Unit - 5
Marketing and Financial Management
Q1) Define Market.
A1) Traditionally, a market is a physical or a meeting place where buyers and sellers gather to buy and sell products and services. These markets exist for products/services that are daily necessities like fruits, vegetables, fish, garments, electronic goods, etc. The transaction for these necessities happens directly with the buyer, which also includes a process of bargaining.
Modern markets are not different from traditional markets except the market need not only be a physical place. Modern markets act like facilitators that allow buyers and sellers of a product or service for exchange. Modern markets can include products/services which are daily necessities along with durable items like plates, knives, fans, etc.
For example- supermarkets (Big Bazaar), hypermarkets, minimarkets, etc., provide all products / services under one roof at fixed prices. Modern markets however, do not allow bargaining like in traditional markets but are considered to be relatively cleaner environment than traditional markets. Modern markets also include online shopping for food (Big Basket), clothes (Myntra), etc., which focus on convenience at prices usually higher than traditional markets.
Market Concept:
The time period "Marketplace" has 3 ideas:
- The idea of area:
The market is a convenient meeting area for customers and sellers to get collectively and purchase and promote. As an example, spot, coins or bodily markets, wholesale or retail markets.
2. Market Idea:
Markets, large and small, have a tendency to have the capacity to rate deliver and demand freely thru the latest means of communique including telephone, telex and telecommunications, and informed consumers and dealers are carefully established. This is the vicinity in which you can do it. With continuous contact to maintain the trade of products and services without formal face-to-face conferences in such markets, charge uniformity can be effortlessly mounted on a location-by way of-place foundation through transportation and in time via warehousing.
In this sense, we have home or international markets for plenty commodities. That is the economic concept of the time period "market". In that experience, a place of interplay isn't critical, it's miles just a count of convenience. As an example, the cash market is a relatively prepared marketplace for the complete united states of America, and there is no primary region for cash debtors and creditors.
3. Call For Concept:
The term marketplace is also used to describe client demand. In this sense, a marketplace way people who need to fulfil, the cash they spend, and people who're willing to spend money to meet their goals. People are yearning animals that have infinite, various, and ever-changing dreams.
The procedure of wants delight is ongoing, and under fierce competition, dealers want to create, capture and maintain a market for their merchandise (patron demand). The seller may be priced from the marketplace if there's no demand for his product. Each product has a life cycle. What become popular the day gone by might not be famous the following day.
- A set of all real and ability shoppers of goods and offerings.
- The vendor gives the product / carrier and communication. In return, they acquire cash and records from buyers and markets.
The definition of advertising and marketing starts with narrowing down by total population and stage. There are various phrases used to recognize those levels.
- Capability market. it's miles the total populace of the marketplace that is interested in purchasing items and offerings.
- To be had markets. all and sundry in a ability marketplace who have enough cash to shop for a product or service.
- Eligible to be had market. humans within the to be had markets who are allowed to purchase to be had products and services.
- Goal marketplace. It's miles the to be had market segments that organizations are prepared to serve.
- Penetrated marketplace. Goal advertising customers have bought services and products.
Q2) What are the features of marketing?
A2) Some of the basic features of marketing are:
1. Customer focus:
The marketing function of a business is customer-centric. We check the needs of our customers and produce products accordingly. The existence of a business depends on human needs. In a highly competitive market, the most suitable product for a customer is a widely accepted product. Therefore, all business activities are customer-oriented.
2. Customer satisfaction:
The customer expects some service or benefit from the product for which payment is made. If this benefit is significant, the customer is happy. In the long run, customer satisfaction helps maintain market demand. Helps achieve the goals of the organization. Customer satisfaction is often improved by providing value-added services, such as providing additional facilities at little or no additional cost.
3. Goal orientation:
All marketing activities are purpose-oriented. Different purposes are fixed at different levels, but the main purpose is to benefit the business as well as satisfy human needs. The marketing activities carried out by the seller strive to find the weaknesses of the existing system and take measures to improve the shortage to achieve the purpose.
4. Marketing is both art and science.
Art refers to the specific skills required for marketing activities of all kinds of businesses. Science refers to a scientific body of knowledge based on facts and principles. Marketing concepts include a lot of social sciences such as economics, sociology, psychology, and law. It shows market management based on several principles. Therefore, marketing is both science and art.
5. Continuous and regular activities:
Marketing is an activity aimed at product planning, pricing, promotion, and distribution. At the same time, it caters to both current and future consumers. Therefore, it is an endless process. Marketers need to monitor their environment consistently. This helps create new products.
6. Replacement process:
Marketing involves the exchange of money-based products, services, and ideas. The exchange takes place between the seller and the buyer. Most marketing activities involve the exchange of products. Features such as distribution, after-sales and packaging are useful within the replacement process. Distribution channels and logistics play an important role in the exchange process by creating the utility of the place.
7. Marketing environment:
Economic policies, market conditions, and political, technical, demographic, and international environmental factors influence marketing activities. Marketing activities are inseparable from such environmental factors. Successful marketers need to adapt to these changing factors and adjust their marketing strategies as new markets evolve.
8. Marketing mix:
The combination of the four inputs forms the core of a company's marketing system of products, prices, locations, and promotions. The marketing mix can be a flexible combination of variables. They are subject to consumer behavior, trade factors, competition, and government regulatory measures.
9. Integrated approach:
Marketing activities need to be coordinated with other functional areas of the organization. Functions such as production, finance, and research. Purchasing, storage and public relations (PR) are integrated with marketing. This can help you reach your organization's goals. Otherwise, it will end up in an organizational conflict.
10. Commercial and non-profit organizations:
As the concept of social marketing is becoming more important, social marketers are finding useful new ways to apply marketing principles. Commercial organizations also employ cause-related marketing to build long-term relationships with consumers. Corporate organizations such as educational institutions, hospitals, religious institutions, and charitable trusts have also found significant uses in marketing. Therefore, marketing can be applied to both business and non-business organizations.
11. Before and after production:
Identifying consumer needs and needs is a key task for marketing managers. Production activities are adapted to the needs of those consumers. Therefore, marketing precedes production. Marketing helps in the distribution of products following production. Therefore, production activities and marketing activities are closely related.
Q3) What is the exceptional advertising strategy to apply?
A3) Most businesses face demanding situations. It is catch 22. It is clean that visibility wishes daily be expanded everyday enhance income. But daily get more visibility, groups day-to-day spend more money. What are you speculated to do while the nicely is depleted?
There may be no clean and clean solution day-to-day that query that covers all conditions. But these days, even a small budget can be done every day reach greater daily without breaking the financial institution. But it's all summarized in time. In case you don't have enough money, you've got plenty of time to install sweat equity.
Anyways, so long as the premise of a healthful enterprise is there and you are tirelessly striving every day build a real dating with the client through earnestly seeking to upload cost, you could use 10 there may be a dependable strategy for advertising any commercial enterprise on-line.
- Use social media.
Social media cannot be unnoticed. Here, all of the so-called magic is taking place. Some agencies are built completely on social media. Every day be frightening in the beginning. Of path. However, as we benefit momentum, we discover that posting daily social media turns in everyday easier and less difficult through the years.
Of course, if you have the cash everyday burn, you may rent a social media manager. But if now not, be yourself. Be actual. Please post your thoughts. Publish your product. Put up what you find applicable and useful every day assist your viewers analyze more approximately you and your enterprise, or the industry you belong day-to-day.
You can additionally use direct messages on structures like Instagram, snapchat, and twitter everyday contact other successful corporations and reach ability every day who may be looking for a service or product. I'm able to do it. That is day-to-day sturdy advertising and marketing.
2. Create a video educational.
One of the handiest ways every day disseminate data on your enterprise is every day create a video academic. Please tell people something beneficial. Walk via them. Please maintain hands. Step-with the aid of-step everyday are all the rage. The higher this is and the extra precious it's miles every day provide, the quicker you may increase visibility and in the end income.
These days, YouTube is the second largest search engine within the world after google. On every occasion someone day-to-day research something visually, they cross there. You have likely accomplished it yourself endless times. Now ask yourself what you could teach on your business day-to-day help day-to-day remedy some issues. What led you to your enterprise in the first vicinity?
The maximum every day component? You could even hear your voice play or even see yourself. Now you don't need to peer it visually in the digital camera, but you may want day-to-day listen it. You get used daily it over the years. But You tube’s awareness and attain cannot be neglected, so get out there now and begin making actual, beneficial videos.
3. Start running a blog now.
Sure, you may start a blog. In case you don’t have a blog to your enterprise, you want daily get commenced right away Most of the people discover running a blog mediocre due to the fact they lack visibility. The fact is that your weblog could be like a barren dessert until what you are doing.
But this is not pretty much posting your ideas to your very own weblog. You need to start an authorization weblog. Publish your content the usage of a platform inclusive of medium. Solution questions about Quora and reddit. Rather, go to linked in’s publishing platform. All of these are audience domain names that everybody can publish, and with a huge wide variety of customers, they may be simply reachable.
While you blog, ensure you weblog successfully. Please do not put-up thin content. Think about introduced cost. Are you concerned about revealing the secrets of all of your business? Please do not.
4. Apprehend search engine optimization.
This is an area of advertising that I’m distinctly obsessed on. However, it is also an area that many humans are deadly scared of. Sure, seo may be frightening. But it is able to also be effective. And when you learn to take advantage of it and examine seo the right way, the sky is simply the limit.
There are agencies that could educate you a way to "idiot" Google with doubtful pbns and other linking schemes. You could get effects inside the brief term, however in the long term you'll be soaking in warm water. You cannot take shortcuts in search engine optimization. As with enterprise, if you want to see the outcomes, you have to spend your paintings and time.
5. Take benefit of influencers.
Need to disseminate information and increase your social media attention while not having to construct your audience for years? Subsequent, you want to ensure you take gain of influencers. However, the important component is to discover the proper influencer. You do not need to go together with an influencer who has hundreds of thousands of followers. You could even pick out a micro-influencer with tens of lots of followers, and in a few cases a hundred,000.
Trick? Discover the right influencers to your niche to goal the right audience. It's not just about spreading the message. It's approximately spreading your message to the proper purchaser base. If you can do it nicely, you may possibly reach a massive target market for the huge sum of money invested when thinking about the ability advantages it could return.
This makes experience when you have a income system and merchandise in place. If you have an offer that is without a doubt converted and it is just about greater visibility, this might be the right advertising and marketing strategy for you for now. Compare the scenario and contact the influencer to degree the price. Do a small take a look at to see what works and then scale.
6. Create an excellent lead magnet.
So many results in advertising and marketing come all the way down to creating actually wonderful lead magnets. It seems that the right lead magnet presented to the right target market may have explosive outcomes. The excellent manner to do this is if you may pick out the right problem and recommend a solution with a lead magnet, then you're on the right track.
What troubles are purchasers dealing with in your area of interest? What made you start a business within the first location? Ask yourself these questions before assembling the lead magnet. The higher you pick out the problem or trouble first, the more you may virtually address the trouble with the lead magnet solution.
What kind of lead magnet do you need to make? It is able to be an e-book, cheat sheet, checklist, video, and so forth. Of direction, it's now not simply lead magnets. To get humans into your purpose-reaching manner, you want a squeeze page that consists of a sizzling income copy. However, it all starts off evolved with a pleasing lead magnet. The higher it's miles, the greater effective it's far to attain the viewer.
7. Use Facebook advertisements for retargeting.
One of the most powerful methods you can use to marketplace nearly anything these days is fb advertising. With Facebook, you could reach a totally unique audience and it's very easy to do. You may goal by hobby, age, courting popularity, geographic vicinity, and greater.
However, click on visitors isn't always the best key right here for outstanding consequences. You want to recognition on conversion and retargeting through pixels. In case you don't know the way to deploy fb Pixel for your site, you truly need to learn how to try this now. You can use pixels to construct your audience even in case you're no longer walking fb commercials.
Pixels tune anybody who comes in your site and you could construct a custom audience around them. As an instance, if you put up content material about how to power a semi-truck and music your traffic in pixels, you could marketplace your trucking certification to folks that are already interested due to the fact you visited a selected page. And your conversions will skyrocket.
8. Use LinkedIn the right way.
Do you have got a video in your LinkedIn profile? Did you realize that it’s easy to feature? Take the time to introduce yourself and your enterprise. Hyperlink it for your profile description. That is an easy manner to passively marketplace your business and, if achieved effectively, will have surprising results.
If you have lots of connections on LinkedIn and you haven’t truly published there, get commenced now. You may reach a massive audience, specifically if you publish is spread with the aid of word of mouth. This is a wonderful vicinity to tell your entrepreneurial adventure. Talk and communicate approximately your task. The more powerful the story, the much more likely it is to unfold thru phrase of mouth.
You can also reach out to other businesses on LinkedIn and collaborate with like-minded entrepreneurs. This is a dependable resource for any business, and too many humans forget it.
9. Create an affiliate software.
The majority do not recognize the electricity of associate advertising. Associates can provide large fuels for increase. However, drawing close the proper partner isn't always usually easy. You need larger affiliates to take you critically, make a great shift.
We've got determined that navigating associate minefields may be tough. It requires tenacity, and actual grit is wanted to overcome it. Most people are discouraged after some setbacks, but with regards to affiliates we can't allow feelings to get inside the manner. Build an associate application and begin accomplishing out to capability associates who assist you to.
There are numerous web sites to be had, inclusive of E. Brian Ross's JV Zoo and Tim and Eileen Barber's click on financial institution and commission Junction.
10. Use email marketing sequences
Part of a good sales funnel is the email marketing sequence. These are automatic messages sent to a user when they subscribe to the list. Use email sequences to build relationships with your subscribers. Be genuine and transparent. And tell us your journey.
Segment the list using email responses and clicks. For example, when someone clicks on a particular link, it's clear that they're interested in something. Tag the subscribers and sell them later. If someone buys it, tag it as a buyer. Identifying the interests of buyers and subscribers is very important for segmentation.
If you want to send a broadcast, split the test. Split test everything. In fact, you can't really know what works best until you pull the trigger and actually test it. This will make your viewers more responsive, improve your communicator, and improve your sales to your customers.
Q4) Who are customers? What are marketing motives for them?
A4) Customers are individuals or businesses who purchase products and services produced by a business. The purchase of products and services depends upon the willingness and the ability of the customer to pay in accordance to their needs and wants. Needs and wants are different from each other, wherein needs are those products/services which are necessities such as food, water, clothing or home.
Alternatively, wants are those products / services which an individual aspires to have in addition to the necessities which an individual can do without. For example, gold or diamond jewellery, an expensive and branded watch, designer clothes, lottery tickets, etc.
Consumers do not buy products. They buy motivational satisfaction and solutions to problems. One doesn't buy a sofa set, but he buys comfort. People don't buy cosmetics, but they buy hope to make them look good. Therefore, marketers find motives for purchasing and try to build a product and marketing mix based on these motives. One may buy a product with many motives. One of them can be rewarded for yourself, or indulging in them, or for gifts. There are multiple motives involved in consumption. Therefore, marketers try to find the following:
Marketing motivation
- Motivation for purchase,
- How to develop strategies to realize these motives, and
- How to reduce conflicts between motives.
How to discover motivation
This can be seen by asking the respondents. Some motives have been disclosed by respondents, while others have not been revealed or hidden. For example, ask a woman why she is wearing designer jeA) She can say that:
- They are stylish
- They fit well
- They are worn by her friends. These motives are disclosed. Potential motivation may not be disclosed.
- They show that i have money
- They show that i am young
- They project my slimness etc.
- Manifest and potential motivation
Another important way to find motivation is through a "motivational survey" that asks indirect questions to get information from respondents. This is done by unstructured camouflaged interviews or surveys.
Once you know your motives, your marketing strategy is designed around the right set of motives. When designing a strategy, you need to determine your target market and choose communication for that target market. Due to multiple motives, multiple benefits need to be communicated through advertising and other promotional methods.
Q5) Why is motivation important?
A5) Motivation is a major factor in business success. Motivation can make or break your marketing plan. No matter how much marketing you do, if you don't have the motivation and investment (physically and emotionally) in marketing, you're prepared for failure.
- Talk
Talking to your customers is one of the best ways to get motivated. Customer feedback helps us generate new ideas and find ways to improve our business. You can provide a better customer experience by opening communication channels with your customers.
2. High goal
Having goals motivates us to succeed. In your marketing strategy, you set small goals to achieve big goals so that your clients aren't overwhelmed by the “big picture”. By making your goals smaller, everyone can go smoothly and get a sense of accomplishment.
3. Inspired
Having a support network for other SMEs is invaluable. You can bounce ideas from each other, give and receive advice, and are generally inspired by each other's stories. We are a member of the local networking group and are the core material for special sources.
Q6) What are the sources of marketing information?
A6) Adequate and up-to-date information about changing market conditions is necessary for successful marketing of products. Decisions concerning the type of product, the price policy, the channel of distribution and sales promotion can be made rightly with the help of right marketing information at the right time.
In order to collect marketing information, LSI conduct market research. SSI’s are often unable to afford continuous marketing research. However, they can use personal contacts and other informal methods for collecting required information about markets.
Marketing information can be collected from the following sources:
I. Primary Source:
(a) Customers
(b) Dealers
(c) Salesman
II. Secondary Source:
(a) Press- (e.g., Economics Times and Business Today).
(b) Govt. Publications- (Different Ministries and departments of the Central Government and State Government publish regularly some journals, periodicals etc. Which contain very useful data relating to business e.g. Annual report on the working of public understandings; import policy; guidelines for industries etc.).
(c) Publication of financial institutions- The RBI, public financial institutions and commercial banks publish a lot of useful information (e.g. Monthly bulletin of RBI etc.).
(d) Publication of trade associations- Trade associations and chambers of commerce collect and publish useful data for the benefit of their members (useful to analyse business trends in India).
(e) Private concerns and research institutions- Some research institutes like National Council of Applied Economic Research, Indian Institutes of Foreign Trade, etc. Conduct research studies regularly and publish data of various types. Private agencies like FICCI also publish data.
Q7) What are the types of Market?
A7) Physical market. The physical marketplace is in which the client and supplier physically meet, and each party are involved in the transaction in alternate for cash. There are few proper examples of department shops, buying malls, retail stores, etc.
- Virtual market / internet market. In today's business environment, these types of markets are growing rapidly. This is an online platform, where sellers offer goods and services over the Internet. Buyers and sellers do not have to physically meet or interact with each other. Examples are Freelancer.com and Amazon.com.
2. Auction market. The auction market is where sellers and buyers show the lowest and highest prices they want to exchange. This exchange takes place when both the seller and the buyer agree on a price. A good example is the New York Stock Exchange (NYSE).
3. Consumer market. This market type refers to the marketing of consumer goods and services consumed by individuals and families. An example of the consumer market
- FMCG is ready to cook meals, newspapers, magazines and more.
- Durable consumer goods include refrigerators, televisions, and personal computers.
- Soft goods are shoes and clothes,
- Services include hotels, barbers, schools, colleges and more.
4. Industrial market. Industrial markets include business-to-business sales of goods and services. These marketers do not target the consumer market. Some examples of the industrial market include finished products such as office furniture.
- Sale of raw materials for companies such as gas and chemicals
- Providing services to businesses2business such as security agencies, audit and legal services.
5. Black market. Like black money, the black-market deals with illegal drugs and weapons.
6. Intermediate goods market. These markets deal with the sale of raw materials that require further processing to produce the finished product.
7. Financial market. This is a wide range of markets known as financial markets. A place to handle current assets such as stocks and bonds.
Q8) Explain the objectives and functions of financial management.
A8) The financial management is generally concerned with procurement, allocation and control of financial resources of a concern.
The objectives are:
- To ensure regular and adequate supply of funds to the concern.
- To ensure adequate returns to the shareholders this will depend upon the earning capacity, the market price of the share, expectations of the shareholders.
- To ensure optimum funds utilization. Once the funds are procured, they should be utilized in a maximum possible way at least cost.
- To ensure the safety of investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
- To plan a sound capital structure-There should be the sound and fair composition of capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management
1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of the enterprise.
2. Determination of capital composition: Once the estimation has been made, the capital structure has to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
3.Choice of sources of funds: For additional funds to be procured, a company has many choices like-
- Issue of shares and debentures
- Loans to be taken from banks and financial institutions
- Public deposits to be drawn like in form of bonds.
- Choice of the factor will depend on relative merits and demerits of each source and period of financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns are possible.
5.Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:
Dividend declaration – It includes identifying the rate of dividends and other benefits as a bonus.
Retained profits – The volume has to be decided which will depend upon expansion, innovation, diversification plans of the company.
6.Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc..
7.Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
Q9) How is the finance function organised? What are the functions that finance department performs in a large organisation?
A9) Functions that finance department performs in a large organisation: -
1. Bookkeeping and Payables/Receivables
Bookkeeping is the most basic financial activity in a company. Before a business owner ever considers hiring a CFO, they bring in a bookkeeper, who tracks all of the transactions in the organization, covering both sales and expenses. As the organization grows, they might hire more specialized payables and receivables clerks, to take over functions such as corresponding with vendors and suppliers, above and beyond recording transactions.
2. Financial Reporting and Control
Financial Reporting and Control is the function that takes raw accounting entries and transforms them into usable and comparable financial statements. Requiring far more judgment than the bookkeeper’s role, this function involves everything from ruling on how to implement accounting principles to designing financial processes of the organization, selecting accounting systems, liaising with external auditors, and ensuring that there are no gaps or oversights in existing processes.
3. Tax and Compliance
Running a business involves paying tax, and paying tax means doing a lot of calculations and filling out a lot of forms. Often using the financial statements as a basis, along with various other configurations of the information produced by Bookkeeping and Payables/Receivables, the Tax and Compliance function will make sure all of the government forms and filings are sent complete and on-time to the taxman. A strong Tax and Compliance function will go one step beyond simple compliance, and will find ways to minimize tax, so as to maximize the company’s net income.
4. Strategic Planning and Financial Planning & Analysis
This function, “FP&A” for short, is the true bridge between the Past and the Future. FP&A regularly creates strategic and financial plans that forecast what financial results (sales and expenses) will look like in future periods. Then, they compare actual results—prepared with the assistance of the Financial Reporting and Control function—to determine areas where the business can improve. With this “variance analysis” complete, they can then prepare more accurate forecasts for the future. A strong FP&A function will not only generate annual forecasts but will be able to update them even over the course of a day or two, and to run many scenarios that examine the effects of, say, losing a big customer or an economic contraction.
5. Treasury & Working Capital Management
The key role of Treasury is to make sure that the company doesn’t run out of cash. This means, among other things, forecasting the upcoming working capital (receivables, payables and inventory) needs of the company, investing surplus cash in short-term instruments to generate modest interest income, and managing currency risk.
6. Capital Budgeting
Capital Budgeting is the function responsible for selecting between the various uses of capital, or capital projects. After all, most organizations will have money available to invest in the business, with the hopes of either growing sales or reducing expenses. But the opportunities for spending typically exceed the amount available to spend, so Capital Budgeting develops business cases to evaluate and identify the most effective projects. A strong Capital Budgeting function will not only forecast project benefits, but will also track these benefits over time to determine whether the use of capital was as effective as originally anticipated.
7. Risk Management
Risk Management is a function that is rapidly developing after the financial scandals of the early 2000s (Enron, WorldCom, the Great Recession and Lehman/Bear Stearns collapse, etc.). In the financial services industry, the function is particularly central as most institutions run with a high amount of debt (leverage), though leaders in other industries are also bulking up this function. Risk Management takes a hard look at some of the key risks faced by the company—currency, interest rate, market, operational, legal, etc.—and tries to quantify the possible impacts so that they can be mitigated as much as possible. If FP&A looks at the base case scenario for the company’s financial results, Risk Management takes a wrecking ball to it.
8. Corporate Development & Corporate Strategy
Corporate Development and Corporate Strategy can be widely defined, but it is the area of Finance most heavily populated by former investment bankers and management consultants. As such, common tasks that fall to this function include sourcing and analyzing mergers & acquisitions deals, raising debt and equity financing, making capital structure decisions and providing insight into high level strategic decisions such as entering a new market.
Q10) Define capital structure. Explain the principles, while forming the capital structure of the organisation.
A10) Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance.
Capital structure is the mix of the long-term sources of funds used by a firm. It is made up of debt and equity securities and refers to permanent financing of a firm. It is composed of long-term debt, preference share capital and shareholders’ funds. “Capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholders”
Factors Determining Capital Structure
1. Trading on Equity- The word “equity” denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on a reasonable basis. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company’s earnings, equity shareholders are at an advantage which means a company should go for a judicious blend of preference shares, equity shares as well as debentures. Trading on equity becomes more important when expectations of shareholders are high.
2.The degree of control- In a company, it is the directors who are so-called elected representatives of equity shareholders. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the company’s management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares.
3.The flexibility of financial plan- In an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plA) Debentures and loans can be refunded back as the time requires. While equity capital cannot be refunded at any point which provides rigidity to plA) Therefore, in order to make the capital structure possible, the company should go for the issue of debentures and other loA)
4. Choice of investors- The company’s policy generally is to have different categories of investors for securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping in mind conscious investors.
5. Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the company’s capital structure generally consists of debentures and loA) While in the period of boons and inflation, the company’s capital should consist of share capital generally equity shares.
6. Period of financing- When the company wants to raise finance for short period, it goes for loans from banks and other institutions; while for long period it goes for an issue of shares and debentures.
7. Cost of financing- In a capital structure, the company has to look at the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits.
8. Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and the company is in the better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If a company is having unstable sales, then the company is not in a position to meet fixed obligations. So, equity capital proves to be safe in such cases.
9. Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for the issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is total capitalization.
Q11) Define working capital. What factors would you take into consideration in estimating the working capital needs of a budget hotel?
A11) Working Capital is the capital which is needed for meeting day to day requirement of the business concern. For example, payment to creditors, salary paid to workers, purchase of raw materials etc., normally it consists of recurring in nature. It can be easily converted into cash. Hence, it is also known as short-term capital.
Main factors affecting the working capital are as follows:
(1) Nature of Business:
The requirement of working capital depends on the nature of the business. The nature of the business is usually of two types: Manufacturing Business and Trading Business.
In the case of the manufacturing business, it takes a lot of time in converting raw material into finished goods. Therefore, capital remains invested for a long time in a raw material, semi-finished goods and the stocking of the finished goods.
(2) The scale of Operations:
There is a direct link between the working capital and the scale of operations. In other words, more working capital is required in case of big organisations while less working capital is needed in case of small organisations.
(3) Business Cycle:
The need for the working capital is affected by various stages of the business cycle. During the boom period, the demand for product increases and sales also increase. Therefore, more working capital is needed. On the contrary, during the period of depression, the demand declines and it affects both the production and sales of goods. Therefore, in such a situation less working capital is required.
(4) Seasonal Factors:
Some goods are demanded throughout the year while others have seasonal demand. Goods which have uniform demand the whole year their production and sale are continuous. Consequently, such enterprises need little working capital.
On the other hand, some goods have seasonal demand but the same are produced almost the whole year so that their supply is available readily when demanded.
Such enterprises have to maintain large stocks of raw material and finished products and so they need a large amount of working capital for this purpose. Woollen mills are a good example of it.
(5) Production Cycle:
Production cycle means the time involved in converting raw material into finished product. The longer this period, the more will be the time for which the capital remains blocked in raw material and semi-manufactured products.
Thus, more working capital will be needed. On the contrary, where the period of production cycle is little, less working capital will be needed.
(6) Credit Allowed:
Those enterprises which sell goods on cash payment basis need little working capital but those who provide credit facilities to the customers need more working capital.
(7) Credit Availed:
If the raw material and other inputs are easily available on credit, less working capital is needed. On the contrary, if these things are not available on credit then to make a cash payment quickly large amount of working capital will be needed.
(8) Operating Efficiency:
Operating efficiency means efficiently completing the various business operations. Operating efficiency of every organisation happens to be different.
Some such examples are: (i) converting raw material into finished goods at the earliest, (ii) selling the finished goods quickly, and (iii) quickly getting payments from the debtors. A company which has a better operating efficiency has to invest less in stock and the debtors.
Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency.
(9) Availability of Raw Material:
Availability of raw material also influences the amount of working capital. If the enterprise makes use of such raw material which is available easily throughout the year, then less working capital will be required, because there will be no need to stock it in large quantity.
On the contrary, if the enterprise makes use of such raw material which is available only in some particular months of the year whereas for continuous production it is needed all the year round, then a large quantity of it will be stocked. Under the circumstances, more working capital will be required.
(10) Growth Prospects:
Growth means the development of the scale of business operations (production, sales, etc.). The organisations which have sufficient possibilities for growth require more working capital, while the case is different in respect of companies with fewer growth prospects.
(11) Level of Competition:
High level of competition increases the need for more working capital. In order to face competition, more stock is required for quick delivery and credit facility for a long period has to be made available.
(12) Inflation:
Inflation means a rise in prices. In such a situation more capital is required than before in order to maintain the previous scale of production and sales. Therefore, with the increasing rate of inflation, there is a corresponding increase in the working capital.
Q12) When a firm follows wealth maximization goal, it achieves maximization of the market value of a share. Do you agree? Substantiate your arguments.
A12) Wealth maximisation means maximising the net wealth of a company’s shareholders. Wealth maximisation is possible only when the company pursues policies that would increase the market value of shares of the company. It has been accepted by the finance managers as it overcomes the limitations of profit maximisation.
The following arguments are in support of the superiority of wealth maximisation over profit maximization.
Wealth maximisation is based on the concept of cash flows. Cash flows are a reality and not based on any subjective interpretation. On the other hand, profit maximisation is based on accounting profit and it also contains many subjective elements.
Wealth maximisation considers the time value of money. Time value of money translates cash flows occurring at different periods into a comparable value at zero periods. In this process, the quality of cash flows is considered critically in all decisions as it incorporates the risk associated with the cash flow stream.
Let us now look at some of the key definitions:
The time value factor is known as the time preference rate, that is, the sum of the risk-free rate and risk premium.
The risk premium is the consideration for the risk perceived by the investor in investing in that asset or security.
The required rate of return is the return that the investors want for making the investment in that sector.
In the liberalised setup, society expects corporate to tap the capital markets effectively for their capital requirements. Therefore, to keep the investors happy throughout the performance of the value of shares in the market, the management of the company must meet the wealth maximisation criterion.
When a firm follows wealth maximisation goal, it achieves the maximisation of the market value of the share. A firm can practice wealth maximisation goal only when it produces quality goods at low cost.
Another notable feature of the firms committed to the maximisation of wealth is that to achieve this goal, they are forced to render efficient service to their customers with courtesy. This enhances consumer welfare and benefit to society.
Since listing ensures liquidity to the shares held by the investors, shareholders can reap the benefits arising from the performance of the company only when they sell their shares.
Therefore, we can conclude that the maximisation of wealth is the appropriate goal of financial management in today’s context.
Q13) For each of the following, is the business a price-taking producer? Explain your answers.
- A cappuccino café in a university town where there are dozens of very similar cappuccino cafés
- The makers of Pepsi-Cola
- One of many sellers of zucchini at a local farmers’ market
A13)
- The cappuccino café is probably a price-taking producer, especially if there are a large number of cafés in town, since each will have a small market share and each produces a standardized product.
- There is only one manufacturer of Pepsi-Cola, and it works hard to differentiate its product from others in the minds of consumers. It is not a price-taking producer.
- Zucchini sellers at the farmers’ market are price-taking producers; there are many of them, none of whom can affect the market price for zucchini, which is a standardized product.
Q14) Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table.
Quantity of meals | VC |
0 | $0 |
10 | $200 |
20 | $300 |
30 | $480 |
40 | $700 |
50 | $1,000 |
- Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output.
- What is the break-even price? What is the shut-down price?
- Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
- Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
- Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
A14)
- From Kate’s variable cost (VC), the accompanying table calculates Kate’s total cost (TC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC).
Quantity of meals | VC | TC | MC of meal | AVC of meal | ATC of meal |
0 | $0 | $100 | - | - | - |
10 | $200 | $300 | $20.00 | $20.00 | $30.00 |
20 | $300 | $400 | $10.00 | $15.00 | $20.00 |
30 | $480 | $580 | $18.00 | $16.00 | $19.33 |
40 | $700 | $800 | $22.00 | $17.50 | $20.00 |
50 | $1,000 | $1,100 | $30.00 | $20.00 | $22.00 |
b. Kate’s break-even price, the minimum average total cost, is $19.33, at an output quantity of 30 meals. Kate’s shut-down price, the minimum average variable cost, is $15, at an output of 20 meals.
c. When the price is $21, Kate will make a profit: the price is above her break-even price. And since the price is above her shut-down price, Kate should produce in the short run, not shut down.
d. When the price is $17, Kate will incur a loss: the price is below her break-even price. But since the price is above her shut-down price, Kate should produce in the short run, not shut down.
e. When the price is $13, Kate would incur a loss if she were to produce: the price is below her break-even price. And since the price is also below her shut-down price, Kate should shut down in the short run.
Q15) Bob produces DVD movies for sale, which requires a building and a machine that copies the original movie onto a DVD. Bob rents a building for $30,000 per month and rents a machine for
$20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table.
Quantity of DVDs | VC |
0 | $0 |
1,000 | $5,000 |
2,000 | $8,000 |
3,000 | $9,000 |
4,000 | $14,000 |
5,000 | $20,000 |
6,000 | $33,000 |
7,000 | $49,000 |
8,000 | $72,000 |
9,000 | $99,000 |
10,000 | $150,000 |
- Calculate Bob’s average variable cost, average total cost, and marginal cost for each quantity of output.
- There is free entry into the industry, and anyone who enters will face the same costs as Bob. Suppose that currently the price of a DVD is $25. What will Bob’s profit be? Is this a long-run equilibrium? If not, what will the price of DVD movies be in the long run?
A15)
- Bob’s average variable cost, average total cost, and marginal cost are shown in the accompanying table.
Quantity of DVDs | VC | MC of DVD | AVC of DVD | ATC of DVD |
0 | $0 | - | - | - |
1,000 | $5,000 | $5 | $5.00 | $55.00 |
2,000 | $8,000 | $3 | $4.00 | $29.00 |
3,000 | $9,000 | $1 | $3.00 | $19.67 |
4,000 | $14,000 | $5 | $3.50 | $16.00 |
5,000 | $20,000 | $6 | $4.00 | $14.00 |
6,000 | $33,000 | $13 | $5.50 | $13.83 |
7,000 | $49,000 | $16 | $7.00 | $14.14 |
8,000 | $72,000 | $23 | $9.00 | $15.25 |
9,000 | $99,000 | $27 | $11.00 | $16.56 |
10,000 | $150,000 | $51 | $15.00 | $20.00 |
b. When the price is $25, Bob will sell 8,000 DVDs per month and make a profit of $78,000. If there is free entry into the industry, this profit will attract new firms. As firms enter, the price of DVDs will eventually fall until it is equal to the minimum average total cost. Here, the average total cost reaches its minimum of $13.83 at 6,000 DVDs per month. So the long-run price of DVDs will be $13.83.
Q16) Consider Bob’s DVD company described in the previous question. Assume that DVD production is a perfectly competitive industry. For each of the following questions, explain your answers.
- What is Bob’s break-even price? What is his shut-down price?
- Suppose the price of a DVD is $2. What should Bob do in the short run?
- Suppose the price of a DVD is $7. What is the profit-maximizing quantity of DVDs that Bob should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?
- Suppose instead that the price of DVDs is $20. Now what is the profit-maximizing quantity of DVDs that Bob should produce? What will his total profit be now? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?
A16)
- Bob’s break-even price is $13.83 because this is the minimum average total cost. His shut-down price is $3, the minimum average variable cost, because below that price his revenue does not even cover his variable costs.
- If the price of DVDs is $2, the price is below Bob’s shut-down price of $3. So Bob should shut down in the short run.
- If DVDs sell for $7, Bob should produce 5,000 DVDs because for any greater quantity his marginal cost exceeds his marginal revenue (the market price). His total profit will be −$35,000, a loss of $35,000. In the short run, he will produce because his short-run loss if he were to shut down would be greater; it would equal his fixed costs of $50,000. In the long run, he will exit the industry because his profit is negative: the price of $7 per DVD is below his break-even price of $13.83.
- If DVDs sell instead for $20, Bob should produce 7,000 DVDs because at this quantity his marginal cost approximately equals his marginal revenue (the market price). His total profit will be $41,000. In the short run, he will produce because he is covering his variable cost (the price is above the shut-down price). In the long run, he will stay in the industry because his profit is not negative (the price is above the break-even price).
Q17) A perfectly competitive firm has the following short-run total cost:
Quantity | TC |
0 | $5 |
1 | $10 |
2 | $13 |
3 | $18 |
4 | $25 |
5 | $34 |
6 | $45 |
Market demand for the firm’s product is given by the following market demand schedule:
Price | Quantity demanded |
$12 | 300 |
$10 | 500 |
$8 | 800 |
$6 | 1,200 |
$4 | 1,800 |
- Calculate this firm’s marginal cost and, for all output levels except zero, the firm’s average variable cost and average total cost.
- There are 100 firms in this industry that all have costs identical to those of this firm. Draw the short-run industry supply curve. In the same diagram, draw the market demand curve.
- What is the market price, and how much profit will each firm make?
A17) This firm’s fixed cost is $5, since even when the firm produces no output, it incurs a total cost of $5. The marginal cost (MC), average variable cost (AVC), and average total cost (ATC) are given in the accompanying table.
Quantity | TC | MC | AVC | ATC |
0 | $5 | - | - | - |
1 | $10 | $5 | $5.00 | $10.00 |
2 | $13 | $3 | $4.00 | $6.50 |
3 | $18 | $5 | $4.33 | $6.00 |
4 | $25 | $7 | $5.00 | $6.25 |
5 | $34 | $9 | $5.80 | $6.80 |
6 | $45 | $11 | $6.67 | $7.50 |
a. This firm’s minimum average variable cost is $4 at 2 units of output. So the firm will produce only if the price is greater than $4, making its individual supply curve the same as its marginal cost curve above the shut-down price of $4. The same is true for all other firms in the industry. That is, if the price is $4, the quantity supplied by all 100 firms is 200. The quantity supplied by all 100 firms at a price of $6 is 300, and so on. The accompanying diagram illustrates this principle.
c. The quantity supplied equals the quantity demanded at a price of $10—the (short-run) market equilibrium price. So the quantity bought and sold in this market is 500 units. Each firm will maximize profit by producing 5 units of output—the greatest quantity at which price equals or exceeds marginal cost. At 5 units of output, each firm’s revenue is $10 × 5 = $50. Its total cost is $34. So it makes a profit of $16.
Q18) Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it.
- A profit-maximizing firm in a perfectly competitive industry should select the output level at which the difference between the market price and marginal cost is greatest.
- An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run.
A18)
- False. For a profit-maximizing firm in a perfectly competitive industry, profit is maximized by producing a quantity at which marginal cost is equal to the market price.
- False. Changes in fixed cost do not affect marginal cost and so do not change the profit-maximizing quantity of output produced. Changes in fixed cost do, however, change the amount of profit earned and the firm’s break-even price: the higher the fixed cost, the higher the firm’s break-even price and the lower its profit.
Q19) The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S. Department of Agriculture about wheat production in the United States in 1998.
- The average variable cost per acre planted with wheat was $107 per acre. Assuming a yield of 50 bushels per acre, calculate the average variable cost per bushel of wheat.
- The average price of wheat received by a farmer in 1998 was $2.65 per bushel. Do you think the average farm would have exited the industry in the short run? Explain.
- With a yield of 50 bushels of wheat per acre, the average total cost per farm was $3.80 per bushel. The harvested acreage for rye (a type of wheat) in the United States fell from 418,000 acres in 1998 to 274,000 in 2006. Using the information on prices and costs here and in parts a and b, explain why this might have happened.
- Using the above information, do you think the prices of wheat were higher or lower prior to 1998? Why?
A19.)
- Since the yield is 50 bushels per acre, we know that producing 50 bushels of wheat is associated with an average variable cost of $107. So the production of 1 bushel of wheat is associated with an average variable cost of $107/50 bushels = $2.14 per bushel.
- We would not expect the average farm to have exited the industry in the short run because the price it received for wheat, $2.65 per bushel, was greater than the average variable cost of production, $2.14 per bushel.
- The average farm would have exited the industry in the long run because the price it received per bushel was less than the average total cost of production. The farm was incurring an economic loss by operating. So a decline in the harvested acreage of wheat should have been expected after 1998.
- Because unprofitable farms were operating in 1998, when prices were $2.65 per bushel, we would expect that prior to 1998, prices were higher—assuming that production costs were approximately the same. So prior to 1998, farms were at least breaking even. Indeed, the average price of wheat was $4.25 per bushel in 1996 and $3.85 per bushel in 1995.
Q20) The accompanying table presents prices for washing and ironing a man’s shirt taken from a survey of California dry cleaners in 2004.
Dry Cleaner | City | Price |
A-1 Cleaners | Santa Barbara | $1.50 |
Regal Cleaners | Santa Barbara | 1.95 |
St. Paul Cleaners | Santa Barbara | 1.95 |
Zip Kleen Dry Cleaners | Santa Barbara | 1.95 |
Effie the Tailor | Santa Barbara | 2.00 |
Magnolia Too | Goleta | 2.00 |
Master Cleaners | Santa Barbara | 2.00 |
Santa Barbara Cleaners | Goleta | 2.00 |
Sunny Cleaners | Santa Barbara | 2.00 |
Casitas Cleaners | Carpinteria | 2.10 |
Rockwell Cleaners | Carpinteria | 2.10 |
Norvelle Bass Cleaners | Santa Barbara | 2.15 |
Ablitt’s Fine Cleaners | Santa Barbara | 2.25 |
California Cleaners | Goleta | 2.25 |
Justo the Tailor | Santa Barbara | 2.25 |
Pressed 4 Time | Goleta | 2.50 |
King’s Cleaners | Goleta | 2.50 |
- What is the average price per shirt washed and ironed in Goleta? In Santa Barbara?
- Draw typical marginal cost and average total cost curves for California Cleaners in Goleta, assuming it is a perfectly competitive firm but is making a profit on each shirt in the short run. Mark the short-run equilibrium point and shade the area that corresponds to the profit made by the dry cleaner.
- Assume $2.25 is the short-run equilibrium price in Goleta. Draw a typical short-run demand and supply curve for the market. Label the equilibrium point.
- Observing profits in the Goleta area, another dry cleaning service, Diamond Cleaners, enters the market. It charges $1.95 per shirt. What is the new average price of washing and ironing a shirt in Goleta? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both.
- Assume that California Cleaners now charges the new average price and just breaks even (that is, makes zero economic profit) at this price. Show the likely effect of the entry on your diagram in part b.
- If the dry cleaning industry is perfectly competitive, what does the average difference in price between Goleta and Santa Barbara imply about costs in the two areas?
A20)
a. The average price per shirt washed and ironed is $2.25 in Goleta and $2.00 in Santa Barbara.
b. The marginal cost curve (MC) cuts through the average total cost curve (ATC) at the lowest point of the ATC curve. Since California Cleaners is making a profit, price has to be above the break-even price (the minimum average total cost). Given this, California Cleaners maximizes its profit by producing quantity Q1 in the accompanying diagram—the quantity at which its marginal cost equals the market price.
c. The accompanying diagram shows the short-run market supply curve and the market demand curve.
d. The entry of a new firm increases the quantity supplied at each price and shifts the supply curve to the right, as indicated by the move from S1 to S2 in the accompanying diagram. So the new equilibrium corresponds to a lower equilibrium price, $2.20, and a higher equilibrium quantity.
e. Since California Cleaners breaks even at $2.20 a shirt, it must be operating at the minimum of its average total cost curve. The likely effect on the diagram in part b is shown below.
f. Since, in the long run, firms break even in a perfectly competitive industry, costs have to be higher in Goleta than in Santa Barbara