Components of Business Environment Explained | Internal and External Environment

Q. Discuss the components of Business Environment in detail.

OR

What do you mean by internal and external environment of business ? How they affect the success of a business ? 

Ans. Business Environment is the sum total of internal and external factors within which the enterprise operates. These factors may have both positive and negative influence on the growth of entrepreneurship. The internal factors are within the control of business whereas the external factors like economic environment, political environment, socio-cultural environment, technological environment, international environment are beyond the control of business. Similarly, competition is external factor which significantly affects the business but is beyond the control of business. The success of business lies in understanding the environmental change and adapting its business policies.

Components of Business Environment: Various factors affecting the success of a business can be categorised in two areas viz, internal factors and external factors. These factors are as follows:

1. Internal Environmental factors: The internal business environment includes factors within the organization that impact the approach and success of an enterprise. Internal environment include five things as man, material, money, machinery, management available with the business. The components of internal environment are usually within the control of the business. Quality of human resources as component of internal environment is largely responsible for success or failure of business unit. Motivated, hardworking and talented workers generally produce better results than unmotivated, less talented employees. If employees of an organisation are skilful and committed towards the the organisation then it can take the business to the big heights. If workers are not satisfied then their efficiency will go down, they may even go on strike and it may badly affect the organisation. In a high performing work place, employees not only have talent but also they work well together.

2. External Environment Factors: External Environment refers to external aspects of the surroundings of the business enterprise which have influence on the functioning of the business. The external aspects of surroundings are beyond the control of the business. The success of a business enterprise depends to a great extent on its awareness about its surroundings, environment and adaptability to changes in the environment. 

External environment factors are as follows:

(A) Micro External Environmental Factors: Operating environment is also known as micro environment or competitive or task environment. These factors can be influenced or controlled by the firm. It consists of company’s immediate environment that affects the performance of the company. It includes suppliers, customers, market intermediaries, competitors and public. 

1. Suppliers: Every business enterprise requires a number of suppliers who supply raw materials and components to the company. If an entrepreneur has no good relation with their suppliers then it affects their enterprise in negative sense. If supplier does not provide raw material to the entrepreneur in time, he cannot produce the goods timely. This creates the negative impact on the outside parties towards an enterprise. So, for success of an enterprise, the entrepreneurs should maintain good relations with their suppliers.

2. Customers: The other micro environmental factor is the customers. For success of an enterprise, the entrepreneurs should maintain good relations with their customers. Success of a business organisation depends upon identifying customers, their needs, tastes, liking, etc. and by enhancing the level of customers’ satisfaction. Because of increase in competition, attracting and satisfying the customers, has become more challenging. For attracting new customer, companies conduct consumer research, design product as per needs and requirements of customer, spend heavily on advertisement, provide after sale services, etc. The task of customer satisfaction has become more challenging with increase in globalisation. With growing globalisation, various multinational corporations are entering into our markets and with the reduction in tarrif duties, more imported products are available in our markets. Hence, customers are becoming more global in their shopping, because they can choose from domestic products and foreign products. So, an entrepreneur special concentration on this area.

3. Market Intermediaries: Like suppliers marketing intermediaries also form an important components of the company’s overall value delivery system. Marketing intermediaries help the company to promote, sell and distribute its products to final buyers. Marketing intermediaries may be individuals or firms or agencies. They include: 

(i) Resellers: Resellers are wholesalers and retailers who buy and sell merchandise. They help the company to find the customers and make sales to them.

(ii) Physical Distribution Firms: They include, media firms, warehousing and transport agencies, shipping companies, purchase agents, etc. They help the company to stock and move goods from their point of origin to their destinations.

(iii) Marketing Services agencies: They include, media firms, advertising agencies, marketing research agencies, marketing consultancy firms, etc. They help the company to target and promote its products to the right markets.

(iv) Financial intermediaries: They include Bank credit and finance companies, Insurance companies and other financial service agencies that help in financial transaction or insure against the risk associated with the buying and selling of goods.

So, this is area which can decide the future of the business. An entrepreneur should keep in mind all these points, for successful running of a business.

4. Competitors: Competitors are those individuals and firms who sell similar goods and services in the same market. It is therefore, necessary to build an efficient system of marketing. No single competitive marketing strategy is best for all companies. Each entrepreneur should consider its own size and industry position compared to those of its competitors. Large firms with dominant position in the industry can use certain strategies that smaller firms cannot afford. Therefore, small firms can develop strategies, which give them better rates of return than large firms. The competitive environment consists of many things, which every businessman must take into consideration, while studying the marketing environment and for achieving success in the business.

5. Public: Public is any group that has actual or potential interest in the business. Broadly speaking, it includes the followings:

(i) Financial Public: It includes banks, investors, shareholders, etc. They influence the company’s ability to obtain funds.

(ii) Media Public: It includes newspapers, magazines, radios and television, etc. They carry news, features and editorial opinion about the company.

(iii) Government Public: It includes Government departments and agencies. Entrepreneur must often consult with lawyers and experts on the issues of product safety, truth in advertisement and other matters.

(iv) Internal Public: It includes managers, workers and other employees of the company. Large companies use newsletters and other means of information to inform and motivate their internal public. When employees good about their company, this positive attitude spills over to external public.

(v) Local Public: It includes neighbourhood residents and community organisations. Large companies generally appoint a community relation officer as P.R.O. to deal with the community. They attend meetings, answer questions and contribute for public cause.

So, it is clearly understandable that these factors can change the direction of the business. To achieve success, it becomes necessary for the entrepreneur to understand the importance of this factor and work accordingly.

(B) Macro Environment Factors: Macro Environment means general environment of business. It consists of demographic, economic, social, cultural, political, legal, technological and physical factors which influence marketing policies and operations. 

Macro Environment factors includes the following:

1. Economic Environment: By economic environment, we mean the purchasing power and desire to spend the income by the consumers, which results in effective demand, which in turn, influenced by economic conditions. Hence, economic conditions play a significant role in the success of the business. Economic environment refer to those factors which have impact on the working of business viz., economic system, economic policy, nature of economy, trade cycles, economic resources, level of income, distribution of income and wealth, statutory provisions, etc. Economic environment is very complex in nature. It is very dynamic. It keeps on changing with the change in government policies, change in political situations, etc. It contains the following: 

(i) Economic System: An economy system is a way in which an entrepreneur is organised to decide the following three basic questions of the economic organisation. 

● What product should be produced and in what quantities?

● How should the products be produced?

● For whom should the products be produced?

The economic system of a country may be as follows:

(a) Capitalism: Such economy is dominated by private sector. Here private sector has much important role in economic activities. It is also called open economy. e.g. economy of USA, UK.

(b) Socialism: Such economies are state owned economies. Government plays major role in economic development of such economies.

(c) Mixed Economy: In such economies, both public and private sector co-exist.

(ii) Economic Policies: Macro economic policy as determined and changed from time to time impacts business conditions more directly. The policy design can be a response to actual economic conditions or problems or to create a favoritable conditions in the near future. The basic objective of this policy is to stimulate or maintain growth, achieve economic stability, increase employment, stabilize balance of payments, correct regional imbalances and make the economy more competitive.

Important economic policies are: (a) Monetary policy (b) Fiscal policy (c) Export Import policy (d) Foreign Investment Policy (e) Industrial Policy (f) Industrial Licensing Policy. 

Besides these policies, Government has also framed legislation which regulates and controls the business. The main legislation regulating the business are as follows:

(a) Industrial Disputes Act, 1947

(b) Factories Act, 1948

(c) Industrial Development and Regulation Act, 1951

(d) Companies Act, 2013

(e) Consumer Protection Act, 1986

(f) Foreign Exchange Management, 1999

(g) Securities and Exchange Board of India Guidelines, 2000

(h) Competition Act, 2002

(iii) Economic Conditions: Economic environment exercises the most direct and immediate influence on entrepreneurship. Capital, labour, raw material and markets are the main economic factors. 

(a) Capital: Capital is one of the most important pre-requisites to establish an enterprise. Availability of capital facilitates the entrepreneur to bring together the labour of one, machine of another and raw material of another to combine them to produce goods. Capital is, therefore regarded as lubricant to the process of production. With an increase in capital investment, capital output ratio tends to increase. This results in increase to profits which ultimately goes to capital formation.

(b) Labour: The quality of Labour is another factor which affects the birth of entrepreneurship. Division of labour depends on the size of market leads to improvement in the productive capacities of labour due to an increase in the dexterity (skill) of labour. So, labour problem does not prevent entrepreneurship from emerging. 

(c) Raw Material: The necessity of raw materials hardly needs any emphasis for establishing any industrial activity and therefore its influence in the emergence of entrepreneurship. In the absence of raw materials neither any enterprise can be established nor can an entrepreneur emerge.

(d) Market: The size and composition of market both influence entrepreneurship in their own ways.

An entrepreneur must understand the type of economic system, various policies, Act, regulations of the government. All these factors are very important as they decide the success of a business. These may not be in the control of businessman, but he can be in safer zone by understanding them.

2. Political Environment: Political environment of the economy affects different units significantly. Political environment mainly includes the following:

(i) Political ideology of government 

(ii) Political stability in the country 

(iii) Relation of government with other countries 

(iv) Defence and military policy

(v) Welfare activities of government 

(vi) Centre state relationship

(vii) Thinking of opposition parties towards business 

Political ideology of government refers to the political thinking, approach and vision of the government towards various economic and  social activities of the country. Political ideology affects the business unit. It decides as to what type of business activities should the country have, what areas should be opened for private sector, what should be reserved for public sector. Laws and regulations covering all aspects of business are enacted by the government. 

In order to be a successful entrepreneur, it is expected to have a close look on the political environment of the country. This will always be helpful for him, as he will act according to the changing environment.

3. Socio-Cultural Environment: Business is an integral part of society and both influence each other. Social and cultural environment refers to influence and exercise by certain social and cultural factors which are beyond the control of business unit. Such environment includes:

(a) Attitude of people at work

(b) Family system

(c) Caste system

(d) Religion 

(e) Education

(f) Marriage

(g) Habits and preferences

(h) Languages

(i) Urbanisation

(j) Customs and traditions

(k) Value system

(l) Social responsibility of the business 

Social-Cultural environment influence the business in the long run. Our society is ever changing. New demands are created and old ones are lost. It is a essential for the success of business to prepare marketing plan according to the changing need of the society and thereby satisfy new social demands. Main aspects of social environment are: 

(a) Change an our lifestyle and social values e.g. changing role of women emphasises on quality of goods instead of quantity of goods, more preferences to recreational activities etc.

(b) Major social problem e.g. concern for pollution, need for safety in products, social responsible marketing etc.

(c) Growing consumerism is the symbol of increasing desires of the consumers. The growing consumerism is the result to two primary factors: (a) Increasing educational level of consumers (b) Scientific and technical progress. 

So, an enternepreneur is also expected to be aware about the changing social cultural environment. This will help him to achieve and maintain the success of his business.

4. Technological Environment: Technology represents the application of scientific knowledge for practical purpose. Information technology tools such as computers and mobile phones for processing, storage and transfer of data, internet communication have increased in recent years. An entrepreneur should consider the technological environment because changes in technology are uncontrollable.

The success of every business in future depends upon the factor that how efficiently they adopt the technological change. This area is the most crucial one and cannot be ignored at any cost.

5. National Environment: It includes geographical and ecological factors such as natural resources, weather and climatic conditions, port facilities to topographical factors such as soil, land forms, sea, rivers, rainfall, water pollution etc. Climatic and weather conditions affect the location of certain industries like textiles industry in maharashtra and gujarat. Similarly, geographical factors affect the location of certain industries, like iron and steel industries is located near raw material source in Bihar and Orissa. Sugar industry has been set up near to those areas where sugarcane is cultivated. Exports oriented industries are located near ports so that transportation cost can be minimized

Weather and climatic factors affect the demand pattern for clothing, building material, room heaters, air conditioner etc. Ecological (environmental) have also become significant in the study of business environment. Environment pollution in the form of air pollution, water pollution and noise pollution have caused disturbances in ecological balance. The entrepreneur must keep in mind geographical factors, pollution factors. In brief it includes:

(i) Climatic and weather conditions 

(ii) Availability of natural resources 

(iii) Topographical factors, physical features of a place

(iv) Pollution control 

(v) Location aspect

(vi) Port facilities 

Success of business is undoubtedly affected by these factors collectively. Ignorance of any of these factors may adversely affect the business unit. So an entrepreneurial project should be established after considering all these factors.

6. Demographic Environmental Factors: Demographic environment is the study of features of population viz. its size, its growth rate, age composition, sex composition, income level, education level, family size, family structure, etc. All these demograhic factors affect size of demand, taste, fashion, liking, preferences of consumer, etc. Demographic environment differs from country to country and from place to place within the same country. Important demographic factors are:

(i) Size of population and population growth

(ii) Age compososition

(iii) Sex composition 

(iv) Education level

(v) Family size and structure 

(vi) Economic satisfaction of population 

(vii) Urban-Rural population 

All the demograhic factors affect the success of every venture. Giving less weightage to these factors or ignoring these factors can lead to the failure of the business. So, demograhic factors always remain an area of concern of every entrepreneur.

7. International Environment: The international environment is particularly important for industries directly depending on import or export. The present era is of globalisation. At the company level, globalization means two things (a) the company commits itself heavily with several manufacturing locations around the world (b) it also means ability to compete in domestic markets with foreign competitors. It has been observed that major international development has its impact on domestic market. For example, due to globalisation, Indian electronic market has depressed, oil price hikes have increased the cost of production of certain industries like fertilizers, synthetic fibers, etc. If a enterprise has to survive in the open market, it has to modify its products according to different customers,  needs and tastes. They must acquaint themselves at the advanced means of transport and communication, foreign languages, currencies of different countries, legal provision, etc. 

If a business is prevailing in international market and acquaints itself with the changing environment, the success rate will be higher. They will earn more and more profit. So, they should consider these factor with right perspective.

Selection Sales Force: Meaning, Process and Stages Selection

 Q. What do you understand by selection of sales-force ? Explain various stages involved in the selection of sales force.

Ans. Meaning of Selection of Sales Force: Selection is the process of determining whether an applicant meets the qualification for a specific job and choosing the applicant who is most suitable to the organisation. Selection is a process by which qualified personnel are chosen out of applicants who have offered their services to the organisation for seeking employment. It is a negative process of employment by which few are selected and others are rejected. A well organized selection procedure involves many steps and a decision to reject a candidate can be made at any of these steps. Selection process attempts to reject unsuitable candidates, leaving only the best to be taken in the organisation.

In the words of Dale Yoder, “Selection is the process in which candidates for employment are divided into two classes those who are to be offered employment and those who are not.”

In brief, selection is the process of rejecting unfit candidates from the large number of candidates provided by recruitment process.

Selection Process – Selection process may have following steps: 

(1) Receiving Applications: The first step in the selection process is receiving applications from prospective candidates. The application form usually contains information like name of applicant, date of birth, sex, address, educational qualifications, experience, minimum acceptable salary, marital status, references etc. (References – for character viewpoint. References should not be in blood relations.) Application form gives a preliminary idea of the candidate and helps the interviewer in formulating questions. Application form should be simple and it must have all such points for which preliminary information is needed. On the basis of such information, the management screens out the undesirable applicants.

(2) Selection Tests: After eliminating undesirable applicants, the selection tests are conducted to evaluate different types of skills and qualities of applicants.  Basic assumption of these tests is that individuals differ in their abilities and skills and these skills can be accurately measured by various tests such as mental ability test, aptitude test, achievement test, interest test, etc. At this stage, the candidates with poor performance in the tests are eliminated. These tests help to know applicant’s mental ability, word fluency, speed of perception, ability to learn new jobs, etc.

(3) Interview: The main objective of interview is to obtain additional information which is not available in application form or selection tests. The purpose of the interview is to determine the suitability of applicant for job and of the job for the applicant. For recruiting sales personnel, interview is a very important step of selection process as we come to know the conversation capabilities, speech fluency, confidence and personality of candidates. Interview must be conducted in a friendly atmosphere and candidate must be made to feel at ease. Unwanted questions should be avoided. It is better to ask questions mainly based on job-specification. The interviewer should also verify the information supplied by the interviewee in the application form. The place of the interview should be comfortable and free from interruption. After all the candidates have been interviewed, a panel of selected candidates is prepared according to their merit. In this stage also undesirable candidates are rejected. The interview can be of following types:

(a) Structured Interview: Interviewer prepares a list of questions to be asked in advance on the basis of job specification.

(b) Unstructured or Free Interview: In this method, no list of specific questions is prepared in advance. The applicant is encouraged to talk freely. Experts opine that this technique is better for probing individual’s personality in depth. 

(4) Reference Check: Generally candidates are asked to give names of two or three references in their application forms. The references are contacted to know the character, conduct, behaviour of prospective candidates. The reference should be reputed persons holding reposible position. Moreover certificates/degrees are also checked from the records of colleges/universities/professional institutes. The experience of candidates can be checked by contacting previous employers. This step also helps to drop unsuitable candidates supplying wrong information or employees of doubtful character and conduct.

(5) Medical or Physical Examination: Certain jobs require more strength, travelling and involve tough working conditions. Physical examination reveals whether or not a candidate possesses these qualities. Those who are physically unfit are rejected. Medical examination prevents the employment of those candidates who suffer from some type of contagious disease. The medical examination tests can be with regard to weight, height, heartbeat, blood pressure, mental-balance, ENT, eyesight, etc. A person with poor health remains absent more frequently than a healthy person. It is important to select salesman possessing good health because he has to travel for long periods and has to make numerous sales calls.

(6) Selection and Placement: If the candidate is found suitable in above stages, then he will be selected, first on probation basis, and if his performance remains satisfactory in that period then either his probation period is extended for future review or further training is provided or he may be dropped. 

After initially selecting a person, he will be inducted in the overall organisational structure, and he is explained regarding history, customs and traditions of the company. He is introduced to his colleagues, he is told about his authority, responsibility, superiors and subordinates. He is also shown the necessary facilities such as canteen, rest-room, etc. The selected employee should be properly inducted before starting his work.

Procedure for incorporation of a public Company.

 Q. Explain the steps to be taken or a procedure to be followed for the incorporation of a Public Company. 

Ans. Incorporation is the second stage of company’s formation, which is done by getting the company registered with the Registrar of Companies. The required fee for registration is paid and the certificate of Registration is obtained from the Registrar of companies. The company becomes an entity only after it is registered. It is, therefore, said that floatation is the conception of a company whereas the incorporation is its birth when it takes on the form of an artificial person. So long as a company is not incorporated, it cannot be called a ‘company’ from the legal viewpoint and it has not entity as such. After completing the promotional work and before getting the company registered, the preparatory steps are as under:

Procedure for incorporation of a public Company.

1. Preliminary Activities: Before a company is incorporated, the promoter has to do the following: 

(i) To decide where the registered office of the company will be located: The promoters, as a first step, must decide in which state will the headquarters of the company be located. It is necessary to do so because the company must be registered with the Registrar of Companies of the state where it has its head office.

(ii) To decide the name of the company: Before it is given a name, it is necessary to ascertain from the Registrar of Companies whether the proposed name of the company is available or not, and whether the name is acceptable. Although a company can be given any name, yet it must conform to the provisions of the Indian Companies Act — i.e., the company’s name should not be similar to that of an existing company and should be appropriate as per the directives of the Central Government. The word ‘Limited’ must be used at the end of the company’s name. For the acceptance of the company’s name, the promoters need to make an application, through the Registrar of Companies, to Company Department of the Central Government. For the availability of name, it is mandatory to sen̈d at least three names for approval of any one of them.

(iii) To make appointments: It is also required to appoint underwriters, brokers, bankers, solicitors, auditors and signatories on the memorandum of the company. 

(iv) To get the important documents prepared: The preliminary activities include preparing the memorandum and articles of association of the company and getting them printed.

(v) To send the application to the Registrar: After completing the above mentioned formalities, the promoter makes an application to the Registrar of Companies of the state in which the company is to established for the registration of the company. The documents that need to be filed with the application are as under:

2. Documents to be Filed with the Registrar: 

(i) Memorandum of Association: This is a very important document. No conce company can be incorporated without having a Memorandum of Association. A company’s memodandum of association is its charter and under the provisions of the act defines its rights and obligations. The memorandum defines the basic objectives for which the company is allowed to be incorporated.  For a public company, a minimum of seven and for the private company, a minimum of two persons need to be signatories, i.e. subscribers to the memandum of association. Each signatory must give his address, description and occupation etc. and number of shares subscribed by him. The subscribers must sign these documents in the presence of atleast one witness who shall attest the signature. The documents should also bear the date.

(ii) Articles of Association: This document defines the rules that the activities of the company in the attainment of its objectives. The document must be properly stamped, duly signed by the signatories of the memorandum and witnessed. The articles must be printed and in paragraphs. The articles of association are optional in the case of a public limited company with limited liability, which may adopt Table A, the model set of articles, in its entirety. If the company adopts Table A, the fact must be specified by writing ‘Registered without Articles’ on the memorandum.

(iii) Information about the Head Office of the company: The address and location of the company’s registered office must be communicated to the Registrar of Companies. This information can also be given within 30 days of the registration of the company.

(iv) List of Directors: A list of persons who have agreed to function as the first directors of the company must also be communicated to the Registrar. The list of directors must have their names including surname or family name. Director Identification Number, residential address, nationality, proof of Identification etc.

(v) Written Consent of Directors: Not only is a list of the directors mandatory, it must also be sent by the secretary of the company along with their written consent to act in that capacity. The written statement must be signed by each director who has agreed to work in that capacity. An affidavit from each of the subscribers to the memandum and from persons named as the first directors, if any, in the article, that he is not convicted of any offence in connection with the promotion, formation or management of any company, or has not been found guilty of any fraud or misfeasance or any breach of suty to any company under this Act or any previous company law during the preceeding five years and that all information filed in the documents with the Registrar for registration of the company is correct and true to the best of his knowledge and belief.

(vi) Statutory Declaration: A declaration in the prescribed form by an advocate, chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of company, and by a person named in the articles as directors, managers, or secretary of the company, that all the requirements of this act and rules made thereunder in respect of registrations and matters precedent or incidental thereto have been compiled with. 

(vii) Payment of Prescribed Fee: A filing fee has also to be deposited along with the aforesaid documents. 

If, having received the above documents and having scrutinised them, the Registrar is convinced that the necessary formalities required by law have been compiled with and the prescribed fee has been deposited, he will enter the name of the company in the Register of Companies maintained by him and issue a certificate of Incorporation under his signature testifying that the company has been officially incorporated and that it is a ‘limited’ public or private company. 

The Registrar of Companies issues (allocates) a Corporate Identity Number (CIN) to each registered company.

It must be stated that if the documents are in order and the object of the company is legal, the Registrar has no discretion in the matter and he must grant the certificate of incorporation.

If the documents produced before the Registrar are returned for rectifications of certain defects and the applicant instead of rectifying the defects, drops the matter, he cannot claim refund of fees paid for registration.

How to determine financial requirements of business?

 Q. How you will determine the financial requirements of a business? Explain. 

Ans. Determining the financial requirements of the business is one of the main objective of financial planning. Before raising funds, it is essential that requirement of funds be correctly estimated. In the absence of correct estimates the firm may suffer either from inadequate or from surplus funds. If the funds are short of its requirements, the firm will not be able to meet its day-to-day expenses and pay the short-term and long-term liabilities on time. On the other hand, if the funds are an excess of the requirements of the business, they will remain idle and will reduce the profitability of the business. Hence, the estimate should be made in a way that all financial requirements are properly satisfied. 

Funds requirements of business can broadly be classified into two main categories.They are:

(i) Fixed Capital Requirements, and

(ii) Working Capital Requirements.

Assessment of Fixed Capital Requirements: Fixed capital is the capital which is meant for fulfilling the permanent or long-term term needs of the business. Fixed Capital is the funds required for the acquisition of those assets that are to be used over and over for a long period. 

Fixed capital is required for acquiring fixed assets. Fixed assets may include the following:

(i) Tangible assets such as land, buildings, plant and machinery, furniture etc.

(ii) Intangible assets such as goodwill, patents, copyrights etc. 

Certain amount of fixed capital is also required for meeting certain expenditures not leading to creation of asset like research expenses, promotional expenditure incurred for the establishment of business, share issue expenses, underwriting commission etc. Requirement of funds for these expenditures is long-term and hence the funds required in respect thereof is also included under fixed capital.

Every business needs a fair amount of fixed capital to be invested in fixed assets so as to create production or business facilities. For a new business, the fixed capital is needed in the beginning because fixed assets are needed at the time of promoting or establishing the business. For an existing business fixed capital is required for development and expansion of business. Hence, it is essential to have adequate amount of fixed capital in the business.

The assessment of fixed capital requirements for a new business can be made by preparing a list of fixed assets needed by the business. The list is prepared by the promoters by studying the similar units and by taking advice from technical experts. The estimation of cost of land can be made from property dealers, estimation regarding cost of building can be made with the help of building contractors and the cost of machinery can be ascertained from the suppliers of the machinery. Similarly, the amounts to be paid for goodwill, patents, trade-marks etc. can also be estimated. 

Factors Affecting the Estimation of Fixed Capital/Fixed Assets Requirements: Factors which affect the estimation of fixed capital or fixed assets requirements can be : (a) Internal Factors, and (b) External Factors.

(a) Internal Factors

(i) Nature of Business: Certain types of business require heavy investment in fixed assets, while others do not. Usually, the manufacturing concerns require more fixed assets than the trading concerns. Similarly, public utility undertakings like railway, electricity, water supply etc. require huge funds to be invested in fixed assets.

(ii) Size of Business: Larger the size of concern, greater will be the requirement of fixed capital. Also, in larger concerns most of the activities are preferred with the help of automatic machines. As such, they require huge investment in fixed capital.

(iii) Types of products: A concern which manufacturers simple consumer products such as soap, oil etc. will need lesser amount of fixed capital in comparison to a concern which manufacturers complicated products such as motor cycle, cars etc.

(iv) Activities Undertaken by the Enterprise: A concern which is engaged in the manufacturing of all parts of a product by itself will require greater amount of fixed capital as compared to a concern which gets most of the parts manufactured from outside and merely assembles them. Similarly, if a concern itself manufacturers and markets its products, it will require more amount of fixed capital as compared to a concern which is engaged only in the manufacturing or only in the marketing activities.

(v) Mode of Acquisition of Fixed Assets: If some of the fixed assets are available on lease or on hire, lesser amount of fixed capital will be required. On the contrary, if all the fixed assets are to be purchased on immediate cash payment, larger amount of fixed capital will be needed.

(vi) Acquisition of Old Assets: In certain industries, old plant and machinery may be available at sufficiently reduced prices and which can be used satisfactorily. It would reduce the requirements of fixed capital to a great extent. But the old plant and machinery should be used in the industries where the technological changes are moderate or slow.

(vii) Availability of Fixed Assets at Concessional Rate: In some areas, the Government provides land and other equipment at concessional rates to promote balanced industrial growth. In such a case, the requirement of fixed capital is reduced.

(b) External Factors 

(i) General Economie Outlook: If the economy is recovering from depression and the level of business activity is expected to rise, the requirement of fixed assets will also rise and hence the need for fixed capital will also rise.

(ii) Technological Changes: If rapid technological innovations are taking place in an industry, the need for fixed capital will be larger because the old and out-dated machinery will have to ɓe replaced by new ones.

(iii) Degree of Competition: Degree of Competition also affects the fixed capital requirements. If there is a lot of competition in some industry, the need for fixed capital will be more because if some firms go on adopting the new technology, the others have to follow them.

(iv) Shift in Consumer Preferences: If the consumer preferences go on changing in some industry, the need for fixed capital will be more because the firm will have to produce new varieties accordingly, which require more investment in fixed assets.

Assessment of Working Capital Requirements: The capital which is needed to conduct/carry day-to-day operations of a business enterprise is called Working Capital. The term ‘Working Capital’ is used in two ways. In one sense it denotes the ‘total current assets’ whereas in another sense it is regarded as the excess of current assets over current liabilities. 

Total amount of working capital can be estimated by estimating the needs of working capital for the following:

(i) For maintaining adequate stock: Every industry undertaking is required to maintain a minimum stock of raw materials, work in progress and finished goods. The requirement of stock is determined by various factors like volume of production, the length of production cycle and the period for which the finished goods have to remain in warehouse before they are sold.

(ii) For Receivables: Finished goods may be sold on cash or on credit.  Credit sales take the form of receivables (i.e., debtors and bills receivables). The a mount is tied up in receivles until cash is realised from them. The amount tied up in receivables until cash is realised from them. The amount tied up in receivables depends upon a number of factors such as quantum of credit sales, credit period allowed, efficiency of debt collection system etc. For example, if a firm changes its credit period from 30 days to 60 days, the amount tied up in debtors will go up and consequently the need for working capital will also increase by a similar amount.

(iii) For Paying Day-to-Day Expenses: A firm has to carry some minimum cash balance to make payment for wages, salaries and other expenses throughout the year. A proper cash balance is also maintained to avail of the cash discounts facilities offered by the suppliers.

(iv) For Contingencies: A minimum cash balance is also maintained for meeting unseen contingencies so that the business successfully sails through the period of crisis.

Thus, the overall financial needs of a business can be determined by assessing the needs for fixed capital and working capital separately and then by adding the two.