AmanualforentrepreneursFoodProcessingSector Opt PDF

A Manual for Entrepreneurs:
Food Processing Industry

A Manual for Entrepreneurs:
Food Processing Industry
Dinesh Awasthi
Raman Jaggi
V Padmanand
Entrepreneurship Development Institute of India

Ahmedabad
Sponsored by
Ministry of Food Processing Industries

Government of India
New Delhi
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Foreword
R eduction of unacceptable level of wastages of the farm produce and

providing remunerative prices to farmers are major problems for
the Indian agriculture which carries about 2/3rd of the population. The prob-
lem is likely to aggravate if the planned doubling of agri-production is
realized. The problem could be addressed substantially if farm produce
like fruits, vegetables, milk, fish, meat, poultry, grain, etc., are processed
and marketed aggressively including through exports. Food processing
adds value, enhances shelf life and encourages crop diversification. Moreover,
it is employment intensive and generates 1.8 direct employment per ten
lakh rupee of investment and 6.4 employment indirectly. Food processing,
coupled with marketing, has thus the potential of solving the major problems
of agriculture surpluses, wastages, unemployment and uncertain prices to the
farmers.
India is world's third largest farm producer even at the present level of pro-
ductivity due to diverse agro-climatic conditions and large tracts of arable and
irrigated land. In fact, India produces 50% of world's mango, 19% of banana,
36% of cashew nut, 11% of onion, 38% of cauliflower, 28% of green peas and
has 53% of world's buffalo, 23% of sheep, 17% of goat, vast marine resource
(8000 km of coastline) etc.
There would be large farm surpluses if the productivity increases to global

levels. Further, the proposed agri-diversification will mainly lead to shift from
non-perishable cereals to perishable non-cereals like fruit, vegetable, meat,
dairy, etc. Storage, processing and marketing of perishables, therefore, is
going to be a much bigger problem.
On the other hand, India's share in global food trade of over $520 billion is
likely to grow exponentially (from the existing 1.5%) if the expected market
access in the developed world materialises in the new WTO regime. Thus the
threat and opportunity co-exist.
Rapid growth of food processing sector is inevitable since urbanisation with

globalisation is changing life-style and food habits, rising prosperity is
increasing demand for value added food products, more and more women
joining work force need sheer convenience of processed food, and large
export opportunities exist globally where price realization is much better.
Accordingly, the vision 2015 set out is to realise the vast potential Indian agri-
culture by trebling the size of the processed food sector so as to enhance
farmer income, generate employment opportunities, provide choice to
the consumer at affordable price and contribute to overall national growth
by increasing a) the level of processing of perishables from 6% to 20%.
b) value addition from 20% to 35%, and c) Increase in global food trade from
1.5% to 3%.
In the early 90s, the sector grew rapidly and large domestic and foreign invest-
ments and IEM's were made. However, growth in the late 90s slowed among
others due to relatively high cost and low quality of food products. While cost
and quality are partly attributable to the farm gate, obsolete/inappropriate
technology and inefficient conception and management of food processing
units are the major factors. It is often complained that financial institutions are
unwilling to finance food processing units because of risk factors such as sea-
sonality, perishability and high term loan requirements. Financial institutions,
however, attribute it to lack of good projects and perceived lack of ability of
such promoters to manage the business ventures professionally.
With a view to bridge this critical gap, this Ministry has been running EDPs
through various institutions. The objective has been to enable trainees to
establish commercially viable enterprises in food processing sector by
providing knowledge of project formulation and management including
technology and marketing, motivating them and instilling confidence, show-
ing them opportunities and providing escort services. However, results are not
very satisfactory.
Lack of training institutions and trainers dedicated to EDP in food process-

ing sector, absence of reference manuals for trainers and trainees, sustained
monitoring and guidance by trainers to enable EDP trainers to actually set up
units, etc have hindered realization of the objective. EDI, Ahmedabad, who
showed keen interest and capability in doing these, attracted our attention
and they were given the tasks of preparing manuals for trainers and trainees
separately, conducting training for master trainers and closely monitoring
actual conduct of EDP by the select institutions.
As one of the outcomes, this manual is before you. It is expected that both
the government and non-government institutions particularly state EDIs,
will use these manuals and facility for training master trainers at EDI,
Ahmedabad and conduct quality EDPs at state and district level so that a
large number of food processing units are established throughout the
country adding value to farm produce at every stage in the food chain.
Prospective entrepreneurs will, in particular, find this manual very useful
in preparing project and business plan, starting and managing a business
venture, assessing and managing risks, understanding market and enhancing
profitability.
vi Foreword
Vast opportunities are opening up in food processing sector as stated above.
But the country needs opportunity seekers, and that also in large numbers,
who have grit, knowledge and competitive spirit to succeed and who enabled
through EDP training, would derive full benefits from the various schemes of
the Ministry.
Suggestions for improvement in the manual would be highly appreciated.
A.N.P. SINHA
Joint Secretary
Ministry of Food Processing Industries
Government of India
New Delhi
Foreword vii
Acknowledgements
India has achieved significant growth in food production as a result of the

Green Revolution. It is equal to that of USA and is second only to China.
Government of India has rightly been giving major thrust to this sector.
Therefore, the criticality of adequate supply of competent and competitive
entrepreneurs could hardly be over stated.
This calls for major investments in developing human resources who could
stand up to the challenges of global competition. However, it might be
difficult for new entrepreneurs to launch and manage their enterprises, due
to inexperience. They, not only need motivation but also need to acquire skills
to launch and subsequently manage their ventures. Since the strategy was to
promote young potential entrepreneurs in the food processing sector, through
EDPs, it was thought all the more important to develop basic material on
management of new ventures as well as material related to soft skills.
The objective was that after the EDP, the trainees should carry with them
a ready reckoner that they could use in solving some of their teething
troubles. We are happy that at the end of the day, we have something
tangible to offer to our budding entrepreneurs, in the shape of this Ready
Reckoner.
At the outset, we would like to express our gratitude towards Shri ANP Sinha,
IAS, Jt. Secretary, Ministry of Food Processing Industries (MoFPI),
Government of India, who reposed confidence in assigning the task to us. His
constant encouragement and constructive comments have helped us in
improving the Reckoner a great deal. We are also grateful to Shri RC
Sachdeva, Deputy Secretary (MoFPI), Shri KK Maheshwari, Assistant
Industrial Advisor (MoFPI) and Shri Kothari, Under Secretary (MoFPI) for
all their help, support and useful comments on the earlier draft of the
Reckoner.
My predecessor, Dr. VG Patel, the then Vice President and Director, EDI, was
a source of immense encouragement to us, while we were preparing this
Reckoner. He virtually relieved us of all responsibilities to carry out this
assignment. We are extremely grateful to him for all his support and kindness.
We would like to put on record our appreciation for Mr. Debmuni Gupta for
editing our loosely written draft and making it readable. We would like to
acknowledge the help extended by Mr. Manish Damani, Deputy Manager
(Systems) and Mr. Chirag Shah of our Computer Centre for doing a good job
of formatting the text.
We will be failing in our duty if we don't acknowledge the contribution of our
secretary Mr. A Sivan, who worked tirelessly to see that we are able to meet
our deadlines. He has probably worked the hardest in typing manuscripts
again and again, without looking at his wristwatch and without any complaint
(his spouse would have!).
We sincerely hope young and dynamic potential entrepreneurs—the EDP

trainees will find this effort worthwhile and useful.
EDI, Ahmedabad DINESH AWASTHI

RAMAN JAGGI
V PADMANAND
x Acknowledgements
Contents
Foreword v
Acknowledgements ix
1. The Food Processing Sector in India: An Overview 1
2. The Impact of Policy on Enterprises 21
3. Who is an Entrepreneur? 33
4. Soft Skills for Entrepreneurs 37
5. Planning a Small-Scale Unit: Whom to Approach for What 41
6. Business Opportunity Identification 49
7. Market Survey Tools, Preparation of Schedule and Techniques of

Data Collection 53
8. Production Programme, Plant Capacity, Manpower

Requirements and Layout 65
9. Business Plan Format for Tiny and Small Enterprises 71
10. The Financials of a Project Report 73
11. Assessing Financial Viability of the Project 115
12. Bookkeeping and Accounting and Financial Statements 119
13. Costing and Pricing of Products 139
14. Working Capital Management 145

15. Marketing Management 155
16. Applied Management in Business: Learning from

Existing Businesses 165
17. Legal Requirements 187
18. Support Institutions for Promotion of Food Processing Sector 191
Annexure I 195
Annexure II 203
Annexure III 205
Annexure IV 207
References and Suggested Readings 211
xii Contents
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CHAPTER 1
The Food Processing Sector in India
An Overview
INTRODUCTION
T he food processing sector is critical to India’s development, for it estab-

lishes a vital linkage and synergy between the two pillars of the econ-
omy—Industry and Agriculture. India is the world’s second largest producer
of food and holds the potential to acquire the numero uno status with sus-
tained efforts. The enormous growth potential of this sector can be understood
from the fact that food production in the country is expected to double in the
next 10 years, while the consumption of value-added food products will also
correspondingly grow. The growth of this industry will bring immense bene-
fits to the economy, raising agricultural yields, enhancing productivity, creat-
ing employment and raising life-standards of a large number of people across
the country, especially those in rural areas.
The liberalisation of the Indian economy and world trade and rising con-
sumer prosperity has thrown up new opportunities for diversification in the
food-processing sector and opened new vistas for growth. A recent study has
revealed that there is tremendous potential in India to build a profitable
business in the sector. This industry ranks fifth in the country and employs
16 lakh workers, comprising 19% of the country’s industrial labour force. It
accounts for 14% of the total industry output with 5.5% of the GDP. Its
turnover is estimated at Rs.1,44,000 crore, of which Rs.1,11,200 crore is in
the unorganised sector. The industry has started producing many new items
like ready-to-eat food, beverages, processed and frozen fruit and vegetable
products, marine and meat products, IQF products, etc. The Indian consumer
is being fast introduced to newer high quality food products made by using
the latest state-of-the-art technology, that is also giving the industry a com-
petitive edge.
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Table 1.1 Status of Food Processing Industry in India
Sr. No.
1. Rank of Industry 5th
2. Employment in lakhs 16
3. % of total Industrial Labour 19
Force
4. Total Industry Output in 14
percentage
5. Output as % of GDP 5.5
6. Estimated Turnover 1,44,000
(rupess in crores)
7. Unorganised Sector 1,11,200
(rupees in crores)
BROAD CATEGORISATION OF FOOD PROCESSING

ENTERPRISES AND THEIR PRESENT STATUS
(i) Fruits and Vegetables

Horticultural crops in India are currently grown on 12 million hectares repre-
senting 7% of the country’s total cropped area. Annual horticultural production
is estimated at 100 million metric tonnes, which is over 18% of India’s gross
agricultural output. India is the third largest producer of fruits after Brazil and
the United States, while its vegetable production is exceeded only by China.
Mango, Banana, Citrus fruits, Guava and Apple account for 75–80% of fruit
production, which was around 37 million metric tonnes in 1997–1998.
Vegetable production was 65 m tonnes in the same period. India’s share of
world trade in this sector is still around one per cent.
In 1997–1998, processed fruits and vegetables exported, valued Rs.5,240 mil-

lion. India’s major exports are fruit pulp, pickles, chutneys, canned fruits
and vegetables, concentrated pulps and juices, dehydrated vegetables and
frozen fruits and vegetables. This sector has attracted a total investment of
Rs.75,000 million in the last six years i.e. since the initiation of the liberali-
sation process, including a rise in Foreign Investment from Rs.46.9 million to
about Rs.102 million between 1993 and 1998.
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The following statistics presents the growth in the number of fruit and veg-
etable processing units, their production and installed capacity.
Table 1.2 Fruit and Vegetable Processing Units
Year 1994 1995 1996 1997 1998 1999

F&VP Units 4270 4368 4674 4932 5112 5198
Installed Capacity
(lakh tonnes) 12.60 14.02 17.50 19.10 20.40 21.00
Production 5.59 6.79 8.50 9.50 9.10 9.40
(in million metric tonnes)
Out of the 5198 F&VP enterprises in 1999, 2002 (38%) were home-scale
(household) units, 1083 (21%) cottage, 834 (16%) small-scale, 598 (12%)
large-scale and the remaining 681 (13%) were only relabellers.
Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry
Cottage
Home Scale : 2002 Units
21% Home Scale
Relabellers : 681 Units
38%
Large Scale : 598 Units
Small Scale
16% Small Scale : 834 Units
Relabellers Cottage : 1083 Units
Large Scale
13%
12% Total : 5198 Units
The growth trend from 1994 to 1997 remained upward, being 21.8% in the
first year, 25.2% in the second and 11.76% in the third. During 1997–1998,
this sector showed a negative trend of 4.2% over the preceding year and
1998–1999 registered a positive growth of 3.3%. Though the detailed reason
for this trend could be ascertained by ground-level research, the factor respon-
sible for negative growth in 1997–1998 was excise duty of 8% on processed
(Fruit and Vegetables) F&V products, as against no duty in the preceding
years.
The Food Processing Sector in India: An Overview 3

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(ii) Meat and Poultry

Meat Processing: India has the world’s largest livestock population, account-
ing for 50% of buffaloes and 1/6th of the goat population. Such a large popu-
lation represents a challenge to retain existing productivity traits by applica-
tion of modern science and technology. Rigorous efforts are being made to
improve the condition of livestock by providing basic infrastructure and lat-
est technology.
FAO has estimated the existing production of meat and poultry products at
4.42 million tonnes. Only 11% of the buffalo population, 6% of cattle, 33% of
sheep and 38% of the goat population is culled for meat.
Source: Composition of Estimated Meat Production
Buffalo
Others 11%
12% Buffalo
Cattle
6% Cattle
Sheep
Goat Goat
38% Sheep
33% Others
At present, only a small percentage of the meat produced is converted into

value added products and most meat is purchased by consumers in the
fresh/frozen form for conversion into products at home, restaurants, etc.
Maximum conversion takes place in pork products.
With growing urbanisation and increasing quality consciousness, the market

for scientifically produced meat products is expected to grow rapidly.
Demand is growing for ready-to-eat and semi-processed meat products
because of changing life styles and increase in exports to neighbouring
countries, especially the Middle East. India exports meat products worth
Rs.8,000 million mainly to countries in the Middle East and South East
Asia.
Meat processing is the new thrust sector for Indian industry with many
processing centres being set up with advanced technology. Animals render
4 Chapter One
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extremely useful service in out-transport system and agriculture. India

needs technical cooperation to build up organised facilities for rearing meat
producing animals, proper storage and refrigerated transport system. This
sector has attracted an investment of Rs.9000 million, including foreign
investment of Rs.5000 million, in the last six years since the initiation of
the liberalisation process.
Poultry India ranks fifth in the world in egg production with a yield of
1.61 million tonnes a year. Yet the per capita availability is low. Now, with
changing food habits and increasing availability of eggs, the demand is
increasing and growing at 10% a year.
Egg production has grown during the last 30 years at an annual average of
16%, while that of broilers, by 27%. During this period, Indian poultry indus-
try made spectacular progress transforming itself from backyard farming to a
dynamic and sophisticated agri-based industry.
The increasing awareness about balanced nutrition has effected changes

in eating habits with vegetarians accepting eggs as part of their diet.
Simultaneously, purchasing power has increased and more money is allo-
cated for food. Despite this, the egg industry experiences periodic slumps.
There are five modern integrated poultry processing plants in the country,
besides a good number of not-very-modern small plants. These plants produce
dressed frozen chicken and cut parts. While poultry industry is gradually
taking shape, poultry dressing and processing is still in its infancy in the
country.
There are about 15 pure-line and grandparent franchise projects in India.

There are 115 layer and 280 broiler hatcheries both in the private and public
sector, producing 1.3 million layer parents and 2.6 million broiler parents,
which, in turn, supply about 95 million hybrid layer and 275 million broiler,
day-old chicks. Please refer to Table 1.3. In India, five egg powder plants have
also been set up to produce whole egg, yolk and albumen powders. Demand
for egg powder is increasing every year. Each project will process a million
eggs daily. Only one egg powder plant has been in operation in Mumbai since
the 1970’s. Other such plants will help boost egg production.
Table 1.3 Status of Pureline & Grandparent Franchise Projects

in India
Sr. No. Hatcheries No. of Parents (in Supply (in

Hatcheries Million) Million)
1. Layer 115 1.3 95
2. Broiler 280 2.6 275

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(iii) Milk and Milk Products

India has the largest livestock population with milch cows and buffaloes being
its main constituent. India is the world’s largest milk producer (72 million
tonnes annually) and the dairy industry has been recognised the world over as
its most successful development programme.
Going by FAO estimates, while world milk production fell by 2% in the last
three years, the Indian production galloped by 4%. While consumption of liq-
uid milk accounts for 46% of the total production, the rest is converted into
milk products. Of this, the share of the organised sector is less than 10%. The
products manufactured by the organised sector are ghee, butter, cheese, ice
creams, milk powders, malted milk food, condensed milk, infant foods, etc.
The products also include casein, lactose and dairy whiteners.
The value of Indian dairy produce is expected to rise from Rs.2,88,000 mil-
lion in 1999 to Rs.10,00,000 million by 2005.(Please see the chart below). In
the last six years, investment in this sector has been to the tune of Rs.16,000
million with foreign investment of Rs.3,600 million.
Value of Dairy Products
1200000
1000000
1000000
Rs. Millions
800000
600000
400000
288000
200000
1999 2005 (est.)
Year
(iv) Consumer Products

This comprises product groups like confectionery, chocolates, cocoa products,
soya-based products, ready-to-eat foods, mineral water, high protein foods
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etc. This sector has attracted a whopping investment of Rs. 1,28,000 million,
including foreign investment of Rs.50,000 million, since liberalisation.
Soft drinks enjoy the biggest share in this. The Indian soft drinks’ market is
worth Rs.22,000 million a year. Statistically, this implies three bottles per
Indian. Cola, orange and lemon are some of the accepted tastes in India. It is
estimated that 65% prefer non-carbonated drinks. Lemon drinks continue to
be very popular in the country.
India produces a large range of cocoa and non-cocoa based confectionery

items, besides other cocoa-based products. The production of confectioneries,
except chocolates, is reserved for the small-scale sector. However, there are
several large companies with an established market presence and brands in
cocoa and non-cocoa confectionery markets.
Confectionery output grew at a compound rate of 6 to 7% in recent years.

Chocolate production is growing at the rate of 10 to 15% a year.
Among the ready-to-eat products, the installed capacity in the organised sec-
tor is 33,400 tonnes for manufacture of pasta products like noodles, macaroni,
vermicelli, etc. Besides, there are 10 units with an annual capacity of 9,340
tonnes for corn flakes, oat flakes and pearl barley.
(v) Alcoholic Beverages

Liquor made in India is categorised as beer, country liquor and Indian Made
Foreign Liquor (IMFL). Country liquor is made from a variety of raw mate-
rials and has different names in different parts of the country.
IMFL production comprises wine, vodka, whisky, gin, rum, brandy, etc.
Pre-mixed drinks like gin and lime, rum and cola are being introduced in India
now. Draught beer is another recent introduction and has done well where
introduced. Canned beer is also a recent introduction.
There are 36 breweries with a licensed capacity of 160 million litres per
annum. Current production is over 300 million litres. In all, Rs. 11,000 million
including Rs. 7,000 million of foreign investment, has been made in this sec-
tor in the last six years.
The Indian beer market, currently at Rs.7,000 million a year, has been grow-
ing by 15% and now all world famous brands of liquor are available in India.
The country has 212 distilleries with a yearly installed capacity of 1,933 mil-
lion litres. However, there are only 24 units producing IMFL and 31 making
country liquor. Alcohol produced by the rest is either sold as industrial alcohol

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or in bulk as potable alcohol to other distilleries for bottling or for making bot-
tled alcohol (estimated 927.82 million litres).
Raw material like Molasses, barley, maize, potatoes, grapes, yeast and hops
for beer and alcoholic products’ industry are abundantly available in India.
(vi) Fisheries and Sea Food

India boasts of the seventh largest marine landing base in the world with an
extensive 7,500 km coastline and an Exclusive Economic Zone (EEZ) of
2 million sq km, largely untapped, and a 29,000 km stretch of rivers and
canals, 145 million hectares of reservoirs and 0.75 million hectares of tanks
and ponds. Though India’s fish potential from the EEZ has been estimated at
3.9 million tonnes, the harvest is only of 2.87 million tonnes. This can be
increased to 3.37 million tonnes by intense tapping in offshore and deep-sea
grounds using modern technology. There is also a good scope to improve fish
harvest from inland waters which, at present is 2.7 million tonnes. Besides,
the fish potential in aquaculture and shrimp farming has also largely remained
untapped.
Though, traditionally, only local fishermen have tapped the vast marine and
inland water resources to meet domestic demand, the organised corporate sec-
tor has become involved in preservation and export of coastal fish since the
last decade.
Marine fish found in India include prawns, shrimps, tuna, cuttlefish, squids,
octopus, red snappers, ribbon fish, mackerel, lobsters, cat fish and countless
other varieties.
Domestic per capita consumption of fish is only 5 kg per annum against the
world average of 12 kg. India’s per capita consumption is much lower than the
Asian maritime countries (e.g. Japan–86 kg). India’s 60% fish production is
from marine sources. However, coastal fishing i.e. from the continental shelf
constitutes the bulk of the marine catch. It is estimated that only 10% of the
marine catch is accounted by deep-sea resources. Processing of produce into
canned and frozen form is done almost exclusively for the export market.
Totally, there are 258 freezing units with a capacity of 2,170 tonnes, 23 canning
units of 84.5 tonnes capacity, 131 ice-making units of 1820 tonnes, 24 fish
meal units with a capacity of 419 tonnes and 297 cold storage units with a
capacity of 2,03,448 tonnes.
This sector has attracted domestic and foreign investment to the tune of
Rs.30,000 million in the last six years, of which the foreign component is
around Rs.7,000 million.
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Please see Table 1.4 which compares the investment pattern in different
sectors.
Table 1.4 Investment Pattern in Different Sectors
Sr, No. Sector Total Foreign

Investment Investment
(in Million) (in Million)
1. Milk & Milk Products 16,000 3,600
2. Consumer Products 1,28,000 50,000
3. Alcoholic Beverages 11,000 7,000
4. Fisheries/Sea Food 30,000 7,000
(vii) Grain Processing

The country’s current foodgrain production (including rice, jowar, bajra, maize,
ragi, wheat, barley, gram and pulses) has been put at 225 million tonnes a year.
Food processing industries play a crucial role in reducing post-harvest losses.
Since most operations of this industry are rural based, it has the potential to gen-
erate high employment at low investment. Promotion of food processing also
helps in energy conservation by reducing energy wastages in home cooking.
Grain processing, with a share of 40%, is the biggest component of the food
sector. Its basic feature is pre-dominance of the primary processing sector,
sharing 96% of the total value, with the secondary and tertiary sectors adding
about 4%. This area needs to be viewed as a high growth potential area.
Indian Basmati rice commands a premium in the international market.

The export of Basmati and non-Basmati rice has been steadily increasing.
From Rs.3538.3 million in 1988–1989, the exports increased to Rs.62,000
million in 1998–1999. The country has a total paddy milling capacity of
186 million tonnes, of which 85 m tonnes is of traditional mills and 101 of
modern mills.
(viii) Plantation
Tea, coffee, cashew, cocoa, etc. are the country’s major plantation crops, which
are grown in different parts for they require specific agro-climatic conditions.
India’s principal plantation crops account for around 5 to 6% of the country’s

aggregate export earnings. Production and domestic consumption of major
plantation crops have increased considerably during the last three decades.

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India continues to be the world’s largest producer, consumer and exporter of

black tea. Cashew is also an important crop and earns foreign exchange worth
Rs.16,000 million. India is the world’s leading producer and exporter of
cashew kernels (75,000 tonnes annually) and shares 31% of the world’s pro-
duction of raw cashew and nearly 48% of the world’s cashew kernel export.
Coffee is the oldest plantation crop of India.
POLICY INITIATIVES THUS FAR

The food processing sector has been identified as a thrust area for develop-
ment. This industry has been included in the priority lending sector. Most food
processing enterprises have been exempted from industrial licensing under
the Industries (Development and Regulation) Act, 1951, with the exception of
beer and alcoholic drinks and items reserved for Small Scale Sector. For for-
eign investment, automatic approval is given even to 100% equity for major-
ity of the processed foods. Since economic liberalisation in 1991, 5875
Industrial Entrepreneur Memoranda (IEMs), involving an investment of
Rs.53,736 crore and envisaging employment for 10.23 lakh persons, were
filed between July 1991 and December 1999. Of these, 673 IEMs with invest-
ment of Rs.7,517 crore and jobs for 0.87 lakh persons have been imple-
mented. Moreover, 1,120 approvals for investment of Rs.19,100 crore and
employment of 2.75 lakh have been given. From these, 248 proposals with
investment of Rs.4,225 crore and 0.95 lakh jobs have been implemented.
The kind of units, which have come up, include:
Fruit and Vegetable – Beverages, Juices, Concentrates, Pulps, Slices, Frozen

& Dehydrated products, Wine, Potato wafers/chips etc.
Fisheries – Frozen and canned products mainly in fresh form
Meat and Poultry – Frozen and packed mainly in fresh form, egg powder
(only a couple of units)
Milk and Dairy –Whole milk powder, Skimmed milk powder, Condensed
milk, Ice cream, Butter and Ghee
Grain and Cereals – Flour, Bakeries, Biscuits, Starch, Glucose, Cornflakes,

Malted foods, Vermicelli, Pasta foods, Beer and Malt extracts, Grain-based
Alcohol
Consumer Industry – Chocolates, Confectionary, Soft/Aerated Beverages/

Drinks
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The policy initiatives of the government also include automatic approvals

for Foreign Technology Agreements, sale of 50% in domestic tariff area of
agro-based 100% EOUs, zero duty EPCG scheme extended to Food
Processing sector with a reduced threshold limit of Rs.1 crore in the Exim
Policy, declaration of the industry for priority lending by banks, the Plan
schemes envisaging grant of loans at a very low rate of 4% and grant-in-aid
to select cooperatives and NGOs, assistance for upgrading standards to inter-
national level and assistance for R&D activities.
CHALLENGES, CONSTRAINTS AND CONCERNS

Despite policy initiatives, growth potential and significant achievements,
there are several disturbing trends as delineated here:
z In India, the value addition to food fortification is only 7% com-

pared to as much as 23% in China, 45% in Phillipines and 188%
in the UK. Further, there are few large or medium sized compa-
nies in the organised sector against many small ones. The
small-scale and unorganised sectors account for 75% of the total indus-
try.
z Despite its importance to India’s well-being, the food industry has in

the past been neglected. Food is usually the first industry to develop
and has importance in most economies. In India, it is still relatively
small and not regarded attractive.
z External liberalisation opens up new export avenues and seeks to inte-

grate the economy with the global market. But it also poses threats
of stiffer competition under a new world trade order with WTO
agreements relaxing quantitative restrictions and non-tariff/sanitary
barriers on importing countries. This exposes the Indian farmer to
world market forces. Strategies to convert the potential disadvantage,
on account of the new import regime, into advantage are needed.
The inherent strength of high raw material production and large
domestic market base has to be buttressed and energised by evolv-
ing the right international-level infrastructure and growing suitable raw
material. This, coupled with operating processing units at optimum
capacity levels as per economies of scale, would enable
achieving a competitive edge over imported products. The
food sector will be confronted by challenges of trade related
Intellectual Property Rights, comprising patent laws, copyrights, trade
links, etc.

chp-1.qxd 10/18/05 9:03 AM Page 12
z Advances in bio-technology have enabled production of Genetically

Modified (GM) foods. These have already appeared in some countries.
GM foods need be critically examined on their good and adverse
impacts on human health.
z India is the second largest producer of food in the world but its
share in world’s exports is very low despite its inherent strength in tea,
spices and rice. The share of agricultural exports in the country’s total
export basket has been fluctuating, from 27% in 1985–1986 to 16% in
1994–1995 and to 20% in 1996–1997. In 1996–1997, India exported
Rs.24,618 crore worth of agro products. During 1997–1998, marine
products, rice, coffee, oil and spices were major export items. The
share of horticulture crops, plantation crops, meat and meat prepara-
tions and sugar in the country’s agri exports is much less than its
competitive potential.
z Taxes on processed food in India are among the highest in the
world. No other country imposes excise duty on processed food.
No country distinguishes between branded and unbranded food sectors
for taxation. There is excise duty of 16% in the form of CENVAT
levied on food products and then there is sales tax, octroi, mandi
samiti, entry tax and customs duty on material, levied by the
Central/State/Local bodies. The net effect ranges from 21% to 30% on
various food items. India is the only country to have levied excise duty
on machinery and equipment for processed foods. Indian consumers
are very price-sensitive and cost reductions are imperative to raise
demand and consumption of food products. Since the net effect of var-
ious taxes falls directly on the price, the off-take of processed food
items remains low. Consider the Food and Vegetable sector, where
against the installed capacity of 21 lakh tonnes (of the units registered
under FPO), present production is only 9.4 lakh tonnes or about 45%.
Assuming a value of Rs.10 per kg, the receipts on account of 16%
CENVAT would be around Rs.150 crore in the first year,
and looking at past experience of negative growth, the receipts will
reduce by 5 to 10% in every succeeding year. Reduction of excise duty
by say 5% might result in less receipts in the first year but would more
than make up in the subsequent years i.e. at 100% capacity utilisation,
the first year receipt would be Rs.100 crore, but with annual growth
rate of 25%, the receipts would Rs.125 crore in the second year, Rs.156
crore in third and after five years, it would cross
Rs.200 crore at the present price index. Moreover, the National
Savings because of reduction in wastage would run into thousands of
crores (the present level because of 30% wastage in Fruit and
Vegetable Sector alone results in an estimated wastage of Rs.25,000 to
Rs.30,000 crore).
12 Chapter One
chp-1.qxd 10/18/05 9:03 AM Page 13
z India is viewed as an unpredictable and unreliable source of food and

agro products despite its world class production measures for ensuring
supply to the international markets and increased production and qual-
ity of food products specific to exports.
z Food processing enterprises in organised and unorganised sectors

are in private hands. Though there has been certain growth in the
food industry because of domestic demand, the demand itself
remained low due to policies pursued earlier. Majority of the food
units are in primary processing and since production base of
secondary and tertiary processed foods is low, there is lower value
addition.
z Commercial R&D activities in the food industry have remained con-

fined to only a few areas. R&D activities have scarcely emerged from
the laboratory to be extensively adopted on the field.
z Indian brands have yet to acquire an image in the international markets

because of poor global marketing. Poor awareness of most of Indian
agri produce, seed constraints and India’s image and identity of a low
quality, unreachable producer of food items ensure that Indian food
items are not the most preferred ones.
z Financial institutions do not have the capacity to appraise hi-tech

export-oriented projects. There are no suitable insurance schemes
for such projects, most of which deal in export of perishables. In
financing projects like high density farming, greenhouse floriculture,
controlled environment livestock farming, bio-technology, tissue
culture, embryo transfer technology, bio-pesticides and bio-fertil-
izer, etc., the banks face considerable risk like credit risks. With
new technology, the risk perception is higher than the existing one.
Since it has not been tested in actual situations, the chances of
failure of new technology are higher. For risk of rejection by
consumer or by sovereign intervention foreign exchange risks,
ECGC cover is available only in cases of insolvency/default of
importers.
z Branded food items attract higher sales tax and excise duty as against
the unbranded ones. It is reasonable to expect that any meaningful
investment in this sector will necessitate branding of products. It is
noteworthy that no country treats branded food differently for levying
duties. The exemption to unbranded and unorganised sector from
excise and sales tax leads to low quality consciousness among manu-
facturers and consumers.

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z There is a growing disparity between the actual and potential results in

the food industry, exposing the gulf between research and extension
agencies.
z There have been instances of ban imposed by the European Union on

all seafood exports originating from India. This was after detection of
salmonella in some EU-bound consignments and of V Cholera in con-
signments to Denmark. These consignments mostly had fish, prawns
and frozen squids.
z The sector is capital starved. Investments in infrastructure and research

have been far from adequate.
z The sector has been characterised by poor marketing, transport and

communication infrastructure. The market density of fruits and
vegetables is low and facilities for storage and cold chains in the
hinterlands are woefully inadequate. Erratic and inadequate power sup-
ply, lack of roads, education and health facilities and no or low rural
industrialisation accentuate the problems. There is lack of integration
of local markets with national and global ones to support faster and
more diversified growth. Lack of maintenance of infrastructure
because of limited and declining public resources and the absence of
community involvement in the protection of community assets and
poor cargo facilities at airports and ports are other bottlenecks.
Infrastructure for extension of food technology is hampered.
Moreover, there is lack of organised marketing system in meat and
poultry products. The system is obsolete, with primitive methods of
sale of live birds or unhygienic slaughtered birds. A similar poor
system exists in towns and small cities in the case of pork and pork
products.
z Cooperatives and other semi-government organisations are weak and

people’s participation, either through Panchayat Raj institutions,
NGOs, farmer organisations or industries’ associations in food sector
remains extremely inadequate.
z Multiple and complicated tax regimes have rendered the food industry
uncompetitive. Regulations on the entry operations of private sector in
trade, post-harvest facilities and food processing have restricted private
sector investment in the agricultural sector. Then, the current land ten-
ancy regulations have frozen the land-lease market and discouraged
tenant farmers and share-croppers from investing in the land they till.
With the signing of the GATT and the coming up of World Trade
Organisation, this sector is facing internal and external pressures stem-
ming from policies of economic liberalisation.
14 Chapter One
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NEED FOR A COMPREHENSIVE PAN-INDIAN

INITIATIVE
The present scenario has resulted from the lack of cohesive and integrated
planning of the industry, keeping in mind specific needs of various regions,
their produce and special industries, which could be energised to work at opti-
mum capacity. The policy initiatives thus far have gone by the assumption
that this industry has high risk and low return and that seasonalities of pro-
duce dictates the levels of capacity utilisation; that any multi-line projects will
become unviable, for there is paucity of marketing outlets and lack of other
infrastructural facilities. These problems cannot be viewed in isolation nor
can they be tackled by a single department/ministry. It is important to adopt a
holistic approach in formulating any viable policy for this nascent sector. The
planning should be bottom up and not top down, for in India, the initiative has
to come from the rural sector constituting 70% of the population. This is
where tapping of Panchayat Raj institutions and networking of cottage, small
and medium industries can viably provide the primary and secondary pro-
cessing for take-off by large-scale industries. What is envisaged is an inte-
grated model wherein cottage, small and medium enterprises act as input fac-
tors for further development of products by larger enterprises, by creating pri-
mary/secondary processing facility centres within a radius of 15 to 25 km
from the farm. These centres will provide appropriate packing techniques for
farmers. Other facilities that could be envisaged at these centres include
treatment, washing, sorting and grading, packaging and cold storage.
Adequate system will be evolved to transport these processed products for use
by larger industries as well as for sale in wholesale markets. This process will
ensure backward and forward links between farmers, markets (domestic and
international) and larger industries.
This way, each unit would be viable and independent and at the same time,
be linked with higher players in the market. The sectoral deficiencies and
advantages in each spatial segment will be attended to since investment will
not be higher. Thus, imbalances, which were a built-in variable, could either
be corrected or converted into an advantageous variable. This is possible only
if all Panchayat institutions in the country are networked with leading market
outlets, including the top players in the industry. Such a synergy cannot
evolve in a short time unless the government initiates many Centrally-spon-
sored direct assistance to Panchayat institutions, including allocations for
infrastructure like roads and transport. This way, the WTO restriction on sub-
sidies could be overcome and within a couple of years the entire gamut of
functioning of these industries could be re-oriented. This will also wean away
the thinking process of planners to view the food processing industry only as
a means to reduce wastages. In fact, this Pan-Indian Model will ensure a pro-
active industry-oriented approach enabling the industry’s growth in a modern,

chp-1.qxd 10/18/05 9:03 AM Page 16
scientific and planned manner. This will increase productivity at minimum

costs improving the product’s competitiveness in any economy. On a larger
scale, this will make the economy vibrant and prevent unnecessary migration
of population and unplanned urbanisation.
STRATEGIES AND INITIATIVES PROPOSED IN THE

NEW POLICY
There are various strategies and initiatives proposed in the new policy.
These are discussed below:
Creating an Enabling Environment

a. The Central and State Governments will work closely and evolve joint
efforts to provide an enabling environment to entrepreneurs to set up food
processing enterprises.
b. Fiscal initiatives/interventions like rationalisation of tax structure on fresh

food as also processed foods and machinery are a must. This is necessary to
provide processed food at reasonable prices as well as to stimulate domes-
tic demand. The aims of the National Policy on food enterprises are sought
to be achieved by adopting initiatives and practices congenial to industrial
development in the processed food sector. A concentrated promotion cam-
paign is vital to create market for processed foods. Multinational companies
can take care of their products for they have large funds for promotional
campaigns. The Department will continue to provide financial assistance to
industry associations, NGOs/Cooperatives, private sector units, state gov-
ernment organisation for market promotion and brand formation.
c. Going by projections of the Working Group on Food Processing Industries

for the 9th Plan, investment requirement of Rs.24,315 crore from the pri-
vate sector, Rs.2,275 crore from the Central Government, Rs.1,660 crore
from the State Government, totalling upto Rs.28,250 crore, have been
identified for the entire food processing sector in a five-year plan period.
d. Efforts will be made to expand the availability of raw material and improve
their quality for agro-based processing activities round the year by increas-
ing production, improving productivity and yield.
e. The information/database for the industry will be strengthened to ensure

greater reliability and thus help in planning and policy making. This is
16 Chapter One
chp-1.qxd 10/18/05 9:03 AM Page 17
proposed to be achieved through studies and surveys in various states. The

information will be vital for the industry to plan investments in appropri-
ate sector matching availability of resources and market conditions.
Intensive and Extensive Awareness

a. Extensive training will be provided to farmers and cooperatives in post-
harvest management of agro-produce to encourage creating pre-processing
facilities near farms. Facilities may include provision for washing, fumi-
gation, packaging, etc. Efforts will be made to encourage the setting up of
agro-processing facilities as close to the area of production as possible to
avoid wastages in transporting raw materials to far away places and to
ensure increased value addition, specially for horticultural produce.
b. Efforts will be made to improve general awareness about the advantages of

consuming processed foods to stimulate domestic demand. Unfounded
apprehensions about consuming processed food will also be removed.
Infrastructural Development
a. Establishment of cold chain and provision of low cost pre-cooling facili-
ties for farmers, entrepreneurs, traders and consumers would be encour-
aged and they will be trained to bring about attitude changes. Efforts will
be made to disseminate market intelligence to enable farmers to fetch
higher value for their produce.
b. Efforts will be made to motivate farmers/industries to use insulated/refrig-

erated vehicles for transporting raw materials from the place of produc-
tion/harvest to the point of consumption, to avoid wastage and quality
deterioration.
c. Establishment of cold storages and cold chain facilities would be encour-

aged.
d. The interactive mesh between technology, economy, environment and

society will be promoted for quicker development of agro-processing
industries and to build up a substantial base for production of value-added
products for domestic and export market with special emphasis on food
safety and quality, taking into account all aspects of Total Quality
Management (TQM) and Hazard Analysis and Critical Control Points
(HACCP) to achieve international standards. Sustained R&D activities
will be encouraged through recognised institutions having expertise in
respective fields.

chp-1.qxd 10/18/05 9:03 AM Page 18
e. Application of bio-technology, remote sensing technology, pre and post

harvest technologies, energy saving and environmental protection tech-
nologies through National Research System or any other mode will be
encouraged.
Backward Linkage—Raw Material Supply

a. The concept of backward linkage between farmers and industry would be pro-
moted to encourage and enable farmers to grow products of appropriate qual-
ity. This will help the poorest of the poor farmers as well as marginal and
medium farmers fetch appropriate and remunerative return for their produce.
The scheme for providing assistance under the 9th Plan is already in opera-
tion and will be strengthened further to cover majority of farmers/producers.
It would be ideal to dovetail this scheme with similar schemes offered by local
bodies like Panchayats to provide the required fillip to this significant pro-
gramme in the best interests of farmers and processors.
b. The existing institutions like local bodies, cooperatives and self-help groups,
which have been in operation for over four decades in different contexts,
would be utilised to strengthen the backward linkage. This way the skill and
expertise acquired by these institutions would be constructively used, while
this mechanism would help quickly create the bridge of trust between farm-
ers and processors. This would ensure smooth supply of raw material to the
processors and help the farmers (poor, marginal and big) in getting remu-
nerative prices for their products. Thus, a complete network of farmers and
processors will be created cutting across their status.
Forward Linkage—Marketing
a. There is an urgent need to develop forward linkages for fresh and
processed food. Presently, there are a large number of intermediaries oper-
ating between the farmers/processors and the consumers, resulting in high
cost to the latter and low return to the former. The efforts to cut intermedi-
aries would be made in such a way that the special skill and expertise
required to operate the intermediate links in the system like transportation
and market distribution are not jeopardized. To achieve this, attempts will
be made to provide appropriate tax incentives and holidays for setting up
food processing industries, taking care of expenses on market promotion
and ancillary activities.
b. The North Eastern Region, the Hilly States (J&K, HP and Western UP),
the Islands (A&N, Lakshadweep) and the Integrated Tribal Development
18 Chapter One
chp-1.qxd 10/18/05 9:03 AM Page 19
Projects (ITDP) areas in the country need to be given special considera-

tion. Fiscal incentives like excise duty/sales tax concessions and tax holi-
days should be given not only to the units being established here, but also
to those set up outside but processing the produce from these areas. This is
because the high cost involved in transporting raw material and packaging
material makes the product expensive, and thus uncompetitive, in the mar-
kets outside. Providing fiscal incentives to units located outside but oper-
ating as a part of the primary processing unit in one of these areas would
facilitate cutting down the double transportation cost and help the products
from these areas become marketable at competitive rates. The consumer
would also have the advantage of buying quality products from these areas
at affordable prices.
c. Special attention is to be laid towards setting up regulated markets with the

primary objective to improve market efficiency and achieve equitable dis-
tribution of benefits between producers, traders and consumers. This will
be possible by evolving strategies to strengthen regulated market yields
and equipping them with grading, cleaning and packaging facilities, along
with market information systems.
d. Efforts are to be made to develop packaging technologies for individual

products to increase their shelf life and improve consumer acceptance,
both in the domestic and international markets.
e. Efforts are to be made to harmonise food laws to encourage production of

high quality products with minimum intervention from regulatory authori-
ties. The complexity of multiple administering authorities for food
processing enterprises is also required to be simplified by developing an
integrated and unified system.

chp-2.qxd 10/18/05 9:02 AM Page 21
CHAPTER 2
The Impact of Policy on Enterprises
FRUIT AND VEGETABLE PROCESSING SECTOR:
AN ELABORATE PROFILE IN TERMS OF GENERIC
AND INTERNAIONAL MARKETING
A lthough India is the largest producer of fruit and vegetables, their process-
ing has largely remained in primary forms like pickling, sun drying and/or
making preserves. Commercial processing is rather poor. Indians largely prefer
fresh fruit and vegetables over processed foods because of economic reasons
and food habits. High packaging costs make them expensive. Therefore, the
Ministry has offered specific support for the marketing and generic promotion
of processed food. Since India has varied agro-climatic conditions, some prod-
ucts are available throughout the year. Fruits and vegetables like banana are
non-seasonal, while apples, oranges, potatoes, etc. are put in the cold storages
and made available in the off-season as well. Fruits like guavas and oranges
have two seasons and so are available fresh almost half the year.
Units registered under the Fruit Products Order, 1955, are distributed across
the country and most are in cottage and small-scale sector. Liberalisation of the
country’s economic policies has attracted a few modern processing plants to pro-
duce mango pulp and tomato paste in aseptic packing and freeze drying of fruit
and vegetables including mushroom. Joint ventures with USA, UK, Netherlands,
Switzerland and Germany are on, focussing on technology transfer, financial and
marketing tie-ups. Such projects focus on production of canned mushrooms,
banana and mango puree, fruit concentrates, dehydration of vegetables and
frozen fruits/vegetables. The policy has been supporting such options.
Items already being produced in the country include, pulps, particularly of
tomatoes and mangoes, ready-to-serve juices, canned fruits, jam, squashes etc,
while carbonated fruit drinks, dehydrated and freeze-dried fruits, fruit juice con-
centrate are poised to pick up. There is varied potential for the demand of
processed food. The markets for mango pulp are Saudi Arabia, Kuwait, UAE,
Netherlands and Hong Kong, while pickles and chutneys go to the USA, UK
and Germany, besides Saudi Arabia and UAE. Products like tomato paste, jams,
jellies and juices are exported to the USA, Russia, UK, UAE and Netherlands.
chp-2.qxd 10/18/05 9:02 AM Page 22
The Ministry of Commerce and the Ministry of Food Processing Industries

have been giving specific support to international marketing initiatives.
Policy to bridge the gap between resource

base and value addition
India is among the world’s major producers of food products. It ranks first in
the production of cereals, livestock population and milk; is the second largest
fruit and vegetable producer; and among the top five producers of rice, wheat,
groundnut, tea, coffee, tobacco, spices, sugar and oilseeds. And yet, India’s
share in international food trade is less than two per cent. Value addition to
food by processing is poor.
This has encouraged a policy thrust on the sector and enlarged the Food
Processing Industry Ministry’s scope to promote it. It includes developing
fruit/vegetable processing, food grain milling, dairy products and processing
of poultry, eggs and meat products and fish, including canning and freezing.
This is in addition to developing enterprises in bread, oilseeds, breakfast
food, biscuits, confectionary, non-alcoholic beer and aerated drinks.
While the Ministry supports investment in R&D and product development,

the Agricultural and Processed Food Products Export Development Authority
(APEDA) offers subsidy to upgrade laboratory facilities. The Development
Commissioner of Small Scale Industries (DCSSI) offers subsidy for imple-
mentation of ISO systems in business. The production quality as also
hygienic and sanitary improvement in manufacture are accorded priority.
Simultaneously, the production base is being enlarged by modern methods

of cultivation to improve yield and productivity. A cold chain is also being
developed to reduce post-harvest losses and maintain freshness. With new
hybrid varieties being added, the production season is getting extended.
Thrust is being given to enhance productivity with better raw material.
Since liberalisation, several policy measures have come for regulation and
control, fiscal changes, export and import, taxation, exchange and interest
rate control, export promotion and several incentives to high priority indus-
try, including food processing.
Deregulation and Decontrol

The policy initiatives include an important incentive that industrial license is
not required for most food processing enterprises, except for products like
22 Chapter Two
chp-2.qxd 10/18/05 9:02 AM Page 23
beer, potable alcohol and wines, cane sugar, hydrogenated animal fat and oils,
etc, and some items reserved for exclusive manufacture in the SSI sector, like
pickles, chutneys, bread, confectionary, mustard, sesame and groundnut oil,
ground and processed spices, other than spice oil and oleoresin, sweetened
cashew nut products and tapioca flour. Price controls have been removed.
Automatic investment approval up to a certain percentage of foreign equity or
cent per cent NRI equity is allowed for most of the sector, except in the case
of malted food, alcoholic beverages, etc. Use of foreign brand names is freely
permitted. Most items can be freely imported and exported. Capital goods
may also be freely imported, including second-hand ones. These initiatives
are likely to encourage entrepreneurship in the field.
Fiscal Incentives with Additional

Encouragement for Export
Under this, excise and import duty rates have been reduced. Many processed
food items are exempted from excise duty. There are limited-period tax incen-
tives for new manufacturing units, except for beer, wine, aerated water using
flavouring concentrates, confectionery, chocolate, etc. A high capital investment
subsidy is available for new processing units. Food processing is one of the thrust
areas identified for exports. Free Trade Zones (FTZs) and Export Promotion
Zones (EPZs) have been set up with necessary infrastructure. Capital goods,
including spares, can be imported at concessional customs duty, subject to export
obligations under the Export Promotion Capital Goods (EPCG). Export-linked
duty-free imports are also allowed. Enterprises in EPZs and FTZs may retain a
percentage of foreign exchange receipts in foreign currency accounts and a per-
centage of output is saleable domestically. Profit from export sales are, however,
being progressively brought under the corporate tax bracket. Effective capital
structuring of projects has therefore become more critical.
The WTO Agreement and the Sector

Trade liberalisation under the World Trade Organisation (WTO) is expected
to improve scope for exports for the Indian food processing industry, while
smoothening import barriers on inputs and making enterprises cost competi-
tive. Enterprises will, however, need to improve safety and quality standards
to reap the benefits of the new world order and avoid being penalised for non-
tariff barriers. They will have to progressively follow a food quality manage-
ment system called Hazard Analysis and Critical Control Points (HACCP).
Many developed countries have already made this mandatory. The seafood
processing enterprises have already faced the brunt of related bans from
importing countries asking them to implement the costly requirements. Be it
The Impact of Policy on Enterprises 23

chp-2.qxd 10/18/05 9:02 AM Page 24
with regard to the aflatoxin content in groundnut, lead in milk or sulphur in

sugar, it is safer to meet the more stringent international norms. Quality, safety
and health are the buzzwords for the food enterprise of tomorrow.
IMPACT OF POLICY IN TERMS OF INTEREST RATES

AND INCOME TAX ON THE STRUCTURING OF A
PROJECT
Policy incentives in terms of investment subsidies and duty relief have an obvi-
ous impact on project viability. Policy-related variables, such as interest rates on
term loans and the working capital, also affect project viability. Similarly do
variables, such as income tax on profit or net earnings of an enterprise. These
variables have serious implications on the structuring of a project in terms of
debt or loan and equity (promoters’ contribution or investment) in either ‘fixed
assets’ such as equipment, land, and buildings or with regard to ‘current assets’
or working capital (or money required for operating a business). The latter may
imply cash, stock and receivables for credit sale. The structuring of a business
in terms of capital basically involves decisions on the debt and equity mix.
Policy variables also have implications on the structuring of costs.
Implication of policy variables on the

structure of capital of an enterprise
Consider a mixed fruit jam project ‘Manjunath Enterprises’ that is to be sanc-
tioned in Mysore, Karnataka. The enterprise requires an investment (project
cost) of Rs.50 lakh. The project expects to earn a Return On Investment (ROI)
of about 24 per cent every year. The enterprise plans to manufacture juice con-
centrates and jams. The interest rate on loan (debt) is about 15 per cent. If the
project were structured in terms of wholly equity investment by the promoter,
it would yield a much lower return on equity. For illustration, assume the tax
on earnings is 50 per cent. An ROI of 24 per cent implies a net profit of Rs.6
lakh after tax. In the case of an alternative option assume that half the invest-
ment is financed by equity and one half (Rs.25 lakh) by debt. In this case it
will be observed that net profit after payment of interest on loan and tax will
be Rs.4,12,500. By investing an equity of Rs.50 lakh on this project, the net
profit works out to Rs.6 lakh and alternatively, investing equity of only Rs.25
lakh net profit works out to Rs.4.125 lakh. In terms of return on money
invested by the entrepreneur, return on the second case is about
33 per cent higher! This benefit is due to the tax shield on interest paid on
debt. Therefore, the structure of investment is dependent on tax rates. If they
24 Chapter Two
chp-2.qxd 10/18/05 9:02 AM Page 25
are low or negligible or not `declared’, it does not make a difference if the
business is financed by high debt or high equity. Similarly, the structuring of
a project should be based on interest rates on debt. If interest rates are higher
than the ROI, going in for debt will kill an enterprise, as repayment will not
be possible. It is, therefore, necessary to understand past trends and make a
judgement on future trends on these two parameters before taking a decision
on the structuring of a business in terms of capital.
In fact, there is yet another critical impact on debt-equity mix on a business.

Consider Tables 2.1 and 2.2 below. The Tables consider profit after taxes for
a given increase in the ROI in two circumstances. A project that entails an
investment of Rs.50 lakh is considered. Table 2.1 considers an option of 25
per cent equity in capital structure while Table 2.2 considers 100 per cent
equity investment. The Tables indicate the impact of the structure of capital
of the enterprise on Profit before Tax (PBT) and Profit after Tax (PAT).
Table 2.1 Capital Structure of Manjunath Enterprises:

(75% debt, 25% equity)
(Rs.in lakhs)
ROI 8% (Rs.4 lakhs) 12% (Rs.6 lakhs)
Interest 3 3
PBT 1 3
Taxes 0.5 1.5
PAT 0.5 1.5
Table 2.2 Structure of Capital of Manjunath Enterprises:

(100% equity)
(Rs.in lakhs)
ROI 8% 12%
PDBIT 4 6
Interest - -
PBT 4 6
Taxes 2 3
PAT 2 3

chp-2.qxd 10/18/05 9:02 AM Page 26
The tables above illustrate a similar benefit with regard to the rate of
increase in profit with similar increase in return on investment. The ROI
increases by 50 per cent in both cases but profit after taxes increases by the
same amount in a self-financed project (Table 2.2) but by 200 per cent if
highly debt financed (Table 2.1). Therefore the rate of increase in profit is
much higher for a unit increase in the ROI, if the project is highly debt
financed.
Implication of policy variables on structur-

ing project costs
Compare the proposed cost structure of Arundhati Enterprises in Ahmedabad
with another proposed enterprise ABC Food Products. The latter plans to
focus on largely outsourced ‘manufacture’ of pickles, while Arundhati
Enterprises plans on largely in-house processing of pickles. In the case of
Arundhati Enterprises fixed costs are higher while in the case of ABC Food
Products, variable costs are higher. The fixed cost in operation includes
costs such as rent that do not vary with output, while variable costs such as
raw-material purchase costs do. As the table below indicates, Arundhati
Enterprises could make more profit than the outsourcing ‘packager’ (ABC
Enterprises). This indicates that scale economies operate on the manu-
facturing front. Nevertheless, in the case of Arundhati Enterprises, the extent
Table 2.3 Cost Structure of Enterprises
ABC Enterprises Arundhati Enterprises

Production (Jars) 80,000 80,000
Selling price (per jar) Rs.40 Rs.40
Variable price (per jar) Rs.30 Rs.10
Contribution (per jar) Rs.10 Rs.30
Sales revenue (Total) Rs.32,00,000 Rs.32,00,000
Variable cost (Total) Rs.24,00,000 Rs.8,00,000
Contribution (Total) Rs.8,00,000 Rs.24,00,000
Fixed cost (Total) Rs.1,60,000 Rs.10,00,000
Profit (Total) Rs.6,40,000 Rs.14,00,000
26 Chapter Two
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of fall in profits with fall in sales or sales margins is likely to be higher. The
interest cost on term loan is a fixed cost, while the interest cost on the work-
ing capital is a variable cost. Arundhati Enterprises is likely to operate with a
substantial term loan while ABC enterprises is likely to be operating more
with mere working capital. It may be estimated that a 20 per cent fall in sales
will lead to about 25 per cent fall in profit in the case of ABC Enterprises.
There is a much greater fall (about 34 per cent) in the case of Arundhati
Enterprises. The reverse operates in the case of an increase in sales.
Therefore, studying potential for interest rate change on the working capital
and term loans and market demand which in turn may be affected by
policy variables such as customs duties on finished products (market protec-
tion) remains critical either in terms of reducing business risk or enhancing
profitability.
Therefore, particularly for those who declare profit ‘realistically’ such as

exporters, interest rates and income tax rates critically determine the extent of
debt finance to be sought for a project. This benefit occurs due to the tax
shield on interest on loan or debt finance. Similarly the trend falls in interest
rates as indicated by fall in the Prime Lending Rate (PLR) of lending institu-
tions as also increased implementation of income tax rules may encourage
going in for debt finance.
The cost structure in a business, which in effect helps decide on the ‘size’ of
an enterprise in terms of fixed investment, is affected by interest rates and cus-
toms duties, among other variables. Further, customs duties on inputs used by
food processing manufacturers, for instance, may initially help on deciding on
the structuring of a project. For instance, customs duties on oranges as raw
material may be rather stagnant at 35 per cent, while customs duties on
squashes as finished product may be progressively reducing at a higher rate.
In this case, the manufacture of a standard product (with little scope for dif-
ferentiation) like a ‘squash’ may warrant export orientation as to import inputs
sans duty (as per the export-import policy) and remain competitive.

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THE IMPORTANCE OF POLICY:

THE CASES OF PURSHOTTAM ENTERPRISES AND
MAHILA UDHYAM SANSTHA
The case of Purshottam Enterprises in Patna exemplifies the importance of
sourcing and production management, including purchase decisions and
channel motivation, to serve as critical success determinants of projects in the
sector. Purshottam Enterprises was launched in 1985. It initially started off as
a flourmill, which set up a retail outlet. The enterprise has graduated from a
turnover of about Rs.40 lakh to about Rs.3 crore. The enterprise, which
started off as a tiny unit, has now become a flourishing small-scale enterprise.
This has happened without its availing support in the form of any incentive
or schemes. In fact, the promoter has been ‘blissfully’ ignorant of such
schemes. Investment in equipment over the years has been done by the pro-
moter out of the surplus generated by the business. Further, the enterprise uses
formal finance of only about Rs.10 lakh in the form of a cash credit facility
from a bank. It uses about Rs.60 lakh of own funds as the working capital.
The enterprise is involved in the manufacture of spices, viz. chilly powder

and various types of spices. The enterprise operates through 183 distribu-
tors. Raw material is sourced from various parts of India directly viz. chill-
ies from Andhra Pradesh, for instance. The working capital is largely
locked up in credit sales. About 25 per cent of output is sold on cash basis
and 75 per cent on credit sales of 2 months. A cash discount of 3 per cent
is offered for cash purchase. The enterprise has not availed itself of any bills
discounting facility from agencies such as the National Small Industries
Corporation (NSIC) or commercial banks. As a matter of fact, blocking on
own funds on equipment and fixed assets and on the working capital has
affected potential growth prospects of the enterprise. Policy and support
system incentives have not been effectively availed of. There is a virtual
dearth of information on support schemes. Policy and support seems to
have hardly played any role in the current success of this enterprise. The
enterprise proposes to attempt at exporting its spices-based ‘masalas’ to tar-
get NRIs viz. ethnic Biharis in particular. However, information on the
Market Development Assistance Schemes of the Ministry of Commerce or
the Development Commissioner–Small Scale Industry (DCSSI) is not
known. The enterprise would like to go in for ISO implementation but is
ignorant of sources such as the Indian Statistical Institute and the Small
Industries Service Institute. The enterprise, therefore, plans its growth as it
had operated since inception—absolutely ‘self-driven’ and not policy or
support driven. Though, a costly proposition, the case of Purshottam
28 Chapter Two
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Enterprises highlights that effective management of a business is the key to

performance. Policy support may be required to augment and not substitute
this requirement.
Handholding needs to be coupled with business acumen and drive: Policy

and support alone will hardly suffice.
Consider the enterprises established by the support system in the

1990s. These include enterprises established by the Khadi and
Village Industry Board in different states. The cottage industries’
department in Tamil Nadu had established a self-help group of 200
women under the leadership of Neelavalli who acts as the President
of ‘Mahila Udhyam Sanstha’. The enterprise had secured about Rs.1
lakh for equipment with a significant amount of subsidy and reaps
interest subsidy as to secure C.C. facility at the rate of only about 9
per cent. Support agencies such as the State Export Promotion
Corporation have helped them ‘indirectly’ export their ‘papads’ to
Europe. Support in the form of entrepreneurship and management
skill development training has been received and financial support in
terms of soft loans and marketing support offered. But since the
beginning the enterprise’s turnover has remained stagnant. Despite
support right from the conception stage, the enterprise has hardly
even taken off despite a decade of operation.
Policy with Regard to Sales Tax and

Customs Duties
A ‘masala’ manufacturer in Guwahati makes chilli powder and sells
it in an average lot size of 1 kg. He gives his distributor a margin
of 15 per cent and his retailer a margin of 30 per cent on the MRP.
He also offers various schemes for retailers such as a one kg pack for
every 10 kg of material paid for. He essentially uses retailer or chan-
nel motivation at the point of sale as a tool to push his products.
Bigger ‘masala’ manufacturers and suppliers are believed to offer a
margin of only 7 per cent to distributors and 5 per cent to retailers.
The net margin on chillies is believed to be about 10 per cent. His
own costing of the product is as follows: for one kg. of chilli—raw
material cost works out to Rs.4, labour about Rs.1.5, packaging
about Rs.2.5, marketing (advertising/hoardings) Rs.3 and transport
(raw material and finished products) Rs.2. The product is offered to
distributors at Rs.19, viz. he believes he makes a net profit of about
Rs.6. He does not consider interest or opportunity on own cost of
capital under which circumstance margins may vary. Large Indian

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business houses are believed to enjoy economy of scale advantages

(in terms of lower per unit cost) of even 15-20 per cent on various
products. It is their marketing expenses in terms of TV commercials,
etc., that are believed to be high. It is believed that larger enterprises
focus on a ‘consumer-pull’ strategy, while smaller enterprises lay
emphasis on a ‘customer-push’ strategy. The latter seems to work
better! It is believed that ‘masalas’ and chilli powders, for instance,
have to be blended to suit the palate of different communities in
India. Hence, large enterprises do not manufacture many ‘masala’
varieties; cottage and small units do well. It is, therefore, efficient
marketing that serves as a critical success determinant.
Yashwant Bakery in Patna has a turnover of Rs.1.25 crore. The
equipment utilised include semi-automatic mixers. The promoter
had taken an NSIC loan of Rs.25 lakh. Equipment was sourced
from an Indian agent of the machinery manufacturer. The enter-
prise’s main competitor is a medium-sized manufacturer. The com-
petitor, who has a turnover of over Rs.10 crore and a market share
of about 50 per cent in the region, uses fully automatic equipment.
Yashwant Bakery seems to have not realised the value of using the
push strategy to enhance market reach. Perhaps, this is why both
enterprises, which started at about the same time with similar
investment, have different performances. For instance, in the 400
gm. ‘sandwich bread’ that he manufactures, the retailer is offered a
margin of Rs.2 and distributor a margin of 80 paise. He sells at
Rs.7.20 to distributors. He makes a net margin of about 8 per cent
on sale price. Price has been about the same for over a 3 year
period. Unlike his competitor, he gives exclusive agency or distrib-
utorships and low ‘customer’ or middleman margins.
The larger enterprise, which has the bulk of the market share in
the region, offers 50 per cent higher margins to dealers (whole-
salers) and retailers. No wonder Yashwant Bakery has a 5 per cent
market share of Patna city, while his competitor is believed to have
an over 50 per cent market share. What is also obvious is that mar-
ket growth in the case of chilli powder and bread, for instance, is
more likely to be merely related to population growth. Setting up
new projects in such relatively saturated markets could only affect
the performance of existing enterprises, while affecting the sustain-
ability of new enterprises. Existing enterprises in the sector would,
in fact, have to look for options such as technology upgradation to
further reduce costs and enhance performance. Further, with regard
to new projects, a focus on value added and newer products such as
bread with soya etc. would benefit. New value added products may
30 Chapter Two
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be considered by new projects and technology upgradation

options may be pursued by existing enterprises as to reduce costs
and increase margins in new markets. Technology upgradation may
be in terms of incorporating high-speed mixers and kneading
machinery.
Policy is often skewed towards protecting raw material
providers. For example, in 400 gms. of sandwich bread offered at
Rs.7.20, raw material cost (maida, wheat flour, yeast) is about 65
per cent, labour 10 per cent, electricity 5 per cent and chemicals and
salt and oil about 12 per cent. Raw material costs in India are
skewed towards the higher side in the international perspective due
to lower productivity in agriculture. With regard to surviving even
in the context of high domestic raw material costs, enterprises may
do well if they focus on ethnic and traditional products. South East
Asian competitors cannot afford to focus on ‘masala’ powders tar-
geted at the region specific taste and preference segments! Sickness
in the industry is believed to be largely due to problems in credit
realisation and inefficient speculation in raw material prices, both
of which affect performance. Efficient management is the key.
A ‘masala’ powder and confectionery manufacturer in Chennai has
the ‘Agmark’ label and is also involved in intra-state trade. He
believes that while bread has no sales tax, items like masala and cakes
and pastries have tax fixed at 2 per cent on ‘Masalas’ and 12 per cent
on cakes and pastries. Supplying beyond a state could imply payment
of local sales tax in a state plus octroi at the rate of, say, 2 per cent for
entry into different regions as also sales tax in the target state. This
effectively keeps away efficient competition from other states, a sort
of tariff barrier to protect local manufacturers in a state. Further, food
inspectors in other states are believed to be a source of ‘harassment’
in terms of pulling up intra-state suppliers under the Weights and
Measures Act, ingredient content and mix, labelling norms, etc.
While the various acts are necessary, filing cases in local courts by
authorities proves to be expensive for entrepreneurs. This entrepre-
neur in Chennai has been going to court in Andhra Pradesh for the
last 25 years to resolve a relevant dispute. A promoter needs to under-
stand such aspects before planning and implementing a business.
The margins secured by entrepreneurs in some sectors are

believed to be phenomenal. In the manufacture of confectionery
products such as ‘pedas’, for instance, for the manufacturing enter-
prises in Pune, which are integrated into own retail outlets, returns
on cost of production are expected to be 200 per cent. Cottage and

chp-2.qxd 10/18/05 9:02 AM Page 32
smaller enterprises do well if they operate in fragmented markets.

Markets may be fragmented either due to the perishable nature of
the product with low shelf life such as bread or due to regional
variations in preferred taste or choice. Pickles and certain spices are
all examples. Further, in some products such as ‘rotis’, which are
convenience products that are tending towards becoming necessi-
ties, pricing has to be low. MNCs are not likely to enter into such
products, as it is difficult to charge premium prices for their brand
image. Hence, small enterprises have their own opportunities in the
sector, while larger enterprises have theirs.
Regional characteristics of demand are also critical. In cities like

Mumbai and Pune, the fast pace of life and palate of local con-
sumers have encouraged a wide range of processed enterprises to be
established. In a city like Ahmedabad, however, convenience foods
have not made as much an entry. Hence, such aspects also play a
critical role in determining the success of a project. An example of
regional variation is that of chilli preferred in Gujarat which is less
pungent than in other states. Consumers stress more on colour, i.e.
in terms of ‘dark red’. Bigger enterprises may find it difficult to
enter into such fragmented markets by reaping scale economies in
manufacturing or purchase as their production run may not be opti-
mised, particularly if such fragmented markets are relatively small
as also price conscious. Exchange rates are critical policy related
factors for price competitiveness. ‘Basmati’ rice from Pakistan has
an advantage over that from India, currently, given their lower
rupee–dollar rates.
The cases of different enterprises presented in this section indicate the impor-
tance of management along with the need for incorporating possible policy
trends such as regulatory norms, sales tax, customs duties, etc., while plan-
ning a project and implementing it.
32 Chapter Two
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CHAPTER 3
Who is an Entrepreneur?
W ithout entrepreneurship and growing number of entrepreneurs, an econ-

omy is certain to become sluggish in growth. Entrepreneurial
dynamism forms the cornerstone of a progressive society as it is a purposeful
activity that attempts to create value through recognition of business opportu-
nity, management of risk appropriate to opportunity and through communica-
tive and management skills to mobilise human, financial and material
resources necessary to bring a project to fruition.
This gives a definite upsurge to the economic growth of a nation. Economic

growth is an upward change whereby the per capita income increases over a
long period of time. If economic growth is the effect, entrepreneur is the
cause. Entrepreneurs are the ones who explore opportunities, scan the envi-
ronment, mobilize resources, convert ideas into viable business proposition
and provide new products and services to the society by bringing together and
combining various factors of production. An entrepreneurial individual has a
distinct concept, vision and a dream, which he/she is able to convert into prod-
ucts. Such individuals are driven by task, challenge and opportunity with very
high achievement orientation.
If you wish to start and succeed in your enterprise, you need to play different
roles at different stages. Some essential qualities of entrepreneurs are:
1. A strong desire to win. (NEED FOR ACHIEVEMENT)
Most people dream of success, but seldom do anything to imple-

ment it. In contrast, entrepreneurs have a strong desire to continu-
ously hit new goals and do not rest till they win.
2. An approach of never-say-die. (PERSEVERANCE)
Once committed to a goal and a course of action, entrepreneurs

never retract. Difficulties do not deter them and they work hard till
the entire project is successfully accomplished.
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3. Entrepreneurs prefer a middle-of-the-road strategy while handling

tricky situations. (MODERATE RISK BEARING)
They don’t take high risks; they are not gamblers. They prefer a
moderate risk to a wild gamble, high enough to be exciting and con-
taining a reasonable winning chance.
4. Alert to opportunities and seizing them to their advantage. (ABIL-

ITY TO FIND AND EXPLORE OPPORTUNITY)
Entrepreneurs are innovative and can convert crises into opportuni-

ties. But they are realistic enough to ensure that the opportunity suit-
ably dovetails into realising their goals.
5. They have a dispassionate approach to problems. (ANALYTICAL

ABILITY)
Entrepreneurs will not let personal likes or dislikes come in the

way of their taking a business decision. They seek out experts for
assistance rather than friends and relatives. Their decisions are
objective and not emotional or impulsive.
6. It is important for them to know how they are faring when they
work on their goals. (USING FEEDBACK)
Entrepreneurs take immediate feedback on performance and prefer
prompt and accurate data, irrespective of whether these are
favourable or not. Unfavourable news spurs them into making
amends to attain their goals.
7. Entrepreneurs do not get deterred by unfamiliar situations. (FACING

UNCERTAINTY)
Achievement-driven people are optimistic even in unfamiliar

situations. Even if they find the odds daunting, they see no reason
why they can’t succeed with their treasure of abilities. They march
undeterred, making the best of fine opportunities that come their
way, even without guidelines. They quickly come to grips with the
new environment and present a picture of boldness and prudence.
They apply their special insight and skill to quickly understand the
environment and adapt to it.
8. They dislike working for others. (INDEPENDENCE)

Entrepreneurs do not like to work for others and therefore start off
on their own. They wish to be their own masters and be responsible
for their own decisions.
34 Chapter Three
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9. They are flexible. (FLEXIBILITY)
Successful entrepreneurs have an open mind and do not hesitate to

change their decisions.
10. Entrepreneurs think ahead of others and plan for the future.
(PLANNING)
Most successful people set goals for themselves and plan to realise
them in a time frame.
11. Entrepreneurs can deal with people at all levels. (INTERPER-

SONAL SKILLS)
An entrepreneur comes across all kinds of people. He has to make

them work for him and with him to help realise his objectives. He
likes working with people and has skills to deal with them.
12. They can influence others. (MOTIVATION)
Successful entrepreneurs can influence others and motivate them to

think and act in their way.
13. They can work for long hours and simultaneously tackle different
problems. (WITHSTANDING STRESS)
As a key figure in his enterprise, the entrepreneur has to cope with

several situations simultaneously and take the right decisions, even
if it involves physical and emotional stress. This is only possible if
one has the capacity to work long hours and still keep cool.
14. They know themselves. (POSITIVE SELF-CONCEPT)
An achiever channelises his fantasies into worthwhile, achievable

goals and sets standards for excellence. He can do this for he knows
his strengths and weaknesses, and so adopts a positive approach. He
is seldom negative.
15. Entrepreneurs think ahead. (ORIENTATION FOR FUTURE)
They have the ability to look into the future. They won’t allow the
past to bother them and think only of the present and the future.
“Bygones are bygones, what of now?” This is their usual response.
An individual may not have all these qualities, but most will have
many. The first step for a person aspiring to become an entrepreneur
is to make an inventory of his traits. This self-awareness and analy-
sis will help him define his strengths and overcome weaknesses.
Who is an Entreprenuer? 35
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CHAPTER 4
Soft Skills for Entrepreneurs
COMMUNICATION SKILLS
C ommunication is the process of exchanging ideas, facts or opinions by

two or more persons. For communicating, we use different modes, like
oral, written or non-verbal. The process is explained by using this diagram:
Who? Through To whom? Impact

Say what?
which
channel?
Communicator Message
Medium Receiver Effect
Major vehicles for communication:
Speech – Face to face (oral)
Writing Formal – long (reports, documents, etc)
Non-verbal – Facial expression, body language
In life, we use several methods to communicate effectively (i.e. gestures/

watch for response/ words/ pictures). Successful communication depends on
correct receipt of the message and receiving is an active element.
Communication vehicles will be effective only if both parties are involved in
the process. Good communicators listen and observe. They are alert receivers
of response signals while they are also communicating. This helps them tailor
their communication style to make it easier for the receiver to absorb or accept
the message.
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There are certain rules for communication:

i. Fitness of purpose:
z Will it achieve the objective?
z What, why, when, where, how?
z Select the most effective way to achieve the objective.
ii. Quality of the message:

z Always maintain clarity, accuracy and simplicity.
z Don’t leave the important part of the message merely implied.
We all transmit personal, non-verbal signals continuously, mostly reflecting

our attitudes and responses to communication systems. By observing and
responding to signals appropriately, we can build on the positives and weed
out the negatives. To some extent, most people respond to non-verbal com-
munication, but often only to the obvious, well-known signals. The table
below gives examples of such signals and their implications:
Sr. No. Behaviour Reason Circumstances Responses
1 Leaning z Concentration z Important meeting z Make points clearly
Forward z Increased
emphasis z Negotiation z State your own case
2 Leaning z Taking time to z After a proposi- z Allow silence

Back think tion/explanation thought
z Inviting z Towards end of z Wait for others to
expansion meeting speak first
z Looking for
conclusion
3 Clasping both z Extreme con- z Non-threatening z Maintain openness

hands behind fidence situations of situatiuon
neck z Relaxation z In charge of z Be positive about
situations your own case
4 Straight gaze z Failing z Disputed occasions z Ask for reactions/

No head attention feelings
movement z Dislike what is z Unwelcome z Ask for suggestions
communicated instructions
z Lack of co-
operation
5 Narrowing z Disapproval z Expects to z Allows expression

eyes z Disbelief challenge of opinion
z Dislike z Patience may be z Shows that you
short acknowledge
difference
z Give your reasons
Source: Adapted from Communication Skills, 1996 by Carter Wendy
38 Chapter Four
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CREATIVITY AND PROBLEM SOLVING

An entrepreneur has to be creative. He has to arouse and enhance creativity
and experience competition not only with others but also the standards of
excellence set for himself. Certain pre-conceived ideas create barriers in the
growth of creative thinking. The barriers are:
1. Self-imposed
2. Restricted mindset
3. Nature of compliance
4. Backtracking to obvious challenge
5. Jumping to conclusion
6. Fear of being ridiculed
It calls for a positive attitude, an open mind, insight and right perception to
remove these barriers and arouse and enhance creativity. Everyone faces
problems of different nature and magnitude. Sometimes in daily life, we
encounter problems so often that we don’t even notice them and this is
because of our monotonous experience in dealing with them and hence the
spontaneous reactions result in solutions. But we do get stuck when faced
with unusual and difficult problems, as our routine reactions fail to produce
solutions. In such cases, different approaches and ways have to be tried out.
Similarly, as an entrepreneur you may face several problems while managing

your small-scale enterprise. If you develop an appropriate system, approach
and methodology to solve problems, it will prepare you to manage your
affairs and problems smoothly and without tension.
There are several qualitative and quantitative approaches evolved in manage-

ment science to help solve problems. The right strategy would be to under-
stand your own environment, resources, capacities, limitations, strengths and
weaknesses in order to design the right approach. This approach will help
you, initially, in working on problems and, later, in formulating your own
strategy to solve them. These steps help you have a problem-solving attitude
and mechanism:
z Create a desire to solve problems
z Recognise the problem
z Formulate the possible causes
Soft Skills for Entrepreneurs 39

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z Specify the problem
z Test each cause
z Explain each cause with minimum assumptions
z Verify your explanation and determine the cause
z Establish objectives about the resources to be produced and resources

used
z Classify objectives into ‘MUST’, ‘DESIRABLE’ and ‘CAN BE

IGNORED’ categories
z Generate alternative solutions
z Choose one solution
z Compare each solution in terms of positive and adverse consequences
z Make a decision to implement
z Internalise the process
40 Chapter Four
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CHAPTER 5
Planning a Small-Scale Unit:
Whom to Approach for What
T he speed with which you implement your project is critical during these
days of competition. If you have planned in advance and evaluated
resources required, your project will be implemented in the shortest possible
time. The first step to initiate planning is to identify a suitable project.
PROJECT IDENTIFICATION
There are no set rules to identify a suitable project, though this is one decision
on which the success of your entire venture hinges. So, don’t take hasty deci-
sions. Most prospective entrepreneurs tend to display the herd tendency and
go for a project, which people have already ventured into. This is not a healthy
attitude as success of one in a particular field does not guarantee success of
the other. While identifying a suitable project, you should make a SWOT
analysis of your own strengths and weaknesses. There are more details in a
separate chapter.
The next step, after you have selected your project, is to collect all infor-
mation about it. The most important information is about the potential market
of the items you selected. There are several ways for this. You may go for a
basic desk survey, a snap survey or a detailed market survey. A separate chap-
ter provides guidelines to assess the market potential.
PROJECT REPORT: A FORECAST PLAN

Now, you will need to prepare a feasibility report about your project. A feasi-
bility report will broadly contain:
chp-5.qxd 10/18/05 9:06 AM Page 42
a. Background of the entrepreneur and constitution of the business
b. Market potential and marketing strategy
c. Selection of location
d. Requirements of land and building
e. Manufacturing process
f. Requirements of plant and machinery
g. Requirement of utilities
h. Requirement of raw material
i. Estimated cost of the project
j. Proposed means of finance
k. Cost of production and profitability
l. Break-even point
m. Cash flow statement
n. Internal rate of return
REQUIREMENTS TO START A BUSINESS
Selection of Location: A Vital Decision

This is extremely important. Usually, small-scale entrepreneurs are found to
have a predetermined location. The location should be decided according to
the proximity to sources of raw materials, consumption centers, availability
of infrastructure, necessary skills in surrounding areas and availability of
incentives. Sometimes the requirements conflict with one another and a par-
ticular location may not match all. Such situations want you to balance out
the requirements, while also ensuring that they do not affect the viability of
the project. Experience shows most entrepreneurs attaching more impor-
tance to available financial incentives and ignoring other important aspects
guiding the selection of the location. Such misplaced emphasis may run
the project into unviability in the long run. Your decision on the location,
42 Chapter Five
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therefore, should not just be based on incentives, but more on availability of

infrastructure and skills.
Land and Building: Make Correct Assessment

Before assessing land requirements, you must draw up a plant layout based on
the type of facilities proposed to be installed. Normally, the land should not
exceed five to six times the built-up area; but it all finally depends upon the
project. Land in excess of the requirement will block up funds, which could
otherwise be utilised for productive purposes. The land should be free from
any encumbrances and should be non-agricultural.
Select the Right Manufacturing Process

Suitable manufacturing processes have to be identified for production. Some
products may need a particular process depending upon raw material avail-
ability, the prices and the quality requirement of the end product. A detailed
flow chart may also be drawn with all operating parameters.
Government Formalities and Procedures

The process of planning also includes planning for execution of various gov-
ernment formalities. Though the government in the post-liberalisation era
intends to reduce permissions/clearances to free the industry from bureau-
cratic controls, you need to clear specific formalities to avail certain benefits.
The following formalities need to be considered for small-scale units:
i) SSI Registration: Required for the Records

Though SSI registration is not mandatory according to recent changes in the
rules, it is advisable that you register your small-scale unit with the District
Industries Centre (DIC) of the district where your project will be located. The
government requires this registration to plan for future needs of the industry
and it is in your interest to register your unit.
ii) Acquisition of Infrastructure Facilities

If you plan to locate your project in an industrial estate promoted by a gov-
ernment agency, you may apply for a built-up shed or a plot of land. You can
start your activities once the shed/plot is offered. If you have been allotted a
Planning a Small-scale Unit: Whom to Approach for What 43

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plot, you can start construction after your building plans are approved. In
either case, you have to apply for power connection to the State Electricity
Board and for water to the authorities concerned.
iii) Pollution Control Clearance: Obtain NOC or

Consent
You should also apply for obtaining an NOC from the State Pollution Control
Board (PCB). If your unit is likely to be a pollution hazard or may discharge
effluents, the PCB first issues an NOC with certain conditions to install facil-
ities to check air or water pollution to specific levels. After you have installed
the necessary facilities and they are satisfied, the PCB gives its consent to
start operations.
iv) Constitution of the Business

You should decide on the organisational form of your business, viz. if it should
be a proprietorship, partnership or a private limited company, according to the
size of its operations and the degree of risk involved. In proprietorship, the
gains and losses of the business rest with the proprietor, while in partnership,
all the partners share the gains and the losses except the minor partners, who
are exempt from bearing the losses. In a private limited company, the members
take the gain or losses as per their holding in the company, for it is considered
to be a separate legal entity. Once the business constitution is decided, you may
undertake necessary formalities for registering the firm accordingly.
v) Arrangement of Finance for Fixed Assets and

Current Assets
After taking these clearances, you may apply for a term loan either to a state-
level financial institution or a commercial bank, with a techno-economic fea-
sibility report, including market survey, and all documentary evidence justify-
ing your claim for the project being feasible. Once the loan is sanctioned, you
may have to execute necessary legal documents mortgaging your assets. The
disbursement of the term loan usually starts after you have fulfilled all the con-
ditions and also after 50 per cent of your own capital is raised and invested in
the project. The institutions generally disburse 75 per cent of the loan sanc-
tioned on a matching basis. Thereafter, you should raise and invest the rest of
your contribution to stake your claim for disbursal of the balance term loan.
Simultaneously, you can also negotiate with your bankers to sanction the
working capital requirements. The bankers would, however, consider the working
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capital loan only after the term loan is sanctioned. If you propose to locate your
project in developing areas eligible for state incentives, you will need to apply
for registration and sanction with the state authority to avail the incentives. Only
after you get the sanctions can you start implementing your project.
vi) Government Formalities Need to be Viewed

in Proper Perspective
Experience shows that many people do not give adequate weightage to com-
plying with various government formalities. Utmost care should be taken in
this connection during the planning stage itself, as in the case of ignorance the
project implementation gets delayed and incurs cost overruns, and sometimes
derails the entire project.
You must also be aware of the sequence of steps to be followed while plan-
ning a small-scale unit. There are no rigid rules, but experience reveals that
nothing important will be missed if you follow the sequence. Some activities
can be handled simultaneously. The sequence may vary according to the
needs and size of your project. You may decide basing on ground realities.
The steps above will help you develop an insight into project planning. Fine-
tuning project implementation activities at the planning stage will help you
coordinate resources appropriately in keeping with the project needs and
avoid slippage in implementation and cost overruns.
Whom to Approach for What?
New entrepreneurs must know where to go for a particular piece of informa-

tion as this knowledge will help them avoid a lot of running around. For this,
they must know clearly what they are looking for.
Some may be completely ignorant, a few may know about marketing or

production or finance, etc. The completely ignorant will require initial desk
work and discussions with knowledgeable persons like the EDP trainer, exten-
sion officers, businessmen, small-scale industrialists, etc. This will help you
accelerate the process of enterprise establishment.
Those with some knowledge will require specific information. It will be

useful for them to list the various things to be completed to set up their enter-
prise. This desk work will give them a clear idea about the assistance they
need to fulfill their activities.
Various development agencies assist entrepreneurs:
a. Some agencies provide only general information and you yourself

have to collect specific information.

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b. Some provide technical/marketing expertise in specialised areas.
c. Some provide guidance in technical and financial matters, besides

taking up turnkey responsibility (implementation assistance).
But government formalities will have to be completed by the entrepre-

neurs themselves. They can contact the concerned departments/offices for
information.
You should only retain the relevant information/data while collecting infor-
mation. You must keep important information at a proper place to find them
when needed. The compilation and segregation of information will need table
work and it should be compared with the checklist prepared earlier to ensure
all data has been collected before actual commencement of work.
Expert guidance will help in decision-making process. It will be useful to

acquire first-hand information from institutions to get a clear picture of the
entire exercise.
A table below shows various sources of information for a new entrepreneur.

They need not contact all agencies except the relevant ones. However, they
must contact at least the following agencies to have knowledge about small-
scale industries and the procedures:
z District Industries Centre
z Directorate/Commissioner of Industries Office
z State Financial Corporation
z Technical Consultancy Organisation and
z Agencies Conducting Entrepreneurship Development Programmes
46 Chapter Five
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Whom to contact and for what information

Sr. No. Area of Assistance Sources
1 For Selection SISI, DIC, TCOs, SFCs
of a Project
2 Registration DIC
3 Finance Banks, SFCs, NSIC
4 Technical DIC, TCOs, CFTRI,
Guidance SISI, NSIC, DFRI
5 Training ED Inst., SISI, TCOs,
DICs, CFTRI, NGOs
6 Infrastructure DIC, IDCs, LA
7 Raw Materials DIC
8 Plant & Machinery DIC, NSIC, SISI
9 Marketing DIC, TCOs, EPC
Information (APEDA, MPEDA)
DIC = District Industries Centre

SISI = Small Industries Service Institute
TCOs = Technical Consultancy Organisations
SFCs = State Financial Corporations
NSIC = National Small Industries Corporation
DFRI = Defence Food Research Laboratory
ED Inst. = Entrepreneurship Development Organisations
CFTRI = Central Food Technology Research Institute
IDCs = Infrastructure Development Corporations
LA = Local Authorities like Municipalities
EPC (APEDA, MPEDA) = Export Promotion Council (Agriculture and
Processed Food Export Development Authority, Marine Products
Export Development Authority)

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CHAPTER 6
Business Opportunity Identification
A good business opportunity is that which is a techno-economically and

commercially viable and feasible and environmentally sustainable
proposition. Every entrepreneur needs to identify a sound opportunity. To
identify an opportunity, one needs to:
i. Collect basic information on local resource base, e.g. agriculture,
forest and mines
ii. Collect information on Opportunity Identification (OI) exercise
done earlier (if any), by DIC, banks, other financial institutions, etc.
iii. Discuss the potential business opportunities with existing entre-
preneurs
iv. Discuss with octroi and sales tax officials about the inflow of
goods
v. Collect information on new major investment going to materialise
in the area
vi. Collect negative list of banned items for financing
vii. List out poor performing industries
viii. Collect information on skill base—especially on handicrafts, etc.
ix. Collect information on availability of infrastructure like power,
water and transport, etc.
The opportunities in the food-processing sector may be classified on the basis

of the following parameters:
1. Natural Resource-Based Opportunities: such as the ones based
on cereals, cash crops, fruits and vegetables, agro-wastes, animals,
marine-based, processing of food products like cereals and pulses,
chp-6.qxd 10/18/05 9:20 AM Page 50
fruit preservation, pickles, honey, etc.
2. Local Industry Based: those dealing in supply of intermediary raw

material, ancillarisation, job-work, recycling of industrial wastes,
by-products, etc.
3. Local Demand Based: which may include products like bread, bis-
cuits, flour, spices, etc.
4. Export Based: any local product, which is being exported; or

resources available locally to manufacture the items, which have
good export potential
Following the above method, will offer a large number of business opportu-
nities. However, please remember, these opportunities are location and time
specific. An opportunity today may not remain an opportunity tomorrow. Or
an opportunity in a forest area may not hold good in the deserts of Rajasthan,
as the resource base will change. Moreover, one would also need to assess the
viability and feasibility of the opportunities before pronouncing them as busi-
ness opportunities.
An opportunity may be absolutely viable but may not be feasible if it is

mismatched. For example, although setting up a large flourmill may be a per-
fectly viable proposition, it may not be feasible to set up one in Sunderbans
for an illiterate rural or tribal man. Therefore, one needs to consider the fol-
lowing facts before deciding upon an opportunity:
One’s Education
Experience
Economic Background
Investment Capacity
Family Background
Managerial Capabilities
Market Competition with other Producers/Size of Market
Location of the Unit
Availability of Technology and Process Know-how
50 Chapter Six
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Availability of Raw Material
Availability of Skilled Workforce
Availability of Required Infrastructure
Project Cost
Export Potential
Life-cycle of the Product and Future Growth of the Product
Shelf-life of the Product (highly perishable like milk or long-term

like capital goods or consumer durables, etc,)
Profitability of the Product
Degree of Risk
Gestation Period
Government Policy
After ascertaining these factors, a SWOT analysis of the entrepreneur vis-à-

vis the identified opportunity should be conducted. If both match, one can
proceed for a preliminary feasibility study through market survey. It is advis-
able to zero in two to three opportunities to finalise one.
A set of introspective questions while deciding upon an opportunity:
How comfortable are you with the technology? Will you be able to
handle it?
What is the situation of competition? How will you withstand the
competition?
Will you be able to muster enough resources (especially finance)?
Will you be able to manage investment from your own resources?
If not, how do you plan to get funds?
How critical is the government support for your product?
Is raw material easily available? If not, how will you manage regu-
lar supply of raw material?
Will you get adequate skilled manpower? If not, how will you
manage?
Business Opportunity Identification 51

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CHAPTER 7
Market Survey Tools, Preparation of
Schedule and Techniques of Data
Collection
M arket survey is a valuable tool to help minimise risks and increase the
probability of success. However, that doesn’t mean it is a sure-shot way
to eliminate risk and guarantee complete success. You should undertake mar-
ket assessment with a survey before you finalise marketing plans for your
product or service. This chapter aims to explain what a market survey is and
how to conduct it.
Markets are changing rapidly, becoming complex and competitive. It is dif-

ficult to keep pace with the rapidly changing demand and supply patterns as
an entrepreneur is unable to respond quickly to a new environment. He needs
better market understanding and a market survey puts him in contact with the
market. A systematic use of this tool can reduce risks in decision-making.
WHAT IS A MARKET SURVEY?

A market survey is an objective and systematic collection, recording, analysis
and interpretation of data about existing or potential markets for a
product/service. This definition will be better understood by looking at the
objectives of a market survey. During a market survey, one needs to focus on:
z Size of the market and the anticipated market share in terms of vol-
ume and value
z Pattern of demand—seasonal or fluctuating in time (in a month,

day, etc)
z Market structure
chp-7.qxd 10/18/05 9:23 AM Page 54
z Buying habits and motives of buyers
z Unique selling proposition of certain products/services
z Past and present trends affecting the selected product or similar

product
PROCESS OF CONDUCTING A MARKET SURVEY

A systematic 5-point process is involved in a market survey:
1. Defining objectives and specific information needed:
z Identifying source to obtain information
z Assessing time and cost for the study
z Working methodology and action plan
2. Selecting a sample size by determining whom to contact and when
3. Preparing questionnaires for the survey
4. Collecting data and analysing it
5. Preparing a report, based on analysed data
PRIMARY AND SECONDARY SOURCES OF

INFORMATION
Conducting a market survey does not always mean contacting people directly.
There may be information in the form of reports, published material or
documents of trade/industry associations. Data may be collected from two
sources:
z Primary data sources: Information coming straight from those in the

specified market, e.g. in the toy market, information obtained from toy
manufacturers and traders.
z Secondary data sources: Data existing in reports or in a published

form and may not have been collected for specific purpose. Such
information can also be had from census office, banks, traders and
manufacturers’ association or published anywhere.
54 Chapter Seven
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SCHEDULE FOR MARKET SURVEY

A market survey is not restricted to collecting information on the market for a
product, but also about marketing infrastructure and existing market conditions.
Designing a market survey schedule could fetch a lot of data. Questions

may be designed on these areas:
z Existence of competitors, their products and marketing strategies
z Information on all consumer groups
z Information on competing products/ similar products
z Attitude of existing/potential consumers, including buying prefer-

ences, behaviour etc.
DON'TS OF CONDUCTING A MARKET SURVEY

z Do not be prejudiced. As an entrepreneur, you must be open-minded
and confident.
z Do not be impatient or argumentative. Your objective is to get infor-

mation.
z Do not reveal privileged information to others, for you may lose the
trust of your sources.
z Avoid taking notes while discussing. Make notes immediately after

an interview. People are not comfortable if one writes while talking.
z Don’t interview without preparation and sequencing of questions.

Ensure that the interviewee has time for you.
z Don’t approach competitors as “likely competitors” but meet them as

“potential clients” to get best results.
MARKET RESEARCH: 10 TIPS TO BE MORE

EFFECTIVE
1. Clearly identify the issue/problem that needs to be investigated. See
if any published/secondary sources of information are available for
this problem.
Market Survey Tools, Preparation of Schedule and Technique of Data Collection 55

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2. Based on existing information, check if the problem can be defined

or narrowed down. Further, with this as your basis, write down
“terms of reference” for any subsequent study.
3. Try to look at the problems from different angles:
z your own point of view as producer or seller

z customers/consumers’ viewpoint as buyer and end users of prod-
ucts/services
z competitors’ viewpoint for they may have addressed similar prob-
lems
4. Try to remain objective throughout the market research process and
check impulses/gut feeling from totally influencing the research.
5. Prepare schedule in as simple and clear a form as possible.
6. Maintain a tight control on the subject. If other subjects surface dur-

ing the research, give them the attention they deserve.
7. Complete the research promptly and maintain confidentiality lest the

competitors hear of it and forge ahead in the market.
8. Be prepared to take necessary action, which the research identifies.
9. Use the research immediately for the good of the enterprise.
10. Review all market research exercise and processes—the lessons

learnt and areas to improve next time.
MODEL QUESTIONNAIRE FOR MARKET SURVEY
For Market Potential

Collect data about sources of market information like consumers, suppliers
and manufacturers.
A. Consumers
z What is their annual consumption and requirement?
z What is their present source of supply?
56 Chapter Seven
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z What is the customer’s brand loyalty and preferences about price,

quality, payment terms, etc?
z Are they satisfied with the present product and supply?
z What is their purchasing criteria and purchasing power?
z What is the consumption pattern? (basis to calculate their require-

ments)
z What could be the future consumption pattern, in quantity and qual-
ity due to technological changes, etc?
z What is the size of the average order, specifications and time and fre-
quency of their placement?
z Will any government institutions/departments or any company/indus-
try buy the products? Is it possible to establish linkages with them, and
how?
z What is the life of your potential buyer?
z Their age group, sex?
z What geographical area they live in? Urban, village and which part of
the country?
B. Suppliers (Traders)
z Who are the principal traders in the item, their range of products and
business terms/commissions, etc?
z What are the possibility to trade with them and on what business
terms?
z What is the normal stock level maintained and problems in stocking?
z What are future predictions on business conditions?
C. Manufacturers and Competitors
z What are their products range, installed capacity, selling price?
z What are their normal business terms about payment, price, etc?
z What are their salient features, like technical skill, finance, other
resources, etc.?

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z What are their strengths and weaknesses? (Try to do their SWOT

analysis)
z Where do they get information regarding market and consumer pro-

files from?
For Information on Raw Materials
z Who are the major manufacturers/suppliers?
z What is the time required to get raw material after order placement?
Supply terms (tax structure, price, packing, payment, etc)? Cost of
transportation?
z What is the standard or minimum order quantity?
z Is raw material freely available or is there a quota system?
z Will any decision/policy affect its availability or price?
For Information on Machinery and Equipment
z Who are the manufacturers/suppliers?
z What capacity, specifications and brands are available in market?
z What is the price of the machine? (Consider all costs—taxes, trans-

port, accessories, etc.)
z Which electrical equipments, like motors, starters, switches, are

needed?
z What performance guarantees/warranties are given? Is the sup-

plier/manufacturer reputed and reliable?
z What is the normal repair/maintenance cost per year?
z What spare parts would be frequently required?
z What quality and maximum output (production) a machine can give?
z Does the supplier train you/staff to acquire skills to operate machinery?
58 Chapter Seven
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Suggested Sources of Technology and List

of Machinery Manufacturers and
Suppliers
A K G FOOD PRODUCTS AGARAM INDUSTRIES
168 B B Chatterjee Road 126, Nelson Road
KOLKATA – 700 042 Aminjikarai
Pr: Food Processing Equipments CHENNAI – 600 029
Pr: Milk Analytical Instruments,
Pasta Making Machines, Food
A M B AGROTECH Analytical Instruments
Ashvini Layout
Nr. Sahakar Nagar
AKOLA – 444 004 AGRITECH INDIA FOODS
Pr: Mini Dal Mill 8, Manilaxmi Apts.
Daxini Society – Maninagar
AHMEDABAD – 380 008
A V ENGINEERING WORKS Pr: Processed Food Machinery,
12-A, Adj.Hira Automobile Beverage Processing Machinery
Factory Area
PATIALA – 147 001
Pr: Automatic Biscuit making plant AGRO THERMODYNE CO.
8/4, Shamanna Layout
B/h. Mangaram Factory
ADVANCE EQUIPMENT CO. Gorugunte Palya
Navjivan Society BANGALORE – 560 002
Building No.3/2/7 Pr: Bakery/Biscuit making
Bombay Central Equipments
MUMBAI - 400 008
Pr: Bakery Equipments, Meat/Fish, BAHUBALI ENGINEERING
Poultry Processing/Packaging plant 5, Parekh Nagar, S.V. Road
Kandivali (W)
MUMBAI – 400 067
AERO THERM SYSTEMS
Pr: S S Food Processing
PVT.LTD.
Equipments
Plot No.1517, Phase – III
GIDC (Vatva)
AHMEDABAD – 380 445 BAJAJ MECHANICALS
Pr: Hot Water Generators, C-582, New Friends Colony
Steam Boilers, Fluid Bed Dryers, NEW DELHI – 110 065
Tray Dryers Pr: Food Processing Equipments
chp-7.qxd 10/18/05 9:23 AM Page 60
BAKER ENTERPRISES Pr: Bakery Equipments,

23, Bhera Enclave Commercial Kitchen Equipments
Nr. Peera Garhi Refrigeration Equipments
NEW DELHI – 110 087
Pr: Bakery Machines, Machines for DAIRY DEN LTD.
Buns, Hotdogs, Cookies, Rusk & A-29, GIDC Electronic Estate
Cakes Sector – 25
GANDHINAGAR – 382 044
BANSAL FLOUR MILL Pr: Soft Ice-cream Machines,
ENGINEERS Juice Dispensing Machines,
4/5-B, Asaf Ali Road – Gr. Floor Fast Food Vans
NEW DELHI – 110 002
Pr:Grading/Sizing/Cleaning DANDEKAR BROTHERS
Machinery, Spices Cleaning Factory Area, Shivajinagar (N)
Machines Sangli – 416 416
MAHARASHTRA
CENTRAL ENGINEERING Pr: Knit Grinding Machines,
WORKS Groundnut Decorators, Grinding
380, Patel Roadways Mills, Chaffcutters, Sugarcane
COIMBATORE – 641 009 Crushers
Pr: Commercial Kitchen Grinders
DELHI INDUSTRIES
CHALLENGER PRODUCTS 4, Paharganj Lane
12, Devaki Niketan NEW DELHI – 110 055
396,402 Kitchen Garden Lane Pr: Fruit & Vegetable Processing,
B/h. Lohar Chawl Canning/Bottling Equipments and
MUMBAI – 400 002 Machinery
Pr: Pizza Ovens, Sandwich
Grillers, Idli Steamers
DELTA CORPORATION
201, Wadala Udyog Bhavan
CHEMICAL CONSTRUCTION
Naigaum Cross Road
CO. PVT.LTD.
Wadala – MUMBAI 400 031
Br: 956/57 T.H.Road
Pr: Internal Gear S.S. Pumps for
CHENNAI – 600 019
Food Processing
Pr: Poultry Feed Plant, Coconut
Processings,
Oil Refinining Plant, Solvent EASTEND ENGINEERING CO.
Extraction Plant, Vanaspati Plant, 173/1, Gopal Lal Thakur Road
Veg. Oil Refining Plant KOLKATA – 700 035
Pr: Fruits & Vegetables Processing
CONGAS FOOD SERVICES Machinery & Equipments
EQUIPMENTS (PVT.) LTD.
4, Krishanapur Road, Dum Dum ELMEC INDIA
KOLKATA – 700 028 P B No.7624,
60 Chapter Seven
chp-7.qxd 10/18/05 9:23 AM Page 61
No.37/38, Goodshet Road FLORA ENGINEERING CO.

BANGALORE – 560 053 A-4, Laghu Udyog Kendra
Pr: Packaging Machines, Heat I.B. Patel, Goregaon (E)
Sealing Shrink Packaging, Seal MUMBAI – 400 063
Machines, Bottling Machines, Pr: Industrial Ovens (for
Bag Closures Dehydrating Roasting,
Drying of Food Products)
EMERGE SYSTEMS &
SERVICES PVT.LTD. FOOD TECH ENGINEERS
A-2/4, Arjun Towers 31/A, Ghanshyam Ind. Estate
Satellite Road Veera Desai Rd., Andheri (W)
AHMEDABAD – 380 015 MUMBAI – 400 058
Pr:Waste Food Disposers Pr: Machinery for Fish/Meat, Veg.
Fruits, Frozen, Pulps, Juices
EMERSION ENGG.
ENTERPRISES FOODMAC ENGINEERS
Nr. Gate Station (PVT.) LTD.
SURENDRANAGAR – 363 001 Bassi Road
Pr: Cookers, Vacuum Batch, Sirhind 140 406 PUNJAB
Packaging Machinery, Pr: Automatic Machinery for
Break/Biscuits Machinery, Biscuits Cookie/Crackers Cream
Cutting & Wrapping Machines, Sandwiching
Bubble Gum
FORAM FOODS PVT.LTD.
ESS EMM CORPORATION 397, Swami Vivekanand Road
205-H, Vivekanand Road Vile Parle (W)
Ramnagar MUMBAI – 400 056
COIMBATORE – 641 009 Pr: Lug Cap Sealing Machines,
Pr: Baking Equipments, Ovens, RTE Snack Food Plant,
Deep Fat Fryers, Bread Slicers, Pickle/Jam making plant,
Packaging Machines
Meat Mixers, Juicers, Coffee
Grinders, Vegetable Cutters, GADEKAR & ASSOCIATES
Cutter/Mixers, Veg. Processing PVT.LTD.
Machines 304, Sector 21A
FARIDABAD – 121 001
EUROTECH FOOD & Pr: URSCHEL Food Cutting
PACKAGING MACHINES machinery, Snack Food Fryers
K-17, Ghirongi, Malanpur Ind. Area
Dist. Bhind, GWALIOR, M.P. GAYATRI FABRICATION
Pr: Nut Roasting Plant, Form-Fill- WORKS
Seal Packaging Machines, Namkeen Tarun Plastic Ind. Estate
Frying Plant Gali No.10, Mogra Road,

chp-7.qxd 10/18/05 9:23 AM Page 62
Andheri (E) HEATRAN SERVICES

MUMBAI – 400 069 180-A/131, NSP Complex
Pr: Kitchen Equipments – Pizza (Opp Royal Agencies)
Ovens, Potato Peelers, Bulk Dr. Nanjappa Road
Cookers, Deep Fat Fryers, COIMBATORE – 641 108
Griddle Plates Pr: Pizza Ovens, Bread Baking
Ovens, Heaters for Steam Boilers
GENERAL MECHANICAL
INDUSTRIES INDIAN DAIRY EQUIPMENTS
National Tankiwala Ind. Estate CO.
Steelmade Compound 364, Azad Market
Marol Maroshi road DELHI – 110 006
Andheri (E) Pr: Milk Testing equipments,
MUMBAI – 400 059 Cream Separators
Pr: Confectionery Equipments
INDO STAINLESS FABTECH
GOLDEN ENGINEERING PVT.LTD.
INDUSTRIES 439, Sidco Ind. Estate
A-87, Naraina Ind. Area Ambatur CHENNAI – 600 098
Phase – I Pr: Milk Coolers,
NEW DELHI – 110 028 Milk Chillers, Cooling Tanks,
Pr: Sealing & Cutting machinery, Milking Machines
Pouch/Bag Making Machinery,
Veg. Oil Refining Plant INDUSES FOOD PRODUCTS &
EQUIPMENTS LTD.
H P INDUSTRIES 238/B, Acharya J.C. Bose Road
2, Hoaquim Cottage, Vazir Glass KOLKATTA – 700 020
Works Rd. Pr: Paddy Processing, Parboiling,
J B Nagar, Opp. Tata Infotech Ltd. Drying equipments
Andheri (E) MUMBAI – 400 059
Pr: Conveyors, Automatic INDUSTRIAL AIDERS
Pickle/Chutney/ Jam Filling & BD-135/1, Tagore Gardens
Capping Machines NEW DELHI – 110 027
Pr: Dairy/Food Chemical
HARI OM INDUSTRIES Equipments
Dhebar Road (South)
Atika Ind. Area INTERNATIONAL FOOD
Str.No.3, Nr. Jaydev Foundry MACHINERY
RAJKOT – 360 002 A-13, Kailash Colony
Pr: Potato Cutting Machines, Dry NEW DELHI – 110 048
Fruit Cutting Machines, Banana Pr: Blanches, Groundnut, Hammer
Wafer Machines, Other Food Mill Dehydration Machinery for
Processing Machines Onion & Garlic
62 Chapter Seven
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J K ENGINEERING WORKS & processing line Potato Chips

Bus Stand Road Line, Pulp Concentration Plant
RAJPURA – PUNJAB
Pr: Bread/Biscuits Machinery K.S. ENGINEERING WORKS
Bakery machinery Factory Area, Nr. Ranjit Press
Patiala – 147 001 PUNJAB
Pr: Biscuit Plant, Papad Plant &
JWALA ENGINEERING
Bread Plant
COMPANY
12, Survey Industrial Estate KAG FABRICARES PVT. LTD.
Sonawala Cross Road No.1 A-26N, Gali No.4
Goregaon (E) Anand Parbat Ind. Area
MUMBAI – 400 063 NEW DELHI – 110 005
Pr: Fruit & Vegetable Processing Pr: Bread/Bakery Plant
& Packing Machinery such as
Fruit & Vegetable Preparatory, LARSEN & TOUBRO LIMITED
Fruit Juice Concentration Plot No.101, GIDC
Equipments, Mushroom Processing Ranoli DIST. BARODA
& Canning line, Peas Preparatory Pr: Food Processing Machinery

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CHAPTER 8
Production Programme, Plant
Capacity, Manpower Requirements
and Layout
PRODUCTION PROGRAMME
P roduction programme of a food processing unit is based on several param-

eters—local conditions, market access and technology. Your programme
should be justified in relation to:
z Market requirement and marketing strategy, e.g. fruits/vegetables are

perishable.
z Input requirements and supply schedule—seasonal nature.
z Technology and economy of scale—low BE, cottage, small and medi-

um scale in food processing.
z Minimum economic size and equipment constraints.
z Resource and input constraints.
z Performance of staff/labour.
PLANT CAPACITY
Consider these to determine the plant capacity:
z Project cost corresponding to various sizes and whether one has finan-
cial resources to meet the cost and whether one is prepared to run a risk
commensurate with the project cost
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z Minimum economically viable size of plant
z Popular plant size of existing small-scale enterprises making similar

products
z Comparative capital cost of major plant sizes, within the maximum of

the project cost one has estimated, offered by machinery producers
and their operating income/expenditure implications. A comparison of
net financial impact of individual plant sizes.
z Market size and growth prospects (biscuit market in India is growing

rapidly and a well-organised promoter may find himself unable to
meet the demand, if he chooses too small a market size)
z SSI in India gets benefit in excise duty and interest rate concessions.
But there is a legal ceiling on the investments in plant and machinery
to avail these concessions. No wonder, most plants are priced just
around that ceiling. You may choose a size matching the ceiling, for
exceeding it will deprive you of excise/interest benefits.
z The cost of expanding the plant capacity vis-à-vis setting up a

larger plant must be considered for it might be cheaper to establish
a larger plant of 5 MT per day than to expand capacity from 2 MT to
5 MT.
MANPOWER REQUIREMENT
You will need manpower for:
z Production (Workers)
z Supervision (Technicians)
z Administration, sales, miscellaneous work (Staff)
In a small unit, it is possible that the entrepreneur handles administration, sales

and technical supervision, and thus have limited manpower needs. It is, how-
ever, important to analyse workload and arrive at a gross manpower need.
Manpower requirements will be decided by manufacturing operations,

material handling and packing jobs. It is useful to classify your manpower-
need in three categories—skilled, semi-skilled and unskilled. The wage rate
for each category varies. Special attention should be paid for hiring and
retaining skilled workers.
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Look at the availability of skills at the selected location and plan for their
recruitment. It may be, for instance, difficult for a biscuit manufacturing unit in
Himachal Pradesh being established at Parwanoo to source biscuit machine
operators locally. They may have to be brought from Delhi/Chandigarh. It is dif-
ficult to find skilled people in industrially backward areas and may have to be
scouted for in nearby towns. Arrangements will have to be made for technical
and other staff also. Such employees expect better living conditions or compen-
sation and won’t move in otherwise.
SELECTION OF LOCATION
Ideally one may want to locate the project in one’s home town or native place,
but there may be a problem of high land price if that place is a large city. Usually,
the government offers investment subsidy and tax concessions to enterprises in
specified areas. One must be aware of various physical and commercial facili-
ties to run an enterprise. The hometown or native place may not be an ideal
choice. Various parameters need to be considered while deciding a location.
One will then have to select a site—a specific piece of land in a given town
where the enterprise will be located. Sometimes, one may also have to drop
a location for want of a good site.
How should one go about location/site selection? We recommend a two-

stage procedure. Practically, only a few locations will merit consideration. In
the first stage, identify two-three such locations. Identify one or two sites at
each location. In the second stage, examine each location/site according to a
six-dimension selection checklist:
z Basic consideration (development status of the town and its location

vis-à-vis enterprise needs)
z Status of physical infrastructure (power, water, etc.)
z Status of commercial infrastructure (telecom, banking, etc.)
z Status of social infrastructure (housing, health, etc.)
z Financial incentive position (investment subsidy, tax concessions etc.)
z Site-specific considerations (land price, contours, etc.)
The findings of each parameter will help decide a location.
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Sources of Information on Location

How do we get answers to the checklist? We try to tap the right sources of
information:
z Industrial Estate Officials
z Local Authorities
z Revenue Department
z State Electricity Board
z Public Works Department
z Office-bearers of Local Industry Associations
z Local knowledgeable Persons/Businessmen
z Banks/State Financial Corporations
z District Industries Centre
z Landowners, Residents of Nearby Villages/Towns, Local Opinion

Leaders, etc.
It is important to visit the location, armed with the checklist and to put down
answers to each point. One may also get water and soil tests done. One must
review the data objectively and then decide.
PLANT LAYOUT PLAN

One needs to develop a factory layout plan to decide on location of each facility
like raw material, storage, individual machines, packaging, finished goods stor-
age and quality control unit and work out the space for each. The distance
between one facility and another or one machine and another should meet tech-
nical requirements. Usually, the flows of production process and space require-
ments for material handling and manpower determine the layout. It calls for con-
siderable technical knowledge. Without the layout plan, it is not possible to
decide the gross built-up area of the enterprise. For a food processing industry,
statutory requirements like FPO and by-laws of the local authority issuing food
production license have to be fulfilled in the layout plan. Where HACCP or GMP
is required, additional care must be taken as per the rules and regulations.
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Following is a model layout plan for a jelly and jam manufacturing unit:
A Preliminary Layout Plan

20
MT
BOILER ROOM QC LAB OFFICE
RAW MATERIAL PACKING

12 & OTHER STORE
MT
2 1
FRUIT JUICE JUICE EVAPORATION &

EXTRACTION JAMS/JELLY MAKING
(Note: Layout is not to scale)
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CHAPTER 9
Business Plan Format for Tiny and
Small Enterprises
A business plan helps the entrepreneur set out objectives, targets and
benchmarks. It is also a prerequisite to get credit from lending agencies
like banks and State Financial Corporations, etc. It is a blueprint or a road map
for your business.
The purpose of a business plan is:
z to arrange thoughts logically
z to highlight resource needs and their sources
z to raise funds from a bank or other source
z to demonstrate viability of the business proposition and potential to

repay credit
z to stimulate reality and anticipate pitfalls before they occur
The business plan must answer these questions:

z What do you intend to do/how do you intend to do it/when do you
intend to do it?
z How much do you wish to borrow?
z When will you repay it?
z Will you be able to pay the interest?
z Can your business survive a setback in its plans?
z What is the security available for lending?

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z How many jobs will be created?

z Is the business proposal commercially viable?
z Will the business be profitable?
z Can the business cope with inflation?
The business plan must include the following in sequential order:
z Summary of the Project/ Project at a Glance
(The purpose of the business plan, location, resource needs, volume
of business, brief note on market, customers, promoters and financial
highlights)
z General Information
(About the business and promoter’s qualification, training and rele-
vant experience)
z Details of the Proposed Project
(Requirement of fixed and working capital, project cost and means
of finance)
z Market Potential
(A note on marketing strategy, potential customers, competition,
market size and future prospects)
z Manufacturing Process
(Step-by-step description of the manufacturing process, plant capac-
ity, expansion plans and quality control procedures, etc.)
z Production Programme/Sales Revenue
(Plant capacity, capacity utilisation, quantity produced/sold and sale
realisation)
z Cost of Manufacturing
(Cost of raw material, utilities, manpower, repairs and maintenance,
selling and distribution expenses, administrative overheads, interest
on loans availed, depreciation and any other expenses)
z Profitability Projects
(Sales, cost of manufacturing, tax liabilities, repayments, retained
profit/loss)
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CHAPTER 10
The Financials of a Project
Report
A SCAN OF FACTORS PRIOR TO PREPARATION

OF A PLAN
B efore preparing a business plan, one must analyse various factors

and related actors. This manual stresses this aspect repeatedly. This chap-
ter analyses factors existing in a district, including other enterprises, particu-
larly relating to institution-information-enterprise gaps and problems. The
findings about raw material stocking and market issues are to be incorporated
in the financials of a business plan in the context of dehydrated vegetable
unit and a grain processing enterprise. Consider Patna district in Bihar, where
the crops grown are vegetables, grains and grams. A study of enterprises in
the region shows that the food processing sector is less developed than the
agricultural sector. There are several rice and flourmills. The agricultural
resources are vital raw material for such enterprises. Milling activities
include paddy milling. The by-products are rice, bran and husk. Several
dal mills are also there. Their main activity is green and bengal gram
milling.
The State Government encourages self-help groups to set up small food

processing units making pickles, spice powder, papads etc. and these enter-
prises and others dominate the local market. Institutions/associations at local
level include industry associations, District Rural Development Agency
(DRDA) and financial institutions. According to Government of India’s cap-
ital investment criteria, units with investment up to Rs.1 crore in plant and
machinery are small-scale units. Tiny units have investment below Rs.25
lakh, while cottage or household enterprises are those operating largely out of
households.
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Lacunae in Information and Support System

Linkages
The main activity of the units here is processing of jams, pickles, papads,
spices and rice and dal milling. Within similar product mix, medium and
smaller units cater to the brand and quality conscious affluent sections.
Packaging quality is better and prices are higher. In the lower end, tiny and
cottage units vie with each other for their market share through lower price and
margins. Their market comprises low income group consumers, who buy non-
branded and low priced products. Units without their own marketing outlets
undertake distribution through local outlets. The State Government is encour-
aging Self Help Groups (SHGs) to sell their products through exhibitions.
Most products have simple packing material with the manufacturer’s name on
the pack. ‘Unorganised’ enterprises are hardly aware of food related norms.
Rice and dal mills procure raw material through commission agents. Rice
millers used to sell rice to the Food Corporation of India (FCI) and in the open
market through commission agents. In the processing sector, rice millers face
problems like high percentage of brokens and need upgraded technology. The
milling and polishing of paddy require electricity. Consumption of electricity
is high in this case. The reason is use of rewound and higher HP motors.
Most milling units face problems with institutional finance. Local suppli-
ers largely meet the machine and equipment needs of the units. Also, the main
weakness of enterprises here is the lack of testing facilities and access to
information on advanced technology, quality and food-related norms. Few
SSI units are aware of the Mysore-based CFTRI, which has excellent infra-
structure to provide consultancy on technology, equipment design etc. Yet,
options like value-added products or reducing ‘brokens’ by involving agen-
cies like CFTRI are unexplored. There is a dearth of information on packag-
ing to improve shelf life with the support of agencies like DRDA, while the
latter has backed such initiatives in other regions.
Can Policy Incentives Substitute for such

Gaps?
The Bihar Government offers several special fiscal concessions like sales tax
relief/exemption on purchase of raw material/exemption in excise duty. Fiscal
incentives include investment subsidy upto 25 % of fixed investment, subsidy
between 20% and 25% on cost of installing captive power generators, subsidy
on cost of preparing feasibility/project reports, subsidy on technical know-
how, etc. The Bihar State Industrial Development Corporation offers equity
participation in ventures.
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The State Government’s five-year policy, effective from 1.1.90, had, in fact
decided to continue capital investment subsidy to all new units set up in all
districts at a rate of 15% of the equity (maximum Rs.1.5 million). This facil-
ity is also available for expansion programmes of existing units, provided the
capacity is raised by atleast 50% of the installed capacity. Additional 5%
(limited to Rs.5 lakh) capital investment subsidy is given to units located in
notified growth centers, units promoted by NRIs and cent percent export–ori-
ented units. Additional 10% subsidy (maximum Rs.1 million) is for invest-
ment on energy saving schemes based on energy audit reports or otherwise for
small and medium units. Subsidy on power, water and such utilities is also
available.
However, although incentives are important, there are other aspects also
which are crucial. Be it Bihar or Assam, other critical parameters like raw
material availability and their prices/quality/domestic market potential/labour
availability need to be considered before structuring the project costs, means
of finance and working capital requirements. On this basis, financial state-
ments may be developed with profitability analysis. Such structuring is pre-
sented in the form of a pulse processing enterprise in Patna in sub-section 5
of this chapter. First, two cases of grain processing units are given here to help
understand how not to structure your project costs/means of finance.
INTERNAL FACTORS KILL AN ENTERPRISE:

SINHA RICE MILLS, PATNA, BIHAR
Established in 1997 near Patna, the mill was engaged in dehusking

paddy and rice shelling with an installed capacity of 2,400 MT
paddy per annum. The target market was Patna city. A term loan
was provided by the SFC and working capital by a commercial
bank. But by 2001, the unit became unviable.
Depressed Project Cost and Working

Capital Finance and hence Means of
Finance: The Culprit
The enterprise was doomed since inception due to underfinance. It faced a
problem in the first two years because of poor monsoon with the failure of
paddy crop. The paddy prices in other regions were high, while payments were
getting delayed. This resulted in a cash crunch. Then, the bank discontinued its
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cash credit. Written assurances by the promoter to liquidate overdrawal of CC

limit in monthly instalments and application for relief were not entertained. The
bankers later froze the account and the unit was tied for working capital. As a
cumulative effect of delayed payments and high input costs, the unit worked at
a very low capacity and incurred huge losses. With no institutional support for
working capital, poor capacity utilisation contributed to the tragedy.
The enterprise closed for three months. But later, bumper harvests of paddy
made purchase easier and cheaper. The promoter borrowed money from
friends in the form of unsecured loans and re-started operations. The main
problems were the failure of paddy crop for two years and subsequent
increase in input costs. The problem seems external and not internal. In fact,
even during a ‘good’ year input prices fluctuate up to 200 per cent depending
on the ‘season’ or ‘non-season’ timing of purchase. In his project report, the
promoter simply took the average of purchase price trends of previous years.
Had he taken the weighted average purchase price of the months when a price
level prevails, he would have projected a purchase price and working capital
double than what he had asked. It was his fault that he did not project his
working capital needs and margin higher. Besides, he had also misjudged the
importance of a credit strategy to push sales. In other grain milling enterprises
in the region, 70% sales were on two-month credit. His was only 50%, but he
had not even considered credit sale necessary while projecting working capi-
tal nor had included the relevant margin in his report submitted to and sanc-
tioned by the term lender and banker.
Infuse Funds as Working Capital and

Focus on the Procurement front to Revive
Manufacturing facilities of the enterprise were good, while the main raw mate-
rial, paddy, was available locally. But, resources and equipment do not make an
enterprise. He would need, in future, to reinvest all surplus earnings in business
as working capital to enable him to procure and stock raw material when prices
are low and use it over a period of time. Sustainable management is all about
taking timely decisions and procuring adequate raw material inputs.
At 60% capacity utilisation, sales of basmati, husk, rice barn etc. and paddy
milling could have touched Rs.150 lakh. At this level of operation, the enter-
prise could earn Rs.20 lakh profit by incurring Rs.130 lakh expenditure.
These expenses also cover the liabilities on term loan and working capital. In
two years, it could have earned Return on Investment (RoI) of 29%.
For a few months, the enterprise could mobilise funds from friends and rel-
atives and regularise repayment of dues of term loan and working capital.
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Over two years, the surpluses generated could replace such support. The
irregularity in existing term loan and interest since its disbursement could be
corrected during this period. With additional doses of working capital, the unit
could have become viable. Offering cash discount for cash purchase and iden-
tifying alternative sources of procurement to avoid adverse input problems in
the region are other options the enterprise could have pursued for revival.
INGTY DAL MILLS, ASSAM: EXTERNAL FACTORS

LIKE BAD DEBTS COULD ALSO AFFECT
PERFORMANCE
Ingty Dal Mills, a sole proprietory firm, was promoted by Ingty to

manufacture dal, besan and flour with an installed capacity of 12
MT/day for dal, 4 MT for besan and 8 MT for flour. This capacity
is based on 300 working days in one shift of 8 hours. The
Department of Industries and Commerce (DIC) granted permis-
sion to the unit to grind wheat in 1997. There are other Roller flour
mills in the district for wheat milling. All are operational. This is
the only unit engaged in processing of grams and other gram prod-
ucts i.e. dal and besan. The enterprise had potential for the local
market and was doing well till 2000 and could repay interest and
principal obligations to institutions in time. Later, payments were
blocked owing to recessionary conditions and the enterprise had to
be closed down due to non-recovery of receivables.
An Analysis of the Enterprise’s

Performance: Indicators of Unsustainability
The financial statements of the enterprise for the last two-three years showed
that in 2001–2002 and 2002–2003 it made ‘cash’ losses. An analysis of the struc-
tural strength and liquidity viz. ability to meet short-term liabilities, profitability
and performance of the enterprise is revealing. (Annexure II to this chapter elab-
orates on definitions of various management and accounting terms and ratios).
Structural strength: The unit had promoter’s fund of Rs.10 lakh in 2001–2002.
However, the accumulated losses by 2002–2003 were Rs.6.62 lakh. Total out-
side liabilities had been rising because of non-payment of interest liabilities.
Liquidity: The current ratio viz. current assets over current liabilities was 0.76
in 2001–2002 and it declined to 0.52 in 2002–2003, showing that current

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assets were insufficient to meet current liabilities. Current assets largely

included stock and debtors while current liabilities were creditors. Though the
promoters infused Rs.8 lakh into the business in the last three years, the lia-
bilities of creditors remained high.
Turnover: Stock of finished goods and receivables for credit sales were high
in 2001–2002 and 2002–2003.
Profitability: Since the unit was near Guwahati and the local market had good
potential, the unit did well initially and the dues were regularly paid upto 2000.
Performance deteriorated rapidly due to repayment problems from two major
traders (debtors). A revival plan could have been evolved based on analysis of
past performance and future projections on various parameters. Evolving cost of
project and means of finance for revival was possible in the past when financial
institutions were not finicky about reducing their Non-Performing Asset (NPA)
portfolio. Today, most institutions prefer one-time settlement of dues. The only
option for evolving, implementing and managing a sustainable project is to struc-
ture the cost of project and means of finance by properly estimating the cost of
raw material procurement, working capital etc, as well as income, and deciding
on the optimal means of finance through a capital structure analysis.
FINANCIAL VIABILITY OF PREPARATION AND

ANALYSIS
The analysis of financial feasibility of a project or business plan helps study
a project’s potential from financial angle. It also helps understand invest-
ment requirements and its sources. Some major components of financial
viability are:
z Cost of establishing a project
z Means of finance or sources contributing to project cost
z Capacity utilisation and income and expenditure estimates on an

annual basis
z Profitability projections on an annual basis
Income, expenditure and profit projections are made till the period of repayment
to financial institutions. An eight-year period could be ideal. Projections may be
made in such a manner that capacity utilisation improves over the years.
Parameters such as, selling price and cost of raw material may be changed every
year. It is obviously difficult to project the direction or extent of such change. It
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is normally assumed that increase in costs over time will be matched with
increase in selling price. And so, they can be assumed constant over the years.
The following sub-sections introduce major components of financial viability

preparations and assessment.
Project Cost
Project cost comprises investment for establishing an enterprise. The signifi-
cant elements of project cost are land and site development, building, machin-
ery, other fixed assets, technical know-how expenses, preliminary and pre-
operative expenses, including interest during construction period, working
capital margin and contingency costs.
Certain administrative and financial expenses are incurred before produc-

tion starts. These are Preliminary and Pre-operative (P&P) expenses. They
include rent, interest during construction, Pollution Board licence, collateral
related expenses like stamp duty, trial production expenses, deposits for utili-
ties and processing fees of financial institutions.
Contingency is a provision made for escalation of cost of equipment, for

instance, in the lag between plan preparation and project implementation.
These are the key components of project cost:
1. LAND AND SITE DEVELOPMENT: Cost of land, legal charges,

levelling and developing charges, fencing etc.
2. CIVIL WORKS: Factory building, office, warehouse, drainage

facilities, etc.
3. PLANT AND MACHINERY: Price of machinery/equipment and

excise duty, sales tax, freight, octroi and installation costs.
4. OTHER FIXED ASSETS: Furniture, office equipment like fax

machines, vehicles, laboratory and pollution control equipment,
diesel generating sets, etc.
Comparative quotations from several suppliers may be invited to convince

lending institutions about cost of plant and machinery. Institutions, sometimes,
specify ‘acceptable’ suppliers. For valuation of land and building, lender offers
loan against the ‘book price’ as per documents and not ‘market price.’ A pro-
moter should know these aspects and work closely with lending institutions.

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Means of Finance
The common means of finance are term loan, subsidy or equity. State finan-
cial or industrial development corporation and even commercial banks offer
term loan against project cost. Repayment terms vary with institutions and
with schemes. The MoFPI offers subsidy on a proportion of the cost of fixed
assets. Equity capital is promoters’ contribution or monetary contribution by
others in terms of deposits and unsecured loans. The minimum amount of pro-
moter contribution, irrespective of such private participation, could be speci-
fied at a minimum 17.5 per cent of project costs by lending institutions.
Working Capital, Relevant Margin and its

Assessment
Funds required to operate an enterprise is Working Capital. A certain minimum
amount of working capital is permanently invested in business. The entrepre-
neur will have to contribute this fund initially. Working capital margin, which
is included in the project cost, is estimated on the basis of the year when the
enterprise breaks even. The estimation of this margin depends on projections
of working capital needs:
z Projecting output over different years of operation.

z Projecting raw material input needed and unit price of each input
required to produce output and the amount of material an enterprise
must carry, given first year production targets. For the latter, the
‘lead’ time between order placement and receipt should be consid-
ered. Enterprises in the food processing sector need to carry high raw
material inventory, given the seasonality of production. Price of
inputs vary drastically and enterprises need to stock up to reap advan-
tage of favourable prices. The value of raw material, to be stocked,
should be ascertained, as also that of other consumables and packing
material to be stocked up.
z Projecting value of goods under production. This will depend on the
length of the manufacturing cycle. For such valuation, direct costs of
raw material, wages and utilities should be considered. You may ignore
depreciation, administrative and marketing expenses.
z Projecting the level of stock of finished goods. An enterprise produc-
ing in anticipation of demand, as do most processing enterprises, may
carry substantial stock of processed/semi-processed finished goods.
The quantity of such stock should be valued at cost, viz. direct and
indirect, sans depreciation.
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z Projecting total sales on credit in terms of duration or amount of out-

standing receivables. Only production cost of sales is considered.
z Projecting the monthly wages and salary expenses, power/fuel, other
utility related costs, administrative expenses, selling, repair/mainte-
nance expenses.
z The sum total of the value of investment forecasted for each of the
components of raw materials as indicated in the second bullet point
for one operating cycle, should be considered while projecting the
requirement.
Working Capital Requirement for Priya Foods, Chennai

1. Even at 30% utilisation of its capacity, the enterprise should be gen-
erating profits. As per product-mix annual capacity amounts to
745.4 tonnes.
2. Annual raw material stock in the first year of carrots, onion, potato,
garlic and ginger amounts to 223.6 tonnes. Raw material stocking
period is projected at two months. This is valued at Rs.5.41 lakh
(viz. Rs.32.43 lakh divided by 12 months and the resultant estimate
multiplied by 2).
3. Value of Consumables and / Packing Material Stock in terms of one
month stocking period:
Consumables: Rs.5,000
Packing material: Rs.19,000
4. Value of Stock of Goods in Process in the first year
a) Manufacturing cycle = 1 day
b) Quantity of goods in = 0.745 tonnes
process in the first year
c) Price of Goods in Process = Rs.17000 per tonne
d) Working capital on account of Goods in Process equals approxi-
mately Rs.13,000
5. Value of stock of Finished Goods in the first year:
a) Carrying of Finished Goods = 1/2 month
b) Price of Finished Goods = Rs.26000/-
c) Quantity of Finished Goods to be carried = 9.32 tonnes
d) Price of Finished Goods = Rs.24,000 per tonne

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e) Working capital on account of finished = Rs.2.24 lakh

Goods
6. No Working Capital is required on account of credit sale as all

sales are assumed to be on cash basis.
7. Wages and Salary for one month (first year) = Rs.70,000/-
8. Fuel, light, power, utilities for one month = Rs.1,00,000/-
(first year)
9. Administrative and selling expenses and = Rs.32000/-
repairs and maintenance for one month
(first year)
10. Working Capital requirement (total 4 to 9) = Rs.10.04 lakh/-
A financial institution may refuse working capital support for expenses either
on wages/salary or administrative expenses. Such policy may change with
time. Around 60–70% support for most working capital components may be
secured. Anticipated institutional support and working capital margin for
Priya Foods is presented in the following table:
Table 10.1 Working Capital Contributors for Priya Foods, Chennai –

Approximate Estimates (rounded off).
(Rs. in lakhs in first year)
Sr. No. Component No. of days Amount Margin Bank Loan Margin
1. Raw Material 60 5.41 50% 2.71 2.70
2. Consumables 30 0.05 30% 0.03 0.02
3. Packing Material 30 0.19 30% 0.13 0.06
4. Stock of Goods in
Process @ Rs.17,000
per tonne 1 0.13 30% 0.09 0.04
5. Stock of Finished
Goods @ Rs.24,000
per tonne 15 2.24 30% 1.57 0.67
6. Wages & Salary 30 0.70 100% - 0.70
7. Utilities 30 1.00 100% - 1.00
8. Production and
Administrative
Expenses 30 0.25 100% - 0.25
9. Repairs and
Maintenance - 0.07 100% - 0.07
Total 10.04 4.53 5.51
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Support for Working Capital and Term Loans

To sanction a term loan, a term lender may ask the promoter to submit a sanc-
tion letter of a bank approving, in principle, a working capital facility for a
project. The project appraisal pursued by a term lender is considered prior to
such ‘in-principle’ sanction. A bank may still disagree on projections on
capacity utilisation or profitability, and hence on support. Many enterprises
are still-born despite receiving working capital support as they receive and
accept less than requirements. SFCs and institutions like NSIC and many
banks offer both term and working capital loans. They offer composite loans.
An enterprise may also secure deposits or private loans at a certain interest

but a lending institution invariably insists that such private loans remain unse-
cured in terms of assets of the project as they will be mortgaged to the lend-
ing institution.
Agencies like NSIC also support hire purchase financing of machinery.

Special assistance is also available under several schemes for women entre-
preneurs. Agencies offering venture finance for risky projects with new tech-
nology also exist. For instance, there is the Technology Development and
Information Company of India (TDICI), an ICICI-sponsored company in
Bangalore. They remain partners in profits and losses. Conventional financial
norms are not followed under this financing pattern.
Extent of Loan or Debt Financing: Norms

and its Sanction and Disbursement
The extent of term loan that can qualify depends on norms of Debt-Equity
Ratio, minimum Promoter Contribution, policy of lending institutions about
margin against specific components of project costs and the fixed asset cov-
erage security margin for the lender.
A 2:1 Debt-Equity Ratio may be acceptable to a lender. The term lender has a
policy on contribution pegged between 15% to 22.5%. Component-wise norm
policy about margin against project cost may vary over time between institu-
tions. Land, building, machinery, equipment and other assets may be mortgaged
with the term lender as security. Lenders accept no security for working capital
margin or preliminary/pre-operative expenses. The promoter may have to con-
tribute as these assets cannot be disposed off to recover dues. The term loan is
pegged at 30–40% less than the value of fixed and saleable assets. While a
lender may offer extra loan against a cost overrun, assuming project viability is
not affected, it is not responsible for delay in receipt of subsidy.

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A loan application of a lender will include standard questions about the

components of a project report. There could be questions about promoter-pro-
file and experience, financial strength, personal assets/liabilities. Homework
on the project should be thorough. Also, the loan is disbursed in stages. It is
necessary to study disbursement procedures and fund-position of the lender.
The term lender may need collateral security besides the mortgage of assets
and may include personal residence or other personal assets. SIDBI supports
term loans without collateral in certain schemes.
Financial Viability of Priya Foods, Chennai

The project cost as well as means of finance for the company is given below:
Table 10.2 Project Cost—Priya Foods, Chennai
Particulars Cost(Rs. in lakh)

1. Land (6000 sq. m. @ 3.00
Rs.50 per sq. m)
2 Site Development 0.12
3. Civil Works 20.20
4. Plant and Machinery 72.51
5. Other Fixed Assets 2.80
6. Preliminary and 5.40
Pre-operative Expenses
7. Working Capital Margin 5.50
8. Contingency and Escalation @ 9.68
10% of (1) to (5)
Total 119.21
Means of Finance—Priya Foods, Chennai
Sources of Finance Amount (Rs. in lakh)

Promoter’s Equity 26.82
Term Loan 62.39
Investment Subsidy 30.00
Total 119.21
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The structuring of a project’s finances should consider the cost of capital. The
cost of capital is the minimum return expected by its suppliers. The expected
return depends on the degree of risk assumed by the investor. The cost of capital
from different sources varies depending on risk level. In the case of a promoter’s
own investment, cost of capital is the opportunity cost or the rate of return fore-
gone on an alternative project/ investment option of similar business risk.
Capacity Utilisation and Income Estimate

The table 10.3 below shows capacity and product-mix for Priya Foods, Chennai.
Table 10.3 Capacity, Product-mix and Income at Full Capacity:

Priya Foods, Chennai
Vegetable Output Price Amount

(tonnes) (Rs./tonne) (Rs. in lakh)
Onions 360.00 35000 126.00
Garlic 228.60 30000 68.58
Potatoes 92.30 32000 29.54
Peas 20.00 75000 15.00
Carrots 17.00 90000 15.30
Lady’s fingers 15.00 80000 12.00
Ginger 12.50 100000 12.50
745.40 278.92
The installed capacity based on product mix is 745.4 tonnes/year. High capac-
ity utilisation cannot be achieved in the first year. Market constraints and
teething technical problems always exist. Table 10.4 shows year-wise capac-
ity utilisation and income estimates of Priya Foods.
Table 10.4 Projected Production and Income—Priya Foods, Chennai
Year 1 2 3 4 5 6 7 8
Installed capacity 745.4 745.4 745.4 745.4 745.4 745.4 745.4 745.4
Capacity utilisation 30% 40% 50% 60% 60% 60% 60% 60%
Production (tonnes) 223.6 298.16 373.7 447.24 447.24 447.24 447.24 447.24
Income 83.68 111.57 139.46 167.35 167.35 167.35 167.35 167.35

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Sale prices may be fixed at the rate the competitors’ charge. Production esti-
mates and sale price are considered to project income. After this, expenditures
are projected. Expenditures and their basis are:
z Raw material: Proportional to production quantity.
z Consumables and packing materials: Depend on production quantity

but not proportionately.
z Power, fuel and utilities: Depend on production quantity but not pro-
portionately.
z Wages and salary: Partially related to production quantity.
z Repairs and maintenance: Expenses on plant, building and other assets

increase over time.
z Rent, taxes and insurance: These are fixed expenses.
z Administrative expenses: Fixed.
z Selling expenses: Include fixed expenses as advertising and salesmen’s

salary as well as variable expenses like commission to dealers.
z Interest on term loan: Outstanding loan due.
Loan repayment plan is fixed by the term-lending agency and interest on

working capital fixed by working capital provider. Interest rates depend on
working capital requirement, which in turn depends on sale/production quan-
tity and working capital margin.
There are cash and non-cash expenses. Cash expenses have to be projected
annually for raw material, packing, utilities, wages/salary, repairs/mainte-
nance, administrative and selling expenses, interest on loan, rent, etc. Income
minus such cash expenses is cash profit. To account profit, both cash and non-
cash expenses are deducted from income. Non-cash expenses include depre-
ciation, amortisation of P&P expenses and write-off of technical know-how
expenditure. Value of fixed assets like building, machinery and office equip-
ment depreciates every year. Depreciation in ‘accounting’ measures such
reduction in the asset value. It also helps build a cash reserve for replacement
of the existing asset later. Land’s value does not depreciate and no deprecia-
tion is provided for it. Amortisation or gradual write-off of intangible assets
are stipulated in income tax rules, viz. how and by how much every year. One
may write off P&P and technical know-how expenditures in 10 and 6 years
respectively. Contingency/escalation expenditures may be added to estimate
asset cost and depreciation is provided on the resultant amount.
86 Chapter Ten
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Depreciation can be provided by two methods, straight line (SL) and writ-
ten down value (WDV). Depreciation rates are stipulated by law and vary
according to asset and industry. The WDV method enables making substan-
tial provisions in the initial years, thereby increasing expenditure and reduc-
ing accounting profit, and hence, income tax. The SL method may be used to
prepare a projected profit statement, while the WDV may be used to estimate
income-tax obligations.
Income Tax Projections

The tax burden can be estimated as follows:
z The WDV depreciation amount is subtracted from profit before tax. A

percentage of preliminary and know-how related expenditure may be
deducted every year as per norms to correspondingly reduce taxable
profit before tax. It is also possible to carry forward losses. Losses
incurred in a particular year may be offset against profit in the follow-
ing years.
z Tax incentives offered for enterprises in a region or sub-sector should
be incorporated and subtracted.
z Tax calculation depends on tax rate, which depends on assessee status and
legal form of an enterprise’s constitution. It may be a sole
proprietary, a Hindu Undivided Family (HUF), a private or public limited
company or a cooperative society. Tax rates vary accordingly. Tax is
deducted from profit before tax (PBT) to arrive at profit after tax (PAT).
Financial Viability and Cash Flow of an

Enterprise
Viability from the lender’s point of view is the ability to repay the term loan.
A financial ratio measures the enterprise’s capacity to meet term loan and
interest. Related obligation is the Debt Service Coverage Ratio (DSCR). A
DSCR of 1 implies that the enterprise will earn cash to exactly meet all term
loan and interest obligations. DSCR of about 2 is considered adequate. The
higher the DSCR, the better the project.
There are various ratios like income-capital ratio, PBT to turnover ratio and
Return on Investment (RoI) ratio, which reflect profitability:
z A turnover capital ratio shows annual income as against project cost.
A small enterprise may earn only low levels of profit or even incur loss
with slightest of adversity.

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z PBT to turnover ratio indicates profitability of enterprise operations. A

0.08 ratio implies that even a small adverse movement in selling price
may result in a loss.
z Interest on term loan added back to PBT is the RoI. Return divided by
investment gives RoI. RoI may be estimated every year.
The projects and estimates over above sub-section 4.1 to 4.8 are the basis to
estimate cash flow. Table10.5 presents the cash flow of Priya Foods. As there
is no cash deficit, there will be no need to generate it to fill it.
Table 10.5 Priya Foods, Chennai—Cash flow
Year 0 1 2 3 4 5 6 7 8
Inflow
Equity 26.83 - - - - - - - -
Subsidy 30.00 - - - - - - - -
Term loan 62.39 - - - - - - - -
Bank loan - 4.50 1.50 1.50 1.50 - - - -
Profit - 1.17 15.64 32.44 47.87 48.32 48.77 49.22 48.67
before tax
Depreciation - 9.96 9.96 9.96 9.96 9.96 9.96 9.96 9.96
Total inflow 119.22 15.63 27.10 43.90 59.33 58.28 58.73 59.18 58.63
Outflow
Capital 113.71 - - - - - - - -
expenditure
Working capital - 10.00 13.33 16.67 20.00 - - - -
Term loan - - 12.39 10.00 10.00 10.00 10.00 10.00 10.00
repayment
Tax - 0.07 0.90 1.87 2.75 2.78 2.80 2.83 2.80
Dividend - - 4.02 5.36 5.36 5.36 5.36 5.36 5.36
Total outflow 113.71 10.07 30.64 33.90 38.11 18.14 18.16 18.19 8.16
Net inflow 5.51 5.56 (3.54) 10.00 21.22 40.14 40.57 40.99 -
Risk and Sensitivity Analysis of an

Enterprise
This analysis is the means to study business risk. Each level has a break-even
point. The higher the break-even in terms of capacity utilisation, the greater
the degree of risk. Break-even for Priya Foods is about 27.7%.
88 Chapter Ten
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At break-even level of capacity utilisation, surplus or contribution or income

minus total variable expenses equals to total fixed costs. The break-even
analysis thus implies risk analysis indicating the extent of possibility to reduce
expenses. Limited ability to do so implies a high break-even and risk level.
Through sensitivity analysis, it is possible to study the impact of changes in
the assumptions on enterprise performance and viability. The impact of
adverse changes in a few variables may be studied. The risk is low if viabil-
ity sustains despite significant changes in variables. In contrast, if a negligi-
ble fall in selling price reduces DSCR to an unacceptable level, it means a
heavy risk. A sensitivity analysis for Priya Foods is presented below. Table
10.6 considers a 10% possible fall in capacity utilisation.
Table 10.6 Sensitivity Analysis:

(Priya Foods, Chennai)
10 per cent fall in capacity utilisation throughout projected period

1. Drop in Profit Before Tax Rs.95.36 lakh
2. Drop in Profit After Tax Rs.89–99 lakh
3. Profit After Tax over 8 years Rs.185.42 lakh
4. Return on Investment (after tax) 24.66%
20 per cent rise in raw material cost throughout the projected period
1. Drop in Profit Before Tax Rs.90.80 lakh
2. Drop in Profit After Tax Rs.85.58 lakh
3. Profit After Tax over 8 years Rs.188.72 lakh
4. Return on Investment (after tax) 25%
A sensitivity analysis helps isolate variables critically determining the extent

of profits.

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Financial Viability: A Summary

Installed capacity is 745.4 tonnes/year (based on product-mix). Financial via-
bility of Priya Foods is given below:
Particulars Amount (Rs. in lakh)

Project cost 119.21
Means of finance
Promoter’s equity 26.82
Term-loan 62.39
Investment subsidy 30.00
Capacity utilisation
1st year 30%
2nd year 40%
3rd year 50%
4th year onwards 60%
Average turnover (Rs.) 145.18
Debt service coverage ratio 3.21
Turnover capital ratio 1.22
Profit before tax to turnover ratio 0.257
Cash balance at the end of 8 years (Rs.) 168.60
Break-even point 27.76%
The following sub-section elaborates the financial scheme of a project report.
A CASE ON DEVELOPING THE FINANCIAL SCHEME

OF A PROJECT REPORT OR BUSINESS PLAN
An entrepreneur plans to establish a minipulse processing unit. Advanced

‘Durham’ quality pulse is to be processed. The enterprise, to be established in
an industrial estate in Guwahati, is to have an installed capacity of 24,000kg
per annum working in double shifts (16 hours) for 310 days a year. It is to
operate at 60% of installed capacity in the first year, 70% the second year and
80% in future years. The project expense of land cost, site development and
90 Chapter Ten
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fencing is Rs.17,000. One thousand and fifty kg of whole pulse yields 1,000
kg of processed dal. The price of whole-pulse is Rs.62 a kg. It is considered
sufficient to carry raw material and finished goods stock for 30 days. The pro-
duction cycle time is two days.
The cost of constructing buildings, including warehouse, office and factory

is Rs.2 lakh, while that of stores, consumables and packing is estimated at
Rs.2 per kg of output. The stocking period of these items is believed to be the
same as that of raw material. The cost of machinery and equipment is Rs.4.6
lakh and includes excise duty. Besides, sales tax and freight, insurance and
octroi are estimated at 5%, each, of post-excise duty of machinery.
Machinery and equipment related installation expenses are around

Rs.30,000. The average finished goods inventory is estimated at one month
and 50 per cent of total sale is expected to be on credit basis, while balance
will be cash sales. The credit sale will carry credit at an average of 30 days.
Rs.4,000 is required as expense on office furniture, while other such miscel-
laneous assets are likely to cost Rs.6,000 more.
A provision of 10% each, against possible price escalation/contingencies in

fixed/miscellaneous assets can be made.
The term lender is expected to offer loan up to 75% of project cost. The State
Bank of India, the potential working capital provider, gives assistance
up to 75% for goods in process and finished goods. The bank supports up
to 70% for raw material, stores, packing material and 60% of value of
sundry debtors or accounts receivables. The rate of interest on working
capital is 17%.
Salary and wages are estimated at Rs.7,000 a month, while administrative

expenses at Rs.3,000. The power consumption will be 15 units a day. The sub-
sidised power tariff is Rs 3 per unit. The selling commission to be paid is
Rs.2.50 per kg of output. Repairs and maintenance are likely to touch
Rs.30,000 per annum for the first year and rise by Rs.2,000 thereafter.
Construction period of factory is 6 months from sanction of term loan. Term
loan interest is 12%. First registration and other preliminary expenses are put
at Rs.4,000. Rs.1,000 will be needed in trial production.
The selling price of dal is Rs.110 a kg. The income tax rates for taxable
profit is in the range of Rs.0.75 to Rs.1.0 lakh, Rs.1.00 to Rs.1.25 lakh,
Rs.1.25 lakh to Rs.1.75 lakh is 10%, 13% and 15% respectively.
To estimate the financial viability of the project, various statements are

needed: project cost, working capital, means of finance, capacity utilisation
and income projections, expenditure projections, profit and tax projections,

chp-10.qxd 10/18/05 9:31 AM Page 92
debt service coverage, profitability indicators, cash flow projections and

break-even levels.
The sub-sections below present relevant statements. The values have been
rounded off for easy comprehension.
Project Cost
Table 10.7 Project Cost Estimates (Approximate Estimates)
(Rs. in '000)
(I) Land and Fencing 17
(II) Building 200
(III) Machinery and Equipment (M & E)
* Price inclusive of duty 460

* Sales-tax @5% 23
* Freight, Insurance, Octroi @ 5% 23
* M & E installation related expenditure 30
536
Miscellaneous
(IV) Assets (total) 10
(V) Escalation & Contingencies 76

(10 percent of above total)
(VI) Preliminary & Pre-operative Expenses 5
* Firm-registration and—trial-production
* Interest during project implementation period 18
(construction and installation of machinery)
(VII) Working Capital Margin 91
92 Chapter Ten
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Table 10.8 and Table 10.9 below indicate calculations of two components:
interest during implementation and working capital margin. Their values are
incorporated in Table 10.7.
Table 10.8 Interest During Period of Implementation
Item Particulars Cost

No. Rs.
(I) Land and Site Development 17,000

Building 2,00,000
Plant & Machinery 5,36,000
Miscellaneous Assets 10,000
Preliminary and pre-operative expenses 5,000
(Excluding interest during construction)
Escalation and Contingency 76,000
Total of (1) above 8,44,000
(II) Term loan @ 70% of (I) (Rounded off) 5,91,000
(III) Implementation Period 6 months from sanction

of term loan
(IV) Average period for which interest during
construction period on term loan
should be computed is 3 months. Interest
during construction period is
(approximately) 18,000

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Table 10.9 Working Capital—Estimation

i Capacity utilisation and output: 60%, or 14,400 kgs. per annum.
ii Annual raw material requirement: 15,120 kgs @ Rs.62 per kg.
iii Desirable raw material carrying level: one month
(15,120 ÷ 12 viz. 1260 kgs.)
iv Value of raw material which will be kept in stock
(1260 kgs. × Rs.62 viz. Rs.78,120)
v Annual value of stores, consumables, packing-material
(Rs.2 × 14,400 kgs) is Rs.28,800. Desirable carrying level:
one month value of stores, consumables and packing material
(Rs.28,800 ÷ 12) as stock equal Rs 2,400
* Goods in Process:
a) Manufacturing Cycle: 2 days
b) Quantity under manufacturing cycle
14400 × 2
= 96 kgs
300
c) Direct cost of 14,400 kgs. of output
Raw Material (15120 × 62) 9,37,440

Stores, Consumables, Packing (14400 × 2) 28,800
Wages (Rs.7000 per month × 12) 84,000
Power (15 units per day × 300 days × Rs.3.00 per Unit) 13,500
10,63,740
d) Direct cost of one kg. of output: Rs. 73.87

e) Direct cost of goods in process (96 Kgs.): Rs. 7,092
* Finished goods:
i) Desirable carrying level: One month (1200 kgs)

ii) Direct cost of 1200 kgs. of output (1200 kgs. × Rs. 73.87):
Rs. 89,000 (approximately)
iii) Other Indirect Cost (one month) Administration: Rs. 3,000
94 Chapter Ten
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Selling Expenses: Rs. 6,000

Interest on Term Loan (Adhoc) Rs. 6,000
Interest on Working Capital Loan (Adhoc) Rs. 3,000
Rs. 18,000
iv) Total (direct + indirect) cost of 1200 kgs of output

excluding depreciation Rs. 1,07,000
* Account Receivables:
i) Cost of a month's sale Rs. 1,07,000
ii) The cost of credit sales (50 per cent) Rs. 54,000
* Wages and Salary (one month) Rs. 7,000

* Electricity (one month approximated) Rs. 1,000
* Administrative, Selling Expenses, Repairs Rs. 9,000
and Maintenance
Gross Working Capital Requirement (approximately)
Component Rs.
Raw Materials 78,000

Store, Consumables &
Packing Materials 2,000
Goods in Process 7,000
Finished Goods 1,07,000
Account Receivables 54,000
Wages and Salary 7,000
Electricity 1,000
Administrative and Selling Expenses,
Repairs and maintenance 9,000
Total 2,65,000

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The working capital requirement and margin that may have to be contributed
by promoters is in Table 10.10 below:
Table 10.10 Working Capital—Contributors
(Amount in Rs.)
Sr. Requirement Quantity Total Norm for Amount of Promoter's
No. Bank Bank Contribution
Assistance Assistance (Margin)
1 Raw material 1260 kgs 78000 70% 54600 23400
(@ Rs. 62 per Kg.)
2 Store, Consumables — 2000 70% 1400 600
and Packing
Materials
3 Goods in Process 2 days 7000 75% 5250 1750
4 Finished Goods 1200 107000 75% 80250 26750
5 Account 600 kgs 54000 60% 32400 21600
Receivables
6 Other Expenses (Wages 1 month 17000 None None 17000
7000, Power 1000,
Admn. 3000, Selling
3000, Repair &
Maintenance 3000)
Approximate Total 265000 174000 91000
The project cost is summarised in the following Table 10.11:
Table 10.11 Project Cost
(Rs. in ’000)
Land and Fencing 17
Building 200
Machinery and Equipment 536
Miscellaneous Assets 10
P & P Expenses 23
Escalation & Contingency 76
Working Capital Margin 91
Total 953
96 Chapter Ten
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Means of Finance
Financial institutions expect promoters to contribute a minimum of 17.5%
of total project cost, irrespective of extent of subsidy. Subsidy, therefore,
reduces equity required to such extent and balance goes to reduce debt. For
the purpose of illustration, subsidy is not considered. Hence, at 3:1 debt-
equity ratio, the term loan is about Rs.7.15 lakh while equity contribution
is Rs.2.38 lakh.
Capacity Utilisation and Income Estimate

A capacity utilisation and income estimate statement is in Table 10.12 below:
Table 10.12 Capacity Utilisation and Income Estimate
Installed capacity is 24000 kgs / year. Capacity utilisation and output esti-
mates in this circumstance are:
Year 1 2 3 4 5 6 7 8
I Capacity 60% 70% 80% 80% 80% 80% 80% 80%
Utilisation
II Output 14400 16800 19200 19200 19200 19200 19200 19200
Selling Price: Rs.110 per kg.
Income Estimates given selling price of Rs.110 per kg. is

(Rs in ‘000)
I Year 1 2 3 4 5 6 7 8
II Income 1584 1848 2112 2112 2112 2112 2112 2112
Expenditure Estimates
The expenses, raw materials, power, fuel and utilities, stores, consumables and
packing material are considered proportional to production levels. The
expenses also include salary and wages. The term lender offers a moratorium
period of 2 years when interest payments alone have to be made.
The estimates the promoter needs to incorporate in the case of depreciation is

given below. It is necessary to consult an updated tax manual to incorporate
prevailing rates.

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Table 10.13 Depreciation Rate (Indicative)
Assets WDV Rate Sl. Rate

1 Buildings 10% 2.3%
2. Machinery and 33.33% 8.33%
Equipment
3 Miscellaneous Assets 10% 2.3%
Table 10.14 below, proportionately allocates about Rs.76,000 of contingency

and escalation @ about 10% to various assets.
Table 10.14 Allocation of Contingency And Escalation To Various

Depreciable Assets
(Rs. in ‘000)
Item Value Allocation Value of assets for
depreciation
purposes
Building 200 20 220
Machinery and 536 54 590
Equipment
Miscellaneous Assets 10 1 11
98 Chapter Ten
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Calculation of Depreciation [WDV]
(Rs. in ‘000)
Item Value Rate Year wise Depreciation
[%]
1 2 3 4 5 6 7 8
Building 220 10.00% Dp. Val 220 198 178 160 144 130 117 105
Depn 22 20 18 16 14 13 14 11
W.D.V. 198 178 160 144 130 117 105 95
Machinery 550 33.33% Dp. Val 550 367 245 163 109 73 49 38
Depn 183 122 82 54 36 24 16 11
W.D.V. 367 245 163 109 73 49 38 22
Equipment 40 100.00% Dp. Val 39.6 - - - - - -

Depn 39.6 - - - - - -
W.D.V. 0 - - - - - -
Miscellane- 11 10.00% Dp. Val 11 10 9 8 7 6 5 4

ous Assets Depn 1 1 1 1 1 1 1 0
W.D.V. 10 9 8 7 6 5 4 3
The income and the expenditure statements help get a statement of profit
before tax. To compute tax obligations, depreciation levels also need to be
estimated. Depreciation rules may change with time. Section 32 of the
Income Tax Act lays down income tax rates. Under the SL method, depreci-
ation rate is applied to the asset’s annual acquisition value every year. Under
WDV, it is computed on the written down value or an asset’s balance value.
Further, 8.33% SL method rate and 33.33% WDV rate is almost the same, as
both reduce the asset value to almost nil in 12 years.
While preparing income, expenditure and profit statement, the SL method

is used. Under this, the annual depreciation value remains constant and
hence it is possible to judge the impact of annual improvement in capac-
ity utilisation on profit. To compute taxable profit, it is necessary to use WDV.

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Profit is income less direct and indirect expenses during production.

Depreciation is an amortised expense and written off. Other expenses have also
to be deducted to assess profit before tax. Fixed assets entail depreciation. P&P
expense requires amortisation. This is for preliminary and not pre-operative
expenses like on establishment and interest during construction, which can be
added to fixed asset value and then depreciation computed. For business plan
purposes, P&P expenses may be amortised or deducted from profit in 10 equal
annual instalments as amortisable. All preliminary and prospective expenses,
including interest during construction, are amortised at 10% p.a. in this project.
The term loan repayment is made over the year. Repayment is not made in
the beginning of the year. Therefore, half repayment amount is deducted from
the outstanding term loan at the beginning of the year and the interest is com-
puted on the balance amount.
Table 10.15 The Solution Interest Burden And Loan Repayment
Term Loan : 715

Working Capital loan (First Year) : 174
I. Interest on Term Loan

(Rs. in ‘000)
Year 1 2 3 4 5 6 7 8
Outstanding 715 715 650 520 390 260 130 Nil
Term Loan
Term Loan - 65 130 130 130 130 130 Nil
Repayment
During the Year
Interest @ 86 82 70 55 39 23 8 Nil
12% p.a.
II. Interest on Working Capital Loan

Year 1 2 3 4 5 6 7 8
Working 174 203 232 232 232 232 232 232
Capital Loan
Interest 30 35 39 39 39 39 39 39
@ 17%p.a.
III. Total Interest (Term-Loan and Working Capital)

Year 1 2 3 4 5 6 7 8
Total Interest 116 117 109 94 78 62 47 39

Payment
100 Chapter Ten

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Table 10.16 Expenditure Statement: The Solution

(Rs. in ‘000)
YEAR/ Year Year Year Year Year Year Year Year
EXPENDITURE 1 2 3 4 5 6 7 8
Raw Material 987.4 1093.7 1249.9 1249.9 1249.9 1249.9 1249.9 1249.9
Stores, Consumables & 28.8 33.6 38.4 38.4 38.4 38.4 38.4 38.4
Packing Materials
Power 162 189 216 216 216 216 216 216
Wages and Salaries 84 96 108 116 124 132 140 146
Repairs and 30 32 34 36 38 40 42 44
Maintenance
Rent, Taxes & 12 13 14 15 16 17 18 19

Insurance
Dt. Admn. Expenses 24 26 28 30 32 34 36 38
Selling Exp. 36 42 48 48 48 48 48 48
Interest on Term Loan 86 82 70 55 39 23 0 0
Interest on Working 30 35 39 39 39 39 39 39
Capital
Depreciation 92 52 52 52 52 52 52 52
P&P Amortisation 2 2 2 2 2 2 2 2
Total (approximate) 1524 1696 1899 1897 1894 1891 1889 1894
Tax Computation for the Project

Tax computation for the project is shown in the following table:
Table 10.17 Tax Computation (Illustrative) (Rs. in ‘000)
YEAR 1 2 3 4 5 6 7 8
Profit before tax 60 152 213 215 218 221 223 218
Excess of WDV over SL (154) (91) (49) (19) - (14) (23) (30)
Depreciation carry (94) (94) (33) - - - - -
forward loan
80 HHA Deduction - - (26) (39) (44) (47) (49) (50)
80 I Deduction - - (21) (31) (35) (38) (39) (40)
Taxable Profit (94) (33) (84) (126) (139) (150) (158) (158)
Tax - - (8) (19) (23) (23) (25) (25)
Profit After Tax 60 152 205 196 197 198 198 193

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Table 10.18 The Solution: Profit Statement

(Rs. in ‘000)
YEAR 1 2 3 4 5 6 7 8 Total
Income 1584 1848 2112 2112 2112 2112 2112 2112 16104
Expenditure 1524 1696 1899 1897 1894 1891 1889 1894 ---
Profit before Tax 60 152 213 215 218 221 223 218 1520
Tax - - (8) (19) (23) (23) (25) (25) ---
Profit after Tax 60 152 205 196 197 198 198 193 ---
Non-cash 94 54 54 54 54 54 54 54 --
-
Expenditure
(Depreciation and
P&P Amortization)
Cash Profit 154 206 259 250 251 252 252 247 ---
Debt Service Coverage Ratio

The single most important parameter is an enterprise’s ability to repay term-
loan in terms of principal and interest. A financial ratio, which measures
enterprise capacity to meet term-loan-cum-interest and other long-term com-
mitments/obligations, is called Debt Service Coverage Ratio (DSCR). The
term lender prefers a project in which even if there is some slide back in pro-
jected performance, it will generate enough cash surplus to meet the dues. A
DSCR of 1.7 may be considered as minimum.
Table 10.19 The Solution: Debt Service Coverage Ratio

(Rs. in lakh)
YEAR 1 2 3 4 5 6 7 8 Total
i. Cash Accrual 154 206 259 250 251 252 252 247 1624
ii. Interest on Term- 86 82 70 55 39 23 8 - 363
loan (pre-tax)
iii. Term-loan – 65 130 130 130 130 130 – 715
Repayment
(post tax)
iv Debt-service 2.79 1.96 1.60 1.66 1.72 1.80 1.88 1.83
Coverage Ratio -
(i+ii/ii+iii)
v Average Ratio
Need be Estimated
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Loan Repayment is Post-Tax, but interest is tax deductable. Hence all

inflows/outflows be shown uniformly on pre-tax or post-tax basis.
Profitability Indicators
Table 10.20 Profitability Ratios For The Project
YEAR 1 2 3 4 5 6 7 8 Total
Turnover 1.66 1.94 2.22 2.22 2.22 2.22 2.22 2.22 2.11
Capital Ratio
Profit Before 0.44 0.08 0.19 0.10 0.19 0.19 0.19 0.10 0.09
Tax to Turnover
Cash Flow Statement

Cash Flow Projection for the Project is presented in the next table. There is a
cash surplus every year. And, the enterprise will have a cash balance of
Rs.12,58,800 at the end of seven years upon meeting loan-repayment and
interest liability.

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Risk or Break-even Analysis

The projected cash-flow statement and break-even analysis for the project is
presented below.
Table 10.21 Projected Cash Flow Statement

(Rs. in ‘000)
Details Constn. 1 2 3 4 5 6 7 8 9
CASH INFLOW
Prom. Cap. 238 - - - - - - - - 238
Term Loan 715 - - - - - - - - 715
Working Cap. - 174
Prof. B.T. - 60 152 213 215 218 221 223 218 -
Depreciation - 92 52 52 52 52 52 52 52 -
P&P Amortn. - 2 2 2 2 2 2 2 2 -
Other - - - - - - - - - -
Total 953 328 206 267 269 272 275 277 272
CASH OUTFLOW
Increase in Working Cap. - 265 - - - - - - - -
Cap. Exp. 862 - - - - - - - - -
Tax - - - 8 19 21 23 25 25 -
Repmt. of TL - - 65 130 130 130 130 130 130 -
Dividends
Total 862 0 65 138 149 151 153 155 25 -
Surplus/Deficit 91 63 141 129 120 121 122 122 247 -
Cum. Surplus 91 154 249 424 544 665 787 909 1156 -
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Table 10.22 The Break-even Analysis
I. Variable Cost per Unit (kg) of Output (Rs.)

Raw Material Consumption 65.10
Stores, Consumables and Packing Materials 2
Power 11.25
Wages and Salary (50% of total annual bill) 2.92
Selling Expense 2.50
Interest on Working Capital 2.08
Total 85.85
II. Fixed Cost (Rs.)
Wages and Salary (50% of total annual bill) 42,000
Repairs and Maintenance 30,000
Rent, Taxes and Insurance 12,000
Other Administrative Expenses 24,000
Interest on Term Loan 86,000
Depreciation 92,000
P&P Amortisation 2,000
Total 2,88,000
III. Selling Price per Unit (kg) of Output Rs. 110
IV. Contribution per Unit (kg) of Output Rs. 24.15
(Selling price less variable cost)
V. Break-even Point (Unit of Output)
Fixed Cost (Rs.) 2,88,000
Contribution per Unit of Output (Rs.) 24.15
(or)11590 Units (kg)
VI. Break-even Point (Capacity) 11,590 kgs. (48.3%)

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Table 10.23 The Sensitivity Analysis

(Rs. in ‘000)
Possibility No.1: Drop of 5% in selling price with costs remaining

unchanged
(i) Income under basic plan (8 years) 16104

(ii) Revised income estimate (8 years) 15299
(iii) Revised profit before tax 715
(iv) Revised tax burden (ad hoc) 45
(v) Revised profit after tax 670
(vi) Revised cash profit 1142
(vii) Revised debt service coverage ratio (same loan 1.4
repayment schedule)
1142 + 363 1505

=
715 + 363 1078
Possibility No. 2: Capacity-utilisation levelling off at 70%
(i) Income under basic plan (8 years) 16104

(ii) Revised income estimate (8 years) 14520
(iii) Revised expenditure estimate (8 years) 13454
(iv) Revised profit before tax 1066
(v) Tax burden 70
(vi) Revised profit after tax 996
(vii) Revised profit after tax 1468
(viii) Revised debt service coverage ratio 1.7
1462 + 363 1825
=
715 + 363 1078
The financial viabilities of the project therefore indicate that the project
is viable. However, a five per cent drop in selling price rendered the project
unviable.
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Table 10.24 Financial Viability of Project

i. Installed capacity 24000 kgs of yarn
per year
ii. Project cost Rs. 9,53,000
iii. Means of Finance
Term Loan Rs. 7,15,000
Promoters Capital Rs. 2,38,000
iv. Capacity Utilisation
First Year 60%
Second year 70%
Third year and thereafter 80%
v. Average Annual Turnover Rs. 20,13,000
vi. Debt Service Coverage Ratio 1.82
vii. Turnover Capital Ratio 2.11
viii. Profit before Tax to Turnover Ratio 0.09
ix. Cash Balance at the end of 8 years Rs. 12,58,000
x. Break-even Point 48.3% of Installed
Capacity
xi. Sensitivity Analysis Findings
(a) 5% drop in selling price DSCR of 1.4 project
unviable
(b) Capacity utilisation levelling off at 70% DSCR of 1.7 project
viable.
BUSINESS PLAN FORMAT FOR TINY AND COTTAGE UNITS
1.0 General
Name of the Firm:
Project:
Location:
Type of the Organisation: Proprietary/Partnership
Address:
Name of the Chief Promoter (s):
Birth Date:

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1.1 Educational Qualifications
SSC Degree/ Institute Major Year of

or Below Diploma Subject Passing
1.2 Special Training
Training in Institute Duration Achievement/Remark
1.3 Work Experience (Past and Present)
Organisation Position Nature of Work Duration
1.4 i. Promoter's Annual Income: Rs.______________(Last year)
ii. Assets owned by the promoter(s):
Movable Rs.-----------
Immovable Rs.-----------
2.0 Details of the Proposed Project: Manufacturing
2.1 Land and Building
Sr. No. Particulars Area Required Total Value Remarks

1. Land
2. Building
Total
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2.2 Machinery/Equipments
Sr. No. Description Nos. Required Rate (Rs.) Total Value

(Rs.)
Total
2.3 Misc. Fixed Assets
Sr. No. Particulars Nos. Required Rate (Rs.) Total Value

(Rs.)
Total
2.4 Preliminary and Pre-Operative Expenses
Sr. No. Particulars Amount (Rs.) Remarks

1. Interest during Implementation
2. Establishment Expenses
3. Start-up Expenses
4. Misc. Expenses
Total
2.5 The Working Capital
Sr. No. Item Duration Total Value (Rs.)
Year-I Year-II Year-III

1. Raw-material Stock
2. Semi-finished
Goods Stock
3. Finished Goods Stock
4. Sales on Credit
5. Production Expenses
Total

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2.6 Total Cost of the Project

Sr. No. Particulars Total Value (Rs.)
1. Fixed Capital
(Total of item nos. 2.1,2.2,2.3)
2. Working Capital
(Total of item no. 2.5)
3. Preliminary & Pre-operative Expenses
(Total of item no. 2.4)
Total
2.7 Means of Finance

1. Own Investment
2. Term Loan
3. Working Capital Loan
4. Any Other Source
Total
3.0 Market Potential
3.1 Present demand and supply of the product

3.2 Competition
3.3 Target clients/selected market area
3.4 Marketing strategy (USP)
4.0 Manufacturing Process
a) Technical know-how availability

b) Step-by-step description of the manufacturing process (R.M-F.G)
c) Attach process flow chart (if required)
5.0 Production Programme
i) No. of working days per annum -

ii) No. of working shifts (8hrs) per day -
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iii) Installed capacity (annual) -
iv) Utilised capacity (%): -
Year - I -
Year - II -
Year - III -
Sr. No. Items Quantity Produced Per Year Capacity Utilisation (%)
5.1 Sales Revenue
Year Items Quantity Sold Rate Per Sales Realisation

Per Year Unit (Rs.) (Rs.)
Total
5.2 Raw Material (Annual Requirement)
Sr. No. Items Quantity Rate (Rs.) Total Value (Rs.)
Total
5.3 Utilities
Sr. No. Particulars Annual Expenditure (in Rs.) Remarks

1. Power/Electricity
2. Water
3. Coal/Oil/Steam
4. Any Other Item
Total

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5.4 Man Power (Salary/Wages)
Sr. No. Particulars No. Wages/Salary Annual

per Month (Rs.) Expenses (Rs.)
1. Skilled
2. Semi-skilled
3. Unskilled
4. Office Staff
5. Any Other
Total
5.5 Repairs and Maintenance

Sr. No. Particulars Amount (Rs.)
Total
5.6 Selling and Distribution Expenses

1. Publicity Expenses
2. Travelling
3. Freight
4. Commision
5. Misc.
Total
5.7 Administrative Expenses

1. Stationery & Printing
2. Post/Telephone/Telegrams
3. Entertainment Expenses
4. Misc.
Total
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5.8 Interest
Year Outstanding Loan Interest Instalment Balance
Amount (Rs.) (Rs.) (Rs.) (Rs.)
5.9 Depreciation
Sr. No. Type of Asset Cost of Asset Expected Life Depreciation
6.0 Profitability Projections
Sr. No. Particulars Amount (Rs.)

Year-I Year-II Year-III Year-IV Year-V
A. Sales Realisation
B. Cost of Production
i) Raw Materials
ii) Utilities
iii) Salary/Wages
iv) Repairs & Maintenance
v) Selling & Distribution
Expenses
vi) Administrative Expenses
vii) Interest
viii) Rent
ix) Misc. Expenses
Total
C. Less: Depreciation
D. Gross Profit/Loss (A–B)
E. Income-tax
F. Net Profit/Loss
G. Repayment
H. Retained Surplus
Debt Service Coverage Ratio*

Break-even Level of Activity*
Return on Investment*
Larger projects require projected financial statements like projected

Profit and Loss Accounts and Balance Sheets.*
* These concepts are covered in the next Chapter.

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CHAPTER 11
Assessing Financial Viability of the
Project
C ertain tools help us assess the financial viability of any project where
investment is contemplated. We will discuss some tools in brief.
Tools that determine the adequacy of the surplus:
RETURN ON INVESTMENT (ROI)
What is Return?
As we know, a project collects funds from two sources for long-term invest-
ment. The amount collected is used to create assets and operation, which
generates surplus for the enterprise. Surplus is required to be distributed to
the contributors of the funds. Interest is the compensation given to contri-
butors of borrowed capital, and net profit and depreciation are given to
contributors of own capital. Why should one add depreciation here? Though
depreciation reduces profit, it is a non-cash provision made to recover the
original investment. Thus, the cash profit of the enterprise is increased to
the extent of depreciation.
The total surplus generated by the project over its entire life has to be averaged
to find out yearly return. This yearly return, when calculated on the total invest-
ment needed for the project, tells us about the Return on Investment. Simply
speaking, this ratio tells us the surplus-generating capacity of the investment.
One must know how much RoI a viable project must generate. This is an
important question that needs to be answered to know the financial viability.
The simple rule to assess the viability is that the RoI must be greater than the
cost of investment.
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First look at the investment cost. Investment comprises two major compo-
nents:
i. Borrowed Capital (Normally taken as loans from banks and financial

institutions)
ii. Own Capital (Normally contributed by entrepreneurs)
It is simple to calculate the cost of borrowed capital. Any borrower is

required to commit the fixed service charge, i.e. interest at the time of sanc-
tioning loan. Thus, the interest becomes the cost of borrowed capital. Interest
is tax-allowed expense and, therefore, its effective weight is reduced by the
actual rate of tax paid by the borrower. The entrepreneurs may have more
than one investment alternative and under such conditions, the opportunity
cost becomes the cost of entrepreneur’s capital.
Acceptance Rule
For the investment to be financially viable, the RoI should be greater than the
cost of investment.
DEBT SERVICE COVERAGE RATIO (DSCR)

Running an enterprise with financial support from banks/financial institu-
tions, requires their loans to be repaid with interest. Therefore, an entrepre-
neur must generate surplus, adequate to meet repayment obligations. The
DSCR is a tool used to determine this. Its formula is:
Net profit + Interest (on long term loans) + Depreciation

Interest (on long term loans) + Principal Loan
Acceptance Rule
A project is considered financially viable if the cumulative DSCR during
repayment period is at least 2:1
BREAK-EVEN POINT (BEP)

This is another important tool. The break-even point is the level of activity
where the total contribution is equal to the total fixed cost. Contribution is the
excess of sales over variable cost, i.e.;
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Contribution = Sales – Variable Cost
Contribution is a type of surplus that the business generates after paying fully
the variable cost from the sales revenue.
The break-even point is the point of activity where all costs (variable as well
as fixed) are recovered from the sales values. The business, therefore, does
not make profit or loss. For any activity below break-even, the business will
incur loss, while it makes profit when activity is above it. So, when the busi-
ness fully pays for the total fixed cost from contribution, the unit can be said
to have achieved the BEP. When contribution fully pays for fixed cost, the
business is said to have achieved break-even. Several formulae have been
evolved to calculate break-even:
1. Total Fixed Cost

(In quantum of activity) Contribution per unit of activity
2. Total Fixed Cost

× Selling Price per unit
(In sales value) Contribution per unit of activity
Acceptance Rule
The BEP indicates the risk involved in a project. Normally, enterprises
achieving break-even sales level at a higher capacity utilisation, are consid-
ered to be more risky, while those achieving it at a lower level of capacity util-
isation are safer. The thumb rule is lowering the break-even betters the propo-
sition.
DEBT-EQUITY RATIO
This ratio indicates the extent to which the promoter’s funds are leveraged to
procure loans. The formula of DER is:
Total long-term debt

Total promoter’s funds (includes subsidy)
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A higher debt equity ratio indicates more risk due to a higher fixed cost of
interest. The BEP of such enterprises will go up.
Acceptance Rule
It would be desirable to maintain the DER at a judicious level, say, varying
between 2:1 and 3:1 for small and micro enterprises.
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CHAPTER 12
Bookkeeping and Accounting and
Financial Statements
A ny business activity, be it manufacturing, servicing or trading, involves

monetary transactions. At the end, if the total money received is more
than the total money spent, the business is said to have generated a ‘surplus’
or `profit'. If it is otherwise, the business is said have been in ‘deficit' or
`loss'. Every business intends to generate a surplus or profit. Therefore, the
promoter(s) is/are always interested in knowing the outcome of the economic
activity.
Several transactions take place in the course of business. To remember all

of them is almost impossible. A business therefore, needs to record all such
transactions to find out the outcome of the business activity. A methodical and
systematic science has been developed which helps the promoter record all
economic transactions properly and know the outcome of the business deal-
ings. This science is called "Financial Accounting."
Accounting is a name given to the system which measures, records, analy-

ses and reports the effect of business transactions and events taking place
in a business enterprise. Since such reporting is in financial units, the
system is also known as financial accounting. It has been defined as the
art and science of recording business transactions in a methodical manner
so as to show (a) the true state of affairs of a business at a particular time,
and (b) the surplus or deficiency, which has accrued during a specified
period.
Thus Financial Accounting involves (a) data recording and (b) data
presenting technique used for recording various transactions. This is
called ‘Bookkeeping’. The data recorded is summarised and systemati-
cally arranged and presented to various users in the form of Financial
Statements.
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WHAT IS BOOKKEEPING?
‘Bookkeeping’ is one of the functions of financial accounting. Bookkeeping
entails maintaining proper records and books for recording complete details
of transactions made during the course of business. Business transactions can
be classified into several major activities/groups e.g. sales, purchases, assets,
etc. Separate books for recording transactions pertaining to these activities
are maintained, registering in them the details of respective transaction. This
exercise is called Bookkeeping.
Why are Books of Accounts Maintained?

It is extremely important to have the latest information about what is hap-
pening in business. This helps in taking appropriate and timely action. A doc-
tor needs details about the physiological conditions of a patient to diagnose
the illness, its causes and its remedies. Just like that the owner of the business,
creditor, or banker needs to know about the latest financial health of the busi-
ness for taking suitable decisions about the future course of action.
Bookkeeping helps in maintaining and providing the latest financial position
of the business and, therefore, assumes great significance. It is advisable to
maintain books of accounts for the following reasons as well:
z They provide up-to-date information about the business.
z They reflect the outcome of transactions made during the period under
review.
z They give information about the state of affairs of the business at

regular intervals.
z They help governments and other authorities to decide about the

incidence of various taxes.
z They help analyse the performance of the business.
z They help compare the performance of several business firms.
The accounting information of business is required not only by the owner of

the business but by various other parties too. They are the government, sup-
pliers, creditors, bankers, investors, shareholders, auditors, etc. They depend
on the information prepared by financial accounting for taking various deci-
sions pertaining to their activities. This emphasises the need for writing
books of accounts in a systematic and methodical way. Though, as an owner
of the business one has the prime responsibility to write and maintain the
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books of accounts, one is not free to write the accounts, the way one likes. They
have to be written as per the norms and principles of techniques and systems of
accounting used the world over. There are a few accounting techniques avail-
able for writing accounts but the Double Entry Bookkeeping System has uni-
versal acceptability and credibility. It is the modern and scientific accounting
system designed to reflect the true and fair position of the business.
DOUBLE ENTRY BOOKKEEPING

The concept of the Double Entry Bookkeeping System is based on the princi-
ple that every economic transaction has two effects, which are exactly oppo-
site to each other. Any transaction can have only two effects: ‘debit’ and
`credit', and they are always equal. As a result, at the end of the accounting
period, the accounts should ‘tally’, meaning thereby that both ‘total debits’
and ‘total credits’ should tally with each other. Double entry bookkeeping is
designed in such a way that, while entering the credit entry of a particular
transaction, the details of the corresponding debit entry is also given.
Writing Accounts Under Double Entry

Bookkeeping
Transactions
In business, the promoter does several transactions. The effect of these trans-
actions on the business is recorded in the books of accounts. Only those trans-
actions, which result in exchange of money or exchange of goods or services,
whose value can be measured in monetary terms, need accounting treatment.
Transactions may be of the following nature:
a. Exchange of goods against cash/credit
b. Exchange of services against cash/credit
c. Exchange of assets against cash/credit
d. Payment of cash to creditors
e. Receipt of cash from debtors
f. Exchange of goods against assets
g. Exchange of goods against services
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Thus several types of transactions take place in business and they form the start-
ing point of accounting. There are two types of transactions: (i) Cash transactions
and (ii) Credit transactions. Cash transaction results in exchange of cash, while
credit transaction results in an obligation to pay / receive cash in the future.
Accounts
Transactions involve ‘accounts’. Each transaction has to be done through an
‘account’. There are total three types of accounts:
i. Personal Account or Individual account: This group of accounts

includes all accounts of individuals and organisations like a firm, a
corporate entity, a society, etc.
ii. Assets Account: This group of accounts covers all types of assets.
Assets mean all those investments made in tangible or intangible
form of assets, which have utility value or use value. Moreover,
these assets can also be disinvested and converted into cash.
iii. Income-Expenditure Account: This group of accounts encompasses

all accounts, which represent revenue income and revenue expendi-
ture of the business.
Rules of Debit and Credit

In the Double Entry Book-Keeping System, each transaction has two effects.
One is called ‘Debit’ and the other is called ‘Credit’. Thus each transaction
has minimum one debit effect and minimum one corresponding credit effect.
There are prescribed rules for debiting and crediting various accounts, which
are classified under three major groups as mentioned above. These rules form
the basis of accounting under Double Entry Bookkeeping System. Below
given are these rules:
(i) Rule for ‘Personal Accounts’: "Debit the Receiver and Credit the Giver".
Explanation: Any person involved in a transaction can either be a receiver of

cash, asset or services, or be a giver of cash, asset or services, without any
immediate consideration. The account of the person who receives is debited,
while the account of the person who gives is credited.
(ii) Rule for ‘Assets Accounts’: "Debit what comes in and Credit what goes out."
Explanation: In business, goods and assets come and go. Whenever assets or
goods come in the business its respective account is debited, while in the case
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of assets or goods going out of the business as a result of a transaction, its

respective account is credited.
(iii) Rule for ‘Income-Expenditure Accounts’: "Debit Expenses and Losses

and Credit Incomes and Gains"
Explanation: This group of accounts covers all revenue income and expendi-
ture accounts. All those revenue incomes that are generated during the course
of the business are credited in their respective accounts and all such revenue
expenditures incurred during the course of the business are debited in their
respective accounts.
Steps for Identifying Debit or Credit Effect
i. Decide whether the transaction needs accounting treatment.
ii. Determine which are the two accounts involved in the transaction.
iii. Apply the rules of debit and credit for the identified accounts as per
their classification.
iv. It should be seen that there couldn’t be both ‘credits’ and both ‘deb-
its’ in a single transaction. Every transaction must have a debit and a
corresponding credit.
The Journal Entry

A journal entry is the first noting in the books of accounts whereby debit and
credit effects of each transaction on accounts are identified and noted along
with proper description. Journal entries help in preparing several books of
accounts. A suggestive format for maintaining a journal and writing journal
entries is shown below:
Journal entries in the book of M/s. .................

Date Particulars Ledger Debit Credit
Folio No. (Amount) (Amount)
Explanation:
i. Date: The journal entries must be written date-wise in a chronologi-

cal sequence. It is ideal to make entries of the transactions daily. The
year, month and date of the transaction for which journal entry is
made should be mentioned in the ‘Date’ column.

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ii. Particulars: In this column, for each transaction, the account to

be debited and the account to be credited is mentioned. The account,
which is to be debited, is written first followed by the account to
be credited. A word ‘To’ precedes the name of account, which is
credited.
E.g. “Bank Account debited to Sales Account”
Subsequent to debiting and crediting the appropriate accounts, a brief narra-

tion of the transaction, if possible, in one line only is written in the
‘Particulars’ column.
iii. Ledger Folio No.: In the third column the folio number of the
respective accounts in the ledger is mentioned. This helps trace the
posting of each transaction and verify it.
iv. Debit and Credit: In this column the amount by which the respec-
tive account is debited and credited is mentioned. At the end of every
page the total of debits and credits is made and is carried forward to
the next page.
Ledger
A ledger is a book, which contains details of all accounts in which transac-
tions are made. It contains a condensed and classified record of all business
transactions transferred from the journal or subsidiary books. Ledger is the
principal book under the double entry bookkeeping system. It contains up-to-
date information about all accounts, e.g. if an owner wants to know how much
he/she owes to Mr. X, he/she can learn this from Mr. X’s account maintained
in the Ledger. If such accounts were not maintained in the ledger, the owner
would be required to go through each transaction involving Mr. X to find out
the payment liability. This exercise is time-consuming and inconvenient. For
businesses with a sizeable number of transactions, it is impossible to scan the
primary books or journal every time to know the exact position of any
account. It is, therefore, very important to maintain a ledger.
A suggestive format for maintaining an ‘account’ in the ledger is given

below:
Debit Side Account (Name of the Account) Credit Side
Date Particulars Folio Amount Date Particulars Folio Amount
No. No.
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Explanation:
It may be noticed from the format that a ledger account has two sides: debit
side (left-hand side) and credit side (right-hand side). Each side is further
divided into four sections, viz. ‘Date’, ‘Particulars’, ‘Journal Folio Number’and
‘Amount’.
i. Date: In this column, the date of a transaction as entered in the jour-

nal book from where the entry is brought to the ledger account, is
mentioned.
ii. Particulars: In this column the name of the account in which the
corresponding credit or debit (under the double entry principle) is
found, is mentioned.
iii. Journal Folio Number: In this column the page number of the jour-
nal book or subsidiary book from where the transaction is brought to
the account is mentioned.
iv. Amount: In this column the amount, with which the account is deb-
ited or credited, is mentioned.
Transactions
Transactions are entered, as and when they occur in the journal book or sub-
sidiary books. From there necessary records are created in the ledger. The
process of transferring entries from the journal or subsidiary books to the
appropriate accounts in the ledger is called ‘posting’. If an account is debited
with an amount as entered in the debit column of the journal book, the same
is posted to the debit side of the account in the ledger. Similarly, if an account
is credited in the journal book, it is posted to the credit side of the account.
While posting entries, care should be taken to see that the name of the account
in which the entry is posted is not mentioned in the column of particulars.
Instead the name of the other account, which is affected under the same trans-
action, should be mentioned. While posting, each entry to the debit side of an
account should begin with the word ‘To’ (in the ‘Particulars’ column) and
each entry to the credit side should begin with the word ‘By’.
Balancing the Account

Normally as it happens, the total of all postings to the debit side and the credit
side of the account is not equal. The amount by which the total of any side
(debit or credit) is greater than the total of the other side is called the ‘balance’

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of the account. If the total of debit side is greater, then the balance is
called ‘debit balance’ and if it is vice versa, it is called ‘credit balance.’ For
example:
i. Following accounts always have debit balances:
a. Cash Account/Bank Account
b. Asset’s Account
c. Debtor’s Account
d. Stocks Account
e. Revenue Expenses Account
f. Losses Account
g. Investment Account
ii. Following accounts always have credit balances:
a. Creditor’s Account
b. Revenue Income's Account
c. Gain’s or Profit's Account
d. Bank Loan Account
e. Interest Received
As seen earlier, the journal book is the first book required to be kept in
the business where all transactions are recorded. It is the book of original
entry. Likewise, the ledger is the most important basic book, which records
all accounts. So long as the transactions in the business are limited and
simple, it is possible to enter all transactions first in the journal book and
then in respective accounts in the ledger. But with the size of a business
and the number of transactions increasing, it becomes difficult to maintain a
journal book for all the transactions and post them in the ledger. Under such
circumstances, it becomes necessary to divide the journal books and the
ledger into some separate subsidiary books, each of which is reserved for
recording one particular class of transactions, e.g. purchase book, sales book,
cash book, etc.
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BOOKS NEEDED TO BE MAINTAINED FOR A SIMPLE

ACCOUNTING SYSTEM
For a small industrial enterprise, the usage of the simple financial accounting
system is recommended. Such businesses must maintain a set of books as sug-
gested below. By doing so, the businesses can get a correct and fair picture of
the activities speedily.
a. Journal: All transactions (except those which are to be recorded in sub-

sidiary books) are properly recorded here.
b. Subsidiary books (for journal)
i. Purchase book: In the purchase book, all transactions pertaining to

purchases, be it on credit or by cash, are recorded. Transactions of pur-
chase returned are also recorded here separately.
ii. Sales book: In the sales book, all transactions pertaining to credit or
cash sales are recorded. Transactions of sales returned are also
recorded separately.
iii. Ledger: All accounts involved in the transactions recorded in the jour-
nal or its subsidiary books are maintained here, and necessary posting
is made.
iv. Cash book: The cashbook is a subsidiary book of the ledger where the
account of `cash' is maintained. Transactions involving ‘petty cash’ are
also posted here separately.
v. Bank book: The bankbook is a subsidiary book of the ledger where the
account of `bank' is maintained.
vi. Stock register: This is a register where the movement of stock is
maintained.
The formats for the journal book and the ledger accounts were discussed ear-
lier. The formats of subsidiary books like purchase book, sales book, cash-
book, bankbook and stock register are given here along with a brief explana-
tion for its usage.
Format of a Purchase Book
Date Party's Bill Ledger Item Quantity Rate Amount Terms

Name No. Folio Name
Total

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Explanation:
i. Date: The date on which the purchase was made is mentioned here.
ii. Particulars: The name of supplier of the materials and necessary

details of the invoice are mentioned here.
iii. Bill No.: The number of the bill of the supplier is mentioned here.
iv. Ledger Folio: The folio number of the ledger, on which either the
supplier's account (if credit purchase) or cash account (if cash pur-
chase) is credited, is mentioned here.
v. Amount: The net amount of purchase made is mentioned here.
vi. Terms: The terms of purchase, as on cash terms or credit terms, etc.,
are mentioned here.
Format of a Sales Book
Date Party's Bill Ledger Item Quantity Rate Amount Terms

Name No. Folio Name
Total
Explanation:
i. Date: Date on which the sales transaction took place is mentioned here.
ii. Particulars: The name of the purchaser of the goods and necessary
details of the transaction are mentioned here.
iii. Bill No.: The number of the bill given to the buyer is mentioned here.
iv. Ledger folio: The folio number of the ledger on which either the
buyer account (if credit sales) or cash account (if cash sales) is deb-
ited is mentioned here.
v. Amount: The amount of sales done through this transaction is men-

tioned here.
vi. Terms: The terms of sales transactions like, ‘cash or credit’ is men-
tioned here.
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Format of a Cash Book
Debit side(Receipts) Credit side (Payments)

Date Particulars Journal Amount Date Particulars Journal Amount
Folio Folio
Closing
Balance
Total Total
Explanation:
The ‘Cash Book’ is nothing but a cash account. Like other asset accounts, this
account is also required to be mentioned in the ledger. However, because of
the multiplicity of cash transactions and for convenience, cash account is not
maintained in the general ledger but maintained as a separate account and
named as cash book. All the rules of maintaining accounts in ledger apply to
this account also.
Format of a Bank Book
Debit side(Receipts) Credit side (withdrawals)

Date Particulars Journal Amount Date Particulars Journal Amount
Folio Folio
Closing
Balance
Total Total
Explanation:
Like cash book, bank book is nothing but the bank account required to be
maintained in the ledger. Since the transactions involving bank are increas-
ing, it is convenient and proper to keep a separate bank account where all
transactions involving the bank are posted. This account, therefore, is sepa-
rately maintained and named bank book. All rules of making posting in other
ledger accounts are applicable to this account as well.

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Format of a Stock Register
Date Particulars S.B./ P.B. Receipts Issues Balance

Folio No.
Quantity Value Quantity Value Quantity Value
Explanation:
The stock register is very similar to the stock account. It tells us about the
actual closing stock available with the business to help the owner physically
verify and place further orders.
i. Date: The date of transactions resulting in movement of stock is put

here.
ii. Particulars: The details of transactions due to which the stock

changes, are narrated here.
iii. Sales Book/Purchase Book Folio number: The page number of the
sales book or purchase book where the particular transaction result-
ing in addition or deduction of stock is put here.
iv. Addition: Purchase resulting in addition of stock. The quantity of

stock purchased along with its value is put here.
v. Deduction: Sales result into deduction of stock. The quality of

stocks sold along with its value is put here.
vi. The Closing Balance: The amount that accrues, as a result of addi-
tion or deduction is calculated and put here.
vii. Itemwise separate page is to be kept in Stock Register.
FINANCIAL STATEMENTS
The main objective of bookkeeping is to record all transactions according to
the accepted accounting principles and practices. But only proper recording
of transaction is not adequate. Unless the various accounts recorded are prop-
erly classified for summary, it becomes difficult to visualise the total picture
of the business. It is, therefore, very essential to summarise all those account-
ing details recorded by maintaining various books and to present them in an
acceptable form. Financial statements are such forms in which all accounting
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details are presented for the use of various users like owners, bankers, credi-
tors, tax authorities, government, suppliers, etc. With the support of the
financial statements, one can understand the financial position of the business
meaningfully.
Various Financial Statements

Normally at the end of the financial period for which the accounts are writ-
ten, the ledger accounts are closed and balances are drawn for preparing final
accounts. The statements known as final accounts are:
i. Trial Balance
ii. Profit and Loss Account
iii. Balance Sheet
(i) Trial Balance
The first step in preparing final accounts is to prepare a trial balance. The main
objective of the trial balance is to determine the arithmetical accuracy of the
entries made in the ledger. The fundamental principle of Double-Entry
Bookkeeping is that every transaction has two equal and opposite effects. It
means, every debit has a corresponding credit and vice-versa. Hence the total
of all those accounts having a ‘debit balance’ and the total of all those accounts,
which have a ‘credit balance’ at the end of the accounting period, should tally.
They should be equal; otherwise the accounts would be inaccurate.
While preparing the trial balance, the accounts, which have debit balances,
are placed in the debit column, while the accounts, which have credit bal-
ances, are placed in the credit column. In every trial balance, the total of the
debit column must tally with the total of the credit column, unless some mis-
takes in posting, casting or compilation have been committed. The agreement
of the totals of debit and credit columns of the trial balance ensures only arith-
metical accuracy of the accounting, but it is not a conclusive evidence of the
accounting accuracy as there are some mistakes which a trial balance cannot
detect. A suggestive format of trial balance is given below:
Format of a Trial Balance
Trial Balance of M/s. ------------ for the year -----------

Ledger Folio Name of Account Debit closing Credit
balance closing balance
Total

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Explanation:
i. Ledger Folio: In this column the folio number (page number) of the
ledger or its subsidiary books where a particular account is maintained, is
written. This helps in crosschecking the accuracy of accounts.
ii. Name of Account: In this column, the name of the account whose closing
balance is being brought to the trial balance is written.
iii. Debit/Credit closing balance: In these columns, the amount of debit and
credit closing balances of individual account is mentioned.
It may be noted that a single account at a time cannot have both debit
and credit balances. If an account has a debit closing balance the amount
of that balance is mentioned in the debit column of the trial balance
against the name of the respective account. Similarly, if an account has
a credit closing balance, it is mentioned in the credit column of the trial
balance.
iv. Total: When the closing balances of all accounts from the ledger and its
subsidiary books are brought to the trial balance one by one, the totals of
account in the debit column and the credit column are made and tallied.
One should remember that:
a. Closing balances of all ‘Assets Accounts’, ‘Revenue Expenses

Accounts’ and ‘Losses Accounts’ are always debit balances.
b. Closing balances of all ‘Revenue Income Accounts’ and ‘Gain

Accounts’ are always credit balances.
c. Accounts of individuals to whom the business owes money always

have credit balances and accounts of individuals who owe money to
the business always have debit balances.
d. ‘Loan (Taken) Accounts’ always have credit balances.
e. ‘Cash Account’ always has debit balance.
If the totals of debit and credit columns of the trial balance do not agree, it
means there is some mistake in preparing the accounting books. The mis-
take/s, traced and rectified would tally the trial balance. However, there are a
few mistakes, which cannot be detected by trial balance, such as:
i. Errors of Principle
ii. Errors of Omission
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iii. Errors of Commission
iv. Compensating Errors
After the trial balance is tallied, necessary adjustment entries need to be made
for closing stocks, outstanding expenses, transfer provisions, etc.
(ii) Profit and Loss Account
The preparation of a trial balance is a step towards preparing the remaining

two more important financial statements correctly viz. profit and loss account
and balance sheet. However, its use remains to a great extent limited to detect-
ing arithmetical accuracy. From the financial accounting system, the user
would like to know about the profitability of the business operations for a
specified period and the position of the business at the end of the period. A
statement that reveals the profitability of the business operations for the
accounting period is called ‘Profit And Loss Account' (P & L A/c.).
Contents of P & L A/c.
From all the balances mentioned in the trial balance, the accounts that are for
revenue expenditures, revenue type of losses, revenue income and revenue
type of gains, are taken to P&L A/c. By doing so, it becomes possible to learn
whether the business at the end of the accounting period has generated a sur-
plus or deficit. All accounts of revenue income and gains are brought to the
credit side, whereas all accounts of revenue expenditure and losses are
brought on the debit side of the P&L A/c. If the total income is more than the
total expenditure, the business is said to have generated surplus or profit. But
if the total expenditure exceeds the total income during the accounting period,
the business is supposed to have made losses. If the P & L A/c. has a credit
balance, it signifies net profit and on the other hand, if the P&L A/c. has a
debit balance, it denotes net loss of the business during the accounting period.
A suggestive format of the profit and loss account is given below:
Format of Profit and Loss Account
Profit and Loss A/c. of M/s.-------------------------;

For the period -------------------------
Debit side Credit Side
Particulars Amount Particulars Amount
Net Profit Net Loss
(Balance Figure) (Balance Figure)
Total: Total:

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Explanation:
i. Particulars: In this column, on the debit side, names of the following

accounts are mentioned individually:
a. All accounts of revenue expenditure

b. All accounts of revenue losses
Names of the following accounts are mentioned on the credit side:
a. Sales account
b. Closing stock account (if it is adjustment entry)
c. Accounts having credit effect of adjustment entries
ii. Amount: The respective amount of debit and credit balances of the
accounts, which are brought to the P&L account, is mentioned in these
columns on debit and credit side against the names of their respective
account head.
One should also keep in mind the following:
i. The P & L account contains all “Income and Expenditure Accounts”.

Not a single account from either individual, ‘Personal Accounts or
Asset Accounts’ can be brought to the P & L account. All accounts of
‘Income and Expenditure Accounts’ get closed when they are brought
to P & L account while the balance of ‘Personal/Individual Accounts’
and ‘Asset Accounts’ get carried forward to the subsequent year. All
income generated and expenditure incurred during the whole period is
mentioned in the P & L account.
ii. Subsequent to bringing all balances of the accounts to concerned

debit and credit sides, the total of their balances is made. If the total
of credit side is more than the total of debit side then the business is
said to have made net profit. The amount by which the total of the
credit side exceeds the total of the debit side of the P&L account is
called the ‘Net Profit’ generated during the accounting period.
Similarly, the amount by which the total of the debit side exceeds the
total of the credit side of the P & L account is called ‘Net Loss’ gen-
erated by the business during the year. Thus both figures of net profit
and net loss are balancing figures. Adding them up with the total of
the debit or credit side as the case may be would make the totals of
both the sides tally. This is a situation where total income is equal to
total expenses.
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Thus, if
i. Total of credit side > Total of debit side = Profit

of P&L A/c. of P&L A/c.
ii. Total of credit side < Total of debit side = Loss

iii. Total of credit side = Total of debit side = No profit/no loss

Net profit or net loss is the result of business operations during the account-
ing period. They are transferred to the balance sheet where the capital account
representing the financial involvement of the promoter is increased or
decreased appropriately by the figures of net profit or net loss.
iii. Balance Sheet
A balance sheet is a statement prepared for measuring the true financial posi-
tion of a business at a certain point of time (normally the last day of the
accounting period). It is essential to prepare the balance sheet (i) to ascertain
the results of business operations during the accounting period; and, (ii) to
know the financial position of the business at a particular point of time. The
profit and loss account serves the former objective while the balance sheet
serves the latter.
As seen earlier, all the accounts pertaining to the group of ‘Income and
Expenditure Accounts’ are taken to the profit and loss account. The accounts
pertaining to the remaining groups, viz. “Personal or Individual Accounts”
and “Assets Accounts” are brought to the balance sheet. The accounts brought
to the balance sheet are not closed. Their closing balances at the time of the
balance sheet are carried forward to the subsequent accounting period. They
are shown on the balance sheet only to apprise the users about the position of
the accounts at that particular time. The balance sheet should be prepared in a
prescribed format so that its understanding becomes easy. Given below is a
prescribed format of the Balance Sheet.

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Balance Sheet – Format
Balance Sheet of M/s. ----------------------- as on ------------
Liabilities Amount Assets Amount

Capital Fixed assets
Reserves & Surplus Investments
Secured Loans Loans and Advances
(Received) (Given)
Unsecured Loans & Current Assests
Deposits
(Received) (i) Stocks ------
Current Liabilities (ii) Debtors ------
Provisions (iii) Cash ------
Profit Accumulated (iv) Bank ------
Balance ------
Accumulated Losses
Total Total
Explanation:
It has been explained above that the balance sheet reveals the true and
fair position of a business at a particular point of time. Thus, the balance
sheet gives the details of what the business owns and what the business
owes. Whatever the business owns is termed as ‘Assets’ and whatever the
business owes is termed as ‘Liabilities’. All liabilities are mentioned on
the left-hand side of the balance sheet, while assets are shown on the right-
hand side.
Assets
Assets are classified under the following broad heads:
i. Fixed Assets: Fixed assets are of permanent nature and the underlying
motive of the business is to utilise them for value addition. The total value
of fixed assets at the close of the accounting period is shown on the bal-
ance sheet.
ii. Current Assets: Current assets, unlike fixed assets, do not permanently
maintain the same form. In whichever form they may be, they are likely to
be converted in the form of ‘Cash’ or ‘Bank Balance’ in the near future.
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Normally, the following accounts are termed as ‘Current Assets’:
a. Stocks: Closing stock of raw material, work in process and finished

goods.
b. Debtors: Individuals from whom money is to be received (as a result

of business transactions) are termed as ‘Debtors’ or ‘Accounts Recei
vables’ and are also current assets.
c. Cash Balance & Bank Balance: Cash lying with the business, and
balance in the bank account of the business are current assets.
iii. Investments: At times, the business invests in some other businesses or

companies. The value of these investments is an ‘Asset’ for the business.
iv. Loans & Advances (given): At times, the business gives loans or
advances to third parties. The value of such loans or advances is an
‘Asset’. These are not similar to debtors (current assets) where the indi-
vidual becomes liable to pay to the business due to his buying the product
of the business on credit terms.
v. Fictitious Assets: Fictitious assets are not real and tangible assets but are
debit balances of accounts like P&L A/c., Accumulated Losses A/c.,
Expenses Not Written Off A/c., etc.
Liabilities
On the liabilities side, all ‘Personal’ and ‘Individual’ accounts to whom the
business owes are mentioned. Liabilities can be classified in the following
broad groups:
i. Capital: Money invested by the promoter is a liability. Business

owes that much to the owner.
ii. Reserves and Surplus: Accumulated profit, which is not withdrawn
and is a part of profit, which is reserved for some specific purposes,
also belongs to the promoter(s). Business owes that much to the
owner. They are, therefore, liabilities.
iii. Secured Loans (received): Amount of loans taken by the business
is a liability for the business. These loans are secured against some
assets, which are offered to the institutions/person who have given
loans, as security or collateral.
iv. Unsecured Loans and Deposits (received): Like secured loans,
these loans are also liabilities for the business. However, these loans
are not secured.

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v. Current Liabilities: They are short-term funds taken for financing

current assets. Normally, they are credits offered by suppliers of raw
materials and the working capital loans given by banks.
vi. Provisions: They are liabilities in which case payment provision has
been made by the business from the profits, e.g. provision for tax
liability.
The total of the ‘Liabilities’ side and the ‘Assets’ side of the balance sheet
must tally. If they don’t, there are some mistakes in preparing the final
accounts, which should be detected and rectified.
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CHAPTER 13
Costing and Pricing of Products
A realistic and comprehensive knowledge on costing and pricing is

required to build the financial management capabilities of entrepreneurs.
This will help in running the enterprise successfully and enable one to give
due importance to costing and pricing.
Costing can be defined as the process of determining how much it costs to

produce and sell a product or service. Costing is very important as the cost of
a product can decide its profit or loss. There are two costs involved in deter-
mining the cost of a product / service, i.e. direct cost and indirect cost.
Direct Cost: The cost of those items that become part of the end-product are
known as direct costs such as; raw material, labour, packing material, etc.
Indirect Cost: All expenses incurred in running a business and that which
cannot be directly identified with the end product are indirect costs.
The following exercise could be used as an illustration for a better under-

standing of the concept:
Costing Exercise
Mr. Ramesh is processing mangoes for a pickles manufacturer, who subcon-

tracts the work, when he has orders for processing less than 5000 Kgs of
mangoes. The pickles manufacturer provides raw mangoes, but all other
inputs and expenses are the responsibility of Mr. Ramesh.
To process 200 Kgs of mangoes, he needs spices and oil costing Rs.400/- and
fuel costing Rs.100/-. In addition, he pays Rs.2000/- to workers who work
for eight hours, processing 2000 Kgs of mangoes.
Calculate the price that he must quote per Kg of processing, to the pickle
manufacturer if he decides to earn a minimum of Rs.20 per Kg for himself.
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The correct solution is:
Cost of processing 200 Kgs of Mangoes Rs.
i) Spices and Oil 400.00

ii) Fuel 100.00
iii) Labour 200.00
700.00
He wants to earn Rs.20/- per Kg. Hence for 200 Kgs targeted earning is
Rs.4000/- (i.e. 200 × 20). Therefore, he must quote Rs.700.00 + Rs.4000
= Rs.4700/- for 200 Kgs i.e. Rs.23.50/- per Kg.
Please note that more the price the higher the profitability. But then proper
pricing should be done so that the product finds a place in the market. Cost
reduction is the other way to earn more profit. For pricing a product/ service,
an entrepreneur could exercise the following options:
A desired margin may be added to the total cost to obtain the

price.
All possible efforts are made to make the price competitive and keep
it less than the existing brands.
In this option the price is kept exorbitantly high. This happens in a

monopoly market.
PRICING AND COSTING: MARGINAL COST BASED

PRICING AND CONTRIBUTION ANALYSIS
As an illustration of select costing and pricing tools, consider the case of a
small enterprise—Fardeen Products, making and selling sheekh-kebabs in
plastic packs and casseroles to institutions and directly to consumers. The
break-even level of the activity can be estimated from the data in table
below. The performance of the enterprise has remained stagnant in the last
four years.
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Indicative break-even level of activity of Fardeen Products, Ahmedabad
Sr. No. Particulars Variable Cost Fixed Cost

1 Raw Material 10,00,000.00 -
2 Electricity 64,000.00 3,000.00
3 Labour 4,80,000.00 -
4 Interest - 1,80,000.00
5 Other Expenses 10,000.00 1,000.00
6 Depreciation - 1,000.00
Total 15,54,000.00 1,85,000.00
Selling price (SP) of the product on a per kilogramme basis is about Rs. 120.
The enterprise manufactured about 15,000 kg. of the product in a year on full
capacity basis. It had sales of about Rs. 22 lakh a year.
Break-even point (BEP)
Total Fixed Cost (Rs. 1.85 lakh) × 100=75.20% of capacity

=
Revenue (Rs. 18 lakh)—Total Variable Cost (Rs. 15.54 lakhs)
Beyond break-even, viz. production of about 11,280 kg, it is on the basis of

marginal costs that pricing may be made, as all fixed costs are covered at
break-even level. Similarly, the ideal product mix of an enterprise may be
identified by means of a contribution analysis as illustrated in the example
below. Avidhoot enterprises has 6 product lines. The enterprise makes stuffed
paratha, macaroni and pasta items and sells them to institutional customers
viz. to private offices, foreign banks etc. in Ahmedabad, Gujarat. The table
below provides line wise data on variable costs, selling price and output of
the enterprise for the year 2001–2002.
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Avidhoot Enterprises—Current Product-mix & Variable Cost (VC)

Statement of the Enterprise
Sr. Product - mix Qty. Sold VC/Unit SP/Unit Total VC Total Sales
No. (nos.) (in Rs.) (in Rs.) (Rs. lakh) (Rs. lakh)
1 Stuffed Paratha 30000 45.00 50.00 13.50 15.00

(Veg)
2 Stuffed Paratha 40000 52.00 60.00 20.80 24.00
(Non-Veg.)
3 Macaroni (Veg.) 10000 17.00 20.00 1.70 2.00
4 Macaroni 7000 20.00 25.00 1.40 1.75
(Non-Veg.)
5 Pasta (Veg.) 20000 16.00 20.00 3.20 4.00
6 Pasta (Non-Veg.) 25000 17.20 25.00 4.30 6.25
Total 132000 44.90 53.00
The enterprise has a fixed cost of Rs.6.10 lakh per annum. Hence, profits had
been Rs.2 lakh in the year 2001–2002. Upon study of the performance of the
enterprise and customer and consumer demand pattern in the last 4 years, it
was observed that there are certain market constraints. About 1,00,000 nos. of
Stuffed Parathas (Vegetarian and Non-Vegetarian, each), about 25,000 nos. of
Macaroni (Vegetarian and Non-Vegetarian, each) and about 50,000 nos. of
Pasta (Vegetarian and Non-Vegetarian, each) is the maximum demand for
respective product lines a year. Further, a minimum demand or order size of
5000 plates or numbers of each product line prevailed. The enterprise has the
capacity to make and sell maximum 1,45,000 plastic packs and casseroles of
all products in total.
Wide variations in demand prevailed in different years. Nevertheless, the

enterprise has to make and offer all the six product lines as to remain a ‘one-
stop’ shop of its clients.
How could the enterprise resolve its problem of stagnant sales perform-
ance?
If the enterprise is to optimise its product mix (and profits) it should ide-
ally sell about 1,00,000 plates of Stuffed Parathas (Non-Veg.), 30,000
plates of Pasta and 5,000 plates of other products. That is, products with
maximum contribution need be sold. The table below presents the revised
product mix.
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Avidhoot Enterprises—Ideal Potential Product-mix of the Enterprise

(in Rs.)
Sr. Product-mix SP/ VC/ C/ Qty. Contribution VC SP

No. Unit Unit Unit
1 Stuffed Paratha 50 45 5.00 5000 25,000 2,25,000 2,50,000

(Veg.)
2 Stuffed Paratha 60 52 8.00 1,00,000 8,00,000 52,00,000 60,00,000
(Non-Veg.)
3 Macaroni (Veg.) 20 17 3.00 5,000 15,000 85,000 1,00,000
4 Macaroni 25 20 5.00 5,000 25,000 1,00,000 1,25,000
(Non-Veg.)
5 Pasta (Veg.) 20 16 4.00 5,000 20,000 80,000 1,00,000
6 Pasta (Non-Veg.) 25 17.20 7.80 25,000 1,95,000 4,30,000 6,25,000
1,45,000 10,80,000 61,20,000 72,25,000
If the enterprise can restructure its product mix, it can increase its profit to
Rs.4.95 lakh per year—more than double. However, an ideal selling incentive
in terms of credit and discount strategy may have to be evolved as to encour-
age sales of product with higher contribution and in turn encouraging such
shift in the product mix. A similar analysis of the market mix with regard to
marketing channels and customer or consumer segments or groups need be
made and ideal strategies to encourage sales through such channels or cus-
tomer or consumer segments that yield high contribution may be evolved. For
instance, direct sale to consumers may yield higher contribution to a small
‘Curry base and Instant Noodles’ manufacturer. In which case, a strategy of
employing salespersons to directly market products to consumers with appro-
priate selling incentives to both the sales persons and consumers may be an
ideal sales strategy than adopting the conventional dealer-retailer channel.
The cases on product mix, pricing, contribution analysis presented in this

chapter indicates scope for sales promotion incentives and pricing of products
as also on product positioning, packaging and real differentiation. The learn-
ing from these cases may be incorporated to enhance rigour in terms of mar-
ket-mix and market-plan as a part of an efficient preparation of a business or
project plan.
Costing and Pricing of Products 143

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CHAPTER 14
Working Capital Management
I n the chapters on ‘Planning an SSI Unit’ and ‘ Business Plan’, a discussion

was made on the fixed capital and the working capital. Every business
needs investment to procure fixed assets, which remain in use for a longer
period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed
Capital’. Business also needs funds for short-term purposes to finance current
operations. Investment in short term assets like cash, inventories, debtors etc.,
is called ‘Short-term Funds’ or ‘Working Capital’. The ‘Working Capital’ can
be categorised, as funds needed for carrying out day-to-day operations of the
business smoothly. The management of the working capital is equally impor-
tant as the management of long-term financial investment.
Every running business needs working capital. Even a business which is

fully equipped with all types of fixed assets required is bound to collapse
without (i) adequate supply of raw materials for processing; (ii) cash to pay
for wages, power and other costs; (iii) creating a stock of finished goods to
feed the market demand regularly; and, (iv) the ability to grant credit to its
customers. All these require working capital. Working capital is thus like the
lifeblood of a business. The business will not be able to carry on day-to-day
activities without the availability of adequate working capital. The diagram
shown on the next page clarifies it:
Working capital cycle involves conversions and rotation of various con-

stituents/components of the working capital. Initially ‘cash’ is converted into
raw materials.
Subsequently, with the usage of fixed assets resulting in value additions, the
raw materials get converted into work in process and then into finished goods.
When sold on credit, the finished goods assume the form of debtors who give
the business cash on due date. Thus ‘cash’ assumes its original form again at
the end of one such working capital cycle but in the course it passes through
various other forms of current assets too. This is how various components of
current assets keep on changing their forms due to value addition. As a result,
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Cash Creditors
Debtors Raw Material
Value Value
Working Expenses
Addition Addition
Finished Goods Work in Process
they rotate and business operations continue. Thus, the working capital cycle
involves rotation of various constituents of the working capital.
While managing the working capital, two characteristics of current assets

should be kept in mind viz. (i) short life span, and (ii) swift transformation
into other form of current asset. Each constituent of current asset has com-
paratively very short life span. Investment remains in a particular form of cur-
rent asset for a short period. The life span of current assets depends upon the
time required in the activities of procurement; production, sales and collec-
tion and degree of synchronisation among them. A very short life span of cur-
rent assets results into swift transformation into other form of current assets
for a running business. These characteristics have certain implications:
i. Decision regarding management of the working capital has to be

taken frequently and on a repeat basis.
ii. The various components of the working capital are closely related
and mismanagement of any one component adversely affects the
other components too.
iii. The difference between the present value and the book value of
profit is not significant.
The working capital has the following components, which are in several
forms of current assets:
Stock of Cash
Stock of Raw Material
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Stock of Finished Goods
Value of Debtors
Miscellaneous current assets like short term investment loans &

advances
The working capital needs of a business are influenced by numerous factors.

The important ones are discussed in brief as given below:
i. Nature of Enterprise
The nature and the working capital requirements of an enterprise are interlinked.
While a manufacturing industry has a long cycle of operation of the working
capital, the same would be short in an enterprise involved in providing services.
The amount required also varies as per the nature; an enterprise involved in pro-
duction would require more working capital than a service sector enterprise.
ii. Manufacturing/Production Policy
Each enterprise in the manufacturing sector has its own production policy,
some follow the policy of uniform production even if the demand varies from
time to time, and others may follow the principle of 'demand-based produc-
tion' in which production is based on the demand during that particular phase
of time. Accordingly, the working capital requirements vary for both of them.
iii. Operations
The requirement of working capital fluctuates for seasonal business. The work-
ing capital needs of such businesses may increase considerably during the busy
season and decrease during the slack season. Ice creams and cold drinks have
a great demand during summers, while in winters the sales are negligible.
iv. Market Condition
If there is high competition in the chosen product category, then one shall
need to offer sops like credit, immediate delivery of goods etc. for which the
working capital requirement will be high. Otherwise, if there is no competi-
tion or less competition in the market then the working capital requirements
will be low.
v. Availability of Raw Material
If raw material is readily available then one need not maintain a large stock of
the same, thereby reducing the working capital investment in raw material
stock. On the other hand, if raw material is not readily available then a large
Working Capital Management 147

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inventory/stock needs to be maintained, thereby calling for substantial

investment in the same.
vi. Growth and Expansion
Growth and expansion in the volume of business results in enhancement of

the working capital requirement. As business grows and expands, it needs a
larger amount of working capital. Normally, the need for increased working
capital funds precedes growth in business activities.
vii. Price Level Changes
Generally, rising price level requires a higher investment in the working cap-
ital. With increasing prices, the same level of current assets needs enhanced
investment.
viii. Manufacturing Cycle
The manufacturing cycle starts with the purchase of raw material and is com-
pleted with the production of finished goods. If the manufacturing cycle
involves a longer period, the need for working capital would be more.
At times, business needs to estimate the requirement of working capital in

advance for proper control and management. The factors discussed above
influence the quantum of working capital in the business. The assessment of
working capital requirement is made keeping these factors in view. Each con-
stituent of working capital retains its form for a certain period and that hold-
ing period is determined by the factors discussed above. So for correct assess-
ment of the working capital requirement, the duration at various stages of the
working capital cycle is estimated. Thereafter, proper value is assigned to the
respective current assets, depending on its level of completion. The basis for
assigning value to each component is given below:
Component of Working Capital Basis of Valuation

i. Stock of raw material Purchase cost of raw
materials
ii. Stock of work in process At cost or market value,

whichever is lower
iii. Stock of finished goods Cost of production
iv. Debtors Cost of sales or sales value
v. Cash Working expenses

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Each constituent of the working capital is valued on the basis of valuation

enumerated above for the holding period estimated. The total of all such val-
uation becomes the total estimated working capital requirement.
The assessment of the working capital should be accurate even in the case
of small and micro enterprises where business operation is not very large. We
know that working capital has a very close relationship with day-to-day oper-
ations of a business. Negligence in proper assessment of the working capital,
therefore, can affect the day-to-day operations severely. It may lead to cash
crisis and ultimately to liquidation. An inaccurate assessment of the working
capital may cause either under-assessment or over-assessment of the working
capital and both of them are dangerous.
CONSEQUENCES OF UNDER ASSESSMENT OF

WORKING CAPITAL
z Growth may be stunted. It may become difficult for the enterprise

to undertake profitable projects due to non-availability of working cap-
ital.
z Implementation of operating plans may become difficult and conse-

quently the profit goals may not be achieved.
z Cash crisis may emerge due to paucity of working funds.
z Optimum capacity utilisation of fixed assets may not be achieved due

to non-availability of the working capital.
z The business may fail to honour its commitment in time, thereby

adversely affecting its credibility. This situation may lead to business
closure.
z The business may be compelled to buy raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing
cost of purchases and reducing selling prices by offering discounts.
Both these situations would affect profitability adversely.
z Non-availability of stocks due to non-availability of funds may result

in production stoppage.
z While underassessment of working capital has disastrous implica-

tions on business, overassessment of working capital also has its own
dangers.

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CONSEQUENCES OF OVER ASSESSMENT OF

WORKING CAPITAL
z Excess of working capital may result in unnecessary accumulation of
inventories.
z It may lead to offer too liberal credit terms to buyers and very poor
recovery system and cash management.
z It may make management complacent leading to its inefficiency.
z Over-investment in working capital makes capital less productive and

may reduce return on investment.
Working capital is very essential for success of a business and, therefore,

needs efficient management and control. Each of the components of the work-
ing capital needs proper management to optimise profit.
Inventory Management
Inventory includes all types of stocks. For effective working capital manage-
ment, inventory needs to be managed effectively. The level of inventory should
be such that the total cost of ordering and holding inventory is the least.
Simultaneously, stock out costs should also be minimised. Business, therefore,
should fix the minimum safety stock level, re-order level and ordering quantity
so that the inventory cost is reduced and its management becomes efficient.
Receivables’ Management
Given a choice, every business would prefer selling its produce on cash basis.
However, due to factors like trade policies, prevailing marketing conditions,
etc., businesses are compelled to sell their goods on credit. In certain circum-
stances, a business may deliberately extend credit as a strategy of increasing
sales. Extending credit means creating a current asset in the form of ‘Debtors’
or ‘Accounts Receivable’. Investment in this type of current assets needs
proper and effective management as it gives rise to costs such as:
i. Cost of carrying receivable (payment of interest etc.)
ii. Cost of bad debt losses
Thus the objective of any management policy pertaining to accounts receiv-

ables would be to ensure that the benefits arising due to the receivables are

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more than the cost incurred for receivables and the gap between benefit and
cost increases resulting in increased profits. An effective control of receiv-
ables helps a great deal in properly managing it. Each business should, there-
fore, try to find out average credit extended to its client using the below given
formula:
Average credit Total amount of receivables

=
Extended (in days) Average credit sales per day
Each business should project expected sales and expected investment in

receivables based on various factors, which influence the working capital
requirement. From this it would be possible to find out the average credit days
using the above given formula. A business should continuously try to moni-
tor the credit days and see that the average credit offered to clients is not
crossing the budgeted period. Otherwise, the requirement of investment in the
working capital would increase and, as a result, activities may get squeezed.
This may lead to cash crisis.
Cash Management
Cash is the most liquid current asset. It is of vital importance to the daily oper-
ations of business. While the proportion of assets held in the form of cash is
very small, its efficient management is crucial to the solvency of the business.
Therefore, planning cash and controlling its use are very important tasks.
Cash budgeting is a useful device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and out-
flows of cash over a projected short period of time which may usually be a
year, a half or a quarter year. Effective cash management is facilitated if
the cash budget is further broken down into month, week or even on daily
basis.
There are two components of cash budget (i) cash inflows and (ii) cash out-
flows. The main sources for these flows are given hereunder:
Cash Inflows (a) Cash sales

(b) Cash received from debtors
(c) Cash received from loans, deposits, etc.

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(d) Cash receipt of other revenue income

(e) Cash received from sale of
investments or assets.
Cash Outflows (a) Cash purchases

(b) Cash payment to creditors
(c) Cash payment for other revenue
expenditure
(d) Cash payment for assets creation
(e) Cash payment for withdrawals, taxes
(f) Repayment of loans, etc.
A suggestive format for ‘Cash Budget’ is given below:
Cash Budget of M/s…
Particulars Months
January February March

Estimated cash inflows
------------
-----------
I. Total cash inflows
Estimated cash outflows
------------
-----------
II. Total cash outflows
III. Opening cash balance
IV. Add/Deduct surplus/Deficit
during the month (I–II)
V. Closing cash balance (III–IV)
VI. Minimum level of cash
balance
VII. Estimated excesses or shortfall of
cash (V–VI)

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Financing Working Capital

Now let us understand the means to finance the working capital. Working cap-
ital or current assets are those assets, which unlike fixed assets change their
forms rapidly. Due to this nature, they need to be financed through short-term
funds. Short-term funds are also called current liabilities. The following are
the major sources of raising short-term funds:
i. Supplier’s Credit
At times, business gets raw material on credit from the suppliers. The cost of
raw material is paid after some time, i.e. upon completion of the credit period.
Thus, without having an outflow of cash the business is in a position to use
raw material and continue the activities. The credit given by the suppliers of
raw materials is for a short period and is considered current liabilities. These
funds should be used for creating current assets like stock of raw material,
work in process, finished goods, etc.
ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to
businesses to help them create necessary current assets so as to achieve the
required business level. The loans are available for creating the following cur-
rent assets:
z Stock of Raw Materials
z Stock of Work in Process
z Stock of Finished Goods
z Debtors
Banks give short-term loans against these assets, keeping some security mar-
gin. The advances given by banks against current assets are short-term in
nature and banks have the right to ask for immediate repayment if they con-
sider doing so. Thus bank loans for creation of current assets are also current
liabilities.
iii. Promoter’s Fund

It is advisable to finance a portion of current assets from the promoter’s funds.
They are long-term funds and, therefore do not require immediate repayment.
These funds increase the liquidity of the business.

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CHAPTER 15
Marketing Management
A production process acquires meaning only if it produces products which

emerge out of anonymity and find a place in the market. Many small
entrepreneurs produce quality products, but are unable to sell it due to poor
understanding of the markets and marketing management. Most think market-
ing and selling to be the same and hence, face serious consequences. The fact
however, remains that this is one of the most critical areas that entrepreneurs
must master. You must develop the capability to understand your market and
device your marketing strategies accordingly. You should be able to assess who
will buy your product and why; and also your competitors and their strategies.
THE CONCEPT OF MARKETING

Most people think that marketing is all about selling and buying of goods and
services in exchange for money. This is a very narrow view. There are three
major facets of marketing. First is the production-driven approach where
stress is laid on selling whatever is produced. This works during scarcity of
goods. And the producer’s key function here is to sell goods available at
affordable prices. Most small and micro enterprises follow this approach. The
second is the sale-driven approach that revolves around personal selling and
advertising to convince customers to buy your product. This approach is
adopted when there is an abundance of supply in the market. The last is the
consumer-driven approach, which focus on promoting sale by meeting the
customers’ expectations in terms of quality, looks, aesthetics, prices and after-
sales-service. The earlier two approaches where goods are tailor-made are
producer-oriented and may not work satisfactorily as they require a proper
understanding of the consumer behaviour, preferences, tastes and needs
before undertaking production.
The third being consumer-driven, lasts. This is why sales becomes a small
part of an entire system called marketing that addresses planning, pricing,
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promotion and distribution of goods and services to satisfy customer needs.

Therefore, you must understand that marketing is not just selling, but much
more, and includes:
i. Market Assessment
ii. Market Segmentation
iii. Market Targeting
iv. Developing Market Mix
Market Assessment
First, there is a need to know the demand for the proposed product and this
requires market assessment. With this, one would know the volume that
might be bought by a defined customer-base in a defined geographical area
and time-frame, under a defined marketing programme. The market demand
can be estimated by multiplying the number of buyers by the average quan-
tity bought at a given price. Though this may be difficult for small entrepre-
neurs to find out, they can still do a quick survey (discussed in Chapter 7) if
the market is generally local or regional.
Market Segmentation
This helps in indentifying buyers. It is a process that identifies differences in
basic characteristics of different customer groups, and thus helps craft an
effective marketing strategy. Segmentation can be by assorting consumers
like rural & urban, young-old, married-unmarried, educated-uneducated,
rich-poor, etc. and analysing their needs and demand pattern.
Market Targeting
Having done the market segmentation, one should decide the target group. It
is normally not possible to meet the expectations of all the customer groups
in the market. Therefore, there is a need to zero in on a specific segment. One
will commit a blunder if one thinks one can meet the expectation of all the
segments. The risk of a major failure prevails if one tries to cater to all the
segments and, therefore, one should specialize to succeed. The promotional
strategies, infrastructure and manpower resources will greatly vary with the
targets. Having decided the target, strategies for successful marketing can be
devised.
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Marketing Mix
Marketing mix is the tool by which one could strategically position oneself in
the market. The positioning will depend on how different will one’s product
be than others in terms of attractiveness for a particular customer group. It
could include features of the product, performance quality, durability, relia-
bility, style, design, repairability, etc. These factors are popularly known as 4
‘Ps’ of marketing:
i. Product (or service) – its quality, presentation, packaging, varieties,

design, colours, styles, contents.
ii. Place – where it is bought, physical and social barriers, home deliv-
ery, distribution channels, transport, ambience, sanitation, decora-
tion.
iii. Promotion – advertising, tele–marketing, personal and promotional
selling, exhibitions, mailing.
iv. Price – the amount, prices vs. status, quality, discounts, credit terms.
There are more Ps now: People (understanding customers), Packaging (better

product look), Partnership (strategic marketing alliances), Positioning (geo-
graphical, such as Punjabi or South Indian Food).
Product Place
Better Performance Longer Opening Hours

Improved Quality Better Furnishing
Bigger Quantities Better Decoration
Better Finish Different Location
Attractive Packaging Home Delivery
Better Labels Telephone Facility
Attractive Colours Better Sanitation
Attractive Contours
Mind-captivating Brand
Promotion Price
Proper Advertising Competitive Pricing

Signboards Higher Pricing
Competitions Lower Pricing
Different Names Longer Credit
Other Publicity Special Offers
Promotional Selling Quantity Discounts
Cash Discounts
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The famous saying, “Leaders don’t do different things, they do things dif-
ferently”, finds an apt place here. Being able to supply quality goods at com-
petitive prices to the customers’ satisfaction does not take one any further. To
be a market leader, one needs to market the product and create its brand loy-
alty, by also taking care of distribution logistics. Most entrepreneurs neglect
this. Another crucial factor is to be able to make the business communicate for
what it stands, which is done by effective promotional strategies.
PROMOTIONAL STRATEGY
Use of Electronic Media and IT

A proper promotional strategy is needed to create a brand image of the product
and this will need an effective fusion of print and electronic media. Everyday,
we see brand ambassadors like Sachin Tendulkar endorsing Pepsi and Aamir
Khan advocating Coke. This creates an image in the minds of the customers.
The promotional strategy should suit the market. While it may be expensive to
get celebrity endorsement, there are local channels to one can make use of radio
and the internet, besides TV, newspapers or magazines. The best decision will
be to hire a professional advertisement agency, howsoever small, for promotion.
Then, there is always the word of mouth that invisibly promotes the product
by the sheer strength of its quality and other features, which people will talk
about and thus market. This is especially true in the food business.
Collective Marketing Approach

All these steps are good for existing or small-scale entrepreneurs but may not
always apply to a large segment of micro enterprises who might find it diffi-
cult due to paucity of financial as well as human resources. Micro enterprises
should evolve innovative collective strategies to reap mutual benefits.
SEVEN TIPS FOR SUCCESSFUL MARKETING
a) Know Your Consumers/Customers

There are two types of clients:
i. BUYERS/CUSTOMERS who buy goods from you to sell to others.
The customers may not be the direct users of one’s products.
Normally, wholesalers buy in bulk and sell to retailers, who sell to
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individual consumers or exporters, who in turn sell goods abroad to

chain stores and retailers.
ii. Users who directly consume the products, who are CONSUMERS.
b) Satisfy Your Customers/Consumers

They may be satisfied:
i. When they are happy with the features and quality of the product.
ii. When the price of your product is reasonable (reasonable means
within the budget).
iii. When one delivers on time and maintains agreed terms.
iv. When extra efforts are put in to make them happy; like by working
overnight to deliver on time.
c) Attract More Customers

Marketing must ensure that consumers repeatedly buy one’s products and also
speak well about it to others. One should always remember the four Ps dis-
cussed earlier:
i. Product
z Consumers want the product to satisfy their needs and they may want
it to last long.
z The product should be worth the money spent by buyers on it.
z The product should meet the best standards of quality and aesthetics.
ii. Price
Prices should be affordable and there are ways to make them acceptable also.
Match your competitors’ prices. One could use the formula (price – cost =
profit) when (i) one is relatively new to the business (ii) the competition is
strong and (iii) when consumers are used to prevailing prices.
Look at the costs

The price could be set by adding a reasonable profit to the cost and this can
be used during (i) low competition and (ii) when the product is new.

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Make the price attractive

Prices may be made attractive in other regions than one’s own by different
ways. Attractive prices can, for instance, be like Rs.49.95 for Rs.50.00.
iii. Promotion
A satisfied client is one’s best promoter not only in terms of repeat orders but
also for references.
Some ways to promote one’s product: Discount and credit offers can be pub-
licised by placards placed in retail outlets or by distributing pamphlets to
existing and potential clients.
Discount and credit offers: Give limited-period discounts or credits to regular

and new clients as also bulk buyers. This will attract potential customers and
strengthen the existing ones. Offer high discount on high-margin products as
this is likely to encourage sale and manufacture of such products without
affecting profits. Also, distribute pamphlets among exporters/wholesalers, if
necessary.
Promotional items: Paperweights, calendars etc. with one’s brand name can
be good advertisements.
iv. Place
Determine where to sell the product and where should the client to find it.
d) Network and Reach-out to New

Consumers
This helps in expanding one’s customer base.
There are several ways by which one can network and reach new customers
and expand one’s market base:
i. Personal visits to potential clients

ii. Participation in trade fairs where potential is found
iii. Product catalogues and web pages which could be forwarded to dis-
tant customers
iv. Promotion methods like selling incentives to increase sales
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Rather than waiting for customers to come, the entrepreneur should look for
them. While i, iii and iv are means to network with new consumers, it helps
one network with both new and existing customers.
Participating in trade exhibits in different regions

i. Prepare for an exhibition:
z Inquire about trade exhibitions from government offices and non-gov-

ernment organisations that organise such fairs.
z Participate in fairs after considering its location, the fees and products
featured.
z Print business cards, product catalogue and price lists.
z Prepare samples for display.
z Keep a logbook to record visitors’ contact details.
ii. During the trade exhibit:
z Approach visitors and talk informally about the products.
z Encourage them to analyse the product.
z Exchange business cards.
z Request them to fill the logbook.
e) Give Selling Incentives

Marketing starts even before business identification and often involves all
management areas, while selling is about increasing sale. Selling incentives
are various:
z Reduced price or discount
z Multiple products for the price of one
z Fixed-time discount coupons for repeat purchase
z Better credit terms

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A processor may adopt any of these incentives. The following is a case study
of a price discount incentive option:
Arun Processors is a tiny unit and sells Rs.5 lakh worth pickles a year. They
offer 30-day credit to customers. They got an extra order of Rs.2 lakh this year.
But the trader backed out after the products were made. Arun Processors,
therefore, evolved a new incentive plan to dispose off the additional produc-
tion, under which they offered a three per cent discount in case payment was
made in cash 15 days after delivery and 90–day credit otherwise.
Let us do a cost analysis of this strategy. Assume 50% sale is executed
by discount option and 50% by 90-day credit scheme. If the production cost
of increased sales is 70%, the actual cost of locked up funds in the credit
sale would be three per cent a month. This is the rate he has to pay for credit
purchase.
Existing promotional and credit terms: 30 days
Proposed promotional terms: 3/15 (or) 90 days
(Amount in Rs.)
Current Sales 5,00,000

Likely Increase in Sales 2,00,000 (1)
Likely total sales 7,00,000
Cost of discount 3,000

(Rs.1,00,000 of sales @ 3%)
Cost of credit sale for 3 months 9,000
(Rs.1,00,000 @ 36% per year)
Total cost 12,000 (2)
Increase in cost of production 1,40,000 (3)

(70% of Rs.2,00,000)
Profit in production (1) - (3) 60,000
Cost of proposed promotional terms (2) 12,000
Net profit 48,000 (4)
Therefore the increase in profit is Rs.48,000/-. The proposed promotional

stratagem could benefit the enterprise.
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f) Know Your Competitors

It is very important in business to know one’s competitors and their strate-
gies to remain competitive and there is a simple framework to understand
them:
The competitor as a food processor
z What is his experience in the business?
z What are his resources: (i) size of operation, (ii) technology,

(iii) financial resources and (iv) market credibility.
The competitor’s clients
z Does he have many clients?
z Who are they?
z Are his clients happy?
z Can he retain customers?
The competitor’s product
z Is his product better?
z How is his product different?
The Competitor’s price
z Is his price cheaper? Why?
The competitor’s promotional strategies
z Does he provide better credit/discounts?
The competitor’s place
z Does he directly deal with consumers?
z Does he have agents/distributors?

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g) Developing a Sustainable
Marketing Advantage:
A business that does not develop any or all of the three advantages below is
sure to lose out to competition:
A sustainable cost advantage: This will help an enterprise offer lower prices.
Cost savings can also help in offering better credits.
A differentiation advantage: This offers buyers better value than that of the
competitors, as the product is different by its features and services as well as
by brand image.
A niche market: Here consumers are delivered specially customised products

in small volumes.
FINALLY, REMEMBER THE CARDINAL PRINCIPLES

TO SUCCEED IN THE MARKET:
z The customer is the most important person.
z Put yourself in customers' shoes.
z Good marketers sell products that never return but customers do.
z Successful marketing is about building and sustaining human relation-

ships.
z Be flexible so as to encourage people to do business with you.
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CHAPTER 16
Applied Management in Business:
Learning from Existing Businesses
ANMOL FOOD PRODUCTS: STRUCTURING A

PROJECT EFFICIENTLY WITH THRUST ON THE
MARKET PLAN
T he enterprise, registered as a private limited company, has been involved

in marketing processed food products. It now proposes to manufacture
sauces, jams and other products. The unit is registered with the Ministry of
Food Processing Industries. The key promoters include a cost accountant and
a scientist who have earlier worked with CFTRI, Mysore. The cost account-
ant worked for a multinational and also has substantial experience in market-
ing confectionery in Karnataka. He also has experience in catering and
has supplied packed meals to hospitals and banks in Mysore city. His enter-
prise had then undertaken contracts to run canteens in various large facto-
ries in Mysore. The experience of the promoters both in the catering field
and in marketing products in the sector helped them evolve their project
well.
Several products are proposed to be manufactured by this enterprise.

These include sauces, squashes, jams, ‘masala’ paste, ready-to-eat products
and pickles. Sauces for example, include tomato sauce, chilly sauce and soya
sauce. Jams include strawberry and pineapple jam. Ready-to-eat products
comprise tamarind rice mix, tomato rice mix and sambhar. Pickles include
mango, mixed vegetable, lemon, garlic and green chilly. Products are offered
in various packing sizes to meet purchase preferences of different cus-
tomers and consumers. Squashes include mango, orange, grape, pineapple
and strawberry, and ‘masala’ powders largely include ‘garam masala’
powder.
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Reducing production risk in terms of raw

material price fluctuation
The main ingredients for sauces are tomato, green chilly and soya, which are
to be procured in season, processed and retained, in preserved form like
puree. Inputs/ingredients are to be procured fresh and the food stuff prepared
and then processed under high temperature and pressure in retorts under
water for 20 minutes to sometimes several hours, depending on the properties
of the products. With regard to pickles, for instance, main fruits, vegetables
and ‘masala’ ingredients are to be procured in season. They are to be then
converted into intermediaries like paste. The ‘masala’ ingredients are to be
thoroughly cleaned and procured for preservation. When production of vari-
ous pickles is planned the fruit/vegetable and ‘masala’ ingredients is
processed into final products. So also with regard to ‘masala’ powders, raw
materials and ingredients are procured during season, thoroughly cleaned and
preserved, depending on product formulation. Different ingredients are
drawn and processed either separately or together to obtain the final product.
The enterprise proposes to effectively reduce the risk in terms of high raw
material price fluctuations and develop scope to secure high margins during
off season in different products.
The machinery to be used mainly are fruit mills, boiler, steam vessels, pul-
verizers, ovens, blenders, filling machine, etc. Past experience of the promot-
ers helped in evolving a market plan for the enterprise. The product and mar-
ket mix of the project is planned in relative detail.
Market Plan of Anmol Enterprises: Product

and Market Mix
The enterprise has segmented its market and planned a product mix to target
each segment. The table 16.1 below indicatively presents the relevant plan in
terms of the number of customers the enterprise plans to target.
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Table 16.1 Proposed Product-Cum-Market Mix of Anmol Enterprises:

Select Products
Market mix Retail Retail Institutional

(as a percentage Customers Customers Customers
of sales) -Rural (33%) -Urban (31%) (36%)
Product-Mix
Jams 255 145 15
Tomato Ketchup 30 110 -
Tomato Sauce 12 90 6
Chilly Sauce 21 71 18
Soya Sauce 20 50 18
Ready-to-Eat - 105 -
Products
Pickles 110 85 -
Squashes 65 66 -
Syrups 47 78 4
Ready-to-Serve 51 72 -
Beverages
Masala Powders 102 95 -
Specific marketing strategies have been planned to target each customer seg-
ment in the proposed marketing mix.
Retail customer: The enterprise proposes to market its own brand in this seg-
ment. The enterprise plans to appoint distributors who may, in turn, supply to
retailers on a weekly basis. The promoters realised that in some products
branding is hardly critical. Jams are yet “generic” and consumers do not dis-
play strong brand pull. This product would provide volumes of business and
facilitate penetration among distributors and retailers as it has sales potential
even at tiny retail outlets.
The enterprise plans to simultaneously sell its products through various

categories of outlets in Tamil Nadu. Table 16.2 elaborates on points of sale
and region-wise numbers.
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Table 16.2 Point of Sale—Region-wise Numbers
Region Chennai Salem Coimbatore Total

Outlet Category
A Supermarkets 9 2 5 16
B Departmental Stores 25 2 11 38
C Provision Stores 55 11 45 111
D Petty Shops 202 43 83 328
A Consumer Pull-Seeking Strategy

The enterprise plans to initially place products in retail outlets and also cre-
ate brand awareness at outlets. For the first two years, market support for pro-
viding visual displays at points of sale for brand promotion is believed impor-
tant. For this, points of sale (POS) material are to be provided. The enterprise
plans to lease shop shelf space and display boards to build brand awareness.
The enterprise also plans to display its products at prominent trade fairs in
India. Only in the third year, when sufficient profits have been generated and
reserves built, does the enterprise plan to invest in media advertising and
decrease focus on certain other areas. Table 16.3 below presents relevant and
proposed selling expenses of Anmol Enterprises. Such expenses are not to be
incurred uniformally in all outlets but selectively.
Table 16.3 Planned Selling Expenses on Point of Sale of

Anmol Enterprises
Sr. Selling Expense Amount Year (Rs. in lakh)

No. (Rs. in lakh)
1 2 3 4 5
1. Glow Sign Board 6 1.5 1.5 1 1 1
2. Market Support
— for Supermarkets 2.25 1 1.25 - -
— for Dept. stores 4 2 2 - -
— for Provision stores 6 2 4 - - -
3. POS Materials 12.5 2 1.5 3 3 3
4. Trade Fairs 7.5 1.5 1.5 3 2.25 2.25
5. Advertising through 18 - - 6 6 6
print and electronic
media
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Institutional Customers
The enterprise proposes to enter into an agreement with specialised chain
stores in the region such as ‘Nilgiris’ and ‘Foodworld’ for sale of jams and
other products in their brand name. The enterprise also plans to supply sauces
to a re-labeller to market products in their brand name effectively, catering to
a large number of buyers—hotels and restaurants. The selling expense indi-
cated in the Table 16.3 excludes customer discount and margins that are con-
sidered separately in their market plan. The expenses and the plan proposed
in this sub-section are to encourage consumer pull for their products.
More Realistic Sales (Price) and Input Estimates
Product-wise sales have been estimated by the promoters multiplying the pro-
jected output by the selling price as indicated in table 16.4 below.
Table 16.4 Estimated Average Selling Price and Projected Sales

Realisation of Product-mix
Products WeightedAverage Sales Realisation (Rs. in lakhs)

Selling Price (Rs.
per proposed
standard unit)
Year 1 Year 2 Year 3 Year 4 Year 5
Tomato Ketchup and 36.85 13.34 14.01 15.34 16.68 16.68
Tomato Sauce
Chilly/Soya Sauce 38.00 22.20 23.21 25.25 27.75 27.75
Jams 60.50 23 24.15 26.45 28.75 28.75
Tomato Puree 53.70 2.10 2.21 2.42 2.63 2.63
Garlic Paste/Ginger Paste 38.00 1.98 2.08 2.28 2.48 2.48
Ready-to-Eat products 75.00 21 22.05 24.15 26.25 26.25
Pickles 38.50 3.60 3.78 4.14 4.50 4.50
Squashes/Crush 64.00 5.81 6.10 6.68 7.26 7.26
Synthetic Jellies 60.00 3.64 3.82 4.42 4.55 4.55
'Masala' Powders 118.50 14.20 14.91 16.33 17.75 17.75
The enterprise has estimated the selling price of products on the basis of the
weighted average selling price over one year of other similar processors in the
region. The raw material purchase price has also been similarly estimated.
The prices have been weighted with the number of months the rate prevails
on an annual basis. The estimates are hence more realistic.

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The enterprise has also been conservative in projecting sales in terms of

capacity utilisation. This is another factor that a lender scrutinises. As the
enterprise appears to achieve sufficient Debt Service Coverage Ratio (DSCR)
as indicated in table 16.5 below even at a low capacity utilisation, the project
risk is believed to be low.
Table 16.5 Capacity Utilisation as per Projected Profitability Statement of

Anmol Enterprises
Year Year 1 Year 2 Year 3 Year 4 Year 5

Capacity utilisation 40% 45% 55% 75% 75%
Based on the expenses projected in the profitability statement, the break-even

point of the enterprise is estimated. The enterprise is expected to operate on
break-even levels from the first year itself despite its conservative projections.
Given the specific analysis and projections made above, under normal cir-
cumstances, there is hardly any reason why a lender will not support the proj-
ect or question its viability. DSCR is also high in this case. Table 16.6 below
highlights the point.
Table 16.6 Debt Service Coverage Ratio of Anmol Enterprises

(Rs. in Lakh)
Year 1 Year 2 Year 3 Year 4 Year 5
DSCR 5.22 4.61 4.68 5.34 5.84
An entrepreneur needs to accord adequate consideration to the market plan.

The case in this sub-section highlighted efficient procurement and production
management and indicated only some critical aspects that need be given con-
sideration when preparing a plan. The product and market mix analysis and
conservativeness are fundamental issues. The product market plan is the basis
for financial plan of an enterprise.
ANALYSIS AND MANAGEMENT OF RISK IN AN

ENTERPRISE: PARAG BISCUITS, AHMEDABAD
There are other critical decisions to be made in a project. These are particu-
larly on the cost and financial structure of an enterprise. Decisions need to be
made on the risk and profitability orientation of a project. Consider an adverse
environment with falling demand and increased competition. An analysis of
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the cost structure of Parag Biscuits reveals a thrust on fixed costs. This implies
an aggressive or relatively risky cost structure as the environment is adverse
for this enterprise in terms of falling sales and margins in the past two years.
A break-even analysis highlights the level of sales at which the profit

before tax (PBT) is zero. The following information is available on the enter-
prise. The data presented in Table 16.7 below is for 2001–2002.
Table 16.7 Expenses-Revenues-Profit for Parag Biscuits,

Ahmedabad (2001–2002)
Expenses-Revenues-Profit Amount (in Rs.)

Sales 25,00,000
(Less) Variable Costs 21,25,000 (70,000)
(Interest on WC)
Contribution 3,75,000
(Less) Fixed Costs 1,85,000
Profit before tax (PBT) 1,90,000
Break-even sales may be estimated by using the formula: Fixed costs over
sales realisation minus Variable cost. Break-even sale is at about 50 per cent
of current sales.
Risk Analysis of the Enterprise

Risk is estimated in terms of possible variability in profit. The variability in prof-
its arises primarily because of variability in sales (volumes or margins or both).
The impact on the PBT of Parag Biscuits if sales drop from its current level indi-
cates a fall greater than the fall in sales. This is the Degree of Total Leverage
(DTL) and measures the risk arising out of the sensitivity of profits to sales.
DTL = = = 1.97
PBT 1,90,000
The risk includes: (i) the Degree of Operating leverage (DOL) arising from
the structure of operating costs (variable costs that vary with output and fixed
costs that do not) of the enterprise, (ii) the Degree of Financial Leverage
(DFL) arising from the financial structure of the enterprise. This refers to debt
as against the equity structure in the capital of an enterprise.

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The Degree of Operating Leverage (DOL) measures the percentage change

in PBT for a percentage change in sales: An enterprise that has higher levels
of fixed costs in operation will have a higher DOL.
DOL = = = 1.44
PBIT 2,60,000
The Degree of Financial Leverage (DFL) on the other hand measures the
percentage change in PBT for a per cent change in PBIT. An enterprise that has
taken more of institutional finance vis-à-vis own equity will have a high DFL.
PBIT 2,60,000
DFL = = = 1.36
PBT 1,90,000
The Degree of Total Leverage (DTL) is the product of the DOL and the
DFL: Fixed costs in operations cause a 1 per cent change in sales to lead to a
more than 1 per cent change in the PBIT. Similarly, 1 per cent change in the
PBIT causes profits to change by greater than 1 per cent. Fixed costs leverage
the impact of changes in sales on profits. A high DTL is fine if sales have
scope to increase and market growth is high in an industry. If not, it could be
harmful to the enterprise as the fall in the PBT will be 1.97 per cent (DTL) for
every 1 per cent fall in sales. Structuring an enterprise’s finance and cost is
thus important to increase its returns or reduce its risk.
The lessons for an entrepreneur do exist in the food-processing sector in

terms of exploring, outsourcing options of some activities as to reduce inter-
est burden on fixed investment, which is a fixed cost, for example. Further,
depending on the risk-return trade-off and potential of an enterprise, greater
debt financing may be availed of and/or variable costs may be selectively con-
verted into fixed costs as a part of the revised project report.
SYSTEMS IN BUSINESS
Management information and control systems (MICS) are important areas in
enterprise management. As an illustration, consider the following case of an
enterprise—Narsi’s Vegetable Processors engaged in the manufacture of
mango pickles in Hyderabad, Andhra Pradesh. The enterprise buys mangoes
from wholesalers and undertakes processing and marketing. The enterprise
markets its products in Hyderabad. Purchasing and stocking decisions are
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most critical in this sub-sector as the availability of products is seasonal and

the contribution of raw material cost to the total annual cost of production of
such an enterprise is high. Purchase on the basis of economic order quantity
is critical in such business to optimise the cost and the benefit by virtue of
inventory management.
Economic Order Quantity (EOQ) in Purchase

Management information and control systems for larger enterprises may
include utilisation of production and scrap reports on a daily basis, batch con-
sumption reports, material utilisation report and production report on a
monthly basis and, a purchase and stores ledger. Nevertheless, most critically,
the EOQ at the enterprise level has to be estimated for enterprises that are
tiny and small to facilitate purchase and stocking decisions. For instance,
Narsi’s Vegetable Processors in Hyderabad requires raw material of 90,000 kg
of mangoes a year. The enterprise works at an average for 300 days a year.
The cost of processing an order is Rs.30 and the carrying cost per kg. of
mango is Rs.2 for one year. Lead-time for receipt of inputs upon order is five
days and the enterprise may keep a reserve stock of 4 days’ usage. The eco-
nomic order quantity and the re-order point may be estimated incorporating
the formula:
EOQ = 2AO/C, where A is the annual requirement of input, O is the

ordering cost (communication, transport, etc.) and
C is the carrying cost (storage etc.)
The EOQ works out to 5196 kg. The re-order point may be estimated as
follows:
Daily usage 90,000 300 kg

= =
300
Re-order point = Safety stock × Usage rate + Lead time ×
Usage rate
= 4 (300) + 5 (300) = 2,700 kg
Obviously, the variations in sale price over different months need be given
due consideration and then the EOQ decided upon. (The participants may be
asked to work out EOQ of purchase of a hypothetical enterprise and discuss
their estimations).

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Maintaining Information on the Cost

Structure of a Business
The table below presents the cost structure and activity levels of a food pro-
cessing (jam making) enterprise for 2001–2002. Maintaining information in
this format will facilitate decision making in an enterprise.
Cost Structure and Activity of an Enterprise for 2001–2002
Sales (10,000 jars @Rs.75 each) 7,50,000

Variable cost (10,000 jars @Rs.65 each) 6,50,000
Fixed cost 30,000
Profit 70,000
Assume that the enterprise now receives an offer from an exporter on certain
specific terms. The exporter offers to buy products from this enterprise at a
price 20 per cent more than his current sale price. The exporter, however,
guarantees offtake of only 80 per cent of his current sale. He also insists that
the manufacturer offers his product to no one else directly. Certain other
expenses are likely to rise. The Table below summarizes the offer.
1. Offer of increase in prices = 20% 2. Reduction in sales = 20% (As

the exporter would like the
enterprise to manufacture
for him alone)
3. Variable expenses increase = 20% 4. Fixed cost increase = 10% (in

(in terms of better quality raw terms of additional expense on
related cost) upgrading equipment)
Would the enterprise’s profits increase or decrease, if it accepts the offer?

The cost structure and the activity of the enterprise, it accepts the offer, is
presented in the table below.
Production 10,000 jars Total sales Rs.9,00,000

Price Rs.90 per jar Total variable cost Rs.7,80,000
Variable cost Rs.78 per jar Fixed cost Rs.33,000
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Therefore, profit equals Rs.87,000. Profit, therefore, increases if the

enterprise accepts this offer. The decision to accept the offer may be made
quickly and approximately, if an enterprise maintains ready data on its cost
structure.
As a second illustration, consider the concept of a simple systems tool pre-

sented below. Systems for cash management are important. If a business runs
out of cash it may not be able to pay dues on time or take advantage of oppor-
tunities because of lack of funds to finance them. A portion of profit should
be saved and ploughed back to business as retained earnings. Continuous
informal borrowings will put pressures on an entrepreneur to pay high inter-
est and could affect credibility. All cash receipts and expenses should be reg-
ularly recorded. A simple but extremely utilitarian tool appropriate for busi-
ness decision-making is a cash-cum-cost sheet. A cash-cum-cost sheet allows
keeping records of cash and cost. But, more importantly, it helps decision-
making on purchase and sales (discount v/s credit) and on structuring of costs
to take advantage of leveraging effects of fixed costs on profits, or alterna-
tively, reduce business risk.
A Cash-cum-Cost Sheet for Efficient

Decision Making
There are many reasons why an enterprise may run out of cash. Sales may be
poor or perhaps containing credit, besides the burden of paying the raw mate-
rial supplier for credit purchase. Cash goes out even before it comes in.
Working capital is used on personal expenses or directed to the purchase of
equipment. Short-term funds are diverted to long-term investment.
A cash-cum-cost sheet is a tool that allows to forecast how much cash is

earned and how much is spent on every operating cycle. It also shows
the structure of costs. When cash is short at the end of one operating cycle,
one can take remedial measures and purchase on credit and sell on cash,
perhaps by offering discounts over the next operating cycle. One can also
strive to convert fixed cost into variable cost when one is confident of
sales or margins for the next operating cycle or next few cycles. Even ele-
ments of cost such as raw material purchase, which is invariably a variable
cost, may be converted to a fixed cost temporarily or for longer periods
by means of post-dated cheque payments (with bank guarantee) or higher
inventory stockpiling.
One can make entries in a cash-cum-cost sheet for the period of one oper-
ating cycle as to plan on purchase and sales decisions as well as on prof-
itability orientation on the next.

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An Illustration on Maintaining a Cash-cum-

Cost Sheet
Cash transactions may be recorded on the left page. Cash received, cash dis-
bursed, investments, revenues and costs may be recorded on the right page.
Incomes are cash received and costs are cash disbursed.
As an illustration, consider a ‘papad’ and ‘masala-making’ enterprise. The

enterprise had about Rs.5,00,000 as cash balance as on February 1, 2001 and
used it to buy materials worth Rs.80,000 on February 10, 2001. On February
13, the enterprise again bought raw material for Rs.50,000 and paid rental
charges totalling Rs.80,000. On February 25, there was sale of products to an
exporter for Rs.2,00,000. On February 27, the enterprise sold more products
to another trader for Rs.8,20,000. On February 28, the enterprise bought raw
material for Rs.7,00,000. These transactions are recorded in the following
cash-cum-cost sheet.
LEFT PAGE (CASH SHEET)

Date Explanation To/From Cash Cash Cash
Received Disbursed Balance
2/1 5,00,000
2/10 Bought raw material Rajan Traders - 80,000 4,20,000
2/13 Bought raw material Mahesh Traders - 50,000 3,70,000
Paid rent (annual lease) - - 80,000 2,90,000
Arrangement paid every
6 months
2/25 Sales Alap Holds 2,00,000 - 4,90,000
2/27 Sales Mukesh Enterprise 8,20,000 - 13,10,000
2/28 Paid wages (piece-rate) Employees - 7,00,000 6,10,000
Total 10,02,000 9,10,000 -
RIGHT PAGE (COST SHEET)
Start-Up/Investment Income Variable Cost Fixed Cost

5,00,000 - - -
- - 80,000 -
- - 50,000 -
- - 80,000
- 2,00,000 - -
- 8,20,000 - -
- - 7,00,000 -
- - - 80,000
5,00,000 10,02,000 8,30,000 -
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In the cash-cum-cost sheet above, all expenses are recorded as variable or

fixed costs simultaneously. As indicated earlier, such system tool facilitates
decision-making on the purchase, sale and ‘outsourcing’ or profitability front.
For instance, measures to consider when cash balance is inadequate given the
working capital requirement for the following operating cycle, include offer-
ing shorter periods for credit sales and a discount for cash sales and suppliers
requested for credit. Further, if not very confident of demand in the next cycle,
one may also reduce business risk by reducing the fixed cost, perhaps by dis-
continuing the annual lease arrangement and utilising the idle capacity of
other enterprises on a monthly basis or by employing labour on contract than
salary basis and by reducing the stocking of raw material and inputs.
Alternatively, one may enhance the potential for increasing returns or margins
by converting piece rate to salaried labour if the cash balance is relatively
higher and market demand exists. Costs may hence be reduced and margins
increased. That is by converting variable costs into fixed costs. Almost all
variable costs may be converted into fixed costs and vice versa. Such simple
systems in business could help make or break an enterprise.
These decisions also affect working capital requirements for the next oper-
ating cycle. Working capital management involves estimating quantities of
raw material or components, stock-in-progress, finished goods stock and bills
receivable to be carried at any time so that uninterrupted production and
inflow of cash are maintained. Working capital investment has a cost in terms
of interest on funds invested, if they are borrowed, or if it is equity financed,
there is a loss of return that could have been earned if invested alternatively.
Those dealing with exporters and working on orders may require working
capital only for raw material and stock in process as finished goods may be
dispatched immediately upon production. The fortunate ones may also have
their payments received immediately. The cycle beginning with the holding of
raw material or components and ending with the ‘carry’ of finished goods is
known as production cycle. The cycle which extends beyond the stage of ‘fin-
ished goods carry’ up to ‘carry of receivables’ due from customers is called
an ‘operating cycle’.
A business has two kinds of assets: fixed assets such as machinery, land,
building and operating assets, which are enclosed by one operating cycle.
Operating assets are called gross working capital. Current liabilities such as
the amount due for purchase of raw material, components and stores, viz. bills
payable and credit received for other services, payment to electricity and tele-
phone departments or money from an ‘informal’ money lender, all constitute
a source of working capital. The net working capital is thus the difference
between these and the gross working capital.
The cash credit facility is normally given by financial institutions to a busi-

ness in the form of a running current account. Funds may be drawn from time

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to time for only working capital requirements. This account is subject to

‘drawing power’. The drawing power is the limit to which one can draw funds
out of this account. The drawing power is determined on the basis of market
value of stocks (raw materials, stock in process and finished goods) and book
debts at a given point of time less the amount of margin contribution by the
borrower (say, 20%) that is predetermined. The banker may require weekly,
monthly or fortnightly certified statements of stock holdings and book debts
outstanding. The bank may also insist on paying the supplier of raw material
directly from out of the cash credit facility. A financial institution may also
require certain documents that must be executed before provision of loan.
Securities may include primary security and secondary or collateral security.
Primary security includes tangible assets such as stock and book debts in the
case of a cash credit facility and equipment or particular asset that is financed
for a long-term use. Collateral security may include tangible assets such as
property or intangibles such as guarantees from borrower or persons who are
third parties.
Advantage of Cash Purchase of Raw Materials

Consider Parag Patel’s enterprise. He manufactures pickles at home. Raw
material fruits and vegetables are available on credit. For every Rs.100 of raw
material purchased, Rs.2, that is 2% is the interest for credit offered. An enter-
prise that buys about Rs.1 lakh worth of raw material every month and pays
Rs.2,000 as interest may save this and increase their net earnings. The cost of
production approximately accounts for about 20 per cent of raw material
costs. Assume current earnings to be Rs.6,000 a month or about 5 per cent of
the cost of production. If Rs.2,000 can be saved every month, it increases
earnings for an enterprise by 33 per cent.
DAS AGENCY PVT. LTD.: A CASE ON MANAGERIAL

DEFICIENCIES CONTRIBUTING TO POOR
PERFORMANCE
Das Agency Pvt. Ltd. markets a wide range of processed foods. Das had
launched his business in 1998. The enterprise market viz. distributes products
of other brands as also ‘outsources’ processing and sells products in its own
brand. The enterprise operated from a rented warehouse-cum-office head-
quartered near Chennai. Das Agency Pvt. Ltd. is involved in procurement and
sale of various products, including squash, jams and jellies and curried veg-
etables. The products were sold through one small leased outlet in Chennai. It
was also sold through other retailers and directly to household consumers who
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normally gave specific orders. Table 16.8 below presents the approximated
market mix of the enterprise.
Table 16.8 Market mix of Das Agencies Pvt. Ltd. (2002–2003)

(Amount in Rs.)
Own Other Export Direct Traders Total
Retail Retail (Indirect) Consumers- (Domestic (100%)
Outlet Outlets Households sale)
(Customized
Orders)
Sales (Rs.) 26,00,000 14,72,000 3,76,000 3,60,000 1,44,000 49,52,000
Gross contribution 10,72,000 3,96,000 1,08,000 1,40,000 17,16,000
(sales minus cost
of production, inc-
luding finishing &
packaging charges)
Direct expenditure 4,24,000 1,60,000 48,000 36,000 20,000 6,88,000
Contribution (Net) 6,48,000 2,36,000 60,000 1,04,000 20,000 10,28,000
Indirect expenditure 4,52,000 2,16,000 64,000 60,000 24,000 8,56,000
Net profit before 1,96,000 20,000 4,000 44,000 44,000 1,72,000
tax &interest
Majority of sale was through own retail outlets. Retail prices in India were the
same in all retail outlets. Profit margins were, therefore, lower on indirect
retail sale. Sale was also through indirect exports, traders for domestic mar-
kets and direct sale to consumers. As the table above indicates, there were
varying degrees of profitability in sales through different market channels or
market-mix. About 50 per cent of sales were credit sales regardless of the
channel. The enterprise used the services of CFTRI for developing new
processes and new blends and mixes. A retired professional from the CFTRI
was appointed as a consultant on monthly retainership for this purpose.
Activities of the enterprise largely included procurement, packaging and sale.
All products were outsourced. Developing new blends, particularly of the

squash and ‘masala’ products, was an area of expertise of Das. He had devel-
oped over 16 blends and mixes of squash and ‘masalas’. Each blend was to
suit the taste of different ethnic communities based in Chennai. Das Agencies
had a number of suppliers and manufacturers to outsource production, but
were lucky to have vendors who retained quality.
While the business has been earning profits, it has been lower than
expected. Performance has fallen compared to turnover growth. Stocks
seemed to be mismanaged as the bank overdraft often crossed limits—partic-
ularly during peak demand. The turnover growth of the company seemed to

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be putting stress on availing own financial resources. Das was confident of the
ability of his enterprise to improve performance despite intense and increas-
ing competition. Das wondered on options, whether to:
1. Change the structure of capital of the enterprise to enhance profit and

profitability?
2. Backward integrate into food processing than continue with mere pack-
aging and marketing of processed food?
3. Change his pricing strategies in different marketing channels?
4. Improve management in his enterprise in terms of production, finance

and marketing as, though his turnover has been increasing, his profits
have not, proportionately?
The financial performance of the enterprise in the last two years are sum-
marised in the tables below.
Table 16.9 DAS AGENCIES PVT. LIMITED

Profit and loss account for year ending 31st March 2002 and
31st March 2003
(Estimates rounded off to the nearest ‘000)
(Amount in Rs.)
2002–2003 2001–2002
Rs. Rs.
Sales 49,51,358 31,48,252
Cost of Goods Sold (32,34,808) (20,81,684)
Profit (Gross) 17,16,580 10,66,588
Distribution Cost (3,32,180) (2,27,296)
Administration Costs (about 70% are fixed costs) (12,13,724) (6,89,936)
Operating Profit 1,70,676 1,49,356
Interest Receivable - 1356
Interest Payable (46,172) (10,980)
PBT 1,24,504 1,39,732
Tax on Profit Earned 37,068 39,756
PAT 87,436 99,976
Retained Profit (in the beginning of the year) 1,15,976 16,000
Capitalisation Issue (1,00,000) -
Retained Profit (at the end of year) 1,03,412 1,15,976
180 Chapter Sixteen

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Table 16.10 DAS AGENCIES PVT. LIMITED

Balance Sheet as on 31st March 2002 and 2003
(Estimates rounded off to the nearest ‘000)
(Amount in Rs.)
Sr. No. 2002–2003 2001–2002
Rs. Rs.
1. Fixed Assets 2,00,932 1,83,272
2. a. Stock (Current Assets) 5,20,496 5,97,668
b. Accounts receivables (Current Asset) 4,32,132 3,06,256
c. Cash (Current Asset) 1952 1512
Total Current Asset 9,54,580 9,05,438
3. Creditors (Current Liabilities) 9,04,484 9,31,376
4. Net Current Assets (50,096) (25,940)
5. Creditors Falling due beyond one accounting year (7532) -
6. Provisions (36,080) (37,352)
7. Net Assets 2,07,416 1,19,980
8. Share Capital (Fixed liability) 1,04,004 4,004
9. Profit and Loss account 1,03,412 1,15,976
10. Capital Employed (Total in business) 2,07,416 1,19,980
The sub-section below presents an indicative analysis of performance and

future potential of the enterprise.
A Performance and Potential Analysis of

Das Agencies Pvt. Ltd.
The enterprise has seen steady growth in sales since its inception. The pro-
moter Das is technically well trained, having graduated from CFTRI, and very
rightly utilises the ‘retailer-push’ factor in promoting and selling his products,
but lacks in management skills in other areas. Decisions are taken on thumb-
rule basis. Growth in sales and increase in activity has not been well managed.
This has somewhat affected performance. The performance potential of the
enterprise has not been adequately exploited.
A diagnosis of the enterprise may help the present performance as shown

in the statement below. The estimates are approximated, as the objective is to
only pursue an indicative analysis. Sales have increased in the two periods
viz. 2002–2003 over 2001–2002.

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The Financial Front

The net contribution to sales has been about the same over 2001–2002 and
2002–2003. The overheads have increased as a percentage of turnovers in
2002–2003. Operating profits have fallen in terms of sales over the two peri-
ods. The expenditure on interest has also increased. Earnings after interest as
a percentage of sales have gone down.
z Financial Leverage: The unit did not take ideal advantage of financial
leverage, as initial bank borrowings seem low. Savings on the income
tax front could have been more. The enterprise has increased leverage
since but not to the extent desired.
z Return on Capital Employed: Return on capital employed has fallen

over 2001–2002 to 2002–2003.
z Current Ratio: The current ratio of the enterprise has always been rel-
atively poor. The enterprise seems to have invested short-term
funds for long-term purposes. Considering the current ratio, the enter-
prise seemed to have invested more than ideal levels of own funds in
fixed assets. A term loan could have helped maintain better liquidity
levels.
z Cash Flows and Problems: Cash balance has fallen considerably. The
net ‘contribution’ as a percentage of sales is almost the same in both
years.
The Marketing Front

z Growth Rate: The turnover of the enterprise has seen good growth
over the years. Turnover has increased considerably between
2001–2002 and 2002–2003. Net profits are however, a small percent-
age of sales. This is a poor margin on sales performance. They may
reflect a poor market or product mix with a tendency towards worsen-
ing circumstances.
z Debtor Turnover: Sale through own retail outlets has been on cash
basis while remaining sales are on credit basis. The Debtor Turn-
over Ratio (viz. Credit sales to Debtors) is about the same,
indicating poor focus upon market mix or discount vs. credit
modes.
z Margins in terms of operating profits and profit before tax (PBT) to

sales have dropped although sales has increased. This has occurred in
182 Chapter Sixteen

chp-16.qxd 10/18/05 12:51 PM Page 183
spite of increase in sales as overheads (administrative expenses) have

increased more than proportionately. Earnings after interest have fallen
in terms of percentage of sales as interest expenses have increased sev-
eral folds.
z Sales Mix: The sales mix in terms of product or market mix does not
seem decided, considering the contribution per rupee of sales but
on thumb-rule basis. The scope for efficient pricing and discount
stratagem on the basis of contribution analysis seems to have been
ignored. This could have reduced debtor realisation time and enhanced
performance, including sales. Economies of scale do not seem effec-
tively reaped in marketing. As sales have increased, ideally, overheads
to sales ratio should have reduced. Rather, it has increased. This indi-
cates the need for revamping product or market mix and evolving an
ideal promotional stratagem perhaps in terms of credit and discount.
The Production Front

z Rise in Variable Costs: The enterprise is largely outsourcing entire
‘production’. However, it has invested in equipment for packaging and
labelling.
z Inventory Turnover: There may be mismanagement in terms of stock-

ing raw material and finished goods inventory. Thus, inventory
turnover ratios (ITOR) have fallen between the two years. This may
lead to increased working capital requirements and a cash crisis.
Analysis of stock turnover at the market and product mix level seem
ignored.
z Creditors: The level of non-bank creditors seems to be high. Interest

cost has increased several folds as compared to 2001–2002. The use of
non-bank creditors could imply higher interest charges over the years.
This may have also affected performance, viz. margins.
Systems for planning seem to be on thumb rule basis. In essence, to enhance

performance and sustainability, the enterprise could go in for higher levels of
institutional debt finance, may consider integrating backwards into process-
ing, as also develop the marketing front in terms of offering ‘credit and dis-
counts’ in channels of products, where contribution is the highest to ensure
that turnover increase will be matched with profit increase even while bene-
fiting from a higher operating and financial leverage and hence profitability.
In fact, these are aspects that need to have been considered earlier even dur-
ing conception and implementation of the project.

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NETWORKING OPTIONS TO BE CLUBBED WITH

MANAGEMENT EFFICIENCY
In fact, management efficiency at the enterprise level needs to be clubbed with
efficient networking. There are many regions with established food-process-
ing enterprises but with a weak technical knowledge base, weak information
channels and limited facilities for testing and research. Legal and quality
issues may be unknown. Legal compliance, support in HACCP certification
and need for establishing food-testing laboratories are critical. An information
portal www.foodindia.org with information on international product standards
has been developed by the ‘Mahratta Chamber’ (MCCIA) in Pune, for
instance. But, few are aware of the facility. Information gaps need to be
reduced by networking with different support institutions.
The food processing enterprises at Pune produce products such as jelly,

squash, pickle, dehydrated ready food mixes, bakery products, milk products
such as sweets, ice creams, confectionery items, ground cereal flours, papad,
processed spices, etc. A consultant was called (FICCI, Quality Forum, New
Delhi) to introduce HACCP. A food-testing laboratory was established not
only to carry out testing facilities but also to carry out research and provide
training facilities to firms. The laboratory was established to work on the
areas of product testing, (quality control & quality assurance), product devel-
opment and training in an integrated manner. The Food Research and
Analysis Centre (FRAC), New Delhi, signed an MOU with MCCIA to pursue
initiatives.
FRAC helped the Pune laboratory in the selection of right machinery, staff
and in training. In essence, SIDBI and the Ministry of Food Processing
Industries provided financial support. MCCIA provided finance and manage-
ment. The FRAC provided finance and management and the CFTRI provided
training. Such interventions for the benefit of enterprises in a region may be
catalysed only if enterprises work together to ensure the same.
An information centre was developed for farmers, which strengthened

backward linkage of processed food units. Potential entrepreneurs in other
regions should learn of such options to enhance performance.
Grameen Information Centre (GIC)

In the food-processing region of Pune, IT is used to develop linkages between
food-processing units and agriculture producers around the city. The GIC is a
concept developed to provide information to facilitate better linkages.
Information is provided on technology, prices, demand and supply situation in
184 Chapter Sixteen

chp-16.qxd 10/18/05 12:51 PM Page 185
the international scenario, rules and regulations for exports, import duties,
standards and specifications. A pilot GIC was established near Pune. Various
activities of the GIC include ‘Rice Programmes’ to encourage better seeds and
hybrid varieties; ‘Organisation Farming Programmes’ for the development of
niche products; dissemination of information on Government sponsored
schemes, new technologies in agriculture, post-harvest techniques, weather
forecasting and guidance on crop protection.
Development of Raw Material Purchase

Consortia or ‘Raw Material Banks’
Input supplies to individual enterprises may be bought in volumes meriting
discounts. Purchase consortia lend strength to small enterprises vis-à-vis sup-
plies. It is necessary to secure information about raw material and input
sources and quantity discount-related options. Agencies such as the NSIC
may be approached for establishment of such raw material banks. For
instance, in Ahmedabad for certain vegetables Rs.5 crore is believed to be the
optimal size of purchase (on a quarterly basis). Networking with other enter-
prises to purchase together may help even smaller individual enterprises ben-
efit sustainably in terms of cost reduction.
The ‘sub-optimal’ raw material purchase price of various inputs (as it is),
often on a credit purchase basis and in an uneconomic quantity, affects the
cost structure of many smaller enterprises in different sub-sectors. The cost of
uneconomic purchase as also credit purchase need be avoided. The return on
investment (pre-tax) to such common ventures (pre-tax) equals over 50 per
cent. Even if partly (debt for working capital) bank-financed, the ROE is
likely to be very high, depending on the extent of rotation and amount and
cost of working capital secured.
Development of Common Facility Centres

and Exploring Common Financing Options
Common Facility Centres (CFCs) have the objective of providing necessary
services to smaller enterprises. Shared facilities may be in terms of research
and development and product testing and standardisation. The Peenya
Industries Association in Bangalore has, for example, established a permanent
exhibition-cum-display centre for members’ products. Such centres may be
supported by various ministries such as the Ministry of SSI and ARI, DC
(SSI), etc. Common Facility Centres help smaller enterprises utilise expensive
facilities which they as individual enterprises cannot afford to develop and

chp-16.qxd 10/18/05 12:51 PM Page 186
use. Common Financing options can be explored as it benefits tiny and small
enterprises that do not have access to institutional working capital due to
their inability to produce necessary documents on collateral. Mutual Credit
Guarantee Fund Scheme (MCGFS) implemented by SIDBI is one such
option.
The options of networking are several. Entrepreneurs in the sector may

explore networking options among themselves as also establish a good net-
working with support institutions to sustain performance.
186 Chapter Sixteen

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CHAPTER 17
Legal Requirements
A ll industrial activities are governed by certain legal provisions that come

in force from time to time. A few of them are given here with brief expla-
nation for your understanding. These could be divided into ‘general’ and
‘Food Processing Industry specific’.
GENERAL LEGALITIES
Factories Act, 1948

This is applicable to enterprises where the number of employees is:
z Ten or more and where power is used; or
z Twenty or more and power is not used.
The enterprises covered under the Act are required to keep certain records:
z Muster Roll
z Workers Register
z Overtime Register
z Advance Register
z Register for Fine
z Register for Deductions
z Register of Wages
z Register of Accidents and Dangerous Occurrences

chp-17.qxd 10/18/05 12:53 PM Page 188
z Bond Inspection Book
z Register of Cleaning and White Washing
z Record of Examination of Parts of Machinery
There is another Act known as Shops & Establishment Act which is applica-
ble to shops and business undertakings employing 5 or more persons.
Employees Provident Fund &

Miscellaneous Provisions Act, 1952
The Act applies to every factory or establishment employing 20 or more
employees. It, however, exempts a factory or establishment for an initial period
of 3 years from commencement of business if the number of employees is more
than 50 and for an initial period of 5 years if the number of employees is less
than 50. The minimum contribution payable by the employer is 12% of the basic
salary contribution and Dearness Allowance. The employee also makes an
equal contribution. The Act, however, does not specify a maximum contribution.
Employees’ State Insurance Act

It provides benefits to employees in case of sickness, maternity and employment
injury and for certain other matters in relation thereto. The Act also provides for
payment of contributions by employers and employees at the rates specified in
the First Schedule of the Act. The existing rates of employee’s contribution vary
according to wages and the employer’s contribution is exactly double the emp-
loyee’s contribution. It shall apply to factories employing 20 or more people.
Payment of Wages Act, 1936

This Act is applicable to factories and establishments, which come under The
Factories Act. The act is restricted in its application to the class of workers
whose wages range upto Rs.1,600/- per month.
Minimum Wages Act, 1948

The employer has to pay minimum wages to employees in certain scheduled
industries. At present the minimum wages act is applicable in 44 scheduled
industries.
188 Chapter Seventeen

chp-17.qxd 10/18/05 12:53 PM Page 189
The Indian Partnership Act, 1932

The Indian Partnership Act, which was amended in 1932, provides for rules
relating to foundation of legal partnership. It states the rights and duties of the
partners amongst themselves and outside and lays down rules regarding the
dissolution of partnership.
Central Excise (CE)

The Central Government is empowered to levy excise on all articles manu-
factured in India except alcohol, alcoholic preparations and narcotics. The
liability to duty starts the moment a new commodity is manufactured. There
are, however, certain exemptions granted to SSI units. However, there is no
CE on fruit and vegetable products.
Sales Tax
Sales tax is tax levied by state and centre. Tax charged by state is called LST
or Local Sales Tax and tax charged by Centre is known as CST or Central
Sales Tax. The latter is charged when goods move out of a state.
The Income Tax Act, 1911

The Act governs the levy of income tax in India. It defines various terms and
expressions and states the liability of a person to pay income tax. The rates
and pattern of taxation, however, are changed from time to time.
Pollution Control Act

The State Air and Water Pollution Control Board is the body responsible for
implementing this Act. The act is applicable to all kinds of industry.
SPECIFIC LEGALITIES: (FOOD PROCESSING)

In addition to the general legal requirements, there are a few legal require-
ments that are specific to Food Processing Industries. A food processing
enterprise has to comply with several compulsory legal requirements.
Implementation of these norms with regard to Small and Medium Enterprises
Legal Requirements 189

chp-17.qxd 10/18/05 12:53 PM Page 190
is relatively stringent while cottage and household level units sometimes tend
to compromise on such stipulations. These laws include:
a. Prevention of Food Adulteration Act (1954): which is the basic statute

to protect consumers against supply of adulterated food. The Central
Committee for Food Standards ‘under the Directorate General &
Health Services Ministry of Health and Family Welfare has specified
the standards.
b. Milk and Milk Products Order (MMPO): regulates milk and milk
products production in the country. The order requires no permission
for units handling less than 10,000 litres of liquid milk per day or milk
solids upto 500 tpa.
c. Fruit Products Order (1955): regulates manufacture and distribution of
all fruit and vegetable products, sweetened aerated waters, vinegar and
synthetic syrups. The license is issued by Regional Director of MoFPI
located at Mumbai, Delhi, Kolkatta, Chennai and Guwahati based on
the satisfaction of the concerned officer with regard to quality of pro-
duction, sanitation and hygiene, machinery and equipment and work
area standards.
d. Standard of Weights and Measures (Packaged Commodities) Rules,
1977: lay down certain obligations for all commodities in packed
form with respect to their quality declaration. The Directorate of
Weights and Measures under the Ministry of Food and Civil Supplies
operates these rules.
e. Export (Quality Control and Inspection) Act, 1963: is operated by the
Export Inspection Council and under this act many exportable com-
modities have been notified for compulsory pre-shipment inspection
unless specifically requested by the importer not to do so.
f. Voluntary Standards: are regulated by organisations involved with
voluntary standardisation and certificates systems concerning quality
parameters in food. They are the Bureau of Indian Standards (BIS)
and Directorate of Marketing and Inspection (DMI). The food pro-
cessing industries sector as a whole involves other legislations.
g. Oils, Deoiled Meal and Edible Flour Control Order 1967 and
Vegetables Products Control Order, 1976: control the production and
distribution of solvent extracted oils, deoiled meals, edible oil seed
flours and hydrogenated vegetable oils (vanaspati).
h. Meat Food Products Control Order, 1973: regulates manufacture,
quality, and sale of all meat products and is operated by the
Directorate of Marketing and Inspection.
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CHAPTER 18
Support Institutions for Promotion
of Food Processing Sector
THE BASIC SUPPORT INSTITUTIONAL FRAMEWORK
W hile information on various sources of information is presented in this

chapter, potential entrepreneurs need not contact all agencies but only
the relevant ones, depending on their information needs and support.
Important agencies for information on procedures and formalities include the
District Industries Centres (DICs), Directorate/Commissioner of Industries,
State Financial Corporations (SFCs), Technical Consultancy Organisations
(TCOs), and agencies conducting Entrepreneurship Development
Programmes such as State level and National level Entrepreneurship
Development Institutions and Non-Government Organisations (NGOs).
Ministry of Food Processing Industries:

The Key Player
The Ministry of Food Processing Industries, is the key central agency of the
Government responsible for developing a strong and vibrant food processing
sector with a view to creating increased job opportunities in the rural areas,
enabling the farmers to reap benefit of modern technology, creating surplus
for exports and stimulating demand for processed food. The sub-sectors under
the purview of the Ministry are Fruits and vegetable processing; Food grain
milling; Dairy products; Processing of poultry and eggs, Meat and meat prod-
ucts; Fish processing; Bread, oilseeds, meals (edible); Breakfast foods;
Biscuits; Confectionery (including cocoa processing and chocolate); Malt
extract; Protein isolate; High protein food; Weaning food and extrude other
ready to eat food products; Beer, including non-alcoholic beer; Alcoholic
drinks from non-molasses base; Aerated waters/soft drinks and other
chp-18.qxd 10/18/05 12:54 PM Page 192
processed foods; Specialised packaging for food processing industries). It

also provides technical assistance and advice to food processing industry.
Information on schemes of the ministry is available on the website
www.mofpi.nic.in.
OTHER SUPPORT INSTITUTIONS AND THEIR ROLES

Central Food Technological Research Institute – CFTRI (www.cftri.com):
The institute provides technologies for food processing enterprises.
National Small Industries Corporation Ltd – NSIC (www.nsicindia.com):

The Corporation provides integrated technology, marketing and financial
support to small scale sector.
Small Industries Development Organisation – SIDO (www.laghu-udyog.

com): The office of the Development Commissioner (Small Scale Industries)
also known as Small Industries Development Organisation (SIDO) functions
as the Nodal Development Agency for small industries.
Export Credit Guarantee Corporation of India Limited – ECGC (www.

ecgcindia.com): ECGC covers the risk of exporting on credit. Being essen-
tially an export promotion organisation, it functions under the administrative
control of the Ministry of Commerce, Government of India. It provides a
range of credit risk insurance covers to exporters against loss in export of
goods and services. ECGC also provides information on credit-
worthiness/credit ratings of overseas buyers and various countries.
Credit status information agencies abroad

Dun & Bradstreet – (www.dnb.co.in): It is one of the world’s leading sources
of business information, enabling business-to-business commerce for past 160
years. D&B has the largest company database available, with information on
more than 66 million companies worldwide, for credit, marketing and purchas-
ing decisions. Businesses also use D&B's information and technology to authen-
ticate and verify potential trading partners online, increasing their trust and con-
fidence in e-commerce transactions.
Small Industries Development Bank of India – SIDBI (www.sidbi.com):

The Small Industries Development Bank of India Act, 1989 envisaged
SIDBI to be “the principal financial institution for the promotion”, financing
and development of industry in the small-scale sector and to co-ordinate
the functions of the institutions engaged in the promotion and financing or
192 Chapter Eighteen

chp-18.qxd 10/18/05 12:54 PM Page 193
developing industry in the small scale sector and for matters connected there-
with or incidental thereto.
India Trade Promotion Organisation – ITPO (www.indiatradepromotion.

org): This is the nodal agency of the Government of India for promoting the
country's external trade. ITPO, during its existence of nearly three decades, in
the form of Trade Fair Authority of India and Trade Development Authority,
has played a proactive role in catalysing trade, investment and technology
transfer processes. Its promotional tools include organising fairs and exhibi-
tions in India and abroad, Buyer-Seller Meets, Contact Promotion
Programmes, Product Promotion Programmes, Promotion through Overseas
Department Stores, Market Surveys and Information Dissemination.
Federation of Indian Export Organisations – FIEO (www.fieo.com): FIEO

provides the content, direction and thrust to India’s expanding international
trade. It expresses all the dynamism and resurgence that are the hallmark of
India’s open, liberal and progressively market-friendly economic and trade
regime, representing the Indian export promotion effort in its entirety.
Export-Import Bank of India – EXIM Bank (www.eximbankindia.com):

EXIM Bank, set up in 1982 for the purpose of financing, facilitating, and pro-
moting foreign trade of India, is the principal financial institution in the coun-
try for co-ordinating working of institutions engaged in financing exports and
imports.
Websites on the services provided by some other support institutions, web-

sites related to food processing sub-sectors (Annexure I) and country-wise
profile in terms of export/import of processed food is given in Annexure II.
A list of important trade fairs is provided in Annexure III. The addresses of
state level nodal agencies of the Ministry of Food Processing is given as
Annexure IV.
Support Institutions for Promotion of Food Processing Sector 193

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ANNEXURE I
Important Websites Related to Other Support

Organisations, Food Processing Sub-Sectors
and Addresses of Import Promotion Agencies
1. Useful Web Sites on Important Support Organisations: Sources of

technology and marketing assistance
Coffee Board (http://indiacoffee.org)
Spices Board of India (http://www.indianspices.com)
Tea Board (http://tea.nic.in)
Office of the Controller General of Patents, Design and Trade

(http://patentoffice.nic.in)
Directorate General of Foreign Trade (http://dgft.delhi.nic.in)
Indian Institute of Packaging (www.iip-in.com)
APEDA - Agricultural and Processed Products Export Development

Authority (http://www.apeda.com)
MPEDA - Marine Products Export Development Authority

(http://www.mpeda.com)
DGFT - Director General Foreign Trade & Regional Licensing Authorities

(www.commin.nic.in)
Central Institute for Research on Goats (http://cirg.up.nic.in)
Central Institute of Agriculture Engineering (www.ciae.nic.in)
Central Institute of Brackishwater Aquaculture (http://www.nic.in/ciba)

Annex-1.qxd 10/18/05 12:56 PM Page 196
Central Institute of Fisheries Education (www.icar.org.in/cife/index.htm)
Central Marine Fisheries Research Institute (www.cmfri.com)
Central Plantation Crops Research Institute (www.cpcri.nic.in)
Directorate of Wheat Research (www.icar.org.in/dwr/dwrmain.htm)
Indian Agriculture Research Institute (www.iaripusa.org)
Indian Institute of Horticulture Research (www.kar.nic.in/iihr)
Indian Institute of Pulses Research (www.icar.org.in/iipr.htm)
Indian Institute of Soil Science (www.iiss.nic.in)
Indian Institute of Vegetable Research (www.icar.org.in/Directorate1.htm)
National Bureau of Animal Genetic Resources

(www.icar.org.in/nbagr/nbagr.html)
National Bureau of Plant Genetic Resources (http://nbpgr.delhi.nic.in)
National Dairy Research Institute (http://ndri.nic.in)
National Research Centre for Cashew (http://kar.nic.in/cashew)
National Research Centre for Mushroom (http://www.nrcmushroom.com)
National Institute of Agriculture Extension Management

(www.manage.gov.in)
Agmark (http://agmarknet.nic.in)
National Horticulture Board (www.hortibizindia.org)
Central Institute of Fisheries Nautical and Engineering Training

(http://cifnet.nic.in)
Educational Institutes / Financial Institutions / Embassies / Universities

(www.goidirectory.nic.in)
196 Annexure I
Annex-1.qxd 10/18/05 12:56 PM Page 197
2. Useful Websites on Food Processing Sub-Sectors
Vegetable Oils
http://www.oilseed.org/
Topics: Information dissemination, associations, information resources, news,

fats and oils, processing, storage marketing, imports, exports, transport.
http://www.oelmuehlen.de/
Topics: Fats and oils, statistical tables, genetically engineered foods, associ-
ation, news, FAQ’s, publications.
http://www.corn.org/
Topics: Associations, information resources, statistics, conferences, employ-

ment, publications, education, cereals, processing, starch, fats and oils, leg-
islation and regulations, news company information
http://www.geocities.com/CapeCanaveral/Lab/1669/Index.html
Topics: Associations, fats and oils, food science, food technology
http://www.nopa.org/
Topics: Associations, publications, statistics, conferences, foods, soybeans,

company information, exports
http://www.canolainfo.org/scdc/
Topics: Information resources, health, diet, recipes, processing, education,

food service, nutrition, fats and oils
http://fruitsandnuts.ucdavis.edu/
Topics: Information resources, fruits and vegetables, processing, marketing,

nutrition, agriculture
http://www.eridania-beghin-say.com/html/gb/home.htm
Topics: Company information, Sugar, starch, fats and oils, marketing, pro-
cessing, animal nutrition, herbs and spices, ingredients
Annexure I 197
Annex-1.qxd 10/18/05 12:56 PM Page 198
http://www.oilworld.de/
Topics: Fats and oils, economics, markets, publication, financial information
http://www.agriline.it/oil/oil_ita/default.htm
Topics: Fats and oils, company information, consumer information, data-

bases, publishers
Vitamins
http://www.bookman.com.au/vitamins/
Topics: Publishers, information resources, electronic zines, publications, vita-

mins, minerals, nutrition, health
http://www.vitalstoffe.de/inhalt.html
Topics: Consumer information, minerals, vitamins, fruits and vegetables,

human nutrition, cooking, mailing lists
http://ivacg.ilsi.org/
Topics: Information dissemination, information resources, publications, vitamins
http://www.vita-web.com/
Topics: Education, vitamins, health, nutrition
http://verlag.hanshuber.com/Zeitschriften/IJVNR/index.html
Topics: Publishers, publication, vitamins, nutrition
http://www.orst.edu/dept/lpi/
Topics: education, institutes, information resources, vitamins, allergies and

intolerance, nutrition, health
http://www.nalusda.gov/fnic/etext/fnic.html
Topics: Information resources, directories, umbrella sites, food science, food

composition, diet, health, nutrition, illness, databases, electronic journals,
electronic zines, electronic newspapers, legislation and regulations, educa-
tion, vitamins, minerals
198 Annexure I
Annex-1.qxd 10/18/05 12:56 PM Page 199
http://www.realtime.net/anr/
Topics: Vitamins, minerals dietary supplements, nutrition, diet, health
http://www.medicineonline.de/
Topics: Consumer information, human nutrition, diet, foods, food composi-

tion, vitamins, health, illness
http://www.cognis-us.com/cognis/verisonline/default.asp
Topics: Publishers, information resources, publication, nutrition, health, vita-

mins, news
http://www.mc.vanderbilt.edu/biolib/hc/nutrition.html
Topics: Libraries, publications, nutrition, diet, health, vitamins
http://www.nutritionquest.com/
Topics: Nutrition, health, diet, vitamins, minerals, fats and oils, fruits and
vegetables, consumer information, publications, consumer surveys
www.roche-vitamins.com/home.html
Topics: Product news, history, business, research and development, market-

ing, product information, nutrition, careers
www.cybervitamins.com
Topics: Fats, nutrition
Health Foods
http://landwirtschaft.freepage.de/h.bollow/
Topics: Consumer information, education, health foods, food composition,

vitamins, nutritional values, nutrition, processing, drying, minerals
http://www.phytonutrition.org/
Topics: Consumer information, dietary guidelines, dietary supplements, edu-

cation, food composition, foods, health, nutrition, health, foods
Annexure I 199
Annex-1.qxd 10/18/05 12:56 PM Page 200
http://www.diasan.co.jp/cha2e.htm
Topics: Beverages, health, illness, functional foods
http://www.sana.it/
Topics: Consumer information, marketing, trade, food technology, process-

ing, environment and ecology, health, health foods
http://www.earthfoods.co.uk
Topics: Health foods, genetically engineered foods, food safety, cereal prod-
ucts, beverages, fats and oils, sugars
http://www.naturkost.de/
Topics: Consumer information, news, publications, courses, foods, health

foods, vegetarian foods, diet, recipes, health, environment and ecology
http://foodsci.rutgers.edu/nci/index.htm
Topics: Education, institutes, functional foods, quality assurance
http://www.functionalfoods.nu/
Topics: Education, courses, databases, functional foods, dietary supplements,

patents, publications, nutrition, health, legislation and regulations
http://www.aaccnet.org/FuncFood/top.htm
Topics: Associations, news, publications, functional foods, dietary supple-

ments, health, nutrition
http://www.ag.uiuc.edu/ffh/
Topics: Novel foods, functional foods, health, food science, news, publica-
tions, consumer information
http://www.science.ulst.ac.uk/niche/
Topics: Diet, health, novel foods, functional foods, legislation and regula-
tions, food safety, marketing, consumer response, nutrition, sensory analysis,
processing, courses
http://www.chfa.cu/
Topics: Associations, health foods, publications, legislation and regulations,

discussion groups
200 Annexure I
Annex-1.qxd 10/18/05 12:56 PM Page 201
Herbs and Spices

http://www.astaspice.org/
http://www.herbs.org/
http://www.kusumspices.org/
http://www.schamel.de/
http://www.fks.com/
http://www.ahpa.org
http://www.todaymarket.com
Flavours
http://www.mccormick.com/index.cfm
http://www.naffs.org/
http://www.duckworth.co.uk/
http://www.glutamate.org/
http://www.calchauvet.com/index.php
http://www.melchersflavours.com/
http://www.leffingwell.com/
Sugar and Sweeteners

http://www.aspartame-info.com/
http://www.sugaralliance.org/
http://www.saccharin.org/
http://www.daniscosugar.com/
http://www.sucrose.com/sit/
Annexure I 201
Annex-1.qxd 10/18/05 12:56 PM Page 202
http://www.sweeteners.org/
http://www.sugarweb.co.uk/
http://www.sugaronline.com
General
http://mofpi.nic.in/venturesetup/
Topics: Website of Ministry of Food Processing, Government of India, contains

policy, procedure, incentives, guidelines, supporting institutions’ details etc.
http://www.indiatradepromotion.org/
Topics: Information on major trade shows
http://www.tradeportalindia.com/
Topics: ITPO’s Business Information Centre (Bic) one stop point for varied
trade information & services such as market intelligence, global importers
directory, trade opportunities, trade statistics and trends, tariff & taxes, trade
fairs details, etc.
http://www.aaharaindia.com/
Topics: India’s biggest international food show, trade fairs and seminar
organised in association with Ministry of Food Processing Industries,
Government of India.
http://www.soyatech.com
Topics: News regarding soya technology and products all over the world
202 Annexure I
Annex-2.qxd 10/18/05 12:58 PM Page 203
ANNEXURE II
Export/Import of Processed Food: Country-Wise Profile
Sr. Hs Code Item Top 5 Countries of Export Top 5 Countries of Import

No.
1 0201 MEAT OF BOVINE ANIMALS MALAYSIA, EGYPT, UASE
FRESH OR CHILLED ANGOLA, OMAN
2 0202 MEAT OF BOVINE ANIMALS MALAYSIA, PHILIPPINES, SINGAPORE, NETHERLANDS

FROZEN EGYPT, UAE, JORDAN
3 0203 MEAT OF SWINE, FRESH, SAUDI ARAB, SPAIN, YEMEN SINGAPORE, NETHERLANDS
CHILLED OR FROZEN CONGO, GEORGIA ITALY, GERMAN F.REP, FRANCE
4 0204 MEAT OR SHEEP OR GOATS UAE, OMAN, QATAR, SRILANKA NETHERLANDS, SINGAPORE,
FRESH, CHILLED OR FROZEN JORDAN UAE, NEWZEALAND, AUSTRALIA
5 0206 EDIBILE OFFAL OF BOVINE VIETNAM, CHINA, HONGKONG GERMAN F.REP, NEW ZEALAND
ANIMALS, SHEEP, GOAT, ETC UAE, CANADA DENMARK, SINGAPORE
6 0302 FISH FRESH OR CHILLED BANGLADESH, SINGAPORE, BANGLADESH, NETHERLANDS,

MALAYSIA, CHINESE TAIPEI, SINGAPORE, AUSTRALIA, UAE
CHINA PRP.
7 0303 FISH FROZEN CHINA, UAE, JAPAN, USA MAYANMAR, SINGAPORE,

NETHERLANDS, UAE, UK
8 0304 FISH FILLETS AND OTHER JAPAN, SPAIN, CHINESE TAIPEI OMAN, UAE, PORTUGAL
FISH MEAT LITHUANIA, CHINA NETHERLANDS, THAILAND
9 0305 FISH DRIED, SALRED OR IN SRI LANKA, HONGKONG, JAPAN BANGLADESH, OMAN, JAPAN,
BRINE CHINA, BANGLADESH MALAYSIA, PORTUGAL
10 0306 CRUSTACEANS FRESH, JAPAN, USA, NETHERLANDS USA, SOMALIA, MALAYSIA

CHILLED FROZEN CHINA, AUSTRALIA MYANMAR, PAKISTAN
11 0307 MOLUSCS FRESH, CHILLED SPAIN, USA, ITALY, CHINA, OMAN, UAE, YEMEN-REP,
FROZEN JAPAN HONGKONG, SOMALIA
12 0401 MILK & CREAM NOT FRANCE NETHERLANDS

CONCENTRATED
13 0402 MILK & CREAM BANGLADESH, UAE, EGYPT DENMARK, USA, GERMAN F.REP,
CONCENTRATED OMAN, MALAGASY RP. UAE, NETHERLANDS
14 0403 BUTTER MILK, CURDLED MILK ZAMIBIA, THAILAND, UAE, THAILAND, NETHERLANDS
& CREAM, YOGURT, KEPHIER GERMAN F.REP. SAUDI ARAB FRANCE, MALAYSIA, UAE
15 0404 WHEY PROUDCTS CHINA, JAPAN, KOREA REP. FRANCE, NETHERLANDS, CHINA F.
USA, NEPAL REP, AUSTRALIA
16 0405 BUTTER AND OTHER FATS UAE, KUWAIT, GERMAN F.REP NEW ZELALAND, FRANCE,
USA, NEPAL AUSTRALIA, UK, DENMARK
17 0406 CHEESE AND CURD JAPAN, USA, NEPAL, UAE AUSTRALIA, NEPAL, DENMARK
MOROCCO NETHERLANDS, NEW ZEALAND
18 0409 NATURAL HONEY GERMAN F.REP, MOROCCO, NEPAL, AUSTRALIA,

NEPAL, USA, UK NEWZEALAND
UAE, KYRGHYZSTAN
19 0701 POTATOES, FRESH OR NEPAL, UAE, SRI LANKA BANGLADESH, NEPAL

CHILLED MALAYSIA, BANGLADESH
20 0703 ONIONS, SHALLOTS, GARLIC, MALAYSIA, BANGLADESH CHINA PRP, MALAYSIA, MYANMAR
LEEKS & OTHER ALLIACEOUS UAE, SRI LANKA, SINGAPORE HONG KONG, CHINESE TAIPEI
VEGETABLES FRESH OR
CHILLED
21 0710 VEGETABLES COOKED OR UAE, SAUDI ARAB, MALDIVES GERMAN F-REP, NETHERLANDS
NOT BY STEAMING/ BOILING NEW ZEALAND, THAILAND,
IN WATER SINGAPORE
22 0711 VEGETABLES PROVISIONALLY USA, BELGIUM, FRANCE NETHERLANDS, SPAIN,

PRESERVED NETHERLANDS THAILAND, AUSTRALIA, JAPAN
Annex-2.qxd 10/18/05 12:58 PM Page 204
23 0712 DRIED VEGETABLES, WHOLE USA, GERMAN FRP, MALAYSIA, CHINA PRP, GERMAN
CUT, SLICED, BROKEN OR NETHERLANDS, SWITZERLAND F. REP, PADISTAN, USA,
IN POWDER CANADA AFGHANISTAN
24 0713 DRIED LEGUMINOUS BANGLADESH, SRI LANKA MYANMAR, IRAN, CANADA
VEGETABLES SHELLED USA, UAE, UK AUSTRALIA, FRANCE
25 0801 COCONUTS, BRAZIL NUTS & USA, NETHERLANDS, UK, IVORY COAST, GUINEA BISU,
CASHEW BUTS, FRESH OR JAPAN, UAE BENIN, TANZANIA-REP, INDONE-
SIA
DRIED WHETHER OR NOT
SHELLED OR PEELED
26 0802 OTHER NUTS FRESH OR SPAIN, EGYPT, GERMAN F.REP USA, IRAN, AFGHANISTAN,
DRIED W/N SHELLED OR UK, GREECE INDONESIA, MYANMAR
PEELED
27 0803 BANANAS INCLUDING PLAIN- UAE, SAUDI ARAB, OMAN

TAINS FRESH OR DRIED QATAR, BAHARIN
28 0805 CITRUS FRUIT FRESH OR BANGLADESH, UAE, OMAN AUSTRALIA, USA, SINGAPORE
DRIED SAUDI ARAB, USA THAILAND, NETHERLANDS
29 0806 GRAPES FRESH OR DRIED UK, UAE, NETHERLANDS, OMAN AFGHANISTAN, PAKISTAN, IRAN
SAUDI ARAB AUSTRALIA, CHINA PRP, INONESIA
30 0807 MELONS (INCLUDING WATER UAE, SAUDI ARAB, BAHARIN AFGHANISTAN, TURKMENISTAN
MELONS) & PAPAWS KUWAIT, QATER THAILAND, PAKISTAN, AUSTRALIA
(PAPAYAS) FRESH
31 0808 APPLES, PEARS & BANGLADESH, KUWAIT, SAUDI USA, AUSTRALIA, CHINA PRP,
QUINCES, FRESH ARAB, MALAYSIA, SRI LANKA NEW ZEALAND, S. AFRICA
32 0809 APRICOTS, CHERRIES PACHES ITALY, YEMEN REP, USA, PAKISTAN, USA, TURKEY, IRAN
(INCL. NECTARIANS), PLUMS EGYPT, UAE AUSTRALIA'
& SOLES FRESH
33 0810 OTHER FRUITS, FRESH BANGLADESH, SAUDI ARAB, PAKISTAN, ITALY, AFGHANISTAN
UAE, OMAN NEW ZEALAND, INDONESIA
34 1805 COCOA POWDER, NOT UK, MAURITIUS, USA, CHINA INDONESIA, MALAYSIA, SPAIN
CONTANING SUGAR SINGAPORE, MALI
35 1806 CHOCOLATE & OTHER FOOD NEPAL, BANGLADESH, SINGAPORE, MALASIYA, USA
PREPARATIONS CONTAINING NIGERIA, SRILANKA, NIGER NETHERLANDS, UAE
COCOA
36 2006 VEGETABLES, FRUITS, NUTS JAPAN, UAE, SAUDI ARAB UAE, NETHERLANDS,
FRUIT PEEL & OTHER PARTS GERMAN F.REP, OMAN THAILAND SINGAPORE
OF PLANTS
37 2007 JAMS, FRUIT JELLIES, NETHERLANDS, USA, UAE MALAYSIA, THAILAND, OMEN
MARMALADES, FRUIT/ NUT NETHERLANDS ANTIL, SAUDI INDONESIA, GERMAN F.REP
PUREE & FRUIT/NUT PASTES ARAB
38 2009 FRUIT JUCIES (INCL. GRAPE NETHERLANDS, USA, CANADA NEPAL, SINGAPORE,
MUST)/VEGETABLE JUICES SAUDI ARAB, NETHERLANDS NETHERLANDS, DENMARK,
ANTIL SLOVENIA
39 2102 YEASTS (ACTIVE/INACTIVE) NEPAL, RUSSIA, BANGLADESH BRAZIL, FRANCE, SWITZERLAND
SRI LANKA, MYANMAR VIETNAM, USA
40 2103 SAUCES & PREPARATIONS USA, UK, CANADA, SINGAPORE USA, CHINA REP, SINGAPORE
THEREOF UAE ITALY, THAILAND
41 2104 SOUPS & BROTHS & THAILAND, ITALY, USA, UK, USA, SWITZERLAND, MALAYSIA
PREPARATIONS THEREOF SINGAPORE INDONESIA, UK
42 2105 ICE CREAM & OTHER EDIBLE NEPAL, BANGLADESH, NEW ZELALAND, BELGIUM, USA
ICE MARTINIQUE, NIGERIA, OMAN UK, AUSTRALIA
THAILAND
43 2203 BEER MADE FROM MALT NEPAL, BHUTAN, USA, UAE NEPAL, SINGAPORE, NETHER-
SINGAPORE LANDS, DENMARK, SLOVENIA
44 2204 WINE OF FRESH GRAPES GERMAN F.REP, SINGAPORE FRANCE, UK, NETHERLANDS
INCLUDING FORTIFIED WINES SPAIN, FRANCE, ITALY GERMAN F.REP, CHINA PRP,
AUSTRALIA
45 2209 VIEGAR & SUBSTITUTES FOR BELGIUM, FRANCE, BELGIUM, FRANCE, USA,
VINEGAR OBTAINED FROM NETHERLANDS, USA, OMAN GERMAN F.REP, CHINA PRP
ACETIC ACID
204 Annexure II
Annex-3.qxd 10/18/05 12:59 PM Page 205
ANNEXURE III
Important Trade Fairs, Exhibitions and

Conferences in Food Processing
January
13–15: World Food Technology Summit

26–29: International Sweets and Biscuits Fair
February
1–4: International Food Tec, Hyderabad
13–15: BIOFACH
27–Mar2: Genetically Modified Foods – Prospects, Challenges and Safety
March
4–5: Cheese as an Ingredient

5–7: Food Ingredients Asia – China Exhibition
9–13: Ahara
23–26: IFE, International Food Exhibition
30–Apr 1: International Conference on Food Hydrocolloids
April
8–11: ANUGA Food Tec

9–11: New Functional Ingredients and Foods
14–17: Interfood / Interfood Tech / Pack and Ingredients
May
20–22: FiCEE, Food Ingredients Eastern and Central Europe

Annex-3.qxd 10/18/05 12:59 PM Page 206
June
4–5: High Potency Sweeteners – All You Need to Know
July
12–16: IFT Food Expo
September
16–17: Practical Guide to Using Gelling and Thickening Agents

23–25: Fi Asia Food and Beverages, Germany
October
7–9: Health Ingredients (Hi) Japan

9–11: Health Ingredients Japan
11–15: ANUGA World Food Market
15–16: Emulsions and Emulsifiers: Essential Guide to Stable Products
17: Food Additives – Ingredients for Success?
18–21: Genetic Engineering and the Intrinsic Value and Integrity of
Animals and Plants
20–24: SIAL
27–29: CPhl Worldwide Exhibition and Conference and ICSE International
Contract Services Expo
29: A Boost for Bone Health
November
18–20: Food Ingredients Europe and Conference

18–20: Food Safety and Hygiene Arena
P.S. Usually the aforestated events are organised in the months and around
the dates mentioned. However it is advisable to check with the Ministry of
Food Processing, Govt. of India, New Delhi.
206 Annexure III

Annex-4.qxd 10/18/05 1:00 PM Page 207
ANNEXURE IV
List of Nodal Officers of State/U.T. Governments

For Food Processing Industries
Sr. No. State / U. T. Nodal Agency Tel. No.
1. Andaman & Nicobar Islands Director, Agriculture, Port Blair 03192-33257

2. Andhra Pradesh Secretary, Agriculture & Cooperation 0842-231798
Department Secretariat Building
Hyderabad - 500 022
3. Arunachal Pradesh Chief Secretary Government of 03781-22595
Arunachal Pradesh Itnagar
4. Assam Secretary Department of 0361-561307
Industries Government of
Assam Guwahati Fax-561176
5. Bihar Industrial Development 0612-221462

Commissioner, Department of
Industries Government of Bihar
Vikas Bhawan Patna-800 001 Fax-224992
6. Chandigarh Director of Industries & Tourism 0172-707343

Chandigarh Administration
Chandigarh
7. Dadra & Nagar Haveli Director 02638-42367
District Industries Centre
Dadra & Nagar Haveli
Collectorate Silvasa-396 210
8. Daman & Diu Deputy Director of Agriculture 02638-54875
Secretariat Moti Daman -396 220
9. Delhi Commissioner (Industries)
C/O Commissioner of Industries,
Delhi Administration Kashmiri Gate,
Delhi 011-2968144
10. Goa Development Commissioner 0832-223196
Government of Goa Panaji
11. Gujarat Managing Director 02712-25841
Gujarat Agro Industries
Corporation Ltd. Khet Udyog Bhavan,
Opp. Old High Court,
Navrangpura, Ahmedabad.
12. Haryana Managing Director 0172-707343
Haryana Agro Industries
Corporation Chandigarh
13. Himachal Pradesh Director of Industries 0177-213414
Government of Himachal Pradesh
Shimla
Annex-4.qxd 10/18/05 1:00 PM Page 208
14. Jammu & Kashmir Jammu & Kashmir State 0194-30036

Industrial Development Corporation
Government of J&K Darbu House,
Ram Bagh Srinagar
15 Karnataka Technical Consultancy Service 080-2266134
Organisation of Karnataka (TECSOK)
Directorate of Industries & Commerce,
Rashtrothana Parishat Bhawan,
Nrupathunga Road,
Bangalore-560 002
16. KeralaSecretary Department of Agriculture 0471-325992
Government of Kerala
Trivandrum-695 001 Fax-333160
17. Lakshadweep Managing Director 0484-361630

Lakshadweep Development
Corporation, 40.5598
II Floor, Near Padma Junction
M.G. Road, Ernakulam
Cochin-682 035 Fax-373635
18. Madya Pradesh Managing Director 0755-551807

Madhya Pradesh State Agro
Industries Development Corporation
'Panchanan' 3rd Floor Malviya Nagar,
Bhopal Fax-557305
19. Maharashtra Managing Director 022-4305122

Maharashtra Agro Industries
Development Corporation Ltd
Rajan House, Prabha Devi, Mumbai. Fax-4308618
20. Manipur Director of Industries 0385-310220

Industries Department Secretariat
Government of Manipur Imphal Fax-310550
21 Meghalaya Managing Director 0364-224965

Meghalaya Indl. Dev. Corp.
Kismat, Upland Road, Shillong Fax-224763
22. Mizoram Managing Director 0389-323680

Mizoram Food & Allied
Industries Corporation Ltd.
(MIFCO), Aizwal Fax-323680
23. Nagaland Secretary 0370-22919

Department of Industries
Government of Nagaland
Kohima 22534
208 Annexure IV
Annex-4.qxd 10/18/05 1:00 PM Page 209
24. Orissa Managing Director 0674-420526

Agricultural Promotion &
Investment Corporation of
Orissa Ltd., 326, Brahmunda,
Bhubaneshwar Fax-420506
25. Punjab Managing Director, 0172-651386

Punjab Agro Industries Corpn.
2-A Sector-28A, Madhya Marg
Chandigarh-160 002 651576
26. Pondicherry Director of Industries, 0413-34145

Industries Department Thattachavady
Pondicherry-605 009 35512
27. Rajasthan Director of Industries, 0141-380727

Government of Rajasthan
Jaipur Fax-380796
28. Sikkim Director of Industries 03592-22853

Government of Sikkim
Gangtok-737 101
29. Tamil Nadu Managing Director 044-2341664
Tamil Nadu Agro Industries
Corporation Ltd.
Agro House, Industrial Estate
Guindy, Chennai-600 032 Fax-2342375
30. Tripura Director 0381-223826

Industries & Commerce Dte
Agartala, Tripura Fax-224432
31. Uttar Pradesh Secretary 0522-280277

Horticulture & Food Processing
Government of Uttar Pradesh
Lucknow Fax-280382
32. West Bengal Secretary 033-3374244

Department of Food Processing
Industries Government of
West Bengal Mayukh Bhawan,
Bindannagar, Calcutta-700 091 Fax-3372922
Annexure IV 209
Refe.qxd 10/18/05 1:01 PM Page 211
References and Suggested

Readings
1. AIFPA, (1996), All India Food Preservers Association, Investment

Opportunities in India for Food Processing Industries—New Delhi.
2. AIFPA, (1996), All India Food Preservers Association, Legal Provisions

relating to Labelling of Fruits and Vegetable Packages (as amended up to
31-3-1996)—New Delhi.
3. AIFPA, (1996), All India Food Preservers Association, The Fruit

Products Order 1955 (as amended up to 31-3-1996)—New Delhi.
4. AIFPA, (1996), All India Food Preservers Association, The Prevention of

Food Adulteration Act, 1954 (37 of 1954) and PFA Rules, 1955 (as
amended up to 31-3-1996) 4th ed.—New Delhi.
5. Allied, (2001), A Practical Guide for Implementation of Integrated ISO-

9001, HACCP System for Food Processing Industry—New Delhi.
6. Chandra, Prasanna, (2001), Financial Management: Theory and Practice,

New Delhi.
7. Chandra, Prasanna, (1995), Projects: Planning, Analysis, Selection,

Implementation and Review, Tata McGraw Hill Publishing Company
Limited, New Delhi.
8. Checker, Satish, (2001), Food Quality and Safety: An Overall View,

Beverage & Food World.
9. Food Processing Industry Offering Scope for New Investment, (1998),

Industrial Researcher.
10. GITCO, (1998), 25 Prospective Food Processing Projects Vol.1—

Ahmedabad.
11. GITCO, (1998), Gujarat Industrial and Technical Consultancy

Organization Limited, 24 Prospective Food Processing Projects—
Ahmedabad.
12. Government of India, (1993), Ministry of Food Processing in Industry,

Food Processing Industries in India: Investment Opportunities—New
Delhi.
Refe.qxd 10/18/05 1:01 PM Page 212
13. Gulati, M. (1997), Restructuring and Modernization of Small and

Medium (SME) Clusters in India, Small and Medium Enterprises,
UNIDO, Vienna.
14. International Law Book Company, (1998), Prevention of Food

Adulteration Act, 1954 with Prevention of Food Adulteration Rules, 1955
and Commodity Index with Short Notes.—Delhi.
15. ITCOT, Opportunities in Food Processing Industry—Madras.
16. Kanji, Gopal, K. and Asher, Mike, (1996), 100 Methods for Total Quality
Management, Response Books, New Delhi.
17. Kotler, Philip, Leong Siew Meng, Ang, Swee Hoon and Tan, Chin Tiong,
(1996), Marketing Management: An Asian Perspective.
18. Padmanand, V and Jain, P. C., (2000), Doing Business in India: Street-
smart Entrepreneurs in an Imperfect Marketplace, Sage Publications, India.
19. Pandey, I.M. and Bhat, Ramesh, (1991), Cases in Financial Management,
New Delhi.
20. Pareekh, Udai and Rao, T.V., Developing Motivation Through

Experiencing, New Delhi, Oxford & IBH Publishing Co., 1982.
21. Parthasarthy, Ashok, (1998), Food Processing Industry—Futuristic View,

SEDME.
22. Parthasarthy, Ashok, (1998), Food Processing Industry, SEDME.
23. Patel, J.B. and Allampally, D. G. (1991), A Manual on How to Prepare a

Project Report, EDII, Ahmedabad.
24. Patel, V.G., Entrepreneurship Development Programme in India and Its

Relevance to Developing Countries, Ahmedabad, Entrepreneurship
Development Institute of India, 1987.
25. Patel, V.G., Innovations in Banking: The Gujarat Experiments, Bombay,

Industrial Development Bank of India, Oct. 1981, pp.2–10.
26. Porter, M.E., (1990), The Competitive Advantage of Nations, Free Press,
New York.
27. Porter, Michael E., (1980), Competitive Strategy, New York, The Free
Press.
212 References and Suggested Readings

Refe.qxd 10/18/05 1:01 PM Page 213
28. Raghuramaiah, B, (2002), Indian Food Regulations in the Global

Context, Beverage & Food World.
29. Ramaswamy, V.S. and Namakumari, S., (1999), Marketing Management:

Planning, Implementation and Control, New Delhi.
30. SBP, (2001), SBP Consultants and Engineers Private Limited Food and
Biotechnology for Corporates—New Delhi.
31. SBP, (2001), SBP Consultants and Engineers Private Limited Handbook
of Food and Agrobased Industries with High Tech Projects—New Delhi.
32. Shah, Narendra, (1998), Opportunities and Challenges in Agro-based

Industries: Food Processing, Journal of Rural Development.
33. SIDBI, (1994), Profiles on Food Processing and Agro-based Industries—

Lucknow.
34. Sivasankar, B, (2002), Food Processing and Preservation—New Delhi:

PHI.
35. Sohrab, (2002), Adoption of ISO 140001—A New Imperative for Food
Industry: A Practical Implementation Case Study, Beverage & Food
World.
36. The Amalgamated Press, (2001), Processed Foods and Beverages

Directory 2001–2003—4th ed.—Mumbai.
37. Vyas, Jaynarayan and Shah, Girish, (1998), Saket Food Processing
Handbook—Ahmedabad: Saket Projects Limited.
38. World Importers Directory, (1997), Process Food, Food Products,

Vegetables—New Delhi: Centre of Publication.
References and Suggested Readings 213

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A Manual for Entrepreneurs:

Food Processing Industry

Entrepreneurship Development Institute of India

Ministry of Food Processing Industries

Tata McGraw-Hill Publishing Company Limited

© 2006, Entrepreneurship Development Institute of India

No part of this publication can be reproduced in any form or

This edition can be exported from India only by the publishers,

Published by Tata McGraw-Hill Publishing Company Limited,

Cover Design: Mesmerizers, Bangalore

The McGraw-Hill Companies

R eduction of unacceptable level of wastages of the farm produce and

There would be large farm surpluses if the productivity increases to global

Rapid growth of food processing sector is inevitable since urbanisation with

Lack of training institutions and trainers dedicated to EDP in food process-

Suggestions for improvement in the manual would be highly appreciated.

India has achieved significant growth in food production as a result of the

We sincerely hope young and dynamic potential entrepreneurs—the EDP

EDI, Ahmedabad DINESH AWASTHI

1. The Food Processing Sector in India: An Overview 1

2. The Impact of Policy on Enterprises 21

4. Soft Skills for Entrepreneurs 37

5. Planning a Small-Scale Unit: Whom to Approach for What 41

6. Business Opportunity Identification 49

7. Market Survey Tools, Preparation of Schedule and Techniques of

8. Production Programme, Plant Capacity, Manpower

9. Business Plan Format for Tiny and Small Enterprises 71

10. The Financials of a Project Report 73

11. Assessing Financial Viability of the Project 115

12. Bookkeeping and Accounting and Financial Statements 119

13. Costing and Pricing of Products 139

14. Working Capital Management 145

16. Applied Management in Business: Learning from

17. Legal Requirements 187

18. Support Institutions for Promotion of Food Processing Sector 191

T he food processing sector is critical to India’s development, for it estab-

Table 1.1 Status of Food Processing Industry in India

BROAD CATEGORISATION OF FOOD PROCESSING

(i) Fruits and Vegetables

In 1997–1998, processed fruits and vegetables exported, valued Rs.5,240 mil-

Table 1.2 Fruit and Vegetable Processing Units

Year 1994 1995 1996 1997 1998 1999

Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry

The Food Processing Sector in India: An Overview 3

(ii) Meat and Poultry

Source: Composition of Estimated Meat Production

At present, only a small percentage of the meat produced is converted into

With growing urbanisation and increasing quality consciousness, the market

extremely useful service in out-transport system and agriculture. India

The increasing awareness about balanced nutrition has effected changes

There are about 15 pure-line and grandparent franchise projects in India.

Table 1.3 Status of Pureline & Grandparent Franchise Projects

Sr. No. Hatcheries No. of Parents (in Supply (in

The Food Processing Sector in India: An Overview 5

(iii) Milk and Milk Products

Value of Dairy Products

1999 2005 (est.)

(iv) Consumer Products

India produces a large range of cocoa and non-cocoa based confectionery

Confectionery output grew at a compound rate of 6 to 7% in recent years.

(v) Alcoholic Beverages

The Food Processing Sector in India: An Overview 7

(vi) Fisheries and Sea Food