SELECTION OF LINE OF BUSINESS

Nearly every company, business, government and consumer in the world is, to some degree,
dependent on the transportation industry. As such, the shipping of supplies, products and consumer
goods is essential to the domestic and international economic system. Since 1998 the transportation
industry has accounted for 3% of the U.S. GDP each year.

The transportation industry can be broken down into three major groups of companies: Shipping,
passenger transport, and equipment manufacturers. In some cases, particularly within shipping and
passenger transport, companies provide services in multiple areas of the industry. Shipping
companies are responsible for the transportation of supplies, and products to businesses,
governments and individual consumers and operate on a global basis. The passenger transport
segment provides people with the means to get anywhere on the planet, whether it is by air, sea or
land. Finally, the manufacturing segment produces the trucks, planes, ships and railcars along with
all the technology that allow transportation to exist in its current form. These manufacturers are just
as essential to the transportation of materials and people as are the companies that transport them.

CHOICE OF FORM OF OWNERSHIP

Sole Proprietorships
The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the
individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and
the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and
the public, you are one in the same with the business.
Advantages of a Sole Proprietorship
 Easiest and least expensive form of ownership to organize.
 Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
 Sole proprietors receive all income generated by the business to keep or reinvest.
 Profits from the business flow directly to the owner's personal tax return.
 The business is easy to dissolve, if desired.

Choosing a Form of Business Organisation

A business enterprise can be owned and organized in several forms. Each form of organization has its own merits
and demerits. The ultimate choice of the form of business depends upon the balancing of the advantages and
disadvantages of the various forms of business. The right choice of the form of the business is very crucial
because it determines the power, control, risk and responsibility of the entrepreneur as well as the division of
profits and losses. Being a long term commitment, the choice of the form of business should be made after
considerable thought and deliberation.

The choice of the form of business is governed by several interrelated and interdependent factors :-

 The nature of business is the most important factor. Businesses providing direct services like tailors,
restaurants and professional services like doctors, lawyers are generally organised as proprietary
concerns. While, businesses requiring pooling of skills and funds like accounting firms are better
organised as partnerships. Manufacturing organisations of large size are more commonly set up as
private and public companies.
 Scale of operations i.e. volume of business ( large, medium, small) and size of the market area (local,
national, international) served are the key factors. Large scale enterprises catering to national and
international markets can be organised more successfully as private or public companies. Small and
 medium scale firms are generally set up as partnerships and proprietorship. Similarly, where the area of
operations is wide spread (national or international), company ownership is appropriate. But if the area
of operations is confined to a particular locality, partnership or proprietorship will be a more suitable
choice.
 The degree of control desired by the owner(s). A person who desires direct control of business, prefers
proprietorship, because a company involves separation of ownership and management.
 Amount of capital required for the establishment and operation of a business. A partnership may be
converted into a company when it grows beyond the capacity and resources of a few persons.
 The volume of risks and liabilities as well as the willingness of the owners to bear it, is also an important
consideration.
 Comparative tax liability.

LOCATION OF BUSINESS ENTERPRISE

India is the 4th largest economy, in terms of purchasing power parity. Tenth most industrialized economy.

Strong macro-economic performance.

Political stability and broad consensus on reforms. Liberal and transparent foreign investment regime.

Well developed banking system. Vibrant capital market. National Stock Exchange third largest, Bombay Stock
Exchange fifth largest in terms of number of trades.

Strong and independent judicial system.

Among the highest rates of returns on investment.

Price of Land

It is an important factor while choosing the exact site for locating the business because high price of land may
wipe out the advantages provided by the availability of the other factors. If it is proposed to lease out the land
then the question of rent and taxes must be considered as such charges will add to the working expenses. Also,
the plot of land being considered must be big enough to meet the needs of future expansion of the business.

Every entrepreneur is faced with the problem of deciding the location for his/her factory or plant. Location of the
business is the most important factor influencing its success or failure. It is a long-term decision which should
take into consideration not only the present requirements of the organisation but also its future expansion plans.
Errors in location may be very difficult and expensive to rectify. Location of a plant has a bearing on the layout of
machinery and equipment as well as on the process of production. The objective of a locational plan is to find out
the optimum or best location for the particular plant. Such a location not only results in lowest cost per unit but
also facilitates orderly growth of the firm. Hence, the most advantageous location is that at which the cost of
gathering material and fabricating it plus the cost of distributing the finished product to the customers will be at
a minimum . It is not necessarily the most favourable location but rather the site at which all the considerations
are optimised. There is no ideal location for all firms or even for one firm at all times. The choice of location
depends on several important factors. It is influenced by the kind of products being manufactured, costs of
production and distribution. The location of the plant should also be able to meet the environmental guidelines
and other regulations set by the Government specific to a particular industry. The choice of an optimum location
requires judicious balancing of all these factors.
FINANCING THE PROPOSITION

Pricing your Product

Fixing the right price for a product is the most difficult task as it affects the volume of sales of the product of the
firm as well as the profits of the firm. Although non-price factors have become more important in recent
decades, price remains one of the important elements in determining the market share and profitability. Prices
are set by a firm by taking into consideration factors like costs, profit targets, competition and perceived value of
products. Taking into account the various factors, the steps generally followed in setting the price of a product
are :-

Setting the Pricing Objective of the Firm

It is the most important step as it varies from firm to firm. Setting a lower price may attract more customers and
thus fetch a larger market share for the firm's product. But charging a higher price might reflect a high quality
and prestige product.

Determining the Demand for the Product

Demand for the product sets a ceiling price. Penetration pricing is used when the product has a highly elastic
demand and there is strong competition in the market. Under this policy, prices are fixed below the competitive
level in order to obtain a larger share of the market. Once your product is in demand or is accepted in the
market, the price of your product is increased. But when the demand for the product with respect to price is
more inelastic, higher prices are charged for the product. This policy is generally followed during the initial
stages of introduction of the new product.

Estimating the Costs and Profits

Costs set a floor price. Amount spent and return expected is the key factor in deciding the price. The various
costs involved in producing the product must be covered in pricing the product. On a long term basis also the
price must take into consideration the costs of doing business. This also includes sales forecast and profit
margin.

Determining the Competition for the Product

Competitors prices and the price of substitutes provide an orientation point. The number of competitors for the
product in the market as well as the policy followed by them is also an important factor. Competitive pricing is
used if the market is highly competitive and the product is not differentiated from that of the competitor's.

Considering the Governmental Regulations

Government policies and incentives are also taken into account. Prices are also affected by various tax liabilities
which a company and the product is subjected to. It includes, excise duty, sales tax and local taxes like octroi.

Sales tax is levied on the sale of moveable goods in India at the rates which vary depending upon the type and
nature of goods and the State in which sale has taken place. The Central and State Government are both
empowered to impose sales tax. The Central Sales tax deals with transactions in the nature of inter-state sales.
While the State sales tax deals with intra-state sales.

Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use,
consumption or sale. Goods in transit are exempted from it.

Selecting a Suitable Pricing Method/Policy

Right price for the product can be determined through pricing research and by adopting test-marketing
techniques. The various pricing methods are:-

 Perceived value pricing:- in which a firm sets its price in relation to the value delivered and perceived
by the customer. Perceived value is made up of several elements like buyer's image of the product
 performance, warranty, trustworthiness, esteem, etc. Each customer gives different weightage to these
elements. Some may be price buyers, others may be value buyers and still others may be loyal buyers.
If either the price is higher than the value perceived or the price is lower than the value perceived, the
company will not be able to make potential profits.
 Value pricing:- in which companies develop brand loyalty for their product by charging a fairly low
price for a high quality offering.
 Going rate pricing:- is followed if it is difficult to ascertain the exact costs involved and the competitive
response. Hence, firms base their price on competitor's price by charging the same, more or less than
the major competitor.
 Introducing a product at a premium price:- When a product is innovative and competition is low or
non-existent, this policy can be applied. Thus profits are optimised. But when competition arises prices
are lowered.
 Ethical pricing: - Price is fixed keeping the welfare of the society in mind. For many life saving drugs,
this particular policy is used. The product is sold at the lowest possible price with either a very
reasonable margin or no profit at all. Profit may be earned from other products.
 Full Line pricing:- If you are selling a range of particular product for example pickles, then you price
the product in a particular range, this way you may earn more profit in one flavour and less on the
other. But, you cannot sell only the one that gives you maximum profit, or else a customer may switch
over to another brand where he would be able to exercise an option for other flavours.

Financing a Start Up Business

One needs money to make money. Finance is the lifeline of business. A business firm requires finance to
commence its operations, to continue its operations and for its expansion and growth. There must be continuous
flow of funds in and out of business. Sound plans, efficient production and marketing are all dependent on
smooth flow of finance. Hence, a financial plan needs to be prepared, which indicates the requirements of
finance, sources for raising the finance and the application of funds. Financial planning for starting a business
begins with estimating the total amount of capital required by the firm for the various need of the business.

The financial plans of an enterprise should be formulated by taking into consideration the following factors :-

 The financial objectives of the company

 Nature and size of the business
 The image and credit-worthiness of the enterprise
 Growth and expansion plans
 Capital market trends
 Government regulations

Sources of Finance

The Long-Term Finance may be Raised by the Companies from the following Sources :-

Capital Market

Capital market denotes an arrangement whereby transactions involving the procurement and supply of long-
term funds takes place among individuals and various organisations. In the capital market, the companies raise
funds by issuing shares and debentures of different types. When long-term capital is initially raised by new
companies or by existing companies by issuing additional shares or debentures, the transactions are said to take
place in the market for new capital called, as 'New Issue Market'. But, buying and selling of shares and
debentures already issued by companies takes place in another type of market called as 'the Stock market'.

Individuals and institutions which contribute to the share capital of the company become its shareholders. They
are also known as members of the company. Before shares are issued, the directors of the company have to
decide on the following matters:-

 The amount of capital which is to be raised by issue of shares.

 The types of shares which will be issued.
  The time of issuing shares.

When a company decides to issue additional shares at any time after its formation or after one year of the first
allotment of shares, it is required under law that such shares must be first offered to the existing shareholders of
the company. If the offer is declined by the existing shareholders, only then shares can be issued to the public.
Such an issue is called 'rights issue' and these shares are known as 'right shares'. The Government controls the
issue of shares and debentures under the Capital Issues (Control) Act, 1947.

Special Financial Institutions

A large number of financial institutions have been established in India for providing long-term financial
assistance to industrial enterprises. There are many all-India institutions like Industrial Finance Corporation
of India (IFCI); Industrial Credit and Investment Corporation of India (ICICI); Industrial Development Bank
of India(IDBI) , etc. At the State level, there are State Financial Corporations (SFCs) and State Industrial
Development Corporations (SIDCs). These national and state level institutions are known as 'Development
Banks'. Besides the development banks, there are several other institutions called as 'Investment Companies' or
'Investment Trusts' which subscribe to the shares and debentures offered to the public by companies. These
include the Life Insurance Corporation of India (LIC); General Insurance Corporation of India (GIC);
Unit Trust of India (UTI) , etc.

Leasing Companies

Manufacturing companies can secure long-term funds from leasing companies. For this purpose a lease
agreement is made whereby plant, machinery and fixed assets may be purchased by the leasing company and
allowed to be used by the manufacturing concern for a specified period on payment of an annual rental. At the
end of the period the manufacturing company may have the option of purchasing the asset at a reduced price.
The lease rent includes an element of interest besides expenses and profits of the leasing company.

Foreign Sources

Funds can also be collected from foreign sources which usually consists of :-

 Foreign Collaborators :- If approved by the Government of India, the Indian companies may secure
capital from abroad through the subscription of foreign collaborator to their share capital or by way of
supply of technical knowledge, patents, drawings and designs of plants or supply of machinery.
 International Financial Institutions :- like World Bank and International Finance Corporation
(IFC) provide long-term funds for the industrial development all over the world. The World Bank grants
loans only to the Governments of member countries or private enterprises with guarantee of the
concerned Government. IFC was set up to assist the private undertakings without the guarantee of the
member countries. It also provides them risk capital.
 Non-Resident Indians :- persons of Indian origin and nationality living abroad are also permitted to
subscribe to the shares and debentures issued by the companies in India.

Retained Profits or Reinvestment of Profits

An important source of long-term finance for ongoing profitable companies is the amount of profit which is
accumulated as general reserve from year to year. To the extent profits are not distributed as dividend to the
shareholders, the retained amount can be reinvested for expansion or diversification of business activities.
Retained profit is an internal source of finance. Hence it does not involve any cost of floatation which has to be
incurred to raise finance from external sources.

Short-Term Finance may be Raised by the Companies from the following Sources :-

Trade Credit

It is the credit which the firms get from its suppliers. It does not make available the funds in cash, but it
facilitates the purchase of supplies without immediate payment. No interest is payable on the trade credits. The
period of trade credit depends upon the nature of product, location of the customer, degree of competition in the
market, financial resources of the suppliers and the eagerness of suppliers to sell his stocks.

Installment Credit
Firms may get credit from equipment suppliers. The supplier may allow the purchase of equipment with
payments extended over a period of 12 months or more. Some portion of the cost price of the asset is paid at
the time of delivery and the balance is paid in a number of installments. The supplier charges interest on the
installment credit which is included in the amount of installment. The ownership of the equipment remains with
the supplier until all the installments have been paid by the buyer.

Accounts Receivable Financing

Under it, the accounts receivable of a business concern are purchased by a financing company or money is
advanced on security of accounts receivable. The finance companies usually make advances up to 60 per cent of
the value of the accounts receivable pledged. The debtors of the business concern make payment to it which in
turn forwards to the finance company.

Customer Advance

Manufacturers of goods may insist the customers to make a part of the payment in advance, particularly in cases
of special order or big orders. The customer advance represents a part of the price of the products that have
been ordered by the customer and which will be delivered at a later date.

Bank Credit

Commercial Banks play an important role in financing the short-term requirements of business concerns. They
provide finance in the following ways :-

 Loans :- When a bank makes an advance in lump sum, the whole of which is withdrawn to cash
immediately by the borrower who undertakes to repay it in one single installment, it is called a loan. The
borrower is required to pay the interest on the whole amount.
 Cash credit :- It is the most popular method of financing by commercial banks. When a borrower is
allowed to borrow up to a certain limit against the security of tangible assets or guarantees, it is known
as secured credit but if the cash credit is not backed by any security, it is known as clean cash credit. In
case of clean cash credit the borrower gives a promissory note which is signed by two or more sureties.
The borrower has to pay interest only on the amount actually utilised.
 Overdrafts :- Under this, the commercial bank allows its customer to overdraw his current account so
that it shows the debit balance. The customer is charged interest on the account actually overdrawn and
not on the limit sanctioned.
 Discounting of bills :- Commercial banks finance the business concern by discounting their credit
instruments like bills of exchange, promissory notes and hundies. These documents are discounted by
the bank at a price lower than their face value.

Types of Financial Needs

Financial Needs of a Business may be Classified into two on the basis of the Extent of Permanence :-

Fixed Capital

The funds required to purchase fixed or durable assets are known as fixed capital or long term capital. The fixed
or durable assets include land, buildings,machinery,equipment,furniture,etc. The nature and size of the business
generally determines the amount of fixed capital needed. For e.g. manufacturing activities require large
investments in plant, machinery, warehouses and others. While, trading concerns need relatively lesser
investment in such assets. These assets continue to generate income and profits over an extended period of
time. Also, funds which are once invested in fixed assets cannot be withdrawn and put to some other use.

Working Capital

Money invested in short term assets or current assets is known as working capital. It includes purchase of raw
materials, payment of wages and salaries, rent, fuel, electricity and water, repairs and maintenance of
machinery, advertising, etc. Besides, sale of goods on credit leads to the holding of debtors balance and bills
receivable, which may also be regarded as current assets. The requirement of finance for all these purposes
arises at short intervals. Working capital is also known as Circulating capital or Revolving capital because funds
invested in such assets are continuously recovered through realisation of cash, and again reinvested in current
assets. The amount of working capital required depends mainly on the nature of the business, the time required
for completing the manufacturing process, and the terms on which materials are purchased and goods sold. For
e.g. trading companies require more working capital than manufacturing companies.

On the Basis of Period of Use, the Financial Needs of the Business may be Classified into :-

Long-Term Capital

Long-term capital is required for a longer period i.e. five years or more. The fixed assets as well as the
permanent part of the working capital is financed by it.

The important sources of long-term finance are :-

 Issue of shares
 Issue of debentures
 Loans from financial institutions
 Reinvestment of profits

Short-Term Capital

Short-term capital is required for a shorter period i.e. less than a year. It involves financing the current assets
and meeting day-to-day expenses.

The important sources of short -term finance are :-

 Banks
 Trade credit
 Installment credit

Medium-Term Capital

Medium-term capital is required for a period of 2 to 5 years. It involves financing certain activities like
renovation of buildings, modernisation of machinery, heavy expenditure on advertising, etc.

The important sources of short -term finance are :-

 Issue of shares
 Issue of debentures
 Borrowing from banks and other financial institutions
 Reinvestment of profits

The funds raised to meet both the long-term and short-term capital requirements may take the form of :-

Ownership Capital

It is the amount of capital invested in a business by its owners. It is on the basis of the amount invested that the
owners become entitled to the profits of the business. Under sole proprietorship, the individual owner normally
invests capital from his own savings. In partnership, each partner contributes capital as mutually agreed among
partners. While companies raise capital by issuing shares. The investors who contribute towards the share capital
of a company become its owners by virtue of their share holdings. The rate of return on owners investment
depends on the level of profits earned and are entitled to receive dividend out of these profits. Ownership capital
is generally used as permanent capital or long-term capital.

Borrowed Capital

The financial requirements of the business are often met by raising loans. Borrowed money involves a fixed
obligation to pay interest and repay the principal amount as and when due. In a sole proprietary business the
proprietor can borrow money on his personal security or on the security of his existing assets. A partnership firm
can raise loans on the personal security of the individual partners. Companies can also borrow either by issuing
debentures or bonds, or raise direct loans. Money may be borrowed for short-term and long-term i.e. to finance
fixed assets as well as current assets.