Pls Ans the following question.if you do this it will be great help for me.
1) Describe the financial ratios commonly used by entrepreneurs to access their own performance.
2) Write short notes on the following :
a) Trade-Industry Association
b) Formation of the company
c) Market Share Analysis
Thanks in Advance
5]Describe the financial ratios commonly used by entrepreneurs to assess their own performance.
Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible.
This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking.
As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable.
This DETAILS contains descriptions and examples of the eight major types of ratios used in financial analysis: Income, Profitability, Liquidity, Working Capital, Bankruptcy, Long-Term Analysis, Coverage, and Leverage.
I. Purposes and Considerations of Ratios and Ratio Analysis
II. Types of Ratios
III. Income Ratios
IV. Profitability Ratios
V. Net Operating Profit Ratios
VI. Liquidity Ratios
VII. Working Capital Ratios
VIII. Bankruptcy Ratios
IX. Long-Term Analysis
X. Coverage Ratios
XI. Total Coverage Ratios
XII. Leverage Ratios
XIII. Common-Size Statement
I. Purposes and Considerations of Ratios and Ratio Analysis
Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.
Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry.
There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.
• If you are making a comparative analysis of a company's financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span.
• When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms.
• When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.
• Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios.
• Carefully examine any departures from industry norms.
II. Types of Ratios
III. Income Ratios
Turnover of Total Operating Assets
Net Sales = Turnover of Total Operating Assets Ratio
Total Operating Assets*
Obviously, an increase in sales will necessitate more operating assets at some point (sales may rise without additional investment within a given range, however); conversely, an inadequate sales volume may call for reduced investment. Turnover of Total Operating Assets or sales to investment in total operating assets tracks over-investment in operating assets.
*Total operating assets = total assets - (long-term investments + intangible assets)
Note: This ratio does not measure profitability. Remember, over-investment may result in a lack of adequate profits.
Net Sales to Tangible Net Worth
Net Sales = Net Sales to Tangible Net Worth Ratio
Tangible Net Worth*
This ratio indicates whether your investment in the business is adequately proportionate to your sales volume. It may also uncover potential credit or management problems, usually called "overtrading" and "undertrading."
Overtrading, or excessive sales volume transacted on a thin margin of investment, presents a potential problem with creditors. Overtrading can come from considerable management skill, but outside creditors must furnish more funds to carry on daily operations.
Undertrading is usually caused by management's poor use of investment money and their general lack of ingenuity, skill or aggressiveness.
*Tangible Net Worth = owner's equity - intangible assets
Gross Margin on Net Sales
Gross Margin* = Gross Margin on Net Sales Ratio
By analyzing changes in this figure over several years, you can identify whether it is necessary to examine company policies relating to credit extension, markups (or markdowns), purchasing, or general merchandising (where applicable).
*Gross Margin = net sales - cost of goods sold
Note: An increase in gross margin may result from higher sales, lower cost of goods sold, an increase in the proportionate volume of higher margin products, or any combination of these variables.
Operating Income to Net Sales Ratio
Operating Income = Operating Income to Net Sales Ratio
This ratio reveals the profitability of sales resulting from regular business as well as buying, selling, and manufacturing operations.
Note:Operating income derives from ordinary business operations and excludes other revenue (losses), extraordinary items, interest on long-term obligations, and income taxes.
Applications Accepted = Acceptance Index
Obviously, a high sales volume that comes from just two or three major accounts is much riskier than the same volume coming from a large number of customers. Losing one out of three major accounts is disastrous, while losing one out of 150 is routine. A growing firm should try to spread this risk of dependency through active sales, promotion, and credit departments. Although the quality of customers stems from your general management policy, the quantity of newly opened accounts is a direct reflection on your sales and credit efforts.
Note: This index of effectiveness does not apply to every type of business.
IV. Profitability Ratios
Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment.
Gross Profit on Net Sales
Net Sales - Cost of Goods Sold = Gross Profit on Net Sales Ratio
Does your average markup on goods normally cover your expenses, and therefore result in a profit? This ratio will tell you. If your gross profit rate is continually lower than your average margin, something is wrong! Be on the lookout for downward trends in your gross profit rate. This is a sign of future problems for your bottom line.
Note: This percentage rate can — and will — vary greatly from business to business, even those within the same industry. Sales, location, size of operations, and intensity of competition are all factors that can affect the gross profit rate.
V. Net Operating Profit Ratios
Net Profit on Net Sales
EAT* = Net Profit on Net Sales Ratio
This ratio provides a primary appraisal of net profits related to investment. Once your basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations.
*EAT= earnings after taxes
Note: Sales expenses may be substituted out of profits for other costs to generate even more sales and profits.
Net Profit to Tangible Net Worth
EAT = Net Profit to Tangible Net Worth Ratio
Tangible Net Worth
This ratio acts as a complementary appraisal of net profits related to investment. This ratio sizes up the ability of management to earn a return.
Net Operating Profit Rate Of Return
EBIT = Net Operating Profit Rate of Return Ratio
Tangible Net Worth
Your Net Operating Profit Rate of Return ratio is influenced by the methods of financing you utilize. Notice that this ratio employs earnings before interest and taxes, not earnings after taxes. Profits are taken after interest is paid to creditors. A fallacy of omission occurs when creditors support total assets.
Note: If financial charges are great, compute a net operating profit rate of return instead of return on assets ratio. This can provide an important means of comparison.
Management Rate Of Return
Operating Income = Management Rate of Return Ratio
Fixed Assets + Net Working Capital
This profitability ratio compares operating income to operating assets, which are defined as the sum of tangible fixed assets and net working capital.
This rate, which you may calculate for your entire company or for each of its divisions or operations, determines whether you have made efficient use of your assets. The percentage should be compared with a target rate of return that you have set for the business.
Net Sales X EAT = Earning Power Ratio
Tangible Net Worth Net Sales
The Earning Power Ratio combines asset turnover with the net profit rate. That is, Net Sales to Tangible Net Worth (see "Income Ratios") multiplied by Net Profit on Net Sales (see ratio above). Earning power can be increased by heavier trading on assets, by decreasing costs, by lowering the break-even point, or by increasing sales faster than the accompanying rise in costs.
Note: Sales hold the key.
VI. Liquidity Ratios
While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business.
Current Assets* = Current Ratio
Popular since the turn of the century, this test of solvency balances your current assets against your current liabilities. The current ratio will disclose balance sheet changes that net working capital will not.
*Current Assets = net of contingent liabilities on notes receivable
*Current Liabilities = all debt due within one year of statement data
Note: The current ratio reveals your business's ability to meet its current obligations. It should be supplemented with the other ratios listed below, however.
Cash + Marketable Securities + Accounts Receivable (net) = Quick Ratio
Also known as the "acid test," this ratio specifies whether your current assets that could be quickly converted into cash are sufficient to cover current liabilities. Until recently, a Current Ratio of 2:1 was considered standard. A firm that had additional sufficient quick assets available to creditors was believed to be in sound financial condition.
Note: The Quick Ratio assumes that all assets are of equal liquidity. Receivables are one step closer to liquidity than inventory. However, sales are not complete until the money is in hand.
Absolute Liquidity Ratio
Cash + Marketable Securities = Absolute Liquidity Ratio
A subsequent innovation in ratio analysis, the Absolute Liquidity Ratio eliminates any unknowns surrounding receivables.
Note: The Absolute Liquidity Ratio only tests short-term liquidity in terms of cash and marketable securities.
Basic Defense Interval
(Cash + Receivables + Marketable Securities) = Basic Defense Interval
(Operating Expenses + Interest + Income Taxes) / 365
If for some reason all of your revenues were to suddenly cease, the Basic Defense Interval would help determine the number of days your company can cover its cash expenses without the aid of additional financing.
Total Credit Sales = Receivables Turnover Ratio
Average Receivables Owing
Another indicator of liquidity, Receivables Turnover Ratio can also indicate management's efficiency in employing those funds invested in receivables. Net credit sales, while preferable, may be replaced in the formula with net total sales for an industry-wide comparison.
Note: Closely monitoring this ratio on a monthly or quarterly basis can quickly underscore any change in collections.
Average Collection Period
(Accounts + Notes Receivable) = Average Collection Period
(Annual Net Credit Sales) / 365
The Average Collection Period (ACP) is another litmus test for the quality of your receivables business, giving you the average length of the collection period. As a rule, outstanding receivables should not exceed credit terms by 10-15 days. If you allow various types of credit transactions, such as a retail outlet selling both on open credit and installment, then the ACP must be calculated separately for each category.
Note: Discounted notes which create contingent liabilities must be added back into receivables.
Cost of Goods Sold = Inventory Turnover Ratio
Rule of Thumb: Multiply your inventory turnover by your gross margin percentage. If the result is 100 percent or greater, your average inventory is not too high.
VII. Working Capital Ratios
Many believe increased sales can solve any business problem. Often, they are correct. However,, sales must be built upon sound policies concerning other current assets and should be supported by sufficient working capital.
There are two types of working capital: gross working capital, which is all current assets, and net working capital, which is current assets less current liabilities. Moody's Investors Service has listed net working capital since 1922.
If you find that you have inadequate working capital, you can correct it by lowering sales or by increasing current assets through either internal savings (retained earnings) or external savings (sale of stock). Following are ratios you can use to evaluate your business's net working capital.
Working Capital Ratio
Use "Current Ratio" in the section on "Liquidity Ratios."
This ratio is particularly valuable in determining your business's ability to meet current liabilities.
Working Capital Turnover
Net Sales = Working Capital Turnover Ratio
Net Working Capital
This ratio helps you ascertain whether your business is top-heavy in fixed or slow assets, and complements Net Sales to Tangible Net Worth (see "Income Ratios"). A high ratio could signal overtrading.
Note: A high ratio may also indicate that your business requires additional funds to support its financial structure, top-heavy with fixed investments.
Current Debt to Net Worth
Current Liabilities = Current Debt to Net Worth Ratio
Tangible Net Worth
Your business should not have debt that exceeds your invested capital. This ratio measures the proportion of funds that current creditors contribute to your operations.
Note: For small businesses a ratio of 60 percent or above usually spells trouble. Larger firms should start to worry at about 75 percent.
Funded Debt to Net Working Capital
Long-Term Debt = Funded Debt to Net Working Capital Ratio
Net Working Capital
Funded debt (long-term liabilities) = all obligations due more than one year from the balance sheet date
Note: Long-term liabilities should not exceed net working capital.
VIII. Bankruptcy Ratios
Many business owners who have filed for bankruptcy say they wish they had seen some warning signs earlier on in their company's downward spiral. Ratios can help predict bankruptcy before it's too late for a business to take corrective action and for creditors to reduce potential losses. With careful planning, predicted futures can be avoided before they become reality. The first five bankruptcy ratios in this section can detect potential financial problems up to three years prior to bankruptcy. The sixth ratio, Cash Flow to Debt, is known as the best single predictor of failure.
Working Capital to Total Assets
Net Working Capital = Working Capital to Total Assets Ratio
This liquidity ratio, which records net liquid assets relative to total capitalization, is the most valuable indicator of a looming business disaster. Consistent operating losses will cause current assets to shrink relative to total assets.
Note: A negative ratio, resulting from negative net working capital, presages serious problems.
Retained Earnings to Total Assets
Retained Earnings = Retained Earnings to Total Assets Ratio
New firms will likely have low figures for this ratio, which designates cumulative profitability. Indeed, businesses less than three years old fail most frequently.
Note: A negative ratio portends cloudy skies. However, results can be distorted by manipulated retained earnings (earned surplus) data.
EBIT to Total Assets
EBIT = EBIT to Total Assets Ratio
How productive are your business's assets? Asset values come from earning power. Therefore, whether or not liabilities exceed the true value of assets (insolvency) depends upon earnings generated.
Note: Maximizing rate of return on assets does not mean the same as maximizing return on equity. Different degrees of leverage affect these separate conclusions.
Sales to Total Assets
Total Sales = Sales to Total Assets Ratio
See "Turnover Ratio" under "Profitability Ratios."
This ratio, which uncovers management's ability to function in competitive situations while not excluding intangible assets, is inconclusive if studied by itself. But when viewed alongside Working Capital to Total Assets, Retained Earnings to Total Assets, and EBIT to Total Assets, it can confirm whether your business is in imminent danger.
Note: A result of 200 percent is more reassuring than one of 100 percnt.
Equity to Debt
Market Value of Common + Preferred Stock = Equity to Debt Ratio
Total Current + Long-Term Debt
This ratio shows you by how much your business's assets can decline in value before it becomes insolvent.
Note: Those businesses with ratios above 200 percent are safest.
Cash Flow to Debt
Cash Flow* = Cash Flow to Debt Ratio
Also, refer to "Debt Cash Flow Coverage Ratio" in the section on "Coverage Ratios."
Since debt does not materialize as a liquidity problem until its due date, the closer to maturity, the greater liquidity should be. Other ratios useful in predicting insolvency include Total Debt to Total Assets (see "Leverage Ratios" below) and Current Ratio (see "Liquidity Ratios").
*Cash flow = Net Income + Depreciation
Note: Because there are various accounting techniques of determining depreciation, use this ratio for evaluating your own company and not to compare it to other companies.
IX. Long-Term Analysis
Current Assets to Total Debt
Current Assets = Current Assets to Total Debt Ratio
Current + Long-Term Debt
This ratio determines the degree of protection linked to short- and long-term debt. More net working capital protects short-term creditors.
Note: A high ratio (significantly above 100 percent) shows that if liquidation losses on current assets are not excessive, long-range debtors can be paid in full out of working capital.
Stockholders' Equity Ratio
Stockholders' Equity = Stockholders' Equity Ratio
Relative financial strength and long-run liquidity are approximated with this calculation. A low ratio points to trouble, while a high ratio suggests you will have less difficulty meeting fixed interest charges and maturing debt obligations.
Total Debt to Net Worth
Current + Deferred Debt = Total Debt to Net Worth Ratio
Tangible Net Worth
Rarely should your business's total liabilities exceed its tangible net worth. If it does, creditors assume more risk than stockholders. A business handicapped with heavy interest charges will likely lose out to its better financed competitors.
X. Coverage Ratios
Times Interest Earned
EBIT = Times Interest Earned Ratio
EBIT = earnings before interest and taxes
I = dollar amount of interest payable on debt
The Times Interest Earned Ratio shows how many times earnings will cover fixed-interest payments on long-term debt.
XI. Total Coverage Ratios
EBIT + s = Total Coverage Ratio
I = interest payments
s = payment on principal figured on income after taxes (1 - h)
This ratio goes one step further than Times Interest Earned, because debt obliges the borrower to not only pay interest but make payments on the principal as well.
XII. Leverage Ratios
This group of ratios calculates the proportionate contributions of owners and creditors to a business, sometimes a point of contention between the two parties. Creditors like owners to participate to secure their margin of safety, while management enjoys the greater opportunities for risk shifting and multiplying return on equity that debt offers.
Note: Although leverage can magnify earnings, it exaggerates losses.
Common Shareholders' Equity = Equity Ratio
Total Capital Employed
The ratio of common stockholders' equity (including earned surplus) to total capital of the business shows how much of the total capitalization actually comes from the owners.
Note: Residual owners of the business supply slightly more than one half of the total capitalization.
Debt to Equity Ratio
Debt + Preferred Long-Term = Debt to Equity Ratio
Common Stockholders' Equity
A high ratio here means less protection for creditors. A low ratio, on the other hand, indicates a wider safety cushion (i.e., creditors feel the owner's funds can help absorb possible losses of income and capital).
Total Debt to Tangible Net Worth
If your business is growing, track this ratio for insight into the distributive source of funds used to finance expansion.
Current + Long-Term Debt = Debt Ratio
What percentage of total funds are provided by creditors? Although creditors tend to prefer a lower ratio, management may prefer to lever operations, producing a higher ratio.
Times Interest Earned
Refer to "Coverage Ratios"
XIII. Common-Size Statement
When performing a ratio analysis of financial statements, it is often helpful to adjust the figures to common-size numbers. To do this, change each line item on a statement to a percentage of the total. For example, on a balance sheet, each figure is shown as a percentage of total assets, and on an income statement, each item is expressed as a percentage of sales.
This technique is quite useful when you are comparing your business to other businesses or to averages from an entire industry, because differences in size are neutralized by reducing all figures to common-size ratios. Industry statistics are frequently published in common-size form.
When comparing your company with industry figures, make sure that the financial data for each company reflect comparable price levels, and that it was developed using comparable accounting methods, classification procedures, and valuation bases.
Such comparisons should be limited to companies engaged in similar business activities. When the financial policies of two companies differ, these differences should be recognized in the evaluation of comparative reports. For example, one company leases its properties while the other purchases such items; one company finances its operations using long-term borrowing while the other relies primarily on funds supplied by stockholders and by earnings. Financial statements for two companies under these circumstances are not wholly comparable.
6] Write short notes on the following:
a) Trade-Industry Association
A trade association, also known as an industry trade group, business association or sector association, is an organization founded and funded by businesses that operate in a specific industry. An industry trade association participates in public relations activities such as advertising, education, political donations, lobbying and publishing, but its main focus is collaboration between companies, or standardization. Associations may offer other services, such as producing conferences, networking or charitable events or offering classes or educational materials. Many associations are non-profit organizations governed by bylaws and directed by officers who are also members.
In countries with a social market economy, the role of trade associations is often taken by employers' organizations, which also have a role in the social dialogue.
One of the primary purposes of trade groups, particularly in the United States and to a similar but lesser extent elsewhere, is to attempt to influence public policy in a direction favorable to the group's members. This can take the form of contributions to the campaigns of political candidates and parties through Political Action Committees (PACs); contributions to "issue" campaigns not tied to a candidate or party; and lobbying legislators to support or oppose particular legislation. In addition, trade groups attempt to influence the activities of regulatory bodies.
While direct contributions by PACs to candidates are required in the United States to be disclosed to the Federal Election Commission (or state and local election overseers) and are public information, and there are registration requirements for lobbyists, it can sometimes be difficult to trace the funding for issue and non-electoral campaigns.
Almost all trade associations are heavily involved in publishing activities, in print, and/or online. The main media published by trade associations are as follows:
• Association website. The association's corporate website typically explains the association's aims and objectives, promotes the association's products and services, explains the benefits of membership to prospective members, and promotes members' businesses (for example, by means of an online listing of members and description of their businesses).
• Members newsletters or magazines. Whether produced in print or online, association newsletters and magazines contain news about the activities of the association, industry news and editorial features on topical issues. Some are exclusively distributed to members, while others are used to lobby lawmakers and regulators, and some are used to promote members' businesses to potential new customers.
• Printed membership directories and yearbooks. Larger trade associations publish membership directories and yearbooks to promote their association to opinion formers, lawmakers, regulators and other stakeholders. Such publications also help to promote members' businesses both to each other and to a wider audience. A typical membership directory contains profiles of each association member, a products and services guide, advertising from members, and editorial articles about the aims, objectives and activities of the association. The emphasis of association yearbooks on the other hand is on editorial features about the association itself and the association's industry.
The opportunity to be promoted in such media (whether by editorial or advertising) is often an important reason why companies join a trade association in the first place.
Industry trade groups sometimes produce advertisements, just as normal corporations do. However, whereas typical advertisements are for a specific corporate product, such as a specific brand of cheese or toilet paper, industry trade groups advertisements generally are targeted to promote the views of an entire industry.
Below are two different general types of generic advertising used by these groups.
Ads to improve industry image
These ads mention only the industries products as a whole, painting them in a positive light in order to have the public form positive associations with that industry and its products..
Ads to shape opinion on a specific issue
These are adverts targeted at specific issues. For example, in the USA in the early 2000s the MPAA began running advertisements before films that advocate against movie piracy over the Internet.
A common criticism of trade associations is that, while they are not per se "profit-making" organizations that claim to do valuable work which is ultimately for the public benefit, they are in reality fronts for price-fixing cartels and other subtle anti-competitive activities that are not in the public interest.
Trade Associations and Antitrust”. For instance, under the guise of "standard setting" trade associations representing the established players in an industry can set rules that make it harder for new companies to enter a market.
b) Formation of the company
2. To register a company, you need to first apply for a Director Identification Number (DIN) which can be done by filing eForm for acquiring the DIN. You would then need to acquire your Digital Certificate and register the same on the portal. Thereafter, you need to get the company name approved by the Ministry. Once the company name is approved , you can register the company by filing the incorporation form depending on the type of company
(Use quick links available on left panel in case steps are known)
Step 1 : Application For DIN
The concept of a Director Identification Number (DIN) has been introduced for the first time with the insertion of Sections 266A to 266G of Companies (Amendment) Act, 2006. As such, all the existing and intending Directors have to obtain DIN within the prescribed time-frame as notified.
You need to file eForm DIN-1 in order to obtain DIN. To get more information about the same click Director Identification Number
Step 2 : Acquire/ Register DSC
The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the only secure and authentic way that a document can be submitted electronically. As such, all filings done by the companies under MCA21 e-Governance programme are required to be filed with the use of Digital Signatures by the person authorised to sign the documents.
Acquire DSC -A licensed Certifying Authority (CA) issues the digital signature. Certifying Authority (CA) means a person who has been granted a license to issue a digital signature certificate under Section 24 of the Indian IT-Act 2000.
Register DSC -Role check for Indian companies is to be implemented in the MCA application. Role check can be performed only after the signatories have registered their Digital signature certificates (DSC) with MCA. To know about it click Register a DSC
Step 3 : New User Registration
To file an eForm or to avail any paid service on MCA portal, you are first required to register yourself as a user in the relevant user category, such as registered and business user. To register now click New User Registration
Step 4 : Incorporate a Company
Apply for the name of the company to be registered by filing Form1A for the same. After that depending upon the proposed company type file required incorporation forms listed below.
a. Form 1 : Application or declaration for incorporation of a company
b. Form 18 : Notice of situation or change of situation of registered office
c. Form 32 : Particulars of appointment of managing director, directors, manager and secretary and the changes among them or consent of candidate to act as a managing director or director or manager or secretary of a company and/ or undertaking to take and pay for qualification shares
Once the form has been approved by the concerned official of the Ministry, you will receive an email regarding the same and the status of the form will get changed to Approved. To know more about eFiling process click "All About eFiling"
The following article disucsses the process of forming a limited liability company in India. The laws relating to registration of a limited liability company in India is contained in Companies ACt, 1956. Registrars of Companies (ROC), appointed under Section 609 of the Companies Act, by the Ministry of Corporate Affairs (MCA), is vested with the primary duty of registering companies and of ensuring that such companies comply with statutory requirements under the Act. A company can be registered with the ROC of the state under whose jurisdiction the proposed company’s registered office will be situated.
Pre- Registration Requirements
A Private Limited Company must have a Paid-up capital of INR 100,000 and a Public Limited Company must have a paid-up capital of INR 500,000. A Private Limited Company must have a minimum of two directors and two shareholders and Public Limited Company must have a minimum of three directors and seven shareholders.
The directors must have a valid Director Identification Number (DIN), allotted by the Ministry of Corporate Affairs. DIN is a unique identification number for an existing director or a person intending to become a director of a company. As per a recent amenedment to the Companies Act 1956, DIN has become mandatory for all the directors. DIN is unique and specific to an individual therefore only one DIN is allotted per individual even if the individual serves as director at multiple companies. Application for the allotment of Director Identification Number (DIN) can be obtained online on MCA’s website. Duly completed DIN Application Form must be mailed to MCA DIN Cell, along with a proof of identity and a proof of residence with colored photo. The photo affixed on the form and the proofs attached must be certified by a Public Notary or Gazetted Officer or any certified professionals. No fee is charged for issuing DIN. This process takes approximately 3 to 5 working days.
At least one of the directors should have a valid Digital Signature Certificate issued by the Certifying Authorities (CA) and approved by the Ministry of Corporate Affairs. The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic forms, in order to ensure the security and authenticity of the documents filed electronically. Every document prescribed under the Companies Act, 1956, is required to be filed with the digital signature of the managing director or director or manager or secretary of the company. Therefore at least one of directors must have a digital signature. Any person may make an application to the Certifying Authority for the issue of a Digital Signature in such form as may be prescribed by the Central Government. Digital Signatures are typically issued with one year validity and two year validity. The issuance cost varies depending on the CA. Digital Signatures can be obtained within an hour.
The first step in the process of formation is the application for MCA’s approval of the desired name for the proposed company. Once, Company name is allotted, company registration documents are filed with respective ROC for registration. Application for name approval can be made online via MCA’s portal MCA 21.Forms are available here.
The following particulars are required to complete the form
• Name of the proposed company
• Location of registered office of the proposed company
• Main Objectives of the business of the company
• Names of Subscribers to the Memorandum of Association
• Proposed Authorized Share Capital of the Company
• DIN & DSC
Select, at least four names (a maximum of Six names can be listed), and indicate the order of preference. Ensure that the company name is in accordance to the guidelines of the MCA, and also ensure the name is unique and does not resemble the name of any existing company in India. The company name must end with the words ‘Private Limited’ or ‘PVT Ltd’. In order to have specific key words in the name such as corporation, International, Hindustan, Industries, India etc., the proposed company should satisfy a minimum authorized capital criteria. Duly completed Form 1A for name approval must be must be submitted to the concerned ROC along with a fee of INR 500/-.
The Registrar shall intimate, within two to three days, whether the proposed name is available or not. If the preferred name is not available apply for a fresh name on the same application. The name made available by the Registrar shall be valid for a period of six months. In case, if the company is not incorporated within this validity period, an application may be made for renewal of name by paying additional fees. Otherwise the name approval process has to be repeated by submitting new application after payment of requisite fees.
Preparation of Documents
After obtaining name approval from the ROC the following documents must be prepared to incorporate the company
• Memorandum of Association (MOA)
• Articles of Association (AOA)
• Form 1 – providing details of promoters of the company
• Form 18 – providing details of registered office of the company
• Form 32 – providing details Directors of the company
The Memorandum of Association is a document that sets out the constitution of the company. It contains, amongst others, the objectives and the scope of activity of the company and also describes the relationship of the company with the outside world.
The Articles of Association contain the rules and regulations of the company for the management of its internal affairs. While the Memorandum specifies the objectives and purposes for which the Company has been formed, the Articles lay down the rules and regulations for achieving those objectives and purposes. It also states the authorized share capital of the proposed company and the names of its first / permanent directors.
Professional help is to be sought in the drafting of the MOA and AOA, as it contains the governing policies, rules and by-laws of the proposed venture. The draft must be carefully vetted by the promoters before printing and stamping.
The MOA and AOA must be signed by at least two subscribers in his own hand, along with father’s name, occupation, address and the number of shares subscribed for and witnessed by at least one person.
Then the MOA and AOA are required to be stamped & filed with the ROC. A stamp duty is required to be paid on the MOA and on the AOA. The stamp duty depends on the authorized share capital and varies between states. Details of applicable stamp duty can be obtained from here. eStamping facility is now available via MCA’s portal. The document preparation process may take five to seven days.
Submission of Documents
Submit the following documents to the ROC with the filing fee and the registration fee:
• The stamped and signed Memorandum and Articles of Association (3 copies).
• Form-1, 18 & 32 in duplicate.
• Any agreement referred to in the Memorandum & Articles.
• Any agreement proposed to be entered into with any individual for appointment as Managing or whole time Director.
• Declaration of Compliance by an advocate or company secretary or chartered accountant or director, manager or secretary of the company
• Name availability letter issued by the ROC.
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a) Market Share Analysis
Market share analysis is a part of market analysis and indicates how well a firm is doing in the marketplace compared to its competitors.
six factors to help estimate the value of market share :
• unit or dollar sales,
• user base (since piracy and brand switching effect),
• market definition (scope of definitions),
• scope of denominator (which other brands included),
• time frame length,
• product definition (brand, product line, or strategic business unit).
A market share analysis needs to take into account the following:
Total Market Size refers to the annual business volume in currency or in number of transactions;
Market Growth Rate refers to the Compounded Annualized Growth Rate (CAGR) taken over a period of 3 to 5 years;
Market Share is the breakup of market size in percentage terms, to help identify the top players, the middle and the "minnows" of the marketplace, based on the volume of business conducted;
Market Segmentation Some of the factors that determine the market are price, quality, speed of service, ease of maintenance, and points of distribution. By mapping on quality and price parameters, it is possible to identify graphically the spaces which are crowded by service providers and which are the relatively empty spots;
Key Players i.e.the top players in each segment of the market. The extent to which they provide premium quality, or premium service or price advantage, can help identify future target segments;
Swot Analysis. The strengths of players as well as weaknesses/areas of improvement are needed to combat the onslaught in a marketing warfare. Strength and weakness include brand equity, geographic presence, strong management/leadership, technological edge, and patent/copyrights.
Emerging Opportunities should be identified which could make the market grow faster/larger or acquire business more easily. Similarly, are there threat factors that could reduce the total market size. These could be due to regulatory guidelines, changes in fashion trends, consumer preference, macro economic events like currency crisis, import/export, war, natural calamity, or demographic shift;
Business Continuity Plan: While planning for market share analysis, the worse must be planned for to ensure continuity of the concern in the event of a calamity. Companies which have a continuity plan usually sustain shocks better and ensure achievement of targeted market share.
Target Market Share: Based on the above analysis, it is possible to arrive at the overall market size for the assessment period, and thereby decide on the volume of business the firm targets to achieve during the period. This helps determine the firm's targeted market share. This also helps budget for activities like budgeting for R&D, sales promotion, marketing, and training.
Understanding market share is one of the most important metrics used by executives in any business. Through Market Share Analysis methodology, clients see how share is allocated among MARKET providers in key markets. Our detailed analysis of how provider revenue is allocated reveals what types of solutions are succeeding, which are trailing and where opportunities exist for providers to take additional share.
Other Views of Market Share Analysis
We will from time to time examine markets from different perspectives to enhance our understanding of them and identify shifts which may not be evident from examination of revenue alone. Although revenue is the primary basis for our estimates of market share, metrics such as "seat share" may be used as an adjunct to revenue when looking at different markets.
How Do You Use Market Share Analysis?
End-user clients depend on our Market Share Analysis to validate their evaluation of a market’s leading providers. Technology providers use our share analysis to better understand their own market position. The timeliness of our share data gives clients confidence in using it to support their important business decisions. Many markets are updated quarterly. All are updated annually.
How Does Market Share Analysis Work?
Our approach to Market Share Analysis combines primary surveys and vendor briefings with secondary research such as public financial disclosures, industry trade association material and government statistics.
Multiple data points ensure that the statistics we report are objective and accurate.
Our market share methodology has quality checks in place to make sure potential double-counting across sectors doesn't happen. It's another process we have in place to ensure that we accurately quantify market share, helping you make the most informed decisions possible.
Any estimate of market share – whether based on revenue or another metric – is a combination of fact and expert judgment; backed by a methodologically sound research process. Clients are assured that even when we diverge from our standard of revenue-based share that our estimates are well supported.
What is market share analysis for?
Company or brand sales, measured in volume or in value, are the most direct measures of the market behavioural response. Sales analysis can be misleading, however, since it does not reveal how the brand is doing relative to competing brands operating in the same reference market.
For example, an increase in sales may be due to a general improvement in market conditions and have nothing to do with the brand's performance, or the increase may be hiding a deterioration of the brand's position, for instance if it has grown, but less than its rivals.
To be useful, sales analysis must therefore be complemented by a market share analysis.
The reason for measuring market share is to eliminate the impact of environmental factors, which exert the same influence on all competing brands and thus allow a proper comparison of the competitive power of each.
How is market share calculated?
Market share is simply calculated as follows:
Calculating market shares assumes that the firm has clearly defined its reference market, i.e. the set of products or brands that compete with it.
Irrespective of the definition adopted for the reference market, various measures of market share can be calculated:
• Unit market share – company or brand sales in volume expressed as percentage of total sales of the reference market.
• Value market share – calculated on the basis of turnover rather than sales in units. A market share in value is often difficult to interpret because changes in market share reflect a combination of volume and price changes.
• Served-market share – calculated relative to sales in the market segment(s) addressed by the firm (rather than relative to the total reference market). Note that the served-market share is always larger than overall market share.
• Relative market share – compares the firm's sales to that of its competitors, thus excluding the firm's own sales. If a firm holds 30% of the market, and its top three competitors hold respectively 20, 15 and 10%, and the ‘others’ 25%, relative market share will be 43% (30/70). If relative market share is calculated by
reference to the top three competitors, then the firm's relative market share is 67% (30/45). Relative market shares above 33% are considered to be strong.
• Relative market share to leading competitor is calculated by reference to the leading competitor's sales. In the previous example, the dominant firm has a relative market share of 1.5 (30/20). The relative market share of the other firms is obtained by dividing their market share by that of the leading competitor, i.e. 0.67, 0.50 and 0.33, respectively, in this example.
the notion of market share needs to be used with caution, keeping the following considerations in mind:
• The level of market share depends directly on the choice of the basis of comparison, i.e. on the reference market. It is important to check that this basis is the same for all the brands.
• The hypothesis that environmental factors have the same influence on all brands is not necessarily verified. Some brands may be better or less well placed with respect to some environmental factors.
• When new brands are introduced into a market, the share of each participant must
sales unit Totalsales unit A Brand= share Market
necessarily drop, without there being any bad performance, even if some brands resist the entry of a new competitor better than others do.
• Market shares can sometimes fluctuate because accidental or exceptional factors, such as a large order.
• Sometimes the firm may deliberately provoke a drop in market share because, for example, a distribution network or a market segment is being abandoned.
In addition, measuring market share can raise problems depending on the availability of the necessary information. To measure served-market share implies that the firm is in a position to evaluate total sales in each segment. Similarly, relative market share assumes knowledge of sales achieved by direct competition. Obtaining this information varies in levels of difficulty from sector to sector.
In the field of consumer goods, market shares are available through syndicated consumer or dealer panels or through scanning diary panels. In the other fields, in cases where government organisations and trade associations do not provide this information, it is up to the marketing information system to arrange how to purchase
or to create this information, which is vital for tracking sales performance.
Quality of market share analysis
Quality market share analysis helps predict future performance. The critical question addressed is: What makes up our market share? Traditional market share measures in units or in value should be complemented by an analysis of the customer base, as shown in the following examples (see Table Web 10.1), where two competitors with the same market share are compared.
Table Web 10.1
Quality market share Analysis Example number Market share and customer base Brand A Brand B
1 Market share 30% 30%
Composition of customer base: : High profit 15% 5%
Switchable 15% 50%
Unprofitable 5% 15%
Loyal 65% 30%
Loyal 65% 30%
2 Market share 30% 30%
Composition of customer base: Growers 40% 20%
Maintainers 25% 30%
Decliners 35% 50%
The question is: Which 30% market share is preferable? Looking at example 1, Brand A clearly has:
Less risk with fewer 'switchable' customers.
• A stronger financial position fuelled by more 'high-profit' customers.
• Fewer 'unprofitable' customers draining its resources.
Competitor B's outlook is not so bright. With few ‘high-profit’ customers and 50% of its customer base at risk in the ‘switchables’ category, we can anticipate flat or declining sales and unattractive profitability.
In example 2, similar analyses of the customer base can be made, for instance, on how many customers are growing, maintaining or declining in their spending.
Market share movement analysis
Consumers and dealers panels provide detailed information on market shares by region, segment, distribution network, etc. Such data allow the implementation of more refined types of analysis, used to interpret gains or losses in market shares.
Parfitt and Collins (1968) have shown how to decompose market share into a number of components, which help to interpret and to predict its development.
• Penetration rate is the share of buyers, i.e. the percentage of buyers of brand x compared to the total number of buyers in the reference product category.
• Exclusivity rate, is defined as the share of total purchases in a product category reserved for brand x. This rate is a measure of the loyalty attached to brand x, given that buyers have the possibility of diversifying their purchases and acquiring different brands in the same product category.
• Intensity rate compares average quantities purchased per buyer of brand x with average quantities purchased per buyer of the product category.
A brand's market share can be calculated from these three components as follows:
Market share = Penetration rate × Exclusivity rate × Intensity rate
Let x denote the brand and c the reference product category to which x belongs. Let us also adopt the following notations:
Nx = Number of buyers of x;
Nc = Number of buyers of c;
Qxx = Quantity of x purchased by buyers of x ;
Qcx = Quantity of c purchased by buyers of x ;
Qcc = Quantity of c purchased by buyers of c .
It can be verified that
Market share = cccxcxxcxxxxcxccxx/NQ/NQ/NQ/NQNNQQ⋅⋅=
To express market share in value, a relative price index must be added. This is the ratio of the brand's average price to the average price charged by all competing brands.
Explaining market share movement
The definition of market share outlined above can be generally applied. It permits the identification of the possible causes of observed movements in market share. The following are possible explanations of a fall in market share:
• The brand is losing customers (lower penetration rate).
• Buyers are devoting a smaller share of their purchases of the product to this particular brand (lower exclusivity rate).
• Buyers of the brand are purchasing smaller quantities compared to the quantities bought on average by buyers of the product (lower intensity rate).
By tracking these market indicators over time, the market analyst can identify the underlying causes of market share changes and suggest corrective measures accordingly.
Measures of market share can be used from two different perspectives, as an indicator of competitive performance or as an indicator of competitive advantage. In the first case, market shares should, as much as possible, be calculated
over finer divisions, i.e. by segment, by distribution network or by region. In the second case, a more aggregate basis would be more suitable because it would better reveal the strength of the market power held by the firm and the possible existence of economies of scale or of learning curve effects.