INTRODUCTION

Finance is the life-blood of industry and is a pre-requisite for accelerating the process of industry development. Especially in case of small-scale Industries, the finance is the key input of growth and development. The development of small-industries has been considerably hampered by several factors, such as lack of adequate supply of different types of credit and equity capital. Small enterprise generally do not have access to the capital market i.e., financial institutions because of their poor credit risk. Generally these industries have to bank on their own resources and are some times forced to turn to indigenous bankers and other non institutional sources. Break-even analysis is a technique widely used by production management and management accountants. It is based on categorizing production costs between those which are "variable" i.e., costs that change when the production output changes and those that are "fixed" i.e., costs not directly related to the volume of production. Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss.

Features of Break Even

Break-Even Is the Volume Where All Fixed Expenses Are Covered : We can start a break-even analysis by establishing all the fixed overhead expenses of your business. Since most of these are done on a monthly basis, dont forget to include the estimated monthly amount of line items that are normally paid on a quarterly or annual basis such as payroll taxes or insurance. For example, if our annual insurance charge is $9,000, use 1/12 of that, or $750 as part of our monthly budget. With the semi variable expense such as phone charges, travel, and marketing, use that portion that you expect to spend each and every month.For the purpose of a model break-even, lets assume that the fixed expenses look as follows: Administrative salaries Rent Utilities Insurance Taxes Telephone Auto expense Supplies Sales and marketing Interest Miscellaneous Total $1,500 800 300 150 210 240 400 100 300 100 400 $4,500

These are the expenses that must be covered by your gross profit. Assuming that the gross profit margin is 30 percent, what volume must you have to cover this expense? The answer in this case is 15,00030 percent of that amount is $4,500, which is your target number. The two critical numbers in these calculations are the total of the fixed expense and the percentage of gross profit margin. If your fixed expense is $10,000 and your gross profit margin is 25 percent, your break-even volume must be $40,000. This is not a Static Number : You may do a break-even analysis before you even begin your business and determine that your gross margin will come in at a certain percentage and your fixed expense budget will be set at a certain level. You will then be able to establish that your business will break even and then go on to a profit at a certain level of sales volume. But your prestart projections and your operating realities may be very different. After three to six months in business, you should compare projections to the real-world results and reassess, if necessary, what volume is required to reach break-even levels. Along the way, expenses tend to creep up in both the direct and indirect categories, and you may fall below the break-even volume because you think it is lower than it has become. Take your profit and loss statement every six months or so and refigure your break-even target number. Ways to Lower Break-Even : There are three ways to lower your break-even volume, only two of them involve cost controls which should always be your goal on an ongoing basis. 1. Lower direct costs, which will raise the gross margin. Be more diligent about purchasing material, controlling inventory, or increasing the productivity of your labor by more cost effective scheduling or adding more efficient technology. 2. Exercise cost controls on your fixed expense, and lower the necessary total dollars. Be careful when cutting expenses that you do so with an overall plan in mind. You can cut too deeply as well as too little and cause distress among

workers, or you may pull back marketing efforts at the wrong time, which will give out the wrong signal. 3. Raise prices! Most entrepreneurs are reluctant to raise prices because they think that overall business will fall off. More often than not that doesnt happen unless you are in a very price-sensitive market, and if you are, you really have already become volume driven. But if you are in the typical niche-type small business, you can raise your prices 4 to 5 percent without much notice of your customers. The effect is startling. For example, the first model we looked at was the following: Volume direct cost gross profit $15,000 10,500 4,500 70%

Raising the prices 5 percent would result in this change: Volume direct cost gross profit $15,750 10,500 5,250 67%

You will have increased your margin by 3 percent, so you can lower the total volume you will require to break even. The Goal Is Profit : You are in business to make a profit not just break even, but by knowing where that number is, you can accomplish a good bit: You can allocate the sales and marketing effort to get you to the point you need to be.

 Most companies have slow months, so if you project volume below breakeven, you can watch expenses to minimize losses. A few really bad months can wipe out a good bit of previous profit. knowing the elements of break-even allows you to manage the costs to maximize the bottom line. Once you have gotten this far in the knowledge of the elements of your business, you are well on your way to success.

Important Terms used in Break Even Analysis

Fixed Costs Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of investment in production capacity e.g. adding a new factory unit or through the growth in overheads required to support a larger, more complex business. Examples of fixed costs: - Rent and rates - Depreciation - Research and development - Marketing costs (non- revenue related) - Administration cost Variable Costs Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labor fuel and revenue-related costs such as commission. A distinction is often made between "Direct" variable costs and "Indirect" variable costs.

Direct variable costs are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre. Raw materials and the wages those working on the production line are good examples. Indirect variable costs cannot be directly attributable to production but they do vary with output. These include depreciation where it is calculated related to output - e.g. machine hours, maintenance and certain labor costs. Contribution : Contribution is the profit before adjusting fixed cost. If the contribution is more than the fixed cost then there will be net profit and if it is less than the fixed cost then there will be net loss. Contribution = Sales Variable Cost = Fixed Cost + Profit = Sales * Profit Volume Ratio Profit Volume Ratio : When the contribution from sales is expressed as a percentage, it is known as profit volume ratio. It is expressed as a relationship between contribution and sales. This ratio reflects the change in profit due to the change in volume. PV Ratio remains constant at different levels of operation. Change in fixed cost does not result to change in PV ratio. PV Ratio = Sales Variable Cost * 100 Sales = Fixed Cost + Profit / Sales * 100 = Change in Profit / Change in Sales * 100 Margin of Safety : Margin of safety is the difference between the actual sales and sales at break-even point. Larger margin of safety indicates stronger business. Such business can continue to earn profits even if the sales decreases.

Margin of Safety = Profit / PV Ratio = Actual Sales Breakeven sales Break-even : The Break-Even Point is where Total Costs equal Sales. In the CostVolume-Profit Analysis model, Total Costs are linear in volume. In economics, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". Therefore has not made a profit or a loss. Benefits of Break-even Analysis : The main advantage of break-even analysis is that it explains the relationship between cost, production volume and returns. It can be extended to show how changes in fixed cost-variable cost relationships, in commodity prices, or in revenues, will affect profit levels and break-even points. Break-even analysis is most useful when used with partial budgeting or capital budgeting techniques. The major benefit to using break-even analysis is that it indicates the lowest amount of business activity necessary to prevent losses.

Steps to do a Break Even Analysis

1. Determining when your business revenue equals your cost : If you can accurately forecast your cost and your sales, conducting a break even analysis is a matter of simple maths. A company has broken even when its total sales or revenues equal to its total expenses.At the breakeven point no profit has been made, nor have been any losses been incurred. This calculation is critical for any business owner, because the breakeven point is the lower limit of profit when determining margins.

2. Defining Costs : There are several types of costs to consider when conducting a break even analysis, so heres a refresher on the most relevant. 3. Setting a Price : This is critical to your breakeven analysis; you cant calculate likely revenues if you dont know what the unit price will be. Unit price refers to the amount you plan to charge customers to buy a single unit of your product Psychological Pricing : Pricing can involve complicated decision making on the part of consumers and there is a plenty of research on the marketing and the psychology of how consumers perceive price. Pricing Methods : There are several different schools of thought on how to treat price when conducting a break even analysis. It is a mixture of quantitative and qualitative factor. You should be able to charge a premium price, but if you are entering a competitive industry, you will have to keep the price in line with the going rate or perhaps even offer discount get the customers switch to your company. One common strategy is cost based pricing which calls for figuring out how much it will cost to produce one unit of an item and setting the price to that amount plus a pre-determined profit margin. Another method, is referred to by David G. Bakken of Harris interactive as price based costing encourages business owners to start with price that consumer are willing to pay and whittle down cost to meet that price.

Break-even Point calculation

The Break-even Point is, in general, the point at which the gains equal the losses. A break-even point defines when an investment will generate a positive return. The point where sales or revenues equal expenses. Or also the point where total costs equal total revenues. There is no profit made or loss incurred at the break-even point. This is important for anyone that manages a business, since the break-even point is the lower limit of profit when prices are set and margins are determined. Achieving Break-even today does not return the losses occurred in the past. Also it does not build up a reserve for future losses. And finally it does not provide a return on your investment i.e., the reward for exposure to risk. The Break-even method can be applied to a product, an investment, or the entire company's operations and is also used in the options world. In options, the Break-even Point is the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a Call, it is the strike price plus the premium paid. For a Put, it is the strike price minus the premium paid. Calculation of the BEP can be done using the following formula: BEP = TFC / (SUP - VCUP) where:

BEP = break-even point (units of production) TFC = total fixed costs, VCUP = variable costs per unit of production, SUP = selling price per unit of production.

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines:

In the diagram above, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.

Assumptions of Break Even Analysis : It assumes that fixed costs (FC) are constant It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. It assumes that the quantity of goods produced is equal to the quantity of goods sold i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period. In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant i.e., the sales mix is constant. It assumes costs can be classified into fixed and variable categories. Selling per unit remains constant. Market is sufficient to absorb the entire output. Limitations of Break Even Analysis : It is best suited to the analysis of one product at a time. It may be difficult to classify a cost as all variable or all fixed; and There may be a tendency to continue to use a break-even analysis after the cost and income functions have changed. Selling price may not always remain constant. The assumption regarding production and sales does not realize in practice. It assumes that fixed cost remains constant. However, in practice it may change. Variable cost may not vary in direct proportion to the volume.

Four Models For Calculating Price

As it was said earlier , there is no one right way to calculate your pricing. Once youve considered the various factors involved and determined your objectives for your pricing strategy, now you need some way to crunch the actual numbers. Here are four ways to calculate prices: 1. Cost plus pricing Set the price at your production cost, including both cost of goods and fixed costs at your current volume , plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs , and at current sales volume (or anticipated initial sales volume) ,your fixed costs come to $30 per unit. Your total cost is$50 per unit. You decide that you want to operate at a 20% markup , so you add $10 (20% x $50) to the cost and come up with a price $60 per unit. So long as you have your costs calculated correctly and have accurately predicted your sales volume , you will always be operating at a profit. 2. Target return pricing- Set your price to achieve a target return-oninvestment (ROI). For example, lets use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year . You want to recoup all your investment in the first year ., so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit. 3. Value based pricing- Price your product based on the value it creates for the customer .this is usually the most profitable form of pricing , if you can achieve it. The most extreme variation or, this is pay for performance pricing for services, in which you charge on a variable scale according to the results you achieve. Lets say that your widget above saves the typical customer $1,000 a year in, say energy costs. In that case, $60 seems like a bargain may be even too cheap . If your product reliably produced that kind cost savings, you could easily charge $200, $300 or more for it , and customers would gladly pay it , since they would get their money back in a matter of months. However, there is one more major factor that must be considered.

4. Psychological pricing - Ultimately , you must take into consideration the consumers perception of your price, figuring things like: Positioning - If you want to be the low-cost leader, you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of your competition. Popular price points - There are certain price points(specific prices) at which people become much more willing to buy a certain type of product . For example, under $100 is popular price point.Enough under $20 to be under $20 with sales tax is another popular price point, because its one bill people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast food places have a $0.99 value menu). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

Fair pricing - Sometimes it simply doesnt matter what the value of the product is, even if you dont have any direct competition. There is simply a limit to what consumer perceive as fair. If its obvious that your product only cost $20 to manufacture , even if it delivered $10,000 in value , you d have a hard time charging two or three thousand dollars for it people would just feel like they were being gouged . A little market testing will help you determine the maximum price consumers will perceive as fair. Now, how do you combine all of these calculations to come up with a price? Here are some basic guidelines: i. Your price must be enough higher than costs to cover reasonable variations in sales volume. If your sales forecast is inaccurate, how far off can you be and still be profitable? Ideally , you want to be able to be off by a factor of two or more (your sales are half your forecast) and still be profitable.

ii.

iii.

You have to make a living. Have you figured salary for yourself in your costs? If not ,your profit has to be enough for you to live on and still have money to reinvest in the company. Your price should never be lower than your costs or higher than what most consumers consider fair. This may seem obvious, but many entrepreneurs seem to miss this simple concept, either by miscalculating costs or by inadequate market research to determine fair pricing. Simply put, if people wont readily pay enough more than your cost to make you a fair profit, you need to reconsider your business model entirely. How can you cut your costs substantially? Or change your product positioning to justify higher pricing?

iv.

Pricing is a tricky business. Youre certainly entitled to make a fair profit on your product, and even a substantial one if you create value for your customers. But remember, something is ultimately worth only what someone is willing to pay for it.

SMALL SCALE INDUSTRIES

Small scale industries are the backbone of Indian industrial structure. They provide a variety of non-traditional low technology product. They also engage in the processing, preserving, manufacturing and servicing activities. Small scale industries (SSIs) constitute an important and crucial segment of industry sector. Promotion and growth of SSI sector has been an important feature in Indian industrial policy. SSI plays a crucial role in the process of economic development by value addition, employment generation, equitable distribution of national income, regional dispersal of industries, mobilization of capital and entrepreneurial skills and contribution to export earnings. SSI has all the characteristics of the decentralized sector such as small size and employment intensity and the entire lot belongs to private sector. The contribution of SSI sector to employment is next only to agriculture as a dynamic and vibrant sector of economy.

SSI needs a small gestation period and relatively smaller market to be economic. They need lower investments and facilitate and effective mobilization of resources of capital and skill which might otherwise remain unutilized. The development of SSIs is an integral part of the overall economic social and industrial development of a country. The government has given due importance to this sector of economy to eradicate mass poverty and to ensure a better standard of living to the people.

Characteristics of Small Scale Industries

1) Small Capital Investment: Small-scale industries require less capital as compared to medium or large-scale industries. Cottage industries require very little capital. An artisan family could start their business with just a few hundred rupees. 2) Generate Employment: Small-scale industries are generally labour intensive and hence create employment opportunities which is the need of the hour. It is very helpful in a developing country like India where we have a lot of underemployment problems.

3) Personal Contact: There is a personal supervision of all the activities i.e., production, purchase, labour and marketing of goods and it is done by the entrepreneur himself. 4) Location: Small-scale industries are generally located in rural and semi urban areas. They can be easily located anywhere provided raw material, labour and finance are easily available. 5) Exploitation of Human Resources: Child and woman labour in particular are exploited by small-scale industries. The exploitation takes place in industries located in these industries. 6) Entrepreneurial Growth: Small-scale industries activity is a beehive of entrepreneurship. The small-scale industrial activity has been growing has been growing at faster rate even then the large scale sector.

7) Technology: Small-scale industries do not require high level of technology. Indigenous technology is used as far as possible. Being labor intensive not much of capital is needed. 8) Dispersal of Manufacturing Activity: The metropolitan cities have become congested. Small-scale industries make it possible to transfer manufacturing activities from congested metropolitan cities to the rural and semi urban areas.

9) Poor Organization and Management: The management and organization of small-scale industry is poor and negligible. Very often the management is on trial and error basis. There is no delegation of authority. 10) Ownership: Most of the small-scale industries are privately owned and organized as sole proprietorship. The owners and the family workers generally from the largest component of small-scale force.

Sources of Finance
Finance is the life blood of any business. So, depending upon the nature of the activity, the entrepreneur require three types of finance. Short Term Finance: Funds required for a period of less than a year. It is usually required to meet variable, seasonal or temporary capital requirements. Borrowing from banks is a very important source of short-term finance. The important sources of short term finance are trade credit, installment credit and customer advances. Medium Term Finance: The period of one year to five may be termed as medium term. Medium term finance is usually required for permanent working capital, small expansion, replacements, modernisation etc.

Medium term finance may be raised by : Issue of shares Issue of debentures Borrowing from banks and other financial institutions and Plaguing back of profits.

Long Term Finance: Finance required for a period exceeding 5 years is regarded as Long Term Finance. It is required for purchasing fixed assets, for establishment of a new business, for expansion, modernisation etc. Sources of Long Term Finance: Loans from Finance. All sources of medium terms.

Objectives of Small- Scale Industries

1) To create vast employment opportunities for the people. 2) To effect decentralization of industries by creating industrial estate.

3) Redistribution of economic power as well as income.

4) To raise the standard of living of the people.

5) To increase industrial production.

6) To facilitate mobilization of resources for capital and skill.

7) To utilize the available resources.

8) Promoting industrial development of backward areas.

9) To bring about an integration of development of rural economy on one hand and large-scale industry on the other.

10) To tap latent resources like entrepreneurial ability hoarded wealth etc.

Importance of Small-Scale Industries

Small-scale industries play an important role in the process of countrys Industrial Development. It accounts for 40% of the total value of industrial production directly about 33% of the aggregate exports. In a developing country like India it is the small-scale industry that constitutes the backbone of the industrial structure. Its development has created vast employment opportunities and has also brought decentralization. The following points suggest the importance of small-scale industries: 1) Labour Intensive: Small-scale industries do not require large amount of capital. They are labor intensive and can provide employment to large amount of people. The energy of the underemployed may be utilized for productive purpose in the economy. 2) Equitable Distribution of Income and Wealth: By creating opportunities for small business, small enterprises can bring about a more equitable distribution of income and wealth which is socially necessaryand desirable. 3) Production: Small-scale industries projects can be undertaken in a short and hence can increase the production in the short run and the long run. The small-scale sector produces a large proportion of the national products.

4) Linkages: The large-scale industries create an opportunity or facility for the growth of small-scale industry. The growth of large motor industry will create opportunities for setting up of small service station and repair centers. 5) Own Identity: Small-scale enterprises have their own place in the countrys economy. Imperfect competition protects the small firms market and enables them to exist even if they are not efficient in terms of cost. 6) Training Ground for Local Entrepreneur: Small-scale industrial enterprises are the training ground for local entrepreneurs. Their knowledge and skill can be transferred to other enterprises. 7) Mobilization of Services: In the rural areas savings are generally used in unproductive consumption. The growth of cottage and small-scale industry can offset the investment opportunities to people living in under-developed countries. 8) Facilitates Capital Formation: The development of small-scale industries generates additional income and savings, this will facilitate capital formation in the country. 9) Export Potential: Nearly 20% of the total value of export comes from small-scale industry. The main items of exports of small-scale sectors include engineering goods, pharmaceuticals, sports goods, finished leather, readymade cotton garments, processed goods, etc.

Advantages of Small Scale Industries

They are innovative and productive. The products of these enterprises earn a substantial foreign exchange. They have a favorable capital output ratio. They meet substantial part of increasing demand for goods including human consumption goods. They require a short gestation period.

Small Scale Industries

Manufacturing

Trading

Services

(a) Village & Cottage Industries (b)Handloom & Handicrafts (c) Modern SSI (i) Small Scale Units (ii) Ancillary Units (iii) Tiny Units

(a) Wholesale (b) Retail (c) Commission Agents

(a) Professional Services e.g. medicine, law etc. (b) Commercial Services e.g. real estate, wharehousing, repair shop, etc. (c) Personal Services e.g. fashion shops, dry cleaning etc.

Small scale industries can be classified into five main groups : 1) Manufacturing industries i.e. industries manufacturing complete article. 2) Servicing Industries It covers light repair shops necessary to maintain mechanical equipment. 3) Feeder Industries It specializes in certain types of products and services e.g. electroplating, casting welding etc. 4) Ancillary to Large Industries It produces parts and components ad rendering services. 5) Mining or quarrying. Cottage Industries : 1) 2) 3) 4) 5) 6) They produce mainly traditional goods. They have pre-dominant use of manual labor. They are technically backward. They derive raw material from local sources. They are household enterprises employing very little hired labor. They cater to the needs of the local market.

Ancillary Industries : 1) The investment in plant and machinery can go up to Rs. 1 crore. 2) It supplies 50 percent of the production to one or more parent units. 3) It is engaged in the manufacture of parts, components, sub assemblys toolings and renders services to the parent units for production purposes. 4) It is not controlled by any large unit

Relationship between Small and Large Units

1) Supplementary: Due to the supplementary role of small scale units they can fill in the gaps between large scale productions. In Madras city a small tricycle factory sustained and flourished alongside a large cycle factory. 2) Competitive: Certain industries like tiles and bricks, preserved fruits, perishable edibles and fresh baked goods required small engineering skill and demands craftsmanship and artistry. The small scale industry can compete in these selected products with the large scale sector. 3) Complementary: Today many small units produce intermediate products for large units. Examples of such complementary items are plastic dust cover for video recorders, electronic passive components etc. under complementary relationship, small scale nits functions under the cover of the large units and enjoy the advantage of protected markets for their products. 4) Ancillarisation: Many small firms supply components parts and accessories to large firms, in the sense they serve as ancillaries. E.g. Maruti Udyog, Bajaj, Mahindras, Telco, etc. buys some components and accessories used in their products. 5) Jobbing: Sometimes large enterprises provide components and material to small scale units. The small units process these materials and components into finished parts or sub-assemblies. 6) Merchandising: There are small scale units who do not undertake marketing activities but distribute and sell their products through large scale units. For e.g. Hindustan Lever Limited distributes cosmetics and soaps produced by small firms. Even stabilizers, refrigerators, footwear etc manufactured by small firms are marketed by large units.

7) Servicing: Many small firms have been assigned the job of repair and maintenance of products manufactured by large units e.g. digital equipments, personal computers, calculators etc. Small scale industries also start servicing and repairing shops for the products of large units.

UB Engineering Company

Total cost = Rs 9,13,91,658 Fixed cost = Rs 5,26,49,353 Variable cost = Rs 3,87,42,305 Profit = Rs 26,63,804 Selling price per unit = Rs 5000 Number of units sold = 29,341 units Actual Sales = Rs 14,67,05,000 Contribution = Fixed cost + Profit = 5,26,49,353 + 26,63,804 = Rs 5,53,13,156 Sales = Contribution + Variable cost = 5,53,13,156 + 3,87,42,305 = Rs 14,67,04,814 PV Ratio = Contribution / Sales * 100 = 5,53,13,156 / 14,67,04,814 * 100 = 37.70 % BES = = = BEP = = = Fixed cost / PV Ratio 5,26,49,353 / 37.70 * 100 Rs 13,96,53,456 Fixed cost / Contribution per unit 5,26,49,353 / 1885.18 27928 units

Margin of Safety = Actual Sales Break Even Sales = 14,67,05,000 - 13,96,53,456 = Rs 70,51,544 From this, we can see that this company in order to gain profit atleast have to sell 27298 units. In other words it has to sell goods worth Rs 13,96,53,456 and if it sells the exact amount of break even sales then the company is said that it had made neither profit nor loss. So, we can see that the company has to sell 27928 units in order to make profit but it is selling 29341 units which is more than the BEP. This shows that the companys margin of safety is high and the company with high MOS is a stronger business.