What is Materials Management? Need and importance

 Q. Define Materials Management. Why is materials management important for an organisation ? Explain.

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What is materials Management ? What is the need of materials management in the present scenario ?

Ans. Meaning of Materials Management: Materials Management is a combination of two words – material and management. The term material refers to such commodities which are supplied to the manufacturing industry in the crude or original form which need to be processed further. Management is the process of dealing with or controlling things or people. Management is the organisation and coordination of the activities of a business in order to achieve objectives. Thus, materials management is a technique which is concerned with planning, organising and control of flow of materials from purchase of raw material to consumers. 

Materials management is a branch of logistics which deals with the tangible components of supply chain. The materials management is useful for manufacturing Industries. Materials Management is concerned with the planning, procuring, storing and providing the appropriate quality material at right time in right quantity and at right place.

Materials management is ideal for the industries who track the flow and manage the materials in their enterprises. It involves the purchase of material, inventory management and control. It is the integrated function of purchase. It has a very wide scope including purchase of material, planning of materials, maintenance of material and spare parts, obtaining quality material at right time and place, storing of material and issuing of material. There are 5 M’s which are critical for an organisation and out of these, the material is the most important. Thus, the materials management is very important for each such organisation which uses raw-material.

Definition: As per Bailey and Farmer, “Material management is the management of the flow of materials into an organisation to the point, where, those materials are converted into firm’s end product (s).”

Materials Management is important for an organisation for the following reasons.

1. Helps in reducing cost: Materials management helps in solving problems related to reducing the overall cost of product by purchasing materials at reasonable prices. Simultaneously it reduces costs by reducing wastage of material.

2. Improving material productivity: Productivity means quality of producing something. Materials management also solves problems related to standardisation and reduction methodologies for improving productivity. Improved productivity helps in decreasing the cost per unit and thus helps in increasing profitability.

3. Optimum Utilisation of Physical Resources: Materials Management provides adequate and timely material for production. Thus it helps in optimum utilisation of physical resources, and therefore helps in decreasing the cost.

4. Warehouse Management: Warehouse management is also the function of materials management. Through proper warehouse management, materials management helps in decreasing the wastage of material. Thus, indirectly it helps in improving the profitability.

5. Helps in solving Inventory Problem: It helps in solving problems of shortage or excess of inventory. It projects the demand of the material and accordingly arranges the materials. For exact requirement of materials in the stock, it uses various techniques such as EOQ, re-order level, etc. The overstocking of materials is undesirable as it increases the cost. Thus it helps in keeping the investment in materials to minimum.

So, The materials management is crucial for the success of an organisation because it involves a major part of the total cost of the product.

‘Income Tax is charged on the income of previous year’. Do you fully agree with this statement? If not, what are the exceptions?

Q. ‘Income Tax is charged on the income of previous year’. Do you fully agree with this statement? If not, what are the exceptions?

Ans. The year in which income is earned is known as previous year and the next year in which this income is taxable is known as assessment year. 

‘Income Tax is charged on the income of previous year’. This statement is generally true but not fully. Under the Income Tax Act, income earned in previous year is taxable in assessment year. This means that tax is not charged in the same year in which the income is earned. 

Income tax is charged on the income of the previous year. However, there are certain exceptions to this rule. In the following cases the assessee is liable to be assessed to tax in the same year in which he earns the income :

1. Income of non-resident from shipping business: In case of a non-resident carrying shipping business, any income derived from carrying passengers, livestock, mail or goods shipped at a port in India, will be taxed in the year of its earning. 7½% of the amount paid or payable on account of such carriage will be deemed to be the income. 

2. Income of persons leaving India: When an individual may leave India during the current assessment year or shortly after its expiry, and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be charged to tax in the assessment year.

3. Income of an association of persons or a body of individuals or an artificial juridical person formed for a particular event or purpose: Where any A.O.P or B.O.I or an artificial juridical person is formed or established or incorporated for a particular event or purpose and is likely to be dissolved in the assessment year in which it is formed or established or incorporated or immediately after such assessment year, the total income of such assessee for the period from the expiry of the previous year for that assessment year upto the date of its dissolution, shall be chargeable to tax in that assessment year.

4. Transfer of property to avoid tax: An assessee is likely to transfer his property to avoid tax, the total income of such person for the period from the expiry of the previous year for the assessment year to the date when assessing officer commences preceeding shall be chargeable to tax in the same assessment year.

5. On discontinuance of business or profession: In the case of discontinuance of a business or profession, the income of the period from the expiry of the previous year for the assessment year in which the business or profession is discontinued upto the date of such discontinuance may be charged to tax in the same assessment year. 

[C.W. General rule is that income of previous year is taxable in assessment year with some exceptions.

Exceptions to the general rule:

1. Income of non-resident shipping company: Shipping company is one which carry passengers from one port to another. 7.5% of the total freight shall deemed to be the income of non-resident shipping company.

2. Income of person leaving India: has no intention to come back will chargeable to tax in the same assessment year.

3. Income of AOI, BOI or artificial juridical person fall for a particular object.

4. Transfer of assets/shares to avoid tax liability: tax will be paid on same year.]

5. On discontinuance of business.

entrepreneurs not made but born comment types of entrepreneurs

 Q. “Entrepreneurs are not made but born.” Comment on it. Explain different types of Entrepreneurs.

Ans. Entrepreneurs are the persons who takes the risk of new enterprise. It is general perception that entrepreneurs are not made but born. This statement suggests that entrepreneurial quality are inborn. It implies that business family background is considered necessary for the success of an entrepreneur. It also implies that some of the qualities are inborn or hereditary. Thus, entrepreneurs are not made but born.

However some people are of the opinion that entrepreneurs are made not born. They believe that people with adequate knowledge, skill and experience may also become successful entrepreneur. Most of the qualities can be acquired by constant effort and practice. 

In conclusion, entrepreneurs have a combination of inborn and acquired skills and abilities.

Different types of Entrepreneurs: Entrepreneurs can be of classified various basis. Some of important types of entrepreneurs are being explained here:

A. BASED ON THE TYPES OF BUSINESS: An Entrepreneur is found in every type of business. On this basis they can be of following types.

1. Industrial Entrepreneur: Industrial entrepreneurs are essentially considered as manufacturers. He  imdentifies the needs and wants of the customer and manufacturers product according to their need and expectation. He is generally a producer-oriented man. He is found in any Industrial unit such as electronic industry, textile units, machine tool and the like.

2. Trading Entrepreneur: Trading entrepreneur is one who undertakes trading activities (buying and selling of goods and services). He is not engaged in manufacturing. These entrepreneurs identify market opportunities and stimulate demand for their product. Trading may be national and international.

3. Corporate Entrepreneur: A Corporate undertaking is a form of business enterprise which is registered under some state or act which gives it a separate legal entity. A corporate enterpreneur is one who promotes corporation. He is a person who demonstrate his innovative skill in organising and managing a corporate undertaking.

4. Agricultural Entrepreneur: Agricultural entrepreneurs are those who undertake business related agricultural activities. For example, farm equipments, fertilizers and other agricultural inputs. They provide supportive products that can increase the agricultural production through biotechnology and improvement in agricultural yield. In a way, they are engaged in allied agricultural activities.

B. BASED ON THE USE OF TECHNOLOGY: Technology is becoming an important part of every business irrespective of its size and nature. The entrepreneur on the basis of technology usage can be:

1. Technical Entrepreneur: A technical entrepreneur is generally compared to ‘Craftsman’. He mainly concentrates more on production area than marketing. He demonstrates his innovative capabilities in the matter of production of goods and services. Their main asset is technical expertise. Due to his expertise, he develops new and improved quality of goods and attempt to succeed in their business.

2. Non-Technical Entrepreneur: Non-technical entrepreneurs are those who are not concerned with the technical aspects of the product in which they deal. They do not target or concentrate to change the production technique but to increase the demand for the product by alternative course of actions.

3. Professional Entrepreneur: Professional entrepreneur is a person who is interested in establishing a business but does not have interest in managing or operating it once it is established. He sells out his running business and then starts a new venture with the sale proceeds of the old one. They are considered to be dynamic and keep on conceiving new ideas to develop alternative projects.

C. BASED ON THE MOTIVATION:

1. Pure Entrepreneur: A pure entrepreneur is one who undertakes any activity to satisfy his ego. He is motivated to achieve or prove his excellence. He undertakes an entrepreneurial activity for his personal satisfaction in work or status. He is generally a status conscious person.

2. Induced Entrepreneur: He is the entrepreneur who prepares his sound project and wants to start business but needs support in some forms or other. Most of the induced entrepreneurs enter into business due to financial, technical and several other facilities provided to them by the state agencies to promote entrepreneurship. He is the person who is induced to take the entrepreneurial task due to the policy measures of the government that provides assistance, incentives, concessions and necessary overhead facilities to start a venture.

3. Motivated Entrepreneurs: This is a special class of entrepreneurs. They are motivated by the desire for self-fulfullment. They come into existence because of the possibility of making and marketing some new product for the use of consumers. Their level of motivation becomes more high when their idea provides them a satisfactory amount of profit.

4. Spontaneous Entrepreneur: These are the entrepreneur which has the basic qualities of entrepreneur in him. They are such types of persons who have qualities like boldness, confidence, determination, initiatives etc. They commence their business due to their confidence and talent. They need not to be induced by any other due to their strong conviction.

D. BASED ON OWNERSHIP / CLASSIFICATION ON THE BASIS OF OWNERSHIP: Ownership means the legal entitlement of the business. On this basis, the entrepreneur may be of following types:

1. Founders Entrepreneurs: The word founder itself explains the meaning of this category. They are those individuals who are founder of the business. They are those who conceptualise a business plan and put all their efforts to make the plan successful.

2. Family owned business or second generation operator: They are those entrepreneurs who have inherited the business from their fathers or forefathers. Like Mukesh Ambani and Anil Ambani, sons of Dheerubhai Ambani of Reliance Group.

3. Franchises: ‘Franchises’ has been derived from a French word which means free. It is a technique of doing business where in the patent owner (The Franchiser) licenses his trademark, tried, tested and proven method of doing business to a franchisee in exchange for a recurring payment. Here the franchisee has not conceptulised the business but has invested his money and time in the business. These days, this concept is gaining more and more popularity.

4. Owner Manager: When a person buys a business from the founder and then invests his time and resources in it he is called owner manager. 

E. CLASSIFICATION ON THE BASIS OF STAGE OF DEVELOPMENT: Every business grows with the passage of time. It goes through various stages in its life. On this basis, entrepreneur can be: 

1. First generation Entrepreneur: A first generation entrepreneur is one who starts an individual unit by means of an innovative skill. He is essentially an innovator combining different technologies to produce a marketable product or service.

2. Modern Entrepreneur: A modern entrepreneur is one who undertakes business to satisfy the contemporary demand of the market. He is one who undertakes those ventures which suit the current market needs.

3. Classical Entrepreneur: A classical entrepreneur is called starve type entrepreneur. He aims to maximise the economic return at a level consistent with the survival of the firm with or without the element of growth. 

F. CLASSIFICATION ON THE BASIS OF GROWTH: In Industrial world, the industrial units on this basis are categorized as units with high growth, medium growth and low growth industries, similarly entrepreneurs are classified as under:

1. Growth Entrepreneur: Growth entrepreneurs are those who necessarily take up a high growth industry. These entrepreneur choose such type of industry which has substantial growth prospects.

2. Super Growth Entrepreneur: These are those entrepreneurs who have shown extraordinary growth in the performance of their venture. The growth or performance is measured on the basis of various parameters like liquidity, solvency, profitability. 

In addition, every economy has witnessed by the presence of large number of entrepreneurs. They are also found in social, and cultural activities. They are found among different sectors of society i.e. farmers, artisans, workers, etc. In a study of American Agriculture, Dannof has classified entrepreneurs in the following categories:

1. Innovating Entrepreneur: An entrepreneur who is able to foresee potentiality viable and profitable opportunities through innovation is considered to be an innovative entrepreneur. He is highly motivated and talented and, innovation is his key function. These types of persons are generally aggressive in experimentation and cleverly put possibilities into practice. Peter Drucker also stated that an innovating entrepreneur is one who always searches for change, responds to it and exploit it as an opportunity. Innovating entrepreneurs are very commonly found in developed countries. 

2. Imitative Adoptive Entrepreneur: Imitative entrepreneur adapts a successful adoption. They are risk aversive so they do not try any new idea. They do not innovate anything but imitative techniques and technologies adopted by others. That means an imitative entrepreneur is one who is ready to adopt the successful innovations already inaugurated by innovative entrepreneur. They simply follow the innovators after carefully observing their success and extent of attractiveness of society towards innovation. 

Imitative entrepreneurs are most suitable for the underdeveloped nations because in these nations, people prefer to imitate the technology, knowledge and skill already available in the more advance countries. These entrepreneurs also play an important role in the developing countries also. For example, Indian entrepreneurs are adopting Germany in various lines of products such as automobiles, electronics and infrastructure.

3. Fabian Entrepreneur: These entrepreneurs neither fall in innovative category nor in adoptive one. These are very cautious people. They have neither the will to introduce new changes nor the desire to adopt new methods of productions. They are considered as shy and lazy. They follow the footsteps of their predecessors. They are ready to imitate only when it becomes perfectly clear that failure to do so would result in heavy loss to them. They are dominated more by customs, religion, traditions and past practices and are not ready to take risk at all.

4. Drone Entrepreneur: Drone entrepreneurship is characterised by a refusal to adopt and use opportunities to make changes in production. They blindly follow the traditional methods of production even when there is loss to him. They are not prepared to introduce any change in his method of production, which is already in place. They are conventional in the sense that they stick to conventional products and ideas. Reasons of this attitude could be several. Such as lack of funds, lack of understanding of new development in their field of production etc. They are laggards because they continue in their traditional way and in the long run their product loses its marketability or their business becomes uneconomical so they are pushed out of the market.

What is Sales budget? Steps in preparing sales budget.

Q. What is Sales budget? Discuss the steps involved in preparing sales budget.

Ans. MEANING OF SALES BUDGET: Sales budget is an estimate of future sale units, sale value, selling expenses and total profits from sale operations. It specifies that how much quantity is to be sold, in what territories goods are to be sold, to what type of customers goods are to be sold, what will be estimated/projected amount of sales and selling expenses and how projected sales and projected selling expenses will affect our profits. Sales budget generally has two parts. These are (i) Revenue part, (ii) Expense part. Revenue part is related to estimating sale units and sale value for a certain future period of time. Expense part is related to estimating selling expenses to be incurred to achieve estimated sales. 

Sales budget is a basic budget which influences budgets of other departments like production budget, purchase budget, labour budget, overhead budget, cash budget, etc. Budgets of other departments can be finalised only after preparing sales budget. Production budget is decided on the basis of anticipated sales volume; purchase budget is decided on the basis of anticipated production; cash budget is decided on the basis of anticipated sales revenue and anticipated expenses. Similarly other budgets like labour budget, overhead budget, plant budget etc. are also based on sales budget. So, sales budget plays an important role in formulating plans, policies, strategies of other departments also. Sales budget is also important in exercising control over sales force as sales budget sets standards before the sales force. Performance of sales force is evaluated by comparing their actual performance with these standards, weak points are identified and necessary remdial measures are taken to overcome such weaknesses.

According to Cundiff and Still, “Sales budget consists of estimates of the probable dollar sales (in monetary terms) and unit sales and expenses of obtaining them.” From this definition, it is clear that sales budget is related to forecasting sales and estimation of selling expenses. 

Sales budget is prepared by sales department with the assistance of other departments under the guidance of top officials.

SALES BUDGET PROCEDURE/SALES BUDGETING PROCESS/STEPS IN FORMULATING SALES BUDGET: Sale budget procedure is generally of two types: (i) bottom up or build up method (ii) top down or break down method. In bottom up approach, sales budgeting process starts at lower level, then these are compiled by top officials. In case of top down method, budget process starts at top level, then it is allocated among different territories and products. Build up method is more commonly used, as salesmen and sales managers are in direct contact with customers, market conditions, regional problems etc. so they are in a better position to estimate sales. Following are the main steps in sales budgeting process:

(1) Preliminary Analysis: Preliminary analysis is done by convening the meeting of sales managers working at different levels and in different regions. In this meeting, past trends of sales are analysed and present sales problems are discussed. Various internal and external factors affecting the future sales viz. level of competition, phase of business cycle, stage of product life cycle, prevailing economic conditions, promotional measures, price policy, government policy, etc. are discussed in this meeting. This discussion helps to analyse and understand the present position of organisation in the market.

(2) Development of Sales Forecast: After analysing the present situation, the sales manager takes up the task of sales forecasting. Sales forecasting is a quantitative estimate of future sales expressed in units and in rupees for a specific time period, under given marketing programme and market environment. In sales forecasting, projections are made about the anticipated level of sales, keeping in view the whole marketing environment. The figures for forecast are expressed in terms of amounts and units. While developing sales forecasts various statistical and non-statistical methods are used for sales forecasting viz. Time Series Analysis, Regression Analysis, Experts Opinion, Sales Force Opinion, etc.

(3) Determination of Sales Activities: For achieving sales targets, various sales activities are determined which are to be performed to achieve sales target. These sales activities can be – total sales call to be made, number of customers to be contacted, number of repeat sales call; if the product could not be sold in the earlier calls, mileage to be travelled to cover various sales territories, contacting the customers to whom products have been sold so as to enquire about their complaints, difficulties with the products and solving such complaints etc. 

(4) Determination of Selling Expense Budget: After identifying various sales activities to achieve sales targets, cost of various selling tasks/activities to be performed is estimated. The total of such costs will determine selling expense budget. In selling expense budget, amount of selling expense is fixed for each territory. The objective of determine expense budget is to control wasteful selling expenses. Various financial and non financial incentives are given to sale force to control selling expenses. When selling expenses are fixed, sales force operates with more efficiency to reduce selling expenses. The company can use various methods for determining selling expense viz. percentage of sales method, competitive parity method, objective and task method, affordable method, etc. 

(5) Finalisation of Projections at Departmental Level: After fixing sales targets, selling expenses and deciding sales activities, final shape is given to all these projections at departmental level. In final projection, various selling activities are coordinated and reviewed. At this stage, sales budget and selling expense budget are finalised by sales department. These budgets are prepared on month or quarter basis. 

(6) Presentation before Top Management: After the sales budget and selling expense budgets are finalised by sales department, these are presented before top management of the organisation for review and approval. Top management examines such budget proposals in the light of available resources, marketing environment, production capacity, proposed changes in marketing mix, etc. If the top management finds the proposed budget satisfactory and in line with the resources of organisation, then it may approve the budget. Otherwise it may refer back this budget to sales department for further review. The top management may give its suggestions to the sales department in case the budget is referred back for review.

(7) Review: If proposed budget is not approved by top management then sales department will revise the proposed sales budget in the light of suggestions made by top management. Sales department will also review the selling expense budget. 

(8) Approval: Revised budget proposals are submitted before top management for final approval. Top management will analyse various items of sales budget. It may finalise the sales budget as it is or with some modifications. After the approval of top management, proposed sales budget becomes an authorised document, on the basis of which sales department is authorised to incur selling expenses.

(9) Allocation and Assignment: After the approval of sales budget, sales department finalises sales quota and selling expenses quota for each territory, product and for each sale-personnel. In this step, approved sales budget is allocated among various territories, sales force, and products. This division of sales quota and selling expense quota serves as the standards with which actual performance of sales force will be compared to evaluate their performance.

(10) Follow-up: When the budget is being implemented, it is reviewed at different time intervals to ensure that all activities are moving in line with sales budget. This follow up is made by officials of sales department on the basis of progress report of different territories compiled by Field Sales Supervisors. If it is found that sales force is facing some problems, then necessary assistance is given to the sales force. In some cases, they may be allowed extra selling expenses with the approval of top-management.

What is Sales budget? Discuss the steps involved in preparing sales budget. 

Meaning, characteristics, types of debentures.

Q. Write meaning and characteristics of Debenture. Explain different types of debentures.

Ans. MEANING OF DEBENTURE: The word ‘Debenture’ is derived from the latin word ‘debere’, which means ‘taking a loan’. When a company wants to take a loan on a long-term basis so that the loan becomes the company’s capital. It issues debentures and debenture stock. By debenture is meant a ‘document that contains an acknowledgement of indebtedness’. It is issued by company under its common seal and gives an undertaking to repay the debt at a specified date (or at the company’s option), specifies the conditions related to the loan taken by the company. According to Section 2(30) of the Companies Act, 2013, ‘debenture’ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. 

— According to Tophamn, “Debenture is a document given by a company as evidence of a debt to the holder usually arising out of loan, and most commonly secured by a charge.”

CHARACTERISTICS OF DEBENTURES: A debenture has the following characteristics:

(i) A debenture is issued by a company and is an acknowledgement of the company’s debt to the holder. 

(ii) It is issued under the company’s common seal, but need not necessarily specify the company’s capital.

(iii) A debenture is normally issued for a specified amount, but one debenture may also be issued for the total amount given by a debenture holder.

(iv) The rate of interest and the date of renewal is stated in a debenture.

(v) A debenture normally, but not always, is secured by the company’s property.

(vi) The holder of a debenture does not have a right to vote in the company’s meetings, i.e. he does not participate in the company’s management.

DIFFERENT TYPES OF DEBENTURES: Depending upon the conditions of issue, debentures may be of different types, which are as follows:

(1) Registered Debentures: Debentures that have the names, addresses and other particulars of the holder recorded in the company’s Register of Debenture-holders are called ‘registered debentures’. The interest as well as the principal amount with respect to such debentures is payable only to the registered holders. Registered debentures can be transferred only in accordance with the conditions of their issue and the transfer must necessarily be recorded in the company’s register. As such, a registered debenture is not a negotiable instrument.

(2) Bearer Debentures: Debentures that are neither recorded in the company’s register nor require the prior consent of the company for their transfer are called ‘bearer debentures’. In other words, bearer debentures are transferable by mere delivery and whoever has the possession of a bearer debenture is deemed to be its owner. Only the  holder of a bearer debenture has the right to receive the interest or the principal amount. The transfer of such debentures does not involve any legal procedure, and no stamp duty is to be paid for the transfer. The holder of bearer debentures can, on the payment of a normal fee, gets his name recorded in the company’s register of debenture-holder. 

(3) Secured Debentures: Debentures which are secured by a charge on the company’s property are called ‘secured’ or ‘mortgage’ debentures. In case the company does not make the payment of such debentures, the holders can realise the payment from the company’s property which is held in charge or mortgage.

(4) Unsecured Debentures: Debentures that are not secured by any charge or mortgage on the assets of the company are called unsecured debentures. The company does not provide any security for the payment of interest or principal amount of these debentures. The holders of such debentures are like ordinary, unsecured creditors of the company who only have a certificate that they have paid the amount of debentures to the company. In case of default on the company’s part, the holders of such debentures can sue the company. 

(5) Redeemable Debentures: When the holder of debentures is given the option that provides for the payment of the principal amount on a specified date or on demand or notice, the debentures are said to be redeemable.

(6) Irredeemable Debentures: Debentures on which the issuing company does not fix any date by which they should be redeemed, and the holders of debentures cannot demand payment from the company as long as it is a going concern are called ‘irredeemable’ or ‘perpetual’ debentures. Even though the principal amount of such debentures is paid on winding up of the company, the interest is paid regularly. In case, there is a default in the payment of interest, such debentures can be paid during the company’s lifetime.

(7) Convertible Debentures: When the holders of debentures are given the optìon that within a specified period and on fulfillment of specified conditions, they can convert either fully or partially, their debentures into equity shares, the debentures are said to be ‘convertible’.

What is dividend policy? Explain the factors influencing the dividend policy of a company.

 Q. What is dividend policy? Explain the factors influencing the dividend policy of a company. 

Ans. MEANING OF DIVIDED POLICY:

Divided refers to that part of net profits of a company which is distributed among shareholders as a return on their investment in the company. 

A settled approach for the payment of dividend is known as dividend policy. Therefore, dividend policy means the broad approach according to which every year it is determined how much of the net profits are to be distributed as dividend and how much are to be retained in business. Thus, the dividend policy divide the net profits or earnings after taxes into two parts: 

(1) Earnings to be distributed as dividend 

(2) Earnings retained in business 

A firm will have to choose between the portion of profits distributed as dividends and the portion ploughed back into the business. The choice is called dividend policy and it will have its effect on both the long term financing and the wealth of shareholders. 

Factors influencing/determining/affecting the dividend policy.

The following are the factors which generally affect the dividend policy of a firm:

(1) Financial Needs of the Firm: Financial needs of a firm are directly related to the investment opportunities available to it. If a firm has abundant profitable investment opportunities, it will adopt a policy of distributing lower dividends. It would like to retain a large part of its earnings because it can reinvest them at a higher rate than the shareholders can. Other reason for retaining the earning is, that, issuing new share capital is inconvenient as well as involves flotation costs. On the other hand, if the firm has little or no investment opportunities, it should retain only a small portion of its earnings and distribute the rest as dividends.

(2) Stability of Dividends: Investors always prefer a stable dividend policy. They expect that they should get a fixed amount as dividends which should increase gradually over the years. Hence, while determining the dividend policy, the merits of stability of dividends like investor’s desire for current income, resolution of investor’s uncertainty, requirement of institutional investors etc. should be given due consideration.

(3) Legal Restrictions: The firm’s dividend policy has to be formulated within the legal provisions and restrictions. For instance, section 123 of the Indian Companies Act, 2013 provides that dividend shall be paid only out of current profits or past profits after providing for depreciation. Likewise, if there are past accumulated losses, they must be first set off against current year’s profits before the declaration of any dividend. Similarly, a firm is prohibited from declaring any dividends if its liabilities exceed its assests.

(4) Restrictions in Loan Agreements: Lenders, mostly the financial institutions, put certain restrictions on the payment of dividend to safeguard their interests. They may allow the payment of dividend only when some minimum amount has been transferred to sinking fund established for the redemption of their debt. Likewise, they may prohibited the payment of dividends in excess of certain percentage, say, 10%. Alternatively, they may fix the minimum limit of profits that may be used for dividend, say, not more than 40% of the net profits can be paid as dividends. When such restrictions are put, the company will have to keep a low dividend payout ratio.

(5) Liquidity: Payment of dividend causes sufficient outflow of cash. Although a firm may have adequate profits, it may not have enough cash to pay the dividends. It may happen when most of the sales are on credit and firm’s cash resources have been utilized in the expansion of assests or payment of its liabilities. This situation is common for growing firms which needs funds for their expanding activities and permanent working capital. Thus, the cash position is a significant factor in determining the size of dividends. Higher the cash and overall liquidity position of a firm, higher will be its ability to pay dividends. 

(6) Access to Capital Market: A company which is not sufficiently liquid can still pay dividends if it has esay accessibility to capital market. In other words, if a company is able to raise debt or equity in the capital market, it will be able to pay dividends even if its liquid position is not good. While evaluating the ability to raise funds in the capital market, the cost of funds and the promptness with which funds can be raised must be considered. Usually, mature firms have greater access to capital market than the new firms.

(7) Stability of Earnings: Stability of earnings has a significant effect on the dividend policy of a firm. Normally, the greater the stability of earnings, greater will be the dividend payout ratio. 

(8) Objective of Maintaining Control: Sometimes the present management employs dividend policy to retain control of the company in its own hands. When a company pays larger dividends, its liquidity position is adversely affected and it may have to issue new shares to raise funds to finance its investment opportunities. If the existing shareholders do not want or cannot purchase the new shares, their control over the company will be diluted. Under such circumstances, the management will declare lower dividends and earnings will be retained to finance the investment opportunities. 

(9) Effect on Earning per Share: As discussed above (5), high dividend payout ratio affects the liquidity position adversely and may necessitate the issue of new equity shares in the near future, causing an increase in the number of equity shares and ultimately the earning per share may reduce. On the other hand, by keeping a low dividend payout ratio the firm can retain and plough back larger portion of its earnings resulting in increase in future earnings and thereby an increase in earning per share.

(10) Firm’s Expected Rate of Return: If the firm’s expected rate of return would be less than the rate which could be earned by the shareholders themselves from external investment of their funds, then firm should retain smaller part of its earnings and should opt for a higher dividend payout ratio.

(11) Inflation: Inflation may also act as a constraint on paying larger dividends. Depreciation is charged on the original cost of the asset and as a result, when there is an imcrease in price level, funds generated from depreciation become inadequate to replace the obsolete assests. Consequently, companies will have to retain more of its earnings to provide funds to replace the assets and hence their dividend payout ratio will be low during periods of Inflation.

(12) General State of Economy: Earnings of a firm are subject to general economic conditions of the economy. If the future economic conditions are uncertain, it may lead to retention of larger part of the earnings of a firm to absorb any eventuality. Likewise, in the event of depression, when the level of level of business activity is very low, the management may reduce the dividend payout ratio to preserve its liquidity position.

All the above factors must be carefully considered before formulating a dividend policy.

Problems of economy of Haryana.

 Q. What are the various problems of economy of Haryana?

Ans. Haryana is one of the most developed state of India. Per capita income of Haryana is very high in comparison to many states in India. But despite this, Haryana economy has some problems which hinder the fast pace of its economic development. Some of the problems of Haryana economy are discussed below:

(1) Excessive Dependence on Agriculture Occupation: Haryana economy is mainly an agrarian economy where still majority of population is engaged in agriculture sector, which hinders the process of economic development. Problem of disguised unemployment is exist in the agriculture sector. It reflects the state of backwardness of agriculture sector in Haryana. Even growth rate of agriculture sector is less in comparison to growth of industry and service sector.

(2) Regional Disparities: In Haryana, some districts are relatively more developed while some other districts are economically backward. Some districts of Haryana, viz.– Faridabad, Gurgaon, Panipat, Sonipat, Karnal are making more contribution to state domestic product. On the other hand, some districts like Mewat, Mahendragarh, Jhajjar, Bhiwani, Fatehabad, Sirsa are making less contribution to state domestic product. It reflects that some districts of Haryana are forward, while some other districts are backward. 

(3) Weak Infrastructure: Haryana lacks in terms of infrastructure. Infrastructure includes roads, railways, power-generation, dams, irrigation facilities, public-health, etc. Poor Infrastructure creates hindrance in the path of economic development. The districts having good infrastructure like Faridabad, Gurgaon, Panipat, Yamunanagar attract entrepreneurs to set up infustrial units here. But such districts are not much in number. Many districts of Haryana still face problems of power shortage, poor quality roads etc. Haryana state is extremely far from sea port. It hinders its export potential. Weak infrastructural base creates hurdle in the path of faster economic development.

(4) Poor Sex Ratio (Female Ratio): Sex ratio refers to number of females per 1,000 males. Lower sex ratio leads to many social and moral evils. Sex ratio in Haryana is very low in comparison to national average. It reflects negative attitude of Haryana society towards girl child and serious problem of female foeticide. In such imbalanced society, female participation in work-force is less. It hinders the pace of economic development.

(5) Low Standard of Education: In comparison to many other states, the standard of education in Haryana is low. There is lack of professional, technical and vocational education. The quality of education in government run primary educational institutions is not satisfactory. Because of low standard of education, the development of human resources has been slow.

(6) Backward Social Custom: Backward social customs and traditions of society prove big obstacle in the path of economic development. People are trapped in old, outdated customs and conventions in such a way that they do not like to follow scientific and modern notions in place of outdated ideas. To observe social customs, people spend their hard earned money lavishly.  Because of illiteracy and backwardness people have deep faith in fatalism (भाग्यवाद). They consider their poverty is the result of their fate (भाग्य, luck) and they do not make much efforts for its eradication. They have indifferent attitude towards economic progress. So, backward and social customs create hindrance in the path of economic development.

(7) Weak Governance: Due to weak administrative set up, the implementation of economic strategies and plans remains less effective. The delivery system of various services is very weak. The implementation of developmental plans and programmes is ineffective. Due to weak governance, efforts of government do not bring the desired results. Some of the political leaders and government officials are dishonest and corrupt. Because of widespread corruption, scams and leakage of funds in public projects, plans cannot be properly implemented. A very small fraction of funds allocated for poverty alleviation reaches the target group. Corruption poses great challenge in the path of economic development.

(8) Lack of Modern Enterprise: Although in Gurgaon and Faridabad districts, many multinational companies have set up their industrial units/service enterprise but still many districts of Haryana lack in modern enterprise. People lack in entrepreneurial skills. They adopt traditional methods for managing their enterprise. In the lack of modern enterprise, the pace of economic development is hindered. 

(9) Technological Backwardness: Haryana lacks in modern research and development facilities. The level of technology in industry and agriculture is low. Backward technology results in higher capital output ratio and wastage of natural resources of the state. The lack of modern technology has negative effect on industrial and agricultural productivity. Lack of advanced technique also creates hindrance in the path of economic development.

(10) Lack of Natural Resources: Haryana lacks in natural resources like mineral wealth, perennial rivers, proximity to sea, etc. Some districts of Haryana have rocky land and deserts. Some districts of Haryana like Mewat, Mahendragarh, Bhiwani, Hisar, Sirsa share their border with Rajasthan. Some parts of these districts get very less rainfall.

(11) Slow Capital Formation: Capital formation refers to productive investment in the economy. Investment of savings into productive channels results in capital firmation. High rate of capital formation promotes the pace of economic development. In Haryana, rate of capital formation is not very high. People living in rural areas have less saving habits. Even if they save, their savings are not invested in productive channels due to poor banking habits, weak money and capital markets etc. In urban areas, people spend more due to demonstration effect resulting in less savings and thus less capital formation. 

(12) Weak Public Sector Units: Most of the state run PSUs are running into losses. Employees of the public sector units have poor work culture. Further, outdated technology used in the state run PSUs hinders their efficiency. These PSUs are managed by bureaucrats and not by professionals from management field.

In nutshell, there are many economic and non-economic problems in Haryana state which create hindrance in the path of economic development.