the organization
with the performance of the competitors in the market. Such information motivates the
management team as well as all the employees to work harder for the company's growth.

15. Optimizing Marketing Activities

Marketing plays a huge role in the revenue of a firm. A company advertises its products or
services through different means of marketing. But marketing is a department that demands
more funds. So, before investing in any advertising campaign, it is a must to figure out what
return the company can get from investing in that campaign. And if the program is not giving
the expected returns to the company then it should be optimized or temporarily
stopped. That's why the financial manager should check the reports prepared by the
marketing department regarding the returns from any advertising campaign and then he/she
should manage and allocate the funds by keeping the results in mind.

16. Business Survival

In this era of high competition, it is not easy for a company to survive in the market and
earn profits. Hence, the finance manager should take the big decisions carefully after
consulting with the experts.

If the company follows perfect financial management then it can get the benefits of all the
given objectives which will be helpful in the long-run survival of the business with a higher
turnover and goodwill.
 Sources of Long-Term Financing

#1 – Equity Capital

It represents the interest-free perpetual capital of the company raised

by public or private routes. The company may either raise funds from
the market via IPO or opt for a private investor to take a substantial
stake in the company.

 There is a dilution in the ownership and the controlling stake with the
largest equity holder in equity financing.
 The equity holders have no preferential right in the company’s
dividend and carry a higher risk across all the buckets.
 The rate of return expected by the equity shareholders is higher than
the debt holders due to the excessive risk they bear in repayment of
their invested capital.

#2 – Preference Capital


Preference shareholders carry preferential rights over equity
shareholders in terms of receiving dividends at a fixed rate and getting
back invested capital in the company if the same is wound up.
 It is a part of the company’s net worth, thus increasing
its creditworthiness and improving its leverage compared to its
peers.
 #3 – Debentures

Is a loan taken from the public by issuing debenture certificates

under the company’s common seal? Debentures can be placed via
public or private placement. Suppose a company wants to raise
money via NCD from the general public. In that case, it takes the debt
IPO route where all the public subscribing to it gets allotted
certificates and are the company’s creditors. If a company wants to
raise money privately, it may approach the major debt investors in the
market and borrow from them at higher interest rates.

 They are entitled to a fixed interest payment per the agreed-upon

terms mentioned in the term sheet.
 They do not carry voting rights and are secured against the company’s
assets.
 In case of any default in debenture interest payment, the debenture
holders can sell the company’s assets and recover their dues.
 They can be redeemable, irredeemable, convertible, and non-
convertible.
 #4 – Term Loans

Banks or financial institutions generally give them for more than one
year. They have mostly secured loans offered by banks against strong
collaterals provided by the company in the form of land and building,
machinery, and other fixed assets.

 They are a flexible source of finance provided by the banks to meet

the long-term capital needs of the organization.
 They carry a fixed interest rate and give the borrower the flexibility to
structure the repayment schedule over the tenure of the loan based on
the company’s cash flows.
 It is faster than the company’s equity or preference shares issue as
there are fewer regulations to abide by and less complexity.
 #5 – Retained Earnings

These
are the profits the company has kept aside over time to meet the
company’s future capital needs.

 These are the company’s free reserves, which carry nil cost and are
available free of charge without any interest repayment burden.
 One can safely use it for business expansion and growth without
taking additional debt burden and diluting further equity in the
business to an outside investor.
 They form part of the net worth and directly impact the equity share
valuation.