ITB Notes

PRC-05
A Hand Book on
INTRODUCTION TO
BUSINESS
As Per New Education Scheme
Hafiz Junaid APFA, CA(F)

For CA PRC Level
9-A, Shershah Block, Garden Town, Lahore.
0331-6744442
1
Introduction to business
Table of Content
No. Chapter Page
No.
1 Nature of business 2
2 Ownership of Business 9
3 Organization of Business 17
4 Sources of Business Finance 22
5 Information System 34
6 Business Ethics 48
7 Marketingt Concepts 52
8 Human Resource Strategies 59
9 Business Operations of a manufecturing Organization 67
10 Industries of Pakistan 74
Exams Grid
No. Grid Name Chapter No. Marks/Weightage
1 Business Organization 1,2,3 25 to 35
2 Business Operation 5,7,8,9,10 35 to 50
3 Business Finance 4 15 to 25
4 Business Ethics 6 5 to 10
Total 100
Paper Pattern MCQ,s

Total Marks 100

2
Chapter 1
Nature of business
Business
A business is an organization that strives for profit by providing goods and services desired by its customers
Goods
Goods are tangible items that can be held, touched, or stored, manufactured or traded by businesses, such
as laptops.
Services
Services are intangible offerings of businesses that can’t be held, touched, or stored. Physicians, lawyers,
hairstylists, car washes, and airlines all provide services.
Standard of Living
The standard of living of any country is measured by the output of goods and services people can buy with
the money they have. This provides a basis for comparing standard of living among different countries.
Quality of life
Quality of life refers to the general level of human happiness based on such things as life expectancy,
educational standards, health, sanitation, and leisure time. Building a high quality of life is a combined
effort of businesses, government, and not-for-profit organizations (explained later
Measurement of Profitability
The profitability of a business can be measured through key variables such as revenue, costs, and profit.
Revenue
Revenue is the money a company receives by providing services or selling goods to customers.
Costs
Costs are expenses for rent, salaries, supplies, transportation, and many other items that a company incurs
from creating and selling goods and services.
There is a direct relationship between risks and profit: the greater the risks, the greater the potential for
profit (or loss).
Not-for-Profit Organizations
Not-for-profit organization is an organization that exists to achieve some goal other than the usual business
goal of profit
Purpose of a business
 The primary goal of all businesses is to earn a profit.
 Earning profits contributes to society by providing employment, which in turn provides money that
is reinvested in the economy
 Many businesses, for example, are concerned about how the production and distribution of their
products affect the environment

3
 In the strategic planning process, goals, objectives and strategies should be decided with the aim of
fulfilling the entity’s purpose. A business entity should have a hierarchy of aims and plans. A useful
way of presenting this is shown below
Vision (Future Outlook)
Vision Statement
 Really describes what an organization plans or hopes to be in the future
 This is more of an inspirational or motivational statement
 A vision statement shouldn't really discuss the present state of the organization but more what the
organization wants to be and how it wants to be viewed.
Effective Vision Statement

 To be effective the message should be clear, optimistic, and of course realistic.
 A well-written vision statement should be short, simple, specific to the business, leave nothing open
to interpretation.
Mission:
 A mission is the purpose of an organization and the reason for its existence
 A mission statement defines what an organization is, why it exists, and its reason for being.
 A mission describes the organization’s basic function in society, in terms of the products and
services it produces for its customers’ (Mintzberg).
 A mission statement has a more 'present day' focus and really describes how a company plans on
achieving its objectives.
 A mission statement has a more 'present day' focus and really describes how a company plans on
achieving its objectives.
 A statement of stakeholder
Effective Mission statement

A mission statement should be a clear and short statement. The key questions to answer in a mission
statement include:
 What is our business?
 What is our value to the customer?
 What will our business be?
 What should our business be?
 Some entities include a statement about the role of their employees in their mission statement, or
include a statement on the ethics of the entity.
The relevance of the mission statement

A mission statement can have several different purposes:
 to provide a basis for consistent strategic planning decisions
 to assist with translating broad intentions and purposes into corporate objectives
 to provide a common purpose for all groups and individuals within the organization
 to inspire employees
 to establish goals and ethics for the organization
 to improve the understanding and support for the organization from external stakeholder groups
and the public in general.

4
Twitter’s mission statement
Twitter’s mission statement has three parts such as the purpose, value, and action:
 Mission: Give everyone the power to create and share ideas and information instantly, without
barriers.
 Values: We believe in free expression and think every voice has the power to impact the world.
 Strategy: Reach the largest daily audience in the world by connecting everyone to their world via
our information sharing and distribution platform products and be one of the top revenue
generating Internet companies in the world.
Goals
Goals are aims for the entity to achieve, expressed in narrative terms. They are broad intentions
Objectives
Objectives are derived from the goals of an entity, and are aims expressed in a form that can be measured,
and there should be a specific time by which the objectives should be achieved.
Characteristics of objectives
The objectives should be SMART:
 Specific/stated clearly
 Measurable
 Agreed
 Realistic
 Time-bound (clear and specific targets should be set for achievement of objective)
Corporate objective
This is the overall objective for the entity.
Strategic objectives
 In order to achieve the corporate objective, it is necessary to set strategic objectives for key
aspects of strategy.
 the main strategic objectives might be identified as critical success factors, for which there are
key performance indicators
Who decides mission, goals and objectives?

 When an entity states its mission in a mission statement, the statement is issued by the leaders of
the entity.
 For a company this is the board of directors. Similarly, the formal goals and objectives of an
entity are stated by its leaders.
 the decisions by a board of directors about the goals and objectives of an entity are influenced by
the way in which the company is governed and the expectations of other stakeholders in the
company
How to set effective goals

Techniques for setting effective goals include:
 Participate in the goal-setting process
 Ensure that the goals include intrinsically motivating work
 Ensure there is a system that can provide feedback on the achievement of goals
 Goals must be SMART (see above)
 Align personal and commercial goals

5
 When recording goals, state them in a positive statement
 Set priorities
Problems created by goals
 unrealistically challenging – result is the employee simply gives up

 Too easy – resulting in the employee slacking off, feeling under-utilized and lacking inspiration.
 Goals create inflexibility and can lead to a narrow focus.
 Goals may generate stress through a constant pressure and reference to needing to constantly
perform at the highest levels in order to achieve or exceed stated goals.
Factors of Production: The Building Blocks of Business

To provide goods and services, organizations require inputs in the form of resources called factors of
production
 Natural Resources
 human resources (labour),
 capital
 Enterprise.
Natural Resources
Natural resources include any resources or commodities that can be used in their natural form. They
include farmland, forests, mineral and oil deposits, and water.
Human Resources (Labor)

Human resources are the people who are able to perform work for a business.
Capital
The tools, machinery, equipment, and buildings used to produce goods and services and get them to the
consumer are known as capital.
Entrepreneurship
 Entrepreneurs are the people who combine the inputs of natural resources, labor, and capital to
produce goods or services with the intention of making a profit or accomplishing a not-for-profit
goal.
 These people make the decisions that set the course for their businesses
 Entrepreneurship involves the creation of business ideas and the willingness to accept risk.
Stakeholder
A stakeholder in an organisation is a person who has an interest (or ‘stake’) in what the organisation does,
and who might therefore try to influence the decisions and actions of the organisation.
Types
 people or groups within the organisation (internal stakeholders), or

 People, groups or other entities that are external to the organisation (external stakeholders).
Internal stakeholders
Within a business organisation, internal stakeholders can be categorized into groups as follows:
 shareholders

6
 executive directors and senior managers
 Other managers and current employees.
Shareholders/owners
 Shareholders in a large company are usually investors, seeking to earn a return on their
investment in the form of dividends and a higher share price.
 Shareholders leave the management of their company to the board of directors and executive
management team.
 However, they might become more closely involved in the company, and try to influence the
decisions of the directors, when they feel that their interests are threatened. For example,
shareholders might express their concerns about any of the following:
I. Falling profits and a falling share price
II. Lower dividend payments
III. A proposal to invest in a major project where the business risk is high
IV. A proposed takeover bid for another company or from another company.
Executive directors and senior managers

 Executive directors are usually full-time employees of the company.
 The interests of executive directors and senior managers are affected by matters such as:
a. their remuneration,
b. power and status
c. career prospects
d. Job security.
 Executive directors and other senior managers often want their company to grow in size,
Other managers and employees
 Managers in the middle and junior ranks of a management hierarchy might have ambitions to
become senior managers.
 junior managers and other employees share common interests, such as:
a. pay
b. working conditions
c. job security
d. job satisfaction
e. Quality of life.
External stakeholders
 lenders
 suppliers
 government
 customers
 local communities
 the general public, including special interest groups and pressure groups
 Non-executive directors.
Lenders
 Lenders to a company include banks and bondholders.
 The main concerns of lenders are that the borrower should be able to repay the debt, with
interest, on schedule.
 Lenders might therefore be concerned about heavy borrowing by a business organisation

7
Suppliers
 Business organizations buy goods and services from suppliers.
 their main interests are that:
a) a customer will pay what is owed and will not become a bad debt
b) customers will continue to buy from them
c) Customers will treat them fairly, and deal with them in an ethical way.
Government
 The government has an interest in all business organizations
a. Businesses pay tax on profits, so government has an interest in company profitability.
b. The government should want to create and maintain a strong economy.
c. The government should want to achieve low levels of unemployment.
d. The government regulates many different aspects of business activity: employment
law,
 The government might be a significant external stakeholder in a business because of its
power to introduce new laws and regulations, or amend existing laws.
Customers
 They expect to obtain value from the goods or services that they buy.
Local communities
 local communities might be stakeholders in a business when the organisation is a major
employer in the area
 The concerns of a local community might be very strong when a business organisation
proposes to close down operations in the area, and make its employees redundant.
The general public
Areas of public concern might include:
a. public health, especially in the case of food manufacturers
b. protection of the environment, reducing pollution, and creating ‘sustainable
businesses’
c. corruption in business
d. the exploitation of the consumer through miss-selling and misleading descriptions of
good
e. The monopolization of a market by one or a small number of companies.
Non-executive directors
 they are members of the board of directors,
 they are not full-time employees, and they are usually appointed to a company’s board
because:
a. they bring experience and knowledge to the board that they have gained outside
b. their interests are different from those of executive directors and senior executives
c. Appointing independent non-executive directors to the board of directors of a
company is good corporate governance practice,
The main stakeholders
 The main stakeholders in a business organisation, internal or external, are those who exercise the
greatest influence.
 The most influential stakeholders in a company are usually the board of directors
 The directors will often be influenced by the opinions of their shareholders,

8
Connected stakeholders
 The term ‘connected stakeholder’ means a stakeholder who:
a. is not a decision-maker, or
b. is not a part of the permanent (full-time) infrastructure of the organisation, but
c. is nevertheless very influential in shaping the future of the organisation
 The main connected shareholders in a company are usually:
a) non-executive directors
b) employees
c) key suppliers
d) Key customers.
Source of power: External Example

Legal rights Shareholders have some legal voting rights under company law.
Lenders have legal rights under the terms of their lending agreements
Publicity, and ability to Pressure groups and protest groups might be influential.
influence customers or
legislators
Control over key resources A major supplier could exert influence by controlling the supply of a
key resource to the organisation.
Buying power Customers can exert influence collectively through their buying power...
Source of power: Internal Example

Position power Individual employees might be in a position of power within the
organisation, perhaps because of special expertise that they possess
Claim on resources Power might arise from a claim or control that exists over particular
resources of the business.
Personal charisma or influence Some individuals might exercise considerable influence through their
personal qualities and charisma.
Power Interest Matrix

Power-interest matrix is used to categorise relevant stakeholders based on their power or influence and
level of interest in a project or an entity.
Based on the above categorisation, strategies can be developed to manage all stakeholders effectively and
to develop a communication plan accordingly for their consultation and engagement. This may further
result in applying RASCI (Responsible, Accountable, Supporting, Consulted, and Informed) based
strategy to identify the roles and responsibilities of each relevant stakeholder.
Grid Strategy
 High power / High interest Managed closely with regular engagement
 High power / Low interest Keep satisfied with active consultation
 Low power / High interest Keep informed
 Low power / Low interest Monitor only

9
Chapter 2
Ownership of Business
Organization
An Organization is a tool to arrange individual or combined resources for a particular purpose in an efficient
and effective manner.
Business organization
 A business organization is an entity formed for the purpose of carrying on required activities to
achieve its goals and objectives.
 the process of dividing up activities in an efficient and effective manner to enable a system of co-
operative activities of two or more persons
Fctors affecting Organization

 Organizations are strongly influenced by the people that form them.
 Their personalities, attitudes, perceptions, behaviors, and expectations significantly affect the
functioning of an organization
TYPES OF BUSINESS ORGANIZATIONS

Distinguish Feature of an organization
a) Purpose.
 Business organizations exist to make a profit.
 Public sector organizations exist to provide a benefit to the public,
b) Ownership.
 Companies are owned by their shareholders
 public sector organizations are owned by the government
 Co-operatives are owned by the members.
c) Funding
 Business organizations obtain the funds from a mixture of reinvesting profits in the
business, issuing new shares and borrowing from the lenders.
 Charities rely on a mixture of government grants and private donations for the funds they
need.
 Public sector organizations obtain their funds from the government, which in turn raises
through the taxation.
d) Accountability
 The management of an organization is accountable to its owners
 The directors of a company are accountable to the shareholders performance of the
company. This is the main reason why companies produce their annual report and accounts.
Category of Business
 Business Organization
 Not-for-profit organizations
Business organizations:
This type of organization engages in commercial activities, with the purpose of making a profit.

10
Main types of business organization
Sole Proprietorships
 A sole proprietor is an individual who owns and operates his or her own business, but might employ
a small number of people.
 There are no legal formalities needed to set up as a sole proprietor.
 Any profit made after tax belongs to the owner
 The owner is in complete control and is free to make decisions.
 The independence is one of the key attractions of running a business as a sole proprietor.
Advantages of Sole Proprietorships

Ease and Low Cost of Formation.
 Forming a sole proprietorship is relatively easy and inexpensive.
 The legal requirements are minimal.
 A sole proprietorship need not establish a separate legal entity.
 The owner may also need to apply for an occupational license to conduct a particular type of
business..
Secrecy.
 Sole proprietorships make possible the greatest degree of secrecy.
 The proprietor does not have to discuss his or her operating plans with other partners or public,
 Financial reports need not be disclosed, as do the financial reports of publicly owned corporations.
Distribution and Use of Profits.
 All profits from a sole proprietorship belong exclusively to the owner.
 The owner decides how to use the funds
Greater Flexibility and Direct Control.
 The sole proprietor has complete control over the business and can make decisions on the spot
 This control allows the owner to respond quickly to competitive business
 The ability to quickly change prices or products can provide a competitive advantage for the
business.
Ease of Government Regulations.
 Sole proprietorships have the most freedom from government regulation.
 Many government regulations – federal or provincial- apply only to businesses that have a certain
number of employees,
 Securities laws apply only to corporations that issue stock.
Lower Taxation.
 Profits from sole proprietorships are considered personal income and are taxed at individual tax
rates
 The owner, therefore, pays one income tax that includes the business and individual income.
 Profits are taxed as personal income as reported on the owner’s individual tax return.
Ease of dissolution.
 A sole proprietorship can be dissolved easily.
 No approval of co-owners or partners is necessary.
 The only legal condition is that all financial obligations must be paid or resolved.
Disadvantages of Sole Proprietorships

Unlimited Liability.
 The sole proprietor has unlimited liability in meeting the debts of the business.
 In other words, if the business cannot pay its creditors, the owner may be forced to use personal,
nonbusiness holdings such as a car or a home to pay off the debts under the bankruptcy laws.
 The more wealth an individual has, the greater is the disadvantage of unlimited liability.

11
Difficulty in raising funds.
 Few sources of money available to the sole proprietorship are banks, friends and family, or his or
her own funds.
 The owner’s personal financial condition determines his or her credit standing.
 Additionally, sole proprietorships may have to pay higher interest rates on funds borrowed
 If the business fails, the owner may lose the personal assets as well as the business.
Limited skills.
 The sole proprietor must be able to perform many functions and possess skills in diverse fields such
as management, marketing, finance, accounting, bookkeeping, and personnel management.
 Specialized professionals, such as accountants or attorneys, can be hired by businesses for help or
advice. Sometimes, sole proprietors need assistance with certain business functions
Lack of Continuity.
 The serious illness of the owner could result in failure of the business if competent help cannot be
found.
 It is difficult to arrange for the sale of a proprietorship and at the same time assure customers that
the business will continue to meet their needs. This results in ‘key person’ risk.
Difficulty in finding qualified Employees.
 It is usually difficult for a small sole proprietorship to match the wages and benefits offered by a
large competing corporation
Taxation.
 Normally progressive tax rates are used on proprietor income which increases with the increase in
turnover
PARTNERSHIP
Partnerships
 A partnership exists when the ownership of a business is shared by at least two people.
 In most cases, the maximum number of partners is 20, although there are some exceptions, e.g.
accountants and solicitors.
 The co-owners of the business are called partners and they collectively form the ‘firm’.
 The parties agree, either orally or ideally in writing, to share in the profits and losses of a joint
enterprise.
 A written partnership agreement, spelling out the terms and conditions of the partnership, is
recommended to prevent later conflicts between the partners.
 Such agreements typically include the name of the partnership, its purpose, and the contributions
of each partner (financial, asset, skill/talent, etc.). It also outlines the responsibilities and duties of
each partner and their compensation structure (salary, profit and loss sharing, etc.).
 It should contain provisions for the addition of new partners, the sale of partnership interests, and
procedures for resolving conflicts, dissolving the business, and distributing the assets.
Types of partnership:
General partnership
 A general partnership involves a complete sharing in the management of a business.
 In a general partnership, each partner has unlimited liability for the debts of the business.
Limited partnership.
 A limited partnership has at least one general partner, who assumes unlimited liability,
 And at least one limited partner, whose liability is limited to his or her investment in the business.
Limited partnerships exist for risky investment projects where the chance of loss is great. Limited

12
partners do not participate in the management of the business but share in the profits usually the
general partner receives a larger share of the profits after the limited partners have received their
initial investment back.
 Popular examples are oil-drilling partnerships and real estate partnerships.
Limited liability partnerships (LLP)

 Partners are not held responsible for the business debt and liabilities.
Advantages of Partnerships
Ease of formation.
 Partnerships are easy to form.
 The partners agree to do business together and draw up a partnership agreement.
 For most partnerships, applicable laws are not complex.
Higher availability to raise funds.

 Partnerships have the benefit of a combination of talents and skills and pooled financial resources.
 The partners’ combined financial strength also increases the firm’s ability to raise funds from
outside sources due to enhanced credibility.
Combined Knowledge and Skills.

 Combining partners skills to set goals, manage the overall direction of the firm, and solve problems
increases the chances for the partnership’s success. \
 The diversity of skills in a partnership makes it possible for the business to be run by a management
team of specialists instead of by a generalist sole proprietor.
Flexibility of decision making.

 Partnerships can react more quickly to changes in the business environment than can large
corporations.
Less Regulatory Control.

 A partnership has fewer regulatory controls affecting its activities
 A partnership does not have to file public financial statements with government agencies
 A partnership does, however, have to abide by all laws relevant to the industry
Disadvantages of Partnerships
Unlimited Liability.
 All general partners have unlimited liability for the debts of the business.
 any one partner can be held personally liable for all partnership debts and legal judgments
Sharing of profits.
 Any profits that the partnership generates must be shared among all partners.
 Higher the number of total partners, smaller the share of each individual partner.
Difference of opinion.
 Diversity of partners may result in serious disagreements for key business decisions
 Such diversity in personalities and work styles can cause clashes or breakdowns
Dissolution of partnerships.
 When one partner wants to leave, the value of their share must be calculated.

13
 It is always difficult to decide who is going to acquire the shares of a leaving partner
 If a partner who owns more than 50 percent of the entity withdraws, dies, or becomes disabled, the
partnership must reorganize or end.
 To avoid these problems, most partnership agreements include specific guidelines for transferring
partnership interests and buy–sell agreements that make provision for surviving partners to buy a
deceased partner’s interest.
LIMITED COMPANIES OR CORPORATIONS

 The main feature of a limited company is that it has a separate legal identity
 All owners of a company have limited liability.
 If the company collapses, they cannot be forced to use personal funds to pay off debts.
 They only lose the amount that they originally invested in the company.
 A company, also known as a corporation, is a legal entity, created under the government
regulations, whose assets and liabilities are separate from its owners.
 As a legal entity, a corporation has many of the rights, duties, and powers of a person, such as the
right to receive, own, and transfer property. Corporations can enter into contracts with individuals
or with other legal entities, and they can sue and be sued in court of law.
 People become owners of a company by purchasing shares of stock.
 Many small companies are privately held, meaning that ownership is restricted to a small group of
investors, and are called private limited companies.
 Most large corporations are publicly held, meaning that shares can be easily purchased or sold by
investors. These companies are called public limited companies.
 Stockholders of publicly held companies can sell their shares of stock when they need money
Initial public offering

A private limited company that needs more money to expand or to take advantage of opportunities may
have to obtain financing by “going public” through an initial public offering (IPO), that is, becoming a
public limited company by selling stock so that it can be traded in public markets.
Structure of a company / corporation

 A company is created or incorporated through a charter or article of incorporation.
 The organizational structure has three key components: stockholders, directors, and management.
Stockholders (or shareholders)
 Are the owners of a corporation,
 They may receive a portion of the corporation’s profits in the form of dividends,
 They can sell or transfer their ownership in the corporation.
 Stockholders can attend annual meetings, elect the board of directors, and vote on matters that
affect the corporation in accordance with its charter and bylaws.
 Each share of stock generally carries one vote.
Board of directors
 The stockholders elect a board of directors to govern and handle the overall management of the
corporation.
 The directors set major corporate goals and policies, hire corporate officers, and oversee the firm’s
operations and finances.
 Small firms may have as few as 3 directors, whereas large corporations usually have 10 to 15
directors.

14
 The boards of large corporations typically include both corporate executives and outside directors
(not employed by the organization) chosen for their professional and personal expertise.
 Outside directors often bring a fresh view to the corporation’s activities because they are
independent of the company.
 Its top management include the president and chief executive officer (CEO), chief financial officer
(CFO), vice presidents, treasurer, and secretary, who are responsible for achieving corporate goals
and policies. Officers may also be board members and stockholders.
ADVANTAGES OF COMPANIES
Combination of resources and economies of scale.

 The corporate structure allows companies to merge financial and human resources into enterprises
with great potential for growth and profits.
Limited liability.
 A key advantage of companies is that they are separate legal entities that exist apart from their
owners. Owners’
Ease of transferring ownership.

 Stockholders of public companies can sell their shares at any time without affecting the status of
the corporation.
Unlimited life.
 The life of a corporation is unlimited.
 Because the company is an entity separate from its owners, the death or withdrawal of an owner
does not affect its existence, unlike a sole proprietorship or partnership.
Tax deductions.
 Companies are allowed certain tax deductions, such as operating expenses, which reduces their
taxable income.
Ability to attract financing.

 Companies can raise money by selling new shares of stock.
 Dividing ownership into smaller units makes it affordable to more investors,
 The large size and stability of companies also helps them get bank financing.
DISADVANTAGES OF COMPANIES
Double taxation of profits.
 Companies must pay income taxes on their profits.
 Stockholders are taxed as personal income on dividend.
Cost and complexity of formation.

 Forming a corporation involves several steps, and costs can run into thousands of rupees, including
registration, and license fees, as well as the cost of attorneys and accountants.
Increased government restrictions.
 Companies are subject to many regulations and reporting requirements.
 Companies must also register with the Securities and Exchange Commission of Pakistan (SECP)
before selling stock to the public.

15
 A company must publish financial reports on a regular basis and file other special reports with the
SEC and other regulatory agencies.
Summary of Advantages and Disadvantages of Major Types of Business Organization
Sole Proprietorship Partnership Corporation

Advantages:
Ease and low cost of Ease of formation with relatively Limited liability of owners
formation low organizational cost
Secrecy Higher ability to raise funds due Ease of transferring

to more owners ownership
Distribution and use of profits Combined knowledge and Unlimited life - continuity
solely by owner managerial skills due to lack of owner
dependency
Greater flexibility and direct Flexibility of decision making Tax benefits and deductions
control
Ease of government Ease of regulatory control Ability to attract funds

regulations allows growth
Lower taxation Business income taxed as Ability to attract

personal income of each partner employees with
specialized skills
Ease of dissolution
Disadvantages:
Unlimited liability of owner Unlimited liability of owners for Higher cost and complexity
for all business losses and sharing of business losses and of formation
liabilities liabilities
Difficulty in raising funds Complexity of profit and loss Double taxation of

inhibit growth sharing corporate profits and
dividend
Limited skills and Difficulty in exiting or Higher regulatory control
management expertise dissolution
Lack of continuity Potential for conflicts among

partners
Difficulty in finding Limitation of growth

qualified employees due to
limited long- term
opportunities
Not-for-profit organizations
 These type of organizations do not seek to make a profit, although they must operate within the
limits of the funding and financial resources that is available to them.

16
Types of NPOs
Public sector organizations:

These are government organizations that are funded by the government to achieve social indicators of the
country.
Non-government organizations:
These are not-for-profit organizations that are partly or wholly funded from non-government source
Clubs and societies:

 These non-profit making organizations, e.g. sports and social clubs, exist because their members
are drawn together by a common interest.
 The assets of clubs and societies are the property of the members and most income comes from
member’s subscriptions.
 Clubs and societies produce income and expenditure accounts, rather than profit and loss accounts
which show either a surplus or deficit of income over expenditure, as they do not aim to make a
profit.
Cooperatives:
 These are association of persons, usually of limited means, who voluntarily come together to
achieve a common economic end through the formation of a controlled business organization
making equitable contributions to raise capital and accepting a fair share of risks and benefits.
 A cooperative is not formed with profit as the guiding objective but to render services to society
and its members
LAWS GOVERNING BUSINESS ORGANISATIONS

Companies law
 In Pakistan, if a business set-up intends to form a public or private company, it is required to
complete the requirements provided in the Companies Act, 2017 (the Act),
 The Act regulates companies for protecting interests of shareholders, creditors, other stakeholders
and general public and inculcate principles of good governance.
Partnership law
 The law relating to partnership businesses in Pakistan is the Partnership Act, 1932.
 The Partnership Act includes the procedure of registration and dissolution of a firms, rights and
duties of partners etc.

17
Chapter 3
ORGANIZATION OF BUSINESS
ORGANISATIONAL STRUCTURES
 An organizational structure is the formal arrangement within an organization that defines how
activities and tasks are formally divided and
 how processes and information would flow within this structure in order to achieve the goals and
objective of an organization.
Purpose of Organizational Structure
The purpose of having an organizational structure is that it:
 Divides work to be done into specific jobs and departments.
 Assigns tasks and responsibilities associated with individual jobs.
 Coordinates diverse organizational tasks.
 Clusters jobs into units.
 Establishes relationships among individuals, groups, and departments.
 Establishes formal lines of authority.
 Allocates and deploys organizational resources.
Importance of Management Structure

 Choosing the correct management structure ensures an organization’s continued growth, content
employees and profitable returns for the shareholders.
 Choosing the wrong structure creates tensions between employees and managers, allows inefficient
work practices to flourish and reduces company profitability.
TYPES OF ORGANIZATIONAL STRUCTURES
Following are the basic organizational structures that might exist within any entity or part of an entity:
a) an entrepreneurial structure
b) a functional structure
c) a divisional structure
d) a matrix organization
An organizational structure could be based on following approaches:

 Nature of work such as Skilled, Unskilled, Specialized, Management, etc.
 Traditional departmentalization such as Functional (finance, operations, marketing, etc.), Product
(credit cards, mortgages, auto loans, etc.), Process (assembly, shipping, etc.), Customer (auto,
airline, military, etc.), and Geographic (Europe, USA, Canada, etc.) are more rigid.
 Contemporary and team-based such as Matrix (also known as project management approach) more
dynamic and assemble employees to respond quickly to dynamic business environments.
 Outsourcing of non-core activities to specialized vendors such as accounting or IT functions.
 Virtual network of independent companies including suppliers, customers, etc. linking through IT
platforms is the new trend
Entrepreneurial organisation
 An entrepreneurial organisation is an entity that is managed by its entrepreneurial owner.
 The main features of an entrepreneurial organisation are usually that:
a) the entrepreneur takes all the main decisions, and does not delegate decision-making
b) the entity is therefore organized around the entrepreneur and there is no formal management
c) operations and processes are likely to be simple

18
 An entrepreneurial structure is appropriate when an entity is in the early phase of its life.
Functional organisation
 A functional organization groups together people who have comparable skills and perform similar
tasks.
 This form of organization is fairly typical for small to medium-size companies,
 Each unit is headed by an individual with expertise in the unit’s particular function.
 Each function has its own management structure and its own staff
Advantages to the functional approach.
1. The structure is simple to understand
2. enables the staff to specialize in particular areas;
3. everyone in the marketing group would probably have similar interests and expertise
Drawbacks:
1. It can hinder communication and decision making between units and even promote
interdepartmental conflict.
Divisional Organizations
 They are similar in many respects to standalone companies,
 Each division functions relatively autonomously because it contains most of the functional
expertise needed to meet its objectives.
 The challenge is to find the most appropriate way of structuring operations to achieve overall
company goals.
 Divisional structure usually enhances the ability to respond to changes in a firm’s environment.
 on the other hand, services must be duplicated across units, costs will be higher
 Toward this end, divisions can be formed according to products, customers, processes.
Types of Divisional Organization Structure
Product division:

19
 Means that a company is structured according to its product lines.
 Each division has its own functions research and development group,
 This allows individuals in the division to focus all their efforts on the products produced
by their division.
 A downside is that it results in higher costs as services are duplicated in each divisions.
Customer Division:
 Some companies prefer a customer division structure because it enables them to better
serve their various categories of customers
Process Division:
 If goods move through several steps during production, a company might opt for a process
division structure.
Geographical Division:
 enables companies that operate in several locations to be responsive to customers at a local
level
Matrix organisation
Any organisation that employs a multiple command system that includes not only a multiple command
structure but also related support mechanisms and an associated organizational culture and behavior pattern’
 Project managers is appointed with overall responsibility for individual projects.

 Functional managers such as management of engineering, production and sales and marketing,
retained their decision-making authority.
 In this way, a dual command structure is created.
The difference between a matrix organisation structure and a project organisation
 The project management comes to an end when the project ends.

 With matrix organisation, the matrix structure of authority and command is permanent.
Overall, matrix structures should:
 encourage communication
 Place emphasis on ‘getting the job done’ rather than each manager defending his or her own
position.

20
CEO / President
Head of Head of Sales & Head of Finance &

Production Marketing Admin
Project Production Sales Reresentative A Manager Finance A
Manager A Supervisor A
Project Production Sales Reresentative A Manager Finance B

Manager B Supervisor B
Project Production Sales Reresentative A Manager Finance C

Manager C Supervisor C
The virtual organisation

 The virtual company or virtual organisation does not have an identifiable physical existence,
 It does not have a head office or operational premises.
 It might not have any employees.
 A virtual organisation is operated by means of:
a. IT systems and communications networks – normally telephone and e-mail
b. Business contacts for outsourcing all operations.
A key to a successful virtual organisation is the successful management of all the different external
relationships, and successful co-ordination of their activities
KEY ELEMENTS OF ORGANIZATIONAL STRUCTURE
Following are different elements generally considered in building an organizational structure:
 departmentalization,
 chain of command,
 span of control,
 levels of management,
 centralization or decentralization of decision making, and
Chain of Command
 An unbroken line of authority that extends from the top of the organization all the way down to the
bottom. Chain of command clarifies who reports to whom within the organization
Span of Control
 Span of control refers to the number of subordinates a superior can effectively manage. The higher
the ratio of subordinates to superiors, the wider the span of control.
Span of control depends on:

• Managers capabilities (physical & mental limitations)
• Nature of manager’s workload
• Nature of work undertaken (how routine it is)
• Geographical dispersion of subordinates

21
• Level of cohesiveness within the team.
Tall-narrow.
 Each manager has a small number of subordinates reporting directly to him.
 There are many layers of management from the top down to supervisor level.
 The span of control is narrow, and the shape of the organisation structure is tall, because of the
many layers of management
Wide-flat.
 Each manager has a large number of subordinates reporting directly to him.
 There are only a few layers of management from the top down to supervisor level.
 The span of control is wide, and the shape of the organisation structure is flat,
Centralization versus decentralization
Centralization and Decentralization
 If decision-making power is concentrated at a single point, the organizational structure is

centralized.
 If decision-making power is spread out, the structure is decentralized...
 In a centralized organisation, senior management retain the authority to make the important
decisions.
 In a decentralized organisation, the authority to take major decisions is delegated to the
management of units at lower levels
Advantages of centralization
 Decisions by management are more likely to be taken with regard for the corporate objectives of
the entity as a whole
 Decisions by management should be coordinated more effectively.
 In a crisis, it is easier to make important decisions centrally.
Advantages of decentralization.
 In many situations, junior (‘local’) managers have much better knowledge.
 Tactical and operational decisions are probably better when taken by local management,
particularly in a large organisation.
 Giving authority to managers at divisional level and below helps to motivate
 Decisions can be taken more quickly at a local level
 In a large and complex organisation, many decisions have to be made
 The appropriate amount of centralization or decentralization for an entity will depend on the
circumstances.
Key Elements Tall Flat

Work specialization High degree Low degree
Departmentalization Rigid Loose
(more traditional structure) (more contemporary
dtructure)
Management layers Many levels Few levels
Spans of control Narrow Wide
Decision-making Centralized Decentralized
Chain of command Long Short

22
Chapter 4
SOURCES OF BUSINESS FINANCE
Financial Management
 Financial management is the art and science of managing a company’s funds so that it can meet its
goals and objectives.
 The science part belongs to analyzing data and cash flows.
 The art part belongs to optimum use of resources.
 Knowledge of accounting and finance plays a critical part in understanding the concept of financial
management.
 A company’s financial statements such as Balance Sheet, Income Statement, and Cash Flow
Statements are a key source of information for financial management, which are mostly prepared
by professional accountants.
 Financial managers focus on financial planning and cash flow management.
Following is a basic structure of a Balance Sheet, in a report format,
Balance Sheet As at 31 December 20XX

Assets Liabilities and Shareholders’ Equity
Current assets (short-term): which are convertible Current liabilities (short-term): obligations due
into cash within one year within one year
Non-current assets (long-term); which are of a Non-current liabilities (long-term): obligations due
more permanent nature within one year
Total liabilities
Shareholders’ equity (permanent): including
capital and retained earnings
Total assets Total liabilities and Shareholders’ equity
An important aspect of financial management is the choice of financing methods for a company’s assets.
Companies use a variety of sources of finance and the aim should be to achieve an efficient capital structure
that provides:
 A suitable balance between short-term and long-term funding
 Availability of adequate cash for day to day expenses
 A suitable balance between equity (funds raised through the sale of ownership in the business) and
from debt (borrowed funds) in the long-term capital structure.
Role of a Financial Manager

As part of the top management team, chief financial officers (CFOs) need a broad understanding of their
company’s business and industry, as well as leadership ability and creativity.
They must never lose sight of the primary goal of the financial manager: to maximize the value of the
company to its owners, measured by the share price or value of stocks.
The key activities of the financial manager, to achieve their primary goal, are:
 Financial planning: Preparing the financial plan for project’s revenues, expenditures and financing
needs over a given period.
 Investment (spending funds): Investing the organisation’s funds in projects and securities that
provide high returns in relation to their risks.
 Financing (raising funds): Obtaining timely funding for the organisation’s operations and
investments and seeking the best balance between debt and equity.
Sources of Finance on the basis of Nature

Debt Capital (financing)

23
 Loan From Banks
 Loan from general Public by issuing bonds
 The drawback of borrowing money is the interest that must be paid to the lender, where a failure to
pay interest or repay the principal can result in default or bankruptcy
 But, the interest paid on debt is typically tax-deductible and costs less than other sources of capital
Equity Capital (financing)
 An organisation can also raise capital by selling its ownership in the form of shares to interested
investors, existing or new, which is known as equity funding.
 The benefit of this type of capital is that investors do not require interest payments
 The drawback is that further profits are divided among all shareholders (including new ones) in the
form of dividends. Furthermore, shareholders have voting rights on important matters of the
organisation, which means that the company’s management control is weak or forfeited, due to
increase in shareholders.
 Another way of equity financing is through retaining earnings in the business by not fully
distributing the profits to shareholders as dividends
Sources of Finance on the basis of Term
 Short-term Financing
 Long-term Financing
SHORT-TERM FINANCING
 Short term finance refers to financing needs for a small period normally less than a year.
 it is also known as working capital financing.
 Short-term financing is shown as a current liability on the balance sheet.
 It is used to finance current assets and support operations.
Short-term Financing options

Few examples of short term financing are as follows:
 Trade Credit: Accounts Payable
 Bank Loans
 Committed lines of credit
 Operating leases
 Factoring / discounting of receivables
Trade Credit: Accounts Payable

 Accounts Payable are amounts due to vendors or suppliers for goods or services received but have
not yet been paid.
 An unsecured mode of financing.
Advantages
 It allows the organisation to keep a smooth flow of the manufacturing process without any shortages
of the material.
 It gives increased purchasing power to the organisation.
 The organisation does not have to pay interest cost.

24
 Generally, no specific collateral is required.
Disadvantages
 Obtaining goods on credit may become a habit for the organisation and accumulate its debts. It may
also discredit the company’s reputation in market.
 The organisation may lose any discount incentives which are available for buying on cash
 The organisation will have to incur additional costs to manage its accounts payable personnel and
record keeping.
Bank Loans
 Short-term bank loans might be arranged for a specific purpose,
 The specific type of loan that an organisation obtains may depend on its reasons for funding need
or the length of time the funds are required
 Another type of business loan is a term loan, which is used to finance the purchase of fixed assets
such as machinery.
 The maturity on a term loan may typically be between 3 and 10 years. Such loans are considered
long-term loans and can be secured or unsecured.
Advantages
 Bank loans provide you the flexibility to spend the money as per company’s requirements.
 The company does not have to give up with rights for control and ownership to get the finance.
Disadvantages
 There is an interest cost involved in obtaining bank loan.
 The process of obtaining a bank loan is very time consuming as well as requires excessive
paperwork and some kind of collateral to keep the rates lower.
Committed lines of credit
 A committed credit line is a legal agreement between a financial institution and a borrower setting
out the conditions of a credit line.
 Once signed, the agreement requires the financial institution to lend money to the borrower,
provided that the borrower does not break the conditions.
 Generally used when fund needs in future and amount is uncertain
Advantages
 It gives the flexibility to the organisation to borrow money when the need arises
 There is less paperwork involved at each drawdown of funds
 The interest is only paid on amounts borrowed
Disadvantages
 The facility cannot be used for large borrowings
 The rates of interest are generally higher than bank loans
 The bank can change or withdraw limit at any time or may ask for repayment earlier than the
expected date
 The facility may be secured against assets of the organisation and there is a risk that assets may be
confiscated if the company does not to make timely payments.
Operating leases

25
A lease is a contractual agreement whereby one party that is the owner of an asset grants the other party the
right to use the asset in return for a periodic payment.
Advantages of Lease Finance
 Lease rentals paid by the lessee (lease holder) are deducted from taxable profits.
 Leasing provides finance without diluting the ownership of the asset.
 It enables the lessee to obtain the asset with a lower price rather than owning it.
 Easy documentation makes it simpler to finance assets.
 The lessor carries the risk of obsolescence. This allows flexibility to the lessee to replace the asset.
Disadvantages of Lease Finance

 It may result in higher payout obligation in case the equipment is not found useful and the lessee
opts for premature termination of the lease agreement.
 Financial activities of business may be affected in case the lease is not renewed.
 There are chances that a lease arrangement might impose certain restrictions on the use of assets.
For example, it may not allow the lessee to make any modification in the asset.
 The lessee never becomes the owner of the asset.
Factoring / Discounting of Receivables
 In discounting, a firm sells its accounts receivable outright to a factor, which is a financial
institution that buys accounts receivable at a discount.
 Discounting is more expensive than a bank loan, however, because the factor buys the receivables
at a discount from their actual value, but provide quick access to funds.
 For businesses with steady flow of orders but a lack of funds to make payroll or other immediate
payments, discounting is a popular way to obtain financing by selling its invoices to a third-party.
Advantages of Short-term finance

Less Interest Amount:
As these are to be paid off in a very short period within about a year, the total amount of interest cost under
it will be least as compared to long term loans
Disbursed Quickly:
The risk involved in defaulting of the loan payment is lower. As a result, it takes lesser time to get sanctioned
the short term loan as their maturity date will be shorter.
Less Documentation:
As it is less risky, the documents required for the same will also be not too much making it an option for
all to approach for short term loan.
Disadvantages of Short-term finance
Smaller size of facility and installment:

It is fixed that the period of loan will be less than 1 year and if a high amount of loan is sanctioned, the
monthly installment will come very high resulting in an increase in the chance of default in repayment of
loan which will affect the credit score adversely.
High Rate of Interest:

26
Another limitation of short-term finance is that there is generally a higher interest rate associated with short-
term loans
Debt Trap:
It can leave the business with no other option than to come into the trap of the cycle to borrow in which one
continues borrowing to repay the previous unpaid loan. In this cycle, the interest rate keeps on increasing
and can terribly affect the business and its liquidity.
Asset-Liability Mismatch:
Funding long-term assets with short-term liabilities on the assumption of frequent renewals of short-term
debts creates high risk of default due to sudden illiquid market conditions
SOURCES OF LONG-TERM FINANCING

The funds which are paid back after a period of one year are referred to as long term finance.
The primary purpose of obtaining long-term funds is to finance capital projects and carry out operations on
an expansionary scale
Some objectives of long-term finance may be to:
 purchase new asset or equipment
 finance the permanent part of the working capital
 enhance the cash flow in the company
 invest in R&D operations
 construct or build new construction projects
 develop a new product
 design marketing strategies or increase facilities
 expand business operations
The long term financing could be done internally, i.e. within the organization (equity) or externally (debt),
i.e. from outside the organization
Types of Long-term Financing options
 Debt financing
 Equity financing
Financial managers try to select the mix of long-term debt and equity that results in the best balance between
cost and risk
Debt Financing
The term ‘debt finance’ is used to describe a type of finance where the borrower:
 Receives funds, either for a specific period of time or possibly in perpetuity.
 Acknowledges an obligation to pay interest on the debt for as long as the debt remains outstanding;
and
 Agrees to repay the amount borrowed when the debt matures (reaches the end of the borrowing
period).
Few examples of debt financing are as follows:

 Term loans
 Bonds
 Finance lease
Bonds
 Bonds are long-term debt instruments involving two parties- the borrower (issuer) and the lender
(buyer or investor).

27
 The borrower can be the government, a local body or a corporation.
 They generally provide fixed interest payments at periodic intervals and are redeemable at a
predetermined date in future
 Borrowers pay interest as well as par value on maturity
 A bond certificate is issued as proof of the obligation.
 Secured loan
Advantages
 Fixed-rate bond pays a regular interest rate or coupon rate return to investors, therefore, provide a
predicated form of cash out flow needs for an issuer.
 Considered less risky comparing to equity (stocks) mode of financing due to specific maturity
period of bonds.
 Most bonds are universally rated by credit rated agencies providing an independent source of
analysis.
 Convertible bonds can be converted to equity shares after a specified period, making them more
appealing to investors.
 In the event of a corporation's bankruptcy, the bond is paid before common stock shareholders.
Further many bonds are secured through some form of collateral. Therefore, bonds are considered
less risky compared to stocks.
 Provide a medium and long term source of financing avoiding short-term refinancing risk.
 Cheaper form of financing comparing to bank debts for higher credit rating issuers.
Disadvantages
 Fixed-rate bonds may have interest rate risk exposure in environments where the market interest
rate is rising.
 Creditworthiness is important when considering the chance of default risk from the underlying
issuer's financial viability.
 Bonds may have inflationary risk if the coupon rate does not keep up with the rate of inflation.
 Creates a commitment of cash payments – interest and principal – therefore a liquidity risk.
 Requires to maintain certain financial and non-financial caveats such as maintaining certain ratios.
Finance Lease
 A finance lease is another way of providing finance, where effectively a leasing company (the
lessor or owner) buys the asset for the user (usually called the hirer or lessee) and rents it to them
for an agreed period.
 all the risks and rewards (control) associated with the asset to the lessee
 The ownership could be transferred at the expiry of the lease agreement with mutually agreed terms.
Advantages of Finance Lease:

Liquidity:
The lessee can use the asset without investing company funds in the asset. The cost is spread over monthly
instalments rather a large upfront investment.
Fixed cost:
The rental cost is fixed over a specific period, even if interest rate rise.
Tax advantage:
Lease rentals are deducted from taxable profits.
Flexibility:
Customized repayment structures are available, tailored to match a company’s cash flow patterns.
Disadvantages of Finance Lease:

28
Repossession:
Lease agreement is secured against the asset. In case of non-payment, the asset may be repossessed.
Credit Rating:
Non-payment can negatively affect the credit rating of both the business and guarantor.
Ownership:
The legal ownership remains with the finance company (lessor).
Conditions:
There are certain caveats which needs to be followed for finance lease such as maintaining certain mileage
for an auto, overall maintenance of the leased asset, current ratio, etc.
Difference between Finance and Operating Lease

Title:
Once the finance lease is expired, the lessee can purchase an asset at a bargain price. In operating lease,
generally, the ownership is retained by the lessor during and after the lease term.
Term / period of use:
Generally, extended period for finance lease, and brief period for operating lease.
Accounting Treatment:
Finance lease is included as an asset on the balance sheet of the lessee. Whereas, operating lease is treated
as an off-balance sheet item.
Accounting standards provide some quantitative criteria to classify a lease between operating or finance
lease as follows:
 The finance lease term is at least 75% of the estimated economic life of the asset. However, in
operating lease, the lease term is considerably less than the economic life of the equipment.
 The present value of finance lease payment is at least 90% of the asset’s value.
Termination:
 The lessee can terminate the operating lease even at the short notice and without any significant
penalty, subject to the lease agreement.
 Usually, finance lease is difficult to be terminated.
Running costs & administration:
 In Finance lease, the lessee is responsible for insuring and maintaining the equipment,
 Whereas, in operating lease, the cost of insurance and maintenance of the equipment is included
Advantages of Long-term Debt Financing
Coincides with Long-Term Strategy:

Long-term financing enables a company to align its capital structure with its long-term strategic goals,
affording the business more time to realize a return on an investment. Similarly, long-term finance can help
a business in building synergies. Overall, long-term finance can help in the growth and expansion of a
business.
Matches Duration of Asset Base with Duration of Liabilities:
The maturity associated with long-term financing better coordinates with the typical lifespan of assets
purchased.
Long-Term Support from Investor:
A company can benefit from having a long-term relationship with the same investor throughout the life of
the financing.

29
Limits Company’s Exposure to Interest Rate Risk:
Long-term, fixed-rate financing minimizes the refinancing risk that comes with shorter-term debt
maturities, due to its fixed interest rate, thus decreasing a company’s interest rate and balance sheet risk.
Diversifies Capital Portfolio:
Long-term financing provides greater flexibility and resources to fund various capital needs, and reduces
dependence on any one capital source. It also enables companies to spread out their debt maturities.
Lower Cost:
Generally, long-term financing has relatively lower interest rate, comparing to short-term financing.
Flexibility of Repayment:
Generally, long-term finance comes with flexible repayment options, which allows them to repay them in
a controlled manner.
Disadvantages of Long-term Debt Financing

Caveats:
Long-term finance may come with certain conditions or regulations such as maintaining certain mix of
capital structure, and level of current ratios.
Additional Monitoring and Controls:
Due to the higher finance and regulations involved, long-term finance may also need additional monitoring
and control to ensure proper operations.
Fixed Rate of Return for Lender:
In a rising market rates expectation, finding long-term fixed rate financing at a cheaper rate is difficult.
Additional Legal Documentation and Collateral:
Long-term financing may require additional efforts on paperwork, and collateral to avoid default risk.
Comparison of short-term
finance and long-term finance
Short-Term Finance Long-Term Finance
A comparison of Short-term
and Long-term Finance
Typically repayable within Have a longer time span varying from 1 to 30
Duration (maturity)
one year or less. years.
Obtained to fund temporary

Obtained to fund the growth, purchase of
shortfall in the working
Requirements property, plant and equipment, or capital projects
capital, repayment of
on a wide scale.
current liabilities etc.
Do not create a charge on Collaterals are the most primary condition for the
Collaterals
the assets of the company. furnishing of long term finance.

30
Interest rates are unstable
Interest rates are stable and the terms of the loan
and are vulnerable to
offer flexibility such as prepayment options, re-
Terms of loan inflationary forces. Terms
negotiation of interests upon improvement in
of loans are not very
credit rating etc.
flexible.
Used to raise funds in A large volume of funds can be obtained.

limited amount since they However the same is restricted to the nature of
Volume of funds
are repayable in the near securities furnished, the credit rating of borrower,
future. etc.
Overdraft, Credit Cards,

Examples Leasing, Term Loans, Public Deposits, Bonds.
Line of Credit.
Short-term Financing Long-term Financing

Approval Process / Chances Simple and fast process with Complex and slow process with
higher chances of approval – less slightly harder chances of approval –
to verify more to verify
Repayment Schedule Lower flexibility Higher flexibility
Financing Cost Higher interest rate Lower interest rate
Selection Criteria Short-term financing preferable Long-term financing preferable if

if borrower in a liquidity crunch borrower is stable and need funds for
and need funds quickly to bridge strategic goals at best interest rate due
the timing of cash flows. to better credit position
Equity Financing
Equity refers to the owners’ investment in the business.
In corporations, the preferred and common stockholders are the owners.
A company obtains equity financing by selling new ownership shares (external financing) or by retaining
earnings (internal financing).
Few examples of equity financing are as follows:
 Retained earnings
 Issuing shares for cash
 Preferred stock
Retained Earnings
 The Retained Earnings represent that portion of the equity earnings (left after deducting the tax
and preference dividends), which is sacrificed by the equity shareholders and is ploughed back into
the company to reinvest these in the core business operations, such as paying off the debt
obligations or purchasing capital assets.
 The board of directors of each company decides how much of the company’s earnings should be
retained (reinvested in the company) versus distributed as dividends to owners.
Dividends
Are payments to stockholders from a corporation’s profits. Dividends can be paid in cash or in stock.
Advantages of Retained Earnings

31
 These earnings are readily available, and the company is not required to seek help from the
shareholders or lenders in case of urgency of funds.
 Retained earnings enhance the financial position of a business. This further helps the business to
attract equity and debt finance investors.
 Retained earnings are a cheaper alternative to other sources of finance (debt or equity) for a
company because it is internally generated.
 The use of retained earnings reduces the cost of issuing the external equity and also eliminates the
losses incurred on underpricing.
 There will be no dilution of control and ownership, in case the company relies on the retained
earnings.
 If a company chooses not to pay dividends and retain all its earnings, it still generates wealth for
its stockholders through appreciation in its net worth and the value of stocks.
 Generally, the stock market views the equity issue as doubtful and therefore, these earnings do not
carry a negative connotation.
Disadvantages of Retained Earnings

 The amount raised through the accrual earnings could be limited and also it tends to be highly
variable because certain companies follow a stable dividend policy.
 The retained earnings, in some cases, may not necessarily match with the cash flows, forcing the
company to still borrow the funds.
 The opportunity cost of these earnings is relatively high because it shows that amount of earnings,
which have been foregone by the equity shareholders.
 Some companies do not give much importance to the opportunity cost of these earnings and invest
these into sub-marginal projects that have negative NPV, which me reduce the shareholders’ value.
Issuing Shares for cash
 Companies can raise equity capital externally by issuing new shares for cash,
 But the opportunity to do so is much more restricted for private companies than for public
companies.
 Public companies may offer their shares to the general public.
There are three main methods of issuing new shares for cash:
1. Issuing new shares for purchase by the general investing public: this is called an initial public offer
or an IPO
2. Issuing new shares to a relatively small number of selected investors: this is called a placing or
private placement of shares.
3. Issuing new shares to existing shareholders in a rights issue.
There are mainly two types of shares that a company may issue to raise equity. These are known as Common
Stock and Preferred Stock.
Advantages
 There is no commitment to pay back the funds raised through share issuance
 The company can use the funds obtained through share capital in any manner,
 Investors find companies financed through shares more attractive than companies financed with
debts.
 Even for lenders, a higher share capital is considered a buffer to mitigate default risk.
 Shareholders cannot force a company into bankruptcy if it fails to make payments, however, the
creditors may do so if the company fails to repay interest.
 For issuance of shares to employees, it aligns company’s goal of achieving profitability with staff’s
goal of being financially rewarded.

32
Disadvantages
 The company’s ownership is diluted and it will be required to share its future growth and profits
with other shareholders.
 The company’s control is diluted and it will be required to get the consent of its majority
shareholders
 The company will be required to make compliance with the relevant laws in place otherwise it may
face huge consequences. This results in a higher regulatory risk.
 Selling shares is a lengthy, time-consuming process, with lot of uncertainties and cost.
 Public companies require to provide lot of information publicly, which is a costly process
Preferred Stock (Preference Shares)

 Preference shares, also known as preferred shares, have the advantage of a higher priority claim to
the assets of a corporation in case of insolvency and receive a fixed dividend distribution.
 These shares often do not have voting rights and can be converted into common shares.
The basic features of preference shares are as follows:

 Most preference shares are issued with a fixed rate of annual dividend.
 Preference dividends are paid out of after-tax profits.
 Preference shareholders will be entitled to receive dividends out of profits before any remaining
profit can be distributed to ordinary shareholders as equity dividends.
 If the company goes into liquidation, preference shareholders rank ahead of equity shareholders,
but after providers of debt finance,
 Preference shares are fairly uncommon with a few exceptions.
The advantages of preference shares for companies are that:

 The annual dividend is fixed, and so predictable (with the possible exception of participating
preference shares).
 Dividends do not have to be paid unless the company can afford to pay them, and failure to pay
preference dividends, unlike failure to pay interest on time, is not an event of default.
 Issuing preference shares is easy, in the case where the company has undergone an IPO and has
Authorized Share Capital.
 The amount that is raised by selling preference shares does not have to be repaid back by the
company. So, such funds may be used for company’s long-term growth strategy.
 Since Preference Shares do not have voting rights, they do not have control over the operational
affairs in the company.
 Investors like preference shares due to their priority over common shares.
 Preference shares provide flexibility of financing for long-term and short-term purposes.
 Preference Shareholders need to be paid on a high priority basis (before common shareholders) in
the case of liquidation.
The disadvantages of preference shares for companies are that:

 Dividends are not an allowable cost for tax purposes.
 As the annual dividend is fixed dividend, it needs to be paid, similar to the interest on debts,
regardless of the volume of profit that the company has generated in the given year. So, it increases
the financial risk of the firm.
 It is costly in the longer term comparing to long-term debt instruments, as the dividend charge is
higher than rate of interest and not tax deductible.

33
 Because the claims of preferred stockholders on income and assets are second to those of
debtholders, preferred stockholders require higher returns to compensate for the greater risk.
 In the case of cumulative preference shares if the company is unable to pay dividends for one
particular year, the dividend accumulates and is carried forward to the next year. Therefore, this
means that it might be a burden for the company to settle the dividend payments in the years where
they were not able to make substantial profits.
 Only public limited companies can sell shares to the general public on the stock exchange.
Therefore, this option is only available to medium and large organizations that are formally listed
on the Stock Exchange.
Major Differences
between Debt and Equity Debt Financing Equity Financing
Financing Areas
Creditors typically have none, unless the

borrower defaults on payments. Creditors
may be able to place restraints on
Common stockholders have voting
Have a say in Management management in event of default.
rights.
Financial caveats can also be added to
debt agreements such as maintaining
minimum current and quick ratios.
Equity owners have a residual claim on

Debt holders rank ahead of equity holders. income (dividends are paid only after
Have a right to income
Payment of interest and principal is a paying interest and any scheduled
and assets
contractual obligation of the company. principal) and no obligation to pay
dividends.
Maturity (date when

Debt has a stated maturity and Requires The company is not required to repay
debt needs to be paid
repayment of principal by a specified date. equity, which has no maturity date.
back)
Dividends are not tax-deductible and are

Tax Treatment Interest is a tax-deductible expense.
paid from after-tax income.

34
Chapter 5
INFORMATION SYSTEMS
ROLE OF INFORMATION SYSTEMS
 The information is used in day-to-day decision-making to perform multiple tasks such as planning,
acquiring, searching
 An information system (IS) collects and processes data into information that is provided to users
for use in strategic planning, decision making, performance monitoring, and production.
GENERAL SYSTEM CONCEPTS OF INFORMATION TECHNOLOGY
Computer systems
A computer system comprises four key components:
1. Input
2. CPU
3. Output
4. Storage
Input devices
Facilitate the introduction of data and information into the system a keyboard, scanner, and mouse or
barcode reader.
Output devices
Facilitate the extraction of processed information from the system. Printer, speaker or screen (visual display
unit).
Central processing unit

Is the ‘brain’ of the computer that takes the inputs, processes them and then outputs the results
Computer hardware
Computer hardware consists of the computers themselves plus all the peripheral equipment connected to a
computer for input, output and storage of data
INPUT DEVICES
Keyboards
Keyboards are the most common input device and are part of virtually all computer systems. Keyboards
can be stand-alone and connected to the computer with a cable or through a wireless connection, or they
might be integrated into the computer itself, such as with a laptop or notebook.
Touch-sensitive screens and touch pads
A recent trend has been towards integrating the keyboard into touch-sensitive screens and touch pads. Both
these devices involve the user touching an area of a screen,
Magnetic ink character recognition (MICR)

Magnetic ink character recognition (MICR) requires the input media to be formed of specially formatted
characters printed in magnetic ink. These characters are then read automatically using a specialised reading
device called MICR reader.

35
Optical mark reading (OMR)
Optical mark reading (OMR) is similar to MICR in that it is an automated input method. OMR involves
marking a pre-printed form with a pen or typed line (or cross) in an appropriate box. The card is then read
by an OMR device which senses the mark in each box.
Scanners and optical character recognition (OCR)

Scanners read text or illustrations printed on paper and translate the information into a format the computer
can use. The resolution (number of pixels recorded for each image – pixels are minute areas of illumination
on a display screen which taken together form the image) can normally be adjusted to reflect how sharp the
users need their image on the computer.
Mice, trackballs and similar devices

Mice and trackball devices are hand-operated devices with internal sensors pick up the motion and convert
it into electronic signals which instruct the cursor (pointer) on screen to move.
Voice date entry (VDE)

Many computers can now accept voice input via a microphone and voice data entry (VDE) software. One
particularly useful application is found in language translation programs that support simultaneous
translation. Another example might be in a smartphone where you can enter commands aurally rather than
by typing, for example with an instruction such as “Call Office”.
Barcodes and QR (quick response) codes, EPOS

Barcodes are the groups of black and white marks with variable spacing and thickness found on product
labels such as those at the supermarket. Each code is unique and can be read automatically by an electronic
barcode reader.
QR codes are matrix, or two-dimensional, barcodes. Originally popular in the automotive industry they
have seen a recent rise in popularity elsewhere given their fast readability and greater storage capacity than
standard barcodes.
EPOS stands for electronic point of sale which is normally integrated with barcode readers. EPOS allows
credit and debit cards to be read for instant payment for goods.
Digital cameras
Digital cameras capture images and videos in digital form and allow easy transfer to a computer where they
can be manipulated by software.
Benefits and limitations
Input method Benefits Limitations

Keyboards Common, simple and cheap Labour-intensive and slow. Prone to error.
Touch-sensitive screens and Saves space. Integrated graphicual Can be difficult to grasp the techniques for
touch pads user interfaces are very user-friendly accurate data entry. Labour intensive and
and intuitive. slow. Expensive.
Magnetic ink character Speed and accuracy MICR documents are expensive to
recognition (MICR) produce.
Optical mark reading (OMR) Speed and accuracy OMR documents can be expensive to
produce. Also a risk of ‘spoilt’ documents
(marks made outside the allotted boxes).

36
Scanners and optical character Excellent for inputting graphics and Can be slow to scan multiple images. File
recognition (OCR) text quickly sizes might be large for very high quality
scans. OCR can be somewhat inaccurate if
input image is low quality.
Mice and trackball devices Easy to use and very common. Cheap Slow and can be prone to error.
and simple.
Voice data entry (VDE) Convenient and simple. Can be inaccurate and affected by external
interference (noise)
Barcodes and EPOS Very common. Accurate. Quick. Damaged barcodes are impossible to read.
Incompatibility issues if different types of
barcodes are received by the organization.
Digital cameras Versatile, quick, accurate. Higher quality means larger file size which
Widevariety of high quality image can become expensive and difficult to
editing software now available. manage.
Output devices
An output device is the part of a computer system that receives the processed data from the computer and
presents it in some way.
Output device Description

Monitor (display) A monitor is a bit like a television screen – it provides visual output from the
computer for text and graphics. Note though that monitors only offer temporary
output as the image is lost when power removed.
Printers A printer is a device that prints output to a page (on paper). Printing can be in
colour or ‘black and white’ depending on the printer type.
A number of different types of printers exist
Speakers and headsets Speakers are attached to computers for the output of sound. The sound output is
produced by a sound card. Headsets are a combination of speakers and
microphones and are commonly used by gamers.
Storage devices Output may be made to some kind of storage device such as a DVD or CD-
ROM, flash memory (USB flash disk or key), blu-ray drive or external hard disk
drive.
Projector A projector can be thought of as a variation of monitor in that it translates the
digital output into a visual display projected onto a screen.
Storage devices
Computers need somewhere to store all the data such as music, videos, pictures, documents, spreadsheets,
presentations, emails and so on.
Storage type Description
Primary storage (internal memory)  Internal temporary store directly accessible by the CPU that allows it to
process data.
 Volatile by nature as it is erased when power is turned off.
 Much smaller than secondary or tertiary storage
 much quicker to access (as it has no mechanical parts).
Examples include RAM and ROM

37
Secondary storage (external Secondary storage is used for data not currently being processed but which may
memory) need to be accessed at a later stage
Examples include:
 Flash memory (USB flash drives or keys)
 Floppy disks
 CD

Tertiary storage Tertiary storage typically involves a robotic mechanism that mounts (inserts) and
dismounts removable mass storage media into a storage device.
Offline storage Offline storage describes any type of data storage that is not under the control of
a processing unit. The medium is typically recorded on a secondary or tertiary
storage device which is physically removed or disconnected. Off-line storage
therefore needs human intervention to re-connect for subsequent access.
For example keeping a copy of all your important files offline in a separate
building.
INFORMATION TECHNOLOGY AND INFORMATION SYSTEMS

Information technology
Information technology describes the application of computers and telecommunications equipment to store,
retrieve, transmit and manipulate data.
Information system
Information system describes complementary networks of software and hardware that people and
organizations use to collect, filter, process, create and distribute data and information.
System
A set of interacting components that operate together to accomplish a purpose
Business system
A collection of people, machines and methods organised to accomplish a set of specific functions
Information system
All systems and procedures involved in the collection, storage, production and distribution of information
Information technology
The equipment used to capture, store, transmit and present information
Information management
Planning, the environment, control and technology
Elements of a system
The elements of a system include:
 Goals
 Inputs
 Processes
 Outputs
 The environment
 Boundary (this limits the system from its environment)
Open and closed systems

Closed systems

38
The environment has no effect on the system and the system has no effect on the environment.
Open systems
Do interact therefore the environment will affect the system and the system will affect the environment.
System adaptation
Open systems will adapt to their environment with varying degrees of extremity. Examples include:
Deterministic systems
 Use predetermined rules
 Therefore have predicted operations
 Giving predictable outputs
 Examples include machines and computer programs
 These systems will follow a standard and often have a rule book.
Probabilistic systems
 Assign a probability to future events
 Their behaviour is less easy to predict
 Most businesses are examples of probabilistic systems
 When a business sales forecasts it will try to predict sales based on past evidence.
 In effect the business tries to change before the event has occurred.
Self-organizing or cybernetic systems

 Most complex type of system
 Continually changing
 Adapts to the environment
 Example trade union negotiations
 These types of systems are the least likely to be computerized
 Rely heavily on interaction from people
Control systems
Closed loop control has inbuilt control very much like a thermostat in a heating system, they are not
responsive to changes in the environment.
Closed loop control is most suitable for the type of system which is stable. Systems which exist in a
relatively dynamic environment are not suitable for this type of control.
Open loop control systems do not have inbuilt control as it comes from the outside the system - no
thermostat.
A business example would be the whole organisation. Open control systems are responsive to the
environment and they often involve interaction from users.
The elements of a control system include:
 input, process, output
 sensor - measures the output from the system and determines a new value
 comparator - compares the new value with that of the standard
 standard - the predetermined limit set within the system
 effector - effects the feedback into the system can be positive or negative.
KEY ELEMENTS OF INFORMATION SYSTEMS

The key elements of IS are as follows:

39
 Data (raw, unorganized data processed into meaningful and useful information for specific use)
 Database (an electronic filing system to collect and organize data and information)
 Database Management System – DBMS (a software to enter, store, organize, select, and retrieve
data in a database)
 Networks
 Integration (provides an holistic view of data and information available within an organization
under different areas and functions)
 Security and Privacy
Data:
Data are a set of values of qualitative or quantitative variables about one or more persons or objects.
Business data is all the information that is related to a company,
Database:
Database is an electronic filing system that collects and organizes data and information.
DBMS:
DBMS is a software called a database management system, which is used to quickly and easily enter, store,
organize, select, and retrieve data in a database.
The main types of DBMS are:
 Hierarchical database
 Network database
 Relational database
 Object-Oriented database
Popular DBMS examples include cloud-based database management systems, in-memory database
management systems (IMDBMS), columnar database management systems (CDBMS), and NoSQL in
DBMS.
Networks:
A computer network is a group of two or more computer systems linked together by communications
channels to share data and information. T
Computer networks support a vast range of uses including:
 The world wide web (internet)
 Sharing software applications such as databases and Worksheets
 Email
 Sharing devices such as printers, fax machines and scanners
 Online booking systems
 Instant messaging
 Internet-based communication such as Skype
System architectures:
The term system architecture refers to the way in which the components of a computer system such as
printers, PCs and storage devices are linked together and how they interact.
A centralised architecture involves all processing being performed on a single central computer.
Decentralised architectures spread the processing power throughout the organisation at several different
locations. This is typical of the modern workplace given the significant processing power of modern PCs.
Typical network configurations include star networks, ring networks, bus networks and tree networks.
Client-server computing:

40
The client is the application that runs on a personal computer or workstation. It relies on a server that
manages network resources or performs special tasks such as storing files, managing one or more printers,
or processing database queries. Any user on the network can access the server’s capabilities.
A server is a machine that is dedicated to providing a particular function or service requested by

a client within a network system.
File servers manage the data files that are accessible to users of the network. All the shared data files for
the system are held on a file server or are accessible through a file server.
Network servers route messages from terminals and other equipment in the network to other parts of the
network.
Local Area Network (LAN):

A LAN is a computer network covering a small geographic area such as a home, office, group of buildings
or school.
The most common uses of LANs at small businesses
A LAN’s distinguishing features include:
 Due to its localised nature, the data transfer speeds are high
 Typically owned, controlled and managed by one person or a single organization
 Low cost maintenance
 Relatively low data transmission errors
 One LAN can be connected to another LAN over any distance via telephone lines and radio waves
Wide Area Network (WAN):
A WAN is a computer network that covers a broad area i.e. a network that communicates across regional,
metropolitan or national boundaries over a long distance.
A WAN’s distinguishing features include:
 Data transfer speeds are much lower than with LANs due to the greater distance
 WANs exist under collective or distributed ownership and management covering long distances.
 Setup costs are typically higher due to the need to connect to remote areas.
 Furthermore, maintaining a WAN is more difficult (and expensive) than maintaining a LAN due
to its wider coverage.
 In contrast to LANs, the data transmission error rate tends to be significantly higher.
Intranet:
Like LANs, intranets are private corporate networks. Intranets operate behind a firewall that prevents
unauthorized access. They are also considerably less expensive to install and maintain than other network
types. Intranets have many applications, from human resource (HR) administration to logistics.
Virtual Private Network (VPN):

Many companies use VPN to connect two or more private networks (such as LANs) over a public network,
such as the internet. VPNs include strong security measures to allow only authorized users to access the
network and its sensitive corporate information.
Integration:
Company-wide enterprise resource planning (ERP) systems that bring together human resources,
operations, and technology are becoming an integral part of business strategy.
An integrated IT system describes the scenario where all modules of the system are linked and function
together as a system in a coordinated fashion.
For example, an integrated finance system would link a number of underlying modules such as
 Accounts payable control

41
 Accounts receivable control
 Accruals and prepayments
 Bank and cash
 Inventory
 Purchases
 Sales
Advantages of integrated systems
 Offers a more complete view
 Enables better informed decisions
 Should ultimately lead to a more efficient operation
 Which would lead to greater customer satisfaction and hence profitability
Disadvantages of integrated systems

 Greater risk that if one module fails the whole system could fail
 More complex and therefore prone to error
 More expensive than standalone systems
 May require a greater level of support as the system is likely to need to be bespoke (tailored)
specifically to the organisation
Security and Privacy:

Firms are taking steps to prevent costly computer crimes and problems, which fall into several major
categories:
 Unauthorized access and security breaches.
 Computer viruses, worms, and Trojan horses.
 Deliberate damage to equipment or information.
 Spam
 Software and media piracy
Creating formal written information security policies to set standards and provide the basis for enforcement
is the first step in a company’s security strategy.
TYPES OF INFORMATION SYSTEMS

.
There are several types of IS such as:
 Transaction Processing System (TPS)
 Management Support System (MSS)
 Decision Support System (DSS)
 Executive Information System (EIS)
 Expert System (ES)
 Office automation systems to improve the flow of communication.
Transaction Processing System (TPS)

The TPS receives raw data from internal and external sources and prepares these data for storage in a
database similar to a microcomputer database but vastly larger. The DBMS tracks the data and allows users
to query the database for the information they need.
Data could be entered manually as well as electronically
Data entry describes any of the techniques used to initially record data into a system. A few examples of
data include:
 Sales information
 Purchase information

42
 New employee details
 Updates to existing employee details
There are following two ways database can be updated (i) Batch processing, and (ii) Online, or real-time
processing.
Batch processing
 Batch processing is the collection of a group of similar transactions over a period of time, and their
processing at a single time as a batch.
Advantages
 Relatively easy to develop

 Less processing power is required as deals with similar updates
 Checks in place as part of the systems run
 Less hardware required, therefore cheaper.
Disadvantages
 Often delays between when a transaction is made and when the master file is updated and
the output generated.
 Management information is often incomplete due to out of date data.
Often master files kept off line therefore access may not always be available.
Online processing:
 Online processing refers to equipment that operates under control of the central computer but
typically from a different location through some kind of terminal.
 If a service is no longer online (available) it is described as being offline. When a system is offline
its services are no longer available.
Real time processing
 Real time processing is the processing of individual transactions as they occur without the need for
batching them together.
 This type of processing allows the user to update the master files immediately.
Advantages
 Information more up to date therefore providing better management information.

 Increased ability for data to be online. Disadvantages
 Increase in expense as the system becomes more complex to run and to develop.
 Increased hardware capacity which increases costs.
.
Examples of TPS:
Finance and accounting TPS
 Budgeting
 The nominal ledger
 Invoicing
 Management accounting
 The system might be split into a number of modules including:
 Nominal ledger
 Accounts payable
 Accounts receivable

43
 Budgeting
 Treasury management
Human resources TPS

 Personnel records
 Benefits
 Salaries
 Labour relations
 Training
The system might be split into a number of modules including:

 Payroll
 Employee records
 Employee benefits
 Career path systems (appraisal)
Management Information Systems Definition

 A management information system (MIS) is a computerized database of financial information
organized and programmed in such a way that it produces regular reports on operations for every
level of management in a company.
 MIS primarily serve the functions of planning, controlling, and decision making at the management
level. Generally, they depend on underlying transaction processing systems for their data.
 The main purpose of the MIS is to give managers feedback about their own performance
A management information system is characterized as follows:
 Supports structured decisions
 Reports on existing operations
 Little analytical capability and is relatively inflexible
 Internal focus
 Generate regular reports and typically would allow online access to a wide range of users
 Incorporate both current and historical information
Decision support systems

 A set of related computer programs and the data required to assist with analysis and decision-
making within an organization.
 Decision-support systems (DSS) also serve the management level of the organization.
 DSS helps managers make decisions that are unique, rapidly changing, and not easily specified in
advance.
 Clearly, by design, DSS have more analytical power than other systems.
 They use a variety of models to analyze data, or they condense large amounts of data into a form
in which they can be analyzed by decision makers.
Characteristics of a typical DSS

1. They assist tactical level managers in making intelligent guesses
2. They apply formula and equations to facilitate mathematical modeling
3. They enable real-time-systems to solve problems through queries and modeling
4. They use inputs and variables for the model through the user interface
5. They contain a natural language interpreter for querying the system
6. They integrate user interface with data management and modeling software from the key

44
components
7. They create spreadsheet packages as tools for the development of a decision support system
Executive Information System (EIS)

 An EIS, similar to a DSS, is customized for an individual executive. These systems provide specific
information for strategic decisions.
 An EIS incorporates both internal and external data and tends to be more forward-looking rather
than backword-looking.
 EIS typically emphasize graphical displays and simple user interfaces with a ‘high-level’ executive
summary styled dash-board.
Other characteristics of EIS include:
 Helps senior managers to make unstructured decisions with many contributing factors such as price
fixing
 Tends to be very expensive and real-time
 Often limited in use to a small number of senior managers within the business
Expert system
 An expert system is a computer program which uses databases of expert knowledge to offer advice
or make decisions in such areas as medical diagnosis, processing a loan application and on a social
level.
The major components of an expert system are:
1. Knowledge base: It is a database of human experience, scenarios and detail information
about the subjects, gathered from various resources.
2. Inference rules: These are set of logical judgements applied to the knowledge base each
time a user describes a situation to the expert system.
3. User interface: It permits the end user to describe the problem or goal.
Expert systems are most effective when the following preconditions exist:
 problem is reasonably well-defined
 expert can define some rules
 problem cannot be solved through conventional transaction processing systems
 expert can be released to focus on more difficult problems
 investment is cost-justified
The advantages gained from using an expert system include:

 Allows non-experts to make expert decisions
 Fast, accurate and consistent advice
 Ability to change input details to explore alternative solutions
 Reduction in staff costs - less experts required
 Improved allocation of human resources, experts concentrate on more complex issues
 Can become a competitive advantage
 Availability potentially 24 hours 365 days per year
 Multi-access can deal with many problems at one time.
However, some disadvantages may exist, such as:

 High initial capital expenditure
 Technical support required
 System does not automatically learn; it has to be constantly updated by experts
 User as a non-expert may give inaccurate advice without recognising

45
 Down time - systems failures effect all users
 Reliance - probable reduction in basic skills
 Possible user resistance for higher level experts
Financial reporting systems Definition

Financial reporting is the process of producing statements that disclose an organization's financial status to
management, investors and the government.
Order Processing Definition:
 An order processing system captures order data from customer service employees or from
customers directly, stores the data in a central database and sends order information to the
accounting and shipping departments, if applicable.
 Order processing systems provide tracking data on orders and inventory at every step.
Inventory Control System Definition:

 An inventory control system is a system with all aspects of managing a company's inventories;
purchasing, shipping, receiving, tracking, warehousing and storage, turnover, and reordering.
 The characteristics/features of an inventory control system are as follows:
i. The system can report accurately the current inventory level at any time.
ii. A rule should be associated with each item that will trigger a reorder such as minimum
inventory level.
iii. The age of the inventory can be tracked. This will assist sales managers in identifying
ageing stock and employ tactics to reduce it. This is particularly important with perishable
inventory.
iv. The system should be able to highlight shortages.
v. The system should be able to show individual and total cost of inventory items.
vi. The system should maintain supplier details.
vii. Both inward and outward delivery dates must be maintained to enable the warehouse
manager to manage receipts and dispatches of goods.
viii. The location of the inventory should be recorded to ensure it can be found easily and
efficiently.
Personnel System
The personnel system exists to support the human resources management function in performing its duties
of maintaining an appropriate workforce. This involves:
 Recruitment
 Selection; and
 Staff development and appraisal.
.
The system will typically incorporate several components including:
 Recruitment
o Highlighting internal job vacancies that are available to existing staff
o Running external recruitment campaigns and tracking their cost effectiveness
 Redundancy
o Planning and executing voluntary redundancy programs
o Planning and executing compulsory redundancies making sure the company follows all the
legal requirements

46
 Personnel management and control
o Maintaining contract of employment details such as salary, holiday entitlement and duties
o Family and medical contact details
o Employment history
o Training records
o Training plan
o Qualifications and skills
o Amount of holiday accrued and taken
o Sick leave accrued and taken plus authorised absences such as bereavements
o Unauthorized absence
o Time off in lieu
o Disciplinary record
o Bonus and pay history
o Other rewards and commendations
o Annual appraisal
o Goals and objectives
o Formal checks such as references
o Personnel management reporting – management will benefit from seeing graph trends and
summary reports to help with making decisions on headcount. These might include:
o Benefits report
o Headcount (employee numbers) report
o Pay details and total wage expense
o Gender and diversity mix information
o Age profiling
o Tenure profiling
o Absence analysis
Enterprise Resource Planning (ERP)

ERP is a cross-functional system driven by an integrated suite of software modules supporting the basic
internal processes of a business.
The system incorporates a real-time view of core business processes such as:
 Order processing
 Inventory management
Productions Business resources

ERP systems track business resources such as:
 Cash
 Raw materials
 Production capacity
 Personnel
Commitments
ERP systems also track the status of commitments such as:
 Purchase orders
 Employee costs
 Customer orders
LEVELS OF INFORMATION SYSTEMS
Levels of Management Nature of Decision-making Types of IS
Senior Level Strategic management EIS
Middle Level Tactical management MIS, DSS
Operational Level Operational management TPS

47
Operational Level:
The operational level is concerned with performing day to day business
Middle Level:
The middle level users generally oversee the activities of the operational management. This includes
middle-level managers, heads of departments, supervisors, etc. They take tactical, unstructured decisions
partly based on set guidelines and judgmental calls.
Senior Level:
The senior level users make unstructured, strategic decisions. They are concerned with the long-term
planning of the organization. They use information from tactical managers and external data to guide them
when making strategic decisions.
Strategic information relates to long-term decision making e.g. over a 3-5 year time horizon. Strategic
information is useful to senior management and Directors for establishing the overall strategy of the
business.
Tactical information assists managers in making short-term tactical decisions such as:
 establishing a fee to quote on a particular order
 whether to offer discounts on a particular product to help lower excess inventory
 whether to switch suppliers
Operational information relates to the day to day activities of an organisation.
 Daily sales reports
 Daily production reports
 Latest inventory levels
 Details of customer complaints
Uses of information systems
Use Description
Planning Help establish appropriate resources, time scales and forecast
alternative outcomes
Controlling Ensure processes are implemented as planned
Recording transactions Information systems are used to record transactions throughout a
business
Performance measurement Compare actual versus planned (budgeted) activity
Decision making Information systems are used to help managers make all kinds of
decisions such as volume rice, whether to make a component internally
or buy it from a supplier,

48
Chapter 6
BUSINESS ETHICS
What is ethics?
Ethics is defined as the “discipline dealing with what is good and bad and with moral duty and obligation”.
It is a set of moral standards for judging whether something is right or wrong
Business ethics
Business ethics are set of moral principles which guide organizations what is right, wrong, and appropriate
in the workplace.
UNDERSTANDING ETHICAL ISSUES
An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from
among several actions that may be evaluated as right or wrong, ethical or unethical.
Ethical issues in business are generally associated with the following aspects of behavior:
 Acting within the law.
 Fair and honest dealing with suppliers and customers.
 Acting fairly towards employees and showing due concern for the welfare of employees.
 Showing respect and concern for the communities in which the business entity operates.
 Showing respect for human rights, and refusing to deal with any entities that do not show concern
 Suppliers in developing countries who use child slave labor.
 Showing concern for the environment and the need for sustainable businesses.
SITUATIONS INVOLVING BUSINESS ETHICS

Some common examples that may be considered ethical issues are illustrated below.
1. Taking things that don’t belong to you.
2. Saying things you know are not true.
3. Giving or allowing false impressions.
4. Buying influence or engaging in a conflict of interest.
5. Hiding or divulging information.
6. Taking unfair advantage.
7. Committing improper personal behavior.
8. Abusing power and mistreating individuals.
9. Permitting organizational abuse.
10. Violating rules.
11. Condoning unethical actions.
12. Misuse of Organisation Time.
TESTING TECHNIQUES IN ETHICAL DECISION-MAKING

The Mirror Test
To carry out a mirror test, you have to answer a basic question about the ethics of a course of action. If you
choose a course of action, are you able to look yourself in the mirror and see a person who has acted in a
moral and ethical way.
Can you justify the decision you have taken from an ethical perspective?
Three questions that you can ask when carrying out the mirror test are as follows:
1. Is it legal? If it is not legal, you should not be doing it.
2. Even if the action is legal, is it ethically, correct? Does it violate organization’s code of ethics?

49
3. What will other people think?
Consequences Test
Think not only of the potential monetary costs associated with certain causes of action but also the
reputational costs (brand equity), relationship costs, and psychological costs (the burden of regret).
CORPORATE SOCIAL RESPONSIBILITY

Social responsibility of a business refers to the obligations to take those decisions and perform those actions
which are desirable in terms of the objectives and values of society
It is the idea that businesses should balance profit-making activities with activities that benefit society
A business may receive the following advantages from being socially responsible.
 Being a socially responsible organization can bolster an organization’s image and build its brand.
 Social responsibility empowers employees to leverage the corporate resources at their disposal to
do good.
 Formal corporate social responsibility programs can contribute positively to employee morale and
lead to greater productivity in the workforce.
 Embracing socially responsible policies can help in attracting and retaining customers,
Principles of Corporate Social Responsibility

Corporate social responsibility has five main aspects.
1. An organization should operate in an ethical way and with integrity.
2. An organization should treat its employees fairly and with respect.
3. An organization should demonstrate respect for basic human rights.
4. An organization should play a responsible role in its community.
5. An organization should do what it can to sustain the environment for future generations.
Examples of Socially Responsible activities

 Environmental efforts: Businesses, regardless of size, have large carbon footprints. Any steps
they can take to reduce those footprints are considered good for both the organisation and society.
 Philanthropy: Businesses can practice social responsibility by donating money, products or
services to social causes and nonprofits.
 Ethical labor practices: By treating employees fairly and ethically, organisations can demonstrate
their social responsibility.
 Volunteering: By doing good deeds without expecting anything in return, organisations can
express their concern for specific issues and commitment to certain organizations.
CONSEQUENCES OF UNETHICAL BEHAVIOUR

 Poor business ethics can create a very negative image for an organization
 can be expensive for the firm
 The consequences could be the payment of fines to the authorities or compensation to individuals
who have suffered as a consequence of the illegal behaviou
 When businesses act legally but in a way that the general public considers ‘immoral’, there is a risk
of action by the government to make such action illegal.
 Businesses that act in an unethical way are also exposed to reputation risk.
Reputation risk
Organizations with a good reputation find it easier to win and keep loyal customers, and also loyal
employees. When a business reputation is damaged, there is a risk of losing customers to rival organizations.
Other consequences
Ethical misconduct in any organisation can lead to very serious consequences which can cause the
organisation time and money in trying to repair their business reputation

50
 Productivity Levels Decrease
when a level of unethical behaviour starts to form, it can cause productivity levels to decrease which
surround the person or corporation in question.
 Loss of Respect
In episodes where managers or leaders start to make unethical decisions, it can lead to employees
losing a lot of respect for their bosses.
 Loss of Public Credibility
If a lack of ethics in a business becomes public knowledge, that business loses credibility.
 Legal Issues
In severe cases of unethical misconduct, it can lead to severe legal issues that result in loss of time,
large fines, and other penalties including imprisonment.
 Impact on Employee Performance
Lack of ethics has a negative effect on employee performance
 Employee Relations Are Affected
When a manager or head of a business exhibits a lack of ethical behavior, he faces losing the respect
of his employees.
MANAGING ETHICAL BEHAVIOUR IN BUSINESS
Organizations can reduce the potential for ethical consequences by educating their employees about ethical
standards, by providing current news on ethical issues, by leading through example, and through various
informal and formal programs.
Corporate Code of Ethics

 A corporate code of ethics, is a code of ethical behaviour, is a formal written statement, and should
be distributed or easily available to all employees.\
 The effectiveness of a code of ethics depends on the leadership of the organisation, its directors and
senior managers.
If ethical codes are to be effective, then:
 They must be strongly endorsed from the top of the organization.
 Training must be given.
 The code must be kept up-to-date.
 The code must be available to all, for example, through the corporate intranet.
Code of Ethics for Chartered Accountants

Accordingly, ICAP has adopted IFAC’s code of ethics. ICAP members are required to adhere to the
requirements of the Code of Ethics and exhibit the highest standards of ethics and professional conduct that
are expected of the accountancy profession
The Code requires that chartered accountants should comply with five fundamental principles of
professional ethics which are as follows:
 integrity
 objectivity
 professional competence and due care
 confidentiality
 professional behavior
Integrity
 The fundamental principle of integrity to be straightforward and honest in all professional and
business relationships.

51
Objectivity
 Objectivity involves not compromising professional or business judgments because of bias, conflict
of interest or undue influence of others.
Professional Competence and Due Care
 to attain and maintain professional knowledge and skill at the level required to ensure that a client
or employing organization receives competent professional service, based on current technical and
professional standards and relevant legislation; and
 to act diligently and in accordance with applicable technical and professional standards.
Confidentiality
 to respect the confidentiality of information acquired as a result of professional and business
relationships.
Professional Behavior
 to comply with relevant laws and regulations and avoid any conduct that the chartered accountant
knows or should know might discredit the profession.

52
Chapter 7
MARKETING CONCEPTS
The Marketing concept
Marketing is a group of activities designed to expedite transactions by creating, distributing, pricing, and
promoting goods, services, and ideas.
Specifically, the marketing concept involves the following:
 Focusing on the needs and wants of the customers so the organization can distinguish its product(s)
from competitors’ offerings. Products can be goods, services, or ideas.
 Integrating all of the organization’s activities, including production and promotion, to satisfy these
wants and needs.
 Achieving long-term goals for the organization by satisfying customer wants and needs legally and
responsibly
Sales VS Marketing
 Sales incorporates actually selling (exchanging) the company’s products or service to its customers,
against a consideration (e.g., cash or credit),
 While marketing is the process of communicating the value of a product or service to customers so
that the product or service sells.
Marketing Activities
Marketing focuses on a complex set of activities that must be performed to accomplish objectives and
generate exchanges
 Buying. A marketer must understand buyers’ needs and desires to determine what products to make
available.
 Selling. The exchange process is expedited through selling.
 Branding. Branding is an activity that the marketing department would undertake in order to
increase sales or promote the products.
 Transporting. Transporting is the process of moving products from the seller to the buyer.
 Storing. Storing is part of the physical distribution of products and includes warehousing goods.
 Grading. Grading refers to standardizing products by dividing them into subgroups and displaying
and labeling them so that consumers clearly understand their nature and quality..
 Financing. For many products, especially large items such as automobiles, refrigerators, and new
homes, the marketer arranges credit to expedite the purchase.
 Marketing Research. By gathering information regularly, marketers can detect new trends and
changes in consumer tastes.
 Risk Taking. Risk is the chance of loss associated with marketing decisions.
What is a Product?
Anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a
want or need. It includes physical objects, services, persons, places, organizations and ideas”.
Kotler and Armstrong

53
 Product
A product is a complex mix of tangible and intangible attributes that provide satisfaction and
benefits.
 Good
A good is a physical entity you can touch
 Service
A service is the application of human and mechanical efforts to people or objects to provide
intangible benefits to customers.
 Idea
Ideas include concepts, philosophies, images, and issues.
Characteristics of a Product
 A product needs to be relevant.
 A product needs to be communicated
 A product needs a name: a name that people remember and relate to.
 A product should be adaptable: with trends, time and change in segments,
Types of Products
Consumer Products
Products that are bought by the end user are called consumer products.
 Convenience products are widely available to consumers, are purchased frequently, and are easily
accessible
 Shopping products differ from convenience products in that they are not purchased frequently.
Furniture and appliances are examples of shopping products.
 Specialty products are products that specific consumers consider to be special and therefore make
a special effort to purchase.
Industrial Products
These are products which are used as input for manufacturing other products.
 Raw Materials: Raw means unprocessed and untreated material. Raw material is worked upon
and processed for creating end product.
 Manufactured Parts: Some of the raw materials take the form of manufactured parts or
components. These parts are not fashioned or processed further, rather they are assembled into the
final product as they were.
 Capital Items: This category of industrial products includes capital items that are used in the
production process.
 Supplies: Products in this category are usually indirect items that contribute to the production of
end product. These products are also called consumables.
Services
A service is an intangible part of a product. It is an action or effort to fulfil a demand or satisfy customer
needs. It is unable to store or own it and consumed at a point of sale

54
Digital Products
 A digital product is created in a digital format as a file which might be for sale or not
 Consumers who purchase these digital products are known as digital buyers
Difference between industrial and consumer products

Basis Industrial products Consumer products
Meaning These products are used for These products are used for final
further production of other consumption by the direct
goods. consumers.
Number of buyer The buyers of industrial goods The buyers of consumer goods
are limited. are many in number
Buying decision Decisions of buyers are Decisions of buyers are
influenced by technical influenced by advertising and
specification and goodwill. various sales promotional
schemes.
Nature of demand These products have derived These products have direct
demand. demand.
Developing a Marketing Strategy

A plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific
customers
Selecting a Target Market
 A target market is a more specific group of consumers on whose needs and wants a company
focuses its marketing efforts
 Target markets can be broadly classified as consumer markets or industrial markets
Market Segmentation
It is the process of separating, identifying, and evaluating the layers of a market to identify a target market.
Total-market
Assume that all buyers have similar needs and wants.

55
A market segment is a collection of individuals, groups, or organizations who share one or more
characteristics and thus have relatively similar product needs and desires
Common traits used to describe a target market segment include the consumer’s gender, age, and income
bracket but there may be other factors such as:
 Demographic—age, sex, race, ethnicity, income, education, occupation, family size, religion,
social class.
 Geographic—climate, terrain, natural resources, population density, subcultural values..
 Social factors—personality characteristics, motives, lifestyles, faith and belief systems.
Creating a Marketing Mix

These five tools are also called “the marketing mix.” These traditionally are called the 4Ps. Some new texts
have included ‘People’ or ‘Packaging’ as the 5th P of the marketing mix as well:
i. Product A product is something offered in exchange and for which marketing actions are taken
and marketing decisions made.
ii. Price is a value that a consumer is willing to give up in exchange for a product.
iii. Place refers to the process of distribution or making products available to customers in the
quantities desired
iv. Promotion includes methods for informing and influencing customers to buy the product
v. People This includes the process of utilizing organization’s employees to support the marketing
strategies of the company.
The Product Life Cycle

The typical product life cycle has four specific phases:
 Introduction
 Growth
 Maturity
 Decline
Introduction
The introduction phase is the initial period in which consumers are informed about a new product

56
Growth
The growth phase is the period in which sales of the product increase rapidly.
Maturity
The maturity phase is the period in which additional competing products have entered the market, and sales
of the product level off because of the increased competition
Decline
The decline phase is the period in which sales of the product decline, either because of reduced consumer
demand for that type of product or because competitors are gaining market share
BRANDING
 Branding is a method of identifying products and differentiating them from competing products.
Brands are typically represented by a name and a symbol.
 The word “brand” is derived from the Old Norse “brand” meaning “to burn,” which refers to the
practice of producers burning their mark (or brand) onto their products.
 A trademark is a brand’s form of identification that is legally protected from use by other
businesses
Importance of Branding
 Effective branding encompasses everything that shapes the perception of a company or product in
the minds of customers.
 Branding also addresses virtually every aspect of a customer’s experience with a company or
product
 In consumer and business-to-business markets, branding can influence whether consumers will buy
the product and how much they are willing to pay.
Benefits of branding

57
 Branding Gets Recognition
 Branding Increases Business Value
 Branding Generates New Customers
 Improves Employee Pride and Satisfaction
 Creates Trust within the Marketplace
 Branding Supports Advertising
Key Elements/Pillars of Branding
i. Brand Positioning: Branding positioning is all about placing an image of the product in the minds
of customers.
ii. Brand Attributes: The brand attributes are bundle of features and characteristics which highlights
personality aspects of brand.
iii. Brand Elements: The brand elements are components, which creates the identity of brands such
as name, slogan, colour, characters, symbol, sound, jingle, shape,
iv. Brand Ownership: A brand owner may seek to protect proprietary rights in relation to a brand by
registering the trademark
v. Brand Personality: The personality of brand includes all the characteristics of the brand that
represent the business culture, its purpose, overall mission and vision and goals.
vi. Unique Selling Propositions (USP): The USP’s are the key characteristics and factors, which
emphasizes that the company’s product is better than other similar products available in the market.
vii. Brand Image: The brand image is basically customer’s perception about a specific brand
SELLING
 Selling refers to the short term need to close a sale, get an agreement signed, or ultimately do what
needs to be done to sell a product.
 The Selling Concept proposes that customers, be individual or organizations will not buy enough
of the organization’s products unless they are persuaded to do so through selling effort.
Difference between Marketing & Selling
Marketing Sales
Definition Marketing is the systematic planning, A sale is a transaction between two
implementation and control of business parties where the buyer receives goods
activities to bring together buyers and (tangible or intangible), services and/or
sellers. assets in exchange for money.
Approach Broader range of activities to sell Make customer demand match the
product/service, client relationship etc.; products the company currently offers.
determine future needs and has a strategy
in place to meet those needs for the long
term relationship.
Focus Overall picture to promote, distribute, Fulfill sales volume objectives
price products/services; fulfill customer's
wants and needs through products and/or
services the company can offer.
Process Analysis of market, distribution channels, Usually one to one
competitive products and services; Pricing
strategies; Sales tracking and market share
analysis; Budget

58
Scope Market research; Advertising; Sales; Once a product has been created for a
Public relations; Customer service and customer need, persuade the customer
satisfaction . to purchase the product to fulfill her
needs
Horizon Longer term Short term
Strategy Pull Push
Priority Marketing shows how to reach to the Selling is the ultimate result of
Customers and build long lasting marketing.
relationship
Identity Marketing targets the construction of a Sales is the strategy of meeting needs in
brand identity so that it becomes easily an opportunistic, individual method,
associated with need fulfillment. driven by human interaction. There's no
premise of brand identity, longevity or
continuity. It's simply the ability to
meet a need at the right time.
Marketing activities include:

 consumer research to identify the needs of the customers
 product development – designing innovative products to meet existing or latent needs
 Advertising the products to raise awareness and build the brand.
 Pricing products and services to maximize long-term revenue.

59
Chapter 8
HUMAN RESOURCE STRATEGIES
HUMAN RESOURCE MANAGEMENT OVERVIEW
 Human resources (labour) is one of the four traditional factors of production.
 It refers to the economic contributions of people working with their minds and body.
 The success of a business entity depends on the skills and experience of its human resources
The objective of human resource strategy
A responsibility of the human resource management function is to:
 Assess the quantity and quality of human resources currently available, including strength and
skills.
 Estimate the quantity and quality of human resources that will be needed in the future, including
numbers and skills.
 Consider ways of ‘filling the gap’ and ensuring that the entity has the human resources that it needs.
Human Resource Planning

A human resource plan consists of a forecast of the human resources that will be required at a given time
in the future, and plans for ensuring that the required numbers and skills will be available.
A human resource plan of a business enterprise would cover the following areas:
 job analysis and design
 human resource requirements – skills and strength
 recruitment of new staff
 training and development to improve skills
 performance appraisal, to monitor and control the development of skills
 promotion and rewards
 motivation strategy
 redundancies, where some employees will be surplus to requirements, and
 Re-training.
Factors affecting the Human resource Plan

The plans should be realistic, and should therefore take into consideration environmental factors such as:
 population trends, and the total size of the work force in each country
 government policy, such as changes in the retirement age of workers
 educational system, and the numbers of students going from elementary school to college
 the availability of individuals who are trained in a particular skill or vocation
 changing patterns of employment,
 competition for high skill human resources from competitors and other businesses
 trends in sub-contracting and outsourcing
 trends in IT and other technological changes that might affect labour requirements
Job Analysis
Job analysis involves the observation and study of pertinent information about a job—the specific tasks that
comprise it; the knowledge, skills, and abilities necessary to perform it; and the environment in which it
will be performed.
The purpose of a job analysis is to:
 produce a detailed specification of the job (a ‘job description’); and

60
 Produce a specification of the qualities needed from the individual who will do the job (a ‘person
specification’).
Job Description
A job description is a formal description of a job, its purpose and scope, and the formal duties and
responsibilities of the jobholder.
Job Specification
A job specification describes the qualifications and skills necessary for a specific job, in terms of education
(some jobs require a college degree), experience, personal characteristics (job ads frequently request
outgoing, hardworking persons), and physical characteristics.
.
RECRUITMENT
Recruitment starts when a job vacancy is identified. It is the process of obtaining a supply of suitable
possible candidates to fill the vacancy.

61
A job vacancy might be ‘advertised’:

 within the organisation (internally) to existing employees;
 externally, to people outside the organisation; and
 both internally and externally
Internal Recruitment
Internal recruiting seeks to fill open positions with persons already working in the company.
Methods of Internal recruitment
 Performance reports and appraisals of individuals

 List of potential employees who are ready for promotion may be invited to apply for a more senior
job when a vacancy arises.
 The ‘in-house’ or company magazine
 The organisation’s website or HR portal
External Recruitment
External recruiting is an effort to fill positions with applicants from outside the firm.
Sources of external
A company may choose the desired medium based on its goals and overall strategy.
 Recruitment agencies
 Media advertising (Television, Radio, National or international Newspapers)
 Open-house (also called open-days) are commonly used in universities to attract fresh graduates.
 Job Fairs
 Internet resources (e.g. Rozee.pk, Monster.com, etc.) and Social Media (e.g. LinkedIn)
 Internship programs

62
 Company website (Careers section)
SELECTION
 Selection is the process of appointing the most suitable candidate to a job vacancy, by choosing
the best individual from the candidates available.
 Whereas recruitment is concerned with quantity – getting candidates to apply for job vacancies –
selection is concerned with quality – choosing the individual who seems the best for the job.
Selection Process
Initial Screening
During initial screening, an applicant completes an application form and/or submits a resume, and
has a brief interview of 30 minutes or less.
Employment tests
Another step in the selection process is testing. Ability and performance tests are used to determine
whether an applicant has the skills necessary for the job
Selection interview
An in depth discussion of an applicant’s work experience, skills and abilities, education, and career
interests
Background and reference check

If applicants pass the selection interview, most firms examine their background and check their
references
Physical exams and medical exams

A firm may require an applicant to have a medical checkup to ensure he or she is physically able
to perform job tasks.
Decision to hire.
Once the screening is completed, the top candidate can be selected from this list and offered the
job
Offer of employment
The selection process ends with an offer of employment and acceptance of the offer by the chosen
applicant.
Importance of good selection

 Good selection decisions improve the quality of employees within the organisation.
 When an organisation has high-quality employees, it should perform better.
 It will become a competitive advantage for it.
 A good selection is therefore an important factor in improving the human capital
TRAINING & DEVELOPMENT

Training is a process in which individuals are taught something specific.
Development is a process of learning through experience and doing work that augments an employee’s
skillset and prepares him/her for growth
Benefits of training and development
Training and development have benefits for both the employer and the employee.

63
Benefits for the employer
The benefits of training and development for the organisation are as follows:
 Training and development creates a more talented and skilled work force leading to:
 higher productivity, therefore lower costs of output;
 less waste;
 better performance by employees in their jobs; therefore, higher standards of achievement;
 less need for close supervision of subordinates by their managers; and
 An ability to compete more effectively with business rivals.
 Providing employees with training and planned development will improve their morale, and
increase their commitment to the organisation
Benefits for the employee

There are also benefits of training and development for the individual:
 Improves the motivation of the individual and gives them a sense of being more valuable
 Career development increases job satisfaction.
 Improve the individual’s prospects for promotion and higher pay.
Tools of training
Tools of training can be grouped into the following categories:
Formal training in a training room environment:
 ‘In house’, where all the trainees are from the same organisation. (In Pakistan it is common for
‘in-house’ training courses to be delivered by colleagues.)
 ‘External’, where the training is provided by an external trainer or training firm, and the trainees
come from different organisations e.g. the IBA Centre for Executive Education.
Computer-based training (CBT) where trainees work at their own pace from a computer training package.
CBT is highly interactive and typically integrates information and learning-based components with short,
frequent tests.
Training in the work place. Work place training is for technical or practical skills, whereas work place
development helps the individual to gain experience and develop personal skills,
Induction. In-house training may be provided by the organisation’s own trainers and experts. Alternatively,
in-house training may be provided by an external trainer or training firm, hired to deliver the training
programme.
On the Job Training
When an employee learns the job in actual working site in real life situation, and not simulated environment,
it is called on-the-job training and also known as job instruction training
Some types of on-the-job training are listed below:
 Orientation
 Coaching
 Mentoring
 Job instruction manuals
 Apprenticeships
 Work shadowing
Off the job Training

Off-the-job training is conducted in a location specifically designated for training. It may be near the
workplace or away from work, at a special training center or a resort.
Some avenues of off-the-job training may include:

64
 Class room lectures and courses
 Audio visual films and presentations
 Seminars
 Simulation Centres
 Game theory sessions
 Case Study sessions
 Team-Building meets and activities
 Programmed Instruction
 Online courses
Tools of development
Development improves the skills, knowledge and abilities of an individual through real work experience.
Development programmes are commonly associated with managers.
They benefit from development to become better managers, capable of moving on to more senior positions.
Tools of development can be grouped into the following categories:
 Job rotation. Job rotation means moving an individual from one job to another at fairly regular
intervals, so that the individual gains familiarity with the work done in each job.
 Secondment. An individual might be ‘seconded’ to work somewhere else for a period of time.
Secondments are periods of time spent away from the normal working environment, in another
department or as part of a project team.
 Deputising for a manager or supervisor. An individual may be given the opportunity to deputise
for his or her boss when the boss is absent from work for an extended period, on holiday or due to
illness. The individual gains experience by doing the job of the boss for a period of time.
 Delegation. A boss who wants to develop individuals will give the individuals additional
responsibilities, and delegate authority to the individuals to make their own decisions.
 Appraisals. Formal appraisals are a part of development process.
 Job Design. Employees can be given opportunities for development through careful job design.
Two types of job re-design are:
1. Job enrichment Job enrichment means making the job ‘richer’ by building more
responsibility into it.
2. Job enlargement. Job enlargement means giving the job holder more tasks to do, but
without any additional authority.
EMPLOYEES RETENTION
Employee Retention is a process in which the employees are encouraged to remain with the organization
for the maximum period of time or until the completion of the project.
.
Employee Turnover
Turnover, which occurs when employees quit or are fired and must be replaced by new employees,
Why employees leave?

They move due to family reasons to another location, stay home to take care of their loved ones, change
careers, find career growth or promotions, go back for higher education or seek higher salaries. Those
reasons are not easy to address by an employer because they involve life events in the employee’s world
outside of work.
Following are some examples of reasons that can affect an employee’s decision to leave, among others:
 Relationship with the supervisor and co-workers
 Unchallenging work tasks

65
 Financial reasons
 Family and personal reasons
 Termination of a fixed contract
 Financial instability of a company
 Lack of flexible work hours
Employee Retention Strategies

Here are a few strategies that an HR function can employ to retain its valuable employees:
A well-defined career path:

Employees, whether freshers or ones with experience, want to understand how the leadership of an
organisation can facilitate their growth.
Compensation
The employees always have high expectations regarding their compensation packages. Compensation
packages vary from industry to industry. So an attractive compensation package plays a critical role in
retaining the employees.
While setting up the packages, the following components should be kept in mind:
 Salary and monthly wage
 Time to time increase in the salaries and wages of employees should be done.
 Bonus: It is usually given to the employees at the end of the year or on a festival.
 Economic benefits: It includes paid holidays, leave travel concession, etc.
 Long-term incentives: It include stock options or stock grants.
 Health insurance: It is a great benefit to the employees.
 After retirement: It includes payments that an employee gets after he retires
 Miscellaneous compensation: It may include employee assistance programs
Work Relationships
Supervisor or manager builds positive relationships and aids retention by being fair and nondiscriminatory,
allowing work flexibility and work-family balancing
Job and Work-Life

Organizations in which job continuity and security are high tend to have higher retention rates.
Some jobs are considered "good" and others are thought to be "bad," but not all people agree on which jobs
are which. Job design factors that can impact retention include the following:
 A knowledge, skills, and abilities mismatch, either through over qualification or under
qualification, can lead to turnover.
 Job accomplishments and workload demands that are dissatisfying or stressful may impact
performance and lead to turnover.
 Both timing of work schedules and geographic locations may contribute to burnout of some
individuals.
 The ability of employees to balance work and life requirements affects their job performance and
retention.
Work-life balance:
Irrespective of their industry, it is important for working professionals to maintain a work-life balance.

66
Organizational Environment
Organizations should focus on managing the work environment to make better use of the available human
capital. People want to work for an organization which provides:
 Appreciation for the work done
 Ample opportunities to grow
 Friendly and cooperative environment
 A feeling that the organization is second home to the employee
Component of Organizational Component

Organizational environment includes:
 Culture
 Values
 Company reputation
 Quality of people in the organization
 Employee development and career growth
 Risk taking
 Use of leading technologies
 Trust
Recognition and feedback:

Letting your employees know that you appreciate their efforts, recognising and highlighting impactful
outcomes and giving timely feedback is crucial. Similarly, gaining feedback from employees and engaging
oneself in meaningful dialogues to improve areas that are creating obstacles is important.
Transparent and fair reviews:

Enabling transparent and clear reviews and appraisals for employees helps them achieve more with a clear
picture of being rewarded on the basis of merit.

67
Chapter 9
BUSINESS OPERATIONS OF A MANUFACTURING ORGANISATION
OPERATIONS OF A MANUFACTURING COMPANY
The Transformation Process
Objectives of operation management in Manufacturing
 to focus on quality,
 to minimize the costs of materials and labor, and
 to eliminate all costs that add no value to the finished product.
Responsibilities of operation management in Manufacturing
Making the decisions involved in the effort to attain these goals is the job of the operations manager. That
person’s responsibilities can be grouped as follows:
 Procurement & purchasing. Before production begins, a company must plan the sourcing of
materials and inputs that are required for making a finished product.
 Production planning. Overall, four important decisions are made in production planning (i) type
of production process, (ii) site selection, (iii) facility layout, and (iv) resource planning.
 Production control.. Three key scheduling tools are: Gantt charts, the critical path method (CPM),
and the program evaluation and review technique (PERT).
 Quality control. Quality control requires a company-wide dedication to managing and working in
a way that builds excellence into every facet of operations. Key techniques include total quality

68
management (TQM), and six sigma. ISO 9000 and ISO 14000 are the industry standards to ensure
the existence of sound quality procedures.
 Continuous Development. At the end, finding more efficient methods of producing the products
is imperative to remain competitive in the marketplace.
Production planning Phases:
Production planning involves three phases.
1. Long-term planning has a time frame of three to five years. It focuses on which goods to produce,
how many to produce, and where they should be produced.
2. Medium-term planning decisions cover about two years. They concern the layout of factory or
service facilities, where and how to obtain the resources needed for production, and labor issues.
3. Short-term planning, within a one-year time frame, converts these broader goals into specific
production plans and materials management strategies.
Types of Production Process:
There are three types of production process: mass-production, mass-customization, and customization
(i) In mass-production, manufacturing many identical goods at once, is the common theme.
(ii) In mass-customization, goods are produced using mass-production techniques, but only up to
a point.
(iii) In customization, the firm produces goods one at a time according to the specific needs or
wants of individual customers.
Timing
(i) continuous process,
A continuous process uses long production runs that may last days, weeks, or months without
equipment shutdowns..
(ii) intermittent process
In an intermittent process, short production runs are used to make batches of different products.
Location
Another major decision is about where to locate the manufacturing facility. The facility’s location affects
operating and shipping costs and, ultimately, the price of the product or service and the company’s ability
to compete. Firms must weigh several factors to make the right decision such as:
 Access to production resources / inputs:
 Marketing: This includes proximity to customers and competitirs.
 Manufacturing base / zone: This include industrial zones where many other manufacturing units
are already based.
Layout:
The goal is to determine the most efficient and effective design for the production processMain types of
facility layouts are process, product (or assembly-line), fixed position, and cellular manufacturing.
 The process layout is a facility arrangement in which work flows according to the production
process. All workers performing similar tasks are grouped together, and products pass from one
workstation to another. The process layout is best for firms that produce small numbers of a wide
variety of products,
 The product (or assembly-line) layout is a facility arrangement for products that require a
continuous or repetitive production process. When large quantities of a product must be processed
on an ongoing basis, the workstations or departments are arranged in a line with products moving
along the line.
 The fixed-position layout is a facility arrangement in which the product stays in one place and
workers and machinery move to it as needed.

69
Resource Planning and Supply Chain Management:
 Resource planning begins by specifying which raw materials, parts, and components will be
required, and when, to produce finished goods. Resource planning include key decisions like make-
or-buy, outsourcing, and inventory management.
 Supply-chain management focuses on smoothing transitions along the supply chain, with the
ultimate goal of satisfying customers with quality products and services.
Information Systems:
Selecting the type of information systems to control the flow of resources and inventory. Some of the key
systems in use are: Material requirement planning (MRP), Manufacturing resource planning II (MRPII),
Enterprise resource planning (ERP).
MANAGEMENT OF A MANUFACTURING FACILITY

An organization chart shows the chain of command of the company and the proper flow of responsibility
within the manufacturing set up which is essential for the company to run in an efficient manner.
Types of human resource in a manufacturing set-up
Executive Management
 Executive management is the top of the organization.
 An executive manager may be a person with the title of Chief Executive Officer, Chief Operating
Officer, President or other similar title.
 An executive manager has the ultimate responsibility of choosing a manufacturing strategy,
Manufacturing or Production Manager

 These the leader of the production workers and supervisors in the production facility. M
 The production manager usually reports the successes or failures of the predetermined
manufacturing strategy to the executive manager.
Production Line Supervisors

 Production line supervisors are the liaison between the production workers and the production
manager.
 The production line supervisor is responsible for only the production, or assembly,
 It is essential for the production manager to relay the manufacturing strategy given to him to the
production line supervisors that report to him
Production Workers
 The production worker is at the bottom of the manufacturing organizational chart.
 The production worker, when trained properly and given the proper tools needed to complete his
job efficiently, can be the reason for the success or failure of the manufacturing strategy. \
 Production workers report to the production line supervisor.
TYPICAL STRUCTURE OF A MANUFACTURING COMPANY

The Organization Structure
The structuring or organizing process is generally accomplished by three primary decisions:
 Division of labor: determining job duties and responsibilities
 Departmentalization: grouping jobs together
 Delegation: assigning authority and responsibilities

70
Division of Labour
Division of Labour means that the main process of production is split up into many simple parts and each
part is taken by different workers who are specialized in the production of that specific part.
Key advantages of division of labour in a manufacturing concern are:
 Increased efficiency
 Improvement in quality
 Utilisation of specialised skills and talents of workers
 Economies of scale
 Faster training of workers
Disadvantages
 Boredom
 Lack of creativity
 Redundancy due to new technology
 Lack of responsibility and interdependence
Departmentalization
Traditional structures are quite rigid, grouping employees by one or more of the following criteria:
 Function
 Products
 Processes
 Customers
 Regions
 Functional Departmentalization
Functional departmentalization bases the departments on the primary functions conducted by the
company.
 Product Departmentalization
Product departmentalization divides company resources based on the products being manufactured.
 Process Departmentalization
Process departmentalization divides departments based on the work being done.
 Customer Departmentalization
Customer departmentalization usually involves different units based on the type of customers being
served.
 Geographic Departmentalization
When a manufacturer has more than one location, it's often advantageous to divide the company
by region
 Delegation
Delegation is a process the manager uses in distributing work to the subordinates.
Combining Business Structures

Procter & Gamble's "four pillars" refer to four departmentalization models, which it uses at the same time.
1. First Pillar: Global business units organize the company by its product lines,
2. Second Pillar: Selling and marketing operations groups are arranged with the geographical model
3. Third Pillar: Global business services division also uses a geographic model to support its other
business units in areas like accounting, information technology, payroll and facilities management.
4. Fourth Pillar: Corporate functions, using the functional model, provides the company with
resources such as human resources, legal, marketing, research and development and business
development.

71
5. Fifth Pillar: Global business services division also uses a geographic model to support its other
business units in areas like accounting, information technology, payroll and facilities management.
Choosing an Organizational Structure

It is important to align the choices in organizational structure with the company’s strategies. This involves
asking critical questions such as:
 Should manufacturing responsibility be centralized, or should decisions be made locally to account
for regional differences?
 How can you best ensure technology standards are implemented across all business units?
 Should units like engineering, asset management and maintenance be integrated into manufacturing
or separated from it?
 How much responsibility will plant managers have?
 How will responsibility be organized below the plant manager?
Overall, a manufacturing business functions best when its facilities, technologies, and policies are
integrated with recognized priorities of corporate strategy. That’s how a manufacturing business gain
efficiency by improving its operations and productivity.
The manufacturing organizational structure also needs to be consistent with the corporate priorities.
However, simplicity of design is the main element, which in turn requires to have a balance between two
extreme structures such as either a product- or a process-focused form of organization. The proper selection
of an optimal organization structure can smooth a company’s growth by lending stability and efficiency to
its operations.
Comparison between product-based and process-based manufacturing organizational structures:
Key Responsibilities Product-based Process-based

Organization Organization
Responsibility of cost or profit Product groups level Centralized at corporate level
assigned
Centralized corporate staff - Small Large
relatively
Corporate function
responsibilities  Review request for  Assistance to marketing
funds  HR policies
 Communicate corporate  Recruitment of plant
policies controllers
 Assist in functional  Procurement and
needs of: logistic
 HR management and  Inventory management
development  Assistance in production
 Procurement scheduling
 Performance evaluation  Plant performance
of plant controllers as a evaluation as a cost
profit center center
Manufacturing & operational

responsibilities  Assistance to marketing  Operational efficiency
 Procurement and  Operational level
logistics recruitment for plant

72
 Production scheduling  Training and
and control development for
 Management level operational staff
recruitment for plant
KEY DEPARTMENTS OF A MANUFACTURING COMPANY

 Production
 Research and Development (R&D)
 Purchasing
 Marketing and Sales
 Human Resource Management
 Accounting and Finance.
Production
The Production function undertakes the activities necessary to provide the organisation’s products or
services. Its main responsibilities are:
 production planning and scheduling
 control and supervision of the production workforce
 managing product quality (including process control and monitoring)
 maintenance of plant and equipment
 control of inventory
 deciding the best production methods and factory layout.
.
The Research and Development function
The Research and Development (R&D) function is concerned with developing new products or processes
and improving existing products/processes
Purchasing
The primary responsibility of the Purchase department is to find and acquire the most suitable material at
the most optimum price in alignment with the overall objectives of the company and the production
department.
Marketing & Sales
Once any product or service is ready to consumed by the end users, it is important to communicate to the
target audience about them and the company. .
Human Resource Management
Human resource management in the manufacturing industries is often concerned with payroll,
administrative work and mediating between the management and the workers.
Accounting and Finance

The Accounting and Finance function of a manufacturing company is concerned with the following:
 Financial record keeping of transactions involving monetary inflows or outflows.
 Preparing financial statements
 Payroll administration for paying wages and salaries and maintaining appropriate income tax and
insurance records.
 Preparing management accounting information and analysis to help managers

73
MANUFACTURING AND OPERATIONS MANAGEMENT

Manufacturing operations management refers to the ongoing process of monitoring and improving
production processes.
Typically, manufacturing management centers on optimizing efficiency to produce the best quality products
at the lowest possible prices.
Benefits of a Manufacturing Operations Management include:

1. Giving your company a competitive advantage
Managing your business operations gives you the ability to deal with important internal and external factors.
Some of the key internal factors include intellectual capital, operating policies, and average attrition rates.
The external factors to improve competitiveness are political (e.g., new legislation), economic (e.g.,
inflation), social (e.g., change in fashion or taste). A business can does not control external factors, but
rather try to exploit them in its own favour.
2. Increasing your profitability
When the operations are running smoothly, managers will have more time to generate new ideas
and apply them to increase company sales.
3. Increased efficiency and product quality
Operations management gives you the opportunity to increase the efficiency of the way you
manufacture goods.
4. Ensures you comply with government regulations
By managing your business operations, each head of the department in your company takes the
responsibility to ensure that all tasks performed under him are done in a lawful manner.
5. Increased customer satisfaction
Meet customer expectations by deploying a quality management program to help maintain high
standards while ensuring efficiency.
6. Helps in waste reduction
Another benefit of employing manufacturing operations management is the application of
manufacturing systems that aid in reducing waste production.
7. Increased teamwork
Manufacturing operations management requires different departments to work together to produce
quality products. This helps improve business productivity and meet the expectations of your
customers.

74
Chapter 10
INDUSTRIES OF PAKISTAN
POWER INDUSTRY
 Pakistan’s power sector consisted of two government owned utilities, WAPDA and K-Electric
 While K-Electric was responsible for power distribution in Karachi and adjacent areas; WAPDA,
a semi-autonomous statutory body, was mandated to regulate and distribute power in the remaining
country. In addition, water and hydropower resources came under the umbrella of WAPDA.
 KESC was privatized in 2005 as K-Electric (KE)
 WAPDA was unbundled into various Generation Companies (GENCOs), National Transmission
& Dispatch Company (NTDC) and Distribution Companies (DISCOs), while the functions of its
power wing were redefined as Hydel Power Generation and Operation & Maintenance (O&M) of
power houses.
Key Glossary:
A value chain is a set of activities that an organization operating in a specific industry performs in order to
deliver a valuable product for the market.
Upstream refers to the material inputs needed for production, while downstream is the opposite end, where
products get produced and distributed.
Vertical integration refers to an arrangement in which the supply chain of a company is integrated and
owned by that company.
Supply chain refers to the entire process of making and selling commercial goods, including every stage
from the supply of materials and the manufacture of the goods through to their distribution and sale.
Capital intensive refers to the degree that a company must invest money in physical or financial assets in
order to produce a profit.
Generation – at a power plant

 The upstream part of the value chain is called Generation or Generators.
 Different technologies and fuel sources are used for this purpose.
Transmission – from turbine to grid station
 When the turbines generate electricity, its voltage is significantly increased by passing it through
step-up transformers.

75
 Once the high-voltage electricity reaches the grid, electricity is reduced in voltage, again through
the use of transformers, to make it safe for use by households and end users.
Distribution – from grid station to end users
When electricity leaves the Grid Station’s transformer, it enters distribution power lines on its way to the
final destination. Once it reaches the neighbourhood, electricity passes through another transformer (usually
pole-mounted, called PMT) for further voltage reduction. This ensures that it is safe to use in homes and
offices
Transmission & Distribution Losses
The shortfall of electricity between energy generated and energy billed is called transmission and
distribution losses.
Salient Features of a Power Generation Company
Capital intensive
The industry is highly capital intensive particularly in the area of electricity generation
Tariff (pricing)
Pricing in the power industry is determined by the regulator and government authorities.
Subsidy in tariff
Subsidies are provided by government in different segments to encourage or promote a certain
segment of the economy or particular industry and consumers.
Fixed return ensured to investors
A tariff on the basis of fixed rate of return on investment over plant life/contract period is
determined by the regulator; and is contracted. All cost variations are also admissible.
Government guarantee
GOP issues guarantee to IPPs, backing up the payment obligation of the power purchaser
Predominated by government
With contribution of private sector mainly in generation segment, the sector has high dominance
by government.
Highly regulated
Power Sector is a highly regulated sector. Regulatory authority for this purpose is NEPRA,
Composition of a Typical Power Company
Core Business Functions
The core business functions remain the technical side of the business and includes plant and network
operations and maintenance side..
The following are some of the support departments in a power company:
 Finance
 Procurement and logistics
 Regulatory
 Health, safety and environment (HSE)
 Information Technology
 Billing function
 Marketing and communication
Finance
As with all other industries, finance department oversees the entire financial management of the
organization.
Typical finance functions include:
 General Accounting & Financial Reporting
 Taxation & Insurances

76
 Business Partnering
 Accounts Payable
 Accounts Receivables
 Budget Monitoring & Control
 Treasury Management
 Management Reporting
Procurement and logistics

Procurement and logistics strive to ensure that required items are timely available to business unit at
competitive price.
Its inventory management segment ensures that stores and spares are kept in pristine condition and are
ready for use when the need arises.
Regulatory
Regulatory / legal function ensures that the organization is in compliance with laws and regulations and
their application.
Health, safety and environment (HSE)
Operating in a sector where the primary product poses a hazard to life, HSE is of utmost importance.
Some of the key responsibilities of HSE are:
 Compliance with legal and regulatory requirements related to HSE
 To ensure HSE requirements are embedded in routine and non-routine activities
 Prevention of injuries and ill-health through proactive system of risk management
 Conservation of natural resources and reduction of carbon footprint by assessment to environmental
impact and mitigation of adverse effects
 Employee trainings and supervision
 Continuous improvement through a system of performance planning, measurement and regular
reviews
Human Resources
Some of the key responsibilities of this function are:
 Source and retain manpower with required skillset to work on plant and network
 Maintaining industrial relations for labour
 Learning and development of talent
 Mapping the needs of employees in various segments and expectations of the company
Information Technology
Some of the key responsibilities of this function are:
 Infrastructure development and maintenance over large geographical area
 Integrity and security of customers / suppliers information
 Provide need based hardware & software solutions along with integration of
Billing Function
Billing function ensures timely issuance of accurate bills to customers and their subsequent recovery. Some
of the key responsibilities of this function are:
 Management of a large volume of various consumer segments of a distribution company
 Customer account maintenance
 Loss minimization and timely recoveries
 Addressing customer complaints

77
Marketing and Communication
Due to monopolistic nature of business with long term secured contracts and exclusive area licenses
available, marketing function in power sector is limited to:
 Media and PR management; as power related issues directly affect the lives of people
 Uplift and secure the corporate image
 Communication for corporate affairs
Key Challenges
Some of the key challenges faced by a power company are as follows:
 Availability of machines and network and their efficient operation
 Reliable and safe operations
 Uninterrupted power supply to consumers
 Prompt response to customer complaints
 Timely collection of bills
 Reducing power theft and line losses
 Circular debt issue
TEXTILE INDUSTRY
 The main factor to contribute to such huge developments in the textile industry is the production
of cotton in the country,
 Export aprox 57% for 2020-21
 40% industry Employment
 All Pakistan Textile Mills Association (APTMA) being the major representative association of
textile sector in Pakistan, has 396-member textile mills out of which 315 are spinning units, 44are
weaving units and 37 are composite units.
In recent years, growth in textile industry has been dull and stagnant due to multiple factors:
 Textile products are available at lower prices in other countries because of subsidies and other
benefits and therefore Pakistan’s products have become less competitive.
 In Pakistan, tariffs on imported textile materials are applied to provide protection to domestic
industry which has resulted in inefficiencies in the local manufacturing process.
 Stagnant domestic cotton production, due to climate changes, farmers’ interest in more profitable
crops, or lack of using new technology and modern methods of harvesting.
 Limited number of value added products.
 Low usage of manmade fibers.
 Failure to benefit from cost efficiencies through cluster development & growth.
 Absence of modern management practices.
 Lack of skilled labor
The Value Chain of Textile Business

Raw Material Sourcing (Cotton, Polyester & Viscose)
Primary raw materials used in the textile industry are cotton, polyester and viscose.
The other two raw materials are manmade fibers which are both locally produced and imported.
Spinning
Spinning is a process in which raw materials including cotton and polyester are converted into yarn in a
climate controlled facility.
Weaving

78
In weaving, yarn thread from the spinning department is weaved to form greige (unfinished woven or
knitted) fabric. Weaving is a process in which longitudinal threads i.e. threads along the length of fabric
(warp) and lateral threads i.e. threads along the width of fabric (weft) are interlaced to manufacture fabric.
Warping:
It is a process of making a sheet of yarn threads in the form of warping beam. There are different types of
warping such as direct / beam warping, sectional / pattern warping and ball warping.
 Sizing: In this process, the number of ends required for a given fabric quality are taken from
multiple warping beams to the weaving beam. Moreover, sizing chemicals are applied on yarn
thread to cover the yarn surface to withstand friction in weaving process.
 Drawing: It is a process of preparing weaver's beam for the purpose of weaving fabric on the loom
according to design of the fabric.
 Weaving: It is a process of making fabric by interlacement of warp and weft on looms.
 Folding: Weaved cloth from loom shed is brought into folding section for inspection, mending,
grading and packing of fabric. Inspection of fabric is generally done on basis of 4 Point system
(American system). Maximum 4 penalty points can be given to one fault. If points per 100 sq. yards
are less than 20, fabric will be graded as ‘A-Grade Fabric’, however, the criteria is generally agreed
with customers for quality of fabric. After inspection, packing is done in form of bales, rolls or
thaans as per the requirement.
Processing
In processing, greige fabric is converted into processed fabric i.e. fabric is bleached, dyed and/or printed.
As per the desired quality of processed fabric, fabric route is determined for applying different processing
operations which are summarized below:
 Singeing: Singeing is designed to burn off the surface fibers the fabric to invoke smoothness in it.
The fabric passes over brushes to raise the fibers, then passes over a plate heated by gas flames.
 De-sizing: De-sizing is the process of removal of sizing material on fabric (greige fabric is sized as
part of weaving).
 Scouring: Scouring, is a chemical washing process carried out on fabric to remove natural wax and
non-fibrous impurities from the fabric including soiling and dirt. At this stage even the most
naturally white fabric is in yellowish tone.
 Bleaching: Bleaching improves whiteness of fabric by removing natural coloration and impurities
from the fabric through a washing process. The degree of necessary bleaching is determined by the
required whiteness and absorbency of fabric.
 Dyeing: Dyeing is the process of adding color to the bleached fabric as per requirement.
 Printing: Printing is the process of applying color designs and patterns to the fabric. There are
different kinds of printing such as digital printing and printing through engraving screens.
 Finishing: In finishing, different processes are applied to improve the look, performance, shrinkage,
or ‘hand’ (feel) of the fabric. Such finishing processes include raising, calendaring and sanforizing.
 Folding: It is consistent with the one in weaving, however, processing faults are also inspected
during this process
Garment Manufacturing
In manufacturing, fabric is cut and stitched as per requirement and design of desired product. This section
is further divided into three major categories: woven, knitted and home textiles.
Quality Controls and Quality Audits

Parallel with all production operations from spinning to final product, quality controls are being exercised
to ensure prevention of production faults and to rectify defects on spot, rather than waiting for the
manufactured product.

79
These quality audits are generally applied to ensure that shipped goods are not rejected at customer’s quality
audit.
 Cutting: First, fabric is spread for bulk cutting and is cut using the manual or automated machines.
 Stitching: After cutting, the cut pieces along with stitching accessories such as threads, buttons,
hooks and zips are forwarded to stitching section where workers sew the cutting pieces into required
product.
 Laundry: Here the production is washed for cleaning and de-sizing to give it the required final look
and feel.
 Finishing: The pressed articles along with packing accessories such as insert cards, stickers,
branding hashtags and labels are packed into cartons or polythene bags as per requirement.
Shipment and Logistics

The last part of value chain is arranging shipments for customer. For local customers, both ex-mill and ex-
party terms are agreed with customer. In ex-mill terms, arranging transportation is the responsibility of the
customer, whereas in ex-party terms, the company is responsible for transportation. For export suggested
terms for customer, including Free On Board (FOB) and Carriage Insurance and Freight (CIF) are generally
agreed with. These terms are generally called incoterms.
Core Operations of a Textile Business
Accounts and Finance
Roles (including but not limited to) are as follows:
 Budgeting and forecasting
 Financing and treasury operations
 Working capital management
 Costing
 Financial statement closing process
 General accounting
 Legal compliances including those relating to taxation, corporate and labor laws
Sales and Marketing

There are different sales and marketing channels in textile industry such as export markets, local markets
and retail network.
The top five export markets along with percentage share for each kind of Pakistani value added textile
products are as under:
 Ready Made Garments (US$ 2.451 billions):
o USA (23%) Spain (14%) United Kingdom (13%) Germany (13%) Belgium (6.97%)
 Bed ware (US$ 1.768 billions):
o USA (27%) Germany (14%) Netherlands (10%) Belgium (8%) Italy (7%)
 Textile Made-up other than Bed ware & Towels (US$ 0.57 billions):
o USA (77%) Germany (7%) Netherlands (3%) France (3%) Canada (2%)
 Cotton Fabrics (US$ 1.438 billions):
o Bangladesh (33%) Italy (11%) Turkey (11%)%) China (9%) Portugal (6%)
Health Safety and Environment (HSE)

Workers are trained in PPE (Personal Protective Equipment), firefighting and responding in emergency
conditions. Textile companies are to ensure that hazardous wastes and chemical effluents are treated to
remove hazardous materials before discharging these wastes in environment.

80
PHARMACEUTICAL INDUSTRY
There are approximately 650 companies operating in the Pakistani Pharmaceutical market, out of which
less than 30 are multinational companies. The Pharmaceutical industry contributes approximately 1% to
the GDP of Pakistan annually. Today Pakistan has about 759 pharmaceutical manufacturing units including
those operated by 25 multinationals present in the country. The Pakistan Pharmaceutical Industry meets
around 70% of the country’s demand of Finished Medicine.
The Pharmaceutical market in Pakistan is estimated by IMS (MAT June 2017) at Rs.300 billion, growing
at a rate of 12% (5 year CAGR). The industry is dominated by local / national companies which account
for 2/3rd of market share whereas multinationals enjoy the remaining 1/3rd. Top ten companies constitute
approximately 46% of the market whereas top 50 share approximately 90% of the market.
Salient Features of a Pharmaceutical Company

Sales Incentives
Medical Representatives are given a fixed salary and a variable incentive pay.
Payments to Drug Regulatory Authority of Pakistan (DRAP)
There are certain special payments made to DRAP for various purposes including:
1. Central Research Fund: Annual levy of 1% of Profit Before Tax
2. New Drug Registration Fees
3. Drug Registration Renewal Fees
4. Drug Manufacturing License Fees
Payments to Healthcare Professionals

Pharmaceutical companies make various kinds of payments to Healthcare Professionals (HCPs)/Healthcare
Organizations (HCOs) with respect to services obtained from them. These payments include honoraria for
delivering lectures in conferences and symposia, Local Speaker Programs (LSPs) and Round-Table
Discussions (RTDs) covering topics based on latest research in various areas of medicine, awareness
programs for HCPs as well as general public.
Sales Invoicing, Delivery and Receipt of Collection
Pharmaceutical companies generally sell their medicines on advance payment to their distributors.
Scientific Information
A Medical Affairs Department in any pharmaceutical company plays an increasingly important role in
communicating scientific information to HCPs in an objective and ethical manner. It provides medical
education on latest clinical research, treatment guidelines, new medicines, their medical benefits to patients
and any risks of side effect.
Clinical Trials
Clinical trials are undertaken to develop medical research evidence to understand efficacy of new medicines
in treating diseases. Clinical trials are research studies that test how well new medical approaches work on
people
Role of Pharmaceutical Companies, Opportunities and Challenges
Opportunities for Pharma Industries
Market Attractiveness

81
Pakistan’s large population with sub optimal access to quality medicines and high disease burden offers
growth opportunities to pharma companies.
Export Potential
According to McKinsey study, with certain deregulation, Pakistan’s export potential could reach one billion
dollars which is currently less than 200 million dollars in Pakistan
Bangladesh and India have many Food and Drug Administration (FDA) approved plants. However, we do
not have a single manufacturing plant that is FDA approved.
Challenges for Pharma Industries
Price Controls
Pharma industry is largely import dependent; continuous weakness of Pak Rupee has resulted in high
inflationary environment together with high utility cost. In such an environment price controls hurts margin
and industry attractiveness
Delay in New Medicine Registration
It takes significantly longer time to obtain registration for new research-based products. Delay in
registration adversely affects patient’s access to more effective new treatment.
Sourcing APIs and Way Forward
The pharmaceutical industry is highly dependent on import of active ingredients from neighboring countries
such as China and India. Reliance of local pharmaceutical industry on India is estimated at 60%
OIL & GAS EXPLORATION
Oil and gas industry is categorized into three major segments namely:
 Upstream,
 Mid-Stream and
 Downstream.

82
Petroleum Supply Chain
 Upstream
Petroleum supply chain infrastructure in Pakistan starts from port facilities at Karachi. Crude oil,
white-oil products, Low Sulphur Furnace Oil (LSFO) are received at the Karachi port, while LPG
and High Sulphur Furnace Oil (HSFO) are received at the Fauji Oil Terminal at Port Qasim. The
port facilities are connected to the tankage/storage facilities of the refineries and oil marketing
companies (OMCs).
 Midstream
In the midstream—the bulk of petroleum products required by Pakistan’s market is transported by
road, oil pipelines and railways
 Downstream
In the downstream oil sector, there are currently seven refineries and twenty-eight Oil Marketing
Companies (OMCs) operating in Pakistan.
Gas Supply Chain

Gas explored and produced is transferred to two main gas utilities Sui Northern Gas Pipeline Limited
(SNGPL) and Sui Southern Gas Company Limited (SSGCL) via pipelines for further distribution to the
end-consumers.
In comparison, the supply chain of imported LNG starts at the Port Qasim Karachi. The LNG imported is
re-gasified at the plants installed at the port. The re-gasified LNG is then transferred via pipelines to the
two utilities for further transmission.
Salient features of an Oil and gas exploration company

Land Acquisition
Large areas of land are required to carry out the E&P activities.
Land is acquired via either purchase or rental/lease, short term or long term. During Exploration Phase,
land is usually taken on short-term rental/lease, whereas, for Development and Production Phase, it is either
purchased or taken on long-term rent/lease.
Procurement
Most of the material required for drilling and setting up processing facilities is imported.
.
Health, Safety and Environment (HSE)
Every company in the E&P industry has comprehensive HSE policies and procedures and exhibits a
significant focus on HSE
Training and Development

Being a highly specialized industry with continuous technological advancements, it is crucial to provide
specialized training and development opportunities to staff. Most of the companies have a dedicated section
within HR department or a separate training and development department for continuous training of the
staff involved in the operations.
Finance, Accounting and Taxation
The finance function in E&P industry is similar to any other industry apart from some functions dedicated
to some industry specific calculations, financial planning and tax related workings.
Social welfare
E&P activities in Pakistan are generally carried out in less populated and under-developed areas, which are
in need of necessities such as water, electricity, clinics, schools and colleges. E &P companies have
contributed for the last many years in the following areas:
 Provision of water resources for drinking and cleaning
 Primary and secondary schools and vocational training centers

83
 Building and managing small hospitals and dispensaries to provide health services to local
communities
 Vaccination against communicable diseases such as Hepatitis B and C

ITB Notes

Uploaded by

Copyright:

Available Formats

ITB Notes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ITB Notes

Uploaded by

Copyright:

Available Formats

PRC-05

Hafiz Junaid APFA, CA(F)

Paper Pattern MCQ,s

Hafiz Junaid APFA, CA(F)

Hafiz Junaid APFA, CA(F)

Vision (Future Outlook)

Effective Vision Statement

Effective Mission statement

The relevance of the mission statement

Hafiz Junaid APFA, CA(F)

Who decides mission, goals and objectives?

How to set effective goals

Hafiz Junaid APFA, CA(F)

Problems created by goals

 unrealistically challenging – result is the employee simply gives up

Factors of Production: The Building Blocks of Business

Human Resources (Labor)

 people or groups within the organisation (internal stakeholders), or

Hafiz Junaid APFA, CA(F)

Executive directors and senior managers

Hafiz Junaid APFA, CA(F)

Hafiz Junaid APFA, CA(F)

Source of power: External Example

Source of power: Internal Example

Power Interest Matrix

Hafiz Junaid APFA, CA(F)

Fctors affecting Organization

TYPES OF BUSINESS ORGANIZATIONS

Hafiz Junaid APFA, CA(F)

Advantages of Sole Proprietorships

Disadvantages of Sole Proprietorships

Hafiz Junaid APFA, CA(F)

Hafiz Junaid APFA, CA(F)

Limited liability partnerships (LLP)

Higher availability to raise funds.

Combined Knowledge and Skills.

Flexibility of decision making.

Less Regulatory Control.

Hafiz Junaid APFA, CA(F)

LIMITED COMPANIES OR CORPORATIONS

Initial public offering

Structure of a company / corporation

Hafiz Junaid APFA, CA(F)

Combination of resources and economies of scale.

Ease of transferring ownership.

Ability to attract financing.

Cost and complexity of formation.

Hafiz Junaid APFA, CA(F)

Summary of Advantages and Disadvantages of Major Types of Business Organization

Sole Proprietorship Partnership Corporation

Secrecy Higher ability to raise funds due Ease of transferring

Ease of government Ease of regulatory control Ability to attract funds

Lower taxation Business income taxed as Ability to attract

Difficulty in raising funds Complexity of profit and loss Double taxation of

Lack of continuity Potential for conflicts among

Difficulty in finding Limitation of growth

Hafiz Junaid APFA, CA(F)

Public sector organizations:

Clubs and societies:

LAWS GOVERNING BUSINESS ORGANISATIONS