Understanding Business Organization, Localization, and Capital Planning
1.2.3 Partnership Firms
Partnership firms are the second form of commercial organization. They came into existence because of the limitations of the sole trading concern. As businesses grew and developed, they also became more complicated. It became increasingly difficult for a single person to handle and manage the entire business alone. As the scale of business grew, the need was felt for large capital and more efficient and professional management. It was not possible for a sole trading concern to have either large capital or professional management. It became difficult to control all the activities. So, the need was felt for more persons to contribute more capital and managerial abilities. Thus, several individuals came together to start businesses, leading to the partnership firm.
Features of Partnership Firms
Let us study some of the important features of partnership firms.
(1) Two or More Persons
In partnership firms, there are two or more persons who come together. One person cannot form a partnership firm. An agreement must take place for the formation of a partnership firm, and for an agreement to take place, there must be at least two persons. A minor cannot form a partnership firm because a minor cannot enter into an agreement.
(2) Number of Members
According to the Partnership Act, there is no limit to partnerships, but according to the Company Act, in the banking business, there can be a maximum of 10, and in other businesses, a maximum of 20 members are allowed.
(3) Unlimited Liability
Similar to a sole trading concern, the liability of a partnership firm is unlimited. If the partnership firm comes to an end and business assets are insufficient to cover business liabilities, the personal assets of partners can be used. This means the liability of the partnership is unlimited.
(4) Earn Profits
The main objective of a partnership is to earn profits. Charity is not the objective of a partnership. It may incur losses, but profit is its objective.
Social Problems
The development of underdeveloped nations depends upon economic factors, social structure, society, environment, etc. The following factors adversely affect industrialization.
(1) Growing Population
The population is ever-increasing in underdeveloped nations. But land or industries do not increase in the same proportion. Thus, problems of unemployment increase. People depending on agriculture increase. All this creates temporary unemployment, disguised unemployment, etc. These people cannot be absorbed into industries. There is no rise in the incomes of people, or their savings, and no capital investment as well. Even though a rising population leads to more availability of manpower and demand, it is necessary to keep the population limited.
(2) Problem of Manpower
Manpower increases due to the rising population. But most of this workforce is inefficient and uneducated. A trained and skilled workforce is not available for industrialization. Most of the workforce comprises migrants from villages, and they cannot adjust to the city culture. These are always looking forward to visiting their homes in the villages, and thus a permanent workforce is not available. Housing problems in cities also increase absenteeism in labor.
(3) Dearth of Entrepreneurs
Industrialization demands business leadership. A courageous, dynamic business class is required. But in underdeveloped nations, this class is not much prevailing. The lack of training facilities also hinders professional knowledge. Thus, there is a dearth of intelligent, capable, and dynamic entrepreneurs.
(4) Social Structure
Social structure also creates obstacles in industrialization, e.g., the caste system, traditions, joint family businesses, etc. Individuals lack initiative due to the joint family system. They are not ready to take risks and move from one place to another. The caste system also hinders progress. Traditions also hamper progress. Superstitions and other beliefs too hinder progress. People prefer to invest in gold, silver, land instead of capital investment. Thus, there is less capital formation.
3.2.4 Solutions to Regional Imbalances
Some measures can be suggested to reduce the intensity of regional imbalances as follows:
(1) Criteria for Backward Regions
Some basic criteria must be laid down to decide which regions are industrially backward or otherwise so that measures can be implemented.
(2) Provision of Basic Facilities
Basic facilities must be provided in the regions to have industrial progress. These include roads and transport, communication, water supply, electricity, warehousing, etc. It is primarily the government’s responsibility to provide these facilities.
(3) Technical and Economic Research
Technical and economic research must be undertaken to find out businesses that can be commercially viable in backward regions. This will provide a basis for probable industries.
(4) Local Leadership Development
One question that arises while setting up industries in backward areas is whether its economic and industrial progress will remain in the hands of people outside the region or local people should take the lead. Research must be undertaken, and training programs must be conducted to give a boost to new leadership.
(5) Tax Benefits and Financial Assistance
Tax benefits and other benefits could be an important tool to reduce regional imbalance; e.g., for industries set up in backward regions, financial assistance can be provided, some reduction in duties and octroi can be given, etc.
(6) Technical and Professional Education
Facilities for technical and professional education must be provided in backward regions. When opportunities are provided for the enhancement of skills, the region can develop industrially and economically.
(7) Independent Development Programs
Independent programs must be executed for the planned development of backward regions. These programs must primarily benefit the region. Social and economic programs to benefit certain tribes or backward classes, women, etc., must be laid. Basic facilities must be provided. In all these efforts, other organizations can also contribute along with the government.
Advantages of Localization
Advantages of localization can be stated as below:
(1) Cheaper and Convenient Procurement of Raw Material
If localization is done in the right way, then raw material required by industries can be conveniently purchased and at lower prices. This reduces the cost of production. Raw material purchased together will be of good quality, thus the quality of finished goods will be good.
(2) Profitable Purchase of Equipment and Machinery
If the equipment needed to set up an industry is purchased in a lump sum, it can be procured at a low cost. Equipment and machinery can be of good quality. This increases production and leads to high profits. Workers can be paid good wages. Trained and experienced workers can be employed, etc. advantages made available.
(3) Employment Benefit Schemes for Workers
Because of the localization of industries, workers are available on a large scale. Since a single type of worker is available in abundance, it becomes easy to train them. Programs can be devised to best utilize their skills.
(4) Goodwill Established Through Team Effort
Due to localization, industries of a similar type are located at one place. An association of such industries is formed. This association can help to solve the problems of industries. Finished goods can be centrally sold. This helps to increase profit margins, and consumers get goods at reasonable prices. The quality of goods is also maintained. Thus, it helps both businessmen and customers.
(5) Division of Work
One of the major advantages of localization is that the division of labor is possible according to the skills and abilities of workers. The number of workers is on a large scale. There are intelligent, trained, and capable workers. Appropriate division of labor can be done. Workers too are motivated as they get work according to their abilities.
(6) Pollution Control
Industrial estates are established away from cities. As industries are away from residential areas, cities are not affected by polluted air and water from factories. Thus pollution is controlled, and there is no risk to the health of society. This is an important advantage of localization to all.
2.2.2 Need for Decentralization
Economic stability can be achieved in a widespread country like India only if there is balanced industrial development in all regions. Dr. Radhakamal Mukherjee has made the following observation, “There should be a national finance scheme for the progress of the country in independent India, and along with the progress of transport and communication and power, there should be scientific decentralization for the nation’s progress.”
Initially, industrial progress in India was unplanned and unbalanced. Financial advisor of the Indian government in 1945, Dr. P. J. Thomas, has said that the distribution of industries was done in an unplanned way and without any basis. But when India adopted a socialistic pattern of society and chosen the road of a planned way, it became necessary to have balanced industrial growth.
In the second 5-year plan, a survey was taken to find imbalanced industrial development, and it was stated that in an underdeveloped region, special plans must be introduced on a scientific basis. Even in the 1956 industrial statement, it was specified to reduce the regional imbalance of industries. It was said in this statement, “It is necessary to reduce the inequality of distribution of various sectors to progress financially through industrialization.”
In short, decentralization is important on the following grounds:
(1) Optimum Utilization of Local Resources
Resources available in different places in the country should be optimally utilized. That will lead to employment opportunities, a rise in income, and financial stability.
(2) Balanced Industrial Development
Industries should be developed in all regions. No part of the nation should be without industries.
(3) Self-Sufficient Rural Areas
Decentralization of industries helps to bridge the gap between rural and urban areas. Rural areas become self-sufficient, and it will help to reduce population problems in cities, and people will not migrate from villages to cities.
3.2.3 Importance of Small Scale Industries in the Economy
(1) More Employment Opportunities
The question of unemployment is severe in India. Capital is limited, and there is a need to increase industries requiring less capital. This will increase the income of people. Therefore, small-scale industries are important in India.
(2) Regional Equality
India has not progressed equitably. In regions where industrialization has taken place, they have become economically strong, and others where there is no industrialization have remained economically backward. If equal development opportunities are provided to the people of all regions, regional imbalances will be reduced. For this, cottage and small-scale industries must be encouraged.
(3) Development of Agro-Based Industries
India is even today recognized as an agricultural economy. But we cannot depend only on agriculture for economic progress. Along with agriculture, agro-based cottage and small-scale industries must be established.
(4) Optimal Utilization of Natural Resources
Natural resources of a country must be optimally utilized. That will increase production capacity and generate more employment. The standard of living of people will improve. This optimal utilization of resources is possible by establishing cottage and small-scale industries.
(5) Encouragement to Different Skills
In rural areas, there are different types of skilled artisans. Their skills must be encouraged, and they must be provided employment opportunities. This will improve their economic position. Thus, many cottage and small-scale industries must be set up in rural areas.
(6) Stop Migration to Cities
If in the rural areas, cottage and small-scale industries are set up on a large scale, it will provide employment opportunities, and people will not be attracted to cities for jobs. This will reduce the problems of urban areas due to migration and make the rural areas self-sufficient.
What are the Objectives of the District Industries Centre?
District Industries Centre (DIC)
The state government has established DICs for small and medium industries in rural and urban areas, on a district level, and DIC provides all services prior to setting up, during setting up, and after setting up industries.
Objectives of DIC
While establishing these centers, the following objectives were kept in mind.
(1) Decentralization of Industries in the Country
The main objective of DIC was decentralization. Thus, industries are to be established not just in one region but in different places and regions. Decentralization helps in the development of all regions and equality in them.
(2) Removal of Regional Imbalances
Due to the centralization of industries in a particular region, that region makes more economic progress. This progress does not mean the progress of the nation. If decentralization of industries is adopted, such regional imbalances cease to exist.
(3) To Solve Problems of Cottage and Small Industries
This too is an important objective of DIC. There is no favorable environment and necessary liabilities in villages and backward regions. Thus, industries have to face a lot of problems and become sick. For this, DIC studies the particular region and helps to solve such problems. They provide facilities like the provision of raw material, regular water supply, financial help, necessary land, sale of finished goods, etc.
(4) Creation of Employment Opportunities in Villages
The main objective of DIC is to provide employment opportunities in rural areas. There is no full-time employment in agriculture. Thus, people stay unemployed for 5-6 months. To overcome this, DIC has started small businesses in rural areas to provide whole-year employment to people.
1.2.2 Factors Affecting the Size of an Industry
(1) Capital Investment
Capital, fixed and working, in the industry and their relation to the total capital structure, is the primary yardstick to measure the size of the industry. It’s difficult to calculate in figures the capital invested in business. But in general, total capital can be estimated in figures after considering personal savings, bank loans, financial facilities made available by banks, and reinvestment of funds, etc. Similarly, it is also to be considered whether the industry is capital-intensive or labor-intensive. Generally, in big industries, fixed capital is more, but in small-scale industries, the extent of working capital is more. Hence, big industries face a break-even point position later from their commencement, but in small-scale industries, it comes early.
(2) Employment
The size of an industry depends on the employment available to several persons at different levels, like workers, supervisors, administrators, and managers, and their scale of salary. But to study the above, production techniques are also to be considered. An industry is capital-intensive if production is with the help of modern machines and techniques. In capital-intensive industries, there is less availability of employment, but it does not affect production.
Similarly, with the increasing size of the industry, more workers are accommodated. A comparative study of the growth rate and the rate of increasing numbers of workers is to be made. Sometimes mechanization saves labor. Hence, at the initial stage, the government, on defining small-scale industries, has taken into consideration factors like the number of workers and consumption of electricity.
(3) Consumption of Electricity and Fuel
Consumption of electrical units in running the machinery in factories of an industry may decide the size of the industry. More consumption of electricity shows a greater size of the industrial unit or vice versa.
(4) Proportion of Consumption of Material and Its Value
Greater consumption of material is an indication of the big size of the firm. Hence, a comparison of the proportion of consumption of material between two firms indicates the size of the two firms. For example, the size of sweets-producing firms can be shown by milk consumption in liters by them. Sometimes the value of material consumption is also to be considered.
2.2.6 Disadvantages of Industrial Combination
(1) Creation of Monopoly Through Combination
The producer, by controlling the supply of goods, can effect an artificial rise in the price of a product and try to maximize his profits. In this, the consumer suffers losses.
(2) Creation of Centralized Financial Power
Gradually, the producer becomes wealthy and prosperous. All capitalists, by organization, try to have their control over the nation’s financial nerve. The political and financial policies of the nation are implemented for the benefit of the capitalists, and the interests of ordinary people are neglected. It increases exploitation and financial inequalities.
(3) Decay of Small Firms
Small producers find it difficult to stay in the market. Industrial democracy remains a dream only.
(4) Obstruction to New Producers
New producers are not allowed to enter the market. In their path, many difficulties are created purposefully. It results in the stopping of national creative entrepreneurship.
(5) Decay in Industrial Development
On the creation of a monopoly, producers leave the efforts of technical reforms and improving the quality of the commodity and supply low-standard goods to customers. It lowers the speed of industrial development.
(6) Decay in Efficiency
There can be inefficiency and mismanagement in all functions if, through combination, the size of the firm becomes excessively big than expected or wanted.
(7) Scope for Corruption
Combination increases political corruption. Due to unlimited financial power, efforts are made to purchase people’s representatives and government officers.
After taking into account all the above shortcomings, monopoly restrictive laws are made in capitalist countries to avoid all such risks.
Features of Ideal Capital Planning
The success or failure of any industry depends upon its capital planning. The management must take into account all related factors to make it more accurate. The following factors are to be considered, for ideal capital planning of any industry.
(1) Simplicity and Ease
The capital plan of any industry should be simple to follow and easy to understand. It means that the nature of the capital plan should not be complicated and difficult to understand. In the initial period, the types of securities, like shares and debentures, kept for sale by the directors must be limited. It makes it possible for the investor to decide the type of securities to be purchased. Hence, the capital plan must be simple and easy.
(2) Foresight
It is not only the present but also the future expansion plan of the business to be taken into account on the preparation of the capital plan.
(3) Proper Use of Capital
It is necessary to see that the company uses the collected capital toward proper activity and to the required extent. Then only the maximum use of capital will be possible.
(4) Elasticity
The company’s capital plan must be elastic. Elasticity means that it is the capacity to make the supply of capital more or less according to changes in the requirement of capital as per the ever-changing situation.
(5) Liquidity
The company must have liquid capital like cash, bank balance, debtors, stock, bills receivable in adequate proportion. Because there is a danger of a bad reputation in the market if it is not possible for the company to satisfy its debts in time. The proportion of liquidity depends upon the nature and size of the industry.
Need for Special Financial Institutions
In India, there is a need for special institutions supplying capital to industries because of the following:
(1) Low Rate of Capital Formation
In India, there are plenty of natural and human resources. But as these resources are not fully utilized, the national income of the country is low. Similarly, the per capita income of the citizens of the country is very low because the distribution of national income is unequal. The result of this is that the rate of savings and the rate of capital formation are very low. Due to the low rate of capital formation in the country, big industries have a shortage of capital.
(2) Investment of Capital in Unproductive Work
In India, due to the unequal distribution of national income, few individuals have capital accumulations. Due to the conservative attitude of rich people, the capital is used by them in unproductive purchases like gold, land, buildings, etc. Hence, capital is not supplied to industries.
(3) Shyness of Capital
There is a risk in investing capital in industries. Besides this, it is not easily possible to withdraw capital invested in industries. Hence, capital cannot be diverted to new industries. It is called capital shyness. Due to the shyness of Indian capital, it is easily diverted from unproductive use to the productive use of it.
(4) Unorganized Money Market and Capital Market
Short-term capital is supplied from the money market, and long-term capital is supplied from the capital market. In India, there is an absence of an organized and developed money market and capital market. Hence, the need for industrial capital in the country cannot be completely satisfied. Hence, there is a need for special capital-supplying institutions in the country.
(5) Limitation of Banking System
In the country, there is a dearth of industrial banks to supply long-term capital to industries. There are many commercial banks. But these are not ready to supply long-term capital. In this way, there is an absence of coordination between the industrial sector and the banking sector. Therefore, there is a need for special institutions supplying capital.
Sources of Fixed Capital
(1) Shares
After calculating the total requirement of capital, a decision can be made about the amount of shares to be issued. This can be done from time to time.
(2) Debentures
It is an agreement between the debtor and the creditor. They include the terms of interest and repayment.
(3) Public Deposits
The investor trusts his money to the entrepreneur for a certain period. He receives interest on that amount.
(4) Capital Through Various Organizations
The central and state governments have established some organizations that provide capital to industries.
Sources of Working Capital
(1) Private Loans
These are loans taken from moneylenders or from a particular investor. This has become a common system of acquiring funds.
(2) Banks
Banks are the prime source of capital. They also provide various facilities to businesses.
(3) Various Institutions
Institutions like SICOM, Industrial Development Banks, Industrial Finance Corporations, etc., provide working capital for a business.
(4) Shares, Debentures, and Public Deposits
Shares, debentures, and public deposits can also serve as sources of working capital.
(5) Advance Payments and Reinvestment of Profit
Sometimes customers pay in advance to continue production. Even the system of reinvesting profits works as a source of capital.