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  1. 1. 5How to EstablishA Business Enterprise5.1 IntroductionIn the previous lesson you have learnt that one can start a business ofones own. A person can choose any business as a career. A smallbusiness is a profitable economic activity which can become an avenueof employment.You may think that it is easy to start a business if you have necessarymoney required to establish a business. But actually it is not an easytask howsoever small the business may be. It requires so many decisionsand steps to be taken at various stages. At first you have to prepare aplan. You have to take decisions about the nature of business locationand sources of raising necessary capital. You have also to take a decisionregarding physical and material resources. Though the procedure forsetting up a business is not the same for all types of business, thereare certain steps which you have to take to start any business. In thislesson you will learn how to establish a business and how to expandits activities whenever opportunity arises.5.2 ObjectivesAfter studying this lesson you will be able to :• appreciate the role of Small Industries Service Institutes inestablishing a small business unit;100 :: Commerce (Business Studies)• prepare a plan for setting up a small business unit,• identify various factors that affect the decision regarding location;
  2. 2. • identify the various sources of raising fixed capital and workingcapital;• prepare a project for loan to be submitted to an agency whichgrants loans;• describe the methods of obtaining regular and adequate supplyof raw materials and man power;• keep in view the legal and other formalities required to becomplied with to establish a business unit;• evaluate business performance within a short period after itscommencement;• identify the various measures of quality control; and• decide the time and scope of expansion of business.5.3 Role of SISIs (Small Industries Service Institutes)relating to establishing a small business unitDear learner, in case you decide to establish a business unit of yourown and manage its affairs, you can take the help of any SISI. SISIshave been set up by the government in state capitals and other bigcities all over the country. There are 28 SISIs and 30 branches set upin state capitals and other places SISIs render assistance in the followingareas:1. Guidance in financial requirements:An SISI may guide you in determining the capital requirements aswell as selecting the sources of raising finance.2. Trade and market information:SISIs conduct market surveys and give advice to entrepreneurs
  3. 3. regarding market conditions and demand for products to be sold.Self Employment in Business :: 1013. Project Reports:SISIs help in preparing project reports which are to be submittedto licensing authorities or to banks and other financial institutionsfor loans and credit facilities.4. Training Programme:SISIs organise training programmes regarding establishment of abusiness and running it. It also arranges training in various fieldsof manufacturing, such as electroplating and power coating, heattreatment, die and tool making, electronics, repair works, caneand bamboo works etc.5. Modernisation:They also help existing units in the modernisation ofmanufacturing techniques by giving advice regarding itspossibilities and the steps to be taken.Thus, once you decide to start a business, you can go to SISI unit ofyour area. You can seek advice from the experts and select the type ofbusiness you can start. These institutes help in selecting the line ofbusiness, explain legal formalities to be complied with, prepare projectreports and give such advice which may help one in establishing abusiness. If necessary you can get technical training also. Suppose youdecide to establish a unit of Die and Tool making, you can attend thetraining programmes in which you can learn how to make dies andmachine-tools. With that technical knowledge you can easily start abusiness.
  4. 4. Intext Questions 5.1Fill in the blanks(i) SISI stands for __________________.(ii) _______________ SISIs have been set up in the country.(iii) SISI s give advi c e to ent r epr eneur s r ega rding ma rke tconditions as they conduct _______________ .102 :: Commerce (Business Studies)(iv) They organise _______________ programmes regardingestablishment of a business and running it.5.4 Preparing a plan of actionOnce you decide to establish a business unit, you will have to preparea plan of action. You will have to decide in advance each and everystep you are going to take in that connection till it starts functioningwhich is helpful in avoiding delay at the initial stages of startingbusiness. The following aspects of the action plan should be kept inview before deciding on the course of action.1. Selection of the line of business:At first decision is to be taken about the line of business. Themain considerations will be its profitability, risk involved andthe amount of capital required. You may consider other businessopportunities along with the market demand for the goods.2. Choice of form of organisation:A small business may be organised as a sole proprietorship or apartnership firm. Advantages and disadvantages of both the formswill have to be considered and decision is to be taken. As a soleproprietor you will have the authority of managing the business
  5. 5. and will be entitled to the entire profit generated, but then youwill also have to bear the risk of loss involved. In partnershipthere will be others to share the risk and contribute capital andhelp in management. But then the profit earned will also bedistributed among the partners. A company form of organisationmay also be considered for the purpose.3. Financial Planning:A business cannot be started and run without sufficient amountof capital. Capital is required to buy fixed assets like land,building, machines and equipment. Capital is also required tobuy raw material and meet day to day expenses of the businesslike wages, electricity charges, carriage, etc. Decision has to beSelf Employment in Business :: 103taken in advance regarding the amount of capital required for thevarious purposes and regarding the sources of raising it, whatamount is to be contributed by the owners and the amount to beborrowed from financial institutions, banks, etc.4 . Location of business:Where to establish a business is also to be decided in advance.A business established at a particular location cannot be shiftedto other location easily. Decision regarding location of thebusiness unit consists of decision regarding the choice of localityand selection of site. The deciding factors are nearness to thesource of supply of raw material, nearness to the market,availability of labour, transportation and banking facilities.Selection of the site depends on cost of land, development cost,
  6. 6. etc.5. Physical facilities:Decisions have to be taken regarding plant and machinery andequipments to be provided for the business, building and otherphysical facilities like water and power supply, transportation,etc. The factors that may affect the decisions in this regard arethe size of business, techniques of production to be used,availability of funds, etc.6. Plant layout:After selecting the machinery and equipments required, it isnecessary to decide about their installation in a proper manner.This is called plant layout. A good layout makes the operationsefficient and economical. It reduces the costs of material handling,storage of inventory, use of space, etc. It helps in optimumutilisation of all resources.7. Man Power and Raw Materials:The number and type of employees to be enrolled have to beestimated and decided in advance. Decision is also to be takenregarding source of procurement, development and training ofthe employees.104 :: Commerce (Business Studies)Raw material is also very important for producing goods. Tomaintain continuity of production, raw materials must be availablein adequate quantity and at regular intervals . Quantity and qualityof materials to purchased and sources of supply should be decidedin advance.
  7. 7. 8. Production process and operations:The whole production process is to be visualised and the variousactivities of the business operation are to be decided in advance.Action plan should be prepared with great care because itdetermines the course of action to be adopted.Intext Question 5.2Following are the aspects of business action plan and the areas theycover listed in columns A and B. Match them: A B(a) Lay Out (i) decision regarding the amount ofcapital and sources of raising it(b) Line of business (ii) De c i s i o n r e g a r d i n g t h e p l a c ewhether business is to be set up.(c) Financial planning (iii) De c i s ion r ega rding pl ant andmachinery, equipment, buildingetc.(d) Location of business (iv) Type and nature of business(e) Physical facilities (v) The manner in which machineryand equipments are to beinstalled.Self Employment in Business :: 1055.5 Deciding the nature of business and its locationNature of business:To decide about the nature of business the entrepreneur wants to launch,he has to consider the following factors : (i) Whether the business wouldbe profitable, (ii) How much capital would be required, (iii) What would
  8. 8. be the degree of risk, (iv) Whether there would be sufficient marketdemand for the goods, (v) Whether there would be opportunities to growand expand.The above factors will help him to decide as to which line of businesshe can successfully pursue.Location of business:Once the nature of business has been decided upon the decision willhave to be taken regarding the location of the place of business. Specialcare should be taken while making such selection because the place ofbusiness cannot be changed easily. In case of a manufacturing unit thefactors that determine location are:( i ) Nearness to the source of raw material particularly when the costof transporting the raw material is high and these are bulky orheavy in relation to their value. Examples of such raw materialsare timber, sugar cane, jute, iron ore, etc.(ii) Availability of rail or road transport facilities. This will make itconvenient to bring raw materials to the factory and transportingfinished goods to the market.(iii) Av a i l a b i l i t y o f b a n k i n g f a c i l i t i e s a n d p o s t a l a n d o t h e rcommunication facilities. Business cannot be run smoothly withoutc ommu n i c a t i o n wi t h b u y e r s a n d s u p p l i e r s . B a n k s h e l p i ntransmitting money which is necessary to receive payments andmake payments(iv) Adequate supply of power and water is another requirement ofa factory. Availability of power and water is also a deciding
  9. 9. factor.(v) Business unit should be located near the market, particularly when106 :: Commerce (BusinessStudies)the finished product is expensive to carry because of its bulk,weight and perishability.(vi) Availability of labour at low cost and at ease is also a factor tobe kept in view while deciding the location.In case of a trading business, the best location is the main market areaof a commercial city or town. It should have its own godowns preferablynear the railway station. There should be enough scope of selling theproducts.Intext Questions 5.3(A) Fill in the blanks(i) Considerations that will help in the selection of the lineof business are:(a) ____________________(b) ____________________(ii) A small business may be organised as:(a) ____________________(b) ____________________(iii) Capital is required to buy fixed assets like:(a) ____________________(b) ____________________(iv) A good plant layout will make the operations:(a) ____________________(b) ____________________
  10. 10. (B) Write True and False against the following statement as the casemay be :(i) Place of business is changed frequentlySelf Employment in Business :: 107(ii) Availability of power and water is an important determinantof location of business(iii) Opportunities to grow and expand explain the nature ofbusiness(iv) A trading business can be established anywhere.(v) While deciding about the location of your business youwill care least for the cost of labour.5.6 Sources of raising financeYou are well aware that business cannot be run without capital.Adequate capital is required to establish a small business. The capitalrequired for a business are of two types(a) Fixed capital, and (b) Working capitalFixed capital refers to funds necessary to acquire fixed assets like land,building , machinery and equipments. Such assets cannot be easily movedfrom the business site. They provide the base or foundation of thebusiness.Factors determining Fixed Capital:As fixed capital is needed to meet the long term requirements of thebusiness, it is necessary to estimate the amount with utmost care.Following are the factors that may be kept in view for estimating fixedcapital requirements.(a) Nature of Business:
  11. 11. The business may be a manufacturing concern or a serviceundertaking or a trading concern. In a manufacturing firm largeramount of fixed capital is required for building, machine etc. whichrequire more funds to be invested. In a trading concern fixed capitalrequired is smaller as the fixed assets like furniture etc. do notinvolve large investment.108 :: Commerce (Business Studies)(b) Size of business:The amount of fixed capital required depends upon the size ofbusiness i.e. larger the size greater will be the need for fixedcapital.(c) Types of goods produced:If a business manufactures consumer goods like soap, hair oiletc smaller amount of capital is required but if it manufacturesindustrial goods like machine tools and equipments, more fixedcapital will be required.(d) Production Technology :In a capital intensive production unit the amount of fixed capitalrequired will be more while it will be less if labour intensivetechnology is used.(e) Method of acquisition of fixed assets:Fixed assets may be purchased or may be acquired on lease oron hire purchase. If the fixed assets are purchased it will requiremore fixed capital initially than if the assets are procured onlease or hire purchase.Sources of fixed capital
  12. 12. Following are the main sources of fixed capital:1. Ownership Capital:The entrepreneur or partners may invest their own savings ascapital. This amount of capital is not returnable. In case of acompany, share holders contribute the capital as owners.2. Borrowed Capital:Long term loans may be arranged from different sources, such as(i) Commercial banks, and (ii) financial institutions. Banks grantterm loans for two to ten years as per the government’s creditpolicy for small scale industries. The banks exntend credit tosuch industries as part of priority – sector lending.Self Employment in Business :: 109Then there are all–India and state–level financial institutions.Besides there is the Small Industries Development Corporationsand Small Industries Development Bank of India which extendlong term loans on easy terms to small scale units.Factors that determine working capital needs:Working Capital is the capital required to meet day to day expenseslike wages, rent, electricity and water charges, and to be invested inthe current assets, such as stock of raw materials, semi finished goods,finished goods etc. Working capital is also called circulating capital.This is because investment in current assets are recovered and reinvestedrepeatedly in course of business operations. Going by the above meaningof working capital, its requirements may be met by short term funds.however, since the business is a continuing concern it must at all timeshave a certain amount of working capital which would be needed again
  13. 13. and again. This may be regarded as the permanent part of workingcapital.Following are the various factors that need to be considered to estimatethe amount of working capital needed.1. Proportion of cost of raw materials to total cost:If the raw materials account for a major portion of the total costof the finished product, more working capital is required.2. Cost of labour:If labour intensive methods of production are used more workingcapital will be required.3. Length of operating cycle:If more time is taken in the completion of the production processand the sale of the products, higher investment will be requiredin inventories and wage bills and hence more working capitalwill be needed.4. Terms of purchase and sale:If raw materials and other services are available on credit andgoods produced are sold for cash, less working capital investment110 :: Commerce (Business Studies)will be involved. On the other hand, if raw material is to bepurchased for cash and goods produced are sold on credit, largerworking capital will be necessary.5. Current Assets turnover:The current assets turnover is measured by the ratio of sales tocurrent assets. In other words, more rapid is the use of rawmaterials in the production process and more rapid the sale of
  14. 14. goods produced lesser will be the amount of working capitalneeded. For instance if sales over a year amount to Rs. 12 lacand the current assets on the average during the year has beenworth Rs. 2 lac, the current assets turnover will be Rs. 12 lac/Rs.2 lac=6 times. In other words the current assets are used andraised every 2 months during the year. A business having the useand reuse every two months will naturally require more workingcapital than the business where the use and reuse is every onemonth. More rapid the flow of working capital lesser is the needfor working capital and vice versa.6. Cash requirements:Needs for cash to meet the operating expenses like wages, rent,freight, taxes etc, also determine the amount of working capital.7. Seasonal operations:Business units engaged in manufacturing seasonal goods arerequired to have a relatively larger amount of working capital.The recovery of working capital through sales of such productsis limited to a particular period, and hence a large amount ofworking capital is required to meet off–season requirements.Sources of short term finance/working capitalFollowing are the main sources of raising finance to meet workingcapital requirements:1. Trade credit:It is the credit extended by sellers to the buyers. Raw materialin case of manufacturing business and finished goods in case of
  15. 15. trading business may be purchased on credit. The period of creditSelf Employment in Business :: 111depends upon the prevailing custom and trade practices and termsof supply , but it generally ranges from 15 days to 3 months.No security is required for availing of trade credit.2. Bank credit:Commercial banks are the most important sources of short termfinance. The various types of short term credit facilities thatbanks provide are: (a) outright loans to be paid back in onesingle instalment, (b) Cash credit which is a facility of borrowingupto a certain limit, (c) Overdraft which is a facility given tofirms having current accounts to overdraw, (d) Discounting ofbills implying procurement of cash from a bank in exchange forcredit instruments like bills of exchange, promissory notes hundis,etc.3. Advances from Customers:Customers may pay in advance a part of the price of the goodsordered to be supplied later.Intext Questions: 5.4Following statements relate either to Fixed Capital or Working Capital.Classify them:1. Capital required to buy fixed assets like machinery, building,etc.2. Manufacturing seasonal goods require more capital3. A higher ratio of the cost of raw material to the total cost is animportant determinant.
  16. 16. 4. Bank credit is an important source of raising finance.5. A manufacturing concern requires more of this capital than atrading concern.6. Borrowing from financial institutions such as Small IndustriesDevelopment Corporation and Small Industries Development isan important source of raising capital.112 :: Commerce (Business Studies)5.7 Project for LoanOnce the financial requirements, both long term and short term forfixed and working capital, are finalised and it is decided to raise capitalby borrowing money from banks and other financial institutions, aproject report will have to be prepared. A project report is a documentwhich contains the estimated amount of fixed investments and workingcapital to produce or manufacture an estimated quantity of products. Italso contains the methods and techniques of production to be used,estimated number of workers to be employed, and expected salesrevenues during the next one or two years.How to prepare a Project–report?A project report contains the estimates and course of action regardingthe following for an estimated number of years, say five years:-1. Items to be manufactured and production capacity:The item or items of goods to be manufactured are specificallymentioned. For example the items may be optical lenses andglasses which may be bifocal and unifocal. The number ofworking days in a year and per month and the working hours perday have to be shown in the report.
  17. 17. This clause will also show the installed capacity in terms ofquantity and the capacity utilisation of the plant year–wise forthe years for which the report is prepared. In our example, theinstalled capacity may be 2,000 pairs of lenses per month or24,000 pairs per annum. Estimated utilisation may be 7% , 80%,90%, 100%, & 100% respectively during the next five years.2. Use of the products:In this clause the various uses of the item or items of goods tobe manufactured are mentioned. It also explains the marketingfeasibilities, areas and channels of marketing, etc.Self Employment in Business :: 1133. Manufacturing process:This clause contains the basic raw material to be used and thewhole process of converting it into finished product.4. Status of the project:It explains the stage of completion of the project. For example,land has been acquired and construction work is complete, plantand machinery to be used and the sources from which these willbe purchased are identified, provisional registration form SSI isobt a ined, provi s iona l s a l e s t ax r egi s t r a t ion ha s be en done ,temporary power connection is there, etc. The date by whichproduction is expected to start is also mentioned.5. Total cost of the project:This clause contains details of the total estimated cost of theproject clearly dividing it into fixed investment requirements andworking capital requirements and showing the total capital
  18. 18. requirements and the calculations in details. Mention is also tobe made of the owners, proposed contribution and the funds tobe raised through loans.6. Expected Sales Revenue:Details will have to be given of the annual expected sales forthe number of years for which the report is prepared and therevenues expected from sales.7. Projected profitability statement:This clause shows the estimated profit expected to be earnedduring the project period.The project report is an important document and should be preparedcarefully. On the basis of this report banks and other financial institutionsdecide whether loan should be granted, and if granted, the amount thatshould be sanctioned.114 :: Commerce (Business Studies)Intext Questions 5.5Column A contains the name of the clause of a project and Column Bexplanation of the clauses. Match the two: A B(a) Status of the project (i) Shows the estimated profits.(b) Use of products (ii) C o n t a i n s t h e p r o c e s s o fconve r t ing r aw ma t e r i a l s intofinished goods.(c) Project profitability (iii) Shows number of working daysin a year and hours per day.(d) Assumptions and (iv) Explains the stage of production
  19. 19. capacity empletion of a project.(e) Manufacturing (v) Explains the marketing processfeasibilities.5.8 Supply of manpower and raw materials:In case the business is not so small as to be run single handed, theowner will have to employ persons to help him. These workers can beunskilled, semi–skilled and skilled. To run a business smoothly it hasto be ensured that sufficient manpower is available at the right time andat competitive rate. The whole process which ensures a regular supply ofrequired manpower of right type is called recruitment. The various sourcesof recruitment are:( 1 ) Employment Exchange( 2 ) Technical institutions and institutes of education and training likeITIs, and( 3 ) Through news paper advertisement.These sources are useful for skilled workers. For unskilled labour,sources of recruitment are (i) those available at factory gate,(2) through contractors, (3) reference by the existing employees.Self Employment in Business :: 115The owner should find out the going rate of wages and decide about thewages, particularly of the skilled workers. It should be satisfactory, lestthey leave the job as soon as they get a better paid job elsewhere. Howeversome workers may also be employed on trial basis. If found suitable theymay be made permanent later.As a regular and adequate supply of manpower is necessary, so is theregular supply of raw materials necessary. Depending on the nature of
  20. 20. products, there may be need for different types of raw material. Forexample, furniture making requires timber, for making ready madegarments cloth is required and so on. To maintain continuity of production,raw materials must be available in adequate quantity at regular intervals.Suppliers should be identified and enquiries made regarding price, costof transport and terms of payment. Keeping in view the time taken by thesuppliers to supply raw material, adequate stock has to be maintained. Ifthere is apprehension of rise in price of raw materials, quantity of purchasecan be increased. But some factors are to be kept in view while decidingon the quantity to be held in stock. These are (1) Storage cost, (2)working capital, (3) risk of loss or damage of materials held in stock,(4) insurance premium to be paid, (5) discount available if purchased inbulk and so on.Intext Questions 5.6Fill in the blanks with suitable words.1. Man power consists of (a) ________ (b) ___________and (c) _________ wokers.2. ITIs are sources of recruitment for _________ workers.3. Contractors are sources of recruitment of ____________workers.4. Discount on bulk purchase will decide ___________ ofpurchase.5. T h e r a w m a t e r i a l r e q u i r e d f o r f u r n i t u r e m a k i n g i s__________ .116 :: Commerce (Business Studies)5.9 Legal Requirement
  21. 21. To establish a business unit many legal and other formalities are to befulfilled which are as follows :(A) Form of organisation:Sole ProprietorshipThere is no legal formality necessary to set up a soleproprietorship business.PartnershipAn a g r e eme n t b e twe e n t h e p e r s o n s wh o wa n t t o f o rm apartnership firm is necessary. As far as possible it should be inwriting. A partnership firm should be registered with the Registrarof firms.Joint Hindu FamilyNo legal formality is required. A Joint Hindu Family business isrun as per Hindu Law.Joint Stock CompanyIt must be registered under the Indian Companies Act. It may bea Private Limited Company or a Public Limited Company.Cooperative SocietyIf the business is organised as a cooperative society, it is requiredto be registered with the Registrar of Cooperative Societies ofthe State in which societies registered office is to be situated.B. Other l egal requirements and formalities which areapplicable to all forms of organisations:1. License is to be obtained from the Ministry of Industriesif manufacturing activities are taken up. However industrial
  22. 22. units employing less than 50 workers with power or lesst h a n 1 0 0 w o r k e r w i t h o u t p o w e r, h a v e b e e n g i v e nexemption.Self Employment in Business :: 1172. Registration with the Registrar of Small Scale Industries ofthe state in which the unit is to be set up is compulsory.3. Registration with the Labour Commissioner of the state inwhich the unit is set up is also compulsory. This isnecessary so that there is compliance of various labourlaws and the Factories Act.4. Environmental clearance certificate has to be obtained fromthe state Pollution Control Board. However except for 17categories of heavily polluting industries, such as fertilizer,sugar, chemicals, etc., sending an application is sufficient.5. The industrial unit has to get it registered with the excisedepartment so that it can get concession under GeneralExcise Duty exemption scheme.6. The firm has to be registered with Sales Tax Authoritiesand a Sales tax number is to be obtained.7. If it is a trading concern it is to be registered with theShop and Establishment Authorities.Intext Question 5.7Which the following statements are true and which are false ?1. Partnership is formed by an agreement2. No legal formality is required to form a Joint Stock Company.3. License is to be obtained from the Ministry of Industries if more
  23. 23. than 100 workers are employed without use of power.4. Registration with the Registrar of Small Scale Industries iscompulsory.5. Environmental clearance certificate has to be obtained from theState Pollution Control Board.118 :: Commerce (Business Studies)5.10 Evaluation of business PerformanceEvaluation of business performance means reviewing the performanceof business activities to ascertain how far the predetermined objectivesof business have been achieved. It is a system of finding out thedifference between the planned performance and the actual performanceso that the reasons of the difference can be ascertained and correctivemeasures can be taken.Once all the formalities have been completed and business is startedi . e . , the bus ine s s uni t s t a r t s func t ioning, i t s eva lua t ion be come snecessary. It may be done say after one or two months.The purpose of evaluation of business performance is to ascertainwhether the performance of the business is as per plans or not.Evaluation is necessary to maintain the progress of business on theright lines. In the project report, a certain percentage of estimatedcapacity to be utilised in the very first year of business is shown. Ifthe performance is not as indicated in the project report, the loanextending agencies may review their decision. Performance appraisalwithin a short period after commencement of business activities helpsin evaluating the plans and making amendments whereever necessary.The owner may revise the targets or make amendments in the methods
  24. 24. of production and marketing if the performance is not as per plans. Ifthe management of operations has not been perfect that may also beimproved upon.Performance evaluation is done in terms of :(a) Profitability:This is to ascertain how far the estimated profit expected to beearned during the given period has been earned.(b) Capacity utilisation:This is to ascertain whether the production is equal to the quantityplanned or not.(c) Quality of product & service:This is another field of evaluation. Goods produced or servicesSelf Employment in Business :: 119to be provided should be us per the standards laid down in theplan.(d) Volume of Sales :This is to determine whether sales in terms of quantity andrevenue are as per estimates or not.(e) Expenses incurred :This is to find out whether expenses under various heads suchas labour, raw material, etc. are as estimated or not.Intext Question 5.8Fill in the blanks with suitable words:(i) Evaluation of business means evaluating the _________of business.(ii) The purpose of evaluation of business performance is to
  25. 25. s e e wh e t h e r t h e p e r f o rma n c e o f b u s i n e s s i s a s p e r___________ or not.(iii) Performance evaluation in terms of _____________ meansto ascertain how far the estimated profits have been earned.(iv) Goods produced should be as per the standards fixed isperformance evaluation in terms of _________.5.11 Measures of Quality Control.For success in business, ‘customers’ confidence should be won bystandard quality of products. In other words, products should not onlybe of good quality but the quality should also be maintained. Qualityproducts find ready market and can fetch higher price. Therefore youwill have to take a decision about setting a particular standard ofquality and adopting measures for quality control.The term quality has got different meaning for different products. Forexample in case of medicines it is the genuineness. In case of household120 :: Commerce (BusinessStudies)appliances it is the durability and safety, and in case of ready-madegarments it is the design and the fastness of colours and so on. Basically,quality means conformity with standards set on the basis of customers’requirements. It is not simply glitter or gloss or beauty.Quality control refers to the use of operational techniques and activitiesto maintain the standard quality of product or service that will satisfythe needs of users.Aims and Objectives of Quality Control :1. The first and foremost aim of quality control is that the goodsare produced according to the quality decided upon.
  26. 26. 2. Quality control helps in increasing sales as it enhances thereputation of the product in the eyes of the consumers.3. It helps in bringing about uniformity in the ingredients and rawmaterials used in the of manufacturing process and thus helps inestablishing a brand name.4. It enables a firm to compete with other firms because, given thesame price, the consumers generally prefer qualitatively superiorproducts.5. Quality control helps in reducing the cost of production byreducing the rejection rate.6. In some cases it is legally compulsory to maintain a particularstandard of quality. The Bureau of Indian Standards (BIS) setssuch quality standards. For example wearing helmet is compulsoryfor a scooterist in Delhi and the helmet should bear the ISI mark.Similarly for supplies to the government departments the goodsshould bear ISI mark.Measures of Quality Control :Following are some of the measures of quality control :1. Inspection2. Statistical quality control (SQC)3. Quality circles (QC)Self Employment in Business :: 1211. Inspection :It is a simple and direct method in which each and every itemproduced is inspected as per the specifications laid down. Thosefound not in conformity with specifications are rejected. This
  27. 27. may include inspection of raw materials or the goods in processof manufacturing.2. Statistical Quality Control :It is an application of the statistical methods in controlling, thequality of manufactured products. In this method, sampling andtests of significance are carried out. The characteristics of theproduct are noted and compared with the specifications. Thevariations are then shown in a chart. It is called a control chart.A tolerance limit is decided by the management in advance. Sayit is 5%. If the variation is within this limit the entire lot istaken to be in conformity with the standard quality. If it exceedsthe tolerance limit the whole lot is rejected.3. Quality Circles :This method originated in Japan and is widely used now. It is amethod of involving workers in quality analysis and qualityimprovement. It is a voluntary group of workers who have ashared area of responsibility. They meet at short intervals todiscuss, analyse and resolve the quality problems.Intext Question 5.9(A) Match the following :AB(a) Quality (i) method of involvingworkers in quality analysisand quality improvement(b) Inspection (ii) application of statistical methods
  28. 28. to control the quality of goodsproduced.122 :: Commerce (Business Studies)(c) Quality Circles (iii) conformity with standards orrequirements.(d) Statistical (iv) physical verification of productsQuality Control to ascertain whether the same areaccording to specifications ornot.(B) Fill in the blanks :(i) A ____________ chart contains the variation between thecharacteristics of a product and the specifications.(ii) In case of medicines quality means _____________(iii) BIS stands for _____________(iv) Quality Control helps in __________ which is necessaryto build up a brand image for the product.5.12 Expansion of businessOnce you have established yourself in the market, you are Free to sellyour products as well as efficiently manage your organisation. Now youcan think of increasing your sales and adding other items to the existingproducts. That means you can think of extending or broadening theoperation or area of business. This is called expansion or growth ofbusiness:For example, if you are in the business of readymade garments ofgents and ladies, you can now also manufacture children’s wear. Youcan start manufacturing jeans. You can decide to export your products.
  29. 29. This is growth or expansion of your business.Need of expansion :1. It is a universal truth that survival depends upon growth. It isvery difficult to keep your operations at a particular level becauseall the factors may not always be available in desired quantitiesfor an ideal combination.Self Employment in Business :: 1232. The volume may be increased so that the machinery, building andother resources can be utilised to the maximum extent.3. A true entrepreneur is never satisfied with what he has achieved.He sets new targets and accepts new challenges. So he eithertakes up intensive growth of business or extends his operationsin other spheres.4. Expansion is also done to exploit new opportunities of businessand to increase profits. Proper planning is required before takingthe decision of expansion. Following points are to be consideredto determine the scope of expansion:(i) Market Potential:The scope to increase sales is found out through market research.To what extent sales can be increased either in the same market orin new markets can be estimated on the basis of potential demand.( i i ) Scope of increase in production:To increase production new machines must be installed, moreworkers will have to be employed more capital will be requiredboth for fixed assets and for working capital. Generally the areaof factory is limited and it limits the scope of expansion.
  30. 30. ( i i i ) Management capability:Management capability is another factor that is to be kept inmind. With the expansion of business, management problemsincrease.(iv) Favourable conditions:Generally the boom period is the best period for expansion ofbusiness activities. Supply of labour, of raw material and ofelectricity should be adequate. Various state agencies also comeforward with assistance for expansion programmes of the existingbusiness units during periods of rising demand.124 :: Commerce (Business Studies)Intext Questions 5.10Fill in the blanks with suitable words:( i ) Extending or broadening the operations or area of businessis called ____________.(ii) Generally the ___________ period is the best period forexpansion.(iii) E x p a n s i o n i s d o n e t o e x p l o i t t h e n e w_______________opportunities.(iv) Since the area of factory is generally___________, it limitsthe scope of expansion.(v) I t i s a n u n i v e r s a l t r u t h t h a t s u r v i v a l d e p e n d s u p o n_________.5.13 What You Have LearntSmall Industries Service Institutes help in establishing small businesses.They help in preparing project reports, arrange training and give trade
  31. 31. and market information.To start with, a plan of action will have to be prepared. It consists ofdeciding about the line of business, the type of organisation, financialrequirements, location of business, plant layout and estimates of rawmaterial and manpower requirement.Profitability, capital requirements, scope of expansion and degree ofrisk involved will be other deciding factors of the nature of business.The factors that will determine the location of business are nearness tothe source of raw materials and the market, availability of power, water,cheap labour, banking and transport facilities and the concessions to begiven by the government.Two types of capital are required to run a business (a) Fixed Capital, and(b) Working Capital. Requirement of both will have to be estimated.Fixed capital will be provided by owners’ investment and by borrowingfrom banks and loans from SIDC and SIDB. Working capital can be raisedSelf Employment in Business ::125through (i) trade credits, (ii) Bank Credit, (iii) discounting of bills, (iv)advances from customers.A Project report contains the estimates and course of action for someyears regarding (a) items to be manufactured, assumptions and productioncapacity, (b) uses of products, (c) manufacturing process, (d) status ofthe project, (e) total cost of the product, (f) expected sales revenue and(g) projected profitability.Sufficient man power & raw material of the right quality is to be madeavailable. The various sources of recruitment are employment exchange,technical institutes and advertisement for skilled workers and recruitment
  32. 32. at factory gate, through contractors and reference of the exhistingemployees for unskilled workers. Wages should be satisfactory. Adequatestock of raw material is to be maintained. More purchases can be madeto bear the impact of expected rise in price of raw materials.Legal formalities may divided into two categories, viz., (A) As regardform of organisation (B) Those that apply to all organisations. No legalformalities are required for sole proprietorship and Joint Hindu Familybusiness. As for as possible agreement for partnership should be in writingand is to be registered with Registrar of Partnership, where as jointstock company should be registered under Companies Act and acooperative society under the Co-operative Societies Act.Other legal formalities which are required to be fulfilled for all formsof organisation are: (i) License from Ministry of Industries, (ii)R e g i s t r a t i o n wi t h t h e R e g i s t r a r o f Sma l l S c a l e I n d u s t r i e s , ( i i i )Registration with the Labour Commissioner, (iv) Environmental clearancefrom State Pollution Control Board, (v) Registration with excisedepartment, sales tax department and income tax department, (vi) Atrading concern is to be registered with Shop and EstablishmentAuthorities.Evaluation of business is required to ascertain whether the performanceof the business is as per plans or not. In case of deviations eithertargets are revised or methods of production and marketing are changed.Quality Control means use of operational techniques and activities tomaintain the given quality of a product. It helps in (i) increasing sales,( i i ) making the produc t s compe t i t ive , ( i i i ) r educ ing the cos t of126 :: Commerce(Business Studies)
  33. 33. production. In case of certain products it is legally compulsory to maintaina particular standard. Methods of quality control are: (a)Inspection (b) Statistical quality control (c) Quality Circles.Extending or broadening the operation or area of business is calledexpansion. Expansion in necessary (i) for survival, (ii) to make full useof building, machinery etc., (iii) to be a true entrepreneur, (iv) toexploit new opportunities in business. Factors determining the scope ofexpansion are: (i) Potentiality of the market, (ii) scope of increase inproduction, (iii) limits to management capabilities, (iv) favourableconditions.5.14 Terminal Exercise1. E x p l a i n t h e r o l e o f Sma l l I n d u s t r i e s S e r v i c e I n s t i t u t e i nestablishing a business.2. Enumerate the various aspects of an action plan.3. Explain the factors that determine the location of a business.4. State the meaning of working capital.5. Enumerate the various sources of raising working capital.6. State the meaning of a project report.7. How is a project report prepared?8. List out the main sources of recruitment of skilled workers.9. List out the factors determining the quantity of stock of rawmaterials.10. Explain the various legal formalities to be complied with to runa small business.11. State the meaning of evaluation of business performance.
  34. 34. 12. What is meant by quality control? Explain its objectives.13. Explain the various methods of quality control.14. State the meaning of expansion of business.15. Explain the need for business expansion.Self Employment in Business :: 1275.15 Answers to Intext Questions5.1 (i) Small Industries Service Institute(ii) 28(iii) market surveys(iv) training5.2 (a) & (v);(b) & (iv);(c) & (i);(d) & (ii);(e) & (iii)5.3 A) (i) (a) Whether the business would be profitable(b) How much capital would be required(ii) (a) Sole proprietorship(b) Partnership(iii) (a) Land and Building(b) Plant and Machinery(iv) (a) Efficient(b) EconomicalB) (i) False(ii) true(iii) true
  35. 35. (iv) False(v) False .5.4 Fixed Capital : 1, 5, 6Working Capital : 2, 3, 45.5 (a) & (iv);(b) & (v);(c) & (i);(d) & (iii);(e) & (ii);128 :: Commerce (Business Studies)5.6 (1) unskilled, semiskilled & skilled( 2 ) skilled( 3 ) unskilled( 4 ) quantity(5) Timber5.7 (1) True(2) False(3) True(4) True(5) True5.8 (i) performance(ii) plans(iii) profitability(iv) Quality of product and services.5.9 (A) (a) & (iii);(b) & (iv);
  36. 36. (c) & (i);(d) & (ii);(B) i) Quality Control(ii) Genuineness(iii) Bureau of Indian Standards(iv) Standardisation5.10 (i) expansion of business(ii) boom(iii) business(iv) limited(v) growth.