C Question Paper

Business Organisation and Management
~ 1 ~Part – A (Business Organisation) Unit – I .................................................................................................................... 13

Definitions: .......................................................................................................................................................... 13
Characteristics / features of business: ................................................................................................................ 14
1. Entrepreneur: ............................................................................................................................................... 14
2. Economic activities: ....................................................................................................................................... 14
3. Exchange of goods and services: .................................................................................................................... 14
4. Profit motive: ................................................................................................................................................ 15
5. Risk and uncertainty: .................................................................................................................................... 15
6. Continuity of transaction: .............................................................................................................................. 15
7. Creation of utility:.......................................................................................................................................... 15
8. Organisation: ................................................................................................................................................ 15
9. Financing: ..................................................................................................................................................... 15
10. Customer satisfaction: ................................................................................................................................ 15
11. Satisfying social needs: .............................................................................................................................. 16
Functions of business: .......................................................................................................................................... 16
1. Production function: ....................................................................................................................................... 16
2. Marketing function: ........................................................................................................................................ 16
3. Personnel function: ......................................................................................................................................... 16
4. Finance function:............................................................................................................................................ 16
5. Purchase function: .......................................................................................................................................... 16
6. Public relations function: ................................................................................................................................. 16
7. Legal function: ............................................................................................................................................... 17
8. R&D function: ............................................................................................................................................... 17
9. Advertising and sales promotion function: ......................................................................................................... 17
Industry ......................................................................................................................................................................... 17
Types: ................................................................................................................................................................. 17
a. Genetic industry: .......................................................................................................................................... 17
b. Extractive industry: ....................................................................................................................................... 18
2. Secondary industries: .................................................................................................................................... 18
a. Manufacturing industry: ................................................................................................................................ 18
a. Analytical industry: ....................................................................................................................................... 18
b. Processing industry: ...................................................................................................................................... 18
c. Synthetic industry: ........................................................................................................................................ 18
b. Construction industry: ..................................................................................................................................... 18
3. Tertiary or service industry:........................................................................................................................... 18
Commerce ...................................................................................................................................................................... 19
Definition: ............................................................................................................................................................ 19
Components: ....................................................................................................................................................... 19
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Def: ..................................................................................................................................................................... 19
a. Internal trade: ............................................................................................................................................... 19
 Local trade: .................................................................................................................................................. 19
 State trade: .................................................................................................................................................. 19
 Inter-state trade: ........................................................................................................................................... 19
b. External trade:.............................................................................................................................................. 19
c. Wholesale trade: .......................................................................................................................................... 20
d. Retail trade:.................................................................................................................................................. 20
2. Aids to trade: ................................................................................................................................................ 20
a. Transport: .................................................................................................................................................... 20
b. Distribution: .................................................................................................................................................. 20
c. Banking: ....................................................................................................................................................... 20
d. Warehousing: ................................................................................................................................................ 21
e. Advertisement and salesmanship: ................................................................................................................ 21
f. Insurance: ..................................................................................................................................................... 21
g. Communication: ........................................................................................................................................... 21
Differences /Relationship of Trade, industry and commerce ............................................................................................ 21
Characteristics: .......................................................................................................................................................... 23
1. Individual initiative: ....................................................................................................................................... 23
2. Unlimited liability: ......................................................................................................................................... 23
3. Management and control: ................................................................................................................................ 23
4. Motivation: .................................................................................................................................................... 23
5. Secrecy: ........................................................................................................................................................ 23
6. Proprietor and proprietorship are one: ............................................................................................................... 23
7. Owners and business exist together: .................................................................................................................. 23
8. Limited area of operations: .............................................................................................................................. 23
Advantages of sole proprietorship: ............................................................................................................................. 24
1. Easy in formation: .......................................................................................................................................... 24
2. Better control: ................................................................................................................................................ 24
3. Flexibility in operations:.................................................................................................................................. 24
4. Retention of business secrets:........................................................................................................................... 24
5. Easy to raise finance: ...................................................................................................................................... 24
6. Direct motivation: .......................................................................................................................................... 24
7. Promptness in decision making: ....................................................................................................................... 24
8. Direct accessibility to consumers: ..................................................................................................................... 25
9. Inexpensive management: ............................................................................................................................... 25
10. No legal restrictions: ................................................................................................................................... 25
11. Socially desirable: ....................................................................................................................................... 25
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12. Self-employment: ....................................................................................................................................... 25
13. Healthy relations with employees: ................................................................................................................. 25
14. Benefit of inherited good will: ...................................................................................................................... 25
Disadvantages / Limitations of sole proprietorship: .................................................................................................... 25
1. Limited resources: .......................................................................................................................................... 25
2. Limited managerial ability: .............................................................................................................................. 26
4. Continuity is uncertain: ................................................................................................................................... 26
5. Limited scope of employees:............................................................................................................................ 26
6. No large scale economies: ............................................................................................................................... 26
7. More risk involved: ........................................................................................................................................ 26
Partnership ..................................................................................................................................................................... 26
Definitions: ................................................................................................................................................................. 27
Characteristics of Partnership: ................................................................................................................................... 27
1. Association of two or more persons: ................................................................................................................. 27
2. Contractual relationship: ................................................................................................................................. 27
3. Earning of profits: .......................................................................................................................................... 27
4. Existence of business: ..................................................................................................................................... 27
5. Implied authority: ........................................................................................................................................... 28
7. Principal and agent relationship: ....................................................................................................................... 28
8. Utmost good faith: .......................................................................................................................................... 28
9. Restriction on transfer of shares: ...................................................................................................................... 28
10. Common management: ................................................................................................................................ 28
11. Partners and partnership are one: .................................................................................................................. 28
12. Capital contribution:.................................................................................................................................... 28
13. Protection of minority interest: ..................................................................................................................... 29
14. Continuity: ................................................................................................................................................. 29
Advantages of Partnership : ....................................................................................................................................... 29
1. Easy to form: ................................................................................................................................................. 29
2. Large resources: ............................................................................................................................................. 29
3. Greater managerial talent:................................................................................................................................ 29
4. More credit standing: ...................................................................................................................................... 29
5. Promptness in decision making: ....................................................................................................................... 29
6. Sharing of risk: .............................................................................................................................................. 29
7. Relationship between work and reward: ............................................................................................................ 30
8. More possibility of growth and expansion: ........................................................................................................ 30
9. Close supervision: .......................................................................................................................................... 30
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10. Flexibility of operations: .............................................................................................................................. 30
11. Secrecy: ..................................................................................................................................................... 30
12. Protection of minority interests: .................................................................................................................... 30
13. Easy dissolution:......................................................................................................................................... 30
14. Democratic administration: .......................................................................................................................... 30
15. Saving in managerial expenses: .................................................................................................................... 31
Disadvantages / Limitations of Partnership: ............................................................................................................... 31
2. Limited resources: .......................................................................................................................................... 31
3. Instability: ..................................................................................................................................................... 31
4. Mutual distrust: .............................................................................................................................................. 31
5. Limitations on transfer of share: ....................................................................................................................... 31
6. Burden of implied authority: ............................................................................................................................ 31
7. Lack of public faith: ....................................................................................................................................... 31
8. Lack of prompt decision: ................................................................................................................................. 32
9. Cautious approach: ......................................................................................................................................... 32
Kinds of Partners: ................................................................................................................................................. 32
1. Active or managing partner:............................................................................................................................. 32
2. Sleeping or dormant partner: ............................................................................................................................ 32
3. Nominal or ostensible partner: ......................................................................................................................... 32
4. Partner by estoppel or holding out: ................................................................................................................... 32
5. Partner in profits only: .................................................................................................................................... 32
6. Minor as a partner: ......................................................................................................................................... 32
7. Secret partner: ................................................................................................................................................ 33
8. Sub- partner: .................................................................................................................................................. 33
Partnership deed:................................................................................................................................................ 33
Contents: .............................................................................................................................................................. 33
Differences between Sole-trade business and partnership: ........................................................................................ 33
Introduction .......................................................................................................................................................... 34
a) Mitakshara: ................................................................................................................................................... 35
b) Dayabhaga: ................................................................................................................................................... 35
Characteristics: ..................................................................................................................................................... 35
2. Membership by birth:...................................................................................................................................... 35
3. Management: ................................................................................................................................................. 35
4. Limited liabilities of others: ............................................................................................................................. 35
5. Continuity: .................................................................................................................................................... 35
6. Minor also a member: ..................................................................................................................................... 36
7. Accounts: ...................................................................................................................................................... 36
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8. Implied authority of karta: ............................................................................................................................... 36
Advantages: .......................................................................................................................................................... 36
2. Utmost secrecy:.............................................................................................................................................. 36
3. Quick decision: .............................................................................................................................................. 36
4. Credit facilities:.............................................................................................................................................. 36
5. Work according to capacity: ............................................................................................................................ 36
6. Natural love between members: ....................................................................................................................... 36
7. Economy: ...................................................................................................................................................... 36
8. Limited liability: ............................................................................................................................................ 37
Disadvantages: ...................................................................................................................................................... 37
2. Limited capital: .............................................................................................................................................. 37
3. Limited managerial skill: ................................................................................................................................. 37
4. Suspicion: ..................................................................................................................................................... 37
Difference between Sole Proprietorship and Hindu Undivided family .......................................................................... 37
Definitions: ................................................................................................................................................................. 39
Characteristics: .......................................................................................................................................................... 39
1. Voluntary membership: ................................................................................................................................... 39
2. Political and religious neutrality: ...................................................................................................................... 40
3. Democratic management: ................................................................................................................................ 40
4. One man, one vote: ......................................................................................................................................... 40
5. Service motive: .............................................................................................................................................. 40
6. Distribution of surplus: ................................................................................................................................... 40
7. Cash trading: ................................................................................................................................................. 40
8. Limited interest on investments: ....................................................................................................................... 40
9. State control: ................................................................................................................................................. 41
10. Co-operative education and training: ............................................................................................................. 41
Advantages / Merits of Co-operative Society: ............................................................................................................. 41
1. Open membership: ......................................................................................................................................... 41
2. Service motto: ................................................................................................................................................ 41
3. Supply of goods at cheaper rates: ..................................................................................................................... 41
4. Democratic management: ................................................................................................................................ 41
5. Low management costs: .................................................................................................................................. 41
6. Surpluses shared by members: ......................................................................................................................... 42
7. Check on other business: ................................................................................................................................. 42
Disadvantages / Limitations / Demerits of Co-operative Society: ................................................................................ 42
1. Lack of capital: .............................................................................................................................................. 42
2. Lack of unity among members: ........................................................................................................................ 42
3. Cash trading: ................................................................................................................................................. 42
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4. Political interference: ...................................................................................................................................... 42
Unit - III.......................................................................................................................................................................... 43
Definitions: .......................................................................................................................................................... 43
Characteristics: .................................................................................................................................................... 43
2. Independent legal entity: ................................................................................................................................. 43
4. Common seal: ................................................................................................................................................ 44
5. Transferability of shares: ................................................................................................................................. 44
6. Separation of ownership and management: ........................................................................................................ 44
7. Perpetual existence: ........................................................................................................................................ 44
8. Corporate finance: .......................................................................................................................................... 44
9. Centralised and delegated management: ............................................................................................................ 44
10. Publication of accounts: ............................................................................................................................... 45
1. Accumulation of large resources: ..................................................................................................................... 45
3. Continuity of existence: .................................................................................................................................. 45
4. Efficient management: .................................................................................................................................... 45
5. Economies of large scale production: ................................................................................................................ 45
6. Transferability of shares: ................................................................................................................................. 45
7. Ability to cope with changing business environment: .......................................................................................... 45
8. Diffused risk: ................................................................................................................................................. 46
9. Democratic set-up: ......................................................................................................................................... 46
10. Social benefits: ........................................................................................................................................... 46
Disadvantages / Limitations / Demerits of Company : ................................................................................................ 46
1. Difficulty of formation: ................................................................................................................................... 46
2. Separation of ownership and management: ........................................................................................................ 46
3. Evils of factory system: ................................................................................................................................... 46
4. Speculation in shares: ..................................................................................................................................... 46
5. Fraudulent management: ................................................................................................................................. 47
6. Lack of secrecy: ............................................................................................................................................. 47
7. Delay in decision making: ............................................................................................................................... 47
8. Concentration of economic power: ................................................................................................................... 47
9. Excessive State regulations: ............................................................................................................................. 47
TYPES OF COMPANY ......................................................................................................................................... 47
1. Classification of Companies by Mode of Incorporation ................................................................................... 47
2. Classification of Companies by Mode of liability:............................................................................................ 48
3. On the Basis of Transferability of Shares ............................................................................................................... 48
A. Private Company.......................................................................................................................................... 48
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B. Public company ............................................................................................................................................. 49
III. On the basis of Ownership ............................................................................................................................ 49
1. Holding Company [Sec. 4(4)]. ....................................................................................................................... 49
V. On the basis of Nationality of the Company ................................................................................................... 50
Incorporation of a company: ................................................................................................................................ 50
Steps: ................................................................................................................................................................... 50
1. Application for approval of name: .................................................................................................................... 50
2. Memorandum of Association (MOA):............................................................................................................... 50
a. Name clause: ................................................................................................................................................. 50
b. Situation clause: ............................................................................................................................................. 51
c. Objective clause: ............................................................................................................................................ 51
d. Liability clause:.............................................................................................................................................. 51
e. Capital clause: ............................................................................................................................................... 51
f. Subscription and association clause: ................................................................................................................. 51
Alterations: .......................................................................................................................................................... 51
3. Articles of Association: ................................................................................................................................... 52
Contents: .............................................................................................................................................................. 52
Alterations: .......................................................................................................................................................... 52
4. Preparation of other documents: ....................................................................................................................... 53
5. Payment of fees: ............................................................................................................................................. 53
6. Incorporation certificate: ................................................................................................................................. 53
Prospectus ................................................................................................................................................................. 53
Contents: .............................................................................................................................................................. 53
Statement in lieu of prospectus: .......................................................................................................................... 54
Differences:.......................................................................................................................................................... 54
Concept of management: .................................................................................................................................... 58
Planning Directing ............................................................................................................................................. 59
Definitions: .......................................................................................................................................................... 59
- Fredrick Winslow Taylor ..................................................................................................................................... 59
- Henry Fayol .................................................................................................................................................. 59
- Koontz and O’ Donnell .................................................................................................................................. 59
- George Terry .................................................................................................................................................. 59
1. Multidisciplinary: .......................................................................................................................................... 60
2. Management is a group activity: ................................................................................................................... 60
3. Management is goal- oriented: ..................................................................................................................... 60
4. Management is a factor of production: .......................................................................................................... 60
5. Management is universal in character: ............................................................................................................ 60
6. Management is a social process: .................................................................................................................. 60
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7. Management is a system of authority: ........................................................................................................... 60
8. Management is a dynamic function: .............................................................................................................. 61
9. Management is an art as well as science:...................................................................................................... 61
10. Management is a profession: ...................................................................................................................... 61
Importance: ......................................................................................................................................................... 61
1. Optimum utilisation of resources: .................................................................................................................. 61
2. Leadership and motivation:........................................................................................................................... 61
3. Initiative and innovation: ............................................................................................................................... 61
4. Minimizes wastages: ..................................................................................................................................... 61
5. Industrial peace: ........................................................................................................................................... 62
6. Builds competitive strength: .......................................................................................................................... 62
7. Improves standard of living: .......................................................................................................................... 62
8. Growth, expansion and diversification:.......................................................................................................... 62
9. Social consciousness: .................................................................................................................................... 62
Administration Vs Management .......................................................................................................................... 62
1. Administration is different from management: ............................................................................................... 62
2. Administration is part of management: .......................................................................................................... 62
3. Administration and management are one: ..................................................................................................... 62
Differences:.......................................................................................................................................................... 63
1. Division of labour and specialisation / work ................................................................................................... 64
2. Authority and responsibility: .......................................................................................................................... 65
3. Discipline: ..................................................................................................................................................... 65
4. Unity of command: ........................................................................................................................................... 65
5. Unity of direction:.......................................................................................................................................... 65
6. Subordination of individual interest to general interest: .................................................................................. 65
7. Remuneration: ............................................................................................................................................. 65
8. Centralisation and decentralisation: .............................................................................................................. 65
9. Scalar chain: ................................................................................................................................................. 66
10. Order: ....................................................................................................................................................... 66
11. Equity:....................................................................................................................................................... 66
12. Stability of tenure: ..................................................................................................................................... 66
13. Initiative: ................................................................................................................................................... 66
14. Espirit-de-corps: ........................................................................................................................................ 66
Functions of Management: ......................................................................................................................................... 66
Planning ......................................................................................................................................................................... 69
Definitions: .......................................................................................................................................................... 69
- Koontz and O’ Donnell ...................................................................................................................................... 69
- Louis A. Allen .................................................................................................................................................. 70
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2. It helps management to face the future with confidence: ................................................................................ 70
3. It focuses its attention on objectives:................................................................................................................ 70
4. It leads to optimum utilisation of resources: ................................................................................................... 70
5. It increases overall efficiency: ......................................................................................................................... 70
6. It provides premises for effective control: .............................................................................................................. 70
7. It guides decision-making: ............................................................................................................................ 70
8. It facilitates coordination: .............................................................................................................................. 70
9. It helps in performance evaluation: ............................................................................................................... 70
10. It makes provisions for contingencies: .......................................................................................................... 71
Process of planning: ............................................................................................................................................. 71
1. Recognising need for action: .......................................................................................................................... 71
2. Gathering necessary information: ................................................................................................................. 71
3. Laying down objectives: ................................................................................................................................. 71
4. Determining planning premises: ......................................................................................................................... 71
5. Examining alternative course of action: ......................................................................................................... 71
6. Evaluation of action patterns:........................................................................................................................ 71
7. Determining secondary plans: ........................................................................................................................ 72
8. Implementation of plans: .............................................................................................................................. 72
- George Terry .................................................................................................................................................. 72
- Mac Farland ................................................................................................................................................... 72
As you can see, there are seven steps in effective decision making. ........................................................................ 73
Step 2: Gather relevant information. ................................................................................................................... 73
Step 3: Identify alternatives. ................................................................................................................................ 73
Step 4: Weigh evidence. ..................................................................................................................................... 73
Step 5: Choose among alternatives. ...................................................................................................................... 73
Step 6: Take action. ............................................................................................................................................ 73
Step 7: Review decision and consequences. .......................................................................................................... 74
1. Identification of a problem: ............................................................................................................................ 74
2. Diagnosing the problem:............................................................................................................................... 74
3. Analysis of a problem: .................................................................................................................................. 74
4. Collecting information: .................................................................................................................................. 74
5. Identifying the alternate courses of action: .................................................................................................... 74
6. Evaluation of alternatives: ............................................................................................................................ 74
7. Choice of the best alternatives: ..................................................................................................................... 74
8. Conversion of decision into action: ................................................................................................................ 74
9. Progressive review: ....................................................................................................................................... 75
Importance of decision making............................................................................................................................ 75
2. Pervasiveness of decision making:.................................................................................................................. 75
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3. Evaluation of managerial performance:......................................................................................................... 75
4. Helpful in planning and policies: .................................................................................................................... 75
5. Selecting the best alternatives: ..................................................................................................................... 75
6. Successful; operation of business: .................................................................................................................. 75
Unit – V ......................................................................................................................................................................... 76
Introduction: ........................................................................................................................................................... 76
Definitions: ............................................................................................................................................................. 76
- Louis A. Allen .................................................................................................................................................. 76
- Koontz and O’ Donnell ...................................................................................................................................... 76
- George Terry .................................................................................................................................................. 76
- L.H. Haney ..................................................................................................................................................... 76
Advantages: ......................................................................................................................................................... 77
2. Better discipline: ........................................................................................................................................... 77
3. Balanced and prompt decisions: ..................................................................................................................... 78
4. Growth and expansion:................................................................................................................................. 78
5. Development of employees: ......................................................................................................................... 78
6. Lesser burden on line officers: ........................................................................................................................ 78
7. Quick actions: ............................................................................................................................................... 78
Disadvantages: .................................................................................................................................................... 78
2. Lack of responsibility: ..................................................................................................................................... 78
3. More dependence on staff: ........................................................................................................................... 79
4. Lack of co-ordination: ................................................................................................................................... 79
5. Ineffective staff: ............................................................................................................................................ 79
6. Expensive: .................................................................................................................................................... 79
The matrix design: ................................................................................................................................................ 79
Advantages: ......................................................................................................................................................... 80
Span of Control ................................................................................................................................................... 80
Def: ..................................................................................................................................................................... 80
- Spriegal ........................................................................................................................................................ 80
Determining of the proper span: .......................................................................................................................... 80
Factors determining the span of management: ................................................................................................... 81
Def: ..................................................................................................................................................................... 82
Nature : ............................................................................................................................................................... 83
Process: ............................................................................................................................................................... 83
1. Estimating manpower needs: ....................................................................................................................... 83
2. Recruitment and selection of staff: ................................................................................................................ 83
3. Training and development: ........................................................................................................................... 83
4. Promotion and transfer: ................................................................................................................................ 84
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5. Remuneration: ............................................................................................................................................. 84
6. Performance appraisal: .................................................................................................................................. 84
Need and importance: ......................................................................................................................................... 84
2. Keep pace with new developments: .............................................................................................................. 84
3. Manpower development: .............................................................................................................................. 84
4. Optimum utilization of manpower: ................................................................................................................. 84
5. Ensuring job satisfaction: ............................................................................................................................... 85
Def: ..................................................................................................................................................................... 85
Process: Job analysis ............................................................................................................................................... 85
Sourcing .............................................................................................................................................................. 85
Screening and selection ........................................................................................................................................ 86
Lateral hiring ....................................................................................................................................................... 87
Selection ................................................................................................................................................................. 87
Def: ..................................................................................................................................................................... 87
Selection procedure: ........................................................................................................................................... 87
1. Receipt and scrutiny of applications: ............................................................................................................. 87
2. Preliminary interview: ................................................................................................................................... 87
3. Blank application: .......................................................................................................................................... 88
4. Tests: ........................................................................................................................................................... 88
5. Interviews: ................................................................................................................................................... 88
6. Checking references: ..................................................................................................................................... 88
7. Preliminary and final selection: ..................................................................................................................... 88
8. Physical education: ........................................................................................................................................ 89
9. placement and orientation: ........................................................................................................................... 89
Performance Appraisal ......................................................................................................................................... 89
Definitions: .......................................................................................................................................................... 89
TECHNIQUES OF PERFORMANCE APPRAISAL ..................................................................................................... 90
Traditional Methods ............................................................................................................................................ 90
A. Ranking Method ........................................................................................................................................... 90
B. Graphic Rating Scales ................................................................................................................................... 90
C. Critical Incident Method ................................................................................................................................ 90
Modern Methods ................................................................................................................................................. 91
D. Management by Objectives .......................................................................................................................... 91
G. Humans Resource Accounting ....................................................................................................................... 91
H. Assessment Centers ...................................................................................................................................... 91
I. 360 Degree .................................................................................................................................................. 92
Directing ............................................................................................................................................................. 92
Def: ..................................................................................................................................................................... 92
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Nature or characteristics of direction: .................................................................................................................. 93
2. It initiates action: .......................................................................................................................................... 93
3. It provides necessary link between various managerial functions: .................................................................. 93
4. It is a universal function: ............................................................................................................................... 93
5. It is concerned with human relationships: ...................................................................................................... 93
Principles of effective direction: ........................................................................................................................... 93
2. Unity of command: ....................................................................................................................................... 93
3. Unity of direction:.......................................................................................................................................... 93
4. Direct supervision:........................................................................................................................................ 93
5. Participative or democratic management: ..................................................................................................... 94
6. Effective communication: ............................................................................................................................. 94
7. Follow-up: .................................................................................................................................................... 94
Importance of direction:....................................................................................................................................... 94
2. Improves efficiency: ..................................................................................................................................... 94
3. Ensures co-ordination: ................................................................................................................................... 94
4. Helpful in implementing changes: ................................................................................................................. 94
5. Provides stability: .......................................................................................................................................... 94
6. Motivation: ................................................................................................................................................... 94
7. Supervision: .................................................................................................................................................. 94
8. Co-ordination: .............................................................................................................................................. 94
Motivation theories .............................................................................................................................................. 95
Def: ..................................................................................................................................................................... 95
- Berelson and Steiner ...................................................................................................................................... 95
Theories of motivation: ........................................................................................................................................ 95
Maslow’s need hierarchy:.................................................................................................................................... 95
1. Physiological needs: ......................................................................................................................................... 96
2. Safety needs: ................................................................................................................................................ 96
3. Social needs: ................................................................................................................................................ 97
4. Esteem or ego needs: .................................................................................................................................... 97
5. Self fulfillment or actualization needs: ........................................................................................................... 97
Herzberg’s motivation: ........................................................................................................................................ 97
Maintenance or hygiene factors: ......................................................................................................................... 97
Motivational factors: ............................................................................................................................................ 98
Communication ................................................................................................................................................... 98
Process of Communication ................................................................................................................................. 98
1. Sender: ......................................................................................................................................................... 99
2. Message: ...................................................................................................................................................... 99
4. Channel: ....................................................................................................................................................... 99
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5. Decoding: ..................................................................................................................................................... 99
6. Receiver: ...................................................................................................................................................... 99
7. Feedback: ................................................................................................................................................... 100
Leadership ......................................................................................................................................................... 100
Def: ................................................................................................................................................................... 100
- Koontz and O’ Donnell .................................................................................................................................... 100
- George R. Terry ............................................................................................................................................. 100
- Mary Parker Follet ......................................................................................................................................... 100
1. Autocratic or authoritarian style leader: ....................................................................................................... 101
2. Laissez-fare or free-rain style leader: .......................................................................................................... 101
Features: ........................................................................................................................................................... 101
3. Democratic or participative style leader:...................................................................................................... 101
Features: ........................................................................................................................................................... 101
Benefits: ............................................................................................................................................................ 102
4. Bureaucratic or rules-centred leadership: ................................................................................................... 102
Features: ........................................................................................................................................................... 102
5. Manipulative leadership style:..................................................................................................................... 102
Suitability: ......................................................................................................................................................... 102
6. Paternalistic style leader: .............................................................................................................................. 102
Controlling ............................................................................................................................................................. 103
Def: ................................................................................................................................................................... 103
- Koontz and O’Donnel ..................................................................................................................................... 103
- Henry Fayol .................................................................................................................................................. 103
Controlling techniques: ........................................................................................................................................... 104
2. Financial Statements ....................................................................................................................................... 104
10. Self-Control ................................................................................................................................................ 106
Part – A (Business Organisation)
Unit – I
Business
Business may be defined as an activity concerned with the production and exchange of goods and services
with the objective of earning profits. The word ‘Business’ literally means ‘ a state of being busy’. An entrepreneur
runs a factory, a trader sells goods, a banker lends money, an insurer covers risk, a marketer satisfies his
customers, a warehouse-owner stores the goods, a transporter transports passengers and goods, etc. All
these are business activities. These activities are undertaken to earn a profit or a living out of them. People
remain busy on one thing or the other. Business is innovation.
Definitions:
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According to L.H. Haney, “Business may be defined as human activities directed towards providing
or acquiring wealth through buying and selling goods.”
According to Wheeler, “An institution organised and operated to provide goods and services to the society
under the incentive of private gain.”
According to Urwick and Hunt, “Business is any enterprise which makes, distributes or provides any article
or service which the other members of the community need and are able and willing to pay for.”
Characteristics / features of business:
The following are the characteristics or features of the business:
1. Entrepreneur:
There must be someone to take initiative for establishing a business. The person who recognizes
the need for a product or service is known as entrepreneur. The entrepreneur visualises a business,
combines various factors of production and puts them into a going concern.
2. Economic activities:
Business includes only economic activities. All those activities relating to the production and
distribution of goods and services are called economic activities. These are undertaken with economic
motive. Business is carried on with a profit motive.
3. Exchange of goods and services:
A business involves exchange of goods and services. The goods to be exchanged mat either be
produced or procured from other sources. The exchange of goods and services is undertaken with a
profit motive. The transactions happening in the market at one time is not a business. It means the
purchasing and selling of products is always exchanged from
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one person to another person or from one place to another place on regular basis is known as business.
4. Profit motive:
The profit motive is an important element of business. Any activity undertaken without profit motive is
not business. A businessman tries to earn more and more profits out of his business activities. The
incentive of earning profits keeps a person in a business and is also necessary for the continuity of the
business. The object of starting of business is to earn profit though there may be losses. The business
activity will flourish more when the business serves the society.
5. Risk and uncertainty:
The business involves a large element of risk and uncertainty. In fact, a business man foresees the
future uncertainties and plans his business accordingly. The factors on which business depends are
never certain, so the business opportunities will also be uncertain. There may be a shift in demand, strike
by employees, floods, war, fall in prices, fluctuations in money market etc.
6. Continuity of transaction:
In business, only those transactions are included which have regularity and continuity. An isolated
transaction will not be called business, even if the person earns profit from that deal. So, the
transactions should have continuity and regularity otherwise they will not be a part of money.
7. Creation of utility:
The goods are provided to the consumers as per their likings and requirements.
Business creates various types of utilities in goods so that consumers may use them. The utility may be
form utility, place utility, time utility. The process of storing goods when they are not required and
supplying them at a time when they are needed is called time utility. Changing the shape of rawmaterial
into finished product is called form utility. Time utility is created by transporting goods from one place to
another place is called place utility.
8. Organisation:
Every enterprise needs an organisation for its successful working. Various business activities
are divided into departments, sections and jobs. An organisation creates the framework for
managerial performance and helps in co-ordinating various business activities.
9. Financing:
Business enterprises cannot move a step without finance. The finances are required for providing
fixed and working capital. The availability of other factors of production also depends upon the
availability of finances. A proper capital structure is a must for the success of the business.
10. Customer satisfaction:
The ultimate aim of business is to supply goods to the customer. The goods are produced for the
customers. If the consumer is satisfied then he will purchase the same thing again. The businessmen
should try to satisfy the customers so that the demand for his products is maintained. The businessman
should try to produce goods according to the
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likings and tastes of customers. The satisfied customers of all business units ensure large number of
satisfied consumers in the society.
11. Satisfying social needs:
The business should aim at serving the society at large. The business is a socio-economic institution.
Now-a-days, the emphasis on the social aspect of business and social obligations of business. It is not
only the public which needs business but business also needs public support. So, business enterprise
must serve public purpose. Some reputed corporate allot not less than 3% of their budget for
discharging their Corporate Social Responsibility
Functions of business:
A business has to perform a number of functions in order to achieve its objectives. Various business
functions are inter-dependent and the efficient performance of all of them is necessary to run the enterprise
effectively. The integration of various functions will be necessary to run an enterprise efficiently. Some of the
functions are given below:
1. Production function:
Production function involves transformation of raw materials into goods and services and
making them useful. A number of inputs such as labour, capital, machinery will also be
necessary to carry out this function. It has become a specialised function in modern business.
2. Marketing function:
Marketing is a process involving activities ranging from getting from producers and
sending them to ultimate consumers or users. It involves all efforts to create customers for the
products and provide maximum satisfaction to them. This function involves various
marketing mix elements are product, price, promotion and physical distribution. It also
involves decisions like product design, package brand name, pricing policies etc.
3. Personnel function:
Personnel function is concerned with people at work and with their relationship with in an
enterprise. It aims to bring together and develop in to an effective organisation. This function
is concerned with employment, development and compensation of the personnel and the
provision of working conditions and welfare measures to maintain a good working force in
organisation.
4. Finance function:
Finance function is the important of all business functions. It remains in focus of all
activities. It is not possible to substitute to eliminate this function because the business will
close down in the absence of finance function. The funds will have to be raised from various
sources. The receiving of money is not enough, its utilisation is more important.
5. Purchase function:
Traditionally, purchase was considered to be a part of production function. However, big

organizations have a separate department for undertaking purchase activities. The purchase
department is entrusted with such activities are by inviting the tenders, locating the sources of
supply, placing order for right quantity at right time, importing raw materials, machines and
equipment etc..
6. Public relations function:
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Modern business houses are becoming more of consumer-oriented the public relations
department is concerned with creating a favourable impression of the business organization on the
government agencies, employees, suppliers, shareholders, consumerists, environmentalists and
others, which may include present and potential customers.
7. Legal function:
Some big business houses have a separate legal department in order to advice business on
legal issues. The legal department ensures that the business unit comply with various rules and
regulations framed by the local, state and central governments from time-to-time.
8. R&D function:
Research and Development (R&D) is an important activity in the modern competitive
business world. R&D has become so significant that many industrial houses have established a
separate R&D department. R&D department consists of experts from various areas, whose
primary job is to experiment new methods and processes.
9. Advertising and sales promotion function:
Although advertising and sales promotion are the part of marketing functions but they
assumed a great importance in the wake of increasing competition.
Industry
Industry is concerned with the making or manufacturing of goods. It is constituent of production
which is involved in changing the form of goods at any stage from raw material to the finished product. The goods
produced may be used by other enterprises as raw materials for further production, they are known as producer
goods. When goods are finally used by consumers they are known as consumers goods. An enterprise may
produce materials which will further be processed by yet another concern for converting them into finished
goods. The following are the types of industries. They are:
Types:
1. Primary industries:
Primary industries relate to all those activities which are connected with the extraction, production,
processing of all natural resources and reproduction of living species.
These industries may be classified as :
a. Genetic industry:
Genetic industry is related to the re-producing and multiplying of certain species of animals
and plants with the object of earning profits from their sale. No doubt nature, climate and
environment play an important part in these industries but human skill is also important. Examples for
genetic industry are nurseries, cattle breeding etc.
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b. Extractive industry:
The extractive industry is engaged in raising some form of wealth from the soil, climate, air, water or
from beneath the surface of the earth. Extractive industries supply basic raw materials that are mostly
the products of the soil. Products are these industries are usually transformed into many useful products
by manufacturing industries. Eg: Mining, crude oils etc..
2. Secondary industries:
Secondary industries are related to the processing of materials which have already been produced
by primary industries. Secondary industry may be divided into:
a. Manufacturing industry:
This industry is engaged in the conversion of raw materials into semi-finished or finished
goods. This industry creates form by making them suitable for human use. These industries supply
machines, tools and other equipment to other industries too. The products of extractive industry are
generally used as raw materials by manufacturing industry which may be classified as follows:
a. Analytical industry:
In this industry, a product is analysed and many products are received as final products. In the
processing of crude oil we will get kerosene, petrol, gas and diesel etc.
b. Processing industry:
In this industry a product passes through various processes to become a final product.
The raw materials can be converted into finished products. Examples for the processing industry
are sugar industry, cotton industry, etc.
c. Synthetic industry:
In this industry many raw materials are brought together in manufacturing process to make a final
product. Examples for synthetic industry are soaps making, paints, cements, rocks, coal, etc.
b. Construction industry:
This industry is engaged in the creation of infrastructure for smooth development of t he economy. It
is concerned with the construction, creation or fabrication of products.
Engineering, architectural skills and constructing firms play an important part in construction industry. Eg:
construction of buildings, dams, roads. etc.
3. Tertiary or service industry:
Tertiary or service sector deals with all those activities which smoothen the flow of goods and services
from the manufacturers/producers to those who use them. Service industry supplements the activities of
primary and secondary industries. Service industry is the back bone of all business activities.
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Commerce
Commerce refers to all those activities which are necessary to bring goods and services from the place of their
origin to the place of their consumption. It is concerned to be a part of business. It is that activity of business which
is concerned with the exchange of goods and services. Commerce includes trade and aids to trade. In the trade
buying and selling is happening but aids to trade relates to provide the help to the trade. It means by using the
various facilities the trade is happened in the right time.
Definition:
According to James Stephenson, “commerce is the sum of total of all those processes, which are engaged
in the removal of hindrance of persons(trade), place (transport and insurance) and time(warehousing) in the
exchange(banking) of commodities.”
According to Evelyn Thomas, “Commercial occupations deal with the buying and selling of goods,
the exchange of commodities and the distribution of the finished products.”
Components:
1. Trade:
Trade means an exchange of goods and services. There are two persons involved in trade
namely, buyer and seller. Trade means buying and selling of goods and services with the use of money or
without the use of money.
Def:
“ Trade involves the transfer of the ownership of goods or services from one person or entity to
another in exchange for other goods or services or for money”
a. Internal trade:
The purchase and sale of goods inside the country is called internal trade. Goods can be taken to
any place but within the boundaries of the country. It may be divided as such:
 Local trade:
When the demand for products is limited only to a particular place, it is called local trade.
Goods are produced according to the local needs of the consumers. The producers and
consumers belong to the same place. Examples for local trade are vegetables, milk etc.
 State trade:
These goods are of a durable nature and sent throughout the state or province. The trade is
limited to the boundaries of the state. Sometimes government puts some restrictions on the sale
of goods outside the state.
 Inter-state trade:
The trade conducted throughout the country but within the national boundaries is called inter-
state trade. The goods traded are of durable nature and can be stocked for a longer period. The
production of these goods is on a large scale basis and they are sent to all parts of the country.
Examples are kerosene, petrol, iron etc.
b. External trade:
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When trade takes place between two countries, it is called foreign trade. Two countries are
involved in foreign trade. The hindrances of place, time, risk, exchange are overcome with the help of
various agencies. External trade may be import trade or export trade. The goods are purchased from
one country is called import trade and the goods are sold to other country is called export trade.
External trade can be further sub-divided into three groups, viz.,

a. Export Trade : When a trader from home country sells his goods to a trader located in another
country, it is called export trade. For e.g. a trader from India sells his goods to a trader located in
China.
b. Import Trade : When a trader in home country obtains or purchase goods from a trader located
in another country, it is called import trade. For e.g. a trader from India purchase goods from
a trader located in China.
c. EntrepotTrade : When goods are imported from one country and then re-exported after doing
some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed
imported goods. For e.g. an indian trader (from India) purchase some raw material or spare parts
from a japanese trader (from Japan), then assembles it i.e. convert into finished goods and then
re-export to an american trader (in U.S.A).
c. Wholesale trade:
In wholesale trade, goods are purchased in large quantities and are sold to retailers. A
wholesaler is a link between the producer and the retailer. This helps the producers in making bulk
production and selling in large quantities.
d. Retail trade:
Retail trade involves selling goods to the final consumers. The goods are sold in small
quantities to the consumers. A retailer purchases goods from a wholesaler and sells them to the
consumers.
2. Aids to trade:
Auxiliaries to business means activities which assist business and trade. They provide proper
infrastructure for the smooth conduct of business and remove the obstacles in the exchange of goods
and services. These services are discussed as follows:
a. Transport:
Goods may be produced at places where they are in less demand. These goods are to be taken to
the places of consumption. The goods are taken from a place where there is less demand. With the
help of transport facilities we can create ‘ place utility’ in goods. The various modes of transport
i.e., road, rail, sea, air have helped the growth of commerce and industries.
b. Distribution:
The producer of goods may not be able to come into direct contact with the consumers. In
the present day world, the consumers are in millions and it is not possible for the producers to know
the consumers. A chain of middlemen acts between the producers and consumers. The chain of
wholesalers, retailers, brokers, agents etc. operate between the producer and the consumer and
remove the hindrance of persons.
c. Banking:
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There is always a time lag between the production and sale of goods. The traders purchase
goods from the producers and then sell to the consumers. It takes time to collect money after sale.
There is a need to finance trade activities for that purpose the financial institutions are providing the
loans, overdrafts etc..to the people.
d. Warehousing:
Goods are produced in anticipation of demand. They may also be produced at a time when
they are not needed. So there is a need to store goods upto a time these are not required for
consumption. There is a time gap in foreign trade because there is a delay in production and
consumption. Agricultural products can be stored in the ware houses, because they are required
throughout a year.
e. Advertisement and salesmanship:
The consumers may not aware of the availability of various goods in the market. The
advertisement and salesmanship help in informing the consumers about the availability and
usefulness of various products in the market.
f. Insurance:
There is a risk involved in transporting goods from one place to another. There can a risk due to
fire or theft. The fear of loss of goods due to any cause acts as an obstacle in the development of
trade. The insurance companies provide a coverage for all types of losses of goods.
g. Communication:
The buyers and sellers at wholesale level and retail level need the services of various
agencies which communicate their message among themselves. The producers intimate to their
customers about the production of goods. The services of post offices, telephones, etc. are utilised
for communicating process.
Differences /Relationship of Trade, industry and commerce
S.No Basis Trade Commerce Industry
1 Meaning It is related to the purchase It deals with all those activities All those activities which deal with
and sale of goods which deal with taking of the conversion of raw materials
goods from producers to into finished goods are
consumers covered in industry
2 Capital The requirements of capital are Commerce requires less Capital needs are high for
more in trade as compared capital industry because it requires
to commerce purchase of huge raw materials and
investments of goods in
process
3 Scope Trade deals only with Commerce includes trading and Industry deals with those goods
purchase and sale of goods other servicing activities which relate to primary,
manufacturing, processing etc.
4 Risk It involves a greater amount of The risk involved in commerce is Industry involves greater
risk of fall in prices or comparatively less. amount of risk as compared to
change in demand any other activity.
Differences between Business, profession and employment
S.No Basis Business Profession Employment

1 Nature of work It involves production and Providing specialised personal Performing the work assigned
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exchange of goods and service. by the employer

services
2 Qualifications No specific qualifications are Specialised qualifications Qualifications are linked to the
required prescribed for the profession nature of work to be undertaken
will be required.
3 Establishment Legal formalities, if required Membership of a professional Appointment will be sufficient
will be performed body is needed to take up the job
4 Investment Investments are needed as Some investments are needed to No investment is required
per the nature and scale of set up office
operations
5 Reward Profit is the reward for Professional fee is charged Salary or wages is the reward for
business from the clients for service service
6 Risk It is faced by lots of risk. Risk is limited There is no risk
7 Code of conduct It may follow the code of Following of code of conduct of Only rules and regulations
conduct devised by business professional body is related to the job are followed
or trade associations essential
8 Motive Profit earning is the motive Service of society and earning Earning of salary to wage is the
of income or fees is the motive.
motive
Unit – II
Forms of Business Organisation
A business organization is an individual or group of people that collaborate to achieve certain
commercial goals. Some business organizations are formed to earn income for owners. Other business
organizations, called nonprofits, are formed for public purposes. The following are
the some of the forms of Organisation:
Sole Tradership/sole proprietorship
Sole-trade is the oldest and most commonly used form of business organisation. It is as old as
civilization. With the development of science and technology the needs of the business also increased
and new forms of organisation developed. This organisation is also known as sole proprietorship. He
makes all investments, shares all risks, takes all profits, manages and controls the business himself.
His powers are unlimited and his decisions are final. A sole-trader mainly depends upon his own
resources, so the business is generally on a small-scale basis. He is, in fact, the sole organiser,
manager, controller and master of his business. The business to be carried on should also be allowed
by law. Normally, no other legal formality is essential for starting a sole-trade business as in the case
of a company or a co-operative. Any person can start or wind up a sole-trade business any time. This
type of business is a one man show and the capacities of that person are limited.
Definitions:
Some of the important definitions are discussed to have a clear view of sole-trade form of
organisation:
According to L.H. Haney, “ the individual entrepreneurship is the form of business organisation
on the head of which stands an individual as the one who is responsible, who directs its operations,
who alone runs the risk of failure.”
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According to James Stephenson, “a sole-trader is a person who carries on business exclusively by
and for himself. He is not only the owner of the capital of the undertaking, but is usually the organiser
and manager and takes all the profits or responsibility for losses.”
According to Kimball and Kimball, “the individual proprietor is the supreme judge of all matter
pertaining to his business. Subject only to the General laws of the land. To such as special legislation
as may affect his particular Business.”
Characteristics:
“One man control is best in the world if that man is big enough to manage the whole show.” This
statement focuses on the following striking characteristics of soletradership:
1. Individual initiative:
This business is started by the initiative of a single person. He prepares the blue prints of the
venture and arranges various factors of production. He may employ other persons for assistance but
ultimate authority and responsibility lies with him.
2. Unlimited liability:
In sole-trade business liability is unlimited. The proprietor is responsible for all losses arising
from the business. The liability is not limited only to his investments in the business but his private
property is also liable for business organisation.
3. Management and control:

The proprietor manages the whole business himself. He prepares various plans and executes
them under his own supervision. There may be some persons to help him but ultimate control lies
with the owner.
4. Motivation:
One person is the sole owner of the business. He takes all profits and bears losses, if any. There is
a direct relationship between efforts and rewards. He is motivated to expand his business activities.
5. Secrecy:
All important decisions are taken by the owner himself. He keeps all the business secrets only to
himself. Business secrets are very important for small business. By retaining business secrets he
avoids competitors entering the same business .
6. Proprietor and proprietorship are one:

Legally, the sole trader and his business are separate entities. Loss in his business is his loss.
Liabilities of the business are his own liabilities.
7. Owners and business exist together:

In sole-trade business there is no separate existence of the business with the owner. The business
and owner exist together. The business is dissolved, when the owner dies, becomes insolvent or is
removed from the scene
8. Limited area of operations:
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A sole-trade business has generally a limited area of operation, the reason being the limited
resources and managerial abilities of the sole-trader. He can arrange limited funds only and will be
able to supervise a small business and the decisions are taken by him so the managerial abilities are
limited.
Advantages of sole proprietorship:
1. Easy in formation:
Sole-proprietorship is the only form of organisation where no legal formalities are required to be
performed. This business is absolutely free from legal formalities. Anybody wishing to start a sole-
trade concern can do so without loss of time.
2. Better control:
In this form of organisation one man is responsible for all types of activities. He controls all
functions of the business. He himself takes decisions at appropriate time. The authority and
responsibility lie with one man. The owner is all in all and he cannot escape his work. The business is
controlled in an effective way.
3. Flexibility in operations:
A sole-proprietorship concern is generally run on a small scale basis. In case a change in operation
is required, it can be possible without involving much expenditure. A small scale concern can adjust
its production according to the changing demand pattern. It can increase and decrease its production
as per requirements. Moreover, no legal formalities are required for making changes in operations. A
soletrader concern is most suitable for industries dealing in seasonal and fashionable goods.
4. Retention of business secrets:

A sole trader can maintain business secrets. Being the sole proprietor, he is not expected to share
his trade secrets with anybody else. He is not expected to publish his accounts. He can maintain
secrecy from his competitors.
5. Easy to raise finance:

An individual entrepreneur is able to create goodwill for his business. This helps him to establish
his creditworthiness in the market. The liability in sole-trade organisation being unlimited, the
creditors can have a claim over the private property of the owner. He can repay the loans as quickly as
possible so that he cannot lose his good will in the market.
6. Direct motivation:
The proprietor takes keen interest in the working of the business. He tries to put his heart and soul
in the business so to earn as much profits as he can. There is a direct relationship in efforts and
reward.
7. Promptness in decision making:
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All important decisions are taken by one person. He can take prompt decisions. He will not let an
opportunity slip away.
8. Direct accessibility to consumers:

In sole-proprietorship the scale of operations is small. The owner can have direct contact with
customers and employees. He can know the reactions, tastes and preferences of consumers. It enables
him to make necessary changes in the quality and design of his products and in turn, he can boost his
sales.
9. Inexpensive management:
The sole-trader is the owner, manager and controller of the business. He does not appoint
specialists for his various functions. He personally supervises various activities and can avoid wastage
in the business.
10. No legal restrictions:

There are no legal requirements for starting a business. There is no special Act governing the work
of sole-proprietor. There is no restriction in changing the nature of business. The tax liability on a
sole-trader is also low. He is taxed as an individual and not as a business unit.
11. Socially desirable:

One man business is generally on a small scale basis. Large number of sole-traders have entered
all types of business. It helps in avoiding concentration of wealth. Sole-trade business also provides
competition to other businesses. The consumers will not be dependent upon big business houses.
12. Self-employment:
The sole-proprietorship form of organisation offers the means of self-employment to those who
do not want to work under others. As everyone cannot get a suitable job to earn his livelihood in a
developing country, the individuals can easily start a small sized business unit as a sole-trader.
13. Healthy relations with employees:

A sole-trader is in a position to maintain direct relations with his employees. This enables the
employer and the employees to understand and appreciate the difficulties of each other. This results
into healthy relations between employer and employees is leads to the success of a business.
14. Benefit of inherited good will:

A sole-trader passes on the business goodwill to his successor. Technically a sole-trade business
is dissolved on the death of the owner but in reality the same business is continued by a heir.
Disadvantages / Limitations of sole proprietorship:
1. Limited resources:
The resources of a sole proprietor are limited. He makes investments from his family sources only.
There is a limit to which a single person can invest. He tries to raise finances from financial
institutions also. The capacity for expanding business operations is limited for want of resources even
when there is a scope for expansion.
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2. Limited managerial ability:

One person may not be expert in each and every function of the business. He will not be able to
devote sufficient time for all types of activities. He will have to depend upon paid employees. The
sole proprietor may not be able to use the services of experts for want of resources. So one person
will not be able to survive effectively. The limited resources will not allow him to use the professional
people.
The liability of a sole proprietor is unlimited. His private property can also be assigned for
meeting business losses. A loss in business may deprive him of his private assets also. Unlimited
liability also restricts his working. He tries to be cautious in taking risks. It acts as a detriment to the
growth of business activities.
4. Continuity is uncertain:
The business continues as far as sole proprietor is there. Incase of his mobility or death, the business
is discontinued. The closure of a business will cause inconvenience to the consumers. It will also
result in social loss.
5. Limited scope of employees:

A sole-trader cannot attract trained and qualified persons for reasons of limited career
opportunities. A sole proprietor cannot offer financial incentives to employees because his activities
are on a small scale. The employees will try to join good concerns whenever an opportunity arises.
6. No large scale economies:

A small scale concern cannot economise in purchases, production and marketing. In a sole trade
concern overhead expenses are also more. So this type of concern cannot enjoy the benefits of large
scale economies.
7. More risk involved:

A sole proprietor is to take all decisions by himself. So there is a possibility of taking wrong
decisions. So the possibility of mistakes and wrong decisions is minimized . Lack of counseling may
create difficult situations.
Partnership
A partnership is an association of two or more persons to carry on, as co-owners, a business and
to share its profits and losses. The partnership may come into existence either as a result of the
expansion of sole trading concern or by means of an agreement. The need for partnership form of
organisation arise from the limitations of sole-proprietorship. In sole-proprietorship, financial
resources and managerial skills were limited. Moreover, risk bearing capacity of an individual was
also limited. So, more persons were associated to form groups to carry on business and they brought
their financial resources and also shared the risk in the business. Sometimes, the nature of business
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demands large amount of capital, effective supervision and greater specialisation. This form is not
suitable for a business requiring big capital and expert managerial personnel.
Definitions:
Some of the important definitions are discussed to have a clear view of partnership form of
organisation:
According to L.H. Haney, “the relationship between persons who agree to carry on a business in
common with a view to private goals.”
According to Section 4 of Partnership Act, 1932, “ the relation between persons who have agreed
to share profits of a business carried on by all or any of them acting for all.”
According to English Partnership act, 1690, “ partnership is the relation which subsist between
persons carrying on a business in common with a view of profits.”
According toKimball and Kimball, “ Apartnership firm as it is often called, is then a group of men
who have joined capital or services for the prosecution of some enterprise.”
Characteristics of Partnership:
1. Association of two or more persons:

In partnership, there must be at least two persons. Partnership is the outcome of a contract, so
there must be two or more persons. Minors cannot form a partnership firm as theyare incompetent to
enter into a contract. According to section 11 of Contract Act, there is no maximum limit on partners
in partnership Act, but according to Companies Act, the maximum number of partners engaged in a
banking business cannot exceed ten and twenty in any another business. The maximum number of
partners in any other business if hundred according to the recent amendment in 2013 to the Indian
Partnership Act – 1932
2. Contractual relationship:
The persons joining the partnership enter into a contract for running the business. According to
Partnership Act, the relation of partnership arises from contract and not from status. The contract may
be oral or written but in practice written agreement is made because it helps to settle the disputes if
they arise later on.
3. Earning of profits:
The purpose of the business should be to make profits and distribute them among partners. If a
work is done for charity purposes or to serve the society it will not be called as partnership. So, the
motive of the business should be to earn profits. It does not mean that there will not be losses but the
motive should be the earning of profits.
4. Existence of business:
Partnership can only be for some kind of business. The term ‘Business’ includes any trade,
profession or occupation. By business we mean all activities concerning production, distribution and
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rendering of services for the purpose of earning profits. It the work is related to social service, we do
not call it a business and, hence, no partnership.
5. Implied authority:
There is an implied authority that any partner can act on behalf of the firm. The business will be
bound by the acts of partners.
As is the case of a sole-trade business liability of the partners of a firm is unlimited. In case
some obligation arises then not only the partnership assets but also the private property of the
partners can be taken for the payment of liabilities of the firm to the third parties. The creditors can
claim their dues from any one of the partners or from all the partners. The partners are liable
individually and collectively.
7. Principal and agent relationship:

In partnership the relationship of Principal and Agent exists. It is not necessary that all partners
should work in the business. Any one or more partners can act on behalf of the other partners. Each
partner is an agent of the firm and his activities bind the firm. He also acts as a principal because he is
bound by the activities of other partners.
8. Utmost good faith:

The very basis of the partnership business are good faith and mutual trust. Every partner should
act honestly and give proper accounts to other partners. The partnership cannot run if there is
suspicion among partners, it is very important that partners should act as trustees and act for the
common good of all. Distrust and suspicion among partners lead to the failure of many firms.
9. Restriction on transfer of shares:

No partner can sell or transfer his share to anybody else without the consent of the other
partners. In case any partner does not want to continue in the partnership, he can give a notice for
dissolution of the firm.
10. Common management:

Every partner has a right to take part in the running of the business. It is not necessary for all
partners to participate in the day-to-day activities of the business but they are entitledto participate.
Even if partnership business is run by some partners, the consent of all other partners is necessary for
taking important decisions.
11. Partners and partnership are one:

A partnership firm has no separate entity from the partners. A firm is only a name to the
collective name of partners. No firm can exist without partners. The rights and liabilities of partners
are the rights and liabilities of the firm. Partners have implied authority to bind the firm for their acts.
12. Capital contribution:
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The partners contribute to the capital of the firm. It is not necessary to have capital in profit
sharing ratio. A partner can be admitted to the firm even without contributing to the capital. It is not
essential that all partners must contribute to the firm’s capital.
13. Protection of minority interest:

All important decisions are generally taken by consensus. It ensures protection of those who may
not agree to the majority view point. A partner may even ask for the dissolution of partnership if he
feels aggrieved.
14. Continuity:
There is no limit for the continuity of a partnership firm. It goes on only upto the time the
partners want it to go. Any misunderstanding among partners, death or insolvency of a partner may
dissolve the partnership. Dissolution of partnership does not necessarily mean dissolution of the firm.
The remaining partners may continue the firm after meeting the claims of outgoing partners.
Advantages of Partnership :
1. Easy to form:
This is a suitable type of organisation requiring no legal formalities. No formal documents are
required to be prepared as is necessary case of company . A simple agreement among partners is
sufficient to start partnership firm. A partnership deed is not necessary though it is advisable to
prepare it. Even the registration of firm is optional.
2. Large resources:
The resources of more than one person are available for the business. The partners can contribute to
start a moderately large-scale concern can also arrange funds from the outside sources.
3. Greater managerial talent:

The partners may be assigned duties according to their talent. Different functional departments
may be managed and controlled by different partners. The talent expertise and knowledge of partners
in different fields can be used for the welfare of the business. It will help to increase the efficiency of
the business resulting in more profits.
4. More credit standing:

The partners may have sufficient contacts in the market. They can offer more securities to the
financial institutions. The liability of partners being unlimited, they will be able to raise more
finances. As compared to a sole-trade business, partnership concern has more credit-worthiness.
5. Promptness in decision making:

The partners meet frequently and they can take prompt decisions. The firm will not lose any
business opportunities because of prompt and timely decision-making.
6. Sharing of risk:
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The risk of business is shared by more persons. The burden of every partner will be much less
as compared to the burden of sole-trade. Furthermore, the business expansion will not be hampered
for fear of risk.
7. Relationship between work and reward:

The partners try to put more labor to earn more and more profits. There is a direct relationship
between work and reward. The more they work, the more they be benefited.
8. More possibility of growth and expansion:

As compared to a sole-trade business, partnership concern has more possibilities for expansion
and growth of business activities. The partner can contribute more and manage the activities more
systematically.
9. Close supervision:
The partners themselves look after the business; so they can avoid wastages. They have direct
access to the employees and can encourage them for more production. The management of
partnership is much cheaper as compared to a company where experts are paid higher salaries.
10. Flexibility of operations:

There is no statutory obligation to seek approval from government before making major changes
in the business set-up, capital and scale of operations. These changes can be made easily depending
upon the business opportunities
11. Secrecy:
A partnership concern is not expected to publish its profit and loss account and balance sheet as
is necessary for a company . The partners can keep the business secrets to themselves. The
competitors don’t know about the exact position of the business. The secrets of business are very
important for a small concern.
12. Protection of minority interests:

Every partner has a right to participate in the management of the business. All important
decisions are taken by the consent of all partners. If a majority decision is enforced on minority then
effected partners can get the business dissolved.
13. Easy dissolution:

The partnership can be dissolved on insolvency, lunacy or death of a partner. If the partnership is
at will, then any partner can get the firm dissolved by giving notice to other partners. No legal
formalities are required at the time of dissolution. So it is easy to start as well as dissolve a partnership
concern.
14. Democratic administration:

All partners may take active interest in the working of the firm. All the partners are consulted
on important decisions. Generally, strategic decisions are taken by consensus only.
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15. Saving in managerial expenses:

There are savings in expenses of a partnership firm. The partners divide all important functions
among themselves and look after them. In other forms like company managerial expenses are huge
because they have to depend on hired employees.
Disadvantages / Limitations of Partnership:
The liability of partners is unlimited. They are not only liable for their business investments but
their private properties can also be taken for business liabilities. Partners try to avoid risks and it
restricts the expansion and growth of the business.
2. Limited resources:
There is a limitation in raising additional resources for expansion purposes. The business
resources are limited to the personal funds of the partners. Borrowing capacity of the partners is also
limited. The number of partners to be added to business is also limited. So, there is a limit beyond
which partners cannot be added.
3. Instability:
The partnership concern suffers from the uncertainty of a duration because it can be dissolved at
the time of death, lunacy or insolvency of a partner. The lack of trust among partners can also lead to
dissolution. The discontinuity of the business is a social loss and it causes inconvenience to the
consumers and workers.
4. Mutual distrust:
The mutual distrust among partners is the main cause for the dissolution of partnership
concerns. It is difficult to maintain harmony among partners because they may have different opinions
and may not agree on certain matters.Lack of confidence in each other can be a cause for quarrels and
it may lead to the dissolution of the firm.
5. Limitations on transfer of share:

No partner can transfer his share to a third party without the consent of the other partners. If a
partner wants his share back it will not be possible without the approval of other partners or without
dissolution of the firm. In partnership, a partner is permanently wedded to it.
6. Burden of implied authority:

A partner can bind the business by his acts. He can act as an agent of the business. A dishonest
partner may lead the business into difficulties. The provision for implied authority may create
problems for the business.
7. Lack of public faith:

The accounts of partnership concerns are not published. So public is unaware of the exact
position of the business. There is no legal binding for the publication of accounts. So partnership
concerns lack of public confidence.
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8. Lack of prompt decision:

All important decisions are taken by the consent of the partners so decision making process
becomes time consuming. There may be possibility of losing business opportunities because of slow
decision making.
9. Cautious approach:
Unlimited liability of partners leads to cautious approach on the part of partners. They try to
avoid decisions where some sort of risked involved. Moreover, risk bearing capacity of partners may
also be limited.
Kinds of Partners:
The different kinds of Partners that are found in Partnership Firms are as follows
1. Active or managing partner:
A person who takes active interest in the conduct and management of the business of the firm is
known as active or managing partner. He carries on business on behalf of the other partners. If he
wants to retire, he has to give a public notice of his retirement; otherwise he will continue to be liable
for the acts of the firm.
2. Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the firm, is bound
by the activities of other partners, and shares the profits and losses of the business. A sleeping partner,
unlike an active partner, is not required to give a public notice of his retirement. As such, he will not
be liable to third parties for the acts done after his retirement.
3. Nominal or ostensible partner:

A nominal partner is one who does not have any real interest in the business but lends his name
to the firm, without any capital contributions, and doesn’t share the profits of the business. He also
does not usually have a voice in the management of the business of the firm, but he is liable to
outsiders as an actual partner.
4. Partner by estoppel or holding out:

If a person, by his words or conduct, holds out to another that he is a partner, he will be stopped
from denying that he is not a partner. The person who thus becomes liable to third parties to pay the
debts of the firm is known as apartner as holding out.
There are two essential conditions for the principle of holding out : (a) the person to be held out
must have made the representation, by words written or spoken or by conduct, that he was a partner ;
and (b) the other party must prove that he had knowledge of the representation and acted on it, for
instance, gave the credit.
5. Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm and would
not be liable for its losses, he is in known as partner in profits only.
6. Minor as a partner:
A partnership is created by an agreement. Thus, at the time of creation of a firm a minor cannot
be one of the parties to the contract. But under section 30 of the Indian Partnership Act, 1932, a minor
‘can be admitted to the benefits of partnership’, with the consent of all partners. A minor partner is
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entitled to his share of profits and to have access to the accounts of the firm for purposes of inspection
and copy. He, however, cannot file a suit against the partners of the firm for his share of profit and
property as long as he remains with the firm. His liability in the firm will be limited to the extent of
his share in the firm, and his private property cannot be attached by creditors.
7. Secret partner:
The position of a secret partner lies between active and sleeping partner. His membership of the
firm is kept secret from outsiders. His liability is unlimited and he is liable for the losses of the
business. He can take part in the working of the business.
8. Sub- partner:
A partner may associate anybody else in his share in the firm. He gives a part of his share to the
stranger. The relationship is not between the sub-partner and the firm but between him and the
partner. He is not liable for the debts of the firm.
Partnership deed:
In a partnership firm, there is a collective and separate responsibility of partners. The acts of the
partners in usual course of business bind the firm. If the partners work with understanding and co-
operation, then the partners will work smoothly. If there is a suspicion among them, then conflicts
among partners are bound to be there. If the areas of dispute, conflict or suspicion are spotted earlier
and a clear understanding is reached, then the business can run smoothly. So, partnership agreement
or deed is a document which is prepared to explain important points so that the changes of conflict are
minimized. Partnership deed forms the basis of partnership. It includes all important clauses like name
of business, contribution of capital, sharing of profits, mode of management etc. the deed must be
signed by the partners. The partnership deed can both be oral or in writing. A written agreement,
however, should be preferred because nobody can dispute the contents.
Contents:
Some of the important clauses to be included in a partnership deed are:
a. The name of the firm;
b. Names and addresses of partners;
c. Nature of business proposed to be carried on by the firm;
d. The total amount of capital and contributions by each partner;
e. The extent to which partners are to take part in the management of the business;
f. Amount of withdrawals to be allowed to each partner;
g. The profit sharing ratio;
h. The amount of salary or commission payable to any partner for the services rendered to the business;
i. Rate of interest to be allowed on capital as well as rate of interest to be charged on drawings;
j. Division of power and duties among partners;
k. The method of evaluating goodwill at the time of admitting a new partner or at the time of retirement
or death of a partner;
l. Procedure for dissolution of the firm and settlement of accounts;
m. Maintenance of books of account and audit of accounts; and
n. Arbitration clause for settlement of disputes among the partners.
Differences between Sole-trade business and partnership:

S.No Basis Partnership Sole-trade
1 Membership Partnership is owned by two or more Sole-trade business is owned and
persons known as partners. controlled by only one person. If a
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second person joins then it becomes a

partnership
2 Agreement To continue partnership, an agreement is A sole-trader does not require any
required is required in the form of formality to start the concern. There is no
partnership deed. The agreement need of agreement in this business
among partners may be express or
implied
3 Registration A partnership concern needs registration No registration of a sole-trade business is
to get certain advantages of registration. required except under Shops and
Though registration is not compulsory but Establishment Act
non-registration bars it
from taking legal remedies
4 Management All partners have equal rights and all of them This business is controlled by one
can participate in the management. person only. His order is a law and he is the
They can bind the final authority in the concern
business by their acts.
5 Risk The business risk is shared by all the The whole risk is shared by the sole-
partners in proportion of their shares trader
6 Capital All the partners contribute towards capital of Only the resources of one person are used
the firm. The partners pool their resources to in the business. He may suffer from shortage
run the business efficiently. Every partners of capital because the resources of one
should bring person will generally
the capital be limited
7 Secrecy The secrets of the business are in the There is a complete secrecy in the
knowledge of all the partners; so there business because the owner does not
is a fear of leaking them out share the secrets with anybody else.
8 Uncertainty The life of partnership is more certain than This business is linked to the fate of the
that of sole-trade business. The change of proprietor. In case of death or with any other
partners does not necessarily close down reason the business is bound to close
the business down. So, the existence of this
business uncertain
Hindu Undivided Family

Introduction
Another form of business organisation is Joint Hindu Family or undivided Hindu family. However,
this form of organisation is prevalent in India only and that too among Hindus as the name itself is
indicative. It also does not have separate and distinct legal entity from that of its members who
constitute it. The membership in this can be acquired only by birth or by marriage to a male person
who is already a member of a Joint Hindu Family. A Joint Hindu Family consists of common
ancestor, which is a must to bring a J.H.F. into existence all his male descendantsupto any generation
along with their wives and unmarried daughters. The death of a common ancestor does not bring the
Joint Hindu Family to an end. Hindu Undivided Family firm is a unique form of business
organization prevailing only in India. This is the form belonging to Hindu Undivided Family and
governed by the provisions of the Hindu law. All the affairs of Joint Hindu Family are controlled and
managed by one person who is known as ‘Karta’ or ‘Manager’. He is having a very unique position
which no other office of any organisation in the world is having. The liability of ‘karta’ is unlimited
but the other members is limited.
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In Hindu law there are two schools:
a) Mitakshara:
It is applicable to the whole of India except Bengal and Assam. According to this school,
a Hindu inherits property from his father, grand father and great grand father. Thus, three
successive generations in the male line inherit the ancestral (Family) property. They are called
coparceners and the senior most member of the family is called ‘Karta’. The Hindu
succession act of 1956 has extended the line of coparcenary interest to female relatives of the
deceased coparcener or male relatives claiming through such female relatives.Even female
have been included in the list of persons who acquire share in succession.
b) Dayabhaga:
It is applicable in Bengal and Assam. According to this, the male heirs become members
only on the death of the father.
According to Hindu law, a business is an inheritable asset. After the death of Hindu,
the business will be jointly owned by all the coparceners. The elder person among the
coparceners becomes the new Karta and manages the business. If any property is inherited
from any other relative, or acquired from personal resources, such property is regarded as
personal property and treated as distinct from ancestral property.
Characteristics:
1. Governed by Hindu Law:

The control and management of the Joint Hindu Family firm is done according to the
unmodified or codified Hindu Law. The unmodified Hindu Law consists of two schools,
mitakshara and dayabhaga. In the same way rights and duties of its members are governed by
unmodified Hindu Law.
2. Membership by birth:
The membership of the family can be acquired only by birth. Whosoever is born in the
family becomes a member. By adoption, an outsider can be admitted to its membership,
because adoption is considered to be replantation in the family by which a person is being
adopted. Marriage with the male member also confers membership. This is by virtue of the
fact that they are married to a person who is having membership by birth.
3. Management:
The family affairs are managed by the senior most male member of the family known as
‘Karta’ or ‘Manager’. The powers of management are unlimited. But the management is more
effective due to the natural and affection with the members of a family. The members also
have full faith and confidence on ‘ karta’. Only karta is entitled to deal with third parties.
4. Limited liabilities of others:
All the members in a Joint Hindu Family have limited liability to the extent of property
which is jointly held by the family. The self-acquired property of any member cannot be
taken in order to satisfy the loans taken by the family. However, karta is also personally liable
for loan taken on promissory note.
5. Continuity:
As it has already been discussed in the introduction, the death in the family does not brig
the joint family firm to an end. It continues forever. There is no limit to its membership
number also.
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6. Minor also a member:

In partnership firm minor cannot become a partner. This is an important feature of this
business organisation that a person from its very birth becomes the member.
7. Accounts:
As discussed earlier accounts are maintained by karta but this is not obligatory on his part.
He is not accountable to any member and no member can ask what are the profits and losses
of a transaction.
8. Implied authority of karta:
There is implied authority in favour of karta to contract debts and pledge the credit and
property of the family for ordinary purposes of family business. No other member is having
such an authority.
Advantages:
1. Centralised management:
The management of a Hindu joint family firm is centralised in the hands of one man
known as ‘karta’. He takes all decisions and gets them implemented with the help of other
members. He may be managing rightly or wrongly. No other member interferes in his
management.
2. Utmost secrecy:
The business requires secrecy of facts regarding it. As in Joint Hindu Family firm only
karta is to manage the entire show. He can do it with utmost secrecy which no other business
can maintain, he can keep a thing secret even from the members of the firm.
3. Quick decision:
In Joint Hindu Family firm, as karta is only decision maker, he can take a very quick
decision. It is further advantageous that the decision is final and unchallengable.
4. Credit facilities:
In Joint Hindu Family firm the credit facilities are more. One reason for this is that the
liability of the karta is unlimited. There is also a pious obligation on the part of sons of karta
to satisfy even unsatisfied debts raised by him during his life time.
5. Work according to capacity:
A physically handicapped or partly disabled member may be assigned a little work or no
work at all. A person who is more strong than others may be assigned work of physical
nature. Infants are not required to do any work at all. This is a great advantage of Joint Hindu
Family firm.
6. Natural love between members:
In Joint Hindu Family firm, it is the natural love and affection which the members are having
for each other. Due to this, they are ignoring the shortcomings of each other and help to run
the business more smoothly and efficiently.
7. Economy:
In a business, for its success, economy is a must. It is well balanced and maintained in
Joint Hindu Family firm. The family is concerned with profits as they are to form the part of
joint family property. Karta spends money with great caution and economy.
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8. Limited liability:
The liability of all the members of the family firm is limited to their undivided shares in
the property of the family. But karta has unlimited liability. This is great advantage of Joint
Hindu Family firm.
Disadvantages:
1. No reward for efficiency:

All the members of the family are provided with basic needs and other facilities. The
persons who work more efficiently and dedicatedly are not rewarded for their work. So
efficient workers are also tempted to work less. It encourages laziness on the part of family
members. The members try to avoid work.
2. Limited capital:
The investments are limited only upto the resources of one family. They may not be
sufficient to meet business requirements for expansion.
3. Limited managerial skill:
Only the eldest male member of the family is to manage the family business. He is
performing all the functions of the management. He may not be well conversant with the
knowledge of business skill and other problems of the business management.
4. Suspicion:
The karta is empowered with vast power of secrecy and he can keep a thing secret even
from its members. This gives birth to suspicion among the members themselves which can be
disastrous for the Joint Hindu Family.
Difference between Sole Proprietorship and Hindu Undivided family
S.No Point of difference Sole Proprietorship Hindu Undivided Family

1 Meaning A business unit which is Hindu undivided family business
owned and controlled by owes its origin to the operation
a single person is known of the Hindu law. As per this
as sole trading concern. law, after death of a Hindu, his
The person, who manages business comes to be jointly
it, is called a sole trader owned by three successive
generations, viz., son, grandson
and great grandson
2 Number of Members In a sole trading firm of All male members of the Hindu
business, there is only one family are member of a Hindu
member, i.e., a sole trader undivided family
himself.
3 Management It is managed by sole It is managed by the head of the
trader himself with the family (Karta) Co-parceners do
help of his family not have right to manager
members or paid
employees
4 Liability The liability of a sole In case of Hindu undivided
trader is unlimited, i.e., in family business, the liability of
the event of insolvency of ‘Karta’ is unlimited and that of
the business, his private co-parceners is limited to the
property may be used to extent of their interest in the
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pay debts of the business business
5 Stability It is less stable as its life It is more stable, since its
and existence is existence is coterminous with the
coterminous with the life Hindu family as a whole
and ability of sole trader.
6 Position of Female It can be started by It is monopolised by the male
anyone, whether male or members of the Hindu family
female
7 Sharing of Profits and Losses A sole trader is the only Although, a Hindu undivided
owner of a sole trading family business is managed by
concern and therefore, the the ‘Karta’, its profits and losses
profits and losses of a sole are shared among the ‘Karta’ and
trading concern are not co-parceners.
shared
8 Expansion There is a limitation on It can be expanded by the ‘Karta’
the expansion of a sole by securing active participation
trading business, due to a of co-parceners in the business.
limited capacity of the
sole trader.
9 Transfer of interest A sole trader can transfer Neither ‘Karta’ nor co-parceners
his business to anyone by can transfer their business
selling his interest in the interests to an outsider.
business.
Difference between Partnership and Hindu Undivided family
S.No Point of difference Partnership Hindu Undivided Family

1 Mode of Creation Partnership firm always A Hindu undivided family business
come into being due to an comes into an existence by the
agreement between the operation of law.
partners.
2 Acquisition of interest In a partnership firm, a In a Hindu undivided family
person can acquire interest business, a member acquires interest
by an agreement by birth.
3 Admission of a New In a partnership firm, new In a Hindu undivided family
Member members can be admitted business, a person becomes a
only with the consent of all member by the virtue of his birth in
the partners. the family.
4 Number of Members In a partnership firm, the In a Hindu undivided family
number of partners cannot business, there is no limit on the
exceed ten in case of a firm maximum membership. A person
carrying banking business born in a family automatically
and twenty in case of any becomes the member of the firm.
other business
5 Authority of In partnership, partners are In a Hindu undivided family
Members mutual agents. Each partner business, members of a family are not
has an unlimited capacity to mutual agents. Karta of the family
bind the firm by his acts, alone has an authority to act on
done in relation to business. behalf of others
6 Liability of Members In a partnership firm, liability In a Hindu undivided family
of all partners is unlimited. business, the Karta of the family is
Thus, the share of each personally liable for the debts of the
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partner in the firm’s property family, whereas the liability of the

as well as his private other members is limited to the extent
property is liable for the of their interest in the firm.
discharge of the debts of the
firm
7 Need for Registration Although, registration of a No registration is required for a
firm in not compulsory, it is Hindu undivided family business
advisable to register it.
8 Effect of Death of a In a firm, unless and In a Hindu undivided family
Member otherwise states in the business, death of the member of the
contract, the death of a family does not result in an end of the
partner results in dissolution family firm.
of the firm.
Co-operative society
The co-operative movement has been necessitated to protect the interests of weaker sections of
society. The primary objective of this movement is “how to protect economically the weaker sections
from the oppression of economically strong segment of society?”. In all forms of organisations the
primary motive is to increase profits. The co-operative form of organisation is a democratic set up run
by its members for serving their own interests. It is self help through mutual help, the philosophy
behind co-operative movement is ‘all of each and each for all’.
Definitions:
According to Hubert Calvest, “Co-operation is a form of organisation wherein persons
voluntarily associate together as human beings on the basis of equality for the promotion of the
economic interests of themselves.”
According to V.L. Mehta, “One aspect of a vast movement which promotes the voluntary
association of individuals having common economic needs who combine towards the achievement of
the common economic end they have in view and who bring into this combination a moral effort and
a progressively developing realisation of moral obligation.”
According to Section 4 of Indian Co-operative Societies Act, 1912, “a society which has its
objectives the promotion of economic interests of its members in accordance with co-operative
principle.”
Characteristics:
1. Voluntary membership:
Everyone is at liberty to enter or leave the co-operative society as and when he likes. Nobody is
compelled to join a co-operative society. The members are also free to use or not to use the services of
the society. Though there is no limit on the membership of the societies sometimes certain limits are
imposed to keep the society as a workable group.
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2. Political and religious neutrality:

The membership of a co-operative society is open to all irrespective of religion, caste, creed,
colour or political affiliation. The co-operative movement can attract a large membership only by
staying out of politics where people have divided opinions. Co-operative represents universal
brotherhood and it should not lose its path in political contradictions. There is no place for caste or
discrimination in co-operatives.
3. Democratic management:
The management of co-operative societies is always on democratic lines. All the members of a
society elect a body of persons to conduct and control the day-to-day working of the society. The
management is elected through ‘one-man, one-vote’ system. The day-to-day work is conducted by
expert persons but the ultimate control lies with the members. Co-operative business stands or falls
with democracy.
4. One man, one vote:

In co-operative societies every member is given one vote irrespective of his contribution
towards the capital. In joint stock companies, the voting rights are given on the basis of number of
shares held by a person. So persons having large number of shares control the organisation. In a co-
operative, nobody can control the society on the strength of his wealth. All members have equal voice
in the management of the society.
5. Service motive:
The primary objective of co-operative societies is to provide service to their members. The aim is
not to earn profits as is the case in all other forms of organisations. The service of members is the
fundamental objective of co-operative societies. The society earn a small amount of profit to cover up
administrative expenses. The profit is generally earned when goods are sold to non-members.
6. Distribution of surplus:
The societies earn surplus from their services. This surplus is not divided according to capital
contributions. The Indian Co-operative Societies At has given guidelines for the distribution of the
surplus. A certain percentage is paid in the form of dividend on capital contributions. At present this
rate should not exceed 9% One-fourth of the surplus should be kept as reserve in the society and up to
10% of the surplus should be spent for the general welfare of the members.
7. Cash trading:
Another principal of co-operative societies is trading on ‘cash basis’. Co-operatives flourish
only when cash trading principle is strictly followed. Cash trading ensures economy for the co-
operatives. It eliminates bad debts and collection expenses. Credit system reduces working capital of
the societies. In granting credit there is likelihood of some discrimination which may lead to
misunderstanding among members.
8. Limited interest on investments:

The pioneers of co-operative movement wanted to give certain percentage on capital
contributions in the form of dividend. This is an incentive to members for keeping money with the
society of deposits. In India, a maximum of 9 percent per annum can be paid as interest on
contributions to the society.
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9. State control:
The co-operative societies are to follow certain rules and regulations framed by the government.
In India, all co-operative societies are registered under Indian Co-operative Societies Act or
respective state co-operative laws. The government gives a number of incentives for the promotion of
co-operatives. There is a control of central and state governments on the working of co-operative
societies in India.
10. Co-operative education and training:

The success of a co-operative will depend upon the awareness of its members towards the
principles of co-operation. The members should be properly educated about the aims and objectives of
the societies, so that they may work unitedly for the success of the society. The members should be
trained to perform various activities of the society. So proper education and training of members will
add to the success of co-operative movement.
Advantages / Merits of Co-operative Society:

1. Open membership:
The membership of co-operative societies is open to each and every person. Nobody is barred
from joining societies on the basis of economic position, caste, colour or creed. The number of
members of a society may be limited to make it a workable group but members are not discriminated
in any way.
2. Service motto:
The co-operative societies are started not for profits but for service. The members are provided
goods at cheap rates and financial help is also given at concessional rates. A feeling of co-operation is
created among members.
3. Supply of goods at cheaper rates:
The societies purchase goods directly from producers and sell them to the members at cheap
rates. The middlemen are eliminated from the channel of distribution. Even capital goods are procured
directly from producers and are supplied to the members. So co-operative societies ensure regular
supply of goods at cheaper rates.
4. Democratic management:
The management of co-operative is elected by the members from among themselves. All
members are given equal voting rights irrespective of the number of shares held by them. So these
associations are run on democratic principles.
5. Low management costs:

The management of co-operative society is in the hands of persons elected by the shareholders.
Members take active interest in the working of the society. So they are not spending large amount on
management.
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6. Surpluses shared by members:

These societies sell goods to the members on a nominal profit to cover up administrative costs.
Non-members are charged at market prices. The surplus earned by the society is distributed among
the members on the basis of their purchases.
7. Check on other business:

All other forms of business are started with a profit motive but co-operatives are started with
service motive. Other enterprises will have to lower their prices when co-operatives are providing
these goods at lower prices.
Disadvantages / Limitations / Demerits of Co-operative Society:

1. Lack of capital:
The co-operatives are started by economically weaker sections of the society. The shares are
generally of lower denominations so that more and more persons may associate with the societies.
They cannot undertake production of goods for want of funds. So the society may suffers from lack of
capital.
2. Lack of unity among members:
The members are drawn from difficult sections of the society. The members do not understand the
working of the societies, so they start suspecting each other. It leads to lapse the unity among
members.
3. Cash trading:
The cash trading business has both advantages and disadvantages. The members of societies are
generally from poor sections of the society. These persons need credit facility. But the society cannot
provide the credit facility to them because they are producing the goods at lower prices.
4. Political interference:
The societies are generally under the regulations of the government. Every government tries to
send their party members to these societies. So political interference has adversely affected co-
operative movement in India.
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Unit - III
Company and its incorporation

The limitations of sole-proprietorship and partnership forms of ownership gave birth to joint stock company
form of organisation. Two important limitations of earlier forms of organisation were inadequacy of funds and
unlimited liability. The demand of business for funds increased with the expansion and development of trade and
industry. The joint stock company form of organisation provide an answer to the difficulties faced by earlier forms.
The liability of members is limited and the participation of large number of persons helps in raising more and
more funds . The present trend of industrial enterprises is to increase their size through expansion and
diversification. This tendency is ascribed to two reasons, namely technological improvement and economic factors.
Since industrial revolution in England there has been a constant improvement in technology. Large scale
production is also associated with a number of economies in buying, selling and production. The result of
expansion, whether due to technical factors or economic factors has been the demand for enormous capital. Joint
stock company organisation was started first in Italy in 13th century. During 7th and 8th centuries, joint stock
companies were formed in England under royal charter or acts of parliament. The speculative business of
companies led to the passage of ‘bubbles act of 1720’.in India the first companiesac was passed in 1850 and the
principle of limited liability was introduced only in 1857. A comprehensive bill was passed in 1956.
Definitions:
According to L.H. Haney, “ A joint stock company is a voluntary association of individuals for profit, having
a capital divided into transferable shares, the ownership of which is the condition of membership.”
According to James Stephenson, a company is “an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss
arising there form.”
According to Section 3 of Indian Companies Act 1956, “ A company means a company formed and
registered under this act.”
Characteristics:
1. Association of persons:
A company is an association of person joining hands with a common motive. A private limited
company must have at least seven members to get it registered. Furthermore, the number of
shareholders should not exceed 50 in private companies but there is no maximum limit for the
members in a public limited company. The maximum number of persons in a private company is
raised to 200 as for the Amendment made in 2013 to the Act
2. Independent legal entity:

The company is created under law. It has a separate legal entity apart from its members. A
company acts independently of its members. The company is not bound by the acts of its members
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and members do not act as agents of the company. A person can own its shares and can be its creditor
too. The life of the company is not is independent of the lives of its members. The company can sue
and be sued in its own name.
The liability of its shareholders is limited to the value of shares they have purchased. In case the
company incurs huge liabilities, the shareholders can only be called upon to pay the unpaid balance on
their shares. The company being a separate legal entity can incur debts in its own name and the
shareholders will not be personally liable for that.
4. Common seal:
A company being an artificial person cannot put its signatures. The law requires every company
to have a seal and its name engraved on it. The seal of the company is affixed on all important
documents and contracts as a token of signature. The directors must witness the affixation of the seal.
5. Transferability of shares:
The shares of a company can be transferred by its members. Whenever the members want to
dispose of the shares, they can do so by following the procedure devised for this purpose. However,
private companies can put more restrictions on transfer on transferability of shares, virtually making it
zero.
6. Separation of ownership and management:

The shareholders of a company are widely scattered. A shareholder may like to invest money but
may not be interested in its management. The companies are managed by the Board of Directors. The
ownership and management are in two separate hands. The shareholders do not get any right to
participate in company management. The right to manage company affairs is vested in the directors
who are the elected representatives of the shareholders.
7. Perpetual existence:
The company has a permanent existence. The shareholders may come or may go but the company
will go on forever. The continuity of the company is not affected by death., lunacy or insolvency of
its shareholders. The company can be wound up only by the operation of law.
8. Corporate finance:
A Company , generally, raises large amounts of funds. The capital is divided into shares of
small denomination. A large number of persons purchase shares and contribute to the capital of the
capital of the company. Since there is no limit on number of maximum members in public
companies, large amounts of sources can be raised from persons in different walks of life.
9. Centralised and delegated management:

A company is an autonomous and self-governed body. The shareholders being large in number
cannot look after the day-to-day activities of the company. They elect Board of Directors in general
body meeting for managing the company. All Policies of the company are decided by a majority vote.
All important decisions are taken in a democratic way. The centralized management and democratic
functioning brings in unity of action.
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10. Publication of accounts:

A Company is required to file annual statements with the Registrar of Companies at the end
of a financial year. The annual statements are available for inspection in the office of the registrar.
Advantages / Merits of Company :
1. Accumulation of large resources:

A company can collect large sum of money from large number of shareholders. There is no limit on
the number of shareholders in a public company. If need for more funds arise, the number of
shareholders can be increased. Joint stock companies are suitable for those businesses where large
resources are required.
The liability of members in a company form of organisation is limited to the nominal value of the
shares they have acquired. If a person has purchased a share of Rs. 100, his liability is limited to Rs.
100 only. If the shares is partly paid, then he can be required to pay only the unpaid value of the
shares. The limited liability encourages many persons to invest in shares of joint stock companies.
3. Continuity of existence:
When a company is incorporated, it become a separate legal entity. It is an entity with perpetual
succession. The death or insolvency of members does not in any way affect the corporate existence of
the company. The continuity of a company is not only in the interests of the members but is also
beneficial for the society.
4. Efficient management:
In company form of organisation, ownership is separate from management. It enables the
company to appoint expert and qualified persons for managing various business functions. The
efficient management will help the company to expand and diversify its activities.
5. Economies of large scale production:

With the availability of large resources. The company can organise production on a big scale.
The increase in scale and size of the business will result in economics in production, purchase,
marketing and management, etc. These economies will enable the company to produce goods at a
lower cost, thus resulting in more profits.
6. Transferability of shares:
The shares of a public company are freely transferable. A shareholder can dispose of his shares at
any time when the market conditions are favourable or he is in need of money. The company does
not return share-money before its winding up but shareholders can easily sell their shares through
stock exchange market. Stock Exchange provides a ready market for the purchase and sale of shares.
The facility of transferring shares encourages many persons to invest.
7. Ability to cope with changing business environment:

The present business enterprises operate under uncertain economic and technological
environments. Technological changes are taking place every day. The needs of consumers are varied
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and changing, to cope with the changing economic environment every business is required to invest
money on research and developmental programmes . Joint stock companies can afford to invest
money on research projects.
8. Diffused risk:
In company form of organisation, the number of contributories is large; so risk is shared by a
large number of persons. The burden to be shared by different individuals becomes signification. It
enables companies to take up new ventures.
9. Democratic set-up:
The values of shares is generally small. It enables persons with low incomes to purchase the
shares of companies. Shareholders come from all walks of life. Every individual has an opportunity
to become a shareholder. Secondly, the Board of Directors is elected by the members. The company
form of organisation is democratic both from ownership and management side.
10. Social benefits:

The company form of organisation mobilizes scattered savings of the community. These savings
can be better used for productive purposes. The companies also enable financial institutions to invest
their money by providing them avenues. It also enable the utilisation of natural resources for better
productive uses.
Disadvantages / Limitations / Demerits of Company :
1. Difficulty of formation:
Promotion of a company is not an easy task. A number of stages are involved in company
promotion. The suitability of a particular type of business is to be decided first. A number of persons
should be ready to associate for getting a company incorporated. A lot of legal formalities are required
to be performed at the time of registration. Promotion of a company is both expensive and risky.
2. Separation of ownership and management:

The ownership and management of a public company is in different hands. The owners i.e.,
shareholders play an insignificant role in the working of the company. The management may indulge
in speculative business activities. There is no direct relationship between efforts and rewards. The
profits of the company belong to shareholders and the Board of Directors are paid only a
commission.
3. Evils of factory system:

The company form of organisation leads to larger-scale production. The evils of factory system
like insanitation, air pollution, congestion of cities are attributed to joint stock companies. Joint stock
companies facilitate formulation of business combinations which ultimately leads to the monopolistic
control and exploitation of consumers.
4. Speculation in shares:
The companies facilitate speculation in the shares at stock exchanges. The prices of shares
depend upon both economic and non-economic factors. The speculators try to fluctuate the prices of
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shares according to their suitability. The stock exchange will not help the growth of healthy
investment when speculative activities are being carried on.
5. Fraudulent management:
The promoters and directors may indulge in fraudulent practices. The management is in the
hands of those persons who have not invested much in the company. The Company Law has devised
methods to check fraudulent practices but they have not proved enough to check them completely.
6. Lack of secrecy:
The management of companies remains in the hands of many persons. Everything is discussed
in the meetings of Board of Directors. The trade secrets cannot be maintained. In case of sole trade
and partnership concerns such secrecy is possible because a few persons are involved in
management.
7. Delay in decision making:

In company form of organisation no single individual can make a policy decision. All important
decisions are taken either by the Board of Directors or are referred to general - house. Decision-
taking process is time consuming. If some business opportunity arises and a quick decision is needed,
it will not be possible to arrange meetings all of a sudden. So many opportunities may be lost because
of a delay in decision-making.
8. Concentration of economic power:

The company form of organisation has helped concentration of economic power in a few hands.
Some persons become directors in a number of companies and try to formulate policies which
promote subsidiary companies. Interlocking of directorship and establishment of subsidiary
companies have facilitated concentration of economic power in the hands of a few business houses.
9. Excessive State regulations:

A large number of rules and regulations are framed for the working of the companies. The
companies will have to follow rules even for their internal working. The government tries to regulate
the working of the companies because large public money is involved. The formalities are many and
the penalities for their non-compliance are heavy. This often detracts companies from their main
objectives for which they have been formed.
TYPES OF COMPANY
Joint stock company can be of various types. The following are the important types of
company:
1. Classification of Companies by Mode of Incorporation
Depending on the mode of incorporation, there are three classes of joint stock
companies.
A. Chartered companies. These are incorporated under a special charter by amonarch. The East India
Company and The Bank of England are examples of chartered incorporated in England. The powers and
nature of business of a chartered company are defined by the charter which incorporates it. A chartered
company has wide powers. It can deal with its property and bind itself to any contracts that any ordinary person
can. In case the company deviates from its business as
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prescribed by the charted, the Sovereign can annul the latter and close the company. Such companies
do not exist in India.
B. Statutory Companies. These companies are incorporated by a Special Act passedby the Central
or State legislature. Such companies do not have any memorandum or articles of association. They derive their
powers from the Acts constituting them and enjoy certain powers that companies incorporated under the
Companies Act have. Alternations in the powers of such companies can be brought about by legislative
amendments. The provisions of the Companies Act shall apply to these companies also except in so far as
provisions of the Act are inconsistent with those of such Special Acts [Sec 616 (d)].
C. Registered or incorporated companies. These are formed under the CompaniesAct, 1956 or under
the Companies Act passed earlier to this. Such companies come into existence only when they are registered
under the Act and a certificate of incorporation has been issued by the Registrar of Companies. This is the
most popular mode of incorporating a company.
2. Classification of Companies by Mode of liability:
A. Companies limited by Shares :These types of companies have a share capitaland the liability of each
member or the company is limited by the Memorandum to the extent of face value of share subscribed by
him. In other words, during the existence of the company or in the event of winding up, a member can be
called upon to pay the amount remaining unpaid on the shares subscribed by him. Such a company is
called company limited by shares. A company limited by shares may be a public company or a private
company. These are the most popular types of companies.
B. Companies Limited by Guarantee : Each member promises to pay a fixed sum of money
specified in the Memorandum in the event of liquidation of the company for payment of the debts and
liabilities of the company [Sec 13(3)] This amount promised by him is called ‘Guarantee’. The
Articles of Association of the company state the number of member with which the company is to be
registered [Sec 27 (2)]. Such a company is called a company limited by guarantee. Such
companies depend for their existence on entrance and subscription fees. They may or may not
have a share capital. The liability of the member is limited to the extent of the guarantee and the face
value of the shares subscribed by them, if the company has a share capital
C. Unlimited Companies :Section 12 gives choice to the promoters to form a company with or without
limited liability. A company not having any limit on the liability of its members is called an ‘unlimited
company’ [Sec 12(c)]. An unlimited company may or may not have a share capital. If it has a share
capital it may be a public company or a private company. If the company has a share capital, the article
shall state the amount of share capital with which the company is to be registered [Sec 27 (1)].
3. On the Basis of Transferability of Shares
On the basis of transferability of shares, a company may be :
(1) Private Company, and (2) Public Company.
A. Private Company
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that
company which by its articles of association :
i) limits the number of its members to fifty, excluding employees who are members or
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ex-employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;
iii) prohibits any invitation to the public to subscribe for any shares or debentures of the company.
Where two or more persons hold share jointly, they are treated as a single member. According to Sec 12 of the
Companies Act, the minimum number of members to form a private company is
two. A private company must use the word “Pvt” after itsname.
B. Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public company which is not a Private
Company”,
If we explain the definition of Indian Companies Act. 1956 in regard to the public company, we note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members on the
company.
iii) It invites the general public to purchase the shares and debentures of the companies
III. On the basis of Ownership
On the basis of Ownership, a company may be classified into :
1. Holding companies, and
2. Subsidiary Company
1. Holding Company [Sec. 4(4)].
A company is known as the holding companyof another company if it has control over the other company.
According to Sec 4(4) a company is deemed to be the holding company of another if, but only if that other is
its subsidiary.
A company may become a holding company of another company in either of the following three ways
:-
a) by holding more than fifty per cent of the normal value of issued equity capital of the company;
or
b) By holding more than fifty per cent of its voting rights; or
c) by securing to itself the right to appoint, the majority of the directors of the other
company , directly or indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the two companies
remain separate legal entities, yet the affairs of both the companies are managed and controlled by the holding
company. A holding company may have any number of subsidiaries. The annual accounts of the holding
company are required to disclose full information about the subsidiaries.
2. Subsidiary Company. [Sec. 4 (I)].A company is know as a subsidiary of anothercompany when its control
is exercised by the latter (called holding company) over theformer called a subsidiary company. Where a
company (company S) is subsidiary of another company (say Company H), the former (Company S) becomes
the subsidiary of the controlling company (company H).
3. Government Companies. A Company of which not less than 51% ofthe paid up capital is held by the
Central Government of by State Government or Government singly or jointly is known as a
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Government Company. It includes a company subsidiary to a government company. The share capital of a
government company may be wholly or partly owned by the government, but it would not make it the agent of
the government . The Annual Report along with the auditor’s report are placed before both the House of the
parliament.
4. Non-Government Companies. All other companies, except theGovernment Companies, are called non-
government companies. They do not satisfy the characteristics of a government company as given above.
V. On the basis of Nationality of the Company
a) Indian Companies :These companies are registered in India under theCompanies Act. 1956 and
have their registered office in India. Nationality of the members in their case is immaterial.
b) Foreign Companies :It means any company incorporated outside Indiawhichhas an
established place of business in India [Sec. 591 (I)]. A company has anestablished place of business in
India if it has a specified place at which it carries on business such as an office, store house or other
premises with some visible indication premises. Section 592 to 602 of Companies Act, 1956 contain
provisions applicable to foreign companies functioning in India.
Incorporation of a company:
A company being an artificial entity comes into existence only after its registration with the Registrar
of Companies. A number of formalities have to be completed before a request is made to the Registrar
for its registration. A legal process has to be completed before a company obtains a separate legal
entity. The important documents has to submitted for the incorporation of a company. The following
are the steps:
Steps:
Before getting a company registered, a number of steps have to be taken up:
1. Application for approval of name:

The first step in getting a company incorporated is of obtaining the approval of name from registrar
of companies. A company may adopt any name which is not prohibited under the Emblems and
Names Act, 1950 and which is not identical with or does not closely resemble the name of a company
already registered. The registrar is expected to approve the name within 14 days of the receipt of
application. The proposed name must be registered within 3 months from the date of intimation by the
registrar failing which the promoter will have to apply again to the registrar for the revalidation of the
approval.
2. Memorandum of Association (MOA):

The memorandum of association is the most important document of the company among all. It is
the Charter which sets out the constitution of the company. It defines the objectives, powers, scope
and relations with outsiders. It is the foundation of the company on which the structure is build. While
designing the memorandum of association, the contents should be divided into clauses, printed and
serially numbered. The document should be signed by at least two subscribers in case of private
company and seven in case of public company. The names, occupations, addresses of the shareholders
and the shares subscribed by each member should be mentioned against their names. The
memorandum can be inspected by any person on the payment of a nominal fee. It is very difficult to
alter the clauses in the memorandum. So, it should be prepared carefully with a foresight keeping in
view the long term needs of the company.
The following are the clauses that a MOA contains:
a. Name clause:
The name of the company should be specified in this clause. A company can choose any name it
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likes. But it should fulfill certain conditions which are as follows:
 The company should not use any name which is objectionable or identical or similar name of an
existing company. Further the prohibited names contained in the Emblems and Names Act, 1950 and
also the names resembling the government bodies should not be used.
 The words “pvt. Ltd.” in case of private companies and the word “Ltd.” in case of public company
should be added at the end of their names.
 Any names which convey any connection or link with a government department should not be used.
 In case of companies which are formed for promoting arts, culture, commerce etc. The word need not
be added at the end of their names
The names of the company must be exhibited in front of the factory, place of business, registered
office and administrative office of the company. The names should also be printed on all letters,
cheques, notices, bills and all official publications in one of the local language as well as in English.
b. Situation clause:
Every company will have a registered office. This clause should specify the place and the state in
which the registered office. This is located. It is necessary to determine the legal jurisdiction and
make correspondence with the management of the company. In case, the registered office is not
confirmed on the date of incorporation of the company, it should communicate the address to the
registrar(within 30 days of its incorporation).
c. Objective clause:
This is the core clause among all clauses. The objective of the company and nature of business
should be stated in this clause. It determines the powers of the company. The company is not
authorised to take up any business outside the scope of this clause. From this clause, the shareholders
and creditors can know the purpose for which their money is utilised. For instance, banking
companies are not empowered to undertake insurance business.
d. Liability clause:
The extent and nature of the liability of shareholders should be stated in this clause. The
shareholders are liable to discharge the debts of the company. The liability may be limited to the
extent of share capital or additional guarantee. So, it should be clearly stated whether the liability is
limited to the face value of share or extended to the guaranteed amount.
e. Capital clause:
This clause states the registered capital of the company. The division of capital into shares of
different denominations, the number of each category and value of shares are also mentioned in this
clause.
In case, the capital comprises preference and equity shares, the extent of each category should
be specified. A company is not authorised to issue shares over and above registered or authorised
capital.
f. Subscription and association clause:

This clause contains a declaration by the members. The signatories on the memorandum of
association make a declaration stating that they undertake to form a company collectively, agree to
subscribe the specified shares and conduct the business jointly. The names, addresses and occupations
of such subscribers should be mentioned. At least two persons in case of a private company and seven
in the case of a public company should sign on the declarations. The declarants should subscribe at
least one share each.
Alterations:
The company law has prescribed a procedure for making changes in different clauses. The provisions
relating to such changes are given below:
 With regards to a change of name clause, prior permission of the central government is required. On
the other hand a special resolution should be adopted by the shareholders.
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Subsequently the change of name can be effected with the consent of the registrar.
 In case of registered office is to be shifted from one place to another place, the permission of the
company law board is required. Earlier this power was vested with the court, but later it was
transferred to the law board.
 The object clause is the most vital clause in the memorandum. It can be altered by the special
resolution of the shareholders and with the permission of the company law board. A copy of the
resolution should be filed with the registrar within 30 days of passing such resolution. After obtaining
his approval, this clause is modified or altered.
 An alteration in capital clause involving an increase in the authorised capital can be enforced by
passing ordinary resolution of the shareholders. A change in this clause is also brought for
consolidation of shares, re-organisation of capital, spliting the shares and conversion of shares
into stocks. In case of reduction of capital a special resolution of shareholders and the consent of
court is required.
3. Articles of Association:
The rules and regulations which are used to manage day-to-day operations of the company are
known as “Articles of Association”. While the memorandum of association define the objectives, the
articles devise ways and means to achieve the objectives. They lay down the relations between the
members themselves and the company and members. The articles determine the powers and liabilities
of the directors, shareholders, other officers etc. Every company has to prepare the articles and file
them with the registrar along with memorandum. In case, a company cannot prepare its own articles,
it can adopt the model set of articles as provided in the companies act. It contains 99 rules and
regulations.
Contents:
The following are the contents of the articles of association:
 Different kinds of shares and the rights attached to them.
 Mode of allotment of shares and calls on shares
 Procedure of issuing share certificates and share warranties; method of conversion of shares into
stocks.
 Procedure for transfer of shares, forfeiture and reissue shares and lien thereon
 Payment of commission on underwriting and brokerage on shares and debentures.
 Declaration of dividend and issue of bonus shares
 Method of appropriation of profit
 Division, consolidation and re-organisation of share capital
 Rules for adoption of primary contracts
 Rules for conduct of meetings, attendance of proxies in the place of members
 Procedure for passing resolutions, polls, voting rights.
 Provisions relating to quorum, minutes and adjournment of meetings
 Provision for appointment, qualifications, rights, remuneration and borrowing powers of the directors
 Rules regarding appointment, remuneration, duties of managing secretary and auditors
 Method of accounting adopted by the company; provisions regarding creation of reserves and
depreciation
 Use of common seal
 Method of maintaining bank accounts
 Winding up of the company, appointment of liquidator and mode of settlement.
Alterations:
The formalities are very few in the articles of associations the alteration is simple. The permission of the court is not
necessary. Adoption of a special resolution by the shareholders if enough. However, in certain cases, the approval of
the government is required. Thus, changes can be made to the articles
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easily.
4. Preparation of other documents:

The promoters are also expected to prepare the following documents at the incorporating the
company.
 The consent of first directors is acquired and filed with the registrar of companies.
 The promoters should execute a power of attorney in favour of one of them or an advocate who is to
carry out the formalities required for registration.
 Copies of preliminary agreements, memorandum and articles of association must also be prepared and
filed at the time of registration.
 The company is required to have a registered office and its information is filed with the registrar
within 30 days of its registration or from the date of commencement of business, whichever is earlier.
 Where the company names first directors in its articles, their particulars are to be submitted with the
registrar within 30 days of its registration or appointment of such directors.
 A statutory declaration that all legal requirements for registration have been complied with is also
filed with the registrar at the time of registration.
5. Payment of fees:
At the time of registration, prescribed registration fees and filing fee for each document filed for
registration are to be paid at the registrar’s office. The fee to be paid varies with the amount of
nominal capital in case of companies with share capital or according to the number of members in
case of companies without share capital.
6. Incorporation certificate:
When all the required documents are filed with the registrar along with the requisite fees, a
scrutiny is made. When all documents are found in order, the registrar will enter the name of the
company in the registrar of companies and issues a certificate of incorporation. The date mentioned in
the certificate is the date of incorporation of the company. A public company and private company
should obtain the certificate of commencement of business as per the Amendment in 2013 to the
Indian Companies Act
Prospectus
Once the certificate of incorporation is obtained from the registrar of companies, a public
company will raise the necessary capital from the public. A declaration is issued to the public inviting
them to subscribe capital purchasing shares and debentures of the company. This declaration is known
as a prospectus. A prospectus, thus, is a document which invites the public to provide funds to the
company by way of subscribing to its shares and debentures.
A private limited company cannot issue a prospectus as they are strictly prohibited from inviting the
public to subscribe their shares or accepting any investment. Even the public limited company which
can raise funds through their own resources, cannot issue a prospectus.
Contents:
A prospectus acts as a window to the company. Every person who desires to invest his money in
the company, looks through the prospectus to understand the financial position of the company. The
following are the contents of the prospectus:
 Name of the company, full address, registered office, place of the factory and address of the
administrative office.
 Names, occupations and addresses of the signatories who have signed the memorandum of association
and shares subscribed by them.
 The main classes of shares and number of shares in every class and the rights attached to each class of
share.
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 Names, occupations, addresses and remuneration of directors, secretary, treasurer etc.

 Number and value of qualification shares of directors
 Amount of minimum subscription
 Main objectives of the company
 Nature of the business of the proposed company
 Time of opening the subscription lists and due dates of accepting application forms
 Amount payable an application, allotment and calls of each class of shares
 Particulars of premium or discount on shares
 Details of special rights if any on shares and debentures
 Particulars of preliminary expenses
 Name and address of bankers and auditors
 Names of underwriters, the value of share underwritten by each, their commission and the statement
of directors has to the soundness of underwriters.
 Particulars of interests of the promoters and shares earned or held by them
 Amount of consideration payable to the promoters and the mode of payment
 Details of assets purchased out of the proceeds of shares and debentures
 Contracts undertaken with stock exchanges over the listing for trading of shares
 Time and place where the financial statements and agreement documents are available for inspection
Statement in lieu of prospectus:
A public company raises its capital from the public and it issues prospectus for this purpose. Sometimes,
the promoters of a company decide not to approach the public for raising necessary capital. They are hopeful of
raising funds from the friends and relations or through underwriters. In that case a prospectus need not be
issued but a statement in lieu of prospectus must be filled with the registrar at least three days before the first
allotment of shares. Such a statement must be signed by every person who is named therein as a director or
proposed director of the company.
Differences:
1. Partnership and joint stock company:
S.No Basis Partnership Joint stock company
1 Governing status A partnership concern is governed by the Joint stock company is governed by the
Partnership act, 1932 Companies Act,1956.
2 Legal status Firm and partners are not separate; no A company has separate legal entity. It ha s a
separate entity; uncertain life common seal and can enter into contracts by
affixing its seal.
3 Liability Unlimited joint and several liability of The liability of members are limited to the
partners. value of the shares.
4 Authority Right to share management, common and Ownership and management are separate. A
ownership and management. Mutual shareholder has no implied authority to bind
agency – implied authority the company.
5 Transfer of shares Ordinarily no right of transfer of share by A shareholder can sell his shares whenever he feels
partner- limited rights of transferee. so. There is no binding on the transfer of
shares of a company.
6 Number of A partnership can be started by at least two There must be at least two persons for starting a
members persons. The maximum number is ten private company and maximum is fifty. At
in case of a banking and insurance least seven persons are required to start a
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business and it is twenty for any other public company and maximum is unlimited.
business.
7 Continuity A partnership concern is dissolved on the The continuity of a company is not affected by the
death or insolvency of a partner. death or insolvency of a member. The members
may go on changing but the company
will not be affected.
8 Registration The registration of partnership concern is not The registration of a company is compulsory.
compulsory. There are certain privileges There are two stages in registering public
given to the registered firm company, the first is incorporation, and the
which are denied to unregistered ones. second is commencement of business.
9 Legal formalities A partnership is not under statutory A company is required to maintain prescribed
obligation for the compliance of any rules and books and have a periodical audit. Some
regulations. There is no compulsion to maintain information has to be supplied periodically to the
certain books and get the registrar of companies.
audited and to publish them.
10 Dissolution/winding A partnership concern can be dissolved easily. A company is wound up only through court. If the
up No legal formalities are required for winding up court is satisfied that there is reasonable ground for
a partnership firm. winding up the company only then it is to be wound
up. A proper procedure is also
to be followed
Private company and Public company:
S.No Basis Private company Public company

1 Number of members To constitute a private company two A public company can be started by seven
members are a must. The number of persons and there is no maximum limit for
members cannot exceed fifty. members.
2 Commencement of The business can be started after getting the The business can be started only after getting the
business certificate of incorporation certificate of commencement of business. This
certificate is issued only when minimum number of
shares have been subscribed by the
public.
3 Transfers of shares The transfer of shares is generally Transfer of shares is freely allowed, though
restricted by the articles. There cannot be any some procedure for transfer has to be
appeal to the central government followed.
against disallowing the transfer of shares.
4 Issue of prospectus A private company cannot issue a A public company must issue a prospectus or a
prospectus giving public invitation for statement in lieu of prospectus for inviting public
purchase of its shares. No public notice for the for the purchase of its shares and debentures.
sale of shares or debentures can be
issued.
5 Statutory meetings A private company is not required to all a A statutory meeting must be held within a
statutory meeting and to submit statutory prescribed period. A statutory report is also
report to the Registrar of Companies. submitted to the Registrar of Companies.
6 Quorum for meeting The quorum for a meeting of a private Five members constitute the quorum.
company is zero.
7 Number of directors A minimum of two directors must be A minimum of three directors must be there and the
there. The company can increase the names and addresses of directors must be intimated
number of directors with the prior to the Registrar of Companies
permission of the Central Government. along with the memorandum of association.
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8 Filing of documents A private company need not send the list of The list of directors, their consent and a
directors, their consent, etc. to the contract with them must be sent to the
Registrar of Companies. Registrar of Companies.
9 Use of the word In case of private company, the word ‘Pvt. Only the word ‘Limited’ is used with the name of a
‘Limited’ Limited’ must be used at the end of the public company.
name of the company.
Memorandum of Association and Articles of Association:
S.No Basis Memorandum of Association Articles of Association

1 Scope The memorandum is a sort of constitution of the The articles contain bye-laws for the day-to-day
company. The company works in working of the company. Articles are framed in
the framework given in the memorandum the orbit of the memorandum of association.
2 Necessity The memorandum is a must for getting a Public companies may not have their own
company registered. articles, but can adopt Table A of Schedule I as its
articles. Private companies, companies limited by
guarantee and unlimited companies
must have their own articles.
3 Provisions The memorandum cannot contain The articles of association are subordinate to
anything contrary to Companies Act. the memorandum and Companies Act and
cannot contain anything contrary to both.
4 Limitation A company cannot do anything beyond the Anything done beyond the scope of the articles will
scope of the memorandum. Any act not be void and it can be ratified by passing
beyond its scope done will be void. a special resolution.
5 Relationship It regulates the relationship between It defines relationship between company and
company and the members of the public. the members and among members themselves.
6 Alteration Memorandum can be altered only under Alternation of articles is not difficult. It can be
special circumstances and involves many altered by passing special resolution.
formalities.
Co-operative Society Vs Company
S. No Point of difference Co-operative society Company

1 Meaning A co-operative society is a voluntary A company is an artificial
association of individuals formed for person recognized by law, with a
mutual help and its aims are distinctive name, a common seal,
accomplished through self-help and a common capital consisting of
collective efforts. transferable shares and
carrying limited liability and
having a perpetual
succession
2 Formation A co-operative society come into A company comes into
existence when registered with the existence when registered with
Registrar of the Co-operative the Registrar of
Societies Companies
3 Objective or Motive The main motive of co-operative The sole objective of company is
society is to provide services to its to maximize profits and
members in particular and to the increase wealth of its
society in general members, i.e., share holders
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4 Membership The membership of a co-operative A company has more

society is confined to a particular area diversified membership which can
or locality. A minimum of ten members extend globally. A minimum of
are required to form co- operative two members are required to
society. There is no restriction on form a private company and
the maximum membership in the seven for a public company.
case of a society The maximum limit for private
company is 200(2013 Act)
/50(1956 Act) while for a
public company there is no
such limit
5 Management A co-operative society is managed A company is managed by the

by a Managing Committee elected by Board of Directors elected by the
its members shareholders
6 Registration A co-operative society is registered A company is registered under the
under the State Co-operative Companies Act, 2013 earlier
Societies Act the companies are registered
under Companies
Act, 1956
7 Liability The liability of the members of co- The liability of the members of
operative society is limited but a company is limited to the
society may opt for unlimited value of shares held by them.
liability
8 Transfer of Interest The shares of a co-operative The shared of a company are
society are non-transferable but can freely transferable, except in the
be passed on to the legal heirs or case of private company. The
reverted back to the society at the shares of listed companies can be
discretion of its members freely are sold at the
stock market.
9 Appointment of Proxy The members of society are not The members of a company
entitled to appoint proxies to can appoint proxies to attend
attend meetings on their behalf. their meetings on their behalf.
10 Burden of Taxation Co-operative societies are subject to Companies are subject to
limited taxes. Some of them are progressive taxation, i.e.,
eligible for subsidies and grants higher the income, higher is
from the government. the tax liability of the company
11 Repayment of Capital A member of co-operative society can The capital contributed by
surrender his shares to society and members of company is
can get back the capital contributed refunded only in the event of the
by him. winding up of the
company
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Part – B (Management)
Unit – IV
Introduction to Management and Planning

Introduction:
The basic unit of a society is the individual. But no individual can satisfy all his desires himself.
Therefore, he unites with his fellow beings and works in an organized group to achieve what he
cannot achieve individually. Human beings are surrounded by organized groups of many kinds. Viz.,
a family, a play group, a work group, a school, a business firm, a government etc.
Any organization is a set of people working together to achieve common goals wherever there is an
organized group of people working towards a common goal, some type of management becomes
essential. No organization can run successfully unless there is someone to manage its activities. thus it
is the management which makes the people realize the objectives of the group and direct their efforts
towards the achievement of those objectives.
Management is an essential part of any group activity. It is a primary force within the group or
organization which tends to lead it towards the group goal. Management is required to plan, organize,
direct, coordinate and control the affairs of the organization. It brings the human and material
resources together and motivates people for the achievement of the objectives of the organization.
Management is a universal process in all organized, social and economic activities. Wherever there is
human activity, there is management. In our real life, we see that every activity we undertake involves
an element that ensure coordination and cohesiveness to the activity, without which our acts would be
unproductive and ineffective.
The term “management” has been used in different senses. Sometimes it refers to the process of
planning, organizing, staffing, directing, coordinating and controlling; at other times it is used to
describe It as a function of managing people. It is also referred to as a body of knowledge.
Concept of management:
The concept of management is as old as human civilisation. Management in today’s context has the most
significant influence on modern life, giving a strong essence to the very purpose of management. The concept of
management is useful and applicable to all types of organisations, whether profit-making or service-oriented.
Therefore, it is said that management is a universal process. In other words, the concept of management
integrates and transforms various resources into ultimate goals and objectives, i.e., maximisation of profits or
services. It is primarily a process of integrating six Ms of management, viz., Men, Material, Machines, Methods,
Money and Markets.
The term management may be referred to a distinct process of allocating inputs by typical management
functions for the purpose or achieving pre-determined objectives, viz., higher output and profits through
customer satisfaction. It can be showed in the following diagram / process:
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Planning Directing
Input Outputs
s Aim
 Men Goals
 Money Objectives
Management process
 Materials
 Machines
 Methods
 Market
Organising Controlling
The traditional concept of management was restricted to the art of getting things done through
others. According to modern views, management is not merely an art of getting things done through others, but it
also covers a wide spectrum of business-related activities. According to modern thinkers, management is a
process, an activity, a discipline and an effort to co-ordinate, control and direct individual and group efforts
towards the attainment of cherished goals of business.
Definitions:
The following are the authors can explain about the management in their different ways. “Management is
knowing exactly what you men to do and then seeing that they do it in the best
and cheapest way.”
- Fredrick Winslow Taylor
“To manage is to forecast, to plan, to organise, to command, to coordinate and to control.”
- Henry Fayol
“Management is defined as the creation and maintenance of an internal environment in an enterprise,

where individuals, working together in groups, can perform efficiently and effectively towards the attainment
of group goals.”
- Koontz and O’ Donnell
“Management is a distinct process consisting of planning, organising, actuating and controlling, performed to
determine and accomplish stated goals by the use of human beings and other
resources.”
- George Terry
Nature of management:
Management means different aspects to different authors. Each definition lays emphasis on a particular
aspect on management thereby presenting only a partial view of the total concept of
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management. Over a period of time managerial techniques to manage a business have undergone a change thus
the nature of management can be followed under:
1. Multidisciplinary:
Though management has developed as a separate discipline but it draws knowledge and concepts from
disciplines such as sociology, psychology, economics, statistics, operation research etc. Management
integrates ideas and concepts from these disciplines and uses them for improving the efficiency of
organisation.
2. Management is a group activity:

Management is an essential part of a group activity. As no individual can satisfy all his desires
himself, he unites with fellow-beings and works in an organised group to achieve what he cannot achieve
individually. Wherever, there is an organised group of people working towards common goal, some type
of management becomes essential. Management makes the people realize the objective of the group and
directs their efforts towards the achievement of these objectives.
3. Management is goal- oriented:
Management aims to achieve economic and social objectives. It exists to achieve some definite
goals or objectives. Group efforts in management are always directed towards the achievement of
some pre-determined goals. Theo Haimann quotes that, “Effective management is always
management by objectives.”
4. Management is a factor of production:
Management is not an end in itself but a means to achieve the group objectives. Just as land, labour
and capital are the factors of production and are essential for the production of goods and services,
management is a factor of production that is required to c-ordinate the other factors of production for
the accomplishment of pre-determined goals.
5. Management is universal in character:
Management is applicable in all types of organisations. Wherever there is human activity, there is a
management. The basic principles of management are of universal application and can be applied in all
organisations whether they are business, social, religious, cultural, sports, educational, politics or military.
Henry Fayol states that, “ Be it a case of commerce, politics,
religion, war… in every concern there is management function to be performed.”
6. Management is a social process:
Management consists of getting things done through others. This involves dealings with people. The
efforts of the human beings have to be directed, co-ordinated and regulated by management in order to
achieve the desired results. In the words of Brech, “Management is a social process entailing
responsibility for the effective and economical planning and the
regulation of the operation of an enterprise, in fulfillment of a given purpose of task.”
7. Management is a system of authority:
Since management is a process of directing men to perform a task, authority to accomplish the
work from others is implied in the very concept of management. Authority is the power to get the work done
from others and to compel them to work in a certain manner.
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Management cannot perform in the absence of authority. In real sense, management is a rule- making and
rule-enforcing body.
8. Management is a dynamic function:
Management is a dynamic function and it has to be performed continuously. It is concerned not
only with moulding of the enterprise but also the alteration of environment itself so as to ensure the
success of the enterprise.
9. Management is an art as well as science:
Management is a science because it has developed certain principles which are of universal
application. But the results of management depend upon the personal skill of managers and in this
sense management is an art. The art of manager is essential to make the best use of management
science. Thus, management is both science and art.
10. Management is a profession:
In the present days, management is recognised as a profession. It has a systematic and specialied
body of knowledge consisting of principles, a technique and laws and can be taught as a separate
discipline or subject. This is also divorced ownership from management.
Importance:
The emergence as an essential factor of production is an important event in the history of business.
Classical theorists stressed land, labour and capital as basic factors of production, needed for the production of
goods and services. However, due to growing complexities of business and consequent increase in
competition, both internally and externally, management has become an important factor of production.
The following are the important points:
1. Optimum utilisation of resources:

A good manager secures maximum results, in terms of production, sales, profits and employees
satisfaction with maximum inputs, in terms of physical resources and manpower efforts. Thus,
management results in optimum utilisation of resources.
2. Leadership and motivation:
Organisational goals cannot be achieved by using force. Management creates willingness
and motivates workers to work towards the achievement of pre-determined organisational objectives.
Thus, management leads and motivates employees in the right direction.
3. Initiative and innovation:
Management is a group activity. A good manager works with a common consensus and creates an
environment in which everyone get as an opportunity to express his/her views.
This gives an opportunity to subordinates to come forward with innovative ideas.
4. Minimizes wastages:
Along with ensuring judicious use of resources, a good management also aims at cutting down
wastage, both human as well as non-human management plans, organises, direct and controls the
activities of the organisation and thereby helps in controlling wastage.
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5. Industrial peace:
Management helps to develop a healthy environment within the organisation by promoting a
two-way communication between superiors and subordinates. This develops cordial relations
between them and promotes industrial peace and harmony.
6. Builds competitive strength:
In today’s competitive environment quality of performance determinants the profitability
of the organisation. Sound management enables the enterprise to achieve higher levels of
productivity and profitability , which in turn build competitive strength.
7. Improves standard of living:
A sound management helps to improve standard of living of both- the workers and consumers
by improving its productivity and profitability. Due to increased profitability, workers get higher
wages and consumers get better quality products at lower prices.
8. Growth, expansion and diversification:
In modern commercial fields, growth and expansion are necessary for making an enterprise
stable, profit-making and economically viable. A sound management helps organisation to grow,
expand and diversify and make it a going concern.
9. Social consciousness:
Business is a part of society. Thus, a sound management shoulders social responsibilities of business
and contributes towards the welfare of different segments of the society, viz., consumers, workers,
investors, shareholders, government and the society at large.
Administration Vs Management
There is a controversy on the use of these terms. Some authors say that administration and management
are the same thing and there is no difference between the two words while other feel that they are different
functions. The following are discussed by various authors:
1. Administration is different from management:

Administration is concerned with the determination of overall objectives and policies of an
enterprise while management is concerned with planning, co-ordinating and controlling of business
activities for attaining the enterprise objectives. Various authors like Ordway, Oliver Sheldon, Florance,
Lansburg, Haimann are also accept this because administration involves decision making and policy
formulation where as management involves execution and supervisory work.
2. Administration is part of management:
Administration is that part of management which is concerned with the installation and carrying
out of the procedures by which the programme is laid down and communicated and the progress of
activities is regulated and checked against plans. Various author and schools like Brech, Kimball and
Kimball and Rickman along with them the European school is also accepted this concept.
3. Administration and management are one:
In the words of Newman, “ Management or administration is the guidance,
leadership and control of the efforts of a group of individuals towards some common goals.” In Henry
Fayol’s opinion every undertaking requires same function and observes same
Page | 62
principles. Other authors such as George Terry, Allen, Koontz and O’ Donnell also feel that both the
terms mean the same thing.
Differences:
Administration Management Organisation

Meaning Administration is concerned with Management is concerned with Organisation is concerned
determination of objectives and implementation of policies with classification of the
major policies of the enterprise. laid down by the activities of the enterprise.
administration
Components Administrative staff includes Board of Management includes various Organisation refers to the
Directors or Chief ExecutiveOfficer sectional heads viz., Production enterprise as a whole, i.e., it
(CEO) or Managing Director (MD) Managers, Sales Manager, consists of administrative and
or Public Relation managerial staffs of the
President Officers etc. organisation.
Anatomy It resembles draftsman. It resembles the entire body It resembles the nervous
of human being system of human body.
Factors Administrative functions are Management functions are Organisation is influenced by
influencing influenced by factors like public influenced by factors like factors like nature and size of
functions opinion, government policies as organisational policies, organisation, nature of work
also social and religious factors. degree of delegation of flow, grouping of activities
authority, values and beliefs andformal
of themanagers. authorities.
Nature of It deals with determination of It is the executive function of It is an organic function of
functions major organisational objectives. getting things done putting together different
through others. parts of an enterprise.
Factors Administrative decisions are Management decisions are Organisational decisions are
influencing influenced by external factors like public influenced by values, beliefs and taken by managers in their
decisions opinion, social, economical, religious opinions of managers official capacities, as decided by
and governmental operating at different the top level authority.
factors. managerial levels.
Objectives It is pre-occupied with planning It ismostly concerned with It provides the mechanism for
aspect of work and formulates performance aspect of work cooperative and integrated
overall goals and objectives, and keeps itself busy for action by two or more
programmes policies and other getting things done through persons in any
plans. others. enterprise.
Set-up Administrative work is kept Managerial work is delegated Organisation sets up a
reserved by the top level to the middle and lower level machinery for effecting
executives for their own executives. delegation and securing
performances. coordination at various
levels of the structure.
Principles of Management:
Henry fayol has been rightly called the father of ‘ Administrative Management’ for his practical approach to
management theory. He has identified fourteen fundamental principles of management. These fourteen
principles are:
Page | 63
1. Division of labour and specialisation / work
Page | 64
This principle of Fayol tells us that as far as possible the whole work should be divided into different parts and each individual
should be assigned only one part of the work according to his ability and taste rather than giving the whole work to one
person.When a particular individual performs the same job repeatedly, he will become an expert in doing that particular part
of the whole job. Consequently, the benefits of specialisation will become available.The principle of division of labour applies
not only to the workers but also equally to the managers.
2. Authority and responsibility:
According to this principle, authority and responsibility should go hand in hand. It means that when a
particular individual is given a particular work and he is made responsible for the results, this can be
possible only when he is given sufficient authority to discharge his responsibility. It is not proper to
make a person responsible for any work in the absence of authority.
3. Discipline:
Discipline is essential for any successful work performance. Fayol considers discipline to mean
obedience, respect for authority, and observance of established rules.Discipline can be established by
providing good supervision at all levels, clearly explaining the rules, and implementing a system of
reward and punishment. A manager can present a good example to his subordinates by disciplining
himself.
4. Unity of command:
According to the principle of unity of command, an individual employee should receive orders from
only one superior at a time and that employee should be answerable only to that superior. If there are
many superiors giving orders to the same employee, he will not be able to decide as to which order is to
be given priority. He thus finds himself in a confused situation.
5. Unity of direction:
Unity of direction means that there should be one head for one plan for a group of activities having the
same objective. In other words, there should be one plan of action for a group of activities having the
same objective and there should be one manager to control them.
6. Subordination of individual interest to general interest:
This principle can be named ‘Priority to General Interest over Individual Interest.’ According to this
principle, the general interest or the interest of the organisation is above everything. If one is asked to
place individual interest and the general interest in order of priority, definitely the general interest
will be placed at the first place.
7. Remuneration:
Fayol is of the opinion that the employees should get a fair remuneration so that the employees and
the owners find equal amount of satisfaction. It is the duty of the manager to ensure that employees are
being paid remuneration according to their work. If, however, they are not paid properly for their work,
they will not do their work with perfect dedication, honesty and capacity.
8. Centralisation and decentralisation:
According to this principle, the superiors should adopt effective centralisation instead of complete
centralisation and complete decentralisation. By effective centralisation, Fayol
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does not mean that authority should be completely centralised.He feels that the superiors should keep
the authority of taking important decisions in their own hands, while the authority to take daily
decisions and decisions of less importance should be delegated to the subordinates.
9. Scalar chain:
Scalar chain refers to the line of authority from the highest to the lowest executive in the organisation
for the purpose of communication. However in the routine course of business, employees at the same
level can communicate with each other following the principle of
‘Gang Plank’.
10. Order:
According to the principle of order, a right person should be placed at the right job and a right thing
should be placed at the right place. According to Fayol, every enterprise should have two different orders-
Material Order for Physical Resources and Social Order for Human Resources.Maintaining these two
orders properly will ensure that everybody knows his workplace, what he is to do and from where he
would get his required material.
Consequently, all the available resources in the organisation will be utilised properly.
11. Equity:
This principle tells that the managers should treat their subordinates in a just and kind manner so that
they develop a feeling of dedication and attachment for their work. All the employees should be
treated equally and impartially.
12. Stability of tenure:
From the point of view of management it is absolutely harmful to change the employees frequently as it
is a reflection of inefficient management. Therefore, according to this principle there should be stability
of tenure of the employees so that the work continues efficiently.Fayol thinks that instability in the
tenure of employees is a cause of poor management and results. High rate of labour turnover will
result in increased expenses because of selecting them time and again, and giving them training
afresh.
13. Initiative:
Initiative means the capacity to work while expressing one’s thoughts. According to Fayol, it is the duty of
the manager to encourage the feeling of initiative among his employees for doing some work or taking
some decision but within the limits of authority and discipline.It will be possible only when the manager
will welcome the thoughts of his/her subordinates. By doing so the subordinates will present new and
useful ideas time and again and gradually they will become an integral part of the organisation.
14. Espirit-de-corps:
As per this principle, a manager should continuously make efforts to develop a team spirit among the
subordinates. To do this, he/she should use the word ‘We’ instead of” during the conversation with
subordinates.
Functions of Management:
There is enough disagreement among management writers on the classification of managerial
functions. Newman and Summer recognize only four functions, namely, organizing, planning, leading
and controlling.
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Henry Fayol identifies five functions of management, viz. planning, organizing, commanding,
coordinating and controlling.
Luther Gulick states seven such functions under the catch word "POSDCORB' which
stands for planning, organizing, staffing, directing, coordinating, reporting and budgeting.
For our purpose, we shall designate the following six as the functions of a manager: planning,
organizing, staffing, directing, coordinating and controlling.
1. Planning : Planning is the most fundamental and the most pervasive of all management
functions. If people working in groups have to perform effectively, they should know in advance what
is to be done, what activities they have to perform in order to do what is to be done, and when it is to
be done. Planning is concerned with 'what', 'how, and 'when' of performance. It is deciding in the
present about the future objectives and the courses of action for their achievement.
It thus involves:
(a) Determination of long and short-range objectives;
(b) Development of strategies and courses of actions to be followed for the achievement of these
objectives; and
(c) Formulation of policies, procedures, and rules, etc., for the implementation of strategies, and plans.
The organizational objectives are set by top management in the context of its basic purpose and
mission, environmental factors, business forecasts, and available and potential resources. These
objectives are both long-range as well as short-range. They aredivided into divisional, departmental,
sectional and individual objectives or goals. This is followed by the development of strategies and
courses of action to be followed at various levels of management and in various segments of the
organization. Policies, procedures and rules provide the framework of decision making, and the
method and order for the making and implementation of these decisions.
Every manager performs all these planning functions, or contributes to their performance. In some
organizations, particularly those which are traditionally managed and the small ones, planning are
often not done deliberately and systematically but it is still done. The plans may be in the minds of
their managers rather than explicitly and precisely spelt out: they may be fuzzy rather than clear but
they are always there. Planning is thus the most basic function of management. It is performed in all
kinds of organizations by all managers at all levels of hierarchy.
2. Organizing : Organizing involves identification of activities required for the achievement of

enterprise objectives and implementation of plans; grouping of activities into jobs; assignment of
these jobs and activities to departments and individuals; delegation of responsibility and authority for
performance, and provision for vertical and horizontal coordination of activities. Every manager has
to decide what activities have to be undertaken in his department or section for the achievement of the
goals entrusted to him. Having identified the activities, he has to group identical or similar activities
in order to make jobs, assign these jobs or groups of activities to his subordinates, delegate authority
to them so as to enable them to make decisions and initiate action for undertaking these activities, and
provide for coordination between himself and his subordinates, and among his subordinates.
Organizing thus involves the following sub-functions :
(a) Identification of activities required for the achievement of objectives and implementation of plans.
(b) Grouping the activities so as to create self-contained jobs.
(c) Assignment of jobs to employees.
(d) Delegation of authority so as to enable them to perform their jobs and to command the resources
needed for their performance.
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(e) Establishment of a network of coordinating relationships. Organizing process results in a structure
of the organization. It comprises organizational positions, accompanying tasks and responsibilities,
and a network of roles and authority-responsibility relationships. Organizing is thus the basic process
of combining and integrating human, physical and financial resources in productive interrelationships
for the achievement of enterprise objectives. It aims at combining employees and interrelated tasks in
an orderly manner so that organizational work is performed in a coordinated manner, and all efforts
and activities pull together in the direction of organizational goals.
3. Staffing: Staffing is a continuous and vital function of management. After the objectives have
been determined, strategies, policies, programmes, procedures and rules formulated for their
achievement, activities for the implementation of strategies, policies, programmes, etc. identified and
grouped into jobs, the next logical step in the management process is to procure suitable personnel for
manning the jobs. Since the efficiency and effectiveness of an organization significantly depends on
the quality of its personnel and since it is one of the primary functions of management to achieve
qualified and trained people to fill various positions, staffing has been recognized as a distinct
function of management. It comprises several sub functions:
(a) Manpower planning involving determination of the number and the kind of personnel required.
(b) Recruitment for attracting adequate number of potential employees to seek jobs in the enterprise.
(c) Selection of the most suitable persons for the jobs under consideration.
(d) Placement, induction and orientation.
(e) Transfers, promotions, termination and layoff.
(f) Training and development of employees. As the importance of human factor in organizational
effectiveness is being increasingly recognized, staffing is gaining acceptance as a distinct function of
management. It need hardly any emphasize that no organization can ever be better than its people, and
managers must perform the staffing function with as much concern as any other function.
4. Directing: Directing is the function of leading the employees to perform efficiently, and
contribute their optimum to the achievement of organizational objectives. Jobs assigned to
subordinates have to be explained and clarified, they have to be provided guidance in job performance
and they are to be motivated to contribute their optimum performance with zeal and enthusiasm. The
function of directing thus involves the following sub-functions:
(a) Communication
(b) Motivation
(c) Leadership
5. Coordination: Coordinating is the function of establishing such relationships among various

parts of the organization that they all together pull in the direction of organizational objectives. It is
thus the process of tying together all the organizational decisions, operations, activities and efforts so
as to achieve unity of action for the accomplishment of organizational objectives. The significance of
the coordinating process has been aptly highlighted by Mary Parker Follet. The manager, in her view,
should ensure that he has an organization "with all its parts coordinated, so moving together in their
closely knit and adjusting activities, so linking, interlocking and interrelation, that they make a
working unit, which is not a congeries of separate pieces, but what I have called a functional whole or
integrative unity". Coordination, as a management function, involves the following sub-functions:
(a) Clear definition of authority-responsibility relationships
(b) Unity of direction
(c) Unity of command
(d) Effective communication
(e) Effective leadership
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6. Controlling: Controlling is the function of ensuring that the divisional, departmental, sectional
and individual performances are consistent with the predetermined objectives and goals. Deviations
from objectives and plans have to be identified and investigated, and correction action taken.
Deviations from plans and objectives provide feedback to managers, and all other management
processes including planning, organizing, staffing, directing and coordinating are continuously
reviewed and modified, where necessary. Controlling implies that objectives, goals and standards of
performance exist and are known to employees and their superiors. It also implies a flexible and
dynamic organization which will permit changes in objectives, plans, programmes, strategies,
policies, organizational design, staffing policies and practices, leadership Style, communication
system, etc., for it is not uncommon that employees failure to achieve predetermined standards is due
to defects or shortcomings in any one or more of the above dimensions of management.
Thus, controlling involves the following process:
(a) Measurement of performance against predetermined goals.
(b) Identification of deviations from these goals.
(c) Corrective action to rectify deviations.
It may be pointed out that although management functions have been discussed in a particular
sequence-planning, organizing, staffing, directing, coordinating and controlling – they are not
performed in a sequential order. Management is an integral process and it is difficult to put its
functions neatly in separate boxes. Management functionstend to coalesce, and it sometimes becomes
difficult to separate one from the other. For example, when a production manager is discussing work
problems with one of his subordinates, it is difficult to say whether he is guiding, developing or
communicating, or doing all these things simultaneously. Moreover, managers often perform more
than one function simultaneously.
Planning
Planning is the fundamental function of management. It is primarily an intellectual exercise.
Planning is the process through which a manager looks to the future and discovers alternative courses of action
for effective corporate achievements at all levels. It is the base of all managerial activities, i.e., controlling,
coordinating, managing, staffing etc. In other words speaking generally, planning is deciding what to do, when to
do, how to do, who will do particular task. Planning is providing the necessary guidelines for effective decision-
making for the entire organisation. Since all future actions in the organisation will be based on plans, planning must
be careful and thoughtful.
Planning helps managers do things in an orderly way. It is necessary “to think” on the basis of available
data before taking a particular decision.
Definitions:
“The determination in advance of a line of action by which certain results are to be achieved.”
- Hart
“The selection among alternatives for future courses of action for the enterprise as a whole and each
department with it.”
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“Management planning involves the development of forecasts, objectives, policies, programmes, procedures,
schedules and budgets.”
- Louis A. Allen
Need and importance:
1. Planning is complementary to all management functions:

All management functions viz., organising, directing, leading, coordinating, controlling, staffing and
motivating are directly related to planning. In fact, planning is the starting point of all managerial
activities.
2. It helps management to face the future with confidence:
The most certain thing about future is that it is uncertain. Planning cannot change the future, but it
certainly equips managers with clear visions and great determination to face the future with greater
strength and confidence.
3. It focuses its attention on objectives:
Plans are objective-oriented, i.e., they are related to organisation and social objectives.
Hence, they help in synchronizing the efforts of everyone towards the fulfillment of predetermined
organisational objectives. This helps in minimising deviations and thereby reduces wastages.
4. It leads to optimum utilisation of resources:
Planning recognises the alternative courses of action and chooses the best alternative in terms of
cost and resources. It also exercises a control over the acquisition and employment of
resources and thereby ensures their optimum use.
5. It increases overall efficiency:
It is said that more sweat on the parade ground lesser blood on the battlefield. Planning prepares
the organisation to meet unforeseen future contingencies and thus, reduces human and non-human
wastages and increases overall organisational efficiency.
6. It provides premises for effective control:
Planning lays down the track on which the work should proceed within the given unit of time, labour
and cost. Thus, it provides bases for comparing the actual performance with the targeted ones and
locates deviations and takes corrective action.
7. It guides decision-making:
Though planning in itself, amounts to decision-making, yet it acts as a guide to further decision-
making for the lower level managers. Organisational or strategic plans set the boundaries within which
decisions can be taken by middle level and lower level managers.
8. It facilitates coordination:
A well-defined plan clearly lays down the objectives and defines the role of each individual
and department in the organisation. Hence, it co-ordinates their activities and converts them into a
homogenous activity.
9. It helps in performance evaluation:
Planning defines the total volume of work, lays down courses of action and identifies constraints. It
is a time-bound exercise and hence, provides a yardstick for evaluation of the performance of managers
and employees.
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10. It makes provisions for contingencies:

A plan anticipates the possible unforeseen contingencies in advance. Moreover, it makes
provision for such contingencies in the form of reserves. Hence, a plan provides cushion for
absorbing future shocks.
Process of planning:
Planning involves a number of steps ranging from determining the problem to follow-up action.
Following steps are involved in planning process:
1. Recognising need for action:

The first step in planning process is the awareness of business opportunity and the need for taking
action. Present and future opportunities must be found so that planning may be undertaken for them. The
trend of economic situation should also be visualised. Before venturing into new areas the pros and
cons of such projects should be evaluated. A beginning should be made only after going through a
detailed analysis of the new opportunity.
2. Gathering necessary information:
Before actual planning is initiated relevant facts and figures are collected. All information
relating relating to operations of the business should be collected in detail. The facts and figures
collected will help in framing realistic plans.
3. Laying down objectives:
Objectives are the goals which the management tries to achieve. The objectives are the end
products and all energies are diverted to achieve these goals. Goals are thread which bind the whole
company. Planning starts with the determination of objectives. Objectives are the guides of employees.
It is essential that objectives should be properly formulated and communicated to all members of the
organisation.
4. Determining planning premises:
Planning is always for uncertain future. Though nothing may be certain in the coming period but still
certain assumptions will have to be made for formulating plans. Forecasts are essential for planning
even if all may not prove correct. The behaviour of certain variables is forecasted for constituting planning
premises. The success or failure of planning will depend upon the forecasts for various. The effect of
various factors should be carefully weighed.
5. Examining alternative course of action:
The next step in planning will be choosing the best course of action. There are number of ways of
doing a thing. The planner should study all the alternatives and then a final selection should be made.
Best results will be achieved only when best way of doing a work is selected.
6. Evaluation of action patterns:
After choosing a course of action, the next step will be to make an evaluation of those courses of
actions. Evaluation will involve the study of performance of various actions.
Various factors will be weighed against each other. A course of action may be suitable but it may involve
huge investments and the other may involve less amount but it may not be very profitable.
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7. Determining secondary plans:

Once a main plan is formulated then a number of supportive plans are required. In fact secondary
plans are meant for the implementation of principal plan. All secondary plans will be part of the main
plan.
8. Implementation of plans:
The last step in planning process is the implementation part. The planning should be put into action so
that business objectives may be achieved. The implementation will require establishment of policies,
procedures, standards and budgets. These tools will enable a better implementation of plans.
Decision making
Decision-making can be regarded as the cognitive process resulting in the selection

of a belief or a course of action among several alternative possibilities. Every decision-
making process produces a final choice that may or may not prompt action. Decision-making
is the study of identifying and choosing alternatives based on the values and preferences of
the decision maker. Decision-making is one of the central activities of management and is a
huge part of any process of implementation. Decision-making can also be regarded as a
problem-solving activity terminated by a solution deemed to be satisfactory. Rational choice
theory encompasses the notion that people try to maximize benefits while minimizing costs.
Decision making is a process of selecting the best among the different alternatives. It is the
act of making a choice. There are so many alternatives found in the organization and
departments. Decision making is defined as the selection of choice of one best alternative.
Before making decisions all alternatives should be evaluated from which advantages and
disadvantages are known. It helps to make the best decisions. It is also one of the important
functions of management. Without other management functions such as planning,
Organizing, directing, controlling, staffing can’t be conducted because in this managerial
function decision is very important.
Definitions:
“Decision-making is the selection based on some criteria from two or more possible
alternatives.”
- George Terry
“A decision is an act of choice wherein an executive forms a conclusions about what must be done in a
given situation. A decision represents a course of behaviour chosen from a number of possible
alternatives.”
- Mac Farland
Decision making process
Decision making is the process of making choices by setting goals, gathering information, and assessing
alternative occupations.
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As you can see, there are seven steps in effective decision making.
Step 1: Identify the decision to be made.

You realize that a decision must be made. You then go through an internal process of trying to define clearly the
nature of the decision you must make. This first step is a very important one.
Step 2: Gather relevant information.
Most decisions require collecting pertinent information. The real trick in this step is to know what information is
needed, the best sources of this information, and how to go about getting it. Some information must be sought
from within yourself through a process of self-assessment; other information must be sought from outside
yourself-from books, people, and a variety of other sources. This step, therefore, involves both internal
and external “work”.
Step 3: Identify alternatives.
Through the process of collecting information you will probably identify several possible paths of action, or
alternatives. You may also use your imagination and information to construct new alternatives. In this step of
the decision-making process, you will list all possible and desirable alternatives.
Step 4: Weigh evidence.
In this step, you draw on your information and emotions to imagine what it would be like if you carried out each of
the alternatives to the end. You must evaluate whether the need identified in Step 1 would be helped or solved
through the use of each alternative. In going through this difficult internal process, you begin to favor certain
alternatives which appear to have higher potential for reaching your goal. Eventually you are able to place the
alternatives in priority order, based upon your own value system.
Step 5: Choose among alternatives.
Once you have weighed all the evidence, you are ready to select the alternative which seems to be best suited to
you. You may even choose a combination of alternatives.
Step 6: Take action.
You now take some positive action which begins to implement the alternative you chose in Step 5.
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Step 7: Review decision and consequences.

In the last step you experience the results of your decision and evaluate whether or not it has “solved” the need
you identified in Step 1. If it has, you may stay with this decision for some period of time. If the decision has not
resolved the identified need, you may repeat certain steps of the process in order to make a new decision. You
may, for example, gather more detailed or somewhat different information or discover additional alternatives
on which to base your decision.
Or
1. Identification of a problem:
The first step in decision-making is to visualise the problem clearly. It is said that a well- defined
problem is half solved. The problem may be financial, technical or related to marketing. These
problems generally arise due to shortage, depression, government regulations, competition,
changing patterns of consumption, etc.
2. Diagnosing the problem:
Once the problem is defined, the next step is to diagnose the problem. Several managerial
problems are entangled with one another. Therefore, it is necessary to isolate the specific problem in
relation to which the decision has to be made. This will certainly give a better understanding of the
problem to a decision-maker.
3. Analysis of a problem:
Analysis of the problem is an important as its diagnosis. The problem should be well analysed with
reference to:
 The nature of decision-whether strategic or routine.
 Impact of decision on the functioning of the organisation.
 The periodicity and futurity of the decision.
4. Collecting information:
Thereafter, necessary data should be collected from all possible sources, i.e., both internally
and externally. The data so collected should be accurate, up-to-date, adequate and unbiased. These
data should be processed statistically in order to draw inferences and make conclusions.
5. Identifying the alternate courses of action:
Means have alternative uses, similarly one end can be achieved by different means. This diversity on
both the sides leads to number of permutations and combinations for deriving a variety of solutions to the
problem under consideration by changing the ratio of time, cost and labour.
6. Evaluation of alternatives:
Peter Drucker has recommended the following criteria for evaluation of the possible
alternatives.
 Degree of risk associated with each alternative.
 Cost, time and efforts involved in each alternative.
 Urgency of decision.
 Limitations of physical, financial and human resources.
7. Choice of the best alternatives:
Now, the decision-maker can select the best alternative which can yield maximum results with
minimum efforts. Alternative, which is economical, less time-consuming and causes no inconvenience to
anyone in the organisation, should be chosen. At the same time, it should be consistent with the
objectives of the organisation.
8. Conversion of decision into action:
Decision-making process completes the theoretical aspect of decision-making while
implementation is the practical aspect of it. For an effective implementation, decision has to
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be communicated to each concerned in the organisation and necessary training has to be imparted
for its successful implementation.
9. Progressive review:
Feedback is necessary due to changes in the internal and external environment.
Revisions, modifications, adjustments etc., are necessary in changing business environment. At the same
time, review helps in locating deviations and taking timely corrective action.
Importance of decision making
1. Implementation of managerial function:
Without decision making different managerial function such as planning, organizing, directing, controlling,
staffing can’t be conducted. In other words, when an employee does, s/he does the
work through decision making function. Therefore, we can say that decision is important element to implement the
managerial function.
2. Pervasiveness of decision making:
The decision is made in all managerial activities and in all functions of the organization. It must be
taken by all staff. Without decision making any kinds of function is not possible. So it is pervasive.
3. Evaluation of managerial performance:
Decisions can evaluate managerial performance. When decision is correct it is understood that the manager is
qualified, able and efficient. When the decision is wrong, it is understood that the manager is disqualified. So
decision making evaluate the managerial performance.
4. Helpful in planning and policies:
Any policy or plan is established through decision making. Without decision making, no plans and policies are
performed. In the process of making plans, appropriate decisions must be made from so many alternatives.
Therefore decision making is an important process which is helpful in planning.
5. Selecting the best alternatives:
Decision making is the process of selecting the best alternatives. It is necessary in every organization because
there are many alternatives. So decision makers evaluate various advantages and disadvantages of every
alternative and select the best alternative.
6. Successful; operation of business:
Every individual, departments and organization make the decisions. In this competitive world; organization
can exist when the correct and appropriate decisions are made. Therefore correct decisions help in
successful operation of business.
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Unit – V
Organising
Introduction:
An entrepreneur organises various factors of production like land, labour, capital, machinery etc. for
channelizing them into productive activities. Business activities are divided into various functions, these
functions are assigned to different individuals. Organisation is the structural framework of duties and
responsibilities required of personnel in performing various functions with a view to achieve business goals
through organisation. Management tries to combine various business activities to accomplish predetermined
goals. Present business system is very complex. The unit must be run efficiently to stay in the competitive
world of business. The authority and responsibility is fixed at various levels. All efforts should be made to co-
ordinate different activities for running the units efficiently so that cost of production may be reduced and
profitability of the unit may be increased.
Definitions:
The following are the authors can explain about the organising in their different ways. “Organisation
is the process of identifying and grouping work to be performed, defining and

delegating responsibility and authority and establishing relationships for the purpose of enabling people to
work must effectively together in a accomplishing objectives.”
- Louis A. Allen
“The establishment of authority relationships with provision for co-ordination between them, both
vertically and horizontally in the enterprise structure..”
“Organising is the establishing of effective authority relationships among selected work, persons, and work
places in order for the group to work together efficiently.”
- George Terry
“Organisation is a harmonious adjustment of specialised parts for accomplishment of some common

purpose or purposes.”
- L.H. Haney
Line and staff organization :
Line and staff organization eliminates the drawbacks of both and also has the good points of them. It is a
happy blending of line and staff organization. Both line and staff personnel have important roles to play. He
will like to know the positions of his enemies so that he is able to plan his
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placings. A line manager is vested with executive authority. He is responsible for making important decisions
and is also accountable for their implications. Line officers are responsible for the accomplishment of
various decisions. Staff officers are experts in their fields. They are attached to line managers to advise them in
the field of their specialization. Their role is of advisers. The staff organization facilitaties the accomplishment
of organizational objectives by making available valuable advise and expert knowledge. They have no authority
to command the line staff but have control within their own organization.
Advantages:
1. Specialization:
Line and staff organization introduces specialization in a systematic manner. Persons with specialised
knowledge are appointed to help line officers. The planning part is generally undertaken by staff
personnel and line officers are able to devote much time for execution.
2. Better discipline:
The unity of command is maintained in this type of organization. The staff personnel do not
interfere with the executive work of line officers. The workers get command from line personnel and
are accountable directly to them for their performance. This creates better understanding and
discipline among employees.
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3. Balanced and prompt decisions:
The functional managers have the advantage of expert advice when taking important decisions..
the staff can also be used to investigate and advice on inter-departmental relationships. The line
officers can take balanced and quick decisions.
4. Growth and expansion:
The line and staff organization is quite suitable for growth and expansion. The burden of line staff is
eased by the appointment of specialists. Line officers will be able to devote much time for future planning.
The present staff will enable the expansion and growth of unit.
5. Development of employees:
This organization provides scope for advancement of career to able and dedicated employees.
There are more openings for those who have capabilities of going up. The separation of functions of planning
and doing also helps in creating more and more job opportunities.
6. Lesser burden on line officers:
With the appointment of staff officers the burden of line officers is greatly reduced. The
specialists help line officers in deciding things regarding their lines of specialization. The line officers are left
with routine administration.
7. Quick actions:
The line officers will have sufficient time to take various decisions. Whenever there is a need for
certain decisions, they will be able to devote time and decide the things. This type of situation helps in
solving many issues which would have created difficulties if timely decisions would not have been taken.
Disadvantages:
1. Conflict between line and staff personnel:
There is a possibility of conflict between line and staff personnel. The responsibility for operations
lies with line officers while staff officers only advise. The staff officers feel ignored at the hands of line officers. The
line officers, on the other hand, complain of interference by staff persons in the day-to-day working.
2. Lack of responsibility:
There is a lack of responsibility for staff officials. They are not accountable for the actual results of
operations. This may tempt them to give rash or theoretical advice. They may also be casual in their
approach because the whole blame for non-performance lies with line.
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3. More dependence on staff:
The line officers become habituated for advice on staff. They refer everything to staff for advice.
Over-dependence on staff will make line officers less creative. They will not give much thought to any
activity since advice will be available from staff.
4. Lack of co-ordination:
There will be a lack of co-ordination between line and staff. The staff advice may be confused
with line orders. The staff orders may also be clear about their exact role. They may try to dominate the
implementation part of their advice.
5. Ineffective staff:
The staff officers do not wield any power in the organization. Without power they will not get prestige
in the organisation. They will feel unimportant and the quality of advice will also be adversely affected.
6. Expensive:
This type of organization is very expensive because a large number of specialists are appointed.
The persons being experts in their fields, they demand higher emoluments. Small and medium concerns
cannot afford line and staff organization because of its expensive nature.
The matrix design:
A very popular organizational design is the MATRIX DESIGN, this design combines two forms of
departmentalization i.e., functional and product. The most important characteristic of the matrix design is
that it directly violates classical principles, such as unity of command. Employees in the matrix have two
bosses-their functional departmental managers and their product managers. Therefore, this design has
a dual chain of command.
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Advantages:
a. The matrix design facilitates coordination when the organization has a multiplicity of complex
and independent activities.
b. The direct and frequent contact between different experts in the matrix can provide for better
communication and more flexibility.
c. The matrix reduces the drawbacks of bureaucratic design. The dual lines of authority reduces the
tendency of departmental heads to put their departmental goals first before the organizational goals.
d. The matrix achieves the economies of scale by providing the organization with both the best the best
resources and an effective way of ensuring their efficient placement.
Span of Control
Every person has a limited capacity to effectively supervise and control other person. No one control an
infinite number of subordinates. The capacity and ability of a person to supervise a large number of subordinates
working under him is limited on account of time at his disposal, knowledge, energy, his personality, interest and
other capabilities. Therefore, the number of subordinates working under him must be manageable and the
management must create departments or distinct activity groups each of which has a manager in charge. The
term ‘span’ literally means the space between two supports of a structure, e.g., the space between two pillars
of a bridge. The space between the two pillars should neither be too large nor too small. If it is too large, the
bridge may collapse; and if it too small, it will enhance its cost.
When applied management ‘span’ subordinates a manager or supervisor can supervise, manage or
control effectively and efficiently. Span of supervision, therefore, refers to the optimum number of subordinates
that a manager or supervisor can manage or control effectively.
Def:
“Span of control means the number of people reporting directly to an authority. The principle of span of
control implies that no single executive should have more people looking to him for guidance and
leadership that he can reasonably be expected to serve.”
- Spriegal
The span of supervision is also known as span of control, span of management, span of responsibility, span of
authority and span of direction
Determining of the proper span:
Very often the question is asked as to how many subordinates a supervisor can manage effectively.
However, this question has been attempted by various management experts and even they are not unanimous
over this point. The idea of limited span developed from experience.
Although the concept of span of control was discussed by Henry Fayol, but Sir Lan Hamilton is usually given
credit for developing this concept.
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V.A. Graicunos published a famous paper in 1933. He analysed subordinate-superior relationship in

terms of a mathematical formula. The formula was based on the theory that the complexities of management
increase geometrically as the number of subordinates increases arithmetically. He identified three types of
subordinate-superior relationship:
 Direct single relationship arising from the direct and individual interaction of the superior with his
subordinates
 Direct group relationships arising between the superior and the subordinate in all possible
combinations, such as A to B with C, and A to C with B.
 Cross relationships arising from mutual relationships among subordinates for working under the same
superior.
Graicunos has given the following formula to ascertain the number of subordinate-superior
relationships:
Number of relationships = n[2n/2 +n-1]
Where, n stands for number of subordinates
Hence, if number of subordinates working under a supervisor is 4, the number of relationships he develops are
44 as calculated below:
No. of relationship = n[2n/2 +n-1] = 4[24/2 +4-1] = 44
Graicunos was of the opinion that a person can manage 222 relationships arising out of 6 subordinates. L.
Urwick, a prominent British consultant, however, found that the ideal number of subordinates for all superior
authorities to be 4 and at the lowest level of organization the number may be 8 to 12. According to Healey, the
span at higher level should not be more than 5 subordinates and at lower levels it can be 7 or 8. J.C. Worthy
suggested a span as higher as 20 to 30 subordinates.
Factors determining the span of management:
Capacity of manager: Each manager has different capacity and ability in terms of decision making,
leadership, communication, judgment, guidance and control etc. mangers having more abilities in respect to
these factors may have more number of subordinates.
Capacity of subordinates: capacity of subordinates also affects the span of a manager. Efficient and trained
subordinates may work without much help of their manager. They may just need broad guidelines and they will
perform accordingly. They would require lesser time from their superior due to which manager can have large
number of subordinates under him.
Nature of work: If subordinates are performing similar and repetitive routine work they can do their work without
having much time of the manager. Frequent changes in work would require more detailed instructions from
manager whenever there is change in work. Type of technology used also affects the span of control.
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Degree of Decentralization: degree of centralization or decentralization affects the span by affecting the
involvement in decision making process. If manager clearly delegates his authority and defines it fully this would
require less time to devote to manage his subordinates as subordinates will take most of the actions by their
own. Hence manager can have wider span.
Degree of Planning: If the planning is effectively done particularly if standing plans procedures rules methods are
clear then subordinates can make their decisions on their own. If they have to make their own plans they would
require more guidelines by superiors and manager can handle narrow span in the case of improper planning.
Communication System: If communication system is modern i.e. tools like electronic devices will save time of
face to face interaction, which require more time, span of manager can be increased
Level of Management: level of management also affects the span. Higher the level
of management lesser the number of subordinates as higher levelmanagement does not have much time to
supervise. They spend their most of time in planning and other functions. Lower
level managers can have wider span than the higher level managers.
Physical location: If all the persons to be supervised are located at same place within the direct supervision of
manager, he can supervise more number of people. If subordinates are at different locations then manager
can supervise less number of spans.
Staffing
Every organization requires a number of persons for taking up different positions. The positions are
created through the process of organization and their occupants help in achieving the business objectives. The
persons occupying different positions should have the ability to meet their requirements. Staffing basically
involves matching jobs and individuals. It may be defined as filling and keeping filled positions in the organization
structure. This may require functions like manpower planning, recruitment, selection, training, development,
performance appraisal, transfers, promotions etc. It is clear that staffing must be closely linked to organizing,
that is, the setting up of intentional structures of roles and positions. Staffing involves making people suitable to
jobs while organizing involves creation of job. Staffing is considered to be the management of managers while
personnel management involves plans, policies and procedures for operative positions. It is taken to be a separate
function of management. Staffing involves specialized knowledge and approach and allows more emphasis on
human resource and its proper selection, training and development.
Staffing refers to the managerial function of attracting, acquiring, activating, developing and maintaining human
resources for achieving organizational goals efficiently.
Def:
According to Mc Farland, “Staffing is the function by which managers build an organizational through the
recruitment, selection and development of individuals as capable employees.”
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According to Koontz and O’Donnell, “The managerial function of staffing is defined as filling positions in the
organization structure through identifying workforce requirements, inventorying the people available, recruitment,
selection, placement, promotion, appraisal, compensation and
training of needed people.”
Nature :
1. Staffing is a basic function management

2. It is concerned with human resource management in the organization
3. Staffing function is performed continuously.
4. Every manager has to guide and train employees and also evaluate their performance on a continuous
basis.
5. The main purpose of this function is to make optimum utilization of human resources and also to provide
proper satisfaction to employees
6. Staffing is performed by all managers.
7. In big concerns there is a separate personnel department to deal with this function, but even here this
department advises line managers regarding different aspects of human resources.
8. Since staffing deals with human beings who have their own needs, emotions and aspirations, this function is
different from other managerial function.
Process:
The purpose of staffing is to employ most suitable and competent persons as per the requirements of the
organization. With this aim in view the following staff process is followed:
1. Estimating manpower needs:
The first thing in staffing process is to estimate manpower needs. These needs are influenced by
the type and size of the organization. Total manpower requirements are properly assessed. The
requirements for human beings are compared with that of the persons already available in the
organization.
2. Recruitment and selection of staff:
Recruitment is the process of searching prospective employees and persuading them to apply in the
organization. Selection is the procedure of spotting most suitable candidates out of those who are interested
to get employment in the enterprise. The purpose of recruitment and selection is to employing right man for
the right job.
3. Training and development:
Training is meant to improve the skill and knowledge of employees. It is beneficial to both employer and
employees. A well trained worker improves his efficiency. A formal training will avoid the risk of trial and error and
will also minimize the cost and wastage involved in training.
Development refers to the training of managerial staff. Through development, managerial staff does
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not increase its capabilities to perform the present work but also enhances their ability tomeet challenges
in future.
4. Promotion and transfer:
Employees are promoted to higher ranks on the basis of their merit and seniority. Staffing also involves
transfer of persons from one job to another, from one place to another place to another on the basis of their
ability, competence and ability.
5. Remuneration:
Remuneration is paid for the services of labour. Employee motivation mainly depends upon the wage
and salary structure prevalent in an organization. Employees should be paid fair remuneration so that they
feel encouraged to contribute maximum in their efforts.
6. Performance appraisal:
After selecting and training an employer for a particular job, management would like to see how he
performs high work. Performance appraisal is a systematic evaluation of employees contribution to the
organization in performance of their jobs. Not only qualities but deficiencies are also evaluated to improve the
performance of employees.
Need and importance:
1. Employing suitable persons:
The employment of suitable persons is essential for every enterprise. The procedure of recruitment,
tests for selection and methods of training are decided by the staffing team. A properly laid down scheme will
ensure the employment of right persons.
2. Keep pace with new developments:
New developments are taking place everyday. A business will have to keep pace with new changes. This
will possible only if competent persons are employees who can adjust as per the new situation.
3. Manpower development:
Manpower planning will have to be done in advance. The future requirements of personnel will be
estimated quite in advance. The new staff will be recruited, people will be prepared for taking up higher
responsibility jobs, all this will be possible only with a well planned staffing function.
4. Optimum utilization of manpower:
The cost of recruiting, selecting and training the staff is very high. The remuneration is also paid at high
rates. The manpower should be utilized to the maximum capacity. It will help in controlling cost also.
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5. Ensuring job satisfaction:
The staffing function will ensure job satisfaction to employees. The executives should be involved in
decision-making process. They should also be suitably rewarded for their contribution to the organization. A good
staffing function will devise methods which will ensure job satisfaction to everyone.
Recruitment
The aim of personnel planning is to determine the needs for persons both in terms of number and type.
For deciding about the number both present and future requirements should be taken into account. The
educational and technical requirements to manage various jobs should be properly analysed so that right
type of persons are employed. Recruitment is sometimes confused with employment. The two are not one
and the same. Recruitment is just one step in the process of employment. Similarly recruitment and selection
are also different in nature. Recruitment is the process of searching for prospective employees and stimulating
them to apply for jobs in the organization. When more persons apply for jobs then there will be a scope for
recruiting better persons. The job-seekers too, on the other hand, are in search of organizations offering
them employment. Recruitment is a linkage activity bringing together those with jobs and those seeking
jobs.
Def:
According to Yorder, “Recruitment is a process to discover the sources of manpower to meet the
requirements of the staffing schedule and to employ effective measures for attracting that manpower in
adequate numbers to facilitate effective selection of an effective working force.”
Process:
Job analysis
In situations where multiple new jobs are created and recruited for the first time, a job
analysis might be undertaken to document the knowledge, skill, ability, and other personal characteristics
required for the job. From these the relevant information is captured in such documents as job descriptions
and job specifications. Often a company will already have job descriptions that represent a historical
collection of tasks performed. Where already drawn up, these documents need to be reviewed or updated to
reflect present day requirements. Prior to initiating the recruitment stages a person specificationshould be
finalized to provide the recruiters commissioned with the requirements and objectives of the project.
Sourcing
Sourcing is the use of one or more strategies to attract or identify candidates to fill job vacancies. It may involve
internal and/or external advertising, using appropriate media, such as local or national newspapers, specialist
recruitment media, professional publications, window advertisements, job centers, or in a variety of ways via the
internet. Alternatively, employers may use recruitment
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consultancies or agencies to find otherwise scarce candidates who may be content in their current positions and
are not actively looking to move companies. This initial research for so-called passive candidates, also called
name generation, results in a contact information of potential candidates who can then be contacted
discreetly to be screened and approached.
Screening and selection
Suitability for a job is typically assessed by looking for that are required for a job. These can be determined via:
screening résumés (also known as curriculum vitae or CV); job
application; Biographical Information Blanks which is an assessment that asks for a more extensive background
than an application; or a job interview. Various psychological tests can be used to assess a variety of KSAOs,
including literacy. Assessments are available to measure physical ability. Many recruiters and agencies use
applicant tracking systems to perform the filtering process, along with software tools for psychometric testing and
performance based assessment. In many countries, employers are legally mandated to ensure their screening
and selection processes meet equal opportunity and ethical standards.
In addition to the above selection assessment criteria, employers are likely to recognize the value of candidates
who encompass "soft skills" such as interpersonal or team leadership, and have the ability to reinforce the
company brand through behavior and attitude portrayal to customers and suppliers. Multinational organizations
and those that recruit from a range of nationalities are also concerned candidates will fit into the prevailing
company culture. Though many hold attitudes that are more enlightened and informed than past years, the
word “disability” carries few
positive connotations for most employers. Research has shown that employer biases tend to improve through
firsthand experience and exposure with proper supports for employee and the employer making the hiring
decisions, less influenced by the disabled applicant perceived contribution. As for most companies, money
and job stability are two of the contributing factors to productivity, which in return equates to the growth and
success of a business. Hiring disabled workers produce more advantages than disadvantages. Disabled workers
are more likely to stay with the company and make their a work a career than most due to the fact that they
appreciate having a job and are more stable because they can work at high levels. There is no difference in the
daily production of a disadvantaged worker. Given their situation, they are more likely to adapt to their
environment surroundings and acquaint themselves with equipment, enabling them to solve problems and
overcome adversity as other employees. Companies are granted Disable Access Credit. Although there are
eligibility requirements for these funds, it could assist with costs of accommodations and other expenses.
Additional management to supervise and assist those who encounter problems are needed which causes
employers to hire more qualified personnel (in case supervisor unavailable) and equate to higher wages, double
shifts and incentives. Ensuring adequate space and property changes such as ramps, restricting parking spaces,
and posting handicap signs can be fairly inexpensive, transformations still have to be in place and tedious.
Sometimes companies loose skilled workers due to depth of responsibility entailed in overseeing employees that
are less advantaged.
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Lateral hiring
"Lateral hiring" refers to the hiring of someone into a position that is at the same organizational level or salary. It
could mean hiring someone from another, similar organization, possibly luring them with a better salary and the
promise of better career opportunities. An example is the recruiting of a partner of a law firm by another law firm.
A lateral hire may also refer to an employee moving from one position to another within the same
organization.
Selection
Selection is a process of choosing duly qualified persons according to the requirement of the job. In
recruitment an effort is to attract more and more applicants while in selection the effort is to eliminate
unsuitable persons. The number of applicants will be much more than the positions vacant. It becomes
important to scruitinise applications properly and call for interview only those persons who are suitable for
jobs. The selection of a right person will improve the quantity and quality of performance.
Def:
According to Dale Yorder, “Selection is the process in which candidates for employment are divided in to
two classes, those who are to be offered employment and those who are not.”
According to Thomas Stone, “Selection is the process of differentiating between applicants in order to
identify (and hire) those with a greater likelihood of success in a job.”
Selection procedure:
The selection procedure consists of a series of methods or steps or stages by which additional
information is secured about an applicant. At each stage may come to light which may lead to the rejection of
an applicant. Selection procedure may be compared to a series of barriers which an applicant is required to
cross before he is finally selected. The following steps are followed:
1. Receipt and scrutiny of applications:
The receipt and scrutining of applications is the first step in the process of selection. A receptionist
in the personnel department gives information about new opening to the visitors and receives their
applications. The scrutiny of applications is essential to take out those applications which do not fulfil the
requirements of posts. Some people send applications even when they do not possess the required
experience and qualifications.
2. Preliminary interview:
Preliminary interview is the first occasion when applicants come into contact with company
officials. This interview is to see whether applicants are suitable for the company both mentally and
physically. The candidates are asked questions regarding there educational
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qualifications, experience, age, hobbies etc. the applicants selected at preliminary interview are given blank
application forms for supplying detailed information.
3. Blank application:
A blank application form is a widely accepted device for getting information from a
prospective applicant. This is a way of getting written information about candidate’s particulars in his own
handwriting. It enables the personnel department to draw tentative inferences about the applicant’s
suitability for employment.
4. Tests:
The use of tests for making selection is the most controversial step. Some persons are of the view
that tests do not serve any purpose and do not improve selection process. The selection of tests to be
applied is an important factor. The selection of appropriate tests may give good results and help in appointing
suitable persons. The worth of test will be judged from its ability to reject unsuitable persons and help in
selecting appropriate persons.
5. Interviews:
Application blank and tests give enough information about the applicant but it is still not sufficient to
make a final selection. Interview may be taken to know more about the candidate and give him information
about the job may be required to undertake. The purpose of exchange of ideas is ‘to get information’ and ‘give
information’. The candidate also gets a chance to know about the company and the nature of his job.
6. Checking references:
The references may provide significant information about the candidate if they happened to be
his former employers or with whom he might have been working earlier. The applicants are normally asked to
name two or three persons who know about his experience, skill, ability etc. but should not be related to him.
The prospective employer normally makes an investigation on the references supplied by the candidate and
undertakes search into his past employment, education, personal reputation etc.. if the referee happens to
be a former employer he will, generally, either praise the candidate or criticize his work and ability.
7. Preliminary and final selection:
Upto this stage selection is handled by personnel department or staff executives. Since the persons
employed are to work under line officers, the candidates are referred to them. If line officer is a production
manager or foreman he may assess on his job performance of the
candidates. If candidate’s performance is not upto the mark then he may be kept as apprentice for some
time.
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8. Physical education:
The jobs may require certain physical standards as to height, eyesight, hearing etc. after the final
selection, candidates are required to appear for medical examination. Even for joining a government job, a
medical fitness certificate from the civil surgeon or state medical board is essential.
9. placement and orientation:
Even after going through the rigorous procedure as explained in various steps, the selection procedure is
not complete. The placement and orientation of the employee is also an important step in this direction. The
selected candidate should be given copies of rules, regulations, procedures, etc. followed in the company.
He should be given a detailed description of the job he is going to be assigned. Besides job-orientation the
selected candidate should be given proper information about the working of the company also. This work may
be assigned to the superior whom he has been attached. Proper orientation of an employee will help him to
adjust easily in the new environment of the organization.
Performance Appraisal
The performance appraisal is the process of assessing employee performance by way of comparing present
performance with already established standards which have been already communicated to employees,
subsequently providing feedback to employees about their performance level for the purpose of improving their
performance as needed by the organisation.
As said above the very purpose of performance uprising is to know performance of employee, subsequently to
decide whether training is needed to particular employee or to give promotion with additional pay hike.
performance appraisal is the tool for determining whether employee is to be promoted, demoted or sacked (
remove ) in case of very poor performance and no scope for improvement.
Performance Appraisal thus is a systematic and objective way of judging the relative worth of ability of an employee
in performing his task. Performance appraisal helps to identify those who are performing their assigned tasks
well and those who are not and the reasons for such performance.
Definitions:
Performance appraisal has been defined by different scholars in various ways. Some of the important
definitions are as follows:
Dale S. Beach, "Performance appraisal is systematic evaluation of the individual with respect to his or her
performance on the job and his or her potential for development".
Randall S. Schuler, "Performance appraisal is a formal, structured system of measuring and evaluating an
employees job, related behaviour and outcomes to discover how and why the employee is presently perfuming
on the job and how the employee can perform more effectively in the future so that the employee, organisation,
and society all benefit."
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Heyel, "It is the process of evaluating the performance and qualifications of the employees in terms of the
requirements of the job for which he is employed, for purposes of administration including placement, selection
for promotions, providing financial rewards and other actions which require differential treatment among the
members of a group as distinguished from actions affecting all members equally."
Dale Yoder, ''Performance appraisal includes all formal procedures used to evaluated personalities and
contributions and potentials of group members in a working organisation. It is a continuous process to secure
information necessary for making correct and objective decisions on employees."
TECHNIQUES OF PERFORMANCE APPRAISAL
There are two types of measures are used in performance appraisal: Objective measures which are directly
quantifiable and Subjective measures which are not directly quantifiable. Performance Appraisal can be
broadly classified into two categories: Traditional Methods and Modern Methods. The performance appraisal
methods are:
Traditional Methods
Traditional Methods are relatively older methods of performance appraisals. This method is based on studying
the personal qualities of the employees. It may include knowledge, initiative, loyalty, leadership and judgment.
A. Ranking Method
According to Dessler et al. (2011), ranking method is ranking employees from best to worst on a particular trait,
choosing highest, then lowest, until all ranked .
B. Graphic Rating Scales

In 1922, Paterson working with the employees of the Scott Company developed a graphic scale to provide the
reliability, consistency over time, usefulness and practicality. Bradshaw in 1931
discussed improvements to the graphic rating scale that included “behaviorism” to anchor the scales and help better
illustrate the trait . In 1972, Flynn told that the five to nine scale points result in the highest quality of ratings.
According to Dessler et al. (2011), Graphic Rating Scale is a scale that lists a number of traits and a range of
performance for each. The employee is then rated by identifying the score that best describes his or her level of
performance for each trait .
C. Critical Incident Method

The technique was formally codified by the works of Fitts and Jones in 1947 for classifying pilot error
experiences in reading and interpreting aircraft instruments. Fitts and Jones used the term “errors” rather than
“critical incidents”. As opposed to Fitts and Jones way of collecting data, data gathering during task performance
is now considered a defining criterion for critical incident
methods. The work of John Flanagan in 1954 became the landmark critical incident technique, after his title entitled
“The Critical Incident Technique” appeared in the psychological bulletin. Flanagan (1954) defined the critical
incident technique as a set of procedures designed to describe human behavior by collecting description of events
having special significance and meeting systematically defined criteria. Flanagan originally used trained observers
to collect critical incident identification.
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Identification of the critical incidents during task performance can be a individual process or a mutual process
between user and evaluator .According to Dessler et. al.(2011),Critical Incident
method is keeping a record of uncommonly good or undesirable examples of an employee‟s work related
behavior and reviewing it with the employee at predetermined times .
A. Narrative Essays Evaluatorwrites an explanation about employee‟s strength and weakness points,
previous performance, positional and suggestion for his (her) improvement at the end of evaluation time. This
technique mainly attempt to focus on behavior .
Modern Methods
Modern Methods were devised to improve the traditional methods. It attempted to improve the shortcomings
of the old methods such as biasness, subjectivity, etc.
D. Management by Objectives
In1954, Peter F. Drucker introduced “Management By Objective” in his book “The Practice of
Management”. It comprises of three building blocks: object formulation, execution process and performance
feedback [17]. In 2000,Weihrich suggested a new model: the system approach to MBO(SAMBO).SAMBO
comprises seven elements: strategic planning and hierarchy of objects, setting objectives, planning for
action, implementation of MBO, control and appraisal, subsystems, and organizational and management
development[16].
F. Behaviorally Anchored Rating Scale (BARS)
BARS were introduced by Smith and Kendall in 1963 with the attention of researchers concerned with the issue
of reliability and validity of performance ratings. Behavioral anchor scales are more informative than simple
numbers. Behaviorally anchored performance dimensions can be operationally and conceptually can be
distinguished from one another [12]. Rater will act as observer not the judge. BARS help rater focus on specific
desirable and undesirable incidents of work behavior which can serve as examples in discussing a rating. BARS
use behavioral statements or concrete examples to illustrate multiple levels of performance for each element of
performance.
G. Humans Resource Accounting

The concept of human resource accounting was first developed by Sir William Petty in 1691.But research into true
human resource accounting began in the 1960 by Rensis Likert. Prof. Flamholtz defines human resource
accounting for people as an organizational resource. The main theory underlying the HRA is: The people are
valuable resources of an organization or enterprise, information on investment and value of human resource
is useful for decision making in the organization. This paper aims at analyzing the application of human resource
accounting in heavy industries covering the period from 2001-2010.In1965, both Cronbach & Glaser and Naylor &
Shine developed models for estimating the financial utility of personnel selection and used the concept of
„utility analysis‟. In 1966, Grojer and Johnson embrace both HRA and UA, suggest the concept of human
resource costing and accounting (HRCA). Another method of human resource accounting is human resource
value accounting (HRVA).
H. Assessment Centers
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The assessment center method, in its modern form, came into existence as a result of AT & T Management
Progress Study by Bray, Campbell & Grant in 1974.Common job simulations used in assessment centers are in
basket exercises, group discussions, simulations of interviews with “subordinates” or “clients”, fact finding
exercises, analysis/decision making problems, oral presentation exercises, written communication
exercises.
I. 360 Degree
It is a popular performance appraisal technique that involves evaluation input from multiple levels within the firm as
well as external sources.360 Degree feedback relies on the input of an employee‟ s superior, colleagues,
subordinates, sometimes customers, suppliers and/or spouses. It provides people with information about the
effect of their action on others in the workplace. It provides a notion of behavioral change might be elicited
through a process of enhanced self-awareness.
J. 720 Degree
Rick Gal breath became dissatisfied with 360 degree reviews. Gal breath started using the 720 degree and defined it
as a more intense, personalized and above all greater review of the upper level managers that brings in the
perspective of their customers or investors, as well as subordinates. 720 degree review focuses on what matter
most, which is the customer or investor perception of their work .720 degree approach gives people a very different
view of themselves as leaders and growing individuals. 360 degree appraisal method is practiced twice. When
the 360-
Degree appraisal is done, then the performance of the employee is evaluated and having a good feedback
mechanism, the boss sits down with the employee again a second time and gives him feedback and tips on
achieving the set targets .
Directing
Management is the art of getting things done through others. One of the main functions of a manager is
to direct subordinates effectively. Directing is concerned with carrying out the desired plans. It initiates
organised and planned action and ensures effective performance by subordinates towards the
accomplishment of group activities. Direction is called management in action.
Def:
According to Koontz and O’Donnell, “Directing is the interpersonal aspect of managing by which
subordinates are led to understand and contribute effectively and efficiently to the attainment of enterprise’s
objectives.”
According to Urwick and Breach, “Directing is the guidance , the inspiration, the leadership of those men
and women that constitute the real core of the responsibilities of management.”
According to Haimann, “Directing consists of the process and techniques utilizing in issuing
instructions and making certain that operations are carried out as originally planned.”
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Nature or characteristics of direction:

1. It is a dynamic function:
Directing is a dynamic and continuing function. A manager has to continuously direct, guide,
motivate and lead his subordinates. With change in plans and organizational relationships, he
will have to change the methods and techniques to direction.
2. It initiates action:
Directing initiates organised and planned action and ensures effective performance by
subordinates towards the accomplishment of group activities. It is regarded as the essence of
management-in-action.
3. It provides necessary link between various managerial functions:
Directing links the various managerial functions of planning, organizing, staffing and controlling.
Without directing the function of controlling will never arise and the other preparatory functions of
management will become meaningless.
4. It is a universal function:
Directing is a universal function that is performed in all organizations and at all levels of management.
All managers have to guide, motivate, lead, supervise and communicate with their subordinates, although
more time is spent on directing at higher levels of management.
5. It is concerned with human relationships:
The direction function of management deals with relationship between people working in an
organization. It creates co-operation and harmony among the members of the group. It seeks to achieve
orderly arrangement of group effort to provide unity of action in the persuit of common objectives
Principles of effective direction:
1. Harmony objectives:
It is an essential function of management to make the people realize the objectives of the group
and direct their efforts towards the achievement of t heir objectives. The principle implies harmony of
personal interest and common interest.
2. Unity of command:
This principle states that one person should receive orders from only one superior, in other
words, one person should be accountable to only one boss. In the absence of unity of command, the
authority is undermined, discipline weakened, loyalty divided and confusion and delays are caused.
3. Unity of direction:
To have effective direction, there should be one head and one plan for a group of activities
having the same objectives. In other words, each group of activities having the same objectives must have
one plan of action and must be under the control of one supervisor.
4. Direct supervision:
The directing function of management becomes more effective if the superior maintains
direct personal contact with is subordinates. Direct supervision infuses a sense of participation among
subordinates that encourages them to put in their best to achieve the organizational goals and develop
an effective system of feed-back of information.
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5. Participative or democratic management:

The function of directing becomes more effective if participative or democratic style of
management is followed. According to this principle, the superior must act according to t he manual consent
and the decisions reached after consulting the subordinates.
6. Effective communication:
To have effective direction, it is very essential to have an effective communication system
which provides for free flow of ideas, information, suggestions, complaints and grievances.
7. Follow-up:
In order to make direction effective, a manager has to continuously direct, guide, motivate and
lead his subordinates. A manager has not only to issue orders and instructions but also to follow-up the
performance so as to ensure that work is being performed as desired.
Importance of direction:
1. Initiates action:
Direction is required to initiative action. The function f planning, organizing, staffing etc., will be taken
up only when directly is given to initiate them. Decision starts the actual work for achieving enterprise
objectives.
2. Improves efficiency:
A manager tries to get maximum work from his subordinates. This will be possible only through
motivation and leadership and these techniques are a part of direction.
3. Ensures co-ordination:
Direction helps in ensuring mutual understanding and team work. The individual efforts are directed
in such a way that personal performances help in achieving enterprise objectives.
4. Helpful in implementing changes:

A business operates in a changing environment. New situations develop every now and then.
A proper system of motivation will help employees in taking up new challenges.
5. Provides stability:
Effective leadership, supervision and motivation will help in the smooth growth of an enterprise.
A growing concern will provide stability to its activities.
6. Motivation:
Motivation is an important element of direction. Motivation is a factor which encourages
persons to give their best performance and help in achieving enterprise goals. A strong positive
motivation will enable the increased output of employees. A key element in direction is motivation.
7. Supervision:
Direction involves giving instructions to employees for undertaking some work. In order to see
whether employees are doing the things as per targets or not there is a need for supervision. In supervision
all the activities of the employees are controlled and efforts are made to ensure proper achievement of
targets.
8. Co-ordination:
Direction will be effective only when there is a proper co-ordination. In direction, different persons
are asked to perform specific tasks. In order to see that efforts of every
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employee are in the direction of achieving organizational goals there is a need of co-ordinate various
activities.
Motivation theories
Every management tries to coordinate various factors of production in such a way that their contribution is
maximum in achieving organizational goals. The performance of non-human factors like machines etc. will depend
upon the level of technology and the competence of those who use them. To improve the overall performance in
a business it becomes essential to increase the efficiency of human beings. The performance of person
depends upon two factors, i.e., i)ability to do a work, and ii)motivation. Both these factors taken together, will
increase the efficiency of human beings. Motivation is an important factor which encourages persons to give their
best performance and help in reaching enterprise goals. A strong positive motivation will enable the increased
output of employees but a negative motivation will reduce their performance.
Def:
“A motive is an inner state that energizes, activates, or moves and directs or channels behaviour goals.”
- Berelson and Steiner
“It is the stimulation of any emotion or desire operating upon one’s will and promoting or driving it to action.”
- Lillis
“Motivation implies any emotion or desire which so conditions one’s will that the individual; is properly led
into action.”
- Vance
Theories of motivation:
It has always been tried to find out the factors which motivate employees the most. There has been no
satisfactory answer until today. Various researches have been undertaken to find out motivating factors but no
generalization could be reached. The motivators differ from time to time, place to place and situation to situation
and person to person. Some scholars have devised different theories which hold good under given situations.
Some important theories of motivation have been discussed here:
Maslow’s need hierarchy:
Motivation is influenced by the needs of a person. There is a priority of certain needs over others. The
importance of needs will influence the level of motivation. A.H. Maslow, an American social scientist, has given a
framework that helps to explain the strength of certain needs. He has categorized human needs into five
categories. He is of the opinion that a person tries to achieve first category first and then moves on to the next
and so on.
These needs are discussed as follows:
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Or
1. Physiological needs:
These needs are most essential for the survival and maintenance of body. These include food,
clothing, drinking, shelter, rest, exercise, etc. A man will try to satisfy these needs first.
Unless physiological needs are satisfied no other needs will motivate him. Once these needs are satisfied then
these will cease to motivate him and he will want to satisfy the other needs.
2. Safety needs:
Once physiological needs are satisfied then safety needs take the precedence. These are the needs
to be free from physical danger and the fear of loss of job, property, shelter, etc. One would like to be free from
economic worries like loss of job, sickness, old age pension etc. The physical safety against murder,
accident, fire , etc. is also essential. The physical and economic needs act as motivators upto the time they
are not properly met.
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3. Social needs:
Since people are human beings, they need to belong, to be accepted by others. When social
needs become dominant, human being will strike to have meaningful association with others. Ina n
organization workers may form informal groups for exchange of ideas. If management tries to have
close supervision and control then workers may retort against such environment.
4. Esteem or ego needs:
The needs are concerned with self-respect, self-confidence, feeling of being unique, recognition
etc. the satisfaction of these needs brings confidence, power, control and prestige. Some of the social
problems have their roots in the unfulfilment of these needs.
5. Self fulfillment or actualization needs:
Self-fulfilment is the highest need in Maslow’s hierarchy. This refers to the needs which helps
an individual to develop his potentialities. He tries to do whatever he can and has a sort of self-development. A
person tries to do whatever he is capable of doing. He tries to bring out something hidden in him. The self-
fulfilment needs give satisfaction to the person concerned and are good for the society also.
Herzberg’s motivation:
The priority of needs characterizes the type of behaviour. The satisfaction of some needs may not have
positive effect on motivation but their non-satisfaction may act as a negative factor. A question arises as to what
types of needs are important for improving motivation. Fredrick Herzberg and his associates conducted a study
of need satisfaction of 200 engineers and accountants employed by firms in and around Pittsburgh.
The persons were asked to describe a few previous job experience in which they felt
exceptionally good or exceptionally bad about jobs. The influence of these experiences on job was also studied.
Herzberg concluded that there were two sets of conditions. First type of conditions, described as maintenance or
hygiene factors, do not motivate employees by their presence but their absence dissatisfies them. The other
conditions, called motivational factors, operate to build strong motivation and high job satisfaction, but their
absence hardly process strongly dissatisfying.
Maintenance or hygiene factors:
These were called maintenance or hygiene factors since they were necessary to maintain current
status i.e., reasonable level of satisfaction. These factors are more dissatisfied by their absence but their
presence will not motivate Herzberg named hygiene factors :Company policy and administration, technical
supervision, inter-personal relations with supervisor, inter-personal relations with peers, inter-personal
relations with subordinates, salary, job security, personal life, work relations with subordinates status.
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Motivational factors:
The presence of these factors build high motivation and job satisfaction. However, if these conditions are
not present, they do not cause dissatisfaction. There are six factors :achievement, recognition, advancement,
work itself, possibilities of personal growth, responsibility. Most of these factors relate to job contents. Their
performance of an employee on the job and the satisfaction which he achieves from them from the contents
of these factors.
Herzberg pointed out that managers have been very much concerned with hygiene factors only. They
could not enlist the full co-operation of employees by increasing salaries etc. They did not realize the importance
of motivating factors. The employees are motivated by the content of the job. The satisfaction which an employee
will derive from the job will go to increase his output.
Communication
MEANING OF COMMUNICATION:
It is very difficult to define the term ‘Communication` in a simple way. Different scholars defined
communication in different ways. The simplest definition of communication is “a process of sending and receiving
a message between two parties.” Actually communication is the process of transferring information and
understanding from one of more people one or more people. In the most clear from, communication means
interaction between two parties. A few comments given by some experts on communication are given below
Definition of communication:
According to Megginson said, “Communication is the process of transmitting meanings, ideas and
understanding of a person or a group to another person or group.”
According to Newstrom & Keith Davis said, “Communication is the transfer of information form one person to
another. It is a way of reaching others by transmitting ideas, feelings, thoughts, facts and values.”
According to Theo Haiman, “Communication means the process of passing information and understanding from one
person to another.”
Process of Communication
In simple words Communication is giving, receiving or exchanging ideas, information, signals or messages
through an appropriate media. It is a dynamic process involving a series of actions and reactions with a view to
achieve a goal. The importance of effective communication is immeasurable
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in the world of business and in personal life. Communication is, therefore, a two way process. Each element plays
an important role in making the communication effective and can be classified as follows:
1. Sender:
Sender is an individual, group, or organization who initiates the communication. This source is initially
responsible for the success of the message. A process by which the sender formulates an idea to
communicate is selected first. The first step the sender is faced with involves the encoding process. In
order to convey meaning, the sender must begin encoding, which means translating information into a
message in the form of symbols signs that represent ideas or concepts, which is then
communicated.
2. Message:
A message can be an idea, concept, emotion, feeling that a person wants to share with another
person. A message can be verbal or non-verbal form of communication. It is based on the source or
idea, but the message is crafted to meet the needs of the receiver. A message can be intentional or
non-intentional. Messages can be encoded into a variety of formats oral, written or visual.
3. Encoding:
Since the subject matter of communication is theoretical and intangible, its further passing requires use
of certain symbols such as words, actions or pictures etc. Conversion of subject matter into these
symbols is the process of encoding.
4. Channel:
It’s the medium through which communication is transmitted from one person to the reliever. Most
channels are either oral or written. Common channels include the telephone and a variety of written
forms such as memos, letters, and reports. The effectiveness of the various channels fluctuates
depending on the characteristics of the communication. In case of immediate feedback Oral
Communication is convenient. For Eg: A president delivering a Speech may speak face to face with an
audience, via the broadcast media or via print.
5. Decoding:
Decoding is the process where the message is interpreted by the receiver.
The receiver begins to interpret the message through words, signs, symbols sent by the sender
translating the message to its set of experiences in order to make the message meaningful.
6. Receiver:
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Receiver is the individual or individuals to whom the message is directed to. The extent to which a
receiver comprehends the message will depend on a number of factors, which include the following:
knowledge of the individual regarding the message, their receptivity to the message. All interpretations
by the receiver are influenced by their experiences, attitudes, knowledge, skills, perceptions, and
culture.
7. Feedback:
Feedback is an integral part of communication process that allows the speaker to monitor the process
and to evaluate the success of the message communicated. This step conveys to the sender that the
message is understood by the receiver. After receiving a message, the receiver responds through a
channel and signals that response to the sender. For Ex: The signal may take the form of a spoken
comment, a written message, a smile, rolling of eyes, a sigh or some other action.
Leadership
Leadership is an important element of the directing function of management. Wherever, there is an

organised group of people working towards a common goal, some type of leadership becomes essential.
Leadership is the ability to build up confidence and zeal among people and to create an urge in them to be led. To
be a successful leader, a manager must possess the qualities of foresight, drive initiative, self-confidence and
personal integrity. Different situations may demand different types of leadership.
Def:
“Leadership is the ability of a manager to induce subordinates to work with confidence and zeal.”
“Leadership is the activity of influencing people to strive willingly for group objectives.”
- George R. Terry
“The power of leadership is the power of integrating. The leader stimulates what is best in us, he unites and
concentrates what we feel only groupingly and scatteringly. He is a person who gives form to the uncoarctate
energy in every man. The person who influences me most is not he who does great deeds, but he who makes
me feel that I can do great deeds”
- Mary Parker Follet
Styles:
The term leadership style refers to the constituent behaviour pattern of a leader as perceived by people around
him. The leadership style is the result of the philosophy, personality and experience
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of the leader. It also depends upon the types of followers and the conditions prevailing in an organization.
According to their attitude and behaviour patterns leaders may be classified as follows:
1. Autocratic or authoritarian style leader:
An autocratic, also known as authoritarian style of leadership implies yielding absolute power.
Under this style, the leader expects complete obedience from his subordinates and all decision-making is
centralized in the leader. There is no participation by subordinates in decision-making process. No
suggestions or initiative from subordinates is entertained. All decisions, major or small are taken by the
leader and subordinates are forced to obey them without questioning. An autocratic leader is, in fact, no
leader. He is merely the formal head of the organisation and is generally disliked by the subordinates
2. Laissez-fare or free-rain style leader:
Under this type of leadership, maximum freedom is allowed to subordinates. They are given free
hand in deciding their own policies and methods and take their own decisions. The leader provides help only
when required by his subordinates otherwise he does not interfere in their work. This style of leadership
creates self-confidence in the subordinates and provides them an opportunity to develop their talents. Such
leadership can be employed with success where subordinates are competent, sincere and self-
disciplined.
Features:
 There is no minimum interference from the leaders

 Leader helps only when requested for.
 Individuals are allowed to plan their work.
 There is free and informal environment
 Decisions may be taken by majority
 Control is exercised with less interference and supervision
3. Democratic or participative style leader:
The democratic or participative style of leadership implies compromise between the two extremes of
autocratic and laissez-faire style of leadership. Under this style, the leader acts according to the mutual
consent and the decisions are reached after consulting the subordinates. Subordinates are
encouraged to make suggestions and take initiative. Mutual trust and confidence is also created resulting in job
satisfaction and improved morale of workers.
Features:
 Decisions are taken after consulting subordinates

 There is a delegation of authority
 Decentralization is followed in decision making process
 There is a both way communication.
 Co-operation of subordinates is taken in making important decisions
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Benefits:
 Level of motivation of employees is high

 Implementation of decisions is quick
 Employees become loyal to the organization
 Willing acceptance of rules, regulations, procedures by employees
 Complaints, grievances and industrial unrest is contained.
4. Bureaucratic or rules-centred leadership:
It is a type of leadership where everything is influenced by rules, regulations and procedures. The
leader sets up a procedure for adhering to the rule book. All decisions are taken on the basis of rules and
regulations. No deviation of set principles is allowed under all situations. The employees are not
encouraged to take initiatives. Over dependence on rules and procedures brings red tapism in the
working.
Features:
 Dependence on rules and regulations

 Decisions are taken in a framework of rules and procedures
 There is too much of paper work and always a desire to play safe
 Subordinates perform jobs in a mechanical way.
 New ideas and initiatives are not encouraged
 There are delays in taking decisions
5. Manipulative leadership style:
Under this style the leader tries to achieve organizational goals by exploiting the weak points of employees.
The needs and aspirations of employees are used as tools for achieving organizational objectives.
The employees are explained through different means for extracting more and more work from them and not
compensating them for their additional efforts.
Employees generally resent this type of leadership. There is a feeling of distrust when the
manipulative nature of the leader is evident and the employees feel cheated.
Suitability:
1. When co-operation of employees is needed urgently for a specific task.

2. When the project are of short durations
3. When long-term relationship may not be required.
6. Paternalistic style leader:
This style of leadership is based upon the sentiments and emotions of people. A paternalistic
leader is like a father figure to the subordinates. The leader looks after the needs and aspirations of
subordinates and also helps their families. He helps, guides and protects all of
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his subordinates but they donot grow under him. The subordinates become dependent on the leader.
Controlling
The objective of every organization is to use scarce resources in a best possible way. Plans are framed to
achieve better results. Control is the process of checking whether the plans are being adhered to or not, keeping a
record of progress and then taking corrective measures if there is any deviation. Control is one of the managerial
functions. These functions start with planning and end at controlling. The other functions like organizing, staffing,
directing act as the connecting link between planning and controlling.
Def:
“The measurement and correction of the performance of activities of subordinates in order to make sure that
enterprise objectives and plans devised to attain them are being accomplished.”
- Koontz and O’Donnel
“In an undertaking, control consists in verifying whether everything occurs in conformity with the plan
adopted, the instructions issued and principles established.”
- Henry Fayol
Process of Controlling
Controlling as a management function involves following steps:
1. Establishment of standards- Standards are the plans or the targets which have to be achieved
in the course of business function. They can also be called as the criterions for judging the
performance. Standards generally are classified into two-
a. Measurable or tangible - Those standards which can be measured and expressed are
called as measurable standards. They can be in form of cost, output, expenditure, time,
profit, etc.
b. Non-measurable or intangible- There are standards which cannot be measured
monetarily. For example- performance of a manager, deviation of workers, their attitudes
towards a concern. These are called as intangible standards.
Controlling becomes easy through establishment of these standards because controlling is exercised
on the basis of these standards.
2. Measurement of performance- The second major step in controlling is to measure the

performance. Finding out deviations becomes easy through measuring the actual
performance. Performance levels are sometimes easy to measure and sometimes difficult.
Measurement of tangible standards is easy as it can be expressed in units, cost, money terms, etc.
Quantitative measurement becomes difficult when performance of manager has to be measured.
Performance of a manager cannot be measured in quantities. It can be measured only by-
a. Attitude of the workers,
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b. Their morale to work,

c. The development in the attitudes regarding the physical environment, and
d. Their communication with the superiors.
It is also sometimes done through various reports like weekly, monthly, quarterly, yearly reports.
3. Comparison of actual and standard performance- Comparison of actual performance with the
planned targets is very important. Deviation can be defined as the gap between actual performance and
the planned targets. The manager has to find out two things here- extent of deviation and cause of
deviation. Extent of deviation means that the manager has to find out whether the deviation is positive or
negative or whether the actual performance is in conformity with the planned performance. The
managers have to exercise control by exception. He has to find out those deviations which are critical
and important for business. Minor deviations have to be ignored. Major deviations like replacement of
machinery, appointment of workers, quality of raw material, rate of profits, etc. should be looked upon
consciously. Therefore it is said, “ If a manager controls everything, he ends up controlling nothing.” For
example, if stationery charges increase by a minor 5 to 10%, it can be called as a minor deviation. On the
other hand, if monthly production decreases continuously, it is called as major deviation.
Once the deviation is identified, a manager has to think about various cause which has led to deviation.
The causes can be-
a. Erroneous planning,
b. Co-ordination loosens,
c. Implementation of plans is defective, and
d. Supervision and communication is ineffective, etc.
4. Taking remedial actions- Once the causes and extent of deviations are known, the manager has to
detect those errors and take remedial measures for it. There are two alternatives here-
a. Taking corrective measures for deviations which have occurred; and
b. After taking the corrective measures, if the actual performance is not in conformity with plans,
the manager can revise the targets. It is here the controlling process comes to an end. Follow
up is an important step because it is only through taking corrective measures, a manager
can exercise controlling.
Controlling techniques:
1. Direct Supervision and Observation
'Direct Supervision and Observation' is the oldest technique of controlling. The supervisor himself observes the
employees and their work. This brings him in direct contact with the workers. So, many problems are solved
during supervision. The supervisor gets first hand information, and he has better understanding with the
workers. This technique is most suitable for a small-sized business.
2. Financial Statements
All business organisations prepare Profit and Loss Account. It gives a summary of the income and
expenses for a specified period. They also prepare Balance Sheet, which shows the financial
position of the organisation at the end of the specified period. Financial statements
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are used to control the organisation. The figures of the current year can be compared with the previous
year's figures. They can also be compared with the figures of other similar organisations.
Ratio analysis can be used to find out and analyse the financial statements. Ratio analysis helps to
understand the profitability, liquidity and solvency position of the business.
3. Budgetary Control
A budget is a planning and controlling device. Budgetary control is a technique of managerial
control through budgets. It is the essence of financial control. Budgetary control is done for all aspects of
a business such as income, expenditure, production, capital and revenue. Budgetary control is done
by the budget committee.
4. Break Even Analysis

Break Even Analysis or Break Even Point is the point of no profit, no loss. For e.g. When an
organisation sells 50K cars it will break even. It means that, any sale below this point will cause losses
and any sale above this point will earn profits. The Break-even analysis acts as a control device. It helps to
find out the company's performance. So the company can take collective action to improve its
performance in the future. Break-even analysis is a simple control tool.
5. Return on Investment (ROI)
Investment consists of fixed assets and working capital used in business. Profit on the investment
is a reward for risk taking. If the ROI is high then the financial performance of a business is good and
vice-versa.
ROI is a tool to improve financial performance. It helps the business to compare its present
performance with that of previous years' performance. It helps to conduct inter-firm
comparisons. It also shows the areas where corrective actions are needed.
6. Management by Objectives (MBO)
MBO facilitates planning and control. It must fulfill following requirements :-
1. Objectives for individuals are jointly fixed by the superior and the subordinate.
2. Periodic evaluation and regular feedback to evaluate individual performance.
3. Achievement of objectives brings rewards to individuals.
7. Management Audit
Management Audit is an evaluation of the management as a whole. It critically examines the full
management process, i.e. planning, organising, directing, and controlling. It finds out the efficiency of the
management. To check the efficiency of the management, the company's plans, objectives, policies,
procedures, personnel relations and systems of control are examined very carefully. Management
auditing is conducted by a team of experts. They collect data from past records, members of
management, clients and employees. The data is analysed and conclusions are drawn about
managerial performance and efficiency.
8. Management Information System (MIS)
In order to control the organisation properly the management needs accurate information. They need
information about the internal working of the organisation and also about the external environment.
Information is collected continuously to identify problems and find out solutions. MIScollects data,
processes it and provides it to the managers. MIS may be
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manual or computerised. With MIS, managers can delegate authority to subordinates without
losing control.
9. PERT and CPM Techniques
Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM)
techniques were developed in USA in the late 50's. Any programme consists of various activities
and sub-activities. Successful completion of any activity depends upon doing the work in a given
sequence and in a given time.
CPM / PERT can be used to minimise the total time or the total cost required to perform the total operations.
10. Self-Control
Self-Control means self-directed control. A person is given freedom to set his own targets, evaluate his
own performance and take corrective measures as and when required. Self- control is especially
required for top level managers because they do not like external control.
The subordinates must be encouraged to use self-control because it is not good for the superior to
control each and everything. However, self-control does not mean no control by the superiors. The
superiors must control the important activities of the subordinates.
Prepared BY B.V.S.N.Mahesh kumar

Lecturer in Commerce and Business Management.
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Business Organisation and Management

~ 1 ~Part – A (Business Organisation) Unit – I .................................................................................................................... 13

Part – A (Business Organisation)

Characteristics / features of business:

The following are the characteristics or features of the business:

Traditionally, purchase was considered to be a part of production function. However, big

6. Public relations function:

9. Advertising and sales promotion function:

These industries may be classified as :

3. Tertiary or service industry:

External trade can be further sub-divided into three groups, viz.,

Differences between Business, profession and employment

S.No Basis Business Profession Employment

exchange of goods and service. by the employer

Sole Tradership/sole proprietorship

3. Management and control:

6. Proprietor and proprietorship are one:

7. Owners and business exist together:

8. Limited area of operations:

Advantages of sole proprietorship:

4. Retention of business secrets:

5. Easy to raise finance:

7. Promptness in decision making:

8. Direct accessibility to consumers:

10. No legal restrictions:

11. Socially desirable:

13. Healthy relations with employees:

14. Benefit of inherited good will:

Disadvantages / Limitations of sole proprietorship:

2. Limited managerial ability:

5. Limited scope of employees:

6. No large scale economies:

7. More risk involved:

1. Association of two or more persons:

7. Principal and agent relationship:

8. Utmost good faith:

9. Restriction on transfer of shares:

10. Common management:

11. Partners and partnership are one:

12. Capital contribution:

13. Protection of minority interest:

3. Greater managerial talent:

4. More credit standing:

5. Promptness in decision making:

7. Relationship between work and reward:

8. More possibility of growth and expansion:

10. Flexibility of operations:

12. Protection of minority interests:

13. Easy dissolution:

14. Democratic administration:

15. Saving in managerial expenses:

Disadvantages / Limitations of Partnership:

5. Limitations on transfer of share:

6. Burden of implied authority:

7. Lack of public faith:

8. Lack of prompt decision:

2. Sleeping or dormant partner:

3. Nominal or ostensible partner:

4. Partner by estoppel or holding out:

5. Partner in profits only:

Differences between Sole-trade business and partnership:

second person joins then it becomes a

Hindu Undivided Family