Tag: Banking Operations and Innovations Bangalore University BBA Notes

Management Notes

Special Order Pricing

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Special order pricing is the price which the company can offer to their customers due to the large quantity or building a good relationship with customers in order to make potential next order. Due to these reasons, the company will try to offer a special price which is usually below the standard price.

One short-term decision that businesses continuously have to make is whether or not to accept special orders. This decision can prove somewhat of a complication to companies because they do not anticipate it when creating their yearly budget.

Special order pricing is a technique used to calculate the lowest price of a product or service at which a special order may be accepted and below which a special order should be rejected. Usually, a business receives special orders from customers at a price lower than normal. In such cases, the business will not accept the special order if it can sell all its output at normal price. However when sales are low or when there is idle production capacity, special orders should be accepted if the incremental revenue from special order is greater than incremental costs.

A company is producing, on average, 10,000 units of product A per month despite having 30% more capacity. Costs per unit of product A are as follows:

Direct Material Rs. 8.00
Direct Labor 5.00
Variable Factory Overhead 2.00
Variable Selling Expense 0.50
Fixed Factory Overhead 3.00
Fixed Office Expense 2.00
  Rs. 20.50

The company received a special order of 2,000 units of product A at Rs. 17.00 per unit from a new customer. Should the company accept the special order, provided that the customer has agreed to pay the variable selling expenses in addition to the price of the product?

Solution

The increment cost per unit for the special order is calculated as:

Direct Material Rs. 8.00
Direct Labor 5.00
Variable Factory Overhead 2.00
  Rs. 15.00

To further determine if you should accept a special order or not, use the contribution margin approach to do your analysis. This analysis will ascertain if the order will lead to a profit or loss. Follow these steps;

  1. Determine the contribution margin per unit

The formula for calculating the contribution margin per unit is:

Order Price – Variable Costs per unit.

Exclude irrelevant costs like fixed costs from the calculation.

  1. Determine the total Contribution Margin

You can determine this by multiplying the contribution margin per unit by the number of units in the special order.

  1. To determine Profit or Loss, less any Incremental Fixed Costs from the Contribution Margin

If there are any incremental fixed costs, you’ll have to subtract them from the contribution margin. But if there are no fixed costs, your contribution margin is your total profit. It’s that simple.

  1. Decide whether or not to accept the Job

The general rule is to take the job if it generates a profit and decline if it incurs a loss.

Management Notes

Essentials of Budgets

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Providing a Framework for Evaluation:

Budgeting provides a basis to evaluate the performance of different departments. A comprehensive budget, properly developed, will contain initially organisational goals and expectations and subsequently can be used as an effective evalu­ation technique.

Acceptance and Cooperation:

Successful budgeting also requires that budgets should be accepted by the people who must execute them. Budgeting should have the active cooperation of the entire organisation from the top to the bottom. Cooperation for the budget can be achieved in a number of ways.

Coordinating Business Activities:

Budgeting needs to coordinate all the individual budgets into an integrated plan as each budget has certain implications for the other budgets. There must be coordination between sales, production, purchasing, personnel budgets.

Efficient Organisation:

Preparation of Budget and its operation requires efficient, adequate and best organisation. Therefore, a budgeting system should always be supported by a sound organisational structure demarcating clearly the lines of authority and responsibility.

Moreover, there should be true delegation of authority from top to lower levels of management so that executives at all levels may get the opportunity to make best decisions and get themselves involved in budget making exercise.

Reasonable Flexibility:

The budgeting programme should contain reasonable flexibility if the situation so demands. However, it should be noted that too much flexibility and too much tightness are both undesirable. Too much flexibility will weaken the cost control and the budget will become inoperative. Similarly, too much rigidity not permitting reasonable deviations will create problems and restrictions in the implementation of the budget. If conditions have changed making the estimates and budgets inaccurate, the budgets should be revised.

Communicating the Budgets:

The success of a comprehensive budgeting programme depends on communication of individual budgets to the different units in the organisation. The basic point is that the preparation of the budget is of no value unless it is known to the person for whom it is meant. Managers are not responsible for budget unless the budget is communicated clearly, concisely and in an authoritative manner to them.

Accurate Forecasting of Business Activities:

Forecasting is a prerequisite in a budgeting process. It is not only the starting point, but is also critical to the development of an accurate budget.

An Adequate, Planned and Reliable Accounting System:

There should be a proper flow of accurate and timely information in the business which is ‘must’ for the preparation of budgets. The finance department should continuously supply financial data on the basis of which budget estimates and forecasts are to be made. If the data are wrong all the estimates will be wrong and the very objectives of budget will be misguiding.

Formation of Budget Committee:

It is the Budget Committee that receives the forecasts and targets of each department as well as periodic reports and finalizes the final acceptable targets in form of Mater Budget. The Budget Committee also approves the departmental budgets. It is imperative that opportunities must be provided to the executives of all the departments for their participation in the process of budget making.

Management Notes

Preparation of Fixed Budgets

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It is a budget known as constant budget, never registers the changes in the preparation of a budget, being prepared for irrespective level of output or production. This budget is mainly meant for the fixed overheads of the firm which are constant in volume irrespective level of production. The ultimate utility of the budget is to control the cost as a cost controlling measure, but the fixed budget is meaningless in having comparison with the actual performance.

A fixed budget is a financial plan that is not modified for variations in actual activity. Since most companies experience substantial variations from their expected activity levels over the period encompassed by a budget, the amounts in the budget are likely to diverge from actual results. This divergence is likely to increase over time. The only situations in which a fixed budget is likely to track close to actual results are when:

  • The industry is not subject to much change, so that revenues are reasonably predictable.
  • Costs are largely fixed, so that expenses do not change as revenues fluctuate.
  • The company is in a monopoly situation, where customers must accept its pricing.

Mitigate

A good way to mitigate the disadvantages of a fixed budget are to combine it with continuous budgeting, where a new budget period is added onto the end of the budget as soon as the most recent budget period has been concluded. By doing so, the most recent projections are incorporated into the budget, while also maintaining a full-year budget at all times.

Another way to mitigate the effects of a fixed budget is to shorten the period covered by it. For example, the budget may only encompass a three-month period, after which management formulates another budget that lasts for an additional three months. Thus, even though the amounts in the budget are fixed, they apply to such a short period of time that actual results will not have much time in which to diverge from expectations.

The fixed budget is not effective for evaluating the performance of cost centers. For example, a cost center manager may be given a large fixed budget, and will make expenditures below the budget and be rewarded for doing so, even though a much larger overall decline in company revenues should have mandated a much larger expense reduction. The same problem arises if revenues are much higher than expected – the managers of cost centers have to spend more than the amounts indicated in the baseline fixed budget, and so appear to have unfavourable variances, even though they are simply doing what is needed to keep up with customer demand.

Features of Fixed budget

  • The performance report does not contain useful information and misleading one.
  • Fixed budget is rarely prepared and used. The reason is that the actual output is differing from the budgeted output. Hence, the management cannot exercise cost control.
  • If units are overlooked in the cost-to-cost comparison, accurate result is not available.
  • Fixed budget is limited by the costs and expenses which are affected by fluctuations in volume. This is a well known accepted fact.
  • The performance report gives merely whether the actual costs are higher or lower than budgeted costs.
  • There is no meaning of comparing one activity level with some other activity level. A fixed budget can be usefully employed when budgeted output is close to the actual output.

Example

let’s assume that a company pays a 5% sales commission on all of its sales. If the company prepares a fixed budget and it is projecting sales of Rs.1 million, the budget for sales commissions will be fixed at Rs.50,000. If the actual sales end up being only Rs.900,000 the budget for sales commissions will remain unchanged at the fixed amount of Rs.50,000. If the actual sales are Rs.1,100,000 the budget for sales commissions will also be Rs.50,000.

Had the company prepared a flexible budget, the budget for sales commissions would be expressed as 5% of sales. This means that the budget for sales commissions will be Rs.50,000 only when sales are Rs.1 million. If the company has actual sales of Rs.900,000, the budget for sales commissions will flex and will be Rs.45,000 (5% of Rs.900,000). If the actual sales are Rs.1,100,000 the budget for sales commissions will be Rs.55,000.

Management Notes

Financial Statement Analysis Meaning, Objective

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The term “financial analysis”, also known as analysis and interpretation of financial statements’, refers to the process of determining financial strengths and weaknesses of the firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative data.

“Analyzing financial statements,” according to Metcalf and Titard, “is a process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firm’s position and performance.”

Objectives and Importance of Financial Statement Analysis:

The primary objective of financial statement analysis is to understand and diagnose the information contained in financial statement with a view to judge the profitability and financial soundness of the firm, and to make forecast about future prospects of the firm. The purpose of analysis depends upon the person interested in such analysis and his object.

However, the following purposes or objectives of financial statements analysis may be stated to bring out the significance of such analysis:

  • To assess the operational efficiency and managerial effectiveness.
  • To assess the earning capacity or profitability of the firm.
  • To assess the short term as well as long term solvency position of the firm.
  • To make inter-firm comparison.
  • To identify the reasons for change in profitability and financial position of the firm.
  • To make forecasts about future prospects of the firm.
  • To assess the progress of the firm over a period of time.
  • To guide or determine the dividend action.
  • To help in decision making and control.
  • To provide important information for granting credit.

Users Objectives

Prediction of Bankruptcy and Failure:

Financial statement analysis is a significant tool in predicting the bankruptcy and failure probability of business enterprises. After being aware about probable failure, both managers and investors can take preventive measures to avoid/minimise losses.

Prediction of Net Income and Growth Prospects:

The financial statement analysis helps in predicting the earning prospects and growth rates in the earnings which are used by investors while comparing investment alternatives and other users interested in judging the earning potential of business enterprises. Investors also consider the risk or uncertainty associated with the expected return.

The decision makers are futuristic and are always concerned with the future. Financial statements which contain information on past performances are analysed and interpreted as a basis for forecasting future rates of return and for assessing risk.

Assessment of Past Performance and Current Position:

Past performance is often a good indicator of future performance. Therefore, an investor or creditor is interested in the trend of past sales, expenses, net income, cash flow and return on investment. These trends offer a means for judging management’s past performance and are possible indicators of future performance.

Loan Decision by Financial Institutions and Banks:

Financial statement analysis is used by financial institutions, loaning agencies, banks and others to make sound loan or credit decision. In this way, they can make proper allocation of credit among the different borrowers. Financial statement analysis helps in determining credit risk, deciding terms and conditions of loan if sanctioned, interest rate, maturity date etc.

Management Notes

Fee based services Security, Features, Documents, Defaults

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The term fee-based investment refers to a product offered by an investment company, bank, or other institution where the financial professional is compensated through a fee as well as a commission for selling the investment vehicle. The investor covers the fee, which covers things like advice, account access, and any other service related to the investment itself, while the commission comes from the investment provider. Financial professionals who sell fee-based investments are called fee-based advisors.

The term fee-based is often used to describe a hybrid advisor or a dually registered advisor. This is a professional who charges fees to certain clients and earns commissions by selling products to others. So, the investor is charged one or more fees for the services provided by a financial planner or advisor, while commissions are paid by companies that provide the investment. Fee-based investments vary depending on the planner who sells them. Like the products other advisors offer, they can range from retirement and estate accounts to regular investment accounts. Fee-based advisors may sell mutual funds, stocks, bonds, and other securities.

Fees may be a fixed amount or a certain percentage of the assets under management (AUM). In many cases, the commissions a fee-based advisor earns are fixed into the investment product itself, like the management expense ratio (MER) of a mutual fund.

Benefits to clients:

Professional Guidance

As an investor, you are flooded with information in the media and on the Internet that can help you make financial decisions. However, you likely don’t have the time to research each investment strategy and product to determine whether or not it’s appropriate for your situation and needs. By monitoring your portfolios and conducting ongoing research, we seek to help you feel more comfortable knowing your money is being professionally managed.

Regular, Personalized Communication

Fee-based services rely on an ongoing relationship. We meet at least once a year to ensure your investment policy is on track towards its goals. You will also receive a regular quarterly performance report that illustrates your progress. This regular communication can help you gain confidence in our investment strategy.

Greater Transparency

In today’s economic climate, transparency is a key factor in consumer confidence. When compared to commission-based services, fee-based services are much more transparent. Advisory fees are a fixed percentage of a client’s accounts’ values and are clearly displayed in the quarterly performance reports.

A Mutual Incentive

Our compensation as investment adviser representatives is a fixed percentage of your accounts’ values. This means that the performance of your advisory accounts is directly proportional to the fees we collect. We are genuinely motivated to grow your portfolio and preserve your wealth.

A Disciplined Approach

Markets inevitably rise and fall, and trying to time the market can be difficult and costly. Following an investment policy helps to institute a methodical, disciplined approach to investing that can strike a balance between risk and reward.

Potential Tax Benefits

Fees for advisory accounts are potentially deductible against your federal income taxes, which could translate into savings. Speak with your tax professional for more details.

Types:

Advising on Capital Restructuring:

For the purpose of fresh issue, the companies have to present and prepare their Balance Sheet in a healthy form but not with the product of window dressing which produces an effective use and application of financial management as a whole. It is not an easy task. It requires a lot a practical exercise and experience. Sometimes, professional advice may also be required.

Needless to mention here that NBFC can supply the necessary service for the purpose on various matters by giving their valued advices and instructions, e.g., capital structuring/restricting, so that the financial health of the enterprise through the Balance Sheet would be looked better. Since, it is a fee based service it will, no doubt, earn a lucrative amount.

Advising on Acquisition and Mergers:

NBFC should pay the proper attention in this field. In order to consolidate the firm and to form a new one or to enjoy the benefits of economies of large scale, many companies are interested to amalgamate. The matter is very clear and simple if the management of both the companies is ready to do so.

To have these objectives, sometimes the promoters misuse their powers over the various companies. For this purpose, the Government has laid down certain guidelines prescribing the maximum limit of holding by the NRJs in the Indian companies recently.

Corporate Counselling:

The corporate counselling is an another attractive fee based service. At the time of diversification, expansion and development, a medium size company needs the service of an expert relating to the above for which they seek the advice from various institutions. The institutions also come forward to assist them as soon as they receive the formal request from such firms.

Now, in this context the role of NBFCs is very important. They can perform various functions relating to the generation of funds by developing the existing systems and pointing out the weak areas of the companies.

Portfolio Management:

Portfolio management implies the investment of funds taken from numbers/clients in various securities and an adequate return should be given to them. In other words, it is a scheme by which the portfolio manager raise funds from his clients/members with a commitment in order to operate the securities market together with the information, in well explained terms relating to the composition of portfolio, annual return, appropriation of capital, the extent of risk etc.

The manager must be authorised by the Securities and Exchange Board of India positively. Before certifying a manager as authorised, the SEBI will enquire about the infrastructure and truck record of the firm For this purpose, a minimum amount of net worth/shareholders’ fund has been fixed at Rs. 50 lakhs.

It is the duty of the portfolio manager to maintain the funds which belong to his clients/ members with the schedule bank in a separate account, which will be invested according to the terms specified. The manager is, however, entitled to a fixed fee and not a variable one depending upon the returns to the clients/members accordingly.

Project Counselling:

It is practically coming from the concept of corporate counselling and under the circumstances, the concerned company employs engineers and MB As and other technical persons who are experts in the area of project management.

If the client desires to invest his resources on long term basis to any project and is ready to invest such funds accordingly as per guidelines presented by the consultant company, the same task can be performed by the NBFC accordingly. Better result can be achieved if these companies form an informal association or a guild.

Arranging the Foreign Collaboration:

It is one of the most significant tasks of the project management and the companies to arrange the foreign collaboration particularly who wants to specialise in the above area and should consider the matter carefully.

As a result of the liberalisation relating to industry and capital market by the Government of India, the companies are employing their resources which they acquire by issuing shares via primary capital route and as such, are interested for good projects relating to either export oriented project or import substitution projects.

Loan/Lease Syndication:

The practising Chartered Accountants who supply the liaison services to the clients where they are in need of funds whether for the purpose of working capital or for term loan purposes.

At present, it has been found that the Chartered Accountant firms are keen interested to keep in touch with the large group of companies and are trying to improve their contact with others with the help of such giant clients who are doing quite successful business.

When a company finds it difficult to procure funds who has some problems, weakness and is not able to get various services, these firms appear in the picture and act as an intermediary between the institution and the company as well In this particular case, NBFC, can play a very prominent role for procuring funds and assist them in various ways, can supply the necessary services for those clients.

They can act as a broker and their fees must be comparable with the fees charged by the Chattered Accountant firms. In order to serve these services, NBCFs should have a direct contact with the high officials of the banks and various financial institutions simply in order to collect the necessary information.

Issue Management:

Like ordinary issue, the process of issue management is same. It is, however, the duty of the Non-Banking Financial Company to supply a complete set of services and must try to improve and develop the process of marking the issues by which the network of the promoters will be extended.

It is needless to say that the institutions who will take the responsibility to supply the services, must be able to improve the network of the brokers which ultimately brings a success relating to the issue.

If the issues are not subscribed the same may be closed on the earliest closing date. In order to overcome this difficulty, these companies join with others and form a club taking 5 to 10 merchant bankers (those who are authorised) who must take a minimum corpus of funds.

Now, if the issue goes in the hands of the club, there will be, no doubt, hesitation on the part of anyone regarding the investment in the issue having a public support and as such, the issue closes at the earliest closing date which relieves the promoters regarding the issue.

As a result of the above, the merchant bankers and the Non-Banking Financial Companies (NBFCs) will earn a reputation in the market by which they can promote many businesses. NBFC, to some extent will capture and curtail the business that flows to the institutions belonging to the state level.

Management Notes

Cheques Collection and Payment procedure

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The clearing process begins with the deposit of a cheque in a bank. The cheque (along with other cheques) is delivered to the bank/branch where it is drawn. The cheque is passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument.

The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing. The realization of the funds occurs after the completion of return clearing and by the absence of an unpaid cheque.

Cheques Clearing Cycle:

Following steps are to be taken during clearance of cheque:

Step 1st:

The customer

Step 2nd:

The PRESENTING BANK where cheques are presented by payee for deposit in his / her a/c.

Step 3rd:

The RCC:

Regional collecting centre- to collect all cheques from their presenting branch.

Step 4th:

Clearing House:

To collect cheques from RCC and for settlement of cheques.

Step 5th:

Drawee’s RCC:

Again, they collect cheques from the clearing house and send to their drawee bank.

Step 6th:

Drawee Bank:

It collects cheques from their RCC and debits the customer a/c.

Settlement of Funds:

The settlement of funds in clearing occurs at several levels. The aggregate amount or value of cheques presented by a bank on other banks represents the claim by that bank on other banks. All the banks on every other bank in the clearing make similar claims.

A net settlement is arrived at the clearinghouse and the debit or credit position of the bank is determined. These are booked in their current accounts maintained by the settling bank. This represents the inter- bank settlement. The settlement of funds between the service branch and the branch concerned represents the transfer of funds to the branch level.

The payment process is completed only when the funds are debited from the drawer’s account and credited to the payee’s account. This occurs after the completion of the return clearing mentioned.

Inter-branch clearing:

Cheques presented by customers drawn on different branches of the same bank need not be sent to the clearing house as the transfer of funds is internal to the bank. The service branch usually acts as a settlement branch for the branches and the instruments are sent to the drawee branches while the inter-branch accounts are credited or debited internally.

Time Required

Generally, if a cheque is to be paid within the same city (local cheque), it would take 2-3 days. In some large cities, there is a system called High Value Clearing, which facilitates completion of cheque clearing cycle on the same day, and the customer depositing the cheque is permitted to utilize the proceeds next day morning.

However, coverage of this High Value Clearing is very limited and usually available at the branches in the main business area; say Fort and Nariman Point area in Mumbai and Connaught Place in New Delhi.

Management Notes

Difference between Salary and Wages

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Salary

Salary is a fixed regular payment, typically paid on a monthly basis, for the performance of work or services. Unlike wages, which are often calculated on an hourly or weekly basis, salaries provide employees with a consistent and predetermined amount of compensation, regardless of the number of hours worked.

Components:

  1. Base Salary:

The core, fixed amount of money paid to an employee on a regular basis, forming the foundation of the overall salary. Reflects the employee’s role, responsibilities, and experience.

  1. Bonuses:

Additional monetary rewards provided to employees, often based on performance, company profits, or specific achievements. Motivates employees and aligns their efforts with organizational goals.

  1. Allowances:

Supplementary payments intended to cover specific expenses or costs related to the job, such as housing, transportation, or meals. Addresses the financial impact of job-related requirements.

  1. Benefits:

Non-monetary compensation, including healthcare, retirement plans, and other perks, provided to enhance employees’ overall well-being. Contributes to employee satisfaction and work-life balance.

  1. Overtime Pay:

Additional compensation for hours worked beyond the standard workweek, often calculated at a higher rate than the regular hourly pay. Compensates employees for extra effort and time invested in work.

  1. Performance–Based Incentives:

Variable payments linked to individual or team performance, encouraging employees to achieve specific goals or targets. Aligns compensation with results and fosters a performance-driven culture.

  1. Profit Sharing:

Sharing company profits with employees, providing them with a stake in the organization’s financial success. Aligns the interests of employees with the overall success of the business.

  1. Commissions:

Payments based on sales or revenue generated by an employee, common in roles with direct sales responsibilities. Rewards employees for their contribution to revenue generation.

  1. Retirement Benefits:

Contributions made by the employer to retirement plans, such as 401(k) or pension schemes. Supports employees in building financial security for their post-work years.

  • Stock Options:

The right to purchase company stock at a predetermined price, offering employees a share in the company’s ownership. Aligns employees’ interests with the company’s long-term success.

  • Education and Training Support:

Financial assistance provided by the employer for the education and skill development of employees. Promotes continuous learning and professional growth.

  • Health and Wellness Programs:

Initiatives and benefits aimed at promoting employees’ physical and mental well-being. Enhances employee health, productivity, and job satisfaction.

  • Vacation and Leave Benefits:

Paid time off from work, including vacation days, holidays, and other types of leave. Supports work-life balance and employee well-being.

  • Severance Pay:

Compensation provided to employees upon termination of employment, often based on factors like length of service. Offers financial support during transitions and provides a safety net for employees.

  • Other Perquisites (Perks):

Additional benefits or privileges provided to employees, such as company cars, memberships, or flexible work arrangements. Enhances the overall employment experience and contributes to employee satisfaction.

Wages

Wages refer to the compensation paid to an employee for the hours worked or services rendered, often calculated on an hourly, daily, or weekly basis. Unlike salaries, which provide a fixed amount irrespective of hours worked, wages are directly tied to the time spent on the job.

Components:

  1. Hourly Rate:

The amount paid for each hour worked by an employee. Forms the basic unit for calculating wages based on time.

  1. Overtime Pay:

Additional compensation provided for hours worked beyond the standard workweek or regular working hours. Compensates employees for extra effort and time beyond the standard working hours.

  1. Piece-Rate Pay:

Compensation based on the number of units produced or tasks completed. Directly links pay to productivity and output.

  1. Commission:

A percentage of sales or revenue earned by an employee, common in sales roles. Rewards employees based on their contribution to generating business.

  1. Tips and Gratuities:

Additional payments received by employees, often in service industries, as a form of appreciation from customers. Augments income and is often based on customer satisfaction.

  1. Holiday Pay:

Compensation for hours worked on recognized holidays. Encourages employees to work during holiday periods and compensates for the disruption to personal time.

  1. Shift Differentials:

Additional pay for working shifts that fall outside regular daytime hours. Compensates for inconveniences associated with non-standard working hours.

  1. Bonuses (Variable):

Additional payments beyond regular wages, often tied to performance, project completion, or other achievements. Acts as an incentive and recognition for exceptional contributions.

  1. Piecework Bonuses:

Additional payments for meeting or exceeding production targets in piecework arrangements.  Motivates employees to achieve or surpass production goals.

  • Travel Allowances:

Compensation for work-related travel expenses, such as mileage or transportation costs. Addresses additional costs incurred while traveling for work.

  • Uniform or Tool Allowances:

Payments provided to cover the cost of uniforms, tools, or equipment required for the job. Supports employees in meeting job-specific requirements.

  • Incentive Pay:

Additional compensation tied to achieving specific targets, often related to productivity or efficiency. Encourages employees to meet or exceed performance expectations.

  • Danger Pay:

Additional compensation for employees working in hazardous conditions or environments. Recognizes the risks associated with certain jobs.

  • Call-out Pay:

Compensation for employees called in to work outside their regular schedule, often applicable to on-call positions. Compensates for the inconvenience of being available on short notice.

  • Benefits (Limited):

Some wage-related benefits, such as health insurance or retirement contributions, may be provided, but to a lesser extent compared to salary packages. Enhances the overall compensation package, albeit on a more limited scale compared to salaried positions.

Difference between Salary and Wages

Basis of Comparison

 Salary

Wages
Payment Frequency Monthly Hourly or Weekly
Consistency Fixed, stable Variable, fluctuates
Calculation Basis Annual rate / 12 Hourly rate x Hours worked
Overtime Compensation Typically included Paid separately
Employment Level Often for salaried employees Common for hourly workers
Work Hours Impact Irrelevant to pay Directly affects earnings
Benefits Often includes benefits Limited or no benefits
Professional Positions Common for white-collar jobs Common for blue-collar jobs
Skill-Based Reflects skills and qualifications Often skill-independent
Administrative Work Common for managerial roles Common for administrative roles
Unionization Less common for unionized jobs Common in unionized settings
Job Complexity Reflects job responsibilities May not directly reflect complexity
Job Stability Generally perceived as stable Can be influenced by job market
Performance Impact Less direct impact on pay Directly impacts pay through hours
Perception in Society Often associated with higher status May not carry the same status

Management Notes

Basis for Compensation Fixation

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Compensation refers to compensating any damage, loss or mental harassments, wages or salaries as reward for physical and/or mental efforts to perform any agreed task or job. But the concept of equity in remunerating any work or task has forced us to perceive wages and salaries as compensation, because people work efficiently only when they are paid according to their worth or feel satisfied with the remunerations. Besides basic salaries or wages, companies are forced to view the benefits and services to justify the positional and esteem needs of employees and to provide adequate cushion for inflations. Though the cost of human resources is estimated at between 2% to 20% of the operating cost (depending upon the type of industry), to retain the employees or to avoid job-hopping, some of the industries are even forced to adopt varying scales and benefits.

Compensation is the reward that the employees receive in return for the work performed and services rendered by them to the organization. Compensation includes monetary payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc., as well as non­monetary perks like a company-paid car, company-paid housing and stock opportunities and so on.

Apart from the basic financial pay the employees receive paid vacations, sick leave, holidays and medical insurance, maternity leave, free travel facility, retirement benefits, etc., and these are called benefits.

The Fixation or determination of compensation involves considering various factors and elements to arrive at a fair and competitive remuneration package for employees. The basis for compensation fixation may vary across industries, organizations, and job roles. The Combination of these factors, tailored to the specific needs and priorities of the organization, forms the basis for the fixation of compensation. Organizations often develop a comprehensive compensation strategy that integrates these elements to attract, retain, and motivate a talented and satisfied workforce.

  • Market Conditions:

Aligning compensation with prevailing market rates for similar positions in the industry or geographic location. Ensures competitiveness in attracting and retaining talent.

  • Job Evaluation:

Systematically assessing the relative value of different jobs within the organization based on factors like skills, responsibilities, and complexity. Establishes internal equity and aids in determining appropriate compensation levels.

  • Industry Standards:

Considering compensation benchmarks and practices established within a specific industry. Helps organizations stay competitive and in line with industry norms.

  • Organization’s Financial Health:

Evaluating the financial capacity of the organization to sustain and afford the proposed compensation structure. Ensures that compensation is aligned with the organization’s financial resources.

  • Employee Performance:

Linking compensation to individual or team performance, often through performance appraisals and merit-based systems. Rewards and motivates high-performing employees, fostering a performance-driven culture.

  • Cost of Living:

Adjusting compensation based on the cost of living in a particular region or country. Accounts for variations in living expenses and ensures fair compensation.

  • Skill and Experience:

Recognizing the level of skills and experience possessed by an employee. Differentiates between entry-level and experienced employees, reflecting their contributions.

  • Legal Compliance:

Ensuring compliance with local, state, and national labor laws and regulations related to minimum wage, overtime, and other compensation standards. Mitigates legal risks and ensures ethical employment practices.

  • Union Agreements:

Adhering to terms negotiated and agreed upon in collective bargaining agreements with labor unions. Reflects the terms and conditions established through negotiations with employee representatives.

  • Market Positioning:

Positioning the organization’s compensation strategy relative to competitors in the talent market. Influences the organization’s attractiveness to potential employees and helps in talent acquisition.

  • Employee Benefits:

Including non-monetary benefits, such as health insurance, retirement plans, and other perks, in the overall compensation package. Enhances the total rewards offered to employees, contributing to their overall well-being.

  • Job Complexity and Risk:

Recognizing the complexity and level of risk associated with specific job roles. Reflects the nature of the job and the skills required, influencing compensation levels.

  • Retention and Succession Planning:

Considering the organization’s long-term talent strategy, including the retention of key employees and planning for future leadership needs. Aligns compensation with strategic workforce planning goals.

  • Employee Value Proposition (EVP):

Evaluating the overall value proposition offered to employees beyond monetary compensation, including career development opportunities, work-life balance, and organizational culture. Considers factors that contribute to employee satisfaction and engagement.

  • Global Considerations:

Adapting compensation practices to account for variations in economic conditions, cultural norms, and legal requirements in different countries for multinational organizations. Ensures consistency and compliance across diverse geographic locations.

Management Notes

Effect of Various Labour Laws on Wages

indiafreenotesby indiafreenotes0

Labour laws play a pivotal role in shaping the employment landscape and influencing wage structures within a country. These laws are designed to regulate the relationship between employers and employees, ensuring fair treatment, safe working conditions, and just compensation. The impact of labour laws on wages is multifaceted, encompassing aspects such as minimum wage regulations, overtime pay, equal pay for equal work, and various other provisions aimed at protecting workers’ rights. Labour laws wield substantial influence over wage structures, seeking to establish a balance between the interests of employers and the rights of workers. While these laws are crafted with the intention of promoting fairness, equity, and worker protection, their impact is subject to various challenges. Striking the right balance between regulation and flexibility, addressing regional disparities, and adapting to evolving workforce dynamics are ongoing challenges for policymakers and businesses alike. Nevertheless, a well-crafted and effectively enforced legal framework is essential for fostering a work environment where wages are just, working conditions are safe, and the rights of workers are upheld.

Minimum Wage Regulations:

Intended Benefits:

  • Fair Compensation:

Minimum wage laws are enacted to ensure that workers receive a baseline level of compensation deemed necessary for a decent standard of living. This promotes economic justice by preventing the exploitation of vulnerable workers.

  • Poverty Alleviation:

Setting a minimum wage helps lift workers out of poverty, providing them with the means to cover essential living expenses. This has broader societal implications, contributing to poverty reduction.

Challenges:

  • Impact on Small Businesses:

Critics argue that higher minimum wages can impose financial burdens on small businesses, potentially leading to job cuts or increased prices for goods and services.

  • Regional Disparities:

Minimum wage regulations may not adequately account for regional variations in living costs, creating challenges in finding a one-size-fits-all solution that addresses the diverse economic landscapes within a country.

Equal Pay for Equal Work:

Intended Benefits:

  • Gender Pay Equity:

Labour laws promoting equal pay for equal work aim to eliminate gender-based wage disparities. This contributes to gender equality in the workplace, fostering a fair and inclusive environment.

  • Fair Treatment:

The principle of equal pay extends to all forms of discrimination, ensuring that employees are not subjected to wage disparities based on race, ethnicity, or other protected characteristics.

Challenges:

  • Data Accuracy and Transparency:

Implementing equal pay measures requires accurate and transparent data on employees’ roles, responsibilities, and compensation. Some organizations may face challenges in collecting and disclosing this information.

  • Subjectivity in Job Evaluation:

Determining what constitutes “equal work” can be subjective, and variations in job roles may complicate efforts to ensure equal pay. Standardizing job evaluation methodologies is a complex task.

Overtime Pay and Working Hours:

Intended Benefits:

  • Fair Compensation for Extra Effort:

Overtime pay regulations are intended to compensate employees for working beyond standard hours. This ensures that employees are fairly rewarded for their additional efforts.

  • Limiting Exploitative Practices:

Labour laws prescribing limits on working hours and overtime seek to prevent exploitative practices and promote a healthy work-life balance. This contributes to employee well-being and job satisfaction.

Challenges:

  • Operational Constraints:

Industries with fluctuating workloads may face challenges in accommodating strict working hour regulations. Flexibility in working hours may be crucial for certain sectors.

  • Compliance Monitoring:

Ensuring compliance with overtime regulations requires effective monitoring mechanisms, which can be resource-intensive for regulatory authorities.

Collective Bargaining and Trade Union Laws:

Intended Benefits:

  • Negotiating Power for Workers:

Collective bargaining laws empower workers to negotiate wages and working conditions collectively. This enhances their bargaining power, leading to more equitable agreements with employers.

  • Labour Market Stability:

By providing a structured framework for negotiations, collective bargaining laws contribute to labour market stability, reducing the likelihood of widespread strikes or industrial unrest.

Challenges:

  • Power Imbalances:

In situations where there is a significant power imbalance between employers and workers, collective bargaining may be challenging. This is particularly relevant in industries with limited unionization.

  • Potential for Disruption:

While collective bargaining aims for mutually beneficial agreements, disputes can arise, leading to work stoppages and disruptions that impact both workers and employers.

Social Security and Benefits:

Intended Benefits:

  • Worker Well-being:

Labour laws pertaining to social security and benefits, such as healthcare, retirement plans, and disability insurance, aim to enhance the overall well-being of workers.

  • Attracting and Retaining Talent:

Competitive benefit packages can attract skilled workers and contribute to employee retention. Labour laws often prescribe minimum standards for these benefits.

Challenges:

  • Financial Strain on Employers:

Mandating certain benefits can place a financial burden on employers, especially smaller businesses. Striking a balance between worker welfare and business viability is crucial.

  • Changing Workforce Dynamics:

The rise of the gig economy and non-traditional employment arrangements poses challenges in adapting social security and benefit regulations to accommodate diverse work structures.

Child Labour and Forced Labour Laws:

Intended Benefits:

  • Protecting Vulnerable Populations:

Laws prohibiting child labour and forced labour are designed to protect vulnerable populations from exploitation. These regulations prioritize the well-being of children and individuals subjected to coercion.

  • Ethical Business Practices:

Compliance with child labour and forced labour laws is integral to promoting ethical business practices. Organizations adhering to these regulations contribute to global efforts against human rights abuses.

Challenges:

  • Enforcement and Monitoring:

Effectively enforcing laws against child labour and forced labour requires robust monitoring systems, especially in industries where such practices may be prevalent.

  • Global Supply Chain Complexity:

Addressing child labour and forced labour becomes complex in global supply chains, where products may pass through multiple jurisdictions with varying regulations and enforcement capacities.

Management Notes

The Impact of Information Technology in Retailing

indiafreenotesby indiafreenotes3

Information technology (IT) has had a profound impact on the retail industry, transforming various aspects of the business from operations and customer interactions to supply chain management and overall strategic decision-making. The integration of IT in retailing has led to increased efficiency, improved customer experiences, and enhanced competitiveness.

Technology has always played a major role, creating a massive impact in reviving the retail industry, bringing it reknown and repute. It is assisting retailers to become highly-equipped and advanced in the way they enhance the experience for consumers.

The Industry Growth

As per Euromonitor International’s recent retailing research, the market size of Modern Grocery Retailers in retail value sales at current prices (including inflation) was Rs 603 billion in 2017. Modern Grocery Retailers grew at 13.2 percent in 2016- 17. The category is forecast to grow by CAGR 9.2 percent through 2017-22.

The search for a one-stop shopping destination keeps making consumers shift from traditional to modern retailing stores. Modern retail stores attract footfalls in their physical store in Tier I and Tier II equally, albeit for different reasons. Aspirational Tier II consumers look at modern retailers as places to experience the new age retail. Equally Tier II & III cities have lucrative geographies for expansion of modern retail.

Retailers are tapping on to this new market of aspirational consumers increasingly. The lack of presence of most of the international and a major portion of national brands in these areas, have led consumers to resort to online channels in Tier II cities.

IT in Retail Importance

  • To collect and analyze customer data while enhancing differentiation.
  • To increase the company’s ability to respond to the evolving marketplace through enhanced speed and flexibility.
  • To work effectively; retailers need one system working across stores (or even across national borders) to make sure the most effective use of stock and improve business processes.

Helpful for Retailer:

  • Transparency and tracking

Retailers must increase transparency between systems, as well as obtain better tracking to integrate systems from manufacturer through to the consumer while obtaining customer and sales information.

  • Customer data

Many retailers struggle with information overload because they’re required to collect and sift through mass amounts of data, then convert it into useful information in a customer-centric industry.

  • PCI Security Compliance

PCI Security Compliance addresses the retailer’s internal security setup and practices, in order to mitigate payment security risks. Every business engaged in credit card payment processing is required to comply with PCI Security Standards. If a retailer collects or stores credit card information that becomes compromised, the retailer may lose the ability to accept credit card payments. Other possible consequences include lawsuits, insurance claims, cancelled accounts, and government fines.

  • Global data synchronization

Due to radio frequency identification/electronic product coding, the entire supply chain has become more intelligent. Retailers must enable the use of real-time data to watch inventory levels. In addition, radio frequency identification tagging positions the company to be able to safeguard its shipments by allowing products to be tracked from manufacturer through the entire supply chain.

Advantages of Information Technology in Retailing

  • Automating processes

Automating a process render many advantages to the retailers. It reduces costs, increases accuracy, reduces processing times, enables quick decision and speeds up customer service.

For example, EPOS (electronic point of sales) uses scanning systems. It ensures accurate prices, enables checkout staff to work faster, and it eliminates the need to fix price label to goods. All these factors reduce the cost considerably.

  • Collecting data about the customer

The purchase details of individual shoppers are collected and analyzed. Product extensions and promotions are based on the analysis of purchasing patterns of different types of shoppers.

Demographic information about the customers is known from a loyalty card database. The entries in the loyalty card are related to transactions data furnished by EPOS. These data can be further used to profile a customer base. This facilitates specific offers to be made to certain types of customers.

A retailer may send mail order catalogue to all loyalty card holders who have bought in the previous year. Moreover, internet and e-commerce sites use previous transactions information to personalize their sites for each shopper by offering them product items that have been related to their last few transactions. They automatically greet them by name when they enter the site.

  • Feedback on marketing decisions

Analysis of EPOS data helps the retailer in knowing the effect of promotion, prices, new products and packaging changes. Retailers can assess the impact of changes in layout or merchandising of stores in terms of category sales, competitor brands, gross profit and sales in the store. Innovative product ideas may be tested against the realities prevailing in the market. In short, the EPOS data analysis helps the company in

  • Evaluating its promotions
  • Calculating customer price responsiveness for core and seasonal products.
  • Predicting the outcome of its newly adopted policies.
  • Planning its promotional measures.

 

  • Communication

The stores manager indulges in effective communication with his suppliers. He sends documents such as purchase orders, stock and sales information over third party communication networks. This is electronic commerce. This method works fast and costs less. It is sufficient for stores to place their orders one or two days and in advance against seven days earlier in the traditional paper based method.

Store computers transmit EPOS data to the head office on daily basis. So, the senior manager is able to assess the performance of every store and product group.

Stock replenishment is done automatically. The computer system receives daily EPOS data from each store and next day’s stock requirements are known.

The system automatically sends the requirement electronically overnight to the distribution centre. So, delivery of merchandise is possible the very next day.

Effective communication reduces the lead time. It is the time taken between sending an order and receiving the merchandise.

Tools for Planning the business

(i) With the use of sophisticated computer software packages, retailers are able to

  • Plan, budget and forecast,
  • Choose the most successful location; and
  • Control their business.

(ii) Model decision making, statistical packages of sales forecast and data mining tools are available for retailers.

(iii) Retailers can also use geographic information systems (GIS).

(iv) Socio demographic data along with company transactions data and intelligent analytical tools are used to forecast sales in different stores.

  • Adding value to the retail transaction

Customers prefer IT assisted transactions to traditional retailing because IT assisted transactions provide speed, accuracy and convenience. For example, ATMs are used at any time of day. Thus, use of IT adds value to retailing.

  • Technology enabled shopping

Selling goods over the internet is becoming popular. Electronic means of selling include the following.

  • Products: Grocery, clothing, footwear, music, books, videos, cameras, photographic goods, computer hardware and software, pharmacy goods etc.
  • Services: Retail banking, personal insurance, financial service, real estate, stocks and shares, Tourism, florists, entertainment tickets, virtual education, information services, etc.

Thus, IT is transforming the nature of products, processes, companies, industries and even competition itself. The spectacular reach of IT is widely accepted today.

Components

  • E-commerce and Online Retailing:

Information technology has fueled the growth of e-commerce, enabling retailers to establish online platforms for buying and selling products. E-commerce platforms provide a convenient and accessible way for customers to browse, shop, and make transactions.

  • Point-of-Sale (POS) Systems:

POS systems, powered by IT, have replaced traditional cash registers. These systems streamline transactions, track sales, manage inventory, and provide valuable data for decision-making.

  • Supply Chain Management:

IT has revolutionized supply chain management in retail. Technologies like RFID (Radio-Frequency Identification), barcoding, and advanced analytics help in real-time tracking of inventory, reducing stockouts and overstock situations.

  • Customer Relationship Management (CRM):

CRM systems leverage IT to manage and analyze customer data. Retailers can personalize marketing efforts, track customer interactions, and enhance customer loyalty through targeted promotions and communication.

  • Data Analytics and Business Intelligence:

Retailers use data analytics and business intelligence tools to gain insights into consumer behavior, market trends, and operational efficiency. This data-driven approach supports informed decision-making and strategy formulation.

  • Mobile Commerce (m–commerce):

The rise of smartphones and mobile apps has given birth to mobile commerce. Retailers leverage IT to create mobile-friendly platforms, enabling customers to shop, compare prices, and make transactions using their mobile devices.

  • Augmented Reality (AR) and Virtual Reality (VR):

AR and VR technologies enhance the shopping experience. Retailers use these technologies for virtual try-ons, interactive product displays, and creating immersive environments that engage customers.

  • Social Media Integration:

IT facilitates the integration of social media platforms into retail strategies. Retailers use social media for marketing, customer engagement, and gathering insights into consumer preferences.

  • Automated Checkout Systems:

Self-checkout systems and automated kiosks, driven by IT, offer an efficient and convenient alternative for customers. These systems reduce wait times and enhance the overall shopping experience.

  • Personalized Marketing:

IT enables retailers to implement personalized marketing strategies. Through data analysis, retailers can create targeted promotions, personalized recommendations, and individualized communication based on customer preferences.

  • Cloud Computing:

Cloud computing technologies have streamlined data storage, processing, and collaboration. Retailers use cloud-based solutions for inventory management, data analytics, and overall business operations.

  • Artificial Intelligence (AI) and Machine Learning (ML):

AI and ML technologies are used for predictive analytics, demand forecasting, chatbots for customer service, and enhancing the overall efficiency of retail operations.

  • Voice Commerce:

 Voice-activated technologies, such as virtual assistants, have introduced new ways of shopping. Customers can use voice commands to search for products, place orders, and receive personalized recommendations.

  • Cybersecurity:

As retail operations become more digitized, the importance of cybersecurity has grown. IT is crucial in implementing robust security measures to protect customer data and secure online transactions.

  • Internet of Things (IoT):

IoT devices, such as smart shelves and connected devices in stores, contribute to real-time monitoring of inventory, temperature control, and other operational aspects, improving overall efficiency.

  • Feedback and Reviews Platforms:

IT facilitates the collection and analysis of customer feedback and reviews.

Limitations of Using Information Technology in Retailing

  • Originally IT was used by retailers to automate control services such as finance, pay roll, and management accounts. Electronic point of sales systems can be afford only by a very few department stores. Basically, retailing is a highly dispersed business. Retailers have to incur enormous amount of expenditure on installation of IT equipment in their retail business.

  • Retailing involves a wide array of products. So, a complex system is required to handle a large number of product lines.
  •  In retail stores, staff may have limited knowledge about computers. So, computer specialists are to be employed to deal with the automation process. Only the largest retailers can afford to employ technically qualified people.
  • The costs of routine investment in automation process is very high.
  • Many IT projects fail and the risk of such failure is too high for retailers.
  • According to Prof. John Sawson, many retailers concentrate on operational improvement rather than transformational ones. The expected pay off from IT has not been fully realized. Retailers devote only a small amount of their budgets to IT.
  • Getting the full benefits of IT may actually take a longer time. Retailers should learn how best to exploit the new systems. Many U.K. grocers invested in EPOS in the 1980s. But only a few made effective use of information about customer’s shopping behavior. Only after making heavy investments and learning from experience, retailers could create IT based stock replenishment system.

  • IT alone has not produced performance advantage in the retail industry.

Inspite of the above limitations in using Information Technology for competitive advantages, firms have gained advantages such as flexible culture, strategic planning and improved supplier relationships. Advantage lies in people and systems rather than systems alone. To derive full competitive advantage of IT requires long-term investment.

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