Paper IV

PIRTI – POST GRADUATE DIPLOMA COURSE IN MECHANICAL
WOOD INDUSTRIES TECHNOLOGY
Paper IV-Management
Principles of Management, Human Resource

Management, Accounting and Financial Management
Prepared by IBMT, Bangalore

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Introduction to Management
What do we study in Management?

We examine the general nature of management, its dimensions and challenges. If this to
explain the concepts of management, managers, discuss the management process, identify
the various kinds of managers different roles and skills of managers, discuss the
managerial work, examine the working pattern of contemporary organizations.
Management as a Function.
Guiding,
Directing, of human efforts and activities for the accomplishment of given tasks.
Unifying,
That is Task of planning organizing coordinating, motivating and controlling the efforts
further towards specific objectives.
Management: Responsibility for getting things done that is accomplishment of tasks

through the efforts for the people. That is managers are responsible for the job done by
themselves and others as well.
While non managers are responsible for the job done only by themselves.
Management as an integrating functions:
Integrity or Integration means: Unification or linking of activities. That is linking of

activities with objectives of the organization.
External Environment (Customers, Labor’s society)
Objectives Linked with
Internal Environment
Prepared: IBMT, BANGALORE

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Objectives are to be linked with
External Environment Internal Environment
Consumers Harmonizing the working of

various departments and linking up
of the allocation of resources with the
objectives and priorities set as a result of
External integration (i.e. Proper Mgmt)
Labour Integration of Employers efforts into the

Companies plans and Programmes.
Society Linking and reconciliation of individual

goals with the organizational goals.
Suppliers of Materials
Investors
Financiers
Govt. Agencies
Others responsible for growth of

organization
Key characteristics to understand the management:

1. Management is purposeful: Management deals with achievements of something
specific expressed as a goal or as an objectives. Management’s success depends and
measured by the external to which the goals are achieved.
2. Management makes things happen( MAKES THINGS HAPPEN)
3. Management is an activity- not a person or group of persons
4. Management is accomplished with or through the efforts of the people or others.
5. Management is usually associated with the efforts of the group.
6. Management is intangible.
7. Management is AIDED by the computer and humans cannot be replaced by
computers.
8. Management is a means to exert impact on human life.

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Challenges of management/Managers
1. Need for vision
a) Collect data
b) Analyze the data
c) Comprehend and anticipate the problems
d) Prepare to counter
e) Act with determination
2. Need for Ethics

What are Ethics? It is a study of Rights (i.e. what is not wrong?) Who is to be
benefited or harmed by an action code of moral principles?
3. Need for Cultural Diversity.

Any ethical organization should have concern for the fair and equitable treatment
of employees. This is an organizational culture. In order to meet the international
competitive pressure, the organization must draw on their most talented employees
with out regard to racial, cultural or sexual difference. “Talent is color blind, gender
blind and talent has nothing to do with dialects. We need talent and we should get
only that. We will do it by harnessing the human power of all the diverse groups
that make upto country.
4. Need for Training.

To a great extent effective managers are made not born. i.e. management skills can
be learnt by people of all back grounds. Successful managers tend to share following
three qualities.
1) The need to manage: only people who want to affect the performance of
others and derive satisfaction form doing this are likely to become effective
managers.
2) The need for Power: Good managers have a healthy need to influence others.
To do this they relay on their superior knowledge and skill rather than the
authority of their positions.
3) The capacity for empathy: effective managers are also able to understand
and cope up with the often unexpressed emotional reactions of others in the
organizations in order to win their co-operations. As a potential manager ask
your self ‘Do I have the qualities ‘?

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Sources of Management skills

Most Manger acquire Sound educational base
their Skills as a result of Continued life long
education and Educational experience.
Successful acquisition
experience and
Utilization of basic
Initial job experience continued Management Skills
Experience through a variety of
Job assignments
The primary advantage of education as source of management skills is that as a student, a

person can fallow a well developed program of study becoming familiar with current
research and thinking on management. As a student one can devote full time energy and
attention to learning. Hence an educated person would have an added advantage of having
learnt many things in advance, although whatever he had discussed in a classroom cannot
be fully appreciated and applied in practice until he get experienced.
Howsoever a person has read to management books, and had all the contents got
memorized, it is impossible for a person to become a top level manager purely on
academics. Because, management skills must be learned by experience. Only by
experiencing the day to day pressures a manager face and by meeting variety managerial
challenges can an individual develop an insight into the real nature and character of
managerial work.
Managerial Skills
1. Technical skills: The skills necessary to accomplish or understand the
specific kind of work required to be done.
2. Inter personal skills: Ability to understand, communicate and motivate
both individual groups.
3. Conceptual Skills: Ability to visualize what the company could be in a
future date.
4. Diagnostic Skills: Ability to realize and act in a most appropriate
manner.
5. Communication Skills: Ability to convey and understand the ideas from
and to others.
6. Decision Making Skills: Ability to recognize, and define problem and
opportunities and then to select a correct appropriate course of action to
solve the problems and capitalize on opportunities.
7. Time Management Skills: Managers ability to prioritize work to work
efficiently and to delegate appropriately.

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Inputs from the Environment

Human Resources Planning Organizing
and
Financial Resources Decision
Physical Resources Making
Information Resources.
Controlling Leading
Management: A set of activities including planning and decision making

organizing leading and controlling directed at an organizational resource
(human financial physical and informational ) with the aim of achieving
organizational goals in an efficient and effective manner.
Manager: Some one whose primary responsibility is to carry out the

management process.

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Planning and Decision Organizing Determining

making setting the how best to group activities
organizational goal and and resources.
deciding how best to
achieve them.
Controlling correcting Leading motivating

monitoring the on going members of the
activities to facilitate goal organizational to work in
attainment. the best interests of the
organizations.
PLANNING
1. To decide in advance about the course of action to be taken by the company.
2. That is by setting the right goals and then choosing the right means to attain the
goals.
3. The process of establishing goals and suitable course faction for achieving these
goals.
4. It is a basic function of each and every one in the organization
5. The management fixes the objectives of the organization as a whole and in the light
of their each department fixes it’s own.
6. Planning by itself does not mean success.
7. Planning attempts to achieve a consistent, coordinated structure of operations
focused on desired results.
Nature of Planning
1. Planning is an intellectual process. Maximum says “ Think before you leap” all
cannot plan, requires through knowledge aware of process and constrains, clarity of
thought, ability to visualize all the alternatives, weighing each one against the other
and ability to decide the best course of action.
2. Planning is a goal oriented.
3. Planning is primary function of management working without a plan is a rudderless
navigation.
4. Planning pervades all management activities.
5. Planning is directed towards efficiency.

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6. Planning is a course faction which warrants the maximum/optimum utilization for

available resource.
Objectives
A managerial objective is intended goal that prescribes the definite scope and suggest
direction to the planning efforts of a manager.
Emphasis is an:
1. Goal
2. Scope
3. Definiteness
4. Direction
Inappropriate and Inadequate objectives can retard management success and suffocate the
operation of any organization.
In order to successful achieve attain the objectives it is imperative for a prudent manager
to periodically review the action taken and determine whether those actions have been
taken in the direction for achieving the objectives and contributed to the success of the
organization rest all the efforts should go waste. It may be too late to correct if not checked
at the earliest stage and once the actions reach no point of return, no amount of efforts to
correct would help the organization.

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Goals:
Goal is nothing but the purpose for which the organization has been formed. Without a
goal organization has no reason to exist. In order to succeed, an organization must set
specific, measurable, goals with realistic achievable deadlines.
Goals are important for the following reasons:
1. Goals provide a sense of direction.

2. Goals focus on efforts.
3. Goals guide the plans and decision.
4. Goals help us to evaluate our progress.
Lest all efforts should go waste.
It may be too late to correct if not checked at the earliest stage and once the actions
reach a point of no return no amount of efforts to correct would help.
The importance of Planning

1. Goals provide a scene for direction.
2. Goals focus on efforts.
3. Goals guide are plans and decision.
4. Goals help us to evaluate our progress
Why Managers fail to set Goals
1. They are not willing to give up the attractive goals.
2. They are afraid of failing and endangering their self-esteem, losing their respect of
others or jeopardizing their job security.
3. They lack the organization knowledge.
4. They lack the knowledge of the environment
5. They lack confidence.
Planning: It is the process of establishing Goals, and suitable courses faction for
achieving these goals.
1. It is to decide in advance about the course of action to be taken that is setting the
right goals and then choosing the right means for the attaining their goals.
2. It is a basic function of everyone in the company.
3. Management fixes the organization as whole and in the right of their each
department fixes its own.
4. Planning by itself, cannot mean success.
5. Planning attempts to achieve a constant, coordinated structure of operations
focused on desired results.
6. Planning an essence, is a pre determined integrated pattern of future activities.

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Nature of Planning:
1. Planning is an intellectual process. Maximum says-‘Think before you leap’.

All can not plan: Planning requires through knowledge must be aware of process and
continues of each decision, and clarity of thought, ability to visualize all the alternatives,
weighing each one against the other and decide about the correct choice.
2. Planning is Goal oriented.

3. Planning is primarily a function of the management working without a plan is a
rudderless navigation.
4. Planning pervades all managerial activities.
5. Planning is directed towards efficiency.
6. Planning is a course of action which allows the optimum utilization of available
resources.
Types of Plans
Plans (Or Operational Plans)
_____________________________________________________
Long Term Plan (Standing Plans) Short Term Plans (Singular Plan)
1. Objectives 1. Programs
2. Policies 2. Budget
3. Procedures 3. Project.
4. Rules
5. Strategy
Long Term Plans
Objectives:
A managerial objective is the intended goal that prescribes the definite scope and suggests
the direction to the planning efforts of a manager.
Mission Statement: Broad organizational goals based on
a) Planning Premise
b) Basic Assumptions about the organizational purpose.

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c) Its values.
d) Its Distinctive competence.
e) It’s Plan in the world.
It’s relatively permanent part of an organizational identity and does much to unify and
motivate the members of organization.
A Goal should not be confused with general area of activities.
Because goal is target activities is means.
Planning
Plans
______________________________________________________________
Strategic Planning Operational

Planning
These are designed by top level and middle level These are designed as to how the
management / managers to meet the strategic plans are implemented in The
organizational goals. day to day activities.
Hierarchy of plans
Founder Board of Directors
and top managers

Mission Statement(to be
happy)
Top Level and

Middle Level
Managers Strategic Goals(well Strategic Plans(mba/
qualified) software)
Front Line and

middle level Operational Operational
managers Objective(join iit/iim) Plans(study 18hrs/day)

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Mission Statement
Goals
Objective
Plans
Missions Statement: To provide hassle free and a very comfortable transportation facility
to citizen.
Strategic Goals: To introduce a inland railways.
Strategic Plan: To have a metro rail system through important parts of the city.
Operational Objective: To not to disturb the existing continuous traffic.
Operational Plans: To appoint qualified engineers, materials.
Differences between Strategic planning and operational planning
Strategic Plans Operational Plans
Time Tend to involve years or even They are immediate and

decades. i.e. long drawn time bound programs.
process.
Scope Strategic plan affect wide Have more norms and

range of organizational limited scopes
activities
Complexity and Impact Often strategic goals are broad Not so

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and deceptively simple.
Independence These are independent The operational plans are

dependent on strategic plans
and have to reflect the
strategic goals and plans as
well as the organizational
larger mission
Planning Process - Steps involved in formal planning process.
Social Responsibility Goal Formulation Management Values
Identification of
current objectives
& strategy
Resource Analysis
Environmental Organizational
Analysis strengths &
Identification of weakness
strategic
opportunities &
threats
6 GAP Analysis determine

the extent of change required
in present/current strategy
Strategic decision making

Social Responsibility Management Values
-Develop alternatives
-Evaluate alternatives
Measurement & Control
–Select the best of
alternative
Progress
Strategic Implementation
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Management by Objectives
Superior Subordinates
I. Establish Objectives
Identify key areas

Determine measuring unit
II. Plan Actions to be taken
Decide necessary activities and tasks

Determine sequence of actions what resources are
needful time needed to accomplish each task and who
is responsible for it
Anticipate potential hurdles and decide what might be
done to over come them
III. Conduct periodic and annual appraisal

Reviews
Look over objectives subordinates are

responsible for periodically
Review actual results obtained
Evaluate results against performance
expectancies as set forth by objectives that were
established. Established new and reversed
objectives.

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Management by Objectives or Results Management
Results Management Emphasis.

1. Results are the achievements of the objectives instead of activities.
2. Importance of human behavior through the fulfillment of needs from work efforts.
When management is purposeful and performed to achieve the goals, Why not
emphasis the results?
Why not use the human resource in a better manner and contribute to the employee’s
satisfaction.
Many times managerial performance falls, short because people who are involved do
not know the objectives, they do not get the authority to decide major areas of attention
are not known. So how do you over come these short falls.
Make the employee participate and contribute. Let them also know, think, understand
assimilate and execute and contribute. Then once they come in and participate, job is
an easier. They are called ‘Joint Action’ strategies.
a) Strength in unity
b) Unwillingly Ally
c) You scratch my back I will scratch your back.
This type of management is called management by objective or management by mission
or management by results science results are core of attention. Results are the real
terms and the criteria that determine the success of the management theory and
praising manager.
Then what is MBO?

Management by Objectives. It is a system in which each employee participate in
determining personnel objectives as well as the means by which he hope to achieve these
objectives.
These objectives and plans are developed with in the frame work defined by the
superior. These objectives and plans for attaining are discussed, and attained if
necessary and adapted for Execution. The specific expected results guide the direction
of the operation and sets the standards of performance. Performances are measured
with these as standards.
MBO tends to make each employee a manager of his own work. It reduces
authoritarian practice of deciding and telling subordinates exactly what to do. The
individual plays a great role in his own work decision and purpose.
‘Top Down’ or ‘Bottom up’ Approach

In Top down: Approach the CEO of the company. Based on the previous year’s
achievement and the current requirements set up an objective for the top management.

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The Top management in turn, Gets down to their immediately lower level and fixes the
goals and the process goes down till the junior most subordinate.
Each superior while fixing the targets for the lower level, takes into account the knowledge,
understanding and ability and acceptance of the subordinates.
The acceptance and the decision will again go to the Top in success level till the CEO and
finally the goals are fixed.
In Bottoms up: Approach, individuals state their objectives and submit them to the
modification and mutually approval with their respective superiors. In turn each superior
consolidates and drafts the objectives and submits them to his higher superior. For
discussion, modification and mutual approval. The process is continued till the chief
executive finally decides and approves.
Then these objectives are given to departmental managers who determine respective
departmental objective that must be achieved to accomplish the overall goal.
Thus approved departmental goals become the required objectives of these respective
units. The departmental manager’s performance will be judged against the objectives. In
this way the objectives are established for each member at each level through out the
company.
Method of Evaluation:
a) Future period should be specific.
b) Task to be performed should be practical, sufficient and obtainable.
c) Method of measuring the accomplishment should clearly stated.
d) Objectives must be compatible with the over all enterprise plans.
Motivation:
a) The employee starts with a self appreciable of performance, objectives and potential
this leads to SWOT analysis to gain self confidence to receive feed back to know why
the actions are performed and to give self directed and self improved member.
b) By participating in establishing their own goals employees are encouraged
1. To think about their work.
2. To capitalize on their experience
3. To believe in their objectives.
c) Result management motivates from within the individual has a clear idea about
what the end result should be and can be sense he is an important part of getting the
work achieved for a vital part in the term effort.
d) MBO helps to satisfy the human need for achievement. The point has is involvement
leads to commitment people are willing to leave responsibility if they have a say in
the work content and environment, if the job satisfaction is these, they are willing
exercise self control.

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e) MBO supplies a special frame work for participation. When the decisions and
actions affecting one self is jointly taken by the superior and subordinates, they
should be supportive from another. This combination creates a high motivation.
f) MBO lays emphasis and shifts the control from people to operations.
g) This improves the superior subordinate relationship. The subordinate has a greater
freedom and plays a more supportive role.

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Communication in organization improves leads personal development for both superior

and subordinates it creates the opportunities for increasing the knowledge and skills.
Performance can be more effective and satisfying.
Limitations of MBO
1. It increases the pressure on the subordinate
2. It does not define the necessary interaction between the superior and
subordinate especially w.r.t. the superior helping his subordinate to set and
reach goals.
3. To achieve goals most subordinates need interpersonal and communicating
skills with and emotional supports from the superior. It may not be there.
4. As every job is inter connected with other’s job in the organization. What
every employee achieves depends upon. What the other does. Therefore
group objectives may be better.
5. Zeigarnik effort - People do not work unless there is compulsion to complete
or achieve a task. This Zeigarnik effect is more in some and less in the others.
Merely setting a task or goal will not result in management. Unless you have
a high percentage of zeigarnick effect, MBO will be disappointing.
Guidelines for objectives
1. Objectives should be result of participation by there responsible for carrying
them out.
2. All objectives within an enterprise should support the overall enterprise
objective.
3. Objectives should have some reach, people are willing to exert themselves if
they get satisfaction and the challenge is reasonably within their range.
4. Objectives must be realistic.
5. Objectives should be contemporary as well as innovative.
6. The number of objectives established for each management member must be
limited.
7. Objectives must be ranked according to their relative importance.
8. Objective should be in balance with in a given enterprise that is in turn with
the corporate objectives.
Objectives play a visual role in the following 8 areas we may call them KPAS of
the company.
1. Market standing
2. Innovations
3. Productivity
4. Resource(Physical+ financial)
5. Profitability
6. Mangers( Performance + Development)
7. Worker( Performance+ Development)
8. Public responsibility.
In fixing objectives for the company, the top management determines both long term
objectives and short term objectives together. The long range of objectives say for 5 years

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or 10 years should be as for a possible a clear possible. But short term objectives say
immediately for 1 year should be not only clear but should be realistic and should be part
of the long range plants.
The company should formulate the objectives for the organ as a whole and also for each
division, department or section so that the objectives are implemented simultaneous and
integrated manner. The divisions and departments will automatically contribute to the
accomplishment of the objectives, of the entire organization.
PROCEDURE
1. They are meant to guide the actions rather than thinking.
2. More specific than a policy.
3. It enumerates the chronological sequence of steps to be taken in order to attain the
objective.
4. A procedure is a series of related tasks that make up the chronological sequence and
established way of performing the work to be accomplished.
5. A procedure helps a manner/ a person to do a piece of work to become repetitive,
their sparring the manager some effort and time in deciding in what to be done in
every recurring work.
6. A procedure should be some what stable yet flexible enough to allow unique and
emergency to be managed when occurred.
ADVANTAGES:
1. It ensures the uniformity fraction.
2. It decreases the need for further decision making as it lays down standard court of a
action to follows.
3. It increases the coordination among the personal in the organization and the various
departments.
4. Provides a good standard for the manager to appraise the employee.

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ORGANISING
 Organisation is a Dynamic Process and a managerial activity.
 Is an act of bringing together all the people of the enterprise and typing them
together to perform and achieve the common objectives of the organisation
 One has to break the Goal or objectives of the company into smaller tasks and them
to individual activity and then again groping them in a logical and methodical basis
so that a team can be formed.
 Such a grouped activity/ activities are called a department. I.e. departmentation is a
process of grouping activities for the purpose of administration.
 In a static term/ sense of the term, organisation refers to the structure of
relationships among positions and jobs built up for the relation of the objectives
(common).
 Network of relationships.
 A blue print of the management as to have the management will assign and connect
the various functions and activities.
 A social system of human relationships existing among people performing different
activities.
 Organisation is a process of arranging an organisation structure and coordinating
its managerial practices and use of resources to achieve the goals.
 Organizing can be thought of a process making the organizational structure fit it
with its objectives, its resource and its environment.
 Organizational structure can be defined as the arrangement and inter relationship
of the component parts and position of the company.
 On the one hand organizational structure gives the stability and reliability to the
action of the members. Stability and reliability are required for an organisation to
move coherently towards its goals.
 On the other hand altering an organizational structure can be a means of adapting
to and bringing about a change.
 Organizational function creates clear cut lines of authority and responsibility in an
organisation. Thus activity and controlling function of a manager.
 Organisation is a structure of relationships among the positions of jobs which are
built up for the relation of objectives.
 Organisation is an institution or functional group. E.g.: A business enterprise or a
hospital or a government agency.
 Organizing a process i.e. the work is arranged or allocated among the members of
the organisation so that the goals of the organisation are easily achieved.

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 Organizing is establishing of effective behavioral relation ship among persons so

that they may work together effectively and gain a personal satisfaction in doing
selected tasks under given environmental conditions for the purpose of achievement
of goals or objectives.
 Persons working together effectively each doing his best and the persons achieving
the best possible result are basis in the concept of organizing.
 Organizing process involves balancing a company’s needs for both stability and
change.
ORGANISATIONAL STRUCTURE
 An organisation structure specifies its division of work activities and shows how
different functions and activities are linked.
 It also shows the level of specialization of work activities.
 It also indicates the organization’s hierarchy and authority structure and shows its
reporting relationships.
 It provides stability and continuity that allows the organisation to survive the
comings and going of the individuals and co ordinate its dealings with the
environment.
ORGANISATIOANAL CHART
 To show the organizational structure managers customarily draw what is called an
organisation chart which depicts the functions, departments and positions in the
organisation and shows how they are related.
 It is a system of inputs( men, materials+ machinery) and process through which
these are converted into outputs( goods+ service + profits etc)
DEFINITIONS
 Organisation is to determine the activities to accomplish a job and arrange the
distribution of activities among the people( L. Urwick)
 Organisation is a harmonious adjustments of the specialized parts for the
accomplishments of some common purpose or purposes( L.H Harey)
 Organisation is an indefinable group of people contributing their efforts towards
the attainment of goals (Mc. Farland).
 Organisation is a combination of necessary beings materials, tools, equipment,
working space and apparatuses brought together in a systematic and effective
manner to accomplish some desired objects.
 Organizing is a process of identifying and grouping the work to be performed,
defining and delegating responsibility and authority and establishing relationships
for the purpose of enabling people to work effectively together in accomplishing
objectives.( Luis A Allen)

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 Organisation is a process of combining the work which the individuals and groups
have to perform with the faculties necessary for its execution that the duties so
formed provide the best channels for efficient systematic, positive and coordinated
application of available efforts.(Olive Sheldon)
 Organizing is a process of defining and grouping the activities of the enterprise and
establishing the authority relationships among them in performing the organizing
function, the manager defines, departmentalizes and assigns activities so that they
can be most effectively executed. (Theo Heimann).
 Organisation is the term of every human association for the attainment of a
common purpose. They visualize as the process of relating specific duties or
functions in a coordinated whole.( Mooney and Ravey)
FEATURES OF ORGANISATION
 Division of Labour: A single individual cannot carry out all the activities of the
organisation. So in order to achieve the goals of the organisation total work will
have to be divided into activities and functions like marketing, finance, personnel
etc. This is the basis of all organizations.
 Co- ordination: After dividing the work into various activities it becomes necessary
to link up or integrates the various activities so that they are unified and
harmonized.
 Accomplishment of goals or objectives: If the goals or objectives are not
accomplished, the structure of the organisation serves no purpose at all.
 Organisation structure is after all a structure of authority responsibility
relationship. A structure cannot serve the purpose of organisation, if certain
positions are not kept over the other and authority and responsibility well defined.
PROCESS OF ORGANISATION
Determination of objectives
Determining and Enumeration of activities
Grouping and classification of activities
Filling individuals into jobs and assignment

of functions
Delegation of Authority

Coordination of activities
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PRINCIPLES OF ORGANISATION
1. Unity of Objective: Every part of he organisation should have a separate objective
yet each of such objective must be in line with the whole objective of the
organisation.
2. Efficiency: Every one must try and devote himself to achieve goal at a minimum cost
of all resources.
3. Span of Management: It fixes the maximum number of people to be supervised
effectively normally 6
4. Division of Labour/ Work
5. Functional Definition: The duties, authority and responsibility must be clearly
defined and properly defined.
6. Scalar Principles: ( Unity of amend): The chain of command or line of command
must be clearly defined. Every one in the organisation must know to whom does he
report and who is his boss.
7. Unity of Direction: All the activities of the organisation must be directed towards
the common objectives.
8. Principles of Exception: Only those matters be referred to higher levels of
management which are of an exceptional nature or which can not be handled out
lower levels. Top management should not be burdened with all routine matters.
This will relieve the top management to concentrate on policy matters also it avoids
delays and develops a sense of responsibility in lower levels.
9. Principles of specializations : In order to foster efficiently and effectively
functioning of the activities, every one should be given a specific area of work, which
is appropriate for KSA ( Knowledge, skill, attitude)
10. Principles of Balance: All the activities of all the departments should be properly
balanced.
11. Principles of authority and responsibility: Authority and Responsibility should be
co- extensive superior should know he is responsible for the activities of the
subordinates. Subordinates must have a moral obligation to complete the tasks
assigned to them. Unless the authority and responsibility are not properly defined,
the subordinates will not be able to discharge their functions and duties.
12. Simplicity: The organisation structure much be simple so that all the employees
must be able to understand the authority and responsibility relationship. This will
help to increase the efficiency in working.
13. Setting up of a mechanism to coordinate the work of the organizational members
into a unified or harmonious whole.
FORMAL and INFORMAL ORGANISATION
Formal organisation is any business enterprise which provides goods or services to their
customers or clients and offers career opportunities to their members.
It refers to the international structure of roles in a formally organized enterprise. The

structure of the organisation should provide an environment in which individual
performances both present and future contributes most effectively group’s goals.

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It is flexible, provides room for discretion, takes advantage of creative talents, and
recognizes individual likes and capacities.
For organisation is a creation of a systematized environment for the performance of roles

with defined reporting and communication links and an organisation chart.
Informal organisation: Social grouping and relationships invariably arise when people are
associated together. These groupings are based on common interest likes and dislikes, age,
political beliefs religious matters etc…Because of informality a single individual belongs to
several such groups and may drips in and draft own still others.
These social relations have an important influence on the effectiveness with which people
work and as such they should be recognized in the establishment and particularly in the
staffing of an organisation.
DEPARTMENTATION
Departmentation is a process by which the activities of an organisation are grouped into
units for the purpose of administration. This process takes place at all levels.
Departmentation is an effective and efficient grouping of jobs into meaningful work units
to coordinate numerous jobs all for the expedition’s accomplishment of organizational
objectives.
Departmentation results from the division of wok and the desire to obtain organisation
units of manageable size and to utilize managerial ability.
Chief means of departmentation are
1. Departmentation by product/ service

2. Departmentation by function
3. Departmentation by territory HO/ZO/ A.O/D.O/B.O/
4. Departmentation by customer Govt/Pvt/P.U/Whole sale/Retail
5. Departmentation by process
6. Departmentation by task force.
FACTORS IN DEPARTMENTATION
1. Specialization
2. Control
3. Co-ordination
4. Local condition
5. Priority
6. Economy
1. To take advantage of specialization.

a) Functional specialists
b) Other kind of specialists
c) Special Equipment

IPIRTI 25
2. To facilitate control
a) Independent check
b) Deadly parallel( i.e. to establish 2 separate units and asks to compete)
c) Easy supervision
3. Aid in co-ordination
a) Interrelated activities: Because the need for coordination is a dominant factor in
grouping common and related activities under one executive.
b) Common Objective
c) Most used criterion
4. To serve adequate attention.
5. To Recognize local conditions

a) Adjustments available for local personnel
b) Informal groups
c) Full time jobs and need to combine activities to fill the jobs
6. To reduce the expenditure

A particular or given arrangement of duties work well or poorly with particular
combination of people. There is no reason to believe the social relationships do not have
any strong influence on the behavior of the executives.
Where a closely knit informal group is present, an organisation change that upsets this
group may cause considerable dissatisfaction. In such situations the advantages of
making dissatisfaction. In such situations the advantages of making a shift should be
substantial and special effort must be made to get the group see the reason why the
change is necessary.
TYPES OF ORGANISATION
ORGANISATION
________________________________________________________
Line organisation Functional organisation Line and staff

organisation
Line organisation refers to that portion of the functions which have direct responsibility for
accomplishing the objectives of the organisation.
Under this system authority flows from the men at the top to the lowest in rang vertically.
This makes the authority straight and vertical.
PRINCIPALS OF LINE ORGANISATION:

1. Commands must be given to subordinate through the immediate
superior.

IPIRTI 26
2. There should be no skipping of links in the chain of command.

3. There should be only one chain of command i.e. command should be
received from only one immediate superior.
4. The number of subordinates whose work is directly commanded by the
superior should be limited.

IPIRTI 27
MERITS:
1. Simplicity
2. Unified control
3. Strong discipline
4. Fixed Responsibility
5. Prompt Action
6. Flexibility
DEMERITS:
1. Over loading
2. Too much is expected from one person all the work depends on one person to
his Whim fancies
3. Lack of specialization
4. Lack of communication
5. Scope for favoritism.
FUNCTIONAL ORGANISATION.
This is a form of departmentation in which every one is engaged in one functional activity
such as marketing or finance, is clamped into one unit.
Whole tasks of management and direction of the subordinates should be divided into types
of work involved. While dividing care should be taken to see that
a) Entire work divided into smaller parts and allotted to one dept or the other.
b) No duplication of work
c) Only inter related jobs are allotted to a particular dept.
MERITS
1. It ensures a greater division of labour

2. Greater efficiency as the number of operations are limited
3. Ensures separation of mental and manual operation.
4. It facilitates greater production.
DEMERITS
1. Weak discipline as the people report to different bosses.

2. Lack of coordination.
3. Responsibility cannot be fixed.
4. Leads to conflict among the members of equal rank.

IPIRTI 28
LINE and STAFF FUNCTION

Generally those functions which have direct responsibility of accomplishing the objectives
are called line functions and those functions which are supposed to help and assist the line
inn discharging the responsibility are called staff function.
The role of staff is essentially one of advice, assistance and provides expert and specialized
service.
E.g.: personnel department, Finance department, Public relations, Production etc…
TYPES OF STAFF
________________________________________________________
Personnel (personal) Specialized General staff
Merits:
1. Planned specialization
2. It brings expert knowledge to bear upon management
3. It provides greater changes for able workers
Demerits:
1. The authority and responsibility may be clear be care by there may be confusion
between line and staff function.
2. The staff experts may become ineffective for lack of authority to carry out their
recommendation.
3. The line manager may resent the activities of staff member feeling staff members
may undermine their authorities. This may lead to friction.

IPIRTI 29
ANALYSIS OF THE ORGANISATION

Structure of an organisation can be created only after a careful analysis of the
organisation.
ORGANISATIONAL ANALYSIS
Activities Analysis Decisions Analysis Relations Analysis
Decides the primary Kinds of decisions to be To examine various kinds of

activities of the organisation. taken and carried out and relationships that develops in
This will decide other how the decision taking organisation.
activities also and how these mechanisms to be designed
activities are to be grouped how their levels are to be Vertical: Superior-
and carried out with decided and how each subordinate.
necessary emphasis member will contribute to
this. Lateral: Specialist- manager
of the same rank.
Diagonal : Specialist
exercising authority over the
subordinate in another
department
The problem of organisation is to select and combine the efforts of men of proper
characteristics so as to produce the results.
EARNEST DALE’S DESCRIPTION OF ORGANISATION

1. List the work that needs to be done to accomplish the organizational goals.
2. Divide the total work load into tasks that can be logically and comfortably
performed by individuals or groups i.e. Division of work.
3. Combine tasks in a logical and efficient manner the grouping of employees

and tasks is called departmentation.
4. Set up mechanisms for coordination the integration of individual, group and

departmental efforts make it easier to achieve the goals.
5. Monitor the organizational structure’s effectiveness and make adjustments

as needed.

IPIRTI 30
Job specialization: The division of work into standardized relatively simple

tasks.
Classification of Tasks for the purpose of delegation
1. Tasks that MUST be done by Manger.
2. Tasks that SHOULD be done by Manager.
3. Tasks that COULD be done by Manager.
4. Tasks that SHOULD be done by others.
5. Tasks that MUST be done by others.
PRINCIPLE OF DELEGATION
1. Authority and responsibility must be co-extensive as far as possible authority cannot
equal responsibility why? Duties are concerned with rights and obligation with
attitudes. Certain kinds of rights an enterprise can pass an only to the managers and
there are restrictions as to how these rights are to be used. To permit anyone charge
without constrains would lead to chaos. Therefore Authority and Responsibility can
only be co-extensive.
2. Responsibility cannot be delegated.
3. Dual subordination must be avoided. Unity of command principle states that each
person in the organisation should only report to one supervisor. Reporting to more
than one superior makes it’s difficult for an individual to know to whom he is
accountable or whose instruction he should fallow. Further reporting to more than
one superior also encourages individuals to avoid responsibilities, since they can
easily blame poor performance on the fact that with several bosses they have too
much to do.
4. Scalar principle: There must be a clear line of authority running from top to bottom
and step by step, to make it easier for the members of the organisation to
understand.
a) To whom they can delegate
b) Who can delegate to them
c) To whom they are answerable
When establishing the line of authority completeness of delegation is required i.e. all
necessary tasks should be assigned. Unassigned tasks called ‘Gaps’ have to be avoided
otherwise there tasks will remain unperformed or the people who voluntarily perform
those tasks will resent their extra burden. Similarly there should not be ‘overlaps’ i.e.
the responsibility of performing the same tasks assigned to men than one person and no

IPIRTI 31
‘splits’ i.e. the responsibility for the same tasks assigned to more than one
organizational unit. Otherwise confusion of authority and Accountability will result.

IPIRTI 32
STEPS FOR EFFECTIVE DELEGATION:

1. Decide which tasks can be delegated. Many items can and should be delegated some
of these are minor decisions, recurring chores, etc.. However unusually demanding
and challenging assignments mat often be delegated to subordinate which will
develop them.
2. Decide who should be assigned. Who has the time? Does this job require special
Competence? Who has those? Ask these questions before you decide.
3. Delegate the assignment provide all information relevant to the task as far as
possible delegate by the results expected not by the method to be used cultivate a
claimant free and open communication between the person delegated and you.
4. Established a feed back system: Because In selecting a system because tighter the
control lesser the delegation takes place.
DIFFICULTIES IN DELEGATION-LIMITATION
I. ON THE PART OF BOSS:
1. I can do it better myself: - A desire for outstanding performance standard.
2. Lack of ability to direct.
3. Lack of confidence in subordinates.
4. Absent of control that war of coming troubles.
5. Conservative and cautions temperament.
6. Desire to dominate.
7. Fear of incompetence
Insecurity may be major cause since the manager is accountable. Also the manager may
fear a loss of power of the subordinate to do a good job.
II. ON THE PART OF THE SUBORDINATE:
1. Dependence on the boss foe decision

2. Fear of criticism: Insecurity can also be a barrier to the acceptance of the
delegation. Some of the subordinates want to avoid responsibility and risks and so
would like their bosses to make all the decisions. Similarly subordinates who fear
criticism or dismissed for mistakes are reluctant to accept delegation.
3. Lack of self confidence.
4. Inadequacy of positive incentives
5. Lack of information and resource to do a good job
6. Excessive work load.

IPIRTI 33
HOW TO MAKE DELEGATION SUCCESSFUL

1. Establishment of clear and definite goals so that the subordinates understand and
knows why his work is necessary and important.
2. Clearly defining of authority and responsibility.
3. Motivation of subordinates.
4. Proper coordination and proper assignment of work
5. Providing of training to the subordinates.
6. Establishment of proper controls in the system to enable the subordinate evaluates
their performance.
7. Proper methods of evaluating performance.
MERITS OF DELEGATION:
1. It frequently leads to better decisions since the subordinates closest to the operating
centre are likely to have clear view of the facts.
2. Effectively delegation also speeds up decision making the delay caused by
consultation by one level with other levels is reduced if subordinates are authorized
to make necessary decision on the spot.
3. Delegation causes subordinates to accept accountability and exercise judgment.
4. It helps to train subordinates and improves the self confidence and willing one to
take initiative.
The extent to which managers delegate authority and Accountability is influenced by
factors like the culture of the organisation, the specific situation involved and the
relationship between the personality involved and the capabilities of the people in that
particular situation.
SPAN OF SUPERVISION
The delegation of authority and responsibility by an executive to his subordinates involves
entrustment of work. Sanctioning authority necessary for performing it and an obligation
to perform the assigned tasks. The delegating executive, even after delegation is responsible
for the performance of the subordinates and is an accountable to his superiors for the jobs
delegated. It is therefore necessary for the delegating executive to exercise power and
control over the subordinates so that tasks are performed effectively. The ability to exercise
control providing the necessary information, thought and guidance for the completion of
the assigned tasks is limited.
This limit is called span of control or span of supervision. Span of control or span of
supervision is number of subordinates a manger can manage effectively.
Factors Limiting Span of Supervision/ Control/ Management.
1. The time and energies of the delegating executive are limited.

2. The capacity of the delegating executive to deal with the problems of the
subordinates and his adaptability is limited.( i.e. mental capacity and personal
adaptability ) The ability of a supervisor to view things in an understanding fashion

IPIRTI 34
dimensions on the number of problems increases with a fewer subordinates he can be

firm with one depending upon the individual and a variety of environmental factors.
Best with larger number of subordinate’s supervisors are faced to adopt a limited
supervisory procedure and hope it is effective in all cases.
3. Individual executives vary of work in the amount of time and energy they
can and will devote to their jobs. They also differ in their capacity to adopt to a variety
of situations. Because of these differences in the basic limits of supervision we cannot
expect to find a fixed formula that will apply in all situations.
4. With increase in the number of activities to be supervised and controlled he
loss a major portion of the time in getting information.
5. Some of the subordinated have a feeling that their status is enhanced by
reporting to some top boss and not some inter mediate manager.
6. Management becomes cost conscious- Any new appointment may in create
the company’s overhead cost resulting in reducing in levels or increasing the span.
7. A manager often believes that the number of people directly reporting to him
gives an index of his importance in the organisation. He likes the power and self
importance generated by a queen on his doormat. Personnel ambition may find him an
outlet in acquiring additional responsibilities without too nice a regard for
organizational refinement. This tendency is usually described as Emphasis building and
is universal.
Why Span of control or supervision cannot be increased?

1. In accuracy in communication
2. Inflexibility takes move time
3. Dangers of layering
4. Expensive
5. Effect on morale
According to Ian Hamillton-3 to 6 ideal
VA Graicunna’s Formula=C=N (2N-1 + N-1)
C= Total number of relationship
N= Subordinates
Relationship=a) Direct single
b) Direct group
c) Cross relationship
Again people who oppose the spam of control argue that
1. Span of control is not democratic

2. Span of control increases the administrative distance

IPIRTI 35
Object is not valid because then can be no greater stimulant of morale than a collective
conscious of efficiency there is nothing which rots morale more quickly and more
completely than poor communication and indecisiveness and there is no condition which
more quickly produces a sense of indecision among the subordinates or more effectively
hampers the communication than being responsible to a superior who has too wide a span
of control.
Manager should not be an executive who wants to over centralize – the man who cannot
delegate properly and therefore demands a tight span of control so that he can pass on
every subordinate decisions important or not. And the executive who is prepared to trust
his subordinates and therefore does not want to see them frequently.
The first type is one who does not know how to lead and hence tries to dominate. Second
one is who not realized that leadership calls as much constant personnel contact us
circumstances permit.
Although many business enterprises have a great desire to decentralize their activities as it
has its own merits, yet decentralization is not being effective when it comes to reality why?
All executives too often sincerely agree to delegate in a particular form but for some reason
the right to decide with corresponding responsibility and imitative does not pass down the
line. Effective relationship centers round a personnel relationship between two individuals
the boss and his immediate relationship.
Freedom and imitative which a subordinate is expected to exercise can rarely be spelt out.
But the substance often delegation takes on real meaning in the working habits which are
developed from day to day habits and attributes in turn are by the subtle interplay of the
two personalities involved now comes the reason why delegation of authority fails.
MISCONCEPTIONS OF SPAN OF CONTROL

Span of control creates an administrative distance is based on:
1. That a superior should never have a direct contact with individual at

lower levels expect through or in the presence of their immediate superior. It indicates
the poor morale within the organisation. The lower level manager is doubtful of the
good sense and loyalty of both his subordinate and his higher executive. This is the
result of a wide span of control.
2. The official channels should be the only avenues of communication. It
is true the officials channels are the only official communication must be the only one,
does not realize the importance of informal relationships which occur at all levels of any
organisation and which are more important to morale and effectiveness than the official
relationship. In any organisation when morale is high most of the important work is
done by verbal contacts between them. Who trust each other, talk the same language
and share the same doctrine. Herber Simon has said that the principle of minimizing
the organizational levels directing contradicts the requirements of span of control. But
the care for administration difference is not to extend the executive span of authority
beyond what he can reason ally handle in order to reduce the number of levels. The
method is to ensure :

IPIRTI 36
a) That each level that an executive has a pattern of organisation when

enables him to devote ample time to know his subordinates.
b) He considers monitoring personal contact in his duties i.e. He is a
leader before he is an administrator.

IPIRTI 37
AUTHORITY and RESPOSIBILITY
 Authority may be defined as a legal right to command action by others and enforce
compliance.
 Authority is the power of a person to command others to act or not in a particular
manner deemed by the person to further the organizational or departmental
objective.
 Authority is the power to make decisions which guide the action of others.
 Authority is the power rooted in the general understanding that specific individuals
or groups have a right to exert influence within certain limits by virtue of their
positions within the organization.
Many scholars argue that the concept of power and Authority are synonymous but
some organ they are distinctly different.
Authority in the managerial content is usually identified with the legitimate base power.
Compliance can be gained in a number of ways through persuasion sanctions request,

coercion constraint or force. A person with authority influences the activator the
behavior of another individual or group. Similarly a person can have influence but have
no power.
Power is a broader concept than authority and can be international or un intentional.
Power can be thought of a strong influence on the direction of the individual behavior.
Power should not be permitted to concentrate in a single organisational unit.
A delicate balance of power is VITAL for an organization to be effective.
What is Power?
Power is the ability to exert influence over the other is the ability to change the
behaviour or attitude of an individual.
What is influence?
Influence is the ability to make another person behave as you like.
Influence is any action or example of behaviour which directly or indirectly causes a

change in the behaviour or the attitude of another.
Persons who can exert influence on others are called stake holders.

IPIRTI 38
Delegation of Authority
What is Delegation and what is Manager’s work.
Manager’s work
___________________________________________________________
Operating Work Managerial Work
This includes the basic activities necessary This refers to the guidance
to other people.
To create goods or services It includes the activities of all

levels of supervisors
From first line supervisors to President.
Accountability: Accountability is the moral obligation other part of a subordinate to carry

out the responsibility and exercise authority in terms of performance standards
established.
Responsibility: Responsibility can be defined as the moral compulsion felt by the

subordinate to accomplish the job assigned by his supervisor.
Delegation is act of assigning the formal authority and accountability for the completion of
specific activities to a subordinate.
Delegation is a matter of entrusting a part of work operations or management to others.
Delegation is a Dynamic process followed by the manager in dividing the work assigned to
him so that he performs that part which only he, became of his unique placement in the
organizational chart, can perform affectively, so that he can get others to help him with
what remains.
Delegation of Authority by the superiors to the subordinate is obviously necessary for the
efficient functioning of any organization since no supervise all the organizational tasks.
Delegation for the organization to make efficient use of its resources accountability for the
specified tasks is assigned to the lowest level of the organization at which these exists
sufficient ability and information to carry out the job competently.

IPIRTI 39
Corollary Rule
To enable the individuals to perform the assigned tasks more effectively sufficient
authority must be delegated to them.
A necessary part of the delegation of Authority and Accountability is the responsibility of

being held answerable for all results. By accepting authority and responsibility individuals
in the organization also agree to take credit or blame for the way in which they carry out
this assignments.
Responsibility is an added dimension to the manager.
Managers are held accountable not only for their performance but they are also held
responsible for the performance of their subordinates responsibility for the action of the
subordinates is one of the defining chrematistics of a managerial position.
Features of Delegation
1. The manager assigns duties.
Duties
Activities Performed Results expected
Types policies Expected to type 50 policies in a day
prepares trial balance T/B Before 7th of every month
Procures business Rs 50 lakhs of Business in a year
The person delegating indicates what works to be done and how much to be done.
2. He grants necessary authority: Along with the permission to proceed with the permission
to proceed with the work, the manager transfer certain rights necessary for the
performance of the jobs.
3. The manager create an obligation: In accepting an assignment a subordinate tasks on an

obligation to his job for the completion of the job.

IPIRTI 40
Classical view Constitution guarantees rights to own

Classical view suppose that the authority Property and control business.
originate at some high level of society and
them lawfully high level may be god the
state or the collective will of the people. Manager issues commands
Internal authority management has a right to
give lawful orders and subordinates have an
obligation to obey. Commands are obeyed
The classical view
Acceptance view
Manager issues commands
Recipient Considers acceptance
Acceptance Non Acceptance
According to acceptance view, basis of authority lies in the influence and not in the
influence. This view starts with the observation that not all legitimate laws or commands
are obeyed in all circumstances some are accepted by the receiver of the order and some
are not. They key point is that receiver decides whether or not to complete according to the
acceptance view, therefore whether or not authority is present in any particular law is
determined by the receiver and not by the issue of orders.
Export Power: Power is based on the belief or the understanding that the influencer has
specific knowledge or relevant expertise that the influence are not have.
Referent Power: The Power is based on the desire of the influence to be like oridentify with
the influencer.
Eg: Popular conscientious managers will have referent power if the subordinates are
motivated to emulate their work habits.

IPIRTI 41
Referent power also operates the peer level-charismatic colleague may want us to do some
of their work which we may do without any reservation or dislike. This is called
Charismatic.
The strength of referent power is directly related to such factors as the amount of prestige
and admiration the influence confers upon the influencer.
These are the potential ways in which are person can influence another person and these
are the source of power.
The Role of the influence in accepting or rejecting the attempted influence on him remains
the key factor.
That part of the contractual obligation.
- Zone of indifference establishes the

range within which the orders are
Zone Zone of
of Indifference obeyed is authority is allowed to be
Acceptance
exercised.
۬.۬Zone of acceptance + Zone of

Indifference = Constant.
Sources of Power
Reward Power: Power derived from the fact that one person known as the influence has
the ability to reward another person known as the influence, for carrying out the orders
which may be expressed or implied.
Co-ecive-power: This is the negative side of the reward power. i.e this is the ability of the
influence to punish the
Influence for not carrying out the orders expressed or implied.
Legitimate Power: Power rooted in the general understanding that specific individuals or
groups have right to exert influence within certain limits by virtue of their positions in the
organization. Power that exists when a subordinate or influence acknowledges that the
influence has a right is lawfully entitled to exert influence – within certain bounds.
This view does not mean that all subordinates will not comply with all the orders are
obeyed.

IPIRTI 42
Chester IBernard, a strong proponent of the acceptance view has defined the conditions
under which a person will comply with higher Authority.
A person can and will accept a communication as authoritative only when 4 conditions
simultaneously occur.
a) He can and does understand the communication.
b) At the time of the/his decision, he believes that it is not inconsistent with the purpose
of the organization.
c) At the time of his decision, he believes it to be compatible with his personal interest
as a whole.
d) He is able to mentally and physically comply with it.
In addition to these conditions, co-operation in accepting authority is fostered by what

Bernard calls the zoon of indifference. Herbert Simon refers to this as area of acceptance.
Both expressions refer to the inclination of individual to accept most orders given to them
by there superiors provided the orders fall with in a normal range.
Eg: We all accept the need to send a periodic report on the program to the HQ. but don’t
we keep thinking why not skip sending a report.
What is not delegation?

1. It is not an abdication.
It is not simply a matter of giving people jobs and telling them to get them done.
Delegation does not make the managers any responsible to their superiors. It does not
mean abdication of responsibility by the delegating manager.
Responsibility is not like an object which can be passed from an individual.
2. It does not mean abandment of his responsibility.

3. It does not mean manager loss his control.
4. It does not mean to manager is avoiding making decisions.
Efective Delegation
Harvey Shermon’s six degrees of delegation. i.e. How much to be delegated
1. Take action- no further contract is needed
2. Take action -report to me the action taken.
3. Look in to the problem- let me know what you intend to do, Do it unless I say ‘Don’t
Do’.

IPIRTI 43
4. Look in to the problem- let me know what you intend to do, Take no action unless I
give my approval.
5. Look in to the problem – let me know the various alternatives and process and
conditions of each and recommend one to me.
6. Look in to the problem – give me all the facts and figures and I will decide what to do.

IPIRTI 44
Decision Making
Decision making is an important process and part of every manager’s job. Decision
making is identifying and selecting a course of action to deal with a specific problem or
take an advantage of an opportunity.
Decision making shapes a company’s strategic and operating plans. It is imperative,

therefore for every manager to develop the art and science of decision making.
A problem arises when an actual state of affairs differs from the desired state of affairs.
Some times opportunities come in the disguised form of problems.
Williams Pounds has argued that the problem finding process is often informal and
intuitive. Four situations usually alert managers to possible problems:
a) When there is a deviation from the past experience.
i.e. a previous pattern of performance in the organization is broken.
Ex. This year’s sales have fallen behind last years.
Expenses have increased on last years. Etc.
Events like this are an indication to the mangers that a problem is developed.
b) A deviation form the plan i.e. manager’s projection or expectations are not met.
Ex. A department exceeding their budget. Such events tell that something must
be done to get the plan back on course.
c) Other people often bring problem to managers: ex. Customers complain about
late deliveries. Higher level managers set new performance standards for the
managers department,
d) The performance of competitor can also create problem.
Solving situations.
When other companies develop new processes or improvements in operating

procedures, the managers may have to re evaluate processes or procedures in
his own organization. Competitors in the same organization may also pose
problems.
If a company has many divisions, the top management may compare the
performance of each division, a problem for the manager of the plant that is
performing below average.

IPIRTI 45
Nearly 80% of the problems will be known to the manager well before the
problems are made known formally. Thus it is proved informal communication
and intuitions are the sources of these problems.
Problem finding is not always straight forward. It is possible that managers

commit errors in sensing the problems.
The pitfalls the managers may encounter while sensing the problems may be
categorized as:
• False association of events
• False expectation of events
• False perceptions and social image.
Opportunity finding
It is not always clear whether a situation faced by a manager presents a problem or an

opportunity.
Missed opportunities create problem for organization and opportunities are often found
while exploring problems.
What is an opportunity: situation that occurs when circumstance offer an organization

the chance to exceed stated goals and objectives.
What is a problem: something that endangers the organization’s ability to reach the
objectives or even prevent the organization from reaching the objectives.
The Dialectical enquiry method or Devil’s Advocate method is useful in solving the
problem and finding an opportunity.
In this method the decision maker determines possible solution and the assumptions
they are based on, considers the opposite of all after assumptions and then develops
the counter solutions based on the negative assumptions. This process may generate
more useful alternative solutions and identify unnoticed opportunities.
It is interesting to note a lot of work has been done to find ways for problem solving but
very little has been done to find ways of problem finding and even less for opportunity
finding. Prof Peter Drucker says it is opportunities and not the problem is the key t
organizational and managerial success solving a problem restores normality, but result
must come from exploitation of opportunities.
Deciding to decide

IPIRTI 46
Managers may be problem solvers but all managers do not visualize all the problems in
the same way. Managers widely differ in what they consider to be a problem and how
they elect to deal with it.
Threshold for problem Recognisition
1. How big is the gap between actual and desired state of affairs?
2. How does this gap affect our chances of reaching or exceeding organizational
goals?
3. If this gap is a problem, how difficult it will be to solve or fix?
4. How quickly are we required to move to fix the problem?
5. How to take advantage of the opportunity?
These are some of the questions the managers must ask themselves in defining the
situation as a problem or an opportunity. Some of these answers may be available
either in strategic plans or an operational plan which includes standards for
performance or by statistical analysis of the available data other answers depend upon
contingencies or events that could not be anticipated during the planning process.
To answer such questions effectively managers must use their sense of judgment
based on their knowledge of both direct and direct action environment for their
operations. That is why gathering information either through formal or informal
information system is so important for being an effective manager. It is observed all this
information is filtered through manager’s values and background which also influence
the types of problems and opportunities they choose to work on.
If managers are:
1. Motivated by economic values: they want to make decisions on practical matters

like marketing, production or profits.
2. Theoretically oriented: they may be concerned with long term prospects of their
organization.
3. Politically motivated: they may be concerned with competing with other

organization or with their own personal advancements.
The background and expertise of managers will also influence what they see as
problems and opportunities.
Managers from different departments will define some problem in different terms.
Setting priorities

IPIRTI 47
No manager can possibly handle every problem that arises in the daily course of
business. It is therefore important that manages learn to establish priorities and
delegate minor problem to its subordinates.
When managers are faced with problems they should ask themselves the following
questions:
1. Is the problem easy to deal with: a manager who gives some level of attention
to every problem will get little work done. Most of the problem requires only
small amount of time and attention of the manager. But if he attends to each
and every problem himself he will be bagged down to trivial details. He would
not be in a position to attend major problems which demand his attention.
That is why managers reserve formal decision making techniques or
problems that truly require their attention. Some of the minor problems where
even if the decision go wrong corrections can be relatively speedy and
inexpensive.
2. Might be the problem solves itself? Managers find an amazing number of

problems which are not worth the attention may be eliminated if ignored.
Therefore the managers should rank the problems in order of importance.
Those at the bottom of the list usually take care of themselves or can be dealt
by others if one of these worsens, it automatically moves to a higher priority
level in the list.
3. Is this my decision to make? Whenever confronted with a problem, a

manager must decide whether he is actually responsible for making a
decision.
The general rule which helps is:-
The closer to the origin of the problem the better is the decision made. This
rule has got two corrolosive:
a) Pass a few decisions as possible to those higher.
b) Pass as many as possible to the lower down.
Usually those who are closest to the problem are in the best position to decide
what to do about it.
When managers refer an issue to a higher authority for a decision they have to be sure
they are not simply passing of the buck instead of being properly cautious.
Referring the matter to a subordinate is not passing of the buck because he retains the
responsibility.

IPIRTI 48
How can manager decide when should they pass the problem to a superior?
Managers can ask these questions in addition to those already mentioned above.
a) Does the issue effect other departments?
b) Will if have a major impact on the superior’s area of responsibility.
c) Does it require information available only from a higher level?
d) Does it involve a serious breach for departmental budget?
e) Is this problem outside my areas of responsibility or authority?
If the answer is ‘yes’ to anyone, then the matter is referred to higher up.
Different problems require different types of decision making. Routine or

minor matters can be handled by s procedure. This is called Programmed
Decision.
Ex. Dispatch of materials, payment of bills etc.
Some important decisions like location of a retail outlet require solution

created through less structured process of decision making and problem
solving.
This is called non programmed decision
Since most of the decisions involve future events, managers also learn to
analyze the certainty risk and uncertainty associated with alternative course
of action.
Programmed and non programmed Decisions
A decision can be either a programmed decision or non programmed

decision.
Programmed decision are made in accordance with written or unwritten

policies, procedures or rules, that simplify the decision making in recurring
situations by limiting or excluding alternatives.
Ex. Pay scale for the new recruiters.
Programmed decisions are used for dealing with complex as el as

complicated issues. When a problem occurs and if its component elements
can be defined, predicted and analyzed, then it may be a case for
programmed decision making.

IPIRTI 49
To some extent programmed decisions limit our freedom instead of

individuals, organization decides what to do. However, programmed decisions
are intended to be liberating. The policies rules or procedures by which we
make programmed decisions save time allowing us to devote attention to
other more important activities.
Ex. Deciding how to handle customer complaints.
While the effective managers lean on policy to save time they remain alert for
exceptional case.
Managers must use their sense of judgment in deciding whether a situations

calls for a programmed or non programmed decisions.
Non programmed decisions
These deal with unusual or exceptional problems. If a problem, that has come
up and cannot be covered by an existing policy or procedure or is so
important that it deserves a special treatment. It must be handled by a non
programmed decision. Ex. Allocation of company’s resources.
Most of the significant problems a manager will face usually require non
programmed decisions.
As one moves up the organizational hierarchy, the ability to make non

programmed decisions becomes more important. That is why management
development programmes try to improve manager’s abilities to make non
programmed decisions usually teaching them to analyze the problem
systematically and to make logical decisions.
Certainty, risks and uncertainty
In many decisions, all managers must weight alternatives many of which

involve future events that are difficult to predict.
Ex. Interest rates in next 3 years.
The reliability in next 2 years of the suppliers
Change in technology in future.
This is the reason decision making situations are categorized on a continuous

ranging from certainty (highly predictable) to the turbulence (highly
unpredictable).

IPIRTI 50
Certainty
Under conditions of certainty we know our objective and we have accurate, measurable
reliable information about the outcome of each alternative we are considering.
Risk
Decision making condition in which managers know the probability a given alternative
will lead to a given goal or outcome.
Probability: A statistical measure of the chance a certain event or outcome will occur.
Risk occurs whenever we cannot predict an alternative with certainty, but we do have
enough information to predict the probability it will lead to desired risk.
Uncertainty: Decision making condition in which manager faces the unpredictable

external conditions or lack of information needed to establish the probability of certain
events. Under conditions of uncertainty little is known about the alternatives or their
outcomes. Uncertainty rises from 2 sources first the managers may face external
condition that is partially or entirely beyond the control. Ex. Weather, public interest.
Second the managers may not have access to key information.
Turbulence: Decision making condition that occurs when objectives are unclear or when
the environment is changing rapidly or uncertain.
Rational model of Decision making
This is the most scientific approach to solve the problem. Most of the organizations that
want to arrive at a most logical and rational decisions use or adopt this method. This
method is especially useful in making non programmed decisions and in helping
managers go beyond prior reasoning, (i.e. the assumptions that the most superficially
logical or obvious solution is the correct one.)
It is not the approach that matters but the quality of the decision that is more important.
In a quality decision making managers use a rational, intelligent and systematic
approach and such decisions are more likely to be more successful.
The basic process of rational decision making involves diagnosing defining and
determining the sources of the problem, gathering and analyzing the facts relevant to

IPIRTI 51
the problem, developing and evaluating the alternative solutions to the problem
selecting the most satisfactory alternative and converting this alternative into action.
This method takes into consideration 3 time aspects of the decision.
1. The past in which the problem developed and information collected.
2. The present where the alternatives are to be selected.
3. The future where the decision to be implemented.
STEP 1 Diagnose the problem
A problem originates when an executive becomes acutely conscious of an unsatisfied

need. A variety of ways may give rise to this need.
Unless the diagnosis, a critical step in organizing is accurate, subsequent planning is

miss directed and wasteful. The love of quick action makes the manager impatient so
that careful diagnosis and detailed planning is not resorted to. The basic issue is right
action is more important than a quick action.
The relevant questions that come up on the context are-
1. What gap exists between the expected and the desired result?
2. The causes for the gaps- both root causes and the intermediate.
3. Does the examination of the higher level of goals place any limits on the range of
satisfactory solutions.
A felt need is only the beginning of the good diagnosis. A good executive is already
preoccupied with his own recognized problems and their solutions through a vast range
of facts, forecasts and pressures. He will be able to discover the new problem only
when he is able to single out or identify from the existing facts and pressures a set of
new objectives which must be related to main objective of the organization.
The more specific the objective, it will be easier to tackle. Time spent on defining the
objective saves the expenditure of energy and cost at the later stage of implementation.
The objective of the solution must themselves reflect the objectives of the business and
take into account the immediate and long term future.
Once the problem is defined, an effective manager must decide which part of the
problem he must decide to solve and which part of the problem he may leave it to
others. It may not be possible for the manager to find a single solution for the entire
problem since the problem may have many parts/elements and the single solution may
not suit them all. If the managers define then they will have a basis for proposing and
evaluating alternative solutions.

IPIRTI 52
Identify the obstacles
A good diagnosis not only specifies the desired result but also identifies the obstacles
that may be encountered. Identification of obstacles needs a keen insight. Symptoms
must not be mistaken for the causes of the problem. Ex. If a marketing department’s
working cost is going up, it is not that they are increasing the expenditure, but real
problem is decreasing the sales.
The distinction between a key obstacles and symptoms is when the symptom is
removed, the problem persists. When the obstacle is removed, the situation improves.
Hence the manager must work for key obstacles in the solution.
Recognize the limitations
Thorough examination often reveals a number of condition which must be satisfied

before a solution is found to be satisfactory.
a) Available resources may be limited
b) Time available may be limited
c) Existing policies of the company may not permit such an action
A diagnosis should be forward looking and specify
a) A result desired
b) The key obstacles
c) Any boundaries imposed
Again a diagnosis rarely remain unchanged for as we search for alternative new
aspects of the problem may occur to us projecting the various consequences of the
alternatives may lead us to revise our objectives introduce new limits.
Hence an effective manager must keep his mind open and receptive to any good ideas
and make full use of them. Causes unlike symptoms are seldom apparent. Managers
have to rely on intuition to identify them.
STEP 2 Develop alternatives
Once the problem is well stated the manager has an almost impulsive temptation to find
a solution which immediately seems feasible, which is based on past experience or the
practice of the competitors or suggestions of the parties.
A prudent manager must weigh before choosing any course of action whether there
could be a better way of solving. The best way can be obtained only when the following
factors are considered:

IPIRTI 53
1. Need for creativity: an effective manager finds helpful suggestions solutions

readily adoptable, yet there is a need for creative thinking in as much as each
operating situation is unique and differing from others. Developing creative
solutions and innovations in method of solving problems is an integral part of
managerial decisions.
2. A manager must be open and willing to entertain novel ideas.
3. A manager must be willing to undergo a change of attitude.
4. He should provide a permissive atmosphere.
All said and done creating ideal permissive atmosphere to generate useful and
workable alternatives is more easily done for the constraints like the desirability of the
degree of permissiveness and selection of people for expressing ideas will impose a
great pressure on the manager’s mind which may finally prove the efforts to be futile.
STEP 3 Evaluate the alternatives
Once the problem has been diagnosed and a set of good alternatives are developed
effective managers must evaluate each one of them on the basis of 3 key questions:
1. Is this alternative feasible?
Does the organization have the money and other resources needed to carry out
this alternative?
Does the alternative meet all the organizational legal and ethical obligations?
Ex. Closing down a plant will lead to workers going to court.
Is this alternative a reasonable one given the organization’s strategy and internal
policies?
Any solution is only as effective as the support it wins within the organization.
In evaluating alternatives, managers must try to anticipate what would happen if

the employees fail to support and implement it wholeheartedly.
2. Is the alternative satisfactory solution?
Managers must decide first,
Does the alternative meet the decision objectives i.e. both the must and should
(i.e. whether it includes the decision to be made by them or others)
Does the alternative have an acceptable chance of succeeding assuming this

can be assessed?

IPIRTI 54
What is acceptable to one organization may not be acceptable to others what is

acceptable to one person may not be so to others depending on the organization
culture and the individual tolerance limit.
3. What are possible consequences for the rest of the organization?
It is likely that one solution found by a manager my affect other areas- both
present and future in as much an organization is a system of interrelated parts.
If the decision might affect other departments, they too shall be consulted.
Competitors may be affected and their reactions will have to be taken into
account.
Alternatives with negative consequences must be eliminated. Of course

alternatives with positive consequences must be preferred to the neutral
consequences.
STEP 4 Implement and Monitor the Decision
Once the solution is selected, steps should be taken to translate it into action.
Implementing a decision involves more than giving appropriate orders. Resources must
be acquired and allocated as necessary. Manager must set up budgets and schedule
for actions have to be decided upon. This helps them to measure the progress in
specific terms. Next they assign responsibility for specific tasks involved. They also set
up procedure for progress reports and prepare to make corrections if new problem
arise.
One should not commit the mistake of getting the possible and potential risks which
were identified during earlier evaluation of alternatives stage. It is essential at this stage
to re-examine their decision and develop detailed plans for dealing with risks and
uncertainty.
A manager must not commit the errors of assuming that action will automatically follow
once the decisions made. The decision made may be a good one if the subordinates
are unwilling or unable to carry out the decision, the decision will be in effective.
Ultimately a decision is no better than the action taken to make it a reality.
Action taken to implement must be monitored.
Are things working according to plan?
What is happening in the internal and external environment as a result of the decision?
Are the subordinates performing according to the expectations? Etc… are some of the
questions which should be asked.
Decision making is a continual process and a continual challenge.

IPIRTI 55
Revised and
Confirmed decision
Listen to the devils advocate
Assess bias in analysis
Project decision into plans
Reconsider assumptions
Review discard alternatives
Severe consensus
More sequentially
Tentative Decision
Classification of decisions
Decisions can be classified as strategic and tactical decisions.
Tactics can be defined as arrangement of alternative in a calculated procedure to as to

utilize the available resources to achieve the desired end.
Strategy is a broad programme for defining and achieving the organization’s objectives
and implementing its mission (i.e. what the organization wants to do)
Programme means an active, conscious and rational role played by managers in

formulating the organizational strategy.
Strategy can also mean the pattern of the organization’s responses to the environment
over time.
What the organization does whether or not the action were originally intended.
Strategic Tactical
Objective To achieve the end result To achieve the end result
Timing Taken after due Taken at the spur of the
deliberation and moment
consideration of all the
relevant factors
Implementation Necessitates careful Implemented quickly
approach
Level of decision taking At the higher level by the At the scene of the

IPIRTI 56
board of directors, policy happening out the lowest

making level. level.
Decision Making

e) When there is a deviation from the past experience.
f) A deviation form the plan i.e. manager’s projection or expectations are not met.
g) Other people often bring problem to managers: ex. Customers complain about
h) The performance of competitor can also create problem.
Solving situations.

problems.

IPIRTI 57

categorized as:
Opportunity finding

opportunity.


IPIRTI 58
Deciding to decide
goals?
If managers are:

organization.


IPIRTI 59
Setting priorities
questions:
inexpensive.

level in the list.

decision.
c) Pass a few decisions as possible to those higher.
d) Pass as many as possible to the lower down.

IPIRTI 60
responsibility.
f) Does the issue effect other departments?
g) Will if have a major impact on the superior’s area of responsibility.
h) Does it require information available only from a higher level?
i) Does it involve a serious breach for departmental budget?
j) Is this problem outside my areas of responsibility or authority?

Decision.

solving.
of action.

decision.



IPIRTI 61


exceptional case.




unpredictable).

IPIRTI 62
Certainty
Risk
Uncertainty: decision making condition in which manager faces the unpredictable

outcomes. Uncertainly rises from 2 sources first the managers may face external
condition that are partially or entirely beyond the control. Ex. Weather, public interest.
Turbulence: decision making condition that occurs when objectives are unclear or when

IPIRTI 63
4. The past in which the problem developed and information collected
5. The present where the alternatives are to be selected
STEP 1 diagnose the problem


4. What gap is existing between the expected and the desired result?
5. The causes for the gaps- both root causes and the intermediate

IPIRTI 64

d) Available resources may be limited
e) Time available may be limited
f) Existing policies of the company may not permit such an action
d) A result desired
e) The key obstacles
f) Any boundaries imposed
STEP 2 develop alternatives

IPIRTI 65

STEP 3 evaluate the alternatives
this alternative?
policies?


IPIRTI 66

can be assessed.

account.

consequences.
STEP 4 implement and monitor the Decision
arise.
uncertainty.

IPIRTI 67
Revised and
Confirmed decision
Severe consensus
More sequentially
Tentative
Decision


over time.

IPIRTI 68
Strategic Tactical
relevant factors
approach
Decision Making

i) When there is a deviation from the past experience.
j) A deviation form the plan i.e. manager’s projection or expectations are not met.
k) Other people often bring problem to managers: ex. Customers complain about
l) The performance of competitor can also create problem.

IPIRTI 69
Solving situations.

problems.

categorized as:
Opportunity finding

opportunity.


IPIRTI 70
Deciding to decide
goals?
If managers are:

organization.


IPIRTI 71
Setting priorities
questions:
inexpensive.

level in the list.

decision.
e) Pass a few decisions as possible to those higher.
f) Pass as many as possible to the lower down.

IPIRTI 72
responsibility.
k) Does the issue effect other departments?
l) Will if have a major impact on the superior’s area of responsibility.
m) Does it require information available only from a higher level?
n) Does it involve a serious breach for departmental budget?
o) Is this problem outside my areas of responsibility or authority?

Decision.

solving.
of action.

decision.


IPIRTI 73


exceptional case.




IPIRTI 74

unpredictable).
Certainty
Risk


IPIRTI 75



IPIRTI 76

g) Available resources may be limited
h) Time available may be limited
i) Existing policies of the company may not permit such an action
g) A result desired
h) The key obstacles
i) Any boundaries imposed

IPIRTI 77

this alternative?
policies?


IPIRTI 78

can be assessed.

account.

consequences.
arise.
uncertainty.

IPIRTI 79
Revised and
Confirmed decision
Severe consensus
More sequentially
Tentative
Decision


over time.

IPIRTI 80
Strategic Tactical
relevant factors
approach
Decision Making

m) When there is a deviation from the past experience.
n) A deviation form the plan i.e. manager’s projection or expectations are not met.
o) Other people often bring problem to managers: ex. Customers complain about

IPIRTI 81
p) The performance of competitor can also create problem.
Solving situations.

problems.

categorized as:
Opportunity finding

opportunity.


IPIRTI 82
Deciding to decide
goals?
If managers are:
organization.

IPIRTI 83
Setting priorities
questions:
inexpensive.
level in the list.

decision.
g) Pass a few decisions as possible to those higher.
h) Pass as many as possible to the lower down.

IPIRTI 84
responsibility.
p) Does the issue effect other departments?
q) Will if have a major impact on the superior’s area of responsibility.
r) Does it require information available only from a higher level?
s) Does it involve a serious breach for departmental budget?
t) Is this problem outside my areas of responsibility or authority?

Decision.

solving.
of action.

decision.


IPIRTI 85


exceptional case.




IPIRTI 86

unpredictable).
Certainty
Risk


IPIRTI 87



IPIRTI 88

j) Available resources may be limited
k) Time available may be limited
l) Existing policies of the company may not permit such an action
j) A result desired
k) The key obstacles
l) Any boundaries imposed

IPIRTI 89
this alternative?
policies?


IPIRTI 90

can be assessed.

account.

consequences.
arise.
uncertainty.

IPIRTI 91
Revised and
Confirmed decision
Severe consensus
More sequentially
Tentative
Decision


over time.

IPIRTI 92
Strategic Tactical
relevant factors
approach
Decision Making

q) When there is a deviation from the past experience.
r) A deviation form the plan i.e. manager’s projection or expectations are not met.
s) Other people often bring problem to managers: ex. Customers complain about

IPIRTI 93
t) The performance of competitor can also create problem.
Solving situations.

problems.

categorized as:
Opportunity finding

opportunity.


IPIRTI 94
Deciding to decide
goals?
If managers are:
organization.

IPIRTI 95
Setting priorities
questions:
inexpensive.
level in the list.

decision.
i) Pass a few decisions as possible to those higher.
j) Pass as many as possible to the lower down.

IPIRTI 96
responsibility.
u) Does the issue effect other departments?
v) Will if have a major impact on the superior’s area of responsibility.
w) Does it require information available only from a higher level?
x) Does it involve a serious breach for departmental budget?
y) Is this problem outside my areas of responsibility or authority?

Decision.

solving.
of action.

decision.


IPIRTI 97


exceptional case.




IPIRTI 98

unpredictable).
Certainty
Risk


IPIRTI 99



IPIRTI 100

m) Available resources may be limited
n) Time available may be limited
o) Existing policies of the company may not permit such an action
m) A result desired
n) The key obstacles
o) Any boundaries imposed

IPIRTI 101
this alternative?
policies?


IPIRTI 102

can be assessed.

account.

consequences.
arise.
uncertainty.

IPIRTI 103
Revised and
Confirmed decision
Severe consensus
More sequentially
Tentative
Decision


over time.

IPIRTI 104
Strategic Tactical
relevant factors
approach
Decision Making

u) When there is a deviation from the past experience.
v) A deviation form the plan i.e. manager’s projection or expectations are not met.
w) Other people often bring problem to managers: ex. Customers complain about

IPIRTI 105
x) The performance of competitor can also create problem.
Solving situations.

problems.

categorized as:
Opportunity finding

opportunity.


IPIRTI 106
Deciding to decide
goals?
If managers are:
organization.

IPIRTI 107
Setting priorities
questions:
inexpensive.
level in the list.

decision.
k) Pass a few decisions as possible to those higher.
l) Pass as many as possible to the lower down.

IPIRTI 108
responsibility.
z) Does the issue effect other departments?
aa)Will if have a major impact on the superior’s area of responsibility.
bb)Does it require information available only from a higher level?
cc) Does it involve a serious breach for departmental budget?
dd)Is this problem outside my areas of responsibility or authority?

Decision.

solving.
of action.

decision.


IPIRTI 109


exceptional case.




IPIRTI 110

unpredictable).
Certainty
Risk


IPIRTI 111



IPIRTI 112

p) Available resources may be limited
q) Time available may be limited
r) Existing policies of the company may not permit such an action
p) A result desired
q) The key obstacles
r) Any boundaries imposed

IPIRTI 113
this alternative?
policies?


IPIRTI 114

can be assessed.

account.

consequences.
arise.
uncertainty.

IPIRTI 115
Revised and
Confirmed decision
Severe consensus
More sequentially
Tentative
Decision


over time.

IPIRTI 116
Strategic Tactical
relevant factors
approach
MOTIVATION
By definition the management is concerned with the realization of organizational objectives
through the administrative actions. All the administrative action is of no avail unless the
members of the organisation are willing to contribute towards the fulfillment of their
assigned tasks. It is the primary concerns of the manager to see that every member of the
organisation some how someway must desire to execute his duties effectively. It is this
process of creation and substance of the desire to work for certain goals among the people
in the organisation is called Motivation.
Motivation is desired from the works motive- one express of a man’s needs in order to
motivate individuals to work for the goals and objectives of the organisation the manager
has to determine the motives of the needs of the employees that calls for satisfaction.
A manager needs to have a keen appreciation of human behaviors if he is provide the

maximum motivation among his associates. A manger by definition works with through
people but people and complex their motivations are hard to comprehend. Motivation is
the result of the interaction of the individual and the situation motivation is the
unwillingness to exert high levels of efforts to organizational goals, conditioned by the
efforts ability to satisfy some of the individual needs.
The efforts element is one of the intensity. When one’s motivated he tries hard. High levels
are unlikely to lead to favorable job performances unless. Unless the efforts are canalized
towards the benefits of the organisation. One should consider not only the quality of the
efforts but also the intensity.
What is relevant here is whether efforts are consistent towards the organizational goal.
Motivation is a need satisfy process.

IPIRTI 117
Motivation Process
Reduction
Unsatisfied Search Satisfied
Tension Drives and
need behavior need
Tension
Motivation Theories:
1. Traditional view: Enunciated by Fredrick Taylor based on his scientific
management theory known as time and motion study. According to this theory
managers job was to make sure that workers perform respective asks in the most
efficient manner. Mangers should determine how the job should be done as uses a
system of wage incentives to motivate workers the more they produce the more they
earned. This perceptive assumed that workers lazy and the managers understood
the job of the workers better than the workers fid; workers could only be motivated
by financial reward and had little to contribute beyond their labor. In many
situations this approach was effective as efficiency impresses fewer workers were
needed for the tasks. Gradually managers led need the size of the wage incentive lay
offs became common employee sought job security more than the wage incentive or
temporary increases.
2. Human Relations Model: According to this theory social contacts at work were
important besides the job security and wage earnings. The boredom and the
repetitiveness of the tasks acted as a determinates and reduced the enthusiasm
under for working. Elton Mayo conducted a research and felt that the managers
could motivate the employees by acknowledging the social needs and making the
feel useful and important. As result employees were given some freedom to make
their over decision on the job greater attention was paid to the organisation
informal work groups. Max information was furnished to the employees about the
manager’s intension and operations of the organisation. The researchers found that
the employees tended to set up group norms and patterns behavior at the rate at
which group production would process. Even though the management maintained
formal authority to set goals and hold workers accountable for them work situations
extend its own influence on the standards of work situations.
3. Human resources Model: Douglas Mc Gregor and others criticized the human
relations model as a simply a more sophisticated approach to the manipulation of
the employees. The motivation of the employees depends upon not only money or
the desire for satisfaction but also for the need for the achievements and meaningful
work. They argued by that most people are already motivated to do a good job and
they do not automatically see work as undesirable. They suggested that the
employees are likely to desire satisfaction from good performance and therefore can
be given greater responsibility for making decisions and carrying out the tasks.
Mc Gregor proposed that there are 2 different sets assumptions what motivate the
people. One basically negative labeled ‘X’ theory (traditional) view and the other
basically positive labeled Y theory.

IPIRTI 118
Mc Gregor concluded that a manager’s view of the nature of human beings is based
on certain grouping of assumptions and that he tends to mould his behavior towards
the subordinates according to this assumption.
Under theory ‘X’ four assumptions are held by the manager.
1. Employee inherently dislikes work and when even possible will attempt to
avid it.
2. Since the employee dislike work they must be co-arced and controlled or
treatments with punishment to achieve goal.
3. Employee will avoid responsibilities and seek formal direction wherever
possible.
4. Most workers place security above all other factors associated with work and
will display little ambitions.
In contract to these negative views about the nature of human beings. McGregor
listed four positive assumptions under ‘X’ theory.
There are:
1. Employees can view work as being as natural as at rest or play

2. People will exercise self direction and self control, if they are committed to
the objectives.
3. The average person can learn to accept even seek responsibility.
4. The ability to make innovative decisions is widely disposed through the
employee population and is not the sole province of those in managerial
positions.
What are the motivational implications if you accept Mc. Gregor’s analysis?
Theory ‘X’ assumes that lower order needs domination by individual. Theory
‘Y’ assumes that high order needs.
Mc. Gregor concluded that assumptions under theory Y one more valid than
assumptions under ‘X’.
Content theories of motivation

Content theories focus on inner needs that motivate behaviour in an effort to
reduce or satisfy their needs, people will act in certain ways.
Abraham
Maslow’s
Theory of
Hierarchy of
needs:
This is the
most well
known
theory of

IPIRTI 119
motivation. Mr. Abraham Maslow classifies human needs in a convenient way

and also how got direct implications for managing human behaviour in
organizations.
This tries to assess the individual characteristics and needs that people to their
jobs.
Maslow hypothesized the existence of a hierarchy of 5 needs in every human

being: They are:
1. Physiological: Includes hunger, thirst, shelter, sex and other bodily needs.
2. Social needs: Includes affection, love, belongingness acceptance and
friendship.
3. Safety and security: Includes need for safety, order and freedom from fear or
threat.
4. Esteem: Includes the need for self respect, self esteem achievement and
respect.
5. Self actualization: Includes the need to glow to feel fulfilled and to realize
one’s potential.
According to Maslow, individuals will be motivated fulfill which ever need is most powerful
for them at a given time. The prepotency of the need depends on the individual’s current
situation and recent experience. Starting with the physical needs which are most basic each
need must be at least partially satisfied before the individual desires to satisfy a need at a
higher level.
Motivation- Hygiene theory

This theory was proposed by psychologist Frederick Herzberg. This theory is based n the
attitude of the employees to the work. A research was done to find out as to what to do
people want from their jobs and when do they feel good or bad.
Some of the factor tends to be consistently related to the job satisfaction while others
to the job dissatisfaction. Intrinsic factors like achievement reorganization, the work
itself responsibility advancement and growth seem to be related to job satisfaction.
When they felt good the employees tended to attribute those characteristics to
themselves. On the other hand extreme factors like company policy, administration
interpersonal relations supervision working condition tended to give job
dissatisfaction. It was also found that the opposite of job satisfaction is not job
dissatisfaction. Removing the dissatisfaction characteristics of a job does not
necessarily mean job satisfaction. This indicates the existence of dual continence.
Opposite of satisfaction is no satisfaction.
Opposite of dissatisfactions is no dissatisfaction

IPIRTI 120
The factors leading to job satisfaction are separate and distinct from those that lead to job
dissatisfaction. Therefore the managers who seek to eliminate factors that create job
dissatisfaction can bring about peace but not necessarily motivation. They will placate the
work force rather than motivating then. As a result such characteristics like company
policy and administrative supervision, interpersonal relation working condition and salary
have been characterized hygiene factors. When they an adequate people will not be
dissatisfied however neither they will be satisfied. If people are to be motivated one has to
emphasize achievement recognition, the worksite responsibility and growth. These are the
characteristics that people find intrinsically rewarding.

IPIRTI 121
Challenge in work
Motivational factor
Self achievements growth in the job
Actualization responsibility
Esteem and
Status
Affiliation or Advancement recognition

acceptance status
Maintenance Factors
Security and Interpersonal relations
safety company policy quality
supervision
Physiological
Needs
Working and job security
Salary personal life
Comparison of Maslow’s theories and
Herzberg theory of motivation

IPIRTI 122
COMMUNICATION
Definitions
Communication comes from a Latin verb ‘Communicare’ which means to impart, to
participate, to share or to make common
Communication is the process by which two or more persons come together to exchange
ideas and understanding amongst themselves’
( Koontz and O’Donnell )
What is communication
Communication is a two way process involving a Sender and a Receiver
Successful communication occurs when a sender sends a message and a receiver responds
to the message in a manner which satisfies the sender

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Why Communication
INDIVIDUALS
 To share knowledge and information
 To build relationships
 To express emotions
 To present ideas
 To influence others
GROUPS
 To achieve common goals
 To reach a common understanding
 To ensure effective completion of a task
 To share common values/ systems
 To build relationships

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Communication Process
Methods of Communication
Types Examples Usefulness
Written Letters, Memos, Reports It is relatively permanent and

accessible
Oral Conversations, Interviews, Phone calls,When one needs to communicate

Speeches, urgently- It’s the easiest
Nonverbal Facial expr. gestures, actions, tone,Unconsciously body talks- 90% of

posture comm. Through this

IPIRTI 125
Types of Communication
Informal
Grapevine is the informal channel of communication amongst people which flows around
water coolers, down hallways, through lunch rooms and wherever people get together in
groups.
Advantages Disadvantages
Transmits information at fast speed Not very dependable
Feedback reaches the managers Does not always carry complete information
faster
It draws the worker near to each Information may be distorted

other
Barriers to communication
 Language Barrier
 Status Barrier
 Physical Barrier
 Resistance to change
 Wrong choice of Medium
 Psychological Barriers

IPIRTI 126
7 Cs of Good Communication
 Conciseness
Write the message in as few words as possible
 Completeness
Ensure that all the information needed by the reader to respond or act is included
 Courtesy
Show consideration for the receiver
 Clarity
Write clearly
 Correctness
Check the letter for accuracy of all statements and details
• concreatness
Essentials of Good Communication

Major Writing Steps
 PLANNING
Ask yourself what are your goals
Gather all relevant data and materials
 DRAFT
Jot down points, put caption heading, Reorganize for coherence
 EDITING
Clarity, Unity, Wordiness
Verbal
 Vocabulary and Usage
 Pronunciation

IPIRTI 127
 Courtesy
 Three stages
 Tell them what you are going to tell them
 Tell them
 Tell what you have told them
 Physical Quality of Speech
 ABC- Accuracy, Brevity, Clarity
 KISS-Keep it short and simple
Non-Verbal Communication
BODY-LANGUAGE
Posture Relaxed, open, Comfortable on both feet
Gestures Reaches out
Expressions Attentive and Interested
Eye Contact Direct, looks at everyone
VOICE
Voice Appropriate, Modulates
Rate of Speech Moderate, Varies
Verbal Clues “I think” “I feel” “What are our options”
Non-Verbal Communication
BEHAVIOURAL
Beliefs : “I have rights, so do others” Its okay to learn from
mistakes”
Feelings : Joyous, open, Enthusiastic, Excitement, Even
Tempered

IPIRTI 128
Style : Understanding, Flexible, Decisive, Open minded,
Encourages feedback, Effective Listener
Effects : Looks confident, Gains respect, They feel motivated and
understood
Listening
Listening is not the simple ability to decode information; it is a two way exchange in
which both parties involved must always be receptive to the thoughts, ideas and emotions
of the other person.
Please Listen to Others
Look Interested what they are saying is important

and means a lot to you
Inquire with questions right and relevant use of technique
Stay on target be attentive
Evaluate the message, read between the lines
Neutralize your feeling emotional leakage/ biases/

prejudices/perceptions/ selective
listening
Feed Back
Feed Back is a mechanism by which the sender reconfirms the receivers

understanding of the message. This is essential with a view to ensuring that
the communication is properly understood
the way it was meant to be
Disadvantages of Bad Communication
 Can be Misunderstood
 May not be taken seriously
 Reduced effectiveness

IPIRTI 129
 Can lead to Conflicts

IPIRTI 130
Advantages of Good Communication
 Would be understood properly
 Ability to handle any situations
 Ability to lead others
 Willingness of others to be lead by you
 Helps in easy decision making
 Helps in reducing and resolving conflicts
 Personality with a difference
How to be effective in communication
Self
 Clarify objective - Inform
-Understand
- Perform
- Transform
 Practice proper expression – Written, Verbal, Non-verbal
 Learn to Listen
 Learn to empathize
 Learn to deal with emotions
 Watch your tongue
 Be gentle – People are fragile
 Learn to use feed backs effectively
 Learn to apologize if you have communicated wrongly

IPIRTI 131
How to be effective in communication
As a Group Member
 Always keep the objective of the group in mind
 Listen and appreciate others point of view
 Clarify Assumptions
 Communicate your views, ideas truthfully but softly
 Record points depending on the importance of subject, for future reference
 Use feedback
In an Organisation
 Identify the receiver – whether to an individual, a group/ Dept. or all
 Be clear and avoid ambiguity
 Ensure physical receipt of communication
 Use feed back
 Be proactive in communicating
 Avoid distractions
 Use grapevines positively

IPIRTI 132
CONFILICT MANAGEMENT
Conflict is a process that begins when one party perceives that another party has negatively
affected, or is about to affect negatively, something the first party cares about.
This definition is used enough to include any kind of interaction between employees or
people which crosses over to become an inter party conflict. This encompasses all kinds of
conflict people experience in organizations.
TRADINATIONAL SCHOOL OF THOUGHT

According to this school, conflicts are bad, negative, violent, and destructive irrational and
harmful. Therefore conflict must be avoided at any cost.
HUMAN RELATION SCHOOL

According to this school of thought conflicts are natural phenomenon, because of the
human nature, all kinds of conflicts occur in organizations. It cannot be eliminated what
cannot be caused must be endured. Therefore accept conflict as they are they may prove to
be beneficial.
INTERACTIONISTS VIEW
According to this school, harmonious, peaceful tranquil and co-operative group will prove
to become a state, apathetic and non responsive to the needs of a change and innovation.
Therefore encourage the group leaders to maintain conflict enough to keep the group
viable self critical and creative.
CONFLICT CAN BE FURTHER CLASSIFIED AS:

Functional and Dysfunctional (Destructive) of course the demarcation between these two is
not clear and cannot be precise.
What is healthy and positive involvement to one group may not be healthy and positive to
another group.
No one level of conflict can be adapted as acceptable or unacceptable under all conditions.
Therefore whether a conflict is functional or dysfunctional depends on group performance.
It is the impact on the group that counts rather than a single individual of course the
groups and individuals are not mutually exclusive. The way the individual perceives a
conflict may have an important influence on its effect on the group and the group’s impact
is vital.
CONFLICT PROCESS
Conflict is a process that begins when one party perceives that another party has negatively
affected or it is about to negatively affect something that first party cares about. If the
following conditions create opportunities for a conflict to arise. They need not lead directly
to conflict but one of the conditions is necessary if conflict is to arise.

IPIRTI 133
Conflict arise only
1. When one party perceives the conflict.

Conflict does not exist if no body is aware of it.
Basis contents of a conflict are:
a) Opposition
b) In compatibility
c) Some form of interaction
Conflict is an ongoing activity.
Causes of a conflict are:
a) Incompatibility of goals
b) Differences are interpretation of facts.
c) Disagreements based on behavior expectations.
Conflicts range can be anyone between suitable disagreement and over violent
acts.
Conflict
Subtle disagreement (0%) over and violent acts

(100%)
Stage I: potential opposition or in compatibility
These include a) Communication
b) Structure
c) Personal variable
Communication: Opposition comes from: a) Semantic difficulties
b) Misunderstanding
c) Noise in communication channels
It is always true better the communication better the understanding and lesser the
differences. It is also true the problems in communication process will relent collaboration
and stimulate misunderstanding.

IPIRTI 134
Semantic difficulties in sufficient exchange
Function and the noise in the channels in will lead to potential conflict
Communication chosen
The causes of semantic difficulties are: a) Lack of training
b) Selective perception
c) Inadequate information about others.
Interestingly, potential conflict arises when communication is either too less or too much
takes place. Any increase in the communication is functional up to a point. But beyond this
could be source of conflict, further the channel chosen for communicating can have a
stimulating opposition. The filtration that occurs as information is passed between the
members and the divergence communication from formal or previously established
channels offer potential opportunities for conflict to arise.
Structure means: 1) Size of the organisation
2) Degree of specialization n the tasks assigned to members.
3) Jurisdictional clarity (jurisdictional ambiguities increases inter group

fighting for control
Of Resource and territory)
4) Member goal compatibility
5) Leadership styles
6) Reward systems
7) Degree of dependence between the groups.
A close style of leadership, tight and centrifuges observation with general control of other
behavior increases the conflict potential. Too much reliance on participation may also
stimulate conflict. Participation and conflict are corrected since participation encourages
the promotion of differences.
Personal variable:-
Personal factor= (Individual value system) x (Personality characteristics that

account for individual is
Dio synchronization and difference)

IPIRTI 135
Individuals who are Authoritarian
Dogmative Leads to conflict.
Demonstration
Esteem
Another important factor is the social conflict is differing value system.
Value differences such as a) Prejudices
b) Disagreements over areas Lead to potential Conflict.
Contribution to group.
c) Rewards and
d) General assignments
Stage II: Cognition and Personalization:
If the conditions cited in stage I negatively affect something that one party cares
about, and then the potential for opposition or incompatibility becomes actualized in stage
II. The antecedent’s conditions will lead to a conflict when one of the parts are affected and
becomes aware of it.
Perception further is vital. One of the parts must be aware of the existence of the
conditions.
It is important to note just because a conflict is perceived is need not to be personalized.
It is at the felt level when individuals becomes emotionally involved and the parties
experience anxiety tenses frustration and hostility.
PERCEIVED CONFLICT: is the awareness of one or more of the parties of existence of

the conditions that create appointment for conflict of awareness.
FELT CONFLICT: Emotional involvement is a conflict creating anxiety tenseness

frustration or hostility.
STAGE II is important because it is where conflict issues tend to be defined. This is the
place in the process where the parties, what is the conflict is about. And in turn, this sense
making is critical because the way a conflict is defined goes a long way towards establishing
the sort of outcomes that might settle out. The definitions of a conflict are important for it

IPIRTI 136
typically delineates the set of possible settlements. Emotions play a major role in shopping
perceptions. Negative emotions have been turned to produce over simplification of issues,
reduction in trust and the negative interpretation of the other party’s behavior.
Positive feelings have been found to increase the tendencies to see the potential relationship
among the elements of a problem to take a broader view of the situation and to develop
more innovative solutions.
STAGEIII Intentions Intensions intervene between people’s perceptions and emotions and
their overt behavior. These intensions are the decisions to act in a given way. If one wants
know the way one is going to respond to the behavior of another, he has to understand and
inter the intensions of the other. A lot escalation in conflict has taken place merely because
one party has attributed wrong intensions to another. Additionally there is typically a great
deal of slippage between intensions and behavior so that behavior does not always
accurately reflect a person’s intensions.
In any conflict, then two parties and each party has got 2 alternatives:
1. To satisfy or attempts to satisfy his own concern or

2. To satisfy or attempts to satisfy the other party concerns
That is assertiveness (satisfaction of his own concern) and cooperativeness
(satisfaction of another concern) using these two dimensions, one can arise at 5
different conflict handling intentions can be identified.
1. Competing ( Assertive + un co operative)

2. Collaborative ( Assertive + cooperative)
3. Avoiding( Unassertive+ un cooperative)
4. Accommodative( Unassertive and co-operative)
5. Compromising ( Midrange on both assertiveness and cooperativeness)
Assertive
Assertiveness
Competing Collaborating
Uncooperative
Compromising
Avoiding
Accommodating
Uncooperative Cooperative
Cooperativeness
IPIRTI 137
1. Competing: A desire to satisfy ones interest regardless of the impact on the other parties
to the conflict.
E.g. Intending to achieve one’s own goal sacrificing the other’s goal trying to convince the
other that he is correct and he has been mistaken some one else is blamed for the mistake.
2. Collaborating: A situation where the parties to the conflict each desires to satisfy fully
the concerns fall the parties each party tries to get a mutually beneficial outcome.
3. Avoiding: A person may recognizes that a conflict exists and wants to withdraw from it
or suppress it. That is just ignoring the conflict and avoiding other with whom you
disagree.
4. Accommodating: When one party seeks to appear an opponent that party may be willing
to place opponent’s interest above his own. In other words in order to maintain the
friendship one party is willing to be sacrificing.
5. Compromising: It is a situation in which each to a conflict is willing to give up

something. When each party to the conflict seeks to give up something, sharing occurs
resulting in a comprised outcome. In a compromise there is no clear winner or loser.
Rather there is a rationalizing the object of the conflict and accept a solution that provides
incomplete satisfaction of both the parties concerns and each party in the process, availing
to give up something. Intensions provide general guidelines for parties in a conflict
situation. They define each party’s purpose and yet people intentions are constant. During
the course of the conflict they may change because of re conceptualization or because of
emotional reaction to the behavior of the other party people have an underlying disposition
among the five conflict handling situations.
Stage III Behavior: Behavior is the stage where the conflict becomes visible. It includes
statements, actions and reactions made by the conflicting parties. These conflict behaviors
have a stimulus quality that is separate from intensions. Conflict behaviors are usually over
attempt to implement each party’s intensions.
As a result of miscalculations or unskilled enactments over the behavior sometimes deviate

from original intensions.

IPIRTI 138
Stage IV: Behavior is a dynamic process of interaction. The entire operation can be
expressed in a continuum like this.
Unlikely conflict over efforts to destroy the other party.
Aggressive physical attacks
Assertive verbal attracts
Over Questioning or challenging others
Minor disagreements or misunderstanding
No conflict
Stage V: Conflict may prove to be an improvement in group performance is dysfunctional

in that it hinders group performance. Conflict is constructive when,
1. It improves the quality of decisions

2. Stimulates creativity and innovation.
3. Encourages interest and curiosity among group members.
4. Provides the medium through which problem can be raised and tension released.
5. Fosters an environment of self evaluation and change.
Dysfunctional outcomes arise when:
a) A regarding of communication
b) Reduction in group cohesiveness
c) Subordination of group goals to the primacy of the infighting of the members.
Ultimately, the conflict can bring a group functioning to a grinding hail and potentially
theater the group survival.

IPIRTI 139
NEGOTIATION
Negotiation is a process in which two or more parties exchange goods or serves and
attempt to agree upon the exchange rate for them.
Negotiation=Bargaining
Bargaining
DistributiveBargaining IntegrativeBargaining
Negotiation that seeks to divide up a fixed Negotiation that seeks or more

settlements that
Amount of resources acuin-lose situation. Concrete a win-win situation.
E.g. Labour Management negotiation Nerways
1. It leaves the party a loser
It operate under
the assumption that there exists
One or more settlements that can

create a
Win-win situation,
2. It tends to build animosities 2. It builds long term

relationships
3. It deepens divisions when people have to 3. It facilitates working together

in future.
Work together on going process 4. It bonds the negotiations and

each feels happy and
Winner feeling.

IPIRTI 140
‘Negotiations situations’ are defined by 3 characteristics.
1. Conflict of interests between two or more parties that is, what one wants is not
necessarily the other wants.
2. Either there is no fixed or established set of rules or procedures for resolving the
conflict or the parties prefer to work outside of a set of procedures and rules to
invent their own solutions to the conflict.
3. The parties at least for the moment prefer to search for agreement rather than to
have one side capacitate, to surrender permanently break of contact or take their
dispute to a higher authority for resolution.
A successful negation depends upon:
1. Whether or not the parties see their interest on depending on each other (regardless
of whether they actually do or not)
2. The extent of trust and distrust among the parties.
3. Each parties ability to communicate, persuade or coerce the other party to its point
of view.
4. The personalities and the idiosyncrasies of the actual people.
5. The goals and interests of the parties.
Concepts in Negotiations
1. Verify the facts so that both sides agree to them.

2. Separate the people from the problem
3. Our position is based on principle
4. Defend your position based on the principle even if the opponent tries to personalize
it.
5. Same return to the principle of fairness.
6. Ask questions ratter than making ascertains
7. Find out the principle behind the other’s actions if there is one.
8. Use active listening clarifies your understanding of the other’s position.
9. Evaluate your position outside of the negotiations. Verify facts; think it over check
with consistency.
10. Present you rationale before you present a new proposal.
11. Present your proposal in the context of principle of fairness.
12. Present alternate incomes in the event of agreement or no agreement.
13. Let the other have some influence on the final agreement.
14. End the negotiation on a conciliatory note, even if you do not feel conciliatory.

IPIRTI 141
NEGOTIATION PROCESS
Negotiation Process
offer counter offer
concession compromise
Agreement
Processes
Content Inter Structure of
dependence outcomes Communication
Trust goals presentation
power
Influence on goals and

outcomes Personality values
subjective preferences social
context.

IPIRTI 142
Management Control
Errors, like straws, upon the surface flow;
He who would search for pearls must dire bdms.
After the goals are set, the plans formulated; the structural arrangements, delineated: the
people hired, trained, motivated, there is still the possibility that something go amiss. To
ensure that things should go as they should management must monitor the organization’s
performance. Actual performance must be compared with the previously set goals. If there
are any significant deviations it is management’s job to get the organization back on task
this monitoring, comparing and potential correcting is what is meant by the controlling
function.
Controlling is monitoring the activities to ensure they are being accomplished as planned
and correcting any deviations controlling is determining what is being accomplished that is
evaluating the performance and if necessary applying corrective measures so that the
performance takes places according to plans controlling implies measurement of
accomplishment against the standard and the correction of division of deviation in which it
is intended to move .
Management control is a systematic efforts to set performance standards with planning

objectives to design information feedback systems, to compare actual performance with
these predetermined standards, to determined whether these are any deviations and to
measure the significance and to take any action required to assure all corporate resources
are being used in the most efficient and effective way possible in achieving corporate
objectives.
In the process of attainment of objectives, some errors, loss of efforts and ineffective
directives are bound to take place and make for unwanted deviations from the intended
goal. So control is necessary. The purpose of control is positive and to make things happen
by means of planned activities. Controlling should never be viewed a negative and as a
hurdle to getting objectives won. Control is an essential managerial function, a necessity
and not an impediment or a hindrance.
There may be a number conflicting view points regarding the best manner in which to
manage an organization, but all both theorists and practicing executives agree that good
management requires effective controls. A combination of well planned objectives strong
organization, capable direction and motivation has little probability of success unless there
exists an adequate system of control.
Control Process:

IPIRTI 143
Determine
Establish standards whether Take
Measure the
and methods for performance N corrective
performance
measuring matches the o action
performance standard
Ye
s’s
Do nothing
continue
work process
CONTROL PROCESS
The process of controls involves four strategic fallows:
1. Establish standards and methods for measuring performance

2. Measure the performance
3. Determine whether performance matches the standard
4. Take corrective action
I. Establish standards and methods for measuring performance.

To set up effective standards and methods for measuring performance. The
standards must be specified in meaningful terms and accepted by the individuals
concerned without measurement a manager is forced to guess or use a rule of
thumbs methods which may or may not be reliable. Measurement requires a
measuring unit and a count of how many times the entity is under consideration.
In planning the overall objectives of the enterprise or the departmental goals are
crystallized which them, become the standards for evaluating the performance of the
overall enterprise or departmental performance. These standards may be tangible or
intangible. Tangible could be either physical like number of units per hour or
monetary like the cost of production.
Standards and Methods

IPIRTI 144
Tangible Intangible
Like Training or advertising

Physical Monetary
In the case of intangible items like training programmer an advertising campaign, it

is difficult to measure the performance objectively; nevertheless an attempt has to be made
to set up suitable quantitative standards.
Eg: Results expected from the training programmer or advertising campaign. Again it is
difficult to measure intangible objectives. Such as creating a high morale among the
employees or in creating the customer good will.
The types of standard for control: These are many types of standards which can be fixed
for measuring performance which include the following:
1) Physical Standards
2) Cost Standards
3) Revenue Standards
4) Capital Standards
5) Intangible Standards
1) Physical Standards: Like quantities in units and man hours deal with non monetary
measurements and often used more at the operating level when materials are
utilized, labour employed and goods manufactured. These can be qualitative or
quantitative in nature. Quantitative may define the number of units to be produced
per hour. Physical standards may also measure quality such closeness of tolerances
fastness of a colour, the durability of the production. Goetz describes these physical
standards as the building blocks of managerial planning and simultaneously they
constitute the physical standards for control.
2) Cost Standards: These monetary measurements are also common at the operating
level and give some monetary value to the cost of the operations involved. Eg: direct
or indirect cost per unit of sells. These cost standards state the expense involved in
monetary terms pertaining the various goals.
3) Revenue Standards: These standards attach a monetary value to the sale eg: sale
per capita in a defined market area, Again the annual sale for a departmental store

IPIRTI 145
can be stated in Rs by multiplying the forecasted member of units by selling price

per unit and can become the expected revenue volume of the enterprise for defined
period.
4) Capital Standards: These standards are internal of his capital invested by

organization and are thus related to the balance sheet. Eg: rate of return a capital
invest and several ratios of current assets to current liabilities.
5) Intangible Standards: These standards are expressed is neither physical nor

monetary measurement and get they exist in an organization. They related to the
measurement of employees, success of a training program.
II Measure for Performance.

Like all aspects of control this is an on going repetitive process with the actual frequency of
measurements being dependent on the type of activity being measured. Eg: number of
claims processed or number of policies typed may be continuously monitored in an
operating center whereas program on a long-term. Expansion objectives may need to be
reviewed by top management only once or twice a year. Good managers avoid allowing
extended periods to pass behaviour performance measurements.
III Determine whether performance matches the standard.

In effect this evaluates the performance. When there is a difference between the
performance and the standards, judgment is frequently required to asses its significance.
To establish a rigid absolute variation or even a range for what is satisfactory is
inadequate. Relatively small deviations from the standard are approved for the
performance of some activities while in other case a slight deviation is very serious.
Managers performing controlling work must therefore analyse, evaluate and judge the
result to the best of their ability.
In this respect spotting of deviation from standard is especially helpful. Also suggestions
should be sought from those performing the work or that close to it, including what control
efforts might be taken. Any trend data for the subject are helpful. In addition the
indicating of the controllable as differentiated from the non controllable, items should be
included. In most case, this controlling step of comparing the performance with the
standard should be done as close to the point of performance as possible. This expedites
controlling efforts and assists in locating areas to be corrected it usually results in min
losses.
In comparing performance with the basis of control it is the exception to which managerial
attention should be directed. The manager does not need to concern himself with situation
where performance equals or closely approximants the expected results. Further more
concentration on the exception necessitates for normally the number of items having
significant variances is small compared to the total. This brings up the managerial
principle of exception. (I.e Management by exception)

IPIRTI 146
Controlling is expedited by concentrating on the exceptions or out standing variations from

the expected result or standard. This principle is important in controlling. It means that
much of the controlling effort is directed to the exceptional case or those that do not
conform adequately to the standard or basis of control. It is only the exceptional cases that
require remedial action. Time and efforts are saved.
Correcting Deviations:
This last step in control process is called for only if the performance falls below the
standards and ensures that operation are adjusted and efforts are made to achieve the
results initially planned wherever significant variances are uncured vigorous and
immediate action is imperative. Effective control cannot tolerate needless delays excess or
excessive exceptions.
The creative action is put into effect by those who have the authority over the actual
performance. It may involve a modification of a plan or a change in the original standards.
Eg: a change in the method or procedure or a new way to cheek the accuracy of the parts
being manufactures. In some cases an organizational modification may be in order while in
other cases a change in motivation may suffice.
Reestablishment of the objective in the employees mind or a review of the policy and its
application may be all that is necessary.
For max effectiveness correcting the deviation should be a compared by fixing individual
responsibility. Fixing individual responsibility tends to personalize the work and take the
necessary action to reach satisfactory performance.
Control is a dynamic process and unless the managers see the control process through to its
conclusion, they are merely monitoring the performance rather than exercising the control.
The emphasis should always be a devising constructive ways to bring performance upto
standard rather them identifying past failures.
The control process must be carried out by managers throughout the organization. Because
of the prominence of the financial controls some people assume that control responsibility
can be left largely in the hands of the accountants and comptrollers. Financial controls
often do set the resource limits within which managers must operate and many control
methods involve budgets profit and loss account and other financial tools. Control is not
limited to financial control.
Control is behavioral in nature is as much as organisational activity involves human

resources. They are designed to guide individual and group behaviour in accordance with
organisational goals and standards. From this perspective it becomes clear that all
managers need to exercise control to carry out their activities successfully.
The control deuces frequently are nonfinancial in nature. E.g.: absenteeism employee turn
over sales force, customer service.

IPIRTI 147
Remedial actions are preferable to corrective action. Control thus implies more them
terreting out the trouble and correcting it.
Organizational Factors creating the need for control

These are many factors that make control a necessity in the present organizations. They
include the changing the environment of organizations. The increasing complexity of
organizations leads to the fallibility of organization members and the need for manager to
delegate authority.
Change
Change is an inevitable part of any organization’s environment markets shift new products
and services emerge new materials or new regulations are passed. Through the control
functions managers detect changes that are affecting their organizations products and
services. They can then move to manage effectively that is control the resulting threats or
opportunities these changes create.
Complexity
Present day’s vast organisations require a very formal and careful approach. Diversified
product lines and services must be watched closely to ensure that quality and profitability
and maintained.
Adding to the complexities of today’s organisations is the trend in some industries towards
decentralization. Many organisations now have regional sales and services offices, widely
distributed research facilities or geographically separated plants. Decentralization can
simplify an organisations control efforts since all the organizations operations requires
control by companies had quarters. Paradoxically for decentralization to be effective each
denaturalized units control activities must be especially precise. Performance against
established standards has to be watched closely so that general managers can appraise the
effectiveness of the unit for which they are responsible and so that corporate management
in turn appraise the effectiveness of the general managers.
Mistakes
If managers or their subordinates never made mistakes, managers could simply establish
performance standards and note significant and unexpected changes in the environment.
But organization members do make mistake – wrong parts are ordered, wrong pricing
decisions are made, service problems are diagnosed in correctly. A control system allows
managers to detect there mistakes before they become critical.
Delegation
When managers delegate authority to subordinates the managers own responsibility is not
diminished. The only way managers can determine if their subordinates are accomplishing

IPIRTI 148
delegated tasks is by implementing a system of control. Without such a system, managers

are unable to check on subordinates’ progress.
Types of Control
There are 3 types of control and they are preliminary control, concurrent control and
feedback control.
Preliminary Control
Takes place before operations begin and include the development of policies, procedures
and rules that are designed to ensure that planned activities will be carried out properly.
Rather than wait for results and compare them with goals it is possible to sort a controlling
influence by limiting activities in advance.
Represent is the effect of applying policies and procedures. Which in the case of the forms
limit the scope within which the divisions are to be made and in the case of the latter define
what specific actions in a presented sequence are to be followed. The deglu to which they
are or are not followed is last evaluated by applying the control process.
Actually the control influence of policies procedures (a post of the planning efforts) reflect
the closeness of planning and controlling and it should be bosomed that controlling helps
unify the under standing of the policies and procedures. Consistency in the use of policies
and procedures is aided by the controlling efforts. Eg: guide lines in premium sets are not
to violated without the written the written consent of controlling office.
This will give a control to the controlling office about what is going on and can exercise
regulation and restraint over it.

IPIRTI 149
Concurrent control
Concurrent is the heart of any operating control system on the production floor all efforts are
directed towards getting out the concurrent control can artist in guaranteeing that the plan will be
carried out at the specified time and required conditions.
Feedback control is of special importance in controlling. It can

be considered a system mad up of the elements shown is
follows: External Force
Economical
Social
Technological
Governmental
Goal Setter Information Control sensor

processor
Internal force
Machine Failures Basic Planning Results

resource Organising Expected
Employee dissatisfying input
Activating
Resignation
The Goal setter or manager defining the expectancy (upper left) gives requirements to an
information processor which is either a person with needed information to control or a
computer with proper information. In turn the information processor relays the required
information to the control sensor, also a person or a computer when the control process
carried out that is the expectance of the goal setter are compared with what is actually
achieved by the fundamental management functions. In addition what goals are set or their
modification as well as affected by the external force as indicated in the top of the figure.
Feedback control
It implies that data have been gathered and analysed and the results returned to someone
or something in the process being controlled so that corrections maybe made. Timing is
critical of feedback is to have any benefit. A process may be in under real time control such

IPIRTI 150
as a computer controlled robot or assembly line. These units are sensing units which
determine whether they are in correct position to perform their functions.
The responsibilities and control emphasis of managers at each organizational level form
top to bottom vary considerably. The following figure shows graphically the concerns of
top middle and first line (operating)
Management categorized by type of control.
High Top management
Moderate
Degree of concern
Middle
LOW
First line
Preliminary Concurrent Feedback
Top management deals with policy issues and with planning and analysis that concern the
organisation and its further direction. Top management is most concerned with
preliminary control and with obtaining feedback to indicate the degree to which long range
plans are being successfully carried out. Due to the intangible nature of their work it is
difficult for the top management to apply concurrent control. Recent emphasis on assessing
top measurement by such short time results as return on investment or market share
increase have often created long term problems for the firm.
Middle levels of management tend to have an intermediate time horizon and control
emphasis. They are concerned with the preliminarily control in the form of operating
policies and procedures. They are also charged with the responsibility of development and

IPIRTI 151
justifying requests for new products, capital investment programs and productivity
improvement projects and of reporting on progress and controlling it. In these feedbacks
control important. Middle managers have moderate interest in the concurrent control
necessary for good co-ordination with lower management levels.
First line management (operating level) is concerned with immediate events and typically
deals with a short time horizon anything that happened a month ago an ancient history and
anything that anticipates requirements a month in the future is long range planning to the
first line manager. This manager is in formation that will help control quality, inventory
personal and costs or a day to day basis. First line managers typically have little concern
for preliminary or feedback control expect as it can be applied to their immediate area or
needs.
Case must be taken to understand the situations to which these generalizations apply.
Occasionally top management will visit.

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HUMAN RESOURCES MANAGEMENT
STAFFING
After planning and organizing, comes the third most important management functions
called “Actuating”.
Actuating is getting all the members of the group to want and to strive to achieve the
objectives of the organisation because the members want to achieve these objectives.
Since the management consists in getting things done through people, people are called
dynamic elements of the management. Without the proper people, things will remain mere
materials, idle money or empty dreams of objectives.
People in organizations fall into 2 categories: Managers and Non managers
The non managers are the people who are directly working with things on things and for
things. They are not required to get the work done through others.
Rests of all are called Managers from the first line to Directors. They are responsible for
achieving the objective and they have to work with and through the people.
Peter Drucker assigns three responsibilities to managers they are:
1. Managing work
2. Managing workers
3. Managing managers
The third function of ‘Managing Mangers’ is called staffing. According to Heimann,
Staffing is recruitment, selection development, training and compensation of subordinate
managers. This forms part of the management process and belongs to personnel
department.
RECRUITMENT
Once a company determines the various jobs that must be filled, develops job disruptions
for these jobs and conducts a skills inventory to determine the present and future human
resource needs, the recruitment of prospective employee begins. The purpose of
recruitment is to generate qualified candidates from which the company may choose the
most appropriate persons for the jobs to be done.
Without recruitment, managerial positions cannot be filled and eventually the organisation
cannot survive. i.e. Recruitment develops and maintains adequate manpower to run an
organisation efficiently.
Recruitment is a continuous job of an organisation is a dynamic and progressive institution

and its demand for personnel is continues.

IPIRTI 153
SELECTION
Once the recruitment begins, the organization collects applications. Since the number of
jobs compared to the total number of people or job aspirants there are bound to be a large
number of applications received. Once the application are received the organisation will
have to segregate the applications into two categories: one to whom the job can be offered
and the other to whom the jobs cannot be offer no keeping in views their qualifications,
job requirements their knowledge and skill.
A good and effective selection of the employees will:
1. Raises the output.
2. Improves the product quality
3. Reduces the production cost.
4. Minimizes the disputes and grievances
5. Lower the turn over rates.
The applicant selected for the post should
a) Be willing to work.
b) Be able to perform the job
c) Be stable in the organisation i.e. stays in the organisation
d) Be able to fit him to work situation.
e) Should have development and growth potential.
FUNCTIONS OF TE EMPLOYENT SECTION OF THE COMPANY
1. To hire the right type of employees for the specific jobs of the company.
2. To maintain adequate supply of right kind of employees.
3. To develop job specification.
4. To procure information about current wage rates.
5. To introduce the personnel policy of the company to newly recruited employees.
6. To help the new recruits to adjust themselves to the organisation, claimant.
7. To maintain the seniority system and provide counseling to the needy employees.
8. To provide and maintain needs of the employees a) Hired b) resigned c) Discharged
d) transferred.

IPIRTI 154
Sources of new employees
From Within the Company:

a) From among the present employees: E.g. Contractual workers temporary
employees who have the knowledge and acquaintance of the company using a merit
cum seniority basis.
b) Transfers and promotions: A transfer is generally changed in the position or
location but without a change in the status. Promotion may involve either or both.
c) Former employees who had good services records when they left.
d) Friends and Relatives of the present employees duly recommended by them.
MERITS OF THE INTERNAL RECRUITMENT

a) Reduced recruitment cost.
b) Little or no orientation needed.
c) Person is a known quality
d) Performance record known
e) Motivates employees
f) Promotes loyalty
g) One can realize return on investment in the individual
DEMIRTS
1. Stagnant ideas- no creativity
2. Envy towards one promoted.
3. Can encourage complacency if promotion assured.
From Outside The Company

1. Through press and advertisements can help us to reduce the job of sorting. Only
those who have requisite qualification will apply.
2. Through employment exchanges and agencies. Science employment exchanges are
the authorized and established agencies. Almost all people would have registered
their norms and other details. By notifying and calling application one is sure to get
a good bunch of capable considerable and also satisfy strategy requirement. Besides
the government agencies, there certain leading and very reliable private agencies
who can help the organizations in their hunt for talents.
3. Through deputation from other organisation.
4. Through business school, colleges and universities – campus requirements.
5. Through references and word of mouth

IPIRTI 155
Having identified the applicants the next step is to evaluate their experience and
qualification and make a selection. Selection means process of offering jobs to one or more
applicants from the available applications. Great care should be taken to ensure the ‘best
fit’ between the job requirement and the qualification of the candidates. Any fault at the
time of selection can have for reaching effects on the organisation.
Selection procedure
Job description
Receipt of applications and scanning for qualifications and experience
Conducting tests
Interviewing
Physical examination
Induction or orientation

IPIRTI 156
A TYPICAL SELECTION PROCESS
Step 1: Preliminary screening

Application Bank and
interview
Step 2: Employment
Interview
Step 4: Back ground and

Reference checks
Step 3: Employment tests
Selection decision
Physical/Medical
Examination
A TYPICAL SELEC
It goes without saying before selecting a candidate the employee should know what the job
that can be given to him is. That is he must know the details of the job to be done. This is
called job description.
Job description is nothing but a written description of the job’s title duties and
responsibilities including its location on the organisation chart. It describes not only the
work to be performed but also the essential requirements of a particular job.
It helps to clarify to the applicant what exactly is required and removes uncertainties.
Rewards and punishment can be easily legitimized. It selves as a basis for wage and salary
administration. It helps to identify the training needs.

IPIRTI 157
APPLICATION FORM
It is a universal applied mechanism to get the data comprehensively from the candidate. It
provides information regarding the age, marital status education and training had previous
experience nature of duties salary drawn reasons for leaving. An application form not only
several his ability to organize his thoughts but also his map of progress made in his earlier
part of his career.
EMPLOYMENT TESTS
The basic assumptions of tests in personnel selection is that individuals are different in
their job related abilities and skills that there skills can be adequately and accurately
measured for comparison. Since many human abilities are complex and interrelated they
have to be understood in association with each other.
KINDS OF TESTS
1. ACHIEVEMENTS TESTS: Measure a person’s potential in a given area.
2. APTITUDE TESTS: To measure the ability and skills specific aptitude tests
are designed.
3. INTEREST TESTS: Designed to discover a person’s area of interest and to
identify the kind of work that will satisfy him.
4. PERSONALITY TESTS: Asses the individual motivation predisposition and
other pattern of behavior. They predict performance success for jobs that
deal with people or jobs that are supervisory or managerial in character.
5. INTELLIGENCE TESTS: These are generally similar to aptitude tests and
are usually expressed as intelligent quotient which are calculated by the
following formula:
Mental Age
IQ= X100
Actual Age
6. INTERVIEWS: It is an age old method for selecting a candidate. It is the

most popular method adapted by all organizations. It serves the following
purposes: It helps to study the
b) Impact of the candidate upon others
c) Innate abilities
d) Motivational and emotional adjustment of the applicant
e) His abilities to meet the specific requirements of the job.
f) In all, the suitability of the candidate.
7. PHYSICAL EXAMINATION: The examination provides an important
information about his medical, physical fitness, and previous health history.
8. RECENT TECHNIQUES:
a) Group discussion
b) Individual presentation.

IPIRTI 158
TRAINING METHODS
1. On the job training: In this method the worker is put on a specific job and is guided by
an experienced employee or special supervision. There is no separate or special school. The
trainee learns the job contributes to the output. It may be the senior employee acting like
instructors may not have sufficient time or an inclination to teach or the competence for
training. This method is useful only for the trainers are well qualified, competent to teach
and have interest to teach.
2. Vestibule Training: Workers are trained on specific jobs in a special hall of the plant. An
attempt is made to create working conditions similar to the actual conditions of the
workshop. After training the worker is put on an actual workshop. This enables the
workers to secure training in the best methods of work and to get rid of the initial
nervousness.
3. Apprenticeship Training: This method is used where long periods of training are
required to gain efficiency. Normally this method is used for technical fields. The trainee
serves as apprentice to experts for long periods. They have to work in direct association
with and also under the direct supervision of their masters. The main purpose of such
training is make trainee around craftsmen. It is an expensive training method. There is no
guarantee that the trained worker will continue to work in the serve organisation after
securing training.
There are other methods of training as well
1. Lecture method: This is a traditional method. Trainer communicates and

group’s role is to listener. This method is suitable for large audiences. Where
participation is not required.
2. Group Discussion: Trainer conducts a group discussion solving a problem
getting feedback sharing experiences establishing a consensus or far
exchanging ideas. During the group discussion, the trainer plays role of
facilitator poses questions, encourages involvement manage the environment
manages the environment and summarizes the conclusions.
3. Case study method: In this method a situation we can similar to the real one
is given and trainees are encouraged to apply their knowledge skills they
have acquired to examine the case, make proper decisions and proper
solutions or recommendation. This method is useful for development of
analytical skills.
4. Role play: This method is called simulation technique. In this method
artificial situation are created to suit the instructional needs so that the
trainees would be feeling that they are experiencing life like situations. This
method provides trainee opportunity to apply new skills in a safe
environment. Role play involves the trainee acting the part of other people so
that they can practice newly acquired skills.

IPIRTI 159
PERFORMANCE APPRAISAL
After an employee has been selected for the job, trained to do it and has worked on it for a
period of time, it is natural his performance must be evaluated. Performance evaluation or
performance appraisal is the process of deciding how the employees do the jobs. It refers to
the degree of accomplishment of the tasks that make up an individual’s job. It initiates how
well an individual is fulfilling the job requirements.
The term performance appraisal should not be caroused with efforts which mean energy
expected and used in the wrong sink performance is always measured in terms of results.
Definition: Performance appraisal is a method of evaluating the behavior of employees in

work spot normally including both qualitative and quantitative aspects of job performance.
It is a systematic and objective way of evaluating both work related behavior and potential
of the employees.
It is a process of evaluating an employee current and or past performance in relation to his

performance standards performance appraisal involves
a) Setting standards
b) Assessing the actual performance of the employee relative to those standards.
c) Providing feed back to the employees with the aim of motivating the
employee to eliminate performance deficiencies or continue to perform above
performance.
It is a process that involves determining and communicating to an employee how he is
performing the job in relation to the standards set to him.
Performance appraisal is broader than the merit rating. In earlier time manager used to
judge the employee based on his traits like honesty, dependability true, personality etc…for
the promotions and salary increases but not on their performances that is they were
concentrated with what an employee has and not with what an employee does. That is
traits were important and not the performance. This kind of evaluation was open to
criticisms because of the doubtful relationship between performance and the mere
possession of tracts.
Features of performance appraisal:
The main characteristics of performance appraisal are:
1. The appraisal is a systematic process. It tries to evaluate the performance in the

same manner using the same approach in a predetermined manner.
2. It provides an objective description of an employee’s jobs relevant strengths and
weakness.
3. It tries to find out how well the employee is performing the job and tries to establish
a plan for farther improvement.
4. Performance evaluation is not a job evaluation. It is only an evaluation of an
employee efforts and extent to which to where he fulfills the job requirements. It
also helps a manager to fix his emoluments.

IPIRTI 160
5. The performance appraisal may be formal or informal the informal evaluation is

more likely to be subjective and influenced by personal factors. Same employees
may be treated better or preferentially be cause of the personal likes and dislikes.
The formal system is likely to be fairer and objective since it is carried out in a
systematic manner.
Advantages of performance appraisal.
1. Compensation decisions: it provides a rationalized approach for rewarding the
employee. It identifies the employees who are working more than the expected
levels, and at the normal level are also below par.
2. Promotional decision: It provides a scientific basis for promotions and other
rewards. If the relevant aspects for ask and measured properly, the feelings of
frustration and disappoints will be minimized for those who are not promoted.
3. Training and development Programmes: It can serve as a guide for formulating a
suitable training and development programmed. Performance employee can inform
the employee about their progress and tell then what progress has been made by
them and also the skills they need to improve to get a proper reorganization in the
form of promotion and rewards.
4. Feed back: Performance appraisal enables an employee to know how well he is
performing. It enables him as to what he is required to improve where to claim up
the official ladder.
5. Personal development: Performance appraisal can level the causes of good and poor
employee performance through personnel discussion a line manager can help an
employee to improve his personality by informing his deficiencies.
Objectives of performance appraisal:
Performance appraisal could be taken for
1. Evaluating the performance of the employees or developing them.

2. Using the performance data rewarding or remunerating system can be developed.
3. The developmental objectives focus on finding individual and organizational
strengths and weakness.
4. Developing healthy superior-subordinate relationship.
5. To offer appropriate counseling and or training to needs employees
Factors for appraisal:
Though a general dictate for particular factors is not there the following are the common
factor. An enterprise is free enough to fix the factors to suit their individual needs.
2. Job knowledge
3. Organizing ability
4. Decision taking ability
5. Leadership
6. Relationship with subordinates, Russo superiors
7. Communicating skills
8. Seek of judgments and direction
9. Sociability
10. General attitude towards work

IPIRTI 161
11. Ability and interest to develop people

12. Cost consciousness
13. Commitment
14. Sincerity and integrity
15. Emotional control
16. Dependability and credibility.
Who will appraise?
1. By the supervisors: This includes superiors of the employee department head or
manager. The general practice is immediate superior appraise and then the same
will be reviewed by the departmental heads/ manager.
2. Peers: Peer appraisal may be suitable if the work group is stable over a reasonably
long period of time and perform tasks that require interaction. Peers are close to the
action. Daily interactions provide them with a comprehensive view of an employee’s
job performance. The peer ratings provide multiple independent judgments. A boss
can give a single evaluation but peers provide multiple judgments. An average of
several ratings is more reliable than a simple evaluation. But this method is not free
from friendship based biases. This method is rarely used.
3. Self evaluation: This is most wide spread method. If employee understands the
objectives they are expected to achieve and the standards by which they are to be
evaluated they are very great extent in the best position to appraise their own
performance. Employees who appraise their own performances may get motivated
they suffer from over inflated assessment and self serving bias. The bosses may not
accept this self evaluation as incorrect.
4. Immediate Subordinates: Although this method is not used immediate subordinates
evaluation can provide accurate and detailed information about a manager
behavior because the evaluate has a constant touch with the evaluate. The great
draw back is fear a reprisal from bosses for unfavorable decision. Therefore
respondents anon mish is crucial.
Process of Performance Appraisal
1) Establish performance standards:
Performance standards are like bench mark and yard stick with which a person’s
performance can be measured standards should be realistic measurable and related to
actual job carried out. It should be clear to both the appraiser and the appraise in order
to avoid embarrassments. Goals or performance standards should be developed after a
through analysis of the job.
2) Communicate the standards:

Performance Appraisal involves two parties appraiser and appraisers. The appraiser
should make it know to appraiser exactly what he should do and what is expected of
him. He should objectively analyze the results, offer coaching and counseling where
necessary and levered the good results. The appraise should clear know what he is
doing and why he is doing in order to do the performance standards should be
communicated and written down last some one should be embarrassed.
3) Measure actual Performance:

IPIRTI 162
Once the bench make is set it is the duty of the appraiser to measure the actual
performance. Rating measures used must be reliable, accurate and early capable of
being understand for this purpose 4 sources of information are used personal
observation, statistical reports oral repots and written reports performance measures
maybe objectives or subjective. Objective performance measures are indicators of job
performance that can be verified by others and are usually quantitative. Objective
indicators are quality of production, degree of training needed accidents occurred in a
given period absenteeism, length of service. Subjective performance measure are
ratings that are based on the personal standards of opinions of those who are doing the
valuation and are not verifiable by others. Subjective criteria include ratings by
superiors knowledge about overall goals contribution to socio culture values of the
environment.
Objective criteria can be laid down for lower level jobs which are specific and
defined clearly.
Objective criteria can be laid down for middle level positions which are complex
and vaguer.
4) Compare the actual performance with standards and discuss the appraisal.
Actual performance may be better or equator less than the standards set assessment
of one’s ability is not an early task. It has serious emotional overtones as it affects the
self esteem of the appraise therefore case should be taken to discuss the performance is
must to an expected standards. Any subjects appraisal is likely to be destined by the
appraise.
5) Taking Corrective action if necessary:

Corrections if made temporarily may ward of the problem for the lines being but
care should be taken to see that problem should be attacked at the root level so that
permanent solutions can be followed.
Methods of Performance Appraisal
Performance Appraisal
Individual Evaluation Multiple person evaluation

Others methods
1. Confidential report 1. Ranking

1.Performance tests

IPIRTI 163
2. Essay evaluation 2. Paired companies 2.field

review techniques
3. Critical incidents 3. forced distribution
4. Check list
5. Graphic Rating Scale
6. Behaviorally archived rating seals
7. Forced choice methods
8. Management By Objectives
1)Confidential Report: The mostly common used method in government and public
sector understandings where the employees immediate superior writs a report
annually highlighting the strength and weakness of subordinate. It is an imprisons
of the superior without giving the actual data and it dose not offer any feedback to
the employee in the absence of the feedback, the employee will not know whether his
performance is properly written or not. What is to be done to improve his
performance.
2)Essay evaluation: In this method the rater is asked to express the strong as well as
weak points of the employees behaviour this technique is normally used with a
combination of the graphic rating scale bearer the rater can elaborately present the
scale by substantiating an explanation for his rating. While preparing the essay on
the employee the later considers the following factors.
a) Job Knowledge and potential of the employee.

b) Employee understanding of the company programs policies and objectives
etc.
c) The employee’s relation with co-workers and controlling ability.
d) The attitudes and perceptions of the employee in general.
This is a non quantitative technique.
This method is advantages in at least one area.
It provides a good deal of an information about the employees and also about the
evaluator.
The disadvantages of this method.
a) This is highly subjective: The supervisor may be asked depending outer

relationship with him.
b) Some evaluates may be poor in writing essays other employees and others may
be superficial and flowery language. Which may not reflect the actual
performance. It is very difficult to find an effective writer.

IPIRTI 164
c) The appraiser may not find time to write an essay. A hurried by prepared by
essay may not reflect all the aspects of the actual performance of the employee.
3) Critical Incident method: Under this method the manger prepares list of
statements of very effective and ineffective behaviour of the employee. These critical
incidence or events represent the outstanding or poor behaviour of the employee on the
job. The manager maintains log book on each employee where in he rewards periodically
critical incidence of the work behaviour. At the end of the rating period these rewarded
critical incidence are used in the evaluation of the workers performance.
4) Check lists and Weighted checklist: This is another simple type of individual
evaluation method. This represents in a simple form a set of objectives or descriptive
statements about the employees and his behaviour. If the rater believes strongly that the
employee possesses a particular track. He checks the item otherwise he leaves the item
blank.
A more recent variation of the checklist method is the weighted list. Under this the value of
each question may be weighted equally or certain questions may be weighted mere heavily
then others.
5) Graphic Rating Scale method: This is the simplest and more popular method used for
performance appraisal. A graphic rating seals list paints such a quality and reliability and
a range of performance value from (unsatisfactory to out standing) preach trait. The
supervisor rates each subordinate by circling or checking the soon that best describes his
performance for ach trait. Them the assigned values are to allow.
6) Behaviorally archived rating seals method: Also called behaviorally expected seal this
method is latest innovation in performance appraisal. It is a combination of rating seal and
critical incidents serve a an anchor statement on a seal and the rating form usually contains
6-8 specifically defined performance dimensions.
Eg: Performance Rating Behaviour
Extremely goods 7 Can expect trains to make

valuable suggestions
for increased sale and to

have positive relation
ships with customer all

organize the country.

IPIRTI 165
Good 6 Can expect to intimate

creative ideas for
improved sales.
Performance Point Behaviour
Above average 5 Can expect to keep in touch

within the customer
Through at the year.
Average 4 Can manager, with difficulty

to deliver the goods
in time.
Below Average 3 Can expect to unload the

trucks when asked by the
Supervisor.
Poor 2 Can expect to inform only a

part of the customer.
Very Poor 1 Can expect to take coffee

breaks and roam armed
Purposelessly.
7) Forced Choice Method: This method was development to eliminate bias and
preponderance of high ratings that might occur in some organizations. Main purpose of
this method is to correct the tendency of a rater to consistently high or low rating to all
the employees. This methods makes use of several sets of paired phrases two of which
an positive and two of which an negative and the rater is asked to indicate which of the
four phrases is most and which is the least depictive of a particular worker. Actually the
statement items are in such a way the rater cannot easily judge which statements apply
to the most effective employee. The favorable qualities can earn a plus credit and the
unfavorable once earn the levers. The worker gets over plus when the negative factors
override the negative once or when one of the negative phrase is checked as being
insignificantly rated.

IPIRTI 166
8) Management By objectives: This has already been discussed ashier under the
topic ‘ORGANISING’ pl refer to those lines.
Multiple Person Evaluation Techniques
1) Ranking Method: In this method one employee is compared with another in the
group. The relative position of each employee is tested in term of his numerical
rank. It may also be done by ranking a person on his job performance against
another member of the competitive group. The idea is that employee are ranked
according to their performance. While using this method the evaluator is asked to
rate the employee from highest to lowest on some overall criterion. Through the
method locks easier practically one has a cost of problem.
2) Paired comparison method: Ranking becomes more reliable and easier under a
paired comparison method. Each worker is compared with all other employees in
the group trait by trait.
3) Forced Distribution method: under this system the rate is asked to appraise the
employees according to a predetermined distribution seal. The rater’s bias is sought
to be eliminated workers are not placed at a higher or lower end of the scale
normally the two criteria used are job performance and promotability. A 5- point
performance seals is used without any mention of descriptive statements. Workers
are placed between two extremes of good and bad performance.
Appraised interview and feedback
The post appraised interview is an essential part of the performance appraisal system.
The employee gets useful feedback information about how effectively and efficiently he
is able to discharge the assigned duties. It also gives the employee an opportunity to
explain his views about the ratings standards rating methods internal externals cause
for low level performance. The appraise gets a chance to explain to the employee his
rating the traits the behaviour he has taken into account for appraisal. He can also
utilize this opportunity to offer his constructive suggestions help, guide and coach the
employee for his advancement. The post appraisal interview will help both the parties
to review standard, set new standards based on the experience gained.
It the serves to meet the following objectives.
1) To let the employee know where they stand.

2) To help employees to do a better job by clarifying what is expected them.
3) To plan opportunities for development and growth.
4) To strength the subordinates supervisor working relationships by developing a
mutual agreement of goals.
5) To provide an opportunity for the employees to expires themselves on performance
related issues.
The word ‘Work place feed back’ implies 2 things
A) Job performance-whether ‘x’ is performing tasks assigned to him competently.

B) Work related behaviour- The way ‘x’ performs his tasks whether x is polite to the
customer and works co operatively with other team members.

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Principles of Accounting
The Need for Accounting

Every organization needs to maintain good records to track how much money they have,
where it came from, and how they spend it. These records are maintained by using an
accounting system.
These records are essential because they can answer such important questions as:
• Am I making or losing money from my business?

• How much am I worth?
• Should I put more money in my business or sell it and go into another business?
• How much is owed to me, and how much do I owe?
• How can I change the way I operate to make more profit?
Even if you do not own or run a business, as an accountant you will be asked to provide the
valuable information needed to assist management in the decision making process. In
addition, these records are invaluable for filing your organization’s tax returns.
The modern method of accounting is based on the system created by an Italian monk Fra
Luca Pacioli. He developed this system over 500 years ago. This great and scientific system
was so well designed that even modern accounting principles are based on it.
In the past, many businesses maintained their records manually in books – hence the term
“bookkeeping” came about. This method of keeping manual records was cumbersome,
slow, and prone to human errors of translation.
A faster, more organized, and easier method of maintaining books is using Computerized
Accounting Programs. With the decrease in the price of computers and accounting
programs, this method of keeping books has become very popular.
Accounting and Business

Accounting is the system a company uses to measure its financial performance by noting
and classifying all the transactions like sales, purchases, assets, and liabilities in a manner
that adheres to certain accepted standard formats. It helps to evaluate a Company’s past
performance, present condition, and future prospects.
A more formal definition of accounting is the art of recording, classifying, and summarizing
in a significant manner and in terms of money, transactions and events which are, in part at
least, of a financial character and interpreting the results thereof.
What Accountants Do
We have said that accounting consists of these functions:

• Recording
• Classifying

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• Summarizing
• Reporting and evaluating the financial activities of a business
Before any recording can take place, there must be something to record. In accounting,
the something consists of a transaction or event that has affected the business. Evidence
of the transaction is called a document.
For example:
• A sale is made, evidenced by a sales slip.
• A purchase is made, as evidenced by a check and other documents such as an
invoice and a purchase order.
• Wages are paid to employees with the checks and payroll records as support.
• Accountants do not record a conversation or an idea. They must first have a
document.
In almost any business, these documents are numerous and their recording requires some
sort of logical system. Recording is first carried out in a book of original entry called the
journal. A journal is a record, listing transactions in a chronological order.
At this point, we have a record of a great volume of data. How can this data best be used?
Aside from writing down what has occurred for later reference, what has been
accomplished? The answer is, of course, that the accountant has only started on his task.
This great volume of data in detailed listings must be summarized in a meaningful way.
When asked, the accountant must turn to these summaries to answer questions like:
• What were total sales this month?
• What were the total expenses and what were the types and amounts of each
expense?
• How much cash is on hand?
• How much does the business owe?
• How much are the accounts receivable?
The next task after recording and classifying is summarizing the data in a significant
fashion.
The records kept by the accountant are of little value until the information contained in the
records is reported to the owner(s) or manager(s) of the business. These records are
reported to the owners by preparing a wide variety of financial statements.
The accountant records, classifies, summarizes, and reports transactions that are mainly
financial in nature and affect the business. The reporting, of course, involves placing his
interpretation on the summarized data by the way he arranges his reports.

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Every business has a unique method of maintaining its accounting books. However, all
accounting systems are similar in the following manner:
Business documents representing transactions that have taken place. (A business
transaction occurs when goods are sold, a contract is signed, merchandise is purchased, or
some similar financial transaction has occurred).
Various journals where the documents are recorded in detail and classified
Various ledgers where the details recorded in the journals are summarized
Financial reports where the summarized information is presented
Where variations exist, they have to do with the way the business transaction is
assembled, processed, and recorded. These methods are partly arbitrary. First, you
must understand certain simple principles of accounting. When you have a firm grasp
of the fundamentals you can deal with any kind of accounting problem.
Types of Business Organizations
Three principal types of organizations have developed as ways of owning and operating
business enterprise.
In general, business entity or organizations are:

• Sole proprietorship
• Partnerships
• Corporations
Let us discuss these concepts starting with the simplest form of business organization,
the single or sole proprietorship.
Sole Proprietorship
A sole proprietorship is a business wholly owned by a single individual. It is the easiest and
the least expensive way to start a business and is often associated with small storekeepers,
service shops, and professional people such as doctors, lawyers, or accountants. The sole
proprietorship is the most common form of business organization and is relatively free
from legal complexities.
One major disadvantage of sole proprietorship is unlimited liability since the owner and
the business are regarded as the same, from a legal standpoint.
Partnerships
A partnership is a legal association of two or more individuals called partners and who are
co-owners of a business for profit. Like proprietorships, they are easy to form. This type of
business organization is based upon a written agreement that details the various interests

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and right of the partners and it is advisable to get legal advice and document each person’s
rights and responsibilities.
Corporations
The Corporation is the most dominant form of business organization in our society. A
Corporation is a legally chartered enterprise with most legal rights of a person including
the right to conduct business, own, sell and transfer property, make contracts, borrow
money, sue and be sued, and pay taxes. Since the Corporation exists as a separate entity
apart from an individual, it is legally responsible for its actions and debts.
The modern Corporation evolved in the beginning of this century when large sums of
money were required to build railroads and steel mills and the like and no one individual
or partnership could hope to raise. The solution was to sell shares to numerous investors
(shareholders) who in turn would get a cut of the profits in exchange for their money. To
protect these investors associated with such large undertakings, their liability was limited
to the amount of their investment.
Since this seemed to be such a good solution, Corporations became a vibrant part of our
nation’s economy. As rules and regulations evolved as to what a Corporation could or
could not do, Corporations acquired most of the legal rights as those of people in that it
could receive, own sell and transfer property, make contracts, borrow money, sue and be
sued and pay taxes.
The strength of a Corporation is that its ownership and management are separate. In
theory, the owners may get rid of the Managers if they vote to do so. Conversely, because
the shares of the company known as stock can sold to someone else, the Company’s
ownership can change drastically, while the management stays the same. The
Corporation’s unlimited life span coupled with its ability to raise money gives it the
potential for significant growth.
A Company does not have to be large to incorporate. In fact, most corporations, like
most businesses, are relatively small, and most small corporations are privately held.
Some of the disadvantages of Corporations are that incorporated businesses suffer from
higher taxes than unincorporated businesses. In addition, shareholders must pay income
tax on their share of the Company’s profit that they receive as dividends. This means that
corporate profits are taxed twice.
There are several different types of Corporation based on various distinctions, the first of
which is to determine if it is a public, quasi-public or Private Corporation. Federal or state
governments form Public Corporations for a specific public purpose such as making
student loans, building dams, running local school districts etc. Quasi-public Corporations
are public utilities, local phones, water, and natural gas. Private Corporations are
companies owned by individuals or other companies and their investors buy stock in the
open market. This gives private corporations access to large amounts of capital.

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Public and private corporations can be for-profit or non-profit corporations. For-profit

corporations are formed to earn money for their owners. Non-profit Corporations have
other goals such as those targeted by charitable, educational, or fraternal organizations. No
stockholder shares in the profits or losses and they are exempt from corporate income
taxes.
Professional Corporations are set up by businesses whose shareholders offer professional

services (legal, medical, engineering, etc.) and can set up beneficial pension and insurance
packages.
Limited Liability Companies (LLCs as they are called) combine the advantages of S
Corporations and limited partnerships, without having to abide by the restrictions of
either. LLCs allow companies to pay taxes like partnerships and have the advantage of
protection from liabilities beyond their investments. Moreover, LLCs can have over 35
investors or shareholders (with a minimum of 2 shareholders). Participation in
management is not restricted, but its life span is limited to 30 years.
Types of Accounting
The two methods of tracking your accounting records are:

• Cash Based Accounting
• Accrual Method of Accounting
Cash Based Accounting
Most of us use the cash method to keep track of our personal financial activities. The cash
method recognizes revenue when payment is received, and recognizes expenses when cash
is paid out. For example, your personal checkbook record is based on the cash method.
Expenses are recorded when cash is paid out and revenue is recorded when cash or check
deposits are received.
Accrual Accounting
The accrual method of accounting requires that revenue be recognized and assigned to the
accounting period in which it is earned. Similarly, expenses must be recognized and
assigned to the accounting period in which they are incurred.
A Company tracks the summary of the accounting activity in time intervals called
Accounting periods. These periods are usually a month long. It is also common for a
company to create an annual statement of records. This annual period is also called a Fiscal
or an Accounting Year.
The accrual method relies on the principle of matching revenues and expenses. This
principle says that the expenses for a period, which are the costs of doing business. The
accrual method relies on the principle of matching revenues and expenses. This principle
says that the expenses for a period, which are the costs of doing business to earn income,
should be compared to the revenues for the period, which are the income earned as the

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result of those expenses. In other words, the expenses for the period should accurately
match up with the costs of producing revenue for the period.
In general, there are two types of adjustments that need to be made at the end of the
accounting period. The first type of adjustment arises when more expense or revenue has
been recorded than was actually incurred or earned during the accounting period. An
example of this might be the pre-payment of a 2-year insurance premium, say, for $2000.
The actual insurance expense for the year would be only $1000. Therefore, an adjusting
entry at the end of the accounting period is necessary to show the correct amount of
insurance expense for that period.
Similarly, there may be revenue that was received but not actually earned during the
accounting period. For example, the business may have been paid for services that will not
actually be provided or earned until the next year. In this case, an adjusting entry at the
end of the accounting period is made to defer, that is, to postpone, the recognition of
revenue to the period it is actually earned.
Although many companies use the accrual method of accounting, some small businesses
prefer the cash basis. The accrual method generates tax obligations before the cash has
been collected. This benefits the Government because the IRS gets its tax money sooner.
Cash versus Accrual Accounting

Accounts Receivable is an asset that is owed to you but you do not have money in the bank
or property to show you own something -it is intangible, on paper. It grows or accumulates
as you issue invoices; therefore, Accounts Receivable is part of an accrual accounting
system.
Double-entry accounting is the most accurate and best way to keep your financial records.
With a computer, you don’t have to fully understand all the accounting details. Basically,
in double entry accounting each transaction affects two or more categories or accounts, so
everything stays in balance. Therefore, if you change an asset balance by issuing an invoice
some other category balance changes as well. In this case, when you issue an invoice, the
category that balances the asset called Accounts Receivable is an income or a sales account.
When you bill your client, there is an increase in income (on paper) and hence an increase
in Accounts Receivable. When you are paid, the paper asset turns into money you put in
the bank – a tangible asset. Through a process of recording the payment and the deposit,
Accounts Receivable decreases and the bank balance increases. This accounting program
takes care of all the accounting details.
This paper income can be confusing if you don’t understand that it is the total of all
invoiced work, both paid and unpaid. If you have invoiced clients for a total of $10,000 but
only $2,000 has been paid, your income will be $10,000 and your Accounts Receivable
balance will be $8,000, and your bank account has increased by the $2,000 you received. An
accountant would call this an accrual accounting method.

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A cash accounting method only counts income when money is received, and it does not
keep track of Accounts Receivable.
However, in real life, small businesses tend to use both methods without realizing the
difference until income tax time.

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Key Accounting Concepts

The two fundamental accounting concepts which were developed centuries ago but remain
central to the accounting process are:
The accounting equation
Double-entry bookkeeping
The Accounting Equation
Now let us discuss the accounting equation, which keeps all the business accounts in
balance. We will create this equation in steps to clarify your understanding of this concept.
In order to start a business, the owner usually has to put some money down to finance the
business operations. Since the owner provides this money, it is called Owner’s equity. In
addition, this money is an Asset for the company. This can be represented by the equation:
ASSETS = OWNER’S EQUITY
If the owner of the business were to close down this business, he would receive all its assets.
Let’s say that owner decides to accept a loan from the bank. When the business decides to
accept the loan, their Assets would increase by the amount of the loan. In addition, this
loan is also a Liability for the company. This can be represented by the equation:
Assets = Liabilities + Owner’s Equity
Now the Assets of the company consist of the money invested by the owner, (i.e. Owner’s
Equity), and the loan taken from the bank, (i.e. a Liability). The company’s liabilities are
placed before the owners’ equity because creditors have first claim on assets.
If the business were to close down, after the liabilities are paid off, anything left over
(assets) would belong to the owner.
The Double Entry System

As we had mentioned earlier that today’s accounting principles are based on the system
created by an Italian Monk Fra Luca Pacioli. He developed this system over 500 years ago.
Pacioli had devised this method of keeping books, which is today known as the Double
Entry system of accounting. He explained that every time a transaction took place whether
it was a sale or a collection – there were two offsetting sides. The entry required a two-part
“give-and-get” entry for each transaction.
Here is a simple explanation of the double entry system. Say you took a loan from the bank
for $5,000. Now if you can recall in an earlier discussion we had mentioned that:

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ASSETS = LIABILITIES + OWNER’S EQUITY
Since the company borrowed money from the bank, the $5,000 is a liability for the
company. In addition, now that the company has the extra $5,000, this money is an asset
for the company. If we were to record this information in our accounts, we would put
$5,000 in an account called Loan Taken from the Bank, and $5,000 in an account called
Cash Saved in the Bank. The former account will be a Liability and the second account
would be an Asset. As you can see, we created two entries. The first one is to show from
where the money was received (i.e. the source of the money). The second entry is to show
where the money was sent (i.e. the destination of the money received).
In a double entry accounting system, every transaction is recorded in the form of debits
and credits. Even for the simplest double entry, transaction there will be a debit and a
credit. In simpler terms, a debit is the application of money, and credit is the source of
money.

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The Accounting Process

Although most of the managers are not concerned with how the record keeping procedures
are used in the accounting system basic knowledge of this would be useful in understanding
how the information flows to reach the final reports that they get.
The basic accounting process is shown in the figure below.
Transactions
Information Sources
Accounting
Invoices Principles
Receipts
Cheques
Analysis and
Datawise entry of Transformation
Transactions as they
occur Double Entry
Single Entry
Voucher
Journal Entry
Ledger Entry
Complete
Information about
the transaction
Posting inAccount
different
wise
details
Error
Correction
accounts
Trial Balance Transformatio
n
To check for errors Adjusting Entries
Closing Entries
Reports and Financial Statements
Balance Sheet
Income Statement
Cash Flow Statement
Management Accounting Reports
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The first thing that the accounting system takes on is the financial transactions. A
transaction is defined as an external event or internal event which gives rise to a change
affecting the operations or finances of an organisation. Now there should be evidence that a
transaction has taken place. This evidence comes from the documents that are used to
support a transaction, like invoices, receipts, cheques, bank statements, etc. For recording a
transaction, it must be analysed to determine its effects on the two (or more) accounts and
the reason why it affects those accounts. As the original document cannot be used to write
these details, a standard document known as a voucher is used to accompany the original
document.
Voucher is the basic document of an accounting transaction. Every voucher mentions the
two (or more) accounts that are being affected, the amount with which each account is
affected and the reason for the transaction (known as narration). Each voucher is
numbered and dated, so as to make referencing easier.
Once the vouchers are made for the day, they are entered into an intermediate book known
as Journal. Vouchers are normally recorded in the order in which they occur. Journal
entries contain all relevant information pertaining to a transaction.
This data from the journal has to be rearranged to assist in analysis. For this the data is
transferred to Accounts in the General Ledger (the process is known as posting). In
accounting the term account is used to denote any item for which the transactions affect the
amount of that item. A general ledger is a group of accounts, both permanent and temporary.
In a manual system a loosely bound book with title general ledger could be used where at
least one side of a page is maintained for every account. More pages are added as required
if the number of transactions in that particular account is high.
Account Types
In order to track money within an organization, different types of accounting categories
exist. These categories are used to denote if the money is owned or owed by the
organization. Let us discuss the three main categories: Assets, Liabilities, and Capital.
Assets
An Asset is a property of value owned by a business. Physical objects and intangible rights
such as money, accounts receivable, merchandise, machinery, buildings, and inventories
for sale are common examples of business assets as they have economic value for the owner.
Accounts receivable is an unwritten promise by a client to pay later for goods sold or
services rendered.
Assets are generally listed on a balance sheet according to the ease with which they can be
converted to cash. They are generally divided into three main groups:
• Current
• Fixed
• Intangible

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Current Asset
In other words, cash and other items that can be turned back into cash within a year are
considered a current asset.
Fixed Assets
Fixed Assets refer to tangible assets that are used in the business. Commonly, fixed assets
are long-lived resources that are used in the production of finished goods. Examples are
buildings, land, equipment, furniture, and fixtures. These assets are often included under
the title property, plant, and equipment that are used in running a business. There are four
qualities usually required for an item to be classified as a fixed asset. The item must be:
• Tangible
• Long-lived
• Used in the business
• Not be available for sale
Certain long-lived assets such as machinery, cars, or equipment slowly wear out or become
obsolete. The cost of such as assets is systematically spread over its estimated useful life.
This process is called depreciation if the asset involved is a tangible object such as a
building or amortization if the asset involved is an intangible asset such as a patent. Of the
different kinds of fixed assets, only land does not depreciate.
Intangible Assets
Intangible Assets are assets that are not physical assets like equipment and machinery but
are valuable because they can be licensed or sold outright to others. They include cost of
organizing a business, obtaining copyrights, registering trademarks, patents on an
invention or process and goodwill. Goodwill is not entered as an asset unless the business
has been purchased. It is the least tangible of all the assets because it is the price a
purchaser is willing to pay for a company’s reputation especially in its relations with
customers.
Liabilities
A Liability is a legal obligation of a business to pay a debt. Debt can be paid with money,
goods, or services, but is usually paid in cash. The most common liabilities are notes
payable and accounts payable. Accounts payable is an unwritten promise to pay suppliers
or lenders specified sums of money at a definite future date.

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Current Liabilities
Current Liabilities are liabilities that are due within a relatively short period of time. The
term Current Liability is used to designate obligations whose payment is expected to
require the use of existing current assets. Among current liabilities are Accounts Payable,
Notes Payable, and Accrued Expenses. These are exactly like their receivable counterparts
except the debtor-creditor relationship is reversed.
Accounts Payable is generally a liability resulting from buying goods and services on
credit
Suppose a business borrows $5,000 from the bank for a 90-day period. When the money is
borrowed, the business has incurred a liability – a Note Payable. The bank may require a
written promise to pay before lending any amount although there are many credit plans,
such as revolving credit where the promise to pay back is not in note form.
On the other hand, suppose the business purchases supplies from the ABC Company for
$1,000 and agrees to pay within 30 days. Upon acquiring title to the goods, the business has
a liability – an Account Payable – to the ABC Company.
In both cases, the business has become a debtor and owes money to a creditor. Other
current liabilities commonly found on the balance sheet include salaries payable and taxes
payable.
Another type of current liability is Accrued Expenses. These are expenses that have been
incurred but the bills have not been received for it. Interest, taxes, and wages are some
examples of expenses that will have to be paid in the near future.
Long-Term Liabilities
Long-Term Liabilities are obligations that will not become due for a comparatively long
period of time. The usual rule of thumb is that long-term liabilities are not due within one
year. These include such things as bonds payable, mortgage note payable, and any other
debts that do not have to be paid within one year.
You should note that as the long-term obligations come within the one-year range they
become Current Liabilities. For example, mortgage is a long-term debt and payment is
spread over a number of years. However, the installment due within one year of the date of
the balance sheet is classified as a current liability.

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Capital
Capital, also called net worth, is essentially what is yours – what would be left over if you
paid off everyone the company owes money to. If there are no business liabilities, the
Capital, Net Worth, or Owner Equity is equal to the total amount of the Assets of the
business.
Rules of Accounting
• For Personal Account:
 Debit: the receiver
 Credit: the giver
• For Real Account:
 Debit: what comes in
 Credit: what goes out
• For Nominal Account:
 Debit: all expenses and losses
 Credit: all incomes and gains

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Financial Statements: Summary of Accounting Information

Trial Balance
A trial balance is a list of all of the ledger accounts of a business and the balance of each.
Debits are shown as positive numbers and credits as negative numbers. The trial balance
should therefore always equal zero. From the trial balance, the summary statements are
generated.
The general-purpose information provided by financial accounting is summarized in three

primary financial statements: balance sheet, income statement and cash flow statement.
Balance Sheet
The balance sheet is the position statement which shows where the company stands in
financial terms at a specific date. The balance sheet is a snapshot view of the assets and
liabilities of the organisation at a point in time.
The balance sheet reports the resources of the company (assets), the company’s obligations
(the liabilities), and the owners’ equity, which represents the difference between what is
owned (assets) and what is owned (liabilities).
Balance Sheet
Assets
Current Assets Rs.
Stock X
Debtors X
Bank X
Cash X
Fixed Assets
Buildings X
Vehicles X
Total Assets XX
Liabilities
Current Liabilities
Overdraft X
Creditors X
Long-term Liabilities
Bank Loan X
Total Liabilities XX
Total Assets less Total Liabilities ZZ
Owner’s Capital Y
Retained Earnings Y
Owner’s Equity ZZ

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Income Statement or Profit and Loss Account

The Profit and Loss A/C (PandL A/c) is also known as Income Statement, provides
information on the efficiency of utilisation of resources in obtaining current revenues – the
current profitability of the organisation.
The profit and loss a/c is an activity statement that shows details and results of the company’s
profit related activities for a period of time.
A. Sales _______________
____
B. Other Income _______________

____
C. Income from Operations _______________

____
D. Less: Cost of Goods Sold _______________

____
E. Operating Profit _______________

____
F. Less: Interest Paid _______________

____
G. Depreciation _______________
____
H. Profit Before Tax (PBT) _______________

____
I. Tax _______________
____
J. Profit After Tax (PAT) _______________

____
K. Apportioned as: Dividend _______________

____
L. Retained Earnings _______________

____
Cash Flow Statement

The cash flow statement provides information on how the organisation is allocating the
resources that were generated by the organisation during the preceding year.

IPIRTI 184
It is an activity statement that shows the details of a company’s activities involving cash
during a period of time. The statement of cash flow reports the amount of cash collected
and paid out by a company in the following three types of activities: operating, investing
and financing.

IPIRTI 185
Analysis of Financial Statement

The financial statements are affording many facts though they are absolute and concrete in
terms; but not in a position to interpret and analyse the stature of the enterprise. To
analyse and interpret, the financial statement analysis is being instrumented across the
financial statements viz. trading, profit and loss account and balance sheet.
Under the financial statement analysis, the information available are grouped together in
order to cull out the meaningful relationship which is already available among them; for
interpretation and analysis.
The analysis and interpretation of financial statements are an attempt to determine the
significance and meaning of financial statement data so that the forecast may be made of
the prospects for future earnings, ability to pay interest and debt maturities and
profitability and sound dividend policy.
Classification of Financial Statement Analysis

• Comparative financial statements
• Common size financial statements
• Trend percentages
• Fund flow statements
• Cash flow statements
• Ratio analysis
Comparative Financial Statements
Comparative Study of PandL Statement and Balance Sheets
Comparison in between Comparison in between the

financial statements of two or financial statements of various
more years firms or industrial average
Intra firm comparison Inter firm comparison

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Comparative Financial Statement Analysis – Balance Sheet

Objectives of comparative financial statements:
• Changes taken place in the financial performance are taken into consideration
for further analysis.
• To reveal qualitative information about the firm in terms of solvency, liquidity,

profitability and so on are extracted from the analysis of financial statements.
• With reference to yester financial data of the enterprise, the firm is facilitated to
undergo for the preparation of forecasting and planning.
The major part of financial statement analysis is mainly focused on the comparative
analysis.
The comparative analysis classified into four different analyses viz.
• Comparative Balance sheet
• Comparative Profit and Loss account
• Common Size statement
• Trend percentage
Comparative Balance Sheet

The following steps need to be taken:
i. While preparing the comparative statement of balance sheet, the particulars for the
financial factors are required.
ii. The second most important for the preparation of the comparative balance sheet is
yester financial data extracted from the balance sheet or balance sheets.
iii. The next most important requirement to have an effective comparison with the
yester financial data is current year information extracted from the balance
sheet.
iv. After having been procured the financial data pertaining to various time periods are
ready for comparison; to determine or identify the level of increase or decrease
taken place in the financial position of the firms.
v. To determine the level of increase or decrease in financial position, the percentage

analysis to carried out in between them.

IPIRTI 187
Illustration 1
From the following information, prepare comparative Balance sheet of X Ltd.
Particulars 31st Mar, 2007 31st Mar, 2008
Equity share capital 50,00,000 50,00,000
Fixed Assets 60,00,000 72,00,000
Reserves and surpluses 10,00,000 12,00,000
Investments 10,00,000 10,00,000
Long term loans 30,00,000 30,00,000
Current assets 30,00,000 21,00,000
Current liabilities 10,00,000 11,00,000
The first step we have to do is segregate the available information into two different
categories viz. Assets and Liabilities.
Particulars 2007 2008 Absolute % %

Change Increase Decrease
Fixed Assets 60,00,000 72,00,000 12,00,000 20 -
Investments 10,00,000 10,00,000 N.C. - -
Current Assets 30,00,000 21,00,000 (9,00,000) - 30
Total Assets 1,00,00,00 1,03,00,00 3,00,000 3 -

0 0
Equity share capital 50,00,000 50,00,000 N.C. - -
Reserves and surpluses 10,00,000 12,00,000 2,00,000 20 -
Long term loans 30,00,000 30,00,000 N.C - -
Current liabilities 10,00,000 11,00,000 1,00,000 10 -
1,00,00,00 1,03,00,00 3,00,000 3 -

0 0

IPIRTI 188
From the above table, the following are basic inferences:
• The fixed assets volume got increased by 20% from the year 2007 to 2008,
amounted Rs.12,00,000
• Rs.9,00,000 worth of current assets decrease from the year 2007 to 2008,
recorded 30%
• The total volume of assets recorded 3% increase from the year 2007 to 2008.
• It obviously understood that 20% increase taken place on the reserves and
surpluses.
• It clearly evidenced that the current liabilities of the firm increased 10% from
the year 2007 to 2008
• The firm has not recorded any changes in the investments, equity share capital
and long term loans.
Comparative Income Statement Analysis

This analysis is being carried out in between the income statements of the various
accounting durations of the firm, with other firms in the industry and with the industrial
average.
This will facilitate the firm to know about the stature of itself regarding the financial
performance. It facilitates to understand about the changes pertaining to various financial
data which closely relevantly connected with the financial performance
• Change in the gross sales
• Change in the net sales
• Change in gross profit and net profit
• Change in operating profit
• Change in operating expenses
• Change in volume of non-operating income
• Change in the non-operating expenses
The ultimate purpose of the comparative income statement analysis is as follows:
i. To study the income earning and expenditure pattern of the firm for two or more
years.

IPIRTI 189
ii. To identify the changing pattern of the income and expenditure of the firms. The
preparatory steps for the preparation of the comparative financial statement
analysis.
Steps to be taken:
i. While preparing the comparative statement of Profit and Loss account, the
particulars for the financial factors are required.
ii. The second most important requirement for the preparation of the comparative
PandL account is previous years financial data extracted.
iii. The next most important requirement to have an effective comparison with the old
data is to have current year financial information extracted form the balance
sheet of the firm.
iv. After having been procured the financial data pertaining to various time periods, we
are ready for comparison; to determine or identify the level of increase or
decrease taken place in the operating financial performance of the firms.
Illustration 2
Prepare the comparative income statement from the following:
Particulars 2007 Rs. 2008 Rs.
Sales 2,00,000 2,50,000
Cost of goods sold 1,00,000 1,30,000
1,00,000 1,20,000
Operating expenses 10,000 10,000
Net profit 90,000 1,10,000
Comparative Income Statement
Particulars 2007 2008 Absolute % Increase % Decrease

Rs. Rs. change
Rs.
Sales 2,00,000 2,50,00 50,000 25 -

0
(-)Cost of goods sold 1,00,000 1,30,00 30,000 30 -

IPIRTI 190
1,00,000 1,20,00 20,000 20 -

0
(-) Operating expenses 10,000 10,000 N.C - -
Net Profit 90,000 1,10,00 20,000 22.22

0
From the above table, the following inferences can be had:
• The firm has registered 25% increase in sales from the year 2007 to 2008
• Cost of goods sold raised 30% from the year 2007 to 2008
• There is no change in the level of operating expenses
• The firm has got 22.22% increase in the level of net profits from the year 2007 to
2008.
Common Size Statement Analysis

The next important toll of financial statement analysis is a common size statement analysis
which is known as predominant tool in intra firm analysis.
The components are translated into percentage for analysis and interpretations. For profit
and loss account, net sales is considered as a base for the computation of a share of each
financial factor available.
For Balance sheet, total volume of assets and liabilities are taken into consideration for the
computation of a share of each financial factor available under the heading of assets and
liabilities.
Illustration 3
Prepare the common size statement analysis for the firm ABC Ltd.
Liabilities 2007 2008 Assets 2007 2008

Rs. Rs. Rs. Rs.
Share Capital 2,00,000 3,00,000 Fixed Assets 2,25,000 4,00,000
Reserves and 1,00,000 2,00,000 Stock 1,29,000 2,00,000

surpluses
Bank overdraft 60,000 2,00,000 Quick assets 46,000 2,00,000

IPIRTI 191
Quick liabilities 40,000 1,00,000
4,00,000 8,00,000 4,00,000 8,00,000

IPIRTI 192
Common size statement analysis of the Balance Sheet of the firm ABC Ltd.
Particulars Amount Rs. % of Balance sheet total
Assets 2007 2008 2007 2008
Fixed assets 2,25,000 4,00,000 56.25 50
Stock 1,29,000 2,00,000 32.25 25
Quick assets 46,000 2,00,000 11.5 25
TOTAL 4,00,000 8,00,000 100 100
Liabilities
Share capital 2,00,000 3,00,000 50 37.5
Reserves and 1,00,000 2,00,000 25 25

surpluses
Bank overdraft 60,000 2,00,000 15 25
Quick liabilities 40,000 1,00,000 10 12.5
TOTAL 4,00,000 8,00,000 100 100
Trend Percentage Analysis

The next important tools of analysis is trend percentage which plays significant role in
analyzing the financial stature of the enterprise through base years performance ratio
computation. This not only reveals the trend movement of the financial performance of the
enterprise but also highlights the strengths and weaknesses of the enterprise.
The following ratio is being used to compute the trend percentage
= Current year/Base year x 100
This trend ratio is being computed for every component for many number of years which
not only facilitates comparison but also guides the firm to understand the trend path of the
firm.

IPIRTI 193
TYPES OF ACCOUNTING
Financial Accounting
Management Accounting
Cost Accounting
Financial Accounting
Information developed in conformity with Generally Accepted Accounting Principles
(GAAP). It involves the recording and summarization of business transactions and events.
Financial accounting relates to the preparation of financial statements for external users
such as creditors, investors, and suppliers. The financial statements include the balance
sheet, income statement, and statement of changes in financial position.
Management Accounting
Management Accounting is the presentation of accounting information in such a way as to
assist management in the creation of policies for long term and for day-to-day operation of
an undertaking.
 It involves:
 Financial statement analysis
 Cash flow information
 Cost Information
 Budgets and Standards
Financial Accounting vs. Management Accounting
The key difference between financial and managerial accounting is that financial
accounting is aimed at providing information to parties outside the organization, whereas
managerial accounting information is aimed at helping managers within the organization
make decisions.
Cost Accounting
 Cost accounting is a part of Management Accounting; it establishes budget and
actual cost of operations, processes, departments or product and the analysis of
variances, profitability or social use of funds.
 Managers use cost accounting to support decision-making to cut a

company's costs and improve profitability.
 Cost accounting need not follow standards such as GAAP, because its primary use is
for internal managers.

IPIRTI 194
Cost Accounting vs. Management Accounting

 Cost accounting is concerned with cost accumulation for inventory valuation to
meet the requirements of external reporting and internal profit measurement.
Management accounting relates to the provision of appropriate information for
decision-making, planning, control and performance evaluation.
Accounting Standards
Accounting standards are the guidelines issued by the Institute of Chartered Accountant of
India in respect of financial transactions. It is a common standard for accounting and
reporting. Accounting Standards contain the principles governing accounting practices and
determine the appropriate treatment of financial transactions.
Accounting is the art of recording transactions in the best manner possible, so as to enable
the reader to arrive at judgments/come to conclusions, and in this regard it is utmost
necessary that there are set guidelines. These guidelines are generally called accounting
policies. The intricacies of accounting policies permitted Companies to alter their
accounting principles for their benefit. This made it impossible to make comparisons. In
order to avoid the above and to have a harmonised accounting principle, Standards needed
to be set by recognised accounting bodies. This paved the way for Accounting Standards to
come into existence.
Accounting Standards in India are issued By the Institute of Chartered Accountants of

India (ICAI). At present there are 30 Accounting Standards issued by ICAI.
Objective of Accounting Standards
Objective of Accounting Standards is to standardize the diverse accounting policies and

practices with a view to eliminate to the extent possible the non-comparability of financial
statements and the reliability to the financial statements.
The institute of Chartered Accountants of India, recognizing the need to harmonize the
diverse accounting policies and practices, constituted at Accounting Standard Board (ASB)
on 21st April, 1977.
Compliance with Accounting Standards issued by ICAI
Sub Section(3A) to section 211 of Companies Act, 1956 requires that every Profit/Loss
Account and Balance Sheet shall comply with the Accounting Standards. 'Accounting
Standards' means the standard of accounting recommended by the ICAI and prescribed by
the Central Government in consultation with the National Advisory Committee on
Accounting Standards(NACAs) constituted under section 210(1) of companies Act, 1956.

IPIRTI 195
Accounting Standards Issued by the Institute of Chartered Accountants of India are as

below:
1. Disclosure of accounting policies.

2. Valuation Of Inventories.
3. Cash Flow Statements.
4. Contingencies and events Occurring after the Balance sheet Date
5. Net Profit or loss for the period, Prior period items and Changes in accounting
Policies.
6. Depreciation accounting.
7. Construction Contracts.
8. Revenue Recognition.
9. Accounting For Fixed Assets.
10. The Effect of Changes In Foreign Exchange Rates.
11. Accounting For Government Grants.
12. Accounting For Investments.
13. Accounting For Amalgamation.
14. Employee Benefits.
15. Borrowing Cost.
16. Segment Reporting.
17. Related Party Disclosures.
18. Accounting For Leases.
19. Earnings Per Share.
20. Consolidated Financial Statement.
21. Accounting For Taxes on Income.
22. Accounting for Investment in associates in Consolidated Financial Statement.
23. Discontinuing Operation.
24. Interim Financial Reporting.
25. Intangible assets.
26. Financial Reporting on Interest in joint Ventures.
27. Impairment Of assets.
28. Provisions, Contingent, liabilities and Contingent assets.
29. Financial instrument.
30. Financial Instrument: presentation.
31. Financial Instruments, Disclosures and Limited revision to accounting standards.
Disclosure of Accounting Policies: Accounting Policies refer to specific accounting

principles and the method of applying those principles adopted by the enterprises in
preparation and presentation of the financial statements.
Valuation of Inventories: The objective of this standard is to formulate the method of

computation of cost of inventories / stock, determine the value of closing stock / inventory
at which the inventory is to be shown in balance sheet till it is not sold and recognized as
revenue.

IPIRTI 196
Cash Flow Statements: Cash flow statement is additional information to user of financial
statement. This statement exhibits the flow of incoming and outgoing cash. This statement
assesses the ability of the enterprise to generate cash and to utilize the cash. This statement
is one of the tools for assessing the liquidity and solvency of the enterprise.
Contingencies and Events occurring after the balance sheet date: In preparing financial
statement of a particular enterprise, accounting is done by following accrual basis of
accounting and prudent accounting policies to calculate the profit or loss for the year and
to recognize assets and liabilities in balance sheet. While following the prudent accounting
policies, the provision is made for all known liabilities and losses even for those liabilities /
events, which are probable. Professional judgment is required to classify the likelihood of
the future events occurring and, therefore, the question of contingencies and their
accounting arises.
Objective of this standard is to prescribe the accounting of contingencies and the events,
which take place after the balance sheet date but before approval of balance sheet by
Board of Directors. The Accounting Standard deals with Contingencies and Events
occurring after the balance sheet date
Net Profit or Loss for the Period, Prior Period Items and change in Accounting
Policies : The objective of this accounting standard is to prescribe the criteria for certain
items in the profit and loss account so that comparability of the financial statement can be
enhanced. Profit and loss account being a period statement covers the items of the income
and expenditure of the particular period. This accounting standard also deals with change
in accounting policy, accounting estimates and extraordinary items.
Depreciation Accounting: It is a measure of wearing out, consumption or other loss of

value of a depreciable asset arising from use, passage of time. Depreciation is nothing but
distribution of total cost of asset over its useful life.
Construction Contracts: Accounting for long term construction contracts involves question
as to when revenue should be recognized and how to measure the revenue in the books of
contractor. As the period of construction contract is long, work of construction starts in
one year and is completed in another year or after 4-5 years or so. Therefore question
arises how the profit or loss of construction contract by contractor should be determined.
There may be following two ways to determine profit or loss: On year-to-year basis based
on percentage of completion or On completion of the contract.
Revenue Recognition: The standard explains as to when the revenue should be recognized
in profit and loss account and also states the circumstances in which revenue recognition
can be postponed. Revenue means gross inflow of cash, receivable or other consideration
arising in the course of ordinary activities of an enterprise such as:- The sale of goods,
Rendering of Services, and Use of enterprises resources by other yielding interest, dividend
and royalties. In other words, revenue is a charge made to customers / clients for goods
supplied and services rendered.

IPIRTI 197
Accounting for Fixed Assets: It is an asset, which is:- Held with intention of being used for
the purpose of producing or providing goods and services. Not held for sale in the normal
course of business. Expected to be used for more than one accounting period.
The Effects of changes in Foreign Exchange Rates: Effect of Changes in Foreign Exchange
Rate shall be applicable in Respect of Accounting Period commencing on or after 01-04-
2004 and is mandatory in nature. This accounting Standard applicable to accounting for
transaction in Foreign currencies in translating in the Financial Statement Of foreign
operation Integral as well as non- integral and also accounting for Forward exchange.
Effect of Changes in Foreign Exchange Rate, an enterprises should disclose following
aspects:
• Amount Exchange Difference included in Net profit or Loss;

• Amount accumulated in foreign exchange translation reserve;
Reconciliation of opening and closing balance of Foreign Exchange translation reserve;
Accounting for Government Grants: Government Grants are assistance by the Govt. in the
form of cash or kind to an enterprise in return for past or future compliance with certain
conditions. Government assistance, which cannot be valued reasonably, is excluded from
Govt. grants,. Those transactions with Government, which cannot be distinguished from
the normal trading transactions of the enterprise, are not considered as Government
grants.
Accounting for Investments: It is the assets held for earning income by way of dividend,
interest and rentals, for capital appreciation or for other benefits.
Accounting for Amalgamation: This accounting standard deals with accounting to be made
in books of Transferee company in case of amalgamation. This accounting standard is not
applicable to cases of acquisition of shares when one company acquires / purchases the
share of another company and the acquired company is not dissolved and its separate
entity continues to exist. The standard is applicable when acquired company is dissolved
and separate entity ceased exist and purchasing company continues with the business of
acquired company.
Employee Benefits: Accounting Standard has been revised by ICAI and is applicable in
respect of accounting periods commencing on or after 1st April 2006. the scope of the
accounting standard has been enlarged, to include accounting for short-term employee
benefits and termination benefits.
Borrowing Costs: Enterprises are borrowing the funds to acquire, build and install the
fixed assets and other assets, these assets take time to make them useable or saleable,
therefore the enterprises incur the interest (cost on borrowing) to acquire and build these
assets. The objective of the Accounting Standard is to prescribe the treatment of borrowing
cost (interest + other cost) in accounting, whether the cost of borrowing should be included
in the cost of assets or not.

IPIRTI 198
Segment Reporting: An enterprise needs in multiple products/services and operates in

different geographical areas. Multiple products / services and their operations in different
geographical areas are exposed to different risks and returns. Information about multiple
products / services and their operation in different geographical areas are called segment
information. Such information is used to assess the risk and return of multiple
products/services and their operation in different geographical areas. Disclosure of such
information is called segment reporting.
Related Party Disclosure: Sometimes business transactions between related parties lose the
feature and character of the arms length transactions. Related party relationship affects
the volume and decision of business of one enterprise for the benefit of the other enterprise.
Hence disclosure of related party transaction is essential for proper understanding of
financial performance and financial position of enterprise.
Accounting for leases: Lease is an arrangement by which the lesser gives the right to use
an asset for given period of time to the lessee on rent. It involves two parties, a lessor and a
lessee and an asset which is to be leased. The lesser who owns the asset agrees to allow the
lessee to use it for a specified period of time in return of periodic rent payments.
Earning Per Share: Earning per share (EPS)is a financial ratio that gives the information
regarding earning available to each equity share. It is very important financial ratio for
assessing the state of market price of share. This accounting standard gives computational
methodology for the determination and presentation of earning per share, which will
improve the comparison of EPS. The statement is applicable to the enterprise whose equity
shares or potential equity shares are listed in stock exchange.
Consolidated Financial Statements: The objective of this statement is to present financial

statements of a parent and its subsidiary (ies) as a single economic entity. In other words
the holding company and its subsidiary (ies) are treated as one entity for the preparation of
these consolidated financial statements. Consolidated profit/loss account and consolidated
balance sheet are prepared for disclosing the total profit/loss of the group and total assets
and liabilities of the group. As per this accounting standard, the consolidated balance sheet
if prepared should be prepared in the manner prescribed by this statement.
Accounting for Taxes on Income: This accounting standard prescribes the accounting
treatment for taxes on income. Traditionally, amount of tax payable is determined on the
profit/loss computed as per income tax laws. According to this accounting standard, tax on
income is determined on the principle of accrual concept. According to this concept, tax
should be accounted in the period in which corresponding revenue and expenses are
accounted. In simple words tax shall be accounted on accrual basis; not on liability to pay
basis.
Accounting for Investments in Associates in consolidated financial statements : The

accounting standard was formulated with the objective to set out the principles and
procedures for recognizing the investment in associates in the consolidated financial
statements of the investor, so that the effect of investment in associates on the financial
position of the group is indicated.

IPIRTI 199
Discontinuing Operations: The objective of this standard is to establish principles for

reporting information about discontinuing operations. This standard covers "discontinuing
operations" rather than "discontinued operation". The focus of the disclosure of the
Information is about the operations which the enterprise plans to discontinue rather than
disclosing on the operations which are already discontinued. However, the disclosure about
discontinued operation is also covered by this standard.
Interim Financial Reporting (IFR) : Interim financial reporting is the reporting for periods
of less than a year generally for a period of 3 months. As per clause 41 of listing agreement
the companies are required to publish the financial results on a quarterly basis.
Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset without

physical substance held for use in the production or supplying of goods or services for
rentals to others or for administrative purpose.
Financial Reporting of Interest in joint ventures: Joint Venture is defined as a contractual

arrangement whereby two or more parties carry on an economic activity under 'joint
control'. Control is the power to govern the financial and operating policies of an economic
activity so as to obtain benefit from it. 'Joint control' is the contractually agreed sharing of
control over economic activity.
Impairment of Assets: The dictionary meaning of 'impairment of asset' is weakening in

value of asset. In other words when the value of asset decreases, it may be called
impairment of an asset. As per AS-28 asset is said to be impaired when carrying amount of
asset is more than its recoverable amount.
Provisions, Contingent Liabilities And Contingent Assets: Objective of this standard is to

prescribe the accounting for Provisions, Contingent Liabilities, Contingent Assets,
Provision for restructuring cost.
Provision: It is a liability, which can be measured only by using a substantial degree of

estimation.
Liability: A liability is present obligation of the enterprise arising from past events the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
Financial Instrument: Recognition and Measurement, issued by The Council of the

Institute of Chartered Accountants of India, comes into effect in respect of Accounting
periods commencing on or after 1-4-2009 and will be recommendatory in nature for An
initial period of two years. This Accounting Standard will become mandatory in respect of
Accounting periods commencing on or after 1-4-2011 for all commercial, industrial and
business Entities except to a Small and Medium-sized Entity. The objective of this
Standard is to establish principles for recognizing and measuring Financial assets, financial
liabilities and some contracts to buy or sell non-financial items. Requirements for
presenting information about financial instruments are in Accounting Standard.

IPIRTI 200
Financial Instrument presentation: The objective of this Standard is to establish principles

for presenting financial instruments as liabilities or equity and for offsetting financial
assets and financial liabilities. It applies to the classification of financial instruments, from
the perspective of the issuer, into financial assets, financial liabilities and equity
instruments; the classification of related interest, dividends, losses and gains; and the
circumstances in which financial assets and financial liabilities should be offset. The
principles in this Standard complement the principles for recognizing and measuring
financial assets and financial liabilities in Accounting Standard Financial Instruments:
Financial Instruments, Disclosures and Limited revision to accounting standards: The

objective of this Standard is to require entities to provide disclosures in their financial
statements that enable users to evaluate:
• the significance of financial instruments for the entity’s financial position and
performance; and
the nature and extent of risks arising from financial instruments to which the entity is
exposed during the period and at the reporting date, and how the entity manages those
risks.
Financial Management
Financial Management can be defined as:
The management of the finances of a business / organisation in order to achieve financial

objectives
Taking a commercial business as the most common organizational structure, the key
objectives of financial management would be to:
• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks that the business is
taking and the resources invested.
There are three key elements to the process of financial management:
(1) Financial Planning
Management need to ensure that enough funding is available at the right time to meet the
needs of the business. In the short term, funding may be needed to invest in equipment and
stocks, pay employees and fund sales made on credit.

IPIRTI 201
In the medium and long term, funding may be required for significant additions to the
productive capacity of the business or to make acquisitions.
(2) Financial Control
Financial control is a critically important activity to help the business ensure that the
business is meeting its objectives. Financial control addresses questions such as:
• Are assets being used efficiently?
• Are the businesses assets secure?
• Do management act in the best interest of shareholders and in accordance with business
rules?
(3) Financial Decision-making
The key aspects of financial decision-making relate to investment, financing and dividends:
• Investments must be financed in some way – however there are always financing
alternatives that can be considered. For example it is possible to raise finance from selling
new shares, borrowing from banks or taking credit from suppliers
• A key financing decision is whether profits earned by the business should be retained
rather than distributed to shareholders via dividends. If dividends are too high, the
business may be starved of funding to reinvest in growing revenues and profits further.
Corporate Financial Planning and Capital Structure

Financial planning is deciding in advance, the course or line of action for the future with
respect to the financial management of a concern, it includes:
(i) Estimating the amount of funds to be raised.
(ii) Determining the forms and the proportionate amount of the securities to be issued
for raising the capital and
(iii) Laying down the policies as to the administration of financial plan.
Aspects of Financial Planning

(a) Determining the financial objectives
(b) Formulation of financial policies
(c) Development of financial procedures
Need for Financial Planning

Financial planning is needed, not only in the case of enterprises proposed to be setup,
but is equally needed for on-going enterprises as well.

IPIRTI 202
The need for financial planning arises from the following reasons:
a) Would ensure liquidity throughout the year.
b) Would bring to light, the surplus of funds available for examination.
c) Would contribute to the rational utilization of the available resources, to get the
maximum benefit.
d) Would make things easy for the management team to function smoothly.
Steps in Financial Planning:

The financial planning process can be broken down into six major steps:
1. Project of Financial Statements
2. Determination of Funds needed
3. Forecast the availability of funds
4. Establish and maintain system of control
5. Develop Procedures
6. Establishment performance-Based management compensation system
Objectives of the Financial Plan

1. Ensure the availability of sufficient funds
2. Balances of risk and costs
3. Simplicity
4. Flexibility
5. Liquidity
6. Optimum Use
7. Economy
CAPITALISATION
The concept of capitalisation is used only in the case of joint stock companies and not in
the case of other forms of business undertaking like sole trading concerns and
partnership firms. In financial management, the term ‘Capitalisation’ is concerned only
with the quantitative aspects and not with the qualitative aspects of business finance.
It is used in two different senses:

IPIRTI 203
1. Broad sense – synonymous with financial planning
2. Narrow sense – quantity of finance required by the company
Components of Capitalisation
a. Par value of share capital – paid-up value of both equity and preference share
capital.
b. Reserves and surplus – all types of reserves, capital reserves as well as revenue
reserves and surplus.
c. Long-term borrowed funds – debentures issued and other long term borrowings.
Capitalisation vs. Capital: The term ‘capitalisation’ confines itself to only long term
sources of finance. But the term ‘capital’ includes all the sources of finance.
The concept of capitalisation is used only in the case of companies. But the concept of
capital is used in the case of all forms of business undertakings.
Capitalisation vs. Share Capital: The term ‘capitalisation’ includes not only share
capital but also reserves and surplus, long term borrowings. But the term ‘share
capital’ includes only the share capital.
Estimation of Capitalisation
1. Cost approach or cost theory of capitalisation
2. Earnings approach or earning theory of capitalisation
Cost approach or Cost Theory of Capitalisation: The capitalisation of a company is

based on the cost of acquisition of fixed assets, the establishment of the company and
the amount of regular working capital requirement.
Earnings approach or Earnings Theory of Capitalisation: The capitalisation or the

value of a company is determined on the basis of its earnings. The capitalisation or
value of a company is equal to the value of its earnings. For example, if the average
annual earnings or profit of a company is Rs.50,000 and the capitalisation rate (the fair
rate of return of the average rate of return in the industry) is 10% on the capital
employed,
Avg. amount of profit of the company x 100/Fair rate of return
i.e., 50,000 x 100/10 = Rs.5,00,000
To sum up, the cost approach of capitalisation is suited for a new company while the
earnings approach of capitalisation is suitable for an existing company.
Over-Capitalisation

IPIRTI 204
A Company is said to be over-capitalised, when its actual earnings or profits are not
sufficient to pay dividend at proper rate to the shareholders.
Under-Capitalisation
A company is said to be under-capitalised when the actual capitalisation is much less

than its proper capitalisation (capitalisation warranted by its earnings).
CAPITAL STRUCTURE
Capital structure refers to the mix of long-term sources of funds, such as equity shares
capital, reserves and surpluses, debenture, long-term debt from outside sources and
preference share capital.
“Capital structure may consists of a single class of stock, or it may be complicated by

several issues of bonds and preferred stock, the characteristics of which may vary
considerably”.
Capital Structure = Long-term Debt + Preferred Stock + Net worth
OR
Capital Structure = Total Assets – Current Liabilities
Features of Capital Structure

An appropriate capital structure should have the following features:
(a) Profitability/Return
(b) Solvency/Risk
(c) Flexibility
(d) Conservation/Capacity
(e) Control
Capital Budgeting
Capital budgeting refers to planning the deployment of available capital for the purpose of
maximizing the long-term profitability of the firm. It is the firm’s decision to invest its
current funds most efficiently in long-term activities in anticipation of flow of future
benefits over a series of years.
In other words, Capital budgeting may be defined as the firm’s decision to invest its
current funds most efficiently in the long-term assets in anticipation of an expected flow of
benefits over a series of years.
Capital budgeting is classified as under:

IPIRTI 205
1. Planning/Idea Generation
2. Evaluation/Analysis
3. Selection
4. Financing
5. Execution/Implementation
6. Review
Capital Budgeting Appraisal Methods

1. Traditional Methods (Non Discounted Cash Flow method)
a. Payback period method
b. Accounting rate of return method or Average Rate of Return (ARR)
2. Modern methods (discounted cash flow methods)
a. The Net Present Value method (NPV)
b. Internal Rate of Return (IRR)
c. Profitability Index or Benefit-Cost Ratio
Payback Period Method:

Period required to recover the original cash outflow invested in a project. The cash flow
after taxes is used to compute pay back period. Payback period is calculated in two ways:
(i) Using formula – when the cash flows stream of each year is equal in all the years of
projects life.
Payback period = Original Investment or Initial investment or cash outlay /

Constant annual cash flows after taxes
(ii) Using cumulative cash flow method – when the cash flows after taxes are unequal or
not uniform over the projects’ life period.

IPIRTI 206
Accept-Reject Rule:
Accept: Calculated PBP < Standard PBP
Reject: Calculated PBP > Standard PBP
Consider: Calculated PBP = Standard PBP
Accounting Rate of Return/Average Rate of Return

It is also known as Return on Investment (ROI). It is calculated in two ways:
(i) Whenever it is clearly mentioned as accounting rate of return:
Accounting Rate of Return (ARR) = Avg. annual EAT or PAT/Original

Investment x 100
OI = Original Investment + Additional NWC + Installation Charges +

Transportation Charge
(ii) Whenever it is clearly mentioned as average rate of return:
Average Rate of Return = Average annual EAT/Average investment x 100
AI = (original investment – scrap)/2 + Additional NWC + Scrap value
Accept-Reject Rule
Accept: Calculated ARR > Predetermined ARR or Cut-off rate
Reject: Calculated ARR < Predetermined ARR or Cut-off rate
Considered: Cal ARR = Predetermined ARR or Cut-off rate
Net Present Value method (NPV)

It is one of the discounted cash flow methods. It is also known as discounted benefit cost
ratio method. NPV can be defined as present value of benefits minus preset value of costs.
It is the process of calculating present values of cash inflows using cost of capital as an
appropriate rate of discount and subtract present value of cash outflows from the present
value of cash inflows and find the net present value, which may be positive or negative.
Positive net present value occurs when the present value of cash inflow is higher than the
present value of cash outflows and vice versa.
Steps involved in computation of NPV are:
(i) Forecasting of cash inflows of the investment project based on realistic assumptions.
(ii) Computation of cost of capital, which is used as discounting factor for conversion of
future cash inflows into present values.

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(iii) Calculation of cash flows using cost of capital as discounting rate/factor.
(iv)Finding out NPV by subtracting present value of cash outflows from present value
of cash inflows.
Accept Reject Rule:

Accept: NPV > Zero
Reject: NPV < Zero
Consider: NPV = Zero
Internal Rate of Return (IRR)

IRR is that rate at which the sum of discounted cash inflow equals the sum of discounted
cash outflow. It is the rate at which the net present value of the investment is zero. This
method is also known by names:
a) Marginal Efficiency of Capital
b) Rate of Return over Cost
c) Time adjusted rate of return
d) Yield on Investment
IRR can also defined as the discounting factor at which the present value of cash
inflows equals to the present value of cash outflows.
IRR = A + (C – O)/(C – D) x (B – A)
Where: A = Discounted factor of low trail; B = Discounted factor of high trial;

C=Present value of cash inflow in the low trial; D = Present value of cash inflow in the
high trial; O = Original or Initial outlay.
Accept Reject Rule:

Accepted: IRR > Cost of Capital
Reject: IRR < Cost of Capital
Consider: IRR = Cost of Capital
Profitability Index (PI) / Discounted Benefit Cost Ratio (DBCR)

This method is similar to NPV method. It is the ratio of the present value of cash inflows, at
the required rate of return, to the initial cash outflow of the investment proposal. PI
method measures the present value of future cash inflows and present value of cash
outflows. NPV method is not reliable to evaluate projects requiring unequal initial
investments. PI method provides solution to this problem.

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PI = PV of cash inflows/Initial Cash outlay
Accept Reject Rule:

Accept: PI > 1
Reject: PI < 1
Considered: PI = 1
Cost of Capital
Cost of capital represents the rate of return that the firm must pay to the fund suppliers,
who have provided the capital. It is the weighted average cost of various sources of finance
used by the firm. The sources are – equity, preference, long-term debt and short-term debt.
The financial manager has to compute the specific cost of each type of funds needed in the
capitalisation of a company. The company may resort to different financial sources (equity
share, preference share, debentures, retained earnings, public deposits; or it may prefer
internal source (retained earnings) or external source (equity, preference and public
deposits). Generally, the component cost of a specific source of capital is equal to the
investors’ required rate of returns. Investors required rate of returns are interest, discount
on debt, dividend, capital appreciation, earnings per share, dividend and share of profit on
preference shareholders.
Cost of Equity
Firms may obtain equity capital in two ways:
(i) Retention of earnings
(ii) Issue of additional equity shares to the public
The cost of equity or returns required by the equity shareholders is the same in both
the cases, since in both cases, the shareholders are providing funds to the firm to
finance their investment proposals. Retention of earnings involves an opportunity cost.
The shareholders could receive the earnings as dividends and invest the same in
alternative investments of comparable risk to earn returns. So, irrespective of whether
a firm raises equity finance by retaining earnings or issue of additional equity shares,
the cost of equity is same. But issue of additional equity shares to the public involves a
floatation cost whereas; there is no floatation cost for retained earnings. Hence, issue of
additional equity shares to the public for raising equity finance involves a bigger cost
when compared to the retained earnings.
Cost of Debt Capital

Companies may raise debt capital through issue of debentures or loan from financial
institutions or deposits from public. All these resources involve a specific rate of interest.
The interest paid on these sources of funds is a charge on the profit and loss account of the
company. Computation of cost of debenture or debt is relatively easy, because the interest
rate that is payable on debt is fixed by the agreement between the firm and the creditors.

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Weighted Average Cost of Capital (WACC)

A company has to employ a combination of creditors and fund owners. The composite cost
of capital lies between the least and most expensive funds. This approach enables the
maximization of profits and the wealth of the equity shareholders by investing the funds in
projects earnings in excess of the overall cost of capital.
Source of Working Capital and Working Capital Management

Working capital requirements may be for short term or for long term.
Short-term working capital

Sources of short-term funds have to be used (exclusively) for meeting the working capital
requirements only and not far financing fixed assets and for meeting the margin money for
working capital loans.
Sources of short-term financing:
1. Trade credit
2. Accruals
3. Deferred Income
4. Commercial Papers (CPs)
5. Public Deposits
6. Inter-Corporate Deposits (ICDs)
Bank Finance
Banks provide different types of tailor made loans that are suitable for specific needs of a
firm.
1. Loans
2. Overdrafts
3. Cash credits
4. Purchase or discounting of bills
5. Letter of Credit
Long-term working capital

Long-term working capital or fixed working capital is required to maintain the minimum
sales.
The sources of long-term working capital are:

IPIRTI 210
1. Internal financing Sources
(a) Retained earnings/ploughing back of profits, and
(b) Depreciation charges
2. External Financing sources -Share capital
Managing Working Capital

Working capital refers to short-term funds to meet operating expenses. It refers to the
funds, which accompany must possess to finance its day-to-day operations. It is concerned
with management of the firm’s current assets and current liabilities. It relates with the
problems that arise in attempting to manage the current assets, current liabilities and their
inter-relationship that exists between them. If a firm cannot maintain a satisfactory level of
working capital, it is likely to become insolvent and may even be forced into bankruptcy.
Working capital management’s goal is to maintain a satisfactory level of working capital.
Net working capital concept focuses attention on the two aspects of current assets
management. They are: Maintaining liquidity position, and to decide upon the extent of
long-term capital in financing current assets.
Working capital has been classified into regular or permanent working capital and
temporary or variable working capital.
The objective of working capital management could be stated as, to ensure optimum
investment in current assets, to strike a balance between the twin objectives of liquidity and
profitability in the use of funds, to ensure adequate flow of funds for current operations,
and to speed up the flow of funds or to minimize the stagnation of funds.

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Cash and Receivables Management

Cash is one of the components of current assets and it is a medium of exchange for purpose
of goods and services and for discharging liabilities.
In cash management, the term ‘cash’ has used in two senses: Narrow sense and Broad
sense.
In narrow sense, cash covers currency and generally accepted equivalent of cash, viz.
cheques, demand drafts and banks demand deposits. In broad sense, cash includes not only
the above stated but also near cash assets. There are bank’s time deposits and marketable
securities. The marketable security can easily sold and converted into cash. Here cash
management is in broader sense.
Cash budget is a statement showing the estimated cash inflows and cash outflows over a
planning period. It pinpoints the surplus or deficit cash of a firm as it moves from one
period to another period. Cash budget is prepared for the purpose of estimating cash
requirements; planning short-term finance planning; scheduling payments, in respect of
acquiring capital goods; planning and phasing the purchase of raw materials; evolving and
implementing credit policies; checking and verifying the accuracy of long-term cash
forecasting.
Preparation of cash budget involves two steps:
1. Selection of period of time (planning horizon)
2. Selection of factor that has bearing on cash flows.
Receivables Management
The term receivable is defined as ‘debt owed to the firm by customers arising from sale of
goods or services in the ordinary course of business”. When the firm sells its products
services on credit, and it does not receive cash for it immediately, but would be collected in
near future. Till collection they are recorded as current assets.
The accounts receivables arising out of credit sales has the characteristics – Risk
involvement, Based on economic value, and implies futurity.
Account receivable management involves maintenance of receivables of optimum level, the

degree to credit sales to be made, and the debtors collection.
The objectives of accounts receivables management are:
Maximizing the value of firm
Optimum Investment in sundry debtors

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The management of accounts receivables is not cost free. It involves cost and its association
with accounts receivables results in: Opportunity cost/Capital cost, collection cost, and bad
debts.
The economic value of goods or services sold on credit, will be paid by adoption of different
modes:
1. Cash mode; 2. Open Account, 3. Letter of Credit and 4. Consignment
Receivables management involves the decisions areas: credit standards, credit period, cash
discounts, and collection procedures.
Liberal credit policy is that policy where the seller sells goods on very liberal credit terms
and standards, which increase sales, higher profits. But it involves bad debt loss, and
liquidity problem.
Stringent credit policy is a policy where seller sells goods on credit on a highly selective
basis only, which reduces bad losses, sound liquidity position. These benefits are
accompanied by less sales and less profits.
The major controllable variables of credit policy are:
(a) Credit standards
(b) Credit terms and
(c) Collection policy and procedures
Credit standards refer to the minimum criteria for the extension of credit to a customer.
The firm’s decision, to accept or reject a customer to extend credit depends on credit
standards. Practical ones lies between these two points, liberal credit standards and rigid
credit standards.
The success of collection effort depends on monitoring and controlling receivables.

Techniques used for monitoring receivables are:
(a) Receivables turnover
(b) Average collection period
(c) Aging schedule and
(d) Collection matrix.

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Inventory Management
Inventory management occupies the most significant position in the structure of working
capital. Management of inventory may be defined as the sum of total of those activities
necessary for the acquisition, storage, disposal or use of materials.
Efficient management of inventory reduces the cost of production and consequently

increases the profitability of the enterprise by minimizing the different types of costs
associated with holding inventory.
The two conflicting objectives of inventory management are:
(1) Maintain investments in inventory and
(2) To facilitate the smooth functioning of production, which in turn meet the demand.
An effective inventory management should ensure a continuous supply of raw materials

and supplies to facilitate uninterrupted production; maintain sufficient finished goods
inventory for smooth sales operation, and efficient customer service; minimize the carrying
costs and time; and control investment in inventories and keep it at an optimum level.
Inventory management problems can be handled by sophisticated/refined mathematical

techniques. The major problem areas are:
(a) Classification problem to determine the type of control required.
(b) The order quantity problem
(c) The order point problem
(d) Determination of safety stocks.
The most widely used inventory control technique is ABC analysis (classification problem).
According to this technique, the task of inventory management is proper classification of
all inventory items in to three categories namely A, B and C category. ‘A’ item, because
greater benefit. The control of ‘C’ items may be released due to less benefits. (some times
control cost may exceed benefit of control) and reasonable attention should be paid on
category ‘B’ items.
Economic Order Quantity (EOQ) refers to that level of inventory at which the total cost of
inventory is minimum. The total inventory cost comprising ordering and carrying costs.
EOQ is also known as Economic Lot Size (ELS). EOQ can be obtained by adopting two
methods
(a) Trial and Error approach
(b) Short cut or simple mathematical formula given by

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EOQ = √2AO/CC
Where A = Annual usage
O = Ordering cost per order
CC = Carrying cost per unit = price per unit x carrying cost per unit in percentage.
Order Point Problem relates to the determination of the different stock levels. The different
stock levels are:
(a) Minimum level – level that must be maintained always production will be disturbed
if it is less than the minimum level.
(b) Reorder level – level of inventory in weeks, which an order should be placed for
replenishing the current stock of inventory. Generally the reorder level lies between
minimum stock level and maximum stock level.
(c) Average stock level
(d) Dangerous level
Dividend Policy
Management of earnings means how the earnings of a firm are be determined and how
they are utilized or appropriated or allocated or distributed. Management of earnings
policy must maximise value of the firm, there by maximise benefits to its owners.
The term ‘dividend’ refers to that portion of company’s net earnings that is paid out to the
equity shareholders (not for preference shareholders, since they are entitled to have a fixed
rate of dividend).
Dividend policy of a firm decides the portion of earnings to be paid as dividends to

ordinary shareholders and what portion is ploughed back in the firm for investment
purpose. The alternative use of net earnings or net profit dividends and retained earnings
are competitive and conflicting, since it affects the value of the firm.
There are different types of dividend policies: stable dividend policy, here “stability” refers
to the consistency or lack of variability in the stream of dividend payments. In more precise
terms, stable dividend means payment of certain minimum amount of dividend regularly.
There are three distinct forms of stability, they are:
(a) Constant dividend per share
(b) Constant payout ratio
(c) Stable rupee dividend plus extra dividend.

IPIRTI 215
Risk Management and Insurance
Insurance
The business of insurance is related to the protection of the economic values of assets.
Every asset has a value. The asset would have been created through the efforts of the
owner. The asset is valuable to the owner, because he expects to get some benefits from it. It
is a benefit because it meets some of his needs. The benefit may be an income or in some
other form. In the case of a factory or a cow, the product generated by it is sold and income
is generated. In the case of a motor car, it provides comfort and convenience in
transportation. There is no direct income. Both are assets and provide benefits.
Every asset is expected to last for a certain period of time during which it will provide the
benefits. After that, the benefit may not be available. There is a life-time for a machine in a
factory or a cow or a motor car. None of them will last forever. The owner is aware o this
and he can so manage his affairs that by the end of that period or life-time, a substitute is
made available. Thus, he makes sure that the benefit is not lost. However, the asset may get
lost earlier. An accident or some other unfortunate event may destroy it or make it
incapable of giving the benefits. An epidemic may kill the cow suddenly. In that case, the
owner and those enjoying the benefits there from, would be deprived of the benefits. The
planned substitute would not have been ready. There is an adverse or unpleasant situation.
Insurance is a mechanism that helps to reduce the effects of such adverse situations. It
promises to pay to the owner or beneficiary of the asset, a certain sum if the loss occurs.
Brief History
Insurance has been known to exist in some form or other since 3000BC. The Chinese
traders, traveling treacherous river rapids would distribute their goods among several
vessels, so that the loss form any one vessel being lost, would be partial and shared, and not
total. The Babylonian traders would agree to pay additional sums to lenders, as the price
for writing off the loans, in case of the shipment being stolen. The inhabitants of Rhodes
adopted the principle of ‘general average’, whereby if goods are shipped together, the
owners would bear the losses in proportion, if loss occurs, due to jettisoning during
distress. The Greeks has started benevolent societies in the late 7 th century AD, to take care
of the funeral and families of members who died. The friendly societies of England were
similarly constituted. The Great Fire of London in 1666, in which more than 13000 houses
were lost, gave a boost to insurance and the first fire insurance company, called the Fire
Office, was started in 1680.
The origins of insurance business as in vogue at present, is traced to the Lloyd’s Coffee
House in London. Traders, who used to gather in the Lloyd’s Coffee house, agreed to share
the losses to their goods while being carried by ships. The losses used to occur because of
pirates who robbed on the high seas or because of bad weather spoiling the goods or
sinking the ship. In India, insurance began in 1818 with Life insurance being transacted by
an English company, the Oriental Life Insurance Co. Ltd. The first Indian insurance
company was the Bombay Mutual Assurance Society Ltd, formed in 1870 in Mumbai. This
was followed by the Bharat Insurance Co. in 1896 in Delhi, the Empire of India in 1897 in

IPIRTI 216
Mumbai, the United India in Chennai, the National Indian and the Hindusthan
Cooperative in Kolkata.
Later, were established the Cooperative Assurance in Lahore, the Bombay Life (originally
called the Swadeshi Life), the Indian Mercantile, the New India and the Jupiter in Mumbai
and the Lakshmi in New Delhi. These were all Indian companies started as a result of the
swadeshi movement in the early 1900s. By the year 1956, when the life insurance business
was nationalized and the Life Insurance Corporation of India (LIC) was formed on 1st
September 1956, there were 170 companies and 75 provident fund societies transacting life
insurance business in India. After the amendments to the relevant laws in 1999, the LIC
did not have the exclusive privilege of doing life insurance business in India. The Insurance
sector was again privatized.
Purpose and Need of Insurance

Assets are insured, because they are likely to be destroyed or made non-functional before
the expected life time, through accidental occurrences. Such possible occurrences are called
perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are perils. If such perils can
cause damage to the asset, we say that the asset is exposed to that risk. Perils are the events.
Risks are the consequential losses or damages. The risk to a owner of a building, because of
the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the
cost of the building, the contents in it and the extent of damage.
The risk only means that there is a possibility of loss or damage. The damage may or may
not happen. The earthquake may occur, but the building may not have been affected at all.
Insurance is done against the possibility that the damage may happen. There has to be an
uncertainty about the risk. The word ‘possibility’ implies uncertainty. Insurance is relevant
only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it
cannot be insured against. In the case of a human being, death is certain, but the time of
death is uncertain. The person is insured, because of the uncertainty about the time of his
death. In the case of a person who is terminally ill, the time of death is not uncertain,
though not exactly known. It would be ‘soon’. He cannot be insured.
Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril
cannot be avoided through insurance. The risk can sometimes be avoided, through better
safety and damage control measures. Insurance only tries to reduce the impact of the risk
on the owner of the asset and those who depend on that asset. They are the ones who
benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only
compensates for the losses – and that too, not fully.
Only economic consequences can be insured. If the loss is not financial, insurance may not
be possible. Examples of non-economic losses are love and affection of parents, leadership
of managers, sentimental attachments to family heirlooms, innovative and creative abilities,
etc.
Classification of risks
Risks are classified in various ways. One classification is based on the extent of the damage
likely to be caused. Critical or Catastrophic risks are those which may lead to the

IPIRTI 217
bankruptcy of the owner. It would happen if the loss is total, like in a tsunami, wiping out
everything. It can also happen if the deceased person was heavily in debt. Important risks
may not spell doom, but may upset family or business finances badly, requiring a lot of
time to recover. The adverse effects of an economic recession is one such. Less damaging
are Unimportant risks, like temporary illness or accidents.
Another classification is between Financial and Non-financial risks, referred to in an

earlier paragraph. Insurance is concerned with only Financial Risks.
A third classification is between Dynamic and Static risks. Dynamic risks are caused by
perils which have national consequence, like inflation, calamities, technology, political
upheavals, etc. Static risks are caused by perils which have no consequence on the national
economy, like a fire or theft or misappropriation. Dynamic risks are less likely to occur
than static risks but are also less predictable. Static risks are more suited to management
through insurance.
Fundamental risks are those that affect large populations while Particular risks affect only
specific persons. A train crash is a fundamental risk while a theft is a particular risk. Life
Insurance business deals with particular risks, but fundamental risks affect the life
insurance company’s experience, as many persons will be affected at the same time, when
there is an earthquake, flood or riot.
Another classification is between Pure risk and Speculative risks. The latter are in the
nature of betting or gambling where the risk is, to some extent, under the control of the
person concerned, while a pure risk is not so. It is more in nature and an Act of God.
Insurance deals with only pure risks and not speculative risks.
How Insurance Works

The mechanism of insurance is very simple. People who are exposed to the same risks come
together and agree that, if any one of them suffers a loss, the others will share the loss and
make good to the person who lost. All people who send goods by ships are exposed to the
same risks, which are related to water damage, sinking of the vessel, piracy, etc. Those
owning factories are not exposed to these risks, but they are exposed to different kinds of
risks like, fire, hailstorms, earthquakes, lightning, burglary, etc. Like this, different kinds
of risks can be identified and separate groups made, including those exposed to such risks.
By this method, the heavy loss that any one of them in the group may suffer (all of them
may not suffer such losses at the same time) is divided into bearable small losses by all the
others in the group. In other words, the risk is spread among the community and the likely
big impact on one is reduced to smaller manageable impacts on all. Insurance helps to
spread the costs or risks.
If a jumbo jet with more than 350 passengers crashes, the loss would run into several
crores of rupees. No airline would be able to bear such a loss. It is unlikely that many
jumbo jets will crash at the same time. If 100 airline companies flying jumbo jets, come
together into an insurance pool, whenever one of the jumbo jets in the pool crashes, the loss
to be borne by each airline would come down to a few lakhs of rupees. Thus insurance is a
business of ‘sharing’. It makes an unbearable loss, bearable.

IPIRTI 218
There are certain principles, which make it possible for insurance to remain a preferred
and fair arrangement. The first is that it is difficult for any one individual to bear the
consequences of the risks that he is exposed to. It will become bearable when the
community shares the burden. The second is that the peril should occur in an accidental
manner. Nobody should be in a position to make the risk happen. In other words, none in
the group should be set fire to his assets and ask others to share the loss. This would be
taking unfair advantage of an arrangement put into place to protect people from the
accidental risks they are exposed to. The occurrence has to be random, accidental, and not
the deliberate creation of the insured person.
The manner in which the loss is to be shared can be determined before-hand. It can be
equal among all. It can also be proportional to the risk that each person is exposed to. The
trader who has sent Rs.100 lakhs worth of goods on a ship will bear double the loss to be
borne by another trader who has got Rs.50 lakhs worth of goods on the same ship. Current
practice is to make the sharing proportional to the exposure to risk. The share could be
collected from the members after the loss has occurred or the likely shares may be collected
in advance, at the time of admission to the group. Insurance companies collect in advance
and create a fund form which the losses are paid.
The collection to be made from each person in advance is determined on the basis of
assumptions. While it may not be possible to tell beforehand, which person will suffer, it
may be possible to tell, on the basis of past experiences, how many persons, on an average,
may suffer losses. The following three examples will explain the above concept of
insurance.
Example-1
In a village, there are 400 houses, each valued at Rs.20,000. Every year on an average, 4
houses get burnt, resulting into a total loss of Rs.80,000. If all the 400 owners come together
and contribute Rs.200each, the common fund would be Rs.80,000. This would be enough to
pay Rs.20,000 to each of the 4 owners whose houses got burnt. Thus the loss of Rs.20,000
each of 4 owners is shared by 400 house-owners of the village, bearing Rs.200 each. This
works out to 1% of the value of the house, which is the same as the probability of risk (4
out of 400 houses).
Example-2
There are 1000 persons who are all aged 50 and are healthy. It is expected that, on an
average, 1% of persons aged 50, or 10 persons, may die within one year. If the economic
value of the loss suffered by the family of each dying person is taken to be Rs.20,000, the
total loss would work out to Rs.2,00,000. If each person in the group contributed Rs.200,
the common fund would beRs.2,00,000. This would be enough to pay Rs.20,000 to the
family of each of the ten persons who die. Thus, the risks are shared by 1000 persons,
although 990 of them did not suffer any loss.
Example-3
In the first example, assume that 400 houses are of different values. In that cse, the
contribution of each house owner would be 1% of the value of the house. If the assumption
was that 8 (2%) out of 400 houses are likely to get damaged, the contribution would be 2%

IPIRTI 219
(probability of risk) of the value of each house. The probability of risk does not depend on
the nature of construction of the house (concrete or thatch work) or the location in which it
is (residential, commercial or industrial area) or the location in which it is (residential,
commercial or industrial area). The risk is measured in terms of percentages nd the
contribution would be that same percentage. Similarly in the case of human beings, the
probability of risk (death or disability) will vary according to age, profession, life styles and
habits, health conditions, heredity, etc.
The Business of Insurance

Insurance companies are called insurers. The business of insurance is to
(a) Bring together persons with common insurance interests (sharing the same risks)
(b) Collect the share or contribution (called premium) from all of them, and
(c) Pay our compensations (called claims) to those who suffer from risks.
In India, insurance business is classified primarily as Life and Non-Life (General)

insurance. Life insurance includes all risks related to the lives of human beings and general
insurance covers rest.
General Insurance has three classifications viz.,
1. Fire (dealing with all fire related risks)
2. Marine (dealing with all transport related risks and ships)
3. Miscellaneous (dealing with all others like liability, fidelity, motor, crop,
engineering, construction, aviation, personal accident, health etc).
Premium for insurance is based on expectations of the losses. These expectations are based
on studies of occurrences in the past and the use of statistical principles. There is, in
statistics, a ‘law of large numbers’. When you toss a coin the chance or probability, of a
head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the heal
will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer
to half a million proportionately than in case of 10. The variation will be less as a
percentage. So also, the larger the numbers (of risks) included in the pool, the better the
chances that the assumptions regarding the probability of the risk occurring, will be
realised in practice. In order to be amenable to statistical predictions, insurers have to
insure large numbers of risks. The larger the spread of the business, the better the
experience in relation to expectations. The probability of risk being the basis of premium
calculation, large numbers are necessary to ensure that the premium charged is viable or
adequate.
The business of insurance is one of sharing. It spreads losses of an individual over the
group of individuals who are exposed to similar risks. People who suffer loss get relief
because at least part of their loss is made good. People who do not suffer loss are relieved
because they were spared the loss.

IPIRTI 220
Trustee
The insurer is in the position of a trustee as it is managing the common fund, for and on
behalf of the community of policyholders. It has to ensure that nobody is allowed to take
undue advantage of the arrangement. That means that he management of the insurance
business requires care to prevent entry (into the group) of people whose risks are not of the
same kind as well as paying claims on losses that are not accidental. The decision to allow
entry is the process of underwriting of risk. Underwriting includes assessing the risk, which
means, making an evaluation of how much is the exposure to risk. The premium to be
charged depends on this assessment of the risk. Both underwriting and claim settlements
have to be done with great care.
Reinsurance
Insurance companies are taking risks. They have to pay claims as and when they occur.
They cannot be sure when the claim will occur and how big the claim may be. This is so
because of the very nature of perils. Insurers normally are financially sound enough to be
able to pay claims. But there are limits. An event like the tsunami or a hurricane may
generate claims amounting to crores of rupees, which may put a very heavy strain on the
reserves of the insurer. Insurers protect themselves from such situations, which may be
beyond their capacity, by reinsuring the risk with other insurers. If there is a claim, the
burden is shared by the primary insurer and the reinsurers.
There are some companies which are exclusively in the business of reinsurance. In India
the General Insurance Corporation of India is the national reinsurer. Reinsurance business
is placed globally. When there is a major calamity, the claims affect several insurers all
over the world through the system of reinsurance.
Insurance as a Social Security Tool

The United Nations Declaration of Human Rights 1948 provides that “Everyone has a right
to a standard of living adequate for the health and wellbeing of himself and his family,
including food, clothing, housing and medical care and necessary social services and the
right to security in the event of unemployment, sickness, disability, widowhood or other
lack of livelihood in circumstances beyond his control”.
When the break winner dies, to that extent, the family’s income dies. The economic
condition of the family is affected, unless other arrangements come into being to restore the
situation. Life insurance provides such an alternate arrangement. If this did not happen,
another family would be pushed into the lower strata of society. The lower strata creates
accost on society. Poor people cost the nation by way of subsidies and doles and so on. Poor
people also cost by way of larger growth in population, poor education and vagaries in
behaviour of children. Life insurance helps to reduce such costs. In this sense, the life
insurance business is complimentary to the State’s efforts in social management.
Under a socialistic system the responsibility of full security would be placed upon the State
to find resources for providing social security. In the capitalistic society, provisions of
security is largely left to the individuals. The society provides instruments, which can be
used in securing this aim. Insurance is one of them. In a capitalistic society too there is a

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tendency to provide some social security by the State under some schemes, where members
are required to contribute e.g. the social security scheme in UK.
In India, social security finds a place in our Constitution. Article 41 requires the State,
within the limits of its economic capacity and development, to make effective provision for
securing the right to work, to education and to provide public assistance in case of
unemployment, old age, sickness and disablement and in other cases of undeserved want.
Parts of State’s obligations to the poorer sections are met through the mechanism of life
insurance.
As per the law and the directions of the regulatory authorities, insurance companies in
India are obliged to extend insurance benefits to economically weaker sections of the
society in the unorganized sector.
Role of Insurance in Economic Development

For economic development, investments are necessary. Investments are made out of
savings. A life insurance company is a major instrument for the mobilization of savings of
people, particularly from the middle and lower income groups. These savings are
channeled into investments for economic growth.
The Insurance Act has strict provisions to ensure that insurance funds are invested in safe
avenues, like Government bonds, companies with record of profits and so on.
All good life insurance companies have huge funds, accumulated through the payments of
small amounts of premium of individuals. These funds are invested in ways that contribute
substantially for the economic development of the countries in which they do business. The
private insurers in India are new and have accumulated funds equal to about one-eighth of
the L.I.C’s. But even their investments in the various sectors and contributing directly and
indirectly to the country’s economic development, would be of similar proportions.
Apart from investments, business and trade benefit through insurance. Without insurance,
trade and commerce will find it difficult to face the impact of major perils like fire,
earthquake, floods etc. Financiers, like banks, would collapse if the factory, financed by it,
is reduced to ashes by a terrible fire. Insurers cover also the loss to financiers, if their
debtors default.

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Principles of Insurance
Insurance is a contract between the insurer and the policyholder. The policyholder can be
different from the person whose life is insured. Insurance is a specialised type of contract.
Apart from the usual essentials of a valid contract, insurance contracts are subject to two
additional principles viz. Principle of Utmost Good Faith and the Principle of Insurable
Interest. These two principles applies to both Life and Non-life insurance.
Principle of Utmost Good Faith

Commercial contracts are normally subject to the principle of caveat emptor i.e. let the
buyer beware. It is assumed that each party to the contract can examine the item or
service, which is the subject matter of the contract. Each party can verify the correctness of
the statements of the other party. There is no need to take the statements on trust. Proof
can be asked for.
In the case of insurance contracts, this principle does not apply. Most of the facts relating
to health, habits, personal history, family history etc., which form the basis of the life
insurance contract, are known only to the proposer. The insurer cannot know them, if the
proposer does not disclose them. The underwriter can ask for a medical report. Yet there
may be certain aspects, which may not be brought out even by the best medical
examination. For example, a person suffering fro blood pressure or diabetes an, through
appropriate medication, hide these facts from the examining doctor. History of past
sicknesses, operations, injuries can be suppressed. Some of these may affect the life
expectancy of the person to be insured. Hence, these constitute material information to
enable the insurance company to assess the risk involved. Similarly, in general insurance,
an inspection of the premises may not disclose that the contents of the godown have been
temporarily relocated. Non-disclosure of such facts would put the insurer as well as the
community of policyholders, at a disadvantage. When a proposer, knowingly, puts an
insurer and the community of policyholders at a disadvantage, there is what is called
‘adverse selection’. The contract is unfair, because one of the parties to the contract is in a
more advantageous position.
The law imposes a greater duty on the parties to an insurance contract than in the case of
other commercial contracts, to disclose relevant information. This duty is one of utmost
good faith or Uberrimae Fides. It is the duty of the proposer to make a full disclosure to the
insurer. The implication is that, in the event of failure to disclose material facts, the
contract can be held to be void ab initio.
Every circumstance that would have a bearing on the judgment of a prudent insurer in
fixing the premium or determining the acceptability of the proposal for insurance, is a
material fact. Therefore, facts regarding age, height, weight, build, nature of occupation,
personal habits like smoking/drinking, medical history, surgeries, earlier insurances, etc.,
are material facts and must be disclosed. The proposer cannot defend non-disclosure by
contending that he did not think that the fact was material.
There are certain facts which, though material, need not be disclosed. They are:

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1. Facts of common knowledge, which every one is supposed to know.
2. Facts of law
3. Facts which a survey would have revealed.
4. Facts which could be reasonably discovered, by reference of previous policies and

records available with the insurer.
The duty of disclosure in life insurance operates till the risk commences.
Circumstances, which may have arisen after the risk has commenced, do not affect the
validity of the contract, unless the conditions of the contract, make relevant stipulations
to that effect. For example, any change in occupation does not affect the contract unless
the policy is issued with a condition that any change in occupation must be notified to
the insurer. However if the term of policy are to be altered, or any reason the
continuance of the contract is subject to approval by the insurer, there would be a duty
to disclose all material facts at that time.
The breach of the principle of utmost good faith may arise due to misrepresentation or
non-disclosure. Misrepresentation or non-disclosure should be such that what is stated
in the proposal is
a. Substantially false and known to the proposer as false
b. Not known to the insurer
c. Concerned with facts which are material to the acceptance or assessment of the risk
or material to the benefits sought by the proposer.
d. Calculated to induce the other party to enter into a contract on its own terms.
In a proposal for life insurance, the proposer makes a declaration to the effect that all the
statements in the proposal form are true in every respect and, if any untrue statement be
contained therein, the insurer would be entitled to treat the contract as null and void and
forfeit all the moneys paid as premia. The effect of this declaration is to turn the
representations in the proposal into warranties, which must be complied in-toto. However,
the insurer’s right to cancel the contract, in terms of this declaration, is limited by the
provisions of section 45 of the Insurance Act, 1938. This section stipulates that a policy
cannot be called in question after 2 years from the date of commencement, on the grounds
of inaccurate or false statement, unless it is provided to be material and fraudulently made.
The duty of full disclosure rests on both parties. It is easier to see where the proposer might
be in breach of this duty rather than the insurer. In practice there could be breaches of
duty on the part of the insurer or the agent making representations to the proposer.
Examples of these are:
• Making untrue statements during the sale

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• Not advising the proposer that loans may not be available under the particular
plan offered or that bonus rates could be different.
• Advising actions that benefit the agent, in the pretext that they benefit the
prospect.
• Withholding information that the sprinkler system entitles the proposer to a

rebate in fire premium.
Insurable Interest
All risks are not insurable. Otherwise, an insurance contract would be no different from a
wagering contract or betting. IT was explained earlier that speculative risks are not
insurable. A wagering subject matter of a valid contract has to be legal. What distinguishes
an insurance contract from a wagering contract and makes it non-speculative, is that the
insured must have an insurable interest in the subject of insurance.
In simple terms, it means that the proposer must have a stake in the continuance of the
subject matter insured and could suffer a loss, if the risk occurs. What is insured is the
financial or pecuniary interest in the subject matter of insurance. The insured must be in a
relationship with the subject matter of insurance, whereby he benefits from its safety and
wellbeing and would be prejudiced by its loss or damage.
A wager is what is commonly called a ‘bet’. Example is, “who will win the World Cup?”
One of the parties to the bet will lose. There are also chances that he may gain. Therefore,
the risk is a speculative risk and is not insurable. The party concerned could have avoided
the loss. Insurance assumes that the event insured against (peril) is not subject to the
control of the insured. The World Cup does not interest the bettor, other than as a means
of making some money. An investor cannot insure against the movements of the prices in
the stock market.
The Insurance Act, 1938 does not define insurable interest. Court judgments have
established the circumstances in which insurable interest is deemed to exist. It has been
held that a person has unlimited insurable interest in his own life. Other clarifications
relevant for life insurance are:
• A husband has insurable interest in the life of his wife and vice-versa
• Parents have insurable interests in the lives of their children
• An employer has insurable interest in his employee to the extent of the value of
his services.
• An employee has insurable interest in the life o f his employer to the extent of his
remuneration for the period of his notice.
• A creditor has an insurable interest in the life of the debtor, to the extent of the
debt.

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• Partners have insurable interests in the lives of each other.
• A surety has an insurable interest in the life of the principal debtor and also in
the life of his co-surety to the extent of the debt.
• A company has an insurable interest in the life of a key valuable employee.
In the case of life insurance policies, insurable interest must exist at the inception of the
policy. There is no requirement for insurable interest at the time of a claim under the life
insurance policy. In the case of Marine policies, insurable interest must exist at the time of
the claim. This implies that there need not be insurable interest at the inception of the
policy. When an importer asks for insurance cover on goods which he has ordered, he is
still not the owner and therefore, has no insurable interest. In other insurances, insurable
interest must exist at the time of inception as well as at the time of claim.
Principles of Indemnity
Insurance is meant to compensate losses. By implication, the mechanism of insurance
cannot be used to make a profit. This is broadly is the Principle of Indemnity. The amount
paid out as a claim cannot exceed the amount of loss incurred. Insurance should place the
insured in the same financial position after a loss as he enjoyed before it, not better.
There is a link between indemnity and insurable interest. It is the interest of the insured in
the subject matter of insurance, that is insured. Therefore, the amount of claim cannot
exceed the extent of interest. In the case of life insurance however, because the insurable
interest (on own life) is assumed to be unlimited, the principle of indemnity does not apply.
In health insurance covers, which are part of general insurance, the principle of indemnity
will apply.
Because of the principle of indemnity, there could be difficulties in settling claims in

general insurance. Assessments of losses made by qualified surveyors are often disputed.
The damaged parts that have been replaced, called salvage, may have some resale-able
value. The insurer may have the option to settle the claim by way of repair, reinstatement
or replacement. In the case of liability or damages (for pain and mental agony etc.), the
level of indemnity is vague and indeterminable. Such problems do not exist in life
insurance.
The measure of indemnity applied to some types of property is explained below:
Buildings: In these cases, the cost of reinstating the building or repairing the damaged
portion, is assessed, and from that, an appropriate allowance is made towards depreciation,
depending upon the age and condition of the building.
Machinery: In practice, the measure of indemnity is the replacement value at the place and
date of loss or damage, less an appropriate allowance towards depreciation.

IPIRTI 226
If the damaged machinery is repairable, the measure of indemnity is the cost of repairing
the damage. If, however, during repairs, any part is replaced, an appropriate allowance is
to be made towards depreciation of the replaced part.
Stocks: In respect of the stocks of wholesalers and retailers, the measure of indemnity is not
the selling price of the wholesaler or the retailer, but it is the price at which he can replace
the goods. The element of expected profit does not play any part in computing the measure
of indemnity.
Fire insurance policies may be issued on Reinstatement Value basis. Under these policies,
generally issued for covering building or machinery, the basis of indemnity is the cost of
reinstatement or replacement of damaged or destroyed property by new property of the
same type. In as much as the insured gets new property in the place of old, the principle of
indemnity is modified.
Subrogation
Subrogation may be defined as the transfer of rights and remedies of the insured to the
insurer who has indemnified the insured in respect of the loss. If the insured has any rights
of action to recover the loss from any third party, who is primarily responsible for the loss,
the insurer, having paid the loss, is entitled to avail himself of these rights to recover the
loss from the third party. The effect is that the insured does not receive more than the
actual amount of his loss and any recovery effected from the third party goes to the benefit
of the insurer to reduce the amount of his loss. The principle of subrogation arises from the
principle of indemnity.
Example: If cargo is damaged due to the negligence of a carrier (e.g. railways, truck
operators, shipping companies etc.) who have an obligation to make good the loss of the
insured, the benefit of this obligation passes to the insurer.
Contribution
An insured may have several insurances on the same subject matter. If he recovers his loss
under all these insurances, he will obviously make a profit out of the loss. Common law has,
therefore, evolved the principle of contribution which may be defined as the right of
insurers who have paid a loss under a policy to recover a proportionate amount form other
insurers who are liable for the same loss.
The principle of contribution would lead to a situation in which the insured would be able
to recover his loss from any one insurer, who then, will have to effect proportionate
recoveries from other insurers concerned. In order to avoid this, fire policies and a
majority of accident policies contain a contribution condition, which modifies the common
law position. According to this condition, when ever contribution applies, the insured is
obliged to prefer claims against all the insurers, each of whom pays only his proportion of
the loss.
The principles of subrogation and contribution do not apply to personal accident policies as
these are not contracts of indemnity.

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Proximate Clause
The object of insurance is to provide indemnity for such losses as are caused by insured
perils. If stocks are burnt, then the cause of loss is fire which is covered under a fire policy
and hence the claim is payable. If stocks are stolen, the loss is not payable under the fire
policy, as ‘burglary’ is not a peril covered. If stocks are burnt by a bomb dropped by an
enemy country, then the loss is caused by war which is an excluded peril and hence not
payable under the standard fire policy. Thus, it is important to determine the cause of loss
to decide whether the loss is payable or not.
If the loss is brought about only by one event, it would be no problem to decide the question
of liability. But in actual situations, the loss may be the result of two ro more causes, acting
simultaneously or one after the other. Then, it becomes necessary to choose the most
important, the most effective, the most powerful cause which has brought about the loss.
This cause is termed as the ‘proximate cause’. All other causes being considered as
‘remote’.
Example 1: A person insured under a personal accident policy went out hunting and met
with an accident. Due to shock and weakness, he was unable to walk. While lying on the
wet ground he contacted cold which developed into pneumonia which caused his death.
The court held that the proximate cause of death was the original accident and pneumonia
(a disease which is not covered under the policy) only a remote cause. Hence the claim was
payable.
Example 2: An insured suffered accidental injuries and was taken to hospital. While
undergoing treatment he contracted an infectious disease which caused his death. In this
case, the court gave contrary ruling. The ‘proximate cause’ of death was the disease and
the original accident only a ‘remote cause’. Hence the claim was not payable under a
personal accident policy.

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Life Insurance
The Human Asset

A human being is an income generating asset. One’s income generating ability depends on
one’s skills (manual, professional, problem solving, entrepreneurial, etc.) These are the
assets. The value of the asset can be measured by considering the income that is generated
by the person concerned. The concept of Human Life Value, provides scientific ways to
determine the asset value of the human life and therefore, the amount of life insurance
required.
These assets also can be lost through unexpectedly early death or through sickness and
disabilities caused by accidents. Accidents may or may not happen. Death will happen, but
the timing is uncertain. If it happens around the time of one’s retirement, when it could be
expected that the income will normally cease, the person concerned could have made some
other arrangements to meet the continuing needs. But if it happens much earlier when the
alternate arrangements are not in place, there can be losses to the person and dependents.
Those dependent on the income are helped to overcome their difficulties, by insurance.
A person, who may have made arrangements for his needs after his retirement, also would
need insurance. This is because the arrangements would have been made on the basis of
some expectations like, likely to live for another 15 years, or that children will be able to
look after the aged parents. If any of these expectations do not become true, the original
arrangement would become inadequate and there could be difficulties. Living too long can
be as much a problem as Dying too young. Both are risks, which need to be safeguarded
against. Insurance takes care.
Thus, the risks in the case of a human being are related to:
1. Early death (Dying Too Soon – DTS)
2. Living Too Long (LTL)
3. Disabilities
4. Sickness
5. Unemployment
Advantages of Life Insurance

Life insurance has no competition from any other business. Many people think that life
insurance is an investment or a means of saving. This is not a correct view. When a person
saves, the amount of funds available at any time is equal to the amount of money set aside
in the past, plus interest. This is so in a fixed deposit in the bank, in national savings
certificates, in mutual funds and all other savings instruments. If the money is invested in
buying shares and stocks, there is the risk of the money being lost in the fluctuations of the
stock market. Even if there is no loss, the available money at any time is the amount

IPIRTI 229
invested plus appreciation. In life insurance, however, the fund available is not the total of
the savings already made (premiums paid), but the amount one wished to have at the end
of the savings period (which is the next 20 or 30 years). The final fund is secured from the
very beginning. One is paying for it over the years, out of the savings. One has to pay for it
only as long as one lives or for a lesser period, if so chosen. The assured fund is not affected.
There is no other scheme which provides this kind of benefit. Therefore life insurance has
no substitute.
A comparison with other forms of savings will show that life insurance has the following
advantages:
1. In the event of death, the settlement is easy. The heirs can collect the moneys
quicker, because of the facility of nomination and assignment. The facility of
nomination is now available for some bank accounts, provident fund, etc.
2. There is a certain amount of compulsion to go through the plan of savings. In other

forms, if one changes the original plan of savings, there is no loss. In insurance,
there is a loss.
3. Creditors cannot claim the life insurance moneys. They can be protected against
attachments by courts.
4. There are tax benefits, both in income tax and in capital gains.
5. Marketability and liquidity are better. A life insurance policy is property and can be
transferred or mortgaged. Loans can be raised against the policy.
6. It is possible to protect a life insurance policy from being attached by debtors. The
beneficiaries’ interests will remain secure.
Essence of Life Insurance Business

The life insurance business deals with risks relating to life of human beings. The
circumstances (perils) that create the loss or damage (risks) are mainly two – death and old
age. Insurance does not prevent either. It can mitigate the consequences in those
circumstances.
Human beings also run the risk of sickness (medical costs can be very burdensome),
accidents (causing disability) and unemployment. These are insurable in non-life insurance.
Sickness and accident risks, including disability, are insurable as supplementary benefits,
also called riders, under life insurance policies.
As a rule, risks are managed in three ways.
1. Prevention or Avoidance
2. Retention
3. Transfer

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Death and old age are not preventable at all. Accidents, sickness and unemployment are
also perhaps not avoidable despite being careful. Accidents may be caused by someone else
being negligent. Surroundings can create sickness. Economic conditions lead to
unemployment.
Retention of the risk is an alternative. This is possible by having one’s own resources to
take care of the needs, like putting aside savings to be used ‘for the rainy day’. Big
organizations like the State Road Transport Corporation or the Railways may find it
cheaper to bear the risks themselves, as they have the benefit of large numbers. One might
think of joint families as systems that can manage the risks themselves. Strictly, however,
in a joint family system, there is sharing by others in the family. That is the principle of
insurance.
The third option is the transfer of the risk to another person. One common ‘transfer’ is
when the State, being a welfare State, takes over the responsibility for medical care of its
citizens, or pays benefits to the elderly and the unemployed. This happens in some
countries in Europe, USA and Canada. Insurance is a mechanism for transfer.
Life Insurance Contracts

A life insurance policy promises that the insurer will pay to the policy holder a certain sum
of money if the person insured dies or any other specified contingency happens. It is a
contract, within the meaning of the Indian Contracts Act, 1872. A contract is an agreement
between two or more parties to do, or not to do, so as to create a legally binding
relationship. A simple contract must have the following essentials:
• Offer and acceptance
• Consideration
• Capacity to contract
• Consensus ‘ad idem’ (genuine meeting of minds)
• Legality of object or purpose
• Capability of performance
• Intention to create legal relationship
Need for Life Insurance

Risks arise because there are needs to be fulfilled. The risks attached to early death arise
because of the need to maintain the family that is left behind. If there were no needs, there
would be no risks. Insurance is therefore, related to the needs of individuals. Different
plans are designed with different benefits, so that they may cater to the different needs of
people. While selling life insurance, therefore, it is necessary to be aware of the needs of
people.

IPIRTI 231
Needs of people are not the same. They vary. They depend on personal values, demands of
society, family and other relationships, age, occupation, habits, place of residence, and so
on. Someone could be seriously concerned about the welfare of a movement for trees or for
animals, at some neglect of own personal comforts. It is necessary to be sensitive to the
needs.
Broadly, the needs of individuals may be classified as flows
• Protection of the standard of living of the family, which is at risk on early death.
Insurance must provide the necessary income to maintain the standard, after
providing for repayment of loans and other debts. Modern lifestyles subject
people to debts on account of car, house, appliances and equipments at home,
obtained on hire purchase arrangements.
• Future expenses on account of children’s education, marriage, start of some

business and so on, which are ambitions and dreams. Wanting to send one’s son
to a medical college is a dream. It is not a need as essential as being able to
provide for food and clothing.
• Continuance of business, when financiers ask for life insurance policies as

collateral security, or partners need to rearrange finances on the death of a
partner.
• Substitute income when earning capacity ceases due to old age or disabilities.
All the above needs have to be met, after meeting the costs of inflation. People would not be
consciously aware of these as formidable problems in the future. Even if they do, they may
not be willing to sacrifice some of the pleasures of the present in order to provide for the
future.
There have been two significant developments in the few years after the opening up of the
life insurance industry to private players. One is the result of demographic changes, caused
by better health care and longer life expectancies. The number of aged people is more in
absolute numbers as well as a proportion to the total population. Therefore, there is an
increasing need and demand for pension plans, whereby the elderly persons can get a
steady income. The second development is the demand for linked insurance policies, arising
out of the need to compensate for the falling value of money. Pension plans and linked
products are becoming increasingly popular. The terms and conditions of these policies are
different from the traditional life insurance products.
Types of Life Insurance Policies

 Term Insurance: Pure Risk Cover insurance
 Pure Risk Cover
 Insurance for a term: 5 - 30 yrs.

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 Only Death Benefit payable during the term of the policy
 Cheapest Cover: Rs. 2 - 5 / 1000 sum assured
 No Surrender Value
 Tax Benefit: Rebate u/s 80C
 Maturity Claim: Exempt from tax u/s 10(10)D
 Endowment Policy
 Risk Cover + Savings
 Maturity Benefit: Full Sum Assured + Bonus (Accumulated Fund Value)
 Death Benefit: Full Sum Assured during the term of the policy
 Suitable for meeting capital needs: Children's education / Marriage /

Mortgage repayment
 Marriage Endowment : benefit paid at end of a term, to coincide with likely

marriage of children
 Educational Annuity: death benefit paid in installments at end of the term to

facilitate education of children
 Money Back Policies: Risk Cover + Saving + Liquidity at regular interval
 Whole Life / Joint Policies: Risk Cover for whole of life + Savings
 Unit Linked Plans: Risk Cover + Returns based on your preferences + Liquidity
 Risk Cover + Savings
 Flexibility to allocate the premium between the Fund options based on the
risk profile of the insured
 Flexibility to switch between the funds and increase or decrease the life cover
based on the life stage of the insured.
 Withdrawals allowed based on the accumulated fund value.

IPIRTI 233
 Death Benefit: Fund Value or Life cover whichever is higher
 Fund Value not guaranteed: varies with value of invested funds (NAV)
 Pension / Annuities: Post - Retirement age cover

IPIRTI 234
General Insurance
Most of the General Insurance policies are of One year duration (except Marine
insurance and Overseas Mediclaim insurance) policies, renewable each year.
Tariff: Premium rates are stipulated by Tariff Advisory Committee
Tariff covers:
Fire and Engineering
Marine – hull
Motor – Third party
Non-tariff covers:
Marine – Cargo
Motor – own damage
Burglary
Mediclaim, Overseas Mediclaim
Personal Accident
Theory and Practice of Rating
Basis of Rate:
The most important question in underwriting is: what should be the rate of premium to be
charged under a policy of insurance. The rate of premium is fixed according to certain
principles:
• Firstly, the premium varies according to the degree of hazard or exposure to loss
or damage of the property.
• Secondly, to assess the variations in the degree of hazard, property must be

classified according to the hazards involved.
• Thirdly, the degree of hazard is determined on the basis of past loss experience.
Degree of Hazard
The first principle says that greater the risk, the higher should be the premium. The moiré
probable the loss and the more severe it is likely to be, the higher should be the premium.

IPIRTI 235
There is a greater likelihood of fire in a building of wooden construction than in a concrete

building. Hence, the former is charged higher premium and latter lesser premium. Goods
vehicles are more exposed to accidental loss or damage than private cars. Hence the former
attract higher premium than the latter.
Classification of Risks
The second principle flows from the first principle. It says that rates of premium should be
equitable and fair as between different individual insured. Strictly speaking, each
individual should be charged a premium according to the hazard to which he is exposed.
But this is not feasible. Therefore, a system of classification of risks in broad categories is
adopted. For example, for purposes of premium rating, motor vehicles are classified into
private cars, motor cycles and scooters, and commercial vehicles.
Within the broad groups, further sub-division, according to the hazards involved, is
attempted. Private cars are classified according to the cubic capacity of the engine. Higher
the C.C. more powerful the engine and higher the premium. In fire insurance, godowns are
classified according to the type of goods stored e.g. non-hazardous, hazardous, extra-
hazardous etc. The similarity of hazard is the basis of classification.
Past Loss Experience

The third principle says that the rate of premium is arrived at on the basis of past loss
experience. Therefore, statistical data regarding past losses is most essential for purposes of
fixing rates.
To fix the rates, it is necessary to give a ‘mathematical value’ to the risks. For example, if
the loss experience of a large number of motor cycles is collected for a period of say 20 or
30 years, the result will indicate the sum total of the losses resulting from damage to the
vehicles. If this amount of loss is expressed as percentage of the total value of motor cycles
we are in a position to fix the ‘mathematical value’ of the risk. This may be expressed in
the formula
L/V x 100
Where L refers to the sum total of the losses and V to the total values of the motor cycles.
The following hypothetical figures are used for illustration:
 Value of a motor cycle Rs.50000.
 Loss experience: Out of 1000 motor cycles, in 10 years, 50 motor cycles are stolen.
 On an average, five motor cycles become total losses due to theft every year.
 Applying the formula, the result will be:
Losses (Rs.50000 x 5) = Rs.2,50,000

----------------------- x 100 = 0.5%

IPIRTI 236
Values (Rs.50000 x 1000) = Rs.5,00,00,000
Therefore, the rate of premium that a motor cycle owner pays is 0.5% of Rs.50,000 i.e.,
Rs.250/- per year. This is called ‘Pure Premium’.
The pure premium arrived at as above will constitute a fund which will be sufficient only to
pay for losses. At the rate of Rs.250 per motor cycle, Rs.2.5 lakhs is collected which is paid
out in claims on the total losses of 5 vehicles. There is no surplus left.
But insurance operations involve costs of administration (expenses of management) and

costs of procuring the business (agency commission and brokerage). It is also necessary to
provide a margin for unexpected heavy losses. Besides, as insurance is transacted on a
commercial basis, like any other business, it is necessary to provide for a margin of profit
which is a return on the capital invested in the business.
Therefore, ‘pure premium’ is suitably loaded or increased by adding percentages to

provide for expenses, reserves and profits. Thus the final rate of premium will consist of
the following components:
a) Loss payments
b) Loss expenses (e.g. survey fess)
c) Commission to intermediaries
d) Expenses of management
e) Margin for reserves for unexpected heavy losses e.g. 7 total losses against 5 assumed.
f) Margin for profits
Types of General Insurance Policies

• Fire Insurance
• Marine Insurance
• Motor Insurance
• Personal Accident Insurance
• Health Insurance
• Liability Insurance
• Engineering Insurance
• Miscellaneous Insurances

IPIRTI 237
• Rural Insurances

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PIRTI – POST GRADUATE DIPLOMA COURSE IN MECHANICAL

WOOD INDUSTRIES TECHNOLOGY

Principles of Management, Human Resource

Prepared by IBMT, Bangalore

What do we study in Management?

Management: Responsibility for getting things done that is accomplishment of tasks

Management as an integrating functions:

Integrity or Integration means: Unification or linking of activities. That is linking of

External Environment (Customers, Labor’s society)

Objectives Linked with

Prepared: IBMT, BANGALORE

Objectives are to be linked with

External Environment Internal Environment

Consumers Harmonizing the working of

Labour Integration of Employers efforts into the

Society Linking and reconciliation of individual

Others responsible for growth of

Key characteristics to understand the management:

Prepared: IBMT, BANGALORE

2. Need for Ethics

3. Need for Cultural Diversity.

4. Need for Training.

Prepared: IBMT, BANGALORE

Sources of Management skills

The primary advantage of education as source of management skills is that as a student, a

Prepared: IBMT, BANGALORE

Inputs from the Environment

Management: A set of activities including planning and decision making

Manager: Some one whose primary responsibility is to carry out the

Prepared: IBMT, BANGALORE

Planning and Decision Organizing Determining

Controlling correcting Leading motivating

Prepared: IBMT, BANGALORE

6. Planning is a course faction which warrants the maximum/optimum utilization for

Prepared: IBMT, BANGALORE

Goals are important for the following reasons:

1. Goals provide a sense of direction.

The importance of Planning

Prepared: IBMT, BANGALORE

1. Planning is an intellectual process. Maximum says-‘Think before you leap’.

2. Planning is Goal oriented.

Plans (Or Operational Plans)

Long Term Plans

Mission Statement: Broad organizational goals based on

Prepared: IBMT, BANGALORE

A Goal should not be confused with general area of activities.

Because goal is target activities is means.

Strategic Planning Operational

and top managers

Top Level and

Front Line and

Prepared: IBMT, BANGALORE

Strategic Goals: To introduce a inland railways.

Operational Objective: To not to disturb the existing continuous traffic.

Operational Plans: To appoint qualified engineers, materials.

Differences between Strategic planning and operational planning

Strategic Plans Operational Plans

Time Tend to involve years or even They are immediate and

Scope Strategic plan affect wide Have more norms and

Complexity and Impact Often strategic goals are broad Not so

Prepared: IBMT, BANGALORE

and deceptively simple.

Independence These are independent The operational plans are