Topic 1

IMPORTANT DEFINITIONS

1. BUSINESS - DEFINITION: Business organizations can be defined in several ways. Given below are few definitions of business.

“An organization engaged in producing or trading goods and services to the society under the incentive of private gain.”

OR “Business organizations are those, producing / manufacturing or trading goods and / or

services in order to make profit” OR

“An institution organized and operated to provide goods and services to the society under the incentive of private gain” EXPLANATION: From above definitions we can conclude that business comprises all those activities that start from manufacturing of goods or services and end on their consumption. Point or place where goods are manufactured is termed as point of production and where these goods are consumed is called point of consumption. However, generally, there is a big gap between points of production and consumption therefore several channels are used to fill this gap known as channels of distribution. Middle men like wholesalers and retailers are some examples of distribution channels. Organizations or individuals involve in any of these activities are considered to be a part of business. Profit earning is the basic and prime objective of all business activities.

BUSINESS PROCESS

2. INDUSTRY DEFINITION:

Term industry can be defined as follows

“Any business activity which results in the creation of goods and services”

OR “Industry refers to all business activities, which are connected with raising, producing

and processing of goods and services.”

Point of production Wholesaler Retai ler Point of consumption

Distribution Channels

EXPLANATION:

From above definitions we can say that industries are manufacturing units. They produce goods and services. Industries, through manufacturing process, change shapes and qualities of existing products to modified form. Some industries convert raw material into semi -finished goods like cotton (raw material) is used to produce cloth (semi- finished good). However, some industries convert semi- finished goods into finished goods as Shirt (finished good) is manufactured from cloth (semi- finished good).

3. COMMERCE DEFINITON: Commerce can be defined as follows:

“Commerce includes all those activities which facilitate transfer of goods and services

from one place to an-other." OR

“It is the sum of total activities involving the removal of hindrances in the process of exchange of goods and services and facilitates the availability for consumption or use.”

EXPLANATION: Goods are produced or manufactured for consumption or use. Goods or services are manufactured by industries but these are of no use until they reach to their target customers or consumers. Commerce, therefore, covers all activities of making these goods available for use to their consumers.

a) TRADE: It is the exchange of goods or services of some worth between two persons or organizations.

b) AUXILIARIES TO TRADE: These are different modes, means or channels that facilitate the process of trade. Transportation, Warehousing, Insurance and Banking are main auxiliaries

to trade.

4. TRADE DEFINITION: Trade can be defined as:

“Trade is the exchange of goods or services of some worth between two persons or organizations”.

OR “Trade is the exchange i.e. buying and selling of goods or services”.

EXPLANATION: Trade means buying and selling of goods or services, usually on regular basis. The person or organization that purchases goods or services for further sale in order to make profit is termed as trader. Presence of both the activities i.e. buying and selling is compulsory in order to make trade possible. Trade can be further divided into following two types:

1. Home Trade. 2. Foreign Trade.

a) HOME TRADE: Trade with in the country is termed as home trade. This process involves exchange (buying and selling) of goods and services within one city or even from one city to another of same country. It is very often, that goods are directly supplied from producer to consumer, but several medium are involved in this process. As producers sale their produ cts to wholesalers, from whole sellers products are purchased by retailers and finally consumers buy these products from retailers.

When wholesalers purchased goods from producers, trade is termed as whole sale trade and retailers purchase goods from wholesalers it is called retail trade.

b) FOREIGN TRADE:

Trade between two countries is termed as foreign trade. We can say that in a foreign trade, buyer belongs to one country while seller to another. Buyer, in foreign trade is called importer while seller is termed as exporter. Foreign trade can be of following types:

(i) IMPORT TRADE: When goods are purchased from a foreign country for selling in our

own country, trade will be import trade.

(ii) EXPORT TRADE: When goods are sold to a foreign country, it is called export trade. (iii) ENTREPOT TRADE: Sometimes goods are imported into one country for the purpose of

exporting them to another country with or without making any change. Such type of

foreign trade is termed as entrepot trade.

5. AUXILIARIES / AIDS TO TRADE INTRODUCTION: Trade is not a simple process. Usually there is a big gap between producer and customer. In many cases goods are produced in one city and their wholesaler belongs to another city. Similarly if a retailer wants to carry goods from wholesaler’s outlet to his shop he must need transport in order to fulfill this objective. Therefore, there are many activities that help, support and facilitate the trade process. All such activities are termed as auxiliaries or aids to trade.

Given below are some important auxiliaries to trade:

(a) TRANSPORTATION: Transport is considered as a backbone for trade success. Transport is required to move goods from one place to another for example producer to wholesaler or retailer to consumer. For home trade, traders use trucks, huge trawlers, vans, pickups or trains in order to move products within the city or even from one city to another. Similarly, in foreign trade, these are ships and aero-planes that move goods from one country to another.

(b) BANKING:

Banking sector helps the trade process in many ways. Not only they sanction loans to traders in order to give their financial support but banks are also safe, easy and fast channels of funds transfer from bank to bank, city to city or even from one country to another. Banks also facilitate foreign traders with the services like discounting bill of exchange, opening of L/Cs, and issuance of E-forms etc.

(c) INSURANCE: Not any business or trade is free from risks. Whether it is production, transporting or storage of goods, chances of loss, damages, theft and fire etc. are present with them. Every trader, of-course, wants to minimize these risks. Insurance companies play an important role in this regard as they come forward to bear such risks. They commit to compensate trader in case of loss or damage of his goods in return of receiving premium from traders.

(d) WARE HOUSING:

Warehouses solve the storage problem of traders. Especially those traders, importers or exporters who do not have sufficient space to store their products, can store with such warehouses by paying them some rent. These warehouses contain almost all facilities in order to keep product secure like safety from sun, wind or rain, cold storage facility and security etc.

(e) COMMUNICATION / INFORMATION: Information is the key to success. A trader needs different sort of information from both the suppliers as well his customers. Information from suppliers’ side, relates to enquiries about products, prices, delivery time, new models etc. Whereas from customers, a trader always seeks feedbacks about his products, sometimes he may also receive some complaints and he has to quote prices to his customers. All such information can be received and sent through various communication means like telephone, faxes, telegrams, letters and emails etc.

6. SCOPE OF BUSINESS

INTRODUCTION: Business is a broader term and it covers all activities done for the sake of profit. Following

activities or functions fall under the scope of business:

1. PRODUCTION: Business process starts with planning for production. Production is converting raw materials into semi- finished or finished products. Business organizations involve in production are termed as industries. Industries can be divided into various types depending upon the nature of work. Every manufacturing business strives to maintain quality, standard and grades of its products so that it can get maximum profits.

2. TRADE: Trade is exchange (buying and selling of goods or services). Production is of-course done for consumption. We can say that without consumption of any product or service its production is useless. Trade is the process of moving goods or services from point of production to point of consumption either directly or gradually.

From direct trade, it means, when consumer of product directly purchase the goods from manufacturer. However direct trade is very often, because goods, gradually reach to consumer or end-user from producer. As wholesaler purchases goods from producer, retailer from whole seller and from retailer goods are purchased by consumer. Trade can be within the country, termed as home trade and trade between two countries is called foreign trade.

3. AUXILIARIES TO TRADE: (Concern previous topic)

CONCLUSION: “Every production needs consumption”. All channels or activities making this idea possible under the incentive of private gain come under the scope of business.

Topic 2

PROBLEMS IN ESTABLISHING A BUSINESS HOUSE

INTRODUCTION: Establishing and running any business, in this competitive era, is not an easy task. It requires lot of research work, surveys and analysis in order to establish a business. Given below are some major points an organization must deal with while starting its operation.

1. SELECTION OF TYPE OF THE BUSINESS:

First of all, a businessman has to decide the type of his business. We can say that, he should select amongst manufacturing, trading or service businesses. This selection would be based on his knowledge, interest and experience. At this stage, the businessman must also analyze the demand of his product(s) or service(s). Further, he should do a proper working about the profitability of his business. In short, proper research and feasibilities must be made while starting a new business.

2. FORM OF BUSINESS: There are several choices available as far as form of business organization is concerned. A businessman can go in for Sole Proprietorship, Partnership of Joint Stock Company. The selection is based on certain elements like size of business organization (small, medium or large scale), financial needs, management and controlling issues and future expansion plans of business etc. For example, a small retail shop can be opened and run by an individual but multinational or national level businesses are usually in form of corporations.

3. FINANCING:

Finance is the life blood of every business. No business activity can be started without arrangement of funds. For example, while starting a business businessman has to purchase building, land, furniture, machinery and equipment etc. Further finance is needed in order to meet day-to–day business issues as making payments to suppliers, paying salaries to staff and purchasing merchandise or other assets etc. Funds can be arranged either by owner(s) themselves in the form of capital or businesses can also borrow the required amount from financial institutions like banks on certain rate of interest. Financial resources depend upon the size of the business.

4. LOCATION: Location of the business is also an issue that should be carefully handled by a business man. Suitable business location is always easy to approach by all means. Location depends upon many factors like availability of raw material and other accessories, transport, manpower, nearness to market and basic necessities like water, power and gas etc. Selection of a suitable location for business always increases profitability and decreases cost of doing.

5. SUITABLE MANPOWER:

Employees are the resources of business, business success or failure is heavily dependent upon its employees. Selection of a right person for a right job is another issue a businessman has to deal with. Specially at the time of starting a business, the businessman has not only to find suitable candidates but also has to motivate them for joining the setup. He must analyze the number of staff (labors, semi-skilled and skilled) his business is required. Further salary and remuneration package must be in accordance with job assignments, knowledge, and experience and market trends.

6. MACHINES AND EQUIPMENT: The choice of machineries and equipments is also another delicate problem while starting a new business. Although, this issue is of great concern for manufacturing businesses but trading enterprises also have to purchase certain machines or equipments like Photostat, Generators and Air Conditioners etc. Availability of funds and size of business are major considerations in this regard, however, repair and maintenance facilities, availability of spare parts and after sales service are also important factors while purchasing a machine or equipment.

7. COMPETITION:

A businessman has to keep an eye on his competitors. Specially, while establishing a new business he must analyze the number of competitors already working in the market. Important factors in this regard would be their products quality and standards, prices, discounts and other benefits they offer to customers. The analysis will help in setting-up the right prices and quality of product(s). Further, it will also help the businessman to know whether his products can compete with the market or not.

8. FUTURE SCOPE:

Good businesses always work for future. In this competitive era, it is almost impossible for a business to survive without having a vision for growth. A businessman, therefore, must also analyze the future prospects of his business. He must choose such products and services that not only have a continuous but also increasing demand in market.

9. GOVERNMENT POLICIES:

Every business in bounded by the laws and policies of the government. A businessman must thoroughly read and understand the laws, policies and rules and regulations defined by the government. Main factors would be taxes, import and export duties, policies related to advances and rebates and different quotas etc.

Topic 3

SOLE PROPRIETORSHIP

DEFINITION: Sole proprietorship business can be defined as follows:

“The business owned by a single owner, who is referred as sole proprietor”

OR “A business structure in which an individual and his/her company are considered a single entity for tax and liability purposes”

EXPLANATION: Sole proprietorship business is owned by single person called “owner” or “proprietor.” The owner, in sole proprietorship, does not pay income tax separately for the company, but he/she reports business income or losses on his/her individual income tax return. As owner is inseparable from the sole proprietorship, so he/she solely enjoys all the profits of his business. On the other hand owner in such type of businesses is solely liable for all the losses and debts as well.

Sole proprietorship businesses are very easy to form and do not require much legal formalities. Same is the reason that huge number of businesses are running under this form of organization n ot only in Pakistan but throughout the world.

MERITS OF SOLE PROPRIETORSHIP Following are the advantages of a sole proprietorship business.

1. OWNERSHIP OF ALL PROFITS: Business is owned by a single person therefore the profits whether big or small are enjoyed by the proprietor. As the only owner, he is not required to share any of his profits amount with others.

2. EASY FORMATION:

The formation of sole proprietorship business is very easy and simple. No legal formalities are involved for setting up the business excepting a license or permission in certain cases. The entrepreneur with initiative and certain amount of capital can set up such form of business.

3. PROMPTNESS IN DECISION-MAKING:

When the decision is to be taken by one person, it is sure to be quick. Thus, the entrepreneur as sole proprietor can arrive at quick decisions concerning the business by which he can take the advantage of any better opportunities.

4. SECRECY: Each and every aspect of the business is looked after by the proprietor and the business secrets are known to him only. He has no legal obligation to publish his accounts or share the information with others. Thus, the maintenance of adequate secrecy leaves no scope to his competitors to be aware of the business secrets.

5. FLEXIBILITY IN OPERATIONS:

The sole proprietorship business is undertaken on a small scale. If any change is required in business operations, it is easy and quick to bring the changes.

6. INEXPENSIVE FORMATION AND MANAGEMENT: The management of the business is also inexpensive as no specialists are normally appointed in

various functional areas of the business which is an added advantage.

7. FREE FROM GOVERNMENT CONTROL:

Sole proprietorship is the least regulated form of business. Regulated laws are almost negligible in its formation, day-to-day operation and dissolution as well.

8. EASY DISSOLUTION: Like that of formation, the dissolution of the sole proprietorship is also very easy. Since the

proprietor is the supreme authority and no regulations are applicable for closure of the business he can dissolve his business any time he likes.

DE-MERITS OF SOLE PROPRIETORSHIP Following are the disadvantages of a sole proprietorship business.

1. LIMITED RESOURCES:

The financial resources of any small entrepreneur as an individual are limited. He mainly finances from his own savings or borrows from financial institutions, friends and relatives as per his capacity. Thus, limited resource is the major drawback of this form of business.

2. LIMITED MANAGERIAL CAPABILITY:

Modern business requires updated managerial skills in each and every sphere of activity. We cannot hope a single individual to possess all the managerial talents necessary to carry on a business efficiently.

3. UNLIMITED LIABILITY: Since the liability of the sole proprietor is unlimited, the private properties of the proprietor are also at risk. Because if business fails, owner himself is required to pay-off his business debts even by utilizing his private properties. Thus, the entrepreneur must have to look this aspect carefully.

4. UNCERTAINTY OF CONTINUITY: The continuity of the business is uncertain because the business may come to an end due to the incapacity or death of the proprietor. Even if at all the business passes on to the successor(s) of the proprietor, it is unlikely that they may possess same abilities like that of the proprietor.

5. NOT SUITABLE FOR LARGE SCALE BUSINESS: The limited financial resources, limited managerial capability of the proprietor, risk to the private property etc. make the sole proprietorship business unsuitable for large -scale business. This system of business is not affordable for large-scale operation.

6. LIMITIED OPPORTUINITIES FOR EMPLOYEES:

Sole proprietorship business does not offer career opportunities to its employees because of its limitation of size. Mostly employees in such type of businesses work at lower level management.

Topic 4

PARTNERSHIP

DEFINITION: Partnership business can be defined as follows:

“An association of two or more persons to carry on as co -owners a business for profit.” OR

“A relation between persons who have agreed to share the profits of a business carried out by all or any of them acting for all.”

EXPLANATION: Partnership is basically a relationship between two or more persons who join hands to form a business organization with the objective of earning profit. These persons are individually known as ‘Partners’ and their business is collectively known as ‘Firm’. The partners provide necessary capital, run the business jointly and share the responsibility. A ‘partnership agreement’ or ‘partnership deed’ is made with mutual understanding of all the partners at the time of start of the business clearly explaining clauses like:

(i) Amount of capital to be contributed by each partner (ii) Profit and loss sharing ratio of each partner and

(iii) Management issues in partnership business etc.

MERITS OF PARTNERSHIP Following are the advantages of a partnership business.

1. EASY FORMATION:

Like sole proprietorship, the partnership business can be formed easily without any legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in writing, is sufficient to create a partnership firm.

2. AVAILABILITY OF LARGE RESOURCES:

Since two or more partners join hand to start partnership business it may be possible to pool more resources as compared to sole proprietorship. The partners can contribute more capital, more effort and also more time for the business.

3. BETTER DECISION:

The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict they can sit together to solve the problems. Since all partners participate in decision-making, there is less scope for reckless and hasty decisions.

4. FLEXIBILITY IN OPERATIONS:

The partnership firm is a flexible organization. At any time the partners can decide to change the size and nature of the business or area of its operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.

5. RISK SHARING:

In a partnership firm risk of loss, damages or any uncertain situation is always shared by all the partners as per their agreement. Therefore, a partnership business does not give complete burden of risk on an individual as in sole proprietorship business.

6. PROTECTION OF INTEREST OF EACH PARTNER:

In a partnership firm every partner has an equal say in decision making. If any decision goes against the interest of any partner he can prevent the decision from being taken. In extreme cases a dissenting partner may withdraw himself from the business and can dissolve it.

7. BENEFITS OF SPECIALIZATION: Since all the partners are owners of the business they can actively participate in every aspect of business as per their specialization and knowledge. For example two or more doctors may start a clinic in partnership. Similarly in a legal consultancy (partnership) firm one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per their specialization.

DE-MERITS OF PARTNERSHIP Following are the disadvantages of a partnership business.

1. UN-LIMITED LIABILITIES: All the partners are jointly as well as separately liable for the debt of the firm to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties.

2. UNCERTAIN LIFE:

The partnership firm has no legal entity separate from its partners. It comes to an end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting member can also give notice at any time for dissolution of partnership.

3. LACK OF HARMONY:

In partnership firm every partner has an equal right to participate in the management. Also every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this sometimes there is a possibility of conflict among the partners. Difference of opinion may lead to closure of the business on many occasions.

4. LIMITED CAPITAL:

Since the total number of partners cannot exceed by 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.

5. NO TRANSFERABILTY OF SHARES: Any partner is not allowed to transfer his or her share of interest to outsiders without mutual consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

RIGHTS AND DUTIES OF PARTNERS RIGHTS: Partners have certain rights over their businesses. Main rights are given below. 1. Right of the partner to take part in the day-to-day management of the firm. 2. Right to be consulted and heard while taking any decision regarding the business. 3. Right of access to books of accounts and call for the copy of the same. 4. Right to share the profits equally or as agreed upon by the partners. 5. Right to get interest on capital contributed by him to the firm. 6. Right to avail interest on advances paid by the partners for business purpose. 7. Right to the use of partnership property exclusively for partnership business only not himself. 8. Right as agent of the firm and implied authority to bind the firm for any act done in carrying the business. 9. Right to prevent admission of new partners. 10.Right to retire with the consent of other partners and according to the terms-and conditions of deed.

DUTIES / RESPONSIBILITIES: On other hand a partner is also liable or responsible towards his firm. Main duties or responsibilities of a partner as follows:

1. TO CARRY ON THE BUSINESS TO THE GREATEST COMMON ADVANTAGE:

Every partner is bound to carry on the business of the firm to the greatest common advantage. In other words, the partner must use his knowledge and skill in the conduct of business to secure maximum benefits for the firm.

2. TO RENDER TRUE ACCOUNTS:

Every partner must render true and proper accounts to his co-partners. Each and every entry in the books must be supported by vouchers and explanations if demanded by other partners .

3. TO PERFORM HIS DUTIES:

Every partner is bound to attend diligently to duties in the conduct of the business of the firm .

4. TO HOLD AND USE PARTNERSHIP PROPERTY EXCLUSIVELY FOR THE FIRM: The partners must hold and use the partnership property exclusively for the purpose of business and not for their personal benefit.

5. NOT TO CARRY ON ANY COMPETING BUSINESS: A partner must not carry on competing business to that of the firm. If he carries on and earns any profit then he must account for the profit made and pay it to the firm.

6. TO SHARE LOSSES:

It is the duty of the partners to bear the losses of the firm. Partners share the losses equally when there is no agreement otherwise, as per their profit share ratio.

7. TO ACT WITHIN AUTHORITY:

Every partner is bound to act within the scope of his authority. If he exceeds his authority and the firm suffers from any loss, he will have to compensate the same.

DISSOLUTION OF PARTNERSHIP

Under the following conditions a partnership firm stands dissolved:

1. ADMISSION OF A NEW PARTNER: In case of admission of new partner(s), the old partnership has to be dissolved and a new agreement is required to be made.

2. RETIREMENT OF AN EXISTING PARTNER:

In case of retirement of an existing partner the old partnership stands dissolved. Howeve r, the firm may continue its operations in case of mutual agreement of other existing partners.

3. DEATH OF A PARTNER: Death of a partner also brings the partnership to an end. If other partners want to continue the business, they make a new agreement for their partnership.

4. INSOLVENCY OR BANKRUPTCY OF AN EXISTING PARNTER:

If partner is declared bankrupt, the partnership will turn dissolved. Remaining partners have to make a new agreement in order to continue their partnership business.

5. CRIME CONVICTION BY AN EXISTING PARTNER:

If a partner is convicted of crime or declared gui lty by the court of law, he cannot enter in any kind of agreement or run any business, therefore conviction in any kind of crime will automatically dissolved the partnership business.

6. EXPIRY OF PARTNERSHIP PERIOD: In some cases partnership agreement is made for a definite period. Such partnerships automatically dissolve at their period of expiry. However, at the will of partners, the agreement can be renewed for future.

Topic 5

JOINT STOCK COMPANIES DFINITION: Joint Stock Company can be defined as follows:

“An artificial being, intangible, invisible but existing in contemplation by law.”

OR “A company is an artificial person created by law, having a separate legal entity with

perpetual succession and a common seal.”

EXPLANATION: A company form of business organization is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular type of business, which is established by law and can be dissolved only by law. Persons who contribute capital become members of the company. This form of business has a legal existence separate from its members, which means members may come and go but the company remains in existence. This form of business organizations generally requires huge capital investment, which is contributed by its members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders.

FEATURES OF COMPANY Following are the main features of a Joint Stock Company:

1. LEGAL FORMATION: A joint stock company is formed only by completing several legal formalities. It always comes into existence when it has been registered after completion of all formalities required by the country’s law. As in Pakistan companies are formed and governed under compan ies’ ordinance of 1984.

2. ARTIFICIAL PERSON:

A company is always considered as an artificial person as it establishes with its own entity and can enter in any agreement like any individual. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person.

3. SEPERATE LEGAL ENTITY: Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law.

4. COMMON SEAL:

A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, become binding on the company.

5. PERPETUAL EXISTENCE:

A joint stock company continues to exist as long as it fulfi lls the requirements of law. It is not affected by the death, insolvency or retirement of any of its members. Members may come in and go out through buying and selling of shares (usually termed as transfer of shares) without affecting working of the company.

6. LIMITED LIABILITY:

In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. Therefore, even if there is liquidation of the company, the personal property of the shareholder cannot be attached and he will lose only his shares worth Rs. 10,000.

MEMORANDUM OF ASSOCIATION

INTRODUCTION: Memorandum of association is the fundamental charter which defines the aims and objectives of a company. It contains fundamental rule regarding the constitution and the activities of a company. It is the most significant document on which the super-structure of the company is raised. It sets out the limits with in which the company may function and defines the relations of the company w ith the outside world. Any action beyond the scope of the memorandum of association is void. The following are the main clauses of the memorandum of association:

1. NAME CLAUSE: This clause contains the name of the company. The word limited is used after the name of a public limited company and private limited is used after the name of a private company. The name of the company should not be identical to the name of an existing company. The words like Royal, King, Emperor and Federal may not be used without prior permission of the government.

2. OBJECT CLAUSE:

This is an important clause of the memorandum of association which states the objects with which the company has been established. Any action beyond the stated objective is illegal therefore great care has to be taken in drawing up this clause. It is better to keep broad objective of a company along with subsidiary objectives.

3. DOMICILE CLAUSE:

This clause states the place at which the registered office will be situated. It is advisable to mention the name of province or state in order to avoid legal formalities in shifting the registered office of the company. Domicile clause is vital for determination of jurisdiction of the court for legal matters.

4. CAPITAL CLAUSE: This clause states the amount of authorized capital with which a company is registered. The division of share capital into different shares must be stated in the capital clause. The face value of the share will be stated in this clause. This clause gives an idea of exact capital structure of the company.

5. LIABILITY CLAUSE:

This clause states that the liability of the shareholders is limited to the extent of the face value of shares purchased by them. Further, it also means that the liability of the company to pay -off its debts is limited to its capital. This clause protects personal properties and belongings of

shareholders from settling the debts of company.

ARTICLES OF ASSOCIATION INTRODUCTION: It is a document in which rules and regulations are written which govern the internal admini stration of the company. It defines the powers and rights of the directors, officers and shareholders. The article of association are framed and registered to settle the daily affairs of the company. It is subsidiary of Memorandum of Association. No any rule can be framed which against the Memorandum of Association.

CONTENTS OF ARTICLE OF ASSOCIATION Following are the main clauses of article of association. 1. Amount of capital and its division into various shares. 2. Rights regarding the different shareholders. 3. Rules regarding transfer of shares. 4. Rules regarding issue of shares and debentures. 5. Calls on shares. 6. Appointment of directors powers and duties. 7. Alteration of capital. 8. The functions and powers of managing agent. 9. Proceeding of disposing of resolution. 10. Accounts and audit. 11. Stamp of a company. 12. Voting rights of shareholders. 13. Winding up procedure of company. 14. Rules regarding the forfeiture and surrender of shares. 15. Proceeding of shareholders meeting. 16. Proceeding of Board of Directors meetings. 17. Change of shares into stock and stock into shares.

FORMATION OF A COMPANY INTRODUCTION: Incorporation of a company is a complicated and time consuming procedure. Following are the main steps in order to form a company.

1. GETTING PROMOTERS: Promoters are the founders of a company. Therefore they must get together in order to design the work plan, objective and skeleton of the company. A public limited company may have at-least seven promoters while the minimum number of promoters required to form a private limited company is two.

2. APPOINTMENT OF ADVISORS: In second step a legal advisor is hired by the promoters. The advisor helps them in preparing legal documents like article and memorandum of association, prospectus or statement in its lieu etc. He further deals with the office of the registrar for company registration.

3. PREPRATION OF COMPANY’S DOCUMENTS: According to the companies’ ordinance 1984, certain documents are required to be prepared in order to get a legal status of the company. Important documents in this regard are

i. Memorandum of Association ii. Article of Association iii. Prospectus of the company

4. SUBMITTING APPLICATION TO THE REGISTRAR: After completion of all necessary documents an appl ication is submitted to the registrar office in order to get registration of the company. The application (along-with the documents mentioned in step 3) also contains details like name and addresses of company’s directors and name and address of the registered office of the company etc.

5. PAYMENT OF REGISTRATION FEE: A registration fee is also required to be paid along-with application form. The fee amount is not fixed and always depends upon the share capital of the company. Greater the amount of capital higher will be the registration fee.

6. PRINTING SHARE CERTIFICATE:

During the process of registration the promoters try to get share certificates of their company to be printed. These certificates are issued to the shareholders as a token of their ownersh ip in the company.

7. ISSUANCE OF REGISTRATION CERTIFICATE:

After a thorough examination and analysis a registration certificate is issued by the registrar of the company, after the issuance of which the company gets a legal status. We can also say that bef ore getting a registration certificate no any company can start its business operation.

It is also important to note that a private limited company can immediately start its business affairs after getting the registration certificate, however a public l imited company cannot commence its operation at this stage unless it gets another certificate known as commencement certificate.

8. PUBLICATION OF PROSPECTUS: ( Only for Public Limited Companies)

On receipt of registration certificate the company issues prospectus to general public (through advertisement). The prospectus helps the company in raising the desired capital amount from the public.

9. APPLICATION FOR COMMENCEMENT CERTIFICATE: (only for Public Limited Companies)

After raising capital through prospectus the company applies for commencement certificate. The commencement certificate allows the company to begin its actual operations.

PROSPECTUS

A prospectus is an invitation or advertisement of a public limited company to general public asking them to invest in the share capital of the company. Prospectus is required to be circulated (through advertisement) by public limited companies. Without its publication a company is unable to gather its desired share capital hence, cannot get the commencement certificate to start its business affairs.

It is important to note that prospectus is not compulsory for a private limited company as it does not raise its capital from general public. Similarly, public limited companies arranging their share capital privately are not required to publish their prospectus.

VALIDITY / ESSENTIALS OF PROSPECTUS: A legally valid prospectus must fulfill the following conditions.

i. Invites general public to buy shares. ii. Its copy must be submitted to registrar office before its publication. iii. It must be properly dated.

iv. It must be signed by all or at-least two directors of the company.

FEATURES OF PROSPECTUS: Following are the salient features of a prospectus.

i. It contains the content of memorandum of association ii. It contains the total number of shares and promoters of the company. iii. Number of redeemable shares. iv. Qualifications shares of directors v. The name of underwriters of shares. vi. Description of companies’ directors. vii. Allotment, installments and forfeiture of shares. viii. Preliminary Expenses ix. Promoters’ Fees x. Name and address of auditors. xi. Minimum subscription of shares xii. Nature of debentures and their underwriters xiii. Name and date of contract relating to company’s property.

STATEMENT IN LIEU OF PROSPECTUS Private limited companies and Public limited companies (arranging their share capital from private sources and not from general public) are not required to publish company’s prospectus. Therefore, in accordance with companies’ law they are only required to submit to the registrar a statement in lieu of prospectus. This statement should include same information as of prospectus and is required to be

submitted at-least three days prior to the issuance of shares or bonds.

Topic 6

SOCIALISM DEFINITION: “An economic system or theory under which means of production and distribution work for

community as a whole.” OR

“Economic system under which means of production and distribution are held under collective ownership in public interest.”

EXPLANATION: Socialism is also termed as business under public ownership. Under socialism production of goods and services are organized in order to fulfill human needs and not to earn profits. Socialist economies are state owned where all factors of productions are owned, controlled and managed by state government. Socialist states are not profit oriented but these are welfare states. Hence socialism encourages state control, dependence, spending and bureaucracy while discourages private ownership, profit and individual responsibilities.

SOCIALISM – CHARACTERISTICS Following are the main characteristics of socialism:

1. GOVERNMENT CONTROL: All factors of production related to goods and services are controlled by government. Heavy industries, utilities services (water, power and gas etc.), financial institutions and educational sectors etc. are completely controlled by government. Government, as per state requirements utilize factors of production in the manner it finds best.

2. INTEREST FREE ECONOMY: Socialism is based on public welfare, therefore, socialist economies are interest free. Resources and wealth are supposed to be distributed on the basis of equality in general public and interest is the factor that results in wealth concentration in hands of some people, hence it is discouraged in socialism.

3. CLASSLESS SOCIETY: The concept of socialism, at large, eliminates differences of rich and poor from the society. Mostly goods and services are produced or manufactured on the basis of analysis about their number of consumers. We can say that in a socialist economy, almost all goods and services are within the range of everyone.

4. CONTROLLED ECONOMY: Besides having control over factors of production, government in a broader aspect also controls trade and auxiliaries to trade of the country because of which government has complete control over entire country’s economy. In a socialist economy it is the government that decides about prices of commodities, rates of services and even salaries of employees.

5. EMPLOYMENT FOR ALL: Being a welfare state, a socialist economy guarantees compulsory employment to every citizen of state. All men and women get employment in state run organizations based on their capabilities, skills and knowledge. Hence we can say that in a complete socialist economy, un-employment does not exist at all.

6. SERVICE ORIENTED FOR PEOPLE: As businesses are run by government for welfare of its citizens, socialist economies themselves become service oriented. Government offers services and goods to consumers at moderate and affordable prices. Same is the reason, that government sometimes runs few of its organizations

even at losses but does not windup such businesses in public interest.

SOCIALISM – ADVANTAGES

Following are the main advantages of socialism:

1. WELFARE STATE: A socialist state is also termed as welfare state. Factors of production, resources of country and other business affairs are utilized for general public welfare and not to earn profits. Government offers, goods to consumers at moderate and affordable prices. Further, service providing sectors like education, utilities, hospitals, rail and air ways etc. are also under government control, which sometimes runs few of its organizations even at losses but does not windup such businesses for welfare of its public.

2. INTEREST FREE ECONOMY: Due to interest factor wealth and other resources start going into the hands of few people of the state. Further interest is one of the major causes of inflation in the society. A socialist economic system is based on the concept of public welfare through equal distribution of wealth and resources, hence it completely discourages interest.

3. CLASS LESS SOCIETY: The concept of socialism, at large, eliminates differences of rich and poor from the society. Mostly goods and services are produced or manufactured on the basis of analysis about their number of consumers. This factor is beneficial as all goods and services are within the range of everyone, life style people is almost same, chances of robbery and theft are minimized and discriminating factor is eliminated from the society.

4. CONTROLLED PRICES: Due to complete government control over the economy, prices of goods and services remain stable. Thus profit making is not the objective of businesses in a socialist state the government fixes prices in favor of consumers by which they purchase commodities and avail services at low rates.

5. LESS WASTAGE OF RESOURCES: Factors of production and resources of a socialist state are used, controlled and managed by the government which does not use these resources for profit making. Allocation of all the resources in productive manner is based on government analysis and research. Same is the reason that wastage or misuse is supposed to be at its minimum level in a socialist economy.

6. EMPLOYMENT FOR ALL: Being a welfare state, a socialist economy guarantees compulsory employment to every its citizen. All men and women get employment in state run organizations based on their capabilities, skills and knowledge. Hence we can say that in a complete socialist economy, un-employment does not exist

at all.

SOCIALISM – DISADVANTAGES A socialist economy has following major disadvantages:

1. ABSENCE OF PRIVATE OWNERSHIP: Every individual must have right to use his personal resources as per his choi ce. Private ownership is based on profit and revenue generation. In a socialist state concept of private ownership does -not exist. All resources are owned by government. Every individual has to surrender his resources (if any) to government and has no right to use it as per his choice. Absence of private ownership eliminates the profit generation factor from the society by which individual’s interest in business affairs go down.

2. NO CONSUMER CHOICES: Consumers in a socialist state are not supposed to demand but they have to accept. Production of goods and services are controlled by government. Further it is the government that decides about prices, rates, standards and qualities of goods and services. Not any individual or organization is allowed to enter in any sort of business. Same is the reasons that consumers do-not have much choice of products or services.

3. LESS CHOICES OF PROFESSION: Due to complete control of government over all business activities, people get fewer professional choices. As there is no private sector, people can only apply for jobs in industries run by government. It is the government that decides about matters like job assignments, salaries, fringe benefits, promotions and increments etc. Therefore employees, mostly, have no right to negotiate on their salaries and other matters.

4. LOW MORALE OF PEOPLE: It is the responsibility of state to provide employment to every citizen. Government usually has its own criteria of salary fixation, promotion and increment. Usually increments and promotions are given on seniority basis instead of performance or worth abilities. The factors bring morale of employees at very low side. On the other hand, compulsory employment and permanent nature of job usually decrease job interest and increase factors like absenteeism and late comings in employees.

5. BUREAUCRATIC CULTURE: Management, in a socialist economy is based on rule and not on objective. Every matter goes through process designed by the government. Further top management of organizations is directly transferred or appointed by government hence sometimes is un-experienced about organization matters. It is usually observed that mostly government employees take least interest in betterment of corporation same is the reason that several government owned organizations show losses of millions of rupees every year.

6. CORRUPTION: Socialist economies lead to increase corruption in their country. Most government employees indulge in corruption, inefficiency and fudged accounts.

7. SLOW ECONOMIC GROWTH: Absence of factors like private ownership, competition, profit making and interest of employees to -wards their job assignments slow down the economic growth of the country. Organizations in socialist economies hardly move towards updating themselves with new technologies and other changes.

Topic 7

CAPITALISM DEFINITION: “An economic system or theory in which all means of production and distribution work under

private ownership with incentive of private gain or profit.” OR

“An economic system in which means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment

of profits in a free market.”

EXPLANATION: In a capitalistic economy, businesses are run under private owner with the incentive of private gains. There is no or very little involvement of state government in business affairs, usually up-to the extent of policy making. Factors of production and resources remain under private ownership. Profit earn ing is the key factor of economical growth in a capitalist economy. More profits lead to more investment which ultimately results in economic growth of the country.

CAPITALISM – CHARACTERISTICS

Following are the main characteristics of capitalism:

1. PRIVATE OWNERSHIP: In a capitalist economy factors of productions are owned, managed and controlled by private sector. Individuals or organizations are free to run their businesses and use their resources in the manner they like. Government does not interfere in any legal use of resources like land, capital or labor. Similarly, the fourth factor i.e. entrepreneur is also free to start, own and run any legitimate business in a capitalist economy.

2. PROFIT ORIENTED ECONOMY: Profit is the main motivating factor of a capitalist economy. Businesses under private ownership are established and run for profits. Every businessman, after paying all taxes, duties and liabilities is free to use his profit in the manner he likes. We can say that, entrepreneurs are f ree to use their profits either for their personal use, savings or reinvesting in their businesses.

3. INTERST BASED ECONOMY: Interest is one of the strong pillars of capitalism. It is referred as return on investment an owner gets on his capital. Investor is free to use his capital in any sector to get maximum rate of return. The return on investment can be, again, freely use by the owner.

4. ECONOMY OF CLASSES: Due to minimum government control and freedom of private sector capitalist economy generates classes of rich and poor. More capital investment brings more return, good quality products and services generate more profit, experienced and skilled employees get more salaries and benefits as compared to in-experienced and unskilled staff. All such factors divide the community in upper, middle and lower classes.

5. FREEDOM TO CHOOSE: In a capitalist economy, variety of products and services are available for consumers. Hence, consumers are not only free to choose any of the available products or services but they can also negotiate on their prices. Further, consumers also have right either to accept or reject any product on basis of its price, quality or standards.

6. FREEDOM OF PROFESSION: A capitalist economy provides open opportunities of professions to the whole community. Employers are free in selection for suitable candidates. Similarly employees and workers can also search jobs of their own interest. Further employees are also free to negotiate on their salaries and

other fringe benefits with their employers.

CAPITALISM – ADVANTAGES Following are the main advantages of capitalism:

1. PROFIT OREINTED ECONOMY: Profit is the basic objective of private ownership. Businessmen invest more and work hard in order to earn more profits. This factor results in business expansion and growth which is not only fruitful for businessmen but also creates employment opportunities and faster the economic growth as well.

2. CONSUMER FREEDOM: In capitalist economy, consumers have lot of choices of goods and services. They have freedom to choose among the available goods and services in the market. They can negotiate on price, quality and standard of products and services and have right to reject or accept any product or service on such grounds. In simple words we can say that in a capitalist economy consumer is the king. Same is the reason that businesses work hard for maintain good quality and standard of their products and services in order to satisfy their consumers

3. FREEDOM OF PROFESSIONS: Capitalism also gives individuals, freedom to choose professions of their own interest. They can apply for any job in any industry or sector they like, further have right to negotiate on salaries and other benefits with their employers. It is obvious that employees work whole heartedly if they get jobs of their interest which ultimately results in business and so economic growth. Similarly, employers also have right to search and select candidates according to their requirements.

4. COMPETITION: Capitalism provides equal opportunities to all businessmen. Businesses that work hard and maintain good standards will earn more profits. This makes the business environment competitive and consumers get better quality products at good price levels.

5. USE OF TECHNOLOGY: Producers in order to satisfy their customers and get more market share keep themselves busy in introducing new products in the market which needs a lot of research and analysis. Same is the reason that science and technology is used in the best possible way in a capitalist economy.

6. FASTER ECONOMIC GROWTH: In a capitalist economy, private ownership and profitability increases interest of individuals in their businesses. Further investors try to invest their capital as they have chance to get return on their investments. Similarly employees and workers work with full devotion as their professional growth is dependent upon their performance. Due to such factors capitalist economies bring fast economic growth in country.

CAPITALISM – DISADVANTAGES Following are the disadvantages of capitalism:

1. ECONOMY OF CLASSES: Due to minimum government control and freedom of private sector capitalist economy generates classes of rich and poor. Same factor creates class conflicts of rich and poor. Rich people can afford luxurious goods and services but poor cannot. Same is the reason that complexity and jealousy are common elements in a capitalistic society.

2. INTEREST FACTOR: Interest is one of the strong pillars of capitalism. Due to interest factor wealth and other resources start going into the hands of few people of the state. Further interest is one of the major causes of inflation in the society. Due to interest factor rich become richer and poor become poorer. Interest is also ‘Haram’ from Islamic point of view.

3. RISK FACTOR: Business activities are always full of risk. The risks may be in form of loss, fire, theft, natural calamities, competition etc. Individual or business organizations are not strong enough to absorb big risks and losses. As a result of which sometimes entrepreneurs have to windup their businesses due to losses and other risks.

4. MISUSE OF RESOURCES: In a capitalist economy, individuals are free to use their resources. Same is the reason that chances of misuse increase in a capitalism. People invest only in those sectors that provide maximum profits and returns. Further funds and resources are used freely in order to get maximum customers e.g. businessmen use huge amount for advertising and other marketing strategies in order to compete with their rivals.

5. LACK OF SOCIAL ETHICS AND NORMS: Businesses in capitalist economy do not care about social ethics and norms. In order to generate profit unethical business practices are usually observed in capitalist economy like casinos and lotteries etc.

Topic 8

MIXED ECONOMY DEFINITION: “It is an economy with co-existence of both private sector and a degree of state monopoly in some sectors”

OR “Mixed economies are those where means of production are shared between private and

public sector”

EXPLANATION: Mixed economy, also termed as dual economy, is a moderate system consisting characteristics of two other economic systems viz. capitalism and socialism.

Pure capitalism has its demerits like complete hold of private sector over factors of production, thirst of maximizing profits and un-controllable prices etc. Socialism, on other hand gives no choices to consumers and employees, observes slow economic growth and increases chances of corruption in the country. Mixed economy therefore is a moderate way to run country’s economy. It is an economic system that contains advantageous characteristics of both capitalism and socialism while ignores all such factors that can be harmful to economy. Due to its moderate nature, many countries have implemented mixed economy as their economic system. Pakistan is one of the countries where mixed economic system has been followed.

MIXED ECONOMY- CHARACTERISITCS

Following are the characteristics of mixed economy:

1. DUAL OWNERSHIP: Ownership of business resources, in a mixed economy, is held in both sectors. (i) Public Sector (Ownership of Government) (ii) Private Sector

(i) OWNER SHIP OF PUBLIC SECTOR Industries of basic necessities of goods and services are owned by government, further government usually does-not permit private sector to enter in such businesses. These industries usually include infrastructure and utilities services like water, gas and power etc. Due to complete control over such industries, government directly controls prices or rates of such products and services to keep them within the range of general public. Sui-Southern, Sui- Northern gas corporations and Water and Power Development Authority (WAPDA) are examples of government owned sectors in Pakistan.

(ii) OWNER SHIP OF PUBLIC SECTOR However individuals and private organizations are also allowed for business activities in all other permissible sectors. Private sector has right to enter in any permissible business under the prime objective of profit. Further individuals are also allowed to invest their capital in any sector in order to get maximum return. Just like capitalism, businesses can decide the prices of their products and services, however in order to keep prices stable, government can also enter in any business along with private sector. For example in Pakistan, Utility Stores are government owned departmental stores that offer products at low prices than market. Similarly there are several private organizations producing steel products in our country but Pakistan Steel Mills (a government owned organization) is also working in Pakistan in steel sector.

2. DUAL OBJECTIVE: In a mixed economic system, public sector organizations work for welfare of general public and not to earn profit. Same is the reason that government runs some of its enterprises even at loss b ut does not wind them up for benefits of general public. Pakistan International Airlines, Pakistan Railways and Pakistan Steel Mills are the biggest examples of such enterprises in our country.

On other hand, private sector of mixed economic system works with the prime objective of maximizing its profit. Goods and services are produced, as per consumers’ demands. Good quality products and services observe more sales hence generate more profit for the business.

3. GOVERNMENT CONTROL OVER PRIVATE SECTOR: In order to deal with issues like good quality and stable prices of products and services government, in mixed economy system, also keeps a check and balance in business affairs of private sector and several regulatory authorities work to achieve this objective. Pakistan Standards and Quality Control Authority (PSQCA), Oil and Gas Regulatory Authority (OGRA) and Pakistan Electronic Media Regulatory Authority (PEMRA) are some examples of such organizations in Pakistan. Defining and implementing policies and rules about standards and quality of products and services is the prime objective of such organizations. Further government has right to take legal action to businesses that do not follow government policies.

4. PLANNED ECONOMY: Like socialism, mixed economies are also based on long run. Usually countries make their policies and regulations in order to achieve long run objectives. The long run planning may be for ten to twenty years but government, usually in every country, is elected for five years, therefore five years plan is common in this regard.

5. CONSUMER FREEDOM: Having involvement of private sector in business, consumers in mixed economy get variety of products and services available in the market. Further, they have right to negotiate on prices and have right to accept or reject any product or service due to its price, quality or standards. The added advantage in a mixed economy is that consumer can also launch complaints (if any) about products and services to government authorities for legal action.

6. FREEDOM OF PROFESSION: Mixed economy does not guarantee confirm employment however various fields and professions are available in both public and private sectors where people are free to apply. Public sectors job are usually of permanent nature where salary package, bonus, increment and other benefits are decided and announced by government. Further promotions in government owned organizations are generally given on seniority basis. On other hand, people may search jobs in private sector as well where they have freedom to negotiate their salaries, bonuses and other benefits. Jobs in private sectors are performance oriented and employees’ promotions, increments and even job continuity is heavily dependent on their performance.

Topic 9

DIFFERENCE BETWEEN CAPITALISM & SOCIALISM Socialism and Capitalism are basically two different schools of thought for economy. Both the systems are different from each other in many ways. Major differences are as follows:

Difference of SOCIALISM CAPITALISM

1. OWNERSHIP Factors of production and other resources are completely owned, controlled and managed by state with no interference of private sector.

Factors of production and other resources are privately owned. Government interference is up-to the extent of policy making.

2. OBJECTIVE Objective of a socialist economy is the welfare of its people. Businesses are run to provide benefits to general public and not to earn profit.

Profit is the prime objective of capitalistic economy. Individuals and private organizations do businesses in order to get maximum profits.

3. INTEREST Socialist states are interest free. As all factors are under state control, hence used for public welfare and not for wealth concentration.

Interest is one of the strong pillars of capitalism. It is the return on investment of capital. In capitalism, individuals are allowed to invest their capital in any sector from where they can get maximum return (Interest)

4. Government Control

In socialism factors of production, resources, distribution and all other business affairs are completely controlled and managed by government. What, why, when and how to produce? decided by state government.

There is no government interference in business affairs. Factors of production, resources and business affairs are completely under control of private sector. Therefore profits, market trends and consumer demands decide the production of goods and services.

5. Consumer Choices

Consumers in a socialist economy are not supposed to demand but they have to accept. It is the government that decides about the prices, standards and qualities of products and services. Same is the reason that consumers get fewer choices of products and services.

In capitalist economy, consumers have lot of choices of goods and services. They have freedom to choose among available goods and services in the market. They can negotiate on price, quality and standard of products and services and also have right to reject or accept any product or service on such grounds.

6. Employment All businesses are run by government. Salary packages, benefits, promotion and increment criteria is decided by the governments. Employees have not much choice of professions.

Capitalism gives individuals, freedom to choose profession of their own interest. They can apply for any job in any industry or sector they like, further have right to negotiate on salaries and other benefits with their employers.

7. Competition In socialism there does not exist any Capitalism provides equal

competition, as the only producer of all goods and services is government. We can also say that government enjoys monopoly in a socialist state.

opportunities to all businesses. Right to produce and right to purchase make a capitalist economy competitive.

8. CLASSES The concept of socialism, at large, eliminates differences of rich and poor from the society. Mostly goods and services are produced or manufactured on the basis of analysis about their number of consumers. We can say that almost all goods and services are within the range of everyone. Similarly, salary packages of workers at same level in different organizations are equal.

Due to minimum government control and freedom of private sector capitalist economy generates classes of rich and poor. More capital investment brings more return, good quality products and services generate more profit, skilled employees paid more than un-skilled staff. All such factors divide the community in upper, middle and lower classes.

Topic 10

BUSINESS COMBINATION

INTRODUCTION: From business combination we mean combining of two or more business organizations to form a new business. Such combinations are done due to various reasons, some of them are given below: 1. Organizations want to expand their business resources 2. Organizations want to expand their market 3. National level organizations want to become multi-national organizations 4. Organizations with small resources or less capabilities want to have shelter of big organizations in

order for their survival.

KINDS OF COMBINATIONS: Business combination may be of different kinds some of them are given below. 1. Merger 2. Amalgamation 3. Holding companies 4. Subsidiary companies 5. Trust 6. Pool 7. Cartel 8. Syndicates 9. Licensing

1. MERGER: Merger refers to combination where a firm takes over one or more independent firms in su ch a manner that firms taken over lose their separate identity. This can easily be understandable from following:

A + b + c = A’

From above equation we can understand that two small companies (b & c) are taken over by a big company (A). After their combination both small companies lose their existence but company A’s existence remain the same.

2. AMALGAMATION: This type of combination takes place where two or more companies combine with each other in such a manner that all of them loose their entities and form another company with a new name. Amalgamation can be represented as follows:

A + B + C = D From above equation we can say that all the three companies (A, B & C) surrender their

independent identities and form a new company i.e. D. Amalgamation generally takes place when all the companies are almost equally popular and having equal share in the market.

3. HOLDING COMPANIES: The concept refers to combination under which all companies involved retain their separate identities. However, the firm that initiates the process is known as holding company. The process can be explained by the following equation:

(A) + B + C = (A) + b + c here (A) = Holding company b = the subsidiary company c = the subsidiary company

The holding company (A) has upper hand over the subsidiary companies in management and decision making. The above equation shows that (A) has purchased B and C converting B into b and C into c.

It is mandatory for a holding company to purchase at least 51% shares of the taken over companies which are then known as subsidiary companies.

4. SUBSIDIARY COMPANIES: These are the companies owned by the holding company, but enjoy their separate entity. The holding company may retain from 51% to 100% shares of the subsidiary company and have acquired its whole control of management, that is, it nominates the board of directors.

The position can be shown in equation as under:

(A) + B + C = (A) + b + c

According to this equation (A) is the holding company and B and C. After (A) acquires the majority of

shares of B and C they become the subsidiary company of (A). In this equation both the subsidiary

companies have retained their separate existence but are owned and run by holding company which makes their policies, prepares budgets, and controls all affairs and plans.

5. TRUST: Trust are developed between different companies or organizations in such a manner that none of them loose its existence or entity. It is created by an agreement among competitive companies in order to kill or atleast minimize competition between them. Several methods can be used to create a trust between companies for example trust can be developed by fixing prices on products or services.

6. POOL: Pool comes into existence in order to prevent those companies from competition dealing in identical goods or services. These competing companies can pool themselves into an agreement in order to save each other’s benefits.

Following criteria can be used in order to make such agreements.

a) FIXATION OF MINIMUM PROFIT LEVEL Every member company is required to earn at-least a certain level of profit.

b) FIXATION OF MINIMUM PRICES Every company is required to fix a minimum price of products which is required to be maintained.

c) ALLOCATION OF AREAS

Different areas are allocated to different companies so that these companies can easily market their products in their particular areas, because no any other company is allowed to enter in any area allocated to other companies.

d) LIMIT ON PRODUCTION

A lower limit of production is fixed to control the supply and keep prices at a certain level, so that competition can be avoided.

7. CARTEL: Cartels are established between large industries for example producers of diamonds, zinc, copper, tin and rubber. Amount of production is fixed along with prices and distribution areas as well.

8. SYNDICATES: Syndicates can be established between two or more individuals or organizations in order to gather or enhance their financial resources for meeting a certain project. Syndicates are most common in banking sector where some times huge finances are required for a certain project that cannot be arranged by a single bank therefore two or more banks join hands together in order to fulfill financial resources for that their particular project.

9. LICENSING: Licensing is agreement between two companies (One principal while the other manufacturing). In licensing, principal company allows the manufacturing companies to manufacture or sell its products. In fact principal company issues a license of manufacturing or selling its products to another company. In return manufacturing company pays a certain agreed amount in the form of Royalty to the principal company.

REASONS OF BUSINESS COMBINATION Following factors are responsible for different business combinations

1. WHEN FIRMS SUSTAINING LOSS: When organizations are suffering heavy organizational losses they need to make a combination either in the form of merger or becoming a subsidiary company.

2. TO FORM LARGE CAPITAL: When organizations want to enhance their financial resources, want to explore more markets and try to capture more market share they decide to combine their resources. In such types of combination amalgamation is most common.

3. TO CREATE MANOPOLY: Some of the large enterprises make some business agreements to reduce competition. Pools and trusts are common examples for these type of combinations.

4. FOR COMPLETION OF PROJECT: There are certain conditions when a project cannot be completed by a single organization due to lack of resources. In such conditions two or more organizations may combine together in order to complete the project. Syndicates and Joint Ventures are common examples of such types of combinations.

5. BUSINESS EXPANSION: When organizations want to explore new markets and capture more market share or want to carry

their business at international level may combine their resources with other organizations for their

goals’ achievement. Merger, amalgamation and Franchises are examples in such cases.

Topic 11

MARKETING

DEFINITION: The term marketing can be defined as follows:

“Marketing is process by which goods and services move from point of production to point of consumption.”

OR “Marketing is a social & managerial process by which individuals & groups obtain what they

need & want through creating, offering, & exchanging products of value with others.”

EXPLANATION: Marketing is a very important aspect in business since it contributes greatly to the success of the organization. Production and distribution depend largely on marketing. Marketing is a research based concept the scope of starts from the idea generation and ends at where product or service reaches to the end user consumer.

The present era is “Marketing Era.” The marketing concept gives priority to the customer. All the activities of marketing revolve around one concept i.e. “customer or consumer satisfaction.” Same is the reason that now it is said that “customer is the king.”

MARKET SEGMENTATION

INTRODUCTION: It refers to dividing market into various segments or sectors. Segmentation plays an important role in targeting the right customer and right market even at right time. It is not easy and feasible for any company to capture each and every individual of a city or country. Every human has his own behaviour, purchasing power, test and preferences. Same as the reason that every organization realizes not try to make every person its customers because ofcourse it is impossible. Market segmentation here plays an important role as it divides the entire market into small sectors and helps the organizations to make strategies only for their targeted sectors or market.

A market can be segmentised into following categories.

1. GEOGRAPHICAL SEGMENTATION It refers to dividing the market according to location of the customers. Following can be the main markets resulting due to this segmentation.

a) Rural: people living in villages. b) Urban: people living in cities c) National: people of one country d) Foreign: people of two or more countries

2. CUSTOMER SEGMENTATION Here market is divided on the basis of behaviours, ages and purchasing power of customers. Customers can be segmentised into following main categories.

a) Segmentation by age b) Segmentation by gender c) Segmentation by income

3. CULTURAL SEGMENTATION It refers to dividing the market on the basis of culture of a country, state or province following are the main types in this segmentation.

a) Segmentation by religion

b) Segmentation by fashion

c) Segmentation by culture

MARKETING MIX

Marketing Mix is a combination of marketing tools that a company uses to satisfy their target customers and achieving organizational goals. Following four are the main components of marketing mix 1. Product 2. Price 3. Place 4. Promotion

These four elements are collectively called 4 P’s of marketing. All these elements are variable i.e. controllable. Marketers, with the help of marketing mix can target different group of customers having different needs. Some detail of 4 P’s is given below:

PRODUCT: Product is the actual offering by the company to its targeted customers which also includes value added stuff. Product may be tangible (goods) or intangible (services). While formulating the marketing strategy about a particular product, following questions must be sort out by the organization. 1. What Product to offer? 2. What would be the brand name? 3. What would the Packaging style? 4. What would be the Quality? 5. What additional accessories are or can be provided? (Value added) 6. What will be the conditions of after sale services and warranties?

PRICE: Price includes the pricing strategy of the company for its products. How much customer should pay for a product? Pricing strategy not only related to the profit margins but also helps in finding target customers. Pricing decision also influence the choice of marketing channels. Price decisions include: 1. List Price 2. Payment period 3. Discounts 4. Financing 5. Credit terms

PLACE (PLACEMENT): It not only includes the place where the product is placed, all those activities performed by the company to ensure the availability of the product to the targeted customers. Availability of the product at the right place, at the right time and in the right quantity are crucial in placement decisions. Placement decisions include: 1. Distribution channels 2. Logistics (modes of transportations) 3. Inventory 4. Order processing 5. Market coverage 6. Selection of channel members

PROMOTION Promotion includes all communication and selling activities to persuade future prospects to buy the product. Promotion decisions include: 1. Advertising 2. Media Types 3. Message 4. Sales promotion 5. Personal selling 6. Public relations 7. Direct marketing

CONCLUSION: It always takes time and requires market research to develop a successful marketing mix. Companie s should not depend on one mix but always try new mixes.

PRODUCT LIFE CYCLE INTRODUCTION Businesses should manage their products carefully over time to ensure that they deliver products that continue to meet customer wants. The stages through which individual products develop over the period of time is commonly known as the "Product Life Cycle". The classic product life cycle has four stages 1. Introduction 2. Growth;

3. Maturity 4. Decline

1. INTRODUCTION STAGE At the Introduction (or development) Stage market size and growth is slight. In addition, marketing costs may be high in order to test the market, undergo launch promotion and set up distribution channels. It is difficult for companies to make profits at introduction stage of products. Products at this stage have to be carefully monitored to ensure that they start to grow.

2. GROWTH STAGE At this stage the product enjoys rapid growth in sales and profits. Profits arise due to an increase in output and possibly. At growth stage customers become familiar with the product’s price and quality therefore, companies can enjoy more profit and overall market growth at this stage. Further, companies invest more on promotional activities in order for more growth of their product at this stage.

3. MATURITY STAGE The Maturity Stage is, most common stage for all markets. In this stage competition is most intensed as companies fight to maintain their market share. Here, both marketing and finance become key activities. Marketing strategies have to be monitored carefully, since any significant moves are likely to be copied by competitors.

4. DECLINE STAGE In the Decline Stage, the market starts shrinking, reducing the overall amount of profit that can be shared amongst the remaining competitors. At this stage, great care has to be taken to manage the product carefully. Care should be taken to control the amount of stocks of the product. Ultimatel y, depending on whether the product remains profitable, a company may decide to end the product .

Topic 12

CHANNELS OF DISTRIBUTION

1. WHOLESALERS

DEFINITION: “A marketing or business activity by which goods in bulk quantities are sold to retailers”

OR “A distributor or middleman who sells usually to retailers or institutions, rather than

consumers” OR

“A person or firm that buys large quantity of goods from various producers or vendors and resells to retailers.”

EXPLANATION: Wholesalers are those middlemen who purchase goods in bulk quantity from producers and sell them to retailers after adding some profit. Wholesalers do-not have direct link to end user or final consumer.

These middlemen usually have enough space to stock products same is the reason that they purchase directly from producers in bulk quantities. Due to bulk purchases producers offer, to them, products at quiet low prices so that wholesalers add their profit on such products and sell them to retailers.

TYPES OF WHOLESALERS Following are the main types of wholesalers.

1. MERCHANT WHOLESALERS OR JOBBERS: These are the wholesalers who buy goods in bulk quantity from producers on their own account. Therefore, ownership of goods is transferred from producers to such wholesalers. These have sufficient space to store and enough funds to invest in purchasing of different products. Usually they do not have expertise in any one product but they simply purchase products and stock them at their storage houses or warehouses from where they sell them to different retailers.

2. BROKERS:

Brokers are such wholesalers who do-not buy or sell on their own names. They simply bring seller and buyer at one platform and help them to strike a deal for which they receive commission termed as brokerage. The feature that distinct them from merchant wholesalers is that brokers do-not claim ownership of the products.

3. REPRESENTATIVE OF MANUFACTURERS: Such wholesalers do-not work for every producer, but they make contacts with retailers and sell them products only for their principal company.

4. SPECIALIZED WHOLESALERS: These wholesalers work for one or some products in bulk quantities, they may be merchant wholesalers or broker but their field of business is specific such as livestock, petroleum products, fisheries etc.

SERVICES OF WHOLESALERS- TO PRODUCERS Wholesalers provide valuable services to producers, some of them are given below.

1. APPROACH TO RETAILERS:

Production itself is a complicated and full time job therefore it is not possible and feasible for producers to have a direct link with retailers. If they try to do so, it would almost be impossible to complete the small orders of retailers. Further, producers’ factories are usually not easily approachable to retailers. Wholesalers help producers as they sit in the market and have a direct contact to the retailers whether big or small.

2. STORAGE PROBLEM : Many producers have orders and working capability to produce huge quantity but they restrict themselves to small production due to small storage capacity. Wholesalers also prove themselves helpful for producers, as they have huge space to stock the products.

3. FINANCIAL SUPPORT : Production is heavily dependent on availability of funds. Production often stops due to funds shortage. Wholesalers can assist the producers by making advance payments of their orders by which production cycle do-not stop.

4. SHIFTING OF CREDIT BURDEN: Trade of any kind is usually done on credit terms. Specially retailers purchase products on credit. Wholesalers as middlemen take this burden hence provide relief to producers from credits and recoveries.

5. MARKET INFORMATION:

There is a gap between producers and final consumer because consumers only interact with the retailers. Therefore, producers cannot easily understand their consumers’ issues like demands and complaints about products. Wholesalers have direct interaction with the retailers in such a way they play an important role of giving market feedback to the producers.

SERVICES OF WHOLESALERS- TO RETAILERS Main advantages retailers can get from wholesale services are given below:

1. CONVENIENT BUYING:

Retailers always try to keep variety of products at their stores. Instead of purchasing bulk quantity of single product, their inventory stock contains small quantities (usually a doze n or two) of almost every or at-least popular products and brands. By purchasing from wholesalers, they can get almost all varieties under one roof. Otherwise it is impossible to purchase from all producers one by one all over the country or world. Further every manufacturer prefers to sale his products in bulk quantities which is not feasible for retailers.

2. ON-TIME DELIVERY :

Wholesalers have ready stock of products in their warehouses. Therefore, they can manage on time delivery issue of retailers. Even retailers can themselves approach the wholesalers to bring products at their door.

3. CREDIT FACILTY : Retailers are small investors and do not have huge amount to run their business. Usually they purchase products on credit and pay back the amount after selling them to customers. Wholesalers as big investors understand retailers’ problem and allow them credit purchases for a sufficient period of time.

4. STORAGE FACILITY: Retailers do not have sufficient space to store bulk quantities. Their storage problem is solved by wholesalers as retailers only make purchases when they know their stock is near to be finished.

2. RETAILERS DEFINITION: “A person or business that sells goods to consumer under the incentive of profit”

OR “Retailers are those businessmen that purchase goods in small quantities usually from

wholesalers and sell them to consumers after adding certain amount of profit. ” EXPLANATION: Retailers are the middlemen having direct link with consumers. They are usually small investors than manufacturers or wholesalers. Retailers purchase small quantities of goods from wholesalers or agents, though sometimes they directly purchase from manufacturers too. Retailers are the last channel to bridge the gap between producer and consumer.

TYPES OF RETAILERS Retail businesses can be divided into several kinds some of them are given below:

1. DEPARTMENTAL STORES: A departmental store is a setup which offers a wide range of products to consumers / end users under one roof and same is the biggest advantage for consumers. Departmental stores contain almost every product such as electronic items, garments, toys, books, jewelry, foot-wears, CD’s / DVD’s etc.

2. SUPER-MARKETS: Super markets have resemblance in their nature with departmental stores, the distinct feature is that super markets have wide range of variety related to daily items e.g. food, grocery and other kitchen items like Flour, Sugar, Cooking Oils, Bakery items, Soaps etc. Concept of super market is observing a fast growth in Pakistan.

3. DISCOUNT STORES: These are retail houses that offer products at discount prices to their customers. These may be departmental stores, super markets or retail stores in any residential area. They usually purchase large quantities of products for which they get special discounts from wholesalers or manufacturers and pass this benefit to their customers.

4. SPECIALITY OR SINGLE PRODUCTS STORES: Single product stores are those that are specialized in a particular product or brand. Same is the reason that such stores do-not deal in any other product or brand.

5. COMMON RETAILING SHOPS: These are the small stores usually run by individuals in nearby locality in order to cater needs of

consumers staying in the locality. This is the most common form of retail stores all ove r the world.

SERVICES OF RETAILERS - TO WHOLESALERS AND PRODUCERS Retailers provide valuable services to producers and wholesalers, some of them are given below.

1. WIDE DISTRIBUTION: Retailers are scattered throughout the city. Without retailers i t is impossible for a manufacturer to distribute and mange sales of its products throughout the city or country. Similarly, wholesalers can enjoy more profit by selling the products to large number of retailers.

2. ADVERTISMENT : Retailers play an important role in making products popular with consumers. Therefore, producers enjoy a benefit of free advertisement by making available their products at retail stores.

3. FEED BACK : Retailers have direct link with end-users/ consumers, therefore they play an important role of giving feed back to producers about product quality, consumer behavior, product complaints etc. Further they are also helpful in managing the sales promotion activities of different producers like lucky draws, gifts etc.

SERVICES OF RETAILERS – TO CONSUMERS

Main advantages consumer can get from retail services are given below:

1. EASY APPROACH :

Retailers form their businesses in or near residential areas so these are easily accessible to consumers.

2. EXCHANGE OF GOODS : In case of inferior quality or damage products, consumer can easily approach the retailers to exchange the products with other one.

3. CREDIT FACILTY : Retailers usually belong to same locality of their customers therefore they personally know them. Same is the reason that customers can avail credit facility from retailers.

4. HOME DELIVERY:

Most retailers offer a free home delivery service to their customers. This service is most common specially in case of grocery items.

3. TRANSPORTATION

INTRODUCTION: Transportation is the backbone of all business activities. It is the source of transferring goods from one place to another. Therefore, every business whether manufacturing, trading or even service provider totally depends on transportation. It is transportation that make possible of transferring goods from point of production to point of consumption in both Foreign and Home Trades. Business revolution was impossible without availability of transport.

CHANNELS OF TRANSPORTATION As there are three routes available to travel, same are also the channels of transportation for business

and trade.

1. AIR ROUTES: With the help of air routes goods are transferred through aero-planes and helicopters. This is the quickest channel for goods’ transfer and commonly used in foreign trade. However due to quick service air companies charge high freight rates from businessmen. Therefore it is the most expensive channel of transportation available. Usually it is adopted in case of time issues or export of perishable items such as fruits, vegetables etc.

2. SEA ROUTES: Second channel is transferring the goods is through sea. Like air routes, this channel is also used for foreign trade. Using this channel is more time consuming as compared to air routes, but the freight rates of shipping companies are comparatively at low side as compared to air freights. Further, ships have more capacity to carry goods at one time. Same is the reason that most of the exporters choose sea routes to send their products towards destination.

3. LAND ROUTES: Land routes are generally used to transfer goods from one place to another within the city or between two cities. However many companies use this channel for foreign trade, with their neighbor countries. This is the cheapest among all the channels. Goods are carried with the help of

trains, trucks, mini trucks, pickups and busses from producer to consumer whether within or outside the city or even country. Another channel of this category is Pipelines as through them utilities like

petroleum, water, gas etc. are transferred from point production to point of consumption.

ADVANTAGES OF TRANSPORTATION

Transportation plays a major role in the economy. It increases the production efficiency and it links to the logistics system. Vehicle should have some characteristics which are used for easy transport of goods and services.

Every transport mode has its advantages along with some disadvantages. A business has to choose among the best available options considering the elements like time and rates of transportation. Some advantages and disadvantages of each transportation mode are given below:

1. RAIL:

Advantages: Ability of loading and unloading goods and services is more. Frequency of delivering the goods over long distances is more. Climatic conditions have no effect No traffic or congestion easy movement of the vehicle. Disadvantages: Capital and initial investments are more. High material usage for the construction and even the fuel consumption The above are some of the advantages and disadvantages of using the rail.

2. ROADS (BUSES & TRAINS):

Advantages: High flexibility and ability to move the vehicles fast. Uses different routes to reach the destination quickly. Does door to door service High safety for the cargo. Chance to select the carrier which is suitable for carrying the goods. Disadvantages: It mostly depends on climatic conditions. High cost for long distances. Productivity is low.

3. AIR:

Advantages: Highest speed Even delivers goods to remote places. High reliability

Disadvantages: Highest cost of transportation.

Even adverse weather conditions effect the transportation. Material and fuel consumption is costly.

4. WATER (SHIPS):

Advantages: It is economical mode for transporting heavy loads and even cargo. It is the safest mode which provides convenience to the people without accidents. Cost of construction and maintenance is very low. It even provides international transport Disadvantages: It is highly affected by the weather conditions. It requires large initial investment It is a slow process.

Topic 13

RISKS INTRODUCTION: Like every walk of life, businesses also face various risks. No matter, what is the nature of business, whether the business is small or running on large scale it always faces different types of risks right from its start day. In-fact, more risks are involved while establishing a new business as compared to running businesses.

Risk refers to the chances of loss, damage or injury. Every business tries to make full efforts to survive it from all risk factors through minimizing the chances of loss or damages of any kind.

TYPES OF BUSINESS RISKS Business risks can mainly be divided into following two types:

1. Insurable risks. 2. Un- Insurable Risks. 3. Other Business Risks

1. INSURABLE RISKS:

Insurable risks are those which can be transferred from one person or group (business) to another group (usually insurance companies). The process of shifting the risk in such a manner is termed as insurance of a risk. Insurance does not mean that chance of loss or damage has been totally controlled or eliminated. However, in case of loss the insurance companies accept the responsibility to compensate the same for which they charge some premium usually on annual basis. Loss or damage of Life, Property, Vehicles, Goods, Goods in transit are some examples of risks that can be insured.

2. UN-INSURABLE RISKS: There are several risks a business faces, that cannot be insured. Such risks are un-insurable risks. Change in market prices and trends, government policies, competition, introduction of new products, new innovations are some risks that cannot be insured.

3. OTHER BUSINESS RISKS: Business risks can be of different types and categories. These may be insurable or un-insurable. It is very difficult to keep all business risks in one category. Therefore business risks are sub-divided into several categories. Some important risks are:

i. Marketing Risks ii. Credit Risks

iii. Equipment Risks iv. Inventory Risks v. Government Risks

vi. Fire, Theft and accidental Risks.

(I) MARKETING RISKS: These risks are involved in marketing for a new product. Even after a product has been successfully introduced to the market, risks of decline sales and product failure conti nue to move with it.

(ii) CREDIT RISKS

Each time a company extended credit to its customer, there is always a danger that the customer will not pay his bill. On the other hand if a credit manager becomes too careful too short list his customers who ever made late payments, the company sales will fall down. We therefore, can say that these risks have to be faced and can’t be avo ided.

(iii) EQUIPMENT RISKS

The purchase of special facilities and equipments involve great risks. Risks of theft and fire are ofcorse but besides these risks there are some more that not only un-insurable but also can’t be avoided. For example the expensive equipment purchased to produce some new products may prove use-less or even the sale of product may not according to the company’s expectations etc.

(iv) INVENTORY RISKS Inventories are also another factor due to which a company faces risks all the time. Shortage or substandard stock are examples of such risks. Further risks of theft, fire and expiry are always along with the stored stock.

(v) GOVERNMENT RISKS

Changes in laws by federal or provincial governments always create conflicts between them and businessmen. Risks like changes in duties, restriction on imports and sometimes exports and other tax laws have to faced by a businessman.

METHODS OF HANDLING BUSINESS RISKS INTRODUCTION: Risks are inherent in business. Some risks have to be assumed while some can be minimized with the

help of different managerial techniques. Important techniques for risks handling are given below:

1. RISKS AVOIDANCE: Although it is an impractical techniques but sometimes it is helpful to avoid risks by stopping the work which bears a risk. Ofcourse, it is impossible for a business to stop its business operations but it may be done when chances of damages or losses become more due to particular condition. For example, opening a business in strike, lockouts or any uncertain situation of the city can cause great harm to business property.

2. RISKS REDUCTION: Unavoidable risks can be minimized or reduced by taking safety measures. This technique is used mainly in areas like establishment of employees’ safety programme, Use of proper safety for equipments, fire fighting systems and security guards etc.

3. SELF INSURANCE :

It refers to setting up a separate fund by companies as a back up to compensate any business loss or damage. Self insurance does not eliminate risks, its only provides a me an of covering losses. Further it is only affordable by large business organizations.

4. BUSINESS FLEXIBILITY:

Many risks face by a business are due to changes coming in technology, education and production methods. Organizations can reduce such risks by keeping them flexible with the changes circumstances through adaptation of new production methods and technologies.

5. SHIFITNG REDUCTION: The most commonly used method is to transfer the risk to a professional risk taker i.e. “ insurance company.” An organization can shift its business risks to such companies against payment of a pre -agreed fee termed as premium either lump-sum or in installments. In case of loss or damage or at expiry of policy, insurance companies are bounded to compensate / return pre -agreed amount to the person who purchased insurance policy.

INSURANCE COMPANIES

INSURANCE COMPANIES: These companies can bear the risks of loss or damage of any kind on life and other assets. A common man can shift his life and / or business risks to such companies against payment of a pre-agreed fee termed as premium either lump-sum or in installments. In case of loss or damage or at expiry of policy, insurance companies are bounded to compensate / return pre -agreed amount to the person who purchased insurance policy.

Person who purchase insurance policy of any kind is known as insured. Whereas the company to which risk is shifted i.e. insurance company is termed as insurer.

TYPES OF INSURABLE RISKS / INSURANCE

Insurance are of following types:

1. Life Insurance 2. Accident Insurance 3. Property Insurance. 4. Marine or Goods in transit Insurance

1. LIFE INSURANCE:

Every person cares about future of his family- children and relatives after his death. Several insurance companies insured lives of people against premium. As in Pakistan we have State Life Insurance Corporation that purely works for lives insurance. Business of such insurance companies relies on the law of averages. Insurance companies work out the premium on the basis of number of insured persons and their respective ages. The premium demand by insurance company is dependent on the ages of the people. Insured with lower age is asked for small amount of premium or vice versa. Life insurance is again divided into three main categories:

(a) TERM LIFE INSURANCE:

It is insurance for a certain period of time. It can be from 3 years to 20 years. The insured has to pay amount of premium up-to the agreed time period. After completing the time period the total (pre-agreed) amount of policy is paid to the insured by insurance company. However, if insured expires, during the period the amount of policy will be paid by insurance company to his nominees (usually family members) without asking any additional premium from them.

(b) ORDINARY LIFE INSURANCE:

This insurance is not limited up to certain period. Rather, insured has to pay amount of premium throughout his life. Amount of premium varies from person to person and is decided on the basis of ages of the insured persons. Other terms and conditions in ordinary life i nsurance are same as in term life insurance.

(c) LIMITED PAYMENT LIFE INSURANCE:

In limited life insurance, premium is paid by the insured up-to a certain (pre-agreed) time period. The amount of policy, however, is paid by the insurance company after the death of the insured whether he dies during the period when he is paying the premium or after.

2. PERSONAL ACCIDENT INSURANCE: Accident cannot be prevented. No one has idea about the loss or damage he suffers due to any accident. Loss may be in the form of death, partial or complete disablement. Further no one has idea that disability will be of permanent or temporary nature. Accident risks can also be insured with insurance companies. A premium is decided to be paid by the insured, amount of which varies from policy to policy. The insurance company, in return, commits to pay policy amount, depending upon the loss caused due to accident.

3. PROPERTY INSURANCE: Property / Fixed Assets can be damaged either completely or partially. Hence same can be insured on basis of premium payment to the insurance companies. Property insurance can be of following types:

(a) FIRE INSURANCE: All types of buildings e.g. houses, factories, mills, showrooms etc. carry fire risks with them. Fire risk of buildings can be transferred to insurance companies for a period of time usually 2 years to 5 years. A certain amount of premium is to be paid to insurance companies the amount of which depends upon the age and construction of the building.

(b) CASUALTY INSURANCE:

Risks of theft, loss, damages or robbery are always present with properties like equipments, machineries and vehicles etc. Such risks are also transferrable to insurance companies for an agreed period usually 3 years to 5 years.

4. MARINE INSURANCE:

Risks like accident, theft and fire etc. are always present, while transferring goods from one place to another. Such risks are insured by offering marine insurance policies to insured. A premium is paid to insurance companies for the period when goods remain in transit. In case of any loss during transition of goods, insurance company compensates the same otherwise agreement, automatically, finished if goods safely reach at their destination. Marine insurance are sub-divided into two categories.

(a) OCEAN MARINE INSURANCE: This is the insurance commonly used in foreign trade i.e. when goods are moving from one country to another through sea.

(b) INLAND MARINE INSURANCE: This is the insurance when goods are moving within the cities of same country by roads, trains or even rivers.

Topic 14

HUMAN RESOURCES MANAGEMENT INTRODUCTION: Staffing is the process that starts from hiring of staff and ends at finishing of service tenure. However there are several more activities between these two for example salary disbursement, promotions, increments, transfer and postings etc. Same is the reason that staffing process has taken an important place in every organization and now it is considered as one of the important jobs of a manager. Almost every organization is now managing a separate Human Resources Department for this purpose, same department is responsible to perform activities related to the staff or employees. Some important staffing activities are: (i) Determination of needs (ii) Selection and Recruitment

(iii) Orientation and Training (iv) Performance Appraisal (v) Compensation (vi) Promotion (vii) Seperation

(i) DETERMINATION OF NEEDS: Effective management first determines the need of staff before it makes decision to hire. Once needs are determined it becomes easy for management to select candidates that are suitable for jobs. Further this steps also saves time and over staffing in any organization. Needs can be

determined through various methods some of these are given below.

a) CAMPARISON METHOD Job is determined through comparison from other organizations serving the same industry.

b) JOB FACTOR METHOD Job is determined by analysing the importance and difficulties to be faced by an employee.

c) TIME SPAN METHOD Job is determined through analysing total required time for its completion.

d) ORGANIZATON CHART METHOD This method is most common in formal organizations, here jobs are determined through

organizational chart. We can also say that jobs at top level in any organizational hierarchy

are considered as more crucial than jobs at middle or low level.

(ii) SELECTION AND RECRUITMENT: Once the needs are determined, recruiting starts. Recruiting refers to inviting applications from prospective candidates. Further, once the application has been received they are screened (selected) according to the company’s requirements. Interviews and tests of eligible candidates

are also a part of these steps.

(iii) ORIENTATION AND TRAINING: One of the important activity in this regard is orientation and training of selected staff. Orientation refers to giving an introduction of organization to selected candidates. It covers the history, present situation and future plans of any organizations. Orientation also provides an idea to selected staff about their future scope in that organization along with chances of growth, promotions and increments on good performance. Training, however, is an on going process required to make staff compatible with the changing circumstances and technologies in any organizations. Same is the reason that organizations with broader vision always consider training as a source of success not only for their employees but

the whole organization.

(iv) PERFORMANCE APPRAISAL: It refers to measuring the performance of managers as well as other staff members. The main objective of this step is to make workers to realize their faults and also to keep them on the way of objectives. Further performance appraisal work as a tool to reward the eligible candidates

hence works as a tool for positive competition.

(v) COMPENSATION: It refers to the reward for the service one has to perform. Peopl e should be paid according to

their performance. A salary increase, bonuses and other fringe benefits are the part of this step.

(vi) PROMOTION: Promotion is upward transfer of bringing the suitable candidate. It not only results in increase in

salary but also in the status of selected candidates.

(vii) SEPARATION: It refers to ending of service tenure of any candidate from the organization. Separation not only meant as firing of the employee but it can be in different forms. Some common methods of

separation are as follows:

a) RESIGNATION: It refers to employee’s separation on his own discretion.

b) LAY OFF: It is the process when organizations temporarily discontinue the services of their employees

due to reasons like economic condition or end of service contract etc.

c) RETIREMENT: Here employee is separated as he reached at a certain level of age. Different organizations may have

different age standards for retirement. In Pakistan however, retirement age is sixty years for

men and fifty eight years for women.

d) TERMINATION: It refers to employee’s separation due to his act against organizational procedures and rules. It is involuntary permanent separation from the organization for any reason.

WAGES AND WAGE PLANS INTRODUCTION: Wages are the payment made to person(s) against work done or duties performed by them. It is the reward of productive work. Wages can be in different forms e.g. salary, bonuses, commissions and other fringe benefits.

METHODS OF PAYMENT: Following are the most common methods of wages payment. 1. Straight Salary 2. Time Wages 3. Piece – Rate payment 4. Shift Premium 5. Bonus 6. Profit Sharing plan 7. Dearness Allowance 8. Overtime 9. Commission.

1. STRAIGHT SALARY: It is usually a pre- decided fixed amount paid on a pre-determined period i.e on monthly, weakly and fortnightly basis. In Pakistan salaries are usually paid on monthly basis whereas in UK and USA weakly payment of salaries is in general practice.

2. TIME WAGES: This method is used to make payment as per agreed rate of a period of time e.g. hourly or daily rate .

Usually this method of payment is used for labors. For example if a person works for a total 10

hours and its pay rate is Rs. 20/- per hour then total amount of payment would be (10X20=Rs. 200).

3. PIECE – RATE METHOD: This method is also common in manufacturing companies where usually payment is made on the

basis of per unit produced by the staff. For example a person produced total 30 pieces of any

product with a pay rate of Rs. 10/- per piece then amount of payment would be (10 X 30= 300).

4. SHIFT PREMIUM: It is an additional amount paid only to employees working in odd timings or shifts. There are many

companies working 24 hours a day. Such companies pay additional amount in the form of shift

premium to their employees working in night shifts.

5. BONUS : These are the extra or additional amount paid to the workers on certain occassions. For example

several companies in muslim countries like Pakistan pay bonuses on Eid occassions. Further large

organizations announce may also bonuses on annual or half basis to their employees as well.

6. PROFIT SHARING: In order to maintain better employer- employee relations some companies may also offer some

share of profit to their employees. This may enhance the working of workers. Sometimes public

limited companies offer shares to those employees who performed well throughout the year.

7. DEARNESS ALLOWANCE: It refers to the temporary adjustment in the pay of employee. It is often done by government

organizations as they grant this allowance for a short period instead of permanent increas in the

pay.

8. COMMISSION : It is common specially for sales persons. In order to enhance their sales, companies often announce

commission on piece sale of each product. Sometimes companies also announce extra commission

to staff who made sale above their targets.