Finance for Non-Finance People

Sandeep Goel

• Publisher: Routledge India
• Year: 2019
• ISBN:
  9780429589690
• Edition: 2
• Topic: Business
• Subtopic: Finance
• Index: Business

Finance is key to every business organisation as well as outside. This book makes sense of the finance world from a non-finance perspective. It introduces, explains and demystifies essential ideas of business finance to those who do not have financial background or training. Lucid, accessible, yet comprehensive, the book delineates the financial workings of businesses and offers an overview of corporate finance in the global context. The volume:

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• Contains effective tools for financial communication, monitoring, analysis and resource allocation;

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• Provides important learning aids such as figures, tables, illustrations and case studies;

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• Highlights fundamental concepts and applications of finance;

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• Surveys global corporate practices, recent trends and current data.

This updated second edition contains new sections on Tax Planning, including Income Tax and Goods and Services Tax in India. A guide to building financial acumen, this book will be a useful resource for executive and management development programmes (EDPs & MDPs) oriented towards business managers, including MBA programmes. It will benefit business executives, corporate heads, entrepreneurs, government officials, teachers, researchers, and students of management and business, as well as those who deal with finance or financial matters in their daily lives.

Part I
Introduction

1
Business organisations

Business organisations operate for the production of goods or rendering of services to society. The scale of their activities is vast and has an enormous impact on the life of the community. The activities include providing essential goods and services to ultra-luxury and luxury. Every individual comes into contact with business organisations practically at every turn in his or her daily life. Undoubtedly, these business enterprises are inevitable to the growth of the economy and a part of every individual’s daily life directly or indirectly.

Meaning of business organisation

A business organisation (also known as business enterprise, business undertaking, business firm or business concern) is an organisation which is engaged in some business or commercial activity. It may be owned and controlled by a single individual or by a group of individuals. So business organisation can be defined as ‘an enterprise which produces, distributes or provides any product or service needed by the members of the community for a price’.

Types of business organisations

Business organisations may be classified into three broad categories as depicted in Figure 1.1.

Figure 1.1 Classification of business organisations

I. Private sector enterprise

A private sector enterprise is owned, managed and controlled exclusively by private businessman. There is no participation by the central or state governments in the establishment and ownership of a private enterprise. The main motive of a private enterprise is to earn profit. Examples: Reliance Industries Ltd. (RIL), Infosys Ltd., Parle Products Pvt. Ltd., etc.

II. Public sector enterprise

A public sector enterprise is defined as an enterprise which may be (a) owned by the state, (b) managed by the state, or (c) owned and managed by the state. According to Prof. A. H. Hanson, ‘Public enterprise means state ownership and operation of industrial, agricultural, financial and commercial undertakings’.¹ The basic purpose of such undertakings is to render service to society. Examples: Life Insurance Corporation of India (LIC), Steel Authority of India Limited (SAIL), Engineers India Ltd. (EIL), Delhi Transport Corporation (DTC).

III. Joint sector enterprise

Joint sector enterprises consist of those business undertakings wherein the ownership, management and control are shared jointly by the government, private entrepreneurs and the public. Joint sector enterprises have been designed as an effective instrument for exercising social control over industry. Example: Gujarat State Fertilisers and Chemicals Ltd. (GSFC) incorporated in 1962 as Gujarat State Fertiliser Company (GSFC), a joint sector enterprise set up by the Government of Gujarat. Its equity structure consisted of 49% of state government and the rest of public and financial institutions.²

Joint sector enterprise is not same as ‘Joint Venture’ (JV), though in both the arrangements, two or more parties agree to pool their resources for the purpose of accomplishing a specific task. The basic difference between them is that ‘A business relationship is needed for a joint venture but not for a joint enterprise’.

Types of private sector enterprises

1. Sole proprietorship

In this form of a business enterprise, a single person provides the entire capital, bears all the risks and manages the business. The proprietor is personally liable for all the debts of the firm. Thus, a sole proprietor-ship is a ‘one-man army’. It is the simplest form of business to getting started. Small-scale businesses, like grocery stores and chemist’s shops operate as sole proprietorships.

2. Joint Hindu family business

It may be defined as a form of business organisation in which all the male members of a Hindu undivided family carry on business under the management and control of the head of the family called ‘Karta’. It is found only in India and is the result of the Hindu undivided family system followed in India.

3. Partnership

In this form of ownership, two or more persons enter into a contract to carry on some lawful activity jointly and to share its profits. Section 4 of the Indian Partnership Act, 1932 defines partnership as ‘the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.³ Each partner is considered as the agent of the firm and of its partners. The firm has no separate legal entity from that of the partners. Each partner is jointly and individually liable for the debts of the firm to an unlimited extent.

To form a partnership, the number of members (partners) required for a banking business is 2 to 10, and for a non-banking business it is 2 to 20 members.

4. Cooperative organisation

A cooperative society is a voluntary association of ten or more persons who join hands together to carry on economic activity of common need. It is based on the principles of mutual trust, equality, democracy and freedom. As an incorporated ...