Entrepreneurship & Start- Ups

Unit 3- Formation of Business Entity

Meaning of Opportunity
Exploitable set of circumstances with uncertain outcomes, requiring commitment of resources and involving
exposure to risk.

Meaning of Business Opportunity

Business opportunity involves sale or lease of any product, services, equipment etc that will enable the
purchaser licensing to begin a business. The licensor or seller of a business opportunity usually declares that
it will secure or assist the buyer in finding a suitable location or provide the product to the purchaser-
licensee.
A business opportunity is an arrangement where a third party (the seller) offers to sell you products,
equipment, supplies or services to enable you to start your own business.

A business opportunity consists of four elements:

1. A need
2. The means to fulfill the need
3. A method to apply the means to fulfill the need and
4. A method to benefit
With any one of the elements missing, a business opportunity may be developed by finding the missing
element.

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.

Ways of Identification of Business Opportunity

1. Identifying Market inefficient:
When an individual looking at the market one must consider what inefficient are present in the market. So
therefore an individual must have a knowledge about how to create an opportunity with the help of market
inefficiencies.
2. Remove Key hastles :
One should take a look at some of the key hassles customers face when buying or using product or
services.
3. Consumer Behaviour:
Consumer behaviour will explain the tastes and preferences of the consumer and throw light on the demand
situation.
4. Pick a growing sector or industry:
While considering new business. It’s important to look at whether or not an idea is in a growing sector or
industry. For example A lot of start-ups in IT sector in India did very well because there was huge demand
and growth in the industry.
5. Product differentiation:
Creating superior product or services alternative is improvement for winning in the market place. What
factors will set the product apart from the existing ones?
6. Cash flow consideration
No business man can run a business without cash flow consideration. If one run out of cash, despite
holding inventory or other assets the business will risk failure.
7. It is a seasonal Business:
When picking a new business consideration whether it it’s a seasonal or the year around business.
 9. Conduct a survey/ research:
Conduct a survey / research and collect information on the existing condition of the proposed product/
service to be manufactured / rendered.
8. Legal aspects also determine the type of business opportunity available in a particular place. Business
opportunity should have legal support.
9. Market behaviour gives information on the market feasibility. It gives information on whether the
product has to potential to get sold without any problems.
10. Cost benefit analysis of a proposition in a given business environment will also tell whether the
opportunity can be seized.

Various Stages of Identifying Business Opportunity

1. Scanning of Business Environment
2. Evaluation of alternatives
3. Selection of opportunities based on personal competencies
1. Scanning of Business Environment
Business environment refers to different forces or surroundings that affect business operations.
Such forces include customers, competitors, suppliers, distributors, industry trends, substitutes,
regulations, government activities, the economy, demographics and social and cultural factors etc

Environmental scanning – can be defined as “the study and interpretation of the political, economic,
social and technological events and trends which influence a business, an industry or even a total market.
Both internal and external environment.
The need and importance of environmental scanning:
1. Identification of strength- Analysis of Internal business environment helps to identify strength of
the firm.
2. Identification of weakness- Weakness of from means limitations of the firm. Monitoring internal
environment helps to identify not only the strength but also the weakness of the firm.
3. Identification of opportunities- Environmental analyses helps to identify the opportunities in the
market. The firm should make every possible effort to grab the opportunities as and when they come.
4. Identification of threats- Business is subject to threat from competitors and various factors.
Environmental analyses help them to identify threat from the external environment
5. Optimum use of resources- Proper environmental assessment helps to make optimum utilisation of
scare human, natural and capital resources.
6. Survival and Growth- Systematic analyses of business environment help the firm to maximise
their strength, minimise the weakness, grab the opportunities and diffuse threats. This enables the firm to
survive and grow in the competitive business world.
7. To plan long term business strategy- A business organisation has short term and long-term
objectives. Proper analyses of environmental factors help the business firm to frame plans and policies
that could help in easy accomplishment of those organisational objectives.
8. Environmental scanning aids decision making- An environmental analysis is an extremely
important tool in understanding and decision- making in all situation of the business. Study of
environmental analyses enables the firm to select the best option for the success and growth of the firm.
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2. Evaluation of alternatives
Establishing a small business unit involves and requires the preliminary study of several factors
associated with it. 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 selected or all plans can be rejected, if it is not viable on any score in long-term

Factors for evaluation include

1. Feasibility of the venture- Can the product or service work? Is it legal?
2. Competitive advantage-
What specific competitive advantage will the product or service offer?
How are the competitors likely to response?
3. Buyer decision-
Who are the customers likely to buy?
How much will each customer buy, and how many customers are there?
4. Marketing-
How much will be spent on advertising and selling?
What share of market will the company capture?
What distribution channels will be used- wholesale, retail, agents, and direct mail?
How will prices be set?
5. Production-
Will company make or buy what it sells?
Are sources of supply available at reasonable prices?
Will the needed equipment available on time?
How will quality be controlled?
6. Staffing decisions-
Who will have to be hired? By when? How will they found and recruited?
Will a banker, lawyer, accountant or other advisers be needed?
How will replacements be obtained if key people leave?
7. Control-
What records will be needed?
Will any special controls be required? What are they? Who will be responsible for them?
8. Financing
How much will be needed for development of the product or services?
How much will be needed for setting up operations?
How much will be needed for working capital?
Where will the money come from?
What will be the return?
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3. Selection of opportunities based on personal competencies
A. Short listing of opportunities-SWOT Analysis/PESTEL
B. Finalisation of opportunity or product

A. Short listing of opportunities-SWOT Analysis/PESTEL

Strength: Characteristics that are advantage over others

Weakness: Characteristics that are disadvantage related to others
Opportunities: Elements that can be exploited to its advantage
Threats: Elements that can cause trouble for the business

Internal factors analysis (strength and weakness)

● Production resources- raw material availability, technology availability, skilled labour
availability, machinery and equipment availability, plant availability and quality control.
● Financial resources- capital availability, credit availability, working capital availability and
profitability.
● Marketing resources- knowledge of market, marketing research, customer preference,
distribution channels, sales management team, product and brand name, after sales services.
 ● Human relation resources- management labour relations, workers relations, public relations
● Management and organisational resources- managerial expertise, organisational structure,
rules, policies and procedures of the organisation.
External factors analysis (Opportunities and threats)
● Economic- per capita national income, general consumer price rise, buyers purchasing power,
job opportunities and consumer preferences
● Technological- Advanced Technological process, scope for innovation and cost of saving
innovations.
● Natural- natural resources, climate, cost of power and fuel, geographical features
● Demographic- density, distribution, age group, income groups, literacy level
● Socio-Cultural- Lifestyle, standard of living, social attitudes, consumer awareness, changing
social and cultural values
● Political and Legislative- industrial policy, policies of liberalisation, social attitude towards
business, import export orientation
● Legal- commercial laws, industrial laws, taxation laws, input export regulation, monetary and
fiscal policy

P ESTEL analysis
Political- how and to what degree a government intervenes in the economy. This can include –
government policy, political stability or instability in overseas markets, foreign trade policy, tax policy,
labour law, environmental law, trade restrictions.

Economic- Economic factors have a significant impact on how

an organisation does business and also how profitable they are.
Factors include – economic growth, interest rates, exchange
rates, inflation, disposable income of consumers and businesses.

Social- Include the cultural aspects and include health

consciousness, population growth rate, age distribution, career
attitudes etc. trends in social factors affect the demand for a
company’s product and how the company operate.

Technological- include R&D activity, automation, technology

incentives and the rate of technological change.

Environmental- It includes weather, climate and climate

change, which may specially affect industries such as tourism,
farming and insurance.

Legal- It includes discrimination law, consumer law, employment law and health and safety law. The
factors affect how a company operates, its costs, and the demand for its products.

B. Finalisation of opportunity or product- factors

Total investment
Return of investment
Profit
Likely volume of sales
Others- sources of raw material, size, policy, infrastructure, plant and machinery.

NEW VENTURE
A new venture in any organisation still in its formative stage. Basically new ventures are founded by
individuals intending to change the environment of a given industry by the introduction of either a new
product or a new production process.
Factors to be considered for starting a New Venture
1. Uniqueness
2. Investment
3. Sales growth
4. Product availability
5. Customer availability
Steps in starting a New Venture

Steps in setting up a Small Business Venture

1. Preparation of project
a) Project identification
b) Product or service selection
c) Location selection
d) Project formulation
 Feasibility analysis
 Techno-economic analysis
 Input analysis
 Financial analysis
e) Business plan preparation
f) Project profile
2. Decide on the ownership
3. Complete the legal requirements
 Registration for start-ups/
 Registration for Industry
a) No objection certification
b) Obtain SSI registration
c) Obtain clearances from departments as applicable
4. Arrange for land and building
5. Arrange for plant and machinery
6. Arrange for infrastructure
7. Prepare Project report
8. Apply and obtain finance
9. a) Proceed to implement
b) Obtain final clearance

Project: According to Gillinger- “A project is a whole complex of activities involved in using resources
to gain benefits”.
In business area there is large number of projects like construction project, IT projects, product
development projects, R&D projects, marketing projects etc.
Characteristics/Features of project
 It has fixed set of objectives
 Cannot continue endlessly. It has to come to an end.
 Calls for team work. The team constitutes of people from different functional groups of the
organisations.
 It has definite life cycle reflected by growth, maturity and decay.
 Subjected to changes
 Made to the order of the customers. Customer gives the specifications and constraints based on which
projects are executed.
 Every project has risk and uncertainty associated with it.

1. Preparation of project
a) Project identification- It is concerned with the collection, compilation and analysis of economic
data for the eventual purpose of locating possible opportunities for investment and with the
development of the characteristics of such opportunities.

b) Product or service selection- The process of selection of a product/service has been considered as
an important decisional area.
Factors affecting product selection:
1. Technical knowledge: Availability of technical capability to entrepreneur helps him in selecting a
product in that particular technical field.
2. Availability of market: A wide market creates more demand for the product and market risk can also
be reduced.
3. Financial strength: Manufacturing process of a product needs huge funds in capacity.
4. Position of competition: Product performance in market is also governed by the level of competition
in that particular market.
5. Supply of raw materials: Adequate supply of raw material is necessary to maintain a continuous
production process of a product.
6. Government policy: Product selection process should also be analyzed in terms of government
policy and its impact.
7. Licensing systems: In certain products, it is must for the entrepreneur to seek necessary licenses from
the government authorities.

C) Location selection- Where to set up the unit? It is said that “good location is half the problem
solved”.
 Availability of sufficient space including the space required for future expansion
 Availability of raw material at reasonable price
 Easy availability of skilled / unskilled labour
 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 water and degree of dependability of its supply
 Housing facilities available to employees of the proposed project.
 Laws and regulation conducive for establishing a business unit

d) Project formulation
Feasibility Analyses/feasibility study- It is an evaluation and analysis of the potential of a proposed
project which is based on investigation and research to support the process of decision making.
If the project is feasible it means entrepreneur can move to next step. If the project idea is not feasible, it
is an indication that it would be better to drop the idea.

A feasibility report is a project report of a new enterprise or of an expansion which provides, in general
primary economic information, financial data and technical details. This also helps the entrepreneur to
take to the proposed project or to drop it.
 Types of feasibility studies:
1. Market feasibility
2. Financial feasibility
3. Technical feasibility
4. Social feasibility

1. Market feasibility- Market feasibility study helps to understand the condition of the market and
customer preferences and expectations. It helps the beginners to prepare a real action plan for
implementing the projects. It includes
 Market survey will helps to understand the demand or opportunities of the customers.
 Consumer behaviour helps to understand the need and preference of the consumer and their buying
behaviour etc.
 Price fixation is also an important aspect in market feasibility
 Products and services which we have to offer to the market to satisfy the customers.
 Distribution covers channels of distribution mode of transport, mode of packaging and cost of
distribution, Government policies etc.
 Promotion will help to reach the customer for their choices
 Sales after services
 Competitors, also can be identified to prepare strategy to overcome competition.
 Stakeholders and customers must be satisfied.

2. Financial Feasibility: The financial aspects of any business relate to the total amount of capital required
the sources of finance, the cost of capital and its implication on the business. The comprehensive analysis
of these aspects will give an indication whether the proposed project is viable or not.
o Statements of total projects cost, capital requirements and cash flows need to prepare
o Collection period of sales, inventory levels, credit period that can be availed, etc need to be
estimated.
o The element of production cost, selling, administrative and financial expenses.
o Returns on Investment, returns on equity, Break even volume and price analysis needs to be studied.
o A sensitive analysis needs to be conducted to know the impact of certain items on profitability.
o Working capital requirement at various stages of the project and period of operation.

3. Technical feasibility - Technical feasibility study is the complete study of the project in terms of input,
processes, output, fields, programs and procedures. It is a very effective tool for long term planning and
trouble shooting.
● Whether the required technology is available or not
● Manpower- programmers, Software and hardware
● Is the production process chosen suitable
● Are the machines and equipment chosen appropriate
● Is the technology proposed to be employed appropriate from the social point of view?
● The technology should be workable under local conditions.
● The technology should be in tune with the national goals and objectives
● The risk of obsolescence and the scope for continuous updating of technology is examined.

4. Social feasibility - Social feasibility is one of the feasibility studies where the acceptance of the people is
considered regarding the product to be launched. It describes the effect on users from the introduction of the
new system.
 Environmental protection
 Maintaining values in the society
 Creating employment opportunities for the people of the locality etc
 The estimation of costs and benefits which will accrue to individual members of society as
consumers or as suppliers of factory input.
 Costs and benefits accrue to the community.
 Costs and benefits accrue to the national Exchequer.
 Costs and benefits accrue to the entrepreneur.
 Techno-economic analysis- It is concerned with
i) Determination of project demand potential
ii) Selection of optimal project strategy (Technology)
Information originating from this analysis is generally used a basis for project design. In this way,
techno economic analysis ensures a unique individuality to the project.
● Financial analysis- It involves estimating the project costs, operating costs, profits and fund
requirements. With help of the financial analysis, entrepreneur can compare various project proposals on
the basis of Generally Accepted scale of measurement. Examples of analytical tools are used in financial
analysis: Ration analysis, cash flow analysis, fund flow analysis, profit analysis.
Financial analysis also seeks to find out whether the project will generate revenue to realise the ultimate
objective for which it has been initiated.
● Input analysis- It helps in determining the resources requirement of the project.
- Identifying the nature of the resources that a project will require
- To estimate the quantity of required resources
- To check for uninterrupted supply of inputs

e) Business plan preparation

- A business plan is the written document giving in details all relevant internal and external elements
that affect business and strategies for starting a new venture.
- It must describe current status, expected needs and projected results of new business.
- Every aspect of the venture needs to be covered: the project, marketing, research and development,
manufacturing, management, critical risks, financing etc.

f) Project profile- A Project Profile is a simplified description of a Project. It is required for getting the
registration and obtaining loans and land approval.
- Information heads in a project profile
- Introduction
- Promoter background
- Product description
- Marketing details
- Infrastructure needed
- Plant and machinery
- Process details
- Raw materials required, manpower
- Cost, Means of finance, profitability

2. Decide on the ownership

The right form of ownership can help enterprise not only through initial success but in later growth too.
Therefore the form of ownership of enterprise should be selected after evaluating their relative effectiveness
and limitations. The four mean legal forms of ownership are
 Sole proprietorship- It is a form of business organization in which an individual invests his own
capital, uses his own skill and intelligence in the management of its affairs and is solely responsible
for the results of its operations.
 Partnership- It is the relationship among persons who have agreed to share profits of a business
carried on by all or any of them acting for all.
 Joint stock company- It is a voluntary association of persons who contribute to the capital but their
liability remains limited, it carries on business for profit as a legal entity. It can sue and can also be
sued in its own name.
 Co-operative society- A cooperative is an autonomous association of persons who voluntarily
cooperate for their mutual social, economic and cultural benefit.It is to achieve a common economic
end through formation of a democratically controlled business organization
Depending on the form of ownership they will have to fulfill certain legal formalities.
3. Complete the legal requirements
Licensing: A business license allows one to establish a particular business in a specified area. Trading
without a valid license is a punishable offense

Section 11 of the Industries (Development ad Regulation) act provides that no industrial undertaking shall be
established without a license. After obtaining the license, the undertaking has to adhere to various rule laid
by the central government under section 30. According to the Industrial Development Regulation act, the
industrial License would be required for:
• Establishment of new undertaking
• Substantial expansion
• Production of a new product
• Changing the location of an industrial undertaking

Registration : If you are willing to register a startup or a new company in India then you need to record it in
Indian official records i.e. Ministry of Corporate Affairs (MCA).

The registration includes major steps to register a company/ startup in India:

Step 1: Acquire Digital Signature Certificate (DSC)
Digital Signature Certificates (DSC) are the electronic format of physical or paper certificates. This
certificates serve as proof of identity of an individual for a certain purpose.
The Information Technology Act, 2000 has provisions for use of digital signatures on the documents
submitted in electronic form in order to ensure the security and authenticity of the documents filed
electronically.

Step 2: Acquire Director Identification Number (DIN)

Through DIN, details of the directors are maintained in a database. DIN is specific to a person, which means
even if he is a director in two or more companies, he has to obtain only one DIN. The existing and intending
Directors have to obtain DIN.

Step 3: Create an account on MCA portal- New user registration @ mca.gov.in. – Fill all the required
details to create an account

Step 4: Incorporate or Apply for the company to be registered.- Name reservation, Obtaining PAN and
TAN can be done.
By submitting/ attaching all the documents and identity proof, Example
Original copy of formal letter issued by ROC regarding availability of Company name.
DIN of all those directors of a proposed company
DSC - Digital Signature Certificate
Form-1 for incorporation of a company
Form- 32 for Identity and Address Proof- Copy of Driving license, voter ID, scanned passport size photo,
electricity bill etc,
Form 18- Registered Office Proof – Copy of latest bank statement, notarized rental agreement, o-objection
certificate from the property owner etc

Registration for Industry

a) No objection certification (NOC) from local body/ Panchayat/ Municipality- While promoting a
new venture the entrepreneur has to obtain No Objection Certificate from local body, Panchayat/
Municipality.
b) Obtain SSI registration- Registration with the state directorate of industries or district industry
centre facilitates obtaining of assistance from the government benefits like concession, subsidies, and quota
for scare or controlled raw materials.
1) Provisional Registration: Provisional certificate is the initial registration for starting a small scale
industry. The validity of provisional certificate instance is for one year which can be extended for two
more years on the condition of submission of certificate by the entrepreneur.
2) Permanent Registration : Permanent registration is life time registration granted to Business
which has commenced production. It is given after physical inspection of the enterprise.

Benefits of registration
 Govt support such as registration
 Tax exemptions, subsidies
 Power tariff subsidies can be availed
De- registration- A unit which violate the regulations in the following ways make it liable for de-
registration.
 It starts manufacturing of a new product without license
 It does not satisfy the conditions of being owned, controlled, or being a subsidiary of any other
industrial undertaking.

c) Obtain clearances from departments as applicable

 Building plan approval
 Trade license
 Pollution control board clearances
 Approval of hotels
 Drugs and cosmetic licence
 Food Adulteration Act licence
 Bureau of Indian Standard certificate

4. Arrange for land and building

Business entity land and building has to be in place ready to start with production activity. Entrepreneur
can identify the suitable land and building which can be rented or purchased or leased based on the funds
and others factors consideration. He can use the ready buildings or construct the building as per the
business requirement. He can also use-
Industrial Land- The land for the establishment of industries can be procured from state industrial areas
development board or private land can also be purchased, but it has to be converted for industrial purpose
and necessary legal.
Industrial Shed- An entrepreneur can use the ready industrial sheds which can be on rental or on
ownership basis. Or industrial sheds can be constructed.
Procurement formalities
● Copy of provisional registration certificate
● Project report
● Personal details of entrepreneur and certified copies
● Money deposit
5. Arrange for plant and machinery
Direct purchase- The entrepreneur has to select and buy the required plant and machinery from
recognised and approved manufactures or dealers. The entrepreneur can obtain the list of approved
dealers from banks and state financial institutions.
The entrepreneur should compare the quality, performance, service terms, price and other details of the
alternate plant and machinery that’s available in the market. Then choose the appropriate plant and
machinery for the proposed project.
He can also choose to lease or hire purchase the plant and machinery.
Arrangement for Raw materials- Not more not less of raw materials to be procured and maintained for
smooth flow of production.
Process selection/ Technology selection- Products which require complex process know- how have to be
imported. Choice of appropriate process and technology need to be considered.

6. Arrange for infrastructure

The main infrastructure facilities required for business are
Land and building- Have an appropriate plant layout.
Power supply- Check out the nearest substation for the supply of power, power tariff rates, feeder
availability, quality of power, duration etc.
Water supply- Check for source of water supple, how far it is?, quality, charges applicable etc.,
Transportation, other utility connections.
He should also find out the incentives provided by the state government with respect to tax concessions,
reasonable land.

7. Prepare Project report

Project Report-It is the report which provide all necessary information of the unit proposed to be set up
for the manufacture of a product or rendering service. In other words project report is a written statement
of what an entrepreneur proposes to take up.
Format of project report
1. Executive summary- Introduction, Financial performance, SWOT analysis, Project profitability
analysis
2. Company details- Company history, Manufacturing facilities, Promoters, Shareholding patterns,
Board of Directors, Key executives, Major products, Major customers etc
3. Operational details- capacity and utilization, profit and loss account, balance sheet, working
capital loans, marketing and distribution network, marketing strategy, export sales.
4. Project details- orders and enquires, location, manufacturing process, technical know-how,
manpower, power, water etc
5. Means of finance- equity share capital, internal accruals, deposits, debts and other sources
6. Project status- implementation schedule, current status, government approvals
7. Profitability and risk analysis- financials of the project, major risk factors, analysis of break-even
point, internal rate of return, payback period, sensitivity analysis
8. Company vs. related industry- general analysis, competing industries, advantages of the company
9. Employment generation- both direct and indirect
10. Conclusion- briefly highlight the companies information
11. Annexure- organisation charts, promoters- bio data, approvals, process charts, financial
reports, agreements, statements of cost etc

8. Apply and obtain finance

The need for finance can be classified into:
 Long and medium term loans, Short term or working capital requirements, Risk capital, Seed capital,
Bridge loans.

The sources of finance are:

 Share capital, Inter corporate deposits/investments, Debentures, General reserves, Cash credits etc

The financial support to business in India is available through various institutions namely:
 State Financial Corporations
 Small Industry Development Corporations of various states
 Commercial / Co-operative banks
 Regional Rural Banks
 Also all India financial institutions such as IDBI, IFCI and ICICI.

Procedure to get financial support from financial institutions

- Formal application to be made with financial institutions or commercial banks
- Documents to be provided include
 Balance sheet, Profit and loss statement for last 3 consecutive years
 Proof of possession of land and building
 Income tax assessment certificates of partners/directors
 Architects estimate of construction cost
 Partnership deed/ MOA, AOA
 Project report
 Budgetary quotation of plant and machinery
- A sanction or rejection letter is issued by financial institutions
- Send in writing the acceptance of terms and conditions
- Loan is disbursed based on phased implementation of the project

9. a) Proceed to implement
- Construction of building- The plan of the building should be approved by municipal authorities.
Make contracts for construction with suitable contractors. Along with the construction he should also
start making arrangements for water, drainage system and power supply.
- Measure to procure machinery- While deciding he should take the pricing, quality, terms and
conditions into consideration and then select appropriate channel for procurement.
- Hiring human resources- Entrepreneur should first start recruite the required personnel depending
upon the business needs and necessities.
-Raw material arrangement- An entrepreneur should procure the required quality and quantity of
raw materials and the decision should be taken on the basis of testing the samples.
-Marketing strategy- An entrepreneur should start devising strategies regarding positioning of the
product, promotion and how to approach customers etc.

b) Obtain final clearance

- Pollution control – No objection certificate (NOC) should be obtained from the state pollution
control board before commencement of construction activity.
- For units functioning outside the industrial area- Permission has to be sought from the
municipal corporation. In case private agriculture land is purchased for the project it has to be
converted into industrial land and obtain required approval for the same.
- Registration and licencing of a boiler- safety clearance of the Chief Electrical Inspector and Chief
Inspector of boilers required before commencing operations.
- Registration as 100% export –oriented unit (EOU) - clearance of the Development
Commissioner of the Export Processing Zone is required to enjoy additional concession.