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Management Notes

Revenue recognition: 5 Step approach to Revenue Recognition

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The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting in contrast revenues are recognized when cash is received no matter when goods or services are sold.

The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected.

Cash can be received in an earlier or later period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

  • Accrued revenue: Revenue is recognized before cash is received.
  • Deferred revenue: Revenue is recognized when cash is received.

Revenue realized during an accounting period is included in the income.

Accounting for Revenue Recognition

If there is doubt in regard to whether payment will be received from a customer, then the seller should recognize an allowance for doubtful accounts in the amount by which it is expected that the customer will renege on its payment. If there is substantial doubt that any payment will be received, then the company should not recognize any revenue until a payment is received.

Also, under the accrual basis of accounting, if an entity receives payment in advance from a customer, then the entity records this payment as a liability, not as revenue. Only after it has completed all work under the arrangement with the customer can it recognize the payment as revenue.

Under the cash basis of accounting, you should record revenue when a cash payment has been received.

Conditions for Revenue Recognition

According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied:

  • Risks and rewards of ownership have been transferred from the seller to the buyer.
  • The seller loses control over the goods sold.
  • The collection of payment from goods or services is reasonably assured.
  • The amount of revenue can be reasonably measured.
  • Costs of revenue can be reasonably measured.

Steps in Revenue Recognition from Contracts

The five steps for revenue recognition in contracts are as follows:

  1. Identifying the Contract

All conditions must be satisfied for a contract to form:

  • Both parties must have approved the contract (whether it be written, verbal, or implied).
  • The point of transfer of goods and services can be identified.
  • Payment terms are identified.
  • The contract has commercial substance.
  • Collection of payment is probable.
  1. Identifying the Performance Obligations

Some contracts may involve more than one performance obligation. For example, the sale of a car with a complementary driving lesson would be considered as two performance obligations the first being the car itself and the second being the driving lesson.

Performance obligations must be distinct from each other. The following conditions must be satisfied for a good or service to be distinct:

  • The buyer (customer) can benefit from the goods or services on its own.
  • The good or service is separately identified in the contract.
  1. Determining the Transaction Price

The transaction price is usually readily determined; most contracts involve a fixed amount. For example, a price of Rs.20,000 for the sale of a car with a complementary driving lesson. The transaction price, in this case, would be Rs.20,000.

  1. Allocating the Transaction Price to Performance Obligations

The allocation of the transaction price to more than one performance obligation should be based on the standalone selling prices of the performance obligations.

  1. Recognizing Revenue in Accordance with Performance

Recall the conditions for revenue recognition. Conditions (1) and (2) state that revenue would be recognized when the seller has done what is expected to be entitled to payment. Therefore, revenue is recognized either:

  • At a point in time;
  • Over time

GAAP Revenue Recognition Principles

The Financial Accounting Standards Board (FASB) which sets the standards for U.S. GAAP has the following 5 principles for recognizing revenue:

  • Identify the customer contract
  • Identify the obligations in the customer contract
  • Determine the transaction price
  • Allocate the transaction price according to the performance obligations in the contract
  • Recognize revenue when the performance obligations are met
Management Notes

SEC Reporting Requirements

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The Indian Accounting Standards (Ind AS) shall be applicable to the companies as follows:

  1. On voluntary basis for financial statements for accounting periods beginning on or after April 1, 2015, with the comparatives for the periods ending 31st March, 2015 or thereafter.
  2. On mandatory basis for the accounting periods beginning on or after April 1, 2016, with comparatives for the periods ending 31st March, 2016, or thereafter, for the companies specified below:
  • Companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth of Rs. 500 Crore or more.
  • Companies other than those covered in (2.) (a) above, having net worth of Rs. 500 Crore or more.
  • Holding, subsidiary, joint venture or associate companies of companies covered under (2.) (a) and (2.) (b) above.
  1. On mandatory basis for the accounting periods beginning on or after April 1, 2017, with comparatives for the periods ending 31st March, 2017, or thereafter, for the companies specified below:
  • Companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupees 500 Crore.
  • Companies other than those covered in paragraph (2.) and paragraph (3.)(a) above that is unlisted companies having net worth of rupees 250 crore or more but less than rupees 500 Crore.
  • Holding, subsidiary, joint venture or associate companies of companies covered under paragraph (3.) (a) and (3.) (b) above.
  • However, Companies whose securities are listed or in the process of listing on SME exchanges shall not be required to apply Ind AS. Such companies shall continue to comply with the existing Accounting Standards unless they choose otherwise.
  1. Once a company opts to follow the Indian Accounting Standards (Ind AS), it shall be required to follow the Ind AS for all the subsequent financial statements.
  2. Companies not covered by the above roadmap shall continue to apply existing Accounting Standards prescribed in Annexure to the Companies (Accounting Standards) Rules, 2006.
  3. Banks:
  • Scheduled commercial banks (excluding regional rural banks) will be required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards. Ind AS will be applicable to both consolidated and individual financial statements.
  • Holdings, subsidiaries, joint ventures or associate companies of scheduled commercial banks (excluding regional rural banks) will be required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards.
  • Urban cooperative banks and regional rural banks are not required to apply Ind AS and will continue to comply with the current accounting standards applicable to them.
  1. Non-banking financial companies:
  • Phase I companies required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards (consolidated and individual financial statements) are:
  • Non-banking financial companies having net worth of Rs. 500 crores or more; and holdings, subsidiaries, joint ventures or associate companies of the companies above other than those companies already covered under the general corporate roadmap.
  • Phase II companies required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2019 onwards (consolidated and individual financial statements) are:
  • Non-banking financial companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth less than Rs .500 crores; non-banking financial companies that are unlisted companies, having net worth of Rs. 250 crores or more but less than Rs. 500 crores; and holdings, subsidiaries, joint ventures or associate companies of the companies above other than those companies already covered under the general corporate roadmap.
  • Non-banking financial companies having net worth below Rs. 250 crores and not covered under the above provisions shall continue to apply the current accounting standards applicable to them.
  1. Insurers: Insurance companies will be required to prepare Ind AS based financial statements for accounting periods beginning from 1 April 2020 onwards. Ind AS will be applicable to both consolidated and individual financial statements.
Management Notes

Statement of changes in equity

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A statement of changes in equity and similarly the statement of changes in owner’s equity for a sole trader, statement of changes in partners’ equity for a partnership, statement of changes in shareholders’ equity for a company or statement of changes in taxpayers’ equity for government financial statements is one of the four basic financial statements.

The statement explains the changes in a company’s share capital, accumulated reserves and retained earnings over the reporting period. It breaks down changes in the owners’ interest in the organization, and in the application of retained profit or surplus from one accounting period to the next. Line items typically include profits or losses from operations, dividends paid, issue or redemption of shares, revaluation reserve and any other items charged or credited to accumulated other comprehensive income. It also includes the non-controlling interest attributable to other individuals and organisations.

This primary purpose of Statement of Changes in Equity is to provide details about all the movements in the equity account during an accounting period, which is otherwise not available anywhere else in the financial statements. As such, it helps the shareholders

 and investors in making more informed decisions about their investments. Further, it also allows the analysts and other readers of the financial statements to understand what factors resulted in the change in the equity capital.

The statement is expected under the generally accepted accounting principles and explains the owners’ equity shown on the balance sheet, where:

Owners’ equity = Assets – Liabilities

Requirements of IFRS

IAS 1 requires a business entity to present a separate statement of changes in equity (SOCE) as one of the components of financial statements.

The statement shall show:

  • Total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests
  • The effects of retrospective application, when applicable, for each component
  • Reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
  • Profit or loss
  • Each item of other comprehensive income
  • Transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

Requirements of the GAAP

In the United States this is called a statement of retained earnings and it is required under the Generally Accepted Accounting Principles  whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule.

Therefore, the statement of retained earnings uses information from the income statement and provides information to the balance sheet.

Retained earnings are part of the balance sheet (another basic financial statement) under “stockholders equity (shareholders’ equity)” and is mostly affected by net income earned during a period of time by the company less any dividends paid to the company’s owners / stockholders. The retained earnings account on the balance sheet is said to represent an “accumulation of earnings” since net profits and losses are added/subtracted from the account from period to period.

Retained Earnings are part of the “Statement of Changes in Equity”. The general equation can be expressed as following:

Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income

This equation is necessary to use to find the Profit Before Tax to use in the Cash Flow Statement under Operating Activities when using the indirect method. This is used whenever a comprehensive income statement is not given but only the balance sheet is given.

Closing Balance of Equity = Opening Balance of Equity + Net Income – Dividends +/- Other Changes

  • Opening Balance: It represents the value of equity capital at the beginning of the reporting period, which is the same as the prior period’s closing balance of equity.
  • Net Income: It represents the net profit or loss reported in the income statement during the period.
  • Dividends: Dividends declared during the reporting period should be subtracted from the equity balance as it represents the distribution of wealth among shareholders.

Steps

Step 1. Firstly, determine the value of the equity at the beginning of the reporting period, which is the same as the value at the end of the last reporting period. It is the opening balance of equity.

Step 2. Next, determine the net income or loss booked by the firm.

Step 3. Next, determine the value of the dividend declared by the management for the reporting period.

Step 4. Next, determine all the adjustments for the reporting period, which may include effects of changes in accounting policies, correction of prior period errors, changes in reserve capital as well as share capital.

Step 5. Finally, the closing balance of equity can be derived by adding net income (step 2) to the opening balance of equity (step 1), deducting dividends (step 3), and other adjustments (step 4), as shown below.

Management Notes

Statement of comprehensive income

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The statement of comprehensive income is a financial statement that summarizes both standard net income and other comprehensive income (OCI). The net income is the result obtained by preparing an income statement. Whereas, other comprehensive income consists of all unrealized gains and losses on assets that are not reflected in the income statement.  It is a more robust document that often is used by large corporations with investments in multiple countries.

Comprehensive income is the variation in a company’s net assets from non-owner sources during a specific period. Comprehensive income includes net income and unrealized income, such as unrealized gains or losses on hedge/derivative financial instruments and foreign currency transaction gains or losses. Comprehensive income provides a holistic view of a company’s income not fully captured on the income statement.

Components Comprehensive Income

One of the most important components of the statement of comprehensive income is the income statement. It summarizes all the sources of revenue and expenses, including taxes and interest charges.

Unfortunately, net income only accounts for the earned income and incurred expenses. There are times when companies have accrued gains or losses resulting from the fluctuations in the value of their assets, that are not recognized in net income. Some examples of these unrealized gains or losses are:

  • Adjustments made to foreign currency transactions
  • Gains or losses from pension and other retirement programs
  • Gains or losses from derivative instruments
  • Unrealized gains or losses from available-for-sale securities
  • Unrealized gains or losses from debt securities

One thing to note is that these items rarely occur in small and medium-sized businesses. OCI items occur more frequently in larger corporations that encounter such financial events.

That said, the statement of comprehensive income is computed by adding the net income which is found by summing up the recognized revenues minus the recognized expenses to other comprehensive income, which captures any unrealized balance sheet gains or losses that are excluded from the income statement.

Uses of a Statement of Comprehensive Income

As explained earlier, the statement of comprehensive income encompasses the income statement and other comprehensive income. Preparing the income statement sheds light on a company’s financial events. Here are some of the uses of an income statement:

Analysis tool for investors

The SCI, as well as the income statement, are financial reports that investors are interested in evaluating before they decide to invest in a company. The statements show the earnings per share or the net profit and how it’s distributed across the outstanding shares. The higher the earnings for each share, the more profitable it is to invest in that business.

Detailed revenue information

The primary purpose of an income statement is to provide information on how a company is raising its revenue and the costs incurred in doing so. The income statement is very thorough in highlighting these details. Not only does it explain the cost of goods sold, which relate to the operating activities, but it also includes other unrelated costs such as taxes. Similarly, the income statement captures other sources of revenue which are not associated with the main operations of a company. This entails items such as the accrued interest from business investments.

Limitations of a Statement of Comprehensive Income

Difficulties in making predictions

Another area where the income statement falls short is the fact that it cannot predict a firm’s future success. The income statement will show year over year operational trends, however, it will not indicate the potential or the timing of when large OCI items will be recognized in the income statement.

Misrepresentation

Although the income statement is a go-to document for assessing the financial health of a company, it falls short in a few aspects. The income statement encompasses both the current revenues resulting from sales and the accounts receivables, which the firm is yet to be paid.

Similarly, it highlights both the present and accrued expenses that the company is yet to pay. But if there’s a large unrealized gain or loss embedded in the assets or liabilities of a company, it could affect the future viability of the company drastically. Therefore, an income statement on its own can be misleading.

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

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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

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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.

Management Notes

Social Issues in Retailing in India

indiafreenotesby indiafreenotes0

Retailing in India, like in many other countries, is influenced by a variety of social issues that impact both the industry and consumers. These issues often reflect the broader social and cultural context of the country.

Addressing these social issues requires a holistic approach from retailers, encompassing ethical business practices, cultural sensitivity, and responsiveness to changing consumer dynamics. By aligning their strategies with the social fabric of India, retailers can build stronger connections with their customer base and contribute positively to society. This involves not only understanding the diverse needs of consumers but also actively participating in social initiatives that align with the values of the community.

  • Diversity and Cultural Sensitivity:

India is a diverse country with multiple languages, cultures, and traditions. Retailers need to be sensitive to this diversity in their marketing strategies, product offerings, and customer interactions. Cultural insensitivity can lead to backlash and negatively impact a brand’s image.

  • Consumer Behavior and Preferences:

Consumer preferences in India can vary significantly across regions and demographic segments. Retailers must stay attuned to evolving consumer trends, preferences, and purchasing behaviors to tailor their offerings and marketing strategies effectively.

  • Gender Sensitivity:

Gender plays a significant role in shaping consumer behavior. Retailers need to be aware of gender-related social issues and promote inclusivity in their marketing and advertising. Creating gender-neutral spaces and products can be essential for attracting a diverse customer base.

  • Economic Disparities:

India faces economic disparities, with a significant portion of the population belonging to lower-income segments. Retailers need to balance their product offerings to cater to diverse economic groups. Strategies like affordable pricing, value for money, and inclusive marketing are crucial.

  • Ethical Sourcing and Fair Trade:

There is an increasing awareness among Indian consumers about the ethical sourcing of products and fair trade practices. Retailers are under scrutiny to ensure that their supply chains adhere to ethical standards, and they are expected to be transparent about their sourcing practices.

  • Digital Divide:

While there is a growing trend of digitalization in urban areas, rural parts of India may still face challenges related to digital access and literacy. Retailers need to adopt strategies that cater to diverse digital maturity levels among consumers.

  • Changing Lifestyle and Aspirations:

India is experiencing a significant shift in lifestyle and aspirations, especially among the younger population. Retailers must keep pace with changing consumer expectations, including a demand for international brands, experiential shopping, and lifestyle products.

  • Health and Wellness Trends:

There is an increasing awareness of health and wellness in India, leading to a growing demand for organic, sustainable, and health-conscious products. Retailers need to adapt to these trends by offering healthier options and providing transparent information about product ingredients.

  • Social Media Influence:

Social media plays a substantial role in shaping consumer opinions and trends. Retailers need to have a robust social media strategy to engage with consumers, manage brand perception, and stay connected with the younger demographic.

  • Sustainability and Environmental Concerns:

Environmental consciousness is on the rise, and consumers are increasingly looking for sustainable and eco-friendly products. Retailers need to incorporate sustainable practices in their operations, such as reducing packaging waste and promoting environmentally friendly products.

  • Inclusivity and Accessibility:

Retail spaces and services need to be inclusive and accessible to people with disabilities. Ensuring that stores are wheelchair-friendly, providing assistance for visually impaired individuals, and offering inclusive product ranges are important considerations.

  • Rural-Urban Dynamics:

Retailers need to recognize the unique dynamics between rural and urban consumers. While urban consumers may seek convenience and a wide range of products, rural consumers may have different preferences and purchasing patterns.

Management Notes

Ethical Issues in Retailing in India

indiafreenotesby indiafreenotes2

Ethical issues in retailing are critical considerations that impact the relationships between businesses, consumers, and the broader society. Maintaining ethical standards is not only a legal requirement but also essential for building trust, ensuring fair practices, and sustaining a positive reputation.

Ethics in business have become an essential topic of discussion. In retailing, retailers want to earn maximum profit by providing satisfaction to their customers with ethical means. Some certain laws and regulations govern the retail sector.

Following these laws are important and beneficial for the organizations. In this article, you will learn about ethical behavior in the retail sector and its importance.

Ethics can be defined as the moral principles for the behavior of a person or an organization to conduct activities. Business ethics tell the difference between right and wrong activities. However, ethical conduct in business is not as simple as it seems. There are various complexities when It comes to ethical conduct.

Ethical order ensures a sense of order and justice in an organization. The concepts like Corporate Social Responsibility is introduced in the retailing sector. The CSR is related to the ethical expression to conduct business. Retailing is the end unit of the Supply chain.

Customers directly interact with retailers. Therefore, it is important that retailers act ethically as they impact the lives of many people. Ethical practices are not only moral responsibility of a retailer, but it has great importance for the retail business. Let us learn about them one by one.

Adopting an ethical approach in retailing is not only a legal obligation but also a strategic imperative. Ethical behavior builds trust with consumers, fosters a positive workplace culture, and contributes to the long-term sustainability and success of a retail business. By addressing these ethical issues, retailers can demonstrate a commitment to integrity, responsibility, and the well-being of both consumers and the broader community.

Fair Pricing and Transparency:

Deceptive pricing practices, hidden fees, and misleading discounts can erode consumer trust.

  • Ethical Approach: Retailers should ensure transparency in pricing, avoid misleading promotions, and provide clear information about product costs.

Product Quality and Safety:

Selling substandard or unsafe products can harm consumers and damage a retailer’s reputation.

  • Ethical Approach: Retailers must adhere to quality standards, conduct product testing, and promptly recall defective items.

Supply Chain Ethics:

Unethical practices within the supply chain, such as exploitation of labor, child labor, or environmental violations, can tarnish a retailer’s reputation.

  • Ethical Approach: Retailers should implement ethical sourcing policies, ensure fair labor practices, and promote sustainable and responsible supply chain management.

Employee Treatment and Fair Labor Practices:

Unfair wages, poor working conditions, and lack of employee benefits can lead to ethical concerns.

  • Ethical Approach: Retailers should prioritize fair wages, provide a safe and healthy work environment, and offer employee benefits to promote overall well-being.

Customer Privacy and Data Security:

Mishandling customer data, privacy breaches, and unauthorized use of personal information can lead to ethical violations.

  • Ethical Approach: Retailers must prioritize customer privacy, implement robust data security measures, and adhere to data protection laws.

Truth in Advertising:

False or misleading advertising can deceive consumers and harm a retailer’s credibility.

  • Ethical Approach: Retailers should ensure that advertising is truthful, accurate, and does not exaggerate product capabilities.

Inclusivity and Diversity:

Discrimination or lack of inclusivity in hiring practices or product representation can be ethically problematic.

  • Ethical Approach: Retailers should foster diversity and inclusion, both in their workforce and in the representation of various demographics in marketing and product offerings.

Environmental Sustainability:

Irresponsible environmental practices, such as excessive packaging or contributing to pollution, raise ethical concerns.

  • Ethical Approach: Retailers should adopt sustainable practices, reduce environmental impact, and promote eco-friendly products.

Social Responsibility:

Neglecting social responsibility, such as community engagement or charitable initiatives, can be viewed as ethically irresponsible.

  • Ethical Approach: Retailers should actively engage in socially responsible activities, supporting community initiatives and contributing to social causes.

Ethical Marketing:

Manipulative marketing tactics, such as false scarcity or exploiting emotional triggers, can be ethically questionable.

  • Ethical Approach: Retailers should prioritize honesty, integrity, and authenticity in marketing, avoiding manipulative practices.

Fair Competition:

Unfair business practices, such as price fixing or collusion, can harm competition and violate ethical standards.

  • Ethical Approach: Retailers should compete fairly, adhere to antitrust laws, and avoid engaging in anti-competitive behavior.

Product Endorsements and Reviews:

Deceptive product endorsements or fake reviews can mislead consumers.

  • Ethical Approach: Retailers should encourage genuine customer reviews, avoid deceptive endorsements, and maintain the integrity of product recommendations.

Importance of Ethics in Retail

  • Build a Positive Image in society

People who have not much knowledge about the business ethics and rules of business conduct usually prefer to associate with those organizations which have a positive image in society.

Take the example of an IT company Infosys. Infosys is known for its charitable work, good corporate governance, and social responsibility initiatives such as providing scholarship to deserving children and providing medical help to poor elderly people.

People, when learning all about this they built a positive perception about the company.

  1. Ethics helps in satisfying human needs

People, whether they are employee or customers, want to associate with an organization which works with honesty and in a fair manner.

Therefore, the following ethical practices are important if you want to retain customers as well as employees for a long period of time.

  1. Ethics plays an important role in decision making

In everyday life, retailers need to take important decisions for the well-being of the organization. If an organization believe in ethical practices, it tends to make decisions which are in favor of the organization, its employees as well as customers.

A retailer can take fierce decisions in the absence of ethical practices. For example, an organization which does not follow ethical practice can take fierce decisions to tackle competition.

  1. Bringing People together

Employees love and respect organization whose actions are influenced by ethical practices. The organization which practices ethics will never only think about its own but also think about its employees and customers. In this way, a healthy relationship establishes between employees and the owner.

A healthy relationship is important for the well-being of the organization. A happy employee will never betray his organization and consistently take actions to make his organization successful.

  1. Makes society a better place to live

Society will become a better place to live if everyone follows ethical practices. A society where everyone thinks about themselves and take selfish decisions is not a suitable place for people to live. There will always be contradictions between the people.

However, we know very well that no two people can be the same. There will always be people who will indulge in unethical practices. At that time, ethical laws come into action and restrict unethical practices.

  1. Long-term profits

Organizations which practices malice activities might get profit for short period of time, but can’t retain that success for longer period of time and, on the other hand, Organizations which are driven by values and ethics are expected to be profitable for a long time though they might lose money in a short time.

For example, the Tata group faced a great loss of business in the initial 1990s,’ but soon it turns into one of the most profitable organization by not indulging into unethical practices. The company is one of the most successful companies in India and also known for its ethical conduct in business.

In simple words, it can be said that ethics shows the path of right doing to the organization and let it make decisions which are both in favor of its employees as well as customers.

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