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Dr.K.Baranidharan
Present by…
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Engineering Economics &
FinancialAccounting ment
Ee&fa213 July 2013
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FIRMSPrepared by :
Dr. K. BARANIDHARAN
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FIRM
• Definition of firm
• “A firm is the small business unit involved in
producing the profit”…………..
•
Business (company, enterprise or firm) is alegally recognized organization designed to
provide goods or services, or both, to
consumers, businesses and governmentalentities.
• Businesses are predominant in capitalist
economies.
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• Most businesses are privately owned.
• A business is typically formed to earn profit that
will increase the wealth of its owners and growthe business itself.
• The owners and operators of a business have asone of their main objectives the receipt orgeneration of a financial return in exchange forwork and acceptance of risk.
• Notable exceptions include cooperative
enterprises and state-owned enterprises.Businesses can also be formed not-for-profit orbe state-owned.
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• “the Firm is a unit that produces
a good or service forsale”
-
Edwin Mansfield
• “ a firm is on organisation that
combines and organise resources
for the purpose of producing
goods and services for sale atprofit”- Salvatore
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TYPES OF FIRMS
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• Firms or business may be organised in various
types, depending on the size, nature, legal
framework of the economy and need forresources.
• Based on the concept, firms may be divided
into three broad categories:• A) Private sector (Proprietorship, Partnership,
Company and Cooperative)
•B) Public sector (Company, Corporation anddepartment)
• C) Joint sector
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SOLE PROPRIEORSHIP
• A sole proprietorship is a business
owned by one person.
• The owner may operate on his orher own or may employ others.
•
The owner of the business haspersonal liability of the debts
incurred by the business.
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• Advantages
• Simple and easy
to start or exit
• Undivided profit
•
Secrets of trade• Prompt decision
making
• Personal touch to
business
• Limitations
• No separate
entity of firm
• Unlimited liability
•
Limitedavailability of
funds
• Uncertain life of business
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PARTNERSHIP
• A partnership is a form of business in which
two or more people operate for the
common goal which is often making profit.
• In most forms of partnerships, each partner
has personal liability of the debts incurred
by the business.
• There are three typical classifications of
partnerships: general partnerships, limited
partnerships, and limited liability
partnerships
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Characteristics
• Association of 2 or more persons
• Agreement to voluntarily form
partnership
• Business carried out by all or any
one acting for all
• Partnership deed
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• Advantage
•
Easy formation• Strong credit
position
• Shared risk
• Shared
resources
• Limitations
•
Uncertain lifeof firm
• Unlimited
liability
• Insufficient
funds
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Corporate or Company•
Just like private sector when governmentinvests in production activities and enter the
market, such firm are called as Public sector
Units (PSUS
) or Public sector Enterprise (PSES
).
• These PSUS or PSES have to operate on the same
ground as any other joint stock company, with
the single exception that there are no
shareholders, as the government own of the
entire controlling amount of invested capital.
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• This unit play very significant role
in many respect like: employement
generation, development of product
where private sector does not want
to enter, balanced economicdevelopment and equitable
distribution of National wealth.• In India : ONGC,NTPC,BSNL
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• Advantages
• Balanced
economic growth• Employment
generation
• Profit for public
welfare
• Limitations
• Evils of
bureauracy
• Absence of
profitincentive
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CORPORATION• A corporation is either a limited or unlimited
liability entity that has a separate legalpersonality from its members.
• A corporation can be organized for-profit or not-
for-profit.• A corporation is owned by multiple shareholders
and is overseen by a board of directors, which
hires the business's managerial staff .
• In addition to privately owned corporate models,
there are state-owned corporate models.
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• Another structure of organisation is in
the form of a CORPPORATION OR A
board.• The corporation or board normally
controlls some of the economic
activities, especially where thegovernment feels that government
intervention is necessary for equal
distribution of economic resources.
• Example: KVIC, COIR board, FCI, railway
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Department
• A department is run for a specific
purpose related to social utility, such as
education, health, civil administration,
et.,• This department normally functions
under the directives od relevant
ministries, at the appropriate level.• Example; state (education)and central
govt (customs, telephone).
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Joint stock company
•The most important type of businessorganisation today is the joint stock company,commonly called “COMPANY”
• Registered companies act 1956 (certificate of
incorporation)
• Prepare Memorandum and Articles of association
•
Capital: shares and depentures• Owner ; share holders
• Management ; board of Director
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• A company has 2 basic forms,
namely
•Private Limited and
•Public Limited Company
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Private Limited Company
• The maximum number of shareholders in
such a company is LIMITED TO FIFTY.• The SHARE transferable among
members only.
• Certain return submitting to Registrar
• PLC operate certain restriction; it can
neither issue of PROSPECTUS, nor can itraise CAPITAL by SELLING to OUTSIDE
PUBLIC other than the members.
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Public Limited Company• The Joint stock company may take the form
of a public limited company, in which thereis no LIMIT on the MAXIMUM MEMBERS
through minmum number of member
SEVEN
• Submit certain statement and the balance
sheet to the Registrar of joint stock
companies on an annual basis.
• It can invite the PUBLIC to buy shares by
issuing prospectus
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• Advantages
•
Limited Liability• Perpetual
existance
• Separate entity
• Large funds
•
Economic largescale
• Limitations
• Indifference of share holders
•
Complex information
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CO-OPERATIVES• Often referred to as a "co-op", a cooperative is
a limited liability entity that can organize for-profit or not-for-profit.
• A cooperative differs from a corporation inthat it has members, as opposed toshareholders, who share decision-makingauthority.
• Cooperatives are typically classified as either
consumer cooperatives or workercooperatives. Cooperatives are fundamentalto the ideology of economic democracy
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OBJECTIVES
• (a) Maximization of the sales revenue
• (b) Minimization of overall costs
•
(c) Maximization of firm‘s growth rate• (d) Maximization of Managers utility function
• (e) Making satisfactory rate of Profit
•(f) Long run Survival of the firm
• (g) Entry-prevention and risk-avoidance
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Objectives of firm
Profit maximisation
Sales maximisation
Revenue maximisation
Satisficing profit
Limit pricingObjectives
of firm
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PROFIT BUSINESS OBJECTIVES• Profit means different things to different people.
• To an accountant ―Profit means the excess of revenue over all paid out costs including bothmanufacturing and overhead expenses.
• For all practical purpose, profit or business income
means profit in accounting sense plus non-allowable expenses.
• Economist‘s concept of profit is of ―Pure Profitǁ
called ‗economic profit‘ or ―Just profitǁ.• Pure profit is a return over and above opportunity
cost, i. e. the income that a businessman mightexpect from the second best alternatives use of his
resources
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SALES REVENUE MAXIMISATION
• The reason behind sales revenue maximisation
objectives is the ownership & management inlarge business corporations.
• Managers an opportunity to set their goal other
than profits maximisation goal, which most-owner businessman pursue.
• Given the opportunity, managers choose to
maximize their own utility function.• The most plausible factor in manager‘s utility
functions is maximisation of the sales revenue.
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• The factors, which explain the pursuance of
this goal by the managers are following:.
• First: Salary and others earnings of managersare more closely related to sales revenue
than to profits
• Second: Banks and financial corporationslook at sales revenue while financing the
corporation.
• Third: Trend in sales revenue is a readily
available indicator of the performance of the
firm
MAXIMISATION OF FIRMS GROWTH
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MAXIMISATION OF FIRMS GROWTH
RATE• Managers maximize firm‘s balance growth rate
subject to managerial & financial constrainsbalance growth rate defined as:
• G = GD – GC
• Where GD = Growth rate of demand of firm‘s
product & GC= growth rate of capital supply of
capital to the firm.
• In simple words, A firm growth rate is balancedwhen demand for its product & supply of capital
to the firm increase at the same time.
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MAXIMISATION OF MANAGERIAL
UTILITY FUNCTION• The manager seek to maximize their own utility
function subject to the minimum level of profit.Managers utility function is express as:
• U= f(S, M, ID)
•
Where S = additional expenditure of the staff • M= Managerial emoluments
• ID = Discretionary Investments
• The utility functions which manager seek to
maximize include both quantifiable variables likesalary and slack earnings; non- quantifiablevariables such as prestige, power, status, Jobsecurity professional excellence etc.
LONG RUN SURVIVAL & MARKET
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LONG RUN SURVIVAL & MARKETSHARE
• According to some economist, the primary goal of the
firm is long run survival.• Some other economists have suggested that attainment &
retention of constant market share is an additionalobjective of the firm‘s.
• the firm may seek to maximize their profit in the long runthrough it is not certain.
• Entry-prevention and risk-avoidance, yet anotheralternative objectives of the firms suggested by some
• economists is to prevent entry-prevention can be:
• 1. Profit maximisation in the long run• 2. Securing a constant market share
• 3. Avoidance of risk caused by the unpredictable behaviorof the new firms
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• Micro economist has a vital role to play in running of any
business. Some basic internal issues with which micro-
economist are concerns:
• i. Choice of business and nature of product i.e. what toproduce
• ii. Choice of size of the firm i. e how much to produce
• iii. Choice of technology i.e. choosing the factor-
combination
• iv. Choose of price i.e. how to price the commodity
• v. How to promote sales
• vi. How to face price competition• vii. How to decide on new investments
• viii. How to manage profit and capital
• ix. How to manage inventory i.e. stock to both finished &
raw material
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Economic Goal of the Firm
•Short-run vs. Long-run –Nothing to do directly with calendar time
–Short-run: firm can vary amount of
some resources but not others –Long-run: firm can vary amount of all
resources
–At times short-run profitability will besacrificed for long-run purposes
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Goals Other Than Profit
•
Economic Goals –Market share, Growth rate
–Profit margin
–Return on investment, Return on assets –Technological advancement
–Customer satisfaction
–Shareholder value
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Goals Other Than Profit
•Non-economic Objectives –Good work environment
–Quality products andservices
–
Corporate citizenship, socialresponsibility
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Dr.K.Baranidharan
THANK YOU