The document provides definitions and concepts related to small businesses and entrepreneurship in India. It defines small enterprises based on investment in plant and machinery. It discusses the nature and characteristics of small businesses, and compares small and large businesses. It outlines the role of small businesses in the national economy and common problems they face. The document also discusses the rationale for supporting small businesses, and how small industries can act as a seedbed for entrepreneurship. Finally, it provides information on registration requirements for small scale industries in India.

1. Unit – III
Small Enterprises and Enterprise Launching Formalities
Introduction
Definitions
Nature and Characteristics of Small Business
Small Vs. Large Units
Relationship between Small and Large Units
Role of Small Business in National Economy
Problems of Small Business
Rationale of Small Business
SSI as Seedbed for Entrepreneurship
Package for Promotion of MSME
MSMEs
Registration of Small Scale Industries(SSIs)
Incentive Schemes
Management of the Small Business
Operating and Financial Characteristics
Exports in SSI Sector
Venture Capital
The Business Plan
Sources of finance for a start-up business
Project Appraisal Methods
Project Management – PERT/CPM
Specimen Performa of Project Report

2. Introduction
• Natural habitat of Entrepreneurs – SSI
• Most entrepreneurs start small and then nurture their units into large industries.
• The SSI Sector provides an opportunity for them to hone their skills and talents, to
experiment, to innovate and transform their ideas into goods and services needed by
the society.
• Mostly this sector exhibited positive growth trends even during periods when other
sectors of the economy experienced either negative or nominal growth.
• 95 percent of the industrial units
• provides nearly 80 percent of manufacturing employment
• contributes around 35 percent of exports.
• produces 7500 items
• provides employment to more than 195 lakh persons.
A vibrant small-scale sector holds the key to economic prosperity in an economy like India.
Definition
Small Enterprise:
• An industrial undertaking in which the investment in fixed assets in plant and machinery
whether held on ownership terms on lease or on hire purchase does not exceed Rs 10 million.
Ancillary Industrial Undertakings
The following requirements are to be complied with by an industrial undertaking for being regarded as
ancillary industrial undertaking: -
• An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or
production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of
services and the undertaking supplies or renders or proposes to supply or render not less than 50
per cent of its production or services, as the case may be, to one or more other industrial
undertakings and whose investment in fixed assets in plant and machinery whether held on
ownership terms or on lease or on hire-purchase, does not exceed Rs 10 million.

3. An industrial undertaking
• engaged or is proposed to be engaged in the manufacture or production of parts, components,
sub-assemblies, tooling or intermediates, or the rendering of services and the undertaking
supplies or renders or proposes to supply or render
• not less than 50 per cent of its production or services, as the case may be, to one or more other
industrial undertakings and
• whose investment in fixed assets in plant and machinery whether held on ownership terms or on
lease or on hire-purchase, does not exceed Rs 10 million.
TINY ENTERPRISE
• A unit is treated as a tiny enterprise where the investment in plant and machinery does not
exceed Rs. 2.5 million (Rs. 25 Lakhs) irrespective of the location of the unit.
• Many shops, schools, parlours, Photostate and STD booths in your vicinity are all examples of
tiny units.
Investment limit in plant and machinery in respect of tiny enterprises is Rs 2.5 million
irrespective of location of the unit.
SSSBES
• Small Scale Service & Business (Industry related) Enterprises
• Industry related service/ business enterprises with investment uptoRs 10 lakhs in fixed assets,
excluding land and building, are called Small Scale Service/ Business Enterprises (SSSBEs).
• Example Advertising Agencies, Marketing Consultancy, Auto Repair, services and garages,
Laundry and Dry Cleaning
WOMEN’S ENTERPRISES
• A Small Scale Industrial Unit/ Industry related service or business enterprise,
• managed by one or more women entrepreneurs in proprietary concerns, or in which she/ they
individually or jointly have a share capital of not less than 51% as Partners/ Shareholders/
Directors of Private Limits Company/ Members of Cooperative Society.
EXPORT ORIENTED UNIT [EOU]
• A unit with an obligation to export at least 30 percent of its annual production by the end of the
third year of commencement of production and
• having an investment ceiling up to Rs. 10 million (Rs. 1 crore) in plant and machinery
Household Industries
• Cover artisans, skilled craftsmen and technicians who can work in their own house if their work
requires less than 300 sq ft space, less than 5 workers and no pollution is caused.
• Example: Handicrafts, doll manufacturing

4. NATURE AND CHARACTERISTICS of Small Business:
• Personal Character
• Closely Held
• Flexibility
• Labor Intensive
• Local Area of Operation
• Short Gestation Period
• Limited Scale of Operation
• Indigenous Resources
Small Vs. Large Units
Small Units Large Units
Personal character Impersonal
Local area of Operation Wider Area
Labor Intensive Capital Intensive
Small Fixed Investment Large Investments
Independent Management Divorce between ownership and management
Proprietorship and Partnership Joint Stock Company
Unorganised Labor Unionized Labor
Limited Scope for expansion Economies of scale and Great scope for
expansion

5. Relationship between Small and Large Units
• Competitive
• Complementary
• Initiative
• Servicing
• Jobbing
• Merchandising
• Ancillarisation
ROLE OF SMALL BUSINESS IN NATIONAL ECONOMY
• Employment Generation
• Low Initial Capital Investment : Optimization of capital
• Balanced Regional Development
• Mobilization of local resources
• Equitable Distribution of Income
• Promotes Inter-Sectoral Linkages
• Export Promotion
• Consumer Surplus
• Social Advantage
• Share in Industrial Production
• Development of Entrepreneurship
PROBLEMS OF SMALL BUSINESS
• Paucity of Finance, raw material
• Under Utilization of capacity
• Poor project planning
• Poor availability of power and other infrastructure
• Obsolete Technology
• Marketing Problems
• Poor Managerial and Organizational Skills
• High Incidence of Sickness
• Weak bargaining power
• Unable to invest in R & D
Rationale of Small Business
• The Employment Argument: SSI are labor intensive
• The Equality Argument: Large scale industries results in concentration of
economic power in few hands
• The Latent Resources Argument : Helps in tapping latent resources -
Entrepreneurship
• The Decentralization Argument: Regional dispersal of industries so as to achieve
balanced regional development.
• The Allocation Efficiency Argument: Make use of local resources and cater to
local needs. Uses factors more efficiently

6. SSI as Seedbed for Entrepreneurship(OBJECTIVES/ADVANTAGES)
• Create more self employment opportunities
• Usually based on local resources
• Can be located anywhere
• Give quick return – shorter gestation period
• Less pollution and disruption
• Lead to equitable distribution of income and wealth
• Avoid problems of unplanned urbanisation
• Require simple technology and low managerial skills
• Better utilization of local resources and skills
• Helps to maintain traditional skills and handicrafts
• Assist large and medium industries by acting as ancillaries

7. Micro, Small and Medium Enterprises
Micro, small and medium enterprises (MSME) sector has been recognised as an engine
of growth all over the world. The sector is characterised by low investment
requirement, operational flexibility, location wise mobility, and import substitution. In
India, the Micro, Small and Medium Enterprises Development (MSMED) Act,
2006 is the first single comprehensive legislation covering all the three segments. In
accordance with the Act, these enterprises are classified in two:-
(i) Manufacturing enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the
Industries (Development and regulation) Act, 1951. These are defined in
terms of investment in plant and machinery;
(ii) Serviceenterprises engaged in providing or rendering of services and are
defined in terms of investment in equipment.
Registration of Small Scale Industries(SSIs)
SSI Registration
Small Scale should seek registration with the Director of Industries of the concerned State
Government.
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.
Registration of an existing or proposed small scale enterprise is voluntary and not
compulsory. It has no statutory basis. But, registration is beneficial for the enterprise
itself because it makes the unit eligible for availing the benefits given by the Central or
State Governments for the promotion of SSIs. Some of the incentives so obtained by
them relate to credit guarantee scheme; priority sector lending; capital subsidy;
reduced customs duty; ISO-9000 certification reimbursement; power tariff subsidies;
exemptions under tax laws; etc.
The State Directorate or Commissioner of Industries or District Industries Centres
(DIC's) are the concerned authorities for registration of small scale units. This
registration is both location specific and product specific. Like in certain State capitals
and metropolitan cities, it is granted to only those units which are located in the
designated industrial areas/estates.
A small scale unit is generally subjected to two types of registration. Initially, a
provisional registration is granted for the proposed enterprise. It is termed provisional
because the enterprise is yet to come into existence. It is granted for a specified period
of time during which the unit is expected to be setup.
A 'Provisional Registration Certificate (PRC)' enables the unit to obtain :- (i) term loans
and working capital from financial institutions, banks under priority sector lending; (ii)
facilities for accommodation, land and other approvals; (iii) no objection certificates

8. (NOCs) and clearances from regulatory bodies such as pollution control board, labour
regulations, etc.
Once the unit has commenced commercial production, it is granted permanent
registration. It is a life time registration given after physical inspection of the enterprise
and scrutiny of certain documents. Some of the formalities required to be completed for
seeking permanent registration are :-
 Clearance from the municipal corporation
 State pollution control board clearance
 Sanction from the electricity board
 Ownership/tenancy rights of the premises where unit is located
 Copy of partnership deed/Memorandum of articles of association in case of a
private limited company
 Sale bill of product manufactured
 Sale bill of each end product
 Purchase bill of each raw material
 Purchase bill of machinery installed
 BIS/QC certificate if applicable
 An affidavit giving status of the unit, machinery installed, power requirement,
etc.
The registration certificate so issued by the concerned authority is seen as a proof of
the unit being a small scale unit. It enables the unit to get several concessions like :-
 Income tax exemption and Sales tax exemption as per the State Government
policy.
 Incentives and concessions in power tariff, etc.
 Price and purchase preference for goods produced.
 Availability of raw material depending on existing policy.
Though, provisional registration is not compulsory for getting a permanent registration.
But, a provisional certificate enables the unit to apply to the various departments and
agencies for assistance in setting up of the enterprise.
Such a registration procedures is generally uniform across the States. However, there
may be some modifications done by individual States. For example, certain States may
have a 'SIDO registration scheme' and a 'State registration scheme'. But, whatever be
the registration scheme, the main purpose is to maintain statistics and a roll of such
units for providing incentives as well as to create nodal centres at the Centre, State and
District levels to promote SSIs. It gives recognition to the industrial unit and helps in
generating a database for policy planning.
A small scale unit may also become liable for de-registration, if it crosses the
investment limits; starts manufacturing any new item or items that require an industrial
license or other kind of statutory license; or does not satisfy the condition of being
owned, controlled or being a subsidiary of any other industrial undertaking.

9. Procedure for Registration
• 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.
• 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.
De-Registration
A Small Scale Unit can violate the regulations in the following ways which will make it liable
for de-registration:
• It crosses the investment limits.
It starts manufacturing any new item or items that require an industrial license
or other kind of statutory license.
• It does not satisfy the condition of being owned, controlled or being a
subsidiary of any other industrial undertaking.

10. Elements of Success and Failure
Many business persons prefer to blame the economy, or the bank, or competition, or
government regulation rather than admit their poor management created the failure. Studies
indicate the following are often times the cause of failure.
 Poor Financial Planning / Lack of adequate records.
 Poor Location.
 Poor coordination between functions.
 Absence Management / Nepotism.
 Government Taxes / Regulation.
 Failure to adjust to changing conditions.
 Poorly planned diversification / Uncontrolled growth.
 Poor Credit Controls.
 High Financing Costs / Lack of Capital
 Competition / Domination of Big Business.
 Labor Disputes.
The Business Plan
Venture capitalists view hundreds of business plans every year. The business plan must therefore
convince the venture capitalist that the company and the management team have the ability to
achieve the goals of the company within the specified time.
The business plan should explain the nature of the company’s business, what it wants to achieve
and how it is going to do it. The company’s management should prepare the plan and they should
set challenging but achievable goals.
The length of the business plan depends on the particular circumstances but, as a general rule, it
should be no longer than 25-30 pages. It is important to use plain English, especially if you are
explaining technical details. Aim the business plan at non-specialists, emphasising its financial
viability.
Avoid jargon and general position statements.
Essential areas to cover in your business plan
Executive Summary
This is the most important section and is often best written last. It summarises your business plan
and is placed at the front of the document. It is vital to give this summary significant thought and
time, as it may well determine the amount of consideration the venture capital investor will give to
your detailed proposal.
It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism in order
to be convincing. It should be limited to no more than two pages and include the key elements of
the business plan.
1. Background on the company
Provide a summary of the fundamental nature of the company and its activities, a brief history of
the company and an outline of the company’s objectives.
2. The product or service

11. Explain the company's product or service. This is especially important if the product or service is
technically orientated. A non-specialist must be able to understand the plan.
Emphasise the product or service's competitive edge or unique selling point.
Describe the stage of development of the product or service (seed, early stage, expansion).
Is there an opportunity to develop a second-generation product in due course? Is the
product or service vulnerable to technological redundancy?
If relevant, explain what legal protection you have on the product, such as patents
attained, pending or required. Assess the impact of legal protection on the marketability of
the product.
3. Market analysis
The entrepreneur needs to convince the venture capital firm that there is a real commercial
opportunity for the business and its products and services. Provide the reader a combination of
clear description and analysis, including a realistic "SWOT" (strengths, weaknesses, opportunities
and threats) analysis.
Define your market and explain in what industry sector your company operates. What is
the size of the whole market? What are the prospects for this market? How developed is
the market as a whole, i.e. developing, growing, mature, declining?
How does your company fit within this market? Who are your competitors? For what
proportion of the market do they account? What is their strategic positioning? What are
their strengths and weaknesses? What are the barriers to new entrants?
Describe the distribution channels. Who are your customers? How many are there? What is
their value to the company now? Comment on the price sensitivity of the market.
Explain the historic problems faced by the business and its products or services in the
market. Have these problems been overcome, and if so, how? Address the current issues,
concerns and risks affecting your business and the industry in which it operates. What are
your projections for the company and the market? Assess future potential problems and
how they will be tackled, minimised or avoided.
4. Marketing
Having defined the relevant market and its opportunities, it is necessary to address how the
prospective business will exploit these opportunities.
Outline your sales and distribution strategy. What is your planned sales force? What are
your strategies for different markets? What distribution channels are you planning to use
and how do these compare with your competitors? Identify overseas market access issues
and how these will be resolved.
What is your pricing strategy? How does this compare with your competitors?
What are your advertising, public relations and promotion plans?
5. The management team
Demonstrate that the company has the quality of management to be able to turn the business plan
into reality.
The senior management team ideally should be experienced in complementary areas, such
as management strategy, finance and marketing, and their roles should be specified. The
special abilities each member brings to the venture should be explained. A concise
curriculum vitae should be included for each team member, highlighting the individual’s
previous track record in running, or being involved with, successful businesses.
Identify the current and potential skills gaps and explain how you aim to fill them. Venture
capital firms will sometimes assist in locating experienced managers where an important
post is unfilled - provided they are convinced about the other aspects of your plan.
List your advisers and board members.
Include an organisation chart.
6. Financial projections
The following should be considered in the financial aspect to your business plan:
Realistically assess sales, costs (both fixed and variable), cash flow and working capital.

12. Produce a profit and loss statement and balance sheet. Ensure these are easy to update
and adjust. Assess your present and prospective future margins in detail, bearing in mind
the potential impact of competition.
Explain the research undertaken to support these assumptions.
Demonstrate the company's growth prospects over, for example, a three to five year
period. • What are the costs associated with the business? What are the sale prices or fee
charging structures?
What are your budgets for each area of your company's activities?
Present different scenarios for the financial projections of sales, costs and cash flow for
both the short and long term. Ask "what if?" questions to ensure that key factors and their
impact on the financings required are carefully and realistically assessed. For example,
what if sales decline by 20%, or supplier costs increase by 30%, or both? How does this
impact on the profit and cash flow projections?
If it is envisioned that more than one round of financing will be required (often the case
with technology based businesses in particular), identify the likely timing and any
associated progress "milestones" or goals which need to be achieved.
Keep the plan feasible. Avoid being overly optimistic. Highlight challenges and show how
they will be met.
Relevant historical financial performance should also be presented. The company’s historical
achievements can help give meaning, context and credibility to future projections.
7. Amount and use of finance required and exit opportunities
State how much finance is required by your business and from what sources (i.e. management,
venture capital, banks and others) and explain the purpose for which it will be applied.
Consider how the venture capital investors will exit the investment and make a return. Possible exit
strategies for the investors may include floating the company on a stock exchange or selling the
company to a trade buyer.
Investment Process
The investment process begins with the venture capitalist conducting an initial review of
the proposal to determine if it fits with the firm's investment criteria. If so, a meeting will
be arranged with the entrepreneur/management team to discuss the business plan.
Preliminary Screening
The initial meeting provides an opportunity for the venture capitalist to meet with the
entrepreneur and key members of the management team to review the business plan and
conduct initial due diligence on the project. It is an important time for the management
team to demonstrate their understanding of their business and ability to achieve the
strategies outlined in the plan. The venture capitalist will look carefully at the team's
functional skills and backgrounds.
Negotiating Investment
This involves an agreement between the venture capitalist and management of the terms
of the term sheet, often called memorandum of understanding (MoU). The venture
capitalist will then proceed to study the viability of the market to estimate its potential.
Often they use market forecasts which have been independently prepared by industry
experts who specialise in estimating the size and growth rates of markets and market
segments.
The venture capitalist also studies the industry carefully to obtain information about
competitors, entry barriers, potential to exploit substantial niches, product life cycles, and
distribution channels. The due diligence may continue with reports from other

13. consultants.
Approvals and Investment Completed
The process involves due diligence and disclosure of all relevant business information.
Final terms can then be negotiated and an investment proposal is typically submitted to
the venture capital fund’s board of directors. If approved, legal documents are prepared.
The investment process can take up to two months, and sometimes longer. It is important
therefore not to expect a speedy response. It is advisable to plan the business financial
needs early on to allow appropriate time to secure the required funding.
Project Appraisal Methods
Development projects impose a series of costs and benefits on recipient communities or countries.
Those costs and benefits can be social, environmental, or economic in nature, but may often involve all
three. Public investment typically occurs through the selection, design and implementation of specific
projects to achieve the goals of policy.
Why are some project proposals accepted and rejected, and how?
What are the considerations in appraisal other than the economic rate of return?
How are questions of environmental impact, welfare distribution and risk taken into account?
In addition to being financially viable, a development project cannot usually be considered acceptable
unless it is economically, technically and institutionally sound. It should be the least-cost feasible
solution to the problem being solved and should expect to produce net economic and/or social benefits.
For example, irrigation projects may facilitate the growing of cash crops in one locality, but cause water
shortages, and hence economic, social and environmental pressures in another.
Appraisal is the analysis of a proposed project to determine its merit and acceptability in accordance
with established criteria. This is the final step before a project is agreed for financing. It checks that the
project is feasible against the situation on the ground, that the objectives set remain appropriate and
that costs are reasonable.
Technical Appraisal
• Whether pre-requisites for the success of project considered?
• Good choices with regard to location, size, process, machines etc.
Economic Appraisal
• Social cost -benefit analysis
• Direct economic benefits and costs in terms of shadow prices

14. • Impact of project on distribution of income in society
• Impact on level of savings and investments in society
• Impact on fulfillment of national goals :-
(1) Self sufficiency (2) Employment and (3) Social order
Ecological Appraisal
Impact of project on quality of :- Air, Water, Noise, Vegetation, Human life
Major projects ,such as power plants, leather processing cause environmental damage
Likely damage & the cost of restoration
Financial Appraisal
• Whether the project is financially viable?
o Servicing debt
o Meeting return expectations
TECHNICAL APPRAISAL
Clearly, every project must be technically feasible. Technical Appraisal provides a comprehensive review of all
technical aspects of the project such as rendering judgment on merits of technical proposals and operating
costs. Here is a checklist that can be used:
Is the technology proven or tested? If not, has it ever been successful elsewhere and can that success
be replicated in current context and conditions?
Does the technology/ process/ equipment technically fit with the facility’s existing technology/ process/
equipment & machinery? If not, what aspects of the technology / process do not fit and what measures
is the implementing agency planning to take in this regard?
List of equipments and machinery to be installed with cost and specifications of the equipment.
Equipment capacity & whether it is as per requirement?
List of recommended equipment suppliers.
SOCIAL APPRAISAL
A social appraisal reviews the project design and the process of project identification
throughto implementation and monitoring, from a social perspective. Particular attention is
paid to thelikely impact of the project on different stakeholders, their opportunities for
participation andthe project’s contribution to poverty reduction.
Stakeholder analysis and participation
Based on the distinction of primary, secondary and key stakeholders1, stakeholder analysis
reviews the following:
Who comprise the different stakeholders?

15. What are their interests?
How will they be affected by the proposed project?
What are the project priorities between the different groups?
What is their capacity to participate in the project?
Stakeholders have different abilities to influence the outcome of a project. Often target beneficiaries
are in a relatively weak position to influence the outcome of a project (at A) whereas much of the
control lies in the hands of secondary and key stakeholders (at B). The former may be frustrated by
a lack of access to information or be placed in a weak social position due to traditional hierarchies. In
contrast the latter may have the time, money, organisational capacity or political power necessary to
influence the project; however, if they are not interested in the project, they could pose a risk to the
project’s success by withholding support. Thus recommendations from the social appraisal may be
to include additional project activities to ensure influential stakeholders support a project and
to enable important yet weak stakeholders to become more influential.
ECONOMIC & FINANCIAL APPRAISAL: COST BENEFIT ANALYSIS & IRR
This includes an analysis of economic soundness of the project and the quantification and valuation of costs
and benefits to ensure financial viability.
Social Cost Benefit Analysis
Cost Benefit Analysis (CBA) is used for determining the attractiveness of a proposed investment in terms of the
welfare of society as a whole. By presenting social benefits and costs in a monetary format, CBA not only
facilitates choices between alternative investment options but also gives an idea of the project worth. The
technique is principally used with regard to public sector investments.
CBA differs from financial appraisal which views an investment solely from the perspective of individual
participants, focusing on private benefits and costs and using market prices. In contrast, CBA adopts a much
broader approach, considering both monetary and non-monetary benefits and costs, and uses prices that more
accurately reflect economic, environmental and social values. The divergence between private and social costs
and benefits arises for three reasons:
• Not all costs and benefits fall on the immediate group of individual participants; some may have wider impacts
(known as externalities)
• Not all costs and benefits have market prices
• Not all market prices reflect the true costs and benefits to society.
ENVIRONMENTAL APPRAISAL (ENVIRONMENTAL IMPACT ASSESSEMENT)
Environmental Assessment (EA) is supposed to provide the project analyst with a good quantification of the
biophysical and social impacts from developments. Environmental Assessment generally refers to the broader
system of environmental analysis, including project-specific Environmental Impact Assessment (EIA). Most
countries have an EIA policy and supporting legislation. Traditionally, EIA was designed to operate at the project
level; that is to identify impacts and mitigation measures for an individual project. In the past several years
however, the EIA process has gradually been extended to sectoral levels, strategic reviews of policy, and even
at a global level. This section will briefly discuss focus on project EIA.

16. Project Management
Project management is distinguished from production management primarily by the
nonrepetitive nature of the work; a project is usually a onetime effort. Although
similar work may have been done previously, or may be done in the future. It is not
usually repeated in the identical manner such as cars or TV sets being manufactured
on a production line. The management of projects more complicated than the
management of a production line due to the following characteristics, generally
typical of all projects to a greater or lesser degree.
1. The duration of a project lasts weeks, months, or even years. During such a long period,
many changes may occur, most of which are difficult to predict. Such changes may have
a significant impact on project costs technology, and resources. The longer the duration
of the project, uncertain are the execution times and costs.
2. A project is complex in nature, involving many interrelated activities and participants
from both within the organization and outside it (e.g., suppliers, subcontractors).
3. Delays in completion time may be very costly. Penalties for delays may amount to
thousands of dollars per day. Completing projects late may result in lost opportunities and
ill will as well.
4. Project activities are sequential. Some activities cannot start until others are completed.
5. Projects are typically a unique undertaking, something that has not been encountered
previously.
PERT and CPM
There are some formal tools to aid project management. Two of the best known tools
that fill this need are PERT (Program Evaluation Review Technique)
andCPM (Critical Path Method).
Definitions Used in PERT and CPM
In order to explain the purpose, structure and operation of PERT and CPM, it is
helpful to define the following terms:
Activity: An activity is an effort that requires resources and takes a certain
amount of time for completion. Examples of activities are: studying for an
examination, designing a part, connecting bridge girders, or training an
employee.
Critical activity: A critical activity is an activity that, if even slightly delayed,
will hold up the scheduled completion date of the entire project.

17. Path: A path is a series of adjacent activities leading from one event to another.
Critical path: A critical path is the sequence of critical activities that forms a
continuous path between the start of a project and its completion.
Event: An event is a specific accomplishment at a recognizable point in time; a
milestone, a checkpoint; for example, passing a course at a university,
submission of engineering drafts, completion of a span on a bridge, or the
arrival of a new machine. Events do not have a time duration per se. To reach
an event, all the activities that precede it must be completed. An event can be
viewed as a goal attained, while the activities leading to it can be viewed as the
means of achieving it.
Network: A network is a logical and chronological set of activities and events,
graphically illustrating relationships among the various activities and events of
the project.
Project: A project is a collection of activities and events with a definable
beginning and a definable end (the goal). For example: getting a college degree,
patenting an invention, building a bridge, or installing new machinery.
The Major Differences and Similarities between PERT and CPM
PERT and CPM are very similar in their approach; however, two distinctions are
usually made. The first relates to the way in which activity duration are estimated. In
PERT, three estimates are used to form a weighted average of the expected
completion time, based on a probability distribution of completion times. Therefore,
PERT is considered a probabilistic tool. In CPM, there is only one estimate of
duration; that is, CPM is a deterministic tool. The second difference is that CPM
allows an explicit estimate of costs in addition to time. Thus, while PERT is basically
a tool for planning and control of time, CPM can be used to control both the time and
the cost of the project. Extensions of both PERT and CPM allow the user to manage
other resources in addition to time and money, to trade off resources, to analyze
different types of schedules, and to balance the use of resources.
The Purpose of PERT/CPM
Due to the complex nature of most projects, it is very difficult to completely innate the
delays and the cost overruns. However, with the appropriate management systems for
planning, organizing, and controlling, it is possible reduce them to a reasonable level.

18. The problem is that the cost of implementing and executing such systems can exceed
their benefits because of the large amount of monitoring and reporting that is required.
The major purpose of PERT and CPM is to objectively identify these critical
activities. Further, these techniques can tell us how close the remaining activities are
to becoming critical. (This available delay is called slack or float.).
The Advantages of PERT and CPM
Detailed planning: The use of PERT and CPM forces management to plan in
detail and to define what must be done to accomplish objectives on time.
Commitments and communications: Management is forced to plan and make
commitments regarding execution times and completion dates. The tools also
provide for better communication among the various departments in an
organization and between suppliers and the client.
Efficient monitoring and control: The number of critical activities in a
network (especially in a large one) is only a small portion of the total activities.
Identification of the critical activities enables the use of an efficient monitoring
system (mainly record-keeping and reports) concentrating only on the critical
activities.
Identifying potential problem areas: The critical activities are also more
likely to become problem areas. Once identified, contingency plans may be
devised.
Proper use of resources: Employing PERT or CPM enables management to
use resources more wisely by examination of the overall plan. Resources can he
transferred to bottleneck or trouble areas from other activities.
Rescheduling: The tools enable management to follow up and correct
deviations from schedule as soon as they are detected, thus minimizing delays.
Government contracts: Several government agencies require the submission
of a PERT or CPM plan with bids.
Easily understood: CPM and PERT can be easily understood because they
provide a method for visualizing an entire project. Therefore management can
explain the tools to supervisors and employees in such a way that the chances
of implementation are increased.

19. Adaptable to computers: PERT and CPM are easily adaptable to computer
use. Large projects can be planned by computers in seconds is even capable of
diagramming the networks.
Tools for decision making: PERT and CPM allow management to check the
effectiveness and efficiency of alternative ways of executing projects by
examining possible trade-offs among resources (usually time and cost).
Assess probability of completion (in PERT only): The probabilities of
successfully meeting deadlines, finishing early, or finishing late can be assessed
by the use of PERT.
Cost-time trade-offs (in CPM only): CPM enables management to evaluate
trade-offs between the cost of executing a job in a normal way or expediting
activities (called crashing) at a higher cost so as to finish earlier.