For Private Circulation Only

KCES’s

Institute of Management & Research, Jalgaon

STUDY NOTES

A 3.4 : Management of Small-Scale Industries

==============================================

Compiled By

Prof. Dr. Shama Subodh Saraf

M.A., M.P.M., M.B.A., Ph.D.

Now success is in your Hands………!!!!!!

Notes are not for sale, are only for private use.
• Objectives: The objective of this subject is to enable the students to
understand various aspects in the management of small industrial units.
• Unit 1 : Small Scale Industry
• Meaning, DEFINATION, importance of small-scale industry
in Indian Economy
• Role of small-scale industry in India
• Small scale Industry under five years plans
• Products reserved for small scale industrial Units.
• Problems of SSI units –Managing the SSE, Problems and
issues related to financial Management, Operations
Management, Marketing Management, Labour
Management etc.
• Unit 2: Factors Influencing Entrepreneurial
Development and Motivation
• Role of culture in Entrepreneurial development
• Entrepreneurial development program (EDP), managing
the problem faced by entrepreneurs.
• Development of women entrepreneurs with reference to
SHGs
• Options available to entrepreneurs- ancillary, franchising
and outsourcing.
• Cases on takeover, mergers and acquisitions in India and
at global level.
• Social Entrepreneurship –Definition, importance and
social responsibilities NGOs.
• Unit 3
• Entrepreneurial Project Development
• Idea Generation – Sources and Methods
• Identification and classification of ideas
• Environmental Scanning and SWOT analysis
• Preparation of project plan- point to be considered
 • Components of an ideal business plan – market plan,
financial plan, operational plan and HR plan.
• Project formulation- project report significance and
contents
• Project appraisal- Aspect and methods A) Economic
oriented appraisal B) Financial appraisal
• C) Market oriented appraisal.
• Technological feasibility, Managerial competency

Unit 4.
Incentives and subsidies:

Meaning of incentives and subsides

Incentives and Subsidies in Maharashtra State.
Nature and Types of Subsidies
Types of Incentives under Packaged Incentives Scheme.

Unit 5.
Finance and Production Planning:
Financial requirements
Structure and management of fixed and working capital
Sources of capital
Financial institutions problems in financing a small-scale unit
Production Planning:
Size of plant
Production mix
Costs of production
Production facilities and their optimum utilization
Procurement of raw material
Problems involved Role of Government in supplying machinery and
raw materials.

Unit 6.
Marketing and Manpower planning:

Marketing Planning:
Meaning and concept of Marketing planning
Process of Marketing Planning
Policies of Marketing Planning
Manpower Planning
Meaning and concept of Manpower planning
Steps in Manpower planning
Need and Importance Manpower planning
Small Scale Industries
Small scale industries (SSI) are those industries in
which manufacturing, providing services, productions are done on
a small scale or micro scale. For example, these are the ideas of
Small-scale industries: Napkins, tissues, chocolates, toothpick,
water bottles, small toys, papers, pens. Small scale industries play
an important role in social and economic development of India.
These industries do a one-time investment in machinery, plants,
and industries which could be on an ownership basis,
hire purchase or lease basis. But it does not exceed Rs. 1 Crore. Let
us discuss in detail about it.

Small Scale Industries

Essentially small scale industries comprise of small enterprises who
manufacture goods or services with the help of relatively smaller
machines and a few workers and employees. Basically, the
enterprise must fall under the guidelines set by the Government of
India. At the time being such limits are as follows,

● For Manufacturing Units for Goods: Investment in plant and

machinery must be between 25 lakhs and five crores.
● For Service Providers: Investment in machinery must be between
10 lakhs and two crores.
In developing countries like India, these small scale industries are
the lifeline of the economy. These are generally labour-intensive
industries, so they create much employment. They also help with
per capita income and resource utilization in the economy. They
are a very important sector of the economy from a financial and
social point of view.
Role and Importance of Small-Scale Industries
Small scale industries are important because it helps in
increasing employment and economic development of India. It
improves the growth of the country by increasing urban and rural
growth. Role of Small and medium scale enterprises are to help the
government in increasing infrastructures and manufacturing
industries, reducing issues like pollution, slums, poverty, and many
development acts. Small scale manufacturing industries and
cottage industries play a very important role in the economic
development of India. If any amount of capital is invested in small
scale industries it will help in reducing unemployment in India and
increasing self-employment. The industry is a sector in which
the production of goods is a segment of the economy. Let us learn
more about the importance of Small-scale industries and how SSI
helps in developing the country.

Role and Importance of Small-Scale Industries

● Increases production
● Increases total exports
● Improves the employment rate
● Opens new opportunities
● Advances welfare

Importance of Small-Scale Industries:

SSI Increases Employment Rate

SSI Increases Production

SSI Increases Total Exports

SSI Increases Opportunities

SSI Increases Welfare.

Every small-scale industry plays a big role in the Indian economy.

Apart from providing employment to crores of people, it has the
added benefit of minimum capital requirements. The government
also offers several tax benefits to SSI for this purpose.

Furthermore, they can exist in urban as well as rural areas. Small

Scale Industries have been able to compete with large-scale
industries and multinational corporations because of this. Due to
reasons like these, they are of great importance.

Specific roles that SSIs play in the Indian economy:

1. SSI Increases Production

India is one of the world’s fastest growing economies in the world.
Consequently, its production output is massive. It is pertinent to
note that SSIs contribute almost 40% of India’s gross industrial
value.

These industries produce goods and services worth over Rs. 40

lakhs for every investment of Rs. 10 lakhs. Furthermore, the value
addition in this output increases by over 10%.

Here is another interesting statistic about Small scale industries.

The number of Small-Scale Industries in India increased from
around 8 lakhs in 1980 to over 30 lakhs in 2000.

This figure has grown even more in recent years owing to the
government’s ‘Ease of Doing Business’ policies.
As a result of this, the total industrial production output rose
tremendously in the last few years. SSIs are, therefore, strongly
responsible for the growth of India’s economy.

2. SSI Increases Export

Apart from producing more goods and services, SSIs have been
able to export them in large numbers as well.

Almost half of India’s total exports these days come from small-
scale businesses.

35% of the total exports account for direct exports by SSIs, while
indirect exports amount to 15%.

Even trading houses and merchants help SSIs export their goods
and services to foreign countries.

3. SSI Improves Employment Rate

It is important to note firstly that Small Scale Industries employs
more people than all industries after agriculture.

Almost four persons can get full employment if Rs. 10 lakhs are
invested in fixed assets of small-scale sectors.

Furthermore, SSIs employ people in urban as well as rural areas.

Consequently, this distributes employment patterns in all parts of

the country and prevents unemployment crisis.

4. SSI Open New Opportunities

Small-scale industries offer several advantages and opportunities
for investments.
For example, they receive many tax benefits and rebates from the
government. The opportunity to earn profits from SSIs are big due
to many reasons.

Firstly, SSIs are less capital intensive. They even receive financial
support and funding easily.

Secondly, procuring manpower and raw materials is also relatively

easier for them. Even the government’s export policies favour
them heavily.

5. SSI Advances Welfare

Apart from providing profitable opportunities, Small Scale
Industries play a large role in advancing welfare measures in the
Indian economy as well.

A large number of poor and marginalized sections of the

population depend on them for their sustenance.

These industries not only reduce poverty and income inequality

but they also raise standards of living of poor people. Furthermore,
they enable people to make a living with dignity.

Role of small-scale industry in India……

• SSI contributes an important part of the Indian economic

structure. They integrate a continuing element in the scheme
of national planning. They are a strategic part of the Indian
economy as well as progressive and effective decentralized
sector which is closely related with agriculture and medium
and large-scale industries.
• The basic philosophy underlying Indian planning is that to
develop medium and large-scale sector only to take
 advantage of modern technology. Over the rest of the field,
SSIs will be encouraged to play their active role. If there is
change in scale, that has to be developed with the help of
mutual cooperation both horizontal and vertical.

Small scale Industry under five years plans

• Govt. support to small scale industries in India and steps for

development of SSI were initiated immediately after
independence. That the Govt has attached great importance
to the development of small-scale sector and the successive
five-year plans can be development plan outlays for small
sector.
• 1st five-year plan: (1951-56): In the first five-year plan, Rs.48
crores was spending in small scale sector alone. By the end of
1st plan, there were a total six boards. 1. All India Handloom
Board, All India Handicraft Board, All India Khadi and Village
Industries Board, Small scale Industries Board, Coir Board,
Central Silk Board, thus covering the entire field of small scale
and cottage industries.
• The Second five-year plan 6o industrial estates were
established for providing basic facilities like power, water,
transport etc. Certain items were reserved for exclusive
production in small scale industries. The Total Second plan
reached to Rs. 187 crores.
• The Third five-year plan especially stressed of the coverage
of small-scale industries.
• The fourth five-year plan: The result of various development
programs, small sectors witnessed significant diversification
and expansion during the fourth five-year plan,
• for exam-346 industrial estates had been completed- small
industrial units set up in these estates provided employment
to about 82,700 persons -and annual production was
estimated at Rs. 99 crores.
• The main trust of THE FIFTH PLAN was to develop small scale
industries to remove poverty and inequity staking the land.
On account of massive development programs initiated for
the development of promising small sector.
The result among SIXTH PLAN was increase in the number of
items reserved for exclusive production in small sector
reaching to 836.
• By the end of the SIXTH plan, production from small and
cottage industries increased to Rs. 65,730 crores, export
touched to RS. 4,557 crores and employment reached to 315
lakh persons by the end of the SIXTH Plan (1985)
• The main thrust of the seventh plan was up gradation of
technology to increase competitiveness of small sector.
Employment also increase substantially from 96 lakh persons
during the seventh plan period.
• The main advocating of the Eighth Plan has been
employment generation as the motive force for economic
growth. In order to fulfill this objective, small and village
industries have been assigned an extremely important role.
•
• SSI helps promote rural businesses and small industries,
agriculture and cottage industries, their primary role is to
generate business and employment opportunities in the
unorganized sector. One of the provisions also includes
providing micro-credit access to unorganized entrepreneurs.
Plan Total Expenditure (Rs.
Crores) for SSI

First (1951-56) 48.00

Second (1956-61) 187.00

Third ( 1961-66) 248.00

Fourth (1969-73) 242.00

Fifth ( 1974-78) 592.00

Sixth (1980-85) 1945.00

Seven ( 1985-90) 3249.00

Eight (1992-97) 6334.00

• Here Products reserved for small scale industrial Units

• As on today, there are 836 items reserved for exclusive
manufacturing in the small-scale sectors. It may be
mentioned that the small-scale sector products over 7500
items. For exam: chocolates, toothpick, water bottles, small
toys, notebook, registers, pens, Bakeries, leather belt, t shirt
printing, photography, etc.
• Small scale Industries have best potentialities but they could
not progress satisfactory. Their performance is not good as
they face the following problems.

• Inefficient labor: Many times, level of education of workers,

working in small scale sector is also low & they fail to cope up
with the challenges of modern production system.
• Defective system of supply of raw materials: SSI are facing
the problem of sort supply of raw materials and weak
financial position, they fail to utilize their full production
capacity, it also increases their cost of production which
affect their competitive strength in the market.
• Absence of Credit Facility: due to poor financial image, they
generally fail to get their credit facility at reasonable costs
and interest rates in present scenario forces them to pay
more.
• Lack of Machinery and equipment: Only selected companies
or few producer are engaged in the production of equipment
for small scale sector. So, they generally charge high price
and bargaining power of SSI is not so much. They have also to
use second hand machines that affects production
performance.
• Huge number of bogus small Firms: Govt. policy favors SSIs
in terms of concessions, subsidy and incentives. This has
prompted to so call entrepreneurs to develop bogus firms on
paper to avail govt. subsidies and incentives. They indirect
helps the medium scale and large scale. And it creates
problems for genuine firms.
• Availability of cheap finance: also encourage the bogus firms
to operate in the small-scale sectors.
• Unsuitable locations: small industrialist is not properly
trained in deciding about suitable location. Actually, they
select their location due to other reasons like availability of
 land, family business, attachment of traditional property,
availability labor etc.
• Competition from large scale units: SSI facing the problem of
competition from their other counterparts-medium and
large-scale industries.
• Obsolete technology: SSIs lack latest technology as they do
not have any technological support from Govt. and other
technological institute and laboratories.
• Absence of organized marketing policy: Lack of
standardization, poor design and quality, absence of after
sales services, ignorance about potential market, financial
weaknesses are some of the problems which constitute the
marketing problems as such and SSIs are facing these
problems in their selling process.
• Poor Recoveries: It is general practice for buyers to avail
facility from sellers. SSIs lack bargaining power in dictating
their terms to the potential buyers for their products, a
situation has now developed in which buyers do not pay their
dues to SSIs for more than 12 months. It created working
capital problems before the SSIs.
• All are the issues related to financial Management,
Operations Management, Marketing Management, Labour
Management etc.
 • Unit 2: Factors Influencing Entrepreneurial
Development and Motivation
• Role of culture in Entrepreneurial development
• Entrepreneurial development program (EDP), managing
the problem faced by entrepreneurs.
• Development of women entrepreneurs with reference to
SHGs
• Options available to entrepreneurs- ancillary, franchising
and outsourcing.
• Cases on takeover, mergers and acquisitions in India and
at global level.
• Social Entrepreneurship –Definition, importance and
social responsibilities NGOs.

Over the last two decades, technological changes have reformed

business environment and made entrepreneurial activity as the main
channel behind knowledge spill overs and knowledge creation.
Therefore, the factors affecting entrepreneurial activity will indirectly
affect knowledge transmission. Here we, establishes three different
factors that appear to have dominant influence on the
entrepreneurial process. The first factor is related to entrepreneurial
skills, education, and previous experience, whereas the second
factor is related to issues regarded desire of independence and
locus of control. Finally, the third factor, which influences the
entrepreneurial activity, is related to the access of capital, to social
aspects, and to regions' institutional environment.
The emerging “knowledge-based view” on entrepreneur’s creation
represents a confluence of long-established interests in uncertainty
and information with several streams of newer thinking about the
firm. It considers knowledge as the most strategically important of
the firm's resources, so it is an extension of the resource-based view.
At the same time, knowledge is central to several quite distinct
research traditions, notably organizational learning,
the management of technology, and managerial cognition. The
issues with which the knowledge-based view concerns itself extend
beyond the traditional concerns of strategic management, strategic
choice, and competitive advantage, and address some other
fundamental concerns of the theory of the firm, notably the nature
of coordination within the enterprises’, organizational structure, the
role of management and the allocation of decision-making rights,
determinants of firm boundaries, and the theory of innovation

Factors affecting Entrepreneurship Development

Entrepreneurship is influenced by four distinct factors: economic development,
culture, technological development and education. In areas where these factors are
present, you can expect to see strong and consistent entrepreneurial growth.

These conditions may have both positive and negative influences on the emergence
of entrepreneurship. Positive influences constitute facilitative and conducive
conditions for the emergence of entrepreneurship, whereas negative influences
create inhibiting milieu to the emergence of entrepreneurship.

Let us look at each one of them in details.

Economic Factors
Economic environment exercises the most direct and immediate influence on
entrepreneurship. This is likely because people become entrepreneurs due to
necessity when there are no other jobs or because of opportunity.

The economic factors that affect the growth of entrepreneurship are the following:
1. Capital

Capital is one of the most important factors of production for the establishment of
an enterprise. Increase in capital investment in viable projects results in increase in
profits which help in accelerating the process of capital formation. Entrepreneurship
activity too gets a boost with the easy availability of funds for investment.

Availability of capital facilitates for the entrepreneur to bring together the land of
one, machine of another and raw material of yet another to combine them to
produce goods. Capital is therefore, regarded as lubricant to the process of
production.

France and Russia exemplify how the lack of capital for industrial pursuits impeded
the process of entrepreneurship and an adequate supply of capital promoted it.

2. Labour

Easy availability of right type of workers also effects entrepreneurship. The quality
rather than quantity of labour influences the emergence and growth of
entrepreneurship. The problem of labour immobility can be solved by providing
infrastructural facilities including efficient transportation.

The quality rather quantity of labour is another factor which influences the
emergence of entrepreneurship. Most less developed countries are labour rich
nations owing to a dense and even increasing population. But entrepreneurship is
encouraged if there is a mobile and flexible labour force. And, the potential
advantages of low-cost labour are regulated by the deleterious effects of labour
immobility. The considerations of economic and emotional security inhibit labour
mobility. Entrepreneurs, therefore, often find difficulty to secure sufficient labour.

3. Raw Materials

The necessity of raw materials hardly needs any emphasis for establishing any
industrial activity and its influence in the emergence of entrepreneurship. In the
absence of raw materials, neither any enterprise can be established nor can an
entrepreneur be emerged

It is one of the basic ingredients required for production. Shortage of raw material
can adversely affect entrepreneurial environment. Without adequate supply of raw
materials, no industry can function properly and emergence of entrepreneurship to
is adversely affected.

In fact, the supply of raw materials is not influenced by themselves but becomes
influential depending upon other opportunity conditions. The more favourable these
conditions are, the more likely is the raw material to have its influence of
entrepreneurial emergence.

4. Market

The role and importance of market and marketing is very important for the growth of
entrepreneurship. In modern competitive world no entrepreneur can think of
surviving in the absence of latest knowledge about market and various marketing
techniques.

The fact remains that the potential of the market constitutes the major determinant
of probable rewards from entrepreneurial function. Frankly speaking, if the proof of
pudding lies in eating, the proof of all production lies in consumption, i.e., marketing.

The size and composition of market both influence entrepreneurship in their own
ways. Practically, monopoly in a particular product in a market becomes more
influential for entrepreneurship than a competitive market. However, the
disadvantage of a competitive market can be cancelled to some extent by
improvement in transportation system facilitating the movement of raw material and
finished goods, and increasing the demand for producer goods.

5. Infrastructure

Expansion of entrepreneurship presupposes properly developed communication and

transportation facilities. It not only helps to enlarge the market, but expand the
horizons of business too. Take for instance, the establishment of post and telegraph
system and construction of roads and highways in India. It helped considerable
entrepreneurial activities which took place in the 1850s.

Apart from the above factors, institutions like trade/ business associations, business
schools, libraries, etc. also make valuable contribution towards promoting and
sustaining entrepreneurship’ in the economy. You can gather all the information you
want from these bodies. They also act as a forum for communication and joint
action.

Social Factors
Social factors can go a long way in encouraging entrepreneurship. In fact, it was the
highly helpful society that made the industrial revolution a glorious success in
Europe. Strongly affect the entrepreneurial behaviour, which contribute to
entrepreneurial growth. The social setting in which the people grow, shapes their
basic beliefs, values and norms.

The main components of social environment are as follows:

1. Caste Factor

There are certain cultural practices and values in every society which influence the’
actions of individuals. These practices and value have evolved over hundreds of
years. For instance, consider the caste system (the varna system) among the Hindus
in India. It has divided the population on the basis of caste into four division. The
Brahmana (priest), the Kshatriya (warrior), the Vaishya (trade) and the Shudra
(artisan): It has also defined limits to the social mobility of individuals.

By social mobility’ we mean the freedom to move from one caste to another. The
caste system does not permit an individual who is born a Shudra to move to a higher
caste. Thus, commercial activities were the monopoly of the Vaishyas. Members of
the three others Hindu Varnas did not become interested in trade and commerce,
even when India had extensive commercial inter-relations with many foreign
countries. Dominance of certain ethnical groups in entrepreneurship is a global
phenomenon

2. Family Background

This factor includes size of family, type of family and economic status of family. This
study has been revealed that Zamindar family helped to gain access to political
power and exhibit higher level of entrepreneurship.

Background of a family in manufacturing provided a source of industrial

entrepreneurship. Occupational and social status of the family influenced mobility.
There are certain circumstances where very few people would have to be
venturesome. For example, in a society where the joint family system is in vogue,
those members of joint family who gain wealth by their hard work denied the
opportunity to enjoy the fruits of their labour because they have to share their
wealth with the other members of the family.

3. Education

Education enables one to understand the outside world and equips him with the
basic knowledge and skills to deal with day-to-day problems. In any society, the
system of education has a significant role to play in inculcating entrepreneurial
values.

In India, the system of education prior to the 20th century was based on religion. In
this rigid system, critical and questioning attitudes towards society were
discouraged. The caste system and the resultant occupational structure were
reinforced by such education. It promoted the idea that business is not a respectable
occupation. Later, when the British came to our country, they introduced an
education system, just to produce clerks and accountants for the East India
Company, the base of such a system, as you can well see, is very anti-
entrepreneurial.

Our educational methods have not changed much even today. The emphasis is till on
preparing students for standard jobs, rather than marking them capable enough to
stand on their feet.

4. Attitude of the Society

A related aspect to these is the attitude of the society towards entrepreneurship.

Certain societies encourage innovations and novelties, and thus approve
entrepreneurs’ actions and rewards like profits. Certain others do not tolerate
changes and in such circumstances, entrepreneurship cannot take root and grow.
Similarly, some societies have an inherent dislike for any money-making activity. It is
said, that in Russia, in the nineteenth century, the upper classes did not like
entrepreneurs. For them, cultivating the land meant a good life. They believed that
rand belongs to God and the produce of the land was nothing but god’s blessing.
Russian folk-tales, proverbs and songs during this period carried the message that
making wealth through business was not right.

5. Cultural Value

Motives impel men to action. Entrepreneurial growth requires proper motives like
profit-making, acquisition of prestige and attainment of social status. Ambitious and
talented men would take risks and innovate if these motives are strong. The strength
of these motives depends upon the culture of the society. If the culture is
economically or monetarily oriented, entrepreneurship would be applauded and
praised; wealth accumulation as a way of life would be appreciated. In the less
developed countries, people are not economically motivated. Monetary incentives
have relatively less attraction. People have ample opportunities of attaining social
distinction by non-economic pursuits. Men with organizational abilities are,
therefore, not dragged into business. They use their talents for non-economic end.

Psychological Factors
Many entrepreneurial theorists have propounded theories of entrepreneurship that
concentrate especially upon psychological factors. These are as follows:

1. Need Achievement

The most important psychological theories of entrepreneurship were put forward in

the early) 960s by David McClelland. According to McClelland ‘need achievement’ is
social motive to excel that tends to characterise successful entrepreneurs, especially
when reinforced by cultural factors. He found that certain kinds of people, especially
those who became entrepreneurs, had this characteristic. Moreover, some societies
tend to reproduce a larger percentage of people with high ‘need achievement’ than
other societies. McClelland attributed this to sociological factors. Differences among
societies and individuals accounted for ‘need achievement’ being greater in some
societies and less in certain others.

The theory states that people with high need-achievement are distinctive in several
ways. They like to take risks and these risks stimulate them to greater effort. The
theory identifies the factors that produce such people. Initially McClelland attributed
the role of parents, specially the mother, in mustering her son or daughter to be
masterful and self-reliant. Later he put less emphasis on the parent-child relationship
and gave more importance to social and cultural factors. He concluded that the ‘need
achievement’ is conditioned more by social and cultural reinforcement rather than
by parental influence and such related factors.

2. Withdrawal of Status Respect

There are several other researchers who have tried to understand the psychological
roots of entrepreneurship. One such individual is Everett Hagen who stresses the-
psychological consequences of social change. Hagen says, at some point many social
groups experience a radical loss of status. Hagen attributed the withdrawal of status
respect of a group to the genesis of entrepreneurship.

Everett Hagen believes that the initial condition leading to eventual entrepreneurial
behaviour is the loss of status by a group. He postulates that four types of events can
produce status withdrawal:

1. The group may be displaced by force;

2. . It may have its valued symbols denigrated;
3. It may drift into a situation of status inconsistency; and
4. It may not be accepted the expected status on migration in a new society.

3. Motives

Other psychological theories of entrepreneurship stress the motives or goals of the

entrepreneur. Cole is of the opinion that besides wealth, entrepreneurs seek power,
prestige, security and service to society. Stepanek points particularly to non-
monetary aspects such as independence, persons’ self-esteem, power and regard of
the society.

On the same subject, Evans distinguishes motive by three kinds of entrepreneurs

 1. Managing entrepreneurs whose chief motive is security.
2. Innovating entrepreneurs, who are interested only in excitement.
3. Controlling entrepreneurs, who above all otter motives, want power and
authority.

Finally, Rostow has examined inter gradational changes in the families of

entrepreneurs. He believes that the first generation seeks wealth, the second
prestige and the third art and beauty.

4. Others

Thomas Begley and David P. Boyd studied in detail the psychological roots of
entrepreneurship in the mid-1980s. They came to the conclusion that
entrepreneurial attitudes based on psychological considerations have five
dimensions:

1. First came ‘need-achievement’ as described by McClelland. In all studies of

successful entrepreneurs, a high achievement orientation is invariably present.
2. The second dimension that Begley and Boyd call ‘locus of control’ This means
that the entrepreneur follows the idea that he can control his own life and is not
influenced by factors like luck, fate and so on. Need-achievement logically
implies that people can control their own lives and are not influenced by
external forces.
3. The third dimension is the willingness to take risks. These two researchers have
come to the conclusion that entrepreneurs who take moderate risks earn higher
returns on their assets than those who take no risks at all or who take
extravagant risks.
4. Tolerance is the next dimension of this study. Very few decisions are made with
complete information. So, all business executives must, have a certain amount
of tolerance for ambiguity.
5. Finally, here is what psychologists call ‘Type A’ behaviour. This is nothing but “a
chronic, incessant struggle to achieve more and more in less and less of time”
Entrepreneurs are characterizing by the presence of ‘Type A’ behaviour in all
their endeavour’s

Role of culture in Entrepreneurial

development
Elements of an Entrepreneurial Culture

People and empowerment focused

Value creation through innovation and change

Attention to the basics

Hands-on management

Doing the right thing

Freedom to grow and to fail

Commitment and personal responsibility

Emphasis on the future and a sense of urgency

 What are 4 types of organizational culture?
According to Robert E. Quinn and Kim S. Cameron at the University
of Michigan at Ann Arbor, there are four types of organizational
culture: Clan, Adhocracy, Market, and Hierarchy.

● Clan oriented cultures are family-like, with a focus on mentoring,

nurturing, and “doing things together.”
● Adhocracy oriented cultures are dynamic and entrepreneurial, with a
focus on risk-taking, innovation, and “doing things first.”
● Market oriented cultures are results oriented, with a focus on
competition, achievement, and “getting the job done.”
● Hierarchy oriented cultures are structured and controlled, with a
focus on efficiency, stability and “doing things right.”
There’s no correct organizational culture for an arts organization. All
cultures promote some forms of behaviour, and inhibit others. Some
are well suited to rapid and repeated change, others to slow
incremental development of the institution.

For example,

● The Clan Culture: This culture is rooted in collaboration.

Members share commonalities and see themselves are part of
one big family who are active and involved. Leadership takes
the form of mentorship, and the organization is bound by
commitments and traditions. The main values are rooted in
teamwork, communication and consensus. A prominent clan
culture is Tom’s of Maine, the maker of all-natural hygiene
products. To build the brand, founder Tom Chappell focused on
building respectful relationships with employees, customers,
suppliers and the environment itself.
● The Adhocracy Culture: This culture is based on energy and
creativity. Employees are encouraged to take risks, and leaders
are seen as innovators or entrepreneurs. The organization is
held together by experimentation, with an emphasis on
individual ingenuity and freedom. The core values are based on
change and agility. Facebook can be seen as a prototypical
adhocracy organization, based on CEO Mark Zuckerberg’s
famous admonition to, “Move fast and break things – unless
you are breaking stuff, you are not moving fast enough.”
● The Market Culture: This culture is built upon the dynamics of
competition and achieving concrete results. The focus is goal-
oriented, with leaders who are tough and demanding. The
organization is united by a common goal to succeed and beat
all rivals. The main value drivers are market share and
profitability. General Electric under ex-CEO Jack Welch is a good
example of this culture. Welch vowed that every G.E. business
unit must rank first or second in its respective market or face
being sold off. Another example of the market culture is
 software giant Oracle under hard-driving Executive Chairman
Larry Ellison.
● The Hierarchy Culture: This culture is founded on structure and
control. The work environment is formal, with strict
institutional procedures in place for guidance. Leadership is
based on organized coordination and monitoring, with a culture
emphasizing efficiency and predictability. The values include
consistency and uniformity. Think of stereotypical large,
bureaucratic organizations such as McDonald’s, the military, or
the Department of Motor Vehicles.

Role of the culture of entrepreneurship development in

India:
It is going to be a long-term effort, but thankfully it is doable as everyone from
government to management institutes and even organisations have realised the
importance of promoting entrepreneurship in India. Few of these initiatives
include:

1. The government of India and even the state governments are already
encouraging start-up ideas with initiatives such as Start-up India and the
major Global Entrepreneurship Summit (GES) that was held last year in
Hyderabad. Of course, there are certain hiccups in the execution.
However, it is undoubtedly a sign of positive development.
Entrepreneurs should look for updates from the government and
identify avenues that can help them realise their ideas and execute it.
2. Leading management institutes such as SP Jain Institute of Management,
Narsee Monjee Institute of Management Studies, and many more have
realised the need for a structured format of learning entrepreneurship.
Entrepreneurs can enrol in these courses to understand how it works.
No time to attend classroom lectures? Well, there are several online
lectures such as Udemy’s Entrepreneurship and Innovation course or
EdX by Massachusetts Institute of Technology (MIT) to learn the latest
lessons on entrepreneurship.
3. There are many networking conferences conducted in major Indian
cities. Entrepreneurs can look for the ones that interest them and attend
it to get an idea of how start-ups work. They also get access to mentors
who can guide them in areas such as business development, raising
 capital etc. These events are apt for budding entrepreneurs to learn the
lessons of entrepreneurship.
4. Organisations can also play a significant role in nurturing
entrepreneurship. Many organisations have an initiative called
Entrepreneurship that allows employees with innovative ideas to pitch
and receive funding for it. This gives people the opportunity to test the
water before plunging into it.

NASSCOM had last year reported that India has the third largest start-up base in
the world. This is a good sign considering that the culture of entrepreneurship is
still at the nascent stage. All that is needed now is correct mentoring and support
from the family, friends, and government to nurture entrepreneurs in our
country. Remember, if you cannot see an opportunity, create one!

Entrepreneurship development programme is a programme meant

to develop entrepreneurial abilities among the people.
The concept of entrepreneurship development programme involves
equipping a person with the required skills and knowledge needed for
starting and running the enterprise.
EDP is an effective way to develop entrepreneurs which can help in
accelerating the pace of socio-economic development, balanced
regional growth, and exploitation of locally available resources.

Entrepreneurship Development Programme is primarily meant for

developing those first-generation entrepreneurs who on their own
cannot become successful entrepreneurs. It covers three major
variables- location, target group and enterprise. Any of these can
become the focus or starting point for initiating and implementing an
EDP.
Entrepreneurship development programme is a programme meant
to develop entrepreneurial abilities among the people. The concept
of entrepreneurship development programme involves equipping a
person with the required skills and knowledge needed for starting
and running the enterprise.
EDP is an effective way to develop entrepreneurs which can help in
accelerating the pace of socio-economic development, balanced
regional growth, and exploitation of locally available resources. It
takes care of all the constraints and therefore it is proved to be one
of the most effective tools for developing new entrepreneurs.

Entrepreneurship Development Programme (EDP) in India has many

objectives.
The expert group constituted by the NIESBUD accepted that it must
be able to help selected entrepreneurs to:
(1) Develop and strengthen their entrepreneurial quality/motivation;
(2) Analyse environment related to small industry and small business;
(3) Select project/product;
(4) Formulate projects;
(5) understand the process and procedure of setting up of small
enterprise;
(6) Know and influence the source of help/support needed for
launching the enterprise;
(7) acquire the basic management skills;
(8) Know the pros and cons of being an entrepreneur; and
(9) Acquaint and appreciate the needed social
responsibility/entrepreneurial disciplines.

Entrepreneurship Development Programme – Feature

The basic features of Entrepreneurship Development Programme
have gone through several modifications overtime as:
(a) Identification and careful selection of entrepreneurs for training;
(b) Developing the entrepreneurial capabilities of the trainee;
(c) Equipping the trainee with the basic managerial understanding
and strategies;
(d) Ensuring a viable industrial project for each potential
entrepreneur;
(e) Helping him to secure the necessary financial, infrastructural and
related assistance; and
(f) Training cost is highly subsidised and only token fee is charged. A
deposit is, however, taken to ensure commitment of participants.

But EDPs suffer on many counts.

The problems are the part of those who are involved in process
such as:
i. The trainers
ii. The trainees
iii. The Entrepreneur Programme Organization
iv. The supporting organization
v. The State Government.
There are various problems faced at the time of organizing these
programmes.
These problems are explained as follower:
1. Lack of National Level Policy:
There is no suitable national level policy in India for
entrepreneurship development. The Government did not formulate
and enforce a policy for the promotion of entrepreneurship. Because
of that the entrepreneurship development programmes faced many
problems at the time of their organization.
2. Difficulty in Pre-Training Phase:
It is also stated that there is ill-planned training methodology
inconsistency during that phase, its content sequence, theme and
the focus of the programme is not clear. There are large number of
problems in that phase such as identification of business
opportunities, finding and locating target group, selection of trainee
and trainers etc.
3. Over Estimation of Trainees:
There are over estimation of trainees by assuming that the trainees
have aptitude for self-employment and training will motivate and
enable the trainees in the successful setting up of their enterprise.
4. Time Period of EDPs:
The duration period of these EDPs varies between 4 to 6 months,
which is too short a period to in still basic managerial skills in the
entrepreneurs. In that short period the trainees cannot develop their
skills those are important for a successful entrepreneur.
5. Lack of Infrastructure Facility:
These programmes are conducted in the rural and backward areas.
In that area there are many problems regarding class rooms, guest
speaker etc., so that we can say that the EDPs faced many problems
such as – no proper infrastructure facility.
6. Wrong Selection Procedure:
Because of competition, the institutions not follow uniform method
for the selection of trainees or prospective entrepreneurs. Some of
institutions are still debating whether to have a proper identification
and selection of entrepreneurs for preparing successful
entrepreneurs.
7. Absence of Competent Management or Faculty:
Experience revealed that entrepreneurial failures are mostly due to
incompetence faculty and management. There is a problem of non-
availability of competent teachers and even they are available, they
are not prepared to take classes in the rural and backward areas.
8. Non-Availability of Inputs:
Non-availability of various inputs i.e., raw materials, power etc., with
poor follow up by the primary monetary institutions resulted failing
in the entrepreneurship development programmes.
9. Lack of Standardization:
The course content of training is not proper standardized – It is also
another problem that there are not standard even in terms of a
broad module being adopted by interventions.
10. Other Problems:
Those involved in and concerned with the selection and follow up
activities have either limited manpower support or a narrow linkage
with other support agencies. Training institutions do not have much
concern for the objective’s identification and selection of
entrepreneurs for preparing successful entrepreneurs.
The problem is that there is a low institutional commitment for local
support to the entrepreneurs. There is also a very low level of
involvement in the marketing of the products of the units. Most of
the existing support organizations meant for maintenance operation
are not for innovative functions.
There is also an element of cynicism. A re-orientation in the attitude
of supporting organization is called forth.

• Development of women entrepreneurs with reference to

SHGs
Women entrepreneurs may be defined as the women or a group of
women who initiate, organize and operate a business enterprise.
Self-help group is a small voluntary association of poor people
preferably from the same socio-economic back drop. They have been
recognized as useful tool to help the poor and as an alternative
mechanism to meet the urgent credit needs of poor through thrift.
SHGs enhance the equality of status of women as participants,
decision-makers and beneficiaries in the democratic, economic,
social and cultural spheres of life.

Meaning of Self-Help Group (SHG):

SHG is a holistic programme of micro-enterprises covering all aspects of
self-employment, organization of the rural poor into self Help groups and
their capacity building, planning of activity clusters, infrastructure build
up, technology, credit and marketing.

It lays emphasis on activity clusters based on the resources and the

occupational skills of the people and availability of markets.

Self-help Groups has an important role in the Women

Entrepreneurship Development. The factor which has major
contribution in the entrepreneurship development of the women is
considered as skill training programmes. The other factors like the
financial literacy programmes, Group saving, Micro-credit facility,
separate identity in family, time to repay the loan, chance to repay
old debt, ability to fulfil family needs, increment in the decision
making in family and society level do not have major impact upon
the entrepreneurial development of the women.

SHG has played a significant role in the women entrepreneurship

development. SHG has conducted various financial literacy
programmes, to provide skill training programme to women with the
help of NGO’s and NABARD. To provide a facility of Micro-saving and
Micro-credit to women to enhance their businesses on small scale
and also to provide them a separate identity in the bank by having
their bank account. Women in rural areas felt emotional attachment
with the SHGs because it has provided a platform of growth for
women which further lead to have entrepreneurship development
among women. An effort has been made through primary data
collected from the women respondents, who have joined the SHG to
be self-dependent.
There is only one factor i.e. skill training programmes provided by
the SHGs to women has put more significant impact upon the
Women Entrepreneurship Development. NGO’s has to made
attention towards the other factors to promote entrepreneurship.
Government should help the women by providing them the ways to
promote their small-scale businesses.

• Options available to entrepreneurs- ancillary,

franchising and outsourcing.

Ancillary industries are the industries that produce

components and segments to be utilized by larger businesses. ...
Thus, the meaning of Ancillary industry refers to the
secondary industry that provides semi-manufactures materials to
the higher industries.
 Ancillary industry is an industry which has fixed investment in plant
and machines that do not exceed 1 crore rupees. Ancillary
industry manufactures parts, components, sub-assemblies, tools,
intermediates, machines etc.
the role of ancillary industries in the growth of heavy engineering
industries.
Ancillary industry is an industry which has fixed investment in plant
and machines that do not exceed 1 crore rupees.
● Ancillary industry manufactures parts, components, sub-assemblies,
tools, intermediates, machines etc.
● Any heavy industry depends on the machinery for its work to
progress; the heavy industry always requires support of ancillary
industry.

Ancillary industries are the industries that produce components and

segments to be utilized by larger businesses. Ancillary, in simple
terms, is something that has secondary importance. Thus, the
meaning of Ancillary industry refers to the secondary industry that
provides semi-manufactures materials to the higher industries. GE
Company (that manufactures locomotive for the aircraft
entrepreneurs) is one of the best examples of the Ancillary
industries.

A franchisee is a small-business owner who operates a franchise.

The franchisee pays a fee to the franchisor for the right to use the business's
already-established success, trademarks, and proprietary knowledge.
CAPITAL
The franchisor’s capital requirements will be lower because the franchisees
provide the capital to open each franchised outlet.
MOTIVATED AND EFFECTIVE MANAGEMENT
The local management of each franchised unit will be highly motivated and
very effective. They treat the franchise units as their own and that will usually
lead to higher sales and profit levels.
FEWER EMPLOYEES
The number of employees which a franchisor needs to operate a franchise
network is much smaller than they would need to run a network of company
owned units.
SPEED OF GROWTH
The franchise network can grow as fast as the franchisor can develop its
infrastructure to recruit, train and support its franchisees.
REDUCED INVOLVEMENT IN DAY-TO-DAY OPERATIONS
The franchisor will not be involved in the day-to-day operations of each
franchised outlet.
LIMITED RISKS AND LIABILITY
The franchisor will not risk its capital and will not have to sign lease
agreements, employment agreements, etc.
INCREASING BRAND EQUITY
Leveraging off the assets of franchisees helps franchisors grow their market
share and brand equity more quickly and effectively.
ADVERTISING AND PROMOTION
Franchisor will reach the target customer more effectively through co-
operative advertising and promotion initiatives.
CUSTOMER LOYALTY
Franchisors use the power of franchising as a system to build customer loyalty-
to attract more customers and to keep them.
INTERNATIONAL EXPANSION
International expansion is easier and faster, since the franchisee possesses the
local market knowledge.

In return, the business owners pay fees and royalties. In most cases,
the franchisee also buys supplies from the franchiser. Fast food
restaurants are good examples of this type of franchise.
Prominent examples include McDonalds, Burger King, and Pizza Hut.
Outsourcing is the business practice of hiring a party outside a
company to perform services and create goods that traditionally
were performed in-house by the company's own employees and
staff. ... The practice of outsourcing is subject to considerable
controversy in many countries.
Professional Outsourcing
Professional Outsourcing includes accounting, legal, purchasing,
information technology (IT), IT or administrative support and other
specialized services.

IT Outsourcing
IT outsourcing, a type of professional Outsourcing, is one of the more
common services outsourced today. It refers to the practice of
seeking technology related resources or subcontracting outside of an
organization for all or part of an informational technology function.

Multisource
Multisource is another important term and provision of IT
outsourcing worth exploring more. Multisource is a term that can
apply to any business area, but is most commonly used when
referring to IT outsourcing and IT services, as it is the blending of
business and IT services from the main set of internal and external
providers in the pursuit of business goals.

Manufacturer Outsourcing
The term "Outsourcing" became popular in the U.S. near the turn of
the 21st century and was widely adopted and forged in the
manufacturing industries. This mainly involved the transferring of
blue-collar jobs to a third party for various reasons such as expertise,
human capital, time to market and cost factors.

Process-Specific Outsourcing
Other Outsourcing services can be specific to a process or internal
procedure, which is commonly referred to as process-specific
Outsourcing. Today, it is very common to outsource specific
operation-related aspects to other companies or units that specialize
in that specific service.

BPO
Besides professional process Outsourcing, manufacturer Outsourcing
and process-specific Outsourcing, there is also Outsourcing services
for operational activities.

Project Outsourcing
Sometimes companies have trouble managing one of their projects
or even just completing a portion of a specific project. In such a case,
companies can project outsource. There are individuals and
specialized units that specialize in project management that
companies can outsource to. These Outsourcing services can be
contracted to either manage entire projects or complete portions of
projects.

Franchising relationships gives the company with more bargaining

power on the franchisee and enable it to maintain its competence.
That in the case of outsourcing relationships the company loses its
competence and has less bargaining power on
the outsourcing company.

• Social Entrepreneurship –Definition, importance and

social responsibilities NGOs.

Social entrepreneurship is mainly found as an interaction

between NGO's and other organizations, though. self-sustainable
and independent activities that are constantly changing economic
and legal framework within a. country.

The social entrepreneur develops a mission and vision to bring in

change in the society. They possess innate talent and qualities to
understand and analyse the social problems. They are able to
develop creative innovative ideas and strategies to help alleviate
these problems from the society as a whole.
Corporate Social Responsibility and Social Entrepreneurship. ... The
creation of CSR firms increases aggregate social giving. Firms can also
undertake strategic CSR activities that increase profits, and a social
entrepreneur carries strategic CSR beyond profit maximization and
market value maximization.

For instance, when Bill Gates (who is one of the richest persons in
the world) initiates philanthropic activities through his charitable
foundation 'The Gates Foundation' such acts are claimed as social
entrepreneurial because Bill Gates is also a social entrepreneur.

The key role of India in Social Entrepreneurship

Some well-known Indians became aware of the potential of Social
Entrepreneurship quite early. Two of them were the Social
Entrepreneurs Dr. Govindappa Venkataswamy and Thulasiraj D
Ravilla who established the Aravind Eye Hospital in 1976. Since then,
they have treated more than 2.4 million patients, often free of
charge. Many others have also contributed to the comparatively high
levels of Social Entrepreneurship which have been reached in India.

As the Swiss Klaus Schwab, founder of the World Economic Forum

and of the Schwab Foundation, pointed out in an interview with the
Hindustan Times: “India has some of the most advanced and
innovative social entrepreneurs. We believe and already see that
many of the models developed in India, for instance rainwater
harvesting for schools pioneered by Barefoot College, are exported
around the world.” Thus, India is a key country in developing social
entrepreneurs. Several institutions help people to become involved
with Social Entrepreneurship, such as Un Ltd India and the National
Social Entrepreneurship Forum (NSEF).

Furthermore, the Schwab Foundation and its Indian counterpart,

the Jubilant Bhartia Foundation, give the Social Entrepreneurship
Award to prominent visionary Indian social entrepreneurs. In 2009,
the winners of the Social Entrepreneur of the Year Award included
Brij Kothari of “Planet Read and Book box” who found to combat
illiteracy, Padmanabha Rao and Rama Rao of “River” which focused
on the primary education of children and Rajendra Joshi of “Saath”
who created inclusive societies by empowering India’s urban and
rural poor. The next winner will be announced in a ceremony
coinciding with the India Economic Summit in November 2010.

Another important organisation that is linked to India is Ashoka,

which is the global association of the world’s leading social
entrepreneurs. Since 1981, they have elected over 2.000 leading
social entrepreneurs as Ashoka Fellows, providing them with living
stipends, professional support and access to a global network of
peers in more than 60 countries. India is home to Ashoka's first
Fellow and for the past 25 years, India has served as a testing ground
for most of Ashoka's international Fellowship building programs and
other key initiatives. Since 2003, Ashoka and the American India
Foundation (AIF) have partnered to co-invest in social entrepreneurs
in India. This partnership has enabled Ashoka to increase the number
of Fellows elected in India to 250

Reasons Why Social Entrepreneurship Matters

Among the large number of individuals chasing financial freedom, there is a

growing minority of social entrepreneurs who are focused on solving some of
the world’s biggest problems. Utilizing the latest technologies and innovations,
they are driven to create an impact that will improve our lives and
environment. Making money is not enough for them. They need to add
meaningful value to the world
1. You will be an inspirational source of impact

There is entrepreneurial passion and there is impact. Guess what, in a social

enterprise you can have both! How about putting your energy into solving a
meaningful issue that will contribute to our society and/or to make our
environment more sustainable?

On the employees’ side, we are getting familiar with these newbies called
“Millennials” who are slowly but surely starting to occupy the workplace. They
have a different sense of priority, and as fastcompany.com reminds us, only a
few rank moneys as #1 criteria while the majority actually “wants to work with
purpose”.

“Social enterprises fulfil a pressing desire to work with purpose and align
people’s efforts with their values.”

A growing number of companies already started to enhance the link between

purpose and work. Social enterprises however, truly fulfil this pressing desire
to work with purpose and align people’s efforts with their values. Global
success stories such as Tom Shoes and the Grameen Bank, also local ones such
as Scholly in the US or Triiodo’s in Belgium highlight the opportunities for
employees to switch from #workforsalary to #workforpurpose. Even better:
beliefs stating that “doing good” cannot be turned into a viable business finally
fade away. So yes, you can survive, financially speaking, while tackling a social
or environmental issue.

2. You will respond to customers’ needs

You surely have noticed that our sustainability awareness has been rising in the
past years. The Guardian states that even the crisis “has not dented people to
minimize their impact on the environment and their spending on ethical
products”. This proves the demand of market for businesses with social
mission at the core of their raison d’être.

It is true that social enterprise’s customer segments can be tough to handle

because there are often not only the clients’ but also the beneficiaries’ needs
to fulfil. Moreover, as the former segment is allowing the social business to
serve the latter, there is a balance to be worked out. Take the example of a
social grocery as Eis Epicerie in Zolwer (LU) that has regular clients paying the
fair price for local and fair-trade products. Enabling the beneficiaries of the
social office can access these products for an affordable amount.

However, the current trend for environmentally friendly and ethical products
dispels doubts about the lack of opportunities for social businesses to be
profitable. In brief, as long as there is a need to fulfil and a viable business to
develop, there’s no reason for you to shy away from the customer segment
challenge.

3. Relationships beyond economic purpose

Social enterprises also have the ability to build strong relationships between
individuals in social and economic networks. As opposed to traditional
commerce and other business connections, social relations facilitate exchanges
are nourished mainly by emotional support provided not only to people in
need but also to the entrepreneurs.

By the same token, sharing information and resources amongst communities

can be beneficial to similar social groups from different parts of the world. For
instance, international humanitarian initiatives like fair trade have proved that
social entrepreneurship can also help create networking opportunities
between two or more countries and reinforce those who are being
economically and socially marginalised.

4. A more responsive business to create economic and social value

This fast-growing sector can solve social problems and exploit new market
opportunities more responsively than traditional businesses. Social enterprises
do not rely only on the priorities of governments and that is why they can
respond to social problems more efficiently. Additionally, not depending on
limited funds from official institutions make it easier to meet the needs of our
society.

What is more, being change agents for the community and significantly
contributing to the global economy, social entrepreneurs deliver solutions in a
way the State does not. This is also why social entrepreneurship is important –
it offers alternative solutions when the administration is not acting effectively
to supply the urgent needs.

5. A social mission to make the world a better place

Going by the motto “do well by doing good”, social value and social change are
at the heart of any social enterprise operation. Monetary profit becomes just a
tool for entrepreneurs to accomplish people-centred goals. Certainly, social
entrepreneurship is more than an economic activity –it gives society positive
world-changing solutions at a time when we need them.

Social entrepreneurship matters because it maximises social benefit.

Entrepreneurs from the third and the fourth sector consider it as their
obligation to give back to the community. And to do so, they find unique ways
of creating sustainable solutions to either global or local pressing social issues
such as healthcare, homelessness or child labour.
• Unit 3
• Entrepreneurial Project Development
• Idea Generation – Sources and Methods
• Identification and classification of ideas
• Environmental Scanning and SWOT analysis
• Preparation of project plan- point to be
considered
• Components of an ideal business plan –
market plan, financial plan, operational plan
and HR plan.
• Project formulation- project report
significance and contents
• Project appraisal- Aspect and methods A)
Economic oriented appraisal B) Financial
appraisal C) Market oriented appraisal.
• Technological feasibility, Managerial
competency
Entrepreneurial Project:

An entrepreneurial project is a tool used in executive programs that has

three main objectives: stimulate the work of multifunctional and multi-
disciplinary teams, assure networking and integration of professionals
within the company, and promote a short-term return on the investment
made.
Entrepreneurial projects have been used as an adult education
development tool, in different programs and applied to different
companies, with a high level of success. The principle behind the
concept of an entrepreneurial project is that professional executives of a
corporation, with their knowledge and experience related to the specific
business that they are in, may conceive and develop business solutions
that are not only viable but also worth the investment made. What they
need is stimulus and methodology to be applied in the conception,
development and implementation of a project related to their reality and
to the company's needs.
An entrepreneurial project is in nature, an applied research. This means
that executives will work on a specific problem or opportunity related to
the company's needs in order to define and implement a solution. The
solution to be put into practice must be based on sound concepts
related to the theme of the project and also on best practices observed
in different companies. This way, the project team develops and
presents a solution that has a solid conceptual and practical basis,
consolidating the nature of applied research of entrepreneurial projects.

Here we see the case of Ola cabs:

When Bhavesh Aggarwal, the CEO of Ola cabs, told his parents of his
plan of developing a cab aggregator app, they were taken by surprise.
“When I started, my parents thought I was going to become a travel
agent. It was very hard to convince them that I was not”, he said about
his journey.

Aggarwal is not the only one to have faced this hurdle from his family. I
had seen a post by someone on LinkedIn that said, parents are willing to
fund a child’s higher studies in an International University, but are
unwilling to support their start-up, which could cost a fraction of the
money spent on fees. The post resonated with many people and I
realised that despite the government trying to provide support to the
start-up ecosystem, and Venture Capitalists becoming accessible on
networking platforms such as LinkedIn, entrepreneurship is still a less
desirable choice in India.

Idea Generation – Source and methods

• Idea generation is described as the process of creating, developing

and communicating abstract, concrete or visual ideas. It's the front
-end part of the idea management funnel and it focuses on coming
up with possible solutions to perceived or actual problems and
opportunities.
Methods of Generating New Ideas for Entrepreneurs:
• Focus Groups – these are the groups of individuals providing
information in a structural format. ...
• Brainstorming – it is a group method for obtaining new ideas and
solutions. ...
• Problem inventory analysis- it is a method for obtaining new
ideas and solutions by focusing on problems.
Source of Idea Generation:

1. Start with family.

Tapping family for great business ideas may not seem like an obvious
first step. But sure, you'll hit them up for cash once you've developed
your idea, but what can your aging father contribute this early in the
process? For example, Donald Trump certainly wasn't bashful about
learning the real estate business from his dad. If his father hadn't
provided the foundation and training [he needed] to create a profitable
business, Trump wouldn't be where he is today," Trump had the good
idea and sense to get some priceless training before going off to
become one of the country's foremost builders and real estate
developers. "Unfortunately, many people insist on [creating a business]
2. Get a little help from your friends.

See, you are severely limiting yourself if you rely solely on your own ideas
-- especially “If you have 15 or 20 friends, chances may be a couple of
them have some incredible business ideas. You must have to listen to
ideas others and then decide about your Idea. "

If it weren't for Steve Jobs' good friend Steve Wozniak, there would be no
Apple Computer today. "Jobs didn't know anything about computers,
Wozniak, on the other hand, was the computer genius who developed
the first Apple." Jobs had an eye for great business ideas and saw the
marketing potential for developing a new type of computer. So here, the
important lesson is to keep your antenna up at all times so you can
retrieve good ideas when you stumble across them.

It may not sound profound, if King C. Gillette hadn't been fed up with
the tedious process of sharpening his straight-edge razor, he wouldn't
have founded the massive disposable razor industry. When he took
his idea for a portable razor with a blade that could be used several
times to a research university for assistance, engineers questioned
his sanity. Gillette followed his instincts and the rest is history.

3. Tap your interests.

"When you're doing something you love, it's never considered work".
Thousands of clever people have taken up hobbies and turned them into a
successful business. Tim and Nina Zagat, who launched the Zagat Surveys, a
publishing empire that sells restaurant guides for many major U.S. and
European cities, are great examples.
4. Travel.
Traveling opens your eyes to a plethora of potential business ideas.
Leopoldo Fernandez,' discovery of Domino's Pizza on a trip to the United
States from his native Spain. Pujals was so impressed with the fast-food
operation, he went back to Spain and launched his own version, called
Tele Pizza, in 1986. His company now registers $260 million in sales,
and employs 13,000 people in eight countries.6. Keep your eyes open.
"When you see something that piques your interest, ask yourself, what is
it about this situation that's special?”, "Then narrow your focus so you
home in on the idea." The process of zeroing in on the idea often spawns
important niche markets.

5. Examine old mouse-traps -- then build a better one.

"If a product doesn't meet your own high standards, create a better one,"
advises business trendwatcher Perry Lowe. "That's what put Ben &
Jerry's on the map." Ice cream fanatics Ben Cohen and Jerry Greenfield
felt popular ice creams weren't rich and tasty enough for their cultivated
palates, so they created their own super-premium line of ice cream,
which is a bestseller nationwide. Just think: If these ice cream gurus
weren't such picky eaters, there would be no Cherry Garcia, Chubby
Hubby or Phish Food to enjoy.

1. Take it to the streets:

There's no better place to lock into up-and-coming trends than city

streets. Great ideas can often be found by just browsing happening inner
-city neighbourhoods in virtually any big city in the any area, any field.

2. Jot down those great ideas before they're forgotten.

Many people ignore their dreams, and some don't remember them at all.
But sometimes it pays to listen to those inner messages, no matter how
strange or unintelligible they are. "You never know, you might just find
the germ of a great idea”. The tough part is crawling out of bed in the
dead of night to jot down those great ideas before they're forgotten.
8. Go online.
Finally, it’s a web surfing as a fun way to log on to potential business
ideas. "Make it a point to check out various sites daily. It may trigger an
idea or concept you never thought of."

General Sources of Idea Generation:

1) Customers:
All marketing activities focus attention on customer needs &
wants. It has been observed in various research study that
customer often n gives very good suggestion for such
informa¬tion can be obtained with the help of regular customer
service of other techniques like focused group discussion &
through interviews.
2) Distribution Channel Members:
Distribution personnel who are in touch with customer often give
excellent suggestion for new product development. Good
marketing companies generally keep regular contact lead¬ing
stockiest or dealers not only defined various information from their
existing but also find information about new products or
modification made by competitors. The dealer con¬ference can
also bring about such new idea.
3) Competitors:
All marketing companies keep a close watch on development
carried out by competitors & these are collected by their own sales
force, & dealers. A company should monitor such development
activities of competitors; accordingly build their new product
development activity.
4) Own Sales Force:
The company’s sales force who is actually working but have failed
in selling, but are in touch with dealers & consumers know about
shortcomings of their products & they can often give good ideas
for new product development.
5) Marketing Research and Advertising Agencies:
Advertising agencies/dealers can often suggest new ideas to the
management as these agencies are involved in studying consumer
& market behavior, lifestyle changes.
6) Suppliers & Vendors: New product ideas can be obtained from
suppliers or vendors who are dealing with custom¬ers. They may
suggest certain improvement in quality or growing for new
products with the help of raw materials.
7) Company Management:
 Many times, owners saved us and members of management have
given brilliant ideas for product development & these ideas should
be carefully studied.
8) Scientist & Consultant: New innovative ideas have been
developed through basic & industrial research centers. The
pharmacy industry has been greatly helped by scientific
programmers carried out in various research laboratories.

Identification and classification of ideas:

Identification is the practical use of classification criteria to distinguish
certain organisms from others, to verify the authenticity or utility of a
strain or a particular reaction, or to isolate and identify the organism that
causes a disease.
This involves a process including first generating the ideas and then
scrutinizing of the ideas generated to come up with an idea to serve as
the basis for a new enterprise formation. The entrepreneur can use
several methods to generate new ideas.
We propose that opportunity identification is a competency that can be
developed as are other unique competencies and that
the entrepreneurship classroom is an appropriate venue for developing
the skills necessary to improve the ability to identify opportunities.
Here are five simple ways through which you can identify world-
changing business ideas:
1. Find opportunities in your own community. ...
2. Draw upon your own personal experiences. ...
3. Look for ideas that get other people involved. ...
4. Go out of your way to ask others how you can help. ...
5. Give back through meaningful philanthropical work.

Here are four ways to identify more business idea and opportunities.
 Listen to your potential clients and past leads. When you're
targeting potential customers listen to their needs, wants,
challenges and frustrations with your industry. ...
 Listen to your customers. ...
 Look at your competitors. ...
 Look at industry trends and insights.

Environmental Scanning and SWOT analysis

Scanning means detection. Environmental scanning means having a
detailed investigation of the environment. Environmental scanning can
also be termed as SWOT analyses. ... This is the process in which the
enterprise monitors environmental factors to identify opportunities and
threats of the business.

Environmental analysis is the study of the organizational environment to

pinpoint environmental factors that can significantly influence
organizational operations. It is a process of gathering, analysing and
dispensing information for effective purpose.
Preparation of project plan-

Now that you know the details of your business, you need to put
everything down on paper. Writing out these details will help you
visualize all the aspects of your business. It will also help you convince
banks and other people to invest in your business idea.

1. Idea Scanning:
In idea generation the objective is to create number of
new ideas. The major objective of the idea scanning is
to reduce number of ideas by retaining goods 7
relevant ideas. The new products short listed after
screening could need consider prices, development
time, manufacturing cost, & rate of return on
investment. The consumer welfare should be kept in
mind in making choice of product.
2. Concept Development and Testing:
For the ideas which survive in second stage of
product development i.e. screening stage firm used
concept testing. Getting reaction from customers on
how well new ideas fit with their needs. Concept
testing uses market research. It is important to
distinguish between product idea & services & as
important to specialty chemicals, restaurants and
engineering products.

3. Business Analysis:
Once the product concept has been developed which
would be acceptable in market to satisfy needs &
wants of the customers next stage is business
analysis. The company can analyze its external &
internal environment Analysis of internal environment
in¬cluded analysis of its own strength & weakness,
while analysis of the opportunities & threats.
Company always try to watch its strength with
opportunities try to reduce its weakness & threats.
The company will assess future sales, cost, profit.
 Total cost of production, sales, distribution cost,
marketing cost, product development & R&D cost,
allocation of overheads are decided after,
consultation with all functional depts. Involved in
developing, designing, production, sale, marketing,
purchase & finance de¬partments.
4. Market Strategy Development:
The market strategy will include target market
selection, market size, location of major markets &
sub – markets, demographic & consumer
characteristics. Sales and profit at the introduction
stage & growth stage.
The marketing strategy will also comprise, pricing
strategy, distribution strategy. Advertisement & sales
promotion strategy. The product positioning brand
decisions are also to be taken into consideration.

Point to be considered
Components of an ideal business plan – market plan,
financial plan, operational plan and HR plan.

Project planning is the process of defining your objectives and scope, your goals
and milestones (deliverables), and assigning tasks and budgetary resources for each
step. A good plan is easily shareable with everyone involved, and it's most useful
when it's revisited regularly.

Not all business plans are alike. A business plan for a sole
proprietorship business based in a home differs from a business plan
for a large corporation with offices in many cities. But, all business plans
serve the purposes described in this chapter. All business plans have the
same purposes, they all have the same seven basic elements.

ALL THOUGH BUSINESS PLAN DIFFER, all should include some basic
information in following areas:
 History and background in your idea: Something must have
sparked the idea for your business. Describing how you came up
with your idea can help lenders, investors and others understand
how your business will operate.
 Goals and objectives for your company: Your business plan should
outline your short term, medium term, and long term goals. This
section describes your vision of where you want your company to
be in the future. Some entrepreneurs are very clear about what
they want to do with their businesses. Others know their short-
term goals, but have not thought farther ahead.
 Products or services you will offer: this part of your business
should describe the products or services your entrepreneurs plan
to produce and sell. You should explain how these products or
services differ from those already on the market. Highlight any
unique fractures of your products or services, and explain the
benefits customers will receive by purchasing from your company.
This section your business plan should describe the industry you
will operate in. things you should include in this section are:
- External factors affecting your business, such as high
competition or a lack of certain suppliers
 - Growth potential of the industry
- Economic treads of the industry
- Technology trends that may affect the industry
- Forecasts for industry growth
To find this information, you will need to perform research.
Govt. documents, articles and books on industry leaders, the
internet or other reliable sources are good places to start. Be
sure to name all these sources in your plan. Citing sources
makes a business plan more convincing.
The product or service section of your business plan should
also describe the location of your business. Lenders want to
know exactly where your business will be because the
location of a business is often a critical factor in its success.
Writing the products or services selection of the business
plan was easy for Riya and Richa because they had a clear
idea what they wanted to do. In the industry section of their
plan, they included population data for their area. This
information showed that demand for their service could grow
overtime. They also cited Govt. sources reporting that the
demand for day-care services is expected to grow steadily as
more and more women with young children join the labour
force. For the location section of the business plan, Riya and
Richa put down n writing that they planned to start the
business in a prime location, in the heart of a community
where most families have young children and both parents
work outside the home.
 Form of ownership: In your business, you should have a selection
detailing your form of ownership. Provide information relevant to
your form of ownership. Provide information relevant to your form
of business such as who your partners are and how many
shareholders you have. This selection of the business plan is
important because each legal form of business has an effect on
how the business works and makes profits. If you use your
business plan to obtain financing, the lender will be interested in
 this information.
 Management and staffing:
 Marketing:
 Current and projected financial statements:

Think about your milestones within the SMART framework. Your goals should be:

 Specific: Clear, concise, and written in language anyone could

understand.
 Measurable: Use numbers or quantitative language when appropriate.
Avoid vague descriptions that leave success up to personal,
subjective interpretation.
 Acceptable: Get buy-in from stakeholders on your goals, milestones,
and deliverables.
 Realistic: Stretch goals are one thing, but don’t set goals that are
impossible to achieve. It’s frustrating for your team and for your
stakeholders, and might ultimately delay your project because
accomplishing the impossible usually costs more and takes longer.
 Time-based: Set concrete deadlines. If you have to alter deadlines
associated with your milestones, document when and why you
made the change. Avoid stealth changes—or editing deadlines
without notifying your team and relevant stakeholders.

Step 1: Explain the project to key stakeholders, define goals, and get
initial buy-in

The first step in any project is to define the “what” and “why”. Key
stakeholders have the influence and authority to determine whether a
project is successful, and their objectives must be satisfied. Even if the
project comes from the CEO himself, you still need their buy-in.

Use this initial conversation to get aligned, define goals, and determine
the value of the project. In this part of the project planning process,
discuss needs, expectations, and establish baselines for project scope,
budget, and timeline. This creates a solid base for your project work
plan to visualize your strategy and ensure your project's success.
Step 2: List out goals, align OKRs, and outline the project

According to executive leaders, a lack of clear goals accounts for 37%

of project failure. Without clear goals, you’ll find that the requirements,
tasks, and deadlines you set for your project work plan have nothing
anchoring them. But now that you have a list of key stakeholder needs
and their buy-in, begin to assign them to goals and OKRs. OKRs are a
planning and goal setting technique made famous by Intel and Google.
Your project should align with your team and company’s OKRs.

Try writing down the project goals in a project plan board and connect
them to the stakeholder requirements they address. From there, build
out the structure, milestones, and tasks it takes to reach those goals.
Milestones can define check-in points throughout the project so that
everyone is clear about what progress looks like, what the expectations
are, and when they’ll be measured.

Step 3: Create a project scope document

Now that you have the project outlined, your tasks aligned with goals,
and buy-in from the team, it’s time to create a project scope
document detailing the project elements you’ve listed in step 2.

Look at each deliverable and define the series of tasks that must be
completed to accomplish each one. For each task, determine the
amount of time it’ll take, the resources necessary, and who will be
responsible for execution. Finalize and record the project details so that
everyone has a single source of truth. Make the document easily
shareable, like in your project management tool, in order to reduce the
chance of costly miscommunication.

While preparing project scope documentation and calculating earned

value should be standard practice, 1 in 4 project managers surveyed
in Wellingstone's State of Project Management Survey said that they
“never” or “sometimes” prepare standard scoping documents. Creating
one ensures you stand out from the crowd and helps everyone stay on
the same page.

Step 4. Craft a detailed project schedule

With your goals, tasks, and milestones already outlined for you, it’s time
to start plugging your project into a schedule. A Gantt chart is a handy
tool that helps you easily visualize your project timeline. It’s an
interactive timeline that gives you a complete view of the project’s
progress, work scope, and dependencies.

Dependencies are tasks that need to be completed before other tasks

can begin. As you plot out tasks, use subtasks to help you break up
larger ones into smaller ones. Let’s define each:

 Tasks: The individual tasks that people need to carry out to

achieve your goals.

 Subtasks: No longer than a few days each, these help you take
a task and break it down into the smaller steps that will
complete the larger task.

 Milestones: Major phases or events in your project that help

break up the project. Use milestones as check-in points
throughout the project.

Want in on a little secret? As you set them up, add cushions to key tasks,
so you have wiggle room for fire drills or unexpected bottlenecks — for
example if a client needs extra time to review or a team member calls in
sick. In a perfect world, some tasks might take a day. So maybe you
make it two in your plan. No need to give every task a cushion though.
Weigh the risks and add it where it makes the most sense. Future you
will thank you.
Step 5: Define the roles, responsibilities, and resources

Resources are the people, equipment, or money needed to complete a

project. Once you’ve selected your tools and gotten a budget, don’t
forget about your people. Even folks who already know how to write
a project work plan and have done so a hundred times can
underestimate their labour needs.

It's a matrix of all a project’s tasks, paired with who's responsible

(assigned to complete the work), accountable (has yes/no/veto power),
consulted (needs to approve or contribute), and informed (needs to
know about the action or decision).

you begin to assign tasks, make sure you take into consideration
bandwidth. Clarify the responsibilities and expectations of each person.
Keep in mind that 95% of workers report working on more than one team
or project concurrently.

As you plan your project, consider how you’ll filter incoming requests
that impact the project’s timeline or budget. Knowing how to calculate
earned value to monitor the level of work completed on a project against
the plan is imperative. For project managers, tools like Wrike
Resource can help you visualize the tasks for your project from a team
workflow perspective, giving you the visibility and flexibility to balance
workloads.

Step 6: Define the communication and check-in process

According to McKinsey, employees spend nearly 20% of the work week

searching for and gathering information. Adding to that, inefficient
communication and collaboration are two of the top causes of stress in
the workplace. When stakeholders have to dig through pages of emails
or constantly ask for updates, they get frustrated and motivation dips.
Mitigate frustration by housing all project pieces — like assets,
conversations, tasks, due dates, updates, reporting — in a single location,
like a collaboration tool. This makes it easy to track progress, share
updates, and make edits. Define how everyone should communicate
throughout the project and keep it in one tool so everyone can access
information.

Step 7: Plan for it not going as planned

Even if you’re an expert and already know how to write a project plan, the
truth is that all projects have twists and turns — that’s what makes them
fun. You’ve given yourself some breathing room during
the scheduling process, you’ve made sure everyone knows their role, and
you’ve set up communication.

But before you launch, sit down and identify potential issues like
upcoming vacations for team members, holidays, or external teams that
might be involved. Set up a clear chain of command and list key
contacts within the project. Communicate upfront about risks so the
whole team can be prepared to tackle them together.

Step 8: Throw a launch party!

Every successful project needs a kick-off. Set a quick meeting with key
stakeholders and have a clear agenda. Your goal should be to get
everyone on the same page with goals, roles, process, and timeline. Your
agenda should include everything you’ve focused on in the steps above:

 Define the project goals and value they bring.

 List out the assets the project is expected to deliver.

 Draw the connection between stakeholder requirements and

the project tasks.

 Show the timeline of the project so everyone can see

 dependencies and know the expected dates.

 Describe the roles and responsibilities of each stakeholder.

 Review how and where everyone will communicate throughout

the project, where they can go for information — like your
scope document — and who to call for questions.

 Discuss risks and ensure the team is prepared.

 Get that final commitment

Project formulation- project report significance and

contents:

Project formulation is a step-by-step investigation of resources and

development of project idea for achieving the objective of taking an
investment decision. It is stepping stone which involves the joint efforts
of team of experts. It presents project related facts before the
interested parties.

The project report contains detailed information about Land and

buildings required, Manufacturing Capacity per annum, Manufacturing
Process, Machinery & equipment along with their prices and
specifications, Requirements of raw materials, Requirements of Power &
Water, Manpower needs, Marketing Cost of the project,

The elements of Project formulation are feasibility analysis, techno-

economic analysis, project design and network analysis, input analysis,
financial analysis, social cost benefit analysis and project appraisal.
The purpose of project identification is to develop a preliminary
proposal for the most appropriate set of interventions and course of
action, within specific time and budget frames, to address a specific
development goal in a particular region or setting.

So, Project formulation is defined as “taking a first look carefully and

critically at a project idea by an entrepreneur to build up an all-round
beneficial to the project after carefully weighing its various components.”
Stages of Project Formulation
1. Feasibility Analysis

2. Techno-Economic Analysis

3. Project Design and Network Analysis

4. Input Analysis

5. Financial Analysis

6. Cost-Benefit Analysis

7. Pre-Investment Analysis

When all these steps are done, the stage results in developing
a formulation document that defines and approves a proposed project.
This document is to be submitted to the sponsor for review and
signature. Once it is signed, the project is to be provided with necessary
funds.

Project Report – Meaning, Contents

Meaning of Project Report
A Project Report is a document which provides details on the overall
picture of the proposed business. The project report gives an account
of the project proposal to ascertain the prospects of the proposed
plan/activity.
Project Report is a written document relating to any investment. It
contains data on the basis of which the project has been appraised and
found feasible. It consists of information on economic, technical,
financial, managerial and production aspects. It enables the
entrepreneur to know the inputs and helps him to obtain loans from
banks or financial Institutions.
The project report contains detailed information about Land and
buildings required, Manufacturing Capacity per annum, Manufacturing
Process, Machinery & equipment along with their prices and
specifications, Requirements of raw materials, Requirements of Power &
Water, Manpower needs, Marketing Cost of the project, production,
financial analyses and economic viability of the project.
Contents of a Project Report
Following are the contents of a project report.

1. General Information
A project report must provide information about the details of the
industry to which the project belongs to. It must give information about
the past experience, present status, problems and future prospects of
the industry. It must give information about the product to be
manufactured and the reasons for selecting the product if the proposed
business is a manufacturing unit. It must spell out the demand for the
product in the local, national and the global market. It should clearly
identify the alternatives of business and should clarify the reasons for
starting the business.
2. Executive Summary
A project report must state the objectives of the business and the
methods through which the business can attain success. The overall
picture of the business with regard to capital, operations, methods of
functioning and execution of the business must be stated in the project
report. It must mention the assumptions and the risks generally involved
in the business.

3. Organization Summary
The project report should indicate the organization structure and pattern
proposed for the unit. It must state whether the ownership is based
on sole proprietorship, partnership or joint stock company. It must
provide information about the bio data of the promoters including
financial soundness. The name, address, age qualification and
experience of the proprietors or promoters of the proposed business
must be stated in the project report.

4. Project Description
A brief description of the project must be stated and must give details
about the following:

 Location of the site,

 Raw material requirements,
 Target of production,
 Area required for the work shed,
 Power requirements,
 Fuel requirements,
 Water requirements,
  Employment requirements of skilled and unskilled labour,
 Technology selected for the project,
 Production process,
 Projected production volumes, unit prices,
 Pollution treatment plants required.
If the business is service oriented, then it must state the type of services
rendered to customers. It should state the method of providing service
to customers in detail.

5. Marketing Plan
The project report must clearly state the total expected demand for the
product. It must state the price at which the product can be sold in the
market. It must also mention the strategies to be employed to capture
the market. If any, after sale service is provided that must also be stated
in the project. It must describe the mode of distribution of the product
from the production unit to the market. Project report must state the
following:

 Type of customers,
 Target markets,
 Nature of market,
 Market segmentation,
 Future prospects of the market,
 Sales objectives,
 Marketing Cost of the project,
 Market share of proposed venture,
 Demand for the product in the local, national and the global
market,
 It must indicate potential users of products and distribution
channels to be used for distributing the product.
6. Capital Structure and operating cost
The project report must describe the total capital requirements of the
project. It must state the source of finance, it must also indicate the
extent of owner’s funds and borrowed funds. Working capital
requirements must be stated and the source of supply should also be
indicated in the project. Estimate of total project cost, must be broken
down into land, construction of buildings and civil works, plant and
machinery, miscellaneous fixed assets, preliminary and preoperative
expenses and working capital.
Proposed financial structure of venture must indicate the expected
sources and terms of equity and debt financing. This section must also
spell out the operating cost
7. Management Plan
The project report should state the following.

a. Business experience of the promoters of the business,

b. Details about the management team,
c. Duties and responsibilities of team members,
d. Current personnel need of the organization,
e. Methods of managing the business,
f. Plans for hiring and training personnel,
g. Programmes and policies of the management.
8. Financial Aspects
In order to judge the profitability of the business a projected profit and
loss account and balance sheet must be presented in the project report.
It must show the estimated sales revenue, cost of production, gross
profit and net profit likely to be earned by the proposed unit. In addition
to the above, a projected balance sheet, cash flow statement and funds
flow statement must be prepared every year and at least for a period of
3 to 5 years.
The income statement and cash flow projections should include a three-
year summary, detail by month for the first year, and detail by quarter for
the second and third years. Breakeven point and rate of return on
investment must be stated in the project report. The accounting system
and the inventory control system will be used is generally addressed in
this section of the project report. The project report must state whether
the business is financially and economically viable.

9. Technical Aspects
Project report provides information about the technology and technical
aspects of a project. It covers information on Technology selected for
the project, Production process, capacity of machinery, pollution control
plants etc.

10. Project Implementation

Every proposed business unit must draw a time table for the project. It
must indicate the time within the activities involved in establishing the
enterprise can be completed. Implementation schemes show the
timetable envisaged for project preparation and completion.

11. Social responsibility

The proposed units draw inputs from the society. Hence its contribution
to the society in the form of employment, income, exports and
infrastructure. The output of the business must be indicated in the
project report

Project appraisal- Aspect and methods A) Economic

oriented appraisal B) Financial appraisal

Project appraisal is the process of assessing, in a structured way, the

case for proceeding with a project or proposal, or the project's viability.
It often involves comparing various options, using economic appraisal or
some other decision analysis technique.

The purpose of the financial appraisal is to determine whether

the project is worthwhile, comparing its costs with its expected benefits.
... Financial appraisal addresses not only the adequacy of funds, but
also the financial viability of the project, estimating in the end if and
when the project returns a profit or not.

Technical Appraisal is the technical review to ascertain that

the project is. sound with respect to various parameters such as
technology, plant. capacity, raw material availability, location, manpower
availability, etc.

Some of the methods of project appraisal are as follows:

1. Economic Analysis:
Under economic analysis, the project aspects highlighted include
requirements for raw material, level of capacity utilization, anticipated
sales, anticipated expenses and the probable profits. It is said that a
business should have always a volume of profit 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 profit. Undoubtedly, demand for the product will be
estimated for anticipating sales volume. Therefore, demand for the
product needs to be carefully spelled out as it is, to a great extent,
deciding factor of feasibility of the project concern.

In addition to above, 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. The Government offers specific incentives and
concessions for setting up industries in notified backward areas.
Therefore, it has to be ascertained whether the proposed enterprise
comes under this category or not and whether the Government has
already decided any specific location for this kind of enterprise.

Financial Analysis:
Finance is one of the most important pre-requisites to establish an
enterprise. It is finance only that facilitates an entrepreneur to bring
together the labour of one, machine of another and raw material of yet
another to combine them to produce goods.

In order to adjudge the financial viability of the project, the following

aspects need to be carefully analysed:
1. Assessment of the financial requirements both – fixed capital and
working capital need to be properly made. You might be knowing
that fixed capital normally called ‘fixed assets’ are those tangible
and material facilities which purchased once are used again and
again. Land and buildings, plants and machinery, and equipment’s
are the familiar examples of fixed assets/fixed capital. The
requirement for fixed assets/capital will vary from enterprise to
enterprise depending upon the type of operation, scale of
operation and time when the investment is made. But, while
assessing the fixed capital requirements, all items relating to the
asset like the cost of the asset, architect and engineer’s fees,
electrification and installation charges (which normally come to 10
per cent of the value of machinery), depreciation, pre-operation
expenses of trial runs, etc., should be duly taken into consideration.
Similarly, if any expense is to be incurred in remodelling, repair and
additions of buildings should also be highlighted in the project
report.
2. In accounting, working capital means excess of current assets
over current liabilities. Generally, 2: 1 is considered as the optimum
current ratio. Current assets refer to those assets which can be
converted into cash within a period of one week. Current liabilities
refer to those obligations which can be payable within a period of
one week. In short, working capital is that amount of funds which
is needed in day today’s business operations. In other words, it is
like circulating money changing from cash to inventories and from
inventories to receivables and again converted into cash.

This circle goes on and on. Thus, working capital serves as a

lubricant for any enterprise, be it large or small. Therefore, the
requirements of working capital should be clearly provided for.
Inadequacy of working capital may not only adversely affect the
operation of the enterprise but also bring the enterprise to a
grinding halt.

The activity level of an enterprise expressed as capacity utilization,

needs to be well spelt out in the business plan or project report.
However, the enterprise sometimes fails to achieve the targeted
level of capacity due to various business vicissitudes like
unforeseen shortage of raw material, unexpected disruption in
power supply, inability to penetrate the market mechanism, etc

Then, a question arises to what extent and enterprise should

continue its production to meet all its obligations/liabilities. ‘Break-
even analysis’ (BEP) gives an answer to it. In brief, break-even
analysis indicates the level of production at which there is neither
profit nor loss in the enterprise. This level of production is,
accordingly, called ‘break-even level’.
3. Market Analysis:
Before the production actually starts, 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. There is a trite saying in this regard: “The
manufacturer of an iron nails must know who will buy his iron nails.”

This is because production has no value for the producer unless it is

sold. It is said that if the proof of pudding lies in eating, 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 in
‘Managerial Economics’ as ‘demand forecasting’, range from the naive to
sophisticated ones.

Project Report • It is a concise copy of detailed analysis done for the

project. • An entrepreneur/expert prepares the report before the
investment in project is done. • The report assesses the demand for
proposed product/service, works out cost of investment and profitability
on this investment. • It acts as an instrument to convince investors to
invest in the project.

A project report gives information on the following:

• Economic aspects: present market, scope for growth, justification for

investment.
• Technical aspects: technology, machinery, equipment needed.

• Financial aspects: Total investment needed, entrepreneur’s

contribution, cost of capital and return on capital.

• Production aspects: Product details, justification for the choice of

product, export worthiness.

• Managerial aspects: Qualifications, experience of people needed for

managerial posts.

Contents of a project report

• Product characteristics (product design, specifications, quality

standards, uses and applications).

• Market position and trends (current capacity for production, potential

demand, export prospects, trends in import-export, price structure etc).

• Raw materials (types, quality, sources, price).

• Manufacturing (process, production schedule, technique used. )

• Plant and machinery (types, infrastructure support, cost).

• Land and building (Requirement, building construction schedule, choice

of location, cost).

• Financial implications (Capital structure, fixed and working capital

investment, project cost, profitability).

• Marketing channels (Trade practices, marketing and advertising

strategy).
• Personnel (Requirement of staff, skilled-unskilled labour, salary and
wage payment, qualifications, experience)

Objectives and scope of the report.

• The project report is submitted to financial institutions for grant of land

and other financial concessions.

• Organisations like Small Industries Service Institute (SISI)and Small

Industries Development Organisation (SIDO) help entrepreneurs to
prepare project report.

• The financial institutions ascertain from the report, whether the project
can generate enough funds to repay the borrowings in stipulated time
frame
Unit 4.
Incentives and subsidies:
Meaning of incentives and subsides
* Incentives and Subsidies in Maharashtra State.
* Nature and Types of Subsidies
* Types of Incentives under Packaged
Incentives Scheme.

Incentives and subsidies:

Meaning of incentives
A subsidy or government incentive is a form of financial aid or support extended to
an economic sector (business, or individual) generally with the aim of promoting
economic and social policy.

The term “incentive', generally means encouraging productivity. It is a motivational

force, which encourages an entrepreneur to take a right decision and act upon it. The
objective of providing incentives is to motivate an entrepreneur to set up a new
venture in the larger interest of the nation and the society.

Concept of incentives
In the mega best-seller “Freakonomics,” Levitt and Dubner said “there are three basic
flavors of incentive: economic, social, and moral. Very often a
single incentive scheme will include all three varieties.” And they're right.

• social incentives; incentives based on human beings' desire to be accepted

and liked by other people.
• Moral incentives, For example, people may go to church because they believe
it is the “right thing to do,” but they may also do so for indirect material or
 social benefits, such as socializing with others, or signaling one's beliefs or
shared values

Understanding Incentives in Economics:

Common Types of Economic Incentives
Positive Incentive:

• In simple words, incentive is anything that attracts a worker and

stimulates him to work. The incentives can be financial and non-
financial. Both types of incentives play important role under
different conditions. ... According to the National Commission on
Labour, “Wage incentives are extra financial motivation.
• Businesses like restaurants or stores offer positive incentives like
discounts or coupons in order to get people to choose their
business.
• Compensation incentives may include items such as raises,
bonuses, profit sharing, signing bonus, and stock options.
Recognition incentives include actions such as thanking
employees, praising employees, presenting employees with a
certificate of achievement, or announcing an accomplishment at a
company meeting.
• Rewards incentives include items such as gifts, monetary rewards,
service award presents, and items such as gift certificates. An
additional example is employee referral awards that some
companies use to encourage employees who refer candidates for
your jobs.

• The most common type of economic incentive system is payroll: A

paycheck motivates people to show up to work and perform their
duties. Yet there are other types of economic incentive structures
as well. Here are five common examples.

1. Tax Incentives. Tax incentives—also called “tax benefits”—are

reductions in tax that the government makes in order to encourage
spending on certain items or activities. Tax incentives are often
cited as a great way to encourage economic development. For
example, a common individual tax exemption in the United States
is the mortgage interest deduction, which ensures money paid
 toward mortgage interest isn’t counted as taxable income. This
incentivizes people to buy property. An example of a corporate tax
incentive is a government giving a major company tax breaks in
exchange for them building an office or plant in their city. This type
of tax incentive stimulates the economy in that area by
empowering the company to provide jobs, as well as make goods
or services available for purchase.
2. Financial Incentives. A financial incentive is a broader term that
encompasses any monetary benefit given to a consumer,
employer, corporation, or organization in order to incentivize them
to do something they might not otherwise do. For employees, a
financial incentive might include stock options or commissions
that encourage certain types of work (think of salespeople, whose
commission is considered a sales incentive). For customers, an
example of a financial incentive is a discount, like a buy-one-get-
one-free sale, which encourages more spending under the guise of
saving.
3. Subsidies. Subsidies are government incentive programs that
provide set amounts of money to businesses in order to help
them grow. Agricultural subsidies are common in the United
States, with the federal government giving farmers billions of
dollars both to farm more of certain products and to reduce their
outputs in times of surplus. Agricultural subsidies aren’t the only
type of U.S. government subsidy, of course. Others types of
government subsidies include: oil, ethanol, export, environmental,
housing, and health care.
4. Tax rebates. Tax rebates are incentives to take certain actions,
like investing in solar energy, for example. In the case of renewable
energy tax rebates, a state or local government offers a certain
amount of money to consumers to purchase more environmentally
-friendly methods to generate electricity. For instance, a city might
offer any homeowner who pays to install solar panels on their roof
a check for $1,000.55Negative incentives.
5. Negative economic incentives, or disincentives, punish people
financially for taking certain actions. This is a way of encouraging
specific actions without making them compulsory. For example,
the Affordable Care Act was designed with a built-in negative
economic incentive called the “individual mandate,” which
penalizes anyone who doesn’t buy health insurance with a
monetary fine at tax time.
Nature of Subsidy:
A subsidy or government incentive is a form of financial aid or
support extended to an economic sector generally with the aim of
promoting economic and social policy. Although commonly
extended from the government, the term subsidy can relate to any
type of support – for example from NGOs or as implicit subsidies.

a sum of money granted by the state or a public body to help an

industry or business keep the price of a commodity or service low.

"a farm subsidy “, “Small Scale subsidy” “Industrial Subsidy”

Concept of Subsidy:
A subsidy is a benefit given to an individual, business, or institution,
usually by the government. ... The subsidy is typically given to
remove some type of burden, and it is often considered to be in the
overall interest of the public, given to promote a social good or an
economic policy.

• Government subsidies help an industry by paying for part of the

cost of the production of a good or service by offering tax credits
or reimbursements or by paying for part of the cost a consumer
would pay to purchase a good or service.
• Subsidy is a transfer of money from the government to an entity. It
is a part of non-plan expenditure of the government. ...
Major subsidies in India are petroleum subsidy, fertilizer subsidy,
food subsidy, interest subsidy, etc.
• In short, any subsidy that benefits women, the poor and the
marginalized is good; their growth propels national
growth. Subsidies on medical equipment or medicines ensure
healthcare for the poor, especially in a country like India that is
bedeviled by a rickety rural healthcare infrastructure.

Type of Subsidy:
• Subsidies come in various forms including: direct (cash grants,
interest-free loans) and indirect (tax breaks, insurance, low-interest
loans, accelerated depreciation, rent rebates). Furthermore, they
 can be broad or narrow, legal or illegal, ethical or unethical.
• You don't have to repay the subsidy. Any difference should be
used for the wages of other affected staff - the wage subsidy is
designed to keep your employees connected to you.

The purpose of government subsidies

• The purpose of government subsidies is to ensure the availability
of necessary goods and services. A wide range of domestic
businesses, individuals, and other organizations in the United
States are eligible for government subsidies.
• The effect of a specific per unit subsidy is to shift the supply curve
vertically downwards by the amount of the subsidy. In this case
the new supply curve will be parallel to the original. Depending on
elasticity of demand, the effect is to reduce price and increase
output.

The Micro, Small and Medium Enterprise sector contributes

significantly to the economic and social development of the
country by fostering entrepreneurship, generating employment
and by acting as ancillary to large industries. The government
has prioritized this sector in recent years as they are
considered crucial in achieving the objective of a $5 trillion
economy by the year 2024. To achieve this a basket of
schemes have been rolled out over the years by the central
government. As per the most recent data available MSME units
contribute 29 per cent to the GDP of the nation while
contributing 48 per cent to the exports. In the year 2015-16
nearly 11.10 Crore people were employed in the MSME sector.
One of the critical indicators of measuring the success of the
MSME schemes is the establishment of new MSME enterprises.
Since 2015 the process of registration has been simplified by
implementation of Udyog Aadhar Memorandum (UAM) which is
a one-page online registration based on self-certification. The
state of Maharashtra and Gujarat has ever since witnessed a
steady growth in UAM registrations. Some of the key statistics
are tabled below:
The states of Maharashtra and Gujarat have rolled out several
business-friendly schemes and policies over the years which
have attributed to the growth of MSMEs. These incentive
schemes which constitute the backbone of state industrial
policy are aimed at incentivizing the new units while offering
support in expansion of existing ones. This article analyses the
general schemes offered to MSMEs in the state of Maharashtra
and Gujarat.

Incentives to MSMEs in the State of Maharashtra

The Maharashtra Industrial policy, 2019 was introduced w.e.f
01st April,2019 and will remain in force for a period of five years.
The Package Incentive Scheme (PSI-2019) provides incentives
to MSMEs in form subsidies on SGST payments, power
subsidies, interest subsidies, stamp duty and electricity duty
exemptions. These benefits are available subject to certain
conditions which are discussed in detail below:
Eligibility:
  The MSME unit must be a manufacturing enterprise as
defined in the MSMED Act,2006.
 The scheme shall be applicable to a new unit. A new unit
is one whose one of effective steps such as acquiring
land/shed, incorporation, Consent of MPCB etc. is
completed on or after 01st April,2019 and is not formed as
a result of reconstruction of existing unit. However,
establishing a unit by purchasing assets of an existing
enterprise shall qualify for PSI-2019.
 The scheme is also applicable to new unit or existing units
for expansion/diversification the scheme also applies to
small units outside the definition of MSME with gross
fixed capital investment (GFI) up to Rs.50 Crores.
 Units manufacturing textiles covered under textile policy
2018-2023 will be eligible for the scheme in respect of
only those incentives which are not offered by other state
agencies.
 Units engaged in manufacture of Liquor, cigarette, bidi and
other tobacco products and other banned products will
not be eligible for the scheme.
Classification of Areas of States:
For the purpose of this scheme the state has been divided into
different categories of “talukas” based on the level of industrial
development. The quantum of incentive to a unit is contingent
upon the category of taluka in which it is located. The various
categories of talukas, in order of most industrially developed to
least ones are – A, B, C, D, D+, No industry districts, Naxal
affected area. In addition, a special category of “aspirational
districts” consisting of four districts has been carved out.
Expansion/diversification Project:
Before we dwell upon the intricacies of the scheme it is
important to understand what an Expansion or a Diversification
Project is – When an Existing / New Unit in any of the areas
covered under Group “B”, “C”, “D”, D+, Maximum Affected Areas,
Aspirational Districts or No – Industry – Districts, makes, on or
after 1st April, 2019, an additional fixed capital investment in
additional manufacturing facilities for manufacture of the same
product or for manufacture of different products then it
qualifies as an expansion project. It must be noted that units
covered under Group “A” making expansions are not covered
within the scope of this definition and resultantly do not qualify
for the incentives.

Eligible Fixed Assets: For the purpose the scheme Fixed assets
shall mean and include –
 Land for commercial use.
 Building including administrative or residential building as
part of facilities in manufacturing process.
 Plant and Machinery including tools for sustaining the
working of unit.
 Development Cost (fencing, roads, other infrastructure
under the project).
 Installation and pre operating expense to extent
capitalized.
 R&D units with benefit limited to lower of 25 per cent of
investment or Rs.100 Crore
 Royalty on technical know-how and drawings capped at
10% of capital cost.
 Amount paid for supply of power for development of
infrastructure of the unit.
 Cold Storage which integral part of manufacturing process.
Unit 5
Finance and Production Planning:
Financial requirements
Structure and management of fixed and working capital
Sources of capital
Financial institutions problems in financing a small-
scale unit
Production Planning:
Size of plant
Production mix
Costs of production
Production facilities and their optimum utilization
procurement of raw material
Problems involved Role of Government in supplying machinery
and raw materials.
All business need money to survive. However, many entrepreneurs
lack the money they need to start up and run a business. In fact, lack
of money is one of the main reasons that small businesses fail. How
can entrepreneurs with solid business idea get the financing they
need to start and run a business?

Before you can approach a lender or investor about financing your

business, you will have to prepare financial statements. These
statements include a list of start-up costs, a cash flow statement, an
income statement, a balance sheet, and a personal financial
statement. These statements allow potential lenders and investors to
figure out if your business is viable. They also help lenders determine
whether the financing you are requesting is reasonable.

The first four financial statements are estimated based on how you
think your business will perform in its first year. Financial statements,
based on projections are known as pro forma financial statements.
The personal financial statement you submit consists of actual
figurers listing your personal assets and liabilities.

Start-up costs
One of the pro forma financial statements is a list of start-up costs. Start
-up costs are the one time only expenses that are paid to establish a
business. Common start-up costs include:

 Equipment and supplies, such as cash registers, computers,

telephones, fax machines.
 Furniture and fixtures, such as desks and chairs.
 Vehicles, including delivery trucks and other automobiles
 Remodelling, such as electrical and plumbing expenses
 Legal and accounting fees.
 Licensing fees.
Financial requirements
State up costs should be considered when you are figuring out how
much money you need to start your business. Most entrepreneurs have
to borrow the money needed to cover start-up costs.

A cash flow statement describes how much cash comes in and goes out
of a business over a period of time. The amount of cash going out is
your expenses. The cash flow statement is important because it will
show how much money you have to pay your bills.to create a proforma
cash flow statement, you will need to estimate your monthly revenues
and monthly operating expenses.

Many entrepreneurs create two types of cash flow statements based on

a best-case scenario and a worst-case scenario. You should project
lower revenues and higher expenses than you think you will really have.
To create a best-case scenario, you should project the highest revenues
and the lowest expenses your business is likely to have. Together, these
scenarios will help show you and potential lenders how much cash your
business is likely to generate in any situation. Most businesses choose a
year as the period measured by an incomes statement. New businesses
often view their income statements monthly in order to determine
whether a profit is being made.

Another pro forma financial statement you should prepare is a balance

sheet. A balance sheet shows the assets, liabilities and capital of a
business at a particular point in time. Assets are items of value owned
by a business. They include items such as cash, equipment and
inventory. Liabilities are items that a business owes to others. They
include loans and outstanding invoices. Owners’ equity is the amount
remaining after the value of all liabilities is subtracted from the value of
all assets. It is commonly referred to as the net worth the business.

Structure and management of fixed and working capital

Define working capital; Discuss Factors affecting working capital requirement;
Define net working capital; Define fixed capital; Discuss Factors affecting fixed
capital requirement; Discuss Importance of managing fixed capital; Discuss
Financing of fixed capital; Discuss about the meaning of capital structure; Discuss
factors affecting choice of capital structure.
Fixed capital is defined as the part of the total capital of the enterprise
which is invested in long-term assets. Working Capital refers to
the capital, which is used to perform day to day business
operations. Fixed capital investments include durable goods. Working
Capital is the money used to make goods and attract sales. The
less Working Capital used to attract sales, the higher is likely to be the
return on investment. Working Capital management is about the
commercial and financial aspects of Inventory, credit, purchasing,
marketing, and royalty and investment policy.

Although the importance of working capital is unquestionable in any

type of business. Working capital management is a day-to-day activity,
unlike capital budgeting decisions. Most importantly, inefficiencies at
any levels of management have an impact on the working capital
and its management.

Fixed capital investments include durable goods, which will remain in the
business for more than one accounting period. On the other
hand, working capital comprises of short-term
assets and liabilities of the business.

Sources of capital

Sources include: personal savings, partnerships, borrowings, venture capitalists etc.

Borrowing needed capital for the business is called credit or debt financing
– sources: banks, government agencies, NGOs, etc.
Some of the top ways to raise capital are through angel investors, venture
capitalists, government grants, and small business loans. There are other methods
for financing such as credit cards or invoice financing, but these should be used only
if you need cash quickly and know the risks involved.
There are many different sources of capital—each with its own requirements and
investment goals. They fall into two main categories: debt financing, which
essentially means you borrow money and repay it with interest; and equity financing,
where money is invested in your business in exchange for part ownership.

Many entrepreneurs do not know where to acquire funding when starting out
or expanding. If you know where to look, you'll find that there are many
different sources for entrepreneurs to raise capital.
However, not every source of capital is suitable for every business. An
entrepreneur should choose one which meets the capital structure that best
fits their business. A business' capital structure is the way that it is funded,
either through debt (loans) or equity (shares sold to investors) financing.

Financial backing usually includes loans, grants, or investor funding. Some of

the top ways to raise capital are through angel investors, venture capitalists,
government grants, and small business loans. There are other methods for
financing such as credit cards or invoice financing, but these should be used
only if you need cash quickly and know the risks involved.

Main Type of financial sources

Internal Sources: External Sources:
Founder Sources Bank loan
Retained profile Business agenda
Friends and Family Venture Capital
Credit Cards Trade Credit
Issue to share and debentures
Discounting bill of exchange
Public deposit

Financial institutions problems in financing a small-

scale unit
Financial institutions play a very significant5role in the growth of small-
scale business. The roles they play includes:

 Giving of loans to small scale business.

 Giving of overdraft
 They render business advisory services. This is one of the roles played
by financial institutions in the growth of small-scale business.

Financial institutions have some problems they are confronted with too.
These problems include borrowers not paying back at stated time, government
policies and regulations etc. These problems affect the smooth running of financial
institutions because ties up capital that would have been used for further
development of the sector.
Financial challenges, however, tend to loom the largest. Not only are business
finances a complex, ever-changing entity, but they’re also the engine of any operation.
A good financial situation can keep a business running, while too many financial
hardships can cause even the most pristine machine to sputter and stall out.

Production Planning: is the process of aligning demand with

manufacturing capacity to create production and procurement schedules for
finished products and component materials. ... It tracks and makes a record of the
manufacturing process flows, for example, the planned and actual costs.

As Benjamin Franklin once said 'By failing to prepare, you prepare to fail' and as with
all best laid plans, they must be SMART (Specific, Measurable, Achievable, Relevant,
Time Bound) in order to be truly effective.

Size of Plant:

Production mix:

Once you have determined what kind of business you

will run, you will need to make decisions, about the
products that you will sell. To select your products, think
carefully about which products and services most
appeal to your target customers. The different products
and services a business sells are a product mix.

Leena Raut, 32 years old entrepreneurs, want to open a

gourmet food shop in her community. Leena’s Gourmet
Luxuries will sell hundreds of different packaged goods,
from Italian olive oil to Mexican rice to imported Italian
pastas. She will also offer a wide selection of fresh
foods, including cheeses, fruits, vegetables and baked
goods. To determine her product mix, Leena lists the
various departments she plans to establish in her store.
She then lists the products that each department will
carry.

Costs of production:

To determine how much profit they are earning, entrepreneurs need to

know how much it costs to produce their goods or service. To do so,
they must consider all the recourses that go into producing the good or
services to determine a price to charge.
The jewel Box, a small company that produces handmade jewellery,
required office space, materials, labour, management and other costs to
make goods. All of these recourses go into making a price of jewellery,
and all of them must be taken into account when figuring out the price to
charge. A company that prices its product based only on the materials
involved in producing it will lose money and go out of business very
quickly.

Product cost refers to all those costs which are incurred by the company in order to
create the product of the company or deliver the services to the customers and the
same is shown in the financial statement of the company for the period in which they
become the part of the cost of the goods that are sold by the company.
Examples of Product cost mainly includes the following expenses:

1. Direct material (DM) 2. Direct labour (DL) 3. Factory overheads

(FOH)

The cost to material and labour are the direct costs while the factory overheads are
the indirect costs, all of which are required to create a finished good (or service)
ready to sell from raw material.

As per GAAP and IFRS, the product costs are required to get capitalized as inventory
in the balance sheet and should not be expensed in the statements of profit and loss
because the expenditures to such costs generate benefits and value for future
periods also.

Types of Product Costs

Types of Costs of Production

There are various types of costs of production that businesses may incur in the
course of manufacturing a product or offering a service. They include the following:

1. Fixed costs and 2. Variable costs

Every business has fixed costs and variable costs. Fixed costs are costs that must
be paid regardless of how much of a good or service is produced. Fixed costs are
also called sunk costs. Variable costs are cost that go up and down depending on
the quantity of the good or service produced.

To understand the difference the between fixed and variable costs consider The
Bread and Bagel, a small business owned by entrepreneur Rajiv Deshmukh. Whether
or not customers buy his baked goods, Rajiv pays the same monthly rent, the same
insurance fees, and the same interest on the loans taken out to finance his business.
These are Rajiv’s fixed costs. He must pay them even if “The Bread and Bagel Shop”
makes no sales. The store also has variable costs, including the expense of buying
flour, sugar and coffee. These expenses rise directly with the number of items sold.
The more cups of coffee, bagels and donuts the company sells, the more resources
it must buy to make more goods. In contrast, when fewer loaves of bread are
purchased by customers, Rajiv’s does not pay for more flour to make more bread.
Understanding the difference between fixed and variable costs is important. A
business with many fixed costs is a higher risk than a business with mostly variable
costs because fixed costs will be incurred regardless of sales. If sales turn out to be
much lower than expected, the business will be stuck with many bills to pay and little
revenue.

Fixed costs tend to be time-limited, and they are only fixed in relation to the
production for a certain period. In the long term, the costs of producing a product are
variable and will change from one period to another.

Variable costs are costs that change with the changes in the level of production.
That is, they rise as the production volume increases and decrease as the production
volume decreases. If the production volume is zero, then no variable costs are
incurred. Examples of variable costs include sales commissions, utility costs, raw
materials, and direct labour costs.

3. Marginal cost

Entrepreneurs make business decisions based on the concepts of marginal benefit

and marginal cost. Marginal benefit measures the advantages of producing one
additional unit of a good or service. Marginal cost measures the disadvantages of
producing one additional unit of a good or service. Rajiv of the Bread and Bagel Shop
wants to increase his sales. Rajiv thinks about keeping the store open two extra
hours every day. He estimates that during the last two hours of every day. He will sell
an additional 150 baked goods and 30 cups of coffee, bringing in additional revenues
of 1500 a night. This 1500 represents the marginal benefit from keeping the store
open an extra two hours a day.

Marginal cost is the cost of producing one additional unit of output. It shows the
increase in total cost coming from the production of one more product unit. Since
fixed costs remain constant regardless of any increase in output, marginal cost is
mainly affected by changes in variable costs. The management of a company relies
on marginal costing to make decisions on resource allocation, looking to allocate
production resources in a way that is optimally profitable.

4.Opportunity cost

Another type of cost you should think about is opportunity cost. Opportunity cost is
the cost choosing one opportunity or investment over another. For exam, you want to
start your business. But you have been offered a job that pays Rs 3,00,000 a year. In
addition to the salary, you will receive two weeks paid vacation and your company
will pay your medical insurance. If you add in these benefits, which you estimate are
worth 30,000 a year, that total of 3,30,000 represents the opportunities cost of
starting your own business. It is the amount you could have earned by choosing a
different path.
Business people use the concept of opportunity cost to make business decisions.
Sarthak Nashikar, for exam, has 5000 Rs in extra cash that he wants to put into his
cake decorating business can invest money in an advertising campaign or he could
invest the money in the new equipment. The opportunity cost of the advertising
campaign, therefore, will be the value of the new equipment. Like all entrepreneurs,
Sarthak will have to choose between various investment options.

4. Total cost

Total cost encompasses both variable and fixed costs. It takes into account all the
costs incurred in the production process or when offering a service. For example,
assume that a plastic company incurs a production cost of 9 per brash, and it
produced 1,000 units during the last month. The company also pays a rent of 1,500
per month. The total cost includes the variable cost of 9,000 (9 x 1,000) and a fixed
cost of 1,500 per month, bringing the total cost to 10,500.

5. Average cost

The average cost refers to the total cost of production divided by the number of units
produced. It can also be obtained by summing the average variable costs and the
average fixed costs. Management uses average costs to make decisions pricing its
products for maximum revenue or profit.

The goal of the company should be to minimize the average cost per unit so that it
can increase the profit margin without increasing costs.

For example, if the company wants to increase production capacity, it will compare
the marginal cost vis-à-vis the marginal revenue that will be realized by producing
one more unit of output. Marginal costs vary with the volume of output being
produced. They are affected by various factors, such as price discrimination,
externalities, information asymmetry, and transaction costs.

How to Calculate the Cost?

The first step when calculating the cost involved in making a product is to determine
the fixed costs. The next step is to determine the variable costs incurred in the
production process. Then, add the fixed costs and variable costs, and divide the total
cost by the number of items produced to get the average cost per unit.

For the company to make a profit, the selling price must be higher than the cost per
unit. Setting a price that is below the cost per unit will result in losses. It is, therefore,
critically important that the company be able to accurately assess all of its costs.
Production facilities and their optimum utilization
Production facilities means OCS facilities that receive hydrocarbon production either
directly from wells or from other facilities that produce hydrocarbons from wells.
They may include processing equipment for treating the production or separating it
into its various liquid and gaseous components before transporting it.
Production Capacity utilization measures how much a line, plant, or factory uses its
total productive capacity. For example, if you have the potential to significantly
expand orders, you should check your capacity utilization before agreeing to deliver
product.

Procurement of raw material

It is critical to understand what is procurement first because it will give an in-depth
understanding of procurement and supply processes. Procurement is the term that is
used to refer to the process or the act of sourcing or obtaining services or goods for a
business. Some businesses use the term procurement only to refer to the actual buying
while others refer to the entire process that leads up to the purchase as procurement.

The word procurement is used to refer to buying for a business and is customarily
performed on a large scale. Procurement involves two companies; the buyer and the
seller. But it is the act of buying that is labelled procurement and not the activities of the
seller.

Procurement is usually a part of the input to a company that then uses the goods or
services procured in the making of their own final product. This makes it a very vital
function of any business. It is important to the success of the buyer’s business to
procure the best quality of goods or services procured at the most competitive rates.

On the surface, procurement might come across as a simple process. But it is often
highly competitive with great care and attention paid to each step. The activities that
procurement entails include:

 Vendor Selection
 Payment Negotiation
 Strategic Vetting
 Final Selection
 Contract Negotiation
 Final Purchase

The actual steps involved in a procurement are as follows:

 Identification of Requirement
 Determination of the Specifics of the Requirement
  Sourcing
 Negotiation and Finalization of Price and Terms
 Purchase Requisition and Order
 Delivery of the Purchase Order
 Expediting
 Product/Service Supply and Inspection
 Payment Process
 Record Keeping and Review

Problems involved Role of Government in supplying

machinery and raw materials.

The government had reserved certain items for exclusive production by Small Scale
Industries. Large scale enterprises were not allowed to produce the items which
were reserved for the SSI sector. With the opening up of the economy and following
the principles of liberalization and globalization, many items have been successively
De-reserved. Therefore, Small Scale Industries have to now counter the twin forces
of competition from Indian large-scale enterprises as well as foreign competitors.

Problems faced by Small Scale Industries

The following are the problems faced by Small Scale Industries:

1. Poor capacity utilization

In many of the Small-Scale Industries, the capacity utilization is not even 50% of the
installed capacity. Nearly half of the machinery remains idle. Capital is unnecessarily
locked up and idle machinery also occupies space and needs to be serviced resulting
in increased costs.

2. Incompetent management
Many Small-Scale Industries are run in an incompetent manner by poorly qualified
entrepreneurs without much skill or experience. Very little thought has gone into
matters such as demand, production level and techniques, financial availability, plant
location, future prospects etc. According to one official study, the major reason for
SSI sickness is deficiency in project Management i.e., inexperience of promoters in
the basic processes of production, cash flow etc

3. Inadequate Finance
Many Small-Scale Industries face the problem of scarcity of funds. They are not able
to access the domestic capital market to raise resources. They are also not able to
tap foreign markets by issuing ADR’s (American Depository Receipts) GDR’s (Global
Depository Receipts) etc because of their small capital base. Banks and financial
institutions require various procedures and formalities to be completed. Even after a
long delay, the funds allocated are inadequate.
Bank credit to the small-scale sector as a percentage of total credit has been
declining. It fell from 16% in 1999 to 12.5% in 2002. Small Scale Industries are not
able to get funds immediately for their needs. They have to depend on private money
lenders who charge high interest. Finance, as a whole, both long and short term,
accounts for as large as 43% of the sector’s sickness.

4. Raw material shortages

Raw materials are not available at the required quantity and quality. Since demand
for raw materials is more than the supply, the prices of raw materials are quite high
which pushes up the cost. Scarcity of raw materials results in idle capacity, low
production, inability to meet demand and loss of customers.

5. Lack of marketing support

Small Scale Industries lack market knowledge with regard to competitors, consumer
preferences, market trends. Since their production volume is small and cannot meet
demand for large quantities their market is very restricted. Now with the process of
liberalization and globalization they are facing competition from local industries as
well as foreign competitors who sell better quality products at lower prices. For e.g.
heavily subsidized but better quality imports from China has made most of the
Indian SSI units producing toys, electronic goods, machine tools, chemicals, locks
and paper etc., unviable.

6. Problem of working capital

Many Small-Scale Industries face the problem of inadequate working capital. Due to
lack of market knowledge their production exceeds demand, and capital gets locked
in unsold stock. They do not have enough funds to meet operational expenses and
run the business.

7. Problems in Export
They lack knowledge about the export procedures, demand patterns, product
preferences, international currency rates and foreign buyer behavior. Small Scale
Industries are not able to penetrate foreign markets because of their poor quality and
lack of cost competitiveness. In countries like Taiwan, Japan etc. products produced
by Small Scale Industries are exported to many foreign countries. But in India not
much thought and focus has gone into improving the export competitiveness of
Small-Scale Industries.