Benefits-Drawbacks

What Is Hire Purchase System ?

It is a method of acquiring expensive assets under which buyer get the right to use products without making the whole payment. He/she obtains the asset by making the partial payment and the remaining amount is paid periodically in installments (interest is added in installment amount). The ownership of the asset remains with the seller and it will be transferred to the buyer after the payment of final installment. Hire purchase is beneficial for both sellers and buyers but it has some drawbacks also. In this post we discuss about the pros and cons of hire purchase system.

Benefits Or Advantages Of Hire Purchase System

The main advantages of hire purchase can be highlighted as follows:

Benefits Of Hire Purchase To The Sellers

1. Market Expansion

Hire purchase allows the customers to use expensive items or products without making the full payment. So, it attracts more potential customers which helps the seller to expand the market.

2. Increased Sales And Profit

It encourages the customers to buy more goods because the payment can be made in installment. So, it helps to increase sales which leads to increase in the profit of sellers.

3. Extra Income

Another benefit of hire purchase to the seller is that he/she can earn some extra income in the form of interest which is added in the installment amount.

4. Less Riskier

Hire purchase system is less riskier than installment system because ownership of the asset is not transferred to the buyer until the final payment. The seller can acquire the product or asset if the buyer fails to make regular payment.

Benefits Of Hire Purchase To The Buyers

1. Suitable For Small Traders

It reduces the financial burden of small traders because they can acquire expensive items such as plant, machinery, vehicle etc. by making periodic payments. It eliminates the complexities of borrowing fund from other sources to run the business.

2. Easier To Buy

In hire purchase system, buyers make payments in installment. So, Customers having lower income can buy required products easily.

3. Immediate Use

Buyers can use the products immediately after the first installment.

4. Tax Benefit

Interest payable is deducted from taxable income which provides tax benefits to the buyers.

Drawbacks Or Disadvantages Of Hire Purchase

The main disadvantages of hire purchase system can be highlighted as follows:

Disadvantages Of Hire Purchase To The Sellers

1. Huge Capital Required

Sellers require huge amount of investment to acquire expensive assets such as car, plant, machinery etc. to run hire purchase business.

2. It Involves Risk

Although the seller can take back the item in case of default payment, he cannot recover the actual cost of the product because value of second hand product is decreased.

3. Increased Bad Debt

If customers do not pay the installment in time, it may increase the amount of bad debt.

      Also Read:

Advantages And Disadvantages Of Leasing

Features Of Hire Purchase System

Difference Between Hire Purchase And Installment

4. Work Load

Hire purchase may increase the workload of the seller because more clerical and paper work is required to maintain sales accounts.

Disadvantages Of Hire Purchase To The Buyers

1. No Ownership Of Assets

Ownership of item is not transferred to the buyer until the final installment. So, seller can repossess the asset in case of default payment.

2. Higher Cost

Sellers add extra cost (interest) in the selling price of the asset. So, buyer has to pay more than the actual price of the item.

3. Larger Duration

It takes very long time to make full payment which may create frustration to the buyer.

4. Risk Of Overspending

It attracts more audience because of the periodical payment system. It may create artificial demand for the product in the market. Buyer may be tempted to buy unnecessary and expensive items. So, higher purchase may encourage overspending.

Pros:

- Sellers can attract more customers which helps to increase sales and profit

- Seller can earn extra income in the form of interest

- There is less risk for the seller because ownership of the good remains with him until the last installment.

- Buyer can obtain expensive item by making small initial down payment

- It may provide tax benefit to the buyer

- It is very beneficial to the small business firms to acquire valuable fixed assets

Cons:

- Large amount of capital is required to run hire purchase business

- There is a risk of default payment

- There exists a chance of increase in bad debts

- Because of the interest, buyers have to pay more than the actual amount

- It encourages overspending to the buyers

What Is Specialization ?

Specialization is a process of breaking down the jobs into smaller units. The task is divided among the people according to their ability. Employees become perfect in the specific field because they have to perform same task over and over. It practices division of labor where a complex task is divided into different pieces of jobs and assigned to different staffs. It helps to increase the performance and productivity of the organization.

Benefits Or Advantages Of Specialization

The main advantages of specialization can be pointed out as follows:

1. It Increases The Efficiency

In specialization, jobs and duties are divided among the employees according to their skills and abilities. It promotes the principle of 'right man in right place' which helps to improve the efficiency and performance in the workplace.

2. Less Errors And Mistakes

Specialization helps to reduce errors and mistakes because tasks are assigned to highly qualified and professional employees having good skills and experience. Specialist workers commit less mistakes and errors than non-skilled ones.

3. Time Saving

Employees have to do same type of job regularly over and over which helps to boost the speed in their performance. So, they can perform more tasks in less time than non-specialized manpower. 

4. It Saves Costs

Increased efficiency, less mistakes and quick performance increases the productivity of the business. Specialization also lowers the wastage and unnecessary costs which helps to minimize the cost of production and increase the earning of the firm.

5. Less Supervision and Control

As we know that specialization believes in the principle of 'right man for right job'. it hires highly competent and self-motivated employees. So, it requires less supervision, direction and control to perform activities.

Drawbacks Or Disadvantages Of Specialization

The main disadvantages of specialization can be highlighted as follows:

1. Monotonous Work

Because of the repetition of job or doing a certain type of job everyday may lead to monotony. Employees may feel frustrated and stressed. So, monotony of work may lead to decrease the performance and productivity.

      Also Read: 

Advantages Of Division Of Labor

Disadvantages Of Division Of Labor

2. Increased Expenses

Skilled employees may demand high salary and other financial benefits as compared to un-skilled workers. So, it may increase administrative expenses in the organization.

3. It Lacks Flexibility

A specific type of work is assigned to each employee. He/she cannot perform other types of jobs because of the lack of skills and abilities. So, employees cannot be shifted or transferred to other departments or units. So, there is less employees mobility or flexibility in the work station.

4. Lower Job Satisfaction

Because of monotonous, stress and frustration, the job may become boring. Employees cannot get the opportunity to learn new skills to perform other tasks. So, there is no scope for career development. So, specialization may decrease the interest in the job which may lead to decrease in employee satisfaction.

Pros:

- It helps to minimize errors and mistakes while performing the job

- It increases the quality of output

- It helps to increase the productivity that leads to increase in the earning of the firm

- Because of the increase in efficiency, it saves time and cost of production

- It sharpens the specific skill of employees

Cons:

- Employees may feel boring because of the repetition of the same job over and over

- There will be no flexibility in the workplace because employee hired for specific job cannot be shifted or transferred to another job

- High possibility of employee frustration and stress 

- It may decrease employee satisfaction

- It increases the expenses due to the high salary of skilled employees

What Is Trade Credit ?

Trade credit is a business practice where seller or supplier allows the buyer to purchase goods on credit without making immediate payment. It is a short term agreement (generally 15 to 90 days) and buyer should pay the bill amount before the due date. It is beneficial to new business firms and small traders for short term financing.          

Benefits Or Advantages Of Trade Credit

The main advantages of trade trade credit can be highlighted as follows:

Benefits Of Trade Credit To The Suppliers/Sellers

1. It Helps To Increase Sales

Trade credit encourages clients to buy more products and services because it does not require immediate payment. So, it helps the sellers to increase sales volume which leads to increase in the earnings of the business.

2. Better Customer Relation

Trade credit builds trust between the sellers and buyers which improves customer relation and loyalty. Better customer relation helps to increase repeated customers.

3. Attracts New Customers

Better of better customer relation and trust, it improves the image of the business. Good public image helps to attract more potential customers.

4. Competitive Advantages

Sellers who provide trade credit facility to their clients can increase their sales and gain more customers which helps them to compete with rivals in the market.

Benefits Of Trade Credit To The Buyers/Clients

1. Cost Effective And Convenient Source Of Financing

Trade credit may be the most cost effective and easy source of financing to start a new business because it reduces the capital requirement. It is very useful for those who cannot raise enough fund to commence  business. 

2. Better Cash Flow

It improves the cash flow and helps to maintain liquidity in the business. So, daily business activities can be performed smoothly without facing any financial problem.

3. Incentives And Discounts

Sellers offer incentives for early payment ro encourage their clients. Buyers also can enjoy the benefit of bulk buying.  

Drawbacks Or Disadvantages Of Trade Credit

The major disadvantages of trade credit can be highlighted as follows:

Drawbacks Of Trade Credit To The Sellers/Suppliers

1. Problem On Cashflow

The main disadvantage of trade credit to the seller is that it may negatively affect the cashflow and create liquidity problem. Suppliers may have to face difficulty to pay outstanding bills.

2. Monitoring Problem

It takes paper work, extra time and effort to maintain and monitor outstanding account receivable .

3. Risk Of Bad Debt

Another drawback of trade credit is that there exists a high chance of bad debt. If buyers fail to make payment, it negatively impact business. In this situation, sellers have to suffer from huge financial loss.

Drawbacks Of Trade Credit To The Clients/Buyers

1. Difficult To Obtain

Although trade credit is convenient source of financing, it is very hard for new businesses because they do not have past record. So, suppliers may hesitate to provide this facility to the new clients.

2. High Penalties And Interest 

If buyers cannot make payment on time, then suppliers may charge penalties and interest on debt. It becomes difficult for the clients to repay debt with interest.

3. May Affect The Image

It client fails to make payment by given deadline, then it negatively affect the credit rating that may hamper the image and goodwill of the buyer/client.

Pros (To The Supplier)

- It boosts sales and earnings

- It promotes customer relations and loyalty

- It helps to widen the market 

- It improves the goodwill and image of the firm.

Pros (To The Buyer)

- It is convenience source of short term financing

- It helps small businesses to main better cash flow

Cons (To The Supplier)

- Because of credit sales, supplier may face liquidity problem

- It may increase the bad debt because of default payment

- It requires extra time and work to maintain credit records

Cons (To The Buyer)

- In case of late payment, suppliers may charge higher rate of interest and penalties

- It is very difficult to obtain this facility for new business firms

What Is ABC Analysis Method Of Inventory ? 

ABC analysis of a technique of categorizing the inventory or materials according to their value and importance. Highly valued items are categorized in  class 'A' , least valued materials in class 'C' and less profitable items than 'A' and more profitable than 'C' fall in class 'B'. A strict control is required for highly important and profitable items (group A materials). Average control is exercised for group B and least control is exercised for group C inventory.       

Benefits Or Advantages Of ABC Analysis

The main advantages of ABC inventory analysis can be highlighted as follows:

1. Better Control Over Inventory

ABC analysis system of inventory management gives focus on the control of high priority products (inventory categorized in group A). Strict control over such materials helps to minimize wastage and misuse of most valuable items.

2. Provides Views 

It provides up-to-date information about the quantity and value of stock. It helps the management for decision making and forecasting.

3. Saves Cost

Because of strict control and minimization of wastage, it helps to reduce inventory cost. Materials that falls in group A or high valued products are purchase in less volume which helps to decrease material purchase, handling and storage costs.

4. Better Stock Turnover

Better control, cost reduction and waste minimization leads to increase in stock turnover ratio of the firm.

5. Effective Cycle Counting

ABC analysis provides accurate data about the inventory fluctuations which helps the manager in cycle counting.

6. Economical System Of Inventory

It is more economical than others techniques of inventory management because it does not spend more cost and effort for those materials which are grouped in B and C category. 

7. More Profit

Proper classification of inventory, better handling and cost reduction helps to increase the profitability of the firm.

8. Suitable For Big Firms

ABC analysis system is suitable for big business companies which consumes different types of materials in larger volume.

The main disadvantages of ABC analysis system of inventory management can be highlighted as follows:

1.  It Ignores GAAP

This method does not follow the rules of GAAP (generally accepted accounting principles). Therefore, it is suitable for internal use only.

2. Complex And Time Consuming

It is very complicated task to categorize materials in different groups. It consumes more resources such as time, labor and cost to group materials in case of large group of inventory.

3. Static In Nature

Value of materials may change according to the market trend. It means category A product may move to B and C may move to A with the change in dollar value of product in the market. In such situation, ABC inventory system may become outdated because of the lack of dynamism. 

4. Based On Financial Value

This analysis is based completely on the dollar value of materials and does not consider other important factors.

5. Not Suitable For

ABC analysis is not suitable for small business houses which does not require large volume of inventories. It is also not applicable for materials which cannot be standardized.

6. Possibility Of Loss

It gives less attention to B and C grouped materials. Therefore, there is a chance of loss because of over stock, damage and wastage of these items.

Pros And Cons Of ABC Analysis In Short:

Pros:

- It ensures better control of inventory by minimizing wastage and improper use of materials

- It is suitable for big manufacturing companies

- It improves stock turnover ratio

- It saves time and cost to store materials

- Because of effective control and proper utilization of materials, reduction in time and cost, it helps to improve the profitability of the business.

Cons:

- It is complex than other techniques of inventory control

- It lacks dynamism and flexibility

- It is not suitable for small firms because it consumes high resources

- It ignores GAAP

What Is Process Layout ?

Process or functional layout is an floor arrangement where machines and equipment of similar functions and processes are arranged in the same area. Similar types of machines and devices of each process are installed in the one floor or department. There are some benefits as well as limitations of process layout which are briefly discussed in this post.       

Benefits Or Advantages Of Process Layout

The main advantages of process layout can be highlighted as follows:

1. Flexibility

In process layout, changes and adjustment in operation can be made as per the requirement. So, it is more flexible than product layout. 

2. Less Interruption

Another benefit of process layout is that it does not interrupt the production process because if there is a breakdown in one machine the work will be shifted to another machine because there are other machines to perform similar jobs.

3. Easy Expansion

If the company wants to increase its production capacity, more machines and devices can be installed without disturbing existing layout and operation process. So, it has high scope for expansion.

4. Requirement Of Less Investment

Process layout avoids duplication of machinery which is not possible in product layout structure. So, it requires less capital to acquire machines and equipment.

5. Optimum Utilization Of Machinery

In product layout, machines and devices are used for single product line, but in process layout, they can be operated in full capacity because they can be engaged in different operation. So, it ensures maximum utilization of fixed assets.

6. Promotes Specialization

It ensures specialization in manufacturing process by using automatic equipment and highly proficient workers.

7. Less Supervision

Because of automation and specialization, less supervision is needed in this layout.

Drawbacks Or Disadvantages Of Process Layout

The main disadvantages of process layout can be described as follows:

1. More Cost Required

In process layout, equipment are arranged according to their functions. Similar machines are grouped in one floor. It increases the movement of materials from one process to another which increases the cost of materials handling. It also increases the chance of wastage because of intermittent flow of materials. So, it requires more cost of production than product layout.

     Also Read: 

Advantages And Disadvantages Of Product Layout

Difference Between Product And Process layout

2. More Floor Space

It requires more space to arrange machines and equipment. Separate floor space is required for the installation of different types of machines. So, it lacks optimum utilization of space in the production center.

3. Long Processing Time

Manufacturing process takes more time because of more movement of materials from one department to another. So, it is more time taking layout than product layout.

4. High Cost Of Production

Due to more material handling costs , wastage and slow production process, it increases the cost of production.

5. More Inspection And Supervision

It requires more inspection because each department should handle variety of jobs. It also requires strict supervision to control inventory.

Pros

- It is flexible and can be easily expanded as per the requirement

- There will be no stoppage in the production process

- Less supervision and control is required because of specialization

-  It fully utilizes the machines, equipment and devices in the work station

- It minimizes the overhead costs

Cons:

- It requires more investment

- More space is needed to arrange machines and equipment

- Due to long processing time, cost of production will be increased

- It requires more inspection costs than product layout