Commerce Notes

Commerce-(GCSE-O Level) - Study Materials Subject Code- 7100 & 7013 CONTENTS 1. Production 2. Retail Trade 3. Wholesale Trade 4.Warehousing 5.Advertising 6.Transportation 7.Communication 8.Insurance 9. Banking 10. Business Units 11. Consumer Protection 12. Trade Documents 13. Finance 14. International Trade.

UNIT-1
PRODUCTION ECONOMIC ACTIVITY Human activities are many and changed. An effort to do something is known as an activity. Why do so many people engage themselves in different activities? The answer is that they want to earn their livelihood and to satisfy their wants and needs. Human activities are broadly classified into two categories; Economic activities: - Economic activities are those activities which relate to the production and exchange of economic goods or services for getting something in return. E.g. :- Activities of traders, manufacturers, sellers, etc... Non- economic activities: - Non economic activities are those activities which aim to the mental satisfaction rather than profit making. E.g.:- A house wife is cooking for her family, social work without the intention of return, etc. Meanwhile, cooking food in the hotel is an example of economic activity but cooking food for the family is a non-economic activity. Types of Economic Activities Economic activities are classified into the following categories; 1. Business: - Business is an economic activity concerned with the production and distribution of goods and services with the object of making profit or acquiring wealth for satisfying material wants. 2. Profession:- Profession is an economic activity wherein a person renders personal services of specialized nature by using his personal skills, for the purpose of earning something. E.g.:- Services of Nurses, Teachers, Doctors, Lawyers, Accountants, etc.. 3. Employment:- Employment involves working for or under someone else, known as the employer, in return for a salary or wage. The people rendering services (both mental and physical) are known as the employees. Important Terms in Commerce [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 1

Goods:- All physical things or materials which are ready to use are known as goods, it can be seen and touched. E.g.:- books, pen, pencils, car, etc… Services:- Services are physical and mental efforts for doing something. It cannot be seen and touched. E.g.:- Services of teachers, Doctors, Lawyers, Nurses, etc. Needs:- The basic requirements of human being are known as human needs, these are limited in nature. E.g.:- food, clothes and shelter Wants:- Human wants are those goods or services that require ever and above the basic needs, they are unlimited in nature. E.g.:- Car, Air conditioner, TV, Vehicles, etc Economic goods:-These are goods which are produced and demanded by the consumers who are ready to pay a price for each. They are limited in supply. E.g.:- Books, pencils, clothes, TV, washing machine, etc Free goods:-These are the gifts of nature; we don’t have to pay a price for those. They are unlimited in supply. E.g.:-Sunlight, Air, Water. Barter system: - Barter system means the exchange of goods for some other goods. It is the mutual exchange of one’s goods to other’s goods without money as a medium of exchange. This system is replaced by the arrival of money. Production Production is an economic activity by which the raw-materials are transformed into finished goods to satisfy the requirements of the consumers or other organizations. It is important to notice that a production process is said to be completed when the goods reach in the hands of the final consumers. E.g.:-Woods become furniture and Bricks, stone, cement, etc become buildings, bridges, etc. Production may be divided into Industry, Commerce and Direct services. STAGES OF PRODUCTION 1. Primary production [Primary Sector] 2. Secondary production [Secondary Sector] 3. Tertiary production [Tertiary Sector] 1. Primary stage This is the first stage of production. It includes the extraction of basic raw materials from the nature and the reproduction of plants and animals. This stage is further sub-divided into two, -Extractive industry -Genetic industry E.g.:- Mining, quarrying, fishing, farming, forestry, etc. 2. Secondary stage This is the second stage of production where the raw materials found in primary stages become semi-finished or finished products. Primary stage supplies the input for this stage. This stage includes the following two types of industries-Manufacturing industry -Construction industry E.g.:- Textile industry, Building construction, Chemical industry, Road construction, etc. 3. Tertiary stage [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 2

This is the third stage of production where the finished goods are distributed to the consumers. This stage includes both commercial services and direct services. The commercial services include transportation, communication, warehousing, advertising, retailing, banking, insurance etc. The direct services refer to such services which are necessary even though they are not directly participating for production activities but they are necessary for a healthy workforce. For example, doctors, actors, civil servants, policemen, teachers, nurses, lawyers, etc. CHAIN OF PRODUCTION Chain of production is the way through which the raw materials are passed on and become finished goods and reach in the hands of the final consumers. The Chain of production begins with the raw materials and ends with the consumers. Raw materials Manufacturers Finished goods Wholesalers Retailers Consumers INDUSTRY An industry is a group of independent business producing similar articles.

TYPES OF INDUSTRY 1. Genetic industry Genetic industry is related to the reproducing and multiplying of certain species of animals and plants. E.g.:- Nurseries, Cattle breeding, Pisciculture, cultivation, poultry farms, etc 2. Extractive industry The extractive industry is engaged to the extraction of raw materials from the soil, air, water or from the beneath the surface of the earth. E.g.:- Hunting, Fishing, mining, Collection of basic foods, quarrying, etc. 3. Construction industry Construction industry is engaged in the creation of bridges, roads, buildings, etc for the development of the economy. Immoveable things are produced under this industry. E.g.:- Construction of buildings, roads, dams, bridges, canals, airports, etc 4. Manufacturing industry Manufacturing industry is engaged in the conversion of raw materials and semi-finished materials into finished products. Moveable things are produced under this industry. E.g.:- Cement industry, sugar industry, iron and steel industry, Cotton industry, etc. Manufacturing industry can be classified into three: a. Analytical industry b. Synthetic industry c. Processing industry a. Analytical industry Here one raw material is analyzed and many products are received as finished goods. E.g.:- Crude oil is the main raw material for making petrol, diesel, LPG, kerosene, etc b. Synthetic industry [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 3

In synthetic industry, many raw materials are brought together in order to make a final product. E.g.:-Vehicle manufacturing, Furniture manufacturing, etc c. Processing industry In this industry, a raw material passes through different various processes to become a final product. E.g.:- Cloth industry- Collection of raw cotton from the farmers-Makes threads- makes cloths-Tailors make clothes- reach to the consumers. Sugar industry, etc. 5. Service industry These industries are engaged in the provision of essential services to the community. Service industry is classified in to two, a. Direct services:- These are services directly provided to the consumers without middlemen. There is direct contact between the render and the consumer. E.g.:- Teachers, doctors, lawyers, nurses, accountants, etc b. Indirect services:- These services are also known as commercial services or aids to trade. These are provided to help the movement of finished products from the producer to the consumer. E.g.:- Finance, communication, transportation, advertising, insurance, warehousing, banking, etc. FACTORS OF PRODUCTION Factors of production are important factors which smoothen the production processes. 1. Land 2. Labour 3. Capital 4. Enterprise 1. Land Land includes all natural resources such as agricultural and building land, mines and quarries, rivers, oceans and atmosphere and everything where a business located. The reward for land is called rent 2. Labour Labour includes both physical and mental efforts, whether undertaken for payment or not or within the family or household. The reward for labour is called wages or salaries 3. Capital Capital includes not only wealth and finance but also physical assets such as machinery that can be used to produce goods and services. The reward for capital is interest 4. Enterprise Enterprise shows the undertaking of risk to run the business or production. The person who undertakes this risk is known as entrepreneur. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 4

The reward for enterprise is profit or loss DIVISION OF LABOUR AND SPECIALIZATION Division of labour is the process by which the complex works are divided into different categories and each category is assigned to expert personnels. E.g.- In a business organization, there are so many departments such as finance, administration, labour, distribution, advertising, etc. Each department will be under the control of Head of the Department. Specialization -means the process of ensuring maximum output by employing right personnel in the right job, according to their skills and experiences. Advantages of specialization 1. Individual workers can concentrate on those jobs to which they are most suited. 2. Practice makes perfect. Once people have learned a job, their skills at it increase. 3. Division of labour normally allows a great saving on tools and equipment. 4. As the work is broken down into individual tasks, it is likely that new and more efficient techniques will be developed. 5. It makes possible to mechanize the production process. 6. It ensures the standardization of products. Disadvantages of specialization 1. Interdependence: Each part of a factory or an industry depends on the performance of the other departments. For example if there is broke down in one section it can quickly spread to other sections, causing delays and sometimes unemployment. 2. There is a danger of boredom when a worker is performing a simple continuous routine, often hundreds times a day. 3. As machinery becomes more complex it replaces labour, causing unemployment. 4. The spread of division of labour normally leads to a decline in craftsmanship. 5. As machinery takes over, output is standardized and the choice of goods available to consumers is reduced. 6. Difficult to select skilful employees.

TYPES OF DIVISION OF LABOR The principle of the division of labour is applied at all levels of economic activity 1. Specialization by industry An economy is made-up many industries, each of which tends to specialize on a particular product or process. For example, in the UK there are industries which are specialized in the production of coal, oil, chemicals, clothing, pottery, and so on. 2. Occupational division of labour. The division of labour according to the occupations or works is known as occupational division of labour. E.g.:- Teachers, Fishermen, Carpenters, lawyers, Doctors, etc 3. Geographical division of labour [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 5

This is a type of division of labour according to the geographical location. Here the division is based on the production or manufacture of certain goods. E.g.:- Arabian countries for Petroleum products, Maldives for fishing, Srilanka for tea leaves, China for electronic goods, etc 4. Complex division of labour. The process of dividing entire work of an organization into a number of specialized jobs is known as complex division of labour. E.g.:- A business organization is classified into different departments like Finance, Administration, Marketing, Advertising, etc COMMERCE Commerce includes all the economic activities connected with the distribution of goods and services with the object of earning profits. It includes Trade and Aids to trade. It is a part of production. Trade Trade is a branch of commerce, it means the buying and selling of goods for the object of earning profit. Trade is classified into two, -Home trade (Wholesale trade and Retail trade) -Foreign trade (Export trade, Import trade and Entrepot trade) Aids to trade Aids to trade are various activities which help to the trade. Aids to trade are also known as commercial services. Both direct and indirect services are essential in the business aspects. Aids to trade refer to the indirect services or commercial services. E.g.: - Finance, communication, transportation, advertising, insurance, warehousing, Banking, etc. TYPES OF TRADE Home trade or Domestic trade The trade which is carried on within the boundaries of a particular country is called home trade, where the buyer and the seller belong the same country. Foreign trade or International trade or overseas trade The trade between two countries is called foreign trade. The buyer in international trade called importer and the seller is called exporter and both belong different countries. Entrepot Trade Entrepot trade means importing of goods from one country and exporting the same goods to other foreign countries. Such countries act as collecting and distributing centres. E.g.. Singapore, Hongkong, etc Wholesale trade [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 6

Wholesale trade consists of buying large quantities of goods directly from the manufactures for the purpose of selling to the retailers. Retail trade Retail trade consists of buying goods from wholesalers in large quantities and selling them to consumers in units with the view to make a profit. UNIT-2 RETAIL TRADE Retailer A retailer is a middleman who buys goods from the manufacturer or from the wholesaler and sells to the final consumers in small quantities. He acts as a connecting link between the wholesalers and the consumers. Retail trade Retail trade consists of buying goods from wholesalers in large quantities and selling them to consumers in small units with the view to make a profit. Functions of the retailer 1. Breaking bulk. The retailer buys goods from the wholesalers in large quantities and cuts it into smaller quantities or units and sells to the consumers according to their demand. 2. Provides goods in convenient quantities Retailer buys goods from different wholesalers and keeps in his shop and sells in smaller quantities according to the convenience of the buyers. 3. Provides goods in convenient locations and in time The consumers can buy the goods from the retailers who are situated nearby them, and whenever the consumers want they can buy the goods. 4. Provides a variety of goods A retailer deals with number of wholesalers at a time so he buys goods and keeps in his warehouse. Comparing to the other traders he will have wide varieties of goods. 5. Provides a delivery service for some goods Certain retailers may use their own vehicles to deliver the goods to the consumers according to the order from them. 6. Provides advice and information to consumers An expert retailer can give advice and information about a product to the buyers and provide the technical knowledge to handle and operate it. 7. Provides credit to customers Some retailers provide credit facility to their regular customers. 8. Provides after-sales service If any problem is happened to the products after immediate purchase, the retailer is responsible to replace or refund for it. And during the warranty or guarantee period the retailers or the manufacturers have to repair or replace the damaged products. 9. Deals with customers’ complaints Retailers help the consumers even if there is any problem due to the usage of products and inform the manufactures to solve it. 10. Acts as a link between customers and the wholesalers of goods. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 7

A retailer acts as a link between the consumers and the wholesalers or manufacturers.

TYPES OF RETAILER Retailers are broadly classified into two, Small scale retailers Large scale retailers 1. Small scale retailers These are small scale traders but don’t have any fixed place for retailing. They move from place to place for selling their products. They carry their goods on their heads or wheeled vehicles. Itinerant traders are of the following types, a. Hawkers They are traders selling goods in public places. They always shout about their ware’s price and quantity. E.g.- Vegetable traders, fruits traders, etc b. Peddlers A trader, who travels to different places to sell small goods, usually by going from house to house, is known as peddler. E.g.- Small house hold traders. Lyons vendors who sell cascades and yoghurt c. Street traders These are traders who keep their goods in big cities or in towns especially in busy streets. E.g. - small bookshops, pen, clothes, etc d. Market traders These traders display their goods in different localities related with the festivals like Id and celebrations of new-year, etc. They can be seen in different market places. e. Seasonal Traders These are traders who can be seen in certain seasons. E.g.- sellers of umbrellas in rainy season, Woollen clothes at winter season, etc. 2. Large scale retailers These are large scale retailers having fixed place or location for trading. They are as following, a. The general Shop It is a small scale retail establishment which stocks wide varieties of consumer goods in a single shop. The aim is to supply the day- to- day requirements of customers in a locality. E.g.- Local shops

b. The specialty Shop It is a small shop which specializes on one line of goods. It sells limited varieties of specialty goods in a single line. E.g.- Clothes shop, Jeweller shops, Sportswear shops, Foot wears shops, etc c. Departmental Shops

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A departmental shop is large retail outlet comprising a number of small shops or departments. Each department deals with different types of products and all these departments will be under one roof and ownership. E.g. - Big shopping malls: Meikles shop in Mutare d. Multiple Shops or Multiple chains The multiple shop or chain store is one of the series of stores operated under a centralized management or ownership. The branches of the multiple shops will be situated in different parts of the city or country. E.g. Edgars, Topics, Truworths, Power sales e. Super Market A supermarket is a large retail outlet selling a wide range of consumer goods, having minimum 200 square meters of sales area and is normally situated in the cities. Normally it provides self-service and displays the goods. TM, OK, SPAR f. Hyper Market. Hypermarkets are very big supermarkets having more than 5000 square meters of sales area. It is normally situated in the outside of the cities because of its large size. It offers wide range of goods as well as facilities like parking places, refreshment parks, etc. g. Voluntary Chain. It is a group of independent retailers who join together in order to make profit from bulk purchases. They share the trade discounts given by the seller. E.g. SPAR, Lucky 7 h. Franchise. It is an agreement that allows one company to trade under the name or logo of another. In this method a business can expand its business using its product name and logo. E.g.:- McDonalds, Kentucky Fried Chicken, etc in the restaurant business. Dairy board i. Shopping Centre. A shopping centre refers to a group of different shops located in a town or city. It offers one stop shopping facilities to the customers. Differences between Hyper market and Super market

. Hypermarket Supermarket It has 5000 square metres of sales area It has 200 square metres of sales area. It offers wide range of services to the It offers fewer services to the customers customers It is situated outside part of the cities It is situated inside the cities HOME SHOPPING. It is a type of latest retailing method by which the customers can order for the product without the middlemen, at their own homes. In this method the customers get information about the product as well as the product at their doors. The following are the important forms of home shopping, 1. Mail order firms. It is type of business unit specializes in a particular kind of retailing by which sales and purchases are done through post or mail without the personal contact between the buyers [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 9

and the sellers. They advertise about their products and services through newspapers, internet, etc. 2. Shopping by Phone. In this method the sellers advertise about their product in the newspapers, TV, etc. and get orders through telephones and dispatch products by post. 3. Shopping by TV. It is similar to shopping by phone, here the firms advertise about their products through TVs and get orders by telephone or internet. 4. Shopping on Internet. It is the latest form of home shopping by which customers can collect information about the products and order through internet and email. Customers can pay money through the internet using cash cards and can deliver by post. MODERN TRENDS IN RETAILING 1. Branding- It means the selling of goods under a well-known trade mark or brand name. Brand name must be indicated clearly on the package or container. Brand helps the customers to distinguish a particular product from other similar producers. 2. Packaging- It means the covering of goods in different ways using different materials in order to protect the goods as well as to carry from one place to another. 3. Self-service- It is the latest trend in the present market system. Normally large scale retailers provide this facility. In this method the customers are allowed to choose the products by themselves without the force from the sales staffs. Here the retailers display the branded products in their shops. E.g.-Supermarkets, Hypermarkets, etc 4. After-sales service- It is offered by the retailers or manufacturers to the buyers after sales is taken place. The products are to be repaired or replaced if any faults occurred within a certain period. E.g.- Guarantee, Free installation and fitting, repair, etc. 5. Bar-coding- It consists a number of parallel black strips and which is printed on the wrapper of the product itself. It consists all the details about the product and a special scanning machine is used to read this. 6. Loyalty card- Under this scheme the regular customer is given a card which benefits him when he purchases goods repeatedly from the same shop. When the purchases reach to the fixed target, the customer will be given a cash discount or a voucher for further purchases. 7. AVM (Automatic Vending Machines)- It is an electronic machine which vendors the goods without the assistance of human. We get goods when we insert certain money in this machine. 8. EPOS (Electronic Point of Sale)- It is an electronic device installed on the counter of the shop for registering the cash transactions. It helps to provide the bills and details of the purchases to the customers and allows the payment through cash cards. ADVANTAGES OF LARGE SCALE RETAILERS. a. Advantages to the retailers 1. They get cash discounts and trade discounts due to bulk purchase. 2. Increased sales due to the wider choice of goods. 3. High turnover due to the cash sales. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 10

4. Self-services reduce the staff costs such as wages or salaries. b. Advantages to the consumers 1. Lower price to the goods. 2. Wider choice for fresh goods 3. Freedom to select the goods without the force from the salesmen 4. Better facilities for shopping.

DISDVANTAGES OF LARGE SCALE RETAILERS. a. Disadvantages to the retailers 1. Large capital investment is required for warehouse, facilities, etc 2. High operating expenses such as camera and security measures. 3. Chance of theft due to self service b. Disadvantages to the customers 1. There are no personal services from salesmen. 2. There are no credit facilities. 3. Increased price due to high cost of operation. E-COMMERCE (ELECTRONIC COMMERCE) E-com. is an advanced form of business using electronic devices such as computers through the internet. Shopping on internet or on-line shopping is an example of E-com. All traditional activities such as advertisements, ordering and the payment can be taken place through the internet without being in a face to face contact between the buyer and the seller. Advantages of E-commerce. 1. Business can be taken place without the face to face contact between the buyer and the seller. 2. Ordering and the payment can be done at home 3. Increased speed of transactions 4. Worldwide sales area 5. Customers can shop for 24 hrs Disadvantages of E-commerce. 1. Consumers should have technical knowledge about how to use computers. 2. Chance of fraudulent practices due to the malpractices in cyber sector. 3. It is not suitable for rural areas or undeveloped areas where there is no internet coverage. 4. Difficult to set up websites. 5. High cost of installation such as internet connection, computers, etc.

REASONS FOR THE SURVIVAL (EXISTENCE) OF SMALL SCALE RETAILERS. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 11

Or EXPLAIN WHY SMALL SHOPS ARE POPULAR WITH CONSUMERS? Answer: 1. Small shops are close to the consumers and opening hours are enough. 2. Consumers get personal services and information about the products. 3. Consumers get informal credit from the sellers. 4. Consumers can replace goods immediately if any damage happened. 5. Small shop sells goods according to the demand of a particular area where it is located. 6. Consumers get high quality goods. UNIT-3 WHOLESALE TRADE Wholesale trade Wholesale traders are traders who act as intermediaries between the producers and the retailers. They purchase goods bulkily for the producers and store at their own warehouses and sell to the retailers. FUNCTIONS OF WHOLESALERS 1. Bulk purchase 2. Warehousing 3. Bulk breaking and distribution 4. Keep price stability 5. Free delivery 6. Provide information to the parties 7. Provide credit facilities to the retailers ADVANTAGES OF WHOLESALING 1. Economies of scale Wholesalers buy goods bulkily from the manufactures. It enables them to take the advantages of discounts and increase profits and sales. 2. Specialization Wholesalers can concentrate to a particular type of product which is demanded in a particular area. It ensures the continuous supply of goods without price variation. 3. Price stabilization. Shortages to the products always tend to increase the prices of such products. But wholesalers help to reduce the price of goods by providing goods to the retailers in time by keeping goods bulkily in their own warehouses. 4. Regular supply of goods. Wholesaler helps to reduce the distance between the retailer and the manufacture. Otherwise it takes too much time to supply goods from the manufacture to the consumers.

TYPES OF WHOLESALERS [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 12

1. General Wholesalers- They are large scale wholesalers operate on national and regional bases. They purchase goods from manufactures and store at their own warehouses at different places. 2. Specialist Wholesalers- They are wholesalers who restrict their operation on a particular product and to a particular area. 3. Cash and carry Wholesalers- These are wholesalers who do not allow credit facilities to the buyer. They are similar to the large scale retailers but do not provide delivery to the customers. SERVICES OF WHOLESALERS 1. To the Manufactures. 1. Place bulk order for the goods 2. Providing market information (demand and supply) 3. Reduces the risk warehousing. 4. Clearing production lines by carrying goods from manufactures to the retailers. 5. Reduces the difficulties in marketing such as delay in delivery, warehousing, distribution, etc. 2. To the Retailers 1. Provide wide variety of goods in small quantities. 2. Provide information about new products 3. Provide free delivery of goods 4. Provide credit facilities to the retailers. 5. Introduce new products. REASONS FOR THE ELIMINATION OF WHOLESALERS 1. Small retailers are located nearby the customers. 2. Large scale retailers perform all the functions of wholesalers. 3. Large scale retailers buy goods bulkily and get discounts so this enables them to sell at lower prices. 4. Growth of home shopping or mail order business. 5. Usage of credit and debit card and delayed payment.

BUSINESS INTERMEDIARIES (MIDDLEMEN) 1. Brokers- They are middlemen who bargain to sell or buy goods. They help to bring buyers and sellers together. They take commission called brokerage. 2. Factors- They find buyers for the sellers and take the possession of goods from his principal. They sell goods in their own name and take all the responsibilities to sell the goods. 3. Commission agent- A commission agent buys and sells goods in return of a commission. He acts as a middleman in between the owners and the buyers. 4. Del-credere agent- When the owner of a good fails to collect dues from the customer, a del-credere agent helps him in this regard. He possesses the goods and guarantees to sell the goods. If the goods are not sold, it may bring loss for him. Here as he takes too risk so gets high commission. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 13

5. Freight forwarding agent- Freight forwarding agents specialise in arranging transport facilities for goods in international trade. They help in documentation of goods, customs clearance, insurance, etc. on behalf of the principal.

UNIT-4 WAREHOUSING Warehousing Warehousing is an arrangement by which goods can be stored without any damage until the distribution. It is an important aid to trade. Warehouse Warehouse is a large shed or building specially built to store goods without any damage. It provides the facilities for packing, grading, displaying and distribution of goods. IMPORTANCE OF WAREHOUSING 1. It enables production to be carried on continuously. Warehouses can be used to store raw materials as well as finished goods. It enables the manufactures to continue the production without any delay. 2. Stabilizes the prices of goods. Warehousing ensures the supply of goods whenever it is demanded in the market. The delay to supply of certain goods leads to the increase in prices. This can be solved because the goods stored in the warehouses can be released gradually so that the price fluctuation can be avoided. 3. Ensures a regular supply of goods. Large stocks of goods which are seasonally produced like paddy, fruits and wheat are stored for long times, so they are available throughout the year which ensures the regular supply of scarce products. 4. Enables preparation of goods for sale to be carried out. Activities like blending, bottling, grading, packing and branding can be carried out in the warehouse before the goods are distributed to the various retail outlets. 5. Provides a place for display of goods. Goods are displayed and can be viewed and examined at the warehouse by potential buyers before placing purchase orders. 6. Helps in foreign trade. Exporters have to keep their goods at the ports until the arrival of ships to take them abroad. Importers also make use of bonded warehouse for storing of goods until the customs duties have been paid. TYPES OF WAREHOUSES [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 14

1. Manufacturer’s warehouse. This a ware house used by the manufactures to safeguard the raw materials, semifinished goods and finished goods. Normally it is in large size and can be stored many items. 2. Wholesalers warehouses. This ware house is similar to manufactures but can be used for safeguard finished goods bulkily. This warehouse offers the facilities for packing, assembling, displaying and bulk braking of goods. 3. Retail warehouses. This ware house is used by the large scale retailers to keep goods to distribute to the final consumers. This ware house is used by the departmental stores, multiple shops, hypermarkets, supermarkets. Etc 4. Cold storage warehouses. This is type of ware house with refrigeration plants for storing perishable goods such as vegetables, fruits, meats, fishes, etc. 5. Cash and carry warehouses. It is a self service ware house operated by wholesalers, where small retailers or consumers can buy goods in bulk at lower prices. There is no credit sale so buyers should pay on the spot. 6. Regional distribution centres. These are warehouses situated at different locations of the country. These warehouses are used by the multiple shops, super markets, mail order business, and hypermarkets in order to supply goods according to the demand arising in their retail outlets. 7. Bonded warehouses. This is a type of warehouse situated at seaports or airports or railway station where there is entrance from other countries. The goods can be kept in this warehouse until the duties are paid on the imported goods. Normally this warehouse is under the control of customs authorities. FEATURES OF BONDED WAREHOUSES 1. Bonded warehouses are under the control of customs authorities. 2. They are normally located at seaports, airports and land frontiers. 3. Record the arrival and departures of goods to the countries. 4. Collect duties on imported goods and distribute goods. 5. While in bond, goods can be sampled, packed or blended 6. The owner of the goods can sell them while they are in bond, in which case, the purchaser becomes liable for the customs duty. IMPORTANCE OF BONDED WAREHOUSE: 1. To the trader: 1. The trader can sell the goods while they are still in bond. 2. Goods can be kept safely until the distribution. 3. He can make the delivery of the goods as he sells them by paying the duty. 4. When the goods are warehoused the trader can perform the necessary operations like grading, packing and labelling to prepare the goods for sale. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 15

5. It helps to export and import goods without delay. 2. To the manufacturer. 1. Bonded warehouses provide the facility of paying customs duties in instalments. 2. Bonded warehouses allow processing functions such as assembling, grading, packing, etc. 3. It helps to protect goods without any damage. 3. To the Government. 1. Bonded warehouse enables to collect duties and prevents the evasion of customs duties. 2. It provides trade statistics (information) on the goods imported and exported. 3. The Government can regulate the export and import of certain goods based on this statistics. DIFFERENCE WAREHOUSE Bonded warehouse BETWEEN BONDED WAREHOUSE AND ORDINARY

Ordinary warehouse( other)

1. It is located near to the ports of entry into 1. There is no specific location for this a country warehouse. 2. It is controlled and supervised by the Customs Authority. 3. It is used to store dutiable goods 2. It is controlled and supervised by the owners. 3. It is used to store any kinds of goods

4. It is used in foreign trade for the storage 4. It is used in home trade for the storage of goods that are exported or imported. of goods that are locally produced, exported or imported. 5. Dutiable goods can’t be removed until 5. There is free movement of goods into the duty is paid and out of the warehouse.

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UNIT-5 ADVERTISING Advertising Advertising is a form of communication which spreads information or awareness to the public using the persuasive methods. It aims to increase the sales of certain goods or service by motivating the public to buy them. Advertising is a form of communication that typically attempts to persuade potential customers to purchase or to consume more of a particular brand of product or service. OBJECTIVES (AIMS) OF ADVERTISING 1. Increase sales. The main purpose behind advertising is to increase sales by providing information about new services and goods to the public. 2. Persuade the public. The methods or techniques used in the advertising influence the public and force them to buy certain goods or services; this results in the overall increase in sales as well. 3. Information The public get information about various services and new products through the advertising. It enables them to know how to use, where to purchase, price, benefits, etc. 4. Expansion of market. Advertising aims at maintaining or expanding markets for existing products too. Advertising does it by highlighting the attractive features and the uses of existing products. 5. Creation of goodwill. Advertising creates reputation for the company and its products. It brings attraction to particular brand or company. 6. Encouraging the retailers. Advertising encourages the retailers to hold the stocks of certain goods. Well advertised brands can be sold off easily by the retailers. ADVANTAGES OF ADVERTISING 1. Advertising leads to higher profits by increasing sales. 2. It helps to launch a new product in the market. 3. Consumer can be better informed of the goods available and of their relative merits through advertising. 4. Spreading market by the increased demand. 5. Reduce cost of production by the increased sales and revenue. 6. Enables the business firms to compete with other similar business. DISADVANTAGES OF ADVERTISING 1. Advertising can be very expensive. 2. The cost of advertising may lead to higher prices for consumers if sales do not increase sufficiently to cover the cost of advertising. 3. Some advertisements carry the misleading information. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 17

4. Advertising can persuade consumers to buy things even if they do not really want them. 5. Increase spending and purchasing habits among the people. TYPES OF ADVERTISING 1. Persuasive advertising. In this advertisement the advertiser tries to persuade the public to buy his products or services by explaining the various good qualities which possesses over other similar products. E.g.:- Lower price, Large car parking facilities, buy one get two, 20% discount, warranty, etc. 2. Informative advertising. In this advertisement various information about the products, sellers and services are passed to the public. It covers the general information of a particular product or shop. E.g.:- Name of the shop, Location of the shop, Contact details, New product or service, Advertising for employees, Warning and instructions, New events such as exhibition, sports match, music shows, etc 3. Competitive advertising This type of advertising is carried out by different producers of different brands of the same products. Each producer tries to compete with other producers in order to increase sales and market. E.g.:- Advertisements of soap, cool drinks, etc. 4. Collective advertising. When all the producers of the same industries combine to advertise their products is called collective advertising. These advertisements are usually sponsored by trade associations. E.g.:- Join the tea set, Drink more tea, There is no substitute for coffee, etc 5. Sponsorship advertising. In this advertising a sponsor conducts a particular cultural or sports event and meets all the expenses himself. He can advertise through the events about his products and services. E.g.:- Coca cola conducts foot ball match or cricket match, Wataniya conducts cultural meet and musical programme, etc 6. Institutional advertising. Advertising whose purpose is to promote the image of a business organization rather than the sale of a product or service is called institutional advertising. This advertising is also used to create public awareness of a business firm or to improve its reputation in the marketplace. E.g.:- Educational institutes, Coca-Cola, etc. METHOD OF ADVERTISING APPEAL Advertising appeals are the techniques or methods or devices used within the advertisement in order to attract more consumers. E.g.:- Colour, shape of the products, back ground music, demonstration by famous persons like film star, foot ball star, singer, cartoon characters, animals, etc.

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METHODS OF SALES PROMOTION These are methods used to promote sales as part of advertising. The aims of sales promotion are same as those of advertising, but promotions schemes tend to demand more of the consumer than just watching or reading of advertising. E.g.:- Discounts, Free gifts, Free samples, Loss leader, buy one get two offers, Special packaging, etc. 1. Discounts. This is a special percentage of reduction given by the seller to the buyers on selling price for a particular period of time for the purpose of increasing sales. 2. Free gifts. This is a surprise product given as free along with certain purchases in order to increase sales during a particular occasion. 3. Free samples. These are free samples of new products given to the consumers without charging any money. This is given in order to capture market for the new products. 4. Loss leader. This is a method followed by a new retailer to attract consumers by selling goods at lower price than cost price. 5. Coupons. This is method of sales promotion by which the consumers will be given special coupons on each purchase from certain shops, these coupons can be returned and certain amount will be refunded to the buyers.

6. Competitions. Sometimes producers may organize competitions for the buyers those who purchase of several packets of the producer’s goods. It consists of lucky draw, mega prize, free tour, etc. 7. Loyalty cards. Under this scheme the regular customer is given a card which benefits him when purchases goods repeatedly from the same shop. When the purchases reach to the fixed target, the customer will be given a cash discount or a voucher for further purchases. DIFFERENCE BETWEEN ADVERTISING AND SALES PROMOTION 1. Advertising is a part of sales promotion. 2. Advertising spreads information where as sales promotion boosts the sales. 3. Advertising is happening mostly outside of the shops where as sales promotion is taken place within the shops. 4. Advertising is focused to long run where as sales promotion may be focused for a particular limited period such as New Year, Christmas, etc ADVERTISING MEDIA Advertising media are the instruments or methods used to pass information from the advertiser to the public. Types of advertising media [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 19

1. Television advertising. Advertisement through TV is known as television advertisement. Nowadays it is popular because which can carry both audio and visual messages. 2. Internet advertising This is the latest trend of advertising used internet services. It enables the consumers to contact sellers and purchase by paying through cash cards. It provides world wide acceptance for advertisers. 3. Radio advertising. It is a traditional mode of advertising by which radios are used for passing audio messages. It is widely circulated and preferred by most of the people. 4. The news paper. These are common method of advertising by which news papers carry the messages of advertisers. It is cheap as well as can be kept for long time. 5. Posters. This is a cheapest mode of advertising using a sheet of paper carrying a message printed in attractive colours. 6. Magazines or Trade journals. These are printed mode of advertising through the periodicals and distributed weekly, monthly, yearly, etc. 7. Window display. When the products are exhibited beautifully through the windows of the shop is called window display. These displays are made in front of the shops. 8. Digital bill board These are electric displays placed in front of the shops and in public places to show pictures or name of a particular product. INDOOR AND OUTDOOR ADVERTISING MEDIA 1. Indoor advertising media. The advertising media that deliver the message to the public when they are at their houses are called ‘indoor advertising media’. E.g.: TV, Radio, Internet, Newspaper, magazines, etc 2. Outdoor advertising media The advertising media that deliver the message when people set out of their houses are called ‘outdoor advertising media’. E.g.:- Posters, digital bill boards, window display, etc ADVANTAGES OF INTERNET ADVERTISING 1. It provides wide area than all other media –world wide accepted. 2. It provides 24 hrs services. 3. Consumers can contact to the sellers, purchase the goods and can pay money on-line. 4. It helps in mail order business. DISADVANTAGES OF INTERNET ADVERTISING 1. Chance of misuse and malpractices. 2. High cost of investment to install internet. 3. It cannot be possible where there is no internet facility. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 20

4. Lack of technical knowledge about computers. ADVERTISING AGENCY An advertising agency is a business organization which develops or creates and places advertisements in the suitable media on behalf of a firm. Functions of advertising agents 1. Provide advices on best form of advertisements to the relevant business firms 2. Creating the advertisement for the business organizations. 3. Conduct market research 4. Helps to select suitable media for the business organization on the basis of their target, budget, etc. FACTORS TO BE CONSIDERED BEFORE SELECTING A MEDIA FOR ADVERTISING 1. Nature of the product. According to the type of product the media can be selected. For example, if the product is perishable the suitable media is poster or local news papers. 2. The Target The target means the group of people to whom the advertisement is prepared for. For example:-Products for youths, for women, for children, etc. 3. Market (Advertising coverage) The media can be selected according to the market that is local market or national market or international market. According to the area the media may be changing. 4. Cost of advertising (budget). If the business organization has enough budgets they can select expensive or mass media which will cover wide area. 5. Time The media can be selected according to the time that how long the advertiser wants to last his message in the minds of public. On the basis of this, either short message or wide message can be given. 6. Image to be conveyed According to the image to be conveyed, the advertiser can use different methods of appeal. For example if the message for children, he can use children or cartoon characters in the image. For the sales of football and sports equipments, he can use a foot ball star UNIT-6 TRANSPORTATION Transportation Transportation is an important aid to trade by which the movement of physical things can be possible using commercial vehicles. IMPORTANCE OF TRANSPORTATION 1. Transportation helps to the movement of raw materials , finished goods and the labour from one place to another 2. It saves the time and cost of distribution of goods 3. It helps in continuous production by supplying raw materials in time. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 21

4. It helps in international trade to export and import 5. It increases the employment opportunities 6. It helps the consumers to get goods in time 7. It helps in foreign trade and increases the economic growth. TYPES OF TRANSPORTATION The transportation methods are of three types 1. Land transport 2. Air transport 3. Sea transport

1. LAND TRANSPORT Land transport is a common method of transport on land areas. Land transport is of two types -Road transport -Rail transport A. ROAD TRANSPORT Road transport means the transportation using wheeled commercial vehicles on roads Advantages of road transport. 1. Flexibility:-it is flexible method and can be seen everywhere in the land areas. 2. Door-to-door service:- It helps to the door to door delivery of goods to the customers 3. Remote rural areas:- It is possible to the remote rural areas where there are no more infrastructural facilities like rail way link, air or sea port links. 4. Convenience:- According to the type of goods the vehicles can be selected and used for short term distances, e.g.:- Pick-up vans, trucks, lorries, etc 5. Motor vehicles:- The arrival of motor vehicles increased the speed of transport according 6. Lower cost:- Comparing to other methods of transport, it is less expensive and can be used the vehicles according to the consignment. 7. Suitability:-It is the most suitable mode of transport for carrying goods over short distances. Disadvantages of road transport. 1. Bulk goods. Road transport is not suitable for carrying bulk goods for long distances. 2. Long distance. It is not suitable for carrying goods for very long distances. 3. Air pollution The increased use of vehicles leads to the air pollution and diseases. 4. Congestion and delays Road transport may be subject to delays because of rush and traffic problems 5. Chance of damage Comparing with other methods of transport, it increases the damage of goods. COMMERCIAL VEHICLES USED FOR ROAD TRANPORT. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 22

1. Tanker trucks. These are heavy trucks or Lorries specially built for carrying liquid items such as Oil, gas, water, etc. 2. Roll-on roll-off trucks. These are heavy trucks specially built for carrying goods without unpacking. It is suitable for carrying vehicles, machineries, etc. 3. Container trucks. These are heavy trucks/lorries specially built for carrying containers. These are used to carry heavy weighted goods for long distance. It may be refrigerated to carry perishable goods too. 4. Delivery van. These are small or medium pick-up vans used by the suppliers to deliver goods to the particular parties in the short distance. 5. Passenger vehicles. These are vehicles used for carrying passengers from one place to another. These include bus, taxi car or rental car, jeep, etc.

B. RAIL TRANSPORT. It is an important mode of land transport through a specially made metal tracks called rail ways. It is a largest and fast mode of transport in land area. Advantages of rail transport. 1. Speed. Comparing with other modes of road transport, rail transport is faster and suitable for long distance. 2. Lower cost of labour. In rail transport, there is no need of number of labours, normally two or three employees are there –a driver and two guards. So it saves labour costs. 3. Bulk commodities Railways are particularly suitable for the transport of bulk commodities such as coal, iron and steel over long distances 4. Containerization Containers can be used in the rail transport. It helps to avoid delays, breakages, theft and Protect from weather conditions. 5. Less pollution. The arrival of electric trains reduced the air pollution happens due to the consumption of diesel and coal. 6. Distance. Railway transportation is intended to long distances carrying heavy goods such as oil, cement, coal, etc. Disadvantages of rail transport. 1. Needs special tracks. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 23

For rail transport, specially built metal tracks called rail way, required. So it is limited and not available everywhere.

2. Depended on other vehicles The goods can be loaded and unloaded only at railway stations, but for further distribution of these goods, other vehicles such as trucks or pick-up vans are necessary. 3. High capital cost. For building railway tracks and signal system, high cost of investment is required and not possible to private individuals. 4. Delays. For loading and unloading of goods there are too much handlings and workers required. Some times it leads to the delay in supply of goods. 5. Not suitable for Short journeys Short journeys by rail usually waste time and money, particularly where the consignments are small. Types of trains 1. Passenger trains. These trains carry passengers from one place to another place. These trains run on fixed time tables. 2. Container trains These are heavy trains having many coaches specially built for carrying containers. 3. Bullet trains. These are high speed trains moving on the special tracks with the help of magnetic force. These trains can move around 500 km per hour. 2. AIR TRANSPORT. Air transport is a very expensive as well as fastest mode of transport than all other modes of transport using aircrafts. Advantages of air transport. (Importance of Air Transport) 1. Speed of air transport is higher than all other methods of transport. 2. It is suitable for carrying light weighted high valued goods such as diamond, gold etc, safely. 3. It is useful to carry perishable goods to any part of the world without spoilage. 4. It is useful to carry emergency goods such as news papers, medicines, food and emergency help quickly. 5. It is suitable for carrying goods such as electronic goods, computers, etc, without damage. 6. No need of special packing to the goods because the chance of damage is less. 7. It is suitable for landlocked countries there is no direct sea access. Disadvantages of air transport. 1. The rate of charge is usually higher than any other mode of transport. 2. High cost of investment required for buying an aircraft. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 24

3. Only limited quantity of goods is allowed to carry at a time. 4. Chance of risk is high. 5. Air services may be affected due to the bad weather. 6. Needs other vehicles to carry goods from the airports to the final destination. TYPES OF COMMERCIAL AIRCRAFTS 1. Passenger flights. These are used to carry passengers from one place to another. 2. Cargo flights. These are heavy flights specially built for carrying cargoes bulkily. 3. Container flights. These are newly arrived flights for carrying containers from one place to another.

3. SEA TRANSPORT Sea transport is the traditional and common mode of transport. It is less expensive and slow mode of transport. Advantages of Sea transport 1. Cheap:- Sea transport is cheap for carrying bulky and heavy goods over long distances. Moreover the fuel needed to run a ship is much less when compared with air transport. 2. Bulk goods:- Heavy weighted goods can be delivered in a single journey. Oil tankers can deliver four hundred thousand tones of oil in a single journey. 3. Flexibility:- Ships go where business takes them. Hence they are flexible and exporters can transport goods easily. 4. Perishable goods:-Perishable goods can be transported in specially built refrigerated vessels. 5. Containerization:-Goods are now packed in containers, sealed and then transported in container ships. It reduces the chance of damage and theft. 6. Safety:- The chance of damage to the products due to the shake of vehicles will be lower than in sea transport comparing with road transport. 7. Long distance:- Sea transport will be cheap for long distance for carrying heavy goods. Disadvantages of sea transport. 1. Lower speed: Sea transport is not suitable for goods urgently needed because of its slow speed. 2. Not suitable for all the goods:- Sea transport is no suitable for the goods which are to be delivered immediately, such as perishable goods, news papers, etc. 3. Chance of loss due to deterioration:- The goods may be damaged due to the salt water. 4. It is not suitable for short distance:- For carrying small goods over short distance, the sea transport will be expensive. 5. Weather:- Sea transport is greatly depending upon the weather and tide conditions. COMMERCIAL VESSELS USED FOR SEA TRANSPORT. 1. Liner. Liners are of two [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 25

Passenger liner:- These vessels carry passengers and run on fixed routes in fixed time according to the time table. Cargo liner:- These vessels carry huge cargoes and run on the prefixed routes and time. 2. Tramps. These are cargo vessels and do not have fixed time and route for the voyage. They set out when they have sufficient loaded. 3. Tanker ships. These are bulk carriers specially built to carry liquid items such as Oils, gas and other petroleum products. 4. Container ships. These are ships can carry heavy weighted containers. It is used for exporting goods. 5. Ferries. These are small vessels- boats or ships which can carry passengers over short distances on a regular route. 6. Roll-on roll-off ferry (Ro-ro ferry) These are special ships can carry goods unpacked. These ships can be used for carrying vehicles and machineries. 7. OBO (Oil, Bulk, Ore) ships. These are heavy vessels can carry both liquid and solid items such as Oil, ore, etc. OTHER FORMS OF TRANSPORT Pipeline Transport This mode of transport can be used to carry liquid items such as petroleum products and gases. It is safe and secure because separate pipelines can be laid on land and can be used over long distances from the place of production. For example:- Oil rigs to Refineries. Advantages of pipeline transportation 1. Less expensive than other method of transport. 2. Less air pollution. 3. Once installed, there is no need of more labourers to handle. 4. It is not affected by weather conditions. Disadvantages of pipeline transport 1. High initial cost to install pipelines. 2. Only suitable for certain types of products-liquid and gases. MODERN TRENDS IN TRANSPORT Following are the recent developments in transportation sectors. 1. Charter transport. Under this method, the user can hire the vehicles for a particular period or a journey. 2. Express road routes. This is an important development in road transport. The express highways ensure the speedy transportation on land area. 3. High speed railways. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 26

The development of electric trains and bullet trains increased the speed of railway transportation and reduces the cost too. 4. GPS (Global positioning System). GPS is a satellite based device used to find location and possible routes to a particular destiny. It saves time and reduces delay in transportation. 5. OBO (Oil, Bulk, Ore) ships. These are heavy vessels can carry both liquid and solid items such as Oil, ore, etc. 6. Containerization Containerization means the storing of goods in large metal boxes for carrying from one place to another. Containers are large metal box used for storing the goods.

Advantages of Containerization or containers Container acts as a warehouse to protect the goods against damage or theft. 1. It helps to store goods for long term. 2. It helps to allow trans-shipment of goods without unpacking. 3. It ensures the quick turnaround of ships and other forms of transport. 4. It saves warehouse space and labour expenses. 5. It provides refrigeration facility for perishable goods. Disadvantages of containerization 1. High capital costs are involved in purchasing and maintaining containers. 2. Special machines like cranes are necessary to handle the containers. 3. Containers occupy a lot of space and hence large space is needed to keep the containers. 4. The usage of machines like cranes reduces the employment opportunities. DIFFERENCE BETWEEN LINERS AND TRAMP SHIPS Liners Tramp ships 1. Liners run on fixed routes. 1. Tramp ships do not have fixed routes. 2. Liners run on fixed time table. 3. Liners carry passengers and cargoes. 2. Tramp ships do not have fixed time table. 3. Tramp ships do not carry passengers.

FACTORS TO BE CONSIDERED WHEN CHOOSING A METHOD OF TRANSPORT 1. Bulk of the consignment. 2. The degree of urgency. 3. Value of the consignment. 4. Nature of goods. 5. Choice of transport. 6. Distance. 7. Speed. 8. Risk of damage. 9. Convenience.

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TRANSPORT DOCUMENTS. 1. Delivery note It is sent by the seller to the buyer along with the goods to confirm the delivery of goods. It is used when the goods are sent through the seller’s own vehicles. The delivery van driver brings both the goods and the delivery note and the buyer has to sign on it after the goods are received. 2. Consignment note. This is similar to delivery note but it is used when the goods are sent by hired vehicles. 3. Bill of lading The bill of lading is the most important export document whenever goods are sent by ship. It is issued by the shipping company. It is a document of title to the goods which means the holder can claim the goods from the ship when it reaches the destination. 4. Air way bill. An airway bill is issued by an airline company when the goods are handed over to them. It is sent along with the goods.

UNIT-7 COMMUNICATION Communication Communication is the process by which the information or messages can be sent and received among the people. It is an important aid to trade. Importance of communication in business 1. Communication speeds up the contact between the buyer and the seller. 2. It acts as a connecting link between the employer and employees. 3. It helps to save time and cost in trading activities. 4. It helps to increase market for new products by informing the public. 5. It helps to bring buyers and sellers together. 6. It helps to maintain good relationship among the parties. 7. It helps to reduce the staff wages and other costs. Methods of Business Communication Broadly the business communication is of two types. Internal Communication -it means the communication is taking place among the employees within the business organization. It may be either upward or downward. External Communication -it means the communication is taking place between the business organization and its outside customers. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George

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Forms of Communication Communication process can take place in the following forms, 1. Oral Communication. In oral communication information or messages are put into spoken words. As far as Oral Communication is concerned, a business organization has the following types of oral communication. a. Face to face communication - In this communication, the parties come face to face and pass information directly. It may be in formal or informal ways. b. Interview - It is a formal method of communication used for selecting employees. It is conducted by the employers who collect information from the interviewee. c. Meeting - A meeting may be formal or informal. It is used for sharing common ideas among a group. It is followed by certain procedures. 2. Non-Verbal communication. Communication without the use of spoken language Nonverbal communication includes gestures, facial expressions, and body positions (known collectively as “body language”), e.g.:- Nodding of heads, waving of hands, blinking of eyes, etc 3. Written communication. In this form of communication, written words are used to convey messages. It is sent through printed or electronic media. The following are the forms of written communication. a. Letter- It is used for external communication. The information are arranged in a specific order and sent to the parties. b. Report- It is an upward communication by which the facts are collected in a specific order about a problem or task and submitted to the superiors by the subordinates. c. Memo- These are downward communication by which the important messages are sent to the subordinates by the superiors. 4. Electronic Communication a. Internet. This is the latest form of electronic communication having world wide acceptance. It is fast as well as cheap. Much information can be collected through the websites. Advantages -It is faster than any other method of communication. -It provides 24 hrs services -It ensures worldwide access -It is cheap and convenient. b. Intranet. This is similar to internet but limited to a particular area or business organization. It is an internal form of communication by which employees can communicate one another. E.g.:-Communication between employer and employees. c. E-mail. This is the cheapest form of communication which having world wide access. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 29

d. Telex. Telex is a combination of telephone and typewriter. This is an oldest form of fax by which the messages are typed into a special machine and transmitted to telex printer via telephone lines. e. Fax (Facsimile Transmission). This is a common method of communication used to send the copies of written documents or pictures among the parties. A document is scanned and can be sent through telephone line. E.g.:- To send the copy of invoice, statement, debit and credit note, etc f. Teleconferencing. Teleconferencing means the communication through the telephones. It may be spoken or typed. e. Video conferencing This is the latest form of communication by which different parties staying in different countries can communicate with one another. It is a satellite based service and both audio and visual can be shared at the same time. E.g.:- It is suitable for communication among the branches of Multinational company on ad hoc meetings. Communication media 1. Internet 2. Television 3. Radio 4. Newspaper 5. Telephone 6. Magazine Factors influencing the choice of Communication method 1. Cost of Medium According to budget available, the types of medium can be selected for communication. The higher the circulation needs, the higher the cost and vice versa. 2. Urgency Depending on the urgency, the medium of communication can be selected. For example parties want to communicate immediately; they can use email or telephone, etc. 3. Accuracy and secrecy Information must be sent to the correct destination without delay or wrong delivery. There should be secrecy in communication so the parties can use electronic methods rather than traditional methods like letter or telegram. 4. Convenient Communication medium should be convenient to the parties, for example- while travelling mobile phone will be suitable and in the office room land line or internet will be suitable. 5. Record of information. Some medium provides the proof of delivery and communication, for exampleemail and video conferencing. 6. Target. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 30

Target means the group of people to whom to be communicated. If world wide access is required, internet can be selected or for local area, letter or telephone can be selected. The Post Office The post office is a public sector enterprise which renders services to trade and commerce regarding communication. 1. Letter post In this service, the parties can exchange written letters through post office by paying a less amount. Letter post will be in the following types. a. Ordinary Post : - It is cheap and slower method of sending written documents. b. Business Reply Service: - In this service, the traders can send short business reply to the parties at a lower price. The sender has to deposit an advance amount with the Post Office to cover the likely costs of delivering the letters. The sender is awarded by the Post Office a licence number and which must be stuck on every envelope used together with the words ‘Business Reply Service’. Pays only for returned letters or replied letters c. Freepost: - This service enables the parties to send number of envelopes at a lower price. Pay forward, recipient pays a surcharge for postage d. Registered post: - in this service, the customers can send valuable things to the parties. It is safe and the customers will be given the proof of delivery. The charge will be imposed on the basis of the value of the contents. Compensated if lost 2. Parcel post: - In this service the parties can send parcels to the customers. The price will be based on the weight of the parcel. Max weight handled by the post office is 10kg 3. Certificate of posting. By charging a small charge, the post office will issue a certificate showing the proof that the customer has posted a parcel or letter to a particular address. 4. Post codes. This service allows the automatic sorting of letters to the particular addressee. It helps to identify the location or address immediately. 5. Data post: Data post has been developed to meet the punctual delivery of some items like letters, documents, parcels etc. It ensures the fast delivery of things to the addressee in time. Delivery done overnight 6. Payment through the Post Office -Postal orders -Registered Post

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UNIT-8 BUSINESS UNITS Types of Business Units According to the ownership, the business units are classified into three, they are 1. Private sector enterprises 2. Public sector enterprises 3. Joint sector Enterprises Private Sector Enterprises Private sector enterprises are enterprises which are owned and controlled by the private individuals such as sole traders, partners, and shareholders. Their main aim is to make profit. Public Sector Enterprises Public sector enterprises are enterprises which are owned and controlled either by the state Government or by the central Government. It is managed by the board of directors who are appointed by the Government. The main aim of the public sector enterprises is to provide services rather than profit making. Joint Sector Enterprises Joint sector enterprises are enterprises owned and controlled by both Govt. and private individuals. Types of Private Sector Enterprises 1. Sole trade business 2. Partnership business 3. Public limited companies 4. Private limited companies 5. Co-operative Enterprises 1. Sole Trade business It is a business unit which is owned and controlled by a single owner. He invests his own capital and manages all the activities of the business and takes the entire profits as well as bears all the risks of the business. Features of sole trade Business 1. It is very easy to start business because there are few formal procedures required. 2. It is flexible so the owner makes independent decisions. 3. The owner has personal contact with employees and customers. 4. There is no sharing of the capital, profit and loss. 5. No need of more skills and efforts to run the business because of small size. 6. It ensures self employment opportunities to the individuals. 2. Partnership Business. -The partnership business is defined as a voluntary association of two to twenty people to carry on business with a view to make profit. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 32

-Partnership business is established with a deed of partnership, which is a legal agreement of the terms and conditions of the partnership, signed by all the partners. Features of a partnership business 1. There may be minimum 2 and maximum 20 partners (except in a Professional partnership (solicitors, for example) where there is no upper limit) 2. All partners are entitled to be involved in the management of the business 3. Profits and loss of the business are shared by the partners according to the ratio agreed in the partnership deed. 4. Sharing of capital and ideas among the partners. 5. Lack of perpetual succession, death, insanity or insolvency of any partner may result to the winding up of the business. 6. Unlimited liabilities of the partners. Types of Partnership business a. Ordinary (General partnership) This is a partnership without having the feature of limited liability to the partners. They are responsible for the entire liabilities of the business. b. Limited partnership This is a special type of partnership with the feature of limited liability to the one or more partners in the business. Such partners cannot take any part in the management. Advantages of a partnership business Easy to start the business with two members. Sharing of capital among the partners may result better running of business. Sharing of ideas and experiences among the partners ensures smooth management. Division of work is possible. Each partner may concentrate on a particular activity of the business, such as sales, administration etc. All the partners are involved in the management.

1. 2. 3. 4. 5.

Q. Explain the demerits of partnership business. 1. Partners have the unlimited liability. 2. Sharing of profit 3. Lack of continuity of the business if anything happened to any partners. 4. Chance of conflicts among the partners may be high in the managerial level Types of partner There are three main types of partner, each of which has different rights and responsibilities. 1. General partners They invest in the business, take part in running it and share in its profits. Each general partner is fully liable for any debts that the partnership may have. 2. Limited partners They are not permitted to participate in the day-to-day running of the business. Their debt is limited to the amount of their initial investment. 3. Sleeping partners [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 33

They invest money in the business and share in its profits, but do not take part in day to businesses. Like general partners, they are fully liable for the partnership's debts. Limited Companies Companies are of two types, they are  Public Limited Companies  Private Limited Companies 3. Public Limited Companies A company is considered to be Public Limited Company when it is registered under any of the companies Act and is able to issue shares to the public. E.g.:-Coca-Cola Ltd, Bank of Maldives PLC, MTCC.PLC, etc. Features of a Public Limited Company 1. It should be registered under the Company 2. It can issue shares to the public for raising capital. 3. The issued capital of the company must be at least £ 50000. 4. The name of the company ends with the words of PLC or Ltd. 5. There should be a minimum 2 members to an upper limit of authorised share capital to start the business. 6. Shareholders are the owners of the company. 7. Membership is open to the public but is by invitation through a prospectus 8. On formation, the promoters of the company draft and submit to the registrar of companies the prospectus, articles and memorandum of association and statutory declaration 4. Private Limited Company A company is considered to be private limited company when it is registered under the company Act and is not able to issue shares to the public. E.g.:- Sony (pvt) ltd, Reefside (pvt) ltd, etc Features of a Private Limited Company 1. It should be registered under the company Act 2. It cannot issue shares to the public. 3. There is no limit to the issued capital 4. The name of the company must end the word of PVT.LTD. 5. There should be minimum 2 members to start the business. (No limit of members under the British Companies Act and maximum of 50 members under the Zimbabwe Companies Act) 6. Shareholders are the owners of the company. FORMATION OF LIMITED COMPANIES The formation of limited companies is governed by the Companies Act. This involves complex legal formalities i.e. Articles and Memorandum of Association and Statutory Declaration which must be submitted to the registrar of companies. The company must be registered through the issue of a Certificate of Incorporation by the Registrar of [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 34

Companies. The following are the important documents required for the formation of a limited company a. MEMORANDUM OF ASSOCIATION It is an important legal document of the company, prepared by the promoters of the company. It furnishes the objectives and other details of the company. It must contain the following: Name of the company, Registered office, Objectives of company, Statement of limited liability, Amount of share capital; Number of shares to be taken by each of the four directors b. ARTICLES OF ASSOCIATIONT It is an important document which contains rules and regulations relating to the internal management of the company. It includes the following 1. The rights and obligations of the directors, 2. Procedures for calling a general meeting of the company, 3. Procedures for electing directors, 4. Borrowing powers of the company. c. STATUTORY DECLARATION CERTIFICATE. It is a legal declaration made by the officially committed authority furnishing the Act and the rules there under have been complied with. d. CERTIFICATE OF INCORPORATION This is the certificate issued by the Registrar of the companies giving legal approval to start the business. It ensures the company has a legal status. So the private limited companies can start business with this document. e. CERTIFICATE OF TRADING This is the final document required by the Public Limited Company in order to start business. Important features of limited companies Formation Limited companies are formed by registration with the Registrar of Companies after the submission of the required legal documents. Name of the firm The name of a private company must contain the word ‘Pvt .ltd’, the name of the public company must contain the words ‘public limited company (Plc) ,or Ltd Capital Capital is acquired by sale of shares. Public companies can offer shares to the general public, private companies cannot do so. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 35

Ownership Shareholders are the owners of limited companies. Control Companies are controlled and managed by directors, who are elected by the shareholders. One share one vote principle is followed there. Liability for debts Shareholders liability is strictly limited to the nominal value of the shares they have agreed to buy. Continuity A limited company is a legal ‘person’, and has a life independent of the lives of its owners. Change of ownership Shares in a public limited company are freely transferable; shares in a private limited company can be transferred by consent of the other shareholders Annual Accounts All limited companies must publish annual accounts, and copies of these must be sent to the Registrar of Companies. Differences between a Sole trade business and a Private limited company Sole proprietorship (sole trader) Private limited company 1. Number of members: It is formed by a 1. Number of members: It requires single man. minimum two and there is no maximum limit of its members 2. Legal status: A sole trading business has 2. Legal status: A private limited Company no legal status or existence has legal status and it is formed according to the Companies Act requirements. 3. Liability: In sole trading business the 3. Liability: In a private company the liability of a owner is unlimited liability of a shareholder is limited. 4. Continuity: There is often a lack of 4. Continuity: Due to the death of a continuity in the event of the owner’s shareholder or any shareholder leaves the death. business; the business may not be affected. It has the legal entity 5. Control: - A sole trading business is 5. Control: The private limited company is controlled by a Sole trader. controlled by the promoters. 6. Capital: As the sole trading business 6. Capital: There is no shortage of capital grows, often the owner finds shortage of because in a private company the capital capital. may be contributed by many individuals

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Q. Differences between private limited company and partnership 1. Numbers of Members: In order to form a partnership business it requires minimum two and maximum twenty members. Whereas, to form a private company it requires minimum two and there can be no maximum limit.; 2. Formation Formation of a partnership business is quite simple whereas the formation of a private company is quite complex, because more legal formalities are involved. 3. Liability The liability of a partner is unlimited for the business debts whereas, in a private limited company, the liability of a shareholder is limited. 4. Capital Partners contribute money into the business for raising capital whereas, in a private limited company, the shareholders or promoters contribute capital and also it is controlled by board of directors. 5. Registration The registration of partnership business is optional whereas, the registration of private limited company is compulsory. 6. Continuity Partnership business has no legal status. Due to the death of any partner or any partner leaves the business, the business comes to an end. Whereas, the private limited company has a legal status. It is not affected by the above mentioned reasons. Q. Distinguish between a private limited company and a public limited company and a private limited company private limited company public limited company 1. The name of a private company must 1. The name of the public limited company end with the word ‘Pvt Ltd’ must end with the -words public limited company (Plc) or Ltd 2. It is not allowed to issue shares and 2. It is allowed to issue shares and debentures to the public for raising up debentures to the public for raising up capital. capital 3. No transfer of shares. It is possible only with the consent of other shareholders 4. It can have the capital as much as possible. 5. Private company is usually small in size 3. Shares of a public limited company are transferable to anyone without the consent of other shareholders 4. The issued capital of the company must be at least £50000 5. Public company is usually a large firm

5. Co-operative Enterprises It is an organization of persons who join together on voluntary basis for the development of societies and to satisfy their common economic interests. The basic object of co-operatives enterprises to provide services, not profit maximization. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 37

FEATURES OF CO-OPERATIVES 1. Democratic control Each member can vote for the managing committee, one man one vote principle is followed there. 2. Open membership There is no limit to the members, but the share cost will be 1 pound and a member can buy shares up to 5000 Pound 3. Service motive The basic objective of co-operative enterprises is to provide services to the societies but not profit maximization. 4. Distribution of profits The profits of the co-operative enterprises will be distributed to the members in accordance with the share value. PUBLIC SECTOR ENTERPRISET Public sector enterprises are those enterprises which are owned and controlled either by state government or by the central government. It is managed by the board of directors who are appointed by the government. The main aim of public sector organization is to provide public service rather than making profit. Q. List out the main types of public enterprise. 1. Government Departments These are important forms of public sector enterprises by which various Govt. departments undertake some activities under the supervision of ministers. E.g.:- Ministry of Education, Ministry of Health, etc 2. The public corporations These are organizations formed and controlled by the government based on an Act in the Parliament. E.g. – British Rail, The post office, ZBC, Air Zimbabwe, etc. 3. Municipal enterprise (Local government) These are enterprises which carry out some activities under the control of local government. These enterprises are managed by the elected members called Councillors. E.g. - Male Municipality

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Difference between a public corporation and a public limited company Public corporation Public limited Company 1.Aim It is established to promote public interest by providing essential goods and services at reasonable rates to those who need them, whether rich or poor. It is created by a special Act of Parliament which governs its operations It is established with the purpose of making a lot of profits

2.Formation

3 Capital

The capital is subscribed by the state or central government or both the governments 4.Management The management is entrusted to a board appointed by the Government and the management is accountable to the Parliament 5. Profit Profits made by the corporation distribution are used to pay debt or cover losses or for the expansions of the industry 6.Ownership and control It is owned by the state and controlled by the state or central or both the Government

It is formed by registration with the Registrar of Companies and its operation is governed by the Companies Act The capital is raised by issuing of shares and loans in the form of debentures and bank advances The management is entrusted to a board of directors who are appointed by the equity shareholders of a company Profits of public limited company are used for the expansion of the company or given to the shareholders as dividend It is owned by the members of the public who have shares in the company

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UNIT-9 BANKING Banking is an important aid to trade. It ensures the smooth running of business by providing finance whenever and wherever required. Banking includes the services such as depositing of money, withdrawing of money and the transferring. Bank: - Bank is a financial institution which deals with all the financial transactions of collection of deposits from the public, safeguarding the deposits and lending for the borrowers. Types of Banks Banks are of the following types. 1. Central Bank. Central bank is the apex banking institutions of a country. It controls entire banking activities of that country. So it is known as banker’s bank. The central bank of the England is Bank of England, The USA is Federal Reserve System and the Maldives is Maldives Monetary Authority (MMA). Features of Central Bank a. It is the principal bank of the country. b. It acts as the banker to the government. c. It does not deal with the public directly. d. It acts as banker’s bank. Functions of Central Bank 1. The note issue The central bank only has the right to issue currency notes and coins for the particular country. According to the necessity of currencies, the central bank issues notes and coins on behalf of the government and these currencies are spread to the public through the commercial banks. 2. Acts as a banker to the Government. Central bank acts a banker to the government because it does all the financial transactions for the government in domestic and international. 3. Controller of foreign exchange. The exchange of different currencies of different countries is known as foreign exchange. It will be under the control of central bank because the rate of exchange is fixed by it. 4. Acts as banker’s bank.

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The central bank acts as a banker’s bank that is every commercial bank has to keep an account with the central bank. Whenever commercial banks require money, the central bank helps them. 5. The lender of last resort. Central bank acts as a lender of last resort. Whenever the commercial banks or government need money, the final solution is given by the central bank. The central bank decides the rate of interest and the amount of loan. 6. The controller of credit. Central bank regulates the supply of money according to the purchasing power of currency of the country. The over issue of currency may lead to the inflation and financial crisis. 2. Commercial Banks. Commercial bank is also known as retail bank. It is having direct deal with the public in the form of depositing, lending and safeguarding of money. Functions of commercial bank 1. Collection of deposit. A commercial bank collects the money through the following types of accounts. a. Saving Account. Saving account is known as time deposit. The main purpose of this account is to have savings among the customers. Prior notice of withdrawal is required in this account to take money. Lower rate of interest is paid to the customers. b. Current Account. Current account is also known as demand deposit. Customers can deposit and withdraw any amount at any time. Normally there is no any interest to the customers. Current account is suitable for businessmen. c. Fixed Deposit Account. Fixed deposit account is also known as term deposit. Customers can deposit money for a fixed period of time and can enjoy highest rate of interest. Customers can withdraw money after the expiry of the stipulated term. 2. Lending of Money. A commercial bank lends money in the following ways.

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a. Loan. A commercial bank gives a fixed amount to the customers in the form of loan. A separate account is required for a loan is called loan account. The borrower should repay the amount with a fixed rate of interest within the agreed period. Loans may be: Short term loan (It is to be repaid within one year) Long term loan (It is to be repaid more than one year) Features of a loan - Loan may be long term or short term -interest rate is fixed and repayable during the period. -Collateral securities are needed -Separate account called loan account is required. b. Overdraft. It is an informal way of lending to the customers those having current account. It is a short term payment and the customers should pay high rate of interest to the banks. Features of overdraft -Overdraft is a short term advances -Interest rate is variable. -No need of collateral securities -Current account is needed -Helps to business men. 3. Collection of cheques, demand draft (DD), bills, etc and their encashment. 4. Safe deposit locker. The commercial bank provides the facility of safeguarding the valuable things of the customers by charging a small amount. Customers are allowed to keep their valuables such as gold, diamond, silver, documents, etc in this service. 5. Night safe facility. In this service, the customers can deposit money after banking hrs. Certain developed banks offer this service to their customers. 6. Plastic money System Plastic money refers to the use of cash cards such as debit cards and credit cards. a. debit cards. It is a plastic card used to pay for the purchases or to withdraw money from the actual deposit in the bank. In order to with draw money, the customers have to keep sufficient balance in their accounts. E.g.:-Visa card, Master b. Credit card: It is similar to debit card but the difference is the customers have to pay the money after a stipulated period that how much they withdraw using this card. High rate of interest is payable by the cardholders. E.g.:- Visa, Master card, Maestro, American express, etc [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 42

7. Standing order. Under this service the customers are allowed to pay a fixed amount at regular intervals. Here the customers can give a written order to the bank furnishing the payments such as rent, insurance premium, interest, etc. 8. Direct debit. It is similar to standing order but the creditor gives order to the buyers’ bank to pay the money with the prior authorisation of the buyer (debtor). Here the amount may be varying according to the invoices and the creditors are paid immediately. 9. Bank statement Bank statement is a valuable document issued by the bank to their customers. It shows the summary of all financial transaction during a particular period. This statement can be used for further financial dealings. 10. Bank draft. This is an easiest method to remit a large amount of money from one account to another by charging a commission. 11. ATM (Automatic Teller Machine): This is the latest service offered by the banks to their customers to withdraw cash using cash cards at any time without being in the queue in front of the bank. 12. Traveller’s Cheque: This is a cheque used instead of carrying large amount of foreign currencies when travelling abroad. These cheques can be encashed while abroad. 13. Bank Giro credit system. This service can be used to pay a single amount to a number of accounts at the same time. It is suitable to the payments such as salaries of the employees and payments to the creditors etc. 3. Foreign bank (Overseas bank). Foreign bank is the branch of any foreign bank situated in the country. It is an example of commercial bank and the main aim of this bank is to help their country’s people in foreign countries. E.g.:- State bank of India (origin-India), Habib bank (Pakistan), Bank of Ceylon (Sri Lanka), etc 4. Merchant Bank: It is a group of retail banks but refers specifically to the sixteen members of the Accepting House Committee. They accept deposits from customers, usually stipulating a minimum of £50000 and helps a company by making necessary arrangements which want to issue shares to the public. (Important) Modes of payments of Commercial banks 1. Cheque 2. Credit transfer (Transfer of money from one account to another directly) 3. Standing order [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 43

4. Direct debit 5. Bank draft (Demand Draft) (DD) 6. Traveller’s cheque 7. Electronic transfer a. Online banking (Internet banking) b. Use of plastic money (Debit card and credit card) c. Telegraphic transfer Cheque A cheque can be defined as a written order by a person to a banker to pay a specified sum of money on demand to the bearer of the cheque or to the named person on it. Parties to the Cheque 1. Drawer: - Drawer is person who writes or signs the cheque. Drawer orders the bank to pay an amount specified to the person named in the cheque. 2. Drawee: - Drawee is a bank on which the cheque is drawn and is ordered to pay the amount specified on the cheque. 3. Payee: - Payee is the person to whom the cheque is payable. The drawer him self can be the payee also. Types of cheque 1. Open or bearer cheque: It is type of cheque which can be encashed easily by anyone who possesses it. It is not safe to issue an open cheque. This type cheque can be issued to the persons who do not have a bank account. 2. Crossed cheque. If two parallel lines are drawn across the face of a cheque, it becomes a crossed cheque. The bank will not pay cash over the counter on a crossed cheque, because the crossing indicates that the cheque must be paid into a bank account. If a thief pays a stolen crossed cheque in to the wrong account, it will be possible to trace the account to which it has been credited. The contents of a cheque (The features of a cheque) 1. The date – All cheques should carry the date on which they are drawn. The date may be prior or post. The drawee bank will refuse to pay a cheque after six months have elapsed from the date of issue. 2. The drawee’s name- Each cheque carries the name of the bank on which the cheque is drawn and the address of the branch on which it is drawn. That bank is known as the drawee.

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3. The payee’s name - This is the name of person to whom the cheque issued, must be written on the top line of the cheque. 4. The drawer’s name – This is the name of person who writes or sign on the cheque. It is often printed beneath the box in which the figures are written. 5. The branch code number- This appears in the top right-hand corner of the cheque and again at the bottom in the magnetic characters to facilitate the automatic handling of the cheque. 6. The drawer’s signature - The drawer must also sign the cheque, to authorize the bank to pay the money out. If the cheque is not signed, or if the signature does not correspond with the specimen signature, the bank will not encash the cheque. 7. The amount – The amount that is to be paid must appear both in words and in figures. There is provided specified space for this purpose. 8. The cheque number - It appears in magnetic characters in the bottom left-hand corner of the cheque and also appears on the customer’s bank statement. 9. The account number - It appears at the bottom of the cheque, again in magnetic characters, to facilitate the automatic handling of the cheque. Dating of a cheque- A cheque may be Ante-dated or Post-dated. Ante-dated cheque: A cheque which bears a date which is prior to the date (past) on which it is drawn up is called an ante-dated cheque. Post-dated cheque: A cheque which bears a date which is yet to come (future), it is known as a post dated cheque. A post dated cheque shall not be paid by the bank until the arrival of the date mentioned therein. Stale cheque An ante dated cheque will not be paid by the bank if it is very old or out of date. A cheque is usually considered as a stale cheque if it bears a date of six months back. Reasons for the Dishonour of a Cheque (Refusal of a cheque) 1. The cheque may be Stale cheque 2. There may not be sufficient funds in the drawer’s account. 3. The drawer’s signature may not be the same as the specimen signature. 4. The amount written in words and figures may not be the same. 5. Defaced or torn cheque. 6. The cheque may be post dated (The date is yet to come) Monetary Policies of Central Bank [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 45

According to the condition of the economy, the Central Bank updates certain measures to protect the economy. During Inflation and Deflation the Central bank take measures to balance the economy. Central bank controls the supply of money and to maintain price stability by controlling credit. Credit Control Methods Following are the methods of credit control 1. Bank Rate: - It is the rate fixes by the central bank to maintain the surplus fund upon the other banks. During inflation, the bank rate is increased and during deflation the rate is decreased. 2. Variable Reserve Ratio: -Every commercial bank has to keep a minimum cash reserve with the Central bank. During inflation this ratio is increased and during deflation it is decreased. 3. Credit Rationing: In this method, the central bank fixes a limit on the amount of loans for every commercial bank. It may be varied according to the condition of the economy. Recent trends in banking Following are the recent developments in the present banking sectors. 1. Automatic Teller Machines. 2. Tele-banking. 3. Internet Banking (Online banking) 4. EFTPOS-(Electronic Funds Transfer at the Point of Sale) 5. Cash cards (Debit and credit cards)

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UNIT-10

INSURANCE

Insurance is an important aid to trade. It is a contract between two parties whereby one party undertakes the risk of the other by receiving an amount is called premium. Parties to the Insurance Insurer-The party who undertakes the risk is called Insurer. E.g.Insurance Company. Allied Insurance Company of the Maldives Pvt. Ltd. Insured-The person who receives the protection of loss from the insurer is called Insured. E.g.-Owner of the assets. Important terms in the Insurance. Insurance policy The document on which the contract of insurance is written is called an Insurance Policy Premium-It is a regular payment made by the policy holder to the insurance company. The premium may be paid either in lump sum or through periodical instalment Subject matter- The subject matter refers to the things what are insured by the insurer. E.g.- House, Boat, Vehicles, Life of the people. Types of Insurance Insurance is broadly classified into two: 1. Life insurance: Life insurance is also known as the contract of assurance. The insured risk (death or maturity of the term) in life insurance will be happened anyway so the payment is sure as far as an insurer is concerned. In this insurance, the life of the people is insured instead of assets or properties. 2. Non-Life insurance. (General Insurance) It is a type of insurance whereby the assets or properties are insured instead of life. The risk is not sure but the possibility to occur is fifty percentages and it may be either partially or fully. Need or importance of insurance 1. It provides protection against sudden and unexpected losses. 2. It encourages the habit of saving and investment. 3. It provides security to the assets as well as the life of the business men. 4. It reduces the difficulties in foreign trade. 5. It increases the confidence and efficiency of businessmen. Advantages of insurance. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 47

1. Protection Insurance provides protection against sudden and unexpected losses. It creates a sense of security in the life of an individual as well as the businessman. 2. Sharing of Risk: Insurance shares the risk to which human life and property are subject. It distributes a certain risk over a group of persons who are exposed to it on a cooperative basis. 3. Increases confidence and efficiency among the businessmen. The security of life and property given by insurance brings peace of mind and confidence to the insured. This increases their efficiency. 4. It enables to obtain to loan from the banks or other firms. Insurance serves as a basis of credit. Credit on insured properties is easy to secure. Banks may even charge a lower rate of interest in such cases. The policy is an important document it also can be considered as a collateral security for getting loans and advances from the banks. 5. Promotes Savings and investment. Insurance promotes the habit of saving among the public. In the case of life insurance, the premiums paid by the insured will be accumulated and paid after the expiry of agreed period. 6. Provides the better atmosphere for the employees and employers. Insurance helps to bring good working conditions in the business organizations. Any accident occurred to the workers during working time, increase the liability of employers. It can be managed by insurance. 7. Reduces the difficulties in foreign trade. Insurance reduces the uncertainties such as the chance of damage on products, loss on trading, bad debts, etc arising in international trade. RISK Risk means uncertainty. This includes the chance of loss, damage on assets or properties and the accident or the death of people. TYPES OF RISK Insurable Risks: - The insurable risks are calculable in terms of money. Insurance company can make this calculation on the basis of past statistics. Insurance company provides only protection against the insurable risks. E.g.- Motorcycle accidents, theft, damage of buildings, damage of properties, etc Non-insurable risks: -The non-insurable risks are not calculable in terms of money. The necessary calculations cannot be made because no statistics are available and insurance [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 48

protection cannot be undertaken. E.g.- Loss due to fewer sales, changes in fashion, less demand, loss due to bad management, examination failure, etc (Impt) PRINCIPLES OF INSURANCET Utmost good faith An insurance contract is based on the principle of utmost good faith. It means that both the parties to the contract must disclose all the material facts relating to the subject matter of the insurance. If the insured does not disclose all material facts, the contract between the parties becomes void. For example, when applying for the assurance, a person must disclose the age, the ownership of the property and the previous history furnishing the any loss happened so far. Insurable interest The insured should have insurable interest in the subject matter of insurance. It means that the insured must suffer a loss by the destruction of the subject matter and is benefited by its safety. For example, a person has insurable interest on his life, wife, his property, etc. Indemnity According to this principle, the insured will be paid only the actual loss happened to the subject matter. Here the insured is paid only the actual compensation. For example, if a 10-years old car is damaged so badly in an accident that it cannot be repaired, the insurance company will give the amount which is sufficient to buy a 10-years-old car in a similar model rather than a new model. Principle of subrogation This principle follows the principle of indemnity. According to the principle of subrogation, after the claim is paid by the insurer, he gets all such rights which the insured has in that subject matter. For example, a car is insured for one lakh, unfortunately it is damaged completely on a fire and the scrap remained worth 500. The insured will be paid one lakh as compensation and the insurance company will undertake the damaged car (scrap). 5. Contribution Sometimes a person may get his goods insured with more than one insurer for the purpose of making profit. This is referred to as double insurance. But in the event of loss, each company pays a proportion of the cost so that no profit is made by the insured. 6. Proximate cause: Before an insurance company pays out on a claim, it will want to satisfy itself that the claim is for an event caused by something which is within the [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 49

precise terms of the policy. The root cause of the event is known as the proximate cause and this must be covered by the policy for a claim to be valid. For example, a house is insured against the fire, if it is damaged due to earth quake, the insurer does not give the compensation. Important documents used in insurance 1. Proposal form. A person wishes to takeout any insurance protection, must complete a proposal form which requires him to answer a series of questions, so that it is in effect an application which the insurance company can accept or reject. 2. Policy. This is an important document issued by the Insurance Company to the insured. This shows the details about the contract made between them. Once the risk has been accepted and the premium paid, the company will issue a policy. It sets out the terms and conditions of the contract. 3. Cover note. While the policy is being prepared, the company will confirm that the risks have been accepted, by issuing a temporary document called the cover note. 4. Claim form. This is the form should be filled by the insured furnishing the details of the loss happened to the subject matter. This form should be verified by the insurer to pay the compensation. 5. Insurance Quotation Insurance quotation is an important document issued by the insurance company as part of advertisements of their business. It shows the entire details about the company and their businesses such as policies, amount of protection, premiums, agent’s details, etc. Uses of insurance quotations It helps to advertise the companies. People get information about the policies and services. People can compare the policies and can choose best alternate one Premium: It is a regular payment made by the policy holder to the insurance company. The premium may be paid either in lump sum or through periodical instalment Factors Affecting Insurance Premium The rate of insurance premium depends on the following factors [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 50

1. The nature of the property or assets According to the type of property the premium rate will be changed. If it is good in condition the chance of loss will be low and the premium rate also will be low. 2. Age of the property or assets If the property is very old, the chances of damage are high and so the premium will be high. 3. Value of the property or assets According to the value of the property, the premium may change. Higher the rate of premium will be charged for the high valued property. 4. Location of the assets or property If the property is near an oil factory or sulphur factory, the chances of fire will be high and will have to pay higher rate of premium. 5. Past details about the assets or property If the property has a record of many accidents, the premium rate will be high. 6. Chance of loss or damage If the property has highly inflammable contents or it deals with highly explosive items bring high chance of loss and leads to the high premium. 7. Precautionary or safety methods If the property is sufficient with precautionary measures like fire extinguishers, sprinklers, alarms, etc the insurance company will charge a lower rate of premium. 8. Cost of repairs. According to the maintenance cost or repair cost the premium rate may change. Assignment-1: What are the factors that are taken into account before a policy for motor insurance is issued? The age of the driver: Statistics show that drivers under twenty-five are more likely to make claims than older people are. 2. Eligibility of the driver The driver must hold a valid driving license in order to drive the car. 3. The type of the car If the car is very old, the chance of accident will be high, so the company may charge high rate of premium. 4. The value of the vehicle Higher the value of the car may be charged high rate of premium and vice versa. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 51

5. The cost of repairs Higher the cost of repairing and maintenance may lead to charge high rate of premium. 6. The area where the driver lives Accidents are more likely to occur in town areas where having high traffics than in remote rural areas. 7. The driver’s past record. The company will check the previous records of the driver in order to ensure his performance is good. If not satisfied, company may reject the proposal. 8. The driver’s occupation The company will search out the occupation of the driver such as sports driver, taxi driver, private vehicle, etc. Even sports driver, the chance of accident is high and will be charged highest rate of premium. Types of non- life policies (General Insurance) 1. Marine insurance a. Hull insurance It covers the vessels- boats, ships, launches, etc and their fixtures, either for a particular voyage or for a particular period of time. b. Cargo insurance It covers the goods (cargoes) carried by the vessels. The loss of goods will be undertaken in this insurance policy. c. Freight insurance Freight is not the same as cargo in this context: it is the charge levied by the shipping company for carrying the goods. If the goods are not delivered for some reason, the shipping company may have loss, so this loss can be managed in this policy. d. Ship owner’s liability This policy covers the losses due to injury to the passengers, crew or dock workers, etc. 2. Fire, motor, aviation insurance a. Fire insurance This policy covers the risks due to fire. b. Motor insurance Motor insurance is compulsory for all drivers. The various motor insurance is as follows: i. Minimum Legal Cover Policies This policy covers injuries to third parties on the public roads only ii. Third Party Cover This policy covers injuries to third parties on the public roads, damage of other people’s property and legal costs iii. Comprehensive Policy [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 52

This policy covers injuries to third parties on the public roads, damage of other people’s property, fire, theft, personal injury to the driver and other related legal costs. c. Aviation insurance This policy covers the losses to the air craft against accidental damage and the operator’s injury or the deaths of passengers and crew and third parties. 3. Accident insurance. a. Personal accident insurance This policy covers the insured against partial or total disability arising from accidental causes. b. Property insurance This policy covers the losses on the properties due to any accidents such as natural disasters, theft, fire , etc 4. Liability insurance:a. Public liability insurance This policy covers the accidents happening to the public due to the hazardous emission from the business organizations. b. Employers’ liability insurance This policy helps to reduce the liabilities of the employers happening inside the organization such as accident to the employees, death of the employees, etc. c. Fidelity bond This policy covers the loss of the employers happening from the fraudulent activities of the employees inside the organization. 5. Consequential loss policy. In the case of any accident occurred, the business may be interrupted for some periods. The owner has to face the loss of profit for that period due to the interruption in the business. If consequential loss policy is taken out, the insurer agrees to indemnify the insured for such loss of profits. Pooling of risk Insurance is based on Co-operation. A large number of people contribute money called premium to a central pool (collection); here the policy holders pay the premiums, become a large amount and out of this the compensation can be paid to the parties. The money collected as premium must be sufficient to pay compensation, and to get profit to the insured. Insurance Market Insurance market consists of the insurance companies, agents or brokers, underwriters and other parties. Lloyds’ of London [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 53

It is a corporation which provides facilities for its members (Brokers and Underwriters) who wish to provide or negotiate insurance for business or individuals. Underwriters: - Underwriters are the permanent members of Lloyds of London who accept insurance which are brought to them by the brokers and safeguard the insured against the risk. Brokers: - Brokers are the member of Lloyds’ of London. A public can obtain insurance only through the brokers, whose job is to find the best possible policy for their clients. Syndicates Underwriters have formed themselves into groups known as Syndicates. An underwriting agent accepts insurance on behalf of the Syndicate. Actuaries: These are expert people who calculate the premium based on the past statistical records. Assessors These are people help to establish what the insured receives in compensation after damage or loss. Why an insurance company may refuse (or reject) to provide insurance protection to a person? Answer:- Following are the reasons for the refusal or rejection of the insurance protection. If he hides any details about the subject matter. (Utmost good faith). If he has had convictions for dangerous to the subject matter. ( Consumption of alcohols, Drugs, etc) If he is outside the age ranges of the insurance policies offered by the company e.g. Age less than 18 years or Very old. If he is unable to pay the premium (bankrupt). If he has no insurable interest on the subject matter -not his own property Health reasons -suffering serious sick Chance of loss is very high- earth quakes, tsunami, etc Meaning of no claim bonus It is a reduction in premium given to the insured by the insurer for not making claim for the past years. For example, A person insured his property for the last three years by paying the premium of $1000, If there was no any loss (claim) on the property for the last three years, the company will give him a discount of 10% premium for the next year. Therefore he can insure his property by paying $900 (1000-100) as premium for the next year. Under insurance and over insurance [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 54

Over insurance If a property is insured more than its actual price, it is called over insurance. For example property worth $1000 is insured for $2000. It is illegal and the insurer may reject to pay the compensation if any loss occurred on such property. Under Insurance If a property is insured less than its actual price it is called under insurance. For example property worth $5000 insured only for $3000. It is considered as partial insurance so the insurer will pay a proportionate amount of compensation to the insured. The amount of compensation will be calculated by applying the following formula, Compensation = Insured amount X Actual loss Value of the property Role of insurance agents or brokers in the business Insurance agent is a person appointed to find the parties who need insurance services. 1. Agent helps to bring parties to the insurer 2. Agent acts as a middleman between the insured and insurer. 3. Agent helps to find better policy for the customers 4. Agent helps in documentation such as collection policy, filling up of proposal form, collection of cover note, distribution of quotations, etc 5. Agent helps to the payment of premium for the clients. UNIT-11 CONSUMER PROTECTION Consumer: - Consumer is the last link in the chain of distribution. The finished goods are used by the consumers directly to satisfy their needs and wants. Meaning of consumer protection. Consumers are often exploited by the unscrupulous sellers with the purpose of maximising their profit. So consumer protection is very important. Consumer protection means the protection of rights and interests of the public as a consumer. It focuses to free the consumers without exploitation from the sellers.

NB: The government intervenes in the economy to ensure that there is fairness and justice in trade. Legislation is enacted to protect the traders and consumers from unfair business practices; and the nation from hazardous goods.
Why consumer protection needed? All the business firms need to keep their costs as low and their profit as high as possible. For increasing profit they may follow wrong ways, which will lead to the exploitation. Consumers are exploited in the following ways, [email protected] [email protected] 55 [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George

1. Selling at higher prices The consumers pay higher price rather than the fair price because the prices might be fixed artificially high either by one firm or by a group of firms together. 2. Misleading price reduction. Fair prices might be unnecessarily high so that retailers can offer attractive reduction. 3. Product Risk. Consumers face product risks such as mortal diseases, electric shock, etc if they buy harmful and banned drugs, electrical appliances without safety. 4. False advertisements. False information about the product and its contents may mislead the consumers. 5. Food Adulteration. Consumers suffer from diseases and are subjected to the death if they buy adulterated food, which increases the quantity or colour or taste of the product using inferior and dangerous ingredients. 6. Malpractices in weight and quantity. This cause to the loss of money to the consumers and increases the profit of the seller in unusual way. 7. Duplication of products. Consumer fails to identify duplicate from the original and lead to the loss of money. Duplicates of popular brands of products can be seen in the market nowadays. 8. Expired or stale products. The sellers may be sold expired products especially in the case of food products will cause to the illness and other problems to the users. 9. Hoarding It means artificially creating the scarcity to a product in the market by unusually collecting its large quantity and it will cause to the higher price in the market. 10. Other practices. Late delivery of goods, improper packing, improper covering of the after sales services, sales of used products as new, etc cause the problems to the consumers. 11. Formation of cartel It helps to the formation of consumers union which will help to the collective bargaining and the movement against any exploitation from the sellers. Ways for Consumer Protection [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 56

Consumer Legislation Consumer Protection Agencies Government Organization Radio and TV Programmes Self Protection Consumer Legislation Consumer Legislation means the law or Act passed by the government to protect rights of consumers in different fields of trade. These Acts provides a technical knowledge to the consumers as well as traders. 1. Sale of Goods Act - 1979. This Act regulates most day to day trading. The basic provisions in this Act are; a. Goods must suit the purpose for which they are sold. b. Goods sold by description must fit the description. c. Goods sold by sample must correspond with the sample d. Goods must be of merchantable quality-that is, safe and in good condition. In the event of any of these conditions not being fulfilled, buyers are normally entitled to choose whether the retailer refunds their money, replaces unsatisfactory item or repairs it. 2. The Trade Descriptions Act -1968. This Act lays down high penalties for traders who deceive the public by making false claims for their goods or services, or who make inaccurate price comparisons. Misleading descriptions about a product is crime and this Act prevents such practices. 3. The Fair Trading Act -1973. This Act is controlled by the Director General who is assisted by the Consumer Protection Advisory Committee. The following are the Recommendations in this Act, a. Retailers are not allowed to quote manufacturers’ recommended price b. Shop keepers are forbidden to have notices such as “No cash refunded” as it will mislead a consumer as to his rights. c. This Act sets Codes of Practice for traders to follow some rules and regulations. 4. Consumer Protection Act 1987. Sometimes consumers are endangered by the goods they buy. This Act imposes certain commitments on manufacturers to supply safe products. Failure to do, so may liable a firm to pay unlimited compensation. 5. The Food and Drugs Act 1955.

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This Act controls the contents of food products and their labelling. It is enforced by the Health Department. This Act prevents the adulteration in food items using harmful ingredients. 6. Weights and Measures Act 1979 This Act helps to prevent the malpractices in the weighing and measuring of goods as per mentioned in the labels of pre-packed goods. Consumer Protection agencies It is impossible or the government to protect the rights of consumers by Laws. Instead, a number of organizations have been established to keep a day to day watch on consumer affairs. The following are the important organizations, 1. Citizens Advice Bureau (CAB) Their role is to act as a mediator between consumers and traders in the areas where there is no consumer protection agencies. 2. The British Standard Institution (BSI) It is an independent organization. It ensures the quality of products by providing certain standards to the manufacturers to follow. The kite-mark of the BSI is now well known, and regarded as a sign of quality. 3. The nationalized industries. To help the consumers, large nationalized industries may have their own consultative council. They will assist with the individual problems pertaining to the activities of such industries. E.g. :- The Post Office Users National Council 4. The Media Some media like news papers, radio, TV, etc have been running their own consumer protection services for many years. By this system individuals can complaint to the media, and it helps to bring the attention of a mass into such complaints. And also they promote consumer awareness programmes. Government Organizations 1. The National Consumer Council It was established in 1975 by the British government. The members are drawn from trade unions, Parliament, Industry and independent consumer organizations. Their role is to bring the consumers view to the government and provide support to the consumers for their convenience. 2. Ministry for Consumer Affairs This is a government organization specially established for handling consumer’s problems arising due to the unfair trade practices. Individuals can complaint to this against the malpractices. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 58

3. Competition Commission This is an independent organization created by the government appointed members for ensuring the well being of the consumers. Consumers Association Consumers Association is an independent non-profit organization established by different consumers as members. They test the products to find the best value for money and publish the list of good and bad points of a particular product in their magazines. Self Protection Consumers can protect themselves by ensuring the following ways. 1. by comparing the prices and qualities of the similar products. 2. Ensure the quality of products by finding that such as BSI, ISI marks. 3. Join in the consumer association to protect against the problems. 4. Beware about the rules and regulations of the government regarding the trade. 5. Avoid the sellers those who do malpractices. 6. Get advises from the consumer agencies such as CAB, CPA, etc.

The Government protects the consumer by enforcing the following measures: Safety All household goods must meet the standards of safety. Unsafe goods e.g uncoated electrical appliances, lead content pencils may not be sold. Weights and Measures. Correct quantities must be marked on packets. Shop seals and any other forms for measuring must meet the laid standards. Food and Health Food should precisely show production, consumption and expiry dates; ingredients and storage guidelines. The premises should be clean and hygienic. Price Control Legislated Maximum retail prices are marked on basic, essential goods offered for sale. Producers, wholesalers and retailers form trade associations to discuss and resolve challenges in their sectors. Trade Associations include Manufacturers, wholesalers, booksellers, transporters’ associations etc. These trade associations -promote standards of quality of consumer goods and services
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- maintain high standards of advertising and trade practice -have their goods labelled and described -test the goods for quality -take legal action against offenders -use distinguishable seals of approval on their goods. Consumers form associations to articulate shared common causes. Common causes might be Crossing borders between Botswana and Zimbabwe; South Africa and Namibia, Lodging issues, Students Examination entries etc.Name some consumer associations in your locality, explain their strengths and weaknesses. The Consumer Council of Zimbabwe (CCZ) is the commonest consumer association. The Organisation is government – assisted; sponsored by private organisations and the public. The CCZ’s Functions. -resolves conflicts between traders and consumers -the conflicts usually arise when items purchased are faulty -the trader refuses to replace or repair the item -the item is shoddy, substandard, fails to perform to the satisfaction of the customer. -it is inferior and derogatorily remarked as ‘Zhing – zhong’! -keeps watch on prices of goods and services and advises consumers accordingly. -ensures that advertisements are truthful, decent and ethical -ensures descriptions ,contents and labels are accurate and specific. -informs and advises the public on rights of the tenants, landlords, traders etc. -conducts surveys on current issues of concern and advises all concerned. -investigates complaints, anomalies and recommends corrective action.

UNIT-12 TRADE DOCUMENTS Trade documents are also known as business documents. These are written records that provide the details of the transaction between the buyer and the seller. Importance or Needs of trade documents [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 60

1. It provides written record of transactions that have taken place. 2. It helps to maintain books of accounts. 3. It helps to assess the rate of tax and revenue. 4. It helps the government to publish statistics regarding the business activities. Contents of Business documents A business document may have the following features or information 1. Date of issue. 2. Date of Transactions 3. Nature of transactions (goods) 4. Name of the parties 5. Amount of transactions 6. Terms and conditions of transaction 7. Serial number Types of Trade document According to the types of trade, different documents are used. Documents used in Home trade 1. Letter of enquiry It is a document sent by the buyer to the seller to find about the goods required, their availability, their prices, quantity and the terms of payment. The buyer can send a number of letters to various sellers to find best goods at lower prices. 2. Quotation It is sent by the seller to the buyer in reply of the letter of enquiry. It provides all the relevant information required by the buyer which has been mentioned in the letter of enquiry. It shows the types of goods, their brands, their respective prices, the terms of delivery, the terms of payment, etc 3. Catalogue Sometimes, instead of sending a quotation, the seller may send a catalogue containing detailed and classified information of the various types of goods offered for sale. It is similar to quotation but prices are not quoted there in. It can be used as an advertisement medium. 4. Order Purchase order is sent by the buyer to the seller to place an order for buying the goods regarding the quotation. It states the type, brand, quantity and price of the goods (as given in the quotation) as well as the terms of delivery, the terms of payment, the expected delivery date and the address to which the goods are to be sent. 5. Invoice [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 61

It is sent by the seller to the buyer to inform the buyer about the amount due on the goods supplied, stating also the type, quantity, price and terms of payment. It is a bill used for goods sold on credit. It is a very important document used for preparing accounting entries. 6. Advice note It is sent by the seller to the buyer to inform the buyer that the goods have been dispatched. It shows the quantity of the goods and the date of dispatch. 7. Delivery note It is sent by the seller to the buyer along with the goods to confirm the delivery of goods. It is sent through the delivery van driver and the buyer has to sign on it after the goods are received in good condition. 8. Consignment note It is similar to the delivery note. It is sent by the seller to the buyer when the goods are delivered through the hired vehicles. It is a formal instruction to the transport firm to deliver the goods to the customer. It is to be signed by the buyer for ensuring the right delivery of goods. 9. The debit note. It is prepared by the seller and sent to the buyer who has been undercharged on an invoice. It is an additional invoice sent to the buyer to pay the short amount. It informs the buyer that his account is debited, increasing the amount that he owes. Reasons for issuing a debit note. -If there has been an undercharge on an invoice -If some charges like delivery, packing, loading, etc. have not been included in the invoice. 10. Credit note It is prepared by the seller and sent to the buyer who has been overcharged on an invoice. The credit note is normally printed in red to distinguish it from other documents. It is sent to the buyer to deduct the over charged amount in the invoice. It informs the buyer that his account is credited, decreasing the amount that he owes. Reasons for issuing a credit note -If there has been an overcharge on an invoice -If damaged goods have been returned by the retailer -If the goods are short delivered to the buyer. -If the retailer has returned gift vouchers or coupons to the supplier 12. Cheque/draft.

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The cheque or draft should be sent by the buyer to the seller in the given period to settle the due amount mentioned in the invoice. Nowadays the traditional payment system is replaced by the online payment using cash cards. 13. Receipt It is issued by the seller to the buyer as a proof of the money received. When the payment is made by cheque, it is not necessary to issue a receipt since the cheque serves as a proof of payment. 14. Statement of account. It is sent by the seller to the buyer showing the summary of the transactions between the buyer and the seller for a particular period of time. It shows the amount of goods purchased, the returns made, the payments, cash discounts, and the details of the credit and debit note. Cash discount and Trade discount Trade discount Trade discount is a deduction in price given to a trade customer when calculating the price to be charged to that customer for some goods. It does not appear anywhere in the accounting books and does not appear anywhere in the financial statements. Trade discount is discount allowed to the buyers who make bulk purchases from the seller. It is also known as quantity discount. E.g.:- If the buyer purchases more than 100 units he will be given a 5% discount on price. Cash discount Cash discount is a discount allowed to the buyers those who make the payment on time for their purchases. It is allowed by the seller to motivate the buyers to pay the due in the given credit period of time. E.g.:- If the buyer pays within 10 days he will be given a 6% discount.

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Difference between Cash discount and Trade discount Cash discount 1. This is a deduction off the invoice price of goods purchased on credit. 2. This is given to encourage prompt payment. 3. The rate of cash discount depends on the period of credit allowed. 4. The buyer loses the cash discount if he fails to pay within the given period. 5. It is treated as an expense in the ledger accounts. Trade Discount 1. This is a deduction off the list price of goods purchased. 2. This is given to encourage bulk purchases. 3. The rate of trade discount depends on the quantity purchased. 4. Buyer is entitled to the trade discount even if he fails to pay within the given period. 5. It does not appear in the ledger accounts.

Trade Documents Used in International Trade 1. Indent or order. The order for the goods placed by the importer to the exporter or his agent is known as indent. It shows the nature of products, quantity, shipping mark, etc. 2. Bill of lading Bill of lading is an important documents used in foreign trade when the goods are sent through the ships. It contains the details of the goods, details of the consignor and the ship which carries the goods. Bill of lading is a document of title to the goods. This means that the holder is entitled to claim the goods from the shipping authority when the ship reaches its destination. 3. Airway bill (Air consignment note) Air way bill is similar to bill of lading but it is used only when the goods are sent by the air. It is issued by the aircraft authority as an evidence of the contract of carriage between the exporter and the carrier. It is not a document of title to the goods. 4. Consular invoice. Consular invoice is issued by the consul (Foreign ambassador) of the importing country resident in the exporting country. It is issued for the purpose of reducing the falsification on the price of goods with the intention of evading the duty. 5. Certificate of insurance Certificate of insurance is issued by an insurance company. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 64

In order to reduce the chance of risk, the goods must be insured with the insurance company. This certificate is enclosed with the goods if the goods have been insured properly. 6. Shipping note. (Dock receipt) When the goods are delivered to the docks, they are accompanied by a shipping note formally requesting the port authorities to handle them. This document furnishes the details of the goods, ship and the destination port. A copy of the note is signed by the port authority and retained by the exporter as a proof of delivery to the port; it is then referred as dock receipt. 7. Mate’s receipt. A receipt signed by the mate (captain or his agent of the ship) to say the cargo has been received on board in good condition after examining the goods. 8. Certificate of origin It is a document stating the name of the country that produced the specified goods which are ready to export. It is often required before importation of goods. Certificate of origin can be used to prevent the evasion of duty on goods. 9. Letter of credit Letter of credit is a document issued by the importer’s bank to the exporter giving a guarantee of payment to the exporter. It can also be the source of repayment of the transaction meaning that the exporter will get paid with the redemption of the letter of credit. 10. Customs declaration forms This is the document issued by the customs authority in order to examine the concerned goods easily for calculating duties therein. It is to be filled by both the exporter and the importer respectively and furnishes the details of the goods.

INTERNATIONAL TRADE SIMILARITIES BETWEEN HOME TRADE AND FOREIGN TRADE: · Objective: Businessmen involved in home trade and foreign trade buy and sell goods for the same objective. That is to make a profit. · Dependence: Both, home trade and foreign trade depend very much on aids to trade. That is there is much dependence on transport, insurance, finance, warehousing, etc, · Specialization: Both, home trade and foreign trade depend very much on specialization, whether it is national, regional or personal. DIFFERENCES BETWEEN HOME TRADE AND FOREIGN TRADE: · Meaning: Home trade is buying and selling goods within the country, while foreign trade means buying and selling goods between countries. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 65

· Distance: The distance involved in foreign trade is much greater than the distance involved in home trade. This means that air or sea transport has to be arranged in foreign trade, whereas road and rail transport can be used in home trade. · Trade Barriers: In foreign trade, there are trade barriers like customs duties, quotas and embargoes, levied on imports and some exports. There are no such trade barriers in home trade. · Types: Home trade includes wholesaling and retailing, whereas foreign trade includes importing, exporting and entrepot trade. · Languages: In home trade, there would be no difficulty regarding language, as the same language is spoken. But in foreign trade, translators would be required as each country speaks a different language. · Currencies: In home trade, the problem of exchange rate would not arise, as the same currency is used for payments. But in foreign trade, each country uses a different currency. So the problem of exchange rate would arise. • Technical Requirements: In home trade, the same technical specifications for goods are required. But in foreign trade, each country has a different technical specification. So manufacturers would have to produce goods according to different technical specifications. • Methods of Payment: In home trade cheques are the most favored means of payment. In foreign trade, bills of exchange, letters of credit and cable transfers are the most suitable means of payment. • Cultural Differences and Requirements: In home trade, there is not much need for market research as there are no differences in taste and fashion. But in foreign trade, each country has a different culture, taste and fashion. So first market research has to be carried out and then goods exported accordingly. IMPORTANCE OF INTERNATIONAL TRADE • Some raw materials do not occur naturally in the country has to be imported. •It is cheaper to import some goods than to produce them. For example bananas in UK. • Selling goods and services abroad provides the country with foreign currency. • By selling abroad the country gains the benefits of wider markets. • International trade creates employment opportunities in the country • Consumers in the country will have a wider variety of goods from all over the world. • It increases country’s income, which results in a higher standard of living. • It helps to maintain friendly foreign relationships with other countries. • Income can be earned by exporting the excess goods and services. THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET No country in the world is self sustained. By nature, every country has some resources in its limit and some resources are unlimited by nature. Economics clearly has defined that resources are scarce in nature; so, countries must be interdependent if it wants to satisfy the wants and economical needs to the growing population.

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No countries can be interdependent in today’s market. The best examples could stand with reference to today’s market is, satellite services, foreign soft drinks. E.g. Coca Cola, cars, electronic goods etc. Today every country wants to consume goods and services at the cheapest price and at the best advanced technology. To produce these goods and services in its own country with the available resources, it may not be possible to achieve the task due to lack of resources, lack of capital and lack of technological advancement. All these factors have led to interdependence of countries within a global market. VISIBLE TRADE AND INVISIBLE TRADE

1. Foreign trade involves the export and import of both goods (called visible trade) and services (called invisible trade). 2. Visible trade involves trading in goods, such as wheat, and it can be divided into: (a) Visible exports which involves the sending of goods (raw materials, semi manufactured goods, machinery or other manufactured goods) from the home country for sale abroad by the exporter. (b) Visible imports which involves the buying of goods (raw materials, semi manufactured goods, machinery or other manufactured goods) from abroad into the home country. 3. Invisible trade involves trading in services, something which cannot be seen such as tourism, education services, insurance services, transport services and the like. It can be divided into: [email protected] [email protected] 67 [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George

(a) Invisible exports which occurs when nationals of other countries use the services offered by companies or individuals of the home country. Singapore exports shipping services when foreigners send goods in ships owned by Singapore nationals. (b) Invisible imports which occurs when nationals of the home country use the services provided by foreign individuals or companies owned by foreigners. Singapore imports education services when Singapore students go overseas to the UK to study at the British universities. 4. The money which a country earns from her exports, both visible and invisible, will be used to pay for her imports both visible and invisible. BALANCE OF TRADE AND BALANCE OF PAYMENTS 1. The Balance of Payments figures for a country show the amount of currency being received from other countries and that being paid to other countries as a result of many different types of transactions over a given period, usually a year. The Balance of Payments can be broadly divided into two main sections: (a) The Current Account consists of: (i) The Balance of Trade (difference between visible exports and visible imports) (ii) The Balance of Services or Invisible Balance (difference between invisible exports and invisible imports) (iii) Transfers items (b) The Capital Account consists of: (i) The capital items (inflows or outflows) (ii) Official financing (adding to or drawing from foreign reserves) 2. The difference in value between visible exports and visible imports is called Balance of Trade. If the visible export value exceeds the visible import value, the Balance of Trade is said to be favourable or in surplus. If the visible import value exceeds the visible export value, then the Balance of Trade is said to be unfavourable or in deficit. 3. A country's Balance of Trade can be assessed from annual statistical records obtained from customs declaration forms for imports and exports. The Balance of Trade is very important because: (a) All imports have to be paid for with the proceeds received from the sale of exports. (b) Thus, in the long run, a country cannot import more than it exports. (c) If the Balance of Trade has been unfavourable for many successive years, then the government has to take steps to discourage imports and encourage exports. 4. A country also exports and imports services: shipping, educational, tourist, etc. Singapore exports shipping services when a foreigner travels in a Singaporean ship. The total value of services exported within a year forms the invisible exports, whilst that of services imported forms the invisible imports. 5. 'Transfer items' refers to interest, profits and dividends sent abroad as a result of foreigners investing in the home country. It also includes the repatriation of interest, profits and dividends from abroad to the home country as a result of its nationals investing abroad. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 68

6. 'Capital items' refers to the amount of money which has flowed into or out of a country. (a) Examples of capital outflows are as follows: (j) Nationals invest in businesses abroad, buy properties or shares abroad. (ii) The government in the home country gives monetary aid to other countries. (iii) Nationals in the home country lend to nationals or organizations or governments of other countries. (b) Examples of capital inflows are as follows: (i) Nationals sell off their properties, businesses and shares abroad and bring the money home. (ii) The government in the home country receives monetary aid from overseas. (iii) Nationals or government in the home country borrow from abroad. 7. It is very unlikely that total receipts will exactly be equal to total payments over a particular year. (a) If total payments exceed total receipts, we have a Balance of Payments deficit. (b) If total receipts exceed total payments, there is a surplus in the Balance of Payments. 8. A country's balance of payments is of utmost importance. (a) If the country continues over a period of years to experience a Balance of Payments deficit, it will eventually not have enough foreign exchange to pay its creditors. (b) No country wishes this to happen for it will cause economic ruin in the long run. 9. If a country does not have sufficient foreign currency to pay its creditors abroad, it can temporarily borrow money from the International Monetary Fund (IMF) which is specially set up to help countries having Balance of Payments problems. However, this would mean that foreigners can now control the economic policies of the government of such a country. 10. The calculation of Balance of Trade and Balance of Payments can be seen as follows: Illustration Country A Balance of Payments for the Year 1998 Value of goods exported $4,000 million Value of goods imported $4.800 million Balance of Trade 1998 -$800 million Value of services exported $8,000 million Value of services imported $7.000 million Invisible balance +$1,000 million Net transfers - $ 50 million Balance on Current Account +$150 million Capital items +$200 million Total currency flow (net) +$350 million (a) The figure shows that the Balance of Trade for Country A in 1998 is unfavourable or adverse because the cost of goods imported is higher than those exported by $800 million. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 69

(b) In the same period, however, Country A has a net positive balance of $1,000 million from her invisible trade. Money earned from her export of services abroad exceeded her import of services from abroad. (c) The overall amount of net transfers of interest, profits and dividends abroad is $50 million. (d) Country A has a favourable balance on Current Account of $150 million in 1998. (e) In 1998, Country A has an overall net inflow of capital of $200 million. (f) In 1998, Country A has a surplus of $350 million on her Balance of Payments. This means that Country A receives $350 million more than what she paid out to the rest of the world in the same period. (g) Since the Balance of Payments is positive in 1998, this means the central bank of Country A can build up her reserves of foreign currency. This reserve can be used to pay for future deficits or to repay funds previously borrowed from the IMF. Association of South East Asian Nations (ASEAN) The Association of South East Asian Nations (ASEAN), organized in 1967, comprises Brunei, Cambodia Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. It promotes cooperation in many areas, including industry and trade. Member countries are protected in terms of tariff and non-tariff barriers. Yet they hold promise for market and investment opportunities because of their large market size (500 million people). On January 1, 1993, ASEAN officially formed the ASEAN Free Trade Area (AFTA). AFTA’s goal is to cut tariffs on all intrazonal trade to a maximum of 5 percent by January 1, 2008. The E.U and EMU 1. The E.U was created aiming at free trade between the member states. 2. Free trade means that there are no barriers in terms of duties, quotas, etc. 3. Free trade requires free movement of labour (no visas), capital (businessmen are treated equally regardless nationality), and goods and services (same product specifications with no barriers to entry). 4. The single market was declared so that the member states will enjoy one big domestic market (France and the U.K, for instance, will be the same as Male’ and Addu, as no tariffs, no quotas). 5. The single market requires single currency. Because exchange rate fluctuations might make it difficult for free trade to take place. The currency used in Male’ and Addu is the Rufiyaa, so that the currency used in the U.K and France, for example, should be the same. 6. The starting step was with the ERM, to minimize the problem of exchange rate fluctuations, but the U.K withdrew itself from that system in 16 September 1992, after two years of membership. 7. Till today, the U.K is not a member state in the Euro. 8. Now we cannot find French franc or German mark, as they are all replaced by the Euro. 9. The Euro has 12 member states so far (as at 30th January 2003). [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 70

10. The main advantage of the Euro is the certainty assured in transactions across the member states in terms of exchange rate. But the ERM, which led to Euro later, makes it difficult for countries to control their economies. 11. Euro makes it easy for businesses all over the member states to trade between them. It is difficult for the U.K businesses now as the pound is struggling with new powerful comer, the Euro. 12. However, the U.K goods do have the free access into the E.U as it is a member in the single market. 13. The single market, common specification and the Euro represent challenges, in terms of competition, to big businesses, and, in fact, a big threat to the smaller ones. 14. Businesses outside the E.U have to use the Euro in exchange. They have to follow the product specifications approved by the E.U as well. Matching the E.U specifications increases cost because it requires full revise for the business techniques. AIMS OF TRADING BLOCKS: • To eliminate customs duties and quotas on the import and export of goods between member states. • To establish common customs tariff and a common commercial policy towards nonmember countries. • To allow the free movement of persons and capital between member states. • To establish common policies for agriculture and transport. • To prohibit harmful business practices which restrict competition within the Common Market. ADVANTAGES OF FREE TRADE: • There are no tariffs and quotas among member countries. • There is free movement of goods and services among member countries. • There is free movement of people among member countries. • Workers can be hired from any member country without any restrictions. • There is free movement of money and capital. · There is better relationship among member countries. DISADVANTAGES OF FREE TRADE: · Home industries get affected. · Infant industries get affected. · Loss of revenue for the Government when foreign currency goes out. · It sometimes causes unemployment. · It causes imbalance of power among member countries. · There is sometimes a drain of wealth. IMPORTANCE OF FREEPORTS IN INTERNATIONLA TRADE FREEPORTS: A port where no customs duties are levied on goods coming into or leaving it. E.g. Singapore [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 71

IMPORTANCE 1. Free ports encourage a fair international trade practices. 2. Free ports encourage free movement of goods within a trade region. 3. Good economic relationship can be developed and maintained among countries. RESTRICTIONS ON INTERNATIONAL TRADE: Tariffs: These are import duties, such as the customs and excise duties of the United Kingdom. These have the effect of raising the price of the imported goods and therefore making them less competitive when compared to home products. Quotas: These are physical restrictions on the amount of goods that can be imported into a country over a period of time. For example, the United Kingdom has set a limit on the number of Japanese cars that can be imported into the United Kingdom. Subsidies: These are given to home producers, which makes their goods cheaper and therefore more competitive when compared with the prices of overseas products. Embargoes: These are bans on importing certain items from overseas. Reasons for restricting trade: • To raise revenue from tariffs. • To protect existing industries from overseas competition. • To protect infant industries which are not yet strong enough to compete with established overseas firms. • To restrict dumping of foreign goods. DIFFICULTIES FACED BY EXPORTERS: • Distance: The distance involved in transporting goods from one country to another country is greater than in domestic trade. Air transport and sea transport have to be arranged. Overseas representatives also may have to be appointed. There are charter agents available at the Baltic Exchange who find ships for goods and goods for ships. • Language Differences: Every country speaks a different language. Communications with overseas traders have to be carefully translated. Publicity material and instructions have to be prepared in many languages. Hence translators have to be found. Exporters can contact the Central Office of Information where information of translators is available. • Cultural Differences and Local Requirements: Every country follows a different culture and requires various goods. Market research has to be carried out. This is quite difficult and expensive. The services of the Department of Trade and Industry can be sought in this case. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 72

• Technical Differences: Different governments may have different technical specifications for goods sold in their country. An exporter of electrical goods, dealing with several countries has to produce the goods according to the required specification of each country. • Trade Barriers: Tariffs and quotas are a considerable obstacle to trade. Tariffs are taxes levied on imports and quotas are a limit imposed on imported goods. These increase the price of goods that are imported. These barriers can be overcome by exporting to countries where the tariffs are low and where there are no quotas. • Customs Regulations: All goods exported and imported have to go through customs regulations. This creates more work for the exporter. • Documentation: Documents used in international trade are more complex than those used in domestic trade. Handing over the work to a freight forwarder can solve these problems. • Payment: This is a big problem faced by exporters. Every country uses a different currency. So currency must be exchanged in the foreign exchange market. The problem of the changing exchange rate comes into existence. Exporters can make future dealings to overcome this problem. • Insurance: The risks involved in foreign trade are more than the risks in domestic trade. So insurance has to be taken out. The Department of Trade and Industry and Lloyds of London can overcome these problems. • Risk of Non-Payment: The importer may not pay the exporter for the following reasons: # Because he does not want to pay. # Because he becomes insolvent. # Because payment is prevented by the importer’s government. # Because of war. # Because the import license has been cancelled by the government. This causes a big problem for the exporter and can be solved by taking out a Comprehensive policy at the Export Credit Guarantee Department. CUSTOMS AUTHORITIES: Functions: • Statistics: They collect a wide range of statistical data showing the pattern of trade and the movement of goods. • Control: They supervise the movement of goods in and out of the country ensuring that prohibited goods are not imported or exported. • Revenue: The customs authorities collect the duty payable on imports. • Enforcement of Quotas: The customs authorities ensure that the goods imported are according to the limit imposed by the government. • Bonded Warehouses: The customs authorities control these warehouses by supervising the withdrawal of goods. • Public Health: They have certain functions in connection with the control of infectious diseases. [email protected] [email protected] [email protected] [email protected] [email protected] acknowledgements: Premlal C R and Emmanuel George 73