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entrepreneurship and small business management unit iii


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ip university full syllabus notes of ms207 entrepreneurship and small business management

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entrepreneurship and small business management unit iii

  1. 1. UNIT III 1
  2. 2. Unit I Entrepreneurship: Concept and Definitions; Entrepreneurship and Economic Development; Classification and Types of Entrepreneurs; Entrepreneurial Competencies; Factor Affecting Entrepreneurial Growth – Economic, Non-Economic Factors; EDP Programmes; Entrepreneurial Training; Traits/Qualities of an Entrepreneurs; Entrepreneur; Manager Vs. Entrepreneur. (14 Hours) Unit II Opportunity / Identification and Product Selection: Entrepreneurial Opportunity Search and Identification; Criteria to Select a Product; Conducting Feasibility Studies; Project Finalization; Sources of Information. (14 Hours) Unit III Small Enterprises and Enterprise Launching Formalities : Definition of Small Scale; Rationale; Objective; Scope; Role of SME in Economic Development of India; SME; Registration; NOC from Pollution Board; Machinery and Equipment Selection; Project Report Preparation; Specimen of Project Report; Project Planning and Scheduling using Networking Techniques of PERT / CPM; Methods of Project Appraisal. (14 Hours) Unit IV Role of Support Institutions and Management of Small Business : Director of Industries; DIC; SIDO; SIDBI; Small Industries Development Corporation (SIDC); SISI; NSIC; NISBUED; State Financial Corporation SFC; Marketing Management; Production Management; Finance Management; Human Resource Management; Export Marketing; Case Studies-At least 4 (four) in whole course. (14 Hours) 2
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  4. 4. Sometimes called a small business, a small-scale enterprise is a business that employs a small number of workers and does not have a high volume of sales. Such enterprises are generally privately owned and operated sole proprietorships, corporations or partnerships. The legal definition of a small-scale enterprise varies by industry and country. Defining small-scale industry is a difficult task because the definition of small-scale industry varies from country to country and from one time to the another in the same country depending upon the pattern and stage of development, government policy and administrative set up of the particular country. 4
  5. 5. The Fiscal Commission, Government of India, New Delhi, 1950, for the first time defined a small-scale industry as, one which is operated mainly with hired labour usually 10 to 50 hands. The new Policy Initiatives in 1999-2000 defined small-scale industry as a unit engaged in manufacturing, repairing, processing and preservation of goods having investment in plant and machinery at an original cost not exceeding Rs. 100 lakhs. For small-scale industries, the Planning Commission of India uses terms 'village an small-scale industries'. These include modern small-scale industry and the traditional cottage and household industry. 5
  6. 6. The U.S. Small Business Administration states that small-scale enterprises generally have fewer than 500 employees within a 12-month period in non-manufacturing industries. A company must consider any individual on its payroll as an employee. In Australia, however, a small-scale enterprise is one that has fewer than 15 employees on payroll, as defined by the Fair Work Act. The Small Business Act for Europe states that small enterprises are those that have 250 employees or less. Small-scale enterprises in Asian countries generally have 100 or fewer employees, while small-scale African enterprises hire 50 or fewer workers. 6
  7. 7. Small Scale sector can stimulate economic activity and is entrusted with the responsibility of realizing the following objectives: To create more employment opportunities with less investment. To remove economic backwardness of rural and less developed regions of the economy. To reduce regional imbalance. To mobilize and ensure optimum utilization of unexploited resources of the country. To improve standard of living of people. To ensure equitable distribution of income and wealth. To solve unemployment problem. To attain self reliance. To adopt latest technology aimed at producing better quality products at lower costs. 7
  8. 8. The scope for entrepreneurial activities in small business sector can broadly be classified into: Industrial sector Agricultural and allied industrial sector Service sector INDUSTRIAL SECTOR Small scale industries occupy an important place in the industrial sector. This sector provides a wider scope for the potential entrepreneur to develop his or her own industry. There is a good scope and enormous potential to use technology based products in the small- scale sector. An entrepreneur can exploit a profitable venture in any of the industries reserved for exclusive department under the small- scale sector. 8
  9. 9. AGRICULTURAL AND ALLIED INDUSTRIAL SECTOR There is a vast cope for entrepreneurial activities in the agricultural sector. By establishing a link between agriculture and allied industries, the rural entrepreneur can exploit opportunities in areas of farming, agricultural processing and marketing. The government has given priority to IRDP programme and ensured adequate flow of credit to small and marginal farmers through re- financing facilities and by establishing national bank for agriculture and small development. Trading takes place in wholesaling and retailing. It may be in domestic or overseas market. The retailer entrepreneur makes the goods available at the time and places the consumer wants them. He may decide to start single line store, specialty shop, departmental store etc. trade in overseas market is in wholesale. 9
  10. 10. SERVICE SECTOR The service sector has gained importance for the entrepreneurs because of its rapid expansion. Service sector includes all kinds of business and provides opportunities to the entrepreneurs in business such as hotels, tourist services, personal services such as dry cleaning, beauty shops, photographic studies, auto repair, electric repair shops, wielding repair etc. Transport: They provide time and place utilities in urban and rural areas to both men and material. The different modes or transport are of immense importance in the areas, which are not served by roads and railways. There is a scope for entrepreneur to design prototypes of new carts with the application of indigenous technology so that they may have better mobility and greater carrying capacity. The primary need in the rural area is an efficient system of road transport. The rural economy has a good opportunity for an entrepreneur to develop some business. They can exploit possibilities for a venture in some shops or services. 10
  11. 11. The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points. The small-scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 0.87 million units in the year 1980-81 to over 3 million in the year 2000. Employment SSI Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the small-scale sector generates employment for four persons. Export SSI Sector plays a major role in India's present export performance. 45%-50% of the Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of total exports. 11
  12. 12. Export Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. Opportunity The opportunities in the small-scale sector are enormous due to the following factors: Less Capital Intensive Extensive Promotion & Support by Government Reservation for Exclusive Manufacture by small scale sector Project Profiles Funding - Finance & Subsidies Machinery Procurement Raw Material Procurement Manpower Training 12
  13. 13. Opportunity The opportunities in the small-scale sector are enormous due to the following factors: Technical & Managerial skills Tooling & Testing support Reservation for Exclusive Purchase by Government Export Promotion Growth in demand in the domestic market size due to overall economic growth Increasing Export Potential for Indian products 13
  14. 14.  There are two stages of registration-provincial and permanent (final). An enterprise is granted provincial registration when it is at a pre-investment stage. After getting provincially registered, an enterprise can apply for permanent registration just before launching its production facilities.  However, an enterprise that is already functioning need not have to apply for provincial registration as it is eligible to apply for permanent registration.  Enterprises falling under the three categories (micro, small and medium) are further categorized into two types of industries- manufacturing industry and service industry. The status of an enterprise under the MSMED Act is determined according to the investment slab under which an enterprise falls. The main purpose of Registration is to maintain statistics and maintain a roll of such units for the purposes of providing incentives and support services. States have generally adopted the uniform registration procedures as per the guidelines. However, there may be some modifications done by States. It must be noted that small industries is basically a state subject. States use the same registration scheme for implementing their own policies. It is possible that some states may have a 'SIDO registration scheme' and a 'State registration scheme'. 14
  15. 15. Objectives of the Registration Scheme They are summarised as follows: To enumerate and maintain a roll of small industries to which the package of incentives and support are targeted. To provide a certificate enabling the units to avail statutory benefits mainly in terms of protection. To serve the purpose of collection of statistics. To create nodal centres at the Centre, State and District levels to promote SSI. Procedure for Registration Features of the present procedures are as follows: A unit can apply for PRC for any item that does not require industrial license which means items listed in Schedule-III and items not listed in Schedule-I or Schedule-II of the licencing Exemption Notification. Units employing less than 50/100 workers with/without power can apply for registration even for those items included in Schedule-II. 15
  16. 16. Procedure for Registration Features of the present procedures are as follows: Unit applies for PRC in prescribed application form. No field enquiry is done and PRC is issued. PRC is valid for five years. If the entrepreneur is unable to set up the unit in this period, he can apply afresh at the end of five years period. Once the unit commences production, it has to apply for permanent registration on the prescribed form. The following form basis of evaluation: The unit has obtained all necessary clearances whether statutory or administrative. e.g. drug license under drug control order, NOC from Pollution Control Board, if required etc. Unit does not violate any locational restrictions in force, at the time of evaluation. Value of plant and machinery is within prescribed limits. Unit is not owned, controlled or subsidiary of any other industrial undertaking as per notification. 16
  17. 17. FUNCTIONS OF THE BOARD : Issue of No Objection Certificates from the environmental pollution point of view including adequacy of the site from the environmental angle. Issue of Consent under provisions of section 25/26 of the Water (Prevention and Control of Pollution) Act, 1974. Issue of Consent under provisions of section-21 of the Air (Prevention and Control of Pollution) Act, 1981. Assessment and collection of Water Cess, under provision of Water (Prevention and Control of Pollution) Cess Act, 1977. Identification and assessment of industrial and municipal pollution sources and control thereof. Assessment of ambient air quality. Assessment of quality of inland surface waters. Mass awareness programmes. Notification of effluent and emission standards. Development of Pollution Control technologies. 17
  18. 18. FUNCTIONS OF THE BOARD : Instituting legal action against defaulters. Issue of Authorization under the Hazardous Waste Management Rule, 1989. Identification of isolated storages, onsite crisis management plans etc. under the Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989. Implementation of Biomedical Waste Rules, 1998. 18
  19. 19. The equipment selected should possess certain desirable characteristics or meet certain criteria to be best suited to the desired task. Some of these criteria are: (a) Fit into the system; (b) Be as simple as possible; (c) Require minimum space; (d) Be flexible and adaptable; (e) Require minimum of loading, unloading and rehandling; (f) Call for as little maintenance, repair, power and fuel as possible; (g) Have a long useful life; (h) Capable of higher capacity utilization; (i) Perform the operation efficiently and economically. 19
  20. 20. Establishing a small scale enterprise requires detailed project report so that promoters can understand that in how many years the endowments can be forfeited. Project Report for Small Scale Industry helps in identifying the product line and target market of the sector, besides evaluating the level of skill and accuracy. Hence, a small scale industry project report must contain 5-7 years evaluations in context of revenues, expenditures, cash flows and outflows, balance sheet of legal responsibilities and assets in hand, and reimbursement agendas of working capital and long-term loans, etc. In this way the endorsers can make use of the estimations provided by the firm in the project reports and compare it with the real performance and accordingly take remedial steps against the negative disparities. The promoters establishing their commercial enterprises without considering the project reports are taking a big risk as they are equipped with any measuring units to assess the firm's performance. In the competitive market ambiance, industrialist must not make a foray into a new sector or set up a new business without preparing Project Reports. 20
  21. 21. While preparing the project report for small scale industry always keep in mind that the statistical figures are not discouraging for the promoters. The project valuation should encourage a sense of practicality among them. The other users who could require the project reports are industrialists, Financiers, banks, Financial Analysts, merchants, clients, certifying authorities, Management Accountants, etc Specimen of Project Report The standard format for preparing a project report for small scale industry is listed in sequential order as below: Introduction of the Research Descriptions Small scale sector Auxiliary sectoral enterprises Purposes and range of the Research Methodology of the research work 21
  22. 22. Promotional ideas and their association to the nature of the industry Contemporary perception of advertising Promotional method Service sectors Demand variable of several kinds of products Break even assessments Kinds of values Chief techniques of costing Break even ideas of costing Drawbacks of small scale industries Fundamentals for initiating a small scale industry Drawbacks Reasons of company failure Explanations for dealing with financial crunch 22
  23. 23. Management skills Additional SIDO services Fiscal Data Technical support Quality enhancement and analysis Sectoral administration and guidance Expansion programs: DIC and motivation in diffident areas Technical advisory firm Excise exclusion allowance Commercial expansion strategies Auxiliary development and sub- contracting exchanges Upgrading plans Government store procurement plan Provision of goods for manufacturing Fiscal aid Conclusion References Bibliography 23
  24. 24. Basically, CPM (Critical Path Method) and PERT (Programme Evaluation Review Technique) are project management techniques, which have been created out of the need of Western industrial and military establishments to plan, schedule and control complex projects. Planning, Scheduling (or organising) and Control are considered to be basic Managerial functions, and CPM/PERT has been rightfully accorded due importance in the literature on Operations Research and Quantitative Analysis. Far more than the technical benefits, it was found that PERT/CPM provided a focus around which managers could brain-storm and put their ideas together. It proved to be a great communication medium by which thinkers and planners at one level could communicate their ideas, their doubts and fears to another level. Most important, it became a useful tool for evaluating the performance of individuals and teams. 24
  25. 25. There are many variations of CPM/PERT which have been useful in planning costs, scheduling manpower and machine time. CPM/PERT can answer the following important questions: How long will the entire project take to be completed? What are the risks involved? Which are the critical activities or tasks in the project which could delay the entire project if they were not completed on time? Is the project on schedule, behind schedule or ahead of schedule? If the project has to be finished earlier than planned, what is the best way to do this at the least cost? Essentially, there are six steps which are common to both the techniques. The procedure is listed below: Define the Project and all of it’s significant activities or tasks. The Project (made up of several tasks) should have only a single start activity and a single finish activity. Develop the relationships among the activities. Decide which activities must precede and which must follow others. 25
  26. 26. Essentially, there are six steps which are common to both the techniques. The procedure is listed below: Draw the "Network" connecting all the activities. Each Activity should have unique event numbers. Dummy arrows are used where required to avoid giving the same numbering to two activities. Assign time and/or cost estimates to each activity Compute the longest time path through the network. This is called the critical path. Use the Network to help plan, schedule, monitor and control the project. The Key Concept used by CPM/PERT is that a small set of activities, which make up the longest path through the activity network control the entire project. If these "critical" activities could be identified and assigned to responsible persons, management resources could be optimally used by concentrating on the few activities which determine the fate of the entire project. Non-critical activities can be re-planned, rescheduled and resources for them can be reallocated flexibly, without affecting the whole project. 26
  27. 27. Five useful questions to ask when preparing an activity network are: Is this a Start Activity? Is this a Finish Activity? What Activity Precedes this? What Activity Follows this? What Activity is Concurrent with this? Some activities are serially linked. The second activity can begin only after the first activity is completed. In certain cases, the activities are concurrent, because they are independent of each other and can start simultaneously. This is especially the case in organisations which have supervisory resources so that work can be delegated to various departments which will be responsible for the activities and their completion as planned. When work is delegated like this, the need for constant feedback and co- ordination becomes an important senior management pre-occupation. 27
  28. 28.  Project appraisal methodologies are methods used to access a proposed project's potential success and viability. These methods check the appropriateness of a project considering things such as available funds and the economic climate. A good project will service debt and maximize shareholders' wealth.  The recommended analytical methods for appraisal are generally discounted cash flow techniques which take into account the time value of money. People generally prefer to receive benefits as early as possible while paying costs as late as possible.  Costs and benefits occur at different points in the life of the project so the valuation of costs and benefits must take into account the time at which they occur. This concept of time preference is fundamental to proper appraisal and so it is necessary to calculate the present values of all costs and benefits. Net Present Value Method (NPV) In the NPV method, the revenues and costs of a project are estimated and then are discounted and compared with the initial investment. The preferred option is that with the highest positive net present value. Projects with negative NPV values should be rejected because the present value of the stream of benefits is insufficient to recover the cost of the project. 28
  29. 29. Discount rate The discount rate is a concept related to the NPV method. The discount rate is used to convert costs and benefits to present values to reflect the principle of time preference. The calculation of the discount rate can be based on a number of approaches including, among others: The social rate of time preference The opportunity cost of capital Weighted average method Internal Rate of Return (IRR) The IRR is the discount rate which, when applied to net revenues of a project sets them equal to the initial investment. The preferred option is that with the IRR greatest in excess of a specified rate of return. An IRR of 10% means that with a discount rate of 10%, the project breaks even. The IRR approach is usually associated with a hurdle cost of capital/discount rate, against which the IRR is compared. The hurdle rate corresponds to the opportunity cost of capital. In the case of public projects, the hurdle rate is the TDR. If the IRR exceeds the hurdle rate, the project is accepted. 29
  30. 30. Benefit / Cost ratio (BCR) The BCR is the discounted net revenues divided by the initial investment. The preferred option is that with the ratio greatest in excess of 1. In any event, a project with a benefit cost ratio of less than one should generally not proceed. The advantage of this method is its simplicity. Payback and Discounted payback The payback period is commonly used as an investment appraisal technique in the private sector and measures the length of time that it takes to recover the initial investment. However this method presents obvious drawbacks which prevent the ranking of projects. The method takes no account of the time value of money and neither does it take account of the earnings after the initial investment is recouped. A variant of the payback method is the discounted payback period. The discounted payback period is the amount of time that it takes to cover the cost of a project, by adding the net positive discounted cashflows arising from the project. It should never be the sole appraisal method used to assess a project but is a useful performance indicator to contextualise the project’s anticipated performance. 30
  31. 31. Sensitivity analysis Sensitivity analysis is the process of establishing the outcomes of the cost benefit analysis which is sensitive to the assumed values used in the analysis. This form of analysis should also be part of the appraisal for large projects. If an option is very sensitive to variations in a particular variable (e.g. passenger demand), then it should probably not be undertaken. If the relative merits of options change with the assumed values of variables, those values should be examined to see whether they can be made more reliable. Scenario analysis The scenario analysis technique is related to sensitivity analysis. Whereas the sensitivity analysis is based on a variable by variable approach, scenario analysis recognises that the various factors impacting upon the stream of costs and benefits are inter-independent. Switching values This process of substituting new values on a variable-by-variable basis can be referred to as the calculation of switching values. These can provide interesting insights such as what change(s) would make the NPV equal zero or alternatively, by how much must costs or benefits fall or rise, respectively, in order to make a project worthwhile. 31