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CHAPTER-1 BUSINESS ENVIRONMENT Revision Notes l Meaning: Business environment can be defined as the sum total of all the forces, factors and institutions which are external to the business enterpr...

CHAPTER-1 BUSINESS ENVIRONMENT Revision Notes l Meaning: Business environment can be defined as the sum total of all the forces, factors and institutions which are external to the business enterprise and beyond its control, but they exercise tremendous influence on the functioning and growth of the enterprise. l Features: The main features of business environment are as follows: 1. Totality of external forces: Business environment includes all the forces, institutions and factors which directly or indirectly affect the business organisation. 2. Specific and General forces: Business environment includes specific forces such as investors, customers, competitors and suppliers which affect the business directly and general forces like social, economic, legal and political factors that affect the business enterprises indirectly. 3. Interrelatedness: All the forces and factors of business environment are inter-related to each other. 4. Dynamic: Business environment is highly dynamic. It is not static or rigid. It keeps on changing due to frequent changes in government policy, demand, new technology, etc. 5. Relativity: The impact of business environment may differ from company to company or country to country. 6. Uncertainty: It is very difficult to predict the changes of business environment as environment is changing at a very fast pace like IT sector and fashion industry. l Importance of business environment: 1. It enables the firm to identify opportunities and get first mover advantage. 2. It helps the firm to identify the threats and early warning signals. 3. It helps to adjust and adapt to rapid changes. 4. It helps in tapping useful resources. 5. It helps in formulation of plans and policies. 6. It increases the efficiency and performance of the enterprise. l Dimensions of Business Environment: There are two main dimensions of business environment: 1. Micro Environment 2. Macro Environment O ENVIRONME ACR NT M e rnal Factors I nt Corporate culture, Top management, l Technologica Eco Vision and Mission, etc. nomic Legal Micro Environmennt Customer, Competition, cial Suppliers, etc. So External Factors Political Dimensions of Business Environment 1. Micro Environment: Micro Environment refers to those internal and external factors which exercise a direct influence on the working and performance of an individual business organisation. It has two broad categories as follows: 2 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII (i) Internal factors: It refers to all those factors which exist within a business firm. These factors are controllable because the firm has control over these factors. The main internal factors which influence business organisations are as follows: (a) Top management structure (b) Corporate culture (c) Mission and objectives (d) Human and other resources (ii) External factors: The external factors refer to those individuals and groups or agencies with which business organisation is constantly interacting. Micro Environment consists of the following external elements: (a) Customers: Including individual households, government departments, etc. (b) Competitors: A company may have both direct and indirect competitors. (c) Suppliers: Suppliers refers to the people and group who supply raw materials. (d) Middlemen: Middlemen like agents, wholesalers, and retailers serve as a link between the company and its customers. (e) Financers: The shareholders, financial institutions, debenture holders and banks provide finance to the company. Financial capacity policies and attitude of financers are important factors for the company. 2. Macro Environment: Macro Environment is the general environment or remote environment which may affect all business enterprises. Macro Environment is also known as indirect action environment. Forces in the macro environment are uncontrollable and non-measurable. Success of an enterprise depends on its ability to adapt to the macro environment. Macro environment consists of the following components: (i) Economic Environment: It refers to the nature of economy (capitalist, socialist or mixed) economic policies of the government. It includes gross domestic product, income level at national income, per capita income level, monetary and fiscal policy of the government, etc. (ii) Social Environment: Social Environment consists of the customs and traditions of the society in which business is existing. It includes the standards of living, taste, preferences and education level of the people living in the society where the business exists. The businessman can not overlook the components of social environment as these components play very important role in the business. (iii) Political Environment: Political Environment constitutes all the factors related to government affairs such as the type of government in power, attitude of government towards different groups of societies, policy changes implemented by different governments etc. The political environment has an immediate and great impact on the business transactions so businessmen must scan the environment very carefully. (iv) Legal Environment: Legal environment constitutes the laws and various legislations passed in the parliament which affect the business transactions. Trade Mark Act, Essential Commodity Act, Weights and Measures Act, etc are common legislations passed by the government. (v) Technological Environment: Technological environment refers to the state of technology in the area of manufacturing, mining, construction, transportation, etc. The businessman must closely monitor the technological changes taking place in the competitive business environment. Technological changes always bring quality improvement and more benefits for customers. l SWOT is the acronym for strengths, weaknesses opportunities and threats. It is formed for analysing and formulating an effective strategy that can capitalise on the opportunities and neutralise the threats faced by an organization. SWOT analysis is a systematic and logical approach to understanding the environment of a business organisation. l Strength (S): Strength is an inherent capability of the company which it can use to gain strategic advantages over its competitors. l Weakness (W): Weakness is an inherent limitation of the company which creates strategic disadvantages for it. The firm may face problems due to poor management and ineffective policies etc.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 3 l Opportunity (O): An opportunity is a favourable condition in the company's external environment which enables it to strengthen its position. Economic liberalisation and globalization offer opportunities to companies which want to enter banking, insurance and telecommunication sectors. l Threat (T): Threat is an unfavourable condition in the company's external environment which causes a damage or risk to its position. competition from multinational corporations is a threat to Indian firms. (Internal Environment) Strengths Weakness ORGANISATION Opportunities Threats (External Environment) SWOT- Model of Environment Analysis Example: STRENGTHS WEAKNESSES Customer Loyalty Pricing Expanding Eco system Vender Lock–in Privacy code of Conduct Decreasing market share Hardware and Software In Compatibilities with other OS Manufacture Limited offer of Sector Specific Marketing and advertisement Software for mac Brand reputation Swot "Apple" OPPORTUNITIES THREATS Cooperation Apple-IBM Efforts of Competitor IOS in the Car Increasing Services I TV and I Watch Launch Online music market Obtaining Patent through Reducing fragmentation acquisition Loosing Secrecy Price pressure Key Terms l Socialist Economy: Socialist Economy refers to all means of production, farms, factories, etc., that are belong to the government. l Capitalist Economy: In this economy, economic decisions regarding production are taken by private entrepreneurs who are solely guided by the expected rate of profit based on consumer’s preferences- actual or anticipated. l Mixed Economy: In the Mixed Economy system, all three sectors exist together, that is the private sector, public sector and joint sector. qq 4 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII CHAPTER-2 FINANCE AND CAPITAL Revision Notes l Business Finance Business finance refers to the money employed in the business. It is the arrangement of cash and credit in the business firm at all times. Business finance may be defined as planning, raising, managing and controlling all the money and capital funds required in connection with the business. l Importance of Finance for Business Finance is the lifeblood of business. No business firm can carry on its operations smoothly and successfully without the finance. Importance of finance for business is as follows: (1) In business, finance is required for (i) Establishing an enterprise (ii) Purchase of fixed assets and current assets (iii) Expansion, growth and modernisation of business (2) The firm can meet its liabilities in time. (3) The firm can take advantage of business opportunities. (4) The firm can carry on its business smoothly and without any interruptions. (5) The firm can face recession, trade cycles and other crises more easily and confidently. l Source of finance for different types of business firms Capital requirements differ according to the nature and size of business. Sources of finance for different types of business firms are as follows: (1) Source of finance for sole proprietorship firm (i) Own capital and retained earnings. (ii) Loans from friends and relatives. (iii) Loans from banks and financial institutions. (iv) Long-term loans from state financial corporations. (v) Short-term finance from commercial banks. (2) Source of finance for partnership (i) Own capital contributed by partners in an agreed ratio. (ii) Retained profits. (iii) Loan from commercial banks and financial institutions. (iv) Short-term loans from suppliers of raw materials and finished goods. (3) Source of finance for joint stock company (i) Issue of shares. (ii) Retained profits. (iii) Issue of debentures and bonds. (iv) Long-term loans from financial institutions. (v) Short-term loans from commercial banks. l Financial Planning: Financial Planning is the process of determining the objectives, policies and procedures, programmes and budgets to deal with the financial activities of an enterprise. Financial planning involves both short-term and long-term planning. The steps in financial planning are as follows: (i) Determination of financial objectives. (ii) Estimation of capital requirements. (iii) Determination of kinds of securities to be issued. (iv) Formulation of financial policies, procedures and budgets.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 5 l Features of Financial Planning: (i) Sound financial planning must provide a simple financial structure. (ii) Foresight must be used in financial planning. (iii) Financial planning must enhance the optimum utilisation of the capital. l Importance of Financial Planning The importance of financial planning is discussed below: (i) Facilitates collection of optimum funds: Financial planning estimates the precise requirement of funds which helps to avoid wastage and over-capitalisation situation. (ii) Preparation for future challenges: Financial planning helps the firm in preparation of plans for meeting challenges in future. It makes the firm better prepared to face uncertain events in future. (iii) Helps in operational activities: The success or failure of production and distribution function of business depends upon the financial decisions as right decision ensures smooth operation of production and distribution. (iv) Helps in fixing the capital structure: Financial planning is necessary for tapping appropriate financial sources at right time. It helps the management in fixing the appropriate capital structure. (v) Helps in coordination: It helps in achieving coordination between various functions by providing clear financial policies and procedures. (vi) Linking present and future: Financial planning links present financial resources and future financial requirements. It attempts to achieve a balance between the inflow and outflow of funds. (vii) Financial control: Financial planning serves as the basis of financial control. The management attempts to ensure utilisation of funds in tune with the financial plans. l Factors affecting Capital structure: Capital structure refers to the proportion of debt and equity used for financing the operations of a business. The factors which determine the capital structure of a business firm are: (i) Risk Consideration: Use of debt increases the financial risk of business. Business also have to face operating risk. If the risk of business is lower, they can use more debt. In case of higher business risk, firm’s capacity to use debt decreases. (ii) Capital Market condition: The company should consider the stock market condition before deciding the capital structure. During the bull phase, people are ready to invest more in equity but during the bear phase investors prefer debt which has fixed rate of interest. (iii) Control: Issue of debt does not cause a dilution of management’s control over the business however, issue of equity reduces the holding of management in the company. (iv) Tax Rate: Interest on debt is a tax deductible expense. When the tax rates are high, debt becomes cheaper. Dividend is paid out of after-tax profit so it is not tax deductible. (v) Flexibility: If a firm uses excessive debt in their capital structure, they restrict the firm’s potential to raise further debt. To maintain flexibility, firm should maintain. (vi) Regulatory Framework: All the companies operate under the regulatory framework provided by the law. Raising the funds from the banks or financial institutions require fulfillment of various norms. Mostly those sources of finance are preferred which have easy and less legal and regulatory framework. (vii) Cost of debt: Cost of debt has a direct influence on the extent of debt to be used in the capital structure. If the interest rate on the debt is less, more debt can be used rather than equity. In case of higher cost of debt, equity is preferred over debt. (viii) Cash Flow: The company should keep in mind the future cash flow of the firm. Firms with higher cash flow can raise more debt as it involves fixed cash payment in the form of interest and principal amount. l Meaning of Fixed Capital: Fixed capital refers to the funds required for the acquisition of fixed assets that are to be used repeatedly over a long period of time. Fixed assets are those assets which are required for permanent use by the company and are not meant for resale. Factors affecting Fixed Capital The various factors that affect the fixed capital are as follows: (i) Nature of the business: Fixed capital requirement varies according to the nature of the business. Manufacturing companies require heavy investment in fixed capital such as land, building and plant and machinery while trading enterprises require less fixed capital. 6 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII (ii) Size of the business: A large-scale enterprise generally requires more fixed capital than a small-scale enterprise because of the increased scale of operations. For example: Public utility concerns like railways and electric supply companies require huge investment in fixed assets. (iii) Types of technique: Type of technique affects the fixed capital requirement. A capital intensive company requires more investment in fixed capital as a large investment is required in plants and machinery. However, the firms using labour intensive technique requires less fixed capital. (iv) Growth Prospects: Where a company wants to take growth opportunities, it would require more investment in plant and machinery to increase the productive capacity of the firm which increases the fixed capital requirement. (v) Diversification: Diversification involves increasing the product line of the business. If a company diversifies its operations, it requires a higher amount of fixed capital. (vi) Level of Collaboration: If the companies are preferring collaborations or joint ventures, then, companies will need less fixed capital as they can share plant and machinery with their add full stop after collaborators. But if the company prefers to operate independently then there is more requirement for fixed capital. l Working Capital: Working Capital is that portion of capital which is required for holding current assets like stock of materials and finished goods, bills receivable and cash for meeting current expenses like salaries, wages, rent etc. Working capital is also known as "Circulating capital or revolving capital" because it keeps on circulating or revolving in business. Cash Debtors Raw material Sales Work-in-progress Finished good The term working capital is used in two forms: gross working capital and net working capital. Working Capital (i) Gross Working (ii) Net Working Capital Capital It represent total It represent the value of current assets. excess of current assets-over current liabilities Types of working capital: Working capital can be divided into two broad categories: Working Capital (1) Permanent Working (2) Temporary Working Capital Capital Regular Working Initial Working Seasonal Working Special Working Capital Capital Capital Capital (1) Permanent working capital: It refers to the minimum amount of working capital which is required to operate the minimum level of business activity. It is permanently locked up in current assets. It can be of two types:  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 7 (i) Regular working capital: It is that part of working capital which is required for continuous business operations. It represents the excess of current assets over current liabilities. (ii) Initial working capital: That part of working capital which is required at the time of starting of a business. (2) Temporary working capital: It is that working capital which is required in addition to the permanent working capital. It is required to meet seasonal and special needs of the business. It can be of two types: (i) Seasonal working Capital: It means additional working capital which is required during a particular season. (ii) Special working capital: It is that part of working capital which is required to meet future contingencies in the business. l Factors affecting working capital: The amount of working capital required by an enterprise depends upon the following factors: (i) Nature of business: The working capital requirement is affected by the nature of business. A trading concern needs less working capital as sales are made quickly on receipt of material. Wholesalers and manufacturers require more working capital as they have to sell on credit and maintain a huge inventory. Services also have low working capital requirement as they sell on cash basis and do not need much inventory. (ii) Scale of operations: The size of the concern has a direct relation with the working capital requirements. Big enterprises need higher working capital for investment in current assets. (iii) Business cycle fluctuation: During boom period the market is flourishing and hence, more working capital is required to meet the increasing demand and sales. (iv) Technique of production: If a company is using labour intensive then company will have to maintain more working capital to make payments to the labour. (v) Growth prospects: Firms planning to expand their activities will require more amount of working capital as for expansion they need to increase scale of production. (vi) Inflation: If there is an increase or rise in price then the price of raw materials and cost of labour will rise. It will result in an increase in working capital requirement. l Comparison between Fixed and Working capital: Basis Fixed Capital Working capital Definition Fixed capital is invested in fixed assets like Working capital is invested in current assets building, plant and machinery, furniture, etc. like raw materials, debtors and bills receivable, etc. Nature It remains fixed in the business. It fluctuates from time to time. Term Fixed capital is invested for long time period. Working capital is invested for short time period. Purpose Fixed capital helps in generating income. Working capital is kept to meet day-to-day expenses. Source Fixed capital is raised from long term and Working capital is raised from short term medium term sources of finance. Its main sources of finance. Its main sources are sources are shares, debentures etc. commercial bank, trade exalt, public deposits etc. Key Terms l Inflation: Inflation is a general increase in the prices of goods and services in an economy. l Shares: Shares are units of equity ownership in a corporation. l Trade Cycle: A trade cycle refers to fluctuations in economic activities specially in employment, output and income, prices, profits etc. l Capital Structure: It means the proportion of debt and equity used for financing the operations of business. qq 8 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII CHAPTER-3 SOURCES OF FINANCE FOR A JOINT STOCK COMPANY Owners' Funds Concepts Covered Equity shares - features, advantages and disadvantages. Topic-1 Preference shares - features, types advantages and disadvantages; distinction between equity shares and preference shares. Bonus and rights issue, ESOP and Sweat Equity Shares - meaning. Distinction between bonus shares and right shares. Retained earnings – meaning, merits and demerits. Revision Notes l Meaning: A joint stock company requires two types of finance: (1) Long-term finance (2) Short-term finance. Long-term finance can be raised by issue of shares, debentures, retained earnings, long-term loans, etc. l Sources of Long-Term Finance: (1) Equity shares (4) Debentures (2) Preference shares (5) Loans from commercial banks (3) Retained earnings (6) Loans from financial Institutions. l Equity shares: Equity shares represent the value of an investor's stake in a company. The investors in the equity share hold the right to vote, share profits and claim the assets of the company. It is the Owner's Capital, therefore, it is also known as owner's equity. l Features of Equity Shares: The features of equity shares are: (i) Owner's capital: Equity share holders are the actual owners of the company and they bear the primary risk. (ii) Voting right: Equity shareholders are the actual owners of the company so, they have voting rights. (iii) Participation in management: They have the full right to participate in the management of the company. (iv) Permanent capital: Equity Capital is permanent in nature because it is repaid in the last in the event of winding up of the company. l Advantages of Equity Shares: Equity shares have advantages from the company's point of view and from the shareholder's point of view. These are as follows: l From company's point of view: (i) Permanent capital: Equity capital is permanent in nature as it is refunded only at the time of winding up of the company. There is no liability to repay it. At the time of winding up equity shares are paid in last. (ii) No charge on assets: Equity shares do not create any charge on the assets of the company. The company is free to use its property for raising loans. (iii) No burden on earning: Equity shares impose no burden on the company's resources because the dividend on such share is payable only at the discretion of the management. (iv) Unlimited source: Through the equity shares a company can raise a huge amount of finance. l From investors'/shareholders' point of view: (i) Voting rights: Equity shareholders enjoy voting rights and controlling power over the company. (ii) Pre-emptive right: Equity shareholders have right to get the first new issue of shares by the company. Such shares are called Right shares. (iii) Limited Liability: The liability of the equity shareholders is limited to the face value of shares subscribed by them. l Disadvantages of Equity Shares: l From company's point of view: (i) Danger of over capitalisation: Capital raised from equity shares is not refundable during the lifetime of the company, so there is a possibility of over capitalisation resulting in a lower rate of earnings and dividend. (ii) No trading on equity: When the whole finance is raised through equity shares, the benefit of trading on equity is not possible.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 9 l From shareholder's point of view: (i) High risk: Equity shareholders have high risk as they have to go with the market conditions and prices of these shares keep on fluctuating. (ii) Unhealthy speculation: There is unhealthy speculation in the prices of equity shares. Directors and officers of the company may also involve in the speculation on the basis of internal knowledge of management. l Preference Shares: Meaning: Preference shares are those which carry the following two rights: (i) They have a right to receive dividend at a fixed rate before any dividend is paid on the equity shares. (ii) In case of winding up, they can claim their funds before the equity shareholders. l Types of Preference Shares: (i) Cumulative preference shares: These shares are those preference shares the holders of which are entitled to recover the arrears of preference dividend before any dividend is paid on equity shares. (ii) Non-cumulative preference shares: The holders of such shares get a fixed amount of dividend out of profits of each year. If no dividend is declared in any year such shareholders get nothing. (iii) Participating preference shares: These are those shares which have special right to participate in the surplus profits, if any, after dividend has been paid to equity shareholders. (iv) Non-participating preference shares: Such shares get only a fixed rate of dividend every year and do not carry a right to participate in the surplus profits. (v) Redeemable preference shares: These shares are those which will be repaid by the company within a certain period in accordance with the terms of issue. (vi) Irredeemable preference shares: These shares are those the capital of which cannot be refunded before winding up the company. (vii) Convertible preference shares: The shareholders of these shares have a right to get their preference shares converted into equity shares at a fixed rate, after the expiry of a specified period as mentioned in the memorandum. (viii) Non-convertible preference shares: These shareholders do not have a right to convert their preference shares into equity shares. l Features of Preference Shares: (i) Rate of dividend: Preference shares are paid dividend at a fixed rate. (ii) Payment of capital: They have a preferential right to receive payment of capital before any payment is made to equity Shareholders. (iii) Arrears of dividend: If in any year dividend is not paid on these shares than the arrears of dividend may accumulate. l Advantages of Preferences Shares: (i) Flexibility: Preference shares are flexible as they can be repaid, when the company does not need it. (ii) No charge on assets: Preference shares do not create a charge on the assets of the firm. The company keep its fixed assets to be used for raising loan in future. (iii) No burden on finance: Preference shares do not put any burden on financial position as dividend is paid only out of the profits. (iv) Safety of funds: Money invested by preference shareholders always remain safe and their capital gets high returns. l Disadvantages of Preference Shares: (i) Costly source: The cost of raising finance through preference shares is greater than that of debentures so they are a costly source of finance. (ii) Legal formalities: When company issues preference shares, they have to follow several legal formalities which creates problems in raising finance. (iii) Low appeal: Preference shares have little appeal to investors. Most of the investors want security. (iv) Lack of voting right: Preference shareholders do not carry any voting right in the company. (v) No capital appreciation: Preference shareholders get only fixed rate of dividend and their capital does not appreciate. They are paid fixed amount at the end of certain (fixed) period. 10 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII Distinction between Equity shares and Preference shares: Basis Equity Shares Preference Shares 1. Nominal value Generally low Generally high 2. Degree of risk Very high risk because dividend is Comparatively low risk because of not fixed. fixed rate of dividend 3. Right to dividend After dividend is paid on preference Prior to dividend on equity shares shares 4. Refund of capital Repayment after all other Prior to refund of equity capital. obligations are refunded 5. Voting rights Voting rights exists No voting rights 6. Appeal To the bold adventurous investors To the cautious and conservative investors 7. Redemption Not redeemed during the life of the Redeemable preference shares company are redeemed during the life of company. l Bonus Shares/Bonus issue: When a company have large amount of undistributed profits, they issue fully paid up shares to their existing shareholders, free of charge. This is known as Bonus shares. Issue of Bonus shares is also known as bonus issue or capitalisation of profits of the company. A Company must follow certain conditions before issue of bonus shares. These are as follows: (i) There should be adequate undistributed profits. (ii) SEBI guidelines must be followed in case of bonus issue. (iii) Board of directors of the company must pass a resolution for making the bonus issue. (iv) Articles of Association of the company must permit the issue of bonus shares. l Rights Share or Right issue: Right issue is an invitation to the existing shareholders to purchase additional new shares in the company. When a company wants to raise its subscribed capital by issue of new shares, it can give an issue offer to the existing shareholders to purchase the shares at a price lower than the market price. Such an issue is called rights issue. These shares are offered to existing members at a price lower than the market price. This right is called pre- emptive right. l Employee Stock Option Plan (ESOP) An employee stock option plan is a scheme under which an employee of the company is given a right to purchase a specified number of its shares at a particular price (usually below the market price) during a given period of time under Section 62 (1) (b) of the Companies Act, 2013. A company may offer shares to its employees under a scheme of Employee stock option by passing a special resolution in the annual general meeting of the company. l Sweat Equity Shares: A company may issue sweat equity shares as per section 54 of Companies Act, 2013. Sweat equity shares means equity shares issued by the company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available intellectual property rights. Such shares can not be resold by their holders within a period of 3 years. This is called lock-in period. Following conditions are prescribed for issue of sweat equity shares: (i) They must be of a class of shares already issued. (ii) One year must have lapsed since company commenced business. (iii) The issue must be authorised by a special resolution. (iv) The share must be issued as per the SEBI Regulations. l Retained earnings/ploughing back of profits: Retained earnings or ploughing back of profits refers to the process of retaining a part of the net profit every year and reinvesting it in the business. Merits: (i) It is an economical source of finance. (ii) Shareholders get regular dividend on this.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 11 (iii) The financial position of the firm remains fully flexible. (iv) It can be used to stabilize the rate of dividend on equity shares. l Demerits: (i) Heavy reinvestment of earning year after year may cause dissatisfaction among shareholders. (ii) It may lead to unbalanced industrial growth. Difference between Bonus shares and Rights Issue: Basis Bonus shares Right issue 1. Meaning When a company have large Right issue is an invitation to the amount of undistributed profits, existing shareholders to purchase they issue fully paid up shares to additional new shares in the their existing shareholders, free company. When a company wants of charge, This is known as Bonus to raise its subscribed capital by issue shares of new shares, it can give an issue offer to the existing shareholders to purchase the shares at a price lower than the market price. 2. Objective The objective is to distribute the Its objective is to increase the accumulated earnings without affordability of stock for small paying dividends. This improves retail investors. This increases the creditworthiness of the company. liquidity in market. 3. Face Value Remains same after the issue of Reduces in proportion to the split bonus shares ratio. 4. Future dividend Remains same Decreases due to decrease in face value 5. Regulation It is regulated by the provisions of It is regulated by the Companies the Articles of Association and SEBI Act. guidelines. Key Terms l Floatation cost : Cost involved in the issue of securities. l Financial risk: Risk of inability to meet fixed financial charges. Borrowed Capital: Debentures Topic-2 Concepts Covered  Debentures: Meaning, kinds of debentures, advantages, disadvantages, distinction between shares and debentures. Revision Notes l Meaning of Debentures: According to Section 2 (30) of the Companies Act, 2013 the " debenture includes stock, bonds and any other instrument of a company, whether constituting a charge on the asset of the company or not." l Types or Kinds of Debentures: (i) Secured or Mortgage Debentures: These debentures are those which are secured by having a charge on particular assets of the company. It is called a floating charge. Fixed charge denies the company from dealing with mortgaged assets, whereas the floating charge does not restrict the company from using the assets. 12 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII (ii) Unsecured or Naked Debentures: These debentures are those which are not given any security. The holder of such debentures are treated as unsecured creditors at the time of liquidation of the company. (iii) Registered Debentures: Registered debentures are those which are payable only to those holders whose name and addresses are recorded in a register of the company called 'Register of Debenture holder'. (iv) Bearer Debentures: Bearer Debentures are those which are payable to the bearer or holder of the debenture. These are transferable by mere delivery and the company does not keep any record of name and addresses of the debenture holder. (v) Redeemable Debentures: Redeemable debentures are those debentures which will be repaid by the company at the end of a specified period or by instalments during the life time of the company. (vi) Irredeemable or Perpetual Debentures: These are those debentures which are not repayable by the company during its life time. These debentures are payable only at the time of liquidation of company. (vii) Convertible Debentures: Holders of these debentures are given an option to convert them into equity shares or other securities at a stated rate of exchange after a certain period. (viii) Non-convertible debentures: These instruments retain the debt character and cannot be converted into equity shares. l Advantages of Debentures: Advantages of Debentures are as follow: Advantages (A) From the view point (B) From the view point of company of debenture holders. (i) A company can raise funds (i) Debentures carry an interest at through debentures at a low a fixed rate irrespective of cost. profits. (ii) Interest on debentures is paid (ii) Debentures are secured by a charge at a fixed rate by the company. on the company's assets. (iii) Debentures are flexible as when (iii) Large amount of finance can be company does not require them raised by issue of debentures. the debentures are redeemed. Disadvantages (A) From the view point (B) From the view point of company of Debenture holders. (i) Interest on debenture is a (i) Debenture holders do not burden on the company. have voting rights. (ii) Debentures are charged (ii) Debenture unit price remains on assets. higher than shares. l Distinction between Shares and Debentures: Basis of Shares Debentures Difference Capital v/s Loan A share is a part of capital of the company, A debenture is a part of loan and so, the therefore share holders are the owners of debenture holders are the creditors of the the company. company. Dividend A shareholder gets dividend from the A debenture holder gets interest from the V/s interest company. company. Profit Dividend is paid only when there are If the rate of interest is fixed then it must profits. be paid irrespective of profit/loss.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 13 Unsecure or secure A share is always unsecured hence they Debentures are secured on the assets of bear more risk. the company hence, they bear no risk. Voting rights Shareholders have voting rights in the A debenture holder do not have any company. voting right in the company. Payment Payment of share capital is made after the Payment of debenture is made before the repayment of debentures. repayment of share capital. Borrowed Funds: Long-term Loans and Short-term Sources of Funds Topic-3 Concepts Covered  Loans from commercial banks and Financial Institutions-Loans from commercial banks and Financial Institutions - meaning, advantages and disadvantages.  Short-term sources of funds.  Short-term sources of funds – different types of short-term financial assistance by Commercial Banks; public deposits, trade credit, customer advances, factoring, Inter corporate deposits and installment credit. Revision Notes l Loans From Financial Institutions: Meaning: Indian Government has set up several special institutions in the country to provide long term and medium-term finance to business organisations. These institutions have become a major source of finance for the modernisation and expansion of the existing concerns. These institutions are not simply financial institutions. They also provide promotional, technical and managerial services. IFCI (Industrial Finance Corporation of India), IDBI (Industrial Development Bank of India), ICICI, (Industrial Credit and Investment Corporation of India), SIDBI (Small Industries Development Bank of India) are well-known development banks in the country. In addition, the LIC, General Insurance Corporation, SFCs (State Financial Corporations), NIDC, NSIC, UTI, etc., also help in providing finance to industries. These financial institutions have become the biggest source of finance for businesses in India. l Short-Term Loans From Commercial Banks Commercial banks usually provide short-term finance because most of their deposits are short-term deposits. However, in some cases, commercial banks also provide term loans for medium and long periods especially to Micro, Small and Medium Enterprises (MSMEs). Meaning: Under a term loan, a bank advances a fixed amount in lump sum to the borrower for a specified period. The Interest is charged at a fixed rate on the sanctioned amount. The loan is advanced against the security of some assets or on the personal guarantee of the borrower. l Advantages: The main advantages of institutional finance are as follows: (1) Special financial institutions provide underwriting facilities to new companies. (2) The rate of interest and repayment procedures are convenient and economical. (3) A company can obtain expert advice and guidance for the success and planning. l Disadvantages: The main disadvantages of financial institutions are as follows: (1) A number of formalities and documents are involved in the finance process. (2) Many deserving concerns may fail to get assistance for want of security and other conditions laid by these institutions. (3) Sometimes these institutions place restrictions on the autonomy of management. l Loan and Advances: A loan is a direct advance made in lump sum which is credited to a separate loan account in the name of the borrower. The borrower withdraws the full amount in cash immediately and undertakes to repay it in one or more instalments. l Cash credits: It is a revolving credit agreement under which a borrower is allowed to borrow upto a certain limit. Unlike a loan, it is a running account from which the amounts can be withdrawn and paid back from time to time, subject to the stipulated amount. 14 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII The bank can refuse credit when the creditworthiness of the borrower is unsatisfactory or when there is shortage of funds. The maximum amount known as the 'limit' is determined in accordance to the financial position of the borrower. l Bank overdrafts: It is a kind of a temporary financial accommodation extended by a bank to its regular customers. Under this arrangement, a customer having a current account with the bank is allowed to withdraw a specified amount. A business enterprise can enter into this arrangement to take care of a temporary (a few days) shortage of working capital. Interest in charged on the amount actually overdrawn and not on the amount sanctioned by the bank. l Trade Credit: Trade credit is the credit extended by one business firm to another as incidental to sale or purchase of goods and services. In other words, Trade Credit is the credit extended by sellers to buyers at all levels of production and distribution process down to the retailer. l Installment Credit: Installment credit refers to the facility of buying machinery, equipment and other durable goods on credit. The buyer has to pay a part of the price of the assets at the time of delivery and the balance is payable in a number of instalments. The supplier charges interest on the balance due and the interest is included in the amount of instalment itself. Some suppliers provide instalment credit through finance companies and commercial banks. A business firm may also buy fixed assets on hire purchase basis. Under this arrangement, the ownership of the asset remains with the supplier until all the installments are paid by the buyer. l Factoring (Accounts Receivable financing): It refers to an arrangement whereby the book debt [trade debtors]/ sale or mortgage of book debt, is assigned to a bank and the payment is received against the debts balance in advance from the bank. This facility is provided by the bank on the payment of specified charges. l Customer Advances In certain cases, manufacturers or suppliers of goods require the customers to deposit an advance payment at the time of booking before the delivery of goods. The customers advance represents a part of the price of the goods ordered by the customers to be supplied at a later date. This arrangement is used in case of products which are in short supply or which involve a waiting period for delivery, e.g., automobiles, telephone connection, etc.  CHAPTER-4 BANKING LATEST TRENDS Revision Notes l Meaning of RTGS Real Time Gross Settlement (RTGS) is a system of transferring of funds from one bank to another bank on a real-time and gross basis. Real Time' means there is no waiting period in payment-transaction. The transaction is settled as soon as it is processed. Gross settlement means the transaction is made on one-to-one basis without bunching or netting with any other transaction. RTGS system is controlled by the central bank of the country. In RTGS system, every bank along with the central bank is linked electronically. Every bank maintains its account with the central bank. l Features of RTGS are as follows: (i) RTGS facility is available only to CBS enabled bank branches which are connected electronically. (ii) RTGS facility is available within specified time. Presently, it is available between 9.00 a.m. and 4.30 p.m. on weekdays and 9.00 a.m. and 2.00 p.m. on Saturday, excluding bank holidays. (iii) RTGS is primarily meant for transferring funds involving a large amount. Presently, minimum amount which may be transferred through RTGS is ` 2 lakh. There is no limit on maximum amount. (iv) Inter-bank transactions are settled on real time and gross basis. Thus, funds receiving bank credits account of the beneficiary within two hours after receiving instruction from the central bank. (v) Banks levy service charge on transfer of funds through RTGS. Presently, per transfer charge is as follows: ` 25 for transfer of ` 2 to ` 5 lakh and not more than ` 50 for transfer of more than this amount. However, receiving customer is not required to pay any charge. l National Electronic Funds Transfer National Electronic Funds Transfer (NEFT) is a system that facilitates individuals and organisations having bank accounts to transfer funds from their accounts electronically to individuals or organisations having bank accounts. Transfer of funds from one bank branch to another or from one bank to another is settled in batches. l Features of NEFT are as follows: (i) NEFT facility is available to NEFT-enabled bank branches. A NEFT-enabled bank is one which is electronically connected and has been authorised by the Reserve Bank of India.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 15 (ii) Inter-bank transactions involving transfer of funds are settled in batches for which time duration is specified. Any transfer taking place after this time is settled in the next settlement cycle. (iii) There is no lower or upper limit on transfer of funds through NEFT. (iv) In case one does not have a bank account, the maximum amount that can be transferred through NEFT system is ` 49999. (v) There is no minimum or maximum amount that can be transferred through NEFT when one has a bank account. (vi) NEFT transactions take place in batches. (vii) NEFT cannot be used to receive foreign remittances. (viii) The sender of funds has to pay the following charges for NEFT: Transaction Amount NEFT Charges Amounts upto ` 10,000 ` 2.50 + Applicable GST Amounts above ` 10,000 and upto ` 1 lakh ` 5 + Applicable GST Amounts above ` 1 lakh and upto ` 2 lakh ` 15 + Applicable GST Amounts above ` 2 lakh and upto ` 5 lakh ` 25 + Applicable GST Amounts above ` 5 lakh and upto ` 10 lakh ` 25 + Applicable GST (ix) The receiver of funds has to pay no charges. l Difference between RTGS and NEFT Basis RTGS NEFT 1. Processing Transactions are settled on real-time Transactions are settled after a specified basis and individually. time and in batches. 2. Amount Limit Minimum ` 2 lakhs, no upper limit on No upper or lower limit on transfer of transfer of funds. funds. 3. Number of Transfer No limit on number of transfer per day. Limit of 6 transfers each weekday and 3 transfers on Saturday. l Demand Draft A demand draft is a negotiable instrument similar to a bills of exchange. A bank issues a demand draft to a client (drawer), directing another bank (drawee) or one of its own branches to pay a certain sum to the specific party (payee). The following are the essential features of a Demand Draft: (i) It is drawn by one office of a bank upon another office of the same bank. (ii) It is payable on demand; and (iii) Its payment has to be made to the person whose name is mentioned therein or according to his order. l Electronic Banking (E-Banking) Electronic banking means banking transactions carried out with the help of computer system. Any user having a PC and a browser can access the bank website and avail the banking services. l E-banking gives the following advantages: (i) Customers get 24 hours and 365 days-a-year services. (ii) Customers can make the permitted transactions from residence or office and even while travelling. (iii) Customers feel a sense of security. They do not face the risk of carrying cash. (iv) Unlimited access to the bank increases customer satisfaction. l E-banking offers the following benefits to banks: (a) The bank gains a competitive advantage. (b) Centralised data base reduces load on branches. l E-banking have the following disadvantages: (i) It adds to cost as it requires computer or mobile device all the time that too with internet facility. (ii) Illiterate people or the ones living in rural areas with no internet access derive no advantage of this facility. l The main forms of electronic banking are as follows: 1. Electronic Funds Transfer System (EFTS): Under this system, money can be transferred from one account to another account. For example, a bank transfers wages and salaries directly from the company's account to the accounts of employees of the company. 16 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII The main examples of EFT are as follows: (a) Direct credits: Salary, pension, dividend on shares, interest on debentures, commission, royalty, etc. are directly credited to the bank account of a person. (b) Direct Debits: Loan instalment, school fees, insurance premium, telephone bills, electricity bills, water bills, club membership fee, credit card dues, etc. are directly debited from the bank account of the account holder. Electronic funds transfer offers the following advantages: (i) Payments are made on due dates. (ii) There is no loss in transit. (iii) There is no mishandling of cash. (iv) Transactions are effortless. 2. Automatic Teller Machine (ATM): ATM is an automatic machine. A customer can withdraw or deposit money with the help of this machine by inserting his ATM card and typing his personal identity number (PIN). It provides 24 hours money without a human cashier, clerk or bank teller. 3. Debit Card: A person can get a debit card by depositing money in the bank. The card holder can make payment for the goods purchased or services. When the customer presents his debit card the terminal automatically transfers money from the buyer's account to the seller's account. Debit card can also be used to withdraw money from the ATM. Features of Debit card are as follows: (a) Issued by bank to the account holders at the time of opening a savings or current account. (b) Meant to facilitate withdrawal of money through ATM. (c) Used to check account balance, transfer money etc. (d) Used for shopping and making online payments. (e) Can be used to the extent customer has balance in his/ her bank account. 4. Credit Card: Anybody having good reputation can obtain a credit card from a bank. A person need not have money in his bank to get a credit card. The card holder can buy goods and services with the help of credit card. He keeps on depositing the money used as per the agreement with the bank. l Features of Credit card are as follows: (a) Issued by finance company or a bank. (b) Issued at the discretion of issuer after satisfying himself of the credit worthiness of applicant. (c) Allows holder of credit card to buy merchandise without actually paying for it at the time of sale. (d) User has to pay monthly bill which include the transacted amount along with fee for using the card. 5. Tele Banking: Under this system, the personal computer of a customer is linked by telephone to the bank's computer. The customer can get information about the balance in his account and latest transactions on the telephone. This facility is available round the clock. 6. Core Banking Solution (CBS): Under this system a customer becomes 'customer of the bank' rather than ‘customer of a branch’. By opening a bank account in one branch the customer can operate the same account in all the CBS branches of the same bank anywhere across the country. It offers the following facilities: (a) Cash withdrawal facility from any of the CBS branches. (b) Updating of pass book at all CBS branches. (c) The facility of centralised corporate limits in all the CBS branches. 7. SMS Alert: Under this service, customer gives his/her mobile number. The bank records the mobile number in its computer system in the customer's account. Whenever, a transaction takes place in the customer's account the customer receives information about withdrawal and deposits by an SMS on his/her mobile phone. The SMS states the nature and amount of transaction, date of the transaction and the balance in the account on that date. l Advantages of Mobile Banking: (i) Available 24*7. (ii) It is secure. (iii) It is convenient. (iv) Cost saving technology. (v) Novel way of selling banking and service products by bank.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 17 l Difference between Debit cards and Credit cards: Debit Card Credit Card Debit card is issued to bank account holder at the Credit card is issued at the discretion of issuer after time of opening a savings or current account. satisfying himself of the credit worthiness of applicant. Debit cards are used to withdraw money from ATM. Money cannot be withdrawn through a credit card. Debit card holder gets an e-statement on a regular Credit card holder gets monthly bill for its use. basis. Debit card is useless if the holder’s account does not Credit card extends credit for the holder and is not have the required balance. linked to any bank account. l Immediate Payment Service IMPS provides robust and real time fund transfer which offers an instant, 24×7, interbank electronic fund transfer service that could be accessed on multiple channels like Mobile, Internet, ATM, SMS. IMPS is an emphatic service which allows transferring of funds instantly within banks across India which is not only safe but also economical. Currently on IMPS, 590 members are live which includes banks & PPIs. l Digital Banking Digital banking refers to the use of digital technologies and platforms to perform various banking activities and transactions. It enables customers to access and manage their bank accounts, conduct financial transactions, and avail banking services through online or mobile channels. Digital banking includes features such as online account opening, balance inquiries, fund transfers, bill payments, loan applications, and other banking services accessible through digital interfaces. It offers convenience, accessibility, and flexibility to customers, allowing them to conduct banking activities anytime and anywhere without the need to visit a physical bank branch. l UPI (Unified Payments Interface) UPI is a real-time payment system developed by the National Payments Corporation of India (NPCI). It is a mobile-based platform that facilitates instant fund transfers between different bank accounts in India. UPI eliminates the need for traditional payment methods such as cash, cheques, or even entering bank details for transactions. Users can link their bank accounts to a UPI-enabled mobile application and make payments or receive funds by simply providing a unique virtual payment address (VPA) or scanning a QR code. UPI has gained widespread popularity in India and has revolutionized digital payments, enabling secure, convenient, and interoperable transactions. l E-Wallet An e-wallet, also known as a digital wallet or mobile wallet, is a digital application or platform that allows users to store, manage, and transact with their financial information, such as credit or debit card details, bank account information, or digital currencies. E-wallets provide a secure and convenient way to make payments for various goods and services. Users can load funds into their e-wallets and use them for online and offline transactions, including purchases at retail stores, online shopping, bill payments, or peer-to-peer transfers. E-wallets often offer additional features such as loyalty programs, financial management tools, and the ability to store multiple payment methods in a single digital wallet. Key Terms l ATM: Automated teller machines (ATMs) are electronic banking outlets that allow people to complete transactions without going into a branch of their bank.   18 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII CHAPTER-5 MANAGEMENT: INTRODUCTION, IMPORTANCE AND LEVELS Revision Notes l Meaning of Management: Management is essential for all organisations big or small, profit or non-profit. Management is necessary so that individual may make their best efforts towards the group objective. According to the modern concept, management is a process of getting things done through others with the aim of achieving goals effectively and efficiently. l Modern Definition insists on: Plann ing ng li ol ntr Co Organising Management Process ng ct i ire D S ta ffing (i) Management as a process: Management is a process which denotes the functions that managers perform to get things done. These functions include planning, organising, staffing, directing and controlling. (ii) Management as a discipline: The term 'management' has been used to denote neither the activity nor the personnel who perform it, but as a body of knowledge, a practice and a discipline. Here management refers to the principles and practices of management as a subject of study. (iii) Management as a group: Management has become a very common term. People use the term 'management' to denote a team or group of managers who run an organisation. Management of an enterprise is represented by the group of people who performs managerial functions for the accomplishment of its goals. These people are individually known as 'Managers'. (iv) Management as an Activity: Like various other activities performed by human beings such as writing, playing, eating, cooking etc., management is also an activity because a manager is one who accomplishes the objectives by directing the efforts of others. According to Koontz, “Management is what a manager does”. l Objectives of Management: The main objectives of management are as follows: (i) Profitability: Management must make sure that the firm is earning sufficient profits to meet its different needs. It is necessary for the survival, growth and expansion of the business. (ii) Quality goods at fair prices: Management should provide quality goods at reasonable prices. For this purpose management has to reduce costs by stopping wastage of materials. (iii) Rightful decision-making: Right decision at right time is an important part of management for the success of an organisation. (iv) Change and Innovation: An organisational environment is dynamic so keeps on changing on a day-to-day basis. Management should aim at technological and other innovations so that the organisation can face the challenges successfully. (v) Discipline and morale: Management helps in improving discipline in the organisation with the help of authority, responsibility and control process. It motivates people through monetary and non-monetary incentives.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 19 l Characteristics of Management: The basic features or characteristics of management are as follows: (i) Management is Goal-oriented: The purpose of management is to achieve the goals of the organisation. For instance, management of a business aims at satisfaction of customers, earning of profits and increasing the goodwill and image of the business. The success of management is judged by the extent to which organisational goals are achieved. (ii) Management is all Pervasive or Universal: Management is essential for effective performance of any organised activity. Thus, it is universal in nature. (iii) Management is a Continuous Process: Management is a continuous process, i.e., its functions are repeated time and again. It is an ongoing process of planning the activities and execution of plans through organising, staffing, directing and controlling. (iv) Management is a Group Activity: Management is an integral part of any group activity. It is essential to undertake any organised activity. It involves the use of group efforts in the pursuit of well defined goals or objectives. It requires team work and coordination of efforts of group members for the achievement of organisational goals. Managers of production, finance, marketing and human resource departments of the business work as a team to accomplish the business objectives. (v) Management is a Dynamic Function: Managers continuously monitor the changes in the social, economic, political and legal environment. They make necessary changes to deal with the changing environment. In fact, management of change has become an important function of the management of dynamic organisations. In order to be successful, the management must change its goals and plans according to the needs of the environment. (vi) Management is a Science as well as an Art: Management is an organised body of knowledge consisting of distinct concepts, principles and techniques which have wide application. So it is treated as a science. The application of these concepts, principles and techniques requires specialised knowledge and skills on the part of the manager. Since the skills acquired by a manager are his personal possession, management is viewed as an art. The skills can be learnt through training and experience. (vii) Management is Intangible: Management is intangible. It cannot be seen but its presence can be felt in the way things are managed in the organisation. For example, when we are not able to produce the desired quantity, we say it is the result of poor management. l Nature of management: The nature of management can be analysed in terms of art, science and profession. l Management as an art due to following reasons: (i) Personal Skill: Management is an art as in it, one has to use his personal skills and knowledge in solving many complicated problems to achieve the objectives of the enterprise. It is an art of dealing with people to accomplish desired results. It is personalised like most arts in the sense that every manager has his own method of doing things. Hence, there are differences in the performance of different managers despite possessing equal technical qualifications. (ii) Practical Knowledge: Just as a person cannot be called a musician even if he knows the technicalities of music unless he plays musical instruments, similarly, a person cannot be called a manager even if he learns by heart the principles of management, unless, he can apply these principles in practice while taking managerial decisions. Management does not merely mean the knowledge but practice which makes it effective and useful. (iii) Result-oriented approach: Management aims at achieving maximum productivity at the lowest costs. It is concerned with accomplishment of objectives. In this sense it is a result-oriented approach. It has to ensure that, projects are completed on time, targets of production and sales are achieved, a fair return on capital investment is secured and so on. (iv) Regular Practice: One cannot be a good manager unless he regularly practice this art of decision-making and leadership. As an artist, the manager always tries to attain higher goals in order to reach the stage of absolute perfection. This efficiency and effectiveness is attained through regular practice. An experienced manager moulds the enterprise according to the situations and also alters the environment itself. (v) Creativity: Management is one of the most creative art as it is concerned with getting work done through others by motivating them to work and by co-ordinating their activities. l Management is a Science due to following reasons: (i) Systematised body of knowledge: As a science, management has an organised body of knowledge built up by management practitioners, thinkers and philosophers over a period of time. Management science is a body of systematised knowledge accumulated and accepted with reference to the understanding of general truths concerning management. (ii) Use of scientific methods: The process of management makes use of scientific methods for observation. Frederick W. Taylor, the Father of Scientific Management applied scientific techniques to studies of planning, organising, staffing, motivating, etc. 20 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII (iii) Continued observation: The principles of management have been developed after continued observation. The knowledge of management has principles that have universal application. The knowledge of management has been accumulated and accepted with reference to general truths. Hence, there are certain fundamental principles of management which can be universally applied. l Management as a profession: Management is a profession due to following reasons: (i) Body of specialised knowledge and techniques: Management is an organised body of knowledge build up by management practitioners, thinkers and philosophers over a period of time. In this sense, modern management is certainly a profession. A.P.M. Fleming has rightly remarked that modern management is "a technique quite apart from the technology of the particular works concerned." (ii) Formalised methods of acquiring training and experience: Today, the management science is fully equipped with formalised methods of acquiring the body of knowledge in theory and practice. A larger number of formal institutes in various countries, including India impart management education and training. Several tools of management have been developed such as Business Psychology, Business Law, Statistics, Data- processing, Operation Research and Cost Accounting, etc. Today, the business houses prefer to employ those managerial personnels who have obtained a professional degree in management from some recognised institute. (iii) Establishment of professional associations: Professional Management Associations are being established in most of the countries to (i) regulate the behaviour of members; (ii) to create a code of conduct for guiding the activities of the profession; and (iii) to promote and build up the image of management as a profession. In India, there is an All India Management Association. The main function of this association is to manage and co-ordinate the research work in the various areas of management. However, norms of managerial behaviour have not yet been established and there are no uniform methods of entry. (iv) Code of Conduct: Members of a profession have to abide by a code of conduct which provides rules and regulations, norms of honesty, integrity and professional morality. There exists a standard code of conduct in the traditional professions such as law and medicine. But there exists no uniform code of conduct in the sphere of management. There are no restrictions or licensing on the entry of management profession. Judged from these standpoints, management cannot be regarded as profession. l Importance of Management: Peter F. Drucker refers to management as the dynamic life-giving element of every business enterprise. Management is the thinking organ that provides vision to the business. It is also the integrating force for the accomplishment of business objectives. The importance of management to a modern business is discussed below: (i) Accomplishment of Organisational Goals: It is the management which determines the goals of an organisation and of various departments and functional groups. The goals are communicated to the employees to seek their cooperation. (ii) Efficient Utilisation of Resources: Management ensures efficient utilisation of resources to reduce costs and increase profits. Through planning and organisation, management eliminates all types of wastages and achieves efficiency in all business operations. Management motivates worker to put in their best performance. This would lead to the effective working of the business. (iii) Coordinate the Activities of Individuals: Management establishes sound organisation for the accomplishment of the desired objectives. It clarifies authority-responsibility relationships among various positions in the enterprise. It fills various positions with persons having the right qualification and training. Management also provides the workers with proper environment and encourages the spirit of co-operation. Management deals with integration of human and non-human resources in order to achieve organisational objectives. It directs and coordinates the activities of individuals and groups in the use of materials, methods and machines. It, thus, brings order to endeavours of different groups. (iv) Accomplishment of Personal Objectives: Management leads the group members to inspire them to achieve their personal objectives while working for the organisational objectives. Management helps them to satisfy their physical, social, and psychological needs so as to develop a cooperative and committed team. (v) Development of Society: Efficient management of resources is equally important for the development of society. According to Peter Drucker, "Management is the crucial factor in economic and social development." The development of a country virtually depends upon the quality of management of its resources. Efficient management of resources helps in the development of nation in the following ways: (a) Provision of good quality products and services;  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 21 (b) Creation of employment opportunities; (c) Technological innovations for the betterment of society; and (d) Contribution to economic growth and development. (vi) Vision and Foresight: Management keeps itself in touch with the external environment and provide vision and foresight to the enterprise. It helps in predicting what is going to happen in future which will influence the working of the enterprise. It also takes steps to ensure that the enterprise is able to meet the demands of changing environment. l Levels of management refer to the hierarchical structure within an organization, consisting of different managerial positions and their respective responsibilities. The three primary levels of management are typically recognized as top-level management, middle-level management, and lower-level management. Let's discuss the meaning and functions of each level: l Top-level management (Strategic Management): Meaning: Top-level management consists of executives, such as CEOs, presidents, and board members, who are responsible for making high-level strategic decisions that affect the entire organization. l Functions:  Establishing organizational goals and objectives.  Formulating overall business strategies and plans.  Making major decisions regarding resource allocation.  Representing the organization to external stakeholders.  Setting policies and guidelines for the entire organization.  Monitoring overall performance and ensuring long-term success. l Middle-level management (Tactical Management): Meaning: Middle-level management includes positions such as department heads, branch managers, and division managers. They serve as a link between top-level and lower-level management. l Functions:  Translating top-level strategies into actionable plans.  Implementing organizational policies and guidelines.  Coordinating and supervising lower-level managers.  Setting departmental goals and targets.  Allocating resources within their departments.  Facilitating communication between different levels of management.  Evaluating and reporting departmental performance to top-level management. l Lower-level management (Operational Management): Meaning: Lower-level management consists of supervisors, team leaders, and front-line managers directly responsible for overseeing the day-to-day operations of specific work units or teams. l Functions:  Assigning tasks and responsibilities to employees.  Providing guidance and support to employees.  Monitoring and controlling daily operations.  Ensuring efficient utilization of resources.  Training and developing employees.  Maintaining discipline and resolving conflicts.  Reporting operational issues to middle-level management. Key Terms l Management of work: Management translates work in terms of goals to be achieved and assigns the means to achieve it. l Management of people: The task of management is to make people work towards achieving the organisational goals, by making their strengths effective and their weaknesses irrelevant. l Management of operations: This requires a production process which entails the flow of input material and the technology for transforming this input into the desired output for consumption.  22 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII CHAPTER-6 PRINCIPLES OF MANAGEMENT Principles of Management: Introduction Topic-1 Concepts Covered  Concept of Principles of Management, Nature, Need/ Importance of Principles of Management. Revision Notes l Concept of Principles of Management The principles of management are statements of fundamental truth which can be used by managers as guidelines for decision-making and action under different situations. Over the years, a number of management thinkers including Henry Fayol, F.W. Taylor and James D. Mooney have derived certain generalisations from their experience as managers. These generalisations were termed as principles of management. l Nature of Principles of Management: (i) Universal application: The principles of management are universal in nature, which means they can be applied to all types of organisations irrespective of their size and nature. Their results may vary and application may be modified but these are suitable for all kinds of organisations. (ii) General guidelines: Management principles are not static or absolute statements. These cannot be applied blindly in all the situations. The applicability of management principles depends on conditions and nature of organisation. The manager must apply these principles according to the size and nature of organisation keeping in mind the requirements of the organisations. Management principles give guidelines to solve the problems. These principles do not provide readymade solution for all the problems. (iii) Flexibility: The principles of management are relative and not absolute. They are dynamic, not static. These principles should be applied carefully according to the organisational needs and prevalent situations. (iv) Influence on Human Behaviour: The principles of management are meant for influencing human behaviour and getting higher performance from them. They guide them about how to respond to different situations. (v) Evolutionary/formed by practice and experiments: The management principles are developed only after deep and thorough research work. They are not developed overnight and they are not the personal feeling of any person. Proper observations and experiments are conducted before developing them. These are the expressions of deep experiences of leaders of management thoughts. Therefore, they are evolutionary in nature. (vi) Contingent: Management principles are contingent or dependent upon the situations prevailing in organisation. Their application and affect depends upon the nature of organisation. The application of principles has to be changed according to the nature, size and type of organisation. l Need for Principles of Management The need or significance of management principles arises because of the following reasons: (i) Provides Useful Insights into Reality: The knowledge of management principles makes it easy to analyse the manager's job and define the scope of his duties. The nature of management can be clearly highlighted by properly understanding the principles. It is through the application of management principles that a manager can deal with complex business problems.  Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII 23 (ii) Optimum Utilisation of Resources: The management principles insist on planned activities and systematic organisation of men and materials in the organisation. Principles are designed to get maximum benefits from the human efforts and other resources. (iii) Meeting Environmental Challenges: Every business operates in a dynamic environment. Changes in economic, social, political, technological and legal environment create challenges for the business. The managers can apply the management principles suitably to deal with different kinds of situations. They need to be flexible and careful in dealing with various environmental challenges. (iv) Fulfilling Social Responsibility: Management itself is a part of society and it takes inputs from the society and supplies output to the society. If the management is efficient, the resources of the society will be better utilised. Better products at lower prices will be made available to the society. This will improve the quality of life of the people. Management principles have an important role in developing efficient managers who will work for social objectives. (v) Better Administration: Proper understanding of the principles of management helps the managers in formulation of effective plans and policies. Providing useful Better insights into Administration reality Importance/Need for Principles of Management Fulfilling social Optimum responsibility utilisation of resources Meeting Environmental Challenges. Taylor's Scientific and Fayol's Principles of Topic-2 Management Concepts Covered  Taylor's Principles of Scientific Management, Fayol's principles of Management. Revision Notes l Taylor's Principles of Scientific Management F.W. Taylor laid the foundations of management as a science consisting of fundamental principles. He was the expert to suggest the use of scientific methods. Therefore, Taylor is known as the "father of scientific management". 24 Oswaal ISC Chapterwise & Topicwise Revision Notes, COMMERCE, Class-XII "Scientific management is the art of knowing exactly what you want your men to do and then seeing that they do it in the best and cheapest way". —F.W Taylor The basic principles of scientific management are as follows: (1) Science, not Rule of Thumb: This principle requires development and application of scientific methods. Taylor advocated that the traditional 'rule of thumb' methods should be replaced with the scientific methods. (2) Harmony, not Discord: There should be healthy cooperation between employer and employees. Taylor advocated a complete mental revolution on the part of both management and workers. (3) Maximum, not restricted output: Conflict between management and workers should be avoided. Both have a common interest in increasing productivity. (4) Division of Work and Responsibility: Taylor suggested separation of planning from operational work. Management should concentrate on planning the job of workers and workers should concentrate on performance of work. (5) Scientific Selection, Training and Development of Workers: Workers should be selected and trained keeping in view the job requirements. Each and every worker should be encouraged to develop his full potential. l Fayol's Principles of Management Background and History of Fayol Henry Fayol was born in France in 1841. He got a degree in mining engineering in 1860 and started working as an engineer in a coal mining company. In 1888, he was promoted as the managing director of the company. At that time the company was in a situation of insolvency. He accepted the challenge and applied his managerial techniques to bring out the company from this situation and he succeeded. When he retired after 30 years the company was a leading coal-steel company with strong financial background. Principles of Management Developed by Fayol (1) Division of Work: According to this principle the whole work must be divided into small units and instead of assigning the whole work to one person, one unit of work should be assigned to one person according to the capability, qualification and experience of the person. (2) Authority and Responsibility: Authority means power to take decision. Responsibility means obligation to complete the job assigned on time. According to this principle, authority without matching responsibility may bring negative results and excess of responsibility without matching authority will not allow the worker to complete his job on time. There is a need to bring parity between both for best results. (3) Discipline: Discipline refers to general rules and regulations for systematic working in an organisation. Discipline does not mean only rules and regulations but it also means developing commitment in the employees towards organisation as well as towards each other. Fayol insists that discipline is required at superior as well as subordinate level. (4) Unity of Command: According to this principle, an employee should receive orders from one boss only because if he is receiving orders from more than one boss then he will get confused and will not be able to understand that whose orders must be executed first. (5) Unity of direction: There should be one head and one plan for a group of activities having the same objective. In other words, each group of activities with the same objective must have one plan of action and must be under the control of one superior. Without unity of direction, unity of action and coordination of efforts are not possible. (6) Subordination of Individual Interest to General Interest: The business enterprise is superior to its individual employees. The interests of the business organisation must prevail upon the personal interests of the individuals. This principle calls for reconciliation of goals of individuals with those of the organisation. (7) Remuneration of Persons: According to this principle, employees in the organisation must be paid fairly or adequately to give them maximum satisfaction. The employees should be paid fair wages and salaries, which would give atleast a reasonable standard of living. (8) Centralisation and Decentralisation: Centralisation refers to concentration of authority of power in few hands at the top level. Decentralisation means even distribution of power at every level of management. According to Fayol, a company must not be completely centralised or completely decentralised but there must be combination of both depending upon the nature and size of the organisation.