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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.”
. Limited Resources. High Achievement.Nature & Characteristics Innovation. Leadership. Managerial Skills. Risk Taking.
Fabian Entrepreneurs. . Adoptive Entrepreneurs. Drone Entrepreneurs.Types of Entrepreneurs Innovative Entrepreneurs.
Industrial Engineering. Managing Customers. New product Development. .Functions of Entrepreneur Perceiving market Opportunities. Managing Production. Purchasing Input. Dealing with Public officials ( Taxes. licences) Upgrading Production Process & Product Quality. Managing Finance. Marketing of products. Command over resources.
. Lack of Technical Skills. Lack of Capital.Barriers to Entrepreneurship Lack of market knowledge. Monopoly. Time pressure. Legal Obligation/Regulation. Lack of Business Know how. Social Stigma.
Drive to achieve & grow. Seeking & using feedback.Qualities of an Entrepreneur Total Commitment & Determination. Low need for status & power. Good decision maker. Problem Solving skills. Innovative. Risk taker. Sense of humour. .
Manufacturing Wholesaling Retailing Services Franchising Outsourcing . 5. 6.OPPORTUNITIES FOR ENTREPRENEURS 1. 2. 4. 3.
.SMALL SCALE INDUSTRIES A SSI may be defined in terms of size. The number of person employed 2. it is no longer classified as small. The amount of capital employed 3. The value of annual turnover. Once an enterprise or unit goes beyond the size. 1. The size limit for small firm may be laid down in any one or more of the following criteria.
Investment limit is not exceed rupees five crore. 1. wherein the investment limit in fixed assets of plant and machinery does not exceed rupees five crore. . 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. 2.TYPES OF SSI SMALL SCALE INDUSTRY: Industrial undertaking. 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. 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. 8. 7. 6. 4. 3. 5. .
96 .56 444.87 6454.58 13.00 599.70 392.68 364.00 253.41 5206.96 16.85 18.58 1997-98 1998-99 1999-00 2000-01 4626.70 2416.56 4118.79 542.50 5728.65 15.86 3626.78 4626.48 2988.07 290.15 17.56 4118.50 5728.41 5206.Growth of SSI In Developing Countries Year Production (Billion ) Employment (Million) Exports (Billion ) Production (Billion) 1993-94 1994-95 1995-96 1996-97 2416.87 6454.72 17.93 14.86 3626.48 2988.42 489.26 16.
6. 2. . 3. 7.Reason for Growth of SSI 1. Introduction to new product. Development of Entrepreneurship. 5. Limited Demands Flexibility Personalized services Good relations with employees Support to large industries. 4.
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. 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.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. grants protection to small scale sector. at present the total number of items reserved for small scale sector are 799 as on 29.The IDR Act was amended in March. The policy of reservation initiated in 1967 primarily as promotional and protective measure vis-a-vis the large scale sector. It has contributed to the overall growth or the Gross Domestic Product as well as in terms of employment generation and export. the only exception being the case of large units which undertake minimum level of exports as 75 per cent of their total roduction.06. 1984 empowering Government to reserve items for the small scale sector.2001 .
4% and11.7%.3% in 1995-96 and 1996-97 respectively. employment and exports over the years. the increase was 11. the number of units has increased to 33. their production. Performance of the small scale sector. there has been a steady increase over the previous years ranging between 7%-10% during the period 1990-91 to 1994-95.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. On the production front also.58.000 units in 1990-91. There has been a steady increase in the number of SSI units.16% respectively.43%. and 8. therefore. In 199798 the increase over the previous year was registered at 8. The estimated increase for 2000-01 is 8. which forms a part of total industrial sector.000 units in the year 200001. 70. has direct impact on the growth of the national economy. The increase in the year 1998-99 & 1999-2000 were 7.09%. . from 19.
12. 21.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.1999.e.f. controlled or subsidiary of any other industrial undertaking . (Subject to the condition that the unit is not owned. 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.
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. tooling or intermediates. as the case may be. 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. components. 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.
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. .
. In fact. 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. 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.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. therefore. They also provide employment to agriculturists who remain idle during a part of the year. Small firms promote self-employment particularly among the educated and professional class.
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. Small scale firms can be a useful means of rural reconstruction and development. . Decentralized development contributes to the process of self-sustained growth and avoids concentration of industries in particular areas.ROLE OF SSI IN NATIONAL ECONOMY Balanced Regional Development: small scale industries promote decentralized development and help to remove regional disparities in industrialization.
757 in case of large scale industry.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. small scale industries are very suitable. greater output can be obtained with small investment. . The Annual Surveys of industries reveal that fixed capital per employee in case of small scale industry was Rs. 27. therefore.706 as compared to Rs. 3. In India where the rate of capital formation is low.
. 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. Small business promotes a new cadre of small entrepreneurs and selfemployed and encourages local talent.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.
. they earn valuable foreign exchange through exports of their products. they do not require imports of sophisticated machinery and equipment.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. 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. Secondly. 637 crores in 1975-76 to Rs. First. About 90 per cent of its exports are of non-traditional items. The exports of small scale industries increased from Rs. 2785 crores in 1985-86.
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.
the activities are mainly carried out by one of the partners or directors. As they are their own boss.' they provide an outlet for expression of the entrepreneurial spirit. the decision making process is fast and at times more innovative. Even some small units are run by partnership firm or company. It is mostly set up by individuals.CHARECTERSTICS OF SSI One-man show A small-scale unit is generally a one-man show. . Therefore.
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. . They cannot enlarge their business activities due to limited resources.CHARECTERSTICS OF SSI Use of indigenous raw materials Small-scale industries use indigenous raw materials and promote intermediate and capital goods.
Capital will not be blocked for a longer period. Smallscale industries usually have a lesser gestation period than large industries. 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.
CHARECTERSTICS OF SSI Lower Educational level The educational level of the employees of small industries is normally low or moderate. Hardly there is any need of specialized knowledge and skill to operate and manage the SSI. .
They always try to keep high margins in their pricing.CHARECTERSTICS OF SSI Profit motive The owners of small industries are too much profit conscious. This is one of the reason for which the unit may lead to closure. .
engineering industries.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. For example : Power looms. food processing industries etc. coin industries. Ancillary Industries: The industries which are producing parts and components and rendering services to large industries are called as ancillary industries. khadi industries. .
Cottage. welding. casting. Tiny Industries It consists village. Feeder Industries Feeder industries are those which are specializing in certain types of products and services. These industries are essentially machinebased. e.TYPES OF SSI Service Industries Service industries are those which are covering light repair shops necessary to maintain mechanical equipments. electro-plating.g. . Handicraft etc. etc.
Book Binding. . Screen Printing.T. Automobile repairing workshop. STD/ ISD/ Xerox Centre Computer Hardware repairing/ servicing. Electronic spare parts repair unit.DEMEND BASED ANCILLARIES UNIT I. Centre Cyber Café.
Repairing/ Hiring of earth moving machine.DEMEND BASED ANCILLARIES UNIT Truck/ Bus Building. Computer Paper/ Sheets. Spray Painting/ denting. Hotel/ Motel. Ball Point pen. Packaged Drinking Water. Tyre Retreading unit. .
. Dry Cleaning/ Laundry.DEMEND BASED ANCILLARIES UNIT Infant Food. Phenyle manufacturing. Hair Dresser. File Covers/ Folders.
Jam & Squash. Spices Grinding Honey Processing.RESOURCE BASED ANCILLARY UNITS Paddy Processing Churn/ Poha making. Badi & Papad making. Cup & plate making. Cattle Feed/ Poultry Feed manufacturing Jelly. Oil Mill. .
along with a heavy industrial base. Industrial policies over the year have focused to promote SSIs through various incentives related to financial. Along with the Large Scale sector the thrust was on Small Scale sector because of it decentralized. . employment intensity and its suitability for rural area with limited techno-economic structure. its small size. use mainly indigenous technology. POLICY FOR SSI After attaining independence in 1947 India adopted mixed economic planning as a method to achieve economic development. fiscal and infrastructure measure.GOVT.
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.INDUSTRIAL POLICY RESOLUTION 1956 It stated that besides continuing the policy support to cottage. . and 166 items were reserved for exclusive purchase by government from this sector. the aim of state policy would be that the development of this sector is integrated with that of large scale industry. The focus was to improve the competitive strength of SSIs.
production standardization. such as. market survey.INDUSTRIAL POLICY RESOLUTION 1977 504 items were reserved for exclusive production in the small scale industries . Special marketing arrangement through the provision of services. 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. quality control. . Technological up gradation was emphasized in traditional sector .
INDUSTRIAL POLICY RESOLUTION 1990 It raised the investment ceiling in plant and machinery for SSIs. Special emphasis was laid on training of woman and youth under Entrepreneurial Development Programme. Also. . Activities of Khadi and Village Industries Commission and Khadi and Village Industrial Board were to expand. assistance was granted to woman entrepreneurs for widening the entrepreneurial base. Small Industries Development Bank of India was established to ensure adequate flow of credit to SSIs. Stress was reiterated to upgrade technology to improve competitiveness. It created central investment subsidy for this sector in rural and backward area. Reservation of items to be produced by SSIs was increased to 836.
Priority was accorded to small and tiny units in allocation of indigenous and raw materials. Market promotion of products was emphasized through co-operatives. Factoring services were to launch to solve the problem of delayed payment to SSIs. public institutions and other marketing agencies and corporations. Equity participation by other industrial undertaking was permitted up to a limit of 24% of shareholding in SSIs. The investment limit for tiny enterprises was raised to Rs. .25 lacs irrespective of location.INDUSTRIAL POLICY RESOLUTION 1991 SSIs were exempted from licensing for all articles of manufacture.
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.
.subsequently. 14 item on 2001. 51 item were dereserved in 2002..39 items were dereserved in four phases viz. 15 items in 1997’ 9 items on 1999 1 item on 2001 and. 108 in March 2005 and 180 in May 2006. 75 item in 2003 and 85 items in 2004. Now 298 items stand reserved for this sector.RESERVATION POLICY Out of 836 items reserved in 1989.
the Committee (set up to consider the question of inclusion of additional items) revised list and 358 items were approved . In February2004. This list also includes 8 handicraft items reserved for purchase from the Handicraft Sector.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. .
Technology acquisition .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. Product design including Computer Aided Designs. Material testing facilities through accredited laboratories. . Classroom and practical training for skill up gradation.
NEW INITIATIVES Advisory and Mentoring services Technology Business Incubators > Information technology. > Electronics and Communications Suppliers Rating Accreditation Services. . > Energy and Environment > Bio-Technology . > Production design.
Product Renewal 2. Product scope and advantages 1. .
6. 3. Generation of Employment.ROLE OF SSI 1. 5. Promotion of Industrialization in rural areas. Better Standard of life. Removal of Poverty. . 2. 4. Cultural Heritage. Support to Large Industries.
2. 9. Difficulties in Marketing. Storage of Raw Material. Old Technology. . 7. 10. Inadequate Capital. 5. Low Quality.Problems Faced By SSI 1. 6. Low productivity. 3. Industrial Sickness Global Competition. Lack of Trained Person. 8. 4. Lack of Management.
Preference by government department in purchase of items.Measures taken by Government 1. . Giving concession in excise. Protective measures Reservation of items for exclusive production by SSI. sales tax etc.
Preference in land allocation and power connection to SSI. Setting up industrial estates and provisions of industrial sheds to enterprises on installment basis. 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. . Provision for concessional finance through commercial banks and other financial institutions.2.
3. silk board to provide technical. National small industrial corporation to supply to provide machinery on hire purchase basis. Khadi and village industries commission for encouraging the production and marketing of handicraft items. DIC in all district to serve as the local point of development of SSI. Institutional Measures Small scale industrial development organization to provide training to SSI. . All India coir board. financial and marketing facilities.
Establishment of SIDBI for smooth financing to SSI. Industrial parks for infrastructural development of SSI. .
3. Location of plant. Choice of form of ownership. Financing the proposition. . Selection of industry. Size of firm. 5. 2. 4. 1.SETTING UP A SMALL SCALE INDUSTRY Following are the considerations in setting up a small scale industries/enterprises.
6. 7. 8. Tax Planning 11. Launching the industrial enterprise. 10. Plant Layout. 9. Machines and equipment. Procedural Formalities. . Human Resources.
6. Scanning the environment for identification of business opportunities. 2. Appraisal by financial institution. Assessment of feasibility of idea. 3. Development of product/service idea. .STAGES IN SETTING UP SSI 1. 4. Project launching. Preparation of business plan. Resource mobilization. 7. 5.
Is it a viable business proposition in your area? .Check it out with basic market research . 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: . ideas need to be filtered through a multi-layer sieve.IDENTIFICATION OF BUSINESS OPPROTUNITY Before launching an industrial establishment.Does the idea fire up your motivation? . However.Does it match the needs of your clientele? .
.Look out for competition in the field .Is it a sunrise industry? .Project conceptualization .Consult with the experts .Test it out at market place .Your business opportunity .
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.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.
3. 4. . It should ensure making products that have a demand in market. 1.While selecting a business idea. the following points need adequate consideration. It should enable the entrepreneur to solve a current problem existing in the market. The business idea should enable the entrepreneur to utilize his skills. It should enable the use of available raw material. 2.
Survey reports.Following are the sources of business ideas: 1. Researches 3. Society 5. 2. Environment 4. Area study .
7. . 2.Practical steps in setting SSI 1. Detailing manpower Establishing market Network Application for permanent application. 3. 6. 5. 4. Project report No objection Certificate Formal sanction of loan Construction of building & installation of machinery.
Corporation Small Ind. 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. Tool. Technology Training Infrastructure Raw Material Plant & machinery Marketing Product Standardization SFC Technical Consulting Organization Directorate of Export promotion BIS Directorate of Export promotion Registrar of Trade mark .Institutional Support to SSI Selection of Project DIC. Electricity board. EDI( Entrepreneurship Dev. Local authority Mineral Dev. Ins. Of India National Institute of Small Industry Extension Training DIC. Corporation Mineral & Metal Trading Cor.
a project will involve allocation and use of resources and generation of specific results. 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. A project may involve establishment of new plant or it may also involve the provision of additional facilities or ventures. . Whatever the purpose.
Single entity 3. Elements of risk 5. Team Work 4. Specific Purpose/Objectives 2. Uniqueness 6. Life cycle .Project Characteristics 1.
Project Identification It is concerned with the collection. Opportunity is an attractive idea which an entrepreneur accepts as a basis for his investment decision. An entrepreneur is an opportunity seeker. explore and select the right opportunities. 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. He should identify.
An acceptable return on investment ( ROI).A good business opportunity must have two major ingredients. . 2. Good market scope. 1.
5. 3. 4. limitations and preferences. Understanding own strength. capabilities. Business opportunity may be for manufacturing a product or a service. .Process for Selection of Project 1. Comparative analysis of opportunities available. 2. Exploring all opportunities. Start the project.
2. its components.New demands .Present pattern of trading .Exploring Opportunities The process of exploring the opportunities requires intensive efforts and specialized skills.Emerging trends . CURRENT SCENE . 1.Basic features of an area and its resource inventory.Local needs . . ENVIRONMENT .Population. Following guideline can help us in opportunity identification. occupational pattern.
5. 6. Resource based idea such as mineral. KPO. marine. agricultural. NGO. 4.Sources of opportunity 1. Import and export related ideas Market shift such as change in demand. Special product ideas such as BPO. purchasing power. Household repair and maintenance. 2. wood waste and metal waste. Government policy. change in life cycle. 3. change in population. wasted items such as ago waste. .
3. 5. 2. 4. Investment.Criteria for selecting a project 1. Location Technology Equipment & Machinery Marketing .
2. 4. Unrealistic project objectives. secret process. 5. Lack of project management. unique skills and experience. . 3.Problems in Project Identification (A) Internal Constraints 1. Non availability of sufficient physical resources. Improper preparation of feasibility report. Non availability of non physical resources such as patents.
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.
Maintenance and operation cost Total cost of project-Salvage Value If the value is less then or equal to 1.Benefit Cost Ratio is equal to Benefits. such a project is economically viable .Disbenefits.
they do not evaluate project profitability over its full life. The time value of money means that the money received in present has more value than an equal amount of money received in future. they do not evaluate the time value of money and secondly. The basis of discounted cash flow method is presence of time factor in evaluating the future returns of a project. These drawbacks are removed in DCF. IRR and NPV methods. . Firstly.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.
one can get discount value of his money over a long future time. 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.If A is offered the two alternatives of either receiving 100 Rs today or 100 Rs after one year.
. 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. If the net present value is positive its means project is earning Higher rate of return but if the net present value is negative its means rate of return is lower and some better investment opportunities are required.Net Present Value This method is also recognize the time value of money for evaluating investment proposal.
The 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.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.
IRR= CF0 + CF1 + CF2 + CF3 + ………. CFn (1+r)0 (1+r)1 (1+r)2 (1+r)3 (1+r)n .
4. It is needed to safeguard against risk and difficulties in the implementation of the project. Management expert. It involves step by step investigation and development of the project idea. . 1. Market Analysis.Project formulation Project formulation is the systematic development of a project idea for the final decision of investment. A team of the following expertise is informed to investigate the project idea. Industrial economist. Engineer. 2. 3.
5. 2. 3. 7.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 . 4. 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.
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.Techno Economic Analysis Techno-economic analysis is primarily concerned with 1)identification of the project demand potential. An optical size of the and adoption of appropriate technology would help in deriving the economies of scale. It also indicates weather the economy is in a position to absorb the output of the project. .
. 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.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. This plan is presented in the form of network diagram.
The resources required for the project are classified as human and non-human resources. 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. Human resources refer to manpower and its management while nonhuman resources refers to material. quantification and evaluation of project inputs. .Input Analysis Input analysis involves identification. money and machinery.
. 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.
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 also helps in examine the feasibility of the project in terms of generating revenues to attain the objectives of the project.
profit analysis and fund flow analysis etc to determine the estimated financial performance of the project. . It generates data for computing different profitability criteria with a view to establish the project’s worth to the enterprise. 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.
possibility of import substitution. Improvement in domestic resources capacity.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. increase in foreign exchange earning. employment generation. availability of increased resources. Social benefits includes possibility of financial and out of pockets reduction in service costs. .
on the other hand. . society is expected to incur scarifies in favour of expected benefits. pollution costs and other spontaneous and instant cost. Improvement in living standards and environment etc. These social cost include financial and out of pocket cost.Improvement in industrial development. reduction in foreign exchange.
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. the outcome of feasibility analysis. commercial. design and network analysis. In fact. economic and financial aspects of a proposal. techno-economic analysis. managerial. input analysis.Project Appraisal Appraisal is an independent examination of technical.
Project Report After feasibility analysis. 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. A project report contains the following information: 1. Information on technology. Estimates for manpower required and material input needed. 2. . competition. It may be noted that project report serves as an action plan in case the entrepreneur proceeds with the implementation of the project. prices etc.
Plans for procurement of material input. 4. Manpower plans 5. land lease deed.3. arrangement with suppliers of material and machinery. sales. Documents: Quotations. Projection: production. . 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.
work-in-process. Adequate money to purchase the fixed assets. power. 2. water. .. land. Sufficient capital to support the operation of the business for initial three months such as purchase of raw material. furniture.Need for Finance The amount of finance depends upon the following factors: 1.e. i. plant & machinery. Margin for unplanned expenses called contingencies. tools etc. salary to employee. 3. building. finished goods. transport etc.
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. 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. .
and may include1. . Deposits and loan given by owner. directors etc. Owner’s capital called equity. Life Insurance.Sources of Finance The sources of finance can be broadly classified into two category: 1. 3. partners. Internal Sources The funds which are raised from within the enterprise. 2. mortgage of building. Personal loan of entrepreneur from PF. etc.
Borrowing from relatives 2. Subsidies from government department 7. Credit facilities from financial institutions 4. Term loan from financial institutions 5. Venture Capital of such institutions ( Money invested by investors ) .External Sources The funds which are raised from external sources and is called debts. This may include1. Hire purchase from government department 6. Borrowing from commercial banks 3.
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. The capital structure should have the following features: .Capital Structure The funds raised from internal sources are the ownership capital and called equity. 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. .Involve minimum cost and ensure maximum yield. 2. Debts should be within repaying capacity of the enterprise. Should ensure proper control over the operations of enterprise. 1. 4.
. recording and analyzing necessary data to judge the marketability of a product. methods of marketing and aspect of distribution of products from production to consumer. a detailed field study or market survey is required. nature of competition.Field Study : Collection of Information The entrepreneur requires a lot of information for taking various decisions and preparation of project report. The data or information relates to nature of demand. Field study involves gathering. For collecting the necessary information.
Published literature. Government publications 3. news paper.The sources of information for field study can be: 1. trade journals etc. i. . wholesalers and retailers. 2. Distributors. Prospective Customers. 4. 5.. Industrial Consultations.e.
It gathers data and carries out analysis to discover the market share of the product and location and types of consumers. 4. 2. 3. It provides an effective basis of sales forecast. . It promotes soundness of marketing decision. 1.Benefits of Field Study It helps in having advance idea of consumer acceptance of the production before it is produced on a commercial scale.
3. Lead time required to get the material after ordering. Discount. packing. . List of manufacturers and suppliers of material required. 5. 2. 4. Minimum order quantity. price. Price fluctuations in the market. tax etc.Information Relating to Raw Material 1.
Annual repair and maintenance List of spare parts. List of manufacturers & suppliers.Information Relating to Machines & Equipment 1. switches. 5. control equipment. 2. 3. Requirement of motors. 4. . starters. Availability of machines and equipment.
Information Relating to Competitions 1. . 5. 2. 3. Prices Terms & Conditions of competitors. Range of products. 4. 6. Future plan for expansions Market share Strengths and weaknesses.
5.Information Relating to Customers 1. 3. Present sources of supply. Customers preferences Degree of satisfaction . Annual consumption of customers. 4. Consumption pattern of customers. Purchasing power of supply. 2. 6.
As an essential part of project formulation and appraisal. market and demand analysis is vital so that capacity and facility location can be planned and implemented in line with the market requirements.DEMAND ANALYSIS Emerging competition in market place is propelling managements to hear the voice of their customers. To survive in the market. . 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.
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. . 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.
has to relate to demand forecasting. 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. like procurement of raw materials and production planning.NEED FOR DEMAND FORECASTING All business planning starts with forecasting Capital investment. . Even in a batch type production.
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.
Time horizon of these demand forecasts usually varies from 1 to S years and in rare instances upto 10 years. Managerial Economists play a leading role in masterminding these forecasts at firm. trends in consumption etc at international level. industry. . International Level Companies operating in multinational markets would require similar forecasting of demands for its products. national and international levels.
Thus they are most suited to assess consumers reaction to company's products.METHODS OF FORECASTING. Thus "collective opinion survey forms the basic of market analysis and demand forecasting. reviewed and revised to take into account changes in design/features of products. These estimates are collated. people. promotion and place. price. territory. state and/or region. projected advertising and sales promotion campaigns and anticipated changes in competitors :marketing policies covering product. changes in selling prices. 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. .DEMAND Collective Opinion Survey Sales personnel are closest to the customers and have an intimate feel of the market.
usually in their employment. Adding together demand estimates of individual salespersons to obtain total demand of the country maybe risky as each person has knowledge about a small portion of market only. it suffers from following weaknesses: Estimates are based on personal judgment which may not be free from bias.Although this method is simple. first hand and most acceptable. salesperson may not have the requisite knowledge and experience . Salesperson may not prepare the demand estimates with the requisite seriousness and care. Owing to limited experience. direct.
Survey of Customers Intention Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. survey would involve interviewing them. a sample survey is carried out for questioning a few representative consumers about what they are planning or intending to buy. 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. If the product is sold to a few large industrial buyers. If it is a consumer durable product.
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. edited and summarized together by the Coordinator. Based on the above. Written predictions of experts are collated. Based on the summary. Coordinator repeats the process of collating. demand forecast is worked out in following steps: Coordinator sends out a set of questions in writing to all the experts co-opted on the panel who are requested to write back a brief prediction. . Steps 3 and 4 are repeated by the Coordinator to experts with diverse backgrounds until consensus is reached. editing and summarizing the responses.
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. No discussion takes place in this phase and usually 15 to 25 ideas emerge from this format. A panel of seven to ten experts is formed and allowed to interact. The idea shared is written on the `flip chart' which everyone can see. Experts give ideas in rotation until all of them are written on the `flip chart'. . Facilitator asks each expert to share one idea out of own list with the group. 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.Nominal Group Technique This is a further modification of Delphi method of forecasting.
In the next phase. experts are asked to give in writing ranks to ideas according to their perception of priority. This reduces the number of ideas. . During discussions similar ideas are combined and paraphrased appropriately. Facilitator ensures that all ideas have been adequately discussed. After completing group discussions. experts discuss ideas presented by them.
we take simple average of all past periods . Thus. Simple Average : Sum of Demands of all periods Number of 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. Herein. simple Average Method is the first one that comes to one's mind.
four or twenty periods by once it decided.it may be three. it must be kept constant . Whatever the period selected. 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.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. Simple Average : Sum of Demands of Chosen periods Number of chosen periods . we must continue with same number of periods.
. demand for consumer goods has a relationship with disposable income of individuals and family. demand for tractors is linked to the agriculture income and demand for cement.Regression Analysis Past data is used to establish a functional relationship between two variables. For example. bricks etc is dependent upon value of construction contracts at any time.
+ Wn x Dn .Weighted Moving Average In Moving Average Method. weighted given to the selected number of periods is same.. Depending upon the age of the period. withage can be varied: Weighted Moving Average = W1 x D1 + W2D2 + ………. This has been refined to include the Weighted Moving Average which allows varying weightages for demands in old periods.
.PROJECT APPRAISAL Project appraisal is the analysis of cost and benefits of a proposed project with the purpose of ensuring a rational allocation of limited funds among alternative investment opportunities in view of the specified goals. Project appraisal is carried out by the financial institutions before financing any project. The rationale of project appraisal lies in the fact that the number of project to satisfy the identified needs always exceeds the availability of resources and a choice among alternative projects is to be made.
2. . To lay down the benchmarks to determine the success or failure of a project. 3. To arrive at specific and predicted results of the project.Project appraisal is undertaken with the following objectives: 1. To identify the expected costs and benefits of the project.
Project Appraisal V/S Project Evaluation Project appraisal is different from project evaluation which is basically an analysis and examination of an executed project. Project appraisal is 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 is an preinvestment decision making technique whereas the project evaluation is an post analysis of executed project.
1. 5. 2.ASPECTS/TYPES OF PROJECT APPRAISAL FINANCIAL ANALYSIS Following are the methods of assessing firm’s profitability of capital investment proposal: Payback Period Accounting rate of return NPV IRR Profitability Index 1. . 3. 4.
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.
This techniques is suitable when: 1. 4. Project carries high risk. Project is expected to complete in short period 3. Cost is small 2. . Project is productive so soon as investment is made.
MERITS OF PAY BACK PERIOD 1. It is simple to operate and understand. . 2. It is highly suitable when project has shortest gestation period. 4. It enable the entrepreneur to select an investment proposal which would yield quick return of funds invested. 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. 5.
It fails to examine shortest period of payback. It avoids the cost of capital. 5. 2. . It suits to only small project. It ignore the time value of money.Limitations 1. 3. It does not take into account the cash inflow after pay back period. 4.
This ratio relates project earning to investment. This method is also known as average rate of return or return on investment.ACCOUNTING RATE OF RETURN This method is considered to be an improvement over the payback period method as it is considers the earning of a project during its entire economic life. 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.
The following formula is used to calculate the ARR ARR = Average profit after taxes Average Investment .
It considered total benefits during the entire life of the project. 2. 3. . It is based on readily available accounting information. 1.MERITS OF ARR It is simple to calculate ARR and this method is easily understandable.
4. It fails to differentiate between the size of the investment required for each project. 3. It ignore time value of money 2.Demerits 1. 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 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. A project is considered to be socially viable if the benefits which accrue from the project serve the larger social purpose. .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. Economic appraisal is also called social cost benefit analysis ( SCBA). Thus it is done from a wider angle not merely in financial terms.
SCBA is also relevant to private investment which have to be approved by various government and quasi government agencies which bring to bear larger national consideration in their decision.SCBA is primarily used for evaluating public investment to be financed by the government. employment. saving and foreign exchange etc. . So the acceptance or rejection of a project is depends upon total social or national benefit like impact on planning.
sources of raw material. facilities like transport. Layout plan . manpower requirement. production capacities. airway. latest technology to be adopted etc. Scale of operation 3. engineering know how and technical collaboration.TECHNOLOGICAL ANALYSIS It refers to the review of product mix. location. railway. Type of technology 2. Location 4. Following are the determinants of technological appraisal: 1. size. process of manufacturing.
Cost estimate . 9. Construction schedule 6. Supply of power 8.5. Supply of water 7. Effluents and disposal 10. Waste. Supply of Fuel.
selection of market place. insurance facilities etc. transportation. Among all the aspect are examined. requirement of raw material. To know the commercial viability of the project. it is necessary to examine the demand and availability of the product in the market. . banking. the demand and availability of the product to be manufactured of the demand should also be examine.COMMERCIAL APPRAISAL The proposed project should be commercially viable.
This would also involve review of their past track record and competence. accounting etc. . skills and reliability of management. quality of management affects the success of an industrial project to a large extent. Generally. it is not expected that an entrepreneur should have experience in a particular industry. but he is supposed to appoint adequate experience personnel in the area of production. marketing. Actually.MANAGERIAL APPRAISAL It deals with the evaluation of competencies. finance.
There are two technique of environmental analysis: 1. Environment Impact Statement . Environment Impact Assessment 2. research. For effective environmental analysis. assessment.ENVIRONMENTAL ANALYSIS It refers to environment planning. education. protection. a wide network of legislation is also in force. conservation and substantial use of resources. monitoring.
predict. 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. Environmental impact statement is a report based on studies. .Environment impact assessment is defined as a process designed to identify.
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