Purchasing Policies

Introduction
Industrial purchasing includes buying from outside sources the finished products, raw materials equipment parts
and other manufacturing services needed for the operations of the enterprise. Purchasing as a matter of fact
occupies an important place in most of the industrial concerns. It is therefore natural that the responsibility of
obtaining the goods and manufacturing services rests with the purchasing staff which is specialised in purchasing
and which is generally engaged in service functions, buying for various units of the organisation.
In large organisations, the purchasing is known as the "Purchasing Department" which will have controlling
functions as to the regulation of inventories, timing of buying and cost elements. In the words of George L.
Meyer, "Modern management certainly expects purchasing to occupy an advisory position of equal stature with
other major departments especially including engineering, production and sales. There must be complete
departmental confidence and cooperation. Under the competitive conditions existing today, this cooperation may
spell the difference between profitable and unprofitable operations." This itself indicates the importance of
"Purchasing."
Nature of Purchasing Staff and Organization
A purchasing staff may be organized internally on the following lines:
(a) Buying (negotiations of purchases)
(b) Advisory and Service Activities
(c) Clerical Work.
However, it should be noted that in small or medium-size enterprises,
buying and other services may be handled by the same individuals.

Although we said that the purchasing department would occupy an important place in the organization, still it
would depend upon a number of factors. The foremost among them are:
(i) Custom in the industry;
(i) Tradition in the particular business;
(ii) Special qualifications and interests of a particular executive;
(iii) The nature of the business; and
(iv) The geographical location of the particular function in relation to other functions.
But managerial policy in determining the place of purchasing department in a given enterprise may top the above
list.
FUNCTIONS OF THE PURCHASING DEPARTMENT
The various functions of the purchasing department can be summarised as follows:
(a) The purchasing department is entrusted with the task of securing the necessary materials, equipments,
supplies and other manufacturing services as per predetermined specifications and standards.
(b) The second objective is to make purchases according to an established schedule or as and when needed.
(c) Thirdly, to buy at a price consistent with the standards demanded, not over the prevailing price in the
community in the light of the quantities involved.
It can be emphasised here that the duties to be performed by a purchasing department depend largely upon the
management's conception of organisation and the requirements of the particular business. Thus, over and above
the duties mentioned above, the following activities may be undertaken by a purchasing department of an
industrial enterprise.
Extra Functions
(1) Salesmen being the real missionaries of progress of the sales department which is linked with the
production department, they will be interviewed by the purchasing department in spite of the fact that there may
be no demand for their particular products at the moment.
(1) It is empowered to purchase items not requiring quotations or bids and to cultivate various sources of
supply.
(2) It can also "participate in the formulation of specification" of materials and supplies. A purchasing
department may also advise engineering department to reduce the cost of technical specifications provided by it.
(3) It should "take all precautions" and should be alert to know the whereabouts of new products materials,
or equipments so that they can be substituted for the present items at the earliest convenience.
 (5) Bearing in mind the basic buying policies, framed by the management, quotations on
the purchase of major items can be invited by a purchasing department.
(6) It is the main responsibility of a purchase department to maintain adequate records of
the purchases made from time to time from various suppliers. Maintaining detailed information regarding
prospective suppliers has been deemed to be the foremost duty of a purchasing department.
(7) It can supervise stores in view of the company's requirements and accordingly may
recommend the company as to the total quantity of materials available in the stores and what exact quantity is
required to be purchased.
(8) It is to dispose of all salvage materials and obsolete or excess material or equipment
and it is its responsibility to study markets so that necessary purchases can be made at advantageous times.
(9) No purchasing department can neglect counting and inspecting purchases in order to
ensure correct filling of orders.
(10) It should approve invoices for payment.
Not only this, but it should participate in the formulation of policies regarding purchases and should keep
informed on government regulations and taxes that may affect the prices paid for them.
FACTORS IN BUYING
The principal factors in buying are as follows:
(1) Specifications as to character and quality of the purchases to be made
(2) Quantity
(3) Delivery Requirements (Timing)
(4) Price including terms of payment.
(1) Quality: It is an important factor in buying, and therefore specifications of items
purchased create clear differences in buying practice. The quality of the product affects price and it is difficult to
find out satisfactory sources of supply. It is the quality of raw material that decides the quality of finished
product. And the management is bent upon having a quality product, the purchasing department must pay due
attention to quality.
Quantity: The relationship between quantity and price is not difficult to understand. Anyone who is interested in
buying household supplies can see that lower prices are generally quoted if he is to buy large quantities. Another
point to be borne in mind is that increased quantity not only makes it possible to spread the initial expense and
pooling of an order over more units of production, but also it favours mass production methods: Looking to these
advantages, a purchasing department cannot stick up to the policy of "Quantity Purchases" but it will have to see
the capacity of the concern. Some concerns may be equipped for small-lot production only and if purchases,
under such conditions, are made in large quantities in order to get the price benefit, it will result in the locking up
of capital spent on making such purchases exceeding the capacity of the concern to use them at the moment. It is,
therefore, the responsibility of the purchasing department to take into account all these subsidiary factors and
make the selection of supplier accordingly.
(1) Delivery Requirements (Timing): Delivery requirements also play an important part in the
scheme of buying. This factor has direct influence over price and selection of supplier. If the materials to be
bought are meant for rush orders, it means the buyer will have to pay a higher price. However, this is dependent
on various factors such as interference with other production, overtime, small-lots, high cost of transportation
and less competition. It is at this stage that the right type of supplier should be selected who can be relied upon
for the delivery contract entered into.
So, a supplier of long standing in the line, a man of honesty, integrity and reputation should be the choice of a
purchasing department. In this connection, it may be emphasised that to ensure the delivery at the scheduled
time, the selection of more than one supplier, will prove a wise policy on the part of purchasing department. It
will be fair on the part of the purchasing department if it forecasts the needs of the company well in advance to
get the benefit of low price. It should see that buying takes place when market conditions are best for the buyer.
(2) Price: Price is another factor that gives impetous to sellers when it shows an upward trend
while buyers are encouraged when it is at its minimum. It is, in practice, this factor that forms the basic objective
of the purchasing contracts. Factors like quality, quantity, time of delivery etc. have got direct bearing on price.
However, the other factors influencing the price are:
(i) conditions within the industry ;
(ii) seller's policies as regards price; and
(iii) seller's ultimate cost, his profit and his risk of doing business.
TYPES OF PURCHASING
Goods can be purchased for different purposes and therefore, they can be classified according to:
(1) Purchasing for resale, such as in retailing and wholesaling.
(1) Purchasing for industry where the cost of the raw material is a controlling factor in
determining the price of the finished product, purchasing of cattle for meat packer is an example in point.
(2) The purchasing department in a business where all items are purchased raw materials, parts,
supplies, machinery and equipment.
Still in practical life, the following classification of purchases is more common than what was described above.
(1) Market Purchasing
This type of purchasing consists of buying according to predetel mined schedule of requirements. However,
under this arrangement, the price ticnds are carefully analysed. It should be noted here that in some cases
practising "hedging" is common with market purchasing.
(2) Speculative Purchasing
The very name indicates that making purchases under this method is not for use but for making profit on the
business transaction. This method differs from "market purchasing" for two reasons. Firstly, under this method, a
profit is sought by buying when prices are low and the same purchases are resold when prices rise. Secondly,
whatever purchased is not for use as it is in the case of market purchasing. Sometimes, it may be partly for use.
Another feature of this kind of purchasing is that industries interested in speculative purchasing often strive to
make substantial profits from advantageous buying. In such cases, loss on account of speculative purchasing
frequently occurs and the concern involved in such a type of purchasing sustains a heavy loss irrespective of the
fact that manufacturing operations are efficient.
(1) Purchasing by Requirement
This type of purchasing refers to buying those items that are not often used in the industry. So they are purchased
and when they are needed for a definite purpose Machine tools and special building supplies are some examples
in point.
(2) Purchasing for a Future Period
Under this arrangement, all the anticipated requirements are fulfilled. So, articles regularly used and likely to be
used even in future may be purchased in advance of need. But the only precaution to be taken in this connection
is that the future period to be covered for the purpose of making purchases should not be a fairly long one
because changed operating conditions may call for a greater or lesser quantity.
(3) Group Purchasing of Small Items
This method positively results in savings. For example, ten mill-supply items may be ordered from one firm as
cheaply as one item from the stand-point of paper work and office costs. It is experienced that items purchased
on group basis are generally of low costs. Hence, a purchasing department by accumulating small orders into one
combined big order may place the same with a vendor and thus can buy all the items at a lower cost.
BUYER-SUPPLIER RELATIONS
If we wan', to see the relation between buyer and supplier and his selection, factors influencing price, service and
reliability must be taken into account. Reliability of the supplier and the character of the service that he offers
have important bearing on the cost of materials supplied. But the efficiency of the purchasing department and its
relation with suppliers can be judged from the annual cost of materials and purchased services.
(I) Lazy Buyers: There are certain cases where a lazy buyer influenced by personal considerations may continue
his relations with a friendly supplier although he failed to buy at competitive prices from such a supplier. It is
therefore, suggested that periodic negotiations and checking of price situations are essential to effect an efficient
buying.
(2) Long-term Contract: When purchases are to be made on long-term contract, sufficient time
must be taken for thorough investigations and ample competitive bidding. It is only after getting oneself fully
satisfied with the information as to price, quality and delivery time and other terms and conditions, that a
contract should be entered into so that no scope for misunderstanding between buyer and supplier is provided.
(3) Quoting Prices Unreasonably Low: In actual practice, the suppliers may quote lower prices but
the buyer should not be tempted with such prices. Lower prices generally indicate incompetence on the part of
the supplier and he may fail either to deliver goods at the scheduled time or the specified quantity or quality of
goods as agreed upon.
So, this may create fresh problems which may bring an end to cordial relations between the buyer and the
supplier. Not only that, but a supplier fails to get a good profit, he may fail to render promised services to the
buyer. This may again lead to conflicts and misunderstanding between the two parties. Therefore, buyers must
investigate carefully when materials are offered at prices that seem unreasonably low. Any hasty step in this
respect may lead both the parties to an unhappy position.
(4) Offer of Intangible Services: Many a time, certain intangible services may be offered by
suppliers on account of their business relationship with the buyers, although nothing is mentioned in the
purchase contract. Consulting work, accommodations during rush orders without charging extra rates are certain
concrete examples in point. In such cases although the prices charged by suppliers are moderate or slightly
higher than the market price, the buyer relies upon such suppliers for any sort of services at emergency times and
he may not have to repent of having selected such a supplier leaving aside one who has quoted lower prices. Of
course, advantages to the buyer may be intangible at the initial stage but ultimate savings in operating cost will
be reduced on account of prompt delivery, exact quality and quantity and a number of other invaluable services
that may be rendered whenever occasion arises.
Policy of "Shopping Around": As far as possible, no concern should follow a policy of "Shopping Around" and
change sources of supply from time to time. Because in periods of shortage, it will be difficult to get materials if
no definite supplier is selected. There is also a tendency on the part of suppliers to favour old customers
whenever there is material shortage. At such times, the supplier can be " a friend indeed in time of need"
provided he has been having his relationship with the buyers for a pretty long time. It is during periods of
shortage that one can see the real friendship between buyer and supplier.
(6) Reciprocal Obligations: But for maintaining cordial relations with the suppliers, the buyer "has
reciprocal obligations in the maintenance of satisfactory relations with desirable sources of supply. He is a
conspicuous representative of his company and his buying practices affect the reputation of the enterprise. Most
substantial selling concerns avoid doing business with buyers who are unreasonable and inconsiderate of
salesman's time and expenses.
(1) Adverse Buying Practices: Such practices will be particularly harmful to the buyer during
times of material shortage. Of course, the buying individual is not the only person in his company who
influences relations with the suppliers. Fair policies for quality acceptance and reasonable stability of
specifications and production plants affect the cost of doing business. And the meeting of financial obligations is
an obvious necessity.
QUALIFICATIONS OF A PURCHASING AGENT
Both purchasing and selling go hand in hand. The purchasing function is the other side of the selling function as
it creates time, place and possession utility from the stand-point of economic theory. The general presumption is
that in a buyers' market, it is generally easy to buy at a favourable price while it is not so to sell at a favourable
price. Therefore, to get the full benefit of purchases to be made, purchasing agent should have, normally, the
following qualifications:
(1) From the technical stand-point, he must keep himself well-informed on the details of the items
he is to buy.
(2) He should know how to read the future trends of the market in which he is interested.
(3) He should study the buyers' market and see what materials are likely to go short of industrial
needs and accordingly, he should advise his management to keep pace with the anticipated changes in the
supplies.
(4) He should possess all qualities of leader and that of a good organiser so that he can put that
skill in organising his purchasing department.
(5) He should know how to establish efficient procedures without red tape and how to secure and
hold satisfactory suppliers.
In short, he requires fact, an acceptable personality, an attitude organisational cooperativeness with members of
his own firm, willingness to give credit where credit is due, and willingness to assume the full responsibility of
his acts.
POLICY REGARDING PROBLEMS OF PURCHASING
Usually, in practice, every purchase order issued by a buyer and accepted by a supplier amounts to a contract and
is subject to legal claims for settlement provided that the contract is valid. Any purchasing contract will he
deemed to be valid if:
(1) there is a mutual agreement between a buyer and a seller;
(2) there is consideration;
(3) it has a time-limit; and
(4) it must not require the performance of an illegal act.
(a) Contracts in Writing: In the interest of both the parties, such contracts must he in writing since
a verbal agreement is difficult to support in legal actions. It should be noted here that an inquiry, a bid, a
quotation will not be treated as a contract but it always refers to a transaction agreed upon between the buyer and
the seller. But a purchase order accepted by a seller or a bid or a quotation accepted by the buyer can be a
contract. In the purchase order specifications must be written in detail unless the materials ordered are well-
known standards of the supplier. In such a case, mere listing of names of materials will serve the purpose of the
buyer. But where important materials are to be purchased, irrespective of well-established standards, large buyers
always write complete specifications in their purchase orders. However, while writing purchase specifications,
they will include only those details that are required for excluded potential suppliers who could offer an
otherwise satisfactory product. This problem can be tackled provided there is perfect understanding between
purchasing and engineering staff.
(b) Lack of Technical Details:Where the buyer is not in a position to know about technical details
of a product, he can buy such product by stipulating the results to be obtained in his purchase order. Similarly,
there should be a provision in the purchase contract for inspection which is closely related to specification.
Where it is not possible to verify specification by inspection, the buyer in this case can obtain guarantees from
the supplier as to the satisfactory results of a particular job. In many cases such guarantees may not be reduced to
writing but a reliable supplier will always see that satisfaction to a customer is ensured as a matter of good
business policy.
Sometimes, the buyer's representatives may inspect the goods at the residence of the supplier when the goods to
be purchased are sufficiently big in size and bulky. But this should be completed before approving a product for
shipment. This type of inspection is also undertaken where shipping costs are very high and when the buying
concern has ordered the product either for storage or for resale.
(c)"Non-Performance": This clause should be included in the purchase contract. Some purchase contract may
include "penalty" clause to provide compensation for damage incurred by the buyer on account of the failure on
the part of the supplier to execute the contract either in time mentioned or according to specifications. Such
provisions are not at all uncommon in important contracts.
(d) Provision for Cancellation: There may be a provision for the cancellation of purchase contracts. Reliable
suppliers, under genuine circumstances accept the cancellation of orders; but the real difficulty arises when the
supplier has incurred a substantial loss for no fault of his, and the order is cancelled before completion. This state
of affairs may be settled in the Court of law and the buyer may have to compensate the supplier for breach of
contract unless there is any definite provision otherwise in the purchase contract.
A desirable type of cancellation clause is -
`one which stipulates that the buyer will settle for the actual cost that the seller has incurred on the cancelled
portion of the order, plus an allowance for profit in proportion to that cost."
CENTRALISED VS. DECENTRALISED PURCHASING
There is no one opinion regarding the desirability of centralising all purchases at one place. No doubt that by
centralising all purchases, the establishment can achieve economies provided the purchases of some major items
are centralised.
On the other hand, centralisation of purchases of all items even of minor importance seems to be rather absurd. It
is experienced where purchases of all items, big and small, are centralised, the cost of processing the paper work
involved in purchasing and paying for small items is greater than the cost of the item itself.
Advantages of Centralised Purchasing
(1) Uniform Policies: Uniform policies regarding placing of orders, discounts etc. can be
conveniently followed and in this regard, necessary advice can be made available to other branches from the
centralised purchasing unit.
(2) Benefit of Large-Scale Economies: Such benefit can he achieved by the company as the
purchases are made in large quantities, the supplier can readily offer better prices, attractive discounts and
favourable freight rates.
(3) Specialisation: As the purchases are made at one place, persons working under the Centralised
Purchasing Department will be specialised in buying certain types of materials and it will be a special advantage
under this scheme.
(4) Competitive Bidding: Advantage of competitive bidding can more readily be taken than in a
series of small units.
(1) Standardisation of items: Though the function of standardisation is mainly a technical one, a
central purchasing department will have to distribute materials to different departments according to their needs ;
and thus, it acts as a clearing agent and performs the job of standardisation.
(2) No Elaborate System: Under central purchasing scheme, no elaborate system of accounting.
filing and record keeping is necessary.
(3) Easy Inspection: As all orders received from different departments within a given plant are
controlled by Central Purchasing Department inspection and material counting are easier.
However, centralised purchasing is clothed with one major limitation and that is the tendency to build up vested
interests among industrial bureaucrats. Therefore, it is advisable to have a dynamic purchasing leader who can
appreciate the main limitation of the centralised purchasing.
Disadvantages
(1) Duplication of Records: Although it is stated that number of records is reduced at the C.P.
Dept. in practice, they are actually duplicated and this increases the cost of maintaining records.
(2) Additional Handling Cost: Whatever lower prices are obtained at the initial stage, they may be
offset by additional handling and freight costs as the purchased materials are to be dispatched to respective
departments from the central location. This limitation can be overcome by asking suppliers to send materials
direct to the place where they are to be used.
(3) Benefit of Local Market: Any special advantages which can he had at times in a local market
will be of no purpose under centralised purchasing as all the buying is done at a distant office. Similarly,
perishable goods cannot be purchased centrally unless the management is prepared to sustain huge losses or
make special arrangement of cold storage.
Thus one should note that good management sets up a central purchasing department for those items which can
be best handled centrally, leaving all other purchases to be locally handled. This usually means that large items
as basic raw materials may be purchased centrally and sent direct to the point of use and that most or many of
 other items are purchased locally. Within a given plant, machine tools and technical supplies may be specified by
the proper authorities and the actual and the actual paper work may be performed by the central purchasing
department. At times, the plant engineer may actually issue his own purchase orders sending a copy to the
purchasing department for follow up and the clearance of invoices.
In purchasing for resale by various branch stores and mail-order houses, practices differ :
(1) Where style is a factor, store is likely to have considerable freedom.
(2) Mail-order purchases are usually made by the central buyer.
(3) In chain-grocery stores, standard items are generally purchased centrally and perishable goods
are purchased through the individual store.
In cities some of the chain-stores have two or more major divisions, each one operating in different sections of
the city.
Advantages of Localised Purchasing (Decentralisation)
(I) Delays, in purchasing materials that are urgently needed are avoided.
(2) When different units are located away from the Central Office which is not in a position to
meet their requirements, these units should be given liberty to build up their own inventories. This saves time
between the requisition and procurement of materials.
(3) Different units of the same organisation are supposed to operate under peculiar problems with
different production process. Under such conditions only the local unit is more competent to solve the problems
in procuring material than the central authority.
(4) Where climatic conditions are abnormal for the major part of the year, transportation facilities
are irregular or inadequate, it is found that localised purchasing is the only remedy left to the discretion of
different units located at remote places.
(5) By giving a free hand to the heads of different units, it will avoid conflicts and
misunderstanding between unit-heads and central purchasing authority. Misunderstanding or conflicts generally
occur when goods purchased are not as per specification or not supplied in right quantity or within the time
specified.
POLICY AS TO
COORDINATION OF PRODUCTION, PURCHASING AND SALES
The basis for coordination of purchasing and production with sales, any well-managed concern can set policies
regarding:
(I) Procurement for stock or "to order"
(2) Minimum inventories
(3) Size of production run or purchase order
(4) Stabilisation of production operations
(5) Adjustments to anticipated price changes.
(1) Procurement for stock or "to order" (The Made to Order Policy)
In some business concerns, when sales orders are already received, the manager concerned either buys or makes
goods to have proper coordination of procurement with sales. As a wise policy, neither raw materials are
purchased nor is production of goods undertaken until such time the orders are actually at hand. One should note
that such a "Made-to-Order" policy is normally followed by manufacturers of heavy machinery.
On the other hand, companies interested in manufacturing radio and television broadcasting equipment,
manufacture only finished products "On Order"; but actually they produce many parts for stock. It is only when
order is received, their policy is to undertake final assembling operation for getting a finished product according
to the specification of the customer concerned.
Such a policy is also followed by concerns manufacturing high quality furniture with specific design. Products,
that need accomplishment of specific order, come under such policy.
This policy of "made to-order" helps the manufacturer to reduce inventory risk and at the same time enables the
customer to have what he wants. However, this policy has serious drawbacks such as:
(a) Inevitably slow delivery ; and
(b) High cost of the product because there can be no mass production.
Carrying Stock: It is a normal practice either to purchase or manufacture majority of products long before the
orders from customers are received. Whatever orders received are executed from inventory already on hand. In
our daily life, this is an usual practice of purchasing goods by customers as well as by industrial concerns. But
some firms follow a policy of carrying stock only of standard products. If their customers want products other
than standard ones, such products will be purchased in the open market or may be produced according to their
specifications.
(2) Minimum Inventory
 The next immediate problem that arises is to determine how much inventory to have on hand as minimum. There
should be clear-cut policy as a general guide to assist the purchasing and production departments. Such
minimum inventory at any one time can be logically decided by taking into consideration or ordering points, size
of production runs, and purchase quantities. Speculation on price changes also cannot be ignored.
How low should inventories be permitted is determined by retailers dealing in grocery from their day-to-day
experience. They generally maintain the minimum of those goods regularly sold and since they expect frequent
deliveries of additional products, the minimum that they maintain may be only of week's supply. On the other
hand, where there is slow turnover, the minimum inventory carried may be equal to a full year's sales.
So, it is advisable to have a general policy for minimum inventory by manufacturing firms in regard to both raw
materials and finished goods. For instance, a firm manufacturing woollen blankets may have a policy of carrying
finished goods only during the selling season and not throughout the year. In contrast, the same firm may carry
the minimum stock of raw materials throughout the year to avoid possible delay in production operations. But as
a general policy for finished goods, the minimum stock level at which replacement is to be made maybe
approximately equal to the sales of those goods during the period required for replacement.
It is also customary to add a reasonable margin of safety to the stock on hand that is to continue during the
period of replenishment. This is generally done to cover likelihood of delay as well as customer services. These
considerations force manufacturing firms to follow a policy of keeping minimum inventory much higher than the
general principles demand.
(3) Size of Production Run or Purchase Order
After considering the minimum inventory problem, the next question is, how much should be ordered? This
question is mainly based on how much can be economically produced at company's own plant and what quantity
discount is offered by vendors. In such cases, normally any business firm would like to take an advantage of
large-scale production which helps it to bring down the cost per unit. Hence, it prefers to manufacture more than
what actually ordered by the customer to have the benefit of low production cost per unit.
The extra products thus manufactured will be held as stock on hand until further orders are received from
customers. This policy is invariably followed by almost all firms who intend to secure better quality product at
low cost which may help them to meet open competition in the line.
At times, it is also a common practice to offer what is called quantity discounts by vendors. Such an offer
induces the firm to purchase more goods than arc required for current sales or production necessary to maintain
minimum stocks. However, in such cases, the firm should take proper precaution in anticipating sales orders
likely to be received during a specific period. At the same time, factors like sales volume in terms of rupees, loss
resulting from failure to deliver sales order, minimum inventories, size of production runs, purchase orders etc.
must be taken into account. To cover the necessary risks and to establish safety margins, the judgment of central
management will be of great benefit.
(4) Stabilisation of Production Operations
(A) Production for Stock: In any type of business, seasonal fluctuations are not only common but are
unavoidable. So depending upon the sales volume, the firm may decide how much to manufacture and purchase
bearing in mind that it will not carry inventory in excess of its sales needs at any time. However, in this
connection, one cannot ignore that frequent changes in style may make manufacturer to face the risk either of
getting no demand for what he has manufactured or of selling the same at a reduced price. Therefore, the wise
policy adopted by large number of firms is to produce at approximately a level rate throughout the year. This
policy will enable them to accumulate goods during the slack season and make use of them during peak season.
No doubt, the policy of manufacturing during slack periods does help the firm during boom period; but should be
practised taking into consideration:
(a) obsolescence
(b) deterioration
(c) storage costs; and
(d) financing.
The success of this policy depends on the ability to forecast the duration and the amplitude of downswings and
upswings.
(B) Other ways of dealing with fluctuations: Instead of producing in excess of-demand during slack period, it is
better and advisable to add to line products that have complementary seasonal fluctuations. For instance, the
combination of the radio and electric refrigerator. The second alternative suggested is to a subcontract during
peak demand in place of a temporary expansion within the same firm. Though this is one of the suggestions, in
practice, it is likely to fail because, during peak periods even the subcontractors are also likely to be busy and as
such they may fail to execute the orders received from different firms. So, the best policy is to pay more
attention to seasonal fluctuations than cyclical changes.
(5) Adjustment to Anticipated Price Changes
It is a normal practice for business firms to adjust their purchasing and production schedules in anticipation of
changes in prices of raw materials and finished products. Goods are purchased in excess of immediate
requirements when a rise in price is anticipated and goods in stock are reduced when the fall in price is at sight.
This is done as an adjustment policy to secure extra profits by buying at lower prices and selling at higher prices.
But it should be noted that adopting such a policy linked with the fluctuation in prices is not that easy for a
simple reason that goods may not be easily available when prices are fluctuating very often. It has been
experienced that during inflationary period goods that are in great demand may not be readily delivered thereby
making it difficult to reap high profits for the purchasing firm. Since, the firm should have adequate supply of
goods on hand, it may buy them ahead in boom times just to ensure minimum inventory. In contrast, there can be
prompt delivery of goods when there is a downward trend. Under depression period naturally the firm can safely
cut back its inventory to keep pace with changes in prices. In short, there should be shrewd buying bearing in
mind the rise and fall in the prices of goods dealt in.
CONCLUSION REGARDING TIMING OF PROCUREMENT Goods are procured for fulfilling different
objectives, viz.,
(a)to secure economic production runs, larger stocks are maintained than are required ; or
(b) to obtain quantity discounts from vendors ;
(c)to adjust goods to stabilise production operations; and
(d) to adjust to the fluctuations in prices with the intention of making profit.
Hence, the purchasing executive should consider the following factors while dealing with the timing of
procurement.
(1) Customer requirements for specially designed merchandise or for prompt deliveries of
standard merchandise.
(2) Economies possible from larger production runs.
(3) Economies that may be secured from level production, including more complete utilisation of
facilities, maintenance of well-trained labour force, and possible reductions in tax burdens.
(4) Expenses of carrying goods in inventory, including the storage charges, the financial cost, the
insurance expense and the deterioration or obsolescence of merchandise.
(5) Accuracy with which price changes may be predicted.
(1) Accuracy of prediction of the volume and nature of products demand at a subsequent period of
time.

Marketing Policies

Marketing objectives: Marketing manager popularly known as sales manager will have to think over the
marketing objectives and to fulfil them he is expe .ed to formulate suitable policies. The main marketing
objective could be to :crease sales and thereby increase profits of the company over a period of time. Therefore,
he should have the policies pertaining to finding new sales territories, broadening of the product line, improving
publicity media and imparting training to salesmen for improving their skill and efficiency in promoting the
sales. Marketing manager cannot forget that marketing is "customer-oriented." His policies should cover the
guidelines for meeting various issues concerning the customers. The issues may be (a) needs and wants of
customers, (b) customers' buying habits and their motivations and (c) when and how much they can pay for
goods bought. While considering these issues, the sales manager naturally form the policies regarding the prices
to be charged, discount to be allowed and whether the sales should be on credit or cash basis. If so on what
terms? To fulfil the company objectives, he should also consider the extent and intensity of competition, timing
and media for creation of demand, alternative channels of distribution, sales budget and sales control. His
formulation of policy will not be successful if he fails to consider the above mentioned factors.
(A) PRODUCT POLICIES
The Product Line: The immediate problem of the management is of providing products to customers. The
marketing manager on behalf of the management will have to chalk out a policy whether a large number of
products of different nature are to be manufactured and sold or only the selected line of products. In either case,
the items comprising the product line should be complementary. Generally, the policy should be to have the
selected product line to offer customers the benefit of specialisation. This policy would enable the management
to prove its operating efficiency. So, as per this policy, for example, a book store will concentrate only on selling
books.
The management cannot ignore the fact that the customers have got varied interests and, therefore, to give them
a chance of one shop buying whatever they desire, a full line of related products is helpful. This will not only
maximise the sales but will also help the manufacturer to spread the overhead expenses over the greatest possible
output. Further, greater stability of employment to shop personnel and better selection of goods to customers are
also provided along with an assurance of continued patronage from customers. Under such circumstances a well
thought out policy is necessary so that the management can kill two birds with one stone its own interest and
the interest of its customers.
It should be borne in mind that selected products will not remain top sellers permanently. Innovations, therefore,
are necessary for maintaining profits. So, the marketing manager should see that he supplies always altogether
new products or products with necessary changes so as to satisfy customers. However, he should see that not
only these new products satisfy customers but are manufactured without any change either in equipment, labour
or managerial personnel.
While introducing new product, the management should see that the product is manufactured at a cost permitting
profitable sales and the sale of such product will not adversely affect the sale of other products. For simply to
attract customers, ignoring the cost factor, undue importance to quality should not be given and if possible with
the help of R & D every attempt should be made for utilising the left-over materials as byproducts. At the same
time, management policy in respect of product line should embrace the elements of product durability and
maintenance of stable demand for it over the years to come. Product line policy or marketing policy should have
necessary provision for facing strong competition in the line. Hence, marketing manager should constantly watch
the growth of sales. Take necessary measures if sales begin to drop and this will ultimately bring about changes
in marketing policy.
Quality, Additions and Deletions: Consumers are always interested to buy quality products even though the
price of such products are high. Quality of product indicates reliability performance over a long period of time. It
is only quality products that evoke continuing reorders. To give full satisfaction to consumers, marketing
manager should formulate a policy of manufacturing products that are good and distinctive matching prices with
quality. In fact, market can be captured by offering a product of higher quality than competitors at competitive
prices. While formulating a policy, one should bear in mind that price war or price cutting will have only
temporary effect on sales which will continue to grow only when quality products are offered.
As demands for product change, the sales sometime increase or decrease. The problem for the manager arises is
what policy he should follow particularly when the sales volume reduces significantly. The decline in sales is
naturally an indication of disliking the product by customers. Under such circumstances, the manager can
altogether withdraw the current product from the market and it can be replaced by a new product matching the
quality, price, cost, design etc. of the competitor's products that are now going well in the market. This is the
only way of recapturing the market with complete alterations in the product line. A new product if it is accepted
widely by customers there is no risk to introduce it at any time. But the suitable time to have new products is the
period of prosperity and the manager in this regard should see that the added output sufficiently spreads general
and factory overhead expense over total output so as to result in an overall cost reduction. He should further see
that when the product is dropped, the loss of output will not yield an overall increase in the cost. The marketing
manager can do the needful only when he has definite policies before him.
Simplification Vs. Diversification: Simplification of a product line indicates reduction of the line to essential
products only. On the other hand, under diversification method number of products are added to the product
line.. Whether the management should adhere to simplification or diversification depends on the sales policy
considering the view points of customers and competitors.
Merits of simplification of products
(I) Since only few kinds of products are manufactured, it leads td the specialization of processes and personnel.
(2) No extensive inventory of stores.
(3) Specialised machines and tools can be readily and regularly employed.
(4) Conversion cost is the minimum.
(5) Problems of production control are reduced to minimum and are simple in kind.
(6) Supervision problems will not he acute or complicated.
(7) Helps salesman to achieve greater knowledge of each of the fewer products and this ultimately
results into better selling.
Demerits
(1) The firm will not be in a position to satisfy varied demands of customers as it is manufacturing
only a selected few products.
(2) Seasonal demands for different products cannot be met.
(3) The firm will invariably have to depend on its few large customers.
(4) Since overhead costs are spread over few products, such products become costly.
Diversification Merits
(1) Whatever different products needed by customers can be bought from one supplier.
(2)Stability in production throughout the year is possible and with minimum efforts seasonal demands can be
fulfilled.
(3) Employee relations are cordial as the firm can maintain stability in employment.
(4) Risk of loss from those products that are obsolete is less.
(5) Overall cost per unit is reduced since the overhead cost is spread over a greater total output of
products.
(6) Depression period can be fought successfully.
Demerits
(1) It is difficult to achieve manufacturing cost control.
(2) Handling of diversity of products creates a problem for shop personnel.
 (3) New customer services and quality problems are multiplied.
(1) Sales efficiency is affected badly because salesmen would not be able to know all about each
product.
(2) Stores and process inventories would be larger.
(B) PRICING POLICIES
Meaning of Price
No business transaction is complete unless the price is determined and accepted to pay for either on the spot or at
a future date by the buyer. So it is the price that covers the interest of both buyers and sellers. Therefore it can be
said that "price of any article or product is its market value expressed in terms of money. It is an expression in
terms of monetary units of the power which that article exercises in exchange on the market; that is of the money
it will "Buy" and hence ultimately of goods and services for which it can be exchanged."
In simple words it can be said that price in terms of money decides the market value of an article and helps both
buyer and seller to exchange that article in terms of money so as to enable buyer to get the article and seller, in
general, to get a certain margin of profit. Price is one that fulfils the goals of buyers and sellers at a given time.
Significance of Price
Price once fixed determines the volume of sales.
(1) Sometimes depending upon the prevailing as well as future market conditions, sales may either
be more or less and as a result of the same, seller may be compelled to modify his prices. Thus no fixed pricing
policy be adopted.
(2) Prices, further, differ from article to article depending upon the quality, package, durability,
and reputation of the article.
(1) Similarly, the price depends upon the market situation, viz., the number of buyers and sellers
and also the articles available in the market. Limited number of articles with few sellers and more buyers will
push up prices.
(2) In other words price will be determined under "Demand-Supply theory."

(1) It can therefore be said that price is the result of agreement between buyers and sellers
depending upon demand and supply.
(2) Price is never stable or static and has relevance to cost of the article, substitute for the same
and the competition in the same line.
(3) Seller cannot fix his own price ignoring the free market price unless he is a monopolist.
(4) Even under monopolistic situation, seller will have to pay attention to the conditions of
demand and supply which are subject to frequent alterations in a free market.
(5) In a developing country like India where different types of industries are coming up and get the
requisite assistance from the government to expand home and foreign markets, pricing policy is one of the
important marketing functions.
Characteristics of Market Price
(1) It is the price prevailing in the market.
(2) It is the ultimate result of free play of demand and supply.
(3) It has relevance to factors of production.
(4) It may be, sometimes, above or below the cost depending upon the whims and wishes of
individual sellers.
(5) It is generally announced on radio or published in newspapers and market reports for
information of consumers.
(6) It compels sellers to adjust their output either to maximize their profit or minimize their losses.
Policy regarding Price Changes
(1) Innovated Product: Marketing manager may have different policies as to when and to what
extent the prices are to be changed. Prices are raised when products are innovated in order to skim the cream of
the market. The manufacturer anticipates good demand for such products. As time passes he will have to change
this policy and should charge normal price so as to effect continued sales. However, one should note that unless
the demand is inelastic, lower the price, the greater is the sales volume.
(2) Market Conditions: For effecting a change in price, the situation of the market conditions
should be studied. The real problem is whether the price is to be changed in seasonal or cyclical situation. In
seasonal situation, prices are high in the beginning of the selling season and they are lowered at the close of the
season. It is not so under cyclical situation.
Under cyclical situations, there will be a change in general price line going either up or down and the firm will
be adjusting prices of its all items accordingly. How to react under these two situations will be a real problem for
a sales manager. Some managers who would like to take lead in this respect of price changing, raise or lower the
prices of their products when they find the general price level has shifted. There are others who change the prices
last and that too when prices rise. They take this action to maximise their profits. It is considered the best policy
to be in middle order group, Le., neither first nor last if at all the prices are to be changed.
(3) Effect of Elasticity of Demand: It is interesting to note changing of prices is directly linked with the
elasticity of demand. For example, the demand for products like edible oil, soap, salt, sugar, rice etc. that are part
and parcel of one's living will always be normal and regular irrespective of any change in the price. The demand
for such products is inelastic. Whereas the demand for luxury products such as radio, T.V. set, refrigerator,
watches etc. is highly elastic with price. Sales of such luxury products will show an improved trend when prices
decline and vice versa. However, the adverse effect of elastic demand can be arrested by effective personal
selling, adequate local sales promotions and good customer relations. It is only with the help of well-thought-out
policies, price changes can be introduced.
Price Policy Considerations
Price policy is rather very delicate and complicated. While fixing the price policy, the Sales Manager should not
only see or protect his own interest but also protect the interest of consumers. Side by side, he should see that the
price policy adopted helps him to expand his business. From all these points of view, before adopting a certain
policy, he should consider at least the following factors:
Aims and Objects of selling organisation. Nature of the market.
Competition in the same line of trade. Nature of the product to be handled. Cost and after-sale services.
We shall discuss these factors below, one by one.
(i) Aims and Objects of Selling Organisation: There are different forms of business organisation such as sole
trading, partnership firms, private and public companies and cooperative societies as well as public enterprises.
Individual traders and partnership firms may try to fix price in such a manner as to give them maximum profit at
a short notice. They may even ignore the interest of consumers and thus by charging high prices, they may
exploit consumers. In case they find market conditions are unfavourable, they may charge lower prices. In this
way their price policy is alterable as per their convenience.
On the other hand, the private or public companies will see that they will have stable price policy so as to satisfy
consumers at large and their shareholders in particular. These organisations seldom think of exploiting
consumers. Similarly cooperative societies fix the price "consumer-oriented" bearing in mind service is the main
motto. Thus, the price policy is bound to differ with the different forms of business organisations and their aims
and objects. State enterprises may have price policy on "No profit no loss basis."
(ii) Nature of the Market: Market may consist of different types of customers who may come
from higher class, higher-middle class/and lower class. Customers as per their respective standard of their living
purchase products. For example, customers who are rich do not mind purchasing goods of high prices. On the
other hand, customers who are finIncially poor and socially backward would like to purchase only goods which
are cheap. So, the determination of price has direct relevance to the type of customers in the market.
(i) Competition in the same line of Trade: Competition in the same line of trade has direct impact on the
pricing policy. Where, there is cut-throat competition, a seller cannot afford to get high prices, particularly where
there are substitutes for his product. For example, if the prices for tea are higher than coffee, people would prefer
buying coffee in place of tea. However whether price should be fixed at higher or lower level also depends upon
number of competitors in the line and the demand for the said product. At the initial stage, in the competitive
market, price may be fixed at a lower level so as to popularise the product among new customers.
(ii) Nature of the Product: Products may be generally grouped into (a) industrial; (b)
engineering; (c) agricultural; (d) dairy; and (e) electrical etc. These products differ in quality, durability, etc. and
accordingly, seller will have to fix the price. Products of high quality, durability and popularity may fetch higher
prices than those products which are of inferior quality and of perishable nature. Again while fixing the price, it
should be noted whether, the demand for product is continuous throughout the year or only seasonal. This type of
erratic demand will directly affect the pricing policy. Last but not the least, the volume of demand for the product
also is one of the factors that changes the prices. If the product enjoys demand only from aristocratic class, a
seller may set the price at a higher level.
(iii) Cost and after-sale Services: While fixing the price, the cost of the product must be taken
into consideration. No seller can sell his product below the cost price thus incurring a net loss. Not only the cost
is one of the factors for determining the price but also a certain margin of profit and the expenditure to be
incurred on so called "After-sale Services" must be included as part of the cost of the product. No business is
undertaken on the basis of "No profit no loss." Hence the price should be fixed in such a manner as it can leave a
reasonable margin of profit to a seller and maximum amount of satisfaction to customers.
Temporary Price Reduction Policy
Multiple price policy guarantees jealousy among customers and as a result of the same, sales volume will be
affected. Even the customers favoured with lower prices may not buy more such product as they have to buy
other necessary products at higher prices. But the customers favoured with lower price may buy from the same
firm the substitutes for those products available with competing firms. Thus, they will patronise the firms that
offer varied prices. So long as the added sales contribute more to revenue than to cost, there is no harm either to
practice multiple price policy or to reduce prices. Where a firm aims at profit by adopting a policy of "Price
Reduction" should manufacture high profit items more than low profit items.
Price reduction policy cannot be a permanent feature of any business enterprise. It can be used as a marketing
strategy. Price reduction may be for giving wide and effective publicity so as to promote sales. While reducing
the prices, the sales manager should consider the impact of price reduction on:
(a)the impulse buying by customers,
(b) need of off-season price cut and
(c)the sales boost to new products offered at low prices.
However, the price reduction policy cannot encounter effective innovations by competitors.
PRICING STRATEGIES
Before adopting any definite policy as to price fixation, businessmen generally follow certain strategies so as to
see that their pricing policy will be quite effective and a great success. In this regard, they may follow the
following strategies:
(1) Skim the cream strategy
(2) Market capturing policy
(3) Return on investment
(4) 'Ability to Pay' oriented policy
(5) Price Stability and
(6) Maximisation of profits.
We shall discuss these strategies below one by one.
(1) Skim the Cream Strategy: Under this strategy at the very beginning, a very high price is
fixed for the product that is quite distinct, new, attractive, and well publicised so that the seller can skim the
cream of the demand for the product. The main idea of charging exorbitant price is to make enormous profits at
the very initial stage in order to recover the money invested and to avoid keen competition that is likely to follow
in the near future.
After skimming the cream, i.e., getting maximum profit, the price will slowly be lowered to fall in line with
other competitors. It is easier to bring down the price without affecting the mood of the customers nor will it
largely affect the financial position of the seller since he has already earned huge profits, when price rate was
very high. Moreover, the excess of profits earned at initial stage will enable the seller to expand his business.
Market Capturing Policy: This method, as the name indicates, aims at capturing the market. It is possible only
when the price charged is very low as compared to other similar products that are placed in the market Under
this strategy, the seller is in a better position to capture the market on a mass scale although the margin of profit
is small. Thus one can see that this method dc-2s not exploit the customers and therefore acts just in opposite
direction of "Skim the Cream" policy. This low pricing policy can be adopted when products are manufactured
on a large-scale and thereby large-scale economies are achieved by manufacturing company, and such product is
largely used by customers as part of their daily routine. Since the margin of profit is small as a result of low
prices, competitors get no impulse to enter into the market.
(1) Return on Investment: No business is possible without capital investment which is required
for providing fixed assets and working capital. Every businessman who invests his capital in business, naturally
calculates the probable return on his investment. Pre-determined return on investment is expected on the total
output after taking into consideration the cost of the product and a certain percentage of profit. In order to
achieve the expected return, the seller should fix his price in such a way that he can obtain the anticipated return
on his capital investment without affecting the total output. It can be said that this policy is "Seller-Oriented."
(2) "Ability to Pay" Oriented Policy: Pricing strategy is fixed on the basis of personal services.
Prices charged differ from person to person depending upon his individual income. Common example is that of
medical charges payable in public hospitals. Rich patients whose ability to pay is more sound than that of a poor
patient is charged higher prices although the nature of personal services is the same. Thus it is buyer-oriented
pricing policy since all facilities and obligations of the buyers are taken into consideration.
(1) Price Stability and Profit: Every business concern would like to fulfil two objectives, viz.,
maintaining stable price and earning maximum profit. No company would like to change its prices every now
and then as this practice creates not only a bad impression but also more doubt about honesty and integrity of the
company in the minds of customers. Stable prices do pay in the long run and do help sellers in building up
goodwill and maximising the profit. Frequent change in the price, on the contrary gives impression of corruption,
profiteering and exploitation. It is, therefore, advisable to have stable prices from the point of view of long term
period.
Thus, in the words of Sarin and Gopalkrishnan we can conclude that "pricing strategy must also be adopted
having regard to environmental and anticipated factors such as Government control, existing or potential
competition, fluctuations in purchasing power and the change that occurs in consumer habits and attitudes
because of rising standard of living etc. There must also be consideration for fixing a price that will enable the
organisation to develop for its shareholders a secure and growing market producing a reasonable profit over the
year."
METHODS OF FIXING PRICES
Below given are some of the popular methods adopted for fixing the price of a product:
(1) Pricing in line with similar products already in the market: Under this method, sellers
would like to follow the so called "Price Leaders." Price is normally fixed more or less at the same level at which
the price of other similar products is fixed. Seller is of opinion that he should not create any more confusion
regarding the price in the minds of customers who are well aware of the current price of similar products nor
would he like to turn his price as competitive price. This method ensures customers same but stable price for
similar products during the given period. In other words, same price for similar products will give rise to
competition among customers as to which product is to be purchased and thus it is buyer-oriented method.
(2) Pricing slightly higher than the price leaders: Seller under this policy, charges slightly
higher price than that is prevailing in the market. By charging higher price, he gives challenge to others dealing
in the same line. Higher price than the market price indicates that the product is of superior quality and with all
extensive publicity, attractive brand and after-sale services, seller is successful to push up the sales of his
product. In this case, the seller should take all precautions to maintain the quality of his product highly charged.
Any deterioration in quality of the product with higher price will make such product unpopular and may lose all
prestige as well as goodwill attached both to the product and the seller in the market. One should bear in mind
that higher price embraces quality, durability and "after-sale services."
(3) Pricing slightly lower than the price leaders: At the very outset, charging lower price than
the market price creates and impression upon customers that the product in question is of inferior quality. But the
seller may sell it at lower price because he may not undertake wide publicity campaign and may also not provide
after-sale services to his customers. At the same time it cannot be completely denied that his product is of
inferior quality and therefore he intends to make it popular by charging lower price. Under this policy, the seller
has to get himself contended with lower margin of profit. He further has to face more competitors and cut-throat
competition is likely to take place due to large variation in the price of similar products. Retailers are more
interested in this method than wholesalers and manufacturers.
(4) "Cost Plus" Pricing or Mark-up Pricing: Cost plus or mark-up pricing as it is commonly called is very
popular not only among middlemen but also among manufacturers. Under this system, a certain percentage of
the cost as profit, i.e., mark-up is added to the cost of the product. This cost normally includes, the estimated
expense of manufacture, selling of the product and anticipated margin of profit. It should however be noted that a
price set in this way is always tentative. The price thus fixed may be raised or lowered as per market conditions.
Because the total cost at different times of manufacturing the product is likely to vary and also the demand for
the product. These two factors mainly decide the pricing structure whether it should be raised, lowered or stable.
HOW PRICES MOVE?
(A) Prices Move Up when
(1) There is more demand than supply;
(2) Customers anticipate shortage at a future date;
(3) Manufacturer has to incur extra expenses for sales promotion and maintaining high quality of
the product;
(4) Manufacturer intends to offer after-sale services to customers;
(5) Turn-over is remarkably low; and
(6) Product is of "Made to Order."
(B) Prices Move Down (Fall) when
(1) There is more supply than demand;
(2) New manufacturer would like to obtain rapid market penetration for his product;
(3) Large-scale economies are achieved resulting into reduction in cost of production;
(4) Manufacturer is contented with lower margin of profit;
(5) Products are of perishable nature; and
(6) Turn-over is fast and continuous.
Price Leadership
Under this policy, many dealers instead of determining their own prices, try to adopt prices charged by their
competitors as if their competitors are competent to do so. Any one firm may take initiative in fixing the price
and others will follow marking their prices at, above or below the competing price, according to their general
policy. Generally the products thus priced may be identical with the products offered by the price leader. In case
of differentiation in the product, the price chargeable is likely to vary. By following price leader, the new firm or
the dealer feels confident that the price fixed is fit to meet the competition in his line. It should however be noted
that the price leader is not necessarily the first to announce any change in the price. But if he does so, it will be
the decisive one in deciding the new price because of his long experience in the line.
Price Understandings
Price is also determined in consultation directly or indirectly with other firms. Trade Associations in this respect
play a dominant role. Occasionally, associations collect reports as to the prices from their member firms and then
disseminate the same information to other members who are new in the line.
Price understandings may also result from the use of patent pools and they are frequently found in the local
pricing of stable products which are not branded, such as coal, sugar and lumber.
 RESALE PRICE MAINTENANCE
It is a marketing policy under which the manufacturer insists that the selling price fixed by him should hot be
changed under any circumstances while selling his product by retailers to the ultimate customers. He would like
to see that his price is maintained till his product reaches the consumer. While fixing the resale maintenance
price, the manufacturer should take into account promotional expenses, turnover of the product and the
competition that the retailer will have to face in marketing that product. However R.P.M. policy restricts the
frequent price fluctuations as well as price competition ensuring consumers the stable and registered price for the
product they buy. It is therefore also called "Fair Trading."
Opinions on R.P.M.
(1) Small retailers prefer R.P.M. in order to avoid cut-price competition from other retailers.
(2) R.P.M. has been strongly opposed by new types of retailers who found their enterprise much affected by
these devices for stereotyped methods of sale.
(3) Even the economists are opposed to this type of pricing system which according to them has failed to
recognise differences in the cost of production as well as distribution.
(4) Big retailers who undertake business on a large-scale are in favour of R.P.M. which enables them to
maintain stable prices.
(5) Efficient retailers who would like to pass on the benefits of low prices to consumers are not in favour of
R.P.M. as they feel that they can have large turnover of sales by lowering the prices getting thereby regular
profits which is not possible under R.P.M.
(6) Inefficient retailers with high cost of operation are of opinion that R.P.M. is a blessing
in disguise for them as they are well protected under R.P.M. and thus can operate their business along with
others who are more efficient and successful.
(7) Manufacturers in general are of opinion that R.P.M. is an effective weapon to kill
competition as no change in price already fixed by them, is possible. Further it helps them to maintain stability in
prices and their own reputation.
(8) R.P.M. Policy is strongly opposed even by small hawkers, stall-
holders, and small shopkeepers who prefer low margin of profit but large turnover at lower prices. This is
rather difficult under R.P.M.
Why is R.P.M. preferred?
(1) It helps maintaining stable prices.
(2) Weaker section of business community is protected.
(1) Restricts cut-throat competition among manufacturers or dealers dealing in similar
products.
(2) It results into Fair Trading Practices although public are forced to pay slightly higher
prices.
(1) R.P.M. is a boon to consumers particularly during inflationary conditions.
Loss Leader Sale
As per. Sec. 33 (3) of M.R.T.P. Act, 1969 a "Loss Leader transaction occurs when a resale of the goods is made
by the dealer not for the purpose of making a profit on the sale of those goods, but for the purpose of attracting to
the establishment at which the goods are sold, customers likely to purchase other goods." From the above
provision of the Act, it is clear that the dealer sells leader items that are commonly used for day-to-day living at a
very low price in order to attract customers to his establishment where these customers may be tempted to buy
other articles of daily use at reasonably high price. Thus, although the leader items are sold at a loss, the same
loss is more than compensated by those articles sold at higher prices. Loss leader sale in practice leads to Profit
Leader Sale and is in contravention of the provisions of R.P.M. policy.
(C) THE POLICY OF OFFERING DISCOUNT
Discount is a special concession in price granted by seller to the buyer. In other words, it can be said that
discount is the difference between full amount of the bill and lower amount accepted in money down by creditor
or by seller. It is an allowance made by seller to the buyer so as to promote the sales of his goods. Discount is
also granted to encourage buyers to make prompt payment of their bills. Generally, the benefit of discount can be
obtained only during the stipulated period. It is allowed to buyers purely at the discretion of sellers. No buyer can
claim it as a matter of right and the rate of discount even may vary from the buyer to buyer depending upon the
sweet-will of the seller.
In practice, discounts like (1) Trade Discount (2) Cash Discount (3) Quantity Discount (4) Promotional Discount
(5) Secret or Confidential Discount and (6) Seasonal Discounts are allowed as follows:
(1) Trade Discount
Trade discount is one that is granted on the list price either to the wholesaler or retailer to enable him to sell the
product to his customers at the list price retaining for himself a certain margin of profit. As the name indicates, it
is granted only to the traders who are expected to resale the goods. Trade discount therefore helps retailer to
secure his own margin of profit, and manufacturer to maintain his list price. Thus trade discount is indirectly
acting as Resale Price Maintenance.
Effects of Trade Discount
(1) It helps retailers to sell goods at list price recovering all marketing expenses incurred and to
earn thereby a certain margin of profit.
(2) Seller will have to make necessary changes in the rate of discount allowed if he finds that there
are wide and sudden fluctuations between the market price and list price at which retailer is expected to sell.
(3) To keep pace with the fluctuations in the price, the trade discount is revised from time to time
preferably after three or six months.
(4) It acts as a strong weapon to kill price competition and supports to have service competition.
But in case higher discount is allowed, it may act adversely and thus goods may even be sold below the list price
inviting thereby cut-throat competition.
(2) Cash Discount
Cash discounts are deductions from the amount of the bill for payment in full within a specified time. The
stipulated period is relatively short. It may be ten or fifteen days depending upon different industries and nature
of commodities dealt in. It is mainly granted to the buyers with a view of encouraging them to settle their
accounts in full at an early date. Cash discount benefits buyers as they have to pay less than what is actually due
from them. The sellers on the other hand get their amount earlier than expected. This prompt payment by buyers
to get benefit of cash discount helps sellers not to block their capital for a long time. It further helps them to see
that no amount due from buyers is written off as had debts.
Early recovery of dues helps sellers to reinvest it in their business as additional capital for further expansion or
reorganisation of their business. Generally it is granted on percentage basis for a definite period. For example, if
Mr. A sells goods to Mr. B for Rs. 1000, he may allow Mr. B 5% cash discount if payment is made within a week
or a fortnight. Thus if Mr. B pays within this stipulated period, he is entitled to get Rs. 50 as cash discount, i.e.,
by paying Rs. 950 he will get from Mr. A the receipt for full settlement of Rs. 1000 due from him (B).
(3) Quantity Discount
(1) The very name "quantity discount" indicates that this type of discount is granted by the seller
to the buyer on the total quantity of goods purchased, either at one time or over a designated period.
(2) Quantity discount is allowed to encourage buyers to purchase in bulk. If goods are purchased
in large quantity, the orders can be delivered more economically than small ones. Moreover, large orders can also
be executed more cheaply.
(3) This type of discount is given mainly to "get business" for slow moving items. It is used as a
sales device.
(4) Discount based on quantity purchased over a period of time is also called "Cumulative
Quantity Discount" which serves as rewards for the continued patronage of the buyer. It is also called as
"Patronage Discount."
(5) This discount is paid at the end of the year in proportion to the total quantity of goods
purchased in previous year.
(6) Previous year is taken into account for having bulk purchases in successive years. However, it
should be in excess of the minimum quantity fixed.
(4) Promotional Discount
When the buyer undertakes of his own accord measures for the promotion of the sales of goods bought from the
seller, he is given as a concession a certain amount by the seller as direct reduction in the payment of his bill.
This is called promotional discount which is generally granted by manufacturer to wholesaler or by wholesaler to
retailer for having given special prominence for his product by way of newspaper advertising in local papers,
television and radio advertising, special window-dressing etc. This concession in the form of discount on the
gross amount of the bill is given to compensate the retailers and wholesalers, as the case may be, for the
expenses incurred by them and also to encourage salesmen concerned to put up special efforts to push up the
sales of the products. The promotional discount policy is commonly practised as a sales device particularly when
the product is new in the market.
(5) Secret or Confidential Discount
This type of discount is given only to certain favoured or preferred customers in order to retain their patronage
thinking that they are valuable or prestigious customers. Granting of such discount is not known to customers in
general and therefore this being a secret matter between the seller and the selected customers, is called secret, or
confidential or inside discount. Such discount is granted either in the form of rebate on the total quantity of
goods bought during the year or as per bargaining terms and conditions agreed upon with such individual
customers. It should be noted here that the size of the bargaining discount depends upon the bargaining ability of
the purchaser and the seller.
(6) Seasonal Discount
Actually in business, certain products will have demand only during a particular season. Such products in
general are known as seasonal products. So during slack season, for example winter season is a period during
which electric fans, refrigerators, coolers, ice products etc. may not have even a normal demand. In such cases,
to promote sales, the manufacturers of such products of which demand depends upon the nature of the season
may adopt a strategic policy of granting discount say of 5% or 10% in order to give special impetous to
customers. However, one should bear in mind, such concession as its name indicates confines only to a stipulated
period particularly the slack season.
PRICING POLICY CONCLUSION
(Factors that Determine Prices)
(1) Product Differentiations: When the product is more or less of the same size and quality as
that of competitors, to distinguish the product from that of others, the manufacturer under such circumstances to
build up his distinct position in the market, he may change the price of such a product.
(2) Manufacturing Cost: In determining the price, cost of a product plays an important role and
the price is fixed taking into consider the cost, demand and competition. But normally, the price fixed shall cover
the cost.
(3) Demand and Competition: Over and above the cost factor, the demand for product guides the
manufacturer to fix the price either at higher or lower level. Similarly, if the product has to pass through heavy
competition, prices may be charged at lower level.
(4) Economic Conditions: Actually in practice, inflationary as well as deflationary conditions
affect the prices depending upon demand and supply theory.
(5) Government Regulations: Government policies regarding exports, imports, controls as
against price rise, excise duties etc. influence the determination of price.
(6) Influence of Trade Union: Regular pressure from trade union for higher wages, monetary and
non-monetary incentives to workers compels manufacturer to revise the prices.
Over and above the price fixation, the manufacturer shall always have his own policy of granting different types
of discounts as one of the measures to push up the sales of his products old as well as new.
(D) DEMAND CREATION POLICIES
Sales Appeals: Without any demand for goods, no business can be undertaken. It is just possible to have regular
demand for products of daily use but when innovations are made in the existing products or altogether new
products are manufactured, demand for such products must be created and that can be done only through sales
appeals. There are different appeals such as price appeal, quality appeal, parental appeal, style appeal and service
appeal. Appeal for creating demand for products can also be made through other means than what we have
mentioned here.
(a) Price Appeal: This appeal is attractive to those customers who cannot afford to pay high
prices. Therefore, when competitive prices are fixed or slightly lower prices are charged, any appeal made in this
respect will attract customers of lower and middle income groups. But a price appeal with a little margin of
difference between the appealed price and the current price will make no impact on customers of higher income
group. Even among lower and middle income group, the price appeal will have no effect if the products are not
of high quality.
(b) Quality Appeal: This type of appeal is in common use and is particularly used for advertising
products like automobiles, televisions, machine tools, medicines etc. Similarly for fixed price items, quality
factor is widely advertised. While giving due publicity to quality of a product its use, durability, colour, effects
and safety in use should be brought to the notice of customers through the so called quality appeal. It will have
its effect on customers of all groups. However, customers of higher income group will show greater interest in
such appeal.
(a) Baby Appeal: Parents in general are keen to see that they provide the best food, the best
clothes, the best toys etc. to their children. They also would like to see whatever toys or products they supply to
their children can be safely used by them. So, parental responsibility can be successfully fulfilled through child
and baby appeals which give all particulars about the product to be sold.
(b) Customer Service Appeal: Customers will be tempted to buy products from those sellers who
offer them concessions and after sales services. Concessions such as credit sale, guarantee, free repairs, home
delivery, etc. will automatically create new demand for a product which covers such concessions.
Advertising to Promote Sales
Advertising is playing a dominant role in creating demand for products. All advertisements may not receive
attention of consumers and, therefore, while advertising any product, advertiser should see that advertisement is
clever and catchy one with proper colour, layout and suitable appeal. However, there is no guarantee that the
appeal made will be accepted by all. That is why the advertiser should have special skill to make the
advertisement effective. Many a time it is observed that consumers fail to understand what is advertised and,
therefore, react in an adverse manner. So to avoid such a situation, some businessmen feel that consumers should
be familiarised with all details of product. This may not be practicable and hence it is enough that consumers are
aware of the availability of product advertised. This much of service that one gets through advertisement is more
than enough to create demand.
For making advertising more useful and effective proper advertising media should be selected. Different media
that are at present used are newspapers, radio, magazines, television, play cards, handbills, etc. All these media
may not fulfil our object of advertising. Some may, like newspapers, handbills only point out to the consumers
the availability of the product without giving the detailed facts about the product. The facts regarding product
can well be communicated through television. It is, therefore, very essential that every care should be taken for
selecting the appropriate combination of media and then only the purpose of creating demand through
advertisement can be fulfilled.
Personal Selling: Personal selling indicates selling goods through sales representatives. Demand for existing
products as well as new products can be created at the initiative of sales representatives. If they are efficient,
skilful and hard-working, good business is not difficult to achieve. They should see that they are ever ready to
pay attention to the needs of consumers, convey correct information about product to be sold and are prepared to
render any possible service that may satisfy consumers. But under this system of personal selling, the main
question is who takes the initiative first. For instance in retail business it is the customer who takes initiative and
comes to the shop for making purchases while in industrial business it is the seller who approaches customers
current and prospective with necessary catalogues, samples etc. However, in both the cases, the success of
creating demand for the product depends on how both the parties meet each other and exchange the information
about the product to be sold.
(E) CUSTOMER ORIENTED POLICIES
Selection of Customers: It is always to start with, sellers are not choosy so far as customers are concerned
although the selection of customers mainly depends on the type of products to be sold. For example, if products
dealt in are of daily requirements even the customers of low and middle income group will serve the purpose of
the seller. But when he is dealing in luxury products, he will have to depend upon customers of middle and
higher income group. He should, therefore, put all his efforts to attract customers who enjoy a high standard of
living and a well planned policy should be formulated to see that his customers not only continue to patronise his
products but bring more new customers for him. Once his business is established, he may select customers who
generally place big orders and neglect those whose orders are small and unprofitable.
The Selective selling is possible only after once business is established on sound footings. Further, selection of
customers is directly /linked with location of business undertaken. For example, if a businessman has a general
store, he has no other alternative but to depend upon those people who reside in the vicinity of his store. On the
other hand where one is manufacturing ready made garments need not depend upon local customers. His
clientele in this respect may spread all over the country. So, we can say in determining customers, location as
well as type of business plays an important role and accordingly the selling policies should be chalked out. The
policy regarding customers to be selected on the basis of location should be drawn in such a way as to see that
the cost of serving the customers is the minimum. When customers are dispensed, the selling price cost is more
due to packaging, insurance, transportation etc. but it is comparatively lower when local or state-wise markets
are served than the foreign markets. Hence, it is left to the sales manager to mould his policy in the manner he
thinks fit.
Channels of Distribution
Distribution of products is indeed a problem which must be solved by the manufacturer. It is the different
channels through which products are distributed
decide the success or failure of business. In the process of distribution, we should see that products are made
available to customers whenever they need, transportation cost is the minimum and delay in giving delivery is
avoided. Bearing in mind these points, channels of distribution can be selected.
Different channels are selected by different businessmen so as to suit their conveniences. Some manufacturers
prefer to contact consumers direct through their well trained salesmen while others, particularly manufacturing
consumer goods, open their own retail stores and fulfil the demands of consumers. In addition to this practice,
manufacturers supply their goods to wholesalers who subsequently supply the same to retailers. It is now through
retailers, consumers get all their requirements fulfilled. The wholesalers and retailers may be considered as
middlemen in the channel of distribution. Over and above these two types of middlemen, goods are also
distributed with the help of manufacturer's agents, brokers, auction houses, mail-order houses, department stores,
multiple shops, importers and exporters. But one should note that out of all middlemen mentioned above who are
responsible for distribution of goods, wholesalers seldom offer customer services. It should be a normal policy
that once the channel is selected, it should continue for a long time unless the competitive costs force the
management to change.
Problems of small orders, returns and allowances
Manufacturer or seller would be pleased if he could get large orders from prospective buyers as handling of large
orders in respect of packing, transportation etc. is more economical than small orders. However, no businessman
would like to lose orders for his products even though small orders might be uneconomical. Therefore, to
encourage buyer to send large orders, quantitative discount is granted. The following are some other measures
that can be practised for receiving bigger orders as far as possible.
(1) Dealer should see that his salesmen are well acquainted with the products they are supposed to
handle and sell them at the earliest opportunity they get.
(2) Do not entertain orders of unprofitable customers.
(3) As far as possible, salesmen should be paid on commission basis.

(4) brokers to collect orders in large cities.

(5) Make it a condition that if the order is small, transportation cost should be borne by buyer.
 (6) Try to convince dealers who are in the habit of placing small orders that they lose sales and
profits when they run short of stock which is the outcome of small orders.
(7) Appoint only one sole agent covering a large area so that he may be in a position to place a
bulk order.
The other problem that disturbs the seller is about sales returns and allowances. Many a time, goods once
bought are returned to the seller. The
causes for returning the goods are many and some of them are poor
salesmanship, poor packaging, misleading advertising, products different from samples shown etc. For these
causes, the seller can be held responsible but buyers can be held responsible when they return goods on account
of carelessness and overbuying, or speculative buying. Buyers are in the regular habit of returning goods when
they find the seller is rather liberal and not strict. Therefore, a firm policy discouraging such returns on one
pretext or other should be formulated and salesmen should be strictly warned not to oversell customers. It will
he a wise policy if customers are furnished with all details regarding the products they are likely to buy. This will
strengthen the hands of seller in executing the policy adopted in this regard.
Customer Services: It is a general belief that customer services are very essential for the promotion of sales.
Though the expenditure incurred on customer services appears to be unproductive at the very outset but it proves
to be substantially productive in the long run as it helps the seller to increase his sales. It is rather customary to
offer services such as granting of credit, imparting instructions as to the safety and efficient use of the product,
entertaining of sales returns and complaints, providing facilities of telephone, rest room, if it is a department
store, free delivery of goods and free repairs etc. For granting such services there should be a specific policy
which should neither be too liberal nor too rigid. It is advisable to study the concessions offered by competitors
in the line before any policy in this regard is formulated.
Reciprocal Buying and Selling
This type of transaction is a result of intensive competition and mutual agreement between two manufacturers.
They mutually decide to buy and sell each others products between them. Reciprocity is also possible when there
is diversification of product lines. This type of transaction is economically justified so long both the parties
procure superior goods at reasonable prices. It is not very necessary to have an extensive publicity programme
and since the goods are to be bought and sold between two parties, selling cost comes to the minimum but the
salesmen are losing their importance in the field of sales. Hom, long and to what extent the manufacturers would
like to adhere to this system of selling is a policy matter to decide.
Other problems of Sales Management
Sales Budgeting and Quotas: The immediate problem for sales manager is of preparing a sales programme.
This programme should cover the total sales he would like to have, the areas to be covered, the period during
which he would like to complete the stipulated turnover and the amount of profits he expects after meeting the
requisite expenses. The programme of this nature is nothing but preparing a sales budget which is based upon
sales forecasts. While preparing this budget, care should be taken to see that it is accurate and expected
alterations in the product line, change in demand and competition in the line are taken into account. The sales
budget that is prepared with these precautions will act as a guide to attain the goal of the firm. It is this budget
that will enable the sales manager to allot quotas to salesmen required to be fulfilled territorywise within the
stipulated period. No sales budget is prepared against the basic policies of the firm even though the sales
department has got its own policies to push the sales.
PURPOSES OF SALES QUOTAS
(1) Improve Control: Fundamental purpose to set sales quotas is to exercise control over sales
performance. The management can use sales quotas as an effective tool of control on a sales territory over a
range of products and an individual member of the sales staff. It is also a good method of appraising sales
operation.
(2) Provide Performance Standard: Sales quotas provide an effective method of judging
performance of individual salesman. It also provides quantitative standard for measuring territorial performance.
The sales manager can know by comparing the performance of the sales personnel whether the performance of
an individual is normal, below normal or above normal. It also helps sales manager to know the strong and weak
points in sales performance. However, management should set quotas carefully, not too high and not too below
normal.
(3) Control Expenses: It is necessary to keep sales expenses under check. When sales personnel
are assigned sales territories or quotas, they are also permitted to incur expenses to perform their duties. These
expenses are reimbursed by the management to the staff who are given clear ideas in advance of the permissible
limits of their expenses. So, along with sales quotas, expense limit helps the management to control sales
expenses taking into account the quotas allotted.
(4) Motivate Sales Personnel: Another purpose of the sales quotas is to motivate sales personnel
to achieve a certain standard purpose of motivation. But to be a motivating force, quotas should be so fixed that
they should be attainable for the majority of the sales personnel. However, the quota may be increased gradually
every year to achieve the sales volume desired by the company.
Help Sales Contests: Sometimes a company in order to increase sales or to achieve better performance from the
sales personnel may use sales quotas in sales contests. The sales personnel are rewarded prizes or bonus for
attainment of performance above the quotas or even for attaining the quotas before the time limit. In such cases
sales contests act as powerful incentives if the sales personnel feel that they have equal chance of winning.
 Awards are granted on achieving a percentage of quota assigned. This forms common basis for sales contests.
For sales contests, generally contests quotas are determined for use in sales contests only. It is thought that
Special Quotas motivate average sales personnel to do better and achieve more than average performance.
TYPES OF SALES QUOTAS
(1) Sales-Volume Quota: This is the most common type of quota used by the companies. The
sales-volume quota gives an idea to the sales personnel how much sales are expected by the management. They
know in advance their performance level and their credit with the management will depend upon their
achievement of the sales-volume quota. The sales persons will therefore their best to fulfil the quotas set for
them. It is al so a good method of measuring the performance of the sales personnel.
(2) Sales-Value Quota: In this case, sales quotas are fixed in rupee value and a sales person is
expected to sell products of a predetermined value in a given period. Emphasis is not on total amount of goods
sold but on the total value in rupees of the goods sold. This type of quotas are used by companies having
multiple product lines. This system may also be used for those products where the management has not
determined a firm or fixed price for the products but the sales personnel are permitted to vary the price within
certain limits. The most important advantage of sales-value quota is that the selling expenses may be effectively
controlled by fixing a certain percentage of the value of sales. However, this percentage should be related to the
value of actual goods sold and price realised and not to the total value of goods booked for sale.
(3) Unit-Sales Quota: Under this system, companies fix the sales quotas in the total number of
units of goods sold. Unit-sales quotas are fixed under two situations. Firstly, where the price of the products is
very high, viz., colour TV, refrigerators etc. and secondly when the price of the product is expected to fluctuate
widely during the quota period as it is difficult to measure sales performance by sales-volume or sales-value
quota. Unit-sales quota will provide a better idea about the sales performance. In a fluctuating market conditions,
unit-sales quotas are more reliable yardsticks for performance evaluation.
(4) Point-Sales Quota: This is the system adopted for arriving at proper evaluation of sales
persons whose tasks include (a) number of orders secured (b) value of the orders (c) the number of calls made
(d) new accounts obtained and (e) demonstrations done. Each factor is given certain marks and total marks
obtained by a sales person is taken into account to evaluate the performance and determine payments. Some
companies give negative marks for bad debts and complaints from the customers. This system is supposed to be
more accurate and reliable in appraisal of the sales persons.
POLICY FOR SETTING QUOTAS
There are various methods of setting sales quotas used by different companies. The policy as to the
determination of quota should be flexible and cannot be the same for different products to be marketed. Sales
manager, therefore, before adopting any quota fixing policy, in general, should consider (a) the type of product,
(b) the estimated demand, (c) market conditions and such other factors. Sales quotas should be determined very
carefully based on full information and data available. Even after considering carefully every factor and setting
the quota for a territory or an individual sales person, the calculations may go wrong because of uncertainties in
changing market conditions. Generally, the policy is confined to the following principles followed in setting
sales quotas.
(1) Based on Territorial Sales Potentials
Sales quotas are generally fixed from the sales potential of sales personnel or sales potential in a territory. Sales
quotas for a territory are derived from the current sales potential in that territory. This gives an idea of maximum
possible sales of a product. This procedure is adopted by some companies under two circumstances:
(i) When sales potential has been already determined in a territory and (ii) when sales forecasting methods have
been used in arriving at the sales potential. The estimated potential sales volume quota made by the sales
personnel is revised and adjusted by the company in view of individual differences of sales personnel,
competition, past sales, market conditions, changes in prices, sales promotion etc. But the final revised sales
quota is decided by the management.
(2) Based on Past Experience
In this, sales quotas are based solely on past sales experience. This policy is easy to understand and implement.
However, there are three methods, viz.,
(1) Under first method, the sales of last year are considered and to that a certain percentage is
added.
(2) In the second method, the average of the last immediate three or five years is taken and an
arbitrary percentage is added to that average; and
(3) Sometimes, the average of past of several years is compared with the immediate past year. This
method may be said to be a little more realistic than first two methods.
But deciding the sales quotas based on past experience suffers from following limitations:
(I) It assumes that the past sales have been very satisfactory. Actually, the sales may have been
below average.
(I) perpetuates past mistakes of the company.
(II) dales quotas thus fixed based on past experience may either be too low or too high. They
cannot be realistic.
 (I) Such sales quotas cannot be used as adequate tools of performance appraisal, in as much as
past poor performance of the sales persons will not be found out.
(II) By adopting the sales quotas based on past experience, the management follows the path of
least resistance and thus encourages the inequities and shortcomings of its sales force.
(3) Based on Management Judgement
Under this method, the judgement of the management dominates. Such sales quotas will be highly subjective and
may have no relation to real situations in the market. Where there is lack of market data, such judgement may be
justified. There may not be any sales forecast done on account of product being altogether a new one and its
potential demand not known. The general concensus is that the management should avoid such a course of
action.
(4) Based on Compensation Plan
Sales quotas are sometimes based by certain companies only on the likely amount of payment a sales person
would receive. The management does not take into account such factors as sales potential, past sales experience,
promotional efforts or total market estimates. Though financial incentives are necessary to stimulate
performance, sales quotas should not be based only on compensation plan. Moreover such sales quotas do not
serve as standards of performance evaluation.
How are Sales Territories Allotted?
To get the predetermined quota of sales fulfilled, it is necessary to allot different territories to different salesmen.
Territories are generally allotted to salesmen having considered their knowledge of languages, the previous
performance, the contacts, age, and qualifications. Sales manager should see that equal opportunities are given to
salesmen to work in all territories and should see that products are given due publicity on equal bases in all
territories.
Where some typical difficulties pertaining to certain territories are pointed out by the salesmen to the sales
manager, necessary steps should be taken to solve them so that salesmen need not feel it difficult to push the
sales. The performance in different territories must be evaluated and if the performance is hardly satisfactory that
unpopular territory may be dropped and altogether new territories may be added. Under such a situation the sales
manager should have a definite policy whether the territory where the products do not catch the market is to be
entirely dropped or some additional measures to give more publicity should be undertaken. In this regard
whatever decision he would like to take should be based on comparison of cost and expected profit. Ultimately,
he should see that his policies add to the firm's profits.
Basic Principles for Setting up Sales Territories
(1) Define "territories" clearly so that the expected commission for each salesman, as far as possible, may not
vary to a great extent.
(2) Territories should neither be too big nor too small as to affect the efficiency of sales personnel
to serve and their earnings.
(3) Territories should be so planned as to see that they can be covered by salesman at minimum
expenditure.
(4) They should not be rigid but flexible so that the larger territories may be allotted to senior
salesmen to motivate them for still better performance to the company's interest as well as to their own interest.
(5) Care should be taken to see that a new salesman is not given an independent territory but is
asked to work under the guidance of senior salesman till he gets acquainted with that territory.
(6) Transfer of salesmen from one territory to another should not be done so often unless
temperamental reasons compel the management to do so.
POLICY PROGRAMME FOR TERRITORIAL COVERAGE
To ensure that the territorial coverage programme is effectively implemented, it is essential to establish territories
after careful thought and after the results of different territories have been carefully interpreted. Itshould be borne
in mind that no deviation from the plan is normally permitted, unless it is for a good reason. Nevertheless, every
salesman involved in the programme of sales coverage should have adequate freedom to make independent
decisions in the larger interest of the company.
The established programme or plan is not a straight jacket but a guide to action. Whenever rush-order urgent
calls, popularly known as "hot" calls, arise, the salesman is expected to deal with them, even if he has to depart
from his normal route schedule. Such an action on the part of the salesman does not cause any permanent injury
to the company. However, such hot calls should be carefully screened and critically examined in terms of their
profitability. It is therefore to implement, the following steps are necessary:
(i) Make an attempt to determine whether a personal call is really necessary.
(ii) It is necessary to decide whether such a call should be made immediately.
(iii) Find out whether the salesman can safely defer the call without disrupting his schedule.
(iv) In case the personal calls are absolutely essential or very urgent, it is advisable, without
disturbing the salesman of the concerned territory, that the sales manager himself makes the call or assign
another salesman, with a more flexible schedule to do so.
Conclusion
However, the sales manager and sales personnel should be even ready to make alterations in the assigned call
frequencies, depending upon the constant rise and fall in the demand for products. Territorial adjustments have
also to be made when customers migrate into, or from, certain territories. Adjustments should, as far as possible,
be made only when the need for them has been identified. If the adjustment made in the coverage programme are
minor, no major revisions are necessary. To avoid embarrassing and unnecessary questions from customers,
salesmen should be cautioned not to disclose the call frequency programmes to them because the call frequency
plan is confidential and is their guide and is not meant for public. To ensure an effective execution of the
territorial coverage programme, the sales manager should keep a close watch over the activities of salesmen, in
so far as the territorial coverage programme is concerned. The programme is bound to fail if persons do not do
the jobs assigned to them and if they are not properly guided or supervised by their field sales executives.

11
Personnel Policies
Introduction
The notion that "Management" generally means getting things done through others widely prevails. It is also
generally understood that management means the "boss" or the top executive. It is a term which is used freely
but rarely understood correctly. It will not be very much wide off the mark if we say that many business
executives understand the term management as driving others in the enterprise to do certain appointed tasks.
Management is a very important aspect of modern industrial society and the actions of management have
profound effects upon social and economic life of the community. Management is a part and parcel of business
corporation. In fact it is a specific organ of the corporation. The business corporation exists to perform an
economic function to provide the goods or services to the community. Therefore whatever decisions, the
management of a corporation takes ultimately affects the interests of the community. So management is capable
of influencing the economic life of the people and hence it is vital to understand correctly the meaning of
management. Management is regarded as the specific organ of business corporation. Peter F. Drucker says that
"whenever we talk of a business enterprise, we actually talk of a management decision, a management
behaviour."
"The enterprise can decide, act and behave only as its managers do -- by itself the enterprise has no effective
existence." This statement clearly brings out that management is a vital organisation. Justification for the
existence of a business corporation is its economic performance. Every corporation has to work in such a way as
to discharge its economic function efficiently. It has no basis for existence if it fails to produce economic result
and this is the primary responsibility of management. Therefore,* "the ultimate test of management is business
performance. Achievement rather than knowledge remains, of necessity, both proof and aim. Management, in
other words, is a practice, rather than a science or a profession, though containing elements of both." We can
now define management again in the words of Peter F. Drucker that, "it is an economic organ, indeed the
specifically economic organ of an industrial society. Every act, every decision, every deliberation of
management has as its first dimension an economic dimension.
Personnel Management is a branch of management. It exists in any organisation where people are employed. It
also forms a branch of industrial relations in general. Sometimes industrial relations or labour relations are
considered a part of personnel management. The terms industrial relations and personnel management ai -e
interchanged freely. The personnel management is generally concerned with establishment of friendly relations
between management and labour. In fact, the basic function is thought to foster healthy relations between the
two. It is the function of personnel management to provide the right kind of management leadership which
recognises the dignity of man and the individuality of a worker.
The work of personnel department can be divided into three categories:
(1) To formulate procedures and routines. This includes procedures for employment and dismissal,
fixing rates, promotion, retirement and host of related problems.
(2) To formulate personnel tools and techniques. This includes matters such as job evaluation, job
analysis, merit rating, incentive payments, safety, welfare training etc.
(3) To formulate a personnel policy. This includes the attitude of management towards labour,
policy towards unions, philosophy of the management in general.
The personnel department is largely advisory and supervisory in character. It is a typical staff organisation. That
is the personnel department which prepares policy and makes recommendations to the top management. The top
management may adopt the policy and after that it becomes the responsibility of line organisation to apply and
enforce it.
Functions of Personnel Department
The functions of personnel department can be classified into defined categories as under:
(i) Recruitment and Training
This includes selecting the workers through interviews and tests. Placement and training of the workers after
selection also fall within it.
(ii) Wages, Leave and Promotion
This includes fixing the different wage scales for different j obs, providing incentive wage payment, overtime
payments etc. Sanctioning of leave, promotion of workers to higher jobs, their transfer, lay off and retirement are
the responsibilities of this section.
(iii) Job Analysis and Evaluation
This is an important tool of personnel management which decides the number of jobs, their exact requirements,
payment to the jobs etc. This helps in selection of proper workers, fixation of wage scales and also promotion.
(iv) Merit Rating
This is a technique used to find out how well an employee is preforming his jobs. This helps to find out the skill
and intelligence of the workers which helps in determining promotions.
(v) Safety and Health
Nowadays, factory laws of the government lay down rules regarding safety and medical care of the workers.
This is an important aspect of personnel management. The personnel department generally administers the safety
and health programmes.
(vi) Labour Welfare
Under this falls different recreational and labour welfare programmes for the benefit of the workers. Worker's
education, sports and housing programmes are important aspects of this section.
PERSONNEL POLICY PROBLEMS
Labour in India today is in a defiant mood. It has become conscious of its strength and is in no way prepared to
wait any longer for the solution of its age-long problems. The labour movement is gaining strength day by day
and with the advent of industrialisation of the country, the labour will come to play an increasingly important
role. At the present juncture, Indian economy needs a close identity of interest between labour and management
if India is to develop fast industrially. The country has embarked upon the development plans in the form of Five
Year Plans. The aim of the plans is to achieve the country's economic development in all its aspects and to
establish a society based on socialism. In order to achieve the goal set before it, the country will have to girdle its
loins and work very hard to increase production in order to attain a reasonable standard of living. In this context,
the importance of peaceful industrial relations between labour and management cannot be gainsaid. The rapid
development of the country largely depends upon close cooperation between these two main parties. However,
there are many problems which remain unsolved and on a satisfactory solution of these problems the peaceful
relations will depend. It is true to say that labour in this country has been subjected to ruthless exploitation for a
very long time by the employers and even today the position has not changed very much. The basic attitude of
the employers in India, is to look upon labour as a mere commodity, a factory of production to be bought and
sold at their will. They have completely lost sight of the fact that labour is not separate from the labourer and that
a labourer is a living human being who feels and reacts as the employer. The Government was also for a long-
time a passive onlooker and very often sided with the employers rather than the labourers. After the
independence of the country, this position has changed and the Government has taken many steps and passed
many laws to protect the interests of labourers. Certain measures to give sense of security to the worker have
been taken but the basic question of establishing social, political and economic equality remains. It should not be
forgotten that labour in this country is a weaker party, still largely unorganised, illiterate, ignorant and politically
not very much conscious. Therefore, it behaves on the Government to support the weaker section of the society,
that is, the labourer, when its declared policy is that of establishing socialist pattern of society based on political
democracy.
The Planning Commission observed that "labour problems should be approached from two angles the welfare
of the working class and the country's economic stability and progress. The basic needs of the worker for food,
clothing and shelter must be satisfied. He should also enjoy improved health services, wider provision of social
security, better educational opportunities, and increased recreational and cultural facilities. He should be treated
with consideration by the management and he should have access to impartial machinery if he fails to get a fair
deal. Finally, he should have freedom to organise and adopt lawful means to promote his rights and interests."
Needless to add here that even the problem of adequate food, shelter and clothing remains to be solved even
today let alone the other provisions regarding social security. It is true that these problems are gigantic and
cannot be solved overnight. But what is important is that labour should be made to feel that everything is being
done to solve these problems and that they will be solved in the course of time. It becomes the primary duty of
any progressive government in modem times to see that the basic problems of the community are speedily
solved.
In the light of the above observations, it is now clear that the problems connected with the Indian labour are
varied and complicated, and in the context of the planned development, they have become more complex. The
problems mainly relate to recruitment, training, discipline, absenteeism, excessive labour turnover, workers
participation in management, industrial disputes and their settlement, labour welfare, etc. Each of the problems
in itself a vast and complicated one which calls for a much detailed study. However, it is not in the scope of this
book to study these problems in detail but a brief discussion is made in the following pages.
PRINCIPLES OF RECRUITMENT
The management is expected to stick up to the following principles as sound policy of recruitment:
(1) Sound planning for staffing and for recruitment should be made well in good time to avoid temptations of
recruiting any type of personnel when the work begins to suffer.
(2) Appointments of relations of the management should be avoided. This will help management to be free from
favouritism.
(3) All posts should be advertised in one way or the other with the sole object of giving fair and equal
opportunity for all.
(4) Preference may be given to
(a)Displaced persons who are already in employment with at least one year of approved service.
(b) Other displaced persons of the locality.
(c)Contractor's men and
(d) Others.
(5) Selection should be made by a Committee with one or two experts.
(6) Personnel should be selected on the basis of qualification and merit with no consideration to personal
relationship with the management.
(7) Basic industrial policy laid down by government should not be ignored.
What should be the Recruitment Policy?
While framing the recruitment policy, the management should see that there shall be no injustice either to the
organisation or the personnel to be recruited. Under no circumstances, the labour force is to be exploited nor is it
forced to work under uncongenial atmosphere. The policy should ultimately aim at maintaining industrial peace.
Management should bear in mind its objectives, business ethics, environmental conditions, its commitments
towards society etc. before final shape is given to recruitment policy. However, the policy must cover the
following basic requirements of any business organisation.
(1) Right job for a right person: Under this principle, the proper qualification aptitude of a person
for the job offered, his experience etc. must be considered. Even physical fitness must receive top priority when
the job offered warrants physical strength on the part of operator.
(2) Provide equal opportunity to learn and rise: Recruitment policy should be broad-based giving
an opportunity to every employee to improve his prospects. Policy should be such that facilities of training
within and outside the organisation are made available. Necessary guidance and proper incentives are provided
particularly to those who are at the lower rung of the management ladder so as to enable them to improve their
prospects. In short, policy should never be rigid but flexible.
See that organisation is a symbol of "Esprit de Corps": While recruiting the personnel, one should see that unity
in the organisation is maintained. Because of new recruitment, there should be neither misunderstanding nor
friction leading to unended conflicts and disputes between different departments. The policy should always dim
at maintaining proper coordination and cordial relations in between different departmental heads. Unity as
strength can be expected only when the personnel policy is embodied with retaining initiative of individual
employee.
(1) Make employees fully equipped: To get maximum benefit of services of personnel recruited,
management should provide the employees better tools and machinery and materials so that they can produce
better quality products at lower price ensuring the management higher margin of profit. Labour efficiency is also
directly linked with working conditions and therefore the policy should make provision for having congenial
working condition along with welfare as well as recreational facilities. Concerned policy should never be
conservative so as to make employee morally and technically unhappy. Policy is not only to recruit human
beings but to have satisfactory services out of their technical knowledge, willingness to work, and experience.
(2) Let policy be embodied with "Motivation": Satisfactory services can be expected from
employees only when employer provides them better tools to operate, monetary and non-monetary incentives,
such as security of job, appreciation of work done, providing opportunities for undergoing training, timely
promotions etc. It is motivational policy that controls and guides human behaviour with the result, properly
motivated employees try to give entire satisfaction to the management.
GENERAL CONTENTS OF PERSONNEL POLICY
(1) Need for recruitment
(1) Type of personnel skilled, semi-skilled or unskilled and at all levels.
(2) Selection procedure only by interview or by written-test cum interview.
(3) Age limit for different classes of recruits open category and reserve category, viz., S.C., S.T., B.C.
etc. and also at different managerial levels.
(4) General educational qualifications, experience etc.
(5) Pre-employment medical examination.
 (6) Fixing the priority order for selection between outsiders, employee-relations, and candidates
recommended by Employment Exchange.
(7) Guidelines regarding promotion, transfer, demotion, dismissal etc.
(8) Procedure for conducting job evaluation, selection and training programmes.
(9) Terms and conditions of employment in regard to hours of work, overtime, shift working, layoff,
termination of services, wage policy etc.
(11) Policy as to recognition of trade unions, collective-bargaining, procedure for redressing grievances and
worker's participation in management.
(12) Policy as regards direct dialogue with workers or trade union and also with officials at different levels
of management.
As far as possible, the personnel policies should be in writing. If they are in writing the following advantages can
be derived both by employers and employees:
(1) A written policy becomes a commitment to the management.
(2) It gives an opportunity to employees to watch and see that top management does what is stated
in the policy.
(3) It avoids of favouritism among employees and assures the continuity of the same policy
regardless to any change in the top management.
(4) Helps .management to apply the policy uniformly at all levels of organisation.
(5) Fair play and justice can be expected from the management. This gives an impetous to
employees to show their loyalty and wholehearted cooperation to the management.
(6) No official can do anything detrimental to the interest of employees since terms and conditions
of employment are in writing.
(7) In the event of any dispute or disagreement, the written policy can be referred to come to an
amicable settlement.
So, as a good policy, every management should publish either Policy Manuals, House Bulletins or Booklets as
guidelines for all its managerial and supervisory staff and employees at the lower level.
GUIDELINES FOR SOUND SELECTION POLICY
No firm can conduct its business successfully without whole hearted cooperation of its employees. Even the
basic plans and strategies of the firm will fail if its employees are not happy with the policies that are concerned
with their personal interests. It is, therefore, the policies popularly known as personnel policies have been
considered most important in the business circle. How these policies should be moulded, whether they should be
liberal and sympathetic or rigid towards labour force depends on the philosophy of the management as how
cordial relations with its employees, the personnel policies that are to be to get along with employees. If the
management is really keen on keeping
formulated should be broad-based having due consideration to (a) attitudes and strength of labour unions, (b)
labour legislation and government attitudes towards labour, (c) social approval, (d) development in science and
technology and (e) the personnel policies adopted by competitors. No hasty step should be taken for setting
personnel policies that deal with employees unless all facts and figures are thoroughly studied. To see that our
policies would be acceptable to employees, following guidelines can be followed:
(1) They should be broad enough providing sufficient scope to management and labour for settling
the issues mutually.
(2) Policies should offer equal opportunities to individuals and labour unions to participate in discussions.
(1) Policies should guide decision-makers in taking responsible decisions pertaining to labour
under changing conditions.
(2) As far as possible, they should be flexible leading to good relationship between management
and labour.
(3) They should not be in contravention of government rules and regulations.
(4) Once personnel policies are set up, they should be communicated both orally and in writing to
employees at an early date.
(5) Care should be taken to see that there will be unquestioned cooperation from top management
and the immediate line bosses of workers (supervisors, foremen) who are in direct control with workers. It is
those people who interpret the policies and apply them to situations that arise. The successs of the policy,
therefore, depends on how these people interpret and apply the policy.
SELECTION POLICY
The Labour Market: Whenever new firms are floated, we need workers and they are also needed when new
jobs are created or vacancies take place in the existing firms. For securing the necessary hands, one generally
looks at friends and relatives of present employees, retired persons, persons working in competing firms and at
those who are unemployed or have just come out of colleges. Though these are the sources of securing labour
force, the quality of the people available in such labour market will vary. Where skilled workers are needed,
these sources of labour supply may not come to the rescue of the firm and it may have to run shortage of skilled
hands. To overcome the difficulty, every firm should have a policy for manpower planning for the future.
Similarly, accelerated educational programmes providing vocational and technical courses rather than traditional
courses may solve the problem of skilled labour shortage.
Selection Policy Objectives: The basic policy for selection of persons for any job should necessarily cover
predetermined principles and techniques that govern good management and worker relationship. It is, therefore,
while selecting any person, care should be taken to see whether the person in question is interested in the job for
which he is being considered and is technically qualified or not. Persons who are in the regular habit of changing
their jobs frequently should not be considered despite of their high qualifications. Further, it should be seen that
selection is not partial but only those persons are selected who can handle the job with full ability and efficiency
providing thereby no scope for favouritism. The selection committee should also consider physical, mental,
social and moral requirements before any person is finally selected.
So far placement of men on a given job is concerned, men both from inside and outside the company can be
considered. While doing so, it will be a wise policy if men within the industry who are qualified and capable are
promoted or transferred to this new job. This policy will indeed raise the employee morale. So far outsiders are
concerned, because they are highly qualified and
experienced may be considered on higher salary and other fringe benefits, if adequate number of men suitable
for such jobs within the firm are not available. For jobs at the bottom level of management, outsiders can be
considered and at times these outsiders bring new ideas and capabilities to the firm. In short, selection policy
must give due weightage to physical fitness, technical knowledge, general behaviour, social contacts and
character of the persons likely to be selected. Persons who show willingness to work along with their fellow
workers, if selected, would be an asset to the firm. It should be noted that selection of persons who are closely
related to the top management regardless to their qualifications is beyond the scope of personnel policies and
hence it is outside the scope of this discussion.
Characteristics of Employment Policies
Below given are some suggestions pertaining to employment policies which cannot be the same since the nature
of the firms, their working conditions and locations differ. Despite of these factors, following as general
guidelines can be followed:
(1) Recruit persons from cross-section of population: Under this policy it is suggested
to recruit persons coming from different walks of life and not to confine only to a certain section of population. It
should be spread over covering different types of men, women and children belonging to different status,
religion, race, language etc. There should also be a definite policy for recruiting even physically handicapped
and those already retired. Jobs that can be conveniently and efficiently handled by crippled or handicapped
persons should not he offered to those who can do other hard jobs which physically crippled persons may not be
able to do. Thus, this policy embraces people of all status, religion etc. and those physically sound and unsound
providing thereby equal opportunities physically sound and unsound providing thereby equal opportunities to all.
(1) Select those who are capable: Personnel policy should be such as to select persons
only on merit basis. There should be no favouritism nor personal consideration. Only those who are experienced,
skilled and intelligent should be selected while physical fitness and character under no circumstances are to be
sacrificed. To fulfil these objectives the following steps should be taken before any person is selected:
(a) Screen his application and see whether he is suitable to the job he applied.
(a) Conduct intelligent and aptitude tests.
(b) Collect information regarding his social background, family background, character etc.
(c) Arrange personal interview with the candidate and have a detailed discussion to assure his integrity and
knowledge about the job concerned.
To assure highest competence and loyalty, necessary training programmes should be arranged after selection.
Other fringe benefits and incentives will give an impetus to employees to do justice to the jobs assigned to them.
(3) See that right person is appointed for the right job: It should be the aim of the firm
to place selected employees on jobs they are best qualified to discharge their duties. Overall abilities with job
requirements must receive maximum attention and should see that persons thus selected for suitable jobs would
have no grievances in performing their jobs. This type of personnel policy would automatically create love for
the job and persons thus assigned jobs as per their aptitude, and qualification would work in a team spirit. It is
the team of workers that fosters efficiency, cooperation and progress by eradicating inter-departmental jealousy
and enmity.
(4) Keep detailed personnel records of all employees: A detailed record of every
employee should be maintained and the employing firm should see that it is constantly updated. Such a record
should give information as to (a) job assigned, (b) date of employment, (c) rank or designation, (d) pay with
other fringe benefits, (e) ability, (f) performance, (g) physical condition etc. Such a record should be maintained
for all employees from top to the bottom of the management level. This record will necessarily guide
management to take managerial decisions regarding the job performance of present employees, their promotions,
transfers etc. This may further enable the firm in chalking out personnel policies for future requirement of
persons.
IMPORTANCE OF RIGHT SELECTION
There are many problems in recruiting and selecting personnel for a job. There is the possibility that the selected
 person may not like the job. He might have applied because he was without a job. He may not like the company
or the product he is required to sell. He may not like to travel. He may not possess the qualities required for
undertaking the job offered to him. All these factors are involved in the selection of a person for any type of job
in the organisation. The importance of a proper selection is therefore, quite obvious. There is also the problem of
finding the right type of persons who are interested in a particular career. The main purpose of a proper selection
is to minimise risks risks to the company. An improperly selected person will not fit in the company's
organisation; he will be a misfit; his appointment will involve waste of time, energy and money. For the
company, it will mean so much waste of resources. If the company is able to find the right type of personnel it
will be able to market its goods successfully; it will have higher sales, higher production, and higher profits.
It is difficult nowadays to find the right type of officers or sales personnel. It is difficult to get well-educated and
qualified persons for suitable jobs. If the management is able to recruit and select proper personnel for its
organisation, it can derive many benefits from such selection. For example:
(1) If the right person, who has interest in the job, will not change the job often. This will reduce labour turnover
and the company will have stable work force with the result, the cost on labour is reduced.
(2) The right type of selection will help in general administration. It is not necessary to maintain a
strict supervision of the staff. It is easy to undertake any operations because the selected staff is knowledgeable
and efficient. The right selection makes the management tasks of administration much simpler, for it will deal
with only competent persons.
(3) A well selected staff takes greater interest and therefore is more economical, useful and
productive.
(4) A well qualified personnel are able to build and develop satisfactory customer relations.
(1) A well selected personnel develop cordial relations with other departments of the company
such as purchase, sales, publicity, accounts etc. A better understanding of and coordination and cooperation with
these different departments of the company may be essential for the overall success of the company.
Policy for determining Selection Procedure
The best policy should be that the company management should first prepare a plan of selection. For this
purpose, it should carefully lay down its requirements and the type of the personnel needed. It should do the
following:
(i) Analyse the essential elements required for the necessary job.
(i) Lay down the necessary qualifications for the job concerned.
(ii) Review the existing work force and determine the required additional number.
(iii) Lay down the norms and standards on the basis of the qualifications of personnel required.
In other words, the company management should first undertake job analysis, job description, job evaluation and
merit rating.
JOB ANALYSIS
The term "Job Analysis" means "assembling and analysing factual information on specific jobs." Job analysis has
long been important as a basis for professional management. Job analysis makes available the facts required for
preparing written job descriptions which in turn, are used to derive job specifications. Job analysis, job
discriptions and job specifications provide the factual information necessary for arriving at objective decisions
on the personnel regarding recruitment, transfer, promotion, training and dismissals.
"Job analysis is a detailed study of a given job, breaking down that job into several operations so that every part
of it and the surrounding conditions which affect the job are stated." The purpose of a job analysis is to assist the
management to keep effective control of the organisation. It is concerned with an analysis of the job and not an
analysis of the employee who may hold the job. It gives a complete picture of the job in its various aspects.
Any job analysis requires a systematic collection and study of information bearing on a specific job. It involves
the determination of the objectives of the job and what the person holding the job is required to do in order to
achieve the objectives. It further also elicits information on specific duties and responsibilities, relations with
other departments and company personnel and so on. Thus, the outcome of a thorough analysis of the job should
give a complete picture of the roles that personnel play.
Job Analysis gives following Advantages
(1) It helps to rate the job that is to fix the salary grade according to the type of work and the
risk and the responsibility attached to the job. Without such analysis, it will be difficult to fix the remuneration.
As a result, comparatively lower category of jobs will be suitably paid.
(2) It ;s useful in the training of the employees on the job. When a job is analysed in detail, the
employee gets a clear idea of what he is expected to do. He is also helped to learn the job quickly and
thoroughly.
(3) It helps to simplify the working methods and achieves improvements in the working system.
Unless the job is analysed, it becomes difficult to introduce improved methods of working, for the existing job
specifications may not admit of any change.
(4) It enables the management to know the type of work that is done by the employee. Job analysis
 assists in the better direction and control of production.
(5) Job analysis ensures that the employees will follow prescribed procedures of work. It serves as
a valuable guide to the employees.
(6) The introduction of job analysis enables the management to lay down production standards.
(7) Finally, job analysis serves to clearly lay down the limits of the authority of the supervisory
staff. It lays down the duties and responsibilities of the whole body of employees. If there is no job analysis, it
may be difficult to fix responsibilities; and a tendency may be encouraged among the employees to shrink their
work or to evade their duties and avoid responsibilities.
JOB DESCRIPTION
A job description is a brief and compact statement of duties. It is a summary of job analysis, and given all the
required information. Every job is given a name which suggests the type of work and duties it carries. This is
necessary because, the same job may be differently named in different organisations. Job description also
includes the qualifications required for the job. Job description therefore, assists the management interviewing
the candidates while selecting them for jobs.
The key output for any job analysis, on which modern business management depends heavily, is the written job
description. A job description is a factual written statement which covers:
(i) The reporting relationship of a particular job to other jobs;
(ii) The objectives of the job;
(iii) The duties and responsibilities of the job; and
(iv) The criteria for job performance.
A job description tells to whom the employee should report, what he should do, how it should be done, and why
he should do it. It also describes the standards against which the performance of the job is evaluated.
JOB SPECIFICATIONS
Job specifications describe the qualifications required for the job. They lay down the different criteria, such as:
(a)The physical standard required.
(b) Educational qualification.
(c)Experience for the job.
(d) Aptitude for the job.
(e)Other personal characteristics, such as the ability to adapt, emotional stability, ability to cooperate,
ability to adjust and get along with others, integrity, personal habits etc.
Job specifications may be laid down only after the job description has been given. It may be said that job
description and job specifications go hand in hand.
However, it is comparatively easier to prepare a job description rather than job specifications. A job description
focuses on duties and responsibilities in an attempt to determine the qualifications that an individual should
possess to perform the job satisfactorily. 'This set of qualifications is referred to as job Specifications. For
example, if the job description states that the salesman is to train dealer's salesmen, then he must possess the
qualifications to conduct such training. Job specifications for sales jobs may stipulate the minimum educational
qualifications, knowledge of the product and the technical knowledge if the job so demands for example,
sales engineers. Most of the sales jobs require general education, and average ability. However, it is difficult to
lay down fully objective and accurate job specifications for sales jobs because the skills required for them vary
widely. But a minimum set of requirements is laid down by most companies to help the selectors in their
recruitment of employees.
JOB EVALUATION
Job evaluation may be termed as the rating of the various jobs according to the responsibility, authority, and the
skill required for them. Job evaluation refers to fixing the compensation or remuneration to be paid for various
types of jobs according to their importance to the company. It is systematic determination of the value of a job,
that is, the amount of remuneration the job warrants. Job evaluation compares a particular job with others to
ensure that it is fairly and reasonably rated. It may be done in different ways. The most common method is to
break down a job into definable components and then assign points tcwach component. The factors that are often
assigned points are:
(1) The skill required;
(1) The responsibility involved;
(2) The amount of the effort required;
(3) Qualifications and experience needed; and
(4) Work environment.
Job evaluation is done of each job in relation to other jobs in the company. It is done not only according to the
capacity and requirement of the company but also in relation to the remuneration paid to employees in other
companies. The most important factor in job evaluation is that jobs which are similar in duties and
responsibilities must carry the same remuneration: job evaluation can be applied to all departments and
 personnel.
The methods of job evaluation are mainly two:
(i) The Ranking Method; and
(ii) The Classification Method.
(i) Ranking Method: Under this method, a list of jobs is prepared in a descending order according to the
authority, responsibility and the skill required for them. The grades of remuneration are fixed for each job
accordingly. A managing director may be placed in the grade of Rs. 5000 - 7,500, while a clerk may be fixed in
the grade of Rs. 300 - 600.
(ii) Classification Method: Under this method, jobs are classified according to their importance,
responsibility and authority in the company organisation and the grades of remuneration are fixed accordingly.
They are usually classified as under:
(a) Very Highly Skilled Jobs: These include the top executive and administrative personnel, such
as departmental managers, production and chief sales manager, financial controller, and so on.
(b) Highly Skilled Jobs: These include higher executives and administrative staff, such as sectional
heads, like chief accountant and purchase manager.
(c)Skilled Jobs : These include skilled jobs, such as the stenographers, draftsmen, copywriters in
advertising and so on.
(a)Semi skilled Jobs: These jobs include accounts clerks, and typists.
(b) Un-skilled Jobs: These generally include the menial staff.
MERIT RATING
Job evaluation is concerned, as we have seen above, with the rating of the job to be performed. Merit rating
consists of evaluation of the worker on the job. It is a system of rating the worker whether he is more valuable to
the company or not. In fixing the merit rating, certain factors are considered, such as quantity of work, quality of
work, dependability, cooperation, knowledge of the job, attitude to work, industriousness etc. Each factor is
given certain marks and the total marks give the rating of the worker. Merit rating is an important tool of
personnel management as it affords a basis to reward the better workers. Workers also welcome merit rating
because it gives the better worker an opportunity to progress in the organisation.
However, the greatest defect of merit rating is that it is more subjective than objective. Rating is usually done by
the immediate superior and the rating
will largely depend upon the relation between the worker and his superior. Even though marks are given for
different factors, absolutely impartial rating is rather impossible. Personal likes and dislikes will imperceptibly
enter into the rating and it may not do justice to the worker. Therefore, merit rating reports should be called for
periodically and maintained over a long period which will give an adequate idea of the workers' rating. Secondly,
as far as possible rating should be obtained from two or more persons so that a fairly correct idea maybe
gathered. In practice, it may not be possible to obtain employee rating from different superiors but before a final
rating is arrived at, there should be at least two merit reports from two different superiors; so that reasonably
correct rating can be arrived at. The most important factor to be remembered in merit rating is that it should be
absolutely impartial and should never create a feeling of discrimination among the workers. If once this feeling
is created, the worker will reject the merit rating.
Advantages of Merit Rating
In spite of the pitfalls in merit-rating it has certain basic advantages:
1. It forms the basis for promotion. Whenever the question of promotion arises, the better and the more
qualified worker should be promoted and not merely the senior one.
2. It helps to locate the individual worker's talents and intelligence and gives scope for him to develop
better skills.
3. It similarly locates the weakness of the workers and helps them to get over or improve them.
4. It stimulates competition among the workers. A healthy competition is always a desirable feature but
care should be taken that it does not lead to animosity and jealousy among the workers.
The attitude of the trade union to merit rating has been always hostile; particularly in this country. The Unions
have in recent time persistently opposed the payment to the workers according to their merit, however sound it
may be in practice. Payment according to merit serves as a great incentive to workers as there is natural
difference in their intelligence and capability. However, the trade unions have always insisted on uniform
payment system and have always suspected merit as a subtle device of favouritism. They charge the management
as partial and use merit rating as a tool to subvert union's solidarity. There is a great force in their argument and
the managements themselves are to be blamed for the present trend among unions. It is true to say that the
managements have disliked strong unions and have looked upon them as a challenge to their authority.
Conclusion on Merit Rating
Human characteristics such as honesty, loyalty and carelessness tendency to play mischief etc. can hardly be
graded either numerically or by any other means. They can only be answered by expressing ones own opinion. In
all such cases the raters may have their own methods or procedure due to their continuous contacts with the
workers or by long experience. It should however be remembered that employer who pays to the worker has
 every right to stick up to merit rating of the employee. But merit rating will be successful only when there is full
cooperation of the workers. Finally, in the words of Kimbal:
"Merit rating like time study involves human characteristics, personal qualities, and sometimes suspicions that
must be approached in a fair minded manner, or possibly more harm than good may result."
STANDARD SELECTION PROCEDURE
The actual selection procedure adopted by different companies may vary according to the nature of their
products, their size, location, and so on. But generally, most companies follow the standard procedure in
selecting their personnel requirements, which is:
(i) Receiving application forms
(ii) Conducting tests, such as
(a) intelligence test;
(b) psychological test;
(c) physical test; and
(d) aptitude test.
(iii) Interview of the candidate
(iv) Other tools, such as:
(a) References; and
(b) References to past employers.
SOURCES FOR SELECTING PERSONNEL
There are two sources for selecting the personnel in any organisation and they are (i) internal and (ii) external.
Both these sources are commonly used. These sources have their own merits and demerits. Under internal
sources, from among the existing personnel, the vacancies or promotions are filled-up. The internal policy
encouraging the existing personnel is labour-oriented policy as against the external source that forces the
management to recruit the people from outside of the same organisation. Below given are the strengths and
weaknesses of both (i) internal and (ii) external sources.
Strengths of Internal Sources
(I) The morale of the employee is enhanced with the result, employees show more loyalty and interest in the
performance of their jobs.
1. Liberal use of 'job description' and 'job analysis'
Jobs to which transfers are planned should be clearly indicated with the aid of job description and job analysis.
The nature and depth of retaining warranted to equip the employee so transferred to the new job and the time to
be allowed for satisfactory performance in case of new job should be clearly determined.
2. Choice of basis for transfer
The exact basis for employee transfers should be carefully selected. This problem is of paramount importance
particularly when more than one employee is involved in transfer to the same job or same shift or same
department. The question is whether it is seniority or merit or both. Much depends on the merit of individual
case.
3. Fixing transfer responsibility
Responsibility for initiating and approval of transfer decisions should be defined in concrete terms. These
decisions on transfer normally originate from the floor level supervisor subject to the scanning and approval of
the foreman or the personnel officer. Such an advance responsibility fixation avoids the main-effects of buck
passing.
1. Fixing the gamut of transfers
A very relevant and significant decision is to be taken as to the areas or the unit within which transfers are to be
initiated and implemented. That is, the policy should state in precise terms whether such a transfer is from one
department to another, from one division to another or from one plant to another in the same geographical areas
or the other.
2. Impact on remuneration and seniority
Transfers frequently involve a wage or salary adjustment. The rate of remuneration for the transferred employee
should be fixed. It is of particular importance when interregional transfers are effected. It should be also clarified
whether his seniority so far to his credit is going to be retained even after transfer. Many times inter-departmental
transfers with retained seniority will be a source of discontent among the co-workers.
EMPLOYEE MORALE
`Morale' is a much abused word because it is quite elusive in nature and, therefore, there is lot of confusion about
its meaning. As applied, in the field of personnel management it is the attitude of the employees towards their
work environment, and more specially towards the employer as represented by the foreman and higher
supervision. Dr. Vvr.R. Spiegel says "morale means the cooperative attitude or mental health of a number of
people who are related to each other on some basis." In the words of E. F. L. Breach 'morale' is "a readiness to
cooperate warmly in the task and purposes of a given group or organisation." Mr. M.S. Viteles says "morale is an
attitude of satisfaction with desire to continue in and willingness to strive for the goals of a particular group or
organisation."
The above definitions look morale as the sum total of attitudes of individuals and groups toward their work
environment and toward voluntary cooperation to the full extent of their ability in the best interests of the
organisation. It refers to a condition of physical and mental well being of an individual; it is a social
phenomenon involving subordination of personal interests in the best interests of organization. It stands for the
`tone' or health of a group or association.
The term `morale' alone has neither a favourable nor an unfavourable meaning. Therefore it can be 'high morale'
or `low morale' like good health and `bad' health of an individual. Whether it is `high' or 'low' can be decided by
certain indicators. According to Mr. R.C. Davis high employee morale stands for:
(1) willing co-operation toward the attainment of company objectives,
(2) extended loyalty of employees,
(3) good discipline,
(4) strong organisational stamina,
(5) high degree of employee interests in job and unit,
(6) display of initiative and drive and
(7) pride in the organisation.
(8) the other hand low employee morale is reflected in
(9) reduced productivity,
(10) high labour turnover and absenteeism,
(11) lack of discipline,
(12) excessive complaints and grievances,
(13) clash between the men and boss,
(14) increased accidents, and
(15) addiction to drinks etc.
Employee morale and productivity
Many a times, people have a tendency to assume that high morale and high productivity always go hand in hand.
In fact, there is a positive correlation between morale and productivity, but they are not absolutely related. That
is, an increase of say 10% in morale does not guarantee a proportionate rise in productivity. It is because increase
in morale can be brought about with favourable or unfavourable shifts complicated in productivity. The relation
of morale to productivity is further complicated by confusion of high morale with happiness or
satisfactions. It is so because a happy employee is not necessarily a more productive or creative
employee. Morale can be considered as high only when a person's happiness, satisfaction and
adaptability are linked to the attainment of organisational objective. But alternatively, morale is high
when each person feels that he is reaching his goals by contributing to the organisation's aims.
HOW TO MEASURE EMPLOYEE MORALE
The exact state of affairs as to the level of employee morale can be determined in at least three
ways, though it is really a complicated task. These are: managerial observation, rates of labour
turnover and absenteeism and attitude surveys.
I. Managerial observation
The managers who are responsible for getting the work done from their subordinates can have keen
observation of things happening in their departments. Such an observation can make a penetrating
analysis of morale. However, much depends on the ability of observation and the objectivity in
observation.
II. Rates of turnover and absenteeism
If the actual rates are higher or lower than the normal rates in both cases they can be related to high
or low morale. However, care should be exercised to come to such conclusions because, there are
good many causes affecting the rate of turnover or absenteeism that are outside the purview of
morale measurement. These factors may be tight labour market conditions, epidemic diseases, policy of a trade
union etc.
III. Attitude surveys
Managers of today have learnt that the modern human environment is too complicated for them to read how
employees feel merely by making routine observations. In fact, there is no magic wand on which managers can
depend to reflect the attitudes of employees. Instead, managers seek knowledge of employee attitudes which is
done by attitude survey.
Morale surveys are of three types: These are objective surveys where there will be a number of questions and a
choice of answers so that each employee is to 'tick' an answer of his choice. Description surveys wherein
questions are listed and employee is to answer in his own words. Projective surveys where abstract situations
unrelated to job or company are given and the workers are to analyse the situation and give their comment. After
collecting the information, the managers interpret it for the formulation of policies.
 HOW TO GAIN HIGH EMPLOYEE MORALE
As every manager wants to have a fair degree of high employee morale, he is to give much stress on the
following points that are likely to boost up the employee morale.
1. Effective communication
Mr. John Garnett gives five reasons why communication in business has an important place. It is effective
communication that helps to eliminate the
misunderstandings which all too often affect relationships with employees -to achieve increased productivity and
improved performance, to achieve the acceptance of change, to improve quality of decision making and to assist
the progress of employee participation. In today's mass producing organisations, there is a wider gulf between
employer and employees and this has resulted in good many difficulties and problems. The crux of the problem
is neither employer knows who are working for him nor employees as to who is their owner. The employee
morale is bound to be high in case there is direct relation between employer and employees so that there is two
way communication so that management openly listens to the problems and suggestions of employees. This
means that employees have some place in problem solving. The success of communication lies in its reception
and action. It is communication that guarantees cooperation hinged on common understanding and trust.
2. Matched scheme of incentive
It is already noted that there is a close relation between motivation and morale. The motives for the work can be
noted here as the factors of employee morale. These factors of employee morale are pay, security, working
conditions, recognition, effective leadership, opportunity of moving up, benefits, status, like minded associates.
Thus, there are monetary and non-monetary needs of an employee. In case, sincere efforts are made to meet
these in the form of incentives, it is quite possible to improve the employee relations considerably. These
incentives or stimuli are to be located and satisfied.
3. Scan the cases of employee dissatisfaction
Employee dissatisfaction, if not resolved, results in grave outcome reflected in good many bad effects. To do
away with such cases, some suggestions can be made like establishing agreeable grievance procedure, provision
of a suggestion box, open policy and frank attitude, personnel counselling, group meetings, collective
bargaining, interviews etc. Through these means adequate information will be collected and can be used for
analysis and interpretation to make some policies to solve some of the problems.
4. Wider Worker Participation
It is a dire need of the hour to give the workers the place of partners in industry for higher productivity and
sound relations. The workers must be increasingly associated with the management of industrial undertakings so
that they conceive and develop an awareness of the problems of industry and begin to feel that they have a
positive contribution to make to the running of the wheels of industrial units. Such an effort will give a place of
pride to them to participate in the management. This novel principle seeks to meet psychological needs of the
workers, brings them far closer to the management, promotes their interests in self-education, gives an insight
into the economic and technical conditions to reduce the gulf between workers and owners.
5.Develop art of good management
Business is an interaction of people, materials and money. These money and materials appear on the balance
sheet of a company and excite the interest of both management and owners. However, there is another critical
asset which does not appear in the mirror of business house and that is people. What distinguishes a company is
the quality of management and hence managers. It is the able managers who build competent teams so that the
right mix of skills, the morale and team work of employees can be produced. Thus, it is the art of management
that is capable of balancing extremes and creating an atmosphere conducive to the promotion of employee
morale.
1.Better Working Conditions
The physical aspects of work-place do have their own role to play in morale building. A factory building where it
is a place of working for every worker, its appearance, structure do affect his morale. A building which is
uncared, ugly, and shabby will create a feeling of doubt about job security and payment. He develops an attitude
of insecurity towards his master. Further the size of his work-place has its own impact on his mind. In a small
unit as the number of workers is quite small, he is bound to have personal touch with superiors. Conversely, in a
big concern, he is lost in the crowd.
PROMOTION POLICY
Promotion means entrusting an employee with higher position and responsibility in the same organisation. In
other words when an employee is promoted he is given higher salary, higher status and higher responsibility in
the job which requires greater efficiency. When a vacancy occurs in an organisation in the higher cadre and when
this vacancy is filled by advancing an employee in the lower cadre, it means promotion. The organisation does
not fill these vacancies by recruiting outside personnel but fills these vacancies by promoting its own existing
personnel. When such a policy is followed, it gives hope for the employees in the organisation to better their
prospects and they hope of rising in their occupation. If promotion is not provided for the existing personnel then
they will be dissatisfied and eventually will either leave the organisation to better their prospects or will create
trouble because it will mean stagnation for them. A dissatisfied worker is a potential trouble maker and it is bad
for the enterprise. Therefore, suitable opportunity should be afforded to the employees to rise in the organisation.
Promotion creates a sense of belonging to the company among the employees and they will feel that their work is
recognised by the management. It will improve relation between the employers and employees. The employees
will try to work diligently and honestly and this will increase production.
Promotion policy of the management should be based on sound principles and should be equitable. It does not
however mean that all vacancies should be filled from the existing personnel in the organisation. It is possible
that sometimes suitable candidates may not be available within the organisation to fill a vacancy and at such
times the organisation may recruit personnel for such vacancies from outside by advertisement. This may be
particularly true in the case of higher supervisory staff. Again, if an organisation follows a policy of filling in the
vacancies from among its own staff, then it will shut itself out from new ideas which may be brought by
outsiders. It is, therefore, necessary for the organisation to strike a balance in its promotion policy. It may be said
here that vacancies in the junior supervisory cadres may be filled by promoting the employees from the existing
staff whereas the vacancies in the senior supervisory cadres may be filled by recruiting the personnel from
outside. However, the employees within the organisation should be given an equal opportunity to compete with
the outsiders.
Principles of Sound Promotion Policy
Promotion policy designed and implemented by the management is of great importance because it is likely to
have a deep impact on the whole army of employees. The experts have given well thought out features as
essentials of a sound promotion policy. These essentials are:
I. Equality: Equality is just as necessary in selecting a candidate for promotion as it is in any other dealings with
the work force. It is really significant to avoid the impression that promotion is 'award' because it must be
'earned.' While promoting, the factors like, caste, creed, influence, favouritism should not come in the way as
they affect naturally deserving cases.
2.Clear Communication and Commitment: The promotion positions in the organisation should be clearly
defined with the help of the technique of job analysis' - a chart should be designed that shows the basic job
requirements and how one job leads to another higher rated job. As and when openings for promotion are
expected, they should be notified through posters, notice board well in advance. Such an attempt reduces
misunderstanding as everybody knows about it.
3.Adequate Training: The candidates having the potentiality of being considered for promotion, should be
given appropriate and adequate training as apreparatory step towards promotion. Sometimes special training
programmes are designed to meet the special needs of jobs caused by ever-changing scientific and technological
factors. Such efforts are necessary as they provide to aspiring and promising candidates an opportunity to qualify
for the job.
Make it a line responsibility: Making a promotion in the organisation should be the line responsibility. That is,
advice and assistance should be sought from the personnel department in a staff capacity. The supervisor or the
foreman should propose the likely promotion. This proposal should be processed and assessed and approved by
the immediate superior of the candidate. This ensures line responsibility for promotion and maintenance of chain
of command.
5. Right of Opposition: The other employees, who are otherwise eligible for the same post to which a
candidate is promoted, should have the right to appeal against such case of promotion. Such a challenge does
help to avoid the likely misunderstanding about the candidate and management. The opponents will soon know
the reasons for the promotion.
6. It should not be forced one: Though promotion is to be earned by good work in a given junior position,
it does not necessarily follow that a record of work alone will qualify a person for promotion; many other
qualities should be present in a person before he is considered for the promotion. Under no circumstances, an
employee should be forced to accept promotion. It should be accepted by the candidates because they should
have the grit and confidence of being capable of handling the new position. There are many who accept it and
step down with frustration. Every promotion means not only monetary gain but also greater responsibility and
commitment to work performance.
Basis for Promotion Policy
The problem that now arises is the suitable basis for promoting an employee whether it should be seniority or
ability. The management usually tries to apply ability as the basis for promotion whereas the trade union prefers
usually seniority as the basis for promotion. Though seniority is a good criterion for promotion, the management
will have no say in this matter if it is adopted and everybody will know his place in the order of seniority. This
may reduce friction and minimise disputes regarding promotion. But it will be resented by the young and able
employees in the organisation. They will feel frustrated and may leave the organisation. Others also will not feel
any enthusiasm to work diligently as they know, whatever their ability, they will be promoted only on the basis
of seniority. Thus seniority alone is not a good criterion.
If ability alone is taken as the criterion for promotion then the promotion may not be on the objective basis but
subjective considerations may have greater influence. Though the criterion of ability will give equal opportunity
to all employees and able employees will feel satisfied, the management may not use this criterion impartially.
The management may use this basis for favouring certain employees and thus it will give rise to favouritism and
nepotism. Those employees who are in the good books of the superior controlling staff will be recommended by
them for promotion. It will thus create more 'yes' men. It is, therefore clear that mere ability as basis of
promotion will not he sufficient. Moreover, trade unions usually oppose this basis. Therefore, a blend of the two
will have to be used. The management should involve a sound policy.
DEMOTION POLICY
Demotion involves a change in the job presently assigned to an employee. Such a change is generally disliked as
it has adverse effects. If the person is demoted, there '11 be reduction in his salary, status and in other fringe
benefits if he is entitled to. Therefore, demotion is not to be frequently practised unless the individual worker
makes a request to get himself relieved of responsibility and pressure of work due to his indifferent health and
retiring age. The worker is bound to resent such a demotion if it has been forced on him as a disciplinary
measure. Hence demotion policy before it is put into effect, care should be taken to see that it is adopted only as
a last resort.
Reasons For Demotion: Demotions may take place because of different reasons such as:
(i) When any employee knowingly and deliberately misbehaves or is negligent in performing his duties, he
may be demoted under disciplinary action.
(i) When employees request management to get themselves relieved of additional responsibility and heavy
pressure of work due to indifferent health and retiring age.
(ii) When methods of production are changed on account of new technology and old employees
are unable to adjust in spite of necessary training, they may be demoted.
(i) When jobs are eliminated by combining different departments there will be retrenchment or employees
are compelled to accept jobs at lower !eye] till such time the normalcy is restored.
(ii) When an employee who is promoted is not capable to maintain the establishment job standard
and thereby fails to give satisfactory performance to the management, he may be reverted to his original job
resulting into demotion.
How Domotions are to be Practised?
(1) Frame the clear rules and regulations to be strictly observed by the employees.
(2) Bring these rules to the notice of all employees and let them also know that violation of any of
the rules would result into demotion.
(3) Before giving due effect to demotion of any employee, a thorough and impartial investigation
of any alleged voilation should be undertaken.
(4) in case alleged violations are found as facts, concerned employee should be punished as per the
rules of employment.
(5) A special provision as to review the demotion cases may be included in the rules of
employment.
Layoffs and Discharge Policy: Layoff takes place when company finds a considerable decline in the orders for
its products and as such it becomes very uneconomical to retain all persons on the job concerned. The normal
practice of layoff is the junior most persons are laid off instead of putting an axe on the senior most person.
Layoff, as a wise policy, should be avoided as far as possible and it can be done by reducing the working hours
per day so as to see that all get the work to do. If the workers are well organised under a strong labour union, an
agreement can be signed to this effect that layoffs are subject to seniority or as per the terms and conditions
mutually (management and union) agreed upon. However, there can be layoffs when employees are found guilty
of offences but such layoffs normally should not extend to more than three or four days.
When men are laid off, they should be privately informed and every attempt should be made to find for them
alternative jobs in any other firms.
Workers are discharged very often when they are found dishonest, totally inefficient, indisciplined and are
responsible for violation of safety rules and distruction of firm's property. They are also likely to be discharged
when manufacturing processes are mechanised. It should be noted that discharge in any case throws light on the
failure of both management and labour. Every care should be exercised to see that there will be no over
employment nor management efficiency would suffer to conduct the business successfully so that men will no
longer be discharged. The policy should be moulded in both cases layoffs and discharge in such a way as not
to disturb industrial peace.
However, the discharge policy should contain the following clear-cut guidelines:
(1) The reasons in detail for discharge.
(2) The default-employee should be informed well in advance in writing giving therein the reasons
for his discharge.
(3) Discharge cases must be decided by a competent body representing the management and the
employees.
(4) A well-thought out procedure should be laid-down for settling discharge cases.
(5) Special provision in the employment policy rules must made for the review of the discharged
employee's cases.
(1) A discharged employee is entitled to get a reasonable "notice of discharge" or equivalent of
pay in lieu of notice.
 (2) All discharge cases normally are to be handled by Line Officials.
TRAINING POLICIES
I. Training of Workers
Management that is interested in getting top
performance from all its employees will not hesitate to
draw a training programme for its employees. Training
programme under the policy of labour efficiency
improvement will cover a wide field of activities.
Under the programme, workers will be furnished with adequate knowledge regarding the company, products,
work methods, policies and processes etc. They will be trained to utilise maximum skill in minimum tine and to
work together in a team spirit. The management would like to see that worker's physical, mental and moral
faculties are developed to give a boost to maximum production at minimum cost. In fact the personnel managers
who are foresighted will see that training of workers is a continuous and permanent feature of their departments.
11. Need for Training
Below given are some of the reasons that make management to undertake the training programme:
(1) To raise the morale of the employees by creating self-confidence to do the allotted job to the
satisfaction of the management.
(2) To minimise accident rates and make employees more fit and confident to handle complicated
plant and machinery.
(3) Development of technology and mechanical operations warrant necessary training to get the
best results.
(4) Labour turnover arising from death, promotion, transfer, retirement accidents etc. gives rise to
training programme for making existing personnel or new recruits trained to handle new job.
(5) To keep pace with the changing techniques and methods of production as well as the proper
use of modern tools and equipments, old employees need training either within or outside the organisation.
(6) Arranging a training programme is a regular feature of an establishment which generally
appoints altogether new untrained or experienced personnel or Badli Labour force.
III. Advantages of Training
(1) A trained employee generally improves his efficiency and skill. The quantity and quality of
work done also improves. A new untrained worker will take time to learn the job and will produce slipshod work.
The level of production will be generally lower than other workers.
(2) A trained worker will understand how to use equipment and materials and will handle them
better avoiding waste and accidents.
(1) Training provides an opportunity to the management to find out better and skilful workers.
Similarly it is also easy to find out unsuitable workers. Promising workers can be given responsible jobs.
(2) Training will create affection for the organisation in the minds of the workers as they will feel
that the management is interested in them.
IV. Training Policy of Employees
Employee training methods are of various types and industries employ different methods. But it is necessary for
the industry to brief the new employees as thoroughly as possible. Every new employee will take some time to
adjust himself to the working methods and to the atmosphere in the industry. Time taken by the employee to
adjust himself is called "breaking-in" period during which he learns the necessary things about his job in the
industry. This period may vary according to the type of the job, past experience of the employees, conditions of
work and his own ability. But this period is the most important period as the employee gathers first impressions
about the industry and his environment. Therefore, the management should take special care to put the employee
at ease, assist him in every way and give him complete understanding about the type of work, how to do it, what
is expected of it, the quality of work to be done, the future prospects for better work, conditions and the rules and
regulations of the organisation in this regard. The employee should not be left to himself and learn through self-
help.
V. Methods of Training
The methods of training the employees are usually three :
(i) Apprentice Training.
(ii) On the Job Training, or under actual conditions of work.
(iii) Training Within Industry - TWI.
(i) Apprentice Training
This is the traditional training system of the middle ages. When a young aspirant who wanted to become a
skilled craftsman he had to employ himself as a master craftsman and had to undergo a long period of
apprenticeship varying between 7 to 10 years. Such young men were called "Journeymen." This apprentice
course of training is now revised and modern industry which requires hosts of skilled workers offers good scope
for such training. There are a number of industries such as engineering, automobile, ship-building, printing, etc.,
 where a wide variety of jobs are offered and the industries encourage young men who are just out of school to
take up apprentice course in some skilled trade.
Under this scheme young men who are high school educated are given an opportunity to learn a trade in an
industry. An apprentice-trainee is required to spend some 3 to 4 years before completing the course. He is paid a
nominal stipened during the period of training and arranagement is made for him to attend the theoretical
training in a local technical institute. Thus, theoretical grounding is combined with practical training in the
industry and after the course is over, the apprentice-trainee is usually absorbed by the industry in a responsible
post. This system of training is the most satisfactory one. It may be said that there cannot be any substitute so
well planned through apprenticeship training. The trainee learns the "know-how", both theoretical and practical
and applies it himself in his daily working and learns by actual experience. Because of this, it is a popular
method of industrial training for workers and more and more industries make use of it.
(ii) On the Job Training
Under this system, the new employee is placed under an experienced foreman or a supervisor who is required to
train him. The foreman may sometimes put the trainee under the charge of his subordinate and may ask him to
instruct the trainee. The new employee works under actual conditions of work and learns the trade quickly. This
method of training is considered to be more effective and economical. However, effectiveness of the scheme
depends on the condition in the industry and it is within the power of the management to better uncongenial
conditions. The conditions should be such that they should be the actual job conditions which he will be required
to handle. Training to be effective the employee must be given helpful, friendly and personal instruction. The
type of instruction should be as far as possible informal and it should be of the type of coaching. Most effective
type of instruction is coaching the employee with the maximum of assistance and co-operation. The management
also should keep a close watch and check up the training from time to time. If this is not done, then the instructor
will give the employee a limited range of knowledge. If the instructor himself has some bad work habits, this
will be passed on the employees. Therefore it is of paramount importance that the instructor also should be of
high calibre.
(iii) Training Within Industry TWI
This is the scheme which is widely employed in training the employees. In large organisations where hundreds
of persons are employed, they require large number of skilled workers suited to their particular needs. This is
particularly true in tool-making and machinery manufacturing industries. Such industries devise schemes of
training the employees within the industries. This scheme has generally four steps in the training programme:
(a) Prepare or Tell the Employee: This is the first step when the instructor puts the trainee at ease,
tries to find out the keenness to learn and the extent of knowledge already possessed by the employee.
(a) Present or show the task to be done: In this case, the employee is given a clear understanding
of the work to be done. The instructor starts with easy tasks, operating them personally and demonstrating them
at the same time. Operations are repeated and correct work habits and keypoints are fully explained. Then slowly
task by task he proceeds further.
(b) Application or practice : In this step the employee is asked to carry out the tasks himself under
the watchful guidance of the supervisor. This is the most important step. The length of practice depends upon the
task and ability of the employee.
(c)Test or follow up: This is the last step where the work of the employee is checked up and he is
pronounced fully trained.
All these four steps are applied to each task separately as each task is considered as a separate job. It is necessary
for the instructor to analyse the task completely and he must instruct the task set step by step without skipping or
overlapping any step.
It will be realised from the above that training is very important in modern industry and all the important
industries have one or other types of training programmes. In our country, apprentice-training has been
introduced in many industries especially textile industry in Bombay where the trainees are allowed time to attend
the classes. TWI Scheme is also introduced in the TISCO (Tata Iron and Steel Company), but this requires to be
popularised on a wide scale.
(iv) Internship Training
Under this method of training, the technical institutes and the business enterprises co-operate. A joint programme
of training is drawn up whereby practical and theoretical training is coordinated. This is done to bring about a
balance between theoretical and practical training. Generally an internship of 6 months to a year in a factory is
provided after 3 to 4 years of theoretical training. This is particularly true of engineering institutes. One of the
defects of this type of training is that it is spread over a long period.
(v) Refresher Training
Refresher training is meant for those workers who are already trained. But in business, new developments
continue to take place and with the passage of time new technological improvements and new methods of
production and process develop. It therefore becomes necessary that these new developments should be imparted
to the existing staff to refresh their knowledge. Refresher courses are, therefore, provided and they are of a short
duration. This type of training is generally meant for superior technical and administrative staff.
VI. Why Training Fails?
The main reasons for the failure of training programme are as follows:
 (1) The reluctance on the part of top management to recognise the utility of training. It feels, it is
unproductive and hence, even it is undertaken, no proper attention is paid.
(2) At times, it becomes too difficult to obtain the necessary information as well as statistical data
as regards external programmes.
(3) Trained employees arc either reluctant or indifferent to guide others belonging to their own
organisation. This results into extra financial burden for the management for training the rest of the staff under a
separate training programme.
(4) Lack of proper coordination between top and middle management in respect of preparing
production schedule.
(5) Unsatisfactory working conditions and lack of proper incentives, labour force is not inclined to
undergo training seriously.
(6) When employees are sent for training outside their organisation, sometimes they are taught
techniques and methods quite different from the practices of their own organisation.
(7) The top management often fails to have systematic budget for training programme long or
short range.
VII. Policy to Make Training Effective
(1) Set out the objectives and goals of the organisation and outline the specific training programme
under the strict supervision and guidance of experienced executives.
Carry out the evaluation of training activities and the performance of trainees at regular intervals.
(1) Find out the general I.Q. of the trainees and if necessary special attempts should be made to
make deficiency, if any, by undertaking intensive training programme.
(2) Give all possible help to trainees, motivate them in the best possible manner and convince
them about the personal benefits that they can achieve out of this training.
(3) Training programme should be planned in such a way as to have direct link with trainee's past
experience and some background.
(4) Make training programme flexible and not rigid as all the trainees do not progress at the same
rate.
(5) Provide adequate funds for the smooth conduct of training as per time schedule.
(6) Allow trainees to have active participation in the training programme so as to enable them to
practice new techniques, strategies and behavioural norms.
(7) See that employees after their training are timely rewarded for having shown their special skill,
knowledge and interest in performing their jobs to management's satisfaction.
(8) Do not fail to provide constructive feedback to trainees during their training period.
MANPOWER PLANNING Meaning and Objective

In any company adequate manpower must be obtained if required production within stipulated period of time is
to be attained. From the existing people employed, as time passed, some are likely to retire, some may expire and
some others may resign. As a result of such events, number of job openings are likely to take place. Similarly,
expansion and development programmes undertaken, growth of population and thereby more demand for
products give birth to more job openings and the management to meet all these contingencies, manpower
planning is made for the ensuing period of five to ten years.
While ascertaining the manpower, the programme should cover persons needed at all levels, skilled and
unskilled of the management. The management cannot forget the impact of economic and industrial development
and international markets on the ever increasing demand for manpower. It is therefore to avoid keen competition
and shortage of manpower, proper planning in this regard should be devised so that manpower needed can be
recruited with ease and no delay.
Proper manpower planning helps management to have:
(a) effective utilisation of men employed;
(b) proper allocation of manpower; and
replacements of executives as and when openings occur.
This arranagement will further enable such firms wedded to manpower planning to combat competition
effectively in the open market. So in short, according to Evic W. Velter, manpower planning is "a process by
which a management determines how an organisation should move from its current manpower position to its
desired manpower position. Through planning, a management strives to have the right number and right kinds of
people at the right places, at the right time, to do things which result in both organisation and the individual
receiving the maximum long range benefit."
Benefits of Manpower Planning
(I) It helps the management to get maximum utilisation of human resources.
(2) It eliminates excessive labour turnover and high absenteeism.
 (3) It improves productivity and enables the organisation to achieve its objectives.
(4) It provides full satisfaction of jobs to the workers.
(5) It also avoids headaches for the management as there can be no problem of shortage or excess
of manpower.
(6) It enables individual worker to improve his skill and make use of his capabilities and potential
to the utmost.
(7) Capable persons are made available to the organisation for future promotion.
Basis for Manpower Planning: According to Wickstrom, manpower planning consists of varied activities which
are deemed to be the fundamental basis and they are as follows:
(i) Forecasting future manpower requirements: These requirements are generally considered taking into
account development in industry, economic environment, labour turnover on account of different reasons and
specific future plans.
(ii) Anticipating manpower problems: By projecting present resources into the future and
comparing them with the forecast of requirements to determine their adequacy, both quantitatively and
qualitatively;
(iii) Making an inventory of present manpower resources and assessing the extent to which these
resources are employed optimally ; and
(iv) Planning the necessary programmes of requirements, selection, training, development,
utilisation, transfer, promotion, motivation and compensation to ensure that future manpower requirements are
properly met.
Conclusion
(i) It is involved in determining future manpower requirements.
(ii) To have effective implementation of projects.
(i) It cannot be regid but it should be amenable to modification and adjustment in accordance with
the needs of the organisation.
(ii) It cannot ignore the changing circumstances under which the organisation is supposed to
operate.
Why Manpower Planning?
(1) To get required personnel with necessary skill, aptitude, work experience and proper
qualifications.
(1) Frequent labour turnover that takes place on account of varied reasons such as resignation,
retirement, promotion, discharges etc. compels the management to have constant manpower planning to meet
any contingency in future.
(2) When there is organisational expansion embrasing increase in demand for goods, and services
by a growing population, competitive position of the firm and the rate of growth of organisation, demands
manpower planning on the part of the management.
(1) It is needed to find out the areas of surplus personnel and also those areas in which there is
shortage of personnel. Regular manpower planning comes to the rescue of the management in this regard.
(2) Change in the technique of production and changing technology put existing employees in an
embarrassing position as they either need to be trained or to be replaced. Only manpower planning can solve this
problem amicably.

12

Wage Policy Administration

Formulation of wage policy is a very delicate matter for the management since the wage policy involves both
management and the workers. Wages that are paid to workers directly contribute to the cost of product
manufactured. It is the labour cost that is responsible to a great extent to determine the popularity of the product
particularly in the competitive market. While fixing the wages management would like to see that whatever paid
is for a fair day's work and thereby it can get the full benefit.
At the same time, worker would like to get suitable job for fair wages that may enable him to have comfortable
living to find out the mean between these two goals is a real problem of determining an acceptable wage policy.
The wage policy to be formed should also cover the influence likely to be exercised by labour union, and the
social, economic and legal effects. Finally it should be seen that the policy embracing the interest of both
management and workers can be successfully administered leading to the maintenance of industrial peace.
One may be under the impression that the wage policy wedded to the payment of higher wages is a better policy
for improving the labour productivity. In fact, this notion holds good provided other factors such as adequate
funds, availability of acceptable raw materials, up-to-date plant and machinery, better working conditions etc. are
improved. Wages paid by competitors in the line and the impact of the wages paid on the cost of product
manufactured must be considered before higher rate of wages is fixed. However, the wage policy
that provides:
(a)fair wages to workers,
(b) settlement of grievances at an early date,
(c)putting the cost of production within the competitive level,
(d) reasonable return on investment, and
(a)flexibility for adjusting to changing situation can be deemed to 1;)e a pruduent and broad-based policy.
Factors Influencing Wages
Wages are the price for the services rendered and hence they largely depend upon the law of demand and supply
of labour. However, in the present industrial society this law is circumscribed by so many factors which directly
and indirectly affect wages. The wages depend upon the general economic conditions, government actions and
regulations, strength of the trade union movement, general wage level and regional differences. Within an
industry, wages may differ because of supply and demand of labour, the incentives offered, non-material
incentives, collective bargaining, cost of living, ability of the employer to pay, working conditions, the nature of
the job, skill and efficiency of the labourer. All these factors are very important and they have a significant
bearing on the fixation of wage level. The management cannot afford to neglect these factors and it should
adequately inform itself on these factors.
Policy for a Satisfactory Wage System
While deciding upon a wage system, care should be taken to see that a particular wage system is not adopted
merely because it is successful in a particular industry. A wage plan which is successful in one industry may not
be successful in another industry under similar circumstances. All the systems of wages should be carefully
studied and the one which does justice both to the employer and the employee and also achieves stability should
be adopted. Such a system may be called a satisfactory wage system. We give below certain characteristics of a
good wage system :
(I) Must be based on Fair Standards of Accomplishments. This means the standard which an average workman
can acquire in a given time under the prevailing conditions, taking into consideration the three factors of quality,
quantity and economy of materials. Such standards should be arrived at after a careful time and motion study of
the performance of the "average" skilled worker. Wages will not be fair unless the standards are fixed
scientifically.
(2) Must be fair to the Employer and Employee. To achieve the maximum results, the system must
be fair to the employers as well as to the employees. Unless this is so, full co-operation of the parties is not
possible. The system must secure a certain level of production at a certain cost at the same time it must offer
reasonable wages to the worker for his efforts.
(c)Must be Simple to operate. A system of wage payment which is complicated will not meet its purpose.
The system must be simple to understand for the average worker and easy to put into operation. If the worker
does not understand a wage system, he will be highly suspicious about it and will not accept it. As workers are
generally not well educated, a simple system is most essential.
(4) Must be Flexible. Business conditions are not static and they go on changing. Similarly,
manufacturing methods also change involving a change in working conditions. In such a situation, wage paid
also requires to be changed. So a rigid wage system will not suit the purpose of the enterprise. Any wage system
to be satisfactory has to be flexible so that changes can be made in the system without much trouble. Adjustment
of wage to changed economic conditions must be quite smooth.
(5) Must protect both Employer and Employee. This means both the employer and employee
should be protected against unfair conditions. For example, if the worker has to remain idle for no fault of his,
then he should get his full wages. Similarly, if the worker turns out inferior quality goods than the standard set,
then the employer must be compensated against such a thing and the worker should not be paid his full wages.
(6) Must ensure Prompt Payments. The wage system must be such that it ensures quick payment.
Any system which delays payment will not be popular with the workers. The employer should always pay the
wages promptly and regularly.
(1) Must provide Incentives. Through standard jobs are determined and wages are based on
standard jobs, there will be many workers with greater skills and accomplishments. The wage system should be
such that it should adequately recompense for additional output or devising improved methods of working.
Proper incentive should be included in the wage system as to satisfy efficient worker and to achieve maximum
production. This is also necessary to induce the workers to put in their best efforts.
(2) Must be based on Cost of Living. Any wage system which does not take into account the
prevailing standard of living will not be satisfactory to the workers. The wage system should be such that it
provides at least a minimum living wage. Similarly, the employer should take into account the general wage
level and it should not he below that level. Again the wage level within the same industry should also be taken
into account. The wage system determined should have relevance to all these factors.
(3) Must be Permanent. The wage system once adopted must be permanent one subject to the
changes in economic conditions calling for adjustment. But the wage plan should not be changed often or should
not be adopted as a temporary measure. If wage systems are changed often, the workers will develop a distrust
for the management.
Policy as to What and How to Pay
To decide how much should be paid to a worker is no doubt a policy matter but to see that interest of workers is
protected and disparity in the wages of similar kind of job is avoided, government has passed number of labour
acts such as minimum wages act, factory act, workmen's compensation act, trade union act, payment of wages
act etc. They are paid as per these acts; however, it is morally sound to pay them not less than the minimum rate
prescribed under the act. It is an appreciation and motivation if the worker is paid more than the minimum wages
and normally where the management is liberal and of socialistic views, workers are paid more than the minimum
wages for a fair day's work. It will be fair enough on the part of the management if it considers the community
standards of pay for the given class of work before it decides the quantum of wages to be paid; if this type of
policy is adopted, better type of labour not only be attracted but can be retained in the company resulting into a
negligible labour turnover. It should be noted that lower labour turnover will automatically minimise the cost of
selecting, training and replacement of workers. Training programmes may be required when new workers are
appointed on account of company expansion or for the present workers when manufacturing processes are
radically changed due to automation. However, the question of what to pay can be logically determined under
the policy with following conditions:
(a) Measure the relative worth of different jobs and fix a fair rate for each
job.
(b) See that wage rates thus fixed are internally consistent with one another.
(c)Make a provision to revise the pay scale upward as and when economic conditions justify.
(d) Fix the rate of yearly increment pressing the relative worth of different jobs. It may vary from
job to job.
(e) Wage-brackets should not ignore the quality and quantity of work turned out by a worker and his length of
service.
(f) Indiscriminate cutting of wages should be avoided unless the worker is transferred to alower job on account
of physical unfitness or any other ground.
Time and Piece Wages System
Time wage and piece wage are two universally accepted methods of wage payment. Under "time wage" method,
worker is paid at pre-agreed rate per hour, actually worked irrespective of quality and quantity of products
manufactured. In the latter case, i.e., piece wage method, he is paid on the basis of products with acceptable
quality or standard. Under piece wage method, worker is encouraged to earn more since his wages are linked
with the total output of acceptable product and as such it is considered as an incentive wage system. On the other
hand, time wage method provides no incentive nor any method by which standard labour cost per unit can be
calculated but it is easier to administer. However, labour unions are not much in favour of piece wage method for
the best known reason that management is generally not fair in evaluating a fair day's work in terms of units of
work done that pass inspection. Therefore, the policy should be to see that workers get justice for what they have
done and at the same time whatever standard that is fixed for compliance by workers is attainable by an average
worker. The policy should at the same time cover the interest of the management so that it can get due return on
what it has spent. It is equally desirable that whatever policy that is chalked out should be easily workable
without any confusion in the minds of management and labour union.
Profit Sharing
In addition to time wage, also known as day work payment and piece wages, wage policy may make a provision
for profit sharing by workers. Though this idea seems to be rosy one, workers who are more loyal, skilful and
hardworking feel frustrated as they are considered on par with others who are just average with no extra skill or
proficiency. Those 'skilled workers' who are in fact responsible for quality output, see no reward for their ability,
skill and efficiency. Hence, the wage policy should be adjustable to both the parties management and labour to
maintain unity among workers both skilled and unskilled, having taken due care to see that no injustice is done
to efficient workers who are far above than average workers.
Cost of Living and Seasonal Industries
Management may have to face other two immediate problems directly connected with the payment of wages.
The first problem is the payment of wages on "cost-of-living" basis and the other one is the demand for
guaranteed wages for the whole year to all workers when the company works on seasonal basis. So far the cost-
of-living wages are concerned, management and workers may have all appreciation for this type of payment so
long prices are rising. But the trouble will start when prices fall and the management would like to adjust wages
 to lower cost of living. Because workers under such a situation are to get less than what they were getting when
cost-of-living index was at a higher trend, they will oppose any reduction in their monthly pay packets. It is here
how to mould the wage policy and avoid friction between management and workers lies in the skill of those
responsible for policy making. Similarly, when wages for the whole year is demanded in seasonal industries, any
payment under the hard pressure of labour unions will be uneconomical and shortly the industry concerned will
have to face financial crisis if labour union demands are accepted or face the labour unrest if demands are turned
down. Policy makers, therefore will have to be alert and carefully consider all such and other contingencies
while formulating the so called personnel wage policy.
Policy as to Mode of Work: Personnel policy makers cannot forget some more problems pertaining to (a) hours
of work, (b) shift of workers, (c) overtime, (d) vacation etc. and should, therefore, see the requisite policy will
provide guidelines for solving these problems amicably. Normally standard working hours say for example 40
hours weekly spread over five days are appreciated by workers. They feel that shorter working hours will
increase morale of workers and output as well as productivity. The views expressed by employers are that shorter
working hours per week may not necessarily elevate productivity. On the other hand, reduction in working hours
increases labour cost more than productivity which is presumed to have been increased. So,' whether the policy
should encourage long working hours per week or shorter is to be settled with mutual consent of management
and labour bearing in mind that any policy adopted in this regard will lead to increase output, at reasonable cost,
productivity and morale of workers. Labour unions are also of opinion that those workers working beyond
prescribed working hours should be paid extra as overtime pay which they feel should be one and half times of
original pay. The employer in this regard may have a liberal policy and may pay double the original pay if
workers work extra on Sundays and holidays. Fixation of overtime pay is again a matter of policy because
overtime pay should not encourage workers to be negligent in their normal duties with an intention of earning
regular wages as well as overtime wages. Overtime should, therefore, be carefully introduced only when
increased output is needed and the same cannot be had during normal working hours.
In some companies shift system is common and thus there can be second and third shifts of workers. While
introducing shifts, management should see that it has an open and liberal policy so as to make shift system
acceptable to workers. Workers in general prefer the first shift to second and third one. They complain that night
shifts (second and third) are inconvenient since adequate activities regarding lunch, transportation, safety etc. are
not made available. So, if the management forces the workers under its conservative policy, to work under shifts
with inadequate facilities, the morale of workers along with output will decline and the cost of output will
increase. As it stands, it will be uneconomical and thus the policy should be recast in such a way as io see even
shifts of workers will prove profitable both to management and workers.
Even regarding vacation to workers, mode of granting the same should be clarified in the company policy.
Guidelines in this regard should be as to:
(I) hen workers are entitled to claim it.
(2) W;!etitir the same c-itri he claimed with full pay or half pay.
(3) The duration of vacation etc.
Broad-minded managements feel that liberal policy in this regard helps to raise output, productivity and morale
of workers. Some employers do encourage workers to encash their vacation and are more liberal and sympathetic
if workers go on vacation during slack season. Further personnel policy should be sympathetic and considerate
so far as (a) leave of absence, (b) absenteeism, and (c) working conditions are concerned.
To conclude, personnel policy should not only consider the various problems such as selection, transfer,
promotion, demotion, hours of work, overtime, vacations etc. but also should provide employee services
including toilet facilities, medical aid, recreation, health insurance etc. Retirement planning, pension schemes
and good relations with workers and their unions should not be ignored by policy makers. Personnel policy
should invariably aim at having minimum grievances and if at all any, there should be no managerial difficulty in
solving them promptly and amicably.
POLICY DECISION ON LABOUR TURNOVER
Labour turnover as opposed to absenteeism is the rate of change in the total 'labour force employed in an
undertaking. Absenteeism shows the number of workers who remain away from the work while labour turnover
shows the number of workers who leave the work and the number of new workers that have joined. Thus, labour
turnover is the rate of accession and separation of labourers during a given period in an industry. If there is a
high labour turnover then there is frequent change in the total number of workers employed in an undertaking. It
means a large number of workers are leaving the undertaking and joining other industries. They may leave the
industry for a number of reasons but the existence of a high labour turnover is an indication of the bad working
conditions in the industry. Generally, it is supposed that a worker will not leave a job of his own accord unless he
is forced to do so or unless he finds a better job. So, if labour turnover is high then something is wrong with the
industrial organisation.
Effects of Labour Turnover
The most serious effect of high labour turnover is a sense of insecurity created in the minds of the workers. This
leads to fall in efficiency, fall in production and high cost of production per unit. To the undertaking a high
labour turnover is injurious because it will have to employ continuously new workers who may be inefficient and
untrained. The organisation will have to first train them before any production can be expected from them. Thus,
in the ultimate analysis, it will lead to higher costs, lower production and poor quality. To the worker, it is bad
because there is instability in employment, loss of wages and loss of efficiency as he has to change jobs often.
 Therefore, effects of labour turnover are much more injurious than that of absenteeism.
Extent of Labour Turnover
However, it is difficult to measure labour turnover. In measuring the rate of labour turnover, the "separation"
rate, i.e., the number of workers who leave the job should be found out. Similarly the "accession" rate, that is,
the number of workers who join the concern has to be calculated. The separation may be for a number of reasons
such as dismissals, layoffs and resignations. Then the system of "badli" workers again makes it complicated.
Further, there should be a clear distinction between absenteeism and labour turnover. If a worker leaves one unit
and joins another unit in the same industry, the rate of turnover of the industry is not affected. So, no reliable
rates of labour turnover are available in India. However, the rate is believed to be high in all the organised
industries in this country. They should win over the workers by creating a sense of security and a feeling of
"esprit de corps" among the workers.
CAUSES OF LABOUR TURNOVER
Separation from service embraces labour turnover and it can be divided into two classes.
(1) Labour turnover due to misfortune of employee.
(2) Labour turnover due to negligence on the part of employer.
Thus the employee leaves the job on account of:
(a)his incompetence and insubordination;
(b) laziness and drinking habits;
(c)roving spirit from place to place; and
(d) those misfortunes such as regular accidents, sickness or death over which the worker has no
control.
Employers are responsible for labour turnover on account of the following reasons:
(a) when they pay low wages;
(b) when no proper protection is provided to the workers against accidents.
(c) when workers are compelled to work under bad working conditions.
(d) high-handedness of superintendents and foremen toward the employees preventing thereby the growth of
interest and friendly feeling.
favouritism in making promotions; and
general inefficiency in the day-to-day management of the organisation.
POLICY PROGRAMME TO REDUCE TURNOVER
Recognising the complexities of the problem, serious efforts must be directed to an examination of the entire
process affecting employees from the day they are recruited to the day they leave. This bird's eye view should
include items like recruitment, selection, training, salary and wage programmes, fringe benefits, working
conditions and supervisory practices. Any dissatisfaction with one of these may lead to the problem of labour
turnover. The following points help solving the problem of excessive turnover. These have been beautifully
narrated by Mr. Joseph. C. Augustine of America.
1. Establish updated and realistic job and man needs
Review the job duties to be sure they are complete and uptodate before attempting to recruit for the job. Consider
the requirements necessary to perform the job as opposed to the desired qualification of education, experience,
specialised training, physical effort etc. Under-utilisation of over qualified personnel is a major source of
dissatisfaction.
2. Improve recruitment and selection procedures
Recruitment is the positive attempt to attract applicants, while selection is the negative step in the process of
matching the qualifications of men with the requirements of jobs. Good selection is the right man in the right job
and to achieve this, the personnel manager has to arrange for interview by trained and skilled persons, be honest
with the applicant, have proper instruction, provide more lead time to the selection committee.
3. Encourage effective promotions within
Every employer boasts of a programme of promotion from within. However, many a times, top level positions
are filled in by outsiders. While new blood needs to be brought into the organisation, it must not be at the
expense of good staff members who will read this as a sign that there is no future for them, causing them to look
for employment opportunities that will recognise and reward their ability and performance. It is essential that this
policy be supported by top management and well understood by everyone in the organisation. Meritorious,
experienced and deserving existing employees should get the chance for promotion.
4. Chalk out effective orientation programme
Labour turnover is the highest during the early stages of employment. As the period of employment increases,
turnover decreases. It is important to see that employees' needs are met early in order to increase the likelihood
of their continued employment. All too often, employees are hired and put to work without proper orientation
 rather than have a continuous orientation programme before putting the person to work, integrate it with the
duties to be performed. An integrated orientation and training approach assists the employee to adjust to the
requirements of new job on a more gradual and comfortable basis.
5. Plan and implement proper training
Training takes place in an organisation whether it is provided formally or not. A formalised programme is far
superior to the informal haphazard approach of letting employees to learn things on their own the hard way and
often incorrectly. Such programme needs, responsibility and accountability for training functions, all
comprehensive programme, demonstration and explanation of tasks to be performed, watching the employees'
performance of assigned tasks, follow up to set right the mistakes it should he continuous.
6. Develop competitive and equitable salary/wage programme
Develop and maintain a programme that offers a competitive salary and provide for internal equity and a
systematic salary review for all persons on a fair and appropriately timed basis. Competitive starting salaries
with appropriate increases at reasonable time intervals generally provide greater long range satisfaction than the
higher starting salary with smaller increases over longer intervals between increases. It is wrong to assume that
men leave for money and money only. It should also cover fringe benefit packet for the employees.
7. Provide room for ventilation of complaints
It is imperative that a formal and effective complaint procedure exists so that employees can express their
concern and expect to have them reviewed and responded to. A complaint lodged must be investigated carefully
and completely to ensure treatment of the particular employee who has filed the complaint. Recognise also that
the complaint may point out a fundamental problem deserving special attention and correction.
1. Ensure employee participation
Wherever and whenever possible, employees should be encouraged to assist in
determining how departmental goals might be attained. Given the job to be completed
within a given period, the group can often help plan on how to proceed to meet these
goals in a manner acceptable to the partner of industry. Efforts devoted to keep
employees informed will lead to improved morale as nearly everyone has a desire to know what is happening
and why.
2. Better recognise human needs
After some years of service improvement in wages, job security, survival needs of employees and other benefits
are met very well. What is needed is employee recognition and acceptance. Full appreciation of work done,
sympathetic help on personal problems are all more important than job security or good wages. Many problems
that employees have are personal than work-related. Recognising that outside problems can and do affect work
performance, there should be provision for employee counselling too.
To conclude, labour turnover control is a complex problem that requires keen interest from employers. While
there is no panacea, there are number of variables over which employer has to concentrate as they are
controllable. Concentrated efforts will result in improvement of employee performance, morale, job satisfaction,
etc. and will finally result in reduced turnover.
LABOUR WELFARE POLICY
Basic Principles of Labour Welfare
As labour welfare rests on certain fundamental principles, they are to be borne in mind to achieve the above aims
through the welfare schemes drawn and implemented by the people responsible. These are:
1. Adequacy of wages and allowances
Welfare facilities are not the substitutes for adequate wages allowances. Every worker has right to adequate
wages and allowances. That is very high wages cannot alone, guarantee welfare. These welfare facilities are
provided in addition to adequate wages. There should not be any effort to thin down wages so as to give more
such welfare facilities.
2. They must be efficiency oriented
Though it is a difficult task to measure the relationship between welfare and efficiency, the benefits given should
result in efficiency as every employer spends on these various items with the intention of improving labour
efficiency. For instance, amounts spent on education, training, subsidized food, housing, family planning etc. are
having salutatory effect on efficiency.
3. Encompass intra-extra mural facilities
One of the basic aims of industrial welfare is development of worker personality. This development depends on
the welfare facilities provided in and out of the factory premises. Infra mural facilities include rest pauses, music,
sanitary conditions, drinking water, medical, shelters, creches, canteens, fencing of machines, protectives,
conditions of work and employment. On the other hand extra mural facilities cover housing, medical facilities,
recreation, amusement, games and sports, education, clubs,-transport, cooperatives and other benefits like
sickness, unemployment, old age allowances etc.
4. Active participation
The success of a welfare plan depends not only how much is spent on welfare facilities but how much it has been
welcomed by the people in formulation and implementation. Consultation with and the agreement of workers in
the formulation and implementation of welfare schemes are very essential for their success. Proper
implementation is guaranteed by having employee participation at planning level. Further employees develop a
sense of pride when they are made to feel that they have contributed their mite in shaping those plans. It fosters
the idea of industrial democracy.
5. Priority based schemes
Many a times, the schemes may go waste because the priority of needs has been totally forgotten. Therefore,
well thought out schemes of priorities must be the heart of labour welfare measures. For instance, employee
housing and sanitary facilities, medical facilities, must get priority over the welfare amenities like amusement,
recreation clubs etc. Of course, these may change with the age of the unit providing. Any way there should not
be a blanket policy treating all items on the same footing.
Why Labour Welfare Activities?
(1) Welfare activities ensure minimum amenities required for better living.
(2) They improve living and working conditions of workers.
(3) Better working conditions help improving efficiency of workers mental and physical.
(4) Welfare activities if properly undertaken can help workers not to fall prey to drinking, gambling and other
vices.
As the large number of workers comes from rural area, they are generally tempted to go back to their villages
under one or the other excuse if no proper amenities are provided. Therefore, welfare activities will stop workers
from leaving their places of work and thereby there will be a reduction in the rate of absenteeism.
(6) Welfare activities help to have stable labour force and also encourage people to seek jobs in industries,
(7) They further help development of industries.
Industrial disputes between workers and employers are reduced enabling industry thereby to raise production.
AIMS OF LABOUR WELFARE POLICY
The labour policy should generally be framed so as to improve working conditions in industrial concerns. The
ultimate goal is to see that there is an overall increase in labour productivity. This object can be achieved by
taking into consideration the following conditions.
(1) Workers' Education: This is of primary importance without which workers will not
understand the various provisions of labour laws. Workers can understand the importance of welfare activities,
collective bargaining etc. only when they are educated. Only educated labour force can realise the dangers of
strikes and lockouts. So the labour policy educating workers should receive attention of government and
employers. In this direction, semi-autonomous boards are formed by the government with the help of
organisation representing workers and employers.
(2) Working Conditions: It should be seen by every employer that the conditions under which
workers are working are satisfactory and will lead to the general labour efficiency. With this object in view,
labour policy of any industrial concern should cover all such activities that will promote the welfare of workers.
Therefore, provisions for safety, elimination of accidents, training within and outside industry, research etc.
should be inserted in the labour policy to be adopted by any industrial concern.
(3) Workers' Co-operative Societies: Every industrial concern should see that workers not only
get minimum wages but they get full benefit of real wages. Labour policy can be considered as the best one only,
when workers are provided with better quality food grains at reasonable price, better credit facilities and better
chances for maintaining their standard of living. These objectives can be achieved only through co-operative
consumer's stores and cooperative credit societies. Such organisation should be given priority as one of the
welfare activities under the labour policy.
(4) Trade Unions: To protect the industrial as well as economic interest of the workers, it is
believed that the establishment of well-organised trade unions is necessary. As a general policy, trade unions
should not be looked down by the employers. Their activities should be recognised and under labour policy,
trade unions should receive all importance from both the parties -- labour and management. However, under
labour policy, necessary provisions for satisfactory administration of trade union must be made so that its
existence will promote the industrial interest.
Industrial Housing: The Five Year Plans have also emphasised industrial housing as one of the important
aspects of labour policy. It has been observed in many industrial centres that housing problem is an acute one
and not satisfactory. Whatever measures taken in this direction are inadequate and unless and until housing
problem is satisfactorily solved, morale of industrial workers cannot be improved. Good character and behaviour
are directly connected with accommodation made available. It is. therefore, the Planning Commission has
realised the importance of housing and hence it has been taken as one of the aspects of labour policy.
(6) Industrial Relations and Research: Industrial relations generally refer to the various measures for avoiding
as well as settling industrial disputes. Good labour policy should dictate the different means towards this end.
Necessary provisions should be made in the "Code of Conduct" so that both employees and employers can settle
 their differences through arbitration and conciliation. Provisions as regards standing committees, collective
bargaining, workers' participation in the managements etc. should be made and strictly followed by the
employers as a part of industrial policy maintaining thereby cordial relation between labour and management.
WORKERS' PARTICIPATION Policy: Workers' Participation in Management
In the search for finding out a lasting solution to the problem of employer-employee relations in recent times, the
suggestion of associating the workers with the management of industrial units has been made quite often. In
India too nowadays talk of workers' participation management is going on feverishly and many conferences and
seminars are held as to how to implement such a scheme. It is interesting to note, however, that the attitude of the
employer has undergone a perceptible change to consider labourer as a partner in the industrial effort. From
labour, merely as a factor of production, to labour as a partner in business is indeed a significant step forward. It
must be admitted here that this change in the attitude on the part of the employer does not spring from any
conviction of the labour's importance in the production effort but from the fear of the Marxist ideology of class
conflict and the desire to avoid it by extending the element of democracy to industrial field. Whatever is the
reason, it is a significant trend and the labour too is conscious of its strength when it is united. Therefore, it is
natural for labour to feel that it must have a say in matters highly concerning it, and it is no longer fair for the
employer to decide them unilaterally and if he did so, he would not be tolerated.
WHY IS WORKERS' PARTICIPATION NECESSARY?
1.Awareness of one's rights
Workers at present are well organised under the leadership of their respective trade unions. They are well
informed by their union leaders as to their legal rights pertaining to the service conditions, bonus, welfare
benefits etc. and the demands put forward by workers can be considered amicably in their interests and of
management, provided the labour representative is associated with the management.
2.Sense of Ownership
By allowing labour participation in management, the feeling of discord, jealousy and rivalry between workers
and management can be replaced by cooperation, mutual understanding, appreciation of management difficulties
both financial and administrative, since workers now think these difficulties as their own and automatically they
develop the spirit of "My Own Concern." This spirit ultimately helps to maintain industrial peace.
1. Maintenance of Industrial Peace
No industry can establish industrial peace unless it takes its workers in its confidence. This is possible only when
workers know about all ins and outs of the organisation and management of the industry. Their participation in
the management will enable them to know the exact position of the industry and thus unreasonable demands may
not come forth so as to break industrial peace.
2. Question of Democracy
In no civilised country, dictatorship has any place in any walk of life. No one would like to see that he is only a
puppet in the hands of one or two persons, having no right to raise his voice in the matters he is mainly
concerned with. The present day workers being sufficiently literate are eager to express their views on decision
making, manufacturing and marketing products, rationalisation and automation etc. arguing that all labour
problems should be solved on democratic basis. Democracy in industrial field can be effectively introduced by
following the principle of labour participation in management.
Advantages of Workers' Participation in Management
1.The organisational as well as administrative including financial responsibility will be shared and
properly understood by the workers.
2.Workers' demands or any grievances are redressed amicably without any delay maintaining thereby
cordial relation between workers and the management.
3.Introduction of new technique of production, reorganisation or any other change regarding production,
distribution, settlement of disputes etc. can be had without much difficulty.
4.Decisions taken on different problems will not be generally challenged nor opposed by workers as their
representatives are expected to participate in such decisions.
5.It helps management to improve workers' morale on account of giving an opportunity to workers to
associate with day-to-day problems. Workers feel happy about importance given to them and this active
participation leads to team spirit in performing their duties.
6.Workers' participation further helps industry to increase production, to improve quality of the product,
to reduce labour turnover, absenteeism and also to reduce employer-employee disputes to the minimum.
7. The overall tone of the management will be at high level as it can have free and frank opinions from workers
on decision-making. Workers on the other hand get good scope to develop their inherent managerial skill and
ability.
8. Worker's dignity, prestige and respect are duly maintained by the management and as a result of the same,
management has hardly to face any labour problems of acute nature.
Shortfalls of Participation
1. Political leaders who control many of the trade unions bring disunity among workers who ultimately
fail to nominate right type of representative to participate in management. The urgent need of the day is strong
trade unions free from the clutches of the politicians.
2. In many cases, labour representative on management has proved a great failure either in decision
making or in discussions due to his ignorance of the subject matter. Further lack of education and general
knowledge come in his way to prove his mettle as a part of management.
3. Modern management calls for expert and special knowledge with high management qualifications;
provide little scope, rather no scope at all, to the ordinary worker who is not trained in management. Before such
experts, the workers' representative suffers from inferiority complex.
4. Workers' representative is not given a chance to participate in the discussions pertaining to finance,
company policies, legal matters, technological problems etc.
METHODS OF PARTICIPATION
The idea of associating the labour with management started from the middle of the First World War when
Whitley Report was resented. The Whitley Report contemplated the establishment of Whitley Councils or joint
council in every industrial unit. Since then works committees or joint committees are formed in various
industries with various degree of success but such association of workers has not been a notable success. The
attention of the people since then is concentrated on how best the participation could be achieved. Various
suggestions are put forward, but nothing satisfactory as yet has been formed out. Persons like Prof. G. D. H.
Coles ought to eliminate the distinction between employer and the employee by urging them to work as a team.
He suggested:
(1) That the persons acceptable to the workers should he elected to the posts of managers and the
foremen. This method has obviously many practical difficulties.
(2) Another method is to nominate one or two directors to the board of directors elected by the
workers from among them. Now this method is objected to on the ground that a worker elevated to the post of
directors is no more a worker. Secondly, the board is concerned mostly with matters like finance, purchases and
sales in which the workers are least interested and the director elected by them may be a passive onlooker.
Thirdly, such directors will be in hopeless minority and may not be able to exercise any influence on the policy
decisions of the Board. This method has been unsuccessful even in England. Trade unionists too object to this
method among other things on the ground that it serves no useful purpose.
(3) A third method is to introduce a suggestion system in the industry. The workers like to express
their views and if suggestion system is introduced then it gives them scope to express themselves. Workers are
after all human beings having their own opinions in several matters and from experience they are able to make
valuable suggestions. If these suggestions are looked into and accepted whenever possible and executed properly
it would be a case of industrial democracy in actual working. Moreover, the management should record the
valuable and useful suggestions made by workers or making innovations in the working. This system is
introduced by inviting to make suggestions and offer criticisms on the policy decisions of the management.
(4) The work councils a ndjoint councils are other methods of associating workers which have
been already discussed above. The crux of the whole problem of the worker's participation in management is
how to associate the workers with policy making decisions of the management. So far the scheme has not been
very remarkably successful.
PROFIT SHARING POLICY
The various schemes of incentive wage payments discussed above have been designed to benefit the worker to
increase productivity and to improve the relations between the employer and the employee. But experience has
shown that the relations between the two have not improved very much, and the problem still remains the most
intricate one. So far, not a single wage payment system has been entirely satisfactory and so recently some more
schemes arc devised to achieve the goal of increased productivity and improved industria relations. Among them
'profit sharing' and 'labours copartnership' are the mos important.
Strictly speaking profit sharing cannot be called a method of wage payment because it is paid over and above the
normal wages. It depends upon the profit of the concern whereas the wages are paid before hand and are
considered as an important item of cost structure. The profit-sharing is a bonus paid in a lump sum after a
financial period. Wages must he paid whether the concern makes a profit or not but profit-sharing as a bonus is
paid out of the net profit of the company. The worker's share in the profit may be paid (i) in cash; (ii) in stocks or
shares of the company; or (iii) it may be credited to the provident fund or retirement benefit fund. The payment
of profits depends upon earning of profits beyond a certain limit or is linked with the payment of dividend to the
shareholders of the company. Underlying idea of profit-sharing is that the workers who have contributed to the
production and prosperity of the company must be given a share in its profits. Thus, they are made responsible
for the working and success of the company.
Profit sharing plans may be prepared well in advance. Labour's share of the profits may be decided as so much
per cent of the net profits of the company. It may be also determined according to the total wages or salaries
earned by the workers during the course of the year. Bonus may also depend upon the rates of dividend paid to
the members of the company. Several restrictions and conditions are laid down for workers to be eligible for
bonus payment. Usually they should be regular employees of the company and must put in a stipulated number
of days of work. They should not participate in any illegal strike or they should not be involved in any
disciplinary action. The bonus payment varies according to the actual days of work done and it is calculated as a
certain percentage of the total earning for the period.
Definition
Profit sharing has been defined by the Council of Profit Sharing Industries in America as, "any procedure under
which an employer pays to all employees, in addition to good rates of regular pay, special current or deferred
sums, based not only upon the individual or group performance but on the prosperity of the business as a whole."
It is clear from the above definition that profit sharing has the following features:
Features
(1) Profit sharing plan must apply to all the employees or sufficiently to a large body of
employees. It should apply to at least 75% or more employees.
(2) It must be in addition to regular wage payment or normal wages.
(3) It must be based on the prosperity of the business as a whole, that is, on the profits of the
company. The share of the workers must be determined in advance.
(4) It must be paid when the net profits are beyond a certain limit and this limit must be
determined in advance of the calculation of the profits.
Factors Affecting Profit Sharing
The factors that affect profit sharing are mainly,
(1) fixing the basis of profit sharing
(2) ascertaining the share of the profits to be distributed among the workers.
(3) ascertaining the share of the individual worker out of total workers' share of profits.
(4) deciding the form of distribution of profits to the workers.
Basic policy of Profit Sharing
Profit sharing schemes should be prepared well in advance. The sharing of profits among the workers may be
done on the following bases:
(1) Individual Basis: In this case a worker may be paid, bonus or a share of profit according to the contribution
of profit made by the individual worker to the total profits of the company. As the worker will get bonus
according to his own contribution, a direct relation will be established between effort and reward. However, in
practice, it is very difficult to ascertain the contribution of an individual worker to the total profit of the company
as the profit depends upon various factors.
(ii) Departmental Basis: This is another basis of dividing profits among the workers. In this case,
profits made by each department will form the basis of profit sharing. Such an arrangement will provide an
incentive for each department to put in maximum effort to earn maximum profit. However, in practice, it is not
easy to calculate the profits earned by each department as the profits are earned by the collective effort of all
departments in a company.
(i) Industrial Unit Basis: Profits may be shared, in this case, by workers belonging to each
separate industrial unit. This method of profit sharing is suitable as it provides for the sharing of profits earned
by the efforts and skill of management and labour of a particular unit.
(i) Locality Basis: In this case the profits of all the industries in a particular locality may be
pooled together and shared by the workers. This method is not very suitable because firstly, there will be
different types of industries in a given locality and secondly, inefficient units will be benefitted from the efforts
of efficient units.
(ii) Industry Basis: Under this scheme profits of all units belonging to the same industry will be
pooled together and divided among the workers and management. In this case, the workers of an industrial unit
which makes losses will not be deprived of bonus. They will share in the profits made by successful industrial
units. However, this system is not liked by the management and workers alike of the successful units as they do
not want to fall in line with inefficient units.
(iii) Industry-cum-Locality Basis: In this case all the units of a particular industry working in a
particular locality pool their profits together and share the profits among the workers and management. For
example, profits of all the textile mills in Bombay city may be pooled together for sharing among the workers of
the textile industry.
Policy regarding Worker's Share of Profits
The problem of fixing the share of profits payable to labour and management is a very ticklish one. On this
problem it is very difficulty to achieve amicable, mutual agreement. Labour's share of profits may be decided as
so much per cent of the net profits of the company. It may be also decided according to the total wages or
salaries earned by workers during the financial year. It may also be related to the rates of dividend paid to the
members of the company. Sometimes profits are divided between the management and labour on the basis of the
total capital employed and the total wages earned by the workers in a particular year. According to the
Encyclopaedia of Social Sciences the employers will get at least three times of the share of the workers under
this scheme.
Individual Worker's Share
After deciding the share of the profits of labour, it is necessary to decide the basis of the share of profits of an
individual worker. In some companies, it is often based on the actual number of days of work done in the
company and sometimes it is also calculated as a certain percentage of the total earning of a worker for a given
financial period. Some concerns may take into consideration total years of service or the number of hours of
work done during a period. Generally however, the total wages earned during a period from the basis of payment
of bonus. The management sometimes imposes several conditions and restrictions for being eligible for the
payment of bonus. Usually the restrictions are:
(i) that the workers should be regular employees of the company;
(ii) that they should have put in a stipulated number of days of work;
(iii) that they should not participate in any illegal strike; and
(iv) that they should not be involved in any disciplinary action.
Form of Distribution of Profit
The portion of the profit which is determined as the share of the worker may be distributed to them in the
following ways:
(i) Profit may be paid to them in cash in lump sum payment and the workers are free to utilise the
cash payment in any form they like.
(ii) It can be paid to them in the form of shares or stocks of the company. When the payment of
profit is made in this form, the workers become members of the company and get a voice in die management of
the company. A sense of participation is created irkthe workers and they will become more cooperative and good
relations may be established between workers and management.
(iii) It can be credited to the provident fund or the retirement benefit fund of the workers. Under
this scheme the profits are accumulated by the employer and the worker is paid a lump sum at the time of his
retirement.
Advantages
( 1 )Develops Sense of Esprit de Corps: The profit scheme is designed to bring about cooperation between the
employer and the worker and it is said that it brings about the identity of interest between the two and the friction
is reduced to the minimum. It creates a feeling that the interest of the employer and the employee is the same and
breaks the barrier between the two. This is particularly true in small enterprises. It tends to bridge the gap
between management and labour and develops a sense of "esprit de corps" among the workers.
(2) Serves as an Incentive: It serves as an incentive to the workers as the workers know that they
will get more share of the profit if the enterprise earns more profit. They know that their share in the profits
depends upon the prosperity of the concern. Hence they will try to produce more.
Increases Productivity: Profit sharing will increase productivity of labour. They realise that an increase in
production or a reduction in cost will benefit them also. If they produce less or the cost is high, profits will be
low and they will get a less or no bonus payment at all. Therefore, they will try to produce more, try to avoid
waste of raw materials, spares and power and keep the equipment in trim condition. All this will lead to
increased productivity.
(1) Creates Loyalty: Profit sharing will create an interest among the workers about the enterprise
and a sense of loyalty for it. Labour turn over will be minimised as the profit sharing schemes are made
applicable to those workers to have stayed with the enterprise for a certain minimum period. The workers know
that the final payment depends upon the total output and the number of days of work put in. They will, therefore,
not try to leave the company as far as possible.
(1) Improves Industrial Relations: The relations between the workers and the management will be
very cordial and there will be no cause for industrial disputes and strikes on account of wage questions. The
basic cause for industrial strike is dispute on wages. Profit sharing, when it is introduced, provides a solution to
the wage disputes and eases the relations between management and labour. The workers are also benefited and
feel satisfied as their total earnings rise. The conflict of interest will be replaced by community of interest as both
the employer and the employee will realise that their interest lies in earning the maximum profits. Therefore,
they will try to cooperate with each other and maintain industrial peace.
(1) Realisation of Social Justice: Profit sharing is a measure towards achieving an equitable
distribution of income between the employers and the employees. By introducing profit sharing workers' income
is linked to the profits earned by an enterprise and thus it tries to establish some measure of social justice. If the
workers are enabled to purchase shares in the company and thus become members it is a step in co-partnership
and the workers become the owners of the concern alOng with others.
Disadvantages
(1) Fair Weather Scheme: There are various objections taken to the schemes of profit sharing. One
of the most important objections is that the scheme is a fair weather one, that is, for its success, it depends upon
continuous good time. In business there are good and bad times and hence when there is a slump, the enterprise
may even make losses.
(2) Profits Depend upon Various Factors: It is pointed out that profits are not earned merely by the
effort of workers. Profits depend upon various factors such as the ability of management, business conditions,
taxation policy of the government, market situations etc. Profits may or may not be earned by a concern
 depending upon the interplay of the above factors.
Workers Share Profits and not Losses: Again it is said that the workers are willing to share only profits but they
are not prepared to share the losses. It may be pointed out here that just as profits solely do not depend upon the
labour's contribution, similarly losses may not be due to them. It is, therefore, unfair to labour to ask them to
participate in the losses as their capacity to bear losses is limited. Again the payment of share of profit is made
contingent upon such factors as regular attendance, good discipline and sober habits. These are to be judged
entirely by the management and this may not be fair to the workers.
(4) Failed to serve as Incentive: The incentive aspect of profit sharing is not of much use
as the payment is done after long intervals and hence it loses its incentive value. It has failed to inspire workers
to produce more. Further, payment of bonus, apart from being paid after too long intervals, is also uncertain. It is
not possible for a worker to know in advance what he will earn at the end of the period and the amount is too
small to create any incentive aspect. Again it varies according to profits which are themselves very
unpredictable. Hence, profits sharing, as incentive payment has very doubtful value.
(5) Measures All Workers with the Same Rule: Profit sharing schemes are applied to all
workers equally. It does not distinguish between efficient and inefficient workers. Both the types of workers are
paid the same bonus. Moreover, profit is based upon collective output and not individual output. So the efficient
and ideal workers are paid at the same rate. Thus it does not serve as a good system of payment. The workers
will, therefore, be interested in getting a higher regular wage rate than getting a share in the profits.
(6) Failed to establish Industrial Peace: It is pointed out that the scheme of profit sharing
has failed to establish good industrial relations. Though an analysis to the labour disputes involving profit
sharing is small, if the scheme is in force, then the workers will resent if it is abolished. If the management tries
to show losses, then the workers will become suspicious of the management and instead of improving the
relations, tensions will be created. The payment of bonus is looked upon by the workers as a matter of right; a
lapse of certain time and its abolition or reduction in the percentage of payment has led to industrial friction. Far
from becoming a source of industrial peace, experience shows that it has often become a cause of conflict.
(7) Opposition of Trade Unions: The trade unions generally oppose scheme of profit
sharing on the ground that it is a mischievous method on the part of employers to create disaffection and disunity
among the workers. The workers in those concerns which have high rate of earning and hence can get high
bonus will have no sympathy towards other workers who are not so fortunate. Thus it will weaken the trade
union movement.
The Committee recommended that profit sharing should be introduced unit-wise, but to begin with, it can be
tried on the industry-cum-locality basis in the textile industry in Bombay, Ahmedabad and Sholapur.
POLICY ON BONUS
Payment of bonus is another incentive method of remuneration and it can be paid in different forms to promote
general improvement in the working of the factory. Below given are some of the forms for which bonus can be
paid.
Quality Bonus
In any manufacturing concern, particularly one under well-organised management, more attention is paid to
quality of the product than to quantity. Product with no quality brand or those lacking in quality will find no
place in the market even though they are manufactured on a large scale. Hence different inspection methods are
introduced to ensure quality of the product. This object of maintaining quality can only be fulfilled provided
there is co-operation of the workers who are mainly responsible to handle different manufacturing processes. So,
to encourage workers, bonus is paid for the product that passes inspection and is up to the prescribed standards.
Bonus for Waste Elimination
In some industries, waste of material is a common feature where product is to be cut from main material such as
hides, cloth etc. In the process of manufacturing finished products, wastage of material is likely to be on a large
scale due to haphazard cutting of raw material by the workers. Either to stop such undesirable waste or to reduce
the percentage of such waste, bonus is declared to give special impetus to workers to achieve this main object.
Similarly bonus is paid for
(1) Maximum period of service
(2) Prompt and quick attendance at work
(3) Reduction of accidents
(1) Keeping machines in operation so as to have maximum production. LABOUR CO-
PARTNERSHIP
Labour co-partnership is yet another attempt to achieve harmonious relations between capital and labour. It is a
step forward over the profit sharing plan and usually includes it. Under labour co-partnership the workers are
allowed to have a voice in the control and management of the firm. The scheme envisages the participation of the
workers in the management of the concern and thus makes them jointly responsible for the success of the
company. The features of the plan are:
(i) The worker is paid over and above the normal wages, a share in the net profits of the firm;
(ii) The share of the profits is accumulated and later on invested in the shares of the company, thus
giving the right of ownership to the worker. The worker may be given shares at a concessional rate or under
special conditions;
(iii) Co-partnership committees are formed and the control over internal management is given to
the workers.
It should be noted that even though acquisition of shares gives them rights of membership vote is often very
innocuous to the management. It is the general experience that labour co-partnerships are introduced generally
during the times of rising prices and increasing profits. The management does not want to put an impediment in
the earnings of the concern by not granting the demands of labour for more share in the profit. By giving them
the right of participation in the profits and management, the employers effectively yoke the workers also to their
scheme of earning higher profits. The workers also do not hesitate to cooperate with the management as they are
assured of higher returns. But as soon as the boom period is over, the management will try to abandon the
schemes of labour co-partnership and thus it will result in industrial unrest.
Thus it is clear that the success of the scheme largely depends upon the enlightened outlook of the management.
It may be pointed out here that the scheme merely serves as a temporary measure to tide over possible industrial
conflict. But as a permanent solution to the problem of industrial relations, it is not found to be satisfactory. It is
pointed out 'hat the workers are enabled to purchase shares in the capital of the company and thus can have an
effective voice. It is to be noted that workers have no choice to invest their shares in the profit as they like but
they are forced to purchase the shares of the enterprise. This indirectly binds them to the company and they lose
their freedom of mobility. Their voice in the management is merely nominal and their status in the organisation
does not in any way improve. On the contrary, a worker's representative on the board of directors may be merely
a puppet or in a hopeless minority and hence unable to safeguard the interest of the workers. Copartnership,
therefore, as a solution to wage-problem is of doubtful utility.
The labour co-partnership to be really effective should be based on cooperative principle where there is absence
of profit motive. This scheme has the same merits and demerits like profit sharing. However, it is an
advancement made towards the attainment of industrial democracy and its success will depend upon the attitude
of management and labour. So long as the attitude of management is one of paternalism and the labour's
approach that of class conflict, there is hardly any possibility of solving the problem. It can be solved only when
both realise that they have a common interest in increasing profits and raising wages because both are
interdependent.
Merits of Copartnership
Labour copartnership as a unique scheme of labour participation has the following special merits:
1. It promotes thrift
If the employees are left to themselves, there can be hardly any voluntary savings. Even when legally authorized
deductions are made the workers generally grumble. This method is such that they need not pay additional sum.
Their share in profit, instead of being wasted on consumption items grows in the form of investment. It
inculcates a habit of thrift once they like taste of investment as it pays back some decent return.
2. Partnership feeling
The conflict aetween the workers and employers is eased out, because this scheme of workers' participation
gives a sense of satisfaction to the workers.
Generally, there is a hiatus between the worker and the employer but as he is himself the owner, now he
understands the problems of an owner as an owner and as a worker is aware of the problems. Thus, the conflict is
resolved and cooperation takes the place of conflict. If these two wheel:, of industry rnzve on without friction
then what more is needed for increased prosperity of both the employer and employee?
3. Strengthens employee security
Every employee who serves in an undertaking is always in search of job security. Getting a good job is one
problem and after getting a good job retaining it permanently is still another problem. Continuity of service in an
organisation is a much desired need of every worker, as it is a means of livelihood. As he is the owner under
labour copartnership, he has better chances of representing his case if his services are terminated. When a
company accepts him as a partner, it becomes a delicate problem for the company to part with such a partner
who is a worker also. This builds employee loyalty and a sense of belonging to the company.
4. Increases efficiency
Copartnership provides for fulfilling employee motivational need. As an employee has a say in management, his
ideas and suggestions are not only considered but also are accepted and implemented. Respect for employees and
recognition of their services play a significant role in improving employee morale and hence performance. Now
they will work with heart and soul together and the company will have the benefit of fuller utilisation of man
hours as they will feel that loss of time will mean loss of income and the earning on their investment. Thus it has
cementing effect on relations between employees and employers.
The picture drawn above is an optimistic one but the actual experience is quite discouraging. Even in a country
like America hardly 3% of employees own shares as a result of labour copartnership. The obvious reasons for
such a scant response are: (1) It weakens the unity of trade unions. (2) Danger of loss caused by market changes
in the value of investment. (3) No advantage of diversified investment. (4) Lack of knowledge to solve the
company problems at higher levels.
Profit Sharing Vs. Copartnership
(I) Under profit sharing scheme, a worker will have a right only to share in the profits. Copartnership entitles
him to participate both in management and to a share in profits of the firm where he is employed.
(2) Benefits of profit sharing can be had in all forms of business organisation such as sole trading, partnership
firms and company organisations whereas copartnership is confined only to joint stock company form of
organisation.
(3) Under profit sharing, a worker participates only in profits without having any risk of bearing
losses. It is not so in copartnership.
(1) Industrial democracy is rather absent under profit sharing scheme while copartnership
promotes it, since worker enjoys ownership along with other shareholders.
(2) Usual method of distributing profit under profit sharing scheme is to declare bonus in cash.
Under copartnership profit is distributed through bonus shares.
OTHER EMPLOYEE BENEFITS
The other employee benefits mean the 'fringe benefits,' offered to them. Fringe benefits are the extra benefits
granted to the employees in addition to the normal wages or salaries or other compensation. The term 'fringe
benefits' came in to being in 1950's when the Regional Chairman of the National War Labour Board of U.S.A.
used it for the first time. It does not mean that people of other countries were unaware of these. In fact, in U.K.
these were known as early as the days of Industrial Revolution.
Purpose of fringe benefits
The objectives that are served by granting these extra benefits are: (a) generating high morale of employees, (b)
creasing happier hence better employer employee relations, (c) catering to the health and safety of the workers,
(d) promoting much desired employee welfare, (e) injecting a sense Of loyalty to the company on the part of
employees, (f) providing congenial work environment and (g) meeting the provisions of the law.
Types of benefits
These fringe benefits are the outcome of managerial policy decisions and may also be induced by law. They may
be granted voluntarily by the company or may be demanded by the unions. These can be broadly grouped in to
four classes as: (A) Payment Without Work (B) Retirement Benefits (C) Safety and Health Provisions and (D)
Recreation and Other Benefits.
Payment Without Work
It is natural that a worker is paid for his work. However there are occasions when the worker is paid even for not
working. He gets paid even without work. These benefits of cash payment without work are 1. paid holidays, 2.
overtime payment and 3. liberal leave facilities.
1. Paid holidays
In a year as many as 52 Sundays and some 15 to 20 national and local holidays are declared. Some organisations
even give off on every Saturdays. It means that roughly hundred days are paid holidays. In case of vocation
departments particularly in teaching profession almost 180 days are paid holidays including vacations. It means
such a heavy cost burden is added to produce a commodity or to render a service.
2. Overtime payment
Both employees at floor level and office workers are paid for overtime work. The rate at which these workers are
paid ranges from one and half times to two of the basic and dearness pay they draw for usual work. Such a
benefit has resulted in slowing down the regular work so as to work more at higher rates. In view of such an
attitude of employees, of late, some concerns have stopped payment for overtime work.
3. Liberal leave facilities
An employee is granted leave and he is paid for this leave. It takes normally three to four forms. The most
common are (a) casual leave, (b) medical leave, (c) earned leave and (d) commuted leave. Casual leave for the
year works out to 15 days, medical leave from one month to three months, earned leave scaled on actual working
only two days for one month and they are allowed to accumulate over a period of any 120 to 180 days which can
be encashed if not availed. Even in case of commuted leave, it works out 20 days a year accumulated up to 180
days. In addition, maternity leave is granted in case of female workers for a period of three months.
RETIREMENT BENEFITS
Most of the employers provide for retirement benefits in the form of provident fund, pension and gratuity. The
reason is that the employees should not feel the loss of regular earning on the superannuation age may be 55
or 60.
1. Providet Fund
As required by the legal provisions of Provident Fund Act of 1952, there is a provision for contributing provident
fund facility where employer and employees contribute not more than 8'/,% . of their basic salary. It is the
responsibility of the employer to deduct this at source, add his share and invest in some fruitful investment
portfolio so that the employee has the benefit of compound interest accumulation.
2. Pension Schemes
'Pension' is the fixed amount other than wages paid at regular intervals to a person or his surviving dependants in
consideration of his past services, age, merit, poverty, or an injury or loss sustained. A retirement pension is an
allowance, annuity or a subsidy. The details of the pension plan followed by a compeee governed by
Employees' Provident Fund and Family Pension Fund Act 1952. Of late this pension works out roughly half the
salary though
it used to be 3/8th of his last salary drawn.
3. Gratuity Plans
Gratuity is another lump sum payment made by the employer at the time of retirement. Originally gratuity was
paid as an exgratia payment to a servant by master for his service over a long period of time. Today, however, it
is a legitimate claim of work force. The difference between pension/provident fund and gratuity is that there is
no contribution made by the employee. Hence provident fund aims at compulsory saving while gratuity does not.
There is a separate Act called The payment of Gratuity Act of 1972, that governs the payment procedure.
Normally, 15 days' wages both basic and dearness pay is to be paid for every completed year of service. Such
payment can be made for maximum 20 months' wages. However, there is provision for penalty both for
employer and employees in case of misconduct.
(4) Safety and Health Provisions
The enlightened managements have long recognized the need of employee safety and health, as productivity is
dependent on human capital. Employee morale, loyalty and above all efficiency can be toned up if sincere efforts
are made to meet the needs in the fields of safety and health of employees. It is obligatory on the part of
employers of large concerns to care for employees' health and safety as provided under the provisions of the
Factories Act 1948 and the Shops and Establishment Act. Many sections of these Acts deal with safety, health,
cleanliness, sanitation, lighting, provision of drinking water, rest rooms, canteens, creches, working conditions
etc.
(5) Recreation and other Benefits
An employee is not a machine and hence he needs rest and recreation to recoup his strength and stamina. It is
wrong to assume that a company can increase the output by making the work force to toil and moil continuously.
There are such facilities which provide for employee recreation and other needs. These are (1) Recreation
programmes, (2) Cafeterias, (3) Rest periods, (4) Tuition reimbursements, (5) Employee counselling, (6)
Physical examinations, (7) Parties and picnics, (8) Transport, (9) Inplant music, (10) Subsidised housing, (11)
Medical benefits and (12) Low interest rate loans, etc.
There can be good many other benefits which may be granted by the company. The overall aim is to treat the
labourer as a human being. A company should strive hard to give him a sense of belonging to the company. Of
course, in return it gets the loyalty, improved morale and productivity and hence lower cost of output.
CONCLUSION
The main defect of these schemes is that they require a lot of supervision and clerical work. It also generates
rivalry among the workers and ultimately is injurious to industrial peace. Therefore nowadays "group incentive
bonus" schemes are introduced for the whole group of workers in a department particularly in the western
countries. It is said that individual incentive schemes act against the team spirit and unity among the workers and
against the feeling of fairness within a working group. It is also pointed out that it is often difficult to include
non-producing workers such as supervisors in the individual incentive schemes. The group incentive scheme
avoids all these defects and covers every worker in a department. Again it is much more simple and requires
much less inspection and supervision. Under the group incentive scheme, the standard output and time is fixed
for the whole department and the payments are increased by the percentage by which the standard output is
exceeded. Group incentive schemes are particularly suitable in the Indian conditions today because there is no
element of discrimination and favouritism between one worker and another.
Any incentive scheme of payment to be successful should be based on the following principles:
I. It should be simple and easy to understand.
The scheme should be determined in consultation with the trade union and the workers.
3. Any dispute about the scheme should be immediately investigated and rectified.
4. Supervisors themselves should be fully conversant with the scheme, its implication and its application.
5. Proper supervision should be always maintained under the scheme.
 13

Financial Policies

Need for Financial Planning

Financial planning may be defined as "the act of deciding in advance on the action which is to be undertaken. It
is the executive function which involves the selection from among alternatives of enterprise objectives, policies,
procedures and programmes." From this definition, it can be said in short that financial planning is a projected
course of action. Under the proposed course of action, financial planning includes the following acts:
(I) Establishing the firm's objectives
(2) Determining the firm's policies
(3) Establishing the procedures which the firm should take in order to accomplish its policies.
Financial planning has gained its importance and popularity because of today's complex nature of business
enterprise. Due to financial planning, at the very first outset, waste resulting from complexity of operations can
be eliminated. Further, planning policies and procedures which help the enterprise to bring closer coordination
between various functions facilitate smooth running of business at a minimum cost. It helps the enterprise in
preparing its programme for the future. It should be mentioned here that any firm or enterprise not interested in
its own financial planning will depend upon its past experience. So far its objectives, policies and procedures are
concerned, this policy of depending upon past experience is dangerous and not advisable in view of the fact that
the economy in which the firm operates is dynamic and future is uncertain being subject to variations. However,
in planning to avoid unprofitable as well as uneconomical factors forecast of future trends must be made with
due care. Well prepared plan will assist and relieve its executives from time consuming processes. In the absence
of well thought out financial plan, executives at lower level of management will prepare their own policies and
procedures creating thereby more confusion in day-to-day working of the firm. This may lead to a waste of time,
goodwill and financial resources. In fact the success of the firm is linked with the successful functioning of
finance department. Therefore the financial plan should be drawn carefully before any decision regarding
production or distribution is taken.
Steps in Financial Planning
Financial planning generally aims at making maximum use of available resources so as to see that the firm will
make adequate amount of profit by providing necessary requisites to the society in which it is operating. To
achieve this goal the firm will be taking following steps in respect of financial planning.
(1) Establishing the Firm's Financial Objectives: In this respect the firm should employ the
agents of production in the most efficient manner so that it can easily add to the material wealth of society. It is
therefore necessary for the firm to see that over the long period it is employing the capital in such a proportion as
to increase the productivity of the other factors of production. Since the financial objective is the same in all the
firms, the variation of extent to which capital is employed in different firms may not affect the plan.
Financial planners should pay attention to short-run and long-run objectives in order to take advantage of
changing economic conditions. It should be borne in mind that capital can be used in correct proportion in the
long-run objective and not in the short-run goal. No firm will try to place obsolete machinery by uptodate
equipment to meet the effects of business cycle during short-run objective when survival is the only goal. But the
same may be replaced during long-run period. Accordingly the financial planners should have both long-run and
short-run objectives and as per convenience they should employ the capital.
(2) Formulation of Financial Policies:Business executives are required to follow certain policies
pertaining to procurements, administration, disbursements of funds etc. and the financial planners should be
aware of these policies. These policies may be classified as:
"(a) Policies governing the amount of capital required for firms to achieve their financial objectives,
(h) Policies which determine the control by the parties who furnish the capital,
(c)Policies which act as a guide in the use of debt or equity capital,
(d) Policies which guide management in the selection of the sources of funds,
(e)Policies which act as guides in controlling the use of funds, and
(f) Policies which govern the credit and collection activities of the enterprise."
 In all these cases, the planners must collect "facts" and "figures" concerning the future programme. So
forecasting the future in the right direction is an equally important step so that future can be rightly predicted in
respect of various factors influencing the firm's policies. Business can be effectively implemented only when
planners are in possession of correct "facts" and it is on the successful implementation of these policies, the
success of enterprise depends.
(3) Formulation of Procedures: Policies are nothing but guidelines and if they are to be put into
practice, certain procedure is to be followed. Procedure in this connection includes series of "steps or methods."
Each procedure is analysed in detail into various steps to ensure consistency of action, to be taken by financial
manager. Under the procedural methods, each person knows well his own duty and responsibility. Thus when the
procedure is established it simplifies the administrative process, assures coordination of activities, improves the
quality of performance, assures consistency of action, increases the efficiency of work performed and improves
control process.
(4) Providing Flexibility: Business operations are carried out under changing conditions. Business
operations are also influenced by the effects of business cycle. Thus there will be short-run and long-run effects
and it is the duty of the management either to revise or completely change the objectives, policies and procedures
in order to take advantage of changing conditions. No firm can neglect this factor of flexibility and if it does, its
share of profit will be adversely affected. In the absence of flexibility, the firm may find itself as a marginal firm
or it may experience financial difficulty.
LIMITATIONS OF FINANCIAL PLANNING
(1) Forecasting of Future Conditions Difficult
Planning needs actual facts, particularly of the future period. Facts about future are non-existent and hence
cannot be forecast accurately. It is for this reason, the success of the plan is seriously limited as the plan covers
several years in advance. In fact plans covering relatively short period are highly reliable since factors like wage
rates, prices, interest rates and general business conditions can be predicted with a fair degree of accuracy. To
offset the limitations of forecasting the future conditions accurately the management should improve the
techniques of forecasting or should revise the plans periodically say every six months so as to suit it the
prevailing conditions.
(2) Reluctance of Management to change the Plan once Made
Management generally is reluctant to change the plan it has prepared for following reasons:
(a) Plans involving capital expenditure run into lakhs of rupees and commitments for funds are
made well in advance. Such a decision cannot readily be changed.
(b) Managements also make arrangements for obtaining raw materials and equipments which
cannot be altered at the sweet will of the management.
(a) Further management undertakes training programmes for personnel prior to the time when the
plan is to be initiated.
(b) Management personnel are psychologically against change which creates rigidity.
(3) Lack of Coordination or Indecision among Personnel
Consistency of action on the part of planners is very essential and to ensure this, there should be perfect
coordination in the organisation where different functions relating to finance are performed. In many firms
particularly of large size, coordination among different departments lacking and as a result it disturbs timing and
sequence of events making the plan thereby ineffective.
Many a time executives fail to take prompt decision which affects the plan adversely. Executives fail to take
decisions particularly when they find that the information regarding the need of the plan is incomplete, and
personnel are improperly trained. To eliminate poor coordination and indecision management should do the
following:
(a) Avoid complex organisational structures
(b) Synthesize objectives, policies and procedures.
(c) Develop well-designed communication processes
(d) Train executives in the basic fundamentals of administration.
(4) Sinking Huge Amount in Fixed Assets
Since huge amount is invested in plant and machinery, it will be too difficult to remodel the whole structure by
scraping large amounts of machinery and equipment to instal specialised one under the new plan however sound
it may be. The present assets can be discarded only when the firm recovers sufficient amounts of "Sunk Capital"
and then only the new plan can be introduced.
OBJECTIVES OF THE FINANCIAL PLAN
(1) To provide adequate funds to the firm for getting expected returns by employing available
resources.
(2) To cover expected financial risk so that firm may not find any difficulty to earn usual profit.
(3) To make available funds at a low cost by securing the same under the most advantageous
 circumstances.
(4) To keep the financial plan as simple as possible and flexible so as to apply to other objectives
in favour of the firm under changing conditions.
To balance costs with risks in order to protect owners from the hazards of loss of control or loss of the business.

CAPITAL EXPENDITURE Need for Capital Expenditure

(1)Industrial revolution and modern techniques require increasing use of capital equipments.
(2) Ever increasing demand for fixed assets due to methods of mass production and automation
demand more capital expenditure.
(3) Modern tendency to have mechanical substitutes for labour due to ever rising wage rates
compels firms to seek more capital.
(4) New method and processes as a result of research and advancements in science and technology
give threats to existing equipments with obsolescence thus requiring increased care in selection of new
equipment.
(5) The size and structure of today's business firms create problems in the management so far as
capital expenditure is concerned.
(6) Decentralisation, both geographical and organizational, creates more problems in insuring the
capital outlays.
From what we have mentioned above, it can be seen that capital expenditure is generally incurred to determine
productive uses of new assets, to secure the best combination of productive resources and to have timing of
action in acquiring assets in the best interest of the firm.
The type of business will guide as to the selection of uses of capital for fixed assets. In what way and to what
extent capital expenditure is to be incurred will be determined as per the nature of the business and the financial
plan chalked out in this respect. Hence general business plans and objectives of the firm are the first deciding
factors of capital expenditure. The management is also facing side by side the problem of choosing of alternative
uses of fixed assets that may increase profit. However, management to get benefit of changing times makes
provision for additional capital within the business and as such choosing among possible uses of funds is a
constant task of management. But the management may not always find funds for employing at its discretion and
hence it will have to allocate scarce means (capital) among multiple ends. Similarly when and how assets are
acquired and to what extent capital is to be sunk will depend upon timing and evaluation of business
opportunities.
GENERAL PROBLEMS AND LIMITATIONS (1) Expectations for the Future

Any firm will expect good return on the capital invested. Hence it wants profits at all future dates. It will not
hesitate to incur capital expenditure if expected marginal revenue exceeds expected marginal costs leading
thereby to have an increase in profits. But expected revenue as well as costs are linked with judgement
concerning future. It sInnild be borne in mind that future is uncertain and in collecting market data or in the
evaluation procedure, chances of error between projected and actual figures are more and cannot be ruled
out in practical life. However, these data may be handled with reasonable accuracy for all practical
purposes. Their margin of error may vary with:
(a) stability of the economy,
(a) nature of the enterprise,
(b) type of assets involved and
(c) proficiency with which cost and revenue estimated are made.
(2) Revenue Changes and Control of the Firm
A firm is justified to expect revenue after acquiring the necessary fixed assets. There are somefactors like costs,
sales plans and advertising programmes that may influence future profits and these factors may be within the
control of the management. As such it will net be difficult to predict future profits. However factors like general
economic conditions, consumer habits and competitive conditions although they influence annual revenue or
future profit, they are outside the firm's control. making thereby difficult to estimate probable profit out of the
capital expenditure incurred. Estimating future profit is much more accurate if major variables are properly
controlled. Particularly in respect of capital expenditure, many factors are not within the control of the firm.
(3) Time Period for Planning
It is very easy to select uses of capital for new fixed assets unless all the possible alternative uses of future needs
are considered taking into consideration each individual case. Sometimes the problem arises whether capital
expenditure that is likely to add to revenue within two or three years should he given priority over one that may
produce result after seven years. Naturally an investor may prefer investing in such assets that may give
immediate revenue thinking side by side that longer the period higher the degree of risk in investment. But there
may be assets which may require not less than five years to give returns. Are we not going to consider capital
expenditure on such assets? General tendency is to have capital expenditure with expected returns within a
period of three years unless it is like electric utility services that may justify capital expenditure even for a
decade.
 It is, therefore, possible outlays must be measured one against the other in order to arrive at the exact decision.
For this, proper choice of time must be determined for different purposes depending upon the nature of business,
its importance and urgency. Thus capital expenditure planning can be made for projects covering more than five
years, covering less than two years and even those running for less than six months.
(1) Uncovering the Possibilities
The management may make proposals for actual capital outlay but it may fail to evaluate the exact amount of
capital expenditure if other possible use of capital is not proposed. No guarantee however can be given to a firm
about all potential uses of funds. Even then, the possible uses of capital are taken into account. Thus the success
of capital expenditure depends upon clear-cut ideas regarding the use of capital proposals and the degree of
extent at which the capital expenditure makes assets productive and profitable. It is just possible that all of a
sudden altogether a new project may appear to be more profitable than one already under planning schedule and
to get full benefit of this, capital expenditure is required to be incurred against those projects already included in
the schedule. This unproposed expenditure will disturb the financial plan. Since such possibilities are generally
faced by firms, it is therefore expected that each proposal be weighed against all others, old and new, up to the
point where the outlay is actually made.
(5) Difficulties of Measurement and Comparison
Potential use of funds for acquiring assets must be judged by estimators. Comparison should be done in
quantitative terms to see to what extent the capital expenditure has added to the net profits of the firm as per
expectation. In practice this is not effective as expectations are made by different people some being optimistic
and some pessimistic. Thus the estimation of capital returns is subject to errors and hence it is difficult to give
proper weightage to different proposals for utilising funds. Moreover capital expenditure is needed for expansion
and reorganisation which proposal involves great amount of risk. It is again difficult either to measure or
compare the respective risks against expected returns. In all such circumstances the financial executives should
consider each individual case, its potentiality and accordingly take the decision.
(1) Acquisition of Assets
Generally in large units capital expenditures are made in acquiring assets for long-term use to add to the revenue
of the firm. When and how they are to be acquired is left to the proper planning and control of the management.
Experts are expected to pay continuous attention to the acquisition of fixed assets in a large firm whereas it may
not be so in a small firm where acquisition of assets may not be a regular feature. Therefore, this item of capital
expenditure is strictly under planning control.
So far capital expenditure for acquiring assets is concerned management can count on substitution. Assets may
require to replace obsolete ones and accordingly decision may be taken. In some cases where the need is not so
urgent, capital expenditure in acquiring fixed assets may be postponed without sacrifice of volume. This sort of
decision enables management to stick to the status quo without knowing the effect upon profit. However, the
management should not hesitate to sink funds if they are necessary for improvement and to add to the revenue
earning capacity of the firm.
PLANNING AND CONTROL OF CAPITAL EXPENDITURE
Organising of Proposals: Before incurring any capital expenditure it should be preplanned as to how, how much
and for what purpose and when it is to be used. A detailed proposal should be drawn by taking into consideration
the various opportunities. All decisions must be properly weighed and final choice for employment of funds can
be made only after consultation of financial experts. However, it should be seen that capital expenditure to be
incurred either at present or in future is incurred for productive purposes which may increase the revenue of the
firm. Moreover executives at low as well as top levels of management should be motivated to submit well
thought out proposals covering all aspects of business. Rewards for good proposals may be given. However good
a proposal may be, it should be thoroughly screened before it is finally accepted.
Any proposal will bear profitable results which will involve in two functions: firstly in cost saving devices and
secondly in market opportunities. Cost saving method will lead to the process of increasing the overall efficiency
and market opportunities will deal with sales promotions for old and new products so that the new proposal that
was put into practice would give good returns on the capital expenditure incurred. Before putting through the
proposal, research projects and market surveys should receive timely attention of the planners.
Classifying the Ideas or Projects: Any idea or project for capital expenditures must be properly classified on
different basis. The classification may vary from firm to firm but each firm will need to experiment and
formulate its own classification or group into which the project should be placed so as to facilitate the selection
process. It is also a common practice to have cross-classifications. Following are some of the common methods
used for classifying projects:
(a) Adaptability to General Firm Plans: The first step in classifying the ideas is to divide ideas separately so as
to see that each idea is suitable to the established firm from the point of view of long-term plan. Future,goals of
the firm must be considered and the ideas embodied in plans must be flexible and subject to change when they
are to be applied to a firm. A firm may not pay that much of attention to the ideas involving capital expenditure
for short run period but for long-range plans involving capital expenditure should be grouped into:
(i) those well within plants;
(ii) those that are marginal in nature but could not be carried out with only slight changes in long-
range plans; and
 (iii) those outside the scope of established plans plans outside the scope of established schedule
may be considered provided executives get full assurance about marketability and future prospects for the
products on which capital is to be invested.
It should be seen whether the projects involve plans and within or out of proportion to sustain all expenses for
the growth of the firm. Growth rate of the firm and the rate at which the capital is sunk must be considered in
order to see that the project may prove profitable. It is difficult to apply sustainable growth to the planning
programme. However, projects that are out of proportion may be considered taking into consideration past and
present programme of the firm. Before considering sustainable growth, and projects that are out of proportion,
factors like personnel training, competition, future prospects, availability of funds and raw materials and capacity
of the management must be considered.
(b) Reasons for Expenditure: It is true that the capital expenditure is made for earning profit but it should be
noted that the profit may not increase at a uniform rate on all capital expenditure made. It is here that
classification of proposals must be considered as to, on what proposal, how much is to be spent and at what time.
In this connection even, alternative projects with their detailed analysis should not miss planner's attention.
Capital expenditure may be made on the projects for the following purposes:
(i) To replace worn-out plant and equipment so as to maintain current level of production
(i) To facilitate distribution of products
(ii) To integrate operations towards sources of raw material
(iii) To improve general plant efficiency, working conditions and employee morale
(iv) To improve efficiency of employees
(v) To add capacity so as to produce or handle new product lines
(i) To secure plant and machinery necessary to expand production of existing products
(i) For strategic reasons of:
(a) Keeping up with competition
(b) Research to insure future industry position
(c) Plant re-location to secure future advantages
(d) Diversifying so as to reduce risks.
(c) Broad Firm Component Affected: Where projects of similar nature are to be undertaken with more or less
same component of activity, they can be included in the same group although the goals of projects are different.
Projects are to be regrouped according to impact and not goals. Thus categories under so called cross-
classification would be:
(i) plant facilities,
(ii) equipment and processes,
(iii) markets and
(iv) personnel.
To elaborate the above consideration, a proposal to improve morale of employees might force management to
incur expenditure on air conditioning constituting thereby an improvement of plant facilities. Similarly
expenditure for long-term on advertising programmes or research would be classified under markets. Further
training programmes would be personnel oriented. Even under such cross-classification there may be
overlapping; even then the process for spending capital expenditure is facilitated under such grouping.
(d) Priority and Essentiality: In respect of capital expenditure next question arises on which project the amount
must be spent in preference to other project. So, to decide this question projects might be divided according to
those which are (i) not postponable (ii) postponable without deterioration and (iii) postponable but with some
loss of opportunity. In the first case when project cannot be postponed, immediate consideration must be given
and must be finalised whether to be undertaken or not. This prior consideration is to be given to this project
without comparing it with other projects. On such project, amount to be spent cannot be put off.
The second project that can be postponed without deterioration must be viewed from the degree of essentiality
and thus the proposals can be grouped as:
(a) essential to continue in business,
(b) essential to maintain current output,
(c) highly productive,
(d) productive and
(e) of questionable value at this time.
Having made the above different groups according to their usefulness to the firm, certain projects according to
their essentiality and availability of funds maybe considered and the rest may be eliminated.
The third project involves profit and therefore it should be considered to what extent profits are affected if the
project is postponed. Hence projects can be divided into:
(a) Projects affecting profits directly through cost reductions or increases in revenue, or
(b) Projects that increase profits indirectly and accordingly weighing the pros and cons, the
decision may be taken so as to see that spending capital is justified.
CAPITAL EXPENDITURE AND BUSINESS CYCLE
The policy of capital expenditure cannot be static. It should be alterable as per the conditions of business cycles.
Traditionally, firms used to undertake expansion programmes during boom period. They used to see that capital
goods industry was operating at full capacity. In this enthusiasm, there used to be overcapacity and the firm
could gain advantage of expansion on the downswing of the cycle, building the plant capacity at low cost. It is at
this time firm enjoys the maximum capacity to get the benefit of upward trend in the market.
However in practice, this cannot be considered as a normal condition in business because such policies cannot be
blindly followed on account of
changing business cycles. Had there been no business cycles, there would have been no problem for
businessman. Similarly preplanning for expenditure cannot be easily accepted unless the effects of cycles are
considered because cycles are erratic and not definite in degree of swing. However precaution must be taken
before taking counter-cyclical investment policy and should see that it will not conflict with the general policy of
capital spending. Even in such cases, the expected profits will determine the capital expansion. It should be
noted here that external financing for capital assets may not be so easy to get when profits of the firm are low.
One should carefully note that the effects of business cycles on the acquisition of fixed assets are very prominent
and the expansion policy may be drastically cut if general business activity slows down.
CAPITAL PLAN AND ITS STRUCTURE
For any public company, the problem of raising adequate capital is as important as its own formation. Any
corporate body will not be in a position to do justice to the objects clause of its memorandum, of association
unless and until its promoters have well conceived necessary plan that may provide the adequate amount of
capital. One should note in this connection that 'capital' comprises of the aggregate amount obtained by a
company through its owner:I:1p capital and borrowed capital as represented by its long term indebtedness.
Under ownership capital, the amount representing the share capital of a company, its reserves as well as revenue
is included. It will not he out of place if we just mention that "capital structure" refers to the kinds of securities
that make up the capitalisation. So, one can see that "capitalisation finally includes" amounts embracing the
share capital, debentures issued and loan borrowed secured and unsecured from various financial houses such
as commercial and industrial banks and finance corporations. Thus, it will be the foremost duty of the promoters
to see that provision for capital is made and the first priority is given to the financial planning of the proposed
company. It is the supply of capital that determines the strength of the concern. The well distributed capital gives
stability, improves the reputation of the concern, helps to earn more profit and finally enables it to run the
business even during depression. Hence the supply of capital must be made available at the right time for the
right purpose because a company, when it undertakes a particular business enterprise, needs capital on different
occasions. So, this problem of capital planning becomes important when:
(a)a company is floated and needs fixed and current.assets;
(b) a company is thinking of expanding its activities and as such is in need of additional capital;
(c)a company is merged or consolidated with another existing company; and lastly
when a company is planning for recapitalisation or reogranisation.
CAPITALISATION
Capitalisation is a wider term and denotes the total resources collected by a concern through the issue of shares
and debentures. It is a process of determining the capital structure of a company and involves the difficult tasks
on the part of a promoter. It is the sum total of all owned capital including the long-term borrowed capital.
When a new enterprise is undertaken, it can very well start functioning provided necessary amount of capital is
made available. Capital is required for different purpose during the course of business. But to know the exact
amount of capital needed, different types of costs must be taken into account. Under different costs, we may find
promotion expenses, expenses to be incurred for installing fixed assets which are necessary to start the business
and capital required to keep the business going, i.e., the liquid capital known as working capital. Over and above
these costs, the cost of financing, i.e., the cost of raising funds must be taken into account. We may, therefore,
require funds to finance
(a) fixed assets (block capital),
(b) current assets (working capital), and
(c) improvements and extensions.
There are other objectives of raising capital and they are given below.
OBJECTIVES OF RAISING CAPITAL
(1) To have high-grade securities: The high grade securities can be had under conservative capital
structure which provides the concern advantages such as low cost financing, better scope for raising funds in bad
times, and can meet the unforeseen difficulties whenever they crop. Under conservative capitalisation, good
relations with shareholders are usually maintained. But for achieving these objectives, the company must take
into consideration the form of securities likely to be issued, the effect of the proposed securities on the company
and other securities likely to be issued, the effect of the proposed securities on the company and other securities
likely to be issued by the company in the near future. The company should also consider the possibility of
rearranging the financial structure of the company in the light of declaring dividends to maintain the position of
the company so far as its investment credit is concerned.
(2) To retain control: In achieving this objective, it is suggested that whenever the occasion for
issuing new securities arises, they should preferably be first issued to the old shareholders in proportion to their
holdings. This arrangement will facilitate to have relative control amongst the security holders. But, when the
security holders show their reluctance to invest their extra funds in the same company, the company in this case,
to maintain control can issue bonds or stock to other new investors without voting power.
To have simple capital structure: While raising funds, it should be borne in mind that the securities to be issued
should be manageable and unnecessary complexities should be avoided. It should be seen that the investors are
given a clear cut. idea about their rights as regards the securities they buy. This will not only popularise the
securities that are issued but will create a fund of confidence in the minds of investors.
(4) To keep the best security to the last: It should be the goal of any business concern to see that not only it gets
adequate working capital but also proper provision is made for getting funds to meet contingencies. So, the
company should keep in reserve the security that can easily be purchased by the public. This policy helps the
management to tide over the financial difficulties in bad times.
PATTERN OF CAPITAL STRUCTURE
(CAPITAL GEARING
After determining the amount of capitalisation. the question as to what type of securities arc to be issued and
what should be the ratio between them will arise. In other words, the management have to see to wiat extent the
capital is to be divided into equity shares, preference share :L. a: -)d .debentures. Finding out an appropriate ratio
between. these different types us securities is a complex job for the management. The maintenance of such a
ratio as between different securities comprising the capital structure is called Capital Gearing. It is said that
capitalisation is highly geared when the proportion of equity share capital in relation to the total capital
comprising the other securities is small and vice versa. It should, however, be noted that whenever the capital is
highly geared, equity shares become more speculative, as the holders of such shares can expect high return on
such shares. Because only a fixed amount in respect of preference shares and interest on debentures will be paid
out of profits leaving a major part of profit to he distributed among a few equity shareholders.
Really speaking, there is not a hard and fast rule for having capital structure in a particular ratio. It all depends
upon the nature of industry, size, prospects and market conditions under which a company is operating. A certain
rule suitable for one industrial unit may not be suitable to a another industry although the nature of both units is
similar. However, the management will have to see that the capital structure of a company is devised with
different securities in such a way that the concern can run its business smoothly and economically.
Taking into consideration the import Capital structure in acompany and the difficulties that one may have to face
in arriving at the appropriate ratio between different types of securities, we racy describe certain general
principle on which the pattern of capital structure can be had. The main principles governing the times of issue
and type of security are given below.
(1) Equity Shares: A company can issue equity shares during period of rising profits. Similarly,
such shares can be issued when there is no guarantee of earning definite profit.
(3) Preference Shares: Such shares can be issued when a convany finds that its yearly profits are
dwindling whereas it is quite confident that average earnings are fairly good.
(1) Debentures: A company will issue debentures when it finds it more economical to raise funds which
may help the concern to improve its earning capacity than to borrow funds from banks at higher rate of interest.
Particularly when a company wants funds on long-term basis, it resorts to the issue of debentures. Lastly, a
company can issue debentures only when it is possible for it to pay interest till they are redeemed.
It should however be noted that there is no restriction on any company in respect of issuing all the three types of
securities at one time. If a company desires, it can issue any number of securities on different occasions.
However, as a matter of policy or as a matter of common practice no new company will issue debentures to start
with but it may do so after getting itself well established in the field of business. Although We have derived these
principles, we find that sometimes market conditions have a dominant influence over pattern of capital structure.
For example, when the business cycle shows an upward trends (i.e., during boom period) investors will be
interested in buying equity shares for the simple reason that they can expect a high rate of dividend on their
holdings. On the other hand, when the business cycle shows a downward trend a period of depression the same
investors may prefer debentures as there is uncertainty of earning regular profits. But the influence of business
cycles may not be very effective and the above general rule may not hold good during a period when the
investors are liable to pay income tax at a very high rate. We should also further remember that these tax
considerations may compel companies to prefer the issue of debentures to equity shares even during prosperous
years. So, it may be concluded in the words of Gerstenberg that "the greater the stability of earnings the higher
may be the ratio of bonds to stock in the capital structure. Also the capital structure should be balanced with a
sufficient equity cushion to absorb the shocks of the business cycle and to afford flexibility."
For giving final shape to the pattern of capital structure it is necessary to know the different items for which the
total amount of capital is utilised. So, the capital is required for meeting:
(a) Promotion and formation expenses; (h) Cost of fixed assets;
(c) Regular working capital;
(d) Cost of financing; and
(e) Cost of establishing the business. Trading on the Equity
According to Charles W. Gerstenberg "when a person or a corporation uses borrowed capital as well as owned
capital in the regular conduct of its business he or it is said to be trading on equity." Realy speaking, trading on
the equity means taking advantage of equity shares issued by the company. In any company organisation, capital
can be raised by way of issuing equity shares, preference shares at a fixed rate of dividend and debentures at a
stipulated rate of interest. On this total capital which may comprise of borrowed as well as owned capital, the
company investing this capital is expected to earn profit at a certain rate. It should be noted that on borrowed
capital such as bonds, debentures and also on preference shares, company is expected to par a fixed rate of
interest and dividend. When this amount payable towards interest and dividend at a fixed rate is lower than the
general rate of earning on capital employed by the company equity shareholders under such circumstance will
get a larger share of profit in the form of higher dividends. This type of situation which brings out an advantage
of getting additional profit by equity shareholder over others is called "Trading on Equity." Where such cases are
possible, companies may be tempted to trade on equity. This can be best illustrated from the following example.
Total capital of the company is Rs. 10,00,000 comprising of:
(a) Debentures at 8% Rs.5.00,000
(b) 6% preference shares Rs.2,50,000
(c) Equity shares Rs.2,50,000
Let us presume that the general rate of earning profit of the company is 10%. So the profit of the company is Rs.
1,00,000 on capital of Rs. 10,00,000 at 10%.
Interest payable to debenture holders at 8% Rs. 40,000
Dividend on pref. shares at 6% Rs. 15,000
Rs. 55,000
Divisible profit amongst equity shareholders is:
Total Profit Rs. 1,00,000
Less Rs. 55,000
Rs. 45,000

Thus it can be seen that equity shareholders holding the capital amounting to Rs. 2,50,000 will get a dividend at
the rate of 18% as compared to 8% and 6% on debentures and preference shares respectively.
Limitations of Trading on the Equity
(1) The policy of trading on equity is conditioned primarily by stability and certainty of earnings. No
company with fluctuating income can adopt this policy as the yearly payment of interest on debentures and
bonds as well as repayment of principal amount on maturity is compulsory irrespective of profits earned or not.
Therefore only public utility concerns with their stable earnings are in a better position to adopt this policy than
that of industrials.
It should be noted that successive sums are borrowed at higher rates of interest as the lender of money finds
greater risk while advancing money at successive stages. As such, every additional borrowed capital becomes
uneconomical and may wipe off the probability of borrowing. Therefore neither bonds nor debentures which
involve payment of fixed rates of interest should be issued unless the estimated earnings will give a high
measure of safety.
(1) This policy cannot be practised when the company finds that the rate of earnings is less than the rate of
interest payable upon bonds and debentures.
CAPITAL BUDGETING
Financial planning and control are generally guided by the budget which is prepared, other factors being taken
into consideration, in accordance with the financial policy of the company. It is the policy of the company that
decides the next two or three years operations and on the basis of this, the budget is prepared coveting all
activities under existing conditions.
Persons in charge of production and sales will have to act as per the budgeting programme because any deviation
from the budget plans will upset the financial arrangements made in advance. In case, the expected results have
not been achieved, financial budget may be revised during the year so as to suit the changes that have taken place
in the business environment. The budgetary revision may lead to expected results. A policy giving proper
directions as to what to produce, how much and when and what alterations can be made in the sales programme,
will be an asset to all those who are concerned with effective employment of capital.
The next immediate issue will be which project is to be undertaken and which is to be rejected. To solve this
problem, a device called "Capital Budgeting" is followed.
Under this method, to start with, all major proposal including additions to fixed assets are thoroughly screened so
as to find out the quantum total investment on these proposals and their respective benefits. While analysing
these projects maximum care should be taken because the ultimate result can be no better than the data fed into
the process at the very initial stage. Therefore, the best way of screening out all proposals is to screen them not
consistent with production, sales, purchasing and personnel policies as well as general investment policies.
Next, the anticipated investment as well as results must be clearly expressed in terms rupees so that the company
may make "Additional Outlays" in case the project is put into action and can find "Additional Receipts" as a
result from the project. Having done analytical study in terms of outlays and returns, the proposals should be
arranged in order of merits, i.e., those showing the highest rate of return to outlay at the top and those at the
lowest return at the bottom. Finally, if the company finds that the available capital is exhausted or the predicted
rate of return falls below the minimum acceptable, the project may be withheld for the time being hoping to get
situation improved.
LEASING VERSUS PURCHASE OF FIXED ASSETS
It has been an experience of financial experts that long-term leasing is showing better results than buying of the
fixed assets adhering to the company's normal financial structure. Why leasing is preferred the reason being at
times it may be not prudent owning a building thereby blocking the capital or prospects of rapid expansion may
suggest some changes in asset commitments.
This method of leasing is a way of reducing the need for tying up capital in fixed assets. Under the leasing
system, the company need not invest its funds in fixed assets but whatever assets, the company needs, are
purchased by the leasing company for use on lease basis for a long period. However the rental charges charged
by the leasing are high enough to cover overall charges such as real estate taxes, depreciation, repairs and the
interest on the capital thus blocked. It should be specially noted that these expenses even the company would
have to pay if it had owned those assets. However, the difference between owning and leasing is that the
company need not show those assets leased nor the source of funds as liability in company's balance sheet when
it is using fixed assets under leasing method.
When the company needs peculiar type of asset, instead of taking it on lease, it may construct the same as per its
requirements and then Sell and Lease Bank. Under this policy the company gets its investment back from the
leasing company. Moreover, the company may enjoy an option to buy this asset specially designed exclusively
for its use, when the lease period expires at a depreciated value. From such provisions, one can see that leasing is
more like owning. In the same way, the investor (the leasing company) holds a strong position as a mortgage
holder. He is assure,, under leasing contract) of interest and return of his investment. So the firms that are
concerned with large assets resort to leasing instead of blocking capital in fixed assets. However, those firms
opting for leasing transaction should consider operating cost and the tax implication for a simple reason that long
term lease obligation is just like a mortgage obligation for the company. One should note that long term lease is
no doubt, a financial burden to the company and as such the leasing policy should not be constantly adopted.
Minimum Rate of Return
When capital is assigned to a proposal a minimum rate of return must be anticipated. It is felt that whenever new
investment is to be made in fixed assets, it must earn at least 10% p.a. after providing for taxes and depreciation.
What should be the rate of return must be decided and it will be purely a policy matter taking into consideration
various provisions to be made. Different companies may treat these provisions, viz., depreciation, taxes, interest
etc. in different ways, therefore, the anticipated rate of return may differ in different companies mainly
depending upon their respective policies. However, it is advisable that the policy should clearly indicate the
formula for achieving the minimum and this will avoid ambiguity or confusion in the minds of financial
managers.
For calculating the minimum permissible rate of return, the average cost of capital to the company is taken into
account. Under capital cost items like long term borrowing rate, the earning and price ratio on company's stock
are considered for amining at normal rate of return. This minimum rate is also likely to be affected by number of
other factors such as expansion programme availability of funds, future risks etc. Aparts from these risk factors,
company executives are generally optimistic while making any new investment in fixed assets. However, to be
on the safe side, the central management insists to have the minimum acceptable rate slightly higher than the
minimum theoretically calculated.
Sources of Finance
We have observed above that funds are required to finance (a) fixed capital, (b) working capital, and (c)
extensions and improvements. The sources that are tapped for these are share capital, debentures, public
deposits, managing agents, banks, "ploughing of bank profits" and the State the. loans from Industrial Finance
Corporation of India and State Finance Corporations. It should, however, be noted that the finance is divided into
(a) short-term finance and (b) long-term finance. The short-term finance embraces the capital required for
financing stocks of raw materials, stores, finished products and for meeting current liabilities. On the other hand,
the long-term finance is that capital needed for the purchase of fixed assets, viz., land, building, plant,
machinery, etc. The long-term finance is also meant for extensions and improvements. The capital invested under
the scheme of long-term finance is locked up for a fairly considerable period and it may not be easily possible to
convert the same into liquid capital, i.e., cash without affecting the business operations of the concern. The
agencies such as commercial banks, indigenous bankers and money-lenders and co-operative banks and societies
are the primary sources of supplying in short-term finance while the others along with these are the sources of
long-term finance. So, we will now discuss below these different sources of finance.
Shares
In a public corporation, equity shares are issued for raising the necessary share capital. They are deemed to be
ownership securities. When a company issues equity shares, it does not commit itself with the compulsory
payment of dividend. The equity shareholders, though they get first honour of subscribing to the share capital,
will be the last claimants when the dividend is declared. But the expectation of the higher profits of the company
is always matched with a higher return on such shares. So it is only during boom periods that the equity
shareholders will get the maximum benefit while they may have to go without any return on their holdings
during depression. So, those persons who would like to bear the "business risk" will buy equity shares and thus a
concern which has got a bright business prospect will find no difficulty in getting necessary share capital through
equity shares, although it may not be possible for the concern to declare dividend in the initial stages. Financing
a business enterprise through equity shares brings out a number of advantages.
Firstly, it provides "venture" capital even though the company has not started earning profits.
Secondly, bu issuing such shares, the company does not create any financial liability as the declaration of
dividend is purely voluntary. So, whatever amount of the equity share capital raised, entire profits earned may be
fully utilised in strengthening the financial position of the company. In thiS case from the point of view of
getting higher returns much more than one can expect from bank deposits or other investments the equity
shareholders will not object to the plan of retaining profits in the business.
Thirdly, whatever the funds raised by the issue of equity shares maybe they are not subject to refund during the
life-time of the company and, therefore, the company is assured in this case of permanent capital. Finally, equity
shares when issued, do not create any change against the assets of the company are existing maybe offered as
security for raising emergency funds.
However, financing a business enterprise exclusively through the issue of equity shares is not a healthy practice
as it is likely to affect the efficiency of the management on account of cliques of equity shareholders. Moreover,
excessive issuance of equity shares is bound to bring a set-back in respect of dividends to be declared in future
when the earning capacity of the company dwindles. Under such conditions, a concern is likely to come under
the state of over-capitalisation.
No-par Share
Under "no-par share" the dividend is not paid on percentage basis on the paid up value of the share but is paid at
the rate of certain amount on every share issued. Such shares are not common either in India or in England, but
are quite popular in America. The issuance of shares of no-par value in America helped the issuing concern to
escape from the liability of stamp duty. The introduction of shares of "no-par value" is based on the principle of
giving effect to changes in economic conditions. The business is dynamic and therefore, the value of sAiares of
no-par value. When no-par shares are issued, it is presumed that the value of assets is not inflated and, therefore
in the balance sheet of the issuing company "no-par value can be sold at any price and the liability of the holder
ceases when he makes the initial payment to the issuing company. It can, therefore, be seen that they are fully
paid and the value is not static. So it facilitates the task of fixing the price of shares under changing conditions.
Over and above this, the value of the shares is linked up with the earnings of the company with the result that the
shareholders will not find any difficulty in arriving at the real value of their shares. It should also be noted that in
the case of no-par shares, the question of reduction of share capital will not arise since the value of shares is
automatically adjusted according to the earning of the company issuing no-par shares.
Preference Shares
This is one more method adopted by a business concern is raising the necessary funds. The very name indicates
that such shares have got priority over equify shares and that preference is always given to preference
shareholders as to the payment of dividend, if declared, and repayment of capital in the event of winding up of
the company. Preference shares form a part of the share capital with a priority over equity share capital. But it
should be noted that the issue of preference shares gives no guarantee as to the compulsory payment of dividend,
while the holders of preference shares may have certain privileges so far their investments are concerned. The
preference shareholders, as said above, may have preference over the payment of dividend. The preferential Jaim
may be cumulative or non-cumulative and, in some cases, the preference shareholders may also have a claim to
participate in the profits of the company along with the equity shareholders. This claim may be in addition to the
priority claim that the shareholders enjoy. The preference shareholders are given an option to convert their shares
into equity shares at a later date if they desire to get benefit of higher returns. This option given to preference
shareholders not only encourages investors but helps the issuing company to raise funds even at its initial stage
without much difficulty.
Redeemable Preference Shares
Similarly, a company, in order to attract more investors towards its scheme of raising funds, can issue
redeemable preference shares, giving an assurance of redemption of such shares within a stipulated period. It is
considered by many through experience that this is a suitable method for raising semi-permanent finance. This
source is advantageous to the company, as it can redeem preference shares with high rate of dividend when the
rates of money market are favourable and thereby can get the advantage of low money market. It also enables the
issuing company to capitalise its reserves and surplus funds. A company issuing redeemable preference shares
will not be over-capitalised but at any stage, if it finds the danger of over-capitalisation, it can safely avoid the
same by redeeming such shares, as and when it deems fit. However, it should be borne in mind that the
preference shares in general are susceptible to capital appreciation and they can be successfully issued only to
those who decline to take risk in money market.
Debentures
Debentures are issued by a company whenever additional funds are required either for expansion or
improvement. The issue of debentures by the company is an acknowledgement of debt and it binds itself to repay
the same as per terms and conditions on which they are issued. Debentures may be secured or otherwise and
carry a fixed rate of interest which must be paid till the debentures are repaid. The amount of interest to be paid
on debentures is a change on the profit and loss account of the issuing company. So, we find that debentures
denote debt acknowledged by a company. They may be secured by a fixed or floating charge. When the charge is
floating, the company is not only at liberty to use its property covering the charge but also to deal in its property
while it is not so under a fixed charge. Over and above secured or unsecured debentures, a company may also
issue bearer and registered debentures. Bearer debentures are transferable by mere delivery while the transfer of
registered debentures must be registered with the company. The interest on registered debentures is payable only
to the registered with the company. The interest on registered debentures is payable only to the registered with
the company. The interest on registered debentures is payable only to the registered holders but for the payment
of interest to the holders of bearer debentures, coupons are annexed to the certificates which will be cashed by
the holders whenever interest falls due. It is necessary at this stage, when different types of debentures are issued
to know the difference between redeemable and irredeemable debentures. Under redeemable debentures, the
company raising funds through this source, gives guarantee to the holders that the principal amount will be paid
either on a stipulated date or on notice or demand. But in the case of irredeemable debentures, the issuing
company retains the right to repay at its own will. So, the holders of irredeemable debentures are deprived of the
right to claim the payment of principal amount during the lifetime of the company. The irredeemable debentures
become redeemable in the event of the company being wound up.
Importance of Debenture Finance
When debentures for raising funds are issued, the holders of debentures will not get any control over the internal
management of the company. Not only this, but the financial aid for the definite period is assured to the company
and, therefore, the company gets full scope for adjusting its financial plan. In addition to this, the company by
trading on equity can try to raise the return on equity shares. This will indeed attract those investors who are
willing to take risk. It Should also be noted that raising funds through the issue of debentures will not be difficult
for a company as it offers better security to the holders of debentures than to preference shareholders. For
instance, the holders of secured debentures know their exact security. Moreover, when the security given is good,
not only individuals but also institutional investors will not hesitate to buy debentures. However, an industrial
concern should not generally raise funds exceeding 20 per cent of the gross earnings through the issue of
debentures. Because every issue of debentures brings a financial burden for the concern and to maintain the
interest of shareholders, it is wise on its part not to depend too much on funds borrowed through the issue of
debentures. No doubt, a company having ample immovable property that can be offered as security and at the
same time, a capacity to earn regularly can make the issue of debentures popular amongst investors. This has
been noticed in the case of jute mills on account of their monopoly in respect of production and profits, while the
coal companies could not float debentures with such confidence and success as jute mills could do. The scheme
of finance through the issue of debenture has therefore proved great success in all enterprises showing greater
capacity to earn; so, new enterprises like iron and steel, shipping and sugar industries, railway and tramway
companies were more successful in floating debentures as compared with tea, coal and other organised
industries. It should, however, be noted that the part played by debentures in the scheme of financing industries
in our country is significant. The reasons contributing to the failure of raising funds through debentures are given
below:
Causes of Unpopularity
Firstly, Indian investors mostly have a tendency to invest in speculative securities rather than in those securities
that may give a steady yield. Debentures as such will provide little scope for capital appreciation.
Secondly, industrial concerns with their limited assets find it very difficult to make the issue of debentures a
success, as they cannot offer adequate security for the debentures to be issued to the public.
Thirdly, the attitude of commercial banks in India is also to a great extent responsible for the unpopularity of
debentures in out country. All the industrial concerns issuing debentures are looked down upon with disfavour by
joint stock banks. Further, a company which has already issued debentures finds it difficult to get further
accommodation from banks as they consider that the security of such a company is weakened due to the issue of
debentures which are treated as first charge on the property of such concerns.
Fourthly, absence of efficient trustee service and investment agencies such as Investment Trusts, Finance
Companies and Investment Banks.
Fifthly, the stamp duty on transfers of debentures, commission and brokerage, all these make the issue of
debentures costly.
Finally, no good response is noticed on the part of insurance companies to take up debentures.
From the point of investors, we also find that the debentures are issued with high denominations and hence no
common investor can buy them. Moreover, the terms and conditions on which they are generally issued are not
attractive. Similarly, they are usually bought by conservative investors who prefer government securities to
debentures issued by individual concerns which stand on the last rung of the ladder in respect of security as
compared to government bonds. Lastly, the present tendency of the investors is towards investing funds in
National Certificates and other various schemes proposed by the government. These are the factors responsible
for making the issue of debentures unpopular in Indian industries.
Financial Restrictions on Inventory
It is a usual practice in well-established companies to have policies with general restrictions on the total capital
amount invested in inventories. While investing on inventories, company should see that the size of the
inventories remains more or loss constant so that it may not have to face difficulties in financing accounts
receivables. But it may not be so stingy in the capital attraction for inventories when company mainly relays
upon service as one of its sales appeals. While putting any financial restrictions on inventories, the ratio between
current assets and current liabilities must be the guiding factor. Whatever restrictions to be laid down should be
therefore, tied in with the maintenance of a good "current ratio." It is this ratio alone determines the credit
standing of a company. If the inventories are to be purchased in large number on cash basis, then the effect of
growth in inventories will result into lowering the current ratio. Therefore, for the same reason that inventory
policies are deemed to be integral part of the company's financial structure.
To make the inventory policies more effective so as to maintain good current ratio, every care should be taken by
the management in respect of:
(a)checking on the speculative and obsolescence risks involved and
(b) seeing that inventories do not become so large that the financial programme is thrown out of
gear:
The management should, normally not encourage to have investments in inventories of speculative nature which
may likely to put financial burden over the company's financial structure. Even where it has adopted a
conservative inventory policy, continuous vigilance is necessary to see that capital invested on inventories will
not be a waste or inventories are not purchased more than the requirement of the company.
CREDIT POLICY
Extension of Credit
Granting credit to customers is a general feature of any business enterprise. Credit policies vary from industry to
industry and even in different localities. Where credit policies are conservative, losses on account of bad debts
are very negligible and thereby there can be no pressure over financial structure. But it should be granted so
cautiously that only potential customers with long business standing are covered under this policy. The credit
department cannot afford to be. completely independent. It should be consistent with other policies of the
company. It should be noted that credit policy cannot be rigid. It is normally flexible and subject to technological
changes, gravity of competition, industry norms, financial structure of the company and general economic
conditions.
Factors Influencing Credit Policy
The credit policy should generally he well-balanced. However, the following factors influence the credit policy:
(i) The cost of extending credit which includes interest, probable loss on account of bad debts and handling
expenses etc.
(ii) The net profit that is likely to be earned on sales resulting from the credit granted.
(iii) Credit period, i.e., the time duration within which, the customer is supposed to pay.
(iv) Cash discount terms granted not only to encourage customers to buy but also to make prompt
payments.
Credit standards which are determined by (a) willingness of customers to pay;
(b) customer's ability to pay; and
(a) general economic conditions.
Collection Policy
Credit policy involves consideration of total amount, type of customer to whom the credit is to be granted and
how and when the amount of credit is to be collected. When a little doubt is created about customer's ability to
pay, he will be requested rather reminded to do the needful through polite letters without getting business
relations strained. In spite of courteous reminders, if customer fails to respond favourably and the situation gets
tough, he may be threatened for legal action. When such action is to be taken, depends upon company policy and
it varies from company to company.
When the customer discloses o his inability to pay or is on the verge of getting his business liquidated, such a
situation being financially delicate, the financial manager may have to modify his policy by postponing the date
of payment particularly when such a customer shows his willingness to make at least part payment. Besides this
concession granted, company may mutually make an arrangement with the customer to manage the enterprise in
case the amount involved is large. Such a policy not only helps the company of getting full collection but also to
build goodwill among customers. This will finally result into a substantial volume of business fetching good
amount of profit for the company. In any case, the credit policy to be adopted should be based on cost of
collection and the net return.
MERGERS AND ACQUISITIONS
For any business enterprise, its growth in size and development in different phases of production and
administration are the matters of pride and this can be effectively put into practice by channelizing its capital into
different assets in a slow manner. The growth may be either slow or rapid and at the same time it may take place
both internally and externally. The internal growth of a firm is due to acquiring more assets with the help of
retained profits or from the external sources whereas external growth is purely based on acquisition of another
business unit.
As a matter of fact, in a merger "entire company is absorbed including its physical assets, its personnel and
much of its reputation without opportunity for managerial scrutiny of the usefulness of each part. In simple
words, one company losses its corporate entity. The company in which the other company merges, acquires all
assets, liabilities, personnel etc. of the merging company and altogether a new corporation is established
whereby the company whose assets and liabilities are taken over ceases to be running company. It comes to an
end knowingly under mutual contract between two companies. When merger takes place, it has its own effect on
the utilisation of capital so acquired and on sources of capital. Generally, for any single company, mergers are
uncommon but when they occur, they have outstanding effect creating major issues for the management and they
are:
(1) Reasons for entering a merger;
(2) Alternate ways to finance acquisitions; and
(3) Problems of Compatibility.
Reasons for Entering into a Merger
(1) Economic Benefits: Large shareholders want to convert their assets into marketable securities
or cash in view of inheritance taxes. They try to do so because of their old age or poor heath. If merger takes
place, they can reap the fruits of high price.
(2) Growth: It is a general tendency of a growing company to acquire large amount of cash or
marketable securities of declining firm. For tax reasons, owners of declining company prefer to hold stock and
not cash dividend.
(3) Tax Credit: When a company has accumulated a large tax credit because of heavy losses
suffered for several years prefers to merge with another company making high profits. Under this system, past
losses can be used to offset profits of the second firm and thus can avoid paying about half of the profits to the
government as income-tax.
(4) Listing of Shares on Stock Exchange: A small company when it intends to have its securities
listed on the stock exchange, may not be able to do so because of its size that is too small. So it merges with
larger firm and tries to get additional capital by listing its securities on stock exchange under the name of new
company at lower cost.
ALTERNATIVE WAYS TO FINANCE ACQUISITION
Merger in simple words is a result of financial negotiations in between two running companies. Merger can be
said complete only when financial negotiations are finalised by both the companies. Under financial negotiation
issues relating to liabilities, need for capital, tax positions, desire to withdraw or remain active and the like are
considered by the owners of the two companies. Having analysed these issues, their strengths and weaknesses
final shape to merger will be given. However, in a merger following elements are included with some variations
depending upon the market situation
PROBLEMS OF COMPATIBILITY
As stated earlier, merger is an outcome of deal negotiated between two independent companies involving
financial issues relating to assets and liabilities. It is said that merger is essentially a "marriage of convenience"
with all the risks of incompatibility and troubles in future. So, the problem of Compatibility, to certain extent can
be solved if merger takes place only when the situation is ripe. Therefore, it should be the duty of this
management to have proper amalgamation in its true sense to get anticipated benefits materialised. Even then
some of the frictions noted below give rise to the problems of Compatibility.
(1) Nature of Policies: New policies adopted by merged firm likely to differ so much that for want
of proper understanding, there is every possibility of being opposed by the personnel in the newly set-up
organisation. Conflicts ontrifling matters maybe so common that they make working together very difficult or
sometime impossible.
(2) More Affinity Towards old Methods: When merger takes place, the employees of the fusing
company if absorbed by the new company are generally reluctant to accept, at the initial stage, the new policies,
norms and methods of production adopted by toe new company. So to avoid friction, working personnel should
be properly motivated by experienced executive staff.
(3) Status Cult: It is likely that under new arrangement of merger if some senior executives are
either reverted or transferred to altogether different place or department, they may adopt negative approach for
each and every proposal put before their preventing thereby the smooth coexistence. Therefore, the management
by bypassing the weak ones should build a new team using those men who are experienced and efficient.
(4) Technological and Union Influence: When merger takes place, companies find it difficult
either to close down plant or to reasign the work among workers because of strong pressure from the union
leaders and effect of modern technology. Both these factors not only make coexistence uncomfortable but
hamper the speed of production making thereby merger unpopular.
(5) Break of old "Role Set": Under merger there will be a sudden change in the working
environment and people who were used to work under old conditions, norms and officials may feel
uncomfortable to work altogether under new environment and supervision. Such breaking down of the old "role
set" is not acceptable to a majority of workers. This factor may again give rise to some friction between workers
and the management.
We may conclude that mergers "occasionally provide of fast and economical way to move toward company
objectives, but they also take a lot of central management time to negotiate and to place on an operating basis.
Therefore, the anticipated benefits should be clearly appraised before such a major step is undertaken."
 PROFIT PLANNING
A business enterprise will always look at earning profit and to achieve this goal, a financial administrator should
have an effective plan. For preparing a, profit plan, following factors should receive due attention from those
concerned with planning for profits.
(a) Setting Realistic Targets: While planning for profit, financial administrator should first
consider the capacities of personnel working at all levels of organisation. Having considered this alongwith
other facilities required for successful operations, he can fix the target of profit. Care should be taken to sec that
the profit targets thus fixed are neither too high nor too low but are moderate so as to yield a fair return on the
investment made. They should be workable and within the reach of all those employed in the organisation and
in case he finds any impediments or obstacles in the operations directed for attaining the profit targets should be
removed at an early date. It should be seen as a prudent policy that no one in the organisation has to work under
undue pressure to attain the target of profit. Therefore, the best policy is first to consider: (a) ability of
personnel, (b) availability of resources, (c) role of competitors and (d) the immediate past performance and then
only fix the profit target. It should be seen that the profit targets fixed are workable and not imaginary ones.
(b) Decentralisation of Profit Responsibility: In the policy administration it is experienced that
unless and until some people at middle and top levels of management are held directly responsible for a fair
return on the capital investment made under their jurisdiction, no profit targets can be achieved. If this is so,
certain powers should be delegated to them to carry on the work so as to achieve the predetermined profits. This
amounts to decentralisation of profit responsibility making them accountable if predecided targets of profits
have not been achieved. It is in this regard, that policy decision is necessary to determine to what extent the
powers are to be delegated. The degree of delegation of powers and responsibility is bound to differ from person
to person as they enjoy different status in the organisation. So, the management will find it difficult to allocate
profit responsibilities. Nevertheless, management will experience difficulties regarding the standard rate of
return, differentials in profit earning capacity of different departments and difficulties in exceeding the current
rates of return. When profit responsibility is given to say a departmental head, he may react adversely. Any
additional investment proposed by management may he rejected by divisional manager who is already showing
higher rate of return than the standard rate fixed by management. Again profits earned by different departments
are bound to differ depending upon the type of plant and machinery they use. Further, those departments that are
showing higher profits may not work hard and thus the whole policy of assigning the profit responsibility
divisionwise may not hear any fruits. So, the finance administrator should consider all these limitations before
decentralising profit responsibility which should be administered in a typical manner with clue consideration to
the performances of different departments.
Business Risks and Insurance: No firm can undertake any type of business without risks; and the success in
business lies, apart from other reasons, in facing the risks effectively or reducing their impact on business
activities to the minimum. I i. s.re can be risks on account of (a) sudden declaration of employee strike, (b) thefts
and fire either in the factory or godown, (c) earthquakes, (d) depression impact on sales and (e) competition. The
financial policy makers while determining the exact policy for the firm should take into consideration all these
expected risks and make financial provision for meeting such contingencies. Policy should also guide as to what
steps are to be taken or can be taken in the event of occurring such risks. In case no financial provision is made
and no measures are suggested, it is likely that the financial plan of the whole firm will be out of gear.
So for covering such risks and to see that on this account the firm's financial position will not get disturbed
financial policy should have provision for insuring business risks that are invariably common in any type of
business. The firms should insure its building, finished goods, raw materials, etc. against thefts and fire or losses
on account of acts of God. Even the worker's interest can be insured by taking advantage of Employee's State
Insurance Scheme and Workmen's Compensation Insurance. Any losses likely to occur due to seasonal or
cyclical fluctuations can also be insured and thus the risk hazards can be avoided without affecting the financial
position of the firm. Besides going for insurance, some managements may set aside some amount per annum or
create a specific reserve fund to this effect. A further wise step that is generally proposed to avoid risk hazards is
to diversify the product lines by scattering the operations to different locations. All these need a well drawn
policy and the policy-makers.should be aware of all pros and cons of the various financial measures they propose
to put into effect in case any risk occurs.
POLICY DECISION REGARDING CAPITAL SPENDING
After making necessary provision for working and fixed capital, the next problem that the administrator has to
face is of raising funds for expansion and reorganisation of his firm. How to raise, through what sources and at
what cost is a matter of policy decision he is expected to follow. But it is certain that funds are needed for
spending while the firm grows in size. Funds may be thus needed for expansion of production, distribution and
office facilities. When plant and machinery becomes obsolete due to wear and tear it should be replaced by new
one or to increase operating efficiency or output due to heavy demand, instalment of new machinery is inevitable
and this problem demands additional capital spending.
To see that adequate capital will be available for spending on various heads under expansion programme the total
amount should be budgeted and properly controlled by the financial administrator. The normal practice followed
in this regard is to create a special reserve fund by setting aside the amount that may require to replace
machinery or to expand other facilities. The total amount of such fund is subject to alteration as per the needs of
the firm and, therefore, the financial policy should give necessary directives to the administrator. Under the
circumstances he is expected riot to spend capital on items that do not justify spending. Where he is anticipating
requirement of huge amount for spending on large-scale replacement of facilities he may even think of issuing
additional shares or debentures. However, it should be done in accordance with the policy decisions. Financial
administrator can acquire certain assets needed under development programme by purchasing the same under
hire purchase system. It all depends on what provision is made in the budget and accordingly capital can be spent
but while spending it should be seen that equipment is acquired at the minimum cost irrespective of mode of
payment made. Therefore, the financial administrator should consider all alternatives before spending and see
that equipment thus purchased will lead to optional investment.
Ploughing Back of Profits
Under this arrangement, profits earned by companies, instead of distributing the same to the shareholders in the
form of dividend are retained in the business as additional capital. When such undistributed profits are retained
and used for meeting capital requirements for expansions and improvements, the process is known as "internal
financing" or self-financing." This method, at the first glance, may dissatisfy the shareholders who may have to
go without dividend, but in the long run, it proves its worth in the interest of the concern and investors as it is
one of the cheapest and most convenient methods of securing capital. For implementing this scheme, the
enterprise need not undergo any formalities and difficulties that are common while borrowing funds under other
methods. When this methods is to be followed, the company should see that it follows a conservative policy so
far as the declaration of dividend is concerned. All reserves and divisible profits by means of a hook-entry can be
retained in the concern and may be used as working capital. If all the profits earned during the prosperous
periods are retained in the business, it will help the retaining concern to escape from adverse effects of
depressions and it is considered that in case in this method is effectively put into practice, it can dispense with
the finance supplied by managing agents and other investors. It is worth noting that self-financing has
contributed its mite to supply working capital in number of existing industrial concerns. Even the government in
our country has taken several measures towards the goal of encouraging "self-financing." The various measures
adopted by the government are directed "on the one hand, to increase the quantum of profits through the
provision of additional depreciation allowance, development rebates on undistributed profits, and on the other
hand to prevent an excessive distribution of profits by dividend limitation, progressive taxation of divided or by
compulsory deposit of company reserves."
As regards the actual contribution of this source of finance in the existing concerns, it is pointed out by the
Taxation Enquiry Commission that, during 1946-51, the industrial concern raised about two-thirds of additional
capital from self-financing. While it was about 35 per cent during 1950-51 self-financing contributed 80 per cent
of additional capital during the First Five Year Plan. From tills, one can see that the "self-financing" scheme is
gaining in popularity :amongst the industrial concerns.
Merits and Demerits
Firstly, retaining profits in the business, improves the financial position of the concerns and makes the concern
free from all problems and complication inherent in borrowing funds.
Secondly, the concern interested in the method of self-financing can increase its profit by replacement of
equipments and thus can pay a stable rate of dividend.
Thirdly, the concern can enjoy freedom in respect of finance as self financing method helps it to escape from the
clutches of managing agents and indigenous bankers.
Finally, it helps the company to earn more profit, the benefit of which is given to the shareholders who can get a
higher market price for share if sold or can .t.alisc enlarged profit if shares are retained.
On the other hand, ploughing hack of profits may result in overcapitalisation of the company particularly when
the directors are overarrita tious. Similarly, those shareholders who are not personally interested in the company
but are eager to have regular return in cash on their investments will be disappointed if the concern sticks up to
take policy of self-financing for a fairly long time. Lastly, as pointed out by S.S. Chatterjee, excessive ploughing
back of profits may give an impetus to the so-called "industrial demagogues" to create their own industrial
kingdom against the interest of the community. So, if this policy is used with proper precautions, our industries
would, no doubt, he free from the financial exploitation by managing agents and others and can develop a system
of internal finance by standing on their own legs. Therefore, if implementation of this method is undertaken with
due care and precaution, it can be considered as one of the safest methods of financing industries in our country,
when capital market is yet in its infancy.
RESERVE AND DIVIDEND POLICY
A successful company is faced with the conflicting issues of reserve creation and dividend declaration. These
two are tied up together, the one depending on the other. More the reserves a company wants to create out of
current profits, less the dividend declared and vice versa. However, it is in the interest of the company to
formulate a prudent dividend policy, that will enable it to build up adequate reserves and at the same time satisfy
the shareholders. These two tasks are not so simple as they appear to be.
It is quite natural for the shareholders to expect the maximum returns on their investments, At the same time,
they will be unhappy if the rate of dividend goes below the rate of interest prevailing in the money market.
Dividend declaration is a discretionary power left with the board of directors. The shareholders, legally speaking,
have no right to demand a rate of dividend higher than that recommended by the Board. Nor they can insist upon
the payment of dividend if no recommendation is made by the board for such payment.