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ENTREPRENEURSHIP DEVELOPMENT
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ENTREPRENEURSHIP AND ITS SCOPE
Who is an Entrepreneur?
•Person responsible for setting up a Business or an enterprise.
•Takes initiative, has skills for innovation and looks for achievement.
•Agent of change and work for the good of people.
•Opens up employment opportunities, creates wealth and boosts other sectors.
•
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Highly self-motivated person, who take risks to achieve goals.
Firm believer in social betterment.
Visionary having outstanding leadership.
Desire to excel, strongly believes in R & D.
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Found in all areas.
Play important role in economic growth.
Aims at high goals.
Person, who identifies an opportunity, gathers the necessary resources, ultimately responsible for the performance of the organization.
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A French economist Richard cantillon in 1755, was the first to use the term Entrepreneur.
He said – “Entrepreneur is one who buys factors of production at Certain Prices and sells his Products at uncertain prices, thereby bearing a non-insurable risk that may arise, due to depressed demand for his product.
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Peter F. Drucker said – “Entrepreneurs are innovators. Innovation is the specific tool of entrepreneurs, this means by which they exploit change as an opportunity for a different business or a different service. He always searches for changes, responds to it an exploits it as an opportunity
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We can now say that entrepreneur is a person who bears the non-insurable risk, works under uncertainty, combines and manages the factors of production, innovates on all fronts on regular basis, functions as proprietary capitalist and is motivated by profit. Associated with three elements:- Risk–bearing, organizing, innovating.
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QUALITIES / TRAITS / CHARACTERISTICS OF AN ENTREPRENEUR
Strong achiever
Self-Reliant & Independent
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Determined and committed
Hungry for success, optimistic
Self confidence and self-faith
Sustained enthusiasm
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Courage & Self-motivated
Ability to survive defeat
Single-Mindedness
Willing to accept responsibility
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Never ending energy
Both thinker and doer
Clear objective & creativity
organization skills
Intelligent and have technical knowledge
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TYPES OF ENTREPRENEURS
1. INNOVATING ENTREPRENEURS:-
Introduces something new into the economy – New technique of production, a new source of material or product, opens a new mkt.
— Aggressive in experimentation.— Puts attractive possibilities into practice. — Commonly found in developed countries, as
people of such countries also look for change and progress, extensive research feasible.
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ADOPTIVE OR IMITATIVE ENTREPRENEURS:-
Adopt successful innovations created by innovating entrepreneurs.
Copy the technology and techniques, knowledgeCommonly found in developing countries as can not
afford expensive research.Have capacity to start ventures with limited
resources.Face lesser risks.Very important for developing countries as he
brings change.
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FABIAN ENTREPRENEURS:-
Very cautious and skeptical for change.Lack the will to adopt new methods.Shy and lazy for taking risksDealings determined by customs, traditions,
past practices.May change only for survival
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DRONE ENTREPRENEURS:-
Conservative and laggardsResist change, continue past methods.Struggle to exist, not to growMay be pushed out of the market, when they
loose the market.
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FUNCTIONS OF AN ENTREPRENEUR 1. INNOVATION:- Conceives / ideas for production of
new products/services or improvements in the quality of production
For this he considers the economic viability and technological feasibility.
Introduction of different kinds of electronic gadgets – innovation
Includes introduction of new products, creation of new markets, application of new process of production, discovering new and better sources of Raw-Materials, New form / culture of Industrial organization.
Innovation produces satisfaction & profits as he works on inventions – new knowledge.
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2. ASSUMPTION OF RISK OR RISK – TAKING:-
Assumes all possible risks of business.Also involves risks due to changes in tastes/behavior
of consumers, competition, new inventions and techniques of production.
For all such risks, he may bear losses as he takes up the responsibilities.
Invests capital, pays interest to lenders, Wages/ salaries, rent, working capital expenditures and after all these, may be left with little or no profits.
Being Enterprising, assumes risks and tries to manage / handle it by his skills, innovation, judgement, planning, expansion etc.
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3. BUSINESS DECISIONS AND ORGANIZATION BUILDING
Decides nature & types of goods/services to be produced.
Crucial decision of entering a particular industry, prospects of products in future and most profitable methods of production.
Decides about changes in size of business, its location, new branches, techniques, ways to develop business.
Organizes and monitors various factors of production, minimize costs of production.
Takes majority of core decisions himself but delegates authority and decision making when business grows and decisions become complex.
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4. MANAGERIAL FUNCTIONS:- Also performs managerial functions of
planning, directing, controlling, leadership etc.
Formulates plans, arrange finance, procure raw materials, arrange production facilities, HRD functions.
Large organs:- Delegated to paid managers.
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5. EARNING PROFITS:- As he takes up ventures, takes risks – for earning profits. Have strong motivation to earn profits and have success.
For this exploits opportunities.
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ROLE OF ENTREPRENEURS IN THE ECONOMIC GROWTH OF A COUNTRYi) AS AN INNOVATOR
They commercialize the inventions made by inventors, to produce better goods to yield both satisfaction and profits.
They implement inventors ideas as the same product made by many entrepreneurs.
Converts technical work of the inventor into economic performance
Assumes the role of a pioneer and an industrial leader. Innovational activities raise the productive efficiencies
of the economy resulting in greater output / income. Have to be innovative for survival and better
performance, to solve all the problems of business. All the resources combined by him.
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II) BALANCED REGIONAL DEVELOPMENT OF INDUSTRIES:-
Growth of Industry and Business leads to large number of public benefits like road transport, health, education, entertainment.
Rapid Development of Entrepreneurship ensures balanced regional development. e.g. builders making townships and shopping malls in many places in the country.
Competition in big cities force the entrepreneurs to setup business in small towns, helping development of backward areas.
Small scale industries found everywhere requiring meagre resources.
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III ) FOREX EARNINGS:-
By exports, bring foreign exchange for the country, enabling it to handle imports bills.
Foreign exchange reserves for any country improve the financial standing of the economy.
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IV) AUGMENTING AND MEETING LOCAL DEMAND:-
Entrep. help in meeting wide variety of demand for goods/services.
Need for new goods, products also get created by them, by many methods of promotion, education etc.
Many times in backward areas and states, entrepreneurs from other places come and start a business thus harnessing local resources, found abundantly and fulfill local as well as national demand.
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INTRAPRENEURSHIP
Also called intra corporate entreps.
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Persons with deep desire of personal achievements within organization are internal Entreps.
Creative and innovative people within the organization, catch hold of new ideas for product, service or process and work to bring their vision into reality.
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Work independently but do not assume ownership from employer. They are on the payrolls of the company. Incharge for an identifiable activity.
Allowed to reap the full benefit of their creative effort
May leave the company to start their own venture and compete with the company
Dynamic executive, leads company to greater heights that’s why encouraged
Top Management provide financial and technical assistance to their ideas.
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Entrepreneur V/s Intrapreneur
Basis Entrepreneur Intrapreneur
1. Status 1. Entrepreneur is the owner of the business. 1. Intrapreneur works as employee of the company
2. Capital 2. Entrepreneur raises the requisite capital himself.
2. Intrapreneur does not raise any capital.
3. Freedom 3. Entrepreneur works independently. 3. Intrapreneur is semi-independent.
4. Risk-taking 4. Entrepreneur is one who bears full risks of his business
4. Intrapreneur does not bear any risks of business.
5. Guarantee 5. Entrepreneur guarantees payment to suppliers of inputs.
5. No such guarantee is required to be given by the intrapreneur.
6. Norms and Rules 6. Entrepreneur operates independently. He is the master of his own show as he frames norms and rules of his business.
6. Intrapreneur operates from within the organization. He is an organization man and is bound by organizational norms and rules.
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DISTINCTION BETWEEN ENTREPRENEUR AND MANAGER
ENTREPRENEUR MANAGER
1. Introduces new ideas to increase
profits.
2. Sets up new venture
3. Assumes risks of economic
uncertainties
4. Earns profits which fluctuate.
5. Own boss and independent status.
6. Formal education not essential.
7. Very high amount of commitment,
self-motivation required.
1. Runs the business on established lines.
2. Runs an existing venture.
3. Undertakes no risk
4. Earns salary which remains relatively
fixed and regular
5. An employee and dependent on the
owner.
6. Formal education more important.
7. Commitment and self-motivation may
be relative
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METHODS & PROCEDURE TO START AND EXPAND ONE’S OWN BUSINESS
Decide which type of business organization would like to have
Type of organization determines risk, control, responsibility, decision of profits.
Decision to be taken after due care, clear vision, long term view.
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VARIOUS FORMS OF BUSINESS ORGANISATIONS
Sole ProprietorshipPartnership FirmJoint Stock CompanyCo-operative Society Joint Hindu Family Firm
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SOLE TRADER
Oldest form – owned, controlled by oneBears all responsibilities, risks & profitsManages himself, however may take the help
of family members/relatives/paid employeesSimplest and easiest formNo need for any legal formalities
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Features of Sole Proprietorship
One person’s controlSingle ownershipUnlimited & undivided riskNo. Govt. regulation / formalityNo separate entity of the firm
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ADVANTAGESEasy and simple formations No legal
formalities/approval/licenses required, start, close, expand sole trading concern anytime.
Quick Decision Making:- Sole authority to decide and no
interference – quick decisions.Direct & Exclusive Control:-
Full direct authority to run the businessExclusively accountable to himself
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Maintenance of secrecy:- Handles business single-handedly, so
business & trade secrets, remain with himSelf-Motivation and direct Incentive for work:-
Direct relation between efforts / rewards.Personal touch with customers:-
Always possible to develop close relations with the customers, better understanding of the customers and better satisfaction provided, goodwill improves.
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Economies in Management:- As compared to other forms of business,
majority of the activities controlled by the sole trader himself. Thus economies of scale do occur in business
Minimum govt. regulation/interventions.Socially Significant:- Many individuals
start with reasonable ease a sole trading concern in many sectors and places, generates self-employment, livelihood, initiative, confidence levels etc.
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DISADVANTAGES OF SOLE PROP.Limited Financial Resources Limited Managerial Abilities Unlimited Liability:- Debts of business relate
entire property.Limited Growth:- Lack of capital and
managerial skills lead to limited growth.Uncertainty of continuity:- If dies, there is no
guarantee of continuity.
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Suitability of Sole Proprietorship
Where capital required is small, limited. Where limited risk is involved.Where personal attention to individual
customers tastes & fashion required – beauty parlors, tailoring shops.
Where demand – local seasonal, temp-fruit sellers etc.
Where activities / Operations – simple – do not require skilled management.
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PARTNERSHIPLimitations of sole trader and need to
expand the business lead to the need to create a partnership firm.
Group of persons with different skills, capital, resources set up a combined business with common ownership and Management.
Risks, responsibilities shared
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Sec-4 of Indian Partnership Act, 1932- “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
Individually called partners & jointly a firm.
Terms / conditions contained in an agreement called ‘Partnership deed’.
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FEATURES OF A PARTNERSHIP FIRM
More persons required:- Minimum two Max. – 10 persons for banking business and 20 for Non-banking business.
Sharing of profits / losses as per agreementUnlimited Liability:- if the assets of the firm
fall short to meet firm’s obligations the private assets of partners can be used.
Contractual Relationship:- Oral or written agreement among partners.
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Lawful business:- partner to carry on lawful business & share profits / losses.
Utmost good faith and honesty required:-Principal – Agent Relationship:- Business
carried by all or anyone of them acting for all. Each partner represents the firm and other partners while performing business. Thus partner is an agent of the firm and also other partners.
Restrictions on Transfer of share:- No partner can transfer his share to an outsider without the consent of other partners.
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PARTNERSHIP DEEDThe agreement can be oral or written.Advisable to have written agreement to
avoid litigations and misunderstandings in future.
Agreement in written form called partnership deed which has to be signed by all the partners, stamped & registered.
Any modification only with mutual consent of all partners.
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A partnership deed generally contains the following:-
Name of the firmNature of the businessNames of the partnersPlace of businessAmount of capital contributed by each
partnerSalary / Commission payable to each partner
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Ratio of Profit sharingLoans / Advances from partners &
incentives to be paid.Duties, powers and obligations of
partners.Arbitration in case of disputes among
partners.Accounts settlement in case of
dissolutions.Maintenance of Accounts and
arrangement for Audit.E.D-41
ADVANTAGES OF PARTNERSHIPEasy Formation - However some difficulty in
selection of partners. Enhanced financial resources. Risks DividedFlexibility:- Easy to introduce changes like
introduction of a new partner, raising new capital, expansion of business.
Combined abilities & balanced Judgment:- Brains ideas, skills, capital of more than two persons pooled together for better management of business. Joint consultatrans may produce better business results. E.D-42
Business Secrecy Maintained:- No legal requirement to publish and circulate annual accounts / Financial statements.
Mutual Trust and Inter-dependence:-Each partner an agent of other partnersTeam sprit and inter-dependence developsAll partners get equal rights & powers.Easy Dissolution:- Can be dissolved by the
partners merely by expressing to each other their desire to do so.
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DISADVANTAGES OF PARTNERSHIP:-
Availability of Limited Resources:- Unlimited Liability:-
Held personally liable for debts of firm.Lack of Public Confidence
Annual accounts not published & made public
Hardly any legal control over these firms
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Instability:- Firm dissolved if any partner dies or become insolvent.Small disputes may lead to dissolution.
Non-Transferability of Interest:- No partner can transfer the business interest, to an outsider without the consent of all other partners. Even then it may not came easily.
Risk of Implied Authority:- Any partner can act as an agent of the firm or other partners. If negligent, acts carelessly, commits a mistake, other partners became equally liable.
Lack of centralized Authority:- Lack of a supreme and a centralized authority, as all partners enjoy the power of management. E.D-45
Registration of Partnership FirmNot mandatory as per partnership Act.But desirable to have registration Registration process – Firm applies to the
registrar of firms of the state Govt. in the prescribed applications form, signed by all.
Following information filled:- Name of the firm.Location of the business place.Other places, if any where the firm is carrying
on the business.
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Date of the commencement of the business.Date of joining of all the partners. Names and permanent addresses of all the
partners. Duration of the firm, if applicable.
When the registrar is satisfied with all the above details, he registers the firm by making an entry in the Register of firms.
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Dissolution of a Partnership FirmWhen a partner ceases to be associated with the
business, it is dissolution of partnership. Winding up of the business – dissolution of firm, new
agreement among remaining partners Three ways:-
1.Dissolution by Agreement:- As per P. Deed, compulsory dissolution as per agreement.
2.Dissolution by the court:- if one partner becomes of unsound mind/ one partner transfers his share to third party without authority.
3.Dissolution due to contingency- completion of firm’s venture, expiry of partnership period /death of any partner.
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ENVIRONMENTAL FACTORS AFFECTING THE SUCCESS OF A NEW
BUSINESS Entrps. require conducive social,
political and economic environment to start business and be successful.
Right environment, alongwith their efforts make them achievers.
Developed countries provide better environment.
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ENVIRONMENT FACTORS AFFECTING SUCCESS
I. ECONOMIC FACTORS:- Availability of Capital
Basic need is capital, to arrange for land, materials, machines, equipments.
Easy availability motivates entrepreneurs to start and grow. Raw materials Availability
Raw materials required for manufacturing and industrial enterprises.
Easy availability and access to raw-materials encourage entrepreneurs
Labour:- Quality / Quantity of Labour and its cost influence the entrepreneurship More flexible and mobile labour motivates.
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II. Social Factors 1. Education:- gives knowledge and better
understanding for solving day to day problems.Any country, the system of education has
an impact on people to inculcate and develop entrepreneurial values.
The knowledge given by education regarding growing economy, new business opportunities, trade on global standards, changing consumer behaviour influence some people to show their initiative and entrepreneurial talent.
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2. Caste Factor :- In every society, there are certain cultural practices and values that influence the actions of individuals.
Right from early life, people develop same inclination towards certain occupations, business – global trend.
In Indian society also, certain caste show better entrepreneurial initiatives.
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3. Family Background :-
Exp. of a family in some business – a motivating factor to encourage family members. Success factor encourages family members.
Expertise, traits, practices available within the family
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4. Market:- all the goods and services produced must get a market with customers willing to buy and with capacities to pay. Entrepreneurs feel encouraged if there is
potential in the market. Consumption trends provide encouragement to
the entrepreneurs. Size of the markets and its composition relating
to number of suppliers, competition, types of customers, their profiles motivate entrepreneurs and they look for opportunities to exploit.
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5. Infrastructure:- Availability of required infrastructure encourage entrepreneurs.
Developed communication, transportation, power facilities – big support for entrepreneurs.
With these better infrastructural facilities, entrepreneurs can develop new business and also enlarge their markets / supplies.
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III. PSYCHOLOGICAL FACTORS Need Achievement:- Sense of need achievement /
achievement motivation leads to growth of more entrepreneurs.
Motives:- Motive to earn wealth, seek power, prestige and be independent.
Entrepreneur thinks he can control his own life independently, does not believe in luck/ fate
Risk taking is quite high, confident of handling business risks.
Power of tolerance helps entrepreneurs. They must have a certain amount of tolerance for ambiguity/Uncertainty.
Entrepreneurs have the thinking of achieving more and more in less and less time.
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IV. POLITICAL FACTORS Entrepreneurs function effectively if govt.
provides them support. Govt must ensure that infrastructure is created,
required resources available and accessible to entrepreneurs.
Various polices of the Govt. relating to prices, capital availability, labour, taxation greatly affect entrepreneurship.
Providing incentives/ Subsides/ Tax benefits provide encouragement.
Stable Govts. Provide required encouragement.
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JOINT STOCK COMPANY Bigger form of business organ.Most of the limitations of other forms of businesses get
removed here. Most appropriate for large scale productions, economies of
scale, using advanced technology and arranging large capital.
A company is a voluntary association of persons, recognized by law, having a distinctive name and a common seal.
Formed to carry on business for profit with capital divisible into transferable shares
Members/ shareholders have limited liability. Organ has a corporate structure and a perpetual succession,
a going concern.
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FEATURES / MERITS OF A COMPANY Separate legal Entity
Company has a separate legal entity, independent of its members. Company owns property and enters into contracts in its own nameCan sue and get sued in its own name.
Limited Liability:- Liability limited to the extent of ownership of shares held. If the company has to pay the creditors, members/shareholders
liable to the extent of shares held or unpaid amount of shares subscription.
Prepetual Succession :- Not affected by the death, insolvency of a member or a director. Services as long as not wound upOld members may go and new may come but no effect on the
existence of the company.
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Artificial Legal Entity:- as created by law, does not come into existence through natural birth, called on artificial entity.
Common Seal:- as it is an artificial legal entity, it can not sign for itself, so as per law, it needs to have a common seal as a substitute for its signature. Approves its documents by putting the company’s common
seal which has the company’s name engraved on it, alongwith signature of at least two directors or other authorized officials.
Transferability of shares:- Shares of public Ltd. Co. transferable easilyCan be sold, purchased through brokers at the market priceSome restrictions in a Pvt. Ltd. Co.
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Ownership & Management Separated:- a public co. may have large no of shareholders but can not be asked to run the co. and look after the affairs of the company – so they choose same representatives called Directors, to run the company.
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Incorporated association of Persons:- No single individual can make/run a
company Is a registered association of persons,
requires at least seven persons to start a public limited company and two to start a Pvt. Ltd. Co.
Procedures to add more persons.
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Availability of Large Financial Resources – shares, Debentures, Bonds, Loans, etc.
Professional Management :- Employees Professional Mgrs as has
large financial resources, perpetual succession and growth path
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Considerable scope for growth and expansion:- due to large financial management, technical resource – very good scope for growth.
Public confidence:- People / shareholders have lot of faith, trust in
a Public ltd. Co. based on its performance, sales, quality, audited accounts and since regulated by companies Act., get listed, trading done liquidity available.
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Suitability of a Company Appropriate for large scale business and where:- Owners want limited liability. Business involves uncertainty / heavy risks, like shipping, mining etc. Heavy, basic industries requiring huge finances. Large scale operations crucial for economies of scale – manufacturing etc. CO-OPERATIVE SOCIETY
Profit Motive Substituted with Service Motive. An association of persons, usually of limited means, who have voluntarily
joined together to achieve a common economic end. Associate together to promote common interest Generally formed and registered under the co-operative societies Act 1912. Form of business organizations can be applied to every type of economic
activity. Members supply the capital by buying the shares of the society. Each shareholder has one vote in the management of the business,
irrespective of the number of shares held.
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FEATURES OF A CO-OPERATIVE SOCIETY
Voluntary associationDemocratic style of Management Equal voting Rights.Service Motive Limited Returns of
Capital:- Limited rate of interest presenting max 10% is given as capital invested.
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State Control:- Working governed by the Co-operative societies Act of 1912 or the state co-operative Act of the state Society to be registered under these
Acts and rules, regulations followedAccounts to be audited and a copy to be
submitted to the registrar. Separate Legal Entity: - as it has to be
registered can own property, enter into contracts
sue and be sued in its own name.
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Equitable Distributions of surplus:- Equitable distributions of surplus to its members, irrespective of the capital contributions.As per co-operative society Act. 25% of its profits,
after meeting its trading expenses and paying a fixed rate of interest on capital not exceeding 10% to be transferred to general reserve.
Also, portion of the profit not exceeding 10% to be utilized for the general welfare of the locality where the society is functioning.
Remaining distributed to members, collectively. Suitability:- For small and medium business
like retail stores, building societies, etc. Few cases of Large – Amul – kaira dist. Co-
operative society. E.D-68
JOINT HINDU FAMILY FIRMAlso called Hindu undivided family. Found only in India and governed by the
provisions of Hindu Law.Family consisting of Grand Parents, parents and
sons carry on business. HUF defined as a form of business organ in
which all the male members of a HUF carry on business under the Management and control of the Head of the family called Karta
This business disappearing due to decline of the Joint family system.
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FEATURES OF HUFMembership for male child by birth. Minors can become full-fledged members Restrictions on Female Membership (can not Join)No limit on members – minimum twoNo need of registration as per Hindu Law.Management by Karta – Senior Most Member.Liability of Karta is unlimited. Perpetuality – Death of a member or karta is no matterRights / Duties governed by Hindu sucession Act 1956.Fluctuating share – due to birth or Death of a Male Member. Right to Accounts – Members can ask details of A/C’S from Karta when leaving or disintegration of family.
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MOTIVATION OF ENTREPRENEURS
Motivation is something that moves the person to action and continuous him in the course of action already initiated.
Factors that motivate some people to start business enterprises are:-
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I. Internal FactorsEducational Background Occupational ExperienceDesire to do Something Pioneering and
InnovativeDesire to be Free & Independent Family Background Internal factors lead to do something creative,
introduce an entirely new product in the market, place hometown on country’s industrial map, make use of technical skills, give employment
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II. External Motivating FactorsAssistance from govt. Financial assistance from institutions Availability of Technology / Raw
MaterialEncouragement from big business unitsOthers – Availability of surplus funds,
sick units available at cheaper price, support of friends / relatives, dissatisfaction of job held
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ACHIEVEMENT MOTIVATION Achievement Motivation theory developed by
David McClellandAn individual’s need for achievement (n-ach)
refers to the need for personal accomplishments. A drive to excel and strive for success. Person
with high achievement motives takes calculated risks and wants to win.
Take personal responsibility for initiatives and solving problems. Plus – keep on evaluating themselves – how well are they doing and what more required.
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Do something better and more efficiently than others have done before
Not for social recognition but for the inner feeling of personal accomplishment.
This need for achievement motivate some persons to take risks and prove themselves.
Such persons behave in Entrepreneurial way and take initiatives.
McClelland considers the need for achievement to be the most important and critical element for country’s economic development.
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He termed the need for achievement as inner spirit. Higher it is, more energetic entrepreneur would grow, high need for achievement motivates entrepreneur to take risks, work hard, innovate, save more, reinvest savings in business.
Said-achievement motivates lower in underdeveloped countries compared to developed countries – lack of ambitions explains the lack of enterprise in underdeveloped nations. The ambition motivate people, make them active, broaden success and make their life meaningful, builds up achievement pressure in persons.
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Duty of leaders and teachers to build up ambition into the minds of young people. Ambition nourish the achievement motivates and brings economic growth. However ambition differs among individuals on the basis of the environment in which they are born and brought up.
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Becoming EntrepreneurPersonal and environmental barriers
to entrepreneurship
Entrepreneurship is influenced by many personal & environmental barriers.
Personal barriers or factors can be Qualifications, skills, experience, knowledge and environmental factors could be economic, social, and political factors.
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PERSONAL BARRIERSLack of Viable conceptLack of Market Knowledge Lack of Technical SkillsLack of Seed Capital Lack of Business Know-HowComplacency – Lack of Motivation
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Social Stigma-Compared to successful ones.
Time pressures Legal constraints & Regulations
(Not in Residential Areas) First Generation EntrepreneursEntrepreneur by Accident since was
unemployedE.D-80
ENVIRONMENTAL BARRIERS
Sudden Changes in Government policySudden Political UpsurgeOutbreak of war or regional conflicts e.g.
“Sons of the soil” call Political Instability or hostile govt. attitude
towards industryExcessive red-tapism and corruption among
government agencies
ENTREPRENEURSHIP IS ENVIRONMENTALLY ORIENTED
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Ideological and social conflictsUnreliable supply of power, material,
finance, labour and other inputsRise in costs of inputsUnfavorable market fluctuations.Non co-operative attitude of Banks
and Financial Institutions Competition
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PROBLEMS IN SETTING UP A NEW VENTURE
I. Lack of Managerial experience or poor knowledge of the particular line of production:-
All-round knowledge about various aspects of Production, Processes, Management Not known – what, how and when to produce, how to market the products, maintenance of accounts, financial transactions understanding etc.
None of the above areas can be ignoredChanging technology, methods of production not
known.
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II. Lack of Accounting knowledge/ system
Information, Understanding about costs, gross margins, break-even point, depreciation is lacking, thus decision making may become difficult.
Difficult to maintain proper accounting Data etc.
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III.Wrong / Inadequate Estimate of cash requirements or faulty capital
planning / budgeting.Proper Financial Planning Essential for
proper functioning of the enterprisesNew enterprise feels cash crunch when:-Production does not reach optimum levelProduction is below Break-Even PointFails to Create and Increase the Demand
for products. Result – wastage of FinanceDelay in various activities will cause need
for additional finance. E.D-85
IV. Lack of Knowledge About Tax-Related Matters
May not be Aware of provisions related to Income Tax / Sales Tax, Obtaining of Sales Tax Registration at the right Time, Filing Tax – Returns.
V. Erratic Shortages of Raw Materials.
VI. Flourishing Black marketVII Gaps between official promise and
performance by various deptts.VIII. Irresponsible attitude of employees.IX. Rising cost of capital & credit.
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X. Arrogance and Non Co-operative Attitude of Bankers
XI. Inadequate common services like road, power, water in the area
XII. Emerging competition XIII. Lack of knowledge about
inventory management
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STAGES FOR SETTING UP A NEW VENTURE Or
PROMOTION OF A VENTUREFoundation of an enterprise is the project or the ventureVenture is a plan or an idea which is intended to be
carried out in the futureVentures can be industrial, agricultural, Production,
Services etc.Entrepreneur originates the idea, makes a detailed
study of various aspects of project, estimate the profit, finally implements it.
Setting a New Business not an easy TaskVarious difficulties to be faced in creating the business
and making it successful
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BASIC CONSIDERATIONS IN SETTING UP A NEW BUSINESS UNIT/STAGES
An entrepreneur wanting to start a new venture has to take decisions with regard to following:-
1. SELECTION OF A LINE OF BUSINESS:-Proposed idea analysed to find out whether the
business would be profitable, including probable risks and the capital required.
Conduct survey of various business opportunities.Make feasibility reports, surveysEstimated Costs, Profits, Returns Analysed
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2. CHOICE OF FORM OF OWNERSHIP
Could be sole proprietorship, P.Ship or a Joint stock company
Choice of form will determine the authority of the entrepreneur
Size of business also will determine the form of organ.
Company form more suitable for large business Sole Trader / P.Ship for Small / Medium Capital requirements, Managerial Skills,
Coverage will also decide the form
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3. SIZE OF BUSINESSSize of the firm influenced by various factors like
Technical, Managerial, financial and MarketingSome factors favour the large size of business while
others operate to restrict the scale of operationWherever Entrepreneurs confident of marketing their
products widely and arrange large resources can start large business
For new ideas / business beginning can be made on small / medium scale.
Forces of risks and uncertainties can restrict the size of business
Basic purpose of the optimum size to achieve max. output at minimum cost
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4. Financing the Proposition
Adequate amount of capital for starting and running the business to be arranged.
Capital to be arranged for fixed as well as working capital
Large businesses to arrange capital from various sources.
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5. Location of Business
One of the very difficult decisions Location to be reviewed from the
point of view of access to raw materials, labour, power, Markets and services like banking, Insurance, Transport, communication.
Location has to be optimum to have minimum costs of production from and distribution
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6. Machines and EquipmentChoice will depend upon availability of capital,
size of production, nature of production processes. Mechanisation needs to be optimum, leading to
higher productivity.
7. Human ResourcesRight kind of Skilled, Unskilled and
Managerial Staff necessary to avoid huge losses of time, money and effort.
Proper Training and Motivation to be provided.
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8. Plant LayoutAn efficient Plant Layout allows
materials to move through rapidly and the most direct way possible.
It reduces Transport, Materials Handling, Clerical and other Costs and increases inventory turnover.
Experts Services can be used.Must reduce chances of delay and
bottlenecks in the Production Systems.
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9. Procedural FormalitiesNo formalities in sole Traders and Partnerships.Co. exposed to greater procedural formalities
both at incorporations and during its life. Incorporation compulsory, documents and fee
deposited with the Registrar of cos. A public co. also obtains certificate of
commencement. Co. also required to send periodical returns to
the registrar of cos. and stock exchange authorities.
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10. Tax-PlanningEntrepreneurs to visualize well in
advance the various taxes to be paid.11. Launching the Business Enterprises:-
Promoter actually arrange men, material, machinery, money and the managerial ability.
Makes organ. Structure, various deptts. Mkg., Prod., Finance, HR Made to accomplish goals.
Advtg. Sales Promotions to be done.
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ENTREPRENEURIAL INPUTSEmergence and development of Entrepreneurship
depends upon many economic, social, political, psychological factors.
Various Entrepreneurial Inputs influencing the entrepreneurship are as under:-
I. ECONOMIC INPUTS
Capital:- Most important InputRequired for arranging Land, Raw Material, and
Machines and finally for production. Additional capital also required for expansion of
business.Entrepreneurship increases if capital supply increases
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2. Labour:- Quality of Labour more important than the quantity of Labour for entrepreneurship.
Entrepreneurship gets encouraged of flexible and mobile labour force available
Considerations of economic and emotional security inhibit Labour Mobility.
Entrepreneurs may find it difficult to secure sufficient Labour, at cheap costs.
At times costly arrangements may have to be made to recruit the necessary labour
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3. Raw-Materials:- — Easy and sufficient availability of Raw-
Materials leads to emergence of Entrepreneurship
Areas rich in many types of raw-materials encourage persons to come forward to start enterprise.
Good quality raw-material available is a big boost to the entrepreneur
Sugarcane as raw material in U.P. has given rise to many sugar mills in U.P.
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4. MARKET:- Potential of the Markets becomes a determinant for
entrepreneurial activity and initiatives. From Market will come sale and profit for entrepreneurSize and composition of the Market bath are crucial for
entrepreneurs. Monopolistic condition in the market liked by an
Entrepreneur but fact remains that markets are competitive.
Competitive Market Condition can be tackled by improved Quality, innovative techniques, better services.
Progressive Markets encourage entrepreneurs
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5. InfrastructureNeeded and Required Infrastructure encourages
entrepreneurs Properly developed Communication, Transportation,
Insurance Facilities leads to boost the Entrepreneurial activity.
Good Infrastructure helps in expansion of business and also for new initiatives.
e.g. Industrial Estates give good push.— Trade Associations, good business schools provide
inputs, informations. — Government must take care of good Infrastructural
facilities if it wants good Industrial Development.
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II. SOCIAL INPUTSSome social factors do contribute towards
development of Entrepreneurship1) Family Background:- Type and Economic status of family, matters.Wealthy and Landloard families exhibit higher
levels of Entrepreneurship.History of a family in business lead to
entrepreneurial ventures. Background of a family in Manufacturing provides
a source of industrial Entrepreneurship Business families are more venturesome.
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2. Caste FactorMany cultural practices and values do
encourage entrepreneurship, in each society These divisions, practices are normally very oldE.g. Hindu Society, prima facie business people
were categorized and majority of businesses emerge from there.
Social caste equations, to a great extent provided monopoly in business ventures
Dominance of entire groups in entrepreneurship – global phenomena
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3. EducationEducation is power to provide skills and
knowledge to deal with day to day problems. In a society, the system of education plays an
important role in developing Entreprenurial values.
In general in India, our educational system does not encourage entrepreneurial initiatives but prepares for different jobs.
However development of vocational courses and professional course is encouraging entrepreneurship.
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4. Cultural Values
Entrepreneurial Growth requires proper motives like profit – making, prestige, attaining social status & power.
Persons having such strong motives normally try to venture out, take business risks & start enterprises.
Culturally wealth accumulations is a way of life – will encourage entrepreneurship
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III. Psychological Inputs. Many theories of Entrepreneurship indicate towards
some psychological inputs required to be entrepreneurs. Mental thinking, inner spirit, commitment, outgoing
mind, hard work, leadership quality are also responsible for encouraging entrepreneurial initiatives.
Need Achievement:- McClelland talked about need achievement to excel.Need achievement motivates to take risks and
stimulates for taking more efforts.Other theories talked about Leadership, Managerial
Skills.
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Innovative Mind:- Creative Minds more likely to be
Entrepreneurs. Sense of Achievement:- Personal sense of
achievement motivates some to do something on their own.
Motives:- Seek power, prestige, service to society, independence encourage Entrepreneurship.
Others:- Non influenced by Luck, fate and take initiatives and risks, tolerance for ambiguity.
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Political InputsGovernment support required for the success of entrepreneursAs Entrepreneurs contribute towards the well being of the society,
Government must provide required resource to them by taking various actions.
Government must make appropriate economic policies regarding availability of capital, Labour, raw-materials, Taxation, income distribution, economic growth, infrastructure, transportation etc. as they affect the growth of entrepreneurs to a large extent.
Incentives, subsidies, Tax benefits by the Government motive them further.
Easy Licensing, restriction on monopolies also desirable. Political stability provide consistent growth oriented policies and
support to entrepreneurs. Opening up of some sectors by the Government for private sector also
encourage many entrepreneurs to show their worth.
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PROBLEMS OF SMALL BUSINESS 1. Shortage of Material & Power:-Face acute shortage of basic raw materials at times. Under a handicap in obtaining raw materials of
requisite Quality at reasonable prices. Some short supply of raw material may increase the
prices and rise in prices puts pressure on these firms to procure the Materials etc.
Some times few bogus units take away Quota of Scarce Materials and create shortage.
Also face power shortage and are not able to fully utilize their plant capacity – Power not available due to cuts and can not install their own power generating sets.
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2. Lack of Adequate Finance:- Often unable to procure adequate financial
resources for purchase of machinery, equipment, raw materials due to their weak financial standing – credit may also not be available. 3. Competition from Big Players:-
Low goodwill and little fixed investment make it difficult to borrow at reasonable interest or lower interest rates.
Largely depend upon internal resources as are not able to borrow easily from others.
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4. Outdated Technology:- Most firms use old Techniques of
Prod. and outdated machinery / equipment.
Can not use latest ones – Quality suffers
Research & Development not possible on a continuous basis and thus Productivity / Quality suffers.
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5. Inadequate Marketing Facilities:-
— Many difficulties faced in marketing and distribution – do not have their own Marketing Network.
Find it difficult to sell at remunerative prices due to high cost of production and non-standardized quality of products.
Can not afford much advertising, sales personnel
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6. Weak Organization & Management:- As generally managed by owners, not
qualified.Lack of Distribution of Labour.7. Lack of Trained Personnel:- Find it difficult to recruit, retain and
motivate skilled managerial and technical people as they leave for large business.
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PREPARATION OF FEASIBILITY REPORTS
Before starting any venture / enterprise, an entrepreneur must study the feasibility of the project.
Type of Industry / Business to start, where to start and how to start.
Various items / area can be listed, shortlisted which have scope for developmentPROJECT FEASIBILITY ANALYSIS
Includes – Market analysis Financial analysisTechnology analysis Profitability analysis To study the strengths and weaknesses of the projects.
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MARKET ANALYSIS INCLUDESMarket area / size, methods of
transportation, channels of distribution and general trade practices.
Study past and present demand, consumption patterns, major common pockets, future potential – past and present supply – domestic and imported, extent of competition – selling power, quality and marketing practices of competition.
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TECHNICAL ANALYSIS INCLUDESWhether the project is technically feasible or not, costs
involved. Study the techniques, processes to be applied.Description of the product – physical, mechanical and
chemical specifications, uses of the product. Processes flow chart – justifications for use of a particular
process.Plant size and prod. Schedule.Selection of Machinery, equipment, quotations, suppliers,
delivery, terms of payment, spare parts availability.Location of the plant, raw material.Cost of setting up building, other infrastructure. Estimate of the production cost of the product
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FINANCIAL ANALYSIS INCLUDECapital RequiredSources of Financing Total Project CostInitial Capital Required Working capital requiredBreak even point study Cost – Price analysis
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PROJECT REPORTWhat is a project?
The foundation of an Enterprise is a Project as it will lead to success or failure.
An idea or a plan that is intended to be carried on in future or is being carried out at present, is a Project.
Has a distinct mission, for the completion of which a group of activities are carried on.
Every entrepreneur wants to complete the project successfully.
E.g. Industrial Projects, Construction Projects, Making of Flyover, running a School.
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PRODUCT IDENTIFICATION & PROJECT FORMULATION
Entrepreneur comes across many business opportunities & becomes difficult to identify the most suitable one
Prduct identification involves collection, compilation and analysis of economic data, for the final choosing of the best opportunity for investment.
The success of the Project or venture will depend upon the right choice made.
The skills, availability of resources, background, and qualifications play very important role in identifying the right project.
Before identifying the right project, study should be made with respect to raw materials, potential customers.
Also study of environment, Government policies, technology to be used etc E.D-120
PROJECT FORMULATIONA process where the entrepreneur makes an
objective & independent assessment of the various aspects of a project idea to determine its total impact & liability.
Specialists and consultants provide advice.Careful weighing of various components.Analytical stage where aim is to achieve the
project objectives with the minimum expenditure & adequate resources.
Project formulation leads to making up a project report which is very crucial for setting up an enterprise
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PROJECT REPORTAfter selecting a particular project – product or service, a project report has
to be prepared by the entrepreneur. A project report provides all the necessary information / details of the project
/ unit offering a product or service. Required by financial Institutions / Development Institutions offering finance
or other assistance.A project report will enable the entrepreneur to know:-
Money, Manpower, Machines RequiredTechnology, LocationEconomic viability and gains. Technical Managerial, Financial needs.
Project report, prepared by C.A., Management Consultant, Experts. Entrepreneurs own judgment, views important as it will bring him close to
realities. His own involvement in making of a project is very crucial.
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SIGNIFICANCE OF A PROJECT REPORTThe important benefits of a project report are:- 1. Helps in procuring suitable developed land
or shed from concerned deptt. of the Govt. 2.Helps in approaching Dist. Industries centre for
obtaining provisional or permanent registration.
3.Helps in securing supply of raw-materials, water, power etc.
4.Approaching Bank / F.I. for working capital loans.
5.Obtaining term loans from SFCs/Banks/F.I.
6.Preparation of Techno-Economic viability reports of the project.
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CONTENTS OF A PROJECT REPORTNo Short cut to prepare a well-prepared business plan or a
project report. Project report to be prepared with great care and should be a
concrete, complete and clear. A good project report should have the following contents:-
General Information:- Product / Profile and details of the product.
Promoter:- Name full address, educational and other qualifications, work experience and project related experts.
Location :- Exact location of the project, lease or freehold, locational advantages.
Land & Buildings:- Land area, construction area, type of construction of building, cost of Land, building, plant layout etc
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Plant & machinery:- Details of machinery required, capacity, suppliers, cost, various alternatives available.
Production Process:- Details of production process, process flow-chart, technical know-how, production programmes, targets etc.
Utilities Required:- Water, power, steam cost estimates, sources of utilities.
Transport & Communications:- Modes of transport / Communication to be used, various costs involved.
Raw-Materials:- List of raw – material required, Quality-Quantity and source of procurement, costs, supply arrangement etc.
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Manpower:- Various types of Labour, to be employed, sources of Manpower cost of recruitment / selection, training etc.
Products:- Product Mix Variants estimate of sales, distribution channels, product standard & quality, competition etc.
Market:- End users of the products, - Type of Mkt-local, domestic or international, trade practices, sales promotions methods, marketing research.
Working capital Requirements:- Sources of working capital and amount required, need for collateral security, nature and extent of credit facilities which will be available, etc.
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Funds requirement:- Break up of project cost in terms of cost of land, building, machinery, preliminary expenses contingencies, total amount required for setting up the full project.
Cost of Production & Profitability for first 10 years.
Break-Even Analysis – Point at which no profit, no loss.
Schedule of Implementations
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SELECTION OF A FACTORY LOCATION Multiple locations may be available for
locating a factory.Few sites more suitable Factors for a suitable location can be – raw
material, transportation, labour, supply of water, power, and attitude of local Govt. etc.
Different type of business may prioritise the above factors. A good balance of all these factors may lead to choosing the right location.
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THREE – STEP PROCESSSelection of the region, district, state.Particular part of the city/district –
East/West.Selection of the plant site, plot etc.
One follows the other – All are inter-related. The comparisons play very important role. Lot of information do help.
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FACTORS AFFECTING INDUSTRIAL / FACTORY LOCATION
1. FACTORS AFFECTING SELECTION OF A REGION While keeping in view the nature of business, the following are
considered when choosing a region:- 1. Availability of Raw Material— Cost of raw – materials an important issue for cost of production.Nearness to the raw-materials very useful. 2. Labour Availability:- Labour an important factor of Production and it greatly affects the
locationEntrepreneurs want easy supply of labour at low wages Location should attract mobility of labourMore organized Labour in some state may discourage entrepreneur
to located his plant.
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3. Accessibility to Markets:- Sole aim of manufacturing is selling Easy, quick access to the markets crucial factor for locations. Industries whose products are costly to carry, on account of fragility,
perish ability or bulky may be located in close proximity to the markets. Nearness to markets have many benefitsSaves time & transportation costs. 4. Fuel, Water, Power Supply:- — For arriving at the final cost of production the cost of power, water,
fuel will have to be considered. Sources of energy / fuel like coal, gas, electricity and their easy and
cheaper availability will help in locations. If certain industries need lot of water for its processes then a place with
good availability of water must be chosen.
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5. Communication Transport Facilities — Raw materials to be brought to the factory & finished
products to be dispatched economically. Good transportation facilities including storage, handling &
service facilities in a place will motivate an entrepreneur to locate his factory at an ideal place
Cheap and easy transportation is an important considerations Sometimes, to save transportation costs, the entrepreneurs
may try to locate the factory from where raw-material may be nearer.
Better communication facilities are very useful for the success of the business. Their easy availability will also help in choosing a right location.
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6. Natural and Climatic ConsiderationsTopography of a region, level of ground,
drainage facilities, disposal of waste products and the climate also greatly affect the locations.
Extractive industries like coal, iron ore located in regions where they are available in plenty.
Dry climate is required for flour mills – in U.P. Humid climate required for cotton Mills –
Mumbai. Good Climate also encourages employees to
work better / harder.
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7. Personal choice of the Entrepreneur being home town or some other personal preference.
8. Open a factory in a region where all the facilities are already there, including an established mkt
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9. Political and strategic considerations. Political stability may also influence setting
up industry in a particular state. Disturbed area and failure of the Govt. to
curb the disturbances is also a negative factor.
10. Govt. Policy:- Govt. Encourages setting up industries in backward areas by giving subsidies, tax-rebate, good transport. This attracts entrepreneurs and the state achieves balanced regional growth.
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Financial Facilities:- Finance – life blood.Availability of financial institutions and easy terms for finance
also a consideration for locations.Offices of Financial Institutions.Locating a factory – a long term proposition and so above points
to be considered wiselyFACTORS AFFECTING SELECTION OF A COMMUNITY,
DISTRICT WITHIN THE REGION:- Adequate labour supply in Quantitative and Qualitative TermsGeneral attitude of the people should be industry friendly.
Should not indulge in frequent strikes.Prevailing wage-rates be reasonable.Availability of complementary or supplementary enterprise
supplying various raw-materials etc.Tax burden be moderate and compliance of laws, acts etc.Living conditions in the place should be favourable so that the
employees at all levels get proper social life.Urban or Rural area to be decided, as both have merits /
demerits. E.D-135
III. FACTORS AFFECTING SELECTION OF A SPECIFIC SITE:-
Last stage- for actual plot / site.Size of plot for present and future
needs.Load-bearing capacity of land for heavy
building.Better water and power facilities. Easy sewage, waste disposal facilities.Easy approachable roads, rail links.Cost of the land.
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INDUSTRIAL ESTATESSpecially designed area where factories
can be built (a U.K. concept for encouraging industrial growth in selected area.)
Basic infrastructure & common services facilities created for development of industrial units.
Utility services – water, power, drainage, transport available to all units – low, subsidized rates
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Objectives of Industrial EstatesPromotion of small / medium industries
– backward areas.Removal of congestion in Industrial
cities / towns.Balanced reg. development by
decentralizing industry.Growth of ancillary industries in the
townships surrounding major industrial units.
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Advantages of an Industrial Estate to Entrepreneur
Offers industrial sites / plots at reasonable rates and the decision to buy can be quick
Utility services – water, power, drainage and common services – testing center workshops, banks, insurance, courier available at subsidized rates etc.
Promoters of such estate provide safety, security and protection.
Combined strength of Entrepreneurs can help the entrepreneurs to bargain
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Demand Analysis & Market Potential Measurement
Q.1. What is the likely total demand for my product / service?
Q.2. What share of the market my
product will enjoy?
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While searching answers to above questions demand analysis get made. (Consumption, competition, substitutes) Demand Analysis is the in-depth study of and assessment of many factors including:-Patterns of consumption Growth.Composition of the marketNature of competition Availability of substitutesReach of distribution channels Increase of the consumers Price elasticity of demand
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KEY STEPS FOR DEMAND ANALYSIS
1. Situational analysis and specification of objectives.
Informal talks with customers, competition middlemen, others etc. and details gathered.
Situation analysis generates enough dataLittle later, specific objectives, with relation to
the product / service to be stated, questions made.
Answers will bring clues for demand of the product.
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2. Collection of Secondary Information Secondary Information – which is already
available, as gathered in some other context.Secondary information provides the base
and the starting point for demand analysis – books, journals.
Provides clues for collecting more primary informations.
Sources can be census reports, economic survey, annual reports, economic survey, annual reports of Ministries, Journals, Research Reports etc.
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3. Conduct of Market Survey
Primary information in the shape of Market survey supplements secondary information.
Survey can be Product / customers / Segment / Behaviour specific
Costly and time consuming Population or sample survey
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4. Characterization of the market
Demand for the product / service has to be described with respect to:- Effective demand in past & present Total demand broken down as per the segments. Competitive Pricing / Competitions.Methods of distribution & sales promotion
methods required. Consumers behaviour, attitudes, likingsGovt. Policy – import duties, export incentives
excise duties, import policy etc.
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5. Demand ForecastingAttempt made to forecast future
demandSale in monetary terms / units to be
sold.Will help greatly the sales deptt.Various methods / intuition used in
forecasting demand – computers used
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6. MARKETING PLANNINGAn appropriate Market Plan required to enable the product to reach the right markets.
All 4 Ps of Mktg. to be taken care
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MARKET POTENTIAL MEASUREMENT
A market potential is an estimate of the maximum possible sales opportunities present in a particular market segment and open to all sellers of a good or service during a stated future period.
By using the appropriate marketing methods, how much a particular product can be sold to a particular segment in a specified future period.
Cell phones, Luxury case, LaptopsE.D-148
STEPS TO MEASURE MKT. POTENTIALMarket identification:- Identify the
Mkt./Users, market segment, their interests, patterns.
Market Motivation:- Find why customers buy the product today & why potential customers will buy in future – study mind – factors of users.
Measuring the Market Potential:- Cases not be done directly straightaway. Market factors to be analyzed – all do not buy LIC Policy to save taxes
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CAPITAL SAVING & PROJECT COSTING
Financial analysis most important tool for appraising the real worth of a project.
Looks at capital cost, operations, cost and operating revenue.
Cost of the project concerned with the size of the funds required.
Every project’s cost to be calculated to bring together land, labour, assets, machinery, materials etc.
Wherever possible, capital needs to be saved.
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Ideal piece of land, right kind of Raw Material Quantities to be purchased.
Capital to be borrowed at minimum possible rate of interest.
Cost of borrowings should be minimum.Incentives / subsidies available as per
Acts / Law should be fully utilised.All tax benefits to be fully utilised.
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PROJECT COSTINGCosting is the calculation to determine how much each
product or service costs to produce and sell.Knowing the various costs helps in setting prices,
reducing costs and improving profits. Project Costing
Project Capital Costing Project Operating Costing
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Project Capital CostingSum total of the expenditure expected to be incurred till the date of
starting the commercial production of a project. Includes
All advance expenditure for the project before taking a final investment decision.
Cost of fixed assets (land, machinery) Duties and taxes on imported goods.Consultancy expensesPre-operative expenses Interest charges paid during the construction phase.
Advance expenditure on feasibility report, consultancy charges.Land charges for basic cost of land plus for its acquisition &
development. Cost of plant & machinery – basic & duties if imported.Training costs, cost of patents, copy rights, trade marks are project
capital costs. Can be some misc. costs also. E.D-153
Project Operating CostingOnce project started commercial prod. Expenses
incurred for day to day operations.Operating costs generate operating revenues, so
very importantCosts vary with the outputs.The matching of operating costs and revenues
result in profits or losses. Costs used for making profit & loss A/c, Balance
Sheet, Cash flow statements.Operating costs classified into Direct / Indirect /
Fixed / Variable / Marginal
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Main components of operating costs:-Raw Materials costs Labour Costs Energy CostsPlant Maintance Costs. Supervision CostsAdministrative & Management Costs.Depreciation Charge and the interest on
borrowings.Selling and distribution costs Promotion Expenses
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WORKING CAPITAL REQUIREMENTWorking capital required for day to day successful operation
& continued existence.Efficient Management of working capital – basic necessity for
sound operational health.Basically means – Management of current assets, current
liabilities and interrelationships, between the two Current assets are:-
Advance given for purchase of raw materials etc.Inventories (raw materials, store, packing materials, spare
parts) Work-in-processFinished GoodsCash & Bank BalanceMarketable securities.
All current assets (except cash) get converted into cash. Current liabilities include payment of bills, interest, to
creditors etc E.D-156
DETERMINANTS OF WORKING CAPITALMany factors influence the working capital needs of
a business.Needs change over different periods of time for the
same firm and also needs are different for different firms.
Total investment in working capital depends upon:- Nature & Size of Business:- Trading,
Financial, Retail Stores – More working capital and less in fixed assets.
Manufacturing Cycle:- Larger the manufacturing cycle – more working
capital required Minimum time Sh. Be taken in processes
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3. Business Fluctuations:- — Many firms face seasonal and cyclical
fluctuations in the demand for their products.These variations affect the working capital
requirements.Due to upward swing in the economy, the sales
will increase – more investment in Inventories will be required, borrowings made.
4. Production Policy:- — Production policy has to be a policy to produce
as per the changing demand and thus the working capital will be required and adjusted accordingly
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5. Firms Credit Policy:- Credit allowed by the company to its
customers and its policy of collection also affect the working capital requirements. There is also a risk of some credit turning into bad debts.
6. Availability of Credit:- Liberal credit terms available from the
suppliers / creditors will need less working capital as the firm will have time to pay.
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7. Growth and expansion activities:- A growing firm needs more working capital, as sales
grow and more production required.More investment needed in current assets to support
enlarged production.A growing firm needs working capital funds on a
regular basis, to be arranged from internal / external sources.
8. Profit Margin & Appropriation:- Profit is also a source of working capital A firm earning high net profit can contribute more to
working capitalCash Profits can be allocated to increase the stocks,
thus less working capital to be arranged from external sources.
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9. Price Level Changes:- — Changes (increase / decrease) in price levels
affect working capital requirements. Rising price levels will require a firm to maintain
higher amount of Working Capital Some levels of current assets will need increased
investment when prices are rising. 10. Operating Efficiency:- — Should be optimum utilization of resources at
minimum cost. Better utilization of resources improve
profitability and helps in releasing the pressure on working capital.
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SOURCES OF FINANCE FOR WORKING CAPITAL1. Trade Credit:- Primary source and the most popular Few days credit given by seller/supplier to the buyer.2. Bank Credit:- Primary Institutional source.Banks offer both secured and unsecured loans to business like cash
credit, overdrafts, loans, purchase & discounting of bills. 3. Non Bank Short Terms Borrowing:- Private loans.Cash advance from customers.Inter – corporate deposits – deposit made by one company with
another, for a period upto six months. 4. Long-Term sources comprising equity capital and long term
borrowing. EquityDebenturePublic Deposits
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MANAGEMENT OF WORKING CAPITAL
Working Capital means administration of both current assets and current liabilities.
Satisfactory level to be maintained.Following different components of working
capital need to be managed. 1. Management of Cash:- — Adequate cash required to pay current
liabilities and also unexpected contingencies. — Avoid idle cash to prevent loss of income — Cash flows to be managed.
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2. Management of Inventory:- Include raw material, finished goods, work-in-
progress, supplies.Minimum stock of inventory required to carry
on operations. 3. Management of Accounts receivable:-
Goods sold on credit needs to be monitored. Terms of credit sales, credit period, terms, cash discount, efficiency of collection to be managed.
4. Management of Accounts Payable:- Liberal terms of credit can be obtained from suppliers
Save interest cost through delayed payments.
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PROFIT & TAX PLANNINGProfit PlanningProfit is a major objective of any businessAn award for entrepreneur for his efforts,
risk taking ability.Profit planning includes
Arriving at minimum costsBreak even point and the level of
operations.Margins of profits. Profit planning for future years depends on
the capacity utilizationsE.D-165
Profits do not happen, need to be produced.
Profit planning is part of an overall planning process.\
Profit planning represents an overall plan of operations. Cover a definite period of time and formulates the planning decisions of the Management.
Consists of the operating budget, financial budget and appropriation budget
Preparation of profit plan begins months before end of the year & chief executive makes it. E.D-166
Long term profit planning implies a sacrifice of today’s profit for tomorrow on the belief that management makes the future of a business today.
Long range profit planning is systematic and formalized process for purposefully directing and controlling future operations with a view to achieving the desired objectives for periods extending beyond one year.
Process includes budgetary planning and control programme, costs, profits, working & fixed capital, dividend distributions.
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Sales, prod., purchase, inventory budgets provides the basis for making a profit plan.
Largely a routine exercise and covers a definite span of time.
Profit planning is an indicator of what the future holds for a company.
The ultimate objective of profit planning is profit Maximisation
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EMERGENCE OF ENTREPRENEURIAL CLASS
Entrepreneurs started emerging from the times of Industrial revolution when men with mechanical rather than financial and commercial skills started setting up industrial establishments on small scale.
They mostly worked with their own hands whose innovations were in the field of technology, cause from lower / middle classes.
In India, growth of Entrepreneurship in post-independence era has been significant.
Number of entrepreneurs in the small / medium scale sectors has increased significantly over the years.
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Self Motivated and talented class of people who are engaged in the development of new enterprises.
Upto the 19th century, entrepreneurs included those persons who bore risks of future uncertainty of profits in new ventures.
Used efficiently the economic resources of the society and contributed to higher productivity and greater yields.
Here an important difference was made between entrepreneurs and the capital suppliers.
Those taking risk by forming new ventures and earning profits were called entrepreneurs.
Others were people who earned profits by supplying capital.
They had different kind of risks and job profiles.E.D-170
During 20th Century, the Entrepreneurs not only took risks of new ventures but also innovated new useful products, technologies and markets.
Maximized opportunities by innovating new products, taking initiatives, organizing some social and economic mechanisms (understanding needs of society and arranging new sources of capital, learning economies of scale and also accepting risks of failure.)
In view of time and effort put in by such people they were seen as a different class – real entrepreneurs and differentiated from venture capitalists who provided finance and earned interest there on.
Entrepreneurs made lot of research, made innovative products, competition intensified and customers started getting better products
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Since 1980’s, a new class called the Intrapreneurs have started emerging.
Emerge from with in the confines of an existing enterprise.
In big organs. Top Mgrs. are encouraged to catch hold of new ideas and convert them into innovative products with the help of the research and development facilities available in the organs.
This class becoming popular in developed Nations and India also.
Of late women are also emerging as a new class of entrepreneurs
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ENTREPRENEURIAL BEHAVIOURAn entrepreneur performs many tasks:- perceives opportunitymake business planorganize resourcesmanage & oversee production Undertakes marketing manage financial activities Establish liaison with Govt. officials. Establish liaison and manage various stakeholders.Innovate, bear risks and build an organizationFace competition & beat it. All above require sound values and attitudes on the part
of the entrepreneurE.D-173
CORE VALUES AMONG ENTREPRENEURSi) INNOVATION & CREATIVITY:-Most important valueAre guided by these values when they come out with
creative ideas, new products, services, processes etc. to solve specific problems of the society.
Discovering new opportunities, working out new combinations and seeing the new idea through to the end- are all different facets of the uniquely creative and innovative spirit of the entrepreneurs.
Innovativeness can be seen through actions like – Experimenting with new ideas, facing uncertainty, valuing unconventional behaviour, finding new use for existing methods or equipments.
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ii) Independence or Self-Reliance:- Entrepreneurs drive great satisfaction in their sense of
independence or ownership.A very strong and positive ego drive involved in the action
plans of entrepreneurs. Enables them to develop a mission concept which drives
them to achieve their goal with a clear vision. Want to work in an atmosphere of freedom, master of their
own destiny.Quality of self-reliance – an imp. asset as it provides
courage and confidence to undertake risks of trying with innovative things.
Need to be independent to accomplish the sense of achievement.
Dependence on others for decision undermines independence.
E.D-175
iii) Respect for work:- Have great respect for work.Successful entrepreneurs believe that they
can achieve anything through hard work.Concentre on work to achieve goals.Nothing deviates them.This value encourages them to pursue right
path and they realize the incentives / rewards linked to degree of hard work.
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iv) Quest for outstanding performance or achievements orientation:-
This value makes their organs. vibrant and successful.
Challenges stimulate and motivate entreps.Set for themselves certain standards of excellence
and deal with unexpected obstacles with confidence.Quest for excellence resolves problems under
pressure.Are persistent and work harder when things go
wrong. Find another way to solve problems.Leads to systematic planning
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What are values?Values are beliefs that guide actions and judgment
across a variety of situations. E.g. a businessman is expected to supply true information rather than making false claims.
Values are standards of moralityRelatively permanent in nature.Value system influences an entrepreneur’s
decisions and his solutions to various problems. Parents, friends, teachers and external reference
groups can influence individual values. A persuasive values develop as a product of
learning and experience in the cultural setting in which he lives.
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What are attitudes?Attitudes constitute an important
psychological attribute of individuals which shape their behaviour.
An attitude may be defined as the way a persons feels about some thing – a person, a place, a situation.
It explains an individual’s positive or negative feelings about some object.
May be unconsciously held.Can be considered as a way of thinking
feeling and behaving. E.D-179
Entreps. have attitude of developing user-friendly products for customers.
Attitudes are invisible but the results may speak a persons is higly productive. We may infer that he has a positive attitude towards his work.
Attitudes acquired from direct personal experiences (handwork pay), associates with good people.
Optimists have positive & pessimist have negative attitud
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ESSENTIAL ATTITUDES OF SUCCESSFUL
ENTREPRENEURS Attitude towards imaginations to visualize
opportunities. They imagine to solve the problem of the people, by intuitions & efforts.
Att. Towards risk – take calculated risk, do not become gamblers.
Towards initiative – do not remain on lookers, basically leaders, endeavour to turn dreams into reality.
Towards change – like change, accept challenges thrown open.
Towards freedom of expressions & actions/think on their own and act.
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Towards performance (successful completion of targets) – Give outstanding performances against odds – satisfaction.
Towards personal capacity – own efforts not luck is emphasized.
Towards building relations or networking— Solve many difficulties in business by having
networking with suppliers etc. Towards customers – put customers first – give
respect, top priority for cust. Satisfactions, best quality – feedback, improve.
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SOCIAL RESPONSIBILITY OF ENTREP.Entrep. Part of society Society provides opportunities It provides resources like capital, materials, human
resources, infrastructures etc. Since entreps. utilize resources of the society, must
assume social responsibility. SR means obligations to act in a manner which will best
serve the interests of the society. Relates to the voluntary efforts on the part of business
organs. To contribute to the social well-being. Refers to the concern for the welfare of the society. A business unit owes its very existence to the society
E.D-183
MAJOR AREAS OF S.R. OF ENTREPS.Honoring contractual commitments. –
fulfill them for bank, suppliers, workers etc.Concern for ecology & envt:- SR for not
causing air, water, pollution SR to keep it under control – devices.
Concern for consumers – produce goods which meet the needs of the consumers of different classes, tastes and with different purchasing power.
Give reasonable prices, give prompt, adequate service, handle grievances quickly, ensures regular supply, truthful advts.
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4. Concern for workers.Pay reasonable wages & salaries to lead a good
life.Provide good working conditions Provide service benefits like housing, medical,
retirement benefits. 5. Concern for community & society:- Ensure safety of local surroundings.Generate employment opportunitiesProvide quality products to societyDiscourage social evils like hoarding, black mktg.,
overcharging etc.
E.D-185
6. Obligations towards suppliers.Make payments to suppliers in time and also be
transparent in dealingsEnsure timely payment of interest and principal to
lending institutions 7. Concern for healthy competition. for survival & growth, should increase productive
efficiency, improve product, quality, design, use etc. Do not use by unfair means in business dealings 8. Statutory obligations — Abide by law & guidelines issued by the govt., pay
taxes honestly, avoid corrupting Govt. officials, follow labour laws, adopt fair dealings in foreign trade.
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COMPETING THEORIES OF ENTREPRENEURSHIP
Good quality entrepreneurs are very important for economic growth of an economy.
Entrepreneurs bear non-insurable risks. All economic activities carried on by the entrepreneurs.
THEORIES 1. Entrepreneurship: A function of
Innovation.propounded by Joseph – A. Schumpeter (1934) Entrepreneurship plays critical role in economic
development.Economic development is not an automatic process, but
takes place when a new product is introduced in the market, new production technology is introduced, a new market is developed, new sources of supply are found out and there is new organization of the industries.
E.D-187
All above changes must be actively and deliberately promoted by the agents – entrepreneurs.
They provide economic leadership to bring dynamic changes, regularly.
He is an innovator.Psychologically, entrepreneurs not solely motivated by
profit.Theory conceived in the context of the industrial revolution,
innovations, inventions of that time. Such innovations attracts surplus for reinvestment and the
entrepreneurs can invade various economic fields with great success.
Theory modeled on big private entrepreneurship as large volumes can be handled by the entrepreneurs in Pvt. Hands.
Entrepreneurship is shy in an underdeveloped region as basic infrastructure is weak, only innovative mind can’t work
E.D-188
2. Entrepreneurship: A function of group level pattern – by Frank W. YoungOne individual cannot take
entrepreneurial initiative.One must find entrepreneurial groups
for a joint effort, as groups have higher differentiation and different capacities.
Members of a group can show more solidarity.
Unified actions & mutual understanding will bring better results.
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Some members of the groups excel at combining the resources like labour, capital etc. in new ways and thus they become better entrepreneurs.
Entrepreneur does not work single handedly.
Individual characteristics are not above group effort.
Entrepreneurial activity is generated by the particular family background and combined experiences.
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3. Entrepreneurship: A function of Managerial skills & leadership.
By Bert. F. Hoselitz (1952)Person / Entrepreneur has a drive to amass wealth
motivated by profit expections. But must have some managerial abilities,
including the ability to lead.Managerial abilities and leadership are the prime
concern and financial skills have a secondary concern.
More matured and developed personalities make better entrepreneurs leading to productivity, creative integration of resources and the establishment of social institutions.
An open society also develops good entrepreneurs. E.D-191
4. Entrepreneurship: An Organization building Function:-
— By Frederick Harbison. Ability of “Organizations building” – most critical
skill in industrial development. Entrepreneurship is the skill to build an organ. He effectively delegates responsibilities to others
and thus multiplies himself.Harnesses the ideas of other innovations and
becomes an “Organizer builder”.Good leaders are excellent administrators. More stress on managerial skills and creativity.Ability to create an organ is most crucial skill as it
facilitates the economic use of other innovations.
E.D-192
4. Entrepreneurship: A function of high achievements or achievement motivation.
N-Achievement & Management Success It is Mclleland’s Achievement Motivation –
Already Done
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ENTREPRENEURIAL SUCCESS IN RURAL AREAS Entrepreneurship most crucial factor in the economic
development of each and every region including rural areas. 70% of people in our country live in rural areas where
agriculture main occupation, allied activities but there is a limit to the rural labour force getting engaged in Agriculture.
Despite rural migration to cities, rural unemployment remains a problem.
Thus entrepreneurship becomes crucial in non-agricultural activities also.
In India Rural Industrialization is characterized by small scale sector.
Big employment generator, next to agriculture in rural areas.
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PROBLEMS OF RURAL ENTREPRENEURS
1. Lack of Managerial experience.Less knowledge of Management, A/cs, finance Can not afford to employ specialists. However ideally should have knowledge about
different aspects of Prod., Mkg., A/cs, Fiannce.
2. Lack of knowledge about Tax-related Matters.
Should have Income Tax Knowledge to file returns and sales tax to obtain sales–tax registration and abide by Tax rules.
Normally lacking in rural entrepreneurs.
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3. Poor Accounting System:- Good Knowledge about various costs,
margins, break-even points – lacking may hamper good decision making.
4. Inadequate estimate of cash
requirements:- Prod. Not reaching optimum level, not
reaching break-even point, less demandCreates poor cash Mgt. – delays means more
cash requirements. Expert advice also not available.
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CHOICE OF A SUITABLE FORM OF BUSINESS ORGANIZATION
Choice to be made at two occasions:- I Choice at the starting of a new business:- Following factors to be considered:-
Nature of business – trading, manufacturing or service.
Degree of control by the owner.Scale of operation – small / medium / large.Size of market area – local, regional, national etc. Amount of capital required.Capacity to take risk / liability. Tax liability and Govt. control.Profit margin and distribution
E.D-197
II – Choice for expanding business:- Increase in demand and the success of
business may require expanding the business. To expand and changing over to other form
of business, following need to be analysed. Additional capital required.Need for internal re-organization. Arrangement for specialized services. Increase in risk / liabilities Retention of effective control.Increased Tax Liability.
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ALTERNATIVES AVAILABLE FOR CHANGING EXISTING FORMS OF BUSINESS
SOLE TRADER:- 1. Employing A Manager V/s changing over
to partnership:- Sole trader needs additional capital and help
in management to expand business. Either can hire a paid manager or can consider
one / more partners.
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Let us examine this furtherCapital:- If Manager hired, the additional
capital to be arranged by the owner himself. However, does not share profits with the Manager – can repay the loans out of the profits. If partners taken – will bring more capital but
will also share profits. No need to take loans and repay them.
Re-organization of the business structure:- Manager taken – existing structure does not change. If partners taken from sole trader to partnership firm – P. Deed –registration – difficult to get a good partner
E.D-200
Management:- A skilled or qualified Manager may improve the quality of management. With fixed salary, may not show full worth and
not take full interest.Partners became owners, bring capital and run
the business with full interest, as they will also share profit.
Control of the business:-
Managers control with the owner.Partners – control gets diluted.
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Sharing of business risks:- Managers – risks with owner, losses are
borne, loans/int. Repaid. Partners – Risks, losses get shared.
Busines secrecy:- Mgr – Secrecy maintained. Partners – information to be shared
Continuity of business:- Business comes to an end if sole trader dies,
insolvent Partners – remaining partners may carry on
the business
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2. Partnership V/s Private Company:- When partnership grows – option are:- Induct more partnersGo in favour of a Private Company.Points to be considered will be:-
Additional Capital:- Partnership – Max – 10 or 20Pvt. Co. – 50 Max. – More cap available
Liability concerns:- P.Ship – Liability Unlimited Pvt. Co. – Limited Liability – Positive
Legal formalities for the re-organization of business:- Pvt. Co. Legal formalities. Will be there.
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Issue of management:- P.Ship – all partners to be consulted, so conflicts,
disputes may hamper business.Pvt. Co. – Elected Directors have full authority. Control over the business:- P.Ship – Joint ControlPvt. Co. – Original owner becomes M.D. has full
authority. State regulations. Filing of Accounts – Co. files audited A/cs/ -
Reg. Continuity – Co. continues for long.Tax benefits:- P.Ship pay taxes on profits at
progressive rates – Co. at flat rate pay more. E.D-204
3. PRIVATE CO. OR PUBLIC CO.:- When business of a Pvt. Co. grows, Either continues as a Pvt. Co. or Convert it into a Public Ltd. Co.Following points to consider:- Capital Requirements:- Public co. can
arrange huge financial resources. Re-organizations:- A public co. has to raise
minimum subscription, obtain certificate for commencement of business etc. to convert a Pvt. Co. to public, articles of association to be amended.
E.D-205
Management:- Pvt. – Directors – close associates Public – Directors may be no-owners, experts form
outside having sp. Mgt. skills. Degree and extent of control:- Pvt. – Owners have close control, by having key
positions. Public – Control shared with share holders, financial
institutions, C.A., etc. Secrecy:- Pvt – Published accounts filed with
registrar, not open to public, for inspections.Public – Open to inspection on payment of fee. Govt., Regulations:- Pvt. Co. closely held – not much
regulations – Public:- widely held – various govt. acts regulates these cos. entp. Must analyse above points.
E.D-206
STAGES FOR SETTING UP A NEW BUSINESS VENTURE – THREE STAGES
Pre-Investment Stage:- Setting of aims & ObjectivesForecasting of DemandSelection of Best Means, Strategies, to achieve
objectives Evaluations of resources or inputs required.Projection of financial plan.Cost-benefit analysis.Pre-investment appraisal of all resources, approvals,
etc.
Project Idea converted into a concrete investment proposal
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The Construction Stage:- Starts after the investment decision is
taken. Resources like land & buildings, plant &
machinery, transport, communication & other services technology, arranged & assembled.
Processes made for control systems, sales & marketing, managerial and other personnel, policies for acquisition of raw materials, supplies assembled and allocated to create tangible project.
E.D-208
Normalization stage:- The allocated resources of assets (created in the 2nd stage) utilized / employed to produce end results – i.e. output of goods and services.
Production of Actual Goods and Services fulfill the project objectives.
Final Stage – Project starts operating – Processing inputs and generating outputs.
Goods Distributed and customers created
E.D-209
GROWTH OF & DEVELOPMENT OF SMALL SCALE INDUSTIES-DEFINITION OF SMALL ENTERPRISE“Small Scale” used to describe industrial units referring
to the scale of investment in plant & machinery. Small enterprises exist in every country of the world
but more in developing country, like India. Small scale industries tend to be labour intensive or
capital saving.Provide better opportunities for generating
employment, better utilization of local resources, wider dispersal of industries & for equitable distribution of national income
DEFINITION OF SMALL ENTERPRISE:- What is small enterprise depends on the character of
economic activity. Different countries define small business in different ways
E.D-210
Two standards have been used to define small business:-
Size of Business:- Very often, small firms that have not grown beyond a certain size are termed as small. The criteria used to measure the size of small enterprises include:-
The number of persons employed.Amount of capital investedThe value of annual sales turnover.
USA – Any plant employing less than 200 workers is termed small.
India – Fixed investment is the basis of defining small business.
E.D-211
Qualitative Criteria:- Complexity and quality of Material also criteria for defining small enterprise, like:- Ownership in the hands of one individual or
a small group of individuals.Management is independent & personalized.Area of operation is mainly local though the
goods might be exported.Technology employed is labour Intensive.Business enterprise is relatively small in
comparison with the largest units in the field in which it operates.
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DEFINITION OF SMALL BUSINESS IN INDIAIndustries regulation and development ACT (IRDA) 1951,
defined a small scale unit as one that employed not more than 50 persons when using power and 100 when not using power and with a capital investment not exceeding Rs. 5 Lacs.
In 1960, all industrial units with capital investment of not more than Rs. 5 Lacs irrespective of the number of persons employed, was termed as small business.
In 1966 – not more than Rs. 7.5 Lacs.In 1975 – not more than Rs. 10 Lacs.In 1980 – not more than Rs. 25 Lacs. In 1990 – not more than Rs. 60 Lacs. On the recommendation of Abid Hussain Committee, Govt.
of India once again revised the definition of Small scale Industry, if the Plant and machinery is upto Rs. 1. Crore
E.D-213
Can offer personalized services to their customers.
The No. of persons employed cannot exceed 50, using power or 100 without power.
Greater motivation possible as owner can maintain personal rapport with the employee’s
efficiency Enjoy special govt. support for more
employment and diversification of industries.
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SCOPE OF SMALL SCALE INDUSTRIES IN EMERGING SCENARIO
Wide scope for small scale business in various sectors.Scope of small businesses can be understood by their
operation in various areas of eco. Activity:- 1. Manufacturing:- Engaged in assembling and
processing various types of products, some produce small parts, some make & supply finished products.
They manufacture electronic components, optical instruments, lab equipments, eatables, furniture, construction equipment, mat-weaving, basket-making, stationery items, toys, cosmetics, soaps, hosiery, sports goods, bicycles, foot wear, and handicrafts.
Some make useful components for large business
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2. Wholesale Trade:- Small business carried on for distribution of consumer and industrial goods. These wholesale small business channels for distribution are very economical for manufacturers and retailers. They provide lot of services from their firms.
Small firms carry wholesale trade in textiles, toiletry-preparations, bakery products, fruits & vegetables etc.
3. Retail Trade:- Retailing dominated by small scale firms. Small retail stores found in every area of business.
Wholesalers and sell them to consumers, maintaining variety. Deal in daily use articles; take care of varied
consumer needs and provide consumer needs and provide convenient shopping to consumers
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4. Services:- No. of services are increasing day by day in every area of business.
Small scale business very suitable for providing services of a local and personal nature.
Doctors, attorneys, property dealers, CI’s tax consultants, financial advisors, restaurants, repair shops, beauty parlours, gyms, fast food outlets operate as small scale firms.
Can provide personal attention and care. 5. Franchising and agency business:- Small
business very suitable for those who want to take franchising without making much investments. They follow methods, policy of franchisor. Many foreign cos. also interested to tie with small firms.
E.D-217
SMALL BUSINESS
ROLE OF SMALL BUSINESSSmall business achieve many goals:- 1. Employment :- Use labour intensive techniques to provide
more employment.In India, small / tiny units employ people next
to agriculture. Create more employment in scattered areas
more than large scale units.
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Balanced Regional Development:- Promote decentralized development.Help removing regional disparities.Leads to industrialization in rural and backward areas. Check migration from rural areas and their living standards
improve there.Optimization of Capital:- Require less capital per unit of output and thus greater
output can be obtained with small investment. Due to shorter gestation period, quick returns can be
obtained. Mobilization of local resources:- Facilitate mobilization and utilization of local resources and
skills which might otherwise remain unutilized. Promote a new cadre of small entrepreneurs, self employed
and encourage local talentE.D-219
Foreign Exchange earnings:- Do not require imports of sophisticated
machinery and equipment, thus reducing pressure on foreign exchange.
Also earn valuable foreign exchange through export of their products, 35% of India’s total exports now
Promote more equitable distribution of national income and wealth:- Help in reducing concentration of economic
power in few hands. Benefits of small scale business spread over
wider population.Standard of living of rural people improves
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Feeder to large Industries:- Manufacture various components, spare parts, tools
required by the large scale sector. Also distribute the goods made by large scale firms.
Social Advantages:- Offer Opportunity for an independent way of life to
people with small means.Help to raise per capita income and standard of
living. Widely diffused ownership permits wider
participation of people in the process of economic development.
Promotes entrepreneurship by providing an excellent opportunity to young men and women with limited money to start their own business ventures. E.D-221
Need & Rationale of Small BusinessDevelopment of Entrepreneurship.Introduction of new products.
Better to start at a small scale.Limited demand for local products.Flexibility in operations for making changes
in products etc.Personalized services – Auto / TV repairs,
interior decorations etc. Relations with employeesSupport to large enterprises
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THE DEFINITION OF SMALL SCALE INDUSTRY
In India, the small scale industry has been defined in three ways
The conventional definition includes cottage and handicraft industries which employ traditional labor – Intensive methods to produce traditional products.
Operational Definition for policy purposes includes all those under-takings having an investment in fixed assets plant & machinery whether held on ownership terms or by lease or hire purchase, not exceeding Rs. 1 Crore
E.D-223
Ancillary and tiny units also come under the umbrella of small scale industries. A tiny unit where investment upto Rs. 5 Lacs.
An ancillary unit whose investment is not more than Rs. 75 lacs.
And is engaged in:- The manufacture of parts, tooling, intermediate parts. The rendering of services of supplying 1/3 per cent of
their total service or production to other units production of other articles.
Third Definition of small scale industries relate to national income accounting – includes all processing and manufacturing activities including repair and maintenance services undertaken by both house hold and non house hold small scale units, not regd, under factories act.
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Accordingly a small scale industry is presently defined:-
“As a unit engaged in manufacturing servicing, repairing, processing and preservation of goods having an investment in plant & machinery at an original cost not exceeding Rs. 1. crote”. An ancillary unit is defined as “A unit having investment in fixed assets in plant and machinery not exceeding Rs. 75 lacs and engaged in manufacture of parts, components, sub – assemblies, tooling or intermediaries or rendering of services and supplying 50% of their prod. of articles provided that no such undertaking shall be subsidiary or owned or controlled, by any other undertaking.”
Govt. of India announced a new policy for tiny sector and kept the investment limit of Rs. 5 Lacs, irrespective of location the unit. E.D-225
Traditional
Khadi
Village Industries
Handlooms
Coir Industries
Sericulture
Silk worm breeding
Cottage
Artisans
Modern
Power Looms Small Scale
Export Oriented
Ancillaries
Tiny Enterprises
Small Scale Services and business enterprises
With power
Without Power
CLASSIFICATION OF SMALL SCALE INDUSTRIES
TECHNOLOGY KNOW-HOW AND APPROPRIATE TECHNOLOGY
Growth of small scale sector industries has not been very satisfactory despite the various provisions for its promotion in the Industrial Policy.
One reason is the absence of latest technology which can ensure quality and high rate of productivity.
Should keep abreast of developments in technology so as to:-
Remain in the marketLower the cost of production Improve the quality of productsPass on the benefits to the customers Even without the facility of a sophisticated laboratory and
gadgets, by using his intellectual capabilities and utilizing the knowledge gained by others.
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SMALL INDUSTRIES SERVICE INSTITUTES FOR TECHNICAL ASSISTANCE
They prepare improved designs and drawings for products.Also assist in making tools, dyes fixtures etc. Help in optimum utilization of men, material and
machinery.Prepare management control charts for maximization of
profits and train managers and supervisors in industrial management train workers to upgrade their skills.
Demonstrate modern technical processes.National Small Industries Corp. N. Delhi:-Give advanced training in their prototype prod-cum-
training centres in the operations of modern machineries. COUNCIL OF SCIENTIFIC AND INDUSTRIAL
RESEARCH. NEW DELHI:- Develops new technological processes and provides the
same to industryE.D-228
PRODUCTIVITY COUNCILS:- Train the factory owners to increase the productivity.
SMALL INDUSTRY EXTENSION TRAINING INSTITUTE, HYDERBAD:- Gives full time Management Training to Managers and proprietors in small Industry sector.
CENTERAL INSITUTE OF TOOL DESIGN (CITD):- Specializes in provision of technical consultancy and tool facilities, training in design and manufacture of tools.
INSTITUTE FOR DESIGN OF ELECTRICAL MEASURING INSTRUMENTS (IDEMI):-
Provides technical know-how and testing, laboratory, workshop and training vacilities to electrical measuring instrument manufacturers.
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APPROPRIATE TECHNOLOGY FOR SMALL BUSINESS
Underdeveloped / developing economies face a number of serious and complex problems one of them is the unemployment.
Blind imitation of and wholesale adoption of the established technology from industrialized countries may aggravate the problem of unemployment.
India, an agricultural economy is also labour-intensive. Issue is whether our small scale sector should try to follow the scientific discoveries of advanced countries? We should always think of our large number of labour force.
Small industries offer same remedy for the monitoring unemployment problems
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Appropriate technology should be used so that it takes care of millions of idle hands and at the same time, facilitate prod. of goods of comparable quality at a reasonable cost. Such a technology is required for the small scale sector, called as “Appropriate technology”.
Also linked with the affordability Scientific capabilities and innovative talents
can provide a solution. Urgent necessity to develop this appropriate
technology in view of economic factors and factors of our economy.
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LEGAL ASPECTS OF SSIPROCEDURE FOR REGISTRAION OF SMALL SCALE
INDUSTRIES:- Registration done in two stages:- Provisional Registration Permanent Registration PROVISIONAL REGISTRATION:-Helps the party to take necessary steps to bring the unit into existence
should be converted into a permanent registration once the unit comes not existence.
Granted at the state / UT / District level by the state Director of Industries or his designated authority.
Valid for one year in the first instance and thereafter may be renewed by a period of two or more years in six-monthly extensions by the designated authority on submission of satisfactory proof that the party is working.
Lapse automatically at the end of three years. Application for extension of validity period and for permanent registration to be made within validity period.
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The provisional registration entitle the party to:-
Apply for a shed in an industrial estate/develop site in an industrial area / material for the construction of the shed as the case may be.
Apply to municipal corporations, panchayat or other local authorities for permission to construct the shed to establish a unit.
Apply for power connectionE.D-233
Apply for financial assistance to SFC / Nationalized banks or other financial institutions on the basis of a project report as may be required by them.
Apply to NSIC / SSIC / Other institutions for procuring machines on his re-purchase basis.
Obtain sales tax, excise registration etc. whenever required.
Take other steps / approvals that may be necessary to establish the industrial units including obtaining import license for capital goods / raw materials.
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PERMANENT REGISTRATIONWhen the entrepreneur has taken all the steps to establish the unit,
like:- Factory building / Sheds readyRequired Machinery, equipment ready. Power connection obtained. Then:- Application for permanent registration can be made within seven
days of the receipt of application.The General Manager, District industries centre or other
designated officer will inform the party of the date and time of inspection of the unit.
On being satisfied that the unit is capable of productions activity, a registration certificate may be issued by the Directorate of Industries within one month of receipt of application.
All registered units should submit half-yearly reports of raw materials.
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DEREGISTRATION OF SMALL SCALE UNITS
A small scale unit already registered may be de-registered by the registering authority on any one or more of the following grounds:- If the unit remained closed continuously for a period
exceeding one year. If the unit failed / refused or avoided to give full and
truthful information as called upon by registering authority form time to time and in particular the half-yearly report.
If the unit has been proved to have misutilised the raw material allocated to it.
If the unit is found to be a subsidiary of or owned or controlled by medium or large scale undertakings.
If the fixed investment in plant and machinery exceeds the fixed investment ceiling prescribed in the definition of small scale / ancillary units.
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The order of the de-registration will have to be signed by an officer not below the rank of Joint Director of Industries or the G.M. of the District Industries Centre where the unit was reported to be closed, the notice may be duly pasted on the premises. Action for de-registering the unit may be taken only after the expiry of the 30 days time from the day of parting the notice.
Any unit aggrieved by the order of de-registration may appeal to the next higher prescribed authority as notified by the state Govt. within one month on receipt of the intimation of the same. The appellate authority many, after examining the case and making necessary enquiry, pass suitable order whether to set aside the order of de-registration or maintain it.
One of the important decision to be taken by the entrepreneurs when he propose to start his unit is to decide about the firm of ownership of the industry whether to set up a proprietary / partnership or a company.
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FINANCIAL AND MARKETING MANAGEMENT OF SSI
FINANCIAL PLANNING Finance – very important pre-requisite to start an
enterprise, life-blood. Enterprise must chalk-out clearly its future financial
requirements right in the beginning. The decisions taken by the entrepreneur in advance
regarding the future financial aspects of the enterprise is called financial planning. It is a financial forecast made for the enterprise in the beginning itself.
In a Financial Plan, The enterprise must answer the following questions very clearly:- How much finance is needed?Where will money come from?When does the money need to be available?
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In every business, including a SSI, capital is arranged from two sources – international and external. Internal source is owner’s own money called equity. In case of small scale unit, owner’s capital in this. External sources include sources like financial institutions and bank.
Finance required for construction of factory building, purchase of plant, machinery, equipment and also for working capital requirements. Money also required for expansion, renovations or modernization of plant machinery.
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LONG TERM & SHORT TERM CREDIT FLOWS 1. Long term finance required for procuring fixed assets,
establishment of new business, substantial expansion of existing business, modernization etc. It is such money whose repayment is arranged for more than 5 years in future. The sources of long term finance could be owner’s equity, term-loans from financial Institutions, credit facilities from commercial bank, hire-purchase, leasing facilities from specific organs, ploughing back of profits etc. Also provides by SFCS, National small industries corp (NSIC), St. Ind. Dev. Corp. (SIDC) etc.
SHORT TERM CAPITAL (CREDIT FLOWS):- This is borrowed capital that is to be repaid within one year. The sources of short-term fiancé include bank borrowing, for working capital, borrowings from friends and relatives, short term credit flows usually required to meet variable, seasonal working capital requirements, short term finance can also come from trade credit, customer advances etc. finance for working capital requirements also provided by state industrial & investment corporations and also the co-operative banks. In small places, even money lenders also advance loans.
Short term finance / credit used for current assets like raw-materials, semi-finished goods etc.
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The project appraisal is a process whereby a leading financial institution makes an independent and objective assessment of the various aspects of an investment propositions for arriving at a financial decision and is assigned at determining the viability of a project, and sometimes modifying some provisions and contents so as to improve its viability. The financial institutions has to take special care
with regard to the managerial aspects of the project. The promoter, mgt. must be efficient and competent. The financial appraisal ensures that the project has a sound financial base. Analysis of cost, pricing, availability and utilization of funds, income and expenditure and fair return on investment areas are covered under financial appraisal.
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A Financial Institution requires a detailed evaluation of the feasibility from the
following major points of view:- 1. Managerial competence:-
Will find out whether the entrepreneur possesses needed managerial skills.
The project report should contain information like family background education qualifications, any past experience, innovative ideas so as to enable the financial institutions to assess managerial capabilities of the entrep.
Not necessary that the entre., should have all managerial skills but the managerial structure should be explained to the financial institutions
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2. Technical Feasibility:- Deals with the reso8urces and technical aspects, to be mentioned in the project report. Technical appraisal will deal with:-
Location of the unit. Size of plant Process of Prod.Factory LayoutPersonnel Availability and Cost of Raw-Material Power and water facilities Technology used / required for making the
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3. Market Analysis:- — Marketing activity produces revenue while all
other activities incur expenditure. Thus success of the project will depend on how it is able to sell the product / services in the market. Supply / Demand of the product / Service to be estimated and market opportunities also to be judged. The project report should contain the following information’s:-
— Present demand for the product. — Market segments identified. — Short and long term demand / Projections. — Extent of completions in the industry.— Broad pricing structure — The strategy of Marketing.
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Economic Viability:- An important criteria for evaluating a project. Whatever may be the motivation in starting a project from the point of view of the promoters, it shall be necessary that the operators quantified on a year to year basis should generate sufficient profits. A project without adequate profits or which is likely to incur losses. Could not be classified as economically and commercially viable. Evaluation of economic of economic viability can be carried out through the projection of profitability worked out for a period ranging from three to ten years.
Financial Viability:- The appraisal of the financial aspects involve the scrutiny:- Cost of the project and the means of financing. Estimate to be made for cost of land, building, fixed assets, machinery, preliminary expanses etc.
Then sources to be listed Cash flow estimates to be analysed. A cash flow statement is a
projection of future sources of cash and application profit is also a source of cashflows.
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