Establishing a Small Enterprise 5(1)

8/8/2019 Establishing a Small Enterprise 5(1)

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Establishing A Small Enterprise (Steps in setting up a Business Venture)

STEP1; THE START UP PROCESS - < called as homework>

You are choosing one option out of SERVICE OR SELF EMPLOYMENT

Need is to assess SLEPT features of the country before starting a new venture. The main

components of such environment are as under:

(a) Priorities and policies of the Government with respect to Entrepreneurs

LEGAL

Industry policy 2004 ,start of j&k EDI ,various R&D facilities jkdfc for subsidy for

disbursement .

\DIC reg thru single window system3% interest subsidy on wc advanced.

100% subsidy on lab testing quality equipment

Subsidy fr brand promotion

Tax limits fr new limits upto 5 yrs in j&k

SOCIAL

Majority of pop in j&k are in middle class so r price conscious.

People have diff taste and preferences

ENV

Moderate climatic conditions avg temp is 25 deg cel

Resources easily available

TECH

R&D facilities available

(b) Assistance and facilities offered by various states for starting a business

(c) Incentives for starting industry offered from State or Central Government

Above all Personal capabilities

STEP2: PROJECT IDENTIFICATION

Defined as process of identifying OPPORTUNITIES for new business ventures based on

different marketing models. SWOT, GE Model, Porters 5 forces Model etc.

SWOT

Strength-

Low price of prdt

Incentives and subsidies

No wastage

Not a Seasonal prdt


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Nutritious value of prdt

Narrow marketing

Weakness-

New entrance in mkt nt experienced

Not easy to arrange funds

Opportunity-

Huge mkt potential

Cheap labour available

More favourable temp for raw mat storage

Less competitive pressure

THREAT-

Competitor

Backward state category

Political and eco pressure

PORTER MODEL

BUYER-900000 customers

NEW ENTRANT-Local vendors

SUBSTITUTE-Milk powder and tins

SUPPLIERS-MILK SOCIETY COOPORATIVES.(KATHUA) JYODIYA

GAJANSUI

It requires defining the objectives and characteristics of the selected project.

OBJECTIVESOFTHE PROJECT:

The financial assistance is extended for processing of milk with the following objectives.

I) To enhance the keeping quality of milk and also to avoid economic losses to farmers.

ii) For manufacturing various milk products to make it available for the domestic market as well as for export

markets

- Done through Environment Scanning also called as Strategic Planning Process

Every project has three dimensionsinputs, outputs and social costs and benefits. .

a) The input characteristics define what the project will consume in terms of raw materials, energy,

manpower, finance and organisational set up. The nature of these inputs is defined by objectives.

b) The output characteristics of a product define what the project will generate in the form of goods

and services, employment, revenue, etc. The quantity and quality of all these outputs should be

clearly specified.


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Product Rs per Kg Kg daily sold or produced

Curd 20 15

Cheese 140 10

Ghee 220 10

Milk 6 per lt 6000lts

c) In addition to inputs and outputs, every project has an impact on the society. It is, therefore,

necessary to judge the sacrifice which the society will be required to make and the benefits that will

accrue to the society from a given project.

Zeroing in Process:

It is a process to evaluate ideas to identify the most appropriate idea / opportunity. Following factors

should he considered while selecting the product to be manufactured .(i) Market potential-900000

(ii) Degree of competition

Competitors of SATYAM:

o Verka

o Surya

o Amul

o Snow caps

o

Snow maxo Local vendors

(iii) Availability of raw material and technology

milk

(iv) Government policies and regulations concerning imports and exports, excise and sales tax,

Factories Act, foreign collaborations, etc.

(v) Licensing and registration requirements

Legal documentation

Certificates required:-

Weights and Measurement, Packaging (Municipality), ISI certificate, DIC, Labor department, Certificate of

electric department, Certificate of water department, Sales Tax department, Police, Trade mark registration

STEP3: SELECTION OF THE PRODUCT e.g. PAPER MILL

Idea Generation:

In order to select the most promising product, it is necessary to generate a few ideas about the

possible lines of business. Generation of business ideas or opportunities is also known as opportunity scanning and

identification (OSI).

Idea generated internally wrt huge mkt pot and easy availability of RM


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INPUT CHRS

Easy availability of RM

Low m/c cost

Subsidy by j7K govt

Ecofrndly process

OUTPUT CHRS

Nutritious value of product

Ecofriendly transportation

SOCIAL COST BENEFITS

Employment

Quality prdt

GDP growth

The business ideas may be generated from internal and external sources.

Internal sources of product ideas:

(a) Analysis of concepts in the light of existing problems and their solutions

(b) Brain storming of employees

(c) Personal interests and hobbies of the individuals

(d) Conceiving improvements in existing products

External Sources of product ideas:

(i) List of items reserved by the Government for exclusive production in the small sector (35 nos)

(ii) Items reserved for exclusive purchase form small scale industries under the Central Store

Purchase Programme of the Government

(iii) Professional journals, trade fairs, Trade Directories etc.

(iv) Government agencies like SIDO (Small Industries Development Organization), National Small

industries Corporation (NSIC), Chamber of Commerce etc.

(v) Market surveys or Interviews etc.

(vi) Technical and management consultants, trade associations.

(vii) Government store purchase programmes

STEP4: ASSESSMENT OF PROJECT FEASIBILITY

1. Technical Feasibility:

It implies the availability or otherwise of plant and machinery and technical know-how required for

production. It consists of the following:

Identifying the technical specifications of the product to be manufactured.

Finding out availability of necessary inputs e.g. raw materials, (both quantity and quality),

plant and machinery, technical skills, power and water, transport and communicationfacilities, service facilities like machine shop and repair shop, etc.

If the technical knowhow to be obtained from outside (Foreign Countries) Exports,

arrangement is made should be specified in the project report.


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Preparing an outline of the manufacturing process including flow process charts,

Testing of the product through:

(a) Standard specifications (ISI, ISO, BIS etc)

(b) In comparison to product models and prototype

(c) Product testing through third party laboratories and field study.

2. Economic Viability: Involves:

(i) Identifying the market potential in terms of current demand for the product and potential future

demand = Demand & Supply .

Based on competition through both direct (from similar products) and in direct (from

substitutes).

(ii) Estimate potential sales volumes and profit volumes at different price levels;

3. Financial Feasibility:

It comprises the following aspects:

(a) Assessment of total financial requirements: It included

Nonrecurring expenses or fixed investment

Includes land and buildings, plant and machinery, furniture and fixtures, etc. The amount of

fixed capital will depend on the scale of operations, type of technology, tune of investment, etc.

While assessing the fixed capital requirements, the cost of assets, engineering and architectural

fees, installation and electrification charges, pre operation expenses of trial runs, etc. should be

taken into consideration.

Working capital or recurring expensesInclude raw materials, stock of finished goods, wages and salaries, etc. It will depend upon level

of operations.

a)project cost

Land = Rs 900,000

Civil Construction = Rs 400,000

Machinery = Rs 405,000

Misc. Fixed Assets = Rs 15,000

Preoperative Exp. = Rs 75,000

Contingencies on assets = Rs 279,500

(b) Determining sources and costs of funds. Once the total funds required are estimated, appropriate

sources need to be chosen to raise the required investment. Some sources of funds are:

Equity or Preference shares

Debentures

Term loans

Bank loans

b)Mean of finance

Total Financing (Long + W.C) = Rs 1769500


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Total Contribution from Owners = Rs 800000

Contribution From Each Partner = Rs 2 Lacs

(c) Analysing cash flow: After estimating the amount of funds required and their costs, the

anticipated flows of cash from the project are determined. For this purpose, a cash flow statement is

prepared. (Cash inflows and Cash outflows)1,404,000

(d) Anticipating Return on Investment:

ROI IS CALCULATED AS=

Average earnings expected from the project over a specific period of time

Investment

1404000=54.2%

2569500

4. Managerial Competence: (Matching the skills sets with Technology and Organizational Basic

Requirements)

A proper organisation structure is decided.

Then the skills and talents required to man the structure are determined.

CEO-Akash

MKTNG MGR-Akash--------

8 sales representatives

FINANCE-Divya

Computer operator-1

HR MNGR-shravani and mithila

4 workers

5. Implementation Scheme: PERT & GANT Chart

A schedule is prepared to ensure timely completion of the project.

Timely completion will help to avoid time and cost overruns.

Delays in project completion may jeopardise the financial viability of the project.


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Difference between Gantt Charts & Pert Charts

Charts Project managers commonly use both Gantt and PERT charts to display tasks required for task scheduling and project

completion.

A main difference between Gantt Charts and PERT charts is that Gantt is a bar chart, while PERT is a flow chart. They are

probably the best-known project management charts.

Time and Relationships

Gantt charts emphasize the time it takes to complete tasks, while PERT charts emphasizerelationshipsbetween tasks.

STEP5: MARKET SURVEY

Product selection is followed by market survey.

To anticipate the possible market for the product to measure returns.

Commonly used survey methods for anticipating the potential market for a product are as:

1. Opinion Polling Method-

In this method, the opinions of the ultimate users of the product i.e. the customers is estimated. It isof two types:

(a) Census Survey (Complete Enumeration Survey) - In this survey, all the probable customers

of the product are approached and their probable demand for the product is estimated and

then summed. It obtains the first hand and unbiased information. Not possible to approach a

large number of customers scattered all over the market.

(b) Sample Survey - Under this method, sample is taken out of their total population is

approached and data on their probable demand for the product during the forecast period are

collected and summed. Figures are then spread over the total population. No doubt, survey

method is less costly than the complete enumeration method.

(c) Vicarious Method- Under the vicarious method, the consumers of the product are not

approached directly but indirectly through some dealers who have a feel of their customers.

The dealers opinions about the customers opinions are elicited. Being based an dealers
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opinions, the method is bound to suffer from the bias on the part of the dealers. Then, the

results derived are likely to be unrealistic

(d) Sales Representatives Experience Method- Under this method, executives from sales

department was questioned to judge the sales of new product. Based on their views, total

demand for the product is estimated.

2. Life Cycle Segmentation Analysis (PLC): It is well established that every product has its own life

span. in practice, a product sells slowly in the beginning. Backed by sales promotion strategies over

period, its sales pick up. in due course of time, the peak sale is reached. After that point, the salesbegin to decline. After some period, the product dies. This is, in fact, a case of natural death. Thus,

every product has its own life span. That is why firms go for new products one after another to keep

the firm alive.

The product life span/cycle has been classified into five stages: (1) Introduction, (2) Growth, (3)

Maturity, (4) Saturation, and (5) Decline. The sales of the product varies from stage to stage and

follows S-shaped curve.

STEP6: INVESTMENT/RISK ANALYSIS

The basic objective of every investment is to maximise the profit. So, capital should be invested inthose opportunities which could give the maximum return on capital employed because SSI have

limited capital.

a) Ratio Analysis

Situation1

A ratio shows the arithmetical relationship between the two relevant figures i.e. 2:4 ratio is 50% or

1:2.

Situation2: Ratio against profits

E.g.: X Co. earned a profit of RS 50,000 and Y Co. earned a profit of RS 40,000, we conclude

that X Co. is more profitable.

Situation3: Ratio against profits in relation to capital employed.

X Co. earned profit of RS 50,000 against RS 500,000 employed as capital; and Y Co. earned RS

40.000 against RS 2,00,000 as capital employed, we can conclude that Y Co. is more profitable

since its net profit to capital employed is 20% as against 10% of X Co.

With the help of ratios, we can reach useful conclusions about the profitability of investments made

in tile enterprise.

Profitability ratios are calculated by relating profits either to sales or to investments. They are

usually expressed in percentages.

Types of Profitability Ratios:

a) Return on Proprietors Fund or Net Worth This ratio expresses the ratio of net profit after

tax and interest to proprietors funds or net worth, As mentioned earlier, the major objective

of any business is to earn the maximum profits and this ratio indicates the extent to which

this objective is achieved. This ratio also suggests that whether the investment would be

worth making in terms of returns as compared to the risk involved in the business which

ultimately helps in taking business decisions for the future.

It is calculated as follows:

(Net Profit after Tax and Interest / Proprietors Funds or Net Worth)

Return on net worth=PAT/PROP=20/150=13.3%(FIRST YR)


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b) Return on Capital Employed - This ratio indicates the earning power of the capital employed

in the business and points out to the owner the progress or deterioration in the earning

capacity of the business. It is of great significance to the shareholders or the owners as it

shows the ratio of profit earned on invested capital.

For example, if an enterprise has Rs. 5 lakhs as equity capital and Rs. 3 lakhs as loan, its total

capital employed will be Rs. 8 lakhs (Rs. 5 lakhs + Rs. 3 lakhs). Now, suppose the enterprise

earns a profit of Rs. 80,000 in a year before interest and taxation, then Rate of Return on

Investment i.e. capital employed will be 10%.


(Net Profit before Interest and Tax / Capital Employed) x 100

Thus, the ratio of capital employed indicates how the management has made use of the funds

supplied by the both-owners and creditors. Obviously higher the ratio, the more efficient use

of the funds the enterprise is making and vice-versa. After comparing the ratios of the similar

business and, industry, the enterprise comes to know the relative operating efficiency of the

business which helps take investment decisions accordingly.

1404000=54.2%

2569500

c) Return on Total Investments - It is the ratio of net profit to total investment. This ratio

indicates the overall profitability of the enterprise.


(Net Profit after Interest and Tax / Total Assets) x 100

20/250=8%

b) Capital Budgeting

Capital budgeting involves investment decision related to balancing the sources and uses of funds for

acquiring fixed capital assets like machinery and equipments.

a) Payback or Payout Period: How long the investor has to wait before the invested capital is

recovered. The cash flow starts coming and accumulating. After a certain period of time the

accumulated cash inflows become equal to the original investment made. At that point of

time the payback occurs and the time it has taken for recovery is called the Payback or

Payout Period.


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It is seen from the Table that cash inflow started from the second year. At the beginning of

the fifth year, the balance of initial investment to cover was Rs. 50,000 but the total inflow

was Rs. 75,000 during the fifth year. Assuming that the inflow of Rs. 75,000 was uniformly

spread over 12 months, the recovery period for Rs. 50,000 will be: (12 x 50,000) / 75000 = 4

years 8 Months.

This method involves CHOSSING THE PROJECT THAT REPAYS INITIAL

INVESTMENT in the SHORTEST PERIOD OF TIME.

b) Average Rate of Return: In simple words, average rate of return (ARR) is just the reverse ofthe payback method. While payback method is based on cash flow, average rate of return is

based upon the principles of accounting.


(Average Net Income after Tax / Average Investment over the life of the project) x 100

Drawback: Both the methods ignore time value of money. The value of RS 1,000 today may be less

after ten years. But, these methods ignore this fact.

STEP6: BREAK -EVEN ANALYSIS

It is stage where income exactly equals expenses.

It is an analysis of production point at which profit starts. This point is where income and expenses

are exactly equal and the point is called break-even point. Thus, break-even analysis is used to find

the break-even point.

Expenses to be incurred refer to cost. Cost is broadly divided into two types viz. (1) Fixed cost, and

(2) Variable cost. What are these costs?

Fixed Cost: Fixed costs are defined as those that do not change with increase or decrease in

production. No matter what the production is the fixed cost remains the same. Examples of fixed

costs could be the monthly rent paid for the factory, interest on long term loan, administrative

expenses, etc., Even if there is zero production, the fixed cost will remain unchanged.

Variable Cost: defined as expenses that change with the volume of production. It varies

proportionately with changes in production. Thus, if production is zero, variable cost would be zero.

The absolute total variable cost increases or decreases along with increase or decrease in production.

But the variable cost per unit is constant at any level of production.

There are some variable costs that do not vary proportionately with the change in production. In fact,

these vary in varying degrees. As a result such costs are called semi-variable. The popular examples

of such costs could be telephone, electricity and gas charges if they are billed on a usage basis. In

such cases that proportion of expenses which continue even if production falls are considered as

fixed and expenses which increase or decrease as production increases or decreases are considered as

variable cost.

After knowing sales and total cost in terms of fixed cost and variable cost, now the breakeven point

can be calculated. According to the simplest method, Profit is the excess of sales over cost, i.e.

Sales-Cost = Profit.

The calculation of break-even point involves four- steps. These are:

Segregation of fixed and variable costs

Percentage of variable costs to sales

Calculate the contribution or margin, i.e., the difference between 100 and the percentage of

variable cost to sales as worked out above.

Divide the fixed cost by the percentage of contribution or margin as worked out above.

Thus, the calculated figure will be break-even point.


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NOTE: Break-even point can be calculated in terms of units also.

Fixed Cost

Selling Price Per Unit Variable Cost Per Unit

Break Even Chart


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STEP7: SELECTION OF SITE (LOCATION)

Some of factors to be considered while choosing site are given below:

(i) Nearness to the source of raw materials-jewel

(ii) Nearness to the market

(iii) Availability of land at cheap rates

(iv) Availability of skilled labour

(v) Cost of labour (Prevailing wage rates) in the area

(vi) Availability of transport and communication facilities

(vii) Availability of power, water, waste disposal and other essential services

(viii) Incentives and concessions available in different States

(ix) General business climate in the region

(x) Climate and environmental factors

(xi) Availability of factory sheds in industrial estates.

STEP8: LEGAL CONSIDERATIONS

Setting up of a small scale industrial unit involves some legal formalities. These legal formalities are

discussed below:

Registration With Director of Industries: Registration of a small scale industry is not compulsory.

However, registration with the State Directorate of Industries or District Industries Centre helps in

getting assistance from the Government.

The registration of small scale units is done in two stages viz (a) provisional registration, and (b)

permanent registration.

Normally, a provisional registration is made before the unit is set up and a permanent registration isgiven when the unit goes into production

Provisional Registration:


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Provisional registration is possible even when one is planning to set up the unit. The issue of a

provisional certificate is automatic and given within a week unless the proposed industry is one

which needs raw materials which Government has declared nonavailable to new units because of

their scarcity.

The provisional registration is valid for one year in the first instance.

It may be reviewed for a further period of two years in four 6 monthly extensions on submission of

satisfactory proof that the entrepreneur has taken active steps to establish the new unit and needs

more time. Application for extension should be made within time, otherwise registrationautomatically lapses.

The application for registration of a small scale unit should he submitted to the General Manager,

District industries Centre located in the district where the unit is to be set up.

Municipal License: The next step is to obtain the municipal license. For example in Delhi it is

necessary to obtain from the Municipal Corporation of Delhi (M.C.D.).

Registration with Central and State Sales Tax Department would also be necessary for which the

concerned department will have to be contacted.

Permanent Registration:

Provisional registration is meant to enable the entrepreneur to take the necessary steps to bring the

unit into existence.

When the entrepreneur has taken all steps to establish the unit i.e. the factory building is ready,

power connection is obtained, the machinery and pollution control equipments have been installed,

and license from municipal corporations and other local authority is obtained, one can apply for

permanent registration.

Cancellation of Registration: Registration of a small scale unit can be cancelled (after a show cause

notice) on the following grounds:

(a) The unit remains closed continuously for more than one year

(b) The unit fails/refuses/avoids to give full and true information required by the registering

authority from time to time;

(c) The unit has misutilized the raw materials allocated to it

Registration With DGS&D/NSIC: A small scale unit can get itself registered with Director General

of Supplies and Disposal (DGS&D) or National Small Industries Corporation (NSIC) if it wants to

avail of the benefit of purchases made for Government offices.

Legal documentation

Certificates required:-

Weights and Measurement, Packaging (Municipality), ISI certificate, DIC, Labor department, Certificate of

electric department, Certificate of water department, Sales Tax department, Police, Trade mark registration

STEP9: BASIC STARTUP PROBLEMS

(i) Selection of the Industry: Once a person has decided to start his own business, the first major

problem is to select the line of business. This problem can be solved by analysing:

Persons aptitudes,

Propensity to take risk,

Skills and experience,


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Family background,

Financial position,

Government policy and incentives,

Infrastructural facilities,

Advice of consultants, etc.

(ii) Product Selection: Another start up problem is the choice of the particular product to be

manufactured. This can be decided through a comparative analysis of a few product items with

special reference to:

Size and structure of the market

Future demand pattern

Competitve position

Life cycle of the product

Availability of raw materials

Technical aspects of production

Availability of required labour

Government policy and controls

(iii) Choice of Factory Site:

(iv) Form of Organisation:

(v) Problem of Construction: Construction of factory building involves several problems e.g.

Acquisition of land in the chosen locality

Architectural design of the building

Appointment of engineers and contractors

Civil work like obtaining power and water connection

Supervision of construction work.

Acquisition and installation of machinery and equipment.

(vi) Supply of Raw Materials:

Agreement need to be made with the concerned suppliers

(vii) Financing the Unit:

Estimate both fixed capital and working capital.

Identify the sources.

Liaison with them.

(viii) Recruitment and Training of Staff:

Identify and design organizational structure.

Identify the skills sets needed at each level

Find the quantity of staff.

Recruit and train them.

(ix) Marketing:

Hire consultancies


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Conduct proper research.

Identify STP and other related marketing strategies.

Develop a new product.

(x) Gestation Period: Great care and efforts are required to successfully overcome the problems and

risks during the gestation period (time period before company start earning profits).

Effective control over expenses, time and cost overruns, sales pattern, etc. is necessary to ensure that

the unit survives the initial expenses and losses.

4. Marketing Plan

The methods and data used for making estimates of domestic supply and selection of the

market areas should be presented.

Impact of Price on Demand must be presented.

It should contain an analysis of past trends in prices.

5. Operating Requirements and Costs

Incurred after the commencement of commercial production.

Operating costs relate to the cost of raw materials and intermediates, fuel, utilities,

labour, repair and maintenance, setting expenses and other expenses.

6. Financial Analysis

A Performa Balance Sheet for the project data should be presented

Methods of accounting.

The feasibility report should take into account income-tax rebates for priority industries,

incentives for backward areas, accelerated depreciation, etc.

7. Economic Analysis

Impact of enterprise on employment generation for nation.

The enterprise should try to assess the impact of its operations on foreign trade.

Indirect costs and benefits should also be included in the report. If they cannot be quantified

they should be analysed and their importance emphasised.

ONCE YOU ARE DONE WITH ABOVE STEPS, THEN YOU NEED TO UNDERTAKE

THE ACTIVITIES FOR IMPLMENTATION

The main steps involved in the establishment of a small business venture are as follows:

Selection of the product

Location of the enterprise

Choice of form of ownership

Registration with the authorities

Arranging term finance

Licenses and clearances

Acquiring land and building


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Arranging Working capital

Recruitment of staff

Installation of machinery

Procuring raw materials

Power connection and water supply

Starting production

Marketing the product

Preparation of the project report

Documents

Establishing a Small Enterprise 5(1)