CHAPTER-4

MANAGING A NEW
ENTERPRISE
A U T H O R : A L PA N A T R E H A N

© 2011, Dreamtech Press :: Chapter 4 1

 MANAGEMENT FUNCTIONS OF AN
ENTREPRENEUR
 In a startup enterprise, the entrepreneur performs the
functions of both, an owner and manager.
 As a manger, he/she performs two types of management
functions:
 Managerial Functions
 Planning
 Organizing
 Staffing
 Directing
 Controlling
 Operative Functions
 Human Resource Management
 Marketing Management
 Financial Management
 Production And Operation Management
© 2011, Dreamtech Press :: Chapter 4 2
 MANAGERIAL FUNCTIONS OF AN
ENTREPRENEUR
 Planning
 Involves determining goals and objectives of the enterprise
 Organizing
 Refers to the process of integrating, balancing, unifying, and
coordinating activities of employees
 Staffing
 Refers to the process of employing right type of individuals for the
right job
 Directing
 Involves influencing, motivation, encouraging, counseling, mentoring,
and guiding the employees to achieve the goals
 Controlling
 Involves establishing performance standards, determining the gap
between set standards and achieved results, and rectifying the gap
© 2011, Dreamtech Press :: Chapter 4 3
 HUMAN RESOURCE MANAGEMENT IN A
NEW ENTERPRISE
 Human resource is considered to be the most valuable asset
of an enterprise as it utilizes the various resources, such as
raw materials and machinery, of the enterprise and converts
them into final products.
 A new enterprise needs HRM due to the following reasons:
 Building and maintaining cordial relations among employees working
at different levels of the enterprise
 Ensuring effective utilization of available human resources
 Providing fair working conditions, wages and salaries, and amenities
to employees
 Achieving the development of each individual employee to his/her
fullest potential

© 2011, Dreamtech Press :: Chapter 4 4

 ACTIVITIES OF HRM PROCESS

Human Recruitment Selection Induction and Placement Training Performance

Resource • A process of • A process of Orientation • A process of • A process of appraisal
Planning identifying and staffing the • A process of assigning a enhancing the • A mechanism
(HRP) attracting right type of providing specific job and knowledge, that helps the
efficient candidates for information to its associated skills, aptitude, enterprise to
• A systematic candidates for various grade and and abilities of
the new understand the
process of vacant positions in the responsibility to an employee
employees abilities and
identifying and positions in the enterprise each of the for doing a
about the competencies
evaluating enterprise selected specific job in
enterprise’s of its each
human candidates an efficient
background employee
resource manner
and introducing
requirements
a new
of an enterprise
employee to
his/her profile
in the
enterprise

© 2011, Dreamtech Press :: Chapter 4 5

 THE SELECTION PROCESS

Preliminary Application Employment

Interview Blank Tests

Physical Reference Employment

Examination Checks Interviews

Appointment Final
Letter Selection

© 2011, Dreamtech Press :: Chapter 4 6

 TRAINING METHODS

 On- the- job training method

 Coaching and Mentoring
 Understudy
 Job Rotation
 Apprenticeship Training
 Special Project Assignments
 Self-Instructional Mode
 Of f-the- job training method
 Special Courses
 Classroom Training
 Case Study
 Role Playing
 Vestibule Training
 Programmed Instructions
 Simulation Exercises
 Sensitivity Training
 In-Basket Exercise

© 2011, Dreamtech Press :: Chapter 4 7

 PERFORMANCE APPRAISAL

 Performance appraisal includes all formal procedures used to

evaluate personalities and contributions and potentials of
group members in a working organization. It is a continuous
process to secure information necessary for making correct
and objective decisions on employees. --- Dale Yoder
 Performance appraisal is the systematic, periodic and an
impartial rating of an employee’s excellence in the matters
pertaining to his present job and his potential for a better job.
--- Flippo
 Performance appraisal is a method of acquiring and
processing the information needed to improve an individual
employee’s performance and accomplishments. --- Douglass

© 2011, Dreamtech Press :: Chapter 4 8

THE PERFORMANCE APPRAISAL SYSTEM

Determining the
Establishing
Communicating the person responsible
performance
standards to conduct the
standards
appraisal

Communicating the
Taking corrective results of appraisal Measuring the
actions to the concerned actual performance
employee

© 2011, Dreamtech Press :: Chapter 4 9

 COMPENSATION

 A monetary value or non-monetary reward that an enterprise

offers to its employees in exchange of services rendered by
them.
 The different types of compensation provided by the
enterprise are:
 Skill-based Pay
 Refers to the compensation that depends not only on the job but also on
the potential of the employee
 Team-based Pay
 Refers to the remuneration that is given to teams where a group of people
work together
 Variable Pay
 Refers to the reward that is based on the performance of the employee on
his/her job

© 2011, Dreamtech Press :: Chapter 4 10

 WAGES

 A monetary form of compensation given to workers in

exchange of services rendered by them.
 The different types of wages are:
 Minimum Wage
 Living Wage
 Fair Wage
 Need-based Minimum Wages

© 2011, Dreamtech Press :: Chapter 4 11

 DIFFERENCES BETWEEN WAGES AND
SALARIES
Basis Wages Salaries

Hours Amounts paid per hour Paid on a monthly basis

Contract base Wages are not based on Salaries are based on

contracts contract

Type of workers Paid to blue collar workers Paid to white collar

workers

Type of work Paid for physical labor Paid for mental Labor

© 2011, Dreamtech Press :: Chapter 4 12

 MARKETING MANAGEMENT IN A NEW
ENTERPRISE

 It is described as a process of creating, building, and

maintaining beneficial products.
 A market consists of different types of customers; therefore,
an enterprise divides the market as per the customers’
gender, age, tastes, attitudes, and personalities.
 It includes:
 Market Segmentation
 Marketing Mix
 Marketing Research
 Branding

© 2011, Dreamtech Press :: Chapter 4 13

 MARKET SEGMENTATION

 Market segmentation is a natural result of the vast

differences among people. --- Donald Norman, a Doctorate of
Philosophy
 The following figure shows the bases of market segmentation
adopted by enterprises:

© 2011, Dreamtech Press :: Chapter 4 14

 MARKETING MIX

 It is defined as a collection of tools that can be used in

achieving marketing objectives.
 It uses four Ps as its tools to decide the marketing strategy
for a product:
 Product
 Includes the goods, services, events, persons, places, ideas, and
information offered to the customers by producers
 Price
 Implies the monetary value given by a buyer to a seller to get a product
 Place
 Involves a decision about the location of the product from where it can be
purchased
 Promotion
 Involves the use of communication tools to increase the awareness of the
customer about the product

© 2011, Dreamtech Press :: Chapter 4 15

 PROMOTIONAL TECHNIQUES OF
MARKETING
 Adver tising
 Refers to a promotional technique of marketing communication that is used
to target a huge number of geographically dispersed audiences.
 Direct Marketing
 Refers to the type of marketing in which the enterprises reach customers
directly without any intermediary.
 Personal Selling
 Refers to face-to-face selling in which a sales representative tries to convince
the customer to purchase a product by explaining or demonstrating its
features.
 Public Relations (PR)
 Refers to the process in which enterprises maintain a relationship with the
customers, shareholders, employees, distributors, partners, competitors, and
the government.
 Sales Promotion
 Refers to a traditional element of marketing communication.

© 2011, Dreamtech Press :: Chapter 4 16

 PROCESS OF MARKETING RESEARCH

Interpreting Reporting
Defining a Designing Collecting
Research Research
Problem Research Data
Findings Findings

© 2011, Dreamtech Press :: Chapter 4 17

 FINANCIAL MANAGEMENT IN A NEW
ENTERPRISE
 Financial Management is an area of financial decision
making, harmonizing individual motives and enterprise
goals. ---- Weston and Brigham
 The various elements of Financial Management are:
 Financial Planning
 Financial Decision-Making
 Financial Control

© 2011, Dreamtech Press :: Chapter 4 18

 FINANCIAL CONTROL

 It is a process of supervising and monitoring the financial

operations of an enterprise.
 The various tools of financial control are:
 Financial Statements
 Contains detail regarding the financial activities, such as total income,
expenditures, and cash inflows and outflows, of the enterprise
 Financial Audits
 The formal investigations to ensure that financial management practices
follow accepted accounting procedures, policies, laws, and ethical
guidelines
 Financial Ratio Analysis
 The systematic use of ratios to assess the performance and status of the
enterprise

© 2011, Dreamtech Press :: Chapter 4 19

 PRODUCTION AND OPERATIONS
MANAGEMENT IN A NEW ENTERPRISE

 It is the field of management that deals with supervising,

designing, and redesigning business operations in the
production of goods and services.
 Operations management is the field concerned with managing
and directing the physical and/or technical functions of a firm
or organization, particularly those relating to development,
production, and manufacturing. --- The U.S. Depar tment of
Education

© 2011, Dreamtech Press :: Chapter 4 20

 DIFFERENCE BETWEEN PRODUCTION
AND OPERATIONS MANAGEMENT
Characteristics
Nature of Output
Production Management Operations Management
Involves the production of tangible Involves production of intangible goods,
products such as services and utilities

Consumption of Output There is a time gap between production The output is consumed immediately
and consumption after it is produced

Nature of Work Need land, labor, machinery, and Need comparatively less land, labor,
capital on large scale machinery, and capital

Degree of Customer Contact There is no direct contact with In almost every case, there is direct
customers customer contact

Customer Participation in Conversion
There is no participation of customer in
conversion process. For example,
during the production of steel, customer
has no role in converting iron ore into
steel.
There is frequent customer contact in
conversion process. For example, when
a sick child goes to hospital for
treatment, the child goes through
conversion process, he/she is being
cured.

© 2011, Dreamtech Press :: Chapter 4 21

 METHODS FOR MEASURING
PRODUCTIVIT Y
 Output/Labor Ratio
 The ratio of output produced to input of labor.
 It is measured for an enterprise, a process, an industry, or a country.
 The two major problems associated with output/labor ratio are:
 This ratio uses labor as the only input
 It ignores other important factors of production, such as equipment and
raw materials
 Multifactor Productivity (MEP)
 The ratio of the real value of output to the collective labor and capital
input
 The formula of calculating the MFP is:
MFP =

© 2011, Dreamtech Press :: Chapter 4 22

 RECAP

 The long-term survival of an enterprise requires an efficient

management of its business.
 Managing an enterprise involves several interrelated
functions, such as searching the market for profitable
business opportunities and formulating marketing, financial,
and human resource strategies.
 The efficiency and productivity of employees is directly linked
with the type of work environment.

© 2011, Dreamtech Press :: Chapter 4 23

 CHAPTER-3

FINANCIAL
REQUIREMENTS OF A
NEW ENTERPRISE
A U T H O R : A L PA N A T R E H A N

© 2011, Dreamtech Press :: Chapter 3 24

 FINANCING A NEW ENTERPRISE

 An enterprise needs to determine its financing requirements,

before its set up.
 An enterprise has two types of financial requirements:
 Fixed capital
 Helps in purchasing the fixed assets such as land, buildings and furniture
 Also called as long term capital
 Amount depends on the nature and size of the business
 Generates income and profits in long term
 Working Capital
 Implies the amount of money required for the day-to-day management of
the business
 Covers expenses on raw materials, wages and salaries, advertising, rent,
fuel, electricity and water
 Also called as revolving capital or circulating capital

© 2011, Dreamtech Press :: Chapter 3 25

 FINANCIAL REQUIREMENTS ON THE
BASIS OF PERIOD OF USE
 Long-Term Capital
 Refers to the capital required for a period of five years or more.
 Helps to finance the fixed capital and the permanent part of the working capital.
 Raised through various sources, such as by issuing shares and debentures and
taking loans from financial institutions.
 Medium-Term Capital
 Refers to the capital required for a period of two to five years.
 Performs various activities, such as renovation of buildings, expenditure on
advertising, and modernization of machinery.
 Raised through various sources, such as by issuing shares and debentures and
reinvestment of profits.
 Shor t-Term Capital
 Refers to the capital required for a period of less than a year.
 Helps to finance the current assets and meet day-to-day expenses.
 Raised through various sources, such as banks, trade credit, and installment
credit.

© 2011, Dreamtech Press :: Chapter 3 26

 FIXED COST

 The fixed cost includes the expenses of an enterprise that do

not change with change in the levels of production.
 The following are the fixed cost of an enterprise:
 Land and Site Development
 Construction Cost
 Plant and Machinery
 Technical Knowhow
 Utility Cost
 Miscellaneous Fixed Assets

© 2011, Dreamtech Press :: Chapter 3 27

 LAND AND SITE DEVELOPMENT

Legal and
Purchase price
registration Leveling of land
of land
charges

Laying of
Boundary wall / Gates and site
internal and
fencing of land office
approach roads

Tube well and

Any other
electrification for
expense of
project
similar nature
implementation
© 2011, Dreamtech Press :: Chapter 3 28
 CONSTRUCTION COST

Factory buildings Non-factory buildings

• Production shed • Ware house
• Boiler House • Stores
• Transformer room/ • Security house
generator room • Workers’ rest room
• Workshop • Parking
• Laboratory • Time office/ excise room
• Administrative block
• Essential quarters for
workers
• Canteen

© 2011, Dreamtech Press :: Chapter 3 29

 PLANT AND MACHINERY

Transshipment cost
Basic cost of Excise/ custom duty (from vendor to site)
equipment and sales tax and insurance during
transportation

Erection and
Piping cost
foundation cost

© 2011, Dreamtech Press :: Chapter 3 30

 TECHNICAL KNOWHOW

Basic cost of
technology Training cost for
development or employees
purchase

Royalty paid (if

lump sum)

© 2011, Dreamtech Press :: Chapter 3 31

 UTILIT Y COST

Generator/
Boiler Compressor
Transformer

Underground Effluent
/ overhead treatment
water tank plant

© 2011, Dreamtech Press :: Chapter 3 32

DETERMINANTS OF WORKING CAPITAL

Finished
Work in
Goods
Progress
Inventory

Raw
Receivables Material
Inventory

© 2011, Dreamtech Press :: Chapter 3 33

 SOURCES OF FINANCE

Long-term Finance

Medium-term Finance

Short-term Finance

© 2011, Dreamtech Press :: Chapter 3 34

SOURCES OF LONG-TERM FINANCING

Equity Financing

• A method of raising long-term funds by selling the common and

preferred stock of the enterprise to the investors

Debt Financing

• An agreement between a debenture holder and the enterprise, which

acknowledges that the enterprise would repay the debt at a specified
date to debenture holders

Term Loans

• The long-term loans that are raised for the duration of 3 to 10 years
from financial institutions

© 2011, Dreamtech Press :: Chapter 3 35

SOURCES OF MEDIUM-TERM FINANCING

Lease Finance

• An agreement between the owner of assets, called the lessor, and the user of assets, called
the lessee

Public Deposits

• Funds and loans raised from general public, employees, and other similar kind of
depositors
Retained Earnings

• The accumulated profit for future investments, which can be short-term or long-term in
nature

Hire Purchase

• An agreement between a hiree (the owner of assets) and a hirer (the user of the assets)

© 2011, Dreamtech Press :: Chapter 3 36

 SOURCES OF SHORT-TERM FINANCING

• An arrangement in which the supplier allows the buyer to pay for goods and services
Trade Credit at a later date in future

• The art of payment made in advance by the customer to the enterprise for the
Customer Advances procurement of goods and services in the future

Installment Credit • The borrowed amount is paid in equal installments with interest

• The amount of money granted by the bank at a specified rate of interest for a fixed
Bank Loan period of time

• An arrangement made by the bank for the clients to withdraw cash exceeding their
Cash Credit account limit

• An instrument used by the enterprise with high credit rating to raise money from the
Commercial Papers market

• A promissory note issued by the bank to the investors for depositing funds in the
Certificate of Deposits bank for a fixed period of time

• A document in which an individual asks the recipient to make payment for goods
Bills of Exchange and services received to a third party at a future date

• A temporary arrangement with the bank that allows the organization to overdraw
Bank Overdraft from its current deposit account with the bank up to a certain limit

© 2011, Dreamtech Press :: Chapter 3 37

 INSTITUTIONS PROVIDING FINANCIAL
ASSISTANCE

 Reserve Bank of India

 State Bank of India
 Bank of Baroda
 Andhra Bank
 Small Industries Development Organization (SIDO)
 National Small Industries Corporation Ltd (NSIC)

© 2011, Dreamtech Press :: Chapter 3 38

 VENTURE CAPITAL FUNDING

 It is a source of finance for newly established small and

medium enterprises willing to raise funds.

 Independently managed, dedicated pools of capital that focus

on equity -linked investments in privately held, high-growth
companies. ---- Gompers and Lerner (1999: 11)

 Methods of Venture Funding in India:

 Equity
 Conditional Loans
 Income Note

© 2011, Dreamtech Press :: Chapter 3 39

 VENTURE CAPITAL FUNDING PROCESS

• Involves interaction between venture capitalists and entrepreneurs

Deal Initiation regarding the investments in business proposals

• Involves an initial screening of all the projects on the basis of certain

Preliminary Screening criteria, such as the size of investment, geographical location, and
stage of financing

• Includes activities that are associated with evaluating an investment

Due Diligence proposal

• Involves negotiation between the venture capitalist and the

Deal Structuring entrepreneur regarding the terms and conditions of the deal

• Indicate the activities performed by venture capitalist after finalizing

Post Investment Activities and completing the deal with the entrepreneur

• Refers to a stage when the venture capitalist wishes to exit from the
Exiting business

© 2011, Dreamtech Press :: Chapter 3 40

 RECAP

 Finance is prerequisite for mobilizing the resources of an

enterprise.
 Financing a new enterprise essentially involves two things,
namely, estimating the funds/capital requirement and
deciding sources.
 Estimating financial requirements for a startup enterprise
involves determining the total amount of capital required for
various needs of the business and deciding the sources and
methods to raise it.
 Venture capital is an important source of finance for newly
established small and medium enterprises willing to raise
funds.

© 2011, Dreamtech Press :: Chapter 3 41