MBA II – ED UNIT IV

Project Management - meaning, objectives and how to chose a project.

Technical, Financial, Marketing, Personnel Feasibility . Estimating and
Financing funds requirement, Significance and determinants of working
capital, venture capital funding, Schemes offered by the commercial
banks and financial institutions.

Project: Webster Dictionary defines a project as a scheme , design, a

purpose of something intended or devised. Project report or a business
plan is a written report or statement of what an entrepreneur proposes
to take up. It is a kind of guide that tells what the entrepreneur hopes to
achieve and how he proposes to achieve it. It is a well defined course of
action.

Contents of a Report:

1. General information: This contains the general information

regarding product profile and product detail.
2. Promoter: The educational qualification and work experience of the
entrepreneur.
3. Location: The exact location of the project and its advantages.
4. Land & Building: Land area, construction area and type of
construction etc.
5. Plant & Machinery: Details of machinery required, capacity, cost,
various alternatives available, cost of miscellaneous assets.
6. Production process: Description of production process, process
charts, technical know how, technology, etc.
7. Utilities: Water, power, compressed air requirements, cost estimates,
sources of utilities.
8. Transport and communication: Mode, possibility and problems and
cost.
9. Raw material: List of raw material required, sources, cost, tie-up
arrangements, alternatives, if any.
10.Manpower: Manpower requirement. Skilled, semi-skilled, sources,
cost, training.
11.Products; Product mix, estimated sales, distribution channels,
competitions, standards in-put/out-put ratio, product substitute.

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 12.Market: End users, distribution of market – local, national,
international, trade practices, sales promotion, research.
13.Requirement of working capital:
14.Requirement of funds: source and amount.
15.Cost of production:
16.Break-even analysis
17.Schedule of implementation

How to Choose a Project:

There are various factors that will help to decide which project to select;
These factors can be broadly be classified into Internal factors and External
Factors.
1. Internal Factors:
a) Cost: If a totally new enterprise is being thought of, the cost will
be very high as it includes cost of research and product
development. Initial investments on new machinery, training to
employees and raw material will also have to be considered. If,
however, the enterprise is just a modification of any existing
product or company, the cost will be much less. The ability to
spend will determine the type of product or enterprise to be chosen
b) Experience: Cost benefits are enjoyed by those who enter into a
business first or who have experience in the technology required.
The pioneering companies establish a good lead and stay in the
forefront. In addition, companies that are already experienced in
similar fields have a positive edge over others who do not.
c) Differentiation: An entrepreneur should select a product which is
distinctly different from his competitors. The difference need not
be real or actual. It has to be psychological that it is superior from
all other brands because it is different.
d) Financial strength: If a luxury product is selected for production
like luxury cars , jewellery, etc, a very high initial investment will
be required. This calls for finance from other sources than ones
own. Such sources may be financial institutions, banks, shares,
loans etc.
e) Functional Departments: All the departments in an enterprise have
an impact on the entrepreneur’s plans and actions. Before making
a decision, he has to consult and get the support of his other
departments like Finance, Production, Materials etc.
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 f) Personal Factors: The nature of an entrepreneur also decides what
product he is going to produce. If he is self-confident, optimistic
and able to take risks, reacts positively to new challenges, he can
take up production of a completely new product. Otherwise, it is
better to take up products that are already existing in the market.

2. External Factors:
a) Demand of Consumers: Successful entrepreneurs are those who
recognize and respond profitably to unmet demands and trend of
consumers needs. Entrepreneurs can make a fortune if they can
meet some long pending or pressing need like medicines for cancer
or mental diseases.
b) Competition: An entrepreneur is always surrounded by his
competitors. Competitors have to be identified and monitored to
capture and maintain customer loyalty. The entrepreneur has to
decide what kind of market he is facing. Whether it is pure
competition, monopolistic competition, Oligopoly ( a few large
interdependent firms that account for the bulk of industry’s sales)
or pure monopoly. An entrepreneur with innovative ideas and
good and research facilities can invent something new and capture
the market himself.
c) Suppliers: Entrepreneurs have to keep a check of the availability
of raw material for his products and also for future expansion. He
has to check upon various suppliers and upon their reliability of
delivery and quality of material.
d) Technological improvement: An entrepreneur should keep pace
with the latest happenings and technology . He should think of
selecting a new product or even an existing product after
incorporating the latest technology Otherwise he will be outdated
even before he starts.
e) Demographic factors: Market means people. He should study
factors of human population and its distribution structure. He
should take into consideration size, growth rate, education,
geographical distribution, occupation and age distribution The
economic ability of the population of the area under consideration
should also be taken into consideration.
f) Natural environment: Natural environment consists of raw-
material, energy, pollution and the Government policies and
interferences. These aspects should be studied very carefully
before deciding upon the project.
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 g) Political and Legal Aspects: Political and legal aspects and rules
are different in every country. An entrepreneur should be aware of
the rules and regulations, especially those that concern his project,
in that particular country where he is trying to establish his
enterprise.

The important aspect to be looked into before choosing a project has been
indicated. Next is to decide on the project itself. There are various network
techniques that are used to find out the sequences to be taken and how much
time it is like to take for completion.

1. PERT (Programme Evaluation and Review Technique)

PERT is a popular technique used for project planning and control. It
schedules the sequence of activities to be completed in order to accomplish
the project in the shortest possible time. It helps reduce both time and cost of
the project.
Steps:
1. The activities involved in the project are drawn up in a sequential
relationship to show what actively follows what.
2. The time required for completing each activity is estimated and noted
on the network.
3. The critical activities of the project are determined.
4. The variability of the project and completion time can be estimated.

Advantages:
1. It determines the expected time required for completing each activity.
2. It helps completing the project within a given period of time.
3. It helps management handle uncertainties involved in the project.
4. It helps management to make optimum allocation of limited resources.
5. It presses for the right activity to be done in the right sequence and at
the right time.

Limitations:
1. If the estimates of time required is miscalculated, then the entire
results will be wrong.
2. The technique does not take into consideration the different resources
required during the process.
3. The technique required frequent updating and revision of PERT
Calculations.

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2. CPM (Critical Path Method):

The CPM differentiates between planning and scheduling of a project.

Planning refers to the determination of activities to be accomplished,
scheduling refers to the time set for each activity. The duration of different
activities are determined.

Advantages:
1. It helps in ascertaining the time schedule of a project.
2. It makes control easier for the management.
3. It identifies the most critical elements of the project. The management
keeps itself alert on these points.
4. It makes better and detailed planning possible.

Limitations:
1. CPM operates on the assumption that there is a precise known time
for each element. This may not be true in actual practice.
2. CPM time estimates are not based on statistical analysis.
3. It cannot be used as a controlling device because any change made,
will upset the entire structure of network.

TECHNOLOGICAL FEASIBILITY:

Technology involves the use of tools, machines, materials, techniques

and sources of power to make work easier and work more productive.
Industrial technology helps people achieve goals. Technology implies the
knowhow, design and intellectual input of doing things in the proper
way. It refers to the practical application of the principles of science for
day to day industrial and commercial use.
With the rapid change in technology, an entrepreneur needs to remain in
touch with the latest and also ensure that his technology and machinery
have not become obsolete.
Consideration in selecting technology:
1. Investment capacity: High technology requires heavy capital
investment which is often beyond the reach of small-scale
entrepreneurs. Therefore, small scale entrepreneurs often depend on
manual operations.
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 2. Volume of production: Desired volume of out put depends on the
size of the market and the demand for the product. In case of small
scale industries, the market is often local and low tech plants are
sufficient.
3. Nature of product: Some products, like matches, detergent etc, low
and slow process technology is sufficient. For manufacture of high
precision machines and tools, high tech equipments may be needed.
4. Manufacturing strategy: In case the manufacturing strategy of the
enterprise requires high tech machinery, such machines will have to
be procured.
5. Economic evaluation: Return on investment will also determine the
technology used and its sophistication.
6. Social consideration: Environment, legal and cultural aspects will
also determine the technology used. As the Govt. and the public are
becoming more and more aware and concerned about pollution, need
for anti-pollution technology is increasing.

Benefits of Technology to the Industry:

1. Increased production: Through improved technology, entrepreneurs
are able to produce much more than their predecessors were able to.
2. Reduced labour:
3. Improved products:
4. Higher living standards.

Need for Financial Planning:

Finance is one of the most important requisites to start an enterprise. It is
finance that helps his to bring together land, material man and other
resources to start his production.
1. There should be adequate money to pay the purchase considerations.
2. There should be sufficient capital to support the business till its
gestation period.
3. Enough provision should be made to meet unexpected expenses.

There are 2 ways of classifying the financial needs of a company;

1. On the basis of extent of performance: Fixed Capital and Working
Capital.
2. On the basis of period of use: Long-term capital and Short-term capital.

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Fixed Capital: The money invested in fixed assets or durable assets like
land, building, machinery, equipment, furniture. These assets are required
for permanent use., for a long period of time.
Working capital: The money invested in current assets which are required
for day-to-day use, like raw material, finished goods, debtors,
Long-Term Capital: This is money whose payment is arranged for more
than five years in the future. The source of long-term finance could be
owner’s equity, term-loans from financial institutions, credit facilities from
commercial banks etc.
Short-term Capital: This is borrowed capital that has to be repaid within one
year. The source of such capital may be the bank, borrowing from working
capital, deposits or borrowing from friends and relatives.

Source of Finance:
(i) Internal: Funds are raised from within the enterprise itself. .
The source of such capital may be the bank, borrowing from
working capital, deposits or borrowing from friends and
relatives.
(ii) External Source: This money could be had from deposits or
borrowings from friends or relatives, from banks or working
purpose capital, credit facilities from commercial banks,
Term loans, Personal funds or equity capital, Mortgage
loans, Subsidaries.

Capital Structure:
Enterprises raise capital through internal as well as external resources.
These take the form of ownership and borrowed capital respectively. The
former, ie, owner capital, is also known as equity and the latter is known as
debt. The total equity and debt of a company is known as Capital structure.
Capital Structure is the ratio between debt and equity capital. It is often
called debt-equity ratio.
Capital structure is different from financial structure. Capital structure
means the long term or permanent financing of the enterprise which consists
the debt and equity. It excludes funds raised from short term sources.
Financial structure comprises all sources of fund, including short-term
finance.
The Optimum capital structure is the financial mix that incurs the least
cost but yields the maximum returns. It is obtained when the market value
per equity is the maximum. For a successful business, in favourable
conditions, debt capital can be more, even twice the amount of equity
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capital. But during unfavourable situations, debt capital should be as low as
possible. This is because the enterprise may not be able to pay interest on
loan on account of cash crunch. The creditors and suppliers may think that
the enterprise is unreliable and stop extending loans and credit. This will
lead t insolvency.
The Optimum Capital Structure has the following features;
1. The capital structure should have the minimum cost and maximum
yields.
2. The adopted capital should be flexible enough to fulfill the future
requirements of capital as and when required.
3. The debts should be within the repaying capacity of the enterprise.
4. There should be a proper control over the financial affairs of the
enterprise.

FACTORS DETERMINING CAPITAL STRUCTURE:

1. Nature of Business: The nature of business is one of the factors

determininbg the capital structure to be maintained. Business with
wide fluctuations of sales should maintain smaller proportion of
borrowed funds, ie., debt capital, ie., companies manufacturing
televisions, refrigerators, tools, etc. Business with inelastic type of
selling like consumer goods, may have large proportion of borrowed
funds. The reason is that generally these companies have stable
earnings.
2. Size of the Enterprise: Small enterprises have to rely more on the
owner’s capital and less on borrowed money. This is because leders
consider lending to small firms risky.
3. Trading on equity: In case the rate on returned capital is more than in
the case of rate on debenture or dividend on preference shares, it is
called trading on equity or leverage effect. In that case there is greater
dependence on borrowed capital.
4. Cash Flow: The ability of a company to discharge or meet its fixed
obligations depends upon the availability of cash. Or cash flow. The
more the cash inflow, more will be the proportion of borrowed capital
in the capital structure.
5. Purpose of financing: In case cash is required for direct production
purpose, the company may rely on external sources of money, ie.,
borrowed money, because the company can repay the borrowed
money from the money earned out of production. If the money is for

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 non-productive activity, like employee’s payment, the owner has to
set aside the money.
6. Provision for future: Provision for the future should be made by
keeping the best securities till the last. Lesser securities can be reeased
if required, at the earlier stage.

TERM LOANS:
There are two types of loans, short-term and long-term loans;
Term loans means long-term loans, ranging from 5-15 years. These are
usually raied to purchase capital assets like land and site, building and
civil works, plant and machinery, installation expenses and miscellaneous
fixed assets. It may also be used to construct roads, railways, etc, in case
of backward areas.
Means of raising such long-term loans are issue shares, issue of
debenture, loans from Financial institutions and Commercial Banks,
Public deposits and Retention of profits.
Shares: Shares is the unit in which the total capital of a company is
divided.
Preference Shares: These are the shares which carry a preferential right
over equity shares with reference to dividends. They also carry a
preferential righ over equity shares at the time of winding up or payment
of capital
Equity Shares: What is not preferential share is equity share. Equity
shares are entitled to dividends and capital after the payment of
preferential shares.
Debentures: A debenture is an instrument which is acknowledged as a
debt by a company to a person or persons.

Difference between Shares & Debentures::

Base Share Debenture
Representation A portion of capital A portion of debt.

Status Shareholder member of co. Creditor of company

Return Paid dividend Paid interest

Right of controlRight over the working No right over company

Repayment No repayment Repaid after specified

period
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 Purchase Cannot purchase own shares Can purchase own
debentures

Order of repay Last to get payment Priority of payment

Venture Capital:
Venture capital is a form of financing especially designed for financing high
tech, high risk and perceived high reward projects. Venture capital helps
entrepreneurs translate new ideas into commercial production. It especially
helps in financing high technology projects and research and development
projects.

International Finance corporation, Washington (IPCW) defines venture

capital as equity or equity featured capital seeking investment in new ideas,
new companies, new products, new processes or new services that offer the
potential of high returns on investment.

The Govt. of India issued some guidelines in November 1988, mainly to

promote a broad framework for the operation of venture capital companies
in the country. The main features are;
1. Al India Financial Institutions, SBI and other scheduled banks are
eligible to float such a fund.
2. Minimum size of the fund should be Rs. 10 crores.
3. In case of public issues, the promoter’s share is to be more than 40%
of the issue capital.
4. Foreign holding will be allowed I up to 25% provided it comes from
multilateral international financial organizations, developmental
institutions or mutual funds.
5. The NRI’s investment is allowed up to 74% in the capital.
6. Debt equity ratio should be limited to 1:1.5
7. This fund is not allowed to operate in money market operations.
8. The venture capitalist will pay tax @ 20% on the dividend income
subject to a maximum of Rs. 10,000 and will have to pay tax @20%
on capital gains..

PERSONNEL FEASIBILITY:
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“A happy worker is a more productive worker.” – Adam Smith.

This was said many years ago. It holds good even for today. With the
increase in competition, and ever changing environmental conditions,
organizations have become very conscious of effective utilization of man
power.

Information technology has brought about significant changes in our day to

day lives. Indians have made great strides in information technology. Man
has turned loss making units into profitable ones. Man has, in fact, made
many strides in the field of excellence.

Every organization has to select and hire people who can improve its
position and work efficiently. The organization has to ensure that the people
acquire required
Knowledge and skills. Employees also have to be motivated to contribute
their best for managing the organization successfully.

Need/ Importance of managing men:

It is the men who do the planning, organizing, directing co-ordinating
and controlling.
The objectives for which the company is established are attained
economically and effectively.
If men are managed properly, they try to maintain a positive outlook
and work for the company with great enthusiasm.
An individual’s knowledge, skill, creative abilities, talents, etc., can
be extracted and utilized properly.
The value, attitude, culture and beliefs of each individual can be
known.
The objectives of the society can be duly considered and served. It
helps in the creation and development of human relations.
It leads to job satisfaction. The productivity, excellence,
innovativeness, profitability, etc., can be increased. The Right person
for the Right job can be secured.

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 The employees’ leanings, likes and dislikes become known and these
attributes can be used to attain the company’s goals. Labour turnover
can be reduced drastically The drawbacks of each and every employee
can be analysed. It helps in releasing stress, strain and tension.
Since it is the men who make use of all the other resources required
for production, proper handling and motivation of men can make
wastes or improper utilization of resources. great contribution in the
achievement of company goals. It eliminates
It helps to co-ordinate individual and company goals.
It helps in identifying adequate and equitable wages, incentives,
employees benefits and social security and measures for challenging
work, prestige, recognition, security, status, etc.

MOTIVATION:
There are two ways by which people can be motivated.
Positive motivation: People are said to be motivated positively when
they are showed a reward and the way to attain that reward. Such a
reward may be financial or non-financial. Positive motivations create
a positive atmosphere in the organization.

Negative Motivation: By installing fear in the minds of people, one

can get the desired work done. Here, the fear of consequences of
doing something keeps the workers in the desired direction. It is an
unfavourable attitude and hence, should be avoided.

Forms of motivations:
Monetary:
Pay in conformity with market trend. Skill-based reward system.
Merit pay.
Employee work option.
Performance bonus/ incentives.
Non-Monetary Motivations:
Awards – trophies, citations, certificates.
Token – vacation trips, gift coupons, watches, etc.

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 Club membership Salary break-up in accordance to employees’
choice. Medical benefits.
Group life insurance.
Retirement benefits.

WORKING CAPITAL:
Working capital is that amount of funds required to carry on the day-to-
day operations of a company. It may also be regarded as that portion of a
company’s total capital which is employed in its short term operations.
Working capital, sometimes called the net working capital is represented
by the excess of current assets over current liabilities and identifies the
relatively liquid portion of total enterprise capital .

Working capital is called cycling capital because the money circulates in

various forms of current assets in a continued manner.

Capital finance is regarded as the life blood of any enterprise. Therefore, the
significance of working capital in an enterprise lies in the fact that its
circulation has to be properly regulated in the business. The total working
capital is composed of two kinds of parts; (i) Regular or fixed (ii) Variable.

raw
cash
materials

Cash

Bills
Semi-
Receivab
finished
les
goods
Bills
receivabl
e
Finished
goods

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SCHEMES OFFERED BY THE VARIOUS INSTITUTIONS:

Various financial institutes provide financial assistance to the Small-Scale

Industries and entrepreneurs. Some of those institutes are;

1. IFCI - Industrial Finance Corporation of India

2. ICICI - Industrial Credit Corporation of India
3. IDBI - Industrial Development Bank of India
4. LIC - Life Insurance Corporation
5. UTI - Unit Trust of India
6. SIDBI- Small Industries Development Bank of India
7. NSIC - National Small Industries Corporation

IFCI-
This was established in the year 1948 to provide assistance to the medium
and large industrial Organisations. Its functions are;
1. To provide assistance for industrial infrastructure.
2. To process Merchant banking operation
3. Helps to improve various factors for the socio-economic objectives of
the company.
4. Provides needed guidance in project evaluation, identification,
formulation, implementation, etc.
5. Gives a helping hand in respect to technical and administrative
objectives.
6. Undertakes research and survey for the sake of industrial
development.
7. Advances loans for various purposes such as underwriting of shares
guaranteeing of deferred payments for machinery.
ICICI:-
This was established in the year 1955 as a private institution for the purpose
of assisting long term funds for capital assets and project promotional
services. Its various functions are;
1. Direct subscription to securities.
2. Provide long term loans in rupees.
3. Provide loans in foreign currencies
4. Guaranteeing payment for credits
5. Providing credit facilities to indigenous manufacturers.
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 6. Leasing of equipment
7. Conducting techno-economic survey for backward areas.

LIC:
This corporation was established in 1956. It provides financial assistance to
industries.
1. It works in close liaison with the other All India financial institutions
in providing finance to the industries.
2. Helps industrial concerns by its underwriting support.

UTI
This was established in the year 1964. It provides the following assistance;
1. It subscribes to industrial securities and also to purchase outstanding
securities in the secondary market.
2. It is governed by considerations of yield and security as it has an
obligation to earn a reasonable rate of return for its holders in its
various schemes without exposing customers to undue risks.

IDBI
IDBI was established in the year 1964 as an apex financial institution and
subsequently reconstructed as the principle financial; institution. IDBI
provide assistance for the development of industries;
1. Direct assistance to industrial concerns in the form of underwriting
of shares and debentures.
2. Soft loans for modernization, renovation and replacement od
existing industries.
3. Rediscount bills arising out of sales of indigenous machinery on
deferred payment.
4. Finance export oriented industries.
SIDBI:
This was set up in 1989 to function as the principal financial institution for
the promotion, development and financing of industries in the small-scale
sector. The assistance provided by this organisation are;
1. Refinancing of loans and advances extended by primary lending
institutions.
2. Discounting and rediscounting of bills.
3. Extension of risk capital or soft loan assistance to industries.
4. Extending financial support to SSIDC and NSIC
5. Technological up gradation and modernization services to industries.
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 6. Promotes employment oriented industries , especially in semi urban
areas.
NSIC
NSIC was set up in 1955 as a public undertaking. It was established mainly
to develop small scale industries in the country. The functions followed are;
1. Procuring Govt. orders for small scale units.
2. Developing small scale industries as ancillaries to large scale
industries.
3. Developing and upgrading technology for project based wastes
4. Importing and distributing scarce raw material, components and parts
among users in the small scale industries.

Questions:
1. What do you understand by Project Management? What are its
objectives and how are they selected?
2. How are funds requirement estimated and from where are they
procured by small scale industries?
3. What is the factors and significance of Working Capital? How will
you differentiate it from Fixed Capital?
4. What is Venture Capital?
5. What are the funding schemes offered to Small Scale Industries by
various Banks and Financial Institutions?
6. What do you understand by Long Term and Short Term Loans?

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