Module: 3 – FORMATION OF A BUSINESS ENTITY 08 Hrs

Business opportunity, scanning the environment for opportunities, evaluation

of alternatives and selection based on personal competencies. Steps involved in
the formation of a small business venture: location, clearances and permits
required, formalities, licensing and registration procedure. Assessment of the
market for the proposed project – Financial, Technical, Market and Social
feasibility study.

Business Opportunity

The entrepreneur is commonly seen as a business leader and innovator of new

ideas and business processes. Every entrepreneur has started his business unit
because there was business opportunity without the opportunity one could not have
established his/her own business unit. But if such unit does not have business
strength to provide an economic gain, the whole effort becomes useless. Therefore
to establish a small or big business there should be an opportunity.

Business opportunity is governed by many factors

• Congenial business environment

• Economic viability of the proposition

• Whether the proposed business will serve and satisfy the target consumer.

• Business information relating to proposed unit to be collected locally and from

experts in the field and analysis of the same.

• To extent of competition the proposed business faces.

• Evaluation of the proposition in terms of cost benefit.

Identification

The business opportunity cannot be identified casually. There is scientific

approach to identify the opportunity. Following preliminary investigation about
governing factors will help the identification of sound business opportunity.
a. It becomes essential to conduct a small survey to know the existing condition of
proposed product to be manufactured or service to be rendered.

b. The functional aspects of the proposed business such an s market condition or

behavior, consumer behavior, financial support, legal aspects and economic
viability have to be examined.

c. Market behavior tells whether tells whether the proposed business to produce a
product or service has potential to sell without any problem or what will be the
probable disturbance which hinders the sales.

d. Consumer behavior explains the demand situation of the proposed unit. Demand
depends upon the taste, fashion and preference of the consumers.

e. Business opportunity is also governed by strong financial support. This study

examines the size of finance required for the project; whether it can run only on
own finance or it has to resort to borrowing from external agencies.

f. Legal aspects also determine the type of business opportunity available in a

particular place. Business opportunity should have legal support.

g. Cost benefit analysis of a proposition in a given business environment will also

tell whether the opportunity can be seized.

Scanning the Business Environment

Business environment acts as a vital aspect in establishing a business unit. There

are interacting and interdependent groups of variable in the business system of an
enterprise.

1. Controllable variable- As name suggests are controllable. They are internal

factor (such as production policy, financial policy, marketing policy, HR policy
etc)

2. Uncontrollable Variable

Business management of an enterprise must operate within the framework of

forces which constitute the business environment. Business strategy in the form of
business mix is formulated within framework involving many controllable
variables called business parameter.

Thus it may be noted that scanning the environment reveals the following factors:

i. The environment is conducive to start or not to start the business.

ii. The proposed production is needed in that locality or can serve as an ancillary
unit to a large industry. iii. Whether the product can be produced at cheaper cost

iv. Whether the proposed SSI can easily market its product

v. Whether the technology to produce is available and at what cost.

The answer to these questions will reveal whether there is a business opportunity
or not.

Evaluation of alternatives

Establishing a small business unit involves and requires the preliminary study of
several factors associated with it. The study of these factors will help the
evaluation of different alternatives available to continue or drop the proposed
business. For each of the proposed business it is always necessary to prepare two to
three plans considering the existing resource and competencies of entrepreneur. Of
these proposed plans a viable plan has to select or all plans can be rejected, if it is
not viable on any score in long-term.

Setting of a Small Scale industry

The process of setting up a small industry has been indicated, which has been
drawn on the basis of practical experience gained in its promotion. It indicates all
the important stages in the setting up of a small scale industry.

Phases/Steps involves in starting a Small Scale Industry

1. Project Selection Phase: The objective is to select those products, processes
or system in an organization where the value and cost ratio is low and where
analysis will lead to increased
benefits: To gather, organise and analyse data; to define functions; to
establish a functional monetary value.
2. Information Phase
3. Creative Phase
4. Evaluation Phase The objective of Information Phase, Creative Phase, and
Evaluation Phase is to generate alternative methods for providing necessary
function: To develop refine and evaluate alternative methods generated
during the creative phase; to determine the cost; to select a feasible method
offering best value.
5. Recommendation Phase
6. Implementation Phase
The objective of Recommendation and Implementation Phase is to prepare a
report containing recommendation along with benefits: To establish a plan
of action for implementation of selected method; to obtain approval; to
perform all other actions necessary to put the proposal into effect.
7. Follow-Up Phase: The objective of this phase is to follow-up and audit
actual results and to resolve problems if any during proposal
implementation.

Preparing the promotion plan involving various steps

A. Conceiving The Business Idea: Establishing a successful business mainly
depends upon conceiving a business idea which has to be fruitful.
Conceiving ideas take place sometimes by intuition of the entrepreneur or by
examining the environment in terms of factors conducive for development of
business.

B. Screening the ideas: Of the ideas conceived, the entrepreneur has to

identify one idea that he hopes to run successfully at a reasonable profit.
While screening the business ideas he has to make a comparative analysis of
all conceived ideas in terms of location availability of infrastructure,
financial aspects, capabilities of entrepreneur himself, marketing
opportunities of each idea, general behaviour of target consumer etc.
Screening of ideas is starting point of the feasibility analysis.
C. Business analysis: This is mainly concerned with cost benefit analysis.
Detailed investigation of all costs involved in the business has to be made.
Costs include the fixed cost as well as variable cost. These may be otherwise
called fixed capital and working capital. The cost determining factors or
variables are; Size of investment or total outlay, location cost, cost of
technology adapted in production process , equipment cost like plant cost,
erection cost, other moving equipment like cranes, trolleys etc , marketing
and distribution cost, various operating costs.
D. Feasibility Report: Considering every aspect of business, a detailed draft
project report has to be prepared. This report gives a clear picture of the
proposed business. This also helps the entrepreneur to take to the proposed
project or to drop it. As project idea is examined in the context of internal
and external constraints, three alternatives could be considered.
E. Alternative Plans: The feasibility report provides all types of data relating
to the proposed business. This draft report contains techno-economic
analysis, project design and network analysis, input analysis, financial
analysis, cost-benefit analysis. Based on the basic report entrepreneur has to
prepare two or three alternative plans, focusing on different aspects.
F. Preparing a Right Plan: A comparative analysis of all the alternative plans
has to be made and a final action plan has to be prepared considering the
best aspects of each plan. This is very rigorous task because in each
component of the plan, economic viability has to be considered on a long
term basis.
G. Project Implementation: After finalising the ultimate project plan, the
entrepreneur starts implementing the various activities to commence
business. Project implementation is time consuming process. When business
is ready, trial production starts or business will be launched.

H. Feed Back and Commercial Production: When trail production is on

problems may crop up, entrepreneur has to adapt corrective measures and go
in for commercial production. When once the project takes off for
commercial production, entrepreneur has to divert his attention to the
marketing of the product to generate revenue.
 After identifying the business opportunity, entrepreneur has to commission
this concept. He/She has to work on the proposal with the issue involved in
selection of a proper site for locating the unit, availing all clearance,
analysing the feasibility of finance, societal reaction and potential market for
the product or service of the proposed unit. These issues are
1. Location
2. Clearance and permits
3. Licensing
4. Registration
5. Market Feasibility
6. Financial Feasibility
7. Technical Feasibility
8. Social Feasibility
1. Location: Selecting a place to locate the proposed unit is a real challenge
to entrepreneur. It is said that “good location is half sold”. A thorough
analysis of the location to be selected is to be undertaken by the entrepreneur
by the entrepreneur before he selects a particular site.
The issue to be examined are:
• Availability of sufficient space including the space requires for future
expansion
• Availability of raw material at reasonable price
• Easy availability of labour
• Availability of industrial fuel and supply
• The type of transport facility, the proposed unit requires and its availability
• Distribution facilities available for the proposed product or service
• Availability of power and degree of dependability of its supply
• Water supply as per the requirement
• Facilities available for education, health, recreation, shopping, religious
and social life and professional services
• Housing facilities available to employees of the proposed project.
• Laws and regulation conducive for establishing a business unit
• Tax incentives available in that locality
• Climate condition of the area
Thus selection of a best place for establishing a business unit plays a major
role in successful operation of proposed venture

2. Clearance and Permits: Several types of clearance and permissions have

to be obtained from different agencies. General clearance applicable to SSIs
and other size of business are enlisted. Following types of industries have
obtain Provision Registration from the respective District Industrial Centres’
(DICs)
a. SSI (Investment in plant below Rs 1 crore)
b. Ancillary industries whose investment in plant and equipment below Rs 1
Crore
c. Tiny industries (Investments below Rs 25 Lakhs in plant and machinery)
d. Women entrepreneurs where one or more women entrepreneur has not
less than 51% financial holding.

Other Clearances

a. Land/Location: Environmental clearance from government of India; No

objection certificate (NOC) from Pollution Board of the respective state;
Change of land used from District Collector/Government in municipal
Administration and Urban Development through Director/ Town and
Country Planning/ Urban Development Authority; Exemption from Land
Ceiling.
b. Building: Permission for building layout need to be taken from Gram
Panchayat/ Municipality/Town and Country Planning Department/ Urban
Development Authority.
c. Plant and Machinery: Approval of layout needs to be taken from the
departmental of Factories/Boilers
d. Raw Material: Need to get permit of scarce raw materials like Coal,
Molasses, alcohol, paraffin wax etc. If required from Industries Department.
e. Power: Need to get power feasibility from concerned State Electricity
Board; to obtain approval Captive Generation, if need be; Agreement with
private power producer to purchase power from private generating stations.
f. Water: Water supply services can be obtained from the following:-Own
captive source; Public Supply (local Bodies); Supply from the state
Government Authority in case of Industrial Parks/ Industrial Development
Areas; Supply from state Irrigation Department for bulk consumption.

Post Implementation Clearance/Approvals

a. Registration and Licence under Factories Act
b. Clearance and Electrical Inspectorate
c. Letter of Intent of Distillery/ Brewery
d. Registration under Milk and Milk orders
e. Mining/Quarry lease
f. Registration with central excise department
g. Sales Tax registration with Commercial Taxes department
h. Provident Fund Registration i. ESI Registration.

3. Licensing: This is a part of clearance activity. All legal aspects to

establish a business unit irrespective of the size have to be strictly followed.
- Any entrepreneur is open to set up an industrial unit in the small scale
sector, no formal permission from the state government is necessary for this
purpose.
- Also, industries employing less than 100 workers and having fixed asset of
Rs 10 Lakhs need not obtain any licence under the industries(Development
Regulation) Act.
- Small scale units have to follow the rules and regulation prescribed by the
state or local authorities under Factories Act, the Commercial Establishment
Act, the Town Planning Rules and rules mage for the issue of quotas of raw
materials etc.
- However Power looms do not come under the purview of small scale
industries programme. For installing power looms the prior permission of
the Textile Commissioner, Government of India is required.

4. Registration: In their own interest, all existing small scale unit or

intending entrepreneur employing more than 10 workers should get
themselves registered with Director of Industries in their state.
- A copy of the Registration Application has to be sent to the Director of
SSI Institute in the Concerned State.
 - Such registration with the Director of Industries and Small Industries
service Institute will be of considerable help to small unit in obtaining
financial assistance from the government and for obtaining machinery on
hire purchase basis from National Small Industries Corporation.
- Assistance in the supply of controlled raw material essentiality certificate
for imported raw materials and components and facilities for export
promotion would then be easily made available to small scale units
registered with the State Director of Industries.

5. Market Feasibility: Marketing of the product or service is the biggest task

of any business enterprise. - Entrepreneur involved in small business should
feel that their business will be secured with good marketing effort.
- The success of any business is mainly depending on its marketing effort
and the market share that it possesses.
- For beginners it is not advisable to get into a project particularly the first
which would not mean survival amidst cut throat competition involving
direct selling to the ultimate consumer.
- Marketing objective is to match total enterprise resource against market
requirement and opportunities.
- The focus should be on marketing strategies and planning.
- The firm has to manufacture what it can sell.
- Marketing seeks to create markets and develop saleable products.

6. Financial Feasibility: The financial aspect of any business will tell us the
total capital outlay of the proposed business, the sources through which they
can be availed, the cost of capital and its implication in the proposed
business. The comprehensive analysis of these issues will give an indication
whether the proposed business is viable or not.
- The areas where finance would be needed after the small scale industrialist
has acquired the land are:
- Purchase and installation of machinery
- Procurement of raw materials and components and the manufacture of
products
- Working funds
- Availability of funds until the realisation of sales.
 - The State Director of Industries provides loans for block capital under
industries Act.
- State Finance Corporation (SFC) provides long term credit for the purchase
of fixed assets.

- The application should be submitted to the SFCs along with the following
documents
a. Project Report
b. Copy of registration
c. Cash flow statement
- Commercial banks provide medium term instalment credit. It also provides
loans for meeting working capital for purchase of raw materials and also day
to day requirements.
- In order to get loan from a commercial bank the entrepreneur has to fill an
application.
- The purpose of loan application is to convince a lender that the project is a
desirable investment that it not only possesses the potential for profit but
also the proposed management team has the capability to achieve the
potential.
- The investment proposal normally contains