Need to know about Accounting:

As a current or aspiring entrepreneur, it’s easy to get caught up in the more

exciting aspects of launching a business: Choosing a name, designing a
brand, developing your product or service, and just generally getting stuff
done.

While each of these is important and deserving of your time and focus,
entrepreneurs must wear many hats. This means dedicating at least a portion
of your time to some of the arguably less glamorous aspects of running a
business—like finance and accounting.

Being able to move money around to purchase supplies, pay creditors, and
attract investors is often just as important as developing and executing your
business plan, especially in the early stages of your business. Simply put, if
you’re an entrepreneur, or thinking about starting a business, you should
consider the financial implications of your idea and the practical aspects of
your business model.

Here's why all business owners should understand at least the basic concepts
of accounting, and some of the most important accounting skills that all
entrepreneurs need to know.

WHY ENTREPRENEURS NEED TO UNDERSTAND

ACCOUNTING
Managing costs, cash flow, invoices, vendors, and payroll probably isn’t what
you imagined when you decided to launch your own business. But they are
critical components of running any successful company, especially in the early
stages when you’re both steering the ship and running the show.

For many organizations, accounting influences nearly every facet of business

management. Whether you’re applying for a business loan or grant, managing
payroll and employee benefits, paying expenses like rent and utilities,
invoicing vendors, seeking investors, or projecting growth, accounting will form
the basis of everything you do.

If you don’t have the budget to hire an accountant, you’ll need to be your own.
Even if you do have an accountant, you should understand enough about the
subject to have meaningful conversations with potential partners, investors,
employees, and others.
ACCOUNTING SKILLS FOR ENTREPRENEURS
1. Managing Cash Flow

The time-tested saying, “cash is king” really is true. For many businesses,
especially new ones, where credit lines are limited and financing is difficult,
cash proves to be one of the most critical assets. It serves as the fuel to your
company’s engine. Without it, you can’t pay suppliers and will find it difficult to
build inventory, reach customers, and grow the business.

Understanding and projecting cash flow allows companies to plan for the
future and ensure that there’s always enough money in the bank to keep the
business running (and hopefully growing). Paying attention to cash inflows
and outflows allows entrepreneurs to plan accordingly, prevent any
unnecessary cash shortages, and use excess cash productively to grow the
business.

2. Maintaining a Balance Sheet

The balance sheet provides a snapshot of a company’s financial health at a

particular point in time. It allows those interested in the business to quickly see
what resources are available and how those resources were financed, and
shows both the assets and liabilities—or what you have right now and what
you owe others.

Entrepreneurs can use the balance sheet to help keep the business in check.
While sales may be increasing exponentially, keeping an eye on the liabilities
side of the balance sheet is important to the long-term success of the
business. Even though investors care about growth potential, they also care
about how much the company owns versus how much it owes. The balance
sheet gives investors, and potential buyers, a solid understanding of where
the company currently stands.

Related: Financial Statement Analysis: The Basics for Non-Accountants

3. Identifying a Path to Profitability

Profitability is defined as how much money is left from each dollar of sales
after all expenses have been subtracted. This may seem obvious for those
interested in starting a business, but it can sometimes fade into the
background during the early stages of a company.
It’s often necessary to take a loss early to reach a target market, accumulate
customers, increase visibility, or launch successfully, but this cannot be a
long-term strategy. Entrepreneurs must have a path to profitability to attract
investors and succeed over time.

4. Communicating About Money

Solid communication skills are essential to nearly every aspect of running a

business, but they’re particularly important when dealing with finance and
accounting. As an entrepreneur, you must be comfortable and able to clearly
discuss the hard numbers of your business—with employees, vendors, and
investors or other stakeholders.

Clear communication, especially in relation to terms of payment and scope of

work, allows you to ensure that all parties are properly aligned, protecting you
and your business from assumptions or miscommunication.

Similarly, developing your organizational skills and putting in place clear

protocols for everything related to payment can help protect your business
from the same kinds of misunderstandings and miscommunications. This is
especially important when working with multiple invoices, purchase orders,
vendors, and tax accounts.

5. Forecasting the Future of Your Business

For most entrepreneurs, growth is a key motivation. Some are happy acting as
a one-person business, but want to maximize their revenue streams. Others
may want to grow their team by adding employees. And others still may want
to scale dramatically.

In order to grow responsibly and successfully, an entrepreneur must be

capable of making predictions about the future of their business—regardless
of their specific growth goals. Accurate predictions about future revenues,
future operating costs, future resource needs, and future profit levels are
necessary to attract investors, secure funding, hire employees, and take on
additional clients or customers.

Without accurate predictions, it's all too possible to grow either too fast or not
fast enough—both of which can be detrimental to the success of your
business.
What Is Working Capital Management?
Working capital management is a business strategy designed to ensure
that a company operates efficiently by monitoring and using its current
assets and liabilities to their most effective use.

The efficiency of working capital management can be quantified using ratio

analysis.

Understanding Working Capital Management

The primary purpose of working capital management is to enable the
company to maintain sufficient cash flow to meet its short-term operating
costs and short-term debt obligations. A company's working capital is
made up of its current assets minus its current liabilities.

Current assets include anything that can be easily converted into cash
within 12 months. These are the company's highly liquid assets. Some
current assets include cash, accounts receivable, inventory, and short-
term investments. Current liabilities are any obligations due within the
following 12 months. These include accruals for operating expenses and
current portions of long-term debt payments.

Main Components of Working Capital Management

Certain balance sheet accounts are more important when considering
working capital management. Though working capital often entails
comparing all current assets to current liabilities, there are a few accounts
more critical to track.

Cash
The core of working capital management is tracking cash and cash needs.
This involves managing the company's cash flow by forecasting needs,
monitoring cash balances, and optimizing cash inflows and outflows to
ensure that the company has enough cash to meet its obligations.
Because cash is always considered a current asset, all accounts should be
considered. However, companies should be mindful of restricted or time-
bound deposits.

Receivables
To manage capital, companies must be mindful of their receives. This is
especially important in the short-term as they wait for credit sales to be
completed. This involves managing the company's credit policies,
monitoring customer payments, and improving collection practices. At the
end of the day, having completed a sale does not matter if the company is
unable to collect payment on the sale.

Payables
Payables in one aspect of working capital management that companies
can take advantage of that they often have greater control over. While
other aspects of working capital management may be out of the company's
hands (i.e. selling goods or collecting receivables), companies often have
a say in how they pay suppliers, what the credit terms are, and when cash
outlays are made.

Inventory
Companies primary consider inventory during working capital management
as it may be most risky aspect of managing capital. When inventory is
sold, a company must go to the market and rely on consumer preferences
to convert inventory to cash. If this cannot be completed in a timely
manner, the company may be forced to have short-term resource stuck in
an illiquid position. Alternatively, the company may be able to quickly sell
the inventory but only with a steep price discount.

Types of Working Capital

In its simplest form, working capital is just the difference between current
assets and current liabilities. However, there are many different types of
working capital that each may be important to a company to best
understand its short-term needs.

 Permanent Working Capital: Permanent working capital is the

amount of resources the company will always need to operate its
business without interruption. This is the minimum amount of short-
term resources vital to operations.
 Regular Working Capital: Regular working capital is a component
of permanent working capital. It is the part of the permanent working
capital that is actually required for day-to-day operations and makes
up the "most important" part of permanent working capital.
 Reserve Working Capital: Reserve working capital is the other
component of permanent working capital. Companies may require
an additional amount of working capital on hand for emergencies,
seasonality, or unpredictable events.
 Fluctuating Working Capital: Companies may be interested in only
knowing what their variable working capital is. For example,
companies may opt into paying for inventory as it is a variable cost.
However, the company may have a monthly liability relating to
 insurance it does not have the option to decline. Fluctuating working
capital only considers the variable liabilities the company has
complete control over.
 Gross Working Capital: Gross working capital is simply the total
amount of current assets of a business before considering any short-
term liabilities.
 Net Working Capital: Net working capital is the difference between
current assets and current liabilities.

Marketing Management
Philip Kotler has defined marketing management thus:

“Marketing management is the analysis, planning, implementation, and control of

programmes designed to bring about desired exchanges with target audiences for the
purpose of mutual or personal gain. It relies heavily on the adaptation and
coordination of product, price, promotion, and place of achieving effective response.”

To make his definition very clear, he lays down the following facts:

1. It is a management process and includes analysis, planning, implementation,

and control.
2. It is a purposive activity which aims at bringing about desired exchanges,
(which may be of goods or services).
3. It can be practiced by either the seller or the buyer, whoever seeks to stimulate
the exchange process.
4. It may be carried on for personal or mutual gain.
5. If stresses the adaptation and coordination of several factors
viz., product, price, promotion and place to achieve the effective response.

Human Resources Management

What is human resource management (HRM)?
Human resource management (HRM) is the practice of recruiting, hiring,
deploying and managing an organization's employees. HRM is often
referred to simply as human resources (HR). A company or organization's
HR department is usually responsible for creating, putting into effect and
overseeing policies governing workers and the relationship of the
organization with its employees. The term human resources was first used
in the early 1900s, and then more widely in the 1960s, to describe the
people who work for the organization, in aggregate.
HRM is employee management with an emphasis on employees as assets
of the business. In this context, employees are sometimes referred to
as human capital. As with other business assets, the goal is to make
effective use of employees, reducing risk and maximizing return on
investment (ROI).

The modern term human capital management (HCM) is often used by large
and midsize companies when discussing HR technology.

The importance of human resource management

The purpose of HRM practices is to manage the people within a workplace
to achieve the organization's mission and reinforce the corporate culture.
When people management is done effectively, HR managers can help
recruit new employees who have the skills to further the company's goals.
HR professionals also aid in the training and professional development of
employees to meet the organization's objectives.

A company is only as good as its employees, making HRM a crucial part of

maintaining or improving the health of the business. Additionally, HR
managers monitor the state of the job market to help the organization stay
competitive. This could include ensuring compensation and benefits are
competitive, events are planned to keep employees from burning out and
job roles are adapted based on the market.

Labour Laws
Labour Laws
As every business firm has employees or labour which helps in proper and efficient functioning
daily. Many laws related to labours like minimum wages act, gratuity, Provident funds payment,
paid holidays to workers, maternity benefits, harassment at workplace, payment of bonus, etc.

Even the government has provided an exemption from labour inspection for a startup if they apply
all the major 9 labour laws of the country regularly for worker's benefit:

 The Industrial Disputes Act, 1947

 The Trade Unit Act, 1926
  The Inter-State Migrant Workmen (Regulation of Employment and Service) Act, 1979
 The Payment of Gratuity Act, 1972
 The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
 The Employees’ State Insurance Act, 1948.
 Building and Other Constructions Workers’ (Regulation of Employment and Conditions of
Service) Act, 1996
 The Industrial Employment (Standing Orders) Act, 1946
 The Contract Labour (Regulation and Abolition) Act, 1970

Proper employee's and worker's policies may help in increasing the morale and
efficiency in the working of the workers.

Organizational support services - Central and State

Government
Financial Assistance: The central government often provides grants, subsidies, and low-interest
loans to support startups and small businesses. These financial incentives can help entrepreneurs
cover initial costs and scale their ventures.

Research and Development Funding: To encourage innovation and technology-driven

entrepreneurship, the central government may offer funding for research and development projects.

Skill Development Programs: The central government can establish skill development programs
and vocational training to enhance the entrepreneurial capabilities of individuals.

Incubation Centers: Setting up business incubators and accelerators to nurture and mentor early-
stage startups is a common initiative by central governments. These centers provide workspace,
mentorship, and networking opportunities.

Regulatory Support: Simplifying and streamlining business registration and licensing procedures
can ease the burden on entrepreneurs. The central government can play a role in reducing
bureaucratic red tape.

Export Promotion: Central governments often provide support for businesses looking to expand
into international markets, including export subsidies and trade missions.

State Government Entrepreneurship Development Support:

Local Incentives: State governments may offer additional financial incentives, tax breaks, or
subsidies tailored to the specific needs of businesses operating within their jurisdiction.

Infrastructure Development: Improving local infrastructure, including transportation and

communication networks, benefits businesses and entrepreneurs.
Cluster Development: Encouraging the formation of industry clusters can stimulate collaboration
and knowledge sharing among businesses.

Access to Land and Real Estate: State governments can help entrepreneurs access land and real
estate for business purposes at favorable rates.

Industry-Specific Support: Some states focus on specific industries, offering targeted support
and initiatives to foster growth in those sectors.

Training and Development Programs: State governments often run training programs and
workshops to enhance the skills of local entrepreneurs.

Local Regulatory Support: Simplifying state-level regulations and licensing procedures can
further reduce the barriers to entrepreneurship.

Networking and Collaboration: State governments may facilitate networking events, trade
shows, and conferences to promote collaboration among entrepreneurs.

Incentives and Subsidies

What is Incentives and subsidies?
 The term “incentive” includes concessions and bounties. ‘Subsidy’ denotes a
single lump sum which is given by a government to industry. It is granted to
an industry which is considered essential in the national interest.
 The term ‘bounty’ denotes bonus or financial benefit which is given by a
government to an industry to help it compete with other units in a nation or in
a foreign market.
 It is given in proportion to the output. Bounty confers benefits on a particular
industry, while a subsidy is given in the interest of the nation.
These subsidies and incentives offer the following advantages:
 (a) They act as a motivational force which attract the prospective
entrepreneurs to enter into manufacturing line.
 (b) They encourage the entrepreneurs to start industries in backward areas.
 (c) By providing subsidies and incentives the Government can :
 (i) Bring industrial development uniformly in all regions.
 (ii) Develop more new entrepreneurs which lead to entrepreneurial
development.
 (iii) Increase the ability of entrepreneurs to face competition successfully.
 (iv) Reduce the overall problems of small scale entrepreneurs.
The schemes of incentives in operation in India:
Various incentive schemes offered by Central and State Governments including
Union Territories to the entrepreneurs in India are as follows:
 Incentives Under The Licensing Regulations:
 o When the controls dominate, a relaxation of the control itself is a
significant incentive.
o A government notification states that the Central Government is of the
opinion that directions for a further positive production orientations are
to be given to the economy to increase production by removing all
constraints to the maximum extent possible.
o Now, therefore, in exercise of powers conferred by Section 29(B) (i) of
the Industries (Development and Regulation) Act, 1951, the Central
Government hereby exempts all undertakings registered under the said
Act from the operation of Section 13(i) (d). “Such exemptions are quite
many and resorted to frequently”.

Major Causes of Sickness in Small Scale

Industries
Small Scale Industries (SSIs) play vital role in the economic
development of a country. Some SSIs turn out to be sick due to
various reasons. Some of the major causes for sickness in small
scale industries are dealt in brief.

1. Inadequacy of working capital

Some units turn out sick due to inadequacy of working capital.
There may exists delay in sanction of working capital by financial
institutions. Industrial units find it difficult to meet out day to day
operations due to the time gap between sanction of term loan and
working capital needs. Shortage of Working Capital is one of the
main reasons for sickness.

2. Non-availability of credit
Sickness in SSI sector may be attributed to non-availability of
credit. Delay in getting loans may result in stoppage of work or lead
to production loss. Low production may lead to reduced sales which
in turn may lead to financial loss.
3. Poor and obsolete technology
Some industrial units use technology which is outdated. Out dated
technology may affect the quantity and quality of production. This
results in production loss and reduces demand for the goods.

4. Non availability of raw material

Some units may require raw material which are scarcely available.
Sometimes, the raw material required by the unit may not be
available in abundance. Hence, this affects the production and the
sales of the goods. If the raw material is not abundantly available,
then the industrial units have to spend a large amount of money to
buy them. This may result in financial loss.

5. Marketing problems
Sometimes, the industrial units may not know as to how to create
demand for the products. Lack of marketing knowledge may result
in less demand for the goods. Similarly, there may be less demand
for the goods produced by the SSI due to competition or change in
the taste of the buyers.

For example, lot of units producing dyes and ceramics have been
found sick in Gujarat and Tirupur.

6. Erratic power supply

Shortage in power supply affects the industries. This results in delay
in production of goods and leads to financial losses.

7. Labour problems
The relationship between the employer and the employees may not
be cordial. Some of the labour problems such as strike, lay off, lock
out may lead to industrial sickness.
8. Poor Management
The entrepreneur must be a good planner, organizer and a manager.
If the Industrial Unit promoters lack managerial skills, then it may
lead to several problems.

9. Inadequate attention to R&D

Industries have to allocate a part of money in research and
development to survive and compete with competitors. Failure to
focus on the above may lead to industrial sickness

10. Diversion of resources

If the employer utilizes the funds obtained for the business for any
personal purposes, then diversion of funds will lead to industrial
sickness. The funds used for personal purposes cannot be
regenerated and hence it may result in delay in payment of loans or
financial crisis for the borrower of the loan.

11. Globalization
Small scale industrial units may find it very difficult to compete
with large scale industries and foreign competitors. Inability of the
units to face growing competition due to liberalization and
globalization may lead to industrial sickness.

12. Dispute among partners

There may arise dispute between the partners or family members
running the unit. This results in stoppage of work and leads to
industrial sickness.

13. Overambitious projects

The project may not be technically feasible, such an overambitious
project is one of the reasons for industrial sickness.
Causes and symptoms of sickness

What is Industrial Sickness?

As per the definition of the Reserve Bank of India, a sick unit is one such
industrial unit that has been in loss for the past year of operations and has
been declared on a loss for the present and coming year as well by the
financing bank. An increase in such units leads to industrial sickness in
India which can spread and affect the country’s economy in a very bad
manner.

The industrial sector in India contributes majorly to the Indian

economy and accounts for more than 27% of the GDP. India is home to a
number of large industries of all types. Having said that, industrial sickness
is a process that affects the economy negatively and needs to be well
understood.

Industrial Sickness in India

In its attempt to give an appropriate definition to industrial sickness, the
Government laid out a Sick Industrial Companies Act (SICA), also known
as Special Provisions Act in 1985. The SICA Act was introduced by the
government in an effort to lay out certain special provisions that could
enable the identification of sick units on time.

The Board for Industrial and Financial Reconstruction (BIFR) was formed
under SICA to determine the extent of the industrial sickness of such
units and further decide if they need to be revived or completely shut
off. The Government, in its act, laid out certain guidelines based on which
a large-sized or a medium-sized company or unit could be defined as sick.

Symptoms of Industrial Sickness

As per the Sick Industrial Companies Act (SICA), the following are the
basic signs or symptoms of industrial sickness in India which can lead to
the identification of a company as a sick unit.

 Initially, the government put a guideline of 7 years minimum for a

company to be registered which was later brought down to 5 years.
 The company should have been at a loss in the present and the past
year.
  The complete net worth of the company must have crumbled
including the reserves and the paid-up capital.

Industrial sickness has been defined yet again in the Companies Act, of
2002 which is also the Second Amendment.

Causes of Industrial Sickness

Talking about the small-scale industry (SSI), there can be various reasons
for a company to suffer from industrial sickness. Therefore, the causes of
industrial sickness can be divided into two categories – Internal
Causes and External Causes. Let us look into the various causes of
industrial sickness below.

Internal Causes for Industrial Sickness

The internal causes of industrial sickness refer to such factors that arise
because of certain internal disorders and are within the control of the
management, such as-

 Financial crunch.
 Inappropriate production policies.
 Inefficient maintenance of machinery.
 No control over the quality.
 Lack of R&D.
 Incorrect market research methods and poor sales promotions.
 Improper corporate management.

External Causes for Industrial Sickness

Apart from the internal causes that we discussed above, there are many
external factors also that affect the level of industrial sickness. These are
the factors that are not directly under the control of the management such
as-

 Unavailability of skilled labor.

 Marketing constraints such as marketing recession or imprudent tax
policies.
 Shortage of raw materials, power, and fuel.
 Restrictions on import-export and high prices.
Remedies of Industrial Sickness
Finding a way to stop the industrial sector from falling prey to the menace
of industrial sickness is utterly important. In that direction, the Government
realizes the significance of finding ways of restricting the strong industries
from converting into sick units. It has been adopting a few measures to
revive the sick units and put a stop to industrial sickness.

Remedial to overcome for Industrial Sickness

The measures to overcome industrial sickness or remedies of
industrial sickness are enlisted below :

 Effective Planning

 Identifying sickness at initial stage

 Financial Assistance

 Improving Infrastructure

 Technology Up-gradation

 Marketing assistance

 Liquidation

 Government Intervention

 Training

 Rehabilitation

 Effective Planning : It is essential for every small and medium

sized enterprise to conduct in-depth survey of prevailing
circumstances in small scale sector and productive programmes.
 Only a small number of entrepreneurs initiate their operations
based on an accurate and diligent plan. Thus, effective planning
is essential as all small entrepreneurs require a detailed project
report or an all-inclusive feasibility study to start their units.
Absence of such a planning can affect entrepreneurs with issues
like inappropriate technology, under-estimation of costs,
unsuitable location, unqualified or inexpert consultancy service,
etc. Hence, it is indispensable for SMEs to launch effective action
plans for their sustenance.

 Identifying sickness at initial stage- Industrial sickness is

not an overnight occurrence but it is a gradual process taking
from 5 to 7 years Corroding the health of a unit beyond cure.
Therefore, the identification and detection of sickness at the
incipient stage is the first and foremost measure to detect and
reduce industrial sickness. It will not be less than correct to
argue that delayed identification of sickness could have been
mainly responsible for such high proportion of non-viable units
among the identified sick units.

 Financial Assistance -For avoiding industrial sickness, firms

and industries should arrange adequate credit for running their
business efficiently. There are many small and medium sized
firms which are incompetent to obtain proper financial support
from banks and other funding agencies, they primarily depend
more on owned funds and funds borrowed from non banking
sector. However, SEBI has devised guidelines and directives for
venture capital and better finance facility is expected for this
sector. Moreover, lending schemes offered by priority sector
 should be made more wide-ranging and general credit with
improved limit.

 Improving Infrastructure- Firms require many important

facilities to ensure smooth. functioning of its operations such as
finance,, water supply, power arrangement, etc. These facilities
are extended by small industries corporation. State technical
consultancy organisations and State Development Corporation.
However, their support system requires more improvement.
Evolution of industrial estates has resolved this problem partly,
yet more efforts are necessary to establish more industrial estates
to accommodate more small units.

 Technology Up-gradation -With the advent of technological

advancements, firms must attempt. to upgrade their process of
production. They must adopt the latest technology for producing
goods/ services. Under the following circumstances, government
consultancy organisations and laboratories play a crucial role. As
small firms are incompetent to spend money on the latest
technologies, government should arrange practical and modern
methods of production for them. If financially possible, firms
should also invest in their research and development activities.
They should always strive for constant innovation for leading the
market and sustaining in globalized business environment.

 Marketing assistance- Every firm must emphasize on their

market, brand and product development. They must strive to
persist in the market by paying exceptional significance on
quality enhancement programme. Offering products at cheaper
rates and transmitting the benefits to consumers would be
 advantageous in the long-run to raise their marketing
performance. Marketing the products of small units by charging
a very high price from the customers enables large companies to
earn substantial profits. Thus, firms should adopt effective
marketing strategies to overcome industrial sickness.

 Liquidation -In view of limited resources at the disposal, a

large number of sick units may have to be permitted to
close/liquidate; a fewer number of sick units may be picked up
for revival/rehabilitation and a larger number of weak units may
be combined together to prevent sickness. The time has come to
substitute the old adage that what cannot be cured has to be
endured’ by ‘what cannot be cured should be ended. However,
merger of a large number of sick units will be a welcome
proposition only when complete social security for labours
displaced due to unit closure is prevalent in the society.

 Government Intervention- In order to arrest sickness, at the

incipient stage, banks and financial institutions should
periodically review the accounts of small-scale industries
borrowers to identify units which are becoming sick or are prone
to sickness. The Government of India and the Reserve Bank of
India should be requested to direct commercial banks and
financial institutions to provide information on sickness to the
agencies like BIFR implementing the rehabilitation programs to
facilitate them to take appropriate action.

 Training — A proper environment must be created where an

entrepreneur will be educated and will have a proper knowledge,
Skill & experience about internal & external environment of
 business to compete with large Scale industries and
multinational companies. Industries must make coordinated
efforts in bestowing formal training and education to workers
involved in this sector as they are the real profitable asset of the
industry. Firms should consider the expenses incurred on
training and educational activities as investments for ensuring
long-term of the growth business.

Role of Banks and Governments in reviving industries

The banking system plays an important role in the modern
economic world. Banks collect the savings of the individuals and
lend them out to business- people and manufacturers. Bank loans
facilitate commerce.

Manufacturers borrow from banks the money needed for the

purchase of raw materials and to meet other requirements such
as working capital. It is safe to keep money in banks. Interest is
also earned thereby. Thus, the desire to save is stimulated and the
volume of savings increases. The savings can be utilised to
produce new capital assets.

Thus, the banks play an important role in the creation of new

capital (or capital formation) in a country and thus help the
growth process.
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Banks arrange for the sale of shares and debentures. Thus,

business houses and manufacturers can get fixed capital with the
aid of banks. There are banks known as industrial banks, which
assist the formation of new companies and new industrial
enterprises and give long-term loans to manufacturers.

The banking system can create money. When business expands,

more money is needed for exchange transactions. The legal
tender money of a country cannot usually be expanded quickly.
Bank money can be increased quickly and used when there is
need of more money. In a developing economy (like that of India)
banks play an important part as supplier of money.

The banking system facilitates internal and international trade. A

large part of trade is done on credit. Banks provide references
and guarantees, on behalf of their customers, on the basis of
which sellers can supply goods on credit. This is particularly
important in international trade when the parties reside in
different countries and are very often unknown to one another.

Trade is also assisted by the grant of loans by discounting bills of

exchange and in other ways. Foreign exchange transactions (the
exchange of one currency for another) are also done through
banks.

Finally, banks act as advisers, counsellors and agents of business

and industrial organisations. They help the development of trade
and industry.