Aldersgate College Entrepreneurial Mind

School of Business Management and Accountancy

Module 7: Setting-up of Small-Scale Unit

Objectives
After completing this unit, you will be able to:
 Explain the start-up process of a small-scale business.
 Understand how to conduct feasibility analysis
 Understand the legal requirement of establishing a small-scale business.
 Learn about business plan development.

Introduction: Start up Process

The various steps involved in starting up of a business are as follows:
Various techniques can be adopted for idea generation like brain storming, group discussion, data collection through a survey,
data collection through internet, market research, commercialization of invention, etc.
1.Idea Generation: It is the first stage of starting a business. The entrepreneur gets an idea about new products, new
services, or improved products and services to satisfy existing and future demand. The idea about new product or service can
be initiated by research and development, existing companies, current suppliers or customers etc.
2.Environmental Scanning: Once an idea has been generated about a product or a service, the next step is environmental
scanning. It is advisable to carry out environmental scanning as preliminary study before getting into detailed project
formulation. Different variables, in the external and internal environment should be scanned so as to analyses the viability of a
business. External environment variables like government, legal, socio cultural, political, economic, demographic and
technological are to be scanned to identify the opportunities and threats. Internal environment variables like availability of raw
material, machinery, finance and human resource, are to be scanned to identify the strength and weakness.
The information from as many sources can be collected regarding the following variables:
 Socio Cultural Appraisal: The study of social and cultural features of the society is important to understand about the level of
acceptance of the product or service offered. Features like religion, beliefs, norms, fashions and fad, educational level,
lifestyle, attitude towards consumerism and materialism and many other affects the level of demand of the product. For
example, a company providing adventure sports will not have many takers in counties which are considered conservatives.
Such company will have better prospects in western countries or societies which are not conservative.
 Economic Appraisal: Various economic parameters like rate of industrial growth, gross national product (GNP), per capita
income, disposable income, rate of interest, presence of financial institutions and their networks, sources of finance available,
condition of primary and secondary markets, population growth, rate of unemployment, rate of inflation, affect the viability of a
business plan.
 Demographic Appraisal: To identify the target market and its size, the variables like sex, age distribution, income distribution
etc., help in identifying the viability of a business.
 Regulatory and Legal Appraisal: The legal and regulatory frame work is beyond the control of a business owner yet it has
the greatest impact on operations of a business. The incentives, grants, subsidies can be very beneficial in establishing a
business. While choosing a business venture, the factors like price control, licensing, etc. should also be studied carefully.

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 Raw Material: the access to and availability of raw material at present and in near future should be analyzed. The difficulty in
access and shortage in availability of raw material can bring the business to stand still.
 Production and Operation: the availability of various machinery, equipment, tools, etc. should be analyzed.
 Market: presence of an attractive market having present, potential and latent demand
 Human Resource: assessing the availability of type and number of human resources required.
3. Feasibility Study: Feasibility study is undertaken after environmental scanning. Environmental scanning gives an idea
about the internal and external factors that might affect the viability of a business. It tells whether it makes sense or not to
actually start the proposed business. After environmental scanning an idea might lose its attractiveness and might be dropped.
If an idea seems good enough to proceed after environmental scanning, the next step undertaken is of feasibility study.
Feasibility study is a detailed study conducted to analyses the feasibility of a project in a particular environment. The
environmental scanning forms the platform on which the feasibility study will be build. Although, feasibility study is dependent
on environmental appraisal, yet it is much more detailed.
The various dimensions of a feasibility study are:
a) Market Analysis: A business cannot succeed without effective marketing. Effective marketing can be achieved
through systematic marketing research. It is important to know about the intended market. The market analysis
should be carried out in a way so as to answer the following questions:
 What is the total size of the market?  What percent share of the market will you have?  Current demand
in target market.  Trends in target market—growth trends, trends in consumer preferences, and trends in product
development. Growth potential and opportunity for a business of your size.  What are the barriers to entry in this
market viz.  High capital costs  High production costs  High marketing costs  Consumer acceptance and brand
recognition  Training and skills  Unique technology and patents  Unions  Tariff barriers and quotas  How these
barriers can be overcome?
b) Technical/ Operational Analysis: Technical/ operational analysis is done to assess the operational viability of the
proposed business venture. Key questions to be answered are:
 What will be the Production techniques and costs?  How will the Quality be controlled?  How will the
Inventory be controlled?  What type of location will be needed? Is it important that your location be convenient to
transportation or to suppliers?  What type of Physical requirements like Amount of space and Type of building will
be required?  What will be the type of utilities like power, water etc., will be required?  What kind of inventory will
be required: raw materials, supplies, finished goods? How will it be acquired?  Who are the key suppliers?
c) Financial Feasibility: After the market analysis and techno- operational analysis, financial feasibility of the
proposed venture is assessed. Following costs are estimated:
 Cost of land and building  Cost of plant and machinery  Preliminary cost: expenses in conducting
market survey and feasibility study, establishment expenses, expenses in raising capital, etc.  Working capital
estimates  Cost of production: raw material cost, labor cost, overhead expenses, utilities.  Profitability projections:
Are achieved after determining gross profit through summation of cost of production, selling expenses, administrative
expenses and expected sales.

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School of Business Management and Accountancy

4. Business Plan Development: After environmental scanning and feasibility analysis, a detailed business plan is developed.
It is a written document that describes step by step, strategies designed for starting and running a business. Business plan
development has been discussed in detail in later section.
Legal Framework
An entrepreneur should be aware of various legal aspects for setting up and running of a small business. The knowledge
about the legal framework helps an entrepreneur in running business successfully. Some of the legal considerations are as
follows:
1. Intellectual Property: Any resource which gives a trade a commercial advantage is called Intellectual Property. The
resources may be a formula, data, compounds, new processes, compiled information, list of customers etc. The Intellectual
Property laws in India have been implemented following WTO’s agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS).

The Intellectual Property laws cover the following:

A. Trademark: A trademark is a distinguishing word, figure, symbol, design, numeral or a combination of these that
identify particular goods or services. The trademark gives the proprietor the exclusive right to use the trademark
in relation to the goods or services for which it was registered. Trademarks can also be transferred with or
without transmitting the goodwill of the business. The trademarks can be established in the market through
brand building activities.
B. Copyright: The copyright laws protect the legal rights of a person for his or her work of writing or authorship.
This law prevents others from reproducing the work in any other way. The intellectual property under copy right
include:
 Literary work (books, articles, manuscripts etc.)  Dramatic work (drama, dance choreography, costumes etc.)
 Musical work (lyrics, music, graphical notations etc.)  Artistic work (drawing, painting, sculpture, photographs
etc.)  Cinematographic work (recoding, sound tracks, sound effects etc.)  Computer work (programs, tables,
databases etc.)
C. Patents: A patent gives protection to the inventor of a new product/ process/ design to solely use the copying/
selling/ using of the invention for a limited period of time. This right acts as an incentive for the inventors who
have worked hard and created something innovative. The term ‘invention’ is defined as ‘a new product involving
an innovative step and having industrial application’. In India, the rights of patents are granted to the person who
first applies.
Anything, for which a patent is desired, should be:
 New: patents are not granted for things already well known and well established.
 Useful: inventions should be beneficial for people and should be capable of industrial applications.

2. Licensing: Licensing may be defined as a contractual agreement between two parties where one party having some
proprietary rights agrees to transfer its rights to another party by charging some kind of fee or royalty in a proper mode.

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School of Business Management and Accountancy

Licensing has acquired great importance in today’s global world. There are many examples where a company owning the
intellectual property of a product, manufactures it in its country and gives license to other businessmen in other countries to
manufacture the same product.
3. Contract: A contract is a written document that is enforceable legally. Generally, an entrepreneur starting a business gets
into discussions with landlord, suppliers, service providers, buyers and sellers, government authorities, etc. After finalization of
the discussions, contacts will take place which binds the two parties legally. Broadly, a contract document will contain the
following things:
 Name of parties involved in the contract and their roles.  Detailed description of transaction taking place between the two
parties.  Specification of contract value in terms of price and charges.  Signature of competent persons from each of the
organization who are party to the contract.
Business Plan Development
A business plan is a written document giving in detail all relevant internal and external elements that affect business and
strategy for starting a new venture. It is an important document that deals with all aspects of proposed new business. It
integrates the functional areas of the organization like marketing, production, finance and human resource. It also takes into
account the time horizon for a new venture. In preparing a business plan an entrepreneur can take help of experts in different
fields like finance, legal, marketing, technical consultants etc. Various governmental agencies at the state and central level
also extend help in preparation of business plan to entrepreneurs starting a small business.
A business plan can be used by an entrepreneur for a variety of objectives. Some of the objectives are as follows:
 Getting debt from banks or getting equity funding from various investors.
 Attracting business partners or key alliances
 To clarify exact nature of the business

A business plan must describe the company, its product, and its management team. It should also state from where money
will come and how it will be spent. A well-developed business plan is an asset to an entrepreneur and helps in understanding
the objectives of the business and achieving them. While writing a business plan following thing should be taken care of:

 Defining Purpose: deciding the purpose of business plan in advance i.e. using the business plan for securing loan
or attracting business partners, etc.; helps in customizing it according to the need of the audience.
 Information Collection: It is important to list out all the information that is already available with you regarding
business and the industry. The gap in information should be identified and required information should be collected.
Government has created specialized institutions and bodies that are entrusted with collection, dissemination and updating of
correct and current information about different aspects of business and industry.
 Financial Analysis: All costs and revenues estimates have to be calculated; financial statements have to be drafted.
This exercise will finally lead to sensitivity analysis, calculation of ROI (Return on Investment), break even analysis and
various financial ratios. It should be taken care that financial analysis is realistic and practical.

A business plan consists of the following sections:

1. Executive summary

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2. Business Description
3. Market Plan
4. Competitive analysis
5. Operations and Management Plan
6. Financial Plan
7. Appendices

1. Executive Summary: The statement should be short, may be of one or two pages. It should explain the fundamentals of
the proposed business: What will be the product? Who will be the customers? Who are the owners? What future holds for the
business and the industry? It should be professional, complete, concise and above all should sound enthusiastic. If purpose of
making the business plan is to get a loan, it should be clearly stated that how much loan is required, how it is going to be
used, and how the money will make the business more profitable, thereby ensuring repayment.

Business Description: It is important to describe what business will you be in and what will you do. To describe one’s
business, following key elements may be included:

 Mission Statement: Many companies have a brief mission statement, usually in 30 words or fewer, explaining their
reason for being and their guiding principles. Although it is not compulsory to have a mission statement, but it is a
good to have one as it serves as a guiding point.

 Company Goals and Objectives: Goals are destinations—where you want your business to be. Objectives are
progress markers along the way to goal achievement. For example, a goal might be to have a successful company
that is a leader in providing quality products. Objectives might be annual sales targets and some specific measures of
quality achievement.

 Industry Description: Describe your industry. Is it a growth industry? What changes do you foresee in the industry,
short term and long term? How will your company be poised to take advantage of them?

 Target Market: Target market tells about the customers to whom the product will be marketed. It should be briefly
stated here as detailed explanation will be covered under marketing plan section.

 Competitive Edge: Describe your most important company strengths and core competencies that will make the
company succeed? It could be a better service, a wider range of products, better after sales services etc. What
background experience, skills, and strengths do you personally bring to this new venture?

 Structure: describe the type of operation, i.e. wholesale, retail, manufacturing or service-oriented. Also state
whether the business is new or already established.

 Legal form of Ownership: State the form of ownership adopted like - Sole proprietor, Partnership, Corporation,
Limited liability corporation (LLC)? Why have you selected this form?

Market Plan: A good entrepreneur with poor marketing plan will face an early disaster. Any product or service has to be
marketed competently. A market plan describes the strategies to be adopted for marketing of the product. It is a result of
market analysis. A market analysis helps in knowing about various aspects of the market so that the target market can be
defined and the company can be positioned in order to capture desired market share. Market analysis enables the
entrepreneur to establish the strategies regarding the marketing mix i.e. the four P’s- product, price, place (distribution) and
promotion. These strategies:

 Will allow the company to become profitable within a competitive environment.

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 Provides an indication of the growth potential within the industry.

 Helps in developing estimates for the future of proposed business
As discussed in earlier section, market analysis has enabled the entrepreneur in:
 Defining the Market in terms of size, structure, growth prospects, trends and sales potential.
 Defining the Target Market: The segmentation factors can be geographic, customer attributes or product oriented. If
the distribution of the product of the proposed business is confined to a specific geographic area being a small
business, the target market can be defined as number of users of that product within that geographic area.
 Defining Total Feasible Market: The total feasible market is the market that can be captured provided every
condition within the environment is perfect and there is very little competition. Although this situation is not true in
most industries. The factors that affect the share of the feasible market a business can are obtain are - structure of
the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of
capital the business is willing to spend in order to increase its market share.
 Estimating Market Share for the Time Period the Plan will Cover: It is calculated after considering the projected
growth of the market and the expected conversions from the competitors.

After the above-mentioned details have been estimated through market analysis, the strategies regarding the marketing mix
i.e. the four P’s- product, price, place (distribution) and promotion should be developed and included in the business plan. The
key strategies should be regarding:

 Describing Product: Describe in depth the products or services (technical specifications, drawings, photos, sales
brochures, and other bulky items are to be included in Appendices). Describe the most important features including
the after-sale services provided like warranty, service contracts, support, follow-up, and refund policy.
 Pricing of Product: Pricing strategy should fit with what was revealed in competitive analysis. Prices should be
compared with those of the competitor. Most small businesses go for low pricing. This is not a good strategy as it
decreases profit margin; customers may not care as much about price if they have a good quality product. The better
strategy will be to have average prices and competing on quality and service.
 Distribution: includes the entire process of moving the product to the customer. The type of distribution set up
chosen will depend on the structure of the industry and the size of the business. The business plan should clearly
indicate how products or services will be sold (Retail, Direct mail order, Web catalog, Wholesale, Sales force, Agents,
Independent representatives, etc.)
 Promotional Plans: promotional plans will have to be initiated over a period of time. Promotion strategy regarding
advertising campaigns, seasonal discounts or improved packaging have to de described in detail like: What media,
why, and how often? Cost effectiveness of various methods to get the most out of the promotional budget? Will you
use methods other than paid advertising, such as trade shows, catalogs, dealer incentives, word of mouth (how will
you stimulate it?), and network of friends or professionals? What image do you want to project? What will be the
promotional Budget? How much will be spent on what all items listed above, before startup and after startup?

4. Competitive Analysis: The purpose of the competitor analysis is to determine the strengths and weaknesses of the
competitors within the market, strategies that will provide business with a distinct advantage, the barriers that can be
developed in order to prevent competition from entering the market, and weaknesses that can be exploited within the product
development cycle. The questions to be answered are: What products and companies will compete with you? List your major
competitors and state whether competition is full or just for certain products, certain customers, or in certain locations? Will
you have important indirect competitors from businesses? (For example, mobile phones manufacturing companies compete
with cameras making companies, although they are different types of businesses). Strategies should be so designed that they
are primarily based on competitive advantage and that they set the product or service apart from the competitors.

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School of Business Management and Accountancy

5. Operations and Management Plan: This section will describe:

 Operational procedures, manufacturing equipment, level of production required, locations, licensing and other
aspects related to providing the product or service.
 The organizational structure has to be well defined and based within a realistic framework given the parameters of
the business. Organize tasks into departments that produce an efficient line of communications between staff and
management. Establish the function of each task and how it will relate to the generation of revenue within the
company.
 Human resource requirement: Determine the number and type of personnel required to perform each task, where
the right employees will be found, what will be the pay structure, what type of labor (skilled, unskilled, and
professional) will be required? Determine who does which tasks and prepare schedules and written procedures. If the
business seems to have more than 10 employees, it is good to create an organizational chart showing the
management hierarchy and who is responsible for key functions. Include position descriptions for key employees.
 If purpose of business plan is to secure loans from investors, resumes of owners and key employees should be
included. List of following should also be included: Board of directors, Management advisory board, Attorney,
Accountant, Insurance agent, Banker, Consultant or consultants, Mentors and key advisors.

6. Financial plan: The enterprise should have sound financial regulations. An exact assessment of the revenue, costs, profits
and losses, cash-flow dynamics, stock of raw materials and finished products, loans etc. has to be reflected in the financial
profile. Critical assessment of the finances and its dynamics help in the holistic assessment of the enterprise. More important,
the process of thinking through the financial plan will improves insight into the inner financial workings of the company.

The three common financial statements need to be prepared are - cash flow statement, profit and loss account and the
balance sheet. Together they constitute a reasonable estimate of the company’s financial future.

 The profit and loss statement tells how much money the business earns over a given period of time. A twelve-
month profit and loss projection and a four-year profit and loss projection (optional) are to be prepared.
 The cash flow statement is an information tool telling how much cash is needed to meet obligations, when will it be
needed and where is it coming from. If the profit projection is the heart of a business plan, cash flow is the blood.
Every part of the business plan is important, but none of it means a thing if the business run out of cash. Businesses
fail because they cannot pay their bills. It is important to plan how much cash is needed before startup, for
preliminary expenses, operating expenses, and reserves. It will enable to foresee shortages in time to do something
about them—perhaps cut expenses, or perhaps negotiate a loan the cash flow projection is just a forward look at the
checking account. For each item, determine when actual receipt of cash (for sales) will happen or when actually the
cash will be needed. Essential operating data, should be kept track of, which may not be the part of cash flow as it
allows controlling items that have a heavy impact on cash flow, such as sales and inventory purchases. Cash outlays
should also, be kept track of, prior to opening in a pre-startup stage. Cash flow shows whether the working capital is
adequate.
 Balance sheet is a summary of all the financial data giving a macro view of the company at a given point of time. It
is one of the fundamental financial reports that any business needs for reporting and financial management. It shows
what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are
subtracted from assets, the remainder is owners’ equity.
 Break-Even Analysis can be prepared. It predicts the sales volume, at a given price, required to recover total costs.
In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit.

7. Appendices: It includes details and studies used in the business plan; for example:
 Brochures and advertising materials

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School of Business Management and Accountancy

 Industry studies
 Blueprints and plans
 Maps and photos of location
 Magazine or other articles
 Detailed lists of equipment owned or to be purchased
 Copies of leases and contracts
 Letters of support from future customers
 Any other materials needed to support the assumptions in this plan
 Market research studies
 List of assets available as collateral for a loan

Raising Funds

The various external sources of raising funds available to an entrepreneur for setting up of a business are:

1. Debenture: it is a form of long-term loan obtained by a public limited company for a large sum and paid back over several
years. It is usually borrowed from specialized financial institutions.

2. Share Issue: it involves a business selling new shares that entitle the shareholder to share in the control of the business.
There are two types of share: equity and preference.

3. Commercial Banks: Banks provide two types of funds: overdrafts and loans. Overdraft mean drawing more than what is
present in your account. This credit is provided for a short duration of time. Bank Loans is a long-term source of finance.
Interest is charged for the loan provided which has to be deposited as per the rate and terms.

4. Venture Capital: It is a contemporary method of raising finance. It is the money provided by professionals who invest in
rapidly growing companies that have high potential to grow. Venture capitalists generally purchase equity securities and also
actively participate in managing the company.

Registering

Benefits of Registering: There is no statutory compulsion for registration. Units normally get registered to avail benefits,
incentives or support extended either by the Central or the State government. The regime of incentives offered by the Centre
generally contains the following:
 Credit prescription (Priority sector lending), differential rates of interest etc.
 Excise Exemption Scheme
 Exemption under Direct Tax Laws.
 Statutory support such as reservation and the Interest on Delayed Payments Act

Objectives of the Registration Scheme: The objectives of registration are as follows:

 To enumerate and maintain a roll of small industries to which the package of incentives and support are targeted.
 To provide a certificate enabling the units to avail statutory benefits mainly in terms of protection.
 To serve the purpose of collection of statistics.
 To create nodal centers at the Centre, State and District levels to promote SSI.

Features of the Scheme: Various features of the registration scheme are as follows:

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 DIC is the primary registering center

 Registration is voluntary and not compulsory.
 Two types of registration are done in all States. First a provisional registration certificate is given. And after commencement
of production, a permanent registration certificate is given.
 PRC is normally valid for 5 years and permanent registration is given in perpetuity.

Provisional Registration Certificate (PRC): Provisional registration is granted to a unit at its reinvestment period to enable it
to take necessary steps to apply for financial credit, land or an industrial set, water, power or telephone connections, etc.
 This is given for the pre-operative period and enables the units to obtain the term loans and working capital from financial
institutions/banks under priority sector lending.
 Obtain facilities for accommodation, land, other approvals etc.
 Obtain various necessary NOCs and clearances from regulatory bodies such as Pollution Control Board, Labor Regulations
etc.

Permanent Registration Certificate: Provisionally registered industrial unit when it is about to go into production is to apply
for grant of Permanent / Final Registration. An existing and functioning industrial unit is eligible to apply for Permanent / Final
Registration without going into provisional registration processes. The permanent registration certificate enables the unit to get
the following incentives/concessions:
 Income-Tax exemption and Sales Tax exemption as per State Govt. Policy.
 Incentives and concessions in power tariff etc.
 Price and purchase preference for goods produced.
 Availability of raw material depending on existing policy.
 Permanent registration of tiny units should be renewed after 5 years.

Summary

The various steps involved in starting up of a business are: Idea Generation, Environmental Scanning, Feasibility Study and
Business Plan Development. An entrepreneur should be aware of various legal aspects for setting up and running of a small
business. Some of the legal considerations are: Intellectual Property, Trademark, Copyright, Patents, Licensing, and Contract.

A business plan is a written document giving in detail all relevant internal and external elements that affect business and
strategy for starting a new venture. A business plan can be used by an entrepreneur for a variety of objectives like getting debt
from banks or getting equity funding from various investors. A business plan consists of the following sections: Executive
summary, Business description, Market Plan, Competitive analysis, Operations and management plan, Financial Plan and
Appendices. There is no statutory compulsion for registration of a small-scale unit. Units normally get registered to avail
benefits, incentives or support extended either by the Central or the State government.

 Environmental Scanning: Scanning of different variables, in the external and internal environment so as to analyze the
viability of a business.
 Feasibility Study: Feasibility study is a detailed study conducted to analyze the feasibility of the project in a particular
environment. Feasibility study is undertaken after environmental scanning.
 Business Plan Development: It is a written document prepared after environmental scanning and feasibility analysis that
describes step by step, strategies designed for starting and running a business
 Trademark: A trademark is a distinguishing word, figure, symbol, design, numeral or a combination of these that identify
particular goods or services.
 Copyright: The copyright laws protect the legal rights of a person for his or her work of writing or authorship.

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 Patents: A patent gives protection to the inventor of a new product/process/ design to solely use the copying/ selling/ using
of the invention for a limited period of time.
 Licensing: Licensing may be defined as a contractual agreement between two parties where on party having some
proprietary rights agrees to transfer its rights to another party by charging some fee or royalty.
 Contract: A contract is a written document that is enforceable legally.
 Executive summary: It should explain the fundamentals of the proposed business.
 Business Description: Describe what business will you be in and what will you do.
 Market Plan: Describes the marketing strategies regarding product, price, place and promotion

Post Test
1. Define business start-up process
2. Discuss the types of environmental analysis.
3. Is intellectual property an asset?
4. Write short notes on: a. Copyright b. Patents c. Trademark d. Contract
5. What is a business plan? Describe in detail.
6. What are the objectives of preparing business plan?
7. What are the essentials of a good business plan?
8. What are various financial statements that need to be included in a business plan?
9. What are various sources of raising funds?
10. Search and explain the procedure for registration of a small business in the Philippines.
11. Make a business plan for your intended business. (final Requirement)

“Whatever you do, work heartily, as for the Lord and not for men” Colossians 3:23

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