Plus Two

Kerala State Board New Syllabus Plus Two Economics Chapter Wise Previous Questions and Answers Part II Chapter 2 National Income Accounting.

Kerala Plus Two Macroeconomics Chapter Wise Previous Questions Chapter 2 National Income Accounting

Question 1.
The national product can be measured by using the expenditure method, income method, and value-added method. Prepare the equations to find out GNP_MP with these separate methods. (MARCH-2008)
Answer:
National Income is the sum total of the value of goods and services produced in a country during a year. It can be measured using 3 methods namely product method, expenditure method, and income method.
Product Method
The process to obtain GNP_MP by the production method is: Value added in the primary sector + valued added in the secondary sector + value-added in the tertiary sector + Net factor income from abroad.
Income method
The process to obtain GNP_MP by the income method is: Compensation of employees + Profit + rent + interest + Mixed-Income + Depreciation + Net indirect taxes + Net factor income from abroad
Expenditure method
The process to obtain GNP_MP by the expenditure method is: Private consumption expenditure + Investment expenditure + Govt, purchase of goods and services + net exports + Net factor income from abroad.

Question 2.
Prepare self explanatory charts to explain the various concepts related to National Income concepts. (MARCH-2008)
a) GDP
b) PCI
c) NNP
d) PDI
Answer:
a) GDP – > GNP -> Net factor income from abroad
National Income
b) PCI – > \(\frac{\text { National Income }}{\text { Population }}\)
c) NNP – > GNP- depreciation
d) PDI -> Personal Income-direct taxes

Question 3.
Identify the Boxes and flows and complete the following. (MARCH-2009)

Answer:

Question 4.
The following table shows the different components of domestic factor income for the economy of Malasia. Complete the table by calculating the necessary figures. (MARCH-2009)

Answer:
Domestic Factor Income = Compensation of employees + Operating surplus + Mixed income of the self-employed.
1)250
2)450
3)-750
4) 1400

Question 5.
Give one word for the following statement: (MAY-2009)
a) National income + population
b) A pictural illustration of the interdependence between major sectors and their economic activities.
c) Personal income – direct tax.
d) GNP – Depreciation
Answer:
a) Per capita income
b) Circular flow
c) Disposable income
d) NNP

Question 6.
Suppose that in a two-sector economy the value of finished goods is equal to 200 crores and the income generated as factor reward is also equal to 200 crores. The household spends only 160 crores. Then (MAY-2009)
a) What will happen to circular flow?
b) Which system can be introduced to correct circular flow?
c) Name the leakages and injunctions.
d) Draw the flowchart by incorporating the new system
Answer:
a) Circular flow of income and expenditure will be disturbed when households spend less than their earnings.
b) Financial system can be introduced to correct the circular flow.
c) Saving is a leakage Borrowing is an injection

Question 7.
between income method and the expenditure method of national income measurement. (MARCH-2010)
Hint: The report should have
a) Title
b) Introduction
c) The main points
d) Conclusion win own observation
Answer:
Measurement of National income
Respected teachers and dear friends,
The topic of my seminar paper is ‘measurement of national income or the methods of measuring national income’. The concept of national income occupies an important place in economic theory. National income is the aggregate money value of all goods and services produced in a country during an accounting year. In this seminar paper I would like to present various methods of measuring national income. Introduction
National income can be measured in different ways. Generally, there are three methods for measuring national income. They are

• Value added method
•  Income method
• Expenditure method Value added method

The term that is used to denote the net contribution made by a firm is called its value-added. We have seen that the raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’. Therefore the value-added of a firm is, value of production of the firm – value of intermediate goods used by the firm. The value-added of a firm is distributed among its four factors of production, namely, labour, capital, entrepreneurship and land. Therefore wages, interest, profits and rents paid out by the firm must add up to the value-added of the firm. Value-added is a flow variable.

Expenditure Method

An alternative way to calculate the GDP is by looking at the demand side of the products. This method is referred to as the expenditure method. The aggregate value of the output in the economy by expenditure method will be calculated. In this method, we add the final expenditures that each firm makes. Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.

Income Method

As we mentioned in the beginning, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents.
That is GDP = W+ P + ln + R
Conclusion:
Thus it can be concluded that there are three methods for measuring national income. These methods are the value-added method, income method, and expenditure method. Usually, in estimating national income, different methods are employed for different sectors and sub-sectors.

Question 8.

a) Complete the chart showing circular flow of economic activity. (MARCH-2010)
b) Identify money flow and real flow from the figure.
Answer:
a)

b) Consumption expenditure and factor payments are money flows, flow of goods and services and factor services are real flows.

Question 9.
The GNP is considered as an index of welfare of a country, but there are some limitations of using GNP. Explain the three limitations. (MAY-2010)
Answer:
It is usually argued that GDP is not always a true index of welfare of a country. There are several limitations in using GDP as an index of welfare as discussed below.
1) Distribution of GDP- how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in GDP maybe concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. In such a case the welfare of the entire country cannot be said to have increased. If we relate welfare improvement in the country to the percentage of people who are better off, then surely GDP is not a good index.

2) Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges goods (or services) are directly exchanged against each other. But since money is not being used here, these exchanges are not registered as part of economic activity. In developing countries, where many remote regions are underdeveloped, these kinds of exchanges do take place, but they are generally not counted in the GDPs of these countries.
This is a case of underestimation of GDP. Hence GDP calculated in the standard manner may not give us a clear indication of the productive activity and well-being of a country.
Externalities: Externalities refer to the benefits or harms a firm or individual causes to another for which they are not paid or penalized. Externalities do not have any market in which they can be bought and sold. In the case of externalities, whether positive or negative, it may not reflect the true picture of the economy. That is in the case of externality, GDP will underestimate the actual welfare of the economy.

Question 10.
using three methods: (MAY-2010)
a) Identify the three methods.
b) Prepare the equations to find out GDP with these separate methods.
Answer:
a) Product method, Income method, Expenditure method
b) Product method
Income method: GDP = C + S + T

Question 11.
Prepare a seminar report on the topic ‘Product Method and Income Method of National Income Measurement’. (MARCH-2011)
The report should contain
a) Title
b) Introduction
c) Main points
d) Conclusion with own observation
e) Order of presentation
Answer:
Measurement of National income Respected teachers and dear friends, The topic of my seminar paper is ‘measurement of national income or the methods of measuring national income’. The concept of national income occupies an important place in economic theory. National income is the aggregate money value of all goods and services produced in a country during an accounting year. In this seminar paper I would like to present various methods of measuring national income.
Introduction
National income can be measured in different ways. Generally there are three methods for measuring national income. They are

• Value added method
• Income method
• Expenditure method Value added method

The term that is used to denote the net contribution made by a firm is called its value added. We have seen that the raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’. Therefore the value added of a firm is, value of production of the firm – value of intermediate goods used by the fine. The value added of a firm is distributed among its four factors of production, namely, labour, capital, entrepreneurship and land. Therefore wages, interest, profits and rents paid out by the firm must add up to the value added of the firm. Value added is a flow variable.

Expenditure Method

An alternative way to calculate the GDP is by looking at the demand side of the products. This method is referred to as the expenditure method. The aggregate value of the output in the economy by expenditure method will be calculated. In this method we add the final expenditures that each firm makes. Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.

Income Method

As we mentioned in the beginning, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents.
That is GDP = W+ P + In + R
Conclusion
Thus it can be concluded that there are three methods for measuring national income. These methods are value-added method, income method and expenditure method. Usually, in estimating national income, different methods are employed for different sectors and sub-sectors.

Question 12,
Pick out the correct equation. (MARCH-2011)
a) GDP = GNP + Net factor income from abroad
b) NNP = GNP – Depreciation
c) NDP = GDP – Net Indirect Tax
d) NNP = GNP-Net Indirect Tax
Answer:
NNP = GNP – Depreciation

Question 13.
The term used to refer the benefits (or harm) a firm or an individual causes to another firm or an individual for which they are not paid is (MARCH-2012)
a) Welfare
b) Externalities
c) Transfer Payments
d) Internal Economies
Answer:
b) Externalities

Question 14.
Identify the real and nominal flows in the circular flow of income. (MARCH-2012)

Answer:
Real flows
Factor services
Final goods and services Nominal flows
Factor incomes
Expenditure on goods and services

Question 15.
GDP Deflator refers to (MARCH-2012)
a) The ratio of real to nominal GDP.
b) The ratio of nominal to real GDP.
c) The ratio of nominal N to real GDP.
d) The ratio of nominal GDP to nominal GNP.
Answer:
b) The ratio of nominal to real GDP.

Question 16.
From the data given below, calculate (MARCH-2012)
a) GDP at market price.
b) Net National Income at Factor Cost.
c) Personal income.
Data :
1) NDP at market price – ₹74,905
2) Net indirect taxes – ₹8,344
3) Income from Domestic product accruing to Govt. – ₹1,972
4) Net factor income from abroad – ₹(-) 232
5) Current transfers to households – ₹2,305
6) Depreciation – ₹4,486
Answer:
a) GDP at market price
GDP_MP = NDP_MP + Depreciation
= ₹74905 + 4486 = ₹79,391 .
b) Net National Income at factor cost
NNP_FC = NDP_MP – Net indirect tax + Net factor income from abroad = 74905-8344+ (-) 232 = 7 66,329
c) Personal income
= NNP_FC+Current transfers to households = 66329 + 2305= ₹68,634

Question 17.
List of some variables are given below. Classify them in a table into stocks and flows. (MARCH-2013)
i) Wealth
ii) Income
iii) consumption
iv) Investment
v) Expenditure
vi) Capital stock
Answer:
Stock variables

• wealth
• capital stock

flow variables

• income
• consumption
• investment
• expenditure

Question 18.
From the following information, calculate GNP and NDP (₹ in crores) (MARCH-2013)
i) GDP_MP 65,665
ii) Consumption of fixed capital 2,250
iii) Net factor income from abroad 750
Answer:
GNP = GDP + Net factor income from abroad GNP =65,665 + 750 = 66415 Crores
NDP = GDP – depreciation (Consumption of fixed capital)
NDP =65665-2250 = 63415 Crores

Question 19.
The value of the nominal GDP of India was ₹ 2,800 crores during the year 2011. The value of GDP of the country during the same year evaluated at the price of some base year was ₹3,200 crores. Find the value of GDP deflator of the year in percentage terms. (MARCH-2013)
Answer:
The ratio of nominal GDP to real GDP is known as GDP deflator

Question 20.
Though Gross Domestic Product (GDP) is often used as an indicator of economic welfare, it is not a comprehensive indicator of welfare. Elaborate. (MAY-2014)
Answer:
GDP deflator = Current year GDP / Base year GDP x 100 = 1800/1200 x 100 = 1.5 x 100
= 1.5 (in percentage terms 150)

Question 21.
Pick the odd one and justify your answer. (MAY-2014)
a) Product method
b) Deductive method
c) Income method
d) Expenditure method
Answer:
deductive method. All others are methods for measuring national income.

Question 22.
Identify central/basic economic problems. (MAY-2014)
i) What is to be produced?
ii) What is to be regulated?
iii) How goods are to be produced?
iv) How sectors are to be divided?
v) How produced output is to be divided?
vi) How much is to be produced?
Answer:
Basic economic problems are
i) what to produce
iii) how goods are to be produced
vi) how much is to produced

Question 23.
Define value added method. A farmer produces 5 quintals of wheat, out of which he sells 3 quintals to a flour mill and 1.5 quintals to consumers at the rate of ₹1000 per quintal. He retains the balance of 0.5 quintals of self-consumption. For wheat cultivation he spends ? 2000 on account of purchasing seeds and fertilizers. Calculate value added by the farmer (MARCH-2015)
Answer:
The real value added in the production process is called Gross value added.
Gross value added = Value of output – Intermediate consumption
Gross value added = 5000 – 2000 = 3000

Question 24.
Suppose in a two sector economy goods worth ₹150 crores are produced and income generated is also equal to ₹150 crores. Draw circular flow of economic activities in this economy and explain. (MAY-2015)
Answer:
The inter related process of production, income generation and expenditure is called circular flow of income. In the given two sector economy, the flow of economic activities can be in the following way.

In this sector households receive ₹150 crore for their factor services given to firms. Firms in reply, provides goods and services to household sector to firms as consumption expenditure.

Question 25.
Write down the three identities of calculating the GDP of a country by the three methods. Also explain why each of these should give us the same value of GDP.(MAY-2015)
Answer:
Gross National Product (GNP) equals Gross National Income equals Gross national expenditure i.e.
GNP = GNI = GNE
These are equal because national income is a circular flow of income. Aggregate expenditure is equal to aggregate output which in turn, is equal to aggregate income. However each method has some different items, yet they show exactly identical results. Their identity can be shown in the following manner: Reconciling Three Methods of Measuring Gross

Question 26.
Fill in the blanks :
a) A balanced budget multiplier is unity implies that ₹100 increase in ‘G’ increases National Income by (MAY-2015)
b) Gross primary deficit = ________
Answer:
a) ₹100
b) Gross primary deficit = Gross fiscal deficit – net interest liabilities.

Question 27.
Fill in the blanks : (MARCH-2016)
a) GDP + ______ = GNP
b) GNP – Depreciation = ______
c) ________ – Net Indirect Taxes = NNP_FC
(GDP – Gross Domestic Products
GNP – Gross National Products
NNP_FC – Net National product at factor cost)
Answer:
a) Net factor income from abroad
b) NNP
c) NNP_MP

Question 28.
You are to be cautions while taking only GDP (Gross Domestic Product) as index of welfare. Why so? (MARCH-2016)
Answer:
GDP deflator = Current year GDP / Base year GDP x 100
= 1800/1200 x 100
= 1.5 x 100
= 1.5 (in percentage terms 150)

Question 29.
If the quantity demanded of ‘good’ X’ increases with a rise in the price of ‘good Y’, these goods are ________ (MAY-2016)
a) complementary goods
b) Inferior goods
c) Normal goods
d) Substitute goods
Answer:
d) Substitute goods

Question 30.
Differentiate between the stock variables and flow variables with examples. (MAY-2016)
Answer:
Stocks and flows
There are differences between the concepts of stocks and flows. Stock is a variable measured at appoint of time, whereas, flow is a variable measured over a period of time. Wealth, capital etc are variables which can be measured at a point of time. Therefore, they are stock variables. At the same time, income, output, profits etc are concepts that make sense only when a time period is specified. These are called flows because they occur in a period of time. Therefore we need to delineate a time period to get a quantitative measure of these.
Net Investment -> Flow
Capital -> Stock

Question 31.
Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP. (MAY-2016)
Answer:
Gross National Product (GNP) equals Gross National Income equals Gross National Expenditure,
i.e. GNP = GNI = GNE
These are equal because national income is a circular flow of income. Aggregate expenditure is equal to aggregate output which in turn, is equal to aggregate income. However each method has some different items, yet they show exactly identical results. Their identity can be shown in the following manner: Reconciling Three Methods of Measuring Gross.

Kerala State Board New Syllabus Plus Two Economics Chapter Wise Previous Questions and Answers Part II Chapter 1 Introduction.

Kerala Plus Two Macroeconomics Chapter Wise Previous Questions Chapter 1 Introduction to Macroeconomics

Question 1.
Classify the following statements into two branches of Economics. (MARCH-2008)
a) Reliance Communications reduced the STD charges by 20% from November onwards.
b) The Government proposed to reduce unemployment by introducing IT-related industries.
c) RBI hiked the cash reserve ratio.
d) Maruti Udyog decided to increase the production of the brand Estilo.
Answer:
a) Micro Economics
b) Macro Economics
c) Macro Economics
d) Micro Economics

Question 2.
them in a table based on two branches of Economics. Give suitable titles to the column. General price level, Aggregate consumption,Rent for a house in a city, Demand for fish in a local market. (MARCH-2009)
Answer:

Micro	Macro
Rent of a house in a city	General price level
Demand for fish in a local market	Aggregate consumption

Question 3.
Read the following statements carefully. (MARCH-2009)
Statement i:
M/s. Sathyam Computers Ltd. decided to introduce a wage cut of 10% for the labourers in the company in November, 2008.
Statement ii:
Reserve Bank of India introduced a new credit policy for the economy in the month of October, 2008.
In which Branc of Economics do you include the statement and why?
Answer:
Micro: Individual approach
Macro: Aggregate / General approach

Question 4.
In a seminar on “Definition of Economics” a group leader presented the definition as follows: “Economics is on the one side a study of wealth and on the other side study of man”. (MAY-2009)
State the correct definition. State the name of the economist.
Answer:
Wealth definition.
According to wealth definition, “Economics is the study of the nature of wealth, its generation, and its spending”. This definition was developed by Adam Smith.

Question 5.
Classify the following statements into two branches of economics: (MAY-2009)
a) Firm’s decision about how much to invest.
b) Govt, has adopted devaluation to overcome deficit in balance of payments.
c) RBI has increased Cash Reserve Ratio to control inflation.
d) Price elasticity of luxury good is elastic.
Answer:
a) Micro economics
b) Macroeconomics
c) Macroeconomics
d) Microeconomics

Question 6.
Classify the following economic variables under suitable heads. International trade, price theory, economic growth, partial equilibrium, aggregate demand, allocation of resources. (MARCH-2010)

.	.
.	.
.	.
.	.

Answer:

Micro Economics	Macro Economics
Price theory	International trade
Partial equilibrium	Economic growth
Allocation of resources	Aggregate demand

Question 7.
According to the macro economic point of view there are four major sectors in an economy. Name these sectors. (MAY-2010)
Answer:
1)Households
2) Firms
3) Government
4) External sector

Question 8.
Classify the following in a given table under the given titles. (MARCH-2011)

Micro Economics	Macro Economics

(National Saving Rate, Wage Rate of a KSRTC worker, Average Cost, Inflation)
Answer:

Micro Economics	Macro Economics
Wage rate of KSRTC worker	National saving rate
Average cost	Inflation

Question 9.
Some variables are given below. Classify them in a Table based on the two branches of Economics. (MARCH-2012)
i) Utility
ii) Price level
iii) Inflation
iv) Demand for pen Aggregate consumption
vi) Taxes
vii) GDP
viii) Rent
Answer:

Micro Economics	Macro Economics
Utility	Inflation
Price level	Aggregate consumption
Demand for pen	Taxes
Rent	GDP

Question 10.
Keyne’s book ‘‘General Theory of Employment, Interest and money” was published in (MARCH-2013 )
Answer:
i) 1926
ii) 1936
iii) 1946
iv) 1956
Answer:
ii) 1936

Question 11.
Classify the following under the heads micro and macro economics. (MARCH-2014)
a) Govt, regulations on auto emissions
b) Price elasticity of refrigerators
c) A family’s decision about how much income to save
d) The impact of higher National Savings on Economic Growth.
Answer:
a – Macroeconomics
b – Microeconomics
c – Microeconomics
d – Macroeconomics

Question 12.
Who is known as the father of modern Macro Economics? (MARCH-2015)
a) Adam Smith
b) Alfred Marshall
c) J.M.Keynes
d) J.B.Say
Answer:
c) J.M.Keynes

Question 13.
Classify the following under two heads Micro and Macro economics. (MAY-2015)
Utility, Inflation, Price of rice, taxes, GDP, Rent received by a shop owner, Extension in demand, Aggregate demand.
Answer:

Micro Economics	Macro Economics
Utility	Inflation
Price of rice	Taxes
Rent received by a shop owner	GDP
Extention in demand	Aggregate demand

Question 14.
Distinguish the following economics systems. (MARCH-2016)
a) Centrally Planned economy
b) Market economy
Answer:
a) Centrally planned economy is an economic system where all the economic decisions are taken by the government through planning.
b) In a market economy, economic problems are solved by market forces of demand and supply. Competition are profit are the driving forces.

Question 15.
What would come in the place of question mark: (MARCH-2016)
A) (a) Wealth of Nations : 1776
(b) The general theory : ____?____
B) (a) ___?____ : Economy as a whole
(b) Micro Economics : Individual units
Answer:
A) (b) 1936
B) (a) Macroeconomics

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 11 Marketing Management.

Kerala Plus Two Business Studies Notes Chapter 11 Marketing Management

Market

It refers to a place where the buyers and sellers meet each other for sale and purchase of the commodity.

Marketing

Marketing may be defined as all activities that are facilitating the movement of goods and services from producer to the ultimate consumer.

Features of Marketing

• Needs and Wants: Marketing focuses on satisfaction of the needs and wants of consumers.
• Creating a Market Offering: It refers to providing complete information about the product and services like name, type, price, size, etc.
• Customer Value: A buyer analyses the cost and the satisfaction that a product provides before buying it. The seller should manufacture the product keeping in view this tendency of the customer.
• Exchange Mechanism: The process of marketing involves exchange of products and services. Exchange is the essence of marketing.

Marketer

Any person, who takes more active role in the exchange process is called marketer.

Marketing Management

It refers to planning, organising, directing and controlling of the activities which facilitate exchange of goods and services between producers and consumers.

Differences between Marketing and Selling

Marketing:

1. Marketing is a wider term consisting of number of activities.
2. It is concerned with product planning and development.
3. It focuses on maximum satisfaction of the customer.
4. It aims at profits through consumer satisfaction.
5. Marketing begins before actual production.
6. It is customer oriented. Customer is important.
7. The principle of “let the seller beware” is followed.

Selling:

1. It is a narrow concept.
2. It is concerned with sale of goods already produced.
3. It focuses on the maximum satisfaction of the sellers through the exchange of products.
4. It aims at maximum profit through maximisation of sales.
5. Selling takes place after the production.
6. It is product oriented. Product is more important.
7. The principle of “let the buyer” beware is followed.

Marketing Concepts

1) The Production Concept: This concept believed that profits could be maximised by producing at large scale, thereby reducing the cost of production. Here greater emphasis was given on improving the production and distribution.
2) The Product Concept: According to this concept quality of the product is more important than quantity. Product improvement became the key to profit maximisation of a firm, under the concept of product orientation.
3) The Selling Concept: This concept focuses on the sale of products through aggressive selling and promotional techniques to persuade the buyers to buy the products,
4) The Marketing Concept: Marketing concept implies that focus on satisfaction of customer’s needs is the key to the success of any organisation in the market. Customer’s satisfaction becomes the focal point of all decision making in the organisation.
5) The Societal Marketing Concept: This concept stresses not only the customer satisfaction but also gives importance to the welfare of the society.

Functions of Marketing

1) Marketing Research: Marketing Research is a process of collecting and analysing market information to identify the needs and wants of the customers.
2) Marketing Planning: Another function of marketing is to develop appropriate marketing plans so that the marketing objectives of the organisation can be achieved.
3) Product Designing and Development: The products are designed and developed according to the needs and wants of the consumers. It requires decision making on various aspects such as the product to be manufactured, its packing, selling price, quality of the product, etc.
4) Standardisation and Grading: Standardisation refers to producing goods of predetermined specifications. Grading is the process of classification of products info different groups, on the basis of quality, size, etc.
5) Packaging and Labelling: Packaging refers to designing and developing the package forthe products. Packaging gives protection to goods. Also it attracts the consumers to buy the product. Labelling refers to designing and developing the label to be put on the package.
6) Branding: A brand is a name, term, sign, symbol, design or some combination of them, used to identify the products of one seller and to differentiate them from those of the competitors.
7) Customer Support Services: An important function of the marketing management is to develop customer support services such as after sales services, handling customer complaints, etc. which provides maximum satisfaction to the customers.
8) Pricing: Price of a product refers to the amount of money which customers have to pay to obtain a product. Price is an important factor affecting the success or failure of a product in the market. Price is fixed after taking into account the cost of production, desired profit, competitor’s price, govt, policy, etc.
9) Promotion: Promotion of products and services involves informing the customers about the firm’s product, its features, etc. and persuading them to purchase these products. It includes Advertising, Personal Selling, Publicity and Sales Promotion.
10) Physical Distribution: It includes decision regarding channels of distribution and physical movement of the product from the production centre to the consumption centre.
11) Transportation: Transportation involves physical movement of goods from one place to another. It removes the hindrance of place and creates time utility.
12) Storage or Warehousing: In order to maintain smooth flow of products in the market, there is a need for proper storage of the products. It stabilizes the prices of products and keep the product without damage until they are sold.

Role/Objectives of Marketing

1) Role in a Firm: Modern marketing emphasises that customer satisfaction is the key to the survival and growth of an organization. A satisfied customer is the most valuable asset of any firm. So product must be designed according to the needs and wants of the consumers, ensure fair distribution and determine an appropriate pricing strategy.

2) Role in the Economy: Marketing plays a significant role in the economic development of a nation. Marketing helps to increase the standard of living of the people by providing quality goods at reasonable prices. Marketing accelerates the economic activity leading to higher incomes, more consumption and increased savings and investment.

Marketing Mix

It refers to the combination of four basic marketing tools (Product, Price, Place and Promotion) that a firm uses to pursue its marketing objectives in a target market.

Elements/4 P’s of Marketing Mix

1) Product: Product means goods or services or ‘anything of value’, which is offered to the market for sale. The important product decisions include deciding about the features, quality, packaging, labelling and branding of the products.

2) Price: Price is the amount of money paid by the customers to pay to obtain the product. In most of the products, price affects the demand of the products. Desired profits, cost of production, competition, demands, etc. must be considered before fixing the price of a product.

3) Place: Place or Physical Distribution includes activities that make firm’s products available to the target customers. Important decision areas in this respect include selection of dealers, storage, warehousing and transportation of goods from the place of production to the place of consumption.

4) Promotion: Promotion includes activities that communicate availability, features, merits, etc. of the products to the target customers and persuade them to buy it. It includes advertising, personal selling, sales promotion and publicity to promote the sale of products.

Product

Product may be defined as anything that can be offered to a market to satisfy a want or need. Products may broadly be classified into two categories.

1. Consumers products
2. Industrial products

Consumers’ products

Products, which are purchased by the ultimate consumers for satisfying their personal needs and wants are referred to as consumer products.
Consumer products are classified as
a) Shopping efforts involved
b) Durability of products

a) Shopping Efforts Involved: On the basis of the time and effort, buyers are willing to spend in the purchase of a product, we can classify the consumer product into three.
1) Convenience Products: Those consumer products, which are purchased frequently, immediately and with least time and efforts are referred to as convenience goods, e.g. ice creams, medicines, newspaper, stationery items, toothpaste, etc.

2) Shopping Products: Shopping products are those consumer goods, which buyers devote considerable time, to compare the quality, price, style, suitability, etc., at several stores, before making final purchase, e.g. clothes, shoes, jewellery, furniture, etc.

3) Speciality Products: Speciality products are those consumer goods which have certain special features because of which people make special efforts in their purchase. The buyers are willing to spend a lot of time and efforts on the purchase of such products. The demand for these goods is inelastic.

b) Durability of Products: On the basis of their durability, the consumer products have been classified into three. They are:

1) Durable Products: Durable goods are used for a long period. Such goods generally require more personal selling efforts, have high profit margin, and require aftersales service.
e g. refrigerator, car, washing machine, etc.

2) Non-durable Products: The consumer products which are normally consumed in one or few uses are called non-durable products, e.g. toothpaste, detergents, bathing soap and stationery products, etc.

3) Services: Services are essentially intangible activities which provide want or need satisfaction, e.g. Medical treatment, postal, banking and | insurance services, etc.

Industrial Products

Industrial products are those products, which are used as inputs in producing other products. The examples of such products are raw materials, engines, lubricants, machines, tools, etc.

Types of industrial products:

1. Materials and Parts: These include goods that enter the manufacture’s products completely.
2. Capital Items: These goods are used in the production of finished goods.
3. Supplies and Business Services: These are short lasting goods and services that facilitate developing or managing the finished product.

Branding

The process of giving a name or a sign or a symbol, etc. to a product is called branding. Terms related with branding

• Brand: A brand is a name, term, sign, symbol, design or some combination of them, used to identify the products of one seller or group of sellers and to differentiate them from those of the competitors.
• Brand Name: That part of a brand, which can be vocalized i.e., can be spoken is called a brand name, e.g. Asian Paints, Maggie, Lifebuoy, Dunlop, etc.
• Brand Mark: A brand mark is that part of a brand which can be recognized but cannot be vocalized, i.e., non-utterable. It appears in the form of a symbol, design or distinct colour scheme. For example:‘Girl’of Amul.
• Trade Mark: A brand or part of a brand that is given legal protection against its use by other firms is called trade mark. The firm which got its brand registered with the government, gets the exclusive right for its use.-/*

Advantages of Branding

Advantages to the Firm:

• Branding helps a firm in distinguishing its product from that of its competitors.
• It helps in advertising and display Programmes.
• Branding enables a firm to charge competitive price for its products than that charged by its competitors.
• It helps in Introduction of new product in the market.

Advantages to Customers:

• Branding helps the customers in identifying the products.
• Branding ensures a particular level of quality of the product.
• Some brands become status symbols because of their quality. It creates a feeling of proud and satisfaction in the consumers.

Qualities of a Good Brand Name

• The brand name should be short, easy to pronounce, spell, recognise and remember.
• A brand should suggest the product’s benefits and qualities.
• A brand name should be distinctive.
• Brand name should be adaptable to packing or labelling requirements, to different advertising media and to different languages.
• The brand name should be sufficiently versatile to accommodate new products.
• It should be capable of being registered and protected legally.

Packaging

Packaging refers to the act of designing and producing the container or wrapper of a product. Packaging plays a very important role in the marketing success or failure of products.

Levels of Packaging:

• Primary Package: It refers to the product’s immediate container, e.g. toothpaste tube, match box, etc.
• Secondary, Packaging: It refers to additional layers of protection that are kept till the product is ready for use.
• Transportation Packaging: It refers to further packaging components necessary for storage, identification or transportation.

Functions of Packaging:

• Packaging helps in identification of the products.
• Packaging protects the product from spoilage, breakage, leakage, etc.
• It facilitates easy transfer of goods to customers.
• Packaging provides convenience in the storage of the product.
• It attracts the consumers to purchase the product.

Labelling

Labelling means putting identification marks on the package. It is a simple tag attached to the product.

Functions of Labelling:

• It describes the product, its usage, cautions in use, etc. and specify its contents.
• It helps in identifying the product.
• It helps grading the products into different categories.
• It helps in promotion of products.
• It provides information required by law.

Pricing

Price may be defined as the amount of money paid by a buyer in consideration of the purchase of a product or a service.

Factors Affecting Price Determination:
1) Product Cost: One of the most important factors affecting price of a product or service is its cost of production and distribution. Fixed Costs, Variable Costs and Semi- Variable Costs are to be considered for determining the price.

2) Demand: The price of a product is affected by the elasticity of demand of the product. If the demand of a product is inelastic, the firm is in a better position to fix higher prices.

3) Competition: Competitors’ prices and their anticipated reactions must be considered before fixing the price of a product. In case of high competition, it is desirable to keep price low.

4) Government and Legal Regulations: In order to protect the interest of public against unfair practices, prices of some essential products are regulated by the government under the Essential Commodities Act., e.g. Medicines.

5) Pricing Objectives: Another important factor affecting the fixation of price of a product is pricing objectives, e.g. maximisation of profit, market share, etc.

Place (Physical Distribution)

The third element of marketing mix is physical distribution of products and services. In order to ensure availability of products at the right place, two factors require consideration.

1. Channels of distribution
2. Physical distribution

Channels of Distribution

A channel of distribution refers to the pathway used by the manufacturer for transfer of the ownership of goods and its physical transfer to the consumers.

Types of Channels:

1. Direct channel (Zero level): Producer → Consumer
2. One level channel: Producer → Retailer → Consumer
3. Two level channel: Producer → Wholesaler → Retailer → Consumer
4. Three level channel: Producer → Agent → Wholesaler → Retailer → Consumer

Physical Distribution

Physical distribution covers all the activities required to physically move goods from manufacturers to the customers.

Components of Physical Distribution

• Order Processing
• Transportation
• Warehousing
• Inventory Control

Promotion Mix

Promotion mix refers to combination of promotional tools such as Advertising, Personal Selling, Sales Promotion, and Publicity used by an organisation to achieve its communication objectives.

Advertising

Advertising may be defined as “any paid form of non-personal presentation and promotion of ideas, goods or service of an identified sponsor”.

Merits of Advertising:
1. Advantages to Manufacturers and Traders

• Advertising helps in introducing new products.
• It stimulates the consumers to purchase the new products.
• Advertisement helps to increase the sales of new and existing products.
• It helps to increase the goodwill of the firm.
• It helps to face the competition in the market.
• It increases profit of the firm through large sales.

2. Advantages to Consumers:

• It helps the consumers to know about the various products and their prices.
• Consumers can purchase the better products easily.
• It helps in maintaining high standard of living.
• It educates the consumers about the various uses of products.

3. Advantages to the Society:

• Advertisement helps to create more employment opportunities.
• It provides an important source of income to the press, radio, T.V., etc.
• It is a source of encouragement to artists.
• It plays an important role in economic development of the country.
• It reduces number of middlemen and consumers get quality products at lower cost.

Disadvantages/Objections to Advertising

• Advertisement encourages consumers to buy unwanted goods.
• Most of the advertisements are misleading.
• Advertisement may lead to monopoly of a brand.
• Advertisement is a costly affair. So, ultimately it increases the price of the product.
• Advertisement persuades people to purchase even the inferior products.
• It undermines social and ethical values.

Personal Selling

Personal selling involves face to face contact between the seller and prospective customer with an intension of selling some products. It is a personal form of communication.

Features of Personal Selling:

• It is a direct presentation of the product to the consumers.
• Develop personal relationships with the prospective customers.
• The sales presentation can be adjusted according to the specific needs of the individual customers.
• It is possible to take a direct feedback from the customer.

Role of Personal Selling:

1) Importance to Businessmen:

• It helps in influencing the prospects about the merits of a product and thereby increasing its sale.
• Personal selling helps to develop lasting relationship between the sales persons and the customers.
• Personal selling plays very important role in the introduction stage of a new product.
• Personal selling increases the competitive strength of a business organisation.

2) Importance to Customers:

• Personal selling helps the customers in identifying their needs and wants.
• Customers get latest market information.
• Customers get expert advice and guidance in purchasing various goods and services.
• Personal selling induces customers to purchase new products.

3) Importance to Society:

• Personal selling offers greater employment opportunities.
• Personal selling provides attractive career with greater opportunities.
• Personal selling increases product standardisation and uniformity in consumption pattern.

Sales Promotion

It refers to those marketing activities other than personal selling, advertising and publicity that stimulate short term sales. Sales promotion activities include offering cash discounts, sales contests, free gift offers, and free sample distribution, etc.

Merits of Sales Promotion:

• Sales promotion activities attract attention of the people.
• Sales promotion tools can be very effective at the time of introduction of a new product in the market.
• Sales promotion helps to increase sales.
• It creates new customers and retains existing customers.
• Consumers can purchase quality products at low cost.

Limitations of Sales Promotion:

• If a firm frequently relys on sales promotion, it creates doubts in the minds of consumers about the quality of the product.
• Use of sales promotion tools may affect the image of a product.
• It is a short term incentive.

Techniques of Sales Promotion:

• Rebate : Offering products at special prices, to clear off excess inventory.
• Discount: Offering products at less than maximum retail price.
• Refund: The seller offers to refund a part of the price paid by the customer on production of some proof of purchase.
• Free gifts: Offering another product as gift along with the purchase of a product.
• Quantity Gift: Offering extra quantity of the product.
• Contests: Prize contests are organized for the consumers and winners are given attractive prizes.
• Money refund: There are certain manufacturers who promise to refund the price of the product, if it does not satisfy the consumer.
• Samples: Offer of free samples of a product to customers at the time of introduction of a new product.

Publicity

Publicity is a non-paid form of non personal communication. The tools of publicity are press conference, publication and news in the electronic media, etc. It is published or broadcasted without charging any money from the firm.

Features of Publicity:

1. Publicity is an unpaid form of communication.
2. There is no identified sponsor for the communication

Difference between Personal Selling and Advertising

Advertising:

• It is an impersonal form of communication.
• It is inflexible.
• Same message is sent to all the customers in a market segment.
• Advertising lacks direct feedback.
• The cost per person is very low.

Personal Selling:

• It is a personal form of communication.
• It is highly flexible.
• The sales talk is adjusted according to the customer’s background and needs.
• Personal selling provides direct and immediate feedback.
• The cost per person is very high.

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 10 Financial Markets.

Kerala Plus Two Business Studies Notes Chapter 10 Financial Markets

Financial Market is a market for creation and exchange of financial assets such as Shares, Debentures, Treasury Bills, Commercial Paper, etc. It helps in mobilisation and channelising the savings into most productive uses.

A financial market also helps in price discovery and provides liquidity to financial assets.

Functions of Financial Market

• Mobilisation of Savings: Financial markets mobilise savings of investors and channelise it into the most productive use.
• Facilitating Price Discovery: Financial Market helps in the determination of prices of the financial assets.
• Providing Liquidity: Financial market facilitates easy purchase and sale of financial assets. Thus, it provides liquidity.
• Reducing the Cost of Transactions: Financial market provides valuable information about securities which helps in saving time, efforts and money and thus it reduces cost of transactions.

Money Market

The money market is a market for short-term funds, which deals in financial assets whose period of maturity is up to one year. It enables in raising short term fund for meeting day-to-day requirements. The major participants in the money market are the Reserve Bank of India, Commercial Banks, Non-Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.

Money Market Instruments

1) Treasury Bill: They are issued by the RBI on behalf of the Central Government to meet its short¬term requirement of funds. They are issued at a discount on the face value of the instruments and repayable at par. They are issued in the form of promissory notes. They are also known as Zero Coupon Bonds as no interest is paid on such bills. They are highly liquid. The maturity period of these bills may be between 14 to 364 days.

2) Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a maturity period of 15 days to one year. It is sold at a discount and redeemed at par.

3) Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions.

4) Certificate of Deposit: Certificates of Deposit (CDs) are short-term instruments issued by Commercial Banks and Special Financial Institutions (SFIs), which are freely transferable from one party to another. The maturity period of CDs ranges from 91 days to one year.

5) Commercial Bill: A commercial bill is a Bill of Exchange used to finance the working capital requirements of business firms. When goods are sold in credit, the seller draws the bill and the buyer accepts it. The seller can discount the bill before its maturity with the bank. When a trade bill is accepted by a commercial bank it is known as commercial bills.

Capital Market

It is a market for long term funds where debt and equity are traded. It consists of development banks, commercial banks and stock exchanges. The capital market can be divided into:

1. Primary Market.
2. Secondary Market

Primary Market

The primary market is also known as the new issues market. It deals with new securities being issued for the first time. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, etc. of existing enterprises. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals.

Methods of flotation

There are various methods of floating new issues in the primary market. They are:
1. Offer through Prospectus: Prospectus is an invitation to the public for the subscription of shares and debentures of a company. The issues may be underwritten and also are required to be listed on at least one stock exchange.

2. Offer for Sale: Under this method new securities are not offered directly to the public. Initially the entire lots of securities are sold to an intermediary at a fixed price. The intermediary sells these securities to the public at a higher price.

3. Private Placement: Private placement is the allotment of securities by a company to institutional investors or some selected individuals. It is less expensive and saves time.

4. Rights Issue: According to the Companies Act, if a public company wants to issue additional shares, it must first be offered to the existing shareholders, in proportion to the amount paid up on their shares. This right is known as ‘Pre-emptive right’ and such an issue is called right issue.

5. Electronic Initial Public Offer (e-IPOs): It is a method of issuing securities through on-line system of stock exchange. Such a company has to enter into an agreement with the stock exchange. This is called an e-initial public offer.

Difference between capital market and money market

Capital Market:

1. Market deals only long term fund.
2. It arranges large amount of fund.
3. Return is high.
4. The instruments used are equity shares, preference shares, debentures and bonds.
5. SEBI is the market regulator.
6. Capital market instruments are highly risky.

Money Market:

1. Market deals only short term fund.
2. It arranges small amount of fund.
3. Return is law.
4. The instruments used are call money, treasury bills, trade bills, commercial paper and certificate of deposit.
5. RBI is the market regulator.
6. Money market instruments are safe.

Differences between Primary Market and Secondary Market

Primary Market:

1. It deals with new securities
2. It promotes capital formation directly.
3. Investors can only buy. securities.
4. Prices of the securi¬ties are determined by the management of the company.
5. Companies sell securities directly

Secondary Market:

1. It deals with exisitng securities
2. It promotes capital formation indirectly.
3. Investors can buy and sell the securities.
4. Prices are determined by the demand and supply of securities.
5. Securities are exchanged between investors

Secondary market

The secondary market is also known as the stock market or Stock exchange. It is a market for the purchase and sale of existing securities. It also provides liquidity and marketability to existing securities

Stock Exchange

According to Securities Contracts (Regulation) Act 1956, stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities.

Functions of a Stock Exchange:

• Providing Liquidity and Marketability to Existing Securities: Stock Exchange provides
  a ready and continuous market for the sale and purchase of securities.
• Pricing of Securities: A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. It is based on the forces of demand and supply.
• Safety of Transaction: Stock exchange has its own well-defined rules and regulations. This ensures safety and fair dealings to investors.
• Contributes to Economic Growth: Stock exchange provides a platform by which savings are channelised into the most productive investment proposals, which leads to capital formation and economic growth.
• Providing Scope for Speculation: Stock exchange provides scope within the provisions of Law for speculation in a restricted and controlled manner.
• Economic barometer: A stock exchange serves as a barometer of a country’s economic condition. Price trends in stock exchange indicate whether economy is going through boom or depression.

Trading Procedure on a Stock Exchanges

• Selection of a broker.
• Opening Demat account with the Depository Participant (D.P.).
• Placing order for the purchase or sale of securities with the broker.
• Purchase or sale of securities through on-line.
• Delivery of the contract note to the investor.
• Effecting changes in the Demat account.
• Making payment or receiving of money.

Advantages of electronic trading system (Screen based on line trading)

On line trading means buying and selling of shares and debentures are done through a computer terminal.

• On line trading ensures transparency in dealing.
• It helps in fixing prices of securities efficiently.
• It increases efficiency of operations by reducing time, cost and risk of errors.
• People from all over the country can buy or sell securities through brokers.
• All trading centres have been brought into one trading platform.

Dematerialisation

It is a process by which physical share certificates are converted into an equivalent number of securities to be held in electronic form and credited in the investors’ account. For this, the investor has to open a Demat account with an organisation called a depository.

Working of the Demat System

• A depository participant (DP), either a bank, broker, or financial services company, may be identified.
• An account opening form and documentation (PAN card details, photograph, power of attorney) may be completed.
• The physical certificate is to be given to the DP along with a dematerialisation request form.
• If shares are applied in a public offer, details of DP and demat account are to be given to the depository registrar.
• If shares are to be sold through a broker, the DP is to be instructed to debit the account with the number of shares.
• The broker then gives instruction to his DP for delivery of the shares to the stock exchange.
• The broker then receives payment and pays the person for the shares sold.
• Alt these transactions are to be completed within 2 days, i.e., delivery of shares and payment received from the buyer is on a T + 2 basis, settlement period.

Depository

A depository is an organization where the securities of a shareholder are held in electronic form at the request of the shareholder. All transactions of the investors are settled with greater speed, efficiency and use as all securities are entered in a book entry mode.

Benefits of Depository Services and Demat Account

• Sale and Purchase of shares and stocks of any company make easy.
• Saves time.
• No paperwork.
• Lower transaction costs.
• Ease in trading.
• Transparency in transactions.
• No counterfeiting of security certificate.
• Physical presence of investor is not required in stock exchange.

National Stock Exchange of India (NSE)

NSE is the most modern stock exchange in India. It was incorporated in 1992 and was recognised as a stock exchange in April 1993. It commenced operations in 1994. NSE has set up a nationwide fully automated screen based trading system.

Objectives of NSE

• Establishing a nationwide trading facility for all types of securities.
• Ensuring equal access to investors all over the country.
• Providing a transparent securities market using electronic trading system.
• Enabling shorter settlement cycles and book entry settlements.
• Meeting international benchmarks and standards.

Over the Counter Exchange of India (OTCEI)

The OTCEI is a company incorporated under the Companies Act 1956. It was set-up to provide smalt and medium companies an access to the capital market. It is fully computerised, transparent, single window exchange which provides quicker liquidity to securities at a fixed and fair price, liquidity for less traded securities. It is commenced trading in 1992.

Objectives of OTCEI

• Provide a trading platform to smaller and less liquid companies.
• Provide online trading facilities to the investors.
• Ensure a transparent system of trading.
• Ensure liquidity to the listed securities.
• Help the investors to exchange the securities at minimum cost.

Bombay Stock Exchange (BSE)

BSE was established in 1875 and was Asia’s first Stock Exchange. In 1995 it introduces screen based trading called BOLT (BSE Online Trading).

Objectives of BSE

• To provide an efficient and transparent market for trading in securities.
• To provide a trading platform for equities of small and medium enterprises.
• To educate the investors and brokers
• To provide other services to capital market participants, like risk management, clearing, settlement, market data, etc.
• To conform to international standards.

Securities and Exchange Board of India (SEBI)

In order to protect the investors and to promote the development of stock market, the Govt, of India established the Securities and Exchange Board of India (SEBI) in 1988. In 1992 it becomes a statutory body under a special law of the Parliament. SEBI is the supervisory body for regulation and promotion of securities market in the country. Investor protection is the major responsibility of SEBI. It’s head office is at Mumbai.

Objectives of SEBI

• To regulate stock exchange and the securities market to promote their orderly functioning.
• To protect the rights and interests of investors and to guide and educate them.
• To prevent trade malpractices.
• To regulate and develop a code of conduct to intermediaries like brokers, merchant bankers etc.

Functions of SEBI

1. Regulatory Functions:

• Registration of brokers and sub brokers and other players in the market.
• Registration of Mutual Funds.
• Regulation of stock brokers, portfolio exchanges, underwriters, etc.
• Regulation of takeover bids by companies
• Calling for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries.
• Levying fee or other charges for carrying out the purposes of the Act.

2) Development Functions:

• Training of intermediaries of the securities market.
• Conducting research and publishing information useful to all market participants.
• Undertaking measures to develop the capital markets by adapting a flexible approach.

3) Protective Functions:

• Prohibition of fraudulent and unfair, trade practices.
• Controlling insider trading price rigging etc. and imposing penalties for such practices.
• Undertaking steps for investor protection.
• Promotion of fair practices and code of conduct in securities market.

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 9 Financial Management.

Kerala Plus Two Business Studies Notes Chapter 9 Financial Management

Business Finance

Money required for carrying out business activities is called business finance. Finance is needed to establish a business, to run it, to modernize it, to expand or diversify it.

Financial Management

Financial Management is concerned with optimal procurement as well as usage of finance. For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks. Financial Management aims at reducing the cost of funds procured and ensuring availability of enough funds whenever required.

Objectives of Financial Management

The primary aim of financial management is to maximise shareholder’s wealth. It means maximisation of the market value of equity shares. It is the responsibility of the company to pay reasonable dividend and also to maximize the value of its shares.

Finance Functions

The finance function is concerned with three broad decisions which are:

1. Finance Decision: It relates to the amount of finance to be raised from various long term sources. The main sources of funds for a firm are shareholders’ funds (equity capital and the retained earnings) and borrowed funds (debentures or other forms of debt). A firm needs to have a judicious mix of both debt and equity in making financing decisions.

2. Investment Decision: The investment decision relates to how the firm’s funds are invested in different assets. Investment decision can be long-term or short-term. A long-term investment decision is also called a Capital budgeting decision.

Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables.

3. Dividend Decision: Dividend is that portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business.

Financial Planning

The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. It ensures that enough funds are available at right time.
The twin objectives of financial planning are

1. To ensure availability of fund at the right time and its possible sources.
2. To see that firm does not raise fund unnecessarily.

Importance of Financial Planning

• It ensures adequate funds from various sources.
• It reduces the uncertainty about the availability of funds.
• It integrates the financial policies and procedures.
• It helps the management to eliminate waste of funds and reduce cost.
• It helps to achieve a balance between the inflow and outflow of funds and ensure liquidity.
• It serves as the basis of financial control
• It helps to reduce cost of financing to the minimum.
• It helps to ensure stability and profitability of business.
• It makes the firm better prepared to face the future.

Factors Affecting Capital Budgeting Decisions

1. Cash flows of the project: Cash flows are in the form of a series of cash receipts and payments over the life of an investment. The amount of these cash flows should be carefully analysed before considering a capital budgeting decision.
2. The rate of return: The expected returns and risk from each proposal should be taken into account to select the best proposal.
3. Investment criteria involved: The various investment proposals are evaluated on the basis of capital budgeting techniques.

Factors Affecting Financing Decision

• Cost: The cost of raising funds from different sources is different. The cheapest source should be selected.
• Risk: The risk associated with each of the sources is different.
• Floatation costs: Higher the floatation cost, less attractive the source.
• Cash flow position of the business: In case the cash flow position of a company is good enough, then it can easily use borrowed funds.
• Fixed operating costs: If a business has high fixed operating costs, lower debt financing is better.
• Control considerations: Issues of more equity may lead to dilution of management’s control over the business.

Factors Affecting Dividend Decision

• Stability Earnings: A company having stable earnings can declare higher dividends. Otherwise, pay lower dividend.
• Stability of Dividends: Companies generally follow a policy of stabilising dividend per share. Dividend per share is not altered if the change in earnings is small.
• Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings to finance the required investment. In such a case, they can declare dividend at a lower rate.
• Cash Flow Positions: Availability of enough cash in the company is necessary for declaration of dividend.
• Shareholders’ Preference: While declaring dividends, managements must keep in mind the preferences of the shareholders in this regard.
• Taxation Policy: A company is required to pay tax on dividend declared by it. If tax on dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are lower, then more dividends can be declared by the company.
• Capital Market: Reputed companies have easy access to the capital market and, therefore, they can pay higher dividends than the smaller companies.
• Legal Constraints: The companies Act has laid down certain restrictions regarding payment of dividend. No dividend can be paid out of capital.

Capital Structure

Capital structure refers to the mix between owners funds and borrowed funds. Owners fund consists of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits, etc.

A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share.

Factors Affecting Capital Structure

• Trading on Equity (Financial Leverage): It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders.
• Stability of Earnings: If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Otherwise issue of equity shares is recommended.
• Cost of Debt: A firm’s ability to borrow at lower rate, increases its capacity to employ higher debt.
• Interest Coverage Ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt.
• Desire for control: If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights.
• Flexibility: Capital structure should be capable of being adjusted according to the needs of changing conditions.
• Capital Market Conditions: In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.
• Period of Finance: If funds are required for short period, borrowing from bank should be preferred. If funds are required for longer period company can issue shares and debentures.
• Taxation Policy: interest on loan and debentures is deductible item under the Income Tax Act whereas dividend is not deductible. In order to take advantage of this provision, companies may issue debentures.
• Legal Requirements: The structure of capital of a company is also influenced by the statutory requirements. For example, Banking Regulation Act, Indian CompaniesAct, SEBI, etc.

Fixed Capital

Fixed capital refers to the capital needed for the the acquisition of fixed assets to be used for a longer period.

Factors affecting Fixed Capital

• Nature of Business: A trading concern needs lower investment in fixed assets compared with a manufacturing organization.
• Scale of Operations: An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale.
• Choice of Technique: A capital-intensive organisation requires more amount of fixed capital than labour intensive organisations.
• Technology Upgradation: Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations.
• Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets.
• Diversification: The firms dealing in number of products (Diversification) requires more investment in fixed capital.
• Use of Fixed Assets: Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.

Working Capital

Working capital is that portion of capital required for investing in current assets for meeting day to day working of an organization. Current assets can be converted into cash within a period of one year. They provide liquidity to the business.

Working capital is of two types:

1. Gross working capital = Total of current asset
2. Net working capital = Current assets – Current Liabilities

Factors Affecting Working Capital

• Nature of Business: A trading organisation usually needs a smaller amount of working capital as compared to a manufacturing organisation.
• Scale of Operations: A large scale organisation requires large amount of working capital as compared to the organisations which operate on a lower scale.
• Business Cycle: In the boom period larger amount of working capital is needed to meet the demand. In case of depression, demand for goods declines so less working capital is required.
• Seasonal Factors: During peak season demand of a product will be high and thus high working capital will be required as compared to lean season.
• Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.
• Credit Policy: A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.
• Operating Efficiency: If cash, debtors and inventory are efficiently managed, working capital requirement can be reduced.
• Availability of Raw Materials: If the raw materials are easily available in the market and there is no shortage, huge amount need not be blocked in inventories, so it needs less working capital.

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 8 Controlling.

Kerala Plus Two Business Studies Notes Chapter 8 Controlling

Meaning

Controlling is the process of ensuring that actual performance conform to planned performance. It also ensures that an organisation’s resources are being used effectively for the achievement of predetermined goals. So controlling is a goal oriented function. The controlling functions measure actual performance against standards, find out the deviations, analyse the causes of such deviations and take corrective actions.

Importance of Controlling

1. Accomplishing organisational goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action.
2. Judging accuracy of standards: A good control system enables management to verify whether the standards set are accurate.
3. Making efficient use of resources: By exercising control, a manager seeks to reduce wastage of resources.
4. Improving employee motivation: A good control system motivates the employees and helps them to give better performance.
5. Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the organisation.
6. Facilitating co-ordination: An efficient system of control helps to co-ordinate all the activities in the organisation.

Limitations of Controlling

• Difficulty in setting quantitative standards: Control system loses some of its effectiveness when standards cannot be defined in quantitative terms.
• Little control on external factors: Generally an enterprise cannot control external factors such as government policies, technological changes, competition, etc.
• Resistance from employees: Control is often resisted by employees. They see it as a restriction on their freedom.
• Costly affair: Control is a costly affair as it involves a lot of expenditure, time and effort.

Relationship between Planning and Controlling

• Planning and control are interdependent and inseparable functions of management.
• Planning is a prerequisite for controlling.
• Planning initiates the process of management and controlling complete the process.
• Planning is prescriptive where as controlling is evaluative.
• Planning and controlling are both backward looking as well as forward looking functions.
• Planning based on facts makes controlling easier and effective.

Controlling Process

Controlling is a systematic process involving the following steps.

1. Setting performance standards
2. Measurement of actual performance
3. Comparison of actual performance with standards
4. Analysing deviations
5. Taking corrective action

1. Setting Performance Standards: Standards are the criteria against which actual performance would be measured. Standards can be set in both quantitative as well as qualitative terms.
2. Measurement of Actual Performance: After establishing standards, the next step is measurement of actual performance. Performance should be measured in an objective and reliable manner.
3. Comparing Actual Performance with Standards: This step involves comparison of actual performance with the standard. Such comparison will reveal the deviation between actual and desired results.
4. Analysing Deviations: The deviations from the standards are assessed and analysed to identify the causes of deviations.
5. Taking Corrective Action: The final step in the controlling process is taking corrective action. No corrective action is required when the deviations are within the acceptable limits.

Techniques of Managerial Control

1) Traditional Techniques:
i) Personal Observation: It creates a psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job.

ii) Statistical Reports: Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful information to the managers regarding performance of the organisation.

iii) Break Even Analysis: Break even analysis is a technique used by managers to study the relationship between costs, volume and profits. The sales volume at which there is no profit, no loss is known as break even point. It helps in estimating profits at different levels of activities.

B.E.P = \(\frac{F}{S-V}\)
F = Fixed cost
S = Selling price per unit
V = Variable cost per unit

iv) Budgetary Control: Budgetary control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards.

2) Modern Techniques:
i) Return on Investment: Return on Investment (ROI) can be used to measure overall performance of an organisation. It helps to know the invested capital has been used effectively for generating reasonable amount of return.
Return on investment = \(\frac{\text { Net Income }}{\text { Total Investment }}\)

ii) Ratio Analysis: Ratio Analysis refers to analysis of financial statements through computation of ratios.

iii) Responsibility Accounting: Responsibility accounting is a system of accounting in which different sections, divisions and departments of an organisation are set up as ‘Responsibility Centres’. The head of the centre is responsible for achieving the target set for his centre. E.g. Cost centre, Revenue centre, Profit centre, Investment centre, etc.

iv) Management Audit: Management audit may be defined as evaluation of the functioning, performance and effectiveness of management of an organisation.

v) PERT and CPM: PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are important network techniques useful in planning and controlling.

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 7 Directing.

Kerala Plus Two Business Studies Notes Chapter 7 Directing

Meaning

Directing refers to the process of instructing, guiding, counseling, motivating and leading people in the organisation to achieve its objectives.

Features

• Directing initiate action
• Directing takes place at every level of management
• Directing is a continuous process
• Directing flows from top to bottom

Importance of Directing

1. Directing helps to initiate action by people in the organisation towards attainment of desired objectives.
2. Directing integrates employees efforts in the organisation in such a way that every individual effort contributes to the organizational performance.
3. Directing guides employees to fully realise their potential and capabilities by motivating and providing effective leadership.
4. Directing facilitates introduction of needed changes in the organization.
5. Effective directing helps to bring stability and balance in the organization.

Principles of Directing

1. Maximum Individual Contribution: This principle emphasises that directing techniques must help every individual in the organization to contribute to his maximum potential for achievement of organisational objectives.
2. Harmony of Objectives: The objectives of individual and organization must be in harmony with each other.
3. Unity of Command: This principle insists that a person in the organisation should receive instructions from one superior only.
4. Appropriateness of Direction Technique: According to this principle, appropriate motivational and leadership techniques should be used while directing the people.
5. Managerial Communication: Effective managerial communication across all the levels in the organisation makes direction effective.
6. Use of informal organization: Managers must make use of informal structure in the formal organisation forgetting correct and real feedback.
7. Leadership: While directing the subordinates, managers should exercise good leadership.
8. Follow through: Managers must continuously review whether the instructions are being understood and followed by the employees or not.

Elements of Direction

1. Supervision
2. Motivation
3. Leadership
4. Communication

Supervision

Supervision means overseeing the subordinates at work. Supervision is instructing, guiding and controlling the workforce with a view to see that they are working according to plans, policies, programmes and instructions.

Importance of Supervision:

• A good supervisor acts as a guide, friend and philosopher to the workers.,
• Supervisor acts as a link between workers and management. It helps to avoid misunderstandings and conflicts among the management and workers.
• Supervisor provides good On the Job training to the workers and employees.
• A supervisor with good leadership qualities can build up high morale among workers.
• A good supervisor analyses the work performed and gives feedback to the workers.
• Supervisors help to maintains harmony among workers.

Motivation

Motivation is the process of stimulating people to action to accomplish desired goals. Motivation depends upon satisfying needs of people.

Features of Motivation:

• Motivation is an internal feeling.
• Motivation produces goal directed behaviour.
• Motivation can be either positive or negative.
• It is a complex and difficult process.

Importance of Motivation:

• Motivation helps to improve performance levels of employees as well as the organisation.
• Motivation helps to change negative attitudes of employee to positive attitudes.
• Motivation helps to reduce employee turnover.
• Motivation helps to reduce absenteeism in the organisation.
• Motivation helps managers to introduce changes smoothly.

Maslow’s Need Hierarchy Theory of Motivation

Abraham Maslow’s Need Hierarchy Theory is considered fundamental to understanding of motivation. His theory was based on human needs. Various human needs are:

1. Physiological Needs: These are the basic needs which include food, clothes, hunger, thirst, shelter, sleep and sex. If physiological needs are not satisfied, the higher level needs will not be emerged.
2. Safety/Security Needs: These needs provide security and protection from physical and emotional harm. These needs include job security, stability of income, pension plans, etc.
3. Social Needs: These needs refer to affection, sense of belongingness, acceptance and friendship. Informal organisation helps to satisfy the social needs of an individual.
4. Esteem Needs: These include factors such as self-respect, autonomy status, recognition and attention.
5. Self Actualisation Needs: It is the highest level of need in the hierarchy. Self actualisation is the need to maximise one’s potential, whatever it may be. These needs include growth, self-fulfilment and achievement of goals.

Financial and Non-Financial Incentives

Incentive means all measures which are used to motivate people to improve performance. These incentives may be

1. Financial Incentives: Financial incentives refer to incentives which are in direct monetary form or measurable in monetary term and serve to motivate people for better performance. Financial incentives are:

• Pay and allowances: It includes basic pay, dearness allowances and other allowances.
• Commission: Under this system, a sales person is guaranteed a minimum wage as well as commission on sales. A commission plan motivates him to work better.
• Bonus: Bonus is an incentive offered over and above the wages/salary to the employees.
• Profit Sharing: Profit sharing is meant to provide a share to employees in the profits of the organisation.
• Co-partnership/ Stock option: Under these incentive schemes, employees are offered company shares at a price which is lower than market price.
• Retirement Benefits: Several retirement benefits such as provident fund, pension, and gratuity provide financial security to employees after their retirement.
• Perquisites: It includes car allowance, housing, medical aid, and education to the children, etc., over and above the salary.

2. Non-Financial Incentives : Incentives which are not measurable in Terms of money are called Non-Financial Incentives. These incentives are essential for satisfying physiological, social and emotional needs. Some of the important non-financial incentives are:

• Status: status means ranking of positions in the organisation. Physiological, social and esteem needs of an individual are satisfied by status given to their job.
• Organisational Climate: It includes individual autonomy, reward orientation, consideration to employees, etc. These characteristics influence the behaviour of individuals in the organization.
• Career Advancement Opportunity: Managers should provide opportunity to employees to improve their skills and be promoted to the higher level jobs.
• Job Enrichment: It is a method of motivating employee by making the task to be performed by him more interesting and challenging.
• Employee Recognition Programmes: It includes Congratulating the employee for good performance, Displaying on the notice board about the achievement of employee, installing award or certificate for best performance and Distributing mementos or complimentaries etc.
• Employee Participation: It means involving employees in decision making of the issues related to them.

Leadership

Leadership can be defined as the process of influencing the behaviour of employees at work towards the accomplishment of organisational objectives.

Features of Leadership:

• Leadership indicates ability of an individual to influence others.
• Leadership tries to bring change in the behaviour of others.
• Leadership indicates interpersonal relations between leaders and followers.
• Leadership is exercised to achieve common goals of the organization.
• Leadership is a continuous process.

Importance of Leadership:

• A leader inspires, supports and influences the behaviour of subordinates to achieve the organisational objective.
• Effective leadership helps to achieve a harmonious relation between the management and subordinates.
• Leadership helps to create job satisfaction among employees by providing good working condition.
• A good leader persuades the people to accept t and carry out the desired change.
• A leader handles conflicts effectively.
• Leader provides training to their subordinates.
• Effective leadership helps to increase efficiency and productivity.

Qualities of Good Leader:

• Physical Features: Physical features like height, weight, health, appearance determine the physical personality of a leader.
• Knowledge: A good leader should have required knowledge and competence.
• Honesty: A leader should possess high level of honesty.
• Initiative: A leader should have courage and initiative.
• Communication Skills: A leader should have the capacity to clearly explain the ideas.
• Motivation Skills: The leader should have the ability to motivate the subordinates by satisfying their needs.
• Self Confidence: A leader should have high level of self confidence.

Leadership Style:

1. Autocratic or Authoritarian Leader: An autocratic leader gives orders and expects his subordinates to obey those orders. Here communication is only one-way with the subordinate.
2. Democratic or Participative Leader: A democratic leader encourages subordinates to participate in decision-making. They respect the other’s opinion and support subordinates to perform their duties.
3. Laissez Faire or Free-rein Leader: Here the followers are given a high degree of independence to formulate their own objectives and ways to achieve them.

Communication

Communication may be defined as an exchange of facts, ideas, opinions or emotions between two or more persons to create mutual understanding.

Elements of Communication Process:

• Sender: The sender is the person who sends message or idea to the receiver.
• Message: Message is the subject matter of communication.
• Encoding: It is converting the message into communication symbols such as words, pictures, etc.
• Media: It is the path through which encoded message is transmitted to receiver.
• Decoding: It is the process of converting encoded symbols of the sender.
• Receiver: Receiver is the person who receives the message.
• Feedback: It includes all those actions of receiver indicating that he has received and understood message of sender.
• Noise: Noise means some obstruction or hindrance to communication.

Importance of Communication:

• Acts as basis of co-ordination: Communication acts as the basis of co-ordination.
• Helps in smooth working of an enterprise: it is only communication, which makes smooth working of an enterprise possible.
• Acts as basis of decision making: Comm Plication provides needed information for decision making.
• Increases managerial efficiency: Communication lubricates the entire organisation and keeps the organisation at work with efficiency.
• Promotes co-operation and industrial peace: Communication promotes co-operation and mutual understanding between the management and workers.
• Establishes effective leadership: Communication is the basis of leadership. Effective communication helps to influence subordinates.
• Boosts morale and provides motivation: An efficient system of communication enables management to motivate, influence and satisfy the subordinates. It helps to boost morale of employees and managers.

Formal Communication

Communication through the official chain of command is called formal communication. It flows through the scalar chain of authority. Formal communication may be of two types:

1. Vertical Communication
2. Horizontal Communication

1. Vertical Communication: Vertical communication flows vertically i.e., upwards or downwards through formal communication channels.

• Downward Communication : Downward communication refers to flow of communication from a superior to subordinate. E.g. Notices, circulars, memos, reports, etc.
• Upward Communication: It refers to flow of communication from a subordinate to superior. E.g. application for leave, submission of progress report, suggestions, complaints, etc.

2. Horizontal or Lateral communication: The flow of communication between persons holding position at the same level of the organisation is known as horizontal communication.

Communication Network

The pattern through which communication flows within the organisation is generally indicated through communication network. Some of the communication networks are:

1) Single Chain: This network exists between a supervisor and his subordinates. Here communication flows from every superior to his subordinate through single chain.

2) Wheel: In wheel network, all subordinates under one superior communicate through him only. The subordinates are not allowed to communicate among themselves.

3) Circular: In circular network, the communication moves in a circle. Each person can communicate with his adjoining two persons.

4) Free flow: In this network, each person can communicate with others freely.

5) Inverted V: In this network, a subordinate is allowed to communicate with his immediate superior as well as his superior’s superior.

Advantages of Formal Communication:

• It is systematic and ensures orderly flow of information.
• It facilitates the location of the source of information.
• It provides authority relationship between the superior and subordinate.
• It helps in fixing responsibilities.
• It facilitates control

Disadvantages of Formal Communication:

• It is time consuming as it passes through scalar chain only.
• It is impersonal; based on authority.
• Accurate and full information may not be transmitted.
• It obstructs free and uninterrupted flow of information.

Informal Communication

Communication that takes place without following the formal lines of communication is said to be informal communication. It results from the social interaction among the members. It satisfies the social needs of members in the organisation. The network of informal communication is known as Grapevine. It is so called because the origin and direction of flow of communication cannot be easily traced out.

Types of Informal Communication/Grapevine Network:

1. Single Strand Network: In single strand network, each person communicates to the other in sequence.
2. Gossip Network: In gossip network, each person communicates with all on non-selective basis.
3. Probability Network: In probability network, the individual communicates randomly with other individual.
4. Cluster Network: In cluster, the individual communicates with only those people whom he trusts.

Advantages of Informal Communication:

• Employees can develop friendly relationship.
• It is very flexible and faster than formal communication.
• Employees attitudes, reactions, etc. to the plans and policies can be easily ascertained.
• It reduces tension in employer-employee relations.
• It can be used in conveying certain information which cannot be passed through official channel.
• Special efforts and expenses are not necessary for informal communication.

Disadvantages of Informal Communication:

• It tends to carry inaccurate information.
• Its origin cannot be traced and responsibility cannot be fixed.
• It is unsystematic and cannot be relied upon.
• It leads to leakage of confidential information.
• It often carries rumours and misunderstandings.

Barriers to Communication

1) Semantic barriers: Semantic barriers are concerned with problems and obstructions in the process of encoding and decoding of message into words or impressions. Semantic barriers are:

• Badly expressed message: The badly expressed messages may be an account of inadequate vocabulary, usage of wrong words, omission of needed words, etc.
• Symbols with different meanings: People may interpret the same message differently depending upon their attitude, education, social and cultural backgrounds.
• Faulty Translations: If the translator is not proficient with both the languages, mistakes may arise causing different meanings to the communication.
• Technical jargon: Technical words may not be understood by the workers.

2) Psychological Barriers: Emotional or psychological factors act as barriers to communicators. Psychological barriers are:

• Premature evaluation: People evaluate the meaning of message before the sender completes his message.
• Lack of attention: The preoccupied mind of receiver and the resultant non-listening of message acts as a major psychological barrier.
• Loss by transmission and poor retention: When communication passes through various levels, there is a chance of distortion of the message.
• Distrust: Distrust between communicator and communicatee acts as a barrier.

3) Organisational Barriers: Organisation’s policies, Number of levels of management, rigid rules, etc., are the examples of organisational barriers.

• Organisational policy: If the organisational policy is complex, it restricts the free flow of communication.
• Rules and regulations: Rigid Rules and regulations may be a hurdle to communication
• Status: Status differences of people in communication chain also adversely affect the effectiveness of communication.
• Complex organisational structure: If there are number of managerial levels, communication gets delayed and distorted.

4) Personal barriers: It includes fear of challenge to authority, lack of confidence, lack of incentives, etc.

• Fear of challenge to authority: If a superior perceives that a particular communication may affect his authority, then he withholds such communication.
• Lack of confidence: If superiors do not have confidence on the competency of subordinates they may not seek their advice.
• Lack of incentives: If there is no motivation or incentive for communication, subordinates may not take initiative to communicate.

Measures to overcome barriers to communication

• The entire problem to be communicated should be studied in depth, analysed and stated in such a manner that it is clearly conveyed to subordinates.
• Communication must be according to the education and understanding levels of subordinates.
• Before communicating the message, it is better to consult with others.
• The contents of the message, tone, language used, etc. are important aspects of effective communication.
• While conveying message to others, it is better to know the interests and needs of the receiver.
• Ensure proper feedback.
• Manager should be a good listener.

Differences Between Formal and Informal Communication

Formal Communication	Informal Communication
1.Communication through the official chain of command	1. Communication through the informal communication network.
2. It is rigid	2. It is flexible
3. The messages can be kept as records for future reference.	3. No messages can be kept as records
4. The responsibility of the sender can be fixed	4. The responsibility of the sender cann’t be fixed

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 6 Staffing.

Kerala Plus Two Business Studies Notes Chapter 6 Staffing

Meaning

Staffing is concerned with determining the manpower requirement of enterprise and includes functions like recruitment, selection, placement, promotion, training, growth and development and performance appraisal of employees in the organization.

Importance of Staffing

• Helps in discovering and obtaining competent personnel for various jobs.
• Makes for higher performance, by putting right person on the right job.
• Ensures continuous survival and growth of the enterprise.
• Helps to ensure optimum utilization of the human resources.
• Improves job satisfaction and morale of employees.

Staffing as a part of Human Resources Management (HRM)

Staffing is an inherent part of human resource management. It is a function which all managers need to perform. Human resource management involves planning, procurement and development of human resources.

Functions of Human Resource Management:

• Recruitment, i.e., search for qualified people.
• Analysing jobs, collecting information about jobs to prepare job descriptions.
• Developing compensation and incentive plans.
• Training and development of employees.
• Maintaining labour relations
• Handling grievances and complaints.
• Providing for social security and welfare of employees.
• Maintaining relation with trade unions.

Staffing Process

1) Manpower planning: It is concerned with forecasting the future manpower needs of the organisation, i.e. finding out number and type of employees need by the organisation in future.
2) Recruitment: Recruitment may be defined as the process of searching for prospective employees and stimulating them to apply for jobs in the organisation.
3) Selection: Selection is the process of selecting the most suitable candidates from a large number of applicants.
4) Placement and Orientation: Placement refers to putting the right person on the right job. Orientation is introducing the selected employee to other employees and familiarising him with the rules and policies of the organisation.
5) Training and Development: The process of training helps to improve the job knowledge and skill of the employees. It motivates the employees and improve their efficiency.
6) Performance Appraisal: Performance appraisal means evaluating an employee’s current and past performance as against certain predetermined standards.
7) Promotion and Career Planning: Promotion means movement of an employee from his present job to a higher level job.
8) Compensation: Compensation refers to all forms of pay or rewards going to employees. It may be in the form of direct financial payments like wages, salaries, commissions and indirect payments like employer paid insurance and vacation.

Sources of Recruitment

There are two sources of recruitment.

1. Internal sources
2. External sources

Internal Sources

It refers to the recruitment for jobs from within the organisation.
It includes:
1) Transfer: It involves shifting of an employee from one job to another without change in responsibility or compensation.
2) Promotion: It refers to shifting of a person from lower position to a higher position carrying higher status, responsibility and more salary.

Merits of Internal Sources:

• It motivate the employees for better performance.
• The existing employees get an opportunity for promotion.
• It establishes better employer-employee relationship.
• It creates a sense of security and loyalty among employees.
• Internal recruitment is less time – consuming.

Limitations of Internal Sources:

• It encourages favouritism and nepotism
• There is no opportunity for efficient outsiders.
• There will be absence of competition.
• It may give rise to conflict in the organisation among employees.
• Frequent transfers of employees may often reduce the productivity of the organisation

External Sources

Selection of employees from outside the enterprise is known as external recruitment. The important external sources of recruitment are:
1) Direct Recruitment: Under the direct recruitment, a notice is placed on the notice-board of the enterprise specifying the details of the jobs available. Jobseekers assemble outside the premises of the organisation on the specified date and selection is done on the spot. It is suitable for filling casual vacancies.
2) Casual callers: Many reputed business organisations keep a database of unsolicited applicants in their office. This list can be used for recruitment.
3) Advertisement: Advertisement in newspapers or trade and professional journals is generally used when a wider choice is required.
4) Employment Exchange: Employment exchanges keep records of job seekers and will be supplied to business concern on the basis of their requisition.
5) Placement Agencies and Management Consultants: These agencies compile bio-data of a large number of candidates and recommend suitable names to their clients.
6) Campus Recruitment: Business enterprises may conduct campus recruitment in educational institutions for selecting young and talented candidates.
7) Recommendations of Employees: Applicants introduced by present employees, ortheirfriends and relatives may prove to be a good source of recruitment.
8) Labour Contractors: Labour contractors maintain close contacts with labourers and they can provide the required number of unskilled workers at short notice.
9) Web Publishing: There are certain websites specifically designed and dedicated forthe purpose of providing information to the job seekers.

Merits of External Sources:

• It attracts qualified and trained people to apply for the vacant job in the organisation.
• The management has a wider choice of selecting the people for employment.
• Best and talented employees can be selected.
• If a company taps external sources, the staff will have to compete with the outsiders.

Limitations of External Sources:

• It may cause dissatisfaction among the employees.
• Employees may feel that their chances of promotion are reduced.
• It is time – consuming process.
• It is costly.

Selection

Selection is the process of identifying and choosing the best person out of a number of prospective candidates for a job.

Process of Selection:
1) Preliminary Screening: Preliminary screening helps the manager to eliminate unqualified job seekers.

2) Selection Tests: Various tests are conducted to know the level of ability, knowledge, interest, aptitude, etc. of a particular candidate. The various types of tests are:

• Intelligence Tests: This is one of the important psychological tests used to measure the level of intelligence quotient (IQ) of an individual.
• Aptitude Test: It is a measure of individual’s potential for learning new skills.
• Personality Tests: Personality tests provide clues to a person’s emotions, reactions, maturity and value system, etc.
• Trade Test: These tests measure the existing skills of the individual.
• Interest Tests: Interest tests are used to know the pattern of interests or involvement of a person.

3) Employment Interview: Interview is a formal, in-depth conversation conducted to evaluate the applicant’s suitability for the job.

4) Reference and Background Checks: Many employers request names, addresses, and telephone numbers of references for the purpose of verifying information and, gaining additional information on an applicant.

5) Final Selection: The final decision has to be made from among the candidates who pass the tests, interviews and reference checks.

6) Medical Examination: After selection, the candidates are required to appear for a medical examination for ensuring that he is physically fit for the job.

7) Job Offer: After a candidate has cleared all the hurdles in the selection procedure, he is formally appointed through an order. It contains the terms and conditions of the employment, pay scale, joining time, etc.

8) Employment Contract: Basic information that should be included in a written contract of employment are job title, duties, responsibilities, date of joining, pay and allowances, hours of work, leave rules, disciplinary procedure, work rules, termination of employment, etc.

Difference between Recruitment and Selection

Recruitment:
1) It is the process of searching for candidates and making them apply for the job
2) It is a positive process
3) It is simple
4) It is less expensive
5) Recruitment is the first stage

Selection:
1) It is the process of selection of most suitable candidates
2) It is a negative process
3) It is complex
4) It is more expensive
5) Selection follows the recruitment

Training

Training is any process by which the aptitudes, skills and abilities of employees to perform specific jobs are increased.

Importance of Training:

A. Benefits to the Organisation:

• It enhances employee productivity both in terms of quantity and quality, leading to higher profits.
• Training reduces absenteeism and employee turnover.
• It helps to obtaining effective response to the changing environment.
• Training increases employee morale.
• If the employees are given adequate training, the need for supervision is minimum.
• Trained employees can use materials and machines economically. It helps to reduce cost of production.

B. Benefits to the Employee:

• Training helps in securing promotion and career growth.
• Increased performance by the individual helps him to earn more.
• Training helps to reduce the chances of accident and wastages.
• Training increases the satisfaction of employees.

Training methods

There are two methods of training

1. On the job training.
2. Off the job training.

1. On the Job Method: Under this method the employee is given training when he is on the job. It means learning while doing. The important On the Job Methods are:

• Apprenticeship Programme: Under apprenticeship training, a trainee is put under the supervision of a master worker.
• Coaching: In this method, the superior guides and instructs the trainee as a coach.
• Internship Training: It is a joint programme of training in which vocational and professional institutes enter into an agreement with business enterprises for providing practical knowledge to its students.
• Job Rotation: Here the trainee is transferred from one job to another job or from one department to another department so that he can learn the working of various sections.

2. Off the Job Method: It refers to those methods under which an individual is provided training away from the work place. It means learning before doing. The important Off the Job Methods are:

• Classroom Lectures/Conferences: The lecture approach is well adapted to convey specific information such as rules, procedures or methods. The use of audio-visuals can often make a formal classroom.
• Films: They can provide information and demonstrate skills.
• Case Study: Trainee studies the cases to determine problems, analyses causes, develop alternative solutions and select the best solution to implement.
• Computer Modelling: It stimulate the work environment by programming a computer to imitate the realities of the job and allows learning to take place without the risk or high cost.
• Vestibule Training: Under this method, separate training centres are setup to give training to the new employees. Actual work environment is created in that centre and employees used the same material, equipment, etc. which they use while doing the actual job.
• Programmed Instruction: Here information is broken into meaningful units and these units are arranged in a proper way to form a logical and sequential learning package.

Development

Development refers to the overall growth of the employee. It includes personality development, motivation for growth, career planning, n etc. Development equip the employees to take up future responsibilities of the organisation.

Differences between training and development

Training:

1. It means imparting skills and knowledge for doing a particular job
2. It increases job skills
3. It has a short term perspective
4. It is job centred
5. The role of supervisor is very important

Development:

1. It means the growth of am employee in all respects
2. It shapes the attitude
3. It has long term perspective
4. It is career centred
5. It is self driven

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 5 Organising.

Kerala Plus Two Business Studies Notes Chapter 5 Organising

Organising

Organising is one of the most important functions of management, which includes

1. Identifying and grouping the work to be performed.
2. Defining and delegating authority and responsibility.
3. Establishing relationships for the purpose of accomplishing objectives.

Step in the Process of Organising

1) Division of Work: The first step in the process of organising involves identifying and dividing the work that has to be done. Division of work leads to specialisation!
2) Departmentation: The second step is to group similar or related jobs into larger units, called departments. The grouping of activities is known as departmentation.
3) Assignment of duties: The next step is to allocate the work to various employees according to their ability and competencies.
4) Establishing authority – responsibility relationship: The last step is creation of authority – responsibility relationship among the job positions. It helps in the smooth functioning of the organisation.

Importance of Organising

• Specialisation: Since the activities are divided into convenient jobs, and are assigned to a particular employee, it leads to specialisation, more productivity and efficiency.
• Clarity in working relationship: It helps in creating well defined jobs and also clarifying authority – responsibility relationship between the superior and subordinates.
• Optimum utilisation of resources: The proper assignment of jobs avoids overlapping of work and also makes possible the best use of resources.
• Adaptation of change: It allows a business enterprise to adapt itself according to changes in the business environment.
• Effective administration: Clarity in working relationships enables proper execution of work and brings effectiveness in administration.
• Development of personnel: Organising stimulates creativity amongst the managers and subordinates.
• Expansion and growth: Organising helps in the growth and diversification of an enterprise by adding more job positions, departments and product lines.

Organisational Structure

The organisation structure can be defined as the framework within which managerial and operating tasks are performed. It specifies the relationships between people, work and resources.

Span of Management: Span of management or span of control refers to the number of subordinates that can be effectively managed by a superior.

Types of Organisation Structures

The organisational structure can be classified under two categories.

1. Functional Organisation
2. Divisional Organisation

1. Functional Structure: The functional structure is formed by grouping together the entire work to be done into functional departments. Eg. Production department, marketing department, etc.

Advantages:

• It promotes division of work which leads to specialisation.
• It promotes control and coordination within a department.
• It helps in increasing managerial and operational efficiency and this results in increased profit.
• It helps to reduce duplication of effort.
• It makes training of employees easier.
• It ensures that different functions get due attention

Disadvantages:

• Each departmental head gives more importance to their departmental objectives than overall organisation objectives.
• In large functional organisations, taking quick decisions and co-ordination become difficult.
• Inter departmental conflicts may arise in the absence of clear separation of responsibility.

2. Divisional Structure: Grouping of activities on the basis of different product manufactured are known as divisional structure of organisation. Each division has a divisional manager responsible for performance. Each division is multifunctional because within each division functions like production, marketing, finance etc. are performed together to achieve a common goal.

Advantages:

• Each division functions as an autonomous unit which leads to faster decision making.
• It helps in fixation of responsibility in cases of poor performance of the division
• It helps to develop the skill of the divisional head.
• It facilitates expansion and growth as new divisions can be added without interrupting the existing operations.

Disadvantages:

• Conflict may arise among different divisions with reference to allocation of funds.
• It may lead to increase in costs since there may be a duplication of activities across products.
• It is not suitable for small organisations.

Differences between Functional and Divisional Structure

Functional Structure:

1. Formation is based on functions
2. Functional specialisation
3. Difficult to fix responsibility on a department
4. It is economical
5. Suitable for small organisation

Divisional Structure:

1. Formation is based on product lines.
2. Product specialisation
3. Easy to fix responsibility for performance
4. It is costly.
5. Suitable for big organisation

Formal Organisation

Formal organisation refers to an organisation structure which is deliberately created by the management to achieve the objectives. It is a system of well-defined job in terms of authority, responsibility and accountability.

Features:

• It is deliberately created by the top management to achieve the objectives.
• It is based on division of labour and specialisation.
• It is impersonal – Does not take into consideration emotional aspect of employees.
• It clearly defines the authority and responsibility of every individual.
• The principle of scalar chain is followed in formal organisation.

Advantages:

• It is easier to fix responsibility since mutual relationships are clearly defined.
• Clear determination of duties, authorities and responsibilities. It helps in avoiding duplication of effort.
• Unity of command is maintained through an established chain of command.
• It provides stability to the organisation.
• Co-ordination and control become easy.

Disadvantages:

• While following scalar chain and chain of command, actions get delayed in formal structure
• Formal organisational structure does not give importance to psychological and social need of employees.
• Formal organisation structure is very rigid. It reduces the creativity of employees in the organisation

Informal Organisation

Informal organisation refers to relationship between individuals in the organisation based on interest, personal attitude, emotions, likes, dislikes etc. The network of social groups based on friendship is called informal organisation.

Features:

• It originates from within the formal organisation as a result of personal interaction among employees.
• It has no written rules and procedures.
• It does not have fixed lines of communication.
• It is not deliberately created by the management.
• It has no definite structure.

Advantages:

• There can be faster spread of communication.
• It helps to fulfil the social needs of the members and this enhances their job satisfaction.
• Top level managers can know the real feedback of employees on various policies and plans.

Disadvantages:

• It spreads rumours.
• If informal organisation opposes the policies and changes of management, then it becomes very difficult to implement them in organisation.
• Informal organizations lead to conflicts among employees.

Difference between Formal Organisation and Informal Organisation

Formal organisation	Informal organisation
1) It is deliberately created by top level management.	1) It arises automatically as a result of social interaction among the employees.
2) It has pre-determined purpose.	2) It has no pre­determined purpose.
3) It is highly rigid.	3) It is more flexible.
4) Communication is allowed through the scalar chain.	4) Communication is allowed through all channels networks.
5) Managers are leaders.	5) Leaders are chosen voluntarily by the members.
6) It is based on authority and responsibility.	6) There is no authority and responsibility relationship.

Delegation of Authority

Delegation means the granting of authority to subordinates to operate within the prescribed limits. It enables the manager to distribute his workload to others so that he can concentrate on important matters.

Elements of Delegation:

• Authority: Authority refers to the right of an individual to command his subordinates and to take action within the scope of his position. Authority flows from top to bottom. Authority determines the superior subordinate relationship in an organisation.
• Responsibility: Responsibility is the obligation of a subordinate to properly perform the assigned duty. Responsibility flows upwards, i.e., a subordinate will always be responsible to his superior.
• Accountability: Accountability implies being answerable for the final outcome, i.e., subordinate will be accountable to a superior for satisfactory performance of work.

Importance of Delegation of Authority:

• Reduces the work load of managers: The managers are able to function more efficiently as they get more time to concentrate on important matters.
• Employee development: Delegation empowers the employees by providing them the chance to use their skills, gain experience and develop themselves for higher positions.
• Motivation of employees: Responsibility for work builds the self-esteem of an employee and improves his confidence. He feels encouraged and tries to improvers performance.
• Facilitation of growth: Delegation helps in the expansion of an organisation by providing a ready workforce to take up leading positions in new ventures.
• Superior-subordinate relations: Delegation of authority establishes superior-subordinate relationships, which are the basis of hierarchy of management.
• Better co-ordination: The elements of delegation – authority, responsibility and accountability help to avoid overlapping of duties and duplication of effort.

Difference between Authority, Responsibility and Accountability

Authority	Responsibility	Accountability
Right to command	Obligation to perform an assigned task	Answerability for outcome of the assigned task
Can be delegated	Cannot be entirely delegated	Cannot be delegated at all
Arises from formal position	Arises from delegated authority	Arises from responsibility
Flows downward from superior to subordinate	Flows upward from subordinate to superior	Flows upward from subordinate to superior

Decentralisation

Decentralisation refers to a systematic dispersal of authority to the lower levels of the organisation. Here decision making authority is shared with lower levels in the organisation.

Centralisation and Decentralisation: An organisation is centralised when decision-making authority is retained by higher management levels whereas it is decentralised when such authority is delegated to lower levels of management. There must be a balance between centralisation and decentralisation.

Importance of Decentralisation:

1. Decentralisation helps to promote confidence amongst the subordinates.
2. It is a means of trained manpower
3. It helps in quick decision making.
4. It reduces the burden of top executives.
5. It helps to increase productivity and more returns.
6. It helps in maintaining effective control.

Difference between Delegation and Decentralisation

Delegation	Decentralisation
1. It is the entrustment of authority and responsibility from one individual to another.	1. It is a systematic delegation of authority from one level to another level.
2. Responsibility cannot be delegated.	2. Responsibility can be delegated.
3. Delegation is a compulsory act.	3. Decentralisation is an optional policy decision.
4. More control by superiors hence less freedom to take own decisions. it is individualistic.	4. Less control over executives hence greater freedom of action. It is totalistic.

Kerala State Board New Syllabus Plus Two Business Studies Notes Chapter 4 Planning.

Kerala Plus Two Business Studies Notes Chapter 4 Planning

Planning – Meaning

Planning is deciding in advance what to do and how to do. It is one of the basic managerial functions. Planning is closely connected with creativity and innovation. Planning involves setting objectives and developing appropriate courses of action to achieve these objectives.

Importance of Planning

• Planning provides directions: By stating in advance how work is to be done planning provides direction for all actions.
• Planning reduces the risk of uncertainty: Planning enables an organisation to predict future events and prepare to face unexpected events.
• Planning reduces wasteful activities: Planning serves as the basis of co-ordinating the activities and efforts of different departments and individuals. It helps to eliminate useless and redundant activities.
• Planning promotes innovative ideas: Since planning is thinking in advance, there is scope for finding better and different methods to achieve the desired objectives.
• Planning facilitates decision making: Planning helps in decision making by selecting the best alternative among the various alternatives.
• Facilitates control: Planning provides the basis for control. Planning specifies the standard with which the actual performance is compared to find out deviation and taking corrective action.

Features of Planning

• Planning is goal oriented
• It is the primary function of management
• It is required at all levels of management
• Planning is a continuous process
• Planning is futuristic (forward looking)
• It is a decision making function
• It is a mental process

Limitations of Planning

• Planning makes the activities rigid.
• Long term plans are insignificant in the rapidly changing business environment.
• It reduces creativity.
• It involves cost.
• It involves a lot of time.
• Planning does not guarantee success.

Planning Process (Steps in Planning)

1) Setting Objectives: The first step in planning is setting objectives. Objectives may be set for the entire organisation and for each department. The objective must be specific and clear.
2) Developing premises: Planning is based on certain assumptions about the future. These assumptions are called planning premises. Forecasting is important in developing planning premises.
3) Identifying alternative courses of action: The next step in planning is to identify the alternative courses of action to achieve the objectives.
4) Evaluating alternative Courses: The pros and cons of various alternatives must be evaluated in terms of their expected cost and benefits.
5) Selecting an alternative: After evaluating the alternatives the manager will select that alternative which gives maximum benefit at minimum cost.
6) Implement the plan: Implementation of plan means putting plans, into action so as to achieve the objectives of the business.
7) Follow up action: Plans are to be evaluated regularly to check whether they are being implemented and activities are performed according to schedule.

Types of Plans

1) Single use plan: A single use plan is developed for a one-time event or project. Such plans are not to be repeated in future. E.g. budgets, programmes, projects, etc.
2) Standing plan: A standing plan is used for activities that occur regularly over a period of time. E .g. policies, procedures, methods and rules.

Plans can be classified as Objectives, Strategy, Policy, Procedure, Method, Rule, Programme and Budget.

• Objectives: Objectives are the ends, towards which activity is aimed at for the accomplishment of organizational goals. Objective should be measurable in quantitative terms.
• Strategy: Strategy is a comprehensive plan for accomplishing an organization objectives. This comprehensive plan will include determining long term objectives, adopting a particular course of action and allocating resources.
• Policy: Policy is a broad statement formulated to provide guidelines in decision making.
• Procedure: Procedure is a chronological sequence or steps to be undertaken to enforce a policy.
• Method: Methods provide detailed and specific guidance for day-to-day action.
• Rule: Rules are prescribed guidelines for conducting an action.
• Programme: Programme includes all the activities necessary for achieving a given objective Programmes are the combination of goals, policies, procedures and rules.
• Budget: A budget is a statement of expected results expressed in numerical terms.