CBSE Class 12th Business Studies Question Paper - QP2

Free Business Studies - Class 12th (CBSE) - Question Paper - QP2

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Here are the quick details:

• Class: XII
• Subject: BUSINESS STUDIES
• Time: 3 Hours
• Maximum Marks: 80

Below is the content pattern:

• Question Paper
• Answers

CBSE Class 12th Business Studies Question Paper

General instructions:

• This question paper contains 34 questions.
• Marks are indicated against each question.
• Answers should be brief and to the point.
• Answers to the questions carrying 3 marks may be from 50 to 75 words.
• Answers to the questions carrying 4 marks may be about 150 words.
• Answers to the questions carrying 6 marks may be about 200 words.
• Attempt all parts of the questions together.

Q1. Aarti Steel Limited is a large creditworthy company manufacturing Steel. The company seeks to enter the Asian market and therefore wants to raise additional funds of ₹1 crore from the primary market. 

The finance manager of the company, Mr Sundaram, has suggested raising funds by issuing debentures, in order to take advantage of ‘Trading On Equity’. 

Identify the factor which is an important determinant of the company’s ability to use the ‘Trading on Equity’ and thus the capital structure.

1. Return on investment
2. Cost of debt
3. Cost of equity
4. Risk consideration

Q2. Over the past five years, there has been an exponential increase in the number of people practising healthier lifestyles in India. 

Doctors and nutritionists are advising people to reduce the daily intake of soft drinks as they are aerated, which can lead to obesity and other health issues. 

In order to cope with the setback in the demand from the consumers, “ENERGISE’, a soft drink giant, decided to introduce a tea brand named ‘SFUR-TEA’ and a wellness drink named ‘FORTY PLUS’ for women. 

The company received a hearty response from the consumers. Identify the feature of Management reflected in the above paragraph.

1. Management is intangible
2. Management is a dynamic function
3. Management is a group activity d)management is multidimensional

Q3. KG Electrical Appliances, a company that manufactures bulbs, incurred heavy expenditure on scientific research and development and invented a technology that made it possible to produce an energy-efficient bulb that can last at least 15 times longer than a standard LED bulb. 

This technology helped the company to increase its profitability and growth. 

Identify the significance of the business environment highlighted above.

1. It helps in assisting and policy formulation
2. It helps in tapping useful resources
3. It helps in improving performance
4. It helps the firm to identify threats and early warning signals

Q4. Ajit Nene, the owner of a newly established food delivery outlet, ‘Food and Snacks’ in Maharashtra, instructed the Human Resource Manager of the firm to establish qualitative benchmarks of performance, as he wanted to assess the motivation, skill and satisfaction level of his employees. 

The sales manager was asked to set quantitative benchmarks of performance in terms of volume of sales made on a daily basis.

Identify the step performed by Ajit Nene in the process of controlling.

1. Measurement of performance
2. Analysing deviations
3. Setting performance standards
4. Taking corrective action

Q5. Light and Sound Pvt Ltd manufactures custom in-ear monitors for musicians. Although it has been in the business for the last five years and has a considerable market share, conducting an analysis, it found that the company was spending almost 10% of the total cost on packaging.

The company decided to outsource the packaging function to a professional packaging company. The decision helped the firm to achieve its goals through greater customer satisfaction by timely delivery of orders, and also helped the company in reducing the cost of packaging by 5%.

After the implementation of the decision for outsourcing, the company has become:

1. Effective
2. Efficient
3. Both efficient and effective
4. Neither efficient nor effective

Q6. With the advent of ‘Talk GPT, in the Information Technology industry, companies have started investing in Artificial Intelligence in order to fulfill the expectations of the customers.

Largely, the customers are showing a positive attitude toward the new Artificial Intelligence-based Talkbot. 

Identify the dimensions of the business environment being referred to here.

1. Social and economic environment
2. Technological and social environment
3. Economic and technological environment
4. Legal and social environment

Q7. Name the function of management that completes one cycle of the management process and improves planning in the next cycle.

1. Staffing
2. Directing
3. Organising
4. Controlling

Q8. In                     , it is easier to fix responsibility for performance

1. Functional structure and formal organisation
2. Divisional structure and informal organisation
3. Functional structure and informal organisation
4. Divisional structure and formal organisation

Q9. The business environment is said to be uncertain as:

1. Different elements or parts of the business environment are closely interrelated
2. It differs from country to country
3. It consists of interrelated forces that arise from different sources
4. It is very difficult to predict future happenings, especially when environmental changes are taking place too frequently.

Q10. Arrange the following steps of the planning process in a correct sequence.

1. Implementing the plan
2. Evaluating alternative courses of action
3. Follow-up action
4. Selecting an alternative

1. i,ii,iii,iv
2. iv,ii,i,iii
3. ii,iv,i,iii
4. i,i,iv,iii

Q11. ASSERTION: Controlling helps in making efficient use of resources

REASON: An efficient control system keeps a check on the changes taking place in the organisation and in the environment, and helps to review and revise the standards in light of changes

Alternatives:

1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
2. Both Assertion (A) and Reason (R) are true, and Reason (R) is not the correct explanation of Assertion (A)
3. Assertion (A) is true, but Reason (R) is False
4. Assertion (A) is False, but Reason (R) is True

Q12. Demonetisation has shown a major impact on all major sectors of the economy. Choose the incorrect statement about the impact of demonetisation.

1. Decline in cash transactions
2. Increase in bank deposits
3. Increase in real estate prices
4. Increase in financial savings

Q13. YTS, a shipping company, has been successfully carrying out its shipping business for the past five years. 

Last year, it rolled out a new shipping initiative during the holiday season, with the promise to deliver all packages by a particular time before the holidays. The company had an objective of increasing its profit at a consistent rate. 

The unexpected high demand hassled the workers and the delivery team, causing a delay in the delivery of a large number of packages. 

The company did not recognise the logistical difficulties in training new staff, in order to meet its delivery schedules as promised. 

The complacency of the company to think that a consistent rate of profit could be maintained led to its failure. Identify the limitations of planning discussed above.

1. Planning is a time-consuming process
2. Planning does not guarantee success
3. Planning involves huge costs
4. Planning reduces creativity

Q14.

The above picture highlights the absence of a concept, which is causing a delay in decision-making. Identify the concept.

1. Organising
2. Span of management
3. Delegation
4. Accountability

Q15. As the Production Manager of a large company, which method will be followed for Mr Gopesh to gauge the performance of his department.

1. Sample checking of certain random pieces for quality
2. Checking each piece for quality specifications
3. Calculation of certain financial ratios
4. Checking the increase in market share

Q16. Match the following concepts with their meaning:

COLUMN 1	COLUMN 2
A. Authority	i. Increases the role of subordinates in the organisation by giving them more autonomy
B. Functional structure	ii. Flows downwards from superior to subordinate
C. Decentralisation	iii. Cannot be entirely delegated
D. Responsibility	iv. Minimum duplication of efforts and hence economical

1. Ai, Biii, Cii, Div
2. Aii, Biv, Ci, Diii
3. Aiii, Biv, Ci, Dii
4. Aiii, Bi, Civ, Dii

Q17. Choose the incorrect statement about the controlling function of management.

1. Controlling is both backward and forward looking
2. Controlling is prescriptive, whereas planning is evaluative
3. Controlling presupposes the existence of certain standards
4. Controlling is a pervasive function of management

Q18. _________ is the process of defining and grouping activities of the enterprise and establishing authority relationships among them.

1. Decentralisation
2. Planning
3. Staffing
4. Organising

Q19. Mr Anand Niketan has been successfully running a chain of restaurants in Delhi and Gurgaon for the past 15 years. 

Aadhavan, his son, returned to India after acquiring a Master’s degree in Social Work. He suggested to his father that they should enter into a new line of business of Coffee Bars, and provide employment opportunities to differently abled people and in the process create greater economic value for different sections.

After a lot of deliberation, Aadhavan opened his first Coffee Bar under the name of ‘SPESH’ near the college campus. 

The idea of taking orders was unique. The staff gave a pen and a pad and had codes on the menu in front of the dishes. 

On pressing the bell, the light would pop, and the staff would come to assist customers. The users loved the concept, and very soon ‘SPESH’ expanded its outlets to other parts of the city. Aadhavan hired an additional 70 employees to manage the new outlets.

Identify the objective(s) that SPESH seeks to achieve through its new venture.

1. Organisational and personnel objective
2. Organisational and social objective
3. Social and personnel objective
4. Social objective

Q20. During the devastating earthquake in Gujarat, Mansukhbhai, a traditional clay craftsman, incurred heavy losses in the pottery business. 

Journalists photographed his broken matkas and referred to them with the caption" The poor man's broken fridge". 

An idea struck him to make a real fridge with the same cooling principle, and after several tests of soil and fridge designs, he introduced the innovative ‘Claycool’ fridge in 2005. 

His company is growing at 15% annually, and he seeks to achieve a target of ₹10 crores by the end of the next fiscal year. 

The company has stuck to its statement of keeping all the products priced at a lower rate in order to be affordable.
Identify the plans referred to in the above case study.

1. Objective and strategy
2. Strategy and policy
3. Policy and objective
4. Objective and rule

Q21. Atlantic Pharma Incorporation (Inc.), a distributor of durable medical equipment and sports medicine, is currently facing problems in managing the company's infrastructure and IT projects. To effectively cope with the situation, the company has created a new position of 'Senior Systems Administrator’, who will be able to understand the volatile health care industry, as well as its IT environment. Since the position requires more than just technical expertise, the company has taken the following decisions, for the timely fulfilment of the manpower requirement:

1. Assessing the new role's requirements through a job description, in order to ensure the appointment of a person with the required specific set of educational qualifications, experience, personality and characteristics.
2. Hiring 'Unifold Consultants', a renowned consultancy firm which maintains a database of candidates and which will advertise the job on behalf of Atlantic Pharma Limited.
3. Adopting a deeper screening process of the candidate possessing the technical and business process knowledge.

Identify and state the steps which Atlantic Pharma Incorporation has decided to carry out in order to fill the new job position introduced by the company.

Q22. State any three functions performed by middle-level managers.

OR

State any three features of coordination.

Q23. Explain how planning:

1. provides the basis of control
2. helps in taking rational decisions

OR
Explain why planning is regarded as:

1. a forward-looking function
2. a mental exercise

Q24. Fast Runners has become one of the most recognised athletic brands in India. It deals in a wide variety of sportswear. 

However, of late, it has been facing difficulty in keeping its inventory under control. 

In 2022, the company adopted an inventory management software, which helped it to predict items that could sell best and prepare the company to meet its demand. 

This has helped the company in providing better customer satisfaction by making the goods physically available to them.

State the three activities Fast Runners should undertake other than the one discussed above, in order to ensure the availability of its products at the right place, at the right time and in the right quantity.

Q25. Lilly and Milly are working as Marketing Manager and Finance Manager, respectively, in an insurance company. 

In consultation with the Human Resource Manager, Lilly formulates a plan which links the salaries of the insurance agents of the company with the volume of sales, in order to provide incentives to make them achieve beyond the assigned monthly targets.

Milly conducts regular meetings and congratulates her efficient subordinates for good performance. She also displays their name on the notice board, highlighting their achievements.

Identify and briefly explain the incentives provided to the employees by Lilly and Milly.

Q26. Human resource management requires many specialised activities and duties that the Human Resource Manager must perform. State any four such duties.

OR

State by giving four reasons as to why the staffing function must be performed efficiently by all organisations.

Q27. State any four features of an organisation that is an aggregate of interpersonal relationships and is formed without any conscious purpose.

Q28. Ashutosh Savarkar has recently opened a Tortilla base manufacturing unit in Pune. Processing time being short, as soon as the product is ready, it is dispatched to various outlets and restaurants, in order to keep it fresh. The restaurants are required to give their orders 24 hours in advance, as there is no fixed consumption pattern in the city.

1. Determine whether the working capital requirement of Ashutosh Savarkar’s business is high/low? State the reason in support of your answer.
2. State any three other factors, apart from the one identified above, that should be considered while determining the working capital requirement of a business.

Q29. Give any four reasons to justify that directing is essential for the efficient and effective functioning of the organisation.

OR

State any four measures to overcome communication barriers.

Q30. Distinguish between the New Issue Market and the Stock Exchange (any four points).

Q31. “The principles of management derive their benefit from their utility.” Explain any four points in support of the above statement.

OR

Explain any four points that summarise the nature of the principles of management.

Q32. Drug price watchdog’ National Pharmaceutical Pricing Authority’ (NPPA) has decided to cap the prices of medicines, for which the prices rise by more than 20% in a year. This has been done in pursuance of the ‘public interest ‘clause in the drugs law.

1. Identify the consideration that is being kept in mind by the NPPA while fixing the price of medicines.
2. State any five other considerations affecting the fixation of the price of the product, apart from the one identified above.

Q33. Gasex Fertilisers Ltd expected a growth of 10% in sales in the previous quarter. However, due to the prevailing economic situation around the world, the actual growth in sales was only 5%. 

The company’s Finance Manager was called for an urgent meeting by the senior management of the company, in which he clarified that he was already prepared for the situation, as he had made a financial blueprint for the future operations. 

He also reassured the management that he knew how to control the expenses, in case the sales were lower than expected.

1. Identify the concept that enabled the Finance manager to tackle the situation discussed above.
2. State any five points highlighting how the concept discussed above can help in the smooth functioning of the organisation.

Q34. 

1. Enumerate the purpose of the Consumer Protection Act, 2019.
2. State any five responsibilities that should be kept in mind by a Consumer while purchasing, using, and consuming goods and services, according to the Consumer Protection Act, 2019.

OR

1. Define the scope of the Consumer Protection Act, 2019.
2. State any five functions of Non-governmental organisations which aim at promoting the welfare of consumers.

The End

Answers

Q1. a) Return on investment

Q2. b) Management is a dynamic function

Q3. c) It helps in improving performance

Q4. c) setting performance standards

Q5. c) Both efficient and effective

Q6. b) Technological and social environment 

Q7. d) Controlling

Q8. d) Divisional structure and formal organisation

Q9. d) It is very difficult to predict future happenings, especially when environmental changes are taking place too frequently.

Q10. c) ii,iv,i,iii

Q11. b) Both Assertion (A) and Reason (R) are true, and Reason (R) is not the correct explanation of Assertion (A)

Q12. c) Increase in real estate prices

Q13. b) Planning does not guarantee success 

Q14. c) Delegation

Q15. a) Sample checking of certain random pieces for quality

Q16. b)Aii, Biv, Ci, Diii

Q17. b) Controlling is prescriptive whereas planning is evaluative

Q18. d) Organising

Q19. b) Organisational and social objective

Q20. c) Policy and objective

Q21. Steps which must be carried out by Atlantic Pharma Ltd to fill the new job position are:

1. Estimating the Manpower Requirements-it is important to translate the manpower requirements into a specific job description and the desirable profile of its occupant — the desired qualifications, experience, personality characteristics and so on.
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 choosing from among the pool of prospective job candidates developed at the stage of recruitment.

Q22. The functions of middle level management are: 

1. Interpret the policies framed by top management
2. Ensure that their department has the necessary personnel,
3. Assign necessary duties and responsibilities to them,
4. Motivate them to achieve desired objectives and
5. Cooperate with other departments for smooth functioning of the organisation.  

 OR

1. Coordination integrates group efforts: Coordination unifies unrelated or diverse interests into a purposeful work activity. It gives a common focus to group effort to ensure that performance is as it was planned and scheduled.
2. Coordination ensures unity of action: The purpose of coordination is to secure unity of action in the realisation of a common purpose. It acts as the binding force between departments and ensures that all action is aimed at achieving the goals of the organisation.
3. Coordination is a continuous process: Coordination is not a one-time function but a continuous process. It begins at the planning stage and continues till controlling.
4. Coordination is an all-pervasive function: Coordination is required at all levels of management due to the interdependent nature of activities of various departments. It integrates efforts across departments and levels.
5. Coordination is the responsibility of all managers: Coordination is the function of every manager in the organisation. Top-level managers need to coordinate with their subordinates to ensure that the overall policies for the organisation are duly carried out. Middle-level management coordinates with both the top-level and first-line managers. Operational level management coordinates the activities of its workers to ensure that work proceeds according to plans.
6. Coordination is a deliberate function: A manager has to coordinate the efforts of different people in a conscious and deliberate manner. 

Q23.

1. PLANNING PROVIDES THE BASIS OF CONTROL
• Planning provides the goals or standards against which actual performance is measured. By comparing actual performance with some standard, managers can know whether they have actually been able to attain the goals. If there is any deviation, it can be corrected. Therefore, we can say that planning is a prerequisite for controlling. If there were no goals and standards, then finding deviations, which is part of controlling, would not be possible.  
2. HELPS IN TAKING RATIONAL DECISIONS
• Planning helps the manager to look into the future and make a choice from amongst various alternative courses of action. The manager has to evaluate each alternative and select the most viable proposition. Planning involves setting targets and predicting future conditions, thus helping in making rational decisions.

OR

1. FORWARD LOOKING FUNCTION
• Planning essentially involves looking ahead and preparing for the future. It implies peeping into the future, analysing it and predicting it. Planning is, therefore, regarded as a forward-looking function based on forecasting. Through forecasting, future events and conditions are anticipated, and plans are drawn accordingly.
2. MENTAL EXERCISE
• Planning requires application of the mind involving foresight, intelligent imagination and sound judgement. It is basically an intellectual activity of thinking rather than doing, because planning determines the action to be taken. However, planning requires logical and systematic thinking rather than guesswork or wishful thinking.

Q24. Three other activities that will ensure the availability of products at the right time, at the right place and in the right quantity are:

1. Order Processing: A good physical distribution system should provide for an accurate and speedy processing of orders, in the absence of which, goods would reach the customers late or in the wrong quantity or specifications. This would result in customer dissatisfaction, with the danger of loss of business and goodwill.
2. Transportation: Transportation is the means of carrying goods and raw materials from the point of production to the point of sale. It is important because, unless the goods are physically made available, the sale cannot be completed.
3. Warehousing: Warehousing refers to the act of storing and assorting products in order to create time utility. Generally larger the number of warehouses a firm has, lesser would be the time it takes to serve customers at different locations, but the greater the cost of warehousing and vice versa. Thus, the firm has to strike a balance between the cost of warehousing and the level of customer service.

Q25. 

1. Incentive provided to the employees by Lilly:
• Productivity-linked wage incentive-Several wage incentive plans aim at linking payment of wages to an increase in productivity at the individual or group level
2. Incentive provided to the employees by Milly:
• Employee Recognition Programme-Recognition means acknowledgment with a show of appreciation. When such appreciation is given to the work performed by employees, they feel motivated to perform/work at a higher level.

Q26.

Duties performed by the Human Resource Manager are:

1. Recruitment, i.e., search for qualified people
2. Analysing jobs, collecting information about jobs to prepare job descriptions
3. Developing compensation and incentive plans.
4. Training and development of employees for efficient performance and career growth.
5. Maintaining labour relations and union management relations.
6. Handling grievances and complaints.
7. Providing for social security and the welfare of employees. 8)Defending the company in lawsuits and avoiding legal complications.

OR
Staffing must be performed by all organisations because:

1. Helps in discovering and obtaining competent personnel for various jobs
2. Makes for higher performance by putting the right person on the right job
3. Ensures the continuous survival and growth of the enterprise through succession planning for managers
4. Helps to ensure optimum utilisation of the human resources. By avoiding overmanning, it prevents under-utilisation of personnel and high labour costs. At the same time, it avoids disruption of work by indicating in advance the shortages of personnel
5. Improves job satisfaction and morale of employees through objective assessment and fair reward for their contribution.

Q27. Features of Informal Organisation are

1. An informal organisation originates from within the formal organisation as a result of personal interaction among employees.
2. The standards of behaviour evolve from group norms rather than officially laid down rules and regulations.
3. Independent channels of communication without a specified direction of flow of information are developed by group members.
4. It emerges spontaneously and is not deliberately created by the management.
5. It has no definite structure or form because it is a complex network of social relationships among members.

Q28. 

1. The working capital requirement of Ashutosh Savarkar is low, as the production cycle is shorter
2. Factors that should be considered before determining the working capital requirement are:
• Nature of Business: A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing. Similarly, service industries, which usually do not have to maintain inventory, require less working capital.
• Scale of Operations: For organisations that operate on a larger scale of operation, the quantum of inventory and debtors required is generally high. Such organisations, therefore, require a large amount of working capital
• Business Cycle: In the case of a boom, the sales as well as production are likely to be larger, and, therefore, a larger amount of working capital is required. In this, the requirement for working capital will be lower during the period of depression, as the sales as well as production will be small.
• Seasonal Factors: In peak season, because of a higher level of activity, a larger amount of working capital is required. In this, the level of activity as well as the requirement for working capital will be lower during the lean season.
• Credit Allowed: Different firms allow different credit terms to their customers. A liberal credit policy results in a higher amount of debtors, increasing the requirement for working capital.
• Credit Availed: Just as a firm allows credit to its customers, it also may get credit from its suppliers. To the extent it avails the credit on purchases, the working capital requirement is reduced.
• Operating Efficiency: Firms manage their operations with varied degrees of efficiency. Such efficiencies may reduce the level of raw materials, finished goods and debtors, resulting in a lower requirement of working capital.
• Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant.
• Growth Prospects: If the growth potential of a concern is perceived to be higher, it will require a larger amount of working capital so that it is able to meet higher production and sales targets whenever required.
• Level of Competition: A Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement.
• Inflation: With rising prices, larger amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus becomes higher with a higher rate of inflation.

Q29. Directing is essential for the effective and efficient functioning of the organisation due to the following reasons:

1. Directing helps to initiate action by people in the organisation towards the attainment of desired objectives.
2. Directing integrates employees' efforts in the organisation in such a way that every individual effort contributes to the organisational performance. Thus, it ensures that the individuals work for organisational goals.
3. Directing guides employees to fully realise their potential and capabilities by motivating and providing effective leadership.
4. Directing facilitates the introduction of needed changes in the organisation. Effective directing through motivation, communication and leadership helps to reduce such resistance and develop the required cooperation in introducing changes in the organisation.
5. Effective directing helps to bring stability and balance in the organisation since it fosters cooperation and commitment.

OR

Measures to overcome communication barriers:

1. Clarify the ideas before communication: The problem to be communicated to subordinates should be clear in all its perspectives to the executive himself.
2. Communicate according to the needs of the receiver: The level of understanding of the receiver should be crystal clear to the communicator. The manager should adjust his communication according to the education and understanding levels of subordinates.
3. Consult others before communicating: Before actually communicating the message, it is better to involve others in developing a plan for communication.
4. Be aware of languages, tone and content of message: The contents of the message, tone, language used, and manner in which the message is to be communicated are the important aspects of effective communication.
5. Convey things of help and value to listeners: While conveying messages to others, it is better to know the interests and needs of the people with whom one is communicating.
6. Ensure proper feedback: The communicator may ensure the success of communication by asking questions regarding the message conveyed.
7. Communicate for present as well as future: Generally, communication is needed to meet the existing commitments to maintain consistency; the communication should also aim at future goals of the enterprise.
8. Follow-up communications: There should be regular follow-up and review of the instructions given to subordinates.

Q30.

Point	New Issue Market	Stock Exchange
i	There is sale of securities by new companies or further new issues of securities by existing companies to investors.	There is trading of existing shares only.
ii	Securities are sold by the company to the investor directly or through an intermediary.	Ownership of existing securities is exchanged between investors; the company is not involved.
iii	The flow of funds is from savers to investors; the primary market directly promotes capital formation.	It enhances encashability (liquidity) of shares; the secondary market indirectly promotes capital formation.
iv	Only buying of securities takes place in the primary market; securities cannot be sold there.	Both buying and selling of securities can take place on the stock exchange.
v	Prices are determined and decided by the management of the company.	Prices are determined by demand and supply for the security.
vi	There is no fixed geographical location.	Trading is carried out through specified stock exchange platforms.

Q31. Significance of Principles of Management:

1. Providing managers with useful insights into reality: The principles of management provide the managers with useful insights into real-world situations. Adherence to these principles will add to their knowledge, ability, and understanding of managerial situations and circumstances. As such, management principles increase managerial efficiency.
2. Optimum utilisation of resources and effective administration: Resources should be put to use in such a manner that they give maximum benefit with minimum cost. Principles equip the managers to foresee the cause-and-effect relationships of their decisions and actions. Effective administration necessitates impersonalisation of managerial conduct so that managerial power is used with due discretion.
3. Scientific decisions: Management principles help in thoughtful decision-making. They emphasise logic rather than blind faith. Management decisions taken on the basis of principles are free from bias and prejudice. They are based on the objective assessment of the situation.
4. Meeting changing environment requirements: Although the principles are in the nature of general guidelines but they are modified and, as such, help managers to meet changing requirements of the environment.
5. Fulfilling social responsibility: The increased awareness of the public forces businesses, especially limited companies, to fulfill their social responsibilities.
6. Management training, education and research: Principles of management are at the core of management theory. As such, these are used as a basis for management training, education and research.

OR

Features of Principles of Management

1. Universal applicability: The principles of management are intended to apply to all types of organisations, business as well as non-business, small as well as large, public sector as well as private sector, manufacturing as well as the services sectors. However, the extent of their applicability would vary with the nature of the organisation, business activity, scale of operations and the like.
2. General guidelines: The principles are guidelines but do not provide readymade, straitjacket solutions to all managerial problems. This is so because real business situations are very complex and dynamic, and are a result of many factors.
3. Formed by practice and experimentation: The principles of management are formed by experience and the collective wisdom of managers as well as experimentation.
4. Flexible: The principles of management are not rigid prescriptions, which have to be followed absolutely. They are flexible and can be modified by the manager when the situation demands.
5. Mainly behavioural: Management principles aim at influencing the behaviour of human beings. Therefore, principles of management are mainly behavioural in nature.
6. Cause and effect relationships: The principles of management are intended to establish relationships between cause and effect so that they can be used in similar situations in a large number of cases. The principles of management are less than perfect since they mainly apply to human behaviour.
7. Contingent: The application of principles of management is contingent or dependent upon the prevailing situation at a particular point in time. The application of principles has to be changed as per requirements.

CBSE Class 12th Business Studies Revision Notes - N8

Free Business Studies - Class 12th (CBSE) - Revision Notes - N8 - Controlling

Students who are studying in class 12th need to learn the concepts of Controlling as mentioned in their CBSE Business Studies book.

So, the time has come to read free revision notes for CBSE class 12th, mainly focused on Chapter 09: Controlling.

These exclusive revision notes are built by expert CBSE teachers to increase your knowledge level to score higher in your upcoming board exams.

Here are the quick details:

• Subject: Business Studies
• Class: 12th (CBSE)
• Chapter Name: Controlling

Revision Notes for CBSE Class 12th - Business Studies

Controlling

• The comparison of actual performance with the planned performance.
  
• If there is any difference (deviation) then finding the reasons for such difference and taking corrective measures (action) to stop those reasons so that in future there is match between actual and planned performance.
• Controlling means ensuring that activities in an organization are performed as per the plans.

Importance of Controlling

Learn the below content it in a fun way: MARGO (Motivation, Accuracy, Use, Goals, Order)

1. Improving Employees Motivation- An effective control system communicates the goals and standards of appraisal for employee in advance. It thus, motivates them and helps them to give better performance.
2. Judging Accuracy of Standards- Through controlling we can easily judge whether the standard or target set are accurate or not.
3. Making Efficient Use of Resources- Like traffic signal, the controls guides the organization and keeps it on the right track. Each activity is performed according to predetermined standards. As a result, there is the most effective use of resources.
4. Helps in Achieving Organizational Goals - When the plans are made in the organization these are directed towards the achievement of organizational goals. The controlling function ensures that all the activities in the organization take place according to plan.
5. Ensures Order And Discipline- Control keeps the subordinates under check and makes sure they perform their functions efficiently. It can check over dishonesty and fraud of employees by keeping a close check on their activities.

Relationship between Planning & Controlling

Planning and controlling are inseparable twins of management.

• Planning is the basic function of every enterprise as in planning we decide what is to be done, how it is to be done when it is to be done and by whom it must be done.
• Controlling means keeping a check that everything is under the plan and if there is any deviation, taking preventive measures to stop that deviation.
• Planning and controlling functions always exist together as one function depends on the other.
• The controlling function compares actual performance with the planned performance and if there is no planned performance then controlling cant take place. 
• The planning function is also dependent on controlling function as plans are not made only on papers but these have to be followed and implemented in the organization. The controlling functions make sure that everyone follows the plan strictly.

Planning and Controlling both are Backward and Forward Looking

• Planning is forward looking because plans are prepared for future.
• Planning is also backward looking because planning is guided by past experiences and feedbacks.
• Controlling is also forward-looking because controlling does not end only by comparing past performance with standard. It involves finding the reasons for deviations and suggests the measures so that these deviations do not occur in future.
• Controlling is backward looking because like a postmortem of past activities, the managers look back to the previous year's performance to find out its deviation from the standard.

Steps in the Controlling Process

1. Setting Performance Standards
2. Measurement Of Actual Performance
3. Comparing Actual Performance with standards
4. Analyzing Deviations
5. Taking Corrective Action

Here is the explanation:

1. Setting Performance Standards:
• Standards are the criteria against which actual performance would be measured. Thus, standards serve as benchmarks towards which an organization strives to work. Standards can be set in both quantitative as well as qualitative terms. Standards should be flexible enough to be modified whenever required.
2. Measuring of Actual Performance:
• Measurement of performance of an employee may require preparation of performance report by his superior. Measurement of a company's performance may involve calculation of certain ratios like gross profit ratio, return on investment etc. Progress of work in certain operating areas like marketing may be measured by considering the number of units sold, increase in market share etc.
3. Comparing Actual Performance with Standards
• The manager compares the actual performance with the planned performance and standard. If there is a match in both then the controlling functions end there only. But if there is a mismatch or deviation then the manager tries to find out the extent of the deviation. If the deviation is minor then it should be ignored. But if the deviation is more, then timely actions must be taken.
4. Analyzing Deviations
• All deviations need not be brought to the notice of top management. A range of deviations should be established and only cases beyond this range should be brought to the knowledge of top level management.
• Critical Point Control : It means keeping a focus on some key areas (KRAs) and if there is any deviation in these key areas, then it must be attended urgently. Key areas are those which have an impact on whole organization. For example: In a manufacturing organization, an increase of 5% in the labor cost may be more troublesome than a 15% increase in postal charges.
• Management By Exception : It means a manager who tries to control everything may end up controlling nothing. The deviations which are beyond the specific range should only be handled by managers and minute or minor deviations can be ignored. For example: If production cost increases by Rs 20, it can be ignored but if it increases more than Rs 20, then managers must try to find out the reasons for deviations which need immediate attention.
5. Taking Corrective Action
• On comparing the actual performance with the planned performance, then the next step is to know the reasons for such deviations and try to remove deviations in future. The managers take measures to bring back everything on track, i.e. according to plan.

The End

Have you finished the entire revision of the notes? Do you want to learn more? Below are the revision notes for the following:

• Marketing Management
• Financial Management
• Organising
• Consumer Protection

CBSE Class 12th Business Studies Revision Notes - N12

Free Business Studies - Class 12th (CBSE) - Revision Notes - N12 - Consumer Protection

We have heard slogans on the television, radio, and other mediums that "Jaago Grahak Jaago". This campaign by the Indian Government shows the importance of consumer protection in India.

Students who are studying in class 12th also have a Business Studies chapter on Consumer Protection.

So, time has come to read free revision notes for CBSE class 12th mainly focused on Chapter 12: Consumer Protection.

These exclusive revision notes are built by expert CBSE teachers to increase your knowledge level to score higher in your upcoming board exams.

Here are the quick details:

• Subject: Business Studies
• Class: 12th (CBSE)
• Chapter Name: Consumer Protection

Revision Notes for CBSE Class 12th - Business Studies

Consumer Protection

Definition of Consumer (As Per Consumer Protection Act 2019)

A consumer is defined as a person who buys any goods or avail any services for a consideration, which has been paid or partly paid or partly promised or promised to pay, under any scheme of deferred payment.

It also includes the person, who is using the goods or beneficiary of service with the approval of the buyer. It applies to both offline and online transactions through electronic means or by teleshopping or direct selling or multilevel marketing.

Note: Any person who obtains good and avails services for resale or commercial purpose is not treated as consumer.

Importance of Consumer Protection

From Consumer Point of View

• Consumer Ignorance
• Consumer protection provides information to the ignorant customers regarding the rights and remedial available to them. It spreads awareness so that consumer can know about their rights and various redressal agencies.
• Unorganized Consumer
• In developing countries like India, consumers are not organized. Consumer protection provides power and rights to the organizations as these organizations can file case on behalf of customers.
• Widespread Exploitation of Consumers
• Although nowadays consumer is the king of the market, but even then there is a lot of exploitation of consumers. Consumer protection provides a safeguard to consumers from such exploitation.

From Businessmen's Point of View

• Long-Term Interest of Business
• In the race of competition, the businessmen can win and capture a big share in the market only when they are able to satisfy its customers by designing the products keeping in mind the requirements of customers. So, it is in the interest of the business itself to keep its customers satisfied.
• Businessmen Uses Society's Resources
• Businessmen earn profit by supplying goods and services to the members of society, so it must do something for society. Businessmen are merely trustees of resources; they must use these resources for the benefits of consumers.
• Social Responsibilities
• A businessman has social obligations towards various groups and customers. It is the responsibility of businessmen to provide quality goods at a reasonable price. Consumer protection guides businessmen to provide social responsibilities.
• Moral Justification
• In today's environment, business without ethical value is no more than a criminal activity and no civil society can tolerate and allow the existence of unethical business.
• Government Intervention
• If businessmen want to avoid intervention of government then they shouldn't involve in unfair trade practices. Businessmen should voluntarily involve in the activities which protect the interest of the consumer.

Consumer Rights 

The six fundamental consumer rights are:

1. Right to Safety
2. Right to Information
3. Right to be Assured / Right to Choose
4. Right to be Heard or Right to Representation
5. Right to Seek Redressal
6. Right to Consumer Education

Following are the details:

1. Right to Safety
• According to this right, the consumers have a right to be protected against the marketing of goods and services which are hazardous to life and property. This right to safety protects the consumer from sale of such hazardous goods or services. Thus, consumers are educated that they should use electrical appliances which are ISI marked as this would be an assurance of such products meeting quality specifications.
2. Right to Information
• According to this right, the consumer has the right to get information about the quality, quantity, purity, standard and price of goods or services to protect himself against the unfair practices. The law in India also requires the manufacturers to provide such information on the package and label of the product.
3. Right to be Assured / Right to Choose
• The right to choose means an assurance of availability, ability and access to a variety of products and services at fair price. The producer or supplier or retailer should not force the customer to buy a particular brand only. Consumer should be free to choose the most suitable product from his point of view.
4. Right to be Heard or Right to Representation
• According to this right, the consumer has the right to represent himself or to be heard or the right to advocate his interest. In case a consumer has been exploited or has any complaint against the product or service, then he has the right to be heard and be assured that his/her interest would receive consideration. Under this right, the companies must have complaint cells to attend to the complaints of customers.
5. Right to Seek Redressal
• According to this right, the consumer has a right to get compensation or seek redressal against unfair trade practices or any other exploitation. The right to redressal includes compensation in the form of money or replacement of goods on repair of defect in the goods as per the satisfaction of the consumer.
6. Right to Consumer Education
• According to this right, it is the right of the consumer to acquire the knowledge and skills to be an informed consumer. This right assures that literate and illiterate both consumers can seek information about the rights and the reliefs available to him.

Consumer's Responsibilities

• Be aware about various goods and services available in the market so that an intelligent and wise choice can be made.
•  Buy only standardised goods as they provide quality assurance. Thus, look for ISI mark on electrical goods, FPO mark on food products, Hallmark/BIS Mark on jewellery, WOOLMARK on 100% Pure Wool etc.
• Learn about the risks associated with products and services, follow manufacturer’s instructions and use the products safely.
•  Read labels carefully to have information about prices, net weight, manufacturing and expiry dates, etc.
•  Assert yourself to ensure that you get a fair deal.
• Be honest in your dealings. Choose only from legal goods and services and discourage unscrupulous practices like black-marketing, hoarding etc.
• Ask for a cash memo/Invoice on purchase of goods or services. This would serve as a proof of the purchase made.
• File a complaint in an appropriate consumer forum in case of a shortcoming in the quality of goods purchased or services availed. Do not fail to take an action even when the amount involved is small.
•  Form consumer societies which would play an active part in educating consumers and safeguarding their interests.
• Respect the environment. Avoid waste, littering and contributing to pollution.

Who can File a Complaint?

1. Any consumer.
2. Any voluntary consumer association, registered under any law.
3. The central Government or any state government.
4. One or more consumers, where there are numerous consumers having the same interest.
5. In case of the death of the consumer, his legal heir or legal representative.
6. In case of a consumer being minor, his parents or legal guardian.

Who are not Considered as a Consumer under Consumer Protection Act 2019?

1. The person who obtains goods for resale.
2. The person who uses the goods without the approval of the buyer.
3. The person who avails of the services without the approval of the hirer.
4. The person who obtains goods without any consideration (i.e., payment).
5. The person who hires or avails of any services without consideration.

Relied or Remedies/Solution Available to Consumers on Complaints Filed by Him

• To remove the defects or deficiency in the service.
• To replace the defective product with a new one free from any defect.
• To refund the price paid for the product or the charges paid for the services.
• To pay a reasonable amount of compensation for any loss or injury suffered by the consumer due to the negligence of the opposite party.
• To pay extra compensation as a corrective measure for damage to the consumer due to the opposite party (It is called to pay punitive damages).
• To discontinue unfair/restrictive trade practice and not to repeat it in the future.
• No to offer hazardous goods for sale.
• To withdraw hazardous goods from the market.
• To cease manufacture of hazardous goods and to desist (abstain/cease/stop) from offering hazardous services.
• Compensate for any loss or injury suffered by the consumer under product liability action and withdraw hazardous products from being offered for sale, etc.
• Payment of adequate cost to the grieved party.
• District Commission, State Commission, and National Commission have the power to declare a contract null and void, if it is unfair.
• To cease and restrict from issuing any misleading advertisement.

Redressal Agencies and Their Jurisdiction

Every order of the District Commission, State Commission, or the National Commission is deemed final if no appeal for such order is made by any of the parties involved in the dispute.

Redressal Agencies under the Consumer Protection Act, 2019

• District Forum (now District Commission)
• State Commission
• National Commission

District Forum (District Commission)

• District Commission consists of a president and two other members.
• The president can be a retired or working judge of the District Court. They are appointed by the state government.
• The complaints for goods or services worth ₹ 1 crore or less can be filed in this agency.
• District forum may give grieved parties five days for settlement.
• The agency sends the goods for testing in a laboratory if required and gives decisions based on facts and laboratory report.
• If the aggrieved party is not satisfied by the jurisdiction of the district commission, then they can file an appeal against the judgement in the State Commission within 45 days.

State Commission

• It consists of a president and at least four other members.
• The president must be a retired or working judge of the high court. They all are appointed by the state government.
• The complaints for the goods worth more than ₹ 1 crore and less than ₹ 10 crore can be filed in State Commission.
• On receiving a complaint, the State Commission contacts the party against whom the complaint is filed and sends the goods for testing in a laboratory if required.
• In case the aggrieved party is not satisfied with the judgement, then they can file an appeal in the National Commission within 30 days.

National Commission

• The National Commission consists of a president and four members, one of whom shall be a woman.
• They are appointed by the Central Government.
• The complaint can be filed in the National Commission if the value of goods exceeds ₹ 10 crore.
• On receiving the complaint, the National Commission informs the party against whom the complaint is filed and sends the goods for testing if required and gives judgement.
• If the aggrieved party is not satisfied with the judgement, then they can file a complaint in the Supreme Court within 30 days.

Role of Consumer Organizations and NGOs

1. Educating the public about consumer rights by organizing training programmes, seminars, and workshops.
2. Publishing periodicals and other publications to impart knowledge about consumer problems, reliefs available, and other matters of interest.
3. Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers.
4. Encouraging consumers to strongly protest and act against exploitative and unfair trade practices of sellers.
5. Providing legal assistance to consumers by way of providing aid, legal advice, etc., in seeking legal remedy.
6. Filing complaints in consumer courts on behalf of consumers.
7. Taking an initiative in filing cases in consumer courts in the interest of the public.
8. Helping government agencies to resolve cases of consumer exploitation and to carry on consumer awareness programs.
9. Motivating people to ask for quality marks such as ISI mark, AgMark, etc.

Consumer Protection Act, 2019

The new Consumer Protection Act was passed by Parliament in 2019. It came into force in July 2020 and replaced the Consumer Protection Act, 1986.

Need for the new act

• The Digital Age has led to a new era of commerce. Digitisation has provided easy access, a large variety of choices, convenient payment mechanisms, improved services and shopping as per convenience. However, there are also associated challenges related to consumer protection.
• To help address the new set of challenges faced by consumers in the digital age, the Indian Parliament passed the landmark Consumer Protection Bill, 2019 which aims to provide timely and effective administration and settlement of consumer disputes.

Central Consumer Protection Authority (CCPA)

• The Act proposes the establishment of the Central Consumer Protection Authority (CCPA) as a regulatory authority.
• The CCPA will protect, promote and enforce the rights of consumers and regulate cases related to unfair trade practices, misleading advertisements, and violation of consumer rights.
• The CCPA will have the right to recall products, order reimbursement of the price of goods/services, cancel licenses, impose penalties and file suits.

E-Filing of Complaints

• The new Act provides flexibility to the consumer to file complaints with the jurisdictional consumer forum located at the place of residence or work of the consumer. This is unlike the earlier condition where the consumer had to file a complaint at the place of purchase or where the seller has its registered office address.
• The new Act also contains enabling provisions for consumers to file complaints electronically and for hearing and/or examining parties through videoconferencing.

The End

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CBSE Class 12th Business Studies Revision Notes - N9

Free Business Studies - Class 12th (CBSE) - Revision Notes - N9 - Financial Management

Time has come to read free revision notes for CBSE class 12th mainly focused on Chapter 9: Financial Management.

These exclusive revision notes are built by expert CBSE teachers to increase your knowledge level to score higher in your upcoming board exams.

Here are the quick details:

• Subject: Business Studies
• Class: 12th (CBSE)
• Chapter Name: Financial Management

Financial Management

Business Finance - The fund required to carry out the activities of the Business.

Financial management refers to the efficient acquisition of finance, efficient utilization of finance and efficient distribution of surplus for the smooth working of the company.

Role of Financial Management

• The overall financial health of a business and its future depend on its financial management.
• Optimal procurement and the usage of finance.
• It aims at ensuring the availability of enough funds whenever required and avoiding idle finance.
• The financial statements, such as Balance Sheet and Statement of Profit and Loss Account, of a business are largely determined/affected by financial management decisions taken earlier.

Objectives of Financial Management

The objective of financial management is to maximize the current price of equity shares of the company or to maximize the wealth of owners of the company (shareholders).

Financial Decisions

Investment Decision (Capital Budgeting Decision)

• ¯  This decision relates to the careful selection of assets in which funds will be invested by the firms.
• ¯  The firm invests its funds in acquiring fixed assets as well as current assets.
• ¯  When a decision regarding fixed assets is taken it is also called a Capital Budgeting Decision.

Factors Affecting Investment / Capital Budgeting Decision

·  Cash flow 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 analyzed

· Return on Investment - The rate of return an investment will be able to bring back for the company in the form of income. For example: If project A is bringing 10% return and project B is bringing 15% return then we should prefer project B.

· Risk Involved - The company must try to calculate the risk involved in every proposal and should prefer the investment proposal with a moderate degree of risk only.

· Investment Criteria - There are different techniques to evaluate investment proposals which are known as capital budgeting techniques. These techniques are applied to each proposal before selecting a particular project. 

Financing Decision

This decision relates to the Quantum of finance to be raised from various long-term sources.

¯   A company can raise finance from various sources, but the main sources of finance are divided into two categories :

a) Owner’s Funds: It includes share capital and retained earnings.

b) Borrowed Funds: These include debentures, loans, bonds etc.

¯  Deciding how much to raise from which source

¯  The borrowed funds involve some degree of risk whereas in the owner's fund, there is no fixed commitment of repayment.

Factors Affecting Financing Decision    6CR

·  Cash flow Position - With smooth and steady cash flow companies can easily afford borrowed funds securities but when companies have a shortage of cash flow, then they must go for owner's fund securities only.

·  Cost- The cost of raising finance from various sources are different and finance manager always prefer the source with minimum cost.

·  Flotation Cost- It refers to the cost involved in the issue of securities such as broker's commission, underwriter's fees, expenses on the prospectus, etc. The firm prefers securities which involve the least floatation cost.

· Fixed Operating Cost- If a company is having high fixed operating cost, then it must prefer an owner's fund because due to high fixed operational costs. For example: Building rent, Insurance premium, salaries etc. The company may not be able to pay interest on debt securities which can cause serious troubles for the company.

·  Control Considerations- If existing shareholders want to retain complete control of the business, then they prefer borrowed fund securities to raise further funds. On the other hand, if they do not mind losing control then they may go for owner's fund securities.

·  Capital Market- During the boom period, it is easy to sell equity shares as people are ready to take risks whereas, during the depression period, there is more demand for debt securities in the capital market.

·  Risk- More risk is associated with the borrowed fund as compared to owner's fund securities.

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.

¯  The extent of retained earnings also influences the financing decision of the firm.

Factors Affecting Dividend Decision

·  Cash Flow Position - Paying dividend means an outflow of cash. Companies declare a high rate of dividend only when they have surplus cash. In a situation of shortage of cash, companies declare no or very low dividend.

·  Earning- Dividends are paid out of the current and previous year's earnings. If there are more earnings then the company declares a high rate of dividend whereas, during a low earning period, the rate of dividend is also low.

· Stability of Earnings- Companies having stable or smooth earnings prefer to give a high rate of dividend whereas companies with unstable earnings prefer to give a low rate of dividend. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year.

· Growth Opportunities- If a company has a few investments plans then it should reinvest the earnings of the company. Hence, a company with no growth plans will distribute more in the form of dividends whereas growing companies will be kept aside more as retained earnings.

·   Preference of Shareholders- If a company is having many retired and middle-class shareholders then it will declare more dividend. Whereas if company is having many young and wealthy shareholders then it will prefer to keep aside more in the form of retained earnings and declare a low rate of dividend.

·  Taxation Policy- The rate of dividend also depends upon the taxation policy of the government. Under the present taxation system, dividend income is tax-free for shareholders, but a company must pay tax on dividends given to shareholders. If the tax rate is higher, then the company prefers to pay less in the form of dividend whereas if the tax rate is low then the company may declare higher dividend.

·   Access to Capital Market Consideration- If the capital market can easily be accessed or approached and there is enough demand for securities of the company then the company can give more dividends and raise capital by approaching the capital market. But if it is difficult for the company to approach the capital market then companies declare a low rate of dividend and use reserves for reinvestment.

·  Legal Restrictions / Constraints- Companies Act has given certain provisions regarding the payment of dividends. Apart from the company's act, there are certain internal provisions of the company like whether the company has enough cash flow to pay a dividend or not. The payment of dividend should not affect the liquidity of the company.

·  Contractual Constraints- When companies take long-term loans then financier may put some restrictions or constraints on the distribution of dividend and companies must abide by these constraints.

·  Stock Market Reactions- The declaration of dividend has impact on stock market as the increase in dividend is taken as good news in the stock market and prices of securities rise. Whereas a decrease in dividend may have negative impact on the share price in the stock market. Hence equity share price also affects dividend decision.

·  Stability of Dividend- Some companies follow a stable dividend policy as it has a better impact on shareholder and improves the reputation of the company in the share market. The stable dividend policy also satisfies the investor. When the company is confident then their earning potential has improved then they increase the dividend. 

Financial Planning

• The main objective of financial planning is that sufficient funds should be available in the company for different purposes such as for the purchase of long term assets, to meet day-to-day expenses, etc.
• Excess funding is as bad as a shortage of funds. It may result in the wastage of resources.
•  If adequate funds are not available, the firm will not be able to honor its commitments and carry out its plans.
• On the other hand if excess funds are available, it will unnecessarily add to the cost and may encourage wasteful expenditure.
• It enables the management to foresee the fund requirements both the quantum as well as the timing.

Importance of Financial Planning

• Financial planning helps in forecasting what may happen in future under different business situations. It helps the firm to face the eventual situations. For example: If a company is expecting 20% growth in sales there are chances that it may be 10% or maybe 30%. The planners prepare the blueprint of all three situations so that the company can be well known of all the possible situations and the planning for those situations.
• It helps in avoiding business shocks and surprises and helps the company in preparing for the future.
• If helps in coordinating various business functions e.g., sales and production functions, by providing clear policies and procedures.
• It tries to link the present with the future.
• It provides a link between investment and financing decisions on a continuous basis.
• It makes the evaluation of actual performance easier.

Fixed Capital

• Fixed Capital involves the allocation of firm's capital to long-term assets.
• Managing fixed capital is related to investment decisions and it is also called Capital Budgeting.
• This decision includes the purchase of land, building, plant and machinery, change of technology, expenditure of advertising campaign, research and development etc.

Factors Affecting the Requirement of Fixed Capital

1.Nature of Business - A manufacturing company needs more fixed capital as compared to a trading company and does not need a plant, machinery, etc.

2. Scale of Operation - Companies which are operating at large scale require more fixed capital. Whereas companies operating on a small scale need less amount of fixed capital as they need less amount of machinery and other assets.

3. Technique of Production - Companies using capital-intensive techniques require more fixed capital. Whereas companies using labor-intensive techniques require less fixed capital.

4.Technology Upgradation - Industries in which technology upgradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery. Whereas companies, where technological Upgradation is slow, require less fixed capital as they can manage with old machines.

5. Growth Prospects - Companies which are expanding and have higher growth plans require more fixed capital as to expand their production capacity they need more plant and machinery so more fixed capital.

6. Diversification - Companies which have plans to diversify their activities by including more range of products require more fixed capital. As to produce more products they require more plants and machinery which means more fixed capital.

7.  Availability of Finance and Leasing Facility - If companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets in easy instalments instead of paying a huge amount at one time.

8. Level of Collaboration / Joint Ventures - If companies are performing collaborations, joint venture then companies will need less fixed capital as they can share plant and machinery. But if a company prefers to operate as an independent unit, then there is more requirement for fixed capital.

Working Capital

• Capital required for smooth day-to-day operations of the business.
• It refers to the investment in all the current assets such as cash, bills receivables, prepaid expenses, inventories, Debtors etc.
• These current assets get converted into cash within an accounting year.

  Factors Affecting the Requirement of Working Capital

1. The Scale of Operation- The firms operating at large scale need to maintain more inventory, debtors, etc. so they generally require large working capital.

2. Nature of Business- The manufacturing company requires a huge amount of working capital because they must convert raw materials into finished goods, sell on credit, and maintain the inventory of raw materials as well as finished goods. The trading organization usually needs a lower amount of working capital.

3. Business Cycle Fluctuations- During the boom period, the market is flourishing which means more demand, more production, more stock, and more debtors which means more amount of working capital is required. Whereas during the depression period low demand less inventories to be maintained, and less debtors, so less working capital will be required.

4.Seasonal Factors- The working capital requirement is constant for companies which are selling goods throughout the season. The companies which are selling seasonal goods require huge amounts during the season as more demand, more stock must be maintained and fast supply is needed. Whereas during the off-season demand is very low, so less working capital is required.

5.Credit Allowed- If a company is following a liberal credit policy result in a higher number of debtors, hence needs more working capital. Ø If a company is following a strict credit policy, then it can manage with less working capital also.

6.Credit Availed- It is how much and for how long a period a company is getting credit from its suppliers. If suppliers of raw materials are giving long-term credit, then the company can manage with less amount of working capital. Whereas if suppliers are giving only short-period credit then the company will require more working capital to make payments to creditors.

7.Operating Efficiency- A firm having a high degree of operating efficiency requires less amount of working capital.

8. Level of Competition- If the market is competitive then the company will have to adopt a liberal credit policy and supply goods on time. Higher inventories must be maintained so more working capital is required.

9. Inflation- If there is an increase or rise in price then the price of raw materials and cost of labor will rise, it will increase the working capital requirement.

10. Growth Prospects- Firms planning to expand their activities will require more amount of working capital. As for expansion, they need to increase the scale of production which means more raw materials, more inputs etc.

11. Technology and Production Cycle- If Production Cycle is long then more working capital is required because it will take a long time for converting raw material into finished goods.

    Capital Structure

•          Capital structure means the proportion of debt and equity used for financing the operations of the business.
•          Capital Structure = 𝐃𝐞𝐛𝐭 / 𝐄𝐪𝐮𝐢𝐭y
•          An ideal capital structure is very difficult to define but it should be such that it increases the value of equity shares or maximizes the wealth of equity shareholders (EPS).

                      Debt and Equity differ in Cost and Risk:

Ø  Debt involves less cost, but it is very risky because of the payment of regular interest which is the legal obligation of the business. If the company fails to pay its obligation the security holders can claim over the assets of the company.

Ø  Equity securities are expensive securities, but these are safe securities from the company's point of view as a company has no legal obligation to pay a dividend to equity shareholders if it is running into losses.     

                     Financial Leverage /Trading on Equity

Ø  Financial leverage refers to the proportion of debt in the overall capital.

Ø  Financial leverage = 𝐃𝐞𝐛𝐭 / 𝐄𝐪𝐮𝐢𝐭𝐲

Ø  With debt funds company's funds and earnings increase (CONDITION 1)

      More debt will increase the earning only when the return on investment (ROI) is more than the rate of interest on the debt. (CONDITION 2)

Ø  💥 Return on Investment > Rate of Interest = Favorable Situation.

Ø  💥 Return on Investment < Rate of Interest = Unfavorable Situation.

                  

                 💫 If we compare all the situations then we can see the situation 3 equity shareholders can                    get maximum return followed by the situation  2 and least earning in the situation 1.

                

                💫 Hence, it is proof that more debt brings more income for the owners in capital structure.

                💫 But this statement holds only till return on investment (ROI) of the company is more                      than the rate of interest charged on debt.

                      ROI = EBIT / Total Investment  

                              = 7,00,000 / 50,00,000 X 100

                             = 14%

                    Hence, ROI > Rate of Interest. (14% > 10%)

 

The End