Tag: Features

  • Promissory Note: Definition, Types, and Features!

    Promissory Note: Definition, Types, and Features!

    Explain and Learn, Promissory Note: Definition, Types, and Features!

    A promissory note is a written contract that requires a borrower to pay back a lender an amount of money on a future date. The Concept of the study Explains – Promissory Note: Definition of Promissory Note, Types of Promissory Note, and Features of Promissory Note, Ten-Points, Ten-Key! A promissory note, sometimes referred to as a note payable, is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms. Also learned, Commercial Bills, Promissory Note: Definition, Types, and Features!

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    What is the definition of promissory note? Promissory notes usually refer to the borrower as the maker of the note. The borrower generally is said to have made the written agreement because he or she is initiating the transaction. The lender is referred to as the payee because it is the party that first pays the money to the borrower and then receives the payments at a future date. I know this is confusing. Just remember the maker is the borrower and the payee is the lender.

    Businesses use notes to finance many different operations. Some companies use short-term notes to finance inventory purchases while other businesses use long-term notes to raise enough capital to purchase large equipment and machinery. Really this note is just a fancy way of saying a loan.

    Promissory Note, in the law of negotiable instruments, the written instrument containing an unconditional promise by a party, called the maker, who signs the instrument, to pay to another, called the payee, a definite sum of money either on demand or at a specified or ascertainable future date. The note may be made payable to the bearer, to a party named in the note, or to the order of the party named in the note.

    A promissory note differs from an IOU(An IOU (abbreviated from the phrase “I owe you“) is usually an informal document acknowledging debt) in that the former is a promise to pay and the latter is a mere acknowledgment of a debt. A promissory note is negotiable by endorsement if it is specifically made payable to the order of a person.

    Definition:

    A promissory note is a written agreement to pay a specific amount to specific party at a future date or on demand. In other words, it’s a written loan agreement between two parties that requires the borrower to pay the lender on a day in the future. This could be a set date or a date chosen by the lender.

    According to section 4 of the Negotiable Instruments Act, 1881, a promissory note means “Promissory Note is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.”

    A promissory note is a written and signed contract in which one party promises to pay a specified amount of money to the other party. The terms of a promissory can be tailored to the parties’ needs, as far as the amount borrowed, whether interest will be charged, the schedule or date by which the money must be repaid, and any other needed particulars.

    There is no requirement that a promissory note is made on a certain type of paper or document, or that it contains complex language, though it is important to be as specific as possible. In fact, a promissory written and signed on a scrap piece of paper, back of a napkin, or even in an email or text message, is just as valid as a note drawn up by a lawyer.

    Types of Promissory Note:

    Though every good promissory note contains certain elements, there are several types of promissory note. These notes are largely classified by the type of loan issued or purpose for the loan. All of the following types of the promissory note are legally binding contracts.

    1. Personal Promissory Note: This type is used to record a personal loan made between two parties. While not all lenders use legal writings when dealing with friends and family, it helps avoid confusion and hurt feelings later. A personal promissory note shows good faith on behalf of the borrower, and provides the lender with recourse should the borrower fail to pay back the loan.
    2. Commercial Promissory Note: A commercial promissory note is typically required with commercial lenders. Commercial promissory notes are often more strict than personal notes. If the borrower defaults on its loan, the commercial lender is entitled to immediate payment of the full balance, not just the past due amount. In most cases, the lender on a commercial promissory note can place a lien on the borrower’s property until payment in full is received.
    3. Real Estate Promissory Note: A real estate promissory note is similar to a commercial note, as it often stipulates that a lien can be placed on the borrower’s home or other property if he defaults. If the borrower does default on a real estate loan, the information can become public record.
    4. Investment Promissory Note: An investment promissory note is often used in a business transaction. Investment promissory notes are exchanged to raise capital for the business, and they often contain clauses that deal with returns on investments for specific periods of time.

    Features of a Promissory Note:

    1. The promissory note must be in writing- Mere verbal promises or oral undertaking does not constitute a promissory note. The intention of the maker of the note should be signified by writing in clear words on the instrument itself that he undertakes to pay a particular sum of money to the payee or order or to the bearer
    2. It must contain an express promise or clear undertaking to pay- The promise to pay must be expressed. It cannot be implied or inferred. A mere acknowledgment of indebtedness is not enough.
    3. The promise to pay must be definite and unconditional- The promise to pay contained in the note must be unconditional. If the promise to pay is coupled with a condition, it is not a promissory note.
    4. The maker of the pro-note must be certain- The instrument should show on the fact of it as to who exactly is liable to pay. The name of the maker should be written clearly and ascertainable on seeing the document.
    5. It should be signed by the maker- Unless the maker signs the instrument, it is incomplete and of no legal effect. Therefore, the person who promises to pay must sign the instrument even though it might have been written by the promisor himself.
    6. The amount must be certain- The amount undertaken to be paid must be definite or certain or not vague. That is, it must not be capable of contingent additions or subtractions.
    7. The promise should be to pay money- The promissory note should contain a promise to pay money and money only, i.e., legal tender money. The promise cannot be extended to payments in the form of goods, shares, bonds, foreign exchange, etc.
    8. The payee must be certain- The money must be payable to a definite person or according to his order. The payee must be ascertained by name or by designation. But it cannot be made payable either to bearer or to the maker himself.
    9. It should bear the required stamping- The promissory note should, necessarily, bear sufficient stamp as required by the Indian Stamp Act, 1889.
    10. It should be dated- The date of a promissory note is not material unless the amount is made payable at the particular time after date. Even then, the absence of date does not invalidate the pro-note and the date of execution can be independently proved. However to calculate the interest or fixing the date of maturity or lm\imitation period the date is essential. It may be ante-dated or post-dated. If post-dated, it cannot be sued upon till ostensible date.
    11. Demand- The promissory note may be payable on demand or after a certain definite period of time.
    12. The rate of interest- It is unusual to mention in it the rated interest per annum. When the instrument itself specifies the rate of interest payable on the amount mentioned it, interest must be paid at the rate from the date of the instrument.

    Promissory Note_ Definition Types and Features - ilearnlot

     

  • Bill of Exchange: Meaning, Definition, and Features!

    Bill of Exchange: Meaning, Definition, and Features!

    Explain and Learn, Bill of Exchange: Meaning, Definition, and Features!

    A bill of exchange is generally drawn by the creditor on his debtor. The Concept of the study Explains – Bill of Exchange: What is a Bill of Exchange? Meaning of Bill of Exchange, Definition of Bill of Exchange, and Features of Bill of Exchange! It should be accepted either by the debtor or any person(s) on his/her behalf. It is worth mentioning that before its acceptance by the debtor, it is just a draft. It should be accepted either by a person upon whom it is drawn or someone else on his/her behalf. The stage at which the purchaser of goods signs the draft and writes ‘Accepted’ on it, it becomes a bill of exchange. Also learned, Bill of Exchange: Meaning, Definition, and Features!

    What is a Bill of Exchange?

    According to section 5 of the Negotiable Instruments Act, 1881, defines Bill Of Exchange as “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”

    A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

    The sum payable may be “certain”, within the meaning of this section and section and section 4, although it includes future indicated rater of change, or is according to the course of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.

    The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person,” within the meaning of this section and section 4, although he is misnamed or designated by description only.

    Meaning of Bill of Exchange:

    T.P Mukherjee law Dictionary with pronunciation defines Bill of Exchange as under: “A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or the order of a specified person or to bearer.”

    The legal and commercial dictionary defines Bill of Exchange as under: “Bill of Exchange includes a hundi and a cheque. A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain. The person or to the bearer of the instrument.”

    Black‘s Law Dictionary defines Bill of Exchange as under: “Bill of Exchange. A three-party instrument in which the first party draws an order for the payment of a sum certain on the second party for payment to a third party at a definite future time.”

    Wharton ‘s law lexicon Dictionary defines Bill of exchange as under: “As an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.”

    K.J. Aiyers judicial Dictionary defines Bill of Exchange as under: “It is a written order or request by one person to another for the payment of money at a specified time absolutely and at all events. A bill of exchange is only a transfer of a chose in action according to the custom of merchants, it is an authority to one person to pay to another the sum which is due to the first.”

    P.G. Osborn’s. The concise commercial Dictionary defines Bill of Exchange as under: “An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of, a specified person, or to bearer. A bill of exchange is a negotiable instrument.”

    Mitra’s legal and commercial Dictionary defines Bill of Exchange as under: “A bill of exchange means a bill of exchange as defined in the Negotiable Instruments Act 1881, and includes also a hundi, and any other document entitling or purporting to entitle any person whether named therein or not, to payment by any other person of, or to draw upon any other person for, any sum of money.”

    Stroud’s Judicial Dictionary defines Bill of Exchange as under: “An order to pay out of a particular fund is not unconditional within the meaning of this section, but an unqualified order to pay, coupled with (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited with the amount, or (b) a statement of the transaction which gives rise to the bill, is unconditional.”

    Jowitt’s Dictionary of English law defines Bill of Exchange as under: “An unconditional order in writing, addressed by one person (A) to another (B) signed by the person giving it, requiring the person to whom it is addressed to pay, on demand, or at a fixed or determinable future time, a sum certain in money to, or to the order of a specified person (c), or to bearer ( Bill of Exchange Act 1882, s3 ) A is called the drawee, B the drawer and C the payee. Sometimes, A the drawer is himself the payee. The holder of a bill may treat it as a promissory note (q.v) if the drawer and drawee are the same person s5(2), when B, the drawee, has, by accepting the bill, undertaken to pay it, he is called the acceptor.”

    Definition of Bill of Exchange:

    A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. —Section 5 of the Negotiable Instruments Act, 1881.

    Bill of exchange is a negotiable instrument which is payable either to order or to the bearer. Section 13 (1) of the Negotiable Instruments Act, 1881 defines negotiable instruments as “A promissory note, bill of exchange or cheque payable either to order or to bearer”.

    Definition: Bill of Exchange, can be understood as a written negotiable instrument, that carries an unconditional order to pay a specified sum of money to a designated person or the holder of the instrument, as directed in the instrument by the maker. The bill of exchange is either payable on demand, or after a specified term.

    In a business transaction, when the goods are sold on credit to the buyer, the seller can make the bill and send it to the buyer for acceptance, which contains the details such as name and address of the seller and buyer, amount of bill, maturity date, signature, and so forth.

    Features of Bill of Exchange:

    The definition of a Bill of Exchange under the act is fairly exhaustive and almost covers all the aspects related to it at one place. A Bill of Exchange requires three parties.

    1. The drawer, i.e. the person who is the maker of the bill and who gives the order.
    2. The drawee, i.e. the person who is directed to pay the bill and who on affixing his signature becomes the acceptor; and
    3. The payee, i.e. the person to whom or to whose order the amount of the instrument is payable unless the bill is payable to bearer.

    To analysis of the definition shows the following essential requisites of a bill of exchange:

    1. A Bill of Exchange must be in Writing: A bill of exchange may be written in any language, and any form of words may be used, provided the requirements of this section are complied with.
    2. A Bill of Exchange must Contain an Order to Pay: When a bill of exchange is drawn, the presumption is that there are funds in the hands of the person to whom the order is given, which are payable in any case to the person giving the order. The essence of a bill of exchange is that the drawer orders the drawee to pay money to the payee. As a bill of exchange is an order, it is necessary that it must, in its terms, be imperative and not perceptive.
    3. The Order Contained in the Bill Should be Unconditional: It is the essence of a bill that it should be payable at all events, A bill of exchange cannot be drawn so as to be payable conditionally. The drawer’s order to the drawee must be unconditional and should not make the payment of the bill dependent on some contingency. Where an instrument is payable on a contingency, it does not cease to be invalid by the happening of the event before the expiry of the period fixed for the performance of the obligation, for the instrument must be valid ab initio, and carry its validity on its face. A conditional bill of exchange is invalid. The addition of the words as per agreement does not make a note conditional.
    4. Bills Payable Out of a Particular Fund: On the same principle, a bill expressed to be payable out of a particular fund is conditional and invalid, because it is uncertain whether the fund will be in existence or prove sufficient when the bill becomes payable. Thus a bill containing an order to pay ‘out of money due from A as soon as you receive it, or out of money remaining in your hands belonging to X company is invalid.
    5. A Bill of Exchange must be Signed by the Drawer: A Bill is not valid unless the drawer signs it and if Drawer has not signed it no action can be maintained against the acceptor or any other party who has affixed his signature these too. If the drawer is unable to write his name, he can sign by a mark in lieu of a signature.
    6. The Drawee must be Certain: The next requisite is that the instrument must order a person to pay the amount of the bill. The person to whom the bill is addressed is called the ‘drawee’ and he must be named or otherwise indicated in the bill with reasonable certainty. So that the payee knows the person to whom he should present the instrument for acceptance and payment. A bill cannot be addressed to two or more drawee in the alternative because it would create difficulties as to recourse if the bill were dishonored.
    7. The Sum Payable must be Certain: The sum payable is certain even though it is required to be paid with interest, or at the indicated rate of exchange or by installment with the proviso that on the default in the payment of installment, the whole amount shall become due and payable.
    8. The Instrument must Contain an Order to Pay Money and Money only: The medium of payment should be the legal tender i.e. money and nothing else. An instrument containing the order to pay money along with some other thing or merely some other thing is not a valid bill. An instrument ordering the delivery up of houses and a wharf in addition to the payment of a sum of money is not a valid bill.
    9. The Payee must be Certain: A bill must state with certainty the person to whom payment is to be made. A bill of exchange ought to specify to whom the same is payable, for in no other way can the drawee, if he accepts it, know to whom he may properly pay it so as to discharge himself from all further liability. Where a bill is payable to bearer, the payee is indicated with certainty. Bills are rarely drawn payable to bearer, but cheques are commonly so drawn. A bill cannot be drawn payable to bearer on demand.  Where in a bill the drawee or payee is misnamed or misdescribed, extrinsic evidence is admissible to identify him.

    Bill of Exchange_ Meaning Definition and Features - ilearnlot

     

  • Treasury Bills: Meaning, Features, Types, and Importance

    Treasury Bills: Meaning, Features, Types, and Importance

    Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowings of the Government. As well as discuss the Commercial Bills, this article explains Treasury Bills. The Treasury Bills explain in their key points; meaning, features, types, and importance. Treasury bill market refers to the market where treasury bills buy and sell. Treasury bills are very popular and enjoy a higher degree of liquidity since they issue by the government.

    Explain and Learn, Treasury Bills: Meaning, Features, Types, and Importance!

    Meaning and Features of Treasury Bills:

    A treasury bills nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. The period does not exceed one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any “grading” or “endorsement” or “acceptance” since it claims against the Government.

    Treasury bill issues only by the RBI on behalf of the Government. Treasury bills issue for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security.

    Definition of Treasury Bills:

    Treasury Bills, also known as T-bills are the short-term money market instrument, issued by the central bank on behalf of the government to curb temporary liquidity shortfalls. These do not yield any interest, but issued at a discount, at its redemption price, and repaid at par when it gets matured.

    T-bills are the key segment of the financial market, which utilizes by the government to raise short-term funds, for fulfilling periodic discrepancies between its receipts and expenditure. The difference between the issue price and the redemption value indicates the interest on treasury bills, call as a discount. These are the safest investment instrument of its category, as the risk of default is negligible. Further, the date of issue predetermine, as well as the amount also fixed.

    Features of Treasury Bills:

    The following features of treasury bills below are;

    Form:

    T-bills are issued either in physical form as a promissory note or dematerialized form by a credit to Subsidiary General Ledger (SGL) Account.

    Eligibility:

    Individuals, firms, companies, trust, banks, insurance companies, provident funds, state government, and financial institutions are eligible to invest in treasury bills.

    Minimum Bid:

    The minimum amount of bid is Rs. 25000 and in multiples thereof.

    Issue price:

    T-bills are issued at a discount but redeemed at par.

    Repayment:

    The repayment of the bill is made at par on the maturity of the term.

    Availability:

    Treasury bills are highly liquid negotiable instruments, that are available in both financial markets, i.e. primary and secondary.

    Method of the auction:

    Uniform price auction method for 91 days T-bills, whereas multiple price auction method for 364 days T-bill.

    Day count:

    The day count is 364 days, in a year, for treasury bills.

    Besides this, other characteristics of treasury bills include the market-driven discount rate, selling through auction, issued to meet short-term mismatches in cash flows, assured yield, low transaction cost, etc.

    Types of Treasury Bills:

    In India, there are two types of treasury bills viz.

    • Ordinary or regular and
    • “Ad hoc” known as “Ad Hoc’s” ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government.

    These bills are freely marketable and they can buy and sell at any time and they have secondary market also.

    On the other hand ‘ad Hoc’s’ are always issued in favor of the RBI only. They are not sold through tender or auction. Also, they are purchased by the RBI on top and the RBI authorizes to issue currency notes against them.

    Government explains:

    They are marketable sell them back to the RBI. Ad Hoc’s serve the Government in the following ways:

    • They replenish the cash balances of the central Government. Just like State Government get advance (ways and means advances) from the RBI, the Central Government can raise finance through this Ad Hocs.
    • They also provide an investment medium for investing the temporary surpluses of State Government, semi-government departments and foreign central banks.

    Based on periodicity, treasury bills may classify into three they are:

    91 days T-bills:

    The tenor of these bills complete on 91 days. These are an auction on Wednesday, and the payment makes on the following Friday.

    182 days T-bills:

    These treasury bills get matured after 182 days, from the day of issue, and the auction is on Wednesday of non-reporting week. Moreover, these are repaying on following Friday, when the term expires.

    364 days T-bills:

    The maturity period of these bills is 364 days. The auction is on every Wednesday of reporting week and repay on the following Friday after the term gets over.

    Treasury bills are backed by some advantages like no tax deducted at source, high liquidity and trade-ability, zero risks of default, transparency, a good return on investment and so on.

    Ninety-one day’s treasury bills are issuing at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills quotes in the auction by the participants and accepted by the authorities. Such a rate calls cut off rate. In the same way, the rate is fixed for 91 days treasury bills sold through auction. 91 days treasury bills (top basis) can rediscount with the RBI at any time after 14 days of their purchase. Before 14 days a penal rate charges.

    Operations and Participants:

    The RBI holds day’s treasury bills (TBs) and they issue on top basis throughout the week. However, 364 days TBs are selling through the auction which conducts once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also.

    On the next working day of the date auction, the accepted bids with prices are displaying. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with the cheque for the amount due on RBI within 24 hours of the announcement of auction results.

    Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recording in this account invests who do not have SGL account can purchase and sell TBs through DFHI. The DFHI does this function on behalf of investors with the bits of the help of SGL transfer forms. The DFHI is actively participating in the auctions of TBs.

    It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for the period’s up to 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.

    The participants in this market are the followers:
    1. RBI and SBI.
    2. Commercial banks.
    3. State Governments.
    4. DFHI.
    5. STCI.
    6. Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc.
    7. Corporate customers, and.
    8. Public.

    Through many participants are there, in actual practice, this market is in the hands of the banking sector. It accounts for nearly 90 % of the annual sale of TBs.

    Importance of Treasury Bills:

    The following importance of treasury bills below is:

    Safety:

    Investments in TBs are highly safe since the payment of interest and repayment of principal are assured by the Government. They carry zero default risk since they are issuing by the RBI for and on behalf of the Central Government.

    Liquidity: 

    Investments in TBs are also highly liquid because they can convert into cash at any time at the option of the inverts. The DFHI announces daily buying and selling rates for TBs. They can discount with the RBI and further refinance facility is available from the RBI against TBs. Hence there is a market for TBs.

    Ideal Short-Term Investment:

    Idle cash can profitably invest for a very short period in TBs. TBs are available on top throughout the week at specified rates. Financial institutions can employ their surplus funds on any day. The yield on TBs also assures.

    Ideal Fund Management:

    TBs are available on top as well through periodical auctions. They are also available in the secondary market. Fund managers of financial institutions build the portfolio of TBs in such a way that the dates of maturities of TBs may match with the dates of payment on their liabilities like deposits of short-term maturities. Thus, TBs help financial manager’s it manages the funds effectively and profitably.

    Statutory Liquidity Requirement:

    As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio of investments in TBs takes into account. TBs are eligible securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very helpful. They can readily convert into cash and thereby CRR can maintain.

    Source of Short-Term Funds:

    The Government can raise short-term funds for meeting its temporary budget deficits through the issue of TBs. It is a source of cheap finance to the Government since the discount rates are very low.

    Non-Inflationary Monetary Tool:

    TBs enable the Central Government to support its monetary policy in the economy. For instance excess liquidity, if any, in the economy can absorb through the issue of TBs. Moreover, TBs are subscribing by investors other than the RBI. Hence they cannot mention and their issue does not lead to any inflationary pressure at all.

    Hedging Facility:

    TBs can use as a hedge against heavy interest rate fluctuations in the call loan market. When the call rates are very high, money can raise quickly against TBs and invest in the call money market and vice versa. TBs can use in ready forward transitions.

    Defects of Treasury Bills:

    The following defects of treasury bills below are;

    Poor Yield:

    The yield form TBs is the lowest. Long-term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times.

    Absence Of Competitive Bids:

    Though TBs sell through auction to ensure market rates for the investors, in actual practice, competitive bids are conspicuously absent. The RBI compels to accept these non-competitive bids. Hence adequate return is not available. It makes TBs unpopular.

    Absence Of Active Trading:

    Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs adversely affects.

  • Development Banks: Features, Functions, and Objectives

    Development Banks: Features, Functions, and Objectives

    Development Banks essentially a multi-purpose Financial Institution with a broad development outlook. This article explains about Development Banks and with their topics – Features, Functions, and Objectives. The important functions of development banks in India.

    Learn, Explain each topic of Development Banks – Features, Functions, and Objectives.

    A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long-term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities-economic development in general, and industrial development, in particular. In short, a development bank is a development-oriented bank; The Development Banks and their topics Features, Functions, and Objectives below are.

    Features of Development Banks:

    Following are the main characteristics or features of development banks:

    • It is a specialized financial institution, provides medium and long-term finance to business units.
    • Unlike commercial banks, it does not accept deposits from the public, It is not just a term-lending institution. It’s a multi-purpose financial institution.
    • It is essentially a development-oriented bank. Its primary objective is to promote economic development by promoting investment and entrepreneurial activity in a developing economy. It encourages new and small entrepreneurs and seeks balanced regional growth.
    • They provide financial assistance not only to the private sector but also to the public sector undertakings, It aims at promoting the saving and investment habit in the community.
    • It does not compete with the normal channels of finance, i.e., finance already made available by the banks and other conventional financial institutions. Its major role is of a gap-filler, i. e., to fill up the deficiencies of the existing financial facilities.
    • Its motive is to serve the public interest rather than to make profits. It works in the general interest of the nation.

    Functions of Development Banks:

    Development banks have been started with the motive of increasing the pace of industrialization. The traditional financial institutions could not take up this challenge because of their limitations. To help all round industrialization development banks were made multipurpose institutions. Besides financing, they were assigned promotional work also.

    Some important functions of these institutions discuss as follows:

    Financial Gap Fillers:

    Development banks do not provide medium-term and long-term loans only but they help industrial enterprises in many other ways too.

    These banks subscribe to the bonds and debentures of the companies, underwrite their shares and debentures and, guarantee the loans raised from foreign and domestic sources. They also help undertakings to acquire machinery from within and outside the country.

    Undertake Entrepreneurial Role:

    Developing countries lack entrepreneurs who can take up the job of setting up new projects. It may be due to a lack of expertise and managerial ability. Development banks were assigned the job of entrepreneurial gap filling.

    They undertake the task of discovering investment projects, promotion of industrial enterprises, provide technical and managerial assistance, undertaking economic and technical research, conducting surveys, feasibility studies, etc. The promotional role of the development bank is very significant for increasing the pace of industrialization.

    Commercial Banking Business:

    Development banks normally provide medium and long-term funds to industrial enterprises. The working capital needs of the units are met by commercial banks. In developing countries, commercial banks have not been able to take up this job properly. Their traditional approach in dealing with lending proposals and assistance on securities has not helped the industry.

    Development banks extend financial assistance for meeting working capital needs to their loan if they fail to arrange such funds from other sources. So far as taking up other functions of banks such as accepting of deposits, opening letters of credit, discounting of bills, etc. there is no uniform practice in development banks.

    Joint Finance:

    Another feature of the development bank’s operations is to take up joint financing along with other financial institutions. There may be constraints of financial resources and legal problems (prescribing maximum limits of lending) which may force banks to associate with other institutions for taking up the financing of some projects jointly.

    It may also not be possible to meet all the requirements of concern by one institution, So more than one institution may join hands. Not only in large projects but also in medium-sized projects it may be desirable for a concern to have, for instance, the requirements of a foreign loan in a particular currency, met by one institution and under the writing of securities met by another.

    Refinance Facility:

    Development banks also extend the refinance facility to the lending institutions. In this scheme, there is no direct lending to the enterprise. The lending institutions are provided funds by development banks against loans extended’ to industrial concerns.

    In this way, the institutions which provide funds to units are refinanced by development banks. In India, the Industrial Development Bank of India (IDBI) provides reliance against term loans granted to industrial concerns by state financial corporations. commercial banks and state co-operative banks.

    Credit Guarantee:

    The small scale sector is not getting proper financial facilities due to the clement of risk since these units do not have sufficient securities to offer for loans, lending institutions are hesitant to extend the loans. To overcome this difficulty many countries including India and Japan have devised the credit guarantee scheme and credit insurance scheme.

    • In India, a credit guarantee scheme was introduced in 1960 with the object of enlarging the supply of institutional credit to small industrial units by granting a degree of protection to lending institutions against possible losses in respect of such advances.
    • In Japan, besides credit guarantee, insurance is also provided. These schemes help small-scale concerns to avail loan facilities without hesitation.
    Underwriting of Securities:

    Development banks acquire securities of industrial units through either direct subscribing or underwriting or both. The securities may also be acquired through promotion work or by converting loans into equity shares or preference shares. So, as learn about development banks may build portfolios of industrial stocks and bonds.

    These banks do not hold these securities permanently. They try to disinvest in these securities in a systematic way which should not influence the market prices of these securities and also should not lose managerial control of the units. Development banks have become worldwide phenomena.

    Their functions depend upon the requirements of the economy and the state of development of the country. They have become well-recognized segments of the financial market. They are playing an important role in the promotion of industries in developing and underdeveloped countries.

    Objectives of Development Banks:

    The main objectives of the development banks are:

    • They promote industrial growth.
    • To develop backward areas.
    • To create more employment opportunities.
    • The generate more exports and encourage import substitution.
    • To encourage modernization and improvement in technology.
    • To promote more self-employment projects.
    • The revive sick units.
    • To improve the management of large industries by providing training.
    • To remove regional disparities or regional imbalance.
    • They promote science and technology in new areas by providing risk capital, and.
    • To improve the capital market in the country.

    Development Banks Features Functions and Objectives - ilearnlot
    Development Banks: Features, Functions, and Objectives!

    The Few important functions of development banks in India are as follows:

    • They promote and develop small-scale industries (SSI) in India.
    • To finance the development of the housing sector in India.
    • To facilitate the development of large-scale industries (LSI) in India.
    • They help in the development of the agricultural sector and rural India.
    • To enhance the foreign trade of India.
    • They help to review (cure) sick industrial units.
    • To encourage the development of Indian entrepreneurs.
    • To promote economic activities in backward regions of the country.
    • They contribute to the growth of capital markets.

    Now let’s discuss each important function of development banks one by one.

    Small Scale Industries (SSI):

    Development banks play an important role in the promotion and development of the small-scale sector. The government of India (GOI) started the Small Industries Development Bank of India (SIDBI) to provide medium and long-term loans to Small Scale Industries (SSI) units. SIDBI provides direct project finance and equipment finance to SSI units. It also refinances banks and financial institutions that provide seed capital, equipment finance, etc., to SSI units.

    Development of Housing Sector:

    Development banks provide finance for the development of the housing sector. GOI started the National Housing Bank (NHB) in 1988.

    NHB promotes the housing sector in the following ways:

    • It promotes and develops housing and financial institutions.
    • It refinances banks and financial institutions that provide credit to the housing sector.
    Large Scale Industries (LSI):

    The development bank promotes and develops large-scale industries (LSI). Development financial institutions like IDBI, IFCI, etc., provide medium and long-term finance to the corporate sector. They provide merchant banking services, such as preparing project reports, doing feasibility studies, advising on the location of a project, and so on.

    Agriculture and Rural Development:

    Development banks like the National Bank for Agriculture & Rural Development (NABARD) helps in the development of agriculture. NABARD started in 1982 to provide refinance to banks, which provide credit to the agriculture sector and also for rural development activities. It coordinates the working of all financial institutions that provide credit to agriculture and rural development. It also provides training to agricultural banks and helps to conduct agricultural research.

    Enhance Foreign Trade:

    Development banks help to promote foreign trade. The government of India started the Export-Import Bank of India (EXIM Bank) in 1982 to provide medium and long-term loans to exporters and importers from India. It provides Overseas Buyers Credit to buy Indian capital goods. Also, encourages abroad banks to provide finance to the buyers in their country to buy capital goods from India.

    Review of Sick Units:

    Development banks help to revive (cure) sick-units. The government of India (GOI) started the Industrial Investment Bank of India (IIBI) to help sick units. IIBI is the main credit and reconstruction institution for a revival of sick units. It facilitates modernization, restructuring, and diversification of sick-units by providing credit and other services.

    Entrepreneurship Development:

    Many development banks facilitate entrepreneurship development. NABARD, State Industrial Development Banks, and State Finance Corporations provide training to entrepreneurs in developing leadership and business management skills. They conduct seminars and workshops for the benefit of entrepreneurs.

    Regional Development:

    The development bank facilitates rural and regional development. They provide finance for starting companies in backward areas. Also, they help companies in project management in such less-developed areas.

    Contribution to Capital Markets:

    The development bank contributes to the growth of capital markets. They invest in equity shares and debentures of various companies listed in India. Also, invest in mutual funds and facilitate the growth of capital markets in India.

  • Commercial Paper: Definition, Features, and Advantages!

    Commercial Paper: Definition, Features, and Advantages!

    What is a commercial paper? A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company. The concept of Commercial Paper: Definition, Features of Commercial Paper, and Advantages of Commercial Paper. Implications of Commercial Paper, Impact on commercial banks, Commercial Paper in India, Future of Commercial Paper in India, Commercial Paper Market in Other Countries, and RBI Guidelines on Commercial Paper Issue. Also learned, Merchant Banking, Commercial Paper: Definition, Features, and Advantages!

    Learn, Explain each topic of Commercial Paper: Definition, Features, and Advantages!

    Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations, and foreign governments commonly use this type of funding.

    #Definition:

    Commercial Paper or CP is defined as a short-term, unsecured money market instrument, issued as a promissory note by big corporations having excellent credit ratings. As the instrument is not backed by collateral, only large firms with considerable financial strength are authorized to issue the instrument.

    Why Needed this?

    Commercial paper is issued by a wide variety of domestic and foreign firms, including financial companies, banks, and industrial firms. Major investors in the commercial paper include money market mutual funds and commercial bank trust departments. These large institutional investors often prefer the cost savings inherent in using commercial paper instead of traditional bank loans.

    #Features of Commercial Paper:

    • Commercial paper is a short-term money market instrument comprising since promissory note with a fixed maturity.
    • It is a certificate evidencing an unsecured corporate debt of short-term maturity.
    • Commercial paper is issued at a discount to face value basis but it can be issued in interest-bearing form.
    • The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his liquidity and established earning power, to guarantee that promise.
    • Commercial paper can be issued directly by a company to investors or through banks/merchant banks.

    #Advantages of Commercial Paper:

    Simplicity:

    The advantage of commercial paper lies in its simplicity. It involves hardly any documentation between the issuer and the investor.

    Flexibility:

    The issuer can issue commercial paper with the maturities tailored to match the cash flow of the company.

    Easy To Raise Long-Term Capital:

    The companies which are able to raise funds through commercial paper become better known in the financial world and are thereby placed in a more favorable position for rising such long them capital as they may, from time to time,  as required. Thus there is an inbuilt incentive for companies to remain financially strong.

    High Returns:

    The commercial paper provides investors with higher returns than they could get from the banking system.

    Movement of Funds:

    Commercial paper facilities securitization of loans resulting in the creation of a secondary market for the paper and efficient movement of funds providing cash surplus to cash deficit entities.

    #Implications of Commercial Paper:

    The issue of commercial paper is an important step in disintermediation bringing a large number of borrowers as well as investors in touch with each other, without the intervention of the banking system as the financial intermediary. Directly from borrowers can get at least 20% of their working capital requirements directly from the market at rates which can be more advantageous than borrowing through a bank.

    The forts class borrowers have the prestige of joining the elitist commercial paper club with the approval of CRISIL, the banking system, and the RBI, however, RBI has presently stipulated that the working capital limits of the banks will be reduced to the extent of an issue of commercial paper. Industrialists have already made a plea that the issue of commercial paper should be outside the scheme of bank finance and other guidelines.

    Such as, the recommendation of banks and approval of RBI has not accepted the plea at present as commercial paper is an unsecured borrowing and not related to a trade transaction. The main aim of the RBI is to ensure that commercial paper develops a sound money market instrument.si, in the initial stages emphasis should be on the quality rather than quantity.

    #Impact on commercial banks:

    The impact of the issue of commercial paper on commercial banks would be of two dimensions. One is that banks themselves can invest in commercial paper and show this as the short-term investment. The second aspect is that the banks are likely to lose interest on the working capital loan which has been hitherto lent to the companies, which have now started borrowing through commercial paper.

    Further, the larger companies might avail of the cheap funds available in the market during the slack season worsening the bank’s surplus fund position\, but come to the banking system for borrowing during the busy season when funds are costly. This would mean the banks are the losers with a clear impact on profitability.

    However, the banks stand to gain by charging the higher interest rate on reinstated portion especially of it done during the busy season and by way of service charge for providing standby facilities and issuing and paying commission. Further, when large borrowers are able to borrow directly from the market, banks will correspondingly be freed from the pressure on resources.

    #Impact on the Economy:

    The process of disintermediation is taking place in the free economies all over the world. With the introduction of CP financial disintermediation has been gaining momentum in the Indian economy. If CPs are allowed to free play, large companies, as well as banks, would learn to operate in a competitive atmosphere with more efficiently. This result greater excellence in the service of banks as well as management of finance by companies.

    Recent Trends:

    RBI has liberalized the terms of issues of CP from May 30, 1991.

    According to the liberalized terms, the proposal by eligible companies for the issues of CP would not require the approval of RBI.

    Such companies would have to submit the proposal to the financing bank which provided working capital facility either as a sole bank or as a leader of the consortium.

    The bank, on being satisfied with the compliance of the norms would take the proposal on the record before the issue of commercial paper.

    RBI has further relaxed the rules in June 1992,

    The minimum working capital limit required by a company to issue CP has been reduced to Rs. 5 crores. The ceiling on the amount of which can be raised through CP has been raised to 75% of working capital.

    A closely held company has also been permitted to borrow through CPs provided all the criteria are met. The minimum rating required from CRISIL has been lowered to P2 from 1994 – 95, the standby facility by banks for CP has been abolished.

    When CPs are issued, banks will have to effect a pro-rata reduction in the criteria are met. The while minimum rating needed from ICRA is A2 instead of A1.

    According to the RBI monetary policy for the second half of 1994 – 95,

    The standby facility by banks for CP has been abolished. When CPs are issued, banks will have to effect a pro-rata reduction in the cash credit limit and it will be no longer necessary for banks to restore the cash credit limit to meet the liability on the maturity of CPs. This will import a measure of independence to CP as a money market instrument.

    #Commercial Paper in India:

    In India, on the recommendations of the Vaghul working Group, the RBI announced on 27th March 1989, that commercial paper will be introduced soon in the Indian money market. The recommendations of the Vaghul Working Group on the introduction of commercial paper in Indian money market areas flowers:

    • There is a need to have a limited introduction of commercial paper. It should be carefully planned and the eligibility criteria for the issuer should be sufficiently rigorous to ensure that the commercial paper market develops on healthy lines.
    • Initially, access to the commercial paper market should be registered to rated companies having a net worth of Rs. 5 cores and above with good dividend payment record.
    • The commercial paper market should function within the overall discipline of CAS. The RBI would have to administer the entry on the market, the amount if each issue the total quantum that can be raised in a year.
    • Ni restriction is placed on the commercial paper market except by way of the minimum size of the note. The size of the single issue should not be less than Rs. 1 core and the size of each lot should not be less than Rs. 5 lakhs.
    • The commercial paper should be excluded from the stipulations on insecure advances in the case of banks.
    • The commercial paper would not be tied to any transaction and the maturity period may be 7 days and above but not exceeding six months, backed up if necessary by a revolving underwriting facility of fewer than three years.
    • The using company should have a net worth of not less than Rs. 5 cores, a debt quality ratio of not more than 105, current ratio of more than 1033, a debt servicing ratio closer to 2, and be listed on the stock exchange.
    • The interest rate on commercial paper would be market dominated and the paper could be issued at a discount to face value or could be interest bearing.
    • The commercial paper should not be subject to stamp duty at the time of issue as well as at the time transfer by endorsement and delivery.

    On the recommendations of the Vaghul Working Group, the RBI announced on 27th March 1989 that commercial paper will be introduced soon in the Indian money market. Detailed guidelines were issued in December 1989, through non-Banking companies (acceptance of Deposits through commercial paper) Direction, 1989 and finally, the commercial papers were instructed in India from 1st January 1990.

    RBI Guidelines on Commercial Paper Issue:

    The important guidelines are:

    • A company can issue commercial paper only if it has: 1) A tangible net worth of not less than Rs. 10croes as per the latest balance sheet. 2) The minimum current ratio of 1.33:1. 3) A fund based working capital limit of Rs. 25 crores or more. 4) A debt servicing ratio closer to 2. 5) The company is listed on a stock exchange. 6) Subject to CAS discipline. 7) It is classified under Health Code no. 1 by the financing banks, and. 8) The issuing company would need to obtain p1 from CRISIL.
    • The commercial paper shall be issued in multiples of Rs. 25 lakhs but the minimum amount to be invested by a single investor shall be Rs. 1 crore.
    • The commercial paper shall be issued for minimum maturity period of 7 days and the maximum period of 6 months from the date of issue. There will be no grace period on maturity.
    • Another aggregate amount shall not exceed 20% of the issuer’s fund based working capital.
    • The commercial paper is issued in the form of using promissory notes, negotiable by endorsement and delivery. The rate of discount could be freely determined by the issuing company. The issuing company has to bear all flotation cost, including stamp duty, dealers, fee and credit rating agency fee.
    • The issue of commercial paper cannot be underwritten or co-opted in any manner. However, commercial banks can provide standby facility for the redemption of the paper on the maturity date.
    • Investment in the commercial paper can be made by any person or banks or corporate bodies registered or incorporated in India and un-incorporated bodies too. Non-resident Indians can invest in the commercial paper on non-repatriation basis.
    • The companies issuing commercial paper would be required to ensure that the relevant provisions of the various statutes such as companies Act, 1956, the IT At, 1961 and the Negotiable Instruments Act, 1981 are complied with.

    Procedure and Time Frame Doe Issue Commercial Paper:

    • Application to RBI through financing bank or leader of the consortium bank for working capital facilities together with a certificate from the credit rating agency.
    • RBI to communicate in writing their decision on the amount of commercial paper to be issued to the lender bank.
    • The issue of commercial paper to be completed within 2 weeks from the date of approval of RBI through a private placement.
    • The issue may be spread shall bear the same maturity date.
    • Issuing company to advise RBI through the bank/leader of the bank, the amount of actual issue of commercial paper within 3 days of completion of the issue.

    Future of Commercial Paper in India:

    Corporate enterprises requiring burgeoning funds to meet their expanding needs find it easier and cheaper to raise funds from the market by issuing commercial paper. Further, it provides the greater degree of flexibility in business finance to the issui9ng company in as much it can decide the quantum of CP and its maturity on the basis of its future cash flows. CPs have made a good start.

    Since the inception of CPs in India in January 1990, 23 companies have issued CPs worth RS. 419.4 crore till June 1991. The total issues amounted to Rs. 9,000 crore in June 1994. The outstanding amount of CPs stood art Rs. 4,770 crore on March 31, 1999, and increased to Rs. 7,814 crore on March 31. 2000.

    The issues of CPs declined to Rs. 5,663 crore on March 31, 2000. It shows that the CP market is moribund. There is no increase in issuer base. i.e. the same companies are tapping this market for funds. The secondary market is virtually non-existent. Only commercial banks pick these papers and hold till mortuary. No secondary market is allowed to develop on any significant scale. Further, trading is cumbersome as procedural requirements are onerous.

    The stamp duty payable by banks subscribing charged to non-banking entities like primary dealer, corporate and non-banks instead of directly subscribing to them. The structural rigidities such as rating requirements, the timing of issue, terms of issue, maturity ranges denominational rang and interest rate stand in the way of developing the commercial paper market. The removal of stringent conditions and imposing o such regulatory measures justifiable to issues, investors and dealers will improve the potentiality of CP as a source of corporate financing.

    Commercial Paper Definition Features and Advantages - ilearnlot
    Commercial Paper: Definition, Features, and Advantages!

    Commercial Paper Market in Other Countries:

    The roots of commercial paper can be traced way back to the early nineteenth century when the firms in the USA began selling open market paper as a substitute for bank loan needed for short-term requirements but it developed only in the 1920s. The development of consumer finance companies in the 1920s and the high cost of bank credit resulting from the incidence of compulsory reserve requirements in the 1960s contributed to the popularity of commercial paper in the USA.

    Today, the US commercial paper market is the largest in the worlds. The outstanding amount at the end of 1990 in the US commercial paper market stood at $557.8 billion. The commercial paper issues in the US are exempted from the requirement if the issue of prospectus so long as proceeds are used to finance current transitions and the paper’s mortuary is less than 270 days.

    Most of the commercial paper market in Europe is modeled on the lines of the US market. In the UK the Sterling Commercial Paper Market was launched in May 1986. In the UK, the borrower must be listed in the stock exchange and he must meet assets of least  $50 million. However, rating by credit agencies is not required. The maturities of commercial paper must be between 7 and 364 days. The commercial paper is exempted from stamp duty.

    In finance, commercial papers were thought of as a fixable alternative to bank loans. The commercial paper was introduced in December 1985. Commercial paper can be issued only by non-bank French companies and subsidiaries of foreign companies. The papers are in bearer form. It can be either issued by dealers or placed directly.

    The maturity ranges from ten days to seven years. Rating by credit agencies is essential. To protect investors. Law contains fairly extensive disclosure requirements and requires publication of regular finance statements by issue. The outstanding amount at the end of 1990 in France Commercial paper market was $31 billion.

    The Canadian commercial paper market was launched in the 1950s. The commercial paper is generally used in terms of 30days to 365 days although terms such as overnight are available. The commercial paper issued by Canadian companies is normally secured by the pledge of assets. The outstanding amount at the end of 1990 in the commercial market was $26.8 billion.

    In Japan, the yen commercial paper market was opened in November 1987. The commercial paper issues carry maturities from two weeks to nine months. Japan stands second in the commercial paper market in the world an outstanding amount of $117.3 billion in 1990.

    In 1980s many other countries launched the commercial paper market, notably Sweden (early 1980s), Spain (1982s), Hong Kong (1982), Singapore (1984), Norway (1984).

  • Financial Management: Definition, Features, and Scope

    Financial Management: Definition, Features, and Scope

    The present age is the age of industrialization. Large industries are being established in every country. This article explains about Financial Management and their important topics – meaning, definition, features, and scope. It is very necessary to arrange finance for building, plant and working capital, etc. for the established of these industries. How much of capital will require, from what sources this much of finance will collect and how will it invest, is the matter of financial management? Also, read and learn; Merchant Banking, read and share Financial Management in Hindi as well.

    Learn, Explain each topic of Financial Management: Definition, Features, and Scope!

    It is that managerial activity which concerns with the planning and controlling of the firm’s financial resources. It was a branch of economics until 1890, and as a separate discipline, it is of recent origin. Still, it has no unique body of knowledge of its own and draws heavily on economics for its theoretical concepts even today.

    In general financial management is the effective & efficient utilization of financial resources. It means creating balance among financial planning, procurement of funds, profit administration & sources of funds. What is the difference between Cost and Financial Accounting?

    Meaning of Financial Management:

    They mean planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to the financial resources of the enterprise.

    Definitions of Financial Management:

    According to Solomon,

    “Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.”

    According to J. L. Massie,

    “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.”

    According to Weston & Brigham,

    “Financial management is an area of financial decision making harmonizing individual motives & enterprise goals.”

    According to Howard & Upton,

    “Financial management is the application of the planning & control functions of the finance function.”

    According to J. F. Bradley,

    “Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”

    Main Features of Financial Management:

    Based on the above definitions, the following are the main characteristics or features of financial management:

    Analytical Thinking: 

    They under, financial problems are analyzing and consider. Study of the trend of actual figures makes and ratio analysis is done.

    Continuous Process: 

    Previously it was required rarely but now the financial manager remains busy throughout the year.

    The basis of Managerial Decisions: 

    All managerial decisions relating to finance take after considering the report prepared by the finance manager. It is the base of managerial decisions.

    Maintaining Balance between Risk and Profitability: 

    Larger the risk in the business larger is the expectation of profits. They maintain the balance between risk and profitability.

    Coordination between Process: 

    There is always coordination between various processed of the business.

    Centralized Nature: 

    It is of a centralized nature. Other activities can decentralize but there is only one department for financial management.

    Financial Management Definition Features and Scope - ilearnlot
    Financial Management: Definition, Features, and Scope.

    The Scope of Financial Management:

    Financial management, at present, does not confine to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. also emphasizes because they influenced the underwriting of securities & corporate promotion.

    Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies.

    The scope of financial management below are as under:

    Determining financial needs:

    A finance manager supposes to meet the financial needs of the enterprise. For this purpose, he should determine the financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets relates to types of industry.

    A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon the scale of operations. Larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeopardize the survival of a concern.

    Choosing the sources of funds:

    Several sources may be available for raising funds. A concern may resort to the issue of share capital and debentures. Financial institutions may request to provide long-term funds.

    The working capital needs may be met by getting cash credit or overdraft facilities from commercial bands. A finance manager has to be very careful & cautious in approaching different sources.

    Financial analysis and interpretation:

    The analysis & interpretation of financial statements is an important task of a finance manager. He expects to know about the profitability, liquidity position, short-term and long-term financial position of the concern.

    For this purpose, several ratios have to calculate. The interpretation of various ratios is also essential to reach certain conclusions Financial analysis and interpretation has become an important area of financial management.

    Cost-volume-profit analysis:

    This popularly knows as “CVP relationship”. For this purpose, fixed costs, variable costs, and semi-variable costs have to analyze. Fixed costs are more or less constant for varying sales volumes. Variable costs vary according to the sales volume.

    Semi-variable costs are either fixed or variable in the short-term. The financial manager has to ensure that the income of the firm will cover its variable costs, for there is no point in being in business if this not accomplish.

    Moreover, a firm will have to generate an adequate income to cover its fixed costs as well. The financial manager has to find out the break-even point that is, the point at which the total costs are matching by total sales or total revenue.

    Working capital management:

    Working capital refers to that part of the firm’s capital which requires financing’s short-term or current assets such as cash, receivables, and inventories.

    It is essential to maintain the proper level of these assets. The finance manager requires to determine the quantum of such assets.

    Dividend policy:

    The dividend is the reward of the shareholders for investment makes by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing.

    These contradictory aims will have to reconcile in the interests of shareholders and the company. Dividend policy is an important area of financial management because the interest of the shareholders and the needs of the company are directly related to it.

    Capital budgeting:

    Capital budgeting is the process of making investment decisions in capital expenditures. It is an item of expenditure on the benefits of which are expecting to receive over a period exceeding one year.

    It is expenditure for acquiring or improving the fixed assets, the benefits of which are expecting to receive over several years in the future. Capital budgeting decisions are vital to any organization. Any unsound investment decision may prove to be fatal for the very existence of the concern.

  • Marketing Concept: Features, Importance, and Benefits!

    Learn, Explain Marketing Concept: Features, Importance, and Benefits!

    The Marketing Concept is the philosophy that firms should analyze the needs of their customers and then make decisions to satisfy those needs, better than the competition. Today most firms have adopted the marketing concept, but this has not always been the case. In 1776 in the Wealth of Nations, Adam Smith wrote that the needs of producers should be considered only with regard to meeting the needs of consumers. Also learned, NPD (New Product Development), Explain it each one, Marketing Concept: Features, Importance, and Benefits!

    In a modern industrial economy, productive capacity has been built up to a point where most markets are buyers markets (i.e. the buyers are dominant) and sellers have scramble hard for consumers and ultimately consumers began to occupy a place of unique importance. The business firms recognize that “there is only one valid definition of business purpose to create a customer”. In other words, the recognition of the importance of marketing leads to the acceptance of marketing concept.

    To better understand the marketing concept, it is worthwhile to put it in perspective by reviewing other philosophies that once were predominant. After world war II the variety of products increased and hard selling no longer could be relied upon to generate sales. With increased discretionary income, the customer could afford to be selective and buy only those products that precisely met their changing needs, and these needs were not immediately obvious.

    The key questions became :

    1. What do customers want?
    2. Can we develop it while they still want it
    3. How can we keep our customers satisfied?

    In response to these discerning customer, firms began to adopt the marketing concept, which involves:

    1. Focusing on customer needs before developing the product.
    2. Aligning all functions of the company to focus on those needs, and.
    3. Realizing a profit by successfully satisfying customer needs over the long-term.

    When firms began to adopt the marketing concept, they typically set up separate marketing departments whose objective it was so satisfying customer needs. In other words, marketing concept aims customer’s needs and wants orientation backed by integrated marketing effort aimed at generating customer satisfaction as the key to satisfying organizational goals.

    Features of Marketing Concept:

    The salient features of the marketing concept are:

    • Consumer Orientation: The most distinguishing feature of the marketing concept is the importance assigned to the consumer. The determination of what is to be produced should not be in the hands of the firms but in the hands of the consumers. The firms should produce what consumers want. All activities of the marketer such as identifying needs and wants, developing appropriate products and pricing, distributing and promoting them should be consumer – oriented. If these things are done effectively, products will be automatically bought by the consumers.
    • Integrated Marketing: The second feature of the marketing concept is integrated marketing i.e. integrated management action. Marketing can never be an isolated management action. Marketing can never be an isolated management function. Every activity on the marketing side will have some bearing on the other functional areas of management such as production, personnel or finance. Similarly, any action in a particular area of operation in production or finance will certainly have an impact on marketing and ultimately on the consumer. In a business firm that accepts the marketing concept as the cornerstone of its business philosophy, no management area can work in isolation. Therefore in an integrated marketing setup, the various functional areas of management get integrated with the marketing function. Integrated marketing presupposes a proper communication among the different management areas with marketing influencing the corporate decision-making process. Thus, when the firms objective is to make the profit – by providing consumer satisfaction, naturally it follows that the different departments of the company are fairly integrated with each other and their efforts are channelized through the principal marketing department towards the objective of consumer satisfaction.
    • Consumer Satisfaction: The third feature of the marketing concept is consumer satisfaction. The objective of the company adopting marketing concept is to satisfy the customers’ needs so perfectly that they will become regular or permanent satisfied customer. For example, when a consumer buys a tin of coffee, he expects a purpose to be served, a need to be satisfied. If the coffee does not provide him the expected flavor, the taste and the refreshments his purchase has not served the purpose. Or more precisely, the marketer who sold the coffee has failed to satisfy his consumer. Thus, ‘satisfaction’ is the proper foundation on which alone any business can build its future.
    • Realization of Organizational Goals: Though the organizational goals may differ from firm to firm, though key areas such as innovation, market standings, profits and social responsibility are common to all firms. According to the marketing concept, the right way to achieve these organizational goals is through ensuring consumer satisfaction.
    • Profit Creation: A distinguishing feature of the marketing concept is that it considers the creation of profits as an essential requirement for any business concern. The marketing concept is against profiteering but not against profits. Reasonable returns or surplus are essential for the survival and growth of business organizations.

    Importance of marketing concept:

    Business enterprises are conducting their marketing activities under the following five marketing concepts.

    1. Production concept:

    Production concept is the oldest concept under which the businessmen produce goods thinking customers are interested only in low priced, extensively and easily available goods. Finishing and the interest of customers are not important for the manufacturers. They focus only on large scale production and try to make it available on large scale. They try to achieve high production efficiency and creating wide distribution coverage.

    2. Product concept:

    Consumers favor those products that offer the most quality, performance and features is the basis of product concept.  They believe that consumers are willing to pay higher cost for the goods or services which has extra quality. Companies which concentrate on product concept is focused on product improvement.  They constantly improve the product quality and features to satisfy and attract the customers.  Too much focus on product may go off the track and fail.  For example, a biscuit manufacturer produced  a new brand of biscuits with good color, ingredients and packing etc., without taking much importance in consumer tastes and preferences. This may fail in the market if the biscuit does not taste good to the ultimate consumer.

    3. Selling concept:

    In selling concept, producers believe that the aggressive persuasion and selling is the  essence of  their  business  success. They think without such aggressive methods they cannot sell or exist in the market. They are focused on finding ways and means to sell their products. They believe that consumer  themselves will not buy enough of the enterprises products or service by themselves. Hence they do a considerable promotional efforts to sell their product through advertisements and  other means. Sales agents of electrical equipment’s, insurance agents, soft drink/health drink companies and fundraisers for social or religious causes comes under this category. That is why we are getting lots of calls from insurance agents, even though insurance is a subject matter of solicitation. In short, selling concepts assumes that consumers on their own will not buy enough of enterprises products, unless the enterprise undertakes aggressive sales and promotional efforts.

    4. Marketing concept:

    Under marketing concept the task of marketing begins with finding what the consumer want and produce a product which will meet the  consumer requirement and provides maximum satisfaction. “Customer is the King” concept emerged from this point of view. In the process of evolution many organizations changed their way of thinking to match  the  marketing concept. Under this concept producers considers the needs and wants of consumers as the guiding spirit and deliver such goods which can satisfy the consumer needs more efficiently and effectively than the competitors. The marketing concept is consumer oriented and looks forward to achieving long-term profits by making a network of satisfied consumers. When an organization practice the marketing concept, all their activities  such as research and development, distribution, quality control, finance, manufacturing, selling etc., are focused to satisfy the consumer needs and wants.

    5. Societal concept:

    With the growing awareness of the social responsibility of the business, attempts made successfully to turn the business organizations socially responsible. Environmental deterioration, excessive exploitation of resources and growing consumer movements have necessitated the recognition and relevance of marketing based on socially responsible. Societal concept is the extension of marketing concept to cover the society in addition to the consumers. Under the societal concept the business organization must take into account the needs and wants of the consumers and deliver the goods and services efficiently so as to balance the consumers satisfaction as well as the society’s well being.

    Benefits of Marketing Concept:

    The major benefits of marketing concept are described below:

    1. Benefits to Firms: A firm that believes in the marketing concept always feels the pulse of the market through continuous marketing audit and marketing research. It is fast in responding to the changes in buyer behavior. It rectifies any drawback in its product and this proves beneficial to the firm. The firm gives more importance to planning, research and innovation and its decisions are no longer based on hunches but on reliable scientific data and the proper interpretation of such data. The profits for the firm become more certain.
    2. Benefits to Consumers: The concept on the part of various competing firms to satisfy the consumer puts the later in an enviable position. Reasonable prices, better quality and easy availability at convenient places are some of the benefits that accrue to the consumer as a direct result of the marketing concept.
    3. Benefits to Society: The practice of marketing concept contributes to the better lifestyle, better standard of living and also results in the development of entrepreneurial talents. All these sets the pace for social and economic development.

    Thus the marketing concept benefits the organization, the consumer and society at large. A proper understanding of this concept is fundamental to the study of modern marketing.

  • Management Features Functions Importance Levels Objectives

    Management Features Functions Importance Levels Objectives

    Before starting Studying Management Features, Functions, Importance, Levels, and Objectives! What is it? After that, we can Be Discussing the Features of Management, Functions of Management, Importance of Management, Levels of Management, and Objectives of Management! Also learned, Discuss the Subsidiary Functions of Management: Features, Functions, Importance, Levels, and Objectives!

    Learn More, Explain Management Features, Functions, Importance, Levels, and Objectives!

    Do you want to know, What is a Management? Management is the administration of an organization, whether it is a business, a not-for-profit organization, or a government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees (or of volunteers) to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources.

    The main points of discussion of Management follow are:

    • Features of Management.
    • Functions of Management.
    • Importance of Management.
    • Levels of Management, and.
    • Also, Objectives of Management.
    Management_ Features Functions Importance Levels and Objectives - ilearnlot
    Management Features, Functions, Importance, Levels, and Objectives!

    Now Explain Each one of the Upper Contents:

    #Features of Management!

    Management is an activity concerned with guiding human and also physical resources such that organizational goals can be achieved. Nature and features of management can exist highlighted as: –

    Management is Goal-Oriented: 

    The success of any management activity is assessed by its achievement of predetermined goals or objectives. Management is a purposeful activity. It is a tool that helps users of human & physical resources to fulfill pre-determined goals. For example, the goal of an enterprise is maximum consumer satisfaction by producing quality goods at reasonable prices. This can be achieved by employing efficient persons and also making better use of scarce resources.

    Management integrates Human, Physical, and Financial Resources: 

    In an organization, human beings work with non-human resources like machines. Also, Materials, financial assets, buildings, etc. Management integrates human efforts into those resources. It brings harmony to human, physical and financial resources.

    Management is Continuous: 

    Management is an ongoing process. Also, It involves the continuous handling of problems and issues. It is concerned with identifying the problem and taking appropriate steps to solve it. E.g. the target of a company is maximum production. For achieving this target various policies have to frame but this is not the end. Marketing and Advertising are also to exist done. For this policies have to exist again framed. Hence this is an ongoing process.

    Management is all-pervasive: 

    Management exists required in all types of organizations whether it is political, social, cultural, or business because it helps and directs various efforts towards a definite purpose. Thus clubs, hospitals, political parties, colleges, hospitals, business firms all require management. Whenever more than one person exists engaged in working for a common goal, management is necessary. Whether it is a small business firm that may engage in trading or a large firm like Tata Iron & Steel, management exists required everywhere irrespective of size or type of activity.

    Management is a Group Activity: 

    Management is very much less concerned with individual efforts. Also, It is more concerned with groups. It involves the use of group effort to achieve the predetermined goal of management of ABC & Co. is good refers to a group of persons managing the enterprise.

    #Functions of Management!

    Above you may understand the features of management; Now, Management has stood described as a social process involving responsibility for economical and effective planning & regulation of the operation of an enterprise in the fulfillment of given purposes. It is a dynamic process consisting of various elements and activities. These activities are different from operative functions like marketing, finance, purchase, etc. Rather these activities are common to every manager irrespective of his level or status.

    Different experts have classified functions of management. According to George & Jerry, “There are four fundamental functions of management i.e. planning, organizing, actuating and controlling”.

    According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to control”. Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for reporting & B for Budgeting. But the most widely accepted are functions of management given by KOONTZ and O’DONNELL i.e. Planning, Organizing, Staffing, Directing, and Controlling.

    For theoretical purposes, it may be convenient to separate the function of management but practically these functions are overlapping in nature i.e. they are highly inseparable. Each function blends into the other & each affects the performance of others.

    five basic functions;

    According to Fayol, management operates through five basic functions: planning, organizing, coordinating, commanding, and controlling.

    • Planning: Deciding what needs to happen in the future and generating plans for action (deciding in advance).
    • Organizing (or staffing): Making sure the human and non-human resources are put into place.
    • Coordinating: Creating a structure through which an organization’s goals can be accomplished.
    • Commanding (or leading): Determining what must be done in a situation and also getting people to do it.
    • Controlling: Checking progress against plans.

    Management refers to the activities, and often the group of people, involved in the four general functions:

    1. Planning.
    2. Organizing.
    3. Staffing.
    4. Directing, and.
    5. Also, Controlling.

    Now Explain it to them:

    #Planning:

    It is the ongoing process of developing the business’s mission and also objectives and determining how they will exist accomplished. Planning includes both the broadcast view of the organization, e.g. its mission and the narrowest, e.g. a tactic for accomplishing a specific goal.

    #Organizing:

    Organizing is an essential function of management. Also, It is the process of accumulating resources from different sources to work according to the plans laid out by the management.

    #Staffing:

    It functions in which qualified people exist appointed to different posts relating to their skills and strengths. The activities included in this function are recruiting, hiring, training, evaluating, and compensating.

    #Directing:

    Directing is a function that comes after staffing of the organization, it is the function in which the management exists supposed to lead, direct to a specific goal and also motivate the employees for the achievement of any objective, big or small.

    #Controlling:

    It is a function in which the performance of the organization exists measured and then evaluated after which the standard observed exists determined to be either good or bad, which, in turn, leads to taking preventive and corrective measures.

    #Importance of Management!

    It helps in Achieving Group Goals: 

    You have to study and understand the above functions and features of management; It arranges the factors of production, assembles and also organizes the resources, effectively integrates the resources to achieve goals. Also, It directs group efforts towards the achievement of pre-determined goals. By defining the objective of the organization clearly, there would be no wastage of time, money, and effort. Management converts disorganized resources of men, machines, money, etc. into a useful enterprise. These resources exist coordinated, directed, and controlled in such a manner that enterprises work towards the attainment of goals.

    Optimum Utilization of Resources: 

    Management utilizes all the physical & human resources productively. This leads to efficacy in management. Management provides maximum utilization of scarce resources by selecting its best possible alternate use in industry from out of various uses. It makes use of experts, professional and these services lead to the use of their skills, knowledge, and proper utilization and avoids wastage. If employees and machines are producing their maximum there is no under the employment of any resources.

    Reduces Costs: 

    It gets maximum results through minimum input by proper planning and by using minimum input & getting maximum output. Also, Management uses physical, human, and financial resources in such a manner that results in the best combination. This helps in cost reduction.

    Establishes Sound Organization: 

    No overlapping of efforts (smooth and coordinated functions). To establish sound organizational structure is one of the objectives of management that is in tune with an objective of the organization and for the fulfillment of this, it establishes effective authority & responsibility relationship i.e. who is accountable to whom, who can give instructions to whom, who are superiors & who are subordinates. Also, Management fills up various positions with the right persons, having the right skills, training, and qualification. All jobs should be cleared for everyone.

    Establishes Equilibrium: 

    It enables the organization to survive in changing an environment. It keeps in touch with the changing environment. With the change in an external environment, the initial coordination of the organization must be changed. So it adapts organizations to changing demand for market / changing needs of societies. Also, It is responsible for the growth and survival of an organization.

    Essentials for Prosperity of Society: 

    Efficient management leads to better economic production which helps in turn to increase the welfare of people. Good management makes a difficult task easier by avoiding the wastage of scarce resources. Also, It improves the standard of living. It increases the profit which is beneficial to business and society will get maximum output at minimum cost by creating employment opportunities that generate income in hands. Organization comes with new products and likewise research beneficial for society.

    #Levels of Management!

    Levels of Management is a kind of demarcation between different managerial positions in an organization. The number of levels in management depends on the size of the business and workforce and increases when there’s an increase in both these determinants.

    The levels of management can be classified into three broad categories:

    • Top level / Administrative level.
    • Middle level, and.
    • Also, Low level/ First-line managers.

    Managers at the various levels enjoy various roles and responsibilities that are discussed below:

    1. Top Level of Management:

    The top management, which includes the board of directors, managing director, or chief executive, is the ultimate source of authority. It is responsible for managing the overall goals and policies for an organization and devotes its time to planning and synchronizing functions.

    The main functions of the top management are:

    • Issues important instructions to carry out various procedures.
    • Lays down the enterprise’s objectives and also policies.
    • Prepares strategic plans for the enterprise.
    • Also, Appoints the subordinates for middle level.
    • Coordinates and controls the activities of all the departments.
    • Maintains contact with the external world.
    • Guides and directs people at other levels.

    2. Middle Level of Management:

    Middle Level comprises the branch managers and departmental managers, who are responsible for the functioning of their department. They devote more time to organizational and also directional functions.

    Their functions can be emphasized as:

    • Implement the plans of the enterprise in accordance with the directives and policies of the top management.
    • Make plans for the sub-units of the enterprise.
    • Participate in employing & training the lower level management.
    • Interpret policies from top-level management to the lower level.
    • Also, Coordinates the activities within the division or department.
    • Delivers important reports and other crucial data to the top level management.
    • Evaluate performance of subordinate managers.
    • Inspires lower level managers towards better performance.

    3. Lower Level of Management:

    Also known as the supervisory or operative level of management, the lower level management comprises supervisors, section officers, foremen, superintendent, etc. Also, They are responsible for directing and controlling functions of management.

    Their functions and roles include:

    • Assigning tasks to various employees.
    • Guiding and instructing workforce for day to day activities.
    • Responsible for the quality and quantity of production.
    • Responsible for maintaining good relation in the company.
    • Interacts with the workforce directly and listen to their problems, offers them the valuable suggestion. Also, recommends their appeals to the higher level, if needed.
    • Provides training to the peers.
    • Prepare periodical reports about the workers’ performance.
    • Ensure discipline in the enterprise and motivates the workers.
    • Also, proper coordination between the people at various managerial levels is a must for any enterprise to run well and prosper.

    #Objectives of Management!

    The main objectives of management are:

    Getting Maximum Results with Minimum Efforts: 

    The main objective of management is to secure maximum outputs with minimum efforts & resources. Management is concerned with thinking & utilizing human, material & financial resources in such a manner that would result in the best combination. Also, This combination results in the reduction of various costs.

    Increasing the Efficiency of factors of Production: 

    Through proper utilization of various factors of production, their efficiency can be increased to a great extent which can be obtained by reducing spoilage, wastages, and breakage of all kinds, this, in turn, leads to saving of time, effort, and money which is essential for the growth & prosperity of the enterprise.

    Maximum Prosperity for Employer & Employees: 

    Management ensures the smooth and coordinated functioning of the enterprise. This, in turn, helps in providing maximum benefits to the employee in the shape of the good working condition, a suitable wage system, incentive plans on the one hand, and higher profits to the employer on the other hand.

    Human betterment & Social Justice: 

    Management serves as a tool for the upliftment as well as the betterment of society. Through increased productivity & employment, management ensures better standards of living for society. Also, It provides justice through its uniform policies.

  • The Features of Directing Function of Management!

    Learn and Study, Explain the Features of Directing Function of Management!

    Features of direction which gives us an idea about the nature of directing function of management are: 1) directing is a dynamic function, 2) it provides link between different management functions, 3) it acts as the nucleus of all operations, 4) it is a universal function, and 5) it essentially involves human relationship! Also learned, Job Analysis: Meaning, Definition, and Purpose with Methods, Now Discuss – The Features of Directing Function of Management!

    Directing Function of Management: The directing is also the main function of management. The directing function is concerned with leadership, communication, motivation, and supervision so that the employees perform their activities in the most efficient manner possible, in order to achieve the desired goals.

    • The leadership element involves issuing instructions and guiding the subordinates about procedures and methods.
    • The communication must be open both ways so that the information can be passed on to the subordinates and the feedback received from them.
    • Motivation is very important since highly motivated people show excellent performance with less direction from superiors.
    • Supervising subordinates would lead to continuous progress reports as well as assure the superiors that the directions are being properly carried out.

    Features of Directing Function of Management:

    Features of direction which gives us an idea about the nature of directing function of management as follow are:

    1) Directing is a dynamic function,

    2) It provides the link between different management functions,

    3) It acts as the nucleus of all operations,

    4) It is a universal function, and

    5) It essentially involves human relationship!

    Now Explain:

    Directing is a Dynamic Function:

    The direction is a dynamic and continuing function. It is the essence of the practice of management. The manager should continuously perform this function, no manager can think in terms of ceasing his job of communicating with, guiding and motivating his subordinates without giving up managerial activity. With changes in plans and organizational relationships, he will invariably wave to change the methods and techniques of direction. Thus, it is an ever-present continuing function of management.

    It provides the link between Different Management Functions:

    Direction links the various management functions. Planning, organizing, and staffing, which are regarded as the preparatory functions, are effectively linked with the controlling function, which is the function of checking on the progress of work in the light of plans. Directing lends meaning to all the preparatory functions of management and provides the material (through actual performance) for control. Without it, the function of controlling will never arise at all and the preparatory management functions will be meaningless.

    It acts as the nucleus of all operations:

    Directing is the process around which all other activities and performance revolve. Direction initiates action by creating goal-oriented activity. It plays such a crucial role that “Nothing happens unless and until the business automobile is put into gear and the accelerator depressed.” Thus, unless the management assumes an active role and sets the organizational machinery into motion, it cannot think in terms of activating people towards the accomplishment of enterprise goals.

    Thus, it is a creative function that makes things happen by converting plans into performance. In short, it is the nucleus around which the practice of management is built. As a performance-oriented function, it ensures the continuity of all operations. The effective direction is thus absolutely necessary for the attainment of group-goals at minimum possible cost.

    It is a universal function:

    The function of direction is performed by the managers at all levels of the organization and in all their work-relationships. In other words, the work of direction will have to be performed by the managers at all levels right from the top (i.e., Board of Directors) down to the lower level (i.e. foremen). As an essential dynamic activity, it compels every manager to motivate, supervise, lead and communicate with his subordinates to get the work done for the accomplishment of the enterprise objectives, although the time spent on direction decreases at higher levels of authority. That is why; directing is regarded as the essence of management in action.

    It essentially involves human relationship:

    The Direction is concerned with the relationship between people working in the organization. It seeks to create co­operation and harmony among the members of the group. The supervisor cannot remain contented by just giving orders or by just making commands. He must strike a balance between the personal interest of the employee and the rest of the organization by acting as a useful co-ordination.

  • Explain are the Nature and Features of Planning in Business!

    Explain are the Nature and Features of Planning in Business!

    Learn and Understand, Explain are the Nature and Features of Planning in Business!

    Modern managers are facing the challenge of designing a sound action plan for their organizations to achieve their organizational goals. Planning gives a scientific direction to managers as to where the firm has to move to attain its objectives. A good organizational plan minimizes risk, reduces uncertainties surrounding business conditions, and it classifies the consequences of related action. Also learn, Concepts of Management, Explain are the Nature and Features of Planning in Business!

    Planning increases the degree of success and establishes co-ordinated effort in the organization. It makes the managers future-oriented and their decisions co-ordinated. Good planning makes the organizations reach their objectives. In this backdrop, various issues of planning are narrated in the following paragraphs.

    A careful analysis of the above definitions of planning reveals that:

    • Planning is concerning with future and its essence is looking ahead.
    • It involves thinking and analysis of information.
    • It involves a predetermined course of action.
    • It’s concerning with the establishment of objectives to attain in the future.
    • It’s fundamentally a problem of choosing after a careful study of alternative courses.
    • It involves decision-making.
    • Its objectives are to achieve better results, and.
    • It is a continuous and integrated process.

    For instance, we find that the head of the family plans his expenditure, the housewife plans her daily chores, the teacher plans his teaching work, the student plans his studies and the farmer plans his agricultural activities. In the business field, the need for planning is all the more because of various factors such as fluctuations in demand, growing competition, the introduction of new products, scarcity of resources, changing technology, change in prices, government policy, etc. Organisational activity without a plan is likely to be ineffective and will drift without achieving success. Hence, planning is a must for business organizations.

    Few Main Nature and Features of Planning in Business!

    The following facts come to light about its nature and features:

    (1) It is Focuses on Achieving Objectives:

    Management begins with planning and planning begins with the determining of objectives. In the absence of objectives, no organization can ever think about. With the determining of objective, the way to achieve the objective is deciding in the planning.

    In case, it is necessary to change the previously decided course of action for the attainment of objectives, there is no hesitation to do so. It is thus clear that planning is helpful in the attainment of objectives.

    For example, a company decides to achieve annual sales of? 12 crores. After deciding upon this objective, planning to achieve this objective shall immediately come into force. It was thought to achieve this objective by giving advertisement in the newspapers.

    After some time it comes to know that the medium of advertisement appeared to be incapable of achieving the target. In such a situation the medium of advertisement can change and it can shift from newspapers to television in this way, every possible change is made through the planning activities for the purpose of achieving the objective.

    (2) Planning is Primary Function of Management:

    Planning is the first important function of management. The other functions, e.g., organizing, staffing, directing and controlling come later. In the absence of planning, no other function of management can perform.

    This is the base of other functions of management. For example, a company plans to achieve a sales target of 112 crores a year. In order to achieve this target the second function of management, i.e., organizing comes into operation.

    Under it, the purchase, sales, production and financial activities are deciding upon. In order to complete these activities, different departments and positions are deciding upon. The authority and responsibility of every position are deciding upon.

    After the work of organizing, information about the number of different people at different levels require to achieve the objective shall have to provide. This job will perform understaffing. Similarly, planning is the base of other functions like directing and controlling.

    (3) It is Pervasive:

    Since the job of planning is performing by the managers at different levels working in the enterprise, it is appropriate to call it all-pervasive. Planning is an important function of every manager; he may be a managing director of the organization or a foreman in a factory.

    The time spent by the higher-level managers in the process of planning is comparatively more than the time spent by the middle-level and lower-level managers. It is, therefore, clear that all the managers working in an enterprise have to plan their activities.

    For example, the decision to expand the business is taken by the higher-level managers. The decision to sell products is taken by the middle-level and lower-level managers. Also read, The Theory of Human Relationship Management!

    (4) It is Continuous:

    Planning is a continuous process for the following reasons:

    (a) Plans are preparing for a particular period. Hence, there is the need for a new plan after the expiry of that period.

    (b) In case of any discrepancy, plans are to revise.

    (c) In case of rapid changes in the business, environment plans are to revise.

    (5) Planning is Futuristic:

    Planning decides the plan of action what is to do, how is it to do, when it to do, by whom is it to do all these questions are related to future. Under planning, answers to these questions are found out.

    While an effort is making to find out these answers, the possibility of social, economic, technical and changes in the legal framework is kept in mind. Since planning is concerning with future activities, it is called futuristic.

    For example, a company is planning to market a new product. While doing so it shall have to keep in mind the customs and the interests/tastes of the people and also the possibility of any change in them.

    (6) Planning Involves Decision Making:

    Planning becomes a necessity when there are many alternatives to do a job. A planner chooses the most appropriate alternative. Therefore, it can assert that planning is a process of selecting the best and rejecting the inappropriate. It is, therefore, observed that planning involves decision making.

    For example, Mr. Anthony lives in a town where only commerce stream is taught in schools. His daughter has passed matrix and wants to get admission in 10 + 1. It is evident that there is only one option for her, i.e., commerce. Do you know about, What is Financial Management?

    She doesn’t have to think or plan anything. On the other hand, if all the three faculties’ art, science & commerce were available in the schools, she would have to definitely think and plan about the subject of study. It would have been nothing but decision making in this case.

    (7) It is a Mental Exercise:

    Planning is known as a mental exercise as it is related to thinking before doing something. A planner has mainly to think about the following questions:

    (i) What to do? (ii) How to do it? (iii) When to do it? (iv) Who is to do it?

    Explain are the Nature and Features of Planning in Business - ilearnlot
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