Chapter 6- Principles of Management

                                    Principles of Management

            A principle refers to a fundamental truth about some phenomenon.  It establishes cause and effect relationship between two or more variables and predicts the result in a specific set of conditions.  Thus, principles of management are the fundamental truths, which provide guidelines for managerial decision-making and action. These principles enable a manager to tackle his problems in a scientific and systematic manner. However, these principles are not as exact or specific as the rules of science. These should be applied keeping in view the nature and needs of the organisation.

Nature (characteristics) of principles of management

The main characteristics of the principles of management are given below:

         1) Universality: The POM are universally applicable to all kinds of organizations, may it be an educational, a company, a Government, a hospital or any other business undertaking.  These principles are equally useful at every level of management i.e. top level, middle level, or lower level. The principles enable a manager to attend to his problems more effectively.

         2) Flexible in nature:  The POM are flexible in nature.  These can easily be moulded (modified) with the change in environment.  The principles, which are suitable at one place and time,  may be replaced by others, due to change in the conditions or environment in the organization. For example, the principle of division of labour may not be applicable in a small organization, to the extent, as it can be applied in a large organization.

         3) Relative: The POM are relative and not absolute. It means results achieved through the application of principles vary according to the number of factors like, the environment in the org. the experience of manager, the size and nature of business etc.

         4) Directing Human Behaviour: Management is a social science, dealing with complex human behaviour. Management principles are directed towards regulating human behaviour for getting the best possible results. The quality of application depends upon the quality of mangers.  

         5) Cause and effect relationship: Management principles indicate cause and effect relationship between two or more events. These principles are used to solve different managerial problems, with the help of observation, inspection and analysis. For example;  principle of division of labour can be applied to increase efficiency and productivity.  So division of labour is the cause and increase in productivity is the effect.  A similar relation exists in the application of other principles.

         6) Equal in significance: All the principles of management are equal in significance.  It implies that, no principle has greater importance than others.  E.g., the Principle of Unity of Command is as important as the Principle of Unity of Direction, division of labour etc. 

Importance and Need For principles of management:

            With the passage of time, the managers are increasingly realizing and recognizing the need and importance of the principles of management.  The need for learning of POM is justified on basis of following points:

1)      To increase efficiency

2)      To crystallize the nature of management

3)      To improve research

4)      To Train Mangangers

5)      To attain social goals

                                             Points 1-4 Learn from book

6)      Improving art of management: Management principles help in the art of management by suggesting how things should be done and how to get best results. These principles provide a means of organizing knowledge and experience in management.

7)       

Fayol’s Principles of Management:

Henery Fayol (1841-1925) was a French Industrialist. He joined French Mining Company in1860 as an engineer and rose to the position of its Managing Director in 1888. Through his long practical experience, Fayol developed a general theory of management.  He published a book ‘General and Industrial Administration’ to include all theoretical principles of administration.

            Henry Fayol suggested the fourteen principles of management which are given below :-

     1) Division of work:  Division of labour means division of total task in basic elements so that an employee can concentrate on only one type of work. It helps to improve by avoiding wastage of time and effort caused by change from one type of work to another.  Division of work is applicable to all kinds of work, technical as well as managerial.

     2) Authority and Responsibility: Authority is the right to get work done from others and responsibility is the obligation to perform the assigned task.  Anyone who exercises authority must accept responsibility.  Authority and responsibility are coexistent and they must go hand in hand.  Authority without responsibility leads to irresponsibility and irresponsible behaviour, while responsibility without authority will make a person ineffective.  Therefore, there should be parity between authority and responsibility.

     3) Discipline: Discipline means obedience to rules and regulations of the organization. Discipline is essential for the smooth running of the organization. Maintenance of discipline depends upon the quality of leadership, judicious application of rules and orders.  The system of reward and penalties should be such as would encourage respect to the authority, rules and orders of the superiors.

     4. Unity of Command: This principle implies that subordinates should receive orders from one superior and the subordinates should be accountable to one boss only.  In case there are more than one superior for the subordinates, there may be conflict in authority and confusion among subordinates. This will cause indiscipline in the organisation. There may be conflict between subordinates and superiors. Therefore, the principle of unity of command should be strictly observed in order to avoid conflict and confusion.

    5. Unity of Direction: By unity of direction Henery Fayol means “one unit and one plan”.  That should be one head and  one plan for a group of activities having the same objective. Unity of direction helps in the effective management of the enterprise.  If this principle is not followed there will be unnecessary duplication of efforts and wastage of time. Unity of command ensures coordination of efforts.

            ( Difference between unity of command and unity of direction:

1.      Unity of command relates to the functioning of people,  while unity of direction is concerned with the activities.

2.      Unity of command means- employees should be responsible and receive orders from one boss only.  While unity of direction means- one unit and one plan for a group of activities and these should be under the control of one superior.

3.      Unity of command is essential to fix responsibility of the subordinates while unity of direction is essential for a sound organization.)

     6. Subordination of individual interest to common interest: An organization is bigger than an individual.  Therefore, the interests or goals of the organization must prevail upon the personal(  individuals ) interest of employees.  In order to achieve supremacy of group or common interest, managers must set a good example and they must be firm but reasonable in dealing with subordinates.  Constant supervision is necessary to prevent promotion of personal interest at the cost of the organization.

   7. Fair Remuneration: The remuneration payable to employees should always be fair and provide maximum satisfaction to both employer and employees. The management must ensure a fair reward for the work of the employees and calculate wages according to the most suitable method.  The rate of wages and salaries depends upon a number of factors such as, cost of living, demand of labour, general economic conditions, rate of wages paid by the competing firms etc.  The wages and salaries should provide sufficient incentive and promote higher productivity on the part of workers.

    8. Centralization: According to Fayol, anything that increases the importance of the subordinates is decentralization and that reduces the importance of the subordinates is centralisation. An organization should strive to achieve a balance between centralization and decentralization.  In small organizations there is greater centralization while in bigger organizations the degree of centralization decreases.

            The extent of delegation depends upon number of factors such as size of the business, its nature, the experience of the employees and the nature of the duty to be performed etc.

   9. Scalar chain: (Meaning-Scalar chain is a chain of superiors from the top level to the lowest level in the organization.  The line of authority is the route followed during the process of communication. (Significance- It is necessary to ensure unity of command and effective communicaton. It also facilitate good discipline.

            Precaution- Henery Fayol felt that departure from the chain is necessary to make communication fast and effective.  It should be short circuited as far as possible.  This will facilitate quick communication between one line of the chain and the other.  He advised that either the chain should not be very long or a “gang Plank” should be created between the authorities to enable them to share information directly.

            The working of a scalar chain and the gang plank may be elaborated with the help of the following diagram:   

               

                                   

In this diagram there are two chains of authority. One, flowing downwards, from A to E and the second, flowing upwards, from I to A.  I is the final authority.  Instructions, orders follow from I to A and then from A to E .  Similarly suggestions   and the reports flow in the reverse order. It means if  a message is to pass from D to G , it will take a long time. So a Gang plank ( link) should be created between D and I to facilitate quick  communication.

     10. Order: Hanery Fayol defines this principle as “There should be a place for everything and everyone at its place.” It means arrangement of things and placing of people. The right man, at the right job, doing the right kind of things.  Order requires organisation and good selection and placement of both men and materials.  This will avoid delays.  The loss of energy and material can be avoided.

     11. Equity: The employees should be treated with kindness and equity.  Equity does not exclude strictness and forcefulness.  The managers and superiors in the organization should be good natured and experienced to deal with subordinates. They should not be biased and should not discriminate people on the basis of cast, religion, age or experience etc.  Each subordinate should be given a fair treatment in the matters of reward and punishment. The managers should not give undue favour to one and neglect others.

     12.  Stability of tenure: The management should make efforts to remove feeling of insecurity of job in the mind of employees.  Enough time should be given to each worker to acquire confidence and to perform his job satisfactorily.  If the job of a person is not secure, he will look for an opportunity to leave the organization and join somewhere else.  Higher labour turnover involves cost of employing new workers, who will take time to adjust to the new job, causing loss of production.  This may damage the reputation of the organisation as well.

13. Initiative.  Workers at all levels must be encouraged to think about and execute their task in a better way. The initiative of the subordinates must be inspired and maintained. Workers must be encouraged to give suggestions and improvement in the performance of their duties. They should also be encouraged to contribute useful material in the process of making plans.

14. Espirit-de corps (Union is Strength) :  The strength of the business lies in the cooperation and harmony of its workers. Policy of divide and rule should be replaced by unity of command.  Difference of opinions must be settled then and there. Employees must work as a team.

Taylor's Scientific Management:

Frederick Winslow Taylor (1856-1915) 

                     Master of Scientific Management

1. Frederick Winslow Taylor was an American mechanical engineer who sought to improve industrial efficiency. He was one of the first management consultants. Wikipedia
2. His innovations in industrial engineering, particularly in time and motion studies, paid off in dramatic improvements in productivity.
3. He started his Career as an apprentice mechanist in Midvlae Steel Company ( USA). Later, he became a supervisor. During this period, he continued his studies and earned a degree in Mechanical Engineering. Subsequently, he joined Bethlehem Steel Company (USA). At both these places, he continued to develop scientific management. 
4. Based on his experiments, he wrote many papers and book, ' Scientific Management' published in 1911, which became quite popular. Taylor called his findings as scientific management because these findings were marked differnt from other findings of earlier years. 

                                                            

Chapter 5- Management

Learning Objectives:

1.    Concept – meaning of management

2.    Definition of Management

3.    Characteristics of Management

4.    Nature of Management- as an Art, as a Science and as a profession

5.    Management and Administration

6.    Objectives of Management

7.    Importance of Management

8.    Levels of Management ( brief understanding and their roles)

Meaning of Management :

1.    Management as an Activity:

As an activity, management is concerned with getting the work done through others.

As an activity, managers guides, directs, regulates and integrates human efforts towards the achievement of common goals.

Management integrates, the inputs ( Men, Money, Material, Machinery and Methods) to make an enterprise productive. These are known as 5 Ms of Management.

1.    Management as a group :

As a group, management refers to all those persons who manage the organization. It consists of Board of Directors, Chief Executives ( at the top management) , Heads of Departments and Managers( at middle management), Supervisors and superintendents(at lower management) etc. All these collectively are known as management. More popularly, the term management is used to represent the top and middle management.

As a group, the role of the management is to make rules and enforce them.

2.    Management as a Discipline :

As a discipline, management is a systematic body of knowledge and a separate field of study. It involves the study of principles and practice of concepts and principles which help in managing an organization. It is being studied in various colleges and universities across the world

3.    Management as a Process :

Management as a process consists of various functions which managers perform in managing organizations. These functions are broadly classified into five categories; planning, organizing, staffing, directing and controlling. These functions should be performed in an orderly and systematic manner.

As a process, management integrates all the resources of the organization viz, human, physical and financial resources to achieve the organizational goals.

All the above definitions of management are not separate but define management in different perceptive to give a holistic view of its meaning.

Modern Concept on management: 

It is also called integration concept: Management is defined as the process of planning, organizing,, actuating and controlling an organization’s operations in order to achieve coordination of human and material resources essential in the effective and efficient attainment of objectives.

Other Topics to be learnt from the book are :

•  Characteristics of Management
• Nature of Management- as an Art, as a Science and as a profession
•  Management and Administration
• Objectives of Management
•   Importance of Management
•  Levels of Management ( brief understanding and their roles)

Chapter 3 -Continued ( Short Term sources of Finance )

Sources of Short Term Finance

Short term business finance facilitates businesses and financiers to seize quick business opportunities that require transactions to be completed in short time. The highlight of this kind of finance is its prompt availability to the businessman. Here it is imperative to get the transaction conducted as quickly as possible. Short term business finance is appropriate for both new and existing businesses.

1. Public Deposits:

a)      It refers to the deposits accepted from the public on which a fixed rate of interest is paid. The rate of interest is higher than rate of interest paid by banks on their deposits.

b)      Only Public Companies and non-banking companies are allowed to  accept public deposits. A private company is not allowed to accept deposits.

c)      The time period of such deposits may range from 6 months to 3 years.

d)      Such deposits are unsecured and no assets are required to be pledged.

Advantages : learn  from book

Disadvantages : learn  form book.

2. Commercial Banks:

Lending is an important function of commercial banks. Banks provide finance to business enterprises in the following ways:

 1.   Loans and Advances:  the key features are as follows:

a.       It is lump sum money advanced by way loan to the borrower for which a bank opens a separate account in the name of the borrower in which the amount is credited.

b.      Interest : the borrower is required to pay interest on the whole amount from the date the loan was sanctioned.

c.       Repayment: The loan may be repaid either in instalments at regular interval or in one time at the expiry of a fixed term of loan.

d.      Withdrawal: the borrower can withdraw the whole of the amount or a part of it but interest is charged on the whole amount of loan.

e.      Security: The loan may be secured or unsecured. However in most cases the banks ask for sufficient security from the borrower before sanctioning the loan.

   2. Cash Credit: Its key features are as follows:

a.       Cash credit is a kind of agreement with the bank under which a bank fixes a maximum limit up to which the borrower can withdraw money. It is a running account from which the amount can be withdrawn and paid back as per the needs of the customer.

b.      The limit is usually fixed based on the reputation and security offered by the borrower.

c.       Interest is charged only on the actual amount withdrawn.

The main advantage is flexibility in the use of money and the convenience. The customer does not have to approach the bank again and again in case of need of funds.
The disadvantage is the high rate of interest.

3.       Bank Overdraft: Main points are:

a.       Overdraft is facility of withdrawing/making payment more than the balance in the bank.

b.      Overdraft facility is granted to customers having a current account with the bank.

c.       A maximum limit of overdraft is fixed based on the reputation ( credit worthiness) of the customer and the security offered by him.

d.      Interest is charged on the actual amount of overdraft.

This is a very convenient and flexible one time form of short term financial arrangement with the bank and the customer does not have to ask bank if the payment exceeds the balance in the bank.

4.       Discounting of Bills: Main points are:

a.       Discounting of bills means getting cash from a bank in exchange of Bills of exchange ,promissory note etc.

b.      Bank charge some commission/interest for this service by paying amount lower than the face value of the bill. The charges are for the unexpired time period of the bill. These are called discounting charges.

c.       On maturity date of the bills, the bank will collect full amount of the bill from the drawee ( debtor).

d.      The borrower/customer remains liable to the bank, if the drawee fails to honour the bill on its due date.

Chapter 3- Sources of Finance

EQUITY SHARES

They are the real owners of the company.  Full voting rights are guaranteed to equity shareholders. They participate in the meetings of the shareholders, elect directors and approve major changes in the policies and programmes of the company. Equity shares are listed at the stock exchange and are freely transferable.

The rate of dividend is not fixed. It is decided by the board of directors on the basis of profits left after making payments of preference shares dividend. Therefore, the investors bear the maximum risk but may enjoy the maximum profits if the company’s performance is good.

Advantages of Equity Shares

A.)  From the company point of view

1. Permanent capital – The funds raised through issue of equity shares is permanent capital for the company. It is not required to be refunded during the lifetime of the company. This amount is mostly used to generate fixed assets of the company.

2. No charge on assets – A company is not required to mortgage or create a charge on the assets of the company for raising funds through issue of equity shares.

3. No burden on profits – It is not obligatory on the part of the company to pay dividend on equity shares in case the profits are not sufficient or the company decides to retain profits for expansion or modernisation.

4. Source of strength – Equity share capital reflects the strength of the company because it is used for fixed assets and does not create burden for its repayment or payment of dividend on regular basis.

5. Large funds – Equity shares have a small nominal value (say Rs.10 per share). It encourages the investors to invest in equity shares. There is no limit of number of members in a public company. Therefore, a large number of persons invest in equity shares and the company will be in a position to collect huge amount of money through equity shares.

B.) From the shareholder point of view

1. Voting rights – Equity shareholders have full voting rights and participate in the meetings of shareholders. They elect directors and approve major policy changes.

2. Higher dividend – The rate of dividend on equity shares is not fixed. It depends upon profits, in case the earnings of the company are good, the directors recommend high rate of dividend.

3. Capital appreciation – Equity shares are listed at the stock exchange and the prices of shares go up in case the performance of the company has been good and the market conditions are also favourable.

5. Bonus shares and Right shares – Bonus shares and Right shares are issued only to the equity shareholders.

5. Tax benefits – The company gives tax-free dividend to the equity shareholders.

Disadvantages of Equity Shares

A.) From the company point of view

1. Manipulation of control – The management of the company may be manipulated by few shareholders to maintain the control of the company in their own hands. Sometimes, they may not work in the interest of the company.

2. Overcapitalisation – The funds raised through equity shares are not returned during the lifetime of the company. Sometimes, more capital is raised than required which results in overcapitalisation. It reduces earnings per share.

3. No trading on equity – If all the funds are raised through equity shares, the company will not be able to take advantage of trading on equity.

4. Costly – The cost of raising funds through issue of equity shares is high. A lot of money is spend on underwriting commission, brokerage and other expenses.

B.) From the shareholders point of view

1. High risk – Equity shareholders bear the maximum risk. They are the last to get return on their investment, i.e., dividend and the capital when the company is closed.

2. Uncertainty of dividend – Dividend on equity shares is paid only out of profits. In case, the profits are not sufficient, no dividend is paid.

3. Concentration of power in few hands – Some shareholders keep the control of the company in their own hands by holding majority shares. Therefore, small investors may remain at the mercy of such shareholders.

4. Unhealthy speculation – The stock market fluctuates wildly because of speculations by few operators. The management of the company may also indulge into such activities which causes extensive loss to the innocent investors.

PREFERENCE SHARES

These are those types of shares on which a fixed rate of dividend is paid, and

1.       Dividend on preference shares is paid in priority to equity shares dividend, i.e., the preference dividend is paid before dividend is paid on equity shares.

2.       Return of Capital: Preference share capital is paid back (returned) in priority to equity share capital in the event of or at the time of winding up (closing of) of the company.

Features/characteristics of Preference Shares

1.       A fixed rate of dividend is paid on preference shares.

2.       The preference shareholders have preference in getting the dividend. It is paid in priority to equity share dividend.

3.       The preference share capital is returned in priority to equity share capital, if the company is closed.

4.       Preference shareholders do not have voting rights and cannot take part in the meetings of the shareholders.

5.       A company can issue different kinds of preference shares, like redeemable, non-redeemable, commulative or non-commulative shares, etc.

Types of Preference shares

1.       Cumulative preference shares – These preference shares have a right to get dividend out of the profits and in case the profits are insufficient, the dividend is to be carried forward and paid out of the future profits.

Non-cumulative preference shares – Dividend on such shares is paid only out of the current year’s profit and in case the profits are not sufficient, no dividend is to be paid and the preference shareholders do not have the right to get the ‘arrears’ (past unpaid amount) of dividend in the future.

2.       Redeemable preference shares – Such shares are redeemed (paid back) after a fixed period of time and the preference share capital is returned to the shareholders.

Irredeemable preference shares – The amount raised from such shares is not redeemed during the lifetime of the company and is to be paid back only after the winding up of the company.

3.       Convertible preference shares – Those preference shares which are given the right or option to get their shares converted into equity shares after a fixed period of time, are known as convertible preference shares.

 Non-convertible preference shares – Those preference shares which are not convertible into equity shares, are known as non-convertible preference shares.

4.       Participating preference shares – These are those preference shares on which the investors have the right to participate in the surplus profits left after paying all dividends (i.e., preference share dividend as well as dividend on equity shares).

 Non-participating preference shares – Only a fixed rate of dividend is paid on these shares and there is no right to participate in the surplus profits.

Advantages of preference shares

A.) From the point of view of the company

1. Appeal to cautious investors – A company is able to raise funds from those investors, who want more security and stability or regularity in their earnings as compared to equity shares.

2. No interference in management – Preference shareholders do not have voting rights, therefore, the shareholders are not allowed to interfere in the management and decisions of the company.

3. No charge on assets – A company is not required to create a charge on the assets of the company. Therefore, the assets can be used for raising loans in the future.

4. Trading on equity – The rate of dividend payable on preference shares is fixed. When the earnings of the company are good, a higher rate of dividend can be paid on equity shares.

5. No burden on profits – There is no obligation on the company to pay dividend in case of insufficient profits or when there are losses in the company.

6. Flexibility – A company can maintain flexibility in its capital structure by issuing redeemable preference shares.

B.)    From the point of view of the investors (Preference shareholders)

1. Stable and regular dividend – There is a higher possibility of getting stable and regular dividend because preference dividend is paid before the equity share dividend.

2. Less risk – Preference shares are less risky as compared to equity shares because there is no fluctuation in the prices of shares and there is better security to their investment as compared to equity shares.

3. Redemption – Most of the preference shares are redeemable after a fixed period of time. Therefore, the investors can get back their investment from the company.

4. Cummulative Dividend – In case of cummulative preference shares, the dividend is carried forward and the arrears are paid out of the future profits.

Disadvantages of Preference Share

A.) From the point of view of the company

1. Low appeal – Preference shares have a very low appeal to the investors. A cautious investor prefers debentures than preference shares.

2. Permanent burden – There is a permanent burden on the company to pay dividend on cumulative preference shares

3. More legal formalities – A company has to follow a number of legal formalities when preference shares are to be redeemed

4. Costly – The dividend on preference shares cannot be treated as business expense, therefore, the company has to pay higher rate of tax.

B.) From the point of view of the investors

1. No voting rights – Preference shareholders cannot participate in the meetings of the shareholders.

2. No capital appreciation – Preference shares are not listed at the stock exchange, therefore, there is no possibility of increase of capital appreciation of preference shares.

3. No guarantee of dividend – Dividend on preference shares is paid only out of profits. In case a company continues to suffer losses, no dividend will be paid even on preference shares.

4. Fear of being shown the door – Preference shares are redeemable. A company has the option to pay back the preference share capital in case it has surplus funds. 

Chapter 2- Financing

Business Finance refer to the Money and Capital Employed in the business.

Financing means making money available when it is needed. 

Business Finance include the following steps

1. Planning the amount of funds required.
2. Raising the funds required using various sources finance 
3. Managing the funds so that there is neither surplus/idle  money nor shortage of money which may affect smooth functioning of the enterprise
4. and Controlling all the money so that it put to the best and most use in the business.

Q: - What are the capital needs for different types of business organizations and briefly discuss the sources from which funds can be raised by each of them?

Ans: 1) Sole Proprietorship: Sole proprietor works on small scale. His capital needs are less as compared to Joint Stock Company or a firm. He can raise his capital needs through the following sources:-

i)                    He can invest his own capital.

ii)                  He can borrow from his friends and relatives.

iii)                He can borrow from the bank for short term needs and long term loans may be provided by financial institutions such as  State Financial Institution.

iv)                He can retain profits and reinvest in the business.

v)                  He can take advances from the customers. And he can also buy goods on credit and pay them later on.

vi)                The central or State Govt. may also provide financial support to small scale traders.

  2. Partnership:- A partnership business operates on a higher scale as compared t o sole proprietorship. The amount of funds required depends upon the nature and size of business. A manufacturing concern may require more capital as compared to a trading concern. A partnership firm can raise funds through the following sources:-

i)          Capital contribution by the partners

ii)         Borrowing from friends and relatives.

iii)        Borrowings from banks and financial institutions

iv)        Advances from customers

v)         Sometimes partners may also advance loans to the firm.

3. Joint Stock Company:- A Joint Stock Company operates on a large scale. Financial requirements are huge as compared to a partnership firm. A company can have more members. The total funds required depend upon many factors such as nature of business, size of the business etc. It has more options to raise funds.  There are various sources for raising long term as well as short term funds. The following are the sources for raising funds for long term:

i)          Equity Shares

ii)         Preference Shares

iii)        Debentures

iv)        Loans from Special Financial Institutions

v)         Ploughing  back of profits i.e retained profits

Funds can also be raised for short term through the following sources:

i)        Public Deposits

ii)      Trade Credits

iii)    Advances from Customers

iv)    Loans from Banks and other short term borrowings from commercial banks like –

Discounting of bills of Exchange

Bank Overdraft

Cash Credits 

Q: - What is fixed capital? Discuss the factors on which requirement of fixed capital depends.

Ans.: The capital invested in fixed or permanent assets like land and buildings, plant and machinery, furniture, etc.. is known as fixed or block capital.

   Fixed capital is that portion of the capital which is represented by fixed assets. Fixed capital is known as block capital because it is blocked in fixed assets for a long period of time. Therefore, it is raised through long term sources like shares, debentures, long term loans and retained earnings.

   The amount of fixed capital required for an enterprise depends on the following factors:-

1.Nature of business a manufacturing enterprise and public utility concerns like water and sewerage, electricity companies, telephone companies etc require a larger amount of fixed capital as compared to a trading or commercial concerns.

2. Scale of operations.  A large enterprise generally requires greater fixed capital than a small scale enterprise.  For instance, a large scale steel enterprise like the Tata and Iron steel company requires a huge investment in fixed assets in comparison with a mini steel plant.

3, Nature of products: A company manufacturing consumer goods like toothpaste, cream, pens etc. will require a smaller amount of fixed capital. On the other hand, a company manufacturing heavy and capital goods like, machinery, plant, refrigerators, cars etc will require large amount of fixed capital.

4. Diversity of production line: A company manufacturing multi-products will require large amount of fixed capital as compared to business unit manufacturing a single product.

5. Degree of mechanization:  The technique of production also affects the amount of fixed capital. A firm using automatic machinery requires greater fixed capital than another firm of same size using labour or hand tools. For example, a textile mill using power looms needs more fixed capital than a hand-loom.

6. Mode of acquiring fixed assets:  A company purchasing its fixed assets on cash basis will need large amount of fixed capital as compared to a company which purchases on installment basis, or lease basis or on rent.

7.Scope of activities.  An enterprise which produces all parts of a product will require more fixed capital than the concern which is engaged in assembling the parts purchased from other firms.

Working Capital

   Every business requires some finance to acquire current assets like raw material, stock of goods and cash needed for day to day expenses of the business. Funds needed for such purposes forms a part of working capital.  In other words – working capital is that part of the total capital which is required to meet the day to day expenses of the business and to maintain a minimum balance in current assets.

Different concepts of working capital:-

Gross working Capital :-It is sum total of all the current assets of the business e.g. cash, stock, short term investments, debtors, bills receivable, expenses prepaid, incomes receivable. Current assets keep on circulating in a circular manner. E.g. Cash is used to acquire raw material, which is converted into finished goods. Finished goods are sold and converted into receivables (debtors and bills receivables), which ultimately are realized and converted into cash.

Net Working Capital ;-  It means the difference between Current Assets and Current Liabilities. Excess of current assets over current liabilities represent net working capital. There are various current liabilities, which have to be met out of the current assets. Current assets should always be more than the current liabilities; otherwise the business might land into financial crisis.

Permanent Working capital:- It represent that part of the working capital which remains permanently blocked in the current assets of the business e.g. minimum balance of Cash that should always be maintained in the business to meet any emergency requirement, and the balance of finished goods kept as reserve to meet any emergency order etc.

Variable Working Capital :-  It is that part of the working capital which keeps on changing with the change in the nature and size of the business.

FACTORS DETERMINING REQUIREMENT OF WORKING CAPITAL:-

1.Nature of business. The nature of the business is the basic factor deciding the amount of working capital. Public utilities undertakings require a very small amount of working capital. Trading concerns and financial undertakings require relatively large amount, whereas manufacturing undertakings require a sizeable amount of working capital.

2. Size of business:  The working requirements are directly proportional to the size of the business. It is also affected by the increase and expansion of the scale of business.

3. The proportion of cost of raw material to total cost:  Where the cost of raw material used in manufacturing a product is large in proportion to the total cost, the requirement or working capital will be large. That is why cotton textiles and sugar mills require huge amount of working capital. A building contractor also needs large amount of working capital for this reason.

4. Use of manual labour or machines: - A business undertaking using modern machines and techniques for production requires small amount of working capital compared to labour intensive industries where requirement is large due to more burden of payment of wages and salaries.

5. Seasonal variation:- In certain industries raw material is not available throughout the year. They have to buy raw material in bulk during the season to maintain uninterrupted production during the entire year. As such more amount of working capital will be required to keep stock of raw material.

6. Terms of credit : A company purchasing its raw material for cash and selling its finished goods on credit will be requiring more amount of working capital. On the contrary if a concern is in a position to buy its raw material on credit and sell its finished products on cash basis will require less amount of working capital. The length of the period also effects the requirement of working capital.

7. Production Policy: In certain industries, the demand for the product is subject to wide fluctuations due to seasonal variations.  If it is decided to keep the production constant throughout the year to generate sufficient stock for the season, large amount of working capital will have to be blocked up in finished products. On the other hand if the production policy is to reduce the production during off-season, the requirement of working capital will reduce consideration.

8. Working capital cycle:  In a manufacturing concern, the working capital cycle starts with the purchase of raw material and ends with the realisation of cash form the sale of finished good. The longer the cycle, the more will be the requirement of working capital.

IMPORTANCE/SIGNIFICANCE OF WORKING CAPITAL

   Adequate working capital is required to meet day to day working of the business and pay the operating expenses of the business. Sufficient working capita indicates solvency of the business. The liabilities are discharged in time and the business attains better image in the market. Regular payment of salaries and wages boost the morale of employees. The main points of importance can be discussed under the following headings:-

1.Timely payment of dues.  Timely payment of dues to parties and creditors is possible, if the business has adequate working capital. This will increase the goodwill of the business.

2.Ensure solvency of the business : Adequate working capital ensure short-term solvency of the business.  A running business might be closed for want of sufficient working capital when payment is not made to the creditors and of interest in time.

3.High credit-worthiness:  The credit status of the business depends on its ability to pay outsiders and the promptness with which payments are actually made. Credit-worthiness of the business is rated high if its working capital position is found satisfactory.

4.Timely payment of Dividend  Liquid cash is necessary for the payment of dividends. Due to scarcity of money, if dividends are not given to shareholders, an adverse reaction may be created among them. As a result the business may lose its reputation.  Therefore, adequate working is very much needed for timely payment of dividends.

5. Taking advantage of cash discounts: A business having sufficient working capital is able to take advantage of cash discounts offered by suppliers in return for prompt payments.

6. Meeting daily operating expenses: It is necessary to purchase raw materials, pay wages and salaries, and incur various expenses in order to keep the flow of production uninterrupted, the smooth operations of the business largely depend on the adequate working capital

7. Enhancing morale of employees: A business is able to pay wages and salaries regularly provided it has enough working capital. It enhances the morale of its employees. The sense of security and the confidence of the workers of the workers depend on the strength o the working capital of the business.

8.  Availing of better market opportunities:  In case the market conditions are not favorable to get good price for the product in the short run, a business with adequate working capital can wait by holding up stocks in order to secure higher price