Q. Write short notes on the following : (a) Working partner and his remuneration. (b) Assessment as a Firm u/s 184.

Q. Write short notes on the following :
(a) Working partner and his remuneration.
(b) Assessment as a Firm u/s 184.

Ans. 

(a) Working partner and his remuneration 

‘Working Partner’ means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner. A non-working partner may be financing partner, dormant or sleeping partner. 

Sometimes, the amount of remunation payable to each working partner is not specifically is stated in the partnership deed. It contains only the fact that the “ Working partners shall be paid the remuneration permissible u/s 40(b).” Similarly, in some cases it is mentioned in the deed that the remoneration payable to working partners shall be decided at the end of accounting year.

In this connection, the board has clarified that the partnership deed must specifically state the amount of remuneration payable to each working partner or how the remuneration will be computed otherwise no deduction will be allowed u/s 40(b) regarding remuneration to working partners. 

(b) Assessment as a Firm u/s 184

1. A firm shall be assessed as firm, if : OR A firm shall be assessed as firm if it satisfies the following conditions : 

(i) the partnership is evidenced by an instrument.

(ii) the individual shares of the partners are specified in that instrument. 

2. A certified copy of the instrument of partnership deed shall accompany the return of income of the firm for the previous year relevant to the assessment year in respect of which assessment as a firm is first sought.

3. If once a firm is assessed as a firm for any assessment year, it shall continue to be assessed as a firm for every subsequent year if there is no change in the constitution of the firm. 

4. If any change occurs in the previous year, the firm shall furnish a certified copy of the revised partnership deed along with the return of income for the relevant previous year. 

5. If there is, on the part of the firm, any failure to comply with the provisions of section 144 [viz., failure to file the return of income, failure to comply with the terms of a notice issued under section 142(1) or 143 (2)], the firm shall be assessed as a firm. In such a case the following provisions shall apply : 

(a) No deduction by way of payment of interest, salary, bonus, commission or remunration, by whatever name called, made by the firm to its partners shall be allowed in computing, the income chargeable under the head ‘Profits and Gains of Business or Profession’.

(b) Such interest, salary, bonus, commission or remunration shall not be chargeable to tax in the hands of partners under the head ‘Profits and Gains of Business or Profession’ u/s 28(v).

Assessment of firm u/s 185: [K.U 2012M] 

1. Where a firm does not comply with the provision of section 184 for any assessment year, the forum shall be assessed for the assessment year as a firm. 

2. No deduction by way of payment of interest, salary, bonus, commission or remunration, by whatever name called made by the firm to its partners shall be allowed in computing the income chargeable under the head ‘Profits and Gains of Business or Profession’.

3. Such interest, salary, bonus, commission or remunration shall not be chargeable to tax in the hands of partners under the head ‘Profits and Gains of Business or Profession’. [u/s 28(v)].

working partner remuneration assessment as firm section 184 185

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.

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.

Question papers class 11th and 12th.

English

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Factors Affecting Price Determination & Price Setting Process (Easy notes)

 Q. What factors do affect the price determination of a product? Briefly explain the process of price setting in practice.

Ans. Pricing is an art of translating the value of the product or service into quantitative terms (i.e. rupees) by the marketing manager before it is offered to target consumers for sale. Pricing decisions should be consistent with the marketing objectives of the company. For determination of prices of its products the management must have to take a number of factors into consideration. The influencing factors for a price determination/decision can be divided into two groups, such as:

FACTORS AFFECTING PRICING DECISIONS 

A. INTERNAL FACTORS: Internal factors are those which are well within the control of the company. Internal/controllable factors are as follows:

1. Pricing objectives: The objectives set for pricing affect the decision regarding fixation of price for a particular product. Firms may have a variety of objectives such as price stability, sales maximisation, target return on investment, meeting the competition, survival, etc. Pricing decisions should be made only after proper consideration of pricing objectives.

2. Cost of production: Cost plays an important role in the pricing of the product as both have a close relationship. Cost of production serves as the base for price fixation. Whatever may be cost of production, the price is one at which the seller is prepared to sell and the buyer is prepared to buy.

3. Marketing Mix: Price is one of the important elements of marketing mix and therefore must be coordinated with the other elements: production, promotion and distribution. Any change in price will have an immediate effect on the other three elements. 

4. Product Differentiation: The price of the product also depends upon the characteristics of the product. In order to attract the customers, different characteristics are added to the product, such as quality, size, colour change, attractive package, alternative uses, etc. Generally customers pay more price for the product which is of the new style, fashion, better package etc.

5. Organisational considerations: Pricing decisions are occur at two levels in the organisation. It is the top management which generally has full authority over pricing. The marketing manager’s role is to assist the top management in price determination and administer the pricing within policies laid down by the top management. The top management sets the guidelines within which the price is to be administered and determine the price range within which the actual price is dealt at lower level.

However, in some companies, some authority is granted to subordinate executives for setting prices, especially where pricing varies in different markets or where ther are numerous products and frequent pricing decisions are required.

6. Product life cycle: Pricing decisions are affected by the stages of product life cycle. As the product follows a number of stages i.e. introduction, growth, maturity, saturation and decline. The price which is relevant in one stage may not necessarily be relevant in the next stage and therefore it requires price administration during each stage.

In the introductory stage, the prices are kept low so that the product can easily penetrate the market. As the sales increases and the product reaches the growth stage, the prices can be raised to a certain extent. During the maturity stage, the prices are either kept at the same level or lower down to face the competition. In the declining stage, prices are further reduced to maintain demand.

B. EXTERNAL FACTORS: External factors are those which are generally beyond the control of the company. These are as follows:

1. Product Demand: Product demand has a great impact on pricing. Since demand is affected by many factors, such as: number of prospective buyers, their preferences, their capacity and willingness to pay, number of competitors, what they are charging for similar products, etc. Therefore, these factors must be taken into consideration while fixing the price.

2. Elasticity of demand: Price elasticity of demand also affects the pricing decision. Price elasticity means a relative change in demand due to certain percentage change in price of the commodity. If the demand of product is inelastic, high price may be fixed. Contrary to it, if demand is elastic, the firm cannot fix high prices rather it should fix lower prices than that of competitors.

3. Competition: No manufacturer is free to decide his prices without considering competition unless he has monopoly. Competition is a crucial factor in price determination. While determining the prices, a marketer must know the pricing objectives, policies and strategies, strengths and weaknesses of the competitors. This also helps to know the possibilities of raising or lowering the prices. Even in monopolistic conditions, the manufacturer has to consider the competition with that of substitute products while deciding the price of his product. For example, if price of scooter increases, the consumers will shift towards motorcycle. Number of competitors and their sizes also affect the price decisions.

4. Economic conditions: Economic  environment of the country is an important factor affecting the pricing decisions. Inflationary and deflationary conditions affect the pricing. In recession period the prices are reduced to a sizable extent to maintain the level of turnover. On the other hand, the prices are increased during the boom period to cover the increasing cost of production and distribution. To meet the changing economic conditions, several pricing decisions are available, such as:

(i) Prices can be boosted to protect profits against rising costs;

(ii) Price protection system can we linked with the price on delivery to current costs;

(iii) Emphasis can be shifted from sales volume to profit margin and cost reduction, etc.

5. Government regulations: The government of the country influences the pricing policies in a number of ways. Government regulates the prices of the products, it makes available services it renders to the community like electricity, transport, railway, postal, etc. Government interference in the form of taxes and fixation of prices , influence the pricing decisions. Like other marketers, government also sells necessity goods through its fair price shops such as sugar, rice, kerosene oil, atta, etc.

Government happens to be the largest employer and the buyer in the economy affecting the pricing system. Government has framed different laws to restrict price hikes, artificial scarcity, consumer exploitation, and monopoly tendencies. These are MRTP Act, Essential Commodities Act , Consumer protection Act and so on. The prices cannot be fixed higher, as government keeps a close watch on prices in the private sector. 

6. Consumer behaviour: The behaviour of the consumers and users for the purchase of a particular product, do affect pricing, particularly if their number is large. In other words, the composition and behaviour of consumers have a great impact on pricing decisions. For example, if the consumers are small users, though large in number as in case of daily needs consumer products, they do not have much influence on pricing decisions. On the other hand few consumers , but large users have considerable influence on the pricing decisions.

The pricing decisions are also affected by the fact Whether the consumer is an individual industrial user or a household user. The firm cannot have the same price policy for both the classes of consumers. Buying pattern of the consumers also plays an important role in prisoning of a product. If the purchase frequency of product is higher, lower prices may be fixed, resulting in higher sales along with the higher overall total profit. 

7. Distribution channel: A number of intermediaries exist between the manufacturer and the final consumer. Each of them charges for their services, which ultimately adds up to the cost of the product. Therefore, longer the distribution channel, higher will be the price of the product and vice-versa. If due attention is not given on this factor, it might happen that the price of a product may become so high that the consumer might reject it. 

8. Suppliers: Suppliers of inputs, especially raw materials and fabricated parts have great impact on the price of a product. If the suppliers raise the price, it will lead the manufacturer to increase the price of the product, which will ultimately affect the consumers. The scarcity or abundance of the raw material also has considerable influences on the final pricing decisions.

9. Market position of a company: Besides the above, there are a number of factors which directly or indirectly influences the pricing decisions. Such as: social and ethical considerations, consumers’ reactions towards rising prices, wage rates, productivity, trade customs, speculation, etc. 

Thus, the above are some important factors which affect the pricing decisions of a company. The marketers obviously can exercise substantial control over the internal factors, while they have little control over the external factors.

PROCESS OF PRICE SETTING IN PRACTICE 

There is no specific procedure applicable to all forms for price determination. Generally , the following procedure may be followed. 

1. Select the target market: The very first step for determining the base price of a product is to select the segment or segments, where the marketer wants to pursue. The demographic and psychographic characteristics of the selected segment will effect the pricing decision.

2. Identify the potential customers: The potential customers are those who will pay the price for a product. They are therefore, the focal point in price determination. It is short-sighted (narrow or limited way of thinking) to select a pricing policy or strategy without first identifying those people whom the pricing plan is supposed to affect. The buying motives, paying capacity, location, price sensitivity, consumer’s prior attitude about the marketer and his brand, etc. of the potential customers will have considerable effect on price determination.

3. Estimate the demand: Each price level gives different levels of demand. Higher the price, lower will be the demand. Estimating the demand for an established product is easier than for a new product. There are two steps in estimation of demand:

(a) Knowing the expected prices.

(b) Determining the sales volume at various prices. 

Expected price refers to price range. Surveys may be conducted of potential buyer or competitor’s prices may be studied or the product may be tested in limited area to know the expected prices. After knowing the price range, sales volume at different prices are estimated. The product with elastic demand will be priced lower than the product with an inelastic demand. For example, the increase in the price of convenience products say salt may not affect the demand. Contrary to it, the increase in price of speciality products say scooter may affect the demand level.

4. Anticipate competitive reactions: After estimating the demand of the product, competitive situation in the present and in future should be studied because present and potential competition also influences the price determination. Competition may come from three sources: 

(i) Competition directly from the substitute products: For example, a scooter manufacturer has to face a competition from the other manufacturers of scooters.

(ii) Competition from the substitute products: For example, a scooter manufacturer has to face a competition from the manufacturers of motorcycle.

(iii) Competition from unrelated products: For example, a scooter manufacturer has to face a competition from the manufacturer of small cars, air-conditioners and consumer durable seeking the same consumer’s disposable income.

Estimating the future competitive situation is more important, when the production of the product can be started with low initial capital and the profit margin is quite attractive. The marketer should study the competitor’s product, price, promotional competition either by reducing the prices or by entering into new market segments.

5. Establish expected share of market: The next step is to determine the market share which a company will try to capture. Low priced products may capture a larger share of the market and a high priced product may capture a small share of market. Larger share of the market can also be captured by adopting promotional techniques and by going for non-price competitive strategy. For deciding the market share, the market share should not be fixed beyond the production capacity of the plant.

6. Select pricing strategy: Keeping in view the marketing objectives in mind, a suitable pricing strategy should be selected. There are two main pricing strategies for pricing the new product.

(I) Skimming Pricing: It is a strategy in which prices are kept high with a view to skim the cream of demand. It is possible when the product has distinctive features or when there is no competition and the consumers are not price sensitive. Later on, the firm can easily lower down the prices to attract other segments of the market.

(II) Penetration Pricing: It is a strategy in which prices are kept low with a view to capture large market share. This strategy is useful when consumers are price sensitive, there is a fear of competition and the cost of production goes down with the increase in sales of production.

Both these strategies have their own merits and demerits. The company has therefore, to select the best suitable strategy.

7. Consider company’s marketing policies: In the next stage of price determination process, the product policies, the distribution policies and the promotion policies of the company must be considered.

(i) Product policies: The price of the product is more influenced by the nature of the product, i.e., whether it is a new product or an old product, perishable product or durable product, consumer product or industrial product. Perishable products which cannot be stored for a long period are priced low to facilitate its easy disposal. The change in fashion also forces the marketer to price the products at a level so that they get disposed off before the fashion changes. 

The composition of product, its quality, durability, resistance to heat, light, water, breaking strength, shrinkage, etc. also affects the prices. Product mix is also one of the consideration.

(ii) Distribution policies: The nature of channels used and the gross margin requirements of the middlemen influence the pricing decisions. The length and complexity of the distribution channel greatly influence the price. The long and more complex channel, higher will be the price and vice-versa.

(iii) Promotional policies: The more the promotional activities undertaken, higher will be the price. Because expenses incurred will have to covered from the price.

8. Select the specific price: After considering all the above facts ultimately a specific price is selected. The selection of a specific price vary under different market conditions. The price may be determined through the forces of demand and supply or by cost of production or on the basis of competition prices. 

There is no readymade formula for fixing the prices. It requires a lot of experience to have a good pricing decision after following the procedure. The price must be fixed by watching the interest of all the parties i.e. a fair return on investment to manufacturer, a good profit margin to middlemen and a fair price to consumers.