Premlal C R
Unit-1.1
BUSINESS
ACTIVITY
Economic
activity
An effort to do something is known as an activity. Why do so many people
engage themselves in different activities? The answer is that they want to earn
their livelihood and to satisfy their wants and needs.
Human activities are broadly classified into two categories;
Economic activities: - Economic activities are those activities which
relate to the production and exchange of economic goods or services for getting
something in return. Eg:- Activities of traders, manufacturers, sellers, etc.
Non-
economic activities: - Non-economic
activities are those activities which aim to the mental satisfaction rather
than profit making. Eg:- A house wife is cooking for her family, social work
without the intention of return, etc.
Types
of Economic Activities
Economic activities are classified into the following categories;
1. Business: - Business is an economic activity concerned with
the production and distribution of goods and services with the object of making
profit or acquiring wealth for satisfying material wants.
2. Profession: -Profession is an economic activity wherein a person
renders personal services of specialized nature by using his personal skills,
for the purpose of earning something. Eg:- Services of Nurses, Teachers,
Doctors, Lawyers, Accountants, etc..
3. Employment: -Employment involves working for or under someone
else, known as the employer, in return for a salary or wage. The people
rendering services (both mental and physical) are known as the employees.
The
economic problem: Scarcity, needs and wants
All humans have needs and wants. Needs are the
things that we can't live without and wants are the things we would like to
have but we can live without them.
1.
Needs: - The basic requirements of human
being are known as human needs, these are limited in nature.
Eg:- food, clothes, water and shelter
2.
Wants: - Human wants are those goods or
services that require ever and above the basic needs, they are unlimited in
nature.
Eg:- Car, Air conditioner, TV, Vehicles, etc
Scarcity is the major economic problem. It is a
situation that exists when there are unlimited wants and limited resources to
produce the goods and services to satisfy those wants.
Opportunity cost is the next best alternative
forgone by choosing another item. Due to scarcity, people are often forced to
make choices. When choices are made it leads to an opportunity cost
SCARCITY-
CHOICE - OPPORTUNITY COST
Example – The government has a limited amount of money (scarcity) and
must decide on whether to use it to build a harbour, or construct a hospital
(choice). The government chooses to construct the hospital instead of the harbour.
The opportunity cost here are the benefits from the harbour that they have
sacrificed (opportunity cost).
The economic problem results from limited resources
and unlimited wants. This situation causes scarcity, when there are not enough
goods to satisfy the wants for everybody. Because of scarcity we all need to
choose which wants to be satisfied.
FACTORS OF PRODUCTION
Factors of production
are important factors which smoothen the production processes.
1. Land
2. Labour
3. Capital
4. Enterprise
1. Land
Land
represents all the natural resources such as agricultural and building land,
mines and quarries, rivers, oceans and atmosphere and everything where a
business located. The reward for land is called rent
2.
Labour
Labour
includes both physical and mental efforts, whether undertaken for payment in
the production process. The reward
for labour is called wages or salaries
3.
Capital
Capital
represents not only wealth and finance but also physical assets such as
machinery that can be used to produce goods and services. The reward for
capital is interest
Entrepreneur
is a person or group who undertake the risk of running the business or
production. The reward for entrepreneur is profit
or loss
DIVISION OF LABOUR AND
SPECIALIZATION.
Division of labour is the process by which the
complex business task is divided into different categories and each category is
assigned to expert workers or group of workers.
Eg- In a business
organization, there are so many departments such as finance, administration,
labour, distribution, advertising, etc. and each department will be under the
control of Head of the Department.
SPECIALIZATION
(MAY/JUNE 2020 Q.No-1a)
Specialization means the process of ensuring maximum
output by employing right employees in the right job according to their skills
and experiences. Instead of workers producing one product from start to finish,
they focus on just one skill or one task.
1. Individual workers
can concentrate on those jobs to which they are most suited so their efficiency
increases.
2. Practice makes
perfect. Once people have learned a job, their skills at it increase.
3. Division of labour
normally allows a great saving on resources.
4. As the work is
broken down into individual tasks, it is likely that new and more efficient
techniques will be developed.
5. It reduces unit cost
and so business can offer the products at low price.
6. It ensures high
quality outputs.
Disadvantages
of specialization
1. Interdependence-
each part of a factory or an industry depends on the performance of the other
departments. For example, if there is broke down in one section it can quickly
spread to other sections, causing delays and sometimes unemployment.
2. Danger of boredom-
when a worker is performing a simple continuous routine, often hundreds of
times a day.
3. Causing
unemployment- as machinery becomes more complex it replaces labour.
4. Less choice of goods
available to consumers- as machinery takes over the production processes,
output is standardized and no choice of goods available
5.High cost of skilled employees.
LEVELS OF SPECIALIZATION
The principle of the
division of labor is applied at all levels of economic activity
1.
Specialization by industry
An economy is made-up many industries, each
of which tends to specialize on a particular product or process.
Eg:- In the UK there are industries which are
specialized in the production of coal, oil, chemicals, clothing, pottery, and
so on.
2. Specialization by labour.
The division of labour
according to the occupations or works is known as occupational division of
labour.
Eg:- Teachers, Fishermen, Carpenters, lawyers, Doctors,
etc.
3.
Specialization by Geographical area
This is a type of
division of labour according to the geographical location. Here the division is
based on the production or manufacture of certain goods.
Eg:- Arabian countries for Petroleum products, Maldives
for fishing, Srilanka for tea leaves, China for electronic goods, etc.
4.
Complex division of labour.
The process of dividing
entire work of an organization into a number of specialized jobs is known as
complex division of labour.
Eg:- A
business organization is classified into different departments like Finance, Administration,
Marketing, Advertising, etc.
The primary aim of business activities to
produce goods and services for the society.
The common business objectives are:
1. To make profit- It is
the primary aim of all the businesses.
2. To provide goods and
services according to the demand in society.
3. To increase added value-
each business tries to increase the value of the raw materials by contributing
their own resources to make final products.
4. To expand the business-
Growth of business is the dream of all entrepreneurs so they try to expand the
business coverage or target.
5. To achieve business
survival- Survival is managing business by challenging competitors without
being out of market.
6. To provide services-
Besides profit maximization, most of the business try to provide something to
the society as general service.
TYPES OF GOODS AND SERVICES PRODUCED BY
BUSINESS ACTIVITIES
1. Consumer
goods.
The goods which are ready to be sold and consumed by
the final consumers are called consumer goods. It directly satisfies the
consumers. Consumer goods are classified into two,
a. Durable consumer
goods:- These goods can be used over and over again.
Eg:- TV, Chairs, cars, Tables, etc.
b. Non-durable
consumer goods:- These goods can only be used once.
Eg:- Food, Fish, meat, drinks, etc.
2.
Consumer services
Consumer services are services sold to the public, but they cannot be
seen and touched.
Eg:- Banking, Transport, Insurance, Education, health, etc.
3. Capital
goods/Producer goods.
The goods which are used to produce another goods
are called capital goods.
Eg:- Machinery, Tailoring machine, Crane, pick-up van, Computers, etc.
Adding
value is one of the main objectives of business. Whatever good or service a
business produces, value will be added at every stage of the production or
distribution process.
Added value is the difference between the selling price and
the cost of materials. Any changes made to the product that makes it/s price
more is known as added value.
How Business increases added value? (Oct/Nov 2019 Q.No 1a P-2) (Oct/Nov 2017 Q.No-2a P-2) (Mar-2021 Q.No-2a P-2) (Oct/Nov 2022 Q. No-1c)
Added value is not the same as the profit.
Profit will increase if a business increasing its added value without
increasing costs. So, it is difficult to increase value without increasing its
cost.
A business can increase its
added value in the following ways,
1. Branding
Giving a recognizable name or logo to a product is known
as branding. The business can advertise
the product or service with a brand name. Brand loyalty would enhance the
market share and value of the product too.
2. Change Packaging and Design
Proper packaging based on convenient quantities and
quality materials would attract the consumers so it would add the value of
products. Eg:- Packaging used high quality materials.
3. Personalized services
Services given to the persons based on their personal
demand is known as personalized services. The price of a made -to- measure suit
will be higher than the price of a ready-made suit even the cost of materials is
used will be similar.
4 Increased quality and features
By offering unique quality and features of products, the
business can catch the market. The business can charge higher price as the
reward for the extra qualities offered on goods.
5 Convenient deliveries.
If the goods or services are given at the door step or
convenient locations, the customers will be ready to pay higher charges,
because most of the customers prefer to save time for purchasing products or
service. Eg:- Ready meals, fast food, etc.
6. Aftersales services.
Proper aftersales services such as free installation,
free servicing, etc. can be used to add the value of products.
Unit 1.2
CLASSIFICATION OF BUSINESS
Business
Activities in terms of Primary, Secondary and Tertiary sectors
This is the first stage of production. It includes the collection
or extraction of basic raw materials from the nature and the reproduction of
plants and animals. This sector supplies input to the secondary sectors
Eg:-
Mining, quarrying, fishing, farming, forestry, etc.
2.
Secondary sector (Oct/Nov 2021 Q.No-1a)
This is the second stage of
production where the raw materials (inputs) given by the primary stages become
semi-finished or finished products.
Eg:-
Refining, Manufacturing, construction, etc.
This is the third stage of production where the services are
provided to consumers. This stage represents both commercial services and
direct services. Eg:- Banks, communication, transport, shops, advertising,
warehousing, etc.
a. Commercial services
Commercial
services are indirect services which help the business activities such as transportation,
communication, warehousing, advertising, retailing, banking, insurance etc.
b.
Direct services
Direct
services are services which are directly provided to the ultimate consumers
without middlemen. Eg:- doctors, actors,
civil servants, policemen, teachers, nurses, lawyers, etc.
Countries are described
as developing and developed. A developing country has small industrial sector
and a lower standard of living compared to developed countries.
Developed country’s primary sector would be
normally lower in percentage of the total economy. Meanwhile their contribution
in tertiary sector would be higher. Eg:- USA, Japan, Norway, etc.
Developing country’s primary sector would be higher in percentage of the total economy. But their tertiary sector contribution would be lower than developed country. Eg:- India, China, Maldives, etc.
TYPES OF ECONOMIES
1. Command economy
The government controls the majority
of economic activities in the country, such economy is known as command economy.
There is high government influence over the economy Eg:- China, Cuba, North
Korea, etc.
2. Market economy
Private individuals control the
majority of economic activities in the country, such economy is known as market
economy. There is little or no government influence over the economy. Eg:-
Singapore, Hong Kong, Ireland, etc.
3. Mixed economy
This economy has the characteristics
of both command and market economy. Here the private and public sector controls
the entire economic activities in the country. Eg:- India, UK, France,
Maldives, etc.
Unit 1.3
ENTERPRISE, BUSINESS
GROWTH AND SIZE
Enterprise and entrepreneurship
Entrepreneur
(May/June 2022
Q.No-4a.)
Entrepreneur is the term used to
describe when a person undertakes the business risks in order to get something
in return that is profit. People with enterprise skills are called entrepreneurs.
Entrepreneurs take the risk of running the business organization. They take the
critical decision based upon the questions what to produce, how to produce and
for whom to produce.
Role of an entrepreneur
1. Conduct
market research
2. Exploit the business opportunity
3. Identifying the best location of
business
4. Understand and calculate the risks
involved
5. Makes an investment to set up the
business
6. Procures factors of production
Characteristics of a successful entrepreneur (Oct/Nov 2020.Q.No.3e) (Mar 2018.Q no 1.a P-2) (Oct/Nov 2021 Q.No-2e) (May/June 2023 Q.No1a P-2)
1. Innovation-
able to find novelties in trend.
2. Commitment
and self-motivation
3. Multi
skilled- make product, promote it sell it, use profits wisely
4. Leadership
skills- encourage employees in the business
5. Self-confidence
and ability to bounce back from any setbacks
6. Risk
taking capacity- to invest savings in the new business- more risk more profit
7. Communicator- Need skills to communicate with the stakeholders
Major challenges faced by entrepreneurs
1. Identifying successful opportunities- New
business idea comes from
-Own
skills and hobbies
-Previous
employment experiences
-Franchising
conferences and exhibitions
-Small
budget market research
2. Finding
the sources of capital- Business will have problems due to
-Lack of sufficient own finance
-Lack of support and grants from government
-Lack of trading records to present to banks
-Poor business plan to convince potential investors
3. Selection
of good location- so as to have minimum fixed cost. Business
will have problems due to,
-Not close to potential market
-High rate of rent or taxes
4.
Competition- Business will have always problems form
competitors so business should have something unique to challenge the
competitors.
Eg:- better customer service, quality. Etc.
5. Building customer base- To encourage customers to buy again and again.
Eg:-
Better pre and after sales services- Packing, free delivery, Warranty, replace
or refund, etc.
BUSINESS PLAN (May/June 2020 Q.No-3a) (Mar 2017 Q.No-3a) (Oct/Nov-2015 Q.No2a).
A business plan is a written
document that describes the objectives, mode of operation, area of operations,
finance and owners of the business organization. It is the
operational guide of the business. Making business plan is the top end
managerial activity.
Contents
of a business plan.
(May/June 2018 Q.No-1b) (Oct/Nov 2017. Q.No-3a)
1. Organizational or management details, e.g.
structure, type of business, name and location of business
2. Executive summary – It shows the action plans to
be applied in business including business
targets or vision and mission statement or objectives
3. Marketing mix elements- e.g. pricing, product,
place or promotion
4. Market research methodologies- study or
collecting data about the market.
4. Financial analysis methodologies- e.g. cash flow
forecast, budgets, etc.
5. Human resources- number of employees required,
methods of recruitment and selection, training, remunerations etc.
6. Production details – Methods of production to be
followed- capital intensive or labour intensive, etc.
Uses of business plans (May/June 2020 Q.No-2a P-2) (Mar 2019 Q.No-1a P-2) (May/June 2016 Q.No-3e) (March 2022 Q.No-2d) (May/June 2015 Q.No-1a P-2) (May/June 2023 Q.No2a)
1. Provides a focus on the business idea.
2. Producing a document which helps to get loans
from the banks or other institutes.
3. It helps to make budgets for resources required
in future.
4. It encourages the entrepreneur to attract the
capital investors by convincing the business ideas.
5. It helps to meet the resource requirements of
business in time- Finance, employees, etc.
6. It helps to measure actual performance and
growth of the business.
Role of government to help businesses (Oct/Nov 2021 Q.No-3a)
1. Providing cheap loans and giving grants to the
new businesses.
2. Providing advice and information centres for
businesses.
3. Providing college courses and training
programmes for entrepreneurs.
4. Offering subsidies or tax reduction to
businesses.
5. Maintain a stable exchange rate of the currency.
Why does government help businesses?
1. To help small businesses to survive and
encourage competition in the economy.
2. To encourage firms to export and earn foreign
exchange for the country.
3. To encourage businesses to set up in underdeveloped regions of the country and create wealth and employment opportunities in these areas.
BUSINESS
GROWTH AND MEASUREMENT OF SIZE OF THE BUSINESS
How can measure the size of a business? (May/June-2020 Q.No-4b) (Oct/Nov-2018 Q.No-3b) (May/June 2018 Q.No-3a) (Mar 2017 Q.No-1a) (Oct/Nov 2016 Q.No-4a) (Mar-2021 Q.No-4a) (Oct/Nov 2021 Q.No-4e)
1. By measuring the number of employees
A
business with higher number of employees may be considered as large and
business with a smaller number of employees is considered as small. However, it
is not possible in the following conditions, if business uses machineries to
produce goods- flow production unit with capital intensive method and if the
business uses more part-time employees to complete production
2. By measuring the value of output and sales (Turnover).
Sales
revenue that a business earns could be used to measure the size of the business.
Sometimes, a high sales level does not mean that a business is large when using
the other methods of measuring size. The turnover is depending on the nature
and value of the goods that the business deals with.
If
the business deals with expensive products- luxury cars, or electronic
equipment, cannot be measured with total number of sales
3. By measuring capital employed.
Capital
employed means the total amount of capital invested into the business. The more
money invested businesses are considered as larger and less money invested are
considered as small businesses.
4. By measuring Market share.
Those
businesses which have larger market share for their products are considered as
larger businesses and which have less market share are referred to as small
businesses. E.g. Coca Cola covers 50% of all cola drinks worldwide.
5. By measuring number of investors.
This is the current
share price multiplied by the number of shares. Those businesses which have
more market capitalization are considered as larger firms, which have less
market capitalization are considered as small businesses.
Problems with measuring business size
1. It
is difficult to measure the size of labour intensive and capital-intensive
businesses on the basis of number of workers employed.
2. A
large company may have problems and make only a small profit over a period of
time and yet still stay in business.
3. One
of the problems is that share prices change constantly. This means company size
is fluctuating all the time.
EXPANSION OF BUSINESS (May/June 2022 Q.No-1a.)
Methods of Business Expansion
1. Internal Growth: Internal
growth occurs when a business expands its existing operations by selling more
of its existing products. This could be achieved by selling to a wider market
and it takes a long time for many businesses to provide a sound base for
businesses.
2. External Growth: When a
business takeover or merges with another business. It is often called
‘Integration’ as one firm is joined into another one.
a) Takeover (Acquisition): When one business buys out another business
which then become the part of a large business.
b) Merger (Integration): a merger is when the owners of two businesses agree to join their firms together to make one business.
Advantages of takeover (May/June
2020 Q.No-1a P-2) (Mar 2021 Q.No-1e)
(Mar 2016, Q.No.2e) (Feb/Mar 2023 Q.No-3c)
1. Assets already set up for use so no need to install extra
assets for the business
2. Business will have skilled or trained employees- the
current employees are skilled to work in the business so need not to spend more
for training.
3. Easy method to expand the business as the existing
production facilities can be used to increase the output.
4. Reduce the risk of procuring resources as it is an already running business.
Disadvantages
of takeover
1. High cost of buying other business so it may not be easy
for small business.
2. May be difficult integrating the two companies because
the way of working may be very different.
3. Employees may not like the changes so it would
demotivate and leading to less efficiency
4. More difficult to control larger business due to large number of employees
REASONS
FOR THE BUSINESS EXPANSION (Oct/Nov
2022, Q.No-1a.P-2)
(May/June 2023 Q.No2b)
To increase more profit and revenue by exploring new markets.
To increase market share to be a market leader.
To reduce unit cost by doing more trade.
To improve brand image or reputation.
The problems related with expansion of business (Mar 2023. Q.No-2a.P-2)
1. Bigger
firms are harder to manage and control. This may affect the managing of
employees and result to the lack of productivity.
2. Government’s
legal restrictions such as quota, tariffs, etc.
3. Cash
flow and financial problems.
4. Lack
of experience in managing new business in new market situations
5. Poor
communication due to large number of employees.
WHY SOME BUSINESSES REMAIN SMALL? (Oct/Nov 2021 Q.No-1a. P-2)
Advantages of being small business
1. Business can offer personal service or specialized products.
They cannot grow bigger because they
will lose the personal service demanded by customers. They can continue in
niche market too. Eg hair dressers, cleaning, convenience store, etc.
2. Business can maintain small market
size.
If the size of the market a business is
too small, the business cannot expand. Eg luxury cars, expensive fashion
clothing, etc.
3. Owners’ objective.
Owners
might want to keep a personal touch with staff and customers. So they do not
want the increased stress and worry of running a bigger business.
4. Small business are able to react quicker to
the changes in customer demand or market changes.
Disadvantages of being small business
1. Business gets less opportunity for economies of scale-
bulk production and sales would bring more chance to earn profit than a single
deal.
2. Unable to conduct market research due to high cost of
research and development, this would affect the future marketing.
3. Unable to recruit experienced staffs or employees
because the business may not be able to pay high remuneration.
4. Less visibility as a brand so harder to get recognition
to small business when comparing with large business
5. Lower marketing budgets so small business may struggle to have a large market presence with advertising and sales promotion.
REASONS FOR THE BUSINESS FAILURE (Oct/Nov
2020 Q.No-3a P-2) (May/June 2022 Q.No-4c.) (Feb/Mar 2023 Q.No-2a)
Business
failure- Refers to a company ceasing operations
following its inability to make a profit or to bring enough revenue to cover its
expenses.
Reasons of Business Failure.
1. The poor management of cash flow: - Poor
cash flow may arise from:
-Significant increases
in stock levels
-Inadequate credit control
-Bad debt
incurred
2. Lack of management control: - Lack
of management control may result from:
-Failure to make apt decisions
-Failure to understand
costs, markets and stakeholders
3. Shortage of financing
-Use of short-term overdrafts for long term capital acquisitions
-Failure to use
factoring facilities when sales are substantially increasing
4.
Lack of business plan
Lack of proper business
plan or improper implementation of business plan may bring failure to the
business.
5.
Improper market research
Starting
business without a proper market research may bring failure to the business.
Market research helps to find the opportunities and threats associated with the
business.
6.
Hiring wrong employees.
Employees are the back bone of business. If
the employees do not meet the required skills business will have lower output
and failure.
Unit 1.4
TYPES OF BUSINESS ORGANIZATION
Types of business enterprises
1.
Private sector enterprises
2. Public sector enterprises.
1.
Private sector enterprises (May/June
2017 Q.No-4b) (Mar 2016, Q.No.3a)
Private
sector enterprises are enterprises which are owned and controlled by the
private individuals such as sole traders, partners, and limited companies. The
ultimate aim of such business is to make profit.
2.
Public sector enterprises
Public
sector enterprises are enterprises which are owned and controlled by the
government. It is managed by the board of directors who are appointed by the
Government. The main aim of the public sector enterprises is to provide
services rather than profit making.
PRIVATE
SECTOR ENTERPRISES
Types
of Private Sector Enterprises.
1. Sole trade business
2. Partnership business
3. Public limited companies
4. Private limited companies
5. Joint ventures
6. Franchise.
1.
Sole trade business. (Oct/Nov 2019 Q.No-3d) (May/June 2018 Q.No-1a)
(Mar-2021 Q.No-1a P-2)
It is
a business unit which is owned and controlled by a single owner. He invests his
own capital, manages all the activities of the business and takes the entire
profits as well as bears all the risks of the business.
Merits of sole trade business (Mar 2020
Q.No-2d) (May/June 2021 Q.No-1d) (Feb/Mar
2023 Q.No-4d)
1. Easy to start
business without more capital and skills
2. Easy to take
business decision
3. No sharing of profit
so the single owner can enjoy it fully
4. Sole trader has
freedom in working schedule
5. Sole trader has
regular contact with the customers so it would help to know the local demand
and preferences
Demerits of sole trade business
1. Limited resources
because no sharing of capital is possible as single owner.
2. No division of
labour is possible so risk of management is high to the sole trader
3. No sharing of loss
or liabilities as single owner
4. No continuity in business if the owner moves off from the business.
2.
Partnership business.
It is a business started with minimum of two to maximum of twenty people. Partnership business is established with a deed of partnership, which is a legal agreement of the terms and conditions of the partnership, signed by all the partners.
Merits/Importance of
Partnership business (Oct/Nov 2020 Q.No-2a P-2)
(Mar 2019 Q.No-1c) (May/June 2017
Q.No-3e) (Oct/Nov 2017
Q.No-1a P-2) (Oct/Nov 2016 Q.No-1a P-2) (May/June 2016 Q.No-3d) (March 2022 Q.No.3a P-2) (May/June
2022 Q.No-4e.) (May/June
2023 Q.No2d)
1. Availability of more capital because more
partners share the capital and business can be expanded smoothly.
2. Division of labour so each partner can
specialize in one aspect of the business and can share responsibilities.
3. Share risks so if there are debts or
losses in business, these are shared between the partners.
4. Share ideas so business can implement best ideas or skills from the partners
Demerits
of partnership business
1. Partners have
unlimited liability.
2. No separate legal
identity so partner’s name is considered in legal matters.
3. Lack of continuity
so if anything happened to the partners the business cannot continue as before.
4. Share profit so each
partner would get less profit.
5. Arguments between partners so it would affect the decision-making.
3. Limited companies. (Oct/Nov-2018 Q.No-4a)
(March 2022 Q.No-4e)
A
limited company is a business unit registered under the Company’s Act and
shareholders are the owners with limited liability.
Companies are of two
types, they are
a. Public Limited Companies.
b. Private Limited Companies.
a.
Public limited companies (May/June 2017 Q.No-3a. P-2) (Oct/Nov 2021 Q.No-4a)
A
company is considered to be Public Limited Company when it is registered under
any of the companies Act and is able to issue shares to the public for
collecting capital.
Eg:-Coca-Cola, Bank of Maldives PLC, MTCC.PLC, etc.
Advantages
of Public limited companies.
1. No restriction on
who can buy shares and shares can be sold to the public any time. It attracts
more investors.
2. Business can raise
share capital by selling shares.
3. Easier to obtain
bank loan because company has legal status.
4. No need to return
the share capital once raised.
5. Limited liability so
shareholders are safe from company’s debts up to their investment.
Disadvantages
of Public limited companies
1. Accounts should be
published as it is mandatory so less privacy on financial status.
2. Original owners lose
control over the business.
3. More legal formalities required to form the business and to issue shares to the public
b.
Private limited company
A company is considered to be private limited company
when it is registered under the company’s Act and is not able to issue shares
to the public.
Eg:- Sonee Hardware pvt.ltd, Reefside pvt ltd, Media net Pvt Ltd, etc.
Difference
between a private limited company and public limited company (March 2022 Q.No-4e)
1. The name of a
private limited company must end with the word ‘Pvt. Ltd’ where as the name of
the public limited company must end with the words ‘public limited company
(PlC)/Ltd
2. Private limited company is not allowed to issue shares and
debentures to the public for raising capital. But PLC is allowed to issue
shares and debentures to the public for rising capital.
3. In Pvt Ltd
companies, transfer of shares is not easy, it is possible only with the consent
of other shareholders. But the shares of a public limited company are
transferable to anyone without the consent of other shareholders.
4. There is no limit to
the minimum capital to start the private limited company. But for a public
limited company, the issued capital of the company must be at least £50000
5. Private Ltd
companies are usually small in size whereas public companies are usually a
large firm
6. Minimum 2 shareholders to start private limited companies and maximum 50 whereas in PLC minimum 2 and maximum shareholders are unlimited
Advantages
of Private limited Companies (Oct-Nov 2020 Q.No-2c)
(Mar 2018 Q.No-2c) (Mar
2017 Q.No-4c) (Oct/Nov 2016 Q.No-4c)
(May/June 2021. Q.No-1a P-2)(Mar 2016 Q.No-1a P-2)
1. Business can access more capital by adding
more shareholders.
2. Liabilities are limited- so any liability
occurred on business would not affect the shareholder’s personal assets.
3. It is easy to manage and control as small
in size with limited shareholders when comparing with public limited companies.
4. Continuity of existence- if anything
happened to the shareholders (death or insanity) would not affect the running
of business but it is not possible in partnership business.
5. A limited company has separate legal identity so which can be considered as a person too.
Disadvantages
of private limited companies
1. Business cannot sell
shares to the public so it may cause the shortage of capital
2. Not easy to transfer
shares and cannot be sold on the stock exchange – for transferring shares need
to get the consent of all other shareholders.
3. Financial statements need to be audited each year – increase in annual expenses
4.
Franchise (Oct-Nov 2019. Q.No-2a)
Franchise is a business started on an
agreement which allows one business to trade under the name and logo of another
existing business. The business granting the franchise license is called the franchisor and the business taking the
franchise is called the franchisee.
Eg:- McDonald, Kentuky Fried Chicken(KFC), Marrybrown, etc. in restaurant business.
Advantages
to the franchisor (Mar 2020 Q.No-4e) (May/June 2019 Q.No-4e) (Mar 2019 Q.No-4e) (Oct/Nov 2022 Q. No-1d)
1. Franchisee pays fee
or charge to franchisor to use the brand name so franchisor does not have to
raise as much capital.
2. Can expand more
quickly without investing more capital in the form of starting new business
3. Franchisees are
responsible for day-to-day management so franchisor has less risk of
management.
4. Franchisee should
have local knowledge which could help increase sales/revenue
5. Franchisor receives a percentage of revenue/profits from the franchisee.
Disadvantages
to the franchisor
1. Wrong decision or
poor management by one franchisee can damage reputation for whole business.
2. Franchisor may have
to provide training and support to the franchisee, it would increase the cost
of the franchisor.
3. Chance of misuse of brand name or product by the franchisee.
Advantages
to the franchisee
1. Easy method of
business expansion so new business gets the opportunity to become the part of
well-known business.
2. Gets well known
trademark or products from the franchisor
3. Gets training and advises for marketing activities so less risk of marketing
Disadvantages
to the franchisee
1. No freedom in
decision making so need to depend franchisor
2. Sharing of profit and payment of royalty to the franchisor
5.
Joint ventures
A
joint venture is a strategic partnership of two or more
businesses to share the ownership to start a new business.
Eg:- Allied Insurance Company of the Maldives was established in 1985 as a joint venture Company between State Trading Organization and Commercial Union Assurance Company of the United Kingdom.
Difference
between a limited company and unincorporated business (O/N 2022 Q.No-4.c) (May/June 2023 Q.No1b P-2)
- A limited company has
separate legal identity so assets are owned by the business rather than the
individual, whereas the owners and the business are the same for an
unincorporated business such as sole trade business, partnership business, etc.
- The risk for shareholders/owners of a
limited company is limited to the amount invested. whereas an unincorporated
business has unlimited liability.
- A limited company can
sell shares whereas for an unincorporated business it can be difficult to raise
a large amount of finance.
- A limited company has
continuity if anything happened to the shareholders whereas there is no
continuity in unincorporated business.
PUBLIC SECTOR ENTERPRISES
The main aim of public sector organization is to provide
public service rather than making profit.
1.
Government Departments
These
are important forms of public sector enterprises by which various Govt.
departments under take some activities under the supervision of ministers.
Eg- Ministry of Education, Ministry
of Health, etc.
2. The
public corporations (Oct/Nov 2019 Q.No1a)
These
are organizations formed and controlled by the government based on an Act in
the Parliament.
Eg- British Rail,
The post office, BBC, Utility corporations, etc.
3. Nationalized
industries/Government companies
These are the large sector enterprises under the control
of government to provide goods or services to the public at free or low cost.
Eg:- Public transport, Ferry, etc.
Difference
between Private and Public sector business. (Oct/Nov 2019. QNo-1d)
1.
Private sector may look to maximize profit whereas in public sector the
objective may be social/to provide social welfare and services/products for
free or at a low price
2.
Private sector may look to increase market share it may bring difficulties for
other businesses to survive whereas public sector highlight development of
countries
3.
Private sector may look to increase revenue whereas the public sector may offer
subsidized prices to the customers.
4.
Normally private sector businesses are small in size and operation but public
sector businesses always focus the country for operation not individually.
Unit 1.5
BUSINESS OBJECTIVES AND
STAKEHOLDER OBJECTIVE
Business
objectives: (Mar
2020 Q.No-4a) (May/June 2018
Q.No-2b.P-2)
All businesses have objectives to achieve. These objectives can vary depending on the type of business and situations. The most common objectives are:
a. Profit
maximization:
Profit is what keeps a company going and is the
main aim of most businesses. Normally a business will try to obtain
a satisfactory level of profits so they do not have to work long
hours or pay too much tax.
b. Increase
added value:
Value added is the difference between the price and
material costs of a product. Added value could be increased by working on
products so that they become more expensive finished products.
c. Improve
market share or growth:
Growth can only be achieved when customers are
satisfied with a business. When business grows it is gaining a larger market
share and becomes market leader. Bigger businesses also gain cost advantages,
called economies of scale.
d. Survival:
If a business does not survive, its owners lose
everything. Therefore, businesses need to focus on this objective to ensure the
owners must get fair return on their capital investment.
e. Providing quality products
Business
should ensure customer satisfaction by offering high quality goods or services.
Products should meet the expectation of customers.
f. Providing jobs for themselves or employees
This is the social objective of business; a business creates employment opportunities for the entrepreneurs as well as public.
Social Enterprises (May/June 2019 Q.No.1a)
Social enterprise means an organization whose primary objective is social services or welfare of the society and if any profit made is reinvested in the business.
STAKEHOLDERS OF BUSINESS
Stakeholders (Mar
2018. Q no 4.a) (May/June 2017 Q.No-4a)
(Oct/Nov 2016 Q.No.2d) (Oct/Nov-2015 Q.No4d) (Oct/Nov 2022 Q.No-4b. P-2)
Stakeholders are individuals or groups which affect
and are affected by business. They are two types; internal and external.
Internal stakeholders: The one
who directly affect the activities of a business is called internal stakeholder.
Eg:- Owners, shareholders, employees, managers, partners,
etc.
External stakeholders: The one
who independently and indirectly affect the business activities is called
external stakeholder.
Eg:- Consumers, government, competitors, suppliers,
community, etc.
STAKEHOLDERS AND BUSINESS OBJECTIVES (May 2020 Q. No-1d) (Mar 2018. Q no.2a P-2)
(May/June 2016 Q.No-3a P-2)
(May/June 2021 Q.No-3e)
(March 2022 Q.No-1c.) (May/June 2023 Q.No4d)
A. Internal stakeholders:
1. Owners/Shareholders: Objectives
a. To share
of profit and rate of return on the money invested in the business
b. To
ensure growth of business, so that the value of their investment increases.
2. Workers: Objectives
a. To ensure the contract of employment
and regular payment for their work.
b. To ensure job security
c. To ensure job satisfaction and
motivation
d. To ensure safe and comfort working
environment.
3. Managers: Objectives
a. To earn high remuneration
b. To achieve the selected target
c. To ensure better status and power through business growth.
B. External stakeholders:
1. Customers: Objectives
a. To get safe and reliable products.
b. To get value for money or
satisfaction
c. To get quality products
d. To get after sales service and maintenance
2. Government: Objectives
a. To ensure business and economic
growth
b. To provide more employment
opportunities.
c. To ensure revenue- taxes and duties
d. To increase GDP and development
3. The Community: Objectives
a. To ensure jobs for the working
population
b. To implement environment friendly
production.
c. To ensure socially responsible
products.
4. Suppliers: Objectives
a.
To get constant flow of profitable orders
b. To enable quick settling of debts.
5. Competitors: Objectives
a. To expand
market share through fair competition.
b. To be a market leader.
OBJECTIVES OF PRIVATE AND PUBLIC SECTOR ENTERPRISES
(Oct/Nov-2019 Q.No1d)
Objectives
of Public Sector business
1. Provide a service
rather than profit maximization
2.
Control natural monopolies to ensure equal supply of rare products at lower
price.
3.
Protect key industries
4. Aim
to benefit entire society.
Objectives of Private Sector business
1.
Profit maximization
2.
Growth of business or market.
3. Increase
market share by selling more
4.
Aim to benefit owners or shareholders
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