Tag: University of Mumbai BMS Notes

An amortized loan is a loan with scheduled periodic payments that are applied to both principal and interest. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment reduces the principal. Common amortized loans include auto loans, home loans, and personal loans from a bank for small projects or debt consolidation.

How an Amortized Loan Works?

Interest is calculated based on the most recent ending balance of the loan and the interest amount owed decreases as payments are made. This is because any payment in excess of the interest amount reduces the principal, which in turn, reduces the balance on which the interest is calculated. As the interest portion of an amortization loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan.

An amortized loan is the result of a series of calculations. First, the current balance of the loan is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.) Subtracting the interest due for the period from the total monthly payment results in the dollar amount of principal paid in the period.

The amount of principal paid in the period is applied to the outstanding balance of the loan. Therefore, the current balance of the loan minus the amount of principal paid in the period results in the new outstanding balance of the loan. This new outstanding balance is used to calculate the interest for the next period.

Amortized Loans vs. Balloon Loans vs. Revolving Debt and Credit Cards

Here’s how you can tell these three loan types apart. When you’re taking out a loan, be sure you’re getting the kind you need.

• Amortized loans are generally paid off over an extended period of time by equal amounts for each payment period. However, there is always the option to pay more and thus further reduce the principal owed.
• Balloon loans, on the other hand, typically feature a relatively short term and only a portion of the loan’s principal balance is amortized over that term. At the end of the term, the remaining balance is due as a final repayment, which is large, generally, at least double the amount of previous payments.
• Revolving debt and credit cards don’t have the same features as amortized loans since they don’t have set payment amounts or a fixed loan amount.

Points

• An amortized loan is a loan with scheduled periodic payments that are applied to both principal and interest.
• An amortized loan payment first pays off the interest expense for the period while the remaining amount reduces the principal.
• As the interest portion of the payments for an amortization loan decreases, the principal portion increases.

Right of Parties

• Conduct of business
• Can express opinion
• Access, inseption, copy
• Equality of Profits
• Interest on capital
• Interest on advance
• To get indemnity
• Partner’s authority
• Power in an emergency
• Reconstitution
• Dissolution

Liability of Parties

Negotiable Instrument refers to a promissory note, bill of exchange or cheque payable either to order or to bearer.  It is a piece of paper which carries some value and is transferable from one person to another by mere delivery or by endorsement and delivery. Here, we will discuss the liability of parties to negotiable instrument act.

The provisions relating to the liability of parties to negotiable instruments are under section 30 to 32 and 35 to 42 of the Negotiable Instrument Act, 1881.

The Liability of parties is as follows:

1. Liability of Drawer (Section 30)

Drawer means a person who signs a cheque or a bill of exchange ordering his or her bank to pay the amount to the payee.

In case of dishonour of cheque or bill of exchange by the drawee or the acceptor, the drawer of such cheque or bill of exchange needs to compensate the holder such amount. But, the drawer needs to receive due notice of dishonour.

So, the nature of the drawer’s liability on drawing a bill is:

• On due presentation:- It should be accepted and paid accordingly.
• In the case of dishonour:- Drawer needs to compensate the holder such amount, only when he receives a notice of dishonour by the drawee.

2. Liability of the Drawee of Cheque (Section 31)

 The person who draws a cheque i.e drawer having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required to do so and, or in default of such payment, he shall compensate the drawer for any loss or damage caused by such default.

The drawee of a cheque will always be a banker. As a cheque is a bill of exchange, drawn on a specified banker by the drawer, the banker is bound to pay the cheque of the drawer, i.e., the customer. For the following conditions are need to be satisfied:

• Sufficient amount of funds to the credit of customer’s account should be there with the banker.
• Such funds are required to be properly applied against the payment of such cheque, e.g., the funds are not under any kind of lien etc.
• The cheque is duly required to be paid, during banking hours and on or after the date on which it is made payable.

If the banker unjustifiably refuses to honour the cheque of its customer, it shall be liable for damages.

3. Liability of Acceptor of Bill and Maker of Note (Section 32)

 As per section 32 of negotiable instrument act, in the absence of a contract to the contrary, the maker of a promissory note and the acceptor before the maturity of a bill of exchange are under the liability to pay the amount thereof at maturity.

They need to pay the amount according to the apparent tenor of the note or acceptance respectively.  The acceptor of a bill of exchange at or after maturity is liable to pay the amount thereof to the holder on demand.

The liability of the acceptor of a bill or the maker of a note is absolute and unconditional but is subject to a contract to the contrary and may be excluded or modified by a collateral agreement.

4. Liability of Endorser (Section 35)

 An endorser is the one who endorses and delivers a negotiable instrument before maturity. Every endorser has a liability to the parties that are subsequent to him.

Also, he is bound thereby to every subsequent holder in case of dishonour of the instrument by the drawee, acceptor or maker, to compensate such holder of any loss or damage caused to him by such dishonour. However, he is to compensate only after the fulfilment of the following conditions:

• There is no contract to the contrary
• The Endorser has not expressly excluded, limited or made conditional his own liability
• And, such endorser shall receive due notice of dishonour

5. Liability of Prior Parties (Section 36)

 Until the instrument is duly satisfied, every prior party to a negotiable instrument has a liability towards the holder in due course. The prior parties include the maker or drawer, the acceptor and all the intervening endorsers. Also, there liability to a holder in due course is joint and several. In the case of dishonour, the holder in due course may declare any or all prior parties liable for the amount.

6. Liability Inter-se

 Every liable party has a different footing or stand with respect to the nature of liability of each one of them.

7. Liability of Acceptor when Endorsement is Forged (Section 41)

 An acceptor of a bill of exchange who had already endorsed the bill is not relieved from liability even if such endorsement is forged. This is so even if he knew or had reason to believe that the endorsement was forged when he accepted the bill.

8. Acceptor’s Liability when Bill is drawn in a Fictitious Name

An acceptor of a bill of exchange who draws a bill in a fictitious name, payable to the drawer’s order will be liable to pay any holder in due course. He or she will not be relieved from such liability by reason that such name is fictitious.

Bill discounting

Bill Discounting is a method of trading the bill of exchange to the financial institution before it gets matured, at a price that is in a smaller amount than its par value. The discount on the bill of exchange will be based on the remaining time for its maturity and also the risk concerned in it.

Bill discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. This bill is then conferred to the seller’s client and the full amount is collected. Bill discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through a letter of credit. It is an arrangement whereby the seller recovers an amount of sales invoice from the financial intermediaries before it’s due. It is a business vertical for all kinds of financial intermediaries such as banks, financial institutions etc.

Bill discounting is a major trade activity. It aids the seller’s get funds earlier upon a small fee or discount. It also helps the bank earn some revenue. When the due date of the credit period comes, the borrower or (seller’s) customer can pay money then.

Bill discounting refers to a method of working capital finance for the seller of goods. It refers to a fee charged by the bank from the seller of the goods to release funds before the end of the credit period. The bill is presented to the customer and the amount is collected by the bank. It is mostly applicable in cases where letter of credit is used as a mode of payment. Bill discounting is also commonly known as invoice discounting or the purchase of bills. It is a major trading activity wherein the seller of the goods gets funds before the term of the letter of credit expires for a small amount charged by the bank as fees.

The fee paid by the seller to the bank or the financial intermediary usually depends upon the time left before maturity of letter of credit for which the bill is discounted and the risk perceived. It also depends a great deal over the credit worthiness of the seller and the past payment history of the buyer of goods.

Bill Discounting Companies in India

Bill discounting provides, as a present-day alternative to traditional working capital requirements, immediate access to funds can be provided to entrepreneurs by using their unpaid bills or goods received notes (GRN) as collateral. At present, many banks and non-banking financial companies (NBFCs) provide bill /GRN discounting services to business owners. Hence, an entrepreneur has the option to choose from a wide range of bill discounting service providers. But choosing a good provider is the key to go hassle free and save costs.

Myforexeye an online bill discounting platform where business owners get an opportunity to raise funds for their working capital needs at attractive terms by selling their unpaid invoices raised. Myforexeye aims to remove operational inefficiencies around the invoice discounting space by extensively using technology and reduction in interest rate costs.

Bill Discounting Process

The Process of Bill Discounting is as Follows;

• The seller ships the goods on credit to the buyer and sends the invoice to them
• The buyer accepts the invoice and acknowledges payment is due after credit period over.
• The seller approaches the bank to discount the bill.
• The bank transfers the fund to the seller after deducting discount fee as per the norms.
• When the payment is due, the bank or the seller collects the money from the buyer.
• The bank wants the following conditions to be fulfilled to discount the bill:.
• The bank will look into the seller’s reputation and previous payment history of the buyer.
• The buyer should have a reputed bank. This will ensure seller bank that buyer is reliable.
• The bill should be a usance bill.

Bill Purchasing

The terms ‘bills purchase’,’ bills discount’ and ‘bills negotiation’ are respectively used by the bank for financing against ‘Demand Bills’,’Usance Bills’ and LC bills. The seller of goods (exporter) gets immediate money from the bank for the goods sold by him irrespective of whether it is a purchase, discount or negotiation by the bank according to nature of bills.

For an importer, original shipping documents are required for the purpose of taking delivery of goods shipped to him by the exporter. To enable the importer to take delivery of the cargo shipped to him, the exporter after shipment of goods prepares necessary set of documents like commercial invoice, packing list, certificate of origin, quality certificate, Bill of lading/Airway bills, dock warrant, dock receipt, warehouse receipt, etc. along with order for the delivery of title to goods. The set of documents so prepared will be submitted by the exporter to his bank for onward transmission of documents to the importer’s destination, with an instruction to collect the invoice amount of goods dispatched by him under contracted terms.

Facility of Bill Purchasing

• If this Sale is a Credit Sales, then the seller will get the money from the purchaser only after the expiry of credit period.
• If the seller does not have extra money, during the period between credit sales and realization of money from debtor, he will not be able to buy more goods and sell again at a profit.
• To facilitate the business of manufacture, trade etc, banks help you by giving financial resources in the form of Bill Discounting Facility and the bank’s bill finance product helps you bridge the fund gap between the date of sale of products to the receipt of payments.
• The bank purchases the bill of exchange your company receives against a product sale, at a discount, thus doing away with the delay in realizing the receivables.
• The extent of discounting would amount to the interest calculated till the payments for the original sale are realized, and will be determined on the basis of market interest rates as well as the credit rating of the borrower.
• So, don’t keep the funds blocked during the credit period but get them discounted and increase your sales turnover.

Ancillary services are other services that banks offer to common men along with the necessary banking services. These ancillary services form a very minuscule of the services offered by the banks. Some of the ancillary services provided by the banks are:

1. Funds transfer service

Useful for sending and receiving money from all over the world.

2. Forex service

You can buy the foreign exchange for any purpose of expenditures like travel, buying merchandise, etc. and sell the same to the bank when you earn or receive from abroad.

3. Custodial Service

You can keep your valuables like jewels, documents, etc. Under this service, this is commonly known as Locker facility (Safe Deposit Vaults).

4. Gold sale

Only a few selected branches of banks or banks are allowed to provide this.

5. e–Banking

Also known as Net banking or Internet banking is  the latest and most convenient facility of the banks .You can get id and password to operate your account online : for transfer of funds to another account in the same bank or another bank. You can keep the surplus funds in fixed deposit by using this facility.

Remittance of funds

Some default funds transfer limits are given to customers based on the type of account. In case you wish to raise the limits per day), you may give a written request to your branch.

1. Beneficiary Maintenance

You can maintain a “Beneficiary” for whom you normally wish to transfer funds.   You have to give a “Payee ID” for each of the beneficiary and should attach a valid Account for each of the beneficiary maintained by you.

2. Funds Transfer between your Accounts (Real-time)

You can transfer funds to the extent of “Net available balance” (from one of your accounts – viz. Source Account) or up to the ‘Per day limit’ fixed by the Bank for you, whichever is less, to any one of your other accounts. 

3. Third Party Funds Transfer (Real-time)

You can transfer funds to the extent of “Net available balance” (from one of your accounts viz. Source account) or up to the “Per day limit” fixed by the Bank for you, whichever is less, to any one of the Beneficiary Accounts maintained by you. All the Beneficiary Accounts maintained by you will be available in the pick list and you can select any one of the accounts.

4. NEFT online Transfer

You can transfer funds to the extent of “Net available balance” (from one of your accounts viz. Source account) or upto the “Per day limit” fixed by the Bank for you, whichever is less, to an account with another Bank. The funds will be transferred using the NEFT facility provided by RBI and will be processed in the next available settlement cycle depending on the time of request. The beneficiary gets the credit on the same day or the next day depending on the time of settlement.

Term Deposit Options

Term Deposit Details: You can view the details of the selected Term Deposit account such as principal, contracted interest rate, maturity value, tenure, maturity date, lien (if any) etc.   

Loan Options

• Loan Account Details: You can view the details of the loan account selected and print these details using “print” option. You can also go to “Account Summary”, ‘Early and Final Settlement” and “Loan Repayment” options from here.
• Loan Account Activity: You can view the details of transactions for the selected account for any specified period. The details of transactions can be directly printed using ‘print’ option or can be downloaded and saved as a file using “download” option.

Standing Instruction (SI) Options

• Initiate Standing Instructions: You can create a Standing Instruction. The Standing Instructions are of 3 types viz., Account to Account, Credit to Loan Account and Banker’s Cheque (BC) Request. Wherever the BC request is selected, you have to fill up beneficiary details also. The Bank will prepare the BC and mail it to you.   For all the 3 types, the Standing Instructions will be executed on the Day Begin of the execution day. In case of insufficient balance, no further trials will be made till the next execution date.
• View SI: You can view the details of the Standing Instructions you had given either directly at the branch or through Internet Banking.

(For removing Standing instructions, you have to give a request through your branch.)

Safe custody and safe deposit                          

The facility of Safe Deposit Lockers is an ancillary service offered by the Bank. The Bank’s branches offering this facility will indicate/display this information.

Secrecy and Confidentiality

The Bank will ensure utmost secrecy of the Safe Deposit Lockers hired by the customer and will not divulge any information about hiring of lockers, mode of operation etc. to anyone, except when the disclosure is required to be made with the clear consent of the hirer(s) or in compliance of the orders of a competent authority having statutory powers.

Bank’s lockers will be available to any person, having contractual capacity i.e. capacity to enter into a contract. Thus locker can be hired by an individual singly and / or two or more individuals jointly as well as firms, limited Companies, Societies, Associations, Clubs etc.

Allotment of locker

Allotment of lockers shall be based on the duly (properly) filled in application of the prospective hirers on the printed format provided by the bank. Lockers will be allotted by the branches on first come first served basis.

Providing a copy of the agreement

Branches will give a copy of the agreement to the locker-hirer at the time of allotment of the locker, if preferred by the customer.

Recovery of rent from hirer(s)

Safe Deposit Locker  rent  will be payable in advance and in the event of locker rent remaining  unpaid, when due, the Bank will have the right to refuse access to the locker hirer(s). Locker rent will be recovered on annual basis. The lease period of one year will start from the date of hiring the locker and will continue till the preceding day of the corresponding date in the subsequent year.

Operations of Safe Deposit Vaults/Lockers

Branches will exercise due care and necessary precaution for the protection of the lockers provided to the customer. The Hirer/s can operate the Safe Deposit Locker only on the Bank’s working days and during the business hours of the Bank.

Before operating the locker, the hirer/s should sign the attendance register which shall be kept at the bank.

Death of the hirer

• Notice of knowledge of the death of a hirer or a surviving hirer will be recorded in the Locker Register with date and source of information under the initials of an officer.
• As a further precaution, a slip reading ‘hirer deceased’ will be pasted on the locker.
• Thereafter access to the locker should be allowed on production of legal representation.
• Where authority has been given to the survivor or survivors to operate the locker in writing specifically at the time of lease of the locker, in the case of joint account, the question of legal representation does not arise unless the survivor also dies.

Surrender of Locker:

• Locker can be surrendered by the hirer/s at any time during the contract period through a written application and handing over of keys to the Bank Officials.
• Bank can also request for surrender of locker with due notice.

The major aspects governing the locker services are:

• The Bank will hire locker only to properly introduced persons.
• Lockers are rented out for a minimum period of one year. Annual rent is payable in advance.
• Loss of key should be immediately informed to the branch.
• Withstanding instruction, the rent may be paid from the deposit account of the hirer.

The reported financial statements for banks are somewhat different from most companies that investors analyze. For example, there are no accounts receivables or inventory to gauge whether sales are rising or falling. On top of that, there are several unique characteristics of bank financial statements that include how the balance sheet and income statement are laid out. However, once investors have a solid understanding of how banks earn revenue and how to analyze what’s driving that revenue, bank financial statements are relatively easy to grasp.

How Banks Make Money?

Banks take in deposits from consumers and businesses and pay interest on some of the accounts. In turn, banks take the deposits and either invest those funds in securities or lend to companies and consumers. Since banks receive interest on their loans, their profits are derived from the spread between the rate they pay for the deposits and the rate they earn or receive from borrowers. Banks also earn interest income from investing their cash in short-term securities like rbi.

However, banks also earn revenue from fee income that they charge for their products and services that include wealth management advice, checking account fees, overdraft fees, ATM fees, interest and fees on credit cards. 

The primary business of a bank is managing the spread between deposits that it pays consumers and the rate it receives from their loans. In other words, when the interest that a bank earns from loans is greater than the interest it pays on deposits, it generates income from the interest rate spread. The size of this spread is a major determinant of the profit generated by a bank. Although we won’t delve into how rates are determined in the market, several factors drive rates including monetary policy set by the Reserve Bank.

A bank guarantee is a type of guarantee from a lending institution. The bank guarantee means a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.

Features of a Valid Guarantee

• The period until which the guarantee holds is clearly specified
• The guarantee issuance is always for a specific amount
• The purpose of the guarantee is clearly stated
• The guarantee is valid for a specifically defined period
• The grace period allowed to enforce guarantee rights is also stated in the guarantee
• Guarantee clearly states the events under which it can be enforced

It is important that guarantee can be enforced based on terms of the contract (i.e. guarantee agreement) existing between the bank and the beneficiary. Generally, beneficiaries do state a clause to be included for charging penal interest in the case of delayed payment. Hence, it is essential for the bank to be cautious while finalizing the format and text of the contract (the guarantee agreement). While signing the same, the provision of penal interest and clauses attached to delays and default are to be carefully noted.

Examples of Bank Guarantees

Because of the general nature of a bank guarantee, there are many different kinds:

• A payment guarantee assures a seller the purchase price is paid on a set date.
• An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
• A credit security bond serves as collateral for repaying a loan.
• A rental guarantee serves as collateral for rental agreement payments.
• A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.
• A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
• A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.

For example, Company A is a new restaurant that wants to buy $3 million in kitchen equipment. The equipment vendor requires Company A to provide a bank guarantee to cover payments before they ship the equipment to Company A. Company A requests a guarantee from the lending institution keeping its cash accounts. The bank essentially cosigns the purchase contract with the vendor.

Types of Bank Guarantees

1. Financial Guarantee

Here, the bank guarantees that the applicant will meet the financial obligation. And in case he fails, the bank as a guarantor has to pay.

2. Performance Guarantee

Here the guarantee issued is for honoring a particular task and completion of the same in the prescribed/agreed upon manner as stated in the guarantee document.

3. Advance Payment Guarantee

This guarantee assures that they would return the advance amount in case of no fulfillment of the terms.

4. Payment Guarantee / Loan Guarantee

The guarantee is for assuring the payment/loan repayment. In case, the party fails to do so, a guarantor has to pay on behalf of the defaulting borrower.

5. Bid Bond Guarantee

As a part of the bidding process, this guarantee assures that the bidder would undertake the contract he has bid for, on the terms the bidding is done.

6. Foreign Bank Guarantee

Foreign BG is a guarantee which is issued for a foreign beneficiary.

7. Deferred Payment Guarantee

When the bank guarantees some deferred payment, the guarantee is termed as Deferred Payment Guarantee. For example, A company purchases a machine on credit basis with terms of payment being 6 equal installments. In this case, since the payment is deferred to a later period, creditor seeks deferred payment guarantee for an assurance that the payment would reach him in the given time period.

8. Shipping Guarantee

This guarantee protects the shipping company from all kinds of loss, in case the customer does not pay. This document helps the customer to take possession of goods.

Importance of Bank Guarantee

1. Adds To Creditworthiness

BGs reflect the confidence of the bank in your business and indirectly certify the soundness of your business.

2. Assessment of Business

In the case of foreign transactions or transactions with Government organizations, the foreign party or a Government Undertaking is constrained and cannot assess the soundness of each and every applicant to a project. In such cases, BGs act as a trusted instrument to assess stability and creditworthiness of companies applying for projects.

3. The Confidence of Performance

When new parties associate in the business and are skeptic about the performance of the company undertaking the project, performance guarantees help in reducing the risk of the beneficiary.

4. Risk Reduction

Advance payment guarantees act as a protection cover wherein the buyer can recover the advance amount paid to the seller if a seller fails to deliver the goods or services. This protects against any probable loss that a party can suffer from a new seller.

• A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.
• A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan, of which there are many examples.
• Individuals often choose direct guarantees for international and cross-border transactions.
• A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

Asset/liability management is the process of managing the use of assets and cash flows to reduce the firm’s risk of loss from not paying a liability on time. Well-managed assets and liabilities increase business profits. The asset/liability management process is typically applied to bank loan portfolios and pension plans. It also involves the economic value of equity.

The concept of asset/liability management focuses on the timing of cash flows because company managers must plan for the payment of liabilities. The process must ensure that assets are available to pay debts as they come due and that assets or earnings can be converted into cash. The asset/liability management process applies to different categories of assets on the balance sheet.

Examples of Interest Rate Risk

Asset/liability management is also used in banking. A bank must pay interest on deposits and also charge a rate of interest on loans. To manage these two variables, bankers track the net interest margin or the difference between the interest paid on deposits and interest earned on loans.

Assume, for example, that a bank earns an average rate of 6% on three-year loans and pays a 4% rate on three-year certificates of deposit. The interest rate margin the bank generates is 6% – 4% = 2%. Since banks are subject to interest rate risk, or the risk that interest rates increase, clients demand higher interest rates on their deposits to keep assets at the bank.

Techniques of Managerial Control: Traditional and Modern Techniques

1. Traditional Techniques

Traditional techniques refer to the techniques that have been used by business organisation for longer period of time and are still in use.

Such techniques are:

• Personal Observation
• Statistical Reports
• Breakeven Analysis
• Budgetary Control

(a) Personal Observation: This is the most traditional technique of control. It helps a manager to collect first hand information about the performance of the employees. It also creates psychological pressure on the employees to improve their performance as they are aware that they are being observed personally by the manager. However, this technique is not to be effectively used in all kinds of jobs as it is very time consuming.

(b) Statistical Reports: Statistical analysis in the form of percentages, ratios, averages etc. in different areas provides useful information regarding performance of an organisation to its managers. When such information is presented in the form of tables, graphs, charts etc., it facilitates comparison of performance with the standards laid and with previous years’ performance.

(c) Breakeven Analysis: The technique used by managers to study the relationship between sales volume, costs and profit is known as Breakeven Analysis. This technique helps the managers in estimating profits at different levels of activities. The following figure shows breakeven chart of a firm.

The point at which the total revenue and total cost curves intersect is breakeven point. The figure shows that the firm will have the breakeven point at 60,000 units of output. At this point, there is neither profit nor loss. The firm starts earning profit beyond this point.

Breakeven Point= Fixed Cost/ (Selling Price per unit- Variable cost per unit).

Through breakeven analysis, a firm can keep a check on its variable cost and can also determine the level of activity at which it can earn its profit target.

(d) Budgetary Control: Under this technique, different budgets are prepared for different operations in an organization in advance. These budgets act as standards for comparing them with actual performance and taking necessary actions for attaining organizational goals.

A budget can be defined as a quantitative statement of expected result, prepared for a future period of time. The budget should be flexible so that necessary changes, if need be, can be easily made later according to the requirements of the prevailing environment.

2. Modern Techniques

Modem techniques are those techniques which are very new in management world. These techniques provide various new aspects for controlling the activities of an organisation.

These techniques are as follows:

(a) Return on Investment.

(b) Ratio Analysis.

(c) Responsibility Accounting.

(d) Management Audit.

(e) PERT and CPM.

(f) Management Information System.

(a) Return on Investment: Return on investment is very useful technique for determining whether the capital invested in the business has been effectively used or not for generating reasonable amount of return.

Return on Investment= (Net Income / Total Investment) X 100 Net Income before or after tax can be used for calculating ROI. Total investment includes investment in fixed Assets as well as working capital.

It acts as an effective control device in measuring and comparing the performance of different departments. It also helps departmental managers to find out the problems which adversely affect ROI.

(b) Ratio Analysis: Ratio Analysis is a technique of analyzing the financial statements of a business firm by computing different ratios.

(c) Responsibility Accounting: Under this system of accounting, various sections, departments or divisions of an organization are set up as ‘ Responsibility Centers’. Each centre has a head who is responsible for attaining the target of his centre.

(d) Management Audit: Management Audit is a process of judging the overall performance of the management of an organisation. It aims at reviewing the efficiency and effectiveness of management and improving its future performance. Its basic purpose is to identify the deficiencies in the performance of management functions. It also ensures updating of existing managerial policies.

(e) PERT and CPM: PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are two important techniques used in both planning and controlling. These techniques are used to compute the total expected time needed to complete a project & it can identify the bottleneck activities that have a critical effect on the project completion date. Such techniques are mainly used in areas like construction projects, aircraft manufacture, ship building etc.

The various steps involved in using these techniques are as follows:

(i) The project is first divided into various activities and then these activities are arranged in a logical sequence.

(ii) A network diagram is prepared showing the sequence of activities.

(iii) Time estimates are laid down for each activity. PERT prepares three time estimates-(1) Optimistic (shortest time) (2) Most likely time & (3) Pessimistic (longest time).In CPM, only one time estimate is prepared. Along with this, CPM also lays down the cost estimates for completing the project.

(iv) The most critical path in the network is the longest path. Longest path consists of those activities which are critical for completing the project on time; hence the name CPM.

(v) If required, necessary changes are made in the plan for completing the project on time.

(f) Management Information System (MIS): Management Information System (MIS) is a computer based information system which provides accurate, timely and up-to-date information to the managers for taking various managerial decisions. Thus, it is an important communication tool as well as an important control technique. It provides timely information to the managers so that they can take appropriate corrective measures in case of deviations from standards.

In business parlance, the terms strategy refers to is a unique plan designed with the aim of achieving a competitive position in the market and also to reach the organizational goals and objectives. In short, it is an interpretative plan, that guides the enterprise in realizing its goal. On the other hand, policy refers to a set of rules made by the organization for rational decision making.

Policy lays down the course of action, which is opted to guide the organization’s current and future decisions. Many people have confusion regarding the two terms, but they are not alike. Here, one should know that policies are subordinate to strategy. Here, in this article, we made an attempt to point out the significant differences between Strategy and Policy.

Strategy

The strategy is a game plan, chosen to achieve the organizational objectives, gain customer’s trust, attain competitive advantage and to acquire a market position. It is a combination of well-thought intent and actions which lead to the organization towards its desired position or destination. It is a unified and integrated plan made to achieve the basic objectives of the enterprise like:

• Effectiveness
• Handling events and problems
• Taking advantage of opportunities
• Full resource utilization
• Coping with threats

The strategy is a combination of flexibly designed corporate moves, through which an organization can compete with its rivals successfully. The following are the features of the Strategy:

• It should be formulated from top-level management. However, sub-strategies can be made by middle-level management.
• It should have a long-range perspective.
• It should be dynamic in nature.
• The main purpose is to overcome from uncertain situations.
• It should be made in such a way, to make the best possible use of scarce resources.

Policy

The policy is also regarded as a mini-mission statement, is a set of principles and rules which direct the decisions of the organization. Policies are framed by the top-level management of the organization to serve as a guideline for operational decision making. It is helpful in highlighting the rules, value and beliefs of the organization. In addition to this, it acts as a basis for guiding the actions.

Policies are designed, by taking the opinion and general view of a number of people in the organization regarding any situation. They are made from experience and basic understanding. In this way, the people who come under the range of such policy will completely agree upon its implementation.

Policies help the management of an organization to determine what is to be done, in a particular situation. These have to be consistently applied over a long period to avoid discrepancies and overlapping.

The following are the major differences between strategy and policy

1. The strategy is the best plan opted from a number of plans, in order to achieve the organizational goals and objectives. The policy is a set of common rules and regulations, which forms as a base to take the day to day decisions.
2. The strategy is a plan of action while the policy is a principle of action.

Strategies can be modified as per the situation, so they are dynamic in nature. Conversely, Policies are uniform in nature. However, relaxations can be made for unexpected situations.

3. Strategies are associated with the organizational moves and decisions for the situations and conditions which are not encountered or experienced earlier. On the contrary. Policies define the rules for routine activities, which are repetitive in nature.
4. Strategies are concentrated toward actions, whereas Policies are decision-oriented.
5. The top management always frames strategies, but sub-strategies are formulated at the middle level. In contrast to Policy, they are, in general, made by the top management.
6. Strategies deal with external environmental factors. On the other hand, Policies are made for the internal environment of business.
7. Strategies often contain methodologies used to achieve the set target. In contrast, Policies determine what is to be done and what should not be done in specific circumstances.

The difference between Strategy and Policy is, a little complicated because Policies come under the Strategies. Apart from that, the policies are made to support strategies in several ways like accomplishing organizational goals and securing an advantageous position in the market. Both of them are made by the top management as well as made after a deep analysis.