Entrepreneurship 

UNIT -I
EVOLUTION OF CONCEPT OF ENTERPRENER AND
ENTREPRENEURSHIP
Entrepreneurship is one of the four mainstream economic factors –land, labour,
capital and entrepreneurship. During 14th century references speak about tax
contractors- individuals who paid a fixed sum of money to a government for a license to
collect taxes in their region. Known as tax contractors, they used to take the risk of
collecting taxes. If they collected more than the sum paid for their licenses, they made
profits and kept the excess. The concept of entrepreneurship was existing in 17th
century and was a common topic in economic essays for much of the 18th and 19th
centuries.
David Ricardo, a well known economist didn’t assign any important role to
entrentrepreneurship for economic development of a country. According to Ricardo,
“profit leads to saving of wealth, which ultimately goes to capital formation and leads
to economy development.”: In words of Lewis, “the proximate ways of economic
development are : the efforts to economise, the increase of knowledge, its application to
production and increasing the amount of capital or resources per head.”
Friedrich von Hayek (1899-1922) Ludwig Von Mises (1881-1973), Keynes
defined entrepreneurship and assigned a role played by entrepreneurship. Thus,
entrepreneurship came up as a theory which has ability to mobilize the resources and
combine them to initiate change in production.
CONCEPT OF AN ENTREPRENEURSHIP
Entrepreneurship is the tendency of a person to organize the business of his own
and to run it profitably, using all the qualities of leadership, decisions making the
managerial calibre etc. the term “entrepreneur” is often used interchangeably with
“entrepreneurship”. But conceptually they are different.
ENTREPRENEURSHIP
ENTREPRENEUR
Refers to a person Refers to a process
Creator Creation
Organiser Organisation
Decision maker Decision making
Initiator Initiative
Leader Leadership
Motivator Motivation
Risk taker Risk taking
Entrepreneurship can be defined as the propensity of mind to take calculated risks
with confidence to achieve a pre-determined business or industrial objective.

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The word ‘entrepreneurship’ typically means to undertake. It owes its origin to the
western societies. But even in the west , it has undergone changes from time to time.
In the early 16th century the term was used to denote army leaders. In the 18th
century, it was used to denote a dealer who buys and sells goods at uncertain prices.
Towards 1961,Schumpeter used the term innovator, for an entrepreneur. Two centuries
before, the concept of entrepreneurship was shady. It is only in the recent years that
entrepreneurship has been recognised widely all over the world like in USA,
Germany, Japan, and in the developing countries like ours. Gunnar Myrdal rightly
pointed out that Asian societies lack entrepreneurship not because they lack money or
raw materials but because of their attitudes. Till recently, in the west, the
entrepreneurship is mainly an attribute of an efficient manager. But the success
achieved by entrepreneurs in developing countries demolishes the contention that
entrepreneur is a rare animal and an elusive character. In India, the definition of ‘an
entrepreneur being the one who undertakes to organize, own and run a business’
has been accepted in a National Seminar on Entrepreneurship organized in Delhi in
1975. Still there has been no consensus on the definition of entrepreneurship and
qualities of entrepreneurship.
“Entrepreneurship is essentially a creative activity or it is an innovation function.
The process of innovation may be in the form of
(a) Introduction of a new product.
(b) Use of a new method of production.
(c) Opening of a new market.
(d) The conquest of new source of supplying raw material.
(e) A new form of organization.” Joseph A. Schumpeter
“Entrepreneurship is neither a science nor an art. It is practice. It has a
knowledge base. Knowledge in entrepreneurship is a means to an end. Indeed,
what constitutes knowledge in practice is largely defined by the ends, that is, by
the practice.” - Peter F. Drucker

“Entrepreneurship is the purposeful activity of an individual or a group of

associated individuals, undertaken to initiate, maintain or organise a profit-oriented
business unit for the production or distribution of economic goods and services”.
- A.H.Cole
“Entrepreneurship is the form of social decision making which is performed
by economic innovators.”
- Robert K. Lamb
IMPORTANCE OF ENTREPRENEURSHIP
Entrepreneurship being an intangible factor is the moving force and
development is the consequence. It has an important role in the context of a
developing nation like India which is confronted with major socio-economic
problems. Entrepreneurship can play an important role not only in the industrial
sector of a country but in the farm and service sectors also.

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Constant change and innovations are simply a necessity of entrepreneurship and is

becoming essential to survive in a global economy. An American magazine ‘The
Economist’ (1999)
Recently put it, “Innovation has become the industrial religion of the late 20th
century.” It is being increasingly realised that today’s managers and businessman
need not only managerial skills but entrepreneurial skills as well.
Entrepreneurship needs to be demystified and transformed into a skill by teaching and
practicing. Skill of entrepreneurship knows how to turn an ordinary corporation,
managed in a routine manner, into an entrepreneurial organization. People within the
organisation can be trained to:
(1) Detect the opportunities;
(2) persue the opportunities and rewarded;
(3) To lessen the consequences of failing.
Entrepreneurship plays a premium mobile role in promoting development of
an economy. Hence it is said that an economy is the effect for which entrepreneurship is
the cause. Various levels of economic development across the countries and
even within the country are attributed to their differences in entrepreneurship
development.
FEATURES OF ENTREPRENEURSHIP
Entrepreneurship is the tendency of a person to organize the business
of his own and to run it profitably, using various traits like leadership, decision
making, innovation, managerialcalibre etc. entrepreneurship is a set of activities
performed by an entrepreneur. In a way, entrepreneur proceeds entrepreneurship. The
main features of entrepreneurship are as follows:
(i) Economic Activity
Although classical economists like Adam Smith and Richard Cantillon and
many others didn’t recognize entrepreneurship as an economic activity but since
last few decades entrepreneurship is catching up and primarily becoming an
economic function because it involves creation and operation of an enterprise.
Entrepreneurship is a continuous economic process which recognizes
the need to change and the entrepreneur is a key person to initiate any change.
(ii) Innovative Activity
Innovation is the process of doing new things. Drucker elaborates :”
Innovation is the means by which entrepreneur either creates new wealth –producing
resources or endows existing resources with enhanced potential for creating
wealth”. Entrepreneurship is innovation where new products, services ,ideas and
information is produced ,new efficient production techniques are introduced by the
firms ,new market opportunities are identified and better ways of meeting existing
demands are looked into whenever a new idea occurs ,entrepreneurial efforts
Are essential to convert the idea into practical application. According to
Schumpeter, innovation may occur in any of the following ways:
(a) The introduction of a new good with which the customer is not yet familiar.
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(b) The introduction of a new method of production which is not tested by

experience in the branch of manufacture concerned;
(c) The opening of a new market – the customer are not yet familiar with the
product and the market for that innovative product hasn’t previously been
entered.
(d) The conquest of a new organization of an industry – a new innovation may
create the monopoly for that product or break the monopoly of similar
existing product.
(iii) A function of high achievement
People differ not only in their ability to do but also in their will to do, or motivation.
The motivation, in turn, depends on the strength of their motives sometimes defined as
needs, wants, drives or impulse within the individuals. McClelland identified two
features of entrepreneurship (a) doing things in a different and better way (b) decision
making under uncertainty. He found that looking at the history of industrial
development, many of the pioneers who built up industrial empires are strongly
motivated by need for power and achievement. Thus, people having high need for
achievement and power are more likely to succeed as entrepreneurs and this is a very
critical factor that leads one towards entrepreneurship. Researches also show that stable
personality characteristics like motive are laid down in child hood.
(iv) Creative and Purposeful Activity
Creative is “the ability to bring something new into existence”. The definition
emphasizes on “ability” and not the “activity” of bringing something new into
existence. A person may conceive of something new and also visualize its usefulness
but unless he takes necessary action to convert it into reality, his ideas will not be
termed as creative. Innovation is the process of doing new things. Innovation, therefore,
is the transformation of creative ideas into useful applications, but creativity is a
prerequisite to innovation.
Entrepreneurship is virtually a creative and a purposeful activity. The entrepreneur
passes through the five stages during the process of entrepreneurship viz. idea
germination, preparation, incubation, illumination and verification. Earning profits is
never the sole objective but to introduce something new and creative is the purpose of
entrepreneurship. The benefits of his creativity are enjoyed by people at large. E.g.
Internet benefits are being enjoyed by more than 50 million people world over.
(v) Entrepreneurship: An Organizing function
J.B. say describes entrepreneurship as an organizing function whereby the
entrepreneur brings together various factors of production, ensures the continuing
management and renders risk – bearing function as well. According to J.B. say, an
entrepreneur is one who combines the land of one, the labor of another, and capital of
yet another, and thus produces a product. By selling the product in the market, he pays
interest on capital, rent on land, wages to laborers and what remains is his profit. Thus,
J.B. say clearly distinguishes between the role of a capitalist as a financer and the

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entrepreneur as an organizer. Marshall also advocated the significance of organization

among the services of special class of business undertakes.
(vi) Entrepreneurship: A function of risk – bearing
Richard Cantillon, an Irishman living in France is credited with giving the concept
of entrepreneurship. Cantillon described in his book published in 1755, an entrepreneur
as a person who buys things at a certain price and sells them at an uncertain price.
TYPES OF ENTREPRENEURS (Entrepreneurial Modes)
In the initial stages of economic development, entrepreneurs tend to have less
initiative and drive. As development proceeds, they become more innovating and
enthusiastic. Similarly, when entrepreneurs are shy and humble the environment is
underdeveloped. Business environment becomes healthy and developed when
entrepreneurs are innovating. In a study of American agriculture, Danhof has classified
entrepreneurs in the following categories.
1. Innovating entrepreneurs:
Innovative entrepreneurship is characterized by aggressive assemblage of
information and the analysis of results derived from sound combination of factors.
Persons of this type are generally aggressive in experimentation and cleverly put
attractive possibilities into practice. An innovating entrepreneur sees the opportunity
for introducing a new technique or a new product or a new market. He or she may raise
money to launch an enterprise, assemble the various factors, choose top executives and
set the organization going.
Schumpeter’s entrepreneur was of this type. Such an entrepreneur introduces
new products and new methods of production, opens new markets and re-organises the
enterprise.
Innovating entrepreneurs are very commonly found in developed countries. There
is dearth of such entrepreneurs in developed countries. A country with little or no
industrial tradition can hardly produce innovating entrepreneurs. Such entrepreneurs
can emerge and work only when a certain level of development in already achieved and
people look forward to change and progress. Innovating entrepreneurs played the key
role in the rise of modern capitalism through their entrepreneursing spirit, hope of
money making, ability to recognise and exploit opportunities, etc.
2. Adoptive or imitative entrepreneurs:
This kind of entrepreneurs are ready to adopt successful innovations created by
innovation entrepreneurs. Instead of innovating the change themselves, they just
imitate the technology and techniques innovated by others. Such entrepreneurs are
particularly important in underdeveloped countries because they contribute
significantly to the development of such economics. Imitative entrepreneurs are most
suitable for the under-developed nations because in these nations people prefer to
imitate the technology, knowledge and skill already available in more advanced
countries.

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In highly backward countries there is shortage of imitative entrepreneurs also.

People who can imitate the technologies and products to the particular conditions
prevailing in these countries are needed.
Sometimes, there is a need to adjust and adopt the new technologies to their special
conditions. Imitative entrepreneurs help to transform the system with the limited
resources available. However, these entrepreneurs face lesser risks and uncertainty then
innovative entrepreneurs. While innovative entrepreneurs are creative, imitative
entrepreneurs are adoptive.
Imitative entrepreneurs are also revolutionary and important. “The importance of
these humbler entrepreneurs who exploit possibilities as they present themselves and
mostly on a small scale must not be under-estimated. In the first place, such adaptation
requires no mean ability. It often involves what has aptly been called subjective
innovation that is the ability to do things which have not been done before by the
particulars industrialist, even though, unknown to him, the problem may have been
solved in the same way by others. By western standards, an imitative entrepreneur may
be a pedestrian figure, an adopter and imitator rather then a true innovator. He is more
an organiser of factors of production than a creator. But in a poor country attempting to
industrialise, he is nevertheless a potent change figure. He can set in motion the chain
reaction which leads to cumulative progress. This humbler type of entrepreneur is
important in under developed countries for another reason. These countries are placing
great emphasis in their economic planning on small scale industries and decentralized
industrial structure.
3. Fabian entrepreneurs:
Entrepreneurs of this type are very cautions and skeptical while practicing any
change. They have neither the will to introduce new changes nor the desire to adopt
new methods innovated by the most enterprising entrepreneurs. Such entrepreneurs are
shy and lazy. Their dealings are determined by custom, religion, tradition and past
practices. They are not much interested in taking risk and they try to follow the
footsteps of their predecessors.
4. Drone entrepreneurs:
Drone entrepreneurship is characterized by a refusal to adopt and use
opportunities to make changes in production. Such entrepreneurs may even suffer
losses but they do not make changes in production methods. They are laggards as they
continue to operate in their traditional way and resist changes. When their product loses
marketability and their operations become uneconomical they are pushed out of the
market. They are conventional in the sense that they stick to conventional products and
ideas.
A distinction may also be made between entrepreneurs who are keen on fast
growth and expansion, and entrepreneurs who are content with viable small businesses.
Some more categories of entrepreneurs are given below:
(i) Individual and institutional entrepreneurs: In the small scale sector
individual entrepreneurs are dominant. Small enterprise outnumbers the large

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ones in every country. Such entrepreneurs have the advantages of flexibility,

quick decision making and state patronage. But a single individual can
establish, operate and control an organization up to a limit. Thereafter, it
becomes necessary to institutionalize entrepreneurship. The business will have
to acquire a number of new entrepreneurial skills through a corporate body. A
group of entrepreneurs has to be developed to handle the increasingly complex
network of decision making. The central function of the entrepreneur remains
the same but the basic decisions like the line of business, the amount of capital
employed, etc. are taken collectively by the group of promoters at the helm of
affairs.
Thus, individual entrepreneur and institutional entrepreneur coexist and support
each other. Corporate sector is the symbol of institutionalized entrepreneurship.
(ii) Entrepreneurs by inheritance: At times, people become entrepreneurs when
they inherit the family business. In India, there are a large number of
family-controlled business houses. Firms in these houses are passed from one
generation to another.
(iii) Technologist entrepreneurs: With the decline of the joint family business and
the rise of scientific and technical institutions, technically qualified persons
have entered the field of business. These entrepreneurs may enter business to
commercially exploit their inventions and discoveries. Their main asset is
technical expertise. They raise the necessary capital and employ experts in
financial, legal, marketing and other areas of business. Their success depends
upon how fast they start production and on the acceptance of their products in
the market.
(iv) Forced entrepreneurs: Many persons become entrepreneurs on account of the
circumstances. The moneylenders of yesteryears enter into business due to
decline of money lending business with the growth of banking and
Government legislation. Neo-rich Indians returning from abroad (NRIs) and
educated unemployed seeking self-employment may also be described as
forced entrepreneurs. In some cases newly married bridegrooms start business
with the financial support of their in-laws. This class of entrepreneurs accounts
for the maximum number of failures because there is no proper screening of
misfits. Failure of this type of entrepreneurs can be reduced with proper
training.
Entrepreneurs may also be classified into fist generation (new) and established
entrepreneurs, rural and urban entrepreneurs, male (men) and female (women)
entrepreneurs, small scale and large scale entrepreneurs, etc. In a planned economy like
India, Government has emerged as major entrepreneurs.
On the basis of motive, entrepreneurs may be classified into three categories:
1. Managing entrepreneurs whose chief goal is security;
2. Innovating entrepreneurs who want excitement; and
3. Controlling entrepreneurs who above all desire power

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In the same family succeeding generations of entrepreneurs may have different

aims. The first generation often seeks wealth, the second craves for prestige and the
third wants art and beauty in general.
ENTREPRENEUR
The term entrepreneur is derived from the French verb “entreprendre” which
means “to undertake”. The original related words in English are Entry and Enterprise.
These two words are combined and the new term is developed.
In the early 16th century, the Frenchmen who organized and led military
expeditions were referred to as “entrepreneurs”. Around 1700 A.D., Cochran
expanded the scope and applied the term to civil engineering activities, such as
construction, architecture and public works.
The term “entrepreneur” was applied to business initially by the French economist,
Cantillon, in the 18th century, to designate a dealer who purchases the means of
production for combining them into marketable products.
Another Frenchman, J.B.Say, expanded Cantillon’s ideas and defined the
entrepreneur as an ORGANISER of a business. An entrepreneur adds value.
Adam Smith described an entrepreneur as a person who only provides CAPITAL,
without taking active part in the leading role in an enterprise.
Joseph A.Schumpeter recognized a person who introduced INNOVATIONS, as an
entrepreneur. He is the one who introduces something new in the economy.
According to him, maintenance is not an entrepreneurial activity. Thus, entrepreneur
exists only when new factors are identified for the first time and not in the continuous
activities.
GROWTH OF ENTREPRENEURSHIP
An entrepreneur visualizes business opportunity and organises various factor of
production for setting up an enterprise. In the modern competitive world where there is
survival of the fittest’ an enterprise needs to be strong enough to successfully face the
challenges posed by changing business environment. It highlights the need for growth
of business enterprises. business growth is a natural and ever going on process. The
growth of an enterprises is reflected in the increases in its sales, volume of output
,assets and profits. firms now a days can’t afford to remain static for long as this stage to
may lead to stagnation & finally winding of the business. Thus in order to exist and
succeed firms have to grow. There are various motivating factors which fuel the need
for growth of an enterprise and these are as under:
(i) Need for survival.
In order to survive in the present environment, firms need strength
& stamina which can be generated only through growth. Cut throat competition
stimulates the firms to grow and gain completive advantage. Growth prepares and
places a firm on sound footings to face challenges, competitions, advertise etc. A
growing firm can easily absorb shochs of market forces . Growth thus ensures success
of an enterprises.

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( ii) Benefits of Economics of scale .

A growing firm can reap various advantages of economics of scale. These
advantages can be w.r.t purchasing producing, marketing, financing and managing
aspects of the enterprise.
According to Florence “There are logical reasons for supposing that granting
the advantages of mechanical and human specialization, large scale production
especially when conducted in large scale production especially. These economics of
scale help in reducing per unit cost of production, improving competitive position and
increasing overall sales and profits of the enterprise.
( iii ) Increase in demand .
In order to cater to increasing demand for goods and services the firms have no
choice but to expand or grow. Increase demand throws open opportunities for the
business to exploit through growth.
(iv) Modern technology
Modern technology symbolizes huge investment and mass production .modern
technology bestows various advantages in the shape of more production of better
quality products and that too lower costs.In order to reap this advantages ,firms have
got no choice but to grow.
( v ) Compliance with government policy.
Big business enterprises are better placed w.r..t compliance with government
policies,rules and regulations.they can afford to spend time efforts and money and
in turn can avail various facilities,concessions and incentives provided by the
government.
( vi ) Desire of Recognition.
The desire for social & economic recognition motivates entrepreneurs to set up
enterprises, ensure their efficient function and finally build business empires. Thus
personal desire of an entrepreneur can lead to the growth of the business.
VARIOUS STAGES OF GROWTH
The Growth of business firms is similar to that of human beings. Human life
passes through various stages converting childhood, adolescence, youth and old age.
Similarly enterprise life cycle covers startup, growth, maturity and decline and these
stages can be shown with the help of following diagram.

MATURITY

SALES /
GROWTH

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DECLINE
INTRODUTION
OR STARTUP
X
TIME

( i ) Start Up.
This stage refers to the birth or starting of operations by the
enterprise.productioin on a limited scale and sales are low and creeping very slowly
competition is not there and profits too may be not there.
( ii ) Growth Stage.
There is the growing Acceptance of the firms Product by the
market.Competitions start entering the market and profits too start increasing
.Business is expanded to exploit the opportunities which are there.

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( iii ) Maturity stage.

In this stage competition is at its peak.There is increase in sales but at
decreasing rate. There is adverse impact on profits and marginal firms start quilting
the marketing.
( iv ) Decline.
During this phase sales start going down and profits are
adversely affected.At this stage even bare survival is difficult.Improved products are
introduced and old products become obsolete..Enterprises start incurring losses and are
left with no choice but to close down the business.
Strategies of Growth
Strategy is an intentional and well planned course of action evolved to
achieve desired objectives. growth strategy means a properly designed plan to facilitate
in the growth of business over period of time. various strategies for growth are as under
I. Expansion
II. Diversifying
III. Merges
IV. Joint Ventures
V. Sub Contracting
Expansion.
Expansion relates to internal growth of business .Expansion implies producing
more of the same type of product. Expansion can take place in the following forms.
( a) Market penetration .
It aims at increasing sale of existing products by enlarging existing market. It
means selling more of the product in the existing market by introducing various sales
promotional measures to tempt more buyers.
(b) Market Development .
It refer to exploring or developing new markets .In addition to serving the
existing customers an attempt is made to locate and tempt new buyers.
(c) Product Development.
It refers to adding certain new features in the existing product or modifying the
product in the light of requirements of customers. It aims at launching new and
improved products in the market for increasing sales.

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THE ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

Entrepreneurship is the spirit of a person. It is a quality which may be inherent or
developed. For the economic development of a country, entrepreneurial skills need to
be developed. These skills lead to the development of business and ultimately, the
result is seen in the economic growth of the country.
Entrepreneurship plays a very important role in terms of
(a) generation of employment opportunities
(b) its size and nature, it is more dynamic, flexible and capable of making quick
decisions.
(c) Ensuring balanced economic development. Small enterprises need
relatively low investment and can be easily undertaken in rural and
semi-urban areas. Starting such enterprises create additional employment
in rural area and prevents migration of people from rural to urban areas.
Small enterprises use local resources and are best suited for rural and
underdeveloped sectors. Entrepreneurial development accelerates the
growth of small firms in India. A number of small firms are expected to be
more innovative and make the Indian industry compete in the international
market effectively.
The advantages of entrepreneurial development are that it leads to freedom,
flexibility, growth and development. It also develops leadership quality.
WOMEN ENTREPRENEURS
Women entrepreneurs may be defined as a “woman or a group of women who
initiate, organize and run a business enterprise”. Government of India has defined
women entrepreneurs based on women participation in equity and employment of a
business enterprise. Accordingly, a woman-run enterprise is defined as “an enterprise
owned and controlled by a woman having a minimum financial interest of 51% of the
capital and giving at least 51% of the employment generated in the enterprise to
women”. Women entrepreneurs constitute 10% of the number of entrepreneurs in our
country.
There has been a significant growth in self-employment of women with women
now starting new ventures at three times the rate of men. They constitute 50% of the
population of our country with a lower literacy rate than men. This statistical fact,
indicates that for the economic growth of the nation, women should not be ignored and
they should be encouraged to make their share of economic contribution to the country.
One way of achieving is by making women come out and become entrepreneurs. In
the traditional society, they were confined to the four walls, playing household roles,
but in the modern society, they are coming out to participate in all sorts of activities.
Normally, women entrepreneurship is found in the extension of their kitchen activities,
mainly in preparing commercially the 3 ‘P’s viz., Pickles, Papads and Powder. A few
of them venture into services industry relating to hospitality, catering, educational
services, consultation or public relations, beauty clinics, etc.

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Women enter entrepreneurship due to economic factors which push them to be on

their own and urge them to do something independently. Women prefer to work from
their own residence, difficulty in getting suitable jobs and the desire for social
recognition motivate them towards self-employment. We see a lot of women
professionals in engineering, medicine, law, and also as Chartered Accountants, etc.
They are also setting up hospitals, training centres, etc.
Problems of Women entrepreneurs
1. Problem of Finance : To raise finance, they do not have properties in their
names to use them as collateral securities. Thus, their access to external sources of
funds is restricted. They have to rely on their own savings and negligible loans from
friends and relatives. They have to satisfy themselves with small size of business
operations. Because of limited funds, they are not able to (a) stock raw materials; and
(b) spend on advertising.
2. Limited Mobility: Due to primary household responsibilities towards her
family, her time gets divided between the two worlds. She has restricted timings for
work due to which, she is not in a position to travel frequently and be away for longer
periods. Thus, her mobility is restricted. This also has an implication on business.
3. Lack of Education: Women have lower rate of literacy. Nearly 60% of the
women are illiterate in India, because of which they are not aware of the latest
developments that have taken place in technology. Low level of education results in
low achievement motivation amongst women entrepreneurs.
4. Male dominated society: A woman is dominated by men in her family as
well as business. Often she has to obtain permission from men for almost everything.
They are not treated as equals. Her freedom is restricted. She always has to consult
and get the approval of men.
5. Low risk-bearing ability: This is so because right from the childhood, her
parents take decisions for here and after marriage her husband takes over. She is
protected throughout and thus the risk bearing ability gets reduced.
6. Social recognition: Society does not give due recognition to women
entrepreneurs. They are looked down as small and weak.
On account of the above mentioned reasons, the enterprises of women faces
several problem in finance, marketing and expansion, etc.
RURAL ENTREPRENEURSHIP
Rural entrepreneurship means entrepreneurship emerging in rural areas. In other
words, establishing industrial units in rural areas is rural entrepreneurship. It implies
rural industrialization. According to KVIC, village industry or rural industry is “any
industry located in a rural area, the population of which does not exceed 10,000, which
produces any goods or renders any services with or without the use of power and in
which the fixed capital investment per head of an artisan or a worker does not exceed an
thousand rupees.” The definition has been modified with population ceiling of 20,000
and investment upper limit of Rs.3 crores in plant and machinery. As a result of

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widening of the scope of village industries, classified village industries have increased
from 70 to 101.
Village industries have been grouped into seven categories which are as follows:
(i) Mineral based (ii) Forest based (iii) Agro based (iv) Polymer and chemical
based (v) Engineering and non-conventional (vi) Textiles including Khadi; and (vii)
Service industry.
The need to develop rural industries in India should be accorded the top priority
because they will help in
(i) The reduction in migration of rural population to urban areas.
(ii) Balanced regional growth
(iii) Reducing rural-urban gap
(iv) Increasing rural income
(v) Reducing the heritage of the country
(vi) Reduction the urban pollution
(vii) Higher economic growth
Since a majority of the population lives in villages, it becomes necessary to
develop rural villages to register a quantum leap in economic growth. There is a lot
of potential in rural areas which needs to be tapped. It can be achieved by promoting
rural entrepreneurship.

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Problems of Rural Entrepreneurship

Developing rural entrepreneurship is not an easy task. There are lot of difficulties
in the development of rural industries. They are:
(i) Domination by agricultural mindset
(ii) Lack of education with low literacy
(iii) Poor infrastructure because of which access is difficult and costly. Some
villages don not have roads, drinking water, electricity, drainage, and
telephones.
(iv) Lack of information
(v) Lack of technical know how and skilled labour
(vi) Lack of quality control
(vii) Attitude of people with mistrust of new comers
(viii) Language barriers
(ix) Primitive and low technology
(x) High input cost due to transportation
(xi) Management problems
(xii) Lack of storage and warehouse facilities
(xiii) Inadequate finance and credit
(xiv) Lack of awareness and knowledge about the opportunities
(xv) Preference for salaried jobs than self-employment
Because of these innumerable problems, entrepreneurs shy away from rural
areas. This does not mean that these problems insurmountable. Since the potential is
quite high in rural areas, it is not possible to ignore it. Let us see how these problems
could be solved to promote rural entrepreneurship.
FACTORS AFFECTING ENTREPRENEURIAL GROWTH
Entrepreneurship is a skill, the resultant of a mix of many qualities, traits and
competencies, Entrepreneurship must be a cluster of many entrepreneurial people
devoted to their respective ventures. Entrepreneurship is nothing unless entrepreneurs
give a creative response to the environment and undertake to establish their enterprise.
But devoted, imaginative, hard-working, creative and competent entrepreneurs are not
enough to further the process of entrepreneurship. Entrepreneurship refers to a process
of actions taken by entrepreneur in a specific environment. We can say that
entrepreneurship is sum total of entrepreneur and his environment. We have studied
both the aspects of entrepreneurship – and environment – in separate chapters. Let us
now study that what is obstructing the growth of entrepreneurship. Is it poor
entrepreneurs or unhealthy environmental factors or both?
Undoubtedly, entrepreneurship growth in India is slow as compared to other
countries. Women’s entrepreneurship is still slower and rather negligible. As far as
development of entrepreneurship is concerned, the factors responsible for its slow
growth are:

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1. Incompetence and poor management ;

2. Low level of commitment;
3. Restrictions imposed by custom and tradition;
4. Involvement of high risk;
5. Socio – culture rigidities;
6. Lack of motivation;
7. Lack of infrastructure facilities;
8. Lack of communication network;
9. Absence of entrepreneurial aptitude;
10. Low status of business man;
11. Market imperfections;
12. Legal formalities involved to set up a unit.
13. Low quality products.
14. Low package of salaries to employees.

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UNIT - II
PROJECT IDENTIFICATION
Project identification 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 characteristic of such opportunities.
Opportunities, according of Drucker (1955), are of three kinds: additive,
complementary and break-through. Additive opportunities are those opportunities
which enable the decision-maker to better utilize the existing resources without in any
way involving a charge in the character of business. Complementary opportunities
involve the introduction of new ideas and as such do lead to a certain amount of change
in the existing structure. Break-through opportunities, on the other hand, involve
fundamental changes in both the structure and character of business. Additive
opportunities involve the least amount of disturbance to the existing state of affairs and
hence the least amount of risk. The element of risk is more in other two opportunities.
When the element of risk increases, it becomes more important to precisely define the
scope and nature of project idea, to develop alternative solutions for achieving the
project objectives and to select the best possible approach so as to minimize both
resource consumption and risks and to optimize the return or gains.
Project identification can not be complete without identifying the
characteristics of a project. Every project has three basic dimensions – inputs, outputs
and social costs and benefits. The input characteristics define what the project will
consume in terms of raw materials, energy, manpower, finance and organizational
setup. The nature and magnitude of each of these inputs must be determined in order to
make the input characteristics explicit.
The output characteristics of a project define what the project will generate in
the form of goods and services, employment, revenue, etc. The quantity and quality of
all these outputs should be clearly specified.
In addition to inputs and outputs every project has impact on the society. In
inevitably affects the current equilibriums of the demand and supply in the economy. It
is necessary to evaluate carefully the sacrifice which the society will be required to
make and the benefits that will accrue to the society from a given project.
Projects do not emerge themselves. The inputs to set up a project can come from
different sources such as Governmental agencies, credit and financial institutions,
non-governmental organizations like chambers of commerce and industry,
inter-institutional groups, technical consultancy organizations and international
collaborations. Once the venture ideas have been developed by entrepreneurs by
following one or combination of sources explained, these have to be screened and
evaluated in a preliminary fashion on the basis of internal and external constraints prior
to being put to additional tests of pre-feasibility. This project identification comes to an
end by laying down specific project objectives clearly and concisely and without any
ambiguity so that these convey one and the same meaning to all concerned.
INTERNAL CONSTRAINTS

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Internal constraints arise on account of the limitations of the management

system which will eventually be responsible for the implementations of a project. In
India, the internal constraints for the entrepreneurs while venturing the projects
comprise inputs, resources and outputs. These are narrated under:
(i) Entrepreneurs, while implementing the projects, rely more on outside
consultants for preparation of feasibility reports in the formulation of
their projects. The limitation on the part of entrepreneurs provide inbuilt
project services in the form of preparing feasibility reports is an
important internal constraint in the early implementation of the project.
(ii) For early implementation of the projects within the budgeted cost and
time schedule, all the entrepreneurs cannot develop independent project
management systems, organization structure, network analysis and
other elements. In such a situation, the entrepreneurs’ inherent internal
constraints are developing well equipped project management strategies
and tools while implementing them.
(iii) Project goals and objectives lay down the main purpose for which an
organisation exists. Practically, project management team is not much
involved with the determination of project objectives. Certainty, this
will be another internal constraint for the project team to achieve the
unrealistic objective which is decided by the top management personnel
of the business.
(iv) The availability of the necessary internal project elements and resources
are physical and non-physical resources. The physical resources include
finance, personnel, inventories and facilities. The non- physical
resources are patents, secret processes, and unique experience skills.
Physical and non- physical resources are the important constraints for
the entrepreneurs to make available at a time when the project
implementation is in progress.
EXTERNAL CONSTRAINTS
External constraints are also another important constraint for the entrepreneurs
who venture into project implementation. The important external constraints are the
project environments comprising things, people and situations outside a project and
also the size, nature, location and extent of the project constitute the environment of the
project. The other tangible environment factors are namely, social taboos, government
policies and the state of capital market. These are described as under:
(i) The external environment factors like nature, size, location and the
extent of project are the important limiting factors for the entrepreneurs
when the project does not conform to the socio-economic objectives of
the country.
(ii) Government policies and regulations are another major hurdle for the
entrepreneurs while implementing the projects. They are mainly in the
form of delay in giving approval to the entrepreneurs in the medium of

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industrial licensing, foreign collaboration approval, CCI clearance,

environmental clearance, foreign exchange permit, capital goods
approval and import goods clearance.
(iii) Financial institutions, banks are the important external financial source
for the entrepreneurs while financing their projects. The financial
institutions’ and commercial banks’ cumbersome procedures and
documentation system are important external constraints for the
entrepreneurs in the form of delay in financing the projects.
PROJECT OBJECTIVES
Project objective is an important element in the project planning cycle. Project
objectives are concerned with defining in a precise manner what the project is expected
to achieve and to provide a measure of performance for the project as a whole.
Objectives are the foundations on which the entire edifice of the project design in built.
The essential requirements for project objectives are:
(a) Specific, not general
(b) Not overly complex
(c) Measurable, tangible and verifiable
(d) Realistic and attainable
(e) Established within resource bounds
(f) Consistent with resources available or anticipated
(g) Consistent with organizational plans, policies and procedures.
PROJECT LIFE CYCLE
Like human beings, projects also have a life cycle. Project life cycle consists of
three main stages:
1. The Pre-Investment Phase
This is the first phase in the life of a project. It is primarily concerned with
objective formulation, demand forecasting, selection of optimal strategy, evaluation of
input characteristics, projections of the financial profile, and if necessary cost benefit
analysis and ultimately the pre-investment appraisal. The project idea is developed into
an investment proposition during this phase.
2. The Construction Phase
This phase begins after the investment decision is taken. Resources are invested
during this phase in building the basic assets of the project, which can in due course be
utilized to achieve the project objectives. The assets may be in the nature of land and
buildings, plant and machinery, ancillary accommodation, communication services,
control systems and marketing organisation. In projects not involving the use of plant
and machinery, the construction phase may merely consists of developing necessary
manpower resources. Thus, the construction phase consists mainly of developing the
infrastructure for the project. It is one time effort.
3. The Normalisation Phase

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This phase starts after the trial run of the project framework developed during
the construction phase. It involves routine procedures which are performed in a cyclic
order. The primary objective of this phase is to produce the goods and services for
which the project was established. For, this purpose a provision has to be made for raw
materials and other consumables. These can be determined by analyzing the process
cycle identifying the sequence of process operations. Projects which do not involve
production of goods do not require raw materials but only suppliers or supporting goods
needed to sustain the project process. Thus, the assets created during the construction
phase are utilized during the normalization phase.
CONCEPT OF PROJECT FORMULATION
Project formulation is the systematic development of a project idea for the eventual
objective of arriving at an investment decision. It has the built-in mechanism of ringing
the danger bell at the earliest possible stage of resource utilization. Project formulation
involves a step-by-step investigation and development of project idea. And it provides a
controlled mechanism for restricting expenditure on Project development. One
stage of the exercise leads to the other. In case a weakness is observed at any stage of
investigation, the entrepreneur can exercise his discretion of calling off the exercise if
the facts so warrant. It enables him to take decisions in a scientific way providing a
concrete set of facts.
Project formulation is a process involving the joint efforts of a team of experts.
Each member of the team should be familiar with the broad strategy, objectives and
other ingredients of the project. Besides being an expert in his area of specialization, he
should be able to play his role in the overall scheme of things. The government official
who deals with the project’s final clearance has to be treated as formatting part of the
team. He should be well informed about the project. A well-formulated feasibility
report provides a medium which cuts across scientific, social and positional prejudices
and provides a common meeting ground for all those who have a contribution to make
in successful implementation of a project.
Project team should consist of experts in major substantive fields of the project.
Depending on the situation any large Project should comprise the following team
members,
(a) One industrial economist
(b) One market analyst
(c) One or more technologist/engineer specialising in the appropriate
industry
(d) One mechanical and/or industrial engineer
(e) One civil engineer, if needed
(f) One management accounting expert.
SIGNIFICANCE OF PROJECT FORMULATION
A well- formulated project is the best passport for obtaining the required assistance
from financial institutions. When there is a situation of resource constraint and the
available resources are allocated to various projects based on their importance and

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viability a well formulated project formulation is the best way of selling a project idea
to a financing agency.
Project formulation will also be of great assistance for obtaining necessary
Government clearances and it meeting the hurdles of procedural formalities. It will
pinpoint the matters for which Government sanctions have to be obtained and also
provide an independent assessment of the feasibility of obtaining these sanctions based
on the existing Government policies. The project report submitted by the entrepreneur
will establish his bonafides in the eyes of the bureaucracy and obtain the due
Government sanctions without many difficulties.

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ELEMENTS OF PROJECT FORMULATION

Project formulation is by itself an analytical management aid. It enables the
entrepreneur to arrive at the most effective project decision. Project formulation
exercise normally includes such aspects as follows:
1. Feasibility Analysis
2. Techno-economic Analysis
3. Project Design and Network Analysis
4. Input Analysis
5. Financial Analysis
6. Social cost-Benefit Analysis, and
7. Project Analysis
Feasibility Analysis
Feasibility Analysis is the process of evaluating the future of a project idea within
the limitations of the project implementing body and the constraints imposed on the
project situation by the environment. The Analysis is undertaken to determine the
desirability of investing in further development of project idea. When a project is taken
up for development three alternatives can arise. First, the project many appear to be
positive and in such a case the project assessing body can proceed to invest further
resources in pre-investment studies and design development, secondly, the project may
turn out to be not feasible and, therefore, further investment in the project idea is ruled
out. Thirdly, the data is not adequate for arriving at a decision about the feasibility of
the project. In such a situation, additional information must be collected and the
investment decision is deferred till the final decision.
(i) Prefeasibility Study: The project idea must be elaborated in a more detailed
study. However, formulation of a techno-economic feasibility study that
enables a definite decision to be made on the project is a costly and
time-consuming task. Therefore, before assigning funds for such a study, a
preliminary assessment of the project idea must be made in a pre-feasibility
study.
The principal objectives of such a study are to determine whether:
(a) The investment opportunity is so promising that an investment
decision can be taken the basis of information elaborated at the
pre-feasibility stage,
(b) The project concept justifies a detailed analysis by a pre-feasibility
study;
(c) Any aspects of the project are critical to its feasibility and
necessitate in-depth investigation through functional or support
studies such as market surveys, laboratories tests, pilot plant tests;
(d) The information is adequate to decide that the project not either a
viable proposition or attractive enough for a particular investor or
investor group.

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(ii) Feasibility Study: It is the most important part of project analysis, for it
provides answers to questions in detail on different aspects relating to a project. In
practice this means investigating the project from six different aspects economic,
technical, managerial, organisational, commercial and financial. The relative
importance of these different aspects varies considerably according to the type of
project involved. For example, in the analysis of public sector projects more
importance is usually given to wider social benefits than to narrow financial
profitability. It will define and analyse the critical elements that relate to the production
of a given product together with alternative approaches to such production. Such a
study should also provide a project of a defined production capacity at a selected
location using a particular technology or technologies in relation to defined materials
and inputs, at identified investment and production costs, and sales revenues yielding a
defined return on investment.
2. Techno-Economic Analysis
Techno-economic analysis is primarily concerned with the identification of the
project demand potential and the selection of the optimal technology suitable for
achieving the project objectives. This analysis produces necessary information on
which the project design can be used. It also indicates whether the economy is in a
position to absorb the output of the project.
(i) Determination of Project Demand Potential: Estimation of demand potential is
the starting point of techno-economic analysis. Demand forecasting helps to firm up the
qualitative parameters of the project and also provides a basis for selecting the optimal
strategy for the project. The forecasting may be for a short period extending up to a year
i.e., short-run forecast or may cover only a particular industry i.e., industry forecast. Or
it may be personal or specific forecasts relating to certain commodities or areas. Other
factors of a forecast may be relating to the nature of product viz., new or established
product or the classification of product, viz., capital goods, consumer goods or services,
etc., or the special features particular to the product viz., market competition , risks
associated with the product etc.
(ii) Selection of optimal project strategy: In any project situation, normally, an
infinite series of strategies can theoretically be made available for achieving the project
objectives. The difference in the payoff of several of these strategies will be generally
so small that for the purpose of decision making, a group of these strategies can be
represented by a single representative strategy. This, on the one hand, facilities the
process of identification of feasible strategies and on the other simplifies the decision
problem.
3. Project Design and Network Analysis
Project design is the heart of a project. It defines the individual activities
comprising a project and the interrelationship between the activities. It identifies the
flow of events which must take place before project can start yielding the desired
results. The interrelationship between various constituent activities of a project is
generally depicted in the form of a network diagram.

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Project design and network analysis are concerned primarily with the
development of the detailed work plan of the project and its time profile. This plan is
presented in the form of a network diagram. Network analysis is carried out to identify
the optimal course of action, so as to execute the project within the minimum time
keeping in view the available resources. Thus, project design and network analysis
paves the way for detailed identification and quantification of the project inputs which
is essential for developing the financial and cost-benefit profile of a project.
4. Input Analysis
After a project idea has withstood the tests of feasibility analysis,
techno-economic analysis and network analysis, it becomes necessary to determine the
resource requirements of the project. Input analysis is primarily concerned with the
identification, quantification and evolution of project inputs. The objective is first to
identify the nature of the resources that a project will consume, secondly to estimate the
magnitude of the required resources and thirdly to evaluate the possibility of
un-interrupted supply of inputs.
5. Financial Analysis
Financial characteristic of an investment proposition have a significant impact on
the acceptability or otherwise of a project. The purpose of financial analysis is to
identify these characteristics and to determine the financial feasibility of s project. Such
analysis involves estimates about project costs and revenues and the funds required for
the project. It seeks to find out whether the project will generate revenues to realise the
ultimate objective for which it is undertaken. It reduces investment propositions to one
common scale so as to permit comparison and eventual investment decision. Since
investment propositions has a long time-horizon, due care and foresight must be used in
developing financial forecasts of a project. The information obtained from the financial
analysis could be used for employing commercial profitability analysis.
6. Cost Benefit Analysis
Under this analysis, estimates of social costs and social benefits are made and
presented for computation of social profitability of the project. While the costs and
benefits under the financial analysis are estimated employing market prices based on
financial objectives, this cost-benefit analysis considers them only at certain imputed
prices based on social or national objectives. Generally, the purpose of this analysis
would be to ascertain all social costs and secondary benefits with a view to find out the
impact of the project on the society. The methods of estimating the shadow prices or
imputed prices, social discount rate, etc., are to be explained and the calculations are to
be presented in separate statements or tables. However, most of the data obtained from
financial analysis could be adjusted to reflect the true social values and use. Similarly
most of the decision criteria techniques of the profitability analysis could be used also
in cost-benefit analysis.
PROJECT APPRAISAL
After the project is decided upon and before the entrepreneur approaches a lending
institution, he needs to understand the evaluation methods employed by the lending

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institutions for obtaining any financial assistance. Some aspects of the feasibility are
also used for the purpose of appraisal. If an entrepreneur is aware of the project
appraisal methods, he can anticipate the requirements of the lending institutions and
match his answers accordingly to ensure that answers are available in the project report.
Meaning of Project Appraisal: Assessing the viability or feasibility of a proposed
project by the lending institutions is called “project appraisal”. The difference
between feasibility and appraisal is, that the feasibility is done by the entrepreneur or
his consultant, while appraisal is done by the investors and lending institutions.
Entrepreneur also does the appraisal when he has to choose between two or more
alternative projects. Project appraisal is ex-ante analysis. It identifies and values the
expected costs and benefits of a project. Project evaluation is ex-post analysis of an
executed project. However, sometimes the concepts of appraisal and evaluation are
used interchangeable, but both mean the same. Different analyses are done in the
different stages of the project appraisal.
Project appraisal is a process of transmitting information accumulated through
feasibility studies into a comprehensive form in order to enable a decision maker
undertake a comparative appraisal of various projects.
Different methods are used by lending institutions to evaluate a project proposal.
Marketing, economic, financial, management, and social feasibilities are studied by
lenders/invertors as well. In this chapter, we shall discuss the various profitability
appraisal methods used for evaluation. They are-
1. payback period
2. return on investment
3. discounted cash flow
4. internal rate of return
5. net present value
6. profitability index
Payback Period Technique
One of the most commonly used techniques for evaluating investment proposals is
the cash pay back or payback period. It attempts to calculate the period known as
payback period required to recover the initial investment out of inflow of net cash flows
/ savings or profit form the investment. In other words, it represents the number of
years in which the investment is expected to ‘pay for itself’.
Original cost of
Investment
Payback Period =
Annual net cash inflows or
savings
P = I/S or I/C or I/E
Where,

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P = Payback period
I = Initial Investment
S = Savings per year
C = Annual Cash inflow
E = Earnings per year
This method is suitable for relatively small projects that are expected to be
completed in a short time. However, it does not take into consideration the years
beyond the payback period. The basis is liquidity and not profitability. It overlooks
cost of capital.
Return on Investment (ROI)
ROI is defined as the ration of profit (net of depreciation and taxes) to initial capital
outlay. The figure is compared to the cost of capital. If the project does not yield the
desired ROI, it is not accepted. If there are a number of projects under consideration,
then they are ranked on the basis of ROI and the project with the best ROI or those
above the desired ROI is / are selected. Different methods are used for the purpose of
calculation ROI. For example,
Annual net
Income
Average Rate of Returns =
x 100
Average Investment
Average Investment = initial investment + scrap value / life of asset
Discounted Cash Flow
Money has a time value. It means that the value of money changes over time. An
amount of Rs.100 received after one year will not have the same value that it has today.
The cash flow received in different years have different values. In earlier methods, the
time value of money was not taken into account. Discounting is the opposite of
compounding. In compounding, the rate of interest, the future value of the present
money is ascertained. In discounting, the present value of the future money is
calculated to enable us to make decisions today.
A1 A2 A3
An
Present Value = + + + ………
(1+r) (1+r)2 (1+r)3
n
(1+r)

where A1, A2, A3 - An = Future net cash flows (profit after tax but before
depreciation), r=rate of interest desired, 2,3- and n=number of years. Present value can
also be found by the use of Present Value Tables.
Internal Rate of Return

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Under this method, the ‘life’ of the project is usually fixed and the discount rate at
which the present value of net cash inflow during that chosen ‘life’ equals the initial
outlay. In order words, it reduces the net present value to zero. The IRR is arrived at
through an iterative process and for different lengths of ‘life’ of the project.
Net Present Value
In this method, the discount rate should be equal to the company’s weighted
average cost of capital. In this method, future cash inflows are discounted to the
present value. This is the Gross Present Value of the cash flows. From this, the
present value of the cost of the project (i.e., cash outflow) is subtracted. The resulting
surplus is the net present value of the investment. The best project is the one which has
the highest net present value.

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Profitability Index
It is also called present value profitability index or benefit cost ratio.
Present Value of gross cash
inflows
Profitability Index =
Initial cash outlay

Present Value of Operating

Inflows
Present Value Index =
x 100
Present Value of Net
Investment
Risk Adjusted Discount Rate
In Risk adjusted discount rate (RADR), the discount rate is a adjusted in
accordance with the degree of risks. Higher the risk, higher the discount rate. For
example, if 3 projects have mild risk, moderate risk and high risk, the discount rate
would be 12%, 13%, 14% respectively.
An entrepreneur must be knowledgeable about profitability appraisal methods.
This will help him evaluate his business ideas and in preparation of project reports.
Risk and Uncertainty
A project appraisal can be done under three different situations. The assumption
can be certainty, risk and uncertainty.
A certainty situation is one where the future occurrence of a particular outcome
such as future cash flow or discount rate could be expected with certainty. But, in
practice, all investment decisions are undertaken under conditions of risk and
uncertainty.
Risk refers to a situation where the probability distribution of a particular outcome
could be objectively known in advance. Uncertainty refers to a situation where the
probabilities are not known, but only guessed. For example, risks can be covered with
various insurance policies. But the uncertainty could be due to change in Government
policies, natural calamities, price fluctuation, etc. Uncertainty is minimized by
employing some modern quantitative techniques such as systems analysis, operations
research, marketing research, network analysis etc. The use of these techniques could
make the estimates more realistic for an appraisal.
PROPRIETORSHIP
Sole proprietorship or individual proprietorship is the simplest and the oldest form
of ownership organization. It is a business owned and controlled by one person. The
individual may borrow money and employ assistants. But he/she alone is responsible

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for the results of the business. The individual who establishes it is known as Sole
proprietor or individual proprietor or sole trader.
According to wheeler, “the Sole proprietorship is that form of business
organization which is owned and controlled by a single individual. He receives all the
profits and bears all the risks in the success or failure of the enterprise”. The Sole
proprietor is not only the exclusive owner but Sole founder and controller too.
Thus, Sole proprietorship is established, financed, owned and managed by a single
individual who bears all the risks and receives its gains.
Salient Features
1. Single ownership
2. One man control
3. No separate legal entity of the firm
4. Unlimited liability
5. Undivided risk
Merits
1. Ease of Formation 1.Limited funds
2. Direct motivation 2. Lack of specialization
3. Independent control 3. Unlimited liability
4. Quick decisions 4. Uncertain life
5. Business secrecy 5. Limited scope for
expansion
6. Personal touch
7. Freedom from Government control
8. Flexibility of operations
9. Social utility
Suitability: The foregoing description reveals that sole proprietorship or one-man
control is the best in the best in the world if that man is big enough to manage
everything. But such a person does not exist. Therefore, sole proprietorship is suitable
in the following cases:
(1) Where small amount of capital is required, e.g., sweet shops, bakery, newsstand
etc.
(2) Where quick decisions are very important, e.g., share brokers, bullion dealers,
etc
(3) Where limited risk is involved, e.g., automobile repair shop, confectionery,
small retail store, etc.
(4) Where personal attention to individual tasted and fashions of customers is
requires, e.g., beauty parlor, tailoring shops, lawyers, painters, etc.
(5) Where the demand is local, seasonal or temporary, e.g., retail trade, laundry,
fruit sellers, etc.

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(6) Where fashions change quickly, e.g., artistic furniture, etc.

(7) Where the operation is simple and does not require skilled management.
Thus, sole proprietorship is a common form of organization in retail trade,
professional firms, household and personal services. This form of organization is quite
popular in our country. It accounts for the largest number of business establishments in
India, in spite of its limitations.
PARTNERSHIP FIRM
As a business enterprise expands beyond the capacity of a single person, a group of
persons have to join hands together and supply the necessary capital and skills.
Partnership firm thus grew out of the limitations of one man business. Need to arrange
more capital, provide better skills and avail of specialisation led to the growth of
partnership form of organisation.
According to Section 4 of the Partnership Act, 1932 partnership is “the relation
between persons who have agreed to share the profits of a business carried on by all or
anyone of them acting for all”. In other words, a partnership is an agreement among two
or more persons to carry on jointly a lawful business and to share the profits arising
there from. Persons who enter into such agreement are known individually as ‘partners’
and collectively as ‘firm’.
Characteristic of Partnership
1. Two or more persons – maximum 10 in banking business and 20 in
non-banking business
2. Agreement – written or oral
3. Lawful business
4. Sharing of profits
5. Mutual agency among partners
6. No separate legal entity of the firm
7. Unlimited liability
8. Restriction on transfer of interest
9. Utmost good faith.

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Formation of Partnership
A partnership firm can be formed through an agreement among two or more
persons. The agreement may be oral or in writing. But it is desirable that all terms and
conditions of partnership are put in writing so as to avoid any misunderstanding and
disputes among the partners. Such a written agreement among partners is known as
Partnership Deed. It must be signed by all the partners and should be properly stamped.
It can be altered with the mutual consent of all partners.
A partnership deed usually contains the following details:
(1) Name of the firm
(2) Names and addresses of all partners.
(3) Nature of the firm’s business.
(4) Date of the agreement
(5) Principal place of the firm’s business.
(6) Duration of partnership, if any.
(7) Amount of capital contributed by each partner.
(8) The proportion in which the profits and losses are to be shared.
(9) Loans and advances by partners and interest payable on them.
(10) Amount of withdrawal allowed to each partner and the rate of interest
(11) Amount of salary or commission payable to any partner.
(12) The duties, powers and obligations of all partners.
(13) Maintenance of accounts and audit.
(14) Mode of valuation of goodwill on admission, retirement or death of a
partner.
(15) Procedure for dissolution of the firm and settlement of accounts.
(16) Arbitration for settlement of disputes among the partnership.
(17) Arrangements in case a partner becomes involvent.
(18) Any other clause(s) which may be found necessary in particular kind of
business.
Registration of Firms
The Partnership Act, 1932 provides for the registration of firms with the Registrar
of Firms appointed by the Government. The registration of a partnership firm is not
compulsory. But an unregistered firm suffers from certain disabilities. Therefore,
registration of a partnership is desirable.
Procedure for Registration: A partnership firm can be registered at any time by
a statement in the prescribed form. The form should be duly signed by all partners. It
should be sent to the Registrar of Firms along with the prescribed fee. The statement
should contain the following particulars:
1. Name of the firm
2. Principal place of its business.

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3. Name of other places where the firm is carrying on business.

4. Names in full and permanent addresses of all partners.
5. Date of commencement of the firm’s business and the dates on which each
partner joined the firm.
6. Duration of the firm, if any.
7. Nature of the firm’s business.
On receipt of the statement and the fees, the Registrar makes an entry in the
Registrar of Firms. The firm is considered to be registered when the entry is made. The
Registrar issues a Certificate of Registration. Any change in the above particulars must
be communicated to the Registrar of Firms within a reasonable period of time so that
necessary alterations may be made in the Registrar of Firms. The registrar is open for
inspection on payment of a nominal fee.
Consequences of Non-Registration: An unregistered firm and its partners suffer from
the following disabilities:
1. An unregistered firm cannot file a suit to enforce its claims against third
parties for more than Rs.100.
2. An unregistered firm cannot claim a set-off in a suit for an amount of more
than Rs.100.
3. An unregistered firm cannot sue any partner.
4. A partner of an unregistered firm cannot file a suit against the firm for
enforcing his rights.
5. Partners of an unregistered firm cannot enforce their claims against each
other.
A registered firm and its partners are free from these limitations. Registration is
also a conclusive proof of partnership and it helps to check tax evasion. Registration of
firm provides useful information about partnership firms in the country.

Exemptions: Non-registration of a firm does not affect the following:

(a) The right of a partner to sue for dissolution of the firm or for accounts
thereof.
(b) The power of an official Assignee or Receiver to realise the properties of an
insolvent partner.
(c) Suits-for the realization of the properties of a dissolved firm.
(d) The right of a firm or its partners having no place of business in India.
(e) Suits (or claims for set-off) for a sum not exceeding Rs.100 in value
provided the suit is of such a nature that it has to be filed in the small causes
court.

32 
 
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(f) Suits arising otherwise than under a contract, e.g., a suit against a third party
for infringement of trademarks of the firm.
(g) Suits in the areas where the State Government has by a notification
exempted firms from the provisions relating to registration.
Dissolution of Firm
A distinction should be made between the ‘dissolution of partnership’ and
‘dissolution of firm’. Dissolution of partnership implies the termination of the original
partnership agreement or change in contractual relationship among partners. A
partnership is dissolved by the insolvency, retirement, incapacity, death, expulsion,
etc., of a partner or on the expiry/completion of the term/ venture of partnership. A
partnership can be dissolved without dissolving the end. The remaining partners
continue business by entering a new agreement. On the other hand, dissolution of firm
implies dissolution between all the partners. The business of the partnership firm comes
to an end. Its assets are realised and the creditors are paid off. Thus, dissolution of firm
always involves dissolution of partnership but the dissolution of partnership does not
necessarily mean dissolution of the firm.
Mode of Dissolution of Firms
A partnership firm may be dissolved in any of the following ways:
1. Dissolution by Agreement: A partnership firm may be dissolved with the
mutual consent of all the partners in accordance with the terms of the
agreement.
2. Dissolution by Notice: In case of partnership-at-will, a firm may be dissolved
if any partners give a notice in writing to other partners indicating his intention
to dissolve the firm. In such case, the dissolution takes place with effect from
the date mentioned in the notice. If no date is mentioned, the firm would be
dissolved with effect from the date of receipt of the notice by the partners. When
such a notice is given to other partners, it cannot be withdrawn without their
consent.
3. Contingent Dissolution: A firm may be dissolved on the happening of any of
the following categories:
(a) On the expiry of the term, if it for a fixed period.
(b) On the completion of the firm’s venture
(c) On the death of a partner
(d) On the adjudication of a partner as insolvent.
4. Compulsory Dissolution: A firm stands automatically dissolved in the
following cases:
(a) When all partners or all but one partner are declared insolvent.
(b) When the business of the firm becomes unlawful due to the happening of
an event.
5. Dissolution through Court : Court may order the dissolution of a firm in the
following cases:
33 
 
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(i) When a partner becomes of unsound mind.

(ii) When a partner becomes permanently incapable of performing his duties
as a partner.
(iii) When a partner is guilty of misconduct which is likely to affect
prejudicially (e.g., moral turpitude, misuse of money) the business of the
firm
(iv) When a partner willfully and persistently commits breach of the
partnership agreement.
(v) When a partner unauthorized transfers the whole of his interest or share in
the firm to a third person.
(vi) When the business of the firm cannot be carried on except at a loss.
(vii) When it is just and equitable that the firm should be dissolved.
Settlement of Accounts on Dissolution
When a partnership firm is dissolved, its assets are disposed of and the proceeds
there from are utilized in paying the creditors. If the amount realized by sale of assets is
not sufficient to discharge the claims of the creditors in full, the deficiency can be
recovered proportionately from the personal properties of the partners. If any partner
becomes insolvent, the remaining solvent partners will bear the loss in their capital
ratio. In case the assets of the firm are more than sufficient to meet the liabilities in full,
then the surplus may be utilized to pay off the loans and capitals contributed by the
partners.
Section 48 of the Partnership Act, 1932 lays down the following procedure for the
settlement of accounts between partners after the dissolution of the firm:
1. Losses including deficiencies of capital should be made good (a) first out of
profits, (b) then out of capital, and (c) if need be, out of personal contributions
of partners in their profit-sharing ratio.
2. The assets of the firm including any sum contributed by partners to make up
deficiencies of capital will be applied for settling the debts of the firm, in the
following order, subject to any agreement to the contrary:
(a) First, in paying off the debts of the firm due to third parties;
(b) Then in paying to any partner any advances or loans given by him in
addition to or part from his capital contribution;
(c) If any surplus is available after discharging the above liabilities, the
capital contributed by the partner may be returned, if possible, in full or
otherwise ratably;
(d) The surplus, if any, shall be divided amongst the partners in their profit
sharing ratio.
Merits of Partnership
The partnership form of business ownership enjoys the following advantages:

34 
 
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1. Ease of formation: A partnership is easy to form as no cumbersome legal

formalities are involved. An agreement is necessary and the procedure for
registration is very simple. Similarly, a partnership can be dissolved easily at
any time without undergoing legal formalities. Registration of the firm is not
essential and the partnership agreement need not essentially be in writing.
2. Larger financial resources: As a number of persons or partners contribute to
the capital of the firm, it is possible to collect larger financial resources than is
possible in sole proprietorship. Credit worthiness of the firm is also higher
because every partner is personally and jointly liable for the debts of the
business. There is greater scope for expansion or growth of business.
3. Specialization and balanced approach: The partnership form enables the
pooling of abilities and judgment of several persons. Combined abilities and
judgment result in more efficient management of the business. Partners with
complementary skills may be chosen to avail of the benefits of specialization.
Judicious choice of partners with diversified skills ensures balanced decisions.
Partners meet and discuss the problems of business frequently so that decisions
can be taken quickly.
4. Flexibility of operations : Though not as versatile as proprietorship a
partnership firm enjoys sufficient flexibility in its day-to-day operations. The
nature and place of business can be changed whenever necessary. Partnership
is free from statutory by the Government except the general law of the land.
5. Protection of minority interest: No basic changes in the rights and obligations
of partners can be made without the unanimous consent of all the partners. In
case a partner feel dissatisfied, he can easily retries from or he may apply for the
dissolution of partnership.
6. Personal incentive and supervision: There is no divorce between ownership
and management. Partners share in the profits and losses of the firm and there is
motivation to improve the efficiency of the business. Personal control by the
partners increases the possibility of success. Unlimited liability encourages
caution and care on the part of partners. Fear of unlimited liability discourages
reckless and hasty action and motivates the partners to put in their best efforts.
7. Capacity for survival: The survival capacity of the partnership firm is higher
than that of sole proprietorship. The partnership firm can continue after the
death or insolvency of a partner if the remaining partners so desire. Risk of loss
is diffused among two or more persons. In case one line of business to
compensate its losses.
8. Better human and public relations: Due to a number of representatives
(partners) of the firm, it is possible to develop personal touch with employees,
customers, government and the general public. Healthy relations with the public
help to enhance the goodwill of the firm and pave the way for steady progress of
the business.

35 
 
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9. Business secrecy: It is not compulsory for a partnership firm to publish and

file its accounts and reports. Important secrets of business remain confined to
the partners and are unknown to the outside world.
Demerits of Partnership
1. Unlimited liability: Every partner is jointly and severally liable for the
entired debts of the firm. He has to suffer not only for his own mistakes but
also for the lapses and dishonesty of other partners. This may curb
entrepreneurial spirit as partners may hesitate to venture into new lines of
business for fear of losses. Private property of partners is not safe against the
risks of business.
2. Limited resources: The amount of financial resources in the partnership is
limited to the contributions made by the partners. The number of partners
cannot exceed 10 in banking business and 20 in other types of business.
Therefore, partnership form of ownership is not suited to undertake business
involving huge investment of capital.
3. Risk of implied agency: The acts of a partner are binding on the firm as
well as on the partners. An incompetent or dishonest partner may bring
disaster for all due to his acts of commission or omission. That is why the
saying is that choosing a business partner is as important as choosing a
partner in life.
4. Lack of harmony: The success of partnership depends upon mutual
understanding and co-operation among the partners. Continued
disagreement and bickering among the partners may paralyse the business
or may result in its untimely death. Lack of a central authority may affect the
efficiency of the firm. Decisions may get delayed.
5. Lack of continuity: A partnership comes to an end with the retirement,
incapacity, insolvency and death of a partner. The firm may be carried on by
the remaining partners by admitting new partners. But it is not always
possible to replace a partner enjoying trust and confidence of all. Therefore,
the life of a partnership firm is uncertain, though it has a longer life than sole
proprietorship.
6. Non-transferability of interest: No partner can transfer his share in the
firm to an outsider without the unanimous consent of all the partners. This
makes investment in a partnership firm non-liquid and fixed. An
individual’s capital is blocked.
7. Public distrust: A partnership firm lacks the confidence of public because
it is not subject to detailed rules and regulations. Lack of publicity of its
affairs undermines public confidence in the firm.
The foregoing description reveals that partnership form of organisation is
appropriate for medium-sized business that requires limited capital, pooling of skills
and judgment and moderate risks, like small scale industries, wholesale and retail trade,

36 
 
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and small service concerns like transport agencies, real estate brokers, professional
firms like charted accountants, doctor’s clinics or nursing homes, attorneys, etc.
GOVERNMENT INCENTIVE AND ASSISTANCE
The term “incentive” is a general one and includes concessions, subsidies and
bounties. ‘Subsidy’ denotes a single lump sum which is given by a government to an
industry. It is granted to an industry which is considered essential in the national
interest. The term ‘bounty’ denotes bonus or financial aid which is given by a
government to an industry to help it compete with other units in a nation or in a foreign
market. It is given in proportion to its output. Bounty confers benefits on a particular
industry, while a subsidy is given in the interest of the nation.
These subsidies and incentives offer the following advantages:
(a) They act as a motivational force which makes the prospective entrepreneurs
to enter into manufacturing line.
(b) They encourage the entrepreneurs to start industries in backward areas.
(c) By providing subsidies and incentives the government can
(i) Bring industrial development uniformly in all regions
(ii) Develop more new entrepreneurs which lead to entrepreneurial
development
(iii) Increase the ability of entrepreneurs to face competition successfully
(iv) Reduce the overall problems of small scale entrepreneurs.
NEED FOR INCENTIVES
1. To remove regional disparities in development: While developed regions
in a country are overcrowded with industrial and business activities the
backward areas remain ignored for want of facilities for industrial
development. Incentives are used as baits to lure industrialist to locate their
units overlooking such deficiencies. In the long run the backward areas
become developed and regional imbalances are corrected. Such a
development may lead to the effective utilization of regional resources,
removal of disparities in income and levels of living and contribute to a
more integrated society.
2. To promote entrepreneurship and strengthen the entrepreneurial base
in the economy: The new entrepreneurs may face a number of problems on
account of inadequate infrastructure facilities and other supporting services
such as market assistance, technical training and consultancy and other
institutional services etc. all these problems may demotivate them. The
various incentives normally tend to mitigate some or all of the problems by
several means. Industrial estates, growth centers, power tariff concessions,
capital investment subsides, transport subsidy, etc., are a few examples of
incentive and subsides which are aimed at encouraging entrepreneurs to
take up new ventures without much reluctance.

37 
 
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3. To provide competitive strength, survival and growth: While some

incentives are available at the time of promotion of industrial units, several
other incentives are made available over a long period. Reservation of
products to small units, prices preferences, concessional finance, etc.,
contributes towards the competitive strength, survival and growth of certain
industrial units.
4. To generate more employment and remove under-employment and
unemployment: The proper use of incentives and subsides will generate
more employment by accelerating the industrial growth. Market
adjustments and external economies play a significant role in economic
development. Entrepreneurs will move from developed to backward areas
to start more number of units. This will create the number of jobs which will
help to reduce the problems of unemployment and under- employment.
PROBLEMS OF INCENTIVES
1. The antagonists argue that the incentive schemes may deteriorate into
useless tax-given away schemes if they are not implemented properly.
2. Empirical studies reveal that the incentive schemes are being highly
misused rather than properly used. Some of the units are located in
backward areas with a view to mainly avail the subsides and concessions.
The real objective of providing incentives is hardly achieved.
3. Favouritism and corruption have crept into the administrative machinery
which has caused much financial strain on the exchequer.
SCHEMES OF INCENTIVES IN OPERATION
Different incentives schemes applicable to the industrial sector in India are in
operation. These schemes are offered by Central and State Governments including
Union Territories. The list of incentives offered by either or both the governments are
listed below:-
(i) Export/Import subsidies and bounties.
(ii) Interest free loans
(iii) Subsidy for R & D works
(iv) Capital investment subsidy
(v) Transport subsidy
(vi) Interest subsidy
(vii) Subsidy for power generation
(viii) Exemption from property tax
(ix) Subsidies to artisans and traditional industries including handlooms
(x) Incentives to non-resident Indians
(xi) Special incentives to women entrepreneurs
(xii) Exemption from income tax
(xiii) Interest free sales tax loans

38 
 
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(xiv) Sales tax exemptions

(xv) Subsidy for buying test equipment
(xvi) Subsidy for industrial housing
(xvii) Land and building at concessional rates
(xviii) Price preference to SSI units
(xix) Subsidy/Assistance for technical consultancy
(xx) Exemption from stamp only
(xxi) Concessional water
(xxii) Provision for seed capital
(xxiii) Allotment of developed/constructed sheds
(xxiv) Allotment of controlled or subsidized raw material
(xxv) Subsidizing the cost of market studies/feasibility studies or reports.

NOTES
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……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………

39 
 
Entrepreneurship 
 

UNIT - III
INSTITUTIONAL FINANCE TO ENTREPRENEUR
In the foregoing pages, we have seen the project Identification and formulation of
organizations and govt-incontives towards entrepreneurial development. Now, we
shall study the role of various financial institutions for promoting the Entrepreneur
Development. These financial institutions are known as Development banks.
Performance of Development Banks in India for the year 2000-01*
The following details analyses the operational and financial performance of all
financial institutions (AFIs) in the country, operating at the national and State level.
Before we study about their performance, let us understand the structure of the
Development banks in our country.
Structure of Development Banks: The AFIs comprise of Six All-India
Development Banks (AIDBs), two specialized Financial institutions (SFIs), three
Investment institutions, eighteen State Financial Corporations and twenty eight State
Industrial Development Corporations (SIDCs).
Commercial Banks
1. Industrial Development Bank of India. (IDBI)
2. Industrial Finance Corporation of India Ltd. (IFCI)
3. Industrial Credit and investment Corporation of India Ltd. (ICICI)
4. Industrial Investment Bank of India Ltd. (IIBI)
5. Infrastructure Development Finance Company Ltd. And
6. Small Industries Development Bank of India Ltd. (SIDBI)
The two specialized financial institutions are Export-import Bank of India
(Exim Bank) and National Bank for Agriculture and Rural Development (NABARD).
The three Investment Institutions are Life Insurance Corporation of India (LIC),
General Insurance Corporation of India, (GIC) and Unit Trust of India (UTI).
INDUSTRIAL FINANCE CORPORATION OF INDIA LTD (IFCI)
The Government of India set up the industrial Finance Corporation of India (IFCI)
under IFCI Act in July 1984. since July 1, 1993, it has been brought under companies
Act, 1956. the IFCI extends financial assistance to the industrial sector through rupee
and foreign currency loans, underwriting/ direct subscribtion to shares / debentures and
guarantees and also offers financial services through its facilities of equipment
procurement, equipment finance, buyers’ and suppliers’ credit, equipment leasing and
finance to leasing and hire purchase companies. It also provides merchant banking with
its Head Office in Delhi and a bureau in Bombay.
The financial resources of the IFCI are constituted of the following three components;
(i) Share capital
(ii) Bonds and Debentures
(iii) Other Borrowings
INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)
The government of India set up the Industrial Reconstruction Corporation of India
(IRBI) in April 1971 under the Indian Companies Act mainly to look after the special

40 
 
Entrepreneurship 
 

problems of ‘sick’ units and provide assistance for their speedy reconstruction and
rehabilitation.
The IRBI had diversified its activities into ancillary lines such as consultancy
services, merchant banking and equipment leasing. All these activities are allied to its
task of rehabilitation of sick industrial units. Through its consultancy services, IRBI
attempt to help banks and financial institutions to assess intrinsic worth of sick units
which are seeking assistance for revival. Through its merchant banking services, IRBI
enables units in the process of amalgamation, merger and reconstruction. Equipment
leasing was, in fact, an extension of the IRBI hire-purchase scheme.
SMALL INDUSTRIES DEVELOPMENT ORGANISATION (SIDO)
SIDO a policy making coordinating and monitoring agency for the development of
small scale entrepreneurs. It maintains a close liaison with government, financial
institutions and other agencies which are involved in the promotion and development of
small scale units. It provides a comprehensive range of consultancy services and
technical, managerial, economic and marketing assistance to SSI units. It has a network
of 25 small Industries Service Institutes, 20 branch SISIs, 41 Extension Centres, four
Regional Testing Centres, one Product and Process Development Centre, three
Training Centre and five Production Centres.
Functions
The main functions of the SIDO are coordination, industrial development and
industrial extension service. Some important functions are:
(1) To assess the requirements of indigenous and imported raw materials and
components for the small-scale sector and to arrange their supplies;
(2) To collect data on consumer items which are imported and encourage the
setting up of new units by giving them coordinated assistance;
(3) To prepare model schemes, project reports and other technical literature for
prospective entrepreneurs;
(4) To assist and advice the Controller of Capital Issues in regard to the issue of
import licenses and the imposition of import restrictions on various
products whose manufacture has already been undertaken indigenously by
the existing or new units;
(5) To secure reservation of certain products for the SSIs.
NATIONAL SMALL INDUSTRIES CORPORATION LIMITED (NSIC)
The NSIC was set up in 1955 with the objective of supplying machinery and
equipment to small enterprises on a hire-purchase basis and assisting them in procuring
Government orders for various items of stores.
The corporation Head Office is at Delhi and it has four regional offices at Delhi,
Mumbai, Calcutta and Chennai and eleven branch offices. It has one central liaison
office at Delhi and depots and sub-centres. The main functions of NSIC are:
(1) To develop small-scale units as ancillary units to large-scale industries;
(2) To provide SSIs with machines on hire-purchase basis;
(3) To assist small enterprises to participate in the stores purchase-programme
of the Central Government;
(4) To assist small industries with marketing facilities;

41 
 
Entrepreneurship 
 

(5) To distribute basic raw materials through their depots;

(6) To import and distribute components and parts to actual small-scale users in
specific industries; and
(7) To construct industrial estates and establish and run prototype
production-cum-training centres.
The NSIC has taken up the challenging task of promoting and developing
small-scale industries almost from scratch and has adopted an “integrated approach” to
achieve the socio-economic objectives.
SMALL INDUSTRIES SERVICE INSTITUTES (SISIs)
Established in 1956 this institute – one in each State – has been rendering very
useful service to small-scale industries. The assistance rendered by the institute and its
extension centres in Tamilnadu may be listed as follows:
1.Technical Consultancy and Advisory Service: This relates to selection of
profitable small enterprise, choice of appropriate machinery and equipment, appraisal
of the technique of manufacture, processing of raw materials, adoption of recognised
standards of testing, quality performance of the small industry products and
encouraging small units to participate in Government Stores Purchase Programme.
The institute explores the possibility of setting up small-scale units to supply
parts/components to large-scale industries.
2.Common Facility Service: This includes supply of designs and drawings and
provision of workshop facilities for the manufacture of dies, tools, jigs and fixtures
and components.
3. Training Facilities: Training is provided for workers in basic trades in the
workshops attached to this institute and its extension centres, to increase
industries their productivity and this helps to encourage development of
small-scale in rural areas.
Training in various aspects of industrial and business management is also
provided for the benefit of small industries.
A training course in small industries entrepreneurship and management to
young engineers with emphasis on the practical aspects of small industries management
is conducted. This has been instrumental in creating a new class of qualified
entrepreneurs.
4. Testing Facilities: Basic testing facilities (both Physical and Chemical) are
provided in the laboratories and workshops attached to this institute at
concessional rates
5. Marketing Assistance: Economic information on the nature and extent of
the market for specific products is collected and furnished to small
industrialist at their request. The institute offers export promotion service by
counseling on export procedures and trends in foreign markets.
Market survey for specific products of small enterprise is also undertaken on a
regional basis to enable the small industrialist to increase the sales of his products in the
region.
The special information bureau, called the Tamilnadu Sub-Contract Exchange,
is a central information centre where machine capacities of small-scale industries are
registered and enquires from large industries for the manufacture of different

42 
 
Entrepreneurship 
 

components are passed on to registered small-scale units having spare capacity, so as to

enable them to feed the requirements of large-scale units. The institute conducts
economic survey of particular areas to ascertain their industrial potentialities.
DISTRICT INDUSTRIES CENTRES
Governments – both Central and State – have in the past taken a number of
measures for the development of small and village industries, but the actual
achievements have been far below the expectation. Also the focus of attention for
industrial development was mainly on large cities and State capitals to the neglect of
district areas. In addition, multiplicity of institutions involved in small industries
development and complicated systems and procedures made the job of promoting the
industrial units an uphill task for small entrepreneurs. Hence, it was felt necessary to
establish a development agency which could provide all services and facilities to
village and small industries under one roof. Accordingly, the DICs were established in
May 1978 in order to cater to the needs of small units.
Each district has DICs at its headquarters. And the main responsibility of DIC is to
act as the chief coordinator or multifunctional agency in respect of various Government
departments and other agencies. The prospective small entrepreneur would get all
assistance from DIC for setting up and running an industry in rural areas. Up to 1991
about 422 DICs have been set up throughout the country. These DICs have assisted
more than 1.5 lakh units generating employment for more than 10.3 lakh persons. The
metropolitan cities of Delhi, Mumbai, Calcutta and Chennai have been kept outside the
purview of the DIC.
Organisational Set-up: Each DIC has one General Manager of the rank of Joint
Director of Industries as the head and seven managers each looking after a separate
functional area as follows:
(1) Manager(Economic Investigation)
(2) Manager(Machinery and Equipment)
(3) Manager(Research, Extension and Training)
(4) Manager(Raw materials)
(5) Manager(Credit)
(6) Manager(Marketing)
(7) Manager(KVIC and RAP)
The General Manager has to provide an effective leadership and coordination.
Hence, the success of the centre largely depends upon the functioning of General
Manager and his team of managers and other personnel.

DISTRICT              DIC  RDC 

LEVEL 
INSTITUTIONS 
DRIADA VA

SFC  SSIOC  ICO 

STATE             
LEVEL 
INSTITUTIONS  SIDC KVIB  EDI 

43 
DI  SISI  REC 
 
Entrepreneurship 
 

  IDBI  NSIC  EDII  IIC 

IFCI  KVIC  MDI  FICCI 

ICICI  NABARD NSTED NAYE 

ALL INDIA 
INSTITUTIONS 

COMM.  SIDCOS  NEDB NIMID 

BANKS 

Functions of DIC
Identification of entrepreneurs: DIC develops new entrepreneurs by conducting
entrepreneurial motivation programmers throughout the district especially in Panchayat
Union Headquarters and small towns.
Selection of projects: DIC offers technical advice to new entrepreneurs for the
selection of projects suitable to them
Provisional Registration under SSI: After the selection of projects, entrepreneurs
are issued with provisional SSI Registration which is essential for obtaining assistance
from the financial institutions.
Purchase of fixed Assets: DIC sponsors the loan application to TIIC, SIDCO and
Banks for the purchase of land and buildings and sanctions margin money under Rural
Industries Project Loan Scheme payable to other financial agencies for the purchase of
plant and machinery.
Clearances from Various Departments: It takes the initiative to get clearances
from various departments and takes follow-up measures to get speedy power
connection.
Assistance to Raw Material Suppliers: It makes necessary recommendations to the
concerned raw materials suppliers and issues the required certificates for the import of
raw materials and machinery, whenever necessary.
Assistance to Village Artisans and Handicrafts: DIC arranges for the financial
assistance with the lead bank of nationalized banks of the respective areas..
Interest-free Sales Tax Loan: SSI units set up in rural areas can get IFST loan up to
a maximum limit 8% of the fixed assets from SIDCO. But the sanction order from the
same is being issued by DIC. The DIC also recommends the SSI units to NSIC for
registration for Government Purchase Programme.
Subsidy Schemes: DIC assists SSI units and rural artisans to get subsides such as
power subsidy, interest subsidy for engineers, subsidy under IRDP et., from various
institutions.
Training Programmes: DIC gives training to rural entrepreneurs and also assists
other units giving training to small entrepreneurs.

44 
 
Entrepreneurship 
 

Self-employment for Unemployed Educated Youth: This scheme was introduced in

1983-84 for youths between 18 years and 25 years with SSLC. Technocrats and women
are given preference.

45 
 
Entrepreneurship 
 

UNIT - IV
Entrepreneurs as Managers

Introduction:

By now, you have learnt that it takes a lot of efforts-monetary and non – monetary
– to set up an enterprise. Having once set up the enterprise, the future survival of
enterprise whether small, medium or large, depends upon its profit earning capacity.
The profit earning capacity of any enterprise depends upon inter alia the right decisions
taken by the entrepreneur regarding investment, location of the plant, product design,
quality control, technology, etc. Techniques or analysis are available to help the
entrepreneurs take right decisions on these matters.
Tools of Investment Analysis:
Investment analysis primarily deals with the interpretation of the data incorporated
in the proforma financial statement of a project and the presentation of the data in a
form in which it can be utilized for the comparative appraisal of the projects. The
technique of ratio analysis and capital budgeting have been used as the most important
analysis. These are discussed as follows:

′ x 100

Return on Capital Employed :

x 100

Return on Total Investments :

x 100
Capital Budgeting :
Capital budgeting involves investment decision balancing the sources and uses of
funds for acquiring fixed capital assets like machinery and equipments. Investment in
plant and machinery implies the choice of a particular projects. The project selection is
made on certain techniques known as ‘ techniques of capital budgeting’.
Payback Or Payout Period – As the name itself suggests, this technique answers an
investor’s searching how long he/she has to wait before the invested capital is
recovered. In fact, this is a very simple rule of thump. As the cash flows start coming
and accumulate, after a certain period of time, the accumulated cash inflows become
equal to the original investments made. Thus, that point of time the payback occurs and
the time it has taken for recovery is called the payback or payout period.
Average Rate of Return – This is also known as Accounting Rate of Return. In simple
words, average rate of return is just the reverse of the payback method. While payback

46 
 
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method is based on cash flow, average rate of return is based upon the principles is
calculated by shown below,
x 100

PLANT LOCATION:
Location, localization and planned location of industries are often felt to be
synonymous. But, the distinction among these three terms is of immense importance.
Entrepreneurs locate their enterprises where the cost of production comes the lowest at
the time of establishing industries. This is known as ‘ location of industries’. The
concentration of a particular industry mainly in one area, as occurred with many
industries in India, for example, textile industry in Bangalore is known as ‘ localization
of industries ‘.
It is not always possible to explain industrial location independently with the help
of any factor. In fact, it is a one time decision and cannot be retracted without bearing
heavy penalty. The most important factors are:
(i) Availability of Raw Materials
(ii) Market
(iii) Infrastructural facilities
(iv) Government Policy
(v) Availability of manpower, i.e., labour
(vi) Local Laws and Regulations
(vii) Ecological and Environmental factors
(viii) Competition
Let us discuss these in some details.
Availability of Raw Materials: One of the most important considerations involved in
selection of industrial location has been the availability of raw materials required. The
biggest advantage of availability of raw material at the location of industry is that it
involves less cost in terms of transportation cost. In the case of small-scale industries,
these could be food and fruit Processing,
meat and fish canning, jams, juices and ketchups etc.
Market: Proximity to market also influences the selection of industrial location. If the
products are fragile and highly susceptible to spoilage and if the transporation costs
constitute a substantial portion of the total costs involved, the proximity to market
condition assumes portion of the total costs involved, the proximity to market condition
assumes added importance in selecting location of the enterprise.
Infrastructural Facilities: Of course, the degree of dependency upon infrastructural
facilities may vary from industry to industry, yet there is no denying of the fact that
availability of infrastructural facilities play a deciding role in the location selection of
an industry. The infrastructural facilities include transport and communication, power,
water, banking, etc. Just to give you an idea, availability of water may become deciding
factor for the location selection of industries like leather, food processing, chemical and
such alike industries.

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Government Policy: In order to promote the balanced regional development, the

Government also offers several incentives, concessions, tax holidays for number of
years, cheaper power supply, factory shed, etc., to attract the entrepreneurs to set up
industries in backward areas.
Availability of Manpower: Availability of required manpower skilled in specified
trades may be yet another deciding for the location of skill-intensive industries.
While one can get cheaper labour in industrially backward areas, higher cost of
their training and fall in quality of production may not allow the entrepreneur to employ
the cheap manpower.
Local Laws and Regulations: In some cases, local laws prohibited the sitting up of
polluting in particular areas which are environmentally sensitive. Air (Prevention and
control of pollution) Act, 1981 of U.P. Pollution Control Board, Lucknow, is a classical
example of such laws prohibiting putting up polluting industries in prone areas.
Similarly, while taxation on a higher rate may discourage some industries from setting
up in an area.
Ecological and Environmental Factors : In case of certain industries, the Ecological
and Environmental Factors like water and air pollution, may turn out to be negative
factor in deciding enterprise location.
Competition: In case of some enterprises like retail stores where revenue of a
particular site depends on the degree of competition from other competitor’s location
nearby plays a crucial role in selecting the location of an enterprise.
PLANT LAYOUT:
During the course of technical arrangement of various facilities such as machinery,
equipment etc., it is very necessary to give considerable emphasis on a proper plant
layout to achieving their optimum utilization. Like industrial location, plant layout also
is of great strategic importance. The reason is that once the plant and equipments are
erected, Some important aspects while deciding the plant layout. These are

1. Production technology and production mix.

2. Efficiency, economic and uninterrupted flow of men and material.
3. Adequate space for maintenance work.
4. Scope for future expansion and diversification of the project.
5. Adequate safety precautions, as and when needed.
6. Healthy conductive layout of the plant.
7. Proper lighting and ventilation.
8. Proper provision for effluent disposal, if necessary.
9. Effective supervision of all sorts of activities carried at the plant layout
side.
PRODUCT DESIGN:

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Generally, an entrepreneur needs to keep the following consideration in view while

designing his/her product:
1. Standardization
2. Reliability
3. Maintainability
4. Servicing
5. Reproducibility
6. Sustainability
7. Product Simplification
8. Quality Commensurating with cost
9. Product Value
10. Consumer quality.
PRODUCTION DESIGN:
Once an enterprise decides to make a product, i.e., product design, it must consider
its production. The process of production design can divided into the following two
phases:
(i) Scheduling
(ii) Project Inspection
Scheduling
It is crucial to successful production. It is important for both batch i.e.,
special-order and continuous production situations. The primary objective of
scheduling is the smooth flow of materials through the production process. Simply
Stated, scheduling is a system of planning and keeping track of man power, equipment
and materials used. It ensures when to start work on a given order and by what date it
should be completed.

Techniques of Scheduling
Schedules can be developed by using many techniques. Some of these are:
1. Periodic Production Review Conference,
2. Reports and Returns
3. Growth Charts
4. Charts and Graphs
5. CPM and PERT
6. Computers.
All these techniques can, however, be grouped into two categories: (1) Charts
and Graphs and (2) Operation Research Methods. A few words about each of these two
techniques will introduce us to the total scene of scheduling methods.
Product Inspection:
You have understood scheduling ensures completion of production in time.
Product inspection ensures the quality of product produced. For this, a separate
department, namely Quality control is established oversee the product Inspection,

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management decides upon the location of inspection, when inspection should be done,
the number of items should be inspected and the types of tools needed for inspection.
Let us have a cursory look at these various decisions.
QUALITY CONTROL:
Quality is a relative concept. It is related to certain predetermined characteristics
such as shape, dimensions, composition, finish, colour, weight, etc. In simple words,
quality is the performance of the product as per the commitment made by the producer
to the consumer. In practice, when we say any product as a quality product, it means the
product satisfies certain criteria for its functioning. For a quality product, it is necessary
that it should satisfy the laid down criteria not only at the time of its manufacture, but
also over a reasonable length of time. In India, Bureau of Indian standards lay down
certain criteria for a number of products both – Industrial and domestic.
Statistical Quality Control:
It is an advanced method or technique used to control the quality of product.
This method is based on statistical inferences to determine and control the quality.
Sampling, probability and other statistical inferences are used in this method for
controlling the quality of product. It is widely used in process control in continuous
process industries and in industries producing goods on a mass scale. Under these
method, the entire lot is, firstly, sampled on the basis of its specified characteristics and
then it is divided into three parts. These are,
1. Analysis of samples
2. Use of control Charts
3. Corrective Measures.
INVENTORY MANAGEMENT
CONCEPT OF INVENTORY
What is inventory? Inventory refers to those goods which are held for eventual
sale by the business enterprise. In other words, inventories are stock of the product a
firm is manufacturing for sale and components that make up the product. Thus,
inventories form a link between the production and sale of the product. The forms of
inventories existing in a manufacturing enterprise can be classified into three
categories:
(i) Raw Materials – These are those goods which have been purchased and
stored for future productions. These are the goods which have not yet been
committed to production at all.
(ii) Work-in-progress – These are the goods which have been committed to
production but the finished goods not yet been produced. In other words,
work-in-progress inventories refer to ‘semi-manufactured products’.
(iii) Finished Goods – These are the goods after production process is complete.
Say, these are final products of the production process ready for sale. In case
of a wholesaler or retailer, inventories are generally referred to as
‘merchandise inventory’.

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Some firms also maintain a fourth kind of inventory, namely, supplies.

Examples of supplies are office and plant cleaning materials, oil, fuel, light bulbs and
the like. These items are necessary for production process. In practice, these supplies
form a small part of total inventory involving small investment. Therefore, a highly
sophisticated technique of inventory management is not needed for these.
The size of above mentioned three types of inventories to be maintained will
vary from one business firm to another depending upon the varying nature of their
business. For example, while a manufacturing firm will have all three types of
inventories, are retailer or a wholesaler business, due to its distinct nature of business,
will have only finished goods as its inventories. In case of them, there will be no
inventories of raw materials as well as work-in-progress.

OBJECTIVES OF INVENTORY MANAGEMENT

There are two main objectives of inventory management. These are:
1. Making adequate inventories available for production and sale as
and when required.
2. Minimize both costs as well as volume of investment in inventories
consistent with objective 1 stated above.
MODELS OF INVENTORY MANAGEMENT
Several models or methods have been developed in the recent past for
determining the optimum level of inventories in the enterprise. These all are classified
into two types, namely, (i) Deterministic Models, and (ii) Probabilistic Models. In brief,
the deterministic models are built on the assumption that there is no uncertainty
associated with demand and replenishment of inventories. On the contrary, the
probabilistic models take cognizance of the fact that there is always some degree of
uncertainty associated with the demand pattern and lead times of inventories.
Usually the three deterministic models are in use. These are
1. Economic Ordering Quantity (EOQ) Model
2. ABC Analysis
3. Inventory Turnover Ratio
1. The Order-Formula Approach
One way to determine EOQ is to use the Order-Formula Approach. There are a
number of mathematical formulae to calculate EOQ. Yet, the most frequently used
formula in this connection is a follows:
Q = √2u x p /s
2. Trial And Error Approach – As the name of the approach itself indicates, the
firm can trial a number of alternatives to determine its volume of inventory. In case of
above example, the firm may purchase its all 800 units in the beginning of the year in

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one single lot or in 12 monthly lots of 67 units each. But, while following any
alternative, implications of both carrying and ordering costs should be studied. For
example, if the firm places only one order of 800 units, the firm may have 800 units as
starting inventories in the beginning of the year. In this way, the average inventory held
in the firm during the year will be 400 units (800 x ½), holding Rs.40,000 (400 x
Rs.100) in inventories. In case, the firm places 12 monthly orders, the average
inventory held during month will be 34 (67 units / 2), holding and average value of Rs.
3,400. Many other possibilities can be worked out in the same manner to determine the
EOQ.
3. The Graphic Approach – The Economic Ordering Quantity can also be found out
by drawing a graph. Taking the same example, all three costs, i.e., total costs, carrying
costs and ordering costs are plotted on vertical axis and number of orders on horizontal
axis. We notice, that carrying costs decreases with number of orders whereas ordering
costs increases as the number of order increases. Here, the behavior of the total cost is
noticeable. Firstly, total cost decreases to certain point, then it starts increasing when
the decrease in average carrying cost is more than off-set by the increasing in ordering
cost, thus, EOQ takes place at the point where the total cost is minimum.
Selective Inventory Control :
ABC Analysis:
The ABC analysis of selective inventory technique is based on the logic that in
any large number, we usually have ‘ significant few ‘ and ‘ insignificant many ‘. This
holds true in case of inventories also. A firm maintaining several types of inventories do
not need to exercise same degree of control on all the items. The firm adopts selective
approach to control investments in various types of inventories. This selective approach
is called the ABC analysis. The items with highest value are classified as ‘A items ‘.
The items with relatively low value as ‘ B items ‘, and the items least valuable
are classified as ‘ C items ‘. Since, the ABC analysis concentrates on important items,
hence, it is also known as control by Importance and Exception.
Inventory Turnover Ratio :
Inventory can also be managed by using accounting ratios like Inventory
Turnover Ratio. Inventory Turnover Ratio is calculated with the help of the following
formula:
Cost of Goods consumed or sold during the year
Average Inventory during the year
A comparison of current years inventory ratio with those of previous years
will unfold the following points relating to inventories:
Fast Moving Items – This is indicated by a high inventory ratio. This also means that
such items of inventory enjoy high demand. Obviously, in order to have smooth
production, adequate inventory of these items should be maintained. Otherwise, both
production and sales will be adversely affected through interrupted supply of these
items.

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Slow-Moving Items – That some items are slowly moving is indicated by a low
turnover ratio. These items are, therefore, needed to maintain at a minimum level.
Dormant or Obsolete Items
These refer to items having no demand. These should be disposed of us early as
possible to curb further losses caused by them.
PERSONNEL MANAGEMENT
MEANING OF MANPOWER PLANNING:
We know when intelligent people start on a long trip, they always make plans.
They decide, for example, where they are going and how they plan to get there.
Generally, the longer the trip, the more they plan. Small Scale enterprises also need to
draw plans to take various decisions and perform multifarious activities. In simple
words, plans are basic to any sort of enterprise – whether large, medium or small. This
includes the plans or provisions for manpower also. Unfortunately, manpower planning
is a neglected area in the Indian context especially in small-scale industry. Under
manpower planning, the management needs to ask itself two basic questions of:
i. What kinds of people do we need?
ii. How many people do we need?
We discuss these two question one by one.
What kinds of people do we need?
Before we ask this question, we must first understand the types of jobs to be filled.
For example, Do these jobs require someone with training in typing shorthand, or can
they be done by an individual without any specialized training But who can learn our
filling system quickly and who enjoys assignments requiring attention to small details?
To answer such tricky question in a systematic manner, enterprises often do
develop job descriptions. In simple words, job description with a list of minimum
qualification necessary to hold the job. The use of these guides makes the selection
process, to a great extend, more effective.
How many people do we need?
In fact, the previous question deals with the quality of personnel. This question
deals with the quantity of personnel the enterprise needs. We must answer several
questions to determine the number of people required for various positions throughout
the enterprise. These questions include the following:
1. Is the demand for certain skills and occupations growing, constant or shrinking?
2. How much work can the average person do in a specified period of time?
3. What is the level of absenteeism?
4. What is the level of turnover?
Answer to these questions go a long way towards effective planning for the
manpower needs of the enterprise.
JOB REQUIREMENTS:
Before an enterprise makes the selection of employees, he needs to define job
requirements of each task. The job requirement identification involves the following:
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1. Conducting Job Analysis

This is investigation into various aspects of task in terms of skill,
qualifications, duties and responsibilities. It covers job title, the department
to which relates, line of supervision, relationship with other jobs, types of
material and equipment used, mental and manual dexterity, working
conditions etc.
2. Job Description
Simply stated, job description deals with what, why, when and how tasks
are to be performed. In other words, it is a written statement of work
conditions, time involvement and job responsibilities.
3. Job Specification
Job specification is nothing but a description but a description of the salient
features of the person to be recruited in the specific job. It is a standard
against which the salient features of the employee are matched how far he
matches with the job specification. In other words, it describes the personal
qualities of the employees like their knowledge, skills, experience, qualities
of leadership and decision making abilities, etc.
RECRUITMENTS
After determining the manpower recruitments of the enterprise of the
enterprise and finalizing job recruitments of the tasks, the next problem is where to get
it. This is done through recruitments. Simply stated, recruitments is a process of
obtaining interested people/ applicants.
Recruitments in small-scale industries is more difficult because these cannot
compete with their larger counterparts in salary, fringe benefits and apparent stability.
These limited impose severe problems for small enterprises for attracting qualified and
committed work force.
As regards recruitment in small scale in industries, the most prevalent practice
exercised in small scale units is to seek out and select candidates rather than wait for
applications as happens in the case of large scale industrial units. Broadly, there could
be two sources of recruitment in small scale enterprises:

1.Internal sources.
2.External sources.
Let us discuss these in some details.
Internal sources
Internal sources refer to recruitment from present work force of the enterprises
itself. If there is a vacancy in the enterprise at any time, some one already in the
enterprise in promoted or transferred, as the case may be. Filling vacancies from own
exiting employees boosts the morale of the employees because they look forward scope
and avenues for their career advancement.
External sources

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It will not be less then correct to state that external sources overcome the
limitations, just mentioned above, and imposed by internal source. The various external
sources an enterprise can opt for recruiting his employee can broadly be classified into:
(i) Employees Referrals: many a times, the existing employees of
the enterprise and other sister organizations can refer to suitable
candidates.
(ii) Recommendations: Sometimes the entrepreneurs receive
recommendations from their and relatives to employ the persons
known to them.
(iii) Unsolicited Applications: This is one of the common manners
exercised in recruiting employees in small enterprises. The
enterprises receives applications and requests for jobs from
several sources.
(iv) Advertisements: If the entrepreneurs have sufficient time at
their disposal to process and interview the candidates, they
advertise their vacancies in the newspapers and other medias
like radio and television.
In actual practice, as the various research studies indicate, the
job-search-methods used by small-scale industries are mainly
internal in nature.
TRAINING AND DEVELOPMENT:
Qualified employees can be provided in two ways within a enterprise. First, the
enterprise can select the best employees available, as discussed in the previous section,
those already working in the enterprise can be trained to make the use of their full
potential. In reality, these both approaches are the part of the same process. The reason
is that once an individual is selected for some work, he should undergo some training,
regardless of his qualifications.
Training may be defined as any procedure, initiated by an enterprise which intends
to foster and enhance learning among the employees working in the enterprise. So far as
the training in small-scale units is concerned, the owner himself takes the responsibility
for developing and conducting the training programmes with an objective to enhance
the employee job-related skills and knowledge. The period of training varies depending
upon previous experience or training of the employee.
REMUNERATION AND BENEFITS:
Employees remuneration expressed in terms of wages is of critical concern to
personal relations in small-scale industry. Whereas wages represent income to the
employees, they represent costs to the employer and potential taxes to the government.
Practically speaking, wages constitute the largest part of employees’ purchasing power
and therefore having an important bearing on the level of economic activity. Besides,
wages constitute one of the important factors around which most of the labour problems
revolve. Wages in the small sector are around one-half of those in large organized
sector through labour productivity does not so differ between them. In other words, the

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high wages in the organized sector have Been described as islands of property’ when
compared to the poor wages in the small-scale sector.
WORKING CAPITAL MANAGEMENT
Working capital refers to the funds required to meet the day – to – day obligations
of business operations. Hence, working capital is said to be the life blood of an
enterprise. The fact remains that it is working capital keeps the wheel on. Working
capital, therefore, needs to be maintained at an adequate level. Because, both
excessive and inadequate working capitals are harmful for an enterprise. For example,
if the current assets are inadequate to meet the current liabilities, it will tell upon the
liquidity position of the business. In case , the current assets are in excessive volume,
the profitability of the business will be adversely affected due to some assets lying idle.

Management of working capital means managing different components of current

assets and current liabilities. These are discussed here under;
Management of cash
Every enterprises irrespective of its scale requires certain amount of cash to meet
its day – to –day obligations. Hence, the enterprise needs to decide carefully how much
should be carried in cash. Management of cash aims at striking a balance between two
contradictory objectives of meeting the cash disburshment needs and minimizing the
amount locked up as cash balance. For this purpose, cash management addresses to the
following four problems:
1. Controlling the level of cash
2. Controlling inflows of cash
3. Controlling outlets of cash
4. Optimum use of surplus cash
Management of Inventory
Inventories refer to raw material, work- in – progress and finished goods. These
constitute a major portion, about 60%, of total current assets. There are three major
motives for holding inventories in a firm, namely, transaction motive, precautionary
motive and speculative motive. But, holding inventories involves costs, i.e., ordering
costs and carrying costs. Hence, inventories need to be maintained at an optimum size.
Inventory management is a trade – off between cost of acquiring and cost of holding
inventories. Among various models evolved for managing inventories, the commonly
used model is “Economic Ordering Quantity” (EOQ) model based on baumol’s cash
management model. The other model of inventory management is ABC analysis also
known as Control by Importance and exception (CIE). This method controls expensive
inventory items more closely than less expensive items.
Management of Account Receivable
Account receivable represent the amount of goods sold on credit with a view to
increase the volume of sales. Accounts receivable constitute major portion of current
assets. According to the Indian Chamber of Commerce and Industry (ICICI) study of

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417 companies. The ratio of accounts receivable to total assets, current assets and sales
were, on average, 17%, 30%, and 14-15% respectively. The main objective of
maintaining accounts receivable are achieving growth in sales, increasing profits and
meeting competition.
Management of Account Payable
Accounts payable are just reverse to accounts receivable. Account payable emerge
due to credit purchase. This refers to a loaning of goods and inventories to the buyers.
This is also called ‘ buy – now , pay – later’. The underlying objective of accounts
payable is to slow down the payments process as much as possible.
The salient points to be noted on effective management of accounts payable are:
 Obtain most favorable credit terms with the prevailing credit practice.
 Make payments on maturity or due dates.
 Keep good track record of past dealings with the suppliers.
 Avoid tendency to divert payables.
 Provide full information to the suppliers.
 Keep a constant check on incidence of delinquency.
TOTAL QUALITY MANAGEMENT (TQM)
TQM is known by various names, such total quality improvement (TQI) or total
quality control (TQC) or simply quality or strategic quality management (SQM) and so
on.
British Quality Association defined TQM as “management philosophy and
company practices that aim to harness the human and material resources of an
organization in the most effective way to achieve the objectives of the organization”.
Confederation of Indian Industry (CII) defined TQM as follows:
Meeting the requirements of the internal and external customers consistently by
continuous improvement in the quality of work of all employees. TQM can be
conceptualized into the following three processes;
(i) Quality process: it is for understanding who the customer is, what are
his/her needs and taking steps to completely satisfy the needs of this
customer.
(ii) Management Process for Continuous Improvement: The term
management refers to managing continuous improvement and dose not
address any specific organizational level. The process comprises the PDCA
cycle and its continuously evolving policies, objectives and methods to
achieve goals, education and training, implementation, checking causes,
effects, taking appropriate action, and preventing recurrence. Management
process addresses continuous improvement to keep pace with the :
(a) Changing requirements
(b) Competitive environments, and
(c) Technological advances.

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(iii) People process: It is initiating and maintaining the TQM. It is carried out
through involvement of all employees on the basis of all the three values,
namely, intellectual honesty, self-control and respect for others.
Now, TQM can be defined as an intensive, long –term effort to transform all
parts of the organization in order to produce the best product and serve possible to meet
customer needs.
NOTES
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UNIT - V
Entrepreneurial Environment

Environment Factors
From a strictly economic viewpoint, it can be said that the same factors which
promote economic development account for the emergence of entrepreneurship also.
Some of these factors are discussed in below.
Capital:
Capital is one of the most important prerequisites to establish an enterprise.
Availability of capital facilitates the entrepreneur to bring together the land of one,
machine of another and raw material of yet another to combine them to produce goods.
Capital is, therefore, regarded as lubricant to the process of production.
Labour:
The quality rather quantity of labour is another factor which influences the
emergency of entrepreneurship. It is noticed that cheap labour is often less mobile or
even immobile. And, the potential advantages of low-cost labour are negated by the
deleterious effects of labour immobiulity.
Raw Materials:
The necessity of raw materials hardly needs any emphasis for establishing any
industrial activity and, therefore its influence in the emergence of entrepreneurship. In
the absence of raw materials neither any enterprise can be established nor an
entrepreneur can be emerged. Of course, in some cases, technological innovations can
compensate for raw material inadequacies.
Market:
The fact remains that the potential of the market constitutes the major
determinant of probable rewards from entrepreneurial function. Frankly speaking, if the
proof of pudding lies in eating, the proof of all production lies in consumption, i.e.,
marketing. The size and composition of market both influence entrepreneurship in their
own ways.
NON – ECONOMICS FACTORS
Sociologists and psychologists advocate that economic factors may be
necessary conditions, but they are not sufficient conditions for the appearance of
entrepreneurship. They view that the influence of economic factors on entrepreneurial
emergence largely depends upon the existence of non-economic factors i.e., social and
psychological factors in the society. Some major non-economic factors alleged to
influence the emergence of entrepreneurship can be listed as follows:
Legitimacy of Entrepreneurship:
The proponents of non-economic factors give emphasis to the relevance of a
system of norms and values within a socio-cultural setting for the emergence of
entrepreneurship. In professional vocabulary, such system is referred to as the
‘legitimacy of entrepreneurship’ in which the degree of approval or disapproval granted

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entrepreneurial behaviour influences its emergence and characteristics if it does

emerge.
Social Mobility:
Social mobility involves the degree of mobility, both social and geographical ,
and the nature of mobility channels within a system. The opinion that the social
mobility is crucial for entrepreneurial emergence is not unanimous.
Marginality:
A group of scholars hold a strong view that social marginality also promotes
entrepreneurship. They believe that individuals or groups on the perimeter of a given
social system or between two social systems provide the personnel to assume the
entrepreneurial roles. They may be drawn from religious, cultural, ethnic, or migrant
minority groups, and their marginal social position is generally believed to have
psychological effects which make entrepreneurship particularly attractive for them.
Security:
Several scholars have advocated entrepreneurial security as an important
facilitator of entrepreneurial behaviours. Yet, scholars are not consensus on the amount
of security that is needed. While Cole suggests ‘minimal’ security, McClelland speaks
of ‘moderate’ certainty.
Psychological Factors:
Many entrepreneurial theorists have propounded theories of entrepreneurship
that concentrate specifically upon psychological factors. We consider these theories
separately for that reason.
Need Achievement:
To the best of our knowledge, the best known of primarily psychological
theories is David McClelland’s ‘theory of need achievement’. According to
McClelland, a constellation of personality characteristics which are indicative of high
need achievement is the major determinant of entrepreneurship development.

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Withdrawal of Status Respect:

Hagen attributed the withdrawal of status respect of a group to the genesis of
entrepreneurship. Giving a brief sketch of history of Japan, he concludes that she
developed sooner than any non-western society except Russia due to two historical
differences. First, Japan had been free from ‘colonial disruption’ and secondly, the
repeated long continued withdrawal of expected status from important groups in her
society drove them to retreatism which caused them to emerge alienated from
traditional values with increased creativity.
ENTREPRENEURIAL MOTIVATION
The term motivation has been derived from the word ‘motive’. Motive may be
defined as an inner state of our mind that moves or activates or energizes and directly
our behavioral towards our goals. Motives are expression of a person’s goals or needs.
In simple terms, motives or needs are ways of behavioral. They give direction to human
behavioral to achieve goals or fulfill needs.
Now, motivation may be defined as the process that motivates a person into action
and induces him to continue the course of action for the achievement of goals. It is an
ongoing process because human needs/goals are never completely satisfied.
MOTIVATION THEORIES
The importance of motivation to human life and work can be judged by the number
of theories that have been propounded to explain people’s behavior. They explain
human motivation through human needs and human nature. Prominent among these
theories and particularly relevant to entrepreneurship are Maslow’s Need Hierarchy
Theory and McCllend Acquired Needs Theory.
Maslow’s Need Hierarchy Theory
Maslow’s theory is based on the human needs. These needs are classified into a
sequential priority from the lower to the higher. According to him, all human needs are
classified into the five need-cluster as shown in the following figure.

Self –   
Actualizat
ion   
Needs 
 
   
Esteem and 
      Status Needs 
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  Social 
Safety and 
   
security  Needs 
Physiologic Needs   
al Needs   
Entrepreneurship 
 

Maslow’s Need Hierarchy

These five need – cluster are now discussed one by one.
1.Physiological Needs:
These needs are basis to human life and include food, clothing, shelter, air,
water and other necessities of life. They exert tremendous influence on human
behaviour. Entrepreneur also being a man needs to meet his physiological needs for
survival Hence, he / she is motivated to work in the enterprise to have economic
rewards to meet the basic needs.
2. Safety and Security Needs:
After satisfying physiological needs, the next needs felt are called safety and
security needs. These needs find expression in such desires as economic security and
production from physical dangers. Meeting this needs requires more money and, hence,
the entrepreneur is prompted to work more in his/her enterprise. Like physiological
needs, these become inactive once they are satisfied.
3. Social Needs:
Man is a social animal. These needs, therefore, refer to belongingness. All
individuals want to be recognized and accepted by others. Likewise, an entrepreneur is
motivated to interact with fellow entrepreneurs, his employees and others.

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4. Esteem Needs:
These needs refer to self-esteem and self-respect. They include such needs which
indicate self-confidence, achievement, competence, knowledge and independence. In
case of entrepreneurs, the ownership and self-control over enterprise satisfies their
esteem needs by providing them status, respect, reputation and independence.
5. Self – Actualization:
The final step under the need hierarchy model is the need for self – actualization.
This refer to self – fulfillment. The term ‘self-actualization’ was coined by Kurt
Goldstein and means to become actualized in what one is potentially good at. An
entrepreneur may achieve self – actualization in being a successful entrepreneur.
McClelland’s Acquired Needs Theory
According to David McClelland, a person acquires the types of needs as a result of
one’s life experience. These three needs are:
(i) Need for Affiliation: these refer to needs to establish and maintain friendly
and warm relations with others.
(ii) Need for Power: these means the one’s desire to dominate and influence
others using physical objects and action
(iii) Need for Achievement: This refers one’s desire to accomplish something
with own efforts. This implies one’s will to excel in his/her efforts.
NEED FOR ENTREPRENEURSHIP DEVELOPMENT PROGRAMS
Traits or Competencies are underlying characteristics of the entrepreneurs which
result in superior performance. Then, the crucial question arises is: whether these
characteristics are in both in the entrepreneurs are born are made? Behavioral scientists
have tried to seek answers to these questions.
A well known behavioral scientist David McClelland at Harvard University made
an interesting investigation into why certain societies displayed great creative powers at
particular period of their history? What was the cause of these creative bursts of
energy? He found that ‘the need of the achievement’ was the answer to this question. It
was need to achieve to motivate people to work hard. According to him, money making
was incidental. It was only a measure of achievement, not its motivation.

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SICKNESS IN SMALL BUSINESS

Industrial sickness
Sickness is easy to understand but difficult to define. It is a relative term. In
common parlance, a sick industry is one which is not healthy. A healthy unit is one
which earns a reasonable return on capital employed and which builds up reserves after
providing reasonable depreciation. Different agencies have defined industrial sickness
are reproduced as follows:
According to Reserve Bank of India, (i) “a sick unit is one which incurs cash losses
for one year and, in the judgment of the bank, it is likely to continue to incur cash losses
for the current year as well as for the following year; (ii) the unit has an imbalance in its
fianacial structure such as current ratio of less than 1 : 1 and worsening debt-equity
ratio, i.e., the ratio to total outside liabilities to the net worth; and (iii) when the
cumulative losses exceed capital and reserve”
Signals and symptoms of sickness
It becomes clear from the definition of industrial sickness that industrial sickness
does not occur all of a sudden in the life history of an industrial unit. In fact, it is a
gradual process with distinct stages taking from 5 to 7 years to corrode the health of a
unit beyond cure. It starts with downturn in the industry whose continuation leads to
setting in of industrial sickness.
Signals of Industrial Sickness
It has already been mentioned that industries do not fall sick overnight rather the
process of failure can take number of years. This implies that the signs of sickness may
be discernable quite early in the life of an industry. These warning signs in several
functional areas are termed as ‘signals’ in fact, the timely identification of various
signals makes the detection of sickness easier. Therefore, the various signals need to be
identified and mentioned at an early stage of sickness.
Symptoms of Industrial Sickness
Some of the important symptoms which characterize industrial sickness are given
below:
1. persisting shortage of finance
2. deteriorating financial ratios
3. widespread use of creative accounting
4. continuous tumple in the price of share
5. frequent request to banks and financial institutions for loans
6. delay and default in the payment of statutory dues
7. delay in the audit of annual accounts
8. morale digredation of employees and desperation among the top and middle
management level.

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SMALL ENTERPRISES IN INTERNATIOANL BUSINESS

India today operates the largest and oldest programme for the development of the
small scale enterprises in any developing country. The small enterprise has made an
impressive and phenomenal growth in units, production, employment and exports over
the years. The small sector has now emerged as a dynamic and vibrant sector of the
Indian economy in recent years.
Export Performance and Trends of Small Enterprise
Export from small enterprises has been on increase registering an annual growth of
about 171 per cent during 1978-94. one way to view at the impressive growth of exports
from small enterprise is their increasing share year after to the total exports from the
country.
Major Constraints
The major constraints encountered by the small scale units in exporting their
products are as follows:
Credit Policy
The small scale units have very weak – base of their own funds on the one hand,
and have no access to other sources of funds like capital market, on the other. Hence,
they have to depend upon the State Financial Corporations and the commercial banks to
meet their long term and short term capital requirements.
Infrastructure
Lack of infrastructure facilities like power supply, transportation and
communication adversely affect the quantity and quality of production, its costs and
delivery. These, in turn, tell upon the exports performance of small scale units. The
launching of a new scheme of integrated infrastructure development in rural and
backward areas is a right step in right direction.
Technology
Technology is the crux of quality and competitiveness. However, the adoption of
technology in small industries hampered due to lack of infrastructure facilities, on the
one hand, and the present investment ceiling of the small scale industry, on the other.
The recent telecommunication revolution has offered hi-tech application for market
research which is more cost effective substitute for exploratory personal visits abroad.
As a matter of fact, the conventional method of market exploration through trail and
error and private contacts has been replaced by the electronic network exchanging
business quires between the trading parties.
EXPORT DOCUMENTS AND PROCEDURE FOR SMALL
ENTERPRISES

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Why is documentation needed in export business? Answer to this question lies in

the nature of the business relations between the exporter and the importer operating
from two countries. One knows, unlike the domestic business, the commercial practices
and legal systems are different in the two countries the exporter and importer are
operating from. Therefore, in the order to protect the respective interests of the exporter
and the importer involved in export business, certain documentary formalities become
essential. Such documentation facilities the sooth flow of goods and payments thereof
across national formalities.
Export documents based on the functions performed by them, are classified into
four types.
1. Commercial Documents
2. Regulatory Documents
3. Export Assistance Documents
4. Documents require by importing Countries
Electronic Commerce and Small Enterprises
Like elsewhere in the world, small enterprises play a vibrant and vital role in the
Indian economy as well. They contribute significantly to the national production.
Employment, quality and export. In fact, it is due to its such excellent role, Sehuman
Cher extolled them as small is beautiful. Because of the significance of small
enterprises worldwide, it is increasingly being realized that if small sector gets left
behind in the information, then the whole economy gets left behind. Given the need of
the hour, small enterprises, therefore, cannot have the luxury to adopt a wait and watch
attitude in the matter of marketing. Late adopting of e-commerce will adversely after
the small enterprises for years to come.
 

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