Definition. Nature & Characteristics of Entrepreneurship.. Types of Entrepreneurship. Functions of Entrepreneurs. Barriers in entrepreneurship Development. Qualities of an Entrepreneur.

Concept of Small Scale Industries. Growth of SSI in Developing Countries. Position of SSI.

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Definition of Entrepreneurship
“Entrepreneurship is the purposeful activity of an individual or group of individual to initiate, maintain or generate profit by production or distribution of goods or services.”
“Entrepreneurship is an attempt to create value through recognition of business opportunity, risk taking through the communicative and management skills to mobilize human, financial & material resources for a project.”

 Leadership.Nature & Characteristics  Innovation.  High Achievement.  Managerial Skills.  Limited Resources. .  Risk Taking.

 Fabian Entrepreneurs.  Drone Entrepreneurs.Types of Entrepreneurs  Innovative Entrepreneurs. .  Adoptive Entrepreneurs.

Functions of Entrepreneur            Perceiving market Opportunities. . New product Development. Managing Customers. licences) Upgrading Production Process & Product Quality. Marketing of products. Purchasing Input. Industrial Engineering. Managing Finance. Managing Production. Dealing with Public officials ( Taxes. Command over resources.

 Lack of Technical Skills.  Social Stigma.  Time pressure.  Lack of Capital.  Monopoly.Barriers to Entrepreneurship  Lack of market knowledge.  Legal Obligation/Regulation. .  Lack of Business Know how.

 Good decision maker.  Low need for status & power.  Problem Solving skills.  Seeking & using feedback.  Drive to achieve & grow.  Risk taker. .  Innovative.  Sense of humour.Qualities of an Entrepreneur  Total Commitment & Determination.

2. Manufacturing Wholesaling Retailing Services Franchising Outsourcing .OPPORTUNITIES FOR ENTREPRENEURS 1. 3. 5. 6. 4.

. Once an enterprise or unit goes beyond the size. 1. it is no longer classified as small. The value of annual turnover. The size limit for small firm may be laid down in any one or more of the following criteria. The number of person employed 2.SMALL SCALE INDUSTRIES A SSI may be defined in terms of size. The amount of capital employed 3.

1. 3. wherein the investment limit in fixed assets of plant and machinery does not exceed rupees five crore. Investment limit is not exceed rupees five crore. 2. TINY INDUSTRIES: It is defined as an industrial or business enterprises whose investment in plant and machinery is not more than rupee 25 lakh. ANCILLARY SMALL UNIT: This type of unit is engaged in production of various components and spare parts to be used by a large industrial enterprises to produced the goods for consumer. .TYPES OF SSI SMALL SCALE INDUSTRY: Industrial undertaking.

. 7.ROLE OF SSI IN ECONOMY 1. 8. 6. 2. 3. 4. Employment Balanced regional Development Use of local Skills Variety of products Equal Distribution of income Economical Operation Customized products Support to Large scale industries. 5.

72 17.56 4118.87 6454.85 18.00 599.50 5728.56 444.48 2988.78 4626.86 3626.65 15.00 253.50 5728.70 2416.Growth of SSI In Developing Countries Year Production (Billion ) Employment (Million) Exports (Billion ) Production (Billion) 1993-94 1994-95 1995-96 1996-97 2416.26 16.96 16.70 392.58 1997-98 1998-99 1999-00 2000-01 4626.48 2988.15 17.86 3626.07 290.41 5206.93 14.79 542.56 4118.58 13.96 .41 5206.68 364.87 6454.42 489.

Introduction to new product. 7. 5. . 6. Limited Demands Flexibility Personalized services Good relations with employees Support to large industries. 4.Reason for Growth of SSI 1. 3. Development of Entrepreneurship. 2.

2001 . Reservation/De-reservation of items for manufacture in the small scale sector is a continuing process regularly monitored by an Advisory committee on Reservation constituted under the IDR Act. the only exception being the case of large units which undertake minimum level of exports as 75 per cent of their total roduction. grants protection to small scale sector. The policy of reservation initiated in 1967 primarily as promotional and protective measure vis-a-vis the large scale sector.06. One of the measure of the policy support for promoting small scale industries is the policy of reservation of economically viable and technically feasible items for exclusive manufacture in the small scale sector.The IDR Act was amended in March. at present the total number of items reserved for small scale sector are 799 as on 29.Position of SSI The phenomal growth of industries in the Small Scale sector has been striking feature in the economic development of the country since independence. 1984 empowering Government to reserve items for the small scale sector. It has contributed to the overall growth or the Gross Domestic Product as well as in terms of employment generation and export.

Position of SSI The small scale sector has acquired a prominent place in the socio-economic development of the country during the past four and a half decades. the increase was 11.58. has direct impact on the growth of the national economy. .000 units in the year 200001. which forms a part of total industrial sector. The increase in the year 1998-99 & 1999-2000 were 7.3% in 1995-96 and 1996-97 respectively. their production. employment and exports over the years. 70. The estimated increase for 2000-01 is 8. therefore. there has been a steady increase over the previous years ranging between 7%-10% during the period 1990-91 to 1994-95.43%. and 8.000 units in 1990-91. In 199798 the increase over the previous year was registered at 8.7%.4% and11. On the production front also. There has been a steady increase in the number of SSI units.16% respectively. the number of units has increased to 33. from 19.09%. Performance of the small scale sector.

(Subject to the condition that the unit is not owned. controlled or subsidiary of any other industrial undertaking . 21. An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs 5 Crore.e.1999.f.INVESTMENT LIMITS FOR SSI Small Scale Industrial Undertakings The following requirements are to be complied with by an industrial undertaking to be graded as Small Scale Industrial undertaking w.12.

sub-assemblies. to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase. tooling or intermediates.INVESTMENT LIMIT FOR ANCILLARY UNITS Ancillary Industrial Undertakings The following requirements are to be complied with by an industrial undertaking for being regarded as ancillary industrial undertaking: An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts. as the case may be. components. . does not exceed Rs 5 Crore. or the rendering of services and the undertaking supplies or renders or proposes to supply or render not less than 50 per cent of its production or services.

INVESSTMENT LIMIT FOR TINY INDUSTRIES The Enterprises Investment limit in plant and machinery in respect of tiny enterprises is Rs 25 lack irrespective of location of the unit. .

Small firms promote self-employment particularly among the educated and professional class. Several empirical studies have revealed that the employment generating capacity of small scale industries in about in times more than that of the large scale industries. the healthy growth of small scale industries can be an effective approach to the pressing problem of unemployment in the country. Next to agriculture small business constitutes the most popular occupation of people in India. they have high potential to provide employment to a larger number of people per unit of capital.ROLE OF SSI IN NATIONAL ECONOMY Employment: Small scale firms use labour-intensive techniques and. For every worker employed in large scale industries about three workers are engaged in small scale and cottage industries with regard to large scale industry. They also provide employment to agriculturists who remain idle during a part of the year. therefore. . In fact.

.ROLE OF SSI IN NATIONAL ECONOMY Balanced Regional Development: small scale industries promote decentralized development and help to remove regional disparities in industrialization. By providing employment in rural areas they help to check migration and overcrowding in urban areas. Small scale firms can be a useful means of rural reconstruction and development. Development of decentralized sector also improves the standard of living of people in backward regions. Decentralized development contributes to the process of self-sustained growth and avoids concentration of industries in particular areas.

Small firms also provide quick returns after their establishment on account of short gestation period. therefore.ROLE OF SSI IN NATIONAL ECONOMY Optimization of Capital: Small scale firms require less capital per unit of output and. greater output can be obtained with small investment.757 in case of large scale industry. .706 as compared to Rs. In India where the rate of capital formation is low. 27. small scale industries are very suitable. The Annual Surveys of industries reveal that fixed capital per employee in case of small scale industry was Rs. 3.

. Small business promotes a new cadre of small entrepreneurs and selfemployed and encourages local talent. The growth of small enterprises helps in tapping talent resources like entrepreneurial skills and small savings specially in rural areas. Small business helps to protect technical skills and handicrafts.ROLE OF SSI IN NATIONAL ECONOMY Mobilization of Local Resources: Small scale industries facilitate Mobilization and utilization of local resources and family skills which might otherwise remain talent or utilized.

637 crores in 1975-76 to Rs. Small scale sector accounts for 40 percent of the exports of non-traditional items and about 25 per cent of the country's total exports.ROLE OF SSI IN NATIONAL ECONOMY Exchange Earnings: Small scale industries help in reducing pressure on the country's balance of payments in two ways. they earn valuable foreign exchange through exports of their products. About 90 per cent of its exports are of non-traditional items. 2785 crores in 1985-86. Secondly. First. they do not require imports of sophisticated machinery and equipment. The exports of small scale industries increased from Rs. .

ROLE OF SSI IN NATIONAL ECONOMY
Feeder to Large industries: small scale sector is complementary to the large scale industries. Small scale industries manufacture various types of components, spare parts, tools and accessories which are required by the large scale sector.

ROLE OF SSI IN NATIONAL ECONOMY
Social Advantage: Small scale units offer opportunity for an independent way of life to people with small means. They offer savings in social overheads like education, housing and medical facilities by taking industry nearer to the people. They help to raise per capita income an standard of living in the country. A system of widely diffused ownership permits wider participation of people in the process of economic development. Small scale sector provides a base for democracy, socialism and selfgovernment. At present there are about 16 lakh small scale units in India producing more than 500 times. The Seventh Fiver Year Plan envisages a growth rate of 10 per cent in the small scale sector. By the end of 1990 the production of small scale sector is expected to be Rs. 8,000 crores and employment 1.19 crore persons.

CHARECTERSTICS OF SSI
Labour intensive Small-scale industries are fairly labour-intensive. They provide an economic solution by creating employment opportunities in urban and rural areas at a relatively low cost of capital investment.

Flexibility Small-scale industries are flexible in their operation. They adopt quickly to various factors that play a large part in daily management. Their flexibility makes them best suited to constantly changing environment.

It is mostly set up by individuals.' they provide an outlet for expression of the entrepreneurial spirit.CHARECTERSTICS OF SSI One-man show A small-scale unit is generally a one-man show. As they are their own boss. . the activities are mainly carried out by one of the partners or directors. Therefore. the decision making process is fast and at times more innovative. Even some small units are run by partnership firm or company.

Localized operation Small-scale industries generally restrict their operation to local areas in order to meet the local and regional demands of the people. They cannot enlarge their business activities due to limited resources. .CHARECTERSTICS OF SSI Use of indigenous raw materials Small-scale industries use indigenous raw materials and promote intermediate and capital goods. They contribute to faster balanced economic growth in a transitional economy through decentralization and dispersal of industries in the local areas.

It is the time period between setting the units and commencement of production. . This helps the entrepreneur to earn after a short period of time.CHARECTERSTICS OF SSI Lesser gestation period Gestation period is the period after which the return or investment starts. Capital will not be blocked for a longer period. Smallscale industries usually have a lesser gestation period than large industries.

Hardly there is any need of specialized knowledge and skill to operate and manage the SSI. .CHARECTERSTICS OF SSI Lower Educational level The educational level of the employees of small industries is normally low or moderate.

They always try to keep high margins in their pricing. . This is one of the reason for which the unit may lead to closure.CHARECTERSTICS OF SSI Profit motive The owners of small industries are too much profit conscious.

khadi industries. food processing industries etc. coin industries. . Ancillary Industries: The industries which are producing parts and components and rendering services to large industries are called as ancillary industries. engineering industries. For example : Power looms.TYPES OF SSI Manufacturing Industries Those units which are producing complete articles for direct consumption and also for processing industries are called as manufacturing industries.

etc. casting. e. Feeder Industries Feeder industries are those which are specializing in certain types of products and services. Tiny Industries It consists village. . electro-plating. Handicraft etc.TYPES OF SSI Service Industries Service industries are those which are covering light repair shops necessary to maintain mechanical equipments.g. welding. Cottage. These industries are essentially machinebased.

 Automobile repairing workshop. Centre  Cyber Café.  Book Binding.  STD/ ISD/ Xerox Centre  Computer Hardware repairing/ servicing.T.  Electronic spare parts repair unit.DEMEND BASED ANCILLARIES UNIT  I. .  Screen Printing.

 Packaged Drinking Water.  Hotel/ Motel.DEMEND BASED ANCILLARIES UNIT  Truck/ Bus Building.  Computer Paper/ Sheets.  Tyre Retreading unit.  Spray Painting/ denting. .  Repairing/ Hiring of earth moving machine.  Ball Point pen.

 Dry Cleaning/ Laundry.DEMEND BASED ANCILLARIES UNIT  Infant Food.  File Covers/ Folders.  Hair Dresser.  Phenyle manufacturing. .

Cattle Feed/ Poultry Feed manufacturing Jelly. Cup & plate making. Badi & Papad making.RESOURCE BASED ANCILLARY UNITS          Paddy Processing Churn/ Poha making. Spices Grinding Honey Processing. . Oil Mill. Jam & Squash.

employment intensity and its suitability for rural area with limited techno-economic structure. use mainly indigenous technology. along with a heavy industrial base.GOVT. its small size. . Along with the Large Scale sector the thrust was on Small Scale sector because of it decentralized. POLICY FOR SSI After attaining independence in 1947 India adopted mixed economic planning as a method to achieve economic development. fiscal and infrastructure measure. Industrial policies over the year have focused to promote SSIs through various incentives related to financial.

INDUSTRIAL POLICY RESOLUTION 1948  SSIs are particularly suited for the utilization of local resources and creation of employment opportunities .  The primary responsibility for developing small industries by creating infrastructure has been provided to state government .  Central government frame the broad policies and coordinates the efforts of State Government for development of SSIs. .

To achieve this 128 items were exclusively reserved for production in SSIs.INDUSTRIAL POLICY RESOLUTION 1956   It stated that besides continuing the policy support to cottage. village and small industries by differential taxation or directsubsidies. and 166 items were reserved for exclusive purchase by government from this sector.  . The focus was to improve the competitive strength of SSIs. the aim of state policy would be that the development of this sector is integrated with that of large scale industry.

 The concept of District Industrial Centers (DICs) was introduced to that in each district a single agency could meet all the requirement of SSIs under one roof. such as.  Technological up gradation was emphasized in traditional sector . were laid down.  Special marketing arrangement through the provision of services. market survey. .INDUSTRIAL POLICY RESOLUTION 1977  504 items were reserved for exclusive production in the small scale industries . production standardization. quality control.

INDUSTRIAL POLICY RESOLUTION 1990  It raised the investment ceiling in plant and machinery for        SSIs. Special emphasis was laid on training of woman and youth under Entrepreneurial Development Programme. Also. Activities of Khadi and Village Industries Commission and Khadi and Village Industrial Board were to expand. Stress was reiterated to upgrade technology to improve competitiveness. assistance was granted to woman entrepreneurs for widening the entrepreneurial base. It created central investment subsidy for this sector in rural and backward area. Small Industries Development Bank of India was established to ensure adequate flow of credit to SSIs. Reservation of items to be produced by SSIs was increased to 836. .

.25 lacs irrespective of location. Equity participation by other industrial undertaking was permitted up to a limit of 24% of shareholding in SSIs. Market promotion of products was emphasized through co-operatives. Factoring services were to launch to solve the problem of delayed payment to SSIs. Priority was accorded to small and tiny units in allocation of indigenous and raw materials. public institutions and other marketing agencies and corporations. The investment limit for tiny enterprises was raised to Rs.INDUSTRIAL POLICY RESOLUTION 1991  SSIs were exempted from licensing for all articles of      manufacture.

The equity participation by large sector will stimulate technology flow to small sector. .  Technological development cell in the small industries development organization will be set up. Small business houses will be given opportunity for improvement of technology.

. 14 item on 2001. 75 item in 2003 and 85 items in 2004. 108 in March 2005 and 180 in May 2006.RESERVATION POLICY  Out of 836 items reserved in 1989.. Now 298 items stand reserved for this sector. 15 items in 1997’ 9 items on 1999 1 item on 2001 and.39 items were dereserved           in four phases viz.subsequently. 51 item were dereserved in 2002.

.  In February2004. after deleting items having common nomenclature and addition of some new ones. the Committee (set up to consider the question of inclusion of additional items) revised list and 358 items were approved .PURCHASE PREFERENCE POLICY  Under the Store Purchase Policy of the Government 409 items of store were reserved for exclusive purchase from KVIC/Women’s Development Corporation/Small Scale units in 1989.  This list also includes 8 handicraft items reserved for purchase from the Handicraft Sector.

 No registration fee. .  A consortium to channelize and identify for the production of SSIs both in India and abroad.PRICE PREFERENCE POLICY  Price preference up to 15%in case of selected items.

. Classroom and practical training for skill up gradation. Material testing facilities through accredited laboratories. Technology acquisition . Common facility support in machining Energy and environment services at selected centers.TECHNICAL ASSISTENCE           Technology audits and benchmarking Technology needs assessment Technology sourcing Application of new acquisition. Product design including Computer Aided Designs.

 > Electronics and Communications  Suppliers Rating Accreditation Services.  > Production design.  > Energy and Environment  > Bio-Technology . .NEW INITIATIVES  Advisory and Mentoring services  Technology Business Incubators  > Information technology.

Product scope and advantages 1. .Product Renewal 2.

Generation of Employment. Cultural Heritage. 6. 4. 3. Promotion of Industrialization in rural areas. 5. Support to Large Industries. Better Standard of life. . 2. Removal of Poverty.ROLE OF SSI 1.

Lack of Trained Person. Low productivity. 5. 3.Problems Faced By SSI 1. 10. Difficulties in Marketing. Old Technology. 8. Industrial Sickness Global Competition. 7. 2. Storage of Raw Material. 4. . 6. Inadequate Capital. Lack of Management. 9. Low Quality.

Protective measures  Reservation of items for exclusive production by SSI.  Preference by government department in purchase of items.Measures taken by Government 1.  Giving concession in excise. . sales tax etc.

.  Setting up common testing facility centre. Promotional Measures  Supply of material to all SSI at reasonable prices and setting up of raw material depots to effect quick supply of such material.  Preference in land allocation and power connection to SSI.2.  Provision for concessional finance through commercial banks and other financial institutions.  Setting up industrial estates and provisions of industrial sheds to enterprises on installment basis.

3.  National small industrial corporation to supply to provide machinery on hire purchase basis.  DIC in all district to serve as the local point of development of SSI. .  Khadi and village industries commission for encouraging the production and marketing of handicraft items. silk board to provide technical. financial and marketing facilities.  All India coir board. Institutional Measures  Small scale industrial development organization to provide training to SSI.

 Establishment of SIDBI for smooth financing to SSI. .  Industrial parks for infrastructural development of SSI.

5. Location of plant. 3. Size of firm. Choice of form of ownership. Financing the proposition. 2. Selection of industry. . 4. 1.SETTING UP A SMALL SCALE INDUSTRY Following are the considerations in setting up a small scale industries/enterprises.

Launching the industrial enterprise. 9. Plant Layout.6. Human Resources. Tax Planning 11. Procedural Formalities. 7. 8. 10. . Machines and equipment.

Scanning the environment for identification of business opportunities. Resource mobilization. Preparation of business plan. Project launching. Development of product/service idea. . Appraisal by financial institution. Assessment of feasibility of idea. 4. 6.STAGES IN SETTING UP SSI 1. 2. 3. 5. 7.

ideas need to be filtered through a multi-layer sieve. However.IDENTIFICATION OF BUSINESS OPPROTUNITY Before launching an industrial establishment.Does the idea fire up your motivation? . entrepreneur has to study all the possible factors which may influence the selection of the type of business.Check it out with basic market research . This model is shown in the following flow: .Does it match the needs of your clientele? .Is it a viable business proposition in your area? .

Project conceptualization .Consult with the experts ..Test it out at market place .Look out for competition in the field .Your business opportunity .Is it a sunrise industry? .

DEVELOPMENT OF IDEA The foremost task of a dynamic entrepreneur is the generation of an idea that is new and appears to be worthwhile for further use. This involves a lot of creativity on the part of the entrepreneur. It originates from the real demand for any product or service that an entrepreneur should have a keen and open mind to look for opportunities and generates business idea. . The business idea arises from the opportunity in the market.

3. 4. It should ensure making products that have a demand in market. 1. . It should enable the entrepreneur to solve a current problem existing in the market. The business idea should enable the entrepreneur to utilize his skills. It should enable the use of available raw material.While selecting a business idea. the following points need adequate consideration. 2.

Society 5. Researches 3. Area study . Environment 4.Following are the sources of business ideas: 1. Survey reports. 2.

.Practical steps in setting SSI 1. 4. Detailing manpower Establishing market Network Application for permanent application. 6. 5. 3. 2. 7. Project report No objection Certificate Formal sanction of loan Construction of building & installation of machinery.

Corporation Small Ind. EDI( Entrepreneurship Dev. Corporation Mineral & Metal Trading Cor. Tool. Technology Training Infrastructure Raw Material Plant & machinery Marketing Product Standardization SFC Technical Consulting Organization Directorate of Export promotion BIS Directorate of Export promotion Registrar of Trade mark .Institutional Support to SSI Selection of Project DIC. Electricity board. Ins. Local authority Mineral Dev. State financial Corporation Registration Finance National Small Industries Corporation Director General of Foreign Trade State trading Corporation State financial Corporation Industrial Development Corporation SIDBI Directorate of drug control Central institute of plastic & eng. Of India National Institute of Small Industry Extension Training DIC.

. The objectives and set of activities differ from one project to another . A project may involve establishment of new plant or it may also involve the provision of additional facilities or ventures. a project will involve allocation and use of resources and generation of specific results.Project & its Nature A project is the combination of human and nonhuman recourses pooled together in a temporary organization to achieve a specific purpose. Whatever the purpose.

Elements of risk 5. Life cycle . Uniqueness 6.Project Characteristics 1. Specific Purpose/Objectives 2. Single entity 3. Team Work 4.

He should identify. explore and select the right opportunities.Project Identification It is concerned with the collection. An entrepreneur is an opportunity seeker. . Opportunity is an attractive idea which an entrepreneur accepts as a basis for his investment decision. A good business idea must be capable of being converted into feasibility. compilation and analysis of economic data for eventual purpose of locating possible opportunities for the investment and with the development of the characteristics of such opportunities.

Good market scope.A good business opportunity must have two major ingredients. . 2. 1. An acceptable return on investment ( ROI).

2. limitations and preferences. Start the project. . Comparative analysis of opportunities available. Exploring all opportunities. 3. 5. Understanding own strength.Process for Selection of Project 1. Business opportunity may be for manufacturing a product or a service. 4. capabilities.

CURRENT SCENE . its components.Local needs .Emerging trends . ENVIRONMENT . 1.Basic features of an area and its resource inventory. . occupational pattern. Following guideline can help us in opportunity identification.Exploring Opportunities The process of exploring the opportunities requires intensive efforts and specialized skills.Population. 2.Present pattern of trading .New demands .

NGO. change in population. Import and export related ideas Market shift such as change in demand. Government policy. agricultural. Resource based idea such as mineral. 6. KPO. 5. . Special product ideas such as BPO. purchasing power. 4. change in life cycle.Sources of opportunity 1. 3. 2. Household repair and maintenance. wood waste and metal waste. wasted items such as ago waste. marine.

Investment. 3. Location Technology Equipment & Machinery Marketing . 5.Criteria for selecting a project 1. 2. 4.

Improper preparation of feasibility report. Non availability of sufficient physical resources. 5. Lack of project management. 2. 4.Problems in Project Identification (A) Internal Constraints 1. Unrealistic project objectives. unique skills and experience. 3. . Non availability of non physical resources such as patents. secret process.

External Constraints
The project may not fulfill socio-economic objectives of country. 2. NOCs, approvals, licenses, foreign collaboration, foreign exchange and other government policies. 3. The procedure and documents of financial institutions and banks may delay the implementation of the project.
1.

Assessment of Viability
It means whether some idea will work or not. Viability is a multivariate concept, i.e., a project has to be viable not only in technical terms but also in economic and commercial terms. Moreover, There is always a possibility that a project that is technically feasible may not be economically viable. The decision to implement a project will be based on the expected revenues that the investment is going to generate. The project can be considered feasible only if it is expected to generate sufficient revenues and profit to justify the investment in it.

Evaluation of Project
Following are the techniques to evaluation of project profitability: 1. Benefit Cost Analysis 2. Discounted Cash Flow method 3. Net Present Value (NPV) 4. Internal Rate of Return(IRR)

A product is considered to be attractive only when the benefits to be derived from its production are much more than the cost associated with it. the ratio of benefits to cost associated with a particular project producing the product is ascertained and decision is made either to accept or reject the proposal. one has to calculate the benefits as well as disbenefits likely to arise from a product in financial terms. . For the purpose of analysis. The net value shall be compared with the total cost associated with project less the salvage value.Benefit Cost Analysis method Under this method.

Benefit Cost Ratio is equal to Benefits.Disbenefits.Maintenance and operation cost Total cost of project-Salvage Value If the value is less then or equal to 1. such a project is economically viable .

The time value of money means that the money received in present has more value than an equal amount of money received in future. IRR and NPV methods. These drawbacks are removed in DCF. .Discounted Cash Flow Method The traditional methods of evaluating profitability like the accounting rate of return and the payback method suffer from two major deficiencies. they do not evaluate the time value of money and secondly. Firstly. The basis of discounted cash flow method is presence of time factor in evaluating the future returns of a project. they do not evaluate project profitability over its full life.

he would prefer to receive 100 Rs today because of increasing value of money and after one year he will get Rs 110 if he invest these money with 10 percent interest. Under this techniques.If A is offered the two alternatives of either receiving 100 Rs today or 100 Rs after one year. . one can get discount value of his money over a long future time.

It is similar to IRR method. If the net present value is positive its means project is earning Higher rate of return but if the net present value is negative its means rate of return is lower and some better investment opportunities are required. .Net Present Value This method is also recognize the time value of money for evaluating investment proposal. The present value of cash inflow less the present value of cash out flow gives the net present value.

Internal Rate Of Return This method uses the discounted cash flow rate which equates the present value of the future cash inflows with the initial investment. The internal rate of return is the discounted rate which makes the net present value equal to zero. The cash flows through out the life of the project are forecasted and the discount rate is calculated. It is a type of discounted cash flow techniques which takes into account the time factor to value the future cash flow. .

CFn (1+r)0 (1+r)1 (1+r)2 (1+r)3 (1+r)n .IRR= CF0 + CF1 + CF2 + CF3 + ……….

. A team of the following expertise is informed to investigate the project idea.Project formulation Project formulation is the systematic development of a project idea for the final decision of investment. 2. Management expert. It is needed to safeguard against risk and difficulties in the implementation of the project. Industrial economist. It involves step by step investigation and development of the project idea. 1. 3. 4. Engineer. Market Analysis.

6.Elements of Project Formulation 1. 5. 7. 4. Feasibility Analysis Techno-economic analysis Project design and network analysis Input analysis Financial analysis Social cost benefit analysis Project appraisal . 2. 3.

Feasibility Analysis
It is a process of evaluating the acceptability of a project idea within the limitation of project management and constraints imposed by the environment. The analysis is undertaken to analyzes the desirability of investing in future development of project idea. At the stage of project formulation three alternative can raise. Firstly, the project may appear to be positive and in such case the entrepreneur can proceed to invest further. Secondly, the project may turn out to be not feasible and, therefore, further investment in project idea is ruled out.

Thirdly, the idea is not adequate for arriving at a decision about the feasibility of the project. In such situation, additional information must be collected for taking an appropriate action/decision. Feasibility analysis has two type. Pre-feasibility analysis It refers to preliminary assessment of the project idea which helps in accepting or rejecting it. Normally, this study should be completed within the period of three months to enable entrepreneur to decide weather to accept the new venture or not. It enables to examine the potential demand, size of market, number of competitors, plant, machinery, location, size manpower etc.

Feasibility Analysis It is carried out to get a detailed information on different aspects relating to a project such as economic, technical, managerial, organizational, commercial and financial aspect of project. As compared to pre feasibility analysis with feasibility analysis, this analysis involve more specialized skills and more complicated. Further, the feasibility study is based on additional and more reliable data collected through research. The information gathered in feasibility study and analysis presented in various tables, reports or statement is consolidated into one single report which is called project report or feasibility report.

It produces necessary information on which the project design can be based. and 2) selection of the optimal technology suitable for achieving the project objectives. It also indicates weather the economy is in a position to absorb the output of the project. An optical size of the and adoption of appropriate technology would help in deriving the economies of scale.Techno Economic Analysis Techno-economic analysis is primarily concerned with 1)identification of the project demand potential. .

Project Design & Network Analysis It is highly useful for identification and quantification of the project inputs which are very much required for developing the financial and cost benefit analysis. . This plan is presented in the form of network diagram. Project design defines the individual activities comprising a project and inter-relationship between those activities. The interrelationship presented with the help of a network design. Network design and analysis help in executing the project within the minimum time and ensuring effective utilization of the available resources. Network analysis is concerned with development of the detailed work plan of the project.

The resources required for the project are classified as human and non-human resources. Human resources refer to manpower and its management while nonhuman resources refers to material. . quantification and evaluation of project inputs. money and machinery.Input Analysis Input analysis involves identification. The objectives of input analysis are to identify the nature of the resources that a project will consume to estimate the magnitudes of the required resources and to evaluate the possibility of uninterrupted supply of inputs.

Input requirement constitute the basis of cost estimates of the project. These cost estimates are very much required for developing the financial requirements and cost benefit profile of the project. .

This analysis involves the estimates of project costs and revenues and funds required for the project. It also helps in examine the feasibility of the project in terms of generating revenues to attain the objectives of the project.Financial Analysis The purpose of financial analysis is to identify the financial characteristics of an investment proposition which would determine its financial feasibility. .

profit analysis and fund flow analysis etc to determine the estimated financial performance of the project. . It reduce the investment proposition to one common scale so as to permit comparison and eventually investment decision. It generates data for computing different profitability criteria with a view to establish the project’s worth to the enterprise.Financial analysis uses analytical tools like ratio analysis.

Social benefits includes possibility of financial and out of pockets reduction in service costs. possibility of import substitution. increase in foreign exchange earning. employment generation.Social Cost Benefit Analysis It is an assessment of expected total cost to be incurred and benefits derived out of the project that is under consideration from community point of view. availability of increased resources. . Improvement in domestic resources capacity.

Improvement in industrial development. on the other hand. Improvement in living standards and environment etc. pollution costs and other spontaneous and instant cost. These social cost include financial and out of pocket cost. reduction in foreign exchange. society is expected to incur scarifies in favour of expected benefits. .

. economic and financial aspects of a proposal. managerial. commercial.Project Appraisal Appraisal is an independent examination of technical. design and network analysis. cost benefit analysis are consolidated to give a final shape to a project which is presented in the form of a project report. the outcome of feasibility analysis. It brings out quantitative data which help in project appraisal. techno-economic analysis. input analysis. In fact.

2. Information on technology. It may be noted that project report serves as an action plan in case the entrepreneur proceeds with the implementation of the project. . entrepreneur proceeds to prepare a detailed project report. Estimates for manpower required and material input needed. competition. prices etc.Project Report After feasibility analysis. A project report contains the following information: 1. The project report also serves as an important document to process assistance from financial institutions and to fulfill other formalities for implementation of the project.

. 4. and profitability 6. arrangement with suppliers of material and machinery. Plans for procurement of material input. Projection: production. Documents: Quotations. sales. Manpower plans 5.3. land lease deed.

Financing the project Financing is a critical element for success of a business or industry. . The entrepreneur has to decide the need and sources of finance as per the projection in the project report. Finance facilitates an entrepreneur to bring together the factors of production and produce the desired level of goods or services.

i. 3. Margin for unplanned expenses called contingencies. Sufficient capital to support the operation of the business for initial three months such as purchase of raw material. finished goods. work-in-process. tools etc. water. building. salary to employee. Adequate money to purchase the fixed assets. 2. transport etc.Need for Finance The amount of finance depends upon the following factors: 1.. . furniture.e. plant & machinery. land. power.

2. .Classification of Financial Needs 1. Working Capital or Short term Capital This is the money invested in current assets and is required for short period to meet day to day expenses. Fixed capital or Long term capital This is money invested in some fixed assets which are required for long period of time for permanent use.

Personal loan of entrepreneur from PF. etc. directors etc. 2. 3. Life Insurance. Owner’s capital called equity. and may include1. mortgage of building. . partners.Sources of Finance The sources of finance can be broadly classified into two category: 1. Internal Sources The funds which are raised from within the enterprise. Deposits and loan given by owner.

Borrowing from commercial banks 3. Term loan from financial institutions 5.External Sources The funds which are raised from external sources and is called debts. Hire purchase from government department 6. Borrowing from relatives 2. Credit facilities from financial institutions 4. This may include1. Venture Capital of such institutions ( Money invested by investors ) . Subsidies from government department 7.

The capital structure should have the following features: . The optimum capital structure is the financing mix incurring the least cost out but yielding maximum returns. Capital structure is the ratio between debt and equity capital and is expressed as debt-equity ration.Capital Structure The funds raised from internal sources are the ownership capital and called equity. The funds raised from external sources are borrowed capital and called debts.

. 1. Debts should be within repaying capacity of the enterprise. 3.Involve minimum cost and ensure maximum yield. 4. 2. Flexible to fulfill future requirements of funds. Should ensure proper control over the operations of enterprise.

a detailed field study or market survey is required. For collecting the necessary information. Field study involves gathering. The data or information relates to nature of demand. recording and analyzing necessary data to judge the marketability of a product.Field Study : Collection of Information The entrepreneur requires a lot of information for taking various decisions and preparation of project report. methods of marketing and aspect of distribution of products from production to consumer. nature of competition. .

. 2. 5.e. trade journals etc. Published literature. Government publications 3.The sources of information for field study can be: 1. Industrial Consultations. news paper. wholesalers and retailers. Distributors.. Prospective Customers. i. 4.

It promotes soundness of marketing decision. It gathers data and carries out analysis to discover the market share of the product and location and types of consumers. 3. . 1. It provides an effective basis of sales forecast. 4.Benefits of Field Study It helps in having advance idea of consumer acceptance of the production before it is produced on a commercial scale. 2.

Discount. 2. Price fluctuations in the market. 5.Information Relating to Raw Material 1. Lead time required to get the material after ordering. List of manufacturers and suppliers of material required. 4. . tax etc. packing. 3. Minimum order quantity. price.

Annual repair and maintenance List of spare parts. switches. 4.Information Relating to Machines & Equipment 1. Availability of machines and equipment. 2. Requirement of motors. control equipment. 5. . List of manufacturers & suppliers. starters. 3.

2. 4.Information Relating to Competitions 1. 6. Prices Terms & Conditions of competitors. . Future plan for expansions Market share Strengths and weaknesses. 5. 3. Range of products.

5. 2. Consumption pattern of customers. 3. Purchasing power of supply. Customers preferences Degree of satisfaction . 4.Information Relating to Customers 1. Annual consumption of customers. Present sources of supply. 6.

As an essential part of project formulation and appraisal. . management have to be forward-looking and carry out market and demand analyses of products and develop strategic business policies. To survive in the market. market and demand analysis is vital so that capacity and facility location can be planned and implemented in line with the market requirements. A major error in demand forecast can throw painstaking capita expenditure on plant capacity and other hardware facility totally out of gear.DEMAND ANALYSIS Emerging competition in market place is propelling managements to hear the voice of their customers.

. The subjective considerations may not emerge from any predetermined analysis or approach. Prediction is an estimate of future events and trends in a subjective manner without taking into account the past data.FORECAST VERSUS PREDICTION Forecast is an estimate of future events and trends and is arrived at by systematically combining past data and projecting it forward in a predetermine a manner.

any major mismatch between forecast and manufacture will lead to higher capital tied up in finished products which are slow in selling. . Even in a batch type production. High volume high technology mass production systems have further high-lighted the importance of accurate demand forecasts.NEED FOR DEMAND FORECASTING All business planning starts with forecasting Capital investment. like procurement of raw materials and production planning. has to relate to demand forecasting.

UNCERTAINTIES IN DEMAND FORECASTING
Demand forecasting is the estimate of future demand. As the future is always uncertain, forecasting cannot be completely fool proof and correct. However, the very process of forecasting demand in future involves evaluating various forces and factors which influence demand. This exercise is very rewarding in itself as it enables the personnel to know about various market forces, currents, cross-currents and under-currents relevant to the demand behavior.

LEVELS OF DEMAND FORECASTING
 Firm Level If the exercise aims at forecasting demand

of firm's products locally at state, region or national level, it is a micro-level of demand forecasting. Sometimes, forecasts are required for company's products in specific industry or market segment.
 Industry Level such a demand forecasting exercise

focuses on an industry as a whole for the region and/or national level. These forecasts may be undertaken by a group of companies or by industry/trade associations.

 National Level Demand forecasts at national level

include parameters like national income, expenditure, index of industrial and/or agricultural production etc. Estimating aggregate demand of products at national level facilitates governmental decisions for imports, exports, pricing policy etc.

trends in consumption etc at international level. International Level Companies operating in multinational markets would require similar forecasting of demands for its products. national and international levels. . industry. Time horizon of these demand forecasts usually varies from 1 to S years and in rare instances upto 10 years. Managerial Economists play a leading role in masterminding these forecasts at firm.

METHODS OF FORECASTING. promotion and place. reviewed and revised to take into account changes in design/features of products. Thus "collective opinion survey forms the basic of market analysis and demand forecasting. state and/or region. territory. These estimates are collated. Herein each salesperson makes an estimate of the expected sales in their respective area. people. Opinions of all managers involved at various levels of sales organization are also included in the survey.DEMAND  Collective Opinion Survey Sales personnel are closest to the customers and have an intimate feel of the market. price. . projected advertising and sales promotion campaigns and anticipated changes in competitors :marketing policies covering product. changes in selling prices. Thus they are most suited to assess consumers reaction to company's products.

Although this method is simple. first hand and most acceptable. direct.  Salesperson may not prepare the demand estimates with the requisite seriousness and care. it suffers from following weaknesses:  Estimates are based on personal judgment which may not be free from bias.  Owing to limited experience. usually in their employment.  Adding together demand estimates of individual salespersons to obtain total demand of the country maybe risky as each person has knowledge about a small portion of market only. salesperson may not have the requisite knowledge and experience .

These surveys serve useful purpose in establishing relationships between:  demand and price  demand and income of consumers  demand and expenditure on advertisement etc .Survey of Customers Intention Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. survey would involve interviewing them. It is neither realistic nor desirable to query all consumers either through direct contact or through printed questionnaire by mail. If the product is sold to a few large industrial buyers. If it is a consumer durable product. a sample survey is carried out for questioning a few representative consumers about what they are planning or intending to buy.

Herein experts in the field of marketing research and demand forecasting are engaged in analyzing economic conditions  carrying out sample surveys of market  conducting opinion polls .Delphi Method of Demand Forecasting Delphi method is a group process and aims at achieving a `consensus' of the members.

Coordinator designs a new set of questions and gives them to the same experts who answer back again in writing. . Based on the summary. Coordinator repeats the process of collating. Written predictions of experts are collated. demand forecast is worked out in following steps: Coordinator sends out a set of questions in writing to all the experts co-opted on the panel who are requested to write back a brief prediction. Steps 3 and 4 are repeated by the Coordinator to experts with diverse backgrounds until consensus is reached. editing and summarizing the responses. edited and summarized together by the Coordinator.     Based on the above.

.Nominal Group Technique This is a further modification of Delphi method of forecasting.  After everyone has written down their ideas. discuss 'and rank all the suggestions in descending order as per the following procedure:  Experts sit around a table in full view of one another and are asked to speak to each other. A panel of seven to ten experts is formed and allowed to interact.  Facilitator hands over copies of questionnaire needing a forecast and each expert is expected to write down a list of ideas about the questions.  Experts give ideas in rotation until all of them are written on the `flip chart'. Facilitator asks each expert to share one idea out of own list with the group. The idea shared is written on the `flip chart' which everyone can see. No discussion takes place in this phase and usually 15 to 25 ideas emerge from this format.

experts are asked to give in writing ranks to ideas according to their perception of priority. Facilitator ensures that all ideas have been adequately discussed. During discussions similar ideas are combined and paraphrased appropriately. . In the next phase.  After completing group discussions. This reduces the number of ideas. experts discuss ideas presented by them.

simple Average Method is the first one that comes to one's mind. Herein.Simple Average Method Among the quantitative techniques for demand analysis. we take simple average of all past periods . Simple Average : Sum of Demands of all periods Number of periods . Thus.simple monthly average of all consumption figures collected every month for the last twelve months or simple quarterly average of consumption figures collected for several quarters in the immediate past.

Simple Average : Sum of Demands of Chosen periods Number of chosen periods .Moving Average Method Method of Simple Average is faulted on account of the fact that all past periods are given same importance whereas it is justifiable to accord higher importance to recent past periods. Whatever the period selected. Moving Average Method takes a fixed number of periods and after the elapse of each period. we must continue with same number of periods. four or twenty periods by once it decided.it may be three. data for the oldest time period is discarded and the most recent past period is included. it must be kept constant .

For example. demand for tractors is linked to the agriculture income and demand for cement. bricks etc is dependent upon value of construction contracts at any time. .Regression Analysis Past data is used to establish a functional relationship between two variables. demand for consumer goods has a relationship with disposable income of individuals and family.

. weighted given to the selected number of periods is same. Depending upon the age of the period.Weighted Moving Average In Moving Average Method. withage can be varied: Weighted Moving Average = W1 x D1 + W2D2 + ………. This has been refined to include the Weighted Moving Average which allows varying weightages for demands in old periods.+ Wn x Dn .

.PROJECT APPRAISAL Project appraisal is the analysis of cost and benefits of a proposed project with the purpose of ensuring a rational allocation of limited funds among alternative investment opportunities in view of the specified goals. Project appraisal is carried out by the financial institutions before financing any project. The rationale of project appraisal lies in the fact that the number of project to satisfy the identified needs always exceeds the availability of resources and a choice among alternative projects is to be made.

2. . 3.Project appraisal is undertaken with the following objectives: 1. To identify the expected costs and benefits of the project. To arrive at specific and predicted results of the project. To lay down the benchmarks to determine the success or failure of a project.

Project Appraisal V/S Project Evaluation Project appraisal is different from project evaluation which is basically an analysis and examination of an executed project. Project appraisal is an preinvestment decision making technique whereas the project evaluation is an post analysis of executed project. Project appraisal is done by the financing institution before the project is approved and implemented whereas project evaluation is done after the project has been implemented. . Appraisal is a conscious scrutiny which helps to design a conceptual framework to monitor and evaluate the project after its execution.

1.ASPECTS/TYPES OF PROJECT APPRAISAL FINANCIAL ANALYSIS Following are the methods of assessing firm’s profitability of capital investment proposal: Payback Period Accounting rate of return NPV IRR Profitability Index 1. 3. 2. 5. 4. .

A pay back period locate the break even point or period between outgo and income.PAY BACK PERIOD It is defined as the number of years requires for the saving of cost or net cash flow ( after tax but before depreciation) to recoup the original cost of project. In other words it represents the number of years in which the investment is expected to pay itself. Pay back period= original cost of project/Investment Annual cash flow .

4. Project is productive so soon as investment is made. . Project carries high risk. Cost is small 2.This techniques is suitable when: 1. Project is expected to complete in short period 3.

5. It is useful for the firm which is eager to get back the cash invested in the project as early as possible. 2. 3.MERITS OF PAY BACK PERIOD 1. It enable the entrepreneur to select an investment proposal which would yield quick return of funds invested. It is simple to operate and understand. 4. It is highly suitable when project has shortest gestation period. . It is suitable for high risk project.

It suits to only small project. 2. 5. It does not take into account the cash inflow after pay back period. It ignore the time value of money. It avoids the cost of capital. .Limitations 1. It fails to examine shortest period of payback. 4. 3.

This ratio relates project earning to investment.ACCOUNTING RATE OF RETURN This method is considered to be an improvement over the payback period method as it is considers the earning of a project during its entire economic life. . This techniques is based on accounting profits rather than cash inflows. This method is also known as average rate of return or return on investment. It is defined as the percentage of average profit after tax to capital employed.

The following formula is used to calculate the ARR ARR = Average profit after taxes Average Investment .

1. It is based on readily available accounting information. It considered total benefits during the entire life of the project. 2. 3.MERITS OF ARR It is simple to calculate ARR and this method is easily understandable. .

It ignore time value of money 2. 4. 3.Demerits 1. It fails to differentiate between the size of the investment required for each project. It places more emphasis on profit and not on cash flows. . It does not considered the reinvestment of profits earned over a period of time.

A project is considered to be socially viable if the benefits which accrue from the project serve the larger social purpose. The economic appraisal should cover weather it fits into national priorities and contribution to the development of society. .ECONOMIC APPRAISAL Economic appraisal is done with a view point of society and economy. Thus it is done from a wider angle not merely in financial terms. It is an assessment of the expected total cost to be incurred and benefits derived out a project that is under consideration from society point of view. Economic appraisal is also called social cost benefit analysis ( SCBA).

SCBA is also relevant to private investment which have to be approved by various government and quasi government agencies which bring to bear larger national consideration in their decision.SCBA is primarily used for evaluating public investment to be financed by the government. employment. saving and foreign exchange etc. So the acceptance or rejection of a project is depends upon total social or national benefit like impact on planning. .

Layout plan . size. location. railway. production capacities. sources of raw material. facilities like transport. latest technology to be adopted etc. Following are the determinants of technological appraisal: 1. Location 4. airway. Type of technology 2. manpower requirement.TECHNOLOGICAL ANALYSIS It refers to the review of product mix. engineering know how and technical collaboration. process of manufacturing. Scale of operation 3.

Supply of power 8. Cost estimate . Supply of water 7.5. Effluents and disposal 10. 9. Construction schedule 6. Waste. Supply of Fuel.

COMMERCIAL APPRAISAL The proposed project should be commercially viable. it is necessary to examine the demand and availability of the product in the market. insurance facilities etc. Among all the aspect are examined. requirement of raw material. selection of market place. banking. . To know the commercial viability of the project. transportation. the demand and availability of the product to be manufactured of the demand should also be examine.

skills and reliability of management. accounting etc. finance. marketing. but he is supposed to appoint adequate experience personnel in the area of production. quality of management affects the success of an industrial project to a large extent. it is not expected that an entrepreneur should have experience in a particular industry. Actually. This would also involve review of their past track record and competence.MANAGERIAL APPRAISAL It deals with the evaluation of competencies. . Generally.

monitoring. assessment. Environment Impact Assessment 2. Environment Impact Statement . research. There are two technique of environmental analysis: 1. education. a wide network of legislation is also in force. For effective environmental analysis. conservation and substantial use of resources.ENVIRONMENTAL ANALYSIS It refers to environment planning. protection.

predict. interpret and communicate information about the impact of an action on human health and well being. Environmental impact statement is a report based on studies.Environment impact assessment is defined as a process designed to identify. disclosing the likelihood of certain environmental consequences of a proposed project. .

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