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.

Importance of Agriculture in Haryana and measures for improvement.

 Q. Discuss the importance of agriculture in Haryana. What measures would you suggest for the improvement of agriculture in Haryana.

Ans. Importance/Role of agriculture in Haryana is evident from the following facts:

(1) Contribution to State Gross Domestic Product: Percentage contribution of agricultural sector to the income of Haryana is considerable, but now, it has been declining gradually. In rich countries of the world, agriculture is sufficiently developed but its contribution to the national income is very little. In underdeveloped countries, share of agriculture in the national income is more as compared to share of agriculture in developed countries.

(2) Supply of Wage Goods: Main objective of agricultural sector is to supply wage goods. The goods which are consumed by the masses to satisfy their necessities of life are called wage goods. These include agricultural products like wheat, rice, pulses, maize, bajra, oilseeds, etc. Agriculture sector provides food to people and fodder to cattle.

(3) Increase in Employment: Agriculture is the main source of employment in Haryana. More than half of the population of haryana is engaged in agriculture. Dependence of more than half of the population on agriculture speaks, on the one hand, of the significance of this sector to the state economy, on the other hand, it underlines, the backwardness of the economy. It is so because the productivity of labour is very low in agriculture. Proportion of population, depending on agriculture, has been declining with the increase in economic development.

(4) Agriculture and Industry: Agriculture has an important contribution to the growth of industrial sector in various ways: (i) Industries get raw materials like cotton, sugarcane, oil seeds, cereals etc. from agricultural sector. Many cottage and small scale industries like handloom, oil extracting, rice-mills etc. depend on agriculture for their raw materials. (ii) Income of the people rises under the impact of agricultural development. They demand more goods produced by the industrial sector. As a result, market for industrial products expands. Hence, development of agriculture is very essential for industrial development.

(5) Agriculture and Foreign Trade: Agriculture is of great importance to foreign trade. Haryana is the largest exporter of Basmati Rice among all the states of the country. Horticulture products like baby corn, strawberry, mushroom, vegetables, etc. of Haryana are also exported to other countries. 

(6) Role in Internal Trade: According to National Sample Survey Organisation, in India, in the year 2009-10, 57 per-cent of income was spent on food in the rural areas and 44 per cent of the income was spent on food in urban areas. Thus, agriculture plays an important role in the internal trade. Food trade provides employment to a large number of people and also generates tax revenue for the government. 

(7) Agriculture and Transport: Agricultural production in Haryana is characterised by regional disparities. In some states of Haryana like Karnal, Kaithal, Sirsa, Fatehabad, Jind, etc. production of food grains has increased very much under the impact of green revolution. These districts have not only become self-sufficient in the matter of food grains but other districts also purchase food grains from them. As a result, means of transport like trucks, railways etc. have been earning good revenue by carrying agricultural products from surplus districts to deficit districts.

(8) Capital Formation: Large part of capital is invested in agriculture. From the point of view of fixed capital assets, farm-lands occupy the highest place. Capital worth millions of rupees is invested in the means of irrigation, cattle, agricultural implements, tractors and other agricultural machines, warehouses, etc. Disguised unemployment in Indian agriculture is also a potential source of capital formation. In Haryana, farmers suffer from disguised unemployment. This surplus labour of agricultural sector can be employed in industries and service enterprises. It will help to increase production and productivity in the economy.

(9) Source of Saving: After green evolution, agriculture may constitute an important source of saving. So far, green revolution has benefited rich farmers only. They have grown richer. The additional income earned by them has resulted in higher savings and investments. If benefits of green revolution are extended to all farmers, then income of farmers can be increased and thus saving potential can be very large in agricultural sector.

(10) Basis of Economic Development: Agriculture serves as a basis of the economic development of any country. Because firstly , development of agricultural sector provides inputs to industries for their development. Secondly, agriculture requires relatively less capital for its development. Thus, by making use of the available resources, agriculture can be developed. Agricultural development will help in the development of industries, transport, foreign trade, etc.

(11) Social and Political Importance: Development of agriculture has its social and political significance. Haryana is mainly a state of villages. As a result of agricultural development, economic, social and political life of the villages will improve. They will take more interest in development programmes. Such type of public cooperation is very essential for all round progress of the state. Roughly, two-third of the total electorates live in villages. As such, different political parties make all efforts for their improvement through the development of agriculture.

In brief, agricultural development has a significant role to accelerate the rate of economic development. Appropriate development of the agricultural sector is almost pre-condition for the success of any development plan of the state. 

Measures to improve agriculture in Haryana:

(1) Reduction in Pressure of Population: it is essential that the pressure of population on the soil is reduced. It requires the growth of industries and service enterprises so that the surplus farm-population can be usefully engaged elsewhere. Small and cottage industries must be developed in the rural areas of the state so as to absorb the surplus work force of agriculture sector.  [To avoid sub-division of land.]

(2) Canal Irrigation: [Improvement in irrigation system from tube tubewell irrigation to canal irrigation.] With a view to reducing the dependence of state agriculture on tubewell irrigation, it is essential that permanent means of canal irrigation are developed. There should be more canals and rainwater harvesting. This type of irrigation will help to check ground water depletion.

(3) Mechanisation: [More tools should be provided to farmers.] More and more mechanised means of cultivation need to be introduced to suit the needs and means of the farmers. Also, there should be proper arrangement for their sale and maintenance. Exhibitions of agricultural tools and implements should be organised to arouse awareness of mechanised farming amongst the farmers. Arrangements should be made to sell implements to the farmers on instalment basis.

(4) Scientific Cultivation: Scientific methods of cultivation should be propagated. Farmers should be educated about rotation of crops, use of right kind of fertilisers, inputs-mix, modern techniques of agriculture, etc. Farmers should be taken to state demonstration farms to show the new and scientific methods of cultivation. Farmers using new techniques must be encouraged through awards. More research on the crops, seeds, land and fertilizers should be promoted.

(5) Good Quality Seeds: Farmers should be given complete knowledge regarding high yielding varieties of seeds. Quality seeds should be sold through cooperative societies or ‘Village Panchayats.’ Small farmers should be given these seeds at concessional rates. More research is needed regarding quality seeds. Hybrid seeds and seed certification should also be promoted in the state. High yielding variety seeds may be procured from  abroad.

(6) Use of Manure: Farmers should be educated on the use of green manure. Cow dung,  bio-fertilizers, vermi-composting, etc. should also be used as fertilisers. Production of chemical manures should be raised and be made available to the farmers at reduced rates.

(7) Credit Facilities: Farmers must get more credit at reasonable rates of interest. More and more cooperative banks, regional rural banks, land development banks should be opened. Credit facilities of ‘Mahajans’ must be properly scrutinised. Commercial banks should be spread in the rural areas. Government must offer loans to the farmers whereever there are natural calamities.

(8) Land Reforms: Land reforms are very vital to the progress of agriculture. Zamindari system be abolished and ownership of land be bestowed upon those farmers who actually cultivate it. Ceiling on land holdings be imposed. Evils of soil erosion and water logging be removed. In Haryana, still, a lot of cultivable land is lying waste. It should be treated and put to agriculture use. Land reforms like tenancy  reforms, consolidation of landholdings, computisation of land records, etc. should be promoted in the state. Among tenancy reforms, cultivators should not be evicted (forced to leave a place, especially a house, room, or property. निकाल दिया गया) so long as they continue to pay rent. Moreover, at the time of their eviction, they must be compensated for all permanent improvements made by them on the soil.

(9) Agricultural Marketing: Agricultural marketing must be improved so that the farmers gets appropriate price for his profuce. More number of regulated markets and cooperative marketing societies should be established. Warehousing facilities should be improved. Means of transport should also be improved.

(10) Mixed Farming: Mixed farming should be encouraged so that crop cultivation, animal husbandry, vegetable and fruit growing should be practiced side by side. Dairy farming and horticulture crops should be particularly encouraged with a view to improving the economic conditions of the farmers.

(11) Spread of Education: Education must be spread in the rural areas as much as possible. Farmers must be educated in general and farming operations in particular. It will remove orthodoxy and superstitions among them. With the knowledge of new techniques of cultivation, they will strive to increase production. Free education be given in the villages.

(12) Improvement in the Breed of Livestock: Artificial insemination should be used for improving cattle breed. Provision of good fodder will keep the cattle health. Cattle diseases should be immediately attended. More and more veterinary hospitals need to be opened to treat sick cattle.

(13) Reduction in the Risk of Farmers: Farmers are exposed to a variety of risks related to uncertain rainfall in particular.  The crops are also destroyed by the menace of insects and pests,  besides floods sometimes. All this adversely affects economic condition of the farmer, and therefore farming. Crop insurance may serve as a useful remedy in this context. Use of insecticides and pesticides should be encouraged to check the menace of insects and pests.

(14) Help to Small Farmers: To maintain the impact of green revolution, it is essential that small farmers are helped with HYV seeds, fertilizers and new farming techniques. Also, they should be given a loan at concessional rates of interest to enable them to make use of new technology. Economic prosperity of the farmers would contribute to the prosperity of the state as a whole. 

(15) Price Stability: Benefits of green revolution are mixed with the fear that owing to increased productivity, crop prices may fall. The government should ensure that farmers get reasonable price for their produce. Otherwise, farmers will not adopt improved techniques and agricultural growth will not be enhanced.

(16) Efficient Administration: Development plans regarding agriculture can be successful only if there is efficient administration of the plans. Only such officials should be associated with Rashtriya Krishi Vikas Yojana, National Food Security Mission, Bharat Nirman, Integrated Rural Development Programme, Cooperative Societies and various other rural development programms, etc. who are abreast with the rural life and are committed to the cause of rural upliftment. 

(17) More Public Sector Investment in Agriculture: In India, percentage share of public sector investment in agriculture is declining. To accelerate the growth in agriculture sector both central government and state government should increase public sector investment in agriculture. It will help to promote research, market development, storage and warehousing facilities, irrigation facilities, soil testing facilities, availability of guidance cells like kisan cell centers, etc.

(18) Corporatisation of Agriculture: It means corporate bodies undertake agricultural activities. These ompanies develop large sized agricultural farms. Corporatisation of agriculture will infuse more funds in agriculture sector. It will help in availing economies of large scale production and use advanced technology. Mechanisation of agricultural operations is more effective on large farms. All this will help to increase agriculture productivity.

(19) Other Suggestions:

(i) Demand for fruits and vegetables has grown very much due to increasing urbanisation and changing food pattern. Agricultural research should therefore be mainly directed towards improving the productivity of fruits and vegetables cultivation. This will help in increasing their supply according to demand.

(ii) Policy of liberalisation should also be applied to agricultural sector as it has been applied to industrial sector.

(iii) Under export-import policy, export of agricultural products be encouraged. Essential agricultural inputs should also be imported to enhance agricultural productivity.

Explain Preliminary Expenses

 Q. Explain in brief Preliminary expenses. 

Ans. Expenses incurred on the formation of a company are termed as ‘Preliminary Expenses’. These include the following:

I. Expenses incurred on the preparation and printing of various documents needed for the registration of a company.

II. Stamp duty and registration fees on these documents. 

III. Duty payable on Authorised Capital.

IV. Expenses incurred on the preparation, printing and issue of prospectus.

V. Cost of Preliminary books and the Common Seal.

VI. In case the company has been formed to purchase a running busines, the fees charged by Accountant or Valuer valuing the assests and liabilities of that business.

As per AS-26, Preliminary expenses must be written off against Securities Premium Account or in its absence from Statement of Profit & Loss in the same year in which they are incurred.

Who is an Unpaid Seller and rights of unpaid seller.

 Q. Who is unpaid seller? Explain the rights of an unpaid seller. 

Ans. Who is an Unpaid Seller? A person who has sold goods to another person but has not been paid for the goods or has been paid partially is called an unpaid seller. According to Section 45 of sale of good act, an unpaid seller is one:

(1) Who has not been the price of the goods he has supplied, or has been partially paid for the goods.

(2) Who has been given a negotiable instrument like a bill of exchange that has been dishonored.

Rights of an unpaid seller: The unpaid seller has the following rights:

(1) Rights against the goods: According to Section 46, when the buyer has not paid the full or partial price of the goods supplied to him, then the seller who has transferred the ownership of goods to the buyer has the following rights with regard to the goods:

(a) Right of lien: According to Section 47, if the seller of goods has not been paid, and the ownership of goods has been transferred to the buyer but the goods are in possession of the seller, the seller has the right to retain the goods till he receives the price of the goods from the buyer. The seller has this right under the following circumstances:

(i) When the goods have not been sold on credit.

(ii) When the payment has not been made on the promised date, if the goods were sold on credit and credit period is expired. 

(iii) When the buyer has become insolvent.

Even if the seller has the possession of goods as an agent or bailee of the buyer, he still has the right of lien of the goods. When an unpaid seller has made partial delivery of goods, he can exercise his right of lien on the goods not delivered unless the part of delivery was made in circumstances to show an intention to waive the lien. 

Termination of lien: According to Section 49, the lien of an unpaid seller terminates in the following circumstances. 

(i) When the seller delivers the goods to a carrier or any other bailee, right of lien terminates.

(ii) When the buyer or his agent lawfully obtains the possession of goods.

(iii) When the seller has waived the lien on the goods. 

(b) Right of stoppage of goods in transit: According to Section 50, when the seller has delivered the goods to a carrier for transmission to the buyer and the goods are in transit, if he receives information that the buyer has become insolvent, the seller has the right to stop the goods in transit and retain their possession till such time as he is not paid the price of goods. The seller has the right of stoppage of goods in the following circumstances:

(i) When the price of goods has totally or partially not been paid.

(ii) When the buyer has become insolvent before paying for the goods.

(iii) When the goods are in transit.

Duration of transit: According to Section 51, when the seller has delivered the goods to the carrier or bailee for transmission to the buyer, until the goods are received by the buyer or his agent is the duration of transit. Even if the goods have reached the destination, the seller’s right of lien does not terminate till the buyer or his agent has taken the possession of goods. The rules as to determine when goods are deemed to be in transit are:

(i) Delivery of goods to the carrier or bailee: The goods are deemed to be in transit when they have been delivered by the seller to the carrier or bailee for transmission to the buyer, and the duration of the period in transit is till the buyer or his agent takes possession of the goods.

(ii) The buyer taking delivery before destination: If the buyer or his agents takes the delivery of goods before the good reaches the destination, the duration of the transist, lawfully ended.

(iii) Holding the goods by the carrier on behalf of the buyer: If, after the goods have reached the destination, the carrier is holding the goods on behalf of the buyer, the duration of transit is deemed to have ended.

(iv) When the goods are rejected by the buyer: If the buyer rejects the goods and the possession of goods remains with the career or bailee, the duration of transit is deemed to have ended.

(v) When the goods are delivered to a ship chartered (hired) by the buyer: When the goods are delivered on board a ship chartered by the buyer,  it depends upon the circumstance of the case whether the ship’s owner (i.e. the shipping company) accepts the goods in the capacity of the carrier or an agent of the buyer. If the shipping company accepts the goods as an agent of the buyer, the duration of transit terminates.

(vi) When the carrier or bailee refuses to deliver the goods: When the carrier or bailee, with malafide (दुर्भावना, जानबूझ के) intention, refuses to deliver the goods to the buyer or his agent, the duration of transit is deemed to end.

(vii) When partial delivery has been made to the buyer: In case a part of goods has been delivered to the buyer or his agent, and the rest of goods are in transit, and if the partial delivery is made with the intention that it is not deemed to be total delivery, the seller has the right to stop the remaining goods in transit. 

How Stoppage of Goods in Transit is Affected?

According to Section 52, the stoppage of goods in transit is affected by:

(i) taking actual possession of goods.

(ii) giving notice of the seller’s claim to the carrier or any other person having the control of goods. 

(c) Right of Re-sale: 

(i) Besides the right of lien and stoppage of goods in transit, an unpaid seller has the right to re-sell the goods, if the goods are perishable.

 

(ii) When the unpaid seller has acquired the possession of goods by lien or stoppage of goods in transit, and has given notice to the buyer of his interaction to re-sell the goods, and if the buyer does not pay for the goods, the unpaid seller can re-sell the goods. The seller is also entitled to claim from the buyer any loss that he may suffer in re-selling the goods. If the unpaid seller makes a profit by reselling the goods, the defaulting buyer has no claim on such profit, because the law does not permit a defaulter to profit by his default. 

(iii) In case of a default on the part of the buyer, when the seller has secured the right to re-sell in a clear and certain procedure, he can proceed with the resale of goods. 

When an unpaid seller plans to re-sell the goods, he is obliged by law to give one last opportunity to the buyer by informing him of his intention to do so, so that the buyer can assure himself, if he desires, that the goods are sold at a reasonable price. If the unpaid seller does not inform the buyer of his intention to re-sell the goods and is put to a loss in the re-sale, he cannot later claim such loss from the defaulting buyer or keep with himself any profit that may result from the re-sale. 

(2) Rights Against the Buyer: An unpaid seller has the following rights against the buyer:

(a) Suit for price:  According to Section 55, if the ownership of goods has been transferred to the buyer and he refuses to make the payment for the goods, the seller has the right to file a suit against the buyer.

According to Section 55(2), if, according to the terms of the contract of sale, the payment for the goods is to be made by a certain time or date by the buyer and such payment has not been made, the seller has the right to sue the buyer even if the ownership of goods has been transferred to the latter.

(b) Suit for damages: According to Section 56, [if the buyer] refuses to accept the goods or defaults in making the payment for them with a malafide intention, or [refuses to accept the goods or to pay for the same, the seller has the right to file a suit against the buyer for damages.]

(c) Repudiation of contract before due date: According to Section 60, [if the buyer repudiates the contract before the due date] for the delivery of goods [and the seller does not accept the repudiation and waits for the due date] to make the delivery, [he reserves the right to sue the buyer for repudiating the contract.]

(d) Suit for interest: The unpaid seller, according to Section 61, has the right to be paid interest by the buyer for any delay in making the payment. Such interest is affective on the amount of payment for the period of delay after the due date. 

Or

Such interest is charge after due date of payment and if there is agreement interest will be charge from due date.