ME5075- ENTREPRENEURSHIP

DEVELOPMENT

 UNIT – III
Small Enterprises – Definition, Characteristics, Project
Identification and selection – Project Formulation:
Significance, content, formulation of project report –
Project Appraisal: Concept and method – Ownership
Structures: Selection & Pattern
BUSINESS
 SMALL ENTERPRISES
Small scale industries are labour intensive yet
require little capital. Small scale industries
comprise of small enterprises that manufacture
goods or provide services with the help of smaller
machines and a few workers and employees. The
enterprise must fall under the guidelines set by
the Government of India.
Examples :Bakeries, Candles, Water bottles,
Leather belt, etc..,
 CLASSIFICATION OF SSI
Based on Industries production chain and service,
small
scale industries can be classified as
1. Manufacturing Industries
2 Feeder Industries
3. Serving Industries
4 Ancillary to large industries
5. Mining or Quarrying
1. Manufacturing Industries
These industries produce complete product for direct
consumption and also process industries example. Toys
making, pipe industries etc.
•Micro Enterprises: An Enterprise where the Investment
on Plant & Machinery is up to Rs. 25 Lakh is referred to as
a “Micro Enterprise.”
•Small Enterprises: An Enterprise where the Investment
on Plant & Machinery is above Rs. 25 Lakh up to Rs. 5
Crore is referred to as “Small Enterprise.”
•Medium Enterprises: An Enterprise where the
Investment on Plant & Machinery is above Rs. 5 Crore &
up to Rs. 10 Crore is referred to as “Medium Enterprise.”
2. Feeder Industries
This type of industries are specified in certain
products service example. casting, welding etc.
3. Ancillary to large Industries
These industries produce parts and
components and render services to large
industries.
4. Mining & Quarrying
This industry is involved in unearthing,
breaking of bulk stone etc.
5. Serving Industries
Serving industries cover repair shops necessary to
maintain mechanical equipment i.e., spare parts ship.
1)Micro Enterprises : An Enterprise where the Investment
in Equipment is up to Rs. 10 Lakh is referred to as “Micro
Enterprise.”
2) Small Enterprises : An Enterprise, where the
Investment in equipment is above Rs. 10 Lakh & up to Rs.
2 Crore is referred to as “Small Enterprise.”

3)Medium Enterprises : An Enterprise, where the

Investment in Equipment is above Rs. 2 Crore & up to Rs.
5 Crore is referred to as “Medium Enterprise.”
 CHARACTERISTICS OF SSI
 A small - scale unit is generally a one - man show.
 Capital investment is small and has fewer than 10 workers.
 Most probably it is located in rural and semi-urban area. The
firms are organised as sole proprietorship.
 Compared to large unit, a small scale industrial unit has a
lesser gestation period i.e, the period after which the return
on investment starts.
 Small - Scale Industry can be started any where based on the
availability of resources like raw materials, labour etc.,
 It helps to promote balanced regional development and
influx of job seekers from rural areas to cities.
 They are more flexible to adopt changes like of introduction
of new product, new method of production materials and
new markets, new forms of organizations etc.
 OBJECTIVES OF SMALL ENTERPRISES
1. To eliminate the economic backwardness of rural
and under developed regions in the country.
2. To generate immediate and large scale
employment opportunities.
3. To reduce regional imbalance.
4. To mobilise resources capital and skills and their
optimum utilisation.
5. To ensure more equitable distribution of national
income.
 IMPORTANCE OF SSI

Innovative and Productive

Individual Tastes, Fashions and Personalised
Service
Symbols of National identity
Always winners of the game
Dispersal over wider areas
 ADVANTAGES OF SSI
They create immediate and permanent
employment at a relatively small capital cost.
They meet a substantial part of increased demand
for consumer goods, including mass consumption
goods.
They have a favourable capital output ratio.
They facilitate mobilization of resources of capital
and skills.
SSI do not require heavy and costly, infrastructure
and machinery.
They involve a short gestation period.
 DISADVANTAGES OF SSI

Lack of finance, leads to closing of small unit.

 Some small industries require highly skilled
labour and equipment.
There is a lack of support to the small scale
unit owners.
 DIFFERENCE BETWEEN SMALL-SCALE INDUSTRIES AND LARGE
INDUSTRIES
Small Scale Industries Large Industries
Ownership of SSI is sole proprietary or
Large units are normally public limited
partnership
SSI units have less capital intensive/ Large units generally have higher input
investment technology areas, which are of technology and capital. Relatively
labour intensive they are more capital intensive.
Large industrial undertakings have a
By and large, rural industries adhere to
greater exposure to professional
age old technique and tools
management
SSI basically cater the needs of the local Large industries are basically market-
people oriented.
Different jobs are handled by a chain of
All work from bringing raw materials to
specialized and or professionally skilled
marketing is done by the household.
people

Comparatively a short gestation period Comparatively a long gestation period

OWNERSHIP STRUCTURE
1. Sole proprietorship
According to wheeler, "the sole proprietorship is that
form of business organization which is owned and
controlled by a single individual. He receives all the
profits and bears all the risks in the success or failure of
the enterprise".
Salient Features
Sole ownership
One - man control
No separate entity of the firm
Undivided risk
No government regulation
Unlimited liabilities.
 Merits of sole proprietorship
Objectives of the firm are formulated in an
informal manner by the entrepreneur.
Specialisation is restricted to the entrepreneur.
Authority and responsibility are ne centered
round the entrepreneur.
Quick and prompt decision.
Maximum flexibility in operations.
 Demerits sole proprietorship
There is no plan and policy about objectives.
No scope for developing skill, knowledge,
aptitude and ability.
Limited managerial ability.
No scope for co-ordination of activities.
Lack of continuity.
Instability.
 PARTNERSHIP FIRM
A partnership is a form of business organization in
which two or more persons up to a maximum of
twenty join together to under take some form of
business activity.
Salient Features
1. More persons
2. Profit and Loss sharing
3. Contractual Relationship
4. Existence of lawful business
5. Utmost good faith and honest
6. Unlimited liability
 MERITS PARTNERSHIP FIRM
Objectives of the unit are clearly stated.
Better specialization through division of labour.
Line of authority specified.
Authority and responsibility are defined.
Continuity of work.
Flexibility in operation.
DEMERITS PARTNERSHIP FIRM
Lack of harmony in the event of mutual distrust.
Restricted growth.
Lack of public confidence.
Communication gaps.
A partnership concern would be most suitable
where
The size of the business is relatively small.
The capital requirement is not much.
There is need for variety of skills for managing the
different types of activities.
Procedure for Registration
A partnership firm can be registered at any time by
filling statement in the prescribed form.
The form should be duly signed by all the partners.
The statement should contain the following
information.
•Name of the firm
•Name of the business place
•Name of the Registered office or Branch
•Date of commencement of business
•Duration of the firm
•Nature of the firm's business
Dissolution of Firm
There is a difference between the dissolution of
partnership and dissolution of firm. Dissolution of
partnership occurs when a partner ceases to be
associated with the business, where a dissolution of
firm is the winding up the business.
Modes of dissolution of firms
1. Dissolution by Agreement
A partnership firm may be dissolved with the
mutual consent of all the partners in accordance
with the term of agreement.
2. Contingent Dissolution
On the expiry of the period, if it is for a fixed
period.
On the completion of the firm's goal.
On the death of a partner.
On the adjudication of a partner as insolvent.
3. Compulsory Dissolution
When all partners or all but one partner is
declared insolvent.
When the business of the firm becomes unlawful.
4. Dissolution through court
When a partner becomes of unsound mind.
When a partner becomes permanently in capable of
performing his duties as a partner.
When a partner will fully and persistently commits
breach of the partnership agreement.
When a partner un authorised transfers the whole of
his interest or share in the firm to the third person.
When it is just and equitable that the firm should be
dissolved
The business of the firm can be carried on at loss
only.
 COMPANY
• A company is a legal entity formed by a group of
individuals to engage in and operate a business—
commercial or industrial—enterprise. A company
may be organized in various ways for tax and
financial liability purposes depending on the
corporate law of its jurisdiction.
• The line of business the company is in will
generally determine which business structure it
chooses such as a partnership, proprietorship, or 
corporation. These structures also denote the
ownership structure of the company.
 Salient Features of a Company
1. Separate Legal Entity
A company has an existence entirely distinct from
and independent of its members. It can own
property and enter into contracts in its own name.
The assets and liabilities of thee company are not
the assets and liabilities of the individual members
and vice versa.
2. Artificial person
A company is an artificial person created by law. It
is intangible, like a natural person. It has rights and
obligations in terms of law.
3. Perpetual Succession
A company enjoys continuous existence and its life is
not affected by the death, insolvency etc. In common
words, "Man may come, Man may go, but the
company remains the same".
4. Limited Liability
Company limited has share liability. The members of
company are limited by his / her share.
5. Common seal
Any documents bearing the common seal of the
company and duly witnessed by at least two directors
is legally binding on the company.
6. Transferability of share
The members of public limited company can freely sell
their share to others without the consent of other share
holders or members.
7. Separation of ownership and management
The number of shareholders are scattered all over the
country. Therefore they elect their representatives to
manage the company on their behalf known as directors.
8. Incorporated association of persons
In case of a private limited company, the minimum
number of members is two and the maximum number is
fifty. But, In case of a public limited company, the
minimum number seven and there is no maximum limit.
 PRIVATE AND PUBLIC COMPANY
I. Private Company
Under section 3(i) (ii) of the Companies Act, a private
company has been defined as.
•Restricts the members to transfer the shares, if any
•Number of member is limited to 50
•Prohibits any invitation to the public to subscribe any
•share or the debentures of the company.
•The minimum number of members in case of private
company is two.
•The word "Private must be used in company name.
2. Public Company

Under section 3(i) (ii) of the company Act, a public

company is not a private company. In other words, a
public company is one which.
• Lays down no restriction on the transfer of shares to
others.
•There is no maximum limit in number of members.
•Company can invite public for subscribing to its shares
or debentures of the company.
 CO-OPERATIVE
In simple term, co-operative is a voluntary
organization. It is created not to earn profit but to
improve its common economic interests. The main
objective of this organization is self-help and mutual
help.
A co-operative organization needs to be registered
with the register of co-operative societies of the
state with minimum 10 members and they are the
owners.
The members will elect their managing committee in
the annual general meeting to manage the affairs of
the co-operative organization.
 Salient Features
1. It is an voluntary organization
2. The members themselves elect their managing
committee on the basis of 'one member - one vote‘
with democratic benefit.
3. The primary objective is to render service to its
members rather than to earn profits.
4. The capital of co-operative organization is collected
from its member in the form of share capital.
5. The profit is shared among members as a dividend
which is restricted to 9% and the surplus is
distributed in the form of bonus among the
members.
Merits
1.The formation of co-operative is easy when compared
to other form of companies. It is an associate of 10
members with limited formalities.
2.The liability of members is limited to the extent of
their capital in their capital in the co-operative societies.
3.It helps to create social relationship among its
members and society.
4.They enjoy a tax limit on income tax and surcharge on
its earnings up to a certain limit.
Demerits
• Maintenance of secrecy, like annual reports accounts
are quite difficult in case of co-operative organization.
•Since service and not profit is the motive cooperative
organization. There is a lack of interest in the
managerial activities.
•There is a way to escape in case of misappropriation
of funds by the offices.
 PROJECT REPORT
The World Bank defines a project as "an approval
for a capital investment to develop facilities to
develop facilities to provide goods.
A project report is prepared by an expert after,
detailed study and analysis of the various aspects
of a project.
It acts as a guide to management, specially at the
initial stage to know whether the technical,
commercial, financial and economic conditions are
feasible or not.
 CONTENTS OF A PROJECT REPORT
1. General Information
Information on product profile and products details.
2. Promoter
His/her educational qualification, work experience, project
related experience.
3. Location
Exact location of the project, lease or freehold, locational
advantages
4. Land and Building
Land area, construction area, type of construction etc.
5. Plant and Machinery
Details of machinery required, capacity, suppliers, cost etc.
6. Production Process
Description of production process, process chart, technical
know how etc.
7. Utilities
Water, power steam, sources of utilities etc.
8. Transport and Communication
Mode, possibility of getting, costs
9. Raw Materials
List of raw materials required by quality and quantity.
10. Manpower
Manpower requirement by skilled and semi-skilled sources
of man power supply, cost etc.
11. Products
Product Mix, estimated sales, distribution channel, input
output ratio.
12. Markets
End users of product, distribution of local, national, trade
practices, sales promotion.
13. Requirement of working capital
Source of working capital, peed for collateral security.
14. Requirement of funds
15. Cost of production and profitability of first ten year.
16. Break even analysis.
17. Schedule of implementation.
 PROJECT FORMULATION
• Project formulation is a concise, exact statement of a
project Set the boundaries or limits of work to be
performed by the project. It is a formal document that
gives a distinctive identity, of the project and precise
meaning of project work to prevent the conflict, confusion
or overlap.
• Taking a first look carefully the and critically at the project
idea.
• Carefully weighting its various component.
• Analysing with the assistance of specialists or consultants.
• Assessment of the various aspects of an investment
proposition.
• It is an important stage in the pre-investment phase.
 ELEMENTS OF PROJECT FORMULATION

1. Feasibility Analysis
2. Techno - economic Analysis
3. Project Design and Network Analysis
4. Input Analysis
5. Financial Analysis
6. Social cost - Benefit Analysis and
7. Project Appraisal
 1. Feasibility Analysis
• Feasibility analysis is undertaken to determine the
desirability of investing in further development of project
idea.
• Three alternatives can arise when the project is taken for
development. They are.
(a) If the project is feasible, the project assessing body can
proceed to invest further resources in pre investment
studies and design development.
(b) If the project turn out to be not feasible. Further
investment in the project idea is ruled out.
(c) If the data is not adequate for arriving at a decision about
the feasibility of the project. Additional information must be
collected and the investment decision is delayed till the final
decision.
project feasibility analysis is carried out dividing it formally
into three stages.
(a) Pro -feasibility study
(b) Feasibility study and
(c) Project report
(a) Pro-feasibility study
Pro-feasibility study is to determine whether
The investment opportunity is so promising on the basis of
information elaborated at the prefeasibility stage.
The information is adequate to decide whether the project is
adequate or not.
Pre-feasibility stage is necessary to examine other economic
alternative like market and plant capacity, material input,
location etc.
(b) Feasibility study
•Feasibility study is used to investigate the project
in six different aspects in economic, technical,
managerial, organizational, commercial and
financial.
•The feasibility study of an iterative process
covering all aspects of an investment project such
as possible alternative solutions for production
programmes locations, technology, organizational
setup, etc.
(c) Project report
The project report states as to what business is intended be
undertaken by the entrepreneur be and whether it should be
physically possible, financially viable, commercially profitable
and socially desirable to do such a business.
A project report, in order to be useful, should contain the
following information.
1. Examination of Government policy with respect to the
industry concerned so as to see whether government has any
priority etc. for it.
2.Broad specification of output and alternative techniques of
production in terms of process choices of plant size etc, in
order to make relative evaluation of various alternatives.
3. Listing and description of alternative locations to decide
upon the best location.
4. Preliminary estimation of sales revenue, capital costs and
operating costs for different alternatives.
5. Preliminary analysis of profitability for different
alternatives.
6. Marketing analysis including demand and supply
analysis.
7. Specification of product pattern and product prices.
8. Preparation of layout, designs etc:
9. Specification of skill - wise labour requirements and labour
costs.
10. Estimation of working capital requirements.
11. Phasing of activities and expenditure during construction.
12. Analysis of profitability for the entire project.
2. Techno-Economic Analysis
This integrated techno-economic analysis process offers a
framework for undertaking complex valuation to guide strategic
decision making and to refine strategy. The method integrated
Net Present Value (NPV), Monte Carlo Simulation, and Real Option
Analysis (ROA) to extrapolate the value of an innovation,
particularly when new and uncertain markets are involved.
Scope
Organisational identification of business needs, required
opportunities, challenges, risk tolerance, and key historical data.
A-highly segmental NPV model provides a skeleton. A project
finance approach is utilized for value analysis, focusing on
1. Cash flows
2. Stakeholder segmentation and
S. Exploit risk identification and allocation (i.e., partners,
Customers, financiers).
 3. Project Design and Network Analysis
 Project design is a blue print of a project. It identifies the flow
of events which must take place before a project can start
yielding the designed results.
 The inter relationship between various constituent activities of
a project is generally depicted in the form of a network
diagram.
 Project design and network analysis are concerned primarily
with the development of the detailed work plan of the project
and its time profit.
 Network analysis is carried out to identify the optimal course
of action, so as to execute the projects within the minimum
time keeping in view with the available resources. Thus, it
gives way for detailed identification and qualification of the
project inputs which is essential, for developing the financial
and cost-benefit profile of a project.
4. Input Analysis
Input analysis is to determine the resources requirements of
the project, such as identification, qualification and evaluation
of project inputs. The main objectives of input analysis is
To identify the nature of resource.
To estimate the magnitude of the required resource
To evaluate the possibility of un-interrupted supply of
inputs.
The best method of determining the inputs is to identify the
resources required in the various activities involved in the
project. Both recurring and non recurring resources must be
considered.
Input requirements constitute the basis of cost estimate of the
project.
5. Financial Analysis
The purpose of financial analysis is to identify the
characteristics and to determine the financial
feasibility of a project. Such analysis involves
estimates about project costs and revenues, and
the funds required for the project.
The information obtained from the financial
analysis could be used for employing commercial
profitability analysis. It could be made more
effective by using/break-even analysis and ratio
analysis.
6. Cost-Benefit Analysis
The purpose of this analysis is to ascertain all social costs
and secondary benefits with a view to find out the impact of
the project on the society. The methods of estimating the
shadow prices or input prices, social discount rate, etc. are to
be explained and the calculation are to be presented in
separate statement or tables.
However, most of the data obtained from financial analysis
Could be adjusted to reflect the true social values and use.
Cost Benefit Analysis is known as pre-investment appraisal
and its purpose is to enable the concerned authorities to take
an investment decision about the project.
7.Project Appraisal
Systematic and comprehensive review of the
economic other such environmental, financial,
social, technical and other Such aspects of a
project to determine its objectives.
PROJECT APPRAISAL
ASPECTS OF PROJECT APPRAISAL:
I. MARKET APPRAISAL
It is one of the major areas of introducing of any products in market. In that
case, must be considered this things before launching in a market.
What would be the aggregate demand of the proposed product or service?
What would be the market share of the market share of the project under
appraisal?
Past and current demand trends
Past and current supply position
Production possibilities and constraints
Imports and exports
Nature of competition
Cost structure
Elasticity of demand
Consumer behaviour:
1. motivation,
2. attitudes,
3. preferences, requirements.
Distribution channels: marketing policies.
II. TECHNICAL APPRAISAL
Whether prerequisites for the success of project considered?
Good choices with regard to location, size, process, machines
etc.
Preliminary tests and studies
Availability of raw materials, power and other inputs.
Optimal sale of operations.
Choice of suitable production process
Choice of appropriate machines and equipment
Effluents and waste disposal
Proper layout of plant and buildings
Realistic work schedules
Socially acceptable technology
III. FINANCIAL APPRAISAL
whether the project is financially viable?
✓ Servicing debt
✓ Meeting return expectations
✓ Investment and phasing of the total cost
✓ Means of financing
✓ Break even point
✓ Cash flows in the project
Investment worthwhile?
✓ Net present value
✓ Internal rate of return
✓ Pay back period
✓ Level of risk
IV. ECONOMIC APPRAISAL
Social cost-benefit analysis
Impact on level of savings and investments in society
Impact on fulfilment of national goals:
✓ Self sufficiency
✓ Employment
✓ Social order.
V. MANGERIAL APPRAISAL
Track record in earlier project
Resourcefulness of the promoter
Understanding of business
Commitment to the project
Integrity
VI. SOCIAL APPRAISAL
Impact of project on quality of:
• Air
• Water
• Noise
• Vegetation
• Human life
Major projects such as these cause environmental damage
• Power plants
• Irrigation schemes
• Industries like leather processing, chemicals etc.
Likely damage & the cost of restoration.