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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.”
Risk Taking. High Achievement. . Leadership. Managerial Skills. Limited Resources.Nature & Characteristics Innovation.
Fabian Entrepreneurs. Adoptive Entrepreneurs. . Drone Entrepreneurs.Types of Entrepreneurs Innovative Entrepreneurs.
Managing Customers. Industrial Engineering. Managing Finance. Managing Production. . Dealing with Public officials ( Taxes. Marketing of products. Command over resources.Functions of Entrepreneur Perceiving market Opportunities. Purchasing Input. licences) Upgrading Production Process & Product Quality. New product Development.
Lack of Business Know how. Social Stigma. Time pressure. Lack of Capital. Monopoly. Legal Obligation/Regulation. .Barriers to Entrepreneurship Lack of market knowledge. Lack of Technical Skills.
Seeking & using feedback. Good decision maker. Sense of humour. Low need for status & power. Risk taker. Drive to achieve & grow. Problem Solving skills. .Qualities of an Entrepreneur Total Commitment & Determination. Innovative.
5. 3. 6. Manufacturing Wholesaling Retailing Services Franchising Outsourcing . 2. 4.OPPORTUNITIES FOR ENTREPRENEURS 1.
Once an enterprise or unit goes beyond the size. . 1. The amount of capital employed 3. The number of person employed 2. it is no longer classified as small. The value of annual turnover.SMALL SCALE INDUSTRIES A SSI may be defined in terms of size. The size limit for small firm may be laid down in any one or more of the following criteria.
1. . 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. TINY INDUSTRIES: It is defined as an industrial or business enterprises whose investment in plant and machinery is not more than rupee 25 lakh.TYPES OF SSI SMALL SCALE INDUSTRY: Industrial undertaking. 3. 2. Investment limit is not exceed rupees five crore. wherein the investment limit in fixed assets of plant and machinery does not exceed rupees five crore.
8. 6. . 7. 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. 2.ROLE OF SSI IN ECONOMY 1. 4. 3.
96 16.70 2416.56 444.58 13.65 15.50 5728.26 16.58 1997-98 1998-99 1999-00 2000-01 4626.86 3626.85 18.93 14.41 5206.41 5206.68 364.87 6454.87 6454.Growth of SSI In Developing Countries Year Production (Billion ) Employment (Million) Exports (Billion ) Production (Billion) 1993-94 1994-95 1995-96 1996-97 2416.78 4626.70 392.56 4118.50 5728.56 4118.48 2988.07 290.15 17.96 .42 489.79 542.72 17.86 3626.00 253.00 599.48 2988.
Reason for Growth of SSI 1. . 7. 2. 5. Development of Entrepreneurship. 4. 3. Introduction to new product. 6. Limited Demands Flexibility Personalized services Good relations with employees Support to large industries.
It has contributed to the overall growth or the Gross Domestic Product as well as in terms of employment generation and export. at present the total number of items reserved for small scale sector are 799 as on 29. 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.2001 . 1984 empowering Government to reserve items for the small scale sector. grants protection to small scale sector.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. the only exception being the case of large units which undertake minimum level of exports as 75 per cent of their total roduction. 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.
. their production. On the production front also. from 19.4% and11.43%.58. Performance of the small scale sector. has direct impact on the growth of the national economy. employment and exports over the years.000 units in 1990-91. The increase in the year 1998-99 & 1999-2000 were 7. In 199798 the increase over the previous year was registered at 8.3% in 1995-96 and 1996-97 respectively. 70. The estimated increase for 2000-01 is 8. there has been a steady increase over the previous years ranging between 7%-10% during the period 1990-91 to 1994-95. There has been a steady increase in the number of SSI units.09%.7%.000 units in the year 200001.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. therefore.16% respectively. which forms a part of total industrial sector. the increase was 11. and 8. the number of units has increased to 33.
f.e.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. 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. (Subject to the condition that the unit is not owned. 21. controlled or subsidiary of any other industrial undertaking .1999.
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. sub-assemblies. does not exceed Rs 5 Crore. components. 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. 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. .
the healthy growth of small scale industries can be an effective approach to the pressing problem of unemployment in the country. . they have high potential to provide employment to a larger number of people per unit of capital. In fact.ROLE OF SSI IN NATIONAL ECONOMY Employment: Small scale firms use labour-intensive techniques and. 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. 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. therefore. 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. Next to agriculture small business constitutes the most popular occupation of people in India.
ROLE OF SSI IN NATIONAL ECONOMY Balanced Regional Development: small scale industries promote decentralized development and help to remove regional disparities in industrialization. Development of decentralized sector also improves the standard of living of people in backward regions. . By providing employment in rural areas they help to check migration and overcrowding in urban areas. Decentralized development contributes to the process of self-sustained growth and avoids concentration of industries in particular areas. Small scale firms can be a useful means of rural reconstruction and development.
. small scale industries are very suitable. Small firms also provide quick returns after their establishment on account of short gestation period. therefore. 27. greater output can be obtained with small investment. In India where the rate of capital formation is low. 3. The Annual Surveys of industries reveal that fixed capital per employee in case of small scale industry was Rs.ROLE OF SSI IN NATIONAL ECONOMY Optimization of Capital: Small scale firms require less capital per unit of output and.706 as compared to Rs.757 in case of large scale industry.
The growth of small enterprises helps in tapping talent resources like entrepreneurial skills and small savings specially in rural areas.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 business promotes a new cadre of small entrepreneurs and selfemployed and encourages local talent. Small business helps to protect technical skills and handicrafts. .
they do not require imports of sophisticated machinery and equipment. Secondly.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. 2785 crores in 1985-86. 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. they earn valuable foreign exchange through exports of their products. The exports of small scale industries increased from Rs. About 90 per cent of its exports are of non-traditional items.
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. the activities are mainly carried out by one of the partners or directors. 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. .CHARECTERSTICS OF SSI One-man show A small-scale unit is generally a one-man show. the decision making process is fast and at times more innovative. As they are their own boss.
They cannot enlarge their business activities due to limited resources. 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 contribute to faster balanced economic growth in a transitional economy through decentralization and dispersal of industries in the local areas.CHARECTERSTICS OF SSI Use of indigenous raw materials Small-scale industries use indigenous raw materials and promote intermediate and capital goods. .
It is the time period between setting the units and commencement of production. Smallscale industries usually have a lesser gestation period than large industries.CHARECTERSTICS OF SSI Lesser gestation period Gestation period is the period after which the return or investment starts. This helps the entrepreneur to earn after a short period of time. . Capital will not be blocked for a longer period.
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. .
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. This is one of the reason for which the unit may lead to closure. .
Ancillary Industries: The industries which are producing parts and components and rendering services to large industries are called as ancillary industries. khadi industries. food processing industries etc.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. coin industries. . For example : Power looms. engineering industries.
welding. Handicraft etc.TYPES OF SSI Service Industries Service industries are those which are covering light repair shops necessary to maintain mechanical equipments. etc. Feeder Industries Feeder industries are those which are specializing in certain types of products and services. These industries are essentially machinebased. . casting.g. Tiny Industries It consists village. electro-plating. e. Cottage.
Screen Printing.DEMEND BASED ANCILLARIES UNIT I. Book Binding. Electronic spare parts repair unit. . Automobile repairing workshop. STD/ ISD/ Xerox Centre Computer Hardware repairing/ servicing. Centre Cyber Café.T.
DEMEND BASED ANCILLARIES UNIT Truck/ Bus Building. Packaged Drinking Water. Hotel/ Motel. Spray Painting/ denting. . Ball Point pen. Computer Paper/ Sheets. Repairing/ Hiring of earth moving machine. Tyre Retreading unit.
File Covers/ Folders.DEMEND BASED ANCILLARIES UNIT Infant Food. Dry Cleaning/ Laundry. . Phenyle manufacturing. Hair Dresser.
RESOURCE BASED ANCILLARY UNITS Paddy Processing Churn/ Poha making. Jam & Squash. Oil Mill. Spices Grinding Honey Processing. Badi & Papad making. Cup & plate making. . Cattle Feed/ Poultry Feed manufacturing Jelly.
employment intensity and its suitability for rural area with limited techno-economic structure. fiscal and infrastructure measure. along with a heavy industrial base. . its small size.GOVT. Along with the Large Scale sector the thrust was on Small Scale sector because of it decentralized. Industrial policies over the year have focused to promote SSIs through various incentives related to financial. 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 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.
village and small industries by differential taxation or directsubsidies. . To achieve this 128 items were exclusively reserved for production in SSIs. The focus was to improve the competitive strength of SSIs.INDUSTRIAL POLICY RESOLUTION 1956 It stated that besides continuing the policy support to cottage. the aim of state policy would be that the development of this sector is integrated with that of large scale industry. and 166 items were reserved for exclusive purchase by government from this sector.
quality control. Special marketing arrangement through the provision of services. . such as. production standardization.INDUSTRIAL POLICY RESOLUTION 1977 504 items were reserved for exclusive production in the small scale industries . were laid down. market survey. 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.
Reservation of items to be produced by SSIs was increased to 836. Activities of Khadi and Village Industries Commission and Khadi and Village Industrial Board were to expand. Small Industries Development Bank of India was established to ensure adequate flow of credit to SSIs.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. assistance was granted to woman entrepreneurs for widening the entrepreneurial base. . Special emphasis was laid on training of woman and youth under Entrepreneurial Development Programme. It created central investment subsidy for this sector in rural and backward area.
INDUSTRIAL POLICY RESOLUTION 1991 SSIs were exempted from licensing for all articles of manufacture. Factoring services were to launch to solve the problem of delayed payment to SSIs. . public institutions and other marketing agencies and corporations. The investment limit for tiny enterprises was raised to Rs. 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.25 lacs irrespective of location. Priority was accorded to small and tiny units in allocation of indigenous and raw materials.
. Technological development cell in the small industries development organization will be set up. The equity participation by large sector will stimulate technology flow to small sector. Small business houses will be given opportunity for improvement of technology.
.RESERVATION POLICY Out of 836 items reserved in 1989. 75 item in 2003 and 85 items in 2004.39 items were dereserved in four phases viz. 15 items in 1997’ 9 items on 1999 1 item on 2001 and. Now 298 items stand reserved for this sector. . 108 in March 2005 and 180 in May 2006.subsequently. 14 item on 2001. 51 item were dereserved in 2002.
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. the Committee (set up to consider the question of inclusion of additional items) revised list and 358 items were approved . This list also includes 8 handicraft items reserved for purchase from the Handicraft Sector. after deleting items having common nomenclature and addition of some new ones.
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. Technology acquisition . Material testing facilities through accredited laboratories. . Product design including Computer Aided Designs.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.
> Production design. > Energy and Environment > Bio-Technology .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.
3. . Promotion of Industrialization in rural areas.ROLE OF SSI 1. Better Standard of life. 6. 4. Cultural Heritage. Removal of Poverty. Support to Large Industries. Generation of Employment. 5. 2.
Industrial Sickness Global Competition. 5. Low productivity. Low Quality. 10. 4. 7. 6. Inadequate Capital.Problems Faced By SSI 1. Lack of Trained Person. 8. Storage of Raw Material. 2. . Lack of Management. Old Technology. Difficulties in Marketing. 9. 3.
Giving concession in excise. Preference by government department in purchase of items.Measures taken by Government 1. . sales tax etc. Protective measures Reservation of items for exclusive production by SSI.
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.2. 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. Setting up common testing facility centre. .
silk board to provide technical. .3. Khadi and village industries commission for encouraging the production and marketing of handicraft items. Institutional Measures Small scale industrial development organization to provide training to SSI. financial and marketing facilities. All India coir board. 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.
. Industrial parks for infrastructural development of SSI. Establishment of SIDBI for smooth financing to SSI.
4. Size of firm. 3. 5. Selection of industry. Location of plant. Financing the proposition.SETTING UP A SMALL SCALE INDUSTRY Following are the considerations in setting up a small scale industries/enterprises. 1. Choice of form of ownership. . 2.
6. Human Resources. Machines and equipment. Launching the industrial enterprise. Plant Layout. Procedural Formalities. 7. 10. 8. . 9. Tax Planning 11.
7. 2. Scanning the environment for identification of business opportunities. . 6.STAGES IN SETTING UP SSI 1. Project launching. Appraisal by financial institution. Assessment of feasibility of idea. Development of product/service idea. 5. 4. Preparation of business plan. 3. Resource mobilization.
Check it out with basic market research . This model is shown in the following flow: .Is it a viable business proposition in your area? . However. entrepreneur has to study all the possible factors which may influence the selection of the type of business.Does it match the needs of your clientele? .IDENTIFICATION OF BUSINESS OPPROTUNITY Before launching an industrial establishment. ideas need to be filtered through a multi-layer sieve.Does the idea fire up your motivation? .
Look out for competition in the field .Your business opportunity .Consult with the experts .Project conceptualization ..Is it a sunrise industry? .Test it out at market place .
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. The business idea arises from the opportunity in the market. 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. .
3. It should enable the entrepreneur to solve a current problem existing in the market. 1. 2. the following points need adequate consideration. It should ensure making products that have a demand in market. The business idea should enable the entrepreneur to utilize his skills. . 4.While selecting a business idea. It should enable the use of available raw material.
Area study . Survey reports. Environment 4. 2.Following are the sources of business ideas: 1. Society 5. Researches 3.
Practical steps in setting SSI 1. Detailing manpower Establishing market Network Application for permanent application. 7. 6. 3. 5. 2. Project report No objection Certificate Formal sanction of loan Construction of building & installation of machinery. 4. .
EDI( Entrepreneurship Dev. 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 . 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. Ins. Electricity board. Tool. Corporation Small Ind. Of India National Institute of Small Industry Extension Training DIC. Corporation Mineral & Metal Trading Cor. Local authority Mineral Dev.Institutional Support to SSI Selection of Project DIC.
Whatever the purpose. a project will involve allocation and use of resources and generation of specific results. A project may involve establishment of new plant or it may also involve the provision of additional facilities or ventures. The objectives and set of activities differ from one project to another . .Project & its Nature A project is the combination of human and nonhuman recourses pooled together in a temporary organization to achieve a specific purpose.
Uniqueness 6. Life cycle . Elements of risk 5. Specific Purpose/Objectives 2. Single entity 3.Project Characteristics 1. Team Work 4.
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. A good business idea must be capable of being converted into feasibility.Project Identification It is concerned with the collection. Opportunity is an attractive idea which an entrepreneur accepts as a basis for his investment decision. explore and select the right opportunities. He should identify. . An entrepreneur is an opportunity seeker.
Good market scope. 1. An acceptable return on investment ( ROI). .A good business opportunity must have two major ingredients. 2.
Process for Selection of Project 1. 3. 5. Comparative analysis of opportunities available. Exploring all opportunities. limitations and preferences. 2. . Start the project. capabilities. Business opportunity may be for manufacturing a product or a service. 4. Understanding own strength.
Exploring Opportunities The process of exploring the opportunities requires intensive efforts and specialized skills. . its components.New demands .Present pattern of trading . ENVIRONMENT .Population. occupational pattern.Basic features of an area and its resource inventory. Following guideline can help us in opportunity identification. 2.Local needs . CURRENT SCENE .Emerging trends . 1.
Special product ideas such as BPO. NGO. change in population. 5. 4. agricultural.Sources of opportunity 1. . purchasing power. change in life cycle. marine. Import and export related ideas Market shift such as change in demand. 2. 3. Resource based idea such as mineral. wood waste and metal waste. 6. Government policy. wasted items such as ago waste. KPO. Household repair and maintenance.
Criteria for selecting a project 1. 5. Location Technology Equipment & Machinery Marketing . 3. Investment. 4. 2.
Non availability of sufficient physical resources. 2. Non availability of non physical resources such as patents. 5. Lack of project management. unique skills and experience. Improper preparation of feasibility report. 3. . 4.Problems in Project Identification (A) Internal Constraints 1. secret process. Unrealistic project objectives.
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)
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. The net value shall be compared with the total cost associated with project less the salvage value.Benefit Cost Analysis method Under this method. 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. one has to calculate the benefits as well as disbenefits likely to arise from a product in financial terms. .
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.Disbenefits. such a project is economically viable .
they do not evaluate project profitability over its full life. These drawbacks are removed in DCF. Firstly. The basis of discounted cash flow method is presence of time factor in evaluating the future returns of a project.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. IRR and NPV methods. The time value of money means that the money received in present has more value than an equal amount of money received in future. .
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. Under this techniques. . 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.
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. 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. .
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. 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. The internal rate of return is the discounted rate which makes the net present value equal to zero.
CFn (1+r)0 (1+r)1 (1+r)2 (1+r)3 (1+r)n .IRR= CF0 + CF1 + CF2 + CF3 + ……….
4. 3. . It involves step by step investigation and development of the project idea. 1. A team of the following expertise is informed to investigate the project idea. Market Analysis.Project formulation Project formulation is the systematic development of a project idea for the final decision of investment. Management expert. It is needed to safeguard against risk and difficulties in the implementation of the project. Industrial economist. Engineer. 2.
6.Elements of Project Formulation 1. Feasibility Analysis Techno-economic analysis Project design and network analysis Input analysis Financial analysis Social cost benefit analysis Project appraisal . 5. 3. 4. 2. 7.
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.
Techno Economic Analysis Techno-economic analysis is primarily concerned with 1)identification of the project demand potential. and 2) selection of the optimal technology suitable for achieving the project objectives. An optical size of the and adoption of appropriate technology would help in deriving the economies of scale. It produces necessary information on which the project design can be based. . It also indicates weather the economy is in a position to absorb the output of the project.
This plan is presented in the form of network diagram.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. Network analysis is concerned with development of the detailed work plan of the project. The interrelationship presented with the help of a network design. . 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.
Human resources refer to manpower and its management while nonhuman resources refers to material.Input Analysis Input analysis involves identification. 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. money and machinery. . The resources required for the project are classified as human and non-human resources.
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.
. 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. This analysis involves the estimates of project costs and revenues and funds required for the project.
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. It reduce the investment proposition to one common scale so as to permit comparison and eventually investment decision. profit analysis and fund flow analysis etc to determine the estimated financial performance of the project.
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. Improvement in domestic resources capacity. possibility of import substitution. availability of increased resources. increase in foreign exchange earning. employment generation. . Social benefits includes possibility of financial and out of pockets reduction in service costs.
on the other hand. Improvement in living standards and environment etc. society is expected to incur scarifies in favour of expected benefits.Improvement in industrial development. . These social cost include financial and out of pocket cost. reduction in foreign exchange. pollution costs and other spontaneous and instant cost.
input analysis. economic and financial aspects of a proposal. cost benefit analysis are consolidated to give a final shape to a project which is presented in the form of a project report. techno-economic analysis. design and network analysis. .Project Appraisal Appraisal is an independent examination of technical. the outcome of feasibility analysis. commercial. managerial. In fact. It brings out quantitative data which help in project appraisal.
. entrepreneur proceeds to prepare a detailed project report.Project Report After feasibility analysis. Estimates for manpower required and material input needed. 2. It may be noted that project report serves as an action plan in case the entrepreneur proceeds with the implementation of the project. 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. Information on technology. prices etc. competition.
Plans for procurement of material input. Projection: production. Manpower plans 5. land lease deed. Documents: Quotations. sales. 4.3. arrangement with suppliers of material and machinery. and profitability 6. .
The entrepreneur has to decide the need and sources of finance as per the projection in the project report.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.
Sufficient capital to support the operation of the business for initial three months such as purchase of raw material. work-in-process. 3. salary to employee. . building. transport etc.. plant & machinery. furniture. finished goods. i. water. Adequate money to purchase the fixed assets. Margin for unplanned expenses called contingencies. 2. tools etc.e. land.Need for Finance The amount of finance depends upon the following factors: 1. power.
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. 2. 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.Classification of Financial Needs 1. .
etc. mortgage of building. and may include1. . 3. Life Insurance. Personal loan of entrepreneur from PF. directors etc. 2. partners. Internal Sources The funds which are raised from within the enterprise. Owner’s capital called equity. Deposits and loan given by owner.Sources of Finance The sources of finance can be broadly classified into two category: 1.
This may include1. Term loan from financial institutions 5. Hire purchase from government department 6. Credit facilities from financial institutions 4. Subsidies from government department 7. Borrowing from relatives 2. Borrowing from commercial banks 3. Venture Capital of such institutions ( Money invested by investors ) .External Sources The funds which are raised from external sources and is called debts.
Capital Structure The funds raised from internal sources are the ownership capital and called equity. 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. 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.
Flexible to fulfill future requirements of funds. 3. 1.Involve minimum cost and ensure maximum yield. Debts should be within repaying capacity of the enterprise. . Should ensure proper control over the operations of enterprise. 2. 4.
a detailed field study or market survey is required. recording and analyzing necessary data to judge the marketability of a product. The data or information relates to nature of demand.Field Study : Collection of Information The entrepreneur requires a lot of information for taking various decisions and preparation of project report. Field study involves gathering. . nature of competition. For collecting the necessary information. methods of marketing and aspect of distribution of products from production to consumer.
4. i.e. news paper..The sources of information for field study can be: 1. trade journals etc. Published literature. Prospective Customers. wholesalers and retailers. 2. 5. Government publications 3. . Distributors. Industrial Consultations.
It gathers data and carries out analysis to discover the market share of the product and location and types of consumers. It promotes soundness of marketing decision. 1. 4. 2.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 provides an effective basis of sales forecast. 3. .
2. List of manufacturers and suppliers of material required. . Minimum order quantity. Lead time required to get the material after ordering. 4. packing. price.Information Relating to Raw Material 1. 5. Price fluctuations in the market. tax etc. Discount. 3.
Information Relating to Machines & Equipment 1. starters. 5. Availability of machines and equipment. . List of manufacturers & suppliers. 4. 2. control equipment. Requirement of motors. 3. Annual repair and maintenance List of spare parts. switches.
Range of products. 4. 3. 5. 6. 2. Future plan for expansions Market share Strengths and weaknesses.Information Relating to Competitions 1. Prices Terms & Conditions of competitors. .
2. Present sources of supply. 3. 5. Annual consumption of customers.Information Relating to Customers 1. 4. Purchasing power of supply. Customers preferences Degree of satisfaction . 6. Consumption pattern of customers.
DEMAND ANALYSIS Emerging competition in market place is propelling managements to hear the voice of their customers. A major error in demand forecast can throw painstaking capita expenditure on plant capacity and other hardware facility totally out of gear. 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. management have to be forward-looking and carry out market and demand analyses of products and develop strategic business policies. . As an essential part of project formulation and appraisal.
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.
Even in a batch type production. High volume high technology mass production systems have further high-lighted the importance of accurate demand forecasts. any major mismatch between forecast and manufacture will lead to higher capital tied up in finished products which are slow in selling. has to relate to demand forecasting.NEED FOR DEMAND FORECASTING All business planning starts with forecasting Capital investment. like procurement of raw materials and production planning. .
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. . industry. International Level Companies operating in multinational markets would require similar forecasting of demands for its products. Managerial Economists play a leading role in masterminding these forecasts at firm. national and international levels. Time horizon of these demand forecasts usually varies from 1 to S years and in rare instances upto 10 years.
people. promotion and place. state and/or region. . price. projected advertising and sales promotion campaigns and anticipated changes in competitors :marketing policies covering product. reviewed and revised to take into account changes in design/features of products. Herein each salesperson makes an estimate of the expected sales in their respective area. Opinions of all managers involved at various levels of sales organization are also included in the survey. Thus they are most suited to assess consumers reaction to company's products. territory.DEMAND Collective Opinion Survey Sales personnel are closest to the customers and have an intimate feel of the market. Thus "collective opinion survey forms the basic of market analysis and demand forecasting.METHODS OF FORECASTING. These estimates are collated. changes in selling prices.
direct. usually in their employment. it suffers from following weaknesses: Estimates are based on personal judgment which may not be free from bias. 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 prepare the demand estimates with the requisite seriousness and care. salesperson may not have the requisite knowledge and experience .Although this method is simple. first hand and most acceptable. Owing to limited experience.
These surveys serve useful purpose in establishing relationships between: demand and price demand and income of consumers demand and expenditure on advertisement etc . It is neither realistic nor desirable to query all consumers either through direct contact or through printed questionnaire by mail. a sample survey is carried out for questioning a few representative consumers about what they are planning or intending to buy.Survey of Customers Intention Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. If it is a consumer durable product. If the product is sold to a few large industrial buyers. survey would involve interviewing them.
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. 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. Based on the above. . Steps 3 and 4 are repeated by the Coordinator to experts with diverse backgrounds until consensus is reached. Based on the summary. Coordinator repeats the process of collating. edited and summarized together by the Coordinator. editing and summarizing the responses.
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. . After everyone has written down their ideas. The idea shared is written on the `flip chart' which everyone can see.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'. 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. 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.
Facilitator ensures that all ideas have been adequately discussed. After completing group discussions. 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. This reduces the number of ideas.
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. Thus. Herein. we take simple average of all past periods . Simple Average : Sum of Demands of all periods Number of periods . simple Average Method is the first one that comes to one's mind.Simple Average Method Among the quantitative techniques for demand analysis.
Simple Average : Sum of Demands of Chosen periods Number of chosen periods . it must be kept constant . data for the oldest time period is discarded and the most recent past period is included. four or twenty periods by once it decided. we must continue with same number of periods. Moving Average Method takes a fixed number of periods and after the elapse of each period. Whatever the period selected.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.it may be three.
bricks etc is dependent upon value of construction contracts at any time. demand for tractors is linked to the agriculture income and demand for cement. For example. 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. .
Weighted Moving Average In Moving Average Method. Depending upon the age of the period..+ Wn x Dn . withage can be varied: Weighted Moving Average = W1 x D1 + W2D2 + ………. weighted given to the selected number of periods is same. This has been refined to include the Weighted Moving Average which allows varying weightages for demands in old periods.
. Project appraisal is carried out by the financial institutions before financing any project.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. 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. To identify the expected costs and benefits of the project.Project appraisal is undertaken with the following objectives: 1. 3. . To lay down the benchmarks to determine the success or failure of a project. To arrive at specific and predicted results of the 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. .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.
3.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. 4. 5. 2. 1. .
In other words it represents the number of years in which the investment is expected to pay itself.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 .
Project is expected to complete in short period 3.This techniques is suitable when: 1. Project is productive so soon as investment is made. . Cost is small 2. Project carries high risk. 4.
MERITS OF PAY BACK PERIOD 1. . 3. It is suitable for high risk project. It is useful for the firm which is eager to get back the cash invested in the project as early as possible. It is highly suitable when project has shortest gestation period. 2. 4. 5. It is simple to operate and understand. It enable the entrepreneur to select an investment proposal which would yield quick return of funds invested.
4. It fails to examine shortest period of payback. 5. It suits to only small project. 3. It avoids the cost of capital. . It ignore the time value of money.Limitations 1. 2. It does not take into account the cash inflow after pay back period.
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 ratio relates project earning to investment. It is defined as the percentage of average profit after tax to capital employed. This method is also known as average rate of return or return on investment. This techniques is based on accounting profits rather than cash inflows. .
The following formula is used to calculate the ARR ARR = Average profit after taxes Average Investment .
MERITS OF ARR It is simple to calculate ARR and this method is easily understandable. . 2. It is based on readily available accounting information. 3. It considered total benefits during the entire life of the project. 1.
4.Demerits 1. 3. . 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. It fails to differentiate between the size of the investment required for each project. It ignore time value of money 2.
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 Economic appraisal is done with a view point of society and economy. 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). . The economic appraisal should cover weather it fits into national priorities and contribution to the development of society. Thus it is done from a wider angle not merely in financial terms.
saving and foreign exchange etc. .SCBA is primarily used for evaluating public investment to be financed by the government. 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. employment. So the acceptance or rejection of a project is depends upon total social or national benefit like impact on planning.
production capacities. engineering know how and technical collaboration. airway. Type of technology 2. location. size. Following are the determinants of technological appraisal: 1. latest technology to be adopted etc. process of manufacturing. Scale of operation 3. sources of raw material. Location 4. Layout plan . facilities like transport. railway. manpower requirement.TECHNOLOGICAL ANALYSIS It refers to the review of product mix.
5. Construction schedule 6. Supply of power 8. Waste. Effluents and disposal 10. 9. Supply of water 7. Cost estimate . Supply of Fuel.
banking. . insurance facilities etc. Among all the aspect are examined. transportation.COMMERCIAL APPRAISAL The proposed project should be commercially viable. 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. requirement of raw material. selection of market place. it is necessary to examine the demand and availability of the product in the market.
MANAGERIAL APPRAISAL It deals with the evaluation of competencies. . finance. 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. accounting etc. This would also involve review of their past track record and competence. marketing. but he is supposed to appoint adequate experience personnel in the area of production. Generally. skills and reliability of management.
protection. monitoring. For effective environmental analysis. There are two technique of environmental analysis: 1.ENVIRONMENTAL ANALYSIS It refers to environment planning. research. conservation and substantial use of resources. Environment Impact Statement . education. a wide network of legislation is also in force. Environment Impact Assessment 2. assessment.
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. interpret and communicate information about the impact of an action on human health and well being. predict. .
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