RAJALAKSHMI INSTITUTE OF TECHNOLOGY,

KUTHAMBAKKAM, CHENNAI – 600124.

Department of Artificial Intelligence and Data Science
UNIT -3

ENTREPRENEURSHIP MANAGEMENT: FINANCIAL PERSPECTIVE

Entrepreneurship

Entrepreneurship is the ability and readiness to develop, organize and run a business enterprise, along with any
of its uncertainties in order to make a profit. The most prominent example of entrepreneurship is the starting of
new businesses.

4 Types of Entrepreneurship

It is classified into the following types:

Small Business Entrepreneurship-

These businesses are a hairdresser, grocery store, travel agent, consultant, carpenter, plumber, electrician, etc.
These people run or own their own business and hire family members or local employee. For them, the profit
would be able to feed their family and not making 100 million business or taking over an industry. They fund
their business by taking small business loans or loans from friends and family.

Scalable Startup Entrepreneurship-

This start-up entrepreneur starts a business knowing that their vision can change the world. They attract
investors who think and encourage people who think out of the box. The research focuses on a scalable business
and experimental models, so, they hire the best and the brightest employees. They require more venture capital
to fuel and back their project or business.

Large Company Entrepreneurship-

These huge companies have defined life-cycle. Most of these companies grow and sustain by offering new and
innovative products that revolve around their main products. The change in technology, customer preferences,
new competition, etc., build pressure for large companies to create an innovative product and sell it to the new
set of customers in the new market. To cope with the rapid technological changes, the existing organisations
either buy innovation enterprises or attempt to construct the product internally.
Social Entrepreneurship-

This type of entrepreneurship focuses on producing product and services that resolve social needs and problems.
Their only motto and goal is to work for society and not make any profits.

Characteristics of Entrepreneurship:

Not all entrepreneurs are successful; there are definite characteristics that make entrepreneurship successful. A
few of them are mentioned below:

 Ability to take a risk- Starting any new venture involves a considerable amount of failure risk.
Therefore, an entrepreneur needs to be courageous and able to evaluate and take risks, which is an
essential part of being an entrepreneur.
 Innovation- It should be highly innovative to generate new ideas, start a company and earn profits out of
it. Change can be the launching of a new product that is new to the market or a process that does the
same thing but in a more efficient and economical way.
 Visionary and Leadership quality- To be successful, the entrepreneur should have a clear vision of his
new venture. However, to turn the idea into reality, a lot of resources and employees are required. Here,
leadership quality is paramount because leaders impart and guide their employees towards the right path
of success.
 Open-Minded- In a business, every circumstance can be an opportunity and used for the benefit of a
company. For example, Paytm recognised the gravity of demonetization and acknowledged the need for
online transactions would be more, so it utilised the situation and expanded massively during this time.
 Flexible- An entrepreneur should be flexible and open to change according to the situation. To be on the
top, a businessperson should be equipped to embrace change in a product and service, as and when
needed.
 Know your Product-A company owner should know the product offerings and also be aware of the
latest trend in the market. It is essential to know if the available product or service meets the demands of
the current market, or whether it is time to tweak it a little. Being able to be accountable and then alter as
needed is a vital part of entrepreneurship.

Importance of Entrepreneurship:

 Creation of Employment- Entrepreneurship generates employment. It provides an entry-level job,

required for gaining experience and training for unskilled workers.
 Innovation- It is the hub of innovation that provides new product ventures, market, technology and
quality of goods, etc., and increase the standard of living of people.
 Impact on Society and Community Development- A society becomes greater if the employment base
is large and diversified. It brings about changes in society and promotes facilities like higher expenditure
on education, better sanitation, fewer slums, a higher level of homeownership. Therefore,
entrepreneurship assists the organisation towards a more stable and high quality of community life.
 Increase Standard of Living- Entrepreneurship helps to improve the standard of living of a person by
increasing the income. The standard of living means, increase in the consumption of various goods and
services by a household for a particular period.
 Supports research and development- New products and services need to be researched and tested
before launching in the market. Therefore, an entrepreneur also dispenses finance for research and
development with research institutions and universities. This promotes research, general construction,
and development in the economy.
 3 Management functions
Each of the functions of management-

Planning, Organizing, Directing, Staffing, Control – are used in managing the four major
areas of an agri-business. The mgmt. functions are implemented through the use of various
skills, principles, and tools that have become part of the professional agribusiness manager’s
knowledge and ability. To the successful, the agri-business manager must apply this
functional knowledge and ability to each of the four basic areas of the agri-business; i.e.;
financial mgmt. and planning, marketing and selling, production and operations, and
personnel or human dimension.

The basic functions of management are:

Planning- It is the ongoing process of developing the business, mission and objectives and
determining how they will be accomplished. Planning includes both the broadest view of the
organization, e.g. its mission, and the narrowest, e.g., a tactic for accomplishing a specific
goal.
Organizing- It is establishing the internal organizational structure of the organization. The
focus is on division, co-ordination, and control of the tasks and the flow of information
within the organization. It is in this function that managers distributes authorities to job
holders.

Staffing- It is filling and keeping filled with qualified people all positions in the business.
Recruiting, hiring, training, evaluating and compensating are the specific activities included
in the functions. In the family business, staffing includes all paid and unpaid positions held
by family members including the owner/operators.

Directing- It is influencing people’s behavior through motivation, communication, group

dynamics, leadership and discipline. The purpose of directing is to channel the behavior of all
personnel to accomplish the organization’s mission and objectives while simultaneously
helping them accomplish their own career objectives.

Controlling- It is a four-step process of establishing performance standards based on the

firm’s objectives, measuring, reporting actual performance, comparing the two , and taking
corrective or preventive actions as necessary.

4. Planning

Definition:

1 . Forward thinking about courses of action based on understanding of allreletated

factors involved and directed at specific goal.

OR

2. “Planning is the function that determines in advance what should be done.”

Importance of planning:

1. Selection of “optimum” Goals:

Planning involves rational thinking in setting goals and decision – making concerning
a proposed course of action. The goals should be that maximum efficiency is attained
regarding the usage of men and materials.
2. Tackling increased complexities:
An organization is a heterogeneous group of human beings who differ from one
another in many respects. It is unlikely that they will work effectively and
harmoniously in the interest of the organization, unless they have a plan.
3. Meeting environmental changes:
Business environment changes more rapidly in terms of social value, competition,
new product discoveries and consumer’s tastes and preferences – and these changes
will pose challenges for the growth of any organization. Only proper and effective
planning can help the management by adjusting the adapting the inputs and
transformation process to suit the environmental changes.
4. Safeguard against business failure:
Business failures are blamed on cut- throat competition, unpredictability of consumer
tastes and preferences, rapid technological changes and abrupt economic and political
developments. However, in many cases, failure is caused due to rash and unscientific
decision – making. Planning cannot avert all business failures. But it forces the
management to assess and evaluate each emerging business opportunity and
problems, and examine the various courses of action to meet them effectively.
5. Effective co- Ordination and Control:
Planning makes it easy to exercise control and co- ordination. The work to be done,
the departments which have to do it, time limit within which it is to be completed and
the cost to be incurred, are all determine in advance.

Nature or characteristic of planning:

There is a number feature or characteristics of planning that indicate towards its nature. These
may be outline as follows;

1) Goal –oriented: planning is the goal- orient in the sense that plans are prepared and
prepared and implemented to achieve certain object.
2) Basic to all managerial functions: planning is a function that is foundation of
management process. Planning logically precedes all other functions of management,
 such as organization, staffing, etc. because without plan there is nothing to control.
Every managerial action has to be properly planned.
3) Pervasive: planning is a function of all mangers, although the nature and extent of
planning will vary with their authority and level in the organization hierarchy.
Managers at higher levels spend more time and effort on planning that do lower
mangers.
4) Interdependent process: planning affects and is affected by the programs of
different department in so programs constitute and integrated effort.
5) Future-oriented: planning is forward looking and it prepared an enterprise for future.
6) Forecasting integral to planning: the essence of planning is forecasting. Plans are
synthesis of various forecasts. Thus, planning is inextricably (inseparably) bound up
with planning.
7) Continuous process: planning is an ongoing process. Old plans have to be prepared
in case the environment undergoes a change. It shows the dynamic nature of planning.
8) Intellectual process: planning is mental or conceptual exercise, it therefore involves
rational decision making: requires imagination, foresight, and sound judgment: and
involves thinking before doing thinking on the basis of facts and information.
9) Integrating process: planning is essential for the enterprise as a whole. Newman and
others have drawn our attention towards this feature of planning, “without planning,
an enterprise will soon disintegrate: the pattern of its action would be as random as
that made by leaves scampering (running quickly in short steps) before an autumn
wind, and its employees would be as confused as ants in an upturned anthill.” If there
are no plans, action will be a random activity in the organization, instead there will be
chaos.
10) Planning and control are inseparable: unplanned action cannot be controlled
without control, planned actions cannot be executed plans furnish standards of control
in fact, planning is meaningful without control and control is planning aimless
without planning is measuring rod of efficiency.
11) Choice among alternative courses of action: the need for planning arises due to
several ways available for an action if there is only one way out left there is no need
for planning.
12) Flexible process: the principle of navigational change (i.e., change according to
change in environment) applies to planning in other words effective planning requires
continual checking on events and forecasts, and the redrawing of plans to maintain a
course towards desired goals thus have to be adaptable to changing circumstances.

Steps of planning

A step-by-step procedure has to be followed in the planning process in order to reach the set
goals of the organization.

1. Identification of the opportunity of problems:

Planning must facilitate the organization to suit it to its environment. The constraints and
opportunities provided by the environment may be in the form of government regulations,
existing cultural norms, limited financial resources in the capital market, changing
technology, production of goods and services as per customer preferences, etc. hence, correct
identification of opportunity or problem to be addressed is the first step of planning.

2. Collection and analysis of relevant information:

Effective planning depends on the quality, relevance and validity of the information on which
it is based. The sources of information may be classified as external and internal. External
source will include suppliers, customers, professional people, trade publications, newspapers,
magazines, conferences, etc. internal sources will comprise of meetings, reports, and contacts
with superior, same ranks and subordinates.

3. Establishment of objectives:

Establishment of objectives points out the desired outcome that an organization may aim at
stability of operations, growth, a higher rate of return, market leadership and so on.

4. Determination of planning premises or limitations:

Planning has to take into account numerous uncertainties in its environment. Important
components of the internal environmental limitations are a) technology, b) structural
relationship and organization design, c) employee attitude and morale; and d) managerial
decision- making process. Internal environment is within the control of management, which
can appropriately adjust and adapt it to the requirements of the external environmental.

Uncertainties relating to the external environment are beyond the control of management.
These may be in respect of a) fiscal policies of the government, b) economic condition; c)
population trends; d) consumer tastes and preferences; e) competitors plan and activities; and
f) personal practices.

Only those factors which critically affect the enterprise plan should be identified and
evaluated.

5. Examining alternative courses of action:

Often, there will be more than one action plan to achieve desired objective. For example, if
the objective is to maximize profits and there are no limits to increasing production, the
objectives can be achieved through, either tapping in expected markets, or intensifying sale
efforts in the existing markets, or intensifying sale efforts in the existing markets, or
increasing then price, or diversifying production. The number of alternative plan prepared by
a manger would depend on his imagination, skill and experience.

6. Weighing alternatives courses of action:

 Evaluation of each alternatives action- plan will have to be from different points of view,
namely, a) its effectiveness in contributing to the accomplishment of organizational; b) its
ability to withstand the effects of environmental changes; and c) its integration with on- going
action plans.

7. Selecting the best course of action:

Whether the evaluation of various alternatives is directed by individual preferences and

prejudices, or it is based on mathematical and statistical techniques, the course of action
depends on resource availability, objectives, efficiency and economy.

8. Determining secondary plans:

Secondary plans flow from the basic plan. These are meant to support and expedite the
achievement of the basic plans. For example, once the basic plan is decided upon, a number
of secondary plans dealing with purchase of raw materials and machines, hiring and training
of workers and so on would have to be prepared to facilitate execution of the basic plan.

9. Providing for future evaluation:

In order to ascertain if plans selected for the purpose are proceeding along right lines, it is
necessary to devise a system for continuous evaluation of plan.

Types of planning:

Planning is often classified on the basis of the length of the period covered by it.
Accordingly, there may be long range and short range planning. However, the length of the
planning period will depend on the organization level at which planning is being done- the
type of business, the production cycle, managerial practices, etc.

A) Long- range planning

Long- range planning covers a long period in future, e.g., five or ten years, and, sometimes
even longer. It is concerned with the functional areas of business such as production, sales,
finance and personnel. It also considers long-term economic, social and technological factors
which affect the long-range objectives of the enterprises. All enterprise activities are directed
to achieve the targets set by long-range planning. Long- range planning is also called
strategic planning, because it is concerned with preparing the enterprise to face the effects of
long-term changes in business environment, such as entry of new products, new competitors,
and new production techniques and so on.

B) Short-range planning

Short-range planning, also called tactical planning, covers a short period, usually less than
one year. It deals with specific activities to be undertaken to accomplish the objectives set by
 long-range planning. Thus, it relates to current function of production, sales, finance and
personnel.

C) Intermediate planning.

While long-range and short-range planning encompasses all the major functional areas of the
enterprise, planning also requires accomplishing certain specific goals covering one or a few
of these areas. But such planning is only supplementary to long-range or short-range planning
of the enterprise and, in a sense; it can be called intermediate planning.

In other way, Planning can also be explained in terms of:

i) Production planning and

ii) Project planning and these two are explained below.

Production planning:

It concerns with the planning of size of production and sales. That is,

 Determining the extent to which a particular product is acceptable to

consumers
 Estimating the amount of anticipated sales.
 Determining the period up to which a product would be in demand
 Developing a new product to replace the old one, or improving the
existing product
 Intensifying sales in the existing markets and developing new markets

Project planning

It concerns with a specific project or plan, such as setting up a new factory or plant, or
scheme relating to modernization, amalgamation, or absorption of existing enterprises.

Projects are large, discrete and well defined tasks. A long-time lag is inevitable between the
beginning of a project and its completion.

Limitations of planning:

Uncertainty

Assessment of future can only be in terms of guess work, probabilities, speculations and
assumptions. The goals may be based on scientific analysis of relevant facts, and yet such
analysis cannot be cent correct.

Action packed routine

Managers are ever preoccupied with day-to-day problems. This leaves them little time to
think and plan about the problems of tomorrow.
Rigidity

Planning involves setting of objectives, and determination of the ideal course of action for
their implementation. It implies that there will be little scope for deviation from the chosen
path.

Costly

Planning is not an expensive exercise, but also a time consuming process.

5.Organizing

Importance of Organization

1. Efficiency in Management :-
Planning, direction and control can have meaning only when these functions are undertaken
with the frame work of properly designed and balanced organization. Organization is an
effective instrument for realizing the objective of an enterprise.
2. Instrument of all round development :-
A balanced organization helps an enterprise to grow and enter new lines of business. It can
achieve the necessary momentum and adaptability to meet the various challenges posed by
the environmental force.
3. Adoption of new technology :-
In a rapidly advancing world, changes are bound to take place in the techniques of
production, distribution and man-power management. An effective management can foresee
such changes in environment, which will involve rescheduling of activities as a new approach
to delegation of authority and responsibility.
4. Aid to initiative :-
For an organization to continue to remain effective, it in necessary that it encourages
initiative among its staff. Then alone, it can discover talents and creativity among its
employees.

Nature or characteristics of an organization

1. Division of labour :-
It is the root of any organization structure. In order to improve the efficiency of any
organization, the total efforts of persons who joined together for a common purpose have to
be divided into different functions. These functions are further divided into sub-
functions each to be performed by different persons. After the division of the total effort into
functions and sub-functions the next step is to group the activities on the basis of similarity of
work. For example, in a manufacturing enterprise, its total activities may be divided and
grouped under a) production, b) marketing, c) Finance and d) personnel.

2. Co-ordination :-
An organization has to adopt suitable methods to ensure proper co-ordination of the different
activities to be performed at various work spots. This implies that there must be a proper
 relationship between: a) an employee and his work, b) one employee and another and c) one
department or sub-department and another.
3. Objectives :-
Objectives of a business cannot be accomplished without an organization; similarly an
organization cannot exist for long without any objective and goal.
4. Authority – Responsibility structure :-
For successful management, positions of personnel are so ranked that each of them is a
subordinate to the one above it, and superior to the one below it. Management authority may
be defined as the right to act, or to direct the actions of others.

5. Communication :-
For successful management, effective communication it vital because management is
concerned with working with others, and unless there is proper understanding between
people, it cannot be effective. The channels of communication may be formal, informal,
downward, upward and horizontal.

Process of organization

The important steps in an organizational process are :

1. Determining the activities to be performed :-
The first step in this process is to divide the total effort into a number of functions and sub-
functions each to be performed, preferably, by a single individual or a group of individuals.
thus, specialization is a guiding principle in the division of activities.
2. Assignment of responsibilities :-
It involves selection of suitable persons to take charge of activities to be performed at each
work point. Also the tasks to be performed by each member or group should be clearly
defined.
3. Delegation of authority :-
Along with the assignment of duties, there should be proper delegation of authority. It would
be unrealistic to expect an individual to perform his job well if he lacks the authority to
secure performance from his subordinates.
4. Selecting right men for right jobs :-
Before assigning a particular task to an individual, his technical competence, interests, and
aptitude for the job should be tested. If the individual concerned lacks the technical ability to
do his job he can not performed it to the best of his ability.
5. Providing right environment :-
It involves provision of physical means like machines, furniture, stationary etc. and
generation of right atmosphere in which employee can perform their respective tasks. Key
Element of Organization process
The following are the key elements in the process of organization 1) Departmentation 2)
Delegation and 3) Decentralization.
Principles of organization

The structure of the organization should be designed such that I achieves the stated goals. The
basic principles of an organization are:

1. Objectives :-
The objective of an organization are decisive in the determination of its structure. Does it
plan to produce a single product to begin with, and then go on adding to its product-line as
the financial resources permit? Does it want to produce quality product? Does it plan to retain
customer good will by providing after sales services? All these questions will influence the
organization structure.
2. Unity of command :-
The unity of command stipulates that each is responsible to only one superior. If a
subordinates is made to follow the orders from more than one boss, he will be in a
perpetual dilemma and not knowing whose orders should be carried out first, how to allocate
his time between different bosses, so as to satisfy them all and displease none, and what to do
in case of conflicting orders.
3. Span of control :-
The span of control refers to the number of subordinate managers reporting to a single senior
manager stationed above them in the management pyramid. The span of control should be
legitimate (neither too wide nor too narrow) without split in the line of control.
6.Directing
It is that part of managerial function which actuates the organizational methods to work
efficiently for achievement of organizational purposes. It is considered life-spark of the
enterprise which sets it in motion the action of people because planning, organizing and
staffing are the mere preparations for doing the work. Direction is that inert-personnel aspect
of management which deals directly with influencing, guiding, supervising, motivating sub-
ordinate for the achievement of organizational goals.
Direction has following elements:
• Supervision
• Motivation
• Leadership
• Communication
(i) Supervision- implies overseeing the work of subordinates by their superiors. It is the
act of watching & directing work & workers.
(ii) Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal
to work. Positive, negative, monetary, non-monetary incentives may be used for this
purpose.
(iii) Leadership- may be defined as a process by which manager guides and influences
the work of subordinates in desired direction.
(iv) Communications- is the process of passing information, experience, opinion etc from
one person to another. It is a bridge of understanding.
 7.Motivation
Motivation can be defined as stimulating, inspiring and inducing the employees to perform to their best
capacity.

Process of Motivation

 Unsatisfied need. Motivation process begins when there is an unsatisfied need in a human being.
 Tension. The presence of unsatisfied need gives him tension.
 Drive. This tension creates an urge of drive in the human being an he starts looking for various
alternatives to satisfy the drive.
 Search Behavior. After searching for alternatives the human being starts behaving according to chosen
option.
 Satisfied need. After behaving in a particular manner for a long time then he evaluates that whether the
need is satisfied or not.
 Reduction of tension. After fulfilling the need the human being gets satisfied and his tension gets
reduced.

Types of Motivation

 Achievement Motivation: It is the drive to pursue and attain goals. An individual with achievement
motivation wishes to achieve objectives and advance up on the ladder of success. Here, accomplishment
is important for its own shake and not for the rewards that accompany it. It is similar to ‘Kaizen’
approach of Japanese Management.
 Affiliation Motivation: It is a drive to relate to people on a social basis. Persons with affiliation
motivation perform work better when they are complimented for their favorable attitudes and co-
operation.
 Competence Motivation: It is the drive to be good at something, allowing the individual to perform
high quality work. Competence motivated people seek job mastery, take pride in developing and using
their problem-solving skills and strive to be creative when confronted with obstacles. They learn from
their experience.
 Power Motivation: It is the drive to influence people and change situations. Power motivated people
wish to create an impact on their organization and are willing to take risks to do so.
 Attitude Motivation: Attitude motivation is how people think and feel. It is their self confidence, their
belief in themselves, their attitude to life. It is how they feel about the future and how they react to the
past.
 Incentive Motivation: It is where a person or a team reaps a reward from an activity. It is “You do this
and you get that”, attitude. It is the types of awards and prizes that drive people to work a little harder.
 Fear Motivation: Fear motivation coercion’s a person to act against will. It is instantaneous and gets the
job done quickly. It is helpful in the short run.

8 Ordering

Ordering in management is a crucial function within the organizing aspect of management. It involves the
proper arrangement and allocation of resources, such as personnel, materials, and machinery, to ensure that tasks
are performed efficiently and effectively. Here’s an in-depth look at the concept of ordering in management, its
importance, and how it is implemented:

Definition and Importance

Ordering refers to the systematic arrangement and assignment of tasks and resources to achieve organizational
objectives. It is essential because:
 1. Efficiency: Proper ordering ensures that resources are used optimally, reducing waste and improving
productivity.
2. Coordination: It facilitates coordination among various departments and individuals, ensuring that
everyone works towards common goals.
3. Accountability: Clear ordering assigns specific responsibilities, making it easier to track performance
and accountability.
4. Smooth Operations: It ensures that there is a smooth flow of operations, with each component of the
organization functioning in harmony.

Steps Involved in Ordering

1. Identifying Tasks: The first step is to identify and define the tasks that need to be performed. This
involves breaking down organizational goals into manageable activities.
2. Allocating Resources: Assign the necessary resources (human, financial, material) to each task. This
includes determining the quantity and quality of resources required.
3. Assigning Responsibilities: Designate specific individuals or teams responsible for carrying out each
task. This includes defining roles and expectations.
4. Setting Priorities: Determine the sequence in which tasks should be performed. Prioritization is crucial
to ensure that critical tasks are completed first.
5. Establishing Procedures: Develop procedures and guidelines to be followed in performing tasks. This
ensures consistency and quality in task execution.
6. Implementing Controls: Establish control mechanisms to monitor progress and ensure that tasks are
performed as planned. This includes setting performance standards and metrics.

Types of Ordering in Management

1. Material Ordering: Involves the procurement and allocation of materials required for production or
operations. This includes inventory management and supply chain coordination.
2. Task Ordering: Refers to the scheduling and sequencing of tasks and activities. This ensures that tasks
are performed in the correct order and within the set timelines.
3. Human Resource Ordering: Involves the assignment and organization of personnel. This includes
defining roles, assigning tasks, and managing team dynamics.
4. Financial Ordering: Refers to the allocation and management of financial resources. This includes
budgeting, financial planning, and expenditure tracking.

Challenges in Ordering

 Resource Constraints: Limited resources can make it challenging to allocate them optimally across
tasks.
 Complexity: Large organizations with complex operations can find it difficult to maintain clear and
effective ordering.
 Change Management: Adapting to changes in the external and internal environment can disrupt
established ordering systems.
 Communication: Ensuring clear and effective communication across the organization is crucial for
successful ordering.

9 Supervision

Supervision refers to the process by which managers oversee the activities and performance of their
subordinates to ensure that tasks are completed correctly, efficiently, and in alignment with
organizational goals. Effective supervision involves various responsibilities and practices, including
Guidance and Support, Monitoring Performance, Feedback and Coaching, Problem Solving,
Motivation, and Communication.
supervision in two ways:
1. Supervision as an element of Directing: Supervision means overseeing the subordinates at work and
guiding and instructing them to achieve the goals of the organisation. As supervision is an element of
directing, every manager supervises his subordinates.
2. Supervision as a function performed by Supervisors: A supervisor is a vital link between workers
and management. He is directly responsible for issuing orders and instructions. He guides, trains, and
inspires workers to accomplish goals. He also coveys workers’ suggestions and grievances
to management.
Importance or Roles of Supervision
Supervision is a critical function in business management, playing a vital role in the success and growth of an
organization. Here are the key reasons why supervision is important:
1. Interpersonal Contact with Workers: Day-to-day contact and friendly relations with the workers is
maintained by the supervisor. He acts as a guide, friend and philosopher to the workers.
2. Link between Workers and Management: A supervisor acts as a link between workers and
management. He communicates managerial policies and decisions to the workers and conveys workers’
suggestions, ideas, complaints and grievances to the management. Supervisor helps to avoid
misunderstandings and conflicts between the management and workers.
4. Promotes Group Unity: A supervisor helps in maintaining group unity amongst the subordinates. He
sorts internal differences among the workers and follows a people-oriented approach to build and maintain
harmonious relations in the organisation.
5. Helps in Improving Performance: Supervision helps in inspiring and guiding workers to achieve
organisational goals. As a supervisor is in direct contact with the workers, he is in better condition to improve
the performance of the workers. He motivates them to work hard and improve their productivity by using
both financial and non-financial incentives.
6. Provides Training to Employees: Supervisors provide on-the-job training to new and existing employees
to make an efficient team of workers. They instruct, suggest, criticise, and guide the employees, which makes
them efficient and reduces accidents and wastage of resources in the workplace.
7. Influences Workers: Supervisor influences the workers by inspiring them to cooperate and contribute to
the best of their ability. A supervisor can build up higher morale of the employees through
effective leadership.
8. Provides Feedback: A supervisor evaluates the performance of the workers as per the pre-determined
standards. By measuring the actual performances, the weakness of the employees is identified. The supervisor
provides feedback and corrective measures are taken by the supervisors and subordinates to improve the
performance.
 10 Leading

Leading, in the context of management and organizations, refers to the process of influencing and guiding
individuals or groups towards achieving common goals. It involves several key aspects:

1. Setting Direction: Leaders define a clear vision and establish goals for their team or organization. This
involves outlining what needs to be accomplished and why it is important.
2. Inspiring and Motivating: Effective leaders inspire and motivate their team members to work towards
the established goals. They communicate the vision in a compelling way, aligning individual aspirations
with organizational objectives.
3. Decision Making: Leaders are responsible for making decisions that affect the direction and outcomes
of their teams or organizations. This includes strategic decisions about resource allocation, priorities, and
responding to challenges or opportunities.
4. Communication: Communication is essential in leadership. Leaders must convey their vision, goals,
expectations, and feedback clearly and effectively. They also listen actively to understand concerns,
gather input, and foster an environment of open communication.
5. Building Relationships: Leadership involves building positive relationships with team members,
stakeholders, and other relevant parties. This includes developing trust, showing empathy, and
understanding the needs and motivations of others.
6. Problem Solving: Leaders often face challenges and obstacles. They are responsible for analyzing
problems, developing solutions, and guiding their teams through difficult situations effectively.
7. Developing Others: A crucial aspect of leadership is developing the skills and capabilities of team
members. This involves providing opportunities for growth, offering constructive feedback, and
empowering individuals to take on new responsibilities.
8. Leading by Example: Leaders set the tone for the organization through their actions and behaviors.
They uphold values, demonstrate integrity, and serve as role models for ethical conduct and
professionalism.

Effective leadership combines these elements to create a positive and productive work environment, where
individuals are motivated to contribute their best efforts towards achieving shared goals. Leadership is not
limited to formal positions; anyone can demonstrate leadership qualities by taking initiative, influencing others
positively, and contributing to the success of their teams and organizations.

11 Communication

Communication is simply the act of transferring information from one place, person or group to another. Every
communication involves (at least) one sender, a message and a recipient. These include our emotions, the
cultural situation, the medium used to communicate, and even our location.

IMPORTANCE OF COMMUNICATION IN MANAGEMENT

1. Basis of Decision-Making and Planning: Communication is essential for decision-making and

planning. It enables the management to secure information without which it may not be possible to take
any decision. The quality of managerial decisions depends upon the quality of communication. Further,
the decisions and plans of the management need to be communicated to the subordinates. Without
effective communication, it may not be possible to issue instructions to others. Effective communication
helps in proper implementation of plans and policies of the management.

2.Smooth and Efficient Working of an Organisation:In the words of George R. Terry, “It serves as
the lubricant, fostering for the smooth operations of management process.” Communication makes
possible the smooth and efficient working of an enterprise. It is only through communication that the
management changes and regulates the actions of the subordinates in the desired direction.
3. Facilitates Co-Ordination: Management is the art of getting things done through others and this
objective of management cannot be achieved unless there is unity of purpose and harmony of effort.
Communication through exchange of ideas and information helps to bring about unity of action in the
pursuit of common purpose. It binds the people together and facilitates co-ordination.

4. Increases Managerial Efficiency: Effective communication increases managerial efficiency. It is

rightly said that nothing happens in management until communication takes place. The efficiency of
manager depends upon his ability to communicate effectively with the members of his organisation. It is
only through communication that management conveys its goals and desires, issues instructions and
orders, allocates jobs and responsibility and evaluates performance of subordinates.

5.Promotes Co-operation and Industrial Peace: Effective communication creates mutual

understanding and trust among the members of the organisation. It promotes co-operation between the
employer and the employees. Without communication, there cannot be sound industrial relations and
industrial peace. It is only through communication that workers can put in their grievances, problems and
suggestions to the management.

6. Helps in Establishing Effective Leadership: Communication is the basis of effective leadership.

There cannot be any leadership action without the effective communication between the leader and the
led. Communication is absolutely necessary for maintaining man to man relationship in leadership. It
brings the manager (leader) and the subordinates (led) in close contact with each other and helps in
establishing effective leadership.

7. Motivation and Morale: Communication is the means by which the behaviour of the subordinates is
modified and change is effected in their actions. Through communication workers are motivated to
achieve the goals of the enterprise and their morale is boosted. Although motivation comes from within
yet the manager can also motivate people by effective communication, e.g., proper drafting of message,
proper timing of communication and the way of communication, etc.

8. Increases Managerial Capacity: Effective communication increases managerial capacity too. A

manager is a human being and has limitations as to time and energy that he can devote to his activities.
He has to assign duties and responsibilities to his subordinates. Through communication, a manager can
effectively delegate his authority and responsibility to others and thus, increases his managerial capacity.

9. Effective Control: Managerial function of control implies the measurement of actual performance,
comparing it with standards set by plans and taking corrective actions of deviations, if any, to ensure
attainment of enterprise objectives according to preconceived and planned acts. Communication acts as a
tool of effective control. The plans have to be communicated to the subordinates, the actual performance
has to be measured and communicated to the top management and a corrective action has to be taken or
communicated so as to achieve the desired goals. All this may not be possible without an efficient
system of communication.

10. Job Satisfaction: Effective communication creates job satisfaction among employees as it increases
mutual trust and confidence between management and the employees. The gap between management and
the employees is reduced through the efficient means of communication and a sense of belongingness is
created among employees. They work with zeal and enthusiasm.

11. Democratic Management: Communication is also essential for democratic management. It helps to
achieve workers participation in management by involving workers in the process of decision-making. In
the absence of an efficient system of communication, there cannot be any delegation and decentralization
of authority.

12. Increases Productivity and Reduces Cost: Effective communication saves time and effort. It
increases productivity and reduces cost. Large- scale production involves a large number of people in the
organisation. Without communication, it may not be possible to work together in a group and achieve the
benefits of large-scale production. 13. Public Relations: In the present business world, every business
enterprise has to create and maintain a good corporate image in the society.
TYPES OF COMMUNICATION : FORMAL, INFORMAL,
INTERPERSONAL(VERBAL), NON-VERBAL COMMUNICATION

Communication can be characterized as Formal, Informal, Inter-personal and Non-verbal

communication:

1. Formal Communication

Formal communication means the communication which travels through the formally
established channels. In other words, communication which travels through the formal
chain of command or lines of hierarchy of authority is called the formal
communication. Under it, information is given through the formally designed channel
or network. It is designed, controlled and regulated by the management.
2. Informal Communication
Informal communication refers to the communication which takes place on the basis
of informal relations between the members of a group. It is personal communication
in nature and not a positional communication. It does not flow along with the formal
lines of authority or formal chain of command. Even it is not regulated by the formal
rules and procedures. Normally, members of informal group use this form of
communication in order to share their ideas, views, opinions and other information.
There is lack of official instruction for communication. It is not controlled and
designed by formal organizational structure. So, it is not used to communicate formal
message.
3. Inter-personal Communication (Verbal Communication)
Inter-personal communication is the sharing of information between two or more
people face-to-face through any other direct channel. Since communicating parties get
face-to-face, so it is two-way communication. Very simply, manager or supervisors
give direction and guidance to their subordinates in their presence is the common
example of inter-personal communication. Inter-personal communication can be oral
or written.
4. Non-Verbal Communication
Communication through postures or gestures of body parts is known as the gestural or
non-gestural or non-verbal communication. It is a mode of communication in which
anything other than words may be used to transmit message from one person to
another. In other words, the communication of information by means of facial
expression, body movement, physical contact, gestures, etc. is called non-verbal
communication. It is the communication in which neither written nor oral means are
used. It is often used to encourage the subordinates like shaking hands, blinking eyes,
smiling, clapping etc. It is most powerful means of communication. Good managers
always use this type of communication frequently whenever necessary.

12 CONTROLLING
Controlling can be defined as that function of management which helps to seek
planned results from the subordinates, managers and at all levels of an organization.
The controlling function helps in measuring the progress towards the organizational
goals & brings any deviations, & indicates corrective action.

IMPORTANCE OF CONTROLLING
After the meaning of control, let us see its importance. Control is an indispensable
function of management without which the controlling function in an organization
cannot be accomplished and the best of plans which can be executed can go away. A
good control system helps an organization in the following ways:
1. Accomplishing Organizational Goals
The controlling function is an accomplishment of measures that further makes
progress towards the organizational goals & brings to light the deviations, &
indicates corrective action. Therefore it helps in guiding the organizational goals
which can be achieved by performing a controlling function.
2. Judging Accuracy of Standards
A good control system enables management to verify whether the standards set are
accurate & objective. The efficient control system also helps in keeping careful and
progress check on the changes which help in taking the major place in the
organization & in the environment and also helps to review & revise the standards in
light of such changes.
3. Making Efficient use of Resources
Another important function of controlling is that in this, each activity is performed in
such manner so an in accordance with predetermined standards & norms so as to
ensure that the resources are used in the most effective & efficient manner for the
further availability of resources.
4. Improving Employee Motivation
Another important function is that controlling help in accommodating a good control
system which ensures that each employee knows well in advance what they expect &
what are the standards of performance on the basis of which they will be appraised.
Therefore it helps in motivating and increasing their potential so to make them &
helps them to give better performance.
5. Ensuring Order & Discipline
Controlling creates an atmosphere of order & discipline in the organization which
helps to minimize dishonest behavior on the part of the employees. It keeps a close
check on the activities of employees and the company can be able to track and find
out the dishonest employees by using computer monitoring as a part of their control
system.
6.Facilitating Coordination in Action
The last important function of controlling is that each department & employee is
governed by such predetermined standards and goals which are well versed and
coordinated with one another. This ensures that overall organizational objectives are
accomplished in an overall manner.

Process of Controlling
 Establishing standards: This means setting up of the target which needs to be
 achieved to meet organisational goals eventually. Standards indicate the criteria of
performance. Control standards are categorized as quantitative and qualitative
standards. Quantitative standards are expressed in terms of money. Qualitative
standards, on the other hand, includes intangible items.
 Measurement of actual performance: The actual performance of the employee is
measured against the target. With the increasing levels of management, the
measurement of performance becomes difficult.
 Comparison of actual performance with the standard: This compares the degree
of difference between the actual performance and the standard.
 Taking corrective actions: It is initiated by the manager who corrects any defects
in actual performance. Controlling process thus regulates companies’ activities so that
actual performance conforms to the standard plan. An effective control system
enables managers to avoid circumstances which cause the company’s loss.

TYPES OF CONTROL
There are three types of control viz.,
1. Feedback Control: This process involves collecting information about a finished
task, assessing that information and improvising the same type of tasks in the future.
2. Concurrent control: It is also called real-time control. It checks any problem and
examines it to take action before any loss is incurred. Example: control chart.
3. Predictive/ feed forward control: This type of control helps to foresee problem
ahead of occurrence. Therefore action can be taken before such a circumstance arises.

14 Importance of financial statements

Financial Statements Meaning

Financial statements are the statements that present an actual view of the financial
performance of an organization at the end of a financial year. It represents a formal record of
financial transactions taking place in an organization. These statements help the users of the
information in determining the financial position, liquidity and performance of the
organization.

Uses of Financial Statements

Following are some of the uses of financial statements:

1. Determine the financial position of the business: The most important use of the
financial statements is to provide information about the financial position of the
business on a given date. This piece of information is used by various stakeholders in
order to take important decisions regarding the business.
2. To obtain credit: Financial statements present the picture of the business to the
potential lenders and this information can be used by them to provide additional credit
for business expansion or restrict the credit so as to start recovery.
 3. Helps investors in decision making: Financial statements contain all the essential
information required by the potential investors for determining how much they want
to invest in the business. It is also helpful in decision making regarding the price per
share that the investors want to invest. A sound financial statement is the key to
obtaining investments.
4. Helps in policy making: The financial statements help the government in deciding
the taxation and regulations policies based on the way the company is running its
operations. The government bodies can tax a business based on the level of their
income and assets.
5. Useful for stock traders: Financials statements help stock traders with the
knowledge of the situation the company is in and therefore adjusting their quotes
accordingly.

Importance of Financial Statement

The significance of financial statements prevails in their service to persuade the diverse
interests of distinct classes of parties such as creditors, public, management, etc.,

 Importance to Management: Increase in size and intricacies of aspects influencing

the business functions requires scientific and strategic access in the management of
contemporary trading concerns. The management team needs up to date, precise and
methodical financial data for the intentions. Financial statements assist the
management in comprehending the progress, prospects, and position of the business
counterpart in the industry.
 Importance to the Shareholders: Management is detached from control in the case
of companies. Shareholders cannot take part in the day-to-day business pursuits.
However, the outcome of these pursuits should be disclosed to shareholders during
the annual general body meeting in the form of financial statements.
15 Liquidity ratios

Liquidity is a very critical part of a business. Liquidity is required for a business to meet its
short term obligations. Liquidity ratios are a measure of the ability of a company to pay off its
short-term liabilities.

Liquidity ratios determine how quickly a company can convert the assets and use them for
meeting the dues that arise. The higher the ratio, the easier is the ability to clear the debts and
avoid defaulting on payments.

This is a very important criterion that creditors check before offering short term loans to the
business. An organisation which is unable to clear dues results in creating impact on the
creditworthiness and also affects credit rating of the company.
Types of Liquidity Ratio

There are following types of liquidity ratios:

1. Current Ratio or Working Capital Ratio

2. Quick Ratio also known as Acid Test Ratio
3. Cash Ratio also known Cash Asset Ratio or Absolute Liquidity Ratio
4. Net Working Capital Ratio
Let us know more in detail about these ratios.

Current Ratio or Working Capital Ratio

The current ratio is a measure of a company’s ability to pay off the obligations within the
next twelve months. This ratio is used by creditors to evaluate whether a company can be
offered short term debts. It also provides information about the company’s operating cycle. It
is also popularly known as Working capital ratio. It is obtained by dividing the current assets
with current liabilities.

Current ratio is calculated as follows:

Current ratio = Current Assets / Current Liabilities

A higher current ratio around two(2) is suggested to be ideal for most of the industries while
a lower value (less than 1) is indicative of a firm having difficulty in meeting its current
liabilities.

Quick Ratio or Acid Test Ratio

Quick ratio is also known as Acid test ratio is used to determine whether a company or a
business has enough liquid assets which are able to be instantly converted into cash to meet
short term dues. It is calculated by dividing the liquid current assets by the current liabilities

It is represented as

Quick Ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities

The ideal quick ratio should be one(1) for a financially stable company.

Cash Ratio or Absolute Liquidity Ratio

Cash ratio is a measure of a company’s liquidity in which it is measured whether the

company has the ability to clear off debts only using the liquid assets (cash and cash
equivalents such as marketable securities). It is used by creditors for determining the relative
ease with which a company can clear short term liabilities.

It is calculated by dividing the cash and cash equivalents by current liabilities.

Cash ratio = Cash and equivalent / Current liabilities

Net Working Capital Ratio

The net working capital ratio is used to determine whether a company has sufficient cash or
funds to continue its operations. It is calculated by subtracting the current liabilities from the
current assets.

Net Working Capital Ratio = Current Assets – Current Liabilities

Liquidity Ratio Formula

Here are the important liquidity ratio formulas in a tabular format.

Liquidity Ratios Formula

Current Ratio Current Assets / Current Liabilities

Quick Ratio (Cash + Marketable securities + Accounts receivable) / Current liabilities

Cash Ratio Cash and equivalent / Current liabilities

Net Working Capital Ratio Current Assets – Current Liabilities

Importance of Liquidity Ratio

Here are some of the importance of liquidity ratios:

1. It helps understand the availability of cash in a company which determines the short
term financial position of the company. A higher number is indicative of a sound
financial position, while lower numbers show signs of financial distress.
2. It also shows how efficiently the company is able to convert inventories into cash. It
determines the way a company operates in the market.
3. It helps in organising the company’s working capital requirements by studying the
levels of cash or liquid assets available at a certain time.
16 Leverage ratios
Leverage ratio is one of the most important of the financial ratios as it determines how much
of the capital that is present in the company is in the form of debts. It also analyses how the
company is able to meet its obligations.

Leverage ratio becomes more critical as it analyzes the capital structure of the company and
the way it can manage its capital structure so that it can pay off the debts.

Let us look at some of the leverage ratios that are generally used

There are two broad types of leverage ratios which are:

1. Capital Structure Ratio

2. Coverage Ratio

Capital Structure Ratio

Capital structure ratio is used to determine the financing strategy that is used so that the
company can focus on the long term solvency.

The ratios that fall under the capital structure ratio are:

i. Equity Ratio

ii. Debt Ratio

iii. Debt to equity ratio

i. Equity ratio

This is used to calculate the amount of assets that are funded by the owners investments. It
shows what portion of the assets of the company is being financed by investors and how
much leveraged a company is by using debt.

It is calculated as follows

Equity Ratio = Total Equity/ Total Assets

Or it can be calculated as

Equity Ratio = Shareholder Equity/ Total Capital Employed

A higher equity ratio shows to potential investors that existing investors have trust in the
company and are willing to invest further in the company.
ii. Debt Ratio

Debt ratio is a type of financial ratio that is useful in calculating the extent of financial
leverage a firm is utilising. It is represented in percentage and is very useful in understanding
the proportion of assets which are financed by debt.

The formula for calculating debt ratio is

Debt Ratio = Total Debt / Total Assets

Where total debt = Short Term and Long Term Borrowings, Debentures and Bonds

A higher debt ratio is usually an indicator of high financial risk but many firms use high debts
to generate more business. If the profit earned from using the debt is more than the interest
needed for repaying the debt, it is said to be profitable for the business.

iii. Debt to Equity Ratio

This ratio calculates the proportion of debt and equity that a company uses for funding the
operations of the business. It is an important financial ratio that shows how a company is
funding its operations.

It is calculated by the following formula

Debt to equity ratio = Total Debt/ Shareholders Fund

Or

Debt to equity ratio = Total Liabilities / Total Shareholders equity.

D/E ratio or Debt to equity ratio is different for different kinds of industries. It is more in
companies requiring high amounts of debt.

Coverage Ratios

Coverage ratios determine the ability of a company to meet its debt obligations which include
interest payments or dividends. A higher coverage ratio makes it easier for a business to pay
off the dividends and interest payments.

Let us discuss the types of coverage ratios here

i. Debt Service Coverage Ratio

ii. Interest coverage ratio

iii. Capital gearing ratio

i. Debt service coverage ratio or DSCR

Debt service coverage ratio is used in corporate finance to determine the cash flow available
to business which can be used for clearing off the current debt obligations which are in the
form of interest payments or dividends or sinking funds etc.

It is calculated by the following formula

Debt service coverage ratio = Net Operating Income / Total Debt Service

Where Total Debt service is the current debt obligations that a company owes.

A ratio of 1.5 to 2 is regarded as an idea ratio for a company while a value which is less than
1 is indicative of a negative cash flow which makes a company more vulnerable to being
unable to clear current debt obligations.

ii. Interest Coverage Ratio

Interest coverage ratio is a financial ratio that is used by investors to determine how easily a
company is able to clear off the interest. It is calculated by dividing a company’s EBIT which
refers to Earnings before Interest and Taxes by interest payments that are due in the current
accounting period.

It is shown as

Interest Coverage Ratio = EBIT / Interest Due

It is a margin of safety that a company should have for paying its debts within the given
accounting period.

iii. Capital Gearing Ratio

Capital gearing ratio is a critical ratio that helps in evaluating the financial health of the
company. This ratio calculates the capital structure of the company and analyses the
proportion of debts and equity. Debt is a low cost option but will put more burden as a
liability in the financial statements of the company.

Capital gearing ratio ratio measures the impact that debt has on the company’s capital
structure.

It can be calculated by the following formula

Capital gearing ratio = Common stock-holders equity / Fixed cost bearing funds

17 Turnover ratios

Turnover ratios are essential financial metrics that measure how efficiently a company
utilizes its assets, such as inventory and receivables, to generate sales. High turnover ratios
typically indicate effective management and robust operational health. It’s essential for
assessing a company's financial efficiency and performance.

Types of Turnover Ratios

Inventory Turnover Ratio

The inventory turnover ratio is also known as Stock turnover ratio. It measures how often a
company sells and replaces its stock over a certain period, typically a year. It assesses a
business's efficiency in managing its inventory.

A higher ratio indicates that a company effectively sells its inventory quickly, suggesting
good demand and efficient stock management, while a lower ratio may indicate overstocking
or sluggish sales.

Formula of Inventory Turnover Ratio

Stock/Inventory Turnover Ratio= Cost of Goods Sold/ Average Inventory

Example:

Consider a clothing retailer in India with a Cost of Goods Sold (COGS) of ₹1,200,000 over
the past year and an average inventory value of ₹300,000. To find the inventory turnover
ratio, you divide the COGS by the average inventory:

Inventory Turnover Ratio= 1,200,000/ 300,000

=4

This calculation shows that the retailer sold and replenished its inventory four times during
the year. Hence, it indicates active inventory management and sales efficiency.

Asset Turnover Ratio

The asset turnover ratio measures how efficiently a company uses its assets to generate
revenue. It's calculated by dividing total revenue by average total assets. A higher ratio
indicates effective use of assets, showing that the company is generating more sales per unit
of asset.

This ratio is crucial for comparing the performance of companies with substantial asset
investments.

Formula of Asset Turnover Ratio

The asset turnover ratio is calculated using the formula:

Asset Turnover Ratio=Total Revenue/Average Total Assets

Example: If a company has total revenue of ₹500,000 and average total assets of ₹250,000,
the asset turnover ratio would be:

Asset Turnover Ratio=500,000/ 250,000

=2

This indicates that the company generates ₹2 in sales for every ₹1 of assets employed,
demonstrating effective asset utilization.

Debtors Turnover Ratio

The debtors' turnover ratio, also known as the receivables turnover ratio, measures how
efficiently a company collects debts from its customers. It is calculated by dividing total
credit sales by the average accounts receivable. A higher ratio indicates quicker collection of
receivables, suggesting efficient credit and collection processes, while a lower ratio may
indicate slower collections.

Formula of Debtors Turnover Ratio

The asset turnover ratio is calculated with the formula:

Asset Turnover Ratio=Total Revenue/Average Total Assets

Example: An Indian company with a total revenue of ₹800,000 and average total assets of
₹400,000 would have an asset turnover ratio of

Asset Turnover Ratio= 800,000/ 400,000

=2

This indicates that for every rupee of assets, the company generates ₹2 in sales, reflecting
efficient use of assets.

Significance of Turnover Ratios

Turnover ratios are critical financial metrics that help stakeholders understand various aspects
of a company's operational efficiency. Here are the key points of significance for turnover
ratios:

Efficiency Evaluation: Turnover ratios provide insight into how well a company uses its
assets to generate revenue. High turnover ratios typically indicate efficient resource use,
while lower ratios may suggest inefficiencies or underutilization.
Performance Comparison: These ratios allow for comparisons within a company over
different periods and with other companies in the same industry. This helps in benchmarking
against peers and identifying potential areas for improvement.

Financial Health Assessment: Turnover ratios can be indicators of a company’s financial

health. For example, high inventory and receivables turnover ratios suggest good sales and
efficient collections respectively, which are crucial for maintaining cash flow and
profitability.

Operational Insights: Different turnover ratios can give specific insights into various
operational areas like inventory management, credit policies, and asset utilization. This can
guide strategic decisions such as whether to tighten credit terms or optimize inventory levels.

Investor Decisions: Investors use turnover ratios to assess a company's viability and
profitability. Efficient turnover can be a sign of strong management and operational
effectiveness, which are positive indicators of investment.

Credit Analysis: Lenders often evaluate a company's turnover ratio to determine its ability to
turn resources into cash, which is crucial for loan repayment. Higher turnover ratios can make
a company more creditworthy.

18 Profitability ratios
Profitability ratios are a type of accounting ratio that helps in determining the financial
performance of business at the end of an accounting period. Profitability ratios show how
well a company is able to make profits from its operations.

Let us now discuss the types of profitability ratios.

Types of Profitability Ratios

The following types of profitability ratios are discussed for the students of Class 12
Accountancy as per the new syllabus prescribed by CBSE:

1. Gross Profit Ratio

2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment (ROI)
6. Return on Net Worth
7. Earnings per share
8. Book Value per share
9. Dividend Payout Ratio
10. Price Earning Ratio
Gross Profit Ratio

Gross Profit Ratio is a profitability ratio that measures the relationship between the gross
profit and net sales revenue. When it is expressed as a percentage, it is also known as the
Gross Profit Margin.

Formula for Gross Profit ratio is

Gross Profit Ratio = Gross Profit/Net Revenue of Operations × 100

A fluctuating gross profit ratio is indicative of inferior product or management practices.

Operating Ratio

Operating ratio is calculated to determine the cost of operation in relation to the revenue
earned from the operations.

The formula for operating ratio is as follows

Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/

Net Revenue from Operations ×100

Operating Profit Ratio

Operating profit ratio is a type of profitability ratio that is used for determining the operating
profit and net revenue generated from the operations. It is expressed as a percentage.

The formula for calculating operating profit ratio is:

Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100

Or Operating Profit Ratio = 100 – Operating ratio

Net Profit Ratio

Net profit ratio is an important profitability ratio that shows the relationship between net
sales and net profit after tax. When expressed as percentage, it is known as net profit margin.

Formula for net profit ratio is

Net Profit Ratio = Net Profit after tax ÷ Net sales

Or
Net Profit Ratio = Net profit/Revenue from Operations × 100

It helps investors in determining whether the company’s management is able to generate

profit from the sales and how well the operating costs and costs related to overhead are
contained.

Return on Capital Employed (ROCE) or Return on Investment (ROI)

Return on capital employed (ROCE) or Return on Investment is a profitability ratio that

measures how well a company is able to generate profits from its capital. It is an important
ratio that is mostly used by investors while screening for companies to invest.

The formula for calculating Return on Capital Employed is :

ROCE or ROI = EBIT ÷ Capital Employed × 100

Where EBIT = Earnings before interest and taxes or Profit before interest and taxes

Capital Employed = Total Assets – Current Liabilities

Return on Net Worth

This is also known as Return on Shareholders funds and is used for determining whether the
investment done by the shareholders are able to generate profitable returns or not.

It should always be higher than the return on investment which otherwise would indicate that
the company funds are not utilised properly.

The formula for Return on Net Worth is calculated as :

Return on Shareholders’ Fund = Profit after Tax / Shareholders’ Funds × 100

Or Return on Net Worth = Profit after Tax / Shareholders’ Funds × 100

Earnings Per Share (EPS)

Earnings per share or EPS is a profitability ratio that measures the extent to which a
company earns profit. It is calculated by dividing the net profit earned by outstanding shares.

The formula for calculating EPS is:

Earnings per share = Net Profit ÷ Total no. of shares outstanding

Having higher EPS translates into more profitability for the company.
Book Value Per Share

Book value per share is referred to as the equity that is available to the the common
shareholders divided by the number of outstanding shares

Equity can be calculated by:

Equity funds = Shareholders funds – Preference share capital

The formula for calculating book value per share is:

Book Value per Share = (Shareholders’ Equity – Preferred Equity) / Total Outstanding
Common Shares.

Dividend Payout Ratio

Dividend payout ratio calculates the amount paid to shareholders as dividends in relation to
the amount of net income generated by the business.

It can be calculated as follows:

Dividend Payout Ratio (DPR) : Dividends per share / Earnings per share

Price Earning Ratio

This is also known as P/E Ratio. It establishes a relationship between the stock (share) price
of a company and the earnings per share. It is very helpful for investors as they will be more
interested in knowing the profitability of the shares of the company and how much profitable
it will be in future.

P/E ratio is calculated as follows:

P/E Ratio = Market value per share ÷ Earnings per share

It shows if the company’s stock is overvalued or undervalued.

19 Agro-based industries

Agro-based industries refer to those industries which use agricultural products as raw
materials for manufacturing. Agro-based industries are mostly consumer-based, as the
products manufactured with the help of these industries are sold directly to the customers.
In India, agro-based industries are made of the textile, sugar, newspaper, and vegetable oil
industries. Agricultural products are used as the raw materials in these types of businesses.
Types of Agro-based Industries
In Agro-based industries, there are mainly four types: agro-produced processing units,
agro-inputs manufacturing units, agro produce manufacturing units, and agro-service
centers. They are explained below:
1. Agro-Produce Processing Units: These industries are concerned with the processing
of agro-based raw materials and preserving them for later use and are concerned with
utilizing by-products for agricultural raw materials.
2. Agro-Produce Manufacturing Units: This agro-based industry is used for
manufacturing raw materials and the finished goods after the manufacturing process are
completed are different from that of the used raw material.
3. Agro Inputs Manufacturing Units: The products which are manufactured in this type
of industry are used as inputs for the improvement of agricultural production.
4. Agro Service Centers: These service centers are mostly concerned with the repair and
servicing of all the farm-related equipment and are part of the agro-based industries as
they deal specifically with agro equipment.
Examples of Agro Based Industry
Agro-based industries are of different types and operate in many ways. All the types of
industries have the commonality that all use agricultural produce as raw materials. A few
examples are listed below:

Type of Industry Examples

Agro-Produce Processing Units Dal and Rice processing mills

Agro Produce Manufacturing Units Sugar factory, textile factory, and bakery

Agro Inputs Manufacturing Units Fertilizers, pesticides, and tools

Agro Service Centers Service as well as repair farming equipment

such as tractors, diesel engines, etc.

Agro-Based Industries in India

In India, many agro-based industries cater to the best manufactured and processed
agricultural products for the final customer. Some of the prominent agro-based industries in
India include the following:

Agriculture-Based Industries in India

Textile made of cotton Vegetable Oil Industry

 Agriculture-Based Industries in India

Textile made of silk The textile industry made of jute

Textiles made of wool Tea and Cotton Industry

Fibers made of synthetic materials Leather Goods Industry

Agro-Based Industries in India- Overview

Roughly 18 percent of the GDP in India is provided by agro-based industries and according
to a recent survey, about 42 percent of the population in India depends on agriculture for
livelihood. Some important agro-based industries of the country are listed below:
Textile Manufacturing
Textile manufacturing plays a very important role in the economy of India and makes a
significant contribution to the agro-based industries in India, for employment generation
and foreign exchange. It provides for around 4 percent of the GDP of the country. The
industry is self-sufficient and comprehensive throughout the value chain, from raw
materials to the highest value-added products.
Cotton Textile
Cotton textiles from ancient times were made using hand spinning as well as handloom
weaving techniques. Traditional cotton textiles hit a setback during colonial times as they
were not able to compete with England’s mill-made textiles. At present, there are about
1600 cotton and human-made fiber textile factories in India.
The private sector accounts for over 80 percent of the total, while the public and
cooperative sectors made up the remaining 20 percent. Many small agro-based industries
are present in India with about four to ten looms each. Initially, cotton textile
manufacturing was concentrated in Maharashtra and Gujarat cotton-growing belt.
Sugar Industry
India stands in second position worldwide for the production of sugar, but it is the largest
producer of jaggery. The raw materials which are used in the sugar industry are heavy and
their sucrose concentration tends to decrease during transportation.
Uttar Pradesh, Bihar, Mumbai, Andhra Pradesh, Punjab, Gujarat, Haryana, Madhya
Pradesh, and Karnataka have over 460 sugar mills, and Uttar Pradesh along with Bihar
accounts for 60 percent of all mills. Due to its seasonality, it is most suited as a cooperative
venture.
Jute Textile
India is the largest producer of raw jute and jute products worldwide and the second-largest
exporter of jute after Bangladesh. Around 70 jute mills are present in India and the majority
of these jute mills lie in West Bengal, mostly on the banks of the Hugli River.
Hugli is an important site for jute textiles because of several factors, which include
proximity to jute-producing areas, low cost for water transportation which is backed by a
decent connection of other means of transport like railways, roadways, and rivers and
streams for facilitating raw material movement to the mills. The abundance of water
required for raw jute processing and cheap labor from West Bengal and other neighboring
states play a pivotal role. Kolkata also provides banking, insurance, and port services for
the jute exports, which boosts its growth.
Indian Leather Industry
About 12.93 percent of the world’s hides and skins are produced by Indian Leather agro-
based industries, derived from cattle, pelts, large animals, and small animals like sheep.
Kanpur is well known in India for the leather industry and is noted for high-quality goods
production. A huge workforce is required which results in the generation of employment
for many young and skilled people in the country.
Project
Project planning and analysis has a long history in financial and business analysis. It has
always been used as a means of checking the profitability of a particular investment by
private firms. Recent experiences show that project analysis has attracted the attention of
development economists. Projects are now assessed from the economy‟s viewpoint instead of
only from the firm‟s perspective. The selection criteria have also included economic criteria
on top of financial criteria. Project planning and analysis is essentially a process of “seeking
alternative choices” to reach an agreed upon set of objectives in the most efficient manner.
Figure 1: The Project Concept

A project can also be viewed as a “Proposal for capital investment to create opportunities for
producing goods and services”.
Recently defined a development project as follows:
 “Project can be defined as an investment activity in which financial resources are expended
to create capital assets that produce benefits over an extended period of time.
 A project is a complex set of activities where resources are used in expectation of return
and which lends itself to planning, financing and implementing as a unit.
The linkage between projects and programs
 It is necessary to distinguish between projects and programs because there is
sometimes a tendency to use them interchangeably. A project is an investment activity where
resources are used to create capital assets, which produce benefits over time and has a
beginning and an end with specific objectives. A program is an ongoing development effort
or plan which may not necessarily be time bounded. E.g. a road development program, a
health improvement program, a nutritional improvement program, a rural electrification
program, etc.

A development plan is a general statement of economic policy. National development

plans are further disaggregated into a set of sectoral plans. A development plan or a program
is therefore a wider concept than a project. It may include one or several projects at various
times whose specific objectives are linked to the achievement of higher level of common
objectives. For instance, a health program may include a water project as well as a
construction of health centers both aimed at improving the health of a given community,
which previously lacked easy accessto these essential facilities. Projects, which are not linked
with others to form a program, are sometimes referred to as “stand alone” projects.
Perhaps the distinction between projects and programs would be clear if we see the basic
characteristics of projects. Projects in general need to be SMART.
S – Specific
 Specific in its objective.
 Specific activities.
 Specific group of benefits.
 Specific group of people.
M - Measurable Projects are designed in such a way that investment and production activities
and benefits expected should be identified and if possible be valued (expressed in monetary
terms) in financial, economic and if possible social terms. Though it is sometimes difficult to
value especially secondary costs and benefits of a project, attempt should be made to measure
them. Measure costs and benefits must lend themselves for valuation and general projects are
thought to be measurable.
A – Area bounded As projects have specific and identifiable group of beneficiaries, so also
have to have boundaries. In designing a project, its area of operation must clearly be
identified and delineated. Though some secondary costs and benefits may go beyond the
boundary, its major area of operation must be identified. Hence projects are said to be area
bounded.
R – Real Planning of a project and its analysis must be made based on real information.
Planner must make sure whether the project fits with real social, economic political,
technical, etc situations. This requires detail analysis of different aspects of a project.
T – Time bounded A project has a clear starting and ending point. The overall life of the
project must be determined. Moreover, investment and production activities have their own
time sequence. Every cost and benefit streams must be identified, quantified and valued and
be presented year-by-year.
Project cycle
A project moves through stages. An idea germinates; then it passes through various steps
which will clarify the concept; objectives and activities required to achieve the objectives; the
appraisal of the alternative options and actions; decision making; implementation;
monitoring; completion and final evaluation. The entire process from the first idea to the final
evaluation is called a project cycle, to indicate the phased or cyclical nature of this process.
In operational terms each stage in the project cycle can be understood as leading to a
decision point. The decision to be taken at the end of each stage is if the project should
continue to the next stage, and when it should continue. The various elements or stages in the
project cycle are shown in Figure 0.1 with feedback processes between each stage in the
cycle. The project cycle is thus interactive in nature.

Elements of the Project Cycle:

 Identification
 Preparation
 Appraisal (ex-ante analysis)
 approval/rejection
 Implementation
 investment period
 development period
 monitoring
 completion
 Evaluation (ex-post analysis) including impact assessment
Identification: The identification stage involves finding potentially fundable
projects. Sources include technical specialists, local leaders, proposals to extend existing
projects, rise in market price for products, projection of future demand, economic
development plans with priority areas, separate sector surveys of the current situation in
agriculture, and so on. In the case of agricultural and natural resources projects, the
diagnostic surveys and constraint analysis may result in the identification of priority problems
and research themes, which may lead to project development.
Preparation: Preparation can be broken into two parts depending on size and
complexity of the project. A pre-feasibility study focusing on qualitative and subjective
analysis, could provide enough information for deciding to proceed with a more detailed
analysis. During the pre-feasibility stage, the major objectives of the project are however
clearly defined. The question of whether alternative ways to achieve the same objective may
be preferable should explicitly be addressed and poor alternatives excluded. The analytical
aspects come into play at this stage, but often relying on existing and secondary sources of
data. Once the pre-feasibility study is done, detailed planning and analysis follows. With
large projects, the project may be prepared by a special team to include experts from the
analytical areas considered crucial. These steps involve lot of brainstorming and subjective
judgment. The analysis will include aspects described in the section of project modules (see
2.2). A so-called “screening” exercise during planning ensure that the project identified is
technically and economically viable, and compatible with the existing production systems,
resource use patterns, as well as the social and cultural beliefs of the target group.
Appraisal: After the report on the detailed analysis of all relevant project modules is
completed, a critical review and appraisal of all these aspects are conducted by an
independent team. This team re-examines every aspect regarding feasibility, soundness and
appropriateness. Agricultural Project Planning and Analysis 8 The team may recommend
further preparation work if some data are questionable or some of the assumptions are faulty.
Approval of a project triggers the required set of implementation actions.
Implementation: Implementation is a crucial part of the project cycle and, therefore,
requires equally rigorous analysis and planning in order to develop a realistic project
management plan. The implementation is usually subdivided into the following stages:
 Investment period – in an agricultural project usually 2-5 years from the start of a
project during which the major fixed investments are made, ie. dam and canal systems, most
staff is engaged, equipment procured, etc. The major benefits are expected to flow after this
stage.
 Development period follows investment.
  Monitoring of project activities as per the approved project and adjustments as
required keeping the project on tract.
 Completion or maturity of a project can be as long as 25 – 30 years from the start
during which periodic benefits and costs continue to accrue, and impacts are more apparent
and measurable.
Evaluation (And Impact Assessment): Evaluation involves measuring elements of
success and failure of the project. Evaluation can start from on-going monitoring, to after
completion of the project. Evaluation is usually done by an independent evaluation team.
Evaluation (or expost analysis) looks at the extent to which original objectives and
specifications are met, in other words:
 Technical appropriateness.
 Organisation/institution/management.
 Commercial undertaking.
 Financial aspects.
 Soundness of assumptions.
 Economic implications.
 Social and distributional issues.
Impact assessment goes beyond direct evaluation to look at the results of projects,
both intended and unintended, and the differences, positive and negative, on the position of
society that has been affected. The evaluation stage is usually used as “lessons-from-
experience” for future project planning and analysis.

Net benefit investment ratio (N/K ratio)

he Net Benefit Investment Ratio (N/K ratio) is a financial metric used in investment analysis
to evaluate the profitability of a capital investment or project. It is calculated by dividing the
net benefits (or net present value) of the investment by the initial investment cost (K).

Here's how it's typically defined and calculated:

N/K ratio=Net Benefits (NPV)/ Initial Investment Cost (K)

Key Components:

1. Net Benefits (NPV): This represents the difference between the present value of cash
inflows and outflows associated with the investment project. It takes into account the
time value of money, discounting future cash flows to their present values.
2. Initial Investment Cost (K): This is the upfront cost required to implement the
investment or project. It includes expenses such as equipment purchase, construction
costs, initial operating expenses, etc.

Interpretation:

 A N/K ratio greater than 1 indicates that the project is expected to generate positive
net benefits over its lifetime, meaning the benefits outweigh the costs.
  A N/K ratio less than 1 suggests that the project may not generate enough benefits to
cover the initial investment costs, indicating a potential loss or lower return on
investment.
 The higher the N/K ratio, the more financially attractive the investment is considered,
as it implies a higher return relative to the initial investment.

The N/K ratio is a useful tool for decision-making in capital budgeting and investment
appraisal, helping managers and investors compare different investment opportunities and
prioritize those with the highest potential for profitability.