CU-MBA-SEM-II-Entrepreneurship

 Short-term activities plan: Day-to-day business plans are formulated by the lowest level strategists. Day-to-day HR plans relating to handling employee benefits, grievances, disciplinary cases, accident reports, etc. are formulated by the HR managers.  Labour Turnover: There is always labour turnover in every organization. The degree of labour turnover may vary from concern to concern but it cannot be eliminated altogether. There will be a need to recruit new persons to take up the positions of those who have left the organization. If the concern is able to forecast turnover rate precisely, then advance efforts are made to recruit and train persons so that work does not suffer for want of workers. 10.11 KEYWORDS  Duties and Responsibilities: The primary and essential functions or activities performed by a Staff Member or group of Staff Members. Duties and responsibilities also serve as the basis for performance evaluation  Attrition:A gradual voluntary reduction of employees (through resignation and retirement) who are not then replaced, decreasing the size of the workforce.  Base Wage Rate (or base rate): The monthly salary or hourly wage paid for a job, irrespective of benefits, bonuses or overtime  Benefits (benefits package): Benefits are a form of compensation paid by employers to employees over and above the amount of pay specified as a base salary or hourly rate of pay. Benefits are a portion of a total compensation package for employees. 10.12 LEARNING ACTIVITIES 1: How much cash will we need to start our business? Where will we get it (savings, a loan, venture capital, an angel…)? Comment your ideas. ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- 2: What must be done before we can introduce our product or service to the marketplace? What are the risks? Comment your views. ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 10.13 UNIT END QUESTIONS A. Descriptive Questions 151 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)

1. Define Attrition. 2. Define Human Resource planning. 3. Define Corporate Level HR Plan. 4. What is Integrated level Plan? 5. What is operations plan? Long Questions 1. What do you understand by human resource planning? Describe its characteristics? 2. Discuss the objectives of human resource planning. How is the planning carried at various levels in the organization? 3. Briefly discuss the steps involved in manpower planning in an industry. 4. Define HRP or manpower planning. Review its benefits and limitations. What steps can be taken by an organization to make manpower planning more effective? 5. What is manpower or HR planning? Why is it necessary? Discuss the various steps involved in integrated strategic planning and HR. 6. What is the basis of HR planning? 7. Describe the various steps in conducting HRP. B. Multiple Choice Questions 1. Someone who improves an existing business can be called _________.: a. An intrapreneur. b. A professional. c. A co-worker. d. A changeling 2. Which could provide an individual with the motivation to start a new business venture? a. The financial rewards. b. A desire to be independent. c. Risk taking d. All of these 3. Which industrial sector tends to naturally promote small-scale businesses and Entrepreneurship, and generally has lower barriers to market entry: a. Service. b. Manufacturing. c. Distribution. d. Agriculture. 4. The UK government has implemented a number of policies to encourage Entrepreneurship in schools. One such initiative is _________.? 152 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Young Enterprise. b. Youth venture. c. Young Business. d. Young Initiative. 5. An individual who initiates, creates and manages a new business can be called a. A leader b. A manager c. A professional d. An entrepreneur Answers 1-d, 2-a, 3-d. 4-a, 5-a 10.14 REFERENCES Textbooks  T1 Gupta, R.K. & Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844.  T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books  R1 Gordan, E. and Natrajan, K. 2117. Entrepreneurship Development, 6th Edition, Himalaya Publishing House, ISBN: 978-9352125404.  R2 Radjou, N., Prabhu, J., Ahuja, S. 2112. Jugaad Innovation: A Frugal and Flexible Approach to Innovation for the 21st Century, Publisher: RHI. ISBN: 978- 8184002158.  R3 Bansal, R. 2112. Stay Hungry Stay Foolish, Fourth Edition, Westland Limited. ISBN: 978-9381626719 153 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 11 : DESIGNING ORGANIZATION STRUCTURE – FINANCIAL PLAN STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Overview of entrepreneurial finance and accounting strategies 11.3 Types of Financing 11.4 Special Funding Strategies 11.5 Accounting basics for Entrepreneurs 11.6 Developing start upfinancial statements and projections. 11.7 Summary 11.8 Keywords 11.9 Learning Activity 11.10 Unit End Questions 11.11 References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe the overview of entrepreneurial finance and accounting strategies.  Explain the types of financing  Describe the strategies of special funding.  Describe the accounting basics for entrepreneurs.  Describe the startup financial statements and its projections. 11.1 INTRODUCTION At the end of each accounting period, preparation and presentation of financial statements are undertaken with an objective of providing as much information as possible for the public. The balance sheet presents a snapshot picture of the financial position at a given point of time and the income statement shows a summary of revenues and expenses during the accounting period. Though these are significant statements especially in terms of the principal goals of the enterprise, yet there is a need for one more statement which will indicate the changes and movement of funds between two balance sheet dates which are not clearly mirrored in the balance sheet and income statement. That statement is called as funds flow statement. The analysis which studies the flow and movement of funds is called as funds flow analysis. Similarly, one more statement has to be prepared known as cash flow statement. This requires 154 CU IDOL SELF LEARNING MATERIAL (SLM)

the doing of cash flow analysis. The focus of cash flow analysis is to study the movement and flow of cash during the accounting period. Concept of Funds: How are funds defined? Perhaps the most ambiguous aspect of funds flow statement understands what is meant by funds. Unfortunately, there is no general agreement as to precisely how funds should be defined. To a lay man the concept of funds means `cash‟. According to a few, `funds‟ means `net current monetary assets‟ arrived at by considering current assets (cash + marketable securities + short term receivables) minus short term obligations. A third view, which is the most acceptable one, is that concept of funds means `working capital‟ and in this lesson the term `funds‟ is used in the sense of Working capital. Working Capital Concept of Funds: The excess of enterprise ‟s total current assets over its total current liabilities at some point of time may be termed as its net current assets or working capital. To illustrate this, let us assume that on the balance sheet date the total current assets of an enterprise are Rs.3, 00,000 and its total current liabilities are Rs.2,00,000. Its working capital on that date will be Rs.3, 00,000 – Rs.2, 00,000 = Rs...1,00,000. It follows from the above, that any increase in total current assets or any decrease in total current liabilities will result in a change in working capital. Flow of Funds The term `flow‟ means change and therefore, the term `flow of funds‟ means `change in funds‟ or `change in working capital‟. According to man Mohan and Goyal, “the flow of funds” refers. To movement of funds described in terms of the flow in and out of the working capital area. In short, any increase or decrease in working capital means `flow of funds”. 11.2 OVERVIEW OF ENTREPRENEURIAL FINANCE AND ACCOUNTING STRATEGIES The case of iBackPack demonstrates that entrepreneurial success is not guaranteed simply because a company can secure funds. Funds are the necessary capital to get a business, or idea, off the ground. But funding cannot make up for a lack of experience, poor management, or a product with no viable market. Nonetheless, securing funding is one of the first steps, and a very real requirement, for starting a business. Let’s begin by exploring the financial needs and funding considerations for a simple organization. Imagine that you and your college roommate have decided to start your own band. In the past, you have always played in a school band where the school provided the instruments. Thus, you will need to start by purchasing or leasing your own equipment. You and your roommate begin to identify the basic necessities—guitars, drums, microphones, amplifiers, and so on. In your excitement, you begin browsing for these items online, adding 155 CU IDOL SELF LEARNING MATERIAL (SLM)

to your shopping cart as you select equipment. It doesn’t take you long to realize that even the most basic set of equipment could cost several thousand dollars. Do you have this much money available to make the purchase right now? Do you have other funding resources, such as loans or credit? Should you consider leasing most or all of the instruments and equipment? Would family or friends want to invest in your venture? What are the benefits and risks associated with these funding options? This same basic inquiry and analysis should be completed as part of every business plan. First, you must determine the basic requirements for starting the business. What kinds of equipment will you need? How much labor and what type of skills? What facilities or locations would you require to make this business a reality? Second, how much do these items cost? If you do not possess an amount of money equal to the total anticipated cost, you will need to determine how to fund the excess amount. Once a new business plan has been developed or a potential acquisition has been identified, it’s time to start thinking about financing, which is the process of raising money for an intended purpose. In this case, the purpose is to launch a new business. Typically, those who can provide financing want to be assured that they could, at least potentially, be repaid in a short period of time, which requires a way that investors and business owners can communicate how that financing would happen. This brings us to accounting, which is the system business owners use to summarize, manage, and communicate a business’s financial operations and performance. The output of accounting consists of financial statements, discussed in Accounting Basics for Entrepreneurs. Accounting provides a common language that allows business owners to understand and make decisions about their venture that are based on financial data and enables investors looking at multiple investment options to make easier comparisons and investment decisions. Entrepreneurial Funding across the Company Lifecycle: An entrepreneur may pursue one or more different types of funding. Identifying the lifecycle stage of the business venture can help entrepreneurs decide which funding opportunities are most appropriate for their situation. From inception through successful operations, a business’s funding grows generally through three stages: seed stage, early stage, and maturity. A seed-stage company is the earliest point in its lifecycle. It is based on a founder’s idea for a new product or service. Nurtured correctly, it will eventually grow into an operational business, much as an acorn can grow into a mighty oak—hence the name “seed” stage. Typically, ventures at this stage are not yet generating revenue, and the founders haven’t yet converted their idea into a saleable product. The personal savings of the founder, plus perhaps a few small investments from family members, usually constitute the initial funding of companies at the seed stage. Before an outsider will invest in a business, they will typically 156 CU IDOL SELF LEARNING MATERIAL (SLM)

expect an entrepreneur to have exhausted what is referred to as F&F financing—friends and family financing—to reduce risk and instill confidence in the business’s potential success. Fig 11.1Typical Funding strategies After investments from close personal sources, the business idea may begin to build traction and attract the attention of an angel investor. Angel investors are wealthy, private individuals seeking investment options with a greater potential return than is traditionally expected on publicly traded stocks, albeit with much greater risk. For that reason, they must be investors accredited by the federal Securities and Exchange Commission (SEC) and they must meet a net worth or income test. Nonaccredited investors are allowed in certain limited circumstances to invest in security-based crowdfunding for startup companies. Among the investment opportunities angel investors look at are startup and early-stage companies. Angel investors and funds have grown rapidly in the past ten years, and angel groups exist in every state. An early-stage company has begun development of its product. It may be a technical proof of concept that still requires adjustments before it is customer ready. It may also be a first- generation model of the product that is securing some sales but requires modifications for 157 CU IDOL SELF LEARNING MATERIAL (SLM)

large-scale production and manufacturing. At this stage, the company’s investors may now include a few outsider investors, including venture capitalists. A venture capitalist is an individual or investment firm that specializes in funding early-stage companies. Venture capitalists differ from angel investors in two ways. First, a venture capital firm typically operates as a full-time active investment business, whereas an angel investor may be a retired executive or business owner with significant savings to invest. Additionally, venture capital firms operate at a higher level of sophistication, often specializing in certain industries and with the ability to leverage industry expertise to invest with more know-how. Typically, venture capitalists will invest higher amounts than angel investors, although this trend may be shifting as larger angel groups and “super angels” begin to invest in venture rounds. Private equity investment is a rapidly growing sector and generally invests later than venture capitalists. Private equity investors either take a public company private or invest in private companies (hence the term “private equity”). The ultimate goals of private equity investors are generally taking a private company public through an initial public offering (IPO) or by adding debt or equity to the company’s balance sheet, and helping it improve sales and/or profits in order to sell it to a larger company in its sector. Companies in the mature stage have reached commercial viability. They are operating in the manner described in the business plan: providing value to customers, generating sales, and collecting customer payments in a timely manner. Companies at this stage should be self- sufficient, requiring little to no outside investment to maintain current operations. For a product company, this means manufacturing a product at scale, that is, in very large volumes. For a software company or app provider, this means generating sales of the software or subscriptions under a SaaS model (Software as a Service) and possibly securing advertising revenue from access to the user base. Companies at the mature stage have different financing needs from those in the previous two stages, where the focus was on building the product and creating a sales/manufacturing infrastructure. Mature companies have reached a consistent level of sales but may seek to expand into new markets or regions. Typically, this requires significant investment because the proposed expansion can often mirror the present level of operations. That is to say, an expansion at this level may result in doubling the size of the business. To access this amount of capital, mature companies may consider selling a portion of the company, either to a private equity group or through an IPO. An initial public offering (IPO) occurs the first time a company offers ownership shares for sale on a public stock exchange, such as the New York Stock Exchange. Before a company executes an IPO, it is considered to be privately held, usually by its founders and other private investors. Once the shares are available to the general public through a stock exchange, the company is considered to be publicly held. This process typically involves an 158 CU IDOL SELF LEARNING MATERIAL (SLM)

investment banking firm that will guide the company. Investment bankers will solicit institutional investors, such as State Street or Goldman Sachs, which will in turn sell those shares to individual investors. The investment banking firm typically takes a percentage of the funds raised as its fee. The benefit of an IPO is that the company gains access to a massive audience of potential investors. The downside is that the owners give up more ownership in the business and are also subject to many costly regulatory requirements. The IPO process is highly regulated by the SEC, which requires companies to provide comprehensive information up front to potential investors before completing the IPO. These publicly traded companies must also publish quarterly financial statements, which are required to be audited by an independent accounting firm. Although there are benefits to an IPO for later-stage companies, it can be very costly both at the start and on an ongoing basis. Another risk is that if the company does not meet investors’ expectations, the value of the company can decline, which can hinder its future growth options. Thus, a business’s lifecycle stage greatly influences its funding strategies and so does its industry. Different types of industries have different financing needs and opportunities. For example, if you were interested in opening a pizzeria, you would need a physical location, pizza ovens, and furniture so customers could dine there. These requirements translate into monthly rent on a restaurant location and the purchase of physical assets: ovens and furniture. This type of business requires a significantly higher investment in physical equipment than would a service business, such as a website development firm. A website developer could work from home and potentially begin a business with very little investment in physical resources but with a significant investment of their own time. Essentially, the web developer’s initial funding requirement would simply be several months’ worth of living expenses until the business is self-sufficient. Once we understand where a business is in its lifecycle and which industry it operates in, we can get a sense of its funding requirements. Business owners can acquire funding through different avenues, each with its own advantages and disadvantages, which we will explore in Special Funding Strategies. 11.3 TYPES OF FINANCING Although many types of individuals and organizations can provide funds to a business, these funds typically fall into two main categories: debt and equity financing. Entrepreneurs should consider the advantages and disadvantages of each type as they determine which sources to pursue in support of their venture’s immediate and long-term goals. 159 CU IDOL SELF LEARNING MATERIAL (SLM)

Debt Financing Debt financing is the process of borrowing funds from another party. Ultimately, this money must be repaid to the lender, usually with interest (the fee for borrowing someone else’s money). Debt financing may be secured from many sources: banks, credit cards, or family and friends, to name a few. The maturity date of the debt (when it must be repaid in full), the payment amounts and schedule over the period from securement to maturity, and the interest rate can vary widely among loans and sources. You should weigh all of these elements when considering financing. The advantage of debt financing is that the debtor pays back a specific amount. When repaid, the creditor releases all claims to its ownership in the business. The disadvantage is that repayment of the loan typically begins immediately or after a short grace period, so the startup is faced with a fairly quick cash outflow requirement, which can be challenging. One source of debt financing for entrepreneurs is the Small Business Administration (SBA), a government agency founded as part of the Small Business Act of 1963, whose mission is to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”6 The SBA partners with lending institutions such as banks and credit unions to guarantee loans for small businesses. The SBA typically guarantees up to 85 percent of the amount loaned. Whereas banks are traditionally wary of lending to new businesses because they are unproven, the SBA guarantee takes on some of the risk that the bank would normally be exposed to, providing more incentive to the lending institution to finance an entrepreneurial venture. To illustrate an SBA loan, let’s consider the 7(a) Small Loan program. Loans backed by the SBA typically fall into one of two categories: working capital and fixed assets. Working capital is simply the funds a business has available for day-to-day operations. If a business has only enough money to pay bills that are currently due, that means it has no working capital—a precarious position for a business to be in. Thus, a business in this position may want to secure a loan to help see it through leaner times. Fixed assets are major purchases— land, buildings, equipment, and so on. The amounts required for fixed assets would be significantly higher than a working capital loan, which might cover just a few months’ expenses. As we will see, loan requirements made under the 7(a) Small Loan program are based on loan amounts. For loans over $25,000, the SBA requires lenders to demand collateral. Collateral is something of value that a business owner pledges to secure a loan, meaning that the bank has something to take if the owner cannot repay the loan. Thus, in approving a larger loan, a bank 160 CU IDOL SELF LEARNING MATERIAL (SLM)

might ask you to offer your home or other investments to secure the loan. In a real estate loan, the property you are buying is the collateral. In a way, loans for larger purchases can be less risky for a bank, but this can vary widely from property to property. A loan that does not require collateral is referred to as unsecured. To see how a business owner might use an SBA loan, let’s return to the example of a pizzeria. Not all businesses own the buildings where they operate; in fact, a great many businesses simply rent their space from a landlord. In this case, a smaller loan would be needed than if the business owner were buying a building. If the prospective pizzeria owner could identify a location available for rent that had previously been a restaurant, they might need only to make superficial improvements before opening to customers. This is a case where the smaller, collateral-free type of SBA loan would make sense. Some of the funds would be allocated for improvements, such as fresh paint, furniture, and signage. The rest could be used to pay employees or rent until the pizzeria has sufficient customer sales to cover costs. In addition to smaller loans, this SBA program also allows for loans up to $350,000. Above the $25,000 threshold, the lending bank must follow its own established collateral procedures. It can be difficult for a new business to provide collateral for a larger loan if it does not have significant assets to secure the loan. For this reason, many SBA loans include the purchase of real estate. Real estate tends to be readily accepted as collateral because it cannot be moved and holds it value from year to year. For the pizzeria, an aspiring business owner could take advantage of this higher level of lending in a situation where the business is buying the property where the pizzeria will be. In this case, the majority of loan proceeds will likely go toward the purchase price of the property. Both the high and low tiers of the SBA loan program are examples of debt financing. In Special Funding Strategies, we will look at how debt financing differs from equity financing. Equity Financing In terms of investment opportunities, equity investments are those that involve purchasing an ownership stake in a company, usually through shares of stock in a corporation. Unlike debts that will be repaid and thus provide closure to the investment, equity financing is financing provided in exchange for part ownership in the business. Like debt financing, equity financing can come from many different sources, including friends and family, or more sophisticated investors. You may have seen this type of financing on the TV show Shark Tank. Contestants on the series pitch a new business idea in order to raise money to start or expand their business. If the “sharks” (investors) want to invest in the idea, they will make an offer in exchange for an ownership stake. For example, they might offer to give the entrepreneur $200,000 for a return of 40 percent ownership of the business. The advantage of equity financing is that there is no immediate cash flow requirement to repay the funds, as there is with debt financing. The drawback of equity financing is that the 161 CU IDOL SELF LEARNING MATERIAL (SLM)

investor in our example is entitled to 40 percent of the profits for all future years unless the business owner repurchases the ownership interest, typically at a much higher valuation—an estimate of worth, usually described in relation to the price an investor would pay to acquire the entire company. This is illustrated in the real-life example of the ride-sharing company Uber. One of the early investors in the company was Benchmark Capital. In the initial round of (venture capital) financing, Benchmark invested $12 million in Uber in exchange for stock. That stock, as of its IPO date in May 2019, was valued at over $6 billion, which is the price that the founders would have to pay to get Benchmark’s share back. Some financing sources are neither debt nor equity, such as gifts from family members, funds from crowdfunding websites such as Kickstarter, and grants from governments, trusts, or individuals. The advantages and disadvantages of these sources are discussed in Special Funding Strategies. 11.4 SPECIAL FUNDING STRATEGIES Investments in entrepreneurial ventures can be classified into seed stage (typically financed by angel investors), early stage, and growth and late stage (funded by venture capitalists). While investments in early stage companies generally range between Rs 50-200 million, those in growth and late stage typically exceed Rs 1.1 billion. Angel investors’ participation in India has historically been slow as compared to other countries, primarily due to the nature of investments that entails long payback periods and higher risks. However, recently, there has been a strong growth in angel investments in the country, with angel investors funding early stage companies seeking less than US$ 20 million. There were 114 angel and seed investments worth US$ 60 million during January- November, 2012, as compared to 65 deals worth US$ 19 million during the same period in 2011. Early-stage funding in India has also seen an uptick, with several angel investors moving beyond seed capital and several large VC firms moving from growth-stage funding to early- stage funding. Over the last two years, early-stage funding in India rose to 149 deals worth US$ 397 million by November 2012 from 99 deals worth US$ 334 million in 20109. A majority of the investments took place in start-ups in IT related ventures, and sectors such as clean technology and renewable energy, retail, healthcare and education. MSME funding a key agenda for government: Micro, small and medium enterprises (MSMEs) play a very important role in the Indian economy. Besides providing employment, MSMEs contribute significantly towards the country’s manufacturing output and exports. MSMEs in India account for around 8.5 per cent of GDP, 45 per cent of manufacturing output and 36 per cent of India’s total exports. 162 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 11.2 Support for Promoting MSME and MSME Financing As per a recent study, only one-fourth of the financing demand of India’s MSMEs is met by financial institutions. MSMEs in India are facing a total finance shortfall of over US$ 400 billion. While formal sources are able to fund only around US$ 140 billion, banks provide US$ 70 billion11. The Government of India and the regulators have instituted various policies to facilitate the growth of the MSME sector and encourage participation of financial institutions in funding MSMEs. Figure 8 lays down key initiatives and actions undertaken by the government and regulatory authorities to aid MSME financing in the country. Traditional lending giving way to factoring: Factoring services enable the entrepreneurial ventures to raise funds secured on the issuance of new invoices or its receivables. This fund raising service provides flexibility as the amount a company can borrow grows with sales. Factoring is emerging as a lucrative financing option for SMEs in India, as traditional options remain inadequate. Globally, factoring is employed as one of most important routes of accessing working capital for SMEs. Timely payments from customers help SMEs save on interest costs and hence boost profitability. As per a recent study, SMEs can strengthen profits by at least 15 per cent if they get payments on time from their big corporate customers. 163 CU IDOL SELF LEARNING MATERIAL (SLM)

Extending to global avenues: Developing trade ties between India and other developed nations has led to developed nations offering grants to sunrise and technologically-advanced sectors in India. For instance, several bio-gas or solar power projects have received financial assistance from various overseas trade associations. Corporate entities supporting start-ups – A win-win situation: Corporate entities, including multinational corporations (MNCs) in India, are increasingly playing a key role in providing solutions and low-cost tools to new ventures. This reflects a win-win situation, as the large company benefits from product innovation and entry into new markets. On the other hand, infrastructure support enables SMEs to introduce their products and upgrades more competitively into a fast-changing technology environment. Many companies, such as IBM, Microsoft, SAP, Qualcomm and Google, have stepped in to support Indian start-ups by providing them free tools, applications and technologies. Such collaboration between MNCs and start-up ventures results in various synergies such as: Software support: Technology MNCs can help tech start-ups by providing free and open- source software that enables start-ups to save costs. For instance, Google provides Google App Engine, Maps APIS, Open Social and Google Friend Connect to help start-ups launch online offerings. Microsoft’s BizSpark programme also allows start-ups to access licensed software free of cost. Affiliation: Being affiliated with an MNC helps start-ups to gain global visibility, whereas the MNCs benefit from exporting innovation to global markets. Overall tech support: MNCs also provide their business and technology expertise to SMEs in order to improve the overall technology ecosystem in the country 11.5 ACCOUNTING BASICS FOR ENTERPRENEURS Although financing and accounting complement and rely on each other, they are distinct. As we have seen, financing is the process of raising money. Accounting is the system of recording and classifying financial transactions related to a business and summarizing and communicating those transactions in the form of financial statements. Accounting is essentially documenting what happens to money once a company receives it and thereby makes that information available for reporting to stakeholders and regulatory agencies and informing business decisions. At the most fundamental level, an accounting system accomplishes two goals: 1. It summarizes a business’s financial performance 2. It communicates that performance to owners, managers, and outside parties. 164 CU IDOL SELF LEARNING MATERIAL (SLM)

Assets are items—such as equipment, cash, supplies, inventory, receivables, buildings, and vehicles—that a business owns and derives future use from. Potential investors want to know what resources a company has at its disposal. Business owners want to see where their money has gone. Let’s return to the case of Shanti, the website designer who starts her business by purchasing a new laptop computer. The computer is an asset that Shanti has acquired for her business. Each element of the accounting equation has its own account in an accounting system or software package, and all changes are tracked within its account. The accounting equation must stay in balance after every transaction with assets equaling liabilities. In this case, Cash is an assets account, and Owner’s Capital is an equity account. The $1,000 cash contributed is a cash asset and becomes equity that is recorded as owner’s capital. At this point, Shanti can claim 100 percent of the assets of the business, which right now consist only of the cash. When the cash is spent, reducing the assets column to zero, a new asset account for the computer is created to record the dollar amount paid for the laptop. Again, because Shanti doesn’t owe another party at the end of the transaction (because she didn’t make any additional contribution), the balance of the owner’s equity account remains the same. The equation shows that Shanti still owns 100 percent of the assets. Now consider how to account for a situation in which Shanti does not have a significant amount of cash to contribute to the business. She can afford to contribute only $100 and deposits the money into the business’s bank account. Fortunately, she also has access to a credit card that can be charged for business purchases, increasing her investment options. A liability is a debt that a company has incurred with another party, as when it borrows money from a bank or purchases materials from other suppliers. The business is required to make a future payment to satisfy that debt. For accounting purposes, we want to be able to see what the business owns (assets) compared with what it owes (liabilities). For example, if Shanti does not have sufficient cash to pay for the laptop, she may have the electronics store charge her credit card for the purchase. In that case, the credit card company pays the store, and Shanti’s business now owes the credit card company for the amount of purchase (a liability). Equity is the owner’s claim on the assets of the business, that is, the difference between what they own and what they owe. Essentially, equity tells a business owner or investor how much the firm is worth after all the debt is repaid. Returning to the example of Shanti’s website design business, let’s compare two scenarios of start-up purchases to see the effects on the accounting equation. In both cases, Shanti contributes some of her own money to the initial purchase of a laptop. 165 CU IDOL SELF LEARNING MATERIAL (SLM)

11.6DEVELOPING START UP FINANCIAL STATEMENTS AND PROJECTIONS The information entered into the accounting system is summarized in financial statements, which are the output of an accounting system.  The process of identifying, measuring and communicating economic activities of both profit and non-profit organizations.  The accounting equation: Assets (A) = Liabilities (L) + Stockholders’ Equity (SE) and Debits = Credits must always be true  Generally Accepted Accounting Principles (GAAP) is used to prepare public accounting information.  The main financial statements are: Income (or P&L), Retained Earnings, Cash Flows and Balance Sheet  The Chart of Accounts is how financial transactions are categorized. All transactions have a double entry or two sided effect.  Assets depreciate according to a schedule which decreases their value over time. That time is dependent on the asset  Some important company metrics include: Net Sales, Cost of Goods Sold (COGS), Gross Margin, Net Income and Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). Accounting is one of those disciplines that take some getting used to. It just feels foreign. I blame the acronyms. GAAP, P&L, GM or EBITD. It’s all alphabet soup to most of us. Well, grab a big spoon and dive in since it’s important to understand some of this stuff. We all deal with money and understand what we pay taxes, that we have stuff (assets) and our checking account is mostly balanced (wait, I should double check that). If you invest, then you have surely looked at a financial statement or two and probably wondered, what does it all mean? Well, it means a lot. In fact, accounting is the only consistent language that all businesses understand. You can go anywhere in the world and they will all have financial statements. It’s really the language of business. Accounting is all about reporting how the money was spent and earned. The key here is past tense. Accounting tells you what happened. They have really complicated rules and procedures but it all boils down to show me where the money came from and what we spent it on. Simple. Well, maybe. You see, most companies’ kind of, sort of, well, make their own accounting rules that they refer to as pro forma. Pro forma accounting reports can be misleading since it’s really up to the company to define it (well, within reason). That’s why it’s critical to understand what a pro forma financial statement is really saying. Typically, pro forma earns are greater than GAAP, which makes some critics charge that you really can’t compare different companies based on pro forma earnings. For our discussions, we will deal with GAAP definitions since that is consistent across companies. 166 CU IDOL SELF LEARNING MATERIAL (SLM)

Debits and Credits: The equations of accounting are meant to always be in balance. This balance is the cross check that maintains the integrity of the accounting process (or your “books”, since that is how they kept records back in the day). The double entry method of accounting ensures that each transaction is recorded in two separate ledgers. This means that one ledger will have a debit for the transaction while the other will have a credit. The rules for what is a debit and credit are complex and vary depending on the ledger they go in. As with anything, there are some nuances that complicate matters. The general rules are summarized below (adopted from Double Entry Accounting Article below):  Assets Increase Debit, Decrease Credit. Assets are anything your company owns of value (including cash)  Expenses Increase Debit, Decrease Credit. Expenses are monies spent or costs incurred to generate revenue  Liabilities Increase Credit, Decrease Debit. Liabilities are any monies owed to people or companies other than owners.  Equity Increase Credit, Decrease Debit. Equity is any amount of money (debt) owed to the owners of the company  Revenue Increase Credit, Decrease Debit. Revenue is the amount of money you receive from selling goods and services. The thing to remember about double entry is that it strives for balance always. If you use accounting software (like Quickbooks), then you probably won’t even notice this since most of your transactions will be revenue and expense ones. Keeping In Balance: The basic accounting equation, Assets (A) = Liability (L) + Stockholders’ Equity (SE) is meant to always keep your books in balance. Achieving balance requires that a change in one account must be matched with a change in another account. This is heart of the double entry method. Any deviation from balance, means that an accounting error has occurred. The theory behind the equation is that someone must provide assets or resources so that the company can operate. If that holds true, then the Assets of the company have to equal the equity provided. Liabilities comes in when non-company owners (say a vendor), supplies credit to the company. This is a liability since the company providing credit wants it’s money back. Financial Statements: All of these transactions create a lot of data. Understanding what it all means requires summaries and reports. In accounting, there are four basic reports that allow management to determine the health of the company. All are linked together in some way to provide checks to ensure the books are in balance. The statements are: 167 CU IDOL SELF LEARNING MATERIAL (SLM)

 Income Statement: Often referred to as a Profit and Loss statement or P&L. This statement shows the profitability of the company over a specific period of time. It includes the Revenue (Top Line) and Expenses during the period of interest. The result is the Net Income (Bottom Line) for the period.  Statement of Retained Earnings: Connects the Income Statement to the Balance Sheet by explaining the changes in retained earnings between two balance sheet dates. These changes are the increase (or decrease) in net income from the previous balance sheet date. Also, this is where any dividends are placed since dividends are not expenses so they will not show up on the Income Statement.  Balance Sheet: It’s also called the Statement of Financial Position. This statement lists the Assets, Liabilities and Stockholders’ Equity for a specific moment in time. It’s a snapshot in time of the company’s financial position. It ties the statements together to see if the books are in balance.  Cash Flow Statement: Cash flow is an important metric. It is the real inflows and outflows of cash into the company. This statement shows where all those inflows and outflows went. It’s different than the other statements in that those statements take into account deprecated assets, credit and liabilities not yet paid. All of those don’t effect the cash in the bank. It’s important to monitor cash flows because that determines your ability to operate the company. Out of all the financial statements, figuring out your cash position is the most important. Knowing this allows you to operate your company. Having a shortage of cash will hamper your operations. Having a handle on the cash flow and what your burn rate of cash is, allows you to plan for times when cash might be tight. We will discuss how to determine your burn rate and budgets in the next post on Budgets and Financial Models. Accounting is vital to any business. Knowing a little bit about what your accountant does will allow you to ask the right questions and understand the answers. Accounting is the language of business. Any business, anywhere in the world, understands accounting. This post is just a brief glimpse into a field that makes it possible for business to exist.. 11.7 SUMMARY  Entrepreneurial financing is concerned with understanding the funding requirements for a new business and what sources of funds are available. Each source comes with different expectations and requirements.  Equity financing provides the entrepreneur with maximum flexibility: Dividends are not required and can be made when cash flow is strong enough to meet all obligations of the firm. Debt financing restricts financial flexibility but can be cheaper under some circumstances.  For nonprofit organizations, achieving a sustainable funding strategy requires hard work, creativity, and a delicate balance of financial resources. These types of 168 CU IDOL SELF LEARNING MATERIAL (SLM)

organizations need to create programs that will interest patrons who are willing to pay for activities. They also rely on the generosity of their benefactors beyond simple patronage in the form of donations, and they vie for extremely competitive grant funding.  Although loans and liabilities such as credit card debt can fund a new business, the repayment and additional interest charges are a real challenge to many entrepreneurs. Financing strategies that avoid loans, such as crowdfunding websites and bartering, offer opportunities for funding that are often more manageable.  Accounting is concerned with how transactions are recorded in a way that helps entrepreneurs share information with stakeholders, including potential investors, and helps business owners make decisions about running their company.  Entrepreneurs can use financial information for multiple purposes. These projections can help plan a new business. By forecasting the income and expenses of the first year, an entrepreneur can have a reasonable idea of the level of financing that may be required. Second, these projections can also show potential investors what the business will look like in the future and how long it might take them to get a return on their investment. Break-even points help illustrate a minimum number of sales to cover expenses.  Bootstrapping is the process of self-funding a startup business. Sometimes entrepreneurs will have no financial resources beyond their personal savings. This method of funding a business requires creative approaches to problem solving, generating business, and managing expenses. It can be a slower, more difficult process than a company with more funding might face, but in the long run, it can benefit the company’s strength and growth, and provide robust dividends to the founders. 11.8 KEYWORDS  Accounting: System of recording and classifying a company’s financial transactions and summarizing and communicating those transactions in the form of financial statements.  Accounting equation: Assets = liabilities + equity.  Accounts payable: Account that includes vendors that the company owes money to.  Accounts receivable: Account that includes customers that owe the business money.  Angel investor: Wealthy, private individual seeking investment options with a greater potential return than is generally available with traditional publicly traded stocks.  Assets: Items a business owns and derives future use from. 169 CU IDOL SELF LEARNING MATERIAL (SLM)

 Balance sheet: Financial statement that summarizes a company’s financial condition according to the accounting equation.  Bartering: Exchanging goods or services for other goods or services instead of for cash.  Bootstrapping: Funding strategy that seeks to optimize use of personal funds and other creative strategies (such as bartering) to minimize cash outflows.  Breakeven point: Level of operations that results in exactly enough revenue to cover costs.  Burn rate: Rate at which cash outflow exceeds cash inflow.  Charitable organization: Nonprofit company founded for altruistic purposes.  Collateral: Something of value pledged to secure a loan.  Contribution margin: Gross profit from a single item sold.  Cost of goods sold: Cost required to produce the product or service.  Credit: Lending of funds in exchange for a promise to repay.  Crowdfunding: Financing with investments of small amounts of money from a large number of people.  Debt financing: Borrowing funds that must be repaid, usually with interest.  Donation: Financial gift intended to support an organization’s general operations.  Early stage: Company lifecycle stage in which the product or service has begun development.  Equity: Owner’s interest in the assets of the business.  Equity financing: Funds provided in exchange for a share of ownership in a business.  Expenses: Costs incurred in the normal course of business operations.  Financial statement: Output of an accounting system that is used to make financial decisions.  Financial viability: Long-term financial sustainability of an organization to fulfil its mission. 11.9 LEARNING ACTIVITY 1. How would you work around having limited access to capital in starting your own business? What difficulties can you see in trying to do so? ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- 2. Which external parties would be interested in obtaining a firm’s financial statements? ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- 170 CU IDOL SELF LEARNING MATERIAL (SLM)

11.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the different stages in a company’s lifecycle?? 2. How do financing requirements change at different stages of a company’s lifecycle?? 3. What are the two most common categories of financing available to an entrepreneur?? 4. What is an SBA loan?? 5. What is the Small Business Administration?? Long Questions 1. How would you work around having limited access to capital in starting your own business? What difficulties can you see in trying to do so?? 2. How do companies use financial statements in communicating with potential investors? 3. How can an entrepreneur use preliminary financial information in planning a new business? 4. What do some of the sacrifices you could see yourself have to make to bootstrap your potential business? 5. Why would investors require access to financial statements? 6. What are the basic financial statements? What information do they provide? 7. What does the term bootstrapping mean in terms of startups? B. Multiple Choice Questions 1. Why are small businesses important to a country's economy? a. They give an outlet for entrepreneurs. b. They can provide specialist support to larger companies. c. They can be innovators of new products. d. All of these 2. Intellectual Property laws can protect _________.: a. Trademarks. b. Copyright. c. Patents. d. All of these 3. A business arrangement where one party allows another party to use a business name and sell its products or services is known as__________.? a. A cooperative. b. A franchise. c. An owner-manager business. 171 CU IDOL SELF LEARNING MATERIAL (SLM)

d. A limited company 4. Which of the following is the reason for business failure __________.? a. Lack of market research. b. Poor financial control. c. Poor management. d. All of these 5. The use of informal networks by entrepreneurs to gather information is known as _______. a. Secondary research. b. Entrepreneurial networking. c. Informal parameters. d. Marketing. Answers 1-d, 2-d, 3-b. 4-d 5-b 11.11 REFERENCES Textbooks  T1 Gupta, R.K. & Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844.  T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books  R1 Gordan, E. and Natrajan, K. 2117. Entrepreneurship Development, 6th Edition, Himalaya Publishing House, ISBN: 978-9352125404.  R2 Radjou, N., Prabhu, J., Ahuja, S. 2112. Jugaad Innovation: A Frugal and Flexible Approach to Innovation for the 21st Century, Publisher: RHI. ISBN: 978- 8184002158.  R3 Bansal, R. 2112. Stay Hungry Stay Foolish, Fourth Edition, Westland Limited. ISBN: 978-9381626719 172 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 12 : DESIGNING ORGANIZATION STRUCTURE – FINANCIAL PLAN STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 What is break even analysis 12.3 Importance of Breakeven analysis 12.4 Usage of Breakeven analysis 12.5 Source of finance for enterpreneurs 12.6 Summary 12.7 Keywords 12.8 Learning Activity 12.9 Unit End Questions 12.10 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe the concept of breakeven analysis  Explain the importance of breakeven analysis  Describe the usage of breakeven analysis  Explain the source of finance for entrepreneurs. 12.1 INTRODUCTION Another critical part of planning for new business owners is to understand the breakeven point, which is the level of operations that results in exactly enough revenue to cover costs. It yields neither a profit nor a loss. To calculate the break-even point, you must first understand the behaviour of different types of costs: variable and fixed. Variable costs fluctuate with the level of revenue. Returning to Hometown Pizzeria, we see that the cost of ingredients would be a variable cost. In a previous section, we also referred to these as the cost of goods sold. Variable costs are based on the number of pizzas sold, with the goal being to buy just enough ingredients that the business doesn’t run out of supplies or incur spoilage. In this example, the cost of making a pizza is $4, so the total variable costs in any given month equal $4 times the number of pizzas made. This differs from a fixed cost such as rent, which remains the same every month regardless of whether the pizzeria sells any pizzas or not. 173 CU IDOL SELF LEARNING MATERIAL (SLM)

Fixed costs are a set amount and do not change, regardless of the number of sales. Previously, we referred to rent as such a cost, but most of the business’s other costs operate in this manner as well. Although some costs vary from month to month, costs are described as variable only if they will increase if the company sells even one more item. Costs such as insurance, wages, and office supplies are typically considered fixed costs. Understanding the break-even point for a business provides a great deal of insight. At the most basic level, it demonstrates how many units of a product must be sold to cover the expenses of the business and not incur a loss. It may also help business owners understand when costs are too high and decide how many units need to be sold to break even. Realizing this up front can help entrepreneurs avoid starting a business that will result only in losses. 12.2 WHAT IS BREAKEVEN ANALYSIS The break-even analysis is one tool that every entrepreneur should use in their financial planning. It helps you understand your business's revenue, expenses and cash flow – which is critical to keeping your doors open and your business profitable. Read on to learn more about what a break-even analysis is and how this essential form of financial planning helps business owners make informed decisions. What is a break-even analysis? A break-even analysis is a financial tool that helps you determine at which stage your company, service or product will be profitable. It is a financial calculation used to determine the number of products or services a company must sell to cover its expenses, especially the fixed costs. Here's an example of the elements that go into a break-even analysis:  Fixed costs: These are the costs that stay the same no matter how much the business sells, also referred to as overhead costs. They include utilities, bills, salaries and wages, rent, and insurance.  Variable costs: Variable costs are based on a business's sales. They can include additional labor from independent contractors, materials and payment processing fees.  Average price: This is the average amount you will charge for your products and services. What is the break-even point formula? Taken together, these elements create a formula known as the break-even point formula. It is a relatively simple calculation, but it is critical in planning for profitability. Fixed Costs / (Average Price - Variable Cost) = Break-Even Point 174 CU IDOL SELF LEARNING MATERIAL (SLM)

The term \"break-even\" refers to a situation where you are neither making nor losing money, but all of your costs have been covered. With a break-even analysis, you can determine when your company will generate enough revenue to cover its expenses and earn a profit. The same holds true for a particular product or service. This data is often used for financial projections. Examples of break-even analysis Here are two examples of the break-even point formula. Example 1: The price of one of the products you sell is $100. Your total fixed costs are $10,000 per month, and the variable cost is $50 per product. The formula to calculate how many products you must sell to break even would look like this: $10,000 / ($100 - $50) = 200 Based on the formula, you would need to sell 200 products to cover your costs, effectively breaking even. To be profitable, you would have to sell at least 201 products. Example 2 In this example from the Corporate Finance Institute, a water company has total fixed costs of $100,000. The variable costs of making one bottle of water are $2 per unit, and each bottle is sold for $12. Using the break-even analysis formula, you can see that the company must sell 10,000 bottles to recoup its costs and 10,001 bottles to begin earning a profit: $100,000 / ($12 - $2) = 10,000 12.3 IMPORTANCE OF BREAKEVEN ANALYSIS A break-even analysis informs you of the bare minimum performance your business must meet to avoid losing money. It also helps you understand at which point you'll generate profits so you can set production goals accordingly. You can use this information when your business is in the planning stages to determine whether your idea is feasible or not. Then, once your business is established, you can use a break-even analysis to develop direct cost structures and to identify opportunities for promotions and discounts. While there is a lot to know about conducting a break-even analysis, let's focus on the three most common uses. It helps you identify the point of profitability: A business that doesn't turn a profit could take a turn for the worse at any time. This is why every company needs to focus on its point of profitability. Ask yourself these questions:  How much revenue do I need to generate to cover all my expenses? 175  Which products or services generate a profit? CU IDOL SELF LEARNING MATERIAL (SLM)

 Which products or services are sold at a loss?  A company's goal is to become profitable as soon as possible. To ensure that you are on the right track, it is necessary to focus on your numbers upfront. If you don't calculate the break-even points for your products or services, you risk not generating a profit (or not as much of a profit as you believed you would). It ensures that you properly price a product or service:  When most people think about pricing, they primarily take into account how much their product costs to create and fail to consider overhead costs – underpricing their products as a result. Finding your break-even point will help you price your products correctly. You will know where you need to set your margins to generate the right amount of revenue to break even and begin turning a profit.  If you offer only a couple of products or services, determining your break-even point are simple. It becomes more challenging as your service offerings and production increase. It gives you the information you need to implement the best strategy moving forward. Using your break-even analysis, you can create a strategy for the future. If your business's profitability is determined by the success of one or more products, the break-even point for each product provides a timeline for the company, which can help you implement a better overall financial strategy that fits the projected costs and profits. This analysis can also help you determine ways to speed up your company's break-even point, such as reducing your overall fixed costs, reducing the variable costs per unit, improving the sales mix by selling more of the products that have larger contribution margins, and increasing the prices (as long as it doesn't cause the number of units sold to decline significantly). 12.4 USAGE OF BREAKEVEN ANALYSIS There are many situations in running a business where a break-even analysis comes in handy. According to Rick Vazza, a CFA and CFP and the president of Driven Wealth Management, you should use a break-even analysis to answer the following questions about your business:  How much of my product or service do I need to sell per month?  How much volume do I expect to sell?  What price makes those figures match my break-even calculation?  What price allows me to generate a reasonable profit? Your goal is to get an accurate look at what your profit, net cash flow and finances will be. 176 CU IDOL SELF LEARNING MATERIAL (SLM)

\"It's much easier for people to decide whether they can beat that minimum than guessing how many sales they may make,\" said Rob Stephens, founder of CFO Perspective. Here are three times when you should consider performing a break-even analysis. If you are expanding your business Stephens suggests using a break-even analysis to get a reality check on how long it will take any planned investments or changes in your business to become profitable. \"These investments might be a new product or location,\" Stephens said. \"I've done break- even calculations many times for modeling the minimum sales needed to cover the costs of a new location.\" If you need to lower your pricing This analysis is also helpful when you need to lower your prices to beat a competitor. \"You can also use break-even analysis to determine how many more units you need to sell to offset a price decrease,\" Stephens said. \"The most common use of break-even analysis in my career has been modeling price changes.\" If you want to narrow down your options: When making changes to your business, you may be bombarded with various scenarios and possibilities, which can be overwhelming when you're trying to make a decision. Stephens suggests using a break-even analysis to reduce your decisions to scenarios with straightforward yes-or-no questions like, \"Can we do better than the minimum needed for success?\" 12.5 SOURCE OF FINANCE Business is concerned with the production and distribution of goods and services for the satisfaction of needs of society. For carrying out various activities, business requires money. Finance, therefore, is called the life blood of any business. The requirement of funds by business to carry out its various activities is called business finance. A business cannot function unless adequate funds are made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the business. A businessperson, therefore, has to look for different other sources from where the need for funds can be met. A clear assessment of the financial needs and the identification of various sources of finance, therefore, is a significant aspect of running a business organisation. The need for funds arises from the stage when an entrepreneur makes a decision to start a business. Some funds are needed immediately say for the purchase of plant and machinery, furniture, and other fixed assets. Similarly, some funds are required for day-to-day 177 CU IDOL SELF LEARNING MATERIAL (SLM)

operations, say to purchase raw materials, pay salaries to employees, etc. Also, when the business expands, it needs funds. The financial needs of a business can be categorised as follows: (a) Fixed capital requirements: In order to start business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures. This is known as fixed capital requirements of the enterprise. The funds required in fixed assets remain invested in the business for a long period of time. Different business units need varying amount of fixed capital depending on various factors such as the nature of business, etc. A trading concern for example, may require small amount of fixed capital as compared to a manufacturing concern. Likewise, the need for fixed capital investment would be greater for a large enterprise, as compared to that of a small enterprise. (b)Working capital requirements: The financial requirements of an enterprise do not end with the procurement of fixed assets. No matter how small or large a business is, it needs funds for its day-to-day operations. This is known as working capital of an enterprise, which is used for holding current assets such as stock of material, bills receivables and for meeting current expenses like salaries, wages, taxes, and rent. The amount of working capital required varies from one business concern to another depending on various factors. A business unit selling goods on credit, or having a slow sales turnover, for example, would require more working capital as compared to a concern selling its goods and services on cash basis or having a speedier turnover. The requirement for fixed and working capital increases with the growth and expansion of business. At times additional funds are required for upgrading the technology employed so that the cost of production or operations can be reduced. Similarly, larger funds may be required for building higher inventories for the festive season or to meet current debts or expand the business or to shift to a new location. It is, therefore, important to evaluate the different sources from where funds can be raised. Classification of sources of funds: In case of proprietary and partnership concerns, the funds may be raised either from personal sources or borrowings from banks, friends etc. In case of company form of organisation, the different sources of business finance which are available may be categorised as given in Table. As shown in the table, the sources of funds can be categorised using different basis viz., on the basis of the period, source of generation and the ownership. A brief explanation of these classifications and the sources is provided as follows: 178 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig12.1Classification of funds Period Basis: On the basis of period, the different sources of funds can be categorised into three parts. These are long-term sources, medium-term sources and short-term sources. The long-term sources fulfil the financial requirements of an enterprise for a period exceeding 5 years and include sources such as shares and debentures, long-term borrowings and loans from financial institutions. Such financing is generally required for the acquisition of fixed assets such as equipment, plant, etc. Where the funds are required for a period of more than one year but less than five years, medium-term sources of finance are used. These sources include borrowings from commercial banks, public deposits, lease financing and loans from financial institutions. Short-term funds are those which are required for a period not exceeding one year. Trade credit, loans from commercial banks and commercial papers are some of the examples of the sources that provide funds for short duration. Short-term financing is most common for financing of current assets such as accounts receivable and inventories. Seasonal businesses that must build inventories in anticipation of selling requirements often need short-term financing for the interim period between seasons. Wholesalers and manufacturers with a major portion of their assets tied up in inventories or receivables also require large amount of funds for a short period. Ownership Basis: 179 CU IDOL SELF LEARNING MATERIAL (SLM)

On the basis of ownership, the sources can be classified into ‘owner’s funds’ and ‘borrowed funds. Owner’s funds mean funds that are provided by the owners of an enterprise, which may be a sole trader or partners or shareholders of a company. Apart from capital, it also includes profits reinvested in the business. The owner’s capital remains invested in the business for a longer duration and is not required to be refunded during the life period of the business. Such capital forms the basis on which owners acquire their right of control of management. Issue of equity shares and retained earnings are the two important sources from where owner’s funds can be obtained. ‘Borrowed funds’ on the other hand, refer to the funds raised through loans or borrowings. The sources for raising borrowed funds include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits and trade credit. Such sources provide funds for a specified period, on certain terms and conditions and have to be repaid after the expiry of that period. A fixed rate of interest is paid by the borrowers on such funds. At times it puts a lot of burden on the business as payment of interest is to be made even when the earnings are low or when loss is incurred. Generally, borrowed funds are provided on the security of some fixed assets. Sources of finance: A business can raise funds from various sources. Each of the source has unique characteristics, which must be properly understood so that the best available source of raising funds can be identified. There is not a single best source of funds for all organisations. Depending on the situation, purpose, cost and associated risk, a choice may be made about the source to be used. For example, if a business wants to raise funds for meeting fixed capital requirements, long term funds may be required which can be raised in the form of owned funds or borrowed funds. Similarly, if the purpose is to meet the day-to-day requirements of business, the short-term sources may be tapped. A brief description of various sources, along with their advantages and limitations is given below. Retained Earnings: A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings. It is a source of internal financing or self-financing or ‘ploughing back of profits. The profit available for ploughing back in an organisation depends on many factors like net profits, dividend policy and age of the organisation. Merits The merits of retained earnings as a source of finance are as follows: a. Retained earnings is a permanent source of funds available to an organisation; b. It does not involve any explicit cost in the form of interest, dividend or floatation cost; c. As the funds are generated internally, there is a greater degree of operational freedom and flexibility; d. It enhances the capacity of the business to absorb unexpected losses; 180 CU IDOL SELF LEARNING MATERIAL (SLM)

e. It may lead to increase in the market price of the equity shares of a company. Limitations:Retained earnings as a source of funds has the following limitations: a. Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends; b. It is an uncertain source of funds as the profits of business are fluctuating; c. The opportunity cost associated with these funds is not recognised by many firms. This may lead to sub-optimal use of the funds. 12.6 SUMMARY  Meaning and significance of business finance: Finance required by business to establish and run its operations is known as business finance. No business can function without adequate amount of funds for undertaking various activities. The funds are required for purchasing fixed assets (fixed capital requirement), for running day-to-day operations (working capital requirement), and for undertaking growth and expansion plans in a business organisation.  Classification of sources of funds: Various sources of funds available to a business can be classified according to three major bases, which are (i) time period (long, medium and short term), (ii) ownership (owner’s funds and borrowed funds), and (iii) source of generation (internal sources and external sources).  Long, medium and short-term sources of funds: The sources that provide funds for a period exceeding 5 years are called long-term sources. The sources that fulfill the financial requirements for the period of more than one year but not exceeding 5 years are called medium term sources and the sources that provide funds for a period not exceeding one year are termed as short-term sources.  Owner’s funds and borrowed funds: Owner’s funds refer to the funds that are provided by the owners of an enterprise. Borrowed capital, on the other hand, refers to the funds that are generated through loans or borrowings from other individuals or institutions.  Internal and external sources: Internal sources of capital are those sources that are generated within the business say through ploughing back of profits.  External sources of capital, on the other hand are those that are outside the business such as finance provided by suppliers, lenders, and investors.  Sources of business finance: The sources of funds available to a business include retained earnings, trade credit, factoring, lease financing, public deposits, commercial paper, issue of shares and debentures, loans from commercial banks, financial institutions and international sources of finance. 181 CU IDOL SELF LEARNING MATERIAL (SLM)

 Retained earnings: The portion of the net earnings of the company that is not distributed as dividends is known as retained earnings. The amount of retained earnings available depends on the dividend policy of the company. It is generally used for growth and expansion of the company.  Trade credit: The credit extended by one trader to another for purchasing goods or services is known as trade credit. Trade credit facilitates the purchase of supplies on credit. The terms of trade credit vary from one industry to another and are specified on the invoice. Small and new firms are usually more dependent on trade credit, as they find it relatively difficult to obtain funds from other sources.  Factoring: Factoring has emerged as a popular source of short-term funds in recent years. It is a financial service whereby the factor is responsible for all credit control and debt collection from the buyer and provides protection against any bad-debt losses to the firm. There are two methods of factoring — recourse and non-recourse factoring.  Lease financing: A lease is a contractual agreement whereby the owner of an asset (lessor) grants the right to use the asset to the other party (lessee). The lessor charges a periodic payment for renting of an asset for some specified period called lease rent. 12.7 KEYWORDS  Public deposits: A company can raise funds by inviting the public to deposit their savings with their company. Pubic deposits may take care of both long and short-term financial requirements of business. Rate of interest on deposits is usually higher than that offered by banks and other financial institutions.  Commercial paper (CP): It is an unsecured promissory note issued by a firm to raise funds for a short period The maturity period of commercial paper usually ranges from 90 days to 364 days. Being unsecured, only firms having good credit rating can issue the CP and its regulation comes under the purview of the Reserve Bank of India.  Issue of equity shares: Equity shares represents the ownership capital of a company. Due to their fluctuating earnings, equity shareholders are called risk bearers of the company. These shareholders enjoy higher returns during prosperity and have a say in the management of a company, through exercising their voting rights.  Issue of preference shares: These shares provide a preferential right to the shareholders with respect to payment of earnings and the repayment of capital. Investors who prefer steady income without undertaking higher risks prefer these shares. A company can issue different types of preference shares.  Issue of debentures: Debenture represents the loan capital of a company and the holders of debentures are the creditors. These are the fixed charged funds that carry a fixed rate of interest. The issue of debentures is suitable in the situation when the sales and earnings of the company are relatively stable. 182 CU IDOL SELF LEARNING MATERIAL (SLM)

 Commercial banks: Banks provide short and medium-term loans to firms of all sizes. The loan is repaid either in lump sum or in instalments. The rate of interest charged by a bank depends upon factors including the characteristics of the borrowing firm and the level of interest rates in the economy.  Financial institutions: Both central and state governments have established a number of financial institutions all over the country to provide industrial finance to companies engaged in business. They are also called development banks. This source of financing is considered suitable when large funds are required for expansion, reorganization and modernization of the enterprise.  International financing: With liberalization and globalisation of the economy, Indian companies have started generating funds from international markets. The international sources from where the funds can be procured include foreign currency loans from commercial banks, financial assistance provided by international agencies and development banks, and issue of financial instruments (GDRs/ ADRs/ FCCBs) in international capital markets.  Factors affecting choice: An effective appraisal of various sources must be instituted by the business to achieve its main objectives. The selection of a source of business finance depends on factors such as cost, financial strength, risk profile, tax benefits and flexibility of obtaining funds. These factors should be analyzed together while making the decision for the choice of an appropriate source of funds. 12.8 LEARNING ACTIVITIES 1:How can an entrepreneur use preliminary financial information in planning a new business? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 2: Which external parties would be interested in obtaining a firm’s financial statements? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 12.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is a sustainable funding strategy? 2. What is social entrepreneurship? 3. What is crowdfunding? 183 CU IDOL SELF LEARNING MATERIAL (SLM)

4. What purpose does an accounting system serve? 5. How does accounting differ from finance? Long Questions 1. What are the advantages and disadvantages of different sources of financing? 2. How would you work around having limited access to capital in starting your own business? What difficulties can you see in trying to do so? 3. How do companies use financial statements in communicating with potential investors? 4. What do some of the sacrifices you could see yourself have to make to bootstrap your potential business? 5. How can an entrepreneur use preliminary financial information in planning a new business? 6. What challenges do nonprofit face in securing financing? B. Multiple Choice Questions 1. Good sources of information for an entrepreneur about competitors can be Obtainedfrom_________. a. Websites. b. Product information leaflets. c. Company reports and published accounts. d. All of these 2. Primary data is________. a. The most important data. b. The data that is collected first. c. New data specifically collected for a project. d. Data that is collected second. 3. Innovation can best be defined as_______. a. The generation of new ideas. b. The evolution of new ideas. c. The opposite of creativity. d. the successful exploitation of new ideas 4. Which of these statements best describes the context for entrepreneurship? 184 a. Entrepreneurship takes place in small businesses. b. Entrepreneurship takes place in large businesses. CU IDOL SELF LEARNING MATERIAL (SLM)

c. Entrepreneurship takes place in a wide variety of contexts. d. Entrepreneurship does not take place in social enterprises. 5. Entrepreneurs are motivated by _________. a. Money. b. Personal values. c. Pull influences. d. All of these Answers 1-d, 2-d, 3-c. 4-d 5-c 12.10 REFERENCES Textbooks  T1 Gupta, R.K. & Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844.  T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books  R1 Gordan, E. and Natarajan, K. 2117. Entrepreneurship Development, 6th Edition, Himalaya Publishing House, ISBN: 978-9352125404.  R2 Radjou, N., Prabhu, J., Ahuja, S. 2112. Jugaad Innovation: A Frugal and Flexible Approach to Innovation for the 21st Century, Publisher: RHI. ISBN: 978- 8184002158.  R3 Bansal, R. 2112. Stay Hungry Stay Foolish, Fourth Edition, Westland Limited. ISBN: 978-9381626719 185 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-13 : DESIGNING ORGANIZATION STRUCTURE – LEGAL ISSUES STRUCTURE 13.0 Learning Objectives 13.1 Introduction 13.2 Intellectual Property System in India 13.3 Development of Trips Compiled Regime in India 13.4 Copy Rights 13.5 Protection of Trade Secrets 13.6 Licensing Issues 13.7 Franchising 13.8 Summary 13.9 Keywords 13.10 Learning Activity 13.11 Unit End Questions 13.12 References 13.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the IPR system in india  Describe the development of trips compiled regimes of india  Explain the copy rights pattern in india  Explain the trade secrets protection practices in india  Outline the Licensing issues in india  Explain the rules for getting the franchising business in India. 13.1 INTRODUCTION Intellectual property (IP) refers to the creations of the human mind like inventions, literary and artistic works, and symbols, names, images and designs used in commerce. Intellectual property is divided into two categories: Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their 186 CU IDOL SELF LEARNING MATERIAL (SLM)

radio and television programs. Intellectual property rights protect the interests of creators by giving them property rights over their creations. The most noticeable difference between intellectual property and other forms of property, however, is that intellectual property is intangible, that is, it cannot be defined or identified by its own physical parameters. It must be expressed in some discernible way to be protectable. Generally, it encompasses four separate and distinct types of intangible property namely — patents, trademarks, copyrights, and trade secrets, which collectively are referred to as “intellectual property.” However, the scope and definition of intellectual property is constantly evolving with the inclusion of newer forms under the gambit of intellectual property. In recent times, geographical indications, protection of plant varieties, protection for semi-conductors and integrated circuits, and undisclosed information have been brought under the umbrella of intellectual property. The Concept of Intellectual Property: The concept of intellectual property is not new as Renaissance northern Italy is thought to be the cradle of the Intellectual Property system. A Venetian Law of 1474 made the first systematic attempt to protect inventions by a form of patent, which granted an exclusive right to an individual for the first time. In the same century, the invention of movable type and the printing press by Johannes Gutenberg around 1450, contributed to the origin of the first copyright system in the world. Towards the end of 19th century, new inventive ways of manufacture helped trigger large- scale industrialization accompanied by rapid growth of cities, expansion of railway networks, the investment of capital and a growing transoceanic trade. New ideals of industrialism, the emergence of stronger centralized governments, and nationalism led many countries to establish their modern Intellectual Property laws. At this point of time, the International Intellectual Property system also started to take shape with the setting up of the Paris Convention for the Protection of Industrial Property in 1883 and the Berne Convention for the Protection of Literary and Artistic Works in 1886. The premise underlying Intellectual Property throughout its history has been that the recognition and rewards associated with ownership of inventions and creative works stimulate further inventive and creative activity that, in turn, stimulates economic growth. Over a period of time and particularly in contemporary corporate paradigm, ideas and knowledge have become increasingly important parts of trade. Most of the value of high technology products and new medicines lies in the amount of invention, innovation, research, design and testing involved. Films, music recordings, books, computer software and on-line services are bought and sold because of the information and creativity they contain, not usually because of the plastic, metal or paper used to make them. Many products that used to be traded as low-technology goods or commodities now contain a higher proportion of invention and design in their value, for example, brand-named clothing or new varieties of 187 CU IDOL SELF LEARNING MATERIAL (SLM)

plants. Therefore, creators are given the right to prevent others from using their inventions, designs or other creations. These rights are known as intellectual property rights. The Convention establishing the World Intellectual Property Organization (1967) gives the following list of the subject matter protected by intellectual property rights:  literary, artistic and scientific works;  performances of performing artists, phonograms, and broadcasts;  inventions in all fields of human endeavor;  scientific discoveries; • industrial designs;  trademarks, service marks, and commercial names and designations;  protection against unfair competition; and  “All other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.” With the establishment of the world trade Organization (WTO), the importance and role of the intellectual property protection has been crystallized in the Trade-Related Intellectual Property Systems (TRIPS) Agreement. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) treaty in 1994. The TRIPS Agreement encompasses, in principle, all forms of intellectual property and aims at harmonizing and strengthening standards of protection and providing for effective enforcement at both national and international levels. It addresses applicability of general GATT principles as well as the provisions in international agreements on IP (Part I). It establishes standards for availability, scope, use (Part II), enforcement (Part III), acquisition and maintenance (Part IV) of Intellectual Property Rights. Furthermore, it addresses related dispute prevention and settlement mechanisms (Part V). Formal provisions are addressed in Part VI and VII of the Agreement, which cover transitional, and institutional arrangements, respectively. The TRIPS Agreement, which came into effect on 1 January 1995, is to date the most comprehensive multilateral agreement on intellectual property. The areas of intellectual property that it covers are:  Copyright and related rights (i.e., the rights of performers, producers of sound recordings and broadcasting organisations);  Trademarks including service marks;  Geographical indications including appellations of origin;  Industrial designs;  Patents including protection of new varieties of plants;  The lay-out designs (topographies) of integrated circuits;  The undisclosed information including trade secrets and test data. 188 CU IDOL SELF LEARNING MATERIAL (SLM)

13.2 INTELLECTUAL PROPERTY SYSTEM IN INDIA As discussed above, historically the first system of protection of intellectual property came in the form of (Venetian Ordinance) in 1485. This was followed by Statute of Monopolies in England in 1623, which extended patent rights for Technology Inventions. In the United States, patent laws were introduced in 1760. Most European countries developed their Patent Laws between 1880 to 1889. In India Patent Act was introduced in the year 1856 which remained in force for over 50 years, which was subsequently modified and amended and was called \"The Indian Patents and Designs Act, 1911\". After Independence a comprehensive bill on patent rights was enacted in the year 1970 and was called \"The Patents Act, 1970\". Specific statutes protected only certain type of Intellectual output; till recently only four forms were protected. The protection was in the form of grant of copyrights, patents, designs and trademarks. In India, copyrights were regulated under the Copyright Act, 1957; patents under Patents Act, 1970; trademarks under Trade and Merchandise Marks Act 1958; and designs under Designs Act, 1911. With the establishment of WTO and India being signatory to the Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS), several new legislations were passed for the protection of intellectual property rights to meet the international obligations. These included: Trademarks, called the Trade Mark Act, 1999; Designs Act, 1911 was replaced by the Designs Act, 2000; the Copyright Act, 1957 amended a number of times, the latest is called Copyright (Amendment) Act, 2012; and the latest amendments made to the Patents Act, 1970 in 2005. Besides, new legislations on geographical indications and plant varieties were also enacted. These are called Geographical Indications of Goods (Registration and Protection) Act, 1999, and Protection of Plant Varieties and Farmers’ Rights Act, 2001 respectively. Over the past fifteen years, intellectual property rights have grown to a stature from where it plays a major role in the development of global economy. In 1990s, many countries unilaterally strengthened their laws and regulations in this area, and many others were poised to do likewise. At the multilateral level, the successful conclusion of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in the World Trade Organization elevates the protection and enforcement of IPRs to the level of solemn international commitment. It is strongly felt that under the global competitive environment, stronger IPR protection increases incentives for innovation and raises returns to international technology transfer. 13.3 DEVELOPMENT OF TRIPS COMPILED REGIME IN INDIA The establishment of WTO as a result of institutionalization of international framework of trade calls for harmonization of several aspects of Indian Law relating to Intellectual Property 189 CU IDOL SELF LEARNING MATERIAL (SLM)

Rights. The TRIPS agreement set minimum standards for protection for IPR rights and also set a time frame within which countries were required to make changes in their laws to comply with the required degree of protection. In view of this, India has taken action to modify and amend the various IP Acts in the last few years. Patents Act, 1970: After India became a signatory to the TRIPS agreement forming part of the Agreement establishing the World Trade Organization (WTO) for the purpose of reduction of distortions and impediments to international trade and promotion of effective and adequate protection of intellectual property rights, the Patents Act, 1970 has been amended in the year 1995, 1999, 2002 and 2005 to meet its obligations under the TRIPS agreement. The Patents Act has been amended keeping in view the development of technological capability in India, coupled with the need for integrating the intellectual property system with international practices and intellectual property regimes. The amendments were also aimed at making the Act a modern, harmonized and user-friendly legislation to adequately protect national and public interests while simultaneously meeting India’s international obligations under the TRIPS Agreement. Subsequently the rules under the Patent Act have also been amended and these became effective from May 2003. These rules have been further amended by Patents (Amendment) Rules 2005 w.e.f 01.01.2005. Thus, the Patent Amendment Act, 2005 is now fully in force and operative. Trademark Act, 1999: The law of trademarks is also now modernized under the Trademarks Act of 1999. A trademark is a special symbol for distinguishing the goods offered for sale or otherwise put on the market by one trader from those of another. In India the trademarks have been protected for over four decades as per the provisions of the Trade and Merchandise Mark (TMM) Act of 1958. India became a party to the WTO at its very inception. One of the agreements in that related to the Intellectual Property Rights (TRIPS). In December 1998 India acceded to the Paris Convention. Meanwhile, the modernization of Trade and Merchandise Marks Act, 1958 had been taken up keeping in view the current developments in trading and commercial practices, increasing globalisation of trade and industry, the need to encourage investment flows and transfer of technology, need for simplification of trademark management system and to give effect to important judicial decisions. To achieve these purposes, the Trademarks Bill was introduced in 1994. The Bill pointed towards the changes which were contemplated and were under consideration of the Government of India, but it lapsed in 1994. A comprehensive review was made of the existing laws in view of the developments in trading and commercial practices and increasing globalization of trade and industry. The Trademarks Bill of 1999 was passed by Parliament 190 CU IDOL SELF LEARNING MATERIAL (SLM)

that received the assent of the President on 30th December 1999 as Trade Marks Act, 1999 thereby replacing the Trade and Merchandise Mark Act of 1958. The important salient features of the Act inter-alia include:  It broadens the definition of infringement of a registered trademark to include action against the unauthorized use of a confusingly similar mark, not only in respect of the goods and services covered by registration, as was previously the case, but also in respect of goods and services which are so similar that a likelihood of deception or confusion exists.  An action for infringement will also be available against the unauthorized use of a mark in relation to dissimilar goods, if such mark is similar to a registered mark that is well known in India and the interest of the owner is likely to be affected adversely. The remedy for infringement of a trademark is also strengthened under the new law by authorizing the police with the power to seize infringing articles without a warrant. The Designs Act, 2000: The Designs Act of 1911 has been replaced by the Designs Act, 2000. In view of considerable progress made in the field of science and technology, a need was felt to provide more efficient legal system for the protection of industrial designs in order to ensure effective protection to registered designs, and to encourage design activity to promote the design element in an article of production. In this backdrop, the Designs Act, 2000 has been enacted essentially to balance these interests and to ensure that the law does not unnecessarily extend protection beyond what is necessary to create the required incentive for design activity while removing impediments to the free use of available designs. The new Act complies with the requirements of TRIPS and hence is directly relevant for international trade. Industrial Design law deals with the aesthetics or the original design of an industrial product. An industrial product usually contains elements of both art and craft, that is to say artistic as well as functional elements. The design law excludes from its purview the functioning features of an article and grants protection only to those which have an aesthetic appeal. For example, the design of a teacup must have a hollow receptacle for holding tea and a handle to hold the cup. These are functional features that cannot be registered. But a fancy shape or ornamentation on it would be registrable. Similarly, a table, for example, would have a flat surface on which other objects can be placed. This is its functional element. But its shape, colour or the way it is supported by legs or otherwise, are all elements of design or artistic elements and therefore, registrable if unique and novel. Today, industrial design has become an integral part of consumer culture where rival articles compete for consumer's attention. It has become important therefore, to grant to an original industrial design adequate protection. It is not always easy to separate aesthetics of a finished article from its function. Law, however, requires that it is only the aesthetics or the design element which can be registered and protected. For example, while designing furniture 191 CU IDOL SELF LEARNING MATERIAL (SLM)

whether for export or otherwise, when one copies designs from a catalogue, one has to ascertain that somebody else does not have a design right in that particular design. Particularly, while exporting furniture, it is necessary to be sure that the design of the furniture is not registered either as a patent or design in the country of export. Otherwise, the exporter may get involved in unnecessary litigation and may face claims for damages. Conversely, if furniture of ethnic design is being exported, and the design is an original design complying with the requirements of the definition of 'design' under the Designs Act, it would be worthwhile having it registered in the country to which the product is being exported so that others may not imitate it and deprive the inventor of that design of the commercial benefits of his design. The salient features of the Design Act, 2000 are as under:  Enlarging the scope of definition of the term’s \"article\", \"design\" and introduction of definition of \"original\".  Amplifying the scope of \"prior publication\".  Introduction of provision for delegation of powers of the Controller to other officers and stipulating statutory duties of examiners.  Provision of identification of non-registrable designs.  Provision for substitution of applicant before registration of a design.  Substitution of Indian classification by internationally followed system of classification. (g) Provision for inclusion of a register to be maintained on computer as a Register of Designs. (h) Provision for restoration of lapsed designs.  Provisions for appeal against orders of the Controller before the High Court instead of Central Government.  (j) Revoking of period of secrecy of two years of a registered design.  (k) Providing for compulsory registration of any document for transfer of right in the registered design.  (l) Introduction of additional grounds in cancellation proceedings and provision for initiating the cancellation proceedings before the Controller in place of High Court.  (m) Enhancement of quantum of penalty imposed for infringement of a registered design.  (n) Provision for grounds of cancellation to be taken as defence in the infringement proceedings to be in any court not below the Court of District Judge.  (o) Enhancing initial period of registration from 5 to 10 years, to be followed by a further extension of five years.  (p) Provision for allowance of priority to other convention countries and countries belonging to the group of countries or inter-governmental organizations apart from United Kingdom and other Commonwealth Countries. 192 CU IDOL SELF LEARNING MATERIAL (SLM)

 (q) Provision for avoidance of certain restrictive conditions for the control of anticompetitive practices in contractual licenses. 13.4 COPY RIGHTS The idea of Copyright protection only began to emerge with the invention of printing, which made it for literary works to be duplicated by mechanical processes instead of being copied by hand. This led to the grant of privileges, by authorities and kings, entitling beneficiaries exclusive rights of reproduction and distribution, for limited period, with remedies in the form of fines, seizure, confiscation of infringing copies and possibly damages. However, the criticism of the system of privileges led to the adoption of the Statute of Anne in 1709, the first copyright Statute. In the 18th century there was dispute over the relationship between copyright subsisting in common law and copyright under the Statute of Anne. This was finally settled by House of Lords in 1774 which ruled that at common law the author had the sole right of printing and publishing his book, but that once a book was published the rights in it were exclusively regulated by the Statute. This common law right in unpublished works lasted until the Copyright Act, 1911, which abolished the Statute of Anne. Copyright is a well recognised form of property right which had its roots in the common law system and subsequently came to be governed by the national laws in each country. Copyright as the name suggests arose as an exclusive right of the author to copy the literature produced by him and stop others from doing so. There are well-known instances of legal intervention to punish a person for copying literary or aesthetic output of another even before the concept of copyright took shape. The concept of idea was originally concerned with the field of literature and arts. In view of technological advancements in recent times, copyright protection has been expanded considerably. Today, copyright law has extended protection not only to literary, dramatic, musical and artistic works but also sound recordings, films, broadcasts, cable programmes and typographical arrangements of publications. Computer programs have also been brought within the purview of copyright law. Copyright ensures certain minimum safeguards of the rights of authors over their creations, thereby protecting and rewarding creativity. Creativity being the keystone of progress, no civilized society can afford to ignore the basic requirement of encouraging the same. Economic and social development of a society is dependent on creativity. The protection provided by copyright to the efforts of writers, artists, designers, dramatists, musicians, architects and producers of sound recordings, cinematograph films and computer software, creates an atmosphere conducive to creativity, which induces them to create more and motivates others to create. In India, the law relating to copyright is governed by the Copyright Act, 1957 which has been amended in 1983, 1984, 1985, 1991, 1992, 1994, 1999 193 CU IDOL SELF LEARNING MATERIAL (SLM)

and 2012 to meet with the national and international requirements. The amendment introduced in 1984 included computer program within the definition of literary work and a new definition of computer program was inserted by the 1994 amendment. The philosophical justification for including computer programs under literary work has been that computer programs are also products of intellectual skill like any other literary work. In 1999, the Copyright Act, 1957 was further amended to give effect to the provisions of the TRIPs agreement providing for term of protection to performers rights at least until the end of a period of fifty years computed from the end of the calendar year in which the performance took place. The Amendment Act also inserted new Section 40A empowering the Central Government to extend the provisions of the Copyright Act to broadcasts and performances made in other countries subject to the condition however that such countries extend similar protection to broadcasts and performances made in India. Another new Section 42A empowers the Central Government to restrict rights of foreign broadcasting organisations and performers. The Act is now amended in 2012 with the object of making certain changes for clarity, to remove operational difficulties and also to address certain newer issues that have emerged in the context of digital technologies and the Internet. Moreover, the main object to amendments the Act is that in the knowledge society in which we live today, it is imperative to encourage creativity for promotion of culture of enterprise and innovation so that creative people realize their potential and it is necessary to keep pace with the challenges for a fast-growing knowledge and modern society. Copyright is a right given by the law to creators of literary, dramatic, musical and artistic works and producers of cinematograph films and sound recordings. In fact, it is a bundle of rights including, inter alia, rights of reproduction, communication to the public, adaptation and translation of the work. It means the sole right to produce or reproduce the work or any substantial part thereof in any material form whatsoever (Kartar Singh Giani v. Ladha Singh & Others AIR 1934 Lah 777). Section 14 of the Act defines the term Copyright as to mean the exclusive right to do or authorize the doing of the following acts in respect of a work or any substantial part thereof, namely In the case of literary, dramatic or musical work (except computer programme):  reproducing the work in any material form which includes storing of it in any medium by electronic means;  issuing copies of the work to the public which are not already in circulation;  performing the work in public or communicating it to the public;  Making any cinematograph film or sound recording in respect of the work; making any translation or adaptation of the work.  Further any of the above-mentioned acts in relation to work can be done in the case of translation or adaptation of the work. 194 CU IDOL SELF LEARNING MATERIAL (SLM)

 In the case of a computer programme:  to do any of the acts specified in respect of a literary, dramatic or musical work; and  to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. However, such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. In the case of an artistic work:  reproducing the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work;  communicating the work to the public;  issuing copies of work to the public which are not already in existence;  Including work in any cinematograph film; making adaptation of the work, and to do any of the above acts in relation to an adaptation of the work. In the case of cinematograph film and sound recording:  making a copy of the film including a photograph of any image or making any other sound recording embodying it;  selling or giving on hire or offer for sale or hire any copy of the film/sound recording even if such copy has been sold or given on hire on earlier occasions; and  Communicating the film/sound recording to the public. In the case of a sound recording:  To make any other sound recording embodying it  To sell or give on hire, or offer for sale or hire, any copy of the sound recording  To communicate the sound recording to the public. The main objective of the Act is to give protection to the owner of the copyright from the dishonest manufacturers, who try to confuse public and make them believe that the infringed products are the products of the owner. Further, it wants to discourage the dishonest manufacturers from enchasing the goodwill of the owner of the copyright, who has established itself in the market with its own efforts [Hawkins Cookers Ltd.Magi cook Appliances Co., 00(2002) DLT698]. Unlike the case with patents, copyright protects the expressions and not the ideas. There is no copyright in an idea. In M/s Mishra Bandhu Karyalaya & Others v. Shivaratanlal Koshal AIR 1970 MP 261, it has been held that the laws of copyright do not protect ideas, but they deal with the particular expression of ideas. It is always possible to arrive at the same result from independent sources. The rule appears to be settled that the compiler of a work in which absolute originality is of necessary excluded is entitled, without exposing himself to a charge of piracy, to make use of preceding works upon the subject, where he bestows such mental labour upon what he has taken, and subjects it to such revision and correction as to produce an original result. 195 CU IDOL SELF LEARNING MATERIAL (SLM)

Whether one book is a copy of the other or not, it was held in S K Dutt. V. Law Book Co. & Others AIR 1954 All 57, in deciding the question whether one book is a copy of the other or not the Court has, in one view, to keep in mind the two features of the two books, namely, the external and the internal features. By external features means the get-up and the ‘overall’ scope of the publication. By internal features means the general lay out of the subject-matter, the manner of the treatment of the subject matter and the amount of material contained in the book. 13.5 PROTECTION OF TRADE SECRETS A trade secret is any kind of information that is secret or not generally known in the relevant industry giving the owner an advantage over competitors. Generally, it has been stated that any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable to afford an actual or potential economic advantage over others is a trade secret. Examples of trade secrets include formulas, patterns, methods, programs, techniques, processes or compilations of information that provide one’s business with a competitive advantage. The precise language by which a trade secret is defined varies by jurisdiction (as do the precise types of information that are subject to trade secret protection). However, there are three factors that (though subject to differing interpretations) are common to all such definitions: a trade secret is some sort of information that  is not generally known to the relevant portion of the public,  confers some sort of economic benefit on its holder (which means this benefit must derive specifically from the fact that it is not generally known, not just from the value of the information itself), and  Is the subject of reasonable efforts to maintain its secrecy? Trade secrets are not protected by law in the same manner as trademarks or patents. Probably one of the most significant differences is that a trade secret is protected without disclosure of the secret. A trade secret might be a patentable idea but not always. Unlike patent, a trade secret does not have to pass the test of novelty; nevertheless, the idea should be somewhat new, unfamiliar to many people including many in the same trade. Trade secrets are not registered like other forms of intellectual property and are not creatures of statutes. Instead, the judicial system of each country determines the requirements for obtaining trade secrets protection. In India, trade secrets are not covered under any law. The TRIPS Agreement under Article 39 protects trade secrets in the form of “undisclosed information” and provides a uniform mechanism for the international protection of trade secrets. Such information must be a secret, i.e., not generally known or readily accessible to person within the circles that normally deal with all kinds of information in question. Also, 196 CU IDOL SELF LEARNING MATERIAL (SLM)

the information must have commercial value because it is secret and the information must be subject to reasonable steps by its owners to keep it secret. TRIPS Agreement requires the member countries to provide effective remedies for trade secret misappropriation including: • injunctive relief; • damages; and • provisional relief to prevent infringement and to preserve evidence. Trade secrets are by definition not disclosed to the world at large. So long as trade secret remains a secret, it is valuable for the company. Once the information enters the public domain, it is lost forever. Therefore, companies should take every precaution to keep the information secret. Instead, owners of trade secrets seek to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means, not the least of which is the employment or confidentiality agreements and/or nondisclosure agreements. In exchange for the opportunity to be employed by the holder of secrets, a worker will sign an agreement not to reveal his prospective employer’s proprietary information. Often, he will also sign over rights to the ownership of his own intellectual production during the course (or as a condition) of his employment. Violation of the agreement generally carries stiff financial penalties, agreed to in writing by the worker and designed to operate as a disincentive to going back on his word. Similar agreements are often signed by representatives of other companies with whom the trade secret holder is engaged in licensing talks or other business negotiations. If a trade secret is well protected, there is no term of protection. Trade secret protection can, in principle, extend indefinitely and in this respect offers an advantage over patent protection, which lasts only for a specified period. It is equally possible that a company may decide not to patent as for instance formula for Coca-Cola which is considered to be one of the best well protected trade secrets. Companies often try to discover one another’s trade secrets through lawful methods of reverse engineering on one hand and less lawful methods of industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws, of course. The importance of that illegality to trade secret law is as follows: if a trade secret is acquired by improper means (a somewhat wider concept than “illegal means” but inclusive of such means), the secret is generally deemed to have been misappropriated. Thus, if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for acquiring it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. As noted above, under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.) The “quality of confidence” highlights the fact that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret demonstrates that reasonable efforts have been made to keep the information confidential, the information 197 CU IDOL SELF LEARNING MATERIAL (SLM)

remains a trade secret and is legally protected as such. Conversely, trade secret owners who do not demonstrate reasonable effort at protecting confidential information, risk losing the trade secret even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them. Presumably an industrious competitor could piece together the shredded documents again. Legally the trade secret remains a trade secret because shredding the document is considered to have kept the quality of confidence of the information. In technology transfer a trade secret may be far more valuable than a patent. Sometimes a trade secret is not really a secret and may not be of much value either. In a technology package some part is usually unprotected information, even so the best way of obtaining this unprotected information is to buy from the suppliers. Companies must be assured trade secret protection, which they are enjoying in their respective countries under the international licencing agreements. As mentioned earlier, the value of a trade secret lies in its secrecy. If a company cannot ensure protection of its trade secrets in a foreign country, it will not do business in that country. Every company should therefore, take some important measures to protect its trade secrets. A checklist for the identification of potential trade secrets owned by a manufacturing company has been devised which inter alia includes:  technical information/research and development;  proprietary technology information;  proprietary information concerning research and development;  formulas;  compounds;  prototypes;  processes;  laboratory notebooks;  experiments and experimental data;  analytical data; (xi) calculations;  drawings- all types;  diagrams- all types;  design data and design manuals;  R&D reports-all types;  R&D know-how and negative know-how (i.e., what does not work);  Production/ process information;  Proprietary information concerning production/process etc. Some experts suggest that it may be prudent for the companies to conduct an intellectual property audit to identify the protectable business information. This will help the companies to assess the value of the information useful for their business. The intellectual property audit 198 CU IDOL SELF LEARNING MATERIAL (SLM)

is the starting point for the development of a trade secrets protection programme as company’s portfolio of trade secrets is constantly changing. Some information becomes obsolete, new information is created which is extremely valuable and may be protected. Once the audit is complete, the next step is to determine appropriate level of security necessary to protect different types of trade secret. There are six factors which need to be taken into consideration while determining whether information owned or used by a company is a trade secret in terms of the necessary level of security to ensure adequate protection of those trade secrets. These are:  The extent to which the information is known outside the company.  The extent to which the information is known by employees and others involved in the company.  The extent of measures taken by the company to guard the secrecy of the information.  The value of the information to the company and the competitors.  The expenditures by the company (time, money, effort) in developing the information.  The ease or difficulty with which the information could be properly acquired or duplicated by others. 13.6 LICENSING ISSUES Competition Issues in Intellectual Property Licensing: Typically, intellectual property is one of the components in a production process and derives value from its combination with complementary factors. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through reduction of costs and introduction of new products. Such arrangements also increase the value of intellectual property to developers of technology. By potentially increasing the expected returns from intellectual property, licensing increases the incentive for its creation and thus promotes greater investment in research and development. In majority of cases, licensing is pro-competitive because it facilitates the broader use of a valuable intellectual property right by third parties. If an intellectual property owner licenses, transfers or sells the IP to a company or a group of companies that would have been actual or potential competitors without the arrangement, and if this arrangement creates, enhances or maintains market power, the competition authorities may seek to challenge the arrangement under the appropriate provisions of the Competition Law. However, in assessing whether a particular licensing arrangement involves competition issue, the competition authorities the world over examine whether the terms of the arrangement serve to create, enhance or maintain the market power of either the licensor or the licensee and thereby reduce 199 CU IDOL SELF LEARNING MATERIAL (SLM)

competition substantially or unduly relative to that which would have likely existed in the absence of such arrangement. Thus, Licensing arrangements raise concerns under the competition laws if they are likely to affect adversely the prices, quantities, qualities, or varieties of goods and services either currently or potentially available. Licensing agreements which, directly or indirectly, restrict the ability or incentive of any of the parties, to carry out independent R&D, may also have anti-competitive effects, because such agreements can reduce potential competition in the technology and innovation markets, which would have existed in the absence of the agreement. The term restrictive practice signifies non-governmental measures used by companies to strengthen their position in a given market. In the context of IPRs, these practices can hamper or distort competition in given market. Competition and anti-trust laws deal with such business practices and prohibit them when it is established that they have the effect of distorting or preventing competition in a given market. The concept of unfair competition has been also recognised under the Paris Convention for the Protection of Industrial property which comprises not only infringement of industrial property but also all other acts which adversely affect the business relations of a person. The provisions of the Paris Convention contain a broad stipulation that any act of competition contrary to honest practices in industrial and commercial matters constitutes an act of unfair competition. These provisions affirm the foundation of fair competition as being honest practices or good morals and set out three kinds of acts which are deemed typically unlawful in international trade and therefore, must be prohibited. UNCTAD Code of Conduct on Transfer of Technology under Chapter IV has also recognised some practices as restrictive practices. In India, the Monopolies and Restrictive Trade Practices Act, 1969, the Patents Act, 1970 and Competition Act, 2002 prohibit the use of restrictive practices in business agreements. 13.7 FRANCHISING What is franchising? The Indian law does not define franchising. However, simplistically put, franchising is a method of distributing products or services. The Black’s Law Dictionary defines a franchise as a license from the owner of a trademark or trade name permitting another to sell a product or service under that name or mark. In a normal franchise agreement, there are at least two parties involved:  the franchisor, who lends his trademark or trade name (or other intellectual property rights) and the business system; and  The franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and business system. Characteristic features: 200 CU IDOL SELF LEARNING MATERIAL (SLM)