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Unit Unit -- 44Small and medium enterprises:

Meaning and DefinitionRole and ImportancePolicies governing SMEsOrganizational structure

UnitUnit--44

SIDBI & SISI- role in development of SMEsMarketing mechanism in SMEsExport potential of SMEs

Steps in setting up a small unitSME funding, requirements ofcapital, factors determining capital requirements, importanceof fixed and working capital, working capital management, sources of finance, taxation benefits

Export potential of SMEsProblems of SMEs and prospectsTurnaround strategies for SMEs

Definition Definition A small scale industry (SSI) is an industrial undertaking in which

the investment in fixed assets in plant & machinery, whether held

on ownership term or on lease or hire purchase, does not exceed

Rs. 3Crore. However, this investment limit is varied by the

Government from time to time. Ancillary units and tiny units alsoGovernment from time to time. Ancillary units and tiny units also

come under the umbrella of small scale industries.

(Source:http://www.dcmsme.gov.in/publications/circulars/cirular1.htm)

The Micro, Small & Medium The Micro, Small & Medium Enterprises Development Act, 2006Enterprises Development Act, 2006Fixed Investment in Plant & Machinery for

Manufacturing Enterprises

◦ MICRO: Rs. 25 Lakh,

SMALL R 5 ◦ SMALL: Rs. 5 crore,

◦ MEDIUM: Rs. 10 crore

Service Enterprises

◦ MICRO: Rs. 10 Lakh,

◦ SMALL: Rs. 2 crore,

◦ MEDIUM: Rs. 5 crore

Ministry of Micro, Small and Medium Enterprises acts as the agency for growth and development of SSIs in the country

Assisted by various public sector enterprises like:-

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Small Industry Development Organization (SIDO) is the apex body for assisting the Government in formulating and overseeing the implementation of its policies and programmes/projects/schemes.

National Small Industries Corporation Ltd (NSIC) was established by the Government with a view to promoting, aiding and fostering the growth of SSI in the country, with focus on commercial aspects of their operation.

The Ministry has established three National Entrepreneurship Development I tit t hi h d i d l f i i d l d ki Institutes which are engaged in development of training modules, undertaking research and training and providing consultancy services for entrepreneurship development in the SSI sector. These are:-

National Institute of Small Industry Extension Training (NISIET) at Hyderabad, National Institute of Entrepreneurship and Small Business Development (NIESBUD) at NOIDA Indian Institute of Entrepreneurship (IIE) at Guwahati

Small Industries Development Bank of India (SIDBI) acts as apex institution for financing SSIs through various credit schemes.

The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been constituted with the mandate to examine the problems of enterprises in the unorganized sector and suggest measures to overcome them.

Importance of SMEsImportance of SMEsDevelopment of entrepreneurshipInnovation and productivityEmploymentShare in industrial productionRegional development

EfficiencyHigher growth rateEquitable distribution of national incomePlanned developmentLess industrial disputes

Export promotionFeeder to large scale industriesMobilization of local resourcesSocial advantagesExpansion of SSI Optimization of capital

Use of abundant natural resources Contribution to industrial productionTraining and entrepreneurship development

Policies governing SMEs Policies governing SMEs

Policies

Industrial Policy Resolution, 1948

Industrial Policy Resolution, 1991

Industrial Policy Resolution,

2003-04

Industrial Estate Programsy ,

Small Sector Industrial Policy,

1991

Import Policy 1999-97

Policy for Khadi and Village

Industries

Policy for Development of

Handloom Industry

Industrial Policy Resolution 2005-

06

The Textile Policy

Government Initiatives in Pursuance of Government Initiatives in Pursuance of the Objectives of Policy Statementthe Objectives of Policy Statement

Small Scale Industries◦ Financial support

◦ Marketing and exports

◦ Modernization

◦ Promotion of entrepreneurship

◦ NHDC(National Handloom Development Corporation) as a Nodal Agency

Handicraft Sector◦ Extending services like supply

of raw materials, etcentrepreneurship

◦ Tapping resources

Tiny Sector◦ Investment

◦ Location

◦ Simplification of rules

◦ Service sector role

Handloom Sector◦ Project package scheme

◦ Welfare package scheme

◦ Market Development Support

◦ Expansion of training facilities

Other Village Industries◦ Quality improvement

◦ Up gradation

◦ Thrust on traditional village industries

Aims-

Encouraging and facilitating entry of new entrepreneurs

Support small scale units

Protect small firms from competition

Small Scale Industries Problems resolution

Technological upgradation

Improvement in productivity

Export production and promotion, etc.

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Organizational StructureOrganizational Structure

SSI

Private Public with state participation

Individual

Sole Proprietorship

(86%): 87% & 14%

Collective Ownership

Partnership(12%)

Joint Stock Company

(1%)

Co- operative(0.7%)

Limited Unlimited

Steps in Setting up a Small UnitSteps in Setting up a Small UnitBusiness opportunity◦ Economic viability

◦ Business information

◦ Competition

◦ Cost-benefit analysis

◦ Consumer behavior study

◦ Financial support

◦ Legal aspects

Scanning the business environment

Identification◦ Research or survey

◦ Functional viability to be examined

◦ Understanding market behavior

environment◦ Internal

◦ External

Evaluation of alternatives

Implementation Phase

Follow-up Phase

Crucial Aspects in Setting up a Small UnitCrucial Aspects in Setting up a Small Unit

Analyze strength, weaknessMarket surveySelection of form of ownershipAvailability of own moneyProduct selection

Preparation of project reportProject appraisalFinanceProvisional registrationTechnical know-howP d iProduct selection

Decision to be self employedLocationTechnologyTrainingScanning of business environmentMachine and equipment

Power and water connectionInstallation of machineryInsuranceManpower recruitmentRaw materials procurementProductionMarketingQuality assurance

SME FUNDINGSME FUNDING

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P- 324 Fig 29.1

SMEs fundingSMEs fundingIt is undertaken by:

SIDO (Small Industries Development Organization)NSIC (National Small Industries Corporation)IFCI (I d i l Fi

IDBI (The Industrial Development Bank of India )IRBI ( Industrial Reconstruction Bank of India)NIDC ( National Industrial Development Corporation)IFCI (Industrial Finance

Corporation of India)KVIC (Khadi and Village Industries Commission)ICICI (Industrial Credit and Investment Corporation of India )

Development Corporation)MSFC (Maharashtra State Financial Corporation)NABARD (National Bank for Agriculture and Rural Development)

SBI (State Bank of India)

P-327

Seed CapitalSeed CapitalComparatively small amount of capital contributed in the very

beginning by a firm's founder(s). It is rarely provided by lenders or

institutional investors because startup is the riskiest stage in a

firm's life cycle with the highest chance of failure. Also called front

end money, front money, or startup capital.

Money used for the initial investment in a project or startup

company, for proof-of-concept, market research, or initial product

development. also called seed financing or seed money.

Venture CapitalVenture CapitalFunds flowing into a company, generally during pre-IPO process, in theform of an investment rather than a loan. Controlled by an individual orsmall group known as venture capitalists, these investments require ahigh rate of return and are secured by a substantial ownership positionin the business

ORStart up companies with a potential to grow need a certain amountof investment Wealthy investors like to invest their capital in suchof investment. Wealthy investors like to invest their capital in suchbusinesses with a long-term growth perspective. This capital isknown as venture capital and the investors are called venturecapitalists.

Such investments are risky as they are illiquid, but are capable ofgiving impressive returns if invested in the right venture. Thereturns to the venture capitalists depend upon the growth of thecompany. Venture capitalists have the power to influence majordecisions of the companies they are investing in as it is their moneyat stake.

Requirements of CapitalRequirements of Capital

Capital Requirement

Fixed capital Working capital prequirement- Block

capital

Fixed assets-land, building,

plant

Non- current assets- goodwill,

long term investments

requirement-Circulating capital

Gross working capital

Net working capital

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Factors determining fixed capital Factors determining fixed capital requirementsrequirements

Nature of the businessTypes of productsSize of the firmsDiversity of production lines

Subcontracting facilityNature of competitionPurchase of second hand machineryy p

Method of handling productionMethod of acquiring fixed assetsTechnique of productionType of the industryGovernment subsidy

Factors determining working capital Factors determining working capital requirementsrequirementsSize of the firmNature of the businessType of production processLength of operating cycle

Production policyCost of raw materialsRegular availability of raw materialsDividend policy of the Length of operating cycle

Inventory turnoverTerms of creditBanking facilitiesSeasonal variationsContingenciesTerms of purchase and saleImportance of labour

Dividend policy of the managementExpansion and diversificationDegree of competition

Working capital managementWorking capital management

It includes:

Cash managementInventory managementAccounts receivable managementAccounts payable management Purchase managementInvestment management

Sources of finance: Fixed capitalSources of finance: Fixed capital

Equity sharesPreference sharesRights issue of sharesPrivate placement of sharesDebenturesTerm loansRetained earningsLease financingVenture capital

Sources of finance: Working capitalSources of finance: Working capital

Commercial paperTrade creditAccrualsFunds from

Self- financingInter- corporate depositsBank credit

operationsIssue of debenturesShort term loans from financial institutions

Public depositsDealer advances

Taxation Benefits Taxation Benefits

Tax holidayDepreciation allowanceExpenditure on scientific research allowance

Expenditure on acquisition of patents and copyrightsExemption on excise dutyProfits from business of

Investment allowanceRehabilitation allowanceAmortization of preliminary expensesTax concessions for small scale industries in rural areas

publication of booksTax benefits for amalgamation of sick unitsIncome tax concession to SSIs established in backward areasMODVAT scheme

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SIDBI(Small Industries Development Bank SIDBI(Small Industries Development Bank of India)of India)-- role in development of SMEsrole in development of SMEs

• Single window scheme Tourism related activities scheme• Provision of term loan• Seed capital scheme• Equipment refinance scheme

Refinance assistance

• Scheme for specialized marketing agencies• Project finance scheme• Scheme for foreign currency• ISO scheme Pre- shipment credit foreign currency loan

Direct assistance

• Bills rediscounting scheme (BRS)• Direct discounting schemes (DDS)

Bills scheme

Indirect assistance to primary lending institution (PLIs)◦ Refinancing◦ Rediscounting

Direct assistance to small units◦ Setting up new SSIg p◦ Up-gradation◦ Quality up-gradation◦ Development of markets◦ Development of infrastructure

◦ Pre-shipment and post-shipment credit, etc

Development and support services

Technical consultancy servicesManagerial consultancy servicesEconomical investigation

SISI(Small Industries Service Institute)SISI(Small Industries Service Institute)--Role in development of SMEsRole in development of SMEs

Export promotion servicesModernization/ technology upgradation services Common facility servicesLibrary facilityg

servicesEntrepreneurial development program and Prime Minister RojgarYojana(PMRY) Ancillary development programsMarketing assistance

Library facilityAssistance to state govt. agenciesTechnical assistance to central govt. agencies

Marketing mechanism in SMEsMarketing mechanism in SMEs--functions of marketingfunctions of marketing

Buying and assemblingSellingPackaging and packingP i i

AdvertisingPersonal sellingSales promotionT t k tiPricing

BrandingStandardization and gradingWarehousingTransportation

Test marketingMarketing researchProduct, planning and development

Product-design, brand name, label

Marketing Mechanism in SME’sMarketing Mechanism in SME’s--marketing Mixmarketing Mix

Marketing Mix

Price-discounts, terms of credit

Place-transporta

tion, warehousi

ng

Promotion-media,

advertising

Marketing mechanism in SMEsMarketing mechanism in SMEs--Distribution channelsDistribution channels

Manufacturer

Consumer

Consumer

Manufacturer

Retailer

Manufacturer

Wholesaler

Retailer

Consumer

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Competition from large scale sectorLack of sales promotionWeak bargaining powerLack of brand image

Marketing mechanism in SMEsMarketing mechanism in SMEs--Marketing problemsMarketing problems

Lack of sales forceProduct qualityCredit salesLow pricesLocal and limited market

Export potential of SMEsExport potential of SMEs

Several incentives and concessions are provided by the government to the SMEs:Income tax incentivesLiberalized export credit100% export oriented unitspCash compensatory supportDuty exemption schemeSales tax exemptionExport insuranceMarket development associationForeign exchangeImport replenishment licenses

Problems Problems & Prospects of & Prospects of SMEs SMEs

Problem of financeProblem of raw materialsInadequate infrastructureOutdated technology

Problems of marketingPoor project planningProblems for ancillary unitsB fUnder-utilized capacity

Problem of power and waterUnskilled labourUnsuitable location

Bogus firmsCompetition from large scale unitsProblems of sicknessPoor database

Turnaround strategies for SMEsTurnaround strategies for SMEsTurnaround strategies are the strategies adopted by the management to reverse the deteriorating trends of the performance indicators of a business.

Indicators for turnaround strategies are:Industrial sicknessPersistent negative cash flowNegative profitsDeclining market shareHigh turnover of employeesMismanagementUncompetitive productsUnused capacity

Turnaround StrategiesTurnaround Strategies

Operating turnaround strategies

-Asset reduction strategies-Revenue increasing

Strategic turnaround strategies

-Preparatory stage: Restructuring leadership and organization structureg

strategies-Cost cutting strategies-Combination strategies

and organization structure-Short term stage: cost reduction strategies, asset redeployment strategy, selective product/market strategy

-Growth stage: repositioning strategies

Preventive and Remedial Measures Preventive and Remedial Measures of Industrial Sicknessof Industrial Sickness

Early detection of sicknessFinancial institutions and banks to take corrective measuresAttempts to restore financial healthSetting up of a national fund for the purpose of strengthening of the facilities for retaining of workersSchemes of reconstructionRealistic debt-equity ratioIncentives to professional managers helping in reviving sick units, etc