BA9264 ENTREPRENEURSHIP DEVELOPMENT

Dr.Shankaran Professor & Head, Dept. of Management Studies Agni College of Engineering

UNIT 1 Entrepreneural Competence

Concept of Entrepreneurship Like other economic concepts, entrepreneurship has been a subject for debate and discussion. It is an elusive concept, being dened dierently by dierent authors. Some state entrepreneurship as Risk Bearing, some others view it as Innovating while others consider it Thrill-Seeking. According to A.H Cole entrepreneurship is the purposeful activity of individual or a group of associated individuals undertaken to initiate, maintain or aggregate prot by production or distribution of certain goods and services. However, Schumpeter viewed that entrepreneurship is based on purposeful and systematic innovation and it included not only the independent businessman but also company Directors / Managers and their innovative ways of functioning. Entrepreneurship also refers to the functions performed by an entrepreneur in establishing an enterprise. It is therefore a process of giving birth to new enterprise. Basic elements of Entrepreneurship Innovation: It is about doing something new or dierent in an enterprise which is a mandatory condition to be called an entrepreneur. Entrepreneurs are constantly on the look out to do something dierent and unique to meet the changing requirements of customers. Entrepreneurs may or may not be inventors of new products/methods of production; but they possess the ability to foresee the possibility of making use of inventions for the enterprise. An example for this -fruit juice in tetra packs are being sold for the customers!! Lipton markets in small packs PUDIYAS for rural customers and NARASUS coee in small packs to cater to dierent customers. Similarly, Henry Ford applied new methods of mass production to come out with passenger cars for customers at aordable prices. Since customer taste and preferences keep on changing, the entrepreneur needs to apply invention on continuous basis to meet the changing demands of customers. Risk Bearing: Starting a new venture or enterprise, always involves challenges and risks; same way, to attempt something new or dierent is risky. An enterprise may earn prot or incur loss due to many factors like increasing competition, change in customer preferences, shortage of raw materials and so on. Therefore, an entrepreneur needs to be bold enough to assume the risks involved in running the enterprise. In other words, entrepreneur needs to be a risk-taker and not risk-avoider. Risk-bearing ability enables the entrepreneur to remain persistent so that initial failures are overcome and success is achieved as per the Japanese Proverb Fall seven times, Stand up eight. Meaning of Entrepreneur: Joseph Schumpeter: An entrepreneur is an innovator and develops untried technology. 1

David Mc Celland: Entrepreneur is an energetic moderate risk taker. Peter Ducker: Entrepreneur maximizes opportunities through systematic innovation Although the term entrepreneur is often used interchangeably with entrepreneurship, conceptually they are dierent. They are like the two sides of the same coin and the relationship is explained in the following table. Entrepreneur Person Organizer Innovator Risk bearer Motivator Creator Visualiser Leader Imitator Entrepreneurship Process Organization Innovation Risk-bearing Motivation Creation Vision Leadership Imitation

Thus, entrepreneurship is concerned with the performance and coordination of entrepreneurial functions. Evolution of the Concept and Entrepreneurial Personality The word entrepreneur is of French origin meant to designate an organizer of musical or other entertainment. The word entrepreneurship comes from a French word entreprerudes which refers to a person who undertakes risks of a new business. The concept of entrepreneur is associated with three elements as under Entrepreneur as a Risk-Bearer Entrepreneur as an Organizer Entrepreneur as an Innovator The attributes underlying entrepreneurship include: Self-direction Self-nurturing Action-oriented 2

 High energy level Tolerant of uncertainty

Entrepreneurship as a career Entrepreneurship can play a major role in alleviating poverty, unemployment and underemployment in many developing countries. Entrepreneurship is becoming an increasingly popular alternative career choice in the current economic slowdown. If you are planning to become an entrepreneur you will not be alone and will have plenty of company. Many have gone the entrepreneur route due to external factors including layos, frustration in their current workplace culture, or the need for greater exibility in their lives. However, it is most important to go with your own internal factors, which include passion, wanting to be independent, wanting to accomplish, building an enterprise, enjoying freedom, a burning desire to make a profession out of a hobby and enjoying the challenges. Entrepreneurship is not for all. You may most likely be aware that many new ventures fail and probably one out of three will not be in business after ve years. The dot com ventures were successes of the late 1990s and early 2000s, but it is most unlikely that you will become successful overnight. It requires hard work, determination, vision, need to dedicate long hours and endless energy which is more realistic in todays entrepreneurship. There is no xed pattern for entrepreneurship so long as you are focused and hard working, your dream can become a reality and you can reap the benets of entrepreneurship. In todays world which is becoming atter due to countries opening up, technology, increasing competitiveness, and mature products, there is an urgent need for creativity and entrepreneurship. Fortunately, the attractions to become an entrepreneur is becoming much easier especially since there is a shift from a predominantly manufacturing to a service-based economy, and due to this, cost and barriers to entry for entrepreneurs have lowered considerably. It is worthy to note that new ventures are job creators like the Silicon Valley, Silicon Alley, Route 128, and industrial parks are the envy of the world. Entrepreneurship serves as an anchor to many businesses and economy. It can also play a major role in alleviating problems of poverty, unemployment and underemployment in many developing countries in todays world. Entrepreneurship will thrive only in a culture and environment which encourage entrepreneurs to take a chance and fail. At present, the government and even the former President of India, Dr. Abdul Kalam, have been encouraging young people to take a plunge into entrepreneurship. 3

Entrepreneurship can be spurred by three factors, rst opportunity, second people and third available resources. Entrepreneurs are people with high managerial and creativity skills. Sales people are low in both, managers are high in managerial skills and inventors are high in creativity. This does not mean that you must be high in both. You can form a team to strengthen your skills, as entrepreneurship is all about building a team and not a single person entity. Why look at entrepreneurship? Entrepreneurship creates new jobs, new industries (examples: cellular phone, internet shopping). Entrepreneurship provides economic and social mobility. It creates equity, produces great leaders and contributes to society. With competition increasing and technology becoming more ecient, jobs are decreasing. Hence entrepreneurship is on the rise. Jobs are also decreasing as many women are forced to look for work as one salary is not sucient to run a family. Jobs are not for life. Nowadays people are looking for results and hence the change is common. Rearranging in companies to reduce cost is being done and therefore contract and temporary work are increasing. As an entrepreneur your hours of work can be exible. The positives of an entrepreneurship is that you control your own future, have the satisfaction of making your own money and not for someone else, put your talent to use and most importantly you will be doing something that you enjoy. The ip side of entrepreneurship is you may have irregular income. You have to do all the work by yourself which may result in a hard life. You must dream to make entrepreneurship work for you just like Bill Gates, a Harvard dropout. His dream was to have every desktop in the world running on his software and that dream has made him one of the richest people on the planet. That is the power of dreams, these will help you to face challenges, handle failure, help you build condence to face ambiguity and make the impossible possible. As children we all have big dreams, but as we grow up these dreams are reduced by people who want the best for us like our parents, teachers, friends, society and other forces. The impact is that we lose our big dream and become regular beings looking for things we do not want, like looking for a job. Entrepreneurship as a Career Option? The greatest challenge before the youngsters in India today is to build the country into an economic global giant. The obvious questions that come to the minds of most of them are - Why should we in India think of being an entrepreneur? Why not work as part of a larger organisation where the opportunities and resources to scale ideas are perhaps far greater?

Entrepreneurship is important for two reasons. One, it furthers innovation to nd new solutions to existing and emerging demands. Two, it oers far greater opportunities for wealth creation for self and the society than anything else. Entrepreneurship has its challenges. It is about 20 per cent luck and 80 per cent eort, clarity, courage, condence, passion and above all smartness.

What leads a person to take up entrepreneurship as a career option? There can be a number of reasons including displacement from a job, frustration in the present job, not getting a job of his/her choice, etc. Sometimes a person realises much in advance that his/her job is in jeopardy, as the organisation is moving towards closure. At times a deserving employee getting superseded in promotion is compelled to quit the job and look for doing something on his own. Some people object to a system wherein reward is often based on seniority rather than merit. Above facts are corroborated by the research ndings of Gilad and Levine (1986). They proposed two closely-related explanations of entrepreneurial motivation, the push and the pull theory. The push theory argues that individuals are pushed into entrepreneurship by negative external forces, such as job dissatisfaction, diculty in nding employment, insucient salary, or inexible work schedule. The pull theory contends that individuals are attracted into entrepreneurial activities seeking independence, self-fulllment, wealth, and other desirable outcomes. Research (Keeble et at., 1992; Orhan and Scott, 2001) indicates that individuals become entrepreneurs primarily due to pull factors rather than push factors.

Some of the prominent pull factors that attract individuals towards entrepreneurship as a career option are High Need for Independence: There are personalities who would like to have freedom about: with whom to work, when to work, with whom to do business at what terms etc. It is this instinct in them that pushes such personalities to start something of their own.

To satisfy the dream of having high Financial Rewards: To satisfy the need to derive high nancial rewards as an outcome of eorts leads some to start a business of their own. The fundamental dierence between job and own venture lies in the degree of nancial rewards for the eorts put in to achieve organisational goals.

Opportunity to deal with all aspects of a business:

No job can provide an opportunity to learn and deal eectively with a wide spectrum of business activities starting from idea generation, conceptualisation, design, and creation, marketing to customer response and customer satisfaction. Vision to leave a long lasting mark: Entrepreneurship creates an opportunity to make denite contribution to the society by lifting the people in and around the venture. A continuous zeal to innovate helps in touching the heads and hearts of people at large. A strong urge from within to start a business, combined with workable innovative ideas, careful planning, and hard work can lead to a very engaging, self-satisfying, enjoyable and protable endeavour. The greatest contributory factor to entrepreneurship is an intention i.e. a strong purpose in life coupled with determination to produce desired results.

There is no age bar to entrepreneurship. But youth is certainly more suited to take up an entrepreneurial venture because they are technologically precocious, do not fear from change and challenge, and have greater ability to see things dierently. Thus, leaving aside the pull and push factors leading to entrepreneurship, the fundamental decision to take up entrepreneurship as a career option gets guided by a three part process in which an individual weighs the desirability of self-employment with the desirability of working for others, possession of competencies and capabilities to undertake entrepreneurial venture. The fact remains that present environment provides great entrepreneurial opportunities and more and more youngsters are consciously opting for it a as career option. Characteristics of successful Entrepreneur 1. Capacity to take risk 2. Capacity to work hand 3. Above average intelligence and wide knowledge 4. Self Motivation 5. Vision and foresight 6. Willingness to defer consumption 7. Imagination initiative and emulation 8. Incentive ability and sound judgment 9. Flexibility and sociability 10. Desire to take personal responsibility. 6

11. Desire to seek and use feedback 12. Persistence in the face of adversity 13. Innovativeness and future orientation 14. Mobility and drive 15. Creative Thinking. 16. Strong need for achievement 17. Ability to Marshall resources 18. High degree of ambition 19. Will to conquer & impulse to ght. 20. Will to prove superior to others. Knowledge and Skills of Entrepreneur Functions of an Entrepreneur 1. Idea generation & scanning of the best suitable idea 2. Determination of the business objective 3. Product analysis and market research 4. Determination of form of ownership 5. Completion of promotional formalities 6. Raising necessary funds 7. Procuring machine & material 8. Recruitment of men 9. Undertaking the business operations Entrepreneur & Manager Types of Entrepreneur Innovative Entrepreneur Imitative Entrepreneur 7

ENTREPRENEUR The main entrepreneur is to start a venture by setting up an enterprise. He understands the venture for his personal gratication An entrepreneur is the owner of the enterprise

MANAGER But, the main motive of a manager is to render his services in an enterprise already set up by someone else A manager is the servant in the enterprise owned by the entrepreneur

An entrepreneur being the owner of the enterprise assumes all risks and uncertainty involved in running the enterprise The reward an entrepreneur gets for bearing risks involved in the enterprise is prot which is highly uncertain He acts as an innovator or change agent

A manager is a servant. Doesnt bear any risk involved in the enterprise.

A manager gets salary as reward for the services rendered by him in the enterprise salary of a manager is certain and xed. Simply translate the entrepreneurs ideas into practices.

Fabian Entrepreneur Drone Entrepreneur There are some more types of an Entrepreneur listed by some other Behavioral Scientists Solo Operator Active Partner Inventor Buyer Life Timer Intrapreneur Emerge from within the connes of an existing enterprise. Entrepreneur & Intrapreneur ENTREPRENEUR An entrepreneur is independent in his operations Himself raises funds Bears the risk involved in the business Operates from outside INTRAPRENEUR Dependent on the entrepreneur i.e. owner Not raised by them Doesnt fully bear the risk involved in the business Operates from within the organization

UNIT 2 Entrepreneural Environment

The emergence and development of entrepreneurship is not a spontaneous one but a dependent phenomenon of economic, social, political, psychological factor often nomenclature as supporting condition to entrepreneurship development. These factor may have both positive and negative inuence on the emergence of entrepreneurship. Negative inuence create inhabiting milieu to the emergence of entrepreneurship. For analytical purpose this conditions factor are grouped and discussed under two categories (i.e.) Economic factor and non-economic factor Economic Factor:

Capital

Capital is one of the most important prerequisites to establish an enterprise. If only a capital is available, entrepreneur can bearing land, machine and raw material and together produce goods Capital is regarded as lubricants/fuel to the process of production Increase in capital investment, capital output ratios tends to increase. This result in increase in prot. Capital output ratio- Prot This suggests that capital supply increases entrepreneurship also increases.

Labour:

Quantity rather quality of labour inuence the emergence of entrepreneurship Cheap labour is often less mobile or even immobile. Adam smith consider division of labour as an important element in economic development. According to him division of labour as an important element it depends. Up on the size of the market leads to improvement in the productive capacities of labour due to an increase in the dexterity (i.e.) improvement in skills, grace and cleverness) of labour. Ii appears that labour problem clearly does not prevent entrepreneurship for emerging.

Raw material:

The necessity of raw material hardly needs any emphasis for establishing any industrial activity. In the absence of raw material neither any enterprises nor entrepreneur can emerge. In some cases technological innovations can compensate for raw material inadequate. The Japanese case for example, witness that Lack of raw material clearly does not prevent entrepreneurship from emerging but inuence the directions in which 9

entrepreneurship took place. In fact, supply of raw materials is not inuenced by themselves but became inuential depending upon the opportunity conditions. The more favourable these condition are, the more likely is the raw material to have it is inuenced on entrepreneurial emergence.

Market:

Potential of the market constitutes the major determinant of provable rewards from entrepreneurial function. the proof of pudding lies in eating, the proof of all production lies in conceptions (i.e.) Marketing. Both size and composition of market inuence entrepreneurship in their own ways Monopoly in a particular product in a Particular market becomes inuential for entrepreneurship than a competitive market. Lands hold the opinion that improvement in transportation are more benecial to heavy industry than to light industry because of their eect on the movement of raw materials. Wilken claims that instances of sudden rather than Gradual improvement in market potential provide the clearest evidence of the inuence of entrepreneurship. Germany and Japan as the prime examples where rapid improvement in market was followed by rapid entrepreneurial appearance. Non - Economic Factor: Sociologist and psychologist advocate that the inuence of economic factor on entrepreneurial emergence largely depends upon the extends of non economic factor (i.e) social and psychological in the society. Social Conditions:

Legitimacy of entrepreneurship:

The proponents of non-Economic factors gives emphasis to the relevance of a system of norms and values with in socio culture setting for the emergence of entrepreneurship. The social status of those playing entrepreneurial role has been considered one of the most important content of entrepreneur legitimacy. To increase the legitimacy of entrepreneurship scholar have purpose the need for change in the traditional values, which are assumed to be opposite to entrepreneurship. McClelland had also pointed out that a complete change may not be necessary for entrepreneurial appearance. Instead, they submit a re - interpretation of the traditional values or its synthesis with the newer values to increase entrepreneurial legitimacy.

Social mobility:

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Social mobility involves degree of mobility, both social and geographical and the nature of mobility channel with in a system. social mobility is crucial for entrepreneurial emergence is not unanimous. Hoselitzs need for openness of a system. McClellands need for exibility in a role of relation implied the need for the possibility of mobility with in a system for entrepreneurship development. In contrast, group of scholar who express the view that a lack of mobility possibilities promotes entrepreneurship. Some even speak of entrepreneurship as in to a action in a rigid social system. Third opinion is the combination of exibility and the denial of social mobility. It is also printed out that the degree and nature of social mobility alone is not likely to inuence entrepreneurship, it as determined by other non economic factors.

Marginality:

Scholars hold a strong view that social marginalized also promotes entrepreneurship. They believe that individuals are grouped on the perimeter of a given social system or between two social systems provide the personnel to assume the entrepreneurial roles. People may be drawn from religious cultural, ethinic or migrant minority groups and their marginal social position is generally believed to have psychological eects which make entrepreneurship particularly attractive for them.

Security:

Entrepreneurial security is an important facilitator of entrepreneurial behaviors. Scholars are not consensus (same) on the amount of security that is needed. We also regard security to be a signicant factor for entrepreneurship development. This is reasonable too because if individuals are fearful of tossing their economic assets. Psychological factors:

Need achievement:

David McClellands theory of need achievement states that, a constellation (gathering) of personality characteristics which are indicative of high need achievement is the major determinant of entrepreneurship development. Average level of need achievement in a society is relatively high, one could expect a relatively high amount of ED in the society. 11

To encourage the impact of motivation for achievement, many training programs are organized by the SIEI - Small Industries Extension training Institute.

Withdrawal of status respect:

Hagen believes the initial condition leading to eventual entrepreneurial behavior is the loss of status by a group. He postulates four types of events that can produce status withdrawals,

1. The group may be displaced by force, 2. It may have its valued symbols denigrated 3. It may drift from into a situation of status inconsistency. 4. It may not be accepted the expected status or migration in a new society.

The further postulates that with drawal of status of respect would give rise to four personality types:

1. Retreatist: he who continues to work in a society but remains dierent to his work and position. 2. Ritualist: he who adopts a kind of defensive behavior and acts in the way accepted and approved in his society but no hopes of improving his position. 3. Reformist: he is a person who foments a rebellion and attempts to establish a new society. 4. Innovator: he is a person who is creative individual and is likely to be an entrepreneur.

Hagen maintains that once status withdraws has occurred, the sequence of change information of personality is set in motion, he refers that Status with drawl takes a long period of time as much as 4 or 5 generations to result in the emergence of ED.

Government Actions (Factors):

Government by its actions or failure to act does inuence both the economic and non-economic factor for entrepreneurship. Any interested government in economic development can help through its clearly expressed policies, promoting entrepreneurship, creating basic facilities, utilities and services providing incentives and concessions, providing good facilitative socio economic setting to minimize the risks for entrepreneur. to conclude, in the societies where the government was committed to their economic development, entrepreneurship automatically ourishes. 12

The fact remains that the various factors are observed in the preceding pages will cause emergence of entrepreneurship are integral, interlocking, mutually dependent and mutually reinforcing. On the whole, the various factors inuencing the emergence of entrepreneurship can now be put as per the following model developed by Abdul Aziz Mahmud, Diagram Entrepreneurship Development Programmes (EDP) Need for EDP: A well known behavioral scientists David McClelland at Harvard University made an interesting investigation into why certain societies displayed greed creative power? Is whether entrepreneurs are born or made?. He found that the need for achievement was the answer to the question. Motive people to work hard leads to achievement. According to the scholars, Money making is incidental whereas the measurement of achievement is valid. Experimental study (Kakinada) He conducted a 5 year experimental study in one of the prosperous district of Andhra Pradesh in India in collaboration with small industry extension and training institute (SIET). His experiment is popularly called as Kakinada Experiment. Under the experiment, young employees/persons are selected and put through a three month training program and motivated to see fresh goals. One of the signicant conclusion of the experiment was that the traditional believes did not seem to inhibit. An entrepreneurs and that the suitable training can provide the necessary motivation to the entrepreneurs. The achievement motivation had a positive impact on the performance of entrepreneurs. The Kakinada experiment could be treated as Precursor to the present day EDP inputs on behavioral aspects. 1971 - First massive program of ED embarked in India. At present, 686 All India and state level FI and public sector banks had so far conducted EDPs in hundreds giving training to the candidates in thousands. Example: Junior Achievement - USA Young Enterprises - UK Objectives of EDPs:

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1. Develop and strengthen their entrepreneurial quality (i.e.,) motivation or need for the achievement. 2. Analyze environmental setup relating to small industry and small business. 3. Select product 4. Formulate project for the product. 5. Understand the process and procedure involved in setting up an small enterprise. 6. Know the sources of help and support available for starting a small scale industry. 7. Acquire the necessary managerial skills required to run a small enterprise. 8. To know the pros and cons in becoming an entrepreneur. 9. Appreciate the needed entrepreneurial disciplines. Important objectives: 1. Let the entrepreneur himself/herself set or reset objectives for his/her business and strive for the realization. 2. Prepare him/her to accept the uncertainty involved in running a business. 3. Enable him/her to take decision. 4. Enable to communicate clearly and eectively. 5. Develop a broad vision about the business. 6. Make him subscribe to industrial democracy 7. Develop passion for integrity and honesty 8. Make him learn compliance with law. Course contents and curriculum of EDPs: The course content of an EDP are selected in line with the objectives of the EDPs. The training program is usually to six weeks duration. It consists of the following six inputs: 1. General Introduction to Entrepreneurship: Participants are exposed to a general knowledge of factors aecting small scale industries, the role of Entrepreneurs in economic development Entrepreneurial behavior and the facilities available for establishing small scale industries. 14

2. Motivation Training:

Induces and increases the needs for achievement among the participants. It is the crucial input of Entrepreneurship training. It injects condence and positive attitude and behavior among the participants towards business sometimes successful Entrepreneurs are also invited to speak about their experience in setting up and running a business.

3. Management skills:

Running a business whether large or small requires the managerial skill participants will be imported with basic and essential managerial skills in the functional areas like marketing, nance, HR and production. It helps to run business smoothly.

4. Support system and procedure:

The participants also needed to be exposed to the support available from dierent institutions and agencies for setting up and running small scale enterprises.

5. Fundamentals of project feasibility study:

Participants are provided guidelines on the eective analysis of feasibility or viability of the particular project in view of marketing, organization, technical, nancial and social aspects knowledge is also given how to prepare the projects or feasibility report for certain products.

6. Plant Visits:

In order to familiarize the participants with real life situation in small business, plant visits are also arranged such trips help the participants know more about an Entrepreneurs behavior, personality, thoughts and aspirations. On the whole, the ultimate objective of Entrepreneurship training program is to make the trainees prepared to start their own enterprise after the completion of the training program. Phases of EDPs An Entrepreneurship development program consists of the following three phases: Pre-training phase Training phase 15

 Post-training phase 1. Pre - Training Phase:

The activities and preparations required to launch the training program come together in the phase.

1. Selection of Entrepreneurs 2. Arrangement of infrastructure 3. Tie-up of guest faculty for the training purpose. 4. Arrangement for inauguration of the program 5. Selection of necessary tools, techniques to select the suitable Entrepreneurs 6. Formation of selction committee for selecting trainees. 7. Arrangement for publicity media and campaigning for the program. 8. Development of application form. 9. Finalization of training syllabus. 10. Pre-potential survey of opportunities available in the given environmental conditions. (a) Training Phase:

The main objectives of this phases to bring desirable change in the behavior of the trainees. In other words, the purpose of training is to develop need for achievement (i.e.,) motivation among the employees/trainees. Accordingly, a trainer should see the following changes in the behavior of the trainees.

1. Is he/she attitudinally tuned very much towards his/her proposed project ideas 2. Is the trainee motivated to plunge in to Entrepreneurial career and bear risk involved in it. 3. Is there any perceptible change in his Entrepreneurial attitude, outlook, skill, role etc. 4. How should he/she behave like an Entrepreneur? 5. What kind of Entrepreneurial traits the trainee lacks the most. 6. Whether the trinee possesses the knowledge of technology, resources and other knowledge related to Entrepreneurship? 7. Does the trainee possess the required skill in selecting the viable projects, mobilizing the required resources at right time. 16

Having trained the trainees, the trainees need to ask themselves as to how much and how far the trainees have moved in their Entrepreneurial pursuits.

1. Post- Training phase (Follow up):

The ultimate objective of the Entrepreneurship development program is to prepare the participants to start their enterprises. This phase involvement assessment to judge how far the objectives of the program had been achieved, thisis called Follow up. In nutshell, the purpose behind the EDP follow up is to:

1. Review the pre-training work. 2. Review the process of training program 3. Review post training approach.

Evaluation of EDP: Evaluation of EDP is necessary to see whether the objective of EDPs is fullled or not. In simple words, there is a need to have a look into how many participants have actually started their own enterprises after completing the training. This calls for evaluation of EDPs. So far 16 evaluation studies have been conducted by various organizations and individual researchers. The most recent and nationwide evaluation study on EDPs is carried out by a ED institute of India Ahmedabad. It is observed that one out of every four actually started his/her enterprise after undergoing Entrepreneurial training. Blocked - 10% Given up - 29% (idea of launching) 430 trainees - cannot be contacted However, the performance of EDPs across the states and across the ED organization have not been uniform. This non-impressive performance lies the need for looking at the problems and constraints of EDPs. Problem faced by EDP:

1. Trainer - motivations are not found upto the mark in motivating the trainees to start their own enterprises. 17

2. ED organization lack in commitment and sincerity in conducting the EDPs. 3. Non-conductive environment and constraints make the trainer - motivators role ineective. 4. The antithetic attitude of the supporting agencies like banks and nancial institutions serves as stumbling block to the success of EDPs. 5. Selection of wrong trainees also leads to low success role of EDPs.

Problems are not with the strategy but with its implementations. One way of evaluating the EDPsis to assess their eectiveness in developing Need for Achievement among the Entrepreneurs. This is also called the qualitative evaluation of EDP. The behavioral scientists used the following criteria to assess the eectiveness of EDPs in motivating the Entrepreneurs.

1. Activity level of the respondents 2. New enterprise established 3. Total investments mode 4. Investments in xed asset made 5. Number of peoples employed 6. Number of jobs created 7. Increase in prot 8. Increase in sales 9. Quality of product/services improved 10. Quicker repayment of loans.

The Entrepreneurial behavior is measured on the following four dimensions.

1. Planning orientation 2. Achievement orientation 3. Expansion orientation 4. Management orientation

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Institutional support to small entrepreneurs SIDO (Small Industries Development Organisation) SIDO is a subordinate oce of the department of SSI and ARI. It is an apex body and monitoring the policies for formulating, coordinating and monitoring the policies and programmes for promotion and development of small scale industries. The main functions of SIDO are classied into (1) Coordination - To evolve national policies, to coordinate between various govts. Coordinate the programmes for the development of industrial estates. (2) Industrial development - To reserve items for production by small scale industries, render required support for the development of ancillary units (3) Extension - To improve technical process, production, selecting appropriate machinery, preparing factory layout and design. NSIC (National Small Industries Corporation Ltd) NSIC an enterprise under the union ministry of industries, was set up in 1955 to promote, aid and foster the growth of small scale industries in the country, to provide machinery on ire-purchase scheme to SSI, to provide equipment leasing facility, to help in export marketing of the provided products of SSI, to participate in bulk purchase programme of the Government, to impart training in various industrial trades, to undertake the construction of industrial estates. SSIB (Small Scale Industries Board) The government of India constituted a SSIB in 1954 to advice on development of small scale industries in the country. SSIB is also known as central small industries board. SSIB is created to facilitate coordination and inter institutional linkages. It is an apex advisory body to render service, advice to the government to all issues pertaining in the development of SSI. Industrial minister is the Chairman. SSIDC (State Small Industries Development Corporations) SSIDC were set up in various states under the companies act 1956, as state government undertaking to cater to the primary developmental need of the tine, village industries in the state union territories under this jurisdiction. Important functions are (i) to procure and distribute scarce raw materials (ii) to supply machinery on hirepurcase system (iii) to provide assistance for marketing of the products of SSI. (iv) to construct industrial estates/ sheds, providing allied infrastructure facilities and their maintenance. SISIs (Small Industries Service Institutes) The SISIs are set up to provide consultancy and training to small entrepreneurs both existing and prospective. The main functions are,

To serve as interface between central and state government 19

 To render technical support services To supply promotional programmes To conduct EDP programmes

DICs (The District Industries Centres) DICs was started on May 8, 1978 with a view to provide integrated administrative framework at the distinct level for promotion of small scale industries in rural areas. Functions : The DICs role is mainly promotional and development (i) To conduct industrial potential surveys keeping in view the availability of resources in terms of material and human skills, infrastructure demand for product etc. To prepare techno-economic surveys and identify product lines and then to provide investment advice to entrepreneurs. (ii) To prepare an action to eectively implement the schemes identied. (iii) To guide entrepreneurs in matters relating to selecting the most appropriate machinery and equipment sources of supply and procedure for procuring imported machinery. TCO (Technical Consultancy Organisation) A network of technical consultancy organizations was established by the All India Financial Institutions in the seventies and eighties in collaboration with the state level nancial and development institutions and commercial banks to cater to the consultancy needs of small business and new entrepreneurs. Government Policies for Small Scale Enterprises Small scale enterprises have been given an important place in the framework of Indian planning for both ideological and economic reasons. Development of small scale enterprises has imbued with a multiplicity of objectives. Important among these are

The generation of immediate employment opportunity with relatively low investment The promotion of more equitable distribution of national income Eective mobilization of untapped capital and human skills Dispersal of manufacturing activities all over the country, leading to growth of villages, small towns and far-ung economically lagging regions

So, the government of India has started various programmes for the development of small scale sector in India. 20

The governments objectives and intentions towards industry including SSI were announced through industrial policy resolutions (IPR). Government Policy for Small Scale Enterprise Nation is said to be far well to do if it has a much industry as it has industrial policy. IPR 1948 The IPR 1948 for the rst time, accepted the importance of small scale industries in the overall industrial development in the country. It was well realized that small scale industries are utilized most of the local resources and create employment opportunities. Moreover, they have to face problems of raw materials, capital, skilled labour, marketing etc. since a long period of time. Therefore, emphasis was laid in the IPR 1948 that these problems of small scale enterprises should be solved by the central government with cooperation of the state governments. In nutshell, the main thrust of IPR 1948 as far as possible small scale enterprises were concerned was Protection. IPR 1956 The IPR 1948 set in the nature and pattern of industrial developments taken place in the country. For example, planning has proceeded on an organized manner and the rst ve year plan 1951 1956 has been completed. Industries development and Regulation Act (IDR Act), 1951 was also introduced to regulate and control industries in the country. The Parliament had also accepted the socialist pattern of society as the basic aim of social and economic policy during this period. It was this background that the declaration of a new industrial policy resolution seemed essential. This came in the form of IPR 1956. The IPR 1956 provided that along with continuing policy support to the small sector, it also aimed at to ensure that decentralized sector acquires sucient vitality to self-supporting and its development is integrated with that of large scale industry. To mention, some 128 items were reserved for exclusive production in the small sector.

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Besides the SSIB constituted a working group in 1959 to examine and formulate a development plan for small scale industries during the third ve year plan 1961 - 1966. In the third ve year plan period, specic development like Rural Industrial Projects and Industrial Estates Projects were started to strengthen the small sector. Thus to the earlier emphasis of protection was added to development. The IPR 1956 for small scale industries aimed at Protection + Development. The IPR 1956 initiated the modern SSI in India. IPR 1977 The IPR 1977 classied small sector into three categories

1. Cottage and household industries which provides self employment on a large scale. 2. Tiny sector incorporating investment in industrial unit in plant machinery upto Rs.1 lakh and situated in towns with a population of less than 50,000 according to 1971 census. 3. Small Scale Industries comprising of industrial unit with an investment of upto Rs.10 lakhs and in case of ancillary units with an investment of upto Rs.15 lakhs.

From the small scale sector was thus, to be protected, developed and promoted. IPR 1980 The government of India adopted a new industrial policy resolution (IPR) on July 23, 1980. The main objectives of IPR 1980 was dened as facilitating an increase of industrial production through optimum utilization of installed capacity and expansion of industries.

Introduction of the concept of nucleus plants to replace the earlier scheme of the district industry centre (DIC), in each industrially background district to promote the maximum small scale industries there. Promotion of village and rural industries to generate economic viability in the villages well compatible with the environment.

Thus the IPR 1980 re-emphasized the spirit of 1956. The small scale sector still remained that the best sector to generating wage and self-employment based opportunities in the country. IPR 1990 The IPR 1990 was announced during June 1990. 22

As to the small sector the resolution continued to give increasing importance to small scale enterprises to serve the objective of employment generation. The important elements included in the resolution to boost the development of small scale sector were as follows.

The investment ceiling in plant and machinery for small scale industries was (xed in 1985) raised from Rs.35 lakshs to Rs.60 lakshs and correspondingly for ancillary units from Rs.45 lakhs to Rs.75 lakhs. Investment ceiling for tiny units has been increased from Rs.2 lakhs to Rs.5 lakhs provided the unit is located in the area having a population of 50,000 as per 1981 causes. As many as 836 items was reserved for exclusive manufacture in small scale sector. A new scheme of initial investment subsidy exclusively for small scale sector in rural and backward areas capable of generating more employment at lower cost of capital had been mooted and implemented. A new scheme of initial investment, with a vireo to improve the competitiveness of the products manufactured in the small scale sector, programmes of technology up graduation will be implemented under the umbrella of an apex Technology development centre in small industries development organization (SIDO). Greater emphasis on training of women and youth under EDP (entrepreneurship development programme) and to establish a special call in SIDO for the purpose.

New Small Enterprise Policy 1991 The government of India, for the rst time, tabulated the new small enterprise policy titled Policy measures for promoting and strengthening small, tiny and village enterprises in the parliament on August 6, 1991. The main thrust of New small enterprise policy is to impact more vitality and growth impetus to the sector which enable it to contribute its mite fully to the economy , particularly in terms of growth of output, employment and exports. Salient features of the new small enterprise policy The investment limit has been increased in plant and machinery of tiny enterprises from Rs.2 lakh to Rs.5 lakh based on their location. Inclusion of industry related service and business enterprises, based on their location as SSI. To limit the nancial liability of the new entrepreneurs to the capital investment. A new partnership act has been introduced. 23

Introduction of a scheme of integrated infrastructural development including technological backup services for small scale industries. An factoring services have to be introduced to solve the problems of delayed payment to small sector. Market promotion of small scale industries products through cooperative/ public sector institutions, order specialized professional and the consortium approach. In the small industries development organization (SIDO) an export development centre (EDC) has to be set up. To widen the scope of National Enquiry Fund (NEF) to enlarge the single window scheme and also to associate commercial banks with provision of composite loans. Important points on the New small enterprise policy are; The new policy is founded on a proper understanding of the fundamental problems of small sector and the measure proposed it are well directed to mitigate the various handicaps that faces their sector. The new policy provides for continuous support to the tiny sector like easier access to institutional nance, preference in government purchase and relaxation of certain labour laws. Since tiny sector is the nursery of the traditional skill, the proposed package of incentives for tiny sector will help its grow with more vitality. One important feature is the introduction of new legal form of organization of business, namely restricted (or) limited partnership. As per this form the liability of atleast one partner is unlimited and the liability of other partner is limited to their invested capitals. This can be considered as a welcome provision. It will attract equity capital from friends and relatives who were earlier reluctant to advance their funds due to the limited liability of the partners. The important plan proposal (1992-1999) The main function of the eighth ve year plan has been employment generation as the motive for economic growth to fulll these objectives, small and village industries have been assigned for an extremely important role. The important plan proposal in the year 1992-1997 are; The plan has reiterated that timely and adequate availability of credit is of more importance than concessional credit. So with the establishment of SIDBI, sanction of composite loans under Single Window Concept concessional loan to state corporations for infrastructure development and provision of factory services have been introduced. 24

 It proposes to establish appropriate tool rooms and training institution to upgrade technology. The growth centre approach has been established to measure industrial disputes and is under implementation. In the year 1992-1997, to growth centres are developed and completed. An integrated centre approach has been established in the eighth plan. New policy initiative in 1997-2000 for the small scale sector Announcement of a new credit insurance scheme in the year (1999-2000), particularly exported oriented & tiny units. The working capital limit for SSI unit is determined by the bank on the basis of 20 percent of their annual turnover. Exemption from excise duty, as given to SSI units, will be extended to goods bearing a brand name of another manufacturer in rural area. A national programme for rural industrialization has been announced, with a mission to setup 100 rural clusters per year, to give a boost to rural industrialization. Cotton yarn has been introduced in the general exercise exemption scheme for SSIs. The investment limit for small scale and ancillary undertakings has been reduced from Rs.3 Crores to Rs.1 Crore. Small job workers, engaged in printing of glazed titles, have been exempted from excise duty. Small Enterprises in International Business Introduction India today operates the largest and oldest programme for the development of small scale enterprises in any developing country. The small enterprises have made an impressive and phenomenal growth in units, production and employment, exports over the years. The small sector has now emerged as a dynamic and vibrant sector of the Indian economy in the recent years. Export Performance and Trends of Small Enterprises Exports from small enterprises have been on increase registering an annual growth of about 171 percent during 1978 -1994. One way to view the impressive growth of exports from small enterprises is their increasing share year after year to the total exports from the country. The percentage of share of small enterprise exports to the total from 1971-1972 onwards is presented in Table, P - Provisional 25

Year 1971-72 1976-77 1981-82 1986-87 1991-92 1992-93 1993-94

Total Exports 1608 5142 7890 12567 44040 53688 69547

Exports from SSI 155 766 2071 3644 13883 17785 24149(P)

Percentage 3 to 2 9.6 14.9 26.5 29.0 31.5 33.1 34.5

Increasing Exports from Small Enterprises

It is interesting to that the total exports of the country increased by 43 times, while the exports from small enterprises increased by about 155 times, information given in the table is from direct exports only small enterprises also makes indirect exports through merchant exporters, trading houses and large enterprises. Indirect exports is 10% of total exported (estimated) It is expected to increase in future when the ongoing economic reforms in the country start giving results. Indias share in world exports is very low, at about 0.5 percent. India is now the member of World Trade Organization-WTO. It has to improve its share in worlds exports to be a global player. Given the large industrial sectors attention focused more on internal market than the international market, on the one hand and decreasing exports of primary products and traditional items on the other hand, we need to concentrate on small enterprises to increase our exports as its hold potential for it. In view of the wide range of items produced by small enterprises, only of few items i.e sports goods, readymade garments, leather products, processed food, plastic goods, engineering goods, elastic and electronical goods, basic chemical and pharmaceuticals and cosmetics. These items, thus, hold good promise for increasing exports in future also. Exports of traditional products like cashew and lac is not less encouraging. However, the export performance of smalls sector exhibits some disturbing features also (1) About 83% of total exports from small sector accounted for by four items alone denotes the lack of diversication in export items of small sector. Even the items having good potential for exports like leather products, account for 3 to 4 percent of global exports. (2) Hence, in order to boost the SSI exports, the new potential markets need to the explored and tapped. Major Constraints

26

The major constraints encountered by the small scale units in exporting their products are as follows Credit Policy The small scale units have very weak base of their own funds on the one hand and have no access to other sources of funds like capital market, on the other. Hence, they have to depend upon the state nancial corporations (SFCs) and the commercial banks to meet their long term and short capital requirements. The actual availability of credit from the nancial statements, institutions was very low at 8.1 percent of output. In case of tiny units, it was merely 2.7% of their output. Infrastructure Lack of infrastructure facilities like power supply, transportation and communication aduersely aect the quality and quantity of production, its cost and delivery. These, in turn, tell upon the export performance of small scale units. The launching of new scheme of Integrated Infrastructure Development in rural and backward areas is a right step in right direction. Technology Technology is the crux of quality and competitiveness. However, the adoption of technology in small scale industries hampered due to lack of infrastructural facilities, on the one hand and the present investment ceiling of the small scale industry on the other. Nevertheless the government has setup several tool rooms, production-cum-process development centres, regional testing centres and workshops, schemes of industrial parks and 18,09,000 to break the prevailing inertia and promote exports from small scale units. The recent telecommunication revolution has oered hi-tech application for market research which is most cost eective substitute for exploratory personal visits abroad. As a matter of fact, conventional method of market explorations through trail and error and private contracts has been replaced by the electronic network exchanging business queries between the trading parties. Export Potential of Small Scale Units Given the constraints and weakness of small sector, one cannot conclude the small scale sector has no strong point which help it emerge as a global player. The small units are inherently exible to react to market signals and changing tastes. This makes the small enterprise more innovative and open to new ideas. Opportunities exist for small scale sector to emerge a strong global player especially in the exports of the following products. Food processing industries India has been the second largest producer of a very wide variety of fruits and vegetables in the world. But it processes less than 1% of production. At the end of 1992, the number of processing units 27

registered under fruit products order was 4,057 of which 87% belonged to small scale and cottage industries sector. The major reason for countrys low share in the international market have been over-dependence on a few recognized international markets, lack of quality control, poor packaging, high cost of production, inadequacy of infrastructure like transport and power and non-availability of required inputs at right time and prise. Considering the growing international demand for processed foods, the items which hold good potential for exports from India are sea-foods, spices, cashews, nuts, fruits and vegetables, fruits pulp, juices, jams, pickles, canned fruits and vegetable dehydrated vegetables and gaur gums. Leather Goods India has the largest cattle population and thus has a substantial raw material base for leather based industries, At present, the countrys share in the world leather market is about 4 percent and the target is to raise it by 10 percent by 2000s because this sector holds potential for exports. The sector is plagued by weaknesses like low volume of production units, poor quality, lack of standardization poor delivery and absence of technological upgradation. These weaknesses need to be attended to expeditiously and adequately tap the export potential of leather goods in the country. Electronic Goods The electronic industry has registered a phenomenal compound growth rate of 35% during the last decade 1981-1990. The share of small sector in 1993-1994 was 40% of output and 30% of exports of electrical industry 80% of exports of electrical goods are from Export Processing Zone alone. The electronic industry holds tremendous potential for exports in electronics, software and contract manufacturing. This potential needs to be tapped. India has the third largest technical manpower in the world. Recently, the technically qualied people have started assuming the role of exports. Some of them have made an impressive head-way in export within a short period what is needed, is to provide them support in terms of developed industrial shed/ plants and credit facility. Plastic Goods At present, out of 18500 units manufacturing various industrial and consumer plastics, around 18000 units are in small sector. The items of plastic exports include carry bags, garbage bags, shopping bags, woven sacks, plastic moulded household items like insulated thermoware, pens, spectacles frames, PVC hoses, PVC leather cloths etc. In 1992-1993, the small sector accounted for 45% of these exports. There still exists enough scope to diversify the products and penetrate new markets. There main problems in this industry is facing is shortage of plastic raw materials, (i.e) polymer. But, this has, in turn helped the development of recycling of plastic waste industry and eco-friendly measure. 28

Suggestions to improve Exports 11 % 35 % 1970 - 1971 1993 - 1994 Small Scale Enterprise Shares The government of India has accorded high priority to the development of small scale industries in the country. Under the protective and promotional policies of the government, the small scale enterprises in the countrys exports had made their presence felt nationally and internationally. Increase

Realising the good export potential of small sector, the board of Trade & Ministry of Commerce have identied 8 sectors and 15 items respectively for boosting exports from the small scale sector. The bug bear of the sector has been the inadequacies of the capital, technology and marketing. If the export potential of small scale enterprises is to be tapped to the full extend, then the issues like simplication of procedures, easier access to the bank and institutional credit, improvement in infrastructure and marketing issues need to be attend to expeditiously and adequately we wish our small enterprises a Vibrant Player in the International Business.

UNIT 3

BUSINESS PLAN PREPARATION

What is SSI? The denition of small-scale Industry (SSI) varies from one country to another and from one time to another in the same country depending upon the pattern and stage of development, government policy and administrative setup of the particular country. The term Small scale industries has been dened in three ways; 1. Conventional Denition It includes cottage and handcraft industries which employ traditional labour, intensive methods to produce traditional products, largely in village households. Eg: Handloom textile industry 29

2. Operational Denition The operational denition for policy purpose includes all those undertaking having an investment in xed assets in plant and machinery, whether held on ownership terms (or) by lease (or) hire purchase, not exceeding Rs.60 lakhs. The Ancillary and tiny units also come under the umbrella of SSI. An ancillary undertaking is one whose investment in plant and machinery does not exceed Rs.75. lakhs and it is engaged to manufactory parts and services. A tiny unit is one whose investment in xed asset in plant and machinery does not exceed Rs.5 lakhs. 3. National Income The third denition of SSI relates to national income accounting. This includes all manufacturing and processing activities, including maintenance and repair services, undertaken by both household and non-household small scale manufacturing units, which are not registered under the factories act. CLASSIFICATION OF SSI Based on the industries production chain and service small scale industries can be classied as, 1. Manufacturing industries These industries produce complete product for direct consumption and also processing industries. 2. Feeder industries This type of industries were specialized to certain products and services. Eg. Casting, welding etc 3. Serving industries These industries cover repair, shops necessary to maintain the mechanical equipment (i.e) spare parts shop 4. Ancillary to large industries The industries produce parts and components and render services to large industries. 5. Mining (or) Quarrying This industry is involved in unearthing breaking of bulk stone etc. CHARACTERISTICS OF SSI

30

 A small scale unit is generally a one man show Capital investment is small and have a fewere than 10 workers Most probably it is located in rural and semi-rural urban areas. These rms are privately owned and are organized as sole proprietorship Compared to large unit, a small scale industrial unit has a lesser gestation period (ROI) (i.e) the period after which the return on investment starts. Small scale industry can be started any where based on the availability of resources like raw materials, labour etc. It helps to promote balanced reginal development and inux of job seekers from rural areas to cities. They are more exible to adopt changes like introduction of new product, new method of production, materials and new markets, new forms of organizations etc. Dierence between SSI and Large Industries S.no 1 Small Scale Industries Ownership of SSi by and large, is proprietary or partnership 2 SSI units have less capital intensive/ Investment technology areas, which are labour intensive 3 SSI units are more amenable to dispersal and decentralized growth Large units generally have higher input of technology and capital relatively they are more capital intensive Large units converge more around metropolitan and urban areas where all the basic infrastructural facilities are available 4 By and large, rural industries adhere to the age old techniques and tools 5 SSI basically cater to the needs of the local people 6 All work from bringing raw materials to marketing is done by the household 7 Comparatively a short gestation period Importance of SSI The Small scale industries provide high employment opportunities, promoting entrepreneurship 1. Innovative and Productive 31 Large industrial undertakings have a greater exposure to professional management Large industries are basically market-oriented. They produce goods for the masses Dierent jobs are handled by a chain of specialized and / or professional skilled people Comparatively a long gestation period Large Industries Large units are normally public limited

SSI have highly innovative though do not maintain their own research and development wings. 2. Individual tastes, fashions and personalised service Small rms are quick in studying changes in tastes and fashions of consumer and in adjusting the production process and production accordingly. 3. Symbols of National Identity Small enterprises are almost locally owned and controlled and they can be stronger rather than destroy the extended family and other social systems and cultural traditions that are perceived as valuable in their own right as well as symbols of national identity 4. Always winners of the game Small enterprises and new entrepreneurs were at the forefront of practically every business boom of the last decade 5. Dispersal over wide areas Only SSI have a tendency to disperse over wide areas. According to second All India Census of small scale units 62.19% of the units are located in back ward areas. Advantages of SSI It creates immediate and permanent employment at a relatively small capital cost They meet a substantial part of increased demand for consumer goods, including mass consumption goods They have a favourable capital output ratio Thy facilitate mobilization of resources of capital and skills It does not require heavy and costly infrastructure and machinery They involve a short gestation period It carns foreign exchange

Disadvantages of SSI Lack of nance leads to closing of Small unit Some small industries requires highly skilled labour and equipment There is lack of support to the small scale unit owners 32

Objectives Of Small Enterpriser

To eliminate the economic backwardness of rural and under developed regions in the country To generate immediate and large scale employment opportunities To reduce regional imbalance To mobilize resources capital and skills and their optimum utilization To ensure more equitable distribution of national income

Ownership Structure

Organisational structure of small scale industries in India are The entrepreneurs choice of ownership depends upon the nature of business, scale of operation, capital requirements, ownership rights such as control and decision making opportunities and impact of taxation. In General, an entrepreneur wishing to start on his own will prefer to organize it on a small scale if he has a limited capital and shill will go for sole trader. If the entrepreneur is unable to control all the operation he will seek out other people willing to join him as partners. The risk associated with the unlimited liability can be avoided and large of amount of capital can be brought into business by forming a limited company. If the capital requirements are not very large, a private limited company may be formed, to meet needs of a large amount capital to run a large business, a public company have to be formed. Sole Proprietorship 33

Sole proprietorship is a form of business organization in which an individual invests his own capital, uses his own skill and intelligence in the management of its aairs and is solely responsible for the results of its operation According to wheeler the sole proprietorship is that form of business organization which is owned and controlled by a single individual. He receives all the prots and bears all the risks in the success or failure of the enterprise Salient Features

Sole ownership One man control No separate entity of the rm Undivided risk No government regulation Unlimited liabilities

Merits

Objectives of the rm are formulated in an informal manner by the entrepreneur Specialization is restricted to the entrepreneur Authority and responsibility are centered round the entrepreneurs Quick and prompt decision Maximum exibility in operation

Demerits

There is no plan and policy about objectives No scope for developing skill, knowledge aptitudes and ability No scope for coordination of activities Limited managerial ability Lack of Continuity 34

 Instability

The sole proprietorship would be the most suitable where,

Capital requirement is low Business activity is limited Element of risk is minimum Individual can manage the show and also satisfy customers

Partnership Firm According to Indian Partnership Act, 1932 section 4 of this act denes a partnership as the relation between two persons who have agreed to share prot of a business carried on by all or any of them acting for all. Persons who enter into partnership are collectively known as rm but individually known as partners. The uniform partnership act of the USA dened a partnership as an association of two or

more persons to carry on as co owners a business for prot. According to J.L.Hanson, a partnership is a form of business organization in which two or more persons up to a maximum of twenty join together to undertake some form of business activity. Salient features

More persons Prot and loss sharing Contractual relationship Existence of lawful business Utmost good faith and honest Unlimited liability

Merits

Objectives of the unit are clearly stated Better specialization through division of labour Line of authority specied 35

 Authority and responsibility are dened Continuity of work Flexibility in operation

Demerits Lack of harmony in the event of mutual distrust Restricted growth Lack of public condence Communication gaps

A partnership concern would be most suitable where, The size of the business is relatively small The capital requirement is not much

There is need for variety of skills for managing the dierent types of activities Partnership Deed A partnership rm can be formed through an agreement among two or more persons. The agreement entered into between partners may be either oral and written but it is desirable that all terms and conditions of partnership are put in writing so as to avoid any misunderstanding among the partners. Such written agreement among partners is known as partnership deed. A partnership deed generally contains the following Name of the rm Nature of the business Name of all the partners Date of agreement Place of the business Amount of capital contributed by each partner Duration of partnership 36

 Prot sharing ratio between the partners Loans and advances by partners & interest payable on them Drawings allowed to partners and the rate of interest Amount of salary or commission payable to any partner Duties powers and obligations of partner Maintenance of accounts and audit Mode of valuation of goodwill on admission, retirement and death of a partner Registration of Firms Under the Indian Partnership Act, 1932, the registration of the rm is not compulsory but an unregistered rm suers from certain limitations,. . . .., registration of a partnership is desirable. Procedure for registration A partnership rm can be registered at any time by lling a statement in the prescribed form. The form should be duly signed by all the partners The statement should contain the following information Name of the rm Name of the business place Name of the registered oce / branch Date of commencement of business Dissolution of rm There is a dierence between the dissolution of partnership and dissolution of rm. Dissolution of partnership occurs when a partner ceases to be associated with the business, where as dissolution of rm is the winding up the business Modes of Dissolution of Firms 1. Dissolution by Agreement A partnership rm may be dissolved with the mutual consent of all the partners in accordance with the terms of the agreement 2. Contingent Dissolution 37

 On the expiry of the period, if it is for a xed period On the completion of the rms goal On the death of a partner On the adjudication of a partner as insolvent

3. Compulsory Dissolution A rm stands dissolved in the following cases

When a partner becomes of unsound mind When a partner becomes permanently incapable of performing his duties as a partner When a partner willfully and persistently commits breach of the partnership agreement When a partner unauthorizedly transfers the whole of his interest or share in the rm to a third person When it is just and equitable that the rm should be dissolved When a partner is guilty of misconduct which is likely to aect prejudicially the business of the rm The business of the rm can be carried on at loss only

Settlement of Accounts on Section 48 of the partnership Act 1932, lays down the following procedure for partners after the dissolution of the rm The losses of the rm on dissolution have to be made up,

First out of prots Then, out of capital If need be, out of private estates of the partners in their prot sharing ratio

The assets of the rm are disposed in the following manner,

Payment of debts due to the third parties Reteable payments of loans and advances made by the partners to the rm Payment of partners capital 38

 The surplus, if any, shall be divided among the partners in their prot sharing ratio

COMPANY According to chief justice John Marshall of USA dened a company as A corporation is an articial being invisible, intangible and existing only in contemptation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or an incidental to its very existence. The Indian Companies Act, 1956 denes a joint stock company as A company limited by shares having a permanent paid up or nominal share capital of xed amount divided into shares also of xed amount, held and transferable as stock and formed on the principles of having in its members only the holders of those shares or stocks and no other persons. Salient features of a company 1. Separate legal Entity A company has an existence entirely distinct from and independent of its members. It can own property and enter into contracts in its own name. The assets and liabilities of the company are not the assets and liabilities of the individual member and vice versa. 2. Articial Person A company is an articial person created by law. It is intangible. Like a natural person, it has rights and obligation in terms of law. 3. Perceptual Succession A company enjoys continuous existence and its life is not aected by the death, insolvency etc. In common words Men may come, Men may go but the company remain the same. 4. Limited Liability It has limited liability. The members of the company are limited by his/her share. 5. Common seal Being an articial person, company cannot sign the documents. So, it uses a common seal on which the name of the company is engraved. Any documents bearing the common seal of the company and duly witnessed by at least two directors is legally binding on the company. 6. Transferability of Shares The members of public limited company can freely sell their share to others without the consent 39

of other share holders. 7. Separation of ownership & management The number of shareholders are scattered all over the country. Therefore they elect their representatives to manage the company on their behalf known as directors 8. Incorporated association of persons In case of a private limited company the minimum number of members is two and the maximum number is fty. But, in case of a public limited company, the minimum number is seven and there maximum has no limit. Private and Public Company 1. Private Company Under section 3(i) (ii) of the companies act, a private company has been dened as

Restricts the members to transfer the shares, if any Number of member is limited to 50 Prohibits any invitation to the public to subscribe any share or the debentures of the company The minimum number of members in case of private company is two The word private must be used in the company name

2. Public Company Under section 3(i) (ii) of the company act a public company is not a private company, In other words, a public company is one which,

Lays down no restriction on the transfer of shares to others There is no maximum limit in numbers of members It can invite public for subscribing to its shares or debentures of the company

Distinction between Private & Public company Privileges of a Private Company 40

S.No 1

Basic of dierence Members

Private company The minimum number of member is 2 and maximum member is 50

Public company The minimum number of member is 7 and there is no limit in maximum number of member Minimum 3 directors Must issue and le a prospectus

2 3

Number of Directors Prospectus

Minimum 2 directors Need not issue and le a prospectus

Signing of Documents

Two members need to sign the memorandum and article of association

Seven members need to sign the documents

Allotment of shares

No restrictions on allotment of shares. No binding on further issue of shares

Cannot allot shares without raising minimum subscription and without complying with other legal formalities

Commencement of business

It can commence business soon after incorporation

It can commence business only after getting the certicate of business

Transfer of share

It can commence business restrictions on transfer of shares

Shares are free transferable

Statutory Meeting

It need not hold the statutory meeting or le a statutory report

It must hold a statutory meeting and le a statutory report

Only two person are required to form a company It requires only two directors but in case of public company three directors It is not required to prepare and le prospector or statement in lien of prospectus with the register of companies It can commence it business immediately after incorporation A private company not required to hold a statutory meeting and le a statutory report A non-member cannot respect the copies of the prot and loss account, led with the registrar of companies

Merits 1. Limited Liability 41

The liability of shareholders is limited to the face value of shares held by them 2. Large Financial Resources Company form of ownership enables the collection of huge nancial resources. The capital of a company is divided into shares of small dominations so that people with small means can also buy them 3. Perpetual Existence Death or insolvency of share holders or directors do not aect the companys existence. A company has a separate legal entity with perpetual succession. 4. Transferability of shares A member of a public limited company can freely transfer his shares without the consent of other members shares of public companies are generally listed on a stock exchange so that people can easily buy ansd sell them 5. Diusion of Risk As the membership is very large, the whole business risk is divided among the several members of the company. Therefore the risk of an individual investor is reduced. 6. Professional Management The management is in the hands of the directors who are elected by the share holders. Demerits 1. Lack of Secrecy As per the legal provisions, a company has to make various statements available to the registrar of the companies, nancial institutions, the secrecy of business comes down, and the accounts of a public company are open for inspection to public. 2. Delay in Decisions Too many levels of management in a company result in bureaucracy. It is dicult to make quick decision; the number of person involved is more 3. Legal Restriction A company has to comply with more legal formalities than sole proprietorship and partnership 4. Lack of Motivation, Personal Touch There is divorce between ownership and management in a large public company. The aairs of

42

the company are managed by the professional and salaried managers who do not have personal involvement and stake in the company. Absentee ownership and impersonal management result in lack of initiative and responsibility. Incentive for hardwork and eciency is low. 5. Conict of Interest Company is the only form of business where in a permanent conict of interests may exist. In proprietorship there is no scope for conict and in a partnership continuous conict results in dissolution of the rm. But in a company, conicts may continue between shareholders and board of directors or between shareholders and creditors or between management and workers. Cooperative Another for of business ownership is cooperative. The Indian cooperative society act, 1912, section 4 dened cooperative as a society which has it objective the promotion of economic interests of its members in accordance with cooperative principles. According to international labour organization cooperative organization is an association of persons. In simple term, cooperative is a voluntary organization. It is created not to earn prot but improve their common economic interests. The main objective of this organization is self help and mutual help. A cooperative organization needs to be registered with the registrar of cooperative societies of the state with minimum 10 members and they are the owners. The member will elect their managing committee in the annual general meeting to manage the aairs of the cooperative organization. Salient features It is an voluntary organization The member itself elect their managing committee on the basis of one member - one vote with democratic benet The primary objective is to render service to its members rather than to earn prots The capital of cooperative organization is collected from its member in the form of share capital The prot is shared among members as a dividend which is restricted to 9% and the surplus is distributed in the form of bonus among the members

Merits The formation of cooperative is easy when compared to other form of companies 43

 The formation of cooperative is easy when compared to other form of companies. It is an associate of 10 member with limited formalities The liability of members is limited to the extent of their capital in the cooperative societies. It helps to create social relationship among its members and society They enjoy a tax limit on income tax and surcharge on its earnings upto a certain limit The member itself elect their managing committee on the basis of one member - one vote with democratic benets

Demerits

Maintain of secrecy like annual reports accounts are quite dicult in case of cooperative organization Since cooperative organization is service motive not a prot this leads to lack of interest, in the management activities There is a way to reected in misappropriations of funds by the oces

Selection of an Appropriate Form of Ownership Structure So far we studied various forms of business ownership. It is ethical and dicult situation in selecting appropriate form of business ownership So in selecting a best form of ownership depends on following criteria Meaning of Project Project is an idea or plan that is intended to be carried out Scheme, design, a proposal of something devised to be achieved Project / Product Newman et al dene that a project typically has a distinct mission that is designed to achieve and a clear termination point, the achievement of the mission. Gillinger denes project as the whole complex of activities involved in using resources to gain benets. Project can be dened as scientically evolved work plan devised to achieve a specic objective within a specic period of time. It is also important to mention that while project can dier in their size, nature objectives, time duration and complexity, they partake of the following 3 basic attributes; 44

Criteria

Types of ownership Proprietorship

Join stock company Partnership The business which requires pooling of funds and skills The business which requires large capital and scale of production The area of operation is widespread catering to national & international

Nature of Business

The business that requires personal attention of skill

Area of operation

It is conned to an area or locality only

- do -

Degree of control

If there is need for direct control over business

- do -

There is no need for direct control over business

Capital ment

require-

If the requirement is small amount of capital

- do -

Selection of this type of ownership if the requirement of capital is huge

Extent of Risk & Liability Duration of business Government Regulation

Involves risk

- do -

Hesitant to bear the risk

If the duration is for a shorter period Less rules and regulations

- do -

There is no end

- do -

More rules and regulations

1. A course of action 2. Specic objectives 3. Denite time perspective

Every project has a starting point, an end point with specic objectives Project / Product (sources) classication Project classication is a natural corollary to the study of project idea 1. Quantiable and Non-Quantiable projects Projects for which a plausible quantitative assessment of benets can be made are called quantiable projects Projects concerned with industrial development, power generation, mineral development fall in this category. On the contrary, Non-quantiable projects are those in which a plausible quantitative assessment cannot be made. Projects involving health education and defence are the examples of non-quantiable 45

projects. 2. Sectorial Projects According to this classication, a project may fall in any of the following sector

Agricultural and allied sector Irrigation and power sector Industry and mining sector Transport and communication sector Social service sector Miscellaneous sector

The project classication based on economic sector is found useful in resource allocation more especially at Macro levels. 3. Techno-Economic Projects Projects classication based on techno economic characteristics falls in this category. This type of classication includes factors intensity - oriented classication, causation oriented classication and Magnitude oriented. Factor oriented : based on factor intensity classication, projects may be classied as capital intensive or labour intensive. If large investment is made in plant and machinery, the projects will be termed as capital intensive. On the other, projects involving large number of human resource will be termed as labour intensive. Causation oriented classication : Projects may be classied as demand based and raw material based projects. The very existence of demand for certain goods or services makes the project demand based and the availability of certain raw materials, skills or other inputs makes the project raw material based. Magnitude oriented classication : Magnitude - oriented is based on the size of investment involved in the projects, the projects are classied into large scale, medium scale and small scale projects. Project classication based on techno-economic characteristics is found useful in facilitating the process of feasibility appraisal of the project. Project Identication and Project Selection (PIS) How the entrepreneurs do nally select a project? As a matter of fact, project selection is not a 46

nebulous idea. It is a well outlined game plan. There is a denite procedure for selecting a project. Basically, project selection consists of two main steps 1. Project Identication If you ask any one entrepreneur what project he/ she will select, the obvious answer would be a project having a good market. But the question is how without knowing the product could one determine the market? Whose market will one nd out without knowing the item, (i.e) product. Idea generation about a few projects provides a way out of above tangle. Idea generation: Project selection process starts with the generation of product idea. In order to select the most promising project, the entrepreneur needs to generate a few ideas about the possible projects he/she can undertake. The project ideas can be discovered from various internal and external sources. These may include,

1. Knowledge of potential customer needs 2. Watching emerging trends in demand for certain products 3. Scope of producing substitute for certain products 4. Going through certain professional magazines catering to specic interests like electronics, computer etc. 5. Success stories of known entrepreneurs or friends/ relatives 6. Making visits to trade fairs and exhibitions displaying new products and services 7. Meeting the government agencies. 8. Ideas given by the knowledgeable persons 9. Knowledge about the government policy, concessions and incentives, list of items reserved for exclusive manufacture in small scale sector 10. A new product introduced by the competitor

All these sources putting together may give a few ideas about the possible projects to be examined as the nd project. This is also described as Opportunity Scanning and Identication. After going through the above process imagine that you have been able to get 5 project ideas as a result of above analysis,

1. Nut and bold manufacturing 47

2. Lakhani Shoe industry 3. Photocopying unit (service based) 4. Electrotype writer servicing 5. Polythene bags for textile industry (ancillary) From above list, now one project idea will be nally selected through the following selection process. 2. Project Selection Project selection starts from where project identication ends After having some project ideas, they are analysed in the light of existing economic conditions, the government policy and so on. A tool generally used for this purpose is called as SWOT analysis. The intending entrepreneur analyses his/her strengths and weakness as well as their opportunities/ competitive advantages and threats/ challenges oered by each of the project ideas. On the basis of this analysis, the most suitable idea is nally selected to convert into enterprise. The process involved in selecting a project out of some projects is described as Zeroing in process. What follows from above analysis that there is time interval involved in between project identication and project selection. But in some cases, there may be almost no time gap between the two. Examples: Two friends Nikhil and Chinmoy were travelling from Guwahati to Delhi by North east express. Their train stopped at Allahabad. Some Teenagers with Guava baskets crowded the compartment. Almost every passenger purchased Guava. So did Nikhil and Chnmoy also. The Guavas were really delicious. They reached Delhi and parted company, while Nikhil took Bhramputra mail to Allahabad. He contacted shopkeepers in Allahabad who were selling Guavas. He nalized a business deal for them to send a packet of 1000 kg of Guavas daily to Delhi. Thus, Nikhils business started from the third day when he was selling Guavas in Delhi. Here one permanent question for us is how did this idea make its headway into a business opportunity for Nikhil? In its answer, what can we mention is that Nikhil must have turned questions in his mind like, 1. Who will buy his Guavas? 2. What will be size of the packet and what will be its price? 3. How much will be the cost of per kg of guava? Project identication and selection is half done in the process of establishing an enterprise. The entrepreneur needs to analyse other related aspects also like raw material, potential market, labour, capital, location and forms of ownership etc. 48

It is necessary to mention that each of these aspects has to be evaluated independently and in relation to each other. This forms a back and forth continuous process. Independent process and aspects are separately visualized in the g. Product

Ownership

Raw Material

Location

Market

Working capital

Labour

Total Investment

49

Project Formulation Webster New 20th century dictionary denes a project as a scheme, design, a proposal of something intended or devised. In simple words, Project report or business plan is a written statement of what an entrepreneur proposes to take up. It is a kind of guide frost or course of action what the entrepreneur hopes to achieve in his business and how is he going to achieve it. Project report serves like a big road map to reach the destination determined by the entrepreneur. Project report can best dened as a well evolved course of action devised to achieve the specic objective within a specic period of time. Project report is an operating document. Signicance of Project Report An objective without a plan is a dream. The preparation of project report is of great signicance for an entrepreneur. The project report serves the two essential functions. 1. First and foremost important, the project report is like a road map. It describes the direction the enterprise is going in, what its goal are, where it wants to be, and how it is going to get there. It also enables an entrepreneur to know what he is proceeding in the right direction. Some hold the view that without well spelled out goals and operational methods/ tactics, most businesses ounder on the rocks of hard times. 2. Second function of the project report is to attract lenders and investors. Although it is not mandatory for the small enterprises to prepare project reports, yet it is useful and benecial for them to prepare the project reports for various reasons. The preparation of project report is benecial for those small enterprises which apply for nancial assistance from the nancial institutions and commercial banks. It is on the basis of project report that the nancial institution makes appraisal if the enterprise requires nance or not. The quality of the rms project report weighs heavily in the decision to lend on invest funds. World bank denes a project as an approval for a capital investment to develop facilities to provide goods and services. A project report is prepared by an expert after detailed study and analysis of the various aspects of a project. Signicance of a Project Formulation

50

 A well dened formulated project report is the best gateway for obtaining necessary Government clearances and in meeting the hundreds of procedural formalities. The report which is submitted by the entrepreneur will establish his bonades in the eyes of the bureaucracy and obtain the due government sanction without much diculty. It acts as a guide to management, especially at the initial stage to know whether the technical, commercial, nancial and economic conditions are feasible are not.

51

Contents of a Project Report Having gone through the signicance of project report, it is now clean that there is no substitute for a well developed prepared business plan or project report and also there are no short cuts to preparing it. The more concrete and complete the business plan, the more likely it is to earn the respect of outsiders and their support in making and running an enterprise. Therefore the project report needs to be prepared with great care and consideration. A good project report should contain the following contents S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Contents General Information Promoter Location Land and Building Plant and Machinery Production Process Utilities Transport & Communication Raw material Main power Products Market Requirement of working capital Requirement of funds Cost of production and protability of rst ten years Break even analysis Schedule of Implementation Elements of Project Formulation / Report A general set of information given in any project report is listed by Vinod Gupta in his study on Formulation of a project report. We are reproducing it here. Project formulation divides the process of project development into eight distinct and sequential stages. These stages are 1. General information 2. Project description 52 Break even point is the level of production/ sales where Information on product prole and product details

His/her educational qualication work experience, projec

Exact location of the project lease or freehold, locational Land area, construction area, type of construction, cost

Details of machinery required, capacity, suppliers, cost, v

Description of production process, process chart, technic

Water, power, steam, compressed air requirement cost es Mode, possibility of getting, costs

List of raw material, required by quality and quantity, so

Man power requirement by skilled and semi-skilled, sour

Product mix, estimated sales distribution channels, comp

End users of products, distribution of market as local, na

Working capital required sources of working capital, need

Break up of project cost in terms of cost of land, buildin

Every entrepreneur should draw an implementation sche

3. Market potential 4. Capital cost and sources of nance 5. Assessment of working capital requirements 6. Other nancial aspects 7. Economic and social variables 8. Project implementation

(1) General Information The general nature information given in the project report include the following. Bio-data of promoter: Name and address of entrepreneur, the qualication, experience and other capabilities of the entrepreneur, if these are partners, state these characteristics of all the partners individually. Industry prole: A reference of analysis of industry to which the project belongs (eg) past performance, present status, its organization, its problems etc. Product details: Product utility, product range, product design, advantages to be oered by the product over its substitutes. (2) Project Description A brief description of the project covers,

Site: Location of enterprise, owned, or leasehold land, industrial are; No objection certicate from the municipal Authorities if the enterprise location falls in the residential area. Physical infrastructure: Availability of the following items of infrastructure should be mentioned in the project; (i) Raw material: Requirement of raw material whether inland or imported, sources of raw material etc. (ii) Skilled labour: Availability of skilled labour in the area, arrangements for training labourers in various skills. Utilities: (i) Power-requirement of power, load sanctioned and availability of power (ii) Fuel-requirement for fuel items such as coal, coke, oil or gas, state of their availability (iii) Water-the sources and quality of water should be clearly stated in the project report. Pollution control: The aspects like scope of dumps, sewage system and sewage treatment plant should be clearly stated in case of industries person-producing emissions. 53

 Communication system: Availability of communication facilities. Eg telephone, telex etc, should be stated in the project report. Transport facilities: Requirement for transport, mode of transport, potential means of transport, distance to be covered, bottlenecks etc. should be stated in the business plan. Other common facilities: Machine shops, welding shops and electrical repair shops etc. Production process: A mention should be made for process involved in production and period of conversion from raw material to nished goods. Machinery and Equipment: A complete list of items, required indicating their size, type cost and sources of their supply should be enclosed with the report. Capacity of the plant: The installed licensed capacity of the plant along with the shifts should be mentioned. Technology selected: The selection of technology, arrangements made for acquiring it should be mentioned in the project report. Research and development: Research proposed and development activities to be undertaken in the future must be mentioned.

(3) Market Potential (i) Demand and supply position- state the total expected demand for the product and present supply position. This should also be mentioned how much of the gap be lled by the proposed unit. (ii) Expected Price - An expected price of the product to be realized should be mentioned in the project report. * Marketing strategy: Arrangements made for selling the product should be clearly stated in the project report * After sales service: Depending upon the nature of the product, provisions made for after sale service should normally be stated. * Transportation: Requirement for transportation means indicating whether public transport or entrepreneurs own transport should be mention. (4) Capital cost & sources of nance An estimate of various components of capital items like land and buildings, plant and machinery, installation cost, preliminary expenses, margin of working capital should be given in the report. The present 54

probable sources of nance should also be stated in the report. The sources should indicate the owners fund together with funds raised from nancial institutions and banks. (5) Assessment of working capital requirements The requirement of working capital and its sources of supply should be carefully and clearly mentioned. It is always better to prepare working capital requirements in the prescribed formats designed by limits of requirement. It will minimize objections from the bankers side. (6) Other Financial Aspects In order to adjudge the protability of the project to be setup, a projected prot and loss account indicating likely sales revenue, cost indicating likely sales revenue, cost of production, allied cost and prot should be prepared. A projected cash ow statement and balance sheet should be prepared. In addition to above, the Break even analysis should be presented Breakeven point is the level of production / sales where the industrial enterprise shall earn neither prot nor loss. BEP indicates the gestation period and the likely moratorium required for repayment of loans. BEP = Where
F SV

100

F = Fixed cost, S = Sales projected, V = Variable cost

(7) Economic and Social Variables In view of the social responsibility of business, the abetment cost. i.e the cost for controlling the environmental damage should be stated arrangement made for treating the euents and emission should also be stated. Besides the socio economic benets expected to accrue from the project should be stated, following are the examples,

Employment Generation Import Substitution Ancillarisation Exports Local Resource Utilization Development of the area

(8) Project Implementation 55

Last but no means the least, every entrepreneur should drawn an implementation scheme or a timetable for his project to ensure the timely completion of all activities involved in setting up an enterprises. Timely Implementation is Important If delay

Project Cost over run Jeopardizes the nancial ability of the project Props up the entrepreneur to drop up

Hence, there is a need to draw up an implementation schedule for the project and then to adhere to it. An Illustrative Implementation Schedule S.No 1 2 3 4 5 6 7 8 9 10 11 Tasks/months Formulation of Project Report Application for loan Term loan section Possession of land Construction of Building Placing order for machinery Prelting Power and water Receipt and installation of machinery Manpower recruitment Trial production Commencement of commercial production 1 2 3 4 5 6 7 8

The above schedule can be broken up into scores of specic tasks involved in setting up enterprises. Project Evaluation and Review Technique (PERT) and Critical Path Method (CPM) can also be used to get better insights into all activities related to implementation of the project PERT and CPM network analysis. Planning Commissions Guidelines for Formulating the Report 1. General Information The feasibility report should include an analysis of the industry to which the project belongs. It should deal with the past performance of the industry. The description of the type of industry should also be given (i.e) the priority of the industry, increase in production, role of the public sector, allocation of 56

investment funds, choice of technique etc. This should contain information about the enterprise submitting the feasibility report. 2. Preliminary Analysis of Alternatives This should contain present data on the gap between demand and supply for the outputs which are to be produced, date on the capacity that would be available from projects that are in production or under implementation at the time the report is prepared. All opinions are technically feasible should be considered at this preliminary stage. An account of the foreign exchange requirement should be taken. The protability of dierent opinions should also be looked into an account of the foreign exchange requirement should be taken. 3. Project Description The feasibility report should provide a brief description of the technology chosen for the project. Information relevant for determining the optimality of the location chosen should also be included. To assist on the assessment of the environmental eects of the project very feasibility report must present the information on specic point (i.e) population, water, land air, eects raising out of the project pollution, other environmental disruption etc. Report should contain a list of important items of capital equipment and also the list of the operational requirements of the plant, requirement of water, power, personnel, organizational structure envisaged, transport cost and factors aecting it. 4. Marketing Plan It should contain the following items/ data on the marketing plan. Demand and prospective supply in each of the area to be served. The method and the data used for making estimates of domestic supply and selection of the market area should be presented. Estimates of the degree of price sensitivity should be presented. It should contain an analysis of past trends in prices. 5. Capital Requirement and Cost The estimates should be reasonably complete and properly estimated information on all items of costs should be carefully collected and presented. 6. Operating Requirements and Cost Operating cost are essentially those cost which are included after the commencement of commercial 57

production. Information about all items of operating cost should be collected. Operating cost relate to cost of raw materials and intermediaries, fuels, utilities, labour, repair and maintenance, selling and other expenses. 7. Financial Analysis The purpose of this analysis is to present measures to assess the nancial viability of the project. A performance balance sheet for the project data should be presented. Depreciation should be allowed on the basis specied by the Bureau of public enterprises. Foreign exchange requirements should be cleared by the department of economic aairs. The feasibility report should take into account income tax rebates for priority industries, incentives for backward areas, accelerated depreciation etc. The sensitivity analysis should also be presented. The report must analyse the sensitivity of the rate on the level and pattern of product prise. 8. Economic Analysis Social protability analysis need some adjustments in the data relating to the cost and return to the enterprises. One important type of adjustment involves a correction in input and cost to reect the true value of foreign exchange, labour and capital. The enterprise should try to access the impact of its operation on foreign trade. Indirect cost and benets should be included. If they cannot be quantied they should be analyzed. Matching Entrepreneur with the Project Steps for Starting up a Business Introduction An entrepreneur possessing the keen attitude for setting up a small scale unit and formulate a business plan and take a number of steps to give shape to his business today idea. He is to prepare project report and obtain various approvals and sanctions. The various steps to be taken by entrepreneurs to start a small business unit. Step 1 : Selection of the Product An entrepreneur may select a product according to his own capacity and motivation. As an innovative entrepreneur he may design a new product or like an imitative one he may copy an established existing product in terms of additional uses, comfort or saving in cost. The economic viability of product should cover the following demand aspects, 58

 Volume of existing demand in the domestic market Volume of aggregate existing demand Volume of potential demand The degree of import substitution Degree of substitution of an existing product The volume of demand by big unit for ancillary product

The information can be obtained from various technical publication, state development agencies etc. Step 2 : Selection of form of ownership The most commonly chosen forms of ownership for SSI are Sole proprietorship Family ownership Partnership Private limited company

The rst two rms are mostly preferred for having unied control over the unit. The next two rms highly facilitate the pooling of nancial resources, managerial and technical skills and business experience. However to an appropriate extent especially where the family ties and resources are strong, partnerships are in no way distinguishable from family concern. Step 3 : Selection of Site An entrepreneur has ve options for the selection of site,

1. From state development corporation like SIDCO, SIPCOT, MMDA, TNHB 2. From the industrial estate constructed by the state industrial development agency (SIDA) 3. Choose from plot/sheds developed by private developers 4. Buy private land and develop the same for industrial use 5. The last option is to select a site/shed available in free trade zone

While selecting, following factors to be considered, 59

 Situated in ones native place Site which enjoys all the incentives provided by the Government The place near the market The site which oers a suitable labour supply and raw material The site with modern infrastructural facilities Step 4 : Designing Capital Structures The initial capital of a new venture comes from the following sources, Own capital Long tem loan Term loan from banks and nancial institutions In recent years, the institutional landing has increased rapidly, but it has not yet become the dominant source of funds for small industry. Bank play an important role in providing working capital nance. However, an analysis of capital structure of small scale units reveals that the support from the nancial institution is not adequate and that they should gear up their administrative machinery and produce better performance in order to fulll the objectives and targets adequately. Step 5 : Acquisitions of Manufacturing know-how? Many institution like government research laboratories, research and development divisions of industries and also individual consultants provide the manufacturing know - how. In the case of ancillary units, it is provided by the main unit itself, both domestic as well as foreign. Sometimes, it is provided by the plant and machinery suppliers, both domestic as well as foreign. The scale of operation is linked closely with technology, nancial and market demand Step 6 : Preparation of Project Report It is necessary to prepare a project report according to the format of the loan application of the concerned team building institution. An entrepreneur may get these reports done by a consultant or technical consultancy organization. The project report being compiled by the entrepreneur should accomplish the purpose of providing a Birds eye view of the entire spectrum of activity. The project report may contain the following feasibility 60

 Technical feasibility Economic viability Financial implication Managerial competency

Identifying, Selecting A Good Business Opportunity

Introduction The entrepreneur gets information regarding various numerable investment opportunities from the magazine, internet, nancial institution, government, commercial organization, relatives, friends and so on. To choose the best business opportunity from the information collected required ingenuity, skill and foresight on the part of the entrepreneur. Sources of Business Ideas 1. Market Characteristics Unfullled demand of a product will open the door for new product. Supply and demand of various products and demand for new product should also be analysed. 2. Import and Exports The government of India is encouraging exports and various EXIM policy encourage entrepreneur to think about the new option. 3. Emerging New Technology and Scientic Know-how Commercial exploitation of indigenous or imported technologies and know-how is another sources of project idea. 4. Social and Economic Trends Social and economic status of people are always dynamic in nature and oer wide opportunities. An entrepreneur should observe such change. 5. Project prole An analytical study of the end products and by products can throw light on new project idea. 6. Changes in consumption pattern 61

Changes in consumption pattern of the people in the home country and foreign countries also requires the entrepreneurs attention. 7. Revival of sick units A sick unit gives simple investment opportunities in the hands of dynamic entrepreneur. He can recover and turn a sick unit in a protable one. 8. Trade fair and Trade journals Magazines, journals, industries of trade fair oer wide scope for business opportunities Identifying a Business Opportunity Opportunity can be dened as an active and excellent project idea which an entrepreneur search for and accepts such idea as a basis for his investment decision. An opportunity should contain the following characteristics;

1. Good and wide market scope 2. An attractive, acceptable and reliable return on investment

Steps In Identication Of Business Opportunity

Step I : Preliminary Evaluation As soon as entrepreneur realizes regarding business opportunity, he has to evaluate investment opportunities against set of specic criteria to select those project ideas which are commercially feasible. The criteria are

Is opportunity compatible with the promoter? Is opportunity compatible with government regulations and priorities? 62

 Whether raw materials are easily available? What is the size of the potential market? Whether cost justies the prot? What is the risk inherent in the project?

Step II : Selection of Product or Service Entrepreneur should identify the product which he wishes to manufacture while deciding about the product, following points should be considered.

1. Potential demand for the product or service 2. Estimated volume of demand for the product 3. Assess potential of existing competitor and estimate about probable competitor 4. Study the scope for future demand 5. Infrastructural facilities like power, transport etc 6. Current status of technology and scientic development in the eld 7. Availability of raw material and required labour 8. Government policies, legislative, control 9. Environment factor 10. Degree of protability for the product 11. Information regarding particular line of product 12. Locational advantage of the product 13. Availability of skilled and Unskilled labour

Step III: Conduct a Market Survey or Purpose of Market Survey Market survey with reference to the availability of raw material, equipments, marketing and distribution and consumer behavior should be conducted. 1. Raw Material Availability

Search for leading supplies of raw materials required for the concerned product 63

 Study the price policy of various suppliers and analyse impact of price uctuations on production Fix time for order execution Study local and outside source of raw materials Thorough analysis of credit facilities advance payments/ terms and condition for suppliers 2. Equipment Availability Identify major manufacturer here and abroad Comparative features of various manufacturers Price structure of dierent brands Repair maintenance and after sales service facilities Guarantees and warranties by suppliers Technical and skilled sta requirement Machinery and delivery schedule 3. Marketing and Distribution Selection of best channel of distribution Advertising and publicity programme for the product Product positioning Outstanding features of product or service Market features and practices, credit facilities etc 4. Consumer Behaviour Motivate buyers to buy new product Analyse the buyers purchasing power Step IV: Contractual programmes to collect sucient information about proposed venture Entrepreneur often need information and guidance particularly in the initial stages, on product potential, raw materials, policies, facilities, procedures, nance formalities, incentives etc. It can be collected through state government agencies, contact with central and state level. Agencies set can be helpful in collecting sucient information about proposed venture. 64

1. Industrial Finance Corporation of India (IFCI) 2. Industrial Development Bank of India (IDBI) 3. Industrial Credit and Investment Corporation of India (ICICI)

State organization and banks, have set up a network of state level technical consultancy agencies. They oer a package of professional and consultancy services to stimulate industrial growth. Step V: Succeeding in the Market Following are the important characteristics which help the entrepreneur to succeed in the market.

Study people and their needs before starting any project Identify unsatised needs

Design product in such a way that it should satisfy the customer before better than the competitor product. Ensure that what customer feed about the product which entrepreneur is oering. Project Selection Project ideas identied early are screen on the basis of their technical economic and nancial soundness. After screening, the idea is translated into Project Prole A project prole consists of the following broad items;

1. Economic size 2. Status of industry or scope 3. Raw materials availability 4. Cost of production 5. Capital cost 6. Utility requirement 7. Protability 8. Infrastructure facility needed 9. Government policy 65

After gathering a large number of project proles, the entrepreneur is faced with the problem of selecting the most appropriate project. The following criteria may be used for this purpose. (1) Investment size Investment size depends upon the entrepreneur capacity to raise resources and his attitude towards economies of scale. If the project is to be nanced through all India Institution with lesser promoter contribution, the project cost should be atleast 3 to 5 crores. (2) Location A new Entrepreneur should as far as possible locate his project in and around a state head quarters. Such location help to attract competent managers and facilitates location with the state industrial development the state electricity board and various other agencies. (3) Technology It is better for a entrepreneur to go for a project with proven technology which is indigenously available. It avoids the problems of foreign technical collaboration and makes life easier. (4) Equipment While selecting the equipment the advice of experienced technical consultants should be found. Some entrepreneurs enter into some sort of deal with the equipment manufacturer for a kick-back and in the process sacrice quality. (5) Marketing It is advisable to go for a product with a limited number of industrial customers. A new entrepreneur should not go in a project having cut throat competition. (6) Power and Water The entrepreneur should ensure abundant supply of these two inputs. If possible, power intensive and water intensive projects should be avoided. (7) Others Performance A new entrepreneur should judge how well the existing units in the industry are doing. It is not advisable to enter into industries in which seasoned entrepreneurs fear to tread. As a rule one should get into a line in which others are done reasonably well. (8) Working Capital Requirement The entrepreneur should avoid projects with very long operating cycle and huge working capital. The lending policies of banks are unpredictable and therefore good margin money should be provided for. 66

(9) Labour Component A entrepreneur should minimize unskilled and semi skilled labour. Material handling labour can be reduced through automatic handling devices and proper buying policies. (10) Economic Viability The project should breakeven on a cash basis in the rst 6-8 months. It should generate prot in the rst year of operation. MARKET SURVEY AND RESEARCH Introduction Marketing research involves the gathering of data in order to obtain such information through the following questions.

Who will buy the product or service? What is the size of the potential market? What price should be changed? What is the most appropriate distribution channel? Who are the most eective promotion customers?

Steps in Market Survey Marketing research may be conducted by the entrepreneur or by an supplier or an consultant. Step 1: Dening the purpose or objective The main objective would be to ask people what they think of the product or service and whether they would buy it and to collect some background demographics and attributes of these individuals. The other objectives may be to determine the following

How much potential customers would be willing to pay for the product or service? Where potential customers would prefer to purchase the product or service. Where the customer would expect to hear about or learn about such a product or service.

Step 2: Gathering data from secondary sources

67

Secondary sources of data are collected from the magazines, newspaper, article, libraries, government agencies and the internet. Before considering either primary resources of data secondary data is been considered. Step 3: Gathering information from primary sources Information that is new is called primary data. Gathering primary data involves data collection procedure. Such as observation, networking, interviewing, focus groups or experimentation and usually a data collection instrument used is questionnaire. Step 3: Gathering information from primary sources Information that is new is called primary data. Gathering primary data involves data collection procedure. Such as observation, networking, interviewing, focus groups or experimentation and usually a data collection instrument used is questionnaire.

(a) Observation Method This type of research method involves gathering data by observing and recording. This research can be conducted by transcend observers. Here the observer does not ask any question to the person, but observes the action without letting the person know that he is being observed. It is done at the point of purchase to determine the brand preference likes and dislikes of the person in product. Advantages

Information collected by observation are more objective and accurate It is not biased, as the person does not know that he is being observed

Disadvantages

The behavior of the customer is not easily predictable 68

 Basically the respondent will become aware that he is being observed and act as dierently (b) Experimentation method Under this method the experimenter deliberately manipulates or changes one or more variable in such a way its eect upon one or more other variables can be measured. The experimenter may change any one factor of the product to see the change in sale. We may change the price, design, colour, advertisement, size of the product itself. Advantages This method is more realistic and given best results It is possible to measure relative eciency Disadvantages It is expensive and takes a longtime It is dicult to select market with identical characteristics. (c) Depth interviewing method It is dened as the administration of questions to respondents in a completely relaxed environment where in they are free to express themselves without any fear or disapproval, dispute or admonition. Advantages The volume and variety of information acquired are considerably more The decision making task of an entrepreneur is easiler Disadvantages Method largely depends upon the skill of the interviewer to ask questions, encourage, conversation grasp the important points It is an expensive technique (d) Projective technique method Here the respondents are asked questions and encouraged to speak or project their feelings, attitude or motives of a third person and not themselves. In this process they speak out their own opinion. 69

Some of the techniques are sentence completion test, story completion test or word association test, role playing, whereby the respondents association to certain word or situation would be related. Advantages Information can be acquired in large quantity The feel free to speak out Disadvantages The respondent and the data to be handled with tactics It is time consuming and costly (e) Survey method A survey consist of gathering data by interviewing a limited number of people (i.e) (sample) selected from a larger group. This is the most common method of getting the data. In this method, after selecting the sample, an appropriate questionnaire is prepared to ask questions, which is called an interview. Respondents can be interviewed (1)main, (2)telephone, (3) person. Advantages Less time consuming Structured method Disadvantages Number of respondents are restricted Questions are predened so answers may be biased in nature Step 4 : Analyzing and interpreting the Results The results should be evaluated and interpreted in response to the research objective that were specied in the rst step of the research process often summarizing the answers to question will give some preliminary insights. The data can be cross tabulated in order to provide more focused results. For example, the entrepreneur may want to compare the result to question by dierent age group, sex, location occupation and so on. Limitations of marketing research survey 70

 It only provides a base for predicting future events and does not guarantee any certainty in the happening of the event Some research conclusions may be of limitations as the tools and technique may not be suitable Its use and eectiveness depends largely on the ability of the executives to get the most value of it It is merely a tool for decision making and is not a substitute for decisions It does not provide complete answer to marketing problems as the answers may be vague or irrelevant TECHNO - ECONOMIC FEASABILITY ANALYSIS Introduction to feasibility analysis An entrepreneur has to formulate a project, when a project idea is developed. Project formulation is a process, whereby, the entrepreneur makes an objective and independent assessment of various aspects of an investment proposition of a project idea for determining its total impact and also for determining its liability. The very rst stage in project formulation is Feasibility analysis, the project idea is examined from the point of view of whether to go in for making a detailed investment proposal making a detailed investment proposal or not. Here the project idea is examined in the contest of internal and external constraints. Meaning of Techno-Economic feasibility of the project Techno-economic feasibility makes an analysis of the market and technology. The choice of technology itself will be based on the demand potential and aid in project designing. Techno-economic feasibility analysis gives to the project an individuality and sets the stage. Feasibility Report A feasibility report of a new enterprise or of an expanding enterprise consists of some background information about the industry to which the project belongs and the enterprise submitting the report in general. It also contains the economic information, nancial data and technical details which serve as a nite number of discrete economic processes or cost structure of the industry concerned. The main purpose of the report is to provide information that is required for the project appraisal. This report would enable the nancing agencies to purposefully evaluate the project before extending nancial assistance. Contents of a feasibility report Objective of the report 71

 Product characteristics Market position and trends Raw materials requirements Manufacturing processes Requirement of land area Type of plant and machinery

Factors that have to be considered while preparing a feasibility report Feasibility report is prepared only after conducting a prefeasibility study and detailed feasibility study. Prefeasibility study is analysis made on the various opportunities available, economic attention, technical details, nancial availability, raw materials, labour and materials availability for various opportunities. A feasibility study provides information on economic, technical, managerial commercial and nancial requirements in detail The factors to be considered while preparing a feasibility report are as follows

1. Technical consideration 2. Economic consideration 3. Financial consideration 4. Consideration of managerial competence 5. Implementation schedule

1. Technical Consideration It establishes whether the project is technically feasible or not. Technical considerations include

A description of the product, including specications relating to its physical, mechanical and chemical properties, as well as the uses of the product A description of the selected manufacturing process Selection of plant size and production schedule 72

 Selection of machinery and equipment Availability of raw materials An estimate of the production cost of the product

2. Economic Consideration Economic data relates to market which can be obtained from secondary sources like government agencies trade associations, chamber of commerce, trade directions and other publications. The data can be obtained through primary sources like interviews, mailed questionnaire and market survey; Economic consideration include, Identifying the market potential in terms of current demand for the product Data relating to general economic trends such as per capita income, level of consumption expenditure inventories etc have to be considered Data concerning price structure, discount patterns and sources of market information have to be collected.

3. Financial Considerations It helps the project to evaluate the dierent measures of commercial protability and the magnitude of nancing required. It requires the assembly of the market and technical cost estimated into various aspects; A nancial analysis showing return on investment return on equity, break even volume and price analysis The details with regards to source of fund such as equity shares, preference shares, long term loans, bank loans, trade credit and other sources.

4. Consideration of Managerial Competence It is to assets the number and skills of sta required for the project is to be considered for preparing a feasibility report. Activity analysis involving anticipated workow and the activities involved in the project Classication of tasks as the building blocks of the organization structure Determining inter relationship between dierent position to decide the chain of command 73

5. Implementation Schedule An implementation schedule includes when to apply for term loan, procurement of landsite, construction of factory shed, getting water and power connections, recruitment of human resources and the time commencement of commercial production. General Proforma of a Feasibility Report

1. Introduction 2. Summary and Recommendations 3. Product Capacity 4. Market Potential 5. Process and know-how 6. Plant and Machinery 7. Location 8. Plot plan and Building 9. Raw Materials 10. Utilities (power, water etc) 11. Euents 12. Personnel requirement 13. Capital cost 14. Working capital 15. Mode of Finance 16. Manufacturing cost 17. Financial Analysis 18. Implementation

Project Appraisal (Evaluation Criteria) Concept of Project Appraisal

74

Simply speaking, project appraisal mans the assessment of a project. Project appraisal is made for both proposed and executed projects. In case of former, project appraisal is called ex-ante analysis and in case of latter post-ante analysis. Project appraisal is a cost and benets analysis of dierent aspects of proposed project with an objective to adjudge its viability. A project involves employment of scarce resources. An entrepreneur needs to appraise various alternative projects before allocating the scarce resource for the best project. Project appraisal helps to select the best project among available alternatives For appraising a project, its economic nancial, technical, market, managerial and social aspects are analysed. Financial institutions do project appraisal to assess its credit worthiness before extending nance to the project. Scope of Appraisal The appraisal of a project is undertaken by the nancial institutions with the twin objectives of determining the market potential of a project and selecting an optimal strategy. The methods of analysis vary from project to project, nevertheless certain common aspects of study from the angle of technology and engineering are with a mention. Choice of technical process Technical collaboration arrangements Locational aspect of project and availability of infrastructural facilities. Selection of plant, machinery and equipment together with background, competence and capability of machinery Plant layout and factory buildings Technical engineering services Project design and network analysis for the assessment of project implementation schedule Aspects relating to ecient disposal, management of entry, utilization of by products Project cost and its comparison with other similar projects based on technology, equipment, product mix and time spread Determination of project cost estimates protability projection etc It must be remembered that the dierent aspects of a project are not independent entities but are highly inter-related and a meaningful project appraisal depends upon the appreciation of fundamental fact. 75

Methods of Project Appraisal 1. Economic Analysis Under economic analysis, the aspects highlighted include requirements for raw material, level of capacity utilization, anticipated sales, anticipated expenses and the probable prots. It is said that a business should have always a volume of prot clearly in view which will govern other economic variables like sales, purchases expenses and alike. It will have to be calculated how much sales would be necessary to earn the targeted prot. Undoubtedly, demand for the product will be estimated for anticipating sales volume. In addition, the location of the enterprise decided after considering a gamut of points also needs to be mentioned in the project. The government policies in this regard should be taken into consideration. 2. Financial Analysis The purpose of the appraisal of nancial aspects of a project is generally to ensure its initiation of nancial condition for the sound implementation and ecient operation. The scope of appraisal values, of course considerable with the nature of the project and whether it is revenue producing or not. The Financial aspect of project appraisal covers following areas; (i) Cost analysis : In case of cost analysis it is to be decided or to be worked out what would be the cost of production. There are dierent methods of nding out cost. (ii) Pricing : This strategy concerns the xing up of the products price. Price xation is a very tedious job. The price must be xed very judiciously, because the price is the cause of demand. (iii) Financing : The fund needed to nance the project is an important aspect of project appraisal. It is concerned with raising the funds and making their most ecient use. (iv) Income and Expenditure: The income and expenditure prole is considered with the estimates regarding the income expected and expenditure involved in the project. 3. Market Analysis The entrepreneur needs to anticipate the possible market for the product. He/she has to anticipate who will be the possible customers for his product and where and when his product will be sold. This is because production has no value for the producer unless it is sold. It is said that if the proof of all production lies in marketing / consumption. In fact, the potential of the market constitutes the determinant of probable rewards from entrepreneurial career. Thus, knowing the anticipated market for the product to be produced becomes an important element in every business plan. The various methods used to anticipate the potential market, what is named 76

in managerial economics/ demand forecasting. The commonly used method to estimate the demand for a product are (1) Opinion polling method (2) Complete enumeration end survey (3) Sample survey, (d) Sales experience method (f) Vicarious method. 2. Life cycle segmentation analysis It is well established that like a man, every product has its own life span. In practice, a product sells slowly in the beginning. Backed by sales promotion strategies over period, it sales pick up. In the due course of time, the peak sale is reached. After that point, the sales begins to decline. After some time, the product loses its demand and dies. This is natural death of a product. Thus, every product passes through its lifecycle.

4. Technical Feasibility While making project appraisal, the technical feasibility of the project also need to be taken into consideration. Technical feasibility implies to mean the adequacy of the proposed plant and equipment to produce the product within the prescribed norms. As technical feasibility of the project is used to assess the following inputs covered in the project.

Availability of land and site Availability of other inputs like water, power, transport, communication facilities Availability of servicing facilities like machine shop, electric repair shop etc Coping with anti pollution law Availability of work force as per required skill and arrangements proposed for training in plant and outside Availability of required raw material as per quantity and quality.

5. Management Competence 77

Management ability or competence plays an important role in making an enterprise, a project success or otherwise. Strictly speaking in the absence of managerial competence, the projects which are otherwise feasible may fail. On the contrary, even a poor project may become a successful one with good managerial ability. Hence, while doing project appraisal, the managerial competence assumes greater importance.

UNIT 4

LAUNCHING OF SMALL BUSINESS

Meaning of Business: In simple words, business means the state of being busy, business involves activities connected with the production of wealth. It is an organized and systematized human activity involving production and purchase of goods and services with the object of selling them at a prot. Denitions: A business is any enterprise which makes, distributes or provides any article or service which other members of the community need and are able and willing to pay for - Urwick and Hunt. A single isolated transaction of and purchase will not constitute, recurring or repeated transaction of sale and purchase alone means business - Peterson and Plowman. Business is an enterprise engaged in production and distribution of goods for sale in a market or rendering service for a price - Prof. Own Spines. Thus, in essence, business concerns with buying and selling goods, manufacturing goods or providing services in order to earn prot. Characteristics of Business:

1. Sales or transfer of goods for value: It involves sale or transfer of goods and services for value. It is important to note that the production or purchase of goods and services for personal use does not come under business. 2. Dealing in goods and services: Goods may be consumer goods like bread, cloth, watches etc. And produce goods like tools, machinery etc. As regards services, they refer to intangible and invisible items. 3. Recurrence of dealings: As opined by Peterman and Plowman, business involves recurring or repeated transactions of sale and purchase for sale. 78

4. Prot Motive: It is the biggest and powerful stimulus for running a business. As stated earlier, business involves production and purchase of goods and services with the motive of selling them at prot. 5. Risk involved: Business involved in risk. Business activities always focus on future. Future is highly uncertain. Hence, risk is always involved in uncertainty.

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Objectives of Business: Earning prot is the sole objective of the business. Business involve both economic and social objective. The economic objectives relate to earning a satisfactory prot, creating customers and making innovation. Its social objectives comprise supply of quality goods for the community fair deal to customer, fair return to investors and fair dealing with the supplier also. Social responsibility of business has been given as vital objectives of a modern business. Business Objectives

Requisites of a successful business: 1. Clear objective: Determination of objectives is one of the most essential prerequisites of the success of a business. The objectives set forth should be realistic and clearly dened. 2. Planning: Planning is a predetermined line of action. The accomplishment of objectives set, to a great extent depend upon planning.Well begun is half done. 3. Sound organization: Organization of a business is a harmonious combination of man, machine, material, money, management etc., so that these could work jointly as one unit (i.e.) business. 4. Research: Produce what the customer wants. The business needs to know variety of factors like cultural, social, personal and psychological. The knowledge of these is acquires through market research. Research is a systematic search for new knowledge. 5. Finance: Finance is said to be the life blood of business enterprise. It brings together the labor of one, machine of another, raw material of yet another and combines them into production. Finance is like a lubricating oil to keep the business wheel on moving. 80

6. Proper plant location, layout and size: Success of a business depends upon the location where it is set up. Next important consideration to be given is determination of proper or suitable size of a business. 7. Eective management: The proprietor may not be equally good in all areas of a business. For instance he/she may be sound capitalist but grossly lacking in managerial qualications. Hence, eorts should be made to have ecient and eective management. 8. Harmonious relations with the employees: Successful operation of the business, there should be cordial and harmonious relations maintained with the employees to get their full co-operation in achieving business objective. Management: Management is knowing exactly what you want men to do and then seeing that they do it in the best and cheapest way - Frederie Winslow Taylor. Management is the art of getting things done through people- peter F Drucker Management is a distinct process consisting of planning,organizing, actuating and controlling performance to determine and accomplish the objectives by the use of people and resources. - George R Terry

Characteristics of Management: Management is a powerful activity. It is getting things done in a desired manner. It concerns with the eorts of people working in the enterprise. It relates to decision making. It is a process consisting of various functions such as planning, organizing, leading and controlling. Management is both science and art. It is science because it has developed certain principles and laws. At the same time, it is an art also because it is concerned with the application of knowledge for the solutions of the organizational problems. It is a fast developing profession. It deals with direction and control of business activities. Management is a dynamic concept which adapts itself to changing business conditions. These are the salient characteristics of management. 81

Figure 1: Administration Vs Management S.No. 1. Administration Administration is mainly concerned with policy making and objective setting. 2. 3. 4. These functions are largely legislative. It is a top level management. It needs more administrative and less technical ability. 5. It is a thinking function. Management Management is concerned with the implementation of policy determined by the administration. These functions are mainly executive. It is a lower level management. It needs more technical ability and less administrative. It is a doing function.

Dierence between Administration and Management: Scope of Management: 1. Subject -Matter of Management: Primarily includes the various functions of management such as planning, organizing, stang, directing and control. 2. Functional Areas of Management: Under this aspect, management consist of the following functional areas: Financial Management: It includes the nancial aspects of a business such as cost control, budgetary control, management accounting, etc. Personnel Management: It covers aspects relating to the personnel of an enterprise. These aspects are, for example, recruitment, training, promotion, retirement, industrial relation, social security, labor welfare, etc. Production Management: It consists of production related aspects like production planning, production control, quality control and so on. 82

Oce Management: Under this aspect oce layout, stang, equipment layout etc. are dealt with. Marketing Management: This aspect is concerned with marketing aspects of the product produced by the business concern. It deals with the aspects like price determination, channel of distribution, sales promotion and advertisement. Maintenance Management: It deals with the proper care and maintenance of the building plant and machinery and furniture of the business enterprise. Functions of Management: Management is what management dose. The chief reason for this is that dierent management experts have listed the functions of management on the basis of their experience in the organization. The nature of activities varies from organization to organization. Planning: Every function starts with planning. Planning is a pre-determined course of action to accomplish the set of objectives. Planning gives a business organization and its objectives and set of the best procedure for reaching them. Planning includes determination of objectives, setting rules and procedures, determining projects, setting procedures, policies and strategies, budgeting, etc. The importance of planning lies in the fact that it ensures smooth and eective completion of activity. Organizing: Merely, planning is not managing a business. It also includes bringing together the executive personnel, worker capital, machinery, material, physical facilities and other things to execute plan. When these resources are assembled then the enterprise comes to life. Thus, organizing involves bringing together the man-power and material resources for the achievement set by the enterprise. Organizing involves divided work into dierent parts, grouping these activities in the form of positions, grouping of various positions into departments, assigning such positions to the managers and delegating authority to each of the manager to accomplish the work in a planned manner. Thus, organizing function can be viewed as a tool to translate plans into realities. Stang: Stang involves manpower planning and manpower management. In simple worlds, stang function includes preparing inventory of personnel available, requirement of personnel, sources of manpower selection, their selection, remuneration, training and development and periodic appraisal of personnel working in the enterprise. Stang function is performed by every manager of enterprise. However stang function is a complex and dicult function because it relates to the selection of those persons who are properly qualied and mentally rich for business requirement. Directing: Directing function actually starts the work .The directing is concerned with guiding, teaching, stimulating and actuating the members to work eciently. Directing involved telling the employees what and how they have to do. Once the employees are oriented to their jobs, they need continuous guiding,

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communicating, motivating and leading. Directing concerns the total manner in which a manager inuences the action of his subordinates. It is the nal action of a manager in getting others to act after all preparations have been completed. Controlling: Controlling means to see whether the activities have been or being performed in conformity with the plans or not. Thus controlling is comparison of actual results with the targets and objectives, identication of variation between the two, if any and taking corrective measures so that objectives set are achieved. Control is the process of checking to determine whether or not, proper progress is being made towards the objectives and goals and acting if necessary to correct any deviation. What ows from above that controlling function of management involves the following sub-functions: 1. Determination of objectives and standards. 2. Measurement of actual performance. 3. Comparison of actual performance with the standards or objectives. 4. Determination of dierences between the two and reasons for the same. 5. Taking corrective measures so that the standards or objectives set are attained. Thus, in aggregate, there are three main elements in management cycle: 1. Planning 2. Action 3. Control As a matter of fact, the entire planning-action-control process management is repetitive. This can be depicted in the following cycle:

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Management Process: Management is the process of doing things. A process is dened as a systematic way of doing activities to achieve the objectives set. All the functions are inter-related in such a manner that the every next function depends upon the completion of the earlier one. The process of inter-relationship goes on and on. As a matter of fact, the relationships among the various functions are more related.

It becomes clear that management process involves a group of interactive activities/functions on a continuous basic. The ve functions of management do not work/function separately or loosely. Finance and Accounting: Introduction: Finance is a key input of production, distribution and development. It is therefore, aptly described as the life-blood of industry and is a pre-requisite for accelerating the process of industrial development. Having prepared the project report, the time comes when the entrepreneur needs to decide on the need for and source of nance as per his/her projections made in the project report. Need for Financial Planning: Finance is of the important prerequisites to start an enterprise. The availability of nance that facilitates an entrepreneur to bring together land, labor, machinery and raw material to combine them to produce goods. Financing an enterprises-whether large or small is a critical elements for source in business. Therefore, what follows is the every enterprise should clearly chalk-out its future requirements in its very beginning itself. The decision taken by the entrepreneur well in advance regarding the future nancial aspects of his/her entrepreneurs enterprise is called nancial planning. In simple word, nancial planning deals with the present decision in terms of nancial aspects of an enterprise. 85

The entrepreneur should clearly answer the following questions while preparing the nancial plan, How much money is needed? When does the money need to be available? The structure of assets to be used will vary from enterprise to enterprise depending upon the nature of the product to be produced or services to be rendered as the case may be. While estimating the money needed, the entrepreneur should take the following three things into consideration: 1. There should be adequate money to pay the purchase considerations. 2. There should be sucient capital for the business operations up to the three initial months. 3. Lastly, the total of these three amounts will constitute the total money needed to start the enterprise. Sources of Finance: Capital arrangement by the entrepreneur is done by two sources. 1. Internal sources refer to the owners own money known as equity. 2. External sources like the nancial institutions and commercial banks etc. The nancial needs of an enterprise are been classied into two ways: 1. Fixed Capital: The money invested in some xed assets or durable assets like land, building, machinery, equipment, furniture etc. is known as xed capital. 2. Working Capital: The money invested in current assets like materials, nished goods, debtors etc. is known as working capital. In other words, money required for day to day operations of business / enterprise is called working capital. 3. Long term capital: Long term capital is such money whose repayment is arranged for more than 5 years in future. The source of long term nance could be owners equity, term loans from nancial institutions, credit facilities from the commercial banks etc. 86

Figure 2: Financial Needs of Enterprise

4. Short term capital:

This is a borrowed capital that is to be repaid within one year. The short term nance is obtained from bank borrowing deposits or borrowing from friends and relatives etc. The theory of nancial management suggests short term nance should be utilized for acquiring current assets. Example: Raw materials, nished goods, semi-nished goods, debtors etc. Long term nance should be used for acquiring assets which are of long nature. These are commonly termed as xed assets. Example: Land and building, plant and machinery, furniture etc. Sources of Finance: The various sources from which an enterprise can raise the required funds could broadly classify into two sources. They are:

Internal Sources:

This source is raised by the entrepreneur itself. The internal sources of nancing arrived from owners capital known as equity, deposits and loans given by the owners, the partners, the directors, as the case may be, to the enterprise.

Retained prot = Prot was reinvested into the business

Controlling of working capital = Reducing costs, delaying outows, speeding up the ows 87

Sales of Assets = Assets the company owns can be sold and then leased back which frees up a large amount of capital in the short term. External Sources:

The sources of nance raised through external source other than internal source are:

1. Increasing trade credit: Delaying payments on purchase far as long as possible. 2. Factoring: Use a company to collect all debts. 3. Overdraft: An agreement with a bank to be allowed to overdraw a certain amount. 4. Grants: An agreed amount of money given for a special reason by government or other organization. 5. Venture Capital: People invest in the company when it is unable to oat on the stock market. 6. Debentures: Business equivalent of a mortgage. Loan for a set length of time at a set interest rate. 7. Share Issues: Selling of new shares to raise capital. 8. Owners savings: The owners investing money into the business. 9. Bank Loans: Medium or long term loans but interest is changed. 10. Leasing: Instead of buying sources of nance for small and growing business.

If we know lump both the sources together, these can broadly classied as follows:

1. Personal funds 2. Loans from relatives and friends 3. Mortgage loans 4. Term loans 5. Subsidiaries

Term Loans: The loans which taken for a denite period of time are called term loans. Based on period, loans are broadly classied into two types:

1. Short term loans 88

2. Long term loans Short Term Loans: Short term nance is obtained for a period up to one year. These are required to meet the day to day business requirements. In other words, short term nance is obtained to meet the working capital requirements of the enterprise. All these sources are visualized. Sources of Short Term Finance Long Term Loans: Long term loan is obtained for the period ranging from 5 years to 10/15 years. It is raised for the purchase of xed asset which includes: Land and site development Building and civil works Plant and machinery Installation expenses Miscellaneous xed assets comprising vehicles, furniture and xture, ocer equipment and so on. Term loan or say long term loans are also required for expansion of productive capacity by replacing or adding to the existing equipment. The following are the sources of raising term loans: Issue of shares Issue of debentures Loans from nancial institutions Loans from commercial banks Public deposits Retention of prots Share: Share is a unit into which the capital of the company is dividend. A per section 85 of the companies Act 1956. A public limited company can issue the following two kinds of shares: 89

1. Preference Shares 2. Equity Shares (a) Preference Shares:

These are the shares which carry a preferential right over equity shares with references to dividend. They also carry a preferential right over equity shares with references to the payment of capital at the time of winding up or repayment of capital. There are dierent types of preference shares. They are: Cumulative and non-cumulative Redeemable and irredeemable Participating and non-participating Convertible and non-convertible. 1. Equity Shares: Equity share is not a preference share. In other words equity shares are entitled to dividend and capital after the payment of dividend and capital on preference shares. Procedure for issue of Shares:

Issue of prospectus Receipt of applications Allotment of shares

Issue of prospectus: First of all, in order to give the prospective investors necessary and relevant information, the company issues a statement called prospectus. It also contains information on the manner in which the amount of shares will be collected. Receipt of applications: The company receives applications in response to its prospectus through a scheduled bank. Allotment of shares: After the subscription is over and minimum subscription is received, the shares are allotted to the applicants within 120 days of the issue of prospectus. 90

In case, the minimum subscription is not received, the company cannot procedd with the allotment of shares, but application money must be refunded to the application within 130 days of the issue of the prospectus. Debentures: Issue of debentures is another method of raising term loans from the public. A debenture is a instrument acknowledging a debt by a company to a person or persons. Section2 (12) of the Indian Companies Act, 1956 denes a debenture as follows: Debenture includes debenture stock, bonds and any other securities of the company whether constituting a charge on the companys assets or not. The procedure for the issue of debenture is, more or less, the same as those for the issue of share. Dierence between shares and Debentures:

1. Representation:

A share represents a portion of capital whereas a debenture represents a portion of debt of a company.

2. Status:

A shareholder is a member of the company, but a debenture holder is a creditor of the company.

3. Return:

A shareholder is paid dividend while a debenture holder is paid interest.

4. Right of control:

The shareholders have a right of control over the working of the company whereas the debenture holders dont have such right.

5. Repayment:

Debentures are normally issued for a specied period after which they are rapid. But, such repayment is not possible in case of shares.

6. Purchase:

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A company cannot purchase its own shares from the market, but it can purchase its own debentures and cancel them.

7. Order of Repayment:

In liquidation, debenture holders get priority in payment, but shareholders are the last to get payment after all claims have been fully satised.

8. Capital Structure:

The capital structure is the ratio between debt and equity capital (i.e.) debt-equity ratio. Capital Structure means the permanent nancing of the enterprise represented primarily by long term sources of funds (i.e.) debt and equity. Ezra Solomon dened capital structure in the following words: Optimum leverage can be dened as that mix of debt and equity which will maximize the market value of a company (i.e.) the aggregate value of the claims and ownership interests represented on the credit side of the balance sheet. Further, the advantage of having an optimum nancial structure, if such an optimum does exists, is twofold. It minimize the companys cost of capital which in turn its ability to increase and nd new wealth by creating investment opportunities. Also by increasing the rms opportunity to engage in future wealth. Creating investment, it increases the economys rate of investment and growth. The capital structure bears the following features:

1. It should involve the minimum cost and the maximum yields. 2. It should be exible enough to fulll the future requirements of the capital as when needed. 3. The debt should be within the repaying capacity of the enterprise. 4. It should ensure the proper control over the aairs of the enterprise.

Factors determining Capital Structure:

1. Nature of Business:

The nature of the business itself is one of the factors determining capital structure to be maintained. The business subject to wide uctuations in sales need to maintain smaller proportion of borrowed funds (i.e.) debt capital. 92

Example: TV, refrigerator manufacturer. The capital rms dealing in items/goods having in elastic demand like essential consumer goods may have larger proportion of borrowed capital. This is due to stable earning. The capital structure of companies is also determined by the competitiveness found in them.

2. Size of the enterprise:

It is that small enterprises have to depend more on owners capital than on borrowed capital. This is because investors consider leading to small enterprises is more risky. So they lend more to large enterprise where there money is safe and less risky. This enables the large enterprise to raise funds from dierent sources.

3. Trading of Equity:

In case of the rate of return on capital employed is more than the rate of interest on debentures or rate of dividend on preference shares it is called trading on equity or leverage eect. In such case, there is greater dependence on borrowed capital in the capital structure.

4. Cash Flows:

The ability of a business to discharge its xed obligations depends upon the availability of cash (i.e.) cash ows. As such more the cash inows more will be the proportion of borrowed capital in the capital structure. Reverse will happen in a converse situation.

5. Purpose of Financing:

The purpose of nancing also aects the capital structure of the enterprises. Suppose the funds are requested for some directly productive purposes (for example, purchase of new raw machinery) the enterprise has to raise the required fund from the external sources. For this the enterprise has in position to pay the charges or interest out of the prot earned. In order case the enterprise required to raise fund for unproductive purpose like employee welfare facilities out of owners capital or through issue of equity share.

6. Provision for future: 93

The scope of changing the capital structure of in future happens to be a basic consideration for determining the capital structure of an enterprise. As a general principle, it will always be safe to keep the best security to be issued in the last instead of issuing all types of securities in one stroke only. Capitalization: In common parlance, capitalization means the total amount of capital employed in an enterprise. However, dierent scholars have dened the term capitalization dierently. These are broadly classied into two categories:

1. Broad Sense 2. Narrow Sense

Broad Sense: In broad sense, capitalization means the determination of the quantity of nance and also the quality of nance. Thus, in broad sense, the term capitalization is synonymous with the term nancial planning. Narrow Sense: According to narrow sense, the term capitalization is similar to capital structure. It refers to the determination of quantum of long term funds required to run an enterprise. Thus, in narrow sense, capitalization includes per value of share capital, reserves and surplus and long term debts. Gerstenberg has dened the term capitalization as capitalization comprises ownership capital which includes capital rocks and surplus in whatever form it may appear and borrowed capital which consists of bonds or similar evidence of long term debt. Since the narrow sense is more specic in its meaning, that is why it is more popular in use. Integral to meaning of capitalization is the proper or optimum size of capitalization. These are two generally used theories of capitalization for new business enterprise. These are:

1. The Historical cost theory 2. The Earnings theory

The Historical Cost Theory: According to this theory, capitalization of a new enterprise is considered to be the equivalent of the cost actually incurred on setting up an enterprise. In other words, the amount of capitalization of a 94

new enterprise is the total of the cost of xed assets, working capital and the cost incurred in setting up the enterprise. (Eg: Preliminary expenses, underwriting commission expenses on issue of shares etc.). The historical cost theory lays greater stress on current outlays than on the requirements for future business. The Earnings Theory: In the Earnings theory, the basis for determining the value of an enterprise is its earning capacity. For this, a new enterprise estimates its average annual future earnings and it is capitalized by the normal earning rate prevalent in the similar biz/enterprise. Let us explain this point with an example: Suppose a new enterprise estimates its annual average earnings at Rs. 75,000/- The enterprises is the same activity are earning at the rate of 10% on their capital employed. Then the quantum of capitalization on the basis of earnings for the new enterprise will be Rs. 7, 50,000/- (i.e.) 75000 *(100/10). However, this theory has a limitation for determining the amount of capitalization for new enterprises. The new enterprises nd it dicult to estimate correctly the amount of that future earnings. In case the earnings are not correctly estimated, the capitalization based unit would prove risky for the enterprise. Therefore, it is advisable to adopt the historical cost theory of capitalization in case of new enterprises. We must have learnt the actual capitalization and proper capitalization of an enterprise. These refer to what is and what should be the quantum of capitalization respectively in an enterprise. In practice, there may be 3 situations: 1. When actual capitalization is equal to proper capitalization. 2. When actual capitalization is more than proper capitalization (i.e.) over capitalization. 3. When actual capitalization is less than proper capitalization (i.e.) under capitalization. Over Capitalization: Over capitalization signies a situation when an enterprise possesses excess of assets in relation to its requirement. Such a situation has its bearing on earning capacity of the enterprise. On account of lower rates of return, the enterprise becomes unable to pay its xed obligations (i.e.) interest and dividend, at prescribed rates. Thus, in case of over capitalization the enterprise fails to pay a fair return on its capital investment. An enterprise is said to be over capitalized when its earnings are not large enough to yield a fair return on its capital employed (i.e.) on the amount of shares and bonds. Causes of Over Capitalization: 1. Rising of more money by issue of shares and debentures than what the enterprise can protably use. 95

2. Borrowing of large money at a rate of interest fairly higher than the actual rate of return on its capital employed. 3. Acquiring xed assets on excessive amounts. 4. Inadequate provisions for depreciation and replacement of xed assets. 5. Payment of dividend at highly fair rate. 6. High rates of taxation imposed by the government. 7. Over estimation of earnings for enterprise concern. Evil Eects of Over Capitalization: 1. On Owners - Because of a fall on dividends, the shareholders/owners lose heavily. Further, the owners are not in a position to dispose of their shares at protable prices due to fall in the market value of their shares. Thus, the owners are the biggest losers in case of over capitalization of an enterprise. 2. On Enterprise - In over capitalization the market-value of the enterprises stock falls and it nds dicult to raise capital. Quite often, the enterprises resort to window-dressing with questionable practices. But this only aggregates the evil of over capitalization. The credit worthiness of the enterprise is adverse aected. 3. On Society - Over capitalized enterprises often come to societal rejections. Society gradually withdraws its acceptance to the products produced by such enterprises. No wonder, the enterprises go into liquidation in course of time. Closer or liquidation of enterprises causes losses to society in terms of production, employment, wastage of resources etc. Remedies for Over Capitalization: In order to specify/rectify over capitalization, the enterprise may resort to the following remedies: 1. To reduce the claims of shareholders, debenture holders and creditors. 2. To reduce rate of interest on debentures and the rate of dividend on preference shares. 3. To reduce the number of equity shares. 4. If possible, to reduce the par value of stock. These all remedial measures leave sucient funds with the enterprise. The enterprise can make use of these funds for the purposes of replacement of assets and expansion of business activity. These, in turn, help in increasing the earning capacity of the company and thus, rectifying over capitalization in the enterprise. 96

Under Capitalization: Under capitalization is just the reverse of over capitalization. An enterprise is said to be undercapitalized when its actual capitalization is lower than the proper capitalization. In case of under capitalization, the rate of dividend and the market value of shares are fairly higher than the market value of shares of similar enterprises. According to Gerstenberg, An enterprise may be undercapitalized when the rate of prot is exceptionally high in relation to the return enjoyed by similar situated enterprises in the same industry. The assets may be worth more than the values reected in the books. Causes of Under Capitalization:

1. Under estimation of initial rate of earnings. 2. Utilization of high eciency for exploiting every possibility available. 3. Using lower rate of capitalization. 4. Under estimation of required funds. 5. Retaining prots because of conservative dividend policy followed by the enterprise. 6. Setting up of an enterprise in recessionary conditions. After the recession period is over, enterprises start earning prots at an unusually high rate. 7. Because of excessive earnings, enterprises are exposed to a heavy incidence/burden of taxation.

Eects of Under Capitalization:

It encourages cut-throat competition in the market. High prot earning capacities of undercapitalized enterprises lure new entrepreneurs to plunge into manufacturing. High rate of dividend given to the shareholders propels to the workers to demand for higher wages and salaries. Under capitalization enables management to manipulate the value of shares of enterprises. The government charges higher taxation.

Remedies for Under Capitalization:

To split up the shares of the enterprise. 97

 To issue bonus shares. To increase the par value of shares/stock. To declare dividend payable in stock, if large surplus is available.

It is clear that both over capitalization and under capitalization are not desirable, as both bear evil eects. Notwithstanding, over capitalization is more dangerous. Under capitalization is easily corrected but over capitalization not so easy. Furthermore, under capitalization is indicative of sound nancial position and ecient management of the enterprises. Every enterprise should try to have a proper of fair capitalization. Venture Capital: Venture capital is a form of nancing especially designed for funding high technology, high risk and perceived high reward projects. While a conventional nancier seeks to fund projects with proven technologies and already established markets, a venture capitalist provides funds to the entrepreneurs translate their new ideas in to the commercial production. It especially helps in nancing of high technology projects and helps translate research and development into production. International Finance Corporation Washington (IFCW) denes venture capital as equity or equity featured capital seeking investment in new ideas, new companies, new products, new processes or new services that oer the potential of high returns on investment. It may also include investment in turnaround situations. The origin of the concept of venture capital is traced back to 1946 with the establishment of the American Research and Development Corporation of General Dohiot. It has become a worldwide concept in the eld of funding technology based products. However, the concept of venture capital is of recent origin in India. In India, the venture capital industry had its formal introduction in the budget speech of the nance minister in 1988. The Industrial Credit and Investment Corporation of India Limited (ICICI) came forth with initiatives for addressing technology incentive projects. Industrial Development Bank of India (IDBI) for providing nancial assistance to industrial enterprises attempting commercial application of indigenous technology on adapting imported technology to wider domestic applications. Besides, many of the development banks and development nance institutions have also entered venture capital business in the recent years. The government of India issued some guidelines on November 18,1998 mainly to promote a broad framework for the operations of the venture capital companies in the country. The main features of these guidelines are given hereunder: 98

1. All India nancial institutions, the SBI and other scheduled banks are eligible to oat such a fund. 2. Minimum size of the fund should be Rs. 10 crores. 3. In the event of public issue, the promoters share is to be more than 40% of the issued capital. 4. Foreign holding will be allowed up to 25% provided it comes from multi lateral international nancial organizations, developmental institutions or mutual funds. 5. NRIs investment is allowed up to 74% in the capital on a non-reportable basis and up to 25 - 40 % on a reportable basis. 6. Debt equity ratio should be limited to 1:1:5. 7. Venture capital funds are not allowed to operate in money market operations, bills re-discounting, portfolio investments and nancial consultancy markets. 8. The venture capitalist will pay tax at the rate of 20 % on its dividend income and long term capital gains. But an investor is entitled to tax exemption on dividends subject to a maximum of Rs.10,000/and will have to pay tax at 20% on capital gains.

Export Finance: Export nance refers to credit facilities and techniques of payment at the pre-shipment and postshipment stages. Export nance, whether short term or medium term, is provided exclusively by the Indian and foreign commercial banks which are the members of the Foreign Exchange Dealers Association. The reserve bank of India and IDBI provide renance facilities to be commercial banks. Export-import bank of India (commonly known as EXIM Bank) also extends nance to exporters and to overseas joint venture and construction projects abroad. Export nance provided for pre-shipment and post-shipment purposes are below explained: Pre Shipment Finance: Pre-shipment nance refers to the nancial assistance provided to the exporters before actual shipment of goods. Pre-shipment nance is provided to the exporters for the purpose like purchase of raw materials, their processing and converting into nished goods and packaging them. For these purposes, the following pre-shipment nance is made available:

1. Packaging credit 2. Advance against incentives 3. Advance against duty drawback 99

Pre-shipment credits are granted by the banks under concessional rates of interest at 75 percent. Credit can be extended up to a maximum period of 6 months. Post Shipment Finance: Post shipment nance may be dened as any loan or advance granted or any other credit provided by a bank to an exporter of goods from India from the date of extending the credit after shipment of goods to the date of realization of export proceeds. Thus post shipment nance serves as bridge loan for the period between shipment of goods and the realization of proceeds. Business involves risk but export business is more prone to risk. With a view to reduce risk element in export business, the government setup the Export Credit and Guarantee Corporation (ECGC) which provides export assistance in the form of insurance cover and guarantees. There is also an Export Inspection Council of India (EICI) which extends nancial assistance to the exporters for the quality control purposes. Human Resource Management: Meaning of Manpower Planning: Small scale enterprises also need to draw plans to take various decisions and perform multi various activities. In simple words, plans are basic to any sort of enterprise - whether large, medium or small. This includes the plans or provisions for manpower also. Unfortunately, the man power planning is neglected area in the Indian context especially in small scale industry. Under manpower planning, the management needs to ask itself two basic questions of: 1. What kinds of people do we need? Before we ask this question, we must rst understand the types of jobs to be lled. For example, do these jobs require someone with training in typing or shorthand or can they be done by an individual without any specialized training but who can learn our billing system quickly and who enjoys assignment requiring attention to small details? To answer such questions in a systematic manner, enterprises often do develop job descriptions. In simple words, job descriptions are written explanations of the duties of a job together with a list of the minimum qualication necessary to hold the job. The use of these guides makes the selection process to a great extent, more eective. 2. How many people do we need? In fact, the previous question deals with the quality of personnel. This question deals with the quantity of personnel the enterprise needs. We must answer several questions to determine the number of people required for various positions throughout the enterprise. 100

1. Is the demand for certain skills and occupations growing, constant or shrinking? 2. How much work can the average person do in a specied period of time? 3. What is the level of absenteeism? 4. What is the level of turnover?

Manpower planning can be dened as the process by which an entrepreneur ensures that he has the right number of people and right kind of people with appropriate skills, at the right place and the right time to do work for which they are economically most suitable. Job Requirements: The job requirements must be identied before an enterprise select employees for itself.

1. Conducting Job Analysis:

This is an investigation into various aspects of a task in terms of skill, qualication, duties and responsibilities. It covers job title, the department to which it relates line of supervision, relationship with other jobs, types of material and equipment used, mental and manual dexterity, working condition etc.

2. Job Description:

Simply stated, job description deals with what, why, when and how tasks are to performed. In other words, it is a written statement of work conditions, time involvement and job responsibilities.

3. Job Specication:

Job specication is a description of the salient features of the person to be recruited in the specic job. It is standard against which the salient features of the employee are matched how far he matches with the job specications. In other words, it describes the personal qualities of the employees like their knowledge, skills, experience, qualities of leadership and decision making abilities etc. Recruitment: Recruitment in small scale industries is more dicult because they cannot compete with their large counterparts in salary, fringe benets and apparent stability. These limitations impose severe problems for small enterprises for attracting qualied and committed work force. The entrepreneur should also strive hard to create a public image of his enterprise as a worthy place to work and proper.

101

As regards recruitment in small scale industries, the most prevalent practice exercised in small scale units is to seek out and select candidates rather than wait for applications as happens in the case of large scale industrial unit. Broadly, these could be two sources of recruitment in small scale enterprises: 1. Internal Sources: Internal sources refer to recruitment from the present workforce of the enterprise itself. Filling vacancies from own existing employees boost the morale of the employees because they look forward scope and avenues for their career development and advancement. Such hope for future often motivates the employees to put in their best performance. This manner of recruitment has other side also. One of the serious drawbacks of this manner, to mention, is what while the quality of level of employees remains limited to that of the existing employees, on the other hand, the advantages of including the induction of fresh blood is missed. 2. External Sources: (a) Employees Referrals: Many a times, the existing employees of the enterprise and other sister organizations can refer to suitable candidates. In this case, kinship, friendship and village ties of the existing employees expectedly play a major role in the recruitment process. (b) Recommendations: Sometimes the entrepreneurs receive recommendations from their friends and relatives to employ the persons known to them. The experience suggests that the en-

trepreneurs need to be cautions in considering such recommendations. The best principle in such case will be Never hire a person to please someone, make sure that you want him. (c) Unsolicited Applications: This is one of the common manners exercised to recruiting employees in small enterprises. The enterprise receives application and require for jobs from several sources. The applications are kept and as and when there is a need to recruit people, these applicants are contacted if still available. (d) Advertisements: If the entrepreneurs have sucient time at their disposable to process and interview the candidates. They advertise their vacancies in the newspaper and other medias like radio and television. This manner ensures better choice for entrepreneurs to recruit the employees. If we know lump both the sources together, these can broadly classied as follows: 1. Personal funds 2. Loans from relatives and friends 3. Mortgage loans 4. Term loans 102

5. Subsidiaries

Term Loans: The loans which taken for a denite period of time are called term loans. Based on period, loans are broadly classied into two types:

1. Short term loans 2. Long term loans

Short Term Loans: Short term nance is obtained for a period up to one year. These are required to meet the day to day business requirements. In other words, short term nance is obtained to meet the working capital requirements of the enterprise. All these sources are visualized.

Sources of Short Term Finance

Long Term Loans: Long term loan is obtained for the period ranging from 5 years to 10/15 years. It is raised for the purchase of xed asset which includes:

Land and site development Building and civil works Plant and machinery Installation expenses Miscellaneous xed assets comprising vehicles, furniture and xture, ocer equipment and so on.

Term loan or say long term loans are also required for expansion of productive capacity by replacing or adding to the existing equipment. The following are the sources of raising term loans: 103

 Issue of shares Issue of debentures Loans from nancial institutions Loans from commercial banks Public deposits Retention of prots

Share: Share is a unit into which the capital of the company is dividend. A per section 85 of the companies Act 1956. A public limited company can issue the following two kinds of shares:

1. Preference Shares 2. Equity Shares (a) Preference Shares:

These are the shares which carry a preferential right over equity shares with references to dividend. They also carry a preferential right over equity shares with references to the payment of capital at the time of winding up or repayment of capital. There are dierent types of preference shares. They are:

Cumulative and non-cumulative Redeemable and irredeemable Participating and non-participating Convertible and non-convertible. 1. Equity Shares:

Equity share is not a preference share. In other words equity shares are entitled to dividend and capital after the payment of dividend and capital on preference shares. Procedure for issue of Shares:

Issue of prospectus 104

 Receipt of applications Allotment of shares

Issue of prospectus: First of all, in order to give the prospective investors necessary and relevant information, the company issues a statement called prospectus. It also contains information on the manner in which the amount of shares will be collected. Receipt of applications: The company receives applications in response to its prospectus through a scheduled bank. Allotment of shares: After the subscription is over and minimum subscription is received, the shares are allotted to the applicants within 120 days of the issue of prospectus. In case, the minimum subscription is not received, the company cannot procedd with the allotment of shares, but application money must be refunded to the application within 130 days of the issue of the prospectus. Debentures: Issue of debentures is another method of raising term loans from the public. A debenture is a instrument acknowledging a debt by a company to a person or persons. Section2 (12) of the Indian Companies Act, 1956 denes a debenture as follows: Debenture includes debenture stock, bonds and any other securities of the company whether constituting a charge on the companys assets or not. The procedure for the issue of debenture is, more or less, the same as those for the issue of share. Dierence between shares and Debentures:

1. Representation:

A share represents a portion of capital whereas a debenture represents a portion of debt of a company.

2. Status:

A shareholder is a member of the company, but a debenture holder is a creditor of the company. 105

3. Return:

A shareholder is paid dividend while a debenture holder is paid interest.

4. Right of control:

The shareholders have a right of control over the working of the company whereas the debenture holders dont have such right.

5. Repayment:

Debentures are normally issued for a specied period after which they are rapid. But, such repayment is not possible in case of shares. Purchase: A company cannot purchase its own shares from the market, but it can purchase its own debentures and cancel them.

6. Order of Repayment:

In liquidation, debenture holders get priority in payment, but shareholders are the last to get payment after all claims have been fully satised. Capital Structure: The capital structure is the ratio between debt and equity capital (i.e.) debt-equity ratio. Capital Structure means the permanent nancing of the enterprise represented primarily by long term sources of funds (i.e.) debt and equity. Ezra Solomon dened capital structure in the following words: Optimum leverage can be dened as that mix of debt and equity which will maximize the market value of a company (i.e.) the aggregate value of the claims and ownership interests represented on the credit side of the balance sheet. Further, the advantage of having an optimum nancial structure, if such an optimum does exists, is twofold. It minimize the companys cost of capital which in turn its ability to increase and nd new wealth by creating investment opportunities. Also by increasing the rms opportunity to engage in future wealth. Creating investment, it increases the economys rate of investment and growth. The capital structure bears the following features: 106

1. It should involve the minimum cost and the maximum yields. 2. It should be exible enough to fulll the future requirements of the capital as when needed. 3. The debt should be within the repaying capacity of the enterprise. 4. It should ensure the proper control over the aairs of the enterprise. Factors determining Capital Structure: 1. Nature of Business: The nature of the business itself is one of the factors determining capital structure to be maintained. The business subject to wide uctuations in sales need to maintain smaller proportion of borrowed funds (i.e.) debt capital. Example: TV, refrigerator manufacturer. The capital rms dealing in items/goods having in elastic demand like essential consumer goods may have larger proportion of borrowed capital. This is due to stable earning. The capital structure of companies is also determined by the competitiveness found in them. 2. Size of the enterprise: It is that small enterprises have to depend more on owners capital than on borrowed capital. This is because investors consider leading to small enterprises is more risky. So they lend more to large enterprise where there money is safe and less risky. This enables the large enterprise to raise funds from dierent sources. 3. Trading of Equity: In case of the rate of return on capital employed is more than the rate of interest on debentures or rate of dividend on preference shares it is called trading on equity or leverage eect. In such case, there is greater dependence on borrowed capital in the capital structure. 4. Cash Flows: The ability of a business to discharge its xed obligations depends upon the availability of cash (i.e.) cash ows. As such more the cash inows more will be the proportion of borrowed capital in the capital structure. Reverse will happen in a converse situation. 107

5. Purpose of Financing: The purpose of nancing also aects the capital structure of the enterprises. Suppose the funds are requested for some directly productive purposes (for example, purchase of new raw machinery) the enterprise has to raise the required fund from the external sources. For this the enterprise has in position to pay the charges or interest out of the prot earned. In order case the enterprise required to raise fund for unproductive purpose like employee welfare facilities out of owners capital or through issue of equity share. 6. Provision for future: The scope of changing the capital structure of in future happens to be a basic consideration for determining the capital structure of an enterprise. As a general principle, it will always be safe to keep the best security to be issued in the last instead of issuing all types of securities in one stroke only. Capitalization: In common parlance, capitalization means the total amount of capital employed in an enterprise. However, dierent scholars have dened the term capitalization dierently. These are broadly classied into two categories: 1. Broad Sense 2. Narrow Sense Broad Sense: In broad sense, capitalization means the determination of the quantity of nance and also the

quality of nance. Thus, in broad sense, the term capitalization is synonymous with the term nancial planning. Narrow Sense: According to narrow sense, the term capitalization is similar to capital structure. It refers to the determination of quantum of long term funds required to run an enterprise. Thus, in narrow sense, capitalization includes per value of share capital, reserves and surplus and long term debts. Gerstenberg has dened the term capitalization as capitalization comprises ownership capital which includes capital rocks and surplus in whatever form it may appear and borrowed capital which consists of bonds or similar evidence of long term debt. 108

Since the narrow sense is more specic in its meaning, that is why it is more popular in use. Integral to meaning of capitalization is the proper or optimum size of capitalization. These are two generally used theories of capitalization for new business enterprise. These are: 1. The Historical cost theory 2. The Earnings theory The Historical Cost Theory: According to this theory, capitalization of a new enterprise is considered to be the equivalent of the cost actually incurred on setting up an enterprise. In other words, the amount of capitalization of a new enterprise is the total of the cost of xed assets, working capital and the cost incurred in setting up the enterprise. (Eg: Preliminary expenses, underwriting commission expenses on issue of shares etc.). The historical cost theory lays greater stress on current outlays than on the requirements for future business. The Earnings Theory: In the Earnings theory, the basis for determining the value of an enterprise is its earning capacity. For this, a new enterprise estimates its average annual future earnings and it is capitalized by the normal earning rate prevalent in the similar biz/enterprise. Let us explain this point with an example: Suppose a new enterprise estimates its annual average earnings at Rs. 75,000/- The enterprises is the same activity are earning at the rate of 10% on their capital employed. Then the quantum of capitalization on the basis of earnings for the new enterprise will be Rs. 7, 50,000/- (i.e.) 75000 *(100/10). However, this theory has a limitation for determining the amount of capitalization for new enterprises. The new enterprises nd it dicult to estimate correctly the amount of that future earnings. In case the earnings are not correctly estimated, the capitalization based unit would prove risky for the enterprise. Therefore, it is advisable to adopt the historical cost theory of capitalization in case of new enterprises. We must have learnt the actual capitalization and proper capitalization of an enterprise. These refer to what is and what should be the quantum of capitalization respectively in an enterprise. In practice, there may be 3 situations: 1. When actual capitalization is equal to proper capitalization. 2. When actual capitalization is more than proper capitalization (i.e.) over capitalization. 3. When actual capitalization is less than proper capitalization (i.e.) under capitalization. Over Capitalization: 109

Over capitalization signies a situation when an enterprise possesses excess of assets in relation to its requirement. Such a situation has its bearing on earning capacity of the enterprise. On account of lower rates of return, the enterprise becomes unable to pay its xed obligations (i.e.) interest and dividend, at prescribed rates. Thus, in case of over capitalization the enterprise fails to pay a fair return on its capital investment. An enterprise is said to be over capitalized when its earnings are not large enough to yield a fair return on its capital employed (i.e.) on the amount of shares and bonds. Causes of Over Capitalization:

1. Rising of more money by issue of shares and debentures than what the enterprise can protably use. 2. Borrowing of large money at a rate of interest fairly higher than the actual rate of return on its capital employed. 3. Acquiring xed assets on excessive amounts. 4. Inadequate provisions for depreciation and replacement of xed assets. 5. Payment of dividend at highly fair rate. 6. High rates of taxation imposed by the government. 7. Over estimation of earnings for enterprise concern.

Evil Eects of Over Capitalization:

1. On Owners - Because of a fall on dividends, the shareholders/owners lose heavily. Further, the owners are not in a position to dispose of their shares at protable prices due to fall in the market value of their shares. Thus, the owners are the biggest losers in case of over capitalization of an enterprise. 2. On Enterprise - In over capitalization the market-value of the enterprises stock falls and it nds dicult to raise capital. Quite often, the enterprises resort to window-dressing with questionable practices. But this only aggregates the evil of over capitalization. The credit worthiness of the enterprise is adverse aected. 3. On Society - Over capitalized enterprises often come to societal rejections. Society gradually withdraws its acceptance to the products produced by such enterprises. No wonder, the enterprises go into liquidation in course of time. Closer or liquidation of enterprises causes losses to society in terms of production, employment, wastage of resources etc.

110

Remedies for Over Capitalization: In order to specify/rectify over capitalization, the enterprise may resort to the following remedies:

1. To reduce the claims of shareholders, debenture holders and creditors. 2. To reduce rate of interest on debentures and the rate of dividend on preference shares. 3. To reduce the number of equity shares. 4. If possible, to reduce the par value of stock.

These all remedial measures leave sucient funds with the enterprise. The enterprise can make use of these funds for the purposes of replacement of assets and expansion of business activity. These, in turn, help in increasing the earning capacity of the company and thus, rectifying over capitalization in the enterprise. Under Capitalization: Under capitalization is just the reverse of over capitalization. An enterprise is said to be undercapitalized when its actual capitalization is lower than the proper capitalization. In case of under capitalization, the rate of dividend and the market value of shares are fairly higher than the market value of shares of similar enterprises. According to Gerstenberg, An enterprise may be undercapitalized when the rate of prot is exceptionally high in relation to the return enjoyed by similar situated enterprises in the same industry. The assets may be worth more than the values reected in the books. Causes of Under Capitalization:

1. Under estimation of initial rate of earnings. 2. Utilization of high eciency for exploiting every possibility available. 3. Using lower rate of capitalization. 4. Under estimation of required funds. 5. Retaining prots because of conservative dividend policy followed by the enterprise. 6. Setting up of an enterprise in recessionary conditions. After the recession period is over, enterprises start earning prots at an unusually high rate. 7. Because of excessive earnings, enterprises are exposed to a heavy incidence/burden of taxation.

Eects of Under Capitalization: 111

 It encourages cut-throat competition in the market. High prot earning capacities of undercapitalized enterprises lure new entrepreneurs to plunge into manufacturing. High rate of dividend given to the shareholders propels to the workers to demand for higher wages and salaries. Under capitalization enables management to manipulate the value of shares of enterprises. The government charges higher taxation.

Remedies for Under Capitalization:

To split up the shares of the enterprise. To issue bonus shares. To increase the par value of shares/stock. To declare dividend payable in stock, if large surplus is available.

It is clear that both over capitalization and under capitalization are not desirable, as both bear evil eects. Notwithstanding, over capitalization is more dangerous. Under capitalization is easily corrected but over capitalization not so easy. Furthermore, under capitalization is indicative of sound nancial position and ecient management of the enterprises. Every enterprise should try to have a proper of fair capitalization. Venture Capital: Venture capital is a form of nancing especially designed for funding high technology, high risk and perceived high reward projects. While a conventional nancier seeks to fund projects with proven technologies and already established markets, a venture capitalist provides funds to the entrepreneurs translate their new ideas in to the commercial production. It especially helps in nancing of high technology projects and helps translate research and development into production. International Finance Corporation Washington (IFCW) denes venture capital as equity or equity featured capital seeking investment in new ideas, new companies, new products, new processes or new services that oer the potential of high returns on investment. It may also include investment in turnaround situations. The origin of the concept of venture capital is traced back to 1946 with the establishment of the American Research and Development Corporation of General Dohiot. It has become a worldwide concept

112

in the eld of funding technology based products. However, the concept of venture capital is of recent origin in India. In India, the venture capital industry had its formal introduction in the budget speech of the nance minister in 1988. The Industrial Credit and Investment Corporation of India Limited (ICICI) came forth with initiatives for addressing technology incentive projects. Industrial Development Bank of India (IDBI) for providing nancial assistance to industrial enterprises attempting commercial application of indigenous technology on adapting imported technology to wider domestic applications. Besides, many of the development banks and development nance institutions have also entered venture capital business in the recent years. The government of India issued some guidelines on November 18,1998 mainly to promote a broad framework for the operations of the venture capital companies in the country. The main features of these guidelines are given hereunder:

1. All India nancial institutions, the SBI and other scheduled banks are eligible to oat such a fund. 2. Minimum size of the fund should be Rs. 10 crores. 3. In the event of public issue, the promoters share is to be more than 40% of the issued capital. 4. Foreign holding will be allowed up to 25% provided it comes from multi lateral international nancial organizations, developmental institutions or mutual funds. 5. NRIs investment is allowed up to 74% in the capital on a non-reportable basis and up to 25 - 40 % on a reportable basis. 6. Debt equity ratio should be limited to 1:1:5. 7. Venture capital funds are not allowed to operate in money market operations, bills re-discounting, portfolio investments and nancial consultancy markets. 8. The venture capitalist will pay tax at the rate of 20 % on its dividend income and long term capital gains. But an investor is entitled to tax exemption on dividends subject to a maximum of Rs.10,000/and will have to pay tax at 20% on capital gains.

Export Finance: Export nance refers to credit facilities and techniques of payment at the pre-shipment and postshipment stages. Export nance, whether short term or medium term, is provided exclusively by the Indian and foreign commercial banks which are the members of the Foreign Exchange Dealers Association. The reserve bank of India and IDBI provide renance facilities to be commercial banks. Export-import bank of 113

India (commonly known as EXIM Bank) also extends nance to exporters and to overseas joint venture and construction projects abroad. Export nance provided for pre-shipment and post-shipment purposes are below explained: Pre Shipment Finance: Pre-shipment nance refers to the nancial assistance provided to the exporters before actual shipment of goods. Pre-shipment nance is provided to the exporters for the purpose like purchase of raw materials, their processing and converting into nished goods and packaging them. For these purposes, the following pre-shipment nance is made available: 1. Packaging credit 2. Advance against incentives 3. Advance against duty drawback Pre-shipment credits are granted by the banks under concessional rates of interest at 75 percent. Credit can be extended up to a maximum period of 6 months. Post Shipment Finance: Post shipment nance may be dened as any loan or advance granted or any other credit provided by a bank to an exporter of goods from India from the date of extending the credit after shipment of goods to the date of realization of export proceeds. Thus post shipment nance serves as bridge loan for the period between shipment of goods and the realization of proceeds. Business involves risk but export business is more prone to risk. With a view to reduce risk element in export business, the government setup the Export Credit and Guarantee Corporation (ECGC) which provides export assistance in the form of insurance cover and guarantees. There is also an Export Inspection Council of India (EICI) which extends nancial assistance to the exporters for the quality control purposes. Human Resource Management: Meaning of Manpower Planning: Small scale enterprises also need to draw plans to take various decisions and perform multi various activities. In simple words, plans are basic to any sort of enterprise - whether large, medium or small. This includes the plans or provisions for manpower also. Unfortunately, the man power planning is neglected area in the Indian context especially in small scale industry. Under manpower planning, the management needs to ask itself two basic questions of: 1. What kinds of people do we need? 114

Before we ask this question, we must rst understand the types of jobs to be lled. For example, do these jobs require someone with training in typing or shorthand or can they be done by an individual without any specialized training but who can learn our billing system quickly and who enjoys assignment requiring attention to small details? To answer such questions in a systematic manner, enterprises often do develop job descriptions. In simple words, job descriptions are written explanations of the duties of a job together with a list of the minimum qualication necessary to hold the job. The use of these guides makes the selection process to a great extent, more eective. 2. How many people do we need? In fact, the previous question deals with the quality of personnel. This question deals with the quantity of personnel the enterprise needs. We must answer several questions to determine the number of people required for various positions throughout the enterprise. 1. Is the demand for certain skills and occupations growing, constant or shrinking? 2. How much work can the average person do in a specied period of time? 3. What is the level of absenteeism? 4. What is the level of turnover? Manpower planning can be dened as the process by which an entrepreneur ensures that he has the right number of people and right kind of people with appropriate skills, at the right place and the right time to do work for which they are economically most suitable. Job Requirements: The job requirements must be identied before an enterprise select employees for itself. 1. Conducting Job Analysis: This is an investigation into various aspects of a task in terms of skill, qualication, duties and responsibilities. It covers job title, the department to which it relates line of supervision, relationship with other jobs, types of material and equipment used, mental and manual dexterity, working condition etc. 2. Job Description: Simply stated, job description deals with what, why, when and how tasks are to performed. In other words, it is a written statement of work conditions, time involvement and job responsibilities. 115

3. Job Specication:

Job specication is a description of the salient features of the person to be recruited in the specic job. It is standard against which the salient features of the employee are matched how far he matches with the job specications. In other words, it describes the personal qualities of the employees like their knowledge, skills, experience, qualities of leadership and decision making abilities etc. Recruitment: Recruitment in small scale industries is more dicult because they cannot compete with their large counterparts in salary, fringe benets and apparent stability. These limitations impose severe problems for small enterprises for attracting qualied and committed work force. The entrepreneur should also strive hard to create a public image of his enterprise as a worthy place to work and proper. As regards recruitment in small scale industries, the most prevalent practice exercised in small scale units is to seek out and select candidates rather than wait for applications as happens in the case of large scale industrial unit. Broadly, these could be two sources of recruitment in small scale enterprises:

1. Internal Sources:

Internal sources refer to recruitment from the present workforce of the enterprise itself. Filling vacancies from own existing employees boost the morale of the employees because they look forward scope and avenues for their career development and advancement. Such hope for future often motivates the employees to put in their best performance. This manner of recruitment has other side also. One of the serious drawbacks of this manner, to mention, is what while the quality of level of employees remains limited to that of the existing employees, on the other hand, the advantages of including the induction of fresh blood is missed.

2. External Sources: (a) Employees Referrals: Many a times, the existing employees of the enterprise and other sister organizations can refer to suitable candidates. In this case, kinship, friendship and village ties of the existing employees expectedly play a major role in the recruitment process. (b) Recommendations: Sometimes the entrepreneurs receive recommendations from their friends and relatives to employ the persons known to them. The experience suggests that the en-

trepreneurs need to be cautions in considering such recommendations. The best principle in such case will be Never hire a person to please someone, make sure that you want him. (c) Unsolicited Applications: This is one of the common manners exercised to recruiting employees in small enterprises. The enterprise receives application and require for jobs from several sources. 116

The applications are kept and as and when there is a need to recruit people, these applicants are contacted if still available. (d) Advertisements: If the entrepreneurs have sucient time at their disposable to process and interview the candidates. They advertise their vacancies in the newspaper and other medias like radio and television. This manner ensures better choice for entrepreneurs to recruit the employees. Recruitment Kinship, friendship and relatives Unsolicited applications Gate hiring Referrals and recommendations Advertisements Employment Exchanges Selection: Selection process starts where recruitment ends. Selection means tting a round peg in a round hole. This is done by comparing the requirements of job with the qualications and experience of a candidate. The basic purpose of selection is to nd out right kind of people to ll the available positions; an orderly and systematic procedure is therefore always advisable selection of over qualied people results frustration on the part of the employees, selecting under qualied people invites indignation of the employer frequently. Although, the selection procedure varies from place to place and enterprise to enterprise, most commonly used selection procedures in small scale industries are: 1. Preliminary Interview: If the recruitment programme is non-selective, the preliminary interview is likely to be used in selection. This interview is short, often lasting for ten-fteen minutes. The basic purpose of the preliminary interview is to determine an applicants suitability for further consideration. The kind of work available in the enterprise is explained by the interviewer. If there is felt some chance of successful placement, the applicant is allowed to continue the rest of the selection procedure. 2. Application Blank: It is commonly used in the selection process. Questions like work history, education level, work experience and the type of work applied for are asked in the question blank. Application blanks certain questions related to the probability of job success. 117

3. Psychological Test:

Most psychological tests administered in the enterprise are paper and pencil. The test taker is given a series of questions and a choice of two or more possible answers to each question. Aptitude Test: This is a test measuring intelligence of the applicant and his ability to learn certain skills. Performance Test: It is a test that measures ones current knowledge of a specic test. Personality Test: Under the test, an applicants personality traits such as dominance, sociability and conformity are measured. Interest Test: As the name of the test itself denotes, this is the test measures ones interest in various elds of work.

4. References:

Personal references are generally unreliable and biased. Many a times reference persons are not well qualied to judge ones past work performance. Therefore, the names of previous employees and teachers are considered more reliable and unbiased in giving judgment about ones past experienced/performance.

5. Interview:

Interview facilitates an interviewer to evaluate more eectively the applicants potential for success in the particular job. The basic objective of an interview device should be to measure those facilitating qualities and traits that cannot be better measured by some other devices like testing or application blank.

6. Physical Examination:

A physical examination is usually placed towards the end of the selection process. It gives the enterprise current information about the applicants physical health at the time of selection or hiring.

7. Placement:

Once a new employee has been selected, he/she is nally placed to perform the specic job. A new comer should be properly introduced to his fellow workers, shown the location of facilities available, informed of regulations if any and encourages asking any needed information.

8. Orientation: 118

The employees selected should be made familiar with their enterprises objectives and activities and acquainted with their jobs. Thus begins their orientation period to learn about their work environment. Henceforth starting the training and development of newly selected employees. Training and Development: Training may be dened as any procedure, initiated by an enterprise, which intends to foster and enhance learning among the employees working in the enterprise. Training in small scale unit is concerned, the owner himself takes the responsibility for developing and conducting the training programme with an objective to enhance the employees job related skills and knowledge. Objectives of Training:

1. To improve job performance by enhancing employees knowledge and skill. 2. To prepare employees well competent to discharge the new responsibilities. 3. To impart skill how to operate the new machinery and equipments. 4. To reduce the wastages and accidents. 5. To build a second line for more responsible position at a later stage.

Characteristics of a Successful Training Programme:

1. Its objectives and scope are clearly dened. 2. The training techniques are related directly to the need and objectives of the organization. 3. It employs accepted principles of learning. 4. As far as possible, it is conducted in the actual job environment.

Methods of Training:

1. On the job Training: The oldest and most commonly used training technique in the small scale units is the on the job training. It consists of the employees receiving training from their supervisors and other departmental members while they perform their regular jobs. Such training is considered essential on every job available in the enterprise. On the job training has three categories: (a) Demonstration: The job is demonstrated to the employees and each step involved in the process is explained thoroughly. (b) Performance: The trainees perform the task what they have learned in the step one. 119

(c) Inspection: In the third and nal step, the work performed by the employees, as mentioned in the step two, is inspected and immediate feedback of the job performance to the employees. 2. Apprenticeship Training: Apprentice training combines both formal classroom learning and on the job experience. This kind of training programme is provided mainly in the technical cadres. 3. Job Rotation: This kind of training is particularly benecial in the case of small scale industries where each employee has a thorough understanding of the dierent functions performed in the enterprises. In this training programme, employees are moved from one job to job for a few hours a day, a few days or several weeks. 4. Outside Training: The outside training consists of the employees being trained at schools/institutes outside the enterprise. Training is a continuous process of the employee development.

Remuneration and Benets: Employees remuneration expressed in terms of wages is of critical concern to personnel relations in small scale industry, whereas wages represent income to the employees, they represent cost of the employer and potential taxes to the government. Wages constitute the largest part of the employees purchasing power and therefore have an important bearing on the level of economic activity. As regards labor is organized (i.e.) large industrial sector, he is politically awakened and is ready to protest to secure his rights. Wages in the small sector are around one-half of those in the large organized sector through labor productivity does not so dier between them. The high wages in the organized sector have been described as islands of prosperity when compared to the poor wages or oceans of distress in a small sector. The wages in small enterprises are not xed on well established norms and principles of equal pay for equal work. In fact, wage xation is usually done based on the bargaining strengths of the employer and employee in which the former dominates the scene. Even knowing wide dierences in wages between the two sectors, employee in the small sector/unorganized sector, they are not in the position to voice their concerns is an eective manner due to their poor bargaining strength. Employee Benets and Services: In addition to remuneration (i.e.) wages to the employees for their work done, enterprises nowadays also pay for a wide variety of supplementary items - often called fringe benets. These benets are the indirect payments made to the employees in addition to their direct wages and salaries. The employers federation of India considers fringes as those benets provided by the employer (a) which materially add to the welfare of the employees either during the tenure of their service or their retirement - (b) the expenditure of which does not form part of his normal wages and other allowances. Days are gone when the fringe benets 120

were of secondary importance. Over the period, these benets have risen to such an extent but these now command a signicant proportion of the total employee compensations. All the fringe benets can be broadly classied into

1. Premium payments consisting of bonus 2. Payments for overtime 3. Payments for not-worked 4. Payments for employee welfare.

Regulatory Laws:

The Factories Act,1948

The main objectives of The Factories Act, 1948 are two. First, it aims at to ensure adequate safety measures and promote the health and welfare of the workers employed in the factories. Second, it prevents haphazard growth of factories through various provisions relating to the nal approval of the project plans before a factory is actually created. The Act applies to all industrial and commercial establishment employing one or more workers but it does not apply to those who are employed in administrative and managerial capacities.

The Minimum Wages Act, 1948

The main objective of the Act is to determine the minimum wages in the certain employment in the industry and trade where labor organizations like trade unions are either non-existent or ineective. The Act is applicable to all employees engaged to do any work whether skilled or unskilled, manual or clerical in a scheduled employment including outgoing workers, xation of minimum wages etc.

The Employees Provident Fund Act, 1952

The main objective of the Act as a piece of welfare legislation is to make provisions for the security in old age after the employee retires or for his dependents in the case of early death. This Act all factories and establishment employing 20 or more employees, all person employed directly or indirectly through contractors in any kind of work. The Act can be applicable to the central government establishments employing less than 20 workers if the majority of the workers so desire.

The Workmens Compensation Act 121

The Act aims at securing the payment of compensation by employers for injuries sustained by an employee in an accident occurred either in the course of or out of employment. This Act is applicable to all over India to factories, mines, plantations, transport establishments and construction works. However, the Act does not apply to those establishments which are not covered by the employees state insurance act. It is also not applicable to casual workers working in the factories. The Shops and Establishment Act This Act is passed with an objective to provide statutory obligation and rights to employees and employers in the shops and establishments (i.e.) the major segment of unorganized sector in the country. As regards the scope of this Act, it has all India coverage. Of course, every state has framed its own rules for the application of the Act. The Act is applicable to all persons employed in or about a shop or an establishment with or without wages. However, the employer family members, if any do not come within the purview of this Act. The Payment of Bonus Act, 1985 The Act aims to provide statutory obligations for the payment of bonus to the employees in certain establishments on the basis of prots or productivity. The Act applies to all over India to a factory as dened in section 2(m) of the Factories Act and also to the establishments employing 20 or more persons on any day during a year. It covers all workers whose salaries do not exceed Rs.2500/- per month. The government can extend the coverage of the Act to those establishments also employing less than 20 persons but not less than 10 people by giving 2 months notice. The Payment of Gratuity Act,1972 The main objective of The Gratuity Act is to provide social security measures to provide some protections to persons employed in industrial and commercial establishments. Gratuity is nothing but a lump sum payment in recognition of the long and meritorious services rendered by an employee. The Act is applicable to all factories, mines, oil elds, plantations, railway companies and all shops and establishments in which 10 or more person are employed. A shop and establishment once considered under the Gratuity Act will continue to be covered even if the number of employees however falls, below ten at a later date. Production and Operations Planning: 122

Investment Analysis: Both launching a new product for the rst time and diversifying the product-line involve investments. And more than capital would be scarce given the investment opportunities available particularly in the case of small scale enterprises. Objective of investment analysis is to maximize the prot. Hence the scarce capital should be invested in those opportunities which could give the maximum return on capital employed (i.e.) prot. Investment analysis enables the entrepreneur to choose an investment out of a given set of alternatives. Tools of Investment Analysis:

1. Ratio Analysis:

A ratio establishes an arithmetical relationship between the two relevant gures. It is obvious that absolute gures do not convey much. For example, if we say that X company earned a prot of Rs.50, 000/- and Y company earned a prot of Rs. 40,000/-, we can automatically conclude X company is more protable. Prots in relation to their respective capital employed. X company earned prot Rs.50, 000/- against capital Rs. 5, 00,000/Y company earned prot Rs. 40,000/- against capital Rs.2, 00,000/[Y Company is more protable] Since its net prot to capital employed in 20% as against 10% of X company. When the denition of ratio is expresses with reference to the items shown in the nancial statement, and then it is called Accounting Ratio. With the help of ratios, we can reach to useful conclusions about protability of investments made in the enterprise. It is important to note that prot is value and protability is ratio.

2. Return on Proprietors Fund or Net Prot:

This ratio expresses the ratio of net prot after tax and interest to proprietors fund or net worth. This ratio suggests that whether the investment would be worth making in terms of return as compared to the risk involved in the business which ultimately helps in taking business decisions for the future. The ratio is calculated as follows: Net prot after tax and interest 123

*100 Proprietors fund or net worth

3. Return on Capital Employed:

This ratio indicates the earning power of the capital employed in the business and point out to the owner the progress or deterioration in the earning capacity of the business. It is of great signicance to shareholders or the owner as it shows the ratio of prot earned on invested capital. Net prot before interest and tax *100 Capital employed Thus, the ratio of capital employed indicates how the management has made use of the funds supplied by the both owners and creditors.

4. Return on Total Investments:

It is the ratio of net prot to total investment. This ratio indicates the overall protability of the enterprise. It is calculated as follows: Net prot after interest and tax *100 Total assets

5. Capital Budgeting:

Capital budgeting involves investment decision balancing the sources and uses of funds for acquiring xed capital assets like machinery and equipments. Investment in plant and machinery implies the choice of a particular project. The project selection is made on certain techniques known as techniques of capital budgeting.

1. Payback or payout period

This technique answers an investors searching question as to how long he/she has to wait before the invested capital is recovered. In fact, this is a very simple rule of thumb. The point of the time the payback occurs and 124

the time it has taken for recovery is called the payback or payout period. Payback period = outstanding total investment*12

Net cash ow Investment and Net cash ow (all cumulative) Net cash ow outlay

Payback period

In short, what this method involves in choosing the project which repays the initial investment in the shortest period of time.

2. Average rate of return

This is also known as accounting rate of return. In simple words, average rate of return is just the reverse of the payback method, while payback method is based on cash ow; average rate of return is based upon the principles of accounting. This method does not consider the time period. Average rate of return = Average net income after tax *100 Average investment over the life of the project However, both the methods - payback and average rate of return - suer from the major drawback of ignoring time value of money. The value of Rs.1000 today may be less after 10 years. But these methods ignore this fact. Plant Location: 125

Location, localization and planned location of industries are often felt to be synonymous. But, the distinction among these three terms is of immense importance. Entrepreneurs locate their enterprises where the cost of production comes the lowest at the time of establishing industries. This is known as location of industries. The concentration of particular industry mainly in one are, as occurred with many industries in India, for example, textile industry in Bombay is known as localization of industries. Planned location of industries is a term whereby the location of industries is planned to give each industrial area a variety of industries so that large industries are dispersed not localized. It is not always possible to explain industrial location independently with the help of any one factor. Several factors/considerations inuence the entrepreneurs decision in selecting the location for industry. Collection of industrial location is a strategic decision. The most important factors are:

1. Availability of Raw Materials: The biggest advantage of availability of raw material at their location of industry is that it involves less cost in terms of transportation cost. In case of small scale industries these could be food and fruit processing, meat and sh canning, jam, juices and ketchups etc. 2. Market: If the products are fragile and highly susceptible to spoilage and if the transportation costs constitute a substantial portion of the total costs involved, the proximity to market conciliation assumes added importance in selecting the location of the enterprise. 3. Infrastructural Facilities: The degree of dependency upon infrastructural facilities may vary from industry to industry, yet there is no denying of the fact that availability of infrastructural facilities play a deciding role in the location selection of an industry. Infrastructural facilities include transport and communication, power, water, banking etc. 4. Government Policy: In order to promote the balanced regional development, the government also oers several incentives, concessions; tax holidays for number of years, cheaper power supply, factory shed etc. to attract the entrepreneurs to setup industries in backward areas. 5. Availability of Manpower: Availability of required manpower skilled in specic trades may be yet another deciding factor for the location of skill intensive industries. 6. Local Laws and Regulations: Local laws prohibit the setting up of polluting industries in particular areas which are environmentally sensitive. Air (prevention and control of pollution) Act 1984 of UP pollution control board, Lucknow is a classical example of such laws prohibiting putting up polluting industries in prone areas. 7. Ecological and Environmental Factors: In case of certain industries, the environmental factors like water and air pollution may turn out to be negative factor in deciding enterprise location. 126

8. Competition: enterprises like retail stores where the revenue of a particular site depends on the degree of competition from other competitors location near by plays a crucial role in selecting the location of enterprise. Location of certain industries also depends upon the delivery of emergency services like re, police, hospital etc.

Plant Layout: During the course of technical arrangement of various facilities such as inventory, machinery, equipment etc., it is very necessary to give considerable emphasis on a proper plant layout to achieve optimum utilization. One needs to keep in mind some important aspects while deciding the plant layout. They are:

Production technology and production mix Eciency, economic and uninterrupted ow of men and material. Adequate space for maintenance work. Scope for future expansion and diversication of the project. Adequate safety precautions, as and when needed. Healthy conducive layout of the plant. Proper lighting and ventilation. Proper provision for euent disposal. Eective supervision of all sorts of activities carried at the plant layout side. Provision for proper storage, stocking space etc. where needed.

Advantages of proper plant layout:

Increase in productivity. Optimum utilization of oor space and other areas of operations like loading and unloading. Eective supervision and control over industrial activities. Improvement in working environment. Economy in material handling. Optimum investment in plant and building.

127

Product Design: The backbone of any small enterprise is the products or services it oers. Therefore what to produce and how to produce is the rst step in the evaluation of an operational system. Product design is the key strategic decision an entrepreneur has to take at the very beginning. The experience suggests that the image of an enterprise and its prot earning capacity to a great extent, are inuenced by the product design. This is because the product design once decided continuous for a long time. Therefore one needs to keep in view various factors like change in environment, technology and consumer tastes/requirements while nalizing product design. Right type of product design involves certain consideration/stages to be weighed. It is said that more than time one spends on product design, better become ones chances of success. Generally, an entrepreneur needs to keep the following consideration in view while designing his/her product:

1. Standardization 2. Reliability 3. Maintainability 4. Servicing 5. Reproducibility 6. Sustainability 7. Product simplication 8. Quality commensuration with cost 9. Product value 10. Consumer quality

128

Production Design: Once an enterprise decides to make a product (i.e.) product design, it must consider its production. The process of production design can be divided into following two phases:

1. Scheduling 2. Project Inspection

Scheduling: Scheduling is crucial to successful production. It is important for both batch (i.e.) special order and continuous production situations. The primary objective of scheduling is the smooth ow of materials through the production process. Scheduling is a system of planning and keeping track of manpower, equipment and material used. It ensures when to start work on a given order and by what date it should be completed. Scheduling is generally based upon forecast sales. Scheduling decisions may be both centralized and decentralized. In case of centralized scheduling all job assignments are issued by the production control oce. In decentralized scheduling allows each and every department to prepare its own schedule. Techniques of Scheduling:

1. Periodic production review conference 2. Reports and returns 129

3. Growth charts 4. Charts and graphs 5. CPM and PERT 6. Computers

All these techniques grouped into two categories: (i) charts and graphs (ii) operation research methods. Charts and Graphs: Many sorts of charts and graphs are used for scheduling. One of the best known and profusely used charts is the Gantt chart. Gantt chart is a means of visualizing planning production. It makes plainly visible what has been done in relation to what was scheduled to have been done. Operations Research Methods: Operations research involves mathematical formulae and analyses.

1. Critical Path Analysis breaks the work down into its various component parts. These parts are related to each other in a diagram or network. PERT is the popular critical path technique. 2. Linear Programming oers an optimum answer to a problem. It can only be used if the relationships among the various variables are of linear type. The popular ways of performing linear programming are the graphs, transportation and simplex methods.

Product Inspection: Product inspection ensures the quality of product produced. A separate department quality control is established to oversee the product inspection. Through product inspection, management decides upon the location of inspection; when inspection should be done, the number of items to be inspected and types of tools needed for inspection. Location of Inspection: A centralized and decentralized inspection approach may be taken saving the time of highly trained inspectors on the one hand and need for sophisticated techniques or tools on the other are the important reasons to opt for centralized inspection method. Decentralized inspection is also called oor inspection. When to Inspect? The number of inspections should take into consideration the cost of inspecting versus the cost of not inspecting. All the raw materials rst should be inspected before damage. Product must be inspected 130

at dierent stages of manufacturing. The nished goods inspection is the companys last chance to check the quality. Number of Items Inspected: Inspection may be done on a 100 percent basis or by inspecting only samples. The sampling approach is based on statistical sampling theory. Inspection Tools: Production inspection often requires special tools. A few of the tools are thickness, color, density and tensile strength of products may be measured with electric eyes, x-rays, stroboscopes and reect scopes. Quality Control: Quality is a relative concept. It is related to certain predetermined characteristics such as shape, dimensions, composition, nish, color, weight etc. Quality is the performance of the product as per the commitment made by the prouder to the consumer. Quality control is also a strategic decision. Alfort and Beaty dened Quality Control as Quality Control is the mechanism by which products and are made to measure up to the specication determined from the customers demand and transform into sales, engineering and manufacturing requirements. It is concerned with making things right rather than discovering and rejecting those made wrong. Quality Control is a technique by means of which products of uniform acceptable quality are manufactured. Importance:Quality Control of products bears distinct advantages for all whether producers or consumers.

1. The brand products build up goodwill or image, which ultimately increases sales. 2. It helps the manufacturers/entrepreneurs in xing responsibility of workers in the production process. 3. Quality control also helps in minimizing the cost by increasing eciency, standardization, working conditions etc. 4. It also enables the entrepreneur to know the cost of his/her product quiet in advance which helps him in determining competitive process prices of his product. 5. The entrepreneur can conrm whether the product manufactured by him is in accordance with the government standard.

Methods/Tools of Quality Control:

131

1. Inspection: Inspection is the common method used for quality control not only in production but also in services. (a) Product Inspection: The main purpose of product inspection is to ensure that the products sent into the market comply with the set standard for quality. (b) Process Inspection: It ensures the manufacturing of a quality product. It saves wastages of material by preventing process bottlenecks. (c) Inspection Analysis: It helps the entrepreneur locate the exact points in the manufacturing process where faults are. It enables the entrepreneur to identify the points at which deviations from standard set chart.

Quality Control through Inspection

2. Statistical Quality Control:

It is an advanced method or technique based on statistical techniques to determine and control the quality. Sampling, probability and other statistical inferences are used in this method for controlling the quality of product. Under this method, the entire lot is, rst sampled on the basis of quality control specic characteristics and then divided into three parts.

1. Analysis of Samples: This is based on sampling techniques. Firstly, the universe (i.e.) the population to be analyzed is identied. After, following the sampling technique, the sample representing the whole population is selected and analyzed. It is important that we do not need to analyze all the units of the population but only few units called sample units are studied and analyzed 132

2. Use of Control Charts: It is use to depict the facts, ndings, the results obtained from analyzes of samples are presented in a chart. The method to draw a chart is as follows: (a) Measure the quality characteristics of sample selected. (b) Find out the mean of the sample and also measure its range of dispersion. (c) Then, data regarding mean and dispersion are gathered. (d) Take a graph paper and plot the gathered data on it.

Thus, we have a control chart to guide us about the quality deviation of a product. The shape of the control chart is so plotted will be like: Quality Control Chart

3. Corrective Measures: Having drawn quality control chart, entrepreneur can easily and clearly locate the points of deviations and causes of it. This enables him to evolve corrective measures to control the quality of the product accordingly example, if the quality of raw material is found inferior, then the quality deviation will be corrected.

Quality Control in Small Scale Industries: Quality control is more necessary for small scale units. This is because of the greater use of manpower in small scale industries during the manufacturing processes. The application of quality control is dicult in them because of several limitations like nancial, technical and managerial. Quality implementation is total organizational of quality control largely depends upon the quality of raw materials, selection of machinery and equipment, designing, manufacturing process etc. The timely and required assistance from the government organizations, association and institutes also constitute to successful implementation of quality control. The quality control in small scale industries is based on:

1. Indian Standard Specication 2. Quality Marketing Schemes 3. Company standards in case of ancillary units 4. Any other standard specication prescribed by the government or other purchasing agencies.

Quality Control of Export Products: A product can be sold in foreign markets only when it is not only cheaper but up to a certain quality also. Standardization of these products convinces the foreign customers better than any sales campaign. 133

Realizing this fact, the government of India has made the inspection of several products manufactured by small scale industries compulsory before they are shipped abroad. Cost of Quality Control: The important aspect of quality control (i.e.) the cost involved in ensuring quality products. How much minimum should be the proportion of quality cost to total cost upon various facto:

1. Type of product, its use and hazards involved in its use. 2. The degree of quality awareness prevailing in the enterprise. 3. Additional cost to be incurred for ensuring higher quality standards.

One last word Quality Control in the Indian small scale industry has been satisfactory. Technology Updation in SSE: Technology say, up-to-date technical know-how enables the business men to cope with rapid improvement taking place in manufacturing by increasing production, improving quality and reducing cost. There are two types of arrangements for providing technical assistance and services to small units. (1) The central small scale industries organization through its service institutes provides technical sta to advise the small entrepreneurs on technical problems faced by them. (2) The small industries service institutes (SSI) and also the state government agencies have set up common facility workshops and prototype for production centers for undertaking specic manufacturing processes of SSE. At present, there is a network of 27 SISs, 31 branch institutes, 38 extension centers, 4 regional testing centers for providing technical assistance. Ex: Launch of SIDO, IFCI, and NSIC for up-gradation of technologies. Market and Channel Selection: Marketing is very much integral to market. Market is a place where the sellers and buyers assemble to exchange their products for money and vice versa. Accordingly, the concept of marketing has also altered from one point of time to another. These concepts are broadly classied into

1. Traditional Concept 2. Modern Concept

Traditional Concept: This concept corresponds to the early production phase when there was a general scarcity of manufactured goods in the market. Then, the major function of marketing was to make the products was to make the products widely available to the customers at aordable price.

134

Converse, Huegy and Mitchell observe Marketing includes activities involved in the ow of goods and services from production to consumption. Thus, the traditional concept of market is product oriented. Modern Concept: According to Staton Marketing is a total system of interacting business designed to plan, price, promote and distribute want satisfying products and services to present the potential customers. The marketing concept here focuses on the needs of the customer (i.e.) buyer. Problems of Marketing: Production is meaningless without market. All industries whether small or large face problems in marketing their products or services. Small scale industries are more plagued by the marketing problems. SSE has two main reasons conditioning the marketing of products. First small enterprises cannot withstand the cut throat competition in respect of quality, cost and standardization of the products with medium and large scale industries. Second, the small enterprises of our country neither have the full appreciation of the importance of marketing nor they employed and implemented eective marketing techniques in their enterprises. Market Assessment: Marketing is to produce what the customer wants. It is not very easy task to determine what the customers actually want. Any market is composed of large number of customers/consumers with varying backgrounds like education, income, preferences, likes and so on. Further these heterogeneous customers are spread over nearer and distant places of the enterprise. As a result there is a wide variation in their wants. The demand for the product by the target group must be estimated. Demand forecasting helps entrepreneur in this task. Demand Forecasting: The simplest denition of demand refers to the willingness and ability of customers to buy products or services. When we consider this denition for all the potential customers having both willingness and ability to buy a product it is termed as total market. Considering that an enterprise has its own operational area, the denition of demand can be narrowed as market demand given by Philip Kotler. Market Demand for a product is the total volume that would be bought by a dened customer group in a dened geographical area in a dened time period in a dened marketing environment under a dened marketing programme. There are number of techniques available for forecasting demand. The important ones are:

1. Survey Method - Based on data/information collection from the potential customers, dealers and people with expert knowledge about the customers/subject. 135

2. Statistical Method - Time Series Analysis and Regression Analysis widely used in estimating the demand for the product. 3. Leading Indicator Method - Is based on the fact that some indicators move up and down ahead of others. By observing their movement, the event which will follow them may be predicted. Market Segmentation: Grouping of buyers or segmenting the market is described as market segmentation - R.S.Davar. Market Segmentation is the sub-dividing of a market into homogenous subsets of customers where any subset may conceivably be selected on a market target to be reached with a distinct marketing mix Philip Kotler. In simple words, market segmentation is dened as the act of dividing the market into distinctive and homogenous groups of customers. The importance of market segmentation or target group is that it helps the entrepreneur in ne tuning his/her eorts to what the target group or customers want. The market segmentation can be carried out on the basis of most important variable such as 1. Geographical Variable - A rm need to classify its customers by rural - urban areas. Some rm may target its eorts in one state and some other in few states. 2. Demographical Variable - Classication include population variable like age, sex, marital status, number of children etc. 3. Educational Variable - Education itself creates certain dierence. On the whole, variation in the living styles of literate and illiterate people are quiet visible. 4. Income Variable - Income of the customers provides an important basis for segmentation. Level of income inuences quality and quantity of products demanded. 5. Psychological Variable - Classication based on personality, life style, tastes, interests etc. of the customers. Marketing Mix: The rms task is to nd the best settings for its marketing decision variables. The setting constitutes its marketing mix - Philip Kotler. Thus, the marketing mix is the tailoring the product, its price, its promotion and distribution to reach the target customers. In the present time, marketing mix has become as essential part of marketing management. 136

The fair well-knitting of four Ps (i.e.) the marketing mix is shown: 1. Price - This element of marketing mix consists of the policies and procedures relating to the price level, price specication and the price policy. 2. Product - The product consists of the policies and procedures relating to the product times to be oered and services to be rendered. It also includes research and development programs and the new product policy. 3. Promotions - This element includes special selling plans or devices directed at or through the trade, form of devices for consumer and trade promotion.

4. Place - This element includes policies and procedures relating to the channels to be used between the plant and the customers, the degree of selectivity of among wholesalers. Branding: The word branding haslts origin to the word brand. A brand is a name, word, symbol or a mark used to identify a product and to dierentiate it from the competitive products. A brand is a name, term, sign, symbol or design or a combination of them, intended to identify the goods or services of one seller or group of sellers and to dierentiate them from those of competitors American Marketing Association. Branding is a process of assigning a distinct name to the product so as to dierentiate it from the competitive products of similar nature. If the brand is given a name, it is called brand name. Eg: Colgate tooth paste, Liril soap etc. In order to have a unique identity amongst the competing products, each brand is assigned a mark called brand mark. A brand mark is a symbol or mark used for the purpose of identication of the product. 137

Picture of an elephant is a distinct frame used by the Department of Tourism, Government of India. When the brand name is registered under the Trade and Mercantile Act 1958, it is called Trade Mark. Advantages: Buyers: A brand generally denotes uniform quality of the product. It makes purchasing easier and reduces and eort involved therein. Purchasing branded products gives psychological satisfaction to the buyer. Sellers: Branding helps in identifying the product. It helps in carving out a niche for the product through product dierentiation. Branding helps in reducing selling cost by easing dependence on middlemen. Society: Branding ensures quality of product. It helps in better dissemination of product knowledge. Disadvantages: Buyers: Branded products become more costly to the buyers as brand development involves cost. Once the brand gains popularity, the manufacturer tends to reduce the quality of the product. Sellers: Developing and promoting a brand name involves money to be spent. Branding increases the cost of production leading to increase in prices. Seller nds it dicult to sell its product in the market among its rival products. Society: The brands enjoying the loyalty of the customer prevent the new producers from plunging into the market. 138

Packaging: Packaging is the art, science and technology of preparing goods for transport and sale. Thus packaging has two salient aspects: (1) It helps in the physical/transportation and sales of the products. (2) It performs the functions of selecting package design and packaging material. In other words, packaging means the activities of designing and producing the container or wrapper for a product. The container or wrapper is called package. Packaging has emerged as an industry: (1) rms which manufacture material for packages (via) paper, polyester, plastic tin etc. (2) rms which convert the packaging material into packages. Functions: 1. Production: Packaging should protect the product from damage in the process of transit, storage and use. 2. Appeal: Packaging should attract and appeal to the customers. 3. Performance: The package must perform the test for which is primarily designed. 4. Convenience: This is the fourth it should be very convenient to use (i.e.) opening and closure of the package. 5. Cost Eective: While deciding on package cost, cost incurred in storage and handling of the empty packages and lled packages, transports for distributing, losses due to breakage or spoilage of the product etc. should be taken into consideration. Advantages: It protects the product from damage in the process of transit, storage and use. A good packaging serves as a silent salesman and thus promotes sales. It reduces the cost of transportation and storage of the product. Packaging helps in identifying the product and thus saves the customers from the use of duplicate and spurious products. Disadvantages / Criticism:

The consumers often throw away the empty containers in public places which cause environmental problems. The use of some plastic packages and aerosol cans causes health hazards.

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Legal Dimension of Packaging: Leveling regulation needs to fulll the following: 1. Net weight of the package when packed. 2. Date of manufacture. 3. Date of expiry. 4. Maximum retail price including or excluding local taxes. 5. Directions of use. 6. Directions for storage. Pricing Policy: Meaning of price - Price goes by various names - freight, fare, license fee, tuition fee, professional charge, rent interest etc. Price is the money that customers must pay for a product or service. Pricing of the product is the art of translating into quantitative terms the value of a product to customers at a point of time. The key to pricing is to build value into product and price its accordingly. Pricing is one of the key elements of marketing mix:

1. Pricing covers all marketing aspects like the item-goods or services - mode of payment, methods of distribution, currency used etc. 2. Pricing may carry with it certain benets to the customers like guarantee, free delivery and installation, free alter sale servicing and so on. 3. Pricing refers to dierent prices of a product for dierent customers and dierent prices for the same customer at dierent times.

Factors Aecting Pricing: 1. Product Characteristics: By product characteristics (i.e.) the product life cycle, the product protability, the product substitution and demand postponability or the magnitude of the resistance. 2. Product Cost: The most important in determining price is the cost of the product itself. The cost optimization help in determining reasonable prices which provide equitable return on the cost employed vis-?-vis suits the customers buying power. 3. Objectives of the rm: Objectives set by the rm also inuence the prices of the product. 140

4. Competitive Situation: The magnitude of competition in the market aects prices. 5. Demand of the Product: The fact remains demand for the product concern is found exceptionally instrumental in guiding the pricing decision. As per the law of demand, if there is more demand for the product, prices will be high and vice versa. 6. Customers Behavior: The study of customer behavior bears relevance in marketing pricing decisions. 7. Government Regulations: While deciding pricing policy, the decision maker has to estimate the government regulations imposed from time to time to control the business activity in the country. Due Weightage should be assigned to such regulation like MRTP Act, Essential Commodities Act, Industries Development and Regulation Act etc. Pricing Methods/Policies: 1. Cost plus Method: The cost involved in the production of any product becomes the prime basis for determining its price. According to this method, the total cost (i.e.) xed cost and variable cost is worked out. Total cost (Fixed + variable) + Prot = Selling price 2. Skimming Price: A very high price is charged in beginning with a view to recover the cost involved within a shorter period of time. However the high promotion usually supports the high price. This policy cannot continue for a long period of time because high price of the product attracts other entrepreneur also to plunge into manufacturing. 3. Penetration Pricing: The pricing of the product is set at a lower level to penetrate into the public market. The underlying idea is an item to attract any many customers as possible at the very outset. 4. Market Rate Policy: This policy adopts the prevailing market rates for determining the price of the product. This method is used when the product is indistinguishable from those of the competitors. 5. Variable Price Policy: The price of the same product varies from customers to customers depending upon the situation prevailing in the market. This method is adopted with an objective is to maximize the prots. 6. Resale Price Maintenance (RPM): The manufacturers of the product xes price for the wholesalers and retailers. The retail prices of the product like drugs and detergents are printed on the package. However, the retail price is xed somewhat higher to meet the cost of ineciency retailers not selling the goods timely. 141

Distribution Channels or Channel Selection: Production is for consumption. Having produced the products, these need to be made available to the nal users of the product (i.e.) the consumers scattered in large geographical areas. Since, many a times it becomes extremely dicult, if not possible, to reach the customers on its own, the rm need the help of marketing intermediaries like wholesalers and retailers to reach their products to the ultimate/nal consumers. These intermediaries serve as channels to reach the product to the customers. A channel of distribution or marketing channel is the structure of intra-company organization units and extra company agents and dealers, wholesale and retail through which a commodity, product or service is marketed. R.S.Davar observes Distribution as an operation or a series of operations, which physically bring goods manufactured or produced by any particular manufacturer into the hands of the nal consumer or user. In fact channels of distribution are like pipelines which take the right quantities of the right product to the right location where the target consumers want them at the right time. This section, therefore, deals with the process how products go through this channel from the producer to the nal user. These distribution channels, in a way, refer to the methods of marketing also. In view of the number of intermediaries, distribution channels can be classied into three categories:

1. Zero Level Channel: When the distribution of the product is direct from the producer to the consumer or user. This is called direct selling. 2. One Level Channel: When the product is not sent direct from the producer to the consumer but the producer sells the product to the retailer who, in turn, sells to the consumer. This channel is also known as distribution through retailers. 3. Two Level Channels: When there are two levels of dierent kinds of intermediaries between the producer and the consumer. In other words, under this channel, the manufacturer sells the product to the wholesaler who sells to the retailer and who nally sells to the consumer. This is called distribution through wholesalers and retailers. All these channel can better be understood with the following gure:

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Distribution Channels Direct Selling: This method is also referred to as producer to consumer channel. Under this channel, the producer of goods attempts to make a direct contact with the ultimate user of goods by several methods of selling including door to door sales persons. This method is most common in industrial marketing particularly in respect of capital goods like industrial chemicals, heavy equipments etc. Direct selling to the consumers has the following advantages to the producers:

1. Close relationship to the consumers makes the producer constantly aware of change and other consumer needs. 2. Prot does not go to the middle man. 3. Direct selling is not so powerful because, it involves cumbersome diculties in providing and maintains inventories of goods at many locations to assure prompt delivery to the consumers. 4. The producer has to spend a handsome amount in the training, maintaining and supervision a large number of sales sta.

Producer to Retailer to Consumer Channel: This is a kind of indirect selling. This channel avoids wholesalers. It is suitable when products are perishable and speed in distribution is extremely essential. The goods that are frequently sold in this channel are fashion merchandise, product requiring installations high value goods etc. Producer to Wholesaler to Retailer to Consumer Channel: This channel is also known as the traditional channel. This is also the most common method of distribution under which the producer sells to the wholesalers, who, in turn, sells to the retailer, who nally sells to the consumer. In this system, 143

the wholesaler is granted a certain portion of the total prot, in turn for which he or she buy stores, sells, delivers and extends credits. This channel is invariably used in respect of groceries, drugs, drug goods etc. This channel option is particularly suitable to the following producers:

1. Who lack in nancial resources. 2. Whose product line is narrow. 3. Whose products are not subjects to fashion changes and physical deterioration but are durable.

Despite these features, this channel suers from certain limitation also. To mention (i) an over dependence on wholesales causes him/her (i.e.) the producer to lose contact with the dealers (ii) the wholesaler may have dierent products of dierent producers to sell. In such case, the wholesaler might be quiet unable to push up the sales of one specic product produced by the producer. Despite the various merits and demerits of all the three above mentioned channels, the producer to wholesaler to retailer to customer channel has been commonly used by most of the producer to distribute their products to the ultimate consumers. After going through the above description, an inevitable question arises in the mind in which one is the best suitable channel for distributing the products of a small enterprise. How to select a suitable Channel? The success or failure of an enterprise inter alia depends upon, to great extent, the selection of a suitable channel of distribution. There are number of factors that must be considered when a channel of distribution is to be selected. In practice, many choices are available, so a careful study is required before a decision could be reached that will t to the specic conditions of the enterprise to be the best channel of distribution. Some of the important factors to be kept in mind while selecting a distribution channel are:

1. Study the channels that are available, more especially those used by the competitors. 2. Determine the channel that will best match the salient characteristics of the product to be marketed. 3. Establishes the probable demand for the product. 4. Consider the available nancial resources. 5. Approximate the costs, sales and prots for each available channel. 6. Determine the size of the product line and amount of a typical order.

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How much crucial the selection of a suitable channel of distribution is for new product of a small enterprise is well testied by a grape juice enterprise. The juice was originally sold through food brokers who delivered exclusively to warehouses and only replenished retailers shelves once a month. This led to poor display and frequent out of stock situations. By replacing food brokers with distributors who delivered the beverages to stores several times a week. Thus, grape juice producer transformed his marginal product into a highly successful one by selecting the most suitable channel of distribution for his (juice) product. Growth Strategies / Product Launch: Introduction: A successful new entry provides the opportunity for the entrepreneur to grow his/her business. For example, introducing a new product to an existing market provides the opportunity to take market share from competitors, entry into a new market provides the opportunity to service a new group of customers and a new organization has a chance to make and build up on its rst sales. Objectives of Growth: Growth ensures the survival of the business even in adverse and hard times. The big size of business facilitates the use of technology. The benets of business motivate a small enterprise to grow big. The personal factors of the entrepreneurs also lead to growth of business. Stages of Growth: Business enterprises also pass through dierent stages in their lives. This is called Enterprise Lifecycle.

1. Startup Stage: This refers to the birth or emergence of a business enterprise in the economy. The production takes place in a limited scale. Scale is limited to smaller area. This enterprise is not faced with any type of competition during this stage. Prots may not be earned during the startup stage. 2. Growth Stage: During this stage, the enterprise is known to and accepted by the market. Production and sales increase yet supply falls short of demand for the product market. The enterprises at this stage try to change its strategy from buy my product to try my product. 3. Expansion Stage: This is the stage which business enterprise expands by way of opening its branches and introducing new product lines. Business activities at this stage are diversied to reap the best benets from the available business opportunities. 145

Stages of Small Business Growth

4. Maturity Stage: During this stage, due to keen competition, sales increases but at a decreasing rate. As a result, prots tend to decline. In such situation, marginal enterprises start leaving the scene/market. Some enterprises adopt methods such as trading in to survive for more time in the market. 5. Decline Stage: This is the nal/last change of stage of business enterprises. At this stage, the enterprises nd it dicult to survive either due to the gradual replacement of enterprise product or due to some new innovations or on account of change in customer behavior sales drop abruptly. Enterprises start incurring losses at an increasing rate. Enterprises prefer to close their shutters. Thus, we know the metamorphoses takes place in an enterprise at every stage of its growth. An entrepreneur faces critical problems at every stage. Therefore, requires distinct strategies to overcome the problems. Growth and expansion stages can be clubbed together as Growth Strategies. Types of Growth Strategies: The term strategy is a well planned course of actions devised to achieve an objective. Growth strategy means a well designed scheme meant to expand business operations. Growth strategy means a plan to help the enterprise grow big in course of time. Growth strategies are broadly classied into two types: 1. Internal Growth Strategy: These imply that enterprises grow their own without joining hands with other enterprises. Expansion and diversication have been the popular forms of internal growth strategies 146

2. External Growth Strategy: In case of external strategy, enterprises grow by joining hands with other enterprises. The forms of external growth strategy include joint ventures, mergers and subcontracting.

In this way, the main strategies of growth can be listed as follows:

1. Expansion Expansion is one of the forms of internal growth of business. It means enlargement or increase in the same line of activity. Expansion is the natural growth of business enterprise taking place in course of time. In case of expansion, the enterprise grows its own without joining hands with any other enterprise.

There are three forms of business expansion.

1. Expansion through Market Penetration: It means the enterprise increases the sales of its existing product by enlarging the existing market. In other words, market penetration means making deeper in roads in the existing market. Various schemes are launched to penetrate into an existing market. The scheme of exchanging an old scooter for new one introduced by LML, for example in the form of market penetration. 2. Expansion through Market Development: It implies exploring new markets for the existing product. In order to increase the sale of existing product, the enterprise makes searches for new customers. 3. Expansion through Product Development and or Modication: It implies developing our modifying the existing product to meet the requirements of the customers. Introduction of plastic bottles for selling rened oil in addition to its loose sales is an example of product development / modication.

Advantages:

Growth through expansion is natural and gradual. Enterprise grows without making major changes in its organizational structure. Expansion makes possible the eective utilization of existing resources of an enterprise. Gradual growth of enterprise becomes easily manageable by the enterprise. 147

 Expansion results in economics of large scale operations.

Disadvantages: Growth being gradual is time consuming. Expansion is the same line of product delimits enterprise, growth making enterprise unable to take advantages from new business opportunities. The use of modern technology is limited due to limited resources at the disposal of enterprise. It weakens the competitive strength of the enterprise. 1. Diversication: Diversication strategies involve selling a new product to a new market. A business cannot grow beyond a certain point by concentrating on the existing product/market only. In other words, it is not always possible for a business to grow beyond a certain point through market penetration. This underlines the need for the adding new products/market to the existing one. Such an approach to growth by adding new products to the existing market/product line is called diversication.

Eg: Kelvinator India Limited - private sector which was originally a refrigerator manufacturer, diversied into product line into mopeds. Larsen and Turbo, an engineering company diversied into cement. LICs diversication into mutual funds and SBI into merchant banking - public sector. Advantages: Diversication helps an enterprise make more eective use of its resources. Diversication also helps minimize risk involved in the business. Diversication adds to the competitive strength of the business. Diversication also enables an enterprise to tide over business uctuations and thus, ensures smooth running of the business.

Disadvantages: Diversication involves business reorganization which requires additional resources. Thus, diversication becomes a costly proposition. It becomes dicult, is not impossible to eectively manage and coordinate the diverse business. 148

Types of Diversication:

1. Horizontal Diversication: In this type of diversication the sonic type of product out market is added to the existing ones. Adding refrigerators to its original products of steel safes and locks by Godrej is an example of horizontal diversication. 2. Vertical Diversication: Complementary products or services are added to the existing product or services line of the enterprise. The new products or services serve either as inputs or as a customer for the rms own product. A TV manufacturer may start producing picture tubes needed by it. 3. Concentric Diversication: In case of concentric type of diversication, an enterprise enters into the business related to its present one in terms of technology, marketing or both. Nestle, originally a baby food producers entered into related products like tomato ketchup, magi noodles. 4. Conglomerate Diversication: This type of diversication is just contrary to concentric diversication. In this type of growth strategy, an enterprise diversies into the business which is not related to its existing business in terms of technology nor marketing. Godrej manufacturing steel safes and shaving cream are example of conglomerate diversication.

Joint Venture: Joint venture is a type of external growth strategy adopted by business rms. In simple terms, joint venture is a restricted or a temporary partnership between two or more rms to undertake jointly to complete a specic venture. The parties who enter into agreement are called co-ventures and this joint venture agreement will come to an end on the completion of the work for which it was formed. The coventures participate in the equality and operations of the venture/business. The prots or losses are shared between the co-ventures in their agreed ratio and in the absence of such agreement; the prots or losses are equally shared. In general, joint venture is formed for the purpose of consigning the goods from one place to another, undertaking contracts for construction works, underwriting of shares or debenture of joint stock companies etc. Advantages:

Joint venture reduces risk involved in business. It helps increase competitive strength of the business. It makes possible the use of advanced technology and know-how not available within a rm. Joint venture provides the benets of scale of economy by reducing production and marketing costs, on the one hand and by increasing sales volume on the other. 149

Merger: Merger is yet another form of external growth strategy. Merger means combination of two or more existing enterprises into one. When two or more existing enterprises are combined into one is called a Merger. Merger may takes place in two ways. First, an enterprise or enterprises may be acquired by another, usually a big one. It is called absorption.Second, when two or more existing enterprises merge into one to form a new enterprise, it is called amalgamation. Thus, while no new enterprises are formed in case of former, a new enterprise is formed in case of latter. Usually, mergers are classied into four categories: 1. Horizontal Merger 2. Vertical Merger 3. Concentric Merger 4. Conglomerate Merger Advantages: It provides benets of economies of scale in terms of production and sales. It facilitates better use of resources. It enables sick enterprises to merge into healthy ones. It also promotes diversication product line to take advantages of opportunities available in the particular business. Disadvantages: Larger scale operations often make co-ordination and control ineective. This adversely aects business performance as a whole. Sometimes merger leads to monopoly in the particular business. Monopoly is not welcome in the interest of the society. Sub Contracting: Sub contracting is a mutually benecial commercial relationship between the two companies. This is known as Ancillarisation in India and more generally as sub contracting. 150

A sub contracting relationship exists when a company (called a contractor) places an order with another company (called the sub contractee) for the production of parts; components sub assemblies or assemblies to be incorporated into a product sold by the contractor. Such orders may include the processing, transformation or nishing of materials or parts by the sub contractor at the request of the contractor. In practice, large scale industries do not produce all goods on their own; instead they rely on small scale enterprises called sub contractors for a great deal of production. When the work assigned to small enterprises involves manufacturing works, it is called industrial sub contracting. In other cases, it is known as commercial sub contracting. It is not unusual for sub contractors to work for more than one contractor. Advantages:

1. It increases production in the fastest way without making much eort. 2. The contractor can produce products without investing in plant and machinery. 3. Sub contracting is particularly suitable to manufacture goods temporarily. 4. It enables the contractor to make use of technical and managerial abilities of the sub contractors. 5. Despite leading to dependence, sub contracting ensures existence of sub contractors by providing them business. 6. Sub contracting makes the core rms more exible in their production.

Disadvantages:

1. It does not ensure the regular and uninterrupted supply of goods to the core rms (i.e.) contractors which adversely aect the functioning of the core rms. 2. Goods produced under sub contracting system are often qualitatively inferior. 3. Sub contracting also delimits the expansion and diversication of the core rms. 4. Delays in payments, a common feature by the contractor to the sub contractors endangers the very survival of the later.

Sub Contracting or Ancillarisation in India: In India, sub contracting in the form of Ancillarisation of ancillary units has been receiving government support since sixties. An ancillary unit is one which sells not less than 50% of its manufacturer to one or more industrial units, presumably large units. The government has been repeated aduising public sector undertakings to ensure that a large number of items are farmed out of manufacture by small scale 151

units. In order to encourage sub contracting system, an important development in this area has been the establishment of sub contracting exchanges at the Small Industries Service Institutes (SISIs) all over the country. These exchanges maintain up-to-date information on the unutilized capacities of the small scale enterprises and then match these with the requirements of the large scale industries. Thus, these exchanges ensure orders for the small scale enterprises from the large units. In India, commercial sub contracting and interdependence between localized communities of small enterprise is found in existence around specialized industries. The diamond polishing and garments industries are such examples. In the recent past, the concealed industrial sub contracting has also risen substantially in India. The pronounced rise in employment share but not in income share of the unorganized sector is an indicator of such phenomenon. Franchising: Franchising is as an arrangement whereby the manufacturer or sole distribution of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures. Franchiser: The person oering the franchise is known as the franchiser. Franchisee: The franchisee is the person who purchases the franchise. Franchise: According to David D.Settz A franchise is a form of business ownership created by contract whereby a company grants a buyer the rights to engage in selling or distributing its products or services under a prescribed business format in exchange for royalties or shares of prots. The buyer is called the franchisee and the company that sells right to its business concept is called franchise. Types of Franchising:

1. Territorial Franchise: In this, franchisee has authority over a territory which may be a city, state or country. 2. Operating Franchise: Refers to an independent business which has a franchise. 3. Mobile Franchise: The franchise, selling products from a moving vehicle. 4. Distributorship: An exclusive coverage of a geographical area for distributing the products and also as a supply house for the franchisees. 5. Co-management: In it the franchiser has majority of investment and he/she and the partner manager 152

share prots proportionality. 6. Leasing: The franchiser can lease the land, building and equipments to the franchisees. 7. Licensing: In this franchisee has a license to use the franchisers trademarks and business techniques. 8. Manufacturing: The franchisee has a license to manufacture and distribute the franchisers product. 9. Service: In this type, the franchiser provides a pattern of professional service which a franchiser supplier.

Franchiser: Franchising transactions can involve dierent levels in the manufacturing and distribution of goods and services. In this, there are four types of franchises:

1. Manufacturers and wholesalers 2. Manufacturers and retailers 3. Wholesalers and retailers 4. Retailers and retailer.

Advantages of Franchiser:

1. Small central organization can earn prot without large capital investment. 2. Growth with less capital investment. 3. Minimum of risk capital. 4. Explain the knowledge of the franchisees. 5. Exploits the local knowledge of the franchisees. 6. Less sta problems. 7. Local management is motivated. 8. Wider distribution. 9. Handle accounts on a national basis.

Disadvantages of Franchiser: 153

1. Franchisee may feel independent and not require franchiser quickly. 2. Franchiser has to ensure that standards are maintained throughout the chain. 3. Franchiser has to educate and motivate franchisee to accept its suggestions. 4. May arise a lack of trust. 5. Creation of possible future competitors. 6. Diculty in selection of suitable persons. 7. Diculty in getting cooperation. 8. Problem of communication. 9. Conicts if franchisee has many businesses.

Advantages of Franchisee:

1. Gets basic training. 2. Owns his own business. 3. Benets of a name and reputation. 4. Receives assistance in site selection, planning, training, purchase of equipment etc. 5. Needs less capital compared to without franchising. 6. Benet from franchiser advertising and promotion. 7. Benet of the bulk purchasing. 8. Can tap the specialization of franchiser. 9. Risk is reduced.

Disadvantages of Franchisee: 1. Controls over the quality of the service or goods. 2. Payment of franchisee fear. 3. Diculty in assessing quality of the franchiser. 4. Dependency on the franchiser. 154

5. Restriction on assignment. 6. Franchisers policy may aect the protability. 7. Franchiser may make a mistake. 8. Brand image may become less reputable.

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UNIT V

MANAGEMENT OF SMALL BUSINESS

Introduction In common term sickness means unhealthy like that during the course of its operation, sometimes a small enterprise falls sick. So sickness is not good to either man nor for enterprise. So, we are going to see the various cause and remedies to overcome sickness. Concept of Industrial Sickness: In common expression sickness means not being healthy. A healthy unit is one which earns a reasonable return on capital employed and which builds up receives after providing reasonable return on capital invested and creates reserves after providing reasonable return on capital invested and created reserve after providing for depreciation. According to the RBI(Reserve Bank Of India): A sick is one which incurs heavy cash losses for one year and, in the judgement of the bank, it is likely to continue to incur cash losses for the current year as well as for the following year. The unit has an imbalance in its nancial structure such as current ratio, working debt equity ratio i.e., the ratio to total out-side liabilities to the net-worth. When the cumulative losses exceed capital and reserve.

Thus the emphasis in the Reserve Bank of Indias denition of sickness is on protability, liquidity and solvency. The Sick Industries Companies (Special provisions) Act,(SICA), 1985 denes a sick industry as an industrial company which has at the end of any nancial year accumulated losses equal to (or) exceeding its entire net worth and has also suered from cash losses in such nancial year immediately preceding such nancial year The study team of the State Bank of India(SBI) 1972 in its report on small scale industry advances denes a sick unit as One which falls to generate as internal surplus on a community basis and depends on its survival upon frequent infusion of external funds. Magnitude of Industrial Sickness: The global experience indicates that in the process of economic and industrial development, a certain level of industrial sickness is inevitable to exist as the in euent units are bound to be displace from the 156

industrial scene by more ecient one. For instance during the period 1972-1983, the number of bankruptcies per annum has increased from around 10,000 to more than 25000 in the United States, from less than 7000 to around 20,000 in Japan, from around 4000 to more than 10,000 in West Germany and from 3000 to more than 12,000 in the U.K. In case of India sickness of small scale industries has grown rapidly in the recent years and has assumed alarming proportions. In 1980-81, while non-small sale industry sick units experienced an increase of 67%. Only smallscale industry sick unit recorded an increase of 87% .The sickness of small scale industries in India can be restricted to particular area (or) it may be wide spread to other areas. The incidence of sickness in small scale units assumed alarming proportion during the eighties. To quote, the ratio of the sick small units to total small units trailed at 1:20 which reached to 1:5 by 1988. High incidence of sickness is due to liberalization policy of the government of India declared during the sixth and seventh ve year plan. Due to this numerous small scale units came into existence resulting in more and more competition amongst them. The units which could not with stand to the tough market competition fell sicks. Today, there is one sick small unity out of every ten small units. In the year 1998(march) the total number of sick SSI units was 2, 21,536. There are 1, 99, 634 non-viable units with outstanding bank credit at Rs. 3, 296.58 crore. The banks have yet to decide on viability of the remaining 3216 units with outstanding bank credit at Rs. 104.10 crore.Bank have so far put 13 , 063 units under nursing programs. The information Minister of Finance, government of India, Economic survey of respective years has state the viability states of sick small scale units. PROCESS, SIGNALS AND SYMPTOMS OF SICKNESS: PROCESS: The process of industrial sickness can be presented in dierent ways. According to Bidani and Mitra, the process of industrial sickness as,

1. Normal unit 2. Tending towards sickness 157

S. No 1.

Description Total number of sick small units

June 1987 204259

December 1988 240573

March 1990 218828

March 1991 221472

March 1998 221536

2.

No. of units for which viability assessment has been made

199318

237113

2165113

219138

218320

3. 4.

No. of units found viable No. of units found nonviable

12484 186834

13033 224080

16451 200092

16140 202998

18686 199631

5.

Percentage of viable units to total sick units

6.1

5.4

7.5

7.3

8.4

6.

Outstanding bank credit for unit found viable(Rs. crore)

359.5

471.92

590.50

693.10

77931

7.

Percentage of viable units in total bank credit given to sick unit

21.7

22.0

24.3

24.8

21.6

8.

Unit under nursing programme

8470

7788

12160

13224

1306

9.

Percentage of units under nursing programmes total viable units

67.8

3. Incipient sickness 4. Sickness

Normal unit: Functional area is normal and ecient generating prot, current ratio is more than one. Tending towards sickness: Networth is positive Debt-equity ratio is satisfactory initial abbreviation in some of the functional areas decline in prot during last year losses anticipated in current year. 3. Incipient sickness: Deterioration in the functional area continues cash losses incurred in last year are exe4xted in current year. Although current ratio in more than one during last year. Sickness: Deterioration anticipated in debt-equity ratio during current year. Unit functional areas 158

have become inecient, cash loses incurred in last year, expected in current and next year current ratio is less than one and worsening of debt-equity ratio. According to srivastava and yadav the process of industrial sickness as, (Health unit cash prot + Networking capital + Networth)(Tending towards sickness cash prot networking capital networth)(Incipient of sickness two or more)(Sick all) SIGNALS OF INDUSTRIAL SICKNESS: There are in number of signals of industrial sickness. The important signals of Sickness are: Reduce in capacity utilization. Scarcity of liquid funds to met short term nancial attributes. Inventories in excessive quantities. Non-submission of data to banks and nancial institution Irregularity in maintaining bank accounts Continuous breakdown in plant and equipments Reduce in quality of product or service rendered Non-payment of statutory dues such as provident fund, sales tax, excise duty, etc., Delay in correcting technical dening Frequent labor turnover in the industry

SYMPTOMS OF INDUSTRIAL SICKNESS: The symptoms of sickness arrive from various signals over a long period of time. Some of the symptoms are, Shortage of cash Deteriorating nancial ratio Wide spread usage of creative accounting The price of share decline continuously Frequent request to banks and nancial institutions Default in payment of compulsory dues 159

 Delay in audit of annual accounts Humiliated in the employees role Disparities among the top and middle level management

CAUSES AND CONSEQUENCES: Causes for industrial sickness are: The causes of industrial sickness cannot be attributed to a single factor alone. It is a cumulative of many factors which may be closely inter-related with each other. The caused for industrial sickness can be broadly classied into

1. Internal or Endogenous causes 2. External or Exogenous causes

INTERNAL CAUSES: Internal cause which aects the industry are related to organization, structure, production, channel, distribution channels, technical know how etc. the following are internal enterprise problems which inuence industrial sickness.

Choice of wrong and defective idea of industry People structure of the industry Poor management prevailing in the industry Poor quality maintenance and production capacity Bad marketing ability of the industry Lack of horizontal and vertical integration Poor utilization of capacity Lack of managing strategies Policy planning in various functional departments Poor project implementation and handling of labor Inadequate training in sicks 160

 Poor and close organization EXTERNAL CAUSES: External causes are those factors beyond the control of the industries. Some of the important external factors causing industrial sickness are, Changes in the 8industial policies of the government from time to time. Lack and shortage of demand for the project Inadequate and untimely availability of necessary inputs like raw materials power, transport and the skilled labor. Recessionary trends hovering in the economy Shortage of working capital Continuous industrial strikes and labor unrest Natural calamities like drought oods etc. CONSEQUENCES OF INDUSTRIAL SICKNESS: The important consequences of industrial sickness are as follows, Substantial investment in sick units causes a great national loss in the form of wastage of scarce resources and decline in production (great losses to nancial institutions) Industrial sickness causes a great loss to inter depended entrepreneur and investors Industrial unrest, sick industrials units often delay pay to their sta. As a result strikes, lockouts and other forms of industrial unrest occur Closure of sick and non-viable industrial units causes widespread unemployment in the country Government gets sizeable proportions of its revenue by way of taxes and duties levied on industrial unit. Ultimately this reduction aects various socio and economic development in the country *CORRECTIVE MEASURES: The sickness of small scale industries can be corrected through the following measures. Usually rehabilitation to sick concern are provided only in the nancial form but problems like marketing power and raw materials are ignored. These problem should be given equal weight. 161

 Bank and nancial institutions should periodically review the accounts of small scale industries borrowers to identify units which are becoming sick or promote sickness The government of India should be requested to direct commercial bank and nancial institutions to provide information on sickness to the agencies like BIFR(Board for industrial and nancial reconstruction) implementing the rehabilitation program to facilitate them to take appropriate action The past experiences indicate that many industrial units falls sick because of the improper opportunity scanning made by the entrepreneur themselves. Therefore necessary training program (EDP) must be given to the entrepreneur.

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