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Concept of Small Scale Industries. Growth of SSI in Developing Countries. Position of SSI.
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.”
High Achievement. Managerial Skills. Leadership. .Nature & Characteristics Innovation. Limited Resources. Risk Taking.
. Drone Entrepreneurs. Fabian Entrepreneurs.Types of Entrepreneurs Innovative Entrepreneurs. Adoptive Entrepreneurs.
New product Development. Managing Production. Purchasing Input. . Managing Customers. Dealing with Public officials ( Taxes.Functions of Entrepreneur Perceiving market Opportunities. Marketing of products. Managing Finance. Command over resources. Industrial Engineering. licences) Upgrading Production Process & Product Quality.
Monopoly. Legal Obligation/Regulation.Barriers to Entrepreneurship Lack of market knowledge. Lack of Capital. Lack of Business Know how. Social Stigma. Time pressure. . Lack of Technical Skills.
Good decision maker. . Innovative. Sense of humour. Seeking & using feedback. Low need for status & power. Risk taker.Qualities of an Entrepreneur Total Commitment & Determination. Drive to achieve & grow. Problem Solving skills.
3.OPPORTUNITIES FOR ENTREPRENEURS 1. 4. Manufacturing Wholesaling Retailing Services Franchising Outsourcing . 2. 5. 6.
. Once an enterprise or unit goes beyond the size.SMALL SCALE INDUSTRIES A SSI may be defined in terms of size. The value of annual turnover. The size limit for small firm may be laid down in any one or more of the following criteria. it is no longer classified as small. 1. The number of person employed 2. The amount of capital employed 3.
TINY INDUSTRIES: It is defined as an industrial or business enterprises whose investment in plant and machinery is not more than rupee 25 lakh. . 2. 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. Investment limit is not exceed rupees five crore.TYPES OF SSI SMALL SCALE INDUSTRY: Industrial undertaking. 1. wherein the investment limit in fixed assets of plant and machinery does not exceed rupees five crore. 3.
Employment Balanced regional Development Use of local Skills Variety of products Equal Distribution of income Economical Operation Customized products Support to Large scale industries.ROLE OF SSI IN ECONOMY 1. 6. 2. 5. . 3. 4. 8. 7.
86 3626.65 15.78 4626.50 5728.87 6454.50 5728.56 4118.42 489.48 2988.07 290.00 599.26 16.79 542.41 5206.72 17.58 13.68 364.15 17.93 14.96 .56 444.96 16.86 3626.41 5206.48 2988.70 392.00 253.70 2416.56 4118.87 6454.85 18.58 1997-98 1998-99 1999-00 2000-01 4626.Growth of SSI In Developing Countries Year Production (Billion ) Employment (Million) Exports (Billion ) Production (Billion) 1993-94 1994-95 1995-96 1996-97 2416.
Development of Entrepreneurship.Reason for Growth of SSI 1. 7. 5. Introduction to new product. Limited Demands Flexibility Personalized services Good relations with employees Support to large industries. 6. . 3. 4. 2.
the only exception being the case of large units which undertake minimum level of exports as 75 per cent of their total roduction. 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. at present the total number of items reserved for small scale sector are 799 as on 29.2001 .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. It has contributed to the overall growth or the Gross Domestic Product as well as in terms of employment generation and export. 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 IDR Act was amended in March. 1984 empowering Government to reserve items for the small scale sector.06. The policy of reservation initiated in 1967 primarily as promotional and protective measure vis-a-vis the large scale sector. grants protection to small scale sector.
43%. 70.58. their production.000 units in 1990-91. . has direct impact on the growth of the national economy. the number of units has increased to 33.09%. Performance of the small scale sector. In 199798 the increase over the previous year was registered at 8.3% in 1995-96 and 1996-97 respectively. from 19. On the production front also.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.000 units in the year 200001. which forms a part of total industrial sector. therefore. There has been a steady increase in the number of SSI units.7%. and 8. the increase was 11. employment and exports over the years. The estimated increase for 2000-01 is 8. The increase in the year 1998-99 & 1999-2000 were 7.16% respectively.4% and11. there has been a steady increase over the previous years ranging between 7%-10% during the period 1990-91 to 1994-95.
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. 21.1999. (Subject to the condition that the unit is not owned.e. controlled or subsidiary of any other industrial undertaking . 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.f.
as the case may be. 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. 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. does not exceed Rs 5 Crore. . 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. components. sub-assemblies.
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. They also provide employment to agriculturists who remain idle during a part of the year.ROLE OF SSI IN NATIONAL ECONOMY Employment: Small scale firms use labour-intensive techniques and. . they have high potential to provide employment to a larger number of people per unit of capital. 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. In fact. therefore. 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.
. 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.ROLE OF SSI IN NATIONAL ECONOMY Balanced Regional Development: small scale industries promote decentralized development and help to remove regional disparities in industrialization. Decentralized development contributes to the process of self-sustained growth and avoids concentration of industries in particular areas. Development of decentralized sector also improves the standard of living of people in backward regions.
small scale industries are very suitable.ROLE OF SSI IN NATIONAL ECONOMY Optimization of Capital: Small scale firms require less capital per unit of output and. Small firms also provide quick returns after their establishment on account of short gestation period. The Annual Surveys of industries reveal that fixed capital per employee in case of small scale industry was Rs. . 27. 3.706 as compared to Rs. greater output can be obtained with small investment.757 in case of large scale industry. therefore. In India where the rate of capital formation is low.
. 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.
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. they do not require imports of sophisticated machinery and equipment. The exports of small scale industries increased from Rs. 2785 crores in 1985-86.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. First. . 637 crores in 1975-76 to Rs. About 90 per cent of its exports are of non-traditional items. they earn valuable foreign exchange through exports of their products. Secondly.
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.
Therefore. As they are their own boss.CHARECTERSTICS OF SSI One-man show A small-scale unit is generally a one-man show. Even some small units are run by partnership firm or company. It is mostly set up by individuals.' they provide an outlet for expression of the entrepreneurial spirit. the activities are mainly carried out by one of the partners or directors. the decision making process is fast and at times more innovative. .
CHARECTERSTICS OF SSI Use of indigenous raw materials Small-scale industries use indigenous raw materials and promote intermediate and capital goods. They cannot enlarge their business activities due to limited resources. . They contribute to faster balanced economic growth in a transitional economy through decentralization and dispersal of industries in the local areas. Localized operation Small-scale industries generally restrict their operation to local areas in order to meet the local and regional demands of the people.
Capital will not be blocked for a longer period. This helps the entrepreneur to earn after a short period of time. It is the time period between setting the units and commencement of production.CHARECTERSTICS OF SSI Lesser gestation period Gestation period is the period after which the return or investment starts. 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.
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. They always try to keep high margins in their pricing.
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. khadi industries. coin industries. engineering industries. Ancillary Industries: The industries which are producing parts and components and rendering services to large industries are called as ancillary industries. food processing industries etc. For example : Power looms. .
g. . etc. Feeder Industries Feeder industries are those which are specializing in certain types of products and services. casting. electro-plating. Tiny Industries It consists village. e. Cottage.TYPES OF SSI Service Industries Service industries are those which are covering light repair shops necessary to maintain mechanical equipments. These industries are essentially machinebased. welding. Handicraft etc.
DEMEND BASED ANCILLARIES UNIT I. Electronic spare parts repair unit. Book Binding. . Centre Cyber Café. Automobile repairing workshop.T. Screen Printing. STD/ ISD/ Xerox Centre Computer Hardware repairing/ servicing.
DEMEND BASED ANCILLARIES UNIT Truck/ Bus Building. Computer Paper/ Sheets. Repairing/ Hiring of earth moving machine. Hotel/ Motel. Tyre Retreading unit. Spray Painting/ denting. Ball Point pen. . Packaged Drinking Water.
DEMEND BASED ANCILLARIES UNIT Infant Food. Dry Cleaning/ Laundry. Phenyle manufacturing. Hair Dresser. File Covers/ Folders. .
Spices Grinding Honey Processing. Cup & plate making. Jam & Squash. Oil Mill. .RESOURCE BASED ANCILLARY UNITS Paddy Processing Churn/ Poha making. Cattle Feed/ Poultry Feed manufacturing Jelly. Badi & Papad making.
POLICY FOR SSI After attaining independence in 1947 India adopted mixed economic planning as a method to achieve economic development. . use mainly indigenous technology. Industrial policies over the year have focused to promote SSIs through various incentives related to financial. employment intensity and its suitability for rural area with limited techno-economic structure. along with a heavy industrial base. its small size. Along with the Large Scale sector the thrust was on Small Scale sector because of it decentralized.GOVT. fiscal and infrastructure measure.
. 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.INDUSTRIAL POLICY RESOLUTION 1948 SSIs are particularly suited for the utilization of local resources and creation of employment opportunities .
the aim of state policy would be that the development of this sector is integrated with that of large scale industry. village and small industries by differential taxation or directsubsidies. The focus was to improve the competitive strength of SSIs. and 166 items were reserved for exclusive purchase by government from this sector. 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.
quality control. Technological up gradation was emphasized in traditional sector . 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. were laid down.INDUSTRIAL POLICY RESOLUTION 1977 504 items were reserved for exclusive production in the small scale industries . such as. production standardization. market survey. . Special marketing arrangement through the provision of services.
Reservation of items to be produced by SSIs was increased to 836. assistance was granted to woman entrepreneurs for widening the entrepreneurial base. It created central investment subsidy for this sector in rural and backward area. Activities of Khadi and Village Industries Commission and Khadi and Village Industrial Board were to expand.INDUSTRIAL POLICY RESOLUTION 1990 It raised the investment ceiling in plant and machinery for SSIs. Also. Stress was reiterated to upgrade technology to improve competitiveness. Special emphasis was laid on training of woman and youth under Entrepreneurial Development Programme. Small Industries Development Bank of India was established to ensure adequate flow of credit to SSIs. .
Market promotion of products was emphasized through co-operatives. The investment limit for tiny enterprises was raised to Rs. Factoring services were to launch to solve the problem of delayed payment to SSIs. Equity participation by other industrial undertaking was permitted up to a limit of 24% of shareholding in SSIs.INDUSTRIAL POLICY RESOLUTION 1991 SSIs were exempted from licensing for all articles of manufacture. Priority was accorded to small and tiny units in allocation of indigenous and raw materials. .25 lacs irrespective of location. public institutions and other marketing agencies and corporations.
The equity participation by large sector will stimulate technology flow to small sector. . Small business houses will be given opportunity for improvement of technology. Technological development cell in the small industries development organization will be set up.
15 items in 1997’ 9 items on 1999 1 item on 2001 and.39 items were dereserved in four phases viz. . Now 298 items stand reserved for this sector. 14 item on 2001. 108 in March 2005 and 180 in May 2006. 51 item were dereserved in 2002.RESERVATION POLICY Out of 836 items reserved in 1989..subsequently. 75 item in 2003 and 85 items in 2004.
This list also includes 8 handicraft items reserved for purchase from the Handicraft Sector. . the Committee (set up to consider the question of inclusion of additional items) revised list and 358 items were approved . In February2004.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. after deleting items having common nomenclature and addition of some new ones.
PRICE PREFERENCE POLICY Price preference up to 15%in case of selected items. A consortium to channelize and identify for the production of SSIs both in India and abroad. No registration fee. .
TECHNICAL ASSISTENCE Technology audits and benchmarking Technology needs assessment Technology sourcing Application of new acquisition. Common facility support in machining Energy and environment services at selected centers. Classroom and practical training for skill up gradation. Technology acquisition . Material testing facilities through accredited laboratories. . Product design including Computer Aided Designs.
> Energy and Environment > Bio-Technology . > Production design. .NEW INITIATIVES Advisory and Mentoring services Technology Business Incubators > Information technology. > Electronics and Communications Suppliers Rating Accreditation Services.
Product scope and advantages 1.Product Renewal 2. .
Cultural Heritage. 3.ROLE OF SSI 1. Support to Large Industries. 6. Removal of Poverty. Promotion of Industrialization in rural areas. Better Standard of life. . Generation of Employment. 4. 5. 2.
Storage of Raw Material. Industrial Sickness Global Competition. Low Quality. Inadequate Capital. 6. 10.Problems Faced By SSI 1. . Difficulties in Marketing. 5. 7. 3. 2. 9. Old Technology. 8. Low productivity. Lack of Trained Person. Lack of Management. 4.
Protective measures Reservation of items for exclusive production by SSI. Giving concession in excise. . sales tax etc. Preference by government department in purchase of items.Measures taken by Government 1.
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. Preference in land allocation and power connection to SSI. . 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.2.
silk board to provide technical. DIC in all district to serve as the local point of development of SSI.3. Khadi and village industries commission for encouraging the production and marketing of handicraft items. National small industrial corporation to supply to provide machinery on hire purchase basis. financial and marketing facilities. Institutional Measures Small scale industrial development organization to provide training to SSI. All India coir board. .
Establishment of SIDBI for smooth financing to SSI. . Industrial parks for infrastructural development of SSI.
Selection of industry. Size of firm. 2. 4. 1. . 3. Choice of form of ownership. Financing the proposition. Location of plant.SETTING UP A SMALL SCALE INDUSTRY Following are the considerations in setting up a small scale industries/enterprises. 5.
8. . 9. Machines and equipment. Procedural Formalities. Plant Layout.6. Human Resources. Launching the industrial enterprise. 10. Tax Planning 11. 7.
Assessment of feasibility of idea. Development of product/service idea. Appraisal by financial institution. Project launching. Scanning the environment for identification of business opportunities. 7.STAGES IN SETTING UP SSI 1. . Preparation of business plan. 5. 3. 2. Resource mobilization. 6. 4.
Does the idea fire up your motivation? .Does it match the needs of your clientele? . entrepreneur has to study all the possible factors which may influence the selection of the type of business. This model is shown in the following flow: .IDENTIFICATION OF BUSINESS OPPROTUNITY Before launching an industrial establishment. ideas need to be filtered through a multi-layer sieve.Is it a viable business proposition in your area? . However.Check it out with basic market research .
Your business opportunity ..Project conceptualization .Is it a sunrise industry? .Look out for competition in the field .Consult with the experts .Test it out at market place .
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. This involves a lot of creativity on the part of the entrepreneur. The business idea arises from the opportunity in the market.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. .
It should enable the use of available raw material. 4. 3. 1. . It should ensure making products that have a demand in market. The business idea should enable the entrepreneur to utilize his skills.While selecting a business idea. the following points need adequate consideration. 2. It should enable the entrepreneur to solve a current problem existing in the market.
2. Society 5. Survey reports. Researches 3.Following are the sources of business ideas: 1. Area study . Environment 4.
5. Detailing manpower Establishing market Network Application for permanent application. 6. 2. . 7. Project report No objection Certificate Formal sanction of loan Construction of building & installation of machinery. 4. 3.Practical steps in setting SSI 1.
Ins. Electricity board. Local authority Mineral Dev. EDI( Entrepreneurship Dev.Institutional Support to SSI Selection of Project DIC. 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 . Tool. Of India National Institute of Small Industry Extension Training DIC. Corporation Small Ind. Corporation Mineral & Metal Trading Cor. 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.
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. Whatever the purpose.Project & its Nature A project is the combination of human and nonhuman recourses pooled together in a temporary organization to achieve a specific purpose. a project will involve allocation and use of resources and generation of specific results. .
Project Characteristics 1. Life cycle . Elements of risk 5. Uniqueness 6. Single entity 3. Team Work 4. Specific Purpose/Objectives 2.
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.Project Identification It is concerned with the collection. explore and select the right opportunities. 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. . He should identify. An entrepreneur is an opportunity seeker.
A good business opportunity must have two major ingredients. An acceptable return on investment ( ROI). . 2. 1. Good market scope.
capabilities. 5. Exploring all opportunities. . 2. Start the project. Comparative analysis of opportunities available.Process for Selection of Project 1. Business opportunity may be for manufacturing a product or a service. Understanding own strength. 3. 4. limitations and preferences.
CURRENT SCENE . occupational pattern.Present pattern of trading . . ENVIRONMENT .Population.Basic features of an area and its resource inventory.Local needs . 1.New demands .Emerging trends . its components. Following guideline can help us in opportunity identification. 2.Exploring Opportunities The process of exploring the opportunities requires intensive efforts and specialized skills.
Resource based idea such as mineral. 3. NGO. agricultural. . 2. Government policy. wood waste and metal waste. marine. 5. KPO. wasted items such as ago waste. 4. 6.Sources of opportunity 1. Import and export related ideas Market shift such as change in demand. Household repair and maintenance. change in population. Special product ideas such as BPO. change in life cycle. purchasing power.
Location Technology Equipment & Machinery Marketing . 2. 3. 4.Criteria for selecting a project 1. 5. Investment.
secret process.Problems in Project Identification (A) Internal Constraints 1. Non availability of non physical resources such as patents. Improper preparation of feasibility report. 2. 4. 3. 5. Lack of project management. Unrealistic project objectives. . unique skills and experience. Non availability of sufficient physical resources.
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.
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)
.Benefit Cost Analysis method Under this method. one has to calculate the benefits as well as disbenefits likely to arise from a product in financial terms. 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. For the purpose of analysis. 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 net value shall be compared with the total cost associated with project less the salvage value.
Disbenefits. such a project is economically viable .Benefit Cost Ratio is equal to Benefits.Maintenance and operation cost Total cost of project-Salvage Value If the value is less then or equal to 1.
The basis of discounted cash flow method is presence of time factor in evaluating the future returns of a project. . Firstly. The time value of money means that the money received in present has more value than an equal amount of money received in future.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 project profitability over its full life. they do not evaluate the time value of money and secondly. IRR and NPV methods. These drawbacks are removed in DCF.
. one can get discount value of his money over a long future time.If A is offered the two alternatives of either receiving 100 Rs today or 100 Rs after one year. 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 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. . The present value of cash inflow less the present value of cash out flow gives the net present value. It is similar to IRR method.Net Present Value This method is also recognize the time value of money for evaluating investment proposal.
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. . It is a type of discounted cash flow techniques which takes into account the time factor to value the future cash flow. The cash flows through out the life of the project are forecasted and the discount rate is calculated.
CFn (1+r)0 (1+r)1 (1+r)2 (1+r)3 (1+r)n .IRR= CF0 + CF1 + CF2 + CF3 + ……….
Market Analysis. Engineer. 3. Management expert. . It is needed to safeguard against risk and difficulties in the implementation of the project. Industrial economist. 2. 1.Project formulation Project formulation is the systematic development of a project idea for the final decision of investment. It involves step by step investigation and development of the project idea. 4. A team of the following expertise is informed to investigate the project idea.
3.Elements of Project Formulation 1. 2. 7. 4. Feasibility Analysis Techno-economic analysis Project design and network analysis Input analysis Financial analysis Social cost benefit analysis Project appraisal . 5. 6.
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 also indicates weather the economy is in a position to absorb the output of the project. and 2) selection of the optimal technology suitable for achieving the project objectives. It produces necessary information on which the project design can be based. 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.
. Network analysis is concerned with development of the detailed work plan of the project. 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. Network design and analysis help in executing the project within the minimum time and ensuring effective utilization of the available resources. The interrelationship presented with the help of a network design.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.
The resources required for the project are classified as human and non-human resources. . money and machinery. quantification and evaluation of project inputs. 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 Analysis Input analysis involves identification. Human resources refer to manpower and its management while nonhuman resources refers to material.
These cost estimates are very much required for developing the financial requirements and cost benefit profile of the project.Input requirement constitute the basis of cost estimates of the project. .
. This analysis involves the estimates of project costs and revenues and funds required for 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. It also helps in examine the feasibility of the project in terms of generating revenues to attain the objectives of the project.
. It reduce the investment proposition to one common scale so as to permit comparison and eventually investment decision.Financial analysis uses analytical tools like ratio analysis. It generates data for computing different profitability criteria with a view to establish the project’s worth to the enterprise. profit analysis and fund flow analysis etc to determine the estimated financial performance of the project.
employment generation. Improvement in domestic resources capacity. availability of increased resources. possibility of import substitution. increase in foreign exchange earning. Social benefits includes possibility of financial and out of pockets reduction in service costs.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. .
reduction in foreign exchange. Improvement in living standards and environment etc. on the other hand. society is expected to incur scarifies in favour of expected benefits. These social cost include financial and out of pocket cost.Improvement in industrial development. pollution costs and other spontaneous and instant cost. .
In fact. input analysis.Project Appraisal Appraisal is an independent examination of technical. economic and financial aspects of a proposal. managerial. techno-economic analysis. design and network analysis. the outcome of feasibility analysis. It brings out quantitative data which help in project appraisal. . cost benefit analysis are consolidated to give a final shape to a project which is presented in the form of a project report. commercial.
prices etc. A project report contains the following information: 1. entrepreneur proceeds to prepare a detailed project report. 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. competition. Estimates for manpower required and material input needed. Information on technology.Project Report After feasibility analysis. It may be noted that project report serves as an action plan in case the entrepreneur proceeds with the implementation of the project. 2. .
arrangement with suppliers of material and machinery. Projection: production.3. 4. Manpower plans 5. Plans for procurement of material input. Documents: Quotations. land lease deed. . and profitability 6. sales.
Financing the project Financing is a critical element for success of a business or industry. . Finance facilitates an entrepreneur to bring together the factors of production and produce the desired level of goods or services. The entrepreneur has to decide the need and sources of finance as per the projection in the project report.
land.e. work-in-process. furniture. salary to employee. finished goods. 2.Need for Finance The amount of finance depends upon the following factors: 1. power. transport etc. building. Adequate money to purchase the fixed assets. i. plant & machinery. .. Sufficient capital to support the operation of the business for initial three months such as purchase of raw material. tools etc. 3. water. Margin for unplanned expenses called contingencies.
. 2.Classification of Financial Needs 1. 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. 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.
Sources of Finance The sources of finance can be broadly classified into two category: 1. mortgage of building. . 3. Personal loan of entrepreneur from PF. Owner’s capital called equity. etc. 2. partners. Life Insurance. Internal Sources The funds which are raised from within the enterprise. and may include1. directors etc. Deposits and loan given by owner.
Borrowing from commercial banks 3.External Sources The funds which are raised from external sources and is called debts. Term loan from financial institutions 5. Venture Capital of such institutions ( Money invested by investors ) . This may include1. Hire purchase from government department 6. Borrowing from relatives 2. Subsidies from government department 7. Credit facilities from financial institutions 4.
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. Capital structure is the ratio between debt and equity capital and is expressed as debt-equity ration. The optimum capital structure is the financing mix incurring the least cost out but yielding maximum returns. The capital structure should have the following features: .
Flexible to fulfill future requirements of funds. 1. 3. Should ensure proper control over the operations of enterprise. 2. 4.Involve minimum cost and ensure maximum yield. . Debts should be within repaying capacity of the enterprise.
For collecting the necessary information. recording and analyzing necessary data to judge the marketability of a product. The data or information relates to nature of demand. . methods of marketing and aspect of distribution of products from production to consumer. Field study involves gathering.Field Study : Collection of Information The entrepreneur requires a lot of information for taking various decisions and preparation of project report. a detailed field study or market survey is required. nature of competition.
Government publications 3. . trade journals etc. 4. 5. Industrial Consultations.. wholesalers and retailers. Distributors. Prospective Customers. i. 2. Published literature. news paper.e.The sources of information for field study can be: 1.
It gathers data and carries out analysis to discover the market share of the product and location and types of consumers. It provides an effective basis of sales forecast.Benefits of Field Study It helps in having advance idea of consumer acceptance of the production before it is produced on a commercial scale. . It promotes soundness of marketing decision. 1. 2. 4. 3.
Minimum order quantity. Lead time required to get the material after ordering. . Discount. tax etc. Price fluctuations in the market. List of manufacturers and suppliers of material required. packing. price. 3. 4. 2.Information Relating to Raw Material 1. 5.
Information Relating to Machines & Equipment 1. . 5. 3. Annual repair and maintenance List of spare parts. starters. Availability of machines and equipment. 2. control equipment. List of manufacturers & suppliers. Requirement of motors. 4. switches.
Information Relating to Competitions 1. 5. Range of products. . 4. 6. Future plan for expansions Market share Strengths and weaknesses. Prices Terms & Conditions of competitors. 2. 3.
Customers preferences Degree of satisfaction . 4.Information Relating to Customers 1. Annual consumption of customers. Consumption pattern of customers. Present sources of supply. 5. 3. Purchasing power of supply. 2. 6.
As an essential part of project formulation and appraisal.DEMAND ANALYSIS Emerging competition in market place is propelling managements to hear the voice of their customers. management have to be forward-looking and carry out market and demand analyses of products and develop strategic business policies. A major error in demand forecast can throw painstaking capita expenditure on plant capacity and other hardware facility totally out of gear. . market and demand analysis is vital so that capacity and facility location can be planned and implemented in line with the market requirements. To survive in the market.
Prediction is an estimate of future events and trends in a subjective manner without taking into account the past data. The subjective considerations may not emerge from any predetermined analysis or approach. .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.
Even in a batch type production. any major mismatch between forecast and manufacture will lead to higher capital tied up in finished products which are slow in selling. . like procurement of raw materials and production planning.NEED FOR DEMAND FORECASTING All business planning starts with forecasting Capital investment. has to relate to demand forecasting. High volume high technology mass production systems have further high-lighted the importance of accurate demand forecasts.
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.
industry. national and international levels. Managerial Economists play a leading role in masterminding these forecasts at firm. . Time horizon of these demand forecasts usually varies from 1 to S years and in rare instances upto 10 years. trends in consumption etc at international level. International Level Companies operating in multinational markets would require similar forecasting of demands for its products.
state and/or region. 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. Opinions of all managers involved at various levels of sales organization are also included in the survey. Herein each salesperson makes an estimate of the expected sales in their respective area. Thus they are most suited to assess consumers reaction to company's products. changes in selling prices. price. . These estimates are collated.METHODS OF FORECASTING.DEMAND Collective Opinion Survey Sales personnel are closest to the customers and have an intimate feel of the market. promotion and place. territory. people. projected advertising and sales promotion campaigns and anticipated changes in competitors :marketing policies covering product.
Salesperson may not prepare the demand estimates with the requisite seriousness and care. Owing to limited experience. first hand and most acceptable. 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.Although this method is simple. direct. salesperson may not have the requisite knowledge and experience . it suffers from following weaknesses: Estimates are based on personal judgment which may not be free from bias. usually in their employment.
It is neither realistic nor desirable to query all consumers either through direct contact or through printed questionnaire by mail.Survey of Customers Intention Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. If the product is sold to a few large industrial buyers. survey would involve interviewing them. a sample survey is carried out for questioning a few representative consumers about what they are planning or intending to buy. If it is a consumer durable product. These surveys serve useful purpose in establishing relationships between: demand and price demand and income of consumers demand and expenditure on advertisement etc .
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.
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. Coordinator repeats the process of collating. editing and summarizing the responses. Coordinator designs a new set of questions and gives them to the same experts who answer back again in writing. Based on the summary. edited and summarized together by the Coordinator. Based on the above. Steps 3 and 4 are repeated by the Coordinator to experts with diverse backgrounds until consensus is reached. .
Nominal Group Technique This is a further modification of Delphi method of forecasting. . Experts give ideas in rotation until all of them are written on the `flip chart'. After everyone has written down their ideas. Facilitator hands over copies of questionnaire needing a forecast and each expert is expected to write down a list of ideas about the questions. The idea shared is written on the `flip chart' which everyone can see. 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. No discussion takes place in this phase and usually 15 to 25 ideas emerge from this format. Facilitator asks each expert to share one idea out of own list with the group. A panel of seven to ten experts is formed and allowed to interact.
Facilitator ensures that all ideas have been adequately discussed. . After completing group discussions. This reduces the number of ideas. experts are asked to give in writing ranks to ideas according to their perception of priority. In the next phase. experts discuss ideas presented by them. During discussions similar ideas are combined and paraphrased appropriately.
simple Average Method is the first one that comes to one's mind. Thus. Herein. we take simple average of all past periods .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 Method Among the quantitative techniques for demand analysis. Simple Average : Sum of Demands of all periods Number of periods .
it may be three. it must be kept constant . four or twenty periods by once it decided. Simple Average : Sum of Demands of Chosen periods Number of chosen periods . we must continue with same number of 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. data for the oldest time period is discarded and the most recent past period is included. Moving Average Method takes a fixed number of periods and after the elapse of each period. Whatever the period selected.
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. demand for consumer goods has a relationship with disposable income of individuals and family.Regression Analysis Past data is used to establish a functional relationship between two variables. For example.
.+ Wn x Dn . Depending upon the age of the period. This has been refined to include the Weighted Moving Average which allows varying weightages for demands in old periods. weighted given to the selected number of periods is same. withage can be varied: Weighted Moving Average = W1 x D1 + W2D2 + ……….Weighted Moving Average In Moving Average Method.
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. .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.
To lay down the benchmarks to determine the success or failure of a project. . 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. 2.
Project appraisal is an preinvestment decision making technique whereas the project evaluation is an post analysis of executed project. Appraisal is a conscious scrutiny which helps to design a conceptual framework to monitor and evaluate the project after its execution. .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 done by the financing institution before the project is approved and implemented whereas project evaluation is done after the project has been implemented.
4. 1. 3. 5.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. 2. .
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. A pay back period locate the break even point or period between outgo and income. Pay back period= original cost of project/Investment Annual cash flow . In other words it represents the number of years in which the investment is expected to pay itself.
Project carries high risk. Project is productive so soon as investment is made. . Project is expected to complete in short period 3. Cost is small 2.This techniques is suitable when: 1. 4.
. 3. It is useful for the firm which is eager to get back the cash invested in the project as early as possible. It enable the entrepreneur to select an investment proposal which would yield quick return of funds invested.MERITS OF PAY BACK PERIOD 1. It is simple to operate and understand. It is suitable for high risk project. 2. It is highly suitable when project has shortest gestation period. 4. 5.
It fails to examine shortest period of payback. It does not take into account the cash inflow after pay back period. 2. 5.Limitations 1. It avoids the cost of capital. It ignore the time value of money. 3. 4. . It suits to only small project.
This ratio relates project earning to investment. 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. . This techniques is based on accounting profits rather than cash inflows.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.
The following formula is used to calculate the ARR ARR = Average profit after taxes Average Investment .
3. . 1.MERITS OF ARR It is simple to calculate ARR and this method is easily understandable. It is based on readily available accounting information. It considered total benefits during the entire life of the project. 2.
It ignore time value of money 2. 3. .Demerits 1. It fails to differentiate between the size of the investment required for each project. It does not considered the reinvestment of profits earned over a period of time. 4. It places more emphasis on profit and not on cash flows.
A project is considered to be socially viable if the benefits which accrue from the project serve the larger social purpose. . Economic appraisal is also called social cost benefit analysis ( SCBA). Thus it is done from a wider angle not merely in financial terms.ECONOMIC APPRAISAL Economic appraisal is done with a view point of society and economy. The economic appraisal should cover weather it fits into national priorities and contribution to the development of society. 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.
So the acceptance or rejection of a project is depends upon total social or national benefit like impact on planning. employment.SCBA is primarily used for evaluating public investment to be financed by the government. saving and foreign exchange etc. 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. .
facilities like transport. location. airway. size. latest technology to be adopted etc. Following are the determinants of technological appraisal: 1. process of manufacturing. Location 4. manpower requirement. Layout plan . sources of raw material. Scale of operation 3. production capacities. engineering know how and technical collaboration. Type of technology 2. railway.TECHNOLOGICAL ANALYSIS It refers to the review of product mix.
Supply of power 8. Supply of Fuel. Cost estimate . Construction schedule 6.5. Effluents and disposal 10. 9. Waste. Supply of water 7.
transportation. banking. it is necessary to examine the demand and availability of the product in the market. selection of market place. requirement of raw material.COMMERCIAL APPRAISAL The proposed project should be commercially viable. . insurance facilities etc. Among all the aspect are examined. the demand and availability of the product to be manufactured of the demand should also be examine. To know the commercial viability of the project.
MANAGERIAL APPRAISAL It deals with the evaluation of competencies. marketing. Generally. quality of management affects the success of an industrial project to a large extent. but he is supposed to appoint adequate experience personnel in the area of production. . skills and reliability of management. accounting etc. finance. Actually. it is not expected that an entrepreneur should have experience in a particular industry. This would also involve review of their past track record and competence.
assessment. research. monitoring.ENVIRONMENTAL ANALYSIS It refers to environment planning. Environment Impact Assessment 2. education. conservation and substantial use of resources. There are two technique of environmental analysis: 1. a wide network of legislation is also in force. protection. For effective environmental analysis. Environment Impact Statement .
disclosing the likelihood of certain environmental consequences of a proposed project. predict. . interpret and communicate information about the impact of an action on human health and well being.Environment impact assessment is defined as a process designed to identify. Environmental impact statement is a report based on studies.