Stages in starting a venture


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This project gives a fair idea of starting a venture which is particularly applicable in India due to its various tax and legal laws. But still it gives the essentials of starting a venture anywhere in the world

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Stages in starting a venture

  1. 1. STAGES IN STARTING A VENTURE OBJECTIVES OF THE PROJECT To know various stages involved in starting a venture To know the different sources through which market research can be conducted To understand the cost of starting a venture To understand the various modes of financing a business To check the legal formalities of starting a venture
  2. 2. RESEARCH METHODOLOGY I have completed the project Stages In Starting A Venture using the secondary data like Internet and various research, Management and news portals. Time constraint and the maximum limit in the number of pages are the reasons of not preparing the project report in detail as I wanted it to be but still I have tried to explain in general, the way a venture is normally started in India.
  3. 3. Introduction Many people dream of starting their own businesses, but not everyone is cut out for the challenge of starting their own business. Being employed by someone else offers a slew of advantages, from health insurance and matching retirement contributions to a regular schedule and the company of coworkers. There are several personality traits that are common among successful entrepreneurs, including discipline, frugality, self-confidence, good communication skills, humility, honesty and integrity, superb record-keeping skills, motivation, good health, optimism and more. Before one quits his job to become an entrepreneur, one must first think of a concept, product or service that will generate a steady stream of income. This may sound easy, but for most people, this is actually the hardest part. One should conceive a plan that puts his knowledge, experience and expertise to use in the most profitable way possible. One should try to start with areas where one already has a great deal of interest in, and equipment and materials for. This will help cut down startup costs. Doing something one likes isn't the only consideration. One need to get an idea of the prospects for the potential business and try to find out the answer to some questions like Is it a business with a market? Can one make money at it? This will require some research into the marketplace as well as how other similar businesses have fared. So, starting a business can also be very stressful or unprofitable if one does not take the necessary steps to ensure success. If a person is considering to start a new business, he
  4. 4. has to make sure that he will effectively plan every aspect of his business. This will lead to a solid business strategy, which will help one to increase the chances of success. The task of starting a business can be invigorating and eagerly fulfilling but it is not easy. There are so many challenges to face and decisions to make. Many startups face a lot of trouble in running the business and making it profitable. The pressure can cause a person to make a poor decision which can, in turn, negatively impact the business potential and give it a major setback. So one should spend quality time in planning and considering the possible obstacles the new business might encounter in the long run. Therefore, one has to go through various stages to start his business and to ensure its success.  Identifying Business Opportunities Identify productive inefficiency If a person is able to produce any given output at a lower cost—or could produce more output for given cost, then he may think of entering into that business. For example, a company that is inefficient will have higher operating costs and will be at a competitive disadvantage (or have lower profits than other firms in the market). E.g. Nirma Detergent in India identified productive inefficiency by offering its detergent at a very low price as compared to other foreign brands which were charging exorbitantly high prices.
  5. 5. Remove Key Hassles One can take a look at some of the key hassles customers face when buying or using a product or a service. One doesn’t necessarily have to have a new product or service. One can be innovative and improve a product, a service or a business process. Purchasing processes in some products categories are still a major source of irritation for customers. One can think how he can improve and provide a superior alternative. For example, look at how the search engine market developed. There were millions of websites on the Internet and it was often very hard for customers to find what they were looking for. Searching an index of webpages (on Google, or Yahoo) made it much easier for customers to find information they were seeking. Customers Desire to Experience Something New One may or may not have a new business idea or business process to serve a market. And perhaps there may be no market inefficiencies for a person to exploit. But sometimes, gauging the customers’ desire to experience something new can be a successful strategy. Pick a Growing Sector/Industry When considering a new business, it is important to look at whether or not one’s idea is in a growing sector or industry. For example, a lot of start-ups in the IT sector in India did very well because there was huge demand in that industry and the growth was outpacing other industries. Investing in a stagnant sector/industry may not best serve a person’s interests, unless he identifies a market inefficiency that he can exploit.
  6. 6. Product Differentiation Creating superior products or services vs. alternatives is important for winning in the market place. What factors will set one’s product apart from the existing ones? If there is no such differentiating factor, the potential customers may just stick to the existing product rather than adopt his product. Cash Flow Considerations At the start-up stage, cash flow considerations are just as important as any other business function. If one runs out of cash, despite holding inventory or other assets, his business will risk failure. There are some types of businesses in which cash is typically held up for a long time. If a person is in manufacturing for example, his cash flow can be held up for long periods of time, or money may be stuck in receivables. When picking the right business, a person should consider one that provides fairly regular cash inflows and with slower outflows (if possible). It is imperative that one understands the need for constant cash flow in his business. Without cash flows, no matter how good a person’s idea or business process is, he might be destined for failure. Seasonal Business or All Seasonal Business When picking a new business – it is to be seen whether it is seasonal or the year round. If a person decides on a seasonal business, then he will need to consider how to operate during off-season months. Managing the cash one makes during the season will help him get through off-season. Financial planning will be of utmost importance.
  7. 7.  Checking the Feasibility of the identified opportunity After thinking of a business idea and envisioning all the possibilities, one should make sure that his Business Idea is indeed viable and that he is not getting carried away by the sheer excitement. Industry - Its size, its growth and its future. One should understand the prevailing trends, Analyse Strengths as well as Weaknesses of existing players; Analyse Opportunities as well as Threats to figure out whether a business opportunity exists. He should make sure that the Business Opportunity is large enough to be attractive and the cost of doing business is reasonable enough for the business to be viable. Competition: One should study all aspects of Competition - Direct as well as Indirect. He should dig deeper to find Gaps in Competition's Offerings and the Hassles faced by customers. The existing competition in the market will pose a considerable threat to a person’s startup when he launches his business. He should be aware about the activities of his competition in the market, their business strategy, new partnerships, enhancement of products etc. His competition will have a better knowledge about the market than him. He should always ensure that he is updated about all the crucial developments in the market and prepared to adapt to the changes that take place. He should pay attention to his Competitiors, see what changes they are making and observe whether they have made any changes in recent months or years. He should also observe if their products have changed, or have they started to offer new services. His competitors may be making changes as a result of the changing market needs.
  8. 8. Conducting Market Research Market Research can be an expensive and time consuming task depending on the methods of market research one chooses. However the information he obtains from it can be very valuable to his business. It helps to understand what are the unmet needs and what needs improvement. It is very important to meet and really understand the current purchasers / users of his competitors products. One can decide to hire a market research firm or can do his own market research. 1) Primary market research - Primary Market Research is first hand information from customers and potential customers. Primary market research is more expensive and time consuming to perform than secondary market research, however the information it offers can be much more specific and valuable. Market Research Surveys- Surveys by phone, mail or in person are used to assess the potential success of a product or service. Surveys are a highly used method of small business market research. Market Research Focus Groups- A Focus Group is a group of people (usually 6-10) who gather around to talk about a particular product, service, problems they have and more. A focus group can help a person gain valuable insight about potential customers, by discovering their likes, dislikes and problems.
  9. 9. Market Research Individual Interviews- Instead of conducting a group interview (focus group) one can also conduct individual interviews. Conducting Market Research Interviews provides him with the opportunity to meet individually with his target market. Instead of conducting a group interview such as a focus group he can also conduct individual interviews. In an individual interview the researcher asks the targeted buyer questions similar to those in a focus group. The researcher asks about the interviewees’ likes, dislikes, problems and opinions of a product or service. One can choose to conduct the individual interview in person or over the phone. One disadvantage of individual interviews over focus groups is that the interviewees don’t get to interact with one another. For example in a focus group, one person may say something that causes a reaction in another and suddenly bursts of ideas start sprouting. In individual interviews there isn’t that same kind of interaction. However an advantage of individual interviews is that one gets to talk to his target buyer one-on-one and get more information about that individual and their specific thoughts and opinions. 2) Secondary market research - Secondary market research is far more easer to conduct as the information is readily available on the public domain. Reports/ Studies (University studies) Local Newspapers and business magazines -Many local newspapers and business related magazines offer demographic data.
  10. 10. Library- In the reference section of the library one will find financial data and statistics pertaining to the customer segments. Market Research Statistics- There are many websites online that offer statistics for small business market research. Statistics such as Demographics can help you get a sense of population characteristics of your location. Trade associations- There is a trade association for just about any industry. There is usually a fee to join but it is an opportunity to network with other professionals in the industry. One will also have access to market research which they conducted.  Finding the niche It is important to find a target segment which identifies the benefits a person offers significantly more than alternatives If the segment is distinct and its size economically viable, he may have discovered a profitable niche Finding one’s Niche is also important because he cannot afford to be everything to everyone. A profitable product / service must stand out and find quick acceptance amongst happy & satisfied customers
  11. 11. Defining ones Niche What is the person Selling? Who are his Target Customers? What benefits is the Target Customer Seeking? How the Product or Service is different from one’s Competitor's Offerings? How is a person’s Product / Service Superior v/s the Competition for the Target Segment? Which benefits / differentiators make one’s product unique?  Deciding the Location of Business Location of the business is the most important factor influencing its success or failure. It is a long-term decision which should take into consideration not only the present requirements of the organization but also its future expansion plans. Choosing the right location for a startup will depend on the business one intends to run. If a person is starting a restaurant or a retail business, he should choose a location that is accessible and familiar to everyone. In case it is a manufacturing business, one can opt for a location that will save up the cost for transportation of goods. Location of a plant has a bearing on the layout of machinery and equipment as well as on the process of production. One should keep in mind the convenience of the employees since it will help save time which is a critical factor while managing a startup. The choice of location depends on several
  12. 12. important factors. Selecting a location for setting up an enterprise is dependent on the following factors: Availability of raw materials The availability of good quality raw materials in required quantity at close hand is very crucial for the success of a new enterprise. The region must have abundant supplies of atleast the chief raw material required by the firm. Such a location helps to ensure continuity of production and reduces the transport costs. Few raw materials such as minerals, perishable food, cotton etc. play a vital role in influencing the location of the plant. For e.g, paper manufacturing plants require a regular supply of a large quantity of pure water and are, therefore, generally located near river banks. Supply of Labour The availability of the required grade of labour i.e. skilled, semi-skilled or unskilled is an important factor influencing the location of the industry. Besides, the cost and productivity of labour, attitude of trade unions and the state of industrial relations in a particular region are also important. This also explains concentration of certain industries in certain states. Proximity to the Product Market An industry should ideally be located close to the market for the product produced by the firm. This on one hand reduces the cost of transporting the finished product to the market. On the other hand it ensures maximization of profits by selling the goods at a competitive
  13. 13. price. Generally, in case of the industries having national and international markets, plants are spread over wide geographical areas to have close proximity to all markets. In case of regional demand, plants are located near to the immediate market. Availability of transport facilities A factory requires transport facilities both for getting its raw materials as well as for reaching its finished products to the market. Hence, location is to be chosen in such a way that its total transport cost is the lowest. Of the two elements of transport cost, which one will have a decisive influence on the decision of location will depend on the characteristics of the raw materials and the nature of the manufacturing process. If the factory requires bulky commodities like iron ore, limestone, etc., it should be situated nearer to the source of these raw material. But, if the manufacturing process is such that the raw materials loose a substantial part of its weight like in the case of the chemical and pharmaceutical products, the factory should be located nearer to the market. Therefore, a region which provides adequate transport facilities attracts industrialists. Supply of Power With increased mechanisation, a location which ensures a regular and adequate supply of power and fuel for the business has become an indispensable requirement.
  14. 14. Climatic factors Certain types of industries require a particular type of climate. E.g. flour mills need a dry climate while cotton mills require a humid climate. Natural factors are particularly important in extractive industries like plantations, fishing, agriculture, etc. Climate influences even the capacity to work on the part of the workers. But, the technological advancements like, artificial humidification and air conditioning have reduced the importance of climate as a factor. Government Regulations and Policies Central Government and the State Governments have made several policy announcements from time to time in order to encourage development of industries. Various incentive schemes have been provided to attract investment especially in backward areas. All this has become an important factor while selecting a suitable location. Law and Order Every entrepreneur is concerned about law and order as well as the political stability of the area around which he wants to set up his industry. It is only natural for every entrepreneur to locate his unit in those areas which are not subject to riots and political disturbances. No industrialist can ignore such national and strategic considerations while selecting the location of the industry.
  15. 15. Existence of complementary and competitive industries Such a location on one hand provides backward and forward linkages for the industries and on the other hand it provides a competitive environment for them. It increases the supply of the required raw materials and enhances the demand for the goods produced. It improves the labour market by attracting both skilled and unskilled manpower. It also improves the banking, credit and communication facilities in the area. It brings into existence various commercial services like warehousing, packing, forwarding, grading, appraising, advertising, etc which helps in the growth and expansion of all the business firms in the particular area. Price of Land It is an important factor while choosing the exact site for locating the business because high price of land may wipe out the advantages provided by the availability of the other factors. If it is proposed to lease out the land then the question of rent and taxes must be considered as such charges will add to the working expenses. Also, the plot of land being considered must be big enough to meet the needs of future expansion of the business.
  16. 16.  Deciding the legal structure / form of organization There are several forms of business organizations that one may consider for his company. Understand forms of Legal Structure and the factors one should consider while deciding on the form of business organisation Nature of business: - The organisation of one’s business will depend on the nature of his business. Scale of operations: - Volume of business and size of market area are key considerations. Large market operations are better catered to by public or private companies. Small operations are set up as partnerships or proprietorships. Degree of Control: - If one wants direct control, then proprietorship is a good option. Incorporation of a business involves separation of ownership and management. Amount of Capital: - As need for resources grow, then for example, a partnership may be converted into a company. Volume of Risks & Liabilities: - Willingness of owners to bear risk. A sole proprietorship bears high risk, whilst public or private companies have lower risks for owners, as there is separation of the legal entity and ownership.
  17. 17. Comparative tax liability- An organisation’s tax liability will depend on the form of business organisation one choose. Forms of Business Organisations in India Different forms of business organizations are as follows after having considered the necessary factors for a business: 1) Sole Proprietorship This is the oldest and most common form of business. Main features of this form are: Ease of formation (no elaborate legal formalities) Capital to be provided by owner himself Complete control No separation of ownership Unlimited liability Lack of continuity- the business ceases to exist if the owner dies Difficulty in raising capital Advantages: Ease of formation Incentives to owner to do well
  18. 18. Quick decisions and flexibility Secrecy of business Disadvantages: Limited capital Limited managerial ability Limited life Unlimited liability Suitable for: Businesses involving moderate risk Small financial resources and small capital requirements. 2) Partnership Firm A partnership can be defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. Main features of this form are: Easy to form (no elaborate legal activities). Registration not essential. Minimum partners – 2, Maximum partners – 10 (in banking), 20 for all other businesses. No separation of legal existence. Ownership of property carries right of management for each partner
  19. 19. Liability of partners is unlimited Restrictions on the transfer of interest Limited span of life (must be dissolved if one partner is unable to continue). Difficult to raise a large amount of capital Governed by Indian Partnership Act, 1932 Advantages: Ease of formation Greater capital and credit resources Better judgment and more managerial activities Disadvantages: Absence of ultimate authority Liability for actions of other partners Limited life Unlimited liability Suitable for: Medium size businesses, involving limited capital. 3) Limited Liability Partnership (LLP) The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility
  20. 20. of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. It is governed by the provisions of the Limited Liability Partnership Act, 2008. Salient features: Separate legal entity Perpetual succession- entity survives if the partners die (or unable to continue) Provides flexibility in devising partnership agreement. The duties and obligations of Designated Partners shall be as provided in the Limited Liabilities Partnership Act, 2008 Partners not accountable for actions of other partners. Liability is limited to their contribution in the LLP. Share transfer restricted At least 2 partners needed to form a LLP, with a maximum of 50 Obligation to maintain annual accounts Central government has investigative powers A firm, private company or an unlisted public company is allowed to convert into a LLP Provisions of The Companies Act, 1956 may also be included Indian Partnership Act, 1932 shall not be applicable.
  21. 21. 4) Private Limited Company A private limited company is defined as a voluntary association of not less than two and not more than 50 members, whose liability is limited, the transfer of whose shares is limited and not allowed to invite the general public to subscribe to its shares or debentures. Main features are: Independent legal existence Less cumbersome to organise and operate as it has been exempted from many rules and regulations a public limited company is subjected to. Some of them are: o Need not file a prospectus o Need not obtain a Certificate for Commencement of business o Need not hold statutory general meeting nor need it file the statutory report o Restrictions placed on the directors of the public limited company do not apply to its directors. Liability of its members is limited Shares allotted are not freely transferable between members Enjoys continuity of existence Need a registered office and name Requires signed Memorandum of Association and Articles of Association. Advantages: Continuity of existence
  22. 22. Limited liability Less legal restriction Disadvantages: Shares not freely transferable Not allowed to invite public to subscribe to shares Suitable for: people seeking to take advantage of limited liability, but at the same time desire to keep control over the business within a limited circle and maintain the privacy of their business. 5) Public Limited Company A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited. Main features are: Separate legal existence Governed by The Indian Companies Act, 1956 Minimum of 7 members, no upper limit Collects capital via shares
  23. 23. Shares are freely transferable, without any prior notice to the company Liability of a member of a company is limited to the face value of the shares he/she owns. Shareholders do not own management rights. This ensures separation of ownership and management. Power of decision making given to Board of Directors. Existence of company not threatened by insolvency, death of its shareholders. Advantages: Continuity of existence Larger amount of capital Unity of direction Efficient management Limited liability Disadvantage: May be subject to higher regulation than other business forms  Creating a Business Plan Every new venture should have a business plan. A business plan is the formal written expression of the entrepreneurial vision, describing the strategy and operations of the
  24. 24. proposed venture. The business plan also goes by other names, depending on its intended audience. Presented to a banker, it may be called a "loan proposal." A venture capital group might call it the "venture plan" or "investment prospectus." The business plan should include the following points – Description Goals Marketing Plan Financial Plan Management Plan The advantages of writing a business plan far outweigh the costs. The purpose of the plan is to enable the top executives of the firm to think about their business in a comprehensive way, to communicate their objectives to individuals who may have a stake in the firm's future, to have a basis for making decisions, and to facilitate the planning process. Entrepreneurs should undertake the task of preparing the business plan personally. Although outsiders - consultants, accountants, and lawyers - should be tapped for their advice and expertise, the promoter or the initial top management team should be responsible for the writing. Personally drafting the plan will enable the entrepreneurs to think through all aspects of the proposed business and ensure that they are familiar with all the details, for they will have to make decisions about the new venture and be responsible for those decisions. Moreover, investors expect the founders to be involved in
  25. 25. and knowledgeable about the proposed enterprise. The Benefits of Business Planning The business plan can personally benefit the entrepreneurial team. Founding a new business can be enormously fulfilling and exhilarating, but it is also an anxiety-ridden and tense experience. Usually a great deal of money is at stake, and the consequences of poor decisions can affect many people for a long time. In developing and writing a business plan, the entrepreneurial team reduces these anxieties and tensions by confronting them in advance. By projecting the risks of the new venture into the future, the team comes to grips with potential negative outcomes and the possibility of failure. The knowledge that comes from this experience can reduce the fear of being taken by surprise by problems that could have been foreseen and provided for at the very outset.  Understanding the Startup Costs Depending on the business, the startup cost will vary. The startup cost would majorly comprise of Sales costs: Product inventory, raw materials, manufacturing equipment Professional fees: Setting up legal structure of your organisation, trademarks, copyrights, patents, drafting partnership
  26. 26. Administrative costs: Various types of business insurance, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities Technology costs: Computer hardware, computer software, printers, cell phones, website development and maintenance, high-speed internet access, security measures Wages and benefits: Employee salaries, workers compensation, payroll taxes, benefits Sales and marketing costs: Marketing materials, advertising, trade association membership fees, event or trade show attendance or sponsorship It is important to decide whether each cost is essential or optional. Depending on this, the decision to incur this cost is taken.  Financing of Business Finance is required by a business enterprise at almost every stage of the business life cycle. MSMEs often find it difficult to arrange adequate finance for their operations as well as for expansion and growth. These enterprises can raise finance by various methods. Below are some of the ways to raise long term and short term capital. Sources of Long Term Capital Reinvestment of Profits Profitable companies do not generally distribute the whole amount of profits as dividend but, transfer certain proportion to reserves. This may be regarded as reinvestment of profits or ploughing back of profits. As these retained profits actually belong to the
  27. 27. shareholders of the company, these are treated as a part of ownership capital. Retention of profits is a sort of self financing of business. The reserves built up over the years by ploughing back of profits may be utilised by the company for the following purposes: Expansion of the undertaking Replacement of obsolete assets and modernisation Meeting permanent or special working capital requirement Redemption of old debts The benefits of this source of finance to the company are: It reduces the dependence on external sources of finance It increases the credit worthiness of the company It enables the company to withstand difficult situations It enables the company to adopt a stable dividend policy It increases the debt raising capacity of the company Loans from Commercial Banks / Financial Institutions Medium and long term loans required for setting up projects can be obtained from banks and or financial instituitions for all viable projects. Similarly, funds required for modernisation and renovation schemes can be borrowed from them. Such loans are generally secured by mortgage of the Company's properties, pledge of shares, personal guarantees etc.
  28. 28. Public Deposits Companies often raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Public deposits can be raised by companies to meet their medium-term as well as short-term financial needs. The increasing popularity of public deposits is due to: The rate of interest the companies have to pay on them is attractive. These are easier methods of mobilising funds than banks, especially during periods of credit squeeze They are unsecured Issue of Shares It is the most important method. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for public limited companies there are no such restrictions. There are two types of shares :- Equity shares: the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.
  29. 29. Preference shares: dividend is payable on these shares at a fixed rate and is payable only if there are profits. Hence, there is no compulsory burden on the company's finances. Such shares do not give voting rights. Issue of Debentures Companies generally have powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and the debentures have a charge on the property or assets of the company, which provide the necessary security. The company is liable to pay interest even if there are no profits. Debentures are mostly issued to finance the long-term requirements of business and do not carry any voting rights. Sources of Short Term Capital Trade Credit Companies buy raw materials, components, stores and spare parts on credit from different suppliers. Generally suppliers grant credit for a period of 3 to 6 months, and thus provide short-term finance to the company. Availability of this type of finance is connected with the volume of business. When the production and sale of goods increase, there is automatic increase in the volume of purchases, and more of trade credit is available.
  30. 30. Factoring The amounts due to a company from customers, on account of credit sale generally remain outstanding during the period of credit allowed i.e. till the dues are collected from the debtors. The book debts may be assigned to a bank and cash realised in advance from the bank. Thus, the responsibility of collecting the debtors' balance is taken over by the bank on payment of specified charges by the company. book debts may be assigned by the seller to a FACTOR, who who will provide about 80 - 85 % or more of the value of the book debt, as advance to the seller. The FACTOR will also undertake the task of collecting the amount representing the debt (credit sales) from the debtors. Factoring is an important avenue of raising short funds against the receivables for the MSME units. The charges payable to the FACTOR is treated as cost of raising the funds. Discounting Bills of Exchange This method is widely used by companies for raising short-term finance. When the goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. Instead of holding the bills till the date of maturity, companies can discount them with the commercial banks on payment of a charge known as bank discount. The rate of discount to be charged by banks is prescribed by the Reserve Bank of India from time to time. The amount of discount is deducted from the value of bills at the time of discounting. The cost of raising finance by this method is the discount charged by the
  31. 31. bank which discounted the bill. Bank Overdraft and Cash Credit It is a common method adopted by companies for meeting short-term financial requirements. Cash credit refers to an arrangement whereby the commercial bank allows money to be drawn as advances from time to time within a specified limit. This facility is granted against the security of goods in stock, or promissory notes bearing a second signature, or other marketable instruments like Government bonds. Overdraft is a temporary arrangement with the bank which permits the company to overdraw from its current deposit account with the bank up to a certain limit. The overdraft facility is also granted against securities. The rate of interest charged on cash credit and overdraft is relatively much higher than the rate of interest on bank deposits. Rating Parameters used by the Lenders before financing The lenders (Banks/ Venture Capitalists, etc.) carefully assess one’s credit worthiness and assign ratings by analyzing his business information with respect to various parameters. The main parameters that are generally used to rate business entities are provided below 1) Management Some of the key parameters considered include:
  32. 32. Background Industry experience and knowledge Past conduct of borrower with banks Qualifications Background and Capability of the Promotors Organisation's Preparedness for meeting Challenges Combined net worth of promoters Associate concerns 2) Financial Some of the key parameters considered include: Current ratio Debt equity ratio Average turnover Net profits Income growth Net cash accruals Financial Projects and Debt Servicing Capabilities Provision of security for proposed assistance Quality of collateral security
  33. 33. 3) Operational Some of the key parameters considered include: Proximity to branch Location of unit Borrowers proximity to market Type of technology Equipment supplier Quality certifications 4) Industry Some of the key parameters considered include: Nature of industry – cyclical/ seasonal Eligibility under assistance scheme, if any Competitive advantage Branding of product Number of applications of product/ machinery 5) Past Loan Performance Some of the key parameters considered include: Re-payment history Missed installments Revision in interest rates/ period
  34. 34. Prepayments Defaults Month of default Amount of default Reason of default, if provided Security re-sale value Capital loss to bank  Hiring Human Resources Human Resource is also an important determinant of business location and functioning. Factors such as the availability of labour of different skill levels, productivity and cost of labour, flexibility of labour, attitude and behaviour patterns of labour, nature of trade unionism etc. are important to a business. The whole process begins with the task of hiring manpower for starting a business for filling the present and prospective vacancies in the company. The objective of hiring manpower is to procure the right number of employees, with the required qualifications to do the right type of jobs. The hiring process involves four main steps i.e. manpower planning, recruitment, selection and placement. Each of these steps and sub-steps help the employer obtain more and more information about the candidates and thus help in obtaining the best possible manpower for the firm. This function must be performed carefully because any error committed at the time of hiring manpower may prove to be very costly for the firm both in the short as
  35. 35. well as long term. These costs will be in the form of waste of time, money and energy in repeated hiring process. The training costs incurred on them will go waste. The efficiency of the organisation will go down due to hiring of unsuitable candidates. At the same time the rate of absenteeism and labour turnover will be higher. Hence, an effective hiring procedure includes the answers to the following questions :-  What are the requirements of the jobs to be filled?  What kind of persons are needed?  How many persons are needed?  What sources of recruitment may be utilised?  What steps should be taken to select the right type of candidates for employment?  Fulfilling the legal requirements pertaining to the Business Once a person has validated his idea with the necessary steps, it is time to delve into the legalities and paperwork involved in launching the business. The main legal steps that is taken is as follows: Company Incorporation – Initial Steps: • One should file the desired company name with the Registrar of Companies and make sure it is available for use.
  36. 36. • Then the person has to submit the main objectives of the company to the Registrar of Companies (ROC) for scrutiny. He will be informed of approval or any objections within 10 days. • Then he has to obtain a Director Identification Number (DIN) online from the Ministry of Corporate Affairs portal. This process calls for submitting attested support documents as proof of identity and address. • He has to then obtain a Digital Signature Certificate – a requirement for all those who have to sign ROC forms and related documents. The certificate can be obtained from one of the private agencies authorized by MCA 21. Stamping of Documents: • One should pay stamp duties and submit various incorporation forms and documents, including unsigned copies of the Memorandum and Articles of Association for stamping. - Memorandum of Association – This lists the main, ancillary, subsidiary and other parts of the company. It also lists the authorized share capital of the company and the names of theauthorizeddirectors. - Article of Association – describes the rules and procedures for the routine conduct of thecompany. - These documents have to be executed by the promoters in their own hand and in the presence of witnesses.
  37. 37. Certificate of Incorporation: • One has to submit digital and physical copies of the following documents to the ROC in order to obtain the Certificate of Incorporation: Forms e-form 1 (stating that all requirements of the incorporation process have been completed), e-form 18 (informing the ROC of the location of the registered office of the company) and e-form 32 (stating the appointment of proposed directors) have to be filed electronically by him. Signed and stamped forms of the Memorandum and Articles of Association On initial consent of directors Original approval of name letter Stamped Power of Attorney documents Tax-related Procedures • Permanent Account Number (PAN) – A PAN card can be obtained by filing an application with the Income Tax department using Form 49A along with supporting documents. In recent years, the government has tried to simplify this process through service centres such as UTI Investor Services Ltd or TIN Facilitation Centers. • Tax Account Number (TAN) – This is required for anyone responsible for deducting or collecting tax. Use Form 49B for this and submit it at any TIN Facilitation Centre authorized to receive e-TDS returns
  38. 38. • There is a mandatory registration process for Value-Added Tax (VAT) and other tax requirements such as professional tax and service tax Labour Law Procedures • Registration with the Office of Inspector, Shops, and Establishment Act: The steps involved in this may vary by state. • Registration with the Employees’ Provident Fund Organization: This is required only if the number of employees is 20 or more. • Registration with the Employees’ State Insurance Corporation – A social security scheme to provide protection to workers in the organized sector and their dependents in contingencies such as sickness, maternity, death, disablement or occupational disease The steps and procedures described above may vary depending on the state and type of business. One should tackle these in a proactive and systematic manner to ensure that he does not get caught in a legal tangle that will delay the launch of his business or hamper its operation.  Officially starting the venture Now after completing all the basic formalities along with the legal requirements, the Business would be able to start its operations in full flow. The workers, employees and
  39. 39. the managerial staff being recruited for the Business will be assigned various job roles as per their abilities and skill. In the case of any manufacturing or trading concern, orders for the raw materials of the Business would be given to the suppliers and vendors after negotiating with them regarding the price of the raw material, the payment terms and the credit period to be offered. Then as the raw materials would reach the organization, it would start its production process whereby it will try to minimize the cost of production by making optimum use of its available resources ensuring very little or no wastage. Then as the products are ready to be sold, the firm would be undertaking marketing activities in order to attract its customers and hoping to sell its product successfully. In the case of service oriented organizations, they would look to make a name for themselves in the market as a credible and trustworthy organization by providing good customer services which would enhance their reputation leading to increase in their customer base.  Periodic Review / Follow Up Now, after starting the business operations, the owner/owners of the organization should continuously monitor the performance of their Business. They should see whether their Business is performing well as expected by them . They should find out whether their product is getting good response in the market which will in turn translate to more sales. If not, they should try to analyze the reason for the same. They should look to address those issues at the earliest. Even if the business is not making profits in the beginning, it should be at least ensured that the business is not making huge losses which may even
  40. 40. affect the survival of the organization. The organization should simply try to deliver as per the opportunities identified within the market by following the best practices in the organization which would enable the Business to sustain itself in the market. Conclusion There are few things more satisfying and rewarding than launching and running a business, but before diving in, a person should be sure to do his homework. Making a business work is not an easy task, but proper planning along with following the above steps would definitely increase its chances of success.