Business – Meaning, Stages and Life Cycle of a New Business

 Q. What do you mean by Business ? Explain various stages of a life-cycle of a new business.

OR

What is Business ? Explain various stages of a life-cycle of a new business.

OR

Discuss the main focuses on a new business in different stages of a life-cycle of a new business.

Ans. Meaning of Business: Business is an economic activity which involve the production and sale of goods and services with the motive of earning profit by satisfying human needs. It is the sum total of all the activities which starts from the production of goods an ends when the goods reach the consumers. 

Business is an economic activity which involves production, or purchase of goods for sale, transfer or exchange goods for earning profit.

According to Lewis H. Haney, Business may be defined as / Business is “ human activity directed toward producing or acquiring wealth through buying and selling goods.”

According to Peterson and Plowman, Business may be defined as / Business is “ an activity in which different persons exchange something of value, whether goods or services for mutual gain or profit.”

Different stages of a life cycle of a new business: During its total life, a business has to go through various stages.  Every stage has its own characteristics, advantages, limitations and challenges. Every stage has its own life period also. The life cycle of every business is affected by a number of factors like nature of business, competition, financial position, location, government policies, etc. The concept of various stages can be understood with the help of following diagram: 

These stages of the life cycle of a new business have been explained here:

1. Seed/ Development Stage: This is the beginning of the business life cycle. This is called the birth of a new business. This is known as the inception stage. It starts from that point when as the entrepreneur starts thinking about his business idea. Then he conducts research, gets feedback from friends, family, colleagues or other industry specialists. At this stage, it is anlysed that whether the conceived idea of business should be pursued or not. This stage is considered as the most challenging stage. The entrepreneur has to face and consider the various factors at this stage. These factors may be like business idea, profitability, market acceptance, establishing business, analysing financial availability, etc. As this stage is the early stage of the business, so for financial requirement the entrepreneur mainly depends on cash from owners, friends and family. He may depend upon suppliers, customers and government grants also. At this stage of the business, the focus is given on matching the business opportunities with the skill, experience and passion of the entrepreneur.  Some other important points at this stage are deciding of a business structure, finding professional advisor and business planning.  

2. Start-Up Stage: At this stage, entrepreneur has come into existence. The business idea has now become a reality. Business starts its working as a legal entity. Production of goods or rendering of service is started according to the requirement of the society. At this stage initially the quantity of production is kept at a moderate level. The demand of the product and feedback from the market becomes a base for the future course of action. At this stage, main focus is given on creating a consumer base. Financial resources are major point of consideration. Entrepreneur may take help from friends, suppliers, customers and financial institutions for this purpose. This stage is also full of challenges. Some of the important challenges can be: managing cash reserves, managing sales expectations, creating customer base, facing competition, management of human resource, etc. 

3. Growth Stage: It is the stage where the idea has started giving the rewards in the form of sale of product. The business is consistently generating revenue and adding more and more customers. These revenues are used to meet out the operating cost of the business and to open up new branches and to explore the new business opportunities in the same business stream. This is survival or life giving stage of the business. At this stage, the major focus of the entrepreneur remains on running the business in a more formal and efficient way to deal with the increased sales and customers. Better accounting standards and management system are used. More efficient employees are recruited in the business. For the financial need, the bank, profits, partnership, grants and leasing are used. This stage is full of challenges and all those need to be faced very carefully. The media major challenges can be dealing with increasing revenue, dealing with increased customers, management of human resource, facing competition, etc.

4. Established Stage: This is stage when the business has matured into a established company. The business has a satisfied list of customers and a good market share. Growth of the scale is not explosive but manageable. Entrepreneur has entered into a life cycle where business activities have become a part of routine. This is special stage for an entrepreneur in the life cycle of his business. So, the entrepreneur focuses on some special areas like working out the best marketing strategies. To compete and stay in the market, he is required to adopt better business practices along with automaton and outsourcing to improve productivity. At this stage, he can fulfil his financial requirement from money sources like: Profits, banks, investors, government, etc. This stage is also followed by various challenges and the entrepreneur should work on each challenge. The main challenges at this stages can be anticipating the business with entire financial requirement throughout establishment phase, working out on the best marketing strategy, etc.

5. Expansion/ Rapid Growth Stage: Every entrepreneur dreams for this stage. This is stage when the business has become a thriving company and has marked its establishment in the industry. The business of the entrepreneur has expanded and established its roots into new markets and distribution channels. This is stage through which business units take advantage from the proven sales model, marketing model and operation models in the form of higher sales and higher profits. So, the entrepreneur adds new product or services to existing markets or expand existing business into new markets. For meeting out his financial requirement, he may use the sources like joint venture, banks, new investors, partners, etc. Like every stage this stage also brings challenges for the entrepreneur. These challenges may be like increasing marketing competition, moving into new markets, adding new product, expanding existing business. Entrepreneur should work out on every point with professional attitude to meet out these challenges. 

6. Maturity Stage: Maturity stage means that presently the business is on the top of its industry and has matured enough. The business presence in the marketing is remarkable. But it is also having a parallel problems. At this stage, the growth rate of the business may not be substantial, as it was in the earlier one. So, the entrepreneur has to focus on the business in a critical analytical way. He has to decide to take a step back towards the expansion stage or to think of a possible exit strategy. He may also search for new opportunities and business venture, cutting cost and finding ways to sustain cash flow, etc. At this stage, financial requirements can be met out by using suppliers, customers, owners, banks, profits, etc. This stage decides the future directions of the business. It is followed by the challenges of dropping sales, profits, negative cash flows. So, this is considered to be do or die position for the entrepreneur. He is required to use all his expertise to come out of these problems.

7. Exit Stage: This is very dangerous and unwanted stage of business life cycle. No entrepreneur wants his business to face this stage. At this stage, every thing goes negative. Sales, profits, market shares, etc. show declining trend. So, at this stage, entrepreneur is required to put all his efforts to safeguard his business otherwise,  he may have to face the situation of closing down of his unit. Even after all his effort, if there is no chance of recovery, he should close his business unit if he decides to shut down his unit then he goes for proper valuation of the unit. Taking into consideration his business operations, management, previous business turnovers, etc., he tries to tries to assess the value of the business, so as to sell the business.

At the end, it can be stated that every stage of the business life cycle brings new or pre existing challenges. Solution that may have worked at one stage may not work in another stage. So, every entrepreneur should study and understand the significance of each stage of his business life cycle and should adjust his business plans and operations accordingly.

Sales Force Automation – Meaning and Role in Sales Force Management

 Q. Explain the sales force automation. Discuss its role in various functional areas of sales force management. 

Ans. Meaning of Sales Force Automation (SFA): When IT tools are used in sales force management, it is called ‘Sales Force Automation’. Sales force automation enables the sales force in performing routine office tasks in less time which helps them in sparing more time for customers. It has a significant role in every aspect of sales force management, like  recruitment, selection, training, equipping, reporting, communication, designing sales territory, planning sales routes, redressing customer complaints, controlling sales force, forecasting sales, establishing links with dealers, stockists and other channels of distribution, etc. Further, by providing relevant market information to the management on daily basis, these IT tools help management in modifying the marketing policies and strategies well in time. Thus, sales force automation refers to application of various IT tools in performing various activities of sales force management.

According to Pulling, “Sales force automation involves application of information technology to selling function.”

Role of IT in various functional areas of Sales Force Management. Sales force management is a comprehensive term. It includes various functional areas viz. recruitment and selection, training, equipping, performance evaluation, controlling, compensating, reporting, designing sales territory, sales route planning, etc. The use of IT tools has brought phenomenal improvement in all these functional areas. It is clear from the following:

1. Recruitment of Sales Force: Recruitment is the process of searching for prospective employees and stimulating them to apply for job in the organization. The business units seeking recruitment give job specifications and requirements on their websites. The persons possessing these requirements can send their bio-data through e-mail. For online recruitment, e-recruitment softwares are available through which talented persons can be attracted. Services of some specialised agencies like naukri.com, recruitin.com, etc. can also be hired for recruiting sales force. Various social network sites like Facebook, Twitter, LinkedIn, etc. are also helpful in attracting required workforce.

2. Selection of Sales Force: Selection is the process in which suitable candidates are selected and others are rejected. Selection process involves conducting selection tests, conducting interviews, checking references, conducting medical examination, etc. For screening out unsuitable applications, specific software packages are available which assess bio-data of candidates on the basis of requirements of the business unit. Selection tests can be conducted online. Intervievs can be conducted to video confidencing, smart phones, references of selected candidates can be checked by sending e-mail, SMS to the referred persons or through conversation on mobile phone. Some software packages evaluate the skills like prospecting skills, handling objections skills, presentation skills, communication skills, etc. Evaluation of these skills helps in selection of suitable sales force.

3. Sales Force Training: Training helps in improving the skills and abilities of workforce. It gives knowledge about the sales techniques, market conditions, competitors, marketing strategies, technical features of the product, use of IT tools in various selling activities, etc. Computer based sales training packages, video conferencing, etc. can be used to impart training to sales force at any time, at any  location, without disturbing the routine selling activities. The sales trainees need not leave their work place to attend the training programme. Training aids like projector, audio-visual instruments, laptops, smart phones, etc. are used in imparting sales training. Training videos can be uploaded on the company’s website which can be viewed by the sales trainee many times at any location and at any point of time.

4. Equipping the Sales Force: Equipping means providing required sales and promotional material to the salesmen, like list of company’s products, catalogues, display materials, charts, list of reputed customers, etc. Now a days, companies equip their sales force with laptops, mobile phones/smart phones so as to better display the product features, colors, three-dimensional view of the product, etc. In case the business unit sells customized products, then as per the desires of the customers, the product can be depicted using related softwares on the laptop. The salesmen need not carry catalogues, list of customers, display charts in physical form. These can be depicted in electronic form, like various colours, shades, designs of the product can be shown on laptops. For example, salesmen selling paints can take the picture of building and feeling fill it with desired colours on computer and show the same to the perspective customer. The customer can view his building in various colours on computer screen and can select a appropriate colour.

5. Sales Forecasting: Sales forecasting refers to predicting future sales of business unit. It helps helps in sales planning, sales budgeting and coordinating the activities of sales department with other functional departments. Various statistical packages like SPSS, e-view, excel, etc. are used in sales forecasting. By using various values of independent variable viz. size of advertising budget, price level, disposeable income of consumers, level of competition, etc. the sales for the future period can be estimated. These statistical packages can be run using computer.

6. Sales Reporting: Sales people have to send various types of reports regarding various selling activities viz. details of sales calls made, customer contacted, orders procured, travelling expenses incurred, boarding and lodging expenses, etc. Earlier, these reports were sent on printed forms through posts. But now these reports can be submitted online. It has reduced time and cost of reporting. The management gets timely information about current market situation and can mould its marketing strategies and policies well in time. 

7. Optimising Sales Territories: For exercising effective control over selling activities, the total market area ia divided into various market segments. These segments are called sales territories. These territories can be designed on the basis of geographical area, product, customer, etc. If these territories are designed manually, then there is more possibilities of imbalances in sales territories, i.e. some territories may be large while other territories may be small. Various software packages have been developed to design sales territories. Data regarding number of salesmen, total market area, home locations of salesmen, office locations, sales potential of different regions, etc. is fed and the computer software gives the optimum territory shape and design. It also guides the business unit in assigning sales territories to different salesmen.

8. Routing the Sales Force: Routing refers to movement plan of sales persons in the sales territory. In route-charts, sequence of sales call is determined that maximises the time of salesman with the customers and minimises the time of salesman on road. Traditionally, route charts were made using map, pen and experience, which may result in inefficient route plan. With the help of computer software, efficient route charts are designed so as to reduce travelling time and travelling cost. The software designs route charts considering the location of prospective customers to whom sales call are to be made, travelling time, sales call time, waiting time, buffer (Reserve) time, i.e., time for contingency, etc. 

9. Controlling Sales Force: Sales force control is a process through which functions of sales force are supervised, compared with predetermined standards to ascertain whether the sales personnel are working in accordance with organisational sales objectives or not. With the help of information technology tools, sales executives can get timely reports regarding performance of sales force. The timely reports help the high officials of sales department to take timely actions and devise suitable strategies to overcome weaknesses. Moreover, the reports regarding working of sales force are sent online which reduces the postage expenses and time.

10. Compensating Sales Force: Compensating , here refers to providing monetary and non-monetary remuneration to sales force for their services. The main component of sales force remuneration include: salary, commission, bonus, fringe benefits, etc. Computation of sales force remuneration can be easily done with the help of computers. Manual computation is time consuming and prone to errors, while use of computers makes this task easy, fast and error free. 

Difference between Private Company and Public Company.

Q. Distinguish between a private and a public company.

Ans. Though both private and public companies are incorporated according to the provisions of the Indian Companies Act, there are basic differences between the two which are listed in the following table:

Sr. No.	Basis	Private Company	Public Company
1.	Number of Members	The minimum number of members is 2, and the maximum excluding the present and past employees is 200.	The minimum number of members is 7 and the maximum can be as many as the number of shares of the company.
2.	Invitation to the Public	A private company cannot invite the public to invest in its shares. It needs to arrange the required capital from its own sources.	A public company arranges the total capital requirement from the public. To do that, it invites the public to invest in its shares and debentures.
3.	Allotment of Shares	A private company can allot shares immediately on the receipt of the incorporation certificate.	A public company cannot allot its shares to the public.
4.	Commencement of Business	A private company can commence its business immediately on the receipt of the certificate of incorporation.	A public company cannot commence its business so long as it gets an official letter of commencement to do so.
5.	Issue of Prospectus	A private company cannot issue a prospectus or a statement in lieu of a prospectus.	It is mandatory for a public company to issue a prospectus. In the absence of a prospectus, it is necessary to issue a statement in lieu of a prospectus.
6.	Transfer of Shares	The transfer of shares (if any)is restricted to specified limitation.	The transfer of share is not restricted and is at the will of shareholders.
7.	Preparation of Articles	Preparation of Articles is mandatory for a private company.	Preparation of Articles is not compulsory in a public company. In case the Articles are not registered, the provisions of Schedule 1A Table shall be applicable.
8.	Issue of Bearer Share Warrant	A private company cannot issue bearer share warrants.	A public company may issue bearer share warrants if the shares of the company are fully paid-up.
9.	Number of Directors	There must be at least two directors.	There must be at least three directors.
10.	Qualification Shares	It is not mandatory for the directors to have qualification shares in a private company.	It is mandatory for the directors of a public company to have qualification shares.
11.	Increase in Number of Directors	A private company can increase its number of director without the permission of Government.	A public company cannot increase the number of its directors without the permission of the Central Government.
12.	Loan to Directors	It is not necessary for a private company to get prior permission of the Central Government to give loan to its directors.	Prior permission of the Central Government is necessarily required for a public company to give loan to its directors.
13.	Retirement of Directors by Rotation	It is not required by law for the directors of a private company to retire by rotation.	One-third of the directors of a public company are required to retire by rotation.
14.	Filing of Documents	A private company need not submit the following documents to the Registrar of Companies: (a) list of directors (b) consent of directors (c) copy of any contract with the directors.	For the incorporation of a public company, it is compulsory to file these documents with the Registrar of Companies.
15.	Share-Capital	The minimum paid-up Share-Capital should be ₹1,00,000.	The minimum paid-up Share-Capital should be ₹5,00,000.

Q. Difference between Private Company and Public Company.

Under-Capitalisation – Meaning, Causes and Remedies

 Q. Define Under Capitalisation. Explain its causes and remedies. 

Ans. Under-capitalisation: The term ‘under-capitalisation’ does not mean shortage or inadequacy of capital. The term is just reverse to over-capitalisation. In the words of Grestenberg :

“A corporation may be under-capitalised when the rate of profits, it is making on total capital, is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry, or when it has too little capital with which to conduct its business.”

In simple words, under-capitalisation is a state of affairs when the capital or the resources of the company are being utilised more efficiently. As a result, the company succeeds in continuously earning abnormally high rate of return on the capital employed in it. Such company declares a high rate of dividend in comparison to the prevailing rate and the market value of its shares exceeds their book value. Thus, under-capitalisation refers to the sound financial position and good management of the company.  

Causes of Under-Capitalisation: The following are the important causes of under-capitalisation : 

(1) Under-Estmation of Capital Requirements: At the time of promotion, the promoters may under-estimate the capital requirements of the company.  This results in a situation of under-capitalisation at later stages when more capital is required.

(2) Under-Estimation of Earnings: Sometimes at the time of promotion, the future earnings of the company are under-estimated and the company is capitalised accordingly. If, afterwards it is found that the actual earnings are far in excess of the estimates, the company company may find itself in a situation of under-capitalisation.

(3) Over-Estimation of Rate of Return at the Time of Promotion: Sometimes a concern estimate its income correctly but it over-estimates its rate of return (i.e. capitalisation rate) 

(4) Promotion of Company During Deflation: Companies which are floated under recessionary conditions often experience under-capitalisation after recession is over. This is because of two reasons. Firstly, during the recession assets are purchased at a price which is much lower in comparison to their earning capacity. Secondly, companies established during recession are capitalised at a low figure anticipating low earnings but when recession is over the earnings increase and the company becomes under-capitalised.

(5) Conservative Dividend Policy: Certain companies follow a policy of declaring low dividends and ploughing back a major part of their earnings. They build up large funds for replacement, renovation and expansion. The result of such a policy is reflected in high earnings which is a situation of under-capitalisation. 

(6) High Level of Efficiency: In a company where the management is very efficient, the company may operate on a high level of efficiency even with a meagre amount of capital. Over a period, earning position of the company will improve and it will become under-capitalised.

(7) Desire to Retain Control: In many companies, the promoters desire to retain full control over the management of the company. For this purpose, they issue lesser number of shares to monopolise them. This may lead to under-capitalisation.

(8) Difficulty in Raising Capital: Sometimes the promoters find it difficult to raise the required amount of capital. Even then they start the company and run it mostly with the help of short-term loans. This is a situation of under-capitalisation.

Remedies of Under-Capitalisation: Under-capitalisation can be corrected by adopting the following remedial measures: 

(i) Issue of Bonus Shares: If company has adequate balance of reserves and surplus, the company can capitalise it by distributing bonus shares. This is the most widely used and effective remedy for under-capitalisation because by distributing bonus shares, the number of shares will increase which will reduce both dividend per share and earning per share. 

(ii) Issue of Fresh Shares: If under-capitalisation is due to the shortage of capital, it can be remedied by issuing new shares.

(iii) Splitting of Shares: Another effective method of correcting under-capitalisation is to split up the existing shares into large number of shares by reducing the par value of shares. Supposing, the share capital of a company is divided into 10,000 shares of ₹20 each and its earning is ₹80,000 which comes to ₹8 per share. If the management decides to reduce the par value of shares by 50% and increase the number of shares in the same proportions, the new shares after the split will be 20,000 shares of ₹10 each. As a result of split the earning per share will come down to ₹4 per share (i.e., 

₹80,00020,000). Due to this, the market price of shares will decrease and this will have a psychological effect on the investors. Shareholders do not object to this procedure because they would continue to receive the same amount of income even after split.