Module:-04

Business and Government:-

A Business is defined as an organization or enterprising entity engaged in commercial,

industrial, or professional activities. Businesses can be for-profit entities or they can be non-
profit organizations that operate to fulfill a charitable mission or further a social cause.

The term "Business" also refers to the organized efforts and activities of individuals to
produce and sell goods and services for profit.

Business is more associated with trade, occupation, and commerce that involves transaction
and profit making of a particular people or industry and providing good and service of the
willing market.

Government is an entity to govern and represent collectively a society or a country and all its
avenues. Governments strives to provide needs of all its members and also to provide a sense
of wholeness and a national identity to a particular country or people. This term is directly
associated with power & ruling a certain society of people.

Government and businesses are the two most powerful institutions in any society. The two
together determine public policy, both domestic and foreign, for a country. The policies,
practices and regulations of the government influence to a large extent the nature, growth
and functioning of the business system. In a situation of political stability business flourishes
and businessmen venture to take greater risks. In the same way the ideology of the ruling
party determines the nature and extent of economic development. If the ruling party believes
in socialism, government control and ownership of business will grow. For example, public
sector dominated development strategy in India until 1990. Major economic policies of a
nation such as industrial policy, fiscal policy, monetary policy, and foreign trade policy are
often based on political considerations. Several political decisions have strategic implications
for business and industry. For example, the philosophy of Bhartiya Janta Party government
forced Coca Cola and IBM to leave India in 1977. Since then the clock has turned a full circle.
Now multinationals are welcome in almost all types of industries in India.

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Changes in the nature and extent of government intervention in business matters lead to
changes in the pattern of industrial growth. When public sector was in a dominant position
and industrial licensing was widely applicable, scale of operations and the location of projects
were decided by the government. After liberalization in 1991 businessmen are free to take
such decisions.

Business and industry in turn exercise a significant influence on the government and on its
policies and programmes. It was the Foreign Exchange crisis which necessitated economic
liberalization in 1991 in India.

Roles/ Responsibilities of Government towards Business:-

The Government’s Responsibilities towards business are as follows:-

Enacting and Enforcing Laws:-

Enacting and enforcing laws is the prime responsibility of the Government of each country.
This is because laws and regulations only enable the businesses to function smoothly. Further,
Government provides a system of court for adjudicating differences between firms, individual
or Government agencies.

Maintaining Law and Order:-

Maintaining law and order and protecting persons and property is another responsibility of
the Government of the country. It would be impossible to carry on business in the absence of
a peaceful atmosphere.

Providing Monetary System:-

The Government has to provide monetary system so that business transactions can be
effected. Further, it is also the responsibility of the Government to regulate money and credit,
and protect the money value of the currency in terms of other currencies.

Balanced Regional Development and Growth:-

It is the responsibility of the Government to make sure that there are balanced regional
developments and growth.

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Provision of Basic Infrastructure:-

Government should provide basic infrastructural facilities such as transportation, power,

finance, trained personnel and civic amenities, which are indispensable for the effective
functioning of business concerns.

Supply of Information:-

It is the responsibility of the Governments to provide information, which is useful to

businessmen in carrying out their business activities. Government agencies publish and
provide a large volume of information, which is used extensively by business firms. This
information normally relates to economic and business activity, specific lines of business,
scientific and technological developments, and many other things of interest to business
houses or business leaders.

Assistance to Small-scale Industries:-

It the responsibility of the Government to provide the required facilities and encourage the
development of small-scale industries to overcome the problem faced by them.

Transfer of Technology:-

It is the responsibility of the Government to transfer to private industries whatever

discoveries are made by the Government – owned Research Institutions so that they can be
used for commercial production.

Conducting Inspections:-

It is the responsibility of the Government to inspect the private business concerns in order to
make sure that they produce quality products, and also to prevent the production and sale of
sub-standard goods.

Incentives to Home Industries:-

It is the responsibility of the Government to encourage the development of home industries

by providing them various incentives and subsidies.

Location of Business:-
Location is the place where a firm decides to site its operations. Location decisions can have
a big impact on costs and revenues.

A business needs to decide on the best location taking into account factors such as:-

Customer:- is the location convenient for customers?

Staff:- are there sufficient numbers of local staff with the right skills willing to work at the
right wage?

Support services:- are there services offering specialist advice, training and support?

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Cost:- how much will the premises cost? Those situated in prime locations (such as city
centres) are far more expensive to rent than edge-of-town premises.

Factors Affecting the Location of a Business:-

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These are the factors which directly or indirectly affect the location of the Business:-

a) Availability of Raw Materials

b) Proximity to Market
c) Infrastructural Facilities
d) Government Policy
e) Availability of Manpower
f) Local Laws, Regulations and Taxation
g) Ecological and Environmental Factors
h) Competition
i) Incentives, Land costs. Subsidies for Backward Areas
j) Climatic Conditions
k) Political Conditions.

Let us discuss these in some details:-

Availability of Raw Materials:-

One of the most important considerations involved in selection of industrial location has been
the availability of raw materials required. The biggest advantage of availability of raw material
at the location of industry is that it involves less cost in terms of ‘transportation cost.

If the raw materials are perishable and to be consumed as such, then the industries always
tend to locate nearer to raw material source. Steel and cement industries can be such
examples. In the case of small- scale industries, these could be food and fruit processing, meat
and fish canning, jams, juices and ketchups, etc.

Proximity to Market:-

If the proof of pudding lies in eating, the proof of production lies in consumption. Production
has no value without consumption. Consumption involves market that is, selling goods and
products to the consumers. Thus, an industry cannot be thought of without market.

Therefore, while considering the market an entrepreneur has not only to assess the existing
segment and the region but also the potential growth, newer regions and the location of
competitors. For example, if one’s products are fragile and susceptible to spoilage, then the
proximity to market condition assumes added importance in selecting the location of the
enterprise.

Similarly if the transportation costs add substantially to one’s product costs, then also a
location close to the market becomes all the more essential. If the market is widely scattered
over a vast territory, then entrepreneur needs to find out a central location that provides the
lowest distribution cost. In case of goods for export, availability of processing facilities gains
importance in deciding the location of one’s industry. Export Promotion Zones (EPZ) are such
examples.

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Infrastructural Facilities:-

Of course, the degree of dependency upon infrastructural facilities may vary from industry to
industry, yet there is no denying of the fact that availability of infrastructural facilities plays a
deciding role in the location selection of an industry. The infrastructural facilities include
power, transport and communication, water, banking, etc.

Yes, depending upon the types of industry these could assume disproportionate priorities.
Power situation should be studied with reference to its reliability, adequacy, rates
(concessional, if any), own requirements, subsidy for standby arrangements etc. If power
contributes substantially to your inputs costs and it is difficult to break even partly using your
own standby source, entrepreneur may essentially have to locate his/her enterprise in lower
surplus areas such as Maharashtra or Rajasthan.

Similarly adequate water supply at low cost may become a dominant decisional factor in case
of selection of industrial location for leather, chemical, rayon, food processing, chemical and
alike. Just to give you an idea what gigantic proportions can water as a resource assumes.
Note that a tone of synthetic rubber requires 60 thousand gallons, a tone of aluminum takes
3 lakhs gallons, and a tone of rayon consumes 2 lakh gallons of water.

Similarly, location of jute industry on river Hooghly presents an example where transportation
media becomes a dominant decisional factor for plant location. Establishing sea food industry
next to port of embarkation is yet another example where transportation becomes the
deciding criteria for industrial location.

Government Policy:-

In order to promote the balanced regional development, the Government also offers several
incentives, concessions, tax holidays for number of years, cheaper power supply, factory
shed, etc., to attract the entrepreneurs to set up industries in less developed and backward
areas. Then, other factors being comparative, these factors become the most significant in
deciding the location of an industry.

Availability of Manpower:-

Availability of required manpower skilled in specific trades may be yet another deciding factor
for the location of skill- intensive industries. As regards the availability of skilled labour, the
existence of technical training institutes in the area proves useful. Besides, an entrepreneur
should also study labour relations through turnover rates, absenteeism and liveliness of trade
unionism in the particular area.

Such information can be obtained from existing industries working in the area. Whether the
labour should be rural or urban; also assumes significance in selecting the location for one’s
industry. Similarly, the wage rates prevalent in the area also have an important bearing on
selection of location decision.

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While one can get cheaper labour in industrially backward areas, higher cost of their training
and fall in quality of production may not allow the entrepreneur to employ the cheap
manpower and, thus, establish his/her enterprise in such areas.

Local Laws, Regulations and Taxes:-

Laws prohibit the setting up of polluting industries in prone areas particularly which are
environmentally sensitive. Air (Prevention and Control of Pollution) Act, 1981 is a classical
example of such laws prohibiting putting up polluting industries in prone areas. Therefore, in
order to control industrial growth, laws are enforced to decongest some areas while
simultaneously encourage certain other areas.

For example, while taxation on a higher rate may discourage some industries from setting up
in an area, the same in terms of tax holidays for some years may become the dominant
decisional factor for establishing some other industries in other areas. Taxation is a Centre as
well as State Subject. In some highly competitive consumer products, its high quantum may
turn out to be the negative factor while its relief may become the final deciding factor for
some other industry.

Ecological and Environmental Factors:-

In case of certain industries, the ecological and environmental factors like water and air
pollution may turn out to be negative factor in deciding enterprise location. For example,
manufacturing plants apart from producing solid waste can also pollute water and air.
Moreover, stringent waste disposal laws, in case of such industries, add to the manufacturing
cost to exorbitant limits.

In view of this, the industries which are likely to damage the ecology and environment of an
area will not be established in such areas. The Government will not grant permission to the
entrepreneurs to establish such industries in such ecologically and environmentally sensitive
areas.

Competition:-

In case of some enterprises like retail stores where the revenue of a particular site depends
on the degree of competition from other competitors’ location nearby plays a crucial role in
selecting the location of an enterprise. The areas where there is more competition among
industries, the new units will not be established in these areas. On the other hand, the areas
where there is either no or very less competition, new enterprises will tend to be established
in such areas.

Incentives, Land Costs, Subsidies for Backward Areas:-

With an objective to foster balanced economic development in the country, the Government
decentralizes industries to less developed and backward areas in the country. This is because
the progress made in islands only cannot sustain for long. The reason is not difficult to seek.

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“Poverty anywhere is dangerous for prosperity everywhere.” That many have-not’s will not
tolerate a few haves is evidently clear from ongoing protests leading to problems like
terrorism. Therefore, the Government offers several incentives, concessions, tax holidays,
cheaper lands, assured and cheaper power supply, price concessions for departmental (state)
purchases, etc. to make the backward areas also conducive for setting up industries.

It is seen that good number of entrepreneurs considers these facilities as decisive factor to
establish industries in these locations. However, it has also been observed that these facilities
can attract entrepreneurs to establish industries in backward areas provided other required
facilities do also exist there.

For example, incentives and concessions cannot duly compensate for lack of infrastructural
facilities like communication and transportation facilities. This is precisely one of the major
reasons why people in-spite of so many incentives and concessions on offer by the
Government, are not coming forward to establish industries in some backward areas.

Climatic Conditions:-

Climatic conditions vary from place to place in any country including India. And, climatic
conditions affect both people and manufacturing activity. It affects human efficiency and
behavior to a great extent. Wild and cold climate is conducive to higher productivity. Likewise,
certain industries require specific type of climatic conditions to produce their goods. For
example, jute and textiles manufacturing industries require high humidity.

As such, these can be established in Kashmir experiencing humidity-less climate. On the other
hand, industrial units manufacturing precision goods like watches require cold climate and
hence, will be established in the locations having cold climate like Kashmir and Himachal
Pradesh.

Political Conditions:-

Political stability is essential for industrial growth. That political stability fosters industrial
activity and political upheaval derails industrial initiates is duly confirmed by political
situations across the countries and regions within the same country. The reason is not difficult
to seek.

The political stability builds confidence and political instability causes lack of confidence
among the prospective and present entrepreneurs to venture into industry which is filled with
risks. Community attitudes such as the “Sons of the Soil Feeling” also affect entrepreneurial
spirits and may not be viable in every case.

Besides, an entrepreneur will have also to look into the availability of community services
such as housing, schools and colleges, recreational facilities and municipal services. Lack of
these facilities makes people hesitant and disinterested to move to such locations for work.

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Very closer to political conditions is law and order situation prevalent in an area also
influences selection of industrial location. Hardly any entrepreneur will be interested to
establish his / her industry in an area trouble-torn by nexalites and terrorists like Jharkhand,
Nagaland and Jammu & Kashmir.

People will be interested to move to areas having no law and order problem to establish their
industries like Maharashtra and Gujarat. It is due to this law and order problem the Nano car
manufacturing unit shifted from Nandigram in West Bengal to Gujarat.

There are many qualitative and quantitative techniques adopted to interpolate the above
factors to arrive at a logical decision. The simplest and most commonly adopted is weight
rating method illustrated in Figure below:-

Besides above factors, the location of certain industries also depends upon the delivery of
emergency services like fire, police, hospital, etc. (Buffa 1983).

It seems in the fitness of the context to present the real cases of locational considerations of
the entrepreneurs of small-scale industries in India. Based on extensive research study, one
researcher (Khanka 2010: 45-46) has found the following most important considerations that
entrepreneurs consider for selecting the location of their enterprises.

It is revealed from Table 27.1 that ‘home land’ factor, i.e., to start the industry at one’s native
place has been reported as the most important factor for locating industries in one’s own
native area. Availability of market and ‘infrastructural facilities’ ranked the second and third
most important considerations.

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However, the ‘Government incentives’ could not figure significantly in determining the
location of industry. This can be explicated on two grounds. One, the heavy preference
accorded to the home land factor in the location of industries suggests that enterprise is not
a freely mobile factor, willing to move to any place for only marginal advantage (Wianka
2009).

Two, possibly more important, the accumulation of capital may be a necessary but not
sufficient condition for establishing an enterprise. Because, fiscal concessions and financial
assistance on soft terms cannot adequately, compensate for the lack of infrastructure like
transport and marketing services.

Therefore, concessions and assistance would find it difficult to attract industries to remote,
inaccessible and highly backward areas. On the whole, the major apprehension accorded to
the home land factor in the hills in contrast to the infrastructural and market facilities in the
plains indicate that the location considerations undergo change with differences in the levels
of development across the regions.

Government Policy on Industrial Location:-

The fundamental objective of government policy on location is to achieve balanced regional
development of the economy through decentralization of industries, with a view to ensuring
the following Benefits:-

1) Reduction of inequalities of income and wealth, in various regions

2) Provision of employment opportunities on an equitable basis.
3) Increase in the standard of living in backward areas through removal of poverty
4) Avoid over-concentration of industries in particular regions for strategic defence
considerations
5) Controlling social problems like – development of slums, over-crowding, pollution,
traffic-congestion etc.

Measures taken by Government towards dispersal of industries are of Two Types:-

1) Positive Measures:- for encouraging location of industrial units in backward areas

2) Negative Measures:- for restraining establishment of industrial units in over-
concentrated areas.

Following is a brief account of Positive and Negative measures, of the Government’s Policy on
Industrial Location:-

Positive Measures:-

a) Provision of basic infrastructure and public utility services like – water, electricity, gas,
transportation etc. in backward areas.
b) Provision of social services like education, health, entertainment, training etc. for
development of backward regions.

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 c) Granting of direct subsidies (like supply of raw-materials and machinery at lower
prices) and indirect subsidies (like reducing the cost of certain services to offset the
influence of unfavorable factors), for industrial location in rural areas.
d) Granting of income-tax, sales-tax and excise duty exemptions to the units set up in
backward areas.
e) Public financial institutions to provide finance at low rates of interest to industrial
units to be set up in 246 backward districts, specified by the government.
f) Assistance to the State Governments for the development of infrastructural facilities
in ‘no-industry districts’ of their respective States.
g) Giving assurance by the government to purchase the products of industrial units
established in backward areas.
h) Development of industrial estates in backward areas, to provide benefits of common
services like land, power, water etc. to a large number of industrial units located in
the industrial estate.
i) Setting up of growth centres throughout the country to attract industries to backward
areas; each growth centre to be endowed with best possible infrastructural facilities
like water, power, banking, telecommunications etc.

Negative Measures:-

a) Enhanced rates of local taxes in urban areas.

b) Absolute prohibition to set up new industries in particular areas. Big industrial units
shall not be set up within certain limits of big cities.
c) Not to allow establishment of chemical and other industries involving hazards to
human life in populated areas; in view of Bhopal Gas Tragedy of 1984.

Size of Business:-
The size of a business unit means the size of a business firm.

It means the scale or volume of operation turned out by a single firm. The study of the size of
a business is important because it significantly affects the efficiency and profitability of the
firm.

One of the most important entrepreneurial decisions in organizing a business is realizing its
‘size’ as it affects in company and profitability of business enterprises.

The term size of Business refers to the scale of organization and operations of a business
enterprise. It is essential here to have a clear understanding of the terms “size of the plant”,
“size of the firm” and “size of the industry”.

A ‘PLANT’ means an establishment of the manufacturing of goods. It represents a production

unit where the due provision of all the activities facilitating the production process as made.

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A ‘FIRM’ means as an organization that owns manages and controls a plant or number of
plants and also arranges for the marketing of products, provision of finance, and other
facilities to run the organization.

The term ‘INDUSTRY’ implies the aggregate of all firm which manufacture similar types of
products.

Measurement/ Measures of Size of Business:-

Business firms vary in size-small, medium, and large. To measure the size of a business unit,
the standards of measurement can be grouped into the following two categories:-

Measures about Input:-

This includes capital employed, net worth, total assets, labor employed, and raw material and
power consumed.

1) Capital Employed:-

The capital includes owned capital and borrowed capital. The larger the amount of capital
employed, the larger the size of the firm.

2) Net Worth:-

Net worth is the excess of assets over liabilities, as shown in the balance sheet of a firm.

However, for all practical purposes, it refers to the amount of paid-up capital plays
reserves and surpluses built up during business.

This measure is appropriate for comparing the size of different firms in an industry or to
measure the rate of growth for a particular firm.

3) Total Assets:-

Another measure of size if the size of the total assets of a firm.

The value of total assets is calculated by taking into account the amount invested in fixed
(land, building, plant, and machinery), current (cash, short-term securities, stock, debtors,
etc.) and intangible assets (goodwill, planet, rights, etc.).

4) Labor Employed:-

The number of laborers employed in a firm is another measure commonly employed to

measure the size of the business, which is producing similar types of goods and which are
in the same stage of development.

5) Amount of Raw Materials and Power Consumed:-

The quantity or value of raw materials and power used is yet another measure that can
be used to adjudge a firm.

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Measure about Output:-

This includes a volume of output, the value of output, and value-added.

1) The Volume of Output:-

The number of goods produced or services rendered may also serve as a good basis for
comparison between firms. The greater the number of goods and services produced,
the larger the size.

2) Value of Output:-

The monetary value of goods and services produced by a firm also serves as a basis for
measuring the size of a firm.

3) Value Added:-

A useful variation or combination of the two output criteria is the measure of net value-
added, calculated by deducting the costs of production from the value of production.

It must be mentioned here that no one measure is fully comprehensive, and the accuracy,
adequacy, and utility of each standard will depend upon three factors – nature of industry
and character of its output, the uniformity and accuracy of data available, and the purpose
for which it is required.

On the whole, the output seems to be the best indicator to measure the size of the firm.

Factors Affecting the Size of the Firm:-

These are the factors affecting the size of the firm:-

Resource Availability:-

The extent of resources that are available and that can be arranged by the entrepreneur
determines the size of the firm. In case the entrepreneur is able to raise more resources, he
can opt for a larger sized firm. Conversely if the resources that are available and arranged are
less, the organizations has to settle for a smaller sized firm.

For e.g. though both CavinKare and HUL are both in the FMCG industry, HUL’s size is larger
when compared to CavinKare. One reason being that HUL has more resources available when
compared to CavinKare

Requirement of Capital:-

Certain businesses require huge investments and therefore have to be set up as large scale
units. For e.g. Iron and Steel mills require huge investments in machinery, similar is the case
with cement plants, power generation etc. Therefore in such cases, firms have to be set up as
large scale units.

Nature of Industry:-

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In case the final product produced is complex, or machinery required for manufacturing is of
a large size e.g. aircraft manufacturing, iron and steel mills, boiler manufacturing, power
generation plants, manufacture of ships, rail engines etc., only large size firms are suitable.

Nature of Product:-

If the product manufactured is large, the size of the firm will be of a higher size e.g. heavy
machinery. Smaller size is preferred in case of less durable, less standardized and fashionable
products (e.g. handicrafts).

Nature of Demand:-

If the demand for the product is high and expected to grow further in the future, the size of
the firm would increase. For e.g. to meet the increased demand for its cars, Hyundai has set
up a second car manufacturing plant, Nokia is planning to increase the number of cell phones
manufactured in India to meet the high demand for handsets. In case demand for a product
is showing a declining trend, the size of the firm would not be increased e.g. scooters, floppies,
typewriters etc.

Market Size:-

In case the size of the market is large, then a large sized firm would be preferred. Firms which
are marketing their products not only in their home country but also internationally would
prefer large size e.g. Pepsi, Coke, Nike, Intel, RayBan, Hewlett Packard etc. Those firms which
market their products only in the local market have limited market size and therefore would
prefer to operate with a smaller size.

Ability of Entrepreneur:-

If the entrepreneur is intelligent, motivated and innovative he would tap emerging

opportunities and the firm would grow. For e.g. Azim Premji inherited a company which was
producing vegetable oil. But today Wipro is in the vegetable oil business, consumer care
products, lighting, hardware, software (among the top 3 companies), BPO etc. The reason for
the phenomenal growth is the vision, ability and enterprising spirit of Azim Premji.

Economic Environment:-

Economic environment plays a significant role in influencing the value of the firm. In case the
economy is in a boom condition, and purchasing power is increasing, the entrepreneurs would
be induced to increase the scale of operations. Whereas in case the economy is passing
through a recession or depression, the size of operations would remain small. In India, the
FMCD companies (LG, Samsung, Onida, Videocon etc.), are planning to increase their sales.
They are confident of increased sales because of growing middle class and better purchasing
power.

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Availability of Inputs of Production:-

In case of productive factors such as raw materials, labour, power, land are available in
abundance, entrepreneurs can choose large scale operations. In case inputs are not available
in required quantities then the size of the operation would be small. For e.g. because of the
abundant availability of English speaking skilled manpower, IT, BPO and KPO businesses are
expanding in India. Due to abundant availability of iron ore mines in Orissa, many companies
such as POSCO, Tata Iron and Steel Co., etc. are planning to set up their plants in that state.

Government Policy:-

The government has reserved certain items for manufacture by the small scale industry (SSI).
Therefore the size of such firms would be small in order to enjoy protection and government
privileges.

Estimates of Future:-

If an industry is expected to perform well in the future, then entrepreneurs would be ready
to set up large sized businesses to meet future demand. For e.g. with the increase in
employment and purchasing power the demand for automobiles, housing, consumer durable
are expected to increase. Therefore business units engaged in these businesses are
encouraged to increase their size.

Market Availability:-

If the market for the product is restricted to a particular locality or State, the size of the firm
would be small. But if the market is national or international, a large size firm would be set
up.

Profitability:-

If increase in production is expected to yield only low returns, the firm size would remain
small. In case increase in firm size, is expected to yield higher profits, the firm size would be
increased to a large sized firm.

OR
The main factors that affect the size of the firm are as follows:-

Nature of Industry:-

The nature of the industry has a direct influence on the size of the firm. Manufacturing
industries are, by and large, bigger compared to trading and service firms.

Manufacturing industries heavy machinery, produce goods on a large scale, make higher
capital investments, and therefore large.

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Nature of Products:-

When the product is less standardized, the size of the firm is often small when the product is
standardized, complex, and durable; the size of the firm is often big.

Capital Employed:-

When the capital involved is large, and the firm can raise it, the size of the firm is large, when
the capital involved in small, the size of such a unit will be small.

Size of the Market:-

If the size of the market is large for the product, the firm will also be large and vice-versa.

Quality of Management:-

The competence and integrity of management largely determine the size of a business unit.
If the management is competent to manage the complex tasks of modern business, the firm
can afford to be large.

Factors Determining Size of the Firm:-

Every business is striving towards attaining the optimum size. Usually, any business starts as
a small entity, and then during its operating period, it expands till it reaches the optimum size.

Capital Investment Factor:-

The capital employed by shareholders in the form of share capital, reserves, and surplus (net
worth) determines the size of the business. It is mainly used to compare two firms or more
that are producing similar or differentiated products.

Number of Employees:-

The number of employees employed by any business determines its size. This is done by
comparing the wages paid to employees with other businesses.

This factor is used where firms produce similar goods. If you use it in comparing firms that are
producing differentiated products, then you end up with false results.

Power Used:-

The amount of power used determines the size of the business. Business firms don’t rely on
this factor as it is inaccurate because of the amount of power used by any business may be
more or less.

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Raw Materials Used:-

The annual consumption of raw materials of any firm determines its size. It used only on those
firms that are producing similar products.

The Volume of the Output:-

This factor is used for those firms that are producing homogeneous goods.

The Capacity of Plant:-

It is used by firms that produce similar products.

Total Assets:-

The total assets of any business determine its size. The value of all assets (current and fixed)
is taken as a means of measure. It is used in both similar and differentiated firms.

Value of Output:-

This is another factor that determines the size of any firm; however, this method is only
effective in cases where firms produce a variety of products and where price levels remain
constant.

In all these factors, the volume of output is the most effective and reliable factor in measuring
the size of any business unit.

The Optimum Size of Business/ Optimum Firm:-

From an economic point of view, every business organization should expand as long as its
average per-unit cost is just equal to that of its marginal cost.

In simple words, when the factors of production-land, labor, capital, and organization can
affect maximum returns at their minimum involvement, the economics consider that as the
best, and the most desired size of business.

“A firm with this-sat and volume of operation may ensure minimum unit cost, but a maximum
return is known as the Optimum Firm.”

“By the optimum firm,” says E.A.G. Robinson, “we must mean that firm which, in exiting
conditions of techniques and organizing ability has the lowest average cost of production per
unit, when all those costs which must be covered in the long run are included.”

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The implications of this definition are as follows:-

1) The point to be considered is the average cost of production and not-profits. The
average cost means the total cost divided by the total output. Total cost includes all
costs, including depreciation, interest, and a reasonable margin of profit.
2) Optimum size is a moving point and depends upon technological and managerial
developments. Thus the optimum size is a relative and dynamic concept and static.
That is why the optimum size of firms will vary in different industries where different
technical, marketing, and financial conditions are encountered.

The concept of the optimum firm is represented in the following graph:-

The size’ is measured along the “X” axis and the average cost per unit along the axis. The cost
per unit falls as output increases until, at the point, “p” it begins to rise again. This point
represents the optimum size.

Factors for Determining the Optimum Size of a Business Unit:-

Optimum Technical Unit:-

Technical factors are concerned with methods of production. They may include specialization,
division of labor, mechanization and the like. Production methods become economical when
these steps are taken. Technical forces decide the minimum and the maximum limits to size.

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Optimum Financial Unit:-

Generally, the size of a unit depends upon the volume or size of capital and, in turn, the
volume of capital depends on its size. Larger the size of a unit, larger the volume of capital
required and easier to obtain capital because large volume of production and operational
efficiency insure adequate return on capital. The optimum financial unit is governed by the
volume of funds.

Optimum Managerial Unit:-

Management expenses may vary with size. If the size is small it may be relatively costly to
manage its affairs whereas with the growth of size there is an economy in such expenses. The
growth of size may bring in complexities of organization and management. But in a larger unit
the advantages of specialization and division of labor may be obtained and managerial
efficiency improved.

Optimum Survival Unit:-

The production of a commodity depends upon its demand in the market. Since demand may
fluctuate from time to time, there is risk and uncertainty before the firm. Therefore,
conditions of demand may influence the size of a unit because the risk or uncertainty is
influenced by such conditions.

The changes in demand may be permanent cyclical and seasonal. Changes in demand due to
the development of a substitute or a change in the taste and habits of the consumers may be
taken as a permanent change.

The firm should reorganize its activities to adjust to the changed conditions. Cyclical variations
are those which are concerned with depressions and booms. The firm has to meet both these
situations and make adjustments. Seasonal variations are governed by change situations the
firm has to adjust its size to keep it optimum in a particular situation, in seasons and the
subsequent change in the demand for a commodity. In all these, however, changes in the size
of a unit are difficult to make.

Optimum Marketing Unit:-

Marketing optimum has to seek a balance between large scale marketing operations with a
view to having some economies in selling and buying and better quality of commodities and
services by limiting the size to a manageable limit. Demand estimates are to be prepared to
decide the size of marketing operations.

The Rationale of the Concept of Optimum Size:-

A firm of optimum size is brought into existence partly by the conscious decisions of a
businessman who are considering how they can invest their resources profitably and partly
by the forces of competition, which tend to eliminate the inefficient and encourage efficiency.

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The optimum size, can, however, be achieved only:-

a) If the size of the market is sufficient to absorb the whole production of at least one
firm of such a size and
b) If product competition prevails in the market so that prices charged by the firms tend
to be equalized.

The state of perfect competition is hardly encountered in practice, and hence the concept of
optimum size is generally considered to be of least practice relevance.

However, it is not without practical utility. It motivates the businessmen to bring down the
cost of production to the maximum possible extent through the use of better techniques of
production and better management methods.

The concept of an optimum firm represents a simple analysis of the problem of determining
an efficient size for a firm and the factors which should be taken into account while deciding
upon a desirable scale of operations in the process of growth.

Large Firm:-

In India, large-scale industries are the ones with a fixed asset of more than one hundred
million rupees or ₹ 10 crores.

It is important to note that these industries are either manufacturing units or those which use
both indigenous and imported technologies.

Here are some more Examples:-

Fertilizer, Cement, Natural gas, Coal, Metal extraction, Metal processing, Petroleum, Mining,
Electrical, Petrochemical, Food processing units, Tourism, Banking, Sugar, Construction,
Automobile, Communication equipment, Cement, Chemicals, Earth movers, Consumer
durables (like television, refrigerators, etc.), Engineering products, Vehicle assembly,
Beverages, Agricultural processing, Insurance and Finance.

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Advantages/Economics of Large Firm:-

These are the following Advantages/ Economics of Large Firm:-

Technical Economies:-

1) Large firms can install new machines, automatic appliance and adopt other means of
superior technology because it is economical to do so if they are set for large-scale
production.
2) Large firms can reap the full benefits of specialization through scientific division of
labour.
3) Large firms can afford to earmark funds for conducting technological research and
experimentation in order to find out better and cheaper methods of production.
4) Large firms have adequate resources to enroll the services of experts, to plan guide
and execute the manufacturing operations without any hindrance.
5) Large firms can also realize economies from bulk purchase-contracts for building up
adequate stocks of raw materials etc. so that the continuity of the firm’s operations is
not disturbed.
6) Large firms can think of utilizing by products, acquiring patent rights over innovations,
etc.

Managerial Economies:-

1) A large firm can employ managerial experts at the top level of management so that
the firm functions efficiently under rational regulation. Complicated problems of
finance, labour, marketing, administration can well be tackled by managers of superior
attainments. Such brilliant executives can be appointed by large firms, since they have
adequate resources to pay them and their scale of operations being large there will
be sufficient work for them.
2) Large firms are in a position to introduce modern appliances like calculating machines,
dictating machines, computers, etc. to save time and to improve the services to the
customers.
3) Large firms would be able to introduce elaborate division of labour in functional
arrangement of business activities of the firm.
4) Large firms can go ahead provide they have already qualified cadre of managerial
executives and experts.

Financial Economies:

1) Large firms can have greater access to money and capital markets. They can mobilize
resources on easy and economical terms regarding rate of interest, repayment of
borrowed money etc. through banks and other financial institutions.
2) Large firm can set aside sufficient amount for depreciation and replacement of assets.

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 3) They can adopt new techniques of planning and proper control of utilisation of funds
through budgeting, costing, management, accounting etc. which are new methods of
bringing about financial discipline.
4) Large firms can afford to plough back substantial part of their profits for further
expansion.

Marketing Economies:-

1) Large firms can realize economies arising from bulk-sales. Marketing- costs in case of
larger volume of sales would be relatively less per unit of output.
2) Large firms can make use of services of experts in marketing and talented salesmen.
3) Such firms can afford to spend sizable amount on advertising and under-take sales
promotion efforts so as to step up the rate of turnover.
4) If a firm is handling different lines of products, the same salesmen can canvas sales of
the different products without additional costs.
5) Large firms can render better services to customers and build up goodwill and
business prestige.
6) Large firms can withstand competition in the market.

In short, because of the economies explained above large firms will be in a better competitive
and bargaining position compared to small firms. Lesser costs, higher production, larger sales,
superior techniques, better services, surer stability are the advantages of large firms.

Disadvantages of Large Firms:-

Notwithstanding the various economies enjoyed by the large firms there are certain
limitations inherent with their size.

Large firms suffer from following limitations because of their size and the difficulty in tackling
the technical, managerial and human problems arising there from:-

1) Large firms tend to be bureaucratic and there may be red tapism in its administration.
2) There is no scope for personal initiative, enterprise and skill since the administrative
and operational procedures are minutely standardized.
3) In case of large firms it is not possible to develop personal contact with the customers.
4) Existence of large firms lead to concentration of economic power within few hands.
5) Large firms tend to grow monopolistic through consolidation or integration.
6) Oligarchic hold of large firms over the economy leads to exploitation of consumers in
the form of higher prices, abnormal profits, artificial cuts in supply etc.
7) It becomes unwieldy to manage large-sized firms due to difficulty of coordination and
control.
8) In times of cyclical fluctuations or in the event of sudden or swift changes in the trends
of demand or in technology, large firms find it hard to adjust their organisations to
new situation.

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Small Firm:-
According to the definition provided by the government website for business, business.gov.in,
a small scale business is a business set up in which the financial commitment towards
infrastructure such as building & equipment, whether made as an owner or on rental or
purchase basis, does not surpass ₹ 1 crore.

Advantages of Small Firm:-

Some of the advantages enjoyed by small firms are as follows:-

Despite the benefits of growth, a large proportion of the firms in any country are small. There
are a number of reasons for this:-

The Small Size of the Market:-

This is probably the key influence. If demand for the product is small, a firm producing it
cannot be large. Demand for very expensive items, such as luxury yachts, may be small as it
may be for individually designed items, such as designer dresses and suits and for repair work.

Preference of Consumers:-

For some personal services, such as hairdressing, consumers prefer small firms. Such firms
can cater to their individual requirements and can provide a friendlier and more personal
service.

Owner’s Preference:-

The owner (or owners) of a firm may not want it to grow. People who own and run firms have
various motives. Some may want to avoid the stress of running a large firm and may be
worried that expansion the firm may lead to loss of control.

Flexibility:-

Despite the advantages of large firms, small firms may survive because they may be able to
adjust to changes in market conditions more quickly. A sole trader, in particular, is likely to be
in regular touch with his or her customers and should be able to pick up on changes in their
demand. He or she can also take decisions more quickly as there is no need to consult with
other owners.

Technical Factors:-

In some industries, little or no capital is needed. This makes it easy for new firms to set up. It
also means that technical economies of scale are not important and small firms do not suffer
a cost disadvantage. The lower the barriers to entry, the more small firms there are likely to
be, in the industry.

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Lack of Financial Capital:-

Some firms may want to expand but they may lack the finance required to do so. As
mentioned in the beginning, it may be difficult for sole traders to raise financial capital.

Location:-

If a product is relatively heavy in relation to its value, transport costs can form a high
proportion of total costs. This can lead to emergence of local, rather than national markets
and such markets can be supplied by small firms.

Cooperation between Small Firms:-

For example, small farmers may join together to buy seeds, foodstuffs and equipment such
as combine harvesters.

Specialization:-

Small firms may supply specialist products to, and distribute the products of, larger firms. For
instance, a relatively small firm may provide training services for a large accountancy firm.

Government Support:-

Governments in many countries provide financial help and advice to small firms. This is
because small firms provide a high number of jobs, develop the skills of entrepreneurs and
have the potential to grow into large firms.

Demerits or Disadvantages of Small Firm:-

There are the following Disadvantages of Small Firm:-

Small Businesses Have Less Brand Recognition:-

A large business enjoys brand recognition wherever it goes. Think of giants like Coca-Cola and
Apple, which are known nearly everywhere in the world. A small company won’t have the
brand recognition it requires to easily gain more customers. Larger businesses enjoy this
recognition, and can even increase it by promoting their products more widely and opening
branches in more locations.

Small businesses suffer from less visibility, and this poses a serious challenge for them when
it comes to attracting new traffic and expanding their operations. The company reputation
must be developed from scratch and go through several growing pains before reaching
anywhere near the level of a large business, which has already established its reputation.

Small Businesses Experience Higher Costs:-

Small businesses have lower bargaining power than their larger counterparts, and this
hampers their ability to lower the unit costs of their products. A large company does not face
this problem. It can negotiate large discounts on volume purchases by virtue of the large

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volumes it purchases. It also enjoys economies of scale, which allow it to produce goods in
bulk and reduce the cost of overheads. A small business, on the other hand, simply doesn’t
have the same production capacity or buying power, therefore forcing it to bear greater unit
costs.

Small Businesses Have Smaller Budgets:-

Small-scale businesses are typically faced by budget hurdles. They can’t afford the levels of
research and development, marketing, and technology that large businesses enjoy. They also
can’t employ workers with the same level of skill at the required starter salaries, inhibiting
their ability to grow and offer the same quality of products and services to their consumers
as large businesses. Before the advent of online advertising, advertising was a difficult thing
for small businesses because their ad budgets couldn’t get them a spot on television in most
cities in the US.

Small Businesses Cannot Compete on Price:-

The fact that small businesses cannot compete with their larger competitors on price is a
direct consequence of their lack of bargaining power. When they are unable to reduce the
costs of their products and services, they are forced to charge higher prices. They cannot
profitably compete with their larger counterparts on price. They are therefore forced to
differentiate themselves in other ways, such as customer support or quality of the product or
service, in order to compete. This can place additional stress on their budgets.

OR
High Cost of Production:-

The cost of production per unit increases because there is a high cost of labour, a very little
scope for division of labour and lesser use of machinery.

Wastage of By-products:-

In the small scale production, it is not possible to make economic use of the by-products, as
in the large scale production. By-products of the small producers generally go waste.

Less Use of Machines:-

In the small scale production, there is less scope for the use of machines. As a result, these
firms cannot take advantages of the use of the machinery.

Lack of Division of Labour:-

In the small scale industries, the size of production is small, and there is lack of division of
labour and less profits to the entrepreneurs.

Difficulty in Getting Loans:-

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It cannot enjoy the financial economies. Funds are either not available and if available, they
have to pay higher rate of interest.

Difficult to Face Economic Crisis:-

Because of the limited resources and financial weakness, the small scale producers cannot
face economic crisis. The producers do not have the capacity to bear losses for long. In fact,
under a small economic crisis, many small factories are closed down.

Costly Raw Materials:-

In the small scale production, raw materials are purchased in small quantities which are
available to the small producer at higher prices.

Lack of Standardized Goods:-

The quality of goods is not standardized or up to the mark in the small scale production. It is
difficult to sell goods because of their low standard and inferior quality.

Old Techniques:-

In the small scale industries, the production is undertaken with the help of old techniques or
old and obsolete machines. It is not within their capacity to bear the risk of installing new
machinery.

Lack of Research:-

The small scale industries have limited means at their disposal. They cannot spend much on
research in the field of science and technology. In this way, the small scale industries are a
hurdle in the way of technical research and, industrial development.

Difficult to Face Competition with Large Scale Producers:-

If some large scale producers enter the market, the small producers find it difficult to compete
with them. The small producers perish at the hands of the large scale producers.

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Sources of Finance:-

Business finance is the funds required to establish, operate business activities, and expand in
the future. Funds are specifically required various purchase type of tangible assets such as
furniture, machinery, buildings, offices, factories, or intangible assets like patents, technical
expertise, and trademarks, etc.

Apart from the assets mentioned above, other things that require funding are the day-to-day
operational activities of a business. This activity includes purchasing raw materials, paying
salaries, bills, collecting money from clients, etc. It is essential to have sufficient amount of
money to survive and grow the business.

Classification of Sources of Funds:-

Businesses can raise capital through various sources of funds which are classified into Three
Categories:-

Based on Period:-

The period basis is further divided into Three Sub-Division:-

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 1) Long Term Source of Finance:-

This long term fund is utilized for more than five years. The fund is arranged through
preference and equity shares and debentures etc. and is accumulated from the
capital market.

2) Medium Term Source of Finance:-

These are short term funds that last more than one year but less than five years. The
source includes borrowings from a public deposit, commercial banks, commercial
paper, loans from a financial institute, and lease financing, etc.

3) Short Term Source of Finance:-

These are funds just required for a year. Working Capital Loans from Commercial
bank and trade credit etc. are a few examples of these sources.

Based on Ownership:-

This sources of finance are divided into Two Categories:-

1) Owner’s Fund:-

This fund is financed by the company owners, also known as owner’s capital. The
capital is raised by issuing preference shares, retained earnings, equity shares, etc.
These are for long term capital funds which form a base for owners to obtain their
right to control the firm’s management and operations.

2) Borrowed Funds:-

These are the funds accumulated with the help of borrowings or loans for a particular
period of time. This source of fund is the most common and popular amongst the
businesses. For example, loans from commercial banks and other financial institutions.

Based on Generation:-

This source of income is categorized into Two Divisions:-

1) Internal Sources:-

The owners generated the funds within the organization. The example for this
reference includes selling off assets and retained earnings, etc.

2) External Source:-

The fund is arranged from outside the business. For instance, issuance of equity shares
to public, debentures, commercial banks loan, etc.

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Sources of Finance Examples:-

The sources of business finance are retained earnings, equity, term loans, debt, letter of
credit, debentures, euro issue, working capital loans, and venture funding, etc.

Long Term Sources of Finance:-

Long-term financing is a mode of financing that is offered for more than one year. It is
required by an organization during the establishment, expansion, technological innovation,
and research and development.

In addition, long-term financing is required to finance long-term investment projects. Long-

term funds are paid back during the lifetime of an organization.

Some of the long-term sources of finance are:-

1) Equity Shares
2) Preference Shares
3) Ploughing Back of Profits
4) Debentures
5) Financial Institutions
6) Lease Financing
7) Term Loans
8) Debt Capital
9) Internal Sources
10) Foreign Capital

Note:-

Current Assets:-
A current asset is an asset that a company holds and can be easily sold or consumed and
further lead to the conversion of liquid cash. For a company, a current asset is an important
factor as it gives them a space to use the money on a day-to-day basis and clear the current
business expenses. In other words, the meaning of current assets can be explained as an asset
that is expected to last only for a year or less is considered as current assets.

Examples:- Cash and equivalents, Short-term investments (marketable securities), Accounts

receivable, Inventory, Prepaid expenses, Any other liquid assets.

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Current Liabilities:-
Current liabilities are an enterprise’s obligations or debts that are due within a year or within
the normal functioning cycle. Moreover, current liabilities are settled by the use of a current
asset, either by creating a new current liability or cash.

Examples:- Accounts Payable, Accrued Expenses, Accrued Interest, Bank account overdrafts
(BAO), Notes payable or Bank loans, Dividends payable, Income Taxes payable, Wages.

Shares:-
In simple words, a share indicates a unit of ownership of the particular company. If you are a
shareholder of a company, it implies that you as an investor, hold a percentage of ownership
of the issuing company. As a shareholder you stand to benefit in the event of the company’s
profits, and also bear the disadvantages of the company’s losses.

Types of Shares:-

1) Equity Shares
2) Preference Shares

Equity Shares:-

These are also known as ordinary shares, and it comprises the bulk of the shares being issued
by a particular company. Equity shares are transferable and traded actively by investors in
stock markets.

Preference Shares:-

Preferential shareholders receive preference in receiving profits of a company as compared

to ordinary shareholders. Also, in the event of liquidation of a particular company, the
preferential shareholders are paid off before ordinary shareholders.

Leasing:-
A “lease” is defined as a contract between a lessor and a lessee for the hire of a specific asset
for a specific period on payment of specified rentals.

The maximum period of lease according to law is for 99 years. Previously land or real restate,
mines and quarries were taken on lease. But now a day’s plant and equipment, modem civil
aircraft and ships are taken.

Lessor:-

The party who is the owner of the equipment permitting the use of the same by the other
party on payment of a periodical amount.

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Lessee:-

The party who acquires the right to use equipment for which he pays periodically.

EMI (Equated Monthly Installment):-

EMI or equated monthly installment, as the name suggests, is one part of the equally divided
monthly outgoes to clear off an outstanding loan within a stipulated time frame.

Medium Term Sources of Finance:-

Medium term financing means financing for a period between 3 to 5 years. Medium term
financing is used generally for two reasons. One, when long term capital is not available for
the time being and second, when deferred revenue expenditures like advertisements are
made which are to be written off over a period of 3 to 5 years. Medium term financing sources
can in the form of one of them:-

1) Preference Capital or Preference Shares

2) Debenture / Bonds
3) Medium Term Loans from Financial Institutes, Government and Commercial Banks
4) Lease Finance
5) Hire Purchase Finance

Short Term Sources of Finance:-

Short term financing means financing for period of less than 1 year. Need for short term
finance arises to finance the current assets of a business like inventory of raw material and
finished goods, debtors, minimum cash and bank balance etc. Short term financing is also
named as working capital financing. Short term finances are available in the form of:-

1) Trade Credit
2) Short Term Loans like Working Capital Loans from Commercial Banks
3) Fixed Deposits for a period of 1 year or less
4) Advances received from customers
5) Creditors
6) Payables
7) Factoring Services
8) Bill Discounting etc.

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Some Sources of Finance are short term and must be paid back within a year. Other sources
of finance are long term and can be paid back over many years.

Note:-

Bank will Allow Bank Overdraft if:-

 You are a Business Man or proper financial backings

 You a Bonafide Customer of Bank
 You have a busy Bank Statement
 You should have a Good CIBIL Score

Difference between Overdraft and Cash Credit:-

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CIBIL Score (Credit Information Bureau India Limited):-

A CIBIL Score is a consumer's credit score. A credit score is a numerical expression based on a
level analysis of a person's credit files, to represent the creditworthiness of an individual.

CASA (Current Account Savings Account):-

CASA stands for Current Account Saving Account. This is a unique feature which banks offer
to their customers to make them keep their money in their banks. The account combines the
benefits of savings account and checking accounts.

The account pays negligible or no interest on the current account and an above-average
return on the savings accounts. CASA is mostly popular in the West and Southeast Asia.

Social Responsibility of a Business Organization:-

Social responsibility means that individuals and companies have a duty to act in the best
interests of their environment and society as a whole. Social responsibility, as it applies to
business, is known as corporate social responsibility (CSR), and is becoming a more
prominent area of focus within businesses due to shifting social norms.

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According to Peter F Druker, “Social responsibility requires managers to consider whether
their actions are likely to promote the public good, to advance the basic belief of society, to
contribute to its stability strength and harmony.” Social responsibility refers to the voluntary
efforts on the part of the business to contribute to the social wellbeing. The moral idea behind
this is that the businesses use resources of the society so they must give something back to
the society.

The Need for Social Responsibility:-

Self-interest:-

It is in the self-interest of the business to have a social responsibility as it opens opportunities

for understanding the problems and issues of society.

A Better Environment for Business:-

In today’s cynical age, social responsibility keeps the businesses honest and the markets
stable.

Public Image:-

When a business takes initiative to solve the problems of the society, it puts the business in
the goodwill of the people.

Social Power:-

A leader is a helper. Helping the society is a form of social responsibility. Executing social work
helps the business attain social power within the society.

Arguments Supporting Social Responsibility:-

The justification for existence and growth:-

The primary goal of business is to make profits as only profits can help the business sustain
and expand. Profits should only be made as a return of service to the society by producing
goods and services.

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The Long-term Interest in the Firm:-

A firm is to gain maximum profits in the long run if it has it’s the highest goal as service to
society. As humans are social beings, when they notice that a particular corporation is not
serving it’s the best interest socially, they do not support the organization further.

Avoidance of Government Regulations:-

Government is the highest authority in the nation. When a government feels that the business
is not socially responsible or is creating problems like pollution, the government limits its
freedom.

Maintenance of Society:-

Business is one of the important pillars on which society survives. It is the responsibility of
business to take care of society’s needs. Law alone can’t help people with the issues they face.
Therefore businesses contribute to the wellbeing, peace and harmony of society.

Availability of Resources with Business:-

Business enterprises have huge financial resources, very efficient managers & contacts and
thereby they can ensure that a social problem can be solved easily.

Converting Problems into Opportunities:-

Business means risk. And turning risky situations into profits can also be related to solving
social problems.

Holding Business responsible for Social problems:-

Business enterprises are responsible for many problems such as pollution, discriminated
employment, corruption, etc. It is the duty of the business to solve the problems created by
them.

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Arguments against Social Responsibility:-

Violation of maximization of the profit motive:-

This statement argues that business exists only for maximizing profits and businesses fulfil
their social responsibility best by maximizing profits by increasing efficiency and reducing
costs. They need not take up any additional obligations.

Side effects on Consumers:-

Customers suffer because of the solving social problems and taking social care require huge
financial investment. As the money within the business is used in social help, the business
increase the cost of their products and services.

Lack of Social skills:-

It is often stated that businessmen don’t fully under the social problems and thus can’t solve
them efficiently.

Personal resistance:-

People tend to dislike interference from businesses in their problems.

The Reality of Social Responsibility:-

The threat of Public Regulation:-

Government agencies keep watchful eye on all the business operations. So to avoid
government action, business should behave in a responsible manner.

The pressure of Labour movement:-

Labour play an important role not only in production but also in the managerial factors of the
organization. Labour nowadays are more educated and their movements are more powerful.
‘Hire and fire’ policy no longer work. Managers now have to be more responsible while
dealing with labors.

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Impact of Consumer Consciousness:-

In this era, consumers are well aware of the quality and price of the product. Consumers are
understanding their rights over the product and even in small issues, they file a suit in
consumer court.

Development of a Social standard for Business:-

New social standards consider business enterprises as legitimate but with a condition, they
must also serve social needs.

Development of Business Education:-

Business education has created an awareness among investors, consumers, employees, etc.
and the world is more sensitive towards social issues.

The relationship between Social interest and Business Interest:-

People know that social interest and business interest are complementary. This means long-
term benefits of the business.

Development of Professional and Managerial Class:-

Earlier business houses only aimed at profit maximization but now professional management
and educational institution have made a new kind of managers that give similar importance
to social responsibility.

From the above seen ‘Realities of Social Responsibility’ it is clear that business houses must
assume social responsibility for their survival, growth, and sustainability.

Criteria for Determining the Social Responsibility of Business:-

India`s new Companies Act 2013 (Companies Act) has introduced the provision for

Corporate Social Responsibility (CSR). The concept of CSR rests on the ideology of give and
take. Companies take resources in the form of raw materials, human resources etc. from the
society. By performing the task of CSR activities, the companies are giving something back to
the society.

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Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act
as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules,
2014 (CRS Rules) which has come into effect from 1 April 2014 and certain amendment in
May 2016.

Applicability:-

Section 135 of the Companies Act 2013 provides the threshold limit for applicability of the
CSR to a Company:-

a) net worth of the company to be Rs 500 crore or more; or

b) turnover of the company to be Rs 1000 crore or more; or
c) net profit of the company to be Rs 5 crore or more.

Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian
companies, but also applicable to branch and project offices of a foreign company in India.

Expenditure on CSR does not form part of business expenditure.

Reasons for accepting the Social Responsibility of Business:-

These are 8 Reasons Why Being Socially Responsible Is Good for Business:-

1. Expands the potential customer target market size:-

Social contribution and sustainability are features that appeal to a whole new class of
customers for any solution. These features are extremely important in penetrating customer
sets in different cultures around the world, and more discerning customers in every
geography.

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2. Incentivizes customers to pay a premium price:-

Sustainability and social responsibility are ways to extend your exclusivity and added value,
thus lowering risk, improving profitability, and justifying a premium price.

All stakeholders see this as an advantage, encouraging new investors and raising the valuation
of your business.

3. Increases customer advocacy and loyalty in all markets:-

These days, existing customer advocacy is a key attractor of new customers. In addition,
according to recent statistics, the cost of bringing a new customer to the same level of
profitability as old ones is up to 16 times more.

Loyal customers post great reviews and bring in many new friends.

4. Is seen by customers as a competitive edge:-

Most Millennials and customers of all ages these days strongly believe that all businesses
must be socially responsible, and make that a top criteria for selecting a solution source.

It's a message that you can use both indirectly and directly in your brand positioning and
marketing.

5. Improves your team motivation and productivity:-

Sponsoring social initiatives and providing time for employees to support their own initiatives
builds loyalty, pride, and motivation among team members and disparate organizations
within the company.

This makes everyone in the company more engaged, more responsive, and more productive.

6. Improves employee retention and attracts better candidates:-

Company success is driven by the quality of the team members they can attract and retain.

If your business is recognized as providing a socially responsible culture for employees, as well
as comparable initiatives outside the business, the best and the brightest will join you.

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7. Provides governance flexibility and financial grant opportunities:-

B-corps are given relief from the sole directive of maximizing shareholder profits, to reduce
investor suits.

With targeted social initiatives, they may also qualify for government grants, alternative
energy rebates, and philanthropic initiatives in support of their efforts.

8. Makes your business more attractive to investors:-

Investors look for teams with real passion, integrity, and an attractive message.

They see a commitment to social change as great positioning for the long-term, with
sustainable value to customers and owners alike. They look for that balance between
maximizing profit and expanding the market.

Areas of Social Responsibilities:-

Stakeholder:-

A stakeholder is a party that has an interest in a company and can either affect or be affected
by the business. The primary stakeholders in a typical corporation are its investors,
employees, customers, and suppliers.

Internal Stakeholder:-

Internal stakeholders are entities within a business.

Examples:- employees, managers, the board of directors, investors.

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External Stakeholders:-

External stakeholders are entities not within a business itself but who care about or are
affected by its performance.

Examples:- consumers, regulators, investors, suppliers.

Difference between Stakeholder and Shareholder:-

Social Responsibility towards different Groups/Sections in the Society:-

Towards Shareholders:-

 To ensure safety of their investment

 Regular payment of dividend and Timely payment of loans
 To provide adequate information before investment

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  To ensure a good public image
 To make good and profitable decisions to give a good return on investment

Towards Employees:-

 Payment of Fair wages

 Providing a good working environment
 Providing proper training and education
 Providing fair performance appraisal and career growth opportunities
 Providing opportunity to participate in management decision making
 Providing adequate grievance handling, recreational and retirement facilities.

NOTES:-

Group Insurance Scheme (GIS):-

A group insurance scheme is essentially a health/medical insurance plan that cover all the
members of a particular group, in this case, employees of an organisation. In a group
insurance policy, members get insurance cover at a reduced cost as the provider's risk is
spread across a big number of policyholders.

Difference between Group Insurance and Individual Insurance:-

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Towards Consumers:-

 To provide goods and services at a reasonable price

 To ensure good quality in products
 To introduce new and innovative products by proper research and development
 To not mislead the customer
 To provide adequate information about the product
 To provide good after sale services

Banking Ombudsman Scheme:-

The Banking Ombudsman Scheme is an expeditious and inexpensive forum for bank
customers for resolution of complaints relating to certain services rendered by banks. The
Banking Ombudsman Scheme is introduced under Section 35 A of the Banking Regulation Act,
1949 by RBI with effect from 1995. Presently the Banking Ombudsman Scheme 2006 (As
amended up to July 1, 2017) is in operation.

Who is a Banking Ombudsman?

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress
customer complaints against deficiency in certain banking services covered under the grounds
of complaint specified under Clause 8 of the Banking Ombudsman Scheme 2006 (As amended
up to July 1, 2017).

Towards Society:-

 To take measures for maintaining environmental harmony

 To raise the standard of living of the society
 To help in development of backward areas and promote small scale industries
 To help in economic development of the society
 To conserve the natural resources of the country
 To follow the norms and traditions laid down by the society
 To maintain a fairness and equity in recruitment and compensation of manpower

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Towards Competitors:-

 To have a healthy competitive spirit

 To not use unfair means to succeed in business
 To not harm or defame the competitors
 To not copy competitors strategy

Towards Government:-

 Timely payment of taxes and duties

 To not involve in corruption
 To follow the norms and guidelines laid down by the government
 To follow the legal system of the country
 To support the government in its public welfare initiatives

NOTE:-

MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT (MRTP), 1969:-

This Act was enacted to prevent the concentration of economic power to common detriment,
control of monopolies, and prohibition of monopolistic and restrictive trade practices (MRTP)
and matters connected therewith.

Towards Suppliers/Creditors:-

 To make regular orders for purchase

 To deal on fair terms and conditions
 To have a fair credit policy
 Timely payment of dues

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