Premlal C R
Unit-1.1
BUSINESS ACTIVITY
1.1.1 The Nature of Business 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.
Characteristics
of business activity
It is an economic activity
It is two-way process
It is a profit motive activity
PURPOSE OF BUSINESS ACTIVITY
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.
FACTORS
OF PRODUCTION
Factors of production
are the resources that a business needs to be able to produce goods or services.
The following are the important factors of production,
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, tools. money, etc. that can
be used to produce goods and services. The reward for capital is interest
4.
Entrepreneur
Entrepreneur is a person or group who
undertake the risk of running the business or production. The reward for
entrepreneur is profit or loss
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
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.
Choice
Choice
is the act of selecting one product over another if products are limited. It
leads to opportunity cost.
Opportunity cost (Oct/Nov 2016 Q.No.1a) (May/June 2022 Q.No-4b.)
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.
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
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.
Added
value = Selling price - cost of materials
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 refers to the increase in value
that a business creates during the production process. It is the difference
between the cost of producing a product (the cost of raw materials, labor,
etc.) and the price at which the product is sold.
Added Value = Price – 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. After
sales services.
Proper
after sales services such as free installation, free servicing, etc. can be
used to add the value of products.
Unit
1.2
ECONOMIC
SECTORS
1.
Primary sector (May/June
2021 Q.No-4a)
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.
3. Tertiary sector (Oct/Nov 2017. Q.No-1a)
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.
ECONOMIES
AND SECTORS OF PRODUCTION- Developed and Developing Economy
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.
Private
and 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.
Forms of private sector enterprises (Oct/Nov 2023 Q.No.3c)
1. Sole trade
business
2. Partnership
business
3. Public limited
companies
4. Private limited
companies
5. Joint ventures
6. Franchise.
7. Social Enterprises: It is a business that aims to make a
profit and which is usually reinvested into the business or used to support the
community, rather than being distributed to shareholders. These can include
charities, cooperatives, etc.
Objectives of private sector enterprises
1. Profit Maximization
2. Survival
3. Growth and Expansion
4. Market Leadership
5. Customer Satisfaction
6. Innovation
7. Social Responsibility (Corporate Social Responsibility -
CSR)
8. Employee Welfare
2.
Public sector enterprises (Oct/Nov 2023 Q.No.3a)
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.
Forms
of Public Sector enterprises
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.
Objectives of Public Sector Businesses
1. Providing Public Goods and Services
2. Promoting Economic and Social Welfare
3. Supporting Economic Development
4. Ensuring Fairness and Equity
5. National Security and Defense
6. Providing Employment
7. Stability of the Economy
8. Control of Natural Monopolies
9. Environmental Protection
10. Encouraging Innovation in Key Sectors
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
1.3
ENTERPRISE,
BUSINESS GROWTH AND SIZE
Entrepreneur
(May/June 2022 Q.No-4a.)
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
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.
4. No
single method is completely accurate so all the methods should be used together
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.
Eg:- Develop new products, increase the production
capacity, develop new markets, etc.
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) (Oct/Nov
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) (Oct/Nov 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) (Oct/Nov 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 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.
PRIVATE
SECTOR ENTERPRISES
Types
of Private Sector Enterprises. (Oct/Nov 2023 Q.No.3c)
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(Oct/Nov
2023.Q.No.4d)
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. Sharing of profit so each partner would get less part of
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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